2022-07-28-IMF-Reducing_Dollarization_in_the_Caucasus_and_Central_Asia_39页_1mb

Reducing Dollarization in the Caucasus and Central Asia: Key Insights

Abstract and Introduction:
The working paper examines declining but still high levels of dollarization in the Caucasus and Central Asia (CCA) region, which affects macroeconomic stability and monetary policy. Dollarization roots from weak economic fundamentals like high inflation and currency volatility. The paper explores short-term drivers of financial de-dollarization, highlighting that while significant progress has been made through policies, further reduction requires continued reforms.

Stylized Facts:

• Dollarization rates in the CCA region have declined from historically high levels, with average deposit and loan dollarization at 39% and 37% respectively by end-2020, down from 61% and 81% previously.
• Georgia has the highest dollarization rate at over 60%, while Kazakhstan and Azerbaijan show significant credit de-dollarization.
• Natural levels of dollarization vary by country, influenced by factors like remittances and economic instability, with estimates ranging from 3% to 36.6%.

Policies and Measures:
All CCA countries have implemented de-dollarization policies, including:

• Higher reserve requirement ratios for foreign currency deposits (e.g., 20% in Georgia vs. 0.5% in Azerbaijan).
• Macroprudential tools such as open currency position limits, bans on foreign currency lending for mortgages, and stricter loan-to-value ratios.
• Efforts to develop local currency bond markets and pillar II pension systems to encourage domestic savings.

Empirical Analysis:

• A VAR model was used to analyze short-term drivers, showing that:
  • Reserve requirement differentials reduced both deposit and credit dollarization in several countries.
  • Prudential measures like restrictions on FX lending significantly lowered credit dollarization but not necessarily deposit dollarization.
  • Exchange rate appreciation shocks boosted deposit de-dollarization in Armenia and Kazakhstan, while the impact of cross-country yield spreads and volatility was mixed.
• Deposit dollarization drives credit dollarization, reinforcing the need for regulatory measures.

Conclusion:
The study concludes that while dollarization has reduced through strengthened macroeconomic policies and regulatory actions, further de-dollarization requires addressing limited market development and persistent regulatory risks. Key recommendations include credible monetary frameworks, fiscal discipline, and deeper domestic financial markets to promote long-term currency stability. Currency substitution remains a challenge, and sustained efforts are needed to make domestic currencies appealing.