## 1. The New Concept of the National Fund of the Republic of Kazakhstan (NFRK) ## Source details **Canonical URL:** [1. The New Concept of the National Fund of the Republic of Kazakhstan (NFRK)](https://www.imf.org/-/media/files/publications/cr/2017/cr17108.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17108.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17108.pdf.json) --- ### Context and recent macro-fiscal developments - Kazakhstan’s economy affected by shocks since late 2014: lower oil prices, weaker demand in Russia, China, and the EU, significant exchange rate depreciation, and market volatility in late 2015–early 2016. - Authorities’ responses: fiscal support (notably “Nurly Zhol”), overhaul of monetary and exchange rate policy framework, and structural reforms on business climate and public sector. - Key vulnerabilities exposed: business environment, competitiveness, banking system, and public administration. - Key near-term macro indicators: - Real GDP growth: 2014: 4.3 percent; 2015: 1.2 percent; 2016: 1.1 percent. - Official unemployment rate: 5 percent (2016). - National Fund (NFRK) assets: decreased from $63.5 billion to $60.0 billion (2016), representing 45 percent of GDP. - Current account deficit: widened from 3 percent to 6 percent of GDP in 2016. - Foreign reserves: around $30 billion or 9 months of imports of goods and services. - Gross external debt: over 120 percent of GDP, with intercompany lending over 50 percent of total debt. - FDI: increased from $3 billion in 2015 to $14 billion in 2016 (mostly oil and gas). ### Fiscal performance (selected indicators, percent of GDP) - Total Revenues: 2014: 23.7; 2015: 16.6; 2016: 18.0; 2017: 19.6. - Oil Revenues: 2014: 11.3; 2015: 6.6; 2016: 4.2; 2017: 6.4. - Non-Oil Revenues: 2014: 12.4; 2015: 10.0; 2016: 13.8; 2017: 13.2. - VAT (of which): 2014: 3.0; 2015: 2.3; 2016: 3.3; 2017: 3.2. - Total Expenditures and Net Lending: 2014: 21.3; 2015: 21.1; 2016: 22.1; 2017: 21.9. - Current Expenditures: 2014: 16.9; 2015: 17.5; 2016: 18.5; 2017: 18.7. - Wages (of which): 2014: 2.8; 2015: 2.8; 2016: 3.0; 2017: 3.0. - Capital Expenditures: 2014: 4.2; 2015: 3.2; 2016: 2.9; 2017: 2.9. - Fiscal Deficit (without sectoral support): 2014: 2.4; 2015: -4.5; 2016: -4.1; 2017: -2.3. - Fiscal Deficit (with on-budget fiscal initiatives): 2014: 2.4; 2015: -6.3; 2016: -4.1; 2017: -6.3. - Off-budget fiscal spending (2015): 1.3 (percent of GDP). - Fiscal Initiatives (without sectoral support, percent of GDP): 2014: 1.5; 2015: 2.6; 2016: 3.7; 2017: 2.9. - 2017 budget projections: - Underlying fiscal deficit projected at 2.3 percent of GDP. - Headline deficit projected at 6.3 percent of GDP because of banking sector support KZT 2.1 trillion-$6.4 billion or 4 percent of GDP financed by NFRK transfers and domestic debt. ### Monetary and external developments - Exchange rate and inflation: - NBK floated the tenge; base rate set at 17 percent in February 2016, later reduced to 11 percent as inflation fell. - Inflation peaked at nearly 18 percent in July 2016, then fell to 7.8 percent in February (within NBK 6-8 percent target). - Liquidity and dedollarization: - Deposit dollarization: 55 percent (elevated, though fell in 2016). - Loan dollarization: around 35 percent (stabilized). - NBK sterilization reached KZT 3 trillion ($9 billion or 7 percent of GDP) in March 2017 (sterilization cited elsewhere). - External sector: - NBK gross international reserves (USD, selected years): 2013: 24.7; 2014: 29.2; 2015: 27.9; 2016: 29.5; projections to 2022: 32.5; 35.5; 38.5; 41.5; 44.5; 47.5. ### Financial sector snapshot - Banking sector vulnerabilities: - Bank lending contracted by 3 percent in real terms in 2016. - Restructured loans surged from 10 percent to 25 percent of total loans. - Broader definition (including restructured loans and SPVs) suggests underperforming loans of over 40 percent of total loans. - Deposit placements and subsidized lending provided by authorities, including via the national pension fund (UAPF). - Financial soundness indicators (selected): - Total Regulatory Capital (billion tenge): 2013: 2108; 2014: 2587; 2015: 3058; 2016: 3226. - Total Assets (billion tenge): 2013: 13,303; 2014: 15,598; 2015: 19,149; 2016: 24,562. - Capital adequacy (Regulatory Capital to Risk-Weighted Assets): 2013: 18; 2014: 18; 2015: 16. - Provisions as percent of NPL: 2013: 66; 2014: 52; 2015: 66; 2016: 72. - Public funds in local banks: estimated at 22 percent of sectoral liabilities in 2016 ($15.7 billion or 11 percent of GDP). Exposure increased by 15.5 percent in 2016. ### Bank restructuring and systemic concerns - Delays and resistance to a system-wide Asset Quality Review (AQR); NBK aims to complete AQR by end-2017. - KKB (largest bank): - KKB acquired BTA from the state in 2014. - December 2016: KKB received KZT 400 billion ($1.2 billion) loan from NBK, partially repaid and extended. - Potential purchase by Halyk under consideration; combined entity would control 40 percent of the market if transaction proceeds. - Resolution plans: - Majority of bad assets from KKB-BTA would go to the Problem Loan Fund (PLF), though current KKB-BTA owners may retain a substantial share. - PLF has been used as a pass-through for public deposits rather than to resolve bad assets; needs more resources, staff, authority, and flexibility. ### Annex highlights: fiscal initiatives and NFRK flows - Major multi-year initiatives 2014–17 included: - “1 Trillion Tenge” program (February 2014): KZT 250 billion to capitalize PLF; KZT 250 billion to increase Special Government Reserve; funded via transfers from NFRK (KZT 684 billion) and issuance of bonds (KZT 311.1 billion). - Nurly Zhol (late 2014): allocation of $9 billion over 2015-17; funded via NFRK transfers (KZT 1,297.1 billion) and issuance of debt (KZT 543.7 billion). - Additional anti-crisis measures (2016): targeted NFRK transfers (KZT 164.1 billion), special reserve (KZT 201.3 billion), and UAPF (KZT 576.2 billion). - Nurly Zher (2017): bond issuance KZT 314.3 billion. - Banking Sector Support (2017): NFRK transfers KZT 1,093.1 billion and issuance of debt KZT 1 trillion. - Table 5 (selected fiscal numbers, in percent of GDP and billion tenge): - Revenues and grants (percent of GDP): 2013: 24.8; 2014: 23.7; 2015: 16.6; 2016: 18.0; 2017: 19.6. - Overall fiscal balance (percent of GDP): 2013: 4.9; 2014: 2.4; 2015: -6.3; 2016: -4.1; 2017: -6.3. - NFRK Assets (end of period, in billions of U.S. dollars): 2013: 70.8; 2014: 73.2; 2015: 63.5; 2016: 60.0; 2017: 58.5. ### Public debt sustainability (Annex VI, baseline projections as of March 23, 2017) - Nominal gross public debt (percent of GDP): 2015: 10.0; 2016: 21.9; 2017: 21.1; 2018: 21.8; 2019: 22.0; 2020: 22.7; 2021: 22.9; 2022: 23.8. - Public gross financing needs (percent of GDP): 2015: -1.6; 2016: 7.1; 2017: 4.9; 2018: 6.4; 2019: 2.2; 2020: 1.9; 2021: 0.9; 2022: 1.1. - Real GDP growth (selected): 2015: 6.0; 2016: 1.2; 2017: 1.1; 2018: 2.5; 2019: 3.4; 2020: 2.8; 2021: 3.2; 2022: 3.9; 2022 (last listed): 4.6. - Effective interest rate (percent): 2015: 5.5; 2016: 5.2; 2017: 5.8; 2018: 5.0; 2019: 5.1; 2020: 5.0; 2021: 4.8; 2022: 4.9. - Sovereign spreads: EMBIG (bp): 236; 5Y CDS (bp): 158. - Debt dynamics drivers: primary deficits, exchange rate depreciation (notably 2016 contribution 3.3), and residuals tied to oil fund asset changes. ### Outlook and risks - Staff growth outlook and projections: - Staff estimates potential growth at 4.0 percent (down from 4.75 percent previously). - IMF projections (Real GDP, annual percent change): 2017: 2.5; 2018: 3.4; 2019: 2.8; 2020: 3.2; 2021: 3.9; 2022: 4.6. - Inflation: projected to remain within NBK target band of 6-8 percent (CPI eop projections: 2017: 7.3; 2018: 6.8; 2019: 6.0; 2020: 5.1; 2021: 4.0; 2022: 4.0). - Current account: expected to improve with higher exports; return to surplus gradual (current account balance percent of GDP: 2017: -4.3; 2018: -3.1; 2019: -2.2; 2020: -0.7; 2021: 0.1; 2022: 0.1). - Major downside risks highlighted: - Sustained decline in oil prices (high-impact). - Significant slowdown in China. - Failure to resolve banking issues decisively. - Further tenge appreciation reversing non-oil competitiveness gains. - High total external debt level. - Upside risks: enhanced regional cooperation (e.g., “Silk Road” initiatives), deeper relations with Uzbekistan, stronger recovery in Russia. ### Authorities’ and staff views - Authorities broadly agree with staff assessment on growth range and risks; project growth drivers include agriculture, mining, construction (benefitting from “Nurly Zher”). - Authorities reiterated commitment to reforms under the 100 Concrete Steps initiative and interest in IMF TA on tax policy and GFS reporting standards. - Staff emphasized: - Monetary policy: continue focusing on price stability within the inflation-targeting framework; maintain exchange rate flexibility. - Fiscal policy: gradual medium-term consolidation focusing on non-oil revenue mobilization; adopt IMF GFS standards and fully integrate NFRK and other operations in budget/fiscal accounts. - Financial sector: prompt, decisive AQR; loan-loss recognition and shareholder capital injections; strengthen NBK intervention, LoLR and resolution powers; use public funds only for viable systemic institutions with shareholder losses absorbed first; strengthen PLF to maximize recovery and operate per international best practices. - Structural reforms: prioritize implementation, set benchmarks and timetables, clarify privatization approach to attract investors. *IMF staff summary of “1. The New Concept of the National Fund of the Republic of Kazakhstan (NFRK)” (Republic of Kazakhstan — Selected excerpts from CR17108).