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The monetization of the economy—broad money to GDP—remains relatively low (18 percent of GDP in 2009), reflecting the lingering impact of civil war and hyperinflation.
For Russia, such data were collected by estimating the amount of currency on hand in 1991 and then adding net foreign sales by booths/banks, net withdrawals from foreign deposits, and foreign exchange for travel and shuttle trade (Ibid).
The high deposit-lending spreads are driven by three main factors—limited credit risk assessment and mitigation mechanisms, weak competition, and deficiencies in the tools and infrastructure for liquidity management (2008, IMF).
The lack of tradable government securities constrains monetary policy implementation and banks’ liquidity management. In the absence of domestic financing requirements, the ministry of finance has not issued securities since 2001. The NBT certificates were first issued in 2003 but the NBT’s insolvency discourages larger placements and market-based pricing. The resultant lack of freely transferable collateral drastically limits the use of repos and holds back the development of an interbank money market. These constraints, the lack of standing facilities at the NBT, and payment system’s deficiencies, heighten banks’ incentives to hold ample idle liquidity (Ibid). There is no secondary market for government debt (the majority is held by the central bank) and the interbank market is inactive.
Loan dollarization stood at 60 percent at end-2008. The main driving factor appears to be the evolving currency composition of banks’ funding, which is increasingly skewed toward the foreign currency.
At end-2008, commercial banks’ credit constituted only 47 percent of their assets. Lending has been primarily short term in nature (between 1 and 3 years) driven by the short-term maturity of deposits as well as risk aversion. Loan dollarization stood at 56 percent, and the majority of lending has been directed towards agricultural lending.
For definition of and discussion about exogeneity, see Engle, Hendry, and Richard (1993).
While we focus on the 3-month inflation average to reduce short-term noise in the date, we have also used year-on-year CPI inflation to estimate ARMA models. These models performed less robustly than those with 3-month inflation average.
The NBT’s plan to set up a deposit standing facility is a step in this direction.
A large share of nonresident deposits is reportedly deposited abroad, but this could be easily reversed. Moreover, the exclusion creates an incentive for banks to book deposits as nonresident deposits (this may partly explain the exceptional increase in nonresident deposits in the first half of 2007 and subsequent sharp decline after the exclusion was reversed).
It is indispensable to develop awareness campaigns, concrete education mechanisms, and specific incentives to encourage remittance recipients to use these products. The NBT could foster competition among money transfer operators by increasing market transparency (e.g., publishing comparative data on various pricing and service alternatives offered by banks and other paying agents).