Dollar.kg: Farewell mortgage

November dollar exchange rate fluctuations forced the authorities of the country to pay attention to the problem of dollarization of the economy. Almost at once there are appeared offers of ministries and departments to reduce the participation of "the American" in the Kyrgyz market. The National Bank was one of the first who responded - it proposed to ban mortgage and consumer loans in dollars to individuals.

24.kg news agency asked the respondents whether such a measure can save Kyrgyzstanis from thoughtless steps?

Tolkunbek Abdygulov, chairman of the National Bank of the Kyrgyz Republic:

 - Now we want to ban the mortgage lending and consumer loans for individuals only. We just want to protect the population from errors. We want our citizens to understand that they should not take credit in dollars, if their income is in KGS. This is a common rule. We just want to teach people to be more attentive, more financially educated. People should carefully read credit agreements, learn counting and be aware of consequences of the signing of a contract.

Daniyar Aitman, an international expert in economics:

 - The goal of the measures, proposed by the National Bank- reduction of dollarization of the loan portfolio of the banking system of Kyrgyzstan - is correct and important. The fact is that the foreign currency loans are serious risk to the stability of the financial system and the economy as a whole. The main part of the borrowers receives income in KGS, so its current depreciation reduces people's ability to pay off dollar debts. This increases the risk of borrowers' default and possibility of significant losses for the banking system. However, the administrative-command methods through which the National Bank is going to solve the problem, bear very high risks to the economy.

Dollarization problem can be successfully resolved through elimination of the fundamental cause - lack of credit resources in soms, especially long-term ones. Banks provide loans in foreign currency because their borrowings are nominated in it, too. Dollarization of deposits in the banking system amounts to about 70 percent now. Add the funds, which were borrowed by the banks abroad. The banks can not definitely provide loans in soms, using the funds which have been attracted in foreign currency. This is the height of irresponsibility and violation of regulations of the National Bank of the Kyrgyz Republic. If we just ban consumer and mortgage loans in dollars by banks, without providing them with som resources, they will dramatically reduce the volume of lending.

It seems the National Bank understands this, because it also proposes to limit interest rates on deposits in foreign currency in order to reduce their attractiveness for the population. However, I have doubts that the measure will work. Interest rates do not play a significant role in a situation when the national currency has depreciated by 30 percent during a year. Depositors keep the money in dollar deposits not to earn but to save their money. When the National Bank finds out that the limitation of interest rates had no result - what is the next measure for it? The next logic step is a ban on foreign currency deposits. But this will not lead to the conversion of deposits into the national currency, but to their withdrawal from the banking system.

Dollarization is a kind of "inner emigration" of the financial capital of the country. The first alternative is the external "emigration". Careless, administrative-command methods of combating dollar capital will lead to the fact that it just leaves the country. It has already happened in the world practice. The experience of Latin America and Africa has shown that the administrative-command methods of dealing with dollar could lead to capital flight, a sharp decline in lending volumes, destabilization of the financial system and the economy. The necessary conditions for de-dollarization are: low inflation, stable exchange rate, a well-developed and deep capital market. This requires a long and painstaking work of the government and the National Bank. However, they obviously prefer simple methods for resolving the complex problem.

Arzybek Kozhoshev, Minister of Economy of the Kyrgyz Republic:

 - This is the rational initiative, we support it. The Ministry will take measures for de-dollarization of the economy. We see that the currency fluctuations negatively affect mood and well-being of the population. Therefore, the measure of the National Bank is more than timely. The Ministry of Economy is preparing changes in the legal framework in order all the prices in the Kyrgyz Republic are quoted only in KGS. You know that in most stores the goods are priced in national currency, but some boutiques quote the prices of goods in euro and dollar. This should not be. In addition, we will recommend the people to sign contracts with organizations in the national currency. We need to take preventive measures so that people do not experience shock of currency fluctuations.

