Central Bank Rate Hike Likely to Deter Investors

The National Bank of Tajikistan has raised its headline lending rate in a bid to combat inflation, but NBCentralAsia analysts say the measure is likely to lead to a downturn in economic investment.



The exchange rate of the Tajik national currency is falling precipitously. At the beginning of 2006, the rate was 3.22 somoni to the US dollar, but August this had fallen to 3.42.



National Bank figures as of August 1 show that the annual inflation rate had reached 7.5 per cent. NBCA analysts predict that inflation will continue to rise, and will exceed the nine per cent figure on which the government has based its budget calculations.



To curb inflation, the National Bank has increased the refinancing rate – at which it lends to commercial banks - from 8.5 to nine per cent, making it significantly harder for them to obtain loans from the central bank.



NBCentralAsia analysts say inflation should not be seen as an absolute evil: it does not always have a negative impact on an economy, and under certain conditions it can even promote growth.



They warn that running a tighter monetary policy – of which the increased lending rate is a prime example - could have negative effects on the financial and banking sectors.



Assets held by banks, credit unions and other non-bank financial institutions grew from 22.2 to 26.4 per cent of gross domestic product in the first half of this year. This has stimulated a rise in domestic internal investment – but that will now suffer a downturn because of the latest anti-inflationary measures, NBCentralAsia’s analysts suggest. As credits and loans become more expensive, commercial banks will pass on the cost to their customers, who include domestic investors.



Falling investment will in turn make a dent in the government’s budget revenues. As loan-funded investment declines, production will slow and the government will see a shortfall in taxes and other revenues.



The rise in the refinancing rate could in addition reduce demand for the national currency. If the somoni starts trading at a higher exchange rate, it will become less desirable and money will instead be held in foreign currencies.



Past practice demonstrates that such foreign currency holdings will not be invested in the economy until the financial climate stabilises, NBCentralAsia analysts argue. Once again, this means less money invested in production, less taxes being paid, and less money for the government budget.



(News Briefing Central Asia draws comment and analysis from a broad range of political observers across the region.)