The National Bank of Kazakhstan Continues Reforming
Grigory Marchenko, Chairman of the National Bank of Kazakhstan
The Monetary and Lending Policy of the National Bank
Today the National Bank functions as a classic central bank with all the standard tools at its disposal to operate a monetary and lending policy appropriate to the prevailing economic conditions. The main tools used are open market transactions such as selling and buying securities. Principally, these take the form of the issue and redemption of short-term notes. In addition, the National Bank regulates official rates and the refinancing of banks by rediscounting and providing them with short-term (day or overnight) loans to support their short-term liquidity. It is largely due to this work by the National Bank that the financial sector remains the most stable market segment in Kazakhstan.
In recent times, with the strengthening of the banking sector, second-tier banks have rarely needed loans. Thus the National Bank refinancing rate has become mainly an indicative figure showing its short-term inflation expectations.
Other tools for regulating the banking sector liquidity are repo and reverse repo transactions, which are expected to play a key role in the near future.
The National Bank intends to preserve the floating tenge exchange rate and will not, therefore, set any reference points for it. The tenge exchange rate will be solely market-driven.
Interference by the National Bank in the domestic money market will be confined to preventing any speculative plummeting of the exchange rate.
In accordance with recent amendments to the Act On the National Bank of the Republic of Kazakhstan (effective from 1 January 2004), the main goal for the National Bank will be to secure price stability. Therefore, from 2004 onwards National Bank reference points will be set for inflation only. For the purposes of the Bank’s monetary and lending policy, these will be based on the new “basic inflation” index rather than the general consumer price index; the former is calculated with several non-market factors not being taken into account.
The task of keeping down inflation in the medium term will require the National Bank to adopt inflation targeting principles. For 2006 we have set ourselves a goal of reducing the annual inflation rate (calculated using the consumer price index) to 4-5% per annum.
The inflation targeting technique uses inflation as a target value and one of the short-term interest rates (for example, for repo transactions) as the main operational value. The key tool for regulating the liquidity of the banking system is open market transactions.
The transmission of inflation-regulating signals depends on various channels, such as aggregate supply and demand, currency and interest rate parity, etc. A mechanism like this which delivers an intended impact on a target value and consists of a number of channels interacting with each other, is called a transmission mechanism. Accordingly, inflation targeting requires the development of a transmission mechanism model which would allow changes in the target value caused by the main operational value to be assessed. Each national transmission mechanism is tailored to the specific needs of the country concerned.
Developing a mechanism that is adequate to ensure strict compliance with inflation obligations will enhance trust in the current monetary and lending policy and assist in its progress.
It should be mentioned that only 13 countries currently use an inflation targeting technique, including seven developed countries (Australia, Canada, Finland, New Zealand, Spain, Sweden and the UK) and six developing market economies (Brazil, Chile, the Czech Republic, Israel, Poland and South Africa).
Liberalisation of the Money Market: Merits and Demerits
The currency regulation systems adopted by CIS countries are based on common approaches and principles. At the same time, the degree of liberalisation of currency regulation varies from country to country. For example, Uzbekistan introduced convertibility of its national currency for current transactions only in October 2003, whereas Kazakhstan did so back in 1996. In Kazakhstan, the compulsory sale of foreign currency profits has only been imposed once as a short-term measure, unlike in Russia where this requirement still exists today. On the whole, currency regulation in Kazakhstan relies on a comparatively simple administrative system. However, taking into account the experience of developed countries and the fact that administrative methods of regulating currency transactions are less efficient than indirect market methods, the country is steering a course towards stepwise liberalisation and simplification of its currency regulation procedures.
In order to comply with its international obligations, Kazakhstan has adopted favourable policies towards foreign trade, receipt and repatriation of income from investments (current transactions) and investing by foreigners. However, until recently a licensing system has been operated by the National Bank for most capital flow transactions, in particular investing outside the country, lending to non-residents, opening accounts in overseas banks and buying immovable property (with some minor exclusions).
Taking advantage of a sustained inflow of foreign capital, steady economic growth and the adoption of international standards, the Kazakh banking sector has approached a starting point from which it can embark on further liberalisation of currency regulation in accordance with the Concept and Programme proposed by the National Bank and approved by the Government. In 2003, when the currency law was amended, the necessary legal framework was created for implementing phase 1 of the Concept, which is aimed at a gradual lifting of bans and the simplification of procedures for buying foreign assets by Kazakh nationals, including export and import transactions.
Whilst the former system required a licence from the National Bank for any deferment of payment or product delivery by non-residents under export and import transactions for amounts exceeding US$5,000, the threshold is now set at US$10,000. In the near future the minimum export/import contract amount for which a transaction certificate is required will be raised to US$10,000. In addition, the period for which exporters or importers may grant deferment to non-residents without applying for a licence has been extended from 120 to 180 days.
A simplified licensing procedure will be adopted for settlements under export/import transactions where products are supplied for an advance payment or the delivery price is transferred after a 180-day period (so-called “completed transactions”). The time taken for document processing in these transactions has been halved, with local branches of the National Bank being authorised to issue the licences. Importantly, the list of documents required from applicants has been made much smaller.
In order to ease administrative requirements, the time allowed for applying for National Bank licences has been extended for importers and exporters and the reporting procedure simplified.
Finally, the law now gives the Government the right to maintain a list of exports which will not require licensing, in cases where payment by non-residents to residents is scheduled within a 365-day period. These amendments are intended to cut the administration costs of companies whose contracts provide for extended payment schedules due to the nature of their business.
As a whole, the above efforts to simplify currency regulation will give Kazakh manufacturers more freedom in making contracts for export and import and will enable them to unleash the potential of their competitive advantage in order to win long-term customer demand in new markets.
Adopting a Common CES Currency
The example of the European Union, which has been paving the way to a common currency for decades, suggests that this kind of step can only be considered for the long term. First, a free trade zone and a fully operational customs union should be formed. Next, macroeconomic parameters such as inflation rate, budget deficit, public debt, etc. should be agreed upon. When these have been achieved, common monetary, lending, tax and budget policies will have to be developed. At a later stage, a common supra-national central bank, modelled after the European Central Bank, and a common cashless currency should be introduced.
A common cash currency can only be adopted as a final phase. It is preferable to print a new supra-national currency rather than allow free circulation of any of the existing national currencies, because a common currency would symbolise integration on an equal basis. The currency would be issued by the central bank.
In February 2003 the heads of four states (Russia, Ukraine, Belarus and Kazakhstan) declared a new integrated entity, the Common Economic Space (CES), and in September a treaty was signed envisaging the phased building of the CES.
The issue of adopting a common currency has received little, if any, attention under the CES project; it appears to be far more topical within the EurAsEC framework.
However, if all the integration measures under the CES initiative are implemented successfully, it is likely that the issue of a common currency will be raised at some point.
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