Monetary and credit policy of National Bank of Kazakhstan

 

2.1 Status of the National Bank

 

Legal status and functions of the Bank are determined by the laws «On National Bank of the Republic of Kazakhstan» and «On banks in the Republic of Kazakhstan.» In accordance with the law «On National Bank of the Republic of Kazakhstan noted the independence of the National Bank of administrative and executive authorities, accountable only to its Supreme Council and President of the Republic of Kazakhstan, which also indicated that the National Bank of Kazakhstan is the central bank of Kazakhstan and is the top level Banking System of the Republic of Kazakhstan»

The main purpose of the National Bank is price stability in Kazakhstan. To realize the main purpose of the National Bank shall have the following tasks:

· Design and conduct of monetary policy of the state

· Operation of payment systems

· Implementation of currency regulation and currency control

· Promoting financial system stability.

National Bank in accordance with its objectives the following main functions:

· Implementation of the state of monetary policy in the Republic of Kazakhstan;

· Implementation issue banknotes and coins on the territory of the Republic of Kazakhstan;

· To function as a bank of banks;

· To function as a bank, financial advisor, agent of the Government of the Republic of Kazakhstan and other services to government and other public bodies in agreement with them;

· The orderly functioning of payment systems;

National Bank of Kazakhstan is the only authority in determining and implementing the state monetary policy of the country.

Monetary policy today is fully committed to achieving the primary objective – price stability, which ultimately helps to build confidence in the national currency, providing financial stability and, respectively – economic growth.

In accordance with the legislation of the National Bank is independent in choosing targets and instruments of monetary policy. At the same time, this independence does not mean that monetary policy is conducted in an isolated environment. The new software takes into account the economic policy of the Government, which ensures integrity and consistency of macroeconomic policies.

To achieve the goal, the National Bank uses the funds, that is, the tools of monetary policy include setting:

· Refinancing rate;

· Level of interest rates on major operations of monetary policy;

· Minimum reserve requirements;

· In exceptional cases, direct quantitative restrictions on the level and amount of certain types of transactions.

In order to implement monetary policy, the National Bank of Kazakhstan performs the following operations:

1) Granting of loans;

2) Acceptance of deposits;

3) Foreign exchange intervention;

4) Issue of short-term notes of National Bank of Kazakhstan;

5) Purchase and sale of government and other securities, including the right of redemption;

6) Rediscount of commercial bills and other transactions by the decision of the Board.

To reduce the rate of inflation National Bank this year, as before, continues to conduct «a tight monetary policy.» It includes the following groups of measures that reduce the inflationary pressure:

– Measures to increase rates of the National Bank (a policy of «dear money»);

– Measures aimed at removing the excess liquidity of banks;

– Measures for exchange rate policy.

Use of the National Bank of different instruments feeling the one, but many have no idea about the initial positions of banks at higher rates on loans, with an increase or decrease in rates, etc.

Almost all of changes in interest rate policy in the banking system are based on the introduction of the National Bank of Kazakhstan of an instrument of monetary policy, which is developed by 3 years in advance and subject to annual review. So do not be arhiekonomistom to possess a small set of knowledge for its own analysis, but only regularly visit the site of the National Bank www.nationalbank.kz and reading special literature, which has now been published in leading national and regional newspapers as well («Kazakhstan Pravda, northern Kazakhstan»,» Egemen Kazakhstan»,» Soltustіk Қazaқstan and others). On television broadcast transmission Territory of tenge»,» Business News»,» Economy and Business», where you can see and hear the opinions, forecasts of leading financiers, analysts and bankers.

Of course, at this moment there is a certain panic in general. This echoes the U.S. mortgage crisis, fell deeply in our tightening of the mortgage (and other) loans and some suspension of the construction. This worldwide increase in grain prices due to the use of it to get hyped befouled (bioethanol, this produced at our complex, «Biochim») as an alternative to petroleum products, and also because of crop failures in many countries. This chaotic nature of the dollar, especially manifested in the holidays from 29 to 31 August, when the rate exceeds the limit in our area up to 145 tenge / $, and in Almaty, Karaganda and 160 tenge / $.

 

 

Graph1. The dynamics of the nominal exchange rate of KZT to USD (source National Bank of RK)

But if we analyze the facts of the past, then surely, and with the dollar, many «burned» by buying them at 130–140 m., again based on rumors that the course will continue to grow. However, today they can be purchased for 122.5 tenge. Therefore, we can not succumb to panic rumors, talk. This is also fraught with consequences, unnecessary spending and waste.

