Universal Journal of Accounting and Finance 9(5): 1116-1124, 2021 http://www.hrpub.

org
DOI: 10.13189/ujaf.2021.090521

Currency Depreciation Nexus Country's Export:

Evidence from Georgia
Azer Dilanchiev1,*, Tengiz Taktakishvili2

1
Department of Economics, International Black Sea University, Tbilisi, Georgian Republic
2
Department of Business Administration, Georgian National University, Tbilisi, Georgian Republic

Received July 20, 2021; Revised September 1, 2021; Accepted September 21, 2021

Cite This Paper in the following Citation Styles

(a): [1] Azer Dilanchiev, Tengiz Taktakishvili , "Currency Depreciation Nexus Country's Export: Evidence from
Georgia," Universal Journal of Accounting and Finance, Vol. 9, No. 5, pp. 1116 - 1124, 2021. DOI:
10.13189/ujaf.2021.090521.
(b): Azer Dilanchiev, Tengiz Taktakishvili (2021). Currency Depreciation Nexus Country's Export: Evidence from
Georgia. Universal Journal of Accounting and Finance, 9(5), 1116 - 1124. DOI: 10.13189/ujaf.2021.090521.
Copyright©2021 by authors, all rights reserved. Authors agree that this article remains permanently open access under
the terms of the Creative Commons Attribution License 4.0 International License

Abstract The recent shocks in demand and supply significance level. The paper also discusses possible ways
caused by Covid-19 influence and the current depreciation of stabilization of national currency.
of the Georgian Lari (GEL) reduced the trust of economic
agents in currency. There is no objective macroeconomic Keywords Exchange Rate, Currency Depreciation,
reason that would change their attitude to the future of Export, International Trade, Interest Rate
currency for the better. Depreciation of a currency impacts
all the components of GDP, leading to myriad problems in
economic growth. The depreciation of the national
currency is generally perceived as positively affecting the
country's export. The study analyzes the impact of
1. Introduction
Georgian Lari's exchange rate depreciation on Georgia's Depreciation of the exchange rate has been one of the
export using monthly GEL exchange rate data from May academics and financial analysts' most up-to-date issues.
2006 to April 2020. The paper employs Autoregressive The National Bank of Georgia's key concern is that its
Distributed Lag Model (ARDL) for its advantages of monetary interventions control the exchange rate.
measuring cointegration, usefulness in the small samples, The current depreciation of the Georgian Lari (GEL)
and being unbiased in measuring a long-run relationship reduced the trust of economic agents in currency. There is
between variables. Outcomes indicate that the exchange no objective reason that would change their attitude to the
rate depreciation has an inverse long-run impact on export future of currency for the better. Depreciation of a
in the long-run period. The exchange rate impact on currency impacts all the components of GDP, leading to
Georgia's export shows inelastic demand for Georgia's myriad problems in economic growth.
export goods. The study contributes to the literature while The recent shocks in demand and supply caused by
providing the implication of currency depreciation on Covid-19 influence exchange rates, affecting inflation,
exports of the Georgian economy. The estimated value of interest rates, foreign trade, and other macroeconomic
the exchange rate has been found to exert no direct variables. Also, these shocks cause economic uncertainty,
pressure on the amount of export. In the paper, possible which is another reason for exchange rate fluctuations.
reasons for such implications are also examined. Paper The National Bank of Georgia made more than 20
found that the control variable interest rate also has an interventions in 2020, trying to stabilize the currency, and
inverse impact on Georgia's export performance in the these interventions are to be continued in the first part of
long-run as well as in the short-run. International reserves 2021. As foreign currency inflow to Georgia decreased
positively influence the export in the long-run with a high considerably, these interventions must somehow stop
 Universal Journal of Accounting and Finance 9(5): 1116-1124, 2021 1117

