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Mr. Malcolm D. Knight, Arne B. Petersen, and Robert T. Price

Abstract

For the past six years, the central banks of the Baltics, Russia, and other countries of the former Soviet Union have undertaken ambitious programs of reform.1 The reforms have focused first on stabilizing monetary policy and then on achieving a market-based determination of interest and exchange rates. The reform of central bank operating procedures has been a key piece of the program. Central banks in the 15 countries have been encouraged to manage banking liquidity through market operations with indirect instruments. There have also been closely coordinated reforms to foster foreign exchange markets, interbank money markets, government securities markets, and to strengthen various central bank functions, including the payment system, central bank accounting and internal audit, and banking supervision and restructuring. This volume examines the progress the 15 countries have made in transforming their financial systems, and highlights the substantial progress achieved by central banks in most of the countries.

V. Sundararajan,, Arne B. Petersen,, and Mr. Gabriel Sensenbrenner

Abstract

Since 1992, the central banks of the Baltic states and the Commonwealth of Independent States (CIS) have undertaken to various degrees comprehensive reform of their monetary and exchange arrangements in support of their stabilization efforts.5 The objective has been to achieve market-based determination of interest rates and exchange rates, control of banking system liquidity through indirect instruments, and, pari passu, to enhance the use of markets for transmitting monetary policy signals.

Mr. Henri Lorie

Abstract

The key to the broad-based macroeconomic stabilization that has taken hold since early 1995 has been a deeper understanding among the authorities of the role of strict financial policies as a precondition for price stability and economic recovery. This progress has taken place in the context of the implementation of comprehensive reform programs, frequently with Fund support (13 of the 15 transition economies). Increasingly, support from the Fund is being provided through multiyear arrangements, whether through the Extended Fund Facility (for Azerbaijan, Kazakstan, Lithuania, Moldova, and Russia) or the Enhanced Structural Adjustment Facility (for Armenia, the Kyrgyz Republic, and Georgia).6

Eduardo Levy-Yeyati

Abstract

Country experiences with monetary operations and government securities markets have been highly diverse, but a general pattern seems to have emerged since early 1992: most countries have moved toward more central bank operational autonomy and increased reliance on indirect instruments and on market-based interest rates. In addition, with few exceptions, reforms have led to a slow but sustained growth of the interbank and government securities markets. The sequencing of reforms has varied widely across countries, because of different political and macroeconomic conditions, and faster developments in one central banking area have not always been accompanied by similar progress in others (Table 2.1).

Mr. Bernard J Laurens

Abstract

As a group, the Baltics, Russia, and other countries of the former Soviet Union have achieved substantial progress in the areas of convertibility, foreign exchange market development, and central bank foreign exchange operations over the last six years. The institutional arrangement for an efficient market-based allocation of foreign exchange is in place in most countries; payments and transfers for current account transactions are free of restrictions, except in a limited number of countries; and several countries maintain a liberal system for capital account transactions, or interpret liberally the restrictions in place. Nominal exchange rates have begun to stabilize in most countries (Figure 3.1). The ratio of gross international reserves to imports also indicates that countries are moving to macroeconomic stabilization (Table 3.1). Foreign exchange markets are usually shallow, however, with banking unsoundness often an obstacle to market deepening.

Ceyla Pazarbaşioğlu and Jan Willem van der Vossen

Abstract

Until the late 1980s, the financial sector of the transition countries was characterized by a banking system in which the central bank dominated the financial sector. The savings bank collected savings deposits from households at low interest rates, which were then placed at the Gosbank. According to the credit plan approved by the Planning Authorities, the Gosbank set policy guidelines determining the volume and allocation of credit to different sectors (the credit plan), and the volume and allocation of cash issuance (the cash plan). Funds were then passed to the specialized banks (such as the agricultural and industrial banks), which represented different sectors for on-lending to individual enterprises. Interest rates had no role in the allocation of credit.

Ms. Claudia H Dziobek and Jan Willem van der Vossen

Abstract

The perestroika policies of the Soviet Union during the late 1980s set the stage for the rapid rise in the number of banks in individual states, although the ratio of credit to GDP remained low (see Chapter 8, Table 8.7). Concurrently, lax licensing policies and implementation of licensing requirements allowed many unsuitable banks to remain in the system in the early 1990s. At the same time, significant macroeconomic imbalances created conditions that gave banks incentives to engage in high-risk activities, such as foreign currency speculation. Weak banking laws and enforcement mechanisms failed to contain speculation by banks and to enforce safe and sound banking practices. As macroeconomic stabilization took hold, inflation declined and exchange rates stabilized. Banking problems of a systemic nature began to appear in the majority of countries because profits from speculation plummeted. Resulting bank insolvencies, sometimes entailing significant losses to depositors, damaged public confidence. But the countries have undertaken efforts to develop systemwide policies that address these issues and to restore bank soundness and the public confidence necessary to mobilize savings more effectively.

Lorena M. Zamalloa

Abstract

Transition economies have on the whole made good progress in introducing indirect monetary policy instruments, but much still remains to be done to bring monetary operations to modern market standards.