IMF Executive Board Concludes 2007 Article IV Consultation with the Republic of Kazakhstan

Public Information Notice (PIN) No. 07/77
July 5, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 27, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Kazakhstan.1


Economic performance has remained impressive over the past year, although relatively high inflation persists and vulnerabilities have increased. Output expanded by 10.6 percent in 2006, the seventh consecutive year of growth at around 10 percent. Employment continued to increase and real wage growth was strong. Despite buoyant export growth, the current account was in moderate deficit, driven by a rapid increase in imports. A jump in foreign direct investment and a surge in external borrowing by banks contributed to a large increase in the capital account surplus, leading to an US$11 billion accumulation in official reserves. However, banks' external liabilities more than doubled in 2006 to 41 percent of GDP, implying greater vulnerability related to the increase in external indebtedness, and inflation remained relatively high.

Large foreign exchange inflows are complicating the task of monetary and prudential policies. Despite measures to tighten liquidity, including broadening and raising reserve requirements and increasing policy interest rates, money and credit aggregates have surged. Prudential regulations have also been tightened in an effort to slow bank credit and external borrowing. Since mid-2006, limits on banks' short-term external borrowing were imposed, criteria on household debt service-to-income ratios have been introduced, regulations on banks' foreign currency exposures have been tightened, and, more recently, limits on bank's total external borrowing have been established. The tenge appreciated against the dollar by 4 percent in 2006 and a further 6 percent during January-April 2007.

Fiscal policy remained prudent in 2006 and helped prevent inflation from rising further. The overall surplus rose to 7.5 percent of GDP, of which more than 90 percent was saved in the National Fund. The surplus is expected to narrow to 4.3 percent of GDP in 2007 on account of lower oil prices and an acceleration in public spending.

Executive Board Assessment

Executive Directors commended the authorities' prudent macroeconomic policies and sound oil revenue management, which have contributed to Kazakhstan's impressive economic performance. In 2006, real GDP growth remained robust, employment continued to increase, and social indicators improved further, while the fiscal position—supported by buoyant oil and non-oil revenues—remained very strong. At the same time, these successes have spurred investor interest and led to large capital inflows, with a consequent acceleration in credit growth and rise in inflationary pressures.

Looking ahead, Directors considered that economic prospects for Kazakhstan remain bright. They noted that, while the positive external environment would likely prevail in the near term, policy measures to lower inflation and mitigate mounting banking sector risks are needed to ensure a continued favorable macroeconomic outlook. Structural reforms to further enhance diversification and improve the investment climate will help sustain strong economic performance over the medium term.

Directors encouraged the authorities to take further steps to tighten the monetary policy stance. They welcomed the measures to tighten liquidity implemented over the past year, but noted that money and credit growth remains excessive. Directors recommended early action to further increase reserve requirements, possibly with a wider differential between requirements on external versus domestic liabilities, and to raise policy interest rates.

Directors noted that a stronger and more flexible tenge would support monetary tightening in bringing inflation down and restraining speculative inflows. They observed that real exchange rate appreciation would also be in line with longer-term fundamentals and suggested that nominal appreciation, rather than higher inflation, would better facilitate the adjustment.

Directors welcomed the recent prudential measures aimed at containing risks related to the rapid growth in bank credit and external debt—especially the capital-based limits on external borrowing, criteria on household debt service-to-income ratios, and tighter regulations on banks' foreign currency exposures.

With bank credit and external borrowing—and the associated risks—continuing to grow rapidly, Directors recommended that the authorities consider tightening prudential regulations further. They recommended, in particular, increasing provisioning requirements and implementing more stringent collateral regulations and risk weights for unsecured consumer credits.

Directors emphasized that vigorous supervisory effort is needed to ensure banks' compliance. They therefore welcomed the recent legislation enhancing the Financial Supervision Agency's (FSA) supervisory powers, as well as the plans to increase the FSA's resources. Directors viewed the authorities' progress in formulating early warning indicators and contingency plans as valuable proactive steps to limiting risks. Directors encouraged the authorities to move ahead with enhancing Anti-Money Laundry/Combating Financing of Terrorism legislation in line with international standards.

