The world’s central bankers are certainly in the news these days. Not a week goes by without the Fed, the European Central Bank or the Bank of Japan taking big and often unprecedented actions to fight deflation, preserve financial stability, or address mediocre growth. We tend to forget, however, that these are not the only central banks that are struggling to adapt their policies to changing circumstances in our connected world.
Take the Caucasus and Central Asia — Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. Central banking in these former Soviet republics rarely makes international headlines. But figuring out how best to design and run monetary policy is no less a challenge than in the United States or the euro zone.
New and old challenges
To be sure, over the last two decades, central banks in the region have made important headway in strengthening their monetary and exchange rate policy frameworks: they have been given greater independence (all be it to varying degrees); they have improved their technical expertise; and they have become more transparent and improved their statistics.
Results have been impressive, with price rises dropping from hyperinflation in the 90s to now single digits in most countries.
Of course, despite this progress, certain structural problems persist. Inflation is still relatively high and volatile, dollarization is pervasive, financial systems are weak, and several countries have low foreign exchange reserves.
The recent sharp slowdown in Russia, a key source of trade, remittances and investment adds fresh challenges, as does the related weakness of the Russian ruble because it creates tensions in these countries’ monetary frameworks, which are often anchored in the U.S. dollar. On top of this, the region’s energy exporters are adapting to the recent drop of oil and gas prices, a key source of foreign currency.
A high-level workshop of central bankers from the region and international experts in Zurich two weeks ago organized jointly by Swiss officials and the International Monetary Fund could not have been more timely.
We discussed ways to make monetary frameworks in the region more resilient to shocks and better capable of supporting sustainable growth.
Focus on price stability
The way forward, we agreed, is to move towards a clear and consistent monetary framework. In practice, this means more explicitly focusing on either the exchange rate or price stability.
Some countries, such as Armenia and Georgia, have already made good progress on explicit inflation targeting. Others are still in the early stages of developing a consistent strategy and setting up the necessary institutions. The successes and failures of countries that have already made the transition are invaluable. The central bank governors from the region were particularly pleased to compare notes with colleagues from Croatia, the Czech Republic, Hungary, Israel, Russia and Serbia.
I’d like to highlight three priorities for central banks that emerged from our discussion:
- First, develop a clear strategy of defining objectives (such as price stability), choosing targets (such as the inflation forecast or market interest rates), and developing instruments (such as open market operations)
- Second, build the analytic capacity to model and forecast the economy. Poor data notwithstanding, such models introduce rigor to discussions among policymakers
- Finally, develop a communication policy to clearly explain monetary policy and anchor economic expectations, for example on inflation. This may require new means of proactive communication that go beyond just a website and a press release about the latest monetary policy decision.
All this is of course predicated on developing the right supporting institutions, from central bank independence to a reasonably deep financial market, to fiscal authorities that are not working in the opposite direction. As many practitioners in Zurich pointed out, a monetary regime can only work if it enjoys the full support of the government.
A new peer-to-peer network
This is a tall agenda, and one that will require determination and hard technical work over many years. How to go about it? Thomas Jordan, President of the Swiss National Bank, said:
“You can’t buy reputation and expertise, but you can acquire it through networking.”
In other words, the way forward is to tap the knowledge and experience among colleagues in the camaraderie of central bankers.
In Zurich, we took steps to put in place such a peer-to-peer network of central banks from the region. Staff at all levels will be able to communicate directly with each other through an online discussion forum and regular meetings. For this, we will draw on the experience of our colleagues from the Swiss development agency SECO, who have established such networks successfully in other areas, notably budgeting and treasury operations.
The IMF will do its part, by moderating the discussions and providing analysis and technical advice. I have also asked our teams of economists and financial sector experts to prepare in-depth background papers on monetary issues as part of our regular consultations. Hopefully, in one or two years, we will be able to take stock of progress.
We can’t forget that this isn’t just a technical exercise. At a conference in Bishkek last year, we started a dialogue on a reform agenda to move the countries of Central Asia and the Caucasus to emerging market status. Building a credible monetary framework is a key step forward and an area where the region can deepen its engagement. We at the IMF stand ready to support this process.
