Keynote interview thesis of the NBK Governor Galymzhan Pirmatov to Khabar 24 TV Channel
Regarding ensuring financial stability and maintaining inflation within target corridor
Today, the society is beginning to display great interest in political and economic processes. Therefore, we are committed to communicate our decisions as transparently and clearly as possible. Information policy has a high profile in inflation targeting.
Our main goal is to protect income and savings of the people of Kazakhstan from depreciation. High inflation affects the most vulnerable segments of society the most. Therefore, today, both in Kazakhstan and in almost all countries of the world, inflation control is a top priority, despite risks of a slowdown in economic growth.
Our current goal is to stabilize inflationary processes. Therefore, we have to make important decisions in order not to let inflation ‘eat’ our savings or pension assets.
About monetary policy to support economic growth
Monetary policy cannot be eased amid rising prices. If we lower the base rate at a time when prices grow, this could entail unmanageable inflation. This, accordingly, will cause loss of attractiveness of savings in tenge, and to flow from tenge to dollar assets. Thus, risks of dollarization of the economy will increase, it will make no economic sense any more for the banks to lend in tenge, which will lead to a reduction in lending.
Under current conditions, impact of the base rate on inflation is indeed limited, as prices rise on the supply side.
There is a fundamental rule of economics, supply volume depends on demand. The higher the demand for a product, the higher the rate of supply of this product to a consumer, that is, volume of its production increases respectively. If supply fails to meet this demand, its price rises drastically. The base rate of central banks at such a moment regulates the demand level. That is, the gap between demand and supply volume must not be too large. Therefore, when supply falls, growth in demand should be restricted in order to ensure price stability. In other words, base rate is a tool to influence the gap between supply and demand.
Regarding the inflation indicators
Today, our economy is under heavy pressure from external factors. As September performance reveals, inflation in annual terms has already reached 17.7%. A serious contribution was made by skyrocketing rental fees for accommodation in connection with certain events. In September alone, it grew by 13.1%, whereas having made 40.7% year-on-year. This indicator alone accounted for 1.1% in total rate of inflation out of 17.7%.
However, we believe that price growth will slow down as most external factors are already on a downward trajectory. For example, growing cost of food and raw materials on global markets has flattened out. We believe this trend will continue.
Regarding lending to economy and exit of the National Bank from lending programs
The National Bank, as instructed by the Head of State, together with the Government, participated in implementation of anti-crisis measures during the pandemic. This allowed stabilize the situation.
On the other hand, it is necessary to indicate that if the government continues to provide assistance extensively, loans will cease to be effective. Business will cease to develop production, relying on support from the government. In this regard, we began systematic exit from government programs. Further emphasis will be shifted towards promotion of lending on market terms. Such measures will raise effectiveness of monetary policy, and rates across the entire range of banking products will begin to respond to the dynamics of the base rate.
In order to implement instructions given within the State of the Nation Address, National Bank takes necessary effort together with Government, Agency for Regulation and Development of the Financial Market and the banking sector. As a result, measures are to be introduced to create conditions to expand bank lending to the economy on market conditions.
About ‘National Fund for Children’ program
‘National Fund for Children’ program provides for accrual of 50% of an annual investment income of the National Fund to special savings accounts for children up to the age of 18 to purchase housing and get an education. Its launch is planned from January 1, 2024 after a thorough study of mechanisms and regulations by Government and National Bank. Implementation mechanism of the program itself is currently under active development.
Regarding the factors behind economic development in Kazakhstan
Macroeconomic stability is a prerequisite for sustainable economic growth in the long run. And this, in turn, is possible only if fiscal and monetary policies are balanced and coordinated. If fiscal and monetary policy align, if there is macroeconomic discipline, and inflation remains low for a long time, there are opportunities to get financed in tenge and make long-term investments. This will allow the economy to grow at a natural pace during a favorable period and save financial resources in case of crisis periods.
Second, structural reforms are needed for economic development. The role of state in the economy should be reduced. This will create conditions for growth of private businesses and will contribute to diversification of the real sector and development of highly efficient industries.
Third, institutional reforms are needed to enhance confidence in the judiciary and law enforcement system.
I believe that solution of these three issues will set the background for the Kazakhstan’s business to develop and, accordingly, national economy will grow steadily in the long run.