Inflation: Continuing the Conversation After the CFO Forum
Translated from Russian with the help of AI. Original: Russian version
Exchange rate forecasts for 2026 from the CFO Forum, and how the tenge's high volatility, driven by restrictions on the currency market, acts as an inflationary factor.
I recently took part in the CFO Forum in Astana, which brought together finance directors from domestic real-sector companies. I moderated the event and asked my colleagues what exchange rate they had assumed for 2026, and why. Interestingly, representatives of both the private sector and the quasi-public sector put next year's rate at 550 tenge per US dollar. When I asked, "Why 550, if the republican budget is built on a rate of 540?", everyone gave the same answer: "This year the rate reached 550 and was held back only by interventions, so next year the rate will be above 550, and the average rate will be 550." From a macro standpoint there is logic in this. Depreciation of a currency within the bounds of inflation is a matter of time, and with inflation at 12%, the tenge will be under pressure. Nevertheless, if labor productivity is growing in a country, depreciation should be lower than inflation. Labor productivity typically grows faster in developing countries than in developed ones, and the Government's task is to stimulate precisely the sectors with high labor productivity.
But there is another problem, one specific to Kazakhstan: if the exchange rate is highly volatile, businesses will use the maximum rate rather than the average in their pricing, which in practice pushes up prices of import-dependent goods. Rising prices then automatically push the rate toward the expected level and feed into inflation in the country, which is roughly what is happening now. In other words, high volatility of the national currency is itself a pro-inflationary factor, and we need to address the causes of that volatility. Volatility in itself is normal if it is driven by market mechanisms. However, where the market is subject to restrictions, bans or controls, volatility becomes high, and Kazakhstan has quite a few such restrictions.
The restriction on legal entities purchasing foreign currency means that companies cannot buy currency in advance to hedge currency risk. The flip side is that a company receiving foreign currency revenue has no incentive to sell it, because when it needs currency later, it will not be able to buy it back. This limits both the supply of and the demand for currency on the market. As a result, when a large player comes in and sells currency, nobody can absorb that supply and the tenge strengthens sharply; when the player leaves the market, the rate falls sharply. This is exactly what we observe in Kazakhstan.
Caps on spreads in the retail market mean that banks and exchange offices cannot dampen demand for or supply of currency through their spreads. When the rate falls, for example, because spreads are narrow, individuals rush to buy dollars at the peak. When the tenge strengthens sharply, exchange offices and banks, to avoid booking losses, cut their rate for buying currency even further, pushing the rate lower still. All of this adds to exchange rate volatility.
The restriction on foreign currency lending to legal entities creates a general imbalance in the balance of payments. Investment spending is now financed largely from domestic resources, so we get additional imports not backed by foreign currency inflows, which puts pressure on the tenge when investment spending rises.
Uneven tax payments give rise to so-called "tax weeks," creating additional supply of currency when taxes have to be paid, and we consistently see the tenge strengthen during tax weeks. Here the frequency of tax payments should be increased: for example, the main taxes should be paid monthly rather than quarterly, as is the case now.
The cap of 1% on foreign currency deposit rates creates what looks like an additional arbitrage opportunity for individuals, who buy tenge and move into it. However, the same arbitrage also motivates people to move into foreign assets, buying bonds and other financial instruments on international markets, which results in capital outflow from the country.
There are many more such examples, because our currency market can hardly be called free. The result is not so much a restrained exchange rate as a volatile tenge, owing to the lack of market depth.
Therefore, one of the necessary steps to reduce tenge volatility must be to move away from bans, restrictions and the like, so that the market becomes freer. For now, the reality is this: the rate is 510 tenge per dollar, the budget assumes 540, and businesses base their pricing on a rate of 550 for this year. Naturally, many other factors affect inflation and exchange rate volatility. This is only one of them, and we need to work on each of them.