the role of the central bank in sustaining economic growth
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The Role of the Central Bank in Sustaining Economic Growth. Smolyakov Oleg National Bank of Kazakhstan. Monetary Side of Sustainable Development: (framework of analysis). Necessary Preconditions I. Macroeconomic Stability Low Inflation Rate Maintenance of Competitiveness - PowerPoint PPT PresentationTRANSCRIPT
The Role of the Central Bank in Sustaining Economic Growth
Smolyakov OlegNational Bank of Kazakhstan
Monetary Side of Sustainable Development:(framework of analysis)
Necessary PreconditionsNecessary Preconditions
I. Macroeconomic Stability
Low Inflation Rate
Maintenance of Competitiveness
Sufficient Level of International
Reserves
II. Financial Sector Strength
Capital Market
Money Market
Effective Intermediation
Central Bank’sCentral Bank’s ChallengesChallenges
I. Inconsistency Triangle
Inflation vs. Exchange RateInflation vs. Exchange Rate
II. External Shocks Vulnerability
Normal vs. Crisis timeNormal vs. Crisis time
III. Dollarization
Following vs. LeadFollowing vs. Lead
IV. Public confidence
Rules vs. DiscretionRules vs. Discretion
Exchange RateRegime
Foreign Exchange Market Financial Sector: structural policy
1993 Nov. 1993:Introduction of theNational Currency"Tenge"
Centralized credits to banks and Government were themain tools of NBK to manage broad money and banks’credits to the economy
199450% exports receipts surrender requirement
1. Operations with T-bills have begun2. NBK started to use traditional tools of monetary policy
1995
Surrender requirement has been lowered to 30%and abolished afterwards
1. The practice of providing directive credits to theeconomy by NBK has been abandoned2. Interbank money market has started to operate3. The laws "On National Bank" and "On banks andbanking" determined main principles of two-tier systemand functions of Central Bank4. The law “On insurance” created the basis forqualitative changes of insurance sector
1996 1. July 16: Article VIII, IMF Articles ofAgreement2. The new "Foreign Exchange Regime" law wasintroduced
1997 Introduction of Exports-Imports Foreign ExchangeControl aimed at suppressing the capital flightthrough trade channels
1. REPO opeartions was liven up2. NBK started to implement the Programme ofinternational standards introduction in the banking system
1998
Unofficial CrawlingPeg
1. The practice of Budget deficit direct financing byNBK was abandoned;2. Gov. Debt was transformed into T-bonds3. NBK became in charge of insurance industrysurveillance4. Implementation of the Three-Pilar Pension System
1999 April – November: 50% exports receipts surrenderrequirement was introduced
November: Deposits Insurance System was introduced
2000
1. Advanced Repayment of IMF loans by NBK2. Capital Amnesty
1. Discount operations have started2. Introduction of Mortgage Financing System 3. A new law on Insurance Activity was adopted inDecember: National Bank of Kazakhstan introduced basic17 principles of the insurance supervision accepted byInternational Association of the Insurance Supervision(IAIS)
2001National Fund started to accumulate extra receiptsfrom natural resource sector
1. Establishment of Banking Supervision onConsolidated Basis2. Development Bank was found
2002
April, 1999:Floating Exhange
Rate Regime(Managed)
1. NBK became in charge of securities market andpension funds supervision2. Implementation of Internal Risk Management Systemshave started in banks
Vulnerability to external shocks
1. World commodity markets volatility(i) Extent of trade structure diversification, Kazakhstan, Exports, 2001: Oil - 49.3%, non-CIS - 70%
Metals - 25%, non-CIS - 94% Oil budget revenues - 20%(ii) Persistence of the shock and whether it is anticipated. Asymmetric shocks
2. Trade and financial contagion from other countries
(i) Trade spillovers Kazakhstan - Russia bilateral trade, 2001 - 30% (1996 - 47%)(ii) Financial linkage (iii) Shifts in investor sentiment
The contagion of crisis effect through financial linkages in the case of Kazakhstan is not so severe compared to East Asian countries and even Russia, and can be viewed as the consequence of shocks originating in commodity markets and trade spillover that cause the fundamentals to change.
