Central Bank of Uzbekistan

[Akhee-Abdullah]

Just Wondering should Uzbek Central Bank be more independent from the Government and Political pressures ???
Opinions and arguments for and against are needed and encouraged,
Cheers,:)

[Pakhtakor]

As you know a government has 3 ways of financing its deficit; foreign borrowing, selling gov. bonds and printing money. Our government has limited access to foreign loans due to the country's limited and low volumes of export earnings, and also Uzbek government can't sell gov. bonds to the public or banks as Fed can do. So the only way of financing its deficit is printing money, which makes impossible for us to make SB independent from government.

[OPTIMIST ']

Well, u caN ONLY MAKE CB INDEPENDENT IN WORDS, OR ON PAPER; unless we float our forex rate, CB will have no role in monetary policy, so its better to have it as it is now,

Fiscal policy is what matters most under current circumstances,

OPTIMIST ;p

[OPTIMIST ']

well,LUCKY, i have to mention, seniorage(income from printing money), can not be used to finance any debt in the long term, as the consequence is an increase in iflation,

if it was the case, there would be no problems,
printing money is an indirect tax on the money people hold now,

OPTIMIST ;p

[Akhee-Abdullah]

Optimist, well what you said make sense, but look at this.
Central Bank Independence by Owen F. Humpage [ Review of the article that I made]
* Even though Central Bank’s independence is the key solution to epidemic fiat money problem, inflation, many Americans consider the Fed’s independence undemocratic.
. The only reason for people holding fiat money is the trust and belief that the Federal Government will not depreciate its purchasing power.
· In spite of that fact long-term value of money is uncertain. Because, there is an incentive for the government to inflate the money: Government can generate additional revenues, and plus, a more than expected inflation can increase output and employment in the short run.
· Even though there is some arguments against independent central bank, this system has proven that none can take the responsibility of maintaining price stability but the Central Bank.
* Because fiat money has some advantages over other monies, it is accepted all over the country.
· People take the benefits of money for granted, but the fiat money’s acceptability ultimately depends on its stability of purchasing power. Otherwise, the fiat money can’t serve the intended purpose.
· Ultimately, the faith itself rests on the belief that the Government will not create excessive money.
* There is an incentive for the government to finance its expenses by printing money, especially during the times of economic crisis.
· These incentives not only exist during the difficulties but also during the economically well-off times.
· Inflation generated by printing money is another form of taxation which government imposes on people.
· Government may generate the same type of benefit during unanticipated inflation. Usually, the holders of government bonds lose big times.
* Inflation not only transfers the purchasing power from the private individuals to the government but also causes costs associated with misallocated resources.
· Relative price distortions and other costs associated with the attempt to find more stable assets to transfer for money on the part of individuals pose a very large cost.
· The only way for the government to preserve the purchasing power of fiat money over a period of time is maintaining price stability, the sole objective of monetary policy, and holding Central Bank responsible for the fulfillment of the objectives of monetary policy.
· Despite the attractiveness of this approach not many politicians like the idea of independent Central Bank. However, there is a trend among the politicians who are willing to give Central Bank more freedom.
* The independence of Central Banks depends on many legal, institutional conditions.
· The inflation, interest rate and overall economic health of the economy correlate with degree of Central Bank’s independence and its institutional and political structure.
· Even though, economists claim Central Bank’s actions to be independent, they are not really independent.
* In this, “Who rips who?!” game, both private and public sectors compete against each other to generate benefits or avoid the costs of inflation.
· A stable price is the key to a problem, but as soon as the stable prices are established there is an incentive for the government to inflate.
· To solve this problem and reconcile both sides, the economy definitely needs an independent Central Bank.

Any country that wishes to have a steady economic growth and stable prices should definitely have an independent Central Bank. Since only Central Bank can ensure stable prices and reliable fiat money, the Central Bank should be independent.

