The Impact of Global Economic Events on Georgian Lari Exchange Rates

The Impact of Global Economic Events on Georgian Lari Exchange Rates

Blog • 27-05-2024, 11:36

Georgia is small but open economy, highly susceptible to the impact of global economic events on its currency's exchange rates. In this article, we will explore how various global economic developments, such as financial crises, commodity price fluctuations, and major policy shifts, can influence the value of the Georgian Lari and the implications for the country's economy.

1. Global Financial Crises

One of the most significant global economic events that can impact the Georgian Lari's exchange rate is a financial crisis. During times of global financial turmoil, investors tend to seek safe-haven currencies, such as the US dollar or Japanese yen, leading to a depreciation of emerging market currencies like the Lari.

For example, during the 2008 global financial crisis, the Georgian Lari experienced significant depreciation pressure as investors withdrew capital from emerging markets and sought the safety of more stable currencies. This depreciation made imports more expensive for Georgian consumers and businesses, while also increasing the burden of foreign currency-denominated debt.

More recently, the COVID-19 pandemic has triggered a global economic crisis, with spillover effects on the Georgian Lari. As global demand for goods and services declined and investors sought to reduce their risk exposure, the Lari has faced depreciation pressures, creating challenges for the Georgian economy.

2. Commodity Price Fluctuations

Another global economic factor that can impact the Georgian Lari's exchange rate Laris Kursi is fluctuations in commodity prices, particularly oil and gas. Although Georgia is not a major oil or gas producer, the country is located in a region where many of its trading partners and neighbors are heavily dependent on energy exports.

When oil and gas prices are high, countries like Russia and Azerbaijan, which are major trading partners for Georgia, tend to experience economic growth and increased demand for Georgian exports. This can lead to an appreciation of the Georgian Lari, as the increased demand for the currency drives up its value.

Conversely, when oil and gas prices fall, as they did during the 2014-2016 global oil price slump, Georgia's energy-exporting neighbors may face economic challenges, reducing their demand for Georgian goods and services. This can put depreciation pressure on the Lari, as the reduced demand for the currency leads to a decline in its value.

3. Major Policy Shifts

Global economic events can also include major policy shifts by influential countries or international organizations, which can have ripple effects on the Georgian Lari's exchange rate. For example, changes in US monetary policy, such as interest rate hikes or tapering of quantitative easing, can impact the value of the US dollar and, in turn, influence the Lari's exchange rate.

Similarly, policy decisions by the European Union, which is a major trading partner and source of foreign investment for Georgia, can impact the Lari's value. For instance, the EU's decision to grant Georgia a visa-free travel regime in 2017 was seen as a positive development for the country's economy and helped to support the Lari's exchange rate.

On the other hand, events like Brexit, which marked the United Kingdom's departure from the European Union, can create uncertainty and volatility in global financial markets, with spillover effects on the Georgian Lari.

4. Regional Economic Developments

In addition to global economic events, regional developments in the Caucasus and neighboring countries can also impact the Georgian Lari's exchange rate. For example, economic instability or political tensions in countries like Russia, Turkey, or Armenia can influence trade flows, investment patterns, and currency movements in the region.

The 2014-2015 Russian financial crisis, which was triggered by a combination of falling oil prices, economic sanctions, and structural weaknesses in the Russian economy, had significant spillover effects on Georgia. As the Russian ruble depreciated sharply, Georgian exports to Russia became less competitive, while remittances from Georgians working in Russia also declined, putting pressure on the Lari's exchange rate.

Similarly, the ongoing conflict between Armenia and Azerbaijan over the Nagorno-Karabakh region has the potential to create economic and political uncertainties in the Caucasus, with implications for the Georgian Lari.

Conclusion

The Georgian Lari's exchange rate is highly sensitive to global economic events, reflecting the country's small, open economy and its integration with international markets. Financial crises, commodity price fluctuations, major policy shifts, and regional economic developments can all have significant impacts on the value of the Lari, creating both opportunities and challenges for the Georgian economy.

To navigate these complex and ever-changing global economic conditions, Georgian policymakers need to maintain a prudent and flexible approach to exchange rate management, while also promoting economic diversification, resilience, and competitiveness. This may involve measures such as maintaining adequate foreign exchange reserves, implementing sound fiscal and monetary policies, and investing in human capital and infrastructure development.

At the same time, businesses and investors operating in Georgia need to be aware of the potential impact of global economic events on the Lari's exchange rate and factor these risks into their decision-making processes. By staying informed, adaptable, and proactive, they can potentially mitigate the negative effects of global economic shocks and capitalize on the opportunities presented by the dynamic and evolving global economic landscape.

Ultimately, the impact of global economic events on the Georgian Lari's exchange rate underscores the importance of international cooperation, risk management, and long-term strategic thinking in an increasingly interconnected and complex world economy. As Georgia continues to navigate these challenges and opportunities, the stability and competitiveness of its national currency will remain a key factor in the country's economic development and prosperity.