The trouble with tenge

Does Kazakhstan have enough cash?  The head of Kazakhstan’s central bank thinks so.  Last week, Kairat Kelimbetov told journalists that plenty of tenge were circulating.  If he gave reasons for this view, the newspapers didn’t elaborate on them.

His claim is puzzling.  As a rule of thumb, in normal times, the supply of tenge should rise in proportion to output.  Too many tenge would raise prices, deceiving people about the true value of the products; too few tenge would hinder transactions at the cash register.  Over the past two years, output in Kazakhstan has grown by roughly 9%.  But the amount of cash (measured as the money supply M0) fell by 1.6%, according to data from the National Bank.  Possibly, in purchases, cash is giving way to debit cards, which draw on checking accounts.  But demand deposits aren’t rising rapidly, either.  M1, the measure of tenge supply that includes checking accounts as well as cash, is up by only 1.1%.  What gives?

Cash crash

In theory, one explanation could be falling prices.  The number of bread loaves and phone calls may be rising, but the amount spent on them may increase more slowly if their prices decline sharply.  But in reality, the average rate of increase in Kazakhstani prices – inflation – hasn’t fallen in the last two years and may even be bumping up a bit.  Prices can’t explain Kelimbetov’s claim that the country has sufficient cash.

The only remaining possibility is that people are spending each tenge more rapidly than before.  If a trillion tenge are in circulation, and if each tenge is spent twice per year, then total spending is 2 trillion tenge per year.  If the rate of turnover rises from 2 to 3, then spending will increase to 3 trillion tenge, although the physical supply of tenge remains at one trillion.

To some extent, a higher rate of turnover – economists call it “velocity” – means a more efficient use of cash.  But to make the numbers work, the turnover rate would have to have risen by nearly a fourth since late 2012.  Such a radical change might create difficulties for small businesses, which rely on cash transactions.  The needed tenge spend less time in their cash registers and more time in transit.  The firms' transactions – paying change to customers or a day’s wages to temporary workers – become more convoluted.  So, why, exactly, should we believe that Kazakhstan has enough nalychni den’ge? –Leon Taylor tayloralmaty@gmail.com

Notes

To estimate the required increase in velocity, I use the identity that the number of tenge (M), times the average rate of turnover (V), equals spending on nominal gross domestic product (output Q times the average price level P): MV = PQ.  Solving for V and taking logs gives us this equation: Log V = log P + log Q – log M.  Taking differentials gives us this result:  The relative change in velocity about equals the sum of the two relative changes in prices and output, minus the relative change in money.  For example, the differential d[log V] = (1/V) dV = dV/V, which is a relative change.  Differentiating the right-hand side variables as well, we get dV/V = dP/P + dQ/Q - dM/M.  

Over the past two years, the price level has risen by roughly 14%; output, 9%; and M1, 1%.  Plugging these data into the formula gives us that velocity, which is a rate, has increased by roughly 22%, or nearly a fourth.

References  

Alevtina Donskyx.  Economika viuchennik urokov.  Delovoy Kazakhstan.  October 24, 2014.

National Bank of Kazakhstan.  Various data series.  www.nationalbank.kz

Oksana Kononenko.  Kairat Kelimbetov:  ‘Fevralskaya devalvatsya tenge provedena s bol’shym zapasom.’  Panorama.  October 24, 2014.