Money and inflation

Table 1 forecast of key monetary policy indicators

SCENARIO TWO

 

	2011	2012	2013	2014
	actual	forecast
Inflation, %	7.4	6-8	6-8	6-8
Official Refinancing Rate,%	7.5	6-8	6-8	6-8
Reserve Money, KZT bln.	2 836	3 451	3 778	4 226
Money Supply, KZT bln.	9 751	11 525	12 633	14 149
Deposits of Residents, KZT bln.	8 385	9 995	10959	12 227
Credits to the Economy, KZT bln.	8 781	9 233	10 082	11 283
Monetization of the Economy, %	35.7	36.8	40.0	40.0

table 2 forecast of key monetary policy indicators

 

SCENARIO THREE  

	2011	2012	2013	2014
	actual	forecast
Inflation, %	7.4	6-8	6-8	6-8
Official Refinancing Rate,%	7.5	6-8	6-8	6-8
Reserve Money, KZT bln.	2 836	3 559	3 968	4 464
Money Supply, KZT bln.	9 751	11 891	13 326	15 014
Deposits of Residents, KZT bln.	8 385	10 316	11 571	13 045
Credits to the Economy, KZT bln.	8 781	9 212	10 263	11 532
Monetization of the Economy, %	35.7	39.9	40.1	40.2

table 3 forecast of key monetary policy indicators

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

III.  Analysis of inflationary processes in the Republic of Kazakhstan

3.1 Statistical data of inflation dynamics from 2009 to 2011

Inflation report for 2009

         In 2009, the inflation rates in Kazakhstan were steadily decreasing. Based on 2009, the inflation was at 6.2%. This inflation rate is 1.5 times lower as compared to the inflation in 2008 .

Low business activity, stagnation in the lending activity of banks, low growth rates of  real cash income of the population, limited consumer demand were the major factors for a decrease in the inflationary background in the economy.

   Nonetheless, it should be mentioned that the macroeconomic situation in Kazakhstan in 2009 is characterized by a greater stability as compared to the situation in 2007-2008. At  the same time, if in the first half of the year the output volume in the most sectors of the  economy (manufacturing industry, construction, cargo turnover, retail sales), decreased, in the second half of 2009 a break point outlined. According to the tentative estimates, the real GDP growth was 1% based on 2009.

      A minimal inflationary background allowed the National Bank to implement the monetary policy aimed at ensuring the stability of the exchange rate of the Tenge and the stability of the country’s financial sector. In particular, the National Bank continued providing refinancing loans to the banking sector.

   The need to retain gold and foreign currency reserves and maintain the competitiveness of the domestic producers urged the National Bank to revise its approaches to the foreign exchange policy. In February 2009, a new exchange rate band was fixed at KZT 150/1US$ +/-3%. This allowed significantly reduce devaluation expectations in the market.

Diagram 1. Forecast and actual inflation rates in 2009

 

Inflation report for 2010

At end-December 2010 the annual inflation was at 7,8%(in December 2009 - 6,2%) This inflation rate is in full compliance with the target band of 6-8% established by the National Bank for 2010.

  The inflationary processes in Kazakhstan in 2010 were building up against the backdrop of minimal impact of monetary factors. So, the growth in money supply in 2010 was 14.1%, the reserve money expanded by 5.0% only.

   The main factors of acceleration of the inflation in 2010 were related to the imbalance between demand and supply in the economy. Alongside with that, one of the main reasons for  the expansion of absorption in the economy was the growth in cash income of the population, which in 2010 was supported not only by revived business activity but also by the increase in  wages, social benefits and retirement benefits paid from the budget by 25% in April 2010.

  In 2010 the Kazakh economy demonstrated quite high growth rates. Thus, the GDP growth during 9 months of 2010 accounted for 7.5%. Alongside with that, the growth in production was observed virtually in all industries including mining and manufacturing

industry, trade, transport, communications and construction.

