Kazakhstan’s high base rate is undoubtedly a difficult pill to swallow. Some people may say that such a bitter pill is often the most effective cure. However, almost every powerful medicine has some side effects and we always have to weigh the risks and benefits of this kind of monetary policy.
Those who support the record high base rate in the country (14 ± 1%) now insist that the government has to do everything to prevent the currency crisis in Kazakhstan. Previously, their main argument was control over inflation. However, there is no strong correlation between the base rate and the inflation rate as the county is quite dependent on prices in the global market.
Is there any risk of a currency crisis in Kazakhstan? So far, the amount of individual deposits is about $3.8 billion, while about $6.2 billion are company deposits. So-called quasi-state entities in Kazakhstan account for the vast majority of these resources.
Now, when the government has limited room for national companies, only individual deposits are sensible to the base rate.
The total amount of deposits in Kazakhstan is about 4.2 trillion tenge ($10 billion). The rest of the money has been kept in current bank accounts. They are not sensitive to the base rate as the law prohibits banks from using account balances and paying interest.
This 4.2 trillion tenge can’t be transferred into another currency, even though this is quite a big amount of money – $10 billion. At the same time, the external reserves of the National Bank nominated in a foreign currency are about $33.5 billion.
So, how can someone expect that the base rate would cause a currency crisis in Kazakhstan when oil prices are at their highest? It is hard to expect even if all deposits are nominated in U.S. dollars. Kazakhstan is not Turkey where the super soft monetary policy caused a currency crisis. Moreover, the situation in Turkey was affected by the low base rate, high inflation, low level of gold and currency reserves and non-commodity structure of the economy.
The cost of capital is the key element of the business’s competitiveness. It’s much more important than taxes or the cost of labor. If credit resources aren’t available or expensive, there are not enough goods on the market; businesses have to postpone their capital investments toward the modernization and development of their manufacturing capabilities and as a result, we can lose the competition for a non-commodity business to our neighbors.
In terms of corporate loan facilities per GDP, our neighbors have already shown twofold growth compared to us. Kazakhstan has to make an effort and force the banking system to re-start providing loans to the economy. Currently, commercial banks prefer to put money from 200,000 individual deposit holders and quasi-state companies into risk-free public securities and make $2.4 billion a year.
There is no need to distribute money with no interest. But it is necessary to follow the best practices of other countries with similar economic structures. I do believe that this is the key recipe for a new economic policy. It might be more precious than just words, subsidies, national programs or redistribution of public funds.