Finance about Kazakhstan

Kazakhstan’s economic recovery from the global crisis was rapid, with outputgrowth of around 7ó percent in 2010–11. Real GDP growth slowed in 2012–13, mostlyreflecting declines in oil and agricultural output, but was still solid at around 5–6 percent. At

the same time, core inflation (excluding food, energy, an administered prices) averagedaround 6 percent since 2010 or roughly half the rate of core inflation in the preceding three

years. The February 2014 devaluation of the tenge reflected the central bank’s concern about

loss of competitiveness, amid depreciation of the Russian ruble. Temporary inflationary

pressures are likely to emerge from the devaluation, although the authorities are determined

to keep inflation within the objective range of 6–8 percent.

The NBK has been conducting periodic

auctions for the issuance of short-term notes. In parallel, the NBK in 2012 introduced

important changes to its minimum reserve requirements (MRR). For example, in order to

assess more accurately the size of tenge liquidity, the NBK excluded banks’ cash on hand

and correspondent accounts in foreign currency from the structure of reserve assets.2 In

addition, over the past two years, the NBK periodically provided short-term liquidity to

banks through automatic repo operations to smooth seasonal fluctuations in demand for tenge

liquidity. Moreover, to enhance the transmission mechanism of monetary policy, the NBK

was planning to engage in more active open market operations (OMOs) for both the

provision and withdrawals of liquidity, through changes to its standing facilitates and the

introduction of a new policy interest rate.3 However, following the recent devaluation, the

NBK tightened the exchange rate band and refocused the exchange rate both as primary

objective and as dominant instrument of monetary policy. The NBK remains committed to

allowing greater exchange rate flexibility over time, including enhancing its overall monetary

policy instruments.

The de jure primary goal of NBK’s monetary policy is price stability; however, de facto,

a tightly managed exchange rate guides the management of system liquidity. The NBK’s

monetary policy guidelines are explicit about the primacy of the price-stability objective,

with the view to promoting financial sector stability. In practice, however, the driving force

behind the management of tenge liquidity, and in turn the conduct of monetary policy, is the

tightly managed tenge/USD exchange rate and the frequency in which the NBK intervenes in

the foreign exchange market. The NBK’s tight exchange rate management, both as primary

objective and as dominant instrument (via intervention) of monetary policy, complicates the

management of system liquidity. The lack of effective interest rate instruments (see below)

and high degree of financial dollarization further add to this challenge. Moreover, in recent

months, the FX swap market has played an increasing role in the funding of short-term tenge

liquidity among banks, which has contributed to volatility in the interbank repo market.

As a small open economy, Kazakhstan is exposed to external shocks, and periodically

has resorted to one-step exchange rate devaluations. In early 2009, as a result of the sharp

drop in global oil prices during the second half of 2008 (and following significant

depreciation in the Russian Ruble

and in currencies of otherresource-exporting economies), theNBK devalued the tenge by 20

percent against the USD to a level of150 tenge/USD. During 2009–13, the tenge/US

exchange rate waskept stable, despite volatility in otheremerging market currencies. In

September 2013, the NBK switchedto the use of a multi-currency basket(with weights of 70, 20, and10 percent for the USD, euro, andruble, respectively) in smoothing “excessive” exchange rate fluctuations. However, in

February 2014, the NBK unexpectedly devalued the tenge (by 18 percent), to a level of 185,

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Date: 2015-01-11; view: 1047