description
stringlengths 27
553
| text
stringlengths 0
341k
⌀ | bank
stringclasses 118
values | Year
int64 2k
2.03k
| Month
int64 1
12
|
|---|---|---|---|---|
Keynote address by Mr Tariq Bajwa, Governor of the State Bank of Pakistan, at the Bloomberg Pakistan Economic Forum, Karachi, 18 March 2019. | Governor Title Date Event Venue : Mr. Tariq Bajwa : Keynote Address : March 18, 2019 : Bloomberg Pakistan Economic Forum : Movenpick Hotel Karachi. Ladies and Gentlemen, Assalam-o-Alaikum and Good morning! First of all, I would like to thank the organizers for inviting me to this forum. I’m pleased to have the opportunity to address you today. As you are all aware, Pakistan’s economy is going through a phase of transition. On the one hand, stabilization policies are in place to ensure a stable macroeconomic environment which is vital for economic development; and on the other, the government is pursuing wide-ranging reforms to improve the ease of doing business in the country and minimize the cost of stabilization measures After experiencing a spell of rising GDP growth between FY14 and FY17, Pakistan’s economy is set for a calibrated moderation. This is a result of the high fiscal and CAD which was registered in FY 18. Unless we are able to grapple the three core macroeconomic issues i.e. low savings, low revenue generation and high trade gap, sustainable high growth will continue to be a challenge. Page 1 of 9 The twin objectives of macroeconomic policies are growth and stability. With the twin deficit moving to unsustainable territory, stability became a priority over growth. In view of the pressures building in the economy we had begun to take policy measures. In December 2017, there was an adjustment in the exchange rate. A month later, SBP’s Monetary Policy Committee initiated the tightening cycle, which to date has resulted in a cumulative upward revision of 450 basis points in the policy rate i.e. to 10.25 percent. And the Rupee has moved 31% against the dollar during the same period. However, it has been hard to shift the focus of fiscal policy. While the economic growth is slowing down - which in turn is hurting the revenue growth - many of the government’s expenditures are non-discretionary in nature, especially debt servicing, and increase in defense expenditure under the existing tension with India. On the other hand, Government receipts both tax and non-tax are below target. Therefore, the deficit in the fiscal accounts has persisted at a high level. The need for taking the tax to GDP ratio to atleast 15% cannot be overemphasized. Without this a primary and revenue surplus will be a mirage. On the external front, the foremost step required is to arrange external funding to meet the financing gap. You are all well aware of the government’s efforts in this regard to arrange timely inflows from China, Saudi Arabia, UAE and other friendly countries, alongside the finalization of deferred oil payment arrangements from Saudi Arabia. In addition, the most encouraging aspect is the investment commitments that our friendly countries have recently made. Certainly, these have given the country some cushion to withstand external headwinds, and also bode well for growth and employment opportunities. As for the IMF, the government is continuously negotiating to get a program that can avoid a hard landing for the economy. There is a general agreement regarding the Page 2 of 9 policy direction between us and the IMF; the differences are only on the timing and pace of stabilization policies. In the meantime, we have already laid the foundations of a homegrown stabilization program, which hopefully would deliver good results. As I’ve mentioned before, tight monetary policy is in place, and the government is committed to reduce fiscal deficit. Importantly, the focus is on narrowing external imbalances to a sustainable level by allowing greater exchange rate flexibility and incentivizing savings in the economy. Finally, the government has been pursuing wide-ranging reforms to improve the investment climate in the country. The policy mix has already started to bring the desired results in the external front. The current account deficit has declined by 22.6 percent on a YoY basis during the first eight months of FY19 and was only $ 356 mio in Feb 2019. It is likely to narrow further on the back of a deceleration in imports of goods and services and robust workers’ remittances. FX reserves are also expected to improve further in the coming months. Taken together, these favorable developments have helped reduce the level of uncertainty in the domestic FX market. Furthermore, the early-harvest CPEC projects aimed at eliminating structural bottlenecks in the economy are near completion, and the next stage of the corridor pertaining to Special Economic Zones, agricultural advancement and technology upgradation is about to begin. Thus, the overall business environment in the country stands ready to experience significant improvement in the next few years. Like any stabilization exercise, the economy must brace for an initial slowdown before it gets back on the recovery track. I understand that raw material costs for businesses have moved up because of higher oil prices and exchange rate depreciation, and financing cost has also escalated. At the same time, prices of consumer goods have also increased as the year-on-year CPI inflation for February 2019 has reached 8.2 percent, with Jul-Feb average inflation at 6.5 percent. However, it is encouraging to Page 3 of 9 note that the burden of this rising inflation was considerably lower for low income segment of the society as the food inflation remained considerably low. Going forward, average CPI inflation for FY19 is likely to fall in the range of 6.5 to 7.5 percent. Having said this, let me say that these are short-term challenges, and I hope that our economy’s inherent resilience will meet these challenges successfully. Even during this stabilization period, we are trying to protect our exportoriented businesses. Importantly, the mark up rates on the export finance scheme (EFS) and long-term financing facility (LTFF) have been left unchanged to keep incentivizing the export-oriented sectors of the economy. Currently, the EFF and LTFF rates are at ten years’ low. To further incentivize the financing under EFS, the rates are linked with performance, wherein lower rates are charged from exporters who achieve higher level of export performance. Similarly, the market-driven PKR depreciation has allowed the domestic goods and services to compete more favorably in the international markets. While there are challenges in the Pakistan’s economy, there are opportunities also. The correction in the exchange rate shall make production in many sectors more competitive and encourage new ventures in import substitution. Let me assure you that State Bank will continue to provide, through its regulatory and policy initiatives, a conducive financial system that is able to contribute in the growth of Pakistani businesses through the provision of adequate banking facilities. Furthermore, our banking industry shall also play an effective role when it comes to financial intermediation. In particular, beyond the encouraging growth in private sector credit numbers, banks are now being asked to extend their services to the underserved, unbanked and disadvantaged segments as well. I appreciate that the government has offered a lower tax rate of 20 percent to the banks on their income derived from incremental financing to the SME, Agriculture, and low cost housing borrowers (via the Finance Supplementary [Second Amendment] Act, 2019). As I have emphasized before Page 4 of 9 at other forums, the State Bank’s key focus is on three priority sectors, namely SMEs, Agriculture, and Low Cost Housing, with financial inclusion and Islamic Banking as cross cutting themes. Let me first expand on SMEs. The SME sector makes a prominent contribution towards the country’s GDP, exports and generation of employment opportunities. In this context, SBP had launched a Policy for Promotion of SME Finance in December 2017, aimed at enhancing SME access to finance by addressing the key challenges faced by the sector. There are nine key pillars of the SME Finance Policy, which include (i) improving the regulatory framework, (ii) upscaling of micro finance banks, (iii) risk mitigation strategy, (iv) simplified procedures for SME financing, (v) program based lending & value chain financing, (vi) capacity building & awareness creation, (vii) handholding of SMEs, (viii) leveraging technology and (ix) simplification of taxation regime. The detailed policy is available on SBP’s website, and I would simply encourage those of you who have an interest to review it there at your convenience. It is encouraging to note that SME Financing of banks has, for the first time, crossed the nominal milestone of Rs. 500 billion, as of December 2018. The target that has been given to the commercial banks is that by 2020 SME credit should be equal to 17% of their lending. Let me add that State Bank is keeping close coordination with federal and provincial governments as well as the Chamber of Commerce & SME Associations for timely implementation of all the initiatives identified under this policy. Moreover, under the enhanced National Financial Inclusion Strategy approved by the Prime Minister as part of the government’s 100 days agenda, some immediate measures that need to be taken for SME sector development have also been identified. These measures include strengthening of specialized banking institutions and SMEDA. It also includes formation of a National SME policy on a fast track basis. Page 5 of 9 SBP is also offering concessional refinance facilities, like the Refinance Scheme for Working Capital financing for Small and Low-end Medium Enterprises. The enduser markup rate on such facilities is 6 percent. The Refinance and Credit Guarantee Scheme for Women Entrepreneurs in Underserved areas is even more attractive at 5 percent end-user rate, with up to 60 percent risk coverage facility. Our second priority area is the agriculture sector, which contributes around 19 percent to GDP, 20 percent to overall export of the country and, importantly, employs around 38 percent of the labor force. SBP has been proactively promoting credit to agriculture sectors, primarily through the enhancement in production loans to small farmers to improve their productivity. I am pleased to share that banks have disbursed Rs. 606.1 billion up to January 2019, which is around 50 % of the total assigned target of Rs. 1,250 billion for FY19. Moreover, the number of outstanding borrowers has also increased to 3.92 million as of end-January 2019 from 3.50 million a year earlier, with a growth of 12 percent. Going forward, I believe there is a need to develop stronger linkages between the agriculture sector and SME/large-scale processing and manufacturing sectors. This would help achieve the dual objective of making the country self-sufficient in terms of industrial raw material, while also providing incentives to farmers to grow non-traditional high value crops. Finally, I will move to the third priority area, i.e. low-cost housing finance. Pakistan is facing a shortage of 10 million housing units and this number is growing. This basic human need is felt more profoundly at the bottom-of-the-pyramid comprising of the poor and financially under-served segments of the society. To this end, SBP has undertaken various initiatives to promote and develop housing finance in Pakistan. Key initiatives include separate Prudential Regulations, setting up of the Pakistan Mortgage Refinance Company, capacity-building measures, and creating an enabling regulatory framework. Page 6 of 9 In order to address the issue of affordability, the SBP in the presence of Prime Minister has launched a low-cost housing finance policy last week that encompasses important measures taken by the SBP including regulatory relaxations to banks/DFIs, as well as a subsidized fixed rate financial facility for low cost housing for special segments. Firstly, to give you some examples of regulatory relaxations, the existing 0.5 – 1.5 percent general reserve requirement against classified housing finance portfolio will not be applicable on low-cost housing finance. In addition, the Loan to Value ratio of 85:15 has been relaxed to 90:10 for low cost housing finance. Also, the bank or DFI’s exposure in low cost housing is not to be included for calculating the real estate exposure limit (i.e. 10percentof advances and investments). The Financing Facility for Low Cost Housing for Special Segments is a scheme designed to benefit widows, children of martyrs, special persons, transgender persons, and persons in areas severely affected by terrorism. Under this facility, SBP shall provide refinance against subsidized low-cost housing financing extended by banks and DFIs. Among its salient features, the scheme will have a 5 percent borrower rate, including the bank’s spread of up to 4 percent. Loan amounts up to Rs. 2.7 million, for tenors up to 12.5 years, will be eligible, with up to 100 percent refinancing provided by SBP. Moreover, SBP will also assign targets for housing finance to banks. It is expected that introduction of targets will contribute in achieving the policy objective of increasing the housing finance portfolio from 1.7 percent currently to 6 percent of total private sector credit by December 2023. Now I move to the first cross-cutting theme that is financial inclusion. Financial inclusion is an important instrument for inclusive economic growth and therefore, is also a high priority for the government. We all know that majority of people in our country fall in lower income groups who strive each day to make their ends meet. Financial inclusion can empower these segments to not only meet their financial needs Page 7 of 9 but also improve their livelihoods through better financial management and investment in micro and small businesses. In this regard, the GoP has adopted the National Financial Inclusion Strategy (NFIS) as one of its priorities. The NFIS targets and time-line have been enhanced until 2023 from its earlier end-date of 2020. We now have an agenda set for us for the next 5 years and some ambitious targets to meet, through which we aim to enlarge the strategy’s scope and deepen its impact for the country’s socio economic growth. Besides promotion of digital payments, the strategy also aims to: a. Enhance deposit to GDP ratio to 55%, b. Promote SME Finance to 700,000 Small and Medium Enterprises, c. Increase Agricultural Finance disbursements to Rs.1.8 trillion, and serve 6 million farmers through digitalized solutions; and d. Enhance share of Islamic Banking to 25 percent of the banking industry. Here I would like to stress that the most critical difference in the previous headline targets versus the new targets is emphasis on usage of financial services. I believe that mere account opening is not enough. It is essential that we permeate a culture of using digital financial services, to spur activity in accounts. Secondly, we have a clear priority to ensure that a gender-segregated target for account usage is incorporated as well. I am confident that we can meet all of the targets, based on the progress I have seen so far. By reaching these targets, we hope to create at least 3 million new jobs, and additional exports of US$ 5.5 billion. The Government’s ownership in NFIS can also be determined by the fact that an NFIS Transformation Office will be established in the PM Office: a. To ensure 100% digitalization of Govt. payments, along with providing necessary technical services to provincial government, so they can possess or identify the pool of expertise in this regard. b. To act as Trouble-shooter in resolving Implementation Agencies issues. Page 8 of 9 Second cross cutting theme is Islamic finance. Islamic Banking industry now accounts for 13.6 percent of the country’s overall banking system in terms of assets while in terms of deposits the share is 14.7 percent (as of September 30, 2018). The focus on Islamic Banking is not only a question of faith but an important plank to increase the savings rate. In a survey undertaken in 2015 over 78% of these surveyed had stated that if they have access to Islamic Banking they will use Islamic banking. This is the vast segment of the populace that we want to tap by promoting Islamic Banking. Today we have one of the most robust Shariah governance framework in the world in place that is regularly revised to address the needs of this evolving and dynamic industry. To address the needs of faith sensitive clients Shariah compliant alternatives of existing refinance schemes have been introduced. Our policies aim at not only providing a level playing field for the Islamic Banks but also facilitate them. Why are these initiatives important? Because growth in Agriculture, SME and low cost housing can be a catalyst for the growth in the economy in a short period. Furthermore, growth in these areas would not be a burden on the current account and hence would not only be sustainable but also generate employment. Having highlighted the steps taken by the State Bank of Pakistan to further the agenda of sustainable and inclusive economic growth in the country. Furthermore, the central bank fully supports the agenda of the business community and is always open for discussion and support. I remain very much confident that the new policies and programs being ushered in would prove conducive to our economy and bring about improvements in our economic development. Thank you for your time! Page 9 of 9 | state bank of pakistan | 2,019 | 5 |
Speech by Mr Jameel Ahmad, Deputy Governor for Banking and FMRM at the State Bank of Pakistan, at the 21st MAP( Management Association of Pakistan) Convention, Karachi, 28 August 2019. | 21st MAP Convention Speech by Deputy Governor, SBP on “Monetary Policy and Digitization of Payment Systems” 28 August 2019 بسم هللا الرحمن الرحيم Mr. Amir Jamil Abbasi, President MAP Distinguished Speakers Ladies and Gentlemen! Assalam o Alaikum and a very Good Morning! It is a privilege for me to be here to deliver a keynote address on “Monetary Policy and Digitization of Payment Systems”. These areas are the key policy pillars of every forward-looking Central Bank in the world today and has therefore attracted a lot of interest of the academia, business community and the public in our country as well. In my talk today, I would first like to draw your attention to the challenges our economy is facing and how the recent structural and policy changes by SBP, especially through monetary policy, will help stabilize it. Then, I will share my thoughts on the issue of digitization and technological developments, which is massively changing the payment and banking industry around the globe as well as in Pakistan. Finally, I will talk about the strategy of SBP on digitization and use of technology to not only bring efficiency in the payment but help in documentation of economy while also supporting our efforts of financial inclusion. Page 1 of 10 Ladies and Gentlemen! 1. As most of you may be aware that Pakistan’s economy is passing through a stabilization phase, as structural deficiencies have accentuated the twin deficits during FY17 and FY18. The situation was further complicated by the uncertainty prevalent in the global economy mostly due to trade disputes among major economies. These trade wars are unsettling the capital and commodities markets and affecting the export performance of emerging markets. 2. To effectively tackle domestic structural bottlenecks and enhance our economy’s resilience in line with the evolving global dynamics, Pakistan has made some tough but necessary adjustments in the monetary and exchange rate policies. These measures have already helped contain domestic demand pressures and led to a progressive improvement in the country’s external account. Supported by a healthy growth in workers’ remittances and external financing from multilateral and bilateral sources, the country’s foreign exchange reserves have now stabilized. 3. Encouragingly, the current account deficit decreased by a substantial 32.1 percent during FY19 and the July 2019 figures of a 72.8 percent decline are also encouraging. However, inflation has been on an upward trajectory mainly due to the pass-through of the exchange rate depreciation and adjustment in energy prices. Cognizant of the building up of inflationary pressures, SBP has been pursuing a tight monetary policy stance since early 2018. However, the impact of this tightening is going to reflect in the headline inflation with a certain lag. Page 2 of 10 4. At present, barring any sudden shock, the Monetary Policy Committee (MPC) of SBP is of the view, as stated in the last monetary policy statement, that the adjustment related to interest rate and the exchange rate from previously accumulated imbalances has already taken place. The recent monetary policy statement has explicitly stated that the MPC decision has inbuilt the impact of following 3 important developments: First, the outlook for external financing has further strengthened with the disbursement of the first tranche associated with the IMF Extended Fund Facility, activation of the Saudi oil facility, and other commitments of support from multilateral and bilateral partners; Second, the Government of Pakistan has passed FY20 budget that seeks to improve fiscal sustainability by focusing on revenue measures to widen the tax base. The government has also committed to cease borrowing from the SBP that would qualitatively improve the inflation outlook; Finally, on the international front, the sentiment towards emerging markets has improved as expectations of further policy rate cut in the United States have grown stronger and with all the conducive policies Pakistan has the capacity to attract foreign investment. 5. As we know, the effectiveness of monetary policy critically depends on the level of financial sector development, including financial access. Therefore, countries with low financial inclusion and financial development may have a weaker monetary policy transmission mechanism as opposed to countries with higher financial inclusion and developed financial markets. Globally, financial inclusion is considered Page 3 of 10 an effective tool for achieving sustainable and inclusive economic growth, as it is a prerequisite for equitable distribution of the economic opportunities, poverty reduction, and financial stability. Pakistan is committed towards broadening access to financial services and implementing development finance reforms and policies that can empower individuals and firms to access a well-functioning financial system, which cultivates opportunities for enhanced socio-economic outcomes, improved livelihoods and protection against economic shocks. The stated vision for financial inclusion in Pakistan is to improve the access and usage of quality financial services among individuals and firms, with dignity and fairness. 6. With this vision, and being cognizant of high financial exclusion in the country, SBP in 2015 launched the first National Financial Inclusion Strategy. This strategy sets the vision and outlines an action plan for achieving certain targets like ensuring that at least 50% of adults have a bank account in Pakistan by 2020. The NFIS has progressed well, and I am happy to share that as of June 2018, SBP’s data shows that unique account ownership in Pakistan has reached to 63.9 million, representing more than 50% of adults having a bank account in the country well before the deadline of Year 2020. 7. Since we reached the headline targets well before our deadline of 2020, the Government adopted an enhanced NFIS, which sets the vision to improve financial inclusion through further access to finance & deposit base, promotion of small & medium enterprises, easy & affordable access to finance to farmers, facilitation in low cost housing finance and Page 4 of 10 provision of Shariah compliant banking solutions. Accordingly, the GoP has set the following headline targets to be achieved by 2023: Enhancing the usage of Digital Payments to 65 million active digital transaction accounts, with gender segregation of 20 million accounts by Women Enhancement of Deposit to GDP ratio to 55% Promotion of SME Finance by extending finance to 700,000 SMEs which is 17% of the private sector credit Increase in Agricultural Finance by serve 6 million farmers through digitalized solutions and extending annual disbursements to Rs.1.8 trillion And finally enhancing the share of Islamic Banking assets and its number of branches to 25 percent and 30 percent of the banking industry respectively 8. The NFIS action plan expects to contribute in achieving sustainable development through creation of 3 million new jobs, generate additional exports of US$ 5 billion and enhance banks’ deposits to GDP ratio to 55% by 2023 through measures adopted under NFIS-2023. I must mention that the NFIS strategy also includes digitization of payment systems and adoption of technology as an effective method to improve financial access and inclusion. This leads me to my next topic which is the digitization of payment systems and SBP’s policy on it. Ladies and Gentlemen! Page 5 of 10 9. Throughout history, technological innovations and advancements in payment methods have continually reshaped monetary systems. However, since the last decade we have witnessed the emergence of a plethora of exciting innovations especially in the areas of banking and payments, which has resulted in enabling open business models based on entirely new and disruptive ideas. I would like to briefly mention some of the most prevalent trends: First is the rise of open platforms, such as e-commerce marketplaces, which allows anyone to buy, sell, and share in real time without considerable investments in infrastructure; Second: cloud based hosting enables quick deployment of complex systems using tools that are open source and easily available to anyone; Third is the pervasive adoption of mobile devices where everyone regardless of their social or financial stature owns a mobile phone; Fourth: advancements in big data analytics that provides deep insights about customer behavior, needs and wants; Fifth: advancements in artificial intelligence using big data and complex algorithms are being put to use in ways that were unimaginable a few years ago; Finally, the emergence of distributed ledger technologies like the Block Chain is set to transform entire industries by removing the need for intermediaries. Ladies and Gentlemen! Page 6 of 10 10. These technologies are now threatening to disrupt the financial sector by creating new forms of money and removing the need to intermediate, which has traditionally been the forte of banks. Since this has implications for central banks especially with regard to monetary policy execution and transmission, SBP has adopted a comprehensive strategy to further its agenda of digitizing payments in the country. This includes promoting and developing interoperable payments Infrastructure, issuing enabling regulations especially for retail payment providers, ensuring the trust and security of digital payment channels in the country and finally promoting and experimenting with new fintechs players. Let me now talk about each of these areas one by one: 11. As most of you may be aware that payment systems are usually categorized as wholesale and retail payment systems. Like the rest of the world, SBP upgraded its wholesale payments infrastructure to a Real Time Gross Settlement system, over a decade ago. The RTGS system has made our monetary policy operations more effective and efficient. 12. Now with the emergence of new enabling technologies, the retail payment systems are being transformed into the so-called “faster payments” that enables the public to pay and receive money in almost real time. Consumers accustomed to instant communication via email and social media expect to be able to make payments instantly. Therefore it is not surprising that these faster payments are rapidly gaining acceptance and popularity. Page 7 of 10 13. To remain abreast with these trends, SBP has already started work on the implementation of a Micro Payment Gateway in partnership with Bill & Melinda Gates Foundation and its representatives in Pakistan. This Gateway will offer faster retail payments with advanced Application Programming Interfaces and directory services, which will simplify the requesting, receiving and sending of payments in the country. 14. SBP is also closely working on digitizing government collections and payments, which includes digitization of government salaries, pensions and government collections. Recently, SBP, FBR and the provincial revenue authority of Punjab have successfully completed the project for digital collection of taxes and duties using alternate delivery channels. 15. On the regulatory front, realizing the emerging and critical role of nonbanks in digitization and payments, SBP, back in 2007 issued Regulations for Branchless Banking that disrupted the retail payments space by introducing agent based banking and payments services. Then in 2014, SBP issued the Rules for Payment System Operators and Service Providers. These Rules garnered significant interest in the payments industry and signaled a changed direction in SBP’s policy towards payments and digitization. Further, these Rules not only enabled SBP to regulate the payment systems operators in the market but also helped us in interacting with the new tech-oriented service providers and understand their needs and requirements. 16. In April this year, SBP issued the Regulations for Electronic Money Institutions that signify the resolve of SBP to promote digitization and innovative solutions for payments in the country. Since the initiation of Page 8 of 10 the licensing process, we have received very exciting applications from a variety of service providers who intend to offer innovative, user-friendly and cost-effective low value digital payment products in the country. We expect that with the potential to innovate, these non-banking entities can play a critical role in digitizing different types of payments in the country. 17. For ensuring trust and security of digital payments, SBP being cognizant of the risks inherent in digital payment is strengthening the oversight frameworks and capability. Let me say that enhancing cyber resilience is our number one priority and our recent regulatory instructions and enforcements are just first steps in that direction. I must mention that we have already issued various guidelines encompassing frameworks for Enterprise Technology Governance and Risk Management, Payment Systems’ Designation, Security of Internet Banking and card based transactions, guidelines for prevention against cyber-attack, Risk Management in Outsourcing Arrangements by Financial Institutions, etc. Ladies and Gentlemen! 18. During the past few years, SBP has adopted an open door policy for Fintechs innovators by facilitating and encouraging dialogue and discussions. Our teams from the policy group meet perspective providers especially from payments, remittances and banking and help them asses the appropriateness of their proposals against the existing regulations. 19. To promote Fintechs and nurture innovative ideas, SBP has already established an Innovative Challenge Fund facility, which provides funding facility to companies and Start-ups for innovative products and Page 9 of 10 services in the area of digital payments. Further, we are contemplating the development of a fintechs facilitation mechanism that would enable smaller fintechs to work with SBP in assessing the feasibility of their ideas in a controlled environment while at the same time giving SBP an opportunity to identify and address potential risks. 20. To sum it up, while central banks seem to be primarily concerned with the formulation and implementation of monetary policy, their domain has now expanded towards increasing the financial inclusion as well. This is necessary not only from financial deepening purposes but also from the perspective of poverty reduction. Enhanced financial inclusion ensures economic efficiency, maximum participation of its population in the overall economic process and thus maximizing growth and development. Technology on the other hand is rapidly enabling the policy makers to take effective action and leapfrog economies into new progressive eras. SBP is not only aware of the importance of these trends but is also continuously adapting itself in all areas of policymaking including monetary policy, financial inclusion and adoption of new technologies. I am sure that Insha’Allah; together we will overcome our problems and drive our country on the path of progress and development. 21. In the end, I would like to thank the Management Association of Pakistan for inviting me to deliver this Keynote Address. Thank you for your attention. ****** Page 10 of 10 | state bank of pakistan | 2,019 | 9 |
Remarks by Mr Tariq Bajwa, Governor of the State Bank of Pakistan, at the 23rd Zahid Husain Memorial Lecture, Karachi, 19 April 2019. | Governor Title Date Event Venue : Mr. Tariq Bajwa : Remarks by the Governor, State Bank of Pakistan : April 19, 2019 : 23rd Zahid Husain Memorial Lecture : SBP Head Office Karachi Remarks by the Governor, State Bank of Pakistan 23rd Zahid Husain Memorial Lecture 19th April 2019 Honorable Chief Guest Justice (r) Nasir Aslam Zahid, learned Speaker Dr. Zhou Xiaochuan, distinguished guests, ladies and gentlemen! 1. I feel honored to welcome you all to the 23rd Zahid Husain Memorial Lecture today, on “Lessons from the role of People’s Bank of China in China’s economic rise” by Dr. Zhou Xiaochuan, former Governor of the Peoples Bank of China. 2. The Zahid Hussain Memorial Lecture series is one of the most prestigious events organized by the State Bank of Pakistan every year, and serves a dual purpose: it symbolizes our humble effort to acknowledge the services Page 1 of 7 rendered to the nation by Mr. Zahid Husain – the first Governor of the State Bank. And second, the lectures offer an opportunity for intellectuals, academics and policymakers to come together and engage in healthy and constructive debates on contemporary economic issues and challenges. While we may be in variance with some of the viewpoints expressed by our eminent speakers, we nonetheless wholeheartedly welcome the opportunity to learn from their understanding and interpretation of complex economic interactions, and their efforts to deal with the identified issues. Ladies and Gentlemen! 3. But before I introduce our eminent speaker, please allow me to briefly recognize the services rendered to our country by Mr. Zahid Husain. As we are all aware, this country faced incredible challenges immediately after independence. In the words of Quaid-i-Azam Muhammad Ali Jinnah, we got a ‘mutilated, truncated and moth-eaten’ country.1 Pakistan’s chances of survival did not appear encouraging during those earlier years. It was during these testing times that Mr. Zahid Husain stood out amongst the dedicated lieutenants of our founding father. 4. Mr. Zahid Husain was among the principal architects of Pakistan’s financial and planning system. His commitment to public service and nation-building, and his resolve and ability to overcome multiple, significant challenges faced by the new-born country, set him apart from “Truncated State, Divided Nation” (Ch.2, p.40‐60) from “The Struggle for Pakistan: A Muslim Homeland and Global Politics” (Ayesha Jalal, 2014). Page 2 of 7 others. This was evident from the fact that he was Pakistan’s first High Commissioner to India; the first Governor of the State Bank of Pakistan, the first Chairman of the Planning Commission Board and the Taxation Inquiry Committee; and the author of Pakistan’s first Five Year Plan. We, at the State Bank of Pakistan, feel honored to have had him as our first Governor, and hope that we can carry his legacy forward with the same ideals that he embodied. 5. Mr. Zahid Husain personified a kind of leadership that automatically commanded respect, and this was critical as he set out to lay the building blocks of governance institutions in the country after independence. In this day and age, we often take these pillars of the state for granted, while being nearly oblivious of the untiring efforts of our predecessors. As aptly noted by Sir Isaac Newton, “If I have seen further, it is by standing on the shoulders of Giants.” 6. Today, as we are gathered here, I would like to avail this opportunity to recognize and give a token of thanks to our honorable Chief Guest, Justice (Retired) Nasir Aslam Zahid – the son of Mr. Zahid Husain. He has been very generous in accepting our invitation to grace this occasion as the Chief Guest. In continuing his father’s legacy, Justice Nasir Aslam Zahid has been at the pinnacle of public service, having served as Chief Justice of the Sindh High Court, a judge of the Federal Shariah Court, and finally as a justice in the Supreme Court of Pakistan. Since retirement, he has been actively involved in judicial education, and human and women’s rights issues. Like his father, he is a man of ideals, and commands enormous Page 3 of 7 respect across society. And the State Bank would never forget the contributions of his father. It was in 1973, the Silver Jubilee of the SBP, when it was decided that a lecture series would be instituted in Mr. Zahid Husain’s name. Since then, the SBP has hosted 22 globally acclaimed economists, policymakers and intellectuals, who have delivered lectures on a multitude of topics with enormous significance for economic policymaking. Ladies and Gentlemen! 7. With that said, please let me now introduce our highly esteemed and learned speaker for today,– Dr. Zhou Xiaochuan. During his long career, Dr. Zhou has served as a seasoned and successful banking executive, and as a reformist government official. He retired from the People’s Bank of China (PBoC) after serving for a record period of 15 years as Governor. He was also a member of the PBoC’s Monetary Policy Committee from 2003 to 2018. 8. After completing his PhD in automation and systems engineering from the Tsinghua University, Dr. Zhou worked at multiple economic and financerelated positions, and quickly proved himself to be a capable technocrat, administrator and policymaker. He served as: Vice-Governor of the Bank of China from 1991 to 1995; Vice-Governor of the People’s Bank of China from 1996 to 1998; President of the China Construction Bank from 1998 to 2000; and then chairman of the China Securities Regulatory Commission from 2000 to 2002. He distinguished himself during the Asian financial crisis of the late 1990s by helping keep China’s currency stable Page 4 of 7 while at the same time protecting the Chinese economy from adverse trade shocks. 9. But it is arguably Dr. Zhou’s role as the Governor of the People’s Bank of China that won him international acclaim. He stood out for his integrity, intellectual aptitude and the bold reforms introduced during his tenure that have ably served the public interest in China and allowed the country to emerge as a global economic powerhouse. Dr. Zhou played a pivotal role in his country’s exchange rate and interest rate liberalization, financial services and capital market reforms, and capital account convertibility in China. All of these reforms were enacted on the basis of robust theoretical and empirical foundations. Dr. Zhou actively pursued the internationalization of the Renminbi, to minimize the systemic risks to the global economy by diversifying the basket of reserve currencies and addressing Triffin’s dilemma, which is the predicament that reserve currency-issuing countries face while trying to simultaneously meet the needs of the domestic and the global economy. He has advocated for a formal settlement mechanism, and regretted that John Maynard Keynes’s farsighted idea of ‘BANCOR’ was not accepted at the Bretton Woods Conference. 10. Dr. Zhou’s rich legacy at the People’s Bank of China can be gauged from the Bank’s emergence on the global level as a macroeconomic problemsolver. The inclusion of the Renminbi in the IMF’s SDR basket has increased China’s and the People’s Bank’s role in the global financial system. Great reserves build-up, smooth sailing during the global recession Page 5 of 7 and sustained high growth are all hallmarks of his era. Christine Lagarde, the IMF’s Managing Director, has commended Dr. Zhou’s role in, and I quote, “successfully steering monetary policy while structural transformation was in full swing, contributing importantly to China’s sustained growth to become the second largest economy in the world.” End quote. 11. Dr. Zhou is currently a member of the Group of Thirty (G30) and Chinese Economists 50 Forum, and also holds teaching responsibilities at Tsinghua and other institutions. He has written several books and over one hundred academic articles on various aspects of financial and economic policy. Some of his important articles, such as “Rebuilding the Relationship between the Enterprise and the Bank” and the “Social Security: Reform and Policy Recommendations” touch upon development and inclusive growth. I would also strongly recommend his book “Marching Toward an Open Economic System” to the audience here, as it offers relevant insights about China’s successful journey in the age of globalization. 12. Given Dr. Zhou’s extensive experience at the highest levels of central banking, as well as his intellectual and research output, I am sure that his unique perspective and insights will be of enormous relevance for developing economies like Pakistan. 13. We are therefore delighted that Dr. Zhou Xiaochuan has joined us today as we honor the memory of one of our country’s finest civil servants. I would Page 6 of 7 like to thank Dr. Zhou, on behalf of this forum, for taking time out of his very busy schedule and speaking to us here today. 14. I would also like to thank all of you all for attending today’s lecture. In keeping with our past lectures, I hope this one will also challenge your beliefs, encourage you to think outside your comfort zone, and hopefully trigger a lively, thoughtful and constructive debate. 15. Without further ado, let me now invite Dr. Zhou to share his thoughts with us. Dr. Zhou Xiaochuan…! -- Page 7 of 7 | state bank of pakistan | 2,019 | 9 |
Inaugural remarks by Mr Murtaza Syed, Deputy Governor (Policy) of the State Bank of Pakistan, at the SAARCFINANCE Seminar, 6 April 2021. | Murtaza Syed: Economic modeling and forecasting – practices in central banks Inaugural remarks by Mr Murtaza Syed, Deputy Governor (Policy) of the State Bank of Pakistan, at the SAARCFINANCE Seminar, 6 April 2021. * * * Respected speakers, delegates from SAARC central banks, ladies and gentlemen! On behalf of the State Bank of Pakistan, it is a great honor and privilege for me, to welcome you all to this SAARCFINANCE seminar on the important topic of “Economic Modeling and Forecasting – Practices in Central Banks”. In particular, I would like to extend a warm welcome to our guest lecturers, Professor Vasco Gabriel, Dr. Wasim Shahid Malik and Mr. Azhar Iqbal. As you are all aware, SAARCFINANCE is a premier forum for regional cooperation among South Asian policy makers. Over the years, the SBP has had the privilege of hosting numerous seminars on topical issues under its ambit. In continuation of this tradition; the topic of today’s seminar is both interesting and challenging, especially in the current context, when the Covid-19 pandemic has disrupted the normal course of macroeconomic data and policy making. Ladies and gentlemen, in my opening remarks, I will briefly touch upon three areas, including the need of macroeconomic models in central banks, the evolution of such models, and current practices. Let me begin by discussing the need for macroeconomic models for policy analysis in central banks. Price stability is the key objective of almost all central banks, which they try to achieve through different monetary policy tools available to them. However, this can only be done indirectly through various transmission mechanisms, which are not only uncertain but also take time to work. Therefore, for an efficient application of policy instruments, central banks need to have a fairly good idea of the interplay between macroeconomic variables, the extent of uncertainty and policy lags. That is where macroeconomic models come in. Being a forward-looking policy institution, a central bank tries to analyze trends in economic and financial variables and to predict their future path under different possible scenarios. Macroeconomic models provide the analytical framework for us to do so. These models comprise a set of behavioral equations and definitional relationships that mimic the dynamics of actual economy; and provide a laboratory for scenario analysis and forecasting. These models are, of course, only approximations to complex macroeconomic reality; and also there is no universal model for economic analysis and forecasting which can answer all potential policy questions. Therefore, central banks need multiple models for policy advice. Some macroeconomic and econometric models which central banks use nowadays include univariate, reduced-form, simultaneous equation, state-space, semi-structural, Bayesian methods and dynamic stochastic general equilibrium models (DSGE models). Let me now turn to the evolution of the macroeconomic models at central banks over the years. Macroeconomic modeling experienced a paradigm shift after the general acceptance of the Lucas critique and the emergence of rational expectations theory. This in effect rendered simultaneous equation models, which were popular until the late seventies, obsolete and unleashed a revolution in the form of Real Business Cycle (RBC) theory. Lucas posited that as the behavior of economic agents adapts to changes in the economic structure, policy advice based on models becomes increasingly useless. To address the Lucas critique, 1/3 BIS central bankers' speeches macroeconomists came forward with models that contained stronger micro foundations. This class of models dates back to 1982 and is today classified as DSGE models. In later incarnations, a wider set of distortions and a host of shocks came to play a larger role in these macroeconomic models. For instance, the incorporation of nominal frictions in RBC theory transformed these models into New Keynesian DSGE models. The popularity of such models among central banks has grown manifold, mainly due to their ability to explain how nominal shocks can create real impacts in the short-run. Over time, these models have become workhorse policy analysis tools, especially for monetary policy advice, scenario analysis and forecasting. Alongside standard micro founded DSGE models, central bankers also utilize reduced-form versions of DSGE models, including Forecasting and Policy Analysis System (FPAS) and Quarterly Projection Models (QPM), for policy advice and forecasting. Like DSGE, these models also serve as useful tools for shock decomposition and scenario analysis. In terms of the use and advancement of macroeconomic models, the role of central bank researchers has been stellar in recent years. Researchers at major central banks have developed in-house DSGE models, calibrated on specific characteristics in their economies. Today many central banks, both in developed and emerging market economies (EMEs) have developed their own models and central banks in SAARC countries are no exception. Central banks in some of the SAARC countries have invested heavily in human resources and computational tools for building DSGE and FPAS models tailored to particular dynamics of their economies. In addition to DSGE and FPAS models, central banks also make use of various small-scale and special purpose models called satellite models that help bring an independent perspective into policy formulation. Due to their ability to outperform DSGE models in short-term forecasting, such models can supplement the medium to long-term forecasting process of DSGE models. Finally, let me touch upon some best practices of central banks with regard to the use of macroeconomic models. Central banks usually follow a modular approach in building macroeconomic models. Initially, they build smaller models, and then gradually expand them by incorporating sectoral dynamics, rigidities and shocks. These theoretically rich empirical models can later be integrated with core models, if deemed necessary. This modular approach enables economists to understand key transmission channels and policy tradeoffs. Another major benefit in constructing such a suite of analytical tools is to minimize forecast uncertainty. In this regard several central bankers utilize Bayesian forecast combination and model averaging. From a practical perspective, lack of high frequency data, especially on quarterly National income Accounts (NIA), restricts business cycle analysis. Several SAARC countries including Pakistan do not publish such quarterly data and this severely constrains short-run macroeconomic analysis as well as limits utility of DSGE models. To help address this issue, Nowcasting information from competing models can be used as external inputs to improve DSGE and FPAS model forecast performance over a short-term horizon. Such high frequency information could include independent forecaster’s views on output and inflation developments, expectations of the short-term interest rate and long- run output growth and inflation expectations. Ladies and gentlemen, let me end by noting that the development of the macroeconomic models is a continuous process. Central bankers continuously tinker and enhance models by incorporating real world macroeconomic events, crises, and new computational techniques. In this context, the challenge that Covid-19 has posed in terms of economic data and modelling has no recent parallel. Predicting the trajectory of macroeconomic variables was rarely as difficult as it is today, given their dependence on health factors. Recent research proposes integrated 2/3 BIS central bankers' speeches epidemiological and macroeconomic models to analyze the interplay between the Covid-19 outbreak and macroeconomic activity. 1 These models generally link Covid-19 and labor supply decisions to the current state of the disease progression, allowing for relevant behavioral responses that lead to multiple feedback channels. Another area that has garnered notable popularity of late is E-DSGE (or Environmental DSGE) models. The prospect of climate change and its potentially grave impacts on economic wellbeing are central concerns for policymakers around the world today. E-DSGE models build on 2 to evaluate social costs of the Integrated Assessment Models (IAMs) pioneered by Nordhaus, environmental degradation. Today, work on this area is in full swing. Going forward, novel models that incorporate dynamics linking pandemic and environmental conservation to the macroeconomy are likely to feature alongside unified framework models as a key tool of policy advice. In concluding, I would like to leave you with an exciting question, motivated by the rapid strides that we have made in recent years in both computer processing power and unorthodox data collection. The question is; as central bankers, how can we best marry insights from bigdata and unconventional real time high frequency indicators to further enrich our macroeconomic models? Utilizing real time information is central to effective policymaking and new real-time indicators and proxies of macroeconomic activity have proved extremely useful during the current pandemic. The logical next step would be to devise formal modeling procedures to make effective use of such unorthodox indicators as web scraping, credit card transactions data, and real time data on transportation, port activity, and the like. Let us try to embrace this as our common challenge as we look to strengthen our modelling activity in the coming years. I look forward to insightful presentations from our experts and a rich discussion on the latest modeling practices in different SAARC central banks. 1 Ansah J.P., Epstein N. & Nalban V. (2020),” COVID-19 Impact and Mitigation Policies: A Didactic Epidemiological-Macroeconomic Model Approach,” IMF Working Paper No. 20/233. 2 Nordhaus (2013) has garnered considerable attention regarding climate change and macroeconomic policy. 3/3 BIS central bankers' speeches | state bank of pakistan | 2,021 | 12 |
Keynote address by Mr Jameel Ahmad, Governor of the State Bank of Pakistan, at the inauguration of Institute of Business Administration's Finance Lab, Karachi, 14 November 2022. | Jameel Ahmad: Keynote address - inauguration of Institute of Business Administration's Finance Lab Keynote address by Mr Jameel Ahmad, Governor of the State Bank of Pakistan, at the inauguration of Institute of Business Administration's Finance Lab, Karachi, 14 November 2022. *** As prepared to deliver in the event Dr. Akbar Zaidi, Executive Director, IBA Karachi; Dr. Abdullah Zafar Sheikh, Dean, School of Business Studies; Dr. Asad Ilyas, Registrar IBA; Dr. Sana Tauseef, Chairperson, Department of Finance; Dr. Mohsin Sadaqat, Assistant Professor and Head of Finance Lab; Mr. Azfer Naseem, CEO, Alpha Capital, IBA's faculty and Students; and Ladies and Gentlemen. Assalam O Alaikum and Good Afternoon! It is my pleasure to be here amongst all of you at the inauguration of this Finance Lab and sharing my thoughts with the distinguished audience. Let me begin by congratulating the Institute of Business Administration, Karachi and the Alpha Capital on taking this innovative initiative of establishing this Finance Lab. I hope this Lab will bridge the gap between industry and academia, and between theory and practice in the area of finance by providing students an opportunity to immerse themselves into real-world problems faced by individual corporations and the country's financial system at large. There are several key challenges to industry-academia collaboration and concerted efforts are required to overcome them. Some of the key challenges faced in this regard are that: (1) universities tend to contribute to theory or empirical research with aims to get published in academic journals, while businesses are constrained by their mandate of profitability; (2) businesses typically work on much shorter deadlines and aim for speedy results, whereas research work is inherently time intensive; (3) not all corporations have sufficient funds to invest in research on product or process innovation, market development, and market intelligence. There is, therefore, a pressing need to establish and strengthen a formal collaboration mechanism between academia and industry for designing courses and setting research agenda that serves the objectives of both businesses and academia. In this regard, Trade Organizations can play an instrumental role in providing a consultative platform as well as arranging funds to finance academic research, given their ability to identify key areas of research and pool in required resources. Ladies & Gentleman, I would like to briefly highlight the status and recent trends in financial system landscape, wherein this Lab will be operating. In Pakistan, the state of financial system is marked by low deposit to GDP ratio, account ownership, and bank assets. The credit to private sector in the country is also low compared to peer economies, as is the coverage of credit bureaus' optimal use, 1/3 BIS - Central bankers' speeches which can potentially transform the country's financial system landscape. Similarly, the country's debt and equity markets are also not deep and diversified. All these aspects of our financial system may come to define the scope of the Finance Lab, and challenges it may attempt to address. Globally, in the recent years, financial system has evolved at a brisk pace with the increased use of technology and digital transformation of processes and payment methods. Today, funds can be transferred in just few clicks within and across the borders, accounts can be opened sitting at home and payment for services can be made 24/7 without going anywhere. The world is keeping its pace and advancing toward central bank digital currencies, internationally integrated faster payment channels, growing fintechs, open banking, and cloud technology. These trends are radically reshaping every sector of the economy and have also become important drivers of growth in many countries. Among these trends, financial institutions are now also exploring Artificial Intelligence and Data Analytics, which includes machine learning enabled credit scoring models and credit decisions; artificial intelligence enabled solutions to anti money laundering and know your customers; and technology usage to analyze and get insights from piles of available data and take more informed decisions. Developments in big data analytics is helping financial institutions to dig deeper and get insights about customers' behavior, needs and wants. Similarly, artificial intelligence is facilitating quick decision-making using computer algorithms and big data in ways that were unimaginable a few years ago. Investing in technology offer immense potential. I am pleased to inform that the SBP has taken a number of steps to embrace technological innovation. In the interest of time, I will briefly highlight three such initiatives. First, SBP has developed a licensing and regulatory framework for setting up digital banks in Pakistan. A digital bank is defined as a completely digital entity that will provide all types of banking services and operations, from accounts opening to taking deposits and lending funds, through digital means without the need for customers to physically visit any bank branch. The framework mainly aims to enhance financial inclusion through efficient and cost-effective digital financial services. Second, SBP is working towards Open Banking regime to facilitate the implementation of its agenda on financial inclusion and digitization. SBP is exploring areas such as open Application Programming Interfaces (APIs), and security and data privacy to foster innovation and financial inclusion. For this, SBP has already developed a technical sandbox where banks and fintechs will partner on shared data on developing use cases for financial wellbeing of customers. After this pilot, SBP will be issuing guidelines and framework on Open Banking. Third, the SBP has successfully deployed Pakistan's Instant Payment System, called Raast. This state-of-the-art payment system promises to be simple, free, fast, interoperable, and secure payment option for customers. The SBP launched Raast in 2021 with bulk payments facility that enables processing Bulk disbursements such as dividend disbursements, Government to Person payments, mutual funds payments, Business to Business batch payments, pay-roll payments by corporates etc. 2/3 BIS - Central bankers' speeches The second use-case of RAAST that is Person to Person payments was launched early this year in February 2022. This has allowed individuals to transfer payments to other individuals, family members, and friends across the country. The SBP is now working on the third use case of Raast, which is Person to Merchant payments. This will enable individuals to make electronic payments to merchants through alternate channels for instance, QR codes and Request to Pay, which is a mechanism whereby payee can initiate request for payment to the payer. Ladies and gentlemen, academia can play a very important role in the development of financial markets. In this regard, I would like to highlight few areas for possible interventions of the academia: First, SBP and the government's initiative to improve financial inclusion is challenged by low financial literacy among masses. To improve financial literacy, academia has a significant role to play in not just educating students but also to wider sections of society through innovative means. This is an area where the regulators and academia can also potentially partner and bridge this gap by working towards a common goal of inclusive growth. Second, some businesses, such as micro and small and medium enterprises, have limited awareness about different financing options and do not have the expertise to present their project proposals and borrowing requirements to banks. Third, from the perspective of promoting growth and innovation in value chain financing, academia can play an important role in enhancing their understanding of financial matters. The Finance Lab may consider collaborating with related disciplines to conduct studies on business processes, market sizing and value chain assessments of various products from upstream to downstream and across the thread of bazaars and logistic chain. Fourth, in order to encourage lending based on reputational collateral, the Lab may also encourage collaboration with credit bureaus to test and to create credit scoring models, especially those based on alternate data or otherwise aimed at the segment of individuals and businesses that have no collateral and little or no credit history. Lastly, perhaps the most important consideration for the Finance Lab is how to encourage savings in the country, where particular emphasis may include increasing the awareness of individual savers across the country to understand the risks and returns associated with different avenues, and increasing retail investments in government debt papers and corporate bonds. Let me conclude by reiterating my best wishes for the Lab. I hope IBA's Finance Lab will facilitate financial institutions in Pakistan to rethink and reinvent business models and provide strong product offerings by embracing technology and adopting customer centric approach. I hope that the lab would facilitate great collaboration between the industry and academia to solve topical and long-unsolved problems, and allow students to expand their horizon beyond the classroom. Thank you for your attention! 3/3 BIS - Central bankers' speeches | state bank of pakistan | 2,022 | 11 |
Keynote address by Mr Jameel Ahmad, Governor of the State Bank of Pakistan, at the Sustainable Banking Conference, Karachi, 9 November 2022. | Jameel Ahmad: Launch of Environmental and Social Risk Management Manual Keynote address by Mr Jameel Ahmad, Governor of the State Bank of Pakistan, at the Sustainable Banking Conference, Karachi, 9 November 2022. *** As prepared to deliver in the event Dr. Shamshad Akhtar, Chairperson-Pakistan Stock Exchange Board, Yaseen Anwar Sahib, Senior Policy Advisor-IFC, Mr. Toshio Odagiri, Consul General of Japan in Karachi, Khawaja Aftab Ahmed, Regional Director-IFC, Zeeshan Ahmed Sheikh, Country Manager Pakistan & Afghanistan-IFC, banks' presidents and CEOs, distinguished guests, ladies & gentlemen, Assalam o Alaikum and a very good morning. It gives me immense pleasure to addressthis esteemed gathering at this conference on Sustainable Banking, organized jointly by SBP and IFC with the support from the Government of Japan. This conference aims at creating awareness about risks associated with climate change to the financial sector and provides a platform for deliberating and identifying tangible actions to effectively mitigate and manage these risks. I would like to express my gratitude to both IFC and the government of Japan for joining us in organizing this important event. Ladies and Gentlemen, I was part of the recently concluded IMF-World Bank annual meetings held in Washington DC and one of the spotlight discussions was regarding the threats of climate change to financial stability. A key takeaway from these sessions was the increased realization that climate change is a global issue, which urgently requires a coordinated global response. The World Bank has established a new fund, namely "Scaling Climate Action by Lowering Emissions" for developing countries, which was launched yesterday at the COP27 event in Egypt. The detrimental impacts of environmental degradation and climate change on economic growth are real. We all can observe that the climate change is having its toll on Pakistan. The weather patterns are changing and recently we have experienced some abnormally high downpours and flooding, never observed in our history. One-third of our country was underwater and one in every seven persons was displaced. Ironically there are variations across countries in how the climate change affects the weather patterns, causes flash flooding, droughts, melting of glaciers and rises in sea levels etc. Pakistan is ranked among the top 10 countries most vulnerable to climate change. Ladies and Gentlemen, The transition to a low carbon green economy requires a shift in production and consumption patterns. In this context, the financial industry can play an important role by mobilizing the financial resources needed for the transition. Globally, innovative financial instruments such as Green Bonds have been well-received as they play a vital 1/3 BIS - Central bankers' speeches role in transforming economies through sustainable and responsible financing. According to Climate Bonds Initiative, the cumulative issuance of green bonds has exceeded to USD 2 trillion. To support such initiatives and facilitate transition to a lowercarbon footprint, financial regulators are striving to create enabling conditions that make green financing an attractive opportunity for investors and businesses. Ladies and Gentlemen, To this end, Central Banks across the world have joined hands to strengthen the global response required to meet the Sustainable Development Goals and Paris Agreement. Central Banks in emerging economies like China, Bangladesh, Indonesia, Mongolia, and Turkey among others have already launched national policies, guidelines, or roadmaps focused on sustainable banking. Further, central banks are also incorporating adverse weather-related scenarios in their stress testing of banking sector to evaluate the resilience of financial system to adverse shocks. State Bank of Pakistan has also undertaken important initiatives under the umbrella of Green Banking to ingrain sustainability considerations in the financial sector. SBP became a member of Sustainable Banking & Finance Network in 2015 and is leading the initiative of promoting sustainable banking. SBP has introduced Renewable Energy Financing Schemes both in conventional and Shariah compliant financing modes. The objective of the scheme is to finance clean and renewable energy projects to meet the growing electricity demand in the country. I am delighted to share that the scheme has made remarkable progress by providing financing to more than 2,200 projects with a cumulative capacity of almost 1,600 MWs by August 2022. The total outstanding financing under the scheme was Rs. 95 billion at end-August 2022. On the regulatory side, SBP has issued Green Banking Guidelines in 2017, with the objective to: (i) reduce vulnerability of financial institutions from risks arising from the environment, (ii) facilitate and push banks to fulfill their responsibilities for the protection of environment, and (iii) ensure required financing is made available for transformation into resource efficient and climate resilient economy. Ladies and Gentlemen, SBP has been vigilant in monitoring the progress of implementation of these guidelines by Banks and DFIs. And I am happy to share that the progress is promising. All Banks and DFIs have established Green Banking Offices and nominated chief green banking managers to supervise Green Banking activities . 31 banks and DFIs (79%) have formulated Green Banking Polices that have been approved by their respective Boards. These policies include policy statements on environmental risk management, facilitation of green businesses, and reduction in their own carbon emissions. 27 banks and DFIs (69%) have integrated environmental risk assessment procedures with their credit risk assessment procedures to better evaluate and manage the impact of environmental and climate changes on their credit portfolios. 16 banks and DFIs (41%) have established strategies for facilitation of green businesses by including a policy statement for allocating funds to businesses that intend to lessen their carbon footprint. 2/3 BIS - Central bankers' speeches 18 banks and DFIs (46%) have established annual impact reduction targets including well-defined key performance indicators and strategic plans for achievement of these targets. While a considerable progress has been made towards adopting green and sustainable banking guidelines, degree of implementation varies across the industry. Moreover, there is lack of standardization in assessing and identifying environmental risks. I believe setting minimum standards and benchmarks will help ensuring a faster and broad-based progress. To bridge this gap, I am glad to share that today SBP is issuing Environmental and Social Risk Management (ESRM) Implementation Manual for Banks and DFIs. An exhaustive approach has been adopted in the development of this manual and its contents have been finalized after thorough consultations with the banking industry. The objective of issuing ESRM manual is two-fold. First, to establish a standardized benchmark for environmental and social risk management and compliance of Green Banking Guidelines. Second, to focus on social risk (like child labor, forced labor, safety & health issues etc.), which will align Green Banking Guidelines with international best practices on Environmental and Social Risk Management. Adoption of this manual will be voluntary for a period of 3 years, allowing banks and DFIs adequate time to establish and integrate their environmental and social risk management systems with credit risk management procedures in a phased manner. The manual will help all the banks and DFIs in developing a roadmap for comprehensive implementation of the Green Banking Guidelines. Although, the implementation of the Environmental and Social Risk Management manual will be piloted in two voluntary banks on a fast-track basis, I will encourage the entire banking industry to take full advantage and use this manual for establishing ESRM systems and procedures. State Bank, along with IFC, will continue to provide necessary support and guidance at every stage of ESRM implementation. I am happy to share that our next milestone will be the development of a "National Green Taxonomy" in coordination with relevant stakeholders. This will facilitate financial institutions in identifying, and financing green projects and reporting their green finance portfolios to SBP and public. This will also lay-out the groundwork for development of green bond and Sukuk market in Pakistan. In my concluding remarks, I would like to re-iterate that financing for sustainable development has a pivotal role to play in achieving a resource efficient and climate resilient economy. At the same time, given strong macro-linkages with the real economy, the role of Environmental & Social Risk Management (ESRM) is critical for reducing vulnerability to financial system stability. Well-coordinated and more concerted efforts are needed to mitigate and manage risks associated with climate change. SBP will continue to analyze climate-related risks and opportunities and devise mechanisms for ensuring effective supervisory role to achieve a sustainable financial system in Pakistan. I wish you interactive and productive sessions ahead. Thank You! 3/3 BIS - Central bankers' speeches | state bank of pakistan | 2,022 | 11 |
Keynote speech by Mr Jameel Ahmad, Governor of the State Bank of Pakistan, at the Pakistan Financial Literacy Week 2024, Karachi, 8 March 2024. | Jameel Ahmad: The State Bank of Pakistan's vision of financial inclusion through financial literacy Keynote speech by Mr Jameel Ahmad, Governor of the State Bank of Pakistan, at the Pakistan Financial Literacy Week 2024, Karachi, 8 March 2024. *** Deputy Governors and esteemed colleagues, Presidents and Chief Executives of Banks, Distinguished guests, ladies and gentlemen! Assalam o Alaikum and good morning! It is with great pleasure that I am inaugurating the first ever Pakistan Financial Literacy Week. This is a first-of its kind endeavour in Pakistan to champion financial literacy and inclusion on a national scale. I am really looking forward to the series of events, competitions, and public engagements during the week. These activities aim to promote a better understanding of the financial system and highlight the importance of encouraging responsible financial behaviour in the general public, especially in youngsters. Financial inclusion is a cornerstone of a thriving and equitable economy. As the central bank of Pakistan, our commitment to fostering financial inclusion is unwavering. We recognize that access to financial services is a fundamental right, and our mission is to empower citizens by providing them with the tools and knowledge needed to participate fully in the economy. When more people have access to financial services, it creates a broad base of consumers, savers, and entrepreneurs, and helps stimulate economic growth. It is our duty to dispel common misconceptions about formal financial services, and to engage the public in an informed, yet non-technical manner, to build their trust in the financial system. This is all the more important in developing economies like Pakistan, where the informal economy has a substantial share in overall economic activity and contributes to widespread prevalence of informal and unsafe savings and investment avenues. Better knowledge about financial services and products will help channelize resources towards productive use. Ladies and gentlemen! Financial literacy is our collective responsibility. The government, financial institutions, non-profit organizations, and educational institutions all have a role to play in promoting financial literacy in Pakistan. I am happy that State Bank of Pakistan has been on the forefront in spreading financial literacy in the country. In collaboration with the banking industry and academia, we are proud of leading two iterations of the National Financial Literacy Program, one for adults and one for youngsters. 1/3 BIS - Central bankers' speeches These initiatives are instrumental in disseminating financial literacy to more than 2.9 million individuals, with more than 50% female participation. In addition, an impressive 80% account opening rate of beneficiaries was witnessed under NFLP. I congratulate all of you, who served in this cause and made this initiative a success by transforming it into industry owned initiative. Ladies and gentlemen! Our more recent major initiatives have focused on expand financial services to the unbanked and underbanked segments of the society. a. First, SBP is moving in a more targeted manner to devise policies to better integrate the female population with the formal financial system. Sustained economic growth is not possible if half of the population is systematically excluded from the workforce. To plug this historical gap in the financial services industry, SBP has introduced the Banking on Equality Policy. It supplements our National Financial Inclusion Strategy and other initiatives to provide better access to financial services to women in our country; b. Second, SBP is spearheading multiple initiatives, in partnership with banks, to provide an equitable and easy access to drive usage of a range of financial services. They include RAAST, ASAAN Digital Account, ASAAN Mobile Account and more recently Digital Banks. c. Finally, SBP has introduced specialized schemes to enhance access to finance. These schemes include the SME Asaan Finance or SAAF Scheme, Refinance and Credit Guarantee Scheme for Women Entrepreneurs, Line of Credit for MSMEs, and Prime Minister's Youth Business and Agriculture Loan Scheme. I am happy to share that these initiatives have made an impact on advancing financial inclusion in Pakistan. As of June 2023, there were around 177 million bank accounts in Pakistan. Of these, 83 million are unique accounts, which is 60% of the 137 million adult population. It is also important to note that the total number of accounts owned by women are 49 million, of which unique accounts are 29 million. These 29 million unique accounts represent more than 43% of the female adult population. Although the financial inclusion indicators have shown improvement over the past few years, significant efforts are still required to catch up with regional and peer economies. In our strategic plan for the next five years "SBP Vision 2028", we aim to strengthen the financial inclusion framework through targeted policy initiatives with enhanced focus on digital means. Ladies and gentlemen! True financial inclusion requires individuals to understand how to leverage these services to improve their lives. This is where financial literacy plays a pivotal role. By providing individuals with the necessary knowledge and skills to manage their finances wisely, we empower them to break the cycle of poverty, plan for the future, and 2/3 BIS - Central bankers' speeches seize opportunities for economic development. Financial literacy enables people to make informed decision about savings, borrowings, investing, entrepreneurship and protect themselves from financial risks. In this age of digitalization, let us plan to leverage digital platforms for massive outreach and greater impact in empowering individuals with essential financial knowledge. Digitalization heralds a promising future where financial literacy becomes more accessible and pervasive than ever before. We envision a future where every citizen has access to banking services through their smartphones, facilitating transactions, savings, and investments with ease. Ladies & Gentlemen! At the end, I would reiterate that SBP is committed to realizing a future where every citizen, regardless of their background or location, has the opportunity to participate meaningfully in the economic activities. Financial inclusion through digital means and financial literacy is not just our vision; but it is a collective responsibility to build a prosperous and inclusive Pakistan. I would like to congratulate the banks receiving awards in recognition of their commendable efforts in championing financial literacy campaigns. I thank you for your time, and look forward to the wide range of interesting and engaging activities to achieve our overarching goal of financial inclusion. 3/3 BIS - Central bankers' speeches | state bank of pakistan | 2,024 | 5 |
Speech by Mr José Darío Uribe Escobar, Governor of the Central Bank of Colombia, at the LACEA-LAMES 2007 Meeting, Bogotá, 4 October 2007. | José Darío Uribe Escobar: Globalization and Colombia’s policy framework Speech by Mr José Darío Uribe Escobar, Governor of the Central Bank of Colombia, at the LACEA-LAMES 2007 Meeting, Bogotá, 4 October 2007. * I. * * Introduction The rapid expansion of the world economy in recent years has contributed to the positive performance of the Colombian economy, but has also created new and diverse economic policy challenges. I would like to highlight the following challenges: • To continue reducing inflation and to keep economic growth at a sustainable level. • To help the economy adjust to a sharp real peso appreciation and to worldwide changes in relative prices. All these phenomena are connected. They are also associated with a period of rapid growth in the world economy and with the entry of China, India and the Eastern European countries into the global economy. A good share of policy challenges arises from the uncertainty about how long the world economy will continue to expand and from the difficulties in particular sectors or with groups of individuals associated with sharp and rapid changes in some relative prices. I will now briefly describe the main effects of globalization on the Colombian economy, before analyzing how, in the past, favorable changes in terms of trade and capital flows have been the impulses for large swings in economic growth in Colombia. Lastly, I will identify the principal elements of an economic policy framework that helps to smooth economic cycles, placing special emphasis on the role monetary policy plays in that process. II. Some economic effects of increased globalization As is well known, over the last four years the world economy has been expanding as pace not seen since several decades ago. In addition, this expansion, has (at least) two elements that make it different from previous experiences. First, the strong contribution that China and – to a lesser degree – India have made to global economic growth. These countries have an abundant labor force but are scarce in natural resources. Second, this economic growth phase has been almost even across countries and regions, and unlike what happened at the beginning of the seventies, it has not been accompanied by strong inflationary pressures, up until now. This could mean that the current growth phase of the world economy will last longer than the growth spurt of the seventies (Krueger, 2007). Colombia, like many other countries, has benefited greatly from the rapid world economic growth and the greater commercial and financial interdependence between countries. The scale of growth in the world economy, coupled with the rapid rise in output in China, India and the Eastern European economies have led to a substantial increase in the demand for oil, coal and ferronickel, which are Colombia’s three leading export products. Also as we shifted to import more from countries such as China, where wage and production costs are low, the prices of our manufactured imported goods have dropped or increased at relatively low rates for several years on a row. That is the case for instance, of prices for clothing, household electrical appliances, automobiles and computers, but also many other items. Consequently, prices for imported goods have declined compared to those for exports. Thus the terms of trade have improved and the Colombian economy has received a positive boost to its income and real wealth. The latter has facilitated the growth in consumer, corporate and government spending. In addition, with high oil prices, the economy of Venezuela, Colombia’s second most important trading partner, has been growing at a high rate and has imported large quantities of food products and manufactured goods from Colombia. Similarly, the larger world economic growth has led to an increase in exports from Colombia to countries other than the United States and Venezuela of about 60% over the last 4 years. On its own, foreign net direct investment has increased from annual average levels of US $2873 million in 2004 to more than US$ 5365 million in 2006. This extra investment has been used to expand the production of basic commodities, and more generally exports. It has even been used to take advantage of business opportunities created by domestic growth itself. This is the case, for example, with foreign investment in commerce and the financial services sector, both of which have experienced an important increases in productivity. The combination of high international prices for our main export products, the strong demand for exports and the increase in confidence levels and security, has meant that the growth of both investment and household consumption have accelerated, raising real economic growth. Following two consecutive years when the economy grew at annual rates close to 5%, in 2006 it expanded 6.8%, and during the first semester of this year at a rate of 7.6%. The improvement in the terms of trade together with capital inflows in the form of foreign direct investment has induced a sharp peso appreciation against the dollar and against a basket of currencies. I will return to talk about this later. Turning now to inflation, the expansion of demand arising from the improvement of terms of trade placed moderate pressure on production capacity. There have also been rises in the price of fuel. And more recently, a strong demand for food exports to Venezuela has pushed up the domestic price of certain foodstuffs. These latter two factors are changes in relative prices, and what happens in the future with the general price level will depend on monetary policy decisions. On a more structural level, the increased competition from economies with an abundant supply of cheap labor has made it more difficult for domestic producers to raise prices, even in an environment characterized by strong growth in demand. Likewise, more competition in some productive sectors has curbed wage increases, exerted downward pressure on the costs of other inputs, and encouraged gains in productive efficiency. All of these could eventually imply that inflation in Colombia becomes less sensitive to changes in the domestic output gap, but more responsive to changes in the world output gap. In short, the combination of an improvement in the terms of trade and capital flows in the form of foreign direct investment has contributed to a strong economic expansion. Similar episodes, however, have occurred in the past, even before the deepening of the globalization process. In each case the years of high growth have been followed by years of low growth and often crisis. That is why one of the fundamental challenges of the current economic policy must be to prevent cycles of boom and bust from building up and, in doing this, to ensure that the Colombian economy makes the most of the globalization process. With this in mind, in the next section I will spend some time on the causes of our past business cycles. III. Terms of trade, capital flows and business cycles Chart 1 plots the four Colombian business cycles since the 1970s in terms of growth rates. It seems that very high growth rates where in all cases followed by a slowdown to much lower rates a few years later. GDP per capita fell for at least one year during the slowdown. When we look into the source of these cycles what is interesting is that we see that either favorable terms of trade movements or inflows of capital and sometimes both acted as impulses for each cycle. Chart 2 plots the Colombian terms of trade against the GDP growth. Before the 1990s, coffee was the main export of Colombia. Rises in the world coffee price in 1976-7 and 1986 stimulated demand in Colombia almost a year later. Recent estimates within the Banco de la República confirms that the correlation of the terms of trade cycle of three quarters ago with the GDP cycle now is 0.6 for data since 1994 (Parra, 2007). Chart 3 plots the financial account and FDI net inflows against growth in Colombia. Fluctuations in international lending precede or coincide with fluctuations in GDP growth in the 1980s. In the late 1990s, just as recently, FDI inflows were attracted especially by the petroleum and communication sectors. Capital flows were another source of impulses for some of these cycles, again just as now. The charts also illustrate that terms of trade and international lending flows to Colombia are volatile and can reverse. They have acted first as impulses to these booms and then often reversed to act as detonators to expose the vulnerability built up in the intervening years. For example in 1998 a sharp rise in international market spreads associated with the Asian crisis triggered a recession here. The literature confirms that this pattern of impulse and detonation is common to developing countries. The consensus is that terms of trade shocks are an important source of shocks to growth in emerging market countries (Mendoza, 1995). Others have found evidence that capital inflows are procyclical (Reinhart, Végh and Kaminsky, 2004). The question relevant to then and now is: If terms of trade fluctuations and capital inflows are so volatile, why do we not save during the sunny days for the rainy days? To understand this, Lavan Mahadeva, at the Banco de la República, has offered me a simple scheme to differentiate roles in the drama of the business cycle. He classifies variables into impulses, amplifiers, symptoms and detonators. See Chart 4. Impulses start the cycle. Amplifiers are those factors that generate unsustainable outcomes from what should be favorable impulses. The symptoms are data that reveal the growing vulnerability. Detonators trigger crises by exposing those vulnerabilities. The point is that impulse and detonators, which as we have seen are typically international factors, are inevitable. A developing country like Colombia cannot shut itself off from them. On the other hand, symptoms of ill health such as an unsustainable current account deficit, or an appreciating exchange rate, can be treated, but sometimes that treatment is worse than the disease. Our focus is therefore on amplifiers where we think there is a clear responsibility for domestic policy. What could be an amplifier? Intertemporal consumption theory provides a simple answer. An amplifier is any factor that prevents consumption smoothing in response to a favorable income impulse. Chart 5 plots real private consumption against real private disposable income for when we have data. Clearly there is a failure of consumption smoothing: both follow each other closely. If consumption smoothing worked in Colombia, we would save in the sunny days for the rainy days that will surely follow. Only then could we make full advantage of international developments. Other amplifiers may exacerbate bursts in fixed investment or durable consumption that are triggered by external events. One reason why consumption smoothing fails in Colombia is that businesses here face much uncertainty and cannot guarantee a steady flow of repayments to lenders. We can see that in the high risk premia and credit frictions on domestic lending. High risk premia and high discount rates tilt consumers away from smoothing temporary income flows. The pro-cyclical behavior of financial credit also amplifies the cycles of investment and durable consumption goods. This naturally matches with evidence that asset prices (mostly house prices in Colombia) are pro-cyclical. See Chart 6 also from recent research with the Banco de la República (Tenjo, Charry, López, Ramírez, 2007). Another reason why consumption smoothing could be failing in Colombia is that a higher proportion of shocks to income here are permanent rather than temporary. Aguiar and Gopinath recently (Aguiar y Gopinath, 2007) report that this is typical of emerging market economies and suggest that this in turn may be due to policy regime switches and volatile interest rates. It is more difficult to prove, but still it seems likely that consumption has been pro-cyclical because policy, be that monetary policy, fiscal policy or financial stability policy, has been too pro-cyclical. If consumers or firms face low real rates and easy credit during the booms caused by favorable terms of trade and inflows, they will naturally recycle those gains into consumer demand and into risky forms of investment and not into more sustainable savings and investments. IV. Adjusting to economic change and the role of macro policies The Colombian experience thus suggests that the difficulty in smoothing out consumption following external shocks is important in creating our economic cycles. Moreover, it is quite likely that monetary, fiscal and financial policies were key factors in explaining the procyclical expansion of expenditure. How could these policies instead contribute to smooth economic cycles so that Colombia can obtain the maximum benefit from globalization? Let us begin with monetary policy. The objective of the Banco de la República Board of Directors is to achieve and maintain a low and stable rate of inflation. For this purpose, monetary policy acts symmetrically. The monetary authority is prepared to induce reductions in the rate of growth of aggregate demand whenever the inflation forecast indicates that inflation could exceed the target, while it would allow a greater expenditure expansion – by lowering interest rates – when the inflation forecast undershoots the target. In the long run, low and stable inflation means that both individuals and firms have a better understanding of the signals provided by prices, acting against the build up of large imbalances between aggregate supply and demand. This helps to prevent an excess of unproductive investments during boom periods, associated with favourable external factors. It also helps to stop the formation of asset bubbles that increase the financial risks of the economy and compromise the sustainability of its growth. In addition, with targets of inflation that are met and that are close to the medium and long term objective (3 +/- 1 percentage point), the credibility of monetary policy is strengthened and inflation expectations are anchored. This has several positive effects. Let me highlight the following: • Low and stable inflation rates reduce the uncertainty associated with long term investment decisions, which in turn restrain the risk premium asked by investors. As a result, both the level and volatility of long term nominal interest rates diminish, and also the volatility of inflation and economic growth are reduced. Diminished macroeconomic volatility and lower interest rates in the long run support the good quality investment that the economy needs to adapt to changes in external conditions. • Credible central banks and economies with inflation expectations anchored to inflation targets reduce the pass through from exchange rates to prices. This implies that monetary policy should not be pro-cyclical when the economy is hit by shocks that depreciate the local currency and slow down economic activity. On the contrary, with anchored expectations and credible inflation targets, monetary policy should be rather more counter-cyclical. The other central element of the inflation targeting scheme is exchange rate flexibility. The Board of Directors of the Banco de la República does not have a target or a preferred level for the exchange rate. When the Banco de la República intervened in the foreign exchange market between September 2004 and May 2007, it always sterilized those interventions. The short-term interest rate was maintained most of the time at a level that was considered to be coherent with the achievement of the inflation target. The strong real appreciation of the peso over the last four years has taken place through a nominal appreciation. The exchange rate reached almost $3,000 during the first quarter of 2003 and is now at about $2,020. In a context of favorable terms of trade shifts, growing foreign direct investment, rising remittances from Colombians abroad, and a dollar that tends to depreciate with respect to other world currencies, a fixed exchange rate would have prevented these price signals from working. With a fixed exchange rate the burden of necessary economic adjustment would have fallen on domestic prices and wages, imposing large costs on the economy, and creating unnecessary variability of output and employment. Similarly, the significant rise in investment in machinery and equipment in diverse sectors of the economy that we are seeing currently suggests that companies in Colombia are making the most of the peso appreciation (which lowers the peso price of capital goods imports). They are doing so in order to increase their productivity and to become more competitive. In the industrial sector, some companies are taking advantage of the low cost of imported intermediate goods, and some are concentrating on the production of goods with a higher value added. Employment and production have improved in sectors such as industry, construction and commerce, which have benefited from the rise in income and the strength of domestic demand. From a sectoral point of view, the peso appreciation and the changes in relative prices reflect a need to adjust to the changes in the world economy. These factors have intensified pressure in some sectors that produce agricultural and manufactured goods, either because the appreciation has been accompanied by low international prices for their products or by trade barriers, or because they face strong competition from producers in other emerging economies. In some sectors, all of this has reduced income from exports and lowered the price of imports that compete with domestic output. There are cases, such as the production of flowers, footwear and specific types of wearing apparel, where plants have closed or cut back drastically on the number of jobs. Exchange rate flexibility does not mean however, that exchange rate movements are not taken into account for devising monetary policy. On the contrary, these movements play a key role on discussions of monetary policy. Variations of the exchange rate affect aggregate demand by changing relative prices, which modifies the demand for goods and services tradables and nontradables. In this way, movements of the exchange rate have an incidence on inflation and growth forecasts, which are the basis for decision making on interest rates. A sound fiscal policy, focused on reducing the level of public debt as a proportion of GDP would also contribute to stabilize the economy, and to increase its capacity for withstanding external shocks. This task can be accomplished through three channels (Uribe, 2006): • Reducing the debt/GDP ratio increases the economy’s robustness and enables it to respond to negative external shocks such as changes in liquidity and foreign interest rate. This ratio is one of the main factors that rating agencies take into account when assessing the economies resilience to shocks. • A low debt/GDP ratio enables the governments to operate counter-cyclical fiscal policy. • A low debt/GDP ratio reduces the exposure of the public sector to foreign exchange risk and the exposure of the financial system to domestic market risk. Hence, it enhances financial stability. Finally, the flexibility of the economy is also enhanced by a sound and efficient financial system. As is well known, domestic financial systems amplify and propagate external shocks to emerging markets economies, rather than helping smooth their effects. The build up of internal and external imbalances and the subsequent recession and financial crisis of the nineties in Colombia attest to the perils of a pro-cyclical behaviour of the financial system. V. Concluding remarks Let me conclude with four key points: • Colombia has benefited greatly from the strong global economic growth of recent years. • In the past, positive terms of trade shocks and capital inflows to Colombian have ended in periods of boom and busts. • Sound macroeconomic policies are central to maximizing the benefits of globalization, while minimizing the risks. • Our monetary policy framework – the inflation target in concert with a relatively flexible exchange rate – has mitigated the effects of shocks and facilitated economic adjustment to new external circumstances. References Aguiar, M., and G. Gopinath (2007), “Emerging Market Business Cycles: The Cycle is the. Trend”, Journal of Political Economy 115, 2007. Krueger, A (2007) “How to keep Chile´s export orientation”. Mimeo. August 2007. Mendoza E (1995) “The terms of trade, the real exchange rate, and economic. Fluctuations” International Economic Review 36, 1995. Parra, J (2007) “Stylized facts and the Colombian business cycle”, Banco de la República forthcoming. Tenjo, F, L. Charry, M. López and J. Ramírez (2007), “Acelerador Financiero y Ciclos Económicos en Colombia: Un. Ejercicio Exploratorio”, Banco de la República, Borrador No. Uribe J.D. (2006), “Remarks at the Bear Stearns 2006 Colombia Conference”. | central bank of colombia | 2,007 | 10 |
Speech by Mr José Darío Uribe Escobar, Governor of the Central Bank of Colombia, at the Bear Stearns 2007 Colombia Conference, Cartagena, 28 September 2007. | José Darío Uribe Escobar: Recent performance of the Colombian economy and the central bank’s monetary policy reactions Speech by Mr José Darío Uribe Escobar, Governor of the Central Bank of Colombia, at the Bear Stearns 2007 Colombia Conference, Cartagena, 28 September 2007. * I. * * Introduction Thank you for the invitation to take part in this event. I will begin by describing and interpreting the recent performance of the Colombian economy and then explain our monetary policy reactions. Then I will comment on the recent turbulence in international financial markets and how it might affect the Colombian economy. I will conclude with a summary of what I think are the key strengths of our economy and our policy framework and why they can cope with what may lie ahead. II. The economic situation The Colombian economy is growing at historically high rates. After expanding at around 5% for two years, it grew by 6.8% in 2006. This strong surge has continued into 2007. GDP growth in the first semester was estimated to be 7.6%, and available indicators suggest growth in the third quarter will surpass 5%. As illustrated in Chart 1, there have been very few years since the 1970s when the Colombian economy has expanded as fast as this. Productive capacity and productivity also have increased at a high rate especially in industry and commerce. There is also an ample supply of labor. Turning to domestic demand, the most noticeable feature in recent years has been the strong momentum in private investment. As Chart 2 shows, private investment has grown at two-digit rates since 2002 and, until recently, was concentrated in machinery and equipment. Private investment was up by 18.5% in 2006 compared to 2005 and up by 20% in the first half of 2007 compared to the first half of 2006. This momentum was stimulated by good prospects for economic growth, improvements in security and confidence, tax incentives and the combination of historically low borrowing costs and the real appreciation of the peso. The growth rate of real private consumption has been above 7% for three quarters. Consumption growth was supported by favorable financial conditions as well as a sustained increase in salaried employment. Our surveys tell us that families are optimistic both about their own financial prospects and those of the Colombian economy. Moreover a sharp increase in the terms of trade has contributed to income growth, and quite possibly made firms also feel optimistic about future profits. All this has boosted demand for goods and services. Merchandise exports in current price dollar terms have doubled during the last four years. This applies to both traditional and non-traditional exports. In real peso terms, total exports were up by 7.8% in 2006 as a whole and up by 6.5% in the first half of 2007 compared to the first half of 2006. Our three fastest growing exports in terms of first semester annual growth rates were coal, transport equipment, machinery and electricity. When split by destination, we see that it is exports to Venezuela that have increased the most. This strong growth in exports reflects particularly favorable external conditions in Venezuela and more generally the improvement in international prices for Colombia’s leading export products, and successful efforts of the Colombian private sector to increase productivity. This is likely to continue in the near term. So far, there are very few signs of a reduction in the rate at which demand and output are growing. Domestic demand is still growing fast. The growth in Venezuela and high prices for our major export products continue to stimulate sales in the many companies that are focused on exports. I would expect GDP growth to lie between 5.8% and 7.7% in 2007 and then to moderate to about 5% in 2008. As for CPI inflation, it is now currently at 5.2%, but down from 6.3% in April. This rise in our inflation in the first months of 2007 was in part due to a variety of special factors. Poor crops as a result of the El Niño weather condition caused a sharp rise in the price of certain foods during the early months of the year, particularly in perishable farm products. Then there was a boom in food exports to Venezuela that pushed up prices within Colombia for meat, eggs and chicken, among other items. Also important was the growing demand for food worldwide. Part of high global food demand is due to the use of certain foodstuffs to produce bio-fuels, a phenomenon sparked by high oil prices and the incentives offered by some governments to produce alternative sources of energy. As a whole food prices were responsible for nearly 70% of the rise in total CPI inflation over 2007! Table 1 breaks this down further into the different factors. Close to 73% of the rise in total CPI price inflation up to August of this year is attributed to the impact of food exports to Venezuela. For their part, the prices of foods affected by El Niño, which were the primary driving force pushing up inflation until a few months ago, are now a factor pushing down inflation. Over the period as a whole, international food prices have acted to push down on inflation but given recent rises in world market prices they could be a source of inflationary pressure going forward. But then there is still 28% which we attribute to domestic demand. And the higher inflation was not just in food. Annual non-food inflation went from 3.6% in June 2006 to 4.3% by August of this year. The average of the three core inflation indicators used by the Banco de la República increased from 3.7% to 4.9% during the same period. The behavior of a series called “non-tradable goods excluding food and regulated prices” is particularly worth noting, with an annual price increase of 4.8% at December 2006 and 5.6% at present, including a major build-up in the months of July and August. All of this suggests that while the special food price factors were important, there was also an underlying demand-push pressure on consumer prices. Inflation expectations for the short-term exceeded the target range. This too was important. If left to rise further, they could have fed the inflationary process and be reflected in wage negotiations, in company pricing policies, and in decision-making on financial markets. If not dealt with early on, high inflation would build up and force a more costly adjustment later on. III. The orientation of monetary policy Before I go on to interpret this data and to explain how we responded, let me remind you of the objective of monetary policy in Colombia. We aim to achieve low and stable inflation. For this year, the operational target is inflation between 3.5% and 4.5% but by the midterm we aim to keep inflation to within 1 percentage point of 3%. The objective of low, stable inflation is to provide the economy with a nominal anchor. But we recognize that monetary policy must also help to stabilize resource utilization in the economy near its average or long-term level as long as inflation expectations are anchored to the inflation target. The challenge, therefore, is to define an interest rate level for the central bank that is conducive to meeting the quantitative target for inflation and does its best to keep resource utilization close to its long-term level. The aim is to prevent the economy from either overheating or cooling too much. As shown earlier, inflation in Colombia rose during first four months of 2007 and although it has fallen back it is still above the center of the target range. Only a portion of this increase is due to temporary agricultural supply conditions attributed to El Niño weather. Demand shocks that threatened persistent hikes in future inflation and imbalances that can jeopardize the sustainability of economic growth have been responsible for the rest. Other evidence revealed an excess of demand above supply in Colombia, which, although moderate, is still visible. The various statistical techniques used to analyze the difference between actual and potential output (the GDP gap) all suggest the former exceeds the latter by somewhere between 1 to 2.5 percentage points. Most of the capacity indicators are close to historically high levels. Another very straightforward piece of evidence is by how much our current GDP growth rates lie above historical averages. This year, the annual growth rate during the first semester was 7.6%, which is the highest for the first 6 months of a year since we have had quarterly data at our disposal. A situation where economic growth surpasses its historic average and the GDP gap that keeps positive represents a serious risk of inflation. This demand pressure is also visible in our imports. Nominal imports in dollars have increased at an average annual rate of 34% since 2006. This is much higher than the 7.7% average growth observed since 1994. Nominal exports in dollars have soared as well, but less than imports. This means the current account deficit has risen every quarter since 2006. In summary, our challenge in the second half of 2006 and the first of 2007 was to deal with inflationary demand. Since April 2006, our monetary policy response has been to raise the Banco de la República’s intervention interest rates by 325 basis points. As of May 2007, these hikes have been supplemented with a 24% average marginal reserve requirement on liabilities in the banking system. What I want to emphasize is that in situations such as the job of keeping inflation close to a well – defined target is the same as keeping growth on a sustainable path. There was no trade-off. The growth rate of 11% in domestic demand during the first quarter of 2007 was too high. Had we let demand continue to grow at high rates, it would have meant not only excess inflation, but a worsening-quality and more risky investment, as well as an unsustainable current account deficit. Let me also assure you that my colleagues and I at Banco de la República and in other areas of the government are very much aware that for growth to bring lasting benefits, it must be sustainable. We have public support for this goal. There is greater recognition on the part of the Colombian public that we must avoid repeating the damaging pattern of boom and recession. The early evidence is that our preemptive and counter-cyclical actions have been working. Credit is becoming more expensive and is not expanding as quickly. The same can be said of the growth in monetary aggregates. Both series are plotted in Chart 3. People see a central bank that is making the right decisions and continuing in its effort to place inflation and inflation expectations on a path that is consistent with the targets that have been set. All of this will surely result in a more moderate increase in domestic demand, inflation that is on target, and an economy that is growing at a sustainable pace. IV. Financial market turbulence and the Colombian economy I would like now to discuss something that is I am sure on all your minds: the recent financial market turbulence triggered by problems in the US sub-prime lending market. We can never ignore the fact that the Colombian economy is affected by economic developments worldwide. This turbulence on international financial markets as of September has added to the uncertainty about the future of the economy worldwide and also for Colombia. However, we should also recognize that this has happened after a sustained sequence of strong global growth. World growth is estimated to have stayed above 4% since the turn of the century and to have reached 5.4% in 2006. These rates are well above the average of 3.6% from 1970 to 2005 1 . This strong growth has meant that both private and public institutions worldwide have accumulated substantial reserves to draw on. I am sure that the causes of the turbulence are well known to all of you. What is of prime interest is their eventual impact on the Colombian economy. Financial turbulence is passed through to countries like Colombia through different channels. The following are the main ones: i) through changes in growth in the United States and in the world economy, and particularly in our most important trading partners; ii) through the drop in international prices for major export products and in the prices of imported goods (terms of trade); iii) through an increase in risk premia; iv) through changes in the direction of monetary IMF World Economic Outlook, 2007 I. policy rates in the United States and in other advanced economies; and v) through changes in interest rates on government bonds in the industrial countries. So far, all we can say about the impact of the international financial turbulence on the Colombian economy is that there was an important initial impact but most of that was quickly reversed: i) the Colombian peso depreciated 13.8% between July 15 and September 12 but then appreciated by 7.6% to September 26th; ii) the country-risk premium increased from 97 to 204 basis points from July 15th to September 13th but fell back to 147 basis points by September 26th; and iii) interest rates on TES 2020, the country’s most liquid domestic government bonds, rose by 75.1 basis points from July 15th to September 13th but since then recovered 40 of those basis points. In truth, we have as yet no idea how long the effects of the international financial turbulence on the real economy will last, or how strong they will be. But what we do know is that, over the years, Colombia has constructed a policy and institutional framework that makes the economy more resistant to negative external shocks. This policy framework includes an independent central bank that has lowered inflation, allowed exchange flexibility, and accumulated large amounts of international reserves. It also includes a government that has made it a policy, in recent years, to reduce the public debt as a share of GDP and has changed the currency composition of its debt to the point where nearly 65% is denominated in pesos (internal debt) and 35% in foreign currency (external debt). And then our financial system is in good shape. It is deeper: the growth rates for assets, deposits, and loans in our banking sector recently reached historic highs. And at the same time it is more solid: during this rapid expansion, solvency ratios have remained well above the minimum capital asset ratio (9%). Loan portfolio quality (measured by the percentage of risky loans) has improved steadily too, on average. Of course, there are important risks to be addressed by financial institutions and authorities alike. As we argued in our recent Financial Stability Report, the rapid growth in consumer lending is one concern. The undiversified nature of the portfolio of our non-bank financial institutions is another. We also argued that now is a good time to continue to make improvements in our regulations. Although these improvements would strengthen us further, there is no doubt that we are in better shape with respect to financial stability than when we faced international financial market volatility in the past. Also from the point of view of our balance sheets, it is positive that our current account deficit has been mostly funded by foreign direct investment. The level of private sector indebtedness does not seem excessive. In historical terms, there is less currency and maturity mismatches in balance sheets. Finally, headway is being made in integrating us further with world trade through various means, one of the most important being bilateral trade agreements. A strong framework of macroeconomic and financial policies means that the Colombian economy can better absorb changes in the international economy, be they temporary turbulence or more lasting adjustments. Let me remind you that our inflation targeting scheme allows us to be flexible and discretionary in how we respond to shocks such as these. But in exchange for this flexibility in our instruments, we must keep fixed on three commitments. The first is our monetary policy objective: we must try and keep inflation close to its target path without letting the output gap fluctuate excessively. The second is to explain our actions, so the private sector can plan accordingly. The third commitment is on the part of our partners in the government to support this effort with an appropriate fiscal policy and financial supervision. This strategy should help with whatever awaits us on the road ahead. Of course, we will continue to monitor developments carefully. But we should not let events on international financial markets distract us unnecessarily from these three commitments. If we perceive a further threat to inflation, we should act preemptively to avoid reaching a point where we would have to deal with high domestic inflation, a larger current account deficit and higher international market spreads. V. Concluding remarks In conclusion, the Colombian economy has grown very strongly in 2007 as it did in 2006 and 2005. The growth was not just in consumption. Private investment, especially in machinery and equipment, and exports have increased strongly too. We can now surely say that our productive capacity has recovered from the recession of the late 1990s. But we are also aware that we must not let domestic demand rise too far above productive capacity. This would create inflation pressure. In my review of the data, I concluded that although much of inflation was due to temporary fluctuations in food prices, there was also some underlying demand pressure. Evidence from a wide variety of other data corroborated that domestic demand was growing too fast. Excess demand would mean not just inflation but that imports were stimulated to feed a large current account deficit. Thus the rises in our interest rates since April 2006 have been aimed both at containing inflation pressure and keeping our economy on a sustainable path. I discussed some of the likely channels through which the recent turbulence in international financial markets could come to affect us in Colombia: through international demand for our exports, through changes in terms of trade, and through market interest rates. I also reminded you of the key strengths in our policy framework. We have an independent central bank that keeps firm on its objectives; a government that acts to keep public debt to within sustainable limits, and we have a financial supervisory authority that improves and strengthens our regulatory framework. If we keep to this, we should be well protected against whatever lies ahead. | central bank of colombia | 2,007 | 10 |
