Kyrgyzstan’s government is coming to the assistance of debtors battered by the U.S. greenback’s rise against the local currency, but it is unclear how useful, widespread or sustainable a new som-for-dollar debt scheme will be.
Nearly 3,000 people that took out large loans in dollars for housing in the first half of 2015 were left unable to make payments as the som plummeted by over one-fifth against the dollar in the last six months of the year, largely on the back of economic peril in Russia.
A government initiative presented on February 1 allows those people to exchange their outstanding dollar debt for Kyrgyz soms at a favorable rate of 62.144 soms — a rate from July 1, 2015, before the dollar began its climb towards the roughly 76 soms it costs now.
The government has put aside over $7.5 million to plug the gap between the exchange rate of yore and the current one and is only intervening in loans worth $40,000 or less.
The questions surrounding the scheme relate to whether this will be too little, too late, and whether the government will expand the plan to other struggling debtors that borrowed large dollar sums in the second half of the year — on July 2, for instance.
Also, the interest on the loans will remain at the high market rate of nearly 16.76 percent, even if the original loans were secured at a lower rate. Whether the most troubled debtors will be able to make these payments remains an unknown.
The debt relief plan may mark the beginning of an experiment with more stringent de-dollarizationmeasures agreed at a December 10 meeting of parliament, which included cutting accruable interest on foreign currency deposits to nil and eventually banning foreign currency loans for individuals.
Those tougher measures have caused some economic analysts to raise the alarm over a potential exodus of depositors from the local financial market.
If that happens, Kyrgyzstan might be looking towards the playbook of ever-stricter foreign currency controls drafted by neighboring Uzbekistan with new, hastily made contributions from other Central Asian states Turkmenistan and Tajikistan.
That would be a road to a blossoming black market.
Alternatively, Kyrgyz policymakers could follow the advice of brotherly Kazakhstan’s president and apparent yoga-lover Nursultan Nazarbayev to “take a deep breath and forget about the dollar”, but given Kyrgyzstan’s even more pressing need for quick relief from economic pain, that seems unlikely.