Public Information Notices
Republic of Kazakhstan and the IMF
IMF Concludes 2000 Article IV Consultation with Kazakhstan
On December 11, 2000, the Executive Board concluded the 2000 Article IV consultation with Kazakhstan.1
Macroeconomic developments have turned out to be much more favorable in the second half of 1999 and during 2000 than was projected for the extended arrangement that was approved in December 1999. This performance is due to a strong recovery in regional demand, a substantial improvement in the terms of trade, and prudent macroeconomic policies pursued by the Kazakh authorities.
Growth is estimated to reach 8 percent in 2000, compared to a program projection of 3 percent and the inflation rate has been reduced to 10.2 percent (year-over-year) at end-November. The government has pursued prudent fiscal policies in the face of stronger than expected fiscal revenues; in the first nine months of 2000 the fiscal balance of the general government recorded a surplus of T 23 billion or 1.3 percent of GDP. Exports have grown strongly, resulting in a current account surplus of 1.1 percent of GDP in 1999 and of 4.8 percent of annual GDP in the first half of 2000. Reflecting these developments, the seven-year Eurobond of $350 million issued by Kazakhstan in April 2000 was priced to yield 11.25 percent, about 500 basis points above a comparable benchmark yield. On May 24, 2000 the National Bank of Kazakhstan (NBK) repaid all outstanding obligations SDR 296 million (approximately $385 million) to the Fund, reducing the public external debt stock at the end of June to $3.9 billion, or 23 percent of GDP.
Faced with large foreign exchange inflows, the NBK has sought to stabilize the nominal tenge rate. The tenge fluctuated narrowly around T 138-143 per U.S. dollar in late-1999 and early 2000 and has been unchanged at about T 142.5 per U.S. dollar since the middle of this year. In November, the exchange rate depreciated to T 144 per U.S. dollar. International reserves have risen strongly and gross official reserves reached $2.2 billion (2.7 months of imports) at end-September.
Against the background of economic recovery and a strong balance of payments, monetary aggregates have expanded significantly. With signs of a recovery in demand for tenge, the NBK has loosened monetary policy in 2000. Given the strong growth in deposits and the confidence of market participants in a stable exchange rate, interest rates have declined. Rates on 3-month treasury bills have declined by about one-half in the year ending October 2000 to reach around 8 percent.
Kazakhstan's progress on structural reform has been mixed. There have been delays in the privatization of blue chip companies, in the adoption of important fiscal sector measures, and stagnation in land and social sector reform. As regards trade policy reform, the government has eliminated trade restrictions introduced at the outset of the Russian crisis and has converted most specific tariffs into ad-valorem tariffs. However, there have been delays in the reform of the tariff regime and some ad-hoc trade restrictions have been introduced to address perceived problems in domestic markets.
The quality and coverage of economic statistics has continued to improve but some significant shortcomings persist, particularly as regards the coverage of the fiscal statistics. The authorities' efforts in improving statistics have been supported by technical assistance from the Fund and other agencies. Kazakhstan participates in the General Dissemination System (GDDS) and in this context has undertaken to improve coverage and reporting in a number of areas.
Executive Board Assessment
Executive Directors observed that Kazakhstan's improved economic performance has been linked to a significantly more favorable external environment than in 1999 when the Extended Fund Facility (EFF) program was approved, as well as to the pursuit of prudent macroeconomic policies and past structural reforms. Economic growth in 2000 has been considerably more pronounced than anticipated, inflation has moderated, and the current account has been in surplus. In the period ahead, in light of the availability of much larger resources, economic policies need to be geared to avoiding excessive real exchange rate appreciation, promoting saving, opening trade, improving governance, and strengthening the supply side of the economy through structural reforms. Directors welcomed Kazakhstan's discharge of all its outstanding financial obligations to the Fund in May 2000.
Directors welcomed the monetary authorities' commitment to pursue the price stability objective, and to avoid excessive real exchange rate appreciation, while allowing the nominal exchange rate to appreciate should the monetary targets risk being exceeded. Directors observed that keeping the exchange rate relatively stable in the face of a strengthening external position has complicated the task of achieving single-digit inflation. They supported the staff's recommendation that the central bank avoid a further loosening of monetary policy.