Self-respecting man should be more interested in economic terms, be able to analyze the situation, to build any predictions, comparing and aligning them with

The views and statements of leading analysts, respected financiers and bankers, and thus increase the economic literacy and culture in general.

 

2.2 Credit system and the monetary policy of the state

 

The fundamental objective of monetary policy is to help the economy to reach a total production level, characterized by full employment and price stability. Monetary policy is a change in money supply in order to stabilize aggregate output (steady growth), employment and price levels.

Unregulated activities of commercial banks may lead to cyclical fluctuations in business activity, and then eat in times of inflation to their advantage to increase the money supply, and during the Depression – to reduce, thus exacerbating the crisis. Therefore, a balanced state policy of regulating the currency. This role is the main coordinating and regulatory body of the whole monetary system of the country carries out the central (issuing) bank.

The main task of monetary policy the central bank – to maintain a stable purchasing power of the national currency and ensuring the flexible system of payments and settlements. At the same time the central bank's policy is one of the most important parts of regulating the economy of the state. In the second half of XX century has developed a «magic quadrangle» objectives of economic regulation: ensuring stable economic growth, a stable national currency, employment and balance of payments. In recent years, added to them the task of achieving ecological balance.

Initially, the main function of central banks was the implementation of emission of cash, at the present time, this feature gradually moved to the background, but we should not forget that cash are still the foundation on which rests the entire money supply, therefore the activity of the central bank to issue cash Money should not be less than prudent and thoughtful than any other.

With the help of monetary government seeks to alleviate the economic crisis, to keep inflation in order to maintain the conditions the state is using credit to stimulate investment in various sectors of the economy.

It should be noted that monetary policy is implemented as an indirect (economic) and direct (administrative) methods of exposure. The difference between them lies in the fact that the central bank, or has an indirect effect through the liquidity of credit institutions, or sets limits on the quantity and quality of banks.

At the heart of monetary policy is monetary theory, which studies the effects of money on state of the economy as a whole.

Among economists there is debate caused by two different approaches: the Keynesian theory and monetarism. So what are these differences?

Keynesian theory of money.

John Maynard Keynes and his followers believed that the market has an internal structure of the economy, «vices» that she is unable to regulate itself. This is particularly reflected in unemployment, inflation, frequent economic crises. Keynesians have concluded that the state should actively intervene in the economy to prevent crises and promote stability, should be a tight fiscal and monetary policy. They recognized that the change in money supply affect nominal GNP, and the basis for monetary policy must be put to interest rate (since, by changing interest rates, we change the investment activity, and through the multiplier effect – the nominal GNP).

Keynesian fundamental equation is:

 

GDP = C + I + G + NX

 

(C – consumer spending, I – investment, G – government spending on goods and services, NX – net exports).

Keynesians believe that fiscal, or budget, the policy is more effective in times of economic crisis than monetary policy.

According to Keynesians, the velocity of money is variable and unpredictable. The Keynesian view is that the money is needed not only for transactions, but also for possession of an asset. «They move in» just money «for transactions, money – assets are not involved in trafficking. Therefore, the greater the relative importance of the money used for transactions, the higher the velocity of circulation.

Expansion of money supply will lower interest rates. As soon as is now becoming less expensive to have money as an asset, the population will keep more cash assets with a zero velocity of circulation. Therefore, the overall velocity of circulation declines.

Thus, the velocity of money varies in direct proportion to the interest rate and inversely proportional to the money supply. If so, then a stable relationship between money and net national product is missing, since the velocity of circulation changes with the money.

Above it was noted that for fighting inflation to limit the money supply.

Graph 2

 

 

 

 

 

 

 

 

 

Graph2. Actual and forecast inflation in 2012 (source www.zakon.kz)

In fact, everything depends on the situation in the market. If in the inelasticity of supply of goods to increase the money supply, then it will only lead to higher prices – inflation.

If the market supply is elastic (a lot of products – not enough money), then with the increase in money supply will increase production, hence, inflation will subside.

Keynesians believe that the main problem in the state regulation is hastening the effective demand, rather than fighting inflation, which should be adjustable in nature.

Monetarist approach.

At 70 years, has the crisis of Keynesianism. On the ideas of the school taking over the ideas of monetarism, which is primarily a theorist Milton Friedman, the renowned American economist.

