Show me the money

Why is inflation rising in Kazakhstan?

Last month the central bank of Kazakhstan raised interest rates to discourage spending that is boosting prices. The National Bank targets the rate of increase in prices, inflation, at 4% to 6%. In August, consumer prices were rising by 5.5% per year and were threatening to accelerate to nearly 6% by the end of the year. So the National Bank raised the base interest rate―which is the benchmark rate for Kazakhstan’s economy―by a quarter of a percentage point, to 9.25%. This is a new direction for the Bank. In April, it lowered the base rate from 9.25% to 9%, less than two months before the presidential election.  Bank officials next meet on Monday, October 28.

Raising the interest rate can moderate inflation by making it expensive for people to borrow money to spend. The drop in spending eases pressure on prices. The Bank is being sensible. Last summer, consumer loans in Kazakhstan rose by nearly a fourth.

The Bank attributes the rise in inflation partly to boosts in government spending.  For a decade, Nur-Sultan has been running a deficit – that is, the government has been spending more money than it takes in.  Now the deficit amounts to about 7% to 8% of the economy (as measured by gross domestic product), according to the International Monetary Fund. (These calculations exclude oil revenues.)

The Bank says import and food prices also spur inflation. Meat prices for Kazakhstani exporters this year rose by more than a third. Naturally, this will increase the prices that meat sellers demand in Kazakhstan.

As usual, the Bank’s press release didn’t say a word about the inflationary factor that Bank Governor Yerbolat Dosaev should have most firmly under his thumb―money supply. For January through July this year, tenge currency was up 14.3% since the same period last year; and M1, which includes checking accounts as well as currency, rose 10.8%. In other words, the supply of tenge is increasing much faster than output; so more tenge are chasing, say, a bottle of water than did last year. It is not rocket science to conclude that prices will rise.

The Bank did indirectly refer to this problem. Since June it has sold securities for tenge and thus has withdrawn excess tenge from circulation. That should ease inflation―and, incidentally, strengthen the tenge on the foreign exchange market, where the exchange rate per US dollar is an eye-popping 390 and picking up speed.

Still, the Bank could improve the accuracy of the public’s expectations of inflation, by owning up to its corpulent money supply. With Bank estimates of the future supply of tenge, Kazakhstanis could better plan their purchases, and they would not be shocked by sudden spurts of inflation. But...that would mean that the Bank would have to admit its mistakes, wouldn’t it?—Leon Taylor tayloralmaty@gmail.com

References

International Monetary Fund.  Kazakhstan: staff concluding statement of an IMF Staff Visit.  17 July 2019.  www.imf.org

National Bank of Kazakhstan. Monetary base and aggregates of broad money. Retrieved 5 October 2019. www.nationalbank.kz

National Bank of Kazakhstan. The NBRK Governor Y. Dosayev statement on the base rate of the National Bank. 9 September 2019. www.nationalbank.kz