A financier Murat Temirkhanov offers to readers of Forbes.kz his answer to this question

Usually, I try not to criticize someone's personal opinion, because everyone has the right to express it. However, the call of Olzhas Khudaybergenov to hold a debate on this topic on TV forced me to write this article. He immediately ruled out that no experts who can professionally oppose him should participate in it.

Today, on the background of a sharp deterioration of the financial condition of the population and domestic companies, an intensified debate is held about whether there should be a sharp devaluation and free floating exchange rate of the national currency at al. On this wave in the media and social networks there are many populists who claim that they know how to stop the devaluation and to restore the growth of our economy (meaning the welfare of the population), even with falling oil prices.

The problem is the lack of diversification

Unfortunately, the reality in terms of our raw material (non-diversified) economy is such that falling oil prices will definitely continue the devaluation of the tenge, and the situation of the population and businesses will deteriorate. This is a common thing for every open and market economy, and it's amazing that someone is trying to challenge it in this country.

Of course, thanks to petrodollars, which were accumulated in the National Fund, the state was able to continue to restrain the process of devaluation, that is to artificially maintain the well-being of the population and to reduce social tensions. But it was the road to hell, which was paved with good intentions.

Control of natural devaluation of the tenge in the fall of oil prices means two key things: waste of foreign exchange reserves (including the National Fund) and the accumulation of imbalances in the economy (creation of a bubble). Our currency reserve in the National Fund is not infinite, and after it would have ended, the economy would have suffered an explosion of accumulated imbalances and the difficulties of 90 would seem to us a paradise.

By the way, "mini explosion" occurred in the Kazakh economy on 20^th of August 2015, when the tenge was released to free float. After that, the economic authorities got scared and started again to restrain artificially the devaluation. However, with falling oil prices, this is equal to signing a death sentence, and eventually the decision led to a change of the head of the National Bank. After that there was another "mini explosion" (correction of the exchange rate after its fixation).

What happens to the tenge now can be called an artificial adjustment of the exchange rate by the National Bank so as to match it to the fundamental factors, the main one for us is the price of oil. That is, the fall in oil prices will continue to devalue the tenge. Judging by what is happening on the foreign exchange market, today the National Bank intervenes only when the devaluation, according to the regulator, gets very high speed.

A little bit about the fundamental factors

For readers who are not familiar with how fundamental factors affect the rate of national currency, I would like to explain it in a very simplistic way.

The vast majority of our exports consist of the sale of raw materials or products derived from them. The share of export not linked to the extraction of natural resources, is very small. That is, when a large fall in prices for raw materials occurs, the export revenues decline immediately on a large scale. Thus there is an imbalance between exports and imports, as well as falling budget revenues, which cover the social obligations of the state.

In an open economy that operates on market principles, such an imbalance in public finances caused by the fall in oil prices will be adjusted automatically. So, during the fall of export revenue, the currency will decrease sharply supply on the market, however, importers will still buy the same amount of currency. Because of this, the market demand for the currency significantly exceeds the supply, causing sharp rise of the foreign currency, and devaluation of the national currency.

Imported goods will become more expensive for the population and business after devaluation of the national currency, which in the end will reduce its volume and result in balance with exports. The devaluation will lead to the fact that the state budget revenues received from the exporters (and they are always in national currency) will fall into a much smaller proportion compared to export earnings, which will facilitate the management of the country's budget deficit.

Thus, in the event of the fall in oil prices, the automatic market devaluation of the national currency leads to balancing state finances. In the conditions of our import-dependent economy, it also automatically means a sharp rise in inflation and a decline in living standards and business.

There is a direct link between the decline in raw material prices and decline in living standards in any economy, which is dependent on raw materials and import and operates according to the market rules,. This can be avoided only through diversification of the economy so that the sale of raw materials for export took an insignificant part. But that's another story.

As for the current exchange rate of tenge, then, according to estimates of analysts of Halyk Finance, with oil prices at 30 USD per barrel, the current level of the national currency more or less allows to balance public finances in a way so that our economy does not fall into the abyss. If the fall in oil prices continues, the devaluation is inevitable. In this situation, it does not matter when the tenge rate will bottom out, but the price of oil will reach its bottom.

Some facts

Not to be unfounded over the fact that the artificial suppression of tenge devaluation leads to accelerated burning of foreign exchange reserves (which ultimately leads to a catastrophe), I will show you a couple of charts from the documents of the World Bank, which were published a few months ago.

