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Exchange Rate Developments and Policies in the Caucasus and Central Asia

Exchange Rate Developments and Policies in the Caucasus and Central Asia
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Volume:
16
Series:
Departmental Papers / Policy Papers
Author(s):
Mark Horton, Hossein Samiei, Natan Epstein, and Kevin Ross
Publisher:
INTERNATIONAL MONETARY FUND
Published Date:
May 2016
DOI:
http://dx.doi.org/10.5089/9781513543031.087
ISBN:
9781513543031
ISSN:
2221-030X
Page:
43
Since late 2014, exchange rates (ERs) and ER regimes of the Caucasus and Central Asia (CCA) countries have come under strong pressure. This reflects the decline of oil and other commodity prices, weaker growth in Russia and China, depreciation of the Russian ruble, and appreciation of the U.S. dollar, to which CCA currencies have historically been linked. Weaker fiscal and current account balances and increased dollarization have complicated the picture. CCA countries entered this period with closely managed ER regimes and, in many cases, currencies assessed by IMF staff to be overvalued. CCA central banks have price stability as their main policy objective, and most have relied on ER stability to achieve this objective. Thus, the first policy response involved intervention in local foreign exchange (FX) markets, often with limited communication. In this context, the IMF staff has reviewed ER policy advice and implementation strategies for CCA countries.
Back Matter

Back Matter

Author(s):
Mark Horton, Hossein Samiei, Natan Epstein, and Kevin Ross
Published Date:
May 2016
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References

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1For CCA energy importers, lower energy prices have not translated into significant savings. This reflects the prevalence of long-term contracts priced in dollars and, in some countries, lack of competition and flexibility in supply arrangements.
2Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER).
3While Kazakhstan officially adopted a floating ER regime in August 2015, the IMF’s AREAER reclassification to floating (de facto) requires a period of at least six months of increased volatility in the ER without noticeable short periods of stability. The Kazakh authorities have reaffirmed their commitment to a floating ER regime and noted increased volatility in the ER in recent months.
4Armenia appears not to be overvalued at present, but this reflects to some extent supply side factors in 2015 that led to better-than-expected exports. These factors may be temporary in nature.
5Six of the eight CCA countries have completed an FSSA report or update within the last three years.
6The authors use central bank legislation to measure independence based on management control over mandates, policies, and objectives, and limits on lending to the public sector. They assess transparency by reviewing central bank publications and websites. Information is taken from 2010 or earlier.
7After the breakdown of the Bretton Woods system and the adoption of the Second Amendment to the IMF’s Articles of Agreement, member countries have been free to adopt the ER regime of their choice with few limitations as set forth in the Articles. In this context, the Fund has produced analytical studies on countries’ choices of ER regime. These reviews are part of the IMF’s surveillance mandate, and help inform member countries of how their choice of ER regime can affect their own macroeconomic performance and contribute to the stability of the international monetary system.
8In some cases, modernization of monetary policy frameworks may be achieved through a “hybrid” regime, combining interest rate policy with some ER management, including through use of sterilized intervention in the FX market (see, for example, Ostry and others (2012), Epstein and Portillo (2014)). A risk in such cases, however, is lack of sufficient clarity of the policy framework and operations.
9Fund staff has provided guideposts as countries make the transition to a more flexible ER regime. For example, given the current commodity shock, MCM has produced a note (“Commodity Price Shocks and Greater Exchange Rate Flexibility: Why, If, What and How”), which reviews alternative regime options under greater flexibility and modalities of how to transition to another regime, if an exit from the prevailing regime is deemed desirable by the country. The note draws on the extensive policy and TA work conducted in the Fund.
10Note that in the in the Balassa-Samuelson framework, a supply shock leads to a permanent appreciation of the real exchange rate. For example, see Gauthier and Tessier (2002).
11The term “monetary institutions” denotes the central bank, its capacity/ability to deliver on its core functions (analytical, operational), the broader legal and political environment in which monetary policy decisions are made, and the scope for coordination with (and insulation from) fiscal policy and fiscal pressures.
12In some CCA countries, market structure is another factor, as markets are characterized by limited entry and an absence of competition, particularly for imported goods.
15For example, Ben Naceur and others (2015) looks at how to de-dollarize financial systems in the CCA; Mecagni and others (2015) describes effective de-dollarization strategies in sub-Saharan Africa; Garcia-Escribano (2010) discusses sources of dollarization and de-dollarization strategies in Latin America, and Kokenyne and others (2010) presents de-dollarization policies more generally across a number of regions.
61The IMF is contributing to this effort by organizing media training programs—including for the CCA—and by inviting journalism fellows to the Spring and Annual Meetings.

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