What an exchange rate is: fixed and floating rates

What an exchange rate is

An exchange rate is the price of one currency expressed in another: how many lari you pay for one US dollar, or how many you receive when you sell one euro. The price changes every day, because it follows supply and demand on the currency market.

The lari (code GEL, sign ₾) has been the national currency of Georgia since 1995 and is the only legal means of payment in the country. Prices are set in lari and purchases are paid in lari, so a visitor who arrives with dollars, euros or any other currency exchanges them first.

Fixed or floating exchange rate

Georgia has a floating exchange rate. Nobody sets the price of the lari by decree: it is formed on the interbank market, where banks buy and sell foreign currency for their clients. When more foreign currency comes into the country than leaves it, the lari strengthens; when demand for dollars and euros grows, it weakens.

The National Bank of Georgia does not defend a particular rate. It can smooth sharp swings by selling or buying foreign currency at auctions, and it holds international reserves for that purpose, but its main goal is price stability — an inflation target of 3%.