“We believe that the tenge will need another cycle of devaluation in order to catch up with the other currencies in the Custom Union. The desirable magnitude for such a correction would be at least 25%”, the report says. If the Kazakh authorities try to avoid or delay this move, the country may continue to see its international reserves drop. Ideally, the Tenge should be made more flexible, which could help to prevent the accumulation of such distortions in the future, the report says.

The consumer demand corrected on last year’s devaluation helped to trim imports 14.5% in 2014, according to the report.

“Kazakhstan’s economic performance remains the least predictable of the three in the current environment, even though it currently looks better than that of Russia, Belarus or Ukraine. Major uncertainty stems from the fact that the tenge’s exchange rate versus the dollar has remained almost fixed since the correction in early 2014, which seems unsustainable amid cheaper oil”, the report says.

The Kazakh National Bank devalued Tenge in February 2014 by about 20% and set the new exchange band at 185 plus/minus three tenge per USD. Following devaluation in February, the tenge-US dollar exchange rate remained stable within a band of KZT182-188 per US dollar. In September, the central bank widened the band to KZT170-188. The rapid depreciation of the ruble against the major currencies in the second half of 2014 caused it to depreciate sharply against the tenge as well.

The resulting downward pressure on the tenge against the US dollar induced many firms and households to convert tenge deposits into foreign currency, raising foreign currency deposits by more than 70% to account for 55.6% of all deposits. To prevent speculation and excessive reserve losses, the central bank halted swap operations with banks. Lending slowed in the second half of the year, and some banks stopped lending in tenge.

Monetary policy for the next 2 years will aim to maintain macroeconomic and financial stability while ensuring economic growth and building Kazakhstan’s competitiveness. The goal is to keep broad money growth around 10.0% each year. Efforts are under way to strengthen the financial system, rehabilitate banks, and develop capital markets. Requirements for higher bank capitalization will take effect on 1 January 2016. In addition, preliminary measures to prepare for inflation targeting will be introduced.

A top priority for monetary authorities will be to chart a path for the exchange rate, deciding when to spend currency reserves to defend the tenge and when to let it depreciate. The central bank plans to dampen exchange rate fluctuation while limiting intervention to conserve reserves. Some further depreciation of the tenge can be expected, in part to offset past appreciation against the ruble. To stem dollarization in the economy, the authorities will double in 2015 the ceiling on deposit insurance guarantees to KZT10 mln. Recommended interest rates for foreign currency deposits will be reset from 4.0% to 3.0%.