How to De-Dollarize Financial Systems in the Caucasus and Central Asia?

IMF Working Papers, September 23, 2015

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Dollarization rates in the Caucasus and Central Asia (CCA) region are among the highest in the world, with adverse consequences for macroeconomic stability, monetary policy transmission, and financial sector development.
Using dynamic panel data models, the authors find that foreign exchange deposits and loans in the CCA are mainly driven by:
- volatile inflation and exchange rates;
- low financial depth;
- asymmetric exchange rate policies biased toward depreciation.
There is no unique formula for success, but empirical studies and cross-country experiences suggest the following essential ingredients of any de-dollarization strategy:
- credible monetary and exchange rate frameworks;
- low and stable inflation;
- deep domestic financial markets.

Policymakers need to consider:
- proper sequencing of policies;
- effective communication;
- risks from potential financial disintermediation and instability, and/or capital flight.
De-dollarization strategies should be embedded in broader macroeconomic and financial development reforms, given the drivers identified (inflation volatility, exchange rate behavior, and shallow domestic markets).

Subject: Currencies, Dollarization, Exchange rate policy, Exchange rates, Foreign exchange, Monetary policy, Money
Keywords: CCA country, Central Asia, Central Asia and the Caucasus, Currencies, de-dollarization, De-dollarization policy, deposit dollarization, Dollarization, dollarization level, Europe, exchange rate, Exchange rate policy, Exchange rates, financial development, financial dollarization, loan, loan dollarization, WP