Devaluation of Kazakh Tenge

ASTANA. February 5. KAZINFORM – Currency devaluation measure implemented in order to protect the national economy amidst the world financial crisis, to support domestic producers and to create conditions for fast future growth during the period of recovery from the crisis, has caused heated debates among the country?s community of experts. Here we present the opinion of the director of the Centre for Early Detection of Economic and Financial Shocks, JSC ?Economic Research Institute?, Sara Alpysbayeva.

Widespread currency devaluation is one of the negative influences of the world financial crisis on the national economies. Iceland, RSA, Brazil, Poland, Turkey and South Korea ? all at the top of the list of the countries that have been forced to implement devaluation measures. CIS countries are not an exception, which has caused a threat to the competitiveness of Kazakhstan?s exports. In this case an artificial maintenance of the tenge exchange rate could have led to a decline in the volume of gold and foreign reserves. It is inevitable that in a market economy, any measures implemented by the Government will have both positive and negative consequences, and therefore fine tuning of the instruments becomes one of the toughest tasks. In the last months, Kazakhstan?s largest exporters have taken a hit, losing competitiveness on the international markets. In these circumstances, devaluation of the currency will surely lead to an improvement in trade terms. However we should keep in mind that export volumes of developing countries mostly depend on the world price levels in the raw goods markets. Due to an overall stagnation of the world markets we should expect an increase in profits of exporters due to the exchange rate arbitrage. Unlike export, import levels are more sensitive to fluctuations in the exchange rate and a devaluation will lead to a rise in prices on imports, fall in import volume and expansion of demand for domestic goods. This has been the case in many countries that have experienced similar crises. Aggregate volume of imports coming from Russia is 37.1%. According to the assessments of JSC ?Economic Research Institute? devaluation of the Tenge will improve the competitiveness of a number of Kazakhstan?s enterprises that operate in the following industries: - food products (sugar, confectionaries, dairy products and fish) - non-metal minerals - oil - chemical industry - cars and parts - black metallurgy Decrease in the volume of imports will allow the country to implement an effective policy of import substitution which will support economic growth and employment. Consequnetly this should lead to an improvement in the trade balance and will have a positive effect on the current account balance. Of course we must consider the negative consequences of the currency devaluation, such as the impact on the banking sector which currently contains a high level of external debt. However, I would assume that measures implemented by the RK Government with respect to recapitalization of key banks and promotion of greater stability of the financial system significantly decrease those risks. Devaluation measures also run the risk of raising the inflation rate, however the experience in regulating inflationary processes, accumulated by Kazakhstan over the period of 2007-2008, will play a key role in the management of the impending inflationary pressures. The most important benefit of currency devaluation is preservation of gold and foreign reserves which are the beacon of stability and future growth potential of the country. In 2008 Kazakhstan?s volume of gold and foreign reserves have increased by 21%. In contrast, Russia?s gold and foreign reserves have declined by 28.6% since 01.08.2008. If the conventional measure of stability demands a volume of gold and foreign reserves that is capable to cover 3 months of import then Kazakhstan has accumulated a significantly sufficient level that is able to cover imports for a much longer period.