Deposit Dedollarization Is Not Market-Driven

Lately I keep reading that deposit dedollarization is under way. If we look at the share of foreign-currency deposits in the structure of the banking sector's total assets, the figures partly bear this out. But whether this is good or bad is a question that calls for more detailed analysis.

There are several main reasons for the decline in foreign-currency balances in the banking system.

The first reason for the dedollarization of recent years is the high base rate, at which holding money in tenge becomes profitable even though the tenge keeps depreciating. Interest on tenge assets outweighs the currency's depreciation. Using the base rate is the most traditional dedollarization instrument and is applied by many developed countries.

The second reason, and the most contentious one for both the economy and the financial system, is the artificial cap on rates on foreign-currency instruments. This cap has been in place for a long time and stands at 1%. Until 2022 it was neutral, because the Fed rate was near zero and there was no significant arbitrage between the market and the rate in Kazakhstan. However, after the Fed raised its rate, market rates became substantially higher than bank deposit rates. As a result, people can place their money with second-tier banks at only 1%, while the banks in turn place it at 5–6% without risk: government Eurobonds alone yield more than 6%. People with limited financial literacy switch their deposits into tenge, and that is how dedollarization happens. Even so, foreign-currency deposits still account for a huge share, despite such interest rates. Thanks to this cap, banks earn hundreds of billions of tenge, since on the market they can easily place funds at a rate above 6%. The net risk-free margin is 5%, and if we have, say, KZT 8 trillion of such deposits and foreign-currency current account balances, it is easy to calculate that the cap alone earns the banks KZT 400 billion in income that depositors, that is, you and I, do not earn.

But something else is worse: the part of depositors who do not trust the national currency look for various ways to move these funds into other assets. More and more people are buying foreign securities, buying gold, or simply withdrawing cash and keeping it at home, since low returns combined with tighter compliance procedures make bank foreign-currency deposits unattractive. In this situation what is happening is not dedollarization but capital flight, which harms the economy. The money simply does not work for the country: it either sits at home as cash, or we become investors in other countries' economies, such as the US, the European Union and China, in whose securities we invest. Money also flows to the UAE, Turkey and elsewhere to buy real estate, when it could be working in the country through the monetary and credit system. Our country has a catastrophic shortage of investment and suffers capital outflow, yet we ourselves create the conditions for that outflow to continue. I once wrote a lengthy article on this subject, in which I cited figures. If you look more closely at our balance of payments, it clearly shows that capital is leaving through various channels. On 21 May 2025, for instance, I wrote that over three years more than USD 12 billion had been taken out of Kazakhstan under the portfolio investment item alone.

After 2014, when the devaluation took place, our country began actively fighting both dollarization and foreign-currency investment, in order to protect the private sector from currency risks. Managing currency risks is, of course, necessary, but it should be done by somewhat different methods.

In 2015 Kazakhstan moved to inflation targeting and a freely floating tenge exchange rate. A free float does not imply one-off devaluations, and currency risks are hedged through interest rates, as is done all over the world. But in parallel we began introducing various restrictive measures on the use of foreign currency inside Kazakhstan, thereby limiting our own foreign-currency investment. Banks stopped attracting foreign currency from abroad, while the private sector began actively moving dollars out of the system abroad in search of alternative foreign-currency instruments, which ultimately leaves our economy underfinanced. All the while, the government is trying in various ways to attract foreign investment. The result is, in effect, running on the spot, and last year net investment even turned negative.

So, to sum up, we certainly have dedollarization, but whether it is achieved by market methods is debatable. And if capital is flowing out, we need to assess more carefully which is better: capital outflow or dedollarization of second-tier banks' assets.

In my personal opinion, we should remove all restrictions and currency imbalances in the country, improve regulation, and encourage domestic investors to put their money to work inside the country, including through second-tier banks and the stock market. In this way we would improve our balance of payments, which would strengthen the financial system and stimulate the country's economic growth.