Cheers, :)

[OPTIMIST ']

Well, I think we have to clarify first, what we really mean by independent bank??? Please, do post any arguements about this first, then we ll carry on,

Also, what are the arguements against Central Bank and its independence??

your notes are really good summary of why we need Central Bank!!! But it takes a bit narrower look to the role of government and undermines it by saying the government has the incentive to inflate blah blah, well, if the government really wants to retain its credibility, then everything must be OK, that's true for developed systems, where people are aware of what's going on aroun the corner.

yeah, sometimes people do get into trap according to Economic Theory, ex: expectations adjusted by government announcement, promises and projections of future inflation rates.

<The inflation, interest rate and overall economic health of the economy correlate with degree of Central Bank’s independence and its institutional and political structure. > that's the main point of your notes.

OPTIMIST ;p

[Akhee-Abdullah]

Hello there,
what I was trying to say was, if we let the politicians messup with Central Bank ie. Government's active involvement in the Central Bank's policy, we gonna have huge inflations, because it is for the government's best interest to print out money and meet the budget deficit or what not in that way. Have a look at this article..

Keep Political Hands of the Fed by Robert J. Barro.(review of the article that I made)
* Treasury Secretary Nicholas Brady believes that it would be useful to make Fed less politically independent; otherwise, he thinks the Fed is not increasing the money supply good enough to spur the economy.
o Because the Fed’s first priority is to ensure price stability through a monetary policy, the only way the Fed can avoid high inflation and interest rate is to have more independence in its action.
* With the help of monetary policy the U.S economy has been doing well in terms of real GDP growth, inflation and interest rate results despite the Gulf War.
· The target of Mr. Brady’s attack, M2 has been falling because of sharp decrease in time deposits held at depository institutions.
· The nominal quantity of M2 had to fall if the Federal Reserve wanted to maintain price stability.
· The only way to gain higher level of growth in M2 was to increase the monetary base at an even faster rate. However, there is no guarantee that an increase in M2 in this situation will help to spur the economy.
* It would have been appropriate for the Federal Reserve to carry out a more aggressive monetary policy against the decline in M2 if it were more politically dependent on the government.
· But the studies show that average inflation rate was higher over a long period of time in the countries where Central Banks were less independent.
· This happens when less independent central bank tries to inflate the economy against recession under strong political pressures.
· An increase in the short-term output is achieved only by being able, on the part of central bank, to set an inflation rate higher than expected by the public.
· Despite a little growth in the short-term, economies with less independent central banks, in the long run tend to have higher levels of average inflation rate and a lower level of growth in real output.
* The U.S is lucky enough to have more independent central bank.
· It would have been a great idea to have more economists in Treasury instead of lawyers and bakers who are less qualified and trained in the field of economics.
· An active involvement of many economists, many of whom were graduates from the institutions like Harvard, University of Chicago, in different economies around the world showed a good result in the maintenance of price stability and steady economic growth.

In my opinion, the Fed reserve of the US would make much better a job if it were even more independent. As Milton Friedman suggested, a steady annual growth of M2 would have been a pretty good way of maintaining price stability and overall real growth in output.

Cheers, :)

[JUST']

hi ppl

well, let's summarize first

government has an incentive to be reelected.
therefore it cares about Short term, and not the long term.

so, if there is unemployment in the economy, government has an incentive to increase money supply - to get to full employment; though unemployment is reduced ppl suffer from inflation, those who had loans, government bonds are fooled, but overall new employed ppl are satisfied
plus government gains from indirect taxation

if CB were independent (from government, from political purposes), ppl would believe if:

* CB's actions are transparent
* CB is accountable for its actions
* CB has a reputation from the past (Bundes Bank)

all these contribute to its credibility

in case with Uzbekistan, nobody would trust to CB even if it was independent, CB could gain credibility after some period, after market tests CB

besides we have lots of structural and institutional problems, making our CB independent is not a priority, nor it is possible at the moment

regards

JUST

[CE]

