Chapter

Appendix Summary of Central Bank Reforms

Author(s):
Malcolm Knight
Published Date:
February 1998
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The following tables provide a summary of the reforms in the key central banking areas for each of the 15 countries under review. The tables start with the implementation of monetary policy—specifically, the institutional context in which the central bank operates and its short- and medium-term operating targets, markets and interest rate management, and instruments and operating arrangements. They then move on to developments in the foreign exchange area and priorities for future reform. Significant attention is devoted to banking supervision and bank restructuring; first the institutional framework of the banking system is covered, then the structure and performance of the banking system is summarized, and finally bank restructuring measures in the individual countries are listed. The appendix concludes with summaries of payments systems and central bank accounting reforms.

Table A1.Institutional Background for Monetary Policy Implementation
Central Bank AutonomyMedium-Term Operating Framework and TargetsShort-Term Operating Framework and Targets
ArmeniaA revised central bank law was adopted in June 1996, giving more autonomy to the central bank while increasing accountability. The draft law states that the prime objective of the central bank is price stability.Monetary performance criteria under the program supported by the IMF include a ceiling on net domestic assets (NDA) of the central bank and a floor for net international reserves (NIR) of the central bank, with an indicative target for broad money.Levels of the central bank’s NIR and NDA are closely monitored. Foreign exchange intervention is used only to smooth sharp changes in the exchange rate, with the exchange rate allowed to move more freely from late 1996. Previously, foreign exchange transactions were sometimes used directly to manage domestic liquidity.
AzerbaijanA new central bank law was passed in June 1996. The law contains two key elements: (I) the central bank must maintain price stability and develop and strengthen the banking system, and (2) the Azerbaijan National Bank has independence to operate monetary and exchange rate policy. The law specifies that the central bank reports only to the president of the Azerbaijan Republic, and its financing of the government is limited to an amount that is determined by the National Assembly.Monetary performance criteria under the program supported by the IMF include a ceiling on NDA of the central bank and a floor for the NIR of the central bank, with an indicative target for reserve money in manats.The central bank has been giving an increasing weight to adhering to a reserve money target. Up-to-date banking figures are readily available, including the central bank’s daily balance sheet.
BelarusThe National Bank of Belarus appears to have lost the limited autonomy it had following the referendum on constitutional reform. Monetary and exchange rate policies are determined by the government and the central bank. The bank’s governor is a member of the cabinet of ministers, but does not have ministerial rank.There is no program supported by the IMF.Liquidity forecasts are systematically made on a daily basis for the next two weeks. Banks’ reserves are the day-to-day operating target.
EstoniaEstonia operates under a currency board arrangement. The Bank of Estonia does not lend to the government.Estonia has a program supported by a precautionary Stand-By Arrangement from the IMF. Under the performance criteria of the arrangement, the currency board’s kroon liabilities are to be fully backed with foreign exchange at all times.The central bank is bound by a money-creation rule that limits growth in base money to the growth in foreign exchange reserves. There is a fixed exchange rate.



The central bank has not been managing the liquidity of the banking system actively.
GeorgiaObjectives of the central bank are to maintain price stability and foster the liquidity, solvency, and proper functioning of a stable market-based financial system. A new law enhancing the independence of the central bank was enacted in mid-1995. However, the longstanding acting president of the central bank has not yet been confirmed by parliament.Monetary performance criteria under the program supported by the IMF include a ceiling on NDA of the National Bank of Georgia and a floor on its NIR on all currencies and on convertible currencies, with a financial benchmark for reserve money (including currency issued, required reserves, and balances in correspondent accounts).Exchange rate developments in 1996 were strongly influenced by the central bank’s interventions in the foreign exchange market.



Some effort has been put into estimating actual changes in correspondent bank balances from changes in key elements of the central bank’s balance sheet, but the estimates are not yet useful for liquidity management owing to difficulties in estimating government positions.
KazakhstanUnder the 1995 central bank law, the National Bank of Kazakhstan has considerable autonomy in implementing monetary policy. The central bank’s objective is to maintain internal and external stability of the national currency. However, it is obliged to grant short-term credit to the government under conditions established in the annual budget.Monetary performance criteria under the program supported by the IMF include a ceiling for the central bank’s NDA, a floor for its NIR, and an indicative target for base money.The Technical Committee of Monetary and Exchange Rate Policy (established in August 1995) meets weekly to assess developments in the exchange rate, international reserves, central bank credit, and base money. The committee continuously monitors compliance with monthly targets, which are derived from quarterly targets formulated with the IMF. Liquidity projections are complicated by difficulties in gathering information on government transactions.
Kyrgyz RepublicThe law, adopted in 1992, established a relatively high degree of autonomy for the National Bank of the Kyrgyz Republic. Minor revisions are now under consideration to clarify the objectives of the central bank and to further enhance autonomy.Monetary performance criteria under the program supported by the IMF include a ceiling on the NDA of the central bank and a floor on NIR. Indicative targets include reserve money and NDA of the banking system.Quarterly forecasts are based on extrapolations for the central bank’s main balance sheet items, split into monthly figures. Day-to-day monetary operations keep a close watch on reserve money and central bank credit to the government, in addition to keeping track of the foreign exchange, treasury bill, and credit markets.
LatviaThe Bank of Latvia has a large degree of autonomy.Monetary performance criteria under the program supported by the IMF include a ceiling on the central bank’s NDA and a floor for its NIR, with an indicative target for reserve money and for the NDA of the banking system.The central bank is building a database of daily figures, which are used for monitoring progress under the monetary program. Difficulties in forecasting the government’s cash flows (in part because it holds accounts in several banks) make active liquidity management difficult.
LithuaniaSince April 1994, Lithuania has had a currency board arrangement. The authorities are considering replacing the currency board after the Extended Arrangement with the IMF expires in September 1997.



The Bank of Lithuania does not lend to the government.
Lithuania has a program supported by an Extended Arrangement with the IMF. Under the performance criteria, currency board liabilities (reserve money and other litas-denominated liabilities) are to be fully backed with foreign exchange at all times.The central bank is bound by a money-creation rule that limits growth in base money to the growth in foreign exchange reserves at the fixed exchange rate.
MoldovaThe objective of the central bank is to maintain price stability. The National Bank of Moldova has independence to operate monetary and exchange rate policies. The central bank’s administrative council, in consultation with the government (primarily the Ministry of Finance), adopts an annual monetary program that is communicated to parliament every February.Monetary performance criteria under the program supported by the IMF include a ceiling on the central bank’s NDA and a floor for its NIR, with indicative targets for the bank’s gross international reserves, reserve money, and broad money.Since November 1995, the central bank has used reserve money.



The reserve money target and its associated NDA and net foreign asset (NFA) levels are usually adjusted based on the quarterly program targets that are set forth in the IMF program.
RussiaThe central bank law passed in 1995 enhanced the independence of the Central Bank of Russia.Monetary performance criteria include a ceiling on the central bank’s NDA, defined as currency plus required reserves of commercial banks minus the NIR of the monetary authorities (central bank, government, and the Vneshekonombank). In addition, there are floors for NIR and for gross international reserves of the monetary authorities. The program with the IMF includes quarterly performance criteria and monthly indicative targets.Liquidity forecasting: a five-day reporting system, introduced in 1995, allows the central bank to monitor banks’ liquidity. Information on domestic and foreign currency developments are incorporated in the five-day reporting system. The treasury bill yields, the interbank market rate, and the exchange rate are used to guide monetary policy.



The central bank pursues an interest rate objective that is subsidiary to the exchange rate objective.
TajikistanA new draft that substantially enhances the National Bank of Tajikistan’s autonomy was adopted in December 1996.Monthly bank-by-bank credit ceilings have been established consistent with the overall ceiling for NDA prepared with the IMF.Short-term operating targets are set in line with the monetary program formulated with the IMF. The central bank’s foreign exchange operations have been used to manage short-term liquidity over the last few months. It has no regular liquidity forecasting.
TurkmenistanIn the past, the Central Bank of Turkmenistan had little autonomy in the conduct of monetary policy, with decisions on the quantity and cost of central bank credit generally taken by the government and enforced by presidential decree. A reform program announced in late 1995 gave the central bank more autonomy in principle to implement a monetary policy aimed at reducing monthly inflation to low single digits by end-1996. Directed credits by presidential decree were terminated, and regular foreign exchange and central bank refinance auctions were introduced in June 1996.



However, in December 1996, directed credits by presidential decree were issued again at highly negative real interest rates, below the central bank refinance rate, to selected domestic industries and agriculture, which has undermined the role of the refinance credit auctions.
There is no program supported by the IMF.



Progress in monetary programming has been slow, reflecting the difficulty in projecting various balance sheet items in a highly inflationary economy and a lack of coordination with the Ministry of Economy and Finance.
The central bank uses projections prepared by the IMF as a basis for setting liquidity targets to be implemented through credit auctions.
UkraineCurrent legislation (1991) establishes some autonomy for the National Bank of Ukraine. The latest draft of the Law on the National Bank of Ukraine, which provides for effective independence, was submitted to parliament in December 1996.Monetary performance criteria under the program supported by the IMF include a ceiling on the central bank’s NDA and a floor for NIR, with an indicative target for reserve money.Within the medium-term framework, interest rates are the main operating target. Substantial progress has been made in developing a monitoring framework for short-term money and exchange market conditions as well as a reporting framework for key program variables. Short-term forecasts of commercial banks’ reserves are prepared by the central bank.
UzbekistanThe central bank law passed in 1995 enhanced the independence of the central bank, whose main objective is to maintain price stability. The central bank has independence to operate monetary and exchange rate policy. However, no formal limit is set on central bank financing of the government; central bank credit extended to the government must be approved by parliament.Monetary performance criteria under the program supported by the IMF include a ceiling on NDA of the central bank and a floor for the NIR of the monetary authorities, with indicative targets for reserve money.The central bank monitors commercial bank correspondent account balances, but no formal forecasting is undertaken, nor is there a formal operating target.
Sources: Central banks; and IMF staff.
Sources: Central banks; and IMF staff.
Table A2.Markets and Interest Rate Management
Interbank MarketGovernment Securities MarketInterest Rate Management
ArmeniaThe interbank market has operated freely since July 1995. Trading is limited in part because of risks in lending to banks and the absence of collateral in some banks in addition to a lack of settlement balance account information.Primary market: auctioning of treasury bills started in September 1995, with pre-announced minimum price and uniform price determination. The Ministry of Finance decides on timing, amount, and cut-off price. Outstanding volumes have continued to grow and maturity of bills has been extended to up to one year.



The secondary market is virtually nonexistent.
Deposit and lending rates of commercial banks are market-determined.



The refinance rate set by the Central Bank of Armenia (positive in real terms throughout 1996) is used for setting the interest rate on central bank loans to government, the overdraft rate, and the penalty for noncompliance with reserve requirements.
AzerbaijanInterbank market: most commercial banks redeposit their clients’ foreign currency deposits in one commercial bank (the Azerbaijan International Bank); some interbank deposits in manats occur; commercial banks are allowed to offer refinance credit at the credit action, but in practice only the central bank offers credit.Primary market: regular monthly auctions of one-month treasury bills commenced in September 1996. Three-month and six-month bills are to be auctioned in the near future. Fifteen banks have been selected as primary dealers.



The secondary market is virtually nonexistent.
Deposit and lending rates of commercial banks are market-determined. Rates vary widely according to banks and client groups, reflecting a highly segmented financial market that lacks efficient arbitrage.



The refinance rate since March 1995 is determined at the credit auction.
BelarusThe interbank market developed steadily throughout 1995, becoming volatile toward the end of the year as a result of the transfer of government and state-enterprise deposits to a newly merged bank. The market remained periodically volatile in 1996, mostly because of large injections of liquidity by the National Bank of Belarus through directed credits.The primary market involving auctioning of treasury bills started in 1994 using the multiple price auction. The Ministry of Finance decides on timing, amount, and cut-off price. Volumes have been growing; maturities of bills are from one to six months.



The secondary market, consisting of banks and other financial institutions, has continued to grow. Individuals are not allowed to trade in this market.
The lending rates on loans refinanced by the central bank may not exceed the refinance rate plus a preset margin.



Deposit rates: the minimum rate on deposits was eliminated in 1995.



