Republic of Kazakhstan-Concluding Statement of the IMF Mission
January 16, 2009
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
An International Monetary Fund (IMF) mission visited Kazakhstan during January 12-16, 2009 to review recent economic developments and discuss the government's policy response to the ongoing global financial crisis. The mission would like to thank the authorities for the informative and open discussions during its stay. The following statement reflects the views of the mission.
1. The near-term global economic outlook remains challenging. The financial crisis has evolved into a broader economic crisis, triggered by a freeze in credit markets, large wealth erosion, and a loss of confidence. As a result, private demand is falling sharply across the world. The IMF cut its forecast for global growth for 2009 by ¾ percentage point to 2.2 percent last November, but with the situation having deteriorated further over the past two months, another downward revision to the outlook will be made when the next World Economic Outlook Update is published later this month.
2. Against this background, 2009 is going to be a very difficult year for Kazakhstan's economy. Lower oil and commodity prices, adverse conditions in international financial markets, and developments in Russia are negatively affecting confidence, credit availability, and foreign exchange inflows. We expect economic growth to slow further this year to 1 percent, before recovering modestly during 2010, while inflation is expected to continue to ease. After recording a large surplus in 2008, the current account is projected to swing into deficit this year as export earnings fall.
3. The government has pro-actively introduced a set of policies under its Anti-Crisis Program to help mitigate economic vulnerabilities and establish a basis for the resumption of strong growth. In these endeavors, it has benefited from the prudent policy stance it followed in earlier years which meant that Kazakhstan entered the current difficult period with a large fiscal surplus, low public debt, and a substantial stock of foreign currency assets. We generally support the policy strategy the government is following, although the prompt and effective implementation of the measures will be the key to their success. In turn, this will require all parties (government, banks, companies, and the general public) to work together. Our views on the key policy issues are set out below.
4. A comprehensive strategy is needed to identify and address vulnerabilities in the banking sector. The starting point should be a full evaluation of the current financial situation of the major banks. While input from external experts will be helpful, the FSA should remain at the center of this process. An appropriate policy response, including recapitalization and other needed measures, can then be determined on the basis of this assessment. We welcome the ongoing work of the FSA to strengthen its assessments of the major banks, and concur with them that banks should raise provisioning levels substantially in the current environment of deteriorating loan quality and falling collateral values. In addition, we believe that a full and transparent accounting of the assets held by banks overseas and their ability to generate foreign currency liquidity, the extent of connected lending in bank portfolios, and the links between banks and pension funds is also necessary. Generally, more intensive supervision of banks (particularly those that are frequent users of NBK liquidity or are receiving large government capital injections) is needed to assess ongoing developments and ensure that business plans are put in place to address existing operational weaknesses. To achieve this heightened supervision, it is important that the FSA has the independence and resources available to it to carry out its mandate.
5. With the construction-banking nexus at the heart of many of Kazakhstan's economic difficulties, we support the government's plans to intervene to help complete unfinished construction projects. However, this support should not bailout insolvent construction companies. Otherwise, adjustment in the sector will be prolonged and there is a risk that banks will continue to lend money to unviable companies. It will also be important that plans to offer mortgages at below-market interest rates have adequate safeguards built-in. In particular, they should only be available for the purchase of primary residences, and borrowers should meet appropriate loan qualification standards. More generally, bonds that will be issued by Samruk-Kazyna to finance part of the anti-crisis program should be offered to interested investors through the capital market.
6. Macroeconomic policies can continue to provide support to the economy, but they must not over-reach.
• Given the strong starting position, the substantial easing of fiscal policy over the past year has been appropriate and is providing important support to growth. However, with the new tax code having just come into effect and the outlook for oil prices uncertain, it will be important that the government closely monitors revenue collections in the coming months to ensure they remain on track. If revenues fall substantially below budget levels, some scaling-back of non-essential expenditures may be needed, although it will be important to protect-and even expand-social safety net spending.
• On monetary policy, we expect that there will be some scope to cautiously cut the policy rate further in the period ahead if inflation continues to ease and pressures on the exchange rate do not intensify. We believe, however, that it is important that real interest rates are kept at positive levels to support domestic deposits and help move banks toward a more sustainable funding base.
7. The National Bank is facing a difficult dilemma with regard to exchange rate policy. The stability of the tenge since August 2007 has provided an important anchor for the economy during the financial turmoil, but with other currencies in the region depreciating in recent months, the competitiveness of Kazakhstani producers is being eroded. There are no easy answers to how to balance the trade-offs between maintaining exchange rate stability and accommodating some depreciation to restore competitiveness, and in the current difficult environment any exchange rate strategy has risks. On balance, we believe that at this stage a policy that continues to support the broad stability of the tenge is appropriate and viable-intervention in the foreign exchange market has been relatively modest in recent months and foreign currency reserves are still high. Nevertheless, this policy should be evaluated on an ongoing basis, taking into account developments in key trading partners, the domestic financial system, and foreign exchange reserves.
8. The government has announced that one of its top priorities this year is to limit the increase in unemployment. With economic growth set to remain weak and financial conditions difficult, an increase in layoffs from existing companies will unfortunately be unavoidable in the period ahead. Attempting to prevent this adjustment, either through restrictive trade policies or other means, is likely to be counterproductive. A more fruitful policy direction is to encourage employment creation in new areas, and we therefore strongly support the government's intention to ease the burden of regulation on businesses, particularly in the SME sector. It is also important that steps are taken to mitigate the impact on those people who lose their jobs, and initiatives to broaden job retraining programs and to ensure that the social safety net is adequate are therefore very welcome.
9. In sum, Kazakhstan continues to face considerable economic challenges and the coming months will not be easy. Nevertheless, the government has developed a bold strategy for dealing with the current economic and financial difficulties. As it moves ahead with its plans, it will be important that the government clearly communicates the details and objectives of its policies and works with all stakeholders to ensure consistent and comprehensive implementation. Progress in implementing the program should be monitored closely to ensure the intended goals are being achieved and reports should be made publicly available at regular intervals. Samruk-Kazyna will need to provide a full and regular accounting of its operations given its central role in the program.