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In the beginning, I want to present the main concept
and tasks of the monetary policy. Monetary policy occupies an important place
in the life of society. Monetary policy is one of the four major macroeconomic
instruments, based on the ability of the monetary system to influence the money supply and, accordingly, the interest rate, and
through it on investment and real GDP. The goal of
the monetary policy is to ensure stable economic growth, full employment of
resources, stability of the price level, balance of payments equilibrium. Monetary policy is implemented by
the central bank. However, the change in the supply of money in the economy
occurs, because of the operations not only of the central bank, but also of
commercial banks, as well as decisions of the non-banking sector (households
and firms). Tactical goals of the monetary policy of the central bank can be:
1) control over the supply of money (money supply); 2) control over the level
of the interest rate; 3) control over the exchange rate of the national
currency. The instruments
of the monetary policy are change in the norm of mandatory reserves; change in the discount rate of interest (refinancing
rates); open market operations. The macroeconomic situation of the country has
the main impact on the monetary policy. So, I want to start from the
macroeconomic situation of Kazakhstan.

Macroeconomic situation of the Republic
of Kazakhstan

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Preservation of favorable conditions in the world economy and on external
financial and trade markets contributed to Kazakhstan’s achievement of
sustainable economic growth and improvement of the macroeconomic situation in
the country. GDP growth in Kazakhstan in January-May 2017 increased by 4.1%,
compared with 2016. Inflation since the beginning of the year amounted to 3.3%.
Inflation in annual terms fell to 7.5% compared with 16.7% in May 2016. Monthly
inflation in May 2017 was 0.5%. The volume of investments in fixed assets
increased by 5.2% (5.5% in January-April 2017, 3.1% in January-March 2017). The
growth is due to the implementation of industrial-innovative and infrastructure
projects. In January-April, 2017, by sector, a significant increase in
investments was observed in agriculture by 26.3%, to 47.2 billion tenge (150
million USD) and real estate transactions by 13.5%, to 251.8 billion KZT (796
million USD). The average nominal cash income of the population in
January-April 2017 amounted to 308.4 thousand tenge and increased by 8.2% in
nominal terms in comparison with the corresponding period of 2016, in real
terms by 0.5%. In these conditions, the main activities of the National Bank on
monetary policy were aimed at ensuring low inflation rates and maintaining a
stable nominal exchange rate of tenge. the growth of the gross domestic product
(GDP) of Kazakhstan in 2018 is expected at the level of 5%.

Orientation of the Monetary
Policy in the Republic of Kazakhstan

Since 2002, the benchmarks of monetary policy have been aimed at achieving
relative macroeconomic stability in the country. The main direction of the
monetary policy of the National Bank of Kazakhstan (NBK) in this period was
preparation and transition to the principles of inflation targeting, which
implied a gradual departure from the target values ??for the monetary base of
the gold and currency reserve to the main inflation indicators. Such monetary
policy meets the main objective of the National Bank to reduce inflation and,
moreover, provides it with a greater confidence of market participants and the
pursued monetary policy. The experience of countries shows that the following
factors are the basis for successful introduction of the system of inflation
target indicators:

-Sustainable budget
-Guarantees of macroeconomic stability;
-Stability of the financial system;
-Independence of the Central Bank;
-Sufficient understanding of the interrelations between the instruments of the
Central Bank;
-Information openness.

In 2016-2017, the monetary policy of the NBK was aimed at ensuring the
internal and external stability of the tenge. The main goal of the monetary
policy of 2017 was to keep inflation at around 6%. To achieve these goals, the
pulp and paper mill used open market operations and re-accounting operations
with promissory notes as its main instrument. The persistence of inflation in
these limits was facilitated by substantial economic growth, accompanied by
high consumer demand and investment activity. The significant growth of
monetary aggregates contributed to the persistence of inflation in the economy.
The consequence of high consumer demand was an increase in cash in circulation
by 59% to 379.3 billion. In order to prevent a significant strengthening of the
real exchange rate of the tenge, as well as to smooth fluctuations in the
exchange rate, the NBK participated in the domestic foreign exchange market as
a buyer. The international reserves of the country as of January 1, 2017
amounted to 90.8 billion US dollars and from the beginning of 2016 decreased by
0.6%, including the National Fund assets in foreign currency from the beginning
of 2016 decreased by 3.9% to 61, 0 billion US dollars. Gold and foreign
currency assets of the National Bank amounted to 29.8 billion US dollars and
since the beginning of 2016 grew by 6.9%. In order to contain inflation growth
rates, the NBK in 2017 took measures to strengthen the regulatory impact of
official rates. To increase the role of the refinancing rate since 2004, the
bills are recounted in accordance with the official refinancing rate.

