MONETARY POLICY IN THE BRICS: STRATEGIC BASIS AND EFFECTIVENESS

Cilj ovog rada je specificirati monetarnu politiku u zemljama BRICS (Brazil, Rusija, Indija, Kina i Južna Afrika) sa aspekta njene strateške osnove i efektivnosti. Takva analiza sprovedena po pojedinačnim zemljama ove grupacije je pokazala da one u cjelini konvergiraju razvijenim zemljama svojom politikom novca, napuštajući tako njenu akomodativnu orijentaciju i zasnivanje na targetiranju deviznog kursa u korist direktnog targetiranja inflacije kao strateške osnove. Brazil i Južna Afrika već koriste takvo targetiranje, dok Rusija namjerava to učiniti u 2015. godini. Kina i Indija preduzimaju jasne korake u istom pravcu. Efektivnost monetarne politike u Brazilu i Južnoj Africi je bila zadovoljavajuća, rezultirajući nešto višom inflacijom od one smatrane ravnotežnom u razvijenim zemljama. Takva inflacija karakteriše i ostale zemlje BRICS, od kojih Kina primjenjuje strategiju targetiranja monetarnih agregata, pri čemu uglavnom premašujući targetne vrijednosti, dok Rusija i Indija koriste akomodativnu politiku novca, no dominantno bez njenog međutargeta.

Na prethodno iznesenoj osnovi, rad (nakon uvoda) izlaže najprije opšta obilježja m o n e t a r n e politike, odnosno strategije u z e m l j a m a BRICS.

Introduction
Developed countries mostly use direct inflation targeting, whereas developing countries/countries in transition use exchange rate targeting as their monetary strategy.Direct inflation targeting, as the most robust anti-inflation strategy, suits developed countries given that they (supposedly) have sufficient strength to absorb all economic shocks arising from the flexible exchange rate as the accompanying factor in this form of targeting.On the other hand, exchange rate targeting suits developing countries/ countries in transition, because it allows for a more elastic monetary policy as the means to (more or less successfully) relax the economic growth, with the stabilization of the FC rate as the most important financial price (in most of these countries) introducing the required level of stability into their economic trends.The developing countries/countries in transition with higher economic performance, such as: Brazil, Russia, India, China and South Africa, known under the acronym BRICS, converge with the developed countries (among other things) in terms of their monetary policy, its goals, methodologies and performance.
The subject of this paper is monetary policy in the BRICS from the aspect of its strategic basis, operational and ultimate goals, and results in their achievement.The paper aims to specify the following in respect of the BRICS: 1) monetary strategy; 2) operational or intermediary target of the monetary policy (if any) and the level of its achievement, and; 3) ultimate goal(s) of the monetary policy along with the level of their realization, including the recent position in all these cases, previous (potential) changes and expected trends of the stated categories.The basic hypothesis of this paper is the following: "Monetary policy in the BRICS has evolved from its accommodative orientation and foreign exchange targeting as its strategic basis towards the strategy of direct inflation targeting."This hypothesis will be proven starting from the generally accepted postulates of the targeted monetary policy theory, by means of standard methodology of the economic science, primarily the appropriate logical methods (abstraction, generalization, comparison, induction, and synthesis) and statistical methods (arithmetic and geometric means) in the (empirical) processing of qualitative and quantitative data on the monetary policy of the concerned countries.The paper encompasses the period from 2003 to 2013, which alongside the years of the global 2007-2009 subprime crisis (hereafter to be referred to as just: crisis) equally covers the pre-and post-crisis years.
Based on the above mentioned, the paper (following the introduction) first elaborates on the general characteristics of monetary policy in the BRICS, after which it presents individually, for each of the five countries belonging to this group, the specificities of their monetary policy, i.e. strategic basis, targets and effects, and performance.Finally, the concluding remarks offer the general assessment of the current position and prospects of the BRICS when it comes to the monetary policy.

