inflation
September inflation at 0.6 percent
(SRI) - The inflation in September 2008 was 0.6 percent and 8.1 percent since January, the Kazakh statistics agency reported on Wednesday.
Kazakhstan Business and Economy Roundup - July 14, 2008
Kazakhstan H1 industrial production growth stalls
(Reuters) - Kazakhstan’s industrial production growth stalled in the first half of this year to 3.8 percent compared with 6.8 percent in the same period of 2007.
Kazakhstan gears up to tackle food crisis
(Xinhua) - Kazakhstan, a central Asian country that has also been severely affected by the worldwide food crisis, has put in place a series of significant measures to curb the skyrocketing food prices.
Kaztemirtrans, Kazmortransflot pool efforts to develop transport infrastructure (SRI)
Aktau sea port transshipped over 56.000 tonnes of grain during 6 months (AgriMarket.info)
National Bank of Kazakhstan: Exchange rates July 12-14, 2008 (Kazinform)
Indicators - July 11, 2008 (Reuters)
Kazakhstan: Country Outlook
FROM THE ECONOMIST INTELLIGENCE UNIT
The president, Nursultan Nazarbayev, will stay in power in 2008-09, having consolidated his hold on Kazakhstan’s political structures, but could face growing dissatisfaction among businesses owing to the slow pace of reforms. Rising inflation and liquidity problems in the banking sector will be among the government’s main policy challenges in 2008-09. The National Bank of Kazakhstan (NBK, the central bank) might be forced to raise the refinancing rate from 11% if inflation remains higher than targeted. The Economist Intelligence Unit forecasts real GDP growth of 6.7% in 2008, rising to 7.1% in 2009. This is much slower than in recent years, and reflects the dampening effect of the global credit squeeze on Kazakhstan’s growth. High food prices and a loosening fiscal policy will exert upward pressure on consumer prices, pushing average annual inflation upwards to over 17% in 2008, from 10.8% in 2007. Disinflation should take hold in 2009. The possibility of more sustained downward pressure on the currency has risen, and greater volatility than in recent years is likely. The current-account deficit should narrow in 2008 because of higher oil prices, but it will widen again from 2009 owing to rising invisibles debits.
Who Is Responsible for the Inflation in Kazakhstan
From Yaroslav Razumov in Exclusive. The English version can be found here, the Russian version here.
We asked Petr Svoik, the well-known economist whose economical forecasts frequently (and unfortunately) come true and the person who had experience working for government, to comment on the situation of increasing prices. In our opinion, the present situation shows that the economical problems in Kazakhstan are for the large part caused by the ineffective administering process. How and why does it happen?
- Petr Vladimirovich, to which extent the government and in general state organs are responsible for the increase of inflation?
- Considering the present state structures it is extremely difficult to say which member of the Cabinet is responsible for prices. The Ministry of Finance is definitely not. The Ministry of Economics has never monitored this issue and no one from its leaders said something definite about it, although ideally it should not be the case. The Statistics Committee examines the level of prices but can not influence it. Traditionally only the National Bank was responsible for prices. The population, community and journalists used to address all questions about prices to the National Bank.
In the meantime, the National Bank is able to influence only the monetary factor and there are many more other important price factors.
The present uncontrollable increase in prices revealed the problems that were implicit for many years. The state and a number of experts affiliated with it were euphoric when in 1999 oil prices started to increase, resulting in increase of the National Fund and the 10 % GDP growth rate. However, they didn’t consider seriously the simple fact that this economy was built on export of raw materials and import of absolutely all necessary goods.
- The monetary and non-monetary factors of inflation are sometimes a discussion topic among independent experts. Which factors prevail in our country?
- The inflation is a complex event and involves many factors - both monetary and non-monetary and the latter dominate. However, this fact was ignored and the National Bank made the government and all of us think that only monetary factor causes the increase in prices. However, it is not the reality.
What do we have now? First, the infrastructure component of pricing in Kazakhstan is problematic. The Kazakh transport, electricity and public utility industries, which influence every price, are in archaic condition, lack needed capacities and are catastrophically ineffective in everything. More specifically, they lack energy-efficient technologies. These industries as well as others, for example, road industry, require large investments not only to maintain the present capacities but also to enlarge them. Until now these industries were maintained using old Soviet reserve and as it came to its end the new investments are required.
These investments will result in higher utility, electricity and transport tariffs as well as in higher prices on everything else. And the government can not think of the prevention methods.
