This Selected Issues paper takes stock of the current level of dollarization, both in historic and international perspective. By looking at recent measures and international best practice, it draws some recommendations for a successful de-dollarization framework. Belarus has a high level of loan and deposit dollarization as a result of repeated external crises and hyperinflation. Dollarization in Belarus is much higher than many other countries, accounting for various drivers of dollarization. Dollarization has been decreasing but it is still higher than a decade ago. The authorities have been taking welcome steps to liberalize the foreign exchange (FX) market, such as, for example, eliminating the FX surrender requirement and easing the registration procedure for FX transactions. An overarching and publicly communicated national strategy to de-dollarize the economy is a missing piece of the puzzle. Such a strategy would be an important signaling and commitment device and would help educate borrowers about the risks (private and social) of FX borrowing. The strategy would contain an operational roadmap that would also ensure the coherence of existing policies, and coordinate policy and operational steps.
The Belarusian economy is in a cyclical recovery, inflation is at historically low levels and the exchange rate has been broadly stable. Although macroeconomic policy frameworks have improved, there is a need to reduce deep seated vulnerabilities such as rapidly rising public debt, high dollarization, and limited trade and financing diversification. In addition, reforms of the large state-owned enterprise sector are critical to tackle inefficiencies and increase potential growth. Risks ahead are elevated; notably, Belarus could lose significant oil-related discounts and transfers due to internal tax changes in Russia, but the authorities are confident of a successful outcome to the ongoing negotiations.
Belarusian authorities contemplate transiting to inflation targeting. The paper suggests a small structural model at the core of the forecasting and policy analysis system. A well-researched canonical structure of Berg, A., Karam, P. and D. Laxton (2006) is extended to capture specifics of Belarusian economy and macroeconomic policy. The modified model’s policy block reflects a monetary targeting regime and allows for transition from it to an interest-rate-based framework. Adding wages, directed lending and dollarization allow for studying implications of activist wage policy, state program lending, and dollarization for macroeconomic stability and the strength of the policy transmission mechanism.
The paper uses a unique survey of remittance-receiving individuals from Tajikistan to study the impact of policy awareness on consumer behavior. The results show that knowledge of deposit insurance encourages the use of formal channels for transmitting remittances and reduces dollarization. Given the size and importance of remittances in Tajikistan, improving financial literacy and better publicizing details of the social safety net may encourage a more frequent use of formal channels for transferring remittances and reduce reliance on foreign exchange for transaction purposes. This is likely to improve bank profitability, enhance financial stability, and improve access to finance.
There are 13 countries in Central, Eastern and Southeastern Europe (CESEE) with floating exchange rate regimes, de jure. This paper uses the framework pioneered by Frankel and Wei (1994) and extended in Frankel and Wei (2008) to show that most of them have been tracking either the euro or the US dollar in recent years. Eight countries, all of them current or aspiring EU members, track the euro. Of the five countries keying on the US dollar in various degrees, all but one belong to the Commonwealth of Independent States. The paper shows that the extent to which each country’s currency tracks the euro (or the dollar) is correlated with the structure of its external trade and finance. However, some countries appear to track the EUR or USD to an extent which appears inconsistent with inflation targeting, trade or financial integration, or the extent of business cycle synchronization. The phenomenon is particularly pronounced among the countries in the CESEE euro bloc, which may be deliberately gravitating around the euro in anticipation of eventually joining the Euro Area.
This 2016 Article IV Consultation highlights that the economy of Belarus contracted by 3.9 percent in 2015, with a similar performance in the first half of 2016. The exchange rate depreciated sharply during 2015 and part of 2016. Real wages are down substantially relative to 2014, and corporate losses are up. Unemployment has risen somewhat, though it remains relatively low. The economy is expected to contract further in 2016 and in 2017, reflecting still-weak balance sheets and structural impediments. A subdued recovery is expected in 2018, but over the medium term, potential growth is expected to increase only to about 1.75 percent, limited by negative demographic developments and low productivity growth.
Alex Miksjuk, Mr. Sam Ouliaris, and Mikhail Pranovich
Belarus experienced a sequence of currency crises during 2009-2014. Our empirical results, based on a structural econometric model, suggest that the activist wage policy and extensive state program lending (SPL) conflicted with the tightly managed exchange rate regime and suppressed monetary policy transmission. This created conditions for the unusually frequent crises. At the current juncture, refocusing monetary policy from exchange rate to inflation would help to avoid disorderly external adjustments. The government should abandon wage targets and phase out SPL to remove the underlying source of the imbalances and ensure lasting stabilization.
This Selected Issues paper analyzes the causes of the high inflation in Belarus. It estimates the contribution of two factors: (1) exchange rate pass-through and (2) administrative price increases. Residual inflation is used as a gauge for inflation caused directly by demand pressures and inflation expectations. It is found that the administrative price increases are a key driver of inflation, even ahead of demand pressures, which also explain a large share of inflation. Although exchange rate pass-through is found to be high and fast, particularly for unregulated prices, its contribution to inflation has been comparatively modest in recent years owing to the stability of the exchange rate.