GEL's depreciation. Georgia's monetary structure is 70% of international trade is currently accomplished
floating, and it is characterized by short-term volatility, through the global value chains (GVCs), meaning that
and is mainly shaped by the foreign exchange market. The materials, parts, and components are moving across the
exchange rate trend between USD and GEL is given in borders (OECD). The volume of international trade has
Table 1, showing a drastic depreciation in the period of considerably increased in the last decades; however, the
2014-2019. COVID‑19 pandemic caused a drastic fall. Exports of
The balance of the GEL change rate is vital for the G20 declined by 17.7% in the second quarter of 2020
long-time period monetary improvement of the country. relative to the first, the highest fall since 2007-2008.
Most of Georgia's public debt is in foreign currency, China was the only G-20 nation not affected by the export
which is another issue for concern when the currency decline; export growth in the second quarter of 2020 also
depreciates. Among the factors affecting the exchange rate saw a 9.1 percent growth (OECD). The current pandemic
of GEL are foreign investments, the volume of GEL in the also affected Georgia's export. As Georgia mainly exports
country, and households and businesses' expectations intermediary goods (about 30% of Georgia's exports come
towards the exchange rate fluctuations. As Georgia is an to Copper ores and Ferro-alloys), it is dependent on the
import-dependent country, currency depreciation severely production capacities abroad.
affects its economy. Exchange rate depreciation leads to Restrictions imposed in foreign countries worldwide
market uncertainty, the volatility of incomes for exporters shrank production volume and supposedly will drop
and importers. demand on intermediary goods further. It is worth
One difficulty in this area is to consider how the export mentioning that around 12% share is occupied by
of a nation is impacted. The restriction of tourism, a re-exporting motor cars in Georgia's export. As this
critical source of currency inflow, is another explanation business is also heavily affected by the pandemic, demand
for this. If this pattern progresses, even tougher pressures for these goods in foreign markets has sharply declined.
on GEL can be expected. Investigations into the effect of Last year's essential advances happened to Georgia's
depreciation on the exports of a nation have a long history. international trade. Export markets for Georgian products
For decades, the notion that the weakening of the nation's became more differentiated, caused by instabilities on the
currency has a beneficial impact on exports was one of the Russian market and the need to find alternative markets in
most popular economic literature concepts. the EU and China. Similarly, Georgia managed to agree
When the currency depreciates, products produced about the Deep and Comprehensive Free Trade Area with
domestically become cheaper for foreigners. They can buy the EU and China's Free Trade Agreement. Figure 2
more of these products, so the volume of export increases below shows the data regarding export from Georgia from
has a favorable effect on the net export. Although, in the 2006 to 2020.
case of Georgia, this study found an inverse relationship. The paper employs Autoregressive Distributed Lag
The study has increasingly grown as more analysts Model (ARDL) for its advantages of measuring
examine the exchange-rate-export relationship. Some cointegration, usefulness in the small samples, and being
found adverse effects of fluctuations in exchange rates on unbiased in measuring a long-run relationship between
exports while others did not. variables. The study utilizes monthly aggregate data for
Export is a crucial element of international trade in the period of May 2006 – April 2020 and is extracted
promoting economic globalization that makes developing from the National Bank of Georgia (NBG) database. The
countries more integrated with the world economy and study's findings will allow policymakers in Georgia to
ensures that economic well-being is distributed equally consider the effect of currency volatility on exports. The
among nations. Many governments worldwide support paper's results are also impressive for Georgian exporters
exporting industries because of their ability to create jobs and help them prepare and further predict their foreign
and support countries to acquire new technologies. About activities.
1118 Currency Depreciation Nexus Country's Export: Evidence from Georgia

Figure 1. Exchange rate (EX) trend between USD and GEL. (Source: National Bank of Georgia)

Figure 2. Export (EXP) from Georgia by years. (Source: The National Statistics Office of Georgia)
 Universal Journal of Accounting and Finance 9(5): 1116-1124, 2021 1119

