Will There Be a Devaluation After EXPO?

I keep reading and hearing more and more about a possible devaluation of the tenge against the US dollar. The claims behind it are populist and have nothing to do with the exchange rate. For example: EXPO ends, and that's it, the tenge will be devalued.

Then comes another version: the National Bank of Kazakhstan gave money to Kazkommertsbank, this will increase the money supply and affect the exchange rate, because the printing press has been switched on.

Now the same is being said about the new assistance program for second-tier banks.

To put it mildly, such statements show only that those making them are completely out of touch with the economic processes taking place in the country.

Let's start with what is understood by devaluation here. In Kazakhstan, devaluation means a sharp fall in the value of a currency over a short period (in our understanding, one to two days).

But since the move to a freely floating exchange rate, such a scenario is simply impossible, because the tenge is no longer pegged to the US dollar at a fixed rate. Talking about devaluation is therefore both incorrect and irrelevant.

What we can discuss are the factors that influence the tenge exchange rate in the short, medium and long term.

In the short term, the tenge exchange rate now depends essentially on just two factors: the Russian ruble and oil prices.

In the medium term, we must also take into account the balance of payments and economic factors such as inflation and the money supply.

In the long term, we need to look at labor productivity and how far its growth lags behind that of the United States and other countries.

Now, on assistance to banks and the provision of liquidity. Banks currently have no liquidity problems, as the amount of liquidity sterilized by the National Bank through its notes shows. The sum is enormous, which means that banks need capital, not money. These are completely different things. And when assistance is provided to second-tier banks, the National Bank immediately absorbs it. Talk of a printing press is therefore quite foolish and wrong.

To increase the money supply in the country to the point where it could put pressure on the exchange rate, one of the following would have to happen:

1. The National Bank would have to cut interest rates. Lending would then become more profitable for second-tier banks than keeping money with the regulator, and money would flow into the economy. But this would lead not so much to devaluation as to higher inflation. Higher inflation could in turn affect the exchange rate in the future, but that effect would be medium-term.

2. Economic activity would have to pick up. In a growth phase, additional creditworthy projects emerge, which would increase lending by second-tier banks and so also expand the money supply.

So we will not see a devaluation at all in the coming years. In the short term, the pace at which the tenge loses value against the US dollar depends mostly on external factors, and in the medium and long term on internal ones.

If the depreciation stays within the interest rate differential between the dollar and the tenge and in line with inflation, that is a normal process. It does not erode household deposits and speeds up de-dollarization. For example, if the dollar costs 350–360 tenge a year from now, that is not a devaluation but depreciation within the bounds of normal economic processes.