Nazarbayev explains reasons for switching to floating exchange rate

On Thursday, August 20, Kazakhstan’s tenge plunged 23 percent to its all-time low, as the country has announced its decision to switch to a floating exchange rate and adopt the inflation targeting policy. The next day the depreciation set a new all time low totaling at 36%.

Kazakhstan resorted to the new economic policy as a response to sliding prices for its main exports – oil and metals, as well as the economic slowdown of its two largest neighbors and trade partners Russia and China.

Since Russia, which accounts for 36 percent of Kazakhstan’s overall trade turnover, loosened its ruble in last year’s November and also moved to a free floating exchange rate regime, Kazakhstan has suffered a lot. In particular, Kazakhstan’s enterprises ended up losing their competitiveness against Russian products that became much cheaper and more attractive for foreign customers than their Kazakh alternatives.

Many of Kazakh enterprises have been idle for months, many had to layoff their employees.

This had significantly hurt Kazakhstan that ultimately faced a budget deficit because of the sharp decrease in tax revenues.

According to Kazakhstan’s President, Kazakhstan had no choice, but to allow its tenge to float. “We had three possible solutions. The first was to do nothing and wait for the situation to improve, however by doing so we would have sacrificed our own output, caused more job cuts and wasted our forex reserves. The second option implied a gradual loosening of the tenge to dollar exchange rate within a pegged corridor. This is what the National Bank was doing before, but this option was very costly and besides that it would have led to heavy losses and non-competitiveness (of Kazakh goods). Therefore, with all the possible ways throughly considered, introduction of the free floating exchange rate regime and pursing inflation targeting policy was the optimal way,” Nazarbayev said at the meeting with top managers of leading Kazakh enterprises in Akorda.

There were no other alternatives, according to Nazarbayev. “Crisis always brings changes,” he added.

In fact, a number of countries have eased control of their national currencies lately, with one of the most recent being China, which saw an almost 3 percent devaluation of its yuan, and Vietnam, which had its dong devalued for the third time this year.

“Most countries, including some European countries, have recently devalued their currencies. The economy is in a complicated situation. We have been witnessing a decrease in the competitiveness of our enterprises, which affected the people who work there. According to Kazakhstan's National Chamber of Entrepreneurs Atameken, a lot of companies suffered from a decline of exports to Russia. Moreover, Russian producers are pushing Kazakh products even out of Kazakhstan’s domestic markets,” Nazarbayev pointed out.

For example, Kentau transformer plant in southern Kazakhstan saw a 47 percent fall in its export to Russia and 50 workers lost their jobs, while Almaty yeast plant cut its output by 50 percent. And according to the Kazakh President, a large number of Kazakhstan-based enterprises are facing the same problem.

Now with tenge being largely determined by the market forces, except for occasional intervention of the National Bank in case of financial instability, Kazakhstan, which heavily relies on commodity export revenues, would help its producers restore their competitiveness and make the country more resilient to external shocks.

Chairman of Kazakhmys, Kazakhstan’s largest copper producer and one of the leading copper producers in the world, Vladimir Kim believes that Kazakhstan had made the right decision. “With the creation of a single economic space between Russia and Kazakhstan, we actually entered a trade war. As part of the Kazakh content development program, we are now producing over 15,000 products ranging from bearings and further. Today Russia produces the same,” he said.

According to him, floating the tenge exchange rate would give Kazakhstan’s enterprises “a second wind and would virtually save them”.

“Of course, as you said the crisis is unfolding today and we have developed an anti-crisis program. In particular, the prices for copper have reached its minimum of the last six years, while prices for gold and silver are at their 5-year lowest. As you said, we have had the lowest prices since 2008, when the world had been hit by the global financial crisis,” Vladimir Kim told Nazarbayev.

Alexander Mashkevich, Chairman of the Eurasian Natural Resources Corporation, one of the world's leaders in mining and processing of mineral resources operating in Kazakhstan, in turn, also thanked Kazakhstan’s President for helping revive their enterprises. “Thank you very much. This is the right decision. I am sure that it would give a lot to Kazakhstan’s economy. It will become competitive,” Mashkevich told Nazarbayev.

Kazakhstan’s businessman also said that the situation in the market was deteriorating, in particular he mentioned the sliding prices for aluminum. Because of that and also the lack of demand, the company was unable to sell its products, because if it had sold its aluminum at the current prices, it would have suffered heavy losses. Currently, the company has aluminum worth $100 million stocked up in its stores.

The same problem is with ferroalloys, Mashkevich said.

“Today’s decision concerns not only us, but thousands of other enterprises and small and medium businesses. All of them will make a sigh of relief today and everyone will maintain its competitiveness,” he said.

The company employs 70,000 people and with the floating tenge, all of these jobs have been saved. “With their families, they constitute a big part of the population of Kazakhstan,” Nazarbayev said.

“We commit ourselves to preserving jobs, buying three times more Kazakhstan-made products and building new plants," he promised.

By Assel Satubaldina, editing by Tatyana Kuzmina (Assel Satayeva and Asemgul Kassenova contributed to the story)