Naubet Bisenov in Almaty -
Kazakhstan’s currency, the tenge, slumped in value by almost 29% against the dollar in early trading on August 20 after the government abolished its trading corridor. The decision comes months after the falling price of oil, the depreciating currencies of the country’s main trading partners, and economic fundamentals suggested the tenge needed an at least 30% devaluation.
The value of the tenge fell to KZT255.26 to the dollar in morning trade on the Kazakhstan Stock Exchange (Kase) on August 20 after falling by 4.4% to KZT196.90 a day earlier. Earlier on August 20 the Kazakh government jointly with the National Bank, the central bank, announced that the currency trading corridor was abolished, the tenge would be allowed to float freely, and the bank would switch to inflation targeting.
“The National Bank and the government have decided to start implementing a new monetary and credit policy based on the regime of inflation targeting, abolishing a currency corridor and switching to a free-floating exchange rate from August 20 2015,” Prime Minister Karim Massimov told a government meeting the same day. “The exchange rate will be set by market demand and supply, taking account of fundamental internal and external macroeconomic factors.”
In July, the National Bank expanded the tenge’s trading corridor to KZT170-198 per $1 against the previous range of KZT170-188 per $1. In the early morning of August 20 before the news of the devaluation came in, bureaux des changes traded dollars for about KZT198 per $1, but in the early afternoon they closed shop altogether until there was some certainty about the new exchange rate, although their online quotes suggested they bought dollars for KZT251 and sold them for KZT253 (the regulation requires the difference between the sell and buy rates not to exceed KZT2).
The National Bank will not be involved in setting the market exchange rate of the tenge but will reserve the right to intervene in the local currency market “in case of the emergence of a threat of the destabilisation of the country’s financial system”, Massimov noted.
The government expects the new exchange rate regime to create necessary conditions to revive economic growth and boost credit and investment activity, creating new jobs and bringing the annual rate of inflation down to 3-4% in the medium term.
The low prices of oil and metals, the weak Russian ruble and euro, as well as the feeble economic conditions in Kazakhstan’s main trading partners – the EU, Russia and China – have had an adverse impact on the Kazakh economy and put enormous pressure on the tenge to devalue. Kazakhstan’s economy slowed to 1.7% year-on-year in the first half of 2015 from 4.3% in 2014 and 6% in 2013. The three markets account for three-quarters of the country’s foreign trade, with the EU accounting for 43%, Russia for 19% and China for 13.6%, National Economy Minister Yerbolat Dossayev told a government meeting on August 19.
Speaking at the meeting, Kazakhstan’s strongman President Nursultan Nazarbayev, who has been ruling the country since before it obtained independence in 1991, admitted that the country’s economic troubles might extend into the medium term. At the same time, he blamed external factors – low prices of oil and metals, limited access to foreign investment and capital, and falling demand for Kazakh products in Russia and China – for the current crisis in the Kazakh economy.
While calling for a moratorium on new projects until 2018, Nazarbayev did not mention one of the largest vanity projects the country has ever embarked on – the international fair EXPO in Astana in 2017. Observers and ordinary people question the staging of the event at a price tag of $3bn, and preparations have already been marred by corruption scandals. “In the past few years we had been building a lot, increasing staff and salaries, but now we are facing shortages of funds, and because of this expenditure on new projects will be strictly limited by the monetary base,” Nazarbayev sighed. “This is why we need to impose a moratorium on various initiatives until 2018. This is an involuntary measure prompted by the current reality.”
A more than 50% fall in global oil prices has resulted in a 33% decrease in oil revenues and a 22% slump in overall budget revenues, Finance Minister Bakhyt Sultanov told the meeting. According to Nazarbayev, budget shortfalls are estimated at KZT0.5tn (€2.4bn before the free float of the tenge or €1.78bn now). It is not clear whether the government would be limited only to the moratorium on new projects or would have to make deep cuts to the current budget. In February, Nazarbayev ordered a 10% cut in budget expenditure, which translated into KZT700bn ($3.78bn). The government will now have to bring budget deficit to 1% of GDP by 2018 at the expense of “internal reserves”, which in Kazakh government parlance means cuts to non-essential spending. The amended budget for 2015 sets the deficit at 3% of GDP.
The Kazakh government has been in a state of denial since the price of oil started falling from highs of $115 per barrel and the ruble slumped last year under the weight of the Western sanctions. The National Bank devalued the tenge by 19% in February and has propped up the exchange rate at a cost to its reserves estimated at between $14bn and $18bn. International banks had predicted a 30% devaluation after a series of bank holidays which culminated with Astana Day that coincided with Nazarbayev’s 75th anniversary on July 6.
Kazakhstan and Russia, along with Armenia, Belarus and Kyrgyzstan, are members of the Moscow-led free-trade Eurasian Economic Union and have formally abolished customs borders between the countries. The strong tenge has damaged the competitiveness of Kazakh products on the domestic market, prompting calls from local entrepreneurs and banks for devaluation. The overvalued national currency encouraged a shopping spree in border regions of Russia, which were flooded by Kazakh shoppers snapping up bargains. According to the Atameken national chamber of entrepreneurs, Kazakhs bought up RUB151bn ($2.8bn) in Kazakh exchange offices alone between October 2014 and June 2015, importing from Russia 79,332 cars in 2014 and another 151,085 vehicles in less than six months of 2015. In response, the Kazakh government offered KZT15bn in soft loans to buy Kazakhstan-assembled cars and pledged another KZT10bn for the programme.
According to the chamber, the government’s failed economic policy resulted in a contraction of the local food industry by 15% and of machinery by 30% in the first half of 2015, including a 37% slump in production of poultry, 20% fall in production of confectionary and sugar and 12% in cooking oil and fats. As a result, the share of Russian imports increased to 33.8% in January-July 2015 from 32.6% in the same period of 2014, despite the dollar value of imports falling to $5.2bn from $6.3bn respectively.
The policy of maintaining the tenge’s exchange rate has also led to the country’s industrial enterprises announcing redundancies or cutting the working week of their personnel. The government’s fear of social discontent caused by the falling living standards as a result of a sharp devaluation may well have created a greater headache: in addition to the consequences of the inevitable devaluation, Astana now has to deal with rising unemployment and scrape the money together to support the flagging economy.
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