Michail SERGEEV
ALMATY, April 12
(THE GLOBE)
�The process of transition to a free fluctuation rate of the tenge has turned out to be in compliance with our hopes�, - said Kadyrzhan Damitov, chairman of the National Bank.
According to Mr. Damitov, a process of substituting domestic currency to USD is currently going on. However, the chairman rejected the possibility of a further fall of the tenge.
�The mass of tenge is too insignificant to be able to press on the currency market,� he said.
Kazkommertsbank has received $22 million in the form of a syndicated loan. Damitov considers this development as indicative of the growing trust of foreign creditors in both the Kazakh banking system and Kazakh government.
The chairman said that the first week since the introduction of the free currency regime has passed quietly. The only exception was the first two days of the week when some signs of panic occurred from both currency dealers and the population.
�The span between the maximum and minimum dollar rate of exchange fell from 35 to 3-4 tenge by the end of the week,� said Mr. Damitov.
On April 12, the transactions� volume on the currency exchange reached $9.2 million. The closing rate was 113.85 tenge per USD.
�In general the transition was a success. There are some insignificant uncertainties,� - he said.
ALMATY, April 11
(THE GLOBE)
After the introduction of the new tenge exchange policy, the large majority of the Kazakhstan leading politicians kept silent as usual. Few people dispute the official opinion of Astana. The exceptions were only the representatives of the most active opposition parties and movements. The Parliament was also silent for a long pause. It was not because the deputies were on holidays, as nobody was prohibited from expressing his opinion during his �time off�. As usual, there was no public discussion of the government�s step, which is believed to be very serious for the country. The real attitude of the most prominent representatives of our community to this event was hidden behind the sequences of TV cameras and newspapers. The political elite once again proved its unwillingness to take an active part in the reformation process. Many of them were glad to express their opinion replying to the journalists� questions, but were flatly against being quoted in their publications. �Don�t refer to me,� was the most popular phrase in this week. The most famous economists, whose opinion might be useful, hid their heads in the sand like ostriches. �Our opinion is not interesting for higher authorities,� said one of them.
In his economic program �From stabilization to growth�, published in the beginning of this year, Marat Ospanov wrote �the brightest feature of all the governments with which I had to deal is their absolute inability to listen and to hear let alone agree openly and accept suggestions from outside� The government considers itself the only prophet in the country. That is why the government does not want to listen to the opposition, nor its powerful partners having misappropriated the right for the absolute truth. Meanwhile business suffers and people suffer. While the powerful authorities only suffer the possibility of their dismissal.�
Even before the publication of the sensational program, Marat Ospanov repeated this thought frequently enough. Its main point is that to talk about successful reforms is useless until the authorities create such a system of interrelations inside and around itself that they can painfully search for the truth and find it.
In his interview to THE GLOBE Marat Ospanov said: �I do hope that the next Parliament will be more free, will have more rights and influence the current situation.�
As usual we divided the interview into several chapters, having selected the most important.
1. About the Law on elections
�This week we will call a joint conference of both Houses and begin its discussion. The President did not announce it as urgent, but he asked us to hurry and not to putt it off. Taking into consideration that the Law is simple enough, I mean, nothing new is to be supplemented, except provided by the Constitution, I think in April or in the beginning of May we will approve it. I can say, that all the procedures as well as the entire election system are to become more democratic.�
2. The freely floating tenge rate
�I believe that the government is right in applying this policy today. It is the most appropriate in the current situation. But at the same time I am convinced, that the devaluation of the tenge is not the main thing, as it is impossible to guarantee economic growth simply with devaluation. It is necessary to raise the monetarization level, though to avoid the great collapse, the new tenge policy provides further compression of the monetary mass. At present the volume (based on monetarization) is 7% of GNP. Such a level will not guarantee economic growth.
To achieve this, we should reduce the interest rate. This will make credit resources available. I doubt that in current conditions, we will be able to guarantee the reduction of the interest rate. Most probably it will increase. But at the same time I consider it is better to do this, as it will at last provide an estimate of the real rate of tenge, the actual inflation level and the real state of our economy. Of course the prices in the consumer market will rise. Inflation will be natural. But if the government does not manage to realize these measures, the people�s standard of living as well as their real profits will decrease�.
