Kazakhstan: National Bank of Kazakhstan abandons trade corridor in pursuit of inflation targeting
September 4, 2015
On 20 August, the National Bank of Kazakhstan (NBK) decided to abandon the official exchange rate corridor and instead allow the tenge to float freely in an effort to mitigate the potential impact of recent developments in the global economy. Judging from previous statements elaborated by monetary authorities, the NBK’s decision to abandon the trade corridor that had let the Kazakh currency float between 170 and 198 KZT per USD to a free-floating regime was unexpected in terms of timing. This move caught analysts and investors by surprise and prompted the Kazak currency to close the 20 August trading day at over 250 KZT per USD, plunging nearly 30% over the previous day. In annual terms, the tenge has lost nearly 40% of its value. Following the devaluation, the tenge strengthened slightly and traded at 240 KZT per USD at the end of August.
Monetary authorities stated that their decision to abandon the currency corridor was aimed at starting the transition toward an inflation-targeting monetary policy. President Nursultan Nazarbayev also explained that a shift to a free-floating exchange rate regime was justified by the economic costs of maintaining the corridor in terms of the large volumes of international reserves required for intervening in the foreign exchange market.
Kazakhstan’s decision to resort to a new economic policy was actually principally a quick response to recent global economic developments. Global commodities prices decreased sharply again in August—particularly the prices of oil, gas and base metals, Kazakhstan’s main commodities exports—and the economies of the country’s main trading partners, namely China and Russia, are showing further signs of deceleration.
The move made by the Kazakh authorities is widely seen by analysts as appropriate as it will align the current level of the KZT with macroeconomic fundamentals, improve public finances and provide a positive impulse for exports. However, in the short term, the fall in the currency against the U.S dollar will boost inflation, hurt the country’s financial assets and erode consumers’ purchasing power. The devaluation will also erode confidence in the currency in the short term, increasing the dollarization of the economy. Moreover, the currency adjustment could undermine confidence in the country’s monetary authorities, as they had issued regular assurances that the tenge would be allowed to depreciate only gradually.
Author: Ricardo Aceves, Senior Economist