COVID 19 Pandemic Economic Crisis and Reducing the Instability of Georgia’s National Currency
Vladimer Papava, Senior Fellow at the Rondeli Foundation
Maintaining the stability of the exchange rate of Georgia’s national currency – GEL is not directly related to the COVID 19 pandemic economic crisis as the depreciation of the currency started much earlier than the pandemic did. The basis for the depreciation of GEL were economic, psychological, administrative and political factors. The problem of maintaining the stability of the GEL’s exchange rate was exacerbated in the conditions of the pandemic.
In order to maintain the stability of GEL, short, medium and long-term tasks need to be resolved, some of which are discussed in this post.
During the COVID 19 pandemic economic crisis, short-term measures take priority as it is necessary for both businesses as well as the population to maintain trust towards GEL during this specific crisis.
Before introducing GEL, as well as after its introduction, opinions have been voiced periodically, as is the case today, that we must renounce GEL as the only legal tender and move the country to a multi-currency regime where each individual or entity will be free to choose the currency that they would like to use. In such a case, not only the economic sovereignty of Georgia will be damaged but it will turn the country into one big currency exchange booth as performing multi-currency exchange operations will become a top priority for businesses.
There are also opinions presented periodically that a convertible foreign currency should be introduced in circulation, instead of GEL, or a “Currency Board” must be established instead of the National Bank of Georgia (NBG) where GEL will be pegged to a convertible foreign currency with a fixed exchange rate. Even if both of these approaches were justified, they are still impossible to implement as the economy of Georgia is not capable of generating sufficient amounts of foreign currency. The confirmation of this is that imports exceed exports almost three times over which means that the country loses USD 3 in imports for each USD 1 generated by exports. If the economy of a country is not able to generate sufficient amounts of convertible foreign currency, it will not have enough of it to use as legal tender or maintain its fixed exchange rate with regard to the national currency.
In a short-term perspective, we consider it advisable to move form GEL’s floating exchange rate to a managed floating exchange rate which the NBG has practically been doing with the recommendation of the International Monetary Fund (IMF) since March 2020 (meaning after the beginning of the pandemic), albeit not very successfully.
At the same time, the NBG must also renounce its inflation targeting regime in monetary policy as this tool simply does not work in import-dependent countries as pointed out by Nobel Prize winning Joseph Stiglitz. It is worth noting that similar opinions have been stated by other famous economists as well.
Precisely due to the fact that Georgia is an import-dependent country, the inflation rate is very important as it reflects the changes in prices of that specific part of the consumer basket which is comprised of imported goods and services.
It is necessary for the NBG to move to the complex inflation targeting regime when not one but two indicators are targeted – inflation and imflation. In such a case, in order to achieve the target indicator of imflation, it will be necessary for the NBG to properly regulate the exchange rate of GEL which is of special importance not only today, which is to say during the COVID 19 pandemic economic crisis, but will also be a priority in the post-crisis period as well.
During the COVID 19 pandemic economic crisis, the negative sides of the large-scale measures performed by the NBG with the goal of larization have revealed themselves rather starkly. Namely, artificially increased demand on the national currency in import-dependent Georgia forced the NBG to also increase the amount of refinancing loans given to the commercial banks. Consequently, this caused the increase of the volume of money in circulation (M2). It is advisable for the larization measures to be stopped at least during the pandemic and the upper margin of loans to be given in GEL in the post-crisis period be reduced significantly.
It is necessary for the NBG to be constantly involved in currency trade operations through the Bloomberg system, buying or selling convertible foreign currency not in priorly announced amounts, but rather in amounts necessary to exclude the possibility of jumps in the dynamics of the exchange rate.
It is also necessary for the governance of the NBG to be in constant public communication with society, commercial banks and other businesses with the aim of the stabilization of the currency market.
In the medium-term perspective, it is necessary to take measures that will facilitate the development of the real sectors of economy in Georgia as a result of which the share of the home-produced goods in the consumer basket will increase from current 20% at the expense of reducing the share of imports (currently at 80%).
