Exchange rate regime in Kazakhstan Essay Example | Topics and Well Written Essays - 2000 words

Exchange rate regime in Kazakhstan - Essay Example Kazakhstan has achieved highest economic growth rate amongst its sister countries during 2001-2008.It reached annual GDP of as high as 9.8 percent in 2000 and over 8.5 percent in 2007.Primary resources of higher revenues include: natural gas, oil, zinc, and copper (USAID, 2008, p.3).This paper explores Kazakhstans exchange rate regime over a period of time. Pegging Tenge against US dollar, Kazakhstan opted for an unsanctioned policy of a â€Å"soft† fixed rate regime in 1993.Soft exchange rate regime as compared to stringent regime refer to a regime that repositions the value of its domestic currency more frequently. Tenge’s initial value was fixed at the rate of T5 for every US dollar. Par value indicates the rate on which the domestic government agrees to defend its own currency in order to keep the fixed ratio between domestic and foreign currency (Burke, 2009).According to Begg, Fischer, and Dornbusch, the commitment to fixed exchange rate may built private sector’s trust on government when it comes to creating inflation, as it only makes the country uncompetitive (2003, p.484). In fixed regime, the government agrees to maintain its domestic currency’s value at a fixed rate. The Tenge is convertible, Central Bank of Kazakhstan is able to sell and buy in order to maintain the exchange rate equilibrium (Burke, 2009).Burke (2009) further explains that the Tenge is overvalued as compared to the US dollar. Under fixed exchange rate regime, devaluation means decline in the nominal exchange rate between Tenge and US dollar. However, Blanchard (2006, pp.380-383) warns that devaluation of the nominal exchange rate directs to real depreciation. Instant impact of currency devaluation appears in declining real exchange rate and enhancing the country’s competitiveness. It allows reallocating the resources in order to support domestic industries