Financial Crime World

Central Bank’s Influence on Money Supply: A Key Instrument for Economic Stability

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Background

Prior to the introduction of the Kyrgyz som, the central bank extended credit to specific sectors of the economy through commercial banks, with instructions from parliament and government. This mechanism allowed for targeted support to certain industries or regions, but it also introduced risks of misallocation of resources.

The 1993 Inflation Crisis

In 1993, the central bank faced a significant challenge in managing inflation, which grew to over 40% monthly due to excessive credit expansion. The IMF’s agreement conditions were not met, and as a result, the next aid tranche was withheld.

Measures Implemented to Address the Crisis

To address these issues, the central bank implemented several measures:

  • Credit Reduction: The central bank significantly reduced its crediting of the economy.
  • Prohibition on Preferential Credits: A presidential decree prohibited preferential credits.
  • Resumed Credit Auctions: Credit auctions were resumed in April 1994, with interest rates on refinancing credit falling to 195% and later to 120% as inflation rates declined.

Changes in Minimum Reserve Requirements

The central bank also explored non-inflationary methods for financing the budget deficit by:

  • Raising Minimum Reserve Requirements: In 1993, the requirement was raised from 15 to 20%, and later to 30% of deposits. This measure aimed to reduce commercial banks’ credit activity.

Alternative Methods for Financing the Budget Deficit

The central bank also explored alternative methods for financing the budget deficit by:

  • Issuing State Bonds: State bonds were sold at auctions, initially only available to commercial banks. Later, individual persons and enterprises were permitted to purchase them as well.

Currency Regulations

To govern the circulation of foreign currencies, the central bank established:

  • Currency Transactions: Restrictions on transactions in foreign currencies were lifted.
  • Flexible Exchange Rate: A flexible exchange rate was introduced on the interbank market. Commercial banks could purchase foreign currency at weekly auctions organized by the central bank.

Exchange Rate Developments

The exchange rate thus established stood between 4 and 5 soms per dollar from mid-May until mid-June, before rising to 6 and then 7 soms per dollar in August 1993.

Conclusion

These measures demonstrate the central bank’s commitment to maintaining economic stability and reducing inflationary pressures. By implementing targeted monetary policies, it has been able to stabilize the financial system and promote sustainable growth.