Advantages and disadvantages of a stable lari

For several months the lari has been worth between 1.40-1.42 USD, not deviating outside this narrow parameter. A stable lari has become a tradition since the Rose Revolution and is a fundamental part of the country’s policy. Analysts suggest that the National Bank is trying to dampen inflationary processes by making the lari stable.

There are several factors that have enabled Georgia to achieve a stable currency. A large amount of foreign investment has entered Georgia in recent years, and in 2007 this was worth more than USD 2 billion, most of this being the proceeds of privatization. Money sent home by Georgians working abroad is also a positive element of the economy, the USD 800 million thus received in 2007 being immediately converted into lari. Tourism is also an important source of income, with over 1 million people visiting Georgia in 2007 and each spending around USD 1,900 in one visit.

These factors should continue to help stabilize the currency after the August war. Although foreign investment will decrease foreign aid will increase, eventually reaching USD 4.5 billion, offsetting any decreases in income elsewhere.

However, a stable lari brings with it plusses and minuses. The main plus is that inflation is hindered, as although price increases have been significant in 2007 they would have been much worse without a stable lari. The downside is that the stable lari is damaging the exports of most of Georgia’s competitive products, because companies have to sell products produced with expensive Lari in cheap dollars. “If the aim of the Government is to build fountains, promote Turkish, Chinese and other foreign goods and see the local ones wither away, then a stable lari is a very good thing,” Nodar Javakhishvili, former President of the National Bank, has said.

Despite the policy of maintaining a stable lari, analysts think that price rises are still expected. Although the lari is stable against the dollar, it is decreasing in terms of its ability to purchase the typical consumer basket used to calculate the retail price index.