National Bank preparing pilot project for implementing national digital currency — Erbolat Dossaev

At the government session chaired by the Prime Minister of the Republic of Kazakhstan Askar Mamin, the results of the country's socio-economic development and the execution of the republican budget for January-November 2021 were considered. Chair of the National Bank Erbolat Dossaev presented a report on the current situation in the foreign exchange market and the country's gold and foreign exchange reserves.

According to him, since the end of November this year, volatility in global financial and commodity markets has increased amid heightened uncertainty caused by the spread of the new Omicron variant and growing geopolitical tensions around the world.

The inflationary pressure in the world continues to grow.

“In November 2021, inflationary pressure in the world has increased and may continue to grow as a result of persisting high prices for raw materials and long delivery times,” Dossaev said.

In the world's largest economies, inflation has reached new highs. Following the results of October 2021 in the United States, inflation reached thirty-year highs of 6.2%; in Russia, inflation rose to five-year highs of 8.4%. In the Eurozone in November, inflation reached its highest since the introduction of the euro — 4.9%.

The FAO food price index continues to grow for the fourth month in a row. it rose 1.2% and reached its highest level since June 2011. The largest increase in prices was recorded among cereals and dairy products, as well as sugar, while prices for meat and vegetable oils decreased slightly compared to the previous month.

“In the context of growing inflationary pressure, 18 central banks of the world raised key rates in November of this year, since the beginning of the year their number was 38. As a result, the Global Monetary Policy Index grew over the month from 5.28% to 5.38%,” said Dossaev.

According to him, the continuing rise in inflation has strengthened market expectations for an accelerated roll-off of QE and the start of rate hikes in the United States in 2022. This, in turn, creates risks of capital outflow from emerging markets, putting pressure on the EM currencies against the background of the strengthening of the US dollar. According to the results of November of this year. the US dollar appreciated 2% against the currencies of developed countries, while EM currencies weakened by 4.4%.

“In Kazakhstan, following the results of November 2021, annual inflation slowed down for the first time in 8 months from 8.9% to 8.7% amid a slowdown in food inflation from 11.3% to 10.9%, as well as paid services from 6.9% to 6.4%," said Dossaev.

Monthly inflation, he said, in November amounted to 0.7% and formed below the average values ​​for 5 years.

The slowdown in food inflation is due to the high base of the previous year and the work carried out by the Government to curb the rise in prices for socially important food products. Nevertheless, food inflation still contributes almost half of the annual price increase — 4.3 pp out of 8.7%.

Paid services, according to the head of the National Bank, show moderate dynamics against the background of a moderate increase in tariffs for regulated utilities. At the same time, the pro-inflationary impact has a significant rise in the cost of energy resources, affecting the costs of domestic producers. In particular, the growth in prices for fuels and lubricants amounted to 22.3% in annual terms, incl. for gasoline — 18.4%, diesel fuel — 46.6%.

According to the National Bank's estimates, seasonal growth in consumer prices in recent months has slowed down from its peak in June, reaching 5.6% in November 2021. However, there remains a high level of uncertainty about the sustainability of these dynamics.

Against the backdrop of a slowdown in annual inflation and an increase in uncertainty associated with the emergence of the Omicron variant, the National Bank on Dec. 6, 2021, decided to keep the base rate at 9.75%. Within the framework of the forecast round November-December, the National Bank has updated forecasts of the main macroeconomic indicators. Taking into account the release of the high base of 2021 and the gradual reduction of external inflationary pressure during 2022, inflation is expected to slow down, the peak of which is expected in the first quarter — 8.8% on average per quarter.

In accordance with the updated baseline scenario, with an oil price of $70 per barrel, inflation by the end of 2022 will amount to 6.0-6.5%, taking into account the effective implementation of the Anti-inflationary Response Package. According to the head of the National Bank, high prices for oil and metals will lead to a surplus in the balance of payments.

As part of the forecast round, the National Bank also updated the estimates of the balance of payments indicators. In 2021, the current account deficit is expected to be (-) $4.2 billion, down 34.7% from last year.

“High prices for oil and metals, set in the baseline scenario, will lead to a surplus of $1.5 billion in 2022,” Dossaev said.

Exports are set to grow 18.6% to $70.4 billion in 2022, driven by higher prices for major exported commodities amid recovery in global demand.Imports of goods according to the balance of payments methodology will increase by 6.8% to $40.9 billion due to increased demand from the population and business, as well as the implementation of government programs and initiatives. The deficit in the income balance will widen by 4.6% to $24.5 billion on the back of a 4.0% increase in foreign direct investor income due to higher prices and production volumes of oil and metals.

