Get real

What is the tenge really worth?


On the surface, the central bank of Kazakhstan seems to have stabilized the tenge. The exchange rate has been within a tenge or two of its target rate, 150 tenge to the United States dollar, for nearly four years. But appearances can mislead. In terms of the U.S. products that it can buy, as compared to Kazakhstani products, the tenge has been gaining value since 2002.

The “real exchange rate” expresses the foreign purchasing power of a unit of some currency, relative to its power to buy local goods. Suppose that last year 1,000 tenge could buy either two U.S. newspapers or two Kazakhstani papers. This year, however, 1,000 tenge can buy only one Kazakhstani paper, although they can still buy two U.S. papers. Then, in relative terms, the foreign purchasing power of the tenge has increased: Last year, when you bought a U.S. paper, you had to give up a Kazakhstani paper; but this year, you give up only half of a Kazakhstani paper. The tenge has “appreciated”.

In practice, the real exchange rate is often expressed in terms of its value at some point in the past. The National Bank of Kazakhstan arbitrarily sets the December 2000 rate at 100. With respect to the dollar, the tenge in 2011 had appreciated 82% since December 2000, so the real exchange rate in 2011 was 182 (as defined by the National Bank; not everyone takes this approach). Thus the tenge could buy substantially more of U.S. goods in 2011 than in late 2000.

If people care about what they can buy with their tenge, and not just about the number of tenge in hand, then the real exchange rate better measures the currency’s value, in terms of foreign goods, than does the rate usually quoted in the media, i.e., 150T = $1. The latter rate just expresses the number of dollars that you can buy with a given number of tenge. Economists call this the “nominal exchange rate”.

Watch out for wedges

With respect to U.S. goods, the tenge has been appreciating for years largely because prices have risen roughly four times faster here than in the U.S. Over time, American-made imports into Kazakhstan look more like bargains.

In terms of European goods and the euro, the tenge has appreciated about 20% since 2002. Like the U.S., Europe has not suffered much inflation recently.

This should please Kazakhstani consumers, but the flip side of the coin is that producers here lose domestic and foreign demand. Local consumers substitute some U.S. imports for goods made here. And American consumers buy some of our exports rather than goods made there, since the dollar can’t buy as many Kazakhstani goods as before.

This is not a general problem for the tenge. With respect to the Russian ruble, the real rate for the tenge has fallen 20% since 2001; that is, the tenge has depreciated. (In fact, it has weakened steadily ever since the ruble crashed in 1998.) With respect to our chief trading partner, our imports have become more expensive over time, and our exports have become cheaper. This would tend to increase the difference between our exports and imports -- our “balance of trade” with Russia. The tenge has depreciated compared to the ruble largely because prices rose faster in Russia than here from 2009 through 2011.

How has the National Bank’s stabilization of the nominal exchange rate of the tenge (with respect to the United States) affected the real rates? Let’s take 2009 as a starting point, since the Bank in February of that year weakened the tenge by 25% and announced that it would maintain thereafter an exchange rate of 150 tenge to the dollar. Relative to the West, the tenge has appreciated – by 11% or 12% in 2011 (compared to 2009) for both the United States and the euro region. Relative to the non-West, the picture is mixed. The real value of the tenge was virtually unchanged in 2011 relative to China, Kyrgyzstan and Ukraine. However, it had risen 23% relative to Belarus and fallen 7% relative to Russia.

In general, a wedge is developing in Kazakhstan’s trade picture. In terms of purchasing power, the tenge is strengthening relative to the currencies of rich nations and often weakening, or holding its own, relative to poorer nations. This would tend to reduce our trade balance with the rich and to maintain or increase it with the poorer.  Over time, Kazakhstan may rely less and less on Western economies, which grow more slowly than developing economies.

The wedge may occur for several reasons. Countries that rely on exports of natural resources have similar price patterns, so their real exchange rates may follow similar paths over time (Kazakhstan, Kyrgyzstan, Ukraine and Russia). Developing countries tolerate more inflation than does the West; when their prices rise faster than Kazakhstan’s, the tenge with respect to them will depreciate. Last, and perhaps not least, the National Bank holds the nominal exchange rate close to 150 tenge for a dollar, whatever the dollar’s foreign value, so that movements in the real rate depend entirely on price changes. In this sense, Kazakhstan’s true currency is not the tenge but the almighty buck. –Leon Taylor, tayloralmaty@gmail.com


Notes

In Kazakhstan, the Consumer Price Index (CPI) for December to December increased 6.2% in 2009, 7.8% in 2010, 7.4% in 2011, and 6% in 2012, according to data from the National Bank of Kazakhstan. In the United States, the annual CPI increased 0% in 2009, 2% in 2010, 3% in 2011, and 2% in 2012, according to data from the Bureau of Labor Statistics of the U. S. Department of Labor. The four-year average of the annual rate of change in the CPI was 6.85% in Kazakhstan and 1.75% in the U.S., a ratio of 3.9.


References

National Bank of Kazakhstan. Data on the price level and the real effective exchange rate. The Bank defines an increase in the real tenge rate as appreciation. But some economists define the real exchange rate in such a way that an increase in the rate denotes a depreciation. www.nationalbank.kz

Tradingeconomics.com . Offers an interactive graph for CPI inflation in Russia and other countries, using government data.

United States Department of Labor, Bureau of Labor Statistics. Data on the price level. www.bls.gov