Why the Tenge Is Strong, and Why I Don't Forecast the Exchange Rate

The most common question put to the AI assistant on my website, galim.ai, is a request for a forecast of the tenge's exchange rate against the US dollar. Forecasting the exchange rate in Kazakhstan is a thankless task, because over short periods market signals carry less weight here than in developed markets. The reason lies in the peculiarities of our foreign exchange market, which I have written about many times. In advanced economies with a freely floating exchange rate, any significant market signal is reflected in the rate, one way or the other, almost immediately. Here are a few examples of how this is supposed to work.

For instance, if the National Bank of Kazakhstan (NBK) cuts the base rate, the tenge should weaken. Why? The National Bank manages liquidity within an interest rate corridor of plus or minus 1 percentage point around the base rate. It absorbs liquidity at a rate 1 percentage point below the base rate and provides it at a rate 1 percentage point above. This corridor sets the cost of short-term money in the money market and, through expectations about the future path of the rate, also affects the yields on Ministry of Finance bonds. All other financial instruments then adjust to this risk-free yield, so the cost of funding in the economy is essentially determined by NBK decisions. When the rate falls, tenge-denominated securities become less attractive, and nonresidents begin to reduce their positions, take profits and buy dollars. For all market participants, this is a signal that the tenge should weaken.

The second example is interest rates on foreign currency deposits. If the National Bank, through the Kazakhstan Deposit Insurance Fund (KDIF), raises the maximum rates on foreign currency deposits and banks begin offering higher yields, demand for foreign currency grows and the tenge should weaken. Precisely such a decision took effect on October 1 of this year: the ceiling on foreign currency savings deposits with a term of more than 12 months was raised from 1% to 2.5%. The third example is a rise in prices for the main export commodities. This is a signal that foreign currency inflows into the country will increase in the future, which means it is rational to sell dollars and buy tenge in anticipation of its appreciation.

What sets our currency system apart is a shallow market, a limited number of professional participants, and remaining restrictions that prevent the exchange rate from being fully market-determined. All this makes it difficult to forecast the tenge from market signals over a short horizon. A good illustration is the current year. Since June, the National Bank has cut the base rate four times, from 18% to 15.75%, yet the tenge strengthened for most of the year. Over longer horizons, however, any signal reaches the market and affects the exchange rate.

Why is the tenge strong now? I would single out several reasons.

1. Mirroring of gold purchases. The National Bank buys gold from domestic producers for tenge and sells on the market exactly as much foreign currency as it spent on these purchases. The mechanism was introduced to ensure monetary neutrality and, in that sense, works as intended. But ordinary metal producers usually sell foreign currency only in the amount of their operating costs, whereas here virtually the entire value of the mined gold is converted into a supply of foreign currency. Against the backdrop of rising gold prices, this has noticeably increased the supply of foreign currency. In January–August 2026 alone, the National Bank sold about $5.9 billion from its reserves under gold mirroring, 57% more than in the same period last year. For 2025 as a whole, the amount was about $7 billion.
2. Transfers from the National Fund. Compared with last year, their volume has declined, so the contribution is not as large, but it persists.
3. Growth in exporters' foreign currency earnings thanks to higher prices for oil, uranium and copper. While quasi-public companies were required to sell half of their foreign currency earnings, this inflow went almost directly to the market.
4. Inflow of borrowed capital, primarily into the quasi-public sector. The foreign currency raised is converted into tenge to finance domestic spending, adding to the supply of foreign currency on the market.
5. Notable growth in foreign currency lending. Tenge rates are high and foreign currency rates are low, so companies are increasingly switching to foreign currency loans and selling the proceeds to finance tenge expenses.
6. High base rate. Nonresidents brought in foreign currency, sold it and bought tenge-denominated bonds. As the base rate falls, this flow will begin to reverse.

These factors increase the supply of foreign currency, while demand for it is still held back by foreign exchange restrictions that have built up over the years. The National Bank is gradually lifting them, and this is the right direction. But until this process is complete, growing supply noticeably strengthens the tenge, which is why the exchange rate is hard to predict over the short term.

