durmus yilmaz : dollarization – consequences and policy options speech by mr durmus yilmaz, governor of the central bank of the republic of turkey, at a conference on “ dollarization ”, istanbul, 14 december 2006. * * * distinguished governors, academicians and guests, i would like to welcome you all to the conference entitled “ dollarization : consequences and policy options ”. i would also like to thank you for sharing your precious knowledge and experiences with us. as this conference is one of the activities organized in the context of the 75th anniversary of the central bank of turkey, it gives me an honor to give the start for it. before continuing with my speech, i would like to comment on the motives that lie behind the topic of this conference. although we have never had hyperinflation, we, in turkey, experienced high and chronic inflation for the past almost 30 years before 2001. living long years with chronic inflation led to huge losses in the credibility of our national currency, which is important for us as an institution responsible for issuing banknotes and maintaining stability of the money. in this sense, it will be appropriate indeed to discuss dollarization in depth, i believe. given the wide range of issues related to dollarization and the limited time available, i will make some brief remarks on the concept of dollarization in general and touch upon the turkish experience in particular. dear guests, dollarization has evolved as one of the noteworthy features of globalization during the last two decades. the integration of the international financial system, the removal of restrictions on capital mobility and the increasing trade volumes have contributed to the evolution of dollarization. although it was a phenomenon in different economies for a long time, the word “ dollarization ” has become a well - known term in the 90 ’ s. in this period, the number of countries that gave foreign currencies the legal tender status increased and the official dollarization has been a widely discussed issue. alternatively, unofficial dollarization has expanded even more and become a pervasive phenomenon in a wide range of countries. the number of countries where the ratio of foreign exchange deposits to total deposits higher than 30 percent increased from 7 in 1990 to 46 in the year 2000 1. similarly unofficial dollarization in turkey has also evolved during this decade. in this sense, i will focus on unofficial dollarization in the rest of my speech. distinguished guests, in general, dollarization occurs in circumstances where residents lose confidence in their own currency.

agents to perceive and understand the importance of risk management and using hedging instruments and derivatives market better. in this context, as we have mentioned in several platforms, the opening of the turkish derivatives exchange market in february 2005 has been an important step. accordingly, promoting the use of this market by a wider range and the development of the hedging instruments further are very important for both the financial stability and dedollarization. distinguished guests, as a result of the steps taken towards macroeconomic stability and the implementation of prudent policies, the level of dollarization in turkey started to decrease after 2001, despite some pauses. as of november 2006, the share of foreign exchange deposits in the total deposits 12 and in the broad money supply were 38 percent and 35. 5 percent respectively. also the ratio of foreign currency loans to total loans in the banking sector decreased to the level of 16 percent in the same period. moreover the share of the foreign currency denominated and the indexed debt of the government to total domestic debt decreased to 15. 8 percent as of october 2006. by any measure, this, i believe, is a remarkable performance. but all these positive developments do not enable us to call it a persistent and permanent dedollarization process, for sure. it is apparent that the level of dollarization in turkey is still high, which is an important challenge for monetary policy - making. obviously, the dollarization is not declining fast naturally. this confirms the evidence that even if the inflation falls and the macroeconomic stability is maintained to great extent, the memories of the past inflationary and unstable economic environment can cause economic agents to carry on their past habit of holding foreign currency assets and create an inertia. therefore, even a small threat to the macroeconomic stability or any kind of internal or external development that increase uncertainty perceptions can easily lead to a deterioration in expectations and give rise to an increase in dollarization. the last turmoil in the global and domestic financial markets has been a concrete proof of this fact. thus, the dedollarization is not a straightforward process. as a clear evidence of this, the findings of reinhart and her friends 13 show that only two countries, israel and poland, out of a total of 85 countries managed to achieve large and lasting declines in domestic dollarization. accordingly, we can say that dedollarization is a difficult and long lasting process that is very much related with the macroeconomic stability and proper incentives. hence, what we should