Public Information Notice: IMF Concludes 2004 Article IV Consultation with the Republic of Kazakhstan

September 20, 2004

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On July 21, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Kazakhstan.1


Kazakhstan's economy continues to expand rapidly, with average real growth of more than 10 percent over the past three years, and an estimated 9.1 percent in the first quarter of 2004. Economic growth has been driven by increasing oil production, supported by high oil prices and rising foreign investments. The production of oil and gas condensate reached 51.3 million tons in 2003, an increase of 9 percent over the preceding year. Led by the petroleum sector, other key sectors such as services, manufacturing, and construction have also shown significant gains. Labor market trends have been favorable, with significant gains in employment since 2000. In 2003, the unemployment rate fell from 9.3 percent to 9.0 percent. Real wages have grown in line with real GDP. Notwithstanding the reduction in the share of the population living below the poverty line, poverty remains a serious problem, in particular in rural areas and among the elderly.

Growth in monetary and credit aggregates remained high in 2003, mainly because foreign exchange purchases by the National Bank of Kazakhstan (NBK) were not fully sterilized. As a result of ongoing remonetization, inflationary pressures have remained subdued and the inflation rate remained below 7 percent over the past three years. The level of dollarization of bank assets and liabilities has continued to decline.

Following the adoption of a new monetary policy framework in 2003, the NBK now treats price stability as the key monetary policy objective. With the aim to prevent a rapid appreciation of the tenge, the NBK continued its large-scale purchases of foreign exchange. Since the beginning of 2003, reflecting the movements in the U.S. dollar/euro rate, the tenge has appreciated against the U.S. dollar by about 13 percent, but depreciated sharply against the euro. The tenge remained largely stable against the Russian ruble during 2001-03, appreciating somewhat against this currency in early 2004.

With a general government surplus of 3 percent of GDP in 2003, fiscal policy continued to play a key role in containing aggregate demand. Measured by the non-oil budget deficit, the fiscal stance remained largely unchanged compared to 2002. The strong performance was supported by an increase in non-oil sector revenues resulting from higher corporate profitability in non-oil industries and the services sector, and one-off payments related to the oil and gas sectors. The rise in expenditures mainly resulted from higher outlays for infrastructure and construction of the new capital Astana. A substantial share of the fiscal surplus and privatization receipts was saved in the National Fund of the Republic of Kazakhstan (NFRK). The authorities have redirected a significant share of tax revenues from mining and oil operations—previously earmarked for the NFRK—to the financing of the 2004 budget. The new single treasury account became fully operational on May 1, 2004.

The external current account was essentially balanced in 2003, improving by more than 3 percent of GDP compared with the previous year. Exports of goods and services increased sharply because of higher oil and metal prices and an increase in non-oil export volumes of 14 percent, while the expansion of imports kept pace with GDP growth. Gross foreign direct investment inflows reached a record level, although net inflows rose only slightly as a result of accelerated debt repayments by foreign investors. Official international reserves increased to $6.5 billion at end-May 2004, equivalent to 4.5 months of import coverage; in addition, the NFRK balance reached $3.7 billion. Public external debt rose somewhat in U.S. dollar terms, but fell to 12 percent of GDP, continuing the trend seen over the past few years. Kazakhstan's official sector became more significant as a net creditor to the rest of the world. Standard & Poor's upgraded Kazakhstan's Foreign Currency Sovereign Credit Rating to investment grade/BBB- in May 2004.

Structural reforms are well advanced compared to other countries in the region, but the implementation of the reform agenda has slowed somewhat since 2000. Outside the oil sector, the business climate remains difficult, notably for small and medium-scale enterprises and foreign investors; lack of transparency in law enforcement, customs, and the tax authorities is considered a significant impediment to private sector development.

Reforms of the financial sector were bolstered by the establishment of an independent Financial Supervisory Agency in early 2004. Legislative reforms were carried further with the introduction of consolidated supervision requirements. The recent Financial Sector Assessment Program (FSAP) update mission commended the positive developments since the 2000 FSAP, while highlighting some remaining risks to the financial sector. In line with this mission's recommendations, a draft law on Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) has been prepared.

Progress with trade liberalization has stalled in recent years, including with regard to WTO accession. Although the average tariff is low, there are 10 bands with considerable dispersion. Advancing regional integration is a key policy objective for the authorities, who recently concluded agreements on trade and transit with the Kyrgyz Republic, China, and Pakistan.

Executive Board Assessment

Executive Directors commended Kazakhstan for continued prudent macroeconomic policies, which, supported by high oil prices and increasing foreign investment, have led to strong economic performance, broad-based economic growth, and the rapid accumulation of international reserves and assets in the National Fund. In view of a highly favorable medium-term outlook, Directors emphasized that the main policy challenges facing Kazakhstan are to prudently manage the country's substantial petroleum wealth, and to undertake the structural reforms necessary for sustainable broad-based economic and social development.

Directors welcomed the authorities' more relaxed fiscal stance in the 2004 budget, which increased outlays on pensions and wages, and reduced the rates of the value-added tax, income tax, and social security tax. In view of rapidly rising revenues from oil, they underlined the need to increase spending on education, health care, anti-poverty programs, and infrastructure development, as well as the importance of enhancing institutional capacities, in collaboration with the World Bank, to ensure greater spending efficiency. Directors cautioned, however, against any tendency toward an excessively pro-cyclical budget and recommended the adoption of a non-oil fiscal deficit target as an important step to guide fiscal policy in the face of volatile oil and gas revenues. They welcomed the establishment of a medium-term budgetary framework, stressing the importance of linking it to the annual budget.

