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© 2022 International Monetary Fund
WP/22/154
IMF Working Paper
Middle East and Central Asia Department
Reducing Dollarization in the Caucasus and Central Asia
What Could Help Make Further Progress
Prepared by Selim Cakir, Maria Atamanchuk, Mazin Al Riyami, Nia Sharashidze, Nathalie Reyes.
Authorized for distribution by Nicolas Blancher
July 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: Declining but still high dollarization rates in the Caucasus and Central Asia (CCA) region affect macroeconomic stability, monetary policy transmission, and financial sector development. Although several studies have investigated the dynamics of dollarization in the CCA, the relative roles of macrofinancial policies and financial market development in the de-dollarization process have not yet been assessed empirically. This paper takes stock of de-dollarization efforts and explores the short-term drivers of financial de?dollarization in the CCA region. It highlights that there remains significant scope to further reduce dollarization through continued progress in strengthening macroeconomic policy frameworks and in deve loping markets and institutions.
| JEL Classification Numbers: | E52, E58, F30, F31. |
| Keywords: | Dollarization; Foreign Currency; Foreign Exchange; FX; Monetary Policy; Central Asia; Caucasus; CCA. |
| Author’s E-Mail Address: | scakir@imf.org; matamanchuk@imf.org; nrayes@imf.org; nsharashidze@imf.org; almazinr@gmail.com; |
| JEL Classification Numbers: | E52, E58, F30, F31. |
| Keywords: | Dollarization; Foreign Currency; Foreign Exchange; FX; Monetary Policy; Central Asia; Caucasus; CCA. |
| Author’s E-Mail Address: | scakir@imf.org; matamanchuk@imf.org; nrayes@imf.org; nsharashidze@imf.org; almazinr@gmail.com; |
Title Page
WORKING PAPERS
Reducing Dollarization in the Caucasus and Central Asia
What Could Help Make Further Progress
Prepared by Selim Cakir, Maria Atamanchuk, Mazin Al Riyami, Nia Sharashidze, Nathalie Reyes.1
Contents
Introduction
Stylized facts
De-dollarization policies in the region
Empirical Approach
Methodology
Impulse Responses
Forecast Error Variance Decomposition
Conclusion
References
Annex I. Surveys
Annex II. Impulse Response Functions
BOXES
Box 1. What is a Natural Level of Dollarization?
FIGURES
Figure 1. Dollarization of Deposits and Credits in the CCA
Figure 2. Dollarization of Deposits and Credits in other EMDEs
Figure 3. Change in Dollarization 2010-2021 (At Constant Exchange Rates)
Figure 4. Gross FX Debt and NIIP
Figure 5. Financial Depth and Dollarization
Figure 6. Evolution of the REER and Dollarization
Figure 7. Survey of De-dollarization Measures
Figure 8. Response of Deposit Dollarization to a Shock to Differential Reserve Requirement
Figure 9. Response of Credit Dollarization to a Shock to Differential Reserve Requirement
Figure 10. Response of Credit Dollarization to Introduction of Prudential Measures
Figure 11. Response of Deposit Dollarization to an Exchange Rate Shock
Figure 12. Response of Deposit Dollarization to Shock to Spread Between Local and Foreign Currency
Figure A1a. Response of Deposit Dollarization to a Shock to Differential Reserve Requirement
Figure A1b. Response of Credit Dollarization to a Shock to Differential Reserve Requirement
Figure A1c. Response of Deposit Dollarization to a Shock to Introduction of Various Prudential Measures (Captured by a Dummy in the Analysis)
Figure A1d. Response of Credit Dollarization to a Shock to Introduction of Various Prudential Measures (Captured by a Dummy in the Analysis)
Figure A1e. Response of Credit Dollarization to an Exchange Rate Shock
Figure A1f. Response of Deposit Dollarization to Issuance of Local Currency Long-term Bonds
Figure A1g. Response of Credit Dollarization to Issuance of Local Currency Long-term Bonds
Figure A1h. Responses of financial dollarization to change in spread between local and foreign currency deposit rates
Figure A1i. Response of Deposit Dollarization to an Exchange Rate Volatility Shock
Figure A1j. Response of Credit Dollarization to an Exchange Rate Volatility Shock
Figure A1k. Response of Credit Dollarization to a Shock in Deposit Dollarization
TABLES
Table 1: Definition of Variables in VAR
Table 2. Variance Decomposition of Changes in Deposit Dollarization
Table 3. Variance Decomposition of Changes in Credit Dollarization
Table A1. Qualitative Survey
Table A2. Quantitative Data