Kazakhstan free floats its currency, causing 20% devaluation

Kazakhstan's currency, the tenge, has lost more than 20 percent of its value Thursday after an unexpected government announcement to free float its currency, according to Kazakhstan's national news agency Kazinform.

"The new economic policy of the country amid fundamental negative changes in the global economy requires the adoption of a new monetary policy to ensure a balance between the economic growth and stability of prices," Kazakh Prime Minister Karim Masimov said.

"This policy will be based on inflation targeting and transition to free floating of the exchange rate," Masimov said.

The market responded immediately with the tenge's exchange rate falling from 196 per dollar to 255 per dollar soon after the announcement, though one day earlier Kazakhstan's central bank widened the trading band of the tenge, allowing it to devaluate about 5 percent from about 187 per dollar.

The central bank said the change in the currency exchange mechanism means that Kazakhstan's economic policy would from now on be based on inflation targeting.

"This is a transition to a free floating rate and lets the market itself determine a balanced exchange rate on the basis of demand and supply," Central Bank Governor Kairat Kelimbetov said.

Apart from inflation targeting, Masimov said the change of the tenge rate will also depend on the condition of the world economy.

Masimov pointed out that Kazakhstan's economy has gotten used to a global market where the prices of oil and raw materials are constantly on the rise, which is no longer the case.

He said Kazakhstan must adapt to the new situation in the global market where the oil price will remain low for at least the next five to seven years.

Analysts believe that the tenge's sharp devaluation is a response not only to the falling oil price, but also to the devaluation of the currencies of its major trade partners, Russia and China.

Russia's ruble has decreased by more than 40 percent in the past year, during which Kazakhstan's tenge only lost about 7 percent.

The exchange rate had taken a toll on Kazakhstan's local producers as the country's Ministry of National Economy registered a 40 percent fall in exports between January and July.

China also slightly devaluated its RMB earlier, which may also add pressure to Kazakhstan's trade.

Though allowing a free floating currency, the Kazakh government also voiced its determination to avoid any instability.

Kelimbetov said the central bank will introduce measures to ensure that ordinary people, businesses and banks will adapt to this new monetary policy.

"We believe that we are at a quite smooth and gradual transition. But this is not a painless process," he said.