Foreign exchange auctions
The foreign exchange (FX) auction is a monetary policy instrument through which the National Bank sells or buys foreign currency on the interbank FX market. The main goal of the FX auction is to fill the international reserves, to eliminate the pressure on the exchange rate due to high temporary inflows of foreign capital and/or to balance the private and government gap.
For instance, to maintain the country's foreign exchange reserves at an adequate level, the NBG periodically intervenes in the foreign exchange market and purchases foreign currency. The NBG interventions are through open market operations.
Government operations carried out in a foreign currency create the need to intervene in the foreign exchange market. The NBG is a government's banker, thus government accounts are opened in the National Bank. Hence, inflows and outflows of government funds are managed through the NBG and government accounts bypass the foreign exchange market. As a result, despite the country's balanced Balance of Payments, private sector might have a negative foreign balance while the state might have a positive balance. To balance the gap, the National Bank of Georgia will sell foreign currency via an FX auction and vice versa. For instance, during the 2008-2009 economic crisis the private sector had a negative foreign balance while the government had a positive foreign balance due to external aid, leaving the country's foreign position in balance. However, to avoid a foreign currency imbalance in the private sector, the National Bank of Georgia supplied foreign currency through FX auctions.
The National Bank conducts FX auctions based on a multi price method. Notifications about upcoming auctions are sent to commercial banks in advance. The settlement with the bank(s) winning the auction occurs the next business day. (Additional information about the existing exchange rate regime can be found in the "Exchange rate regime").
From 2019, the National Bank of Georgia introduced a new instrument - FX options. The main goal of using FX options is filling the international reserves. FX option are financial instruments, which gives the right to a holder (but not an obligation) to exchange currency in a predetermined timeframe.
The National Bank of Georgia will offer to the market the options with the right to purchase Lari on an auction basis. The options will give a right to the owners to acquire gel (in exchange for USD or EUR) within the predetermined timeframe and bind NBG with the liability to sell GEL to the options' holders upon execution of the option. The NBG will monitor developments on the market and depending on the FX liquidity conditions, may increase or decrease volume of FX options.
The strike price of the auction is the official exchange rate of the day when an option is exercised, i.e. average exchange rate of the previous day. It ensures that the international reserves be filled automatically only when the lari exchange rate has a tendency to strengthen. At the same time, a holder is able to use an option only when lari exchange rate is stronger than the previous 20-day average. This restriction prevents filling of reserves during short-term volatility of the exchange rate.