The Tenge's Depreciation to 512 in November 2024

In November 2024, the tenge depreciated by 5% and closed the month at 512 tenge per dollar. Measured from May of this year, when it strengthened to 439 tenge, to the current level of 530, the currency has weakened by more than 20%. That points to considerable volatility and, as I have written before, the exchange rate was fundamentally bound to reach these levels sooner or later. What matters more is that we understand the fundamental causes of the currency's depreciation, which I have written about many times.

We can identify the main short-term factors behind the sharp rise of the dollar against the tenge. The external ones include the strengthening of the dollar worldwide, lower oil prices and the fall of the Russian ruble. These external factors do not take effect immediately, because, given how our currency market is regulated, external signals cannot be reflected in it at once: economic agents have no way of hedging, and our currency market is not free. When the currency market is regulated in this way, we deny market participants the chance to react to external factors and to hedge. As I have noted before, the instruments in question include restrictions on conversion for legal entities (which, incidentally, has cost many companies heavy losses in recent months), caps on interest rates on foreign-currency deposits, control of the currency positions of second-tier banks, mandatory sale of export revenue, and so on.

Among the internal factors is the pent-up demand for dollars caused by late budget financing. In other words, as soon as withdrawals from the National Fund were approved, most budget requests were funded at once. The recipients then went to the currency market, which triggered a sharp jump in demand for foreign currency, and even November's tax-payment season did not help to absorb it. This can be traced in the sharp growth of the M2 and M3 money aggregates, which rose by more than KZT 1 trillion in October.

The budget deficit, unbalanced fiscal policy and constant subsidization of the economy have created structural imbalances, and these are now affecting the exchange rate. Last year, for example, active sales of National Fund currency allowed the tenge to strengthen from 470 to 440, and the rate was then held at 440 for a long period despite high inflation. This did great damage to company revenues and to the national budget. A 10% appreciation of the currency, for instance, reduces the profits of commodity companies by the same 10%, while most subsoil users' taxes are calculated on a foreign-currency base, which became smaller in tenge terms and directly affected the state budget. The contribution of the strong tenge to last year's budget deficit was enormous. Had we not flirted with a strong tenge last year and this, today's problems would be far smaller and the sharp depreciation could have been avoided. None of this is hard to calculate.

But the fundamental causes of the tenge's depreciation lie much deeper. I will repeat once again that, over the long term, our economic policy does nothing to strengthen the national currency, because we concentrate on diversifying production at any cost, without proper attention to labor productivity growth. Without productivity growth, our economy will unfortunately be doomed to a depreciating currency. We are repeating classic mistakes made by many countries. In our case, productivity growth has to come from the private sector, and what matters most to it is not subsidies, protectionism or vast state construction projects, but predictability, the rule of law, honest regulation, good antimonopoly legislation, developed infrastructure and a free market. These may be commonplace things, but they are not easy to achieve, and we must move toward them gradually through genuinely structural reforms. In this respect, I think we should follow the example of Britain under Margaret Thatcher, who carried out large-scale privatization of state assets, liberalized the market, including regulated prices, and reformed taxation. Incidentally, the only bastion of good sense that relies on market mechanisms in its work is so far the National Bank, which promptly raised the base rate, and I think it will have to raise it a couple more times in the near future. But, as the saying goes, one man cannot make a battle.

Instead of a conclusion, we should recognize that the current exchange rate has both negative and positive consequences. The negative ones include higher inflation due to the rising cost of imports, a fall in real household incomes, a move further away from the target of USD 450 billion in GDP, and the impossibility of lowering the base rate, which will affect lending and, as a consequence, economic growth. On the positive side, domestic producers will become more competitive against imports, and exporters' revenues in tenge terms will grow by the amount of the depreciation without a significant simultaneous rise in costs, which will boost their profitability. As a result, budget revenues will grow considerably, since many companies' profits will rise and the base for commodity taxes will expand. Incidentally, the fastest way to balance the budget without having to cut spending is currency depreciation.