**Box I**

# **Update of Events: Devaluation and Liberalization in Kazakhstan**

On April 4, the Kazakh Government and the National Bank announced a free float of the tenge's exchange rate. They also announced an end to the highly proteclive trade measures introduced against Russia, Uzbekistan and Kyrgyzstan. The tenge first slumped to around 150 to the dollar, but later, by mid-April fluctuated between 110-120 to the dollar, and by August 1999 was holding around 132 tenge to the dollar, compared to the pre-devaluation 88 tenge to the dollar rate. The float was intended to boost Kazakh exports and to allow the National Bank to cease its costly efforts to support the tenge. These efforts had depleted hard currency and gold reserves to $1.7 billion, down from $1.9 billion in January.

Commenting on the government's actions, Prime Minister NurIan Balgimbayev noted that due to devaluations among neighbor countries, Kazakhstan-produced goods had became uncompetitive. Kazakhstan industry suffered from that, enterprises stopped operating and unemployment increased. He indicated that foreign trade turnover of Kazakhstan was reduced by almost 9%, or USD 1.3 billion with exports reduced by USD 1.25 billion. Kazakhstan had to undertake urgent measures caused by purely external factors and economic policies of neighbor countries. The trade protection was a response to those pressures.

He emphasized that henceforth the US dollar exchange rate will depend on demand and supply at the foreign exchange market. The National Bank of Kazakhstun (NBK) will not substantially intervene in this process. He said that until the announcement, the NBK was spending its gold and foreign currency reserves in order to support the exchange rate at a certain level, but that will not happen any longer. "We have no doubts regarding economic stability and our ability to manage the economic situation... .NBK has significant gold and foreign currency reserves, but what is the reason to give the currency away and support an excessively expensive tenge?" Balgimbayev asked.

Regarding the highly protective trade measures against Russia, Kyrgyzstan and Uzbekistan, he noted that Kazakhstan has borders open for thousands of kilometers with those countries. Cheap goods from those countries easily compete with local producers and take foreign currency out of the country. It is practically impossible to close the borders, and it is also wrong from both economic and political points of view. "Russia and Central A,sian neighbors are our friends, and there is no reason to develop trade wars. From this point of view, the only solution is to introduce a floating exchange rate regime." Source: Oxford Analytica, April 12, 1999 and August 17, 1999; Robert Lyle, Radio Free Europe, April, 1999.

Some Kazakh authorities feared that devaluation would lead to an unstable downward spiral of the exchange rate and possibly a Russia-style financial crisis. But the banking crisis in Russia was precipitated more by the government default on ruble denominated debt, which dramatically reduced the assets of many Russian banks overnight; these conditions were not present in Kazakhstan. Moreover, the worldwide experience, as well as recent experience in transition countries (for example, Ukraine, Moldova and Russia) has shown that defending the exchange rate has no medium-run benefits, since falling reserves will force devaluation eventually. It is better that the devaluation be accomplished without further debilitating losses in reserves and lost 4