However, there are still no serious results to boast. The experts are convinced that the regulator is moving in the correct direction but it needs time and, possibly, even greater decisiveness to eliminate the dollar in Belarus.
Dollar in head. Why is it a problem? The systemic risk for the financial system increases, at least for two reasons. Second, since banks extend loans in foreign currencies not only to exporters, financial dollarization causes foreign exchange inconsistencies that increase credit exposure in foreign currencies. Therefore, a more effective monetary policy and greater financial stability cannot be imagined without low dollarization and high trust in the national currency. Belarus is maintaining one of the highest rates of dollarization among the EAEU member states and European countries Figure 1.
The extent of dollarization changed significantly in after the 20 percent devaluation of the Belarusian rouble with respect to the U. After and until the beginning of , the share of foreign currencies in deposits and loans continued to go up because of necessary adjustments to the rate of the Belarusian rouble with respect to foreign currencies, including as a result of the depreciation of the Russian rouble in foreign markets due to external shocks.
Reducing dollarization in the financial sector would bring significant economic and political dividends to Belarus. To succeed, however, the root causes of this phenomenon need to be eliminated. Some economists insist that dollarization should be explained not only by inflation but also uncertainties as to the effective yield of the assets denominated in the national currency arising due to volatile inflation [4].
In addition, the suggestion that different forms of dollarization intensify each other can hardly be disputed [6]. In our opinion, the main causes of the high level of dollarization in the economy are as follows. High inflation and exchange rate targeting fixation. The fact that dollarization results, to a significant extent, from monetary policies that cannot restrain inflation is illustrated by country comparisons Figures 3 and 4. Tough control of the exchange rate only strengthens motivation for dollarization.
Research and practice in certain countries for example, Turkey and Poland suggest that restoring the floating rate and taking measures to reduce and stabilise inflation are the key conditions, without which any other efforts to de-dollarize would most probably be fruitless.
It should be taken into account that these macroeconomic conditions can influence business savings and investment decisions faster than those of households, which need more time to overcome negative remembrances of high inflation [9].
In this connection central banks should, for a significant time, not only send consistent signals to the public about their firm intention to ensure monetary stability and flexibility of the exchange rate and to prevent any steps back in their policies, but also take supporting measures to promote a favourable environment in the financial market and create additional economic stimuli for de-dollarization. Macroeconomic volatility. Inflation volatility — if it is higher than the volatility of the nominal depreciation of the exchange rate — is one of the causes of dollarization.
In particular, the policy of disinflation aimed at reducing and stabilising inflation by means of controlling the exchange rate when it stabilises faster than inflation — tend to stimulate dollarization. This is because the Armenian monetary policy has many peculiarities, not typical of net inflation targeting. Therefore, a stable exchange rate, in combination with other factors, create preconditions for high dollarization.
Expectations and trust among market participants are also important. If economic players do not believe that the recent good results of a macroeconomic policy would be reversed the medium term, dollarization may not go down even if the policy has been changed fundamentally. The fear of the floating exchange rate induced by the gap in positions having significant open foreign exchange positions. In a highly dollarized economy the central bank may want to fix or control rigidly the exchange rate in order to protect economy players against devaluation effects.
Credit risk undervaluation by unhedged borrowers. Borrowers and lenders may undervalue the credit exposure associated with extending foreign currency loans to unhedged borrowers. The inability to foresee a sharp and significant impairment of the exchange rate makes borrowers accept extreme foreign exchange risks, on the one hand, and induces lenders to provide loans in foreign currencies, on the other hand. In addition, the significant gap between interest rates, which favours foreign currencies, can result — through adverse selection — in that riskier projects will concentrate in the segment of unhedged borrowers.
Without an efficient foreign exchange market businesses will try to attract finance in alternative currencies, exposing themselves to foreign exchange risks.
The best hedging policy for importers, in the absence of a developed hedging mechanism, is to fix prices in foreign currencies. In view of the above, it seems advisable to divide de-dollarization measures into three levels: the top priority measures should be aimed at changing the macroeconomic environment; the second level should be passive measures aimed at creating a favourable financial market environment; and the third level should be active measures intended to influence the stimuli for transaction expansion in a certain market segment and the pricing of certain goods.
As shown by an empirical analysis by the IMF, central banks use active measures to stimulate and support de-dollarization [10]. The top priority measures aimed at changing the macroeconomic reality include inflation reduction and stabilisation by switching to a floating exchange rate. This stage is intended to remove the main obstacle — high inflation and the insufficient flexibility of the exchange rate, failing which all other measures and actions, or most of them, will fail.
The second-level passive measures are aimed at forming a favourable environment in the financial market. In particular, these measures should help banks to expand their balance sheets by promoting instruments denominated in the national currency, developing domestic financial markets, and eliminating uncertainties relating to long-term interest rates. Federal Reserve collects the seigniorage, and the local government and gross domestic product GDP as a whole thus suffer a loss of income.
In a fully dollarized economy, the central bank also loses its role as the lender of last resort for its banking system. While it may still be able to provide short-term emergency funds from held reserves to banks in distress, it would not necessarily be able to provide enough funds to cover the withdrawals in the case of a run on deposits.
Another disadvantage for a country that opts for full dollarization is that its securities must be bought back in U. If the country does not have a sufficient amount of reserves, it will either have to borrow the money by running a current account deficit or find a means to accumulate a current account surplus. Finally, because a local currency is a symbol of a sovereign state, the use of foreign currency instead of the local one may damage a nation's sense of pride.
Advantages of Dollarization Besides reducing risk and protecting against inflation and devaluation , there are some compelling reasons for a country to decide to give up so much control over its economy. As we mentioned above, full dollarization creates positive investor sentiment, almost extinguishing speculative attacks on the local currency and the exchange rate.
The result is a more stable capital market, the end of sudden capital outflows , and a balance of payments that is less prone to crises. Last but not least, full dollarization can improve the global economy by allowing for easier integration of economies into the world's market. Conclusion Many emerging economies already use dollarization to some extent or another.
However, many have shied away from it because economies that would consider full dollarization are those that are still developing. For many countries, having an autonomous economic policy and the sense of individual statehood that comes with it is too much to give up for full dollarization, an extreme option that is for the most part irreversible.
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Your Practice. Popular Courses. Economics Macroeconomics. Zimbabwe could not make its goods and services cheaper in the world market by devaluing its currency, which would attract more foreign investments from these countries. In , Zimbabwe reversed course by reintroducing a new Zimbabwe dollar known as the Real Time Gross Settlement dollar in February and outlawing the use of the U.
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Economics Macroeconomics. What Is Dollarization? Key Takeaways Dollarization is when a country begins to recognize the U. Dollarization normally occurs when the local currency has become unstable and begun to lose its usefulness as a medium of exchange for market transactions.
Dollarization can have both benefits and costs. It typically results in enhanced monetary and economic stability, but necessarily involves loss of economic autonomy in monetary policy.
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