Refinance rate: this rate is set by the central bank and adjusted regularly with a view to keeping it above the anticipated rate of inflation. However, most credit (88 percent in 1996) is lent at a subsidized rate that is below the refinance rate. The real refinance rate turned negative in November 1996.
EstoniaIn the interbank market, the variability of rates is low. Banks use the interbank market actively to minimize excess reserves. The average daily turnover in 1996 fluctuated between 1.5 percent and 2 percent of base money, up from 0.5 percent and 1 percent in 1995. Bank of Estonia certificates of deposit may be used as collateral in interbank operations; certificates of deposit were issued for market development purposes.There is no treasury bill market.Deposit and lending rates of commercial banks are market-determined. Interest rates correspond closely to German interest rates.



The Bank of Estonia certificate of deposit rate has generally tracked the deutsche mark interbank market rate.



The interbank market rate follows closely the short end (overnight to one week) of the deutsche mark interbank market rate.
GeorgiaInterbank market: commercial banks are allowed to borrow and lend at the interbank credit auction. While still somewhat thin, activity in the interbank credit market picked up significantly during 1996. Lack of settlement account balance information has hampered development.Treasury bill auctions started in August 1997.Deposit and lending rates of commercial banks are market-determined. Although interest rates are positive in real terms, deposit mobilization remains low owing to a lack of confidence in the banking system. Prudential limits on mobilization of household deposits were liberalized in January 1997; the limits on such deposits were increased from the amount of a bank’s capital to nine times the amount.



Refinance rate: there is no central bank refinance facility.
KazakhstanThe short-term money market was established in April 1995 with participation of the National Bank of Kazakhstan and 10 banks licensed by the central bank. Maturities of 1–28 days are traded. Collateral may be required for transactions of more than 14 days. Settlement takes place on the central bank books. The number of participants and the daily turnover increased until December 1995, but the turnover fell sharply in 1996, reflecting concern about the health of the financial system.Primary market: the first auction of three-month treasury bills took place in April 1994. With declining inflation, maturity of treasury bills was extended to 6 months in July 1995 and 12 months in July 1996. Government securities are primarily issued for financing the budget deficit.



Secondary market: trading has expanded. A comprehensive regulator y framework for secondary operations, including repurchase agreements and electronic delivery-versus-payment settlement, was introduced by mid-1996. The market conducts repo and reverse repo operations. The central bank has recently begun limited repo and reverse repo operations to manage liquidity.
Deposit and tending rates of commercial banks are market-determined. Banks’ margins are high, reflecting in part the high level of nonperforming loans.



The refinance rate, which is charged on lending to the government, is set by the central bank. It is adjusted regularly in line with inflation to keep it positive in real terms.
Kyrgyz RepublicThe interbank market operates freely. Trading is thin but growing. Development of the market is hampered by the large number of insolvent banks and limited collateral. Activity in the market involves mainly small new banks.Primary market: weekly multiple-rate auctions of 3-, 6-, and 12-month treasury bills. An auction of 12-month bills was suspended in October 1996 owing to low participation. Primary dealership was established in 1996.



Secondary market: following a streamlining of trading procedures, transactions emerged in this market in 1995.
Deposit and lending rates of commercial banks are market-determined.



The refinance rate (Lombard) is linked to the treasury bill rate.
LatviaThe interbank market operates freely. Maturities traded vary from overnight to between three months and one year. Activity was constrained through 1995 because of the banking crisis in the spring of 1995. In 1996, activity in this market recovered appreciably as indicated by a fivefold increase in the daily turnover rate between January and September 1996. Nevertheless, the market remains thin and interest rates relatively volatile. Rates on foreign-currency-denominated transactions have fallen to levels that are only just above foreign rates (as proxied by the SDR interest rate). Rates on domestic-currency-denominated transactions have fallen below the Bank of Latvia refinance rate.Primary market: auctions of treasury bills were introduced in December 1993 (multiple-price auction). Currently, 28-day, 91-day, and 182-day bills are offered in weekly auctions, 1-year bills every 8 weeks. Two-year bills were introduced in April 1997.



Secondary market: few banks are active in this market, and the amounts traded are small. A secondary window, which was established by the central bank in April 1994, provided substantial liquidity to the market.
Deposit and lending rates of commercial banks are market-determined. Deposit rates have become negative in real terms and banks have been reluctant to raise them for fear that the public would associate higher rates with higher risk.



The refinance rate is the central bank’s core interest rate, which is used to determine the rate on repurchase operations and the rates at the Lombard window.
LithuaniaThe interbank market operates freely. There is currently some interbank activity with treasury bills used as collateral among three or four banks. Otherwise, the interbank market has remained inactive because of the banking crisis since the beginning of 1996.Primary market: multiple-price treasury bill auctions were introduced in 1994. One-, three-, and six-month, and one-year bills are offered in weekly auctions. No cut-off rate is set prior to the auction.



Secondary market: the stock exchange organizes trading sessions twice a week, but the turnover is very limited, n part because of tax regulations. The capital gains taxi is applied only to treasury bills sold before maturity, not to those held to maturity. Also, commissions may be too high. The Savings Bank holds more than half of the outstanding treasury bills and could become a market-maker. Limiting factors are the lack of trading skills and absence of an electronic information system linking market participants.
Deposit and lending rates of commercial banks are market-determined. Although interest rates declined dramatically following the establishment of the currency board arrangement, they remained substantially above international rates. This could be explained by devaluation expectations, by the higher risk associated with Lithuanian banks, and, in the case of lending rates, by the lack of collateral and the corresponding collateral legislation.



The emergency lending rate is equal to the interbank’s average rate of three months plus 2 percentage points.
MoldovaThe interbank market is very small, partly because of a lack of confidence in some banks. Improvements to collateral law, including promissory notes as possible collateral instruments, may help to promote interbank activity.Primary market: auctions of treasury bills were introduced in March 1995; the range of maturity on offer has been expanded from durations of 28 and 91 days to 182,273, and 364 days. The Ministry of Finance published a three-month schedule of auctions indicating the amount of securities to be offered at each auction; most sales are to banks approved as primary dealers, but sales to nonbanks are growing. A book-entry system was implemented in February 1996. At times, the Ministry of Finance negotiates sales of government securities with buyers outside of the auction.



Secondary market: trading is beginning to get under way.
Deposit and lending rates of commercial banks are market-determined. In February 1994, the National Bank of Moldova eliminated all remaining limits on interest rate margins applied to central bank credit on-lent to commercial banks, with the exception of loans guaranteed by the government.



The refinance rate has been established by credit auctions since November 1993.
RussiaMarkets were active in both rubles and foreign exchange until the August 1995 interbank market crisis. Volumes dropped precipitously and market segmentation increased. Arbitrage takes place within regions, and markets are again becoming integrated nationally; core activity is at money center banks, or clearing banks, and at financial organizations owned by commercial banks. Typical maturities of ruble deposits and loans vary from three days to six months.



Lack of settlement balance account information may be hampering market development. In March 1997, the Central Bank of Russia introduced a multiple clearing system (four daily sessions), which should improve the information available to banks.
Primary markets, market in treasury bills (GKOs) with maturities of up to one year has been operating since May 1993; GKOs are auctioned mainly for debt-management purposes. In 1995, a new bond instrument, the OFZ, was introduced, with a maturity of longer than one year and with the interest rate coupon linked to the yield on three-month GKOs. In December 1996, an OFZ with a six-month maturity was introduced. A system of primary dealers was established (there are now 65). In the recent past, nonresidents have accounted for an increased proportion of purchases of new GKO issues.



Secondary market: a computer-based market administered by Moscow Interbank Currency Exchange (MICEX) is rapidly growing; treasury bills are traded four times a week in two-hour trading sessions among approximately 200 dealers; trading is on order-matching basis; all bills are held in electronic book-entry form at MICEX, where regional trading began in 1996, with banks outside Moscow having on -line access. With the exception of the primary dealers, who are allowed to take short cash positions, trades have to be prefunded.
Deposit and lending rates of commercial banks are market-determined.



The refinance rate is set in relation to the interbank rate. It is used only to set the overdraft facility rate.



The repo rate is the rate at which primary dealers borrow from the central bank to cover overnight shortfalls related to securities trading; sets a floor on GKO yields.



The Lombard rate on 7-, 14-, and 28-day collateralized credit is currently below market rates.



Yields on treasury bills are market-determined, although the Ministry of Finance and the central bank sometimes intervene to smooth market fluctuations.
TajikistanThe interbank money market is still at an embryonic stage of development. An interbank credit auction market was established in May 1995 to facilitate interbank transactions. Market auctions came to a halt in August 1995, but preparations are being made to reestablish them. No interbank credit auctions have taken place.There are plans to introduce government securities in 1997.Deposit and lending rates of commercial banks are market-determined (the 10 percent maximum margin between banks’ lending rates and cost of funds was eliminated in 1995). Interest rates have turned positive in real terms.



The central bank sets the refinance rate on the basis of inflation.
TurkmenistanInterbank market: commercial banks are allowed to borrow and lend freely among themselves, with some activity emerging, although the market remains thin and transactions are irregular. Interbank loans are fully collateralized. Lack of settlement balance account information has hampered market development.Primary market for treasury bills: very small amounts have been issued since July 1994 at fixed interest rates, with the rate varying on each issue; nonnegotiable; maturity is three months; issued in book-entry form; bought by commercial banks; the Ministry of Economy and Finance has acted independently from the Central Bank of Turkmenistan when issuing the treasury bills.



The secondary market is virtually nonexistent.
Deposit and lending rates of commercial banks are market-determined. Market rates are negative in real terms. A ceiling of 15 percent on commercial bank loans to state enterprises was eliminated in late 1995.



The refinance rate since 1996 is set in the central bank credit auctions and has remained positive in real terms.



Directed credit: although in principle discontinued, a significant volume of directed credits was issued in December 1996; interest rates on directed credits are set by presidential decree.
UkraineThe interbank money market is active, although during 1996 the authorities intervened in order to direct lending to commercial banks with liquidity problems.Primary market for treasury bills: regular weekly multiple-price auctions continued in 1996, with 3-, 6-, 9-, and 12-month bills offered regularly. The Ministry of Finance decides on timing, amount, and cut-off price after consultation with the National Bank of Ukraine, which is agent of the government for auctions. The amounts of bills of each maturity to be offered for sale have been announced approximately one week in advance since January 1997. Significant nonresident purchases of treasury bills began in late 1996, with Ukrainian banks acting as agents for nonresident purchasers as required under law.



The secondary market for treasury bills remains very thin. The central bank registers all secondary market transactions.
Deposit and lending rates of commercial banks are market-determined. The required link between lending rates and the refinance rate, which was introduced by the central bank in 1995, was abolished in late 1996.



The refinance rate is set by the central bank and adjusted in line with inflation developments—normally positive in real terms.
UzbekistanInterbank market: commercial banks are allowed to borrow and lend at credit auctions, but most credit is provided by the Central Bank of Uzbekistan.Primary market for treasury bills: the first issue of treasury bills occurred in March 1996, and the market is developing well. The outstanding stock as of end-November 1996 was 5.3 billion sum (approximately I percent of GDP). Maturity is three months.



The secondary market is virtually nonexistent.
Deposit and lending rates of commercial banks are market-determined.



The refinance rate is adjusted in line with inflation and market developments.
Sources: Central banks; and IMF staff.
Sources: Central banks; and IMF staff.
Table A3.Instruments and Operating Arrangements
Reserve RequirementsStanding and Non-Market-Based Discretionary FacilitiesMarket OperationsOther Instruments
InstrumentsOperating procedures
ArmeniaDifferentiated reserve requirements by maturity were introduced in May 1996:3 percent for all deposits of individual persons; 5 percent for deposits of legal entities with maturity of 31 days to I year; and 15 percent for deposits under I month, as well as deposits of nonresident banks and long-term obligations of banks. Banks are allowed to choose which currency they will use to meet the requirement on deposits denominated in foreign currency. Reserve balances are averaged over a two-week period.



A decree was passed in early January 1997 introducing 8 percent uniform reserve requirements from August 1997. From June 1997, cash in banks’ vaults will be excluded from the reserve requirement calculation.
Overdraft facility: credit provided at a penalty rate (1.3 times the refinance rate). Recent changes now require that these be collateralized and used only once a month, for a maximum period of seven days, and within defined limits.



