Relations of Central Asian countries with international financial system changes

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Simultaneously with the degradation of the dollar-centric model, the process of creating an alternative international financial and economic infrastructure has accelerated, a statement of the Bishkek Center for Expert Initiatives "Oy Ordo" says.

Fundamental changes in the global monetary and credit system are leading to the gradual breakdown of the dollar-centric model built on the dominance of Western financial infrastructure formed by the Bretton Woods agreements.

It is crucial for Central Asian countries not to miss the opportunity to "be at the origins" of the new financial and settlement infrastructure. This conclusion was reached by participants in a roundtable discussion organized by the "Oy Ordo" Center in Bishkek on the topic "What financial and settlement instruments guarantee the economic stability of Kyrgyzstan and Central Asian countries in modern conditions."

Speaking at the roundtable, the former director of the Institute of Central Asian Regional Economic Cooperation, economist Kubat Umurzakov, noted that for many years, the global financial order has been based and still is based on the Bretton Woods system, which includes a single reserve currency and a set of organizational instruments such as the IMF and the World Bank. However, the ongoing process of dismantling this financial infrastructure is objective and justified by the situation that has developed in the global economy.

"Globalization, whose goal was to form a single global financial and economic system, reaching its peak in 2008-2009, resulted in the opposite effect—launching the process of fragmentation of economic space and the creation of separate blocs. The fact is that third-world countries—Asia, Africa, Latin America, which were long considered a "appendage" to the global West, began to form their own bloc, opposing the previously formed Western coalition that dictated its policy to the world for a long time, determining trade conditions, currency usage, and so on," said the expert.

He emphasized that many experts today agree that the United States themselves initiated the process of de-dollarization when they confiscated the gold and foreign exchange reserves of the Central Bank of Russia. For most countries in the world, this signaled that similar actions could be taken against them.

"As a result, the process of reducing the role of the dollar in payment systems and intergovernmental settlements, as well as in the formation of gold and foreign exchange reserves, began. For example, China held a significant portion of its reserves in U.S. bonds. Today, China, like many other countries, has begun to reduce its share of reserves in U.S. securities," explained the economist.

Another significant factor working against the dollar, according to the expert, is the U.S. policy of building trade and economic relations with various countries based on the concept of "reshoring." This eventually led to changes in trade flows and transport-logistic corridors, which, in turn, also contribute to de-dollarization.

However, he expressed doubts that the process of introducing a single currency within the Shanghai Cooperation Organization (SCO) and the Eurasian Economic Union (EAEU) will be imminent.

"For example, in the European Union, a single currency appeared only in 2000, i.e., 50 years after the creation of the union, within which countries formed a single market only when they went through practically all levels of integration," reminded Kubat Umurzakov.

But addressing the issues of implementing common payment systems within the Commonwealth of Independent States (CIS) and the EAEU is entirely possible now. According to the expert, when there is an opportunity, the countries of the Commonwealth and the Eurasian Union carry out settlements in national currencies.

Former Deputy Prime Minister and ex-Chairperson of the Accounts Chamber of Kyrgyzstan, Elmira Ibraimova, believes that the volume of settlements in national currencies among EAEU countries is growing and currently stands at 73%.

"This is a very good indicator; however, the conversion of settlements to a common denominator is carried out through the dollar. When we talk about financial integration, we must also consider the readiness of national economies for this process. For example, today, the Kyrgyz som has undergone leasing and is now traded on some exchanges, but exchanging it in a regular bank or exchange bureau in other CIS and EAEU countries is practically impossible," explained Ibraimova.

However, she speculated that in a few years, the Bretton Woods infrastructure might be replaced by a system of digital currencies, where banks, apparently, will no longer act as financial intermediaries between the population and the issuer, and this role will be taken on by digital exchanges.

"This transition is inevitable. But I still do not see any actions on the part of the National Bank or the government of Kyrgyzstan to switch to a digital som," she added.

In turn, the Deputy Head of the Communications and International Cooperation Department of the National Bank of Kyrgyzstan, Ilichbek Sultanov, shared that the concept of the digital som was created by the National Bank in 2022, and step-by-step work is currently being carried out in this direction. He also mentioned that the dedollarization of Kyrgyzstan's credit portfolio amounted to 21.2%.

"This is a good figure because the NBKR, together with the government, has been working on this issue for a long time, important steps have been taken since 2014. This is important because when only the national currency is present in the economy, it is easier to conduct monetary policy. Our instruments can influence the economy. Whereas influencing another currency is almost impossible," claimed Sultanov.

He emphasized that Kyrgyzstan's financial sector is growing, as is the country's economy, and its stability is confirmed by specific figures. For example, the total deposit base has grown by 21% since the beginning of the year, and credit activity, collectively across all banks, has increased by 22%. At present, the gold reserves of the National Bank of Kyrgyzstan amount to about 50 tons.

He also noted that efforts are being made to increase the share of the national currency in settlements with CIS, EAEU, and SCO countries. Last year, the som/ruble pair was presented on the platform of the Moscow Interbank Currency Exchange. In Kyrgyzstan, there are no obstacles for working with other national currencies.

Mikhail Petrov, the President of the Eurasian Union Commodity and Raw Materials Exchange, addressing the representative of the National Bank of Kyrgyzstan, drew attention to the fact that recently, the situation with money transfers to other countries has become catastrophic.

"At present, there is an instruction from the National Bank, which all commercial banks use and which makes any completely legal banking operation impossible. And if the blocking of transfers continues, very soon there will be no economies because if there are no transfers, there is no movement of funds, accordingly, there is no fulfillment of contracts, no production, etc. There can be no development from the point of view of this instruction," shared the entrepreneur.

Discussing the prerequisites for dedollarization, he noted that the global economy is tired of absorbing the inflation of the U.S. currency.

"During the pandemic alone, the dollars printed doubled the dollar mass of foreign turnover. That is, the United States "gifted" us all its inflation, all its losses, and we support them by buying the dollar as a reserve currency. They printed money, threw it into foreign turnover, and we absorbed all this inflation, and the more dollars we buy, the more inflation of our national currency. If we accumulate the currency of the country we trade with, we tie our currencies at the horizon level, but as soon as a third currency appears, we pay the inflation of that third currency," Petrov added.

In turn, economist Aimen Kasenov noted that the National Bank of Kyrgyzstan should now set specific tasks, but for this, the status of the financial regulator must change.

"The National Bank currently does not answer for the development of the national economy or for the government's obligations; it is an independent structure that pursues its own policy," said the speaker.

According to the expert, the National Bank needs to start financing the real sector of the economy. Moreover, the credit portfolio of the NBKR should be recognized as its asset on a par with gold.

"When we invest in foreign currency, we finance another economy. Therefore, there is no need to accumulate foreign exchange reserves so ardently. It is necessary to increase the gold reserves. Over the past year, if I'm not mistaken, we have accumulated 40-47 tons of gold. I hope it is stored as a reserve. Because, in my opinion, in the structure of the currency reserve, there should be no less than 50% gold," emphasized the expert.

He pointed out that during 2022, banks from different countries around the world bought 1,136 tons of gold, which is a real indicator that they are preparing for the cessation of the Bretton Woods system.

November 20, 2023