IMF Executive Board Concludes 2008 Article IV Consultation with the Republic of Kazakhstan

Public Information Notice (PIN) No. 08/108
August 18, 2008

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2008 Article IV Consultation with Kazakhstan is also available.

On July 9, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Kazakhstan.1


From 2000-2007, the Kazakhstan economy enjoyed an extended period of very rapid growth, with real GDP growth averaging 10 percent annually. The expansion was underpinned by the development of the oil sector, prudent macroeconomic policies, structural reforms, and increased access to global financial markets. As a result, real per capita incomes have doubled since 2000 and social indicators have improved.

More recently, the global financial turmoil that began last summer had a significant impact on the Kazakhstan economy. Market perceptions of risk on Kazakhstan's assets rose sharply last September and remain relatively elevated. As commercial bank access to external funding was reduced, domestic liquidity conditions tightened considerably, and banks sharply curtailed lending. Real GDP growth has slowed and, after several years of rapid gains, property prices are declining.

Bank profitability has nonetheless remained robust and aggregate capital adequacy is above the regulatory minimum. However, financial soundness indicators are showing some signs of deterioration and the banking system is exposed to risks related to the property market and lending in foreign currency to the corporate sector. The authorities are working to reduce the vulnerabilities facing the banks by intensifying supervision, strengthening the regulatory framework, and establishing a comprehensive financial safety net framework.

The authorities reacted appropriately to the sudden stop in capital inflows. The central bank (NBK) provided extra liquidity support to banks and intervened in the foreign exchange market to ensure exchange rate stability. Foreign reserves have since recovered, oil fund (NFRK) assets have continued to grow, and the government has allocated additional fiscal spending to support ongoing construction and investment projects. Fiscal policy has nevertheless remained prudent: the overall fiscal surplus was 5.2 percent of GDP in 2007 and is expected to rise further in 2008 on the back of strong oil revenues.

Economic growth is expected to remain relatively subdued. Real GDP is forecast to grow by 5 percent and 6¼ percent in 2008 and 2009 respectively. The current account is projected to move into surplus in 2008 following the large deficit last year, due to higher oil and commodity prices and much slower import growth. Consumer price inflation (CPI) has begun to ease and is expected to decline to single digit rates by year-end. While risks to the outlook are on the downside, the country has large financial resources to help weather the current situation.

Executive Board Assessment

Executive Directors observed that the economic situation has been affected significantly by the recent global financial turmoil, with growth slowing down and liquidity conditions tightening. The authorities' prompt policy responses have been instrumental in helping the country weather the current difficulties. Directors noted that, while risks to the outlook remain on the downside, growth prospects in the medium term are still favorable, and the Republic of Kazakhstan has considerable financial resources at it disposal, including comfortable levels of the oil fund and international reserves. Directors stressed that policies should continue to focus on managing risks and promoting a return to strong, sustainable growth, supported by a sound banking system and ongoing reforms aimed at diversifying the economy and boosting competition.

Directors welcomed the considerable progress made in developing a financial safety net framework, which has proven effective in supporting the banking sector in response to the dry-up of external financing over the past year. They looked forward to the operationalization of a Memorandum of Understanding on Financial Stability, which sets out the framework for cooperation among relevant bodies during periods of financial distress. In this context, they underscored the importance of enhancing the authorities' flexibility to react to adverse developments in banks without compromising the central bank's financial position or creating moral hazard.

Directors noted with concern the deteriorating loan quality at the banks, linked to their high exposures to the weakening property market and rapid credit growth in recent years. Further efforts will be needed to strengthen banking supervision and regulations, and to fully implement the Financial Sector Assessment Program (FSAP) Update recommendations. Immediate priorities are to improve both onsite and offsite supervision, and to strengthen capacity for stress testing and risk analysis. Steps should also be taken to ensure that banks have sufficient capital and provisioning, and to strengthen the operational autonomy of the Financial Supervision Agency.

Directors agreed that, in current circumstances, preserving a stable exchange rate is key to boosting depositor confidence, limiting the risks from the large foreign currency exposure of the corporate sector, and helping reduce inflation. Any intervention in the foreign exchange market to ease downward pressures on the exchange rate should be carried out under clear operational rules that limit reserve losses. Directors encouraged the authorities to return to a more flexible exchange rate policy when financial market conditions improve. They noted the staff's assessment that there is currently no clear evidence of undervaluation or overvaluation of the real exchange rate relative to its equilibrium.

Directors emphasized the importance of pursuing monetary policy that strikes an appropriate balance between preserving financial stability, cushioning downside risks to growth, and ensuring a downward path of inflation. They encouraged the authorities to monitor headline inflation closely, given the possibility of further food and oil price increases, and to stand ready to tighten monetary policy as needed to bring down inflation to the targeted level.

Directors commended the authorities for their prudent fiscal management, which has resulted in large budget surpluses and low public debt, and created ample room for automatic stabilizers to operate. With the economy weakening, Directors supported the recently announced measures to increase spending in priority areas. They saw room for a further well-targeted fiscal stimulus should growth slow more sharply than expected, while being mindful of its inflationary impact. At the same time, efforts should continue to improve public financial management, with the assistance of the World Bank. Directors looked forward to the finalization of a new tax code, which should help ease the tax burden on the nonoil sector.

Directors emphasized the need for a well-crafted response to the sharp rise in food prices, including well-targeted transfer programs for low-income households. Efforts should be strengthened to improve agricultural production and distribution systems, while avoiding trade restrictions that affect prices in international markets.

Directors welcomed the publication of the Republic of Kazakhstan's first report under the Extractive Industries Transparency Initiative. They encouraged the

Kazakhstan Selected Economic Indicators
            Proj. 1/


2003 2004 2005 2006 2007 2008
  (Changes in percent)

Real economy


Real GDP

9.3 9.6 9.7 10.7 8.9 5.0

CPI (end-of-period)

6.8 6.7 7.5 8.4 18.8 9.7
  (In percent of GDP)

Public finance


Government revenue and grants

25.4 24.6 28.1 27.5 29.6 30.2

Government expenditures

22.6 22.1 22.3 20.2 24.4 23.5

General government balance 2/

2.7 2.5 5.8 7.2 5.2 6.7

General government non-oil balance

-3.2 -4.6 -4.8 -3.0 -4.3 -7.8

General government debt (end-of-period) 3/

15.0 11.4 8.1 6.7 5.9 5.1
  (Changes in percent)

Money and credit


Base money

52.2 82.3 14.7 126.4 -2.5 ...

Broad money

27.0 69.8 25.2 78.1 25.9 ...

Banking sector credit to the economy

45.6 52.4 73.2 84.0 51.4 ...

Interest rate on NBK notes (end of period)

5.2 4.0 2.2 4.8 6.0 ...
  (In percent of GDP)

Balance of payments


Trade balance

11.9 15.7 18.1 18.1 14.6 24.9

Current account balance

-0.9 0.8 -1.8 -2.4 -6.9 5.8

External debt

74.3 75.8 76.0 91.3 92.8 66.5

Gross international reserves


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

5.0 9.3 7.1 19.1 17.6 22.4

In months of imports of goods

3.1 5.9 3.3 7.0 4.7 5.3
  (Changes in percent)

Exchange rate


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

-8.0 -9.3 2.9 -5.1 -5.3 ...

Tenge per Russian ruble (end of period)

-0.8 -4.0 -0.4 3.7 1.2 ...

Real effective exchange rate (p.a) 4/

-3.6 5.8 3.1 7.7 8.7 ...

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, which includes a statistical discrepancy.

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

4/ 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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