“Thus, the improvement in the current account associated with the rise in energy prices is constrained by pressure both from the implementation of deferred demand for imports and from the growth of payments to foreign investors. This, in turn, creates additional pressure on the foreign exchange market,” said the Chair of the National Bank of the Republic of Kazakhstan.

According to the head of the National Bank, the tenge is weakening against the background of a significant deterioration in external factors. In November 2021, high volatility was observed in the global financial and commodity markets amid the discovery of a new strain of coronavirus and reports of its spread in the United States and Europe, which also caused a sharp drop in oil prices. World oil prices have declined to their lowest levels since the end of August — to $65-66 per barrel. The global currency market also saw a global weakening of the currencies of developing countries: the Russian ruble weakened by 4.7% over the month, the South African rand by 4.3%, and the Mexican peso by 4.3%.

“The deterioration of fundamental factors led to the weakening of the tenge in November by 1.7% to 434.2 tenge per $1. As of Dec. 8, 2021, the tenge exchange rate was 434.46 tenge per $1," stated Dossaev.

The national currency was supported by operations to convert the funds of the National Fund to allocate transfers to the budget and the sale of the KGS. At the same time, according to the head of the National Bank, the tax period did not provide significant support to the national currency due to the sufficient tenge liquidity from exporters.

In conditions of uncertainty and a sharp deterioration in external conditions, the demand for foreign currency from individuals and legal entities has significantly increased. In order to prevent destabilizing fluctuations of the tenge, the National Bank for the first time since October 2020 carried out foreign exchange interventions in the last days of November of this year. in the amount of $239 million. Assets of the National Fund slightly decreased against the background of the correction of the share market and amounted to at the end of November 2021, $54.9 billion.

In November, $617 million was sold to ensure the allocation of targeted and guaranteed transfers for 310 billion tenge. Proceeds to the National Fund in November amounted to 657 billion tenge, including $1 billion in foreign currency. Investment income of the National Fund for November of this year. formed negative and amounted to $ (-) 541 million or (-) 0.95% mainly due to a decrease in the portfolios of stocks and bonds of developed countries by (-) 2.11% and (-) 0.64%, respectively.

“Despite the high volatility of the markets due to the new strain of coronavirus, investment income since the beginning of the year remains positive and amounts to $1.4 billion or 2.52%,” Dossaev said.

Gold and foreign exchange reserves at the end of November of this year amounted to $35.5 billion, having decreased over the month by $309 million. The gold portfolio reached almost 407 tons and increased by $267 million. Assets in freely convertible currency decreased by $575 million due to foreign exchange interventions, payment of public debt and other operations on government accounts. Gross international reserves amounted to $90.5 billion, having decreased by $435 million over the month.

Regarding pension assets, according to the head of the National Bank, their transfer to external management ensures diversification and profitability.

“Pension assets of the UAPF at the end of November 2021 amounted to 13.4 trillion tenge, having increased by 3.7% since the beginning of the year,” Dossaev said.

As of Dec. 7, 2021, according to him, the number of executed applications of depositors for early withdrawal of pension savings amounted to 636.6 thousand in the amount of 2.2 trillion tenge, of which 2.1 trillion tenge falls on the solution of housing issues.

“Following the results of 11 months of this year. a profitability of 11.0% was obtained with an inflation rate of 7.8%. Thus, from the beginning of this year. real profitability of 3.2% is provided for the UAPF depositors,” Dossaev said.

The head of the National Bank also spoke about the implementation of the Digital Tenge project. According to him, the National Bank is actively implementing a program for the development of the digital infrastructure of the financial sector and the introduction of financial innovations. One of the key initiatives of the current year is a pilot project for the implementation of the national digital currency — digital tenge. The project is being implemented jointly with financial market participants and international partners. Today, 63 Central Banks are actively studying the issue of the issue and circulation of national digital currencies in the world.

The focus of the National Bank's research in 2021 was aspects of the retail digital currency of the Central Bank. Currently, the development of a prototype of the digital tenge platform has been completed, a series of discussions have been held with market participants and international organizations, the intermediate results of the pilot project were presented at the IX Congress of Kazakhstan Financiers.

“On behalf of the Head of State, the National Bank will develop a model for making a decision on the introduction of digital tenge by July 1, 2022 with an assessment of benefits and costs. In December 2022, a final decision on the need to introduce digital tenge will be worked out,” Dossaev said.

At the end of the report, the head of the National Bank noted that in order to implement the instructions of the Head of State to reduce inflation to 8.5% by the end of this year. taking into account the slowdown in the annual growth of prices in November of this year. up to 8.7%, monthly inflation in December of this year should be 0.7%, while on average over 5 years the indicator was 0.8%.

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