What has been the development of the financial sector during the recent years?
Development of the financial sector of Uzbekistan during the last few years is characterized by the further modernization of the legislative and normative base, enhancement of the level of capitalization intermediaries and implementation of the international standards in the system of regulation and supervision of their activities.
From the beginning, the financial market of the country has been forming under the impact of the prevailing development of the banking sector which corresponds to the total development tendency of the financial systems of the countries in transition. Understanding the importance of the stabilization process and quality development of the banking sector for the whole economy it caused a necessity for issuing a number of presidential decrees and government resolutions directed to further development of liberalization and reforming process of the banking sector. These documents contain step by step approaches for liberalization of the banking activity in accordance with the measures on creation of the adequate system of the banking regulation and supervision.
There has been paid much attention to the development of the non-banking financial intermediaries, and the privatization process and money market development approached the creation of a number of investment institutions. For a short period of time there were created a number of financial institutions such as investment intermediaries, management companies, depositaries, settlement-clearing centers, insurance companies, etc.
As of 2000 the privatization process and enhancement of the financial intermediaries in the corporate securities market made the trade volume increase in all the segments of the securities market by 1.9 times in comparison with the same period of 1999. Recently there was ratified the law "On activities of depositaries in the securities market" with the purpose of providing the legislative with the regulation of depositaries in the securities market.
During the last year the private sector of the economy has been dynamically developing, and currently, one of the main tasks is the creation of the system for financing of small and medium size business units. The world experience witnesses that along with the bank loaning there are the non banking financial structures whose main task is to finance and support of the small and medium size business (inter-assistance cashiers, credit unions, etc.).
Therefore, the Central bank takes the most active part in the development of such institutions in Uzbekistan. There is a legislative base for the creation of credit unions that it is being worked out in cooperation with the Asian bank for development. After completion of the first stage of the current project the creation of a number of pilot credit unions mainly in rural places will follow. The advantage of the credit unions against banks is their faster access to financial resources. Development of the credit unions along with the expansion of the loaning the small entrepreneurship should bring to strengthening of competition in the financial market and to decreasing of the cost of borrowing resources for entrepreneurs.
The major activities and duties of the Central bank of the Republic of Uzbekistan.
The monetary and loaning policy of the central bank is directed to achievement of a stable economic growth and provision of financial stabilization. Along with this, the attention is paid to further development of the tools of monetary and loaning policy. The major principle here is the step by step transition from indirect to direct monetary tools.
With the purpose of enhancement of the financial brokerage and attraction of additional funds into the banking system there have been set differentiated norms on required reserves of banks. This step is made in order to change the structure of the money volume towards increasing its depositary contents. This will encourage the creation of resources for the economy, lowering the inflation of the increasing volume of the money and monetizing the economy.
Another tool which is actively used by CBU is the interest rate policy which is carried out through changing of the refinancing rate. From the beginning of the year this tool became more flexible and the rate is changed upon the dynamics of the inflation rate, supply and demand in the money market. While making decisions on changing the refinancing rate the CBU tries to take into account the whole complex of macro and micro economy factors.
In the current stage the main goal is to achieve and support the lower positive level of the interest rates and thereby this will lower the nominal interest rates in the economy, the credit resources will be less expensive for the real sector as the inflation process slows down. From the other hand, it will lead all the economic agents to increase savings of the disposed free resources.
Taking into account the results of the economic development and also the nature of the of the duties in the economy in the present time, the Central bank of the republic of Uzbekistan pays much attention to creation of factors that will encourage the capital inflow into the real sector of the economy, growth of the savings rate of the people in the banks and investment into the production sector.
Can you specify the actions towards inflation prevention in Uzbekistan?
Considering the issues linked with control over inflation, it is necessary to consider the following numbers. A rigid monetary policy that has been carried out after the implementation of the national currency of Uzbekistan in July 1194 has provided a sharp decrease in inflation. For the last period the growth tendency of the average inflation rate has decreased by more than 20 times - from 30% in 1994 to 1.4 % as of 9 months of the current year.
In the field of control the CBU is experiencing positive changes. In particular, the credit and interest rate policy is reforming towards squeezing the inflation channels and getting rid of the tools of the monetary and crediting regulation. The allocationof the refinancing credits through auctions enactsthe development of market principles in the banking sector. The course of deficit serving of the state budget is directed to the step by step decrease of the CBU share on expanding of non-inflationary sources of its coverage.
At the same time the CBU takes into account the fact that the optimal decrease in inflation must be at the level the achievement of which will not be an impediment for the balanced combination of possible economic growth, increase of the real income of population, execution of investments that are necessary to support sustainable level of economic growth in the future.
