International Monetary Fund. Monetary and Capital Markets Department
This virtual technical assistance (TA) mission supported the Agency in strengthening certain elements of its risk-based supervisory framework. The mission provided recommendations and training to the Agency on the assessment of banks’ recovery plans and interest rate risk in the banking book (IRRBB). The mission benefited from simultaneous translation. The priorities for the forthcoming TA missions were discussed with the Agency (strengthening cybersecurity in financial institutions, and assessment of banks’ liquidity within the SREP framework).
One of the most puzzling facts in the wake of the Global Financial Crisis (GFC) is that output across advanced and emerging economies recovered at a much slower rate than anticipated by most forecasting agencies. This paper delves into the mechanics behind the observed slow recovery and the associated permanent output losses in the aftermath of the crisis, with a particular focus on the role played by financial frictions and investment dynamics. The paper provides two main contributions. First, we empirically document that lower investment during financial crises is the key factor leading to permanent loss of output and total factor productivity (TFP) in the wake of a crisis. Second, we develop a DSGE model with financial frictions and capital-embodied technological change capable of reproducing the empirical facts. We also evaluate the role of financial policies in stabilizing output and TFP in response to disruptions in financial markets.
Declining commodity prices during mid-2014-2016 posed significant challenges to commodity-exporting economies. The severe terms of trade shock associated with a sharp fall in world commodity prices have raised anew questions about the viability of pegged exchange rate regimes. More recently, the COVID-19 pandemic and the measures needed to contain its spread have been associated with a significant disruption in several economic sectors, in particular, travel, tourism, and hospitality industry, adding to the downward pressure on commodity prices, a sharp fall in foreign exchange earnings, and depressed economic activity in most commodity exporters. This paper reviews country experiences with different exchange rate regimes in coping with commodity price shocks and explores the role of flexible exchange rates as a shock absorber, analyzing the macroeconomic impact of adverse term-of-trade shocks under different regimes using event study and panel vector autoregression techniques. It also analyzes, conceptually and empirically, policy and technical considerations in making exchange rate regime choices and discusses the supporting policies that should accompany a given regime choice to make that choice sustainable. It offers lessons that could be helpful to the Caribbean commodity-exporters.
Miss Mercedes Vera Martin, Mr. Tarak Jardak, Mr. Robert Tchaidze, Mr. Juan P Trevino, and Mrs. Helen W Wagner
External shocks since 2014—lower oil prices and slower growth in key trading partners—have put financial sectors, mainly banks, in the eight Caucasus and Central Asia (CCA) countries under increased stress. Even before the shocks, CCA banking sectors were not at full strength. Asset quality was generally weak, due in part to shortcomings in regulation, supervision, and governance. The economies were highly dollarized. Business practices were affected by lack of competition and, in most countries, connected lending, which undermined banking sector health. Shortcomings in financial regulation and supervision allowed the unsound banking practices to remain unaddressed. The external shocks exacerbated in these underlying vulnerabilities. Strains in CCA banking sectors intensified as liquidity tightened, asset quality deteriorated, and banks became undercapitalized. These challenges have required public intervention in some cases.
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.
Capital flow volatility is a concern for macroeconomic and financial stability. Nonetheless, literature is scarce in this topic. Our paper sheds light on this issue in two dimensions. First, using quarterly data for 65 countries over the period 1970Q1-2016Q1, we construct three measures of volatility, for total capital flows and key instruments. Second, we perform panel regressions to understand the determinants of volatility. The measures show that the volatility of all instruments is prone to bouts, rising sharply during global shocks like the taper tantrum episode. Capital flow volatility thus remains a challenge for policy makers. The regression results suggest that push factors can be more important than pull factors in explaining volatility, illustrating that the characteristics of volatility can be different from those of the flows levels.
In recent years, the South Caucasus and Central Asia countries (CCA-6) have received significant foreign exchange inflows. While a healthy reserve buffer is desirable to selfinsure against external crises, holding international reserves also involves costs. We analyze the adequacy of CCA-6 reserves using widely recognized rules of thumb, and simulate optimal reserve levels applying the Jeanne (2007) model. Both the adequacy measures and the model-based simulations indicate that, with the exception of Tajikistan, CCA-6 reserves had increased to broadly comfortable levels by 2006. More recently, reserve adequacy has been tested in Kazakhstan, which has been affected by the 2007 global liquidity crunch.
International Monetary Fund. External Relations Dept.
IEO on IMF exchange rate advice; GFSR: financial system risks and issues for regulators; good times in Belgium; Africa's oil exporters; outlook for Middle East and Central Asia; Caucasus and Central Asia:capital flows; lessons from a decade of crises.
Mr. Gonzalo C Pastor Campos and Ms. Tatiana Damjanovic
This paper reviews the economic conditions in central Asia at the time of the Russian financial crisis of August 1998; the channels by which the crisis was transmitted to the central Asian region; and the policy responses. The paper concludes that, while real exchange rates of central Asian national currencies vis-à-vis the Russian ruble have returned to their pre-crisis levels following the nominal devaluations that ensued, other indicators of external competitiveness, such as unit labor cost indices, suggest the need for further surveillance in this area. Also, it is not yet clear if full exchange rate flexibility has been established in central Asia despite the protracted and costly exits from the nominal exchange rates in place at the time of the crisis. Finally, the debt-to-GDP ratios in central Asia, which grew rapidly between 1998 and 1999 in the context of large exchange rate adjustments, remain a challenge for the Tajik and Kyrgyz authorities, in particular.