EXCHANGE RATE STABILITY PULLS DOWN KAZAKH INFLATION.

Publication: Monitor Volume: 7 Issue: 140

After dropping sharply in 2000, inflation in Kazakhstan has held steady in 2001. Inflation jumped from 1.9 percent in December of 1998 to 18.1 percent in December of 1999 after the tenge was devalued. It then tumbled to 10.0 percent in December of last year. This year, the rate has moved only marginally, down to 9.2 percent at the end of June (Nationalbank.kz, July 5). Inflation will register a downward trend through the end of the year, but ongoing increases in administrative prices for electric power, water, telecommunications and rents will keep the inflation rate over 5 percent.

The Kazakh authorities are attempting to control inflation through the exchange rate. Almost all Kazakhs, even the lowliest goatherd, keep some of their savings in foreign currency. In fact, many citizens keep most of their savings in the preferred foreign currency in Kazakhstan, the U.S. dollar. By keeping the exchange rate fairly steady, the National Bank of Kazakhstan (NBK) gives confidence to Kazakh savers that their tenge savings will hold their value. This policy reduces inflationary expectations. Faced with a constant exchange rate, retailers and manufacturers know that they will face tough competition from their competitors if they try to raise prices. Consequently, a constant exchange rate serves to provide a strong element of price discipline.

So far this year, the NBK has kept the Kazakh currency within a band of 142 to 147 to the dollar; it has fluctuated by less than 2.4 percent from the average rate of exchange in the first half of the year. Although the tenge has slipped by one or so to the dollar in the past few months, with the influx of dollars that will come from increased oil exports this year, the NBK should have plenty of money with which to support the currency. Through April, Kazakh international reserves rose to US$2,607 million, up from US$2,318 million at the beginning of the year. However, with economic growth has come more demand for imports. Although reserves fell US$2,395 million at the end of May, the inflow of dollars, and therefore reserves, should rise later this year. The NBK is likely to choose to buy these dollars for tenge, rather than let the exchange rate appreciate. Consequently, inflation will continue its gradual decline over the rest of the year, but will not fall to the low levels of 1998. The NBK will not choose to seek an immediate sharp decline in the rate of inflation by letting the tenge appreciate against the dollar. Instead, it will try to keep the exchange rate steady so as avoid choking off growth in exports by having the currency rise in value.

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