Subscribe
Logo

News

The Foreign Exchange Rate’s Impact on the Balance of Payments and the Financial Sector
Thursday, 01 December, 2016

On December 1, ISET hosted two economists of the Asian Development Bank (ADB), George Luarsabishvili (Economist, Georgian Resident Mission, Central, and West Asia Department) and Dominik Peschel (Economist, Central, and West Asia Department). Mr. Luarsabishvili gave a presentation entitled “The foreign exchange rate’s impact on the balance of payments and the financial sector”, during which he overviewed the effect of the recent currency depreciation on the balance of payment and financial stability of Georgia. In addition, the two guests outlined the effectiveness and timing of the current de-dollarization strategy implemented by the Georgian government.

At the beginning of the presentation, Mr. Luarsabishvili examined linkages between currency depreciation and current account deficit. He claimed that the lari's depreciation should make domestic production more competitive in the foreign market, increase export and improve the current account. However, due to high and persistent dollarization, the depreciation limits economic growth and aggravates foreign debt servicing. In this fashion, currency depreciation can be contractionary.

Furthermore, high dollarization makes depreciation a dangerous process for the financial sector, as many people with loans or debts in US dollars are unable to pay. In addition, high and persistent dollarization constrains the effectiveness of the monetary policy, as the transmission of the monetary policy to the market interest rates and real variables are rather limited.

Mr. Luarsabishvili also mentioned that the Georgian government has limited power to use diversified instruments for a de-dollarization process. For instance, imposing higher reserve requirements for dollar resources might have a negative impact on the economy, as liquidity in dollars would reduce even further. In addition, the dedollarization of loans while leaving deposits highly dollarized might lead to increased interest rates and impede economic growth. Therefore, successful de-dollarization needs a stable macroeconomic environment and it is hard to say that Georgia has a good starting position for total dedollarization.

Subscribe