Both Georgia and Armenia have been subject to negative external economic shocks, particularly through remittances and exports, in 2014 and 2015, yet the macroeconomic adjustment of the countries appears to have been different. While the GDP growth of both countries remained relatively stable at around 3% in both years, the exchange rate of the Georgian Lari (GEL) depreciated by 29% in 2014-2015 compared to 15% for the Armenian Dram (AMD). While the depreciation of the AMD was initially quicker than that of the GEL, the GEL depreciation lasted much longer into 2015.

Comparing the external shocks faced by the economies of Armenia and Georgia, it appears that Armenia was hit earlier, with remittances and FDI clearly dropping off stronger at the end of 2014 than in Georgia. However, Georgia was subject to a much larger and prolonged fall in exports – a 6% of GDP decrease in Georgia compared to 1.7% of GDP in Armenia in 2015. Also, the reaction of imports to reduced income and lower exchange rates appears much quicker in Armenia, partially explaining why the exchange rate may have behaved more stable in 2015.

However, policy responses across the two countries were clearly different. While the National Bank of Georgia (NBG) only very mildly intervened with reserves in the foreign currency market to smooth the depreciation path of the GEL, the Central Bank of Armenia (CBA) performed heavy foreign exchange interventions in 2014, using up 34% of its foreign currency reserves. Furthermore, monetary policy in Armenia was much more contractionary in a short timeframe, with both the refinancing and Lombard rates being sharply increased in late 2014 (by 4 and 11.5 percentage points respectively), compared to only a relative mild and slower adjustment of the GEL policy rate by 4 percentage points throughout 2015.

Although both countries have experienced similar growth rates of GDP in 2014 and 2015, the contractionary monetary policy seems to have contributed to a significant weakening of the domestic market and stresses on the financial sector in Armenia, whereas domestic demand and credit in Georgia remained highly resilient in 2015.