Pakhtakor (May 01, 2001 21:06):
As you know a government has 3 ways of financing its deficit; foreign borrowing, selling gov. bonds and printing money. Our government has limited access to foreign loans due to the country's limited and low volumes of export earnings, and also Uzbek government can't sell gov. bonds to the public or banks as Fed can do. So the only way of financing its deficit is printing money, which makes impossible for us to make SB independent from government.
Central Bank of Uzb (CBU) is an independent body of state only accountable to Oliy Majlis. It performs all the usual functions of central banks, such as supervising the banking system, controlling the liquidity. (The question is not whether it performs or not, but how it performs) CBU has been selling government bills (SSB-short term State bills) to 14 authorised commercial banks since 1995-96. Even in secondary market SSBs are sold only to banks, individuals cannot buy them (it is not the case in developed countries). If it was financing the deficit by printing notes, inflation in Uzb would be as high as 1993-94. Current low liquidity in money market suggests that there is not enough cash money in circullation, and, partly, due to less liquid resources held by banks.
CBU is not independent in the sense that it does not follow independent refinancing policies, and acts as an agent of MinFin when issuing SSBs. MinFin decides the amount of SSBs to be issued on basis of state budget deficit. Whereas, in developed countries, the amount of T-bills (also state bills and government bonds) also reflects the expected levels of liquidity. SSBs of CBU does not bear a coupon i.e. it does not pay interest on them (all CB of developed countries do pay) however income SSBs can be set against tax base commercial banks.

[CE]

JUST' (May 02, 2001 04:43):
if CB were independent (from government, from political purposes), ppl would believe if:

* CB's actions are transparent
* CB is accountable for its actions
* CB has a reputation from the past (Bundes Bank)

all these contribute to its credibility

in case with Uzbekistan, nobody would trust to CB even if it was independent, CB could gain credibility after some period, after market tests CB

besides we have lots of structural and institutional problems, making our CB independent is not a priority, nor it is possible at the moment

regards

JUST
Economy cannot improve without efficient payment system especially in Uzb (no one can argue that). This makes banking system of Uzb (including CB and commercial banks) of a high priority. The main determinant of confidence in bank or banking system generally is the capital adequacy i.e. are banks adequately capitalised. Capital adequacy states each bank must set aside a portion of its capital for instant demands. (compare your access to your current account in UK or USA with access to any bank account in Uzb) Who does trust a bank which demends a bribe to acces your own money?
The economy of Uzb suffers, parly because of difference between cash and non-cash. I consider the reason is inadequately capitalised banks. However, for capital adequacy to work, generally, there must be legal framework for CB supervising (adequacy requirements are established by CB), efficent financial markets (e.g. equity market), competetive environement, moreover, in the case of Uzb: requirements must be equal to all commercial banks, and "healthy" bank management.
As far as I know we have enough written laws which allow CB to function properly. The rest... well you know that.

[JUST']

thanks for the feedback from the uni of central england :) i guess lawyer's feedback

now, lets reformulate the question then:

assuming the CBU is fully independent, and the authorities are not corrupted,given poor payment ability of the CBU and not developed capital market in Uzbekistan what can this independent Central Bank do to improve the situation?

any ideas?

JUST

[sanatullo]

Assalomu aleykum,

Pretty interesting topic. To be honest, I liked it. :)

I agree with some points that were made above. I also think that according to our laws, specifically, "Law on the Central Bank of Uzbekistan", CBU is an independent entity, and its prime objective is the price stability.

Someone mentioned about the transparency, credibility and accountability.

As far as I know CBU is revealing as much information as possible about its policies. But I don't think that everyone in Uzbekistan is capable/able of/to understand those information. Or, In other words, an ordinary person doesn't directly feel the effect of interest rate reduction/increase made by CBU.

The credebility is built for years. Even that Buba (Bundesbank) had to hyperinflate for some years when Germany had to pay for its ransom. Even that Fed had failed several times in the past. But particularly, or only some of well known policymakers like Alan Greenspan could bring reputation for the CBs. Or even let's take that BOE, which is used to be sucks for some period of years. Only recently, they "had to" target so called "inflation" or "price stability."

Monetary policy making's decisions are made by different entities in different countries. As for Uzbekistan, I think, it is made by Monetary and Credit Committee. If I am not wrong, they are accountable for monetary policy making.

