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The Role of the Central Bank in Sustaining Economic Growth

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

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The Role of the Central Bank in Sustaining Economic Growth

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  1. The Role of the Central Bank in Sustaining Economic Growth Smolyakov Oleg National Bank of Kazakhstan

  2. Monetary Side of Sustainable Development:(framework of analysis) Necessary 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’sChallenges I. Inconsistency Triangle Inflation vs. Exchange Rate II.External Shocks Vulnerability Normal vs. Crisis time III. Dollarization Following vs. Lead IV. Public confidence Rules vs. Discretion

  3. 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.

  4. Kazakhstan: Selected Indicators

  5. 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% Macroeconomic Indices

  6. 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

  7. 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

  8. 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 Implementation

  9. Banking System Development • 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 • 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

  10. 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

  11. Pension Reform • 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) • 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%)

  12. Exchange rates and prices dynamic (in logs)

  13. Weights, assigned to foreign currencies in determining changes in value of KZT

  14. Statistical measures of exchange rate and foreign reserves volatility

  15. Weak version of PPP Pt =  +  ( Et Pt* ) 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. 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.

  16. Summary Why 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 against 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 Preconditions: Pass-through effect TOT shock Normal vs. “Troubles“Time Contagion

  17. Summary

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