1996 1997 1998 1999 2000 2001I. External Shocks Indicators1.External TOT (% to prev. per.) 7,8 1.7 -18.1 15.4 27.1 -7.0 1.1 World prices of exports 5,1 -5.2 -24.0 12.9 30.1 -9.4 1.2. World prices of imports -2.4 -6.8 -7.1 -2.3 2.6 -2.72. Real effective exchange rate (dec .as % to dec.) 10,5 8.9 16.2 -26.4 2.8 -1.6 Relative to Russia -2,8 1 68.6 -30 -8.5 -6.7
II. Balance of Payments and External Debt Current Account (% to GDP) -3,6 -3.6 -5.6 -1.4 2.3 -7.8 FDI – Current account (% to GDP) 2 2 0 7 9 5 Trade Balance (% to GDP) -1,6 -1.2 -3.6 2.0 13.4 4.0 Exports (% to GDP) 30 31 27 36 51 41 Imports (% to GDP) -31,5 -32.4 -30.2 -33.6 -37.5 -36.8 Gross External Debt, at the end of period (% to GDP) 20 28.6 44.9 71.4 68.9 66.7 Short-term external debt in total external debt (%) 40 30.0 23.0 15.0 7.8 8.6 Government and government-guaranteed debt in total external debt (%) 45 42.0 40.3 33.6 31.3 25.5
III. Memorandum GDP (real, %) 0.5 1.7 -1.9 2.7 9.8 13.2 Inflation (%, dec. to dec.) 28.7 11.2 1.9 17.8 9.8 6.4 Exchange rate (% ch., at the year end) 15.4 2.8 10.7 64.6 5.2 3.8 Money ratio (%, M3/GDP) 9,5 10.3 8.6 13.6 15.3 17.3 Refinance rate (%, at the year end) 35 18.5 25 18 14 9
(at the end of period) Dec.96 Dec.97 Dec.98 Dec.99 Dec.00 Dec.01
Ratio of FX deposits to total deposits 0.2 0.23 0.37 0.48 0.51 0.61Ratio of FX loans to total loans 43 0.42 0.43 0.54 0.51 0.71
Money Coverage RatioGross International Reserves/M2 1,17 1.05 1.23 1.17 1.04 1.10 Memo: Reserves (incl. Oil Fund)/M2 1.64
Kazakhstan: Selected Indicators
Macroeconomic Indices
First half of 2002 the real GDP growth : Russia – 3,8% Ukraine – 4,3% Kazakhstan – 9,2% Kyrgyzstan – (-)4,9% Azerbaijan – 8,4% Uzbekistan – 4,0%
The first half of 2002 real GDP
percentage to 1996 level Russia – 117,0% Ukraine – 102,5% Kazakhstan – 138,1% Kyrgyzstan – 144,5% Azerbaijan – 168,0% Uzbekistan – 128,2%
Real GDP Growth in 1996-2002, in percent
-15
-10
-5
0
5
10
15
1996 1997 1998 1999 2000 2001 june 2002
Ukraine Kazakhstan Russia Kyrgyzstan Azerbaijan Uzbekistan
GDP as a percentage of 1996 real GDP, %
60
90
120
150
180
1996 1997 1998 1999 2000 2001 june 2002
Kazakhstan Russia KyrgyzstanUkraine Azerbaijan Uzbekistan
Change in USD rate of exchange during six and half recent years: Russia – 466,8% Ukraine – 181,9% Kazakhstan – 107,7% Kyrgyzstan – 174,7% Azerbaijan – 18,9%
Accumulated inflation for six and half years: Russia – 333,8% Ukraine – 106,4% Kazakhstan – 60,8% Kyrgyzstan – 122,6% Azerbaijan – (-)1,3% Uzbekistan – 248,8%
Particular Features of the Monetary Policy Implementation
Change in USD rate of exchange during 6,5 recent years, %
181,9
107,7
466,8
174,7
18,9 40,349,6
0100200300400500
Uk
rain
e
Kaz
akh
stan
Rus
sia
Ky
rgy
zsta
n
Aze
rbai
jan
Hun
gary
Po
lan
d
Cumulative Inflation for 6,5 years, %
106,460,8
333,8
248,8
122,677,3
53,7-1,3
-203080
130180230280330
Ukr
aine
Kaz
akhs
tan
Rus
sia
Uzb
ekis
tan
Kyr
gyzt
an
Aze
rbai
jan
Hun
gary
Pola
nd
Broad money to GDP ratio: Russia – 24,3% Ukraine – 21,5% Kazakhstan – 18,7% Kyrgyzstan – 15,3% Azerbaijan – 14,1%