Directed credit was abolished in early 1995.
Credit auction: started in January 1996. Only collateralized credit auctions remain; treasuryor central bank bills are accepted as collateral (privatization vouchers are not accepted because their price is not stable).



Central bank auctioned deposits: Central Bank of Armenia deposits, a which initially had 14- and 28-day terms, introduced in September 1996. Auctions were of minor importance until December, but since then larger amounts have been sold.



Repos and reverse repos: these instruments were introduced on a small scale in March 1996.
Collateralized credit auction: a uniform-price auction is held daily with 7-,14-, and 28-day maturities.



The credit obtained through the auction can be rolled over only three times.



The central bank initially capped interest rates in auctions at well below treasury bill rates, but in December 1996 it allowed auction rates to rise substantially.
Central bank foreign exchange operations: interventions mainly now in the interbank market. In some months of 1996, the central bank used foreign currency sales as its main domestic monetary policy instrument. But from late 1996, intervention was reduced as the exchange rate was allowed to float more freely.
AzerbaijanReserve requirements were unified 12 percent in February 1997. Banks may choose whether to hold foreign currency reserves in foreign or domestic currency; most banks choose foreign currency. Reserves were calculated on the basis of daily average deposit balances. here was no averaging of reserve holdings.Overdraft facility: in late 1994, all automatic overdraft facilities were abolished.



There is no formal lender-of-last-resort facility. The central bank has provided such credit on an ad hoc basis to state-owned banks. In principle, all banks seeking credit have to bid at the credit auctions. The only exception appears to be the Agricultural Bank, which receives direct credits from the central bank for crop financing.
(Interbank) credit auction: the open outcry method is used in credit auctions; auctions are conducted at Baku Interbank Currency Exchange (BICEX). Only banks that meet prudential regulations are allowed to participate. Insufficient transparency of auction procedures has hampered development; auctions are generally poorly publicized and admission criteria have sometimes been applied discretionally.



As of end-March 1997, all refinance credit is to be allocated through the credit auctions, whose frequency was increased to at least twice a month as of April I, 1997.



The number of monetary policy instruments available to the central bank has remained limited. During 1995 and 1996, direct instruments of monetary control, such as directed credit allocations to commercial banks, still played a significant role in the conduct of monetary policy. However, the new central bank law has greatly increased the bank’s autonomy for carrying out monetary policy.
(Interbank) credit auction: the supply of credit is adjusted dynamically as the auction proceeds, but amounts sold are usually consistent with central bank’s credit policies; in principle, held monthly with maturities varying from 3 to 180 days, although, in practice, mostly 180-day credits have been auctioned.Foreign exchange sales at the BICEX are also used as a monetary instrument.
BelarusDifferentiated ratios ranging from 5 percent to 15 percent apply to domestic- and foreign-currencydenominated bank deposits, which have all been held in domestic currency since September 1996. There is no averaging of reserves. Banks may meet up to 10 percent of the requirement by holding treasury bills.



Compliance with reserve requirements improved in 1996.
Directed credit increased significantly in 1996 to 88 percent of total National Bank of Belarus credit. A subsidized rate below the central bank refinance rate applies.



Overdraft facility: penalty rate of three times the refinance rate (for overdrafts maintained between four to seven days). The central bank can suspend operations on the correspondent account of banks failing to repay within two days after the credit becomes due. The central bank does not impose a penalty when overdrafts occur for reasons beyond the control of the bank.
Credit auction: this auction resumed in August 1994 after having been suspended in December 1993.



Centrai bank bill auction: the bank has auctioned its bills since June 1995.



Secondary market for treasury bills: the central bank has purchased and sold treasury bills in growing amounts.
Credit auctions: the central bank conducts auctions as needed. There were few auctions in 1996 due to the emphasis on directed credit.



Banks trade credit in the interbank market on a daily basis.
The central bank’s foreign exchange operations are not regularly used as a monetary instrument.
EstoniaThere is a uniform reserve ratio of 10 percent on domestic and foreign currency deposits, nonresident deposits (but excluding credit from foreign banks), and securities (but excluding subordinated debt). As of July 1997, it will also cover the net borrowing of Estonian banks abroad. Eligible assets include deposits at the Bank of Estonia and vault cash (cash can be no more than 40 percent of required reserves, 30 percent as of July 1997). Reserves on foreign currency deposits are to be maintained in domestic currency. There is a four-week maintenance period, and reserves are based on the average of deposit liabilities at the end of the preceding month, and on the 10th and 20th of the month. Reserve holdings are averaged, with a penalty rate of 15 percent a year on the deficiency. Banks must keep at least 20 percent of required reserve balance daily or be subject to penalty. Only excess reserves are remunerated.The extension of central bank credit to commercial banks is limited to a portion of the amount of foreign exchange reserves in excess of those needed to provide full backing of base money. In this context, the Bank of Estonia has provided emergency credit to commercial banks.Certificates of deposit are issued for market development, rather than monetary management, through monthly auctions with sealed bids. Interest rate commission sets upper and lower bounds on accepted bids and decides on volume offered, which is small. December 1996 and January 1997 auctions failed because of lack of interest on the part of the banks.



A secondary market for CDs exists through electronic trading on the central bank depository system, with same-day settlement The central bank stands ready to enter into repos of CDs.
Currency board procedures are in use.
GeorgiaUniform reserve ratio was reduced to 15 percent from 18 percent at end September 1996. Virtually full compliance in 1996; foreign currency reserves being held in domestic currency. Reserves are not averaged, but may be used to collateralize borrowing at the auction. Reserves are unremunerated.Overdraft facility: as of September 1994, banks’ automatic access to overdrafts was eliminated.



Directed credit has been eliminated and the volume of refinance credit has been reduced.



There is no lender-of-last-resort facility at the present time.
(Interbank) credit auction: open outcry method used; National Bank of Georgia can exclude banks not in compliance with prudential regulations. Up to 90 percent of a bank’s reserve requirement may be used to collateralize borrowing at the auction (an increase from 75 percent in June 1996); the scale of operations, while small, is increasing.



Primary market: issues of treasury bills were initiated in August 1997.
(Interbank) credit auction: multiple maturities; central bank intervention designed mainly to foster the development of the interbank market rather than to attain monetary policy objectives, but the central bank has borrowed in the market to manage liquidity.Since December 1994, the central bank has used foreign exchange operations to moderate the monetary impact of its lending to the government.
KazakhstanThe uniform ratio on domestic and foreign exchange deposits was reduced from 20 percent to 15 percent effective May 1, 1996. The portion due on foreign currency deposits may be held in foreign currency. Reserve holdings are averaged. Remuneration on required reserves was, as of July I, 1996, increased from 25 percent to 50 percent of the National Bank of Kazakhstan refinance rate for deposits in tenge and of the average monthly London interbank bid rate for deposits denominated in foreign currency. Eligible assets for required reserves include vault cash, which is not remunerated.A Lombard facility was introduced September 1995 with treasury bills as collateral. The interest rate is set within a lower limit of 1.2 times the refinance rate and an upper limit of the maximum interest bid in the regular central bank credit auction for three months of credit. The maturity of the loan must be seven to eight days.



The Lombard facility has been little used since banks in distress have received ad hoc liquidity support outside this facility.
Centralized credit auctions were significantly reduced in 1996. (The only auctions were held in January, April, July, September, and December. The auctions in April and December were for agricultural credit only.) The regional credit auctions, introduced in June 1994, were phased out by January 1996.



Central bank securities, which were first introduced in June-August 1995, were used on an ad hoc basis in 1996 to absorb liquidity.



The primary market for treasury bills is not used for monetary management.



The secondary market for treasury bills has recently developed, with the central bank increasingly playing an active role, including through repos and reverse repos.
The Technical Committee of Monetary and Exchange Rate Policy meets every Friday morning to discuss recent developments. It makes recommendations for the coming week, which are presented to management Friday afternoon. Management then issues guidelines for the use of various instruments. The guidelines can be amended during the week as necessary.The central bank’s operations in foreign exchange and precious metals have on a few occasions been used as monetary instruments.
Kyrgyz RepublicThe uniform ratio rate was increased to 15 percent in December 1996, then increased to 20 percent on January I, 1997. This rate applies to banks’ domestic- and foreign currency-denominated deposit liabilities. The reserve requirement must be held in domestic currency, and since March 1995 banks have been able to use vault cash to meet the requirement, which is based on the monthly average of bank deposits with monthly maintenance period. Remuneration is based on the credit auction rate. Penalties apply in case of noncompliance, which during 1996 was uneven; a bank that kept treasury bills, instead of selling them to meet its requirement, was not effectively penalized, given current penalty and interest rates.The Lombard facility was redesigned n mid-1996 so that the collateral requirement is now 100 percent, up from 50 percent. Collateral can be in the form of three-month treasury bills, foreign exchange, or precious metals. Maturity of credit is from I to 14 days. Interest rates are 5–12 percentage points above treasury bill rate, based on the accompanying collateral. Usage has been steady, albeit by a limited number of banks, mainly because of a lack of collateral.



An emergency credit facility for problem banks was introduced in November 1994. The board of the National Bank of the Kyrgyz Republic decides on each credit granted or prolonged. The maturity cannot exceed six months but can be rolled over. Initially, the interest rate was well above the credit auction rate. Currently, the applicable interest rate is 80 percent of the most recent credit auction rate.
Credit auctions: in April 1995, required collateral (treasury bills or foreign exchange) was decreased from 70 percent to 50 percent of amount borrowed; in 1996 it was increased to 100 percent. Because of limited participation in credit auctions, the interest rate is not representative. Credit auctions seldom take place owing to low demand. They will be phased out during 1997 and be replaced by repo auctions.



Primary market for treasury bills: until late 1994, treasury bills served purely for monetary purposes. Now, auction volume and timing are determined by the Ministry of Finance based on recommendations by the central bank.



Secondary market for treasury bills: this market is not used by the central bank for liquidity management.
Credit auctions: since July 1994, multiple-rate auctions have been held. Weekly auctions have been held for three-month credit.The central bank’s foreign exchange operations: weekly auctions are held. Foreign exchange operations are partly used as a monetary instrument.
LatviaSince July 1993, a uniform reserve ratio of 8 percent applies to banks’ domestic- and foreign-currency-denominated deposit liabilities of the preceding month, measured as of balances on the 23 rd and last days of the preceding month, and the 7th and 15th of the current month. Since September 1994, banks have been allowed to hold a maximum of 50 percent of their required reserves in vault cash. The remainder is held in non-interest-earning deposits with averaging of reserves. All the reserves are held in domestic currency. In case of noncompliance, banks pay a penalty of two times the refinance rate for the deficiency.The Lombard facility requires treasury bills as collateral. Rates on this facility are set at margins above the refinance rate as follows: 1 percent for 1 - to 10-day loans, 2 percent for 11 - to 20-day loans, and 3 percent for 21 days or more. Notification to draw on this facility has to be made before noon at the latest on the day of the drawing. In practice, demand for Bank of Latvia credit was very low in 1996. Most central bank credit is now in the form of repos, as rates on such credits are guided by treasury bill rates, while the Lombard rate has been higher than treasury bill rates.



An automatic Lombard (overdraft)facility was introduced in 1995 to help banks cover end-of-day clearing imbalances, for which treasury bills are required as collateral. Credit is extended on an overnight basis to banks that have signed collateral agreements. Banks are allowed to borrow up to 80 percent of the value of the collateral. The interest rate is I percent above the refinance rate.



An automatic deposit facility was introduced in 1995 (one-month deposits at the central bank at a fixed rate).



Reverse repos were introduced in May 1996. Commercial banks can offer to buy treasury bills for up to two weeks at the central bank secondary market rates. There has been little use of this instrument to date.



The extraordinary financing facility for banks in serious difficulties was introduced in 1995.
Repo auctions replaced short-term credit auctions in 1995.



The treasury bill secondary window was established in 1994. The central bank used to quote bid and offer rates based on outcome of previous auctions. In April 1997, the central bank introduced secondary market tenders for treasury bills.
Repo auctions are held every day, offering one-month financing except on one day a week when one-week financing is offered.



