The NBG organized a seminar at the Bazaleti lake for journalists. The seminar was held by the NBG management: Mr. David Amaglobeli, the acting President, Mr. Archil Mestvirishvili, Head of Macroeconomics and Statistics Department, Mr. David Lezhava, Head of Macroeconomic Research Division, and Mr. George Laliashvili, Head of Monetary and Foreign Exchange Department. They spoke about the NBG functions, future plans and foreign exchange policy, as well as about the situation with the consumer prices and the newly implemented activities of the NBG.

As David Amaglobeli noted, media plays a crucial role in objectively covering current situation and processes related to the banking sector.

By the end of the seminar the NBG representatives answered journalists' questions: 

1. Has the national currency Lari depreciated?  

If we take into account the last three months, the Lari exchange rate depreciated only with respect to the US dollar, while it appreciated against the majority of other foreign currencies. As a result, the Lari nominal effective exchange rate, which is a weighted exchange rate with respect to the currencies of Georgia's trade partner countries, has in fact appreciated. In particular, during the last three months the Lari appreciated by 6.5% against the Bulgarian Lev, by 4.5% against the Euro, by 12% against the UK Pound, by 31% against the Icelandic Krona, by 10.5% against the Romanian Lei, by 18.5% against the Hungarian Forint, by 11% against the Czech Krona, by 19% against the Australian Dollar, by 14.4% against the Turkish Lira, by 7% against the Estonian Krona, by 7.5% against the Lithuanian Lit, by 7.2% against the Latvian Lat, by 6% against the Ukrainian Hryvna, etc.

2. What economic rational stood behind the NBG decision to make the Lari exchange rate adjustment?

Lari turned out to have excessively appreciated (See explanation in point 14), which was manifested by the Lari exchange rate dynamics against foreign currencies during the last three months as well as by the recently increased demand for the US dollar at the Tbilisi Interbank Foreign Exchange (TIBFEX). It is a firm policy of the NBG that the exchange rate should be close to the equilibrium. This is a prerequisite for a sustainable economic development. Accordingly, it was necessary to have the exchange rate adjustment. 

3. In particular, what kind of risks would exist if the exchange rate were maintained at the previous level? 

Disequilibrium exchange rate is not advisable for dynamic economic development. In particular, excessively appreciated exchange rate hampers exports and forces the country to greatly rely on imports. In fact, the country's international reserves are used for subsidizing importers and hinder domestic production. The country consumes more, than it earns.

4. Since the country is dependent on imports, the Lari exchange rate change may lead to price gains. Will it affect inflation and in which way?

The rate of price gains determines inflation. Although prices on certain products already increased, the NBG maintains that there are no economic reasons for the increase of the price level, including price gains on imported goods (See point 6 for details).

It should be noted that when the European producers tried to take advantage of the Euro introduction by increasing prices, these countries started a campaign: "Do not trust those who increased prices, buy goods elsewhere". The idea was that if there are no economic reasons behind, producers cannot maintain high prices for a long time. Competition will force them to reduce unfairly increased prices. 

5. Georgia is a consumption-oriented country and 80% of its consumption basket contains imported goods, doesn't it?

It is true that the share of imported goods and services in Georgia is very high, but in the consumption basket imported goods account for only 20%, while along with mixed goods they account for 40%. 

6. Why shouldn't we expect price gains?

According to data from the past three months, Lari has appreciated against the majority of foreign currencies. For example, one Euro equaled 2.20 Lari on August 1, today its value is at 2.10 Lari. Turkish Lira was valued at 1.21 Lari on August 1, now its price is 1.05 Lari. Accordingly, to pay for jeans worth 10 Turkish Lira it was necessary to spend more Lari in August than today. Obviously, had the US dollar exchange rate stood at 1.40 Lari, Turkish jeans would cost even less today, but the NBG is saying precisely this - there are no economic reasons for increasing prices, compared to the August 1 situation. As we can see, goods the price of which is determined in foreign currency other than the US dollar should not become more expensive. Neither should those Turkish jeans (or any other goods of other countries) become more expensive if they are purchased with the US dollars, since due to the change in the Turkish Lira/USD exchange rate these jeans cost now less in terms of dollars, than they did on August 1.

During the last three months the Lari has appreciated against the majority of foreign currencies of Georgia's main trade partner countries. Accordingly, goods imported from these countries have become cheaper.

As of the goods, whose international price is determined in the US dollars, their price might increase. However, international prices on the majority of such goods (fuels, sugar, vegetable oil...) dropped significantly after August 1. For example, the price of one barrel of oil plunged from 140 USD to 60 USD.

7. Who took the exchange rate adjustment decision?

It was a well-known fact for everyone who had a certain relation to the economy that the exchange rate needed to be adjusted. The necessity of the exchange rate adjustment was shared by the decision-makers in the NBG, Financial Supervision Agency, the Ministry of Finance, the Ministry of Economy, the State Chancellery. The same views were at the IMF and other international financial institutions. It was only to decide on time (when to make the adjustment), method (one-time or gradual adjustment), and the exchange rate level. The NBG held intensive discussions with other institutions on these issues. The last decision was made by the National Bank. 