In 2017, the priority of the monetary policy of the National Bank was to
maintain a low inflation rate. The
policy of free floating exchange rate of tenge was continued. As instruments
for regulating short-term liquidity of the banking system, operations were used
with short-term notes, operations with government securities on the open
market, regulation of official rates, refinancing of banks by re-calculation of
bills, provision of short-term loans to banks for maintaining liquidity (day
and overnight). To smooth the sharp short-term fluctuations in the exchange
rate of the tenge and to prevent excessive appreciation of the tenge,
operations were conducted in the domestic foreign exchange market (buying and
selling foreign currency). The exchange rate of the tenge in relation to the US
dollar decreased from 315.22 to 312.24 in 2017, which obviously happened under
the influence of strengthening the exchange rate of the Russian ruble against
the US dollar. Since early 2017, the rate of USD / KZT has fallen from the
level of 332.55. The below chart represents the changing of the official rate
KZT to USD during the year 2017.

One of the main aspects of the activity of the National Bank of the
Republic of Kazakhstan is the implementation of monetary policy and the
effectiveness of its implementation depends on the correct course and the
development of measures to stabilize the economy. The National Bank of the
Republic of Kazakhstan, as a state body of economic management, has a great
influence on the credit and financial system. In this regard, its impact is
very huge on the effective functioning of all credit and financial
institutions. Therefore, the issues of approaching the functions of the
National Bank of the Republic of Kazakhstan to the functions of central banks
of countries with developed market economies become topical. The NBK is the
only body that determines and implements the state monetary and credit policy
of the Republic of Kazakhstan. Monetary
policy is implemented by the National Bank of Kazakhstan in order to ensure
price stability. The
National Bank of the Republic of Kazakhstan occupies a special position among
legal entities engaged in managing the economy of the country. The
National Bank does not pursue profit in its activities. It
does not compete with commercial banks and other lending institutions in
financial markets. Its
main goal is to ensure uninterrupted supply of funds to the economy by means of
payment or otherwise to provide the necessary level of liquidity, to establish
a settlement system, to control the work of ordinary banks. Thus,
the economic essence of the National Bank of the Republic of Kazakhstan
consists in its appointment as a central bank whose legal status allows it to
coordinate and regulate the activities of credit and financial institutions. In
order to ensure price stability in the country, the National Bank takes the
necessary measures of monetary regulation, using legally established
instruments and operations. It should be noted that the National Bank can only
influence monetary factors: money supply, monetary base, domestic credit. By
regulating the amount of money in the economy, the National Bank has an
indirect effect on the formation of consumer prices in the country. In the
event of an increase in inflationary pressure, the National Bank conducts
operations to withdraw liquidity on the money market. In
particular, the volume of operations for issuing short-term notes, attracting
deposits from banks is increasing. The
rates of the National Bank are increasing, namely, the official refinancing
rate, deposit rates. As
a result of these measures, the volume of money supply in the economy is
decreasing, and with a certain time lag this affects the reduction of the
inflationary background.

Instruments of
Monetary Policy of the Republic of Kazakhstan

Official refinancing rates. The National Bank of
Kazakhstan sets an official refinancing rate depending on the overall state of
the money market, the demand and supply of loans, inflation and inflation
expectations. The official refinancing rate is a benchmark for remuneration
rates for major monetary policy operations. The official refinancing rate for
the 16 January 2018 is 9,75%. The official refinancing rate decreased (compared
to the year 2017). As the level of inflation rate became lower to the end of
2017, the National Bank decided to reduce the official refinancing rate.

Minimum reserve requirements. To ensure the
balance of the money market and regulate the liquidity of banks, the norm of
banks’ mandatory reserves was reduced from 10 to 8% of the total deposit
liabilities of the bank to non-bank legal and natural persons. Reducing the
minimum reserve requirements did not lead to a weakening of the protection of
the interests of depositors and creditors of banks, but, on the contrary,
allowed banks to more effectively manage the funds raised and increase lending
to the real sector of the economy.

Open market operations. In order to regulate
liquidity in the banking system and sterilize the money supply in 2017, the
National Bank carried out the transactions in the open market for the purchase
and sale of securities, to repurchase and reverse repurchase transactions.