* ### 1. The New Concept of the National Fund of the Republic of Kazakhstan (NFRK) _________________6 ### 1. The New Concept of the National Fund of the Republic of Kazakhstan (NFRK) ### Context - Kazakhstan’s economy is recovering from negative shocks since late 2014 driven by lower oil prices, weaker demand in Russia, China, and the EU, significant exchange rate depreciation, and market volatility in late 2015–early 2016. - Shocks exposed vulnerabilities in the business environment, competitiveness, banking system, and public administration. - Authorities’ responses: fiscal support (notably “Nurly Zhol” targeting infrastructure, utilities, housing, and SMEs), overhaul of monetary and exchange rate policy framework, and structural reforms on business climate and public sector (transparency, accountability, efficiency). - Fiscal and external buffers accumulated during high oil price period have been instrumental. - Key challenges to sustain recovery: fragile financial sector and high dependence on oil. ### Recent developments — macro and fiscal - Growth: - 2014: 4.3 percent - 2015: 1.2 percent - 2016: 1.1 percent - Official unemployment rate: 5 percent (2016) - Fiscal performance (selected indicators, in percent of GDP): - Total Revenues: 2014: 23.7; 2015: 16.6; 2016: 18.0; 2017: 19.6 - Oil Revenues: 2014: 11.3; 2015: 6.6; 2016: 4.2; 2017: 6.4 - Non-Oil Revenues: 2014: 12.4; 2015: 10.0; 2016: 13.8; 2017: 13.2 - VAT (of which): 2014: 3.0; 2015: 2.3; 2016: 3.3; 2017: 3.2 - Total Expenditures and Net Lending: 2014: 21.3; 2015: 21.1; 2016: 22.1; 2017: 21.9 - Current Expenditures: 2014: 16.9; 2015: 17.5; 2016: 18.5; 2017: 18.7 - Wages (of which): 2014: 2.8; 2015: 2.8; 2016: 3.0; 2017: 3.0 - Capital Expenditures: 2014: 4.2; 2015: 3.2; 2016: 2.9; 2017: 2.9 - Fiscal Deficit (without sectoral support): 2014: 2.4; 2015: -4.5; 2016: -4.1; 2017: -2.3 - Sectoral support note: includes a transfer to KazMunaiGas of 1.8 percent of GDP in 2015 and support to the financial sector of 4 percent of GDP in 2017. - Fiscal Deficit (with on-budget fiscal initiatives): 2014: 2.4; 2015: -6.3; 2016: -4.1; 2017: -6.3 - Off-budget fiscal spending (2015): 1.3 (percent of GDP) - Fiscal Deficit (augmented, excluding sectoral support): 2014: 2.4; 2015: -4.5; 2016: -5.3; 2017: -2.3 - Fiscal Initiatives (without sectoral support, percent of GDP): 2014: 1.5; 2015: 2.6; 2016: 3.7; 2017: 2.9 - National Fund (NFRK) assets: decreased from $63.5 billion to $60.0 billion (2016), representing 45 percent of GDP. - 2017 budget: underlying fiscal deficit projected at 2.3 percent of GDP; headline deficit projected at 6.3 percent of GDP because of banking sector support KZT 2.1 trillion-$6.4 billion or 4 percent of GDP financed by NFRK transfers and domestic debt. - External sector: - Current account deficit: widened from 3 percent to 6 percent of GDP in 2016. - Foreign reserves: around $30 billion or 9 months of imports of goods and services. - Gross external debt: over 120 percent of GDP, with intercompany lending over 50 percent of total debt. - FDI: increased from $3 billion in 2015 to $14 billion in 2016 (mostly oil and gas). ### Monetary and financial developments - Exchange rate and inflation: - NBK floated the tenge; base rate set at 17 percent in February 2016, later reduced to 11 percent as inflation fell. - Inflation peaked at nearly 18 percent in July 2016, then fell to 7.8 percent in February (within NBK 6-8 percent target). - NBK interventions: purchased FX in February–May 2016; sold FX in July–August 2016; then stayed out of the market. - Liquidity and dedollarization: - Deposit dollarization: 55 percent (elevated, though fell in 2016). - Loan dollarization: around 35 percent (stabilized). - Tenge liquidity surplus since mid-2016 due to dedollarization, public and quasi-public expenditures, weak activity, and limited lending opportunities; NBK absorbing via short-term notes. - Banking sector vulnerabilities: - Bank lending contracted by 3 percent in real terms in 2016. - Restructured loans surged from 10 percent to 25 percent of total loans. - Official NPL and capital ratios have not deteriorated, but reporting gaps and evergreening mask true asset quality. - Broader definition including restructured loans and off balance-sheet SPVs suggests underperforming loans of over 40 percent of total loans. - Authorities provided support via deposit placements and subsidized lending, including via the national pension fund (UAPF). ### Box 1 — The New NFRK Concept (key elements) - Purpose of NFRK: manage oil revenues, minimize impact of volatile oil prices on public finances, support targeted capital spending, and save for future generations. - Current (2010) concept: annual guaranteed transfer of $8 billion± $1.2 billion depending on cycle and needs; NFRK minimum balance 20 percent of GDP; may acquire domestic securities. - New concept (agreed 2016) changes: - Guaranteed transfer to be in tenge and decline to KZT 2 trillion ($6 billion) by 2020 to reduce oil revenue dependence and hedge against ER changes. - Minimum balance elevated to 30 percent of GDP. - Budget targets: non-oil deficit of 7 percent of GDP by 2020 and 6 percent by 2025. - Acquisition of domestic securities by the NFRK is no longer permitted, although targeted transfers may take place. ### Box 2 — Exposure of the Public Sector to Local Banks (selected figures) - Public funds in local banks: estimated at 22 percent of sectoral liabilities in 2016 ($15.7 billion or 11 percent of GDP). - Exposure increased by 15.5 percent in 2016, reflecting new subsidized lending programs for SMEs and agriculture and SOE deposits. - Breakdown (USD billion, 2016 and growth in percent): - Bank loans and deposits of state agencies and SOEs: 9.8 - Problem Loan Fund: 1.2 (growth 0.0) - Samruk Kazyna entities: 6.6 (growth 38.2) - Baiterek entities: 2.0 (growth 19.1) - Deposits at banks and bank bonds purchased by the UAPF: 5.9 (growth -3.4) - Total: 15.7 (growth 15.5) - Source: Annual Financial Reports. ### Bank restructuring and systemic concerns - Delays in system-wide Asset Quality Review (AQR) and resistance contributed to uncertainty; NBK aims to complete AQR by end-2017. - NBK actions: intervened at two small banks in late 2016, closed one. - KKB (largest bank) situation: - KKB acquired BTA from the state in 2014; operates under uncertainty. - December 2016: KKB received KZT 400 billion ($1.2 billion) loan from NBK, partially repaid and extended. - Potential purchase by Halyk (second largest bank) is under consideration; state expected to provide substantial financial support based on due diligence to clean KKB’s balance sheet. - If Halyk-KKB transaction proceeds, combined entity would control 40 percent of the market. - Other consolidation: Tsesnabank (third largest) acquiring BCC (sixth largest). - Resolution plans: majority of bad assets from KKB-BTA would go to the Problem Loan Fund (PLF), though current KKB-BTA owners may retain a substantial share. ### Outlook and risks - Growth prospects: - Staff estimates potential growth at 4.0 percent (down from 4.75 percent previously). - 2017 and medium-term pickup expected from increased oil production (Kashagan field), lagged effects of Nurly Zhol, structural reforms, and restarting bank lending. - Inflation: projected to remain within NBK target band of 6-8 percent. - Fiscal adjustment: a full adjustment consistent with new NFRK rules requires authorities to specify medium-term revenue and expenditure plans. - Current account: expected to improve with higher exports, but return to surplus will be gradual. - Major risks (highlighted): - High vulnerability to swings in commodity prices; sustained decline in oil prices is a high-impact downside risk. - Significant slowdown in China (impact on exports and FDI). - Further tenge appreciation could reverse non-oil competitiveness gains. - Failure to resolve banking issues decisively is a key risk to growth and public finances. - High total external debt level is a risk, partly mitigated by large share of parent company (intercompany) debt. - Upside risks: enhanced regional cooperation (e.g., “Silk Road” initiatives), deeper relations with Uzbekistan, stronger recovery in Russia. ### Authorities’ views - Broad agreement with staff assessment on growth range and risks, notably oil prices and bank credit. - Authorities’ projected growth drivers: agriculture, mining, construction (construction to benefit from new housing program “Nurly Zher”). - Authorities reiterated commitment to reforms under the 100 Concrete Steps initiative to boost and diversify growth. *IMF staff summary of “1. The New Concept of the National Fund of the Republic of Kazakhstan (NFRK)”* ### 16. Discussions focused on the continued response to lower oil prices, including further ### 16. Discussions focused on the continued response to lower oil prices, including further ### Fiscal Policy - Near-term stance: - Fiscal policy remains broadly supportive of activity; the supportive fiscal stance in 2016 was assessed as appropriate, with a recommendation to avoid extrabudgetary spending. - Substantial consolidation is not desirable in 2017-18 given the fragility of the recovery. - The overall deficit is expected to be lower in 2017—excluding support to the banking sector—driven by oil revenues. - Nurly Zhol (and 100 Concrete Steps) will continue in 2017; a new tax code is being prepared. - One new initiative: “Nurly Zher,” which redirects a portion of planned Nurly Zhol spending to construction of affordable housing. - The envisioned sizable banking support would be beneficial for growth if credit is unlocked and bad assets are sold to new investors. - No extrabudgetary spending is planned. - Buffers and medium-term consolidation: - Despite increased NFRK transfers and issuance of public debt to support the financial sector, the overall fiscal position remains strong. - NFRK assets amount to 45 percent of GDP. - Public debt is expected to remain below 25 percent of GDP. - Staff warned that renewed oil price shocks, slower growth, persistently higher fiscal deficits, or materialization of contingent liabilities could erode buffers. - Staff recommended adjustment in line with an oil price-based approach and welcomed new NFRK rules. - Staff estimated sustainable non-oil deficit levels at 5-7 percent of non-oil GDP. - Medium-term consolidation design: - Consolidation should be focused on non-oil revenue mobilization to protect and increase social and capital spending; more progressive tax rates should be considered. - A new tax code under preparation aims to rationalize exemptions and preferential treatments, broaden tax bases, and support consolidation; it envisages greater reliance on indirect taxes, including increases in excise taxes and expansion of the VAT by reducing the registration threshold; natural resource taxation will be reexamined. Staff suggested IMF TA for the code. - Fiscal reporting and coverage should be enhanced: headline fiscal accounts currently exclude extrabudgetary funds or