EURO IN GEORGIAN CURRENCY MARKET DOES US DOLLAR GIVE UP ITS POSITIONS

DR. MERAB KAKULIA

Introduction of single European currency is one of the stages of world economic development. True, emission of euro was followed by the notable slowdown in the economic growth rates of issuing countries, but this did not keep the new currency from limiting US dollar hegemony in international trade and financial markets.

Though the sharp increase of euro exchange rate against dollar has, mainly, been caused by US economic problems and geopolitical opposition rather than by healthy macroeconomic state in Europe, this has, to a certain extent, served to strengthen trust towards euro. Interest towards euro in developed countries has grown considerably. Thus, the issue about the exchange rate of European currency against dollar seems to become more actual in Georgia.
It is advisable to begin analysis of euro and dollar correlation in internal currency market from stock segment. About 320 thousand euro was sold in Tbilisi interbank market in 2002 whereas sales of American currency exceeded 100 million dollars. At the same time, exchange rate of European currency has always coincided with the initial demand volume, which testifies to the fact that no stock demand has been left unsatisfied. We should also note that euro stock trade has an episodic nature. Last year there were only four cases of euro sale of which two were in October and the rest in May and June. No fact of euro supply and demand has been noted in the first quarter of current year. It is noteworthy that only one bank acted as a seller in the above-mentioned business deal while four banks acted as buyers of which one has purchased 86,4% of sold currency. Thus, we can assert that regular demand and supply of single European currency has not been formed in the stock segment of market. The latter is still dominated by American dollar.
US dollar also dominates in direct interbank, i.e. dealing market though compared with stock segment, the volume of euro exchange rate is much greater. In 2002, Georgian Commercial Bank has sold 15,5 million euro and 74,5 million dollars to other Georgian banks. Euro trade is not regular even in this part of Georgian currency market: 86,4% of last year conversion operations took place in October and December. It is also noteworthy that similar to stock deals, only a few banks took part in dealing with 97% of purchased currency falling at the share of one and the same bank.
Hegemony of US dollar is also clearly observable in customer currency market, i.e. non-cash conversion deals between commercial banks and customers, though volume of euro sale and purchase in this segment of market exceeds volume of similar operations in interbank market. Last year Georgian Commercial bank sold (cash euro operations are, mainly, prevalent in deals with physical persons) more than 50 million euro to legal entities while sales of American currency were 11 times more than that. Given the non-cash conversion deals with physical persons, domination of American currency will become more impressive.
Compared with interbank currency markets, demand for euro in internal bank segment is stable much exceeding currency purchased by banks from customers. Banks usually fill deficit by exchanging US dollars for euro in their foreign correspondent banks (see table below). Thus, exchange rate of Lari against euro is based on cross-course calculation of euro-dollar in customer currency market. At the same time, similar to interbank currency market, only 3-4 banks are dominant in customer market, too, with 85% sales of this segment per bank.
Statistically it is very difficult to separate euro banknote market from customer markets because banknote exchange operations are performed by both banking and non-banking exchange booths. Given the small amount of bank deposits in Europe, we should suppose that single European currency is sold to physical persons, mainly, in banknotes. Last year the amount of these operations totalled 32,5 million euro that is in no way compatible with the amount of similar exchange operations of non-banking exchange booths. The latter sold approximately up to 2 million euro in 2002. Though these data reveal only operations of 250 non-banking exchange booths, they still show a quite real picture of currency composition of banknote markets. Exchange booths of physical and legal persons have sold 90 million US dollars in the same period, which is a quite realistic figure. If we add the real amount of US dollars sold by commercial banks to physical persons, hegemony of American currency in banknote market will become more obvious. It is also noteworthy that Euro sales in both banking and non-banking banknote markets have distinctly grown after the consequent depreciation of US dollar against single European currency (summer 2002). In spite of it, there has not been any change in the amount of US dollar banknote exchange operations.
Proceeding from the above-mentioned, we can say that of four principal segments of internal currency market more or less regulated demand and supply of euro in internal banking and banknote segment is now being formed. Exchange operations with euro will, principally, take place in bank channel though the single European currency market in Georgia is non-competitive. The role of “market maker” in the mentioned market is, principally, performed by two large commercial banks with more than 90% falling at the share of one of them. This very bank has the priority in determining exchange rates. However, the empiric study reveals that exchange rate of lari against euro is cross-course oriented. We can assert that despite the insignificant figure euro market is developed unilaterally in Georgia. It is more like dynamite for American currency rather than full-valued market segment. Such situation is to a certain extent stipulated by peculiarities of fundamental factors of euro supply and demand.
