The effects of devaluation on Kazakhstan’s real sector

Arman Akhunbayev

Deputy Head of the Department for Strategic and Sector Research at EDB

It is expected that after a new, balanced level of the exchange rate is achieved in the framework of the flexible foreign exchange policy, external indicators will be adjusted, in the first place, through the improvement of the competitive ability of Kazakhstan’s economy, accelerated reductions in imports, and the improvement of certain exports, due to a new impetus in certain sectors. Unfortunately, favourable effects for exports will be restrained by the deteriorating external context, which will continue to exert pressure on extractive sectors and metallurgy. The scale of positive effects will also be limited because of the low share of non-primary sectors in the economy and exports. As for the services sector, including trade, this will probably be affected by decreasing domestic demand. It will be hard to compensate this negative effect of devaluation on consumption by the above positive effects in industry, anti-crisis measures, which continue to provide significant support to investment, or good agricultural indicators.

As a result, the slowdown in the real sector will probably be more noticeable than expected. Another consequence of devaluation for the real sector will be accelerated inflation. Given the high share of imports in consumption, it should be expected to speed up. At the same time, we should expect the return to a tougher monetary policy and the temporary introduction of administrative measures aimed at keeping inflation rates within the target corridor (6-8%). The continuing deflationary pressure of external factors will help management in solving this task.