initiatives, oil-related revenues, and fiscal operations of the UAPF or SOEs; these should be fully integrated and IMF Government Financial Statistics (GFS) standards adopted. - Improved coordination, analytics, and communications between the ministries of Economy and Finance would enhance policy clarity. - Authorities’ views: - Authorities acknowledged the need for medium-term consolidation and supported increasing non-oil revenues over the medium term. - They expressed interest in IMF TA in tax policy and in adopting GFS reporting standards. ### Monetary and Exchange Rate Policy - Progress and challenges: - Transition to inflation targeting has advanced; NBK has kept short-term money market rates in the interest-rate corridor and enhanced analytical capacity and communications. - Excess liquidity: - Tenge liquidity surged in 2016; NBK responded with repos and short-term notes. - Sterilization reached KZT 3 trillion ($9 billion or 7 percent of GDP) in March 2017. - Market rates have stayed close to the lower bound of the corridor, suggesting surplus liquidity may be due to structural factors. - Real sector lending has stalled; banks face difficulties matching asset and liability maturities. - Staff suggested unwinding FX swaps and tightening reserve requirements, along with notes issuance, to sterilize excess liquidity. - Yield curve: - NBK notes have been used to build the tenge yield curve, with maturities up to 1 year issued. - Staff welcomed cooperation with MoF to extend the yield curve and develop the market. - Long-term FX swaps: - More than half of the long-term FX swaps arranged two years ago (originally $8 billion) have been unwound; most remaining swaps are set to expire later in 2017. - Staff noted these should not be renewed as they are costly for the NBK. - Exchange rate policy: - Adoption of a floating ER is an important landmark and helped adjustment to the negative terms of trade shock. - Staff underscored benefits of continuing floating ER; interventions should be used primarily to avoid disorderly market conditions. - Analytical capacity and communication: - Models developed with IMF TA are being improved; additional short-term forecasting tools introduced. - Communication strengthened via press releases, interviews, meetings with market experts, the inflation report, forward-looking policy guidelines, and more data. - Transparency increased via monthly data on FX interventions and daily data on open positions of NBK operations. - Policy orientation: - Staff assessed monetary policy as appropriate and recommended continuing focus on inflation, with consideration to growth and employment. - Disinflation was ongoing with inflation expectations increasingly anchored, permitting continuation of the easing cycle within NBK’s existing mandate of price stability. - Staff advised against changing the NBK’s mandate to explicitly include growth, citing operational complexity and potential confusing signals. - Authorities’ views: - Authorities concurred with staff, reiterated commitment to inflation targeting and ER flexibility, and agreed on measures to manage and unwind excess liquidity (central bank notes, expiry of FX swaps, deepening T-bill market, changes in required reserves). - NBK stressed growing cooperation with MoF, especially on bond market development. ### Financial Sector Policies - Overview and need for prompt action: - Weak balance sheets will continue to drag on the banking sector’s ability to support the economy in the near term; prompt action based on clear principles is needed. - The sector suffers from poor lending and reporting standards, opacity of ownership, reliance on state support, and high NPLs that worsen profitability and credit extension. - Banking sector contingent liabilities are an important risk to public finances. - KKB-Halyk transaction and principles: - Staff welcomed possible actions to address issues at KKB but regretted measures were not taken earlier. - KKB-BTA combined NPLs account for over 35 percent of sectoral problem loans. - Staff recommended the KKB-Halyk transaction proceed only after robust due diligence and full identification of KKB’s asset issues so the combined institution will not become another bad bank. - Existing KKB shareholders should not retain assets; NBK should not provide new funds but should be repaid for past liquidity support. - A clear viability assessment of the combined bank is needed. - Proper supervision of the new systemically-important institution will require additional resources and more intervention powers for the NBK, aligned with international best practices. - Staff noted concern that state involvement should not set precedent for support to other banks and cautioned on competition implications. - Sector-wide measures: - An independent, forward-looking AQR is crucial to evaluate financial conditions and capital adequacy. - Loan-loss recognition and shareholder capital injections should be key elements; banks unable to raise new capital should exit. - Several legislative changes are needed for NBK to have sufficient authority and tools to intervene quickly and decisively. - Use of public funds: - SOE and UAPF deposits, subsidized loans, and other claims of public agencies account for a large share of bank liabilities. - Rules guiding placement of public funds do not account for risks or are overridden; staff urged enhanced risk management. - With growth picking up, subsidized lending should be phased out promptly. - On resolution, public support should be provided only for viable, systemic institutions and when stability is at risk; shareholders should be fully diluted before public funds are used; capital support should come from the budget and not the NBK or UAPF. - Problem loans and PLF: - The PLF has been used as a pass-through for public deposits rather than to resolve bad assets. - Successful resolution of KKB-BTA NPLs will require providing the PLF with more resources, staff, authority, and flexibility. - The PLF should have a mandate to maximize value recovery and operate in line with international best practices regarding independence, transparency, and accountability. - As regulator, the NBK should no longer manage the PLF. - Stronger NBK supervision and regulation and changes in tax law would support NPL resolution. - Example: KZT 250 billion ($1.4 billion at then-prevailing June 2015 ER) aimed at capitalizing the PLF were instead deposited at KKB for 10 years at a below-market interest rate. - Regulatory and reporting improvements: - Reestablishing consolidated reporting (covering SPVs) is crucial to present a clear picture of NPLs and capital adequacy. - NBK intervention and regulatory powers and the Lender of Last Resort (LoLR) and resolution frameworks need urgent strengthening, as recommended by the 2014 FSAP and subsequent IMF TA. - Macroprudential measures implemented in 2014 helped reduce concentration and slow FX lending; staff encouraged considering further tools such as higher risk weights and caps on exposures to corporates sensitive to oil price and ER movements. - Staff recommended reversing loosening of prudential measures from October 2015 and tightening provisioning rules further. - Quality of corporate and household balance sheet data should be enhanced. - Increases in capital requirements, originally planned for 2016, were introduced in January 2017; staff encouraged further upward adjustments towards Basel III standards. - Improving regulation and supervision is a prerequisite for a sound and more inclusive financial system that would foster growth. - Authorities’ views: - Authorities agreed that prompt actions and strengthening of regulatory and supervisory frameworks are needed. - They view KKB as systemically-important and support strong state actions to safeguard financial stability; they believe acquisition of KKB by Halyk would bring strong management and capital. - Authorities plan to capitalize the PLF and give it more powers; legal changes to facilitate write-offs of NPLs were approved by the President in February. - Draft legal amendments were being prepared to strengthen NBK’s resolution powers; work underway on LoLR framework, reintroduction of consolidated reporting, and further transition to risk-based supervision. ### Structural Reforms - Scope and objectives: - The structural reform agenda aims to support more effective governance, diversification, and broad-based and inclusive growth. - Reforms cover public administration, rule of law and accountability, the business environment, and nation building. - Energy sector: efforts to foster use of alternative energy and a goal of producing half of electricity from renewables by 2050. - Transport: development of road and rail corridors under Nurly Zhol complements international integration via the One Belt-One Road initiative, boosting logistics and processing including agro-processing. - Financial markets and innovation: development of the Astana International Financial Center, “innovation clusters” in Astana and Almaty, and support for R&D to build human capital. - Implementation challenges and priorities: - Staff viewed the agenda as well intentioned but very wide-ranging and ambitious; stressed importance of implementation. - Reforms will tax capacity and require consensus-building among groups benefiting from the status quo. - Lack of clarity on prioritization, benchmarks, and timetables should be addressed; progress should be systemically reported domestically and internationally. - Some flagship plans are being unveiled before existing initiatives are concluded; some “100 Concrete Steps” have been drawn into a new “Third Modernization” strategy and constitutional reforms. - Privatization approach should be clarified: IPOs should be launched where likelihood of success is greatest; retention of a government majority or “golden” share may dampen investor interest. - Delays in land reforms following protests in 2016 may postpone or limit prospects to harness agricultural potential, especially exports to China. - Clear and decisive implementation, continued dialogue with IFIs and regional counterparts, and regular communications will be key to instilling accountability and creating an environment conducive to growth. - Authorities’ views: - Authorities stressed that reform implementation is proceeding, with responsibilities assigned to ministries, offices, and agencies. - Reforms receive high priority for budget appropriations; working groups meet regularly and report to the President, though capacity within ministries is a challenge. *IMF staff appraisal chapter content as provided in the source.