In August of 2015 after tenge was released to free float, the President announced that, for fixing the rate of tenge for over a year was spent in foreign exchange reserves 28 billion USD (18 billion USD in 2014 and 10 billion USD in 2015). Back then this huge sum has caused great surprise among many experts. In particular, the same Olzhas Khudaibergenov in social networks declared that he was ready to show the President the calculation, thus, proving that he had been misled.

To begin, I would like to comment on a chart, showing the difference between the calculated equilibrium of the exchange rate of the tenge to the dollar (highlighted in brown on the chart) and the actual exchange rate (shown in green). Note that the vertical scale - this is not an exchange rate, but the scale of the change of the rate. The equilibrium is the rate at which the state finances are balanced as described above.

As it can be seen from the chart, the devaluation held in February 2014, was a great folly. This event is demonstrated on the chart in the last but one penultimate intersection when the green line (actual rate) sharply dropped below brown (estimated equilibrium rate). This devaluation was made with a large and unnecessary margin at the time and undermined the credibility to the policy of the National Bank.

Then, during the second half of 2014, oil prices began to fall rapidly, causing the great devaluation of the equilibrium rate (in the event of which state finances are balanced) greatly devalued, and the National Bank continued to fix the rate, not daring to hold the next step devaluation. That is why there appeared a big gap  between the actual and the equilibrium rate. The chart shows the event as the last intersection, when brown line sharply drops below the green one.

As a result of the fixation of the exchange rate until August 2015 Simply put, a huge imbalance appeared between exports and imports (the volume of import was higher than the volume of exports), and it was funded only by the burning of foreign exchange reserves. According to analysts of Halyk Finance, during this period, the population of Kazakhstan informally imported goods from Russia worth 11 billion USD.

Now let's see how since the devaluation in February of 2014 changed the country's foreign exchange reserves (including the National Fund). The lower graph in blue shows the foreign currency assets of the National Fund. Orange shows the gold reserves of the National Bank. Green and purple flowers (in total) mark the official foreign exchange reserves of the National Bank. At the same time (as defined by the World Bank), the green flower represents quality foreign currency reserves, which were not put against any obligations. A purple color shows substandard foreign currency assets, against which the National Bank has an obligation to return the money to the banks and to other organizations, to residents of Kazakhstan.

Before commenting on this chart, I would like to explain how these substandard reserves appeared at the National Bank. Based on the financial statements of the regulator at the end of 2014 at least 10 billion USD of the sum, painted in purple color, were composed of currency swaps between the banks and the National Bank.

As a result of the high degree of dollarization, banks have (and still have) a large excess of dollars and a similar lack of money in tenge. When due to the fall in oil prices during the second half of 2014, the National Bank began vigorously to waste no burdened foreign exchange reserves, the regulator started to substitute them, taking foreign currency deposits from banks, giving them tenge under the security of these deposits. By the way, it was another great folly of the National Bank, as the tenge was given to the second-tier banks at incredibly low 3% per annum, but our history is a different story.

Foreign currency deposits of banks for swap transactions have a limited life and, eventually, the money of the National Bank have to be returned. In this regard, the real foreign exchange reserves are assets of the National Fund, gold and high-quality reserves of National Bank. Now, if the chart excludes purple color, it is clearly visible, where did these burned 28 billion USD since June 2014 came from. At the same time we must remember that all this time the National Fund continues to grow, although the replenishment decreased several times.

Conclusions

So did the sharp devaluation help the country? Sure! As seen from the chart, the devaluation in August of 2015 has reduced almost to zero the huge gap between the actual and equilibrium exchange rate of the tenge. As a result, public finances are balanced and we managed to stop the accelerated waste of foreign exchange reserves, which is vital for the country. Otherwise, it would lead us to a large-scale disaster.

Were there any other options? Only one a gradual reduction of the gap between the actual and equilibrium exchange rate of the tenge. However, it is necessary to immediately recall that between June 2014 and August 2015, the economic authorities have managed to burn 28 billion USD, and it had to stop immediately. That is because of the sharp devaluation were hurt all of us, our economic bodies are to blame and no one else. They made a lot of costly mistakes in "rich" years we were not able to shift to the market monetary policy and were not able to diversify our economy.