Speech by Mr José Dario Uribe, Governor of the Central Bank of Colombia, at the Money and Banking Conference "Lessons and Challenges for Emerging Countries during the Crisis", Central Bank of Argentina, Buenos Aires, 31 August 2009. | José Dario Uribe: The Colombian monetary and exchange regime under stress Speech by Mr José Dario Uribe, Governor of the Central Bank of Colombia, at the Money and Banking Conference “Lessons and Challenges for Emerging Countries during the Crisis”, Central Bank of Argentina, Buenos Aires, 31 August 2009. * * * Let me first thank BCRA for organizing this very interesting seminar and for inviting us to share our experience in these turbulent times. The mere comparison of the shocks our economies have undergone and our policy reactions, let alone the insights of the distinguished economists who join us in this timely event, is of great value for our future policy making. After the Lehman Brothers bankruptcy in September 2008, the Colombian financial and foreign exchange markets came under stress. However, the outcome of the shock was less severe than for other countries in the region. In what follows, I will briefly describe the macroeconomic context in which the shock occurred, the effects of the shock and the policy response by Banco de la Republica. While doing so, I will advance some reasons for the relatively low impact of the shock on Colombia. Most of them are related to the prevailing regulatory framework. By the third quarter of 2008, the Colombian economy was experiencing a deceleration of growth. Consumption growth was weakening as a result of the previous tight monetary policy and the effect of the relative price increases of raw materials and foodstuffs on costs and real household income. Public investment fell drastically due to delays in public works programs. Nevertheless, according to our estimates, there still remained a positive output gap inherited from several years of strong aggregate demand growth. As another consequence of the relative price shocks, inflation was moving well above its target range for the year (3.5%-4.5%). At the same time, inflation expectations started to rise which threatened to permanently unleash inflation. Hence, policy was further tightened in July. The sharp appreciation of the currency observed in the first half of the year was correcting itself possibly due to changing global risk perceptions and the daily purchases of fixed amounts of dollars by Banco de la Republica in the foreign exchange market. Immediately after the Lehman failure, the Colombian sovereign risk premium jumped around 500 bps, an increase similar to the one which occurred in other countries (Charts 1 and 2). The currency moved along, depreciating by 15% between September 12th and October 29th. Again, this reaction was comparable to the behavior of other currencies in the region. Domestic public bond interest rates also rose after the shock and the zero coupon curve became steeper as in other economies in the region (Charts 4 and 5). Thus, the heightened risk aversion after the shock produced the usual reaction on the foreign exchange and local bond markets. 28/12/08 14/12/08 30/11/08 16/11/08 CDS 5 YEARS 02/11/08 19/10/08 05/10/08 21/09/08 07/09/08 CDS 1 YEAR 24/08/08 10/08/08 27/07/08 13/07/08 29/06/08 15/06/08 01/06/08 Bps. / 09 07/ / 0 14 07/ 8 / 0 19 07/ 8 / 0 24 07/ 8 / 0 29 07/ 8 /0 08 03 7/ / 0 08 08/ 8 / 0 13 08/ 8 / 0 18 08/ 8 /0 08 23 8/ / 0 28 08/ 8 / 0 02 08/ 8 / 0 07 09/ 8 / 0 12 09/ 8 / 0 17 09/ 8 / 0 22 09/ 8 / 0 27 09/ 8 / 0 02 09/ 8 / 0 07 10/ 8 / 0 12 10/ 8 /1 08 17 0/ / 0 22 10/ 8 / 0 27 10/ 8 / 0 01 10/ 8 / 0 06 11/ 8 / 0 11 11/ 8 / 0 16 11/ 8 /1 08 21 1/ / 0 26 11/ 8 / 0 01 11/ 8 / 0 06 12/ 8 / 0 11 12/ 8 / 0 16 12/ 8 / 0 21 12/ 8 / 0 26 12/ 8 / 0 31 12/ 8 /1 08 2/ Bps Chart 1 COLOMBIA ‐ RISK PREMIA CDS 10 YEARS EMBI Chart 2 EMBI ‐ SELECTED COUNTRIES COLOMBIA PERU MEXICO BRAZIL CHILE* 28/Dic/2008 13/Dic/2008 28/Nov/2008 PERU 13/Nov/2008 CHILE 29/Oct/2008 14/Oct/2008 MEXICO 29/Sep/2008 5 Years 14/Sep/2008 COLOMBIA 30/Ago/2008 1 Year 15/Ago/2008 31/Jul/2008 16/Jul/2008 01/Jul/2008 31/12/08 26/12/08 21/12/08 16/12/08 11/12/08 06/12/08 01/12/08 26/11/08 21/11/08 16/11/08 11/11/08 06/11/08 01/11/08 27/10/08 22/10/08 17/10/08 12/10/08 07/10/08 02/10/08 27/09/08 22/09/08 17/09/08 12/09/08 Chart 3 NOMINAL EXCHANGE INDEX Sept. 12/08 = 100 BRAZIL Chart 4 Colombian Government Local Bond Zero-Coupon Rates July 2008- December 2008 10 Years 15% 14% 13% 12% 11% 10% 9% 8% Chart 5 10 Year Government Bond Zero Coupon Rates Latin America* 21% 19% 17% 15% 13% 11% 9% Brazil Mexico Colombia 28-Dic-08 13-Dic-08 28-Nov-08 13-Nov-08 29-Oct-08 14-Oct-08 29-Sep-08 14-Sep-08 30-Ago-08 15-Ago-08 31-Jul-08 16-Jul-08 01-Jul-08 7% Peru *7.25 years for Brazil F t Bl b SEN However, the shock had more widespread consequences. As key markets in the U.S. were closed (e.g. the short term commercial paper and the ABS markets), short term external funding for emerging markets was severely hampered. Those countries in which the financial system depended significantly on foreign financing suffered stress in both the foreign exchange and the local short term lending markets as banks and other institutions scrambled to close their foreign currency liquidity gaps. However, this was not the case for Colombia, where regulation prevented local banks from being exposed to maturity mismatches between currency and foreign currency. It also restricted their non-derivative net foreign asset position to be positive which effectively inhibited the existence of a foreign currency interbank loan market. In other countries, pressures on the foreign exchange market and financial stability emerged from two things: the exposure of the corporate sector to currency risk and the realization of huge losses after the depreciation of the local currencies against the US dollar. Again, this was not the case of Colombia where capital controls and exchange rate volatility limited the corporate sector’s external indebtedness. At the same time, regulation limited the gross foreign exchange derivative position of banks to five times their net worth or less. This was established to curb bank counterparty risk in a period in which there were large speculative and arbitrage positions against the dollar and had the effect of restricting the currency exposure of the corporate sector. As a result, the impact of the Lehman shock on the Colombian foreign exchange and short term markets was smaller than it was in other countries. The Colombian peso depreciated less than other currencies in the region during the fourth quarter of 2008 (Chart 1) while Banco de la República’s intervention in the foreign exchange market to support the currency was far lower than elsewhere (Table 1). The interbank overnight interest rates remained close to the policy rate. The spread between the short term deposit interest rates and the policy rate did not increase and financial system deposits continued to grow faster than GDP (Charts 6, 7 and 8). Table 1 FX Intervention II Semester 2008 (US$ Million) Supporting the Dollar Colombia Chile* México** Perú Brazil Supporting the Local Currency Total -235 -969 -15.178 -5.810 -25.967 1.112 2.081 -15.178 -5.810 -20.624 1.347 3.050 5.343 *The "sales" of the second semester correspond to the outstanding value of the swaps by the end of the year. ** By December 11th 200 8 the Central Bank had purchased US$ 22.629 million from PEMEX. Chart 6 Spread between the Interbank Overnight Rate and the Policy Rate - Basis Points -20 -40 -60 -80 02-Dic-08 02-Nov-08 02-Oct-08 02-Sep-08 02-Ago-08 02-Jul-08 02-Jun-08 02-May-08 02-Abr-08 02-Mar-08 02-Feb-08 02-Ene-08 -100 17,0% 16,0% 15,0% 14,0% 13,0% 12,0% 11,0% 10,0% 9,0% 8,0% 7,0% 24-Oct-08 10-Oct-08 26-Sep-08 12-Sep-08 29-Ago-08 15-Ago-08 01-Ago-08 18-Jul-08 04-Jul-08 20-Jun-08 06-Jun-08 23-May-08 09-May-08 25-Abr-08 11-Abr-08 28-Mar-08 14-Mar-08 29-Feb-08 15-Feb-08 01-Feb-08 18-Ene-08 04-Ene-08 19-Dic-08 05-Dic-08 21-Nov-08 Real Growth of the Deposits in the Financial System * Deposit Real Growth Rates 07-Nov-08 Chart 8 Basis Points Chart 7 Spread between the Average Deposit Interest Rate and the Policy Rate -140 -160 -180 -200 -220 -240 -260 -280 -300 * Deflated by CPI ex - food Credit growth remained strong even for foreign-owned banks (Chart 9), which work as subsidiaries in Colombia and are subject to the same regulatory framework as domestic banks. However, lending interest rate spreads did rise in October 2008 thus reflecting a larger risk premium, especially for prime and corporate treasury loans (Chart 10). Our financial system survey showed tightening local credit conditions in the fourth quarter (Chart 11) and both firms and banks reported anecdotal evidence regarding more expensive credit with shorter maturities. Interestingly, throughout 2009 the behavior of foreign and domestic banks in the local loan market has diverged. Foreign banks have drastically cut their exposure to consumer credit while domestic banks have kept high rates of growth of loans (Chart 9). At the same time the external credit lines available to the Colombian Banks were reduced and their cost raised (Chart 12). Nonetheless, the use of those lines remained below the approved amounts and declined along with them (Chart 13). This reflected, among other things, a dramatic fall in the demand for funding linked to international trade (Chart 14). Chart 9 Real Growth of the Colombian Financial System Loans 25,0% 20,0% % 15,0% 10,0% 5,0% 0,0% Local Banks Foreign Banks 4/08/2009 4/07/2009 4/06/2009 4/05/2009 4/04/2009 4/03/2009 4/02/2009 4/01/2009 4/12/2008 4/11/2008 4/10/2008 4/09/2008 4/08/2008 4/07/2008 4/06/2008 4/05/2008 4/04/2008 4/03/2008 4/02/2008 4/01/2008 -5,0% Total * Deflated by CPI ex - food Chart 10 Lending-Deposit Interest Rate Spreads Basis Points Average Lending Rate - Deposit Rate 19-Dic-08 05-Dic-08 21-Nov-08 07-Nov-08 24-Oct-08 10-Oct-08 26-Sep-08 12-Sep-08 29-Ago-08 15-Ago-08 18-Jul-08 01-Ago-08 04-Jul-08 20-Jun-08 06-Jun-08 23-May-08 25-Abr-08 09-May-08 11-Abr-08 28-Mar-08 14-Mar-08 29-Feb-08 15-Feb-08 01-Feb-08 18-Ene-08 04-Ene-08 Corporate Treasury Rate - Deposit Rate Prime Lending Rate - Deposit Rate Chart 11 Observed and Expected Tightening of Requirements for New Bank Commercial Loans Approval (Survey) (% of Respondents) 80,0% 70,0% 60,0% 50,0% 40,0% 30,0% 20,0% 10,0% Observed Sep‐09 Ago‐09 Jul‐09 Jun‐09 May‐09 Abr‐09 Mar‐09 Feb‐09 Ene‐09 Dic‐08 Nov‐08 Oct‐08 Sep‐08 Ago‐08 Jul‐08 Jun‐08 May‐08 Abr‐08 0,0% Expected (previous quarter survey) Chart 12 External Indebtedness through the Financial System: Stock and interest Rate 3.500,0 6,50 3.300,0 6,00 3.100,0 5,50 5,00 2.700,0 4,50 2.500,0 4,00 2.300,0 Interest Rate (%) Stock (US$ Million) 2.900,0 3,50 2.100,0 3,00 1.900,0 2,50 1.700,0 1.500,0 2,00 Ene Feb Mar Abr May Jun Jul Ago Sep Oct Nov Dic Ene Feb Mar Abr May Jun Stock Interest Rate Chart 13 External Credit Lines of the Colombian Financial System Approved Amounts and Use 9.000 8.000 7.000 US$ Million 6.000 5.000 4.000 3.000 2.000 Jun Abr May Feb Mar Dic Ene Oct Nov Sep Jul Ago Jun Abr Approved Amount May Feb Mar Dic Ene Oct Nov Sep Jul Ago Jun Abr May Feb Mar Ene 1.000 Use (Stock) Chart 14 3.500,0 4.800 3.300,0 4.600 3.100,0 4.400 2.900,0 4.200 2.700,0 4.000 2.500,0 3.800 2.300,0 3.600 2.100,0 3.400 1.900,0 3.200 1.700,0 3.000 1.500,0 E x te rn a l In d e b te d n e s s 5.000 2 0 0 7 -0 1 2 0 0 7 -0 2 2 0 0 7 -0 3 2 0 0 7 -0 4 2 0 0 7 -0 5 2 0 0 7 -0 6 2 0 0 7 -0 7 2 0 0 7 -0 8 2 0 0 7 -0 9 2 0 0 7 -1 0 2 0 0 7 -1 1 2 0 0 7 -1 2 2 0 0 8 -0 1 2 0 0 8 -0 2 2 0 0 8 -0 3 2 0 0 8 -0 4 2 0 0 8 -0 5 2 0 0 8 -0 6 2 0 0 8 -0 7 2 0 0 8 -0 8 2 0 0 8 -0 9 2 0 0 8 -1 0 2 0 0 8 -1 1 2 0 0 8 -1 2 2 0 0 9 -0 1 2 0 0 9 -0 2 2 0 0 9 -0 3 2 0 0 9 -0 4 2 0 0 9 -0 5 2 0 0 9 -0 6 T ra d e Total Trade (X+M) Subject to Foreign Finance and External Indebtedness through the Financial System (US$ Million) Trade External Indebtedness Meanwhile, the global economy slumped, terms of trade dropped and the external demand for Colombian products slowed down. Consumer and business confidence indicators collapsed thus driving domestic spending down. Policy makers were then left facing the dilemma of high and increasing inflation on the one hand and a growing deterioration of both the external and domestic economic outlook on the other. Thus, while the picture became clearer, monetary authorities started to relax policy gradually. Capital controls were lifted in October and domestic reserve requirements were reduced in November. Liquidity provision was increased substantially as reflected by the negative and decreasing spread between the overnight interbank interest rate and the policy rate as the end of the year approached (Chart 6). Finally, policy rates were lowered by 50 bps in December, the first such move among emerging economies. A rapid sequence of cuts ensued, dropping the policy rate from 10% in November 2008 to 4.5% in June 2009. A key component of the policy reaction was the flexibility of the exchange rate. This was possible because currency mismatches were small and inflation expectations remained partially anchored despite the large shocks to the price of food, energy and raw materials. Exchange rate flexibility was fundamental in many senses. First, it enabled us to avoid the need to follow the pro-cyclical monetary policies of the past. Second, it worked as an absorber of the shocks hitting the current account of the balance of payments (terms of trade, export demand and workers’ remittances). And third, it prevented dollar demand pressures that liquidity-thirsty global financial institutions would have exerted under a peg regime. In summary, in the last quarter of 2008 our economies underwent a rapid transition from a supply shock situation to a global financial crisis and a world recession. My take from the Colombian experience is that, as a regime, the inflation targeting framework with financial stability complements has fared well and done the best possible job of withstanding the storm. This was mostly due to the fact that the financial stability measures taken before the crisis, when the economy was booming, enabled us to avoid large mismatches and to moderate leverage. The results were: - The financial system was strong enough to absorb a large external shock and policy makers could focus on dealing with its macroeconomic consequences. - The regime was flexible enough to accommodate a gradual path of disinflation under a preannounced path after the relative price shocks pushed inflation far above target. - At the same time, this flexibility allowed the central bank to maintain the liquidity of the financial system in a period of stress. Our challenge ahead consists of carefully examining our financial regulatory framework to shore up some aspects such as countercyclical provisioning and bank capital requirements. Simultaneously, we must strive to enhance financial deepening and enlarge the set of financial instruments available to Colombian firms and households. However, we must do so without significantly increasing systemic risk or depriving policymakers of the tools they need to face shocks. In such a task, difficult tradeoffs must be made, most importantly, perhaps, the one between the financial integration of the Colombian economy and the scope for systemic risk and macroeconomic management. | central bank of colombia | 2,009 | 9 |
Opening speech by Mr Leonardo Villar-Gómez, Governor of the Central Bank of Colombia, at the 24th Meeting of the Regional Financial Stability Group, Bogotá, 23 March 2023. | Leonardo Villar-Gómez: Opening speech - 24th meeting of the Regional Financial Stability Group Opening speech by Mr Leonardo Villar-Gómez, Governor of the Central Bank of Colombia, at the 24th Meeting of the Regional Financial Stability Group, Bogotá, 23 March 2023. *** I am very pleased to welcome you to Bogotá and to this 24th meeting of the Regional Financial Stability Group, which has been organized on this opportunity by Banco de la República (the Central Bank of Colombia) together with the Central American Monetary Council. We are honored to host this important meeting in the year of the Bank's first centennial celebration. It would be difficult to find a more appropriate time for this meeting than today, after two weeks of great turbulence in the international financial markets. The illiquidity situations faced by the Silicon Valley Bank (SVB) and Signature Bank less than fifteen days ago raised the dramatic possibility of the loss of deposits in these institutions, most of which were uninsured. Had this happened, we would have probably also seen a widespread run on deposits in about 4,900 regional banks in the United States for which the liquidity standards that had been established by the Basel Committee following the 2008-2009 crisis were suspended a few years ago. Fortunately, the Federal Reserve System backed all the deposits, granting rediscount credits against the nominal value of the securities and without any haircut. This averted a major crisis, but clearly with a high potential cost insofar as it will receive securities valued at prices well above market prices. The other major episode that has recently affected the global financial system is the loss of confidence in Credit Suisse and its absorption by the Union Bank of Switzerland (UBS) in an emergency intervention operation carried out last week under the supervision of the Swiss National Bank. Once again, this operation made evident the critical role played by central banks, not only because of their supervisory role when they have one but also because of the need that arises in crises to provide huge amounts of liquidity to support confidence in the system. As a result, the Swiss National Bank had to make available amounts of more than 100 billion Swiss francs to the banks in question. These episodes from the last two weeks are good examples of how central banks end up being ultimately responsible for the possible failures in the financial system. This is so even in countries like Colombia, where financial oversight lies in a separate institution from the central bank. For instance, in 1999, almost a quarter of a century ago, Banco de la República responded to the biggest financial crisis since the Great Depression of 1929. In this context, the importance of monitoring financial stability is evident, obviously by supervisory bodies, but also by central banks that are not directly responsible for this task. 1/2 BIS - Central bankers' speeches During the last decades, we have observed how Colombian banks have expanded significantly toward different Central American countries. Specifically, Colombia's foreign banking assets-a good part of them in Central America-currently represent 22% of the consolidated assets of credit institutions. This international presence undoubtedly brings great benefits to the Colombian financial system through greater diversification. However, this expansion of Colombian banking entities in Central America also comes with greater complexity in the activities and risks assumed by these institutions through their operations in the region. In turn, this creates the need to better understand the conditions and characteristics of the different economies and thus be able to monitor more closely and assess the ability of financial institutions to withstand different shocks. Multilateral organizations such as the International Monetary Fund and the World Bank have recognized the significant progress made by Colombia in this regard through the Financial Sector Assessment Program (FSAP), which includes the identification and regulation of local financial conglomerates and the incorporation of Central American exposures in the stress testing developed by Banco de la República. Although this assessment evidences satisfactory progress, improvement opportunities in the analysis of the risks to which we are exposed in the region were also identified. Although this Regional Financial Stability Group to which you belong was established in 2011, Colombia's participation began in September 2014, when it signed the "Cooperation Agreement for the Preservation of Regional Financial Stability." Since then, our officials have permanently participated in the annual meetings emanating from the Agreement. In addition, we have also been permanent users of the Regional Financial Stability Report, which has been very enriching for Banco de la República. During the next two days, you will be presenting and discussing the regulation, operation, dynamics, and experience of the liquidity measures available in each jurisdiction. Also, the situation of foreign currency mismatches in the different financial systems will be reviewed, as well as the current policies and measures available to manage this risk and other issues. I am confident that these spaces will allow the sharing of information and experiences and will serve to promote new regional cooperation initiatives to strengthen financial stability. I wish you every success in your deliberations and, of course, I hope you enjoy your stay in Bogotá. Thank you very much. 2/2 BIS - Central bankers' speeches | central bank of colombia | 2,023 | 12 |
Speech by Mr Leonardo Villar-Gómez, Governor of the Central Bank of Colombia, at the 25th Treasury Conference, Cartagena, 9 February 2023. | Leonardo Villar-Gómez: Speech - 25th Treasury Conference Speech by Mr Leonardo Villar-Gómez, Governor of the Central Bank of Colombia, at the 25th Treasury Conference, Cartagena, 9 February 2023. *** I must begin by saying something that you know very well. The policy interest rate of Banco de la República (the Central Bank of Colombia) has drastically increased over the past year and a half, completing an increase of 11 pp since the beginning of the current cycle of increases in September 2021. We are talking about the strongest monetary policy adjustment process that has taken place during this century and since the Bank adopted the inflation targeting strategy that now guides our decisions. The effects of this increase have already begun to be experienced in recent months on aggregate demand, imports, and loans, among other variables. These effects are generally painful and clearly unpopular. Unfortunately, inflation has continued to rise; however, in Colombia, we have not yet seen a break in the trendline as has already occurred in many other countries in the region and the world. The multiplicity of inflationary shocks that Colombia has received, including the strong accumulated depreciation of the Colombian Peso in the last two years, has combined with the complex indexing mechanisms we have in Colombia to generate considerable lags in the impact of the monetary policy adjustment process on price dynamics. Nevertheless, we expect that the process of returning inflation to the target will begin to be observed in the coming months and may be completed by the end of 2024, as we announced after the Board of Directors' meeting last November. I would like to take the opportunity of this scenario to describe the diagnosis of the main macroeconomic variables and comment on their prospects for the year ahead. Thus, I will first refer to the productive activity and the indicators of demand performance. Then, I will turn to inflation performance and outlooks. Aggregate Demand, Employment, and Productive Activity The first thing worth noting is that productive activity and employment were much more dynamic and robust in 2022 than anyone had imagined. The real GDP growth would have been 8.0%, a rate that by far doubles the growth of Latin America and which the IMF estimates at an average of 3.9%. Last year, very few countries in the world showed growth rates higher than Colombia's. The only ones I can identify with the highest growth are Saudi Arabia and Guyana, in both cases, due to significant increases in oil production. The high growth of the Colombian economy in 2022 was undoubtedly a positive thing, and it would be desirable to grow again at similar rates in 2023 and subsequent years. The problem here is that it was an unsustainable growth driven by an excess in demand that generated complex imbalances on different fronts 1. On the one hand, these imbalances are reflected in the inflationary pressures, to which I will refer in a moment. 2. 1/5 BIS - Central bankers' speeches 2. They are also reflected in the current account's deficit of the balance of payments, which reached levels estimated at 6.3% of GDP, reflecting increases of about 30.0% in the dollar value of imports that could not be covered by the increase in exports, despite good performance of international oil and coal prices. This high deficit requires significant financing needs and makes the economy more vulnerable. 3. Likewise, the excess demand was manifested in consumer credit growth that for most of the year exceeded 20.0%, a rate much higher than the income growth, which will be reflected in a growing financial burden for households. As I said at the beginning, the tightening of monetary policy and the consequent increase in interest rates have already begun to be reflected in a less dynamic demand and an adjustment of the imbalances I have just mentioned. 1. Thus, the dollar value of imports went from growing at rates close to or above 40.0% until August to a negative growth rate in November. Therefore, our perspective is that the external deficit in the current account of the balance of payments will fall from 6.3% of GDP in 2022 to 3.9% of GDP in 2023. Contributing to this adjustment will be the monetary adjustment and the significant reduction in the budget deficit expected in 2023, according to the government's financial plan (which falls from 5.5% of GDP in 2022 to 3.8% of GDP in 2023). 2. Moreover, economic activity as measured by the monthly economic tracking indicator (ISE in Spanish) is slowing down its growth rate. In November, it showed an annual growth of 3.0%, considerably lower than in previous months. 3. Meanwhile, consumer credit, which reached growth rates close to 23.0% per year in the third quarter of 2022, has reduced its growth rate to levels below 17.0% in recent weeks. The slowdown has been much lower in housing loans, whereas in commercial and microcredit cases, the latest data show higher growth rates than in previous months. 4. These trends are part of the adjustment process of demand to sustainable levels. It is well-known that the projections of Banco de la República's technical staff for economic growth in 2023 are among the lowest of all analysts. It is estimated that this growth would only be 0.2%. However, it is important to note that, even with such low growth, the levels of activity that we would have in 2023 would be relatively high. Actually, the adjustment in the growth rate between 2022 and 2023 is largely due to a base effect. Therefore, if we compare the cumulative growth of Colombian GDP to prepandemic levels, our performance would remain broadly favorable with respect to other countries in the region. On the other hand, it is worth noting that the labor market is performing relatively well in the context of the recent slowdown in growth. Indicators to December for the country's urban areas show an annual growth rate of the employed population of 7.5% in the 13 main cities. However, this increase has been partially offset by a less positive employment performance in rural areas and the seats of the smallest municipalities. This phenomenon is probably associated with poor performance in agricultural and livestock production. On the other hand, the number of salaried employees at the national level shows an above-average growth, reflecting a dynamism of formal employment that is confirmed in the data on the number of contributors to the Integrated Social Security Contribution Form (PILA in Spanish). 2/5 BIS - Central bankers' speeches Inflation and Expectations Moving on to the inflation performance, the figures released last weekend for January show that, unfortunately, the adjustment process in demand has not yet begun to be reflected in inflation performance, which continues to rise. Total inflation now stands at 13.25% and keeps being driven by food prices, rising to 26.2%, which is particularly high when we consider that food prices were already rising at 19.9% in January 2022. This means that in the last two years, food price levels have increased by more than 50.0%, which implies an increase in the relative price of this item of the family basket considerably greater than what can be explained by global factors. In part, this increase could be associated with purely sectoral supply factors, which would also explain the poor performance of the agricultural and livestock sector in a year in which all other sectors grew strongly. On the other hand, core inflation, which corresponds to the basket that excludes food and regulated products, showed a rate of 9.78% in January, growing 25 bps compared to the one observed in December. The fact that inflation indicators, and particularly core inflation, continue to increase in Colombia contrasts with the situation of many other countries, including not only the most developed ones but also several in Latin America, such as Brazil, Mexico, Peru, and Chile, where there are clear indications that the upward cycle of inflation has already peaked. The factors that explain the persistence of the upward trend in the Colombian case would be summarized, in my opinion, in three elements: 1. First, despite the slowdown in demand growth, excess demand persists, which can be expressed more technically in the idea that GDP remains above the potential or that the output gap is still positive. This situation emerges from the fact that growth was atypically high in 2022, more than double the Latin American average, strongly driven by demand. Estimates by the Bank's technical staff suggest that positive GDP gap accumulated in 2022 would persist during the first three quarters of this year. 2. A second element to explain the persistence of inflationary pressures in Colombia relates to price indexation. The high inflation rates seen in 2022 have triggered indexation mechanisms, including a 16.0% increase in the minimum wage and sharp adjustments in the prices of some utilities, particularly electricity. These indexing mechanisms reduce the credibility of the target and probably force a tighter monetary policy than would otherwise be required for a successful antiinflationary policy. 3. The depreciation of the Colombian Peso is the third factor that helps explain the greater persistence of inflationary pressures in the Colombian case compared to other countries. With numbers as of yesterday (8 February), the depreciation of the Colombian Peso in the last twelve months exceeded 20.0%, and in the last two years, it was close to 35.0%. The last depreciation number for the Colombian Peso (35.0%) contrasts with a nominal appreciation for the same period of Brazil, Mexico, Costa Rica, and Uruguay currencies. In the case of Chile, a depreciation is seen but much lower than the Colombian one, at 9.2%. Similarly, the exchange rate of the Peruvian Sol depreciated compared to its level two years ago, but only 5.7%. 3/5 BIS - Central bankers' speeches The contrast between the strong depreciation of the Colombian Peso in the last two years and what happened in the main countries of the region with which we usually compare ourselves can be explained in part by the relative deterioration in our country's fiscal soundness, which led to the loss of its investment grade in 2021. Recently, a better perspective of fiscal adjustment has been seen with the 2022 tax reform and the announcements of the Financial Plan regarding compliance with the adjustment plan contemplated in the fiscal rule, which contributed to the Colombian Peso appreciation of last December and January in a favorable international environment. However, it must be recognized that uncertainty about the future of oil and coal exploration and exploitation has kept the exchange rate highly vulnerable to international events. It also helps to explain that in international situations of greater risk aversion, such as the one observed this week, the Colombian Peso suffers more significant depreciations than other currencies in the region. Inflation Outlook What is the outlook for inflation for 2023 and 2024? The first thing I must say is that Banco de la República is strongly committed to creating the necessary conditions for returning inflation to the target. The Bank's technical team's projections suggest that, although by the end of this year, we would still have the permissible range of 3.0% +/1.0%, we would reach that range by the end of 2024. As we stated in the press release issued after the last meeting of the Bank's Board of Directors, with the decision to increase the policy interest rate by 75 bps last January, the monetary policy approached the position required to induce in the medium term a convergence of inflation towards its 3.0% target. Indeed, the uncertainty is considerable, and future decisions will depend on the information we have at any given time. However, in our central scenario, we expect inflation to be approaching a decreasing path, which would initially be driven by a substantial reduction in the growth rate of food prices. Core inflation would continue showing increases for the rest of this semester. Still, the outlook is that in the second half of the year, it will also start to show a decreasing trend, reinforcing the behavior of food prices and helping the convergence process toward the target. This process would continue throughout 2024. Surely there is great uncertainty, and there are risks in projections such as those described. In addition, those projections imply the continuation of a contractionary monetary policy, even if it means lower growth than would be otherwise desirable. In public discussions on the contractionary monetary policy adopted by Banco de la República, there is often a dilemma between the search for lower inflation and the cost this causes in terms of economic growth. I honestly think this is a false dilemma. The alternative we have is not between lowering inflation or growing more. On the contrary, reducing inflation is essential to bring long-term interest rates back to low levels, which will stimulate investment; and to increase growth in the medium and long term, even if it means sacrificing some short-term growth. Ensuring credibility in the inflation target is also essential for monetary policy to have a countercyclical and stabilizing nature in the future, as it, fortunately, did during the 4/5 BIS - Central bankers' speeches COVID crisis. The monetary impulse during the pandemic was undoubtedly crucial to the prompt recovery we have fortunately noticed over the past two years. 5/5 BIS - Central bankers' speeches | central bank of colombia | 2,023 | 12 |
Inaugural speech by His Excellency Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the Joint Seminar of the Nat. Anti-Money Laundering Com. and the Serious Organized Crime Agency, Al-Ain, 2 July 2006. | Sultan Bin Nasser Al-Suwaidi: Encountering money laundering and terrorist financing Inaugural speech by His Excellency Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates and Chairman of the National Anti-Money Laundering Committee in the United Arab Emirates, at the Joint Seminar of the National Anti-Money Laundering Committee and the Serious Organized Crime Agency (SOCA) – UK, Al-Ain, 2 July 2006. * * * Your Excellencies, Honored Guests, Fellow Members of the National Anti-Money Laundering Committee, Ladies & Gentlemen, After Greetings I would like to give you all a whole hearted welcome at the joint seminar of the National Anti-Money Laundering Committee in the UAE and Serious Organized Crimes Agency (SOCA) - UK which is held today in the city of Al-Ain, in order to discuss some topics relating to: "Encountering Financial Crimes; including Money Laundering and Terrorist Financing". The meeting of your esteemed committee this morning, prior to the joint seminar, signifies the important role the committee undertakes in accordance with federal Law No. (4) for the year 2002 regarding Criminalization of Money Laundering, and the role played by fellow members of the committee in facilitating exchange of information, and ensuring coordination between the bodies they represent, and generally representing the UAE in issues and relating to combating money laundering and terrorist financing. At the outset of the joint seminar, I'm also pleased to welcome Mr. Paul Evans, the Executive Director of the Serious Organized Crimes Agency (SOCA) and the accompanying delegation, and also Mr. Robert Dean, the Deputy Head of the Diplomatic Mission of the UK in Abu Dhabi, for their participation at this meeting, and for their appreciated coordination regarding the issues which would be discussed today. Your Excellencies, Ladies & GentIemen, We highly appreciate the significant role of the National Anti-Money Laundering Committee in the UAE in the area of international cooperation and their keen interest to learn of the best practices for combating money laundering and terrorist financing, and the techniques applied in this respect by friendly countries. Delegations from your esteemed committee have visited the UK several times, and received fruitful cooperation from the competent authorities in the UK, including the Serious Organized Crimes Agency (SOCA). We highly appreciate, as well, the attitude of the authorities in the UK, particularly the Serious Organized Crimes Agency (SOCA) for their continuous liaison with the authorities in the UAE, and for their contribution in preparing and organizing joint conferences, seminars and training programs. One of the essential outcomes resulting form this liaison is the participation of (SOCA) officials in the third annual conference of your esteemed committee in Al-Aqah, Fujairah on 27th & 28th December 2005, which addressed: "The Transfer of Currencies thorough Land, Sea, and Air Borders of the UAE. (SOCA) officials have also attended the joint seminar between the UAE and the UK regarding: "Encountering Money Laundering" which was held on 16th & 18th March 2006 at the Central Bank in Abu Dhabi, during which a memorandum of understanding has been signed between the Anti-Money Laundering & Suspicious Cases Unit at the Central Bank and the Serious Organized Crimes Agency (SOCA). Your Excellencies, Ladies & Gentlemen, The UAE attaches great importance to the issue of international and regional cooperation. One of our priorities is to familiarize officials at the competent authorities in the UAE with the experiences and techniques applied by friendly countries in the area of combating money laundering and terrorist financing. My fellow members of the National Anti-Money Laundering Committee are doing a remarkable and important job in this respect. Ladies & Gentlemen, During today's joint seminar, which is attended by the Executive Director of the Serious Organized Crimes Agency (SOCA) and the accompanying delegation, members of the committee shall present working papers focusing on the regulations and measures for combating money laundering, terrorist financing and financial crimes in general, covering all sectors of financial, economic and security activities in the UAE. These working papers will underscore UAE efforts, highlight the legal frameworks and practical applications by the competent authorities in the UAE, and illustrate the achievements made so far by the UAE in this respect. Officials from the Serious Organized Crimes Agency (SOCA) shall also present a working paper on the new measures applied in the UK for combating money laundering and terrorist financing. Ladies & Gentlemen, The topics which would be addressed during today's seminar reflect the determination of both the UAE and the UK to enhance and consolidate cooperation & coordination between the two countries and with the international community, contribute to the international efforts aimed at combating money laundering and terrorist financing, and assume an effective role in this domain. In conclusion, I would like to wish success to all participants. Thank you for your attention. | central bank of the united arab emirates | 2,006 | 8 |
Speech by His Excellency Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the Frankfurt European Banking Congress, Frankfurt am Main, 17 November 2006. | Sultan Bin Nasser Al-Suwaidi: The extended importance of the euro Speech by His Excellency Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the Frankfurt European Banking Congress, Frankfurt am Main, 17 November 2006. * * * Distinguished Guests and Speakers, Ladies & Gentlemen, It is my pleasure and honor to be here today, to speak at this important forum. Thanks to the organizers, for their kind invitation. I will start by the Euro Area's GDP, which had grown continuously over the past five years, especially if we look at the figures as expressed in current prices and in US Dollars. Looking at the Euro Area's GDP would then prove that the Euro had gained extended importance at a GDP figure of US Dollars 9.9 trillion at the end of 2005. Also, if we look at what the Euro Area represents in world trade, we would find-out that it makes about 30% of it, and the Euro Area is the largest single player in world trade, so Europe / Euro Area is the "Trade Centre of the World". Having said this, let us look at the Euro and the Euro Area from an outsider's point of view. In the GCC Countries, we see the Euro as the second currency in the world after the US Dollar. This maybe explained, in part, if we look at the import figures and the currency of settlement for trade imports. If we study the figures of imports into the GCC Countries, we will see that imports from the Euro Area have stayed almost static at about 20-21% over the past five years. As an outsider to the Euro, the GCC Countries must have economic reasons to hold Euros, one of these reasons is to pay for the import bill. In the case of GCC Countries the import bill from the Euro Area has not increased in percentage terms, which means that trade needs for the Euro within the GCC Countries did not grow, as a matter of fact it declined slightly from 21.84% of all imports in 2001 to 20.34% in 2005. This is then the trade related needs for the Euro in the GCC Countries. The next question then; which currency or currencies make-up the other 80% of the GCC Countries' trade related needs. It will be easy to predict if we know that 34% of GCC imports come from Asia, 11% from USA and 35% from all other countries. This means that at least 80% of the 80% of non-Euro Area imports of the GCC Countries are denominated in US Dollars. On the other hand, if we look at UAE imports' picture, the situation is more so not in favour of imports from the Euro Area, due to the fact that UAE imports from the Euro Area went down from 24% of all UAE imports in 2001 to only 15.28% in 2005. Interestingly the picture to the Europeans is misleading if we look at it from absolute figures of imports. These have grown from US Dollars 7.21 billion in 2001 to US Dollars 15.12 billion in 2005, also the UAE gives the Euro Area about US Dollars 9 billion of trade surplus. The next point I want to tackle is the issue of flow of foreign investment funds into the Euro Area, also from a GCC Countries' perspective. There are two questions here; • Can the Euro Area absorb large amounts of investment funds from the GCC Countries in a short period of time? • Can the Euro Area provide a competitive environment to attract investment funds from the GCC Countries, to make it worthwhile to convert part of their oil revenue maintained in Dollar at the moment? The answer to the first question is obviously, "NO", probably because Euro Area Countries do not try to attract large foreign investments, in general, one reason maybe because they do not want to see a lot of liquidity go into their local markets and cause inflationary pressures and the other maybe they do not want to create increased demand for foreign labor force. However, there seems to be no uniform stand on this issue within the Euro Area Countries. The answer to the second question is also "NO", but in this case may be due to the Euro Area have not yet harmonized its labor, tax and financial services laws, which also explain the no common stand regarding the issue of whether the Euro Area is really interested in attracting large investment funds. The Euro Area Countries have choice at the moment in terms of interpretation of their dominant local laws, but once laws get harmonized or unified their choice will be reduced or eliminated all together, and the Euro will witness an upward demand through foreign investment flows. The last point I will consider is tourism and the influence tourism has on demand for a certain currency. Europe is, and has been the most popular tourist destination for people of the UAE and other GCC Countries. Hundreds of thousands from GCC Countries visit one or more of Euro Area Countries every year. If we consider the demand for Euros created by tourists from many countries of the world including of the GCC Countries, we would realize that more Euros will need to be issued and some would be held in cash for ever by all those who travel to Europe. The Euro is the currency of international tourism at the moment, because Europe attracts more tourists than any other region in the world, and it is expanding in this respect. Conclusion With this I come to the conclusion of my short speech. Finally I would say that the Euro will definitely grow to dominate trade outside the Euro Area. The Euro Area will harmonize further its labor, tax and financial services laws, i.e. will become more competitive in attracting investments, which will help the Euro to become the currency of international investments. I expect the Euro to become the currency of international trade and investments in ten years. If we add to that tourism, the Euro will surpass the US Dollar, as the first currency in the world by 2015. Thank you. | central bank of the united arab emirates | 2,006 | 11 |
Speech by His Excellency Sultan Bin Nasser Al-Suwaidi, Gov. of the Central Bank of the United Arab Emirates & Chairman of the Nat. Anti-Money Laundering Committee, at The 4th Annual Conf. of the Nat. Anti-Money Laund. Com., Ras Al Khaimah, 20-21 Dec 2006 | Sultan Bin Nasser Al-Suwaidi: UAE efforts in encountering money laundering and combating terrorism financing Speech by His Excellency Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates and Chairman of the National Anti-Money Laundering Committee, at The Fourth Annual Conference of the National Anti-Money Laundering Committee, Ras Al Khaimah, 20-21 December 2006. * * * Your Highness, Sheikh Saoud Bin Saqer Al Qasimi, Crown Prince and Deputy Ruler of Ras Al Khaimah (May Allah protect him) Your Highnesses Ladies & Gentlemen, I would like personally and on behalf of my brothers NAMLC members, to first express my gratitude to H.H. Sheikh Saqer Bin Mohamed Al Qasimi, member of the higher council of the Federal, ruler of RAK (May Allah protect him), for his continuous support to federal institutions, including our Committee. I would also like, on behalf of all of you, to thank H.H. Sheikh Saoud Bin Saqer Al Qasimi for his presence and patronage of this conference. Your Highnesses Ladies & Gentlemen, I warmly welcome you to NAMLC fourth annual conference which is held this year in Ras Al Khaimah Emirate under the title: “Role of Economic Development Departments, Free Trade Zone Authorities and Customs Departments in Implementing Laws and Regulations Regarding Encountering Money Laundering and Combating Terrorism Financing”. The presence of H.H. Sheikh Saoud Bin Saqer Al Qasimi with us today is considered a support to UAE efforts in encountering money laundering and combating terrorism financing and an incentive to develop our procedures and regulations applied with regard to encountering money laundering and combating terrorism financing, in a way that enhances economic development and ensures a suitable environment for investment, characterized by transparency and stability in the country. Your Highnesses, Ladies & Gentlemen, The UAE confirmed, since its establishment, a strategy to continuously combat all types of crime and to confront criminals through establishing strict laws, approving preventive penalties as well as setting the appropriate legal rules in all areas. And with the obvious increase in money laundering activities and terrorism crimes around the globe, UAE set as a priority a clearly defined strategy to encounter such dangers. The strategy comprises the following: 1. Joining international and regional efforts in encountering money laundering and combating terrorism financing. This is manifest in joining and authenticating international and regional conventions and initiatives as well as responding to international organization requirements, concerned in combating such crimes. 2. Executing decisions of the Security Council and United Nations with regard to subjects or issues, relating to money laundering crimes or terrorist acts and fighting their finance. 3. Implementing the AML (40) Recommendations and the (9) Special CFT Recommendations, issued by Financial Action Task Force (FATF), as well as other international AML/CFT initiatives and directives. 4. Establishing the appropriate legal frameworks to protect UAE economic security in a way that ensures co-operation with the international community, within the context of international efforts exerted to combat crimes, including AML/CFT crimes. This included establishing laws which criminalize such acts, preventive penalties against criminals as well as regulating the relationship among relevant authorities in the country and their responsibility with regard to these crimes, in a way that ensures cooperation and coordination among relevant authorities. 5. Establishing the appropriate regulations and procedures to protect the financial and commercial establishments as well as individuals in the Society and all its establishments. Such regulations contain the means necessary to encounter the dangers resulting from money laundering or terrorism financing, in addition to issues which require special attention, subjecting them to examination and inspection, mechanics of reporting these crimes if they occur and verifying and documenting information. 6. Emphasizing and supporting international and regional cooperation at all levels, particularly with regard to encountering money laundering, terrorist acts and all types of crime in accordance with international and regional conventions, agreements and initiatives. Your Highnesses, Ladies & Gentlemen, On this occasion, I would like to stress the appreciation of the Central Bank of the UAE for the support we receive from H.H. the President (May Allah protect him), his brother Vice President and Prime Minister of UAE (May Allah protect him) and the Council of Ministers to encounter money laundering and combat terrorism financing, whether regionally or internationally. I would also like to stress that we receive cooperation and support from all emirates and from federal and local institutions. Maintaining the achievement realized and seeking to achieve progress and development of legislations, regulations and procedures relating to encountering all types of financial crime, including money laundering and terrorism financing, shall ensure economic security and stability to our country and the region at large and shall enhance progress and prosperity within framework of cooperation and transparency. Your Highnesses, Ladies & Gentlemen, UAE has set among its priorities holding international, regional and local conferences and seminars in order to train experts of all authorities concerned with combating financial crimes in the UAE, GCC countries, sister Arab countries and all countries in the region. The number of conferences, seminars and workshops held to-date exceeds (350). And the UAE shall continue to support training and development of skills, with the cooperation of friendly countries. 5 Due to the huge achievements reached by the UAE in establishing the legal, organizational and supervisory frameworks as well as the AML/CFT regulations and procedures, it has received commendation from international and regional organizations for such achievements. UAE has also contributed to training staff of the concerned authorities responsible for encountering money laundering and combating financing of terrorism in some regional countries, in addition to participating with (FATF) in the mutual evaluation of some countries. Your Highnesses, Ladies & Gentlemen, In conclusion, I would like to express my thanks and gratitude to H.H. Sheikh Saoud Bin Saqer Al Qasimi, Crown Prince and Deputy Ruler of Ras Al Khaimah (May Allah protect him) for his kind presence and patronage of this conference. Thanks extend to his brothers, their Highnesses Sheikhs, for their sincere efforts, wishing Ras Al Khaimah more progress and prosperity. I would also like to thank our guests, representatives of USA, UK, France, Italy and Spain and to my brothers, NAMLC members and to all audience. Wishing you success in this conference. | central bank of the united arab emirates | 2,007 | 1 |
Speech by His Excellency Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the Bankers Lunch, hosted by The Bank of New York, Abu Dhabi, 17 December 2006. | Sultan Bin Nasser Al-Suwaidi: Review of the UAE economy and the central bank’s performance in 2006 Speech by His Excellency Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the Bankers Lunch, hosted by The Bank of New York, Abu Dhabi, 17 December 2006. * * * Excellencies, His Excellency Sulaiman Al Mazroui Ladies & Gentlemen, It is a great pleasure indeed to join you today, especially at this magnificent resort, thanks to our host; "Bank of New York". I would also thank Mr. Sulaiman Al Mazroui for the kind invitation and would try to be in line with the request in his letter, i e. to talk about banks' expected performance in 2006 and talk briefly about the UAE Economy. Therefore, I will focus my short speech on the following subjects: 1. Expected Bank's Performance in 2006 2. The UAE Economy and the Exchange Rate Policy of the UAE 3. Central Bank's Issues and Projects 1. Expected Bank's performance in 2006 This may be seen through four consolidated variables, comparing their figures as at 31st Oct. 2006 with the figures of 31st Dec 2005, we will arrive at some important conclusions, these are: 1. Total Deposits Total deposits went up by 16.3% so far, from AED 426.5 Bil. 2. Total Advances Total advances went up by 29.2%, from AED 379 Bil. 3. Total Assets Total assets went up by 25.1%, from AED 624.9 Bil. , and 4. Total Profits Total profits went down slightly, by -0.5% compared to AED 14.8 Bil for the same period in 2005. this could mean that we will see a further decline by 31st Dec. 2006. These figures suggest that "Total Advances" having grown at 29.2%, deserve further analysis. If we consider loan categories to residents, the following categories witnessed high rate of growth, as at 30th Sept. 2006: - Real Estate Mortgage loans - grew at 58.2% and stood at AED 27.7 Bil. - Services - grew at 69.4% and stood at AED 53.8 Bil. - Transport & Storage - grew at 67.7% and stood at 17.9 Bil. - Financial Institutions (Excluding banks) - grew at 93.4% and stood at 14.4 Bil. Loans to the more traditional categories such as, trade, personal business loans, personal consumer loans and construction went up at normal growth rates of between 9.9% to 13.6%. I do not want to draw conclusions, but please take note of these figures and try to draw your own conclusions. 2. The UAE economy and the exchange rate policy of the UAE The UAE Economy will continue to do well, as oil prices are expected to continue to hold above US$ 50 per barrel. As you know, oil and gas exports' revenue even if we include free trade zones exports and reexports, this still will weigh around 70% of the value of all UAE exports' revenue. Inflation in the UAE comes mainly from higher rental rates, which is a temporary phenomena, and expected to subside as new housing units and office space come to the market in a few months from now. The UAE will continue to be a trade & business center and a tourist destination in the region, and certain economic sectors will continue to grow; just avoid concentration. Ladies & Gentlemen, I will take this opportunity to try to respond to those who voiced their opinion recently that the Dirham fixed exchange - rate peg against the US Dollar is not suitable for the UAE Economy. To analyze, lets look at the UAE imports and exports in 2005, before we make any judgment based on ones feelings or interests. The UAE imported goods worth 36% of all its imports from Asian emerging economies and 10% from USA & Canada and 4% from GCC countries; this is straight 50% of all imports, all denominated in US dollars. If we add Australia & N. Z., Africa, other Arab countries & other countries; at least 70% of these countries trade with the UAE were done using US dollars or a currency pegged to the US dollar. Japan exports (UAE imports) are 69.5% denominated in US dollar, as per Bank of Japan letter to myself. Also Imports from the UK should be at least 50% denominated in US dollar. This leaves the Euro Area which represents only 20% of UAE imports, which could be purely denominated in a non-US dollar currency. On the other hand, about 70% of our exports are priced in US dollars, i.e. our oil and gas exports. 3. Central bank's issues and projects Under this title I will now focus on: a) Regulatory & Supervisory Framework b) Image Cheque Clearing System to Replace Automated Cheque Clearing System c) Mobile Phone Payment System Under the a) Regulatory & Supervisory Framework I have Basel II and Corporate Governance i) Implementation of Basel II Two years ago, we arranged high level meetings with Bank CEOs to discuss our programme for Basel II, and carried-out many awareness raising seminars. Also, In February 2006, we held initial meetings with Basel II managers of banks to discuss the gap analysis and objectives of the exercise. In March 2006, we arranged with the Financial Stability Institute of the BIS to hold a Basel II training workshop for Central Bank BSED Team Leaders. In August and October 2006, we, in coordination with KPMG held a week long comprehensive training programme for BSED examination staff. On 27 August 2006, we issued a notice to all banks to announce Basel II requirements. From September to December 2006, we are reviewing aspects of a national discretion as part of an understanding reached at the GCC level, and we are also carrying-out consultation with UAE banks. In February 2007, a comprehensive Basel II training workshop is planned for all banks, to be conducted by KPMG. ii) Implementation of corporate governance standards During this year, we worked on Corporate Governance, as it is an essential element for the successful implementation of Basel II. We held the first ever seminar on Corporate Governance for UAE Banks' Boards of Directors and senior management on 20th March 2005. To enhance principal based corporate governance guidelines further, Central Bank of the UAE signed an advisory service agreement with International Finance Corporation of the World Bank (IFC) on 26 December 2005, to conduct a high-level workshop for banks in the GCC and MENA countries and to issue a handbook for UAE Banks' Directors. The objective of the Handbook on corporate governance is to: 1. Present a single source of information for bank directors regarding sound corporate governance principles and best practices, and 2. to provide a set of reference standards and guidelines that banks can use to benchmark, assess and if need be, improve their corporate governance framework. b) Image Cheque Clearing System to replace Automated Cheque Clearing System We have taken many steps aiming at implementing a successful Image Cheque Clearing System, there were many technical issues that we needed to tackle and some legal issues to resolve. Our experience tells us that it is not so easy to implement systems that are processed both physically at one stage and then electronically, or vice-versa. Also, the third difficulty is getting banks to work together and to cooperate to achieve a certain objective. We have certainly faced these issues in implementing the image cheque clearing system. But we believe that implementing this system is essential for improving customer services at banks, we also believe that the problems banks talk about are mostly theoretical and imaginary. c) Mobile Phone Payment System for banks Our objective with this system is to make it easier for banks to add another element to improve service to their personal customers. The system is expected to become operational in the early part of 2007. The system will handle the following payments: - Person-to-person - Bill payments - Payments for purchases at point of sale - Internet purchases and many more. We have already negotiated an agreement with Etisalat, to provide this service through their mobile phone network. Ladies & Gentlemen, Before I conclude I must thank The Bank of New York for hosting us at this magnificent resort and Mr. Sulaiman Al Mazroui for all the excellent arrangements and for inviting me. Thank you. | central bank of the united arab emirates | 2,007 | 1 |
Welcoming remarks by H E Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the high-level meeting on "Regulatory & Supervisory Policies in Light of the Recent Financial Crisis", Abu Dhabi, 16 November 2009. | Sultan Bin Nasser Al-Suwaidi: The global financial crisis and issues for a regulatory response Welcoming remarks by H E Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the high-level meeting on “Regulatory & Supervisory Policies in Light of the Recent Financial Crisis”, organised by the Financial Stability Institute & Arab Monetary Fund, Abu Dhabi, 16 November 2009. * * * Good morning, Excellencies Ladies & gentlemen Y.E. Josef Tosovsky, Y.E. Dr. Jassim Al Mannai, It gives me great pleasure to welcome you to the UAE, especially those who traveled a long way to be here with us at the outset of this important high level meeting, and I would mention in particular the honorable Thomas Hoeing, President of the Federal Reserve Bank of Kansas City, and the distinguished speakers. Excellencies Ladies & gentlemen In this short speech, I will describe briefly the financial package the UAE had to make available to banks, to help the banking sector stand in the face of the global financial crisis last year and Issues being considered now for a regulatory response. The financial packages A) Central Bank of the UAE’s package Central Bank made available to banks in the UAE certain facilities to help them with shortages of liquidity, its first such facility was made towards the end of September 2008, I will summarize as follows: 1) An overdraft facility: An AED 50 billion O/D facility was made available to banks through their current accounts at the Central Bank. 2) CD swap facility: Banks were allowed to use 100% of their Central Bank CD holdings to borrow dirham and dollar funds from the Central Bank. 3) Discounting of government bonds: Banks were allowed to borrow against their holdings of bonds and sukuks issued by Local Governments or Local Governments’ Companies, with a reasonable hair-cut. 4) Swap operations (dirham/US dollar): This facility was provided to all banks regardless of their dirham net position. 5) Support to local governments: Central Bank discounted, in March 2009, US$ 10 billion of bonds issued by Dubai Government. B) UAE Federal Government’s package 1) Federal Government guarantee of bank deposits: In October 2008, the Cabinet announced that the Government will guarantee all deposits at banks licensed and operating in the UAE, for 3 years. A plan has been initiated to create a guarantee scheme. 2) Liquidity facility: An AED 70 billion was injected by Ministry of Finance into National Banks in three stages. This is an exercise aimed at enhancing the capital base of National Banks, to strengthen banks against NPLs, should this arise. 3) Formation of the Ministerial Follow up Committee: A committee was formed by the Cabinet, its members are the Minister of State for Finance, the Minister of Economy and the Governor of Central Bank, with a mandate to tackle global financial crisis adverse spill-overs on the UAE economy. We have noticed that these packages put by the Central Bank and the Federal Government improved the liquidity situation at banks, as early as April 2009. Excellencies, Ladies & gentlemen The issues that we are debating now, to formulate our regulatory response are, 1) UAE banks would have had no problem, if they owned sufficient first class and liquid securities among their assets, and here I do not mean “AAA” rated papers. I mean, we have to look at the type of securities that would fit the category of liquid assets at times of crisis and what percentages of these securities would be suitable for our banks to hold. 2) Inter-bank deposits plus MTNs, ECPs and similar instruments issued by UAE banks in international capital markets acted as a two edged sword during the crisis. We have to look here at the liabilities percentage of these Instruments, and how they match with first class liquid securities held by our banks. 3) Also, we have to examine what businesses or assets banks are acquiring or selling to their customers. The question that we need to consider; do they understand the risks, and have they explained the inherent risks sufficiently to their customers? 4) Growth of loans and advances per economic sector, and what is the percentage of cross-border loans, as these rates proved to be very important indicators. Loans per economic sector should be examined carefully to determine higher liquidity requirements in order to mitigate the extra possible risks created through higher growth rate in a sector or two versus the total economy. 5) In addition, we have to look carefully at off-balance sheet items that are likely to become on-balance sheet in a financial crisis. The aim of the regulatory response or reform would be to help banks to devise a better risk management framework, to protect our banking system from future financial crises. With this I come to the end of my short speech, but before I close, I would like to thank the AMF, the FSI of BIS and the IIF, for holding this important high level meeting here in Abu Dhabi. I wish you all a successful meeting. Thank you for your attention. | central bank of the united arab emirates | 2,010 | 2 |
Speech by H E Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the MENASA (Middle East North Africa South Asia) Forum, Dubai, 24 May 2010. | Sultan Bin Nasser Al-Suwaidi: The regulatory partnerships for sustained growth in the MENASA Area Speech by H E Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the MENASA (Middle East North Africa South Asia) Forum, Dubai, 24 May 2010. * * * Good Evening, Excellencies Ladies & gentlemen The distinguished panel speakers It gives me great pleasure to be with you this evening at this important Forum. The subject of my speech is: “The regulatory partnerships for sustained growth in the Menasa area”. Under this subject, I will talk about four issues: First: Implementation of similar banking laws and regulations Implementation of similar banking laws, using similar banking regulations, and adopting similar processes in banking supervision in the MENASA Area countries, in my opinion, will go a long way in providing banking sectors with a strong basis for building on successes. It will also make regulators realize the importance of regional cooperation and coordination, which hopefully will lead, at one stage in the future, to enabling cross-border branching of banks and other financial institutions. But is it realistic to imagine that cross-border branching of banks and other financial institutions will be achieved soon? Another complication is the type of banking institutions that we have in this Area. Most banks are retail commercial ones, and these are operating in the protected zone. I mean here; protected through the growing need to protect interests of national banks. So, the question that comes up; shall the cross-border access of banks be done through a new type of banking institutions? Which the Area is not familiar with yet. On implementing of similar banking laws and using similar regulations, I will start here from the possible regulatory response to the Global Financial Crisis. The banking regulatory response that countries in the Area might adopt is a mix between internationally set standards, through decisions of G20 countries and the national requirements, which might cause slight ring-fencing or insulating of national financial systems from direct competition. The Global Financial Crisis might have already impacted the international cross-border banking business, which might lead to improved regional cooperation and therefore improve doing banking business, region wise. Trade related transfers outward and inward will continue to move without much hindrance. Foreign exchange deals will also go through, as G20 countries are eager to do more trade to improve their economic conditions. However, there will be some restrictions on investment flows both outward and inward, because risks have been clearly identified in investment transactions. Outward flows will be scrutinized by regulators for type of investment and whether direct or passive. Also complexity of investment products will draw special attention. As for inward investment flows, regulators will put some type of filters to prevent Hot Money, or huge inflows followed by quick outflow of funds. Banking regulations will probably be amended in the coming few months. I believe, the smaller economy countries will steer their banking system towards lowering the growth rate of loans and advances plus investments versus stable deposits. Investment banking business, on the other hand will be subjected to a great deal of more regulations than in the past. In summary, I think that the present Global Financial Crisis will impact globalization of financial services, as many restrictions will be put in place in many countries including the G7 countries, which might open a window of opportunity for countries in our region or the wider Area. Second: Cross-border investment flows Cross-border investment flows should be welcomed by recipient countries and encouraged by source countries, as many countries in our Area need to set rules to enable the establishment of large projects for the purpose of creating jobs. That will also enhance peace and stability on the national level, which will certainly improve the prospects for the regions in this vast Area. Any help by the World Bank in improving and unifying investment laws in addition to watching their implementation, will go a long way in achieving this important regional objective. Sovereign Wealth Fund source countries should also be interested in investing in mega projects in the region for three reasons, as follows: 1. The Global Financial Crisis proved that investments through Industrialized Advanced Countries’ investment banks are not totally risk free. 2. There is a need within SWF source countries to safe guard flow of food imports at reasonable prices, and the possibility for incorporating companies as direct investment projects in countries in the region is a realistic possibility, when investment laws are enacted and maintained at international standards. 3. SWF source countries should be interested in the maintenance of social order, peace and stability in the regions of this Area. Another reason that makes me think that SWFs from our region might change the flow of their direct investments, is that once we see the proposed Regulations re Sovereign Wealth Funds in the Industrialized Advanced Economies start being implemented, when economies in the West start doing well, more questions will be asked and more forms will become necessary to fill and more disclosure and transparency will be demanded. This behavior will signal that there is no strong need for foreign capital in the West, and that the political mood has changed. Therefore, we might see gradual tightening of the scrutiny on capital flows from SWF countries, at one stage, especially funds that are destined for direct investment in certain companies. Faced with all this nonsense, SWFs will certainly come to the conclusion that it is time to change strategy. This could make SWFs avoid direct investment in certain companies, or even avoid direct investment in all companies, and become more of passive investment vehicles in the West. As, SWFs have large sums to invest, this might make them direct part of their investments to existing or newly created companies in the region. This situation, if it happens soon, will lead to creating a new regional developmental cycle. Third: Linking regional payment systems Linking regional payment systems and using local currencies for settlement of transactions should be a long-term objective for countries in the MENASA Area, as this will improve speed, efficiency and will achieve transaction cost reduction, for the benefit of cross-border trade, investment flows and tourism business. Achieving this would be a big challenge, because the good old routes, which we all are used to, will have to be abandoned. Also, trust in each other’s national currency in addition to trust in the efficiency of national payment systems across regions is another challenge. However, these challenges can be overcome over a period of time, maybe depositing of the settlement amount with the counterpart payment system provider in the recipient country would create the required trust. To build trust in national payment systems, it will also be necessary for the national regulatory authority to take a leadership role. Payment systems on the national level should be unified into one system, and operate with strict rules for action against mistakes or events of fraud through members. To achieve some form of common payment system among MENASA Area Countries, it will be necessary to: 1. Identify countries that are ready to be linked, through national payment systems that satisfy certain pre-set standards. 2. Setting-up of a steering committee, consisting of technical staff representing the national payment systems, who would agree to work on a certain strategy aimed at achieving a common payment system, that would use local currencies for settlement, at a future stage. Forth: Investment in infrastructural projects Encouraging regional capital flows aimed at investment in infrastructural projects in the MENASA Area Countries should be encouraged through capital markets. This could be achieved through allowing corporations that are in marine transportation, air transportation, rail road companies, road authorities, storage facility companies and ports/air port authorities to raise money through capital markets in countries of the Area, especially countries that are capital surplus ones. The Area can draw on the experience of the UAE in this respect, when it allowed its banking system to raise money for Indian companies as early as the eighties of last century. Certain Indian companies were allowed to raise capital against certain commitments and undertakings. This was possible through the high requirements and standards implemented in both India and the UAE at that time. We believe Indian companies were able to benefit from such funds for a long period of time. Many of such companies are large conglomerates now. Providing a special window for infrastructural projects will benefit the flow of trade and investments across regions of the Area, and will help to sustain growth of economies. Excellencies Ladies & gentlemen The distinguished panel speakers With this I come to the end of my speech, but before I close, I would like to thank the organizers of this important forum for inviting me and for the excellent arrangements. Thank you for your attention. | central bank of the united arab emirates | 2,010 | 5 |
Welcoming remarks by H E Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the 8th High-Level Meeting for the Middle East & North Africa Region on "Recent policy developments for strengthening the resilience of the financial sector", organized by the Basel Committee on Banking Supervision (BCBS), the Financial Stability Institute (FSI) and the Arab Monetary Fund (AMF), Abu Dhabi, 27 November 2012. | Sultan Bin Nasser Al-Suwaidi: Recent policy developments for strengthening the resilience of the financial sector Welcoming remarks by H E Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the 8th High-Level Meeting for the Middle East & North Africa Region on “Recent policy developments for strengthening the resilience of the financial sector”, organized by the Basel Committee on Banking Supervision (BCBS), the Financial Stability Institute (FSI) and the Arab Monetary Fund (AMF), Abu Dhabi, 27 November 2012. * * * Good morning, Excellencies, Ladies & gentlemen, Y.E. Mar Gudmundsson, Governor of Central Bank of Iceland, The Honorable, Josef Tošovský, Chairman of the Financial Stability Institute of the BIS, Y.E. Dr. Jassim Al Mannai, General Manager & Chairman of the Arab Monetary Fund, The Distinguished Speakers, It gives me great pleasure to welcome you to the UAE, especially those who travelled a long way to be here with us at the outset of this important high level meeting. The subjects that would be discussed today are familiar and current, and very much relevant to stability of the financial systems. The financial system's stability in all countries, and this region is no exception, are very important for economic stability. I will start by giving you an idea about the UAE financial system, which falls under the Central Bank supervision. I. Overview of the UAE banking system BIS central bankers’ speeches If I may switch now to talk about one of the subjects this meeting will discuss namely: SIBs or D-SIBs, it will be worthwhile to work on a framework to identify D-SIBs in the region at the first stage. The framework should take into account: (a) the size of the bank (based on simple indicators such as total assets and the bank’s reliance on specific sectors, like the real estate sector and the GREs and counter parties), (b) the interconnectedness between banks (as indicated by deposits from and loans to), and (d) the degree of complexity, even though this does not play a significant role in the UAE, as banks do not trade or invest in sophisticated financial products. Also, cross-border activities by banks in the region can’t be used to determine if they qualify as D-SIBs, as these activities are insignificant. II. Issues for consideration 1. The BCBS assessment framework suggests that Local regulators are entrusted with the task to set up their own methodology for the process of identifying which banks to be considered as D-SIBs. Nonetheless, some general guidelines on the subject from BCBS would be helpful, and they will make the exercise more consistent region-wide. 2. Central Banks in our region could develop a peer-group approach for this exercise so they could learn from each other. 3. It seems that the D-SIBs proposal is restricted to banks. Would Non-bank Financial Institutions (NBSFIs) be considered? Would the assessment of systemic importance cover subsidiaries (and not branches) of banking groups. 4. The assessment framework also suggest there will be a mix of qualitative and quantitative judgments for each D-SIB. With the general guidelines from BCBS, it would be the responsibility of the local authority to assign the appropriate weights to the qualitative vs. the quantitative judgments. 5. While waiting for the final version of BCBS document, Central Banks in our region could start working on the identification exercise of D-SIBs, taking into account local considerations, learning from countries of similar financial systems, and benefiting from peer-reviews. III. Higher loss absorbency (HLA) 1. As in the G-SIBs framework, D-SIBs will be required to hold additional Common Equity Tier 1 Capital (CET1) to meet their HLA requirements, which eventually support capital conservation of the Basel III capital framework. It is a positive development that national regulators are given the authority to decide on the appropriate level of additional CET1, consistent with each bank’s systemic importance. However BIS central bankers’ speeches there is some concern that the proposed HLA would just duplicate the already in place country-specific prudential measures implemented in the region, which would mean that the D-SIB’s cost of doing business will go up. For example, in the UAE we impose the following capital ratios: – Tier 1 core capital: a minimum of 8% (actual is: 14.5%) – Tier 1 and other tiers: a minimum of 12% (actual is: 20.5%) 2. However, it is suggested that local regulators should allow identified D-SIBs a comprehensive grace period to fully comply with the HLA requirements. 3. As local debt markets are at an infancy stage in many countries in the region, this would make it difficult for potential D-SIBs to hold high-quality liquid debt instruments as “pre-emptive” liquidity buffers against early signs of stress. Hence, there is a need to find an appropriate way to deal with this issue, until debt markets in the region witness significant improvements. To conclude, it should be stressed that strengthening the banking supervision exercise in our countries is key to tackling systemic risk in D-SIBs and other financial institutions. Excellencies Ladies & gentlemen With this I come to the end of my speech, but before I close, I would like to thank the FSI of BIS and the AMF, for holding this important high level meeting here in Abu Dhabi, UAE. I wish you all a successful meeting. Thank you for your attention. BIS central bankers’ speeches | central bank of the united arab emirates | 2,013 | 1 |
Welcoming remarks by H E Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the 9th High-Level Meeting for the Middle East & North Africa Region on "Strengthening financial sector supervision and current regulatory priorities", organized by the Basel Committee on Banking Supervision (BCBS), the Financial Stability Institute (FSI) and the Arab Monetary Fund (AMF), Abu Dhabi, 18 November 2013. | Sultan Bin Nasser Al-Suwaidi: Strengthening financial sector supervision and current regulatory priorities Welcoming remarks by H E Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the 9th High-Level Meeting for the Middle East & North Africa Region on “Strengthening financial sector supervision and current regulatory priorities”, organized by the Basel Committee on Banking Supervision (BCBS), the Financial Stability Institute (FSI) and the Arab Monetary Fund (AMF), Abu Dhabi, 18 November 2013. * * * Good Morning Excellencies - The honorable, Josef Tošovský, Chairman of the BIS Financial Stability Institute, - H.E. Dr. Jassim Al Mannai, General Manager & Chairman of the Arab Monetary Fund, - Distinguished Guests, - Ladies & gentlemen, It gives me great pleasure to welcome you to the UAE, especially those who traveled a long way to be here with us at the outset of this important high level meeting, and I would mention in particular the honorable Stefan Ingves, Governor, Sveriges Riksbank and the honorable Eric Rosengren, President & CEO Federal Reserve Bank of Boston, and the distinguished speakers. First of all, I take this opportunity to thank the organizers for their careful selection of the meeting title: “Strengthening Financial sector supervision and Current Regulatory Priorities”, also for the choice of the excellent topics of discussion. I believe this meeting will definitely help regulators in the MENA region develop appropriate methodologies, regulations and macro-prudential oversight regimes that would help us all achieve our objectives, in a more efficient and improved manner. Regulatory development is currently a key focus for Central Bank of the UAE. Very briefly, I would like to mention our two recent Regulations, namely: 1) Regulations regarding mortgage loans, and 2) Regulations re monitoring large exposure limits I would not go into details of these two Regulations, as their details are available on the Central Bank website (or will be available very soon). However, what concerns us at Central Bank of the UAE, is that with strengthening regulations and related supervision, extension of credit through the banking system will be impacted. And since we are operating in one of the developing economies in the region, we believe that we have to support economic and social development. For this reason we have to focus on certain initiatives that could mitigate the impact that would come through strengthening regulations and related supervision, such as: 1) Financial Inclusion: In this respect, and although the UAE is well developed when it comes to Financial Inclusion, there are still unbanked sectors of the society and under banked geographical areas within the UAE. Therefore, we need to provide the infrastructure necessary for banks and other financial institutions to provide their services including credit, to all sectors of the society and in all BIS central bankers’ speeches geographical regions within the UAE. This will be achieved, sometimes, through using electronic systems. 2) SME Financing: We believe that SME Financing will become more difficult when new global regulations are implemented, therefore, we have to find ways and means to improve SME financing outside the banking system. At the moment, the UAE is looking at experiences of other jurisdictions and recently we have at a GCC Banking Conference which was held at the beginning of this month, discussed the experience of Korea. We are also looking at the experiences of Italy and Malaysia. We believe that SME Financing is very important for job creation. Our region in particular will need to create more jobs in the future, due to relatively young population. 3) Domestic Debt Market: The development of a domestic debt market is, in my view, of a national priority. Companies, particularly large private companies and GREs, need an alternative to bank lending. It is a more reliable source of funding and it is less costly for large corporations. Banks also would need instruments of the domestic Debt Market to fulfill the requirements of Basel 3 regarding liquidity ratios. As local debt markets are at an infancy stage in many countries in the region, this would make it difficult for banks to hold highquality liquid debt instruments as “preemptive” liquidity buffers against early signs of stress as required by Basel 3. Therefore, it is necessary for the UAE now to expedite the issuance of the public debt law and to set up the needed market infrastructure, as a first step on the way to a vibrant domestic debt market. Excellencies Ladies & gentlemen With this I come to the end of my speech, but before I close, I would like to thank the Basel Committee on Banking Supervision (BCBS), the FSI of BIS and the AMF, for holding this important high level meeting here in Abu Dhabi, UAE. I wish you all a successful meeting. Thank you for your attention… BIS central bankers’ speeches | central bank of the united arab emirates | 2,013 | 11 |
Opening remarks by H E Mubarak Rashed Al Mansoori, Governor of the Central Bank of the United Arab Emirates, at the 20th International Conference of Banking Supervisors, Abu Dhabi, 28 November 2018. | Opening Remarks by H.E. the Governor of the Central Bank of the UAE for the 20th International Conference of Banking Supervisors Abu Dhabi, 28 November 2018 As prepared for delivery Esteemed colleagues, ladies and gentlemen, Welcome to Abu Dhabi and to the 20th International Conference of Banking Supervisors (ICBS). It is a privilege to host all of you during a very special year for the UAE. We are celebrating the Year of Zayed – marking 100 years since the birth of UAE’s Founding Father. Consistent with the values advocated by the late Sheikh Zayed, the Year of Zayed celebrates people of all nationalities, faiths and cultural backgrounds. This event with its global participation is a true reflection of these values. [Introduction] On this occasion of hosting the ICBS Conference, let me emphasize that the Basel Committee’s role as an international standard setter has progressively solidified over the years, and its work has become equally important for both developed and emerging market economies. Let us remind ourselves of the major shortcomings of the Basel framework prior to the Global Financial Crisis – (1) too little capital with too little going concern loss absorption capacity, (2) excessive leverage, (3) neglect of liquidity risks, weaknesses in banks’ resolvability and (v) insufficient macro-prudential considerations. A decade later, tremendous efforts to remedy such fault lines have culminated in a balanced set of common standards – the Basel III. Reaching consensus on the necessary reforms was a difficult journey. From broad consensus in 2010 to its finalization seven years later, this achievement required strong determination, leadership and coordination across the globe. I take this opportunity to applaud Basel Committee’s many successes - (1) strengthening the global financial system, (2) addressing “too-big-to fail problem”, (3) improving banks’ risk management, and (4) providing credible tools to minimize procyclicality of prudential regulations. Significant improvements have also been made in home-host cooperation, which is the bedrock of resilience of global financial system and help minimize the scope for regulatory arbitrage. In my remarks today, I will say a few words on our own implementation of Basel standards in the UAE, followed by a brief focus on several shared challenges for banking supervision that the Central Bank of the UAE (CBUAE) considers important. [The UAE approach to the Basel Committee on Banking Supervision (BCBS) standards] The UAE remains a committed advocate of the Basel reform agenda. Upon joining the Basel Committee as an observer in 2014, we became a proactive adopter of global regulatory standards. We are convinced that higher and better quality bank capital is the cornerstone of a sustainable global financial order. The UAE has indeed benefitted from the Basel Committee’s outstanding efforts in many ways, supporting the evolution of our financial sector - in terms of its depth, breadth, efficiency and stability. Critics who argued that such reforms would derail global economic recovery have been proven wrong. On the contrary, it has been proven that only well-capitalized banks can continuously provide credit through the economic cycle and remain profitable. We subscribe to the need for a good balance between risk sensitivity, comparability, simplicity and – let me add - proportionality - of the global framework. Looking back at our own implementation of the Basel framework in the UAE, we remain conservative in our approach. It takes into account the idiosyncratic risks of our banking system, and the need to mitigate their impact in a way which is appropriate for our jurisdiction: First, a wider macro-prudential overlay is applied to our regulatory framework. To address negative externalities posed by domestic systemically important banks (DSIBs), capital surcharges are imposed on DSIBs. This is largely driven by their concentrated market position, similar business models and entrenched interconnectedness with major counterparties. This surcharge also covers an implicit Pillar 2 component, while a detailed design of Pillar 2 framework is being finalized. Higher capital requirements are also motivated by UAE’s institutional environment, which presented potential for improvements in areas such as resolution regime for banks and bankruptcy proceedings for corporate borrowers. I am pleased to say that concerted efforts are already underway to address them. Additionally, banks have opted to maintain significant capital buffers over and above minimum requirements. As a result, the UAE banking system has sustained high level of capitalization, as evidenced by the average Leverage Ratio of 10.5% for the four DSIBs. Second, the CBUAE has issued comprehensive requirements on large exposures, which represent a conservative approach to sovereign risk and limits excessive risk concentrations. Past banking crises globally have either led to, were accompanied by or trailed closely behind a sovereign crisis. Learning from these lessons, we came up with an appropriate response. We are fully supportive of BCBS’s ongoing work on sovereign risk. Clearly, ignoring this issue is no longer an option. Third, UAE banks’ capital requirements do not rely on internal models and are calculated only by using the Standardized Approach. This approach has protected us against unwarranted variability in capital levels. It may have also impacted the risksensitivity of the framework and given rise to competitive distortions amid the global nature of financial markets. Borrowers in the UAE may find ways to obtain credit from foreign banks which are not bound by those constraints. The CBUAE will therefore need to continuously assess its position on internal models. The backstop decided by the Basel Committee – a floor of 72.5% of Standardized Approach requirements - is hence a welcomed development. This could potentially enable the UAE to move towards greater risk-sensitivity without jeopardizing banks’ capital levels. Let me reiterate UAE’s support and commitment to implement Basel III in line with the commonly agreed implementation schedule. We will use, where necessary, additional safeguards to complement these minimum standards in order to ensure that our financial system remains sound and robust. We will also enhance the level of cross-border cooperation, by establishing supervisory colleges for our DSIBs next year. This is vital to strengthen ties with supervisory authorities from jurisdictions where our banks are active, or whose banks are active in the UAE. [Concerns about global implementation] We all agree that the finalization of Basel III reforms is a major step forward towards a safer financial system. To fortify its continued success, a “full, consistent and timely” global implementation is the critical next phase. Deviations from the framework in the implementation phase may counteract the benefits sought under Basel III. Thus, we very much welcome the BCBS RCAP process, through which the Committee can monitor the implementation. The temptation to deviate from the minimum agreed standards will surface from time to time. And let me be straightforward - such risk is faced by developed and emerging economies alike. We have observed the desire to subject regulatory framework to divergent developmental priorities - providing support to home owners or specific economic sectors, or even facilitating trading-based business models of global investment banks. We need to collectively resist such temptations. Heightened global risks are already upon us due to escalating trade wars, geopolitical tensions and high indebtedness in many economies. An additional layer of uncertainty arising from a new “race to the bottom” in prudential standards should therefore be avoided. Hence, we need to be jointly vigilant in resisting calls for diluting the commonly agreed standards. It is our common responsibility to ensure that. Let us not forget that we, as central banks, must at all times seek to counter such short-term memory of past lessons, for the collective benefit of long-term financial stability and sustainable economic growth. [Future challenges to banking supervision and regulation] Ladies and gentlemen, let me now turn to some remaining challenges from the perspective of developing economies. I want to focus on three specific challenges – (A) implementation of expected loss provisioning, (B) supervisory safeguards against money laundering and terrorism financing, and (C) financial innovation and cyber security. [A. Expected loss provisioning] One such challenge is the implementation of the expected loss provisioning rules, IFRS9. Continued involvement of the Basel Committee in its implementation is paramount. There is a clear risk that our common efforts to simplify a globally comparable prudential framework can be made somewhat more challenging by an accounting standard that is based on complex internal models. These are exactly the same models which we have opted to backstop amid concerns of arbitrage and perverse incentives. We fully support the concept of forward-looking expected loss provisioning. This is a real improvement over the incurred loss approach which proved to be inadequate - enabling banks to window-dress asset values and consequently their capital. However, the manner in which IFRS9 is implemented creates risks comparable to those observed in the case of internal models recognized in the Basel framework. Banks have strong incentives to produce outcomes which minimize provisioning needs by relying on complex models where assumptions are not appropriately disclosed. Furthermore, supervisors need to be equipped with skills to review such sophisticated models, to ensure that provisioning is adequate and not underestimated. Having dealt with internal models in the capital adequacy context, a common challenge remains for accounting models. In the UAE, we have opted for a more prescriptive approach to minimize potential imprudent practices by banks. The CBUAE has maintained a backstop until sufficient experience is gained, and adequate supervisory comfort has been built in this respect. I therefore welcome the fact the BCBS is devoting more scrutiny to how members conduct supervision, such that we can learn and share good practices. [B. Supervision of anti-money laundering risks] Another remaining challenge for supervisors in both emerging and developing markets is AML supervision. For many years, the global community has stepped up its efforts through the FATF, the EGMONT group and other initiatives to combat money laundering and terrorism financing. Nonetheless, the threat is ever evolving. The UAE is devoted to minimizing this pervasive threat. In bolstering our anti-money laundering and counter-terrorism financing defenses, we have recently enacted new legislation and revised the regulatory framework for exchange houses. We are also strengthening our supervisory capacity via specialized risk teams and a more robust risk-based model. CBUAE has also completed a comprehensive assessment of national banks last year. The same for exchange houses is targeted for completion by this year end. The UAE is also actively exploring how best to leverage on technology to mitigate AML risks. In all of this, international regulatory cooperation is key. Clearly, AML risk is borderless. We very much appreciate further focus of the Basel Committee on AML risks, both in terms of facilitating good supervisory practices, as well as day-to-day supervisory cooperation. [C. Challenges posed by financial technology] Lastly, we are observing how rapid advances in digital technology are transforming the financial landscape. Most are evolutionary in nature, while some are revolutionary in their scale and potential. Those advances bring with them disruptions of various kinds - not only to the financial industry, but also to how we conduct supervision. A clear challenge is to balance the tradeoff between the efficiency and the safety and soundness of financial system in the face of such rapid changes: In the UAE, we see rapid growth in both onshore and in the two offshore financial centers. Regulatory sandboxes managed by financial free zones have facilitated experimentation of innovative services within pre-defined boundaries. Our startups and banks have also been actively developing a variety of FinTech initiatives - digital wallets, solutions to facilitate regulatory compliance, crowdfunding – just to name a few. We must be watchful in maintaining the equilibrium between sound prudential and market conduct standards, without stifling innovation. To achieve this, close engagements with regulated businesses, FinTech firms and other stakeholders in the broader ecosystem is pivotal. We believe that ongoing dialogue is the best way to ensure new players are aware and able to navigate the applicable rules. At the same time, it is our responsibility to ensure that supporting infrastructure is put in place for sustainable innovation to flourish. As we navigate through the evolving ecosystem, we must ensure that our supervisors are well-equipped to identify, assess and tackle potential risks associated with FinTech. I therefore cannot stress enough on the criticality of international cooperation in this area. We can, and should, mutually-benefit from this collective endeavor to find common approaches to such risks and share best practices. Technologies may be new, but most of the risks within and across borders - are similar. In the context of financial technology, cyber security is a key risk whose importance cannot be underestimated. Against this background, we very much welcome BCBS work on sound practices to manage pervasive implications of FinTech developments for banks and bank supervisors. We also highly welcome further cross border supervisory cooperation to strengthen cyber-resilience of our firms and market infrastructures. Ladies and gentlemen, In closing, we firmly believe that the UAE is a reliable global partner to host a dynamic, outward-looking financial system. By that I mean financial system which is governed by robust rules, forward-looking supervision and a clear vision of the future. This is envisioned and detailed out in the UAE Financial Sector Master Plan 2018-2028, which was developed to support the nation’s Post-Oil Strategy. Let me conclude by welcoming you again to the UAE and the conference. And I wish you all a constructive and insightful discussion over the next two days. Thank you. ________________________________________________________________________________ | central bank of the united arab emirates | 2,018 | 11 |
Opening remarks by H E Mubarak Rashed Al Mansoori, Governor of the Central Bank of the United Arab Emirates, at the Arab #FinTeX Symposium on "Blockchain & Financial Inclusion", Abu Dhabi, 10 December 2018. | Arab #FinTeX Symposium – H.E. Governor Opening Remarks Honored guests, ladies and gentlemen, good morning, and welcome to this symposium on Blockchain and Financial Inclusion. I think we can all agree that FinTech is radically changing the financial sector. Rapid advances in digital technology, from artificial intelligence, cryptography to distributed legder technology are already revolutionizing the way financial services are provided. This ranges from the (1) collection and processing of financial information, (2) the way saving and borrowing is executed, (3) the channels for payment of goods, and (4) money transfers between wallets and accounts, both domestically and across borders. FinTech companies are increasingly offering technology-enabled solutions that can better address customer needs and preferences by offering enhanced accessibility, convenience and tailored products. By responding to consumer needs for security, trust, privacy and lower cost services, the FinTech industry is poised to affect an array of financial services in a big way. More widely, I believe that FinTech has the potential to enhance financial inclusion and unlocking SMEs and microenterprise’ access to financing. This is a critical aspect in driving private sector growth and further economic diversification across many countries, including the UAE. However, as exciting as these developments are, as a Central Bank we must always be mindful of our primary goal of maintaining both the safety and soundness of the banking system, and adequate levels of consumer protection. And to that end FinTech presents both challenges and opportunities for consumers, financial service providers and regulators alike. The Central Bank (CBUAE) is currently in the process of developing a Fintech Roadmap that aims to build upon the many successes of the UAE FinTech ecosystem, and to cohesively deploy more balanced regulatory and development initiatives to ensure a healthy and sustainable Fintech ecosystem in the long term. This roadmap will be underpinned by a balanced regulatory framework that protects consumers and maintains institutional safety and soundness on the one hand, but does not stifle innovation on the other. At the same time, we must find 1|Page ways to ensure that supporting public and financial infrastructures are put in place within the ecosystem for sustainable innovation to flourish. As a strong advocate towards the UAE’s innovation and FinTech agenda, the CBUAE has developed and launched multiple initiatives to help advance applications of technological innovation that will collectively benefit every stakeholder in the UAE economy. Allow me to name a few: First, the Central Bank has finalized and is in the midst of implementing the National Payment Systems Strategy. It aims to create a secure, future-proof payments ecosystem that best supports the UAE digital economy and cashless society objectives. To this end, the CBUAE will be working with multiple authorities, global and domestic payment providers and FinTech firms to create consumer-centric, cost-effective and safe e-payment solutions. Second, the Central Bank has also issued regulations for stored valued facilities offering specific digital payment services. This set outs clear requirements to facilitate the advent of convenient and accessible digital payment services to all consumers, in line with the CBUAE financial inclusion agenda. Third, the Central Bank is also in the midst of finalizing its crowdfunding regulation. It seeks to provide regulatory clarity for the operations of crowdfunding platforms. More importantly, it aims to strengthen necessary safeguards to ensure adequate consumer protection and robust disclosure requirements when such platforms serve the UAE market in a larger scale. Fourth, the Central Bank in collaboration with Saudi Arabia Monetary Authority (SAMA) is undertaking a unique, joint project – leveraging on blockchain and cryptography - to issue a joint digital currency accepted in cross border transactions between two countries. A Distributed Ledger Proof of Concept (PoC) to facilitate such cross border settlements is already in put into motion. The PoC’s design involve using digital currency backed by fiat currencies of the two nations. This is probably the first time ever we witness such cooperation in this policy front. We hope that the potential success of this initiative will foster similar collaboration in the GCC region and globally. In the wider UAE context, we have also seen the rapid growth of Fintech-related activities in both onshore and in the two offshore financial centers. These include the regulatory sandboxes managed by financial free zones which have enabled for the experimentation of innovative financial services technologies within predefined boundaries. 