The treasury bill secondary window: ceiling applies to the maximum amount of central bank purchases.
The central bank’s foreign exchange operations have been the main monetary policy instrument since February 1994, with the objective of maintaining the exchange rate at its peg to the SDR.
LithuaniaThe uniform reserve ratio of 10 percent applies to commercial banks’ domestic and foreign currency deposit liabilities of the preceding month. Reserves can be me t only by deposits with the central bank; averaging of reserves is allowed for deposits in litas, but not for foreign currency. In case of noncompliance, banks pay a penalty rate of two times the previous month’s interbank rate for shortfalls of up to 20 percent of the required reserves; for shortfalls in excess of 20 percent, the fine is three times the interbank rate.



In March 1996, the Bank of Lithuania suspended the penalties for reserve shortfalls, and in May 1996 reduced the reserve requirement ratio from 10 percent to 5 percent in response to the liquidity crisis. The authorities are attempting to restore the level of bank reserves gradually and have reintroduced penalties for reserve shortfalls since June 1996. The statutory reserves will be raised I percentage point each quarter, starting in September 1996, until the ratio is restored to 10 percent. It currently stands at 9 percent.
Extension of central bank credit to commercial banks is limited to the amount of foreign exchange reserves in excess of those needed to provide full backing of base money. In this context, the central bank has provided emergency credit to commercial banks on a very limited scale.Repurchase operations in treasury bills were introduced by the central bank in the second quarter of 1997.Currency board procedures are in use.
MoldovaA uniform reserve ratio has been in force since December 1994. In late 1995, the ratio was lowered from 12 percent to 8 percent. The ratio applies to commercial bank domestic currency deposits where deposits are averaged over the reserve maintenance period. Required reserves above 5 percent are remunerated at a rate equal to the inflation rate; and banks meet the reserve requirement on average. Foreign currency deposits are also subject to an 8 percent reserve ratio, but this may be satisfied by holding deposits abroad. As of April I, 1997, vault cash was made eligible as a reserve asset, and reserves for foreign currency deposits have to be maintained in domestic currency.Lombard facility: introduced in April 1996; at the credit auction rate plus 45,50, and 55 basis points, in the first, second, and third months of a quarter, respectively. Because the interest rate has been set at a highly punitive level, banks rarely request liquidity under this facility.



Lombard operations have been structured in the form of repos of government securities because they give the National Bank of Moldova clearer title to the collateral in the event of a bank default.
Credit auctions: in April 1996, the share of auctioned credit in the central bank’s total credit outstanding to banks was only 40 percent. The list of banks eligible to participate in the auction was changed frequently. In November 1996, all remaining restrictions on the access to credit auctions were eliminated, and access to auctions was limited only for prudential reasons or lack of collateral. As of mid-1997, the central bank began to accept bills of exchange as collateral.



Open market operations: these operations began in early 1997 and operate on a regular schedule; they are expected to completely replace credit auctions by end-1998. Insufficient volume of outstanding treasury bills with banks has so far prevented the use of this instrument for increasing liquidity.
Credit auctions: single-price auctions are held with no minimum rate. Auctions are conducted on a fixed schedule twice a month; the maturity of auctioned credit will be gradually shortened to 30 days.
RussiaOn November 1, 1996, reserve requirements were reduced from 18 percent to 16 percent (14 percent) on ruble deposits of less than 30 days; from 14 percent to 13 percent (11 percent) on ruble deposits of 30–90 days; and to 10 percent (8 percent) on ruble deposits of more than 90 days. Furthermore, reserve requirements on foreign currency deposits were increased from 2.5 percent to 5 percent (6 percent). For greater uniformity, Sberbank is now subject to 10 percent reserve requirements on household deposits and has established the same reserve requirement for non-household deposits and foreign currency deposits as other banks. (Requirements as of May I, 1997 are shown in parentheses.)



Reserve compliance has improved, arising from regulations allowing the Central Bank of Russia to unilaterally transfer balances from correspondent to reserve accounts for delinquent banks. Reserve averaging is allowed, but is very restrictive, with a prescribed floor of 95 percent but only from day 5 and 25 of each month. The reserves are unremunerated.
Directed credit: the central bank is no longer providing directed credit.



Overdraft (overnight) facility: credit is provided at a penalty rate of 1.3 times the refinance rate. The facility is uncollateralized and is provided for payment system support of selected banks.



Lombard facility: the central bank introduced a Lombard facility in 1996. The facility provides 7-, 14-, and 28-day credit, on the basis of predeposited collateral. The interest rate is below the market rate.
Credit auctions: held since February 1994, but participation in the auction has declined since March 1995, and the central bank has not provided credit through this source since September 1996.



Deposit auction: introduced in 1995 and used on an ad hoc basis, but mostly at the end of the month. The deposit auction is sometimes held on an auction basis, other times by invitation.



Primary market for treasury bills: the central bank manages auctions of treasury bills.



Secondary market for treasury bills: the central bank actively intervenes, buying and selling treasury bills to manage yields.
Credit auctions: multipleprice auction method is used with a floor price equal to the central bank refinance rate.



Primary market for treasury bills: not used for monetary management.



Secondary market for treasury bills: the central bank purchases treasury bills through the computer based secondary market at MICEX.
Foreign exchange operations: purchases used to provide liquidity to the market on occasion, but primarily for exchange rate management purposes.
TajikistanIn November 1995, reserve requirements on domestic currency deposits were unified at 20 percent, regardless of maturity. Deposits held on foreign currency are subject to 2 percent reserve requirement, which is held in domestic currency. Penalty for noncompliance is 5 percent of the amount of the shortfall.



As of January 1997, uniform 20 percent ratio for all deposits.
Directed credit: the National Bank of Tajikistan operates a standing refinance window. The maturity of refinance credit varies according to type of project and can be as long as two years. The central bank charges the refinance rate. Penalty for overdue loans is five times the refinance rate. Directed credit is uncollateralized.There are no market-based monetary instruments and no plans to introduce credit auctions.Limits on cash withdrawals for households were phased out in July 1995 and reintroduced in August 1995 for fear of inflationary implications of credit expansion.



Bank-by-bank credit ceilings are the main monetary instrument.



The central bank’s foreign exchange operations have been used for short-term liquidity management during the last few months.
TurkmenistanSince January 1996, the uniform reserve ratio on all deposit liabilities including foreign currency deposits (with the latter exempted in the case of one bank) has been 11 percent; there is a weekly maintenance period. Reserves must be held at the central bank. The penalty rate is 0.2 percent of the shortfall daily.Central bank credit: in 1996, the central bank provided refinance credit to commercial banks at the refinance rate. In addition, directed credits were issued by presidential decree at rates below the Central Bank of Turkmenistan refinance rate to selected industries and agriculture.



I n 1996, the central bank introduced an auxiliary credit facility to provide banks with short-term credits at a penalty rate that is linked to the central bank refinance interest rate so that overdrafts can be avoided. These credits are for a maximum of seven days only.
Credit auction: in 1996, the central bank conducted regular auctions to determine the refinance interest rate, which remained stable until end-1996, when it declined in line with lower inflation.The auction format varies, but the multiple-price auction is commonly used.Foreign exchange auctions are conducted as weekly auctions, but are not used for monetary policy purposes.
UkraineDifferentiated ratios: since January I, 1996, the ratio of 15 percent has applied to all domestic currency deposits and foreign currency time deposits. The ratio of 7.5 percent has applied to all household deposits at the savings bank. Since March I, 1996, the ratio of 2 percent has applied to foreign currency demand deposits. The requirement held in domestic currency is based on contemporaneous reserve accounting, averaged over each 10-day period. The penalty rate is twice the refinance rate in case of shortfalls. All reserves are unremunerated.



From April 1, 1997, a uniform rate of 11 percent to be applied to all domestic and foreign currency deposits. Up to 10 percent of vault cash can be used to cover the requirement.
A Lombard facility was introduced in December 1995. It currently provides 10-day advances against treasury bills—the only collateral accepted. The facility provides an interest rate above the refinance rate or the current rate for the securities. There are no quotas, but access is limited to banks with no overdue debt to the National Bank of Ukraine and complying with its regulations.Targeted credit auctions were phased out in 1996; authorities reported no directed credit operations during the year.



General credit auctions were held in 1996. The collateral required for all auctions can be in the form of treasury bills and municipal securities.



Repos between central bank and commercial banks are increasingly used to manage banking system liquidity.
General credit auctions are held as multiple-price auctions with a minimum interest rate (refinance rate).The central bank’s foreign exchange operations were conducted on both auction market and interbank foreign exchange market.
UzbekistanThe reserve ratio on sum deposits decreased from 30 percent to 25 percent effective June 1996. At the same time, the regulations changed to allow vault cash to count toward fulfilling the requirement. No reserve requirement is imposed on foreign currency deposits. Reserves are unremunerated, and there is no averaging.Directed credit: the Central Bank of Uzbekistan has not extended credit to banks at posted rates since the second quarter of 1995. Directed credit is now being provided through the budget.



The central bank stands ready to repurchase its certificates of deposit after they have run for at least two weeks, at a rate to be determined on a case-by-case basis
The (interbank) credit auction uses an open outcry method. Banks must comply with prudential regulations and norms to participate in these auctions. Credits are uncollateralized. The scale of operations is growing, with the central bank providing most of the funds.



Certificate of deposit auctions: the central bank decides what the cut-off rate and volumes will be.



Primary market for treasury bills: the amounts auctioned are determined largely by the Ministry of Finance. The central bank is contemplating a move to engage in open market operations in the secondary market.
The central bank mainly injects liquidity into the auction market. March 1996 was the last time such borrowing occurred. Daily auctions are held.



The primary market for treasury bills is not used actively for monetary management because the Ministry of Finance determines volumes.
Limits on cash withdrawals have been put in place.



Foreign exchange purchases are used to provide liquidity to the market.
Sources: Central banks; and IMF staff.
Sources: Central banks; and IMF staff.
Table A4.Developments in the Foreign Exchange Area
Exchange Rate Arrangements and PolicyMarket StructureRegulatory FrameworkCentral Bank Operations
ArmeniaArrangement: independently floating.



Outcome: the dram was stable in the first three quarters of 1996, despite the authorities’ announcement in March 1996 to move to a more flexible arrangement from the de facto fixed exchange rate regime that had been in effect since end-1994. The dram depreciated markedly in the last quarter as a result of a sharp increase in credit to the government and the effective start of a hands-off approach by the National Bank of Armenia in the foreign exchange market.



Gross reserves fell in the second and third quarters of 1996, but recovered in the last quarter to the equivalent of 2.3 months of imports, from 1.7 months at end-1995.
The exchange rate is unified, with a spread between official and market rates of less than I percent. The official rate is set daily, based on the previous day’s auction, foreign exchange bureau, and interbank rates. The role of foreign exchange auctions fell sharply; instead, deals among dealers, banks, and the central bank were made continuously through a computer network; daily auctions were held in the main stock exchange.



Interbank trading: major progress was made. The central bank has now withdrawn entirely from auctions (except relatively minor transactions) and operates instead in the interbank market.



Foreign exchange bureaus now have brokerage activities, and the requirement for bank affiliation was lifted.
Authorities intend to accept Article VIII status in early 1997. The current account s practically free of restrictions. The recent exchange rate guarantees provided on large nonresident treasury bill purchases have apparently been curtailed.



There is no surrender requirement, although there is a repatriation requirement.



There are practically no capital restrictions, but authorities wish to retain the power to impose them.



The open position limit is 40 percent, high in relation to international standards, and is applied only to long positions.
Foreign exchange intervention was made through the auction system until recently, but now is done through the interbank market and is coordinated with monetary policy.



Reserve management is well advanced. A broad set of investment guidelines has been established but will be revised. Average maturity is up to three months in high-quality institutions. Derivatives are prohibited. The Investment Committee reviews decisions fortnightly with daily and weekly reports;



The Foreign Exchange Department is well organized in its internal control and administration, but it needs better reporting and coordination between back and front offices.
AzerbaijanArrangement: independently floating.



Outcome: the exchange rate of the manat gradually appreciated during 1996. Azerbaijan National Bank maintained its foreign exchange sales in the market broadly consistent with the targeted growth of base money.



