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Republic of Kazakhstan and the IMF
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On January 23, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Kazakhstan.1
Kazakhstan's economic performance has improved markedly, since late-1999, owing to both a much more favorable external environment and prudent macroeconomic policies. Driven by the strong growth in the petroleum sector and associated spillover effects, real GDP growth in 2001 is expected to be around 13 percent. Inflation has declined further to 6.4 percent in December (year-on-year). Gross international reserves of the National Bank of Kazakhstan (NBK) have risen to $2.5 billion, which provides for about three months import coverage. In addition, the government's assets in the newly created National Fund for the Republic of Kazakhstan (NFRK), have reached $1.24 billion (6.4 percent of GDP) at end-December 2001. Petroleum production has been rising at around 15 percent per annum and the oil sector alone, including transportation, now accounts for approximately one quarter of GDP. The recent opening of the Caspian Pipeline Consortium has considerably boosted export capacity and lowered export costs.
The general government surplus is projected to be about 3.3 percent of GDP in 2001 (including revenues transferred to the NFRK of about 4 percent of GDP), on account of higher oil revenue, but also reflecting economic buoyancy. Revenue is projected to reach 27.1 percent of GDP, up from 21.7 percent of GDP in 2000; about two-thirds of this increase is from petroleum. Nonoil tax receipts have been buoyant—rising a projected 20 percent for 2001, in part as a result of the conversion of the VAT for trade with the CIS to the destination principle (excluding energy products). From July 1, the VAT rates were unified at 16 percent and the social tax rate was reduced to 21 percent from 26 percent. The nonoil fiscal deficit is projected to increase to about 4 percent of GDP in 2001. Expenditure and net lending has risen almost by 2 percentage points of GDP, or by about 14 percent in real terms.
Public external debt stabilized at $4.0 billion at end-2000—about 21.8 percent of GDP and has declined in 2001 to just under 20 percent of GDP. Reflecting the improved fiscal position, net domestic debt has also declined significantly to about 0.7 percent of GDP at end-November 2001. The net external debt of the government and NBK, reflecting the build-up of foreign reserves and assets in the NFRK is projected to be below 1 percent of GDP at end-2001.
The Kazakh economy experienced substantial financial deepening since 2000. The stock of broad money (including foreign exchange deposits) increased by 45.9 percent in 2000. Continuing this trend, end-November 2001 broad money was up 35.9 percent over the year, almost entirely due to strong deposit growth. Reflecting the growth of deposits, banking system credit to the economy grew by 82 percent in 2000, and by a further 55 percent in 2001, through end-September. Interest rates on both deposits and loans have declined gradually since 1999, although the spread has remained at about 3-4 percentage points.
Following the floating of the tenge in April 1999, the nominal exchange rate has stabilized. While the real exchange rate to the U.S. dollar has been quite stable, the tenge has depreciated steadily in real terms against the Russian ruble, thus supporting the competitiveness of Kazakhstani industry versus their main trading partner, Russia. The real effective exchange rate appreciated about 7 percent through early 2000 from a trough in October 1999 and has remained broadly stable since then.
Kazakhstan's external position recorded a very strong improvement in 2000. The current account surplus rose sharply to an estimated 5.1 percent of GDP, with exports growing at an annual rate of 60 percent, largely on account of petroleum and mineral price and volume rises. Imports rose by 21 percent. The external current account has deteriorated sharply in 2001 to a projected deficit of about 3.6 percent of GDP, reflecting declining petroleum and mineral prices, but also surging imports, reflecting the spike in foreign direct investment in the petroleum sector and higher consumer income. Against this background, and the sizeable increase in net wealth, major rating agencies have raised Kazakhstan's credit rating on sovereign foreign currency liabilities several times (most recently in July) and spreads on Kazakhstan Eurobonds have fallen by one half to around 200 basis points.
A new tax code signed into law in June 2001. A number of exemptions were removed and all taxes and obligatory payments to the budget are now included in the tax code. Limited progress in large-scale privatization has been recorded in the past two years and the government maintains significant minority shareholdings in a broad cross section of industry. Trade policy reforms, tariff rationalization in particular, have been only very partially implemented. The average tariff rate has risen somewhat to 7.9 percent. There has been slow progress on World Trade Organization accession. In the financial sector, the NBK absorbed the National Securities Commission at mid-year, and is expected to become a unified financial sector supervisory agency, covering banks, insurance, pension funds, and nonbank financials.