2. Literary Review investigation and split into projected and unforeseen

components. The authors noted the asymmetrical effects
A large volume of literature exists that analyses the on the growth of export in the sector of random currency
effect of the exchange rate on export. Some empirical fluctuations. Analysis reveals a positive transformation
researchers have argued for the adverse impact of shock, an unintended strengthening of the domestic
volatility on exports; others have argued for positive or no currency, lower net exports, and greater demand. The
effects at all. However, the majority of the works support study indicates that the growth in export demand is likely
a traditional view that exchange rate depreciation to increase the currency over time, with depreciation
positively influences export (Connolly & Taylor, 1972), having lost momentum due to the rise in export demand.
(Junz & Rhomberg, 1973), (Bahmani-Oskooee & Kara, Yunusa (Yunusa, 2020) studied the influence of
2008), (Thorbecke, 2008), (Yildiz, Ide, & Malik, 2016). exchange rate volatilities on Nigerian crude oil exports in
Some authors found controversial results. The authors their trading partner countries. Author usesARDL and
(Olugbenga & Oluwole, 2008), in the study of the links demonstrates that the instability of exchange rates
between exchange rate fluctuation and export growth, significantly impacts Nigeria's raw oil exports. The study
based on cointegration and the Vector Error Correction measured the influence of the fluctuations of the exchange
Model method in Nigeria, has shown that real-world rate by the ARDL process. The findings show that,
exchange fluctuations generate uncertainty about profit regardless of actual exchange rate shifts, only 2 in 7
opportunities, leading to significant adverse effects on countries have a short-term influence on Nigeria's exports.
exports both in the long and short term. The long-term findings indicate that Nigeria's uncertainty
Aftab et.al (Aftab, Abbas, & Kayani, 2012) found out as a trading partner is statistically significant for any
that instability in exchange rates has a negative impact on trading partner, albeit to a different extent.
Pakistan sectorial exports, with the particular case of The effect on Indonesia's top five export destinations on
waxes and creature oils, flying machine, exports of export goods was estimated as a result of
implyingtransport and weapons, but appearing signs of a variations in the exchange rate by Sugiharti et al.
negative relationship. The relative cost moreover appears (Sugiharti, Esquivias, & Setyorani, 2020). The
to a negative association for all segments. With the approximate GARCH Model value of the exchange rate
exemption of creatures and vegetables, materials and models ARDL and NARDL was used for observational
materials were negative. A negative sign demonstrates analysis. The findings show that the uncertainty in the
that the decay in trade request is related to an increment exchange rate has a significant effect on commodities
within the relative cost. exports. The adverse impact of exchange rate fluctuations
Nyeadi et al. (Nyeadi, Atiga, & Charles, 2014) on Indonesian exports is indicated by both the ARDL and
observed that the exchange rate shift did not affect exports NARDL models. Each of the top trading partners in
in Ghana's case by using the OLS method. Indonesia is calculated separately.
Ahmed et al. (Ahmed, Qasim, & Chani, 2017) using Senadza and Diaba (Senadza & Diaba, 2018) used
the annual time series data from 1970 to 2015 evaluated GARCH-generated substitutes for exchange rate
an impact on export in Pakistan's case. It investigated the fluctuations and GARCH models. They showed a
exchange rate effect. The authors employ the ARDL negative short-run influence of volatility on exports but a
model for assessing the relation between selected positive long-run effect.
variables in the study. The paper shows that the volatility
of an exchange rate negatively yet negligibly affects
exports' net quantity. In the case of Armenia, Barseghyan
and Hambardzumhyan (Barseghyan & Hambardzumyan,
3. Data and Methodology
2017) analyzed how the exchange rate volatility
influences Armenia's export with its leading trading 3.1. Data
partner in the 2007 to 2016 time period, and they found a The paper explores the relationship between export and
significant adverse effect that volatility of exchange rate exchange rate depreciation in Georgia; interest rate and
has in the short-run and in the long-run on export. foreign reserves were selected as macroeconomic control
Thuy and Thuy (Thuy & Thuy, 2019), while analyzing
variables. Variables were selected based on economic
how export is affected by the volatility of exchange rate,
theory; however, some of the variables were excluded due
employing the (ARDL) bounds testing approach, in the
to data unavailability. This study's monthly aggregate data
case of Vietnam, found that depreciation of the domestic
span from 2006 May to 2020 April and are extracted from
currency adversely impacts exports in the short-run, but
the National Bank of Georgia (NBG) database. The paper
favorably in the long-run. Dincer and Kandil (Dincer &
expresses Georgia's Export model as follows:
Kandil, 2010) studied the effect of shifts in exchange rates
on several export sectors in Turkey. Based on the theory
of exchange rate volatility, the findings were established LEXP represents export, LR represents interest rate,
through demand and supply networks in the empirical LEX is the monthly average exchange rate, and LRES is
1120 Currency Depreciation Nexus Country's Export: Evidence from Georgia