Directors commended the authorities for pursuing a prudent fiscal policy, and urged its continuation. They welcomed, in particular, the authorities' expenditure restraint, which has helped keep inflation subdued despite large foreign exchange inflows. They recommended that the authorities prevent large windfalls in revenue from the oil sector from weakening efforts in collecting other taxes, as only a broad and resilient tax base will help minimize volatility in overall revenue. In this context, they urged the authorities to strengthen efforts to collect VAT on imports and to proceed with customs reform. Directors also stressed the importance of improved prioritization of public expenditure and better targeting of social expenditure.
Directors welcomed the authorities' recent provision of additional information on the oil sector, which has contributed to clarifying the linkages between the oil sector and the budget. Nevertheless, important technical and policy concerns remain outstanding, notably regarding budget projections and formulation, and the management of public resources. Directors, therefore, urged the authorities to ensure further transparency of the oil sector's operations and its linkages with public finance. This will strengthen the budgetary process, and facilitate sound macroeconomic analysis and public accountability.
Directors generally supported the authorities' objective of establishing an oil stabilization fund, which should help to insulate the budget from volatility in oil revenues, provide savings for future generations, prevent wasteful increases in government spending, and limit the impact of "Dutch disease." The fund should, however, be based on the principles of transparency and public accountability, and should be appropriately cast in a medium-term fiscal framework.
Directors welcomed Kazakhstan's participation in the Financial Sector Assessment Program and took note of the Financial System Stability Assessment report. They stressed the importance of continuing reforms of the banking and financial system, including, in particular, central bank efforts to require banks to submit consolidated financial statements and steps to assure that the central bank has full authority to revoke a bank's license.
Referring to the authorities' structural reform agenda, Directors urged the authorities not to allow the favorable economic climate to lead to complacency with regard to continuing structural reform. In particular, they noted that a major impetus is required in pressing forward with a well-prepared program of privatization of large-scale enterprises. Directors urged the authorities to open all sectors of the economy to international competition, noting that recent trade policy measures may be harmful to economic efficiency, regional integration, the investment climate, and sustained long-term growth. They also encouraged the authorities to take the necessary legal steps to strengthen property rights and land reform.
Directors welcomed the efforts by the authorities to improve basic macroeconomic statistics. They noted that inadequate coverage of the oil sector and its operations hamper the quality of aggregate statistics and the effectiveness of surveillance. They encouraged the authorities to continue to strengthen the national accounts and improve the compilation and coverage of the balance of payments.
Directors urged the authorities to take the steps necessary to complete the first review under the EFF. In particular, they noted the need to revive structural reforms, to ensure greater transparency in the linkages of the oil sector with the rest of the economy, and to agree with the staff on a suitable macroeconomic framework for 2001.
|Kazakhstan: Selected Economic Indicators|
|(Changes in percent)|
|(In percent of GDP)|
|Government revenue and grants||16.9||13.2||13.3||18.3||18.6||24.1|
|General government balance 1/||-2.7||-5.3||-7.0||-7.7||-5.3||-0.1|
|General government debt (end-of-period)||14.5||14.5||16.4||22.4||33.5||30.9|
|(Changes in percent)|
|Money and Credit|
|Banking sector credit to the economy||-36.7||-11.5||23.1||30.0||51.8||45.7|
|Yield on three-month treasury bill, percent per
|(In percent of GDP)|
|Balance of Payments|
|Current account balance 3/||1.3||-3.6||-3.6||-5.6||1.1||3.9|
|External public debt||...||18.7||20.3||17.9||25.3||24.1|
|Gross international reserves (in millions of US$)||1,653||1,961||2,252||1,967||2,003||2,215 4/|
|In month of imports of goods and nonfactor services||3.3||3.1||3.3||3.5||3.3||2.7|
|End-of-period level (Tenge/US$)||64.0||73.8||75.9||84.0||138.3||144.1 5/|
|Real exchange rate vis-à-vis U.S. dollar 6/||32.4||7.9||6.4||-9.5||-29.8||-0.7 7/|
|Real exchange rate vis-à-vis Russian Ruble 6/||-19.0||8.0||4.9||68.5||-30.9||-3.4 7/|
Sources: Kazakhstani authorities; and Fund staff estimates.
1/ This definition of the general government balance treats revenue from privatization as a financing item.
3/ Reported figures for the 1999 current account have been adjusted for estimates of the underinvoicing of exports.
6/ End-of-period from end of previous year. A positive sign indicates a real appreciation.
1Under 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. In this PIN, the main features of the Board's discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT