For trust, dollar still trumps lari
By M. Alkhazashvili

The Messenger, Georgia
April 19 2005

The Georgian financial sector is still highly dollarized. According to
the data of the State Statistic Department, Georgian citizens save 70
percent of their money in dollars, while 76.3 percent of commercial
bank deposits are in dollars, as reported by Bankebi da Pinansebi
(Banks and Finances).

Over the last 18 months, savings have become less dollarized; in
December 2003 86.1 percent of deposits were in dollars according to
the National Bank of Georgia; by February 2005 this figure had fallen
to 76.3.

Nonetheless, valuation of long-term goods in Georgia remains in dollars
and this can be explained by several factors. Firstly, while the dollar
is a universal world currency, the circulation of the lari is limited
even within Georgia. The lari is not in circulation in South Ossetia
or Abkhazia; nor is it dominant in Javakheti, where ethnic Armenians
predominate and the Russian ruble is the most common currency owing
to economic reliance on the Russian base in Akhalkalaki. Even in
Kvemo Kartli the ruble is frequently found together with lari.

A second factor is that many Georgian families rely on money sent to
them from abroad – and this money is mostly sent in dollars.

Thirdly is the fact that, despite its gradual strengthening over the
last fifteen months, the lari still does not command the full trust
of the population. This is largely because of the Coupon fiasco in
the first half of the 1990s, when people’s savings were wiped out by
the rapid devaluation of the coupon. The lari also devaluated as a
result of the 1998 Russian financial crisis. Recently, of course,
it is the dollar that has been devaluating; but this has so far
had little effect on popular support for the dollar within Georgia.
“Georgians still lack the trust in the lari which would help them
to save in their own currency,” says economist Demur Giorkhelidze as
reported by Rezonansi.

That the lari strengthened so quickly is one of the reasons for
continued lack of trust in the Georgian currency, and fear of possible
devaluation in the future. Furthermore, although the rate of the
lari against the dollar is more or less the same as in the middle of
last year, it should be noted that twice in the last twelve months
the lari has suddenly, mysteriously strengthened, only to then fall
back again. Late last year, for example, the dollar fell from 1.85
lari to the dollar to almost 1.60 in just three or four days; only
for it then to return to its former level.

It is unclear why this should happen, although one plausible
explanation put forward by some economists is that the government
has been interfering with the exchange rate. Such economists argue
that the strength of the lari is unsustainable, and that devaluation
is inevitable. They say, for instance, that if the government spends
money gained from privatization quickly this may well lead the lari
to weaken.

For Georgians to begin saving in lari, however, attractive bonds in
lari need to be introduced. So far the few bonds that do exist are
dollar-denominated.