Monetary Policy in Russia
Monetary policy in Russia is conducted by the Bank of Russia in coordination with the Government and the Parliament of the country (see: Bank of Russia Annual Report, 2003-12; Bank of Russia Monetary Policy Report, 2013 and 2014 and; Bank of Russia, 08.9.2014).Within the analysed period, up to 2012, the Russian monetary policy was declaratively based on the gradual disinflation strategy, considerably colliding with the existing currency strategy of the observed country, the latter strategy of the two being de facto favoured, which may be interpreted as a (monetary) strategy of exchange rate targeting (see: Bank of Russia, BIS papers 2014), otherwise expressed through the controlled flexible (i.e.appreciating) foreign exchange rate of the domestic currency, with a high balance of payments surplus in the observed country (in the designated period) and in specific years from 2003 to 2011 as follows: 8.2%, 10.1%, 11.1%, 9.3%, 5.5%, 6.3%, 4.1%, 4.4% and 5.1%, respectively (Table 1), and thus forcedly created massive amount of (primary) money in it, indicating the (average) growth of official FX reserves of that country in the relevant period at the rate of 29.59% (Source of data: independent calculations of the author based on the Bank of Russia, Bulletin of Banking Statistics 2003 and 2012/12).In the observed time period, Bank of Russia was therefore predominantly focused on absorption (as opposed to generation) of primary liquidity, in respect of which it was only partly successful, due to the enormous size of the concerned liquidity.Although the budget balance of Russia, with the surplus rates in individual years from 2003 to 2008: 1.4%, 4.9%, 8.2%, 8.3%, 6.8% and 4.9%, respectively, in combination with deficit rates of 6.3% in 2009 and 3.4% in 2010, followed by another surplus of 1.5% in 2011 (Table 3), substantially contributed to sterilizing the given (to the huge degree externally generated) liquidity, the amount of money increased (on average) by more than 1/3, and by over 3/4 quicker than the nominal GDP of the observed country (with the following growth rates: 24.16%, 31.24% and 17.33%, respectively) thereby initiating the (forced) domestic expansive monetary policy in the relevant period (Source of data: independent calculations of the author based on the Bank of Russia Bulletin of Banking Statistics, 2003 and 2012/12; IMF, 2014).It was only starting from 2012, with the normalization of Russia's balance of payments position, when its balance of payments surplus amounted to 3.6% (in that year) and 1.6% in the subsequent year (Table 1), this country's monetary policy acquired the potential for (higher and necessary) effectiveness, and its operations of primary pa suficit od 1,5% u 2011.godini (Tabela 3.) znatno doprinosio sterilisanju date (masivno eksterno generisane) likvidnosti, količina primarnog novca se uvećavala (u prosjeku) za više od 1/3, a (ona) novca za preko 3/4 brže od nominalnog GDP sagledavane zemlje (uz stope rasta od: 24,16%, 31,24% i 17,33%, respektivno) indicirajući (iznuđenu) domaću ekspanzivnu monetarnu politiku u relevantnom razdoblju (Izvor podataka: Samostalni proračuni autora na osnovu Bank of Russia Bulletin of Banking Statistics, 2003 i 2012/12, te; IMF, 2014).Tek od 2012.godine sa normalizacijom platnobilansne pozicije Rusije, kada je njen platnobilansni suficit iznosio 3,6% (u toj) i 1,6% u narednoj godini (Tabela 1.), monetarna politika ove zemlje stiče potencijal (veće i potrebne) efektivnosti, a njene operacije ekspanzije primarne likvidnosti postaju znatnije od onih kontrakcije.Nakon prethodnih promjena te politike u pravcu zasnivanja na strategiji direktnog targetiranja inflacije, od kojih je najvažnija modifikacija operativnog okvira te politike u septembru 2013.godine, Rusija namjerava u cjelosti preći na tu strategiju u 2015.godini.
The ultimate goal of Russia's monetary policy is stability of prices with a view to supporting development goals of the domestic economic policy.Within the observed time framework, the given stability was expressed by means of the retail Consumer Price Index -CPI, with a tendency towards a reduced target inflation rates spread from 10-12% to 5-6%, the planned inflation rates for individual years in the period 2003-2013 being at the following levels: 10-12%, 8-10%, 7.5-8.5%,8.5%, 6.5-8%, 6-7%, 7-8.5%, 9-10%, 5-7%, 4-5% and 5-6%, respectively (see: Bank of Russia Annual Report, 2003-12 and; Bank of Russia Monetary Policy Report, 2014).Out of the 11 years belonging to the given time framework, the target inflation (as indicated by Table 2) was achieved ((almost) at the two-digit level) in only three: 2003 (12%), 2010 (8.8%) and 2011 (6.1%), whereas in all other years it was exceeded.The strategy for achieving the set goal was (as already mentioned) obstructed by forcing relative stabilization of the exchange rate in the circumstances of the country's massive balance of payments surplus, only for the strategy to gain on effectiveness after the normalization of the balance of payments position, in terms of a substantial reduction in inflation rates, which were almost halved (Table 2) at the end (6.5%)compared to the beginning of the observed period (12%).
Overall, in the analyzed period Russia achieved (Table 2) abovebalanced (average) inflation (9.57%), accompanied by a satisfactory real economic growth (at the average rate of 4.3%) and (as already mentioned) moderately high unemployment (7.02%).Moreover, up until the outbreak of the crisis the country's macroeconomic dynamics was characterized by inflationary expansion, i.e. a strained economic growth, which was, after the crisis, manifested through the slowed down growth along with inflation deceleration.

