## EXECUTIVE SUMMARY

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### Background and recent developments
- Since the last FSAP in 2014:
  - Stress episodes in the financial sector followed by government bailouts, shareholder capital injections, and use of banks’ operating income.
  - Balance sheet recomposition from corporate to consumer and mortgage loans.
  - Continued de-dollarization of banking sector assets and liabilities.
  - Increased market concentration and state footprint.
  - Establishment of the Agency of the Republic of Kazakhstan for Regulation and Development of Financial Markets (ARDFM) in 2020 as supervisory and resolution agency.
  - Launch of the Astana International Financial Center (AIFC) in 2018.

### Systemic vulnerabilities and scenario-based risk assessment
- Legacy and emerging risks:
  - Stock of problem assets from previous crises not completely resolved.
  - Related party transactions require continuous monitoring.
  - Strong growth in consumer lending is a key emerging risk, compounded by data gaps.
  - High dependence on the hydrocarbon sector exposes the financial system to climate transition risk.
  - Recent trade-pattern changes create a risk of secondary sanctions on domestic entities.
- Scenario-based analysis:
  - Baseline aligned with April 2023 IMF WEO projection; adverse scenario combines abrupt global tightening, sharp commodity price correction, and intensifying regional spillovers.
  - In the adverse scenario, cumulative two-year real GDP would be about 14 percent below the baseline by 2024.
  - Under the adverse scenario, aggregate CET1 capital ratio declines to 13 percent by 2024 from starting point of 17.9 percent but remains above regulatory hurdle rates (7.5 percent for D-SIBs, 5.5 percent for others).
  - Aggregate capital shortfalls over the risk horizon are small at less than 0.5 percent of GDP; some smaller banks face larger solvency risks.
  - Liquidity: aggregate LCR and NSFR at 2.0 and 1.5 respectively (capital-weighted); high-quality liquid assets around 30 percent of total assets.
  - Deposit concentration: sensitivity indicates at least 25 percent of banks could face funding pressures if the largest five depositors suddenly withdrew funding.

### Financial sector oversight: findings and priority actions
- Independence and resourcing:
  - Amend legal framework to strengthen ARDFM powers, ensure financial independence and autonomy over organizational structure, and enshrine the primacy of safety and soundness of supervised entities.
- Problem assets and related party transactions:
  - Align prudential framework for problem assets and provisioning with international standards.
  - Better identify and quantify related party lending; apply the arm’s length principle to transfers of problem assets from banks to asset management companies.
- Consolidated supervision:
  - Align banking-group level risk management and prudential requirements with Basel standards by finalizing ARDFM’s ongoing work.
- Prudential measures to consider:
  - Expand NPL recognition criteria to IFRS9 stage 3 exposures and foreclosed assets.
  - Introduce leverage ratio requirement; increase Capital Conservation Buffer to 2.5 percent (from 2 percent) for non-domestic systemically important banks.
  - Complete Pillar 2 methodology and phase out residual COVID-19 capital and liquidity forbearance measures.

### Consumer lending and financial consumer protection
- Key findings:
  - Consumer lending growing above trend; around 40 percent of consumer loans are to borrowers with DSTI higher than 40 percent (consumer lending capped to 50 percent DSTI).
  - Share of Stage 3 loans in consumer lending was 8.2 percent by end-2022; around 1.5 million borrowers with consumer loans 90 days or more past-due in the banking sector or defaulted on MFI loans.
  - Household indebtedness limited in aggregate at 11 percent of GDP.
  - DSTI data quality is limited due to informal income and exemptions.
- Recommendations:
  - Recalibrate scope of consumer loans, dropping residential real estate from the definition.
  - Require banks to monitor use of consumer loans to prevent misuse and apply supervisory measures where monitoring is inadequate.
  - Redefine DSTI indicator, dropping exemptions (such as on collateralized loans).
  - Strengthen DSTI data quality, including collection of informal income information.
  - Strengthen regulatory requirements on creditworthiness assessment, business conduct, disclosure, and digital adaptations.

### Crypto assets
- Current assessment:
  - Domestic crypto market remains small; crypto assets do not presently pose financial stability risks.
  - Circulation of many types of crypto assets is currently prohibited in Kazakhstan; enforcement and supervision of the ban are difficult.
  - Share of total population buying or selling crypto assets estimated at approximately 1–3 percent as of March 2023.
- Recommended stance:
  - Prepare for potential substantial market growth and for possible need to replace broad prohibition with conduct and prudential regulation.
  - Upskill supervisors to recognize crypto-related risks to banks, consumers, investors, and market integrity.
  - Improve domestic collaboration and international cooperation; improve user education.