Percentage of cash in broad money
by the end of June, 2002: Russia – 27,4% Ukraine – 41,8% Kazakhstan – 21,9% Kyrgyzstan – 60,7% Azerbaijan – 45,5%
Particular Features of the Monetary Policy Implementation
Broad Money to GDP Ratio (disregarding cash USD in circulation), %
0
10
20
30
1996 1997 1998 1999 2000 2001 june
Ukraine Kazakhstan Russia Kyrgyzstan Azerbaijan
Major Instruments of the Monetary Policy : Open Market Operations
Secondary Market Government Bonds Operations
National Bank does not have a right to purchase Government Bonds on a primary market therefore NBK portfolio is not sufficient enough to adjust reserve money
Notes of the National Bank of Kazakhstan Liquidity Adjustment Short-term with maturity beginning
from 7 to 91 days
Weighed Average Note Yield: 18,36% in 1999 9,11% in 1999 6,02% in 2001 5,99 by the end of June, 2002
Refinancing rate: Russia – 23,0% Ukraine – 10,2% Kazakhstan – 8,0% Kyrgyzstan – 8,0% Azerbaijan – 10,0%
Uzbekistan – 30,0%
Particular Features of the Monetary Policy ImplementationIssuance of NBK notes over the period,. USD million
0
200
400
600
800
1000
1200
1995 1996 1997 1998 1999 2000 2001 june2002
Weighted Average Note Yield in percent
45,35
36,29
18,1221,35
18,36
9,116,02 5,99
0
10
20
30
40
50
1995 1996 1997 1998 1999 2000 2001 june2002
O fficial refinancing rate, end of period, %
01020304050607080
1996 1997 1998 1999 2000 2001 june 2002
Ukraine Kazakhstan RussiaKyrgyzstan Azerbaijan Uzbekistan
Number of banks by the end of June, 2002: Russia – 1281 Ukraine – 154 Kazakhstan –39 Kyrgyzstan – 23 Azerbaijan – 47
Capitalisation per bank
by the end of June, 2002: Russia – 12,7 Ukraine – 8,2 Kazakhstan –22,9 Kyrgyzstan – 1,4
Banking System Development
Total Capitalisation per Bank USD million
0
5
10
15
20
25
1997 1998 1999 2000 2001 june 2002
Ukraine Kazakhstan Russia Kyrgyzstan
Commercial banks’ credit to the economy by the end of June, 2002
in percentage to the GDP : Russia – 19,0 Ukraine – 17,0 Kazakhstan –16,8 Kyrgyzstan – 3,0 Azerbaijan – 19,5
Banking System Development
Percentage of medium-term and long term loans in total by the end of June, 2002: Russia – 22,4 Ukraine – 24,5 Kazakhstan –55,0 Kyrgyzstan – 24,6
Interest rates on national currency denominated loans by the end of June, 2002: Russia – 18,3 Ukraine – 27,1 Kazakhstan – 15,0 Kyrgyzstan – 39,4
Households deposits per capita
(first half of 2002), USD: Russia – 177,6 Ukraine – 51,5 Kazakhstan – 95,0
Percentage of Long-term Loans in Total
0
10
20
30
40
50
60
1998 1999 2000 2001 june 2002
Ukraine Kazakhstan Russia Kyrgyzstan
Interest Rate on National Currency Denominated Loans
0102030405060708090
1996 1997 1998 1999 2000 2001 june 2002
Ukraine Kazakhstan Russia Kyrgyzstan
Personal Deposts per capita, USD
51,5
177,6
95
020406080
100120140160180200
Ukraine Kazakhstan Russia
Pension Reform
Investment Portfolio Structure by the end of June, 2002: Government bonds – 58,6%
(private funds – 52,4%) Non-government bonds – 43,1%
(only private funds) Bank deposits – 9,0% (4,5%)