Could you elaborate on your foreign currency policy?
It is necessary to mention here that the foreign currency policy that had been carried out in the past was directed to support of the export-oriented and import substitute production, development of basic and leading industries of economy.
The effective control over the inflow of foreign currency, the most necessary aimed use of foreign currency funds linked with the purchase of modern and leading technologies overseas, allowed to implement large investment projects in the oil and energy complex, gold mining, automobile industry and other priority industries of the economy, to expand the export potential of the country and to decrease considerably dependence on the field of energy resources and other strategic goods.
According to the forecast of the international organization PlanEcon only two post soviet countries - Uzbekistan and Estonia will restore the pre-transitional level of GDP. This witnesses that the foreign currency policy which is part of the overall economic policy, was economically proved.
The major place in economy reforming belongs to the process of liberalization of the foreign currency market. Following the sequence in conducting of the economic reforms, the CBU and government of the country have started implementation of measures on further liberalization of the foreign currency market.
Within the framework of worked out complex of step by step measures the considerable part of operations on sum conversion into foreign currency that previously had been undertaken on the Uzbekistan Republican foreign currency market, are transferred to the over-the-counter market.
The requirement of registration of the legal persons in the Ministry for Foreign Economic Relations as participants of foreign activity is no longer necessary. All acting subjects have a right to open foreign currency accounts in various authorized banks.
The issued resolutions of the Cabinet of ministers in the middle of the year «On measures on further development and strengthening of the over-the-counter market» and «On measures on further liberalization of the foreign currency market and expansion of foreign currency-exchange operations» became the basis for development and strengthening over-the-counter foreign currency market, expansion of the sources and volume of foreign currency inflow into the country, export motivation and expansion of the foreign currency exchange operations.
One of the steps taken towards this direction is the unification of various foreign exchange rates. On May 1st of the current year the previously acting official, over-the-counter exchange rates were unified. Besides that on 1st of July the authorized banks were allowed to independently determine their own rates of purchasing and selling of foreign currency in over-the-counter market and foreign currency market rate resulted from supply and demand.
At the present time CBU is carrying out works on structural optimization of the foreign currency market members and increasing the number of banks conducting all types of foreign currency operations.
How do you regulate and supervise the banking activities in Uzbekistan?
The measures taken by the Central bank in previous
years were directed to the creation of the completely
new regulation system of banks. In other words,
we were given a task to transform the execution
of control functions including the control over
execution of a number of functions of banking institutions
to the execution of healthy banking supervision
over activity of the independent banks. Along with
the regulation of the risk level in the banking
system it became the main task of the banking supervision
and aimed to protect depositors and creditors. |
To achieve this, CBU has refined the regulation documents regulating banking activities, implemented economic norms for banking activities that correspond to the international standards including "Principles of effective banking supervision" by the Basil committee for baking supervision under the International Settlement bank (Switzerland).
The CBU was supported by World bank for reconstruction and development and American agency for International development (USAID). With the assistance of these international organizations along with the modernization of the normative base of the banking activities, the experts in the field of banking supervisions have passed intensive studies. There were implemented distance monitoring systems over banking activities and inspection of the local banks in accordance with famous CAMEL system. Much attention was paid to the development of the institute for independent banking audit, and at the present, time audit controls are carried out by top 5 largest international audit companies.
Recently the banking accounting standards were transformed to auditing that corresponds to the international standards for financial reports. Implementation of modern financial reports that provide transparency of the banking activities is very important taking into account that the banks operate using the funds of customers on their own risk and bear very much of social responsibility.
The banking sector reformation program for the period of 2000-2003 covers all spheres of the banking system and sets specific measures on complex reforming and development. Among the most important aspects of the program are the measures on carrying out the privatization of two largest banks of the country - National bank for foreign economic activity and Asaka bank through sale of the shares to strategic foreign investors.
Moreover, the program also presumes measures on privatization of other banks in which the share of the state exceeds 25%. It is worth to note that the international financial institutions are desirous to participate in the privatization process and motivate the foreign capital inflow process into the banking system.
Another important part of the program are the measures on institutional development of the banking sector. It presumes a wide spectrum of events on universalization and commercialization of specialized commercial banks, asset restructuring of separate banks, creation of interbank Credit-information bureau for providing objective information for the banks on credibility of borrowers, alteration into legislation on collateral and also development of savings rate in commercial banks and expansion of the spectrum of the banking services for the population.
A special attention in the program is paid to enhance the trustworthiness of the banking sector. With the purpose of protecting the bank deposits made by customers and creation of legislative base the program presumes working out a legislative base and guarantee of safety of the funds and confidentiality of depositors savings.
