BAKU, Azerbaijan, July 30. The share of public debt in foreign currency in the countries of the Caucasus and Central Asia (CCA) region remains extremely high, Trend reports via the latest paper on reducing dollarization in CCA region from the International Monetary Fund (IMF).
According to the report, in some countries, such as Kyrgyzstan, Azerbaijan, Georgia and Armenia, public debt in foreign currency exceeds 70 percent. It is expected that the gradual de-dollarization of public debt will be followed by a decline in the deposits dollarization.
“As countries develop their local currency bond markets and these markets gain depth over time, one would expect a more visible decline in public debt dollarization in the coming years,” said the report.
“As expected, the de-dollarization speed of deposits and credit differs. While the two empirical measures of dollarization are often closely correlated, we observe that de-dollarization in credit is considerably higher than deposits in the region. This is particularly the case for Kazakhstan, Azerbaijan and Georgia, where credit dollarization has declined significantly more than deposit dollarization,” the IMF said.
Also, the countries of the CCA region have intensified their efforts to develop their domestic capital markets. Azerbaijan, as well as Georgia and Kazakhstan started issuing long-term bonds about ten years ago, the report noted.
As the IMF explained, the bond markets are still in the formation stage and are not sufficiently developed. Thus, the markets are not at the stage of development that could significantly affect the level of dollarization.
In most CCA countries, there are no floating interest or inflation-indexed bonds that would allow an investor to partially hedge against exchange rate volatility without actually holding a foreign currency, the report added.
---
Follow the author on Twitter: @mariiiakhm