Moreover, there is no theoretical understanding of what parts of the investments and restoration costs could be included into infrastructure and utility natural monopolies’ tariffs. Also it is not clear how to obtain the money needed for the part of investments excluded from tariffs. For example, what money resources and on what terms should the government invest in infrastructure and public utility companies? And if there is private investor, what is the procedure of repayment? There are no answers to these questions. As there is no the required legislation. Thus it’s the description of the first non-monetary factor that caused the price growth.
Second, the domestic goods are quite expensive and hardly compete with the similar products from CIS countries even at the local market. Let‘s take a random example of Russian and Kyrgyz milk and sausage products that are demanded over the goods produced by several domestic companies.
Thus there is no real competition, effectiveness and the production costs economy. Consequently, these inefficiences affect the price growth.
And what is the effect of the domineering import on the inflation processes?
- Depending on the exchange rate of dollar for the importer‘s currency the imported prices carry the external inflation. And it is not the end. Already high import prices are increased further by the customs including the bribery and the payments to bazarkoms. These costs are essential.
Whether the supermarket or bazarkom «the sales business is entirely private. Still it is also akims» business. Through the land, rentals and infrustructure the local government controls everything from «bolashaks» to «„ramstores». The sales bussiness is obliged to pay a significant percentage of its income. My guess is from 20 to 25 %. Although it is just a conjecture as there are no specific researches to rely on. And this is also relevant to the question of price monitoring in Kazakhstan and who is responsible for it.
I can not estimate the increase in price of the import after it passes through customs, but here is the example from practice. The Kazakh businessman buys goods in Urumchi, delivery of one cubic meter volume of goods to Almaty costs 250 dollars for 1,5 km. But the delivery of the same cubic meter from Almaty to Astana costs 300 dollars for 1 km. It means that the Urumchi-Almaty transportation costs 50 dollars. Thus the rest 200 dollars were paid for something else. What part of this money is official customs taxes, profit of the transport company and what amount went for the structured bribery system?
Therefore, in conclusion it can be said that our economy – a) is noncompetitive in value, b) is highly corrupt, c) produces limited amount of goods and services, d) is inefficient in domestic production, i.e. not aimed at costs reduction. And all these factors result in higher prices. And the longer it gets the larger the influence.
- The initial increase of property prices and consequent price growth caused by mortgage loans are always associated with monetary factor …
- The property issue certainly had its impact on the inflation processes. However, it is not fair to blame banks as they also found themselves in difficult situation.
Kazakhstan has a dual economy. One part of this economy focuses on raw materials export and import of the foreign goods. The largest part of export earnings is accumulated in the offshore companies and National Fund and the rest is spent in the country as taxes, salaries and development funds. This additional currency initiates a substantial increase in purchasing capacity. However, this increase can be observed in the limited area of the country.
Those banks give loans using the external resources, which are borrowed at unreasonable interest rate. And this as well causes the inflation.
The above is one of the monetary problems. Another problem is that there are few options for investing the additional money, because of small number of domestic producers. Even assuming that all the production industry projects implemented since 1991 are functioning, the scale of industrial development is still not impressive. Consequently, the banks had to invest only to housing, office property and to giant trade centers. And it created so called “housing bubble” that everyone is worried about now.
So, the only banks that could function in this economy are export banks and they do not work with domestic passives. For example, let’s imagine there is one bank with geographical name. All the other banks do not have access to the export economy and its abundance of currency.
- It’s surprising that you are supporting the banking community. Especially after you criticized it 2-3 years ago.
- The banks can be blamed only for over active investments to property sector. But again it was the only possibility to invest. Also, banks had the unreasonably high margin when they could do well even with smaller interest rate. It is a simple fact - the smaller is the interest rate the stronger is the economy and longer is the economic cycle.
- And why the development cycle of Kazakhstan’s economy appeared to be so short – the “bubble” emerged within only several years?
- Unfortunately, in addition to small scale of our economy just half of transactions are made using tenge. Let’s take the official data without the black market’s unregistered circulation of cash. What is the ratio of credits in dollars to credits in tenge? Approximately fifty-fifty. What is the ratio of banking deposits? The same numbers. It means that half of the money in the economy is foreign currency. Consequently, the capacity of Kazakh economy is cut to half. It is the first reason.
The second reason. In my opinion, the present policy of the National Bank is harmful – it increased the refinancing rate to higher than the inflation level, practically stopping to grant loans to the second-tier banks. And the worst thing is not the rate but the unwillingness of the National Bank to give loans to commercial banks. This is very bad.