### AIFC interaction with the domestic financial system
- Findings:
  - AIFC is small relative to GDP but aims to expand activity toward Kazakhstani residents; assets represented 0.6 percent of GDP at end-2023Q1.
  - Some services can be provided only from the AIFC, creating potential regulatory perimeter issues.
- Conditionalities for safe expansion:
  - Strengthen regulatory arrangements and align with international standards and best practices.
  - Enhance inter-agency collaboration and develop a financial stability protocol between domestic authorities and AFSA, including clear delineation of responsibilities and information-sharing mechanisms.

### Financial safety net, crisis management, and resolution
- Main findings:
  - New resolution regime and recent reforms are steps forward but gaps remain: state intervention options persist; EIMs tend to be triggered too late.
  - KDIF governance and independence limited (KDIF fully owned by NBK).
  - NBK’s ELA framework exists but conditionality and collateral arrangements need refinement; power to provide foreign currency ELA should be granted under stringent conditions.
- Priority actions:
  - Strengthen ARDFM’s operational independence, crisis preparedness, staffing, and resourcing.
  - Improve deposit insurance scheme and align with IADI principles; bring legislative 35-day payout period in line with IADI Core Principles.
  - Specify and tighten conditions for state participation in bank resolution and public resource use.
  - Revise LOLR collateral supervision and prepositioning of eligible nonmarketable assets (ARDFM); refine valuation haircut methodology (NBK); ensure government indemnifies NBK where justified.
  - Establish contingency plans, MoUs, crisis-simulation exercises, and extend legal protection to resolution participants.

### Macroprudential framework and data gaps
- Recommendations:
  - Amend legislation to clarify NBK and ARDFM roles on macroprudential policies and update Memorandum of Understanding on Financial Stability — NBK, ARDFM.
  - Close data gaps and expand macroprudential toolkit; integrate top-down stress testing into the macroprudential framework.
  - Collect granular data on interest-sensitive assets and liabilities by maturity/repricing ladder for interest rate risk monitoring.
  - Develop liquidity stress testing and monitor LCR in significant foreign currencies — ARDFM, NBK — MT.
  - Improve measurement of DSTI and collect reliable information on household income, non-bank corporate lending, and commercial real estate prices.

### Climate-related risks
- Methodology:
  - Micro approach (IMF-ENV + firm-level) and macro approach (macroeconomic model of solvency stress test).
- Findings:
  - Micro: cumulative corporate loan losses across 17 banks over 2023–2030 would be 18.1 percent higher in the disorderly transition scenario relative to baseline; some banks may face >30 percent additional corporate loan losses.
  - Macro: cumulative bank loan losses across 12 banks over 2023–2027 are 18.4 percent larger in the net-zero transition than baseline; over 2023–2025 cumulative bank loan losses would be approximately 600 billion KZT, roughly half of losses estimated under the solvency stress test adverse scenario.
- Recommendations:
  - Further assess climate implications for the financial system; join the Network for Greening the Financial System.
  - Strengthen interagency coordination and create an interagency working group on climate finance and climate risk analysis.
  - Improve and harmonize climate-risk data and develop capacity for climate stress testing.

### FX liquidity and corporate sector
- Findings:
  - FX liquidity appears constrained for a group of medium corporates.
  - Sharp increase in FX debt-to-asset ratio observed for medium-sized corporates with cash ratio in FX lower than 1.
  - System-wide net FX imbalances estimated at around 80 percent of GDP (as of end-2021).
- Recommendations:
  - Build on available datasets and create liquidity indicators in FX to monitor refinancing risks and potential spillovers into the financial system.
  - Monitor liquidity (including via LCR) in significant foreign currencies and expand cash-flow-based liquidity analysis.

### Banking sector structure and soundness indicators
- Financial sector size and structure:
  - Financial sector assets slightly more than 60 percent of GDP.
  - Bank credit around 20 percent of GDP (2022).
  - Banking sector (21 commercial banks) assets equal 43 percent of GDP and almost 70 percent of total financial sector assets (end-2022).
  - Deposits are more than 80 percent of banks’ liabilities.
  - Largest three banks represent about 53 percent of banking sector’s assets.
  - Eight banks are subsidiaries of foreign banks and two are state-owned.
- Key metrics:
  - Total capital adequacy ratio at 21.7 percent on average (as of December 2022).
  - Reported NPLs (90 days past due) represented 3 .4 percent of total loans in December 2022; IFRS9 Stage 3 loans publicly reported by ARDFM were 6.6 percent.
  - Share of Stage 3 loans in consumer lending was 8.2 percent (end-2022).
  - DSTI data shows around 40 percent of consumer loans granted to borrowers with DSTI higher than 40 percent.
  - NBK gross international reserves and NFRK assets were 47 percent of GDP at end 2022.