Directors noted that inflation has been contained despite significant growth in monetary aggregates as this growth was accompanied by rapid financial deepening. They advised the authorities, however, to monitor developments in money markets carefully and to continue developing tools to manage excess liquidity to ensure that the easing of fiscal policy does not threaten the inflation objective. In this regard, they noted the supporting role of a more flexible exchange rate policy, which accords with the authorities' intention to adopt an inflation targeting regime over the medium term. In view of Kazakhstan's strong balance of payments position, buoyed by increasing oil revenues, Directors urged the NBK to reduce its purchases of foreign exchange and allow some real appreciation of the currency.

Directors commended the authorities for their prudent management of increasing oil revenues, noting that the NFRK, which accumulates excess oil revenues, has played a crucial role in easing the burden on monetary policy and reducing pressure for an appreciation of the exchange rate. They urged the authorities to safeguard the assets of the NFRK through enhanced transparency in its operations and the regular release of external audit reports. Directors called on the authorities to ensure that the rules governing the NFRK are aligned with the budget. They encouraged the authorities to enhance transparency in the extractive industries, including by publishing information about all new oil-related contracts and payments, and through the adoption of the Extractive Industries Transparency Initiative.

Directors observed that Kazakhstan would benefit from developing a diversified economy by avoiding overdependence on the oil sector, and referred in this regard to lessons from other resource intensive countries. They encouraged the authorities, in addition to prudently managing petroleum wealth, to strengthen the competitiveness of the non-oil economy by adopting measures to enhance productivity, and as a starting point, to develop a well thought-out public sector investment program with a focus on infrastructure investment. Directors cautioned the authorities against allowing state-owned developmental initiatives to take a more prominent role in allocative decisions in the economy, and urged them to adopt measures to reduce the potential for these programs to distort economic decisions.

Directors encouraged the authorities to press ahead further with the implementation of their structural reform agenda. In this regard, they emphasized the overarching importance of improving the overall business climate by strengthening public administration and the judiciary, and by fighting corruption. They called on the authorities to adopt measures to improve the investment climate for small- and medium-sized enterprises, with a view to creating more employment. Directors encouraged the authorities to take advantage of the positive economic environment to strengthen their efforts to reduce poverty, especially in the rural areas and among the elderly. They also welcomed the adoption of a land code, which allowed private land ownership.

Directors commended the authorities for their continued progress with financial sector reforms and the update of the 2000 FSAP, emphasizing the importance of the establishment of the Financial Supervision Agency in early 2004. They encouraged the authorities to strengthen further their systems of consolidated supervision and internal risk management, in view of continued high credit growth and foreign borrowing by commercial banks, and to enhance supervision of the non-bank financial sector, as recommended by the FSAP update mission. Directors stressed the importance of reducing distortions in credit markets through adequate prudential and market conforming measures. A few Directors also encouraged the authorities to consider temporarily raising reserve requirements for funds borrowed abroad in order to mitigate the significant increase in foreign borrowing by commercial banks. Finally, they urged the authorities to pass AML/CFT legislation, in line with international standards.

Directors encouraged the authorities to take advantage of their strong external position to liberalize the trade system further. They welcomed recent progress on trade and transit arrangements with neighboring countries and agreed that Kazakhstan could play a major role in facilitating regional trade by reducing non-tariff barriers and removing obstacles to trade in transportation and customs. Directors called on the authorities to pursue WTO accession discussions vigorously.

In the context of the ex-post assessment of longer-term program engagement, Directors welcomed the authorities' generally favorable assessment of Kazakhstan's experience with Fund programs, while noting that performance had been affected by some differences in views regarding economic policies at certain stages.

Directors commended the authorities for their progress with respect to improving data transparency, in general, and by subscribing to the Special Data Dissemination Standard and publishing the fiscal and data Reports on the Observance of Standards and Codes in 2003.

Kazakhstan: Selected Economic Indicators







Prel. Est.


(Changes in percent)

Real economy


Real GDP







CPI (end-of-period)








(In percent of GDP)

Public finance


Government revenue and grants







Government expenditures







General government balance 1/







General government debt (end-of-period) 2/








(Changes in percent)

Money and credit


Base money







Broad money







Banking sector credit to the economy







Interest rate on three-month treasury bill 3/








(In percent of GDP)

Balance of payments


Trade balance







Current account balance 4/







External public debt







Gross international reserves


In billions of U.S. dollars, end of period







In months of imports of goods and nonfactor services








Exchange rate


End-of-period level (tenge/U.S. dollar)







Real exchange rate vis-à-vis U.S. dollar 5/







Real exchange rate vis-à-vis Russian ruble 5/







Sources: Kazakhstani authorities; and IMF staff estimates.

1/ Under this definition of the general government balance, privatization revenue is treated as a financing item and measured from below-the-line financing, which includes the statistical discrepancy.
2/ Gross domestic and external debt, including government guaranteed debt.
3/ Starting in 2001, yields refer to NBK notes.
4/ Reported figures for the 1999-2002 current account have been adjusted for staff estimates of the underinvoicing of exports.
5/ End-of-period from end of previous year. A negative sign indicates a depreciation.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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