The correlation between the level of inflation and interest rate is arguable. In any case, the developed countries with independent credit emission do not apply it. The rates of Federal Reserve System, Japanese and EU banks are less than real inflation. If those countries applied the IMF and World Bank recommendations for the developing countries, their own development would have stopped. The developed countries connect their initial credit emission with the GDP growth rate. The emission involves the interval from 0 to maximum (rarely) 5%. The banks further raise the interest rate thus, the European and Japanese economies develop with 6-7 % interest rate. That is a normal practice. In our economy only the initial external rate is 8-9 % and it is further increased by the banks’ margins. That is why Kazakhstan experienced such a short economical cycle. The policy of the initial rate being higher than the inflation makes the loans forbidden. This policy is rather suitable for the inferior, undeveloped economies. However, in our country this rule is applied. Thus only foreign loans are available and those increase the level of inflation in the country.
- Then why the abundant in the last years foreign capital was invested into property and not, as there was no potential in industry, for example, to agriculture?
- Banks are interested in fast yielding investment projects. The agriculture lacked such projects until lately. This year the wheat industry experienced renewal. There is natural rent now, and the prices suddenly increased covering the costs 2-3 times. By the way the wheat is the only component of export that brings foreign currency into country. Unfortunately, this currency mainly goes to agriculture producers, common agriculture workers do not get advantages from the perfect world market conditions. At best they cover their costs. The city owners of hundred thousand hectares and elevators are the ones who enjoy the greatest profit. At least they are domestic owners and they carry the currency into the country. Probably, this would help develop the agriculture industry. Of course, if the land owners make investments to the agriculture and not to the city property.
- Which factors – monetary or non-monetary – had a greater influence on increased prices of bread at Kazakh market?
- At the time of “perestroika” reform, at the final years of the USSR, the country received rich harvest. But the system was so unbalanced that it couldn’t be gathered. Zhvanetsky had an exceptional statement: the rich harvest was the last straw that completely ruined the USSR economy. That was a really funny joke.
What do we have? Kazakhstan long ago received the advantage of high oil prices, but for the population it resulted only in high prices of gasoline at the local market. Now we have higher prices on wheat, however, instead of profit people get higher prices for bread.
Why? It is a question for the government. The independent government should establish the national social and economical policy that will provide the total surplus from favorable prices.
Then it should redistribute this surplus in the country more or less fairly and effectively in economical sense.
At present time, there is no government structure (or even a person) that could be responsible for prices, understand the pricing situation and influence it.
The government is absolutely unable to make the necessary actions in this sphere. For instance, now it is forming wheat stocks by artificially lowering the purchasing price. The world market price is 250 dollars, while government pays only 200 dollars. Prime minister calls for the actions from “akims”, but the government itself uses anti market measures to market entities.
Now, from all said you can make a judgement which factors were crucial for the inflation.
Causes of Rising Inflation in Kazakhstan
Another interesting piece from Exclusive. The English version can be found here, the Russian version here.
What are the reasons for the inflation currently in Kazakhstan? What role have external factors played in this inflationary pressure? Could the government or the National Bank have prevented it? What is to be done now? In order to find out, The Exclusive interviewed several famous Kazakh economists. Below are their unedited answers.
Comments by Bulat Khusainov, the leading researcher of the Institute of Economics
Certainly, Kazakhstan is not the only country that faces price increases on commodity goods, particularly in the food market. This phenomenon is happening in other CIS countries. The causes of such inflation are not monetary in nature. The reasons are in the structure of our industry, in the technological backwardness and, more importantly, in the lack of competition and extreme monopolization.
The inflation index can be compared to “the average temperature” of patients in a hospital. Great Britain and Russia have produced a special calculator, which enables us to count our own inflation. However, the inflation that is estimated with the consumer price index does not accurately reflect the real cost of living.
Why are we in this situation today? Here are some numbers. If one analyses prices for consumer goods and services in Kazakhstan since 1995, one can see that by the end of 2003 the index has increased by a factor of two or three. This inflation has three components: food commodities, non-food commodities and services. The third component has increased more than six fold. This is often caused by the prevailing practice of prepayment for services rendered. The example from our present day reality is mobile telephone service. In their business model they employ a one step payment system. If each mobile user daily pays one dollar for services that have not been made yet (there are about 5 million users in Kazakhstan), you can calculate how much money was charged for a service not yet rendered. A similar scenario happens in many sectors of the economy and will persist in the country until a sufficient number of competing companies-operators exist in the market place.
People in Kazakhstan are primarily concerned with the price increase for bread. Kazakhstan does not import crops, we export them. Our grain production exceeds our consumption. Total grain production is approximately 22 000 000 tons, while the internal consumption is about 4 000 000 tons, including seed banks and grain reserves. Therefore, the claims of some officials that the price increase is explained by worldwide growth in the price of agricultural commodities are not reasonable. References to global pricing and world grain reduction are meant for the naïve. Certainly, bakers have increased their prices as a result of growth in tariffs and duties; however, it is not the only factor causing price increases. Somebody has removed bread from the list of the foodstuffs, the cost of which is regulated by the government. Hypothetically, people who made this change are to be punished.