With this goal in mind, the funding of the Produce in Georgia project must increase. It must fund only the real sector of the economy – not the companies in the field of services. Given the name of the program, it must be focused on production alone and not recreation (the name of the program is Produce in Georgia and not Relax in Georgia). This program must create factories near every settlement (for example, factories for the processing of agricultural products).
The possibility of the government investing in the creation of various types of factories and then privatizing them must not be excluded either.
In a long-term period, it is absolutely necessary to start producing the kind of export products that contain large amounts of added value as exporting those would significantly increase the inflow of foreign currency into the country. This will cause both the export potential of the country as well as the volume of the gross domestic product (GDP) to jump up. Achieving this is only possible by moving the country to a knowledge-based economy model. In this regard, it is advisable for the Government of Georgia to revisit and implement the initiative of producing electric cars through Chinese technologies in Kutaisi. It is necessary for the state to support the implementation of other projects that are based on modern technologies.
The work of the government with those potential foreign investors that are looking for places for factories removed from China due to the pandemic needs to become more active. In this regard, Georgia must use the already existing free trade agreements with the European Union (EU) and China. A rather realistic prospect that such an agreement may be signed with the United States as well in the near future must also be taken into account.
In order to move to the aforementioned economic model, education and science must become a national priority (not only education, as it is today) as the new technological products created by science contain the largest volume of added value. Supporting science is necessary at the very least in order to have good teachers (professors) who will train teachers in the country.
It is necessary for scientific work to become prestigious which will allow talented youth to search for the development of their careers not only in businesses and the public service but in science as well. For this, it is necessary to significantly increase the funding of the Ministry of Education and Science which should ensure a sufficient increase in the remuneration of the work of scientists and the improvement of their working conditions. Citizens of Georgia should be provided not only with full budgetary funding for PhD (at the initial stage and later the same should apply to Master and Bachelor degrees) programs in state universities but with a sufficient amount of scholarship as well so that a young person interested in science does not have to look for work elsewhere.
Vocational education needs to be substantially improved as well so that citizens of Georgia are able to be employed in factories equipped with modern technologies. In such a case, the necessity of importing qualified foreign labor will be reduced to a minimum.
The COVID 19 pandemic economic crisis creates new opportunities and not using them to their fullest will be an utterly unjustifiable mistake.
- The Russian Exclave of Kaliningrad and the Lithuanian "Sting"
- In line for the candidate status, Georgia will get a European perspective. What are we worried about?
- The break-up of the Hungarian-Polish coalition - an opportunity for the EU
- Failed Tskhinvali Referendum
- The War and Georgia
- "Autocratic Peace"
- “Rural Orbanism”- Polarization as a determinant for Hungary's political future
- Illegal Presidential Elections in the Tskhinvali Region: Why Bibilov Lost and What to Anticipate in Future
- How to Respond to Russian Ultra-Orthodox-Historic-Hegemonism?
- The War in Ukraine and the UK’s New Role in Eastern Europe
- What Will the Abolition of the OSCE Minsk Group Bring to the South Caucasus?
- The Presidential Election in France and Europe’s Political Future
- Will Pashinyan Be Able to Make a Drastic Turnaround in Armenian-Azerbaijani Relations?
- Why Has the Abkhaz Side Become More Active on Social Networks?
- Why a Neutral Ukraine Is Not on Putin’s Mind (Ukraine’s Neutral Status Is Getting Closer, but What Does It Mean to Putin?)
- Europe's energy future - challenges and opportunities
- Uncontrolled Mass Immigration and the Position of the Georgian Government
- Changes in Putin's propaganda narratives since the Russian invasion of Ukraine
- Ukraine will soon embark on a path of practical integration into the European Union. What about Georgia?
- Positions and Actions of Turkey in the Russo-Ukrainian War
- NATO’s possible expansion in Northern Europe and its significance for Georgia and Ukraine
- Political Winter Olympics in Beijing
- What Is behind Putin’s Sudden Gambit in Ukraine?
