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The Factors Causing the Economic and Financial Crisis in Georgia and the COVID-19 Results

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Paata Kunchulia

Doctor of Business Administration, Associate Professor, David Agmashenebeli University of Georgia ORCID iD: https://orcid.org/0000-0001-5111-7995 E-mail: pkunchulia@gmail.com

Keywords: economic and financial crisis, currency crisis, target inflation index, de-dollarization policy, COVID-19 results.

Abstract

Peer review method: Double-Blind

Accepted: March 17, 2022

Published: April 04, 2022

Original scientific article

DOI: https://doi.org/10.52340/tne.2022.17.1.05

The paper contains analysis of the currency crisis in Georgia and the factors causing it, the one, which in the last decade has shaped out into the financial crisis creating a huge economic problem. We focused on the increasing inflation far behind the target figure defined according to the economic situation in place. The target figure of the inflation should reflect the price fluctuation index most optimal for the development of the national economy at the time. The sole task of the monetary policy of the National Bank of Georgia is maintaining inflation at the target level. In 2009, NBG shifted to a new mode monetary policy of targeting the inflation, which means defining the desired mid-term inflation index.

NBG determined the 2010-2012 annual target inflation index at 6%, which would then decrease periodically and made up 4.7% on average. However, the reality proved to be different. From 2018 up until now, the target inflation index has gone down to 3%. In 2021, the inflation was above the target figure and the annual inflation rate hit 13.9%. A short-term interest rate is the key tool, where targeting inflation is concerned. If the forecast inflation rate is below the target index, the monetary policy becomes more liberal and conversely, if it is above the target, the monetary policy becomes more stringent.

The negative devaluation effect will keep until the dollarization is high. It was to mitigate it that on 1 January 2017, the Government introduced the de-dollarization policy. The Government and NBG banned issuance of up to 100.000 GEL loans in a foreign currency, which subsequently increased up to 200.000 GEL. Dollarization is the situation where payments for imported products are predominantly made in USD and its share in the credit and financial liabilities is fairly large. [1]

According to the NBG statistics, compared to the previous month, in August 2021, the dollarization index on deposits went up by approx. 0.6% points and made up 60.01% but slightly decreased on credits to 52.27%. The share of the USD in the foreign currency credits was 83.83% while that of euro made up 14.75%. [2]

In the paper we also reviewed and analyzed the direct foreign investments in Georgia. As said above, there are several reasons behind the devaluation of the GEL exchange rate, with one of them being a smaller amount of the direct foreign investments, which brings about deteriorated balance of payments. The balance of payments reflects the resident/non-resident transactions and, consequently, the currency exchange rate.

Finally, the paper contains a brief review of the hospitality and tourism market in Georgia hard hit by the corona pandemic not only here but across the world. The COVID-related restrictions resulted in the halt of operations of companies and eventually their liquidation, which gravely affected the countries like Georgia.

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The New Economist N1, (2022), Vol 17, Issue 1

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Published Date:

11/04/2022