Kazakhstan's under-pressure tenge lost more than a quarter of its value on Thursday after the oil producing central Asian nation, hit by a sharp fall in world crude prices, introduced a freely floating exchange rate for the currency.
Acting against a backdrop of devaluation and depreciation in the currencies of some of its major trading partners and rivals, Kazakhstan's government and central bank said the country's economic policy would henceforth be based on inflation targeting.
"This is not a devaluation, this is a transition to a freely floating rate when the market itself determines a balanced exchange rate on the basis of demand and offer," central bank Governor Kairat Kelimbetov told a news conference broadcast from the capital Astana.
The official tenge rate tumbled by 26.2 percent to 255.26 per dollar on the Kazakhstan Stock Exchange in response to the policy shift.
Kazakhstan, Central Asia's largest economy and No.2 post-Soviet oil producer after Russia, suffered a 40 percent fall in exports between January and July, said National Economy Minister Yerbolat Dosayev, due to the sharp drop in global oil and commodity prices.
Imports shank by 20 percent in the same period, he said.
Low prices for Kazakhstan's commodity exports, which also include significant quantities of metals, may last for five to seven years, Prime Minister Karim Masimov told the same news conference.
Pattern of devaluations
Kazakhstan's central bank had devalued the tenge three times since 1999 - most recently by 19 percent in February last year.
It has been under immense pressure since last year when the rouble rate of its key trade partner Russia collapsed.
Kelimbetov appeared unruffled by Thursday's sharp market-driven drop in the currency, saying he expected the market would set "a fully balanced rate" in five or seven days.
He also said the central bank would no longer intervene massively to influence the rate but added: "The National Bank reserves the right to intervene when there is a threat to financial and price stability."
That brings Kazakhstan's policy more into line with Russia, whose central bank floated the rouble late last year and announced a shift to an
inflation-targeting regime, but still periodically reacts to bouts of rouble weakness.
On Wednesday, the tenge had rapidly neared the upper limit of its then trading corridor of 170-198 per dollar, fuelling expectations of an imminent devaluation.
The central bank had earlier said it would adopt inflation targeting in three to five years.
"We will orient ourselves towards certain inflation targets in the mid-term, as well as towards financial stability," Kelimbetov said.
As well as the pressure from the weak rouble, driven lower by depressed oil prices and Western sanctions imposed on Moscow due to its role in the war in Ukraine, the tenge has also been under the cosh from declines in other currencies in the region.
Neighbouring China devalued its yuan last week, causing a rout in many other emerging market currencies. On Wednesday another, smaller trading partner, Vietnam, devalued its dong.
The government may trim its budget spending due to lean revenues this year, Masimov said. He said next year the cabinet would not borrow on foreign capital markets to bridge the fiscal gap.
But the government also had no plans to open the "rainy day" National Fund, which collects windfall oil export cash and is now worth $69 billion.
"We think the worst times may yet come, and we will need the National Fund then," he said.
