Short-Term Swings of the Georgian Lari: A Guessing Game with High Stakes

In the last two weeks, the Lari depreciated, once again, against the US Dollar. The Georgian currency lost about eight Tetri against its American counterpart, causing quite a stir in the media, among political groups and economic experts. While government authorities claimed that the recent developments are short-term fluctuations driven by negative expectations, the Turkish Lira depreciation, the Dollar’s global strengthening, and are therefore not connected to the fundamentals of the Georgian economy, members of the opposition were quick to blame incompetent fiscal and monetary policy.

One must point out that in such a short period of time, it is impossible for anyone to precisely determine the factors affecting the Lari’s exchange rate. This is mainly due to data availability, or, to be more precise, due to its absence, as data on trade, FDI, remittances and revenues from tourism for May are as yet unknown. Therefore, any attempts to explain away the recent fluctuations with macroeconomic factors are just wild guesses. However, using the Turkish Lira fluctuations as an explanation for all Lari “problems” seems to be a more logical (and at the same time easier) way to get rid of intrusive journalists.

At first glance, it may be easy to reach the conclusion of “co-movement” between these currencies. To observe the relationship one can simply look at the graph of exchange rate developments against the US Dollar. Figure 1 shows a pattern for USD appreciation against the Georgian Lari, Russian Ruble, and Turkish Lira in the last five years (upward movement indicates USD appreciation against the currency in question). From this trio, Lira weakened the most (by 190.82%), while the USD gained “only” 57.08% compared to the Lari. Despite the difference in the magnitudes of currency swings, their direction is visually similar. For example, Lira and Lari were moving side by side until 2018, while the Ruble and Lari were repeating a parallel path since 2017.

To measure and explain these relationships, economists use sophisticated econometric models which span many years. The non-economists may claim that these models are too esoteric – why not use an intuitive, “naïve” model, by calculating the degree of correlation between Lari and other currencies? Surely, the degree of economic closeness with other countries in the region (be it Russia, Turkey or Ukraine) could explain why Lari would move in unison with their currencies, and would provide an easy explanation for Lari depreciation against the USD. For example, if a Georgian worker in Tukey earns his/her salary in Lira and then transfers Lira into USD in order to send remittances back to Georgia, a depreciation of Turkish Lira against the USD would translate into less US Dollars entering Georgia, and, therefore, would cause a higher price for USD on the Georgian internal currency market.

But in this blog I want to demonstrate the drawbacks of using the naïve approach (simple correlations) for explaining currency movements in the short run. If we calculate a simple correlation between Lari and other 40 currencies using NBG’s data on daily exchange rates for different periods (Table 1), the correlation between Georgian Lari and Russian Ruble is 0.85 for the last 5 years period and only 0.45 for June 2006 – June 2013 (period of Russian embargo on Georgian exports). Correlation coefficient with Turkish Lira and Azerbaijanian Manat is calculated to be 0.81 and 0.89 respectively for the last 5 years. The results seem to be extremely logical, as these countries are our main trading partners, sources of remittances and tourism inflows for Georgia and exchange rate fluctuations should transmit to Lari through these and expectations channels . However, the fact that we see the coefficients with Belarussian Ruble, Ukrainian Hryvnia, Kuwaiti Dinar, Norwegian Krone and Swedish Krona to be higher than 0.9 destroyes our previous argument. The good thing is that high positive correlations with almost all currencies in Table 1 hint that there were some common factors which simultaneously affected all countries (especially in the last five years)- e.g. global appreciation of the US Dollar or oil price changes on the world markets. In order to disentangle these effects, one would need to use the sophisticated “esoteric” models.

Thus, we may conclude that the discussion of the causes behind the Lari short-term depreciation against the USD usually does not give any specific answers. Without delving deeper into data on current account and capital flows, any “definitive” explanation would turn out to be a speculation at best and a lie at worst. Considering the fact that currency crisis and political instability in Turkey already had a negative impact on the Georgian economy in the first quarter of 2019, we may guess, or expect the same scenario to repeat itself in the upcoming macroeconomic data. Or, perhaps, the data will have a completely different story to tell – we have to wait and see…

By Giorgi Mzhavanadze