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Larization bubble blows up on dollar2010-09-15 10:43
In April the National Bank of Georgia announced "larization" plans for the coming one year and a half. That means that all deposits and loans will be converted into national currency as a strengthening measure. Georgi Kadagidze, the president of the Bank, was speaking with enthusiasm about a large-scale program aimed at enlargement of the crediting volume and credit resources. However, another crazy plan of the government was not widely supported. Now the bank's leadership states that switch to lari was a temporary phenomenon that has come to its logical end.
Let's refresh memory. To vitalize monetary policy the National Bank planned to increase minimum reserve requirements on loans in national currency up to 10% - the rate expected to slash fluctuations in interest rates on the inter-bank market. Changes also meant provision of funds for loans drawn down by non-residents. Thus, the funds from external sources would be in similar conditions as the finance obtained at home. All these novelties were pressed for by the International Monetary Fund and The World Bank - their recommendations were meant to reduce dollarization. Changes were supposed to take effect in September 2010. September is moving on, and the banks continue to backpedal since mid-August.
It looks like the skeptics' forecast has come true. For the short period of "larization", the dollar circulation rate went down by 2-3 % only. And the number of profit-making banks continues to shrink: only 11 out of 19 banks closed the reporting month in profits. Wealth, and this is the exact translation of the word "lari" from Georgian, has not come about: experts sadly admit that Georgia is not the regional leader in overcoming the financial crisis.
Georgia's former state minister Kakha Bendukidze remarked in an interview with Business Georgia web portal that despite some stabilization of the national currency, US dollar is still strong in the country: "It is inconvenient and unprofitable for banks to issue loans in lari: a massive attraction of lari-denominated deposits is needed which is less likely. It happens in many countries, so there is nothing unexpected here".
Georgi Khukhashvili, an expert for economic issues, considers larization an unnatural process pushed through by the government: