The Central Bank is the main implementer of monetary policy of the country. The new stage of economic development, triggered not by active structural transformations in all spheres, but also by cardinal improvement of macroeconomic policy instruments, has become an important impetus to review and rethink the principles and directions of Uzbekistan’s monetary policy. Our interview with the Chairman of the Central Bank of the Republic of Uzbekistan NURMATOV Mamarizo Berdimuratovich is about the main goals of the Central Bank today – achieving stable economic growth, reducing inflation, and leveling the balance of payments.
– Dear Mamarizo Berdimuratovich, on October 4, 2019, the Senate of the Oliy Majlis of Uzbekistan at the 23rd plenary session approved the new edition of the Law “On the Central Bank of the Republic of Uzbekistan”, which sets out the main goals of the Central Bank’s activities, functions and powers, its interaction with state agencies and other organizations. According to the document, the Central Bank is now accountable to the Senate. What is the reason for adoption of the Law in new edition?
– The law regulating the activities of the Central Bank of the Republic of Uzbekistan, adopted in 1995, did not fully reflect the goals and objectives of the Central Bank in view of the major changes in the world financial system, as well as the measures taken in the country to reform the national economy on a large scale. There was an urgent need for new approaches and principles in the formation and practical implementation of monetary policy and subsequent development of the country’s banking system.
In this regard, the process of drafting the new version of the law of the Republic of Uzbekistan “On the Central Bank of the Republic of Uzbekistan” was initiated, which laid down mechanisms for radically improving the monetary policy and its instruments, increasing its transparency and measures to prevent unreasonable inflation expectations, regulating and supervising the banking system, implementing comprehensive measures to strengthen the financial stability of non-bank credit organizations, as well as strengthening supervision over their activities.
The main objectives of the Central Bank’s activities, in accordance with the new version of the Law, are defined: ensuring stability of prices, the banking system and the functioning of payment systems. The Central Bank’s autonomy and independence in decision-making on monetary policy has also been strengthened, and its role as a regulator of the banking system has been strengthened. To ensure the effectiveness and transparency of the Central Bank’s activities, it is envisaged to include two independent members in the Board, approved by the Kengash of the Senate of the Oliy Majlis of the Republic of Uzbekistan on the recommendation of the Chairman of the Central Bank.
– On November 18, 2019, the President signed a Decree on improving the monetary policy. The Central Bank has been instructed to bring monetary policy instruments, mechanisms and procedures in line with the standards of the inflation targeting regime. What measures have been taken to improve monetary policy in recent years, and what is the Central Bank already doing in the context of the introduced inflation targeting regime?
– As you know, until 2017, the monetary policy of the Central Bank was formed based on the need to stabilize the exchange rate and accumulate international reserves, leaving aside important macroeconomic issues, including domestic price stability. In recent years, serious political and economic changes have taken place in Uzbekistan, the openness of the domestic economy has increased, and regional trade and migration flows have increased. This required greater attention to internal and external factors in order to achieve macroeconomic balance.
We started with the liberalization of the currency market in 2017. In the same year, the need to reorient the goals and priorities of the Central Bank’s monetary policy to ensure price stability was implemented, and a strategy for switching to an inflation targeting regime was chosen.
In subsequent 2018, all efforts were focused on creating a solid institutional framework for the Central Bank’s new monetary policy. As a result, a system of daily monitoring of the banking system’s liquidity was introduced, prices for basic consumer goods and services were monitored, a multi-factor analysis of their variability was organized, and inflation expectations of the population and business were studied, as well as regular surveys on the state of real sector enterprises.
The Decree of the President of the Republic of Uzbekistan “On Improving the Monetary Policy with a Gradual Transition to the Inflation Targeting Regime” sets out the trajectory of a smooth decline in inflation to single digit in 2021 and to the ultimate goal – the target of 5% — in 2023.
In addition, the Central Bank has developed the main directions of the monetary policy for 2020 and the period 2021-2022. In general, the huge amount of work done to transfer the entire monetary system to new rails can be divided into the following three main blocks.
Improvement of the instruments of the monetary policy
A strategy of currency interventions of the Central Bank on the domestic foreign exchange market has been developed based on the principle of “neutrality of foreign exchange reserves,” the reserve requirement has been brought in line with international standards, a single platform the interbank money market has been created, for the first time in many years operations on government securities, etc have been conducted.
The Central Bank’s main interest rate and interest rate corridor were introduced in January 2020.
