Heavy Hitter – Right on Target
The National Bank’s Policy in 2007
The chairman of the Kazakh National Bank, Anvar Saydenov, answers questions from Kazakhstan magazine
Mr Saydenov, as a financier, can you say that 2006 was successful?
Yes, it was quite successful. Above all, we completed the Blueprint to Develop the Country’s Financial Sector in 2003-2006. Its main aim was to build a stable and efficient financial system which meets the demands of the economy’s real sector and in which financial institutions offer quality services in free competition. I would like to note that, in general, the objectives set were achieved.
Kazakhstan is confidently joining the world economic community, leaving behind other CIS countries and catching up with leading Central European countries in terms of financial development. Our country has already completed all the main financial reforms and our financial institutions are now regulated on the basis of international standards. For example, the Financial Control Agency is functioning successfully – the single state body to monitor the activities of players in the financial market.
We still have to further improve the stability of the financial sector’s subsectors and achieve even greater aims. In this connection, the government has drafted a Blueprint to Develop the Financial Sector until 2010, which envisages a strategic vision for the further development of the banking, non-banking, insurance, foreign exchange, stock, pension and other subsectors of the financial market.
Will the National Bank’s policy change in 2007?
There will be no radical changes: the National Bank will continue to carry out a strict monetary policy taking into account continuing inflationary pressure and the factors determining it. This includes a high level of combined demand, growing personal incomes and corporate revenues, a higher growth rate of wages than labour productivity growth and increasing production costs. In order to decrease their negative impact on inflation processes the National Bank will continue to take measures to withdraw commercial banks’ excess liquidity and carry out a “dear money” policy.
The main instruments to regulate interest rates on the stock market and sterilise banks’ excess liquidity will be short-term bonds and commercial banks’ deposits in the National Bank. In addition, the maturity of bonds and their volume can be increased.
The National Bank will stick to a floating exchange rate of the tenge. This means that the dynamics of the tenge’s nominal rate to foreign currencies in the domestic market will be defined by supply and demand. However, we reserve the right to take measures to prevent negative effects of short-term and speculative fluctuations of the exchange rate.
The National Bank’s involvement in the domestic foreign exchange market will depend on the need to buy foreign currency for the National Fund because, in line with the new rules for converting and reconverting the National Fund’s assets, the National Bank will have to buy foreign currency in the domestic market for the National Fund, in addition to selling it.
What do you think about the National Bank’s role in establishing stable relations between the real and financial sectors of the economy?
Firstly, all the bank’s operations, in general, aim to ensure efficient and stable cooperation between these sectors. A comprehensive analysis of macroeconomic statistics, including monetary statistics, current account balance and foreign debt statistics, makes it possible to see a clear picture of the country’s economic development and follow the macroeconomic policy’s impact on the private sector. Precisely this analysis serves as a basis for us to adopt decisions on monetary and foreign exchange policies and the strategy to develop payment systems.
Statistics drawn up by the National Bank are also widely used by commercial banks and other financial organisations in developing their strategies for institutional development. These statistical and analytical data are also used to assess ratings on which foreign investors make their decisions on investing in the real sector of the Kazakh economy.
That is why in our work we put stress on expanding a range of published information and ensuring wide access to it. One of the latest initiatives in this sphere was to prepare a Report on Financial Stability which includes a comprehensive analysis of financial sector indicators linked to the real-sector development figures.
In addition, starting from 2000, the National Bank has been maintaining direct links with enterprises working in the real sector by conducting opinion polls. The results of these polls are used to make an independent preliminary analysis of changes in market conditions and the financial state of the economy’s real sector (by sector and region). This analysis can be used by enterprises to define their competitive positions and by banks to assess the real sector’s demand for their intermediary services.
It is well known that high inflation is a threat to rapidly developing economies. What measures is the National Bank taking to reduce inflationary pressure?
As I have already said, we are tightening monetary policy and taking action to withdraw commercial banks’ excess liquidity and pursue a “dear money” policy.
As a result, since the beginning of 2005, the National Bank has increased the official refinancing rate four times, including twice in 2006. For example, on 1 April it was increased from 8% to 8.5% and to 9% on 1 July. As for the interest rate for deposits attracted from commercial banks, it was increased to 3.75% (from 3.5%) on 1 April, to 4% on 3 July, to 4.25% on 1 November and to 4.5% on 1 December.
About 7,700 billion tenge was attracted from commercial banks to deposits in the first 11 months of 2006, whereas this figure stood at 2,300 billion tenge in the same period of 2005 (a 230% increase). The volume of short-term bonds also grew: bonds worth 3,200 billion tenge were issued in the first 11 months of 2006, an 80% increase from the previous year. The yields of short-term bonds also grew from 2.38% at end-2005 to 4.41% at end-November 2006.
