Photographer: Andrey Rudakov/Bloomberg

Cracking the Code of Kazakh Economy Gives Central Bank Edge

  • Research department head says capital mobility key to new view
  • Central bank adopted more data-driven approach during crisis

Kazakhstan’s central bank had a blind spot.

The range of predictions by its in-house forecasters was too wide and inconsistent to be of much use in guiding monetary policy. The key to divining the future of Kazakhstan was to realize that capital movement in and out of the $220 billion economy is free in name only.

That single clue brought the outlook into sharper focus, said Vitaliy Tutushkin, director of the central bank’s research and statistics department. Before last August, the committee that decides on interest rates criticized the department’s forecasts for appearing to provide a “justification instead of an explanation of the situation,” he said in an interview in Almaty. 

Since then, the attitude has changed, according to Tutushkin, who’s been at the central bank for almost two decades and is now also a member of the policy board.

“The logic of forecasts became clearer,” he said. “Now the committee makes decisions based not only on the actual level of rates and its own understanding of the situation, but also using what we propose.”

At stake is the ability to gauge the pulse of the economy, which can now shape Kazakhstan’s policy like never before. Since monetary decisions work with a lag, the central bank needs clarity about the outlook to assess the impact its measures will have in practice.

The National Bank of Kazakhstan makes projections four times year a year for the main macroeconomic indicators over the coming seven quarters. The forecasts and assessments are used as the basis for rate decisions, according to a statement last week. The latest outlook shows inflation will remain within the target corridor of 6 to 8 percent throughout this year, while economic growth will quicken to 2.2 percent in 2017.

‘Aren’t Free’

“As the central bank, we recognize that formal and informal restrictions exist on the currency market, and participants in it aren’t free to speculate, which includes engaging in arbitrage deals,” Tutushkin said. “Which is why we are introducing capital immobility in the formula for modeling the exchange rate and the base rate, giving it a 90 percent weight.”

While Central Asia’s biggest energy producer survived the shocks of the currency crisis and the downturn in oil without resorting to explicit capital controls, the gatekeepers of the Kazakh market have enough rules in place to snarl the flow of money. These include the requirement to register foreign-exchange operations or notify the authorities of such transfers. A priority task of Kazakhstan’s currency oversight and control, according to the central bank’s website, was to create an information base for cross-border capital flows and use it to monitor transactions.

New Leadership

The crash in oil prices forced the central bank’s hand by propelling decisions to shift to a free float a year and a half ago and transition to inflation targeting. The National Bank of Kazakhstan has grown more data-driven under Governor Daniyar Akishev, whose career started there in 1996 at the research department, which he went on to lead from 2003 to 2007.

The base rate, set as the new benchmark after the central bank abandoned its currency peg in August 2015, rose to as high as 17 percent last year to keep inflation in check. With the tenge stabilizing, policy makers slashed borrowing costs by a cumulative six percentage points since last May, including a bigger-than-forecast cut last week.

“Actions of the National Bank stabilized markets and restored confidence in the tenge,” the International Monetary Fund said this month. It “has made substantial progress in building up its analytical capacity and communicating policy decisions. This should continue.”

It was the IMF that made the breakthrough in forecasting possible for the central bank. As part of its technical support to Kazakhstan, it helped arrange a visit last summer of a delegation from the Czech central bank, according to Tutushkin.

‘Capital Immobility’

“They told us that we have problem with capital immobility and need to introduce it into our calculations,” he said. Finally his team’s models clicked.

The weight assigned to a lack of capital mobility can change as the economy evolves, according to Tutushkin. It can be reduced as policy makers build more trust and the money market develops with the entry of foreign buyers of the central bank’s tenge notes. At the same time, policy makers are intervening less to manage the currency.

“It’s difficult to say when these changes will translate into sustainable trust in central bank policy,” Tutushkin said.

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