In order to increase the flexibility of managing commercial banks, their liquidity and saturating the market with highly liquid and at the same time profitable assets, the Central Bank issues bonds, which, in turn, should contribute to the formation of the yield curve, as well as ensure the stability of the indicators of the entire banking system.
Measures are being implemented to reduce segmentation in the credit market by revising the practice of preferential lending using market principles. Prudential supervision measures were also adjusted in order to achieve stability of the entire financial system and smooth out financial cycles.
Implementation and improvement of the model block
From now on, the Central Bank builds its forecasts for inflation and other important macroeconomic variables on the basis of the quarterly forecast model of Uzbekistan within the framework of the system of macroeconomic analysis and forecasting (FPAS), by adapting it to realities of the country, as well as building scenarios for economic development in response to various shocks.
In addition, econometric models for short-term inflation forecasting are being improved.
Establishing the communication work of the Central Bank
As part of the transition to the inflation targeting regime, it is very important to gain support and trust of the population and business, and to promote the formation of rational inflation expectations, on which the success of monetary policy in achieving its inflation target largely depends.
At the same time, the trust is earned through the sequence of actions of the Central Bank and depends on how clear they are to the market. When inflationary trends appear in the economy, the regulator must have a clear and reasonable explanation of the reasons, as well as a strategy for actions and responses. It is important to correctly and timely transmit the signal to the money and real sectors, including through the communication channel.
Since 2018, we have been conducting an active communication policy by providing detailed coverage of the effectiveness of monetary measures through regular press releases, publication on the main directions of the monetary policy, quarterly reports on monetary policy, and holding press conferences to explain the adopted decisions.
Communication policy should be constantly improved, flexible and reactive, able to transmit signals to the economy in a timely and correct manner. All this is aimed at forming rational inflation expectations and reducing their impact on the level of inflation in the economy.
– If we summarize the experience gained by different countries in applying the inflation targeting regime, we should note such a significant positive effect – almost all countries have already experienced a significant decrease in the rate of inflation at the first stage. What are the main challenges and issues we will need to overcome in the coming years in order to achieve the set inflation goals?
– It should be noted that our task is not just to reduce the inflation rate to 5%, but to create the necessary conditions for natural transition of the economy to a state where an appropriate level of price stability will be provided. There are some challenges along the way that we need to overcome.
First of all, it will be necessary to win the public confidence in the Central Bank’s policy and ability to achieve the inflation target of 5 percent. This is not easy, because for a number of years people have faced double-digit inflation. As mentioned above, actively promoted communication policy and detailed explanation of the essence of decisions in the field of the monetary policy helps to convince that the set goals are achievable and bring inflation expectations closer to them.
At the same time, a significant share of preferential and foreign currency loans to a certain extent reduces the effectiveness of decisions taken on monetary policy. Insufficient development of the financial and capital markets, as well as insufficient set of risk management tools for commercial banks, requires the transition of the banking system to a new stage of development.
We have initiated the improvement of the system of preferential lending, which provides for lending by banks starting from 2021 at market rates with elements of the practice of compensating part of interest expenses. Steps are being taken to activate the securities market by issuing bonds of the Central Bank and the Ministry of Finance.
In addition, some structural problems persist in the economy. For example, in the field of production infrastructure, it is necessary to ensure uninterrupted supply of gas and electricity to producers, develop transport infrastructure and logistics. There is a need to improve the competitive environment, fight against monopolies, further liberalization of foreign trade, etc.
In recent years, in the context of growing demand and development of foreign trade turnover, we have seen an increase in imports, which on the one hand creates pressure on the exchange rate of soum due to increased demand for currency, and on the other hand contributes to the adjustment of prices at the regional level with the prices of the main trading partners. On the one hand, it is good to import when it is cheaper than producing the corresponding goods and services within the country, but on the other hand, the increase in imports can create pressure on the growth of the current account deficit. Therefore, we must step up our efforts to increase export opportunities, in particular to eliminate problems and use the existing production potential to expand and create new types of competitive products that can take a strong position in foreign markets.
Subsequent liberalization of regulated prices will also create some pressure on prices, so it is important to complete the adjustment of regulated prices with market prices this year as soon as possible in order to prevent them from becoming a chronic inflationary factor for subsequent years.
In the context of the above, ensuring the coherence of macroeconomic policy measures, including fiscal and monetary policies, is the most important factor in achieving macroeconomic stability in general.
– In recent years, public confidence in banking cards and other non-cash payment tools has increased as in safe and convenient means of payment. What measures for further development of payment systems were implemented by the Central Bank in the past 2019, and what will be done in 2020?