| Monetary Policy Report
for the first half of year 2006
Considered by Resolution of the Board
of the National Bank of the Kyrgyz Republic
№ 26/2 as of September 8, 2006
Monetary policy performance goals and results for the first half of year 2006.
In accordance with the Statement on the NBKR’s Monetary Policy for 2006, and Main Directions of the Monetary Policy for 2006, the main goal of the monetary policy for 2006 is maintaining a low level of inflation, which is a prerequisite for ensuring a stable growth of the national economy.
As per the joint Statement made by the Government of the KR and NBKR on major directions of the economic policy for 2006, the joint efforts in the area of monetary, tax and budget policy will be aimed at restraining inflation at the level of 5.7%.
According to the National Statistic Committee (NSC), the consumer price index growth for January- June, 2006 was 4.1% (3.6% for the period from January to June, 2005).
An annual inflation rate was 5.4%, same as in the previous year. Real GDP (as per preliminary data) in January-June 2006 had grown by 3.1%.
In the first quarter of 2006, the situation in the financial sector has been developing in a stable way and there was no need whatsoever to pursue an active monetary policy. Whereas in the second quarter, due to a considerable increase in the foreign currency supply and lack of a sufficient demand for the foreign currency on the part of commercial banks, the NBKR had been making foreign currency interventions to avoid sharp som’s exchange rate changes that resulted in a tangible growth of monetary aggregates.
Monetary aggregates’ growth rates have considerably exceeded corresponding indicators for the previous year. It was the money supply М2 that increased most of all, by 14.6% (by 2.0% in the first half of year 2005), whereas the М2Х broad money has increased (at permanent exchange rate) and reached 13.4% (by 9.6% in the first half of year 2005), with the monetary base having gone up by 9.7% (by 3.1% in the first half of year 2005).
It should be mentioned that foreign economic conditions, in particular, foreign currency inflow into the republic in the form of investments, transfers and receipts due to the beginning of a tourism season and also reduction of the US dollar exchange rate relative to major world currencies at external markets, have predetermined the increase in the demand for soms.
The demand growth for som resources is also confirmed by NSC’s updated data provided by industries and segments of economy that generate this demand. As for instance, the retail trade turnover has increased by 13.3 with the capital investments having risen by 18.4% in the first half of year 2006 as compared to a similar period of past year.
Dollarization of deposits, calculated as the share of foreign currency deposits in the total volume of deposits, have fallen and as of end of June, 2006 it was 60.5%( as of January 1, 2006 it was 64.8%). Dollarization of loans made up 68.7% (at January 1, 2006 it was 72.2%).
Taking into account the growth of monetary aggregates as a result of NBKR’s interventions, on the one hand, and retaining business activity and demand for monetary resources, on the other hand, the NBKR so far doesn’t see any reasons for reviewing the target inflation deliverable for 2006 set at the level of less than 5.7%.
For information: As per the NSC’s updated information, the inflation for January- August, 2006 was 1.8%.
In the foreign exchange market, the National Bank continued pursuing the floating exchange rate policy aimed at the prevention of sharp som’s exchange rate fluctuations relative to the US dollar. Taking into account the current situation, upon increase in the foreign currency supply, the NBKR performed transactions only on its purchase which contributed to the accumulation of forex/gold reserves.
Starting from the second half of the reporting year, the National Bank purchased $44.1 mio. (the volume of the net purchase in the first half of year 2005 totaled 765.0 thousand US dollars. The som discount rate relative to US dollar has strengthened for the 6 months of 2006 by 2.65 % and worked out at 40.2052 som/US dollar as of the end of June (41.3011 som/US dollar as at the end of December, 2005), whereas som had strengthened in January-June, 2005 by 1.59%.
The volume of gross international reserves as of the end of June, 2006 totaled 651.2 mio. US dollars, having increased by 38.9 mio. US dollars for the reporting period (at December 31, 2005 it totaled 612.3 mio. US dollars, that according to preliminary data, covers 4.1 months of goods and services importation.
The changes in the volume of mandatory reserves, characterized by the increasing dynamics, indicates the retaining of the growth trends of the deposit base in active commercial banks.
At the beginning of 2006, there was an excessive liquidity at the financial market. Taking this circumstance into account, the National Bank, aiming at the reduction of possible negative influence of the monetary base growth on the inflation, used various monetary regulation instruments, REPO transactions being one of the main instruments.
By taking the decision on the volume and types of used instruments, the NBKR also tracked the interest and exchange rate dynamics at the interbank and STB markets.
The discount rate, which is a benchmark for interest rates in other financial market segments, has slightly increased and as of 01.07.06 it made up 4.27 % (4.13 % as of 01.01.06).
