EDB: monetary policies aligned with exchange rate dynamics in EAEU partner countries, and the establishment of a single payment system will significantly strengthen resilience of the regional economy to crises

10 july 2017

St. Petersburg, 10 July 2017. Implementation of floating exchange rate policies in the EAEU member states has already generated positive results – local currency exchange rates vis-a-vis those of other member states have stabilised. This, in turn, had a positive effect in terms of mutual trade within the EAEU, which grew by 27.5% in January-April 2017 compared to the same period of 2016, reaching US $15.9 billion. This conclusion is presented in a report entitled “Exchange Rate Fluctuations within the EAEU in 2014–2015: Analysis and Recommendations”, which is prepared by the EDB Centre for Integration Studies.

The report analyses the effects of the shock of commodity price drop and monetary policy measures implemented by the EAEU member states in 2014–2015 to stabilise their economies. The authors argue that those were exactly the different monetary policy approaches, applied by the EAEU member states in 2014–2015, that resulted in sharp fluctuations of mutual exchange rates, aggravating the economic crisis with problems in mutual trade that could have been avoided.

At present, there are still certain economic risks, which can be triggered by geopolitical factors, sharp changes in oil prices, a rapid deceleration of economic growth in China, and other factors. Therefore, EDB experts think that it is particularly timely now to review the bitter experience of the recent past. "Learning the lessons of the recent currency crises will be useful to minimise these risks. It’s true that the current economic situation is relatively calm. Therefore, we now have time to define optimal policies, drawing adequate conclusions based on experiences of the past,” says Evgeny Vinokurov, Director of the EDB Centre for Integration Studies.

The authors of the report pay attention to the fact that concerted actions of the EAEU member states in the field of monetary policies would help smooth sharp fluctuations of local currency exchange rates in future. “In the near future, it would involve compliance of all the EAEU member states with the indicators, which affect the economic stability, inter alia the exchange rate, and are reflected in the Treaty on the EAEU (inflation, government debt level, and budget deficit), as well as development of a range of other criteria to serve as targets within the EAEU, in particular those for international reserves and the level of dollarization of the economy,” note experts of the EDB Centre for Integration Studies.

Indicators determining sustainability of the economic development of
the EAEU member states – based on the Treaty on the EAEU.

Values of macroeconomic indicators   
Annual general government consolidated budget
deficit – no more than 3% of GDP
General government debt
– no more than 50% of GDP
Annualised inflation rate
– no more than 5 percentage points
above the inflation rate in the member state
with the lowest value

Source: Treaty on the EAEU, EEC.

One of the medium-term measures of coordinated monetary and exchange rate policies, which are suggested by the experts, entails potential creation of a regional payment / clearing system within the EAEU. In their view, that would help expand the use of local currencies in mutual trade and reduce costs associated with foreign exchange market transactions.

A second medium-term measure could be to develop an instrument to monitor the dynamics of local currency exchange rate evolution compared to the average for the EAEU. Such an instrument could be a regional unit of account like the ECU in Europe (ASEAN countries also showcase some positive experience) and measures of local currency divergence from it. That would provide information on the relative competitiveness of exports of the EAEU member states.

What monetary policies and exchange rate regime will be able to minimise the macroeconomic instability in the EAEU member states? To answer this question, various exchange rate regimes have been studied: a peg to a basket of EAEU currencies, independent exchange rate policies, and a floating exchange rate regime with alignment to the Russian rouble exchange rate. The results are as follows:

  1. In the context of inflation targeting, exchange rate policies with partial alignment to the Russian rouble exchange rate would be efficient for Armenia, Belarus, Kazakhstan, and Kyrgyzstan. Such policies would help avoid excess divergence of exchange rates vis-a-vis those of other member states.
  2. In the current environment, floating exchange rate policies represent the best strategy. A floating exchange rate is a natural stabiliser minimising negative effects of external macroeconomic shocks.

The report is available online.

Additional Information:

Eurasian Development Bank (EDB) is an international financial institution founded by Russia and Kazakhstan in January 2006 with the mission to facilitate the development of market economies, sustainable economic growth, and the expansion of mutual trade and other economic ties in its member states. EDB’s charter capital totals US $7 billion. The member states of the Bank are the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan, the Kyrgyz Republic, the Russian Federation, and the Republic of Tajikistan.

The Centre for Integration Studies is a specialist research centre of Eurasian Development Bank. The Centre organises research and prepares reports and recommendations on regional economic integration. It has published over 40 public reports over six years of its operation. Read more about the Centre’s projects and publications at the Bank’s website.

EDB Media Centre:
+7 (727) 244 05 45, ext. 6147 (Almaty)
+7 (495) 645 04 45, ext. 2724 (Moscow)
pressa@eabr.org

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