Year in Review

As expected, inflation for the year came in at 9.8%, a consequence of the high base rate and the strong tenge. Monthly inflation slowed to 0.8%, while food inflation for the year was 8.5%.

Meanwhile, the tenge continues to show a surprising, yet fairly explicable, resilience, and we ended the year at KZT 454 per US dollar. It should be noted that in the fourth quarter the National Bank actively sold dollars to replenish the state budget: over three months it sold USD 3.5 billion, even though the fourth quarter contains two tax months.

I took a close look at our trade balance. Data are so far available only for 10 months, but they show that, compared with 2022, we are heading for a substantial rise in imports and a decline in exports. In the first 10 months of 2022, imports came to USD 40.3 billion; over the same period of 2023 they reached USD 49.5 billion, an increase of 22.8%. Exports, meanwhile, fell from USD 70.9 billion to USD 64.4 billion, or by 8.9%. I do not expect the full-year percentage changes in imports and exports to differ greatly. Exports fell primarily because of lower exports of oil and metals. At the same time, there was growth in "machinery, equipment and vehicles" of USD 500 million, in "textiles and textile products" of USD 100 million, and in "chemical and petrochemical products" of USD 800 million, which is most likely explained by re-exports to Russia (for example, cars, luxury clothing and so on). On the import side, the growth is simply colossal in "machinery, equipment, vehicles and instruments", at as much as USD 6.6 billion, and in "textiles and textile products", at USD 1 billion. Chemical and petrochemical imports rose by a logical USD 686 million. In other words, it is plain that consumption is growing and that we are in a phase of investment projects. There is no breakdown, so it is hard to judge further. Some of the equipment and cars may also be exported to Russia, but with so little data it is difficult to make an estimate. Still, I think several causes are at work: growth in government spending, high consumer lending by second-tier banks, and re-exports to Russia.

Nevertheless, rising imports and falling exports mean that the country's industry will come under pressure from the exchange-rate imbalance. With low labor productivity, our producers find it hard to compete with imports.

For January 2024, the National Bank has announced foreign currency sales of USD 1.1 billion, almost twice the usual monthly volume, not counting the three months last year when KMG shares were being moved from Samruk-Kazyna to the National Fund. So in January, given the slowdown in business activity at the start of the year, we can expect the tenge not to weaken, and perhaps even to strengthen. February is traditionally a tax month, when subsoil users pay their main taxes for the fourth quarter, which will also support the tenge. But from March 2024 the risks of tenge weakening rise sharply, owing to the shrinking trade balance and the absence of support from the National Bank.

The only thing that can support the tenge over the long term is higher labor productivity. That, however, requires a comprehensive program aimed at technological re-equipment of existing enterprises and the construction of new high-tech companies with high added value. This means attracting foreign investment (so far without great success), improving the investment climate, improving the judicial system, and changing the measures of support for producers: moving away from interest rate subsidies and toward guarantees, long-term contracts and long-term funding. Sales from the National Fund alone do not allow the economy to develop; they only create imbalances that will be hard to deal with later. Although for now, as a means of containing inflation, a strong tenge is the most effective tool.