The national currency of Georgia GEL was launched twelve years ago but still it faces problems from dollarization (Gardner, 2009). The recent security situation in the country has heighted the threat to GEL as more and…
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This helps in reducing money supply in the economy and a reduced money supply results in lower inflation and thus reduce any risk of devaluation. Other Russian states are also facing problems of rapid dollarization; most payments even on micro level are increasingly being made in dollars.
Another method of hedging against currency risk being adopted by banks is lending in dollars. This however creates problems for borrowers who have loans in dollars and business reserves in GEL. Their risk is dramatically increased which makes it difficult to survive in an already recessionary environment (Gardner, 2009). This will also reduce taxes for the Georgian government. This is because as the losses of currency devaluation increase on the income statement, the taxable income is automatically decreased. The high budget deficit of 9.4 percent of the countrys gross domestic product is also a major obstacle to stability of GEL.
The IMF however still insists that Georgian national bank is equipped with all necessary tools to protect the national currency. The high reserves base of GEL being held by the national bank has reached 2,109,000,000 GEL (Gardner, 2009). This is very important in order to keep stability in the currency value. The bank can use these reserves to control exchange rate fluctuations in the market. That will however be a controlled economy, the National bank has pledged that it will not temper with the free floating market. The free exchange rate environment will continue to function. IMF has insisted that Georgian economy cannot sustain a totally market controlled exchange rate system. The National Bank will have to intervene in order to control shocks created by continuous temporary fluctuations.
The current strategies being adopted by Georgian government and National Bank are a positive step in providing stability to both economy and currency. The banking sector has shown resilience against
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