The National Bank of Kazakhstan Strikes the Balance
Mr. Anvar Saidenov, Chairman of the National Bank of Kazakhstan, answers questions from our magazine
AnvarG. SaidenovwasborninMoscowin 1960 (nationalityKazakh).
Education: Mikhail Lomonosov Moscow State University (graduated with honours in 1982, economist, political economy instructor), took a postgraduate course at the same University (1987), the University of London (1994, MSc in Financial Economics); Candidate of Economic Science. Worked as an instructor and researcher.
EBRD (London), specialstaffmember (sinceJanuary 1995). DeputyChairmanoftheBoardoftheNationalBankofKazakhstan (sinceAugust 1996). ExecutiveDirector of the StateInvestmentCommitteeofKazakhstan; Chairman of the Investment Agency of Kazakhstan; Deputy Minister of Finance of Kazakhstan (sinceApril 1998).
ActingChairman (sinceAugust 2000), Chairman (since October 2000) of Halyk Bank of Kazakhstan.
Deputy Chairman (sinceJune 2002), Chairman (since 7 January 2004)of the Board of the National Bank of Kazakhstan.
Mr. Saidenov, what trends in Kazakhstan economy have been noted recently?
In 2004 our economy continued to develop at a fast pace – the real growth of GDP reached 9.1% over nine months (9.2% for 2003). The accumulated increase for the past four years amounts to 43%. This was caused by an increase in industrial output and maintaining positive trends in developing the major sectors of the domestic economy and also by external factors such as economic growth of partner countries, and a favourable price environment in the international commodity market.
It should be remembered that, although the dynamic development of our economy is raising the incomes of individuals and entities, it is also contributing to increasing consumer and investment demand and, as a consequence, prices. Thus, for just the first ten months of 2004, prices grew by 4.9%, while for the same period of 2003 and 2002 inflation was 4.2% and 4.1% respectively. In addition, it has been observed that prices in the real sector of economy grow faster than in the consumer sector, which affects pricing for goods produced. External factors such as increase in oil and grain prices in the international market and in the markets of neighbouring countries are also important. In this connection, the National Bank controls the liquidity of the banking system and conducts a policy of restricting money supply growth, thus controlling the development of inflation.
At the same time, we regard the performance of our financial sector as positive. For example, in 2004 the assets of Kazakhstani banks grew by 42.3% to reach 2.4 trillion tenge. The total volume of residents' deposits increased by 41.2% and exceeded 1 trillion tenge. Growth in lending to the economy by second-tier banks is also important for boosting business activity. It is acknowledged that assets of the pension system have also increased by 23.5% for the past months and reached 455 billion tenge.
Since 2004 the National Bank is implementing a new monetary policy. Could you tell us more about this issue?
This policy was introduced in 2002, when we came to prepare for the transition to inflation targeting principles and declared it to be the guideline for monetary policy. By now a whole system of preparatory measures has been implemented. For instance, a number of key changes in the Law on the National Bank of the Republic of Kazakhstan came into force on 1 January 2004. These applied to the formulation of the Bank's primary objective and its other activities.
Since 2004 the National Bank only establishes underlying inflation targets. A model transition procedure is now being developed. It should be representative of how instruments of monetary policy affect the level of underlying inflation.
Currency liberalization is the primary target in the area of exchange regulation and control. The National Bank intends to support the price competitiveness of Kazakhstani goods in foreign markets by eliminating currency barriers. To this effect the Programme of Currency Liberalisation for 2005–2007 has been adopted. Its objective is to create the conditions for subsequent cancellation of restrictions on exchange operations and to make the tenge fully convertible in 2007.
Another important target is to set up a national integrated system of credit card services. We will arrange for actions allowing their field of application to be expanded.
Certainly one of the key objectives of the National Bank remains assisting in maintaining the stability of the financial system. This will be carried out in close cooperation with the Agency for Control and Supervision of the Financial Market and Financial Institutions (AFN).
Successful development of Kazakhstan's economy would not be possible without effective performance of the banking system. What is your opinion on the current situation?
It has already been mentioned that Kazakhstan is the leader among all CIS countries in terms of profound reformation of the banking sector and bringing it up to international standards. The stability of the domestic banking system is proved by the fact that, since the beginning of 2000, the total equity capital of our banks increased 4.5 times to reach $2.3 billion (6.4% to GDP). We also lead in average capitalisation: about $70 million per bank. Let me remind you that there are 35 second-tier banks in Kazakhstan, including one state bank and 15 with foreign participation. The performance of the Kazakhstan Development Bank has been quite successful; it is authorized to invest resources in priority projects in the real sector of the economy.
The assets of our banking system have increased sevenfold over the past five years and amount to $18.1 billion (about 47% to GDP). Bank deposits by the household sector increased 7.5 times reaching $3.1 billion by the end of October 2004. Today Kazakhstan is inferior only to Russia among the CIS countries in terms of deposit rates per capita ($209).
Kazakhstani banks are rapidly expanding their activities in lending to entities and to the household sector. A major part of their assets (about 60%) are channelled into lending to the economy and about 21% in financing small business. At the end of 1999 the proportion of the volume of bank lending to the economy within the GDP was only 7.4%; at present it is 27.5%. We are sure that this trend will be maintained in the future.