Monetarists believe that the market economy is an internally stable system. All adverse moments – a consequence of unreasonable government interference, this must be minimized.

Monetarism's emphasis on money. Representatives of this school believe that the relationship between GDP and money supply stronger than between investment and GNP. Such a conclusion is drawn from the equation I. Fisher:

 

MhY PhG = (M – money supply, Y – the velocity of circulation, P – price index, G – number of products)

 

After all, if you count that GNP = PhG, and Y is stable (or its variations are predictable), the GNP depends on the mass of money in circulation.

In conclusion, we note that the modern model of monetary policy based on Keynesian and monetarist ideas.

Formation in our country market relations objectively determines the acquisition of whole range of mechanisms of economic regulation. Sometimes prevailing notions of spontaneity and economic processes in market economy are not unfounded. Regulated, and very tough, almost all the major relationships that determine the effectiveness and viability of the economy as a whole. Among them, its importance highlighted and monetary instruments.

 

 

 

 

 

Chapter 3. Analysis of monetary policy National Bank of Kazakhstan

 

3.1 The monetary policy of the National Bank in this year

 

Scenarios for the economy of the Republic of Kazakhstan for 2010

The slow recovery of world economy, moderate world prices of commodity markets, including for basic commodities of Kazakhstan's exports, the continuing uncertainty in global financial markets will be key factors that will determine the economic trends of the Republic of Kazakhstan.

In 2010, the expected decline in foreign direct investment in Kazakhstan, mainly due to reduced funding of the North-Caspian project, which peaked in 2009.

Despite the fact that access to domestic banks in the world market with long term financial instruments will be limited, not eliminated the resumption of foreign borrowing by some banks, as well as to continue funding begun in 2007–2009 projects in the real sector.

A possible outflow of resources in 2010, is associated with an increase in revenue to the National Fund of the Republic of Kazakhstan, will be determined by the level of world oil prices and a mechanism for the accumulation and use of the National Fund of the Republic of Kazakhstan.

Received the National Bank of Kazakhstan modeling and prediction in this scenario show deterioration in the balance of payments, reduced credit and money supply. This is due to the influence of objective factors, such as a decline in business activity, restriction of aggregate demand.

The current account deficit of balance of payments in 2010 could amount to about 8,5% of GDP, the total balance of payments deficit – more than 4% of GDP.

Keeping inflation within a given corridor while reducing the economy's demand for money will be provided by contraction of the monetary base by 2,3%, a decrease in the money supply by 4,7%, loans to the economy – at 1.4% of deposits in the banking system – on 5,4%. Monetization with virtually no change, reaching 45.9% at the end of 2010 (Annex 1).

According to the National Bank of Kazakhstan, the likelihood of this scenario is quite low.

In the case of the second scenario, higher oil prices will have a positive impact on external flows of Kazakhstan; as a result of the current account deficit in 2010 will be approximately 4% of GDP, the deficit of the general balance of payments – about 2% of GDP.

Demand for money in this scenario will remain limited. Expansion of the monetary base grew by 10,0%, money supply increased by 9.6%, deposits in the banking system – by 9,2%, the volume of loans to the economy – by 5.9%. The level of monetization to grow to 46.5% (Annex 1).

Development of the situation in this scenario would allow the National Bank of Kazakhstan and the Government of the Republic of Kazakhstan in 2010 to stimulate economic activity that will provide a moderate rate of economic growth.

In accordance with the third scenario, economic growth in 2010 expected at a higher level than in previous scenarios.

More favorable situation on world markets have a positive impact on Kazakhstan's exporters. Expected a slight current account deficit at not more than 1% of GDP, the overall balance of payments was a positive sign at a rate of about 1% of GDP.

National Bank of Kazakhstan considers the most likely implementation of the second and third scenarios of economic development of Kazakhstan for 2010, based on that developed measures of monetary policy in 2010.

Monetary policy of the Republic of Kazakhstan for 2010

The main goal of monetary policy is price stability. Measures of the National Bank of Kazakhstan to achieve this goal will help sustain economic growth, capacity development of the deposit market, as well as the restoration of credit activity of the banking sector.

National Bank of Kazakhstan will continue to conduct exchange rate policy aimed at ensuring a balance between internal and external competitiveness of the Kazakh economy. Exchange rate policy will be conducted in order to avoid significant fluctuations in the real currency appreciation, which may adversely affect the competitiveness of domestic production in a constantly changing world situation.

