Kyrgyzstan’s Central Bank Tackles Economic Challenges through Credit Funds
The National Bank of Kyrgyzstan (NBK) has been relying on credit funds as a key instrument of monetary policy to stabilize prices and ensure a stable exchange rate for the Kyrgyzstani som.
Early Efforts
At the beginning of 1993, the NBK began extending refinancing credits to commercial banks with interest rates set at 110 percent. This move was aimed at stimulating economic growth and financing government spending.
Increasing Interest Rates
However, by September 1993, the interest rate had risen to 190 percent, reflecting the country’s high inflation rate.
Credit Fund Concerns
Despite efforts to reduce credit activity through changes in minimum reserve requirements, the central bank continued to extend refinancing credits to commercial banks with a total value of nearly 600 million soms by the end of 1993. This has led to concerns over non-performing loans and the potential for further inflationary pressures.
Addressing Issues
In an attempt to address these issues, the NBK introduced state bonds as collateral for refinancing credit extended on the credit auction market. Commercial banks were initially required to hold 10 percent of the value of the loan as state bonds, with individual persons and enterprises permitted to purchase state bonds from the beginning of 1994.
Key Initiatives
- The central bank has been selling state bonds at auctions, with commercial banks being allowed to participate in these auctions since their inception.
- The proceeds from these bond sales have been used to finance government spending and reduce the budget deficit.
- A flexible exchange rate was established on the interbank market to address concerns over foreign currency reserves.
Participation
Commercial banks are permitted to purchase foreign currency at weekly auctions organized by the central bank, with enterprises and private exchange offices also allowed to participate in these auctions from 1994 onwards.
Conclusion
The National Bank of Kyrgyzstan has been using credit funds as a key instrument of monetary policy to address economic challenges in the country. While there are concerns over non-performing loans and inflationary pressures, the central bank’s efforts to reduce credit activity and establish a stable exchange rate may help to stabilize the economy in the long term.