* ### 30. While Kazakhstan has faced significant challenges since 2014, the authorities’ response ### 30. While Kazakhstan has faced significant challenges since 2014, the authorities’ response ### Overview - While Kazakhstan has faced significant challenges since 2014, the authorities’ response has helped mitigate the impact of shocks. - The authorities rightly recognize that favorable factors that boosted growth over the decade-and-a-half prior to 2014 have changed: commodity prices are likely to be lower for an extended period, along with growth in key trading partners—particularly Russia and China. - Their response has included: targeted fiscal stimulus that provided funding to infrastructure, SMEs, and housing; ER flexibility in the context of transition to inflation targeting; and structural reforms focused on improvements to public administration and the business climate, including privatization. - Growth decelerated in 2015-16, but is expected to pick up in 2017 and further over the medium term, supported by higher oil production and the authorities’ ambitious reform agenda. - The external position has deteriorated and is moderately weaker than implied by fundamentals; with the recovery of oil prices, the current account is expected to improve. - Key risks are commodity prices and the financial sector. ### Fiscal policy: recent stance and medium-term priorities - Fiscal policy has appropriately been supportive of activity, but with recovery, the focus should shift to ensuring long-term sustainability. - Nurly Zhol has helped support demand, but as growth picks up and projects under this initiative are completed, the case for continuing support is less compelling, despite substantial fiscal space. - There is a need to maintain a sizeable buffer in view of high revenue volatility and uncertainty, and inter-generational/savings objectives. - The 2017 budget envisages higher revenue and broadly unchanged expenditures, excluding fiscal support for the financial sector, which can be justified as long as the necessary measures are in place to ensure a lasting solution of banking issues. - Over the medium term, fiscal adjustment should be gradual, so that headwinds on growth are minimized. - The new NFRK framework, which targets a lower non-oil deficit and lower NFRK transfers over the medium term, is a step in the right direction. - Consideration should be given to a price-based rule to anchor the medium-term deficit. - It will be important to work out the specifics of the fiscal adjustment and follow up with decisive action. - To protect capital and social outlays important for inclusive growth, focus should be on increasing non-oil revenues. The new tax code presents a key opportunity to do so. - Further strengthening of the fiscal framework requires improved coverage and reporting: - The authorities should fully integrate the NFRK and other operations in the budget and the fiscal accounts. - They should adopt the IMF’s GFS reporting standards to enable a comprehensive assessment of fiscal operations. - Direct NFRK and UAPF involvement in fiscal initiatives should be limited. - Improved analytics and communications are also important. ### Monetary policy - Monetary policy should continue to focus on price stability within the inflation-targeting framework. - Adopting an explicit dual mandate to target both inflation and growth is not recommended. - The NBK should continue to build credibility in its new policy regime, including by maintaining ER flexibility which has played an important role in adjusting to the oil price shock. - Achieving low, stable inflation will support further reductions of the policy rate and the savings and investment needed for diversification and growth. - The NBK efforts to further enhance analytical capacity and strengthening communication of policy decisions are strongly supported. ### Financial sector: priorities for resolution and stability - Financial sector weaknesses call for decisive actions. - Coordinated efforts to resolve the challenges of high NPLs and of KKB, Kazakhstan’s largest bank, are needed. - Previous interventions during the past decade have not been successful. This time, a resolute approach is needed. - State support to the sector should be subject to strict conditions to limit costs and reduce moral hazard, and weak, non-systemic institutions should not be bailed out. - An independent AQR remains a key component of the strategy to restore the health of the banking sector. - Bank shareholders should fully bear losses before public funds are used. - Mergers between banks should take place only after due diligence is completed and only if the resulting institutions are strong and do not pose risks to competition or financial stability. - The authorities should ensure that the acquisition of KKB by Halyk complies with these principles. - Bad assets obtained from banks should be transferred to the PLF and liquidated in a transparent, auction-type approach, in line with international best practices. - Legal and regulatory changes are needed to support PLF operations, along with capacity improvements. - The authorities have already made important steps in that direction, including by transferring PLF ownership to the government and providing more favorable tax treatment of NPL write-offs. - Although TA from the IMF and other international institutions has been provided, progress in key areas of bank resolution, regulation and supervision has been slow. - The priority given to strengthening of the bank supervision and resolution frameworks is welcome; concrete measures will be needed to avoid the recurrence of problems. - Crucially, consolidated reporting should be reinstated, and the LoLR framework should be clarified and strengthened. - This is particularly important given possible requests for support from other banks following the KKB-Halyk transaction. ### Structural reforms for diversification and inclusive growth - Structural reforms are key to diversification and broad-based and inclusive growth, along with improvements in public administration and governance. - The authorities have adopted an ambitious reform agenda, and an important challenge is to ensure decisive implementation, with objectives, actions, and progress effectively communicated to the public, markets, and investors to help ensure that desired positive effects materialize. - To promote private sector development and diversify the economy away from oil and the state, it will be important to attract investors in non-resource sectors. - This calls for resolute actions to improve the business environment, encourage competition, and strengthen governance. - An important milestone will be successful conclusion of the first round of blue-chip IPOs; these will set the tone for other actions. *REPUBLIC OF KAZAKHSTAN INTERNATIONAL MONETARY FUND* ### 35. It is proposed that the next Article IV consultation take place on the standard ### cr17108 - 35. It is proposed that the next Article IV consultation take place on the standard 12-month cycle. ### Banking sector developments - Real credit growth has been negative for over 2 years. - State subsidies resulted in strong growth in SME lending in 2016. - FX deposits increased to over 70 percent of total deposits in January 2016, but have been falling since then. - Amid poor economic prospects, banks have accumulated excess liquidity. - Problem loans have increased in 2016, while provisioning remains low. - System-wide capital adequacy ratios fell in 2015, but have been increasing since then. - Selected time-series indicators (as presented): - Real bank lending growth (Percent change, y-o-y): series covering 2008-Mar through 2016-Dec for Total bank loans, KZT loans, FX loans (chart shown). - Nominal bank lending growth in 2016 (Percent change, y-o-y): SME lending; loans to non-bank legal entities (includes SOEs and SMEs); Loans to individuals (chart shown). - FX deposits and loans: FX deposits (percent of bank deposits); FX loans (percent of bank loans) (chart shown). - Liquidity in the banking sector: Bank liquidity (cash and claims against NBK, million KZT); Cash and claims against NBK as percent of bank assets (RHS) (chart shown). - Bank problem loans (in percent of all bank loans): officially reported NPLs; BTA NPLs; restructured loans; loans in SPVs; provisions for NPLs (chart shown; note: "Assuming 90 percent of de-licensed BTA loans are non-performing"). - Bank capital ratios (in percent of risk-weighted assets): Tier 1 capital; Total capital; Tier 1 minimum (non-SIBs); Total capital minimum (non-SIBs) (chart shown). ### Key financial soundness and monetary indicators - Financial Soundness Indicators (Table 3, 2013–16 highlights): - Total Regulatory Capital (in billions of tenge): 2013: 2108; 2014: 2587; 2015: 3058; 2016: 3226. - Total Assets (in billions of tenge): 2013: 13,303; 2014: 15,598; 2015: 19,149; 2016: 24,562. - Capital adequacy (Regulatory Capital to Risk-Weighted Assets): 2013: 18; 2014: 18; 2015: 16. - Non-performing Loans to Total Gross Loans (percent): 2013: 19; 2014: 12; 2015: 87 (Table notes). - Provisions as percent of NPL: 2013: 66; 2014: 52; 2015: 66; 2016: 72. - Monetary accounts (Table 4, selected series, end-of-period, in billions of tenge and percent changes): - Broad money: 2013: 11,598; 2014: 12,817; 2015: 17,208; 2016: 19,913; 2017: 21,776 (projections continue to 2022). - Credit to the private sector: 2013: 14,244; 2014: 15,051; 2015: 18,736; 2016: 18,812. - Reserve money (percent change, y-o-y): -2.2; 20.8; 39.2; 8.7; 8.0; 8.7; 7.1; 9.5; 7.9; 8.3 (series by year as shown). - Foreign currency liabilities (in percent of total liabilities): 2013–2016 reported as 40/54/67/50 (Table memorandum: "Foreign currency liabilities (in percent of total liabilities) 3/40546750"). - Foreign currency loans (in percent of total loans): 2013–2016 reported as 32/31/43/40. ### Macroeconomic outlook and projections (selected from Table 1 and Table 2) - Real GDP (annual percent change, projections): - 2013: 6.0 - 2014: 4.3 - 2015: 1.2 - 2016: 1.1 - 2017: 2.5 - 2018: 3.4 - 2019: 2.8 - 