Last week the Governor of the National Bank of Georgia Giorgi Kadagidze was in Armenia to participate in the “De-dollarization Policies and Challenges” conference, hosted by the Central Bank of Armenia. Giorgi Kadagidze agreed to have an exclusive interview with Banks.am.

- Armenian President noted recently that Georgia's example vividly denies the hypotheses of people who think devaluation of the Armenian dram resulted from Armenia's soon membership to Eurasian Economic Union. What do you think - why the national currencies of both Armenia and Georgia devaluated at the same time?

- The situation is very similar. On the one hand, USD exchange rate is high towards all the currencies for a long time, and on the other hand regional factors are influencing the process - Russian-Ukrainian conflict, GDP fall in Russia and Ukraine, small growth in EU countries. All these factors are affecting through trade channels and putting more pressure on depreciation of local currencies.

Currencies may move on both directions - depreciation and appreciation. This is normal for the small economies. But what we need to focus is that depreciation of local currencies does not grow and influence on prices and expectations.

- The Central Bank of Armenia has decided to start a new policy and from December 8 it regularly sells foreign currency. What do you think about this policy and are there any plans to launch something similar in Georgia?

- Back in 2010 we conducted an auction during which won the most competitive offer. As a result the average of the official biddings becomes the official exchange. It had a very positive effect. After that volume of National Bank’s interventions was significantly decreased, and market participants started to trade. I think it’s a very healthy process. I think it’s important that the Central Bank of Armenia starts this policy on time.  

In short and middle terms currency fluctuations will be in both directions. We must remember that early depreciation is followed by appreciation which is a characteristic of the faulting exchange rate regime.

The biggest problem when the local currency starts to fluctuate is the so called “impulsive behavior” of the population when business and population start to convert their savings to US dollar. It only increases pressure and makes the situation worse in a short term. But at the same time those who have this “impulsive behavior” suffer the most. History shows that in all circumstances this is not recommended in any country.

- What influence would the currency fluctuations have on trade relations between Armenia and Georgia?

- I don’t think it will significantly affect our trade relationship, because if we compare the exchange rates of Lari and Dram, it hasn’t changed that much. It’s normal. I don’t see any big challenges in that direction.

-The Central bank of Georgia launched “Larization” process in 2010. What results are seen over the last 4 years of its existence?

- It’s a process when the percentage of larization is increasing. People prefer to keep their savings in national currency instead of foreign currency. This also applies to loans.

As a result, it’s the first time in Georgia when more than half of all the loans of the individuals are in national currency. After this process from the 75 % dollarization we are now close to just 60 %. But at the same time let’s keep in mind that in Georgia there is no capital control at all and possibility for local banks to lend loans in any preferable currency exists.

- In Armenia it is often talked about bank merger necessity. Is this process also actual in Georgia?

- 20 banks currently operate in Georgia. We had very active consolidation process of the banking sector. We had the first stage in late 90-s, the second - in 2006-08, and the 3rd stage is ongoing. We support this process because consolidation  makes banks more cost effective and then it’s translated into the interest rates decrease. We welcome the merger and consolidation of the banking system.

- Both in Armenia and Georgia banks which represent international banking groups operate. What role do they play on country’s banking sector development?

- Strong foreign presence brings not only capital and money to the country but also valuable expertise and “know how”, which is very important in terms of process organization and experience. Georgia’s 1st and 2nd largest banks - Bank of Georgia and Tbilisi bank - are listed in London Exchange. It’s kind of a unique situation when we have half of the Georgian banking system listed abroad.

- You are a graduate of a foreign university. Is the education abroad a priority and trend for the majority of Georgian bankers?

- Most of the Georgian bankers are graduates of foreign universities. This is also result of poor conditions in education in Georgia after the break of the Soviet Union. Education system was destroyed, and what was left was not competitive with western institutions.

The implementation of financial literacy among population is our priority because financial literacy brings to the smart decisions and leads to increased savings. This is also a big challenge but we are working on it right now. For emerging markets, particularly for Georgia and Armenia, quality education must be Number One priority.

-I have witnessed an interesting phenomenon in Tbilisi. On every step of the city you could find currency exchange points, sometimes even 2-3 points operating nearby. What is the reason for large number of currency exchange points in Georgia?

- I think it’s the market that drives this force. Tourism industry, which is a very important part of our economy, recently developed significantly. So this tendency to open more currency exchange points may be influenced by increased number of tourists. Market is doing profit of it, so why not? Very liberal environment exists and people are using the opportunity.

Narine Daneghyan talked to Giorgi Kadagidze