Monetary Policy Objective and Tasks
Monetary policy includes a process of controlling money supply in the economy, the liquidity level of banking system and the short-term interbank market interest rates by means of monetary policy tools directed primarily on achievement the price stability and promotion the real growth of economy.
The National Bank of Tajikistan (NBT) as a central bank within the mandate specified by the legislation is responsible for formulation and implementation of the state’s monetary policy. In particular, according to the Article 5 of the Law “On the National Bank of Tajikistan” the main objective of the NBT is achievement and maintenance of long-term price stability. The monetary policy tasks are, first and foremost, shall be carried out for achievement of this objective.
It should be noted that central (national) banks in most developed and developing countries pursue the same goal of ensuring price stability, and directed their policies firstly to achieve this goal.
The NBT by achieving its objective will promote the country’s banking system stability, long-term real economic growth, as well as increase of the population wellbeing.
Currently, the NBT’s monetary policy framework is based on monetary targeting regime and its ultimate goal – price stability ensured through the control of money supply or reserve money, being as an operational target.
Within the limits of this operational target in order to maintain stability of the monetary indicators and of the price level, the NBT each year sets a quantity target indicator on reserve money growth. In certain cases, for instance, in case of external shock respective adjustments, to quantity indicators are amended
For execution of its tasks and achievement of the main objective - price stability the NBT through the use of monetary policy instruments continuously controls the operational targets performance and the level of banking system liquidity.
It is necessary to note that taken and announced decisions on the change of key monetary policy instruments require that corresponding operations would have an impact on financial sector conditions and macroeconomic indicators.
The NBT with the aim of improving its efficiency, in particular to achieve the main objective - maintenance of low and stable level of prices, based on the successful world practice intends to introduce modern mechanisms of formulation and implementation of the monetary policy (Monetary and Exchange Rate Policy Strategy of the Republic of Tajikistan for 2016-2020).
In this respect, the NBT developed a plan on creation of favorable conditions and credible framework for gradual transition from reserve money targeting regime to a new regime of monetary policy implementation – inflation targeting.
In this direction, the NBT takes necessary measures for development of institutional reforms for transition to inflation targeting regime including:
- strengthening monetary policy tools and increase their efficiency, first of all, on short-term interbank market interest rates and macroeconomic indicators;
- improving of the macroeconomic indicators’ forecasting capacity and on that basis effective monetary policy decision-making;
- development and implementation of communication strategy for the maintenance of transparency and credibility;
- strengthening institutional, financial and operational independence.
Thus through implementation of efficient monetary and exchange rate policies the NBT makes direct contribution to a sound functioning of financial system, maintenance the purchasing power of national currency and its credibility, increase in the real incomes of population and the volume of investments into economy of the republic.
Prices stability defined as an environment of low and stable price level (inflation) in economy, which is measured by a consumer price index.
Ensuring prices stability and maintenance of stable inflation rates as one of the fundamental macroeconomic indicators creates favourable conditions for reducing uncertainty and negative expectation of population, increasing in confidence in the national currency, efficient allocation of resources, growth of deposits and investments of population, which as a whole reflected in the real GDP growth and increase in the population wellbeing. Therefore, price stability as one of the major factors of sustainable and inclusive growth of economy is very important in securing economic and social stability of the republic.
In contrast, high and volatile inflation rates have negative consequences for economic growth and population incomes, lays the ground for decrease in confidence in the national currency, inefficient resource allocation and investments in economy, increases an uncertainty and negative expectations of economic agents, and as a result probable cause of social tension.
As it is known, depending on fundamental and structural factors a significant part of the country’s population income is being spent on purchase of consumer goods, especially for purchasing food items, which currently holds a major share in consumer basket. At the same time, according to the estimates imported goods account for the largest part of consumer’s basket products. Thereby, rise in prices for food items or imported products exerting pressure on inflation can be negatively reflected in purchasing power of the money income and living standard of population.
It is necessary to emphasize that effectiveness of monetary policy for achieving its main objective – maintenance of prices stability depends on the degree of non-monetary factors impact and, first of all, on the external situation and its pressures. Since the shocks of non-monetary nature such as changing the world commodity prices, factors of external exchange rate fluctuations, change in prices and tariffs for services and the seasonal factors, being beyond of the monetary policy control may have an impact on the rise or reduction of prices.
As theory and practice shows, monetary policy in the long-run can influence the general price level as for the reason of its limited ability to directly affect the real growth of economic indicators such as real GDP or unemployment rate. That is monetary policy cannot alow a long and excessive growth of money supply considerably exceeding a real demand of economy otherwise it will lead to an increase in prices.
The reason is that economic growth in the long-term mainly depends on the structural and fundamental factors, in particular on internal production capacity, favorable investment and business climate, high-quality labor forces, appropriate level of science, technology and managerial quality.
It is for these reasons that the main objective of the National Bank of Tajikistan, which has an exclusive power of cash issuance is to maintain price stability in the long run.