Republic of Kazakhstan and the IMF
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The International Monetary Fund (IMF) today approved a three-year credit for Kazakhstan in an amount equivalent to SDR 329.1 million (about US$453 million) under the Extended Fund Facility (EFF)1 to support the government's economic program for 2000-2002. The first installment, which will be available immediately, will be in an amount equivalent to SDR 25.5 million (about US$35 million).
After the Executive Board's discussion on Kazakhstan, Shigemitsu Sugisaki, Deputy Managing Director, made the following statement:
"Directors welcomed the recent positive developments in Kazakhstan's economy and the authorities' commitment to achieve macroeconomic stabilization and accelerate structural reforms. They stressed that continuation of the present floating exchange rate regime, the pursuit of monetary policy geared to further reducing inflation, and strict adherence to their fiscal consolidation objective will be essential to help achieve sustainable growth over the medium term.
"Directors praised the authorities' budget program in 2000 as a credible stepping stone towards the medium-term objective of fiscal sustainability. They observed that realistic revenue estimates and strengthened expenditure discipline would help prevent further accumulation of domestic arrears. Directors commended the authorities for implementing tax increases and excise hikes, but emphasized that reform of the tax code and sustained efforts to improve tax and customs administration would also be necessary to attain budget targets. Directors welcomed the authorities' fiscal contingency plan aimed at preventing disruptive across-the-board cuts in expenditure. They viewed the strengthening of the social safety net by improved targeting of social benefits and by accelerated pension reform as an important priority under the program. Directors also urged the authorities to strictly control the issuance of new public guarantees for external borrowing.
"Directors supported the authorities' objective of facilitating financial deepening in the context of a sound financial system, and thus agreed with the emphasis on enhancing prudential standards and improving banking supervision.
"Directors welcomed the authorities' commitment to trade liberalization, and commended them for removing the tariffs imposed on Kazakhstan's major trading partners earlier this year, and for their commitment to further reduce trade barriers.
"Directors commended the authorities' efforts to improve governance, strengthen transparency, and to fight corruption. They agreed that reforms in the areas of civil service, the legal system, regulatory framework, transparency of operations of the public sector, (including the public enterprises), and the quality and timeliness of statistical reporting would improve the quality of public services and foster private sector led growth. Also in the structural area, they noted the importance of reforms in the energy and agriculture sectors. Directors welcomed the progress already achieved in privatization, but stressed the importance of reinvigorating the privatization process over the course of the three-year program, as an important component in the growth process. They emphasized the importance of a favorable environment for foreign investment, including a level playing field," Sugisaki said.
Although the Kazakh government had achieved financial stabilization and advanced the structural agenda by 1997, a series of external shocks hit the economy in 1998, which, together with delays in implementing necessary policy adaptations, resulted in a recession and raised concerns for the medium-term outlook. However, over the course of 1999, the government increasingly focused on addressing the imbalances that emerged and put in place policy elements necessary to resume sustainable high-quality growth.
The government's 2000-2002 economic program2 centers on pursuing a prudent monetary policy in the context of a freely floating exchange rate, consolidating public finances to ensure medium-term sustainability, and pressing ahead with broad-based structural reforms. The program aims to achieve steady GDP growth from zero growth this year to 3% in 2000, 3.5% in 2001, and 4% in 2002, and a progressive decline in inflation from an expected 17% at end-1999 to 9% in 2000, 6.5% in 2001, and 4% in 2002. Furthermore, the program envisages the current account deficit remaining at around 2% of GDP over the next two years before declining, as exports are expected to grow.
Monetary policy will focus on reducing inflation while maintaining the freely floating exchange rate regime. The government's experience with this policy regime since April 1999 has been positive as it takes account of the characteristics of the Kazakh economy, including its continuing vulnerability to large terms-of-trade and other external shocks. Thus, the government is inclined to leave monetary policy unchanged for the period ahead. Under the program, the National Bank of Kazakhstan (NBK) will intervene in the foreign exchange market solely for the purposes of protecting its foreign exchange reserves and maintaining orderly market conditions. The remonetization of the economy that started in the second quarter of 1999 is expected to continue through 2000 and 2001 as confidence in the domestic currency keeps growing.
The primary objective of fiscal policy is to ensure medium-term sustainability of public finances by reducing the primary deficit to about 1% of GDP by 2002, with the aim of preventing the ratio of public debt to GDP from rising above 40%. Fiscal consolidation efforts in 2000 will focus on revenue increases. In its struggle against the culture of nonpayment, the government is committed to avoiding any new expenditure arrears and to repaying existing arrears according to a published multi-year schedule.
The program's structural policies center on achieving macroeconomic stability, on implementing reforms to alleviate poverty, and on deploying measures to foster private sector initiative. The government's strategy to strengthen the financial system and boost financial intermediation includes enhanced prudential standards, closer supervision of the financial sector, laws protecting banking confidentiality, the introduction of limited deposit insurance, and gradual divestment of state holdings in the banking system. The government is committed to improving public governance, strengthening the rule of law, rooting out corruption, and increasing policy transparency and access to economic and financial data. Regarding the social safety net, the government will continue to strengthen the fully funded pension system, which was introduced in January 1998, and to reform social assistance to target the truly needy.
Kazakhstan joined the IMF on July 15, 1992, and its current quota3 is SDR 365.7 million (about US$503 million). Its outstanding use of IMF financing currently totals SDR 335 million (about US$461 million).
1/ Vis-a-vis U.S. dollar. A positive sign indicates a real appreciation.
2/ From April 1999 onward, 3 month government securities are denominated in US $ and thus there is a break in series.
3/ Privatization receipts are treated as a financing item and are excluded from revenues.
4/ Annualized quarterly GDP / end-period broad money.
1The EFF is an IMF financing facility that supports medium-term programs that seek to overcome balance of payments difficulties stemming from macroeconomic imbalances and structural problems. The repayment terms are 10 years with a 4 ½-year grace period, and the interest rate, adjusted weekly, is currently about 3.8% a year.
2Details of the program will be available on the IMF's website: http://www.imf.org.external/np/loi/mempub.asp
3A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.
IMF EXTERNAL RELATIONS DEPARTMENT