National Bank and the lari: history, inflation, devaluation

The National Bank and the official rate

The first state bank of Georgia opened in 1919, in the time of the First Republic; the present National Bank of Georgia was established in 1991. It issues the lari, conducts monetary policy, supervises commercial banks and registers currency exchange offices.

On business days, at about 17:00 Tbilisi time, the National Bank publishes the official exchange rate for the following day. The rate published on Friday stays in force on Saturday, Sunday and Monday. The official rate is used in accounting, for taxes and customs and in contracts — it is a reference, not a price at which anyone sells currency.

What moves the lari

Foreign currency comes into Georgia mainly through exports, tourism, money transfers from people working abroad and foreign investment. It leaves through imports and payments on foreign debt. When the inflows are strong the lari tends to strengthen; a bad tourist season, falling transfers or turbulence in neighbouring economies push the other way. Expectations matter as well: when people and companies expect a weaker lari, they buy foreign currency earlier, and the rate moves sooner.

Inflation, deflation and devaluation

Inflation is a rise in the general level of prices — money buys less than before. Deflation is the opposite, a fall in prices. Devaluation, or depreciation under a floating rate, means that the national currency loses value against foreign currencies. The three are connected: in a country that imports much of what it consumes, a weaker currency makes imports dearer and feeds inflation.

Georgia knows the extreme case. In the early 1990s the temporary coupon currency lost its value in a hyperinflation, and people kept their savings in dollars and roubles. The lari replaced the coupon in 1995 at a rate of one lari for one million coupons.