Gross reserves(including foreign currency-denominated deposits with the International Bank) increased from an estimated three months of imports to three and a half months of imports in 1996.
The exchange rate was unified with the official/cash buying rate spread in the 1—4 percent range during most of 1996. The official exchange rate is set by foreign exchange auctions in the Baku Interbank Currency Exchange (BICEX). The frequency of auctions was raised to five times a week in November 1996.



Interbank market: the prohibition on off auction interbank trading was lifted in September 1997.



Cash exchange takes place through licensed foreign exchange bureaus, provided the selling rate does not exceed 5 percent of the official rate. Half of bureaus were not functioning as of mid-1996. Licenses to operate must be renewed annually.
Authorities intend to move to Article VIII status and to eliminate remaining restrictions.



There is no surrender requirement. The repatriation requirement to sell export proceeds at the BICEX was abolished in June 1996 for enterprises that remain current in tax payments.



The restrictions on capital transactions seem enforced with a high degree of compliance.



Open position limits changed to 20 percent/5 percent and 30 percent/10 percent for hard/soft individual, and hard/soft aggregate currency positions, respectively, at end-1996.
Foreign exchange intervention Occurs solely through the auction system, used to smooth exchange rate movements, and is coordinated with monetary policy.



Reserve management: the central bank is responsible for managing foreign exchange and gold reserves. Reserves are to be gradually transferred from the International Bank by September 1997; the central bank board has not yet formulated an official reserve management policy. The current practice is to keep virtually all reserves in U. S. dollar deposits in some of the world’s largest banks and a few central banks.
BelarusArrangement: other managed floating.



Outcome: the exchange rate depreciated significantly during 1996. Until April, it was fixed at Rbl 11,500 by heavy intervention in auctions and through foreign exchange restrictions, despite stated policy of flexibility in an exchange rate band (of Rbl 11,300–13,100) in the first half of 1996.



In April-June 1996, the National Bank of Belarus allowed the rate to depreciate (banks were instructed not to let cash rates exceed band limits) after a sharp reserve loss (to less than three weeks of imports) and widening cash-noncash premium. By end-June 1996, the central bank announced it would set exchange rates based on supply and demand, but in practice continued to intervene and screen foreign exchange access.



Gross reserves were less than one month of imports in 1996.



In January 1997, band limits changed (to Rbl 15,500–21,000), and in February 1997 it was announced that the national bank would set daily rates on the basis of supply and demand.
From late 1995, exchange restrictions were imposed: tax on repatriation of nonresident profits; 10 percent fee on foreign exchange purchases for certain import transactions (January-July 1996); and allocation of foreign exchange to purchase bids offering least depreciated rates. Cash-noncash spread rose to 30 percent.



The exchange rate is determined in daily auctions at Minsk Interbank Currency Exchange, which dominates foreign exchange trading.



The interbank market was effectively closed in late 1995 with the introduction of $ 1,000 limit on transactions (which was eliminated in January 1997).



Foreign exchange bureaus serve as a channel for retail transactions, but by mid-April 1996, bureaus were only open sporadically. A curb market emerged with rates 25–30 percent above the auction rate at end-April and above 30 percent by end-1996.
Belarus does not have Article VIII status Several restrictions were imposed since late 1995; while some were eliminated during 1996, several important ones remain. New arrears have accumulated.



Surrender requirements of 100 percent to sell export proceeds at auction were reimposed in early 1996. The requirements were reduced to 50 percent in July 1996, while the period to comply with the surrender requirement was shortened.



There is a repatriation requirement



Capital account flows are strictly regulated by the central bank.



There are open position limits for banks, but these apply only to the net of short-long positions.



The Minsk Interbank Currency Exchange, previously owned by the central bank and commercial banks, was nationalized and put under direct control of the central bank in April 1996; screening of bids intensified.
Foreign exchange intervention has been solely through the auction system.



Reserve management is centralized the central bank, which continues to deposit part of its foreign exchange reserves in domestic banks. Satisfactory guidelines with respect to currency distribution, acceptable instruments, and limits have been established, but further improvements are needed for risk diversification.



Internal control and administration: technical conditions for foreign exchange trading have been met, and an operational division between trading and settlement has been put in place, but clearer separation of responsibilities and greater efficiency are needed.
EstoniaArrangement: the kroon is pegged to the deutsche mark.



Outcome: the currency board arrangement has been successfully maintained, and the exchange rate is DM 8. Foreign exchange reserves increased from $583 million at end 1995 to $640 million at end-1996.



Gross reserves were at 2.4 months of imports.
The exchange rate was unified under the currency board arrangement.



Transactions in convertible currencies are freely handled by commercial banks, which can quote their own exchange rates.
Accepted Article VIII status in August 1994.



There is full convertibility for all current and virtually all international capital account transactions. There are no controls on inward or outward capital transfers.



There are no repatriation or surrender requirements.



Open foreign currency position limits: limit is set at 2 percent of own funds; additional capital cover is required for the excess over 2 percent (8 percent of excess). In 1995, enforcement of exposure guidelines appeared lax. The Bank of Estonia Banking Supervision Department enhanced the monitoring of open foreign exchange positions in mid-1996 as follows. Open positions of foreign currencies and bullion are not directly limited, except for Zone B countries, which consist of countries that are not members of the OECD or that have not concluded special loan agreements within the IMF’s General Arrangements to Borrow. For Zone B countries, the open position is limited to 5 percent of own funds, except for Latvian lats and Lithuanian litas, for which it is 10 percent.
Foreign exchange intervention was coordinated with monetary policy according to the currency board arrangement.



Reserve management: the central bank has a reserve cover in deutsche mark exceeding 130 percent. It previously undertook forward transactions, but these have now ceased. The central bank needs some further guidelines for reserve management.
GeorgiaArrangement: other managed floating.



Outcome: the lari was largely stable against the dollar during 1996, with a slight depreciation at the end of the year. The National Bank of Georgia has intervened in the foreign exchange market to smooth out fluctuations.



Gross reserves are estimated to have fallen to 2.5 months of imports in 1996 from 2.7 months of imports in 1995.
The exchange rate is unified, with the official rate set daily on the basis of the auction rate. The auction-street premium is less than I percent.



Foreign exchange auctions are well established, moving to daily frequency in January 1997. Turnover increased from $ 16 million a month at end-1995 to $20 million in late 1996.



The interbank market was relatively small (turnover 16 percent of total transactions), but is emerging in part owing to growing confidence among certified banks. Banks with good financial standing conduct half of their transactions in this market, which is cheaper than the Tbilisi Interbank Currency Exchange (TICEX), where an official fee is applied.



Foreign exchange bureaus have been able to buy and sell cash since 1993.
Accepted Article VIII status (December 1996). The exchange system is free of restrictions on current and capital accounts. Inward and outward capital flows are not restricted, but are subject to a registration requirement for monitoring.



Surrender requirements on export proceeds (32 percent) were eliminated from January 1996.



Open position limits on banks, which amount to 10 percent for individual positions and 25 percent for aggregate positions, are not strictly enforced.
Foreign exchange intervention has been through auctions in TICEX and has been one of the main instruments of monetary policy and of exchange rate management, consistent with meeting reserve targets under the IMF program.



Reserve management: the central bank is well advanced in managing reserves and has established a reserve management committee. Investment is mainly in secure short-term deposits. Reserve management needs guidelines before implementing reserve diversification.



Internal control and administration: the central bank has set up a dealing room with Reuters. The back office is separately located and reports to the international department and vice president for foreign exchange operations.
KazakhstanArrangement: independently floating.



Outcome: the tenge depreciated marginally in the first half of 1996, with the National Bank of Kazakhstan intervening to smooth out exchange rate fluctuations. The tenge depreciated about 6 percent in the last quarter. Authorities have expressed a strong desire to move to a fixed-rate regime in the near future, but modalities have not yet been decided.



Gross reserves increased from about $ 1.66 billion (3.2 months of imports) in 1995 to $1.81 billion (3.0 months of imports) in third quarter of 1996.
The exchange rate is unified, with the official rate differing only slightly from the rate at foreign exchange bureaus. The buying-selling spread is also small.



The official exchange rate is set weekly by the Technical Committee for Monetary and Exchange Policy on the basis of the daily auction rate and interbank market rates.



interbank trading is developing well, with volumes exceeding the auction market (market share 65 percent of total turnover). A draft code of conduct for dealers is under discussion. There is no dealers’ association.



Foreign exchange bureau market is fairly significant, with more than 2,000 licensed foreign exchange bureaus.
Accepted Article VIII status (July 1996) following the removal of two remaining restrictions on current external payments and transfers.



There are no surrender requirements.



Repatriation requirements remain unless a special license is issued by the central bank and Ministry of Finance.



Foreign exchange transactions connected with the capital account require prior registration with the central bank.



Open position limits of 30 percent of capital for individual currencies and 50 percent for aggregate positions. Limits were not consistently observed New prudential regulations issued in 1996 under which foreign exchange positions are to be submitted daily.
Foreign exchange intervention has been mainly in the auction market. The central bank also intervenes in the interbank market, but less frequently, depending on exchange rate and timing. Foreign exchange intervention is mainly to smooth out short-term fluctuations in exchange rates rather than to manage liquidity.



Reserve management: the central bank is relatively advanced in managing precious metals and is developing a strategy and guidelines for other aspects of reserve management.



Internal control and administration were strengthened by a clear distinction between the back and front offices.
Kyrgyz RepublicArrangement: other managed floating.



Outcome: the som remained relatively stable in the first quarter of 1996 because the National Bank of the Kyrgyz Republic intervened in the foreign exchange market to keep the currency with in a relatively narrow range against the U. S. dollar. The som came under pressure in April and continued to depreciate sharply in September-December amid relaxation of credit policy, with the central bank deviating from a long-standing practice of keeping the som in a narrow range. The currency depreciated about 16 percent in 1996 as a whole.



Gross reserves were estimated at the equivalent of 2.0 months of imports at the end of 1996 (2.5 months in 1995 and 1.5 months of imports in April 1996).
The exchange rate is unified, with no significant spread between auction and street-cash rates. Official exchange rate determined in twice-weekly foreign exchange auctions at the central bank to channel funds to the interbank market. The central bank moved from one-way auctions to two-way auctions in the second half of 1996. Turnover at the auction fell from $139 million in 1995 to $97 million in 1996.



Interbank trading gained considerable strength during 1996 (29 percent of total turnover compared with 17 percent in 1995), but lack of trust among banks appears to inhibit further development.
Accepted Article VIII status in March 1995, with no arrears and full capital and current account convertibility.



There are no surrender or repatriation requirements.



Open position limits were introduced in 1993 (20 percent and 15 percent on aggregate and individual currency positions, respectively). Banking Supervision Department assumed the function of controlling open positions in March 1996.
Foreign exchange intervention is through auctions, mainly sale of donor funds. Foreign exchange intervention is used primarily to stabilize the exchange rate.



The central bank’s reserve management capability was strengthened by removal in late 1995 of the legal restriction on the sale of its gold holdings and of the obligation to buy domestic gold. An investment committee was established in 1995 and strengthened in late 1996. Efforts were made to computerize operations and to train staff.



Internal control and administration: administration has clear separation of back and front offices. A Reuters terminal and satellite phones have been acquired.
LatviaArrangement: other managed floating.



Outcome: there is a de facto peg of the lat to the SDR since February 1994 at a rate of SDR 1 = LVL 0.7997, and the authorities remained committed to the peg as a cornerstone of monetary policy. The lat has adjusted slightly against the U. S. dollar.



Gross reserves rose from 2.9 months of imports in 1995 to an estimated 3.0 months in 1996.
The exchange rate is unified. The Bank of Latvia reviews domestic and international exchange markets on a daily basis and announces daily buying and selling rates for the lat.



Interbank trading is developing, with trading among commercial banks taking place through a telephone system. There was an informal dealers’ committee in 1995. Settlement periods are generally in accordance with international practices.
Accepted Article VIII status in June 1994.



There are no surrender or repatriation requirements.



No exchange control regulations governing capital transactions.



Open position limits on banks are 10 percent of capital for each currency and 20 percent on aggregate.
Foreign exchange intervention is conducted in the interbank market.



Reserve management: the Foreign Exchange Department of the central bank is responsible for managing foreign exchange reserves. Reserve management is relatively advanced with an investment committee established, meeting weekly. There has been a gradual move to active management of reserves.



