Yesterday - Three. Today - Five. Why?

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.

Yaroslav Razumov

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.
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).
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.
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.
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)?
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.
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.