2|Page As we navigate through the evolving ecosystem, we believe that constant, close engagement with regulated businesses, FinTech firms, regulators and other stakeholders is crucial. Clearly, ongoing dialogue and collaboration are the best way to ensure industry players are aware and able to navigate the applicable rules. In addition, we must also ensure that supervisors are well-equipped to identify, assess and tackle potential risks associated with FinTech. I cannot stress enough, the criticality of domestic and international cooperation in this area. We can, and should, work to find common approaches to such risks and share best practices. With any new financial product or service that is introduced to the marketplace, we have a responsibility to ensure that the potential risks are clearly identified and measures to mitigate those risks put in place. Financial consumers should not be the ‘laboratory mouse’. Experience has taught us that unexpected problems will still surprise us from time to time despite our best supervisory and regulatory efforts. Such potential risks should not necessarily impede progress; but we must have the foresight to ensure these risks are well managed. The technologies may be new, but most of the risks are similar. Regulators and consumers must be assured that risks to stability and integrity – including from cyberattacks, money laundering and terrorism financing – can be effectively managed without impeding innovation growth. As has been well articulated, Fintech has the potential to offer services across the country, to all segments of society equally, at less cost and with more convenience in making finance transactions. Overall we aim to facilitate the adoption of safe, secure, consumer-centric and innovative digital payments services. Indeed, the legal mandate of the Central Bank UAE, also now specifically includes a provision on financial inclusion. In a very strong statement from the UAE government, the law states, and I quote, that we shall “establish necessary regulations and mechanisms to ensure that every natural person shall have the right to access all or part of the banking and financial services and products from Licensed Financial Institutions suited to his/her need”. To this end, we undertaking transformative changes to CBUAE’s consumer protection department. The department will bring a clear focus on consumer 3|Page protection, consumer education, literacy and awareness and promote inclusion. All of these components of consumer protection should be a very important part of the dialogue at today’s conference. I would like to highlight that solutions for expanding access to appropriate financial services through mobile banking and other forms of branchless banking tend to enhance the convenience for customers. However, they do not necessarily target the unbanked segment of the population. We should therefore be looking to find and promote breakthrough FinTech innovations that target the unbanked segments of the population, enhance the degree of financial inclusion and reduces the costs of cross-border remittances. Let me conclude by welcoming you again to the conference. And I wish you all a constructive and insightful discussion over two days. Thank you. 4|Page | central bank of the united arab emirates | 2,019 | 10 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the Annual Conference of Kosovo Banks, Pristina, 5 December 2018. | Honoured, It is my pleasure to be here today to discuss and take notes of this very important topic to our country’s economy, and would like to express my highest consideration to the Kosovo Banking Association, who on a daily basis is advancing Kosovo’s banking sector representation in all aspects. I consider that the topic of this conference is fitting as it has been raised at a time when the banking sector has made some quite significant progress in improving conditions for a sustainable financing of the economy. *** In the last few years, the Kosovo banking sector has significantly increased its role in terms of funding the country’s economic growth by accelerating the pace of credit growth and considerably reducing credit interest rates. The easing of credit standard, followed by a reduction of credit interest rates, served as important incentives for increasing credit demand, thus resulting with an annual credit increase of 11.6 percent in October this year. This shows that access to finances, which has been long reported by businesses as a key barrier to the development of businesses, is now constantly improving. The same can be observed from the increased crediting of economy sectors that during previous periods had limited access to bank financing. The concrete examples of this are considered to be the sectors of agriculture and production, which have lastly been among sectors with highest increase of accepted credits. However, the total amount of credits issued to these sectors still remains low. In October 2018, the credits issued to the agriculture sector represented 3.8% of total credits to enterprises, whereas credits to the production sector represented 12.7% of total credits. Taking due account of the fact that today’s topic is related to the banking sector’s role in the funding of Faqe 1 nga 5 development, I would like to emphasise that a greater support to these economic sectors, and other sectors with high potentials of generating economic growth, is fundamental for achieving a more viable economic growth. Nonetheless, we are aware that the diversification of the banking sector credit portfolio does not strictly rest on on the supply part, but rather and to a great extent, also depends from the credit demand part. In this context, I would like to emphasize that banks have a high financial potential for further increasing crediting, they have eased credit standards, and have significantly reduced the cost of access to bank financing. In October 2018, the average credit interest rate was 6.6%, which represents a significant improvement compared to a period not so long ago. These indicators show that credit supply has significantly improved. However, in order to ensure better crediting for sectors with currently lower access to bank financing, it is not enough to only improve credit supply, it is also necessary to ensure that these sectors’ credit demand is higher and of a better quality. With that I wanted to say that a more comprehensive approach is needed in terms of identifying and supporting the development of sectors that are of great importance to the country’s economic growth. We consider that the establishment of the Kosovo Credit Guarantee Fund represents an important step forward in terms of increasing support to these sectors. So far, the amount of credits guaranteed by this Fund has reached EUR 71.3 million and is distributed to some 1,836 micro, small and medium enterprises. However, it is noted that the structure of credits, by economy sectors, which are guaranteed under this Fund is quite similar to the structure of unguaranteed credits, whereby credits for the trade sector prevail considerably. Therefore, we expect the Kosovo Credit Guarantee Fund, with the purpose of better serving its purpose of Faqe 2 nga 5 establishment, to play an even greater role in increasing credit financing for sectors with less access to bank financing but with great importance to a higher economic development. *** In order to have a banking sector that ensures sustainable financing for the country’s economic development, the vital precondition is for the banking sector to be sustainable. Having said this, I would like to reconfirm that, based on all financial soundness indicators, Kosovo’s banking sector remain stable. I would like to attach particular importance to the good quality of the credit portfolio, which shows the bank’s good credit risk management, and could just as well serve as an important indicator of the favourable economic environment for banks operation in Kosovo. During September of this year, the rate of non-performing credits was 2.8%, which reflects a very good situation in terms of the quality of credit portfolio. The satisfactory stability of the banking sector is also reflected by other indicators, such as capital adequacy and liquidity indicators, which have consistently exceeded regulatory requirements and represent the high solvency of the banking sector. *** The Central Bank of the Republic of Kosovo, with all of its capacities, is in the function of supporting sustainable development of the financial system, providing all necessary infrastructures to support the development of financial institutions and at the same time ensuring that their activity provides financial stability. In this regard, we are providing the banking sector with utmost modern standards of financial regulation and oversights, thus making banks and other financial institutions in Kosovo operate pursuant to rules that are applicable in all developed Faqe 3 nga 5 countries. Also, the CBK provides the banking sector with a modern financial infrastructure. The interbank payment system, a modern, efficient and secure system, and the credit registry, which offer banks the most modern services in this field, are good examples to illustrate the financial infrastructure development in Kosovo. *** In recent years, the CBK has increased its engagement in the function of protecting the rights of financial service consumers, thus directly serving to the protection of public interest. Financial education activities represent a very important part of this intervention aimed at providing the public with clear information regarding opportunities offered by the financial system and their rights in the use of financial services. For the purpose of protecting citizens and businesses more effectively, we have drafted a Regulation on the disclosure of information by banks, and have established the Division for dealing with complaints by users of financial services, which addresses all complaints against financial institutions. The CBK, from the moment it became functional, has and still fully supports the development of the financial system; however I would like to emphasize that we are committed to ensuring that the financial institutions’ development takes place in full compliance with the principles of protecting consumer rights In this regard, we are determined to further increase our commitment for protecting the rights of financial services users and requests from banks to carefully consider their legal requirements and policies in order to avoid any unreasonable obstacle that would impede normal interaction between citizens and the banking sector. We are committed and expect that the continuous development of the banking sector will create conditions for easier access and more favourable conditions for Faqe 4 nga 5 citizens and businesses in the banking services. This is in line with the Sustainable Development Objectives, prepared by the United Nations, whereby under the objective of economic growth at global level, the requirement of improving access to financial services for ensuring sustainable and inclusive economic growth is clearly emphasized. *** At the end of my speech, I would like to reiterate that Kosovo’s banking sector is in a sound financial situation and with a constant increase of funding to Kosovo’s sustainable economic development; however, it requires an even greater interinstitutional commitment for creating the necessary conditions so that this sector’s contribution to the country's economy is even greater. The CBK will continue to support all aspects of banking sector development, by providing the entire necessary both financial and regulatory infrastructure. The close cooperation between the CBK and the banking sector, facilitated to a great extent by the Kosovo Banking Association, has allowed us to effectively address the needs for developing and maintaining the sector’s stability and we are therefore committed to further advance our constructive cooperation. Faqe 5 nga 5 | central bank of the republic of kosovo | 2,018 | 12 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, in the debate with businesses organized by American Chamber of Commerce in Kosovo, Pristina, 6 December 2018. | Honoured, I am pleased to be here with you today to discuss and hear about a very important topic for our country's economy, and I would like to thank the American Chamber of Commerce for the invitation and to express my high considerations for businesses and their role in the country's economic development. I believe that the topic of this conference is very good because it comes at a time when the banking sector has made great progress in improving the conditions for sustainable financing of the economy, namely businesses. *** Kosovo's banking sector in recent years has considerably increased its role in financing the economic growth in the country, accelerating the loan growth rate, and significantly reducing loan interest rates. Easing the lending standards and reducing the loan interest rates have served as important incentives for increasing loan demand, resulting in an annual loan growth of 11.6 per cent in October this year. This indicates that access to finance, which has long been reported by businesses as one of the main barriers to their business development, is now undergoing continuous improvement. This can be noticed by the growth in lending to the sectors of the economy which in previous periods had a more limited access to banking financing. According to the latest data of October 2018, the loans granted by the banking sector to businesses are in the amount of EUR 1.7 billion which, compared with the same period of five years ago, has increased by 45 per cent. The lending structure by economic sectors has started to improve compared to the previous periods, although there is room for greater diversification of the loan portfolio in favour of the sectors that have the greatest potential to generate Faqe 1 nga 5 economic growth. Currently, about 50 per cent of total loans issued to enterprises are represented by loans to the trade sector. During this year, the agricultural sector and the manufacturing sector were among the sectors with the highest increase of loans received. However, the total amount of loans granted to these sectors continues to be low. The share of manufacturing sector in total loans to enterprises in October was 13 per cent, while loans to the agriculture sector accounted for about 4 per cent of total loans. Since today's topic is related to the role of the banking sector in the country's economic development, I would like to emphasize the fact that the greatest support to these sectors of the economy, but also to the other sectors with the greatest potential to generate economic growth, is indispensable in order to have a more sustainable economic development. However, we are also aware that the diversification of the banking sector's loan portfolio depends not only on the loan supply but is largely dependent on the loan demand. In this context, I would like to emphasize that the banks have very high financial potential for further lending growth, have eased loan standards, and have significantly reduced the cost of access to banking finance. In October 2018, the average loan interest rate was 6.6 per cent, which represents a great improvement compared to previous years. The decline in loan interest rates is clearly visible in all sectors, including loans to the agricultural sector, where the interest rate decreased to 7.5 per cent, compared to 16.7 per cent five years ago; for the industrial sector, interest rates decreased to 5.8 per cent, compared to 12.2 per cent in the past; and also for the service sector, the average interest rate decreased to 6.3 per cent, compared to 11.1 per cent five years ago. Faqe 2 nga 5 Improvement of the conditions for access to banking financing has also been noted with regard to other aspects, such as easing loan approval standards, reducing collateral requirements, and extending the loan maturity term. However, in order to have a greater lending to sectors that currently have the lowest access to banking financing, improving the loan supply is not enough, rather it is also necessary that the demand of these sectors for loans be higher and of better quality. I would like to say that a more comprehensive approach is needed to identify and support the development of sectors of major importance for the country's economic development. We believe that an important step to increase support to these sectors was undertaken when the Kosovo Guarantee Fund was established. So far, the total value of loans guaranteed by this Fund has reached EUR 71.3 million and has been distributed to 1,836 micro, small and medium enterprises. *** In order to have a banking sector which serves the sustainable financing of the country's economic development, the basic prerequisite is for the sector to be sustainable. On this occasion, I would like to confirm again that Kosovo's banking sector continues to be stable based on all the indicators of financial soundness. The main focus will be on the very good quality of the loan portfolio, which reflects the good credit risk management by banks, but which can also serve as an important indicator of the favourable economic environment for the operation of banks in Kosovo. In September this year, the non-performing loans ratio was 2.8 per cent, reflecting a very good condition of loan portfolio quality. There are numerous factors that have contributed to the good quality of the loan portfolio, but amongst the most important ones I consider the macroeconomic stability, legislative Faqe 3 nga 5 developments over the last years, as is the case with private enforcement agents who have facilitated the execution of collateral and the implementation of contracts, prudential oversight by the CBK, adequate bank risk management by banks, and responsible behaviour of citizens of the Republic of Kosovo in meeting their contractual obligations vis-Ã -vis banks. The satisfactory situation regarding the stability of the banking sector is also reflected by other indicators, such as capital adequacy and liquidity indicators, which have consistently exceeded the regulatory requirements and represent the high solvency of the banking sector. *** The Central Bank of the Republic of Kosovo, with all its capacities, is committed to supporting the sustainable development of the financial system by providing the entire necessary infrastructure to support the development of financial institutions and at the same time assuring that their activity provides financial stability. In this regard, we are providing the banking sector with the most modern standards of regulation and financial oversight, thus enabling the banks and other financial institutions in Kosovo to operate under the rules in force in all developed countries. Also, CBK provides the banking sector with a modern financial infrastructure. The interbank payment system, which is a modern, efficient and secure system, and the loan registry that provides banks with the most modern services in this area are good examples to illustrate the development of financial infrastructure in Kosovo. *** At the conclusion of my speech, I would like to emphasize once again that Kosovo's banking sector is in sound financial position and with continued growth of funding the sustainable economic development of Kosovo, nevertheless, greater Faqe 4 nga 5 inter-institutional commitment is required to create the necessary conditions in order for this sector's support to the country's economy and to businesses to be even greater. *** The 100 per cent tax In principle, we support the development of free trade between all countries, but only when the principles of free trade apply reciprocally. In this respect, other countries should allow our businesses to have free access to their markets just like we allow them to freely access our market. Therefore, I consider it is time for other countries to reflect and apply the principles of free trade as a whole rather than on a selective basis because this is not acceptable to us. Faqe 5 nga 5 | central bank of the republic of kosovo | 2,018 | 12 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the End of the Year Conference, Pristina, 24 December 2018. | Dear journalists and media representatives, I feel honoured to meet you today to jointly mark the end of a successful year for the Central Bank of the Republic of Kosovo and the country's financial system, which with its activity has continued to be a very important contributor to the support of development and stability of the country's economy. Effective communication with the media on a continuous basis has, without a doubt, been part of this success. CBK has continuously paid special attention to public transparency, by being open to media regarding all public interest issues. In order to further advance our cooperation, during this year, we have also organized a workshop with journalists where we had the opportunity to talk closely about important topics related to the work of CBK and the financial system of Kosovo. In addition, in order to facilitate access to information for journalists, we have appointed a CBK spokesman who greatly facilitated communication between the CBK and the media. These all indicate that we are continuing to advance our transparency towards the public and we remain committed to continue this in the future. *** Now, please allow me present to you a summary of the developments that characterized the country's economy and the financial system during 2018, taking into account the latest available data. *** Preliminary estimates suggest that the country's economy during 2018 recorded a real growth rate of about 4%, mainly supported by the increase in domestic demand, while the deepening of trade deficit had a negative impact on the growth Page 1 of 6 rate. The factors with the most significant impact on the financing of economic growth included the acceleration of credit growth for the private sector, the increase of public expenditures and the increase of remittances, which by September amounted to euro 587,9 million, which is 6.1 % higher compared to the same period last year. Kosovo's economy, as estimated by CBK, is expected to have the similar economic growth rate next year, when the real growth rate is expected to be around 4.2%. As regards developments at the general price level, the average inflation rate by the end of 2018 is expected to be around 1%. *** Banking activity during this year was characterized by credit growth, improved conditions for private sector access to loans, and further strengthening of the sustainability situation. Banking sector loans amounted to EUR 2.7 billion in October 2018, recording an annual growth of 11.6%. The main source of financing of banking sector activity remains deposits, the value of which during this period amounted to EUR 3.2 billion, which represents an annual growth of 6.9%. Interest rates on loans continued to decline which decreased to 6.6% from 6.8% in the same period last year, indicating the continued ease of access to bank financing. Financial health indicators continued to show a high level of sustainability of this sector in all respects. In particular, it is worth mentioning the very good quality of the loan portfolio with a non-performing loans ratio of only 2.7% in October 2018, which, compared to last year when it was 3.6%, marked a further decrease. *** Page 2 of 6 Other sectors of the financial system were also characterized by favourable developments. The value of assets of the pension sector in September 2018 amounted to EUR 1.76 billion, marking an annual growth of 11.2%. Return on pension fund investments continued to be positive, indicating an increase in the value of pension savings of citizens. *** The insurance sector continued to increase its insurance activity as well as compensate the insured against damages. The total written premium value of insurance companies in September 2018 was EUR 69.1 million, which represents an annual growth of 4.8%. On the other hand, the value of the damages paid amounted to EUR 31.5 million, marking an annual growth of 8.2%. Increased damages paid, in addition to increasing the number of insurance policies, also reflect the more responsible behaviour of insurance companies against insured persons. The insurance sector has continued to have positive financial performance for the second consecutive year, which represents a very important development for the sustainability of this sector. *** Another important sector of the financial system is the microfinance institutions sector, which is continuing to accelerate the lending rate, becoming a sector that is increasingly contributing to the growth of competition in the credit market. The total value of this sector's loans in October 2018 amounted to EUR 177.7 million, marking an annual growth of 29.1%. However, a falling interest rate from the current average level of 23.1% would make this sector even more competitive and with greater role in supporting the domestic economy. Page 3 of 6 *** The Central Bank of the Republic of Kosovo with all its capacities has continued to supporti the sustainable development of the financial system, providing all the necessary infrastructure to support the development of financial institutions and at the same time ensuring that their activity provides financial stability. Harmonization of the regulatory framework with the recent international developments in this area, more specifically in the European Union, has continued to be an important priority of the CBK during this year, which caused the drafting of various regulations which advance different aspects of the banking regulation, such as: the Regulation of IFRS 9 Financial Instruments, and the Regulation on Non-performing Loans and Restructurings. The application of Regulation IFRS 9 Financial Instruments will result in lower reserves for credit losses at the banking sector level and will reduce the cost of preparing and auditing the banks' financial statements since banks will only report under the international financial reporting framework - IFRS. The Regulation on Non-Performing Loans and Restructurings will enable the application of the same criteria for the identification of Nonperforming Loans and Restructuring and it fully complies with the criteria applied in the EU. In recent years, the CBK has increased its engagement towards the protection of the rights of financial services consumers, thus directly serving to the protection of the public interest. Such engagement, either through financial education programs or through corrective measures to financial institutions, will continue to increase during the upcoming periods. During 2018, the CBK, in addition to the advancement of internal capacities, has been very active in the field of international cooperation. As regards this, I would Page 4 of 6 like to emphasize the signing of the memorandum of understanding with the European Central Bank, which paves the way for increased cooperation with this institution. Also, ensuring an LEI international code for the Republic of Kosovo was of a special importance. Through this code, the Central Bank of the Republic of Kosovo is treated equally with other central banks in the execution of financial transactions. A more detailed disclosure of the economic and financial developments and CBK activities during 2018 can be found in the CBK Annual Report, which will be published in the first half of the next year. *** Before we move on to your questions, I would like to inform you that the CBK has continued even this year with the announcement of the already traditional competition for the "Young Economist" award, and I would like to thank and congratulate all the candidates for their papers submitted for this competition. This activity aims to stimulate research activity in the field of economy among young people. Based on the evaluation of the professional commission for the evaluation of these papers, I am pleased to announce today the three winning research papers of this award, hoping that this will motivate the authors of these research papers and other young people to continue and advance even further their research work. The author Jeton Zogjani is awarded the first place with the paper “The efficiency and impact of banking electronic services: evidence for Kosovo” Page 5 of 6 The author Venera Ratkoceri is awarded the second place with the paper “The impact of Remittances and Foreign Direct Investments on Economic Growth Evidence from Albania”. The author Bedri Hasanaj is awarded the third place with the paper “Characteristics of Kosovo's economic growth in the last decade” *** Finally, let me wholeheartedly thank you for the cooperation, professionalism and correctness you have shown in covering the financial and economic developments this year and let me wish you and your family great health, happiness and success for 2018. You are now welcome to ask questions. Page 6 of 6 | central bank of the republic of kosovo | 2,019 | 1 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, on World Consumers Rights Day, Pristina, 15 March 2019. | Honourable Minister Shala, Honourable Chairman of the CBK Board, Mr Mrasori, Honourable Deputy Governor, Representatives of Financial Institutions, Honourable participants, ladies and gentlemen, I am pleased that today we are all together marking the World Consumer Rights Day, which is now transformed into an annual activity for the Central Bank of the Republic of Kosovo. The special feature of today's organization is that this is happening within the activities of marking the 20th anniversary of the establishment of CBK, so we are in a good moment to reflect on the development of Kosovo's financial system over these 20 years and our orientation for the development of this sector in the future. Kosovo started developing the financial system in 1999, at a time when everything had to be developed from the outset. The first years of CBK's operation were mainly related to the construction of the basic infrastructure necessary for the functioning of the financial system, starting from the regulatory and supervisory framework, the payment system and so on. Over time, together with the highly valued support from our international partners, CBK managed to advance its capacities at the same level with the central banks of countries with a longer tradition of the financial system. CBK went through different development stages, and so did the financial institutions operating in Kosovo. The first years of their operation were quite challenging, because they operated in an environment of high uncertainty and significant lack of information. Nevertheless, the improvements made in the financial infrastructure and in the overall business environment in Kosovo, together with the growth of maturity of financial institutions and CBK during these 20 years, have resulted in a modern and sound financial system that is successfully implementing its role of financial intermediation in support of the sustainable development of the country's economy. Nowadays, our financial system is generally characterized by steady growth of activity and a very satisfactory level of financial health indicators. Whereas, in the first years of operation of the financial system, the focus was on creating the conditions for providing basic financial services for the country's economy, now we have reached a level where more attention is given to the quality of these services, where undoubtedly, activities aiming consumer protection of financial services occupy a very important place. For us, consumer protection activities represent a daily task that we exercise with the utmost seriousness, and this day will be used as an opportunity to make a general reflection on these activities. Consumer protection is not a single action, but an entire process that promotes responsible behaviour of financial institutions by incorporating various aspects that, besides protecting the respect of contractual customer rights, also help customers in selecting adequate financial products and contribute to maintaining the solvency of customers. Therefore, given the importance and complexity of consumer protection, CBK has organized consumer protection activities in two main pillars, consisting of consumer complaints and financial education. By reviewing complaints, CBK intends to ensure the implementation of all contractual rights and obligations between financial institutions and customers, in cases where customers consider that such a thing has never happened. In recent years, the number of financial institutions’ customers lodging a complaint to CBK regarding the implementation of their contractual rights has increased. We consider that the increase of the number of complaints directly reflects the higher awareness of customers about the right and the possibility of complaining, which is contributing to the better protection of their rights, but it is also contributing to the rectifying and advancement of internal processes in financial institutions in providing and further developing financial services as well as avoiding various errors. Consumer complaints represent a very important source of information for CBK, which often takes them into account during the supervisory activities of financial institutions. In addition to activities to address possible violations by financial institutions in relation to consumer rights, CBK is working intensively on financial education of the public, which aims to increase the level of public knowledge about financial products and their rights in relation to the financial institution. Also, in addition to its activities in promoting financial education, CBK continuously encourages financial institutions to increase their activity in support of increasing public knowledge about financial products, as well-informed customers take reasonable action and contribute directly to further development and maintenance of financial stability. CBK also gives its contribution to consumer protection as a member of the Consumer Protection Council, an inter-institutional body that aims to provide a harmonized and comprehensive approach to ensure consumer rights protection in Kosovo. The establishment and functionalization of this council indicates the orientation of the institutions of the Republic of Kosovo, which have put consumer protection at the top of their priorities. At the conclusion of my speech, I would like to emphasize our commitment in ensuring a financial system to the country's economy, which contributes in the best way possible to the economic development of the country and, at the same time, conducts the financial intermediation activity while respecting all legal and regulatory provisions. | central bank of the republic of kosovo | 2,019 | 3 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the opening of the Global Money Week, Pristina, 25 March 2019. | Dear Minister Bytyqi, Dear Mr. Marco Mantovanelli, Director of the World Bank for Kosovo and North Macedonia, Dear Mr. Patrick Etienne – Country Director, Swiss State Secretariat for Economic Affairs (SECO) Dear Ms. Lori Michealson, representative of the US Embassy Dear President of the Board Mr. Mrasori, Dear representatives of financial institutions, Dear students and teachers, Dear representatives of media Ladies and Gentlemen, It is my pleasure to welcome you to this event marking the Global Money Week in the function of financial education, with our main affiliates, the Ministry of Education, the World Bank, the Swiss State Secretariat for Economic Affairs (SECO) and the European Fund for South East Europe, who I would like to take this opportunity to thank for the unreserved support to advance developments in the financial sector in Kosovo in general and financial education in particular. This year, Global Money Week is especially important for two reasons: Firstly, for the fact that with the activities that we will organize this week, we have brought the Republic of Kosovo to the attention of the international arena, where the activities that we will organize this week can be followed internationally through "live streams" from central banks, regulators and international organizations dealing with financial education issues; Secondly, for the fact already announced by the CBK that 2019 will be the year of consumer protection and the activities that we will organize in the field of financial education will be in the function of consumer protection. In the present environment, where we are all witnessing the financial stability that Kosovo enjoys, placing Kosovo's financial system at a level that is comparable not only with the countries of the region but also those of the European Union, the financial education has occupied a specific place on our development agenda. Moreover, the financial services sector has a strong share in economic growth, job creation, building of vital infrastructure and sustainable development for Kosovo. Services and products of the financial sector affect the life of every citizen of Kosovo. Therefore, we are grateful, to all our associates, some of whom are here with us today, for the support they have provided to the Central Bank and other relevant institutions in building a financial market that treats consumers fairly, encourages financial involvement and helps citizens to make effective use of financial services. One of CBK's strategic goals is to encourage the development of a sound financial system in the Republic of Kosovo and to further develop the financial education function with a view to creating a sound financial culture that helps all stakeholders to make the right decisions on the basis of sufficient knowledge. This knowledge can only be gained through adequate financial education, which is consequently transformed into financial behaviours. This would be the optimum reality that all of us present today aspire, but have we managed to accomplish it? The Central Bank is developing the financial education in the function of three main dimensions: - in the function of financial stability, - in the function of consumer protection, and - in the function of financial inclusion. These three dimensions actually cover the whole process of financial activity, from the first confrontation with the financial product/service to the realization of the right/obligation in this report. Financial education in the function of financial stability is built on the premise of mutual trust. Financial education is the core of trust building. Without trust there can be no financial stability. If we look from the social welfare point of view, it is very important whether the citizens are able to properly manage their finances. But on the other hand, the benefits of financial knowledge extend beyond the balance sheets and income at the individual or the household level to the promotion of a stable financial system and efficient resource allocation within the real economy. Financial education in the function of consumer protection is an active process in which information communication is only the beginning, while the ultimate goal is a positive long-term financial behaviour. Customers' decisions on the use of products and services are made on the basis of complete and reliable information as well as on their understanding of this information, therefore the presentation of this information by financial institutions is critical. Moreover, such an approach leads to a fair competition of all stakeholders in the financial sector. The CBK is committed to contributing to economic growth in the country and to work towards raising quality across the financial sector and above all to contribute to consumer protection. As a result, with the support of the European Fund for Southeast Europe "EFSE", we will implement the project "Improving the transparency of the banking market through building a platform for comparing interest rates for banks". This platform will enable citizens to make decisions based on complete and clear information, presented on a unified platform for all banks. This platform will also help increase a sound competition in the banking sector. Another important project is the Collection of Books for Financial Education designed for the lower cycle of primary schools, which in cooperation with the Ministry of Education will be distributed throughout all Kosovo schools. Kosovo students will have the opportunity to get familiarized with the economic-financial educational concepts that are important to be installed in early education. The third dimension, the one on financial inclusion is a continuous process of advancing financial infrastructure in order to increase the availability of financial products and services at the lowest cost. Financial intermediation has advanced rapidly through the proliferation of financial services and products but only at the basic level. Building a financial market that treats consumers fairly encourages financial involvement and helps citizens to make effective use of financial services as the main premise of financial inclusion. Therefore CBK has orientated the financial education program in the function of financial inclusion in order to stimulate sufficient demand for a wide variety and wide range of services and products. Therefore, with the support of the World Bank and the Swiss State Secretariat for Economic Affairs (SECO), we have managed to design the "Greenback Project" targeting Remittances as a very important category of revenues in Kosovo, awareness of senders and receivers of remittances, so that the destination of this category of revenues is transformed from consumption to investment. In addition, the Remittance and Payments Program will help the CBK to further advance the payment system infrastructure, in particular, the broader aspect and the cost-effectiveness of small payments. All of us that are here today agree that through financial education we have managed to address many challenges within the three dimensions, but there is still work to be done. The financial system is constantly evolving towards expanding more complex financial products and services, so the financial education program should respond proactively to this new dimension. This proactivity imposes the need for the National Financial Education Strategy, for which I consider that now it is the time to start the dialogue. I consider that today's signing of the Agreement of Understanding between the Central Bank and the Ministry of Education will be a good start in this regard. In conclusion, please allow me to thank the Ministry of Education, Science and Technology, the World Bank, the Swiss State Secretariat for Economic Affairs (SECO), the EFSE for the excellent cooperation in achieving the present results and all you representatives of other relevant institutions for the future cooperation. Thank you very much! | central bank of the republic of kosovo | 2,019 | 3 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the third anniversary of the establishment of the Kosovo Credit Guarantee Fund, Pristina, 16 May 2019. | The third anniversary of the establishment of the Kosovo Credit Guarantee Fund Honourable, Mr Rinor Gjonbalaj, Chairman of the Board of Directors at the KCGF Mr Christian Heldt, German Ambassador to the Republic of Kosovo, Mr Bedri Hamza, Minister of Finance, Mrs Lisa Magno, USAID Kosovo Mission Director, Mr Riccardo Serri, Head of the EU Office, Mr Alessandro Tappi, Chief Investment Officer at EIF, I am honoured to celebrate today with you the third anniversary of the establishment of the Kosovo Credit Guarantee Fund. It has been a privilege for the Central Bank to contribute, within its legal mandate, to the process of the Fund establishment, in particular in the area of proper legal framework. This fund has achieved tremendous success during these past three years, assisting the economic development and creation of new jobs in Kosovo. Within such a short time, the Fund has managed to guarantee more than 2,560 loans amounting to EUR 100 million, with a guaranteed amount totalling to EUR 47.5 million. Studies to date show that, among others, access to finance is one of the obstacles to private sector development. Challenges faced by small and medium-sized enterprises for access to finance in one hand, and challenges faced by financial institutions during risk assessment of the financing of these enterprises on the other hand, are already known. So, by providing credit guarantees, the Fund has assisted in overcoming these challenges by facilitating access to finance for small and medium-sized enterprises. Therefore, financial institutions have channelled their liquidity into the type and value of proper funding for the needs of small and medium-sized enterprises. This additional funding mechanism has helped them to develop, create new jobs, and export, thus positioning Kosovo at a competitive level in the regional and European markets. An essential prerequisite for the proper functioning of the Fund is the interaction with a stable and efficient banking system. The continuous growth of competition in the banking system and the advancement of this sector have led to a decline in cost in bank financing conditions, and improvement thereof. The average effective interest rate on loans in March 2019 was 6.7%. This level of interest rates has now approximated the cost of bank financing in Kosovo to other countries in the region. Also, lending of the banking sector has increased significantly, raising its lending rate to ever EUR 2.8 billion, with an annual growth rate of 11.4% in March 2019. Considering the high level of banking sector stability, the continuous growth of the position of liquidity and capitalism, considerably above the level required by the Central Bank, the Fund's introduction and active participation in this sector have strongly influenced the continuation of significant increase and improvement of the aforementioned lending standards. The satisfactory stability of the banking sector is also reflected by the good quality of the loan portfolio. The low level of non-performing loans marked a further decline to 2.6% in March 2019. This represents the lowest level so far, and continues to list Kosovo as the country with the lowest rate of non-performing loans in the region. Despite the hitherto success, the Fund will face challenges in achieving future objectives. The good quality of loans guaranteed by the Fund, adequate operating tariff, effective risk management mechanisms, operational independence, and financial stability are essential for the functioning and development of the Fund. These can be achieved by proper corporate governance which is integrated into the institutional framework of the Fund. The Board of Directors and Management shall ensure that such a framework is prudent and operates in accordance with the law and the best internationally accepted standards. It is very important for the Fund to increase its activity since the fund's guarantee potential is much higher than what it is currently being utilized. The agreement between the European Investment Fund (COSME Programme) and the Fund enables the reguaranteeing of the portfolio up to EUR 45 million for a two-year period to a credible institution such as the European Investment Fund which will have a positive impact on increasing access to financing for micro, small and medium-sized enterprises. These benefits would enable the Fund to reduce the fee for loans re-guaranteed by the COSME Programme. The CBK will continue to ensure the financial stability it currently enjoys. The role of banks in particular, and of other financial institutions in general, is very important and there is still room for this role to be further advanced in order to increase its impact on the development of Kosovo's economy and further development of the banking system itself. Above all, it is a collective obligation to contribute to the development of a financially stable Kosovo Credit Guarantee Fund so that it serves to the development of micro, small and medium-sized enterprises. Finally, I would like to conclude my speech with praises on the excellent work done so far in the functioning of the Fund, and looking forward to maximum inter-institutional engagement for advancing this Fund so that it further increases financial intermediation in Kosovo. | central bank of the republic of kosovo | 2,019 | 5 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the opening of the new Raiffeisen Bank Kosovo headquarters, Pristina, 16 September 2019. | I am honored to be with you today, to inaugurate the opening of the new Raiffeisen Bank head office. Your investment in this facility is a clear indicator of your commitment to continue operating successfully in Kosovo's banking and non-banking systems, in the future as well. Raiffeisen Bank has played a very important role in creating a safe and sound financial system that has contributed to Kosovo's economic growth. We are very honored with your presence and the success you have shown so far and we hope you will continue with this success in the future. Raiffeisen Bank has greatly contributed to the development of fair competition, continuous improvement of products and development of new products, by increasing access to finance, contributing to the development of trade relations with other countries, helping to attract more foreign investors and, as well, in improving the reputation of Kosovo in general. We are thankful for this. Raiffeisen Bank has also helped in the development of human capital, and continues to use the potential of our youth. Among other things, Raiffeisen Bank remains an example of a good employer, for which, we are all proud of. The CBK as a financial system supervisor will continue to work on maintaining a safe and sound financial system and will continuously improve the economic environment, in which the financial industry operates. The financial sector is a sector with great dynamic development and rapid changes in the economic environment that surrounds it. The financial systems of different countries are constantly integrating and this requires increased cooperation between these countries. The CBK remains committed to cooperating, with the aim of overcoming challenges in the future and integrating Kosovo's financial system into the systems of developed economies. Banks in Kosovo, as in all other countries, have a special status in the economy. This status is associated with different regulatory requirements and greater requirements for social responsibility, and I am pleased to say that banks in Kosovo successfully meet these requirements. Today in Kosovo our savings are safe and advancements in technology allow us to access them faster. Banks are an example of success in Kosovo, so I urge them to promote their success even further, in order to attract and increase foreign investments in other sectors as well. This would affect the economic development that is most needed for financial stability, as well as the further advancement of the banking sector in which Raiffeisen Bank plays a very important role. At the end, I would like to thank you for your contribution to the economic development of Kosovo and wish you success in the future. | central bank of the republic of kosovo | 2,019 | 9 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, to mark World Savings Day, Pristina, 31 October 2019. | Dear teachers, Dear students, Dear guests, Welcome to the Central Bank of the Republic of Kosovo. I am very honored to mark World Savings Day with you today. This day is a very important day for the financial system and now its marking has become a tradition in the CBK. This day, which was first marked in 1924 at the International Savings Banks Congress in Milan, Italy, is now celebrated worldwide by organizing various activities aimed at cultivating culture and developing savings habits. We begin to learn the habits and culture of saving from childhood. The most common phrase we hear from an early age is a saved euro is an earned euro. This phrase best demonstrates the importance of savings. Savings help us achieve our dreams and goals. On the importance of savings, I would like to quote one of the most successful investors, Warren Buffet, who said “Do not save what is left after spending; instead spend what is left after saving”. CBK, within the framework of its Financial Education Program, organized a competition for Kosovo elementary school students in grades 6-9 to participate in the competition for the selection of the best essay on savings and finance under the motto “Savings for a better future”. This competition was very creative, had a lot of good essays and the commission had a lot of hard work in selecting the winner. I can say that there were no losers in this competition. All the essays were very good and I have the honor of today awarding the most distinguished awards. By participating in this competition you have honored the CBK and I promise that we will be with you in the future as well by organizing other activities. I hope this competition has helped you to better understand the importance of finances and savings and I believe that some of you are already dreaming of this profession and you may be part of the CBK or other financial institutions in the future. Dear students, I wish you great results in school, which I believe will be very easy with the help of your excellent teachers | central bank of the republic of kosovo | 2,019 | 11 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the high level International Conference "Risks and Opportunities in a Dynamic Financial Sector - Development Perspective", held in celebration of the 20th anniversary of the establishment of the CBK, Pristina, 19 November 2019. | Speech of the Governor on the occasion of the 20th anniversary of the CBK Honourable... It is my great honour and pleasure to welcome you today for marking the 20th anniversary of the establishment of the Central Bank of the Republic of Kosovo. It is my great pleasure to have representatives of local and international institutions among us today, without whom it would not be possible to achieve the successes we have achieved to date. Therefore, on behalf of all CBK staff and on my behalf, I would like to express my heartfelt gratitude for all that you have done for us over the years and for the honour you have done to us by joining us in marking this very important anniversary for us. To better understand the situation we are in, and the way we are heading, it is a good idea to go back a little retrospectively to remember how we got here, and to use the past as a driving force to move towards a more successful future. The Central Bank of the Republic of Kosovo was established in 1999, at a time when Kosovo was beginning to build all institutions from scratch. Along with the establishment of institutions, the foundation of the market economy in our country was also beginning. Faqe 1 nga 7 CBK as a new institution, in spite of the great efforts to organize the institution itself, where everything was starting from scratch, began to commit itself towards building the financial infrastructure necessary to create the conditions for the financial system to start functioning in Kosovo. This way, the CBK soon began the activity of building the payment system, formulating the regulatory framework for the financial sector, and developing other functions necessary to serve the country's economy. The beginning of the CBK's operation coincided with the time when most of the countries in the region were about to complete the transition process, where the omissions made at the beginning of this process, made the transition lengthy and difficult. CBK showed high diligence and learned from the difficulties that other central banks of transition countries went through, and chose the model that proved successful in developing an efficient and sustainable financial sector. In this way, CBK laid the foundations of a financial system based on private ownership and from the beginning opened the doors for the entry of foreign financial institutions. In fact, it was foreign financial institutions, especially banks, which first started operating in Kosovo, bringing contemporary financial industry experiences and restoring the trust of the local people in the financial system. Also, the CBK has consistently followed a sound licensing policy, which has served as a base for the sound development of Kosovo's financial system. Faqe 2 nga 7 Today, after 20 years, we are proud of the achievements of our institution and for that, I would first of all like to express my gratitude to all the CBK employees who with great enthusiasm and dedication have managed to transform the CBK into a modern institution, capable of serving the country's economic stability and development. During this period, the CBK has made significant progress in all its pillars, managing to build a modern payment system and providing efficient cash supply services to the economy; financial regulatory framework in line with international standards and advanced supervisory capacities; qualitative statistics and economic and financial analysis that provide decision-makers and the public, with a proper understanding of developments in the country's economy; and has consistently shown high efficiency in providing banking services to the Government and citizens. These achievements would not have been possible without help of our international friends, which help was comprehensive and unreserved, who, with their experience and great desire to help, made our way become quicker and less troublesome. On this occasion, I would like to express special gratitude to international institutions such as the International Monetary Fund, the US Treasury, USAID, the World Bank, the European Central Bank, GIZ and many other institutions that have provided and continue to provide a very important contribution for the development of our institution. Faqe 3 nga 7 *** Our work to date has, above all, been crowned with a sound financial system, which at its rapid pace of development has become one of the main promoters of the development and stability of the Kosovo economy. The banking sector, as a key component of Kosovo's financial system, has continued to expand the activity of lending to the local economy, serving as a sustainable source of financing. Domestic deposits continue to be the most important source of financing for banks, and their steady growth has led banks' lending activity to have a low level of sensitivity towards changing financing conditions in foreign markets. The careful behaviour of banks, together with close supervision and regulation by the CBK as well as overall macroeconomic stability in the country, has ensured the Kosovo banking system, to have a satisfactory level of sustainability towards all aspects of banking risks. On this occasion, I would like to point out the very low rate of nonperforming loans, only 2.2%, which represents a desirable quality of the loan portfolio for many developed countries. Therefore, today I am pleased to present a banking sector with steady growth in loans and deposits, with good quality of loan portfolio, high level of capitalization and strong liquidity position. Kosovo's banking sector has also made progress in enhancing the efficiency of financial intermediation, prompting loan interest rates to decline significantly in recent years. Faqe 4 nga 7 Similar progress has been made in other components of the Kosovo financial system. The insurance sector has grown steadily and has shown sufficient ability to cover liabilities towards insurance policy holders. The pension sector has also shown satisfactory performance, where the value of contributions continues to increase, while careful asset management has enabled their value to increase overall. Another important segment of our financial market continues to be microfinance institutions, which in recent years have accelerated the pace of credit growth, thus increasing their importance as an alternative source of credit financing in the Kosovo economy. *** The CBK has also played an important role in the establishment and development of other institutions important for Kosovo's financial stability and economic development such as the Deposit Insurance Fund of Kosovo and the Kosovo Credit Guarantee Fund. *** Faqe 5 nga 7 I consider that all this that I have presented so far, presents a good basis for concluding that the Central Bank of the Republic of Kosovo has passed twenty successful years, during which it managed to transform into a modern institution and to develop a financial system capable of contributing to the prosperity and stability of the country's economy. However, we are aware that we have many more challenges ahead - challenges that other banks in the region are facing and beyond. Business models and strategies of financial institutions are already changing with great dynamics, which requires an equally great dynamic for developing regulatory and supervisory capacities for financial institutions. Regulatory reforms should enable the renewal or further development of financial intermediation, but at the same time must allow sufficient supervision and control over these institutions and activities they perform. However, I have full confidence that our capacities and excellent cooperation with other international central banks and financial institutions serve as a strong guarantee that the CBK will continue to be successful in the future against the challenges ahead. *** Faqe 6 nga 7 The Central Bank of the Republic of Kosovo has also changed its logo on this anniversary. The new CBK logo visually reflects its activities, values and attributes for better representation. The visual elements of the new logo give the CBK a unique identity. Within itself, the new symbol has the meaning of growth, security, statistics and money. The colours of the new logo are colours contained in the flag of Kosovo, the flag of the European Union and the logo of the European Central Bank. *** In the end, I would like to thank you once again for participating in marking this very important anniversary for us and wish you fruitful discussions with the highly respected panellists, that we will have during today's conference, which will address topics that are very important for the economy and the financial sector. Now, I have the pleasure to invite His Excellency the President of Kosovo, Mr. Hashim Thaqi, for an occasional speech. Faqe 7 nga 7 | central bank of the republic of kosovo | 2,019 | 11 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the presentation of the "Transition Report for 2019", Pristina, 17 December 2019. | null | central bank of the republic of kosovo | 2,019 | 12 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, to journalists, Pristina, 23 December 2019. | Distinguished journalists, media representatives, I am very honored with your presence today to mark together the completion of a successful year for the Central Bank of the Republic of Kosovo and the financial system of Kosovo. The CBK, through its activities, has continued to provide a stable financial system and support the country's economic development. Part of our success is also communication with the media which play an important role in informing the public about developments in the country's economic system. Transparency with the public and communication with the media is of particular importance, and during this year we have greatly advanced cooperation in this field. We consider that this year we have had effective communication with the media providing the necessary information and clarifications at all times. *** Now, let me present to you a summary of the most important developments in the financial system and economy of the country during 2019, of course with the most recent data available. *** According to preliminary assestments, economic growth for year 2019, is expected to be around 4.2%, an increase largely supported by the growth of investment and improvement in net exports. A similar pace of economic growth, according to the CBK forecasts, is expected in the next year. The average annual inflation rate until November 2019 has increased by 2.8%, compared to the 0.9% rate in the same period last year. The increase in inflation rate this year is mainly a result of rising food prices. *** Banking sector continued this year as well with high credit growth, improving conditions for private sector access to credit, and increased financial sustainability. At the end of October 2019, banking sector loans reached 2.98 billion euros. Annual credit growth remains high at an annual rate of 10%. Deposits continue to be the main source of financing for Faqe 1 nga 5 the banking sector, the amount of which amounted to euro 3.75 billion during this period, which represents a very high annual growth of 16%. This high deposit growth, among other things, reflects the high public confidence in the banking sector. Interest rates on loans continued downward trend, decreasing to 6.5% from 6.6% as they were in the same period last year, thus, reflecting continued improvement in market conditions, and facilitating access to bank financing. Financial health indicators continued to show a high level of sustainability of this sector in all aspects. It should be particularly emphasized very good quality of the loan portfolio with a rate of nonperforming loans of only 2.1% in October 2019, which continued to decline compared to last year when it was 2.7%. The quality of the loan portfolio is not only the highest in the region, but also it is of better quality compared to some European Union economies. This fact, in addition to reflecting the sound state of Kosovo's banking sector, should be emphasized, as it serves as a very important indicator of the conditions our market offers and which is a very important element for investors who may consider Kosovo as destination to invest their capital. *** The pension funds sector was also characterized by favorable developments. The value of pension sector assets in September 2019 amounted to 1.92 billion euros, marking an annual growth of 8.8%. The return on investment of pension funds was quite satisfactory (138 million euros during the period January to September ), showing an increase in the value of citizens' pension savings. *** The insurance sector continued to increase insurance activity, as well as compensation for damages to the insured. The total written value of premiums by insurance companies as of September 2019 was 74 million euros, representing an annual increase of 7.1%. On the other hand, the value of claims paid amounted to EUR 37.9 million, marking an annual increase of 7.3%. The ratio between claims paid and premiums received reached 51.2%, compared to the same period last year when this ratio was 51.1. The Central Bank of the Republic of Kosovo is committed to continuously ensure the correct handling of claims by insurance companies. Faqe 2 nga 5 In order to ensure financial stability and as a result of non-compliance with regulatory requirements and failure to comply with remedial measures, CBK in 2019, in its role of regulator and supervisor of financial institutions, has revoked license of company "Insig" JSC, Kosovo Branch. In order to protect the damaged parties from the third party liability insurance and in order to create the necessary conditions for the sustainable development of the insurance sector, CBK has adjusted the Category I tariffs for compulsory third party liability insurance, which have been unchanged since 2001. The actuarial study by insurance companies has suggested a 36.56% increase in Category I (passenger vehicles) tariffs. However, the CBK in its assessment has identified some factors that are not fully reflected in the actuarial report, and therefore rejected the insurance companies' request for tariff changes based on that report, but at the same time it has assessed that insurance companies should be allowed to adjust Category I tariffs for the rate of inflation incurred during the period 2002-2018, adjusted for changes reflected in the Corporate Income Law, so that these insurance rates best reflect the current conditions of the economy. This decision of the CBK had prompted various reactions. However, we urge you not to misinterpret this decision, which has adjusted prices only for rising inflation, neglecting the benefits that the insured will have in the future and the impact on enhancing financial stability. This adjustment is also temporary as the CBK plans to liberalize the market of compulsory thirdparty liability insurance in the coming year. *** Another important sector of the financial system is the sector of microfinance institutions and nonbank institutions, which is continuing to accelerate the pace of lending. In this way, this sector is increasingly contributing to increasing competition in the credit market and improving access to finance. The total value of loans of this sector in October, 2019 amounted to euro 217.1 million, marking an annual growth of 22.2%. During this year, effective interest rates decreased from 23.1% to 20.3%. Faqe 3 nga 5 Recently, as you are informed, CBK revoked the licenses for two institutions: MFI “Iute Credit Kosovo” JSC and NBFI “Monego” , which over the years of operating in our market, have consistently deviated from their business plans, on the basis of which they obtained licenses to operate in Kosovo, thus bringing something to our market other than what they had promised they would bring. The most significant and disturbing deviation from their business plans, on the basis of which they obtained the license, relates to the interest rates that these institutions have applied to the loans, which have resulted to be multiple times higher with the norms that these institutions had foreseen in the license application documentation, which represents a very important element in the decision-making process for approving licenses for financial institutions. Regarding this process, we are seeing different forms of public pressure on these decisions, but we would like to reiterate that the CBK has acted in full compliance with its legal mandate and are convinced that our action is fair, therefore, no form of public pressure cannot lead to a review of these decisions. We fully respect the right of the parties to pursue legal ways to appeal these decisions, and we urge the parties affected by these decisions to pursue legal ways. We are ready at any time to testify and clarify the basis on which we have made these decisions. *** The Central Bank of the Republic of Kosovo continues to act in support of the sustainable development of the financial system, providing the necessary legal infrastructure to support the development of financial institutions and at the same time ensuring financial stability. Harmonization of the regulatory framework with the latest international developments in this field, more specifically in the European Union, has continued to be an important priority of the CBK this year as well, whereby various regulations have been drafted which advance different aspects of banking regulation and in particular that of corporate governance of banks. CBK has increased its commitment this year as well to protect the rights of consumers of financial services, thereby directly serving the protection of the public interest. Faqe 4 nga 5 This year CBK has advanced financial education programs and applied corrective measures to financial institutions in order to protect consumers. This area will continue to be a top priority in the coming year as well. A more detailed disclosure of economic and financial developments as well as the CBK activities during 2019 can be found in the Annual Report of the CBK, which will be published in the first half of next year. *** Before we move on to your questions, I would like to inform you that the CBK has also, in 2019, awarded the “New Economist” Award in order to promote research activity in the field of economics among young people. I take this opportunity to thank and congratulate all the candidates for their work that they have submitted in the framework of this competition. Based on the evaluation committee for evaluation of these works, I am pleased today to announce two winners of this award, hoping that this will motivate the authors of these works and other young people to continue and advance further their research work. The first prize is awarded to Mr. Jeton Shatri for the study entitled "Factors that Influence Employee Satisfaction: A Study of the Private Banking Sector of Kosovo", while, the second prize is given to Ms. Blina Zhubi for the study entitled "The Effects of Electronic Transactions with a Focus on Combating Informality: Trends of Realizing Electronic Transactions in Kosovo. *** In the end, let me cordially thank you for the cooperation, professionalism and correctness you have shown in informing about the financial and economic developments and the CBK activities during this year and wish you and your families’ health, happiness and success for the year 2020. Now, I welcome your questions. Faqe 5 nga 5 | central bank of the republic of kosovo | 2,020 | 1 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the press conference where the details of the measures taken by the CBK for maintaining health in the economy were given, Pristina, 3 April 2020. | Honoured media representatives, First of all, allow me to thank you for your participation and express my highest appreciation for the work you are doing in this difficult time to exercise your activity. In recent weeks, we have made maximal efforts to be close to you responding to your requests for information within the shortest time possible; thus, we considered necessary to hold this conference with you in order to respond to all questions in your interest and of the general public. While all efforts and attention of the whole government is rightly oriented in protecting the health and saving lives of our citizens, the discussion about the economy is being considered as necessary because, as it can be seen, it will suffer due to the health crisis that has gripped the world. Protection of health and economy or rescue of the economy with the least consequences possible is necessary to protect the welfare of our citizens during and after the crisis; therefore, it is a very important duty and responsibility on all of us, in particular us as leaders of institutions with direct impact on the economy of the country. Therefore, we invited you today to discuss about the economy and in particular the measures the CBK is undertaking within its scope to ensure the best management of effects of this crisis on the economy of the country. *** In the framework of measures to prevent or slow the spread of the virus, as in other countries, Kosovo is applying a large-scale closure, allowing the operation of solely economic sectors providing goods and services necessary for citizens. This has resulted in the interruption of numerous sectors of the economy, with businesses with no revenues, while the liabilities of these businesses remain active, thus risking their solvency and may lead them to the failure. At the same time, employees of these businesses risk to be left partially or fully without incomes, thus adversely impacting the purchasing power of consumers. Under these circumstances, when the credit demand decreases and future insecurity increases, the decrease in lending from financial institutions is expected as well, thus impacting the reduction of a very important source of funding for consumption and investment. Another important channel of the Kosovo economy shocked by the pandemic crisis may be the foreign sector. Kosovo is highly depended on remittances, receiving an amount of more than 10% of GDP on annual basis. The decrease of economic activity in developed countries is surely expected to have an impact on the decrease of this very important source of funding for consumption in our country. Despite the stable flow of remittances to Kosovo, they marked a decrease in the last global economic crisis, namely in 2009, 2010, 2011; therefore, it remains to be seen how the effects of pandemic crisis are to be manifested in economies where our Diaspora is concentrated in order to have a more specific assessment for the remittances this year. The decrease of remittances in 2009 as a consequence of global financial crisis was 3.8%. At the same period, the Kosovo economy marked a decrease in economic growth from 4.5% to 3.6%. As a result of the overall decrease of demand in all countries, our exports are expected to decrease, thus further increasing the effects of crisis on the economy of Kosovo. Moreover, the inability to perform the economic activity under normal conditions and insecurity for developments in the future are expected to directly impact the decrease of foreign direct investments. Public expenses constitute the category which is expected to sustain sustainability during this period, as their flow in the economy is expected to mitigate to an extent the adverse effects from the abovementioned channels. The package approved by the government of Kosovo few days ago is expected to provide a necessary injection of funds into the economy. However, the circumstances that the economy is experiencing will challenge the public finances as well. The decrease of the general economic activity is expected to have an adverse impact on the total budget revenues, while the increasing need for increased expenses in the form of various transfers may have an adverse impact on capital public investments that are very necessary for creating the conditions for greater economic development in Kosovo. In order to mitigate the consequences of this crisis on our economy, the Central Bank of Kosovo has been proactive by undertaking a range of measures aimed at ensuring the normal functioning of financial system and mitigating the impact of the crisis on our economy. Also, we have continuously followed the developments at the region, EU and international level, and regularly communicated with our international collaborators, such as IMF, World Bank, EBRD and chambers of commerce in Kosovo and we all share the same concerns for this situation and in particular for the consequences that may occur in case this situation is prolonged. Also, in the framework of the CBK constitutional mandate, we have coordinated actions with all institutions of Kosovo in order to effectively manage the situation occurred. Today, although you are informed, allow me to briefly reiterate the measures we have undertaken and their purpose. 1. Initially, we have undertaken all necessary measures to ensure the regular functioning of the payment system throughout Kosovo, including the affected areas that have been isolated for a certain time period. 2. The economy of the country has been constantly and sufficiently supplied with cash and I want to reassure citizens that all banks have sufficient liquidity and there will be no problems in relation to the supply of cash. On this occasion, allow me to inform you that the CBK commenced the regular disinfection of all cash supplied in the market, as a protective measure for users of cash. However, given that cash have a multiple circulation from the moment they leave the bank, we urge citizens to strictly adhere to the hygiene instructions issued by healthcare institutions after each cash or card transactions. We urge our citizens to avoid cash as much as possible and to use bank cards and other electronic payment methods as much as possible. 3. Liquidity levels in the banking sector as of 31 March 2020 remain at a satisfactory level of 35.3%, marking a slight increase of 0.3% compared to 16 March 2020. Deposits are also very stable, reaching EUR 3.88 billion as of 31 March 2020, marking an increase of EUR 9.3 million compared to 16 March 2020. 4. Recognizing the difficulties that some businesses and employees are facing, CBK, together with the lending institutions, has decided to allow a grace period for loan instalment payments starting from 16 March 2020 until 30 April 2020, and depending on the developments of the situation this period may be extended. This is aimed at alleviating the financial burden on all borrowers who are facing difficulties in generating income as a result of the pandemic crisis. 5. The temporary suspension of loan instalment payments will be reviewed on a case-by-case basis by the banks so that these benefits only go to those affected by the current crisis. 6. In the event of such a request being approved by the bank, the penalty interest related to the loans shall not apply during this period. During this period, no deterioration measure of the credit rating will be applied to the borrower. 7. CBK, through its Credit Registry measures, has undertaken all appropriate legal measures to prevent credit ratings, to not require additional provisions and to not classify them as non-performing loans in the Credit Registry. 8. Banks should, in no case, raise fees for the delivery of services. *** We believe that measures taken by domestic institutions will be able to mitigate the effects of the pandemic crisis on the economy, but they may not be sufficient to completely eliminate them. Although the effects of the crisis nowadays are difficult to predict because there is still uncertainty about many aspects of the pandemic, including its duration and its spread, where macroeconomic forecasts are currently being adapted in all countries, with new results suggesting in most cases that the economy will decline. We share a similar view as well, expecting that in 2020 Kosovo's economy will not continue with its economic expansion that was characterized by an average annual growth of 3.6 percent in the last ten years. Assuming that the economic shocks in the economy of Kosovo will be felt more in the first and second quarter and partly in the third quarter of the year, our preliminary forecasts suggest a real economic decline in the range of -2% to -4% during 2020. However, it's too early for these forecasts so they should be taken with great caution. We will be very attentive to the developments in our and the global economy and will also revise our macroeconomic forecasts on these developments. *** CBK has carefully considered the opportunities that they and the Kosovo Government have in order to help the Kosovo economy recover after the pandemic. The following are some of these opportunities aimed at facilitating lending to Kosovo's economy and that will be applied as needed: • Reduction of Minimum Reserve - may impact the increase of the credit supply. Reduction of Minimum Reserve will enable the application of negative rates to the amount above this surplus, encouraging banks to invest surplus funds in other options, one of which will be lending to the economy. • Kosovo Credit Guarantee Fund - Increasing this Fund would facilitate access to finance and reduce the interest rate. However, the target of this fund in this situation should be businesses that have been financially damaged by the situation. So in this situation, priority should be given to businesses that have been economically disadvantaged by the COVID 19 pandemic. • Reduction of liquidity requirements of banks - This measure will also impact the increase of the supply by banks. Liquidity requirements may be temporarily reduced to stimulate credit growth of the economy. • Provisional reduction of capital adequacy requirements - Given that banks may have expected credit losses, which may adversely affect their capital levels, CBK may consider a temporary reduction in capital adequacy requirements from 12% to e.g. 10% or 9% . This measure would also enable banks to increase lending but also reduce its cost. • Suspension of dividend payments of financial institutions - In order to maintain capital levels by banks as regards the enabling of lending, CBK may suspend all dividend payments of financial institutions. *** Finally, allow me to conclude my discussion by emphasizing that the Central Bank of the Republic of Kosovo, fully implementing the recommendations of the health institutions, has immediately succeeded in restoring its function to full normality and 100% functionality. CBK has established a Work Continuity Team and an Inter-Institutional Committee has been established between the CBK, the Treasury and the Banking Association to ensure the smooth functioning of the financial system in the country. Therefore, we will continue to provide all services to the economy of the country, providing readiness to undertake all necessary measures in order to maintain financial stability and support the economy of the country. | central bank of the republic of kosovo | 2,020 | 4 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, on the occasion of the distribution of books on financial education of students in grades 1-5, primary schools and the signing of a memorandum with the Ministry of Education and Science, Pristina, 29 September 2020. | Prishtina 29.09.2020 Disclosure of Textbooks and signing of the Memorandum of Understanding with MES Dear Minister Likaj, Dear Mrs. Hoxha, Dear Media, Distinguished guests, The Central Bank of the Republic of Kosovo is committed to working to promote and maintain financial stability in the country. The financial sector is one of the main contributors to Kosovo's economy. The advancement of financial markets, globalization and technological progress, have influenced consumers to face a variety of complex financial instruments which are offered in the financial market today. The Central Bank of the Republic of Kosovo through its Financial Education Program aims to increase financial knowledge to the public and contribute to the expansion and distribution of information on economic and financial issues, including cooperation with relevant institutions, in order to have a more widespread distribution of knowledge. Financial Education is a field for which the Central Bank of the Republic of Kosovo works and is committed to advancing it for many years now. CBK considers that by advancing and investing in the field of financial education, it directly contributes that the citizens of Kosovo have knowledge in making the right decisions with their financial means. The more informed and financially educated the citizens are, the more capable they will be in increasing their economic and financial well-being as well as in the proper use and utilization of the financial system. The objective of the Financial Education Program of CBK is that educational materials and activities target all age groups and citizens of Kosovo, however, the primary focus has students of all levels of education in Kosovo. Creating adequate financial management skills is compared to creating essential life skills. Consequently, the institutionalization of financial education in schools is a very important step and the CBK has been trying for many years to realize it. We believe that only in this way will we be able to ensure stability, continuity and success in installing a genuine financial culture. The Central Bank of the Republic of Kosovo, in cooperation with the Ministry of Education and Science, financially supported by the Fund for Southeast Europe, EFSE (Finance in Motion Office in Kosovo), has managed to prepare a collection of 5 Books. The purpose of preparing the Book collection is to contribute in informing and educating primary school students with basic financial concepts which they will follow throughout their lives and will influence in the building of a financial culture from an early age. The books have been prepared by relevant experts in the field, researchers, sociologists, lyricists and illustrators, in accordance with the Core Curriculum for Kosovo Primary Education. The Book Collection consists of five books with stories for children aged 6-10, respectively for students of grades I - V, of primary education. The focus of the Books is financial education through which children will have the opportunity to learn about basic financial topics, studied and selected for the respective ages, always based on the standards recommended by the Organization for Economic Cooperation and Development (OECD). In addition to the written form, the books have been prepared with audio so that they are suitable for blind or visually impaired children. Also in order to include all students, the books are in the process of preparation in Serbian and Turkish language. The books will be distributed in physical form in the primary schools of all municipalities of Kosovo, in electronic form through the communication channels of the CBK and with the Association / School of the Blind of Kosovo. Inclusion of financial education into the formal school curriculum is the most sustainable way to ensure that financial knowledge and skills are properly developed starting from early education. Financial education is already part of the curriculum of most countries in the region, European countries and the world. Students of Kosovo as well as students from all other countries of the world are already part of the assessments carried out by the Organization for Economic Cooperation and Development (OECD), within PISA, where as a separate chapter is the assessment of knowledge in the field of financial education Dear participants, almost all initiatives and implementation of CBK activities with students of all levels and university students would be impossible without the support of the MES. The cooperation of the CBK with the Ministry of Education and Science in the field of Financial Education has been going on for years, and today, thanks to the commitment and support of Minister Likaj, the signing of the Memorandum of Cooperation, establishes the basis for starting the inclusion of this field in school curricula. Our two institutions will work closely to decide on an adequate way to include this field. Details about the volume and level of inclusion remain to be viewed and implemented in continuation between our two institutions. A very important cooperation for Financial Education is our cooperation with the Fund for Southeast Europe (Finance in Motion-EFSE), Kosovo Office. EFSE has supported the CBK in building the Financial Education Program, in establishing the Financial Education Center, and continues to support us in implementing these projects. The Book Collection project became possible thanks to the financial support and commitment of EFSE. The next step will be the deepening of even wider inter-institutional cooperation in the preparation of textbooks for secondary and higher level as well as the Preparation of the National Strategy for Financial Education. Dear media, allow me, on my own behalf but also on behalf of the Central Bank of the Republic of Kosovo, to thank you for following the activities and events that the CBK organizes every year and that has never lacked your support and presence. This is especially important in conveying informational and educational messages to the Kosovar public. | central bank of the republic of kosovo | 2,020 | 10 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at a press conference, Pristina, 22 December 2020. | Distinguished media representatives, First of all, let me thank you for your presence at this year-end conference and for the continuous and effective cooperation we have cultivated over the years in order to properly inform the public about the economic and financial developments in the country. Communication with the media is always a very important part of the CBK activity, but in this very challenging year for all of us, communication with the media has been extremely important. Through fair reporting from your part, we have managed to keep the public well informed about developments and mitigation measures in the country's economy, influencing the behavior of the public in relation to the conditions created in the economy to be rational. Therefore, I would like to take this opportunity to express my high appreciation for the sacrifice and professionalism shown during this difficult year. *** Despite the difficulties we have faced, I am happy that the Central Bank of the Republic of Kosovo has managed to implement its objectives this year as well, ensuring a stable financial system, which not only managed to withstand the developments of unfavorable economic situation in the country, but also became one of the main pillars of support for businesses and individuals who faced financial difficulties due to the pandemic crisis. *** Now, let me present to you a summary of the developments that characterized the country's economy and financial system during this year, based on the latest data available to the relevant sectors. As in the rest of the world, in Kosovo, the measures taken to prevent the spread of the COVID-19 pandemic severely affected economic activity, causing the country to face economic downturn after a very long period of economic growth. According to CBK forecasts, Kosovo's economy in 2020 is expected to decline by 7.2 percent in real terms, which represents the heaviest blow to the economy in 20 years. Restriction of the functioning of many economic activities has negatively affected the disposable income of citizens, thus negatively affecting the level of domestic consumption. Also, the weakening of the financial performance of businesses, together with the uncertainty for the future period, have caused a significant decline in investment. Significant impact on the decline of economic activity in Kosovo also had the measures to restrict movement from other countries, which greatly reduced the visits of our diaspora in Kosovo, these visits which represent a very important source of funding for the economy of country. Based on data recorded until September 2020, the expenditures of non-residents in Kosovo, most of which are from the diaspora, were 470 million Euros, which represents a decrease of about 60 percent compared to the same period of the previous year. On the other hand, when it comes to the connection of the diaspora with our economy, a factor that has influenced the mitigation of the effects of the crisis have been remittances from the diaspora, which even in these very difficult times for the world economy, continued the steady flow towards our economy. The value of remittances received until October 2020 was 796.5 million Euros, which represents an annual increase of 12.9 percent. Developments in the global economy as a result of the pandemic have also affected foreign trade. The decrease in domestic demand in Kosovo during this year was reflected in a lower value of imports of goods, which by October 2020 marked the value of 2.63 billion Euros or an annual decline of 8 percent. On the other hand, exports of goods amounted to Euro 382.4 million, marking an annual increase of 19.1 percent, mainly based on the increase in exports of base metals. As a result of these developments, the trade deficit in the goods account during this period recorded a value of 2.26 billion Euros, which represents an annual decline of 11.4 percent. On the other hand, the export of services amounted to 731 million Euros, marking an annual decline of 48 percent, which occurred mainly as a result of the decline in visits of our compatriots and tourists in the country. The decline in imports of services was also characterized by a value of 434 million, marking an annual decline of 24.7 percent. Including goods and services, it turns out that the total value of exports until September 2020 was about 1 billion Euros, while total imports were about 2.6 billion Euros. The trade deficit, including the goods and services account, amounted to 1.6 billion Euros, or about 22 percent of Gross Domestic Product, from about 18 percent in the same period last year. In terms of foreign direct investment, their value by September 2020 reached 250.6 million Euros, compared to the value of 216.4 million Euros recorded until September 2019. During this period, growth was mainly recorded by FDI in the sector of the financial services, which amounted to 66.2 million Euros, compared to the value of 10.9 million Euros recorded until September 2019. On the other hand, real estate investments, which represent the main category of FDI in Kosovo, decreased to 135.8 million Euros, from 176.2 million Euros a year ago. Regarding other macroeconomic indicators, it is worth noting that the average annual inflation rate until November 2020 was 0.2 percent compared to the rate of 2.7 percent recorded in 2019. This price movement trend reflects price dynamics in international markets, but also the decline of general economic activity in Kosovo during this year. *** Now, let me move on to the developments in the country's financial system: In accordance with the new conditions that were created in the country's economy, the CBK was proactive in reacting quickly in order to maintain the normal functioning and stability of the financial system and, at the same time, to put the financial system at the service of the economy. *** In this way, from the first days of the restrictive measures, the CBK activated the Work Continuity Team, which had the task of monitoring and providing instructions that ensure the smooth running of the CBK and the financial system in general. In this way, the regular functioning of the payment and cash supply system throughout the country was ensured at all times, including the areas which have been isolated for a longer period of time. The Central Bank, since 2016 has developed and operates an interbank system of secure and stable payments, which is based on international standards and best practices. During this year the number of bank accounts has reached 2.26 million accounts, or an increase in the number of bank accounts of 4.3 percent, which can be justified by the need for businesses and individuals to open bank accounts to benefit from the Government’s economic facilitation measures.. Also, compared to the same period last year, there was an increase of 22.4 percent of accounts that have access to e-banking, where the number of e-banking accounts until October 2020 is 393 thousand. Also, during 2020, the CBK has fulfilled the provision of a qualitative and quantitative supply of Euro banknotes and coins for the banking sector in order to settle cash transactions of the economy and citizens. In order to deal as effectively as possible with the created conditions, the CBK has continuously been in coordination with all institutions of Kosovo, financial institutions in Kosovo, chambers of commerce, as well as international financial institutions, holding very frequent meetings to ensure that adequate and timely measures are taken against the needs of the economy. From the beginning, the CBK was part of the inter-institutional group for designing emergency measures to help the economy, and then to draft the economic recovery plan, which a few days ago was approved by the Assembly of Kosovo through the passage of the Law on Economic Recovery. As a result of our ongoing communications, RFI (Rapid Financing Instrument) has been approved by the IMF in the amount of 52 million Euros to cover urgent and temporary balance of payments needs as a result of the COVID-19 pandemic. Also, after coordination with the central banks of the region, the European Central Bank has approved the request of the CBK to establish a repo financing line in the amount of 100 million Euros. This line of financing enables the CBK to borrow liquidity in Euro currency from the Eurosystem, to address the potential liquidity needs of financial institutions in Kosovo in the event of market dysfunction due to the COVID-19 pandemic. Seeing that the country's economy was entering a pronounced crisis, where businesses and citizens were facing great financial difficulties, the CBK, based on international best practices and in cooperation with lending institutions in Kosovo, undertook a series of measures to help the economy cope more easily with the challenges of this crisis. These measures initially consisted of applying a moratorium on loan repayments without any punitive measures for all borrowers who have been adversely affected by the pandemic. This moratorium has temporarily relieved the borrower of the loan repayment burden, thus improving their liquidity position to finance other needs. Following the end of the moratorium period, the CBK has published a guide to loan restructuring in order to establish the criteria on which the loan restructuring process should be based for borrowers who have encountered financial difficulties as a result of the pandemic. The Credit Restructuring Guide has made it possible to ease the credit burden on borrowers without implicating any deterioration in their classification in the Kosovo credit register. The measures taken by the CBK were assessed as very adequate, both by the local public and by international financial institutions such as the International Monetary Fund in the Article IV report on Kosovo and the World Bank. Also, the Central Bank of the Republic of Kosovo has welcomed the conclusions drawn in the report of the European Commission for Kosovo for 2019, which recognizes the commitment and reforms undertaken in the financial sector. The EC report has devoted a special space to developments related to the impact of the pandemic on Kosovo's economy, highlighting the measures taken by the CBK to assist borrowers in overcoming the financial difficulties that have arisen as a consequence of the crisis. In the context of international assessments, it is worth mentioning the report of the US Department of State on the investment climate for 2020 for Kosovo, which gave a high assessment of the country's financial system. This report also highlights the stability of the banking sector, which remains well-capitalized and profitable, as well as the significant improvement in recent years. The economic crisis found the banking sector of Kosovo in a very sound condition, characterized by a high degree of liquidity, high level of capitalization and very good quality of the loan portfolio with a share of just over 2 percent of nonperforming loans. This enabled the banking sector not only to withstand the increased risks, but also to play a key role in the process of economic recovery. The contribution of the banking sector to support the economy was very important in terms of continued lending, despite the increase in the level of risks faced by banks. During January-October 2020, the value of new loans issued by the banking sector was 1.2 billion Euros, while the total value of active loans in the banking sector in October 2020 was 3.2 billion Euros, which represents an annual increase of 7 percent. Currently, even after taking all these not very common measures for a banking sector and an economy which is in a phase of recession, the banking sector of Kosovo continues to have a high level of stability and is ready to play its key role to the economic recovery process. The economic recovery package just approved by the Assembly of Kosovo foresees a very important role for the banking sector. A very important part of this package is based on loan guarantee schemes and interest rate subsidies, which will facilitate and improve the flow of bank financing towards the country's economy. Total assets of the banking sector have continued the growth trend during this year, reaching the value of 5.05 billion Euros in October 2020, which represents an annual growth of 10.3 percent. The banking sector continues to enjoy high public confidence, which is also expressed by the continuous growth of deposits. In October 2020, the total value of deposits was about 4.1 billion Euros, representing an annual increase of 8.7 percent. The growth rate of total deposits is mainly dictated by household deposits, a category that dominates the structure of total deposits in the banking sector with a share of 67 percent in total deposits, which in 2020 marked an increase of 7.3 percent. Interest rates on loans continued their downward trend, declining to 6.3 percent from 6.5 percent in the same period last year, which indicates a continuous facilitation of access to bank financing. Financial soundness indicators continued to show a high level of sustainability of this sector in all aspects. It is worth noting the good quality of the loan portfolio with a non-performing loan rate of only 2.7 percent in October 2020, which marked a slight increase compared to last year when it was 2.2 percent. The coverage of non-performing loans with loan loss provisions remains at high levels of 140 percent, which indicates adequate levels of provisions in the banking sector. The banking sector continues to have a high capital adequacy ratio of 16.9 percent in October 2020, compared to 16.5 percent in the previous year, which continues to remain significantly above the minimum regulatory level of 12.0 percent. In order to maintain sound levels of capital within the banking system and to support Kosovo's economy through lending, the CBK has decided to suspend the distribution of dividends by banks for 2019 and 2020. The liquidity position of the banking sector remains high. The ratio of liquid assets to short-term liabilities in October 2020 was 36.1 percent, which was high above the required regulatory minimum of 25.0 percent. In addition to the banking sector, microfinance and non-bank financial institutions also have an important role in the credit financing of Kosovo's economy, which mainly focus on providing microcredit. The total value of loans to this sector in October 2020 was 220 million Euros, which represents an annual increase of 1.4 percent. In the insurance sector, until September 2020, a slight decline in activity was recorded. Gross written premiums until September 2020 were 72.3 million Euros, which is a decrease of 2.2 percent compared to the same period last year. Claims paid by the insurance sector during this period amounted to 35 million Euros, a slight increase compared to the same period last year when they were 34.5 million Euros. Total assets of the insurance sector have continued the growth trend during this year, reaching the amount of 214.3 million Euros in September 2020, with an annual increase of 9.3 percent. As a result of the aggravated financial situation and non-compliance with legal requirements for capital, as well as in order to improve the financial situation, in order to protect policyholders and ensure financial stability of the sector, the CBK during this year has decided to place under temporary administration the insurer "Kosova e Re". This decision is a continuation of a series of measures taken by the CBK to increase the sustainability of the insurance sector, in order to ensure a stable sector and in accordance with the legal requirements of the CBK. Regarding the pension sector, despite the decline in the value of investments at the beginning of the pandemic, the performance of international financial markets has steadily improved in recent months and the value of the decline in the value of these investments has already recovered. The return on investment of the Kosovo Pension Savings Trust by the end of September 2020 was positive at a rate of 12.5 percent. The economic recovery package envisions injecting a significant amount of money into the economy (around € 220 million) enabling pension contributors to withdraw 10 per cent of their pension savings. The CBK has played a very important role in the operational realization of this process by providing the Funds with the data of the bank accounts of the pension contributors through the Register of Bank Accounts in order to validate the accounts of the contributors, and to eliminate the errors of possible in making the 10 percent payment. *** Despite the situation created due to the pandemic and not very favorable conditions in international markets, the Central Bank of the Republic of Kosovo has managed to maintain its financial stability and good performance of the institution. The CBK remains committed to continue its activity in the service of stability and development of the country's economy, creating the conditions for the development of a stable financial infrastructure, in line with contemporary developments in this field, including the development of new segments of the financial system such as the capital market, which requires a broad interinstitutional interaction. Also, the CBK remains committed to base the development of the financial system on the principles of developing sound competition and free movement of capital, thus promoting the continuous increase of efficiency in the financial system. Let me express my gratitude to the Organization for Security and Co-operation in Europe (OSCE) and the Office of the Language Commissioner for awarding the 2020 “Best practice in law enforcement for the use of languages "for the CBK. Also, I would like to inform you that the CBK this year has continued with the announcement of the competition, already traditional, for the award "Young Economist", in which case I would like to thank and congratulate all candidates for the works they have submitted within this competition. This activity aims to promote research activity in the field of economics among young people. Based on the evaluation of the professional commission for the evaluation of these works, today I have the pleasure to announce the winner of this award, Mr. Qendrim Shkodra with the topic " Kosovo's economy in the time of the Pandemic, the impacts of COVID-19 on the local and international economy ". Finally, hoping and believing that next year will be a more positive year in all aspects, I wish you good health, joy and success to all of you and your families. | central bank of the republic of kosovo | 2,020 | 12 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at a press conference, Pristina, 4 March 2021. | Dear media representatives, It was a pleasure to welcome today, in separate meetings, representatives of businesses, commercial banks and leaders of Kosovo Credit Guarantee Fund, with whom the Central Bank of the Republic of Kosovo has established a very effective partnership in support of the country's economy during this difficult period. The CBK, together with representatives of businesses and commercial banks operating in the country, has managed to identify in due time the needs of businesses and citizens to cope more easily with the difficulties arising due to the pandemic crisis, and based on these needs, we responded in time to alleviate the burden of borrowers in paying loan instalments, thus reducing the economic consequences of this crisis in our country. Nonetheless, the difficulties caused by this crisis are still present in our economy, and depending on the developments related to possible restrictive measures, businesses may continue to face similar difficulties in the coming period. To this end, we gathered today to discuss the challenges faced by businesses and possibilities to further strengthen the role of the banking sector in support of recovery and further development of businesses. As you are aware, one of the main pillars of the economic recovery plan is based on facilitating the access to finance through the use of loan guarantee scheme provided by the Kosovo Credit Guarantee Fund. Therefore, we used this meeting to discuss regarding the effectiveness of this loan guarantee program to support those who are in need to benefit from this program. On this occasion, we emphasised the importance of having KCGF implement its mission, as much as possible, in facilitating access to finance of social classes or sectors that have difficulties in accessing to finance, thus facilitating their access to bank financing, especially for those who have difficulties in getting such access independently. We consider that the CBK’s regulatory measures for treating the loans guaranteed by the KCGF as risk-free assets of banks, which represent a very important relief in terms of regulatory requirements for bank equity, as well as coverage of the guarantee fee by the Government of Kosovo, represent very important reliefs which, as we consider, will reflect in more favourable conditions by the lending institutions for the guaranteed loans. The CBK remains committed to further strengthen this partnership, through continuous communication and harmonization of policies, so that they are more effective in supporting the recovery and development of the country's economy. | central bank of the republic of kosovo | 2,021 | 3 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at a press conference, Pristina, 24 September 2021. | Fehmi Mehmeti: Revocation of the license of the Insurer "Kosova e Re" does not endanger the stability of the insurance sector in Kosovo Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at a press conference, Pristina, 24 September 2021. * * * Dear media representatives, Dear citizens, Based on the competencies and responsibilities of the Central Bank of the Republic of Kosovo, deriving from Article 36 and Article 67 of the Law on the CBK, as well as in accordance with Article 16, Article 99, Article 100 and Article 124 of the Law on Insurance, in meeting held on September 24, 2021, the Executive Board of the CBK has decided that to the Insurer “Kosova e Re", to revoke License no. 007 of 25 April 2002, issued by the Banking and Payments Authority of Kosovo (BPK), the legal predecessor of the CBK. The insurer “Kosova e Re", over the years has had financial difficulties in meeting the legal requirements of the CBK, in terms of capital adequacy, solvency and assets covering technical provisions. In order to improve the financial situation and meet the legal and regulatory requirements, the Central Bank of the Republic of Kosovo, respectively the Executive Board of the CBK in accordance with applicable law, has continuously made efforts to improve the financial situation of the Insurer “Kosova e Re". However, despite the readiness and efforts of the CBK, the Board and Management of the Insurer has failed to meet the legal requirements and improve the financial situation of the Insurer. At the same time, the shareholder of Insurer “Kosova e Re” did not respond to the CBK’s requests for capital increase and achieve compliance with applicable legal requirements. The lack of willingness of the shareholder to meet the capital requirements has seriously jeopardized the capacity of the Insurer to meet its obligations to policyholders and other creditors. Therefore, in order to protect policyholders and to prevent the growing negative impact on the insurance market and the financial system in general, the CBK based on the duties and responsibilities arising from the Law on the CBK and the Law on Insurance, has taken the decision to revoke the Insurer’s License. The CBK has opened compulsory liquidation procedures, according to Chapter 18 of Law no. 05 / L-045 on Insurance, by appointing the Liquidator, who will direct the Insurer in Liquidation “Kosova e Re” and will ensure fair and equal treatment, always in accordance with applicable legal requirements, to all creditors. With the appointment of the Liquidator, all responsibilities of the administrator, the Board of Directors and the Management of the Insurer in relation to its management cease. The liquidator will be available to review all claims, primarily policyholders as well as other creditors. The liquidator will report on a monthly basis to the CBK regarding the progress of fulfillment of obligations to creditors. At the same time the liquidator will notify in more detail all creditors and other stakeholders regarding the manner of communication and will provide phone contacts, email and location for submission of all requirements of policyholders and other creditors. 1/2 BIS central bankers' speeches The Central Bank instructs all policyholders and other creditors to follow announcements in the coming days by the Liquidator and the CBK regarding the instructions on processing the claims they have in relation to the Insurer in liquidation “Kosova e Re". On this occasion, I would like to express our high appreciation to the Insurers operating in our market who have expressed their willingness to take over all active policies of the insurer “Kosova e Re” so that citizens do not need to repurchase the policies of insurance. The CBK, in accordance with the duties and responsibilities set forth in the Law on the Central Bank and other relevant laws governing the activity of financial institutions, will continue its activities to ensure full compliance of the activity of financial institutions with the requirements set by applicable laws and regulations. Maintaining the ability of financial institutions to meet financial obligations is of a great importance for maintaining financial stability in the country, which is the primary objective of the CBK. Therefore, in order to maintain financial stability and protect users of financial services, the CBK remains committed to use all legal opportunities to ensure the smooth running of the financial system in the country, providing the country’s economy with a financial system in function of macroeconomic development and stability, as well as a system that provides security for all users of financial services. Revocation of the license of the Insurer “Kosova e Re” does not endanger the stability of the insurance sector in Kosovo. Kosovo’s financial system, since the beginning of its operation, has had a stable development and has served as an important source of macroeconomic stability in the country. In recent years, we have an acceleration of activity growth in almost all components of the financial system, while performance and sustainability indicators have also improved further. Regarding the insurance sector in particular, the activity of this sector is continuing to grow, while the regulatory and supervisory measures taken by the CBK have resulted in a positive financial performance of this sector, after a very long period of loss. Therefore, we pledge that we will continue to take all measures provided by law in order to allow in our market the operation of only those financial institutions that are able to contribute to the further development of the financial system and the economy of the country , as well as to contribute to the further strengthening of financial stability. 2/2 BIS central bankers' speeches | central bank of the republic of kosovo | 2,021 | 10 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at a press conference, 25 November 2021. | Fehmi Mehmeti: Bank lending is continuing to contribute to economic growth Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at a press conference, 25 November 2021. * * * Dear ..., It is a special pleasure to be part of this ceremony that marks another step of the very important contribution that KFW has continuously given to the development of the Kosovo Credit Guarantee Fund and in general to the economic development of Kosovo. The Kosovo Credit Guarantee Fund within a relatively short period of time has managed to become a very important institution for increasing and facilitating financing for the country’s economy. The important role of this institution has emerged especially during the period of pandemic crisis, in which case this institution has served as a very effective mechanism of transmission and multiplication of state aid for the private sector of the country. The grant that is being donated by KFW will enable the further increase of the guarantee potential of this institution, making possible the increase of the number of beneficiaries from the guarantees issued by this institution. In other words, a larger number of individuals or businesses with difficulty accessing credit financing will be able to secure access to this source of financing on favorable terms. Bank lending continues to be a very important and sustainable source of private sector financing in Kosovo. The value of bank loans by September 2021 has reached 3.57 billion euros, marking a significant annual increase of 12.2%. However, despite the satisfactory trend of increasing bank lending, it is considered that the level of financial intermediation in Kosovo continues to be below the average of the countries in the region, which shows that, in relation to the size of the economy, there is further room for expansion of the lending activity. An important role in filling this space has exactly the Kosovo Credit Guarantee Fund, which through its guarantee mechanism can enable the increase of lending and the facilitation of the conditions of access to credit for the sectors which without this service may find it difficult or even impossible to provide access to credit financing. In this context, we expect that in addition to supporting the growth of credit financing in general, the KCGF portfolio, more and more to reflect the increase of credit support for sectors with greater difficulties in accessing credit financing, but which have the potential to make a significant contribution to the economic development of the country. In the end, allow me to once again express my highest appreciation to KFW, which has consistently proven to be a very important supporter of Kosovo’s economic development. 1/1 BIS central bankers' speeches | central bank of the republic of kosovo | 2,021 | 11 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the year-end press conference with journalists, Pristina, 24 December 2021. | Fehmi Mehmeti: The financial sector was the main pillar of support for businesses and individuals Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the year-end press conference with journalists, Pristina, 24 December 2021. * * * Distinguished media representatives, First, let me thank you for your presence at this conference at the end of the year and for the continuous and effective cooperation that we have cultivated over the years in order to properly inform the public about the activity of the CBK, as well as economic and financial developments in the country. Communication with the media is an extremely important part of CBK’s activity. Through your proper reporting, we have managed to keep the public well informed about developments in the financial system and the economy of the country, influencing the behaviour of the public in relation to the conditions created in the economy to be rational. Therefore, I would like to take this opportunity to express my appreciation for the sacrifice and professionalism shown during this year as well. *** Despite the difficulties we faced, I am happy that the Central Bank of the Republic of Kosovo managed to achieve its goals this year as well, providing a stable financial system, which not only managed to withstand the unfavourable economic developments in the country, but also to be one of the main pillars of support to businesses and individuals, and thus to the country’s economy. *** Now, let me present to you a summary of the developments that characterized the country’s economy and financial system during this year, based on the latest data available for relevant sectors. *** Kosovo’s economy started 2021 with a rather uncertain perspective, given that we were leaving behind a very difficult year, in which restrictive measures against the spread of the pandemic had caused a real economic decline of 5.3 percent, which was the biggest blow to the economy in the last 20 years. However, easing the measures of movement of citizens inside and outside the country, which resulted in a large number of diaspora visiting Kosovo during the summer months, together with the supportive policies of the Government of Kosovo and the Central Bank of the Republic of Kosovo for the economy, made 2021 to be characterized by very positive developments for the country’s economy, which, according to the latest estimates of the CBK, is expected to mark a real growth rate of about 9.9 percent. According to data recorded until October this year, the expenditures of non-residents in Kosovo, most of which are from the Diaspora, were in the amount of 1.33 billion Euros an increase of 151.3 percent compared to the same period last year. Also, 2021 marked a faster growth rate of remittances sent from the Diaspora in Kosovo. The value of remittances received by the end of October 2021 is 956 million Euros, which 1/5 BIS central bankers' speeches represents an annual increase of 20.0 percent. The increase in domestic demand in Kosovo, during this year, was reflected in a higher value of imports of goods, which, by November 2021, marked the value of 4.2 billion Euros or an annual increase of 42.5 percent. On the other hand, the export of goods amounted to 684.7 million Euros, marking an annual increase of 60 percent. As a result of these events, the trade deficit on the goods account by November 2021 will be worth 3.5 billion Euros, which is an annual increase of 39.6 percent On the other hand, the export of services until September 2021, amounted to 1.59 billion Euros, marking an annual increase of 117 percent, which has occurred mainly as a result of increased visits of our compatriots and tourists to the country. The import of services was also characterized by an increase, which, until September 2021, registered a value of 642 million Euros. Therefore, the total imports of goods and services, until November this year, are in the amount of about 5 billion Euros, while exports of goods and services are in the amount of about 2.3 billion Euros. As for foreign direct investment, their value by September 2021, amounted to 389 million Euros, compared to the value of 254 million Euros recorded by September 2020. During this period, high growth was recorded in FDI in real estate investments, which amounted to 265 million Euros, compared to the amount of 129 million Euros recorded by the end of September 2020, or expressed in percentage, we have an increase of 106 percent. On the other hand, investments in the financial services sector amounted to about 87 million Euros, compared to the amount of about 67 million Euros recorded during the same period last year. As for other macroeconomic indicators, it is worth emphasizing that the average inflation until November 2021 marked a rate of 3.1 percent compared to the annual average of 0.2 percent for 2020. Whereas, the inflation rate for November 2021 alone was 6.9 percent, which shows that we are facing a trend of growth in the overall price level. The increase in the inflation rate in Kosovo mainly reflects the increase in prices in international markets, which, in Kosovo, are transmitted through the increase in prices of imported goods. *** Regarding the financial system, it is very important to note that Kosovo has managed to build a sound financial system, which not only proved capable of withstanding a very unfavourable economic environment during 2020, but also plays a very important role in supporting the economy to cope with the crisis with the smallest possible consequences. *** Over the past year, seeing that the country’s economy was entering a crisis, and that businesses and citizens started facing financial difficulties, the CBK, based on international best practices and in cooperation with lending institutions in Kosovo, took a number of measures to help the economy cope more easily with the challenges of this crisis. Initially, we took the measure to apply the moratorium on loan repayments without any punitive measures for all borrowers who have been adversely affected by the pandemic. This moratorium has temporarily relieved the borrower of the loan repayment burden, thus improving their liquidity position to finance other needs. Following the end of the moratorium period, the CBK has published guidelines for loan restructuring in order to establish the criteria on which the loan restructuring process should be 2/5 BIS central bankers' speeches based for borrowers who have encountered financial difficulties as a result of the pandemic. Loan restructuring guidelines have made it possible to ease the credit burden on borrowers without implicating any deterioration in their classification in the Credit Registry of Kosovo. Guideline for credit restructuring has been extended until the end of March 2021, in order to be implemented more widely for businesses in financial difficulties. The measures taken by the CBK were assessed as very adequate both by the local public and by international financial institutions, such as the International Monetary Fund in Article IV Report on Kosovo and the World Bank. *** Despite the increased risks due to the economic difficulties that businesses have inherited from the pandemic period, the banking sector continued to increase lending and maintain the degree of stability. Until November 2021, the value of new loans issued by the banking sector was about 1.6 billion Euros, representing an annual increase of 21 percent, while the total value of active loans in the banking sector until November 2021 was 3.7 billion Euros, representing an annual increase of 14.7 percent. Total assets of the banking sector have continued the growth trend during this year, amounting to 5.79 billion Euros in November 2021, representing an annual increase of 13 percent. The banking sector continues to enjoy high public trust, which is also expressed by the continuous growth of deposits. In November 2021, the total value of deposits was about 4.67 billion Euros, representing an annual increase of 12.8 percent. The growth rate of total deposits is mainly dictated by household deposits, a category that dominates the structure of total deposits in the banking sector with a share of 69.6 percent in total deposits, and which, by October 2021, marked an annual increase of 18 percent. The average interest rate on loans in November 2021 was 5.6 percent, which is lower than the rate of 6.1 percent recorded in November 2020. The financial health indicators for the banking sector continue to show a high level of sustainability in all aspects. It is worth emphasizing the good quality of the loan portfolio with a non-performing loan rate of only 2.3 percent in November 2021. Coverage of non-performing loans with loan loss provisions remains at a high level of 147.8 percent, which indicates appropriate levels of provisions in the banking sector The banking sector continues to have a high capital adequacy ratio of 17.5 percent at the end of October, which continues to be significantly above the minimum regulatory level of 12.0 percent. The liquidity position of the banking sector remains high. The ratio of liquid assets to short-term liabilities in July reached 38.4 percent, which is well above the required regulatory minimum of 25.0 percent. *** We also have positive developments in the insurance sector. The assets of insurance sector, representing about 3.0 percent of the total assets of the financial system, in September 2021, reached the value of 235.7 million Euros, representing an annual increase of 10.0 percent. It is important to emphasize that the capital of the insurance sector has been increased this year as well, as a result of the CBK’s request for a capital increase. The value of insurers’ capital in September 2021 amounted to 61.1 million Euros with an annual increase of 5.9 percent. Whereas, this sector continued to have a positive financial performance during this period, 3/5 BIS central bankers' speeches recording a net profit of 5.9 million Euros until September 2021. Gross written premiums by insurance companies until September 2021 amounted to 86.9 million Euros, or an annual increase of 20.2 percent, while gross claims paid amounted to 45.6 million Euros, or an annual increase of 30.0 percent. As a result of the aggravated financial situation and non-fulfilment of legal requirements for capital, in order to protect policyholders and to prevent growing negative impact on the insurance market and financial system in general, during this year, the CBK, based on the duties and responsibilities arising from the Law on CBK and the Law on Insurance, has decided to revoke the insurance license of the insurer “Kosova e Re". This decision was a continuation of a series of measures taken by the CBK to increase the sustainability of the insurance sector, in order to ensure a stable sector and in accordance with the legal requirements of the CBK. *** During this year, the pension sector was also characterized by growth, compared to the previous year. The total value of the assets of the pension sector, in October 2021, reached 2.29 billion Euros, compared to 2.07 billion in October 2020, which corresponds to an annual increase of 10.7 percent. The pension sector marked a positive financial performance, marking a return on investment of about 133 million Euros. New pension contributions during this period amounted to about 157 million Euros. *** Regarding the sector of microfinance institutions and non-banking financial institutions, by November 2021, the assets of this sector amounted to 343.1 million Euros, which is an annual growth of 8.6 percent. The total active loans of this sector in November 2021 recorded a value of 238 million Euros, or an annual increase of 16.1 percent. The average interest rate on new loans issued by microfinance institutions in November 2021 was 18.8 percent, which was 19.7 percent in the same period last year. In this sector, too, the good quality of the loan portfolio is assessed with a non-performing loan rate of 2.9 percent. *** In terms of internal developments, the CBK, during 2021, has continued to advance and develop its professional capacities in all areas of its action. Despite the created situation and not very favourable conditions in the international markets, the Central Bank of the Republic of Kosovo has managed to maintain its financial stability and good performance of the institution, generating a positive financial result. The CBK remains committed to continuing its activity in the service of stability and development of the country’s economy, creating the conditions for the development of a sustainable financial infrastructure, in line with contemporary developments in this field, including the development of new segments of the financial system such as the capital market, which requires a broad interinstitutional interaction. *** Before I receive your questions, let me inform you that the CBK has continued to announce the already traditional competition for the “Young Economist” award. On this occasion, I would like to 4/5 BIS central bankers' speeches thank and congratulate all the candidates for their works that they have submitted within this competition. This activity aims to promote research activities in the field of economics among young people. Based on the assessment of the professional commission for the submitted works, I am pleased to announce the winner of this award, Erzana Uka, with the topic "The impact of digitalization on the banking system". In the end, hoping and believing that next year will be a more positive year in all aspects, I wish good health, joy and success to all of you and your families. 