2020: 3.2 - 2021: 3.9 - 2022: 4.6 - Output gap (in percent of potential GDP): 2013: 3.5; 2014: 4.0; 2015: 1.6; 2016: -1.1; 2017: -0.7; 2018: -0.6; 2019: -0.2; 2020: 0.0; 2021: 0.0; 2022: 0.3. - Consumer price index (eop): 2013: 4.8; 2014: 7.4; 2015: 13.6; 2016: 8.5; 2017: 7.3; 2018: 6.8; 2019: 6.0; 2020: 5.1; 2021: 4.0; 2022: 4.0. - Official exchange rate (Tenge per U.S. dollar; eop): series includes 2013: 153.6; 2014: 182.4; 2015: 339.5; 2016: 333.3 (table shows further entries as "..." for later years). - Current account balance (percent of GDP, Table 2 memo): 2013: 0.5; 2014: 2.8; 2015: -2.8; 2016: -6.4; 2017: -4.3; 2018: -3.1; 2019: -2.2; 2020: -0.7; 2021: 0.1; 2022: 0.1. - Balance of payments (Table 2, selected levels in billions of U.S. dollars): - Current account: 2013: 1.2; 2014: 6.1; 2015: -5.1; 2016: -8.5; 2017: -6.7; 2018: -5.4; 2019: -4.2; 2020: -1.4; 2021: 0.2; 2022: 0.2. - Trade balance: 2013: 34.8; 2014: 36.2; 2015: 12.7; 2016: 9.4; 2017: 15.9; 2018: 18.3; 2019: 19.3; 2020: 22.7; 2021: 25.6; 2022: 33.5. - NBK gross international reserves (in billions of U.S. dollars): 2013: 24.7; 2014: 29.2; 2015: 27.9; 2016: 29.5; projections to 2022: 32.5; 35.5; 38.5; 41.5; 44.5; 47.5. ### Fiscal developments and outlook (selected from Figure 6 and Table 5) - General government fiscal accounts (Table 1 summary; percent of GDP): - Revenues and grants: 2013: 24.8; 2014: 23.7; 2015: 16.6; 2016: 18.0; 2017: 19.6; 2018: 19.8; 2019: 20.0; 2020: 20.7; 2021: 20.6; 2022: 21.4. - Oil revenues (percent of total revenue): Chart shows fiscal revenue from oil, and Table 1 reports Oil revenues series (percent of GDP) 2013: 11.5; 2014: 11.3; 2015: 6.6; 2016: 4.2; 2017: 6.4; 2018: 6.6; 2019: 6.5; 2020: 6.9; 2021: 6.8; 2022: 7.5. - Overall fiscal balance (percent of GDP): 2013: 4.9; 2014: 2.4; 2015: -6.3; 2016: -4.1; 2017: -6.3; 2018: -2.1; 2019: -1.8; 2020: -0.8; 2021: -1.0; 2022: -0.1. - Non-oil fiscal balance (percent of GDP): 2013: -6.6; 2014: -8.9; 2015: -12.9; 2016: -8.3; 2017: -12.7; 2018: -8.7; 2019: -8.3; 2020: -7.7; 2021: -7.8; 2022: -7.7. - Table 5 (General Government Fiscal Operations, 2013–22, in billions of tenge and percent of GDP): - Total revenue and grants (in billions of tenge): 2013: 8,911; 2014: 9,420; 2015: 6,791; 2016: 8,233; 2017: 10,242; 2018: 11,382; 2019: 12,456; 2020: 14,043; 2021: 14,769; 2022: 16,485. - Total expenditure and net lending (in billions of tenge): 2013: 7,151; 2014: 8,457; 2015: 9,367; 2016: 10,102; 2017: 13,528; 2018: 12,573; 2019: 13,581; 2020: 14,618; 2021: 15,484; 2022: 16,574. - Overall balance (in billions of tenge): 2013: 1,761; 2014: 963; 2015: -2,576; 2016: -1,869; 2017: -3,286; 2018: -1,190; 2019: -1,126; 2020: -575; 2021: -716; 2022: -90. - NFRK (National Fund) flows (Table 5): NFRK 3/ (in billions of tenge): 2013: -1,957; 2014: -439; 2015: 2,159; 2016: 1,189; 2017: 1,518; 2018: -101; 2019: -386; 2020: -778; 2021: -882; 2022: -1,155. ### Oil sector, National Fund (NFRK) and related indicators - Oil sector and NFRK indicators (Table 6 highlights): - Oil GDP - Billion Tenge: 2013: 9,861.4; 2014: 11,205.0; 2015: 7,231.9; 2016: 7,987.0; 2017: 10,564.2; 2018: 11,192.0; 2019: 11,254.5; 2020: 11,474.5; 2021: 11,957.8; 2022: 15,490.9. - Oil Production (millions metric tons): 2013: 81.7; 2014: 80.8; 2015: 79.0; 2016: 78.0; 2017: 81.0; 2018: 86.0; 2019: 88.0; 2020: 90.0; 2021: 93.0; 2022: 99.0. - Oil Exports (millions of USD): 2013: 57,249.5; 2014: 53,626.9; 2015: 26,773.0; 2016: 19,378.0; 2017: 26,680.2; 2018: 28,593.7; 2019: 28,514.8; 2020: 29,198.6; 2021: 30,615.5; 2022: 40,100.7. - Oil Revenues (Billion Tenge): 2013: 4,150.3; 2014: 4,485.9; 2015: 2,683.1; 2016: 1,933.6; 2017: 3,351.5; 2018: 3,802.2; 2019: 4,077.2; 2020: 4,662.6; 2021: 4,853.4; 2022: 5,812.2. - NFRK Assets (end of period, in billions of U.S. dollars): 2013: 70.8; 2014: 73.2; 2015: 63.5; 2016: 60.0; 2017: 58.5; 2018: 58.8; 2019: 59.9; 2020: 62.3; 2021: 65.0; 2022: 68.4. - NFRK inflows and outflows (in billions of USD): Inflows Total (2013–2022) include 25.2; 30.0; 32.9; 6.3; 7.8; 8.1; 8.1; 8.4; 8.7; 9.5 (series shown). Outflows Total include 9.3; 11.0; 11.1; 10.5; 9.3; 7.8; 6.9; 6.0; 6.0; 6.0. - Net addition to NFRK (in billions of USD): 2013: 15.9; 2014: 19.0; 2015: 21.8; 2016: -4.2; 2017: -1.6; 2018: 0.3; 2019: 1.2; 2020: 2.4; 2021: 2.7; 2022: 3.5. - World oil price (U.S. dollars per barrel, Table series): 2013: 104.19; 2014: 96.25; 2015: 50.84; 2016: 42.85; 2017: 52.55; 2018: 51.15; 2019: 41.15; 2020: 40.05; 2021: 44.45; 2022: 55.2. *Sources: Kazakhstani authorities and IMF staff estimates and projections.* ### Annex I. Fiscal Initiatives 2014–17 ### Annex I. Fiscal Initiatives 2014–17 ### Overview of multi-year fiscal initiatives (2014–17) - Authorities launched several multi-year fiscal initiatives to support the economy, aimed at stimulating key sectors, promoting infrastructure modernization, and SME lending. - Major initiatives and features: - A “1 Trillion Tenge” program (introduced February 2014) after a 19-percent depreciation of the tenge to stimulate manufacturing and SME lending over 2014-15. - KZT 250 billion used to capitalize the Problem Loan Fund. - KZT 250 billion used to increase the Special Government Reserve. - Funded via transfers from the NFRK (KZT 684 billion) and issuance of bonds (KZT 311.1 billion). - Nurly Zhol (NZ) (announced late 2014), allocation of $9 billion over 2015-17 to support construction (42 percent of NZ has involved housing projects), infrastructure in transport, industry and utilities, and to promote entrepreneurial activity. - NZ funded via transfers from the NFRK (KZT 1,297.1 billion) and issuance of debt (KZT 543.7 billion). - Additional anti-crisis measures (2016) to counteract further decline of oil prices: support agriculture, promote export and SME lending, boost infrastructure; some projects related to EXPO-17 and the Winter Universiade games. - A big portion (17 percent) implemented off-budget through Baiterek Holding and Samruk Kazyna. - Funded via targeted NFRK transfers (KZT 164.1 billion), the special reserve (KZT 201.3 billion) and the UAPF (KZT 576.2 billion). - Nurly Zher (beginning of 2017) to stimulate construction and provide affordable housing, expected to last until 2031 and funded through bond issuance (KZT 314.3 billion). - Support for Basic Sectors (early 2017): budgetary capital expenditures in agriculture, housing, and infrastructure identified as a support package; about 10 percent funds EXPO-17 infrastructure. - Funded via targeted NFRK transfers (KZT 716.6 billion). - Banking Sector Support (2017): operation to clean bank balance sheets. - Financed by NFRK transfers (KZT 1,093.1 billion) and issuance of debt (KZT 1 trillion). ### Financing (as reported) - Financing summary (Table 2 lines as presented in source): - 2014201520162017 - Transfe rs f rom the NFRK325755.2636.92307.7 - Bond i ssuance273315.6266.21314.3 - Pension Fund--576.2- - Special Government Reserve--201.3- - TOTAL5981070.81680.63622 ### Aggregate fiscal spending and accounting issues - Increase in overall fiscal spending in 2014-17 was less than the amount covered by fiscal-support initiatives. - Key aggregate figures (Table 3 lines as presented in source): - 20132014201520162017 - Total Ex pe ndi ture s and Ne t Le ndi ng ( e x cl . fi scal i ni ti ati ve s)7150.67858.68296.58998.09906.2 - Fi scal i nti ati ve s ( on budge t)-5981070.81104.43622 - Total Ex pe ndi ture s and Ne t Le ndi ng7150.68456.69367.310102.413528.2 - Total Ex pe ndi ture s and Ne t Le ndi ng ( e x cl . fi scal i ni ti ati ve s)19.919.820.319.719.0 - Fiscal intiatives (on budget)-1.52.62.46.9 - Total Ex pe ndi ture s and Ne t Le ndi ng19.921.322.922.125.9 - (in billion tenge) - (in percent of GDP) - Specific fiscal-trend findings: - Total spending increased from 19.9 percent of GDP in 2013 to an expected 25.9 percent of GDP in 2017. - Excluding banking support, total spending in 2017 is expected to amount to 21.9 percent of GDP. - Budgetary capital spending increased to 4.4 percent of GDP in 2014, decreased to 3.6 percent of GDP in 2016 and to an estimated 3.2 percent in 2017. - A full accounting is difficult because part of the broader stimulus effort was implemented off-budget, notably projects implemented through SOEs and financed by the pension fund. ### Implementation and fiscal management observations - Financing sources across initiatives included transfers from the NFRK, bond issuances, the national pension fund (UAPF), and a special government reserve. - Off-budget implementation was material for some measures (notably via Baiterek Holding and Samruk Kazyna and projects financed by the pension fund), complicating a full on-budget accounting of the stimulus. *Source: Ministry of Finance and Ministry of National Economy.* ### 2. Development of Kazakhstan’s financial sector has been affected by vulnerabilities in ### 2. Development of Kazakhstan’s financial sector has been affected by vulnerabilities in ### Key constraints and structural features - High share of non-performing loans reduces availability of funding and contributes to high interest rate spreads. - Currency and maturity mismatches between bank assets and liabilities and increased deposit volatility make longer-term lending challenging. - Local banks lack the resource base and experience to provide financial services to large international companies. - Development of the non-bank financial sector is constrained by: - a narrow investor base; - limitations on the participation of institutional investors in government securities offerings; - the absence of a reliable yield curve; - shortage of good quality domestic financial instruments in the securities market. - Significant state presence in the economy limits investment opportunities; a significant share of the economy is still controlled by the state. - Insurance market driven largely by mandatory insurance. - Consolidation of private pension funds into a Unified Accumulated Pension Fund (UAPF) managed by the NBK has affected private asset managers. ### Authorities’ strategy and measures - 2014 “Concept for the Financial Sector Development of the Republic of Kazakhstan until 2030”: - long-term strategy based on consultations with the private sector and building on the recommendations of the 2014 FSAP. - focus through 2020 on increasing financial sector soundness by addressing existing problems and