Regarding other foodstuffs, their prices have grown as many of them are now imported. Do you recall a sudden increase in exchange rates that occurred in August? At the same moment, new customs regulations were introduced. According to the new regulations, to import commodities and services, the exporting party needs to present an export declaration. This is irrational. Nevertheless, a considerable volume of currency of the country’s four important banks was detained at the border for three or four days. The exchange rates fluctuated drastically, provoking panic. This, naturally, caused an increase in prices, even in Zelenyi Bazaar.
Due to its incompetence, the government is unable to control the situation. One specialist in the research center would suffice to analyze the situation in the world grain market. The world grain market did not deplete its reserves instantly, it happened gradually over several months. These changes need to be monitored and an adequate reaction should follow them. Considering the outcome of the situation, nobody did the homework.
The inflation indexes we use, do not factor in the increase of the prices for real estate and the primary and secondary housing markets. According to official statistics, land prices in 2006 have grown 300% in the republic and 500% in Almaty. The prices for new apartments have grown 1,6- 1,7 times. In my opinion, it is not the inflation that needs to be calculated, but the cost of living with the help of a relevant index. Last year our statisticians roughly estimated the increase in the cost of living in Kazakhstan. We used the lowest rates for the housing and land. According to our estimations, the cost of living in the Republic has increased 1,5 times, and 1,75 in Almaty. In this estimation, we considered the real state price change, which is not taken into account in the inflation rate measured by the consumer price index (as per MFA method).
What can we do now? We can create more competition and decrease the import of foodstuffs. There is a threshold of imports of foodstuff, it is equal to 30 % of the total volume of consumption. We have passed this threshold long ago.
The mortgage crisis in the US chronologically coincided with the incompetent decision of the customs authorities; these factors led to the delay of cash inflow into the market. We have created an artificial economy, which does not obey classical or neo-classical economic theory.
Comments by Valeriy Markov, an independent economist
Our problem is that we still do not know how to employ the curves of supply and demand. At the intersection of these curves an equilibrium price is established. The price creates equality between demand and supply.
A sudden outbreak of inflation impacted both Kazakhstan and Russia. We cannot blame this outbreak on external circumstances, like the world grain price increase. Theoretically, internal grain price increases can be affected by global market fluctuations; however, the price increase on vegetables grown locally and sold in a local market is the result of internal inflationary pressures. It is our local factor at play.
Possibly, the government has a point, it is the mediators’ fault. Why the government allowed the mediators to become so influential? It is likely that in the existing circumstances they not only succeeded but also thrived.
Let us recall our nearest past. Not long ago our oil refineries stopped because of an oil shortage. History repeats, but nobody learned its lessons. At that time the Minister of Energy, Mr. Shkolnik, talked investors into supplying oil for domestic refining. The problem was solved without due consideration of the laws of the market. We faced a similar situation in 1990 in cotton production. The same thing is happening now. The problems often left for district management to resolve. Evidently, the districts cannot employ economic theory. Rather, they resort to their administrative resources.
In the Kostanai district the price for 1 liter of sunflower oil reaches 600 Tenges. It is the result of the cultivation of rapeseed instead of sunflowers, which is commonly used in the production of bio- fuels. Evidently, this innovation has not been closely considered. However, the result leaves much to be desired. Salt and sugar disappeared in Kostanai. It was a sign of panic in the market for foodstuffs.
There are many questions with respect to other factors as well. Let us look into the bread market. How can the prices of bread be so high in a year of a record harvests (22 000 000 tons, or 18 000 000 net)?
Speaking about inflation in our economy, not everything can be explained by external forces. Even if the situation with grains is understandable, why did vegetables become so expensive in Almaty? Within the last year, the price has grown by several times. Apart from external factors, there exist internal causes – incompetence and the poorly planned policies of the National Bank and the government.
The primary required measure is an adequate response policy from the National Bank. Every year, the National Bank together with the government signs an agreement regarding inflation containment. Was there a decision of this type this year? I have not heard about it. In any case, cooperation between the National Bank and the government is a necessary measure.
Russia is going to introduce export taxes on grains. This is not a market measure, but in our own turn we resorted to the same measures for oil, in order to provide resourses for our oil- refineries. Russia solved a similar problem in the same way.
