Tenge sent free floating

The devaluation of Kazakhstan's national currency, which was predicted by analysts, has happened. To avoid recession in the economy, the authorities decided to send the tenge free floating. The tenge fell by 30% in one day. According to experts, low oil prices and the devaluation of the ruble, which led to worsened conditions of trade with Russia, were the reasons for this.

“Kazakhstan’s government decided to cancel the currency corridor and shift to a free floating exchange rate,” Premier Karim Massimov stated on Thursday at a governmental session. According to him, formation of the market exchange rate without governmental participation will create preconditions for reconstruction of economic growth, an increase of credit and investment activeness, creation of new jobs, and a decrease of inflation to 3-4% in the medium term. Otherwise, Kazakhstan would face default. “The implementation of the monetary policy which is based on a regime of inflation targeting will encourage a settlement of the strategic tasks of economic policy – the achievement of long-term, stable growth of the economy, a low level of inflation, and improvement of the living standards of the population,” the electronic magazine Vlast cites Kazakhstan’s premier.

Karim Massimov promised that the government would take care of low-income layers of the population and prevent a growth in prices for socially important goods and services.

Meanwhile, on Thursday, most of the currency exchange offices weren't working. Consumer electronics shops and shopping centers were closed as well. One couldn’t buy anything by the Internet. The currency exchange offices which began to work had a higher rate than it was yesterday – $1=258 tenges.

According to the head of the government, the negative development of the world economy will continue for a long time. “The long-term trend will take a lot of time; the story is not for a year, but for the next 5-7 years,” he said at the session. According to him, the government has been preparing for the new economic policy for a long time, including launching the free floating exchange rate of the tenge. “This is one of the elements of the complex of structural reforms which we are discussing,” the Kazakh Prime Minister said. He admits that a free floating currency is a new process for the country, and there is no experience of it. “But we have been preparing for a long time, studying the experience of other countries,” Massimov stressed. He says that Kazakhstan is oriented towards experiences of Australia and Canada. “Speaking about the economic structure, we will orient our economic policy to the direction of these countries. They are similar to us; they are more developed, but we will build our policy considering the experience of these countries,” the Prime Minister stated.

The reaction of the currency market of Kazakhstan was immediate: the average exchange rate of the dollar increased to 255.26 tenges – by 66.88 tenges, the website of the Kazakhstan Stock Market reported. Thus, the tenge lost about 30% of its value. The volume of the morning session on Thursday was $115.5 million, i.e. it decreased by $50 million in comparison to the previous day.

The first wave of devaluation of the current economic crisis took place in February 2014. According to experts, the tenge fell from 150 to 256 tenges per $1, i.e. by 70%. The authorities tried to prevent a single-step shock devaluation of the tenge. The head of the National Bank, Kairat Kelimbetov, promised to provide a smooth change of the exchange rate. The country prepared for the early presidential elections at that moment, which took place on April 26th, 2015, and it was unacceptable to make abrupt moves.

In the current situation, the National Bank of Kazakhstan won’t interfere in the formation of the market level of the tenge exchange rate. But the joint statement of the government and the National Bank says that it doesn’t rule out participation on the exchange market through providing currency interventions if there is a threat of destabilization of the country’s financial system.

Experts believe that artificial support of the national currency exchange rate would threaten Kazakhstan with bankruptcy under current oil prices. “If we support the exchange rate artificially, it will lead to greater devaluation; and the risk of social protest is high,” Amir Kasenov, a Kazakhstan political scientist, wrote on his Facebook page. He thinks that “the government has been trapped.” “On the one hand, the non-energy sector is not sufficiently developed in Kazakhstan. On the other hand, even if the country suddenly increased oil and gas production, there are not enough transit opportunities for export. We can only hope that the losses will be partially compensated for by exporters of goods and that the state budget is full enough to finish the second five-year period of the Program of Forced Industrial Innovative Development, and infrastructural projects will be implemented forcedly. Another thing is that the effectiveness of the process depends on the effective struggle against corruption. Otherwise, we will continue to fan the breezes and produce non-existent tablet PCs,” Kasenov wrote.