strengthening competitive position. - priorities include consolidation and increased capitalization of the banking system; strengthening the resource base and improving bank liquidity management; further progress towards a risk-based approach in regulation and supervision; increasing the supply of financial instruments through IPOs; increasing financial literacy. - State support to clean up the balance sheet of KKB, and the NBK’s efforts to conduct a system-wide AQR would reduce uncertainty and help unlock credit. - NBK commitment signaled to improve regulation of insurance and securities markets and to protect consumer rights; the central bank has taken a number of steps in these directions in recent years. ### Astana International Financial Center (AIFC) - AIFC aims to attract local and international investors by offering: - favorable tax treatment; - simplified labor and visa regimes; - large investments in infrastructure; - a separate legal framework based on UK common law, independent of the domestic judicial system. - AIFC will focus primarily on capital markets, asset management and private banking. - Privatization of public entities may be carried out through AIFC. - Importance of ensuring integrity and sustainability of financial sector, including mobilization of the AML/CFT framework, as Kazakhstan develops AIFC. ### Benefits of financial development (empirical evidence cited) - Financial development increases long-run growth (Levine, Loayza and Beck, 2000) and reduces income inequality (Burgees and Pande, 2005; Clarke, Xu, and Zou, 2006). - Cojocaru et al. (2011) for CEE and CIS: efficiency and competitiveness of the financial sector are more important than the amount of credit. - At the individual level, access to financial services increases savings and productive investments and positively affects consumption and employment (Demirguc-Kunt et al., 2015). - Efficient financial markets can increase the speed of economic diversification and reduce volatility of GDP growth (Manganelli and Popov, 2010). - Note: at high levels of financial development, marginal benefits to growth of increasing financial inclusion begin to decline and higher financial inclusion can have a negative impact on financial stability (IMF Staff Discussion Note 15/17). ### Selected Financial Sector Development Indicators (Source: Global Financial Development database; data for 2014 or latest year) - Account at a formal financial institution (% age 15+): 53.9 - Upper Middle Income Countries comparator: 53.9 - ATMs per 100,000 adults: 72.0 - Upper Middle Income Countries comparator: 46.3 - Credit card (% age 15+): 11.5 - Upper Middle Income Countries comparator: 10.9 - Debit card (% age 15+): 32.0 - Upper Middle Income Countries comparator: 34.1 - Insurance company assets to GDP (%): 1.5 - Upper Middle Income Countries comparator: 5.1 - Life insurance premium volume to GDP (%): 0.1 - Upper Middle Income Countries comparator: 0.3 - Nonlife insurance premium volume to GDP (%): 0.5 - Upper Middle Income Countries comparator: 1.2 - Stock market capitalization to GDP (%): 10.5 - Upper Middle Income Countries comparator: 44.8 - Stock market total value traded to GDP (%): 0.3 - Upper Middle Income Countries comparator: 4.8 - Corporate bond issuance volume to GDP (%): 1.4 - Upper Middle Income Countries comparator: 1.6 - Investments financed by equity or stock sales (%): 2.9 - Upper Middle Income Countries comparator: 3.5 - Investments financed by banks (%): 8.8 - Upper Middle Income Countries comparator: 14.6 - Firms identifying access to finance as a major constraint (%): 8.8 - Upper Middle Income Countries comparator: 19.3 - Firms using banks to finance investments (%): 16.3 - Upper Middle Income Countries comparator: 27.1 - Firms using banks to finance working capital (%): 13.0 - Upper Middle Income Countries comparator: 40.2 - Firms with a bank loan or line of credit (%): 19.2 - Upper Middle Income Countries comparator: 42.0 ### Banking sector—key issues and systemic vulnerabilities (Annex IV) - Need for system-wide balance-sheet clean-up, better bank governance, and more vigilant supervision by a strong, independent central bank. - ER depreciation and economic slowdown exacerbated long-standing issues: weak balance sheets and high dollarization. - Insufficient lending and reporting standards; gaps in supervision and regulation; regulatory forbearance; expectations of state support. - Officially-reported NPL ratios overstate true condition of bank balance sheets: - Reported system-wide NPL level decreased from 23 to 10 percent following delicensing of BTA Bank in June 2015; BTA’s NPLs were not written off, but remained in the system. - Loan restructuring is free of provisions and additional capital charges; restructured loans increased from 10 to 25 percent of total loans in 2016 (estimates). - Broader definition (including BTA portfolio, loans in off-balance SPVs, and restructured loans) suggests overall problem loan level likely above 40 percent of total loans. - Capital ratios and provisioning: - System-wide capital adequacy ratio decreased in 2015, improved in 2016 amid strengthening of the tenge and as banks prepared to comply with higher regulatory requirements from January 2017. - As of end-2016, two banks—including Kazkommertzbank (KKB) —did not comply with the new requirement, while five banks breached other prudential regulations. - Level of provisioning, although higher in 2016, is low at 72 percent of official NPLs. - To ensure sufficient capital following provisioning and write-off of all problem loans (including SPV loans, BTA loans, and restructured loans), very sizeable capital injections appear to be needed. - High volume of FX loans and dollarization of bank liabilities make asset performance and compliance with prudential regulations highly sensitive to ER movements. - Reliance on short-term funding and market obstacles hinder lending: - In 2014, the NBK provided KZT 1.5 trillion via FX swaps to ease scarcity of tenge liquidity. - These swaps are being wound down; progressive de-dollarization of deposits noted in 2016-17 with tenge appreciation. - Banks accumulated excess liquidity managed mainly via short-term NBK notes. - High competition for deposits has led to most term deposits, including from SOEs, having low early withdrawal penalties and being effectively demand deposits. - Limited supply of medium- and long-term government bonds has led to shortage of collateral for interbank transactions and an incomplete yield curve. - Regulatory constraints hold up development of money and capital markets; domestic financial markets have limited depth and scope. - SOE deposits, state support, and moral hazard: - SOE deposits, subsidized loans, and bonds owned by public agencies account for a large share of bank liabilities. - Rules and decisions on placement of public funds in local banks do not fully take account of riskiness of banks, limiting incentives for adequate risk management. - On repeated occasions over the past 10 years, state support provided to distressed banks with lack of full recovery of funds. - Minimum estimate of state deposits share is 20 percent (based on financial statements of Samruk Kazyna, Baiterek and UAPF only). Moody’s estimates that state deposits account for 40 percent of corporate bank deposits. - Example linkage: After acquisition of BTA by KKB, BTA transformed into a legally-independent entity but remains linked to KKB’s balance sheet through a credit line of around KZT 2 trillion and through common shareholders. ### Capital requirements (as presented) - Regulatory requirement before January 2017 / January 2017: - Common Equity: 5% / 5.5% - Tier 1 Capital: 6% / 6.5% - Total Capital: 7.5% / 8% - Conservation buffer: - for all banks: 1% before Jan 2017; 2% January 2017 - for SIBs: 2.5% before Jan 2017; 3% January 2017 - Systemic buffer: 0% before Jan 2017; 1% January 2017 ### Public support to the banking sector (Box: 2008–14; Staff estimates) - Total amount of public funds injected in the banking sector during 2008-14: $11.6 billion, equivalent to 5.3 percent of 2014 GDP. - Financial crisis of 2008-10 ($billion): - Bank bailouts (e.g. KKB, Halyk, Alliance, BTA banks): $3.5 - Subsidized lending and loan refinancing programs: $4.7 - Deposits at banks: $0.5 - Interventions in 2012-14 ($billion): - BTA and Alliance Bank: debt restructuring, capital and deposits injections: $2.9 - Note: The state has not fully recovered funds injected in the banking sector. Of the $3.5 billion used to purchase bank shares in 2008-10, $1.7 billion was recovered. ### Gaps in supervision, regulation, and governance - Legal framework gives insufficient intervention powers to supervisors and regulators; difficult to force recapitalization by shareholders or close weak banks. - Tax rules have made loan-loss recognition costly for banks. - Elimination of consolidated reporting requirement, soft provisioning rules, insufficiently strict regulatory definitions (e.g., related-party lending), and reporting standards (e.g., collateral valuations) have enabled underreporting of real risks. - Lack of transparency, gaps in corporate governance standards, and regulatory framework not fully in line with international practices have added to challenges. ### Risk Assessment Matrix—selected global and country-specific risks and recommended policy responses (as presented) - Retreat from cross-border integration - Likelihood/Time horizon: High/ Short-Medium Term - Expected Impact if Realized: Medium - Recommended Policy Response: Allow the ER to adjust and step up implementation of structural reforms aimed at diversifying the economy. - Policy and geopolitical uncertainty: policy uncertainty and divergence - Likelihood/Time horizon: High/ Short-Medium Term - Expected Impact if Realized: Low - Recommended Policy Response: Allow ER to adjust with lower oil revenues, slow the pace of fiscal adjustment to support activity, continue close monitoring of financial sector and SOE risks. Ensure decisive implementation of structural reforms. - Financial conditions: significant further strengthening of the US dollar and/or higher rates - Likelihood/Time horizon: High/ Short Term - Expected Impact if Realized: Low - Recommended Policy Response: Maintain ER flexibility and provide guidance through NBK communications. - Weaker-than-expected global