National Bank Intervenes as Tenge Falls, But Can It Stop the Slide?

National Bank Intervenes as Tenge Falls, But Can It Stop the Slide? Kazakhstan’s national currency has been fluctuating sharply for the second consecutive week. In July alone, the tenge dropped 4% against the dollar. To stabilize the rate, the National Bank carried out $125 million in currency interventions. 

Orda.kz has spoken to experts about the situation.

Who Benefits?

Officials and experts have offered various explanations for the tenge’s weakening. The National Bank says there are no fundamental reasons for the drop. Deputy Prime Minister Roman Sklyar denies that it’s linked to Prime Minister Olzhas Bektenov’s statement about using a 540 tenge per dollar rate in next year’s budget. Economist Yernar Serik attributes the pressure to the rising business demand for foreign currency for infrastructure projects.

Still, if no fundamental factors exist, who profits from currency speculation? And did the National Bank act too late on purpose? A stronger dollar means more tenge revenue from oil sales in the National Fund, making it easier for the government to cover budget gaps.

Economist Marat Abdurakhmanov notes that the money supply has grown by 18%, while the supply of goods remains unchanged. He believes cutting the lending rate helped slow the devaluation.

Last year, even more tenge was issued, so everyone expected a devaluation last year. It happened by 13%. This year, devaluation has already happened by seven percent. That is, we see the effect of reducing the maximum lending rate — a decrease in the level of tenge devaluation. This is one part of the issue. Gold and foreign exchange reserves are another part of the issue, along with the national debt. Our national debt is growing based on the base rate. It is still at the same level — this means that the national debt is increasing at the same rate as last year. Money for its servicing must be taken from the budget. And the budget is seeing a decrease in revenues.

He adds that Kazakhs hold 17 trillion tenge in consumer loans, often used for basic needs. These loans come with high interest rates and add pressure on the currency, especially alongside tax hikes.

In total, we consume goods and services per year, last year, for 68 trillion tenge. This year it should already be 80 trillion, taking into account inflation. These 80 trillion tenge are what people pay for utilities, food, gasoline, medicine, and so on. And when the government says that it will take 10 trillion tenge more from this money, naturally, people will not be able to pay it because this money does not exist. Officially, we have four million hired workers who receive a salary of about 5 trillion tenge, and two and a half million self-employed earn another 10 trillion tenge. The government is looking for this difference — the actual consumption of food last year was, according to official data, 21 trillion tenge, and according to actual data on the market — 34 trillion tenge. People are trying to survive somehow.

Abdurakhmanov believes the National Bank benefits from a weak tenge as manager of the National Fund. But financial analyst Andrey Chebotarev disagrees, calling that a conspiracy theory.

The National Bank does not benefit from a cheap dollar — although it benefits the government as a whole. But the National Bank and the government are not the same thing. The government might want to lower the dollar, but it has no tools for this. Even the National Bank itself cannot do this manually.

He says the National Bank’s priority is inflation control, not weakening the currency. A higher dollar only drives prices up, outweighing any benefit from selling National Fund reserves.

I am not inclined to believe that the National Bank is somehow playing along with the government with the low exchange rate of the tenge. This is truly the market condition of our currency. Our economy is growing at a breakneck pace — plus six percent, that's a lot. And when the economy grows, the demand for working capital for capital grows. Working capital is everything that is invested in new equipment and so on. And all this is bought for foreign currency. Therefore, with a growing economy, the demand for foreign currency always grows. I do not think that we are 'specially' weakening somewhere. It is not as simple and not as possible as it seems. 

Dollar at 270 — Fantasy or Fix?

Abdurakhmanov argues the tenge is undervalued and calls for radical revaluation — cutting the exchange rate in half through administrative action.

To remove all the imbalances in the economy, the tenge needs to be revalued. That is, to strengthen the rate by two times. Then the difference in the price of fuel with Russia and Kyrgyzstan will disappear, the need to subsidize businesses will immediately disappear, the need to index social payments will disappear. Only the National Bank can do all this, but instead, it, on the contrary, weakens the tenge in order to cover all those distortions that were created jointly with the government with money from the National Fund,
Marat Abdurakhmanov says.

He says a 50% revaluation could solve fiscal, pricing, and social issues all at once.

If it is done now, it will be the ideal solution. The National Bank does this — it announces the tenge rate for the next day. That is, if the rate is 540 now, then the National Bank announces the rate of 270 tenge. And that's it — let everyone who wants to buy more expensive buy from the National Bank, because only it has dollars that go to the stock exchange. This solution is now in place, but no one has announced it yet,
  Marat Abdurakhmanov believes.

But Chebotarev says this is unrealistic. Even if the National Bank wanted to, it lacks the power to impose such a shift in a market economy.

Yes, the National Bank is the largest player on the currency market. Yes, it controls 30–40% of the trading volume. But this does not give it the opportunity to directly set the rate it wants. Our rate is not so 'manual.'
 says Andrey Chebotarev.

The National Bank, he concludes, cannot crash or save the tenge overnight. For now, it can only intervene with hard currency and hope the trend reverses.

Original Author: Nikita Drobny