- Abkhazia in 2021: Energy Crisis, New “Minister” and Political Controversy
- L'Europe pourra-t-elle éviter le “déjà vu” ? (France, President of the Council of the European Union, and the Tensions in Eastern Europe)
- US-Russia Relations and the Issue of Ukraine
- The New Targets of Ramzan Kadyrov’s Regime
- What are the Prospects of the Eastern Partnership Summit Set on 15 December?
- The Upcoming EaP Summit - Why the Trio Initiative Should Finally Find Its Way
- What Will the Post-Merkel Era Mean for the EU’s Russia and Eastern Neighbourhood Policy?
- What Lies Behind the Growing Cooperation of the Georgian and Hungarian Governments
- “Doberman” as a Minister: Inal Ardzinba’s Prospects and Challenges
- The Belarus Crisis: How to Enhance Our Resilience Against the Russian Strategy for Its Near-Neighborhood
- EU-Poland’s worsened relations and what it means for the EaP
- Lessons From Germany on Political Culture: What Georgia Can Learn From the German Parliamentary Elections
- Belarus One Year On: An Insecure Regime Under Russian “Protection”
- Why Did Iran-Azerbaijan Relations Become Strained?
- Russia’s Parliamentary Elections - What Can Be Said About the Regime’s Stability
- Six Key Takeaways from State of the Union Address - Too Little on EU Enlargement?
- An Emerging Foreign Policy Trend in Central and Eastern Europe: A Turn from China to Taiwan?
- Vaccination: “To Be, or not to Be”…
- Can Georgia use China to balance Russia?
- Sharia Patrols in Kabardino-Balkaria: A Growing Trend or a Local Conflict?
- Belarus’ exit from the Eastern Partnership and what to expect next
- Pacta Sunt Servanda: Agreements must be kept
- Associated Trio, What is Next?
- Formation of a New “Political Elite” in Abkhazia - Who Will Replace the Old “Elite?”
- The symbolism of the EU flag and why a true Christian would not tear it down and burn it
- Securitization of the Arctic: A Looming Threat of Melting Ice
- What Should Georgia Expect from the NATO Summit
- The Issue of Abkhazia and the Tskhinvali Region in the Context of NATO and European Union Membership
- (Re)Mapping the EU’s Relations with Russia: Time for Change?
- USA, Liberal International Order, Challenges of 2021, and Georgia
- Georgia's transit opportunities, novelties and challenges against the backdrop of the pandemic
- ‘Vaccine Diplomacy’: A New Opportunity for Global Authoritarian Influence?
- Deal with the ‘Dragon’: What Can Be the Repercussions of the China-EU Investment Agreement?
- Georgia’s Application for European Union Membership
- A New Dawn for Transatlantic Relations under Biden’s Presidency: What Are the Hopes for Georgia?
- Who did the judge sentence: Navalny, Putin or Russia?
- Biden’s Conundrum
- 2020 Developments in Abkhazia: “Elections,” the Pandemic and Deeper Integration with Russia
- The Hungarian Crisis: Is the EU Failing against Authoritarianism?
- Could Belarus Become a Prelude to the Great Polish-Swedish War 400 Years Ago?
- Escalation of the Karabakh Conflict: Threats and Challenges for Georgia
- Some Thoughts on the Use of the Term „Post-Soviet Space“
- Georgia’s European Way During the Period of Pandemic Deglobalization
- Turkey's Caucasus Policy Against the Backdrop of the Latest Armenia-Azerbaijan Tensions
- Khabarovsk Krai Protests as an Indicator of the Russian Federation’s Stability
- The Pragmatism and Idealism of the Georgian-American Partnership
- Independence of Georgia and the Historic Responsibility of Our Generation
- Pensions, Economic Growth, Agflation and Inflation
- Trio Pandemic Propaganda: How China, Russia and Iran Are Targeting the West
- Complications Caused by the Coronavirus in Turkey and Their Influence on Georgia
- From Russia with… a Canny Plan
- “Elections” in Abkhazia: New “President’s” Revanche and Challenges
- Consumer Crisis in the Tskhinvali Region: Food for Thought
- Georgians Fighting the Same Battle 99 Years Later
- Georgian Defense – Political Paradox and the Vicious Circle of Not Having a System
- Why It Matters: Georgia’s 'Troll Scandal' Explained
- Political Crisis in Occupied Abkhazia
- What is the Significance of Killing General Qasem Soleimani?
