Why Consumer Lending in Kazakhstan Hurts the Economy

A Few Thoughts on Consumer Lending

Economic theory offers various ways to stimulate an economy. The crisis of the 1930s in the United States, known as the Great Depression, was a crisis of overproduction. In other words, supply was stimulated across the board without adequate demand. No one stimulated demand, and because people were inclined to save, the rich saved while the poor had no means to live on. As a result, there was no one to buy the goods. When a wealthy person has surplus money, he does not spend it; he saves it.

Keynes then came up with the idea of stimulating demand, and it helped. Various other theories aimed at developing economies followed, modifying the methods. Monetary stimulus appeared in the form of regulating the supply and demand for money, fiscal stimulus aimed at the proper redistribution of taxes, budget stimulus aimed at regulating government spending, and so on.

One of the methods of stimulating demand in developed countries is consumer lending. In developed countries, such stimulus takes the form of mortgage programs, credit cards, auto leasing, and so on.

However, such lending does not work everywhere as a stimulus for economic development, and we are precisely among the countries where stimulating demand through consumer lending does the economy more harm than good. It is sacrilege for a banker to write this, but it is true. Let me try to explain.

Consumer lending in Kazakhstan consists mainly of unsecured loans, which take the form of cash loans and installment credit, as well as auto loans. Interest rates on such loans exceed 20 percent. In the short term, any consumer solves his immediate problem, but then his purchasing power falls by 20 percent until he repays the loan.

Cash loans are taken for personal needs. It is hard to assess exactly what for, but the cases vary, from weddings and education to medical treatment and business.

Consumer goods loans are taken to buy expensive items: furniture, appliances, plumbing fixtures, expensive clothing, and so on. Marketing does not stand still, and various forms of installment plans are now in fashion. People think a loan is interest-free, which strengthens the desire to buy something, but in reality all the interest is built into the price of the goods. Taken together, this makes goods more expensive and affects inflation. Since inflation in Kazakhstan is calculated on a basket made up of socially significant goods, such price increases have almost no effect on official statistics. Localization of production in Kazakhstan is extremely low, and this is actually not a problem if there is something to sell for export. Small countries have no need to produce everything; they need a stable, unique export that is least exposed to volatility.

Consequently, most of these loans go toward buying goods that are not produced in Kazakhstan, and this leads to growth in imports. Growth in imports leads to demand for foreign currency, which affects the exchange rate of the national currency.

Another side of the problem is that people who take out a consumer loan and buy yet another iPhone, television, or vacuum cleaner spend less on essential goods in the future, because they have obligations to repay. Essential goods are in fact more localized, and this is where the drop in demand for domestic goods comes from.

The very idea of localizing the production of everything in Kazakhstan is utopian and ineffective, because mass-market goods require a sufficiently large sales market, cheap labor, and cheap, advanced technology. The absence of any one of these will prevent development and immediately lead to stillborn projects, because in cost and quality our domestic goods cannot compete with others, even with Russian ones, since Russia at least has its own technologies. Small-scale workshop production is in itself very expensive in terms of unit cost. One could introduce protectionism, but protectionist methods do not work in Kazakhstan because of our non-transparent customs at the borders, membership in the Eurasian Economic Union (EAEU), and so on. As a result, our consumer lending stimulates the economies of China, Russia, and other countries more than our own.