A substantial contribution to the increase in the banks’ financial intermediation has been made by measures undertaken to implement the State Program on the introduction of the cashless payment system and creation of the infrastructure able of ensuring efficient payments in the Kyrgyz Republic.
In the first half of year 2006, as compared to a similar period in 2005, the number of payments had increased by 79.1%, whereas their volume had gone up by 17.2%.
The total volume of payments made in the period from January to June, 2006 through the clearing and gross settlement system amounted to 77.5 billion soms and in comparison with the data for the corresponding period of 2005 it had increased by 11.3 billion soms.
Inflation: results and trends
The inflation level, characterized by the consumer price index, in June 2006 remained at the same level as in the similar period of the previous year.
As per the data provided by the National Statistic Committee, in June, an annual consumer price index growth made up 5.4%.
Table 1. Price index in the Kyrgyz Republic
(in % to a corresponding month of the previous year)
Consumer price index
The overall price level for the period under consideration has been determined to a considerable extent by the price dynamics for food products which occupy a considerable share in the consumer basket structure and are characterized by the greatest fluctuations.
The major reason for the price increase was reduction in the volume of harvest in agriculture in 2005. The agricultural production had declined by 4.2% in 2005. The decline in the sugar-beet crops resulted in the sugar production downswing and as a result in the price growth for sugar and confectionary products by 29.5%. The prices had also grown (by 15.0%) for milk and dairy products due to the increase in their exports. Since April 2002, the prices have been growing for meat and fish (by 9.8%). As a result, the price increase for food products in June 2006 in comparison with June 2005 made up 7.8 %.
The price index for non-food products had increased by 3.7%. It was the prices for oil and lubricants that had grown most (by 14.6%), in particular: gasoline had risen in price by 15.0%, diesel fuel had gone up by 13.9%. Following the administrative price increases, the tariffs for gas had increased by 16.4%. The prices for housing materials had gone up by 12.7%, which can be explained by a seasonal demand growth for these products in the summer period.
Paid (fee-based) services provided to the population in the period under consideration had risen by 5.7% mainly due to the price growth for transportation services, which made up 6.3%. Prices for education services had increased by 3.9%, while those for the organization of cultural events had grown by 1.4%. Also, the prices had gone up for consumer services, including: shoe repairs had risen in price by 7.8%, while the cost of public catering services had grown by 3.6%.
The inflation level with allowance for a seasonal factor made up 5.2%. The influence of monetary factors taking into consideration the inflation expectations for the period from June 2005 to June 2006 made up 13.7%, with non-monetary factors making up 76.7%.
Dynamics of monetary indicators
The volume of the monetary base had increased as compared with the beginning of the year by 1 496.6 mio. soms or by 9.7% (annual increase made up 32.9%) and as of July 1, 2006 it totaled 16 962.2 million soms.
The change in the monetary base in the first 6 months of 2005 was insignificant and its growth made up 3.1% (18.3% on an annualized basis).
The share of money in circulation rose in the monetary base structure from 86.7% as of end of December 2005 to 88.2% as of end of June, 2006, while the share of funds in correspondent accounts of commercial banks with the NBKR had fallen from 13.3% to 11.8% correspondingly.
Money in circulation in the reporting period had increased by 11.6% and as of Jule 1, 2006 it totaled 14 971.0 mio. soms. Money in circulation in general for 12 months made up 28.9 which considerably exceeded the growth rate for the previous year (for the first half of year 2005 it made up +1.7 % and +12.8 % for 12 months).
Money supply М2 in the national currency as of July 1, 2006 amounted to 18 286.4 mio. soms having increased from January to June by 14.6% (by 2.0% in the first half of year 2005) which was due to a considerable growth of the volume of deposits in the national currency. The growth rates of transferable and other deposits made up 33.4 and 20.9% correspondingly which exceeded considerably the growth rates for the similar period in 2005 (+4.1 and 6.7%) and showed increase in the demand for som resources.
In general, the growth of deposits in the national currency for the reporting period made up 29.3 % which substantially exceeded the foreign currency deposits (9.8%) and differed from the situation in the last year, when the growth rates were only 5.2%.
The monetization ratio of the economy, calculated based on monetary aggregate М2, as of the end of June 2006 made up 15.4% (14.5% as of the end of 2005), while the velocity made 6.5 (6.9 % as of 2005 year-end).
The volume of the broad money М2Х aggregate including foreign currency deposits as at July 1, 2006 totaled 24 263.8 mio. soms (at a fixed/locked exchange rate) having increased in the first half of the year by 13.4% (9.6 % in the first six months of year 2005).