Recently a tendency has arisen towards extending the repayment period of loans, which is indicative of the improving the investment role for loans. Today the share of long-term loans in the total volume of bank lending to the economy is about 65.5%, whereas five years ago it was just below 50%. Most loans are channelled into developing trade, industry, construction and agriculture. Thus the breakdown of loans to the economy is as follows: 27.4% to trade, 20.2% to industry, 11.0% to construction, and 8.7% to agriculture.
The dynamics of interest rates are also positive. For instance, since the beginning of 2000 the average interest rate for lending to entities reduced from 20.8% to 14.5% (in tenge) and from 20.4% to 10% (in foreign currency).
The securities market is one of the most important components of the financial system. What actions are being taken for its further development?
On 1 January 2004, the State Agency for Control and Supervision of the Financial Market and Financial Institutions (AFN) was separated from the structure of the National Bank. All functions for regulating and supervising participants in the securities market were transferred to this agency. Nevertheless, we have paid and will continue to pay the closest attention to this sector. At present, as instructed by the President of the country, the National Bank is participating in the development of the Programme of Securities Market Development for 2005–2007.
In order to improve further the operations of issuers in our securities market, Kazakhstani joint-stock companies are introducing corporate governance principles. The market requires issuers to reveal public information on their operations and to make general meetings of stockholders transparent, along with the decisions made. This will contribute to the creation of new financial instruments in the securities market. The issuers will be able to raise capital stock in a civilized manner and borrow capital in the securities market at beneficial interest rates. In turn, pension funds will be able to invest in liquid financial instruments of domestic companies.
In spite of the established model of the Kazakhstani securities market it still needs improvement. It will be necessary to organize and develop self-regulatory institutions. All the prerequisites for this have already been established and a certain amount of experience accumulated. Two self-regulatory organisations have operated successfully in our securities market for several years. These are the Kazakhstani Association of Registrars (KAR) and the Association of Asset Managers.
We realise that in the medium-term, the securities market can and must become a solid investment source for entities. At the same time, the practical importance of this segment should not be overestimated when generating a socioeconomic strategy. In the future, state control of the securities market should be exercised on the basis of market liberalisation and transparency of regulatory provisions. At the moment the existing model is still administrative (i.e. based on licences). Theoretically a balanced combination of the following six principles is required:
· Detailed legal execution of procedures connected with the activities of issuers and qualified participants;
· Various statutory requirements (control, transparency, guarantees, etc.) on procedures designed for various economic agents (varying according to qualifications, client base, quantity, etc.);
· A prior assumption of bona fide intentions on the part of the market participants and hence minimisation of the coordination and permits required from the state authorities in favour of a notification approach (for example, when issuing shares and securities, or when obtaining the status of a qualified participant, etc.);
· Transparency of all procedures, in order to avoid ambiguous interpretations and the possibility of administrative selection of certain participants to operate in the market;
· A two-level system of enforcement on detection of non-bona fide intentions: the arbitration courts of self-regulatory organisations (developing and enhancing them) and the state judicial system. Development of the arbitration courts also means partial reduction in budgetary financing of the judicial system;
· A wide range of penalties for violations proved (from withdrawing from a self-regulation agency and/or the prohibition of an activity to criminal prosecution).
The National Bank has a clear idea of the current situation in the securities market, long-term plans for its further improvement, and concrete proposals to realize these. Acting in conjunction with the AFN we will be able to ensure qualitative development of the domestic securities market in the future, in accord with the needs of economic development in Kazakhstan.
Today, Kazakhstan is preparing to enter the WTO. What are the requirements on the financial system and its role in this process?
In accordance with the WTO agreements on trade in services, liberalisation of the service markets of the candidate countries is one of the basic conditions for entering the World Trade Organisation. At present, the segments of the Kazakhstani financial market represented by the banking, insurance and securities markets, and pension funds differ from each other in level of liberalization due to differences in their development.
In order to integrate into global trade, the Kazakhstani financial system has to cope with two major tasks. Firstly, to increase the competitiveness, quality and reliability of financial services. The banking laws are being modernised for this purpose. And laws to stabilise the investment climate and promote overseas investment have been adopted. It should be noted that steps were taken to bring banking and banking supervision closer to generally accepted international standards (particularly to the new capital accord of the Basel Committee on Banking Supervision, commonly known as Basel II). The second task includes maintaining the balance of interests between financial services providers and consumers. Protective measures for national financial organizations should be implemented alongside liberalisation of access by foreign banks to the domestic market.
What are the objectives of the National Bank’s activities in 2005?
First, I would like to state that the National Bank is determined to make an all out effort to achieve our major objective – sustaining a low inflation rate. It is expected that in co-operation with the government we will succeed in lowering the average annual inflation rate to about 4.9-6.5%.
It is necessary to stimulate preparations for transition to inflation targeting principles, as this is the most efficient way to influence inflation. These principles provide for a transition from control of liquidity to control of the cost of borrowings, therefore it is planned to strengthen the regulating role of short-term rates set by the National Bank.
The National Bank will further the policy of the floating exchange rate. Our activities on the exchange market will be targeted at weakening short-term exchange rate fluctuations and profiteering.
We will also continue working in order to create an international financial centre in Almaty.
Currently, the National Bank is developing the main guidelines of monetary policy for 2005-2007, in which our plans will be specified in full detail.
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