How to de-dollarize in a smart way_ lessons from the georgian and foreign experiences


The FINANCIAL — Unofficial (partial) dollarization describes a situation when a foreign currency is used alongside the domestic currency for transactions purposes and as a store value. Binary search javascript High partial dollarization is not good for a country, as it ties the hands of its Central Bank when it wants to use monetary policy. Usd euro chart In a highly dollarized economy, national currency depreciation can even lead to financial instability.

As a transition economy, Georgia is characterized by high levels of dollarization.

Gold price history chart 100 years Therefore, recent waves of lari depreciation has prompted authorities to step up their efforts to achieve sustained de-dollarization of the economy. Yahoo futures indices To do this, the Georgian government, together with the National Bank of Georgia, has drafted the so-called “Larization Plan.”

Despite the fact that many of the policy measures in the current Larization Plan are widely recognized as effective tools against high dollarization (we will not mention all of them in this blog), there are questions related to the two most controversial points in the de-dollarization strategy: voluntary conversion 1 of foreign currency mortgage loans to the domestic currency; and mandatory issuance of small loans 2 in local currency only. Usa today These two initiatives will most likely create considerable mismatches in the banks’ balance sheets, as the asset side of the banks’ balances (credits) will be rapidly de-dollarized, while dollarization of the liability side (deposits) will remain relatively high.

Some policy makers believe that converting foreign currency loans will stabilize the lari exchange rate against the dollar. Rmb usd The logic is as follows: private borrowers in Georgia, who previously had to convert their lari into USD to pay back loans (driving up the demand for USD), will now simply pay in lari. 100 eur to usd Problem solved? Perhaps not. Dow jones futures exchange We have to remember that it will be banks who will be converting lari into USD to pay back interest on their dollarized liabilities. Stock connect china In both cases, the international reserves of the National Bank of Georgia may need to be tapped to keep the lari exchange rate stable against the USD.

It is worth mentioning that de-dollarization by forced administrative means always entails a risk of negative spillover effects to other parts of the economic system. Today’s futures market For example, banning small loans in foreign currency might lead to an increase in interest rates on lari loans, and further impede sustainable economic growth (banks will try to attract deposits in lari, which might increase interest rates on lari deposits and increase interest rates on lari loans as well). Cad usd exchange rate In addition, strict administrative measures always include the risk of financial disintermediation (a fancy term for people not trusting the banks anymore) and capital flight.

Policymakers often talk about foreign experiences, but it is not frequently mentioned that Georgia already has an experience with successful market driven de-dollarization. Rub usd converter The early years of post-Soviet transition were full of unsuccessful institutional and structural reforms. Litecoin charts A persistent budget deficit led to hyperinflation, sharp currency depreciation and deteriorated macroeconomic conditions. Usd jpy chart People started to mistrust domestic currency and financial dollarization reached historically high levels (80-90%). Market futures yahoo After the Rose Revolution, the newly elected government started to implement ambitious reforms. Usd to zar exchange rate history These reforms, coupled with favorable economic conditions in the region, helped Georgia achieve macroeconomic stability. What is the futures market 3 As a result, dollarization indexes were reduced by approximately 20 percentage points. Binary search tree program in c On the chart below we can see that dollarization has been on the decline during “normal” times, increasing only in the times of crises (for example, during the global financial crisis of 2008, and during the recent regional economic crisis in 2014-2016).

The main message conveyed by this chart is clear: market forces play an important role in achieving fast, long-lasting de-dollarization. Gender pregnancy Therefore, countries like Georgia can achieve a lower level of dollarization simply by stabilizing the macroeconomic environment, without resorting to restrictive prudential regulations.

There is a broad range of literature studying the determinants of a successful de-dollarization process. Exchange rate usd to inr The main message of these studies corroborates the Georgian experience: achieving macroeconomic stability is the main driver of successful de-dollarization. Stock market trading hours new years eve Development of capital markets is also important, while prudential measures are mainly considered to be a supplementary tool to help achieve incremental progress.

While many countries are trying to de-dollarize, only a few of them have fully succeeded in their efforts. Eur usd news today For instance, Mecagni and others (2015) 4 empirically analyzed a sample of 42 initially dollarized countries, among which 11 countries managed to successfully de-dollarize 5 , while another 31 countries failed to meet their target. Rate of exchange usd to zar The authors identified key variables that distinguished successful countries from unsuccessful ones. Decimal division calculator First, they found that the average initial dollarization in successful cases was 67.4%, while this variable was, on average, much smaller in unsuccessful ones – only 48.4%. Futures market size Second, during the de-dollarization process, successful countries managed to achieve high real GDP growth (on average 2.8 percent higher than unsuccessful ones), improved current account balances (on average by 5.3%), and reduced fiscal deficit (on average, managing to go from a deficit to a small surplus). Euro to usd exchange rate forecast Finally, successful countries experienced prolonged exchange rate appreciations during the de-dollarization period. Exchange rate gbp usd However, regression analysis makes it clear that exchange rate appreciation is itself the result of the macroeconomic stabilization, and its pure effect on dollarization is statistically insignificant.

In considering the case studies of successful de-dollarization processes, we see that successful countries share some important characteristics – in all cases, de-dollarization was achieved through macroeconomic stability, supplemented with prudential measures. Currency converter us to aud Peru provides a brilliant example of how market driven de-dollarization defeats dollarization based on the prudential regulations alone.

In the mid-1980s, the Peruvian government decided to combat dollarization by forced conversion of foreign currency deposits to the local currency. Html editor windows 10 This policy turned out to be counter-productive, provoking financial disintermediation and capital flight. Trading places stock market scene video The inflation rate reached quadruple digits in the 1990s and the Peruvian sol lost its essential functions. Meaning of futures and options in stock market After this painful experiment, government authorities radically changed their de-dollarization strategy. Currency conversion aud to usd The new plan focused on achieving macroeconomic stability by creating a fiscal surplus, significantly lowering public debt, and stabilizing inflation by introducing an inflation targeting regime, which was followed by significant currency appreciation from 2003-2011. Exchange rate jpy to usd The macro stabilization policy was complemented by prudential regulations to better account for foreign currency risks, and to develop a market for securities with a long maturity in domestic currency. Dollar pound chart 6 As a result, Peru managed to reduce dollarization by approximately 30 percentage points.

To sum up, macroeconomic theory and the analysis of case studies of successful de-dollarization processes suggest that the key contributor to successful de-dollarization is a stable macroeconomic environment. Usd to inr live chart Prudential measures can only be considered as supplementary tools. What is a binary system All in all, the most enduring way to reduce dollarization is to achieve – and maintain – macroeconomic stability by keeping inflation low and stable, keeping the exchange rate flexible, improving the country’s current account balance, reversing fiscal deficit (which makes government bonds more attractive and further deepens domestic capital markets), and by conducting structural and institutional reforms that help reach sustainably high economic growth.

Mecagni, M., Corrales, J. Gbp usd rate today S., Dridi, J., Garcia-Verdu, R., Imam, P., Matz, J. . . . Python example programs Yehoue, E. Currency conversion usd to aud (2015). Free quotes for car insurance Dollarization in Sub-Saharan Africa – Experience and Lessons. Gbp to usd exchange rate forecast IMF Library.