Is the Lari appreciating too fast?
Overview:
The economic situation is improving rapidly. GDP growth is strong, the currency is appreciating in nominal terms and FX reserves are high. However, areas of macroeconomic vulnerability remain: a large current account deficit and high inflation. A strong currency helps the fight against inflation but part of the balance of payments surplus is driven by short-term capital inflows which are easily reversible. Moreover, the real effective exchange rate is appreciating quickly raising fears of lost competitiveness which would worsen the current account further. The central bank has just cut rates even as inflation remains in double digits, perhaps mindful of a large interest rate differential strengthening the currency further. Fiscal policy must therefore be tightened in response to keep domestic demand at a sustainable pace.