Considerable cooperation in institutional development of the banking sector will be provided by the World bank project "Borrowing for the development of the financial institutions". The goal of the project is divided into two groups: short term and average term. The short term goals include strengthening of corporate management of the banks and potential of the banking management for formation of bases for further privatization of the banks. The criteria for achievement of these goals define improvement of the strategic planning of the banks, modernization of the credit policy, analysis of credit application, accounting and information technologies and expansion of loaning of private sector including small and medium size enterprises.
Average term goals include the enhancement of the competition level in the banking system and effectiveness of the banking activity. Achievement of these goals will be evaluated by indicators such as broadening of the specialization of banks, enhancement of loaning of the real sector and implementation of new banking products. Along with this, the number of tasks presumed by the project include further development of the accounting standards of the banking supervision and its strengthening, improvement of report standards and increasing of its transparency.
There were established agencies on banking privatization and agencies for the restructuring of the bank's assets in order to achieve the main goal of the project, which was the privatization of the banks in the country through sale of the shares to foreign investors.
How would you describe the investment climate in Uzbekistan and what is done to make Uzbekistan more attractive for foreign investment?
In the previous years there were issued a number of laws directed to motivation of foreign investment inflow to the economy of the country through setting up guarantees and subsidies. There are two laws that should be mentioned - "On foreign investments" and "On guarantees and measures of protection of foreign investors' rights" the main goal of which is the creation of specific field of activities of the foreign investors in the country.
I should note that these laws set the international agreements as a priority over national legislation. Uzbekistan guarantees that in case of worsening of the investment conditions the old legislation acting at the moment regarding the investments will be valid for 10 years.
Foreign investors are guaranteed to make transfer of profits and dividends overseas without impediments, insured investment protection, and protection of property rights. There is a system of subsidies on taxation of foreign investment activities where the priority is given to long term strategic investors.
Creation of subsidies and stimuli in the country give a chance to increase the share of foreign investments in the total volume of investments in the economy. This indicator was increased from 2.3% in 1994 to more than 20% as of 1999. The number of enterprises with foreign investments is increased by 2.6 times. Their export for the current period was increased by 22.7 times and import was increased by 12.2 times.
It is worth mentioning that the role of foreign investments in the banking system is very significant. Attraction of foreign capital into the most dynamically developing segment of the economy is mutually beneficial because it is highly profitable for foreign investors, and the national economy in turn receives banking technologies and management system that correspond to international standards. The current thesis is confirmed by the experience of countries in transition for the past years.
Uzbekistan initially approached the policy of attraction of foreign capital into the banking sector of the economy, and at the present time every sixth bank acting in Uzbekistan has the share of foreign capital. The acting joint ventures or foreign banks are not only encouraging the banking system to move towards the international standards but also considerably increase the competition in the internal financial market favorably affecting the quality of the banking services provided.
As it was mentioned earlier, one of the most significant parts of the Banking sector reformation program for 2000-2003 is the privatization of the largest commercial banks. I avail myself of this opportunity to invite all potential investors to take part in the program of the privatization of banks that are the largest not only in Central Asia but also in the post Soviet territory.
What are your future outlooks?
Uzbekistan is entering the 21st century as the country whose achievements are confirmed by growth in the economy, stable social and economic development and integration into the world economic system. At the present time our country is moving towards liberalization and deepening the economic reforms.
The central bank's main goal is to provide stability of the national currency and takes measures on further lowering the inflation processes in the economy. In the future the concrete combination of inflation parameters and economic growth will be defined in the framework of the common government economic program with consideration being paid to the changes in internal and external factors of economic development. Along with this a special attention will be given to the smoothness of this process. The analysis of fighting against the inflation in other countries shows that this combination gives best results by minimizing the cost of the disinflation measures for the economy.
One of the lessons learned by the world financial community from the recent crisis in 1997-1999 is the necessity to strengthen regulation and supervision over financial institutions. As it was mentioned earlier, much has been done in this field in Uzbekistan. However, there still has to be done a lot of works on enhancement of the transparency of banks, the level of corporate management and many other things on lowering the risks in the banking system.
In the condition of the liberalization of the foreign currency market, strengthening of the currency regulation based on the market principles is very important. This will result in taking complex measures including asset restructuring of banks that are subject to currency risks, and also initiate restructuring of the enterprises-borrowers that are experiencing difficulties with paying off their credits in foreign currency. A special attention will be paid to provision of full volume foreign currency receipts from export and measures to prevent capital outflow. There will be taken measures on softening the social consequences of the liberalization of the foreign currency market in cooperation with the government agencies.
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Central Bank of Uzbekistan