DOI:  10.36172/EKONOMISTI.2021.XVII.01.KESHELAVA

Expanded summary

Under the Bretton Woods and Gold Standard international currency systems, currency crises were quite rare events. There were several leading currencies all around the world, and the system experienced major fluctuations only due to the large-scale events, such as the Great Depression and World War II. After the collapse of the Bretton Woods system, most of the countries switched to the fiat money system, and hence, the stability of a single currency became dependent on the economic and political situation of a specific country. In addition, globalization and the increasing trend of economic integration of the countries makes it even more difficult to maintain stability of the national currency. As a result, the cases of the currency crises become more frequent in the 20th century, and several global crises have already occurred in the beginning of the 21th century. Thus, it is quite important to predict the episodes of the currency crises in a timely manner and propose policy measures that can avoid or at least mitigate negative impact of the crisis to macroeconomic stability. This article aims to define currency crisis, identify episodes of the currency crisis for Georgia and describe peculiarities of these episodes.

In general, currency crisis is defined as an abnormally large change in the national currency over a short period of time, resulting in the partial or complete loss of the medium of exchange and store of value functions of the national currency [Burnside, Eichenbaum & Rebelo, 2007, pg. 1]. Nevertheless, this definition is mostly valid for fixed exchange rate regimes, while many countries (including Georgia) prefer a floating exchange rate regime over the fixed exchange rate regime. Hence, the most common definition states that, a currency crisis is a situation, when speculative attack leads to a sharp devaluation / depreciation of the exchange rate and / or a significant reduction of the official international reserves.

This article defines currency crisis based on the Exchange Market Pressure Index (EMP), which consists of three main components: 1) annual percentage change of the nominal exchange rate (USD to GEL exchange rate in case of Georgia); 2) Deviation of the domestic nominal interest rate from the foreign nominal interest rate (monetary policy rate for nominal interest rate and US federal funds rate for foreign nominal interest rate); 3) Change in official international reserves [Eichengreen, Rose & Wyplosz, 1996]. In the next stage, EMP is compared to its critical value, and hence, a binary variable is defined.

Since 2008, there have been 8 episodes of the currency crisis and it is possible to distinguish three periods of crises: 1) 2008-2009; 2) 2015-2016; and 3) 2020 currency crises. The global 2008 currency crisis was mostly driven by the negative global macroeconomic shocks associated with capital outflows from developing to developed countries, and decreased crude oil and commodity prices in the international market associated with the severe financial crises in United States and EU countries. It is notable that the direct impact of the global financial crisis to the Georgian economy through the financial sector was quite limited due to low integration of Georgia’s financial sector into the global financial network. Nevertheless, the crisis had a negative contribution to the real sectors of Georgia’s partner countries - worldwide aggregate demand decreased notably.                           

                The 2015-2016 currency crises in Georgia is caused by both regional and country-specific factors. The external factors include:

• Monetary policy of the Federal Reserve System (FED) – after a long-lasted expansionary monetary policy, economic agents had expectation that US federal funds rate is going to increase that ultimately reduced the net inflow of capital to the developing countries.
• Decline in world prices of crude oil, agriculture products and metals – some Post-Soviet countries like Azerbaijan, Kazakhstan, Russia, Turkmenistan and Uzbekistan are oil exporter countries, while Belarus benefits from the transit of Russian crude oil. Most of the Post-Soviet countries (including Georgia) are also heavily dependent on the exports of ferroalloys, metals, and agriculture products. Hence, reduction of the international prices of these products have a significant negative impact on the Post-Soviet countries [Dabrowski, 2016].
• Armed conflict between Russia and Ukraine has led to the human losses, damaged infrastructure in the conflict regions, notable increase in military spending, increased expenditures related to the IDP assistance programs from the Donbas, and trade disruptions between Russia and Ukraine. This process was accompanied by the political problems in Ukraine.
• Notably strained political relations between Russia, and the United States and EU countries, leading to the imposition of diplomatic, political and economic sanctions on Russia by the EU countries, the United States, Canada, Australia, Japan and other countries. Imposed sanctions tend to have a negative impact on the Russian economy.

The third period of the currency crises is related to the COVID-19 pandemic in 2020. It should be noted that the first wave of the currency depreciation started in the summer of 2019 (before COVID-19 pandemic) due to the ban of flights from Russia that had a significant negative contribution to the tourism inflows, national currency and aggregate demand. Depreciation of Georgian lari against currencies of the partner countries was followed by inflation rate notably exceeding NBG’s target (e.g. inflation was 6.1 percent in September 2019, while NBG’s target was only 3 percent). Then, COVID-19 health crisis caused restriction of the international flight (affecting tourism inflows), local policies of social distancing and policy measures devoted to decreasing mobility of the people that had a negative impact on production, deteriorated trade and foreign direct investment. It is notable that after sharp decline remittances started to recover quite soon.