Going, going, gone

 How will Marchenko’s farewell affect Kazakhstan’s central bank?

In a warm but vague press release two weeks ago, the President’s office announced the exit of the well-regarded governor of the central bank in Kazakhstan, Grigorii Marchenko.  The English-language media in Central Asia, to the extent that it exists, treated the departure as a surprise.  And it probably was, for anyone who doesn’t read the newspapers.  In July, the business weekly Kursiv’ predicted that Marchenko would be out by October 1, which is exactly what happened.  Even back then, Marchenko’s departure had been bruited in the Russian-language media for months.

Speculation is rife as to why Marchenko got the boot.  The weekly Kapital said he had failed to develop a rapport with journalists, which is a rather odd reason for an ouster.  Why not just turn over the National Bank’s news conferences to a press secretary?  A more likely factor is that Marchenko had recently ventured into the political minefield called “pension reform”.   

An English newsletter, The Conway Bulletin, hinted that Nazarbayev installed at the Bank a former deputy prime minister, Kairat Kelymbetov, because he was more pliable than Marchenko.  (Kursiv’ had predicted this appointment, too.)  The subsequent loss of central bank independence may disturb foreign investors, Conway mused.  For its conclusions, it didn’t provide a shred of evidence.  Typical.

Fables for children

In reality, central bank independence is a pleasant fiction in Kazakhstan regardless of who heads the Bank, since he serves only at the pleasure of the President.  Neither would a complaisant governor necessarily trouble foreign investors.  In 2009, after a 25% devaluation of the tenge, Nazarbayev pledged in public to hold the exchange rate to 150 per United States dollar.  Even so, in general, central banks that are politically controlled tend to print money whenever the government wants to spend.  In 2009, the resulting annual rate of inflation in Zimbabwe soared into quadrillions of percent, according to some estimates, reported The New York Times.   

Some of these newsletters seem to do their research at the water cooler.  A more systematic way to measure the political independence of a central bank is to see whether it responds to rising inflation by tightening the money supply.  A myopic government might welcome unexpected inflation, and abundant money, because these cut the cost (in terms of goods foregone) of paying off its loans.  The government borrows expensive dollars and pays back cheap ones.  If the central bank is willing to cross the government, in order to stabilize prices, then the growth rate of the money supply should relate negatively to the past growth rate of prices (which is inflation). 

For the period of Q1 2000 through Q4 2011, the rate of money growth did relate negatively to the rate of inflation in the prior quarter, but the correlation was weak (-.028).  The correlation was stronger though still moderate (-0.32) for the years of Marchenko’s predecessor, Anvar Saydenov, and for Marchenko’s second term as governor (-0.39).  This may be evidence, albeit crude and limited evidence, that in these two regimes, the central bank was modestly independent politically, at least in the short run.  More troublesome was Marchenko’s first term as governor, from 1999 to 2004, following the collapse of the Russian ruble. For the period of Q2 2001 through Q4 2003, the correlation was positive (.24).  You may not be surprised to hear that annual consumer inflation in this period averaged over 30%.

Some Russian-language newspapers may be minimizing the importance of Marchenko’s departure.  Drawing upon the Presidential press release, the business weekly Panorama said the changes under the new governor would be more in style than in substance.  Let us ignore the fact that, for a central bank, style is substance -- and consider three issues:

(1)    Will the National Bank soon devalue the tenge?  Over the past two years, the exchange rate has risen to 154 to the dollar and, this year, has been more volatile than usual.  In recent weeks, Marchenko introduced a currency basket of euros and rubles as well as dollars in order to diversify against volatility due to the buck, but that measure will only buy time.  Will Kelymbetov announce a maximum exchange rate at which he would intervene to keep the tenge from weakening any more?

Tenge tangle

The question is not whether the Bank will devalue the tenge but when.  Kazakhstan has the makings of a labor shortage: The unemployment rate has been dropping for years and now stands at about 4%, even for youths.  Within a year or two, employers seeking more workers will have to raise wages – and, subsequently, prices in order to cover labor costs.  This will reduce demand for Kazakhstan’s exports unless the Bank weakens the tenge in order to lower their price in terms of foreign currencies.  And the Bank undoubtedly would.  But recent wages (in terms of their purchasing power) have not been rising steeply enough to engender inflation.

(2)    Did Marchenko fend off inflation?  The answer depends on the benchmark.  Annual consumer inflation under Marchenko was far milder than it had been under his predecessor at the National Bank, Anvar Saydenov, from 2004 through 2008 (10.2% over the four-year period, peaking at 17% in the final year).  And relative to its two partners in the customs union, Kazakhstan has enjoyed low rates of inflation since 2009.  For the period through early 2013, the annual rate of increase in consumer prices averaged 7% in Kazakhstan, as compared to 11.7% in Russia and 13% in Belarus, according to data from the International Monetary Fund.  Kazakhstan also performed well relative to Central Asia, where the inflation rate for the period from 2009 through early this year averaged 7.9%.  On the other hand, the corresponding rate for all post-Soviet countries was 5.3% and was as low as 1.8% in Slovenia. 

Inflation tends to be giddy in resource-intensive countries.  The post-Soviet countries with the steepest rates of inflation were Belarus, Uzbekistan (11.9%), Kyrgyzstan (8.5%) and Serbia (8.4%); the first three of those nations specialize in producing or transporting minerals or food.  Even so, the National Bank's attempt to contain inflation was, at best, only a qualified success.  The Bank usually managed to stay within its declared corridor of 6% to 8%, but those bounds were generous to begin with.

A bite out of Alma-Ata

  

(3)    Will the Bank move to Astana?  As long as we’re on the subject of political pliability.…If the Bank relocates, then much of the financial sector in Almaty may follow.  The city would lose its most important industry, with implications for such of its firms as – just to pick one at random – KIMEP University, which draws half of its students from Almaty and environs, many of whom train for local financial careers.  Almaty has been recovering from the 2008-9 financial crisis more slowly than the rest of Kazakhstan; losing the National Bank won’t help. --Leon Taylor, tayloralmaty@gmail.com

References

The Conway Bulletin.  Central banker sacked.  October 2, 2013.

Drozd, Nikolai.  Smena rykovodstva Natsbank menyaet skoree stylystyku, chem polytyku.  Panorama.  October 4, 2013.     

Dugger, Celia W. Zimbabwe’s inflation drops, a little.  The New York Times.  March 24, 2009.

International Monetary Fund.  World Economic Outlook.  Various years.

Lee, Yana.  Marchenko sdelal svoi delo.  Kursiv’.  July 18, 2013.  

Taybas, Alena.  A kak vi budete vcpomynat’ Marchenko?  Kapital.  October 3, 2013.

Valykov,Yuriy.  Grigorii Marchenko ushel v chasthuu zhyzn’.  Kursiv’.  October 3, 2013.