Funds, accumulated in the pension system have grown significantly: 1 year after the transition to the new pension
system (as of end of 1998) - USD 281 mln (1,4% to GDP)
2 years (as of end of 1999) – USD 467mln (3,2% to GDP)
3 years (as of end of 2000) – USD775mln (4,4% to GDP)
4 years (by the end of 2001) - USD 1213mln (5,7% to GDP)
4 years and 6 months after - USD 1450mln (6,8% to GDP)
Exchange rates and prices dynamic (in logs)
10,00
100,00
1000,00
Jan1994
Apr Jul Oct Jan1995
Apr Jul Oct Jan1996
Apr Jul Oct Jan1997
Apr Jul Oct Jan1998
Apr Jul Oct Jan1999
Apr Jul Oct Jan2000
Apr Jul Oct Jan2001
Apr Jul Oct Jan70,0
80,0
90,0
100,0
110,0
120,0
130,0
140,0
150,0
160,0
170,0
CPI Goods/Services
-5,5
-5
-4,5
-4
-3,5
-3
-2,5
-2
94M1 94M7 95M1 95M7 96M1 96M7 97M1 97M7 98M1 98M7 99M1 99M7 00M1 00M7 01M1 01M7 02M1 02M74
4,2
4,4
4,6
4,8
5
5,2
KZT/USD REER NEER
Weights, assigned to foreign currencies in determining changes in value of KZTYear Constant USD DM/EUR YEN RUR R2 adj. S.E. DW N.O.1995 0.0008 0.99** -0.0007 0.63 0.00829 1.63 196
(0.0006) (0.0693) (0.0815)0.0006 0.74** 0.04 -0.11 0.25* 0.64 0.00818 1.68
(0.0006) (0.1410) (0.0823) (0.0886) (0.1087)1996 0.0006** 0.94** -0.06 0.83 0.00235 1.96 223
(0.0002) (0.03629) (0.0413)0.0006** 0.92** -0.06 0.003 0.029 0.83 0.00235 1.94(0.0002) (0.04999) (0.0415) (0.0359) (0.0303)
1997 0.0001 0.96** 0.041 0.84 0.00282 1.82 228(0.00019) (0.03342) (0.03582)
0.0000 0.64** 0.05 -0.048# 0.34* 0.85 0.00278 1.91(0.0002) (0.15859) (0.0355) (0.0258) (0.1501)
1998 0.0005** 1.01** 0.02 0.98 0.00108 1.93 227(7.1E-05) (0.0120) (0.016)0.0004** 1.006** 0.02 0.01 0.002 0.98 0.00107 1.81(7.1E-05) (0.0124) (0.0165) (0.0165) (0.0012)
1999 0.0005# 0.99** -0.02 0.80 0.00315 2.01 139(0.0003) (0.0466) (0.0568)0.0005# 0.97** -0.01 0.02 0.012 0.80 0.00321 2.02(0.0003) (0.0809) (0.058) (0.035) (0.0596)
2000 0.0002** 1.02** -0.003 0.99 0.00083 1.32 230(5.5E-05) (0.00784) (0.00713)0.0002** 0.96** -0.003 0.002 0.05** 0.99 0.00082 1.36(5.4E-05) (0.02017) (0.00704) (0.0082) (0.0168)
2001 0.00018** 1.003** -0.008 0.99 0.00071 1.61 223(4.78E-05) (0.00737) (0.00832)0.00015** 0.92** -0.008 0.009 0.07# 0.99 0.00071 1.68 223(4.88E-05) (0.03816) (0.00836) (0.0076) (0.0362)
** Statistically significant at the 99 percent level* Statistically significant at the 95 percent level# Statistically significant at the 90 percent level
Daily Volatility in Nominal Exchange Rate
Period Range St. dev. +/- 0.1% band +/- 0.5% bandUS$/EUR (DM) Jan 73- Dec 01 0.10667 0.00695 15.8% 63.8%
Jan 95 – Dec 01 0.07343 0.00660 14.7% 61.1%US$/JPY Jan 73- Dec 01 0.11930 0.00650 23.3% 70.0%
Jan 95 – Dec 01 0.08768 0.00780 14.8% 57.9%US$/RUR Jan 95 – Aug, 14, 98 0.10730 0.00361 61.2% 93.5%
June 99 – Dec 01 0.03247 0.00298 50.6% 93.2%US$/KZT Jan 95 – Mar 99 0.08417 0.00405 58.7% 93.8%
June 99 – Dec 01 0.02420 0.00161 77.5% 98.1%
Monthly Volatility in International Reserves
Period Mean Abs. Ch. St. dev. +/- 1% band +/- 2.5% bandGermany Jan 73- Dec 01 0.0347 0.0702 21.6% 56.2%
