Workshop on Early Warning and Regulations of International Financial Risks
On March 20, the CAREC Institute and the Beijing National Accounting Institute (BNAI) jointly launched a five-day virtual workshop (March 20-24, 2023) on Early Warning and Regulation of International Financial Risks.
Mr. Kabir Jurazoda, Director of the CAREC Institute, in his welcoming speech, stressed the importance of financial stability for economic development. A stable financial system can efficiently allocate resources, assess and manage financial risks, maintain a high level of employment and eliminate relative fluctuations in prices of real or financial assets. Since the COVID-19 pandemic, the risk of spreading regional financial risks has increased even more. Ideally, governments should devise policies to address all areas where the pandemic has exposed or exacerbated economic vulnerability, such as financial sector stability, the legal insolvency framework for households and businesses, access to credit, and public debt sustainability.
“However, addressing the region’s financial stability risks is a complex task, which requires joint efforts by government agencies, financial sector regulators, and the private sector. Consequently, CAREC country members should carefully design and calibrate effective monetary, fiscal, and financial policy measures,” said Mr. Kabir Jurazoda.
The workshop brought together more than 50 participants−senior specialists from financial risk regulatory bodies and line ministries, scholars from well-known universities and experts from think tanks of the CAREC countries. During the workshop, participants learn about new knowledge and approaches to financial risk supervision, debt sustainability and risks, as well as about the best practices of market risk supervision in the People’s Republic of China.
On March 22, Dr. Hans Holzhacker, Chief Economist of the CAREC Institute, talked about existing financial risks in the CAREC region, and how they affect sustainable and inclusive economic growth. Most CAREC economies outgrew the COVID-19 recession already in 2021 as consumption and foreign trade largely recovered. However, mineral fuel net importers saw their foreign trade deficits widen. External debt ratios have been high historically in several CAREC economies, and a high share of public debt owed to non-residents makes refinancing public debt more difficult. Foreign exchange reserves below three months of imports of goods and services would warrant heightened attention by the authorities and lenders. Hence, some CAREC countries still face financial risks and need to implement wise monetary and fiscal policies targeted at preserving financial stability while preserving sufficient flexibility for supporting the economy.
Dr. Holzhacker suggested that a new productivity push is needed for CAREC economies for catching up with developed countries, and further elaborated on how countries can enhance productivity and adapt to ongoing challenges by advancing own reforms, diversifying economies, and capitalizing on new technologies. The new productivity push should come from innovation, digitalization, technology, foreign trade and utilizing comparative advantages, FDI, technology and management transfer, economies of scale, and most importantly from human capital development. Dr. Holzhacker also emphasized that further intensified regional cooperation and integration would contribute to productivity as well as better risk mitigation and−where needed−adaptation.
Mr. Khalid Umar, Chief of Strategic Planning Division of the CAREC Institute, spoke about the relationship between financial inclusion, financial technologies and financial stability. The financial inclusion is broadly recognized as the ability of the adult population, as well as micro, small and medium-size enterprises (MSME), to easily own a bank account and access affordable, reliable and sustainable financial services offered by the formal financial sector. Financial inclusion is central to economic development, poverty alleviation and social inclusivity. However, the CAREC countries are at different stages of development and vary in population size and level of financial inclusion. Mongolia is the leader in the region as its share of the population with a bank account, which stands at 93%, is almost double of what the rest of the countries, followed by Georgia and Kazakhstan with 61% and 59% of population with a bank account, respectively. However, in some countries of the region, the growth in the number of account holders and the adoption of digital technologies remain low.
“To deepen access to financial services, countries need to use financial technologies offering cost-effective and easily accessible financial services for financially underserved segments of the population, especially in remote regions and communities. The penetration of mobile Internet is a driving force in expanding access to financial services,” said Mr. Khalid Umar.
Access to finance for MSMEs is still a challenge, as they do not have collateral to secure their loans, do not have a credit history and, since most MSMEs have a low equity ratio, they are more vulnerable to external shocks. In this regard, to meet the financial needs of the MSME sector, financial policy makers need to better understand them by developing the necessary definition, hence the classification of MSMEs, and adopting targeted policies for their favorable growth.
The jury is still out on the relationship between financial inclusion and financial stability. One viewpoint states that financial inclusion has a positive effect on financial stability. They base their argument on the fact that when banks issue more small loans, they help reduce the overall riskiness and volatility of their loan. Another viewpoint states that when lending institutions relax standards and regulations to accommodate loans to MSMEs they directly or indirectly contribute to financial instability and systemic risk.