Internal control and administration has been strengthened with clearer distinction between front and back offices, settlement periods that meet international standards, and stronger market monitoring.
LithuaniaArrangement: pegged to the U. S. dollar.



Outcome: the litas has been stable against the dollar, reflecting the currency board arrangement (CBA) in which the litas has been fixed against the dollar at LTL 4 since April 1994. The CBA came under pressure at end-1995 and in early 1996 amid political uncertainty and a banking crisis.



Gross reserves fell to 3.3 months of imports, from 3.9 months in 1995. For 1996 as a whole, full coverage in gross terms was maintained, with reserves at 2.6 months of imports.



The government expressed plans in early 1997 to exit from the CBA to a conventional peg through a phased approach during 1997, but in March 1997 plans were postponed.
The exchange rate was unified under the CBA.



Banks authorized to trade in foreign exchange are allowed to transact among themselves, as well as with residents and nonresidents.
Accepted Article VIII status (May 1994). Full convertibility for all current and capital account transactions.



No repatriation or surrender requirements.



The ban on ownership of foreign land in Lithuania was lifted by a constitutional amendment on June 20, 1996, eliminating one of the last remaining restrictions on foreign investment.



The open position limits on banks were 30 percent on aggregate positions and 20 percent for individual currencies, except for the dollar, as of July 1996.
Foreign exchange intervention has been in accordance with the CBA, which also governs coordination with monetary policy.
MoldovaArrangement: independently floating.



Outcome: the exchange rate of the leu has been relatively stable against the U. S. dollar with a slight depreciation in the latter part of 1996.



Gross reserves remained stable at about 3.1 months of imports, with limited net intervention by the National Bank of Moldova.
The exchange rate was unified, with an insignificant spread between cash and noncash rates. The official exchange ratesi determined in daily fixing sessions of the Chisinau Interbank Foreign Currency Exchange auctions.



The interbank market has developed steadily and soundly (71 percent of total turnover). There is a code of conduct for dealers, but banks do no t always comply, particularly with respect to settlement dates.



Foreign exchange bureaus in the cash market are active and functioning well.
Accepted Artide VIII status (June 1995).



There are no surrender requirements on export proceeds.



Repatriation requirements remain.



Capital account remains restricted with license requirements from the central bank, although licenses are mostly granted.



Open position limits on banks were 25 percent on aggregate positions.
Foreign exchange intervention has been conducted mainly through auctions, and partly in the interbank market.



The Monetary and Foreign Exchange Committee meets at least weekly to determine a mix of monetary and foreign exchange operations that would best achieve the established targets.



Reserve management: the central bank is responsible for managing foreign exchange reserves. Investments are made properly with prudential rules fully respected. Traders need clear formulation of investment policy and strategy.



Internal control and administration: foreign exchange operations section properly structured with separate front, middle, and back offices. There are suitable equipment and a skilled staff. Reporting procedures are in place.
RussiaArrangement: other managed floating.



On July I, 1996, the Central Bank of Russia switched from the policy of allowing the ruble to move within an exchange band (of Rub 4,550-5,150) to a sliding band regime. The band would slide from Rub 5,000-5,600 to Rub 5,600-6,100 by year-end, with lower- and upper-band limits announced daily. In November 1996, the central bank announced its intention to keep the ruble within a sliding band of Rub 5,500-6,100 in January 1997 to Rub 5,750-6,350 at year-end; intervention margins are ±5 percent around the midpoint.



Outcome: the ruble depreciated by 17 percent in 1996.



Gross reserves fell from 2.5 months of imports in 1995 to 1.8 months in 1996.
Exchange rate is unified. Since May 17, 1996, daily official exchange rate is determined by the central bank in relation to bid-ask quotations from about 20 large banks in the interbank market, a change from an earlier system in which the central bank quoted an offered rate twice a week based on rates in daily fixing by the Moscow Interbank Currency Exchange (MICEX).



Interbank trading is active and has been further accelerated with dealings by phone, or through brokers or Reuters screens. Government tax imposed on net turnover at MICEX above commission led to further shift toward interbank market. Market share was about 80 percent at end-1996. Interbank trading in foreign exchange derivatives occurs only in Moscow.
Accepted Article VIII status (June 1996).



One remaining restriction resulting from inconvertibility of interest income on foreign holdings of public securities will be abolished by end-1997.



Surrender requirement: 50 percent of export proceeds must be sold through authorized banks



There is a repatriation requirement of 100 percent.



Capital restrictions are weakly enforced.



Open exposure limits on banks exist on daily flows and are not consistent with international practice. The central bank achieved some progress, however, in making such limits more effective.
Foreign exchange intervention has been conducted in both MICEX and interbank market to smooth out fluctuations in the exchange rate within the band.



Greater coordination with monetary policy is needed.



Reserve management: according to current law, the central bank is responsible for managing official reserves, while part of official reserves are managed by Ministry of Finance and part are deposited in former Soviet trade banks; authorities wish to centralize reserves at the central bank. Reserves held at the central bank are managed with clear separation of functions.
TajikistanArrangement: independently floating.



Outcome: the exchange rate depreciated by 11 percent in 1996, with the Tajik ruble fluctuating in a range of TR 275–300 per U. S. dollar.



Gross reserves remained at less than one week of imports.
The exchange rate is unified. Access to foreign exchange is through banks, retail bureaus, and the curb market for small transactions. The foreign exchange system is heavily segmented between cash and noncash transactions. Curb and Tajikistan Interbank Foreign Currency Exchange (TICEX) cash rates differed little. But both interbank and curb markets have large spreads for cash- noncash.



Official exchange rate is based on foreign exchange auctions in TIC EX. Auctions resumed in early 1996, but continued erratically with strict restrictions on access. On nonauction days, official rate is set at previous week’s average interbank rate.



Interbank trading is permitted but attracts limited interest. Problems include settlement delays, no code of conduct or dealers’ association, and poor reporting.
Tajikistan has not yet accepted Article VIII status, but exchange system is free of restrictions on current account transactions. Payment arrears exist.



A surrender requirement(30 percent) for all foreign currency receipts was abolished in February 1996 and replaced with a repatriation requirement.



There are some capital account restrictions.



Open position limits: no prudential regulations existed prior to late 1996, when the National Bank of Tajikistan adopted prudential limit regulations. Banks with a net foreign exchange position in excess of new prudential limits were not allowed to buy or sell in auctions.
Foreign exchange interventions have been mainly conducted through irregular foreign exchange auctions, and used as an instrument for monetary policy; however, they have been carried out on an ad hoc basis depending on foreign exchange availability and without a consistent liquidity management framework.



Reserve management: the national bank assumed full control of foreign exchange reserves. There is too much concentration in one currency and maturity.



Internal control and administration: there is no back office with proper facilities for confirmation. Also, there is no clear separation of responsibilities.
TurkmenistanArrangement: other managed floating.



Outcome: in January 1996, the manat was devalued against the U. S. dollar from manat 200 to manat 2,400, a rate equal to the interbank rate at end-1995. In February 1996, the official rate was revalued to manat 1,000 per U. S. dollar, but subsequently devalued in April to manat 3,000 in line with interbank rate. The official rate was kept roughly stable in the second half of 1996; a growing spread emerged with bank cash rate, which approximates the curb market rate.



Gross reserves have remained stable at about 10 months of imports since 1995.
Official exchange rate unified at the bank market rate on January 1, 1996, but a dual system was reintroduced in February until April.



Foreign exchange auctions were reintroduced on January 2, 1996 to be held twice a month. Since May 1996, the official rate is determined in weekly auctions. Auctions lack transparency.



Interbank trading has been allowed since end-1995, but has been subject to restrictions on the size of the transactions; the volume of trading remains thin.



Curb market rate spread over the official rate was at about 30 percent by end-1996.
Turkmenistan has not yet accepted Article VIII status. A number of exchange restrictions are maintained (prescreening of auction market bids by the Foreign Currency Committee, central bank practice of issuing indicative rates at auctions, restricted convertibility of nonresident manat proceeds into foreign currency). Relatively liberal foreign exchange laws not enforced in practice. Payment arrears and bilateral payment arrangements remain.



Surrender requirements remain: 70 percent for gas and oil exports and 50 percent for all others (30 percent to Foreign Exchange Reserve Fund and 20 percent to central bank for use in auctions).



Capital account restrictions are enforced.



No prudential position limits on banks and no reporting requirements at present.
Reserve management: the Central Bank of Turkmenistan does not have full control over official international reserves. A presidential decree on December 27, 1995 gave the responsibility of developing principles of foreign exchange management to the president. Investment of reserves has focused on one major Western bank.



Internal control and administration: back and front offices at the central bank are separated with SWIFT installed. But there is a lack of adequate reporting for foreign exchange transactions and prudential regulations for banks’ position taking, as well as deficiencies in payments and communications systems.
UkraineArrangement: other managed floating.



Outcome: the exchange rate was generally stable against the U. S. dollar within an informal band (of ±5 percent) until introduction of a new national currency, the hryvnia (to replace the karbovanets), from September 1996. Authorities adopted an official rate of HRV 1.76 per U. S. dollar, intervening to keep the rate unchanged during currency conversion, and subsequently announced an informal band of HRV 1.7–1.9.



In October 1996, the National Bank of Ukraine ceased its de facto fixing of the exchange rate, and let it move within the informal band. In mid- November the hryvnia depreciated, but by end-December was stable at HRV 1.89. Large reserves were lost after introduction of the new currency, but were recovered during a period of stable exchange rates.



Gross reserves were at 3.8 weeks of imports as of October 1996.
The exchange rate has been unified since October 1994, with the official exchange rate determined through competitive bidding of commercial banks at daily auctions of the national bank.



Interbank trading outside auctions has been permitted since early 1995, with foreign exchange transactions allowed to take place within a margin of ±5 percent around the auction rate. Turnover in the interbank market is expected to grow larger relative to the auction market.



The foreign exchange bureau market has been quite active; intermediaries have been required to maintain a maximum spread of 2.5 percent between buying and selling rates. A maximum spread of 10 percent was imposed between the official rate and the rates quoted in bureaus following the introduction of the hryvnia, leading to a closing of many such bureaus at that time.
In September 1996, the authorities informed the IMF of their decision to accept Article VIII status following removal of a set of restrictions (some following introduction of the hryvnia), while other restrictions remained.



Surrender requirements of 50 percent are to be abolished in 1997.



Repatriation requirements remain.



Authorities intend to gradually remove restrictions on capital transactions.



Open position limits on banks exist (10 percent for individual currencies, 20 percent for aggregate positions), but are not properly enforced.
Foreign exchange intervention takes place mainly in the auction market, with the goal of smoothing shortterm exchange rate fluctuations. Authorities announced in late 1996 that they would be prepared to sell foreign exchange in the market as necessary to contain base money, and in case of foreign exchange pressures they would be ready to tighten monetary policy.



Reserve management: work is under way to strengthen reserve management strategy by developing a benchmark portfolio.
UzbekistanArrangement: other managed floating.



Outcome: the exchange rate against the U. S. dollar moved within a relatively narrow band in the first four months of 1996, with official reserves remaining at a comfortable level. The exchange rate subsequently came under pressure in light of a deteriorating economic situation, and the Central Bank of Uzbekistan let the official rate depreciate by over 37 percent in the last quarter of the year.



Gross reserves fell to 4.5 months of imports at year-end from 6.2 months in 1995.
The exchange rate is not unified. There is a high degree of confusion and uncertainty in the foreign exchange market. Until January 1997, the foreign exchange market consisted of the auction market (dormant, nontransparent), the interbank market (undeveloped, small), the foreign exchange bureaus (small volumes of cash transactions with lack of arbitrage activity), and an illegal curb market. The official exchange rate was determined daily on the basis of central bank auction rates, with frequency of auctions raised from twice to thrice weekly in September.



The central bank tightened access to foreign exchange auctions on April I, 1996; the spread between buying-selling rates of foreign exchange bureaus is about 2.5 percent and the spread between noncash auction and cash bureau rates was as high as 21.5 percent, as of mid-1996. After limited liberalization measures, the latter spread fell to 7 percent in September.



