EDB Macroreview, November 2017. Heading for Low Dollarization

Abstract

The global background for the economic recovery of EDB member states has improved this year, in many ways due to rising oil prices and an improved economic growth outlook in the major centers of the global economy. Against the backdrop of improving regional trends in economic growth and mutual trade, we have revised our GDP growth forecasts for the EDB member states in 2017-2019. The appreciable acceleration of GDP growth in Russia beginning in the 2nd quarter of 2017 along with improvements in both foreign and domestic macroeconomic conditions have prompted an upgrade of our GDP growth forecast for 2017, from 1.4% to 1.7%. The preservation and continued improvement of external conditions for the Russian economy is shifting the balance of risks toward higher growth rates. Improvements in the Russian economic performance have delivered a boost to the economies of other EDB countries: the GDP growth forecasts for 2017 have been upgraded for Belarus, from 1.4% to 1.8%, Kyrgyzstan, from 3.7% to 4.0%, Tajikistan, from 6.2% to 7.2%, and Kazakhstan, from 3.4% to 3.7%. In the face of the continuing global imbalances and risks at the key centers of the global economy, EDB member states need to use their internal growth drivers, primarily those aimed at utilizing the potential for amassing investments. Possible drivers of this kind include a weaker monetary policy by reducing the benchmark interest rates of central banks, higher effectiveness of government infrastructure spending, and structural measures to boost labor productivity. In the longer term, the biggest challenge for the global economy consists of the lingering imbalances that have contributed to crises over the past decade. They primarily include the high levels of inequality both within and among countries. Notably, such inequality of incomes is in many ways exacerbated by the unequal involvement of different groups of countries in global integration processes. In this regard, the continuing paradox in the global economy is that the majority of countries that most need economic integration (such as the poorest nations or developing countries without access to the sea) are the most disadvantaged in terms of participation in regional or global economic unions or “clubs”. As part of our special report accompanying this macro overview, we focus particular attention on the dedollarization of the economies of EDB member states as yet another factor contributing to improvements in the regional economic environment. The level of dollarization has been declining this year in all EDB member states, in many ways due to the stabilization of exchange rates, lower inflation, improved economic activity and regained trust in the national currencies. Among the EDB member states, the most noticeable reductions in the level of dollarization (measured as the share of foreign currency deposits within the structure of the broad money supply) have been recorded in Belarus, Kazakhstan, and Kyrgyzstan (the level of dollarization was close to 30% by mid-2017 in Kyrgyzstan, Kazakhstan, and Russia). Such positive trends will contribute to a more effective monetary policy in the regional economies, more conducive conditions to support lower inflation, as well as conditions aiding stronger financial stability.