- What Will the New Dialogue Format with Russia Bring for Georgia?
- On the “Russian Culture Center” in Georgia
- Whither Economic Policy?
- Main Messages of Russian Propaganda
- Massive Cyberattacks On Georgia Calls For Defense And Resilience
- What do we know about the meeting of the Foreign Ministers of the Russian Federation and Georgia?
- What is the Connection between NATO and Reclaiming Abkhazia?
- New Focuses of the Anti-Occupation Policy
- Georgia's Problems are not Addressed at G7 Meetings: Who is to Blame?
- Vladimir Putin’s Main Messages in his Interview with the Financial Times
- Dugin has Come Out as a Supporter of Georgia – How Did This Happen?
- The Outcome of the European Parliament Elections - What Does it Mean for Georgia?
- Deterring Russia
- Why Local Elections of March 31, 2019 in Turkey are Important?
- Does the Principle of Strategic Partnership Work in Ukraine-Georgia Relations?
- A New Chance for Circular Labor Migration between Georgia and the EU
- Georgia’s Trade with Electricity: The Influence of Bitcoin
- Georgia’s External Trade: How to Strengthen Positive Trends
- The Risk of the Renewal of the Karabakh Conflict after the Velvet Revolution in Armenia
- Why It Is Necessary to Know the Day the Russo-Georgian War of 2008 Started
- Georgia’s Position in the Westernization Index 2018
- Why Did the Results of the G7 Summit in Charlevoix not Meet Our Expectations?
- The Ben Hodges Model – a Real Way for Georgia’s Membership in NATO
- Why did the Foreign Ministers of G7 not remember Georgia during their 23 April 2018 Toronto Meeting?
- Georgia and the American Strategy
- Putin’s Pre-Election Economic Promises: Myth and Reality
- Trade of Electricity: Successes of 2016, Reality of 2017 and Future Prospects– the Impact of Bitcoin (Part Two)
- Let Geneva Stay the Way it is
- Trade of Electricity: Successes of 2016, Reality of 2017 and Future Prospects – the Impact of Bitcoin (Part One)
- Geopolitical Vision of the Russian Opposition
- Dangers Originating from Russia and Georgia’s Security System
- Eurasian Custom Union and problems of Russian – Georgian FTA
- What Awaits the People of Gali?
- Disrupt and Distract: Russia’s Methodology of Dealing with the West
- Trojan Horse Model IL- 76 or Why Would Russia Want to Fight Georgia’s Forest Fires
- Russian Diplomats in Georgia – who are they, how many of them are there and what are they up to
- Putin’s Visit to the Occupied Abkhazia: Was our Reaction Actually Adequate?
- Pence’s Visit to Georgia: Several Lessons and What We Should be Expecting
- Is it Acceptable for Georgia to Declare Neutrality?
- Georgia’s European Perspective in the Context of EU’s Future Evolution
- Brexit Negotiations between the European Union and the United Kingdom have been re-launched: What will be their Influence on Georgia?
- How to Stop the “Creeping Occupation”
- Kremlin’s Policy in the Occupied Regions of Georgia Moves to a New Stage
- Syrian Civil War in the Context of Regional Security
- The Winnable Second Round of Russia’s Neighbors’ Struggle against Its Imperialism
- Turkey’s Domestic and Foreign Policy in the Context of Regional Security
- Post-Soviet States – Struggle for the Legitimation of Power
- Current Foreign Policy of Georgia: How Effective is it in Dealing with the Existing Challenges?
- Military Resilience - a Needed Factor for NATO-Partners
- Observations on the Agreement Reached with Gazprom
- New Russian Weaponry in the Caucasus and Its Impact on Georgia’s NATO Aspiration