Directors noted that fiscal policy has remained prudent but emphasized that the easing of the fiscal stance in 2007 would require additional monetary tightening and exchange rate appreciation to keep inflation from rising. Observing that the acceleration of public spending is aimed at addressing Kazakhstan's still substantial social and infrastructure development needs, they underscored the benefits of enhancing spending efficiency. In this regard, Directors welcomed the authorities' intention to conduct a review of public financial management, with assistance from the World Bank.

Directors emphasized the importance of intensified structural reforms to improve competitiveness and underpin prospects for the non-oil sector. They noted that early WTO accession, customs administration reform, and further progress in enhancing regional trade would secure productivity gains. Directors welcomed the initiation of the program to privatize state enterprises, which should facilitate enterprise restructuring and enhance competition policy.

Directors commended the notable progress in improving external debt data, particularly its monitoring on a remaining-maturity basis. They noted that the assessment of vulnerabilities would be enhanced further by progress in disaggregating import data across the oil and non-oil sectors of the economy. Directors urged expeditious completion of the project to broaden the concept of public debt to include obligations of state enterprises and development institutions. They also welcomed the progress made in complying with The Extractive Industries Transparency Initiative and called for early publication of the external audit report.

Kazakhstan: Selected Economic Indicators
            Prel. Proj.1/
  2001 2002 2003 2004 2005 2006 2007
  (Changes in percent)

Real economy


Real GDP

13.5 9.8 9.3 9.6 9.7 10.6 9.5

CPI (end-of-period)

6.4 6.6 6.8 6.7 7.5 8.4 8.5
  (In percent of GDP)

Public finance


Government revenue and grants

25.7 22.5 25.4 24.6 28.1 27.9 27.6

Government expenditures

23.0 21.0 22.6 22.1 22.3 20.4 23.4

General government balance 2/

2.7 1.4 2.7 2.5 5.8 7.5 4.3

General government non-oil balance

-3.9 -3.0 -3.2 -4.6 -4.8 -2.8 -4.3

General government debt

(end-of-period) 3/

19.7 17.4 15.5 11.9 8.0 6.5 5.4
  (Changes in percent)

Money and credit


Base money

30.9 19.1 52.2 82.3 14.7 126.5 ...

Broad money

42.8 34.1 27.0 69.8 25.2 79.9 ...

Banking sector credit to the economy

78.9 34.9 45.6 52.4 73.2 86.3 ...

Interest rate on NBK notes (end of period)

5.8 5.9 5.2 4.0 2.2 4.76 ...
  (In percent of GDP)

Balance of payments


Trade balance 4/

5.3 8.1 11.9 15.7 18.1 18.2 13.3

Current account balance 4/

-5.4 -4.2 -0.9 0.8 -1.9 -2.2 -3.3

External debt

68.5 74.2 74.3 75.8 76.0 91.3 91.5

Gross international reserves


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

2.5 3.1 5.0 9.3 7.1 19.1 25.6

In months of imports of goods and nonfactor services

2.8 3.3 4.5 5.9 3.3 7.0 8.2
  (Changes in percent)

Exchange rate


Tenge per U.S. dollar (end of period)

3.8 3.3 -8.0 -9.3 2.9 -5.1 ...

Tenge per Russian ruble (end of period)

-3.0 -2.1 -0.8 -4.0 -0.4 3.7 ...

Real effective exchange rate (p.a.) 5/

0.9 -3.8 -3.6 5.8 3.1 7.7 ...

Sources: Kazakhstani authorities; and IMF staff estimates and projections.

1/ Staff projections.

2/ 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 a statistical discrepancy.

3/ Gross domestic and external debt, including government guaranteed debt.

4/ Reported figures for 2001 have been adjusted for staff estimates of the underinvoicing of exports.

5/ A positive sign indicates appreciation.

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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