Monetary Policy in China
Monetary policy in China is conducted by the country's Government through the People's Bank og China, as the implementer of the given policy (see: PBC Monetary Policy Report, 2003-06; PBC Annual Report, 2007-13 and; PBC, 2014).In the analyzed period, the main source of money issuing in China was reflected in the massive surplus in the country's current and capital balance of payments account, causing repercussions in terms of an escalation of its foreign exchange reserves.The current account surplus (on average) amounted to (as already mentioned) 5.01% (Table 1), which, together with the enormous net inflow of foreign capital in the country, contributed to its FX reserves expanding at the (average) rate of 26.56% in the corresponding period (Source of data: independent calculations of the author based on IMF, 2014 and; PBC Annual Report, 2013).This generated a primarily defensive, i.e. sterilization monetary policy, throughout the entire observed period, given that the amount of primary money and money supply achieved (on average) an increase by 1/3 (17.7% and 17.48%) slighter than the stated amount of the concerned country's FX reserves, which was the case, broken down by years, from 2003 to 2009, and in 2013 (with the following FX reserves growth rates: 40.8%, 51.3%, 34.3%, 30.2%, 43.3%, 27.3%, 23.3% and 15.4%; primary money amounts: 17.1%, 11.4%, 9.3%, 20.8%, 30.6%, 27.3%, 11.4% and 7.4%, and money supply: 20%; 14.7%; 17.6%; 17%; 16.7%; 17.8%; 28.5% and; 13.6%, in those years, respectively) (Source of data: independent calculations of the author based on the PBC Annual Report, 2003-13 and; PBC, 2014).
In the relevant period, monetary policy in China was gradually directed towards the domestic monetary aggregates, primarily M2, as a composition of money supply and quasi money (the latter signifying non-transaction deposits in the concerned country's the depository institutions) projecting their growth per annual rates ranging between 13%-17%, i.e. for the period 2003-2013 (except for 2008 when for which it was not planned): 16%, 17%, 15%, 16%, 16%, 17%, 17%, 16%, 14% and 13% (see: Laurens, Maino, 2007; PBC Monetary Policy Report, 2003 and Quarter Four of 2004-06; and PBC Annual Report, 2008-12), suggesting the accommodative character of that policy.This is additionally emphasized by the fact that the targeted values of M2 were mostly exceeded instead of not being reached, given that the actual growth of the concerned aggregate in the observed period was higher than the projected one in seven years (the actual growth being stated in brackets): 2003 (20%), 2005 (17.6%), 2006 (17%), 2007 (16.7%), 2009 (28.5%), 2010 (19.7%) and 2013 (13.6%), and lower in (only) three years: 2004 (14.7%), 2011 (13.6%) and 2012 (13.8%) (For the data on the actual growth of M2 see: PBC Annual Report 2007, 2008 and 2013).Yet, on average, the exceeding of the targeted size of M2 was (except in 2009, when it amounted to as many as 17 percentage points, due to the then present strongly accommodative (anti-crisis) monetary policy) relatively moderate, i.e. less than 2 (1.93) percentage points, just like the failure to reach the targeted amount (1.63 percentage points) (Source of data: independent calculations of (pomenutim) budžetskim deficitom od 1,44% u razmatranom razdoblju (Tabela 3.).Njen realni ekonomski rast (Tabela 2.) je bio eruptivan (po stopi (u prosjeku) od 10,18%), uz (naznačenu) nisku nezaposlenost (4,15%), temeljeći se na visokim investicijama i demografskom potencijalu, no već jasno iskazujući (dugoročnu) neodrživost takve, ekstenzivne zasnovanosti.Mjerodavne procjene ukazuju na to da će (data) propulzivnost kineske privrede brzo opasti za 1/3, ukoliko ne dođe do njene deregulacije i bitne transformacije na toj osnovi (Vidjeti: IMF, 2013).Iscrpljivanje potencijala takvog modela razvoja dodatno erodira osnovu postojeće akomodativne politike novca u ovoj zemlji.The ultimate goal of China's monetary policy is stability of the national currency, i.e. the stability of prices of goods and services in the country, as well as of the exchange rate of its currency, with a view to supporting development goals of the domestic economic policy.In the observed time period, stability of prices was expressed through the retail Consumer Price Index -CPI, to the substantial degree administratively regulated, by means of the targeted spread or the inflation rate ranging from 1-2% to 4,8%, for individual years from 2003 to 2013 at the level of: 1-2%, 3%, 4%, 2%, 3%, 4,8%, 4%, 3%, 4%, 4% and 3,5%, respectively (see : Lau, 2003 ).The stability of the exchange rate was expressed descriptively as its adaptive and balanced value.The strategy for achieving the designated goals was reflected in targeting monetary aggregates, which was, in the process of liberalization of the country's cross-border capital flows, accompanied by the sliding appreciation exchange rate of its currency.Considerable contribution to the FX rate liberalization was in 2005 granted by its reform launched with the aim of establishing a guided flexible exchange rate, thereby implying a substantial derogation of the restriction in domestic cross-border capital flows, which opened the door for the introduction of direct inflation targeting in this country.

