The 2008 war and the National Bank of Georgia's emergency response

Georgia's five-day war with Russia in August 2008 struck an economy already facing the onset of the global financial crisis, and the combination hit confidence in the lari hard. According to the IMF's account of its 2009 Article IV consultation with Georgia, the National Bank of Georgia intervened heavily in the foreign-exchange market to defend the currency as capital flows reversed, while commercial banks simultaneously stopped extending new credit despite the central bank cutting its policy rate, reducing reserve requirements and injecting liquidity to keep the banking system functioning. The fiscal deficit widened sharply in 2008 as defense and election-related spending front-loaded the first half of the year before the government pivoted toward infrastructure and social outlays in the second half to support activity. International donors stepped in quickly, with a multi-year pledging effort led by the United States and the European Union combined with a new IMF arrangement, giving Georgia financing that let the central bank avoid depleting its reserves entirely while still absorbing the shock. The episode exposed real fragility in a banking system that had expanded rapidly in the pre-war years on foreign funding, setting up the financial-stability concerns the National Bank of Georgia would spend the following years addressing.