Why the Tenge Keeps Being Devalued: Labor Productivity

According to official statistics, inflation in November 2015 was 12.8% year on year (against November 2014). I expect that inflation for the full year will come in at around 13–14%.

These are official figures; what actual inflation will be for the year is unknown.

Rising inflation is a consequence of the tenge's depreciation, and it was logical to expect double-digit inflation given that the actual devaluation exceeded 60%.

But the problem is not only inflation. It lies in the nature of the devaluation: why does the tenge have to be devalued again and again?

The core of the problem is labor productivity, or more precisely, the growth rate of labor productivity relative to competitor countries, measured in monetary terms. In other words, how much output of goods, works and services, valued at market prices, there is per unit of labor.

Clearly, this is a two-factor model that depends on the following:

1. The market value of goods, works and services

2. Labor productivity in physical terms

Because productivity growth in Kazakhstan was sustained exclusively by oil prices, the fall in commodity prices has pulled down our overall labor productivity.

There is another factor: our main competitor, Russia, has let its currency depreciate, and its labor productivity per unit of labor has risen as a result of the ruble's decline.

In such a system, a country must either cut staff or reduce wages.

Cutting staff without cutting output means higher labor productivity, which is not feasible in Kazakhstan, so wages have to come down for the economy to remain competitive.

Labor legislation and the risk of social unrest will not allow this problem to be resolved that way, so the only way out is currency depreciation, which makes our labor cheaper by international standards.

What follows is the standard scenario: prices inside the country rise, and inflation eats up all the competitive advantages, because wages then have to be indexed as well. In the end we come back to the need to devalue the tenge again, unless energy prices rise.

In this situation, what is needed is technological change that raises labor productivity across the country as a whole, driven by new technology rather than by oil. We must also recognize that if technology-driven productivity gains free up workers, those workers must be put to use so that they, too, can add value within the country.

This is not happening in Kazakhstan, so depreciation of the currency will remain a permanent feature unless the economy itself changes.