Expanded Summary

Our study is the first attempt to overview the three main monetary crises in Georgia history since its independent and to study origin of the crises and evolution. The main goal of monetary policy of the sovereign country is to maintain its political and economic independence. In this regard, the cornerstone of any economic policy should be to reach stable economic growth and welfare of the population that will ensure the steady and reliable integration into the world community as a successful, progress and innovation-based state.

In this regard, the economy and its main indicator - the monetary system is necessary for such asolid and predictable environment, which would be a reliable basis for further progress and development.

This model is called a strong asymmetry in financial societies. This is a model of the financial system where information from the past and present is available. It has a transparent and reliable statistics based on the environment and the most importantly, there is an opportunity to plan the future, its expected financial strategy, course and outcome.

Unfortunately, in Georgia we can observe the low level of financial and economic asymmetry, or in other words, the only one we have to study is the ability to analyze the past. The current situation in finance and economy shows non-transparent market conditions, subjectivity and emotional rule of management in economy, absence of developed financial and capital markets (and its actual liquidation). Such conditions do not allow us to analyze the current situation, which is totally groundless deprives future forecasts and their possible reflection model. This removes the basis for any attempt to establish real stability and ensure sustainable future-oriented, long-term and stable development of the financial strategy.

Our research aims to determine the relevance and regularity of GEL exchange rate and monetary policies conducted by the National Bank.

National currency of Georgia – LARI (GEL)was emitted in September 1995. Its circulation was preceded by a stabilization program, which was enacted in 1994. Since then the circulation of the lari money aggregates (M0, M1, M2 and foreign currency M3) in sequence, but is steadily increasing.

Our research studied what impact the monetary crisis had on GEL exchange rate and the National Bank's foreign exchange policy. In this regard, based on study of the past twenty (20) years monetary policy, we have identified three major Georgian Laricurrency crisis:

1998 - 1999 years, starting with Indonesia, moved into Russia and affected Georgian currency  hardly - first currency crisis;

 2008 - 2009 years - war conflict with Russia and and global financial crisis,  - second currency crisis;

2014 – 2016 years  - tighten monetary policy of FedReserve and strong US dollar –its influence on world currency system and Georgian case – the third and the most serious monetary and currency exchange crisis in Georgia.

The first and the second monetary crisis of Lari are observed based on historical performances, while the current one is ongoing issue and the study paid the special attention on it and its causes.

At the end of 2014, the US Federal Reserve Bank officially announced theend of “quantitative easing policy” and as result - the US dollar strengthen against all major currencies. This issue affected global economy, slowdown global growth, resulted sharp drop in energy prices andfurther expectations of global markets and currencies just triggered sharp volatility. In this regard, Georgian foreign exchange market, which faced luck of liquidity and market principles in its structure was unprepared for this challenge and suffered hardly.

This situation was compounded with money aggregate growth, which 5.911 million  in December 2014 (1 billion or 20 percent increase of money supply in 2014)> That was one of the main reason of Georgian currency crisis and its depreciation. As a result, the exchange rate depreciated against the US dollar from 1.7363 (December 2013) - up to 2.4985 (28 January 2016) (44 percent devaluation).

International currency reserves reveals the unfavorable trend. Since October 2013, when the foreign currency reserves of its historical maximum - 3.110 million US dollars –it was reduced to 2.447 million US dollars (January 2016), or 663 million US dollars (21 percent). At the same time, such intervention has not been does not decrease the Georgian Lari mass in circulation. At the end of the 2013 there were 5.418 million Georgian Lari (M 2) and in January 2016 is was 5,403 million (M 2). In fact, 663 million US dollars in reserve were spent generously and without purpose.

We have studied the deficit coverage issue and its influence on Lari exchange rate. In the last three years emission of State Securities papers has increased dramatically:

In October 2012 - 702 million internal Debt;

In December 2013 - 864 million;

December 2014 - 1,457 million;

October 2015 - 1,824 million;

January 2016 - 1.797 million.

It should be noticed one peculiarity – as the rule, emission of the state securities to the strengthening of the exchange rate, but in Georgian reality, Security papers were used by commercial banks as collateral to receive loan from National Bank of Georgia. As a result, the Georgian Laricirculation has increased drastically and that was one of the main reason for the currency devaluation. Also, GEL exchange rate was negatively affected by non coordinate activity between Ministry of Finance of Georgia and the National Bank of Georgia.

For example, at the end of 2015, the Treasury balance had 900 million GEL, in early 2016 it was just 622 million Gel and in February the remainder was just 300 million Gel – this issue also affected lari exchange rate against USD on the local market.

From the other point, it is positive that energy prices drop dramatically and this issue helped Lari rate - reduced the payable currency (mainly in US dollars). But it was a pretty heavy blow to Georgia's energy future projects, as such drop dramatically reduced their investment attraction and several companies cancelled the investment memorandum.

Growing negative balance balance of payments, which was 5.5 billion US dollars in 2015, shows a negative pressure on Lari rate too, because there is a decrease in foreign exchange inflows.

Additional problem is loans of commercial banks in Georgia to its international lenders. Loans in Georgia issued in line with USD exchange rate, while income of population is in Gel. This issue hardly affected population and its ability to repay the loans. Only in 2015, banks paid US $ 1.4 billion loans. Only 510 million US dollars in 2016 should be repaid, while in 2017 the figure should be 2 billion US dollars. What is most alarming is that in this period, commercial banks borrowed resources of 2.7 billion US dollars, while they have to pay 4.4 billion US dollars. Such conditions create instability to exchange rate and add additional problems to the monetary policy.

The alone way to improve the situation is the solid and reliable economic growth, although the rate of growth was too low:  in January 2016, the result is only 0.8 percent of growth( per year growth rate was 2.5 in 2015).

Overally, the business environment in Georgia is not reliable for one to support sustainable growth – As of February 2016, commercial banks in Georgia issued a total credits of 16.2 billion Gel, while in collateral portfolio banks fixed more than 300 billion property. Such unprecedented proportion (1 to 20) compared to developed countries and to international practice(usual proportion should be 1 to 2 , or 1 to 3 in developing countries) does not support business to develop its business and activity. In such situation, the whole business in Georgia is actually is in collateral of commercial banks and attracted resources is quite expensive (15 - 20 times more expensive in comparison with international practice). In our view, it is impossible to have stable and rapid economic progress and the improvement of the situation based on current conditions.

As conclusion, we can state - Lars has actually lost at least one function - the accumulation of resources and it is sharply limited its exchange and measure of value functions.