Question

Topic: Choice of Exchange Rate Regimes for Developing Countries: Better Be Fixed or Floating? Countries: Russia and Kazakhstan

How selected countries Exchange Rate Regimes are changing before 2020?

How selected countries Exchange Rate Regimes are changing during year 2020?

Answer 1

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Please find below answer to your question

A) Which Exchange rate system is better fixed or Floating

Abstract

Let us understand the importance of Exchange Rates, Its related factors and recent developments.

Foreign Exchange Rate is the amount of domestic currency that must be paid in order to get a unit of foreign currency. According to Purchasing Power Parity theory, the foreign exchange rate is determined by the relative purchasing powers of the two currencies

Fixed Exchange Rates : A fixed or pegged rate is determined by the government through its central bank. The rate is set against another major world currency (such as the U.S. dollar, euro, or yen).

To maintain its exchange rate, the government will buy and sell its own currency against the currency to which it is pegged.2 Some countries that choose to peg their currencies to the U.S. dollar include China and Saudi Arabia.

Currency prices can be determined in two main ways: a floating rate or a fixed rate. A floating rate is determined by the open market through supply and demand on global currency markets. Therefore, if the demand for the currency is high, the value will increase.

Which Exchange rate system is better fixed or Floating

If we look at the different opinions of Economists it can be said that -

No one system has operated flawlessly in all circumstances. Hence, the best we can do is to highlight the pros and cons of each system and recommend that countries adopt that system that best suits its circumstances.

• Historically, no one system has operated flawlessly in all circumstances.
• Probably the best reason to adopt a fixed exchange rate system is whenever a central bank has been independently unable to maintain prudent monetary policy, leading to a reasonably low inflation rate.
• Probably the best reason to adopt a floating exchange rate system is whenever a country has more faith in the ability of its own central bank to maintain prudent monetary policy than any other country’s ability.
• The key to success in both fixed and floating rates hinges on prudent monetary and fiscal policies. Fixed rates are chosen to force a more prudent monetary policy,floating rates are a blessing for those countries that already have a prudent monetary policy.

For example, the European Economic Community (now the EU) implemented the exchange rate mechanism in 1979, which fixed each other’s currencies within an agreed band. These currencies continued to float with non-EU countries

B) Changes of Exchange rate till 2020 for Russia

If we look at the recent news about Ruble Exchange rate it can be noted that the Russian Ministry of Economic Development issued a forecast for the Russian ruble in early 2020. According to the ministry, the ruble will continue to get stronger.

The ruble to US dollar exchange rate grew by 12.5% over the previous year. They believe that the Russian currency will most likely keep growing in 2020

Numerous factors determine exchange rates. Many of these factors are related to the trading relationship between the two countries.

The Russian ruble continued to regain ground against the U.S. dollar over the past month after sliding to a four-year low at the end of March.

On 5 June, it traded at RUB 68.7 per USD, which marked a 7.3% appreciation over the previous month. That said, the currency was down 4.9% year-on-year and 9.9% year-to-date.

The ruble’s recent upturn came against the backdrop of gradually recovering global oil prices which regained some lost ground after further depreciation to a 20-year low in late April.

This, coupled with improving investor sentiment and increasing risk appetite for emerging market assets, supported the ruble in recent weeks, sending it to a near three-month high on 2 June.

Going forward, the ruble is expected to remain close to current levels through year-end, although significant volatility due to the economic fallout from Covid-19 poses significant risk.

On the one hand, the Russian economy is set to contract severely from Q2 onwards, weighing on the RUB in turn, with sustained monetary policy easing adding further downward pressure.

On the other hand, a more stable global oil market and improving investor sentiment should take some pressure off the currency.

The Focus Economics panel projects the ruble will end this year at 72.2 per USD, before appreciating to 68.7 per USD by the end of 2021.

C) Changes of Exchange rate till 2020 for Kazakhstan

Kazakhstan’s central bank said it will allow the currency of central Asia’s largest energy producer to depreciate after an emergency interest rate hike failed to stem a plunge to a record low.

the tenge dropped more than any other currency in the world on Monday, weakening 6.7% to 434.9 versus the dollar.

This is the US Dollar (USD) to Kazakhstan Tenge (KZT) exchange rate history summary can be summarized as below :

Highest: 433.27 KZT on 03 Oct 2020.

Average: 417.95 KZT over this period.

Lowest: 397.09 KZT on 08 Jun 2020

Kazakhstan is trying to limit the fallout from a slump in oil prices and a global sell-off that has pummeled emerging markets. The central bank tried selling dollars to support the tenge last week but failed to avert a drop of about 6%.

Two main reasons behind the drop in Exchange rates are Oil Prices and Budget Cuts

For Example, Oil Falls Deeper Into Turmoil Triggered by Epic Demand Collapse

The base rate will remain unchanged at 12% following a 2.75 percentage point hike last week, the central bank said.

The bank cut its forecast for Brent crude to $35 a barrel from an earlier forecast of $60 a barrel and will monitor markets to help “smooth fluctuations” of the exchange rate, according to the statement.

Another factor is Budget Cuts - The central Asian nation needs oil at $55 per barrel to balance its budget, more than $20 above current levels. The government plans to cut $1.25 billion of budget spending and may raise taxes for mining and extraction companies.

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