3. Inflation and devaluation levels projected by the end of the year
�Once I said that if the government was not able to take all the required measures, by spring the exchange rate would be 92. Today we have even more than 100. Devaluation is already about 15 to 20%. I think it will be about 30%. If we stop at this figure (120 tenge), it will be okay. It may sound paradoxical, but the government should simultaneously take some other measures. I would not separate the new exchange rate policy from the other necessary steps. Following the old economic policy, i.e. low inflation, the compression of monetary mass, the growth of the interest rate and refinancing rates, the unavailability of the credits, and the absence of investments to the real sector - a simple devaluation will not be adequate to bring the expected result. My point of view is different: we should devaluate tenge by increasing the monetarization level of our economy. My critics say: �he wants to engage the money-printing machine.� No, it is possible to increase the monetarization level, the volume of monetary mass that services the economy in other ways. That is why my attitude to such a policy of tenge exchange rate is not pessimistic, I assume its rightfulness. We will be able to look in a normal mirror, not in the distorting one. We will know the real state of our economy, our financial system, and stability of our banks.�
4. The required level of monetarization
�Today it should be about 16 to 17%. Therefore I offered to raise it by 2003 up to 20 to 22% of GNP. In many developing countries that is the monetarization level which allows enterprises to have their working capitals and to guarantee the proper purchasing capacity to stimulate the production.�
5. About the possibility to reconsider the budget�99
�We did not conceal that it was possible. It is possible to reconsider the revenue and expense articles of the budget. We should envisage that the collection of taxes, due to the state of the exporting enterprises may worsen. Nobody knew we would have to reconsider the budget, as devaluation of tenge really was a secret.
There is a factor, such as agiotage, in anticipation of inflation. If it had been announced beforehand, everything would have been swept away. Even today we see people trying to store something, the salesmen raising their prices, though it seems unnecessary to do it. On the contrary, they should sell everything at the lower price, then purchase a new lot of the goods to gain profit owing to their turnover. They are doing harm to themselves. When the salesmen increase the prices for their goods, they doom themselves to losses. These are the market economy and financial laws. Everyone who does not know them, will lose for sure.�
6. About interrelations with the government. Will the Parliament demand Balgimbaev�s head for his last steps?
�The head of the government depends on the government itself. If they calculate everything accurately, there will be no problems. Don�t ask me whether they are able to do it or not. You should well know that they consider themselves offended by me.�
7. About the recent appeal of some Kazakhstan parties and public movements to the Parliament regarding necessity to issue the new election law
�They did not reveal anything new, there is no �know-how� in their appeal. Life is changing. If we are going to democracy we should take into consideration these obvious norms.�
8. About the struggle against corruption
�It is a very complicated problem. It cannot be settled without giving it a second thought. The law regarding struggle against corruption allows us to take proper measures. But nothing can be changed by the only Law and by willingness only. We should perfect the entire system of relations in the society, i.e. the further openness, democratization, and first of all we should develop the mass media. Only through these steps we can get rid of corruption. Some revival of the campaign is obvious today, but it is due to the President�s criticism. The Parliament lacks the control functions to deal with it. We prepare the deputies� inquiries on the facts of corruption. Only during the last conference we submitted four of them.�
On April 4, 1999, the Government of the Republic of Kazakhstan (the �Government�) and the National Bank of the Republic of Kazakhstan (the �NBK�) announced their joint decision to introduce a freely floating exchange rate for the tenge (�FFER�).
The principal purpose of the Announcement is to adopt a freely floating exchange rate for the tenge. The Announcement indicates that the NBK has done so after a review of all alternatives and that the NBK does to not intend to allow fluctuations in exchange rates that exceed �rational expectations�.