Monetarna politika u Južnoj Africi
Overall, in the analyzed period (Table 2) China achieved (in line with the relevant perception in that country) a tolerable (average) inflation (3.02%), whose level, just like the level of target inflation, is slightly higher than for developed countries due to the (already mentioned, generally specific for the BRICS) structural factors of increased prices, in combination with the (also mentioned) accommodative monetary policy in the country, indicated (on average) by a swifter expansion of money supply (17.48%) than the growth of nominal GDP (15.17%) within the analyzed time period (Source of data: independent calculations of the author based on IMF, 2014 and; PBC Annual Report 2007Report , 2008Report and 2013)), as well as the expansive fiscal policy, with the consequent budget deficit of 1.44% in the observed period (Table 3).Its real economic growth (Table 2) was eruptive (at the average rate of 10.18%), with the (designated) low unemployment (4.15%), based on high investments and demographic potential, yet clearly suggesting a (long-term) nonsustainability of such extensive interdependence.Grounded assessments suggest that the given momentum of the Chinese economy will soon drop by 1/3, unless it undergoes deregulation and some significant transformations in that respect (see: IMF, 2013).Exhausting the potential of this development model additionally undermines the basis of the existing accommodative monetary policy in this country.
Monetary Policy Review, 2003-13; and SARB, 15.7.2014).In the observed period this policy was primarily directed towards the regulation of interest rates on the domestic money market, and the financial market overall.To this end, the REPO rate of the SARB was successively changed in the following way: first it was reduced from 13.5% to 7% (based on 7 decisions The ultimate goal of South Africa's monetary policy is stability of prices, implicating on that basis the relevant support to development goals of the domestic economic policy.Within the observed time framework, the given stability was expressed by means of the retail Consumer Price Index -CPI(X) and the allowed inflation rate spread from 3-6% (see: SARB, 15.7.2014).The strategy for reaching this goal was reflected in direct inflation targeting, a conventional method based on a relatively high benchmark interest rate.In the observed period (Table 2) the concerned country achieved (in line with the relevant domestic perception) tolerable (average) inflation (5.34%).As opposed to the other BRICS where the (target) inflation higher than in the developed countries was caused by structural reasons related to the strained, i.e. dynamic yet unbalanced economic growth in combination with low (normal) unemployment, this was not the case with South Africa, which is characterized by the (already mentioned) huge unemployment and (let us add) the failure to utilize domestic economic capacities.Therefore, such inflation dominantly arises from the imperfection of the country's labour market (see: SARB Monetary Policy Review, June 2013).The economic growth of this country (Table 2) was moderate (at the average rate of 3.36%), in combination with (to underline once again) huge unemployment (26.44%).

