FLOAT ON

Kazakhstan 2016 | FINANCE | FOCUS: TENGE FLOAT

Last year, Kazakhstan moved the tenge to a free-floating exchange rate. While the country felt an initial shock, it is making economy-wide changes that Astana hopes to make it a player in the worldwide market.

In August 2015, Kazakhstan made the decision to abandon the currency band and move to free-floating tenge exchange rate. On the day of the announcement, the tenge to dollar exchange rate jumped from 188 to 257 tenge. The exchange rate will now fluctuate according the world economy and the domestic foreign exchange market. While the National Bank will not interfere in the tenge's market level exchange rate, it reserves the right to participate in the domestic foreign exchange market through foreign exchange intervention in the case of potential destabilization.

The tenge's depreciation will make debt repayment in foreign currency more difficult and will weaken the quality of assets and the capital adequacy of banks. This will negatively affect the credit ratings of banks. As of June 2015, approximately 30% of net loans were in foreign currencies, primarily US dollars. Corporations issued several foreign currency loans to SMEs, which have not been repaid in a foreign currency. These borrowers will have a harder time servicing their debt. While major commodity exporters in Kazakhstan may benefit from depreciation, they are often the ones to take loans from foreign banks.

The tenge devaluation could trigger inflationary pressures by increasing the cost of imports. Taking into account the National Bank's plans to move to inflation, such pressure could lead to higher interest rates, which will constrain Kazakhstan' growth. The inflationary effect from a weaker currency will be negative for banks, regardless of efforts to contain inflation with the new monetary policy. If inflation targeting is successful, it will be at the cost of higher interest rates, which Kazakh banks will not be able to pass on to borrowers without compromising the quality of assets.

In the words of the former chairman of the National Bank, Kazakhstan cannot continue to "remain in a fixed exchange rate." It must be flexible. And for that, the National Bank plans to move to a new exchange rate regime, which will become part of the new policy. This same policy of state financiers is called inflation targeting, which is a mix of measures by the National Bank and other monetary institutions aimed at maintaining a certain level of inflation.

Under the new monetary policy, the National Bank will play the role of a think tank. It will develop measures to ensure that there is no increase in consumer prices, which the government will then implement. So far, the usual forecast inflation rate is 6-8% per year. After the introduction of inflation targeting by the National Bank, it is anticipated to reduce to 3-5%. Further, the National Bank and the government will monitor the tenge exchange rate to keep prices down and to develop production in Kazakhstan.

Agricultural producers in Kazakhstan believe moving to a floating tenge is the optimal way to operate. The new exchange rate policy of the National Bank has become a timely and important step to restore the competitiveness of export enterprises, which today enables companies to maintain production volume, jobs, and increase exports. After the change of the rate of tenge, there was an increase in the number a rapid development among agricultural producers.

Implementation of the new monetary policy based on a targeted inflation regime will contribute to the strategic objectives of economic policy and achieve the long-term sustainable growth of the national economy, maintain a low level of inflation, increase employment, and improve the well-being of the population.