Kazakhstan’s national currency, the tenge, recently earned from Bloomberg the unwanted honor of being named “The World’s Most Volatile Currency”.
The tenge lost 26.2% of its value on Thursday, 20 August 2015, when the currency was floated. The official tenge rate tumbled to 255.26 per dollar. As if that wasn’t bad enough, the plunge in value came only 18 months after a 19% devaluation on 11 February 2014.
At a news conference in Astana, as reported by Reuters, the head of the National Bank, Kairat Kelimbetov, asserted that the National Bank’s move was not a devaluation. What had happened was simply a transition to a freely floating exchange rate in which the market itself sets a balanced exchange rate based on offer and demand for the currency.
Well, you may wonder, what is and what is not a devaluation? A drop of 19% is a devaluation and a drop of 26.2% is not? To the man in the street, the loss of the tenge’s value on 20 August clearly was a devaluation.
The point that Mr Kelimbetov was making is that Kazakhstan will no longer try to peg and support the value of its currency in relation to the U.S. dollar or some other currency or a basket of them. Prior to the February 2014 devaluation, the authorities deliberately set the value of the tenge and then supported it by buying or selling U.S. dollars to maintain that pre-set value. The same process continued after the devaluation.
“Floating” essentially means that the currency takes on a life of its own in the market place, divorced from the government. Not that that will happen immediately. The National Bank has continued to intervene in the market to help stabilize the tenge while market forces take over their task.
Like other emerging market countries – Brazil, for example – Kazakhstan is experiencing a tough time. Russia, its main trading partner, is suffering from a battered economy, the sanctions imposed on it, and the precipitous fall in the price of crude oil, its main export earner. The Russian rouble has fallen dramatically in value. China, a leading investor in Kazakhstan and large buyer of raw materials, is suffering from a faltering economy. In consequence of its problems, China devalued its currency in mid-August, causing upheaval in many other emerging market currencies. Under the pressure of these circumstances, the National Bank of Kazakhstan faced a losing battle in its efforts to buoy up the tenge by selling U.S. dollars. Having spent a billion U.S. dollars or more on interventions in the market, the authorities decided that they could not sustain this rate of burning reserves. The government and the National Bank gave up the fight to prop up the tenge and allowed it to float.
After the February 2014 devaluation, which shook the nation, the public was assured that there would be no further devaluation. Instead, the tenge would be supported within a fairly narrow band, allowing it to drift lower over an unspecified period of time. That was not to be.
In the future, the country’s economic policy will be based on “inflation targeting”. This means the central bank will intervene in the currency market by selling or buying currency as required to control the general rise in price levels.
The National Bank’s foreign exchange interventions to support the floating policy from 16 September to 12 October amount to US$1,714 billion. The official exchange rate fell to 274.41 per dollar that day and seems to be holding that position.
According to National Economy Minister Yerbolat Dosayev, speaking at that news conference in Astana, Kazakhstan suffered a 40 percent fall in exports between January and July due to the sharp drop in global oil and commodity prices. Mr Dosayev also said that imports shank by 20 percent in the same period. Looking to the future, Prime Minister Karim Masimov said at the same news conference that low prices for Kazakhstan’s commodity exports – significant quantities of metals as well as crude oil – may last for five to seven years. Translation: the tenge’s problems may persist unless commodity prices perk up. Mr Masimov seemed to confirm this when he stated that the National Fund would not be tapped to prop up the tenge out of concern that the worst times may yet come when the country will really need the National Fund. Currently that fund is valued at US$69 billion.
The loss of value of a currency affects different parties differently. Exporters whose products earn foreign currency, such as US dollars, gain because their earnings will buy more tenge. They may doubly benefit because their local costs of labor and local materials remain denominated in tenge – at least until those costs rise to match the loss of value of the tenge. On the other side, businesses and individuals who purchase imported goods will find that they need increased amounts of tenge just to obtain what they are accustomed to purchasing.
One way to try to protect against the loss of value of the tenge is to convert to hard currency, such as the US dollar, and then purchase tenge as needed later when the tenge costs less in terms of hard currency. If you buy $100 for, say, TG 25,000 (when $1 = KZT 250) and later use the $100 to purchase tenge at $1 = KZT 300, the resulting KZT 30,000 puts you ahead by KZT 5,000, a savings of about $16.
Unfortunately for tenge earners, the flight to dollars runs directly contrary to the government’s efforts to rebuild trust in the national currency through implementation of a dedollarization plan.
