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Opinion
May 12, 2017 www.intellinews.com I Page 21
Financial sector repair needed to spur growth in Caucasus/Central Asia
Juha Kähkönen of the International Monetary Fund
While the Caucasus and Central Asia region (CCA) is facing a somewhat better external environ- ment, prospects for growth remain subdued rela- tive to historical standards, and risks remain tilted to the downside. A comprehensive set of reforms is needed to help unleash the region’s growth po- tential and address the legacy of past shocks.
A strong financial sector is essential to this much-needed economic transformation. How- ever, the slowdown in economic activity and cur- rency depreciations against the dollar since 2014 have added stress to many of the region’s already overburdened, highly-dollarised financial sectors, leaving them too weak to support a strong recov- ery. Without urgent financial sector repair, further pressures on fiscal accounts could emerge and the economic transformation could be derailed.
Financial sector distress has manifested itself across the region in many ways. Since mid-2014, the decline in commodity prices and a slowdown in key trading partners’ growth have made it more difficult for borrowers to service their debt. This has been especially true for foreign currency loans where currency depreciation has also added to the debt-servicing cost.
Tajikistan’s banks such as Tajiksodirotbank have been hit hard by the country’s economic problems, much of them linked to declining exports and remittances with Russia.
Consequently, overdue loans have increased, erod- ing the reserves banks set aside for difficult times. This has reduced their capital further – with many already undercapitalised by international stand- ards. In addition, limited supervisory independ- ence has, in some cases, impeded the resolution of deep-rooted problems, including poor lending practices. These vulnerabilities are holding back credit growth and reducing confidence in banks.
Country authorities have taken steps to address these pressures, including through increases in minimum capital requirements, injections of capi- tal, mergers and closures of problem banks, and the strengthening of supervisory laws and regula- tions. But more remains to be done.
A careful sequencing of reforms is needed, start- ing with a proper identification of bad loans and capital needs.
Second, timely intervention into weak banks is essential to minimise the risk of vulnerabilities spreading further through the broader financial system. Any government support should be pro- vided under strict conditions – for example, funds should be channeled only to viable banks with
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