### Stress testing, interconnectedness, and sensitivity analyses
- Methods: balance sheet analysis (BSA); solvency stress test (12 banks ~90 percent of assets); liquidity stress test (19 banks); interconnectedness analysis; corporate liquidity analysis.
- Results:
  - BSA finds systemic liquidity and FX imbalances; liquidity shock affects nonfinancial corporates first then propagates to banks, central bank, and government.
  - Aggregate capital shortfalls small (<0.5 percent of GDP); some banks fall below regulatory thresholds.
  - Major driver of capital depletion is increased credit loss provisions; market risks mild due to low duration in securities portfolios.
  - Sensitivity analyses with higher initial capital depletion and higher consumer-credit default rates show potential underestimation of capital depletion though aggregate capital remains above regulatory minimums in these analyses.
  - Interbank contagion limited: related exposures about 0.2 percent of total banking system assets; 11 banks participate in bilateral interbank borrowing and lending.

### AML/CFT and beneficial ownership
- 2023 EAG assessment found Kazakhstan "very effective" in some areas but identified weaknesses.
- Priority actions:
  - Enhance risk-based AML/CFT supervision of financial institutions.
  - Strengthen market entry controls and verify beneficial ownership information submitted to state registry.
  - Ensure proportional and effective sanctions across sector.
  - Ensure VASPs implement AML/CFT preventive measures, including the travel rule.

### Financial sector development and competition policy
- Findings:
  - Need to rebalance the state's role away from direct interventions toward risk-sharing mechanisms and better targeting.
  - State footprint and market concentration call for pro-competition policies.
- Recommendations:
  - Improve market access for new entrants and control state support measures.
  - Update antitrust rules for digital platforms.
  - Reform pension fund annual guarantees; develop predictable benchmark issuance program for government securities; strengthen credit guarantee mechanisms to support corporate bond market.

### Main recommendations (timing abbreviated: I Immediate; ST Short term; MT Medium Term)
- Systemic and Climate Risk Analysis:
  - Develop liquidity stress testing and monitor LCR in significant foreign currencies — ARDFM, NBK — MT.
  - Collect granular interest-sensitive asset/liability data by maturity/repricing ladder — ARDFM, NBK — ST.
  - Join the Network for Greening the Financial System — ARDFM, NBK — I.
  - Strengthen interagency coordination and create interagency working group on climate finance — ARDFM, NBK, AIFC, ASPR, MNE, MoF, MEGNR, MoE, MoA, MIID, MES — ST.
- Banking Supervision and Regulation:
  - Enshrine ARDFM’s independence in law and strengthen budgetary resources — ARDFM, MoF — ST.
  - Identify and quantify related party transactions; apply arm’s length principle for problem-asset transfers — ARDFM — ST.
  - Extend prudential standards and strengthen consolidated-level risk management — ARDFM — ST.
  - Expand NPL recognition to IFRS9 stage 3 and foreclosed assets — ARDFM — ST.
  - Strengthen risk-based AML/CFT supervision resources and technology — ARDFM — ST.
- Macroprudential Policy:
  - Amend legislation to clarify NBK and ARDFM roles and update Financial Stability MoU — NBK, ARDFM — ST.
- Consumer Protection:
  - Strengthen creditworthiness assessment, business conduct, disclosure, and digital adaptations — ARDFM — ST.
- Crypto Regulation:
  - Upskill supervisors and prepare to replace prohibition with regulation if domestic growth warrants — ARDFM, NBK, AFSA — ST/MT.
- AIFC Coordination:
  - Develop financial stability protocol for domestic authorities and AFSA collaboration — ARDFM, NBK, AFSA — I.
- Crisis Management and Resolution:
  - Strengthen ARDFM operational independence and clarify rules for state participation in resolution — ARDFM, MoF, MNE — I.
  - Ensure contingency plans, MoUs, crisis simulations, and expand legal protections — ARDFM, NBK, MoF, KDIF, MNE — I.
  - Revise LOLR collateral supervision and prepositioning of eligible nonmarketable assets; refine haircut valuation; ensure government indemnifies NBK where justified — ARDFM, NBK, MoF, MNE — ST.

