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Mr. Juan S Corrales and Patrick A. Imam
Using a newly complied and extended database from International Financial Statistics, and applying different panel-regression techniques, this paper documents the evolution of households’ and firms’ dollarization over the past decade. We assess the macroeconomic determinants of dollarization for households and firms and explore differences between high and low-income countries. We find that households’ and firms’ dollarization in loans and deposits are weakly explained by the currency substitution model, except in low income countries, where inflation plays a significant role. Instead, market development variables such as financial deepening, access to external debt and FX finance as well as other market considerations are key to explain the dynamics of deposits and loans dollarization, regardless of the level of income.These factors can account for a significant fraction of the dollarization, but using a variance decomposition model, there is evidence that a non-negligible portion has yet to be explained. This suggests that there are key determinants for household and firm dollarization that are not fully captured by traditional macroeconomic explanatory variables.
Mr. Juan S Corrales and Patrick A. Imam

the behavior of households and firms. (ii) Structural factors, as measured by the market development model is better at explaining the dollarization behavior of both households and firms, even though their impact differs. Capital account liberalization tends to encourage deposit dollarization by firms in particular, and to a lesser extent by households. This means that opening the capital account, by encouraging borrowing in FX, needs to be carefully monitored to ensure that only companies that earn FX can borrow in foreign currency. (iii) Financial sector

International Monetary Fund. Middle East and Central Asia Dept.

a change should be implemented gradually. They concurred that the flexible exchange rate regime remains appropriate as a shock absorber. 16. External stability hinges on external aid disbursements . The current account is dominated by imports and official transfers. Exchange rate developments primarily depend on the level of foreign aid disbursements and dollarization behavior, while FX auctions aim to limit short-term volatility against the U.S. dollar. The real effective depreciation observed from early 2015 until recently has been largely driven by emigrants

International Monetary Fund. Middle East and Central Asia Dept.
This paper discusses Afghanistan’s First Review under the Extended Credit Facility (ECF) Arrangement and the Request for Modification of Performance Criteria (PCs). Program implementation has been satisfactory. All quantitative PCs and indicative targets were met. The authorities are planning to contract a limited amount of nonconcessional debt to finance an important infrastructure project and are seeking approval of a modification of the relevant PCs. They are also requesting modification of three PCs for June 2017. These were revised owing to updates of the macroeconomic framework and changes in methodology affecting monetary variables. The IMF staff supports completion of the first review under the ECF arrangement and the authorities’ request for a modification of PCs.