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Explore the effective monetary policy and strong banking system in Uzbekistan that contribute to macroeconomic stability. Learn about the past policies, new objectives, and plans for the future.
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The Central Bank of Uzbekistan Effective Monetary Policy and Strong Banking System: Key Factors in Ensuring Macroeconomic Stability November 2018
Outline • Monetary policy in Uzbekistan in the past • New era of monetary policy • New objectives • Initial steps • Medium and long-term plans • Developing banking system • Developing payment system
I. Monetary policy in the past • Monetary policy was in passive mode • Application of policy tools was limited • The exchange rate was regulated administratively while the Government and the CBU were tasked with building up international reserves • The official exchange rate didn’t reflect the real situation in the FX market; black market proliferated • Effective conduct of monetary policy was impeded
II. New era of monetary policy • FX liberalization • New objectives of the CBU: • Price stability • Banking system stability and development • Payment system stability and development • Introducing principles and elements of inflation targeting in the medium term
UZS/USD exchange rate before FX liberalizationJan 1, 2013 – Sept 4, 2017
II. New era of monetary policy (cont.) • Roadmap on Transition to Inflation Targeting • Developing and introducing new monetary policy tools • Strengthening analytical and forecasting capacity of the CBU • Developing and enhancing communication policy • Improving monetary and fiscal policies coordination • Active cooperation with IFIs and other CBs • Revision of the CBU’s activity and structure • New departments were established - BOP and FX Regulation - Research and Statistics - Monetary Operations - Communication and International Relations • Operational independence of the CBU
II. New era of monetary policy (cont.) What has been done so far?
Priorities of monetary policy In the medium term monetary policy will be focused on • curbing inflation by minimizing monetary factors (without explicit target); • laying groundwork for inflation targeting by concentrating all efforts on introducing essential building blocks. But effectiveness of monetary policy to large extent will depend on structural reforms • SOEs reform • Restructuring state-owned banks • Tax reform • Liberalizing further foreign trade • Creating favorable business climate • Stimulating competition in the markets • Increasing productivity of production factors
Monetary conditions are expected to be tight in the medium term due to price and non-price conditions • Price conditions – tight monetary policy • Non-price conditions – strengthening prudential regulation requirements More consideration will be given to improving loan portfolio in line with matching maturities of assets and liabilities • Inflation will be driven by liberalization of regulated prices • Monetary factors of inflation will be kept in check
Inflation projectionin percent, year-on-year change Baseline Alternative Actual
III. Developing banking system Dominance of state banks in the banking system - impedes development of banking system; - stifles competition in the banking sector; - segments credit market; - weakens monetary policy transmission mechanism; - makes large banks inefficient in carrying out their traditional banking functions.
Dominance of state banks in the banking system The Government and the CBU have a good understanding of these problems. Solutions: • move concessional loans to more market-based conditions by introducing highly selective budget-funded compensation of interest payments instead of existing practice when banks just lend out government resources; • gradually reduce state’s share in the banking sector. Setting up a separate development bank?
Development of financial markets will be a priority • SOEs reform – newly privatized companies will need alternative sources of funding; • Besides banks will also need a new market where they could attract additional resources by issuing different debt instruments; • Financial market development requires a benchmark instrument such as government bonds; • All in all, we consider banking system and financial markets development issue as mutually complementary process.
IV. Developing payment system • Creation of a full-fledged data processing center (main and backup data centers) • Developing National Interbank Processing Center (HUMO), a national payment system for bank cards • Updating payment systems-related regulatory environment (Law “On Payments and Payment Systems”) • Development strategy of the CBU’s Interbank Payment System (real time payments, 24/7 instant payments) • Expanding active users base of remote banking and other related services for individuals and legal entities • Implementation of international best practice in digital banking • Ensuring stability and security of digital technologies in the financial sector
Developing payment system (cont.) • Development of remote banking services • With the active development of modern payment technologies and remote services, remote non-cash payments (Internet banking, mobile banking, SMS banking) continue to grow in national currency; • It is planned that by 2021, in all banks of the country having a fundamental membership in international payment systems, the two-factor identification service will be implemented via the3D-Secure protocol for secure online payments; • This year, banks have introduced a number of remote maintenance tools - online conversion, online deposits, P2P transfers that are becoming popular with the public. The demand for these products is caused, first of all, by the convenience of their use and financial affordability (minor commissions or free of charge); • Development of infrastructure for the use of contactless technologies (NFC) and mobile payments (QR-code), as well as the electronic money market.