Regards,

Sanatullo

[Akhee-Abdullah]

Salam alaikum (to whom it concerns)
I liked your guys' replies and opinions. From what I understood majority of you think that for now it is better for Central Bank to be less independent from the Government, and at the same time it is not possible for Central Bank to carry out effective Monetary Policy. If I remember it correctly in our constitution it, approximately, says, as Sanatullo mentioned, Central Bank's prime objective is the price stability. Based on that I could say: First, the Central Bank is not doing its job, Second, it is possible to carry out an effective monetary policy. In my humble opinion, if I am not mistaken, the Central Bank can effectively apply discount rate policy, that's Central Bank should lower discount rates and reserve requirements. This without doubt will spur the stagnant economy as Keynes has expected, though Keynes did not count on the effectiveness of Monetary Policy. And this is what we need now, that's we gotta spur the stagnant economy at least in the short run. Opinions and argumnets are needed and encouraged,
Cheers, :)

[mustafa]

Lucky, do you mean unlimited subsidies i proklyatie shemi. kto v banke i minfine znauit ob etom.

Besides there is a great need for institutions before that "effective monetary poliucy"

Mustafa

[Akhee-Abdullah]

Nope I do not mean unlimited subsidies, LOL I mean discount rate policy. Of course, there gonna be huge inflations as a result, but the benefits by far outweigh the harms [in my opinion]. And sm-bdy mentioned that "we already have everything legally", all we have to do is to aplly the laws in practice instead of complaining, "We do not have that, we do not have this, blah, blah, blah. Do you guys think smbdy will come from the Moon and set up everything for us??? Rome was not built in a day. My point is we have to do the actions, and wait for the results.
Cheers, :)

[sanatullo]

Lucky,

What do you mean by your changes in the discount policy?

Besides, what do you guyz think about the following my message (http://www.forum.uz/UltraBoard.cgi?action=Read&BID=3&TID=4521&SID=51139). I think, so far, our need from monetary system are those factors.

We need to increase M3/GDP through decreasing inflation. Decrease in inflation would lead to increase in deposits which eventually leads to the increase M3/GDP. From M3/GDP, we obviously know that the country might have the higher investment capital.


We have discussed a lot about the source of inflation. As far as I am following, the summary of our earlier discussions say that the sources of inflation are the fiscal deficit and the changes in terms of trade. Stabilization in these two sources eventually brings the stability in the country.

Regards to all,

Sanatullo

[CE]

JUST' (May 02, 2001 16:09):
thanks for the feedback from the uni of central england :) i guess lawyer's feedback

now, lets reformulate the question then:

assuming the CBU is fully independent, and the authorities are not corrupted,given poor payment ability of the CBU and not developed capital market in Uzbekistan what can this independent Central Bank do to improve the situation?

any ideas?

JUST


Even if we hold that these assumptions are true, still so many things has to done at macroeconomic and financial level.
For example, CBU should
-enforce already adopted regulations (I read some of them they look pretty nice on the paper)
-abolish the restriction on enterprise accounts (enterprises can open only one account in foreign denomination one in sum, enterprises can only withdraw cash only to wages)
-allow more banks to conduct foreign exchange
-treat all banks equal in refinacing (sectoral banks gets more others)
overall, CBU activities should focus on increasing competition and confidence in system

commercial banks
-abolish charges on withdrawals from account to attract depositors
-revise portfolios (get rid of non-performing loans)
-learn credit assessment and bank management in general (think carefully before making loan)
Banks should concentrate on atrracting depositors, making better loans, improving their capital structure.

capital market (including securities, cash, credit markets)
-free i.e. prices are set by supply&demand
-more and free(rational) participants

Government
-has to face the problems (better, begin dealing with them), no benefit in delaying reforms by ignoring them.
-adopt more radical policies (I don't know what is radical in terms of Uzbekistan, yet)

Generally, increase competition among banks, free capital markets, and let market and banks decide which enteprise is viable. This is just part of work. Somethings depend on economy and other factors. For example, can expect an increase in number of market participants if average monthly payment is around $5.

