By Simon Pirani
The Kazakh government is keeping a watchful eye on inflation and dollarization of the economy as it struggles with the financial consequences of stratospheric oil prices, deputy finance minister Gani Uzbekov tells Euromoney.
Kazakhstan's diversion of oil revenues into the national stabilization fund has been welcomed as an antidote to "Dutch disease" (an over-reliance on natural resources revenues). However, there are aspects of economic overheating that the fund has not solved, warns the 31-year-old Harvard graduate who arrived at the finance ministry in 2003 after a spell at the UN's internal audit department.
"We have to reckon with the fact that the national oil fund has not dealt completely with the growing inflationary pressure on the economy and the strong increase in the tenge exchange rate," Uzbekov says. "Although for the last two years inflation has been held at 6.4% to 6.9%, the financial authorities have held it at that level only with great difficulty."
Signs of disease
The government and central bank set an inflation target of 5% to 7% for this year, amended upwards from a previous level of 4.9% to 6.5%. "But the tenge's real exchange rate rose by 12.6% in 2003 and 14.3% in 2004, which produced in some non-natural resources sectors, and in particular the processing industries, clear signs of Dutch disease," Uzbekov says. "A role was also played in this by large inflows of foreign investment, including cheap credit from the international markets for Kazakh companies and banks."
Measures taken by the central bank to deal with inflation include an increase in October last year of the repo rate (with a plus or minus 200 basis points corridor) from 3.5% to 4%. Rates paid on deposits also increased by 0.5% and short-term notes worth KT340 billion ($2.5 billion) were issued.
Uzbekov says that dollarization of the economy has been "a priority concern for the National Bank of Kazakhstan in recent years" and that efforts to control it are paying off.
"We now see some preference for tenge-denominated financial instruments," he says. In February this year, for example, tenge deposits in the central bank rose by 9.5% to KT725.4 billion, and those in foreign currency by only 0.1% to KT537.5 billion. In April the volume of tenge credits outstanding surpassed 50% of the total in all currencies, and in May rose more than twice as fast as foreign-currency credits to KT905.2 billion (50.8% of the total).
"So after a long period in which the level of dollarization of the economy was rising we now see it moving in the opposite direction," says Uzbekov. "And this has been achieved without administrative measures from the state."
The recent strengthening of the dollar against the tenge also resulted in an increase in the level of Kazakh pension fund assets being invested offshore, Uzbekov notes. Between January 1 and July 1 this year, the share of offshore investments rose from 3.1% to 6.4% of the total investments by the funds.
The oil stabilization fund, which was established in 2000 and now stands at $5.2 billion, is regarded as the cornerstone of the government's strategy for countering Dutch disease. Changes in the way funds are paid to it and managed are now under consideration, Uzbekov says.
A government commission, which includes foreign experts, has proposed that all tax revenue from the oil sector be paid in full to the fund, and then guaranteed transfers made from the fund to the budget. (Previously the fund was financed under a different methodology, from oil royalties and the sale of mineral assets.)
The new arrangement will provide additional protection for the budget from oil price volatility, Uzbekov says. "Given that the majority of oil proceeds will be promptly paid into the fund, and saved not spent, this method will allow sterilization of excess monetary flows.
"This approach will also reduce unequal pressure on the tenge exchange rate throughout the year and restrain the domestic inflation that has been stimulated by the inflow of oil dollars," Uzbekov says. "Payments into the fund will be made periodically during the year, under the timetable for tax payments, rather than at the end of the year after the completion of the annual plan. But in the long term, the most important 'medicine' for Dutch disease is the diversification of the economy."