What does larization mean?

The Government of Georgia claims it is eager to take steps to strengthen the national currency, the Lari, to encourage the issue of loans in the national currency and reduce dependence on the US dollar, all in order to begin the de-dolarisation procress.

Georgia’s Prime Minister, Giorgi Kvirikashvili, said the Government and the National Bank’s short term step included easing loan obligations for a certain portion of Georgian citizens who had bank loans in US dollars.

This effort means that Georgian citizens who took a loan in US dollars before January 1 2015 could convert their loan into lari.

The Government explained that those people who took loans before January 1 2015 were most affected by the national currency's devaluation .

“If the exchange rate between the lari and the US dollar is 2.50, the loan will be converted at a rate of 2.30,” Prime Minister Giorgi Kvirikashvili said, adding that the remaining 20 Tetri would be covered by the state budget.

The one-time “social activity”, as the Government calls it, will continue for two months and will be dependent on the consumers’ will, on their decisions to convert loans taken in US dollar into Lari or not.

However, the action concerns only those loans that don’t exceed 100,000 GEL.

If a consumer has a more than 100,000 GEL loan taken before January 1 2015 and decides to convert the loan into GEL, the Government subsides only 100,000 GEL, and the remaining money would be converted with the 2.50 rate.

Furthermore, from January 1 2017, banks will be obliged to issue loans worth up to 100,000 GEL only in the national currency, while from 2018 the change would expand to loans up to 200,000 GEL.

For some people, the action will come as a relief, as they will not be dependent on the strength of the US currency, especially when the lari still continues its devaluation against the US dollar and most Georgians are paid in GEL.

However, subsiding the loans will cost about 65 million GEL for the state budget, as the Government will have to transfer the money to commercial banks.

This means if one does not have a loan at all, the government will have to cover the expenses of those who have loans as people pay for the state budget.

Also, there is a risk that private banks will increase interest rates in order to create more guarantees for themselves in the situation when the national currency continues to devaluate against the dollar.

It is unlikely that one-time actions of this kind will provide any relief for the national currency. The Government’s declared intent to increase some taxes will also create more problems for ordinary citizens who still have to live in hard economic conditions.