The mechanism of foreign exchange (FX) interventions of the National Bank of Georgia (NBG) is explained in detail in press releases as well as on the official website of the bank (for more information, see Monetary Policy Operations Manual). However, since there are frequent questions about the instruments, the NBG stands ready to make an additional clarification to meet the increased public interest.

 

First, let us reiterate that the NBG follows a floating exchange rate policy, implying that the goal of the central bank is not and cannot be to set the exchange rate at a specific level. The exchange rate is determined according to market demand and supply. The short-term dynamics and fluctuations of the exchange rate depend on market conditions and expectations, while the medium and long-term exchange rate is determined by macroeconomic fundamentals such as the dynamics of import and export of goods and services, remittances, and other external economic indicators.

 

The intervention instruments of central banks differ by purpose and market development. Interventions are rarely used under the floating exchange rate regime. More developed financial systems need less FX interventions. The instruments used may be: fully discretionary or rules-based, open or confidential, done in spot markets or futures markets; based on the underlying situation or following pre-announced schedules; conducted by decisions of a central bank or through an option, etc. The objective of interventions may be to reduce excess exchange rate volatility, to accumulate reserves and/or to support external competitiveness.

 

In case of Georgia, the NBG uses several instruments for interventions: a) discretionary auctions, b) buying or selling FX based on rules, and c) pre-announced options (currently inactive). Rules-based buying/selling of currencies is practiced through BMatch platform. The instrument functions to mitigate excessive exchange rate fluctuations and, in some situations, it may also serve to accumulate international reserves. It is relatively new, having been developed in cooperation with experts from the International Monetary Fund and technically implemented by employing the BMatch Bloomberg platform.

 

Let us hereby emphasize that Central Banking, the reputable international publication, awarded the Bloomberg L.P. for the implementation of the BMatch platform in Georgia. The award was in the category of financial market infrastructure services. The increased competitive and transparent environment on BMatch significantly reduced the bid-ask spreads. Today, BMatch offers the best rates in the interbank market and, most importantly, deals concluded reflect the market situation for that moment.

 

Also, fluctuations on the FX market is its natural behavior under the floating exchange rate regime, even if unpopular. It is impossible to completely and/or always neutralize them. Under the floating exchange rate regime, short-term volatility is common for an exchange rate. This ensures that the exchange rate is more stable in the medium and long run than it would have been if the exchange rate were attempted to be fixed. And it’s medium and long-term stability of the exchange rate that is important for the stability of the economy, well-being of the population, and economic growth. One can shield from short-term fluctuations of the exchange rate by borrowing in the national currency or by forward contracts for businesses. Such hedging products for companies are available also in Georgia. Although not cheap, these are gaining greater popularity and are expected to grow further in the future. It is also worth noting that dollarization of loans is on a declining trend. Microfinance organizations no longer extend foreign currency loans (while in 2016 65% of loans were in FX). Dollarization of loans to individuals in the banking sector is less than 35% (down from 60% in 2016). In terms of the number of loan contracts, only about 2% of contracts are denominated in FX. Regardless of the downward trend, financial sustainability of each citizen is important and the policy of reducing dollarization will continue.

 

It should be stressed that a floating exchange rate regime helps to automatically absorb shocks. Under a fixed or managed regime, the exchange rate is more stable in the short term, but leads to an accumulation of risks, especially in high current account deficits. Whenever external or domestic shocks occur, it may depreciate much more sharply in a day than a floating exchange rate would do over years in the same country. The advantages of floating exchange rates for economic growth and macroeconomic stability are more evident in open and small economies. Georgia is a small open economy - our foreign trade of goods and services is more than 100% of the Gross Domestic Product. Therefore, our options are clear: the choice has to be made between short-term (though unpopular) fluctuations ensuring long-term stability of the exchange rate, or long-term and sustained depreciation of the exchange rate. Needless to reiterate the fact that the NBG is an institution whose focus is on long-term goals. Our policy is aimed at making balanced decisions to achieve price stability with the least social costs. In this sense, each decision of the NBG is always a search for the golden mean.

 

Based on the above, the NBG intervenes in the foreign exchange market when the intervention is capable of reducing the excess volatility (both up- and downwards) in a way not to threaten the medium and long-term stability of the exchange rate. This usually happens when a transaction being concluded is large given the size of the market, or there is a temporary lack of liquidity. It is also important to note that the impact of currency interventions is asymmetric: it is more effective when the exchange rate is appreciating, but less effective when it is depreciating. Depending on the current level of development of the foreign exchange market in Georgia, interventions are done on both sides, although the NBG always gives due consideration to the asymmetry of effectiveness.

 

As much as the BMatch platform is concerned, its operational arrangement is similar to an auction: when the NBG buys FX, the BMatch software algorithm makes sure to automatically match with a seller whose FX offer is the cheapest. Similarly, when NBG is selling FX, the buyer offer in which the dollar is the most expensive is matched first. This kind of mechanism practically eliminates the occurrence of subjective decisions towards counterparties (who conclude the deal) while also reducing exchange rate fluctuations to the extent possible, without shifting the trend in the market.

 

The publication of intervention statistics and its frequency depends on the characteristics of the instrument and the objective of the intervention. In Georgia, results of FX auctions are published within 15 minutes after the end of the auction. The results of the rules-based interventions, along with other foreign exchange market information, are made publicly available on a monthly basis, 25 days after the end of the month. Publishing statistics on interventions on a daily basis is not a widely accepted practice, which of course has its reasons, and these are explained below. According to the information collected by the International Monetary Fund paper, most central banks (especially those that use interventions most often) do not publish intervention statistics at all. The International Monetary Fund's research has found that "only 16 percent of those of emerging market and developing countries do it [publish FX intervention data]". Georgia is in this 16%. Let us note that the International Monetary Fund is an organization who has reliable information on a global scale.

 

The goal of confidentiality of FX interventions is to eliminate speculative attacks on the exchange rate and avoid additional turmoil in the market. Therefore, market participants (including banks) are unaware of the details of direct interventions, including the timing and principles of market intervention. The publication of detailed information on the interventions would allow the participating banks to identify the behavior pattern of the NBG, hence raising possibility of speculative attacks on the exchange rate and increasing the volatility of the exchange rate. Therefore, the regulatory document for such a rules-based instrument is classified as confidential. As for discretionary interventions, these cannot be predicted in advance and so the risk of immediate publication of this information is small.

 

Like other central banks, the NBG is legally committed to publish the balance sheet data on a monthly basis, which we do every month, within the deadline set by the law. The NBG publishes a lot of other detailed information as well, but we do not publish the information that may increase volatility of the exchange rate and pose risks to financial stability.

 

We emphasize that transparency is one of the strategic priorities of the NBG. This is further underlined by the recognition of the NBG as the most transparent central bank by Central Banking, the reputable publication, last year. In addition, according to the assessment published by the European Commission on June 16, 2022, in Georgia "monetary policy is conducted in a transparent way". However, it is important that there is also a concept of confidentiality. The trust of international investors and partners towards central banks and, therefore, countries as a whole, depends in large part on honoring that confidentiality principle. This trust, in the case of Georgia, has never been questioned, in which the contribution of the NBG is very large. This is our responsibility. We understand that market participants are interested in having additional information; however, there may also be an unsound desire of certain parties to spark turmoil in the market, root additional fluctuations of the exchange rate and undermine financial stability, and the NBG won’t let that happen. We emphasize that the National Bank of Georgia will not deviated from this position at the cost of anyone's private interest, unjustified and groundless accusations or pressure.