In addition to the basic decision to introduce an FFER, the declaration also provides for a series of measures to ameliorate the consequences of the sharp change in policy, including:
� Elimination of the ban on imports from Russia, Kyrgyzstan and Uzbekistan, except where there is evidence of dumping;
� Guaranteed convertibility into US dollars at a fixed exchange rate of 88.3 tenge for individual bank depositors who do not withdraw tenge deposits (made before March 29, 1999) for the next nine months; depositors who chose such a course must present their bank with a written notice to that effect by April 30, 1999;
� Opportunity for legal entities to convert 30% of their tenge deposits at the rate of 88.3 tenge in the event they do not withdraw them during the course of the next six months;
� Opportunity for pension funds to convert their portfolios of tenge state securities into 5-year hard currency state securities;
� Prohibition on tariff increases for services provided by natural monopolists and for utility services for an undefined period;
� Lowering of reserve requirements for second-tier banks from 10% to 5% plus the loosening of other requirements during the banks� adaptation to the FFER;
� Introduction of mandatory sale of 50% of export currency receipts by �organizations�; and
� Strengthening of supervision over the enforcement of export-import customs and bank controls.
NBK Instruction
Likely the most controversial amelioration measure heralded by the Announcement was the imposition of the mandatory sale requirement of 50% of export currency. In order to further define this measure, the NBK published an Instruction on Mandatory Sale of Revenues in Foreign Currency Received from Export of Goods and Services (the �Instruction�) late Monday, April 6, 1999. The Instruction purports to be effective as of April 2, 1999. A second resolution of the NBK dated March 28, 1999, was released on April 6, 1999, confirming the 50% mandatory conversion and setting out the list of foreign currencies subject to sale. An extract of this Resolution was published on April 7, 1999.
� Under the Instruction, the following types of revenues are subject to mandatory conversion:
� revenues from the export of goods and services;
� hard currency cash received from retail sales or services rendered by a company licensed by the NBK receive revenues in hard currency;
� commissions for bank services in hard currency received by Kazakhstani banks; and
� trade mark-up for goods sold on consignment.
The following revenues are not subject to mandatory conversion:
� investments (including loans) and income from them;
� charitable contributions;
� foreign currency acquired on the local currency market;
� foreign currency received from the sale of imported goods on consignment (excluding the amount for trade mark-up);
� foreign currency received by the NBK; and
� foreign currency received by Kazakhstani legal entities founded jointly by foreign investors and the State (or a legal entity nominated by the State) where the volume of investment is not less than USD100,000,000.
The instruction is binding on all legal entities irrespective of the type of ownership (the instruction uses the term �Organizations�) and applies to circumstances under which the Organizations receive revenues in a freely convertible currency. The instruction does not specify whether it applies to branches and representative offices of foreign legal entities in Kazakhstan. It is unclear at this time whether the NBK will attempt to impose the conversion requirement on currency revenues of branches and representative offices of legal entities in addition to Kazakhstani entities.
Mechanically, the Instruction requires that within two working days after an Organization is notified by its bank that foreign currency has been received in its account, the Organization must instruct its bank to sell 50% of its currency revenues and deposit the remainder in its hard currency account. Mandatory conversion must be effected from the �transit� bank account of an Organization. No interest may accrue on the transit account. If an Organization does not instruct its bank to sell hard currency within five working days after the funds hit the account, the bank must sell on its own initiative.
The sale of currency revenues is to be made through an authorized currency exchange, e.g. AFINEX. If no trading operations occur at the exchange for five consecutive working days, the bank must sell currency revenues to the NBK at a rate to be agreed with the NBK.
While the Instruction is by no means short (6 pages), it does not provide answers to a number of important questions, including the following:
� whether branches or representative offices of foreign legal entities are subject to the Instruction;
� the term for which the mandatory conversion requirement is introduced;
� other limitations in carrying out currency operations;
� criteria for determination of �export� of services; or applicability of the conversion requirement to revenues in hard currency earned from operations in Kazakhstan as a result of transactions with non-resident legal entities (e.g., lease payments denominated in USD paid to a resident by a non-resident).
Baker & McKenzie April 7, 1999
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