growth: Significant China slowdown and its spillovers - Likelihood/Time horizon: Low-Medium/ Medium - Expected Impact if Realized: Pressures through lower commodity prices and export volumes and export of other goods and services to China. - Recommended Policy Response: Allow ER to adjust; if pressures are sharp, use buffers to smooth short-term impacts. If sustained, slow fiscal adjustment to support activity, continue close monitoring of financial sector and SOE risks. Ensure decisive implementation of structural reforms. - Lower energy prices - Likelihood/Time horizon: Low/ Short-Medium Term - Expected Impact if Realized: High (external and ER pressures; budgetary pressures; pressures on the financial sector via ER and slower growth) - Recommended Policy Response: Allow ER to adjust; if pressures are sharp, use buffers to smooth short-term impacts. If sustained, slow pace of fiscal adjustment to support activity, continue close monitoring of financial sector and SOE risks. Ensure decisive implementation of structural reforms. - Renewed/worse geopolitical strains, especially involving Russia - Likelihood/Time horizon: Low/ Short term - Expected Impact if Realized: Medium (external and ER pressures) - Recommended Policy Response: Allow ER to adjust; if pressures are sharp, use buffers to smooth short-term impacts. If sustained, slow pace of fiscal adjustment to support activity, continue close monitoring of financial sector and SOE risks. Ensure decisive implementation of structural reforms. - Adoption of macroeconomic and structural reforms by new authorities in Uzbekistan and Turkmenistan - Likelihood/Time horizon: Medium/ Medium Term - Expected Impact if Realized: Medium (favorable dynamic for trade, services, and the region; may be enhanced competition for FDI) - Recommended Policy Response: Support reform momentum in neighboring countries (e.g., reduce barriers to trade and financial integration). *International Monetary Fund. Republic of Kazakhstan—Selected excerpts from CR17108.* ### Annex VI. Kazakhstan: Public Debt Sustainability Assessment ### Annex VI. Kazakhstan: Public Debt Sustainability Assessment ### Baseline Scenario — Key Projections (in percent of GDP unless otherwise indicated) - Projection period: As of March 23, 2017. - Nominal gross public debt: - 2015: 10.0 - 2016: 21.9 - 2017: 21.1 - 2018: 21.8 - 2019: 22.0 - 2020: 22.7 - 2021: 22.9 - 2022: 23.8 - 2022 (last listed): 23.8 - Public gross financing needs (in percent of GDP): - 2015: -1.6 - 2016: 7.1 - 2017: 4.9 - 2018: 6.4 - 2019: 2.2 - 2020: 1.9 - 2021: 0.9 - 2022: 1.1 - 2022 (last listed): 0.2 - Public debt (in percent of potential GDP): - 2015: 10.1 - 2016: 22.2 - 2017: 20.8 - 2018: 21.6 - 2019: 21.9 - 2020: 22.6 - 2021: 22.9 - 2022: 23.8 - 2022 (last listed): 23.8 - Real GDP growth: - 2015: 6.0 - 2016: 1.2 - 2017: 1.1 - 2018: 2.5 - 2019: 3.4 - 2020: 2.8 - 2021: 3.2 - 2022: 3.9 - 2022 (last listed): 4.6 - Inflation (GDP deflator): - 2015: 13.6 - 2016: 1.8 - 2017: 10.7 - 2018: 11.5 - 2019: 6.5 - 2020: 5.5 - 2021: 5.2 - 2022: 2.1 - 2022 (last listed): 2.6 - Nominal GDP growth: - 2015: 20.6 - 2016: 3.0 - 2017: 11.9 - 2018: 14.3 - 2019: 10.1 - 2020: 8.4 - 2021: 8.5 - 2022: 6.1 - 2022 (last listed): 7.3 - Effective interest rate (interest payments divided by debt stock at end of previous year): - 2015: 5.5 - 2016: 5.2 - 2017: 5.8 - 2018: 5.0 - 2019: 5.1 - 2020: 5.0 - 2021: 4.8 - 2022: 4.9 - 2022 (last listed): 5.0 - Sovereign spreads: - Bond Spread (EMBIG, bp): 236 - 5Y CDS (bp): 158 ### Contribution to Changes in Gross Public Sector Debt (2015–2022) - Change in gross public sector debt (cumulative projection): 0.7 (2015), 7.4 (2016), -0.8 (2017), 0.7 (2018), 0.2 (2019), 0.7 (2020), 0.2 (2021), 0.9 (2022), 0.0 (final listed), cumulative 2.7. - Identified debt-creating flows (sum by year): - 2015: -4.5 - 2016: 9.1 - 2017: 2.9 - 2018: 4.7 - 2019: 1.0 - 2020: 1.0 - 2021: -0.1 - 2022: 0.5 - 2022 (final listed): -0.7 - Cumulative: 6.5 - Primary deficit (percent of GDP): - 2015: -3.3 - 2016: 5.6 - 2017: 4.4 - 2018: 6.4 - 2019: 2.1 - 2020: 1.7 - 2021: 0.7 - 2022: 0.8 - 2022 (final listed): -0.2 - Cumulative: 11.6 - Primary (noninterest) revenue and grants: - 2015: 25.3 - 2016: 16.6 - 2017: 16.6 - 2018: 18.5 - 2019: 18.8 - 2020: 19.0 - 2021: 19.9 - 2022: 19.7 - 2022 (cumulative): 20.5 - 2015–2022 cumulative: 116.4 - Primary (noninterest) expenditure: - 2015: 22.0 - 2016: 22.2 - 2017: 20.9 - 2018: 25.0 - 2019: 20.8 - 2020: 20.8 - 2021: 20.6 - 2022: 20.5 - 2022 (cumulative): 20.4 - 2015–2022 cumulative: 128.1 ### Automatic Debt Dynamics and Decomposition - Automatic debt dynamics (derived formula in footnote 5): - 2015: -1.0 - 2016: 3.6 - 2017: -1.4 - 2018: -1.7 - 2019: -1.0 - 2020: -0.7 - 2021: -0.8 - 2022: -0.3 - 2022 (final listed): -0.5 - Cumulative: -5.0 - Interest rate / growth differential (component): - 2015: -1.1 - 2016: 0.3 - 2017: -1.2 - 2018: -1.7 - 2019: -1.0 - 2020: -0.7 - 2021: -0.8 - 2022: -0.3 - 2022 (final listed): -0.5 - Cumulative: -5.0 - Of which: real interest rate contribution: - 2015: -0.6 - 2016: 0.5 - 2017: -1.0 - 2018: -1.3 - 2019: -0.3 - 2020: -0.1 - 2021: -0.1 - 2022: 0.6 - 2022 (final listed): 0.5 - Cumulative: -0.7 - Of which: real GDP growth contribution: - 2015: -0.5 - 2016: -0.2 - 2017: -0.2 - 2018: -0.5 - 2019: -0.7 - 2020: -0.6 - 2021: -0.7 - 2022: -0.8 - 2022 (final listed): -1.0 - Cumulative: -4.2 - Exchange rate depreciation contribution: - 2015: 0.1 - 2016: 3.3 - 2017: -0.3 - Subsequent years: not shown (ellipsis in source). - Other identified debt-creating flows: - 2015: 0.2 - 2016: 0.0 - 2017: 0.0 - 2018–2022: 0.0 - 2022 (final listed): -0.2 - Residual, including asset changes (includes asset changes in the oil fund): - 2015: 5.2 - 2016: -1.7 - 2017: -3.7 - 2018: -4.0 - 2019: -0.8 - 2020: -0.3 - 2021: 0.3 - 2022: 0.4 - 2022 (final listed): 0.7 - Cumulative: -3.8 ### Alternative Scenarios and Underlying Assumptions - Baseline underlying assumptions (selected, in percent): - Real GDP growth (baseline): 2017: 2.5; 2018: 3.4; 2019: 2.8; 2020: 3.2; 2021: 3.9; 2022: 4.6 - Inflation: 2017: 11.5; 2018: 6.5; 2019: 5.5; 2020: 5.2; 2021: 2.1; 2022: 2.6 - Primary Balance (baseline): 2017: -6.4; 2018: -2.1; 2019: -1.7; 2020: -0.7; 2021: -0.8; 2022: 0.2 - Effective interest rate (baseline): 2017: 5.0; 2018: 5.1; 2019: 5.0; 2020: 4.8; 2021: 4.9; 2022: 5.0 - Historical scenario (selected comparisons): - Real GDP growth (historical scenario): 2017–2022: 2.5, 4.6, 4.6, 4.6, 4.6, 4.6 - Inflation (historical scenario): same as baseline series listed above. - Primary Balance (historical scenario): 2017: -6.4; 2018–2022: 1.3 each year. - Effective interest rate (historical scenario): 2017: 5.0; 2018: 6.0; 2019: 5.6; 2020: 5.3; 2021: 5.3; 2022: 5.5 - Constant Primary Balance Scenario: - Primary Balance held constant at -6.4 percent of GDP for 2017–2022. - Other variables as in baseline: Real GDP growth and inflation as baseline series; Effective interest rate as historical scenario series. ### Composition of Public Debt and Financing Needs (figures described in source) - Composition and alternative scenarios are depicted in charts in the source showing: - Gross nominal public debt (in percent of GDP) projections 2015–2022. - Public gross financing needs (in percent of GDP) projections 2015–2022. - By maturity: medium and long-term vs short-term (in percent of GDP) historical series and projections. - By currency: local currency-denominated vs foreign currency-denominated (in percent of GDP) historical series and projections. ### Debt Sustainability Drivers and Risks (from decomposition) - Main drivers of debt changes include: - Primary deficits (large negative primary balances drive debt-creating flows). - Exchange rate depreciation impact (notably 2016 exchange rate contribution of 3.3). - Residuals tied to asset changes in the oil fund (positive 2015 residual 5.2; negative residuals in subsequent years). - Automatic debt dynamics driven by the interest rate/growth differential and real GDP growth contributions. - Contingent liabilities reported: - Contingent liabilities entries are 0.00 for 2015–2022 in the source table. - Other identified flows (e.g., privatization) shown as zeros in the table. ### Market Indicators and Ratings - Sovereign spreads and market metrics: - EMBIG (bond spread) listed as 236 bp. - 5Y CDS listed as 158 bp. - Credit ratings (as listed in the source): - Moody's: Baa3 (foreign and local). - S&Ps: BB- (foreign and local). - Fitch: BBB (local and foreign listings shown as BBB/BBB/BB in table formatting). *Source: IMF staff. (Annex VI. Kazakhstan: Public Debt Sustainability Assessment, As of March 23, 2017)* ### 3. July 2011: Bankruptcy legislation. ### 3. July 2011: Bankruptcy legislation. ### Training and Local Office - Officials from Kazakhstan have participated in IMF courses and workshops in Washington, at the Joint Vienna Institute, and in the region in macroeconomic management, monetary and exchange policy and operations, central bank communications, budgetary expenditure control, financial programming, taxation, and statistics. - The IMF maintains a local office in Almaty. ### Relations with the World Bank (As of March 14, 2017) - Kazakhstan became a member of the IBRD and IDA in July 1992 and a member of the IFC in September 1993. - In 2010 Kazakhstan became an IDA donor under the IDA16 replenishment and contributed to the IDA17 replenishment in 2017. - Kazakhstan is the largest client of the IFC in Central Asia. ### IBRD in Kazakhstan (As of March 14, 2017) - Country Partnership Strategy (CPS) for FY12–17 endorsed by the Board in 2012; new Country Partnership Framework expected to be considered by the Board of Directors in early 2018. - As of March 2017, the IBRD loan program comprised fifteen projects with a total commitment of US$3.9 billion, of which US$2.4 billion has been disbursed. - 82 percent of the commitments are concentrated in the on-going South-West roads project and the East-West roads project. - Two-thirds of the projects are focused on institutional building. - Other thirteen projects include: SME competitiveness, fostering productive innovations, tax administration reform, justice sector institutional strengthening, statistical capacity building, health sector technology transfer and institutional reform, social health insurance, education modernization, skills and jobs, Youth