Energy-rich Kazakhstan announced yesterday it is abandoning its currency band for a free-floating exchange rate, in a move that triggered a 23 percent fall in the value of the tenge against the US dollar.
“The National Bank and the government have decided to implement a new monetary policy from August 20, this year, based on an inflation-targeting regime, to cancel the trading band and move to a free-floating regime,” Kazakhstani Prime Minister Karim Massimov said yesterday at a session of the government.
The decision comes amid bleak price forecasts for crude oil, Kazakhstan’s linchpin export.
On Wednesday, the tenge fell by close to 5 percent against the dollar, the biggest drop since the national bank ordered a shock 20 percent devaluation against the greenback last year.
The ex-Soviet country’s 75-year-old President Nursultan Nazarbayev on Wednesday said that future economic planning in the country should be adjusted to assume oil prices at US$30 to US$40 per barrel and that belt-tightening measures would also affect showy national projects.
“In past years, we have built a lot, increased staffing and salaries. Now however, there is a lack of funds and in connection with this there will be strict limitations on new projects,” Nazarbayev told top government officials.
“For this reason it is necessary to place a moratorium on various initiatives until 2018,” he said.
Benchmark Brent crude is trading at just under US$50 per barrel and the US Energy Information Administration said last week prices are to average less than US$60 per barrel throughout next year.
In addition to slumping prices for crude, the national economy has been hit by falling demand in two key export markets, Russia and China.
The slide of the Russian ruble on the back of Ukraine-related sanctions and falling hydrocarbon prices have also taken its toll.
China must wait until at least next year to join an exclusive club of the world’s top currencies, the IMF said on Wednesday.
The IMF board voted to leave unchanged until Sept. 30 next year a basket of currencies used in IMF operations, known as the Special Drawing Rights (SDR).
China, the world’s second- biggest economy, had wanted the IMF to include the yuan in the basket along with the US dollar, euro, British pound and Japanese yen starting on Jan. 1.
Unlike the other currencies in the basket, the yuan does not trade freely. China sets a daily target and lets the yuan trade 2 percent higher or lower.
The Washington-based IMF only conducts its SDR review every five years and that might have accelerated China’s efforts to get the yuan included.
Last week, Beijing devalued the yuan and said it would give market forces more say in determining the exchange rate — a move the IMF praised as a step in the right direction.
The yuan in Shanghai is now allowed to trade as much as 2 percent on either side of the People’s Bank of China’s (PBOC) reference rate.
The IMF, which rejected the yuan in 2010 on the grounds that it was not “freely usable,” called China’s move a “welcome step,” while cautioning the change had no direct effect on the SDR review.
The SDR basket is a virtual currency the IMF can use for emergency loans and the fund’s member countries can use to bolster their own reserves in times of crisis.
Joining the basket would give the yuan the IMF’s seal of approval and might encourage foreigners to use the Chinese currency and to have more confidence in China’s financial markets.
The yuan yesterday rose on speculation the PBOC intervened to support the currency after the IMF decision.
It closed 0.1 percent higher at 6.3890 per US dollar in Shanghai, according to China Foreign Exchange Trade System prices. It fell as much as 0.08 percent earlier.
In Hong Kong’s offshore market, the freely traded yuan fell 0.08 percent to 6.4465 per US dollar as of 4:51pm, according to data compiled by Bloomberg.
“The IMF executive board vote is slightly negative for the yuan today as the inclusion will be delayed,” said Banny Lam (林樵基), co-head of research at Agricultural Bank of China International Securities (中國農業銀行國際證券) in Hong Kong. “That said, any major yuan depreciation is unlikely in the near term after such a big adjustment last week. It’s time for some stability.”
Additional reporting by Bloomberg
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