Expert comments on risks of dollarization of the Uzbek economy

High level of dollarization of the economy of Uzbekistan reduces effectiveness of the monetary policy of the Central Bank. In some cases, it can lead to default. This was announced on Saturday by the head of the capital market development agency Tursunboy Makhkamov.

According to him, everyone understands that the dollarization level of Uzbekistan’s economy is very high, “but they don’t pay much attention to this”, since the country has enough gold reserves ($26.3 billion as of January 1, 2019) to neutralize currency risks.

The agency identifies five main risks of dollarization of the economy:

1. Weakening of the national currency;

2. Rise in the cost of external borrowings;

3. Negative impact on the level of sovereign rating of the country;

4. Shrinkage of the central bank’s monetary policy capacity;

5. Increase of currency risk. 

“We are seeing a narrowing of the Central Bank’s ability to implement monetary policy. The refinancing rate is very high, but inflation is still double-digit. The Central Bank announced that it will target inflation and tighten monetary policy, the results do not meet expectations. This is precisely due to the fact that most of the banking system is denominated in dollars. It turns out that the CB in its monetary policy acts only on a smaller part of the economy. Therefore, it does not lead to results,” Makhkamov said at a meeting with representatives of the stock market.

He pointed out that total assets in the banking sector are 57% nominated in foreign currency. When implementing the monetary policy, the Central Bank affects only 43%, “it does not control the rest”. “The most interesting thing is that there was approximately the same figure before the devaluation of the national currency in 2017. Everyone expected that after the devaluation, banks and businesses would begin to reduce interest in foreign currency loans, but the numbers confirm that the level of dollarization remains at the same level,” the expert noted.

This is due to the fact that the devaluation was "very soft", since the official rate was at the level of about 4,000 soums, the "black rate" - about 8,000. All were guided by the second rate, so the devaluation "actually became an adjustment of the official rate to the real". "If we imagine a situation that the devaluation is happening for real, then this will have negative consequences for the entire economy and the population". 

“Inadequate assessment of currency risks is the reason that we need and can eliminate in our situation. The fact is that the main part of the businessmen and commercial banks assess this risk not rationally. For them, it is obvious that borrowing in foreign currency is cheaper than national. And they go where a great danger can wait for them,” Makhkamov emphasized.

Also, Mahkamov noted, it is necessary to reduce foreign borrowing in foreign currency, including government loans guaranteed by the Ministry of Finance of Uzbekistan.

“The rates are very attractive, as a result of currency risks in the business. In case of system default, all risk passes to commercial banks. If the banking sector cannot digest it, then the default passes to the Ministry of Finance. And if it also cannot digest it, then this is a country default. Then the population takes on the burden of default,” Makhkamov said.
Expert comments on risks of dollarization of the Uzbek economy

High level of dollarization of the economy of Uzbekistan reduces effectiveness of the monetary policy of the Central Bank. In some cases, it can lead to default. This was announced on Saturday by the head of the capital market development agency Tursunboy Makhkamov.

According to him, everyone understands that the dollarization level of Uzbekistan’s economy is very high, “but they don’t pay much attention to this”, since the country has enough gold reserves ($26.3 billion as of January 1, 2019) to neutralize currency risks.

The agency identifies five main risks of dollarization of the economy:

1. Weakening of the national currency;

2. Rise in the cost of external borrowings;

3. Negative impact on the level of sovereign rating of the country;

4. Shrinkage of the central bank’s monetary policy capacity;

5. Increase of currency risk. 

“We are seeing a narrowing of the Central Bank’s ability to implement monetary policy. The refinancing rate is very high, but inflation is still double-digit. The Central Bank announced that it will target inflation and tighten monetary policy, the results do not meet expectations. This is precisely due to the fact that most of the banking system is denominated in dollars. It turns out that the CB in its monetary policy acts only on a smaller part of the economy. Therefore, it does not lead to results,” Makhkamov said at a meeting with representatives of the stock market.

He pointed out that total assets in the banking sector are 57% nominated in foreign currency. When implementing the monetary policy, the Central Bank affects only 43%, “it does not control the rest”. “The most interesting thing is that there was approximately the same figure before the devaluation of the national currency in 2017. Everyone expected that after the devaluation, banks and businesses would begin to reduce interest in foreign currency loans, but the numbers confirm that the level of dollarization remains at the same level,” the expert noted.

This is due to the fact that the devaluation was "very soft", since the official rate was at the level of about 4,000 soums, the "black rate" - about 8,000. All were guided by the second rate, so the devaluation "actually became an adjustment of the official rate to the real". "If we imagine a situation that the devaluation is happening for real, then this will have negative consequences for the entire economy and the population". 

“Inadequate assessment of currency risks is the reason that we need and can eliminate in our situation. The fact is that the main part of the businessmen and commercial banks assess this risk not rationally. For them, it is obvious that borrowing in foreign currency is cheaper than national. And they go where a great danger can wait for them,” Makhkamov emphasized.

Also, Mahkamov noted, it is necessary to reduce foreign borrowing in foreign currency, including government loans guaranteed by the Ministry of Finance of Uzbekistan.

“The rates are very attractive, as a result of currency risks in the business. In case of system default, all risk passes to commercial banks. If the banking sector cannot digest it, then the default passes to the Ministry of Finance. And if it also cannot digest it, then this is a country default. Then the population takes on the burden of default,” Makhkamov said.