Igor PONTILEEV, an analyst
ALMATY, Oct 4
(Specially for THE GLOBE)
A little less than a half of a year has passed from the moment when within four days the price of dollar in Kazakhstan daringly increased from 88.3 to 138.5 tenge. Before that moment the rate of dollar was called �regulated by the market�, after that - �free-floating�. It was assumed that the free-floating would save the Kazakhstan economy from the complete collapse and would promote prosperity of exporters, the local producers� vanguard, if not all producers. Faces of exporters were demonstrated at TV. Faces were satisfied and radiated gratefulness to the government. Though there was no feeling of deep satisfaction at the faces. From that time the prosperous exporter was to sell a half of his hard currency revenues at the Kazakhstan Stick exchange namely. This infringed his rights. But whose life is easy now? The conscious exporter treated this with understanding.
A simple scheme was explained to the population visually. The exporter is prosperous and creates working places. The production is increasing. Personnel of enterprises-exporters receives salary and begin to buy actively products of local producers (though these products due to some reasons are not demanded abroad). In the result these local producers gradually become also prosperous. They along with exporters pay taxes. People, who get salary, also pay taxes. Taxes are accumulated in the treasury. Pensions and salaries to teachers, doctors and policemen are paid from the treasury. These people also begin to buy products actively. Moreover, now they more willingly teach, treat and protect, than they did before. To make these people buy our products namely (but not foreign ones, especially Russian ones); we need the free-floating rate.
It is interesting that the government and the National Bank were not only saying, but to look more convincing they undertook concrete financial responsibilities, thus having literally shocked International Monetary Fund (foreigners were always impressed with the skill of soviet and post-soviet figures to throw oneself to the embrasures). The population�s pension assets were invested to the state securities, according to the new dollar�s rate. The population was proposed the none-months deposits of the same indices, while banks and other investors, which did not know where they could spent money - hard currency notes and state treasury bonds.
Personnel of banks and other investors said �well, well�, as they understood everything. There was sadness in their eyes, which is a characteristic of wisdom. People did not run to take money from accounts, though they did not actively convert the deposits. Pension Funds and CMPA modestly kept silent, as we did not ask them. Let�s thank them.
It is surprisingly, but Kazakhstan possibly is doomed to realise simple ideas and schemes. Possibly, this began in the soviet period. The One-Sixth Part of the Land had also a popular idea: the Light Future. For the sake of this idea everybody was to work and to tighten belts. All economic conception consists of several party�s slogans, invented 70 years ago (and these slogans had not been changed principally). The de-facto conception permitted mismanagement and disorder, which was supposed to be compensated with heroic (and almost free) work of the people.
... Kazakhstan possibly is doomed to realise simple ideas and schemes
At the present time Kazakhstan has a similar idea. This idea is the development of exporters. This idea is also called the Idea of the Big Oil (Big Copper, Big Gold, etc.). Namely for the sake of this idea the population has to bear due salary, unpaid pensions, inflation, devaluation, taxes and many other things, accompanying the society, which is economically and culturally degrading.
In this case the role of the light in the end of the tunnel is performed by quite real prognoses: in 2004 Kazakhstan may become the fourth world�s power by the oil production. See, this is the production, but not the sale of oil in the world market. You should agree, the difference is significant. Producers of watermelons, for example, understand this difference well. For the second year the domestic market of the republic is full of this product, but watermelon producers have not become richer.
The idea to develop exporters was preceded by another one (the tough monetarism), which in its own turn, had to shovel aside consequences of the ancient experiment called with the word �vzaimozachot�, which is difficult to translate into a foreign language.
For three and a half of years the idea of the tough monetarism was being realised (we should say, at a high professional level), and the purity of the genre is not doubtful.
At the final phase this idea was added with the privatisation idea. But here, opinions regarding the purity of the genre are different.
It is noteworthy, that Kazakhstan ideas are constantly not realised due to annoying trifles. Actually, this is quite the �simplicity� of these schemes: these schemes do not take into consideration everything. The interested chess-player constructs a combination, and the first 10 moves look nice. Then there is a doubtful �should be okay�.
The most professionally realised conception of the tough monetarism was weak due to the following thing: this idea buried the local industry, which was not especially developed. If parallelly with the idea they had thought about the industry, the situation would have been different. To be correct, they did think about the economy. They thought that it would not be ruined before the cherished reduction of the crediting rates, inflation and devaluation. But the economy had collapsed. Besides, in that case the success of realisation significantly depended on the mood of foreign investors. It is well known, moods are changeable. Credits are to be returned.
The realisation of the privatisation idea was complicated with personal aspects. This idea, being the most bourgeois in comparison with the others (hence, some subjects of the societies became richer due to it), it was painfully accepted in the post-soviet space. Besides, there were a few objects to privatise. They thought, while selling the objects we would be able to restore the economy and to develop the stock market. But they did not had enough time: the crisis came, and nobody required our blue �chips�.