Demand for single European currency in internal currency market is, first of all, determined by import from Euro Zone countries. Its ratio totalled 20% of imported goods in 2002, which is 2% less than in last year (see diagrams: 1 and 2). It is not a small figure. It makes up approximately 143 million euro in absolute form. According to our calculations, 40-50% of the sum is repaid in single European currency while the rest is repaid in US dollars. It is not surprising, as US dollar traditionally was currency of import contracts before euro has come into circulation. The new currency has not yet managed to completely replace it. Otherwise, demand for euro would be much greater.
As far as import is concerned, less demand for euro was also stipulated by high level of dollarisation in leading trade partner-countries of Georgia – Russia and Turkey as a result of which import charges from these countries are paid in US dollars.
Comparatively moderate demand for single European currency can partly be explained by a small number of trade operations with EZ countries at which indicates the amount of currency funds transferred from Georgia via “Western Union”. After euro came into circulation (2002), the total amount of 16,1 US dollars was transferred of which 2,7 millions, i.e. 16,8% were transferred to EZ countries. Thus, the ratio of non-trade transfers in the single European currency area is comparatively moderate and is mainly, performed in American currency.
Demand for euro in Georgia was less influenced by the fact that this foreign currency has not yet become means of saving. According the data of the National Bank, in January 1 of last year only one percent of bank deposits in foreign currency was in euro. By July 1 the ratio of euro deposits was 2,4% and 2,5% by 1 January of 2003. Therefore, sharp depreciation of American currency against euro has not shaken the trust of our population and economic subjects toward US dollars.
The amount of Euro segment in internal currency market is not only determined by the demand level of foreign currency for this sort. The amount of euro supply that is mostly dependent on export is also very important. The ratio of countries issuing this currency made up 6% of total supply in 2002 and decreased by 3% compared with last year. This means that importance of euro in export revenues is still small.
The same can be said about foreign investments. Only a small amount of them (according to data of 2002, 51%) falls at the share of EZ countries. As for the so-called transfers or transfers of Georgian residents from the mentioned countries via “Western Union” and other electronic systems their ratio has decreased by 1,6% to 14,2%. As the above-mentioned data reveal, nowadays sources of euro supply in Georgian currency market are limited.
Thus, there arises a question: what are the perspectives of euro development in Georgia? The answer to this question depends on both internal and external economic factors in Georgia.
To begin at the beginning, Georgia intends to join Euro Union in long-term perspective. This will not happen without intensive development of trade and economic relations with Union countries. Nowadays, our country has favourable trade conditions with euro issuing countries. Devaluation of US dollar against euro was followed by 15,4% decrease of lari exchange rate against this currency (by 1 March 2003), which indicates at the competitiveness of Georgian economy.
We should also take into account the fact that our principal trade partners – Russia and especially Turkey are oriented on Euro Union. The results of it can already be observed in the strengthened positions of single European currency. Increase of interest towards euro has already become obvious in Russia though there was no weakening of American currency there. The same concerns Turkey. We should suppose that euro segment will grow in internal currency market after some times at the expense of increased ratio of euro-issuing countries in the total volume of export and import as well as on the basis of strengthened euro in principal trade partner-countries.
Lastly, strengthening of euro in Georgia will be stipulated by the weakening of trust towards US dollar in the world. This, in its turn, will depend on the dynamics of economic activity in USA and Europe. Given the significant devaluation of US dollar against singe European currency as well as perspective stabilisation of oil prices after the end of the war, the growth rates of American economy will not, probably, decrease. However, the US government will have to take additional measures for settling problems of trade balance deficit. As for Europe, after the strengthening of euro, the competitiveness of the region will weaken. This is, to a certain extent, caused by inflexible labour force market. Impressive economic dynamics is less expected in Europe. Thus, in the nearest future positions of American currency are not likely to weaken sharply in the world market. For the time being, no weakening of dollar is expected in Georgia.