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5.1.4Gross international reserves
Georgia cuts minimum reserves ratio to defend currency
Georgia’s central bank on October 1 cut the required reserve ratio for liabilities denominated in foreign currency, with a maturity of under two years, from 30% to 25%. The move follows the hiking, in two 50bp steps, of the refinancing rate to 7.5% during September and the sale by the national lender of another $40mn on the forex market in the month.
The declared purpose of cutting the required reserve ratio was releasing some $700mn to banks and thus preventing a further weakening of the local currency, the Georgian lari (GEL). The downside is that the move again encourages currency substitution, which has been targeted by the central bank over recent years. Also, the forex reserves held by the central bank decrease.
But central bank president Koba Gvenetadze gave an assurance that the monetary authority will only replenish the reserves when circumstances make it possible.
The government has said that there are no fundamental grounds supporting GEL weakening. On the contrary, the currency is undervalued by 7% to 8%, deputy finance minister Niko Gagua stated.
Gagua said that there was an exaggerated reaction on the market, which may be due to low confidence in the lari, which was caused by social or political events. In his estimation, the underlying factors—GDP, the current account deficit—cannot be the cause of the depreciation as long as they are stable.
“Although FDI is down, it is higher than the current account deficit. This is an important positive factor and therefore we cannot talk about the negative factors of the fundamental parameters,” he said.
Indeed, the central bank released the balance of payments data for the second quarter of the year and the figures proved robust. Nonetheless, Russia’s ban on flights to and from Georgia in response to anti-Kremlin protests in the country came into effect as of July.
The Q3 BoP data is yet to be released, but the Q2 figures look bright: the current account deficit narrowed by 63% y/y to $127mn and the current account gap in the rolling 12 months ending June contracted by 44% y/y to
24 GEORGIA Country Report April 2020 www.intellinews.com
