Kazakh tenge depreciation doesn't help exporters

Transition to a floating exchange rate and subsequent depreciation of the Kazakh tenge has had some economic benefits, but insignificant ones, several experts told Tengrinews.

On August 20 this year, the government and the National Bank of Kazakhstan shifted to a free-floating exchange rate.

Top managers of several large Kazakhstani companies in various sectors - mostly ore and metal producers - supported the decision by saying that the new monetary policy would increase the competitiveness of Kazakhstan's oil, coal, metals and grain exporters. They insisted that increased competitiveness of the Kazakh products would lead to increased revenues from foreign markets.

However, several foreign analytical agencies were skeptical of the decision. Moody's analysts said that the devaluation of the tenge did not yield the expected significant benefits. The Financial Times published a study showing that declines in exchange rates in developing countries harm the world trade, since, contrary to the traditional view, they are not conducive to an increase of their exports.

Now that the effects of Kazakhstan's new monetary policy can be evaluated, some national experts also conclude that the tenge depreciation has not produced the expected positive effect.

According to the director of Oil Gas Project Zharas Akhmetov, in theory it is assumed that with the devaluation of the national currency exporters, retaining the same costs of production, increase their export earnings recalculated from dollars into national currency, and thus, increase their profits. However, production costs don't usually remain the same for long and soon cancel the resulting benefits. "Oil producers will see it happening quickly. Firstly, part of the taxes, such as rent tax on exports, is pegged to the dollar. Secondly, oil production is highly capital intensive, and for the most part, capital expenditures are connected to imports. Willingly or not, they will have to re-evaluate fixed assets, which will increase depreciation charges. Thirdly, capital expenditures, for the most part, are financed through loans, therefore payables and payments for the loans will be reassessed, which will also lead to an increase in costs. Fourthly, transportation expenditures account for a significant costs share, and they are denominated in dollars," the economist explained.

At the same time, Akhmetov noted that after the tenge devaluation metallurgists were better off (then other sectors of the economy). "In metallurgists’ expenditure pattern electricity costs have a considerable share, and electricity costs are not expected to increase anytime soon," the expert said. In conclusion Akhmetov said that there were some benefits from tenge’s devaluation, however they were not as significant as its supporters claimed. In his view, the depreciation’s benefits did not compensate for the damages it caused.

Another Kazakh economist Maksat Seraly made similar conclusions, however with a different argument. He said that the new monetary policy did not bring any positive results because exports in all the sectors of production decreased every year. "This decrease in exports is due to the fallen demand for raw materials in both China and Europe. Therefore, the introduction of a free-floating exchange rate did not affect Kazakhstan’s exports in any way,” Seraly said.

The expert explained that heads of large companies supported the new monetary policy because they initially expected the prices for their produce to decrease in comparison to their competitors’. However, neither the demand for raw materials nor the global prices increased. Therefore, according to Seraly, free-floating exchange rate could bring benefits only in two cases. First, if the demand and the price for oil would rise. And second, if the Russian ruble got more expensive. "With the help of a floating exchange rate, the authorities wanted to equalize the prices of goods with those from Russia, but it did not happen, since Russian currency is too weak and Russian manufacturers set the prices lower than ours," the expert concluded.

The expert also believes that Kazakhstan does not benefit from National Bank’s decision to conduct foreign exchange interventions. "Right now, in the fall, we are exporting grain and we need some stability to sell wheat. Therefore, the National Bank decided to keep the exchange rate at the level of around 270 tenge per one US dollar. To maintain this exchange rate large amounts of financial resources are being spent, which I think is wrong. I am convinced that it is necessary to let tenge float freely and not interfere with the process; the money that is spent to maintain the exchange rate can be put to a better use, such as development of small and medium businesses. Why support the exporters, if it does not bring any benefits for the country?” Seraly said.

By Indira Urazova