Jan 95 – Dec 01 0.0223 0.0351 36.1% 71.1%Japan Jan 73- Dec 01 0.0259 0.0432 42.9% 73.2%
Jan 95 – Dec 01 0.0188 0.0308 65.1% 81.9%Russia Jan 95 - Aug 98 0.1467 0.1928 0% 11.6%
June 99 – Dec 01 0.0674 0.0700 9.7% 25.8%Kazakhstan Jan 95 – Mar 99 0.0796 0.1085 8% 22%
June 99 – Dec 01 0.0646 0.0708 9.7% 22.6%
Statistical measures of exchange rate and foreign reserves volatility
Weak version of PPP
Pt = + ( Et Pt* )
Vector Error Correction (VEC) with 4 lags
Long-run relation reveals that coefficient of pass-through is significantly different from 1 and estimated to be 0.6.
The function has a relatively low speed of adjustment to its long-run equilibrium – it takes approximately 1 year the 50 percent of the deviation from the long-term stable equilibrium to be eliminated.
Pt is the domestic price level, namely CPI; Et is the nominal effective exchange rate calculated against 23 countries – main trade partners of Kazakhstan; Pt
* is the index of international prices, approximated by the weighted average of PPI of the main trade partners of Kazakhstan; - is the murk up constant; - estimated coefficient of pass-through.
SummaryWhy do Kazakhstan pursue the policy of smoothing high frequency
exchange rate fluctuations to the USD?There are not enough hedging instruments to allow agents to insure fully There are not enough hedging instruments to allow agents to insure fully against abrupt changes in the exchange rateagainst abrupt changes in the exchange rate
1. Currency of invoicing
2. Profitability of FDI
3. Underdeveloped money and capital markets
4. High dollarization
5. Sensitive expectations
6. Unknown equilibrium <=> margin of safety
Short-run Rigidity vs. Long-run Flexibility
PreconditionsPreconditions: Pass-through effectPass-through effect
TOT shockNormal vs. “Troubles“ Time
Contagion
Period Main objectives CB actions Outside factors
“Tenge” Introduction -External Shocks(Nov, 93 – Aug, 98)
1. Public confidence2. Lower inflation3. Exchange rate stabilization
Unofficial crawling peg 1. Initial undervaluation2. Structural reforms3. Price mark-up adjustment
Macro adjustment tothe shocks(Sep, 98 – Jun, 99)
1. Restore competitiveness2. Prevent crises spreadingto the banking sector
1. Monetary contraction2. Gradual devaluation3. Effective Devaluation4. Compulsory surrenderrequirement5. Implicit guarantee of tengedeposits6. Lower reserve requirement
1. Fiscal contraction2. Trade measures
Booming period(Jul, 99 – Dec, 01)
1. Fear of appreciation2. Monetary expansion3. Financial sectordevelopment
1. Exchange rate riskminimization(managed floating)2. Strengthening of prudentialregulations & financialsupervision
3. Fiscal Conservatism
Perspective 1. Gradual removal ofrestrictions on capital outflow2. Inflation control3. Shocks VulnerabilityMinimization4. Enhance FinancialIntermediation
1. Capital AccountLiberalization2. Inflation Targeting2. Single Financial SupervisionBody3. Derivatives Market Dev.4. Stock Market Dev.5. Mortgage Lending6. Micro-crediting
4. Oil Boom possible “Dutch Disease”problem
5. “Blue chips”
Summary