Access to foreign exchange was tightened further in late 1996 as a result of increasing balance of payments pressures. In early 1997, a two-tier system was introduced: a market in which foreign exchange from government-controlled exports would be earmarked for developmental purposes, and another market organized by commercial banks to finance consumer imports. The spread between these two rates was not significant, but the curb rate continued to depreciate, with the spread between the official and the curb rate exceeding 100 percent in late 1996 and early 1997.



Buying-selling rates for cash transactions of foreign exchange bureaus were administratively set and were more depreciated than the official rate (12 percent premium).
Uzbekistan has not yet accepted Article VIII status. After a few attempts at liberalization in June and September 1996 (revoking the sections of Resolution 95 that had given rise to exchange restrictions and increasing auction frequency and the number of licensed banks in foreign exchange market), exchange system was severely restricted in late 1996, creating a segmented foreign exchange market.



Surrender requirements on export proceeds remained at 30 percent despite plans to gradually phase them out by January 1997.



There are some restrictions on capital account transactions.



Open position limits on banks exist (20 percent of statutory capital).
Foreign exchange intervention has been conducted through the auction system.



Reserve management: all gold and foreign exchange reserves of the Ministry of Finance are sold to the central bank to be managed by it instead of by the National Bank for Economic Activity, which still administers about one-third of official exchange reserves. Reserves are held exclusively in U. S. dollars and in deposits with banks. There is no formal investment policy or investment committee.
Sources: Central banks; and IMF staff.
Sources: Central banks; and IMF staff.
Table A5.Priorities for Future Reform in the Foreign Exchange Area
ARMAZEBLRESTGEOKAZKGZLVALTUMDARUSTJKTKMUKRUZB
Interbank foreign exchange market
Adequate exchange regulations for interbank market
Permission of outside auction transactions
Modification of surrender requirement
Exchange system supervision Open position limits1
Reporting on foreign exchange transactions
Market development
Adoption of code of conduct and market rules
Training foreign exchange dealers
Bringing settlement procedures in line with international standards
Establishing foreign exchange dealers association
Exchange bureaus
Providing access to interbank/auction market
Permitting nonbank exchange bureaus
Foreign exchange reserve management
Reserve management guidelines
Basic investment strategy and policy
Centralization of reserve management at central bank
Management of credit risk and interest rate risk
Reserve management operations
Establishing investment benchmarks
Terminating reserves placement with domestic banks
Setting reporting procedures
Reserve management seminars and training programs
Streamlining correspondents network
Separation of back and front offices
Liquidity, safety, and structure of reserves
Accounting and valuation of foreign exchange reserves
Establishment of investment committee
Exchange and monetary operations coordination
Harmonization of a decision-making process
Information exchanges
Development of intervention policy and guidelines
Intervention sterilization policies and techniques
Current account convertibility
Elimination of exchange restrictions including bilateral payments arrangements
Adoption of new foreign exchange law or regulations
Acceptance of Article VIII obligations
Capital account convertibility2
Sources: Central banks; and IMF staff.

Bullet marks on this criterion indicate that open position limits are either not imposed, or not strictly enforced, or are large compared with international practices (which tend to be about 15 percent and 30 percent on individual currency and aggregate positions, respectively).

Bullet marks on this criterion imply that the removal of capital restrictions should be a priority measure.

Sources: Central banks; and IMF staff.

Bullet marks on this criterion indicate that open position limits are either not imposed, or not strictly enforced, or are large compared with international practices (which tend to be about 15 percent and 30 percent on individual currency and aggregate positions, respectively).

Bullet marks on this criterion imply that the removal of capital restrictions should be a priority measure.

Table A6.Legal and Regulatory Framework for Banking Supervision
ArmeniaAzerbaijanBelarusEstoniaGeorgiaKazakhstanKyrgyz RepublicLatviaLithuaniaMoldovaRussiaTajikistanTurkmenistanUkraineUzbekistan
Central bank as the supervisory authorityyesyesyesyesyesyesyesyesyesyesyesyesyesyesyes
Number of supervisory staff15514552224117425554374,1002143560368
Authority of supervisory agency to exercise
Binding corrective orderyesyesyesyesyesyesyesyesyesyesyesyesyesyes4yes
Removal of managersnoyesyesyesyesyesyesyesyesyesyesyesyesyes4yes
Conservatorshipyesyesyesyesyesyesyesyesyesyesyesyesyesyes4yes
Withdrawal of licenseyesyesyesyesyesyesyesyesyesyesyesyesyesyes4yes
Liquidationyesyesyesyesyesyesyesyesyesyesno5yesyesyes4yes
Forced mergernonoyesnoyesnonoyesyesnoyesyesnono
Prudential regulations
Minimum capital levelyesyesyesyesyesyesyesyesyesyesyesyesyesyesyes
Risk-weighted capital asset ratioyesyesyesyesnoyesyesyesyesyesyesyesyesyesyes
Liquidity ratiosyesyesyesyesyesyesyesyesyesyesyesyesyesyesyes
Maximum exposure to single borroweryesyesyesyesyesyesyesyesyesyesyesyesyesyesyes
Consolidated supervisionyes6nonoyesyesno7yesyesyesnono8yes7yesyesyes
Open foreign exchange position limitsyesyesyesyesyesyesyesyesyesyesyesyesnoyesyes
Limits on equity holdings in nonfinancial enterprisesyesyesyesyesyesyes9yesyesyesnoyesnonoyesyes
Loan classification and provisioningyesyesyesyesyesyesyesyesyesyesyesnoyes (7/96)yesyes
Internal control or audityesyesyesyesyesyesyesyesyesyesyesyesyesyes
Suspension of interest accrual on overdue loansyesyesyesyesyesyesyesyesyesnonoyesnot applicable
Accounting and legal framework
Broadly adapted financial statementsyesyesyesyesnoyesyesyesyesyesyesnoyesno
Internationally accepted accounting standardsnonoyesyesnoyesyesyesyesnononononono
Commercial banking lawyesyesyesyesyesyesyesyesyesyesyesyesyesyesyes
Central bank lawyesyesyesyesyesyesyesyesyesyesyesyesyes10yes
Civil codeyesyesnoyesyesyes
Property rightsyesyesyesyesyesyesyesyesyesyesyesyes
Law on contractsyesyesyesyesyesyesyesyesyesyesno
Law on collateralyes11yesyesyesyesyesno12noyesyesyesyesyes
Law on loan collectionyes13yesyesyesyesyesyesyesnoyesno
Bankruptcy lawyes11yesyesyesyesyesyesyesyesyesyesyes14yes (but not functioning)yesyes
Separate provisions for banksyesnoyesyesyesnoyesyesyesyesnoyes14yesnoyes
Money laundering lawyes15nonounder preparationno16preparednoyes14no
Sources: Central banks; and IMF staff.

Includes central office and regional branches.

Includes staff of central bank office and 89 regional branches.

Only central bank office; branches also perform supervisory functions.

National Bank of Ukraine does not exercise the authority (unless license is withdrawn).

The Central Bank of Russia can take the case to court to initiate liquidation.

Including branches and subsidiary financial enterprises (excluding Moscow branch of Anelik Bank).

Including branches and subsidiary financial enterprises.

Supervision includes branches.

Only investment banks are authorized to have holdings in nonfinancial enterprises.

Not a special central bank law, but a regulation under the Law on Banks and Banking Activities.

Separate law.

Law on collateral is expected to be passed in 1997.

There are laws on debt collection but not specifically on loan collection.

Related provisions are included in the new Central Bank Law.

Incorporated in Banks and Banking Act.

Draft law submitted to the parliament in February 1997.

Sources: Central banks; and IMF staff.

Includes central office and regional branches.

Includes staff of central bank office and 89 regional branches.

Only central bank office; branches also perform supervisory functions.

National Bank of Ukraine does not exercise the authority (unless license is withdrawn).

The Central Bank of Russia can take the case to court to initiate liquidation.

Including branches and subsidiary financial enterprises (excluding Moscow branch of Anelik Bank).

Including branches and subsidiary financial enterprises.

Supervision includes branches.

Only investment banks are authorized to have holdings in nonfinancial enterprises.

Not a special central bank law, but a regulation under the Law on Banks and Banking Activities.

Separate law.

Law on collateral is expected to be passed in 1997.

There are laws on debt collection but not specifically on loan collection.

Related provisions are included in the new Central Bank Law.

Incorporated in Banks and Banking Act.

Draft law submitted to the parliament in February 1997.

Table A7.Structure and Performance of the Banking Sector
ArmeniaAzerbaijanBelarusEstoniaGeorgiaKazakhstanKyrgyz RepublicLatvia
199419951996199419951996199419951996199419951996199419951996199419951996199419951996199419951996
Number of banks
Of which52353321118013647403823181422910161191130101181818574033
Majority state-owned144466632088522322
Foreign34



(including 1 branch)
1132224441246816213
Total assets (in percent of GDP)15811373232241313303343188519211626166463138
Share of five largest banks in total assets (in percent)726568>65>81>8362687578707050>80>80>59747671514344
Total loans (in percent of GDP)84539181019681215228432866171031687
Total deposits (in percent of GDP)115825751478202127222867854201212
Central bank credit to banks (in percent of GDP)11<153274481<1<1311127<1<11
Average capital adequacy ratio11715316131612483<148162225
Nonperforming loans (in percent of total loans)3233231334110114222431103518626322101918
Share of five largest banks in nonperforming loans (in percent)929085799076564808091527572849568206564
LithuaniaMoldovaRussia2TajikistanTurkmenistan3UkraineUzbekistan
19941995199619941995199619941995199619941995199619964199419951996199419951996
Number of banks
Of which2716122627212,5172,2952,03016192315226230228



(only 188 functioning)
261829
Majority state-owned333440333111210101
Foreign3111131225412146
Total assets (in percent of GDP)24202525219302839881473503720



percent of balance sheet
261964
Share of five largest banks in total assets (in percent)677169813832384941907213



(after elimination of intra-company accts., etc.)
9793
Total loans (in percent of GDP)161415910131312121544023105–8131922
Total deposits (in percent of GDP)16141756716161516451225–83824
Central bank credit to banks (in percent of GDP)4415541<12321311<1134
Average capital adequacy ratio (actual)7111861045128321419<1
Nonperforming loans (in percent of total loans)26111077348651333–682
Share of five largest banks in nonperforming loans (in percent)8082783231749285779056
Sources: Central banks.

In the Kyrgyz Republic, total capital/risk-weighted assets times 100 percent.

Data are for the end of the period and are collected for the credit institutions that hold banking licenses.

Wherever GDP is mentioned, Central Bank of Turkmenistan has used Goskomstat’ s estimate, which is much lower than IMF estimate.

No data available for 1994 and 1995.

Branches of foreign banks.

Of which two have 100 percent foreign ownership.

In Russia, minimum requirement; 80 percent of banks comply with requirement.

Sources: Central banks.

In the Kyrgyz Republic, total capital/risk-weighted assets times 100 percent.

Data are for the end of the period and are collected for the credit institutions that hold banking licenses.

Wherever GDP is mentioned, Central Bank of Turkmenistan has used Goskomstat’ s estimate, which is much lower than IMF estimate.

No data available for 1994 and 1995.

Branches of foreign banks.

Of which two have 100 percent foreign ownership.

In Russia, minimum requirement; 80 percent of banks comply with requirement.

Table A8.Bank Restructuring Measures
ArmeniaAzerbaijanBelarusEstoniaGeorgiaKazakhstanKyrgyz RepublicLatviaLithuaniaMoldovaRussiaTajikistanTurkmenistanUkraineUzbekistan
Committee on Bank Restructuringyesyesnononoyes1yesnoyesyes2proposednonoyesno
World Bank financial sector adjustment loannoyesyesyes3yesnoproposednononono, but under preparation
Systemic strategy developednonoyesnoyesyesyesnoproposedyesyesnononono
Deposit insurance in placenonoyesunder preparationnononounder preparationyesnonononoyes, but to be redesignedno
Diagnostic studies undertaken or under wayyesyesyesyesyesyesyesnoproposedyesyesnoyesyesno
Operational restructuring measures Restrictions on operations of banksyesyesyesyesyesyesyesyesyesyesyesyesyesyesyes
License withdrawalsyesyesyesyesyesyesyesyesyesyesyesyesyesyesyes
Number of banks6434145031yes9 in 1996,36 total2282yesnone this year376
Liquidation of banksyesyesyesyesyes427142yes1yesyes
Bank mergers and split-offsyesyesyesyesyesyesnoyesyesyes28noyesnono
Number of banks2411473231none this year
Financial restructuring measures
Recapitalizationyesyesnonoyesyesstate-owned banks onlyplannedyesyesno4nono
Liquidity injection to banksyesyesyesnonoyesyesyesyes5yes6noyes7nono
Deposit guarantees by governmentyesnoyesyesnonoyesnoyesnoyes8noyesyes, only savings bankno
Existence of asset-management corporationnonononononoyesnoyesnononononono
Enterprise restructuring roleyesplanned
Sources: Central banks.