Loans of the National Bank. In 2017, Banks of
Kazakhstan provided loans for KZT 12 705 352. Also, the National Bank of the Republic of Kazakhstan provides deposit
operations. And the main goal of this operations is to attract funds to
deposits and their placement in interbank loans.


Monetary aggregates

The behavior of monetary aggregates during the reporting period was due to
the nature of past trends.
The monetary base. The increase in the national currency of the National Bank of the United
Kingdom by 37.6% to $ 2,093.9 million. However, the monetary base expanded only
5.7% to 134.0 billion tenge. This was due to the fact that, starting from the
second half of the year, the National Bank intensified operations to sterilize
excess liquidity. The growth in net international reserves of the National Bank
was neutralized by an increase in the volume of short-term notes in circulation
by 7.9 times (or by 43.0 billion tenge) and by an increase in the Government’s
deposits by 2.3 times (or by 26.8 billion tenge).

Money supply. The dynamics of the assets of the banking system was positive. Thus, net
external assets of the banking system grew by 15.9% (or by $ 294.9 million),
while internal assets of the banking system increased by more than 5.2 times
(or by 71.3 billion tenge). The growth of domestic assets of the banking system
was due to a significant increase in demand for other sectors of the economy by
more than 1.8 times (or by KZT 137 billion) (despite a decrease in net claims
to the Government of the banking system 26.9% and net other of the assets of
the banking system – by 30%). All these factors contributed to an increase the
amount of money supply by 45.9% to KZT 399.5 billion.

Main targets of the Monetary Policy in the year 2018

Based on the current situation in
Kazakhstan and the world oil markets, the main objective of the NBK will be to
ensure price stability. Existing in recent world markets have a positive impact
on the macroeconomic development of Kazakhstan and at the same time cause a
number of problems. One of them is the excess liquidity of the banking system,
including external borrowings of enterprises in the real sector and commercial
banks, which leads to rapid growth of loans in the economy. The situation is
exacerbated by a significant influx of foreign investment, as well as an
increase in public budget expenditures in recent years. In these conditions, a
threat of overheating of the economy is possible. The goal of monetary policy
will be to keep inflation. To achieve this goal, the NBK is strengthening its
impact on monetary policy operations to further enhance the regulatory role of
its key rates. The NBK’s actions foreseen in the near future will affect the
liquidity of the banking system, which coincides with the interim goals of the
monetary policy pursued by the NBK. Despite the envisaged measures to limit
liquidity in the next three years, the annual growth of monetary aggregates
will ensure the preservation of the existing rates of economic growth. The
tightening of monetary policy implies a change in the direction of influence of
official NBK rates on market rates on loans. If in previous years the NBK
measures were aimed at resolving the task of boosting the activity of banks in
lending to the economy, including reducing rates, then, in the circumstances of
the need to prevent overheating of the economy, the issue of rate reduction is
no longer set as an end in itself.


The main goal for the
monetary policy of the republic of Kazakhstan will be maintaining the
medium-term inflation target –below 4%. National Bank will focus on stability
functioning of the economy; price stability and improving indicators of the
yield curve. In conclusion, I would like to add that developing countries
should not blindly copy the experience and results of their neighbors and other
developing and developed countries when developing their own monetary policy.
The same monetary policy can lead to completely different results. This comes
primarily from the prerequisites forcing the Central Bank to pursue a corresponding
monetary policy. Any state, both developed and developing, should attach
great importance to the Central Bank and its monetary policy. The Central Bank
should be fully independent in its policies. At the same time, it is important
to take into account that the goals of the government do not contradict the
CBR’s monetary policy. In the process of implementing monetary policy,
the Central Bank should try to ensure the necessary expansion of loans and the
size of the money supply corresponding to the long-term needs of the growing
economy of developing countries, while respecting the stability of domestic
prices. In a shorter period, monetary policy should not allow undue
inflationary or deflationary processes. The most important objective of
monetary policy should be price stability, which, with the provision of which
conditions are created conducive to economic growth. For effective
implementation of monetary policy in developing countries, it is necessary for
monetary authorities to set priorities, objectives and ways to achieve them,
drawing on the experience of developed and successfully developing countries.
Before conducting monetary policy as a powerful tool for regulating the
economy, an objective assessment of the current situation in the monetary and
credit sectors and in the economy as a whole should be given. The bodies that
develop and evaluate monetary policy must constantly monitor developments in
the economy

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