     Another reason for non-decreasing inflation background in the economy in 2010 was the realization of external factors. The increase of world prices in the commodity markets, including the price for oil and metals, contributed to the growth in prices for industrial output of the Kazakh producers. Moreover, unfavorable weather conditions (drought, wildfires) in some countries resulted to the decreased production of certain food items including grains. This situation was conductive to the increase in inflationary expectations within Kazakhstan.

      However, the anti-inflation policy implemented in 2010 by the joint efforts of the Government , National Bank local governments allowed maintaining a stable situation in the consumer market.

 The National Bank took actions in line with the Monetary Policy Guidelines    for 2010 intended to ensure the price stability, stability of the Tenge exchange rate and stability of the country’s financial sector.

  During 2010 the versus to the US Dollar remained in the middle of exchange rate band of KZT 150/US$ (+)10% or KZT 15, (-)15% or KZT 22.5 with a minor involvement of the  National Bank in the domestic foreign exchange market. At the same time, there was a  tendency for the appreciation of the domestic currency.                              In 2010 the interest rate band of the National Bank remained unchanged. The official  refinancing rate remained at 7.0% throughout the year. The rate on deposits attracted from banks was 0.5% on 7-day deposits and 1.0% – on 1-month deposits.

  The short-term liquidity in the money market was regulated by the National Bank

through the issue of short-term notes and attraction of deposits from banks. The National Bank provided refinancing loans to support their current liquidity.

 

 

Diagram 2. Forecast and actual inflation rates in 2010

 

 

Inflation report for 2011

At end-2011, according to the official data provided by the Agency of Statistics of the Republic of Kazakhstan, annual inflation was at 7.4% (in 2010 – 7.8%), i.e. it remained within the boundaries of the target band of 6-8% established by the    National Bank for 2011.

   The main factors for the inflation growth in 2011 were associated with unstable

situation in the global commodity markets , persistent trend of price growth including for the major items of the Kazakhstani exports.

 

A significant role in the inflation growth was played by the expansion of aggregate

demand in the economy as a result of steady growth in the income of the population, particularly the thirty percent increase in retirement benefit payouts and student fellowships from January 1, 2011 as well as the increase in wages to the public sector employees by 30% from July 1, 2011.

     High growth rates of the Kazakh economy in 2011 were also conductive to persisting  inflationary pressure. At the end of 9 months the country’s real GDP growth accounted for 7.2%; with the positive dynamics in virtually all sectors, agriculture, communication and trade should be mentioned specifically.

The actual inflation rate (1.1%) in the 4th quarter of 2011 was lower than the forecast (1.5-1.7%) published in the previous issue of the Inflation Report. The inflation has been lower than the forecast throughout the 4 thquarter of 2011. In the 4th quarter of 2011 there was an even price growth in all group of goods. In their

structure, the increased prices for meat products, eggs, education services and utility services should be pointed out. When analyzing the dynamics of the past years, one may note that the growth in prices for such goods and services is typical for such period of the year.

As a whole in 2011, the buildup of inflation process in Kazakhstan was influenced by the increase in prices for foodstuffs and paid services to the population. The growth rates of prices for non-food items were moderate in 2011.

The highest growth rates were observed in prices for such goods and services as

cereals (buckwheat, millet), meat and meat products, fuel and lubricants, education and communication services.

The actual annual inflation rate at end-2011 (7.4%) was within the target band of 6-8% established by the National Bank (Diagram 3).

 

Diagram 3. Forecast and actual inflation rates in 2011

 

 

Diagram 4 Inflation over the  past  11 years

 

 

 

 

 

 

3.2 Monetary aggregates as indicators of  money circulation

Monetary aggregates for 2009

Reserve money has contracted over Q4 2009 by 10.8% and amounted to KZT 2451.2 bln. Narrow money also contracted in Q4 2009 by 10.9% to KZT 1962.1 bln.

   In December 2009 , as compared to December 2008, reserve money expanded by

60.7% . Such expansion was mainly ensured due to crediting of money of the NWF “ Samruk- Kazyna ” to correspondent accounts of some banks with the National Bank denominated in the Tenge .

