Tight Monetary Policy Seen as Drag on Growth
Monday, 21 May, 2007
Tight Monetary Policy Seen as Drag on Growth
Monday, 21 May, 2007
On May 14, Nuriddin Kayumov, director of the Tajik Institute for Economics, told the Aziya Plus news agency that the National Bank’s monetary policy is stopping industries from reaching their potential.
“Until [monetary policy] is adjusted to meet the requirements of accelerating growth, there can be no talk of the economy running at its full potential,” he said.
The central bank has run a tight monetary policy for the last five years, using lending rates to control the money supply and control inflation. As a spokesman for the National Bank told NBCentralAsia, the policy is seeks to “curb high inflation rates and attain financial stability”.
In pursuit of this strategy, the central bank increased its refinancing rates – the rate at which it lends to the commercial banks – on four occasions.
Such interest rate hikes are an attempt to curb inflation by making it more expensive for commercial banks to borrow from the central bank; they will pass the higher cost of borrowing onto their customers, who in turn will then be discouraged from taking out loans. Overall, the total amount of money in circulation should fall.
As a result of this policy, loans issued by Tajik banks are some of the most expensive in the Commonwealth of Independent States.
At the same time, this measure also reduces domestic investment.
Economic experts polled by NBCentralAsia say the current approach to monetary policy is not suitable for a fast-growing economy like Tajikistan’s, which is seeing annual rises in gross domestic product of 7 to 7.5 per cent, far outstripping population growth of just 2.2 per cent annually.
The analysts suggest that new measures should be introduced to stimulate domestic production.
An independent economist who asked to remain anonymous told NBCentralAsia that if the National Bank continues to artificially restrain inflation with the same rigour, the amount and quality of goods Tajikistan is able to import will fall drastically.
He believes Tajikistan needs a “robust economy” with diversified and growing production.
Rahmatullo Mirboboev, head of finance and economics at the Tajik State University, agrees, saying that current monetary policy should be changed radically to reduce lending rates and thereby allow businesses to access the money they need.
According to Mirboboev, lowering interest rates will not exacerbate inflation, contrary to what officials at the central bank believe.
“Loans for [increasing] production capacity will be quickly repaid,” he said. “This will resolve a whole set of issues such as boosting production, providing for domestic consumers, creating new jobs and increasing budget revenue.”
Another well-known economist, Vahob Vahidov, recommends the creation of specialist banks for each sector, where businessmen could get loans on soft terms. He believes this would speed up industrial development.
“At the moment, the local banks are offering loans at 24 to 30 per cent a year, which is unprofitable for those working, for instance, in the agricultural sector,” he said.
(News Briefing Central Asia draws comment and analysis from a broad range of political observers across the region.)
Interest Rates Seen as Too Blunt a Tool
06-Mar-07
The Tajik government’s focus on monetary instruments to curb inflation will not produce the desired corrections to the economy unless they are accompanied by efforts to strengthen the real sector and place the national currency on a firmer footing, according to NBCentralAsia’s economic experts.
Effective from February 23, the National Bank of Tajikistan increased its refinancing rate – the headline rate at which it lends to commercial banks - from 12 to 13 per cent. It was the fourth such increase in just six months.
The interest rate hikes are an attempt to curb inflation by making it more expensive for commercial banks to borrow from the central bank; they will pass the higher cost of borrowing onto their customers, and the idea is that the latter are then discouraged from taking out loans. Overall, the total amount of money in circulation should fall.
These measures are the central bank’s response to concerns over inflation, which in 2006 hit a year-on-year rate of 12.5 per cent instead of the seven per cent that had initially been predicted.
NBCentralAsia experts note that the authorities are trying to tackle inflation through ever tighter monetary policies. But they warn that one side-effect of hiking up interest rates will be to cut into demand for the national currency, the somoni, whose exchange rate is not buoyed up by a strong and vibrant economy. If the somoni loses significant value against the US dollar, it will quickly become less desirable and people will opt to hold their money in foreign currencies instead.
NBCentralAsia economic expert Hojimuhammad Umarov warns that the somoni’s value will plummet in the next six months, to the point where the state itself becomes insolvent. The two causes are, he says, the underlying slump in industrial production, curbed with what he sees as futile attempts to curb inflation.
“The somoni could fall dramatically over the course of several hours, with grave implications for Tajikistan’s economy. To prevent that from happening, manufacturing should grow, giving the currency real backing,” he said.
Other experts agree there is a risk that the somoni will take a nose-dive, and point to yet another contributory factor – the imminent deadline for Tajikistan to start repaying the capital on its sovereign debt, due in late 2008 and early 2009.
One NBCentralAsia economist says that while Tajikistan continues to take out more and more loans, it risks defaulting on its debt in 2009.
However, not all the experts are so pessimistic. Munim Hasanov, head of the department for economic and financial management at the Institute for the Advanced Training of Tajik State Officials is more sanguine about the debt situation, saying, “The peak time for paying off debts comes in 2008 and 2009 and it will mean difficult times for the country.
“Yes, the republic will have to repay large sums of debt, but this won’t lead to the collapse of its economy. The country will make it through.”
(News Briefing Central Asia draws comment and analysis from a broad range of political observers across the region.)
Central Bank Rate Hike Likely to Deter Investors
06-Sep-06
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.)