The realisation of the privatisation idea was complicated with personal aspects
Initially the idea to develop exporters was also impeded by the crisis. The conjuncture of raw materials markets abruptly worsened for Kazakhstan export, and it did not become better after the Russian events. But the new panacea (the free-floating rate) was supposed to correct the situation.
Lets� see, how this happened, in what it has resulted, and what consequences will be. It is high time to reap, when the deeds are to be evaluated.
The obligatory condition of the idea to develop exporters was the so-called increase of the monetarisation level of the economy, i.e. the proportion of circulating money to the gross domestic product. In Kazakhstan this index was too low for the industry to work. The way through an emission was inappropriate. The program worked out inside the government was obviously a financial program, which openly illustrated the rich experience of supporters of the tough monetarism. Indeed, this was done �technically�, how our Finance Minister like to say.
An extremely compressed money supply did not allow dollar�s rate to grow. To create a stable demand for USD, money (tenge) was necessary. But banks had no money. Only National Bank could give it. But not to the banks, as they would convert tenge to dollar, but to the industry, purchasing its hard currency revenues. By the way the accompanying (and, maybe, the main ones) tasks were settled: National Bank had the opportunity to replenish the gold and hard currency reserve of the country avoiding loans and difficult operations with gold, but directly purchasing dollar in the inside market. When it was necessary to repay almost US$ 1 billion debt in this year, it would be absurdly to miss this chance.
There was also an internal debt, which was regulated in a comparatively easy way. The payment of 22 billion tenge (32.5% of the total internal state debt) to the Pension Funds was just delayed by 5 years, thus, actually having conducted the restructurisation under the slogan �to save the population�s pension assets�. As of April 1 out of the rest 45.7 billion tenge of the internal debt, 34.4 billion were denominated in ten-years MEAKAM, supervised by the National Bank. After April 5 the balance of 11.3 billion was devaluated by one-third.
Though, there were some problems. The state securities market could not be cancelled, as 50% of all assets of the Pension Funds had been invested to state securities namely. Pension assets (to be more accurate, assets of the state pension fund) were extremely necessary to the Finance Ministry as a big basket of money, out of which at any moment it is always possible to borrow money at a privileged interest.
To maintain the state securities market, it was necessary to issue new securities at least in order to repay the old ones. But that time the market did not take state securities denominated in tenge. Thus, debt liabilities (notes and MEKABM) depending on the devaluation appeared in the market. But these securities were taken into consideration in the scheme (as it is showed below).
Actually, the situation was expected to develop in the following way.
Exporters sell their revenue at the exchange. For the time being banks do not have money, and the revenue is bought by National Bank. Exporters receive tenge, which, at best, is either spent to repay their debt before other companies, or to widen the production; and at worst (which is the most probable) is accumulated in exporters� banking accounts. In the latter case it is banks, but not the industry, which receive money. The National Bank now has a competitor, who also wishes to buy dollar.
But this variant was taking into consideration beforehand. The program was worked \out by professional financiers. If they had been sure that the industry might eat the money, they would have proposed the emission. If there were no such confidence, the experiment with the emission would not result in replenishment of the gold and hard currency reserves. So, the chosen way was advantageous, as other hazards were equal.
The prudence was embodied in the interest of state securities, which depended on the exchange rate. Under the conditions of high devaluation expectance these state securities were supposed to neutralise money accumulated by the banks. In the result, the competitor in the form of the second-level banks was taken away from the hard currency market, and the role of the main purchaser of dollar was to be performed by the National Bank. Thus, the NB determines whether dollar should grow or fall. When they require a small growth, they buy a lot of dollars and reduce the emission of state securities. When they need the opposite result, they increase loans in the state securities market and purchase less exporters� revenues. If state securities� interest depends on the exchange rate and this rate can be regulated by the above-mentioned method, it is possible to bring profitability in tenge of hard currency securities to nought.
�But what is the connection between the economy and the coefficient of the economy�s monetarisation?� you will ask. I beg your pardon, but according to the idea, money through the purchase of exporters� revenues is to be given to the industry, and only to the industry. It is its problem, if the industry does not take the money.
It is impossible to understand, what professional industrialists were doing during that period? But exporters did not eat the money. This can be proved by the situation in April and the first half of May. A small excess of monetary base over a definite critical point unavoidably resulted in a high demand for dollar. No manipulations with the borrowing volume in the state securities market, as well as dosing of NB�s demand for dollar, could help. Everything ended with banal interventions, with the help of which (as will the blow of a stick) National Bank from time to time regulated the market. Strictly speaking, the scheme did not work properly, and resembled much to the previous one. The tough monetarism was just improved. How could it happen otherwise, if in the sector of the real economy nothing changed principally?