5/5 BIS central bankers' speeches | central bank of the republic of kosovo | 2,021 | 12 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the European Bank for Reconstruction and Development (EBRD) conference, Pristina, 23 March 2022. | Fehmi Mehmeti: Kosovo’s economy in 2021 marked a real growth rate of 10.5% Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the European Bank for Reconstruction and Development (EBRD) conference, Pristina, 23 March 2022. * * * Honorable Mr. Taylor, Head of the EBRD Kosovo Office Honorable representatives of Embassies in Kosovo Honorable representatives of the EU office in Kosovo Honorable Deputy Minister Honorable mayors Distinguished representatives of local and international financial institutions Dear participants, It is a special pleasure to welcome you to the Central Bank of the Republic of Kosovo and to be part of this EBRD event for the presentation of the Transition Report for 2021/2022. This event demonstrates the commitment and the important contribution that the EBRD has continuously given to support the institutions of Kosovo and in general for the economic development of the country. Both, around the world and in Kosovo, recent years have been quite challenging and characterized by a high degree of uncertainty, for the financial system and the economy of the country. As a result of the adequate regulatory framework as well as high supervisory standards, the pandemic situation found the financial system in Kosovo with high levels of capital and liquidity as well as very good quality of assets. Also, prudent measures taken by the CBK in cooperation with financial institutions operating in Kosovo have been shown to be very effective in maintaining financial stability and minimizing the consequences for the country’s economy in general. As a result of these measures, the banking sector managed to maintain a high degree of resilience to the impact of the crisis and to meet very well the challenges and implications of the pandemic, and to play a very important role in the recovery of the economy through continuous lending and providing mitigation measures for borrowers. Currently, the non-performing loan rate in the banking sector stands at around 2.3%, while the annual loan growth rate stands at 15.7%, which indicates that we are talking about a sound banking sector with a very significant contribution to the financing of economic activity. Our priority remains for banks to continue to maintain a high degree of stability, so credit risk continues to be the focus of the CBK in 2022, especially focusing on assessing credit risk management practices, the adequacy of provisions for credit losses and overdue credit management. Kosovo’s economy has marked a very successful recovery in 2021, after a challenging year with significant difficulties caused by measures to prevent the COVID-19 pandemic. Preliminary estimates of KAS suggest that the country’s economy in 2021 marked a real growth rate of 10.5%. Significant impact on the growth of economic activity had the measures of movement relaxation, which greatly increased the visits of our diaspora in Kosovo, visits which represent a very important source of funding for the country’s economy. The concept of transition elaborated by the EBRD report rightly argues that a well-functioning 1/2 BIS central bankers' speeches market economy must be competitive, inclusive, well-governed, environmentally friendly, sustainable and integrated. We welcome the conclusions and recommendations from the transition report and consider them to be a good guide for Kosovo’s economic perspective. The report pays special attention to digitalization, which is also transforming the financial system worldwide. We see the digital transformation process as an opportunity for financial institutions to become more efficient as well as improve access to financial services for households and businesses. In terms of payments, the CBK has taken some important steps in market liberalization, where payments and money transfer services are also allowed to be provided by non-bank financial institutions. The CBK plans to further liberalize the payment services market by adopting the EU Payment Services Directive known as PSD2, as well as two EU directives addressing payment accounts and electronic money, in under the new law on payment services. For the end, allow me to once again express my highest appreciation to the EBRD, which has consistently proven to be a very important supporter of Kosovo’s economic development and promoter of structural reforms in the country’s economy. 2/2 BIS central bankers' speeches | central bank of the republic of kosovo | 2,022 | 3 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the launch ceremony of the Green Recovery and Opportunity Window, Pristina, 17 June 2022. | Dear Mrs. Olmstead, Honorable Ambassador Rohde, Dear Mr. Berisha, It is a special pleasure to be part of this ceremony that marks a very important step in the launch of the Green Recovery and Opportunity Window, where through the Kosovo Credit Guarantee Fund, access to finance for businesses investing in Renewable Energy and in Energy Efficiency will be facilitated. The launch of this project designed and funded by the Millennium Challenge Corporation and the Millennium Foundation Kosovo, and with the capital donated by KFW shows the continued support of our international friends for the development of the Kosovo Credit Guarantee Fund and in general for the development of Kosovo's economy. The Kosovo Credit Guarantee Fund within a relatively short period of time has managed to become a very important institution for increasing the facilitation of financing for the country's economy. Financial institutions play a very important role in financing the green economy, so this project will significantly help promote and further stimulate the green transition. This project will also enable the increase of the guarantee potential of this institution, making possible the increase of the number of beneficiaries from the guarantees issued by this institution. In other words, a large number of businesses with difficulty in accessing finance will be able to provide easy access to this source of funding. Bank lending continues to be a very important and sustainable source of private sector financing in Kosovo. The value of bank loans with data of April 2022 has reached 4 billion euros, or an annual increase of 17.9%. However, despite the satisfactory trend of increasing bank lending, it is considered that the level of financial intermediation in Kosovo continues to be below the average of countries in the region, which indicates the possibility that this window and the KCGF is giving to increase the rate of financial intermediation in Kosovo. The opening of this window also plays an important role. In this context, we expect that in addition to supporting the growth of credit financing in general, the KCGF portfolio is increasingly reflecting the growth of credit support for sectors with greater difficulties in accessing credit financing, but which have potential to make a significant contribution to the economic development of the country. For this reason, the opening of this window and many other windows within the KCGF, have to do with the fact that we need to support businesses, which have difficulty accessing finance. Today, if we look at the structure of the country's economy in Kosovo, we have a structure of the economy that is mainly dominated by commercial enterprises. And the idea is that through these programs, through these projects, through these windows, to change the structure of the economy in the country. In order to have as many manufacturing enterprises. In this way, I believe that Kosovo would address the two challenges it has consistently faced, namely unemployment and the high trade deficit. For the end, thank you very much, I wish you good work, health and success. | central bank of the republic of kosovo | 2,022 | 6 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the 20th anniversary of the establishment of the Kosovo Banking Association, Pristina, 3 November 2022. | Fehmi Mehmeti: The banking sector is able to withstand possible negative shocks Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the 20th anniversary of the establishment of the Kosovo Banking Association, Pristina, 3 November 2022. *** Honoured Chairperson of the Board of the Association of Banks Mr. Lumezi, Honoured executive director of the Association Mr. Balija, Honoured representatives of financial institutions, Dear participants, Ladies and gentleman, On behalf of CBK, I congratulate you on the 20th anniversary of the establishment of the Association of Banks of Kosovo and thank you for your cooperation during these years. Both throughout the world and in Kosovo, the last few years have been quite challenging and characterized by high uncertainty, for the financial system and for the country's economy. As a result of the adequate regulatory framework as well as high supervisory standards, the pandemic situation found the banking sector in Kosovo with high levels of capital and liquidity as well as very good quality of assets. Also, the prudent measures undertaken by the CBK in cooperation with the financial institutions operating in Kosovo have been shown to be very effective in maintaining financial stability and minimizing the consequences for the country's economy in general. This careful and proactive approach has made the banking sector go through this rather difficult period without suffering serious consequences, and today we have a banking sector that has in no way become a burden to the state, on the contrary, it is playing a very important role in lending to the economy and is serving as one of the main pillars of the stability and development of the country's economy. Bank lending continues to be a very important and stable source of financing for households and businesses in Kosovo. The banking sector, despite the increased risks, has continued to increase lending and maintain the level of sustainability. The value of bank loans until September 2022 has reached 4.2 billion euros, marking a significant annual increase of 18.5%. Inflationary pressures, already elevated as a result of post-pandemic developments in the global economy, are now characterized by a marked increase as a result of Russian aggression in Ukraine. Inflationary pressures certainly pose a challenge to financial stability, as they directly affect the solvency of citizens in conditions where incomes are not corrected for inflation. 1/3 BIS - Central bankers' speeches Therefore, in this period of geopolitical shocks, we must especially pay attention to the stability of the banking sector, as one of the main sources of stability and growth of an economy. In Kosovo, fortunately, we have a banking sector with a high degree of stability, which has the ability to withstand possible negative shocks and, at the same time, help the economy to cope with possible shocks with minimal consequences through stable financing. Among the main challenges in modern banking are the advancement of digital banking and the issue of environmental impact on the banking system. During the last years, there has been an important development in the direction of digitalization of financial services, which is transforming the financial system. We see the process of digital transformation as an opportunity for financial institutions to become more efficient and to improve access to financial services for households and businesses. As for the field of payments, the CBK has taken some important steps in the liberalization of the market, where payments and money transfer services have been allowed to be offered by non-banking financial institutions. CBK has planned to further liberalize the payment services market by adopting the EU directive on payment services known as PSD2, as well as the two EU directives addressing payment accounts and electronic money, in within the framework of the new law on payment services. This legal framework will allow a diverse group of payment service providers to operate and compete in the payments market, while also helping to create more efficient and affordable local and cross-border payments. It will also prepare us for meeting the conditions of application for membership in the European Payments Scheme known as SEPA, as one of our main goals in the future. This legal framework will set the foundations for the next decade and bring more pronounced competition in the field of digital financial services. It should be noted that the banks in Kosovo have been very proactive in terms of undertaking initiatives and actions for new developments and adaptation of the most modern technologies, comparable to those of Western European countries. Assessing and managing financial risks arising from climate change is one of the challenges facing supervisory authorities and the banking sector. Within the Western Balkan countries, Kosovo has also adopted the Green Agenda for the Western Balkans at the Sofia Summit in November 2020, which is a comprehensive strategic roadmap regarding climate change. This agenda shows the way to new energy solutions, which means increased investments in renewable resources as well as sustainable environmental development. The banking sector represents the main component of the financial system of Kosovo, so banks will play an important role in the transition towards the green economy. Climate change creates risks for banks, so it is our duty to ensure that the banks under our supervision address these risks adequately and proactively. 2/3 BIS - Central bankers' speeches As part of CBK's commitment to advancing this issue, we have already applied to join the Financial System Greening Network, which is a network of 83 central banks and prestigious financial supervisory authorities that aims to accelerate growth of green finance and develop recommendations on the role of central banks on climate change. We hope to soon become part of this prestigious network of central banks and financial supervisory authorities. Also, in cooperation with the World Bank, we are drawing up a strategy where the recommendations and supervisory requirements for the management of risks related to climate change will be defined. In conclusion, during this delicate period, it is very important that the banking sector continues to support the economy through its lending. Special attention should also be paid to the monitoring of financial risks, adequate provisioning and transparency and responsible behaviour towards customers. The Central Bank of the Republic of Kosovo remains committed to ensuring financial stability and supporting the country's economy with all available instruments. Congratulating you once again for holding today's conference, I wish you good luck in the future. Thank you! 3/3 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,022 | 11 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the conference with the head of the IMF Mission for Kosovo, Mr Gabriel di Bella, Pristina, 4 November 2022. | Fehmi Mehmeti: The financial sector is liquid and supports the economy in Kosovo Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the conference with the head of the IMF Mission for Kosovo, Mr Gabriel di Bella, Pristina, 4 November 2022. *** Dear Di Bella - Head of the IMF mission for Kosovo Dear media First of all, allow me to thank the International Monetary Fund for the continuous support it has provided to Kosovo, and in particular to the Central Bank of the Republic of Kosovo, in carrying out its duties in maintaining and preserving a stable and continuously growing financial system. During the meetings held with representatives of the International Monetary Fund, we informed them about the latest developments and data of the financial system in Kosovo. The financial system in Kosovo has continued to be liquid and well capitalized, where double-digit growth has been recorded in all indicators being one of the important factors in the economic growth and development of the country. In total, the means of the financial system in the country, on 31 August, 2022, have reached the total value of 9.3 billion euros, with an annual increase of 10 percent. In the meantime, the means of the banking sector have continued the growth trend even during 2022, reaching the value of around 6.4 billion euros in August 2022, which represents an annual increase of 11.1 percent. In August 2022, the total value of deposits is worth 5.2 billion euros, which represents an annual increase of 11.8 percent, while the growth of deposits continued during the month of September, with a rate of 12.7 percent. The banking sector continues to be stable, increasing lending activity and playing a very important role in crediting the country's economy during this year as well. The value of the credit portfolio of the banking sector at the end of August 2022 was in the amount of 4.2 billion euros, with an annual increase of 18.6 percent, while the average loan interest rate was 6.0 percent. Non-performing loans have continued with the downward trend and today the rate of non-performing loans is at the level of 2.1%, which is a significantly better indicator compared to countries in the region or even beyond. The banking sector continues to be well capitalized and liquid. The capital adequacy indicator for the banking sector stands at 16.1 percent, which is significantly above the regulatory requirements of 12 percent, while the liquidity indicator is 35.7 percent, similarly, higher than the regulatory requirement of 25 percent. We also have positive results in the insurance sector and other sectors. 1/2 BIS - Central bankers' speeches The Central Bank of the Republic of Kosovo is certain that it will continue to have the support of the International Monetary Fund and we will continue the successful cooperation with the International Monetary Fund. Once again, allow me to thank the representatives of the International Monetary Fund for the contribution and continuous support of Kosovo and the Central Bank. Thank you. 2/2 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,022 | 11 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at a press conference, Pristina, 19 November 2022. | Fehmi Mehmeti: The international arbitration recognized the fair decision of the Central Bank of the Republic of Kosovo Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at a press conference, Pristina, 19 November 2022. *** Honourable representatives of the media Dear citizens, Thank you for your participation in this press conference. I am pleased to share with you today very good news for the Republic of Kosovo and in particular for the Central Bank of the Republic of Kosovo. As you are aware, the Republic of Kosovo has won the case of international arbitration against the financial institution Iute Credit. Iute Credit Microfinance Institution was registered on 27 October 2017, with which registration it is authorized to carry out financial activities of granting loans. Through its licensing policy, the CBK continuously aims to provide the best possible conditions for access to finance in Kosovo, enabling the operation in our financial market only of institutions that contribute to the stability and development of the financial system and, consequently, the sustainable economic development of the country. During the period of operation of Iute Credit in Kosovo, this institution has continuously deviated from the business plan, based on which it had received the license to operate, thus bringing to our market something different from what it had promised. In accordance with the duties and responsibilities related to the supervision of financial institutions, the CBK has conducted two examinations focused on this institution on its compliance with the operation in addition to the business plan approved at the time of registration by the CBK. CBK's examinations had identified a series of major violations, and that the interest rates applied by this institution are beyond any standard, be it even if we compare them with the projections of this institution, or in relation to the loan interest rates that are applied from other financial institutions in the country. This deviation was contrary to the legislation in force, and with its activity, it had endangered the solvency of the borrowers and thus presented a risk to the financial stability of the country. Based on the violations identified by successive examinations, the Executive Board of the CBK, on 6 December 2019, based on the powers guaranteed by Article 36 paragraph 1, sub-paragraphs 1.11 and 1.12, as well as article 67 paragraphs 1 and 2 of the Law on the Central Bank of the Republic of Kosovo, as well as in accordance with Article 105, paragraph 1, sub-paragraph 1.10 of the Law on Banks, Financial 1/2 BIS - Central bankers' speeches Institutions and Non-Banking Financial Institutions, decided to revoke the registration and initiate liquidation procedures for the microfinance institution "Iute Credit Kosovo" J. S.C. CBK has been and remains confident in the legality and proportionality of the decisions, in relation to this institution and all the decisions issued by its executive bodies. The institution in question, in accordance with their legal right, had initiated a claim before the International Arbitration, to dispute the legality of the decision of the Executive Board of the CBK. CBK thanks the Government of the Republic of Kosovo for initiating the allocation of funds for the defence of the Republic of Kosovo during the arbitration. The CBK also thanks the Ministry of Justice and the State Bar for establishing direct contact between the CBK and the defence firm for the Republic of Kosovo. From the beginning, I appointed the former deputy governor Sokol Havolli as the bearer of this process, who, in cooperation with his subordinates, successfully carried out every phase in defence of the Republic of Kosovo, being also the key witness at the arbitration. Also, I seize the opportunity to congratulate all the other employees at CBK who have been on top of their duties throughout the entire work and defence process. Our faith in the professionalism of the employees at CBK has never wavered. As a result of all this commitment and a professional process by the Central Bank of the Republic of Kosovo, we have managed to have an epilogue 100% in favour of the country. As the bearer of all responsibilities within the institution I lead, I feel happy with this result and with all the results achieved over the years. As important as the result is the fact that the costs associated with this process will be borne by the claimant. I feel special pride that I have managed to protect the state, the citizens, the institution, and financial stability throughout this time, in cooperation with all my colleagues at the CBK. At different times, we have faced challenges and orchestrated attacks from both inside and outside, which were intended to damage the processes of CBK but also my reputation, the reputation of CBK and that of the Republic of Kosovo. In some cases, they have made me feel bad. But I have never felt that I am not following the law. Finally, let me inform you that the Central Bank of the Republic of Kosovo is committed to creating conditions for increasing healthy competition in our financial market, enabling a fair competition between financial institutions that ensure increased access to finance and improvement of conditions, but will never allow the operation of those institutions that do not comply with the regulatory and legal requirements of the country, and of those that take advantage of the difficult financial conditions in which a part of our citizens may find themselves, bringing services which impoverish them and make their lives even more difficult. 2/2 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,022 | 11 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the launch of the "Export Window", Pristina, 15 December 2022. | Fehmi Mehmeti: The Central Bank of the Republic of Kosovo continues to support and push the financial sector to increase support to the economy, especially export businesses Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the launch of the "Export Window", Pristina, 15 December 2022. *** Dear Ms. Minister, The honourable Mr. Mike, The honourable Mr. Berisha Dear attendees It is a special pleasure to be part of this ceremony which marks a very important step of the launch of the Export Window. Allow me, on behalf of the Central Bank of the Republic of Kosovo, to congratulate the Kosovo Credit Guarantee Fund and USAID (Kosovo Compete Activity) for launching a new window for financial facilitating called the "Export Window". The Kosovo Credit Guarantee Fund, with the support of our international friends, within a relatively short period of time has managed to transform into a very important institution, playing a very important role in increasing and facilitating financing for the country's economy. Bank lending continues to be a very important and stable source of private sector financing in Kosovo. The value of banking sector loans until October 2022 has reached 4.3 billion euros, marking an annual increase of 17.9%. However, despite the satisfactory trend of the growth of bank lending, it is considered that the level of financial intermediation in Kosovo should increase even further, and that in relation to the size of the economy, there is further room for expansion of the lending activity. An important role in filling this space is played by the Kosovo Credit Guarantee Fund, which, through its guarantee mechanism, will enable the increase in credit and ease the conditions of access to credit even for the extremely important sectors that ensure the economic development of the country. The new export window, which aims to issue new guarantees to partner financial institutions for the benefit of micro, small and medium enterprises, especially for exportfocused businesses, is good news for businesses and the economy of the country. In this period where our economy, and not only, has had negative impacts, firstly from the pandemic and recently also from the Russian aggression in Ukraine, it is very important to help our enterprises, to increase the export as much as possible. 1/2 BIS - Central bankers' speeches Until October of this year, the value of exports reached the amount of 774.4 million euros. This amount represents an increase of over 160 million euros compared to the same period of 2021. However, this increase is still low compared to the import that in the same period January-October 2022 reached the amount of 4.6 billion euros. In the same period last year, imports amounted to 3.7 billion euros. Therefore, this new window will help to increase the export of businesses, contributing to the overall economic development of the country. The Central Bank of the Republic of Kosovo continues to support and push the financial sector to increase support for the economy, especially businesses that aim to export our products. Thank you! 2/2 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,022 | 12 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the year-end press conference with journalists, Pristina, 22 December 2022. | Fehmi Mehmeti: The financial system proved capable of withstanding the crises caused by the pandemic and the war in Ukraine Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the year-end press conference with journalists, Pristina, 22 December 2022. *** Dear representatives of the media, Dear citizens, First of all, let me thank you for your presence at this year-end conference and for the continuous and effective cooperation that we have cultivated over the years with the aim of informing the public as fairly as possible about the CBK's activity, as well as economic and financial developments in the country. Communication with the media continues to be an extremely important part of CBK's activity. Through your fair reporting, we have managed to keep the public well informed about developments in the country's financial system and economy. Therefore, I would like to take this opportunity to express my high appreciation for the professionalism shown during this year as well. Despite all the difficulties we have faced, I am happy that the Central Bank of the Republic of Kosovo has managed to implement its objectives this year as well, ensuring a stable financial system, which in recent years has managed to cope with success the crises caused by the Covid 19 pandemic and now the Russian aggression in Ukraine, but also to be one of the main pillars of support for businesses and individuals, and with this also for the country's economy. Now, allow me to present before you a summary of the developments that characterized the country's economy and financial system during this year, based on the latest data available to us for the respective sector. The economy of Kosovo started the year 2022 with a very good perspective, since we were leaving behind a very successful year, where according to the estimates of the Statistics Agency of Kosovo, the real growth rate of the Gross Domestic Product in 2021 was 10.75 percent. However, during 2022, change of global dynamics as a result of the war in Ukraine, which were accompanied by increase of inflation, changing monetary policies and increase of interest rates, and slowdown of global trade growth as a result of supply chain disruptions, was also reflected in the economic activity in Kosovo. According to CBK's estimates, GDP in 2022 is expected to record a slowed growth of 3 to 4 percent, mainly due to the contraction of domestic demand and increase in imports, while exports have had a positive impact. Based on the data recorded until September of this year, the expenditures of nonresidents in Kosovo, most of which are from the diaspora, amounted to 1.48 billion 1/5 BIS - Central bankers' speeches euros, which represents an increase of 26.1 percent compared to the same period last year. As well, the year 2022 marked a faster rate of growth for remittances sent by the diaspora to Kosovo. The value of remittances received until the end of October 2022 is 1 billion euros, which represents an annual increase of 5.5 percent. The increase in domestic demand in Kosovo during this year was reflected in a higher value of the import of goods, which until September 2022 marked the value of 4.15 billion euros or an annual increase of 24.6 percent. On the other hand, the export of goods marked the value of 688.0 million euros, marking an annual increase of 27.1 percent. As a result of these developments, the trade deficit in the account of goods until September 2022 recorded the value of 3.47 billion euros, which represents an annual increase of 24.2 percent. On the other hand, the export of services until September 2022 marked the value of 2.05 billion euros, marking an annual increase of 32.8 percent, which occurred mainly as a result of the increase in the visits of our compatriots and tourists to the country. The import of services was also characterized by growth, which until September 2022 recorded a value of 901 million euros. So the total imports of goods and services until September of this year are in the amount of 5.05 billion euros, while the exports of goods and services are in the amount of 2.7 billion euros. As for foreign direct investments, their value until September 2022 reached 567 million euros, compared to the value of 395 million euros recorded until September 2021. During this period, high growth was noted by FDI in investments in real estate, which marked the value of 394 million euros, compared to the value of 265 million euros registered until the end of September 2021, or expressed as a percentage, we have an increase of 48.7 percent. Regarding other macroeconomic indicators, it is worth noting that the average inflation until November 2022 marked the rate of 11.5 percent compared to the annual average of 3.4 percent for 2021. Whereas, the inflation rate only for the month of November 2021 was 11.5 percent, which shows that we are dealing with an increasing trend of the general price level. The increase in the rate of inflation in Kosovo mainly reflects the increase in prices in international markets, which in Kosovo is transmitted through the increase in the prices of imported goods. As for the financial system, it is very important to emphasize that Kosovo has managed to build a sound financial system, which not only proved capable of coping with the crises caused by the pandemic and Russian aggression in Ukraine, but also took a very important role in supporting the economy to face the crisis with the smallest possible consequences. In total, the assets of the financial system, on October 30, 2022, were worth 9.43 billion euros, with an annual increase of 10.2 percent. The banking sector, as the main component of the financial system in the country, this year also, is playing a very important role in supporting the country's economy by continuing the pace of credit growth and maintaining the level of sustainability. Until 2/5 BIS - Central bankers' speeches October 2022, the value of new loans issued by the banking sector was 1.59 billion euros, representing an annual increase of 13.6 percent, while the total value of active loans in the banking sector until September 2022 was 4.27 billion euros, which which represents an annual increase of 18.4 percent, compared to the same period last year. It is worth highlighting the good quality of the credit portfolio with a rate of nonperforming loans of only 2.0 percent in October 2022. The coverage of nonperforming loans with provisions for loan losses remains at a high level of 151.2 percent, that proves adequate levels of provisions in the banking sector. In total, the assets of the banking sector have continued the growth trend during this year, reaching the value of 6.46 billion euros in October 2022, which represents an annual increase of 12.4 percent compared to the same period last year. The banking sector continues to enjoy high public confidence, this confidence is also expressed by the continuous increase in deposits. In October 2022, the total value of deposits was around 5.3 billion euros, representing an annual increase of 14.2 percent . The growth rate of total deposits is mainly dictated by household deposits, a category that dominates the structure of total deposits in the banking sector with a participation of 67.6 percent in total deposits, which until October 2022 marked an annual increase of 11.5 percent. The average interest rate on loans in October 2022 was 6.2 percent, which is higher compared to the rate of 6.0 percent recorded in October 2021. While the average interest rate on deposits increased from 1.3 percent as it was in October 2021 to 1.5 percent in October 2022. Financial health indicators for the banking sector continued to show a high level of sustainability in all aspects. The banking sector continues to have high capital adequacy indicators of 15.8 percent at the end of October, which continues to be significantly above the minimum regulatory level of 12.0 percent. The liquidity position of the banking sector remains at a high level. The ratio of liquid assets to short-term liabilities in July was 34.5 percent, which is higher than the required regulatory minimum of 25.0 percent. The interbank payment system (IPS), which enables the processing of a number of payment instruments, interbank clearing, as well as the settlement of securities, has continued to operate normally and without obstacles. Until November 2022, 15.8 million transactions with a total value of over 14.7 billion euros have been processed. Compared to the transactions of the previous year, volume of transactions has increased by nearly 21.6 percent, whereas the value of transactions has decreased by 3.5 percent. During this year, we have a significant increase in the number of transactions at the POS as well as those at the banks' ATMs. The number of POS transactions until November 2022 has reached 23.5 million with an increase of 42.0 percent, while the 3/5 BIS - Central bankers' speeches number of ATM transactions was 18.1 million or an increase of 7.7 percent compared to the same period last year. The number of accounts in the banking sector, until November, reached 2.36 million, while the number of accounts in e-banking is 676 thousand. We have positive developments in the insurance sector as well. The assets of the insurance sector, which represent about 3.0 percent of the total assets of the financial system, in September 2022 marked the value of 259.0 million euros, marking an annual increase of 10.0 percent. It is important to note that the equity of the insurance sector has also increased this year, as a result of the CBK's requests for capital increase. The value of insurers' equity in September 2022 was 66.4 million euros with an annual increase of 8.7 percent. The gross premiums written by insurance companies until September 2022 marked the value of 98.2 million euros or an annual increase of 13.0 percent, while the gross paid claims marked the value of over 42 million euros or an annual increase of over 25 percent. Even the pension sector during this year was characterized by growth, compared to the previous year. The total value of pension sector assets in September 2022 reached 2.3 billion euros compared to 2.2 billion in September 2021, which corresponds to an annual increase of 4.2 percent. The pension sector until September 2022, due to the unfavourable conditions in the international financial markets, recorded a poor financial performance, marking a negative return on investments in the amount of about 170 million euros. The new pension contributions during this period marked the value of around 177.5 million euros. As for the sector of microfinance institutions and non-banking financial institutions, until October 2022, the assets of this sector reached the value of 386.1 million euros, marking an annual increase of 12.6 percent. In total, the active loans of this sector in October reached the value of 276 million euros , or an annual increase of 18.4 percent. The average interest rate on new loans issued by microfinance institutions in October was 19.0 percent, which in the same period last year was 20.6 percent. Even in this sector, the good quality of the credit portfolio is assessed with a rate of nonperforming loans of 2.9 percent. CBK has continued its commitment also in the function of protecting the rights of consumers of financial services, thus directly serving the protection of citizens' interests. Until November of this year, the number of complaints reviewed by the CBK reached 810 complaints. The CBK's commitment to protecting the rights of consumers of financial services, either through financial education programs or through corrective measures against financial institutions, has been and will remain a priority of the CBK in the coming years. 4/5 BIS - Central bankers' speeches As far as internal developments are concerned, CBK has also continued during 2022 with the advancement and development of its professional capacities in all areas of its operation. Despite the created situation and not very favourable conditions in the international markets, the Central Bank of the Republic of Kosovo has managed to maintain its financial stability and good performance of the institution, generating a positive financial result. CBK remains committed to continue its activity in the service of the stability and development of the country's economy, creating the conditions for the development of a stable financial infrastructure, in line with contemporary developments in this field, including the development of new segments of the financial system such as the capital market, which requires extensive inter-institutional cooperation. Also, this year, as you know, the Republic of Kosovo won the international arbitration against the financial institution Iute Credit. This case clearly proves that the CBK has been and remains confident in the legality of its decisions, not only in relation to this institution, but in relation to every institution that carries out financial activity in the country. During the last years, 14 licenses/registrations of financial institutions were revoked and all the cases in the courts had a positive outcome for the CBK. Hoping and believing that the coming year will be a more positive year in all aspects, I wish you and your families lots of health, joy and success. Dear representatives of the media, finally let me inform you that CBK within its general function from the field of financial education, as a separate component and with the aim of promoting research in the field of economics among young people of Kosovo, shares the traditional award for "Young Economists" every year. This year, the theme of the Competition for the Award "Young Economist" was: "The impact of inflation on European and Kosovo Trade" The professional committee has evaluated three best papers by young researchers. I invite the student Njomza Jupa from "Haxhi Zeka" University in Peja I invite the student Anisë Murseli from "Yale University" in the USA I invite the student Rozafa Hajdari from "Haxhi Zeka" University in Peja. 5/5 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,023 | 1 |
Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the end of the mandate press conference with journalists, Pristina, 27 March 2023. | Fehmi Mehmeti: During my mandate, the insurance sector was stabilized Speech by Mr Fehmi Mehmeti, Governor of the Central Bank of the Republic of Kosovo, at the end of the mandate press conference with journalists, Pristina, 27 March 2023. *** Dear representatives of the media, Dear citizens, Allow me to thank you for your presence in this last conference, at the end of the 5-year mandate of the Governor of the Central Bank of the Republic of Kosovo. Also, allow me to thank you for the continuous and effective cooperation that we have cultivated during the last five years and informing the public about the activities of the CBK, as well as the economic and financial developments in the country. Communication with the media has been and I hope will be an important part of CBK's activity. Through your reporting, we have managed to keep the public well informed about developments in the country's financial system and economy. Therefore, I would like to take this opportunity to express my high appreciation for the professionalism shown during this period of time. *** Despite all the difficulties we have faced as an institution, but also me personally as Governor, I am happy and proud to inform you that during the last five years the Central Bank of the Republic of Kosovo has managed to implement its objectives, providing a stable financial system, and, especially in recent years, managed to successfully cope with the crises caused by the Covid 19 pandemic and now the Russian aggression in Ukraine, but also to be one of the main pillars of support for businesses and individuals, and with this also the country's economy. *** Now, allow me to present before you a summary of the developments that characterized the country's financial system during this period. *** Since March 2018, on the occasion of my decree as Governor, we have managed to successfully fulfill our constitutional and legal role through professional decision-making based on good standards and principles of corporate governance, independence and accountability. The financial system in the country during this five-year period has been characterized by positive developments and continuous growth in all its indicators. Through the licensing policy, the CBK has continuously aimed to provide the best possible conditions for access to finance in Kosovo, enabling the operation in our 1/5 BIS - Central bankers' speeches financial market only of institutions that contribute to the stability and development of the financial system, consequently and sustainable economic development of the country. Under my leadership as Governor, CBK has managed to ensure a sustainable, stable, well-capitalized and liquid financial system. A similar attitude regarding the financial system in the country can also be evidenced in the reports of international financial institutions, such as: the International Monetary Fund, the World Bank, the European Commission Report, the European Central Bank, the US Department of State and many other institutions. Also, the overall financial performance of CBK during this period has been very satisfactory, achieving comprehensive income throughout the five-year governance period. While in 2017, CBK had a negative financial result of 881 thousand euros, in 2018 a positive result of 2.2 million euros was realized; in 2019 - 2.1 million euros; in 2020, despite the Covid 19 pandemic - 2.16 million euros; in 2021 - 6.1 million euros, while in 2022 the unaudited profit of CBK is worth about 8 million euros. The positive financial result of the CBK has enable and created financial stability, providing security for the long-term financial stability of the CBK institution. *** During this period, the banking sector in Kosovo has recorded continuous growth both in the number of institutions and at the same time in the growth of the activity of this sector. From ten banks at the end of 2018 to October 2022, this number increased to twelve by adding two financial institutions with banking activity. The banking sector during the period 2018 - October 2022 has recorded an increase in assets of 2.6 billion euros or 61.6 percent. The total value of assets at the end of 2022 was 6.76 billion euros, from 4.18 billion at the end of 2018. The increase in the banking sector's assets also resulted in an increase in the credit portfolio, which in December 2022 reached the value of 4.35 billion euros, from 2.75 billion in 2018. In the context of time 2018 - 2022, the level of active loans increased by 1.6 billion, or an increase of 57.9 percent during these five years. The significant increase in loans has not affected the increase in non-performing loans, since at the end of 2022 the level of non-performing loans was 2 percent, comparable to the banking systems of the European Union. Loans continue to be the main balance item within banks' assets with a participation of 64.3 percent in December 2022. The increase in loans is mainly supported by the increase in deposits, where in December 2022 the level of total deposits was 5.55 billion euros, an increase of 2.19 billion euros or 65.1 percent in the 2022 time horizon compared to 2018. The banking sector throughout this period, despite the continuous double-digit growth of lending, has continued to be well capitalized and liquid. The liquidity ratio of the banking sector continues to be high and above the regulatory requirements of the CBK. The banking sector had the highest level of liquidity during the pandemic period, in 2020, which was 39.8 percent, while in December 2022 this ratio was 36.5 percent, higher than the required regulatory minimum of 25 percent. The 2/5 BIS - Central bankers' speeches liquidity coverage ratio (LCR-Liquidity Coverage Ratio) is at the level of 212.1 percent, which is much higher than the required level of 100 percent (in the third quarter of 2022, this indicator in the Eurozone countries was at the level of 162 percent). The banks' own capital has continued to increase, despite the approval of the distribution of dividends individually for the banks during the last 5 years. As of December 31, 2022, the capital value of the banking sector is 699 million euros from 497 million euros at the end of 2018. While the capital adequacy indicator continues to be above the required regulatory minimum throughout this period, or about 14.8 percent in end of 2022. In addition to the banking sector, the MFI-NBFI have also recorded a stable performance, where at the end of 2022 the value of the assets of this sector was 387.7 million euros, an increase of 146.1 million euros, or 60.5 percent compared to 2018. As in banks, the main item also among MFI-NBFI are loans that in December 2022 marked the value of 351 million euros, or an increase of 128.9 million euros or 58.0 percent, compared to 2018. The stable and qualitative growth of loans is also confirmed by the level of non-performing loans in relation to total loans that at the end of 2022 was 1.8 percent, lower compared to 2018 when it was 2.2%. In relation to this sector, in 2019 the CBK withdrew the registration (license) of two institutions, IuteCredit and Monego. Both of these institutions have made numerous court appeals regarding the revocation of licenses, but all court cases so far have been won by the CBK. Based on the arbitration process initiated by IuteCredit, during 2021 a series of meetings were held with the defense company and statements were given. In 2022, a hearing was held regarding the arbitration process, related to the IuteCredit lawsuit, where it was decided entirely in favor of the Republic of Kosovo. *** We have also had very positive developments in the insurance sector. The assets of the insurance sector, which represent about 3.0 percent of the total assets of the financial system, at the end of 2022 marked the value of 267.5 million euros, marking an annual increase of 12.0 percent, while during the five-year period they have marked an increase of 52.2 percent. Gross premiums written by insurance companies at the end of 2022 amounted to 134 million euros, from 92.1 million euros at the end of 2018, or an increase over the last five years of 45.5 percent, while claims paid amounted to over 64.3 million euros or an increase of 49.9 percent during this period. As you are aware, the insurance sector has been one of the most problematic sectors, for which, on the occasion of the beginning of the mandate, I have decided to start taking actions in order to improve the state of this sector. From the 21.8 million euros that was the lack of capital in 2018, based on the unaudited financial statements, as of December 31, 2022, no insurance company is below the capital requirements. Whereas, the lack of acceptable assets to cover technical provisions from 16.2 million euros as of December 31, 2018, to December 31, 2022, all companies are within the required regulatory parameters. 3/5 BIS - Central bankers' speeches Out of a total of 12 Non-Life insurers operating in Kosovo in 2018, six of them lacked capital and acceptable assets to cover technical provisions. As a result of the measures taken by the CBK, with the aim of protecting policyholders and preventing the increase of negative impact on the insurance market and the financial system in general, based on the duties and responsibilities arising from the Law on the CBK and the Law on Insurance, during this period 2018-2022 the CBK has made a decision to revoke the licenses of two insurers, namely the insurance companies "Insig" and "Kosova e Re". Before making the decision, the CBK continuously made efforts to correct the financial situation of both insurers, however, despite the readiness and efforts of the CBK, the Board and Management of the two Insurers failed to fulfill the legal requirements and improving the financial situation. Close supervision and continuous demands for compliance with legal requirements has resulted in continuous injection of capital from the insurance sector in the country. During the years 2019-2022, the additional capital injection was in the amount of 20.3 million euros. Also, it is important to note that during the years 2018-2022, the Executive Board of the CBK through decisions has issued and taken various administrative measures against insurers and over 100 different decisions have been taken for the insurance sector alone. Therefore, if there is anything I am proud of, it is precisely solving the problem of the insurance sector and taking measures for the improvement and compliance of this sector with legal requirements, , considering that since its establishment and operation, no one has dealt with this sector and the solution of their compliance with legal requirements. *** During the five-year period, Pension Funds in Kosovo have recorded continuous growth. From 1.65 billion euros at the end of 2017, until December 2022, pension funds have reached the value of 2.42 billion euros. It is important to note that despite the withdrawal of 10 percent of pension funds during 2020, as a result of the approval of the Law for economic recovery, worth about 200 million euros, pension funds have continued the upward trend during the following years, namely during 2021 and 2022. However, due to unfavorable movements in international markets, as a result of Russian aggression in Ukraine, during 2022 the pension sector recorded a decrease in investment returns, where the decrease in these investments during 2022 was worth about 120 million euros. However, with the improvement of the financial markets, it is estimated that even the decline in the value of these investments will be recovered. Meanwhile, the new pension contributions during 2022 marked the value of around 242 million euros. *** CBK has continued its commitment also in the function of protecting the rights of consumers of financial services, thus directly serving the protection of citizens' 4/5 BIS - Central bankers' speeches interests. Until November of this year, the number of complaints reviewed by the CBK reached 810 complaints. The CBK's commitment to protecting the rights of consumers of financial services, either through financial education programs or through corrective measures against financial institutions, has been and will remain a priority of the CBK in the coming years. *** As far as internal developments are concerned, CBK has also continued during 2022 with the advancement and development of its professional capacities in all areas of its operation. Despite the created situation and not very favorable conditions in the international markets, the Central Bank of the Republic of Kosovo has managed to maintain its financial stability and good performance of the institution, generating a positive financial result. CBK remains committed to continue its activity in the service of the stability and development of the country's economy, creating the conditions for the development of a stable financial infrastructure, in line with contemporary developments in this field, including the development of new segments of the financial system such as the capital market, which requires extensive interinstitutional cooperation. *** Finally, allow me, in my personal name and on behalf of the Central Bank of the Republic of Kosovo, to express my sincere thanks to the valuable staff of the Central Bank of Kosovo and to thank them for their work and dedication in carrying out their work duties during this period. Thank you and stay healthy! 5/5 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,023 | 4 |
Speech by Mr Bashkim Nurboja, Acting Governor of the Central Bank of the Republic of Kosovo, at the launch ceremony of two new guarantee windows for "women in business" and "start-up", from the Kosovo Credit Guarantee Fund, Pristina, 26 April 2023. | Bashkim Nurboja: The number of businesses with women owners continues to increase Speech by Mr Bashkim Nurboja, Acting Governor of the Central Bank of the Republic of Kosovo, at the launch ceremony of two new guarantee windows for "women in business" and "start-up", from the Kosovo Credit Guarantee Fund, Pristina, 26 April 2023. *** The honourable Minister, The honourable Mr. Berisha, Dear attendees, It is a special pleasure to be part of this ceremony that marks the seventh anniversary of the establishment of the Kosovo Credit Guarantee Fund, and also of the launch of two new guarantee windows, for Women in Business and Start Up. The Kosovo Credit Guarantee Fund, with the support of international friends and partners, within a relatively short period of time has managed to transform into a very important institution, playing a special role in increasing and facilitating financing for the country's economy. Bank lending continues to be a very important and sustainable source of financing for the private sector in Kosovo. The value of banking sector loans until February, 2023 has reached 4.38 Billion Euros, marking an annual increase of 15.1%. Although there is a satisfactory trend of credit growth in the country, the level of financial intermediation in Kosovo should increase even further, and that in relation to the size of the economy, there is further room for expansion of lending activity, and especially for the inclusion of women in economic activities. A very important role in filling this space is played by the Kosovo Credit Guarantee Fund, which, through its guarantee mechanism, will enable the increase in lending and ease the conditions of access to credit. Allow me to share with you some data from the banking sector; the number of business accounts with women owners in the banking sector is 21,247 compared to 104,461 with men owners, or 17 percent of the total accounts, the value of deposits of businesses with women owners is 112 Million Euros or 7 percent of the total deposits of businesses from 1.7 Billion. The number of loans of women-owned businesses is 8,185 or 25 percent of the number of business loans, compared to the number of loans of 24,546 or 74 percent of businesses with male owners. Meanwhile, the value of loans to women-owned businesses is 643 Million Euros or 29 percent of the total business loans of 2.2 Billion. Therefore, the new guarantee Window for women in business, in addition to being good news for new businesses and the country's economy in general, is of special 1/2 BIS - Central bankers' speeches importance because, in addition to the economic empowerment of women, it will also affect their inclusion in the country's economy and in other areas of life. CBK sees the new guarantee window for women in business as a good opportunity to promote gender equality and believes that equality of economic opportunities for women and men is a key element of a modern, well-functioning market economy and is essential for sustainable and inclusive growth. An important role in the level of financial intermediation will also be played by the startup Window, through which will be supported new entrepreneurs, who aim to start the realization of a business model, product or innovation, with rapid growth and expansion potential. Considering the reluctance of the banking sector to finance start-up businesses due to the high risk associated with these businesses, the new guarantee window for start-ups will affect the increase in financial inclusion, and thus the growth and expansion of their activity. These two guarantee windows for women in business and start-up will help in the growth and development of businesses, contributing to the overall economic development of the country. For the end, I would like to congratulate the banks that are part of these windows and encourage other banks to be involved in such projects. The Central Bank of the Republic of Kosovo continues to support and push the financial sector to increase support for the country's economy. Thank you! 2/2 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,023 | 5 |
Speech by Mr Bashkim Nurboja, Acting Governor of the Central Bank of the Republic of Kosovo, at the "Prizes for the best Essays" award, Pristina, 20 June 2023. | Bashkim Nurboja: Through financial education, Central Bank of the Republic of Kosovo is contributing to informing and increasing citizens' knowledge of economic concepts Speech by Mr Bashkim Nurboja, Acting Governor of the Central Bank of the Republic of Kosovo, at the "Prizes for the best Essays" award, Pristina, 20 June 2023. *** Greetings everyone, I am pleased to welcome you to the Central Bank of the Republic of Kosovo, on the occasion of awarding the Prizes for the best Essays in the context of the competition: "Plan your money, plant your future" whose message is to focus on sustainability and raise awareness on the implications of individual financial behaviour, both on the financial future and on the environment and society. Since 2013, CBK is part of this organization, led by the Organization for Economic Cooperation and Development (OECD) which aims to raise awareness among children and young people about economic and financial issues. The Global Money Week is organized in 176 countries around the world and about 53 million children and young people from different countries of the world participate in this event almost every year. The Central Bank is engaged in promoting and maintaining financial stability in the country, and is also tasked with regulating and supervising the financial system in Kosovo and ensuring that it functions in a stable and effective manner. Today, the financial sector is one of the main contributors to the economy of Kosovo and one of the most stable and successful sectors in Kosovo, as well as one of the main pillars of support for businesses and individuals. CBK remains committed to continuing its activity in the service of the stability and development of the country's economy, creating the conditions for the development of a stable financial infrastructure, in line with contemporary developments in this field. Financial education is a function through which the CBK contributes to outreach and awareness raising of citizens with the aim of improving their insights about economic and financial concepts, products, services offered by the financial sector and creating habits to make appropriate choices and take effective action to improve their financial well-being. Financial Education is important for CBK because it contributes to the stability of the financial system: Informed and financially educated citizens know more and understand the products and services of the financial sector, are more protected, are more capable of making smart decisions and manage their finances better and cope with difficult financial situations. This helps to reduce the risk of financial crises and to maintain the stability of the financial system. 1/2 BIS - Central bankers' speeches Through the Best Essay Contest, the primary goal is to encourage high school youth to be more informed about economic and financial topics. CBK will continue to be focused in order to continuously advance the field of financial education, in order to contribute to the awareness raising, transparency and information of citizens and in particular consumers of financial products and services. Similarly, we will continue to cooperate with local and international financial institutions in order to, through this function, be as close as possible to the citizens. Finally, I want to thank you for your presence at the distribution of these awards and on this occasion, you are closer to the Central Bank and as a result, you will have greater familiarity with the Central Bank of the Republic of Kosovo and with the functioning of the financial sector in Kosovo. You may complement this acquired knowledge by studying in financial directions at universities in the country or abroad and in the future, you will be the bearers of the development and steer of the finances of our country, both in the Central Bank and in other financial institutions. Congratulations on the prizes and I wish you success in your studies and new school challenges. All the best! 2/2 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,023 | 6 |
Opening speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the Sustainable Finance Forum, Pristina, 5 October 2023. | Ahmet Ismaili: Opening speech – "Sustainable Finance Forum" Opening speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the Sustainable Finance Forum, Pristina, 5 October 2023. *** Dear, Ms. Zhang and Mr. Marquier, IFC representatives Dear, Mr. Fuchs from Swiss Embassy Dear, Mr. Balija from KBA Dear, EU Ambassador Szunyog Board Members of the Central Bank of the Republic of Kosovo Government representatives Representatives of the central banks, and saving associations Donor, partners, and financial institutions Dear, Colleagues Ladies and Gentlemen It is my pleasure to open this Forum and welcome You all to the first Sustainable Finance Forum, co-organized by the Central Bank of the Republic of Kosovo, the Kosovo Banking Association, International Finance Corporation and Sustainable Banking and Finance Network, in partnership with SECO. Sustainable Finance is the new concept which has emerged from the environmental and climate changes, with associated risks and opportunities to the economies. Following the adoption of the Paris Agreement on Climate Change and the UN 2030 Agenda for Sustainable Development in 2015, governments all over the world are making strides to transition to low-carbon and more circular economies on a global scale. Republic of Kosovo's environmental commitments are aligned with the EU Strategy, and is was one of the six Western Balkan countries that signed the Sofia Declaration (November 2020), where the countries acknowledged the European Green Deal, as a cornerstone for the Green Agenda for the Western Balkans (GAWB). The Energy Strategy of the Republic of Kosovo 2022-2031, adopted by the Parliament of the Republic of Kosovo, is led by a vision of: a sustainable energy sector integrated into the Pan-European market, ensuring energy security and affordability for citizens. Also, the Strategy foresees by 2025 to complete all preparations for implementing a Carbon Pricing System and committed to achieve Net-Zero Emissions by 2050. 1/3 BIS - Central bankers' speeches The Republic of Kosovo has adopted the Program with IMF "Resilience and Sustainability Facility" (RSF) of SDR61.95 million, to support climate change mitigation and adaptation actions, exploit synergies with other official support and help catalyze private investment in green energy. Moving to a Low-Carbon or Green Economy would need extraordinary levels of fresh capital investment, notably in the form of green financing, to support activities that cut GHG emissions and assist firms in adapting to the effects of climate change. As the financial sector is dominated by the banks, climate change may result in physical and transition risks that could affect the safety and soundness of individual banking institutions, and have broader financial stability implications for the banking system. Banks are potentially exposed to climate-related financial risks regardless of their size, complexity or business model. To the central banks, regulatory authorities, financial institutions and other policymakers, has emerged the needs to take actions in response to those challenges. Central Bank of the Republic of Kosovo is committed to strengthening its efforts to improve the resilience of the financial system to climate-related and environmental risks. To address climate-related financial risks within the banking sector, the Central Bank of the Republic of Kosovo supported by the Program of World Bank/FinSAC has drafted a Strategy and established a Cross-Sectorial Working Group to contribute to strengthen the regulation, supervision and practices of banks. Actions by the Central Bank of the Republic of Kosovo to address climate and environmental risk will be toward strengthening regulatory framework toward EU Regulations and Directives, and Basel Standards, strengthening supervisory practices, encompassing the assessment and full understanding of the banks' exposure to climate risks using scenario analysis, and where applicable, stress testing. Central Bank of the Republic of Kosovo will work on building internal capacities, increasing the cooperation with domestic institutions, responsible for climate change mitigation and adaption, considering the international commitments of the Republic of Kosovo. To help the contribute to this direction, financial literacy and broader communication through participating in international conferences – like this today – workshops, forums for broadening the expertise and knowledge in the area of climate risks, is part of the CBK Strategic Plan. Addressing the ESG aspects, has multiple benefits for the entire economy and contributes substantially to reducing or preventing the adverse impact of the current or expected future climate risks, promote foreign investment opportunities, attract new investments and financing and shift the current credit exposures from the traditional sectors toward green and sustainable financing. I wish for fruitful discussions, during the three panels of such very interesting topic, and enjoy the stay in Prishtina. 2/3 BIS - Central bankers' speeches Thank you! 3/3 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,023 | 10 |
Speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the Conference "Cybersecurity in the banking industry", co-organised by the Kosovo Banking Association and the Albanian Association of Banks, Pristina, 25 October 2023. | Ahmet Ismaili: Cybersecurity in the banking industry Speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the Conference "Cybersecurity in the banking industry", co-organised by the Kosovo Banking Association and the Albanian Association of Banks, Pristina, 25 October 2023. *** Dear Mr Balija, Chief Executive Officer of the Kosovo Banking Association Dear Mr Brumbulli, Secretary General of the Albanian Association of Banks Dear Mr Bakkal, Chairman of the Board of Directors of the Kosovo Banking Association Dear, Mrs Hoxha, Senior Investment Officer at Finance in Motion (EFSE) Dear Members of Bank Associations Dear Board Members Dear panellists and attendees I am pleased to greet and welcome you all to the "Cybersecurity in the Banking Industry" Conference, co-organized by the Kosovo Banking Association and the Albanian Association of Banks. The very fact that we have co-organization shows the excellent cooperation between the banking sectors of our two countries, but also the approach to the common challenge, which knows no borders. Therefore, my participation here today also aims to convey such a message of coordination and joint efforts to address these risks, as one of the most complex challenges of the time for the financial industry and beyond. We are witnessing the time that the financial system is changing quite quickly and is being transformed. Digitization on the one hand has influenced the improvement of access to services as well as their quality, which means that in the field of payments, services are being carried out continuously and are available worldwide. But, on the other hand, the main risks related to the introduction of information technology that enables banking and financial services have increased and constitute a threat to be handled with care. They include strategic and reputational risk, operational risk, cyber risk and compliance risk. The cyber threat continues to evolve and become more complex amid continued digitization, increased third-party dependencies, and geopolitical tensions. The rapid pace of technological advancement imposes the need for continuous monitoring of emerging trends and their possible impacts on the operations of financial institutions. 1/3 BIS - Central bankers' speeches Therefore, strengthening cyber security in the financial sector is a priority for financial stability, and not only that. Its influence extends to national security. The Republic of Kosovo, through the National Security Strategy, has determined the responsibilities and duties of the institutions for cyber security and critical infrastructure, from the coordination of legal and strategic initiatives to the development of their protective capacities and functions. In this sense, since the Central Bank of the Republic of Kosovo, according to its mandate, maintains the health of the banking and financial system in general, it recognizes and addresses with increased care the aspects of cyber security and the risks arising from them. The CBK recognizes the critical importance of information systems and cyber security in the financial sector and as a proactive measure to maintain the stability and integrity of financial institutions. We are committed to advancing the regulatory and supervisory framework for financial institutions in harmony with European Union Regulations and Directives as well as international standards and best practices in this field. As for internal capacities and organization, with the new organizational chart, we will create a structure dedicated to the supervision of information systems or cyber risk. Investment will be made in building infrastructural capacities and human resources to ensure that systems, equipment, knowledge, skills and tools of the personnel remain relevant and effective in overseeing the risks of new technologies and innovative business models. The main objectives such as increasing cyber resilience, mitigating operational risks, establishing and implementing cyber security standards, performing comprehensive risk assessments, ensuring effective response to incidents, etc., will be addressed through regulatory instruments and mechanisms, such as cyber security standards, compliance requirements, alignment with international standards, incident response plan and others. The strengthening of internal capacity will be based on support through technical assistance from the IMF's specialized team, who will help design the strategic framework, policies and procedures according to the best world standards. Their principles will also be applicable to the entire sector, through a constructive and regulatory and advisory partnership with financial institutions. In this sense, we as CBK expect the banking industry to: Have effective governance structures and risk management processes; Address cyber risk through specific strategies, policies and procedures that include requirements related to governance and oversight, risk ownership and accountability, information security, etc.; 2/3 BIS - Central bankers' speeches Have adequate risk management practices and processes when dealing with outsourced services, which include due diligence, operational risk management, ongoing monitoring and proper execution of contracts with outsourced service providers that define the responsibilities of each party; Invest in infrastructure and have sufficient qualified personnel to monitor and supervise their activities contracted by third parties; and Take into account factors that ensure business continuity, confidentiality and integrity of information when contracting services from external parties, as well as increase attention to external ownership and origins of funds to clients, through Investor's Screening Mechanism, given the current geostrategic risks. Finally, we remind you that addressing cyber risks requires close cooperation between different authorities, with an emphasis on the state authorities responsible for cyber security at the state level. The CBK remains committed to coordinating and sharing information with other regulators, relevant public authorities such as those for data protection, consumer protection, competition and national security institutions. At the same time, also in the international aspect, with international institutions, regulators of the countries of the region, other institutions, with the aim of coordination and a more stable platform to successfully face these risks and achieve our objectives. We wish you fruitful discussions in the following panels, and we welcome the recommendations resulting from these professional discussions. Thank you! 3/3 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,023 | 11 |
Opening speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the Conference "Approximate market value and sale, and purchase prices of immovable properties", Pristina, 27 October 2023. | Ahmet Ismaili: Approximate market value and sale, and purchase prices of immovable properties Opening speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the Conference "Approximate market value and sale, and purchase prices of immovable properties", Pristina, 27 October 2023. *** Dear Mr Bauer, Director of the Office of Democracy and Governance, USAID Kosovo Dear, Mrs Ober, Head of USAID's Property Governance Activity Dear panellists Dear participants It is with great pleasure that I address you with this introductory speech, underlining the importance of the appraisal of immovable property, which affects many dimensions and important aspects of society and is one of the key factors for the development and economic potential of the country. Investments in construction for residential and commercial properties on average account for a significant share of the Gross Domestic Product, therefore, the establishment of regulatory acts for the adaptation of International Standards and Best Practices for the appraisal of immovable property is of special importance for the Republic of Kosovo. The financing of properties, residential and commercial facilities, but also of businesses depends a lot on the possibilities of immovable property mortgages, which directly affects the credit level of a country's economy. The quality of the collateral used, and especially the quality of its appraisal for an adequate coverage of the risk, has an impact on the stability of the financial system. The Central Bank of the Republic of Kosovo attaches special importance to the appraisal of immovable property from the financial sector, also through a comprehensive regulatory framework that is related to several aspects of this sector. Therefore, the CBK has regulated the appraisal of immovable property through specific regulations that apply to banks, other lending institutions and insurers that rely on immovable property as collateral for any purpose. Appraisal of immovable property and the quality of market value data have a significant impact on all the following aspects related to financial institutions, such as: Presentation of the real state of financial statements of the financial institutions; Fair presentation of health indicators of financial institutions related to reserves for covering losses, solvency, and liquidity; Accurate presentation of the value of exposures, preparation and monitoring of the Residential Property Price Indices for macroprudential supervision; 1/3 BIS - Central bankers' speeches Proper presentation of issues related to the field of formalization of the economy and prevention of money laundering; and The correct presentation of tax obligations from immovable property ownership. The Regulatory Framework applied to financial institutions aims to determine the minimum requirements and standards that must be applied by every licensed financial institution. Appraisal of immovable property in relation to transactions in which immovable property is used as collateral for any credit instrument issued by financial institutions, as well as determining which immovable property transactions require the services of a licensed appraisers is of primary importance. Property appraisal potentially affects capital allocation through Risk-Weighted Assets, for loans that are collateralized by immovable property. Once we have managed to have this process finalized, we will also look at the possibility of considering Commercial Immovable Property collateral to be weighted with a smaller weight in Risk Weighted Assets. Currently these collaterals are weighted with a risk of 100 percent according to our Regulation, so that when the appraisal is more accurate/fair, they will be able to be weighted with a lower weight. This would also enable the release of capital and therefore the possibility for more lending. The CBK cooperates closely with the Supervisory Council on Licensing of Immovable Property Assessors, established by the Ministry of Finance, Labour and Transfers, in which it also participates with its representative. In addition to the licensing by this Council of a number of immovable property appraisers who carry out appraisal for the needs of the financial sector, the CBK has also licensed a number of its personnel engaged in the examination of financial institutions, who assess reports prepared by appraisers engaged for financial institutions. The CBK is committed to further advancing the regulatory and supervisory framework related to the appraisal of immovable property. We expect that through this USAIDsupported Project, we will be able to advance the existing legal and regulatory framework of the appraisal of immovable property, including establishing the necessary mechanisms for quality control of appraisal and adequate monitoring of appraisers. In this regard, the Central Bank of the Republic of Kosovo, through its involvement in the Inter-institutional Working Group, within the framework of the International Monetary Fund program, has been involved in the preparation of the Residential Property Price Indices, a project which is being led by the Kosovo Agency of Statistics. We expect that these changes will directly affect banks and other financial institutions to correctly implement the applicable regulatory requirements, as well as to advance their policies and procedures related to the appraisal of immovable property, in accordance with international best practices and European Union standards, known as TEGOVA Standards. 2/3 BIS - Central bankers' speeches Therefore, we expect them to increase the quality of the data, to reflect the real value of the immovable property market in order to respond to all the needs and demands mentioned above, with the final goal of maintaining the financial stability of the country. I wish you fruitful panel discussions on such an interesting and tangible topic. Thank you! 3/3 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,023 | 11 |
Welcoming remarks by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the World Savings Day, Pristina, 31 October 2023. | Ahmet Ismaili: Welcoming remarks - World Savings Day Welcoming remarks by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the World Savings Day, Pristina, 31 October 2023. *** Dear Mr. Jaha, Director of "Xhevdet Doda" Gymnasium in Prishtina Dear Mrs. Shatri, Professor Dear students, I address you today on World Savings Day, which aims to promote educational habits by promoting the culture of savings in the world, especially in the Republic of Kosovo. World Savings Day was established as an event to promote savings on 31 October 1924 at the First International Savings Bank Congress held in Milan, Italy. This day is marked with informative and educational activities with the aim of informing and raising the awareness of citizens about the importance and financial responsibility of savings and their impact in the future. The Central Bank of the Republic of Kosovo marks this day for the 8th year in a row through awareness, educational and informative activities with the aim of encouraging students and young people to be informed and understand the ability of proper money management. The European Commission has declared 2024 the Year of Skills, and of course financial education skills are included, as one of the main social skills, personal finance management, so that the decisions of citizens are then appropriate decisions for the future. The CBK will also focus on access to finance education and inclusion, where, during 2024, it will work in this direction. For this purpose, we will also coordinate with the Bank of Albania, to cooperate and harmonize financial education materials and propose it to be part of the school curriculum, as far as possible. The world is changing fast and we must keep up with it, and advanced changes in information technology, environmental and social changes, and geopolitical changes have become part of our daily life, and we must prepare to face them. Today, more than ever, it is important to cultivate a genuine culture of managing and protection of personal finances and the protection of the environment, so that in the social and environmental aspect, as an individual, as a family or as a society, we have stability and sustainability. You are still young, but it is the right time to think about your financial future, and it is important to create the knowledge and skills of proper management of personal finances, create the habit of savings, and awareness of economic and financial issues. 1/2 BIS - Central bankers' speeches Young people should set clear financial goals for themselves and to achieve these, you should start working on achieving them as soon as possible. The CBK and I encourage you to prepare for the things that will come your way in the future. Get informed and learn about economic and financial issues from the materials on the CBK's website for Financial Education edukimifinanciar.org, or even on the CBK's social networks, where you can be informed about many topics and issues, which will help you for your future. The Central Bank of the Republic of Kosovo will expand cooperation with the Ministry of Education, Science, Technology and Innovation and with other relevant institutions in order to provide even more educational materials, which will be distributed in educational institutions, where you have the opportunity to learn and be informed about these topics. Finally, I would like to inform you that the Central Bank of the Republic of Kosovo, taking into account the encouragement of young people to learn and be informed as much as possible about the importance of savings, announces today a Competition for students of grades X-XII of secondary schools of the Republic of Kosovo to write papers or essays on their concept of savings. The competition will be open for one month and, after closing, the Selection Committee will evaluate and select the 10 best works, which will also be financially rewarded. The CBK encourages you and all high school students to compete with your papers and also share this information with other students, either at school or with your friends. Some tips: Control your expenses; Create a budget plan; Spend rationally; Buy the things you need; Become self-sustaining; Define goals and plans for savings; and Saving money is the best gift you can give yourself. Thank you and good luck! 2/2 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,023 | 11 |
Introductory remarks by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the conference "Creating values – a gateway for the future", organised by the Society of Certified Accountants and Auditors of Kosovo, Pristina, 8 November 2023. | Ahmet Ismaili: Creating values – a gateway for the future Introductory remarks by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the conference "Creating values – a gateway for the future", organised by the Society of Certified Accountants and Auditors of Kosovo, Pristina, 8 November 2023. *** Honoured Mrs. Mehmeti – Spanca, General Auditor of the Republic of Kosovo Honoured, Mr. Pllana, Chairperson of the SCAAK Board, Honoured, Mr. Murtezaj, Executive Director of the Tax Administration of Kosovo, Honoured, Mr. Xhema, Acting Director of the Financial Intelligence Unit, Honoured, Mr. Perani, representative of the International Financial Corporation (IFC), Honoured representatives of financial institutions, Honoured representatives of business and professional associations, Honoured panel members, Respected participants, Ladies and gentleman, Allow me to first express my gratitude to the Society of Certified Accountants and Auditors of Kosovo (SCAAK) for inviting me to gladly address you on the marking of the Accounting and Auditing Professions Week, emphasizing the importance of these professions in accurately reflecting the situation and performance of business entities, respectively to ensure independent and objective assessments on the accuracy and reliability of financial information. Taking into account the importance of commercial entities in the country's economic development, a fair reflection of the situation and performance of their activity is of a critical importance in order to build a stable economy as well as a developed state and with integrity. This element is a precondition in initiatives such as capital market development as well as in other initiatives. The Central Bank of the Republic of Kosovo, according to its mandate to license, regulate, and supervise financial institutions in the Republic of Kosovo in the function of maintaining financial stability, is committed to providing a regulatory framework in accordance with best international standards and practices for the purpose of financial institution reporting and auditing, as well as approval of external auditors that audit these institutions. 1/3 BIS - Central bankers' speeches Therefore, in CBK's supervisory role, the external auditor profession acts as a vital instrument in achieving its purpose. The CBK cooperates closely with the Kosovo Council for Financial Reporting to promote improvement of the quality of supervisory and financial reporting functions, and according to the law, the CBK has a representative in this Council and the Public Supervision Board. The CBK is also committed to building human capacities in the field of accounting and auditing through training and certification in specialized institutions in this field. Continuous qualification and professional education are key for the CBK, both for its employees and for the financial industry as a whole. Special emphasis in the CBK's regulation will be given to the inclusion of the role of the certified accountant and certified internal auditor in the regulation, in addition to the requirements for external audit. The CBK is in the process of harmonizing legislation regarding standards for engagement of external auditor, both in terms of the years of engagement as well as limiting discontinuation from consecutive audits. The CBK, through its regulatory framework and supervision of financial institutions for prevention of money laundering and close cooperation with other authorities at country level, is committed to reduce informal economy and to build a long-term resilient and developed economy. Challenges such as implementing new financial industry standards, with a focus on insurance, such as IFRS 17, illustrates the need for cooperation between regulatory, policy-making institutions, financial sector, the academia, and professional groups. Also, in light of its commitment to improve the financial system's stability against risks related to the climate and the environment, we will engage in harmonizing the regulatory framework with European Union Regulations and Directives and the Basel standards, thus strengthening supervisory practices. Application of International Financial Reporting Standard S1 and S2 on disclosure of business entities' information for management of climate and environmental risks, as well as investment opportunities in the function of the green economy, will also be at the focus of the CBK. Finally, as the CBK we expect to have more accurate financial statements and qualitative audits, in order to correctly present the real situation of the business entities' financial statements, to facilitate right decision-making, bank lending, providing insurance products and other financial services from financial institutions in order to develop the private sector and the economy of the Republic of Kosovo in general. Increasing professional capacities and quality assurance remain our priorities, which help achievement of the CBK's objectives, but also the overall development of the country. I wish you fruitful and successful discussions in the following panels. Thank you! 2/3 BIS - Central bankers' speeches 3/3 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,023 | 11 |
Welcoming speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the conference "Banks, fintechs and businesses: Building synergies to accelerate access to finance", co-organised by the Central Bank of the Republic of Kosovo and the United States Agency for International Development ( USAID), Pristina, 14 November 2023. | Ahmet Ismaili: Banks, fintechs and businesses - building synergies to accelerate access to finance Welcoming speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the conference "Banks, fintechs and businesses: Building synergies to accelerate access to finance", co-organised by the Central Bank of the Republic of Kosovo and the United States Agency for International Development ( USAID), Pristina, 14 November 2023. *** Honourable Mr. Albertine, Director of the Office for Economic Growth, USAID Kosovo Honourable Chairman Mr. Nurboja and Member of the CBK Board Honourable representatives of local and international institutions Honourable managers and representatives of banks and other financial institutions Honourable business representatives Respected panelists Ladies and gentlemen I am pleased to welcome you to this forum co-organized jointly by the Central Bank of the Republic of Kosova and USAID entitled "Banks, fintechs and businesses: Building synergies to accelerate access to finance". The fact that the CBK is a co-organizer of the conference and my participation today in this occasion, demonstrates the importance for the CBK of access to finance, financial inclusion, digitalization of payment services and alternative financial products. Therefore, the compatibility of the USAID IPAF project with the CBK Strategy and goals constitutes a synergy in itself. We are witnesses that the financial system has continuously evolved over the years, especially in recent years, a more accelerated dynamic towards digitization and access to financial services has been observed. From an economic perspective, an efficient financial system supports the development of financial intermediation, financial markets and positively affects financial stability. The advancement of financial services towards the transformation of electronic payments (non-cash transactions) would contribute to increasing financial inclusion, increasing competition, reducing informality and increasing effectiveness, reducing costs, as well as providing quality services to citizens from financial institutions, as well as the integration of our citizens and businesses with the region and EU countries. In this regard, CBK is committed to: 1/3 BIS - Central bankers' speeches Develop and create opportunities for access to the payment system of non-bank service providers, increasing competitiveness and enabling the possession of IBAN, to increase access to finance, within the concept of "payment account"; Develop the technical infrastructure for enabling fast payments 24/7, the creation of the national QR Code and the standardization of the API for the interconnection of systems; Advance the regulatory and supervisory framework for the prevention of money laundering and terrorist financing related to payment and compliance services; Empower the National Payments Council at the country level; and Advocate for enabling access to international payment platforms (Paypal, Apple Pay, Google Pay, Samsung Pay, etc.) to support e-commerce. Therefore, the Central Bank of the Republic of Kosovo, according to the legal mandate and through its Strategy, is in the process of advancing the regulatory and supervisory framework and infrastructure in the area of payment services, toward harmonization with the legislation of the European Union, [the Directive of Payment Services 2, Electronic Money Directive and Payment Account Directive], PFMI and other international standards in view of membership in SEPA and EU payment systems. In this regard, membership in TIPS and the SEPA scheme remains our strategic objective, which would facilitate trade in our country and beyond, supporting economic growth and strengthening the stability of the financial system, and in this way would significantly contribute to an innovative, efficient and integrated payment system. For this purpose, CBK will develop important projects in order to improve services to citizens, where investments will be made in building infrastructure capacities and human resources. By investing in this direction, we will ensure that systems, equipment, knowledge, skills and personnel tools enable transformation and are relevant and effective in overseeing the risks of new technologies and innovative business models. This is also related to the CBK's plan for the creation of a special function for the supervision of information systems or cyber risk for financial institutions, the function of supervision of the practices of providing services by financial institutions, as well as the strengthening of financial education, as a mean to have a correct and fair treatment of requests arising from such services. In addition to the opportunities and facilities presented by the use of information technology, the CBK will carefully deal with the risks that are going to appear, such as strategic, reputational, operational, cyber risk and compliance risk, and will work closely with academic institutions in carrying out research and scientific research related to the area of access to finance and financial inclusion. CBK, within the regulatory and supervisory scope, expects that the financial industry which also includes non-banking financial institutions: To have adequate risk management practices and processes in cases of outsourced services, which include due diligence, operational risk management, continuous monitoring and proper execution of contracts with providers of outsourced services from external parties defining each party's responsibilities; and 2/3 BIS - Central bankers' speeches To take into account factors that ensure business continuity, confidentiality and integrity of information when contracting services from external parties, as well as to increase attention to external ownership and origins of clients' funds, through screening mechanisms (Investor's Screening Mechanism), given the current geostrategic risks. Allow me to thank USAID for the continuous support it has given to the CBK in building capacities for various areas related to the mandate of the CBK and especially for the projects that we have in the process related to the area of access to finance and capital market development. In this regard, the CBK considers that the USAID project for the Promotion of Investments and Access to Finance is an important tool to achieve the objectives and the Strategic Plan, it confirms the readiness and support in achieving both development goals and also of quality and financial services with broad involvement. By thanking you, I wish you good work and fruitful discussions at this conference. Respectfully! 3/3 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,023 | 12 |
Greeting speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the confernece "Signing of the Re-guarantee Agreement with the Swedish International Development Cooperation Agency", organised by the Kosovo Credit Guarantee Fund and SIDA, Pristina, 7 December 2023. | Ahmet Ismaili: Signing of the re-guarantee agreement with the Swedish International Development Cooperation Agency Greeting speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the confernece "Signing of the Re-guarantee Agreement with the Swedish International Development Cooperation Agency", organised by the Kosovo Credit Guarantee Fund and SIDA, Pristina, 7 December 2023. *** Dear Mr. Azemi, Chairman of the KCGF Board Dear Mr. Westerlund, Ambassador of Sweden to Kosovo Dear Ms. Hajdari, Minister of MIET Dear Mr. Berisha, Managing Director at the KCG Dear participants, I am pleased to participate in this special event of signing the Renewal Agreement of the Guarantee Facility between the Kosovo Credit Guarantee Fund and the Swedish International Development Cooperation Agency (SIDA) that has at its centre the opportunities that pave the way for providing the most favourable conditions for reguaranteed loans from KCGF windows, such as the Women in Business Window, Export Support Window and Grow Window for green investment that enhance energy efficiency and generate energy from renewable resources. Commercial banks and other lending institutions such as institutions regulated and supervised by the Central Bank of the Republic of Kosovo play an important role in providing lending to different sectors of the country's economy and, at the same time, affecting economic development through consumption, investment and net exports. The Kosovo Credit Guarantee Fund, as an independent and developmental legal entity, through guaranteeing the credit portfolio of financial institutions, has historically contributed to increasing access to finance for SMEs, supporting entrepreneurship, supporting domestic production and services, which create added value, create new jobs and support overall economic development. The continued growth of the KCGF capital, combined with re-guarantee schemes, including today's re-guarantee agreement between the KCGF and the Swedish International Development Cooperation Agency, affects the expansion of finance access, increase of competition, reduction of financing gap with competitive conditions, maintenance of the level of non-performing loans and financial stability that are also in accordance with the CBK strategy and mandate. The CBK is committed to supporting any legal and regulatory initiative by the KCGF in the function of expanding membership of (lending) microfinance institutions, reviewing 1/2 BIS - Central bankers' speeches deadlines to become part of the KCGF for new banking institutions as well as the possibility for special guarantee schemes of the KCGF for banks to be able to finance microfinance institutions. The CBK considers the KCGF as a very important mechanism to maintain and further advance the objective of a stable financial system, with an impact on the support of the economy. Therefore, cooperation will also be strengthened in the interest of implementing these objectives. Allow me to thank the Swedish International Development Cooperation Agency (SIDA) represented by the Swedish Embassy in Kosovo for the continued support given to the KCGF in guaranteeing loans in order to increase lending in various sectors of economy and at affordable costs. Thank you! 2/2 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,024 | 1 |
Greeting speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the confernece "Financing Agriculture and Agricultural Insurance, IFC projects in Kosovo", organised by the Ministry of Agriculture, Forestry and Rural Development and International Finance Corporation, Pristina, 12 December 2023. | Ahmet Ismaili: Financing agriculture and agricultural insurance Greeting speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the confernece "Financing Agriculture and Agricultural Insurance, IFC projects in Kosovo", organised by the Ministry of Agriculture, Forestry and Rural Development and International Finance Corporation, Pristina, 12 December 2023. *** Dear Ms. Çerkini, Secretary General of the Ministry of Agriculture, Forestry and Rural Development Dear Mr. Perani, Head of the International Finance Corporation Office for Kosovo Dear Mr. Zaripov, Head of IFC Projects for Agricultural Insurance in Kosovo Dear Leaders of Financial Institutions, Dear entrepreneurs and farmers, Highly respected attendees, I am honoured to participate in this event today, to conclude the joint project between the Central Bank of the Republic of Kosovo, the Ministry of Agriculture, Forestry and Rural Development and the International Finance Corporation (IFC), member of the World Bank on the financing of agriculture and agricultural insurance. As is well known, the agricultural sector in our country presents an extremely great opportunity to develop and contribute to the country's economic development and growth, although this sector is characterized by various natural uncertainties and market prices movement, beyond the tireless work of our farmers. Considering the importance of this sector, it is necessary to strengthen our engagement through different mechanisms both from policymaking and from the perspective of financial and insurance support in the function of financial inclusion and access to affordable finance. IFC, through projects to strengthen the agricultural sector, such as the agricultural insurance system and access to finance for farmers, has cooperated with the CBK and some of the lending financial institutions and insurance companies. As a result, in the agricultural sector, since the project has officially begun and so far, lending to the agricultural sector by banks has increased by 22.8 million euros or 50.7%, where the total portfolio has reached 67.9 million euros, while by the microfinance institutions it has increased by 37.1 million euros, with total credit portfolio reaching 54.2 million euros. However, although lending to the agricultural sector in Kosovo has increased, it accounts for only 2.4% of total loans issued or 1.4% of the country's gross domestic product (compared to the participation of agriculture in the Gross Domestic Product by about 8%), and at a rate of non-performing loans of 3.8%, there is still room for 1/3 BIS - Central bankers' speeches financing with more favourable conditions. On the other hand, insurance-covered agricultural products, despite efforts in this sector, remain at low levels, where the sum insured is totally non-significant. However, in terms of legal infrastructure and technical capacities, progress has been made, which serves as a good basis for the future. We encourage lending institutions to increase lending to the agricultural sector with more affordable conditions and insurance companies to increase voluntary products and coverage, especially in the agricultural sector, while we recommend to the Ministry of Agriculture, Forestry and Rural Development, when drafting such policies, to enable agricultural insurance to be prerequisites for farmers when obtaining grants and subsidies, in order to ensure the sustainability of investments, yields and sector as a whole. Thus, regarding agricultural insurance, the CBK, based on its scope and as an implementing partner in this project, has contributed to the licensing, regulation and supervision of the activities and products of insurance companies, which have expressed interest in expanding their activity to cover the risks associated with the agricultural sector. Insurers initially built their capacities through staff training on product development, insuring, measuring risks through actuaries and providing these products to clients dealing with the agricultural sector. This project should also be of particular importance due to the fact that it would enable customers in the agricultural sector to have more favourable conditions through financing from banks and lending institutions, increased competition, sustainability and development independence without becoming a burden of state aid to cover losses associated with climate events such as frosts, hail, drought or excessive climate rainfall. Therefore, although the legal and regulatory basis as well as the initial capacities have been built, despite the engagement, the field results still leave much to be desired, and require serious review, so the opportunities should be seen to advance these schemes with more innovative and comprehensive forms, as a prerequisite for further growth of this sector and contributing to the real economy. On this occasion, I want to thank the International Finance Corporation for the ongoing support given to public institutions, businesses and financial institutions operating in Kosovo as well as the Ministry of Agriculture, Forestry and Rural Development for the contribution to this project and the willingness to further advance this sector of vital importance to the country's economy. We are witnesses that the climate risks and the environment have become a problem of this century where governments, regulators, businesses and individuals are taking the necessary actions in response to this critical issue. Therefore, the CBK has addressed this issue through the Draft strategy on climate and environmental changes and, at the same time, through the CBK strategic plan for the period 2024-2028, along with the national strategy at the country level for addressing climate and environmental changes. In conclusion, we can say that there is great potential for support in this sector and from the financial industry through various forms, both in lending and providing products in 2/3 BIS - Central bankers' speeches order to mitigate risks and increase sustainability. Financial protection, access to financial services, the overall sustainability of this sector and increased prospects for economic development in general remain the CBK's dedications and priorities. I wish you successful work on the following panels and thank you! 3/3 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,024 | 1 |
Speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the event "Western Balkans towards SEPA", organised by the Bank of Albania, Tirana, 28 February 2024. | Ahmet Ismaili: Western Balkans towards the Single European Payment Area (SEPA) Speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the event "Western Balkans towards SEPA", organised by the Bank of Albania, Tirana, 28 February 2024. *** Dear Mr. Mete, Minister of Finance of Albania Dear Mr. Sejko, Governor of the Central Bank of Albania Ministers of Finances of WB6, Governors of Central Banks WB6, World Bank Representatives, Ladies and Gentlemen, I would like to thank the Bank of Albania for organizing this event on the Regional Ministerial "Western Balkans towards SEPA" in the framework of the Regional Summit on Growth and Convergence Plan and for the invitation to Central Bank of the Republic of Kosovo, which we have positively accepted. It is my pleasure to be here at such an event with the opportunity to share our current activities towards SEPA. We are living in a time when all aspects of our lives are advancing at such a rapid pace of technological development, and the financial industry is advancing at the same pace. In the dynamics of global development, the financial system in Kosovo is facing a rapid change in the field of innovation and migration towards digital payments. A developed financial payment system, where payments are made in a cost-effective and time-efficient manner, makes trade cheaper, enables competitive businesses to grow and provides consumers with easier access to goods and services. At the same time, a developed payment system ensures the protection of the integrity of the financial system and the euro currency, the reduction of the negative effects of the phenomenon of counterfeiting, the protection of consumers and the promotion of market practices, the reduction of the effects of money laundering activities and terrorist financing, and the improvement of access to financial services and financial inclusion. In line with the Stabilization and Association Agreement and the Berlin Process, the reform process and the development of the payment system through the development of fast local payments and the integration of the payment system at the regional level will also accelerate access to SEPA. 1/4 BIS - Central bankers' speeches CBK, in the Strategic Plan 2024-2028 has planned several important activities which are related with CBK and the financial industry which are in line with the current developments in the area of digitalization. Within the activities of CBK to adopt toward digitalization as main activities are planned the following: Advancement of cybersecurity, heightened preparedness for cybersecurity risks, and the establishment of greater virtual information storage capacities; Digitalization and automation of operations, support for electronic signatures, and internal authorization processes; and Advancement and consolidation of the CBK's internal records, as well as interfacing with systems of institutions for data exchange in the best public interest. CBK, within the mandate as the authority for licensing, regulation and supervision of financial institutions, has planned the following activities: Strengthening the supervision of systems and systemically important payment instruments, including FinTech; Advancement of the regulatory and supervisory framework for AML/CFT and compliance; Development of infrastructure, enhancement of security and efficiency for payments and securities clearing, collateral management, and system interface; Advancement of the legal and regulatory framework in relation to payment services, with the aim of harmonization with European Union legislation, PFMI, and other international standards; Development of technical infrastructure to facilitate fast payments 24/7, creation of the national QR Code, and standardization of API for system interconnections; Advancement of the regulatory framework for Anti-Money Laundering and Combating the Financing of Terrorism in connection with payment services; Facilitation of access to International Payment Platforms; Reduction of cash payments and promotion of electronic payments; Creation of opportunities for access to the payment system for non-banking service providers, as well as enabling the possession of IBAN to enhance access to finance within the concept of "payment account"; and Advancement of the legal and technical infrastructure of the CBK for membership in the SEPA Payment Scheme and access to the Target Instant Payment Settlement of the European Union (TIPS). In this regard, within the planned activities of CBK we have: Participated in high-level meetings at the European Central Bank (ECB) in Frankfurt, where the ECB, within the framework of supporting the EU project for the modernization of payment systems in the Western Balkans and the objectives of the G20, is supporting concrete initiatives such as the interconnection of payment systems and the integration of our region into the European Union systems, and we are in constant contact for further developments. 2/4 BIS - Central bankers' speeches In January 2024 we have reinitiated the National Payment Council to support payment reforms through inclusion and increasing of cooperation among market participants in the payment system in the Republic of Kosovo; and Defined a national plan for financial inclusion and reducing the use of cash where the activities of interested parties will be defined and agreed to increase access, use of payment accounts and electronic payment instruments and reduce cash, in order to reduce the cost of payment services for the most efficient flow of transactions as well as other positive effects on the economy. We have created the possibility for access to the payment system of non-bank financial institutions, as well as the possibility of having an IBAN, to increase access to finance, within the concept of "payment account", where we have also approved the relevant regulation. We have changed the Organizational Structure, where the responsibility of Payment Institutions and Electronic Payment Institutions supervision has been added to the MFI / NBFI Supervision Division, the IT Systems Supervision Division has been established, within the Credit Registry Division, the responsibility of Register of Bank Accounts, as well as the Department of Consumer Protection was established where, in addition to the Division of Consumer Complaints of Financial Services, the Division of Supervision of Market Practices was also established. We are in the process of finalizing the draft law on Payment Services, in compliance with EU Directives such as PSD2 (Payment Services Directive 2), EMD (E-money Directive), PAD (Payment Account Directive), and Interchange Fees, where at the beginning of February we have organized jointly with the World Bank and Financial Institutions the two-day workshop in order to increase knowledge about payment services based on the most advanced developments in this field. The Law on the Anti Money Laundering will also be revised and the relevant CBK regulations will be amended in order to fulfill the necessary criteria in this field We are in the process of building infrastructural capacities and human resources to ensure that systems, equipment, knowledge, skills and personnel tools remain relevant and effective in overseeing the risks of new technologies and innovative business models. We have approved the regulation on cash operations as one of the basic criteria towards membership in the SEPA Payments Scheme and access to the European Union's Fast Payments System (TIPS). Recently we are in contact with Central Bank of Italy (Banca d'Italia) and we are interested in gathering insights on the current status of the TIPS clone project, its features, potential implementation in our domestic context, and, possibly, associated costs. We are also working to increase the awareness in our institution and to the supervised institutions for the risks that are linked with digitalization. Cyber intrusions pose a risk to the stability of national and international financial systems due to their potential cross-border spillover effects, and are becoming more complex as a result of increasing digitalization, growing dependence on third parties, and geopolitical tensions. Strengthening cybersecurity in the financial sector is therefore a high priority, particularly for financial institutions and for the financial stability of the country. 3/4 BIS - Central bankers' speeches During the conferences and workshops organized, the CBK has also encouraged all financial institutions to have effective governance structures and risk management processes, risk management practices and processes in place in relation to outsourcing services and to have qualified personnel to monitor and oversee their outsourced activities, including operational risk management, ongoing monitoring and proper execution of contracts with outsourced service providers that define each party's responsibilities, agreed service levels and audit rights. I would like to take this opportunity to thank our international partners, such as the IMF and the World Bank, for their cooperation and coordination, especially the World Bank which has supported us in recent years through the SECO-funded Payments and Remittances Program and the European Union-funded Western Balkans Payment System Modernization Project, administered by the Council for Regional Cooperation (RCC). Let me conclude by reiterating that the development of the national payment system of Kosovo through the possibility of "instant" payments (24/7), as well as the connection to the TIPS system, as a goal of the CBK, if achieved, will have a great impact on the economy of our country, the region, the Diaspora, as well as the circulation of payments for commercial exchanges with the EU, as the largest trading partner of the Republic of Kosovo, with an importance for the free movement of capital, services and products, including the free movement of people from Kosovo through the liberalization of visas from January 1 this year. 4/4 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,024 | 3 |
Speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the National Payments Council – re-establishment and opening meeting for 2024, organised by the Central Bank of the Republic of Kosovo, Pristina, 31 January 2024. | Ahmet Ismaili: National Payments Council – re-establishment and opening meeting for 2024 Speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the National Payments Council – re-establishment and opening meeting for 2024, organised by the Central Bank of the Republic of Kosovo, Pristina, 31 January 2024. *** Dear Mr. Murati, Minister of Finance, Labour and Transfers Dear members of the CBK Board Dearest Mr. Albertine from USAID in Kosovo Dear representatives of the EU Office, Madsen Dear representatives from the Embassy of Switzerland Dear representatives of the IMF and the World Bank Dear representatives of VISA and Master Card Dear heads of banks and financial institutions Representatives of government institutions Highly respectable attendees Ladies and gentleman, First of all, let me thank you for your participation in this event organized by the Central Bank of the Republic of Kosovo regarding the re-establishment of the National Payments Council in order to support reforms in the field of payments through the expansion of inclusion and increased cooperation between the actors of market in the payment system in the Republic of Kosovo. As you have been informed, this event aims to: Reorganize and operationalize the National Payments Council (NPC), respectively, expand the membership of the NPC as an advisory body in support of reforms in the field of payments and increasing the safety of the National Payment System; Update on legal and technical infrastructure developments in the field of payments, as well as developments in processes and plans for the advancement of the legal framework and technical infrastructure of the payment system and services; and Define a national plan for financial inclusion and reducing the use of cash, where the activities of the stakeholders will be defined and agreed to increase access, use of payment accounts and instruments of electronic payments and the 1/4 BIS - Central bankers' speeches reduction of cash, in order to reduce the cost of payment services for the most efficient flow of transactions as well as other positive effects on the economy. In this dynamic of world development, our financial system is also facing a rapid change in the field of innovation and migration towards digital payments. A sound and efficient payment system supports the further development of financial intermediation and the increase of financial stability thus creating a climate in which investors can expand their businesses. A developed financial payment system where payments are made in a cost-effective and time-efficient manner makes trade cheaper and enables competitive businesses to grow and provide consumers with easier access to goods and services. At the same time, a developed Payment System ensures the protection of the integrity of the financial system and the Euro currency, the reduction of negative effects from the phenomenon of money counterfeiting, consumer protection and the advancement of market practices, reduction of the effects of money laundering activities and terrorism financing, increased access to financial services and financial inclusion. In line with the Stabilization-Association Agreement and the Berlin Process, the reform process and the advancement of the Payment System through the Development of Local Instant Payments and the integration of the payment system at the regional level will also accelerate access to the Single Euro Payment Area of the European Union known as SEPA. This is tasked with effectively bringing domestic and cross-border payments within the EU to the same level of cost, time efficiency and security as well as access to the EU's Instant Payment System known as TIPS which is part of of the Eurosystem since 2018. This enables payment service providers to offer funds transfers to their customers in real time and around the clock, every day of the year, where individuals and businesses can transfer money between each other within seconds, regardless of their local bank's business hours. Even the latest regulation for cash operations marks a very big advance in terms of alignment with the requirements and standards for membership in SEPA, as well as TIPS. Therefore, the CBK has started taking actions within the Strategic Plan 2024-2028 for the activities that are planned and related to the field of the payment system, which are as follows: Advancing the legal and technical infrastructure of the CBK for membership in the SEPA Payments Scheme and access to the EU Instant Payments System (TIPS); Developing the technical infrastructure for enabling instant payments 24/7, creating the national QR Code and the standardization of the API for the interconnection of systems; Reducing cash payments and promoting electronic payments; While for two of the following activities we already have developments, such as: Creating opportunities for access to the payment system of non-bank service providers, as well as enabling the possession of IBAN, to increase access to finance, within the "payment account" concept, where we have approved the regulation, 2/4 BIS - Central bankers' speeches Also today, we are carrying out the foreseen activity: Empowering the National Payments Council as an advisory body for joint actions regarding the digitization and standardization of payment systems and instruments; The advancement of the Payment System presents significant challenges both from the perspective of the CBK and from the perspective of banks and non-banking financial institutions and requires close cooperation and coordination. But, allow me to announce some activities that CBK has undertaken in order to develop the Payment System: Participation in high-level meetings at the European Central Bank (ECB) in Frankfurt, with the governors and deputy governors of the six countries of the Western Balkans, regarding the integration into the European System of Central Banks, namely the SEPA payment scheme and the Instant Payment System TIPS, where the ECB, within the framework of supporting the EU project for the Modernization of Payment Systems of the Western Balkan countries and the objectives of the G20, supports concrete initiatives such as the interconnection of payment systems and the inclusion of our region in the European Union systems and is continuously in touch for further developments. It has changed the Organizational Structure where, in addition to the Analysis and Oversight of the Payment Systems Division, the IP and IPE has been added to the MFIs /NBFIs Supervision Division, the IT Systems Supervision Division has been established, within the Credit Registry Division was added the Bank Accounts Registry, as well as the Department of Consumer Protection was established where, in addition to the Financial Services Consumers Complaints Division, the Market Conduct Supervision Division was also established. It has proceeded further with the Draft Law on Banks, already in public consultation, which, together with other laws, will complete the financial ecosystem in a complementary way. The draft Law on Payment Services is in the process of finalizition, in compliance with EU Directives such as PSD2 (Payment Services Directive 2), EMD (E-money Directive), PAD (Payment Account Directive), and Interchange Fees. It is in the process of building infrastructural capacity and human resources to ensure that systems, equipment, knowledge, skills and personnel tools remain relevant and effective in overseeing the risks of new technologies and innovative business models. Also, financial institutions licensed by the CBK, in order to advance the payment system and increase the quality and efficiency of payment services for their customers, are encouraged to: Invest in infrastructure and build human capacity; Advance risk management policies, procedures and processes; Address cyber risks through close cooperation with the CBK and state authorities responsible for cyber security at the state level. 3/4 BIS - Central bankers' speeches Financial education will be the focus of the CBK, alongside the advancement of market practices and consumer protection. Therefore, campaigns will be organized and supported for the financial education of users of payment services regarding the benefits, implementation method, safety and importance of digital/electronic payments. Expanding physical and hardware infrastructure, expanding access to finance and inclusiveness are also intended to be achieved through this modern mechanism, which gradually puts us on the path to a cashless economy, and an integrated system of instant payments, 24/7. To achieve this, commitment and coordination is required from everyone, so once again thank you all for your presence and your institutional and personal contribution. On this occasion, I take the opportunity to thank the international partners such as the IMF and the World Bank, for the cooperation and coordination with the Ministry of Finance, Labour and Transfers, for the technical assistance given to the CBK over the years, as well as for supporting us in recent years through the Remittances and Payments Program financed by SECO and the Project for the Modernization of the Payment System of the Western Balkan countries under the administration of the Regional Cooperation Council (RCC) and financed by the European Union Also, allow me to thank the American Government and its institutions, especially the US Department of the Treasury and USAID, for the continuous support given to the CBK in building capacities for various fields related to the mandate of the CBK and especially for the projects that we have in the process related to the field of access to finance and the development of the capital market. Let me conclude by reiterating that the advancement of the national system through the possibility of "instant" payments (24/7), as well as the interconnection to the TIPS system, as an objective of the CBK, when achieved, will have a great impact on the economy of our country, the region, the diaspora, as well as the circulation of payments for commercial exchanges with the EU, as the largest commercial partner of the Republic of Kosovo with an importance for the free movement of capital, services and products, including the free movement of people from Kosovo through visa liberalization that started from 1 January of this year. Given that the NPC has already expanded, and has a composition that reflects the financial system and the economy as a whole, I consider that we have an opportunity to coordinate the approach and policies to achieve a development that substantially changes the situation, brings us to a new leve, and much closer to our objective of rapprochement with the European Union. I wish you good work and fruitful discussions! 4/4 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,024 | 4 |
Opening speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the 22nd Meeting of the Central, Eastern and South-Eastern European - European Insurance Supervision Initiative (CESEE – ISI), Prishtina, 10 October 2024. | Ahmet Ismaili: Opening speech – 22nd Meeting of the Central, Eastern and South-Eastern European - European Insurance Supervision Initiative Opening speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the 22nd Meeting of the Central, Eastern and South-Eastern European European Insurance Supervision Initiative (CESEE – ISI), Prishtina, 10 October 2024. *** Dear Mr. Peter Braumüller, Managing Director of Insurance and Pension Supervision at the Austrian Financial Market Authority, Dear Deputy Governor Cakaj, Distinguished representatives of Insurance Regulatory Authorities, Ladies and gentlemen, It is with great pleasure that I welcome you to Prishtina at the 22nd Meeting of the CESEE - European Insurance Supervision Initiative – ISI (Central, Eastern and SouthEastern European). Before I continue with my opening remarks, I would like to extend a special thank you to Mr. Peter Braumüller and to all the team involved to the organisation of this event. Mr. Braumüller, your leadership continue to be crucial in keeping this initiative a success. Your commitment to fostering collaboration and knowledge-sharing among our diverse community is truly admirable, and we are grateful for your efforts! This event marks a significant milestone, not only for Kosovo, but also for the Central Eastern and South-Eastern European region, as we unite under the common goal of enhancing insurance supervision and cross-border cooperation. Since its inception in 2011, the meeting has proven to be an invaluable platform for insurance regulators where they are able to exchange insights, share experiences, and discuss pressing issues on insurance supervision. Today, as we meet in Kosovo for the first time, we continue to honour this wonderful tradition of cooperation, knowledge-sharing, but also collegiality. It is a privilege to host such a diverse group of dedicated professionals committed to enhancing supervision and strengthening our regulatory frameworks and ensuring the integrity of our insurance markets. This year is particularly special for us; as the Central Bank of the Republic of Kosovo proudly celebrates its 25th anniversary. Hosting the forum aligns perfectly with our 1/3 BIS - Central bankers' speeches anniversary events and we believe that this occasion resonates with the spirit of our meeting - a celebration of growth, resilience, and commitment to mutual as well as shared values. I would like to briefly highlight the significant progress we have made in our insurance sector, particularly through specific reforms which we have successfully implemented with the aim of restoring the financial position of our insurance sector. CBK as regulator and supervisor has successfully addressed serval challenges while implementing prudent measures to resolve those issues and make sure that the sector perform according to the rules and protect the policyholders or beneficiaries and victims. Taking into consideration all the important measures we have undertaken, including the strengthening of our regulatory framework, these efforts have paved the way for further growth and sustainability, and an increase of the consumer confidence. We are committed to advancing the regulatory and supervisory framework of the Insurance Industry in line with EU standards and best practices. We have received the Roadmap for Solvency II from the World Bank, which is an ambitious, challenging, and demanding project. This means we are gradually transitioning from purely compliance-based supervision to prudential risk-based supervision. This transition also involves the introduction of a risk-based supervision manual, with support from the IMF. We have received also the roadmap for the IFRS 17. The implementation of the Solvency II and the IFRS 17 in our regional countries can certainly be a significant challenge, for which we will have the support of the World Bank. We are working on enhancing the supervision of market conduct among our financial institutions by ensuring the CBK has adequate powers and resources to implement effective oversight. Recently, we established the Consumer Protection Department to improve support for financial consumers. Within this department, we have created a dedicated division focused on market conduct. In our sector and in the most jurisdictions in the region, Motor Third Party Liability (MTPL) continues to play a dominant role in the insurance market. While MTPL is essential to provide basic cover and protect consumers from liabilities arising from the use of vehicles, as regulators we recognise the importance of diversifying the insurance portfolio to enhance overall financial stability. We are therefore committed to increasing the share of voluntary non-life and life insurance products. Currently, Kosovo is the only European country not a member of the Green Card system, despite our ongoing efforts to gain membership. Therefore, our insurers cannot issue Green Cards and vehicles from most European countries entering Kosovo must purchase border MTPL at the frontier for their stay. Although Kosovo officially applied to join the Green Card system, this application was unsuccessful. While progress has been made in meeting many criteria for membership, Council of Bureaux membership remains the step to be achieved. Addressing this issue is important for improving cross- 2/3 BIS - Central bankers' speeches border insurance coverage, support free move of people and capital and aligning Kosovo with regional insurance standards. Here, dear participants and guest, the support of your institutions and followed countries is needed. Our team will provide you with more detailed insights on these developments later today, and I strongly encourage you to engage with them on this important topic. As a Central Bank we recognize the importance of strong collaboration with other financial regulators and supervisors. Working together allows us to ensure the stability and security of our financial systems. By coordinating efforts, sharing information, and aligning policies we can better manage risks and support sustainable growth in our economies. And lastly, as we embark on this journey together, let us embrace the opportunities ahead of us. There is an intensive agenda ahead of us, filled with discussions on current challenges in insurance supervision and a vision for our joint future. I encourage each of you to actively engage, share your insights, and build connections that will extend beyond this meeting. By working together, we can strengthen our commitment to advance the insurance regulatory and supervisory framework towards a more integrated and resilient financial sector in our region. Once again, thank you for being here, and let us make this meeting a success! 3/3 BIS - Central bankers' speeches | central bank of the republic of kosovo | 2,024 | 10 |
Keynote address by Dr E E Ngalande, Governor of the Reserve Bank of Malawi, at the Perago User Group Conference, Johannesburg, 24-25 April 2003. | E E Ngalande: The importance of financial system modernisation in Africa Keynote address by Dr E E Ngalande, Governor of the Reserve Bank of Malawi, at the Perago User Group Conference, Johannesburg, 24-25 April 2003. * * * Introduction Ladies and Gentlemen: Thank you for the invitation to speak, and thank you all for being here. I have been asked to share some thoughts on the importance of financial system modernisation, with specific reference to Africa and in particular the SADC region. Being a central banker, I am confronted with reaching macroeconomic objectives such as price stability, economic growth, balance of payments equilibrium and financial stability. A mammoth task indeed, and living in Africa, one that proves to be extremely challenging at the best of times. Most countries in Africa are confronted with pressing socio-economic problems such as poverty, unemployment, lack of education, lack of housing, and famine, to name but a few. One is constantly tempted to try and address these symptoms, but is faced with the reality that, in the long run, these problems can only be solved by addressing the causes thereof. It is widely acknowledged that sound financial infrastructure is a prerequisite for a sound financial system, which is in turn a key factor in increasing the economic growth potential of a country, and of a region. Given the rapid rate of globalisation and the dynamic nature thereof, there is tremendous pressure on a country to modernise its financial system in compliance with global trends, standards and best practices, and to avoid being left behind in the dynamic drive to faster, better and safer financial transactions. Today I hope to affirm the causal link between a sound and modern financial system and macroeconomic objectives, not only in my country, but also in the whole SADC region. I am going to focus on the role of the central bank in this regard, both as payment service provider and overseer of the financial system as a whole. Finally, I would like to use this opportunity to take stock of where the countries in SADC stand in the whole modernisation process and to share my views on a possible way forward from here. From the outset, however, I wish to clarify what I understand under the term ‘financial system’. It is often interpreted as physical infrastructure such as clearing and settlement systems, but is in fact a much wider concept which encompasses the different financial markets, the legal and regulatory framework, role players, business processes, systems and technology required to provide, support and manage the financial system in a country. Why is it important to build financial infrastructure? A sound and robust financial system is a key contributing factor to financial stability in a country. Although a definite causal link exists between real economic stability and financial stability, sound and robust financial systems play an important role in reducing the risk that distortions in the real economy will develop into a financial crisis and could even minimise the adverse effects of such a crisis in the event of it occurring. A sound and robust financial system is essential for mobilising capital that is necessary for sustainable economic growth. The major objectives of macroeconomic policy in a country are the level of employment, price stability, GDP-growth as a measure of economic growth and equilibrium on the balance of payments, especially in open economies such as those in the SADC region. Domestic financial system weaknesses have potential repercussions on exchange rate stability and the balance of payments. An unsound domestic banking system will be less capable of providing an efficient foreign exchange market and will complicate monetary policy decision making by distorting the link between interest rates, economic activity and inflation. This will by implication make monetary targeting more vulnerable to policy errors. Underdeveloped or developing economies are dependant on investment and uncertainty about the soundness of the national payment system in a country may trigger capital flight or deter foreign investors, thereby putting pressure on the balance of payments and deepening economic recessions. This is likely to, in turn, have an adverse knock-on effect on the level of employment and the general inflation level. Furthermore, a country that does not conform to international standards and best practices with regard to its financial system, risks isolation from the international economic community. Globalisation is a global trend toward the freer flow of trade and investment across borders, resulting in the integration of the international economy. In a globalised world, no country can afford being isolated, as there is no room in a globalised world for an economy isolated from world trade and foreign investment. Globalisation also brings many benefits such as access to foreign capital, global export markets and advanced technology much needed in underdeveloped and developing countries. These benefits have positive social and economic consequences such as faster economic growth, which, in turn, alleviates poverty, leads to higher labour and environmental standards and facilitate democratisation. Countries that resist globalisation, risk being marginalized. In order to become a role player in regional and international trade, countries have to ensure that their financial system is stable, as measured by international standards. From a regional perspective, problems in a domestic financial system often spill over to neighbouring countries, especially if the countries in the region are involved in close economic co-operation, which is one of the primary objectives of the Southern African Development Community. It is therefore important that the region as a whole should ensure that their financial systems comply with international best standards, as this would play a large role in facilitating regional integration. Regional integration, as we know, holds a number of advantages for participating countries. Firstly, the region benefits from the resultant expansion of trade between member states which will be supported by a simultaneous integration of the financial sector. Closer trading links between countries in a region also strengthens their capacity to participate in world trade, allowing countries to become more competitive outside the trading block. Cross-border payments and settlements will be facilitated by the removal of unnecessary financial obstructions and constraints. Secondly, the elimination of geographic constraints will facilitate the extension of services and the movement of people across borders and finally, optimum use will be made of scarce resources. The co-ordination and sharing of limited resources such as skills, technological infrastructure and financial systems will contribute to a higher rate of economic development for the region as a whole. It is also important from an international perspective, where increasing emphasis is being placed on the financial sector in the global economy, that SADC economies meet international expectations as far as possible in such areas as payment, clearing and settlement systems, banking supervision and monetary policy. The role of the central bank The central bank’s core responsibilities in an economy are the maintenance of monetary stability, ensuring financial system stability and the promotion of the efficiency and effectiveness of the financial system. The maintenance of monetary stability; This role of the central bank involves the formulation and implementation of monetary policy objectives with the overall objective of achieving low inflation and protecting the value of a country’s currency. A strong relationship exists between monetary and broader financial stability in that financial stability is a prerequisite for the effectiveness of monetary policy, and therefore the monetary stability in a country. The maintenance of financial system stability. The central bank performs a pivotal role in ensuring the smooth and efficient functioning of markets and infrastructure such as the payment system in a country. This role of the Bank is multidimensional and includes the following: · The provision of physical infrastructure, for example real-time gross settlement (RTGS) systems; · The operation of such infrastructure; · Mitigating systemic risk by providing the liquidity needed to oil the wheels of the financial system; · Oversight of infrastructures such as the national payment system as well as financial markets in order to ensure the smooth and efficient functioning thereof; and · Supervising the financial system on an ongoing basis. The central bank acts as the guardian of financial stability, which is necessary to efficiently allocate resources and absorb liquidity shocks. The Bank has to continuously and comprehensively monitor potential threats to financial stability. This is necessary for prevention of crises, but in the event that they do occur, also for swift crisis resolution. The central bank should consider regulatory and/or operational intervention in cases where financial stability is threatened. The promotion of the efficiency and effectiveness of the financial system. The central bank is concerned with the robustness of the financial system both on a national and global level as disruptions in settlement in securities markets have the potential to spread to payment systems and to the financial sector in general. The central bank has to ensure compliance with international best practices and standards as laid down by institutions such as the Bank for International Settlements and the International Monetary Fund. Standards such as the BIS Core principles for Systemically Important Payment Systems and the Group of Thirty Recommendations Regarding Securities Clearance and Settlement are the result of collaboration and shared experiences between the major financial institutions in the world and provide a blueprint that a country should consider to become a global player and be internationally competitive. The role of the central bank in this regard can thus be summarised as: · Ensuring that policies relating to the efficiency and safety of payment systems are designed to comply with the aforementioned international standards, bearing in mind that the implementation of such standards should be done with the appropriate degree of flexibility to adequately cater for the individual circumstances of each country; · Monitoring, but also participating actively in the development of standards relating to payment systems and cooperating with stakeholders in improving such standards; and · Fostering and developing public policy that supports the financial system in a country. This would include addressing legal and regulatory impediments to the effective and efficient functioning of the financial system. Key features of a sound and robust financial system A sound financial system is one that remains stable and efficient in the wake of shocks such as interest rate hikes, severe exchange rate fluctuations, financial crises in other systems, but also noneconomic events such as terrorist attacks. Robust financial systems are characterised by three basic characteristics: flexibility, resilience and internal stability. A financial system is flexible in that it continues to function efficiently under a full range of economic circumstances. This implies that the system is adaptable to market developments and the dynamic forces of demand and supply and is able to adequately perform its role in mobilising savings, diversifying risks and allocating resources. The system is also not rigid and can adapt to support the functioning of financial markets. The system is resilient in that it remains capable of allocating resources efficiently, timeously and with certainty, even in times of financial crises or external shocks. Technological and infrastructure vulnerabilities in the financial system have also been adequately addressed. The system therefore possesses the necessary redundancy, recovery and resumption capabilities required to prevent, mitigate and manage disasters. The financial system is also internally stable in the sense that the system itself is not a source of economic shocks. The system has a high degree of predictability and integrity, and has sufficient internal controls in place to mitigate operational risk. From a report of the Working Party on Financial Stability in Emerging Market Economies, “Financial Stability in Emerging Market Economies. A strategy for the for the formulation, adoption and implementation of sound principles and practices to strengthen financial systems.” Bank for International Settlements. Basle, April 1997. From a macroeconomic point of view, central banks should focus on policies that promote financial stability, that is those that are aimed at containing fluctuations in aggregate economic activity as far as possible, promote sustainable growth and avoid economic uncertainty. From a structural point of view, policies should ensure that relative prices are in line with economic fundamentals and that structural conditions promote the efficient and sustainable allocation of real and financial resources. Such policies include tax policies and policies pertaining to the allocation of productive factors. The key elements of a sound and robust financial system can be divided into three categories, namely the infrastructure building blocks that support effective market functioning, institutional governance and regulation and supervision. Infrastructure building blocks that support effective market functioning include the following: · A legal and judicial framework which provides legal certainty in financial matters; · Accounting systems capable of providing accurate, relevant, transparent and comprehensive information timeously; · Other mechanisms and institutions for the application of codes of conduct, conventions and best practices to limit price manipulation, fraudulent behaviour and other detrimental practices; · Sound payment and settlement systems, as these provide mechanisms through which payments can be made in risk-free money and as such are essential to the smooth operation of market economies; and · Market diversity and depth. Financial systems need to have a broad array of instruments and markets and to provide a sufficient range of services if they are to be efficient and flexible and resilient enough to continue to function effectively in the face of major economic changes. On the topic of institutional governance, deficiencies in management and control have been common elements in banking and other financial crises. The quality of the institutional governance of financial businesses is crucial to reducing the likelihood that crises will emerge, as well as to limiting the severity of the crises when they do occur. Finally, financial regulation and supervision play an essential role in fostering financial robustness. Official oversight of the financial system encompasses financial regulation, including the formulation and enforcement of rules and standards governing financial behaviour as well as the ongoing supervision of individual institutions. Regulators should seek to support and enhance market functioning, rather than to displace it, by establishing basic rules of the game and seeing that they are observed. Regulatory/supervisory authorities should promote the reliability, effectiveness and integrity of the market infrastructure, in particular payments and transactions systems. The Malawian experience in payment system reform At this juncture let me briefly share with you our own experiences in Malawi our efforts in modernising the payment system. The transformation of the payment system in Malawi has been influenced to a great extent by the structural reforms that have been implemented in the financial sector since the early 1980s. These reforms were initiated by the Malawi Government as part of the overall Structural Adjustment Programmes (SAPs) that the country has implemented since 1981 with the assistance of the International Monetary Fund and the World Bank. The reforms were specifically aimed at making the whole financial system more responsive and efficient so that it can adequately support the development requirements of the country by providing the required financial resources. There are also other factors that influenced payment systems reforms in Malawi. These include: the need to attract foreign investors into the country, the effects of liberalised economic policies adopted in the 1990s and the introduction of the Southern African Development Cooperation (SADC) Regional Payment Systems Modernisation Project by the Committee of SADC Central Bank Governors. The introduction of the SADC Payment Systems Regional Modernisation Project added impetus to the reform process that was initiated under SAPs. The financial system in Malawi, like in many developing countries, is relatively small, underdeveloped and dominated by a few financial players who offer a limited range of services. The economy is predominantly rural-based and cash is the dominant mode of payment. Against this backgroung our efforts have been geared towards promoting the use of cash-less payment instruments in line with our vision and strategy. In order to effectively coordinate the reform process we formed a mother body - the National Payments Council (NPC) which is chaired by the Reserve Bank of Malawi. Membership of the Council includes all financial institutions and service providers like telecommunications company and power supply company. Thus all major stakeholders have been actively involved in payment systems reform initiatives in Malawi. We have found this to be of critical importance because in our view we consider that the task of forging the country’s payment system vision and strategy is a shared responsibility. Through this collaborative effort we have today made tremendous progress in modernising our payment system. The Reserve Bank of Malawi spearheaded and fully financed the establishment of a proprietary Wide Area Network (WAN) infrastructure and a transaction switch - called the Malawi Switch Centre (Malswitch). The switch centre, which was a dream three years ago, is now a reality and this has been our major achievement. Under the Malswitch Model, Malawi has managed to link up all the commercial banks and other major players in the financial system in a single network infrastructure providing a number of products including the following: Smart Card The smart card is intended to reduce cash usage. Some of the commercial banks operating in Malawi have entered into an agreement with Malswitch to become issuers of the smart card. In addition, some private companies and Government Departments have started paying salaries to their employees through the smart card scheme. Retailers and merchants are also actively using the smart card. Virtual Private Network (VPN) This is part of the Malswitch system that offers a national online system linking all small commercial banks (a corporate Wide Area Network) to transact with each other while maintaining complete security and confidentiality of their data. This facility could also be used by government departments and large retailers who have branch networks across the country. The Electronic Bidding System This enables the Financial Market Operations Department of the Reserve Bank of Malawi to accept bids for Treasury Bills and Reserve Bank of Malawi Bills electronically. Capturing, cancellation and notification of bid results is also done electronically. Real Time Gross Settlement (RTGS) System As you are all aware Malawi was the first country to implement an RTGS system using Perago’s Central Real Time Inter-bank Settlement Processor (CRISP) software. The CRISP System in Malawi th became live on 19 March 2002. We initially started with nine participants including the Reserve Bank of Malawi, but within the one year period the number of participants has increased to eleven. The system is working well and meeting our requirements. Government Credit Ceiling Authority System (CCAS) Project The project to automate Government funding arrangement is aimed at replacing the current manual process which involves physical movement of Government officers and paper between Treasury on one hand and the Reserve Bank of Malawi and the commercial banks on the other. All funding processes and reimbursements to commercial banks will be done electronically. Electronic Cheque Clearing House (ECCH) Project The ECCH is expected to be operational by the end of this year and will be running on Malswitch infrastructure. The project is spearheaded by commercial banks. Since this is an RTGS gathering I thought I should also briefly share with you the benefits we have derived from the CRISP System during the one year period it has been operational. The CRISP System provides the Reserve Bank of Malawi with up to the minute liquidity position of the financial market which is essential for proper decision making in as far as risk management is concerned. In addition commercial banks are able to determine their treasury positions and make informed investment decisions. The fast transmission of funds through the CRISP System has also enabled economic agents outside the banking system to make cost effective investment plans since funds are no longer unnecessarily tied up in the payment system as was the case before. The CRISP System has also enabled us to retrieve in a timely manner statistics on liquidity of money market players. The statistics are invaluable for the formulation and conduct of monetary policy. You will agree with me that in the absence of an RTGS system which does not have a comprehensive statistics module, data on liquidity might be difficult as well as time consuming to acquire. This obviously leads to misdiagnosis and its resultant wrong monetary policy prescription. Before I conclude the Malawian experience I would like to request participants to discuss and share experiences on the following RTGS related issues. · Provision of intra-day liquidity is one of the most important aspects of an efficient RTGS system. In Malawi the Reserve Bank provides intra-day liquidity at a cost. Some participants, especially discount houses, suggest that intra-day liquidity should be free. These players do not hold liquidity reserve requirement (LRR) balances with the central bank. The question is, should these participants be given preferential treatment? · After establishing an RTGS system, what is an appropriate cost recovery policy the central bank should adopt to sustain the operations of the system while at the same time ensuring that the system is affordable. Malawi, in particular would like to learn how others have approached this issue within their own countries. · Through the use of the RTGS the float the banks used to enjoy is totally reduced. This used to be one of the sources of profits for banks. After the introduction of the RTGS what are the alternative sources of revenue which our banks should now rely on? Ladies and gentlemen, I also wish to urge you to seriously debate on the issues relating to the role of this CRISP User Group and how often should its members meet. The issues to be tackled by the user group should also be discussed and agreed. This is particularly important at this stage to avoid this group simply being a social club. We need to derive some benefit from it and assist each other to ensure that our systems are efficiently managed. What is the status of financial system modernisation in SADC and what are the next steps? Various steps can be taken to help strengthen financial systems. On a macro-economic level, sound, market-orientated banking and financial systems should be promoted by undertaking structural reforms necessary to remove distortions in the economy that weaken the financial system and undermine effective supervision. Stronger supervisory regimes and the institutional strengthening of the supervisory agency in a country should be undertaken. Countries should acquire high-quality payment and settlement systems and other market infrastructures such as effective clearing and bookentry systems, and ensure that such reforms are supported by the necessary legal reforms. More generally, countries should ensure that the general financial business practices and processes are in line with international best practices. In taking these steps to modernise or strengthen the financial system in a country, the help of international institutions such as the International Monetary Fund, the World Bank and the Bank for International Settlements, or companies that specialise in financial sector reform can also be employed. Most countries in the SADC region have already taken an important first step in developing a sound and robust domestic payment system, which is to define a payment system strategy and development plan. Many countries already have the legal framework required to support such a payment system in place, while five countries in SADC have gone further and have already acquired a real-time gross settlement system. Seven others are set to move in this direction within the foreseeable future. Regular consultation with other countries and market participants is important, especially on a regional level, to ensure coordination of policies and strategies, but also to share views and possibly learn from one another. In order to share these views with and get input from a wider audience, and to communicate their achievements to the rest of the world, countries may consider publishing their experiences in payment system reform by, for example, publishing a so-called ‘Red Book’ in consultation with the Bank for International Settlements with the objective of providing a clear and reasonably comprehensive description of that country’s payment systems. I would like to challenge the SADC countries that have already undertaken comprehensive payment system reform programs since the completion of the ‘Green Book’ on SADC payment systems, to update these by now outdated descriptions by publishing a ‘Red Book’ that reflects the current status of the payment system in that country. And of course, conferences such as this Perago User Group Conference also provide a platform for sharing experiences, keeping abreast of new financial system developments and international best standards and practices. Annual figures Total exports to other SADC countries (USD million) Exports to other SADC countries as % of total exports Total imports from Imports from other other SADC SADC countries as countries % of total imports (USD million) Angola 3.26 0.09 222.35 9.96 DRC 5.33 0.51 230.43 25.91 Malawi 101.16 21.14 375.60 66.38 Mauritius 25.44 1.49 248.19 11.36 Mozambique 106.50 43.52 354.00 43.31 Seychelles 1.33 1.47 57.62 15.04 South Africa 2,607.51 9.70 407.49 1.39 Tanzania 32.86 5.58 181.79 11.57 Zambia 201.94 19.78 564.13 51.88 Zimbabwe 494.34 28.58 1,058.84 40.40 Source: Direction of Trade Statistics Yearbook. 2002. International Monetary Fund, Washington. Comparable figures were not available for Namibia, Botswana, Lesotho and Swaziland. This slide shows import and export statistics of selected countries in the SADC region and is based on the 1998 Direction of Trade Statistics published by the International Monetary Fund. These statistics show that a significant portion of the foreign trade of many SADC countries is with other countries in the SADC region. It therefore makes sense to start thinking of closer co-operation among countries within the Community with the aim of eventually having a shared regional infrastructure in line with international trends in regional groupings such as the European Community. A prerequisite for participating in such a regional infrastructure will be for countries to ensure that their domestic payment systems are sound and robust, which has been the main focus of the SADC Payment System Project. Perhaps we need to start thinking of linking our RTGS-systems in some way as to take the first steps towards regional settlement and interbank clearing systems. Conclusion In conclusion, I wish to once again stress the importance of the financial sector in a regional economic strategy. There is a need throughout SADC to improve existing financial systems in order to encourage both domestic and foreign savings, which can then be channelled into productive investments. SADC payment system initiatives can play a role in this process by promoting cooperation between role players in the financial sector. Financial co-operation is expected to result in greater economies of scale, a pooling of expertise, and the enhanced credibility of the reform process. It can also lay the groundwork for financial integration initiatives further down the line. These initiatives should be undertaken as part of a more holistic integration process, which also takes into account both the political and economic realities faced by the countries of Southern Africa. Central banks should work together to establish a sound basis for full economic integration in the region. Attention should be focussed on the building of a compatible financial infrastructure in the region. The challenge is a mighty one, but it is time for SADC, as well as every other country and region, to meet it. Lastly, I would like to commend Perago for taking this initiative of forming a User Group for the CRISP System. I believe this group will prove to be valuable to all of us as members since we will be able to share views and experiences to ensure efficient utilisation of the CRISP system. I only hope that this forum will continue for the benefit of all its members. Once again I thank you very much. | reserve bank of malawi | 2,003 | 6 |
Speech by Mr Victor Mbewe, Governor of the Reserve Bank of Malawi, at the Sovereign Credit Rating Dissemination Conference, Lilongwe, 16 March 2007. | Victor Mbewe: Positive financial and economic developments in Malawi Speech by Mr Victor Mbewe, Governor of the Reserve Bank of Malawi, at the Sovereign Credit Rating Dissemination Conference, Lilongwe, 16 March 2007. * * * The Minister of Finance, Hon. Goodall Gondwe, M.P. The Minister of Trade, Industry and Private Sector Development, Hon. Ken Lipenga, M.P. His Excellency, the US Ambassador to Malawi, Mr Alan Eastham Members of the Diplomatic Corp Heads of Missions (Development Partners) Members of Parliament The Chief Secretary to the President and Cabinet Secretary to the Treasury Principal Secretaries Heads of Parastatal Organisations Heads of Private Sector Industries Mr Charles Seville and Veronica Kalema from Fitch Rating Agency Representatives of the Civil Society Distinguished Invited Guests Representatives of Electronic and Print Media Ladies and Gentlemen I feel greatly honoured and happy to stand here today at this very important dissemination conference where Malawi has attained yet another economic development milestone indicating an improvement in the country’s creditworthiness. Credit rating is one of the areas where Malawi was considered lagging behind under the Millennium Challenge Account. Honourable Minister, distinguished ladies and gentlemen, since the last credit rating in December 2005, where Malawi was rated at CCC, a lot of progress has been made and it was therefore imperative that a fresh rating exercise be conducted to determine our current status. To this effect, Fitch Rating Agency was engaged by Millennium Challenge Corporation to conduct the rating between 4th and 8th December 2006. Reserve Bank of Malawi as an implementing agency for Credit Rating for the country, successfully coordinated this exercise. To begin with, it is worthwhile to mention that credit rating is an indication of the ability and willingness of a country to pay its external debt on the original terms. With a sovereign credit rating, the country is signalling to the rest of the world especially international investors its readiness to participate in the global economy by opening itself for public scrutiny and foster transparency in the collection and dissemination of information. A credit rating also helps to promote realistic monetary and fiscal policies and adherence to liberalization policies and reform efforts in keeping up with peer group countries and the global economy. Furthermore, the business world uses a sovereign credit rating as the benchmark to evaluate current and potential risks in a nation's economic environment they desire to invest in. As alluded to earlier, many positive developments have taken place in Malawi since the last rating in 2005. Among these are cancellation of Malawi’s debt by both multilateral and bilateral creditors, the decrease in inflation rate and a reduction in interest rates. The IMF and World Bank Boards on 30th and 31st August 2006, respectively, approved that Malawi had reached the HIPC Completion Point after making satisfactory progress in implementing its Poverty Reduction Strategy Paper (PRSP) for at least one year, and maintained satisfactory macroeconomic policies as evidenced by its performance under the PRGF. Furthermore, Malawi also met all the completion point targets in the area of economic governance and public expenditure management, safety nets, and microfinance. Apart from receiving HIPC debt relief, Malawi also qualified for the Multilateral Debt relief Initiative (MDRI) which cancelled all pre-2004 debt to the World Bank and African Development Bank, and pre2003 debt to the IMF. In October 2006, Paris Club creditors also agreed to cancel almost 100% of Malawi’s debt owed to them. These developments, distinguished ladies and gentlemen, reduced Malawi’s external debt from 142% of GDP at the end of 2005 to 23% of GDP at the end of 2006. Other external debt indicators also improved significantly. Distinguished ladies and gentlemen, let me now turn to the monetary policy stance that was pursued in 2006. Monetary developments in 2006 were generally expansionary. The increase in money supply mainly arose from net foreign reserves on account of receipts for balance of payments support. The increase in money stock was also partly a reflection of an expansion in credit to the private sector. It should be noted that since March 2006, credit to the private sector has been increasing steadily, implying that the February 2006 reduction in the Liquidity Reserve Requirement (LRR) was bearing fruit. This is in line with the economic program which allows for more credit to the private sector to boost economic growth. The Bank Rate was adjusted downwards from 25.0 percent to 20.0 percent on 13th November 2006. As a result, commercial banks followed suit by adjusting both their savings and deposit rates. The reduction in interest rates should, therefore, give an opportunity to the private sector to participate in borrowing capital, thereby generating economic growth. It is also pleasing to note that the rate of inflation has been declining since February 2006. By December 2006, the annual rate of inflation declined to 13.6 % from 17.1% realised in 2005. This was mainly due to: • slowdown in food inflation as a result of a good crop. • relative stability of the Malawi kwacha against other major currencies. • lagged effects of a decline in money supply observed earlier in the year. On the external sector, it is pleasing to note that foreign exchange reserves have been building up rapidly since the attainment of the HIPC Completion Point in August 2006. Between September 2006 and January 2007, the country has been benefiting from inflows from various donor partners, including the IMF, the British & Norwegian Governments, the European Union and DFID because of good performance. As a result of these inflows, the country’s gross official reserves improved significantly. Prospects for 2007 Let me now give you a picture of our expected outcome for 2007. GDP growth in 2007 is projected to grow by 5.6%, a slower growth from 8.5% in 2006. The agricultural sector is expected to continue leading this growth due to the on-going fertilizer subsidy program coupled with the current favourable rains. By December 2006, inflation rate had decelerated to 10.1 percent. In January 2007, the rate of inflation dropped to a single digit of 9.6 percent and it is expected that it would continue dropping further. This is mainly premised on the high food supply situation in the country (especially maize), that is expected to have a restraining effect on food inflation, which normally accelerates during this time of the year. The favourable outlook for inflation is based on the continued stability in food prices, the stable kwacha exchange rate and the easing of pressures on international oil prices. In 2007, growth in money supply will be closely monitored to safeguard and consolidate the declining rate of inflation and the overall financial system stability. The stability of the local currency will continue to depend on the flow of foreign exchange from the tobacco auction floors and the donor community, prices of petroleum products, as well as government’s fiscal discipline. Distinguished ladies and gentlemen, this favourable outlook which I have outlined would assist the country to attain a higher rating at the end of 2007 compared to that of 2006. The improvement in credit rating being officially announced today will assist in enhancing pricing and access to international capital markets. This would in turn enhance the inflows of private capital and hence increased investment. The goodwill that we have built with the international community will be further strengthened and this will ultimately signal that Malawi is a better place for doing business. In conclusion, distinguished ladies and gentlemen, I would like to acknowledge the collective efforts played by all stakeholders for the success of the credit rating exercise. These include the Minister of Finance, Members of Parliament, Government officials, members of the private sector, the donor community and Non-Governmental Organisations. These officials spared their time to grant interviews to Fitch Rating Agency. Let me also applaud my staff at RBM for compiling quality data used by Fitch in the rating exercise, some of which was supplied by National Statistical Office and Ministry of Finance. Finally, let me thank Casals and Associates through the Millenuim Challenge Corporation, for their financial as well as logistical support they have provided to make this Conference a success. Thank you for your attention and God bless you. | reserve bank of malawi | 2,007 | 3 |
Opening speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the 2007 SADC ICT Forum Conference, Mangochi, 14 May 2007. | Mary C Nkosi: Information and communications technology in the SADC region Opening speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the 2007 SADC ICT Forum Conference, Mangochi, 14 May 2007. * * * The Chairman of the SADC ICT Forum, Mr Paulo Maculuve The Executive Director, Corporate Services The ICT Directors from the SADC Central Banks Representatives of Hardware and Software Suppliers Members of the Press Distinguished Ladies and Gentlemen On behalf of the Governor, who is not able to be with us this morning due to other prior engagements, I am pleased to warmly welcome all of you here today. I would most especially like to extend a special welcome to our distinguished delegates from sister central banks within the SADC region. I would also like to recognize representatives of hardware and software suppliers who are amongst us this morning. Mr Chairman and Distinguished Delegates, it is pleasing to note that the SADC Information and Communications Technology (ICT) Forum will this year be celebrating its 10th Anniversary. Malawi has therefore been fortunate enough to host this Conference in this memorable year. As you are all aware, information and communications technology (ICT) has become a critical facet for the day to day operations in all our central banks. The rapid evolution of ICT, which is generally called the “ICT revolution”, has been exerting a profound impact on the world’s economies. As we all can acknowledge, technological innovation has brought about the speedy processing and transmission of information, resulting in substantial reduction in costs, wider networking, and globalization on an unprecedented scale and scope. Undoubtedly, ICT has affected a varied range of industries world wide, and the banking industry and central banks in particular, have benefited greatly from this ICT revolution. Mr Chairman and Distinguished Delegates, the central banks within the SADC region have registered unprecedented developments and advances in the areas of Payment Systems, website development, and Banking Supervision Application, just to mention a few areas which are projects emanating from the SADC ICT Forum. These projects have been possible and successfully implemented largely due to the co-operation and collaboration that exists between the central banks in the region. The issues that will be discussed at this Conference are very important in the context of the realization of some of the key objectives of our central banks that can be achieved through sound implementation of the ICT functions. This Conference therefore offers all of us various opportunities to effectively contribute to positive developments of our central banks. I am informed that one of the notable important projects being undertaken collaboratively is on ICT Governance implementation within the central banks using the Control Objectives for Information and related Technology (COBIT) framework. Mr Chairman and Distinguished Delegates, the importance of ICT Governance can never be over emphasized. You may recall that infamous scandals such as Enron in the USA, were largely caused by lack of resilient and sound corporate governance structures within the corporation. It is therefore only prudent that we must embrace and implement proper corporate governance structures in our central banks. The recent emergence of good corporate governance as a key business driver has seen the emergence of a new ball game, hence the importance of such frameworks as COBIT. It is therefore my hope that by the end of the Conference, delegates will learn and share a lot of issues on this tool. Let me now turn my attention to another key issue that I expect delegates to discuss at this Conference. This relates to the operation of the Regional Indicative Strategic Development Plan (RISDP), which is the SADC long-term (15-Year) Strategy. Briefly, the RISDP realigns the cooperation and integration priorities; articulates the policies and strategies; and, sets the overall targets of the processes for the different priority intervention areas. As you all know ICT is listed as one such critical area. I therefore trust that this Conference will seek to prepare a RISDP Action Plan which will steer ICTs within the SADC region to higher levels. Equally important, I also expect that this initiative will assist central banks to harmonise their functions so that they can benefit from each others’ resources and knowledge. Mr Chairman and Distinguished Delegates, at this juncture let me also thank representatives of the hardware and software suppliers for coming to this Conference. These are our partners and the technologies that have been implemented in our central banks would not have been possible without their technical advice, expertise and innovation. It is the wish of the Reserve Bank of Malawi that in future all the SADC central banks can enter into group agreements on certain ICT services that are provided by the vendors. We believe that this would enable us share the cost of expensive ICT resources in order to achieve economies of scale. I would like to conclude by again thanking you all for coming to this Conference and to Malawi, which is widely recognized the world over as the “Warm Heart of Africa.” You obviously may not have ample time to see what Lake Malawi has to offer but the least you can do is to sample our most popular “Chambo” fish dish as well as taking a cruise on the lake. I wish you fruitful deliberations. It is now my pleasure to declare the 2007 SADC ICT FORUM CONFERENCE OFFICIALLY OPENED. I thank you all for your attention. God bless us all. | reserve bank of malawi | 2,007 | 6 |
Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, during the African Bible College students' visit to the Reserve Bank of Malawi, Lilongwe, 4 May 2007. | Mary C Nkosi: Profile of the Reserve Bank of Malawi Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, during the African Bible College students’ visit to the Reserve Bank of Malawi, Lilongwe, 4 May 2007. * * * Mr. Jason Pink, Leader of Delegation, African Bible College Mr Eckton Chinyanga, Member Staff Students of African Bible College The General Manager Senior Management Heads of Department Members of Staff I would like to welcome you Mr. Pink, staff and students to the Reserve Bank of Malawi. It is my pleasure to see you and your team, visit this institution today. Such visits accord the Bank an opportunity to explain to the public in general and to students in particular, the activities that take place at the institution. I am hoping that you will be able to relate what you learnt in class with what you are going to hear and see during your visit today. Let me start by saying that the Reserve Bank of Malawi (RBM) is a central bank. As such it is charged with many responsibilities which include the attainment of price stability or low inflation and ensuring a sound financial system to facilitating economic growth and development. The Reserve Bank of Malawi was established under an Act of Parliament in July 1964 (Caption 44:02) and started its operations in June 1965. In April 1989 the Reserve Bank of Malawi Act was revised stipulating the Bank’s principal functions which are in the interest of the national economy and are in line with the economic policies of the government. The 1989 Act made the Reserve Bank independent from government under section 4. At this juncture, let me touch on the functions and responsibilities of the Reserve Bank of Malawi. These can be split into 3 main parts: A. Main functions of the Bank B. Delegated functions of the Bank C. Other functions of the Bank Departments in the Bank are set up in such a way so as to fulfill these functions and responsibilities. A. Main functions of the Bank 1. Formulation of monetary policies and maintenance of price stability The main function of the RBM is to maintain price stability in the economy so as to minimize inflation. • 2. It does this by controlling money supply growth using 4 major policy instruments: Open market operations, liquidity reserve requirement, the discount rate and repurchase arrangements. To issue legal tender currency in Malawi The RBM is the only institution that is legally authorised to produce statements that can be used as final means of payment for goods and services within the borders of the country. 3. Preserving the value of the Kwacha both externally and internally The Reserve Bank ensures that the exchange rate is stable at all times. Thus it strives to ensure that: • 4. Money that is in circulation in the country should be backed by an equivalent level of foreign reserves. Banker and advisor to the government The Reserve Bank maintains government accounts and manages government domestic debt. 5. Banker to other banks in Malawi The Reserve bank acts a banker to the commercial banks by keeping commercial banks deposits, which can be withdrawn by commercial banks when they run out of liquidity in their vaults. 6. Acts as lender of last resort for financial institutions The RBM helps to alleviate liquidity pressure in the financial system. It does this by lending to banks through the Discount Window. B. Delegated functions On behalf of the Government of Malawi, the Reserve Bank of Malawi carries out the following delegated responsibilities: 1. Establishment of money and capital market The RBM is the authority responsible for regulating and supervising the proper functioning of money and capital markets. It is responsible for the development of the capital market and for the provision of rules and regulations for fair and orderly market conditions. 2. Supervision of financial institutions To promote financial sector development the Bank carries out orderly management and supervision of banks and other financial institutions to protect their liquidity, equity base and ensure their overall viability and stability. 3. Issuing of government paper and Treasury Bills The RBM is vested with the responsibility of issuing Local Registered Stocks and Treasury Bills as a way of raising resources for Government to augment its revenues. The Bank also underwrites i.e. meets the difference in case of under subscriptions from the financial sector, the parastatals and the private sector. 4. Administration of exchange control The administration of exchange control was delegated to the Reserve Bank by the Ministry of Finance on 2 June, 1965. • Currently there are no restrictions on the Current Account. However, the Capital Account has not yet been liberalised. C. Other functions 1. To promote development and economic growth in Malawi The Reserve Bank of Malawi implements several measures designed to influence the money supply and availability of credit, interest rates and exchange rates with the view to promoting growth, employment, stability in prices and a sustainable balance of payments position. 2. Conducting research Collecting and analysing economic data from the financial and other sectors for research and policy purposes. Before I conclude, it is important to note that for the RBM to function effectively there are a number of departments that carry out several functions aimed at meeting the institutional objectives. The following are the departments; Research and Statistics, Treasury, Exchange Control and Debt Management, Banking and Payment Systems, Bank Supervision, Supervision of Non-Bank Financial Services, Currency Management, Legal Affairs, Administration, Information, Communication and Technology, Accounting and Finance, Internal Audit, Risk Management, Human Resource and Institutional Development, Protective Services and Public Relations. There will be brief presentations from some of the departments where most of what I have said will be clarified further. In addition, you will go around some of these departments to see what goes on there. I hope that we can have an exciting exchange of ideas after going through these departments. Once again, we are pleased to have you here and please do take the opportunity to learn about this unique institution. Lastly, let me take this opportunity to invite you back to this room where your burning questions should be asked and possible responses given. Thank you for your attention. MAY GOD BLESS YOU ALL. | reserve bank of malawi | 2,007 | 6 |
Speech by Mr Victor Mbewe, Governor of the Reserve Bank of Malawi, at the opening of the Committee of SADC Stock Exchanges (COSSE) 2008 First Meeting, Lilongwe, 31 January 2008. | Victor Mbewe: Committee of SADC Stock Exchanges Speech by Mr Victor Mbewe, Governor of the Reserve Bank of Malawi, at the opening of the Committee of SADC Stock Exchanges (COSSE) 2008 First Meeting, Lilongwe, 31 January 2008. * * * The Chairman of the Committee of SADC Stock Exchanges; Delegates to the Meeting; Distinguished Ladies and Gentlemen. I welcome all participants to this meeting, aware that some of you are visiting Malawi, the warm heart of Africa for the first time. I wish you all a pleasant stay. Allow me to start by mentioning that we are privileged to host this meeting as it helps us all to take stock of how far we have recently moved towards creating a common market in Southern Africa. Progress toward integration of capital markets on a regional basis will help spur accelerated economic integration goals in other areas. The harmonization of stock market regulations and trading practices that would accompany any regionalization of exchanges could deepen regional integration more broadly in policy areas such as foreign exchange, taxation, accounting standards, corporate governance and legal practices. I am aware that SADC exchanges have been working toward adopting a common framework for clearing and settlement. Among other options under consideration are the establishment of a linked network of individual Central Depository Systems tailored to the specific needs of member exchanges. I hope that the Committee of SADC Stock Exchanges is also drawing up common standards for all stockbrokers operating in the SADC region. This would enable brokers based in one SADC member state to establish a presence in any other member state. Regulation and surveillance of national exchanges ultimately will be carried out on a regional level. I hope that national exchanges will formalise the practice of regular reporting on your national surveillance and regulations. The exchange of information on national surveillance policies and practices will be used to devise a harmonised system of surveillance and regulation for the SADC region. The Committee of SADC Stock Exchanges should also aim to develop the region’s bond as well as other securities markets, and you must continue encouraging national authorities to actively issue government securities on the region’s exchanges. There is broad agreement that foreign exchange control, regulatory and tax frameworks must also be harmonized before financial markets can actually link up. More specifically, this would involve harmonizing not only stock market regulations, listing requirements, and trading, clearing, and settlement procedures, but also transaction fees, accounting standards, corporate governance standards, disclosure requirements, common standards for stockbrokers, and national rules for capital gains and withholding taxes. More importantly, there should be a liberalised framework of capital flows across national borders within SADC. In order to carry out and clear cross border securities trade efficiently, electronic trading, clearing, and settlement systems must be synchronized. Technology in use on the national exchanges seeking to integrate operations must be harmonized as the systems used across the exchanges are not identical, they must at least allow for an efficient, uninterrupted flow of information across borders. This requires an upgrade of technology used by smaller exchanges in particular. You will contribute to regional financial stability by fostering market discipline, resulting in sound and safe markets. We expect the Committee of SADC Stock Exchanges to work creatively, proactively and effectively in assessing and addressing risk to the securities markets, the public and other market participants. The older and more mature markets should share their experiences and resources with the emerging partners in a spirit of equality and common destiny. The Committee of SADC Stock Exchanges should also specifically advocate a regulatory framework for the region’s financial markets that conforms to international best practices. In ending, I thank you for your attention and wish you fruitful deliberations. I declare the 2008 first meeting of the Committee of SADC Stock Exchanges open. | reserve bank of malawi | 2,008 | 2 |
Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the Official Opening of SWIFT Insurance Brokers, Mzuzu Branch, 20 March 2008. | Mary C Nkosi: Insurance broking services in Malawi Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the Official Opening of SWIFT Insurance Brokers, Mzuzu Branch, 20 March 2008. * * * The Chief Executive of Mzuzu City Assembly, Mr. Chirwa The President of the Malawi Chamber of Commerce and Industry, Mr. Harrison Kalua The General Manager of Swift Insurance Brokers & Consultants, Mr. Penwell Nkhwazi Distinguished guests Ladies and gentlemen I am very delighted and honoured to be here tonight to witness this special occasion not only for Swift Insurance Brokers but also the people of Mzuzu and surrounding areas. First of all, on behalf of the Governor of Reserve Bank of Malawi, who is the Registrar of Insurance in Malawi and indeed on my own behalf, I would like to congratulate Swift Insurance Brokers & Consultants for its visible effort to make insurance broking services available to all people in a manner that is convenient to them. This is evidenced by the rapid growth (expansion) that the company has undergone within the short period of three years. This, I must say, is quite commendable and I would like to applaud both Management and staff of Swift Insurance Brokers & Consultants for their efforts and hard work. As regulators, our primary objective is to safeguard the interests of the policyholder. This is why we take keen interest in projects that aim to serve the public better. The function tonight manifests Swift Insurance Brokers’ commitment to achieving this cause. On our part, we try to achieve this by, among other things, constantly monitoring the safety and soundness of insurance market players. This is why we put great emphasis on your adherence to our reporting requirements. I am glad to acknowledge here tonight efforts made by Swift Insurance Brokers in trying to comply with our requirements in this area noting that a number of insurance brokers have, generally, not done well in observing this requirement over the past years. For this reason, this year, we are embarking on a serious compliance monitoring exercise for all brokers to ensure that these regulatory requirements are fully complied with. Ladies and gentlemen, I think I would be failing in my duty if I do not recognize and appreciate that Swift Insurance Brokers is a truly local entity. It is always pleasing to see local Malawians offering dedicated and professional services to people as Swift Insurance Brokers is doing at the moment. You will agree that not so long ago these services were a domain of foreign companies but things have turned around now. I therefore can only encourage this positive development which is also a good sign that our insurance market is thriving, broadening and deepening for the benefit of the Malawian public. Ladies and gentlemen, let me also commend Swift Insurance Brokers for their decision to open an office in Mzuzu. I would like to agree with Mr. Mwaisimba that indeed there has been a gap in the delivery of broking services in this part of the country. This opening will offer the residents of Mzuzu and certainly other parts of this region a rare opportunity to access broking services within their vicinity. I am sure most of you will agree that insurance products are not as straightforward to understand as is the case with other financial products like banking products. By its nature, insurance is a lot more difficult for a layman to understand and appreciate. This is why it is important to have professionals to advise and properly inform the public before they commit their resources to buying insurance cover. As insurance brokers, you are therefore entrusted with this noble responsibility that will help build public confidence in our insurance market. I was interested in the presentation by the Business Development Manager, Mr. Mwase, particularly on the role of insurance brokers to the insured. I think there is need to emphasize that the broker largely represents the insured as opposed to the insurer unlike an agent whose role is vice versa. Overall, however, let us partner each other and strive to attain a stable and viable insurance market. Ladies and gentlemen, it is important, however, to realize that this ultimate goal can only be achieved if companies conduct themselves in an ethical and professional manner. As a Supervisory Authority, the Reserve Bank will endeavour to level the playing field for all market players and ensure that everyone is playing by the rule i.e. within the framework of the law and RBM regulations. It is our intention to promote fairness, soundness and stability in the market and this we will do. Perhaps the only set back currently is the insurance law. As you are aware, the Act is very old having been enacted in 1957. Certainly it has been overtaken by events to the extent that its administration is almost ineffective in most aspects. We, however, are hopeful that the Insurance Bill which is pending tabling in Parliament will address this challenge. Finally, once again, let me congratulate Swift Insurance Brokers & Consultants for leading the way in bringing insurance broking services to the people of Mzuzu and the surrounding area. Distinguished guests, ladies and gentlemen, I now have the pleasure to declare the Mzuzu Office of Swift Insurance Brokers & Consultants officially opened. Thank you and God bless you all. | reserve bank of malawi | 2,008 | 4 |
Address by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the official launching of Mobile Banking Services by Opportunity International Bank Malawi (OIBM), Lilongwe, 27 March 2008. | Mary C Nkosi: Mobile banking in Malawi Address by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the official launching of Mobile Banking Services by Opportunity International Bank Malawi (OIBM), Lilongwe, 27 March 2008. * * * The Chairman, Mr Francis Pelekamoyo, and your fellow Board members The Chief Executive of OIBM, Mr Rodger Voorhies Invited guests Ladies and Gentlemen I am very honoured to be here this morning to witness yet another milestone in the history of Opportunity International Bank Malawi (OIBM) – the official launching of a Mobile Banking Service. First of all, on behalf of the Governor of Reserve Bank of Malawi, and indeed on my own behalf, I would like to congratulate OIBM for its visible effort in making banking services available to all people, particularly the rural masses in a manner that is convenient to them. This is evidenced by the increasing number of customers and retail outlets it has opened since commencing banking operations a few years ago. Statistics show that OIBM is one of the largest private sector microfinance providers in Malawi. Over the years, we have witnessed great innovation by OIBM through its focus on small scale saving, salary and wage payment systems and focus on paperless banking. Today, I am pleased yet again to witness another great drive by OIBM to further deepen the financial sector in Malawi. Mobile Banking will provide a mechanism through which financial services will be penetrated to sectors not currently being served by traditional banking. I have been informed that the bank will serve over 10,000 customers through its three mobile units. I am further informed that some mobile units will have mounted Auto Teller Machines (ATMs). This, I must say, is quite commendable and in line with Government’s objective of empowering rural masses by bringing financial services to their door-step. I therefore would like to applaud both, the Board and Management for their efforts and hard work in this regard. As regulators, our primary objective is to safeguard the interests of the depositors and the general public by among other things constantly monitoring the safety and soundness of banks. This is why we take keen interest in banking facilities or projects that aim to serve the public better. I am glad to acknowledge here this morning the efforts OIBM has made in complying with our requirements in this area. I am also pleased to note the satisfactory financial performance of the bank in the year ended 2007. With these few remarks, Ladies and Gentlemen, I thank you all for your time and attention. I now have the pleasure to declare the Mobile Banking Service officially launched. Thank you and God bless you all. | reserve bank of malawi | 2,008 | 4 |
Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the official launch of risk based supervision, Blantyre, 9 January 2009. | Mary C Nkosi: Risk based supervision in Malawi Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the official launch of risk based supervision, Blantyre, 9 January 2009. * * * The General Manager, Reserve Bank of Malawi; The Chairman of Bankers Association of Malawi; Board Members of various banks; Chief Executives of banks and members of management; External Auditors; Representative of the Institute of Internal Auditors; Representative of Society of Accountants; The Executive Directors - Supervision of Financial Institutions; Corporate Services and Support Services, RBM Heads of Department from Reserve Bank of Malawi; Officers of Bank Supervision and Supervision of Non Bank Financial Institutions; Members of the Press; Ladies and Gentlemen. Accept my warm welcome to this epic occasion and moment in the history of both the Reserve Bank of Malawi and the act of supervision and regulation of the banking industry in Malawi. The Reserve Bank of Malawi changes its mode of supervision from the traditional CAMEL based approach to Risk Based Supervision (RBS). Such changes the world over, have always been clearly marked and remembered as major occasions. Authorities such as the Federal Reserve System of the USA and Financial Services Authority of the United Kingdom where much literature and practice on the subject may be drawn had to change at one point in order to improve the way supervision is conducted. The Reserve Bank of Malawi views this course in the same vein: Change to make improvements in risk management in banks and supervision of the same by the regulators. Risk based supervision entails change of culture in one way or the other because certain things, like risk management can only be done that way now. I will emphasise a few changes that are expected of banks in order to yield and realize full benefits of the Risk Based Supervision initiative. Firstly, the role of the board has been clarified and expectations heightened to an extent that the board can not be a peripheral figure of banks any more. Through the Risk Management Guidelines, the RBM calls for active board oversight in policy and strategy formulation, review and ensuring that management executes its responsibility or is held accountable. Secondly, the governance structure should not impede proper risk management and reporting. Where this is the case, it should be addressed as a matter of urgency and priority. Thirdly, all risks affecting the bank should be addressed by policy, (not just major and traditional financial risks) so that no single risk is over looked. Some of you will recall that one of the major findings of the RBS survey which the Reserve Bank conducted back in 2007 was apparent neglect of non financial risks. In the modern world of hi-tech and globalisation, transferability of risk across jurisdictions and the interrelationship between risks is very high. Worse still, across the boarder qualitative information about reputation, compliance or impact of quantitative financial risk matters more than the actual financial risk itself which may actually be addressed. Therefore, it is imperative that due attention should be given to at least nine risks identified in the Risk Management Guidelines namely, Strategic, Credit, Liquidity, Interest Rate, Foreign Exchange Rate, Price, Operational, Compliance and Reputation risks. Fourthly, banks have to take stock of their resources to meet the requirement to identify, measure, monitor and control risk. Where there are bottlenecks, board members and management present here are requested to make investments in training and some Management Information Systems possibly. I may not be very wrong to submit that the size of the bottom line is not the only performance target in the long run. I am also reliably advised that the overall cost implications of such sacrifices are affordable across our banks. Ladies and gentlemen, the Reserve Bank of Malawi is not spared of the need to re-look at its culture either. One such eminent change is that Bank Supervision Department will be restructured along portfolio lines such that all faces you know or just hear of on the phone or through e-mail will visit banks in an on site inspection. This was not the case before, when we had distinct on-site and off-site divisions. So many good things have been sung about RBS already by the previous speakers. However, let me add two more. These are: Firstly, RBS challenges and allows banks to demonstrate that they can assume more risk as long as it is managed to the satisfaction of the bank itself as determined by the Board and its policies. Of course, other eyes like risk management, internal audit and regulators as interested groups will have an independent opinion on the activities and quality of risk management. Secondly, in RBS both banks and supervisors sit on the same side of the fence as far as risk is concerned, except that supervisors retain their assurance mandate. This gives supervisors better insight into what management is doing about inherent risk. Ladies and gentlemen, my call to you therefore is let us do our job! As you are aware Enron, Adelphia, WorldCom, Société Générale and Barings Bank, to name but a few represent massive corporate failure resulting in untold damage to employees, investors, creditors and economies; but who is to blame? For sure, no one can claim to be doing their job and be ignorant of fraud or more precisely risk in the same line. Therefore, Directors, CEOs, Auditors, Risk Managers and Supervisors, let us do our job. Consequences, of laxity in risk management can not be explained more than the recent financial crisis resulting in collapse of Bear Stearns, Indy Mac Bank and Lehman Brothers in the USA. While state intervention for Northern Rock, Fannie Mae, Freddie Mac and Citi Group just emphasise the cost of ineffective regulation and lack of capacity to fully understand risk being undertaken by the bank itself. We must have learnt lessons from these developments and we should not be scared to handle our challenges. On its part, the Reserve Bank remains committed to its legal mandate which includes ensuring a safe and sound financial system knowing fully well how critical the banking system is in the development agenda of the country. Lastly, on behalf of the Reserve Bank of Malawi, allow me to register our profound appreciation and recognize the contribution of the IMF East Africa Regional Technical Assistance Centre (IMF East AFRITAC). The centre sponsored the technical assistance of Carmencita Santos, the lead consultant on RBS to Malawi as well as Mackay Aomu and Peter Phelan who also worked with us at some stage of the project. The Reserve Bank also appreciates the support and cooperation of banks in honouring and anchoring critical stages of the project. In addition, but not least though, there was a team of Reserve Bank officers who tirelessly worked on the project to its conclusion. It has been a job well done. With these few remarks ladies and gentlemen, it is my singular honour and pleasure to officially launch Risk Based Supervision in Malawi! Thank you for your attention. | reserve bank of malawi | 2,009 | 3 |
Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the official launch of African Alliance, Blantyre, 14 January 2009. | Mary C Nkosi: Promoting the development and regulation of capital markets in Malawi Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the official launch of African Alliance, Blantyre, 14 January 2009. * * * The Chairman of Malawi Stock Exchange; Board Members of African Alliance; Chief Executive Officer of African Alliance Malawi & officials from African Alliance Group; Distinguished Guests; Ladies and Gentlemen. It is an honour to be at the official launch of African Alliance Securities Ltd. As you are all aware, the Reserve Bank of Malawi is the regulatory and supervisory authority and is therefore charged with the responsibility of promoting the development and regulation of capital markets, amongst others. This is done through exercising entry control, on-going supervision, policy development, enhancing competition and market development, consumer education and protection, and exit administration. In this connection therefore, we are very pleased to be here to witness the birth of a new baby (the media often refers to such new babies as “new kid on the block”). For the benefit of the audience, African Alliance Malawi was licensed in September 2008. Mr Chairman, Ladies and Gentlemen, we have observed in the recent times the favourable macroeconomic condition in the country and this has been instrumental in spearheading the expansion of capital market operations. The financial market has experienced rapid growth of market intermediary businesses and public participation witnessed by oversubscriptions during initial public offerings (IPO). The Bank has received a number of enquiries and applications geared towards carrying out brokerage, asset management and advisory services besides banking. The recent developments are an indication of potential and existing resources that need to be channelled from surplus units to deficit units and this is therefore an opportunity and also a challenge to all intermediary market players to facilitate the movement of these funds. Mr Chairman, Ladies and Gentlemen, on the supervisory side, the Reserve Bank shall continue to carry out its responsibilities to achieve its mission of ensuring the existence of a fair, safe, sound and stable non-bank financial services industry in Malawi in line with international supervisory standards. Critical in this regard and in order to protect investors, the Bank shall only allow eligible market players to operate on the market. It is expected that the players will conduct themselves in line with expected professional standards and conduct. I want to assure you that the Reserve Bank will perform its work with professionalism, integrity, impartiality and in a friendly and cooperative manner without compromising its authority or mandate. Our core strategic objectives which represent essential elements of our mission shall continue to evolve around developing capital markets and enhancing stakeholder confidence; providing a quality, professional supervisory and regulatory service; ensuring the existence of an all inclusive and regulated financial sector; and fostering a competitive, cost effective environment in the financial industry. The aim is to safeguard the financial sector and facilitate economic development through broadening and deepening of the capital market. In order to enhance the regulation and supervision of capital markets in line with international developments and standards, the Reserve Bank initiated the formulation of a new legislation, the draft Securities Bill. The Bill intends to repeal the Capital Market Development Act No 17 of 1990 (CMDA) which is considered to be less comprehensive in terms of coverage. The Bill is currently awaiting enactment by Parliament. These legislative reforms including the “Retirement Funds Bill” will provide an opportunity for new and extra resources in the securities market that will require your expertise to tap them on. Mr. Chairman, Ladies and Gentlemen, the coming in of an additional player onto the market will bring competition, increase trading activity and improve price discovery which is an important function of an organized stock market. African Alliance Securities Ltd brings with them a dimension of “research” on the listed companies, which appears to be one of their fundamental skills, which has been erratic on the market. Thus we believe that credible and high quality research will keep investors more informed about the opportunities on the stock market and therefore stimulate well informed trading activity. We expect healthy competition whose benefits will trickle down to the investors and consumers of financial services. Mr Chairman, Ladies and Gentlemen, before I end my speech, let me take this opportunity to express a concern. Last year (2008), the Reserve Bank received reports of fraud relating to share certificates allegedly perpetrated by senior members of the brokerage houses. Clearly, the reports tarnished the image of the market. While the market did not suffer severe damage, we wish to advise all players to ensure that there are internal controls within your institutions, to adhere to best corporate governance standards and to ensure that procedures are followed when handling clients’ funds. Let me appeal to African Alliance and all other market professionals to continually invest in their employees to ensure high standards in the market. Lastly, but not least, I wish to advise all capital market professionals to timely comply with the requirements of the Capital Market Development Act and its subsidiary legislation. Mr Chairman, Ladies and gentlemen, with these few remarks, I wish to officially welcome African Alliance Malawi to the Malawi Capital market and wish them the best of success. I thank you for your attention! | reserve bank of malawi | 2,009 | 3 |
Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the official launch of Dedza Agency, Dedza, 31 January 2009. | Mary C Nkosi: Creating an environment for banks to operate effectively in Malawi Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the official launch of Dedza Agency, Dedza, 31 January 2009. * * * Dr Charles Mataya, who is representing the Board of Directors of the Bank The Managing Director of MSB, Mr Joseph Mwanamvekha Valued Customers of the Bank Management and Staff of the Bank here present Distinguished Guests Ladies and Gentlemen It gives me great pleasure to preside over the official launch of the MSB Dedza Agency this afternoon. Let me begin by congratulating and commending the Board, Management and Staff of MSB for their untiring efforts in getting the Bank to where it is today. It is not too long ago when we heard of similar functions as the Bank launched its new outlets in the just ended year, 2008. Today we are here to witness the official opening of Dedza Agency. This is no doubt a visible sign evidencing the growth and expansion of the Bank and the Banking Industry in general. I have no doubt that the Bank is now well poised to effectively discharge its responsibilities on savings mobilization and financing of investments both in the rural and urban sectors of our economy. The business and economic environment is looking good for Malawi as banks require a sound economic environment in order to operate effectively and efficiently. The Reserve Bank of Malawi is sparing no effort in ensuring that it creates an enabling environment for banks to operate effectively in the country. As a result, more banks have come on the market and are willing to serve the rural and semi-urban communities owing to the ever improving rural infrastructure and conducive fiscal policies. Statistics indicate that nearly a very large population of Malawi remains un-banked. It is therefore commendable to note that MSB has identified itself with the rural communities for a very long time. Through its wide rural network the bank has been able to take banking to the door steps of the rural people who would otherwise not be able to access banking facilities. The Bank, therefore, needs to leverage this network which is one of its strengths, to roll out products and services that should be convenient and easy to use by its client base. Let me take this opportunity to urge the Board, Management and Staff of the Bank not to relax in dealing with the many challenges that the Bank faces; particularly in spearheading bank penetration into the rural unbanked population. The Bank must improve further its strategies for nurturing the existing customer base as well as for attracting new ones and growing its book. Customers must be kept satisfied with the quality of service being offered. I have no doubt that you will succeed in this endeavour. In conclusion, I would like to challenge the banking institutions in Malawi to come up with strategies and plans, particularly in the area of access to credit by rural communities and other banking services by the Malawian entrepreneurs so that jointly we all play our part in the process of transforming the Malawi economy. The Central Bank as a stakeholder will continue to support efforts by banks in improving their service delivery systems for the betterment of all stakeholders. Director Mataya The Managing Director, Mr Joseph Mwanamvekha Customers of MSB here present Management and Staff of MSB Distinguished Guests Ladies and Gentlemen It is now my singular honour and privilege to declare MSB Dedza Agency officially opened. I thank you all for your attention and may God bless you. | reserve bank of malawi | 2,009 | 3 |
Address by Dr Perks Ligoya, Governor of the Reserve Bank of Malawi, at the Conference for the Committee of Insurance, Securities and Non-Bank Financial Authorities, Lilongwe, 17 September 2009. | Perks Ligoya: Co-ordinated regulations for the SADC region Address by Dr Perks Ligoya, Governor of the Reserve Bank of Malawi, at the Conference for the Committee of Insurance, Securities and Non-Bank Financial Authorities, Lilongwe, 17 September 2009. * * * The Chairperson, Committee of Insurance, Securities, and Non bank financial Authorities, Mr Patrick Mhango The Deputy Governor, Reserve Bank of Malawi, Mrs Mary Nkosi The General Manager, Reserve Bank of Malawi, Dr Wilson Banda Distinguished delegates Ladies and gentlemen, It gives me pleasure and honour to grace this important occasion. The Reserve Bank of Malawi is honoured to host this year’s conference for the Committee of Insurance, Securities, and Non bank financial Authorities (CISNA) and in this regard I would like to welcome all delegates particularly those who have travelled from regional member countries to participate in this event. Chairperson, Ladies and Gentlemen, I wish to commend all CISNA members for your continued interest and dedication to the SADC mission. Your attendance in such large numbers is clear testimony of your desire to achieve economic integration in the SADC region. We in Malawi acknowledge benefits of regional integration which, I am glad to say, include systematic growth and development of the financial sector in general, and of insurance, securities, pension and microfinance subsectors, in particular. Chairperson, Ladies and Gentlemen, The financial sector is a catalyst of economic growth and all effort to develop and deepen this sector remains a key public policy challenge. In this regard, I find the role of CISNA to be consistent with aspirations of our Governments. CISNA supports initiatives toward the creation of a strong base of domestic non-bank financial institutions, particularly those specialising in the mobilisation of long-term savings, for example life insurance, pensions and collective investment schemes. In addition, CISNA supports measures to increase access to quality insurance and other risk management products by households and entities in the region. CISNA also addresses issues pertaining to market infrastructure and liquidity of capital markets in the region. This is a critical function because assurance of liquidity acts as a catalyst for greater participation of investors, both local and foreign. These noble goals are supported by SADC governments through protocols which aim at promoting financial markets. Chairperson, Ladies and Gentlemen, CISNA plays a very important role in the improvement and harmonization of regulations for the SADC region. Sound and well co-ordinated regulations promote and maintain confidence in regional financial systems. Allow me, therefore, to commend CISNA’s efforts in harmonising standards in regional markets, particularly in insurance, pensions, and capital markets. Chairperson, Ladies and Gentlemen, You may wish to know what Malawi is doing with respect to improving the regulatory environment for our financial sector and non-banks, in particular. The process of formulating financial sector bills is in its final stages. These include the Financial Services, the Retirement Funds, the Microfinance, the Financial Cooperatives, and the Securities Bills. There are also Payment Systems and Credit Reference Bureau Bills being processed which will also facilitate and support further development of the financial sector. In addition, the Insurance Act and the Banking Act have undergone rigorous scrutiny and review. Once these bills are passed into laws, they will provide us with a stronger mandate and enabling regulatory frameworks for the regulation and supervision of the entire financial sector. I therefore wish to take this opportunity to express my appreciation to the Ministry of Finance and the Ministry of Justice for their useful contribution in the formulation of these bills. The Reserve Bank has, however, been the lead institution the formulation of these bills and I thank the team involved. I wish to encourage them not to relax but to continue working hard until these bills are enacted into laws. Upon enactment of the bills, the Reserve Bank is expected to take on board the regulation and supervision of microfinance and pension plans, in addition to insurance, capital markets and banks. I must say, we are aware of the challenges lying ahead. However, it is my hope that conferences of this nature do provide solutions to such challenges. I therefore call upon all the distinguished delegates to consider this conference as a rare opportunity for sharing experiences on regulation and supervision of non-bank financial institutions. Chairperson, Ladies and Gentlemen, You may ask yourselves why SADC, and indeed Malawi, should bother about enabling regulatory frameworks? Recall an African saying which goes “Umanena Chatsitsa Dzaye Kuti Njobvu Ithyoke Mnyanga.” If we consider the recent financial crisis, then the question would be “where did countries slip”? Many countries in the developed world are now calling for a review of the regulatory infrastructure because the general feeling is that it caused the financial crisis. Recent developments in global financial markets strongly suggest the importance of effective regulatory regimes for financial markets. Misguided regulation can have adverse repercussions on the financial sector, and indeed the entire economy. It is for this reason that SADC must maintain high standards of regulation for our financial markets. The Chairperson, Ladies and Gentlemen, I note from the conference program that you will also reflect on the impact of the financial crisis on the SADC region. This is commendable as it is a subject of interest to everyone. With these remarks, it is now my pleasure and privilege to declare the conference for the Committee of Insurance, Securities and Non bank financial Authorities officially open. Distinguished Delegates, Ladies and Gentlemen, Thank you for your attention. | reserve bank of malawi | 2,009 | 9 |
Speech by Dr Perks M Ligoya, Governor of the Reserve Bank of Malawi, at the official launch of the Exchange Control Manual, Blantyre, 29 December 2009. | Perks M Ligoya: Safeguarding Malawi’s foreign exchange reserves Speech by Dr Perks M Ligoya, Governor of the Reserve Bank of Malawi, at the official launch of the Exchange Control Manual, Blantyre, 29 December 2009. * * * President, Bankers’ Association of Malawi Chief Executives of commercial banks Distinguished guests Ladies and Gentlemen Compliments of the season. It gives me great pleasure to officially launch the Exchange Control Manual. On behalf of Reserve Bank of Malawi and indeed on my own behalf, I welcome you all to this memorable event. Distinguished guests, ladies and gentlemen, the objectives of the official launch of the Exchange Control Manual are three-fold: a) To present the Exchange Control Manual to its ultimate users-authorized dealer banks and the business community. b) To assure exporters and importers that the Reserve Bank of Malawi is fully committed to economic liberalization that it embarked upon some fifteen (15) years ago. c) To garner support and cooperation of banks and the business community in ensuring prudent use of foreign exchange reserves. In order to achieve these objectives, let me start by mentioning that the main challenge (and particularly so in recent times) for Malawi as an emerging economy is the generation of sufficient foreign exchange reserves to meet the economy’s growing import demand. Malawi’s foreign exchange reserves are volatile due to the economy’s over-reliance on primary commodity exports and in particular a few agriculture exports. This reliance will continue to undermine the country’s foreign reserves position unless significant progress is made in growth and diversification of exports. While export diversification on its own may not be a panacea for an improvement in foreign exchange reserves, the principle that export diversification can contribute to reducing instability of export earnings is widely accepted. Thus, Government in its quest to mitigate Malawi’s external vulnerability and, more generally, the country’s overall economic performance and welfare, continues to take initiatives to promote export diversification. The generation of adequate foreign exchange reserves is key to Malawi’s growth prospects. Apart from supporting the Malawi Kwacha exchange rate, reserves are also essential in supporting economic growth through imports of industrial raw materials, agricultural inputs, medicines and other basic necessities. Government, in this regard, continues to undertake initiatives to boost and preserve the country’s foreign exchange reserves. One such initiative is the computerization of export proceeds tracking system. We are all aware that in November 2008, the Bank rolled out the Foreign Exchange Statistical Database System, which is now being used to monitor and enforce repatriation of export proceeds to Malawi. Imports have grown phenomenally in the past three years due to increased demand for machinery and industrial raw materials, and most importantly, agricultural inputs particularly fertilizer. Other imports have also registered a significant growth both in volume and value terms. This largely explains the depletion in the country’s foreign exchange reserves. These developments have necessitated a review of the Exchange Control regime. You will recall, Ladies and Gentlemen, that Exchange Controls in Malawi pre-date our independence i.e. we had exchange controls before 1964 when Malawi became independent. The Exchange Control Act has, thus, undergone several reviews and repeals over the years to re-align it with dynamic macroeconomic developments and hence make it more relevant. Ladies and Gentlemen, let me mention that the Exchange Control Manual being launched today, has been prepared to act as a guide to authorized dealer banks in dealing with exchange control issues. The Manual also addresses the issue of completing relevant exchange control forms. These forms have been reviewed to conform to the 5th Edition of International Monetary Fund’s Balance of Payments Manual. Bankers, importers and exporters will recall that we had numerous forms. These have now been harmonized and we are now talking of three only. The manual contains instructions on how authorized dealer banks should process Exchange Control applications for, among other things, advance payment for imports: You will recall ladies and gentlemen, that these have always been referred to Reserve Bank of Malawi for approval. The Reserve Bank is now delegating this authority to banks to handle advance payment applications of up to $20,000. Anything in excess of that value will however be referred to the Reserve Bank of Malawi for approval. Authorized dealer banks will find the manual to be useful not only in distinguishing between current and capital and financial account transactions but also in determining the minimum that is required in support of Exchange Control applications. The Manual also reflects a commitment by Authorities to move from controls to a more liberal regime. You will note, Ladies and Gentlemen, that most Exchange Control transactions that hitherto required prior Central Bank approval no longer requires such action from the Reserve Bank of Malawi. The Manual also recognizes recent developments in the management of exports and export proceeds in Malawi. It is, therefore, important that authorised dealer banks exercise due diligence in processing Exchange Control applications. Authorized dealer banks should also ensure consistency and uniformity of policy implementation in carrying out duties entrusted to them through strict and impartial application of Exchange Control instructions. Banks are therefore encouraged to consult the Reserve Bank of Malawi whenever in doubt with regard to the interpretation and implementation of exchange controls. Trade liberalization ushers in new challenges in terms of Exchange Control administration. In order to deal with these challenges, Government is working on further amendments to the Exchange Control Act which will enhance penalties for offenders but, at the same time, allow for more transparency and easier implementation of the Act. In order to effectively manage the process, the Bank needs the cooperation and active participation of all institutions and individuals gathered here. Ladies and Gentlemen, I now have the singular honour to declare the Exchange Control Manual officially launched for full application by authorized dealer banks effective 1st January, 2010. I thank you all for your attention. | reserve bank of malawi | 2,010 | 1 |
Speech by Dr Perks Ligoya, Governor of the Reserve Bank of Malawi, on the occasion of the official launch of Lilongwe branch of Malawi Savings Bank (MSB), Lilongwe, 27 February 2010. | Perks Ligoya: Improving access to credit in Malawi Speech by Dr Perks Ligoya, Governor of the Reserve Bank of Malawi, on the occasion of the official launch of Lilongwe branch of Malawi Savings Bank (MSB), Lilongwe, 27 February 2010. * * * Our Guest of Honour, the Minister of Finance, Honorable Ken Kandodo, MP The Chairman of the Board of Directors of Malawi Savings Bank, Mr. Joseph Mwanamvekha who is also the Secretary to the Treasury The Chief Executive of Lilongwe City Assembly, Mr. Kelvin M’mangisa The Chief Executive of Lilongwe District Assembly Directors of Malawi Savings Bank here present Valued Customers of the Bank Management and Staff of the Bank here present Members of the media Distinguished Guests Ladies and Gentlemen: Our Guest of honour, on behalf of the Directors, Management and Staff of the Reserve Bank of Malawi and indeed on my own behalf, I would like to congratulate the Board, Management and Staff of Malawi Savings Bank Limited for their untiring efforts to influence the presence and outreach of the Bank. Some of us may have read in the papers last week that Malawi savings Bank moved out of Post Office premises to occupy modern and spacious office space in Ntaja, Mangochi and Monkey Bay. Furthermore, those of us who ply the BlantyreMulanje Road via Thyolo, may have seen a magnificent branch at Bvumbwe complete with modern amenities like an ATM. To put the icing on the cake, today we are here to bear witness to the official opening of Lilongwe Branch. These are major milestones. The initiatives present solid evidence that the Bank is well poised to effectively perform its roles relating to savings mobilization and financing of investments in both the rural and urban sectors of our economy. The business and economic environment is looking good for Malawi. The IMF has just approved a 3 year financial assistance program for the country. This is clear testimony that Malawi is pursuing good macro economic policies and fiscal discipline under the visionary leadership of His Excellency, Ngwazi Dr. Bingu wa Mutharika. Government through the Reserve Bank of Malawi is sparing no effort in creating an enabling environment for banks to operate effectively in the country. As a result, more banks have come on the market and are willing to serve the rural, urban and semi-urban communities owing to the ever improving rural infrastructure and conducive fiscal policies. The increasing number of players in the banking industry entails stiff competition. Competition should normally favour customers because in the quest to win more customers, banks tend to relax terms and conditions for their products and improve service. However in Malawi the competition is yet to bear fruit by narrowing the gap between lending rates and deposit rates. Recent statistics indicate that over 80% of the population of Malawi remains un-banked and many of these people are in the rural areas. It is therefore commendable to note that MSB has identified itself with the rural communities for a very long time and continues to establish its presence in new areas. I call upon all the authorized dealer banks in Malawi to emulate the example set by MSB in delivering new products and services on the door steps of the rural people. I would also like to urge management of the Bank to leverage on this network, which is a competitive edge, to roll out products and services that should be convenient and easy to use by ordinary customers. The FINSCOPE study should render its usefulness in this regard. Memories are still fresh on the economic meltdown that engulfed western economies in the recent past. From a regulatory point of view, the Reserve Bank of Malawi is proud to observe that our financial sector went through these hard times with a lot of resilience. This is because of the stringent supervision of the banks that RBM provides. Furthermore our banks are very well capitalized and managed. The World Bank and the IMF still believe that Malawian banks are the most profitable in Africa. As a regulator of the financial sector, the Reserve Bank of Malawi will continue to strengthen its supervision function. For example, the supervision of the non-bank financial institutions will grow to include pensions, macro-finance and insurance as stand alone departments. We should all be very thankful to the present Government of His Excellency Ngwazi Dr Bingu wa Mutharika because it is now evident that security within Malawi has been enhanced. This is the major reason why banks should be even more confident to open branches in rural areas. Financial inclusion is one of the current major themes of the Reserve Bank of Malawi hence my happiness and gratitude to the Malawi Savings Bank for opening yet another branch today. I therefore congratulate and commend the Board and Management of Malawi Savings Bank on this auspicious occasion. However, let them and all staff of the bank not relax considering the many challenges that the Bank and the industry at large face; particularly with the growing competition. The Bank should therefore endeavour to keep its customers satisfied by offering superior products and delivering excellent service. Today’s customers are becoming sophisticated and can only distinguish institutions through quality of service. I have no doubt that you will succeed in this endeavour. I would like to challenge banks in Malawi to devise deliberate policies aimed at improving access to credit by our private sector, especially Malawians, as this is the only way Malawi can sustain its current level of social and economic development. In conclusion, the Central Bank, as a stakeholder will continue to complement efforts by banks to improve service delivery systems for the betterment of all stakeholders especially the less privileged rural masses who struggle to access banking facilities as most banks concentrate in the urban areas. Our Guest of Honour Distinguished Invited Guests Ladies and Gentlemen. I thank you all for your attention. | reserve bank of malawi | 2,010 | 3 |