In order to create conditions to increase the flexibility of exchange rate fluctuation corridor tenge, February 5, 2010 will be expanded: $ 150 / m. (+) 10% or 15 tenge (–) 15%, or 22.5 tenge. The prevailing trend in the tenge will be determined by the situation in global financial and commodity markets and balance of payments.

Interest rate policy of the National Bank of Kazakhstan will be aimed at retaining market rates on short-term money market instruments within the corridor rates of the National Bank of Kazakhstan. Activities will promote reduction in the volatility of market interest rates and increasing the stability of money market and promote the effective management of liquidity. The official refinancing rate, which is the upper limit of the corridor will be determined based on the situation in the money market and inflation. Interest rate on bank deposits, hosted by the National Bank of Kazakhstan, will be defined as lower limits of short-term money market rates. In this case, it will be set at the lowest possible level in order to discourage banks in the accumulation of free resources on deposit at National Bank of Kazakhstan.

To withdraw excess liquidity of the National Bank of Kazakhstan will continue to issue short-term notes. Their release is also aimed at maintaining a secondary market for government securities, the formation of the yield curve on financial instruments for up to 1 year.

With the expected modest inflationary pressures from the fundamental factors of the National Bank of Kazakhstan will take measures to ensure financial stability. Continue to monitor the level of bank liquidity and related risks, including currency. If necessary, the National Bank of Kazakhstan will provide refinancing loans to maintain the current liquidity of banks. Terms of these transactions will be short.

National Bank of Kazakhstan will contribute to further reorient banks on domestic sources in the formation of base funding. To this end, the National Bank of Kazakhstan will increase in 2010, the capitalization of JSC «Kazakhstan Deposit Insurance Fund» at 11 billion tenge.

Also to stabilize the resource base of banks will consider the transfer of temporarily free funds of non-bank financial institutions that are placed in the National Bank of Kazakhstan, on deposits of domestic banks.

Implementation of these measures of monetary policy will allow the National Bank of Kazakhstan to achieve the established benchmarks for inflation. This will help to ease the economy on the path of sustainable and quality growth.

In the current year, monetary policy is conducted in accordance with the main directions of monetary policy in 2010. And our main goal now is to keep annual inflation within 6–8% at the end of 2010.

Moreover, despite the fact that the official refinancing rate and minimum reserve requirements are currently at the minimum level, the volume produced short-term notes and deposits attracted from banks rather high. So, for January – September 2010 compared with the corresponding period last year, the short-term notes issued by the increased 2,5 times – up to 2.5 trillion tenge. This represented 93.2% of the total demand of market participants on these types of government securities. The volume of notes in circulation in September 2010 compared to December last year grew by 2,1 times – up to 1 014.4 billion tenge. In January – September 2010 National Bank issued short-term notes with maturity of 3 and 6 months

From banks in January – September 2010 was drawn in the amount of deposits 13.6 trillion tenge, which is 25,4% more than in January – September 2009. Balances on bank deposits in the National Bank decreased by 24,8% compared with December 2009 to 367.5 billion tenge at the end of September 2010.

 

3.2 Forecast of socio-economic development of Kazakhstan for 2010–2014

 

External conditions of development

Following the global recession in 2009 with the 2010 forecasts of international organizations are expected gradual increases in economic activity. However, since the global recession is estimated IMF deep enough, rise, respectively, will be slow

Active anti-crisis measures in countries in conjunction with the restoration of confidence in the financial system can help accelerate recovery.

In the medium term will correction of global financial markets caused by the global financial crisis, the redistribution of global capital in order to reduce risks.

Global economic recovery and higher rates of growth in the medium term will increase the demand and rising prices for resources.

Given the prospects for the world economy in the medium term, a sharp rise in prices on world commodity markets is expected.

International organizations predicted a gradual increase in world prices for oil and metals.

Since 2010 the expected increase in oil consumption in the world at 1,5–3% annually until 2014.

According to the forecasts of international organizations the world oil price in 2010 will be in the range of 70–80 dollars per barrel.

According to forecasts ABARE (Bureau of Economic Research in Agriculture, Mining industry and Energy of the Government of Australia) in 2010, expects a gradual increase in global consumption of metals by an average of 4–6% per year until 2014, which will contribute to higher prices for metals.

In the medium term, a time of global financial markets will remain the problem of lack of liquidity.