Free-floating tenge will not stop Kazakhstani downturn

Subject

Kazakhstan's exchange rate regime.

Significance

On August 19, the National Bank of Kazakhstan (NBK) announced it was relinquishing control of the exchange rate, thereby triggering a 23% decline in the tenge to a record 257.21/dollar. The tenge has since strengthened slightly to 241/dollar, as of September 2. The previous month, on July 15, the NBK had eased the corridor within which the tenge had been allowed to fluctuate against the dollar -- upwards by 13 points, from 170 to 198/dollar. While this exchange rate band was initially expected to last at least until 2016, a combination of fundamental market factors has prompted Kazakhstan's government to shift to a free-floating rate.

Impacts

• Past and forthcoming cuts in public spending will contribute to the slowdown of economic growth and increase the risk of a recession.
• Kazakhstan's move to abandon pegging the tenge could prompt competitive devaluations in other parts of Central Asia.
• Socioeconomic volatility could lead to political instability as the president has yet to designate a successor.