Many economies whose export sectors–like Kazakhstan’s–are based on sales of energy and commodities are afflicted by what is known as Dutch disease. The large trade and current account surpluses which occur during periods of high energy prices can cause a country’s exchange rate to appreciate in real terms, either because the surpluses force down the price of foreign exchange, or because inflows of foreign currency cause the domestic money supply to grow rapidly and produce inflation. The stronger currency and inflation can make the country’s other exports uncompetitive on foreign markets, and make imports cheaper than domestically produced goods at home. In this way, the bounty of high export prices can become a recipe for prolonged industrial stagnation.
Its “oil economy” would seem to make Kazakhstan a natural candidate for Dutch disease. Its onset is already apparent in Russia: High prices for energy exports caused the money supply to rise nearly 70 percent last year. This helped keep producer price inflation above 30 percent, which caused the real exchange rate to rise by more than 20 percent. Imports therefore surged, especially in the fourth quarter and early 2001. Production growth in key import-competing industrial branches like automobiles and food processing ground to a halt in the first quarter of this year. Little relief is in sight for Russia this year–inflation rates seemed to have stabilized at around 25 percent, while the exchange rate remains stuck just below $US1 = 29 rubles.
So far, Kazakhstan had had better luck keeping the specter at bay. After depreciating by some 30 percent against the dollar in 1999, the tenge dropped another 7 percent last year in real terms–despite the oil boom. Consumer prices rose only 13 percent last year, as the National Bank of Kazakhstan (NBK) permitted the tenge to drift gradually downward in 2000. Also, Kazakhstan’s 2000 current account surplus in 2000 was only US$1.1 billion (6 percent of GDP–Reuters, April 4), compared to Russia’s mammoth US$46.3 billion surplus (19 percent of GDP). This relatively small surplus has made it easier for the NBK to buy dollars on the foreign exchange market without causing inflationary growth in the money supply. Also, the NBK’s foreign exchange reserves did not increase substantially last year, which helped keep money supply growth down to 10-13 percent.
This could now be changing, however. In February, the NBK’s cash reserves had grown to US$2.4 billion, up from only US$2.0 billion at the end of last year. February’s figure was close to the previous record level set in November 1997. Still, these reserves were only sufficient to purchase three months of imports, a level often viewed as barely adequate. By contrast, Russia has had cash reserves sufficient to cover five to six months of imports since mid-2000.
According to the NBK, its management of Kazakhstan’s exchange rate is a major reason for the country’s healthy economic growth rate (Reuters, April 4). The NBK believes that the tenge will continue to drift moderately downward in 2001: The bank has forecast an average exchange rate of US$1 = 154 tenge for the year (Reuters, December 2), compared to US$1 = 142 tenge in 2000. Through the first quarter of 2001, however, the exchange rate averaged US$1 = 144 tenge–stronger than the NBK’s forecast. Should the NBK be unable to prevent the tenge from appreciating in real terms this year, Kazakhstan could find that the “Dutch disease” is not Russia’s problem only.
KAZAKH STOCK MARKET DISAPPOINTS, BUT WILL BOND ISSUES CONTINUE TO BOOM?