 

Money Supply

During Q4 2009 , money supply increased by 1.8% to KZT 7386.5 bln. In December  2009 as compared to December 2008, its growth accounted for 17.9% mainly as a result of the increase in net foreign assets of the banking system

  Cash in Circulation

  The volume of cash in circulation in Q4 2009 increased by 12.8% to KZT 913.5 bln . The main reason for the increase was the growth in net pay outs of wages, which at the same time was partially offset by the growth in net proceeds from the sale of goods, services and performed works , net foreign exchange proceeds, net proceeds from loans to natural persons and legal entities.

 In December 2009 as compared to December 2008, cash in circulation increased by 6.5%. This shows that the impact of factors contributing to the growth in cash (payout and the increase in wages, retirement benefits and allowances) was dominating over the impact of  factors which contributed to its decrease (increased volumes of foreign cash sold by the exchange offices, increased deposit balances, proceeds from sales of goods, works and services, etc.).

In Q4 2009 as compared to Q4 2008, payouts of cash from bank cashier    departments increased by 1.4% to KZT 2877.6 bln., cash receipts to bank cashier departments decreased by 3.6% to KZT 2613.8 bln. As a result, net payouts from   bank cashier departments amounted to KZT 263.7 bln.

	Q1	Q2	Q3	Q4
RM (Reserve Money)	2 032 438	2  193 334	2 577 690	2 450 836
Currency in Circulation	714 096	747225	807 062	913 443
Broad money	5 970 359	6  556 048	7 064 482	7  487 306

Table 4

Diagram 5

Monetary aggregates for 2010

  Reserve Money

Reserve money in Q4 2010 expanded by 1.7% and amounted to KZT 2572.9 bln. at end-December 2010. Narrow reserve money contracted by 0.9% to KZT 2143.7 bln.

In 2010 reserve money expanded by 5.0% as compared to December 2009.

    Net international reserves of the National Bank increased by 23.0% to US$ 27.7 bln. in December 2010 as compared to the respective period of 2009. Within their structure , despite operations on the servicing of the Government’s external debt and decrease in foreign currency balances with the correspondent accounts of the second-tier banks at the National Bank, net currency reserves increased as a result of foreign exchange purchase in the domestic foreign exchange market and currency proceeds to the Government’s accounts at the National Bank. Assets denominated in gold also increased.

  Money Supply

During Q4 2010 money supply increased by 1.6% to KZT 8546.4 bln . In December 2010 as compared to December 2009 its growth accounted for 14.1% as a result of increase in net foreign assets of the banking system

Cash in Circulation

   The volume of cash in circulation in Q4 2010 increased by 5.7% to KZT 1148.5 bln . The main reasons for the increase in the cash in circulation were the growth in net payouts on wages, net payoffs on individuals’ time deposits and payouts for retirement benefits and allowances. At the same time, the impact of these factors was not neutralized by the growth in net proceeds from the sale of goods, services and performed works, net proceeds from the foreign exchange sales, and net proceeds from loans to individuals and legal entities recorded in Q4 2010.

   In December 2010 as compared to December 2009 cash in circulation increased by 25.7%. This shows that the impact of factors contributing to the growth in cash (the increase  in wages, retirement benefits and allowances) was dominating over the impact of factors which contributed to its decrease (increased volumes of foreign cash sold by the exchange offices, increased deposit balances, proceeds from sales of goods, works and services, etc.).

 

	Q 1	Q 2	Q 3	Q 4
RM (Reserve Money)	2 657 970	2  635 829	2 551 113	2 563 056
Currency in Circulation	885 089	994 050	1 076 197	1 106 455
Broad money	7 634 902	8 115 818	8 412 755	8 556 353

table 5

Diagram 6

Monetary aggregates for 2011

Reserve Money

In the 4 quarter of 2011 reserve money contracted by 1.6% and amounted to KZT

2836.1 bln. at end-December 2011. Narrow reserve money expanded by 4.5% to KZT 2739.3 bln. During 2011 (December 2011 versus December 2010) reserve money expanded by 10.3%.

