On Aug 20, the situation in Kazakhstan was the same as a day before: most of the local currency exchange offices were closed just like many appliance stores and trade houses. Those few offices that were open exchanged 1 USD for 258 KZT (60 KZT more than a day before).
In the National Bank, the buying rate was 256 KZT, the selling one was 257 KZT. The CenterCredit Bank bought 1 USD for 255 KZT and sold it for 257 KZT. In the exchange offices the rates were 250 KZT and 258 KZT, respectively. When later in the day the government announced transition to a floating KZT rate, experts called people to buy shares of KAZ Minerals traded at the LSE. “The shares are denominated in USD, so, they are protected from depreciation. We also recommend buying KazKommertsbank’s Eurobonds as they are also denominated in USD and their yield is 6-7% a year,” the experts said.
Once announced to be freely floating, KZT slumped by 26%.
The government was forced to convoke a special meeting. It was for the first time after a long pause that mass media were given access to a government meeting. Prime Minister Karim Masimov said that the authorities were going to review their information policy. “Our people have the right to know what is going on. So, we will try to find ways to inform them of our further steps,” Masimov said.
During a subsequent briefing, he said that the Kazakh government launched a new fiscal policy based on inflation targeting. “We will have no more currency band and will transit to a freely floating exchange rate. From now on KZT’s rate will depend on offer and demand as well as on internal and external macroeconomic factors. The National Bank will not interfere in this process but we reserve the right to carry out currency interventions in case of a threat of financial instability,” Masimov said.
He believes that this will create necessary prerequisites for economic recovery, higher lending and investment activity, new jobs and lower inflation.
According to Masimov, the government will take measures to support its most socially vulnerable citizens. “We will also take measures to prevent any speculations that may cause higher prices for essential products and services,” the Kazakh premier said.
He qualified the switch to a floating rate as “a structural reform.” “We suppose that in the next 5-7 years we will live in a different economic situation. There will have no more high fuel prices. So, we will have to get used to a different situation – when oil will cost just $30-50, when our metals will be cheap. So, we have decided to revise our economic policy and to transit to a floating rate. I think this is a structural reform. From now on the rate of our currency will depend on offer and demand. This is market economy, where everything depends on offer and demand. All we will have to do here is to protect the most vulnerable social groups,” Masimov said.
He promised the people that there would be no jump in prices. “We will not let them jump right now. But in the longer run, we believe that each product should have a market price. Only market can decide how much a product should cost. Our task is to guarantee equal competition and to support socially vulnerable groups. We expect that our measures will enhance the competitiveness of our products. Today, in our northern regions, our products are being forced out by more competitive Russian analogues. So, we must do something to ensure equal competitive conditions on the market,” Masimov said.
He is sure that Kazakhstan will cope with these problems. “We would face a default if we did nothing or just wasted our reserves to keep the rate stable. I am sure that we will come out of this situation as a more stable economy,” the Kazakh premier said.