Georgian National Bank raises foreign currency reserve requirement for banks to 25%, aims to replenish reserves by $340 million

TBILISI. Nov 28 (Interfax) - The National Bank of Georgia (NBG) has raised the upper limit of the reserve requirement for banks on foreign currency deposits by 5 percentage points, aiming to replenish reserves by $340 million after they fell to a record low in October.

"To prevent excess liquidity from turning into credit dollarization, the Monetary Policy Committee has increased the upper limit of the reserve requirement on foreign currency liabilities by 5 percentage points," the NBG said in a press release.

The bank justified the move in terms of the "dynamics of deposit dollarization, which increased amid uncertainty in October, leading to an accumulation of excess foreign currency liquidity in the financial system."

Deposit dollarization rose 2 percentage points in October, reaching 49%, as individuals and companies converted deposits amounting to 1 billion lari from the national currency into foreign currency, it said.

"In September and October, we observed that some citizens and companies who were concerned about the exchange rate converted part of their current accounts from lari to foreign currency. This resulted in a relatively excessive level of foreign currency in the market, posing a risk that banks might direct these funds toward lending," David Utiashvili, head of the NBG's Financial Stability Department, was as quoted as saying by the business news portal bm.ge.

"The upper limit of the reserve requirement has been increased by 5 percentage points, meaning that the range will now be from 10% to 25% instead of 10% to 20%. This will remove excess foreign currency liquidity from the market, preventing it from entering as credit, thereby curbing further dollarization," he said.

"As a result, we will increase the minimum reserves by approximately $340 million by reducing foreign currency lending, which also serves as a tool for de-dollarization," he said.

Raising the reserve requirements will increase banks' costs, Georgian Banking Association President Alexander Dzneladze said. "This increase in reserve requirements will sharply raise banks' costs for attracting foreign currency funds and will be very painful for the financial sector. We will need to assess whether individual banks will have to seek additional financial resources," Dzneladze was quoted as saying by bm.ge.

According to Georgia's current reserve system for commercial banks, funds held at the NBG under minimum reserve requirements are part of the central bank's overall foreign currency reserves.

It was previously reported that Georgia's international reserves fell $627.5 million or 13% in the pre-election month of October to a 28-month low of $4.085 billion as of October 31. Reserves have dropped $924.7 million or 18.5% since the beginning of the year.

The sharp decline in reserves was due to record foreign exchange interventions by the NBG last month to stabilize the lari, selling $591.2 million on the market, including $213.4 million through currency auctions and $377.7 million without auctions via the Bloomberg Bmatch platform, which the NBG uses to calculate the official lari exchange rate based on forex transactions.

The official exchange rate as of November 28 is 2.7422 lari/$1.