Why the Tenge Will Keep Losing Value, Again and Again

Most manufacturing in Kazakhstan depends on imports. We also bring in a great deal of finished goods from other countries. Devaluation naturally gives producers inside Kazakhstan a short-term boost, but only by making labor cheaper.

In the medium term, however, labor costs will rise, and we will again find our industry uncompetitive. And our currency, unfortunately, will keep losing value again and again.

To prevent this, we need a qualitative change in the structure of industry, because a cheap tenge encourages more manual labor and reduces the role of intensification and of productivity gains from new technology. Two main factors are at work here.

First, when the tenge is cheap, equipment and new technology become much more expensive. Businesses have neither the money nor the funding, so they have to look for a substitute in additional labor. Take a very simple example: mechanizing the packaging of goods requires money to buy the appropriate equipment. The producer has no money, but the goods still have to be packed. So he hires extra workers and expands production extensively.

Second, manual labor becomes competitive against mechanized labor. Buying new foreign equipment becomes unprofitable, because its cost over its service life already exceeds the cost of manual labor at current wage levels. But as soon as labor costs rise (and they must, since inflation and rising living standards demand it), this competitiveness will evaporate. And by the time businesses realize they need new equipment, the national currency will have weakened again, and everything will go back to square one.

To solve this problem, we need a more sensible approach to monetary policy, one that considers not only current support for producers but also future competitiveness.

Let us look at changes in the prices of goods and services of industrial producers, as well as at inflation in Kazakhstan.

Annual inflation for 2015 was 17.6%, while the price of industrial output in Kazakhstan rose by 26.3% over the same year. Since the beginning of this year, industrial output prices have risen by 13.2%, while inflation has been only 5.4%.

Is it possible for the price of manufactured goods to rise while inflation does not? It is possible only in the short term, when there are stocks of unsold goods and purchasing power has fallen sharply. In other words, producers are building up inventory, retail chains' margins are shrinking, and many are starting to operate at a loss.

Another striking fact: trade in January–July 2016 was down 4.7% from the same period a year earlier, which points to weaker consumer demand. This will affect producers. Production always lags behind sales, and there are two points to make here.

First, a rise in the price of manufactured goods is always an indicator of future inflation in the country. The fact that prices have already risen by 13.2% in eight months while inflation stands at 5.4% means that the National Bank's artificial restraint of inflation will only lead to deferred inflation next year. It has nothing to do with economic growth or with the well-being of the population.

Second, the decline in retail sales is an indicator of a future decline in the country's production, since subsequent orders will fall as the country's well-being grows.

This raises the obvious question: what is to be done? At a minimum, we need to determine what the overall economic goal of the government and the National Bank is.

If the goal is economic growth and rising well-being for the population, that is one direction, and it requires mechanisms for achieving these goals that are entirely different from the current ones.

If the goal is to meet budget revenue targets and to hold down inflation artificially by squeezing the money supply, then that has nothing in common with the goal of economic growth and the well-being of the population.