Corp, catastrophe risk insurance, energy efficiency, and second irrigation and drainage. - Joint Economic Research Program (JERP) provides advisory services and analytics; the JERP for FY17 amounts to slightly over US$3 million and comprises nine interrelated stand-alone and programmatic activities. ### IFC in Kazakhstan (As of March 14, 2017) - IFC role under CPS for FY12–17: support private sector to advance economic diversification and growth, especially non-extractive sectors and frontier regions; short-term focus on (i) strengthening the financial sector and (ii) infrastructure development including PPPs; medium-term focus on international banking best practices, corporate governance, SME development, value-added manufacturing, agribusiness and services, and energy efficiency. - IFC investment growth and levels: - Grew tenfold between FY05 and FY08 (to US$110 million) and nearly doubled again in FY09. - In FY10, IFC invested a record US$336 million in five projects in the financial and agribusiness sectors. - Post-crisis averaged about US$100 million per year in FY11–13. - IFC invested US$174 million between FY13 and FY16. - As of February 2017, Kazakhstan remains IFC's largest client in Central Asia with a total committed portfolio of US$162.5 million, of which US$82 million is outstanding. - Investment portfolio concentrated in the financial sector, infrastructure, general manufacturing and consumer services; IFC has begun investments in agribusiness. ### Relations with the European Bank for Reconstruction and Development (As of March 10, 2017) - In May 2014 EBRD and the government signed an Enhanced Partnership Framework Agreement (“EPFA”). - More than €1.86 billion in new projects have been signed since the conclusion of the EPFA, with an average annual business volume of €650 million. - Under the agreement, the government provided €15.6 million to fund EBRD technical assistance and US$33 million for Advice to Small Business (ASB) programs. - With more than €1 billion of investments in 33 projects in 2016, Kazakhstan became the number two country by business volume for the EBRD. - Annual Bank Investment (ABI) in Kazakhstan: €576 million in 2014, €709 million in 2015, and €1.051 billion in 2016. - EBRD priorities in Kazakhstan: - Diversification and support for the non-resource sector, financing projects to enhance productivity, improve business environment, modernize agribusiness, and facilitate SME growth; develop banking and non-banking financial sectors. - Balancing the role of the state and the market by supporting private sector growth, commercializing public enterprises, upgrading infrastructure, and appropriate risk-sharing between private and public sectors. - Promoting low-carbon growth and energy efficiency aligned with the government’s Green Economy Strategy through projects in energy, renewables, agriculture, water, waste management, transport, and other sectors. - EBRD adopting a new country strategy for Kazakhstan for 2017-20. ### Relations with the Asian Development Bank (As of March 14, 2017) - Kazakhstan became an ADB member in 1994. - ADB sovereign lending operations recently focused on financing credit lines for SMEs and road transport sector projects mainly under the CAREC program. - Knowledge Experience Exchange Program (KEEP) jointly financed with the government delivers reports, policy advisory services, and capacity building. - During 1994-2016, the ADB approved a total of $4.9 billion in sovereign loans, non-sovereign loans, and guarantees for Kazakhstan, of which $2.4 billion (including $1 billion as budget support) was disbursed over the last five years (2012-2016). - Transport sector highlights: - Reconstruction of 375 km of the international transit corridor in Zhambyl oblast completed in 2016. - Reconstruction of 470 km of the Aktau-Beineu road in Mangistau oblast is ongoing. - In 2016, ADB approved a loan for reconstruction of the Aktobe-Makat road. - ADB support for SMEs: provides liquidity in local currency via DAMU (a fund under Baiterek) to improve access to finance, particularly for regional and women entrepreneurs. - Energy and health sector support: technical assistance for renewable energy and performance-based energy-saving contracts; transaction advisory services for a PPP hospital at Karaganda State Medical University. - ADB private sector operations began in 2006 with total private sector financing to six entities amounting to $455.2 million approved to-date; recent operations included projects in energy, agribusiness, and trade finance. - Kazakhstan was one of four founding partners of CAREC in 1997; CAREC-related investments in partner countries have totaled US$29.4 billion. Four of the six CAREC road and rail corridors traverse Kazakhstan. - ADB’s new 2017-2021 country partnership strategy aims to support economic diversification, sustainable development, and inclusive growth. - Kazakhstan became a donor to the Asian Development Fund in 2012, contributing a total of US$8.2 million to date. ### Statistical Issues (As of April 4, 2017) I. Assessment of Data Adequacy for Surveillance - General: Data provision has some shortcomings, but is broadly adequate for surveillance. The most affected areas are the balance of payments and national accounts. - National accounts: - Committee on Statistics (CS) under the Ministry of National Economy has improved statistical infrastructure and updated the business register with full coverage of legal entities and individual entrepreneurs. - Annual estimates of oil and gas sector are compiled and disseminated following international standards, but only in Russian. - CS compiles quarterly GDP on a cumulative basis instead of a discrete basis and uses “comparable prices” instead of fixed base or previous year prices. - IMF STA mission (January 2017) identified the need to migrate to a discrete basis and to revise the method used to compile volume movements for taxes on products used to construct movements in real GDP. - Price statistics: - Kazakhstan has a monthly Consumer Price Index (CPI). - Quality of consumer price statistics is affected by occasional use of administrative price controls; administrative controls typically apply to the variety included in the CPI basket, causing producers/importers to switch to non-controlled varieties or increase prices of non-controlled varieties. - Government finance statistics: - Progress made in classification consistent with GFSM 2001. - Coverage expanded for IMF Government Finance Statistics Yearbook to include National Fund of the Republic of Kazakhstan and State Social Insurance Fund, enabling reporting of annual data for the consolidated general government, including a financial balance sheet. - Statistics on the enlarged government (including public enterprises) are not available. - Monetary statistics: - National Bank of Kazakhstan (NBK) reports SRF 1SR and 2SR monthly for IFS with a lag of about one month. - After IMF TA, NBK developed framework for SRF 4SR for other financial corporations (OFCs) and started publishing quarterly data from March 2015. - Remaining inconsistencies persist in reporting of inter-bank positions due to lack of information on counterpart sector of certain transactions. - Financial sector surveillance: - Kazakhstan participates in the Coordinated Direct Investment Survey (CDIS) and Coordinated Portfolio Investment Survey (CPIS). - Country reports 34 financial soundness indicators (FSIs) quarterly: all 12 core FSIs; 11 of 13 encouraged FSIs for deposit takers; and 11 encouraged FSIs for other sectors and markets (two FSIs for OFCs, four FSIs for nonfinancial corporations, two FSIs for households, and three FSIs for real estate markets). - Balance of payments: - Transitioned to BPM6 starting in 2013. - NBK reports quarterly BOP and IIP data and the Reserves Template; participates in World Bank QEDS. - Deficiencies remain in direct investment statistics: local branch offices of foreign companies in construction are considered nonresident entities, creating discrepancies with national accounts. - External debt statistics discrepancies exist across governmental agencies due to methodological differences, including coverage of external debt of publicly-owned corporations. - Statistical treatment of trade within the Eurasian Customs Union (ECU) is not accurate, contributing to large and increasing errors and omissions; authorities are cooperating with ECU partner countries to resolve problems. II. Data Standards and Quality - Kazakhstan has subscribed to the Special Data Dissemination Standard (SDDS) since March 2003. - Data ROSC published in 2008. Key data-table observations (As of April 4, 2017) - Exchange Rates: latest observation Feb/2017; date received 3/10/2017; Frequency of Data D; Frequency of Reporting D; Frequency of publication M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: latest observation Feb/2017; date received 3/10/2017; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Reserve/Base Money, Broad Money, Central Bank Balance Sheet, Consolidated Balance Sheet of the Banking System, Interest Rates, Consumer Price Index: latest observation Feb/2017 (Interest Rates and Exchange Rates also Feb/2017); dates received 3/17/2017 or 3/10/2017 or 3/3/2017 as shown; frequencies largely M and published M. - Revenue, Expenditure, Balance, and Composition of Financing—General Government and Central Government: latest observation 3/1/17; date received 3/4/17; Frequency M; Frequency of Reporting M; Frequency of publication M. - Stocks of Central Government and Central Government-Guaranteed Debt: latest observation 1/1/17; date received 1/27/17; Frequency M; Frequency of Reporting M; Frequency of publication M. - External Current Account Balance, Exports and Imports of Goods and Services, Gross External Debt, International Investment Position: latest observation Q4/2016; date received 4/3/2017; Frequency Q; Frequency of Reporting Q; Frequency of publication Q. - Data quality assessments referenced: methodological soundness and accuracy/reliability ratings drawn from the Data ROSC update and noted in the table (O = fully observed; LO = largely observed; LNO = largely not observed; NO = not observed; NA = not available). *Republic of Kazakhstan — IMF staff report content as provided in the source document.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17108.pdf_