the amount of foreign reserves in USD. All variables are disturbance error term, the remaining symbols were
taken in the natural logarithm form. described previously. Based on the Walt test, F-statistics
cointegration among variables were tested where the null
3.2. Model Specification hypothesis indicates no integration among the variables.
In contrast, the alternative hypothesis suggests the
In the study, the Peseran et al. (Pesaran, Yongcheol, & presence of integration among variables.
Smith, 2001) ARDL bound test was used to measure
cointegration and a long-term relationship between
variables. The ARDL method of cointegration estimation
gives the benefits of the test, no matter the variables are
I(0) or I. Furthermore, according to Narayan and Paresh Following Pesaran, if F-statistic is above the lower and
(Narayan, 2005) ARDL approach is advantageous in the higher critical values, then it is possible to conclude that
small samples and Harris, and Sollis, (2003) (Harris & there is cointegration among the variables. However, if the
Sollis, 2003) indicate the importance of ARDL method as F-statistic value is below the lower critical value, it is
being unbiased in measuring long-run relations between possible to conclude no cointegration in the series. The
variables. While analyzing the literature, Engle and need for other cointegration tests appears when the
Granger's (Engle & Granger, 1987)cointegration tests are F-statistics value is between higher and lower bounds,
widely used methods for measuring long-run cointegration. which creates uncertainty about the level of cointegration.
However, these methods have some limitations. All
variables have to be stationary at the first level or exclude
multivariate analysis under Engle and Granger method 4. Empirical Results
and lag selection sensitivity issue in the Johansen
Co-integration test (Johansen, 1988). The estimated 4.1. Unit Root Test
ARDL model specified below captures long-run and
short-run: The findings of the Augmented Dickey-Fuller (ADF)
and Phillips–Perron (PP) unit root tests based on the
Schwarz information criterion (SIC) are expressed in table
1. The ADF result indicates that variables household
∑
consumption is not stationary at the level. Simultaneously,
savings and inflation are stationary at the level, and the
∑ ∑ GDP per capita growth rate is stationary at 10%. In the
first difference, household consumption becomes
stationary, and GDP per capita growth rate also becomes
∑ stationary at 5 %. Phillips-Perron (PP) unit root test
results show that all variables are not stationary at a level
except inflation, which is stationary at 1%. At the first
difference, all variables are stationary at a 1% significance
Where Δ is the first difference operator and p,q,v,y are level. The combination of stationary variables in level I(0)
optimal lags in the model, α and β are coefficients is and in the first difference I(1) makes an ARDL bound test
the coefficient of the error correction term (ECT) which method optimal for the analysis's estimation procedure.
measures the speed of adjustment to equilibrium (
should be negative and below the 1) and εt is a white noise
Table 1. Unit root test for stationarity

ADF PP
Variables Level First difference Level First difference
LEXP -2.4179 -18.4115*** -2.4744 -22.6331***
LEX 0.1310 -7.8405*** 1.1437 -7.2386***
LR -0.2404 -14.3435*** -0.8137 -18.9655***
LRES -3.9378*** -4,5880***
1% -3.4699 -3.4699 -3.4696 -3.4699
5% -2.8788 -2.8788 -2.8787 -2.8788
10% -2.5760 -2.5760 -2.5760 -2.5760

