Kazakhstan and the Larger Issue of Central Bank Reserves

The central bank has Kazakhstan announced its intentions to reduce its US dollar holdings in reserves over the long-term. The central bank has reserves of just below $17 bln at the end of July. The Kazakh central bank, like others, says there is simply no alternative to the US dollar, but over the next 10-15 years there will be.

This is disingenuous in the extreme. It may be understandable that China and Japan with $2 trillion and $1 trillion of reserves feel a bit hamstrung, now that they have painted themselves into a corner, but does Kazakhstan and most other countries without the vast accumulation of reserves, which appears largely concentrated in a dozen or so countries (who have over $100 bln in reserves), really have no choice than the US dollar? Surely the euro, sterling, the yen, the Australian dollar and Canadian dollar are viable alternatives for Kazakhstan's reserves. Moreover, Kazakhstan could have swapped it dollars for another country's SDR allocations, if it had wanted.

Most countries seem content to curse the darkness than turn on a light, more content to stay with the status quo than change. Central banks like Kazakhstan vote every day with their reserve management decisions to embrace the dollar for roughly speaking 2/3 of their reserves and 25% in either the euro or its predecessors (ECU, DEM, FRF). And this allocation has been fairly steady, over the past 20 years or so, with the brief exception during the run-up to EMU, where the dollar's share rose a little above 70%. This stability is all the more noteworthy given the swings in nominal exchange rates, which could cause large valuation-induced swings.

If Kazakhstan wanted to it could completely rid itself of as many dollar as it wishes without really disrupting the markets. So could most central banks. The fact that they chose not to is not so much lack of choice but the lack of will. Kazakhstan and most other central banks could adopt a currency allocation in line with the current SDR weighting, if they wanted to. They chose the dollar, for all its flaws. This is what keeps the international monetary system primarily, though clearly not exclusively, in dollars. Free will.