How to Beat Inflation in the Short Term

In the long term, inflation is a consequence of the pace of labor productivity growth in a country (provided there is no inflationary spiral). In the short term, however, a great many factors influence inflation, and they must be contained to keep an inflationary spiral from starting.

Clearly, in Kazakhstan, as elsewhere in the world, inflation results from many factors:

1. An increase in the money supply driven by higher government spending and the printing press: the handing out of pension savings, subsidized lending to households (car loans and mortgages), subsidized money for entrepreneurs, and so on;

2. Supply chain disruptions caused by the coronavirus and the military conflict in Ukraine;

3. A stronger Russian ruble against the main currencies;

4. Higher demand for goods as a result of the sanctions against Russia and the mobilization in Russia;

5. Inefficient government spending, which raises imports without creating a multiplier effect for the economy;

6. A decline in foreign investment in the country, owing to a number of factors;

7. Growth in consumer lending;

8. Artificial restraint of regulated tariffs and prices of controlled goods, such as fuel and lubricants, gas, bread and so on.

To resolve the inflation problem in the short term, we need to tackle precisely these factors.

The money supply must be reduced by abandoning state programs altogether. These currently include the 7-20-25 mortgage programs, the Otbasy Bank programs, subsidized car loans, the spending of the Industrial Development Fund, the "optimization" of the state budget, and so on. However painful this may be for the businessmen who benefit from them, it is people with low incomes who suffer from such programs: these goods become even less affordable for them, while inflation eats into their incomes.

In this respect, we must create a favorable environment specifically for importers. A separate plan is needed to encourage cheap imports. For example, we need unimpeded access to the railways, which is possible only through competition; we need green corridors at customs points; we need transparent customs administration, and so on.

We cannot influence this factor, but in our circumstances we need a strong tenge, which can be achieved only by increasing demand for the tenge. And for that, whatever the haters say, we need a high base rate, which stimulates short-term demand for the tenge, and a positive balance of payments, which can be achieved through the factors that follow on the list.

It is a fact that the sanctions severely disrupted supplies of all kinds of goods to Russia. This created heightened demand for those goods in Kazakhstan, because we have free movement of capital and goods. That is good for our businesses, but it shows up in higher prices. The problem will be resolved as the market becomes saturated, which takes time. Point 2 would help here.

Unfortunately, one of the biggest stimulants of imports is government spending. It must be cut, and all investment projects must be fully reviewed. This is the hardest task, but it has to be done. Examples include the construction of various non-productive facilities whose future utilization is highly doubtful, and wage indexation that runs ahead of inflation, with no link to inflation or to gains in labor productivity, and so on.

The main source of investment inflows into Kazakhstan has been the subsoil use sector. Our subsoil use legislation is badly outdated and unprogressive, and there is little appetite for changing it. The courts are weak and the ministries are opaque. Add the current geopolitical situation, inefficient taxation and many other problems. Yet Kazakhstan's potential is enormous. Resolving the problems in subsoil use would sharply increase investment inflows and thereby strengthen the balance of payments, which would affect the tenge exchange rate. That in turn would lower the cost of imports and help reduce inflation.

Consumer lending is growing because of low incomes, a low base and the widespread adoption of various BNPL schemes, in which the interest is built into the price of the goods. Every kind of installment plan raises the price of the product by the amount of the bank's interest income, and people have no real way of checking what such a product actually costs, because buyers who do not use installments are offered gifts and bonuses to offset the price. For example, a television costs KZT 100 thousand, but is put on the shelf at KZT 125 thousand with a 12-month installment plan on offer. In effect, that is almost 50% per annum once the duration is taken into account. As a result, the large number of installment plans raises the prices of goods by the amount of interest, which feeds into inflation.

Artificially restraining tariffs means that they later have to be raised all at once by a large amount. They are restrained, admittedly, also in order to hold down inflation, but when the time comes to raise them, the increase has to be larger than it would have been if they had been raised cumulatively each year. Subsequent capital repairs and investment always cost more than steady ongoing maintenance.

We could delve further into inflation and find many more factors, for example inflation resulting from improvements in a product's consumer qualities. Phones and cars, for instance, become more technologically advanced with each new model and cost more than the previous ones. One could also ask about inflation resulting from rising prosperity. The richer people are, the more expensive, for example, services become, and the more expensive the goods people consume. But one thing is clear: we need a comprehensive plan to fight inflation, one that addresses the actual causes of rising prices rather than using the Lukashenko method :)