Notes: *** Significant at 1%, ** Significant at 5%, * Significant at 1%

 Universal Journal of Accounting and Finance 9(5): 1116-1124, 2021 1121

4.2. Cointegration Procedure Table 4. Estimated ARDL (1,4,2,0) Short-run model

Variable Coefficient t-Statistic
The second equation (Eq2) bound test identifies the ECT(-1) -0.430977 -5.700743***
cointegration between dependent and independent D(LEXP(-1)) -0.191403 -2.792111***
variables. The ARDL model is selected with (2,1,1,4) lag D(LEX) -1.825230 -4.310336***
order (based on Akaike info Criterion (AIC) with D(LR) -1.134963 -5.682792***
maximum dependent lags 4) where the savings(LRES) has D(LRES) 0.360764 2.264226**
the maximum lag of 4. The dependent variable (LEXP) D(LRES(-1)) -0.478774 -2.866198***
lagged 2 times, and (LEX), (LR) lagged 1 time. D(LRES(-2)) -0.169704 -1.060770
Table 2 indicates the cointegration test results: D(LRES(-3)) 0.274726 1.703885*
Table 2. F statistics and bound test Notes: *** Significant at 1%, ** Significant at 5%, * Significant at 1%
Significance Lower Upper
Model k M F statistics
level bound bound 5. Diagnostic Tests
10% 2.37 3.2
Result tests are summarized in table 5. A widely used
ARDL
(2,1,1,4)
3 4 6.333036* 5% 2.79 3.67 checking for serial correlation Breusch-Godfrey Serial
1% 3.65 4.66
Correlation LM Test did not show any serial correlation in
the model. The Breusch-Pagan-Godfrey test is used to
Notes: M indicates maximum lags, k expresses explanatory variables, check heteroskedasticity. The tests' results indicate no
and * indicates a 1% level of significance.
heteroskedasticity or, in other words, the variance is
F statistic result confirms cointegration between constant in the residuals. The test does not reject the null
dependent and independent variables in the model. In all hypothesis of no heteroskedasticity at 0.05% level. We
levels, the F statistic appears to be higher than the upper checked the normality of the residuals by the Jarqua-Bera
bound critical values. test (JB). The test results cannot reject the null hypothesis,
which indicates that residuals are normally distributed.
4.3. Empirical Results for the Long-Run and The Ramsey Reset test confirmed that the model is
Short-Run Periods correctly specified since the probability result of the test,
70.34%, is more than 5% significance level. The empirical
The outcomes of the long-run and short-run estimations
results revealed that the ARDL model used in the analysis
are presented in Table 3.
passed all diagnosis tests successfully.
Table 3. Estimated ARDL (1,4,2,0) Long-run model
Table 5. Test Statistics
Variable Coefficient t-Statistic X2BG 0.220188 (0.8026) X2JB 0.415397 (0.8124)
LEX -1.128452 -4.228035*** X2BPG 1.515255 (0.1312) X2 Ramsey 0.352655 (0.7034)

LR -1.753426 -5.979000*** Notes: X2 BG is the Breusch-Godfrey Serial Correlation LM Test used to

check serial correlation, X2 BPG is the Breusch-Pagan-Godfrey test used
LRES 0.673169 8.157450*** to check heteroskedasticity, X2 JB is the Jarqua-Bera test used to check the
normality, and X2 Ramsey used to check whether the model correctly
C 3.444765 4.424463*** specified.

Notes: *** Significant at 1%, ** Significant at 5%, * Significant at 1% For checking the stability of the model, QUSUM and a
QUSUMSQ test have been conducted. The stability test
Results in Table 3 shows a long-run relationship results are presented in Figure 3 and Figure 4. The test
between export (LEXP) and independent variables (LEX, results indicate that plots of both stability tests are
LR, LRES) with a high statistical significance level. between critical boundaries at a 5% significance level.
1122 Currency Depreciation Nexus Country's Export: Evidence from Georgia

1.2

1.0

0.8

0.6

0.4

0.2

0.0

-0.2
07 08 09 10 11 12 13 14 15 16 17 18 19 20

CUSUM of Squares 5% Significance

Figure 3. QUSUMSQ test Result of ARDL(2,1,1,4) model.

40

30

20

10

-10

-20

-30

-40
07 08 09 10 11 12 13 14 15 16 17 18 19 20

CUSUM 5% Significance

Figure 4. QUSUM test Result of ARDL(2,1,1,4) model.

6. Discussion of exchange rate depreciation on Georgia's export can be

associated with an increase in the cost of input caused by
The paper's results cast a new light on the exchange domestic currency depreciation and inflation. Based on
rate's impact on Georgia's export performance. From the the theory, the devaluation of the exchange rate leads to
results, it is evident that in the long term period, the an increase in export by making domestic products
exchange rate depreciation (LEX) has an inverse long-run cheaper for foreigners; however, it is linked with the
effect on export (LEXP), which confirms the absence of elasticity of the demand for export in a given country. If
J-curve in the long-run in Georgia. Based on the J-curve export demand elasticity is more than unity in a country,
theory, as the domestic currency's value depreciates, it the exchange rate's devaluation positively influences
causes a particular assumption to decrease import and exports. Another reason is that the Georgian economy
export, but in the long-term export boosts, which is not highly relies on importing raw materials involved in
valid for our case results. The negative long-run influence producing goods for export; the devaluation of the
 Universal Journal of Accounting and Finance 9(5): 1116-1124, 2021 1123

