Liquidity forecasting considers the main elements of the NBG balance sheet. The changes in the latter affect the liquidity of the banking system. To do this, the liquidity forecast team makes estimates of both liquidity demand from banks and autonomous sources of liquidity supply. The NBG takes actions to absorb excess liquidity or supply liquidity as needed, as it detects an imbalance between supply and demand.

 

The autonomous variables affecting the liquidity supply are derived from the NBG balance sheet and represent:

 

1. Net foreign assets
2. The government's net position to the NBG
3. Cash in circulation
4. other net assets

 

Reserves provided by the NBG are also considered, determined by the volume of open market operations and loans issued by the NBG.

 

The methodology for assessing the factors affecting autonomous liquidity supply and demand for reserves is discussed below.

 

Liquidity supply elements

 

The change in net foreign assets is determined by the NBG through FX interventions and the settlement of other FX transactions and can be therefore forecasted. buying the foreign currency causes growth of the foreign reserves, which increases the liquidity; In case of sale, liquidity decreases.

 

Net government position with the NBG which refers to state revenues and expenditures is the most important source of changes in the autonomous liquidity supply. The treasury data, namely the weekly forecasts about the revenues and expenditures is used by the NBG for liquidity forecasting. Based on these data, NBG calculates average daily revenues and expenditures for the forecast period. Government revenues and expenditures display the seasonality pattern for particular dates (for instance, pension distribution dates, deadlines for paying taxes). For example, distribution of pension, which takes place around the date 10-11 of the month, increases government expenditures that in turn results in growth in liquidity. Currency in circulation will increase in the subsequent days that has the opposite impact on liquidity.

 

Currency in circulation is another important component of autonomous liquidity supply. Increase in the demand for currency is followed by decreases in liquidity and vice versa. In the short-run the demand for currency is primarily affected by recurring seasonal factors such as payroll dates, pensions and allowances, weekends and holidays. These factors are considered in the process of short-term liquidity forecast.

 

Time series model (ARIMA) is the alternative approach for the projection of currency demand. However, high level of dollarization of Georgia's economy creates some hurdles in accurate estimation.

 

Other net assets contain changes in the NBG's capital and reserve funds and revaluation reserves. Predicting this component is relatively straightforward since these changes are either known in advance or they do not affect the supply of liquidity.

 

Since OMOs have an influence on the supply of banking reserves they should be considered in the liquidity forecast. Open market operations are conducted by the National Bank of Georgia. The date of auction and nominal volume of emissions are known in advance. The information about the volume of redemption is obtained from the data of past auctions. Issuance of securities decreases liquidity in the system, while the redemption at maturity increases it.

 

Liquidity Demand Elements

 

The demand for required reserve does not need to be forecasted in Georgia’s case. The NBG possesses accurate information on the volume of required reserves, as there is a 2-week interval between the end of the required reserve calculation period and the beginning of a new reserve compliance period.

 

Excessive reserve (under sufficiently high required reserves) is deemed to be equal to zero.

 

The supply of bank reserves is determined as follows:

 

Bank Reserve Supply = Net Foreign Assets + Government’s Net Position + Other Net Asset Positions - Cash in Circulation + Open Market Operations + loans disbursed by the NBG

 

Liquidity demand is determined from the demand for required and excess reserves. The demand for excess reserves is zero in normal circumstances.

 

If the demand for bank reserves exceeds the supply, the NBG offsets this difference through refinancing loans, causing an increase in the supply of reserves.

 

Assets		Liabilities
Autonomous factors of liquidity		Autonomous factors of liquidity
Net Foreign Assets	-	Currency in circulation	+
Domestic assets (government, economy, other.)	-	Government deposits	+
Monetary policy instruments		Monetary policy instruments
Refinancing loans		Correspondent accounts
One-month open market operations		Overnight deposits
Overnight loans		Certificates of Deposits (CDs)

 

‘-‘ decrease in demand for liqudity
‘+‘ increase in demand for liqudity