Is
the National Bank going in the wrong direction?
A steep recession has unfolded in Kazakhstan, says the
latest Statistical Bulletin from the
country’s central bank. For January
through July, average income fell by nine tenths of a percent in annual terms,
estimated the National Bank of Kazakhstan.
Adjusted for inflation, the fall in income was roughly 6%.
The Bank’s figure may
be exaggerated. For January through June,
the Bulletin reported an increase in income of seven tenths of a
percent, compared to that of the same period in 2014. This implies that monthly income in July
alone fell about 14% (roughly 19% when adjusted for inflation). But July news
accounts do not tell of any events that could have immediately reduced national
output by a fifth.
Moreover, while output
was tanking, so was unemployment, claimed the Bank. It reported an unemployment rate of 7.8% for
January through June but 5.2% for January through July. For this to be true, the July unemployment
rate would have been -10.4%, which would be a sizzling labor market even
for a boom. (And impossible, of
course.) Yet firms were allegedly
shutting down a fifth of their production.
Methinks the National Bank is selling us a pig in a poke.
Keynes in Kazakhstan
Even so, the National
Bank has been reporting a fall in price-adjusted average income ever since
April, and the government’s statistical committee puts the income growth rate
this year at 1% or 2%. If we don’t
quibble over numbers, then we can easily accept that a slowdown is for real,
since the annual price of Brent crude oil (the global benchmark) on the spot
market has fallen by half since last year.
Which makes the Bank’s monetary policy all the more curious.
Usually, when national
sales fall, a central bank tries to stimulate spending by “printing” money or
(what amounts to the same thing) by cutting interest rates. (Low rates induce borrowing. Commercial banks
accommodate this by lending out tenge that depositors aren’t using at the
moment. This increases the supply of
tenge in circulation.) These may be the right policies for today since it
appears that the slowdown is due to deficient spending: Both output and
inflation are falling, which indicates a drop in demand. Indeed, in the
last such recession, in 2008-9, the National Bank created money and the
government stepped up spending, which may have made for a gentler recession here
than in other countries stymied by a fall in export revenues.
What has the Bank
actually done? It has reduced money supply in the past year or
two, and it raised the key interest rate early this month, from 12% to 16%.
High interest rates
discourage firms from borrowing money in order to expand their plants. They also prevent youths from taking out loans
in order to attend college. In short, high rates reduce spending and thus
production. They slow down a slowdown.
Expect the worst, and you’ll get it
What is the Bank up
to? Its chair, Kairat Kelimbetov,
explains that its conservative policy is supposed to contain inflation, which
over the past 15 years has been more of a problem for Kazakhstan than has low
demand. There is something to his argument.
The figure below shows annual rates of consumer inflation for 2010
through 2014. You can see that Kazakhstan
has followed the same path as Russia, but with slightly lower inflation than
its neighbor in recent years. Although
inflation has been far less volatile in Kazakhstan than in Kyrgyzstan, it is
still several times higher here than in the United States. Because inflation usually hits different
industries at different times, it creates confusion about prices. This can cause errors in buying and
selling. In short, inflation can make an
economy less efficient unless it is at low rates, say, 2%.
Yes, inflation has
afflicted Kazakhstan in the past, but not today. Annual consumer inflation is somewhere below 5%;
just where depends on whom you ask. In
any case, inflation is below the Bank’s own target of 6% to 8%.
Of course, the Bank
shouldn’t wait until inflation goes haywire before fighting it. By then, people will come to expect it -- and
they will act accordingly, by purchasing goods while prices are still low and
by demanding pay hikes. These measures will make inflation permanent. Even so, the Bank should recognize that its
tough policies may reduce output as well as inflationary expectations.
And it wouldn’t hurt the
Bank to double-check its math, as well as to explain it. -- Leon Taylor tayloralmaty@gmail.com
Data source: The World Bank
Notes
Wrong-Way Corrigan was an American football player who ran toward the wrong goalposts, scoring a touchdown for the rival team.
To estimate the
Bank’s estimate of the July unemployment rate, I solved for x in (7.8*6 + x) / 7
= 5.2. My calculation for the Bank’s
estimate of July average income was similar.
These calculations assume an equal weight for every month, which is reasonable for a comparison of the January-through-June average to the January-through-July one. (The Bulletin does not discuss its methods of calculation.) But even if the Bank gave every month a different weight, a drop from a six-month average of 7.8% to a seven-month average of 5.2% in the unemployment rate is improbably large – particularly when output is supposedly falling off a cliff.
For example, suppose that the unemployment rate was at its logical minimum of zero in July. Then the implied weight on the July rate would be 22%. (This is (1 – k) in the equation (k*6*7.8 + (1 – k)*0) / 7 = 5.2.) If the July unemployment rate is positive, then the July weight will lie within (14%, 22%), which is a narrow range. The point is that the improbability of the six- and seven-month estimates does not result from the assumption of uniform weights; the non-uniform weights are close to the uniform ones. The improbability results instead from the fact that the National Bank estimated an incredibly low unemployment rate for July.
These calculations assume an equal weight for every month, which is reasonable for a comparison of the January-through-June average to the January-through-July one. (The Bulletin does not discuss its methods of calculation.) But even if the Bank gave every month a different weight, a drop from a six-month average of 7.8% to a seven-month average of 5.2% in the unemployment rate is improbably large – particularly when output is supposedly falling off a cliff.
For example, suppose that the unemployment rate was at its logical minimum of zero in July. Then the implied weight on the July rate would be 22%. (This is (1 – k) in the equation (k*6*7.8 + (1 – k)*0) / 7 = 5.2.) If the July unemployment rate is positive, then the July weight will lie within (14%, 22%), which is a narrow range. The point is that the improbability of the six- and seven-month estimates does not result from the assumption of uniform weights; the non-uniform weights are close to the uniform ones. The improbability results instead from the fact that the National Bank estimated an incredibly low unemployment rate for July.
References
National Bank of
Kazakhstan. Statistical Bulletin, August 2015.
www.nationalbank.kz
Николай Дрозд, Кайрат Келимбетов,
Нацбанк: “Мы присутствуем на рынке ровно настолько, насколько это
необходимо.” Панорама. October 9, 2015. (“Kairat Kelimbetov,
National Bank: ‘We are in the market only when necessary.’”)
Николай Дрозд. “Кайрат Келимбетов,
Нацбанк: ‘Переход к инфляционному таргетированию стал стартовым моментом программы
струтурных экономических реформ.’” Панорама. September
18, 2015. (“Karat Kelimbetov, National
Bank: ‘The transition to inflation targeting was the starting point of the
economic structural reform.’”)
Statistical committee of
the government of Kazakhstan. Various
statistics. www.stat.gov.kz
