Why the Tenge Is Not Strengthening Along with Oil

I am currently getting a lot of questions about whether the tenge will strengthen against the US dollar now that oil prices are rising.

It is true that when oil prices rise, the tenge strengthens, and when they fall, the tenge weakens. But in the present case two macroeconomic factors prevent the tenge from strengthening in proportion to the rise in oil prices.

1. The national budget

The budget is built on assumed oil prices and an assumed tenge exchange rate against the US dollar. In theory, if the oil price rises, revenue should not fall even as the tenge strengthens, so the budget should be unaffected. BUT there is a time lag, and it affects the budget.

The mineral extraction tax (MET) and the rent tax on exports are paid only by the 25th day of the second month after the reporting quarter. In other words, in February 2016 companies paid for the fourth quarter of 2015, and in May 2016 they will pay for the first quarter of 2016. In the first quarter of 2016 prices were below $40 and the export customs duty was lowered, which means receipts will be negligible. To make up for the shortfall in the export rent tax for the first quarter (which will be zero for that quarter) and for the revenue lost through the lower export customs duty (in March 2016, $20), the exchange rate has to be kept low even while oil prices are high. Otherwise, revenues simply will not meet the plan. The budget will feel the price increase of the second quarter of 2016, which we are observing now, only in August 2016, and that means that in August 2016 the exchange rate should be consistent with a low oil price.

Otherwise, other sources of budget revenue will have to be found.

2. Inflation and purchasing power

Inflation has accelerated, and prices have risen for almost everything. The point is that inflationary and deflationary surges also work with a time lag, roughly equal to the average turnover period of inventories and receivables. Say prices have risen by 20% because of the exchange rate difference. It will be quite hard for them to fall back, and deflation is unlikely. Yet many household incomes depend on the US dollar exchange rate, especially those of subsoil users and other exporters. By strengthening the tenge, we keep the nominal money supply in tenge from growing, which hurts nominal household incomes and, in turn, their purchasing power, so we get the opposite effect. When the tenge strengthens, purchasing power falls, because prices do not fall while incomes do.

For this reason, a strong appreciation of the tenge against the US dollar is unlikely, even if the oil price rises significantly. And if the tenge does strengthen, there will again be reason to doubt the soundness of monetary policy.

For reference, with oil at $48 a barrel, the dollar was trading at around 260–270 tenge last autumn. Now it is 325–330 tenge.