On March 5-7, 2018 the JVI hosted the fifth IMF Caucasus and Central Asia (CCA) Central Bank Practitioners Peer-to-Peer Workshop. Participants discussed difficulties confronting CCA central bankers in designing and conducting monetary policy in the transition to inflation-targeting approaches, including introducing greater exchange rate flexibility and deepening central bank communications. The workshop, co-sponsored by the IMF’s Middle East and Central Asia Department and the Swiss National Bank, brought together representatives from the central banks of Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan and from the JVI, the IMF, the Swiss National Bank, the Oesterreichische Nationalbank, and the Central Bank of Turkey.
The presentations and discussions revealed how much progress many of the CCA central banks have made in adopting technical tools to support forecasting and policy analysis. Those analytic tools are becoming more and more sophisticated, contributing more to policy-centered discussions. However, central bankers still face challenges. For instance, though incorporating information from sectoral specialists into model-based forecast is demanding, it can greatly improve forecasts. And adjusting current analytic frameworks to country-specific developments would make analyses more useful to policymaker decisions. To better assess inflation expectations, forecasting could also be supported by issuing inflation-indexed bonds, possibly with the help of international financial institutions, to measure inflation expectations better.
Although the adoption of inflation targeting, as many CCA countries have done, requires a highly flexible exchange rate (ER) policy, many of them still continue to manage the ER. Mitigating exchange rate volatility by central banks is often justified by high ER pass-through, imperfect functioning of the foreign exchange market, slow improvement in central bank credibility, and large swings in terms of trade for commodity-exporting countries. Moreover, the general public and markets still put significant weight on the ER when they evaluate monetary policy. CCA central banks made it clear at the workshop that they recognize the importance of improving the ER mechanism for transmitting monetary policy and better communicating future policy intentions for tighter control of inflation expectations. Unclogging transmission channels is particularly important given the prevalence of dollarization in many CCA countries, although that has receded in the past two years as currencies in the region have appreciated.
In the conduct of monetary policy, there continue to be issues related to high structural excess liquidity in most CCA countries and underdeveloped interbank and other markets and instruments. Workshop participants recognized these as problems for many CCA central banks. Besides market development, enhanced liquidity forecasting is also crucial for tighter control of central bank policy instruments. There was a consensus that much could be achieved by building up capacity in central banks and finance ministries and enhancing coordination between them.
Central bank macro-financial analysis also needs attention and resources; publication of stability reports and risk assessments would be useful. The participants called for more IMF engagement in this area through, e.g., analytical and communication tools and training.
The communications challenges are still formidable, especially communication of risks, uncertainty, and FX interventions. Solutions could be publication of interest rate paths, growing use of social media, and holding events outside capital cities. Many participants mentioned as a priority deepening public financial literacy. Also needed besides changes in corporate culture are targeted communications strategies and firm commitment to providing data and to transparency.
During the final discussion participants expressed their appreciation of the peer-to-peer events and the continuing IMF and JVI efforts to sustain and expand the network of CCA central bank practitioners. They also agreed that additional IMF policy advice, TA, and customized training are important in all areas to maintain the progress achieved in recent years.
Tibor Hlédik, Senior Economist, JVI