Diesel Price Hike and the Mistakes of the 2016 Anti-Crisis Policy

In June of this year, I wrote that fuel prices would inevitably rise in August–September. That is exactly what happened: prices went up for AI-92 gasoline and diesel, the two most widely used types of fuel.

The increase was unavoidable. Without it, the country would have faced a fuel shortage, and just before the harvest we could have run into huge problems.

Fuel accounts for a significant share of farmers' production costs, especially for grain producers.

This means that the cost of grain and vegetables will rise this year.

The rise in AI-92 prices could still be kept somehow from affecting official inflation, but a 30 percent increase in diesel prices cannot be offset in any way. We, for example, now have to buy diesel at KZT 135 per liter. We have no choice; we have to take it, and bargaining is out of the question.

The point is that a 30 percent rise in diesel prices will pass through in full to the cost of farm output. Fuel prices were raised right at harvest time, so the entire increase goes into the cost of harvesting and, therefore, into the cost of the produce.

Now consider the task: how do you hold inflation to 8 percent when the prices of basic inputs have risen by at least 30 percent? Neither inspections of the markets, nor a government cap of 20 percent on retail margins, nor any other method will help here. Of course, this year's harvest is unlikely to feel the effect, but next year, especially in winter, we will see a surge in inflation. Deferred inflation, built up by the country's economic and monetary policy over the last two years, will play its part.

Countries around the world use countercyclical methods to manage their economies. We want to be countercyclical, but end up procyclical, because nobody wants to admit there is a crisis.

What is needed now is a strong tenge, to stimulate investment in the country and support purchasing power. Instead, the policy is geared toward a cheap tenge. Incidentally, under current conditions a strong tenge is also the most important tool for fighting the notorious inflation.

What is needed now is not to cling to the fight against inflation, so that businesses can use nominal profit growth to deal with their debts and increase revenue. Yet here everyone is trying to fight inflation in the middle of a crisis. In normal countries, a crisis calls for fighting deflation, and given the depreciation of our currency, our deflation is enormous.

What is needed now is tax stability, along with reform of VAT and the oil industry. Instead, we have set about raising taxes and replacing VAT with a sales tax, which will simply increase inflation and erode competitiveness.

What is needed now is support for SMEs and the simplest possible tax regime for them. Instead, requirements are being tightened and their taxes raised.

What is needed now is to develop subsoil use and increase output, to ensure growth in related industries. Instead, subsoil users have been driven into a corner, and we are now cutting production for the third year running.

What is needed now is to stimulate demand and raise the salaries of public-sector workers. Instead, support goes to builders, carmakers (in effect, Russia) and state companies to pay their external debts.

What is needed now is to carry out privatization in earnest and hand most inefficient projects to the private sector more quickly. Instead, we have only drawn up a privatization plan that will take another five years or so, and decided to pursue transformation instead of privatization.

What is needed now is to support the entire banking system. Instead, support goes only to a chosen few.

And I could easily write another ten items like these.

That is the policy we have. Growth of five percent in five years, you say? Only oil prices or the sleight of hand of statisticians can deliver that, and nothing else.