Yes, there is a dedollarization plan. The National Bank, working with the Government, put together a 2015-2016 plan early in March to ensure macroeconomic stability, develop a cashless payment system, reduce the grey economy, and give priority to the national tenge over foreign currencies.
It is not a complicated plan and one can easily wonder if it will have any significant practical effect. It entails boosting the level of government-guaranteed deposits from $27,000 to $54,000, diminishing the interest rate on US dollar-denominated deposits to 3%, and banning pricing in US dollars.
How will the plan work in practice? As for the changes regarding deposits, which manifestly are an attempt to sponge dollars out of private hands and into banks, there is a big plus and also a minus. On the one hand, those who hold large amounts of U.S. dollars are being encouraged to place them on deposit with the benefit of a government guarantee for twice the amount that previously was covered. The downside, however, is that those deposits will have a capped interest rate of only 3%. So this part of the plan depends more on investors’ desire for the safety factor arising from the guarantee than the expected earnings on the deposits.
Owners of small amounts of cash dollars hidden under their mattresses have no need for an increase in the amount subject to a government guarantee to entire them to a bank, particularly at only 3% interest. And owners of large amounts of untaxed dollars earned in the black economy are unlikely to expose their wealth to the taxman by putting the money in a bank.
What about the ban on pricing in dollars? It seems that this is merely a new statement of an old requirement. If memory serves me correctly, pricing has been required to be in terms of tenge since shortly after the tenge became the official national currency.
In my view, dedollarization won’t really come about unless it satisfactorily addresses three main traits of a dollarized economy – abundance of dollars, easy convertibility, and low esteem of the local currency. That last trait is the most difficult one for a government to tackle.
Abundance of Dollars. The volume of dollars in circulation in a country must certainly be a function of confidence in the local currency. Low confidence, high volume of dollars; high confidence, low volume of dollars. What with the free movement of people and generally unrestricted movement of things, it is hard to imagine a government exerting real control over the amount of a foreign currency in circulation.
I doubt that anyone has an accurate measure of how many dollars are in Kazakhstan. Presumably Kazakhstan has at least its share of the enormous supply of U.S. currency held abroad. As to that, according a 1996 report of the U.S. Federal Reserve Board, of the roughly $375 billion in circulation outside of banks at the end of 1995, between £200 billion and £250 billion of U.S. currency was abroad at the end of 1995. By the end of 2011, according to a 2012 report, the amount in circulation had mushroomed to more than US$1 trillion of which, once again, more than half was held outside the United States.
Ease of Conversion. The second trait is that local currency can easily be converted to U.S. dollars and back into local currency. At least for transactions at the retail level, this is not a problem in Kazakhstan where large shops and shopping centers have currency exchange kiosks or bank offices.
Governments often regulate the movement into and out of dollars by requiring the reporting of large transactions in foreign currency, i.e., mainly dollars.
Low esteem of the local currency. Until people view the local currency as a desirable store of value, they will seek alternatives such as gold, the U.S. dollar or other investment assets. Governments cannot build currency esteem by fiat, and the dedollarization plan does not attempt to address this trait. Kazakhstan’s major problem in building tenge esteem is that the currency’s value is highly vulnerable to external shocks beyond the control of the government, such as devaluation of the Russian rouble or the faltering of the Chinese economy.
The tenge became the national currency of Kazakhstan on 12 November 1993. Previously, independent Kazakhstan had continued to use the Russian rouble as its currency but the Russian central bank effectively pushed Kazakhstan and other countries in the rouble zone out by restricting the flow of credit between Russia and those others. Faced with an increasing shortage of roubles which, in any event, were declining rapidly in value, Kazakhstan brought out its own currency. 1 tenge was pegged as worth 500 roubles. The rate against the U.S. dollar was initially about 4 tenges, but that didn’t hold for long. Attempts were made at that time to dedollarize the economy but the U.S. dollar has persisted as an unofficial second currency in Kazakhstan.
Learn more about Kazakhstan by reading my book – West Meets East in Kazakhstan. This consists mainly of articles I wrote for The Almaty Herald newspaper in the 1990s and later years. The book is about my perceptions as an American expatriate of life in and around Almaty in the 1990s. The book is available in soft cover or as an E-book through publisher AuthorHouse, and the websites of Amazon and Barnes & Noble.
In some countries, the book may not be available through Amazon or Barnes & Noble if they do not store copies in their overseas warehouses.