Eldar Abakirov, representative of the Young Entrepreneurs Association:

 -  The National Bank prohibits borrowings in dollars only to those whose income is in KGS. If you have income from salary or business in local currency, so you should take loans in it. In the context of long-term prospect, of care for future stability, taking the low level of financial literacy of the population in to account - this is a right decision to some extent. But it can only complicate the situation amid the current economic crisis. The population keeps their savings in dollars, resources of the banks are also in dollars, so there will be no lending in soms as such. If the state is able to provide banks with the right amount of money in KGS, then I think it will be a plus. But if it can not, the ban will negatively affect the economy.

- Are the construction firms ready to sell housing in soms? All the transactions are proposed to be carried out in the national currency.

- The type of currency for quoting housing prices does not matter for the companies. They can quote it in KGS, but index it inclusive of dollar exchange rate. A certain percentage of construction materials "is coming" in Kyrgyzstan in dollars. Therefore, it is wrong to artificially peg ourselves to som. There is a natural structure of the economy. Our imports three times exceed the exports as of today. It is in dollars by 70-80 percent. If the deliveries are originally pegged to dollar, we cannot avoid it. Here it is necessary to take other measures: to increase exports and reduce imports. To convert the economy into soms, we have to learn producing more. We should look at what the people eat, what they wear and what they drive today. If all of these are bought for dollars, then how can we talk about refusal of the currency?!

Ainura Chekirova, executive director of biz Expert analytical center:

- I have a twofold attitude towards initiative of the National Bank. It is good, of course, that we are trying to reduce dollar circulation in the country. Most of the population receives income in KGS and the liabilities should be in national currency. But now we, on the contrary, have obligations in foreign currency in most cases.

On the other hand, such approach is wrong from a business perspective. After all, commercial banks are the companies that are aware of their risks and can estimate them in providing a loan to a particular borrower. They have experts who assess the customer's solvency. It turns out now that the National Bank has unilaterally put an obligation not to give mortgage and consumer loans to individuals in dollars. And we have people who are paid in dollars. Why don't we allow them to take loans in foreign currency? It is necessary to retain the right to choose.

There is another risk factor. As of today, the mortgage in dollar is a separate segment of the credit market. We can just lose it through such administrative measures. Moreover, all the loans that microfinance institutions and banks provide to the citizens accumulate not only from the funds of the bank. To issue a loan, the bank can use different sources: deposits of citizens, the credit of the National Bank or external loans. And then the question arises: if these sources are in the foreign currency and is it profitable for the banks to lend in national currency? They should consider the risks, so commercial banks can increase the cost of loans in soms and throw over all the risks to the consumer.

Sergey Ponomarev, President of the Association of Markets, Trade and Services:

- I think that this measure is timely. As of today, the situation in the world is such that almost no expert will take up forecasting the dollar exchange rate on December 31, 2015. There is a risk that Iran starts selling oil in the first quarter of 2016. We see how ruble and tenge are pegged to raw materials. If we exclude Kumtor, exactly Russia and Kazakhstan account for more than 60 percent of the exports of the Kyrgyz Republic. Do not forget how many of our citizens are earning money in these countries. Accordingly, situation in Kyrgyzstan depends on the situation in Kazakhstan and Russia, including the situation with the national currency. Experts do not know anything about the exchange rate and what can be said about the amateurs, who will take mortgage in dollars? If there are rapid changes in oil prices, this will have a negative impact on exchange rates, including som. How the people will pay off a credit? As a result, they may find themselves without money and without housing. Therefore, the initiative of the National Bank to prohibit mortgage and consumer lending in dollars seems to be required. In such a way the government and the National Bank of the Kyrgyz Republic protect the population. The risk to remain without money and housing due to changes in the exchange rate in this case is minimized.

On the other hand, I always say that the government and the National Bank should think before making any changes how it will affect the business at the expense of which the changes are carried out. If the government takes the risks on itself, commercial banks will agree with the idea. Otherwise, they will by hook or by crook refuse of the lending in local currency. Do not forget about the investment climate. If investors see that the authorities are trying to solve their problems at the expense of the private sector, they can stop their work.