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  • The Effect of the U.S. Monetary Policy on the Kazakhstani Economy

    17.08.2017 | Comments | Economy | 118 Daniyar Nurbayev

    Since today we live in the age of globalization and economies, and financial systems of almost all countries are interconnected, social and economic fluctuations in a country can affect other countries. The U.S. is one of the main players in the global economy, and its economy is big enough to have serious effects on world economy. Therefore, most countries pay special attention to the change in the U.S. financial-economic policies.

    There are several works that show that the U.S. monetary policy affects the financial, economic conditions of developing countries. For example, Arora and Cerisola (2000), in their empirical work covering 11 developing countries show that the U.S. monetary policy can affect bond rates, capital flows and economic growth in the countries. Later, Takáts (2015) shows that that the federal fund's rate of the Federal Reserve Bank (Fed) affect policy rates in emerging market economies. Similarly, Rafiq (2015) shows that the U.S. monetary policy affects countries, such as Bangladesh, Cambodia, India, Mongolia, Sri Lanka and Vietnam, but he notes that the effect is relatively weak.

    Kazakhstan as a part of the global financial-economic system is also affected by changes in the U.S. economy. Since the early 2000s, the economic situations in Kazakhstan were mostly affected by external fluctuation, most of which were due to the changes in the U.S. monetary policy. In 2001, after the terrorist attack in September, the Fed started to implement an aggressive monetary policy reducing the Federal Funds Rate (the rate) from 6.0% at the beginning of the year to 1.75% at the end of the year. The rate was lower than 2% until the end of 2004 when the rate was increased to 2.25% and lower than lower than 4% until the end of 2005[1].

    Because of these low rates, the U.S. based financial institutions had got very cheap funding. Because of this abundance of liquidity in the U.S. market, the financial companies decided to invest in developing countries. The financial institution was very interested in developing countries because at that time they offered a quite high return on their investments. Thus, the financial institutions started investing in the Kazakhstani economy, and this had an enormous effect on the country.

    Figure 1: External Debt of Kazakhstan 2000-2017

    Source: The National Bank of Kazakhstan

    Figure 1 shows how the external debt of Kazakhstan has been changing since the early 2000s. According to the National Bank of Kazakhstan (NBK), from the beginning of 2001 to the end of 2006 the average annual growth rate of the total external debt in Kazakhstan was 35.3%, while from the beginning of 2007 to the end of 2016 the average annual growth rate was 8.56%.  This information shows that at the beginning of the 2000s the external lending of the country was high. However, it is important to note that the annual growth rates of the Kazakhstani banking sector’s external lending were significantly higher than the total external debt growth rates. For instance, from the beginning of 2001 to the end of 2006, the average annual growth rates of the banking sector’s external debt was 107.4%, while from the beginning of 2007 to the end of 2016 the average annual growth rate was negative (-12.1%).  It is also worth mentioning that in the second quarter of 2007, the share of the banking sector’s debt in the total country’s external debt reached its highest level, 49.7%. Moreover, in 2017, the share of the banking sector’s debt reached 43.8% of the country’s GDP.

    The data presented above show how cheap funding affected Kazakhstani economy. The country’s, especially the banking sector’s debts were high at that time. This factor had a positive effect on the country’s economy. From 2000 to the end of 2006, the country’s economy grew at a rate of 10.4% in average annually. It is important to note that the U.S. monetary policy affected Kazakhstani economy not only through cheap funding but also through high oil prices.

    There are several researches in the literatures that indicate that there is a relationship between the U.S. dollar and oil prices (Zhang et al. 2008, Harri 2009). The relationship is usually negative, meaning that weakening dollar has a positive effect on oil prices. Thus, the fact that in the first half of the 2000s, the oil prices grew significantly can be partially explained by a decrease in the U.S. Federal Funds Rate.

    However, these low interest rates and the deregulation of the mortgage market in the U.S. led to the financial crisis in the country in 2006, which later led to the global financial crisis. This financial crisis caused a liquidity shortage in the U.S. economy. Because of the liquidity shortage, the international financial institution could not lend money to developing countries anymore, which created a liquidity crisis in these countries, including Kazakhstan. In 2008-2009, Kazakhstani banking system had serious liquidity problems, and biggest commercial banks in the country had to be nationalized.

    In order to solve the problem with liquidity shortage, at the end of 2008 The Fed decreased the rate to 0-0.25%. In addition, the Fed introduced so-called unconventional monetary policy tools, in 2008, such as quantitative easing (QEs). These activities partially solved the problem and the U.S., and the global economy managed to avoid a deep recession. They also allowed to the U.S. based international financial institution to continue to invest in developing countries.

    However, in 2013, the Fed closed its QE program, which led to a huge amount of capital outflows from developing countries, because of reduced liquidity supply in the U.S. According to the UN report[2], in 2015 because of the tapering of the QE program developing countries had net capital outflow in the amount of $600 billion, while during the QE program from 2009-2013, developing countries got $2.1 trillion as net capital inflow. Therefore, most developing countries had to devaluate their currencies.

    Kazakhstan, because of the fact that other developing countries (including Russia) devaluated their currencies, also had to devaluate tenge by almost 18% at the beginning of 2014. Meaning that the Fed’s decision to close the QE program was the reason of the devaluation of tenge. The next negative effect of the tapering of the QE program is that it led to an appreciation in the U.S. dollar. As it was noted above, there is a negative correlation between dollar and oil prices. The appreciated dollar negatively affected the oil prices, which in the second half of 2014 fell from $100 per barrel to $40 per barrel.  Because of these two negative factors, Kazakhstani economy is in downturn nowadays.

    In conclusion, it is important to note that the decisions made by the Fed are very important for world economy and for Kazakhstani economy, in particular. Therefore, it is crucial to monitor every decision made by the Fed. For example, as the Chair of the Fed, Janet Yellen, noted, it is quite possible that the Fed would further increase the rate which is very important for future oil prices and the economy of Kazakhstan. Since the Fed has already increased the rate three times in less than a year and is planning another increase this year, we can expect that oil prices will not go up; despite of the oil freeze agreement of main oil producers and even more, the prices can get even lower.


    Arora, V. B. and Cerisola, M. B. (2001) How Does U.S. Monetary Policy Influence Economic Conditions in Emerging Markets? IMF Staff Papers 48, 474–498.

    Rafiq, S. (2015) The Effects of U.S. Unconventional Monetary Policy on Asia Frontier Developing Economies’, IMF Working Paper 15/18, International Monetary Fund.

    Zhang,Y-F., Fan,Y., Tsai,H-T. and Wei,Y-M. 2008. Spillover effect of US dollar exchange rate on oil prices, Journal of Policy Modelling, 30, 973-991.

    Harri, A., Nalley, L., Hudson, D., 2009. The relationship between oil, exchange rates, and commodity prices. J. Agric. Appl. Econ. 41 (2), 501–510.

    Note: The views expressed in this blog are the author's own and do not necessarily reflect the Institute's editorial policy.

    Tags: Kazakhstan, USA, Economy


  • Junior Research Fellow

    Daniyar Nurbayev

    Daniyar Nurbayev is a research fellow at the Eurasian Research Institute. Daniyar completed his bachelor’s degree in Finance in the Kazakh-British Technical University in 2013. In addition, he holds Masters degree in Finance from the Kazakh-British Technical University (2015).