We should admit that the price increases show again that the country lacks a systematic and qualified economic analysis. Although we have a considerable number of experts with degrees from the leading universities of the USA and Europe, we have been unable to analyze and predict basic economic patterns including price dynamics on the local market and its relation to the world economy.
Meruert Makhmutova, Director of the Center for the Analysis of Social Problems
The government of Kazakhstan is proud to be recognized by the European Union and the United States as a market economy. In practice, normal market mechanisms do not work here. The reasons for today’s inflation go to our past. To contain inflation within five to seven percent the government resorted to various measures, this was often a political necessity.
Presidential elections took place in 2005. Thus, the government ran a deficit of nearly 45%. The government announced a moratorium on the tariffs. In order not to control prices on vegetables, they created food trains from Central Asia. Each Akim was to monitor the prices on its territory.
In 2006 the necessity to contain inflation with administrative measures disappeared, and municipal costs grew considerably. Within the year, the inflation rate reached 8.6 % on average.
Currently, we witness changes that will bring the inflation rate to nearly 12% by the end of the year. All components of the inflation index are skyrocketing, including prices for foodstuffs, non-food commodities and services.
Where are the grounds for these numbers? This year the cost of electricity has already increased two fold. The President states that prices will continue to grow. The authorities explain this by high maintenance costs and the need to make infrastructure upgrades. However, we knew it 10 years ago!
At the beginning of the 1990s, the government stated that not all power enterprises would be privatized, due to their strategic significance. They forgot about these promises in 1997. Thus, all the power infrastructure of Almaty was sold for 5 000 000 dollars, at the same time its estimated value exceeded 300 000 000. The privatization was conducted with a caveat that the new owners will invest in infrastructure upgrades. They seem to have forgotten about this.
Let us see how the energy investors have fulfilled their responsibilities. Today the government insists that we have no resources for the upgrades. Why were these contracts signed 10 years ago? Who monitored the obligations? Now they try to impose the costs and responsibilities on the consumer. Surely, the maintenance costs are very high. We need to carry out a serious control over the fulfillment of responsibilities of those who privatized the objects in the past. The government ought to verify the nature of those responsibilities and the extent to which they have been fulfilled. Municipal cost increases accelerate the overall growth in prices for all other commodities and services.
A similar situation exists on the market of fuels and lubricants - each season brings a price increase for these types of commodities. In any sector of economy, it is not the market that determines prices, but the momentary needs of the government. This technique has been exhausted; the government tries to face the market by saying: “let the consumer pay for everything and the price will be controlled by the correlation of supply and demand”.
Being too deeply involved in politics, the government ignored economic policy (Recall our ministers joining Nurotan). The analysis of economic policy in recent years demonstrates that all measures and actions taken by the government were inadequate. Expenditures on the Kazyn, Samruk, projects, profits of which no one could guarantee, have contributed to inflation. Unfortunately, high oil prices made it possible “to succeed”. However, the problems piled up. The government is unable to predict a single macro-indicator: GDP, state profit and expenditure, inflation, etc. The Parliament, which should contribute to the system of checks and balances, is presently unable to control the administration’s actions.
All the measures offered by our government are reminiscent of an elephant in a china shop. For example, the government promises to support banks, construction companies, and those who have already issued IPO. The President ordered the use of public funds to purchase shares of Kazakh enterprises in the international markets. Why? Nobody discusses the advisability of such actions and their long- term impact. What can we do if their price continues to drop? Business is business, if businessmen are sure to get “a crutch”, nobody is going to make thoughtful decisions.
In order to approach a minimal control on inflation, it is important to analyze all its components. The balance between external and internal factors is approximately fifty- fifty. Monetary and non- monetary factors also arise.
The former prime-minister reproached the National Bank for its monetary policy. However, due to the peculiarities of our economy, each time the National Bank increases the rate of re-investment, it does not affect the volume of money present in the economy. As we all know, a considerable influx of the foreign currency in recent years was caused by domestic banks and companies seeking loans on the international credit market.
This influx accelerated inflation in the domestic economy. The money borrowed abroad allowed increasing volumes of credits, which, in turn, has lead to the greater demand by households. This has expanded the demand growth from internationally traded sectors into internationally non-traded sectors.
Further economic growth was achieved by giving more importance to import- free sectors: trade, construction, services. Two years ago we recommended that one should treat credits with caution, because they promote further increase of prices. Uncontrolled growth in the credit market provoked the Asian crisis of 1997. However, the government made the National Bank responsible for the inflation, while itself increases state expenditures.
There are many components to inflation. Unfortunately, the government has a narrow vision regarding economic processes and it is not interested in expert opinions. The population only thinks about these issues when their everyday lives are affected, like the increase in prices for bread and other basic goods.