On May 24 it became obvious that for the time being IMF will not give any credits. By that time dollar had somehow grown to 119.75, and in general the market had understood the scheme and that it did not work. Using high devaluation expectance (almost unregulated) the National Bank approved the double increase of the currency net-position of the second-level banks and did not interfere in the situation in the currency market within several days. This allowed the NB to devaluate tenge at once to 130 tenge/US$ 1 by the beginning of June.
Having resigned itself with some waste of the currency reserves required for stabilisation of the rate at the new level, as well as with the existing growth of interests of the short state securities, the government made the second effort, but at the new level of the exchange rate.
It was difficult to gain the right for the second effort. Everybody remembers June debates in the Parliament, the approval of the corrected budget, the expected dismissal of the government and the �vote of confidence� game. To make the second effort was more difficult, as the President of the country categorically demanded to reject from the �tough monetarism� policy and criticised the National Bank for lobbying interests of the banking sector, which impeded the development of the economy. The social tension, which abruptly increased after the devaluation coil was to be discharged. It was necessary to reimburse the huge debt towards pensions and salaries without IMF�s support. Moreover, the President demanded a thing, which did not comply with the requirements of IMF.
Thesis was perceived. In three months after the �market regulation� of USD/KZT was abandoned, representatives of the authorities began often sounded the new thought: the time of simple ideas has passed.
Beside circumstances complicating the new effort of the government, there were also some positive moments. The conjuncture of the world�s raw materials markets began to regard Kazakhstan. Financiers were assisted by tax specialists, who introduced the new technologies and demonstrated unprecedented flexibility while approaching the problem. There was talks about privilege tariffs, but this resulted in just that the Antimonopoly Committee stopped to restrain tariffs for oil transportation through main networks of the national company KazTransOil.
But the effort was successful in a way. And for some time. This was a successful effort of financiers, as they had no illusions regarding an abrupt restoration of the economy, but they had to fulfil the instruction. Manipulating with sales and purchase volumes of dollar at the exchange, as well as with the profitability of the notes, the National Bank made the banks lose interest to the foreign currency. The main task was brought to guarantee approximate zero devaluation, to minimise potentially speculative trends. Free money of clients was still being accumulated at the banking accounts, but money could not be spent anywhere. But there were securities in the market. Suddenly they the securities were necessary for not only to divert tenge from the work with dollar. They were used not only as a mean to attract money to serve the current debt. Now it was necessary to press out from the state securities real money to the budget. That was the money to pay pensions and salaries.
It is impossible to understand, what professional industrialists were doing during that period?
The May leap of the dollar�s rate cost too much for the Finance Ministry. The first emission of MEKABM had to be reimbursed on July 15 at 72.8% p.a. in tenge, the second one - on July 22 at 72.7% p.a. This was at the interest rate in hard currency of 7.3%. Obviously, it was impossible to increase the profitability of MEKABM. Moreover, the investor was afraid of these securities at a zero devaluation.
It was short-term credits, which rescued the situation, as free money was invested to the same. It was a success. From day to day from the beginning of July and to the end of August the National Bank managed not only increase the gold and hard currency reserves, issuing free money to the market. They managed to take more and more money owing to the notes. These volumes of money were sufficient to serve the previous emissions and to purchase the Finance Ministry�s securities. The Finance Ministry guaranteed the money inflow to the state budget and helped to reduce the budget debt before the population despite no big external loans were received. It was so successful, that the effective rate of the non-indexed notes reduced from 26.4 to 14.9% p.a., the refinancing rate - from 25 to 22% p.a. (as of July 19). They managed to reject from the summer placement of the third emission of euronotes in the �zone Euro� atmosphere, which was not very favourable for Kazakhstan.
The most surprising thing was that dollar began even to fall, and its rate reduced from 132.58 (July 25) to 131.57 tenge per US$ 1 on August 24. The National Bank weekly reported about the condition of the gold and hard currency reserves, though before we could just dream about it. The reduction of the dollar�s rate allowed (and made) the Finance Ministry to recommence the emissions of the three-months MEKKAM.
Meanwhile, it seemed that the exporters were forgotten.
We should not reproach financiers, as if they were guilty before the economy and lobbied banks� interests. The idea was reasonable. If the state securities market�s liquidity and the currency market (which was not interesting from the point of view of the speculative potential) had been limited, the continuous increase of monetary base would have resulted in excess of free money at banking accounts. But as money was to work, this would have unavoidably led to the reduction of the rates of crediting the industry, and unwillingly the money would have begun to work for the production. The growth of oil and copper prices would have promoted the efficacy of such invetsments, while low rates of the state securities would have allowed to gradually clarify the situation with the servicing of the internal debt�
But for the time being the effort failed. Instead of this, in the beginning of September under the influence of the synchronic subjective factors (these were the same annoying trifles), indefatigable banks and their clients disobeyed and directed all their free money to the hard currency market. The National Bank overlooked a little, was a little too late to take the stick and to wave it (see above), and all achievements fell within a week. On September 28 the rate at the exchange exceeded 141 tenge per US$ 1, and they had to increase the profitability of MEKABM-6 to 9.05% p.a. in hard currency. The value of short money increased two-three times, but what the rates of other state securities bought later will be, we will know in future. For the time being, the auctions for their placement are mainly abandoned.
