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David O. Robinson

Conferences in Bishkek on May 10 and May 12-13 celebrated the tenth anniversary of the Kyrgyz Republic’s national currency and highlighted the economic progress that has been made in the countries of the Commonwealth of Independent States (CIS). But participants also had their eyes on the future. What would be needed to sustain the strong recent macroeconomic performance in the region? Boosting trade was high on the list of priorities, as was financial sector development.

Miss Mercedes Vera Martin, Mr. Tarak Jardak, Mr. Robert Tchaidze, Mr. Juan P Trevino, and Mrs. Helen W Wagner
External shocks since 2014—lower oil prices and slower growth in key trading partners—have put financial sectors, mainly banks, in the eight Caucasus and Central Asia (CCA) countries under increased stress.  Even before the shocks, CCA banking sectors were not at full strength. Asset quality was generally weak, due in part to shortcomings in regulation, supervision, and governance. The economies were highly dollarized. Business practices were affected by lack of competition and, in most countries, connected lending, which undermined banking sector health. Shortcomings in financial regulation and supervision allowed the unsound banking practices to remain unaddressed. The external shocks exacerbated in these underlying vulnerabilities. Strains in CCA banking sectors intensified as liquidity tightened, asset quality deteriorated, and banks became undercapitalized. These challenges have required public intervention in some cases.
Mr. Holger Floerkemeier and Mariusz A. Sumlinski
In recent years, the South Caucasus and Central Asia countries (CCA-6) have received significant foreign exchange inflows. While a healthy reserve buffer is desirable to selfinsure against external crises, holding international reserves also involves costs. We analyze the adequacy of CCA-6 reserves using widely recognized rules of thumb, and simulate optimal reserve levels applying the Jeanne (2007) model. Both the adequacy measures and the model-based simulations indicate that, with the exception of Tajikistan, CCA-6 reserves had increased to broadly comfortable levels by 2006. More recently, reserve adequacy has been tested in Kazakhstan, which has been affected by the 2007 global liquidity crunch.
International Monetary Fund. External Relations Dept.

In the second half of the 1980s, Japan enjoyed above-trend economic growth and near-zero inflation. These conditions resulted in a significant decline in the country risk premium and a marked upward adjustment in growth expectations, which boosted asset price inflation fueled by credit expansion. At the time, Japanese banks were considered among the strongest in the world. During the same period, the pace of financial liberalization and deregulation accelerated, which spurred price competition and prompted banks and other depository institutions to take greater risks, including increased lending to the real estate industry. As land prices rose, these institutions loosened credit standards. In response, the authorities limited total bank lending to the real estate sector, curtailing the banks’ asset growth.

International Monetary Fund. External Relations Dept.

03/97: “Regional Convergence and the Role of Federal Transfers in Canada,” Martin D. Kaufman, Phillip L. Swagel, and Steven V. Dunaway