Central Asia: Problems of External Debt and Its Sustainability

This paper is devoted to one of the most urgent problems of Central Asian economies in transition, i.e. external debt and its sustainability within systemic transformation process. On the basis of vast current statistical data the problems of structure and dynamics of external debt are analysed and some policy recommendations are made. Basic transfer equations and two-gap models are used as tools to measure external debt. The paper attempts to find solutions considering both specific causes of the external debt itself and debt problems via related balance of payments issues. In conlcusion, it emphasized the necessity to deal with external debt through policies in all spheres of debt management, foreign trade and the flow of international financial resources implemented simultaneously. It proves that only the cumulative effect of all measures will allow the rather complex and persistent character of external debt to be overcome.Central Asian Independent States, External Debt, Indebtedness Indicators, Debt Sustainability

Modeling transition in Central Asia: the Case of Kazakhstan

This paper presents a small macro-econometric model of Kazakhstan to study the impact of various economic policies. It uses a new approach to test the existence of a level relationship between a dependent variable and a set of regressors, when the characteristics of the regressors’ non-stationarity are not known with certainty. The simulations provide insights into the role of a tight monetary policy, higher foreign direct investment, and rises in nominal wages and in crude oil prices. The results obtained are in line with economic observations and give some support to the policies chosen as priority targets by the Kazakh authorities for the forthcoming years.Simulation, Forecasting, Transition, Stabilization, Central Asian

Dutch Disease Scare in Kazakhstan: Is it real?

In this paper we explore the evidence that would establish that Dutch disease is at work in, or poses a threat to, the Kazakh economy. Assessing the mechanism by which fluctuations in the price of oil can damage non-oil manufacturing—and thus long-term growth prospects in an economy that relies heavily on oil production—we find that non-oil manufacturing has so far been spared the perverse effects of oil price increases from 1996 to 2005. The real exchange rate in the open sector has appreciated over the last couple of years, largely due to the appreciation of the nominal exchange rate. We analyze to what extent this appreciation is linked to movements in oil prices and oil revenues. Econometric evidence from the monetary model of the exchange rate and a variety of real exchange rate models show that the rise in the price of oil and in oil revenues might be linked to an appreciation of the U.S. dollar exchange rate of the oil and non-oil sectors. But appreciation is mainly limited to the real effective exchange rate for oil sector and is statistically insignificant for non-oil manufacturing.

WHAT CAUSES BANK ASSET SUBSTITUTION IN KAZAKHSTAN? EXPLAINING CURRENCY SUBSTITUTION IN A TRANSITION ECONOMY

Dollarization comes in several forms. The type that this paper examines is asset substitution, when savers hold dollar assets in bank accounts, instead of local currency. It is limited to the transition economy of Kazakhstan. This paper estimates demand for dollar accounts and shows that avoidance of inflation risk, rather than avoidance of exchange rate devaluation of savings, is the most important in explaining dollarization. This result is unexpected. This study examines data from Kazakhstan. Kazakhstan is seen as having a strong banking system and a healthy economy for a former Soviet Republic. It is seen as one of the most market-oriented, FSU countries. However, Kazakhstan also has a large demand for a means of storing savings in dollars, rather than in the local currency. This is particularly curious, when the local currency is appreciating relative to the U.S. dollar. This demand in less prosperous FSU countries is likely to be even greater. The paper combines data and statistical methods with anecdotal information in order to improve our understanding of a paradoxical occurrence.

Dutch disease scare in Kazakhstan: Is it real?

In this paper we explore the evidence that would establish that Dutch disease is at work in, or poses a threat to, the Kazakh economy. Assessing the mechanism by which fluctuations in the price of oil can damage non-oil manufacturing—and thus long-term growth prospects in an economy that relies heavily on oil production—we find that non-oil manufacturing has so far been spared the perverse effects of oil price increases from 1996 to 2005. The real exchange rate in the open sector has ap-preciated over the last couple of years, largely due to the appreciation of the nominal exchange rate. We analyze to what extent this appreciation is linked to movements in oil prices and oil revenues. Econometric evidence from the monetary model of the exchange rate and a variety of real exchange rate models show that the rise in the price of oil and in oil revenues might be linked to an appreciation of the U.S. dollar exchange rate of the oil and non-oil sectors. But appreciation is mainly limited to the real effective exchange rate for oil sector and is statistically insignificant for non-oil manufacturing.price level; inflation; Balassa-Samuelson; tradables; house prices; regulated prices; Europe; transition

Saving in transition economies : the summary report

The stimulation of private saving is essential to both stabilization and structural adjustment in the transition economies. Private saving in these countries has declined sharply since independence, and this decline has been a factor in the onset of extreme inflation because governments have resorted to an inflation tax to finance deficit spending. The author examines evidence on spending in Belarus, Georgia, Kazakhstan, and Ukraine. He examines decisions about whether to save,and in which specific financial or real instruments. He summarizes the evolution of financial sectors in these countries to provide a history of the success or failure of financial institutions to intermediate between private savers and the government as borrower. He concludes that private saving has indeed declined since independence, but less than is indicated by banking system statistics. Concurrent with this downturn has been a shifting of financial assets from bank deposits to alternative financial instruments, including foreign currency,"trust company"shares, and private loans. The financial sector has reacted slowly to this change, but the most successful commercial banks have recognized the change in demand for financial instruments and have accommodated the savers. The state commercial banks - especially the successor to the Soviet Saving Bank - have been slow to adjust to the new environment. As a result, the near-monopoly that banks once held deposits has been rapidly eroded. Government methods for mobilizing funds must change, contends the author. Governments are not typically prepared to borrow savings from the these new instruments, since they are denominated in foreign currency or are offered only at positive real interest rates. That attitude must change if governments are to make needed investments in infrastructure and to avoid creating inflationary credit.Economic Theory&Research,Banks&Banking Reform,Payment Systems&Infrastructure,Environmental Economics&Policies,International Terrorism&Counterterrorism,Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies,Financial Economics,Financial Intermediation

Drivers of exchange rate dynamics in selected CIS countries: Evidence from a FAVAR analysis

We investigate the likely sources of exchange rate dynamics in selected CIS countries (Russia, Kazakhstan, Ukraine, Kyrgyzstan, Azerbaijan, and Moldova) over the last dec-ade (1999-2010). Evidence is based on country VARs augmented by a regional com-mon factor structure (FAVAR model). The models include nominal exchange rates, the common factor of exchange rates in the CIS countries, and international drivers such as global trade, share prices, and oil price. Global, regional and idiosyncratic shocks are identified in a standard Cholesky fashion. Their relevance for exchange rates is ex-plored by a decomposition of the variance of forecast errors. The impact of global shocks to in the developments of exchange rates has increased, in particular, if financial shocks are considered. Because of the financial crisis, regional shocks have become more important at the expense of global shocks.Exchange rates, CIS countries, financial crisis, FAVAR models