Yes, in the Parliament they seemed to have agreed on the budget. And the emission of eurobonds was managed to be placed first in all CIS countries after the Russian crisis. It was expensive, but though successful. The dollar�s rate again is falling, and the National Bank assures that everything has passed. And then there will be the third effort.
But winter is coming. The market of independent Kazakhstan does not remember a single winter, which was not accompanied with the hard currency stress. There will be reimbursement of eurobonds and their autumn servicing, repayments of syndicated loans, of which our biggest banks are so reasonably proud. There will be reimbursement of MEKABM and repayment on deposits indexed in April. There will be the consequences of the prohibition of mazut export, and many other trifles, to struggle against which, possibly we will have to forget about the main tasks�
All Kazakhstan simple ideas have the same peculiarity. They resemble to a mechanism, separate parts of which are made by a master at the highest professional level. At the same time some parts, without which the usage of the aggregate is doubtful, are either absent at all, or made fast without a proper caution.
But the root of evil is not hidden in the degree of caution. To be more accurate, not just in caution. The complexity of the mechanism of the complex economic conception is objectively high. And one to two high-class specialists are not enough. Moreover, everything should be taken into consideration, calculated and every part is to be made at a high professional level. Then it will be necessary to assemble everything and to make this work properly during the projected period of time, despite numerous difficulties, circumstances and obstacles. Indeed, we require masters working in a team, which is to be led by a high-class manager.
That is why, summarising the period of difficult childhood of our snow leopard, we come to the following conclusion: we are obviously short of masters. Probably, there are no masters of the required class in Kazakhstan at all. It is sad, because we will never be able to choose them, whatever developed democracy in our sovereign republic is.
For the time being the main units of the new idea do not work, though everything was done for their sake. The program being realised should be supported by parallel and adequate actions to reform the non-financial sectors. For this half a year the flexible tax policy should have improved the investment in the country (the opposite thing happened) and guaranteed privileges to the import-substitute production. The flexible tariff policy should have joined all numerous ends and guaranteed appropriate conditions for exporters to work, as well as it should have settled problems regarding transit of the Kazakhstan raw materials. The invented (but not urgent, forced and sometimes smelling with a fast �recoil�) privatisation should have promoted the development of the stock market and the maximum utilisation of money of the young and powerful institutional investor (Pension Funds) in manufacturing process. The flexible customs policy� and so on. Without this the Kazakhstan economy, including the financial sector resembles now to the worn through cloth. And the position �to hold out at any case� surprises with unclear reply to the question: �Till what time we should hold out?�
And one to two high-class specialists are not enough.
By the end of the year it is necessary to repay almost US$ a half of billion of the external loan, and to borrow again. It is difficult to imagine stronger confidence regarding this problem than the one demonstrated by our Prime Minister in his hot parliamentary speech on September 26. Who argues? The whole world asks the question: �For what?� to loan in order to repay, and then to borrow again? And nothing changes, except taxes, prime ministers, parliaments (capitals, names of streets, business language and simple ideas)? Possibly, this process is interesting. And romantics of the will to do something �technically� again is quite understandable. But it seems that the population, which is tired with the process, is rather interesting in the result.
For the time being no complex program of the development of the local production (of the small and middle-sized business, exporters and import-substitute industry) has been distinctly proposed by either the government or the opposition. Taking into consideration the latest materials, there is a high risk that this program will by replaced with the old, but advanced simple idea of the effective tax collection. Again this will be proposed as a intermediate phase on the way to the Light Future.
According to the government, �the main aspect, which troubles IMF is tax collection projected for the next year. The Fund considers them overestimated.� This is the main obstacle impeding the opening the new credit line, without which we cannot survive. To prove for IMF the reality of the tax collection volume is the main thing to be done in 2000. Then the country will receive credits.
You should agree that it is most probably that an annoying trifle will again impede the growth of tax deducted to the treasury owing to the development of the production. However, it is impossible not to fulfil the task, as we are got used to credits. Possibly, the task will be settled approximately in the same way, as the idea to develop exporters has been realised in this year: not directly, but according to the accidental variant, making several attempts, and at last, at our expense.
Then only taxes will be changed. And behaviour of persons, who collect the taxes, will also change. But in this case what will happen to exporters, investors, the economy and us?
All Over the Globe is published by IPA House.
© 1998 IPA House. All Rights Reserved.