Financial dollarization and economic growth in CIS countries: evidence from a panel data analysis

Abstract

The study examines the relationship between financial dollarization and macroeconomic development in the Commonwealth of Independent States (CIS). Most previous studies have examined the drivers of dollarization, inflation trends, exchange-rate arrangements, and financial stability outcomes. Far less attention has been given to how dollarization relates directly to economic growth. The present analysis contributes to this area by investigating whether lower levels of financial dollarization coincide with higher GDP growth in CIS countries. The study employs a longitudinal panel dataset covering ten CIS countries during 2010 -2023. Data were collected from the World Bank, International Monetary Fund, Transparency International, and national central banks. Annual GDP growth was used as the indicator of macroeconomic development, while financial dollarization was measured through the share of foreign-currency deposits and loans in the banking system. The empirical analysis applied pooled ordinary least squares, random-effects, and fixed-effects panel regression models, supplemented by diagnostic and robustness tests. The results indicate a statistically significant negative relationship between financial dollarization and economic growth. Higher levels of foreign-currency dependence were associated with lower GDP growth rates across all model specifications. Results from the preferred fixed-effects specification indicate that a one-percentage-point rise in financial dollarization is associated with lower GDP growth after accounting for inflation, trade openness, institutional quality, and exchange-rate volatility. The findings also suggest that stronger government effectiveness and greater trade openness support economic performance, while higher inflation and increased exchange-rate volatility are linked to weaker growth outcomes. The findings indicate that lower reliance on foreign-currency deposits and loans is associated with stronger macroeconomic performance within the estimated panel framework. However, the observational design does not permit strong causal inference regarding the direction of this relationship. The results provide evidence relevant to monetary authorities seeking to reduce financial dollarization and enhance confidence in domestic currencies across the CIS region.