The broad money growth in the reporting period was due to the influence of the increase in the volume of deposits (by 16.6%) and money outside of banks (by 11.3%) including foreign currency deposits at a locked conversion rate.
The increase of foreign currency deposits at a locked conversion rate in the first half of year 2006 was 9.8% (27.5% in the first half of year 2005).
As of the end of June 2006, money outside of banks exceeded the total volume of deposits by 1.53 times (by 1.59 times as of the beginning of 2006).
Velocity of the М2Х broad money including foreign currency deposits as of the end of 2006 made up 4.7 (4.8 as of the end of 2005). Correspondingly, the monetization ratio of the economy, calculated based on the М2 monetary aggregate, made up 21.1% (20.9% as of the end of 2005).
The broad money М2Х multiplier that characterizes the level of the financial intermediation as of 30.06.2006 (inclusive) was 1.416. As of the end of 2005, the М2Х broad money multiplier was 1.377.
The excess of the money supply М2 growth rates over the М2Х broad money increase is explained by a minor growth of foreign currency deposits (9.8%) in comparison with the growth of som deposits (29.3%).
Application of the monetary policy instruments
In the first six months, under the increased liquidity in the banking system and increased inflation rate conditions, the National Bank’s transactions were aimed at the withdrawal of excess liquidity. The primary instrument was reverse REPO transactions. The volume of such transactions in the first half of the year totaled 197.5 million soms which was higher by 68.8% than the similar indicator for January-June 2005. Reverse REPO transactions were performed on a competitive bidding basis. A weighted average period of transactions in comparison with the first half of year 2005 rose from 53 to 140 days. A weighted average rate of reverse REPO transactions was 4.43%
Starting from April, the National Bank has begun using an additional instrument to withdraw liquidity - SWAP foreign currency transactions to sell US dollars. A total volume of such transactions amounted to $5.0 million or 203.6 million soms in the reporting period, with a weighted average period being 86 days.
The National Bank didn’t conduct transactions on adding liquidity to the banking system (direct REPO and SWAP transactions, overnight credits) in the first six months as the level of reserves in banks, in spite of a considerable reduction in the second half of the reporting period, remained quite high.
The banking liquidity fluctuations during the first half of the year influenced the 28-days NBKR notes market, the discount rate of which being equal to their yield.
An average level of the discount rate for the reporting period was 3.8% and it hadn’t changed in comparison with the rate for January-June 2005. The National Bank hadn’t changed a weekly volume of supply of notes during the reporting period having set it at 4.0 million soms. The National Bank placed notes in the amount of 64.0 mio. soms in the first half of year 2006, which was less by 11.1% than that for the similar period of 2005.
The National Bank’s transactions at the interbank foreign currency market totaled $44.1 million in the reporting period. The US dollar discount rate had fallen in the 1st half of year by 2.65% equaling as of the end of June 40.2052 soms/US dollar.
For comparison: in the similar period of the previous year, the discount rate had fallen by 1.59% and was 40.9614 som/US dollar.
The reserve requirements didn’t change in the reporting period having remained at 10%. The volume of mandatory requirements had increased by 17.0% in the reporting period and totaled 1 317.4 million soms as of the end of June. At the same time, the US dollar fixed rate used for conversion of foreign currency deposits upon calculation of reserve requirements had been reduced: until June it worked out at 41.0 som/US dollar, whereas after June 5 it was 40.5 som/US dollar.
In the first half of the year, all the commercial banks fulfilled mandatory requirements and there was no non-compliance cases registered as such.
The amount of compensation paid to commercial banks for compliance with the mandatory reserve requirements in the reporting period amounted to 9.2 million soms or it was by 64.9% higher than that in January-June 2005. The increase in the amount of compensation was due to the depository base growth, the volume of which as of the end of June totaled 14.3 billion soms having risen by 1.4 times for the calendar year.
Foreign economic factor
As per preliminary data, in the first half of year 2006, the deficit of the current transactions account was 20.3% to GDP against 4.9% in the corresponding period of the previous year. It was mainly contributed by the increase in the trade balance deficit.
The trade balance deficit in the reporting period totaled $290.9 million against $150.5 million for the same period in 2005 which was caused by the prevalence of imports over exports. Foreign trade turnover had gone up by 30.7% in the period under consideration and amounted to $1 057.6 million (in FOB prices). The external trade turnover increase was due to CIS countries by 39.9% and non-CIS countries by 21.0%.
Exports of goods for the period under consideration totaled $ 383.3 million which was higher by 16.4% than the corresponding indicator in 2005. At the same time, the main influence on slight export growth rates was made by the reduction in supply of gold due to cut-back in gold production and decrease in its supply in a physical volume. The export volume in natural terms (in kind) had reduced by 28.9%, however, thanks to the increase in the world gold prices and reduction in the gold exports in value terms turned out to be negligible and made up 1.7%.