exchange rate makes these goods expensive and raises the the exchange rate of GEL on Georgia's exports.
cost, negatively influencing export. The inverse impact of Depreciation of GEL is among the current issues facing
the exchange rate on Georgia's export confirms that the country's economy. Hence, it analyzes how this trend
Georgia's export goods' demand elasticity is less than the relates to the country's export and whether it is according
unity. The exchange rate measured coefficient is -1.12 to the literature's prevalent findings of the positive impact
percent, implying that the exchange rate negatively of currency depreciation on a country's export. The results
impacts export, meaning that the exchange rate complement the existing evidence about such effects in
depreciation negatively influences the export volume in the economic literature.
Georgia's case in the long-run (Table 3). The estimated Recent fluctuations in the exchange rate may be
long-run results show that if the exchange rate increases attributed to the considerable reduction of foreign
by 1% (devaluation by 1%), the export will decrease by currency inflows (reduced foreign investments and the
1.12% in the long-run. In the short-run, the results also number of tourists) and reduced trust towards the national
indicate a negative relationship between exchange rate currency in Georgia's population. The results of the paper
and export, so the exchange rate measured coefficient is indicated that in the long-run, depreciation of the
-1.82 percent (Table 4). exchange rate (LEX) negatively affects export (LEXP),
Overall these findings are following theoretical models while interest rate (LR) also negatively affects Georgia's
of export reported by Fang, Lai, and Miller (Fang, Lai, & export performance in both the long-run and the short-run.
Miller, 2005) that report the negative effect of the On the contrary, international reserves positively impact
exchange rate may dominate over the positive the export in the long-run with a high significance level.
contribution of currency depreciation, thus decreasing the The findings of the paper that indicate the negative effect
export. Mukesh et al. (Mukesh & Azeema, 2020) analyzed of exchange rate depreciation on export enables us to infer
the South Asian Economies found that currency that in the case of Georgia, industries are producing goods
depreciation reduces the export in the long-run in the four for export use inputs that are imported, and currency
SAARC countries - Bangladesh, India, Pakistan, and Sri depreciation makes them even expensive, so the price of
Lanka. They reported that in 13 countries, the exchange exported goods will not decrease. The National Bank of
rate volatility negatively influences the export. The Georgia should track and enforce policies to stop the
control variable interest rate (LR) negatively affects GEL's fluctuation in the foreign exchange market.
Georgia's export performance in the long-run (-1.75) and Monetary measures are not appropriate but necessary for
the short-run(-1.13), (Tables 3-4). The long-run 1% this reason.
increase in the interest rate causes the export to decrease On a broader policy level, the government can consider
by 1.75%, while the short-run 1% increase in the interest tax incentives for foreign investors and the
rate leads to a decrease in export by 1.13%. The increase implementation of large projects like the Port in Anaklia.
in the interest rate makes financial sources (credits, bank Without such large-scale projects, the balance between
loans) expensive, which increases the cost of production GEL and foreign currencies will not be stabilized on an
for the exporters, thus affecting the export negatively. exchange market. The paper contributes to the studies on
Interest rate fluctuations also lead to changes in the the impact of exchange rates on exports for Georgia and
exchange rate, leading to changes in net exports. stresses the importance of stabilizing the national currency.
International reserves positively influence the export in As a widely accepted assumption in the economic
the long-run with a high significance level. The 1% literature about a positive impact of currency depreciation
increase in Georgia's international reserves causes a 0.67% on export did not appear to be true for Georgia, it is
increase in the export. The error correction term (ECT) is crucial to tackle the challenge of depreciating national
negative, significant, and between 0 and 1 (-0.43), which currency. The study's future directions should focus on
confirms the model's reliability (Table 4). The findings are how currency depreciation affects export by product
following Polterovich et al. (Polterovich, Pavlov, groups and Georgia's trading partners. That would provide
Polterovich, & Popov, 2006) works. According to NBG, important insights for companies doing exports and help
Georgia's international reserves in 2019 reached the them to better plan their international operations.
historic level of $3.74 billion (Georgia, 2020). The
increase in international reserves is essential for
sustainable macro-financial stability. Starting from 2014,
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