Executive Board Assessment
Directors commended the authorities for the markedly improved macroeconomic performance in 2000-01, reflected in continued strong growth, the reduction of inflation to single digits, stability in the foreign exchange market, and the increased stock of international reserves and foreign assets. Directors noted that, although a favorable external environment, including high oil prices, contributed to such a positive outcome, the prudent stance of macroeconomic policies adopted by the authorities played an important role. Directors considered that Kazakhstan is in a much better position now to confront a downturn in the external environment; nevertheless, they stressed the need to consolidate the recent gains and strengthen the basis for sustained, diversified economic growth by stepping up the implementation of structural reforms.
Directors agreed that prudent fiscal policy had played a vital role in preventing excess demand pressures, avoiding inflation and a real appreciation of the exchange rate, and building confidence in the economy. They commended the authorities for saving the higher than expected fiscal revenue over the past two years. Directors welcomed the continued fiscal prudence in the 2002 budget, and the authorities' commitment to reduce government spending if oil revenue is lower than targeted but stressed that social spending should be protected. However, they observed that while rising oil production is expected to impact favorably on the budget, the authorities need to be mindful of the increasing vulnerability of the budget to oil revenue fluctuations and thus of the evolution of the non-oil fiscal balance. In this context, they stressed the importance of setting the budget in a medium-term context, broadening the base of non-oil revenues, and managing public resources efficiently and conservatively.
Directors welcomed the structural initiatives being taken to further strengthen fiscal performance, including the adoption of a new tax code, a switch to the destination principle for VAT, changes to intergovernmental revenue- sharing rules, and the modernization of treasury operations. However, they noted that there is scope to further strengthen the budgetary process and tax administration, especially customs administration, and to enforce collection of excise taxes on petroleum products.
Directors were encouraged by the initial experience of the NFRK which has facilitated the prudent stance of fiscal and monetary policies, bolstered the credibility of the exchange rate policy, and contributed to increased transparency and accountability in the budgetary process and in the management of the oil wealth. They recommended that the authorities simplify the NFRK's operating rules and to ensure that all flows to and from the NFRK are duly recorded in the treasury.
Directors endorsed the stance of monetary policy pursued in 2001 as it had succeeded in lowering inflation, preserving the competitiveness of the economy, and sterilizing oil-related foreign exchange inflows. Although the need for sterilization has lessened considerably with the advent of NFRK, Directors were of the view that, given the rapid growth in the economy and the prospects for strong foreign exchange inflows, the authorities need to carefully monitor monetary growth and price movements. While agreeing that the existing exchange rate policy of intervening when necessary to moderate appreciation of the currency is generally appropriate, Directors recommended that the authorities guard against reigniting inflationary pressures. In light of the positive role the managed float has played so far, Directors also advised the authorities to proceed cautiously in shifting to inflation targeting.
Directors welcomed the continued process of financial deepening. Nevertheless, they cautioned that the recent very rapid increase in credit may be of concern with regard to credit quality and risk. Directors welcomed the establishment of a unified supervisory institution, and urged the NBK to introduce measures aimed at strengthening prudential regulations, limiting risk, and putting in place effective consolidated supervision. They supported the authorities' gradual approach to capital account liberalization and welcomed the high priority the authorities have placed in supporting international efforts to prevent money laundering.
Directors noted that structural reforms are the key to preserving the macroeconomic stabilization gains, enhancing long-term sustained economic growth, and reducing the economy's external vulnerability by creating a diversified production base. In particular, policy efforts are required to address efficiency concerns and to build an environment conducive to private sector development. In this connection, Directors stressed the importance of good corporate governance and transparency, including by improved and effective regulation and reduced barriers to entry. They welcomed the sale of remaining state-owned minority stakes and urged the authorities to complete large-scale privatization.
Directors encouraged the authorities to accelerate reforms for firms, including public enterprises, to adopt international accounting standards which would help develop a capital market. They also encouraged the authorities to promote free trade, facilitate trade in the region, and actively pursue their request for accession to the WTO.
Directors welcomed the recent efforts to improve macroeconomic statistics, particularly the increased coverage of the petroleum sector, and the authorities' decision to conduct statistical and fiscal Reports on the Observance of Standards and Codes in the near future.
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.
IMF EXTERNAL RELATIONS DEPARTMENT