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Giorgi Kadagidze: stabilising Georgia's currency climate

In an economy that is highly dollarised and in which the local currency has gone through a bout of devaluation, Georgia's central bank governor, Giorgi Kadagidze, has his work cut out. However, in taking a long-term approach, rather than looking for any quick fixes, he is confident that the country can achieve its currency goals.
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Giorgi Kadagidze: stabilising Georgia's currency climate

Q: The Georgian currency – the lari – has devalued by about 30% from its 2011 to 2013 levels. How would you describe the current situation and what measures are you taking to stabilise the currency?

A: Despite the fact that our economic fundamentals are quite strong, Georgia is a small, open economy and we are greatly influenced by what is happening in the rest of the world. The situation in this region in particular is quite challenging and turbulent, therefore we have received a severe external shock on our current account balance. As a result, there was pressure on the lari and because Georgia has a floating exchange rate system, the currency has devalued and now the adjustment is taking place.

At the same time, inflation is under control and our banking system is very resilient and well capitalised. However, it creates pressure for those people who have loans in foreign currencies [but have] revenues  in lari; their debt burden has been increased.

But so far we are coping with this process quite well and all the international organisations – partners such as the International Monetary Fund, the World Bank and the European Bank for Reconstruction and Development [EBRD] – have all praised the policies that we have adopted. The solution to the problem is increased inflows into the country, increased exports, increased tourism revenues and other sources that will get Georgia to the next level of development. 

Q: You have intervened a few times with the aim to stabilise the currency. What is your strategy regarding interventions?

A: We do have a floating exchange rate, which means that we don’t drive the exchange rate and it is driven fully by market forces, but at the same time, because Georgia is a small market, there can be big fluctuations that can occur in very short-term periods – in days and weeks. So we usually intervene to prevent fluctuations that are too big, [but] not to create a sense of instability, and not to create more tension and expectations.

For that reason, we have intervened quite slightly because the whole idea is that you cannot go against the market forces. It is counterproductive. Not even the rich, oil-producing countries can afford to do that. And we are talking about Georgia, which has a high current account deficit, which is a small country, and, of course, spending our reserves to postpone problems is wrong . 

We let the exchange rate get to the new market equilibrium as fast as possible. But of course it is very hard in terms of the public opinion. People are unhappy with that and the increases in the debt burden, but unfortunately the Russia-Ukraine conflict influenced us significantly. 

Q: Is there a level of foreign reserves that you would not want to fall below?

A: Our foreign reserves are 3.2 times import coverage and three months of import coverage is considered to be an appropriate level. Of course, we are looking [to ensure] that our reserves are at an appropriate level. Otherwise it would influence the decisions of rating agencies and investors, which would ultimately lead to higher interest rates and a more expensive cost of funding for our banks. So we are very careful in making sure that we don’t miss targets that could lead to these kinds of consequences.

What we need right now is a second generation of reforms, which purely aim to make Georgia more competitive, and that is very important. Our aim is to reach the medium-income level, and for that reason what we need is as many investors as possible. We need foreign direct investment flowing into the country, not only in terms of capital but also in terms of the know-how of doing business, because a big problem with our producers and our economy is low productivity.

To increase this productivity and to make our goods and services competitive, we need the know-how of doing things well, and this know-how comes with large, successful international companies [being present in Georgia].

Right now the environment is quite challenging. One-thousand kilometres north we have the Russia-Ukraine conflict, and 1000 kilometres south we have ISIS and the crisis in the Middle East, so we need to work very hard to position ourselves well. We cannot afford to make mistakes. We can copy success stories of other countries – eastern European countries that have gone the way we are going right now – and at the same time make sure we do not repeat the mistakes that these countries did, but our debt to gross domestic product is low, we have a business-friendly environment, our level of corruption is very low, and we have all the conditions we need to market [ourselves] to investors. 

Q: What is your near-term and short-term economic outlook?

A: In the near term we are still looking at growth but it will be relatively low, somewhere between 2% and 4%. In the long term, we are much more optimistic. This year we have signed an association agreement with the EU, which will be followed by free trade. This opens up a huge market for Georgian producers and exporters to increase our export potential and provides a nice opportunity to international investors to invest in the country. Therefore, while times are quite hard and challenging, we are very optimistic. 

Q: One of the major obstacles in Georgia is the high level of dollarisation in the economy. The first lari-denominated bonds were issued in 2014. How important are these bond issues?

A: Despite the fact that the Georgian economy has very strong fundamentals and we score quite well in many areas such as fighting corruption, low taxes, the liberal environment, and so on, the dollarisation of the economy is our biggest macro-economic challenge. Our dollarisation rate right now is above 60%, so in this regard, issuance of the first lari-denominated bond [by the EBRD in 2014] was a big success and a big event.

It is not only about the issuance itself but also the way in which it paved the way for new regulation, laws and different acts that mean other investors can easily do the same. It was a pioneering [move] and it has had a tremendous effect because it is the only way we can pursue the challenge of de-dollarisation. 

Q In which other ways are you trying to promote de-dollarisation?

A: Usually, de-dollarising as a country cannot be achieved in one, two or even three years. In the most successful examples – Israel, Chile and Poland – it took decades of sustained, consistent policies. In our case, we are at the primary stage, even though dollarisation has decreased by more than 10 percentage points in the past two years.

What we are doing is to make loans in lari as available as possible: we are increasing the collateral base, and we are trying to provide all the market incentives possible so that companies and individuals can borrow in the local currency.

But again, we are not in favour of any administrative actions, any prohibitions, or anything that distorts the market. So in this regard, you cannot overemphasise the importance of the local currency bonds. We are now talking with several Georgian corporates that also want to follow the same path, and this will [eventually] create a portfolio, which is the next step in the development of our capital markets. We started with the development of the foreign exchange market, treasury bills and government papers. The next step is the corporate bond market and then we will, hopefully, finally get to the equity market. These are the steps we are following. But it is [unwise] to skip a stage. [That] doesn’t work. 

We do have our political challenges, but what doesn’t kill us makes us stronger. That is the mantra we are following. 

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Read more about:  Central & Eastern Europe , Georgia