Speech by Dr Perks M Ligoya, Governor of the Reserve Bank of Malawi, at the official opening of the Financial Programming and Polices Course, Lilongwe, 1 March 2010. | Perks M Ligoya: The challenge of making sound policy choices Speech by Dr Perks M Ligoya, Governor of the Reserve Bank of Malawi, at the official opening of the Financial Programming and Polices Course, Lilongwe, 1 March 2010. * * * The Director, Macroeconomic Management Programme, MEFMI Distinguished Resource Persons MEFMI staff Course Participants Ladies and Gentlemen It is a great pleasure and honour for me to join you on the occasion of the official opening of this regional course on Financial Programming and Policies. Allow me to begin by extending a very warm welcome to you all on behalf of the Government and the people of Malawi, and also on my own behalf. I wish to extend a warm welcome to the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) staff and resource persons. We in Malawi are most delighted to be associated with MEFMI and to host one of your capacity building events once again. A special welcome to colleagues from MEFMI member states. May your two week stay in Malawi be both enjoyable and fruitful. Let me acknowledge the presence of our regional resource persons, who have taken time off their busy schedules to assist us in this important event. I am pleased to note that the team wholly comprises experts trained by MEFMI under its flagship Fellowship Development Programme. This is an indication that MEFMI’s capacity building efforts are now bearing fruit on a sustainable basis. We wish to commend the institute for this achievement. This course, I am informed, is designed for middle to senior level officials from the ministries of finance and economic planning and central banks. These officials provide an important technical input into macroeconomic and financial policies and are sometimes also involved in policy design and implementation. This course aims at enhancing their understanding of the design and implementation of macroeconomic and financial policies. It is most pleasing therefore to see a number of you here representing key economic and financial institutions in our region. May I urge you all to make the most of this rare opportunity. Experience from the region shows a general institutional bias in skills among our economists. For example, economists in the Ministries of Finance tend to have a firm appreciation of fiscal issues but limited understanding of Balance of Payments and Monetary and Financial issues. Similarly economists in central banks may also be weak in Fiscal and National accounting. This, coupled with the weak coordination among key macroeconomic management agencies, often leads to the formulation of inconsistent macroeconomic policies, resulting in poor economic performance. We should at all cost avoid this. This course on Financial Programming is designed to take care of this problem by addressing inter-linkages between sectors and trade-offs associated with different policy mixes. The main challenge of making sound policy choices however still remains with principal officers in our institutions. The financial programming framework makes for more informed policy decisions and is not in itself a substitute for all important policy making process. Ladies and gentlemen the programme for this course is quite comprehensive and covers theoretical issues, practical linkages and applications. The course also covers an analysis of the key macroeconomic accounts in an economy (the general government, non financial corporations, financial corporations, households and non profit institutions serving households). We hope that resource persons will demonstrate how an appropriate set of policy measures can be developed and coordinated to promote growth and achieve macroeconomic adjustment. The course will of course also cover forecasting techniques. At the end of the course, it is our expectation that the tools and techniques imparted to participants will help them achieve the following: – Sharpen their understanding of the essential sectoral linkages and their impact on policy design; – Improve capacity in forecasting and projection skills and applications to policy formulation; – Improve appreciation of policy trade-offs and consistency; – Enhance appreciation of the sequencing issues in policy design and implementation and the importance of commitment to see policy measures run their course. This should enable participants tackle the following: Formulate in a fairly precise way the nature of interrelationships among sectors of the economy; Establish outcomes of various policy options and; Recommend desirable policy packages and possible sequencing of measures. Ladies and gentlemen, I appreciate that this is a fairly heavy agenda for the two week period, but I would like to believe that you will be up to the challenge. MEFMI capacity building events fortunately are not designed as holiday packages! Note however, that as in any learning process, the ultimate success of this programme will hinge upon the extent to which each and every participant exerts himself or herself. Needless to say there is great potential for you to learn from each other as you come from diverse backgrounds and experiences, and there are unique contributions that each one of you can bring to the table. It is therefore my hope that after this course, you will go out fully motivated to make a difference at your places of work by implementing what you have learnt. Share the fruits of this course with colleagues in your respective institutions. This is the very essence of the MEFMI capacity building model and we expect you to be agents of this effort. It is also our expectation that a few months down the line, MEFMI will get a positive feedback from your institutions. Ladies and gentlemen, I would like to wish you all a fruitful programme. While I expect you to apply yourselves with full dedication to the core business at hand, please also find time to enjoy our Malawi hospitality. Lilongwe and its environs has quite a lot to offer, and I hope that over the next two weeks those of you visiting Malawi for the first time will be able to sample Malawi’s social and cultural menu. Without further ado, it is now my humble honour and duty to declare this workshop on Financial Programming and Policies officially open. I thank you for your kind attention. | reserve bank of malawi | 2,010 | 3 |
Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the Mzuzu branch project site handover and pre-contract meeting, Mzuzu, 2 August 2010. | Mary C Nkosi: Mzuzu branch project site handover and pre-contract meeting Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the Mzuzu branch project site handover and pre-contract meeting, Mzuzu, 2 August 2010. * * * The Team Leader of the Consortium (represented by Mr. Davie Chidyaonga) and other members of the Consortium Director of Administration, and members from RBM The Project Coordinator, Mr Morrison Sulumba The Management of SR Nicholas Limited led by Mr G Bizzarro All present I am greatly honoured to be here this morning to deliver the expectations of the Governor, myself and the entire Bank. My presence here is proof of the importance the Bank places on this project which goes beyond the building. The Bank’s presence in Mzuzu will complement development in the City of Mzuzu and the Northern Region as a whole. Let me start by first of all congratulating the Contractor, SR Nicholas Limited, for successfully going through the evaluation process and being awarded this prestigious contract. The competition was tough and therefore this is no mean achievement. At this juncture, let me place on record my gratitude the Chairperson and the entire Internal Procurement Committee of the Bank for a job well done during the tendering process. We know that the award criteria for this contract went beyond the usual price consideration. It mainly considered the capacity to deliver a quality product within the specified period of 24 months. Therefore, issues of experience in projects of a similar nature and magnitude, current commitments and track record of good performance played a bigger role. It is with this in mind that I want to appeal to the successful contractor, SR Nicholas Limited, and all other sub contractors involved in the construction of Phase II that the Bank expects nothing less than a quality building that will be an icon and a centre of public attraction in the City of Mzuzu and will stand the test of time. In this regard, you will be expected to adhere fully to all building standards and specifications. This entails applying world class working methods and use of certified materials throughout the project life. To the Team Leader and indeed the NDDC Consortium, I would like to say the journey continues. You did a good job in Phase I. However, the small problems that surfaced here and there should be considered lessons for Phase II. The Consortium is expected to provide optimum supervision throughout the project life and ensure that all individual consultants in the team are performing as expected. The Bank will be conducting performance appraisals every six months to monitor performance and will not hesitate to server ties with a consultant who is not performing. I would also like to appeal to the Consortium and the Main Contractor to jointly identify all inherent risks that exist as we start Phase II and put in place effective control measures to avoid derailing the project completion date. The risks that are beyond your control should be escalated to the Bank for attention. Issues of cost control on a project of this magnitude cannot be over emphasized. Therefore, all parties involved in this project will be expected to play their rightful roles in cost control. In this regard, the Bank will only honour genuine claims from both the contractor and the consultants. We trust that the bank will not need to call for joint measurements of works done on site before effecting payments. On its part, the bank will look to you, Leader of Consortium for stringent surveillance of cost control at all levels. Ladies and Gentlemen, let me assure all stakeholders of the Bank’s full commitment on this project. Adequate, resources have been set aside to ensure timely payments of all claims by the contractors and fees for consultants. This is a prerequisite for timely completion. The Bank is ready to assist contractors make advance purchase of materials as long as all required procedures are followed and that the arrangement has the blessing of the Consortium. The road has been long for us to arrive at this stage. The design process for the Mzuzu Branch started as far back as 2006. On 16th December 2007, Phase 1 contract commenced with a 42 week contract period. A lot happened and Phase 1 contract period reached 65 weeks. The building was handed over on 30th April 2009, paving way for Phase II. It was intended that by August 2009, the contract for Phase II would have been awarded and that the contractor would be on site. We are now almost 12 months behind schedule. Within these 12 months, many people took it that the project had been shelved, halted, or even abandoned completely. It was very difficult for the Bank to convince the public that the Mzuzu Branch Project was alive even without the physical presence of the contractor. Now that today the contract for Phase II has been awarded to SR Nicholas Limited, the wish of the Bank and the public is that the project should be completed within the contract period of 24 months. We need to restore the confidence our superiors and the public at large seem to be questioning. To the Consortium, you have been on the Project from 2006. I have every reason to believe that all details, drawings, and necessary information for the contractor to start construction are available. To the management of SR Nicholas Limited, this is another challenge and our expectations are that 24 months from the contract commencement we shall all be here, receiving a quality product. I have also been informed that the electrical subcontract has not been concluded yet. I would like to assure you that by the time the main contractor goes on site; the electrical subcontractor will have been procured. We are working round the clock to conclude the matter. The construction period of 24 months is ambitious but achievable as has been seen elsewhere. The Bank wishes to call upon each of you to join hands as partners in completing the project on time. We therefore request you, as usual, to come up with a buildable programme that will include all operations to ensure a successful conclusion and delivery of the Mzuzu Branch offices. On behalf of the Governor of the Reserve Bank of Malawi, I welcome you all to this precontract meeting and look forward to an exciting journey ahead of us culminating in the successful completion of the project. With these few remarks I declare the site handed over to the Contractor; SR Nicholas. I thank you for your attention and may God bless us all. | reserve bank of malawi | 2,010 | 8 |
Opening remarks by Dr Perks M Ligoya, Governor of the Reserve Bank of Malawi, at the launch of the book "Financing Africa - through crisis and beyond", Lilongwe, 7 November 2011. | Perks M Ligoya: “Financing Africa – through crisis and beyond” Opening remarks by Dr Perks M Ligoya, Governor of the Reserve Bank of Malawi, at the launch of the book “Financing Africa – through crisis and beyond”, Lilongwe, 7 November 2011. * * * Ms Sandra Bloemenkamp, Country Manager for Malawi, World Bank Mr. Douglas Arbuckle, Mission Director, USAID Malawi Richard Dictus, Resident Coordinator, UNDP Distinguished Resource Persons Workshop Participants Ladies and Gentlemen Opening Remarks I am honoured to join you this evening at the launch of a flagship publication, Financing Africa: Through the Crisis and Beyond. This publication is a milestone study on the financial sector in Africa. It takes a fresh look at Africa’s financial systems in the light of major changes that have taken place in the global financial structure in the wake of the 2008 global financial crisis. The study covers Africa’s challenges in developing and safeguarding the current financial system. Ladies and Gentlemen, the main barriers to financial sector development in Africa include access to finance and high cost of loans. To grow and improve its productivity, the African financial system needs more competition and be more innovative. The increased competition would promote financial innovations and adoption of new technologies; this would ensure better services to customers and an expansion of these services to new clients. Ladies and Gentlemen, financial innovations comprise a variety of new products. Recent examples in Africa include mobile banking (access to basic payment services through mobile phones), and new players in the financial systems such as deposit taking microfinance institutions, and agency banking (where banks are allowed to engage third parties to provide certain banking services on their behalf without having to put up brick and mortar). Ladies and Gentlemen, this expansion must be done while paying attention to the users of financial services. Adequate financial literacy should be infused to both businesses and households through development of financial skills and establishment of frameworks for consumer protection. The book contains a series of indicators on access, size, and efficiency of financial services in Africa. Today, African banking systems are stable, well-capitalized, and have good liquidity levels. However, they lack depth, because they are too dominated by banks. The transactions are mostly short-term, which is hardly conducive to business development. Financial systems also lack momentum, and penetration of the bank branches per capita is well below world averages. Furthermore, banking services are expensive and limit households’ access to basic financial services. It is therefore encouraging to note initiatives by some banks to reach out to the “unbanked” populations. BIS central bankers’ speeches Finally, may I assure you that the Reserve Bank of Malawi will always strive to provide an enabling legal and regulatory framework to encourage innovations by all players in our financial sector in order to enhance access to financial services. In this regard, we will continue to work with stakeholders to put in place an enabling environment for business to thrive. I thank you for your kind attention, and God Bless you all. BIS central bankers’ speeches | reserve bank of malawi | 2,011 | 11 |
Keynote address by Dr Grant Kabango, Deputy Governor (Supervision of Financial Institution) of the Reserve Bank of Malawi, at the seminar on "Financial services laws for lawyers", Zomba, 22 June 2012. | Grant Kabango: Financial services laws for lawyers Keynote address by Dr Grant Kabango, Deputy Governor (Supervision of Financial Institution) of the Reserve Bank of Malawi, at the seminar on “Financial services laws for lawyers”, Zomba, 22 June 2012. * * * The President of the Malawi Law Society, Mr John Gift Mwakhwawa; The General Counsel and Bank Secretary, Mr Samuel Malitoni; Distinguished participants; Ladies and gentlemen; It is indeed an honour for me to address this distinguished gathering whose main purpose is to provide an opportunity to the Malawi Law Society to be acquainted with the financial services laws in particular, the Financial Services Act 2010, the Banking Act 2010, the Pensions Act 2010, the Securities Act 2010 and the Insurance Act 2010. This seminar will also afford the Reserve Bank of Malawi an opportunity to highlight areas that are likely to be controversial in the financial sector, leading to litigation in the High Court and subordinate courts. Distinguished ladies and gentlemen, As a way of background the legal and regulatory reforms project started way back in 2002. Under the auspices of World Bank and the Malawi Government, FIRST Initiative, a consultancy firm, was engaged to carry out an assessment of the financial system in Malawi in 2004 to 2005 through the Financial Sector Regulatory Reforms Programme. The assessment concluded that the financial sector in Malawi was relatively underdeveloped and that there was need to institute measures to deepen and broaden the sector so that it should contribute more to economic growth of the country. The report also noted the financial sector to be bank-centric with very low penetration of non-bank financial products. In view of these findings, the report identified the following as challenges and requirements for the RBM and Government relating to the financial system: • The need to introduce measures to enhance penetration of financial services in the country particularly non-bank financial products; • The need to introduce measures to increase overall mobilisation of savings particularly contractual savings which are long term in nature and can therefore be channelled into productive investments; • The need to find ways to increase the use of markets relative to financial institutions; • The need to find means of increasing the diversity of financial products available for diversification of risks. Distinguished participants; As a way of dealing with the above challenges, the RBM and Government came up with a policy drive to develop a vibrant non- bank financial sector alongside the existing banking industry to add a degree of resilience to the financial system. This was basically achieved through the introduction of comprehensive regulatory reforms for the financial sector which involved the modernization of existing legal frameworks such as the Banking Act, Insurance Act and Securities Act; and development of new laws for those sectors which were not regulated by the RBM, for example, the pensions, microfinance and financial cooperatives. BIS central bankers’ speeches The central feature of the reforms was to consolidate the supervisory responsibility for the financial sector in a single agency and bring Malawi in line with international best practice. This would create a platform for effective financial sector supervision from which the financial institutions can better contribute to the growth and development of the country. On its part, the RBM restructured its regulatory and supervisory function in 2005 in a bid to prepare and improve its capacity to supervise and regulate the whole financial system in Malawi. This was done by splitting the function into two distinct departments namely, Bank Supervision and Supervision of Non-Bank Financial Institutions Departments. The latter was split again in 2010 into Pensions and Insurance Supervision Department and Capital Market and Microfinance Supervision Department. It is envisaged that the two departments will be split again in future to recognize the distinct characteristics of the different sectors being supervised. Distinguished ladies and gentlemen; The importance of a vibrant financial sector with a strong legal framework cannot be overemphasized. Financial institutions play a major role in the economic growth of any country. Deposit taking, lending, payment and settlement activities of financial intermediaries have placed banks and other financial institutions at the centre of economic activity of any country. In addition, other sectors of the financial services industry such as life insurers, pension fund schemes, and equity markets broaden and offer depth to the financial system, by providing infrastructure for pooling long term national savings and re-channelling them into productive investments necessary for growth. General insurers on the other hand provide risk transfer mechanism that allows big projects to be undertaken in a country without fear of risk. The RBM, in its efforts to facilitate strong and stable growth of these financial institutions, apart from the laws that have been enacted, has organised this Seminar with the aim to assist legal practitioners understand issues relevant to the financial services industry. This will also help in reviewing the legal framework as the legal practitioners share experiences and bring to light issues that need attention. Thus, given the overall importance of financial institutions in the development activities of any country, governments worldwide regard the financial sector as an industry with strong public policy implications, whereby the development and stability of the industry are treated as matters of paramount importance. This is so because it is well recognised that financial sector and economic development in any country go hand in hand and that the collapse of the sector can have serious negative effects on both the socio-economic and political state of any country. It is therefore important that the financial sector be backed by a strong legal framework. This is even important realising the economies are susceptible to crises as experienced in the recent global financial crisis. A robust legal and regulatory structure can act as a bulwark against the backdrop of the crisis, providing clarity and confidence for market players and consumers alike. Distinguished ladies and gentlemen, It is pleasing to note that from 2010 to-date, Parliament has passed the following Acts: • Financial Services Act • Banking Act; • Reserve Bank of Malawi (Amendment) Act; • Microfinance Act; • Insurance Act • Securities Act • Credit Reference Bureau Act BIS central bankers’ speeches • Financial Cooperatives Act and • Pension Act. Of all these Acts, I wish to draw your attention to the Financial Services Act. This is an umbrella law for the financial services industry which is interlinked with all other individual sector laws cited above. It consolidates the supervisory responsibility for the whole financial sector to the Reserve Bank of Malawi Governor, as Registrar of Financial Institutions. It also incorporates more detailed requirements for licensing of all financial institutions in order to be in tandem with current standards. Therefore, as we look at sector laws, we should always be mindful of the provisions of the Financial Services Act, which is an all encompassing law. Distinguished participants; You may recall that the process of enactment of some of these laws was not always a smooth one, often faced with objections from various stakeholders of some provisions. As such, the Reserve Bank of Malawi is fully cognisant of the fact that the implementation of these financial services laws shall in some instances be met with resistance, thus giving rise to legal suits. It is in this regard that we believe that a seminar of this kind is very important and timely, as it will give you lawyers an opportunity to familiarise yourselves with these laws and take note of possible litigious areas. Looking at the seminar programme, I am very optimistic that the objectives of this seminar will indeed be achieved. Let me ask all distinguished participants to be fully involved in this seminar so that at the end of the day, we shall all benefit from the presentations and discussions that will be made. It is the belief of the Reserve Bank that this is just the beginning of such consultations with the Malawi Law Society and other stakeholders in the financial sector, as we try to strengthen the financial sector, for the good of our nation. Ladies and gentlemen Finally, I would like to thank Management of Sunbird Ku Chawe Inn for providing excellent facilities for this seminar. Once again, the Reserve Bank of Malawi warmly welcomes all distinguished participants to this seminar. I wish you very fruitful deliberations. Mr. President, ladies and gentlemen Thank you for your attention and may God bless you all. BIS central bankers’ speeches | reserve bank of malawi | 2,012 | 9 |
Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the business breakfast organized by Sunbird Malawi, Blantyre, 29 June 2012. | Mary C Nkosi: Reflections on Malawi’s economy Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the business breakfast organized by Sunbird Malawi, Blantyre, 29 June 2012. * * * • The CEO of Sunbird Malawi, Mr Roger Gardner • The Director of Finance for Sunbird Malawi, Mr Patrick Lisilira • The Chairman of the Malawi Confederation of Chamber of Commerce and Industry (MCCCI), Mr Chikankheni • Chief Executive Officers of various organisations represented here • Distinguished Guests; • Ladies and Gentlemen I am delighted to be here this morning at this important Business Breakfast organized by Sunbird Malawi. Let me start by applauding the management of Sunbird Malawi for their foresight in fostering discussions and debate on issues that affect our economy through such an interaction. It is through such fora that the intellectuals and business community in this country make enormous contribution to the policy making process. I am aware of your active participation in Ministry of Finance pre-budget sessions and other brainstorming and consultative sessions on the economy. We do not take that for granted. It shows your commitment to seeing positive change in our economy. At the mention of a business breakfast, my expectation was that it was going to be a time to enjoy breakfast while listening to business people discussing. But when I learnt of what was expected of me, I was able to understand the importance if this occasion to the business community and the valuable opportunity it provides in enabling us to interact and share ideas on issues that affect our day to day life, especially things that affect the economy and lives of many Malawians. I deem the theme “Think Global, Act Local” as a very important one especially at this juncture when tremendous will and effort is being applied to fight the numerous challenges facing us. There is renewed optimism amongst Malawians, especially the business community; reflecting the desire of every Malawian to see that the economy is doing well and that most people have sufficient income for essentials and perhaps a little extra. We would want to see that businesses are hiring and jobs are relatively easy to get. We may, not have a job for everyone but we would like to see that everyone is well off. Distinguished guests, ladies and gentlemen, The economic problems we have been facing in recent years reflect, to a large extent the sources of our growth. The Malawi economy, prior to 2011, performed well, supported by macroeconomic stability. However, this growth led to a rapid rise in imports, which outpaced the growth of exports and contributed to the widening of the external current account deficit, and to falling international reserves. Distinguished guests, ladies and gentlemen, Malawi’s economic growth slowed down significantly to 4.3 percent in 2011 after enjoying growth rates above the needed 6 percent since 2005. Actually growth averaged 8 percent between 2007 and 2010 with agriculture taking the lead and other sectors benefiting from the growth in agriculture. The recent underperformance is largely registered by sectors that heavily depend on BIS central bankers’ speeches imports – manufacturing, transportation, construction and wholesale and retail trade sectors – reflecting unavailability of foreign exchange in the domestic market. Growth is expected to stagnate in 2012 and remain at 4.3 percent but will pick up in 2013 with a projected growth rate of 5.7 percent. The rate of inflation has trended upwards since early January 2012 reaching 17.3 percent in May 2012 (12.4 percent in April), largely explained by rising import costs, as imports have been priced at a much depreciated rate. Gross official reserves have declined from slightly over $218 million (1.7 months of prospective imports) in June last year to just over $120 million (one month of import cover) by end-April 2012. Money supply has been growing at unprecedented levels, an average of over 30 percent since early 2011 owing to expanded net credit to government as government revenue performance was negatively affected by the underperformance of businesses in recent years. Ladies and gentlemen The results of all that we were going through started manifesting in November 2009 when we started having queues for forex. After our suppliers cut our lines of credit, we did not adjust accordingly although we are a price taker and with worsening terms of trade there seemed to be no end to the woes. Whereas Malawi escaped the first round effects of the Global Financial Crisis, we were caught up in the second and third round effects in 2009/10. Our foreign markets started to adjust their demand for our commodities and at the same time global financiers started to look cautiously at their balance sheets resulting in locking up the financing facilities. As you might be aware, the tap of foreign aid at that same time was closed due to political and economic governance issues. Revitalising the economy remains our biggest challenge but it can be done. The good thing is that we know where things went wrong and if that were corrected, it is not too late to get back on a positive trajectory. Recent policy changes, including the 49 percent devaluation of the official Malawi kwacha exchange rate against the US dollar, and the subsequent floatation of the kwacha exchange rate are some of the policies that are being put in place to create a better Malawi. There will be short term costs, but the long-term gains more than compensate for the losses. Ladies and gentlemen We made it clear at the onset that the adjustment we have taken will have a price that we all, Malawians have to pay in order to have a long lasting solution. Waiting any longer would have been worse. At the Bank we do not envisage a reversal on the position that we have taken. The results in the short term have been exceptional. Forex is now available; the queues at the bank for forex and fuel have dissipated. Tobacco prices are good and we anticipate a reversal in the tobacco production this coming season. There is an immediate pass-through to price increases and we anticipate the full effect of the devaluation in the next six months with inflation going up from the March level of 12% to an average of 18.4% in 2012. However we anticipate an amelioration of inflation to average 16.1% in 2013 and returning to a single digit average in 2014. The most frequently asked question is: “How will the Reserve Bank ensure sustainability of foreign exchange?” I am proud to report that the Bank has put tremendous efforts to address the supply side of foreign exchange. You may be aware that the Bank has taken a lead in the Export Development Fund (EDF) initiative to promote exports in the country. Consequently the Government has developed the National Export Strategy (NES) to be implemented through participatory process to transform Malawi from a predominantly importing and consuming nation to becoming a producing and exporting nation. The NES will prioritise BIS central bankers’ speeches investment incentives to develop productive capacity, encourage foreign and domestic investment and ultimately create sustainable export capacity. Ladies and gentlemen You will agree with me that Malawi has lagged behind its neighbours in the sub-Saharan Africa with its share of regional exports to the world declining sharply over time in terms of the business environment indicators such as transaction costs and infrastructure. Adjusting the exchange rate regime was one of the measures to enhance Malawi’s international competitiveness. The bank recognises that further steps still remain to be undertaken, such as removal of structural bottlenecks that are retarding growth and diversification of the economy, e.g. reliable and adequate supply of energy. The Bank believes that the private sector is an engine of growth in any economy. But for the private sector to make any impact the Bank would encourage that they should improve on their efficiency in both resource mobilisation and allocation. Ladies and gentlemen Why do we think that the steps we have taken are plausible and will work for Malawi? Malawi has actually come late in responding to problems we were facing. There is a lot to learn from our neighbours who went through similar situations and had responded. We are far behind some of the countries such as Zambia, Uganda, Tanzania and to some extent Mozambique who liberalised their financial sectors some time ago. It was also painful for each one of those countries but the pain did not last. Mr. Chairman, ladies and gentlemen I thank you for your attention and God bless you. BIS central bankers’ speeches | reserve bank of malawi | 2,012 | 9 |
Address by Mr Charles S R Chuka, Governor of the Reserve Bank of Malawi, at the Economics Association of Malawi (ECAMA) business dinner, Blantyre, 20 July 2012. | Charles S R Chuka: Looking at Malawi’s future Address by Mr Charles S R Chuka, Governor of the Reserve Bank of Malawi, at the Economics Association of Malawi (ECAMA) business dinner, Blantyre, 20 July 2012. * * * The Patron, Economics Association of Malawi, Mr Thom Mpinganjira; CEO of FDH Financial Holdings; Acting President of ECAMA, Mr Edward Chilima Distinguished Guests; Ladies and Gentlemen; It gives me enormous pleasure to be amongst you tonight and so I do want to say, thank you, for inviting me to this annual dinner. I have been reminded this evening that, by virtue of being Governor of the country’s “dreaded” central bank, I also assumed the position of Chairman of the Board of Trustees of the Economics Association of Malawi. While I am yet to fully appreciate my new role in the Association, I am most grateful to whoever came up with the idea of honouring a Governor with such responsibility. Allow me for a moment only to count my luck that many of the stones that will be thrown upon me will not come from this highly cultured group. In such turbulent waters, it is always worthwhile to take time off to interact and share hopes and fears with others equally stressed by the unwelcome costs of adjustment to such an acute macroeconomic misalignment as that Malawi went through in last five years. I do not intend to recap what happened since 2004 – well that is a year after I took an early retirement – a well-deserved one. Suffice to ask a few questions: when fate has placed upon you responsibility for monetary policy, what do you do if you find yourself siting on less than one month import cover, money stock is growing consistently at above 30 percent a year and inflation that used to be in single digits for a while – thanks to cash transfers to farmers – is accelerating fast. But hold on, a few clarifications are in order here: first, what I called one month import cover should be adjusted by the fact that the banking system was holding payments arrears of about $400 million, and you have no idea what was kept outside that system. Second, the increase in money stock was being pushed by credit expansion to both the private sector and government. And this despite the fact that you had a zero fiscal budget. Yes, I heard you saying to me, Mr. Governor, get to the point. How do you justify the excruciating pain being experienced by industry and the man on the street? You devalued by a whole 49 percent to K250 and the currency has depreciated since then by another 14 percent to K285. Then from nowhere you increased interest rates by an ugly 5 percentage points! That’s not all, Mr. Governor; you have done nothing when the banks raised lending rates not by 5 but by 10 percentage points! Give me a chance to respond albeit briefly. As we are dining here tonight, the IMF team working on Malawi’s request for a new Fund- supported economic recovery program, and Malawi’s Executive Board member in the Fund, are putting together a BIS central bankers’ speeches strong case that Malawi deserves to be supported in its recovery program. I can envisage the way the case will be laid out. Let me try to put the argument before the IMF Board: In sharp contrast to the political impasse to effectively deal with the country’s problems under the Bingu regime, indeed departing sharply from the country’s history of stop-go policies, the new government of H.E. Mrs. Joyce Banda has undertaken bold measures to correct long- standing macroeconomic imbalances and to set the stage for an economic recovery in the months ahead. The local currency has depreciated by 63 percent in the last two months and interest rates have been hiked with the Bank Rate jumping from 13% to 23% to tame underlying inflation pressures and support the Kwacha exchange rate which now floats freely. Indications are that the pace of reforms will be sustained consistent with the agreed program in view of the President’s demonstrated passion to transform Malawi and improve the welfare of her people. The President has also taken clear steps to allow the central bank policy independence which Malawi badly needs. We therefore recommend approval of Malawi’s reform program with a doubling in access to Fund resources. Well, I believe I can afford to be presumptuous here, if this story line is true, then the chances are that come Tuesday morning Malawi will wake up to realize that the IMF program has been approved and if the government can adhere to its stated policy of zero borrowing, then Malawi’s future is on the right path. You can imagine what some of us feel when we read in the papers and hear on the radio, and indeed hear in some circles “amenewa ndiye sakutithandiza”. Dumbani Mzale in an article in today’s The Nation tried to produce a balanced article by putting together the comments by World Bank’s Country Manager, and those by Ben Kalua, with a rejoinder from an unnamed economist arguing that “recent monetary policy developments have triggered a high cost of borrowing by the private sector which could essentially retard Malawi’s gross domestic product (GDP) of 4.3 percent manufactures .will incur huge cost of production which could force them to pass on to consumers; hence exerting pressure on the headline inflation rate.” I wish I was in a position to determine how many economists agree with which side of the story. I will never know of course. But my sense is that even learned economists and experienced businessmen share the sentiments of the unnamed economist. Fortunately, the IMF Board will not say to the staff team, hold on, what we hear in Malawi is that people are hurting, companies are closing down, the government has no will or capacity to see through this complex reform program. No, they will not say that, not because it cannot be said but because we are not a special case. Many people around the world are going through the same thing. Not because the IMF says so. But because when you mess up you pay the price. We all messed up. We all consumed beyond our means, thanks to an over- valued exchange rate. We all praised the government for single digit inflation and we agreed with the measures being put in place to generate foreign exchange. To justify an over-valued currency, we called upon government to force every exporter to repatriate our hard won foreign exchange – I am yet to fathom how a country can claim hard currency it has not earned – the government only owns what it earns through taxes and the hard currency earned through sales of its local currency. The government does not own anybody’s assets, and that’s by Constitution. BIS central bankers’ speeches The short of the story is that we have all become Indigenous Economists – we recall that we have lived on subsistence farming all our lives, we will make it. Global rules of the game do not apply to us – we have our own rules. The man on the street is entitled to undiminished income. He is entitled to zero inflation. If the government has devalued the currency, it must increase salaries by as much. I am not even sure that the ailing companies have the resources to fully compensate for the lost purchasing power without passing on the cost to the same consumer. We want to live comfortably as before, forget the fact that others are unemployed because we are busy exporting jobs through an overvalued exchange rate, through negative interest rates that undermine the savings culture and encourage low productivity. Forget the many hours spent out of the office in search of fuel that never came or that finished just before we got there. Allow me to conclude on the following note. If we had a choice, we would have left the Kwacha and interest rates alone. However, the extent of economic malaise was unprecedented in our short history and it will take a lot more work and sacrifice by the man on the street before things get better. This is not the time for growth. It is the time for correction. Hopefully by this time next year, so I believe, this country will be different. The key to successful recovery will be the patience of the man on the street and the political will to implement the 2012/2013 Budget as passed. With that the currency will stabilize; interest rates will begin to come down; foreign exchange reserves will be built up and investors will start looking at Malawi again. Inflation should be contained within an average of 18.5 percent in 2012, coming down slightly to about 16 percent in 2013 but with a much lower rate at year-end. Growth will pick up as projected at 5.9 percent and payments arrears will be history. We will forget that fuel used to be scarce. With increased reserves, we will open up trade more so that Malawians can enjoy the economic freedoms so enshrined in our Constitution. That will be the time for the central bank to watch carefully growth prospects and prevent a runaway inflation – single digit inflation will come but in a sustainable way. I can foresee increasing investment in both export and import-substitution industries. That’s what a free float supported by appropriate other monetary and fiscal policies brings about. Obviously, that brings about some instability but not forex shortages. By the way, with a free float you do not need 3 months import cover every time. But we must build up reserves even beyond three month because this is a country and we face many exogenous shocks which require reserves to be addressed expeditiously. Well, we do not have the luxury of the counter-factual – what would have been the situation had the government – as two journalists have put it this week – through the Reserve bank of Malawi, taken the policy actions to-date. We will never know. As I close, I believe commendations are in order for your continued participation and contributions towards ECAMA, its mission, as well as for the way you have championed economics. Now everyone wants to be known as such. You have more work to do ahead of us. Keep the torch burning. Oh, yes, perhaps I should remind us that ECAMA’s sole existence depends on our resources, time, and dedication. Your gathering here tonight in such large numbers to dine and share economic experiences is clear evidence of your willingness to enhance the economic profession and progress in the country for the benefit of the state and its BIS central bankers’ speeches citizens. Please do make sure you are a registered member and to pay any dues. You get from ECAMA what you put in – ideas for strengthening the Association. With these remarks, it is now my pleasure and privilege to wish you a great dinner and fruitful discussions, bon appetite. I thank you for your attention. BIS central bankers’ speeches | reserve bank of malawi | 2,012 | 9 |
Address by Mr Charles S R Chuka, Governor of the Reserve Bank of Malawi, at the Bankers Association Dinner and Dance, Blantyre, 8 September 2012. | Charles S R Chuka: Financial and economic challenges for Malawi Address by Mr Charles S R Chuka, Governor of the Reserve Bank of Malawi, at the Bankers Association Dinner and Dance, Blantyre, 8 September 2012. * * * The President, Bankers Association of Malawi, Mr. William Chatsala and your Executive Committee Chief Executive and Management of Banks and Other Financial Institutions The Vice Chancellor, Dr Emmanuel Fabiano The Principal of Polytechnic, Dr Grant Kululanga The CEO, Bankers Association of Malawi, Mrs. Nkungula, Distinguished Guests Ladies and Gentlemen I am very delighted to be part of this colourful occasion. And so I want to thank you, Mr President, for the invitation to partake in the dinner that is soon to be served. It is the dining and wining part that I came for but I can also well appreciate why you would want me to say something, albeit short. I therefore intend to be very brief in my remarks. Mr president, ladies and gentlemen Let me start by applauding BAM executive management for being foresighted in fostering discussions and debate on issues that affect the banking industry and thus the entire economy. It is through occasions like this one that the financial and banking experts in this country can make enormous contribution to the policy making process. I can assure you that we – the Reserve Bank of Malawi team – do carefully listen to sentiments expressed in our consultations as well as the media. I must admit there are public sentiments that we prefer to ignore. Allow me to give you some examples. First, on August 14 The Nation carried a story “Banks Borrow K0.8 trillion from RBM”. That was for the month of July, meaning the RBM went away with K1.4 billion in interest. Obviously, the so called banking liquidity crisis was going to get worse with borrowing from the Discount Window. Well, the truth of the matter is that the K25.9 billion daily average was a rolling figure and not to be treated as separate borrowings. Today it was the turn of Daily Times which carried the title “Scrap off floating exchange regime”, the argument being it makes planning difficult. Well, I hope that IBAM members made more money when the Kwacha was fixed. My sense is that planning meant nothing then in the absence of hard currency in the banks. I think that IBAM members stand a greater chance than hitherto to make more money. At the same time, however, I want to agree that achieving stability remains the overarching goal for the Reserve Bank of Malawi. I am referring to stability that will be sustained and not temporary – so businesses can plan better with much longer time horizons than was possible before the floatation of the Kwacha. Mr president, ladies and gentlemen As a listening organization, there is something we must clarify though. The 49% devaluation and the subsequent (15%) depreciation of the Kwacha has increased prices but not by 64 per cent. The real effect of currency adjustments comes through the rate of inflation – that’s what measures the average change in prices and thus the loss in purchasing power for BIS central bankers’ speeches the nation as a whole. This explains the acceleration of inflation from 12.4% in April to 21.7% in July. By the way, urban inflation rose from 15.5% to 25.1% during the period. We estimate inflation to be between 21% and 24% by end-year with an average of between 17.5% and 19.8% for the year. Thus, when all companies come to review salaries in January 2013, adjustments in salaries will not exceed the average inflation unless that particular company has made huge profits. Adjustments effected during this year will be taken into account accordingly. It is therefore quite instructive of the nature of and motivations in our public discourse to hear the kind of salary increases that some of our esteemed institutions and social advocates are calling for. I very much hope that the employers will be standing and the workers will still have their jobs when all the demands are met. Ask the person who has no job how life is like. If in its wisdom the government succumbs to the demands of our public institutions, the results are not hard to contemplate. First of all, there is a limit to the ratio of wages and salaries to the total recurrent budget. Anything beyond that limit is unsustainable and the government will one day be forced to reduce its establishment. Unless substantial cuts are made in other budgetary lines to cutter for the unplanned salary adjustments, the 2012/2013 budget will become very difficult to implement, domestic borrowing will increase, and with that pressure will mount on the Kwacha exchange rate and interest rates. The result will be higher inflation and continuous loss of purchasing power for wage earners. The country could enter into a vicious circle which could be even harder to break. Of course few people would believe that – after all things in Malawi have never become that bad, except to remember that we remain among the poorest of nations after nearly 50 years of independence. Mr president, ladies and gentlemen I very much hope that in our life time we will all manage to build an economy in which all citizens will have the opportunity to fully participate in the generation of income and enjoyment of fruits of their labour. Public discourse will be about how to sustain development and the welfare of all citizens. We will have dispensed with windy and inconclusive debates on the negative impacts of devaluations and high interest rates on the man in the street. Labour relations will be more constructive than destructive – employers and employees will be discussing how to improve productivity so that their company can beat the competition and all staff can get bonuses. The economic environment that I am describing is quite possible with a floating exchange rate, and a government that is totally committed to fiscal prudence. The Kwacha exchange rate will have – for all practical purposes – adjusted fully to economic fundamentals and fluctuations will reflect inflation differentials with our major trading partners and the impact of exogenous shocks. In such a scenario I believe the level of foreign exchange reserves could exceed six months of imports. In today’s terms, that is almost equivalent to 100% foreign exchange cover for the total money supply. Mr president, ladies and gentlemen Way before that, there will be no need for exchange controls that have hitherto crippled the ability of the citizens to protect the purchasing power of their savings and thus their ability to increase investments in productivity capacity. For instance, if you got your pension commutation on April 30, your plans to build a house or invest in a small business are now a pipe dream because the 49% devaluation plus the 15% depreciation since then have cut the purchasing power of your pension by over 60%. Perhaps you should be satisfied with an investment in a bicycle. BIS central bankers’ speeches However, for those Malawians that have access to hard currency all the time, their story is totally different. By holding onto some dollars which they sold after the devaluation, they have become relatively richer. In others words, for most of us, exchange controls inhibit active risk management and foster social inequalities. Instead of being a temporary measure to manage the oil price shock in late 1970’s, exchange controls have become a permanent feature of our economy. We are now scared to remove them as exogenous shocks – fuel price increase increases, unfavourable terms of trade, global financial crises and so forth – have never given Malawi a breathing space. Our neighbours in Zambia were wiser: they abolished exchange controls in the 1980’s. At that time both Malawi kwacha and Zambian kwacha were about 2 to US$1. Today Malawi’s is approaching K300 and Zambia’s about K5, 000. Until recently, Zambians were completely free to choose between holding, quoting or transacting in US dollars. The job of defending the Zambian Kwacha’s role as legal tender fell on the fiscal authorities and not the central bank or man in the street. Indeed, the Bank of Zambia became more of a central bank as the conduct of monetary policy became much easier and credible. Recent changes are raising questions not about the efficacy of removal of exchange controls but government’s resolve to sustain fiscal prudence. Mr president, ladies and gentlemen I refer to the Zambia only to underscore the fact that the Kwacha has been floated within a constrained framework – it is still strongly supported by exchange controls on capital transactions – that is movements of funds across the border for investment, savings or good old speculation is prohibited. You are even prohibited from holding onto dollars without permission. It is currently illegal to quote or make payments in hard currency. In the circumstances, therefore, there is a limit to which the Kwacha can depreciate. While it is difficult to estimate that limit, it is definitely the amount of money to purchase hard currency that matters most. This is where the Reserve Bank of Malawi comes in – to balance the supply of money to economic activity and in so doing contain inflation and exchange rate stability. That work is made extremely difficult when the government of the day is forced to print money. That is why the government has committed itself to zero domestic borrowing in order to ensure early attainment of macroeconomic stability and thereby help Malawians to have a chance to improve their lives. Growth and job creation requires a stable environment; we are not yet there, and please do not rock the boat. Mr president, ladies and gentlemen Analysing the on-going labour disputes and to suggest a solution is obviously beyond my pay-grade. I am, however, comforted in the knowledge that all concerned citizens understand the risks ahead of us and the need to stabilise the economy, enhance growth and create jobs. For that, we also need strong banks, banks that can facility investment. Banks that can afford to set aside some capital to cover loans or investments in junk bonds. By junk bonds I mean loans to investors who have minimal resources or just good ideas – very risky borrowers. It is only strong banks – well capitalised and solvent – that can afford to take on such risks. It is strong banks that can facilitate access to finance by the SME’s that are so critical for Malawi’s growth and job creation – not banks that are likely to lose shareholder value by lending carelessly. Ensuring a strong financial system is one of the major roles of the Reserve Bank of Malawi. In this task, we will be as professional as possible. We will do everything in our power and capacity to protect the savings of the man on the street whether such savings are placed in BIS central bankers’ speeches banks, pension funds or insurance and assurance companies. The days for financial institutions that can’t pay up or run away with people’s savings have since passed. Financial institutions should at all times represent a beacon of hope and prudence, underwriting good business and facilitating maintenance of sound macroeconomic fundamentals. In other words, financial institutions must champion financial deepening and access to finance in a sustainable manner. Financial soundness calls for a focus on longterm profitability and not on short-term profit taking. Mr president, ladies and gentlemen I have taken too much of your time and now it’s time to wish you an enjoyable evening. I thank you for your attention and may God bless you. BIS central bankers’ speeches | reserve bank of malawi | 2,012 | 10 |
Speech by Mr Charles S R Chuka, Governor of the Reserve Bank of Malawi, at the opening ceremony of the MEFMI regional workshop on "Intermediate banking supervision", Blantyre, 24 February 2014. | Charles S R Chuka: Intermediate banking supervision Speech by Mr Charles S R Chuka, Governor of the Reserve Bank of Malawi, at the opening ceremony of the MEFMI regional workshop on “Intermediate banking supervision”, Blantyre, 24 February 2014. * * * The Executive Director for MEFMI, Dr. Ellias Ngalande, The Deputy Governor, Supervision Dr. Grant Kabango, The Director of Bank Supervision, Mr Eldin Mlelemba and your Supervisors here present, Esteemed Resource Persons, MEFMI Staff, The Course Participants, Ladies and Gentlemen. I wish to extend a warm welcome to all of you to Malawi, and to the Intermediate Banking Supervision workshop. Allow me to welcome in a special way participants from central banks in the region. I very much hope that you will find the Blantyre environment enjoyable during your stay. It gives me great pleasure to join you for the opening session of this important regional workshop. I want to thank the Executive Director for inviting me to make a brief statement. We live in times of an increasing integrated global community. In particular, the growing role of pan-African banks means that our financial systems are getting interlinked at a pace that creates special challenges to bank supervisors. In particular, capacity challenges have become acute over the past ten years or so. Central Banks have found it hard to retain supervisory skills against the back drop of competitive remuneration packages in the private sector. As a result serious skills gaps have emerged in banking supervision. It is in this context that I wish to applaud MEFMI for its efforts to contribute to capacity building in bank supervision at regional level. I have no doubt that this workshop could not have been better timed. Malawi’s banking system has eleven banks three of which are pan- African: Standard Bank, NEDBANK and Ecobank. But there is also strong foreign presence in three other banks. Moreover, some of the locally registered banks have already opened branches or acquired controlling stakes in banks in neighboring countries. These developments have far reaching implications for bank supervision, including the need to ensure that our staffs are knowledgeable fully in the application of international standards and codes in the bank supervision. They also must grapple with the complexity of bank resolution of pan-African banks. It is in this context, that all countries in the region are at various stages of BASLE standards for bank supervision. You will be interested to know that Malawi has this January implemented Basle II and we hope to catch up with those already on Basle III. Ladies and gentlemen, I have looked at the programme planned for these five days and I note that it covers intricate and crucial issues in the art of bank supervision. I also note that you will also have an opportunity to hear a banker’s perspective of corporate governance and risk management among others. Clearly, the topic selection and coverage should keep all participants excited not just to learn from the resource persons but also to share experiences across the region. I am convinced, therefore, that you do not need any urging from me to remain focused. BIS central bankers’ speeches Ladies and Gentlemen, one of our mandates as central banks is to ensure soundness and smooth functioning of financial institutions. We do this by contributing to the development of a system that effectively intermediates funds between savers and investors, and thereby supporting investment, trade, employment and economic development. We also have a responsibility to create effective supervisory frameworks and regulations with clear mandates, operational independence, defined accountabilities, appropriate tools and adequate resources. To ably do so, calls for insight into the operational environment, regional and international trends, as well as technical capacity which is central to this Intermediate Banking Supervision workshop. The task ahead of you, therefore, is to learn and absorb as much as possible. Thereafter, use the knowledge and make a difference. I am confident that you will leave this forum with a new mind set, that is, a pragmatic paradigm shift to put into practice what you will have learnt and, a renewed commitment to improve supervisory frameworks in your respective countries. Once again, may I take this opportunity to weIcome you all to this workshop and in particular to Malawi. I also wish to welcome and thank our distinguished resource persons, for accepting invitations to come for this workshop. Finally, Ladies and Gentlemen allow me to take this opportunity to express my gratitude to the Reserve Bank of Zimbabwe, Bank of Tanzania, and Standard Bank Malawi Limited for releasing officials from their institutions to facilitate in this workshop. I wish you all the best during the workshop and your stay in Blantyre. With these remarks, I declare this workshop officially OPENED. Thank you. BIS central bankers’ speeches | reserve bank of malawi | 2,014 | 4 |
Address by Mr Charles S R Chuka, Governor of the Reserve Bank of Malawi, at the Guest of Honour at the Inauguration of CDH House, Blantyre, 24 June 2014. | Charles S R Chuka: Review of the financial sector in Malawi Address by Mr Charles S R Chuka, Governor of the Reserve Bank of Malawi, at the Guest of Honour at the Inauguration of CDH House, Blantyre, 24 June 2014. * * * Protocol Mr Franklin Kennedy, Chairman of the Board of Directors of CDH Investment Bank (CDHIB) and your fellow directors Mr Misheck Esau, Chief Executive Officer, Management and Staff of CDHIB Dr Grant Kabango, Deputy Governor, Supervision Mr Eldin Mlelemba, Director of Bank Supervision and Officials from the Reserve Bank of Malawi Distinguished invited guests, CEO’s of banks, private and public institutions Blantyre City Chief Executive Officer Mr Ted Nandolo Ward Counsellor, Counsellor Noel Chalamanda The Officiating Clergy Director of Ceremonies, Mr Benedicto Malunga Members of the press Ladies and gentlemen I wish to begin by thanking you Chairman and the Board for inviting me to perform the honourable task of inaugurating the CDH House. Taking tour of the building convinced me that you mean business, that you intend to grow your bank and to be a significant player in contributing to the economic growth of this country. Indeed, the transformation from a discount house which operated for fourteen years to a bank in April 2012 is a remarkable achievement. I recall in 1998, when we licensed Continental Discount House, there had not been such a financial institution before. However, in view of the need that the Central Bank saw in the market, we found room in the banking laws to license a discount house. The need was to encourage the trading of financial instruments such as Treasury Bills and others. At the time money market investors were not able to access liquidity from their investments in financial instruments before maturity. With the licensing of Continental Discount House then, now CDHIB, a platform was created for a secondary market in financial instruments to develop. The institution, as we were shown today through the displays, not only traded government financial instruments, but also originated other financial instruments such as commercial paper, negotiable promissory notes, corporate medium term notes and bonds. It is pleasing to note the amount of work that the institution performed in the capital market. In the displays, we saw the milestones in equity issues in various forms such as bonus issues, rights issues and the listing of shares on the Malawi Stock Exchange. It is very clear that the foundation to becoming an investment bank was laid over time. I have the confidence that CDH Investment Bank will continue to approach banking in this innovative way in order to make a difference in our financial sector. As we all know, investors, whether local or foreign, require professional financial advisory services to undertake their investments. I would therefore like to encourage CDHIB to continue developing capacity in this area of banking i.e. investment banking and financial advisory, which are evidently under-served in our financial market. The Central Bank would like to see BIS central bankers’ speeches the development of a robust capital market which is capable of attracting both local and international capital investment. I would like to see banks and financial institutions playing their rightful role in the development of this country. It is said, and rightly so, that the development of any country depends largely on the robustness of its financial sector. I am pleased to note that banks in Malawi are strong enough to be able to foster the development that we all desire to have. But perhaps, more needs to be done to make banking more accommodating of the needs of the private sector. I would also like to see banks applying more innovation in serving some of the important but under-served sectors such as agriculture, tourism, to name but a few. The financing for the production of exports is really what will take this country forward. I am pleased to note that there are a few investors in Malawi who have taken up production for exports. I would like all banks to support them with the right financing products as one way of promoting production for exports. I have also gladly noted some businesses investing in value addition to agricultural products. Again, this needs to be supported because it is through value addition that exports start to earn more foreign exchange. The country’s yawning balance of payments deficit will not be closed by government. It is through private sector exports that we will be able to deal with this huge gap between imports and exports. The trade deficit is one of the biggest enemies of our economy. It is this trade gap that threatens our exchange rate stability. Therefore, it requires concerted efforts to improve our export base. The Reserve Bank, on its part will do all it can to achieve macro-economic stability which among other things includes a lower interest rates environment to enable businesses to thrive. We have the capacity to deliver on our constitutional mandate. Distinguished ladies and gentlemen, this function is therefore a very important one. As we have heard, the building was constructed in 1991 with only 22 parking bays. Perhaps, that was adequate then considering the purpose the building was put to. With the renovations and improvements made by the new owners, CDH House now has 53 parking bays. For this, I would like to thank the board and management of CDHIB for ensuring that the bank’s customers are provided with modern facilities. Mr Chairman, the acquisition of the building by your bank demonstrates your strong commitment as a long term investor in Malawi. Malawi requires committed strategic investors if the country is to progress economically. The inauguration of CDH House today is one testimony of investor confidence in the country. The renovation of the building to the new look we see today has greatly enhanced the beauty of the City of Blantyre. I do not want to remind you the look of this building just over a year ago. You all wondered whether it deserved to be in the City of Blantyre, the commercial city of Malawi. On that note, please join me in congratulating the City of Blantyre for having CDH House as one of its prime business properties that will beautifully symbolize the development of commerce and industry. I want to take this opportunity to assure our city authorities that banks will continue to contribute to your efforts in enhancing the beauty and general environment of this city. Banks invest enormous resources to justify the money they make. I am very pleased to see banks ensuring that customers are accorded the respect they deserve through the provision of a conducive environment for doing business. During my tour of the banking hall and other offices of CDH House this morning, I saw for myself the modern facilities that have been put up for customers. I have also seen how customers have been provided with special parking bays to make their banking an enjoyable experience. We have noticed recently that as the economy grows, and as the number of people accessing banking services increases, banking halls are becoming congested. Customers BIS central bankers’ speeches pay such a price to obtain banking services through the discomfort experienced in crowded spaces. And so the investment we see here, is well timed and serves to remind us all of the need to invest in our city. With the foregoing few remarks and in closing, Mr Chairman, Director of Ceremonies, distinguished ladies and gentlemen, let me once again thank you all most sincerely, for according me this opportunity to speak to you today on this occasion of the official inauguration of CDH House here in the City of Blantyre. Please accept my sincere congratulations for the magnificent building that now houses CDH Investment Bank Head Office, its Blantyre Banking Centre and other CDH Group companies. It is now my singular honour and privilege to declare CDH House officially inaugurated today, 24th June 2014. I thank you all for your attention and may God bless you all. BIS central bankers’ speeches | reserve bank of malawi | 2,014 | 7 |
Speech by Mr Charles S R Chuka, Governor of the Reserve Bank of Malawi, at the 20th Anniversary Celebrations of the Malawi Stock Exchange, Blantyre, 1 December 2016. | Charles S R Chuka: Malawi Stock Exchange - contributing to the growth and development of the economy Speech by Mr Charles S R Chuka, Governor of the Reserve Bank of Malawi, at the 20th Anniversary Celebrations of the Malawi Stock Exchange, Blantyre, 1 December 2016. * * * The Chairman of the Malawi Stock Exchange, Mr. Augustine Chithenga, Secretary to the Treasury, Represented by Mr. Ambrose Mzoma, Directors of the Board of the MSE, Deputy Governor Economics, Dr. Naomi Ngwira, The CEO of the MSE, Mr. John Kamanga, Business Captains, Distinguished Guests, Members of the Press, Ladies and Gentlemen. I feel greatly honoured to join you this afternoon during this symposium marking the 20th Anniversary of the Malawi Stock Exchange (MSE). I am particularly delighted to make my brief remarks because the story of the MSE is intricately intertwined with that of the Malawi economy. By its nature, the performance of the Exchange represent a perfect mirror image of the country’s economic fortunes. Two take always from my remarks. First and foremost, macroeconomic stability is always a prerequisite for a conducive investment climate in which stock exchanges find their niche. Second, stock exchanges grow at the back of accelerated and sustained economic growth. The CEO will soon help us understand and appreciate the performance, challenges and prospects for the Exchange in a moment, and so I will limit my remarks to the basic questions of why the Reserve Bank of Malawi together with Treasury established the MSE; what went wrong; and what will be different in the years ahead. A little background is in order for a better appreciation of the context. During the 1970s and 1980s the Malawi economy grew at a fast pace as a result of the development of much of the economic infrastructure we see today as well as the tremendous growth in the agricultural sector. Economic infrastructure was financed largely by increasing donor aid, but government augmented that by issuing long-term domestic bonds – Local Registered Stocks (LRS). Government bond issuance was made possible by relative macroeconomic stability achieved through fixed exchange rate regimes supported by strict exchange controls. The monetary policy framework was basic, the central bank used to set credit ceilings for each bank and also decided on bank lending rates. In fact, banks were directed to focus on lending to agriculture at 2 percentage points below base rate. The foregoing macroeconomic policy framework paid off in terms increased agricultural productivity and diversification. Government invested heavily in that sector, with much of investment focused on rural feeder roads and the growing of tobacco as a major foreign exchange earner. Given limited private sector capacity at the time, government strengthened 1/4 BIS central bankers' speeches ADMARC to become a major player in agriculture marketing including exporting of produce. Make no mistake, the macroeconomic framework just described was made possible by a generous donor community that financed much of the external imbalances, thereby sustaining the Kwacha as a strong currency among its neighbors. The price the country has paid in terms of failed economic diversification and entrenched import dependence is for another day. The advent of globalization championed by the WTO and insured by the Bretton Woods institutions ushered in trade liberalization to underpin sustained global growth generally, and the developing world in particular. The so called WASHINGTON Consensus sealed the deal. MALAWI was not slow in adopting the prescriptions that followed. Exchange controls began to be dismantled. However, unlike our Zambians cousins who made a bold decision to completely liberalize the exchange rate in the mid-1980s, Malawi took a more cautious approach – we began by liberalizing imports of merchandise – while the Kwacha exchange rate remained fixed but adjustable through a series of devaluations. On the monetary policy front, the central bank began to experiment with what we called indirect instruments of monetary policy through the control of monetary aggregates. That simply meant managing the central bank balance sheet through controlling lending to government and seeking to influence banking system liquidity and interest rates through the auctioning of Treasury bills. Indeed, interest rates were fully liberalized beginning 1989. The import liberalization process was completed by 1990. But when donors withdrew their aid in 1992, foreign exchange disappeared and in 1994 the Kwacha was floated. But of course it got fixed again in 1995, in favor of a more managed exchange rate. Those of you interested in the history of interest rates and exchange rate management in Malawi can find that on our website (www.rbm.mw). The authorities recognized the need to accelerate private sector growth in order to diversify the economy and increase foreign exchange generation. But the need for long-term finance was then, as it is today, quite acute. The country required a framework that would allow companies to raise equity or risk finance as well as debt financing. The authorities therefore decided to deepen financial sector reforms and to create capital markets. It was in that context that the idea of establishing a stock exchange was conceived, not just to facilitate capital raising but also to accord Malawians the opportunity to participate in the creation of wealth through investments in stock and debt instruments. The basic ingredients were there in the form of blue chip companies, especially the assets of the then Malawi Development Corporation (MDC), ADMARC Holdings, Press Group of Companies, the NICO Group, and the wellestablished Long-term government debt. With support from these conglomerates and the MCCCI, the reserve bank established a working group to conceptualize and establish the Malawi Stock Exchange (MSE) in 1994. In the absence of adequate script, and with only government debt, the setting up of the MSE followed a model already functioning in Botswana. Thus, the process started with the establishment of Stockbrokers Malawi Limited (SML) with dual functions of a brokerage firm and to operationalize the exchange. The major activity of SML was secondary market trading in Government of Malawi securities namely; Treasury Bills and Local Registered Stocks. The listing of NICO in 1996 brought to fruition equity trading. The MSE later separated from SML and the rest is history. Over the years, the Exchange has grown, it now boasts of 12 domestic listed companies, 1 foreign listed company and two treasury bonds. The companies listed on the Exchange cover a number of sectors such as financial services, tourism, manufacturing, telecommunications and real estate. 2/4 BIS central bankers' speeches The Exchange has played a crucial role in according investors an alternative investment avenue that enables individuals own part of the stake in large companies. It has also helped companies raise finance for growth and expansion or simply for capital restructuring. We have in recent days witnessed the latter, where MPICO, a listed company, successfully completed one of the largest rights issues on the Malawi Stock Exchange, raising K9.0 billion. This rights issue, especially given the difficult macroeconomic conditions, is proof that with vision and hard work, capital raising is possible. Notwithstanding the MPICO rights issue, we can all agree that after two decades of its existence, the Exchange is still in its nascent stage. First, it remains the smallest exchange in the SADC region. Its market capitalization at the end of 2015 stood at $1.3 billion, compared with $2.7 billion (LuSE), $3.1 billion (ZSE) and $4.5 billion (BSE). And its 14 counters are fated against 23 (LuSE), 32 (BSE), and 63 (ZSE). The MSE is also the least liquid with 1,223 trades in 2015, compared with 3216 (LuSE), 8692 (ZSE) and 10863 (BSE). As a result, the MSE continues to require central bank support to this day. The Tanzania Stock Exchange, which commenced operations in 1998, boasts of 18 domestic listed companies and 7 cross listed companies; over 40 treasury bonds and 3 corporate bonds. That brings me to my second point. Why has the MSE grown relatively, slowly. Your guess is as good as mine. First, macroeconomic stability has been sporadic and unsustained over the period, contrary to our expectations at the time the MSE got established. Second, reflecting the macroeconomic instability, the deterioration in economic infrastructure, and stagnation in economic diversification, the economy has been slow in creating wealth. As of last year, Malawi’s GDP was only $4.4 billion when that of Zimbabwe, Zambia and Botswana reached $14.2 billion, $27.1 billion and $17.2 billion, respectively. It should not be surprising, therefore, that the MSE still requires central bank support after 20 years in operations. With the benefit of hindsight, therefore, the exchange has been one of the most expensive to the general public, not because of mismanagement or lack of vision, but because of macroeconomic instability. But the other basic foundations for a successful exchange are in place. Government support remains strong. The regulatory framework has been strengthened with the enactment of the Financial Services Act, 2010 and the Securities Act, 2010. The SME’s governance structure is as good as any. The Registrar of Financial Institutions has an oversight role but day-to-day operational oversight is vested in the Board of the Exchange and market participants. I now come to my third and final point, what does the future hold. First, as a country we cannot continue with our past history of inconsistent macroeconomic policies. With the Kwacha now established as a free float, the policy choices for achieving sustained macroeconomic stability as a precondition for investment growth are now well known and entrenched in policy-making processes. In terms of the financial sustainability of the exchange itself, tremendous progress has been achieved. In the past, the central bank covered all operational costs of the exchange, but currently that support finances infrastructure development only. And in this regard, the Government through the World Bank funded Financial Sector Technical Assistance Project (FSTAP), plans to automate trading on the Exchange are at an advanced stage. It is envisaged that successful implementation of these projects will enhance market efficiency, improve market visibility and increase market liquidity. In addition to allowing efficient trading and settlement, the systems will enable surveillance and risk control by many market participants. Another development in the pipeline is a central securities depository system for corporate equity and debt instruments to provide electronic issuance and custody of financial instruments to enable efficiency, reliability and security of the transactions in the market. I am in no doubt that as the Government continues to pursue sound macroeconomic policies; 3/4 BIS central bankers' speeches coupled with implementation of the electronic systems and other capital market growth strategies pursued by market participants, the exchange and capital markets in general are poised to contribute to the growth and development of the economy. With these few remarks. I hope that I have earned the right to offer the Registrar’s congratulations to the Exchange on its 20th Anniversary. Allow me to acknowledge the commitment and hard work of the Board of Directors, management and staff of the Exchange, and all the market participants for bringing the MSE to where it is now. This anniversary celebration is well deserved. I wish all of you well. And may God bless Malawi. I thank you. 4/4 BIS central bankers' speeches | reserve bank of malawi | 2,017 | 2 |
Remarks by Mr Dalitso Kabambe, Governor of the Reserve Bank of Malawi, at the Inaugural Financial Inclusion Indaba and Launch of the National Strategy for Financial Inclusion, Lilongwe, 27 July 2017. | RESERVE BANK OF MALAWI REMARKS BY DALITSO KABAMBE, PhD GOVERNOR AT THE INAUGURAL FINANCIAL INCLUSION INDABA AND LAUNCH OF THE NATIONAL STRATEGY FOR FINANCIAL INCLUSION AT BINGU INTERNATIONAL CONFERENCE CENTRE (BICC) LILONGWE 27 JULY, 2017 The Secretary to the Treasury, Mr. Ben Botolo; Senior Private Sector Development Economist, World Bank Country Office, Mr E Chilima; The Deputy Governor, Economics and Regulation, Reserve Bank of Malawi, Dr Grant Kabango; Representatives of all Development Partners here present; Representatives of FinMark Trust; Senior Government Officials here present; Chief Executive Officers and Representatives of Financial Institutions; Representatives of Non-Governmental and Civil Society Organizations here present; Distinguished Guests; Ladies and Gentlemen: I am delighted to be part of this Indaba where the country’s Strategy for Financial Inclusion for the period 2016 to 2020 is being launched. Firstly, I wish to agree with other speakers that this meeting could never have taken place at such an opportune time other than this. Our country has just weathered off some of the major shocks of our time. First was the historic devaluation in 2012, then cashgate in 2013 which led to withdrawal of general budget support and then the effects of climate change in 2015 and 2016. As a result of these shocks, inflation persistently remained high over the years, interest rates were also high, Kwacha was volatile and public debt soared. However, the Malawi economy has now weathered off these shocks. The economy is now steadily recovering. Inflation, at 11.3 percent is now the lowest in 7 years, and is expected to be in single digit very soon, Kwacha has been stable for the past 15 months and is expected to remain so. Foreign exchange reserves are at 3.3 months of imports and are expected to remain above 3 months of imports. Lending rates are now on a downward trajectory and growth which was subdued in the previous years is expected to rebound to 4.5 percent or higher this year. These are all hallmarks of a recovering economy. The Indaba therefore is coming at such an opportune time that we can discuss how we can consolidate these gains going forward and deepening of financial inclusions is one such option to support the needs of a growing economy. The case for financial inclusion can never be over emphasized. The country has many people who are not yet reached with financial services. The Strategy being launched today therefore highlights what can be done to ensure that all Malawians regardless of their geographical disposition are reached with financial services. On one hand, we know that Malawi is predominantly a cash based society to the extent that 75% of the cash in the economy is outside the banking system leaving only 25% in the banking system. Going forward, we need to reverse this trend and ensure that all Malawians are reached with various financial services and products so that people can intelligently invest their money and also be able to access capital for their various needs. A practical example is where if one had K100 in 1996, then he/she decided to keep it in the pocket, it could remain K100 today but with inflation, that money could have lost value in terms of how much that money could buy today. If it was put in savings account in the Bank, it could be around K2,300 with interest by now. If it was invested in Treasury Bills, it would be around K13,000 while if it was invested in shares, the value of those shares in one of the companies could be around K23,000 by now. These are the issues which must be brought to the attention of all Malawians so that they can make intelligent and informed decisions at all times whether they choose to keep their money in the home, invest in business, buy shares or deposit in Banks. Financial Inclusion is therefore critical in this regard. On the other hand, if one wishes to access capital to do a business or otherwise, financial inclusion is also critical so that people across the country can access capital for their various needs including running of businesses. Our country needs to grow and as it grows, create jobs most needed especially by the youths. As such, our investments decisions and how we use our money is very critical. The economy could do better if all the resources around us are intelligently invested so that the Private Sector, the engine of growth, should use the resources to develop our country. Hence, the issue of access and cost of capital to all Malawians across the country are the issues the Strategy is addressing. On our part, as a Registrar of Financial Institutions, the Reserve Bank of Malawi is involved in drafting various pieces of legislation and regulations for the smooth running of the financial sector. The Bank is also involved in enforcing the various pieces of legislation that have been approved by the National Assembly. We will continue to play this role and do it better all the time. As part of this, we take pride in some of the efforts which have been made over the years in this area including modernization of existing financial sector laws, such as the banking, insurance, securities, microfinance, pension, financial cooperatives, agent banking, credit reference bureau, payment systems, introduction of the National Switch which has promoted mobile money banking, which have all improved the architecture of our financial systems and advanced the financial inclusion agenda. The Reserve Bank continues to play this pivotal role and is currently championing the Microfinance Processing Hub, the Automated Trading System for the Malawi Stock Exchange, the Central Securities Depository system for securities and equities. These initiatives will benefit the public through increased access to finance and, most importantly, at affordable cost. The Bank is also active in consumer protection and financial literacy. The importance of the consumer protection and financial awareness needs no emphasis here. It aims to empower the consumer so that they transact in the financial sector with confidence. In keeping with this, the Reserve Bank created a Unit to be responsible for Financial Consumer Complaints and Literacy matters. The Reserve Bank, in collaboration with its stakeholders, has implemented financial awareness campaigns in order to empower financial services consumers. But, I must mention that the implementation of the financial awareness program requires a lot of financial resources. The Reserve Bank will therefore put in place a sustainable way of implementing the program. Distinguished Guests, Ladies and Gentlemen, let me conclude my remarks by congratulating and commending the Ministry of Finance, Economic Planning and Development for coming up with the 2016 – 2020 Strategy for Financial Inclusion. This strategy will surely provide a guided direction to achieving and promoting inclusive finance in this country. This being the second strategy, we trust that it has built on the shortfalls of the initial strategy. I thank you all for your kind attention and may God bless our country. | reserve bank of malawi | 2,017 | 8 |
Speech by Mr Dalitso Kabambe, Governor of the Reserve Bank of Malawi, on the Official Launch of Tip-Offs anonymous programme, Lilongwe, 11 July 2017. | SPEECH BY THE GOVERNOR OF THE RESERVE BANK OF MALAWI Mr DALITSO KABAMBE, PhD ON THE OFFICIAL LAUNCH OF TIP-OFFS ANONYMOUS PROGRAMME 11 JULY 2017 Statement by the Reserve Bank of Malawi Governor, Dalitso Kabambe, PhD on the Official Launch of the RBM Tip-offs Anonymous Scheme - The Director, of the Anti-Corruption Bureau, Mr Lucas Kondowe; - The Director, Financial Intelligence Authority, Mrs Atuweni Juwayeyi-Agbermodji; - The Representative From Deloitte Tip-Offs Anonymous, Mrs Vanda Phekani; - The Deputy Governor, Corporate Services, Ms Meg Kajiyanike; - The Deputy Governor, Economics and Regulation, Dr Grant P. Kabango; - Members of Staff in the Reserve Bank; - Members of the Press here present; - Distinguished Delegates, Ladies and Gentlemen. Cashgate is the worst tragedy this nation has witnessed in modern times. Our nation has been taken backwards many years while our sister countries from within the region and beyond have progressed. We have learnt bitter lessons and bounce back as an economy, we need to move with renewed commitment and zeal to fight corruption in all its forms in all our places. This is the reason why, among the core principles, His Excellency Prof Arthur Peter Mutharika, the President of the Republic of Malawi, is advocating that we must be a nation not only of hard working and patriotism but also of high integrity. When I got appointed on 21st April, this year, when I was asked about priorities, I included one where the Reserve Bank of Malawi plays a central role in ensuring that no public money under any circumstances to be pilfered through theft. I am delighted therefore today that I am joined by the Director of the Anti-Corruption Bureau, Mr Lucas Kondowe, the Director of the Financial Intelligence Authority, Mrs Atuweni Juwayeyi-Agbermodji and the Deloitte’s representative Mrs Vanda Phekani, as we launch the first scheme towards the fight against corruption in the RBM and on public resources. In a few days’ time from today, the RBM will also be launching another scheme, whereby for any payment above a particular threshold, say K5 million, from Government resources, an alert in form of a text message will be sent to the Minister of Finance, the Secretary to the Treasury, the Accountant General and the Budget Director and the respective Minister from which the transaction is being charged, the Principle Secretary in that Ministry, the Head of Finance and all those who need to know about the transaction will be informed by way of their mobile phones so that where the transaction is dubious, immediate corrective measures can be taken. We live in a changing world. In the past, we were worried with people standing by the roadside at night to steal from us, today thieves have become sophisticated and are in white collar, robbing us in broad day light and often these acts are perpetrated by those we trust and in position. We need to remain vigilant and we need to raise our sophistication even more, so that they do not beat us. This is why the RBM is leading the way in complementing Government efforts and those of the Anti-Corruption Bureau, the Financial Intelligence Authority and others to ensure that the RBM is free of corruption in all its staff, premises, processes and systems. We stand here to declare total war on corruption. It is therefore my absolute delight that I can preside over this function. The Board of the Reserve Bank of Malawi also recently approved our Fraud and Anti-corruption Policy, which defines the stance of the Bank on fraud and corruption. The Policy reinforces existing systems, policies and procedures, rules and regulations of the Bank towards the fight against fraud and corruption. It aims at deterring, preventing, detecting, reacting to and reducing the likelihood of fraud and corruption. The Policy confirms the Bank’s commitment to a culture of zero tolerance to fraud and corruption in all its forms within and outside the Bank. Our Motto speaks for itself, “Not in the Reserve Bank of Malawi”. The Tip-Offs Anonymous is one of the measures of curbing corruption within the Bank. With the Tip-Offs Anonymous, you can report malpractices and still remain anonymous which has proven a success with other public institutions. I am sure that this whistle-blower hotline creates a better alternative for members of staff and the general public to report any unethical behaviours. I am aware that misguided persons may want to misuse the system to the detriment of others. Let me be clear here that each and every reported item would be thoroughly investigated and scrutinised before arriving at a conclusion. Ladies and gentlemen, some of you might wonder why the public launch and not just issue an internal communication to members of staff. This programme has to be used by all stakeholders who deal with the Bank including the general public if we are to win the war against fraud and corruption. We would like the general public to report on many issues including; a. Production of counterfeit currency; b. Illegal externalisation of currency; c. Operation of unlicensed financial institutions; d. Fraud and mismanagement; e. Corrupt practices; f. Abuse of office and office facilities; g. Procurement related malpractices. It is therefore, against this background, distinguished guests, ladies and gentlemen that the Bank decided to subscribe to Tip-Offs Anonymous as a mechanism for early detection and a deterrent against fraud, corruption and any unethical concerns the Bank may encounter. I am particularly pleased, therefore, to note that the programme has already started producing fruits and it is expected that with this launch, more reports will be received. It is imperative that we should, indeed, be adequately familiar with the reporting procedures like the Toll Free hotline, the postal address, emails and the website as they have to become part of our daily operations in reporting any malpractices observed. Ladies and gentlemen, this programme will only work if people use it. I therefore, urge you to take this programme seriously as it is the safe way to report any malpractices and remain anonymous and also get rewarded for the good tip made. Please inform as many as you can so that together we can root out the evil among us. I need to reiterate that we are serious as our motto states “Not in the Reserve Bank of Malawi”. With these few remarks, I now declare the RBM Tip-Offs Anonymous Programme officially launched. Let’s Join Hands in the fight against unethical behaviour. I thank you all for your kind attention. RESERVE BANK OF MALAWI 11 July 2017 | reserve bank of malawi | 2,017 | 9 |
Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the conference "Capital Markets in the Post-Crisis Environment", hosted by the Global Interdependence Center and the Bank of Finland, Helsinki, 6 June 2011. | Charles I Plosser: A credible commitment to normalization Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the conference “Capital Markets in the Post-Crisis Environment”, hosted by the Global Interdependence Center and the Bank of Finland, Helsinki, 6 June 2011. * * * The views expressed today are my own and not necessarily those of the Federal Reserve System or the FOMC. Introduction Good morning. It is indeed a pleasure for me to be with you today. This is my first visit to Finland and it has proved to be more beautiful than I imagined. So I want to thank the Global Interdependence Center and the Bank of Finland for their hospitality and the opportunity to participate in this conference. It is also a pleasure to join my central bank colleagues from France, Sweden, and, of course, Finland at such an event. The theme of this session, central bank policy after the crisis, is both timely and extremely important. The financial crisis and arguably the worst global recession of the post-war era have challenged policymakers around the world. While for most of the hardest hit countries, the recession trough has passed and a moderate recovery is underway, the actions by fiscal authorities and central banks, intended to mitigate the damage from the crisis, have left a legacy of governments with huge budget deficits and central banks with record-low shortterm interest rates and balance sheets of unprecedented magnitudes. Yet even though the policy responses by central banks were similar and extraordinarily accommodative, a few have already moved toward normalization. As we are likely to hear shortly from Stefan Ingves, the Riksbank has raised its policy rate to 1¾ percent from just 25 basis points since the middle of last year. This tightening of policy was accompanied by a reduction in its lending to the Swedish banking system, which reached more than 300 billion Swedish krona at the depth of the crisis. Other central banks, including the Federal Reserve and the Bank of England, face some daunting challenges as they try to unwind from their extraordinary actions and seek to restore confidence and credibility in their monetary policy frameworks. Today I would like to share with you my perspective on how I think about the normalization of monetary policy in the U.S. I should note the usual disclaimer applies in that I speak for myself and not necessarily for the Federal Reserve System or my colleagues on the Federal Open Market Committee (FOMC). The new normal My thoughts about normalization are driven by some fundamental principles that I believe should guide the way central bankers approach policy. I believe that policymakers should do their utmost to be clear about their goals and objectives and then communicate how policy will be conducted to achieve those goals. Committing to a systematic, or rule-like, approach to policy decisions makes policy more predictable and will generally improve economic outcomes. Policy choices should, of course, be dependent on changes in economic conditions, but the nature of the response should be communicated to the public in advance, so that they understand how policy is likely to react to an evolving economy. Thus, the first step in thinking about how central banks should plan their exit from unprecedented policies is determining the goal or where you want to go. You simply do not start out on a trip without some idea of where you are headed. Put another way, if we are to BIS central bankers’ speeches design an appropriate exit strategy, we must know what the policy framework will look like at the end of the journey. Before describing where I think we should be headed, let me review the current state of affairs. During the last three years, the Federal Reserve, like many other central banks around the world, has taken extraordinary actions to mitigate the impact of the financial crisis and support the return of economic growth. Our traditional instrument of monetary policy, the federal funds rate, has been near zero for nearly two and a half years. Since it is infeasible to reduce the targeted federal funds rate below zero, the Fed implemented additional policy accommodation through changes in its balance sheet. As a result, the Fed’s balance sheet has grown more than threefold, from nearly $900 billion before the crisis to about $2.7 trillion today, and its asset composition has shifted significantly from mostly short- to medium-term Treasuries to longer-term Treasuries, mortgage-backed securities (MBS), and agency debt. I believe that as it normalizes policy, the Fed should be headed toward a system in which, first, the federal funds rate is re-established as the primary instrument of monetary policy; second, the Fed’s balance sheet is much smaller, probably less than $1 trillion, so that the federal funds rate trades above the interest rate paid on reserves; and third, the balance sheet’s composition returns to predominantly shorter-term U.S. Treasuries. For those who get excited about the minutiae of central bank operating procedures – and I know there are some of you in the audience – this system is referred to as a corridor system and has been used by a number of central banks around the world, including the Riksbank and the ECB. For the U.S., this decision of which system we choose is probably more of an issue than for many central banks because prior to the crisis, the Federal Reserve Board was not permitted to pay interest on reserves and now it is. The corridor system, which I prefer, calls for monetary policy to set the federal funds rate at a level within a corridor between the interest rate paid on reserves and the rate at which the Fed is willing to lend to banks through the discount window – or lending rate. For the policy rate to lie above the rate paid on reserves, the supply of reserves must be limited. If the supply of reserves is very large – as is currently the case – banks have no incentive to economize on reserves and the federal funds rate would equal the interest rate on reserves. As a consequence, the interest rate paid on reserves becomes the de facto policy rate and the fed funds rate becomes irrelevant. This environment is sometimes called a floor system. I believe the choice of an operating framework is important. While we would be able to conduct monetary policy by simply setting the interest rate we pay on reserves and allowing the federal funds market to become irrelevant, the floor system is very troubling to me. In a floor system, the size of our balance sheet would become irrelevant. Thus, one could envision using it as an independent instrument of policy, perhaps increasing it or decreasing it as needed to provide emergency liquidity to the banking system. The problem is that the floor system offers no restrictions on how the balance sheet might be used. If our operating framework divorces our balance-sheet decisions from monetary policy, it becomes a tempting instrument for future policymakers inside or outside the central bank to use it for non-monetary-policy purposes. This could jeopardize the independence of the central bank and, if abused, would be a source of many unforeseen problems. For example, using the Fed’s balance sheet to conduct fiscal policy-like actions could prove detrimental to long-run economic stability. So I believe the corridor system, with its constraints on the balance sheet, is more likely to preserve central bank independence and limit the temptation to use the Fed’s balance sheet as an instrument of fiscal policy. A road map to the future Once we know where we want to go, we can begin to map out a path that will take us there. By articulating a systematic plan that gets us to our objective, we improve communication with the public, reduce uncertainty in the marketplace, and lend credibility to the commitment that policymakers will follow through. BIS central bankers’ speeches Any exit plan that is to lead us to a corridor-like operating system has to describe how the fed funds rate or interest rate on reserves will be increased and how the balance sheet will be reduced. There are many ways to do so, but in every case, we must remember that monetary policy decisions should be contingent on the evolution of the economy. In late March 2011, I outlined a proposal for a systematic, rule-based approach that would involve the Fed’s selling assets from its portfolio as it increased its policy rate, with the pace of sales dependent on the state of the economy. The plan would get us back to a normal operating environment in a timely manner, with the Fed’s balance sheet reduced to a size that would again allow the federal funds rate to be the primary policy instrument. I also suggested that the first step of the normalization process would be to increase the interest rate paid on reserves and the targeted federal funds rate away from the zero bound, perhaps to 50 basis points. The Federal Open Market Committee would also announce its intention to stop re-investing the proceeds from maturing agency and Treasury securities. These decisions would initiate the normalization process and begin to raise the funds rate and shrink the balance sheet from the start. How the process evolves from that point will depend on the plan and the state of the economy. The Committee would also announce that at subsequent meetings it would regularly evaluate the policy rate based on economic conditions, as it always does. Sales of assets between meetings beyond those maturing would also be tied to economic conditions, just as policy rate decisions are. The Fed would announce a pace of sales, which would increase when the Committee chose to increase the policy rate. Since the amount of securities to be sold between meetings would be determined in advance, the public and markets would see the Fed shrinking its balance sheet in a predictable manner. For example, the Committee might set a sales pace of $20 billion of assets between FOMC meetings and announce that for each 25 basis points the funds rate target is raised, it would increase sales by, say, $125 billion of assets during the intermeeting period, which is about the pace at which we bought securities. If the policy rate was not raised there would be no additional sales. There is logic to selling assets faster when the policy rate rises. If the economy is growing then market demand for both risk and duration is also likely to expand. So selling assets is likely to be less disruptive. Note that asset sales would not be a separate policy decision but driven by the same monetary policy decision process used to change the policy rate. This plan is consistent with the Fed’s dual mandate of price stability and maximum employment growth. It recognizes that our policy actions will be dependent on the evolution of the economy and ties the shrinking of the balance sheet explicitly to those actions. Of course, other plans could be adopted. For example, an even simpler alternative plan might be to announce in advance that we will shrink the balance by some fixed dollar quantity between each FOMC meeting or each month. That pace would not change unless something extraordinary occurred. Such a plan, in essence, puts the shrinking of the balance sheet on a predetermined glide path, which would allow the markets to predict how the Fed’s balance sheet and asset sales will evolve. The major difference between this plan and the first one I described is that asset sales would not be conditioned on the state of the economy but would proceed at a steady pace. As a result, the interest rate would become the primary policy instrument and vary with economic conditions. To make such a plan credible, I believe that the Committee would have to state clearly that the hurdle for deviating from the planned pace of sales would be a high one. Otherwise, the temptation to manipulate the pace of sales based on some unspecified criteria might arise. Indeed, the major thrust of either plan is to avoid just such a temptation. A good plan will provide clear, reliable guidance on how asset sales will proceed and the conditions under which they may or may not change. Either of these plans represents a viable strategy for normalization. One makes asset sales state contingent in the same way that policy rate decisions are state contingent. The other puts sales on a predetermined path while the federal funds rate becomes the main BIS central bankers’ speeches instrument for implementing policy. Both are plausible plans, and it is not clear that one strategy dominates the other. Perhaps more important than the details of any exit plan is the very establishment of a systematic plan itself – one that can be clearly communicated to the markets and the public in a way that reduces uncertainty. A systematic plan will help define for the public and the markets not only where we are headed but also how we will get there. Of course, monetary policy will always be dependent on the evolution of the economy, but the more we can articulate how we will conduct policy during the transition to normalization, the more we will reduce uncertainty and contribute to stability. Announcing an explicit plan in advance would also enhance the credibility of our commitment to normalization. If, for some reason, the Committee chose to deviate from the plan, it would be forced to explain its reasons to the public. This brings me to one final but important consideration for the Fed’s normalization strategy. Unlike most of the major central banks around the world, including the ECB, the Bank of England, and the Riksbank, the Federal Reserve has not clearly announced and committed itself to an inflation target. Some form of inflation targeting is widely accepted as a best practice by the majority of central bankers and monetary economists around the globe. Given the extraordinary amount of liquidity present in the U.S. banking system, it is reasonable for the public to be concerned about the prospects for inflation down the road. If the public’s expectation of inflation continues to drift upward, whether it is caused by higher commodity prices, concerns over fiscal deficits, or the Fed’s large balance sheet, we could find our credibility under pressure. It is noteworthy that just within the last year or so the public discussion has swung from concerns that the U.S. might face a period of sustained deflation to concerns that monetary policy and rising commodity prices could produce higher-than-desired inflation. It is troubling that the public’s inflation concerns can be so volatile. It suggests that there may be less confidence in the credibility of the Fed’s commitment to price stability than we might desire. Yet, if we are to exit from this period of extreme monetary accommodation in a way that neither leads to higher inflation nor risks undermining the recovery, the public’s confidence in the Fed’s commitment to price stability will be crucial. For this reason, it would be highly desirable for the Federal Reserve to publicly commit to a clear and explicit inflation objective. Conclusion The actions taken in response to the economic and financial crisis have left the Federal Reserve and a number of other central banks far from what most central bankers would consider a normal operating environment. One of the challenges policymakers must face is how to commit to a plan for normalizing the operating framework for monetary policy. There is no one right plan to achieve this outcome. However, it is very important that we think carefully about that process and seek ways to credibly commit to exit from the unprecedented policies. I have tried to outline some of the features that I think will be important for the Federal Reserve as it seeks to unwind its large balance sheet and establishes a new operating framework for monetary policy. I believe we can be most successful if we communicate a systematic plan that describes where we are headed and how we will get there. Moreover, such a plan would be strengthened if the FOMC adopted an explicit numerical objective for inflation, which would help ensure that inflation expectations remain well anchored. BIS central bankers’ speeches | federal reserve bank of philadelphia | 2,011 | 6 |
Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the Society of Business Economists Annual Conference, London, England, 9 June 2011. | Charles I Plosser: The US economic outlook and the normalization of monetary policy Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the Society of Business Economists Annual Conference, London, England, 9 June 2011. * * * The views expressed today are my own and not necessarily those of the Federal Reserve System or the FOMC. Introduction Good morning. Thank you for this opportunity to speak before your Society. As business economists, you are well aware of the extraordinary economic times in which we live. A financial crisis and arguably the worst global recession of the post-war era have challenged policymakers in the U.S. and abroad. In many nations, monetary and fiscal authorities undertook extraordinary actions to mitigate the damage, and for most of the hardest hit countries, the recession trough has passed and a moderate recovery is underway. Yet the actions taken leave a legacy of huge government budget deficits, short-term interest rates at record lows, and central bank balance sheets of unprecedented magnitudes. Even as our economies recover, policymakers face some daunting challenges as we try to unwind these extraordinary actions and rebuild confidence and credibility in our monetary policy frameworks. Today I would like to discuss my outlook for the U.S. economy and some thoughts about ways to begin the normalization of U.S. monetary policy. I believe there are several steps the Federal Reserve can take to ensure a successful exit from this period of extraordinary accommodation, including taking a page out of the Bank of England’s book by announcing an explicit numerical goal for inflation. As always, my remarks reflect my own views and do not necessarily represent the views of the Federal Reserve Board or my colleagues on the Federal Open Market Committee. Economic outlook Let me begin with an update on the U.S. economy. We are nearly two years into a moderate, sustained recovery from financial crisis and the worst economic downturn since the Great Depression. In the fourth quarter of last year, the level of real GDP finally passed its prerecession peak, but it did so with some 7½ million fewer workers, a reflection of strong productivity growth. This year’s first-quarter GDP growth, at just below 2 percent, was somewhat disappointing. But I believe that this weakness will likely prove to be a temporary soft patch and that the underlying fundamentals remain in place for the economy to resume growing at a moderate pace in the second half of this year, and to strengthen a bit more next year. Such soft patches are not that uncommon. Indeed, last year we experienced just such a bump in the road. Yet, after what I described as the summer doldrums, the economy picked up momentum to give us just under 3 percent growth for the full year. I think the slower growth in the early part of this year has similarly been influenced by a number of temporary factors. In particular, severe weather, uncertainty surrounding the aftermath of the disaster in Japan, political events in the Middle East and North Africa, and higher food and energy prices, all have weighed on growth. Oil and commodity price increases and supply chain disruptions from the devastation in Japan may have some carryover into the second quarter, but I believe any loss of momentum is likely to be transitory. BIS central bankers’ speeches Of course, the drama being played out in Congress over debt and spending has provided yet another source of uncertainty for the economy. Progress in that arena would undoubtedly improve confidence going forward and reduce uncertainty. Monetary policy cannot and should not be viewed as a substitute for sound fiscal policies. As I have argued many times in the past, monetary policy is not the silver bullet that many would like to think it is. It cannot solve all of our economic ills, and attempting to do so can be quite dangerous for economic stability.1 I anticipate moderate but above-trend growth of around 3 to 3½ percent for the remainder of this year and next. The overall strength in some sectors will more than offset persistent weaknesses in others, so that the recovery will be sustained and more broad-based as it continues. Improvement in household balance sheets and better labor market conditions will support moderate growth in consumer spending. Solid growth in corporate earnings will support continued healthy advances in business spending on equipment and software. Housing, however, will likely remain a weak spot in the U.S. economy, with flat to slightly falling prices and little new construction. Outside of recent supply disruptions in the auto industry, I anticipate that growth in manufacturing will remain a source for optimism. The Philadelphia Fed’s Business Outlook Survey of manufacturers has proven over the years to be a useful barometer of national trends in manufacturing. In April and May, the measures of current activity saw some pullback from the very high numbers of February and March, but the numbers show that activity in the manufacturing sector continues to expand. Moreover, the survey’s indicators of future activity, a measure of firms’ expectations for activity six months from now, also signal continued expansion. Consumer spending, which makes up about 70 percent of GDP in the U.S., is also increasing. Like GDP, real consumption has surpassed its previous peak and appears to be growing at a moderate pace. Households continue to pay down debt and rebuild some of the net worth that was destroyed during the recession. Higher energy and food prices have been a drag on recent consumer spending. But more important than gas prices for the health of the economy and the strength of consumer spending is job growth. So let me turn to labor markets. Labor markets Overall, conditions in the labor markets continue to gradually improve. But the path has not been a smooth one nor has it been as robust as one might like. In May, nonfarm payrolls expanded by 54,000 jobs, after growing by 232,000 jobs in April and 194,000 in March. The U.S. economy has added over 780,000 jobs since the first of the year. The private sector has managed to increase payrolls by more than 900,000, but government employment has been shrinking, thus dragging net hiring down below 800,000. May’s uptick in the unemployment rate to 9.1 percent was a bit disappointing, but even with that, the unemployment rate has fallen by 0.7 percent since last November. Despite these modest improvements in labor market conditions, millions of Americans remain unemployed. So we have a long way to go. But as the economy strengthens this year, I expect that businesses will continue to add to their payrolls. With continued growth in employment, I expect to see modest declines in the unemployment rate, to about 8½ percent by the end of this year, and then to a range of 7 to 7½ percent by the end of 2012. See Charles Plosser, “The Scope and Responsibilities of Monetary Policy,” Federal Reserve Bank of Philadelphia Annual Report 2010. BIS central bankers’ speeches Inflation Inflation has risen in recent months as the prices of energy and other commodities have surged. These prices have been extremely volatile of late, and despite some recent retrenchment, they remain considerably above their levels of just over six months ago, when the Fed embarked on its plan to purchase $600 billion of long-term U.S. Treasuries. While headline inflation has risen markedly, there has been less of an increase in the so-called core measures of inflation, which exclude food and energy prices, but even they are up noticeably over the same period. There are signs that firms are becoming better able to pass along some of their increased costs to their customers. For example, in response to a special question in our Business Outlook Survey in February, over 56 percent of manufacturers said they had already put through price increases. Nearly 60 percent of all respondents said they had planned to increase prices over the next three months. Our survey’s prices paid index, an indicator of firms’ input costs, has been at high levels for the past six months. And the prices received index, an indicator of the prices that firms are charging their customers, turned positive last fall and continues to suggest that firms are likely to be testing their pricing power. In the May survey, 20 percent reported higher prices for their own goods, while just 3 percent reported price reductions. As commodity prices stabilize, headline inflation should come back down. However, I see the inflation risks in the U.S. as being clearly to the upside. In an environment with very accommodative monetary policy, a key to keeping commodity price increases from passing through to other goods and services and creating more general inflation is to ensure that longer-run inflation expectations stay anchored. So far, that seems to be mostly the case. But, of course, expectations are well-anchored until they are not. So it is somewhat troubling to me that expectations of inflation in the medium to longer term are moving up and down as much as they are. It suggests that the public and the markets may not have as much confidence in the Fed’s ability, or willingness, to deliver on its price stability mandate. When we think about oil prices and inflation, we must keep in mind that inflation is a monetary phenomenon. In looking back to the Great Inflation of the 1970s, we learned it was not high oil prices per se, but easy monetary policy in response to high oil prices that caused the rise in general inflation. Accommodative monetary policy allowed the large increase in oil prices to be passed along in the form of a general increase in prices. As that happened, people and firms began to expect higher inflation – they lost confidence that the central bank would keep inflation in check – and those expectations influenced their decisions, making it that much harder to reverse the rising tide of inflation. Thus, a key lesson from the 1970s is that the credibility of the central bank’s commitment to maintaining price stability must be preserved. Once that credibility is lost, it is very difficult to regain, and economic outcomes are worse as a result. My colleagues and I on the FOMC are committed to ensuring that does not happen again. Yet we must be willing to do more than just talk about our commitment. We must be willing act – that is, undertake the necessary and difficult policies to ensure that medium- to longer-run inflation expectations remain stable and our credibility remains intact. This includes taking the right actions at the right time to exit the extreme accommodative policy that is now in place. Normalization of monetary policy During the last three years, the Federal Reserve, like many other central banks around the world, has taken extraordinary actions to mitigate the impact of the financial crisis and support the return of economic growth. Our traditional instrument of monetary policy, the federal funds rate, has been near zero for about two and a half years. The Fed’s balance sheet has grown more than threefold, from nearly $900 billion before the crisis to about $2.7 trillion today, and its asset composition has shifted significantly from mostly short- to BIS central bankers’ speeches medium-term Treasuries to longer-term Treasuries, mortgage-backed securities (MBS), and agency debt. As our economy recovers, we must normalize our monetary policy framework. Some people have questioned whether the Federal Reserve has the tools to exit from its extraordinary positions. We do. But the question for the Fed and other central bankers is not can we do it, but will we do it at the right time and at the right pace. How central banks manage the exit from such extraordinary policies will be the key to preserving our credibility and the public’s confidence in our institutions. Our success in coping with this challenge will be at least as difficult and perhaps as important for our future economic well-being as our actions during the crisis. Of course, the exact way policy is normalized will vary from central bank to central bank. I will focus my discussion on the U.S. and the elements that I believe will be critical for the Fed. Yet the principles that guide my thinking on these matters are important and apply more broadly to a range of policy discussions. I want to stress three key elements to the normalization effort. The first is clearly defining what we mean by normalization of our policy framework. The second is developing a systematic and credible plan for how policy will be conducted to achieve this normalization. The third is effectively communicating to the markets and the public about our intended policy framework and our plan to get there. I believe, as part of its communications, the Federal Reserve would do well to adopt an explicit numerical inflation goal, just as the Bank of England and many other central banks do. This type of clarity will reduce uncertainty and limit discretion that may lead to greater instability. Let me discuss each of these three elements of exit. For the U.S., I believe normalization should be a return to a framework in which the federal funds rate is the FOMC’s primary policy instrument and the Fed’s balance sheet is composed predominantly of short- to medium-term Treasury securities, as it was before the crisis. This means the Fed will need to sell assets from its balance sheet and shrink the volume of excess reserves to a level that allows the federal funds rate to trade above the interest rate the Fed pays on excess reserves and below the Fed’s primary credit rate, the lending rate the Fed charges for discount window loans. This framework is generally referred to as a corridor system and is fairly common among central banks around the world, including the Bank of England and the ECB. As I mentioned, the Fed’s balance sheet is currently three times larger than it was before the crisis and is composed of longer-term Treasuries and longer-term mortgage-backed securities and housing agency debt. Normalization will require returning the composition of the Fed’s portfolio to predominantly Treasuries with a significantly shorter duration. In my view, the central bank should not be in the business of allocating credit to specific sectors of the economy, such as housing. That credit allocation should rest with the markets and the fiscal authorities should they choose to intervene, not the central bank. By mingling monetary and fiscal policies, the Federal Reserve puts at risk the independence of its monetary policy and therefore the desirable economic outcomes it is capable of delivering. We should make it clear to the public that normalization of monetary policy will mean a return to the federal funds rate as our primary policy instrument and that means a much smaller balance sheet, dominated by Treasury securities. Policymakers should also develop and articulate a coherent and credible plan for normalization. In late March, I proposed a systematic, rule-based approach that would involve the Fed’s selling assets from its portfolio as it increased its policy rate, with the pace of sales dependent on the state of the economy. The plan would get us back to a normal operating environment in a timely manner, with the Fed’s balance sheet reduced to a size that would again allow the federal funds rate to be the primary policy instrument. An alternative plan might be to set the balance sheet on something like a pre-determined glide path that would shrink the balance sheet steadily over time. In general, changes to the path would face a high threshold. BIS central bankers’ speeches Perhaps more important than the details of any approach to exit is the very establishment – and communication – of a systematic plan to do so. Of course, monetary policy will always be dependent on the evolution of the economy, but the more we can articulate how we will conduct policy during the transition to a more normal policy framework, the more we will reduce uncertainty and contribute to stability. Indeed, transparency is always an important ingredient in sound monetary policymaking, but as we exit from the period of extraordinary policy, it is even more important. Given the large amount of liquidity present in the U.S. banking system, it is reasonable for the public to be concerned about inflation. As we normalize the policy framework, we, as policymakers, need to do all we can to ensure that the public’s expectations of inflation remain stable. The majority of monetary economists and central banks, including the Bank of England, now consider some form of inflation targeting a best practice. It is time for the Fed to adopt this practice, as I have advocated for nearly 20 years. Some argue that because the Federal Reserve does not have a single mandate for price stability as other central banks do, it should not set an explicit inflation objective. I disagree. The U.S. Congress set the Fed’s mandate to conduct monetary policy to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Adopting an inflation objective does not mean controlling inflation at the expense of economic stability. On the contrary, most economists, myself included, agree that focusing on price stability is the most effective way for monetary policy to promote all parts of its mandate. Moreover, committing to a stated goal to keep inflation low and stable can help to reduce market uncertainty and enhance the credibility and accountability of our central bank. During the transition from a very accommodative policy stance to a more normal operating environment, it is especially important that the public have confidence in the Fed’s commitment to do so in a manner that does not let inflation accelerate. Thus, in my view, this would be an opportune time for the Fed to commit to an explicit numerical inflation objective. It is noteworthy that just within the last year or so, the public discussion in the U.S. has swung from concerns that the U.S. might face a period of sustained deflation to concerns that monetary policy and rising commodity prices could produce higher-than-desired inflation. These swings in public concern indicate how much uncertainty there is in the lookout for inflation. We should seek to ensure that this does not translate into a lack of confidence in the Fed to maintain price stability. As we work to exit from this period of extreme monetary accommodation in a way that neither leads to higher inflation nor risks undermining the recovery, the public’s confidence in the Fed’s commitment to price stability will be crucial. For this reason, it would be highly desirable for the Federal Reserve to publicly commit to a clear and explicit inflation objective. While an inflation target is not a panacea for all the challenges facing monetary policymakers, it is an important element in a credible program for monetary and economic stability. Conclusion In summary, my forecast is for the economy to continue to expand at a moderate pace and for inflation to move back down from its current level as oil prices stabilize. Despite weakness in the first quarter, I expect annual growth to be 3 to 3½ percent over the remainder of this year and next. As the economy strengthens, prospects for labor markets will continue to improve, with the unemployment rate descending to between 7 to 7½ percent by the end of 2012. As the economy evolves, the Federal Reserve remains committed to its long-run statutory goals of price stability and maximum employment. We must carefully watch for signals of inflation and altered expectations to ensure that monetary policy stays ahead of the curve. As BIS central bankers’ speeches we move forward in this time of change, clear communications regarding our actions and objectives will be of the utmost importance. I believe we can be most successful in exiting from this period of extraordinary accommodation and nontraditional policies if we communicate a systematic plan that describes where we are headed and how we will get there. Such a plan would be strengthened if the FOMC adopted an explicit numerical objective for inflation, which would help ensure that inflation expectations remain well anchored. BIS central bankers’ speeches | federal reserve bank of philadelphia | 2,011 | 6 |
Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the Business Leaders Forum, Villanova School of Business, of Philadelphia, Pennsylvania, 29 September 2011. | Charles I Plosser: Economic outlook Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the Business Leaders Forum, Villanova School of Business, of Philadelphia, Pennsylvania, 29 September 2011. * * * The views expressed today are my own and not necessarily those of the Federal Reserve System or the FOMC. Good morning. Thank you for the opportunity to be here at the Villanova School of Business to address this second annual Business Leaders Forum. As leaders engaged in our business community, you are all aware of the painfully protracted pace of our economic recovery. I have been saying for quite some time that this was going to be a long, slow recovery. Moreover, this frustrating state of affairs continues despite extraordinarily accommodative monetary policy. In my remarks today, I will discuss my outlook for the U.S. economy, as well as my views on the appropriate current and future monetary policy. As always, my remarks reflect my own views and do not necessarily represent the views of the Federal Reserve Board or my colleagues on the Federal Open Market Committee. Economic outlook Let me begin with an update on the U.S. economy. Clearly, this year has not played out as almost anyone forecasted. Indeed, from the revisions to the government’s economic data in July, we now know that the recession was deeper and the recovery was weaker than we had previously thought. Some of this year’s weakness is understandable. We began the year with severe snowstorms in the East, then the earthquake and ensuing disasters in Japan, followed by the unrest in the Middle East and North Africa and the run-up in oil prices, and a lingering concern about sovereign debt in Europe. And all of that occurred before May. With the arrival of summer, we faced another round of problems with the worsening of the European sovereign debt crisis, as well as our own fracas on fiscal policy and the debt ceiling debates in Washington. These events all weighed heavily on business and consumer confidence. While many of these factors are transitory, and each will wane eventually, the cumulative effect has served to feed uncertainty and inhibit growth. Indeed, growth in the first half of 2011 was much weaker than anticipated. In light of this performance most forecasters have revised down their forecasts for overall growth in 2011. Indeed, at the beginning of the year, I was expecting GDP growth in 2011 to be 3 to 3.5 percent. Now, I expect GDP growth to be less than 2 percent in 2011, but to gradually accelerate to around 3 percent in 2012. Although the downside risks around this forecast are significant, I do not believe the current data signal that we are on the precipice of a so-called double-dip recession. Indeed, many of my business contacts suggest that while growth is very sluggish and uneven, they do not see the precipitous declines that the news headlines suggest. Instead, their stories are consistent with a slow recovery due to the very nature of the recession from which we have emerged. The financial crisis was a severe shock that impacted many economies around the world and led to a recession of great depth and structural imbalances. Some sectors, such as financial services and construction, may never BIS central bankers’ speeches return to their pre-recession shares of our economy. The aftermath of the financial stress and the weak housing sector will weigh on the pace of recovery for some time to come. Consumer and business spending One of the more striking aspects of this recession is the continued weakness in consumer spending. While there were modest increases last year, spending decelerated notably over the first half of the year. Partly this reflects the effect of higher oil prices we saw earlier in the year. Partly it reflects the continued deleveraging of the household balance sheet, as consumers pay down debt and work to rebuild their net worth. Most observers agree that weak income growth and falling house prices are restraining spending and we are unlikely to see strong consumer spending as long as we face a depressed housing market and a weak labor market. Another way to view weak consumption is to note that households are continuing to restructure their balance sheets – saving more and consuming less. This is a perfectly natural and rational reaction to events. Until these households perceive that they have restored a balance to their long-run consumption and saving patterns commensurate with their earnings profile, they will not increase spending. Moreover, the more uncertain they are about their own earning power, the more reluctant households will be to increase spending and the more they will feel the need to build up their savings. A brighter spot has been business investment spending, which has been supported by solid growth in corporate earnings. Looking through the month-to-month volatility, spending on equipment and software has continued to expand. Indicators from business surveys, including the Philadelphia Fed’s Business Outlook Survey of manufacturers, suggest some weakening in conditions, although it is too soon to tell whether this will be persistent. Many have taken note of the weakness in our monthly survey, since it has proven to be a useful gauge for national trends in manufacturing. In August and September, the measures of current activity were negative. But our polling in August coincided with market volatility in the aftermath of Standard & Poor’s downgrade of U.S. debt. Measures of future activity have remained positive, and September was stronger than August, suggesting that firms expect activity to pick up over the next six months. Recent volatility in financial markets has contributed to sharp declines in business and consumer sentiment. But with a high degree of uncertainty over future taxes, regulations, and the financial ramifications of the European sovereign debt situation, it is no wonder that sentiment is flagging and this decline poses added risk to the growth forecast. Labor markets Conditions in labor markets remain a serious challenge. Given the weak growth so far this year, we have not made even the modest progress on reducing unemployment rates that forecasters anticipated. Most recently, nonfarm payroll employment was flat in August, and the unemployment rate remained at 9.1 percent. Private payrolls added just 17,000 jobs, far below what we will need to see just to keep pace with changes in the labor force. Ongoing budget pressures faced by state and local governments have led to cuts in public payrolls. These numbers are troubling, especially when more than 40 percent of the unemployed, or some 6 million people, have been out of work for 27 weeks or longer. This underscores that we should not expect any easy solution. Millions of unemployed workers may take longer to find jobs because their skills have depreciated or they may need to seek employment in other sectors. These structural issues will take time to resolve. Jobs and workers will need to be reallocated across the economy, which is a long and slow process. BIS central bankers’ speeches Thus, while I expect a moderate recovery to continue and to strengthen over time, I expect to see only modest declines in the unemployment rate, with probably little change over the rest of this year, and then falling to a range of 8 to 8½ percent by the end of 2012. Inflation Let me now turn to my outlook for inflation. Just as growth has been weaker this year than many forecasters had anticipated, inflation has been higher than expected. Monthly changes in inflation have moderated slightly from those seen earlier in the year when the prices of many commodities, including oil, were rising sharply. However, measured on a year-overyear basis, both total inflation and core inflation continue to advance. I do anticipate that with many commodity prices now leveling off or falling, and inflation expectations relatively stable, inflation will moderate in the near term. However, we must continue to monitor this situation, particularly in this environment of very accommodative monetary policy. Indeed, it is good to remember that the current inflationary environment is quite different from the one we faced a year ago when we embarked on the so-called QE2 policy to purchase $600 billion of long-term U.S. Treasuries. At the time, there were concerns about deflation, whereas now inflation is running above our long-run goal. I would also note that unemployment was higher last fall than it is today. Thus, with inflation higher and unemployment lower, it is appropriate to ask what criteria we are using to justify further accommodation. In this environment, I think it is very important that we refrain from actions that risk fueling a steady rise in inflation or inflation expectations over the medium term. We must not become too sanguine that high unemployment will lead to low inflation. The lesson of the 1970s is clear – high unemployment or low resource utilization is not sufficient to prevent high rates of inflation. The current environment in the U.K. should also be a warning. The unemployment rate in Britain is near 8 percent, having risen sharply during its recession, yet inflation is now approaching 5 percent and has been steadily rising for nearly two years. Monetary policy This brings me to a discussion of the recent policy actions the Fed has taken, why I dissented from these actions in August and September, and what I believe should be the long-term view of monetary policy. As I noted at the beginning of my remarks, the economic conditions of the past few years have led to extraordinary monetary policy accommodation. To date, our actions have led to a level of the federal funds rate – the traditional instrument of monetary policy – that has been near zero for almost three years. The Fed’s balance sheet has grown more than threefold, from nearly $900 billion before the crisis to about $2.9 trillion today, and its asset composition has shifted significantly from mostly short- to medium-term Treasuries to longer-term Treasuries, mortgage-backed securities, and agency debt. This extraordinary degree of monetary accommodation has played a role in supporting the recovery thus far, and it continues to do so. In August, the FOMC changed its guidance about its expectations for the future path of the federal funds rate. In particular, it stated that economic conditions were “likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” At its meeting last week, the FOMC announced additional accommodative action. In an effort to reduce long-term Treasury yields from already historically low levels, the FOMC intends to purchase $400 billion of longer-term Treasury securities and to sell an equal amount of shorter-term Treasuries by the end of June 2012. This action will not increase the size of the Fed’s balance sheet, but it will lengthen the maturity of the Fed’s holdings. In addition, the FOMC will be reinvesting principal payments from its holdings of agency debt and agency mortgage- BIS central bankers’ speeches backed securities in mortgage-backed securities rather than Treasuries. This action was intended to help support mortgage markets. I dissented from these decisions because I believe that they will do little to improve the nearterm prospects for economic growth or employment and they do pose risks. Policy actions should never be considered free and should be evaluated based on the costs and benefits. Based on our experience with Operation Twist in the 1960s and with last year’s QE2, the reduction in long-term rates is likely to be less than 20 basis points for the 10-year Treasury yield, which is currently only 2 percent. The pass-through to the rates at which consumers and businesses actually borrow is likely to be much less. Thus, I am skeptical that this will do much to spur businesses to hire or consumers to spend, given the ongoing structural adjustments occurring in the economy and the uncertainties posed by the fiscal challenges both here and abroad. In addition to having little effect, the actions come with significant potential costs. We have provided a great deal of monetary accommodation to the economy, and given the stubbornness of the unemployment rate in responding to these efforts, we should be cautious and vigilant that our previous accommodative policies do not translate into a steady rise in inflation over the medium term even while the unemployment rate remains elevated. Creating an environment of stagflation, reminiscent of the 1970s, will not help businesses, the unemployed, or the consumer. It is an outcome we must carefully guard against. We also need to ensure that Fed policy remains credible. In my view, the actions taken in August and September tend to undermine the Fed’s credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery. It is my assessment that they will not. We should not take certain actions simply because we can. To address our economic ills we must apply the appropriate remedies. A doctor who misdiagnoses a disease and prescribes the wrong medicine can make the patient worse. The ills we currently face are not readily resolved through ever more accommodative monetary policy. If we act as if the Fed has the ability to solve all our economic problems, the credibility of the institution is undermined. The loss of that credibility and confidence could be costly to the economy because it will make it much harder for the Fed to implement effective monetary policy in the future. Credibility was also at the center of my opposition to changing the forward policy guidance in August. I was concerned that tying monetary policy to calendar time could be misinterpreted by the public as suggesting that monetary policy is no longer contingent on how the economic outlook evolves. This could also lead to a loss of credibility should economic conditions develop in a way that requires the federal funds rate to be adjusted prior to mid2013. And in my view, given the outlook, economic conditions will likely warrant that the Fed begin to raise rates before that time. Finally, the actions taken at our last meeting will make our exit from this period of extraordinary accommodation more complicated. We will have more long-term Treasury securities and more mortgage-backed securities in our portfolio, which may extend the time it will take to withdraw from allocating credit to particular sectors of the economy and return to our stated goal of an all-Treasuries portfolio. This does not mean that I see no circumstances in which further monetary policy action should be taken. Should the developments in the euro area lead to significant financial market disruptions, the Fed would need to respond in its role of lender of last resort to support financial stability and the payments system. Or if deflationary fears were to become a real threat again and we saw signs that the economy was moving to a sustained disinflation with declining inflation rates and inflation expectations, then we would need to consider further action to stabilize inflation expectations. I do not see either of these scenarios in my forecast, so I do not anticipate that further accommodative monetary policy actions will need to be taken. BIS central bankers’ speeches An explicit numerical objective for inflation The past three years have proven to be challenging times for monetary policymakers. We entered unprecedented territory as we employed new policy tools to stem the financial crisis and limit the damage to the economy from the severe economic recession. There was no established framework for making policy decisions in such an environment, and that added to the difficulties in determining appropriate policy. It also created difficulties for the Fed’s communications. In my view, a high priority for the Fed must be to strengthen our monetary policy framework and articulate that framework to the public so that they will better understand the basis for our decisions and be better able to formulate expectations of future policy actions. An important first step in that direction is for the Federal Reserve to adopt an explicit numerical objective for inflation. The explicit inflation goal would help to anchor inflation expectations, raise policy transparency, and increase the central bank’s accountability for its actions. There is considerable evidence that countries that have adopted such an objective as a cornerstone of their monetary policy decision-making have had more success at achieving price stability without any deterioration in the stability of real activity. In the United States, Congress has given the Fed a mandate to promote the goals of maximum employment, stable prices, and moderate long-term interest rates. Price stability is the most effective way for monetary policy to promote the other two goals. Thus, by helping the Fed achieve and maintain price stability, an explicit inflation objective would help the Fed promote all three of the goals set forth by Congress. For nearly 20 years, I have advocated that the Fed make explicit its commitment to a numerical inflation objective in support of its full mandate. I believe that now is an opportune time to do so. First, it will increase the credibility of our commitment to keeping prices stable even as we employ new, less familiar policy tools. Second, we are confronting an environment where some may be questioning the ability or resolve of the government to address our long-run fiscal problems. In such an atmosphere of uncertainty, being explicit about our inflation goal will underscore the Fed’s commitment not to succumb to external pressures to use inflation as a solution to the country’s long-run deficit problem. This will help anchor inflation expectations, which is critical because an undesirable rise or fall in inflationary expectations can generate a self-fulfilling mechanism. Should inflation expectations become unhinged, it would be difficult and costly for the monetary authority to re-establish price stability. Third, communicating an explicit inflation objective will clarify the Fed’s intentions regarding the level of inflation it considers consistent with its mandate. Some economists have suggested that raising our inflation goal above 2 percent would be an effective tool for lowering real interest rates. I am very wary of such a strategy because I don’t believe we can control inflation expectations that precisely. It is at least questionable whether we could credibly raise inflation expectations. And were we able to do so, how easily would we be able to bring them back down? Trying to manipulate the public’s expectations may risk undermining the Fed’s credibility and the public’s confidence in the institution. Fourth, we eventually will need to normalize our monetary policy and exit this period of extraordinary accommodation. Having an explicit inflation objective will help us maintain our commitment to price stability while we do that and increase the credibility of that commitment in the eyes of the public. As business leaders, you understand the importance of credibility in your own institutions. An institution's reputation is built on its credibility for fulfilling its commitments. Once that foundation is compromised, it is very difficult to rebuild. The Fed must do all it can to preserve its hard-earned credibility. I believe an explicit inflation goal can help us do that. BIS central bankers’ speeches Conclusion In summary, the U.S. economic recovery will continue and gradually strengthen over time. I expect annual growth of less than 2 percent this year to gradually accelerate to around 3 percent next year. As the economy strengthens, prospects for labor markets will continue to improve and the unemployment rate will gradually decline. As we move forward in this time of change, the Federal Reserve remains committed to its long-run statutory goals of price stability and maximum employment. We remain vigilant on inflation and committed to clear communication of our monetary policy. I believe that this communication, and our accountability to the public, could be greatly enhanced were the Fed to adopt an explicit numerical inflation goal. Having such an objective in place would prove particularly useful in the current environment in which the Fed is providing monetary stimulus using new tools that are not as familiar to the public and the markets. It will also help at a time when some may view the fiscal situation as threatening the independence of monetary policy. And it will help in the future, during the eventual exit from these extraordinarily accommodative measures. BIS central bankers’ speeches | federal reserve bank of philadelphia | 2,011 | 10 |
Text of the Farash Distinguished Lecture by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the Zell/Lurie Real Estate Center Fall Members' Meeting, Wharton, 12 October 2011. | Charles I Plosser: Outlook and a perspective on monetary policy Text of the Farash Distinguished Lecture by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the Zell/Lurie Real Estate Center Fall Members’ Meeting, Wharton, 12 October 2011. * * * Good afternoon. Thank you for the opportunity to be here at the Zell/Lurie Real Estate Center Fall Members’ Meeting. Your founding director, Peter Linneman, and I were graduate students together at the University of Chicago – a long time ago – and so I am especially delighted to be part of your program today. I am also honored to have the opportunity to deliver the Farash Distinguished Lecture. Max Farash, who died last year at age 95, was a Rochester-based real estate pioneer, and I had the honor of knowing Max over the years, especially when I served as dean of the Simon School of Business at the University of Rochester. Today, I’d like to share with you some thoughts on the nation’s economy. I will also discuss my views on monetary policy. As always, these are my views and do not necessarily represent the views of the Federal Reserve Board or my colleagues on the Federal Open Market Committee. Economic outlook The U.S. economy has not lived up to expectations this year. Indeed, in July we learned from the revisions to the government’s economic data that the recession was deeper and the recovery was weaker than we had previously thought. Some of this weakness is perfectly understandable, given the unanticipated shocks we experienced. We began the year with severe snowstorms in the East, then the earthquake and ensuing disasters in Japan, followed by the unrest in the Middle East and North Africa that led to a run-up in oil prices, and a renewed concern about European sovereign debt. And all of that occurred before May. Over the summer, the economy faced more challenges, with the further deterioration of the European sovereign debt crisis, as well as our own fracas in Washington over fiscal policy and the debt ceiling. These events weighed heavily on business and consumer confidence. While many of these factors are transitory, and each will wane in time, the cumulative effect has served to feed uncertainty and inhibit growth. Indeed, growth in the first half of 2011 was less than 1 percent, reflecting a very weak first quarter, and while the second quarter improved, growth remained well below the longer-term trend. In light of this performance, most forecasters have revised down their forecasts for overall growth for the full year. I now expect GDP growth to be less than 2 percent in 2011, with an acceleration to around 3 percent in 2012. Although the downside risks around this forecast are apparent, I do not believe we are on the verge of a double-dip recession. Indeed, many of my business contacts suggest that while growth is very sluggish and uneven, they do not see the precipitous declines that many news accounts would suggest. Perhaps the greatest uncertainty today surrounds the outcome of financial events in Europe. The sovereign debt crisis is not resolved. Financial markets seem very sensitive to news from Europe, even to the point of discounting positive news on the U.S. economy. Resolution or greater clarity on the path forward in Europe would be most helpful for the U.S. and world economic growth prospects. Yet as our economy recovers, we must realize the financial crisis was a severe shock that affected many economies around the world and led to a recession of great depth and structural imbalances. Prior to the recession, some sectors, such as financial services and BIS central bankers’ speeches real estate, had grown to historically high shares of U.S. GDP. As the economy rebalances, they may not return to those pre-recession highs, nor should we necessarily seek or expect them to do so. Consumer and business spending Now, let me turn to consumer and business spending. One of the more striking aspects of this recession is the continued weakness in consumer spending relative to previous recoveries. There were modest increases last year, but spending decelerated over the first half of this year in the face of higher oil prices and the continued deleveraging of household balance sheets. Consumers continue to pay down debt and work to rebuild their net worth by saving more and consuming less. This is a perfectly natural and rational reaction to events. Until these households perceive that they have restored a balance to their long-run consumption and saving patterns commensurate with their earnings prospects, they will remain conservative in their spending patterns. Moreover, the more uncertain they are about their own future earning power, the more reluctant households will be to spend and the more they will feel the need to save to protect their families against unforeseen events. A brighter spot has been business investment spending, which has been supported by solid growth in corporate earnings. Looking beyond the month-to-month volatility, spending on equipment and software has continued to expand. The new orders data suggest continued growth, although perhaps not at the same pace. Indications from some of the regional business surveys, like the Philadelphia Fed’s Business Outlook Survey of manufacturers, suggest some weakness relative to earlier in the year. Many commentators have taken note of the weakness in our monthly survey, since it has proven to be a useful gauge for national trends in manufacturing. In August and September, the measures of current activity were negative. But our polling in August took place in the midst of market volatility after Standard & Poor’s downgrade of U.S. debt, and the September survey occurred just days after the hurricanes and the severe flooding in New Jersey and Pennsylvania. Measures of future activity, however, have remained positive, and September was stronger than August, suggesting that firms expect activity to pick up over the next six months. Nevertheless, the volatility in the financial markets over the last few months has contributed to sharp declines in business and consumer sentiment. With many businesses and consumers uncertain about future taxes, regulations, and the financial ramifications of the European sovereign debt situation, it is no wonder that sentiment is flagging. This high degree of uncertainty dampens current growth and poses added risk to the forecast. Labor markets Conditions in labor markets remain a serious challenge. Given the weak growth in employment so far this year, we have not made even the modest progress on reducing unemployment rates that many forecasters had anticipated. The September employment report, including revisions to July and August, was a bit of positive news. Firms added 287,000 jobs to their payrolls in the third quarter, comparable to the second quarter. But this pace is below what is needed to make significant progress in reducing the unemployment rate, which has remained stubbornly high at 9.1 percent. The challenges facing the employment situation are underscored by the fact that more than 40 percent of the unemployed, or some 6 million people, have been out of work for 27 weeks or longer. This suggests we should not expect an easy solution to the problems in the labor market. Millions of unemployed workers may take longer to find jobs because their skills have depreciated, or they may need to seek employment in other sectors or in other parts of the country. These sorts of adjustments will take time to resolve. Jobs and workers will need BIS central bankers’ speeches to be reallocated across the economy and across the country, which is likely to be a long and slow process. Thus, while I expect a moderate recovery to continue and to strengthen over time, I expect to see only modest declines in the unemployment rate, with probably little change over the rest of this year, and then gradually falling to a range of 8 to 8½ percent by the end of 2012. Inflation Let me now turn to my outlook for inflation. Just as growth has been weaker this year than many forecasters had anticipated, inflation has been higher than expected. Monthly changes in inflation have moderated slightly from those seen earlier in the year as the prices of oil and other commodities have come down. However, measured on a year-over-year basis, both total inflation and core inflation continue to advance. I do anticipate that with many commodity prices now leveling off or falling, and inflation expectations relatively stable, inflation will moderate in the near term. Our focus should not be so much on the near term as on the medium term. Looking further ahead, we must continue to monitor this situation very carefully, particularly in this environment of very accommodative monetary policy. Inflation most often develops gradually, and if monetary policy waits too long to respond, it can be very costly to correct. Indeed, it is good to remember that the current inflationary environment is quite different from the one we faced a year ago when we embarked on the so-called QE2 policy to purchase $600 billion of long-term U.S. Treasuries. At the time, inflation was falling and there were concerns about deflation – year over year, PCE inflation was running about 1.2 percent and core PCE inflation (excluding food and energy) was under 1 percent. Today, PCE inflation is 2.9 percent and core PCE is running nearly 1.7 percent. I would also note that unemployment was 9.8 percent last fall compared to 9.1 percent today. Thus, with inflation higher and unemployment lower, it is not so surprising that some might question the need for the additional accommodation the FOMC undertook in August and September – a point I will return to shortly. In this environment, I think it is very important that we refrain from actions that risk fueling a steady rise in inflation or inflation expectations over the medium term. We must not become too sanguine that high unemployment will lead to low inflation. The lesson of the 1970s is clear – high unemployment or low resource utilization is not sufficient to prevent high rates of inflation. The current environment in the United Kingdom should also be a warning. The unemployment rate in Britain is near 8 percent, having risen sharply during its recession, yet inflation is now approaching 5 percent and has been steadily rising for nearly two years. Monetary policy This brings me to a discussion of the recent policy actions the Fed has taken, why I dissented from these actions in August and September, and what I believe should be the long-term framework of monetary policy. As I noted at the beginning of my remarks, the economic conditions of the past few years have led to extraordinary monetary policy accommodation. To date, our actions have kept the federal funds rate – the traditional instrument of monetary policy – near zero for almost three years. The Fed’s balance sheet has grown more than threefold, from nearly $900 billion before the crisis to about $2.9 trillion today. Moreover, the asset composition has shifted significantly from mostly short-term Treasuries to longer-term Treasuries, mortgagebacked securities, and agency debt. This extraordinary degree of monetary accommodation has played a role in supporting the recovery thus far, and it continues to do so. In August, the FOMC changed its guidance about its expectations for the future path of the federal funds rate. In particular, it stated that economic conditions were “likely to warrant BIS central bankers’ speeches exceptionally low levels for the federal funds rate at least through mid-2013.” At its late September meeting, the FOMC announced additional accommodative action. In an effort to reduce long-term Treasury yields from already historically low levels, the FOMC intends to purchase $400 billion of longer-term Treasury securities and to sell an equal amount of shorter-term Treasuries by the end of June 2012. This action will not increase the size of the Fed’s balance sheet, but it will lengthen the maturity of the Fed’s holdings. In addition, the FOMC will be reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in mortgage-backed securities rather than Treasuries. This action was intended to help support mortgage markets. I dissented from both of these decisions. As I noted earlier, given that inflation was notably higher and unemployment lower than it was last fall when we embarked on our second round of asset purchases, it wasn’t clear that further accommodation was called for. In addition, I believe these actions will do little to improve the near-term prospects for economic growth or employment, but they do pose some real risks. Policy actions are not free and should be evaluated based on the costs and benefits. Based on our experience with Operation Twist in the 1960s and with last year’s QE2, the reduction in long-term rates from our actions in September is likely to be less than 20 basis points for the 10-year Treasury yield, which is currently only 2 percent. The pass-through to the rates at which consumers and businesses actually borrow is likely to be considerably less. Thus, I am skeptical that this will do much to spur businesses to hire or consumers to spend, given the ongoing adjustments occurring in the economy and the uncertainties posed by the fiscal challenges both here and abroad. In addition to having little benefit, the actions come with significant potential costs. We have provided a great deal of monetary accommodation to the economy, and given the stubbornness of the unemployment rate in responding to these efforts, we should be cautious and vigilant that our accommodative policies do not translate into a steady rise in inflation over the medium term even while the unemployment rate remains elevated. Creating an environment of stagflation, reminiscent of the 1970s, will not help businesses, the unemployed, or the consumer. It is an outcome we must carefully guard against. We also need to ensure that Fed policy remains credible. Economic theory and historical experience tell us that a central bank’s ability to maintain price stability and promote economic growth hinges on its credibility. Actions that undermine credibility can put at risk the effectiveness of a central bank’s ability to achieve its objectives. In my view, the actions taken in August and September risk undermining the Fed’s credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery. It is my assessment that they will not. We should not take actions simply because we can. To address our economic ills we must apply the appropriate remedies. A doctor who misdiagnoses a disease and prescribes the wrong medicine can make the patient worse. The ills we currently face are not readily resolved through ever more accommodative monetary policy. If we act as if the Fed has the ability to solve all our economic problems, our credibility will be undermined. The loss of that credibility and the loss of the public’s confidence could be costly to the economy because it will make it much harder for the Fed to implement effective monetary policy in the future. Credibility was also at the center of my opposition to changing the forward policy guidance in August. I was concerned that tying monetary policy to the calendar could be misinterpreted by the public; it could suggest that monetary policy is no longer contingent on how the economic outlook evolves. This could lead to a loss of credibility should economic conditions develop in a way that requires the federal funds rate to be adjusted prior to mid-2013. And in my view, given the outlook, economic conditions will likely warrant that the Fed begin to raise rates before then. If such a move is required and we don’t act, our credibility to control inflation would be severely damaged. Yet, if we do act, our credibility will also be damaged because we encouraged the public to believe we would not act before mid-2013. BIS central bankers’ speeches Finally, the actions taken at our last meeting will make our exit from this period of extraordinary accommodation more complicated. Since we will have more long-term Treasury securities and mortgage-backed securities in our portfolio, the time it will take to unwind and get back to our stated goal of returning to an all-Treasuries portfolio and shrinking our balance sheet may need to be extended and may put at risk our ability to control inflation over the medium term. This does not mean that I see no circumstances in which further monetary policy action should be taken. Should the developments in the euro area lead to significant financial market disruptions, the Fed would need to respond in its role of lender of last resort to support financial stability and the payments system. Or if deflationary fears were to become a real threat again and we saw signs that the economy was moving to a sustained disinflation with declining inflation rates and inflation expectations, then we would need to consider further action to stabilize inflation expectations. The past three years have proven to be challenging times for monetary policymakers both here and abroad. We are in unprecedented territory in terms of policy tools and actions employed. This creates difficulties not only for policymaking but also for the Fed’s communications. In my view, a high priority for the Fed must be to strengthen our monetary policy framework and articulate that framework to the public so that they will better understand the basis for our decisions and be better able to formulate expectations of future policy actions. I believe that this communication, and our accountability to the public, could be greatly enhanced were the Fed to adopt an explicit numerical inflation goal. For nearly 20 years, I have advocated that the Fed make explicit its commitment to a numerical inflation objective in support of its full mandate. I believe that now is an opportune time to do so. Having such an objective in place would prove particularly useful in the current environment in which the Fed is providing monetary stimulus using new tools that are not as familiar to the public and when some may view the fiscal situation as threatening the independence of the Federal Reserve and its ability to maintain price stability. And it will help in the future by keeping inflation expectations well anchored during the eventual exit from these extraordinarily accommodative measures. Conclusion In summary, the U.S. economic recovery will continue and gradually strengthen over time. I expect annual growth of less than 2 percent this year to gradually accelerate to around 3 percent next year. As the economy strengthens, prospects for labor markets will continue to improve and the unemployment rate will gradually decline, undoubtedly too gradually for many of us. As we move forward in this time of change, the Federal Reserve remains committed to its long-run statutory goals of price stability and maximum employment. And it is a credible commitment to price stability that provides the surest path for monetary policy to successfully promote economic growth and employment. BIS central bankers’ speeches | federal reserve bank of philadelphia | 2,011 | 10 |
Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the Global Interdependence Center's 2011 Global Citizen Award Luncheon, Philadelphia, Pennsylvania, 8 November 2011. | Charles I Plosser: Strengthening our monetary policy framework through commitment, credibility, and communication Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the Global Interdependence Center’s 2011 Global Citizen Award Luncheon, Philadelphia, Pennsylvania, 8 November 2011. * * * The views expressed today are my own and not necessarily those of the Federal Reserve System or the FOMC. Good afternoon. I am deeply honored to be this year’s recipient of the GIC Global Citizen’s Award. For the past five years, I have had the pleasure of observing and participating with the GIC in its efforts to foster an international dialogue on economic matters of global importance. I have been very impressed with the breadth and reach of the programs the center has put together. The GIC’s efforts to promote such a dialogue have been especially timely as the world economy continues to wrestle with the consequences of a financial crisis and a severe global recession. The GIC’s convening of central bankers, policymakers, and business leaders from different nations and different industries has created opportunities to leverage knowledge and experiences in these challenging times. Yet even as the world economy recovers, we all have learned that our economies are increasingly intertwined, and therefore, I believe these GIC programs will remain relevant and valuable in the years to come. In the past few years, the global financial crisis has led central bankers around the world into uncharted territory as extraordinary disruptions in financial markets led them to take extraordinary actions. However necessary these actions may have been, unusual and unexpected policy choices do shape the public’s views and expectations about future policy, even if policymakers do not intend to do so. This is especially true when policymakers take unusual or highly discretionary policy actions without communicating a clear framework for those actions. For example, the rescue of Bear Stearns’ creditors in March 2008 led many investors to expect that other investment banks would receive similar treatment should they run into trouble, even though no such promise was made or intended. This belief probably encouraged investors and firms to take more risks, perhaps excessive risks, which they might not otherwise have undertaken. This likely led to unexpected losses with the failure of Lehman Brothers in September 2008, adding to the turmoil in the markets. Thus, taking highly discretionary policy actions without communicating to the public the implications of those actions for the conduct of future policy can be problematic and destabilizing. More generally, economic research in the past 30 years has shown that setting monetary policy in a systematic or rule-like manner leads to better economic outcomes – lower and less volatile inflation and greater economic stability in general.1 As I have discussed on many occasions, there is value in conducting policy in a systematic manner in both good times and bad.2 Systematic policy helps the public and markets better understand how policy will be conducted in the future and thus enables them to make better decisions today. But the benefit depends on the public’s understanding of the policymaking framework being used, and that requires commitment, credibility, and effective communication by the central bank. Today, I would like to step back and discuss specific ways to strengthen the framework for U.S. monetary policy through enhanced commitment, credibility, and communication and, in See Kydland and Prescott (1977). See, for example, Plosser (2008) or Plosser (2010). BIS central bankers’ speeches so doing, improve economic stability. Of course, these are my views and do not necessarily represent the views of the Federal Reserve Board or my colleagues on the Federal Open Market Committee. The goals and objectives of monetary policy In order to discuss the framework for achieving our policy goals, we need to have a clear understanding of those goals. Congress set the goals of monetary policy in a 1977 amendment to the Federal Reserve Act and then reaffirmed them in 2000. This mandate requires the Federal Reserve to conduct monetary policy “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Many people think these objectives conflict with one another, but in fact, they are complementary. Economists have come to understand that achieving price stability is the most effective means for monetary policy to promote the other two goals. Price stability contributes to the economy’s growth and employment prospects in the longer term and helps to moderate variability of output and employment in the short to medium term. Price stability allows the economy to function in a more efficient and a more productive manner by giving individuals and businesses more confidence that the purchasing power of the dollar will not erode. Failing to maintain price stability can often lead to more instability in employment and output. One way to see this is to recognize that if inflation rises to unacceptable levels, as it did in the 1970s, monetary policy may be forced to react to restore price stability. This, in turn, could lead to an increase in unemployment as it did in the recession early in the 1980s. Thus, increases in inflation in the near term risk creating unemployment in the future – as a result, we end up with less stability, not more. Price stability also helps to foster financial stability and moderates long-term interest rates by minimizing the inflation premium that investors demand to hold long-term assets. Because moderate long-term interest rates follow so directly from the price stability mandate, many people have come to refer to the Fed as having a “dual mandate” – price stability and maximum employment. Yet, the price stability and the employment goals are materially different in nature. The most significant difference is that the level of prices and thus inflation is a monetary phenomenon over the intermediate to longer term, and so the inflation rate can be chosen and controlled through monetary policy. The same cannot be said for the goal of maximum employment or the unemployment rate. These are largely determined by factors that are beyond the direct control of monetary policy. In the long run, maximum employment depends on such things as demographics, taxes and regulations, labor productivity and skills, unemployment benefits, minimum wage laws, and a host of other factors. This means that maximum employment will fluctuate over time. Monetary policy cannot and should not be used to offset these longer-run changes in maximum employment. Even in the near term, the modern approach to macroeconomics recognizes that employment will fluctuate with forces that affect supply and demand, such as oil price shocks, earthquakes, or decisions by households to save more, or deleverage, perhaps due to a fall in the stock market or in house prices. In this framework, it is neither desirable nor efficient for monetary policy to try to prevent market forces from making the necessary adjustments to such disturbances, even if they have consequences for employment. Instead, monetary policy should be set in a way that allows the economy to efficiently use its resources given the economic disturbances it has experienced – it allows for the best economic outcome given the environment. Because monetary policy can deliver price stability, I believe it makes sense for the central bank to be clear in setting a numerical objective for medium-term inflation. But because employment is affected by many other factors in both the long and the short run, it does not BIS central bankers’ speeches make sense for the Fed to set explicit numerical objectives for employment or unemployment. By creating an environment of low and stable inflation, monetary policy will make a valuable contribution to maximum employment in the short and long run. A credible commitment to price stability helps anchor inflation expectations and affords the central bank the flexibility to adjust monetary policy to support output and employment adjustments in the face of economic disturbances. Flexible inflation targeting What I have just described is the modern textbook view of how to conduct monetary policy. It is commonly referred to as flexible inflation targeting. This approach combines a credible commitment to a medium-term inflation objective, which, in turn, allows monetary policy to adjust to economic shocks in a manner that helps promote the return of output or employment to a more desirable value without undermining inflation expectations. It emphasizes clear and transparent communication with the public about policymakers’ views of current economic conditions, the economic outlook, and its decision-making framework. Flexible inflation targeting is widely practiced by major central banks around the world. While details often differ, key themes include a commitment to an explicit medium-term inflation objective and transparent communication about the economic outlook, the policy process, and how policy decisions relate to changes in economic conditions. It is important to recognize that by being more explicit about its objectives and more transparent and systematic about its decision-making framework, the central bank enhances its credibility. This also increases its accountability to the public. It is harder to make commitments that you will be unable or unwilling to keep, if you know the public can call you to task for failing to meet your commitments. Improving the Federal Reserve’s monetary policy framework The Federal Reserve has not explicitly adopted a flexible inflation targeting framework. Indeed, monetary policymaking in the U.S. has historically been conducted on a highly discretionary basis, and the Fed has resisted adopting a specific framework or numerical objective. Yet, over the last two decades or so, Fed policymakers have gradually taken steps toward the more mainstream approach of flexible inflation targeting. In particular, the Fed, especially under Chairman Bernanke, has become increasingly transparent and has worked to improve its communications with the public and the markets. It has recognized and stressed the importance of keeping inflation expectations well anchored. It has become more transparent regarding the Committee’s economic outlook over both the short and the intermediate term through the publication of its Summary of Economic Projections, or SEP for short, which is published four times a year. All of these efforts have moved us closer to having an explicit monetary policy framework. Of course, such a framework does not solve all of our difficult policy choices. A good deal of judgment needs to be used in setting appropriate monetary policy. Still, having an explicit framework within which to consider our policy choices in a systematic way would improve monetary policy’s effectiveness in meeting our mandated objectives while increasing transparency and accountability. Yet, I believe there is more the Fed could and should do to further improve and strengthen its approach to policymaking. The minutes of the September FOMC meeting, for example, indicated that most participants favor taking steps to further increase the transparency of monetary policy. This includes providing more information about our longer-term policy objectives and factors that influence our policy decisions. So, let me offer my own views about the steps we could take. BIS central bankers’ speeches First, let’s clarify and make explicit our inflation objective. The effectiveness of monetary policy in achieving its dual mandate is enhanced if the public understands and finds credible the Fed’s inflation objective. The FOMC’s inflation mandate has been interpreted as being 2 percent or a bit less. This interpretation arises from the quarterly SEP, in which the majority of participants have said that under “appropriate monetary policy,” 2 percent is their longer-run “forecast” of inflation.3 So I see no reason for the FOMC not to simply make explicit that its longer-term inflation objective is 2 percent. Making such a clear and explicit statement should give the public confidence that the Fed’s commitment to its price stability mandate is a credible one. Being explicit about our inflation objective is fully consistent with the Fed’s statutory dual mandate. Given that dual mandate, the structure of the economy, and the magnitude and frequency of typical economic disturbances, I would anticipate that when inflation deviates from the objective in the short term, it could be brought back to 2 percent within two to three years or less. But the timing would depend on the size and nature of the shocks to the economy. In deciding how quickly to move toward the inflation objective, the FOMC would always take into account the implications for near-term economic and financial stability and would continue to appropriately use its judgment in setting policy to promote fulfillment of the dual mandate. Being explicit about our inflation objective would help anchor expectations and reduce uncertainty about future policy steps. Also, stabilizing inflation expectations and increasing the credibility of the central bank to maintain stable prices can actually change the inflation process itself. In particular, inflation will become less responsive or sensitive to short-run supply and demand disturbances. This means less volatility in monetary policy and less volatility in output and employment. Second, let’s provide more information about the expected path of policy. Many central banks that set explicit inflation targets also provide information about the expected path of policy. For example, Norway, Sweden, and New Zealand all do so, although they each do it in their own way. The Fed has also, at times, provided information about the expected path of policy, albeit in less effective ways. The Fed has used phrases like “extended period,” or, in the Greenspan era, the Committee talked about policy moving at a “measured pace.” More recently, the Committee indicated that rates were likely to be kept low until “mid-2013.” These examples illustrate ways of communicating what central bankers call “forward guidance.” Yet such approaches are not very satisfactory. “Extended period” is vague and can be interpreted differently by Committee members or market participants. I believe policy should always be a function of the state of the economy, rather than an “extended period” or a specific calendar date. Indeed, one of the reasons for my dissent in August was over the use of the “mid-2013” language. I was concerned that this would be misinterpreted by the markets as suggesting that monetary policy was no longer contingent on how the economy evolved. In my view, it was the wrong way of communicating forward guidance. The Summary of Economic Projections provides a better and more natural way to convey the Committee’s sense of the future path of policy. Currently, the SEP indicates individual policymakers’ forecasts of the key economic variables, including output, inflation, and unemployment conditional on each policymaker’s assessment of “appropriate policy” in the absence of further shocks. I think a more appropriate and meaningful way for the Committee to convey forward guidance would be to report information about Committee members’ underlying view of “appropriate policy.” This additional information would provide a useful picture of the range of views of future policy as envisioned by the policymakers. These views The SEP reports the longer-run forecast of the year-over-year change in the overall personal consumption expenditure (PCE) chain-weighted price index. BIS central bankers’ speeches would not constitute a commitment to follow a particular path but would evolve as economic conditions changed. This information would add a useful signal to the markets as to the thinking of the Committee on an ongoing basis. Third, let’s be more explicit about the Committee’s reaction function. Policymakers can promote greater economic stability if the public is better able to predict future policy actions. Because policymakers do not know with certainty how economic conditions will evolve, they cannot say with certainty what policy will be in the future. But policymakers can provide information on what factors will influence their policy decisions. I have long argued for more rule-like or systematic policymaking. This means making policy decisions using available economic information in a consistent and predictable manner. We don’t know what the future holds, but we can be more systematic about how we use economic data in formulating our policy. Currently, the FOMC looks at a variety of information in formulating policy, including several different versions of monetary rules. We are some ways from choosing one rule or reaction function as a guide for policy. Yet, research has found that some simple rules perform fairly well in a variety of models. These rules involve policy responding aggressively to deviations of inflation from its target and also responding to deviations of output from some concept of potential. In addition, the rules tend to involve some smoothing of the policy rate over time rather than sharp jumps in rates. The practice of looking at a variety of rules or reaction functions and what they tell us about appropriate policy imposes an important discipline on policymaking. We made some progress in November 2009 when the Committee indicated in its statement that we were conditioning policy decisions on measures of inflation, inflation expectations, and resource utilization. This was a good first step, but we should go further. In addition to describing the set of conditioning variables that we consider as we formulate policy, we should communicate our policy decisions in terms of the changes in these important conditioning variables. If the Fed chooses a consistent set of variables and sticks to them, the public would better understand our reaction function and thus have a greater ability to form judgments about the likely course of policy. This approach would reduce uncertainty about policy actions and promote stability. What not to do I have spent some time discussing how I would strengthen our monetary policy framework by completing our move to flexible inflation targeting. This would include an explicit numerical objective for inflation. Given the current state of the economy, there has been some recent public discussion of the perceived benefit of having the Fed aim for an inflation rate higher than 2 percent. Some have argued that since the unemployment rate is higher than anyone would like and since the federal funds rate is stuck at the zero bound, we should target higher inflation as a means to reduce unemployment. Others have suggested that higher inflation could inflate away the debt overhang problem. Sometimes these arguments are opportunistically couched in terms of alternative policymaking frameworks, such as nominal GDP targeting, or price-level targeting. Regardless of the name, though, I believe the main motivation for many is to raise inflation. By increasing inflation, some argue that we could lower the real rate of interest and increase monetary accommodation for as long as it takes to bring the unemployment rate down by a substantial amount. At that point, the goal would be to return inflation to a lower, more stable level. But for this strategy to work, the public must have complete confidence that the Fed will be able and willing to bring down inflation in the future. If that confidence wanes and inflation expectations begin to drift up, this strategy will fail. And the consequence could easily be a repeat of the 1970s, when monetary policymakers’ effort to target a lower unemployment rate BIS central bankers’ speeches allowed inflation to steadily drift upward. The outcome was a steady rise in inflation with no commensurate fall in unemployment. To pursue such a strategy would be very risky. The effort to try to chase the unemployment rate in the 1970s ultimately failed, leading to a severe recession and even higher unemployment rates as policy worked to bring down the inflation rate. This is a clear example in which price stability and employment are complementary to each other. Others argue that we should strive for a higher rate of expected inflation as a means to drive down short-term and longer-term real interest rates. Moreover, a higher rate of inflation would begin a process of inflating away many of the bad debts that people think are holding back economic recovery. Here, too, I am very skeptical of such a strategy. In the aftermath of the financial crisis and the severe recession, some people and businesses do indeed face losses, including the many mortgages that remain under water. However, in my view, using inflation to assign winners and losers associated with these bad debts is poor monetary policy. It is probably poor fiscal policy too, but it would undoubtedly mix monetary policy and fiscal policy in a way that could undermine the independence of the central bank and its ability to maintain price stability. Summary Over the last couple of decades, the Fed has taken steps toward a flexible inflation targeting framework for monetary policy decisions that aim to achieve our statutory dual mandate of long-run price stability and maximum employment. The Fed has stressed the importance of keeping inflation expectations well anchored and has strived to improve its communications with the public and the markets about the monetary policy decision-making process. It is time for the Fed to explicitly adopt the flexible inflation targeting framework and in doing so take three steps to strengthen its approach to policymaking. First, clarify and make explicit that our long-run inflation objective is 2 percent year-over-year PCE inflation. Second, publish information about the individual FOMC participants’ assessments of the appropriate monetary policy that underlie their economic projections in the FOMC’s Summary of Economic Projections. Third, provide information on the FOMC’s reaction function. That is, communicate policy decisions in terms of changes in the economic conditions that the FOMC is using to formulate policy. By helping the public to better understand the policymaking process and better anticipate policy changes, these three steps can make monetary policy more effective in promoting economic stability in accordance with our dual mandate. References Kydland, Finn E., and Edward C. Prescott. “Rules Rather Than Discretion: The Inconsistency of Optimal Plans,” Journal of Political Economy, 85 (January 1977), pp. 473–91. Plosser, Charles. “The Benefits of Systematic Monetary Policy,” speech to the National Association for Business Economics, Washington Economic Policy Conference, March 3, 2008. Plosser, Charles. “Credible Commitments and Monetary Policy After the Crisis,” speech to Swiss National Bank Monetary Policy Conference, Zurich, Switzerland, September 24, 2010. BIS central bankers’ speeches | federal reserve bank of philadelphia | 2,011 | 11 |
Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at The Philadelphia Fed Policy Forum: "Budgets on the brink: perspectives on debt and monetary policy", Philadelphia, 2 December 2011. | Charles I Plosser: Some observations on fiscal imbalances and monetary policy Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at The Philadelphia Fed Policy Forum: “Budgets on the brink: perspectives on debt and monetary policy”, Philadelphia, 2 December 2011. * * * The views expressed today are my own and not necessarily those of the Federal Reserve System or the FOMC. Introduction Good morning and welcome to the Philadelphia Fed Policy Forum. We are delighted you could join us today. The topic for our conference is both important and timely: “Budgets on the Brink: Perspectives on Debt and Monetary Policy”. I look forward to today’s presentations and discussion, but as the host for today’s program, I am going to take the opportunity to share some of my thoughts on the fiscal situation facing many countries, including our own. Of course, these are my views and do not necessarily represent those of the Federal Reserve Board or my colleagues on the Federal Open Market Committee. The challenge of fiscal imbalances for the economy During the past year, we have witnessed the ongoing saga of governments, both in Europe and in the U.S., as they struggle with large deficits and soaring public debt, which are the result of unsustainable fiscal policies. Financial markets have become increasingly skeptical about whether the political process can come to grips with the problems. And so far, this skepticism appears to be wholly justified. Politicians continue to engage in protracted debates over who will bear the burden of the substantial adjustments needed to put fiscal policies back on a sustainable path. In my view, these prolonged debates have detrimental effects on economic growth, in part, because of the uncertainty they impose on consumers and businesses. Given the magnitude of the fiscal shortfalls in many countries, the way in which fiscal discipline is restored will have profound implications for some time to come. Will there be higher taxes on productive investments by the private sector and higher taxes on wage earners – which would discourage both investment and work effort? Or will there be cutbacks on government purchases of goods and services from certain industries, such as aerospace and defense, or cutbacks on entitlements that would affect health care and social insurance? Or will a viable fiscal plan combine various types of tax increases and spending cuts? Until the path is chosen, uncertainty encourages firms to defer hiring and investment decisions and complicates the financial planning of both individuals and firms. The longer it takes to reach a resolution on a credible plan to reduce future deficits, the more damage is done to the economy in the near term. The cause of the current fiscal crisis is sometimes attributed to cyclical factors and the magnitude of the recent global recession. It is certainly true that the financial crisis and the policy choices made by governments to deal with the ensuing recession have caused a significant deterioration in fiscal balances and debt levels in many countries. For example, in the U.S., the federal budget deficit is now about 9 percent of gross domestic product, up from less than 2 percent in 2007. However, the underlying trends that are at the root of unsustainable fiscal deficits in many countries, including the U.S., have been in place and known for some time. Even after cyclical effects play out, many countries will have large structural budget deficits. In this sense, the financial crisis and recession have simply exacerbated the underlying problems and perhaps moved up the day of reckoning. In some BIS central bankers’ speeches cases, such as Greece, that day has come. Market participants have begun to question the solvency of governments and their ability to honor their sovereign debt obligations. In Europe, the doubts have greatly complicated the political problems as various countries debate the question of “who pays” for the anticipated bad debts of individual countries. Here too, the protracted nature of the political debate creates uncertainty, which undermines economic growth and exacerbates the crisis. Indeed, the argument offered by many that preventing Greek default would prevent the crisis from spreading has proven false. The interaction of monetary policy and fiscal policy The fiscal challenges are daunting, yet they also have implications for monetary policy. The policy choices made during the recent global recession have made these implications even more complex and potentially dangerous. But the appropriate relationship between monetary and fiscal policy is not a new topic. Indeed, our very first Policy Forum in 2001 was organized around three questions for monetary policymakers, one of which was how should monetary and fiscal policy interact? It is widely understood that governments can finance expenditures through taxation, debt, or printing money. If public debt levels are high and rising, and fiscal policymakers are reluctant to make the hard choices of cutting expenditures or increasing taxes, history suggests that governments often resort to the printing press to try to escape their budget problems. Yet we all understand that this option is a recipe for creating substantial inflation. Indeed, it is often a path toward hyperinflation. Failure to resolve underlying fiscal imbalances combined with rising inflation means nominal funding requirements to close the budget gap keep growing, requiring ever more money to be created, and causing inflation to rise even further. It is a cycle any nation should seek to avoid. In addition, inflation is a hidden tax on holding nominal assets, and when it is unanticipated, it can have significant consequences that redistribute wealth from creditors to debtors. The near-term effects of money creation often appear to be positive, while the undesirable consequences only become apparent over time. While money creation results in lower nominal interest rates and perhaps a modest boost to real activity in the short run, over time, it results in higher inflation and higher nominal interest rates and ultimately requires painful efforts to restore price stability. Awareness of these long-term consequences of succumbing to the temptation of excessive money creation is the basic reason that over the last half of the 20th century, there has been a strong movement to establish and maintain independent central banks in country after country. It is simply good governance and wise economic policy to maintain a healthy separation between those responsible for tax and spending policy and those responsible for money creation. Another widely acknowledged basic tenet of sound central banking is the wisdom of maintaining a low and stable inflation rate. Price stability contributes to the economy’s growth and employment prospects in the longer term and helps to moderate the variability of output and employment in the short to medium term. Price stability allows the economy to function in a more efficient and more productive manner by giving individuals and businesses more confidence that the purchasing power of their money will be maintained over time. Central banks are uniquely positioned to achieve price stability. The economic costs of failing to do so can be quite high. Despite the well-known benefits of maintaining price stability, there are increasing calls to abandon this commitment in both Europe and the U.S. Central banks are under increasing pressure to act, both because fiscal authorities have been unable to make credible commitments to maintain fiscal discipline and because central banks have been willing to engage in actions that stray into the realm of fiscal policy – for example, purchasing assets of the housing sector. This is a disturbing trend that risks undermining the independence of the central bank to control monetary policy and its ability to preserve a credible commitment to price stability. BIS central bankers’ speeches Why monetary policy and fiscal policy should remain separate As I mentioned, governments can finance expenditures through only three options: taxes, debt – which is really just a euphemism for future taxes – or money creation, which leads to the hidden tax of inflation. Central bank independence allows monetary policymakers to pursue price stability without the political pressures to finance government expenditures or otherwise engage in fiscal actions constitutionally reserved for the fiscal authorities. In a classic paper1, recent Nobel Prize winner Thomas Sargent and his co-author Neil Wallace showed that when the fiscal authority chooses an unsustainable fiscal policy path, in which debt to GDP ratios are rising and proposed budgets don’t generate enough future surplus to offset current deficits, seigniorage is the only way for the government to achieve intertemporal budget balance. In other words, the central bank must eventually monetize the debt – whereby high rates of inflation devalue longer-term government debt. Today, one of our speakers, Eric Leeper, will discuss his work on how long-run fiscal stress can undermine monetary control of inflation. In such an environment, monetary policy is no longer independent but becomes subservient to unsustainable fiscal policy. There are those who argue that this is exactly what monetary policy should be doing today: creating higher inflation to solve the fiscal failures by devaluing the outstanding government debt. The inflation tax would transfer wealth from those that have lent money to the government in good faith – the investors in sovereign debt – to the government itself. I am deeply skeptical of such a strategy. In my view, inflation is a blunt and inappropriate instrument for assigning winners and losers from profligate fiscal policy. Moreover, history has shown that once inflation is unleashed, it is not always easy to bring it back down, especially if the central bank loses the public’s confidence and damages the credibility of its commitment to return to price stability. The continuing fiscal disarray may also lead the public to believe that the government’s only near-term strategy is to monetize the debt. Even if the central bank resists, expectations of future inflation could become unanchored and inflation could rise through no fault or consequence of central bank action or intent. Unfortunately, from my perspective, the Fed and other central banks have already embarked on a path that has blurred the distinction between monetary policy and fiscal policy. These steps were undertaken with the sincere belief that they were absolutely necessary to address the challenges posed by the financial crisis. For example, the Fed established credit facilities to support particular asset classes, such as commercial paper and asset-backed securities, and in November 2008, the Fed announced it would begin purchasing housing agency mortgage-backed securities and agency debt to increase the availability and reduce the cost of credit in the housing sector. These types of credit programs target particular market sectors and thereby alter the allocation of credit across markets, reducing funding costs for some sectors and likely raising costs for others. These programs departed from the usual way the Fed implements monetary policy through buying and selling U.S. Treasury securities, an activity that is generally neutral across markets. When the Fed engages in targeted credit programs that seek to change the allocation of credit across markets, I believe it is engaging in fiscal policy. Instead of the central bank engaging in this credit policy, the federal government could carry out these transactions by issuing Treasury debt to support lending to the targeted markets or firms. In fact, the fiscal authorities frequently undertake such actions – think of “green energy” loans, small business loans, and subsidized home mortgages. Such credit allocation decisions belong with the fiscal authorities, not the central bank. Even the recent maturity extension program, or “Operation Twist” as it is sometimes called, involves selling short-term Treasuries and buying longer-term Treasuries – an action that could just as well have been conducted by the U.S. Treasury. Thomas Sargent and Neil Wallace, “Some Unpleasant Monetarist Arithmetic”, Federal Reserve Bank of Minneapolis Quarterly Review, 5 (Fall 1981), pp. 1–17. BIS central bankers’ speeches Once a central bank ventures into conducting fiscal policy, it may find itself under increasing pressure from the private sector, financial markets, or the government to use its balance sheet to substitute for other fiscal decisions. This pressure can threaten the central bank’s independence in conducting monetary policy and thereby undermine monetary policy’s effectiveness in achieving price stability. I have long argued for a bright line between monetary policy and fiscal policy, for the independence of the central bank, and for the central bank to have clear and transparent objectives. Decisions to grant subsidies to particular market segments should rest with the fiscal authorities – in the U.S., this means the Congress and the Treasury Department – and not with the central bank. Should the fiscal authority ask the central bank to engage in lending outside of its normal operations, the fiscal authority should be willing to exchange government securities for the nongovernment assets that would accumulate on the central bank’s balance sheet as a result. This type of swap would ensure that the full authority and responsibility for fiscal matters remained with the Treasury and Congress. Congress has mandated the goals of monetary policy to promote long-run price stability, maximum employment, and moderate long-term interest rates. Asking monetary policy to take on the role of fiscal policy undermines the ability to achieve this congressional mandate. Central banks and monetary policy are not and cannot be real solutions to the unsustainable fiscal paths many countries currently face. Proponents who believe otherwise are skating on thin ice. The only real answer rests with the fiscal authorities and their ability to develop credible commitments to sustainable fiscal paths. It’s a difficult and painful task to be sure, but a monetary solution is a bridge to nowhere at best, and the road to perdition at worst – a world of rising and costly inflation. Once again, I want to thank everyone for coming today. I am confident that it will be a fascinating program. So now that I’ve told you what I think, let’s get stared and hear from the real experts. BIS central bankers’ speeches | federal reserve bank of philadelphia | 2,011 | 12 |
Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the 2012 Economic Forecast Breakfast and Annual Meeting of the Main Line Chamber of Commerce and the Main Line Chamber Foundation, Gladwyne, Pennsylvania, 1 February 2012. | Charles I Plosser: Economic outlook and communicating monetary policy Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the 2012 Economic Forecast Breakfast and Annual Meeting of the Main Line Chamber of Commerce and the Main Line Chamber Foundation, Gladwyne, Pennsylvania, 1 February 2012. * * * Introduction Good morning and thank you for inviting me to participate in the 2012 Economic Forecast Breakfast. We are in that season when traditionally we reflect upon the past year and look ahead. So in the spirit of the season, I will give you my take on the economic outlook. Then I want to spend the remainder of my time discussing recent steps taken by the FOMC to enhance the way we communicate about monetary policy. Before I begin, though, I should note that one of the strengths of the Federal Reserve System and its Federal Open Market Committee is that it brings together a wide range of independent assessments of economic conditions and perspectives on policy. As that famous American journalist Walter Lippmann once said: “Where all men think alike, no one thinks very much.” So let me assure you that there is a lot of thinking going on among policymakers at the Fed, but my views are my own and not necessarily those of the Federal Reserve Board or my colleagues on the Federal Open Market Committee. Economic outlook Let me start with some general comments on the state of the economy as we enter 2012. A year ago, most economists were forecasting that economic growth would be 3 percent or a bit more in 2011. Instead, the latest numbers released last Friday showed that real GDP in 2011 was 1.6 percent, compared to 3.1 percent in the prior year. Some of this weakness is perfectly understandable, given the shocks we experienced throughout most of the year. Last year began with severe snowstorms in the East. As 2011 progressed, there were the earthquake and ensuing disasters in Japan, followed by the unrest in the Middle East and North Africa, which led to a run-up in oil prices. In addition, there were renewed concerns about European sovereign debt and the midsummer uproar in Washington over fiscal policy and the debt ceiling. All of these events weighed heavily on growth, as well as on business and consumer confidence. Yet, the economy persevered. Indeed, growth accelerated across each of the four quarters, from less than 0.5 percent in the first quarter to around 2–3/4 percent in the fourth quarter. I anticipate that we will continue to see moderate growth of around 3 percent for 2012 and 2013, which is slightly above trend. Business spending, especially investments in equipment and software, was relatively healthy last year, buoyed by solid growth in corporate earnings. In January, the Philadelphia Fed’s Business Outlook Survey showed that regional manufacturing activity continued to expand at a moderate pace, the fourth consecutive monthly increase since a late summer lull. The survey’s measures of future activity also indicated that our respondents expect activity to continue to pick up over the next six months. I take this as a sign that business sentiment is also improving. On the housing front, I expect to see stabilization but not much improvement in 2012. We entered the Great Recession over-invested in residential real estate, and we are not likely to see a housing recovery until the surplus inventory of foreclosed and distressed properties BIS central bankers’ speeches declines. Even as the economy rebalances, we should not seek nor should we expect housing and related sectors to return to those pre-recession highs. Those exuberant days were simply not sustainable, and it would be a mistake to retain that standard as our benchmark for recovery. The housing crash destroyed a great deal of wealth for the average consumer and the economy as a whole. The losses are real and the consequences severe for many individuals and many businesses. Moreover, the losses cannot be papered over with monetary policy nor should it try to do so. Households and businesses, however, continue to make progress on restoring the health of their balance sheets by paying down debt and increasing savings. Most economists, including myself, believe that this process will continue into 2012. But the drag on growth from this rebalancing will gradually lessen over time. While there is a long way to go in restoring a vibrant labor market, I am encouraged by the employment reports released over the past several months. The December employment report showed a net gain of 200,000 jobs and a decline in the unemployment rate to 8.5 percent. The economy added over 1.6 million jobs during 2011, and the unemployment rate fell nearly a full percentage point. Interestingly, the last time the unemployment rate fell by this much in one year was in 1995. As growth continues and strengthens, I expect further gradual declines in the unemployment rate, with the rate falling to around 8 percent or a little less, by the end of 2012. Of course, forecasting is a hazardous business, even in the best of times, and we should all take any economic forecast with at least a grain or two of salt – if not more. So it is important to recognize that there are some obvious risks to the growth forecast. The largest of these are the ramifications for the U.S. economy of the continuing sovereign debt crisis in Europe. An economic slowdown in the euro zone will likely restrain U.S. exports. And while strains in financial markets have been limited to European institutions so far, the situation bears watching to ensure that there are no adverse spillovers to U.S. financial institutions. Of course, regardless of how the European situation plays out, it has already imposed considerable uncertainty on growth prospects for the global economy. That uncertainty has been compounded by our own nation’s inability to establish a clear plan to put our fiscal policy on a sustainable path. Until the economic environment becomes clearer, firms and consumers are likely to postpone significant spending and hiring decisions – posing a drag on the recovery, even as economic developments in the U.S. continue to improve. Just as growth was weaker in 2011 than many forecasters had anticipated, inflation was higher. A year ago, many were concerned about the risks of a sustained deflation. I was not among them. Instead, I thought we would see inflation at about 2 percent for the year. It turns out we were all wrong. Total inflation in 2011, as measured by the CPI on a yearover-year basis, was 3 percent, reflecting strong increases in energy and food prices, particularly in the early part of the year. Core inflation, which excludes food and energy prices, rose to about 2.2 percent. I anticipate, however, that with many commodity prices now leveling off or falling, and inflation expectations relatively stable, inflation will moderate in the near term. Indeed, total inflation has been more subdued over the past several months. As a policymaker, though, I focus less on the near term and more on the medium term. Given the very accommodative monetary policy that has been in place for more than three years, I believe we must continue to monitor inflation measures very carefully. Inflation most often develops gradually, and if monetary policy waits too long to respond, it can be very costly to correct. Measures of slack such as the unemployment rate are often thought to prevent inflation from rising. But that did not turn out to be true in the 1970s. Thus, we need to proceed with caution as to the degree of monetary accommodation we supply to the economy. So let me review some of the policy actions the Fed has taken. BIS central bankers’ speeches Monetary policy As you know, the Fed has kept the federal funds rate near zero for more than three years to support the recovery. We have also conducted two rounds of asset purchases that have more than tripled the size of the balance sheet and changed its composition from short-term Treasuries to longer-term Treasuries and housing-related securities, mostly mortgagebacked securities. In the most recent meeting, the Federal Open Market Committee announced that economic conditions were “likely to warrant exceptionally low levels for the federal funds rate at least through late 2014” – that’s almost three years from now. Last August when the FOMC first signaled a time frame for continued low rates, it was until mid-2013. So our announcement last week lengthened the period of anticipated very low rates by 18 months. In addition, the Committee announced that the Fed intends to continue the maturity extension program, or “operation twist,” first launched last September. In this program, to be completed by the end of June, the Fed is buying $400 billion of longer-term Treasuries and selling an equal amount of shorter-term Treasuries, in an effort to reduce yields from already historically low levels. The FOMC is also continuing to reinvest principal payments from its holdings of agency debt and MBS into MBS in an effort to help mortgage markets. You may know that I dissented from the FOMC decisions in August and September because it was not clear to me that further monetary policy accommodation was appropriate. After all, inflation was higher and unemployment was lower relative to the previous year. Moreover, policy actions are never free; they need to be evaluated based on a thorough analysis of costs and benefits. I believed that the benefits of further monetary policy easing were small at best, since, in my view, they would do little to help resolve the challenges we face on the employment front. But the potential costs of this further accommodation could translate into a steady rise in inflation over the medium term, even without much of a drop in the unemployment rate. In my assessment, the potential costs of further accommodation outweighed the potential benefits. For similar reasons, I was not supportive of the most recent decision to extend the time frame for exceptionally low rates through 2014. In my view, economic conditions have modestly improved since our December meeting, especially on the employment front, and the downside risk of a double-dip recession that many feared in September when the Committee instituted “operation twist” has substantially abated. Thus, with the economy gradually improving, I saw little justification to further ease monetary policy and felt it risked undermining confidence in the process. In addition, I don’t support the practice of offering forward policy guidance by saying economic conditions are likely to lead to low rates through some calendar date. Such statements are, in my mind, particularly problematic from a communications perspective. Monetary policy should be contingent on the economic environment and not on the calendar. For example, I often read comments in the media that the FOMC has “pledged” or “vowed” to keep rates at zero at least until late 2014. But this is clearly incorrect. The FOMC has made no such commitment and the statement indicates as much – if economic conditions change, then so will policy. Yet there continues to be confusion and the confusion stems from our statement. In my view, there are much better ways to communicate information about the future path of policy than the use of calendar dates. Indeed, one of these ways was provided in January when we began providing information on the policy paths that underlie FOMC participants’ forecasts. Improving communications So let me turn to our communication initiatives, which have received a fair amount of attention in the financial press. Improving the transparency of monetary policy has always been high on my list of things to do since joining the Federal Reserve Bank of Philadelphia in BIS central bankers’ speeches 2006. The Federal Reserve is accountable to the public, so it needs to clearly communicate its goals and its approach to making policy decisions. To its credit, the Federal Reserve has strived to increase transparency about its actions and its policies, particularly during the tenure of Chairman Ben Bernanke. For instance, in an effort to improve its communications to the public, the FOMC decided in 2007 to release its Summary of Economic Projections, or SEP, four times a year. In 2011, Chairman Bernanke introduced press briefings to provide additional context for the FOMC’s policy decisions following the release of the SEP. However, until now, these releases did not include any information about the assumptions policymakers made about the path of monetary policy. Therefore, it was difficult for the public to interpret the projections for growth, employment, and inflation. Early last summer, Chairman Bernanke asked Governor Yellen, Governor Raskin, President Evans, and me to serve on a communications subcommittee. In January, the FOMC adopted two initiatives brought forward by the subcommittee. Both initiatives are important steps forward for the FOMC and are intended to serve the Committee and the public over the longer term. The first concerned improving our communications about FOMC participants’ economic projections in the SEP. So starting with our last meeting, the expanded SEP now contains information about policymakers’ assumed path for monetary policy, along with the projections for growth, unemployment, and inflation. It is important to keep in mind that the Fed’s SEP projections differ from those of private-sector forecasters. Private-sector forecasters explicitly or implicitly try to predict what the Fed’s next move will be. In the SEP, each policymaker assumes a path for monetary policy that – based on current economic conditions – he or she believes will deliver the best outcomes for the economy. Providing policy projections in the SEP helps the public to interpret the economic forecasts included in the SEP. For example, FOMC participants might have considerably different growth forecasts. Is it because they have different views about the underlying dynamics of the economy? Or is it because they are assuming different policy paths? Alternatively, two participants may have similar forecasts – say, the same inflation forecast – but they may believe that these forecasts will be achieved through different policy paths. The expanded SEP will now show the range of views about the assumed policy paths that give rise to the projections. Of course, over time, policymakers’ views will evolve as the economy evolves. So, the expanded SEP will add an important perspective not just of prospective policy at a point in time, but of how the policy projections are influenced as economic conditions change. I would argue that adding policymakers’ assumptions to the SEP conveys more useful information about the likely future path of monetary policy than using a calendar date as we have been doing. It has two main advantages in my view. First, it illustrates the full range of views and, in doing so, underlines the uncertainty that truly exists about future policy. Second, over time it will reveal more information about the reaction function of policymakers’ views of policy to the evolution of economic conditions, which are, after all, the ultimate drivers of policy decisions. Such communication will prove useful not only in periods such as the current unusual circumstances but in more normal times as well. The second important communications initiative adopted by the FOMC in January was to issue a consensus statement of the longer-run goals and policy strategy. When households, firms, and markets have a better understanding of what to expect from monetary policy, they can make better financial plans and spending decisions. Thus, greater clarity helps monetary policy become more effective at promoting its congressionally mandated goals of price stability, maximum employment, and moderate long-term interest rates. BIS central bankers’ speeches The consensus statement does three very important things never before undertaken by the Federal Reserve. First, the FOMC explicitly states its goal for inflation as 2 percent, as measured by the year-over-year change in the overall personal consumption expenditures (PCE) chain-weighted price index. Being explicit about our inflation objective will enhance the credibility of our commitment to price stability, which will help anchor inflation expectations and foster price stability and moderate long-term interest rates. Moreover, a credible commitment to price stability affords the Fed more flexibility in the short run as it attempts to mitigate the fluctuations in output and employment in the face of significant economic disturbances. Second, the statement explains why the FOMC cannot set a fixed long-run numerical objective for the employment part of our mandate. This is not because we do not seek maximum employment or because we want to disregard or downplay its importance. Rather, it reflects the differences between the economic determinants of the inflation and employment parts of our mandate. Over the longer run, the economy’s inflation rate is primarily determined by monetary policy. So, the FOMC is able to set a longer-run numerical goal for inflation and should be held accountable for achieving that goal. On the other hand, maximum employment is largely determined by factors that are beyond the direct control of monetary policy. These factors include such things as demographics, technological innovation, the structure of the labor market, and various governmental policies – all of which will vary over time. Policymakers consider a wide range of indicators in assessing employment, but estimates of maximum employment at any point in time are subject to substantial uncertainty. The FOMC cannot set a fixed numerical objective for something that it does not directly control and cannot accurately measure. A third element of the consensus statement is that it makes clear that the FOMC takes a balanced approach to setting policy. By balanced approach I mean one that promotes all of our congressionally mandated objectives of maximum employment, stable prices, and moderate long-term interest rates and does not favor one over the other. The consensus statement does not provide answers for all the hard policy choices. How best to implement this balanced approach takes a lot of judgment and may well differ across policymakers who may have different models of the economy even as they work to promote the same long-term goals for monetary policy. Conclusion In summary, the U.S. economy is continuing to grow at a moderate pace. I expect annual growth to gradually accelerate to around 3 percent in 2012 and 2013. Prospects for labor markets will continue to improve, with job growth strengthening and the unemployment rate falling gradually over time. I believe inflation expectations will be relatively stable and inflation will moderate in the near term. However, with the very accommodative stance of monetary policy, the inflation situation is one that bears careful watching in order to ensure that inflation pressures remain contained over the medium run. On monetary policy, the Federal Reserve has taken bold and significant steps to improve the transparency of its policy actions and to create better public understanding of the rationale behind the FOMC’s decisions. Specifically, the FOMC now includes information about each participant’s assessments for the target federal funds rate path in its Summary of Economic Projections. The FOMC has also clarified its longer-run goals and monetary policy decisionmaking process and clearly articulated its inflation objective. Economic research over the past 30 years has shown that setting monetary policy in a systematic manner leads to better economic outcomes – lower and less volatile inflation and greater economic stability in general. But the benefit depends on the public’s understanding of the policymaking framework. Transparency not only furthers the effectiveness of monetary BIS central bankers’ speeches policy by enhancing the credibility of the central bank but also raises the Fed’s accountability to the public. Thus, I remain committed to working to increase the clarity of the Fed’s public communications about current economic conditions, the economic outlook, and our policymaking framework. BIS central bankers’ speeches | federal reserve bank of philadelphia | 2,012 | 2 |
Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the Economic Forecast, The University of Delaware Center for Economic Education and Entrepreneurship, Newark, Delaware, 14 February 2012. | Charles I Plosser: The outlook and the hazards of accelerationist policy Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the Economic Forecast, The University of Delaware Center for Economic Education and Entrepreneurship, Newark, Delaware, 14 February 2012. * * * Introduction Thank you for inviting me back again to the University of Delaware. It has been three years since I last spoke at this event and a lot has happened. Yet, as I will explain, we have come a long way on the road to recovery from the Great Recession. So, this morning I will share with you my take on the economic outlook. Then I want to discuss the hazards of trying to apply ever more monetary accommodation to speed up the recovery process.1 Economic outlook We are now in the third year of a moderate economic recovery that has had more than a few bumps along the way. We finished 2011 with real GDP at 1.6 percent, compared to 3.1 percent in the prior year. Some of this weakness is perfectly understandable, given the unexpected shocks we experienced during the year. Yet, the economy persevered. Indeed, growth accelerated across each of the four quarters, from less than half of a percent in the first quarter to around 2-3/4 percent in the fourth quarter. I anticipate that we will continue to see moderate growth of around 3 percent in 2012 and 2013, which is slightly above trend. Business spending, especially investment in equipment and software, was relatively healthy last year, buoyed by solid growth in corporate earnings. In January, the Philadelphia Fed’s Business Outlook Survey showed that regional manufacturing activity continued to expand at a moderate pace, the fourth consecutive monthly increase since a late summer lull. The survey’s measures of future activity also indicated that our respondents expect activity to continue to pick up over the next six months. I take this as a sign that business sentiment is also improving. On the housing front, I expect to see stabilization but not much improvement in 2012. We entered the Great Recession over-invested in residential real estate, and we are not likely to see a housing recovery until the surplus inventory of foreclosed and distressed properties declines. Even as the economy rebalances, we should not seek, nor should we expect, housing and related sectors to return to those pre-recession highs. Those highs were unsustainable, and the housing crash that ensued destroyed a great deal of wealth for consumers and the economy as a whole. The losses are real and the consequences severe for many individuals and many businesses. Moreover, monetary policy cannot paper over these losses, nor should it try to do so. Households and businesses, nevertheless, continue to make progress on restoring the health of their balance sheets by paying down debt and increasing savings. Most economists, including me, believe that this process will continue into 2012. The labor market has grown stronger in recent months. Although there are still too many people unemployed in our region and the nation, I am encouraged by the most recent employment reports. The January employment report showed a net gain of 243,000 jobs, and revisions to November and December added another 60,000 jobs to the recovery. Some I should note the usual disclaimer that my views are my own and not necessarily those of the Federal Reserve Board or my colleagues on the Federal Open Market Committee. BIS central bankers’ speeches have downplayed the report, suggesting that one good data point does not make a trend, and I wholeheartedly agree. But what we have seen is more than one data point. Net employment gains were 103,000 in October, 157,000 in November, 203,000 in December, and 243,000 in January – a clear positive trend. The household survey also reported a significant decline in the unemployment rate. Here, too, the trend is encouraging – 8.9 percent in October, 8.7 in November, 8.5 in December, and 8.3 in January. That is the lowest level in nearly three years. As growth continues and strengthens, I expect further gradual declines in the unemployment rate, with the rate falling to 8 percent or less, by the end of 2012. In our District, all three states ended 2011 with lower unemployment rates. New Jersey’s rate, at about 9 percent, is still higher than the national average, but Delaware’s and Pennsylvania’s were below the national average, with rates of 7.4 and 7.6 percent, respectively. As we continue down the road to recovery, I expect we will face further hiccups along the way. One significant risk is the potential effects of the continuing sovereign debt crisis in Europe. The economic slowdown in the euro zone will likely restrain U.S. exports. And while strains in financial markets have been limited to European institutions so far, we must continue to monitor events to ensure that there are no adverse spillovers to U.S. financial institutions. Of course, regardless of how the European situation plays out, it has already imposed considerable uncertainty on growth prospects for the global economy. Moreover, our own nation’s inability to establish a clear plan to put our fiscal house in order contributes additional uncertainty to the economic landscape. Until the economic environment becomes clearer, firms and consumers are likely to postpone significant spending and hiring decisions – imposing a drag on the recovery, even though economic developments in the U.S. continue to improve. Inflation risks in the near term remain modest. However, I remain concerned that monetary policy has exposed us to substantial inflation risk over the medium to longer term. Total inflation in 2011, as measured by the consumer price index on a year-over-year basis, was 3 percent, reflecting strong increases in energy and food prices, particularly in the early part of the year. The personal consumption expenditures price index rose 2.4 percent. While these inflation rates exceed our target, I anticipate that with many commodity prices now leveling off or falling, and inflation expectations relatively stable, inflation will remain moderate in the near term. My forecast is that inflation will settle around 2 percent in 2012. Yet, inflation often develops gradually, and if monetary policy waits too long to respond, it can be very costly to correct. Measures of slack such as the unemployment rate are often thought to prevent inflation from rising. But that did not turn out to be true in the 1970s. Thus, we need to proceed with caution and be circumspect as to the degree of monetary accommodation we supply to the economy. So let me review some of the policy actions the Fed has taken. Monetary policy As you know, the Fed has kept the federal funds rate near zero for more than three years to support the recovery. We have also conducted two rounds of asset purchases that have more than tripled the size of the balance sheet and changed its composition from short-term Treasuries to longer-term Treasuries and housing-related securities, mostly mortgagebacked securities. Today, we are in a modest recovery from a deep recession and financial crisis. The financial crisis has passed, however, and monetary policy should not continue to act as if the crisis was still with us. In January, the Federal Open Market Committee announced that economic conditions were “likely to warrant exceptionally low levels for the federal funds rate at least through late 2014” BIS central bankers’ speeches – that’s almost three years from now. And that is 18 months longer than the mid-2013 calendar date first signaled last August. In addition, the Committee announced that the Fed intends to continue the maturity extension program, or “operation twist”, first launched last September. In this program, the Fed is buying $400 billion of longer-term Treasuries and selling an equal amount of shorter-term Treasuries, in an effort to reduce yields from already historically low levels. The FOMC is also continuing to reinvest principal payments from its holdings of agency debt and MBS into MBS in an effort to help mortgage markets. You may know that I dissented from the FOMC decisions in August and September because it was not clear to me that further monetary policy accommodation was appropriate. After all, inflation was higher and unemployment was lower relative to the previous year. In addition, I do not support the practice of offering forward policy guidance by saying economic conditions are likely to lead to low rates through some calendar date. Such statements are, in my mind, particularly problematic from a communications perspective. Monetary policy should be contingent on the economic environment and not on the calendar. Thus, I was not supportive of the Committee’s actions in January. I think that economic conditions, as they have evolved since late last year, do not call for further accommodation. In fact, the economy has actually improved. Moreover, I continue to oppose using calendar dates to communicate forward guidance. Yet, despite the extraordinary steps taken to support the economy, many argue that monetary policy should do more. The argument is that while inflation may be close to our target, unemployment remains elevated, and thus, monetary policy must act more aggressively if it is to meet its mandated employment objective. I disagree and believe that doing so would lead us down a very treacherous path – one that would be ever more difficult to navigate and one that would increase the already substantial risk of higher inflation. But the problem is not just inflation risk down the road. Prolonged efforts to hold interest rates near zero can lead to financial market distortions and the misallocation of resources. Let me offer an analogy that might help you visualize the risks. Imagine you’re driving a car down the Delaware Turnpike on a rainy and foggy day on the way to a birthday party for your mother. Unfortunately, you can’t see very far ahead because of the weather, and you don’t know exactly how far you are from the exit. You are anxious because you don’t want to miss the party. Your children are in the back seat, giddy with excitement about seeing their grandmother. So you decide to go a little faster. You accelerate. After some time passes, you still think you are some distance from your exit. The children are now fidgeting in the back seat, and you don’t want to be late, so you decide to step on the gas a little more. Now, you are speeding, hoping to get to your destination sooner. Eventually, though, as you are flying down the highway, you finally catch a glimpse of the exit through the fog and rain, only now you are going too fast to safely navigate the off ramp. You are faced with two very unattractive options. One option is to slam on the brakes to make the exit. This strategy risks causing a multicar accident, as your abrupt efforts to slow down surprises drivers behind you who had expected you to continue at high speed. The result is an accident, perhaps injuries to innocent people, and maybe a severe traffic jam, diverting or delaying many others. The second option is to continue down the road to the next exit, turn around, and then backtrack to the right exit. This strategy means that you are late, you miss the party, you disappoint everyone, you pay extra for tolls and gas, and you incur numerous other costs in the process. Monetary policy is sometimes criticized for such “go-stop” policies. Policymakers step on the accelerator aggressively, only to slam on the brakes in order to change course. Such an BIS central bankers’ speeches approach to policy can be highly destabilizing, creating added volatility for financial markets and the economy. I would add that constant acceleration only makes these risks even more hazardous. Slamming on the brakes or abruptly changing course could disrupt the economy. Failing to slow down and exit at the right time risks excessive inflation, which then has to be controlled. It also risks the misallocation of resources and capital, and perhaps even credit bubbles or other distortions that could pose problems for the economy. Thus, in my mind, such an accelerationist approach to monetary policy is risky and the potential costs may be quite high. It is an approach most often driven by an excessive focus on the short run and perhaps some hubris that we will be able to successfully avert the risks such a strategy poses for the economy over the longer run. Conclusion In summary, the U.S. economy is continuing to grow at a moderate pace. I expect annual growth of around 3 percent in 2012 and 2013. Prospects for labor markets will continue to improve, with job growth strengthening and the unemployment rate falling gradually over time. I believe inflation expectations will be relatively stable and inflation will moderate in the near term. However, with the very accommodative stance of monetary policy, we must guard against the medium- and longerterm risks of inflation and the potential for distortions such accommodation can create. Finally, I believe we must also guard against an accelerationist approach to policy – one that calls for monetary policy to do more and more in an attempt to get to our objectives that much faster. The risks to economic stability of such an approach over the medium term could be quite high and could jeopardize our ability to achieve our longer-terms goals. BIS central bankers’ speeches | federal reserve bank of philadelphia | 2,012 | 2 |
Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the US Monetary Policy Forum, sponsored by The Initiative on Global Markets, University of Chicago Booth School of Business, New York City, 24 February 2012. | Charles I Plosser: Fiscal policy and monetary policy – restoring the boundaries Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the US Monetary Policy Forum, sponsored by The Initiative on Global Markets, University of Chicago Booth School of Business, New York City, 24 February 2012. * * * The views expressed today are my own and not necessarily those of the Federal Reserve System or the FOMC. Introduction I am pleased to participate in this important forum once again. I am particularly delighted to be a part of such a distinguished panel. This conference has rapidly become one of the premier venues for serious discussions of monetary policy and I am honored to be a part of it. Fiscal imbalances During the past year, we have witnessed the ongoing saga of governments, both in Europe and in the U.S., struggling with large deficits and soaring public debt. For the most part, these challenges are self-inflicted. They are the result of governments choosing fiscal policies that they knew would be unsustainable in the long run. Financial market participants remain skeptical about whether the political process can come to grips with the problems. So far, this skepticism appears to be wholly justified. Neither the European nor the American political process has developed credible and sustainable plans to finance public spending. Instead, politicians continue to engage in protracted debates over who will bear the burden of the substantial adjustments needed to put fiscal policies back on a sustainable path. In my view, these prolonged debates impede economic growth, in part, due to the uncertainty they impose on consumers and businesses. Moreover, the longer the delay in developing credible plans, the more costly it becomes for the respective economies. Given the magnitude of the fiscal shortfalls, the way in which the political process restores fiscal discipline will have profound implications for years to come. Will there be higher taxes on investments by the private sector that risk reducing productive capacity and output in the future? Will there be higher taxes on labor that discourage work effort or hiring? Will there be cutbacks in government expenditures on defense or basic research that might force significant resource reallocations and affect a wide array of industry sectors? Will there be cutbacks on entitlements that could affect health care, social insurance, and other aspects of our safety net? Or will a viable fiscal plan combine various types of tax increases and spending cuts? These are important questions that involve hard choices and trade-offs between efficiency and equity. Yet, until fiscal authorities choose a path, uncertainty encourages firms to defer hiring and investment decisions and complicates the financial planning of individuals and businesses. The longer it takes to reach a resolution on a credible, sustainable plan to reduce future deficits and limit the ratio of public debt to gross domestic product, or GDP, the more damage is done to the economy in the near term. Some observers say cyclical factors and the magnitude of the recent global recession caused the current fiscal crisis. It is certainly true that the policy choices made by governments to deal with the financial crisis and ensuing recession have caused a significant deterioration in fiscal balances and debt levels in many countries. However, the underlying BIS central bankers’ speeches trends that are at the root of unsustainable fiscal deficits in many countries, including the U.S., have been in place and known for some time. In the U.S., for example, the major long-run drivers of the structural deficit at the federal level are entitlements such as health care and Social Security. 1 Thus, even after cyclical effects play out, many countries will continue to have large structural budget deficits. In this sense, the financial crisis and recession have simply exacerbated the underlying problems and perhaps moved up the day of reckoning. In some cases, such as Greece, that day has come. In light of these realities, market participants have begun to question the solvency of governments and their ability to honor their sovereign debt obligations in the absence of deep structural reforms. In Europe, the doubts have greatly complicated the political problems as various countries debate the question of “who pays” for the anticipated bad debts of individual countries. Here, too, the protracted nature of the political debate creates uncertainty, which undermines economic growth and exacerbates the crisis. While some have argued that preventing Greek default would keep the crisis from spreading, that argument has proven false. The interaction of monetary policy and fiscal policy The fiscal challenges alone are daunting. Yet, they can also have profound implications for monetary policy and the role of central banks. Today, I want to focus my remarks on that interaction between monetary policy and fiscal policy. Of course, the appropriate relationship between the two is not a new topic. Yet, it has taken on new relevance and importance as a result of the recent crisis and the actions undertaken by policymakers. Let me elaborate. It is widely understood that governments can finance expenditures through taxation, debt, or printing money. In this sense, monetary and fiscal policy are intertwined through the government budget constraint. Nevertheless, there are good reasons to prefer an arrangement that provides a fair degree of separation between the functions and responsibilities of central banks and those of the fiscal authorities. For example, in a world of fiat currency, central banks are generally assigned the responsibility for establishing and maintaining the value or purchasing power of the nation’s monetary unit of account. Yet, that task can be undermined or completely subverted if fiscal authorities independently set their budgets in a manner that ultimately requires the central bank to finance government expenditures with significant amounts of seigniorage in lieu of tax revenues or debt. 2 The ability of the central bank to maintain price stability can also be undermined when the central bank itself ventures into the realm of fiscal policy. Imagine a situation in which public debt levels are high and rising. Now stretch your mind even more and imagine that fiscal policymakers are reluctant to make the hard choices of cutting expenditures or increasing taxes. Of course, neither of these assumptions requires much imagination. Indeed, history and our daily newspapers provide numerous examples. Unless governments are constrained institutionally or constitutionally, they often resort to the printing press to try to escape their budget problems. Yet, we all understand that this option is a recipe for creating substantial inflation. 3 Indeed, history shows that it is often a path toward hyperinflation. 4 In other countries and jurisdictions, such as the state and local level, pension and entitlement commitments also account for a significant source of the growth in commitments and thus are central to the fiscal problems. See Sargent and Wallace (1981). Inflation, of course, is also a tax. It is a hidden tax on holding nominal assets, and when it is unanticipated, it can have significant consequences that redistribute wealth from creditors to debtors. The near-term effects of money creation often appear to be positive, while the undesirable consequences only become apparent over time. While money creation results in lower nominal interest rates and perhaps a modest boost to real activity BIS central bankers’ speeches Awareness of these long-term consequences of excessive money creation is the reason that over the past 60 years, country after country has moved to establish and maintain independent central banks. Without the protections afforded by independence, the temptation of governments to exploit the printing press in the absence of fiscal discipline is just too great. Thus, it is simply good governance and wise economic policy to maintain a healthy separation between those responsible for tax and spending policy and those responsible for money creation. But it is equally important that independent central banks be constrained from using their own authority to engage in activities that enter the realm of fiscal policy or distort private markets. 5 There are several ways to place limits on central banks so that the boundaries between monetary and fiscal policy remain clear: 6 First, the central bank can be given a narrow mandate, such as price stability. In fact, this has been a prominent trend during the last 25 years. Many major central banks now have price stability as their sole or primary mandate. Second, the central bank can be restricted as to the type of assets it can hold on its balance sheet. This limits its ability to engage in credit policies or resource allocations that rightfully belong under the purview of the fiscal authorities or the private marketplace. Third, the central bank can conduct its monetary policy in a more systematic or rule-like manner, which limits the scope for discretionary actions that might violate the boundaries between monetary and fiscal policy. Milton Friedman’s famous k-percent money growth rule is one example, as are Taylor-type rules. Such approaches to systematic policy can be a commitment device that limits discretionary behavior and thus helps to solve time-consistency problems. The breakdown of the accepted boundaries Unfortunately, over the past few years, the combination of a financial crisis and sustained fiscal imbalances has led to a substantial breakdown in the institutional framework and the accepted barriers between monetary and fiscal policy. The pressure has come from both sides. Governments are pushing central banks to exceed their monetary boundaries and central banks are stepping into areas not previously viewed as acceptable for an independent central bank. Let me give you some examples. I will start with what I see as a not-so-subtle undermining of the commitment to price stability. Despite the well-known benefits of maintaining stable prices, there are calls in both Europe and the U.S. to abandon this commitment and create higher inflation to devalue outstanding nominal government and private debt. Such an inflation tax would transfer wealth from those who have lent money, in good faith, to the borrowers. I am deeply skeptical of such a strategy. In my view, inflation is a blunt and inappropriate instrument for assigning winners in the short run, over time, it results in higher inflation and higher nominal interest rates and ultimately requires painful efforts to restore price stability. Some of the more notable examples include Germany, Hungary, and Austria after World War I. Hungary and Greece experienced hyperinflations after World War II. More recently, countries from South and Central America have had episodes of hyperinflation, including Argentina, Bolivia, Brazil, Peru, Mexico, and Nicaragua. Zimbabwe is the most recent example, and its hyperinflation episode ended with a currency reform in 2008. See Plosser (2010) for further discussion on the risks of unconstrained policy tools and the necessity of commitment devices. Sargent (2010) has a thoughtful and insightful discussion on these and related issues. BIS central bankers’ speeches and losers from profligate fiscal policy or excessive borrowing by private individuals and firms. Forced redistributions of this kind, if undertaken at all, should be done through the political process and by the fiscal authorities, not through the backdoor by the central bank by way of inflationist policies. As a monetary policymaker, I do not want to be complicit in such a strategy. Moreover, history has shown that once inflation is unleashed, it is not always easy to bring it back down, especially if the central bank loses the public’s confidence and damages the credibility of its commitment to price stability. Thus, proposals to use inflation to fix the debt overhang problem are nothing more than a call for debt monetization to solve a problem that is fundamentally fiscal in nature. Pressure on central banks is also showing up through other channels. In some circles, it has become fashionable to invoke “lender of last resort” arguments as a reason for central banks to engage in fiscal actions. This is a strained argument at best. The basic role of a lender of last resort is to provide liquidity to financial institutions that are solvent but facing temporary liquidity problems. Yet recently, some have used the concept to argue that the central bank should be the lender of last resort to governments. This is a perversion of one of central banking’s core concepts. It is a fig leaf to conceal the process of monetizing the sovereign debt of those countries that are insolvent due to their inability to manage their fiscal affairs. Monetary policy should not be used to solve a fiscal crisis. Unfortunately, from my perspective, breaching the boundaries is not confined to the fiscal authorities asking central banks to do their heavy lifting. The Fed and other central banks have also undertaken actions that have blurred the distinction between monetary policy, credit policy, and fiscal policy. These steps were undertaken with the sincere belief that they were absolutely necessary to address the challenges posed by the financial crisis. For example, the Fed established credit facilities to support particular asset classes, such as commercial paper and asset-backed securities. In November 2008, the Fed announced it would begin purchasing housing agency mortgage-backed securities and agency debt to increase the availability and reduce the cost of credit in the housing sector. When the Fed engages in targeted credit programs that seek to alter the allocation of credit across markets, I believe it is engaging in fiscal policy and has breached the traditional boundaries established between the fiscal authorities and the central bank. Indeed, some of these actions have generated pointed criticisms of the Fed. I view the breakdown of the traditional institutional arrangements as dangerous and fraught with longer-term risks. While it is popular to view such blurring of the boundaries as appropriate “cooperation” or “coordination” between the monetary and fiscal authorities, the boundaries were established for good reasons and we ignore them at our own peril. Restoring the boundaries Once a central bank ventures into fiscal policy, it is likely to find itself under increasing pressure from the private sector, financial markets, or the government to use its balance sheet to substitute for other fiscal decisions. Such actions by a central bank can create their own form of moral hazard, as markets and governments come to see central banks as instruments of fiscal policy, thus undermining incentives for fiscal discipline. This pressure can threaten the central bank’s independence in conducting monetary policy and thereby undermine monetary policy’s effectiveness in achieving its mandate. I have long argued for a bright line between monetary policy and fiscal policy, for the independence of the central bank, and for the central bank to have clear and transparent objectives. I have also stressed the importance of a systematic approach to monetary policy that serves to limit discretionary actions by the central bank. At this conference three years ago, I argued for a new accord between the Treasury and the central bank that would BIS central bankers’ speeches severely limit, if not eliminate, the ability of the central bank to lend to private individuals and firms outside of the discount window mechanisms. 7 I argued that decisions to grant subsidies to particular market segments should rest with the fiscal authorities – in the U.S., this means the Congress and the Treasury Department – and not with the central bank. Thus, I proposed that the new accord limit the Fed to an all-Treasuries portfolio, except for those assets held as collateral for traditional discount window operations. Should the fiscal authority ask the central bank to engage in lending outside of its normal operations, the fiscal authority should exchange government securities for the nongovernment assets that would accumulate on the central bank’s balance sheet as a result. This type of swap would ensure that the full authority and responsibility for fiscal matters remained with the Treasury and Congress and the Fed’s balance sheet remained essentially all Treasuries. Congress has mandated the goals of monetary policy to promote price stability, maximum employment, and moderate long-term interest rates. Asking monetary policy to take on ever more fiscal responsibilities undermines the discipline of the fiscal authorities and the independence of the central bank. Central banks and monetary policy are not and cannot be real solutions to the unsustainable fiscal paths many countries currently face. The only real answer rests with the fiscal authorities’ ability to develop credible commitments to sustainable fiscal paths. It is a difficult and painful task to be sure, but a monetary solution is a bridge to nowhere at best, and the road to perdition at worst – a world of rising and costly inflation and a weakening of fiscal discipline. References Plosser, Charles I., “Credible Commitments and Monetary Policy After the Crisis,” speech presented at the Swiss National Bank Monetary Policy Conference, Zurich, Switzerland, September 24, 2010. Plosser, Charles I., “Ensuring Sound Monetary Policy in the Aftermath of Crisis,” speech presented at the U.S. Monetary Policy Forum: The Initiative on Global Markets, New York City, February 27, 2009. Sargent, Thomas, “Where to Draw Lines: Stability versus Efficiency,” New York University Working Paper (September 6, 2010). Sargent, Thomas, and Neil Wallace, “Some Unpleasant Monetarist Arithmetic,” Federal Reserve Bank of Minneapolis Quarterly Review, 5 (Fall 1981), pp. 1–17. See Plosser (2009) and Plosser (2010). BIS central bankers’ speeches | federal reserve bank of philadelphia | 2,012 | 2 |
Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the Forecasters Club, New York, 29 February 2012. | Charles I Plosser: A progress report on our monetary policy framework Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the Forecasters Club, New York, 29 February 2012. * * * The views expressed today are my own and not necessarily those of the Federal Reserve System or the FOMC. Introduction I am pleased to be here today, and I will do my best to avoid all the hackneyed forecaster jokes. I am sure you have heard them all anyway. I will simply note that I have often said that forecasting can be a humbling experience in the best of times but I have learned some lessons along the way. For example, one Thursday morning not long ago, a reporter asked me what I thought the monthly employment numbers would show when they were released the next day. I responded that I had been around long enough to learn never to predict anything about which I can be proven right or wrong within a week and certainly not within 24 hours. It simply doesn’t pay. So, in lieu of a typical forecasting speech today, I would like to discuss the recent steps taken by the Federal Reserve to improve the transparency of monetary policy. These important initiatives are intended to increase the effectiveness of monetary policy as well as the accountability of our central bank. Over the last few years, I have spoken frequently about the need to improve transparency and to bring our monetary policy framework into the 21st century.1 In my view, there are four interrelated dimensions to a stronger monetary policy framework. The first is to ensure that the central bank commits to a set of clearly articulated objectives that can be feasibly achieved by monetary policy. The second element requires the central bank to be transparent and clear in its communications. The third element, related to the second, is for the central bank to conduct monetary policy in a systematic or rule-like manner.2 The fourth element, and arguably the most important, is for the central bank to set monetary policy independently from the fiscal authorities. As many of you know, last year Chairman Bernanke asked Governor Yellen, Governor Raskin, Chicago Fed President Evans, and me to serve on a subcommittee whose task was to develop recommendations to improve the Federal Open Market Committee’s communications. In January, the FOMC adopted two initiatives brought forward by the subcommittee. I want to review these initiatives today and how they relate to my broader views on a stronger monetary policy framework. Of course, improving policy transparency will always be a work in progress. So, I will also talk about additional steps I believe we could take to further improve our framework for conducting policy. See Plosser (2010) and (2011), among others. As always, these views are my own and not necessarily those of the Federal Reserve Board or my colleagues on the Federal Open Market Committee. See Dotsey and Plosser (2012) and Plosser (2008). BIS central bankers’ speeches Statement of principles The first communications initiative adopted by the FOMC was to issue a consensus statement of principles about its long-run policy goals and objectives. The statement makes four very significant points in clarifying our policy objectives. First, the statement reaffirms the Committee’s commitment to its congressional mandate to promote “maximum employment, stable prices and moderate long-term interest rates”. More important, the statement gives texture to those objectives in a way never before articulated. In particular, the statement’s second significant point stresses that inflation over the longer run is mainly determined by monetary policy. In this sense, the FOMC acknowledges what every economist has known for over two centuries: inflation is a monetary phenomenon. Therefore, it is both appropriate and feasible for the monetary authority to set an inflation goal and be held accountable for achieving it. The Committee, therefore, adopted a long-term inflation goal of 2 percent, as measured by the annual change in the price index for personal consumption expenditures. By establishing an explicit inflation target, the Federal Reserve is adopting a practice used by most major central banks around the world and one that is acknowledged as a best practice by academics and central bankers. A third important point made in the statement is that it is not appropriate for the central bank to set an explicit numerical goal for the maximum employment part of our mandate. Maximum employment is mainly determined by nonmonetary factors, such as demographics, technological change and productivity, the structure of the labor market, and governmental policies – for example, minimum wage laws, unemployment benefits, retirement incentives, and taxes. Since these factors change over time, the concept of maximum employment can also change over time. While policymakers consider a wide range of indicators to assess employment, the value of such indicators is subject to considerable uncertainty. Economists, for example, can, and often do, have very different assessments of what the level of maximum employment is at any point in time. This arises because different models suggest different conceptual definitions, most of which are not directly observable. So, monetary policy should not seek to achieve an explicit objective for something it does not directly control and cannot accurately measure. Fourth, the statement notes that, in general, price stability and maximum employment are complementary. Price stability promotes economic efficiency by giving individuals and businesses more confidence that the purchasing power of the dollar will not erode. Conversely, the failure to maintain price stability can often lead to greater instability in employment and output. When inflation rises to unacceptable levels, as it did in the 1970s, monetary policy will be forced to react to restore price stability. This, in turn, could lead to increased instability in employment and output, as it did in the recession in the early 1980s. But the FOMC’s consensus statement of principles also acknowledges that in the short run, the maximum employment and price stability parts of the Fed’s mandate could be in conflict. In such circumstances, monetary policy will seek to follow a balanced approach in promoting its statutory mandate. The consensus statement does not provide answers for all the hard policy choices. How best to implement this balanced approach requires judgment and may well differ across policymakers who may have different models of the economy even as they work to promote the same long-term goals for monetary policy. Improvements in the summary of economic projections The second important step the Committee took in January toward increased transparency involved the economic projections that the FOMC releases four times a year. The Summary of Economic Projections, or SEP for short, summarizes the individual FOMC policymakers’ views on the economy as reflected in several key economic variables, including output, BIS central bankers’ speeches inflation, and unemployment. Yet, these projections are not forecasts in the usual sense. Each policymaker’s projections are conditioned on the policymaker’s assessment of “appropriate policy”, that is, the policy path that he or she views as the most likely to yield the best outcomes for the economy in the absence of further shocks. This policy path isn’t necessarily the most likely path; instead, it is the path viewed as being the best policy. Thus, the projections should not be compared with the forecasts of private-sector forecasters who try to predict what the Fed’s next move might be. Instead, each policymaker makes economic projections based on an assessment of the best policy path to achieve the most desirable outcomes. Until January, the SEP did not reveal any information about the appropriate paths assumed by the participants. This lack of information about the underlying policy assumptions made it difficult to know what the SEP represented. For example, two participants may be projecting the same long-run inflation rate, but they may believe it will take very different policy paths to achieve that outcome. Other central banks, such as those of Norway, Sweden, and New Zealand, have provided information about the assumed path of policy. In January, the Fed joined them and began releasing information on the underlying policy paths assumed by the participants in their economic projections. These policy paths are summarized in two charts. The most important chart displays the level of the federal funds rate assumed by each participant at the end of each calendar year for three years out and for the longer run. This information provides a useful picture of the range of views of future policy assumed by policymakers. Note once again that these are assumptions, not forecasts in the usual sense. For example, I might submit a very different projection of inflation rates if I were asked to use someone else’s policy path or even the policy path implicitly assumed in the fed funds futures market. It is also important to emphasize that these policy assessments do not constitute a commitment to follow a particular path but will evolve as economic conditions evolve. In fact, I believe that changes in this chart over time will prove to be a far better way to provide information about the path of policy than using calendar dates, as we are currently doing in our FOMC statements. Policy should be conditioned on the state of the economy, not the calendar. Observers watching how these policy paths evolve as the economy improves are likely to learn more about the timing and magnitude of future policy actions. This then will reveal more about the policymakers’ reaction function, on which I will have more to say in a moment. From my perspective, our actions in January were important steps forward. We clarified our goals and objectives, and we became more transparent about our views of future policy. More to do Of course, as I mentioned at the outset, improving the transparency of our communications and strengthening our policy framework is a work in progress. More can be done. First, as a way to increase transparency, I believe the SEP should include more information about the linkages among the economic variables and the associated policy paths. Even with the recent improvements, the public cannot link a policy path to a particular set of projections for output, inflation, and unemployment in the SEP. That is only possible when individual policymakers choose to reveal such information in their speeches and other public communications. A natural next step would be to include a matrix of output, inflation, and unemployment, and the associated policy path assumptions that each policymaker submitted. This would make the information in the SEP easier to interpret and give a better sense of the linkage between changes in economic conditions and policy. Second, I believe the Federal Reserve should do a more comprehensive monetary policy report four times a year. Currently, the Chairman testifies before Congress twice a year – in BIS central bankers’ speeches fact, he is doing so today – and that testimony is accompanied by a written report. In addition, the Chairman holds press briefings four times a year to summarize the SEP. I think there is an opportunity to combine these efforts in a more comprehensive report on monetary policy. Most central banks that have adopted an inflation target have also sought to improve communication and transparency through the publication of a regular policy report. In the U.K., for example, the Bank of England issues a quarterly Inflation Report. Other countries produce a Monetary Policy Report that discusses the central bank’s forecasts and the longerterm context of policy. These reports offer an opportunity to reinforce the underlying framework the central bank has adopted for the conduct of policy. I think the Fed should consider producing a similar report to elaborate and reinforce its policy framework and how it relates to economic conditions. These reports will help improve the public’s understanding of policy, which will help make policy more effective and the central bank more accountable. Third, I believe the FOMC should adopt clearer guidelines on how policy evolves with economic conditions. The better the public and the markets understand how policy is likely to be adjusted as the economy changes, the more predictable policy becomes, which promotes price stability and better economic outcomes. The history of U.S. monetary policy is filled with stops and starts and changes in direction, yet the Fed has communicated little about what drives those decisions. Indeed, historically, central bankers have tended not to reveal such information, since they preferred discretionary policy over systematic policy. Of course, policymakers do not know with any degree of certainty how economic conditions will evolve. So they cannot and should not say with any certainty what policy will be in the future. But policymakers can provide information about the factors that will influence their policy decisions. Some call this a policy rule. Milton Friedman advocated a rule in the form of a k-percent growth rate of the money supply. John Taylor devised a rule that depends on a measure of inflation relative to a target and some measure of resource utilization. Other versions of the Taylor rule involve a degree of smoothing to minimize sharp swings in the policy rate. A policy rule is also called a reaction function or response function because it describes how policy will evolve as key economic conditions evolve. I believe that the Fed should provide more information about its reaction function. The practice of using systematic rules as guides to monetary policy imposes an important discipline on policymaking and improves communication and transparency. This is because systematic rules make policy more predictable and therefore helps the public and markets make better decisions. Moreover, if policymakers choose to deviate from the guidelines, they are forced to explain why and how they anticipate returning to normal operating practices. Systematic policy also reduces the temptation to engage in discretionary policies. I believe the Committee is still some way from agreeing on one systematic policy rule or reaction function. Such choices will involve elaborate discussions and agreement on the appropriate class of models and an agreed-upon loss function. One way to move toward more systematic policy would be to describe the variables that are important for our response function. The academic literature suggests using rules that respond aggressively to deviations of inflation from the central bank’s target and less aggressively to deviations of output from some concept of “potential output”. Research has found that such rules perform fairly well in a variety of models and frameworks.3 Thus, it is reasonable and feasible for the Fed to describe policy in terms of the variables in a rule that is robust across models. We would not have to articulate a precise mathematical rule but would provide the key variables and then communicate policy decisions in terms of changes in these key variables. If policy were changed, then we would explain that change See Orphanides and Williams (2002). BIS central bankers’ speeches based on how the variables in our response function have changed. If we choose a consistent set of variables and systematically use them to describe our policy choices, the public will have a greater ability to form judgments about the likely course of policy. This would reduce uncertainty about policy and promote stability. There is one more item on my list of things to do. At the beginning of my remarks, I stressed the importance of maintaining the independence of the central bank. That independence is now under attack. Last week, I gave a speech on the fraying boundaries between monetary and fiscal policy.4 I noted that while monetary policy and fiscal policy are intertwined through the government’s budget constraint, there are good reasons to maintain clear boundaries between the two. Specifically, in a world where fiscal discipline is lacking, governments without the institutional or constitutional guarantees of an independent central bank often resort to money creation as a solution to fiscal problems. This, of course, is a recipe for high rates of inflation and, in the extreme, hyperinflation. For this reason, countries throughout the world have moved over the last 60 years to strengthen the independence of their central banks. It is simply good governance to keep a healthy degree of separation between those responsible for tax and spending policies and those responsible for monetary creation. The pressure on independence stems, in part, from fiscal imbalances and the inability of governments to develop credible and sustainable plans to finance public expenditures. In turn, the pressure can manifest itself in calls for higher inflation or for central banks to act as lenders of last resort for failing governments. Yet central banks have also contributed to the breakdown of the boundaries by engaging in credit allocations to particular sectors, such as housing, and bailouts to particular firms, such as Bear Sterns. Thus, the fiscal authorities and supposedly independent central banks have acted in ways that undermine central bank independence. I believe this is a dangerous path and one that needs to be changed. We need to restore the boundaries. Conclusions To summarize, the FOMC has taken significant actions toward greater transparency, most recently with the historic steps adopted in January. These steps in turn help to promote better public understanding of the rationale behind the FOMC’s decisions. First, we released a statement clarifying the long-run goals of monetary policy and our policymaking strategy. Second, we began releasing information about the policy paths that underlie our economic projections. Yet, I believe there is more that can be done. We can and should provide more details about the interplay between economic conditions and policy. We can also better define our reaction function, to enable the public to better understand and anticipate future policy actions. Economic research has shown that increased transparency can improve the effectiveness of monetary policy, as well as the Fed’s accountability with the public. These benefits underscore the importance of our continued pursuit of finding better ways to communicate our framework for monetary policy decisions. References Dotsey, Michael, and Charles I. Plosser. “Designing Monetary Rules in an Uncertain Economic Environment”, Federal Reserve Bank of Philadelphia Business Review (First Quarter 2012). Orphanides, Athanasios, and John C. Williams, “Robust Monetary Policy Rules with Unknown Natural Rates”, Brookings Papers on Economic Activity (2002), pp. 63–118. See Plosser (2012). BIS central bankers’ speeches Plosser, Charles. “The Benefits of Systematic Monetary Policy”, speech to the National Association for Business Economics, Washington Economic Policy Conference, March 3, 2008. Plosser, Charles. “Credible Commitments and Monetary Policy After the Crisis”, speech to Swiss National Bank Monetary Policy Conference, Zurich, Switzerland, September 24, 2010. Plosser, Charles. “Strengthening Our Monetary Policy Framework Through Commitment, Credibility, and Communication”, speech to Global Interdependence Center’s 2011 Global Citizen Award Luncheon, Philadelphia, Pennsylvania, November 8, 2011. Plosser, Charles. “Fiscal Policy and Monetary Policy: Restoring the Boundaries”, speech to U.S. Monetary Policy Forum, University of Chicago Booth School of Business, New York, New York, February 24, 2012. BIS central bankers’ speeches | federal reserve bank of philadelphia | 2,012 | 3 |
Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the conference of the Global Interdependence Center / Bank of France, Paris, 26 March 2012. | Charles I Plosser: Restoring central banks after the crisis Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the conference of the Global Interdependence Center / Bank of France, Paris, 26 March 2012. * * * The views expressed today are my own and not necessarily those of the Federal Reserve System or the FOMC. Introduction I am delighted to be here today in this beautiful city and to have the honor to serve on such a distinguished panel with friends and colleagues. David Kotok has been the guiding force behind the GIC conferences over the past several years. He and his team at the GIC never fail to gather an interesting and knowledgeable group of people to discuss important topics on truly global issues. So, I want to thank him and the GIC for their efforts and contributions. I also want to thank our hosts, Christian Noyer and the Banque de France. I am going to take a little different tack on the subject matter of this gathering. Rather than focus on what new orthodoxy we should take away from the financial crisis, I want to argue that we need to restore some of the old orthodoxy. David did suggest that he wanted to have a conversation on important issues, so I intend to be somewhat provocative in an effort to stimulate such conversation. As usual, I want to stress that my views are my own and not necessarily those of my colleagues in the Federal Reserve System. I will focus my remarks on two related topics that have emerged as a consequence of the crisis. The first is the relation between monetary policy and fiscal policy. The second topic involves the role of a central bank’s balance sheet as a policy tool. These are issues that I believe are of fundamental importance to the role of central banks in our economies. The relationship between monetary and fiscal policies Let me begin by sharing some thoughts on the appropriate relationship between monetary and fiscal policies. In the wake of the financial crisis and the ensuing recession, many countries around the world responded with a significant increase in government spending. Some of this increase came about through what economists call automatic stabilizers. But there has also been a dramatic expansion in budget deficits attributable to deliberate efforts to apply fiscal stimulus to improve economic outcomes. This expansion in government spending has been very significant in the U.S., but it has also occurred in other countries. So what does this have to do with monetary policy? Well, it turns out, a great deal. It is widely understood that governments can finance expenditures through taxation, debt – that is, future taxes – or printing money. In this sense, monetary policy and fiscal policy are intertwined through the government budget constraint. For good reasons, though, societies have converged toward arrangements that provide a fair degree of separation between the functions of central banks and those of their fiscal authorities. For example, in a world of fiat currency, central banks are generally assigned the responsibility for establishing and maintaining the value or purchasing power of the nation’s unit of account. Yet, that task can be undermined, or completely subverted, if fiscal authorities set their budgets in a manner that ultimately requires the central bank to finance BIS central bankers’ speeches government expenditures with significant amounts of seigniorage in lieu of current or future tax revenue.1 The ability of a central bank to maintain price stability can also be undermined when the central bank itself ventures into the realm of fiscal policy. History teaches us that unless governments are constrained institutionally or constitutionally, they often resort to the printing press to try to escape what appear to be intractable budget problems. And the budget problems faced by many governments today are, indeed, challenging. But history also teaches us that resorting to the printing press in lieu of making tough fiscal choices is a recipe for creating substantial inflation and, in some cases, hyperinflation. Awareness of these long-term consequences of excessive money creation is the reason that over the past 60 years, country after country has moved to establish and maintain independent central banks – that is, central banks that have the ability to make monetary policy decisions free from short-run political interference. Without the protections afforded by independence, the temptation of governments to exploit the printing press to avoid fiscal discipline is often just too great. Thus, it is simply good governance and wise economic policy to maintain a healthy separation between those responsible for tax and spending policy and those responsible for money creation. It is equally important for central banks that have been granted independence to be constrained from using their own authority to engage in activities that more appropriately belong to the fiscal authorities or the private sector. In other words, with independence comes responsibility and accountability. Central banks that breach their boundaries risk their legitimacy, credibility, and ultimately, their independence. Given the benefits of central bank independence, that could prove costly to society in the long run. There are a number of approaches to placing limits on independent central banks so that the boundaries between monetary policy and fiscal policy remain clear. First, the central bank can be given a narrow mandate, such as price stability. In fact, this has been a prominent trend during the last 25 years. Many major central banks now have price stability as their sole or primary mandate. Second, the central bank can be restricted as to the type of assets it can hold on its balance sheet. This limits its ability to engage in credit policies or resource allocations that rightfully belong under the purview of the fiscal authorities or the private marketplace. And third, the central bank can conduct monetary policy in a systematic or rule-like manner, which limits the scope of discretionary actions that might cross the boundaries between monetary and fiscal policies. Milton Friedman’s famous k-percent money growth rule is one example, as are Taylor-type rules for the setting of the interest rate instrument. Unfortunately, over the past few years, the combination of a financial crisis and sustained fiscal imbalances has led to a breakdown in the institutional framework and the previously accepted barriers between monetary and fiscal policies. The pressure has come from both sides. Governments are pushing central banks to exceed their monetary boundaries, and central banks are stepping into areas not previously viewed as appropriate for an independent central bank. Let me offer a couple of examples to illustrate these pressures. First, despite the well-known benefits of price stability, there are calls in many countries to abandon this commitment and create higher inflation to devalue outstanding nominal government and private debt. That is, some suggest that we should attempt to use inflation to solve the debt overhang problem. See Thomas Sargent and Neil Wallace, “Some Unpleasant Monetarist Arithmetic”, Federal Reserve Bank of Minneapolis Quarterly Review, 5 (Fall 1981), pp 1–17. BIS central bankers’ speeches Such policies are intended to redistribute losses on nominal debt from the borrowers to the lenders. Using inflation as a backdoor to such fiscal choices is bad policy, in my view. Pressure on central banks is also showing up through other channels. In some circles, it has become fashionable to invoke lender-of-last-resort arguments as a rationale for central banks to lend to “insolvent” organizations, either failing businesses or, in some cases, failing governments. Such arguments go beyond the well-accepted principles established by Walter Bagehot, who wrote in his 1873 classic Lombard Street that central bankers could limit systemic risk in a banking crisis by “lending freely at a penalty rate against good collateral”. Central bankers have abandoned this basic Bagehot principle in the last few years but have not replaced it with a clear alternative. Indeed, actions were often confusing and unpredictable and lacked a coherent framework. I believe that central banks need to think hard about how and when they exercise this important role. We need to have a well-articulated and systematic approach to such actions. Otherwise, our actions will exacerbate moral hazard and encourage excessive risk-taking, thus sowing the seeds for the next crisis. Unfortunately, neither financial reform nor central banks have adequately addressed this dilemma. Breaching the boundaries is not confined to the fiscal authorities asking central banks to do their heavy lifting. The Fed and other central banks have undertaken other actions that have blurred the distinction between monetary policy and fiscal policy, such as adopting credit policies that favor some industries or asset classes relative to others. Such steps were taken with the sincere belief that they were absolutely necessary to address the challenges posed by the financial crisis. The clearest examples can be seen when the Federal Reserve established credit facilities to support markets for commercial paper and asset-backed securities. Most notable has been the effort by the Fed to support the housing market through its purchases of mortgagebacked securities. These credit allocations have not only breached the traditional boundaries between fiscal and monetary policy, they have generated pointed public criticisms of the Fed. Once a central bank ventures into fiscal policy, it is likely to find itself under increasing pressure from the private sector, financial markets, or the government to use its balance sheet to substitute for other fiscal decisions. Such actions by a central bank can create their own form of moral hazard, as markets and governments come to see central banks as instruments of fiscal policy, thus undermining incentives for fiscal discipline. This pressure can threaten the central bank’s independence in conducting monetary policy and thereby undermine monetary policy’s effectiveness in achieving its mandate. In my view, this blurring of the boundaries between monetary and fiscal policies is fraught with risks. As I said, these boundaries arose for good reason, and we ignore their breach at our peril. I believe we must seek ways to restore the boundaries. The central bank’s balance-sheet policy Another related issue facing central banks arises from the degree to which central banks have expanded their balance sheets. There are two dimensions to this issue. One is the composition of the balance sheet. In the U.S., for example, the balance sheet of the Federal Reserve has changed from one made up almost entirely of short-term U.S. Treasury securities to one that is mostly long-term Treasuries, plus significant quantities of long-term mortgage-backed securities. This concentration of housing-related securities is problematic because it is a form of credit allocation and thus violates the monetary/fiscal policy boundaries I just mentioned. The second aspect is the overall size of the balance sheet. Many central banks expanded their balance sheets in an effort to ease monetary policy after their usual policy instrument – an interest rate – had reached the zero lower bound. Do central bankers anticipate that their balance sheets will shrink to more normal levels as they move away from the zero lower BIS central bankers’ speeches bound? Is it desirable to do so? Or should monetary policy now be seen as having another tool, even in normal times? Some have suggested that central banks adopt a regime in which the monetary policy rate is the interest rate on reserves rather than a market interest rate, such as the federal funds rate. This would then permit the central bank to manage its balance sheet separately from its monetary instrument, freeing it to respond to liquidity demands of the financial system without altering the stance of monetary policy. In principle, this would take pressure off central banks to shrink their balance sheets from the current high levels and simply rely on raising the interest rate on reserves to tighten monetary policy. The alternative is to return to a more traditional operating regime in which the central bank sets a target for a market interest rate, such as the federal funds rate in the U.S., above the interest rate on reserves. Implementing this regime would require a smaller balance sheet. I am very skeptical of an operating regime that gives central banks a new tool without boundaries or constraints. Without an understanding, or even a theory, as to how the balance sheet should or can be manipulated, we open the door to giving vast new discretionary abilities to our central banks. This violates the principle of drawing clear boundaries between monetary policy and fiscal policy. When markets or governments come to believe that a central bank can freely expand its balance sheet without directly impacting the stance of monetary policy, I believe that various political and private interests will come forward with a long list of good causes, or rescues, for which such funds could or should be used. Economic theory and practice teach us that monetary policy works best when it is clear about its objectives and systematic in its approach to achieving those objectives. Granting vast amounts of discretion to our central banks in the expectation that they can cure our economic ills or substitute for our lack of fiscal discipline is a dangerous road to follow. In June, the Federal Reserve’s Open Market Committee outlined some principles that would guide its exit from this period of extraordinary monetary accommodation. In my view, those principles represented an important first step in the FOMC’s attempt to restore the boundaries between monetary and fiscal policies. In particular, the FOMC clearly stated its desire to return to an operating environment in which the federal funds rate is the primary instrument of monetary policy. To achieve that objective, the Fed will have to shrink its balance sheet to a more normal level. I interpret this as saying that our balance sheet should not be viewed as a new independent instrument of monetary policy in normal times. The exit principles also indicated the Committee’s desire to return the Fed’s balance sheet to an all-Treasuries portfolio. This re-establishes the idea that the Fed should not use its balance sheet to actively engage in credit allocations. In other speeches, I have outlined a framework that I have termed a “new accord” between the Federal Reserve and the Treasury. It would enable the central bank to act in emergencies when requested by the Treasury or the fiscal authorities, but it would be clear up front that any non-Treasury assets that accrued on the central bank’s balance sheet would be swapped for government securities within a specified period of time. This would ensure that fiscal policy decisions remain under the purview of the fiscal authorities, not the central bank. Summary To summarize, it is important for governments to maintain independent central banks so that they are better able to achieve their mandates. It is also sound policy to limit the discretionary ability of central banks to engage in policies that fundamentally belong to fiscal authorities or private markets. Establishing and maintaining clear boundaries between monetary and fiscal policies protects the independence of the central bank and its ability to carry out its core mandate – maintaining price stability. Clear boundaries and resisting the use of the balance sheet as a new policy tool would also improve fiscal discipline by making it more difficult for the fiscal authorities to resort to the printing press as a solution to unsustainable budget policies. BIS central bankers’ speeches | federal reserve bank of philadelphia | 2,012 | 3 |
Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, to the Rotary Club of Wilmington, Wilmington, Delaware, 29 March 2012. | Charles I Plosser: Economic outlook Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, to the Rotary Club of Wilmington, Wilmington, Delaware, 29 March 2012. * * * The views expressed today are my own and not necessarily those of the Federal Reserve System or the FOMC. Introduction Thank you for inviting me to speak to the Rotary Club of Wilmington. In planning for today, I learned that Wilmington’s business and community leaders have been gathering under your auspices at this location since 1914, longer than any other Rotary Club in the world. From one organization that is almost a century old to another, that is quite an achievement. Since the Federal Reserve is nearing its centennial in December 2013, I thought I would give you a little background on our nation’s central bank before I talk about my economic outlook. While many Americans hear about the Fed in the news every day, not everyone knows how we work or how we are structured. Congress created the Federal Reserve System in 1913. To balance political, economic, and geographic interests, the System was designed with 12 independently chartered regional Reserve Banks throughout the country, overseen by a Board of Governors in Washington, D.C. The Federal Reserve Bank of Philadelphia serves the Third District, which includes Delaware, the southern half of New Jersey, and the eastern two-thirds of Pennsylvania. The Reserve Banks distribute currency, act as a banker’s bank, and generally perform the functions of a central bank, including serving as the federal government’s fiscal agent. A central bank also guides the country’s monetary policy. In the U.S., the body within the Federal Reserve that makes monetary policy decisions is the Federal Open Market Committee, or the FOMC. The Committee includes the seven members of the Board of Governors in Washington – there are currently two open posts – and five of the 12 Reserve Bank presidents: the president of the New York Fed and four other presidents, who serve one-year terms on a rotating basis. This structure ensures that our national monetary policy has its roots not just in Washington or on Wall Street, but also on Main Street and across our diverse nation. Whether we vote or not, all Reserve Bank presidents attend the FOMC meetings, participate in the discussions, and contribute to the Committee’s assessment of the economy and policy options. Each of us prepares for the meetings by gathering information throughout our Districts, around the nation, and, in some cases, internationally. This occurs through meetings with our boards of directors and advisory councils, conversations with local and international business leaders, as well as briefings on economic conditions by our Research staffs. All this helps contribute to a rich and comprehensive mosaic of the national economy. In this way, we are able to make the best informed decisions possible to achieve the goals of monetary policy that Congress has set for us in the Federal Reserve Act. Specifically, Congress mandates that the Fed should conduct policy to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates”. Since moderate long-term interest rates generally result when prices are stable, it is often said that Congress has given the Fed a dual mandate. I believe the diversity of opinion around the FOMC table is one of its great strengths and serves to improve the quality of our decision-making. As the famous American journalist Walter Lippmann once said, “Where all men think alike, no one thinks very much”. But that BIS central bankers’ speeches diversity of views also requires me to note that I speak for myself and not the Federal Reserve Board or my colleagues on the Federal Open Market Committee. Economic outlook Now let me turn to the state of our economy. We have now seen 10 quarters of real GDP growth since mid 2009, when the Great Recession officially ended. However, growth has not been particularly robust or smooth. To many, it occasionally feels like we take two steps forward only to take one step back. We finished 2011 with real GDP at 1.6 percent, compared to 3.1 percent in the prior year. There were some perfectly understandable reasons for the weakness last year, given the unexpected shocks we experienced early in the year. Yet, the economy persevered. We saw growth accelerate across each of the four quarters, from less than half of a percent in the first quarter to 3 percent in the fourth quarter. I anticipate that we will continue to see moderate growth of around 3 percent in 2012 and 2013. That outlook puts me in a slightly more optimistic camp than some forecasters. For instance, the Philadelphia Fed’s first-quarter Survey of Professional Forecasters reported average estimates of real GDP growing 2.3 percent in 2012 and 2.7 percent in 2013. Business spending, especially investment in equipment and software, remained relatively healthy last year, buoyed by solid growth in corporate earnings. Results from the Philadelphia Fed’s monthly Business Outlook Survey of manufacturers, which are widely viewed as a useful barometer of national trends in manufacturing, have continued to improve since last summer’s lull. In March, regional manufacturers reported that their current activity continued to expand at a moderate pace, the sixth consecutive month of positive numbers. The survey’s indicators of general activity, new orders, shipments, and employment all remained positive. The survey’s measures of future activity showed that our respondents expect activity to continue to pick up over the next six months. Consumer spending, which accounts for about 70 percent of the nation’s GDP, also continues to improve. While personal consumer expenditures were steady through January, retail sales in February grew 1.1 percent. While not exactly robust growth, retail sales are more than 6 percent higher than a year ago. On the housing front, I expect to see stabilization and maybe some slight improvement in 2012. We entered the Great Recession over-invested in residential real estate, and we are not likely to see a strong housing recovery until the surplus inventory of foreclosed and distressed properties declines. Even as the economy rebalances, housing and related sectors are not likely to return to those pre-recession highs, nor should we expect them to do so. Those highs were unsustainable, and the housing crash that ensued destroyed a great deal of wealth for consumers and the economy as a whole. The losses are real and the consequences severe for many individuals and many businesses. Moreover, monetary policy cannot paper over these losses, nor should it try to do so. Nevertheless, households and businesses continue to make progress on restoring the health of their balance sheets by paying down debt and increasing savings. That is a healthy trend, and most economists, including me, believe that this trend will continue into 2012. On the labor front, I continue to be encouraged by recent employment reports, although everyone would agree that there are still too many people unemployed in our region and in the nation. The February employment report showed a net gain of 227,000 jobs, giving us the third month in a row with job growth of more than 200,000. We also continued to see a trend of upward revisions in prior months, adding another 60,000 jobs to payrolls. The unemployment rate was 8.3 percent in February, as it was in January, but the unemployment rate has been moving down steadily for six months, and it is now at its lowest BIS central bankers’ speeches levels in three years. As growth continues and strengthens, I expect further gradual declines in the unemployment rate, with the rate falling below 8 percent by the end of 2012. At the regional level, the latest unemployment rates for January also showed improvement. New Jersey’s rate, at about 9 percent, was still higher than the national average, but Delaware’s rate of 7.0 percent and Pennsylvania’s rate of 7.6 percent were below the national average. Our Research Department is forecasting no change in the unemployment rates for Pennsylvania and New Jersey and a decline in Delaware’s unemployment rate in February. The data are scheduled for release tomorrow. We are also seeing continued improvement in the employment index in our monthly survey of manufacturers, which suggests more employers are adding to payrolls than cutting back. As we continue down the road to recovery, there will undoubtedly be some bumps and setbacks along the way, but I am generally optimistic. Of course, any forecast is subject to some risks. The most significant and identifiable risk on the horizon is the potential effects of the continuing sovereign debt crisis in Europe. In recent months, I have come to believe that the European governments and their economies will work through their challenges. Nonetheless, the economic slowdown in the euro zone will likely exert a small drag on U.S. exports. And while European financial institutions have so far endured through the financial market turmoil in Europe, we must continue to monitor events to ensure that these troubles do not spill over to U.S. financial institutions. Of course, regardless of how the European situation plays out, it has already imposed considerable uncertainty on growth prospects for the global economy. Hopefully, some of that uncertainty is beginning to wane. Moreover, our own nation’s fiscal challenges contribute additional uncertainty to the economic landscape. Until the economic environment becomes clearer, firms and consumers are likely to exercise some restraint in their spending and hiring decisions, thus limiting the pace of recovery, even while economic fundamentals in the U.S. continue to improve. On the inflation front, there are risks and we must monitor the trends with care. The rate of inflation, as measured by the consumer price index, was 2.9 percent for the 12 months through February. Another common measure called the personal consumption expenditures price index was 2.4 percent through January. Thus, inflation is higher than the Fed’s longterm target of 2 percent. Some of the increased inflation over the past year was driven by sharp increases in energy prices. During the late summer, oil prices did decline somewhat, slowing price increases, but unfortunately, they have been rising again and crude oil prices are now over $100 a barrel and gasoline prices are rising. Oil prices have added a great deal of volatility to the overall price index. At times, sharp spikes in oil prices raise overall inflation, which is then reversed when those prices increases moderate. Yet, since early 2009, when oil prices fell to about $60 a barrel, the trend has been upward. Moreover, inflation rates that remove the effects of energy and food have been drifting upward as well from their lows of 1 percent or less in late 2010 to about 2 percent or a little higher today, depending on the particular index. Thus, we must monitor these inflation trends with some care and be prepared to take appropriate actions as necessary. The public has the right to expect the central bank to keep inflation near its target of 2 percent over the medium to longer term. Inflation often develops gradually, and if monetary policy waits too long to respond, it can be very costly to correct. Measures of slack such as the unemployment rate are often thought to prevent inflation from rising. But the lessons of the 1970s show that is not the case. As you may recall, we ended up with both high unemployment and high inflation, which became known as the misery index. That is not a place we want to find ourselves again. BIS central bankers’ speeches Monetary policy Before discussing where monetary policy might go in relation to economic conditions, it might be helpful to review just how much accommodation we currently have in place. As you know, the Fed has kept the federal funds rate near zero for more than three years to support the recovery. We have also conducted two rounds of asset purchases that have more than tripled the size of the Fed’s balance sheet and changed its composition from short-term Treasuries to longer-term Treasuries and housing-related securities, mostly mortgagebacked securities. Many of these actions were taken at the height of the financial crisis and the ensuing deep recession. Yet, since then, as I have indicated, the economy has been healing, if somewhat more slowly than we would like, and the financial crisis has substantially abated. Of course, problems remain, but things are not nearly as bad or as gloomy as they were in 2009 and early 2010. At its latest meeting in March, the Federal Open Market Committee continued to hold to its statement that economic conditions were “likely to warrant exceptionally low levels for the federal funds rate at least through late 2014”. That follows a structure for forward guidance that the Committee first began last August, when it said conditions were likely to warrant exceptionally low rates through mid 2013. Then in January, it pushed back that calendar date another 18 months. The FOMC has also announced that the Fed intends to continue the maturity extension program, or “operation twist”, first launched last September and set to end in June. In this program, the Fed is buying $400 billion of longer-term Treasuries and selling an equal amount of shorter-term Treasuries, in an effort to reduce long-term yields from already historically low levels. The FOMC is also continuing to reinvest principal payments from its holdings of agency debt and MBS into MBS in an effort to help mortgage markets. You may know that I dissented from the FOMC decisions in August and September, because it was not clear to me that further monetary policy accommodation was appropriate then. After all, inflation was higher and unemployment was lower relative to the previous year, as we have been discussing. Monetary policy should be responsive to economic conditions, and since that time, unemployment has decreased, and inflation is above target. I believe monetary accommodation is still called for, but I do not believe it should be as accommodative or aggressive as it was at the height of the crisis, when unemployment was over 10 percent and inflation was just 1 percent. Now that unemployment is at 8.3 percent and falling and inflation is over 2 percent and drifting up, we should not anticipate additional accommodation. Indeed, in the absence of some shock that derails the recovery, we may well need to raise rates before the end of 2014. Nevertheless, monetary policy should be responsive to economic conditions. In my view, current conditions do not warrant further accommodation. Yet, should economic conditions significantly deteriorate or the upside risks to inflation I have stressed fall and significant risk of deflation emerge, we should rethink our policy stance. But neither of these events seems likely to me at this juncture. I believe further accommodation at this stage of the business cycle could lead us down a very treacherous path – one that would be ever more difficult for us to navigate and one that would increase the already substantial risk of higher inflation. Yet, the problem is not just inflation risk down the road. Prolonged efforts to hold interest rates near zero can lead to financial market distortions and the misallocation of resources that could lead to more, not less, economic instability. Conclusion In summary, the U.S. economy is continuing to grow at a moderate pace. I expect annual growth of around 3 percent in 2012 and 2013. BIS central bankers’ speeches Prospects for labor markets will continue to improve, with job growth strengthening and the unemployment rate falling gradually over time. I believe inflation expectations will be relatively stable and inflation will remain at moderate levels in the near term. However, with the very accommodative stance of monetary policy that has now been in place for more than three years, we must guard against the medium- and longer-term risks of inflation and further distortions such accommodation can create. Monetary policy should be determined by economic conditions and not by a calendar date. And we should resist any notion that we can solve all of our economic challenges simply by an ever more accommodative monetary policy. BIS central bankers’ speeches | federal reserve bank of philadelphia | 2,012 | 3 |
Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the KAEA-Maekyung Forum, Korea-America Economic Association, Philadelphia, Pennsylvania, 4 January 2014. | Charles I Plosser: Shocks, gaps, and monetary policy Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the KAEA-Maekyung Forum, Korea-America Economic Association, Philadelphia, Pennsylvania, 4 January 2014. * * * The views expressed are my own and not necessarily those of the Federal Reserve System or the FOMC. I want to thank Bang Jeon, president of the Korea-America Economic Association (KAEA), who is on the faculty here at Drexel University, and Yongsung Chang, vice president of the KAEA, who is on the faculty at the University of Rochester, for inviting me to speak to this forum. The KAEA has hosted a number of prominent speakers in recent years at its annual meetings, and so it is a pleasure and an honor to speak to you this evening. Much has happened in the field of macroeconomics and monetary policy in the past seven years since I left Rochester to join the Federal Reserve Bank of Philadelphia. Today I want to highlight some key features of the recent recession and the recovery and to discuss how they have influenced my views on monetary policymaking. Before I begin, though, I would like to point out that my views are not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee (FOMC). The challenges presented by the recession and recovery have illustrated why policymakers must have a framework that provides a basis for their policy judgments. We say that our policymaking is data dependent, but without a lens through which we view economic data, it is impossible to interpret those data in any sort of useful way, particularly as they pertain to policy. However, policymakers also must approach their task with a great deal of humility. The lens through which we look is often foggy and lacking focus. There is still much we do not understand about recent events, and I am mindful that further research is likely to bring more clarity to the narrative and to our ability to make more informed policy decisions going forward. After all, economists are still debating the events surrounding the Great Depression three-quarters of a century after it ended. Indeed, I would argue that none of us have the economic theory exactly right. That is why I believe it is useful and important that policy discussions include a healthy debate with different perspectives clearly represented. There are many different interpretations of recent events, each with strengths and weakness and it is unlikely that economists will converge to a common or shared understanding of these events anytime soon. Unfortunately, this is not just a characteristic of the current economic environment – it is the typical state of affairs – and it is one of the reasons I believe it is important for monetary policymakers to think in terms of policies that are likely to be robust across many models and perspectives. The traditional view of shocks and gaps I want to organize my comments today around “shocks” and “gaps.” I find this to be a simple but useful way to highlight some different perspectives and their implications. For example, economists have different views about the nature of the shocks that sent the economy into recession and about the dynamics of the economy in response to those shocks. Those dynamics are summarized by the economic models or frameworks economists use to interpret incoming data. As a policymaker, I think it is impossible to determine the right course of policy without an assessment of the nature of the shocks and a framework or implicit model for the economy. One way to characterize some of the key differences in models is to view how the models assess departures from some concept of ideal or desirable outcomes. The concept could be a steady state, some notion of economic potential, or the economic efficient outcome. Departures of the economy from these ideal outcomes can be viewed as gaps. Of course, to BIS central bankers’ speeches the extent that the ideal outcomes are model dependent, the gaps would also depend on the model one is using. According to one perspective, which I’ll call the traditional view, shocks hitting the economy are largely transitory and dissipate rather quickly over time. Negative shocks can then give rise to something called a negative output gap – a level of output that is lower than the level consistent with the economy operating at its full potential. Such a gap then becomes an object that policy seeks to close or eliminate. In some models, this negative output gap also acts to dampen inflation. Think about the recent recession. Some economists and policymakers characterize the shock that hit financial markets as a temporary, albeit large, aggregate demand shock. This shock gave rise to a large “output gap,” sometimes referred to as slack, which, in turn, is working to keep inflation low. According to this view, the large output gap and low inflation justify keeping interest rates near zero for a long time. The belief is that low rates will help to close the output gap by increasing the growth of demand and thus output, which will reduce slack and allow inflation to move back to target. In this perspective, there are headwinds that are temporarily restraining economic growth, but these can be offset with aggressive monetary accommodation. An alternative view of shocks and gaps But there is an alternative interpretation. Let’s look at a rather simple, but I think useful, figure.1 The figure shows the level of real GDP as well as various vintages of potential GDP estimated by the U.S. Congressional Budget Office (CBO). The CBO defines potential GDP as a “measure of the economy’s maximum sustainable output, in which the intensity of resource use is neither adding to nor subtracting from inflationary pressure.”2 Such a definition obviously has embedded in it some implicit assumptions about an underlying economic model, but I will return to this point shortly. I would like to draw your attention to two noteworthy features. First, during the recession, GDP fell sharply, as we all know. But since the end of the recession in June 2009, the economy has continued to grow at roughly the same pace as it grew before the recession. There has been little evidence of the rapid growth required to return the economy to the path of potential GDP as estimated by the CBO in 2007. While that may still happen, there has not been the V-shaped recovery to date anticipated by many. The shock that hit the economy appears to have had very persistent, if not permanent, effects. From a statistical perspective, the economy appears to have taken a permanent hit to the output level. The second noteworthy feature illustrated in the figure is that the CBO has revised its estimate of the path of potential GDP numerous times since the beginning of the recession. Specifically, almost every year since 2007, it has revised down potential GDP. I am showing only three vintages here as an example. If you look at the “gap,” or the difference between the actual level of GDP – measured as of February 2013 when the latest CBO estimate of potential was released – and estimated potential, it is about half the size that it would have been if the path of potential GDP had not been revised. The gap is closing not because GDP has rebounded toward the earlier estimates of potential – but because potential GDP has fallen. And this has occurred in spite of aggressive policies – especially monetary policy – that were intended to boost economic growth rates. So, what might one infer from these observations? I want to offer a perspective based on some empirical research that Charles Nelson and I published in the Journal of Monetary See figure below. Congressional Budget Office, “A Summary of Alternative Methods for Estimating Potential GDP,” Background Paper, March 2004, p. 1. BIS central bankers’ speeches Economics over three decades ago.3 In that paper, we concluded that real output contained important stochastic trends. A stochastic trend is often characterized as a random walk. A particular feature of a random walk is that it doesn’t exhibit any mean reversion. It means that the stochastic shocks that drive such a series accumulate. Put another way, each shock is permanently embodied in the level of the series – there is little tendency to return to a previous trend line. Such shocks are the antithesis of transitory, or what some refer to as cyclical, shocks that, by definition, dissipate over time. In our analysis, Nelson and I assumed that the economy was buffeted by a mixture of permanent and transitory shocks. Such a framework is not unusual and is compatible with the type of permanent and transitory distinction stressed in Milton Friedman’s permanent income hypothesis.4 More generally, in dynamic models, forward-looking agents’ responses to permanent shocks can be quite different from their responses to transitory shocks. For example, in the permanent income framework, agents adjust consumption much more in response to changes in permanent income than to temporary changes in income. Our statistical analysis found that a large portion of the fluctuations in real GDP were the result of shocks to the stochastic trend, that is, permanent shocks. Interestingly, the recent recession saw a marked drop in consumption. Some of this decline may have been due to credit constraints that became binding on some consumers. But some of the decline likely reflected the fact that many consumers now perceived that their permanent income had fallen, so they reduced their level of consumption. Looking at the figure, we see that the behavior of the GDP suggests that in the recent recession, the U.S. economy sustained what appears to be a permanent or at least highly persistent shock to the supply side of the economy that has lowered the level of GDP – although not necessarily its growth rate. One could contemplate numerous hypotheses about the nature of such a shock. In 2009, I put forward the idea that the crisis and recession were caused by a shock that likely had either permanent or very long-lasting consequences for the economy. I suggested that the financial crisis may have precipitated a permanent or highly persistent decline in the output of financial intermediation. I have also considered the possibility that the collapse in house values could be viewed as a permanent loss of wealth affecting household balance sheets. Either of these disturbances would require significant real adjustments in the economy.5 If we view the shock we experienced as largely permanent in nature, in contrast to being largely transitory, then it alters the way we should think about gaps and about the policy responses, particularly appropriate monetary policy. If you accept the idea that money is neutral in the long run, then efforts to use monetary policy to offset such permanent shocks and to close what appears to be a gap will likely be ineffective and perhaps even counterproductive. The real economy must ultimately adjust to such permanent shocks. Monetary policy cannot offset the costs or the necessity of such real adjustments, and so it is unlikely to be an effective stabilization tool. Looking at the figure again, we see the repeated downward revision in the estimate of potential GDP suggests that the CBO is gradually recognizing that the fall in output was most likely a permanent or at least highly persistent shock to the supply side of the economy. In other words, the CBO’s measures of potential output now recognize that the shock that hit the economy damaged the productive potential of the economy in a persistent way, as potential GDP is now lower as far out as 2020. Therefore, the output gap is no longer what Charles R. Nelson and Charles I. Plosser, “Trends and Random Walks in Macroeconomic Time Series: Some Evidence and Implications,” Journal of Monetary Economics, 10 (1982), pp. 139–162. Milton Friedman, A Theory of the Consumption Function, Princeton: Princeton University Press (1957). Charles Plosser, “A Perspective on the Outlook, Output Gaps, and Price Stability,” speech presented to Money Marketeers, New York, May 21, 2009. BIS central bankers’ speeches we thought it was – it has been revised down over time. One can wonder whether five years from now the CBO’s potential GDP estimates will gradually converge with the existing growth path of real GDP. At that point, the output gap will have been gradually revised away. The constant revision of estimates of potential output and thus of the output gap also underscore one of the difficulties policymakers have in trying to use gaps as a guide to policymaking in real time. Indeed, Athanasios Orphanides and Simon van Norden have argued that a major problem that gave rise to the great inflation of the 1970s was the mismeasurement of the perceived output gap.6 They explained how the Fed consistently relied on estimated output gaps that were subsequently revised and ended up being much smaller than initially thought. They argue that policymakers’ reliance on estimated gaps led to overly expansionary monetary policy and the resulting high rates of inflation. There is a separate and perhaps more challenging issue. While a permanent shock to the level of GDP is disturbing enough, it would be even worse if the underlying growth rate of the economy were to slow. Economists normally think that the longer-run growth rate of the economy is roughly the sum of the growth rate of the labor force and the growth rate of productivity. Here again, monetary policy would not be an effective tool to address such real economic challenges as slower labor force or productivity growth. Appropriate policies would require focusing on increasing productivity and the quality of the labor force, not on traditional countercyclical monetary policy. Alternative concepts for the gap To this point, I’ve talked about the traditional view and an alternative view of the nature of the shock the economy experienced and how these views change the nature of the gap and the appropriate monetary policy response. But as I mentioned at the outset, there are different ways to approach the standard to which economic performance is measured. In particular, we need to remember that economic theory does not give us a unique way to define gaps. Different models can offer different conceptual approaches to the gap. For example, as I mentioned earlier, implicit in the CBO’s approach to constructing potential GDP is a model of the economy and the concept of a noninflationary maximum level of output. One feature of the CBO’s construct of potential, and many others’, is that potential output moves very slowly and very smoothly. This means that potential GDP does not – indeed, cannot – respond much to current shocks to the economy regardless of their magnitude or source, especially in real time. This is in contrast to research Nelson and I conducted that revealed that a significant proportion of the variability in GDP was due to permanent or very long-lasting shocks. While our statistical approach was not based on an economic model, there is good reason to believe that shocks that give rise to permanent changes in GDP should be viewed differently from those that give rise to purely transitory movements, especially in terms of their policy prescriptions. Measures that arbitrarily, or by assumption, assign the bulk of fluctuation in GDP to purely temporary factors may provide poor policy guidance when shocks are more permanent in nature. A different conceptual approach to defining a gap is implied by a class of economic models in wide use today – the new Keynesian dynamic stochastic general equilibrium, or DSGE, models. DSGE models explicitly posit that firms have some pricing power; that is, there is imperfect competition so that a firm can choose to sell more of its output by lowering its price or to sell less of its output by raising its price, and the firm will set its price at a markup over marginal cost to maximize its profits. DSGE models also assume that firms are able to only Athanasios Orphanides and Simon van Norden, “The Reliability of Inflation Based on Output Gap Estimates in Real Time,” Journal of Money, Credit and Banking, 37 (2005), pp. 583–601. BIS central bankers’ speeches adjust prices infrequently. This form of sticky prices, together with imperfect competition, allow monetary policy to have real effects in the short run, while remaining neutral for the real side of the economy in the long run. The sticky prices generate distortions that mean allocations and output can be inefficient in the face of shocks. In these models, the efficient level of output is the level of output that would prevail in the absence of the sticky prices and other market imperfections that allow deviations from perfect competition. In this framework, the relevant output gap to be addressed is the difference between the efficient level and that level generated by the distortion introduced by the sticky prices and market imperfections. The behavior of the efficient level of output is unlikely to be a smooth or a slowly evolving series like the CBO concept. In fact, it could be quite volatile and may bear little or no resemblance to the traditional concept of potential used by the CBO and others. Efficient output would be altered by changes in technology that affect productivity or changes in agents’ preferences. The role of monetary policy in these models is to react to economic conditions in a way that minimizes the potential for distortions arising from the price stickiness or other market imperfections. The general policy prescription is to minimize the gap between output and the efficient level of output. In the absence of unexpected events that lead firms to change their desired markups over marginal cost, or other real rigidities like real wage rigidities, this would be equivalent to stabilizing inflation.7 A great deal of work is being done on this class of models. For example, many researchers are attempting to build richer models that have a more elaborate financial sector in light of the recent financial crisis, and they are incorporating frictions of various kinds. Regardless of how these models are enhanced, their concept of the gap will continue to be a deviation of output from the efficient level that would prevail in the absence of nominal rigidities and market imperfections. Therefore, the gap in these models will remain conceptually different from a gap based on potential output. And there is no reason to believe that the policy prescriptions based on these gaps will be the same. Indeed, the nature of the shock will be an important determinant in whether the efficient output level changes and whether monetary policy should react or not. Conclusion Policymakers need a framework with which to evaluate incoming data in order to set appropriate monetary policy. But the recession and recovery have underscored that we must remain humble about our degree of understanding of the economy and that we must entertain various perspectives in setting policy. As I’ve discussed, there are several different ways to interpret the economic dynamics we have seen in recent years, and those perspectives would call for different policy responses. Some view the shocks hitting the economy as transitory and potential GDP as stable. Others view the shocks as being more permanent, affecting both actual and potential output. In addition, there are alternative concepts of the output gap itself, some of which focus on the efficient level of output instead of potential output. Each of these perspectives has some merit as well as drawbacks, and it will be some time (if ever) when we will know which perspective is the correct one in explaining our recent economic experience. This state of affairs has led me to be skeptical of relying on gaps in general as well as optimal control exercises that are derived from specific models. Instead, I have long advocated that we should think in terms of robust policies that yield good economic See Jordi Gali and Olivier Blanchard, “Real Wage Rigidities and the New Keynesian Model,” Journal of Money, Credit and Banking, 39 (2007), pp. 35–65 and Aubhik Khan, Robert G. King, and Alexander L. Wolman, “Optimal Monetary Policy,” Review of Economic Studies, 70 (2003), pp. 825–860. BIS central bankers’ speeches outcomes across a variety of models and frameworks.8 In my view, a robust, systematic approach to policy, which is transparent and minimizes the degree to which data mismeasurement and model uncertainty affect policy, is the most promising approach to the uncertainties facing policymakers in real time. Charles Plosser, “Output Gaps and Robust Policy Rules,” speech presented to the 2010 European Banking and Financial Forum, Czech National Bank, Prague, the Czech Republic, March 23, 2010. BIS central bankers’ speeches | federal reserve bank of philadelphia | 2,014 | 1 |
Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at The School of Business at La Salle University, Union League of Philadelphia Business Network, Philadelphia, Pennsylvania, 14 January 2014. | Charles I Plosser: Perspectives on the economy and monetary policy Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at The School of Business at La Salle University, Union League of Philadelphia Business Network, Philadelphia, Pennsylvania, 14 January 2014. * * * The views expressed are my own and not necessarily those of the Federal Reserve System or the FOMC. Introduction I want to thank La Salle University and the Union League for inviting me to speak at this annual economic event. The new year always seems like a good time to reflect on the past and refresh our outlook for the future, and I will try to do a bit of both today. This is a particularly noteworthy time in the history of the Federal Reserve. On December 23, 1913, President Woodrow Wilson signed into law the act that created the Federal Reserve System. Thus, the Fed’s official 100th anniversary occurred just three weeks ago. So, I thought I would begin by sharing a brief history of our nation’s central bank with you before discussing my views on economic conditions and monetary policy. Before I begin, though, I should note that my views are not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee (FOMC). A historical look at a decentralized Fed What better place to share a little history of our central bank than here in Philadelphia and in this historic venue of the Union League. Just a few blocks from where the Philadelphia Fed stands on Independence Mall, you will find vestiges of two earlier attempts to create a central bank for the United States, dating back to the time Philadelphia was the nation’s major financial and political center. The first institution was the brainchild of our first Treasury secretary, Alexander Hamilton. His efforts led to the creation of the First Bank of the United States, which was awarded a 20-year charter by Congress in 1791. Although the First Bank’s charter was not renewed, the War of 1812 and the ensuing inflation and economic turmoil convinced Congress to establish the Second Bank of the United States. It was also given a 20–year charter and operated from 1816 to 1836. However, its charter was not renewed – Congress could not override the veto of President Andrew Jackson, who led the opposition to the central bank. Public distrust of centralized power was an important factor in the demise of both banks. Both became entangled in politics, and both failed to gain the public’s confidence and establish the independence necessary to serve our vast and diverse country of bakers and bankers, farmers and financiers, and manufacturers and merchants. It took Congress nearly 80 years to try again to establish a central bank. This time Congress and President Wilson agreed upon a uniquely American governance structure – a decentralized, central bank. To balance political, economic, and geographic interests, Congress created the Federal Reserve System made up of regional Reserve Banks with oversight provided by a Board of Governors in Washington, D.C. This structure helped to overcome political and public opposition stemming from fears that a central bank would be dominated either by political interests in Washington or by financial interests on Wall Street. BIS central bankers’ speeches The Federal Reserve Act formed a Reserve Bank Organization Committee to divide the country into no fewer than eight and no more than 12 Federal Reserve Districts. Almost immediately after the law was enacted, the committee started receiving letters and telegrams from local business owners, bankers, farmers, and others, who were all making a case for where they wanted a Reserve Bank to be located. The committee held meetings in 18 cities before submitting a report to Congress in April 1914, naming the final 12 cities and districts. The Federal Reserve Bank of Philadelphia was designated as the regional Reserve Bank for the Third District, an area that includes Delaware, the eastern two-thirds of Pennsylvania, and the southern half of New Jersey. These Reserve Banks distribute currency, act as a bankers’ bank, and generally perform the functions of a central bank, which includes serving as the bank for the U.S. Treasury. The 12 regional Reserve Banks are deeply rooted in our nation’s communities, which ensure that the Federal Reserve stays in touch with Main Street. The Reserve Banks all have boards of directors, many also have Branch boards, and all have advisory councils and other mechanisms to keep abreast of conditions in their regional economies. This rich array of information and the diverse views from around the country contribute to a mosaic of the economy that is essential as we formulate national monetary policy. Of course, most people associate the Fed with the determination of monetary policy. Within the Federal Reserve, the body that makes monetary policy decisions is the Federal Open Market Committee, or the FOMC. Here again, Congress has designed the system with a number of checks and balances. Since 1935, the composition of the FOMC has included the seven Governors in Washington, the president of the New York Fed, and the presidents of four other Reserve Banks who serve one-year terms as members on a rotating basis. One important role of the independent regional Reserve Banks is to ensure that diverse views are represented. The Reserve Banks each have economic research departments to guarantee that a wide variety of perspectives are brought to the table. In this way, the institution avoids groupthink. By being open and transparent about these various perspectives, the decentralized model for the Federal Reserve helps strengthen public confidence and preserve its independence. Whether we vote or not, all Reserve Bank presidents attend the FOMC meetings, participate in the discussions, and contribute to the Committee’s assessment of the economy and policy options. The FOMC has eight regularly scheduled meetings a year to set monetary policy. It discusses economic conditions and, in normal times, adjusts short-term interest rates to achieve the goals of monetary policy that Congress has set for us in the Federal Reserve Act. Congress established the current set of monetary policy goals in 1978. The amended Federal Reserve Act specifies that the FOMC “shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Since moderate long-term interest rates generally result when prices are stable and the economy is operating at full employment, many have interpreted these instructions as being a dual mandate to manage fluctuations in employment in the short run while preserving price stability in the long run. Economic conditions In order to determine the appropriate monetary policy to promote these goals, the FOMC must monitor economic developments. So, let me turn to an assessment of our economy. As we enter 2014, I think the bottom line is that the economy is on firmer footing than it has been for the past several years. BIS central bankers’ speeches Real output grew at a 4.1 percent annual pace in the third quarter of last year, the strongest gain in nearly two years and a marked acceleration from the first half of 2013. Some of this growth came in the form of inventory investment, which is volatile and is less likely to have contributed as much to growth in the fourth quarter. Still, personal consumption and fixed investment provided positive contributions, and economic prospects at the end of last year and the beginning of this year are positive. Personal consumption, which accounts more than two-thirds of GDP, advanced at an annual rate of 2 percent in the third quarter. Some observers have lamented at the lack of stronger growth in consumption. But I would note that consumption growth has not fluctuated that much over the course of the recovery. I am encouraged by the U.S. consumers’ persistence in the face of many challenges, including a payroll tax hike last January, a government shutdown, significant uncertainties about future tax policy, and the implications of health-care reform. Consistent job growth has added to wage and salary growth, which has supported spending. The December employment report released last Friday, which showed payroll gains of 74,000 jobs, came in below many analysts’ expectations. Yet, I caution you not to read too much into one month’s number. December’s number was likely affected by the unseasonably cold and snowy weather, although it is not yet clear by how much. The number is also subject to revision, and such revisions can be significant. Because of the month-to-month volatility and data revisions, I prefer not to read too much into the most recent number but, instead, look at averages over several months, and here the news remains positive. Firms added an average of 182,000 jobs per month last year, comparable to the pace in 2012. This consistent pace of job growth was enough to drop the unemployment rate to 6.7 percent in December. This means that the unemployment rate fell 1.2 percentage points last year, and, importantly, it is at a lower level than the FOMC anticipated it would be at this point when we started the current asset purchase program in September 2012. That is, the labor market has performed noticeably better than expected, according to the unemployment rate measure. Some people, however, feel that the decline in the unemployment rate overstates the degree of progress being made in labor markets because it reflects declines in labor force participation as well as increases in employment. There is even concern that the unemployment rate will move back up significantly when discouraged workers reenter the labor force. Based on research by my staff, I am less concerned about this possibility.1 First, it is important to realize that labor force participation rates have been declining since 2000. The declines are driven mostly by demographic changes, including the aging of the baby boomers. This trend is ongoing and was expected to accelerate. Second, detailed analysis of the Current Population Survey’s micro data indicates that much of the decline in participation since the start of the recovery can be accounted for by increased retirements and disability. Some of these increases might have been driven by the state of the economy as some baby boomers perhaps moved their retirement decision forward after losing a job. Nevertheless, few of these former individuals are likely to reenter the labor force. In addition, there has been an increase in the number of people out of the workforce who are going to school, which means there is less concern about skill depreciation for these people. So while I do expect some discouraged workers to reenter the labor force as the expansion picks up and while they search for a job there could be upward pressure on the unemployment rate, I would not overinterpret the decline in participation as a lack of progress made in labor market conditions or as a problem that must be corrected. Shigeru Fujita, “On the Causes of Declines in the Labor Force Participation Rate,” Research Rap Special Report, Federal Reserve Bank of Philadelphia, November 19, 2013. BIS central bankers’ speeches There are fundamental changes in the structure of the labor market that are likely real and sustained. The progress in the labor market has led to growth in household income. In addition to income growth, household balance sheets have strengthened as well. Overall household wealth, in nominal terms, advanced 11 percent year over year through the third quarter. The improving housing market has been an important contributor to that growth, with owners’ equity in real estate surging 29 percent in 2013 over 2012. House prices are rising; the number of homeowners with underwater mortgages and the number of mortgage delinquencies are down. I expect these improvements will help to support consumer spending going forward. Business balance sheets are also healthy. Industrial production was very encouraging in November, when it advanced 1.1 percent on gains in all major categories. That growth was the most rapid in 12 months and brought the overall index higher than its prerecession peak for the first time. The Philadelphia Fed’s Business Outlook Survey of regional manufacturing, which is a reliable indicator of national manufacturing trends, has also been in positive territory for seven months, and our firms expect continued expansion in manufacturing activity over the next six months. This gives me some hope that business fixed investment, which has been generally lackluster during the course of the recovery, will pick up somewhat this year. Inflation has been running below the FOMC’s long-run goal of 2 percent. The year-over-year change in the price index for personal consumption expenditures, or PCE inflation, is the Fed’s preferred measure. It has drifted downward over the past year to about 0.9 percent in November. Core PCE, a measure that removes food and energy prices that tend to be volatile, was a bit higher at 1.1 percent. I believe we must defend our 2-percent inflation target from below and above. However, I believe inflation is likely to firm up as some of the factors that have held it down, such as the cut in payments to Medicare providers and generally weak medical costs, are likely to abate over time. I am encouraged that inflation expectations remain near their longer-term averages and consistent with our 2-percent target. So, I anticipate, as the FOMC indicated in its most recent statement, that inflation will move back toward our target over time. Indeed, given the large amount of monetary accommodation we have added and continue to add to the economy, I think that there is some upside risk to inflation in the longer term. I anticipate overall economic growth of around 3 percent this year, a pace that is slightly above trend. This is far from the robust growth that many would like to see; nevertheless, it does represent steady progress and an improving economy. My forecast is largely in line with those of my colleagues on the FOMC, whose most recent projections had a central tendency of growth of 2.2 to 2.3 percent for 2013, and accelerating to 2.8 to 3.2 percent in 2014. I believe this growth will continue to lead to declines in the unemployment rate over the next year and should result in an unemployment rate of about 6.2 percent by the end of 2014. This makes me somewhat more optimistic than most of my FOMC colleagues, who reported a central tendency of 6.3 to 6.6 percent by the end of 2014. Monetary policy So, let me turn to some observations about monetary policy. Over the past five years, the Federal Reserve has taken extraordinary actions to support the economic recovery. The Fed has lowered its policy rate – the federal funds rate – to essentially zero, where it has been for more than five years. Since the policy rate cannot go any lower, the Fed has attempted to provide additional accommodation through large-scale asset purchases, or quantitative easing. We are now in our third round of these purchases, or QE3. These purchases have greatly expanded the size and lengthened the maturity of the assets on the Fed’s balance sheet. BIS central bankers’ speeches The Fed is also using forward guidance as a policy tool, which is intended to inform the public about the way monetary policy is likely to evolve in the future. In its December statement, the FOMC indicated that it intends to leave the policy rate near zero well past the time that the unemployment rate falls below 6.5 percent, especially if projected inflation continues to run below the FOMC’s 2-percent target. On asset purchases, the FOMC has indicated that it will continue the purchases until the outlook for the labor market has improved substantially in the context of price stability. The Fed has structured its latest round of asset purchases as a flow-based program, with the idea that policymakers could fine-tune the rate of purchases in response to the economy. The FOMC decided in December to reduce the purchases from $85 billion to $75 billion per month. Thus, we are still adding monetary accommodation but at a slightly slower pace. Asset purchases are not on a preset course and will continue to be contingent on the FOMC’s economic outlook. However, the FOMC did indicate in December that if economic conditions evolve as expected, with improved labor market conditions and inflation moving back toward its goal, then the FOMC will likely reduce the pace of asset purchases in measured steps at future meetings. Chairman Ben Bernanke indicated in his December press conference that if we are making progress in terms of inflation and continued job gains, then the program would be concluded late in 2014. The December employment report has not changed my belief that the economy has already met the criteria of substantial improvement in labor market conditions. So my preference would be that we conclude the purchases sooner than this, but I am glad that we have taken the first step on the path to ending the program. Eventually, monetary policy will be normalized, but the way in which that is done will depend on what operating framework we plan to use in the normalized environment. I believe that the exit strategy principles laid out by the FOMC in June 2011 still apply. More specifically, we need to return to an operating framework in which a market interest rate is our policy instrument. We also should shrink the size of our balance sheet, which is now about $4 trillion, and return to an all-Treasuries portfolio as part of the normalization process. This sounds easy in principle, but I believe the size and composition of our balance sheet will make it challenging to execute smoothly. There are now more than $2.4 trillion of excess reserves in the banking system. These reserves are not inflationary until they are converted to money and flow out into the economy. But as market rates rise in an improving economy, banks will find it advantageous to begin to increase lending or acquire assets using their reserves. The challenge for the Fed is to control the flow of reserves so that we can successfully maintain our 2-percent inflation target. This may require raising interest rates more quickly than currently anticipated. We have the tools that would enable us to raise rates if we chose to do so. However, the Fed may be subject to political pressures or pushback from various interest-sensitive sectors that could result in a more measured response than required. One of the consequences would be higher inflation. History suggests that the Fed tends to be behind the curve when it comes time to tighten monetary policy, and in the current environment, that delay could prove to be more costly than when reserves are in limited supply. Thus, it’s a matter of our will rather than our ability. Conclusion In summary, I believe that the economy is continuing to improve at a moderate pace. We are likely to see growth of around 3 percent in 2014. Prospects for labor markets will continue to improve gradually, and I expect the unemployment rate will continue its decline to 6.2 percent by the end of 2014. I also believe that inflation expectations will be relatively stable and that inflation will move up toward our goal of 2 percent over the next year. BIS central bankers’ speeches On monetary policy, the reduction in asset purchases from $85 billion a month to $75 billion a month is a step in the right direction. I believe the economy has met the criteria of significant improvement in labor market conditions for ending the program and that further increases in the balance sheet are unlikely to provide appreciable benefits for recovery. Even after the asset purchase program has ended, monetary policy will still be highly accommodative. The work of the Fed, however, is far from over. Monetary policy still faces considerable challenges as we seek to normalize policy. The task should be to return to a framework in which a market rate is our primary policy tool, to reduce the size of our balance sheet, and to restore our portfolio to all Treasuries. The challenge will be to do so in a way that ensures that inflation remains close to our target, that the economy continues to grow, and that we avoid sowing the seeds of another financial crisis. BIS central bankers’ speeches | federal reserve bank of philadelphia | 2,014 | 1 |
Subsets and Splits
No community queries yet
The top public SQL queries from the community will appear here once available.