Monday , April 24 2017
Home / When Currencies Collapse

When Currencies Collapse

Summary:
In late December, the Azerbaijani currency, the manat, lost a third of its value in a single day. This was after the central bank decided to float the manat, which had previously been fixed to the dollar. The move has angered the population and made ...

Topics:
Simeon Djankov considers the following as important: , , , ,

This could be interesting, too:

Blog Admin writes How western populism weakens democracy in Ukraine

Blog Admin writes Book Review: Reconstructing Karl Polanyi: Excavation and Critique by Gareth Dale

Blog Admin writes The West needs to call Russia’s bluff in the Balkans

Suman Bery writes Demonetisation: India’s stress test

In late December, the Azerbaijani currency, the manat, lost a third of its value in a single day. This was after the central bank decided to float the manat, which had previously been fixed to the dollar. The move has angered the population and made ripple waves across the Caucasus region. Soon after, the prime minister in neighboring Georgia resigned, currency fluctuations being cited as one of the reasons for his abrupt departure. This may be just the beginning of a painful restructuring period in the region’s public finances.

In 2015, the Azeri currency lost 55 percent of its value against the dollar, following an earlier devaluation in February. The proximate reason is the fall in oil and gas prices, the dominant Azerbaijani export. The country’s budget is so dependent on these exports that the 2015 budget deficit is projected to reach nearly 10 percent of GDP. Analysts predict trouble in the Azerbaijani banking sector, where many companies and households have borrowed heavily in dollars and backed this debt with manat-denominated income.

Azerbaijan is not alone. Kazakhstan’s currency, the tenge, lost 47 percent of its value versus the dollar in 2015; Georgia’s currency has lost 25 percent, the Russian ruble 24 percent, and the Turkmeni manat 19 percent. These countries had all previously enjoyed a decade of high economic growth, fueled by energy exports or energy transit taxes. This largesse has now ended.

What should governments do when currencies collapse? For a short period, they can continue planned expenditures, even if this means large budget deficits. Indeed, all four countries will finish the year 2015 with deficits, above 3 percent of GDP in Georgia and Russia and significantly above that in Azerbaijan. Longer term, some difficult cuts in public spending are needed.

The first effect usually comes in the form of freezing public sector salaries and pensions. As many everyday consumer products are imported in these countries, this freeze effectively means the population suddenly becomes poorer. Next comes a reduction in social expenditures for schools, universities, and health care. These sectors then have to deal with smaller budgets while delivering the same service. Third come reductions in infrastructure spending. Russia has already announced a 60 percent cut in previously planned infrastructure projects, leaving untouched only spending on the 2018 World Cup. Similar announcements can be expected soon from other governments.

In democratic societies, such announcements usually lead to changes in the government and often new elections. Georgia, the only democratic country among the four, has already seen a government reshuffle. In the other countries, individual ministers can be sacrificed to boost the government’s popularity, but the regimes will remain intact—unless the currencies keep falling.

0 0
Simeon Djankov
Simeon Djankov, nonresident senior fellow at the Peterson Institute for International Economics, was deputy prime minister and minister of finance of Bulgaria from 2009 to 2013. In this capacity, he represented his country at the Ecofin meetings of finance ministers in Brussels. Prior to his cabinet appointment, Djankov was chief economist of the finance and private sector vice presidency of the World Bank.

Leave a Reply

Your email address will not be published. Required fields are marked *