[sanatullo]

CE,

Sizning aytib o`tgan faktorlaringiz qaysidir ma`noda quyidagiga (http://www.imf.org/external/pubs/ft/issues/issues14/index.htm) o`xshash. Qolaversa, menimcha, sizning faktorlaringiz O`zbekiston sharoyitiga asoslanga. Qisqasi bildirgan fikringiz qo`shilaman.

Aytganday, gapingiz to`g`ri. Nima keragi bor. :)

[Akhee-Abdullah]

Hello there read my next post, I messed up this time, cheers, :)

[Akhee-Abdullah]

Ok What do you guys think about this???

Money Growth and Inflation: How Long is the Long-Run? By Terry J. Fitzgerald. ( A review of the article that i made)

*Currently, Federal Reserve pays not much attention to the money growth even though fighting against inflation is one of its prime objectives. The Fed does it because, it did find not much relationship between money growth and inflation rate in the short run.

* However, many studies showed that there is a strong relationship between long-run averages of money growth and inflation. According to some economists maintaining a money-growth rate that corresponds to long-run desired inflation is the way to keep inflation low.

* There are two reasons for disagreement between findings that show that there is a close relationship between a long-run money growth and inflation and the policymakers’ lack of interest in money growth rates.
· The findings rely heavily on the data for countries where high inflation and steady money growth rate persists not on the data for the countries where money growth rate is low.
· A close relationship between inflation and money growth exists only in the long run, and the long run is of little importance for conducting an effective monetary policy.
* Unclear relationship between inflation and money growth in the short run raises a question, “How long is the long run if there is a close relationship between money growth and inflation.”
· Ignoring money growth in short-run policy making poses a risk of inflation if there is indeed a close relationship between money growth and inflation in the long run.
· Because long run is composed of many short-runs, ignoring money growth for many short runs causes inflation in the long-run.
· Inflation-fighting policy makers, usually, respond to inflation in the last moment which in turn causes recession or economic slowdown.
· Ignoring money growth becomes even more dangerous for the health of the economy if the long-run is relatively short.
* However, in the case of the US, there does not emerge a close relationship between money growth and inflation even in the long-run, then ignoring money growth within specified range should not pose a big threat.
· In the case of the US, factors other than steady money growth might dominate the cause of inflation, since modest money growth shows very little relationship between money growth and inflation.
* According to the studies that compared the relationship between money growth and inflation, only M2 and M3 money aggregates show a close relationship between money growth and inflation over a long run as short as four years. However, M1 money aggregate shows no clear relationship over relatively longer period than a short run.

* It is known that at an average price level quantity of money demanded equals quantity of money supplied.
· Because the quantity of money largely controlled by the Fed, it can influence average price level by increasing and decreasing money supply.
· However, it is not easy to control quantity of money demanded, because it does not only depend on price level but also real income that the economic agents hold, interest rates, technological advances in the methods of holding money and conducting transactions at a relatively low cost and other factors. However, quantity of money demanded has a very close proportional relationship with real income and general level of prices.
· A relatively faster growth in money supply than the money demand produces inflation.

[Akhee-Abdullah]

* Studies show that money growth in excess of real output growth has a very tight relationship with inflation in the long run.
· Money growth in excess of real output accounts for around 85% of inflation between eight-year averages. Even in the shorter period, four-year averages, money growth in excess of real output accounts for around 75% of inflation. The research was based on the data provided during the last 40 years.
* These results suggest that there is a close relationship between money growth and inflation in the long run. The long run could be as short as 4 years, maybe even shorter than that. However, we should keep in mind that:
· It is almost impossible to accurately forecast real GDP growth over a relatively long period.
· There results presented are based on the last 40-year period. And it does not necessarily mean this close relationship will persist in the future.
· The most important finding was that a closer relationship between money growth and inflation persists only with larger money monetary aggregates other than M1 money aggregate. Studies show that there is no clear relationship between money growth and inflation even in the longer period, in this case eight-year averages.
* What does “a close relationship between money growth and inflation exists in the long run if measured in terms of money aggregates other than M1” mean at all?!
· Even though it does not say much at the first look, if analyzed closely, it tells a lot to us in terms of inflation and money growth relationship.
· The studies show that if the policy of steady money growth is pursued when the money growth rate exceeds the real GDP growth rate in the short run, in the long run these small differences accumulate and produce a larger inflation during the longer period in the future
* Even though there is not a clear relationship between money growth and inflation in the short run, it would be unwise to ignore money growth for too a long period. Studies show that there is a very strong correlation between money growth and inflation in the long run if measured in terms of money aggregates other than M1. Long-trends in inflation can be predicted by the long run growth rate of money supply which again emphasizes the importance of not ignoring money growth rate for too a long period.

