Sky high?

Are interest rates in Kazakhstan excessive?

In Kazakhstan, interest rates generate interest in more ways than one.  Kazakhstanis have long complained that the central bank sets interest rates so high that they discourage borrowing and consequently economic growth. Youths cannot afford loans for tuition, so they don’t go to college; the minute that they begin working, their skills are obsolete. Firms can’t afford loans for modernizing their plants. In South Kazakhstan, entrepreneurs sound off about high interest rates almost as often as they do about bribes.

By global standards, Kazakhstan’s double-digit interest rates do look prohibitive. Last year, the target base rate – the benchmark interest rate set by the National Bank, on overnight loans between commercial banks – hit 17% in annual terms.

But most of this rate just compensates the lender for the average rise in prices throughout the economy – inflation. Last summer, the rate of inflation approached 18%. So in terms of purchasing power, the given base rate was roughly -1%.

To see what negative interest rates mean, suppose that you lent 10,000 tenge in 2016 for one year. This year, you would collect 11,700 tenge. Sounds great, but meanwhile the price of a samsa has risen from 100 tenge to 118. Rather than lending the 10,000 tenge last year, you could have bought 100 samsa. By lending instead, you delay buying the samsa to 2017; but at today’s prices, the interest repayment of 11,700 tenge purchases only 99 samsa or so. You wind up worse off than you would have been had you not lent.

Kazakhstan’s interest rates are not too high; they’re too low. They discourage lenders, not borrowers.  Creditors and debtors focus on the real interest rate – the market rate minus the (expected) rate of inflation. In our example, the real rate is about -1%: A given interest payment loses about 1% of its purchasing power per year.

Real interest rates are negative around the world. They aren’t always thus in Kazakhstan; but in recent years they were unconscionably high only in late 2015, when the gyrating tenge float created uncertainty that made borrowers cringe.  Ever since the National Bank began targeting the base rate, in September 2015, it has never exceeded 8% in real terms; and it was negative from April to October 2016, perhaps partly due to inflation engendered by a tenge devaluation and an expansion of money supply.  Since October the real base rate has been positive but has not surpassed 4.1% (see the figure below).

To determine whether real interest rates are high or low, compare them to the rate of economic growth – i.e., the rate of change in output (real gross domestic product). Since a loan can finance expansion of our capacity to produce, we would expect its real interest rate on average to approximate the overall rate of return to our stock of capital, which is the rate of growth in real GDP.  For the period from September 2015 to now, the average real base interest rate is 1.67%. This tracks well with the rate of real economic growth in 2015 (1.2%) and 2016 (1%) but not with 2017 (5.8% for January through May).  In fact, the average base rate this year has been 3.5%, which is strikingly low.

So if entrepreneurs in South Kazakhstan can’t find desirable lenders in their neighborhood, maybe the banking market there is not competitive.  They should beat the bushes in Almaty.  – Leon Taylor tayloralmaty@gmail.com

    

Notes

I derived all data on base rates and inflation rates (calculated from the Consumer Price Index) from the statistical publications of the National Bank of Kazakhstan (nationalbank.org).  Rates of economic growth are year-to-year changes in gross domestic product, adjusted for consumer inflation. They are from the National Bank for 2015 and 2016 and from the Committee on Statistics for 2017 (stat.gov.kz).

Reference

Institute of Business Ombudsman. Business development in the South Kazakhstan region is hampered by high banking interest rates and corruption in government agencies.  April 2017. http://ombudsmanbiz.kz/eng/press-centr/smi_ob_ombudsmene/?cid=0&rid=212