IMF assesses dollarization level in Azerbaijan’s banking sector

Following the introduction of open foreign exchange position limits, the gap between loan and deposit dollarization has declined considerably in the Caucasus and Central Asia since 2010, said the "Reducing Dollarization in the Caucasus and Central Asia" report of IMF, Report informs.

According to the document, credit dollarization has declined significantly more than deposit dollarization, partly as a result of administrative measures in Kazakhstan, Azerbaijan, and Georgia.

"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.

In Armenia and Uzbekistan, deposit de-dollarization outpaced credit de-dollarization, implying that there is room for macro-prudential measures to reduce credit dollarization to the level of deposit dollarization.

Credit dollarization declined by 32 percentage points on average in the region. Regulatory factors, such as restrictions on foreign currency lending, clearly play a role in this differentiation as well as supply and demand factors," said the IMF.

According to the IMF, during 2010-2021, the de-dollarization of deposits in Azerbaijan decreased by 4%, and the de-dollarization of loans decreased by 31%. During this period, the largest decrease in deposits from the region's countries was in Kyrgyzstan (31%) and Kazakhstan (60%).

"All the countries in the region issue long-term government securities in local currency, Uzbekistan being the latest one. Still, local currency debt accounts for a small share of total public debt in the region. Similarly, negative net international investment position in several countries in the region remain above 70 per cent of GDP, exacerbating the contractionary impact of foreign exchange depreciations through balance sheet impact."