IMF gives recommendations to central banks of Caucasus, Central Asia

The banking sector of the Caucasus and Central Asia (CCA) region weathered the pandemic well - profitability has recovered, and liquidity and capital buffers are high, Report informs referring to IMF’s Regional Economic Outlook for May 2023.

“But central banks should be mindful of financial stability risks amid heightened global financial stress and closely monitor financial system vulnerabilities that could arise from continued monetary tightening. Bank supervisors should ensure that banks have governance and risk management commensurate with their risk profile, including adequate supervisory capital and liquidity stress tests, while strengthening resolution regimes and crisis management frameworks,” reads the report.

After the pandemic and the unwinding of supportive measures, banks in the region have seen their profitability recover, with the median return on assets at 3.9 percent, up from 1.1 percent since 2020, according to the IMF.

Capitalization levels have remained high, with tier 1 capital ratios at 16.7 percent, 8.1 percentage points above regulatory minimum thresholds. Nonperforming loan ratios stood at 4.4 percent on average in 2022.

“Most banks in the region depend on customer deposits and long-term funding, which make up more than 90 percent of total funding. However, structural vulnerabilities remain because of comparatively lower levels of loan-loss provisioning, foreign exchange exposures, and currency mismatches amid still widespread though declining dollarization,” reads the report.

“In response to large capital inflows from Russia, several recipient countries’ banks increased liquid assets abroad rather than lending in foreign exchange domestically (Armenia, Georgia) to hedge against foreign exchange risks if sudden reversals were to occur. However, net foreign direct investment inflows rose across the region by about 1 percentage point of GDP on average from 2021, more than offsetting portfolio outflows,” the IMF added.