## DE-DOLLARIZATION IN BELARUS

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**Canonical URL:** [DE-DOLLARIZATION IN BELARUS](https://www.imf.org/-/media/files/publications/cr/2019/cr1910.pdf)

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### Introduction
- Financial dollarization in Belarus is high for both deposits and loans, driven largely by historic factors: past crises, hyperinflation, and strong depreciation episodes that undermined trust in the local currency.
- High dollarization is a systemic vulnerability that:
  - Increases liquidity risks because a lender of last resort can provide funding in domestic currency but is constrained in FX funding by existing reserve levels.
  - Exposes the economy to credit risk via currency mismatches and unhedged borrower positions; devaluation can offset the interest rate benefit from FX borrowing and limit borrowers’ ability to repay dollar debts.
  - Weakens the interest rate channel of monetary transmission and reduces seigniorage revenues.
- Recent measures and macro stability have contributed to gradual de-dollarization, but key components—particularly developed domestic capital markets—remain missing.
- This chapter takes stock of dollarization levels in historical and international perspective and draws recommendations for a de-dollarization framework.

### Dollarization: current situation and benchmarks
- Historical context:
  - Belarus experienced repeated high inflation episodes: record high inflation in 1994, price instability in 1999, hyperinflation in 2011 with price increases "above 100 percent," and inflation "above 65 percent" in 2012. The sharp devaluation and BOP crisis in 2014 further undermined confidence in the domestic currency.
- Current levels (as presented):
  - Belarus has the highest share of FX deposits among CEE countries at "around 70 percent."
  - FX lending is "close to 60 percent."
  - Between 2006 and 2016, both loan and deposit dollarization increased significantly in Belarus.
  - The NBRB estimates a loss of seigniorage revenues of "2–3 percent per year on average" due to high dollarization.
- Dynamics over time:
  - Household FX deposits declined from a peak of "over 80 percent in 2015" to "around 70 percent" of total deposits (versus "only 35 percent in 2006").
  - Loan dollarization: corporate FX lending is "65 percent now" versus "40 percent in 2006"; FX lending to households fell after the "ban in 2009 on household FX borrowing."
- Benchmarks and drivers:
  - Structural and policy factors predict a benchmark level of about "20 percent" dollarization for Belarus given trade and financial linkages, but actual dollarization is well above the predicted level.
  - The gap between benchmark and actual dollarization in Belarus is among the highest in the region.
  - Structural determinants used in benchmarking include population, real GDP per capita, trade openness, capital account openness, remittances, the Minimum Variance Portfolio, exchange rate volatility, and inflation (including lagged inflation).

### Policies for de-dollarization: components and Belarus experience
- Key components observed in successful de-dollarization case studies:
  - A public de-dollarization strategy to anchor expectations and signal commitment.
  - Better and sustainable macro policies to increase confidence in the domestic currency.
  - Prudential policies and supervisory measures to limit dollarization where appropriate, increase buffers, and ensure banks and borrowers internalize the true cost of FX borrowing.
  - Development of local capital markets: deepen government securities market, diversify investor base (including foreign investors), develop secondary market, establish a government yield curve, and encourage long-term local-currency savings (e.g., via pension funds).
- Example: Peru (summary of successful case)
  - Loans in FX fell from "80%" to "30%" between 2003–2016 as a result of macro and macroprudential measures.
  - Instruments used in Peru included:
    - Prudential: Higher capital requirements for FX loans and provisioning requirements.
    - Monetary: Cyclical Required Reserve Ratios and remuneration (FX vs. local currency).
    - Quantitative: "De-dollarization repos".
    - Regulatory: Stricter limit on net open FX positions and FX derivatives.
  - Peru complemented macro stability (fiscal surpluses, inflation targeting) with issuance of longer-term local-currency public bonds (maturity now above "30 years") and macroprudential measures targeting liquidity risks and excessive FX credit growth.
- Belarus-specific policy measures and developments:
  - Macro policies:
    - Fiscal policy: overall general government deficit has stayed "below 3 percent."
    - Monetary policy: a more rules-based framework introduced in early "2015" with focus on gradual transition towards inflation targeting; improved central bank communication; inflation has fallen sharply, ruble-FX lending spreads have been coming down, and exchange rate variance has been gradually decreasing.
  - FX market liberalization steps: elimination of the FX surrender requirement; easing registration procedures for FX transactions; a draft law for a second wave of liberalization is being developed.
  - Macroprudential and supervisory measures:
    - Differentiated reserve requirements: current RR for FX is "17 percent" and on domestic currency it is "4 percent."
    - Asset-side measures: (i) ban on household FX borrowing since "2009"; (ii) banks required to assess borrowers’ FX cash flows for FX loans and cannot take ruble cash flow into consideration; higher provisioning for FX lending.
    - Limits on banks’ open FX positions to "10 percent of regulatory capital."
  - Note on implications: with high FX deposits, closing banks’ FX positions implies either increased FX lending (potentially to unhedged borrowers) or accumulation of FX government bonds (already happening in Belarus).

### Remaining challenges and recommended operational roadmap
- Remaining macro policy challenges:
  - Price stability mandate remains joint with government (Ministry of Antimonopoly regulation and Trade), weakening credibility and transmission channels.
  - The share of regulated prices remains "close to 20 percent of the CPI"; unregulated prices can still be "frozen" administratively.
  - The NBRB still applies a wide set of recommended interest rate levels for banks, including an interest rate cap on household deposits set well below competitive levels, which limits banks’ ability to attract more local currency deposits and works against de-dollarization.
  - Moral hazard associated with SOE FX borrowing due to implicit expectations of government bailouts.
- Domestic financial market development needs:
  - Domestic capital markets are shallow and currently act as a brake on de-dollarization.
  - Positive steps: EBRD cooperation, issuance of longer-dated ruble paper, lending in rubles, and planned longer-than-one-year ruble-denominated issuance for "2019."
  - Further efforts needed to establish a proper benchmark yield curve and to create institutional demand for longer-term bonds.
- Need for a public, overarching national de-dollarization strategy:
  - A publicly communicated strategy would signal commitment, educate borrowers about FX risks (private and social), and coordinate coherent policy and operational steps.
  - The strategy should contain an operational roadmap with conditional, milestone-based implementation tied to progress on macroeconomic stabilization, financial stability, and structural reforms.
  - Emphasize market-based and market-friendly measures; heavy-handed administrative approaches risk capital flight, financial disintermediation, and banking sector instability.

*IMF Country Report No. 19/10 (completed November 15, 2018).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1910.pdf_