What is the OECD for?
For the man in the street, OECD is just another of those irritating sets of initials that the world seems so full of these days. Readers of the business pages may know, at least, that those initials stand for the Organisation for Economic Cooperation and Development. Rather than lending money with menaces, like the International Monetary Fund, or chewing over the woes of the rich world, like the G8, the OECD sees its role as the dissemination of free-market ideas and sound regulatory policies.
The OECD does not concern itself with the grand themes of global macroeconomics, instead pondering unglamorous but worthy subjects such as agricultural reform in China, or educational development in Denmark. Someone has to do this sort of thing, presumably. But there seems to be a growing body of opinion that the OECD may not be the right agency to do it.
The OECD was born in the early Cold War, as a means of distributing American cash and economic wisdom to war-weary Europe. As Europe boomed, the OECD seemed to have a coherent identity as the rich countries' club. Now, though, that identity is looking dangerously blurred. The OECD has admitted as members a host of distinctly unrich countries including Poland, Mexico and Turkey. I think it is very clear that we have a greater role now than at any time in the past 30 or 40 years, says Mr Johnston. What we do is unique, and I can't see that any other agency the United Nations, for example could do it instead.
Behind closed doors at this week's meetings, OECD ministers are starting to discuss what people call the modalities of allowing in more members Russia, for instance, which has submitted a formal membership application. This may take time: members acknowledge that achieving consensus among 30 fairly like-minded countries is hard enough expanding membership to tough customers like the Russians or Chinese could gum up the decisionmaking machinery completely. But Mr Johnston says the mere fact that countries are keen to sign up is positive.
Global economic growth will pick up over the next two years helped by tax and interest rate cuts, the OECD said. The strongest recovery will be in the US, while the rebound in Europe and Japan will be slower and less steep. Europe's largest economies, however, are told they will have to continue reforming, or be more susceptible to recession in coming years.
Jean-Philippe Cotis, chief economist, said that after a drawn-out period of fits and starts, a palpable recovery has finally taken hold. The strong mo-
mentum already achieved in Asia, North America and the United Kingdom provides ample evidence of the renewed strength of the world economy. That will come as a relief to many Western economies, following three years of sputtering growth and slumping stock markets.
To kickstart the world's largest economy US President George W Bush cut taxes, while the country's central bank, the Federal Reserve, set interest rates at the lowest levels in almost half a century. Europe's largest economies and central bank were criticised by many analysts and business leaders for being slow to react. They seern however, to have weathered the storm, with countries including Germany emerging from recession and promising tax relief of their own.
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The OECD has concerns about debt levels among private individuals in the US, the UK and Australia and among businesses in continental Europe. Large deficits in the US government budget and in its trade with the rest of the world are a possible source of instability in the currency markets. A sudden weakening of the dollar would make Europe less competitive and could, the OECD warns, stifle a fledgling recovery.
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Monetary Operations
The ability of the NBT to control liquidity is limited by the few instruments at its disposal. Also, its liquidity management framework will need to be strengthened.
Until the introduction of credit auctions the main indirect instrument to control liquidity in the economy was intervention in the foreign exchange market, which made it difficult for the authorities to simultaneously achieve three objectives, i.e., maintain exchange rate stability, ensure a certain level of international reserves, and control liquidity. The credit auction has provided additional flexibility in reaching monetary policy objectives. In particular, it is quite suitable for injecting liquidity; however it is constrained in withdrawing liquidity to the extent that a withdrawal of liquidity can only be achieved by choosing not to roll over maturing credits. The introduction of treasury bills in early September 1998 will over time allow the NBT to develop additional and more flexible instruments to conduct open market operations.
It is important that intervention targets in both the exchange and the credit markets be determined in a coordinated fashion, and not be compromised by the provision of credit outside the credit auction mechanism. The introduction of treasury bills has made policy coordination more complicated as it now involves not only NBT departments but the Ministry of Finance as well. Although the amount of bills to be issued (less than TR 1 billion) is small compared with total NBT credit to the private sector outstanding (TR 20 billion), decisions concerning the timing and amounts of primary auctions and the terms of issue should be closely coordinated with the NBT. The various objectives pursued when creating a Treasury bill market, i.e., providing a source of domestic financing for the government and an instrument to conduct open market operations to manage liquidity for the NBT, have to be duly taken into consideration.
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Liquidity Management
In early 1997 a Monetary Policy Committee, composed of the Directors of the Monetary Policy, the Foreign Exchange, and the Emission and Cash Transactions Departments, was established with the aim of coordinating intervention in the foreign exchange market with credit provision to the economy. This Committee functions at the technical level and makes recommendations to the Board of Directors of the NBT on how to deal with perceived deviations with respect to the monetary program agreed with the IMF. Recommendations are based on past developments, as shown by daily balance sheets of the NBT and consolidated balance sheets of the banking system (produced every ten days), and on estimates of the likely repayment of outstanding NBT loans. However, they do not take fully into account projected deviations based on forecast of liquidity needs of the banking system and expected developments in the Governments position and in the exchange market.
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The Committee formally meets when the situation requires it, rather than weekly as intended. Although the staff of the departments involved maintains continuous contact, sharing information on current developments, the mission would encourage a regular meeting schedule to facilitate information flows.