In addition, in order to reduce the banking sector’s liquidity and loan issuance, and therefore inflationary pressure, the National Bank has tightened the minimum reserve requirements (MRR) and changed their criteria. As a result, new rules for MRR were adopted in July 2006. In line with these rules the structure of bank liabilities subject to MRR has been expanded significantly. In addition, the very criteria became differentiated: 6% for internal liabilities and 8% for other liabilities.
One of the National Bank’s main tasks is to further liberalise the mechanism of foreign exchange regulation. Taking into account that 2007 will be crucial in this sphere, how do you assess the work done?
The foreign exchange market has been liberalised stage by stage in Kazakhstan, taking account of the specifics of the local economy’s development. The first stage aimed to improve the efficiency of using foreign currency through expanding the investment potential of residents in Kazakhstan. Foreign exchange regulation was eased for investment in securities issued by non-residents investing in the country and residents’ direct investment in foreign countries. This expanded the country’s production potential, created conditions for entering promising new markets and expanded the necessary level of monitoring investment entities.
The next stages of reforms aimed to create the conditions for abolishing restrictions on foreign exchange transactions and switching to full convertibility of the national currency in 2007.
Steps taken under the Programme to Liberalise Foreign Exchange Regulation in 2005-2007 fulfilled the new law On Foreign Currency Regulation and Foreign Currency Control, which came into force on 18 December 2005. The new law significantly cut the list of operations subject to licensing. In addition, on 1 January the system of permissions for foreign exchange transactions was completely abolished, and a switch to the principles of repatriating foreign currency earnings on terms set by foreign trade contracts is being currently carried out (in contrast to the 180-day period set by existing legislation).
As a result, from 1 January 2007, Kazakhstan has created conditions for the full convertibility of the Kazakh tenge on current and capital operations. These changes in legislation should further develop foreign trade operations; improve the investment climate in the country and the structure and quality of investment by Kazakh residents.
The National Bank is responsible for developing a cashless payment system in Kazakhstan. What are your achievements in this sphere?
Experts from international financial organisations have repeatedly pointed to the high efficiency and reliability of Kazakhstan’s payment systems which ensure timely payments and money transfers in the country. Consultants from the International Monetary Fund have said our payment systems fully meet the Key Principles set for payment systems by the Bank for International Settlements. We will continue to modernise our technical infrastructure and improve the mechanism of monitoring payments and managing risks in the future.
The volume of cashless payments made using the Kazakh payment systems is growing every year. For example, as compared with 2001 the number of cashless payments grew by 110% and the volume by 400%. Annual growth averaged from 40% to 80% over this period. This trend continued in 2006 too. A total of 22.1 million transactions worth 83 billion tenge ($664.8bn) were made in January-November 2006. The number of transactions grew by 6% and the volume by 80.8% from the same period of 2005.
A promising market is the plastic cards market, which also grew significantly in recent years. One Kazakh in four had a plastic card in 2006 against one in five in 2005.
Cards of international payment systems (VISA International, Europay International, American Express International and Diners Club International) and cards of local systems (Altyn Card, Duet, SmartAlemCard and ones issued by Citibank Kazakhstan, Caspian Bank and Tsesna Bank, and Kazcard) are offered in the domestic market. As at 1 November 2006, the total number of cards issued by the Kazakh banks reached 4.12 million, up by 35% from 2005. The number of card holders grew by 35.1% to 3.94 million people.
Despite the fact that plastic cards are mainly used to withdraw money from cash points, cashless transactions are made more often now. For example, the volume of cashless payments using cards grew by 200% in 2006, whereas the volume of cash withdrawn from cash points increased only by 42.2%.
A major event of 2007 is that the Regional Financial Centre will start operations in Almaty. What place will it occupy in the country’s system of financial institutions and how will it interact with the National Bank?
Indeed, the idea of setting up the Regional Financial Centre is a priority aspect of the development of the country’s entire financial sector. In general, a legislative basis has already been created for it. In 2006, the Agency for Regulating the Regional Financial Centre’s Activities was set up and it started to register players in the centre on 31 October.
The centre was set up not only to develop the national stock market and ensure its integration into the international capital market, but also to develop the infrastructure of Almaty as a regional financial centre. For example, players in the Almaty Regional Financial Centre have to have offices only in Almaty.
In general, the Almaty Regional Financial Centre represents the city of Almaty itself with a well-developed infrastructure and an advanced stock exchange with relevant structures, including a specialised financial court, a clearing house, a depositary and others.
Interaction between the National Bank and the Almaty Regional Financial Centre will be based on coordinating legislatives acts and the keynote documents of the Agency. For example, the National Bank has recently received a draft Programme to Develop the Almaty Regional Financial Centre in 2007-2010, and we have made our proposals on it.
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