Personally, I do agree with Milton Friedman when he said, “Inflation is always and everywhere a monetary phenomenon.” In my humble opinion, agreeing with Milton Friedman, I think a steady growth of money growth at 2.5% or a little bit higher than that should be maintained in the case of the US economy, because it is obvious that the US economy is too big and much “nourished” to have a growth rate higher than 3% per annum average. What if there is an exception one year and the growth rate for that year was 7%, let’s say? The answer would be like this, “Well, it means deflation, it is not also a good sign if persisted for a long time. However, this is not a usual thing for the US economy. So the benefits form keeping the money growth rate around 3% per annum by far outweighs the harms caused form having large money growth over a longer period.” “Inflation-fighting policy makers, usually, respond to inflation in the last moment which in turn causes recession or economic slowdown”- this excerpt is from the outline which was in its place was taken from the article. What I got from the article was a recent phenomenon; that’s how Greenspan messed up with the growing economy by increasing interest rates last year and caused the economy to get into recession or at least to a slow down. From the article I understood that it is really hard to predict a real growth rate in GDP, and based on that to conduct monetary policy. I think Greenspan decreased the money supply more than the amount needed which would equate quantity demanded and supplied of money, I mean “Qs=Qd”(Of money) when “money supply growth rate=real GDP growth rate” but what Greenspan did was “money supply growth rate< real GDP growth rate” which caused recession or maybe slowdown. However, there could be a question, “If what you said was true, why then we did not have a decrease in the average price level since the money supply growth rate was smaller than the real GDP growth rate?? Besides that we had a positive inflation this year how can you explain this??” Well, first of all, we have to look closely at the issue. Money growth rate was positive but it did not increase as fast as the real GDP growth rate. Because money growth rate and real GDP growth rate were positive average price level went up.

Cheers, :)

[Akhee-Abdullah]

BTW, I beg ypur pardon if I confused you in any way. My point in posting this message was that even the Fed is paying liitle attention to money growth in a very short time preiod, but if we let the politicians to mess up with monetary policy, the inflation is gonna be by far larger which in turn "kills" the economy :( , so we need an independent Central Bank of Uzbekistan...??? Arguments and replies are welcome, only if they are supported by facts and reaosnable ideas based on simple economics ;)
Cheers, :)

[CE]

Sanatullo (May 12, 2001 11:41):
CE,

Sizning aytib o`tgan faktorlaringiz qaysidir ma`noda quyidagiga (http://www.imf.org/external/pubs/ft/issues/issues14/index.htm) o`xshash. Qolaversa, menimcha, sizning faktorlaringiz O`zbekiston sharoyitiga asoslanga. Qisqasi bildirgan fikringiz qo`shilaman.

Aytganday, gapingiz to`g`ri. Nima keragi bor. :)
Sunnatillo, link uchun rahamt. Afsuski bu maqolani oldinroq oqimagan ekanman. Bazi fikrlarini projectimda ishlatgan bolardim. Projectimda asosiy maqasad Uzb dagi reformalarni "Capital Adequacy" tomonidan korib chiqish, CBU supervisor funciyasini tadqiq qilish edi. Oxirida shunday xulosaga keldimki CBU Aprel 2000 da qabul qilgan "Trebovaniya k adekvatnosti kapitala kommercheskix bankov" qarorini amalga oshishiga 'yetti qovun pishigi' bor ekan.

[------]

==========================================