The monetary program contained in the economic and financial program supported by the IMF provides a useful framework for analysis and guides the central bank in achieving its price stability objective, and the authorities rightly concentrate their efforts on meeting these targets. However, as noted above, the procedures will need to be strengthened to take into account all factors influencing the development in liquidity. A concern in this area is that staff at the technical level do not always have full access to relevant information.
The above aggregated approach, based mostly on monthly estimates derived from quarterly targets, is not always the most practical basis for policy decisions in the very short run. In a market-based system, the central bank has to respond to unexpected developments in financial sector liquidity in order to avoid excessive volatility in interest rates. The February 1998 mission provided advice on a liquidity framework, aimed at influencing banks excess reserves, which remains valid. While daily liquidity management is too ambitious for the NBT at this time, it should quickly develop the capacity to implement liquidity management on a weekly basis. Based on the projections for the likely net inflows of funds into the banking system in each week of the month, the weekly interventions should be calculated in such a way as to offset any deviation from the NBTs liquidity target. In this context, the NBT will need to consider whether an undesirable change in banks reserves is projected to be permanent, in which case it should use instruments with longer maturities to counteract the liquidity effect in the economy.
Currently, the exchange rate is informally pegged to the US dollar. In these circumstances, Tajikistan cannot operate an independent monetary policy since interest rates will automatically adjust to those in the market of the currency to which it is pegged, although with possible lags because of market imperfections as well as a risk premium. While overall monetary conditions therefore cannot be independently set, it is nevertheless crucial to ensure that central bank credit policy is set so as to support the authorities foreign exchange rate and reserve targets, as agreed in the program supported by the Fund.
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Prudential Regulations
The last mission recommended considerable changes to the NBTs prudential supervisory standards to assure that banks follow prudential banking practices.Recommendations were made to adjust or include standards on capital adequacy, liquidity, credit diversification, and asset valuation. The most important of the proposed changes related to capital adequacy, where risk-weighted assets and minimum capital levels were to be redefined. The changes were to be accepted in their totality before April 1, 1998.
In response to the recommendations of the previous mission, the NBT has made significant improvement in revising quantitative prudential supervisory standards. The NBT issued a revised set of prudential regulations on April 21, 1998, which became effective on June 1, 1998.
According to the new regulations, banks are to maintain a minimum of 12 percent of total capital to risk-weighted assets after full implementation by the end of 1999, compared with the previous level of 8 percent. Total capital should be divided into primary and secondary capital. Secondary capital should be limited to 25 percent of primary capital, which is more stringent than the ratio established in the Basle Capital Accord. The minimum total capital for new banks shall be US$1 million. The minimum total capital for banks already in existence is to be raised in steps to US$ 1 million by the end of 1999. Previously, the minimum total capital was set at US$300,000.
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In line with the recommendation of the previous mission, the definition of total capital was revised to exclude the Fixed Asset Fund and Fixed Asset Depreciation accounts. Any type of debt instrument will not be allowed as an element of secondary capital until Tajikistans economic environment exhibits significant stability. Fixed asset revaluation will be disallowed as primary capital, but it will be allowed only as secondary capital. The NBT allowed 100 percent of fixed asset revaluation as secondary capital, however, it is advisable to allow only 50 percent such amount as secondary capital, considering the absence of a reliable market for fixed assets.
With regard to connected lending, 100 percent of guarantees and other off-balance sheet items issued by a bank in favor of insiders are now included in the definition of lending.
The prudential standards for foreign exchange exposure were also reinforced. Long positions for hard currency are restricted to 50 percent of banks total capital while short positions are restricted to 25 percent of total capital. These revisions were in line with the recommendations of the previous mission.
Although the revised standards have become effective from June 1, 1998 a more flexible timetable for implementation of the recommended changes was established by the NBT considering the fact that the proposed prudential standards are considerably stricter than the previous standards. Instead of requiring that banks meet the previously scheduled end-1998 deadline, a new end-1999 deadline was established. The mission considers the NBTs timetable reasonable in consideration of the current financial weakness of banks and the significant upgrading of prudential standards.
In order to encourage banks to follow prudent banking practices, prudential regulations need to be strengthened further and must be accompanied by capable supervision. In particular, it is advisable to introduce a system of prompt corrective actions based on explicit quantified criteria so that banks problems may be remedied before they become critical; a nonviable bank should be closed before it deteriorates into insolvency, so that depositors funds may be reimbursed upon liquidation. Banks may be divided by capital ratio into well capitalized, adequately capitalized, under capitalized, significantly undercapitalized, or critically undercapitalized. These classifications should be used as triggers for supervisory actions. It is also recommended that the NBT introduce a minimum set of disclosure requirements for the enhancement of market discipline to take effect with the banks introduction of international accounting standards from the 1998 financial year.
The NBT management has deemed that more time than originally envisaged will be needed for banks to comply with the new regulations. Specifically, the previously scheduled deadline of end 1998 was moved to end 1999. Banks are to maintain a minimum of 6 percent from April 1, 1998, of 9 percent as of July 1, 1999 and of 12 percent by the end of 1999. Considering the fact that the revised prudential standard is considerably stronger than previous standards, and that major banks are undergoing restructuring, an end 1999 deadline seems more reasonable. However, the mission recommends that a target of 7 percent should be reached by the end of 1998.
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