Conclusion
Although developing countries and countries in transition mostly use exchange rate targeting as a monetary strategy or strategic basis for their monetary policy, the countries with higher economic performance from that group: Brazil, Russia, India, China and South Africa, known under the acronym BRICS, do not apply this strategy as the foundation of their monetary policy.In general, these countries do not find exchange rate targeting suitable due to the structure of their economies, whose characteristics are more unfavourable (insufficient diversity of the production base, relatively closed system when it comes to goods and services and (moderately) high unemployment) than favourable (moderation of the public sector and interest rate nonsensitivity of domestic economic entities) for that form of targeting.
Brazil uses direct inflation targeting as its monetary strategy.Monetary policy based on it in this country features the interest rate at the market for one-day interbank REPO loans as its operational target, which was in the analyzed period (from 2003 to 2013, with the same scope in all other countries examined in this paper) achieved to the large degree.The ultimate goal of that policy, i.e. stability of prices, was also achieved according to the domestic standards, given that the real (average) inflation rate (5.86%) remained within the spread acceptable for this country (2.5-6.5%).
Russia declaratively applied the gradual disinflation and de facto the exchange rate targeting, in the form of its controlled floating (i.e.appreciation) as its monetary strategy.Thus grounded, the monetary policy in the country did not have an operational target, but it did have a (designated) ultimate goal -i.e. the stability of prices, in the form of a tendency reduced inflation rate spread from 10-12% to 5-6%, which was typically exceeded.Yet, balancing the country's balance of payments position, with a significant reduction of its inflation rate (at 6.5% in 2013) strengthened its program orientation for accepting direct inflation targeting, to which it intends to fully shift in 2015.
India has been pursuing a short-term or discretionary monetary policy, in the function of stability of prices and dynamization of its economic growth as the ultimate goals of that policy.It was only in 2011 that India for the first time established the operational target of the observed policy, in the form of interest rate on the market for one-day interbank loans, which was subsequently achieved to the satisfactory degree.The planned inflation rates ranging from 4-6.5% and the real economic growth range from 5.7-8.5% were mostly exceeded, in part due to the domestic accommodative monetary policy.The establishment of its operational target in line with direct inflation targeting was accompanied with a change in the policy's tools of identical orientation.
China implements monetary aggregates targeting as its monetary strategy.Monetary policy based on it typically uses M 2 as its intermediary target, as a composition of money supply and quasi money.Its planned values were mostly exceeded, thereby indicating the expansion character of the concerned monetary policy.Its ultimate goals were stability of prices, with the inflation rates planned within the range from 1.2-4.8%and the exchange rate stability in terms of a (descriptive) safeguarding of its adaptive and balanced value.The actual (average) inflation (3.02%) stayed within the allowed spread alongside the controlled appreciating exchange rate of the domestic currency.Its increasing liberalization (since 2005) paved the road to direct inflation targeting, especially given the evident exhaustion of the potential provided by the existing model of (extensive) economic growth and accommodative monetary policy in the country.
South Africa bases its monetary policy on direct inflation targeting.Thus grounded, it uses the interest rate at the market for one-day interbank loans as its operational target, which is otherwise realized to a substantial degree.Its ultimate goal, i.e. stability of prices, was also achieved according to the domestic norms, given that the actual (average) inflation rate (5.34%) stayed within the spread acceptable for this country (3-6%).
The conducted analysis clearly indicates that the BRICS overall approach the developed countries (among other things) in terms of their monetary policy.Thus, they gradually renounce its accommodative orientation and exchange rate targeting as its basis, typically inherent for developing countries and countries in transition, to which these countries (still) belong, in favour of direct inflation targeting as this policy's strategic basis, characteristic for the majority of developed countries.Brazil and South Africa already shifted to this strategy, whereas Russia plans to do so in 2015.China and India have been undertaking specific steps in the same direction.Examination of the further course of this process is scientifically and practically relevant, given that the (designated) evolution of monetary policy in the BRICS implies the operational and (international) institutional increase in the (relative) strength of these countries' currencies, thereby significantly changing the economic and financial physiognomy of the world, in turn affecting wider political processes on the global scale.
) from June 2003 to April 2005; increased to 12% (by means of 10 decisions) from June 2006 to June 2008; reduced to 5% (on the grounds of 10 decisions) from December 2008 to July 2012, and finally increased to 5.5% in January 2014 (see: SARB, 15.7.2014).The target interest rates at the market were considerably aligned with the benchmark interest rate, thereby suggesting high effectiveness of the concerned policy in the primary domain of its activity.This is confirmed by the level of the standard benchmark interest rate at the South Africa's money market (basically, the interest rate at the market for one-day (noncollateralized) interbank loans), which in the months of the changed course in the observed monetary policy, amounted to: 1.3% (June 2003); 6.82% (April 2005); 7.01% (June 2006); 11.62% (June 2008); 11.45% (December 2008); 4.79% (July 2012) and 5.28% (January 2014) (see: SARB, 15.7.2014).

Table 1 .
-Main characteristics of the foreign sector in the BRICS economies -in % of nominal GDP 1

Table 4 .
-Main characteristics of the financial sector in the BRICS economies -in % of nominal GDP Country(Izvor podataka: S a m o s t a l n i proračuni autora na osnovu BCB, 2014).