During 2011 net international reserves of the National Bank increased by 3.8% and amounted to US$ 28.8 bln . The growth in the foreign currency balances with correspondent accounts of banks at the National Bank and foreign currency proceeds to the Government’s accounts with the National Bank were partially neutralized by foreign exchange sales in the domestic foreign exchange market, operations on the servicing of the Government’s external debt and replenishment of assets of the National Fund from gold and foreign currency reserve accounts. As a result, during 2011 net currency reserves (NCR) decreased by 0.2%, and assets denominated in gold increased by 36.0% as a result of transactions and the growth of price for gold in the global markets.

Money Supply

During the 4 quarter of 2011 money supply decreased by 0.7% to KZT 9751.1 bln.

During 2011 its growth accounted for 15.0% as a result of increase in both net foreign  assets and domestic assets of the banking system

  Cash in Circulation

The volume of cash in circulation grew during the 4th quarter of 2011 by 8.3% to KZT 1365.7 bln.

During 2011 cash in circulation increased by 18.9% . Cash payouts from the bank cashier departments increased by 20.9% to KZT 1.5 trln., and the receipts to the bank cashier departments also increased by 20.9% to KZT 1.3 trln.

  The growth of cash in 2011 was associated with the growth in payouts of wages, retirement benefits and allowances and as a result of the growth in payouts to support ATMs.

   Also, the increased payouts on demand deposits and checking accounts of individuals were conductive to the growth of cash in circulation. The effect of these factors was not neutralized by the growth in proceeds from the sale of goods, services and delivered works and the increased proceeds from foreign exchange sales observed in 2011.

 

 

	Q 1	Q 2	Q 3	Q 4
RM (Reserve Money)	2 693 956	2 879 033	2 988 107	2 954806
Currency in Circulation	1 093 561	1 153 046	1 254 224	1 286 891
Broad money	8 712 236	9 114 763	9 691 856	9 725 342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IV.  Problems and ways to improve the mechanisms of money circulation and inflation processes dependence regulation

4.1 The main challenges of money circulation and inflation rate regulation mechanisms

One of the main problems of effective anti-inflationary monetary policy is the definition of its targets.

The importance of correct identification of intermediate monetary targets due to the following circumstances:

1) the monetary authorities can not directly control the achievement of the ultimate goals of monetary policy (these are usually related to economic growth, high employment, stable prices, balance of payments, etc.);

2) it is difficult to assess the effectiveness of monetary authorities on the basis of observations only ultimate objectives as they impact on monetary policy occurs with a lag time. In addition, the interim targets are usually target to reduce inflationary expectations of economic agents to adjust their decisions regarding the prices of goods and services.

In conducting monetary policy and anti inflationary regulations are mainly used in the following milestones:

- Indicators of money supply (depending on the country - the monetary base, M1, M2, M3, or other indicators);

- Market interest rates;

- The exchange rate.

 

In the last decade as a benchmark of monetary policy in several countries, mostly developed, began to use domestic price level. Refusal of the application of the intermediate benchmark, and the transition to direct inflation targeting was due to the fact that globalization and liberalization of financial markets, including foreign exchange, have led to increasing the impact of external factors on the domestic currency. In these circumstances, to use as targets of the monetary policy of various monetary aggregates or the exchange rate was not effective, does not guarantee the ultimate objective of monetary regulation - price stability.

The benefits of inflation targeting are: clarity of purpose and clarity of monetary public and market participants the opportunity to pursue a more flexible monetary policy that is free from obligation of choice and the achievement of intermediate objectives. The National Bank is focusing its efforts on achieving price stability as the primary objective of monetary policy (priority with respect to its ultimate goals such as economic growth, high employment, etc.). To do this, he can use all the instruments of monetary regulation depending on the macroeconomic situation.