The exchange rate is also closely linked to inflation, and the link runs both ways: a weak currency fuels inflation through imports, while high inflation eventually puts pressure on the currency. Over long horizons, a currency generally depreciates by the inflation differential with the main trading partners whose currencies make up the basket. For us, these are the dollar, the ruble, the yuan and the euro. This differential is adjusted for the difference in labor productivity growth rates, known in the economic literature as the Balassa–Samuelson effect. If a developing country achieves high-quality economic growth, its labor productivity, starting from a low base, grows faster than in developed countries. This makes it possible to keep the exchange rate stable even if domestic inflation is higher than that of trading partners. Even so, the currency usually weakens over time. In our case the trend has so far been the opposite: with inflation above 9%, the tenge has been strengthening for almost a year. Over the past twelve months, the official dollar rate has dropped from 538 tenge to as low as 439 tenge, and it now stands at about 454 tenge. Such a divergence from fundamentals cannot last forever and could later lead to an accelerated depreciation of the currency.

The main pros and cons of a strong currency for a country are as follows. I will start with the pros.

1. The most important effect for the country is lower inflation thanks to cheaper imports. This appears to be exactly what is happening here. Annual inflation has fallen for the twelfth consecutive month, from a peak of 12.9% in September of last year to 9.3% in September 2026, and the National Bank itself cites exchange rate movements as one of the factors behind the slowdown.
2. The real standard of living rises, and GDP per capita in US dollar terms increases.
3. It is a good time to invest, because it is not only imported consumer goods that become cheaper, but also equipment, fixed assets and intangible assets. Within the investment cycle, entrepreneurs can put more into new production facilities and business expansion.
4. Businesses in trade can earn more thanks to lower procurement costs.

There are also quite a few cons.

1. The competitiveness of domestic business declines. Exporters receive less revenue in tenge terms, and their profitability falls. Domestic producers have to cut prices to compete with imports, which reduces margins and forces some production facilities to close. Launching new production projects in such conditions is considerably harder.
2. Tax revenues fall short of the plan, which puts additional pressure on the budget. Compared with the plan, the profits of exporters and domestic producers decline, while imports become cheaper in tenge terms, which narrows the base for import VAT. This is what we saw in 2026. The revenue forecast was built on an exchange rate of 540 tenge per dollar, but in fact the dollar cost 85–95 tenge less for most of the year. In January–August, VAT revenues fell short of the plan by about KZT 490 billion, and the Ministry of Finance lowered its full-year forecast by KZT 2–2.2 trillion in light of changes in macroeconomic conditions. Other macroeconomic conditions, such as higher prices for oil, gold and copper, have little effect on VAT, since exports are zero-rated for VAT. Therefore, in my estimate, most of the shortfall against the plan is explained precisely by the strong tenge.
3. In the long term, plant closures reduce domestic supply, which ultimately fuels inflation again.
4. The longer imbalances accumulate, the higher the risk of an accelerated depreciation of the currency in the future, one that would affect prices and living standards.

Another point that matters to entrepreneurs is the predictability of the exchange rate and the absence of high volatility. This does not mean that the rate should be fixed. It means that movements in the rate should be explainable by market signals. When the tenge can strengthen or depreciate by 10% over a short period, businesses cannot plan properly or manage currency risks. Volatility mainly benefits professional financial market participants, while it hampers the real sector.

In my opinion, over the short term a stronger tenge helps in the fight against inflation, but over the long term it is right to continue the work already under way to lift restrictions so that the tenge returns to its natural market rate. The first steps in this direction have already been taken, for example the liberalization of rates on foreign currency deposits.

As for the forecast I am asked about most often, I will not give an exact figure. Over a horizon of several months, the exchange rate will be determined largely by the volume of gold mirroring, sales from the National Fund, inflows of foreign borrowing, especially by the government and the quasi-public sector, and the behavior of nonresidents, who may start reducing their positions in tenge-denominated bonds as the base rate falls. Over a horizon of several years, the logic is simpler: as long as inflation in Kazakhstan is markedly higher than that of its trading partners and productivity growth does not offset the difference, the tenge will gradually depreciate. It is important that this movement be smooth, and the consistent lifting of restrictions on the foreign exchange market helps achieve exactly that.