Stopped working in April 1996.

Economic Analysis Division of the Bank Supervision Department.

In the appraisal stages.

No individual recapitalization. However, minimum capital was set at the equivalent of $300,000 to be observed by all banks by January 1, 1997.

Government guarantees.

Limited volume.

Government has formally guaranteed some loans to state enterprises.

Government guarantees deposits only in state-owned banks.

Sources: Central banks.

Stopped working in April 1996.

Economic Analysis Division of the Bank Supervision Department.

In the appraisal stages.

No individual recapitalization. However, minimum capital was set at the equivalent of $300,000 to be observed by all banks by January 1, 1997.

Government guarantees.

Limited volume.

Government has formally guaranteed some loans to state enterprises.

Government guarantees deposits only in state-owned banks.

Table A9.Features of Payments Systems
Central Bank Settlement Services and PolicyDistribution of Settlement AccountsClearing TimesLarge-Value Transfer System (LVTS)Security Transfer System
ArmeniaPlans to end automatic overdrafts and to move to same-day settlement. Information on settlement balances is not available promptly.One account for each bank branch held at head office of central bank.Clearing times are variable, especially outside the capitalAn electronic “all-purpose” system is planned.



Telecommunications upgrade is a prerequisite.
A personal-computer-based book-entry system for treasury bills is in operation. Delivery versus payment is planned for later this year.
AzerbaijanTransactions that would overdraw a settlement account are rejected. Information on settlement positions is made available promptly. Settlement is same day in the capital.One account for each bank branch held with the central bank. A project to rationalize accounts is being discussed.Clearing times are variable.No firm plans but discussions have started.A book-entry system is operating.
BelarusThe central bank is authorized to reject transactions that would result in overdrafts. In practice, overdrafts are given, but at a high penalty rate. Information on current account positions is provided five times a day. Settlement is same day.Commercial banks have one central settlement account.Interbank clearing is prompt and predictable, although there are delays before funds are released to customers.Technical specifications for an LVTS have been drafted. The proposed system will be electronic and process gross payments. Decisions on risk-control features and access to liquidity are pending.A book-entry system that supports delivery versus payment is planned.
EstoniaSettlement is end of day after interbank trading of funds. Any potential overdrafts at settlement are avoided by rejecting payments to the amount of the potential overdraft.Banks have one central settlement account.Clearing is generally prompt. Customers may experience delays if the central bank rejects payments. In this case banks are required to carry out the payment order within two days.The central bank is planning a new real-time gross settlement (RTGS) system. Currently payments are made across an all-purpose electronic funds transfer system.There is a book-entry system that supports delivery versus payment.
GeorgiaThe central bank does not give automatic overdrafts. Settlement is end of day. Banks do not receive information on settlement positions promptly.Banks have one central settlement account.Clearing times are variable.An LVTS based on RTGS is planned. It will be nationwide and run by the central bank.There is no book-entry securities transfer system.
KazakhstanThe central bank does not allow overdrafts, and payments may be rejected. Information to help liquidity management is promptly available in the capital but not nationwide.Commercial banks have a settlement account at each regional branch of the central bank. There is a project to centralize accounts.Clearing times for payments within the capital are prompt and predictable. Overall, the picture is mixed.LVTS is carried on an electronic system. The system is not a specialized, high-value system.A book-entry system for transfers of treasury bills exists and is linked to the gross settlement system.
Kyrgyz RepublicThere are no automatic overdrafts. Banks are required to access funds in the interbank market or to use Lombard facility. Banks are provided with information on account positions promptly. Settlement is same day.Banks have one central settlement account.Clearing times are slow and unpredictable.There is a paper-based system for processing large-value payments in the capital.A book-entry system for transfer of securities is operating.
LatviaCollateralized end-of-day credit within Lombard facility is available on settlement account. End-of-day outstanding overdraft is converted to overnight at Lombard rate. Settlement is same day.Banks have one central settlement account.Clearing times are prompt and predictable.A dedicated RTGS system is planned. At present, high-value payments are processed using an electronic system based on SWIFT network.A book-entry system for transfer of securities is operating, with a real-time link to the electronic payment system.
LithuaniaNo automatic overdrafts are given. Settlement is same day, and banks are given information on account positions promptly.Banks have one central settlement account.Clearing times are prompt and predictable.A national electronic RTGS is planned.A book-entry transfer system is in operation. It is to be linked to the RTGS system.
MoldovaNo automatic overdrafts are given. Banks are given information on settlement account positions promptly.Banks have one central settlement account.Clearing times are prompt and predictable.RTGS is planned for the capital city.A book-entry system for transfer of securities is operating. Links to an RTGS system are planned.
RussiaOvernight overdraft for selected banks. Settlement became same day in March 1997. Information on settlement balances became available to banks in March 1997. Lombard facility cannot yet be used to cover end-of-day liquidity shortfalls.Commercial banks hold settlement accounts regionally. The banks are developing systems to monitor their account balances nationally to improve liquidity management.Processing is done within 24 hours in cities; clearing times are longer and variable otherwise.Plans for an RTGS system are being finalized. The system is expected to be in operation for large banks in 1998 in Moscow, with plans to extend operations nationally thereafter, as telecommunications are being upgraded.A book-entry security transfer system is in operation. Links to an RTGS system are being explored. The current system supports delivery versus payment, but funds used in payment are not available for use by recipients until next day. Trading is prefunded, except for primary dealer banks since August 1996.
TajikistanOverdrafts are not permitted. Information on account positions is not available to banks promptly.Commercial banks hold settlement accounts with the central bank branches in each region. No rationalization is planned.Clearing times are slow and unpredictable.There has been some discussion of an LVTS but plans are not firm. Telecommunications appear inadequate.A book-entry transfer system has been discussed.
TurkmenistanAutomatic overdrafts are given without penalty. Information on account positions is not available to banks to allow efficient liquidity management.Commercial banks have a single national settlement account.Clearing times are slow and unpredictable.An electronic national system carries small- and large-value payments.There is a book-entry system for treasury bills.
UkraineNo automatic overdrafts are given. Any access to credit is at penal rates. Information is available to allow banks to manage their liquidity positions within the day.Some banks have centralized their settlement accounts.Clearing times are reasonably prompt and predictable.LVTS is carried on an electronic system. The system is not a specialized high-value system. An RTGS system is planned.There is a book-entry system that is linked to the electronic payment system.
UzbekistanNo automatic overdrafts are given. Banks receive information on account positions promptly. Settlement is same day.Commercial bank branches hold settlement accounts with each regional branch of the central bank. There are plans to consolidate branch accounts at the regional level.Clearing times are prompt and predictable.LVTS is carried on an electronic system. The system is not a specialized high-value system.There is an operational book-entry transfer system. This operates on a delivery-versus-payment basis.
Sources: Central banks; and IMF staff.
Sources: Central banks; and IMF staff.
Table A10.Central Bank Accounting Reforms
Current Information Source for PolicymakersNew Chart of Accounts and International Accounting Standards (IAS) Financial StatementsInternational Assessment of Accounting ReformsFuture Reform Issues
ArmeniaMonetary and financial reports are based on a new chart of accounts.Financial statement format is consistent with IAS. Profits are measured on accrual basis.The first IAS external audit was held in 1995, and a full audit for 1996 was available in March 1997.Enhancements to financial statements as recommended by IAS external auditors should be incorporated.
AzerbaijanMonetary and financial reports are based on a new chart of accounts.The new format balance sheet is available for internal use at the central bank. Further work is needed for full IAS format, and to remove legislative barriers for IAS financial statements.An IAS external audit has not yet been undertaken.Introduction of IAS-based practices and financial statement format is recommended, in addition to foreign exchange accounting and internal controls.
BelarusMonetary and financial reports are based on a new chart of accounts.Financial statement format is consistent with IAS. Accrual-based profit measurement has been accepted.An IAS external audit has not yet been undertaken.Introduction of IAS-based practices and development of IAS format financial statements are suggested.
EstoniaMonetary and financial reports are based on a new chart of accounts.A new chart was adopted, but recording is done using the old chart and then converted to new-format reports. Profit measurement and financial statement format reflect IAS.There are ongoing annual IAS audits.
GeorgiaMonetary and financial reports are based on an “old” chart of accounts, which has been modified for new activities.A new chart is developed and ready for testing. Financial statement format is consistent with IAS. Accrual-based profit measurement is in place.An IAS audit of 1996 financial statements is in progress.Implementation of IAS policies is recommended.
KazakhstanMonetary and financial reports are based on a new chart of accounts.A new chart has been installed and is operating in parallel with the old chart, pending resolution of system problems. The balance sheet is prepared based on IAS format, and profits are based on the accrual concept.The first IAS external audit was held in 1995; findings were largely accepted. The 1996 audit is under reviewIntegration of accounting subsystems, software installation, and improvements in foreign exchange accounting and internal controls are recommended.
Kyrgyz RepublicMonetary and financial reports are based on an “old” chart of accounts, which has been modified for new activities.A new chart has been developed. New general ledger software has been installed, but requires some further testing. IAS financial statement format and accrual-based profit measurement have been accepted.The first IAS external audit was undertaken in 1996.Implementation of IAS-based practices and completion of new general ledger and related systems are recommended.
LatviaMonetary and financial reports are based on a new chart of accounts.Financial statements are prepared according to IAS. Profits are measured on an accrual basis.“Clean” IAS audit opinions have been given since 1994 accounts.
LithuaniaMonetary and financial reports are based on a new chart of accounts.Financial statements are prepared according to IAS. Profits are measured on an accrual basis.There is a “clean” IAS audit for 1995, and the 1996 IAS audit is ongoing.
MoldovaMonetary data are based on an old chart; financial information is available on a new-chart basis.Financial statements are prepared according to IAS, but there is a legislative impediment to adoption of the accrual basis.An IAS external audit has not yet been undertaken.Development of an IAS accounting system as prime source of financial information for policymakers is suggested.
RussiaMonetary and financial reports are based on the “old” chart of accounts, which has been modified for new activities.The new chart reflects former methodology and did not adopt accrual basis. IAS-consistent policies have been adopted for foreign exchange accounting.IAS diagnostic audits have been completed for 1993, 1994, and 1995, with no opinion expressed. Audit findings are under review by the central bank.Acceptance of the accrual concept and development of related accounting practices are recommended.
TajikistanMonetary and financial reports are based on the “old” chart of accounts, which has been modified for new activities.A new chart is under consideration, and accounting policies and financial statement format are yet to be determined. Profits are measured on cash basis.An IAS external audit has not yet been undertaken.Intensive implementation program to develop a new chart of accounts, and IAS-based practices should be enacted.
TurkmenistanMonetary and financial reports are based on the “old” chart of accounts, which has been modified for new activities.A new chart has been developed, but the IAS financial statement format has not yet been adopted. Profits are measured on a cash basis.An IAS external audit has not yet been undertaken.Intensive implementation program to develop a new chart of accounts, and IAS-based practices should be enacted.
UkraineMonetary and financial reports are based on an “old” chart of accounts, which has been modified for new activities. Old and new chart information is used for financial reports.A new chart has been developed and is capable of producing IAS financial statements on an accrual basis. The integration of accrual subsystems into accounting framework is in process.A satisfactory IAS external audit was completed for 1995.Integration of accrual-based subsystems and production of regular consolidated IAS financial statements should be put in place.
UzbekistanMonetary and financial reports are based on the “old” chart of accounts, which has been modified for new activities.A new chart was developed, and IAS financial statement format is under preparation. There is a legal impediment to adoption of accrual-basis accounting, and profits are measured on a cash basis.IAS external auditor is to be selected in the first half of 1997.Continuing introduction of IAS-based practices and financial statements format is recommended.

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