Georgia's Foreign Exchange Reserves Decrease by $216 mln

The National Bank of Georgia (NBG) data reads that in October 2019, Georgia's total foreign exchange reserves decreased by $216 million and amounted to $3.38 billion. This is the minimum level of reserves the country has had this year.

Such a reduction in foreign exchange reserves may be linked to the alleviation of the minimum reserve requirement for commercial banks. In March 2019, under the Larization policy, the minimum reserve requirement for commercial banks in foreign currency increased to 30%. The decision aimed to increase the attraction of foreign currency resources to increase the relative advantage of the national currency GEL (Lari).

However, on October 2, 2019, the National Bank reversed its decision and reduced the minimum reserve requirement by 5 percentage points from 30% to 25%. Speaking on the decision, Prime Minister Giorgi Gakharia said the move was backed by the Georgian government and would boost private sector lending. The National Bank's decision came into force on October 17, 2019.

The Monetary Policy Committee of the NBG sets the norms for minimum reserve requirements, which are determined separately for national and foreign currencies based on the average attracted funds.

The minimum reserve requirements for funds attracted in a foreign currency are kept on foreign currency reserve accounts in the National Bank of Georgia. Banks are obliged to fulfill reserve requirement norms and have the required amount of funds on reserve accounts for 14 days. During the maintenance period, the required amount is blocked on the reserve accounts.

By changing reserve requirements, the National Bank of Georgia is able to influence banks' credit activities and interest rates. The reserve requirements on foreign currency liabilities can be used to control the interest rates on credits denominated in a foreign currency.

Exchange reserves are one of the leading indicators of the country's economy. This amount is the wealth that protects the country's economy in times of economic crises, external or domestic shocks, and acts as a buffer for it. Exchange reserves are an important indicator for investors as well - if adequate, this is a clear signal to investors and international lenders that operating in the country is relatively low risk. Accordingly, foreign exchange reserves are directly linked to the country's credit rating and investor confidence.

Moreover, it also influences expectations. If the financial sector sees reserves as low or the state fails to adequately utilize them, then the likelihood of even a minor crisis escalating into an economic recession is high.

How are Georgia's Foreign Exchange Reserves Filled?

An important source of filling Georgia’s foreign exchange reserves is the foreign debt and direct foreign exchange interventions attracted by the State. When Georgia, for example, receives $500 million foreign debt from the World Bank, the amount is credited to the National Bank's balance when it enters the country, after which the NBG provides the government with a relevant amount of GEL. Half of Georgia's foreign exchange reserves represent foreign debt.

Another source of replenishment of currency reserves is the SDR allocated by the International Monetary Fund. This is the amount allocated to Georgia by the Fund, which is a special right to loans.

Moreover, deposits opened by the commercial banks in the National Bank constitute an important part of Georgia's foreign exchange reserves. Today, it is about half of total reserves. For example, if a Georgian citizen opened a $1000 deposit at any of the Georgian banks for a period of one year with an interest rate of 3%, it means this person lent some money to the bank, which must repay the deposit holder the sum with the interest. To do this, the bank will lend this deposit amount to some other company to gain a profit. Throughout this process, the commercial bank has to comply with the regulations of the National Bank of Georgia. One of the most important of these rules is the minimum reserve requirements. From the $1000 deposit opened by the client, $250 or 25% must be stored in a deposit account of this bank opened in the NBG.

By Tea Mariamidze

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11 November 2019 19:43