An average sales price per ounce in the first half of the current year worked out at $596.1 which was higher than the price for the same period of the previous year by 29.3 %.
The export volume of other types of goods not taking into account gold had risen by 27.6% and totaled $ 260.1 million.
There had been a trend towards the reduction in exports of raw materials in the reporting period (by 5.9%). The decrease in the raw material exports was caused by a substantial cutback in the supply of tobacco, cotton and wool. As for other functional items, there had been a growth. The export of investment goods had grown by about 2.5 times due to the increase in the supply of mining equipment, spare parts and equipment for motor vehicles, sale of helicopters and airplanes. Exports under this group of goods were mainly due to the sales of unused fixed assets from that of available.
In January-June 2006, their share had grown in the geographical structure by 3.5 percentage points in comparison with the corresponding period of the previous year due to an outrunning growth of exports to CIS countries, with the share of foreign countries having reduced correspondingly.
Among CIS countries, export supplies had growth substantially to Uzbekistan (by 81.6%), Tajikistan (by 51.1%) and Kazakhstan (by 32.1%). At the same time, exports to Belorussia, Turkmenistan, and Ukraine had reduced. Afghanistan, Switzerland, and Turkey are foreign countries, to which export supplies had increased substantially. Exports to Afghanistan had grown by 6.8 times due to re-export of oil products. The major part of export products to Turkey was also taken by supplies of oil products, in particular, kerosene for fueling of air transport.
Due to shifting to supply of gold to Switzerland, consequently, exports to Switzerland had growth, whereas exports to UAE had fallen.
Import of goods (in FOB prices) for January-June 2006 totaled $ 674.3 million which was by 40.5% higher than that of the corresponding period of 2005.
The increase in imports was both from CIS countries by 46.4% and foreign countries by 32.3%.
In the functional structure, there had been the growth of imports by all the items. The most substantial, as before, was the increase in imports of power products by 69.5%. Traditionally the major part in the power product group is taken by oil products, which had increased by 63.0% in value terms and by 41.4 in physical terms. The growth of import receipts was also influenced by the acquisition of helicopters and railway locomotives, increase in supply of trucks, other machines and devices.
The import growth trend from CIS countries and reduction in the share of foreign countries had remained in the geographic import structure.
The share of CIS countries for the 6 months of 2006 was 62.2%1 having increased by 1.8 percentage points. The most substantial increase in imports was from Russia (by 88.9 %) and Belorussia (by 71.6%). Import supplies from Russia had increased mainly due to the growth of oil product receipts by 2.5 times which accounted for 60% of total imports from Russia. As for foreign countries, the most considerable increase had been seen from Canada and China. Imports from Canada had increased by almost 2.5 times due to supply of mining equipment and various instruments. Traditionally, the growth of import receipts had been influenced by supply of consumer goods which accounted for almost 60% of the total volume of supplies.
At the same time, imports from USA and Germany had been reduced due to the decrease in the supplies of commodity grants from the USA as compared to the corresponding period of the previous year and reduction of supply of fixtures and equipment from Germany.
A positive balance of the current transfers rose in the reporting period by 24.5% having totaled $161.8 million, which could be explained by the increase in the inflow of private transfers in the form of cash receipts in the money transfer systems by 29.5%. At the same time, the volume of official transfers had fallen by 45%.
In the first half of year 2006, the capital and financial transactions account (in an analytical representation) had been formed with a positive balance totaling $199.4 million against the deficit for the same period of the previous year in the amount of $ 64.3 million.
The positive balance of the financial account worked out at $206.2 million which was provided by the rise in the net capital inflow on other investments to $182.2 million against a net outflow in the corresponding period in 2005 amounting to $57.9 million.
Thus, as per preliminary data, the total balance of payments of the Kyrgyz Republic for the first half of year 2006 had been formed with a positive balance totaling $33.3 million against the deficit in the same period of the previous year in the amount of $28.9 million.
The volume of gross international reserves as of the end of the period totaled $651.2 million. The level of the NBKR’s reserve assets correspond to 4.1 months of imports of goods and services.
Som’s real and nominal efficient exchange rate indices. As per preliminary data, the nominal efficient exchange rate had been set at 0.3 percentage points in the first half of year 2006 as compared to a corresponding indicator of the past year. In January-June of the current year, som’s real devaluation relative to partner countries’ currencies made up 4.1 percentage points with regard to the similar indicator for 2005.
As for the January-June level of the past year, som’s real devaluation relative to the Russian ruble and Kazakh tenge in the reporting period made up 6.3 и 8.7 percentage points correspondingly.