Additional liquidity instruments
In response to Covid-19 pandemic, the National Bank of Georgia (NBG) has set up temporary instruments to avoid future liquidity risks: the FX swap, the stand-by FX swap, and the SME liquidity supply instrument
"Swap" operations are a monetary policy instrument aimed at delivering liquidity to the market.
From April 2020, in addition to standard refinancing loans, the NBG has provided liquidity support to the market through FX swap operations. In addition to banks, the FX swaps were also available to microfinance organizations.
Through swap transactions, the NBG buys foreign currency with the national currency for a period of one month at a spot rate, provided that it is sold back at the forward rate. The commercial banks and microfinance organizations will receive liquidity through swap operations with a limit of 200-200 million USD (in total 400 million USD). The total amount of the swap will be distributed among the participants of the scheme in proportion to the market share of the financial institution. At the same time, to avoid excessive concentration, a limit of 25% of the total volume is be imposed on each organization. The Commercial Bank and the microfinance organization have the opportunity to receive different amounts of FX swap every month within the limits set for them.
Moreover, to reduce the risk of liquidity, the NBG uses a stand-by swap instrument, which allows banks, if necessary, to receive additional liquidity at a penalty rate. The stand-by swap tool allows banks and microfinance organizations to meet the increased demand for GEL liquidity without taking additional risks.
The calculation of the forward rate of the FX swap relies on interest rates of one month TIBR1M for GEL and interest rate of one month LIBOR1M rate for USD. Meanwhile, in the case of a stand-by swap, the spread of overnight loan to the NBG policy rate (currently 0.75%) is also added to the interest rate of the loan.
The period to use the FX swap operation is set at: for commercial banks - from April 15, 2020 to April 15, 2021; for microfinance organizations - from April 15, 2020 to October 15, 2021 (the amount will be reduced gradually from April 15, 2021). In April 2021, the period of use of FX swap operations lasted for one year and ended on April 15, 2022.
Meanwhile, the stand-by swap instrument will operate until May 1, 2021, with the possibility of a monthly renewal. In April 2021, the period of use of stand-by swap operations was extended by one year.
From May 1, 2022, the term of the stand-by swap has been reduced to 7 days. This tool can be used until the Board of the National Bank makes a decision on its termination. From May 1, 2022, the calculation of the stand-by swap operation rate is based on overnight TIBR rate and overnight SOFR rate.
As of June 1, 2020, the liquidity instrument to support SMEs was launched, consisting of two components. The first component is designed for commercial banks that will have the opportunity to receive GEL liquidity support from the NBG using small and medium business loan portfolios as collateral. The second component is designed for microfinance institutions, which will be able to mobilise resources from commercial banks, with the support of the NBG, using the SME loan portfolio in accordance with the criteria established by the NBG.
This liquidity management mechanism will operate until the end of 2023 (The amount will be reduced gradually from 2022), with the possibility of monthly renewal. Meanwhile, the price is determined by the TIBR1M one-month index.