8. Why now?

For the exchange rate adjustment in Georgia the following was needed: 

• Tendency of macroeconomic stability;
• To avoid the situation when the adjustment period coincided with some negative economic event (for example, financial crisis in a neighboring country);
• To have a positive price dynamics, so that depreciation would not lead to inflation. World prices dynamics allowed us to think about the exchange rate adjustment. To remind you, the main goal of the National Bank is to maintain price stability, for which it has sufficient resources and instruments.

9. One-time or gradual adjustment? Why one-time adjustment was a better outcome for the country? 

Both methods have positive and negative aspects. One-time adjustment leads to smaller changes in resources, but it is a less popular step. Gradual adjustment would lead to a gradual but complete loss of trust towards the Lari. Gradual adjustment would take approximately three months, i.e. rehabilitation of the economy would start three months later. It is not hard to imagine that people would stop trusting the Lari, had its exchange rate depreciated by 30 basis points daily (1.4400, 14430, 14460, 14490, 14520, etc.). On each of these days the NBG would spend 15-20 million USD of international reserves. This is precisely what was happening during October 28-November 6 at the TIBFEX trading sessions, when the exchange rate gradually changed from 1.4160 to 1.4400, and the NBG was forced to sell daily on the average 20 million USD of foreign currency reserves.

10. Why on Friday?

The currency exchange rate adjustment should have happened on Friday in order to have major fluctuations on Saturday-Sunday and to cause minimum problems for the business.

On Saturday and Sunday the market (without the NBG interventions) should have achieved the equilibrium point independently. On other days the market would not act independently, since the NBG is one of the TIBFEX participants, and thus, the equilibrium exchange rate which is expected by the markets in the medium-run would not be achieved.

11. In order to avoid a panic, why wasn't the population informed beforehand? 

In was incorrect to preannounce the exchange rate, since the goal of the NBG was to send a signal to the economic agents about a new equilibrium. The signal was correctly understood by the economic agents on Friday and the equilibrium was achieved in the market during the next two days. Any announcement of the National Bank would have affected expectations and the equilibrium would not be reached at an appropriate level. 

12. Did the NBG intend to adjust the exchange rate in advance, or it failed to maintain the exchange rate?

The interest of the NBG was to return the exchange rate to the equilibrium level. The NBG, by its action at the TIBFEX, created incentives for the exchange rate adjustment.

13. How was the equilibrium exchange rate calculated?

The NBG finds that the major deviation from the equilibrium exchange rate took place in the last three months, when exchange rates of foreign currencies against the US dollar changed, whereas the Lari did not follow these general trends. Accordingly, to return to the nominal effective exchange rate of three months ago meant to return to the equilibrium. The unchanged level of nominal effective exchange rate implied the Lari/USD exchange rate level at 1.65. It should be noted that the exchange rate registered in the foreign exchange market on November 7-9 showed that economic agents also considered the 1.65 level appropriate for the equilibrium nominal exchange rate.

14. By means of conducting a correct policy, was it possible to avoid the Lari depreciation? 

No. The Lari's deviation from the equilibrium took place in the last months. In this period the NBG tried to maintain the Lari exchange rate. This was conditioned by the fact that change of the Lari exchange rate could have been associated with the war or the financial crisis leading to a panic. Economic and financial consequences of such a panic could be deplorable. Therefore, the National Bank practically pegged the Lari exchange rate to the US dollar. As a result, the Lari appreciated in an unnatural way which was conducive to the need of the exchange rate adjustment in the future.

15. Why such a jump in the exchange rate level did not take place in other countries?

The exchange rate in other countries was gradually changing over the last three months. The exchange has not changed mainly in a few post-Soviet countries (Azerbaijan, Belarus, Turkmenistan, Tajikistan, Armenia, Uzbekistan, Kazakhstan).  

16. Will there be another jump in the exchange rate level? 

No. The NBG will maintain the exchange rate at the equilibrium level, allowing it to float in the future. If there are no speculative, ungrounded expectations in the economy or external shocks, the exchange rate even under the floating regime will maintain its medium-term stability. 

17. Will the Lari exchange rate have a positive impact on the inflow of foreign investments? If it will, what are the reasons of that? Also, will that happen in the medium- or long-term perspective? 

The exchange rate will affect foreign investments only in one way: sound macroeconomic environment improves the guarantees of macroeconomic stability. Such an environment attracts investors. In addition, when there are depreciation expectations, similar to those prior to November 7, people do not invest (since there is an uncertainty hindering decision-making processes) and economic activity is strained. 

18. What can you advise to the population - in which currency should they keep their savings? 

In order to reduce exchange rate volatility risks (for those who have such a desire), we should try to plan revenues and expenditures in the same currency. In particular, if a family has the main revenues in Lari, it should get a loan in Lari as well, and so on. We advise to the population to avoid speculative transactions. For example, the Euro is more volatile than the Lari against the US dollar but the population in Europe does not convert its savings from one currency into another because of this volatility. 

Also, deposits should be kept in that currency which is intended to be used for expenditures in the future. If a deposit does not have a concrete goal, then it is advisable to have a diversification of deposits, i.e. placement of deposits in different currencies.