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Monetary Policy Analysis
Formation and Change of Money Supply in the Economy
In the first half of 2017, the intensification of the implementation of the program of comprehensive and balanced development of the country, considerable expansion of volumes of lending to economy, including entrepreneurship, have led to the rapid growth of the money supply. In fact, in the first half of 2017, the balance of commercial banks' national currency loan portfolio grew by 32 percent and money supply by 15 percent[ CITATION Cen17 \l 1033 ].
There was also an increase in the share of cash in the structure of money supply. The increase in cash in circulation was due mainly to the increase in demand for cash in the current year on social and other primary payments, as well as the relative increase in the amount of cash in the bank's offices due to problems in the domestic foreign exchange market during this period.
Rapid growth of lending and cash flows led to a decrease in liquidity in many banks and the banking system as a whole by 2.5 times as compared to the beginning of the year. The current refinancing rate of the Central Bank increased from 9% to 14% this year, in particular, in order to curb inflation and curb the growth of cash money and to optimize the volume of loans disbursed to the economy[ CITATION Cen17 \l 1033 ]. At the same time, timely banking supervision was taken to prevent the rapid growth of the volume of credit portfolio of commercial banks on the negative impact of the banking system and the financial system in general.
Source: Central Bank of Uzbekistan (2017)
The tightening of the monetary policy has allowed commercial banks to significantly reduce the volumes of lending and money supply growth since July and reduce inflationary pressures. As a result, since July 2017, the slowdown in growth rates of money and money has been due to the fact that monetary factors have a downward trend in inflation in the second half of the year. As a result of these measures, since July of the current year there has been a steady decline in the growth rates of loans and money supply. In particular, the average monthly growth rates of the balance of credits and money supply in national currency decreased from 4.7% and 2.3% in the first half of the current year to -0.1% and 0.2%, respectively, in July-October[ CITATION Cen17 \l 1033 ]. At the same time, growth of lending in foreign currency was observed in July-October this year.
The surplus of the state budget in the last ten months of 2017 and the increase in the balance of funds in the budget and off-budget funds' accounts compared to the beginning of the year have resulted in a reduction in the massive growth of money supply. In particular, in January-October this year, the total balance of government's cash loans increased considerably. This increase is mainly explained by the increase in the value of export earnings in national currency as a result of the transition to the market mechanisms of exchange rate formation and an increase in revenues from the production of precious metals.
In general, it is expected that by the end of 2017 the anti-inflationary dynamics of money supply will be maintained and the rate of growth of money in the national currency will be around 17-20% year-on-year.
Analysis of Monetary Policy Instruments
Starting from July 2017, the Central Bank extended short-term loans to commercial banks and activated swap operations to expand the access to monetary instruments to regulate liquidity in the banking system.
In particular, the Central Bank extended commercial banks' loans for 689 billion UZS in July, 466 billion UZS in August, and 262 billion UZS in September, total amount of 1.4 trillion UZS. Taking into account the repayment of loans in August (131.7 billion UZS), September (848.9 billion UZS) and October (313.2 billion UZS), the balance of loans issued to commercial banks made up 84.4 billion UZS[ CITATION Cen17 \l 1033 ].
In September and October, the Central Bank satisfied the liquidity requirement through the sale of foreign exchange cash deposited by the commercial banks in the currency exchange market in the conditions of transition to the market mechanism of exchange rate formation.
Over the past period, 11 commercial banks participated in attracting the Central Bank's loans, which accounted for 62% of the total number of banks, such as the People's Bank, Asaka Bank, Agro Bank, and Qishloq Qurilish Bank.
In general, the introduction of the Central Bank's refinancing loans helped to increase the efficiency of the transmission channel by the interest instruments of the monetary policy. This, first of all, resulted in the change in interest rates on the interbank money market and commercial banks' loans and deposits, as well as the dynamics of monetary aggregates, and gradually reduced the impact of monetary factors on the inflation level.
The introduction of these operations also served to meet the short-term liquidity requirements in the banking system and maintain the stability of the payment system.
Interest rates on Central Bank operations with commercial banks
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Central Bank Loan Type
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Period
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Rate
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Loans granted under a non-volatile interest rate with collateral of foreign currency
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1 month
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Refinancing rate
+14%
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2 months
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Refinancing rate
More than +0.25%
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3 months
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Refinancing rate
+0.5%
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Source: Central Bank of Uzbekistan (2017)
Also, flexible use of compulsory reserves in the regulation of liquidity of commercial banks, proceeding from the situation in the economy and in the monetary sphere.
Balance of funds on accounts of compulsory savings formed by commercial banks in the Central Bank as of November 1, 2017, increased by 32 percent from 3.9 trillion UZS to 5.2 trillion UZS. This increase was due to the real increase in the deposit base of commercial banks and the increase in foreign currency deposit in national currency.
The share of funds in national currency in the structure of total consolidated mandatory reserves decreased from 60% at the beginning of the year to 8% as of November 1. This, in turn, reflected the high level of demand for liquidity in the national currency during this period, and this instrument was one of the main sources of liquidity deficit in the banks.
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ource: Central Bank of Uzbekistan (2017)
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