Page 34 - GEORptMay20

Georgia’s c​entral bank intervenes as lari plunges
The EBRD has expanded its response and recovery programme addressing the coronavirus (COVID-19) crisis and it expects the entirety of its investments of up to €21bn in the two years ahead to be dedicated to this effort. The package includes a €4bn Resilience Framework for existing clients, offering liquidity support, short-term working capital and trade finance. The EBRD emphasised that it was also ready to deploy its capacity to provide local currency lending.
Georgia’s currency, the lari (GEL), weakened by 6.5% versus the dollar and 8.3% against the euro on March 24, leading to the central bank, the National Bank of Georgia (NBG), opting to sell $40mn into the market on March 25.
The national lender had already sold $60mn in two similar interventions since the currency came under pressure a couple of weeks ago.
The latest move was announced after the GEL reached 3.45 to the USD.
The GEL was valued at 2.78 to the USD on March 8, when it marked a 3.2% ytd gain. In just over one week, the currency plunged by 7.2% amid the COVID-19 crisis and anxieties over lower tourism revenues. The GEL fell as low as 3.04 to the USD during March 16, following the announcement of the closing of border crossings to foreigners looking to enter the country due to the coronavirus (Covid-19) pandemic.
The decision stirred controversy. Some observers argued that the monetary authority was simply wasting money in trying to defend the currency from depreciation driven by expectations of weaker tourism revenues and remittances caused by the ongoing COVID-19 pandemic that has led to the economic shutdowns or restrictions across key industries around the world. The extent of the slowdown in such forex revenues from tourism and remittances—important as Georgia struggles to address its balance of payments—cannot yet be gauged for this month those arguing against forex intervention noted.
On the upside, Georgia’s currency is not the only currency that has lately depreciated regionally, something that may help price stability, economic analyst Akaki Tsomaia said.
The Russian ruble and the Turkish lira are also under pressure and Georgia’s import prices should not increase when expressed in GEL, he added. Furthermore, demand was likely to weaken generating demand-side disinflationary pressures, Tsomaia said. Last year, when the GEL also saw bouts of depreication and the NBG similarly intervened, the situation was totally different: only the lari weakened, something that could have prompted inflation, he also said.
The NBG stated that Georgia’s financial system was well prepared to face the economic challenges ahead.
“It is very important that the financial system of Georgia is well prepared to face the economic challenges. The banking sector is healthy and sustainable, which is a guarantee that after coming through the shock the Georgian economy will recover promptly and return to its normal condition,” the central bank said.
34​ GEORGIA Country Report ​May 2020 ​​www.intellinews.com