### Digital Tenge (Appendix VII) — project status, risks, and analytical priorities
- Project status:
  - Aim for operational model by 2025; exploratory group established in 2020; prototypes developed during 2021 and 2022; pilot underway.
  - Footnote: The Digital Tenge was launched in November 2023, after the conclusion of the FSAP missions. This Appendix was finalized in July 2023.
- Design features:
  - Two-tier hybrid infrastructure; DT as an unremunerated token on DLT; wallets opened by second-tier banks and payment providers.
  - Functionalities include programmability, offline capability, and customizable anonymity.
- Financial stability considerations:
  - DT may induce switching away from bank deposits, requiring banks to seek alternative financing and potentially affecting cost of credit and lending.
  - NBK has focused on non-remunerated design with potential holding limits; NBK assessments to date see minimal implications for financial and macroeconomic stability.
- Recommendations for analytical work and policy:
  - Continue pilot testing; finalize operational model; identify legal, regulatory, and cross-border challenges.
  - Expand scenario and stress analysis including user demand under steady state and stress, wholesale and cross-border holdings, distributional impacts across banks, and DT–DeFi interoperability implications.
  - Prepare operational readiness for active monetary policy operations and safeguards for wholesale or cross-border usage during stress.

*Source: EXECUTIVE SUMMARY, 1kazea2024003*

### EXECUTIVE SUMMARY __________________________________________________________________________ 8

### EXECUTIVE SUMMARY

### Background and recent developments
- Since the last Financial Sector Assessment Program (FSAP) in 2014, key changes include:
  - Stress episodes in the financial sector followed by clean-up via government bailouts, shareholder capital injections, and use of banks’ operating income.
  - Balance sheet recomposition from corporate to consumer and mortgage loans.
  - Continued de-dollarization of banking sector assets and liabilities.
  - Increased market concentration and state footprint.
  - Establishment of the Agency of the Republic of Kazakhstan for Regulation and Development of Financial Markets (ARDFM) in 2020 as supervisory and resolution agency.
  - Launch of the Astana International Financial Center (AIFC) in 2018.

### Systemic vulnerabilities and risk assessment
- Legacy and emerging risks:
  - The stock of problem assets from previous crises has not been completely resolved.
  - Related party transactions require continuous monitoring and assessment.
  - Strong growth in consumer lending is a key emerging risk, compounded by data gaps that hinder quantification and monitoring.
  - High dependence on the hydrocarbon sector exposes the financial system to domestic implications of global climate risk mitigation policies.
  - Recent changes in trade patterns create a risk of secondary sanctions on domestic entities.
- Scenario-based analysis:
  - Under an adverse scenario, aggregate capital adequacy ratios would remain robust, though some smaller banks face larger solvency risks.
  - Concentration of large deposits in some banks could heighten liquidity risks from deposit outflows.
  - Large domestic nonfinancial corporates are, in aggregate, mostly externally funded and exposed to refinancing risk—underscoring the need to monitor foreign currency liquidity risk.
  - Climate risk analysis indicates significant transition risk from domestic and especially global climate policies.

### Financial sector oversight findings
- Overall improvements noted, but further strengthening needed in key areas:
  - Independence and resources:
    - Amend the legal framework to strengthen ARDFM powers, ensure financial independence and autonomy over organizational structure, and enshrine the primacy of safety and soundness of supervised entities.
  - Problem assets and related party transactions:
    - Align prudential framework for problem assets and provisioning more closely with international standards.
    - Better identify and quantify related party lending; apply the arm’s length principle to transfers of problem assets from banks to asset management companies.
  - Consolidated supervision:
    - Align risk management and prudential requirements at banking-group level to Basel standards by finalizing ARDFM’s ongoing work.

### Consumer lending and financial consumer protection
- Consumer lending:
  - Identified as an emerging financial stability risk and a source of potential over-indebtedness and consumer harms.
  - Authorities have taken prudential measures, but:
    - Blurred legal definition of consumer lending and issues affecting debt service to income (DSTI) estimates hamper identification and management of risks.
  - Recommendation: Strengthen the financial consumer protection framework to keep pace with growth and digitalization of the segment.

### Crypto assets
- Current assessment:
  - Crypto assets do not presently pose financial stability risks to the domestic financial system; the domestic crypto market remains small.
  - This is an evolving area requiring proactive vigilance.
- Recommended stance:
  - Prepare for potential substantial market growth and for the possibility that the current domestic ban becomes untenable, which would require conduct and prudential regulation, supervision, and closer inter-authority collaboration.
  - Upskill supervisors to recognize crypto-related risks to banks, consumers, investors, and market integrity.

### The AIFC and interaction with the domestic financial system
- AIFC is still small relative to GDP but has ambitious plans to expand activity, particularly toward Kazakhstani residents.
- Conditionalities for safe expansion:
  - Strengthen regulatory arrangements and align with international standards and best practices.
  - Enhance inter-agency collaboration to mitigate increased financial stability risks.

### Financial safety net, crisis management, and resolution
- Recent reforms and a new resolution regime are important steps, but gaps remain:
  - Current resolution regime still allows state intervention in the banking system; gaps exist in crisis management process, deposit insurance framework, and emergency liquidity management.
- Priority actions:
  - Strengthen ARDFM’s operational independence, crisis preparedness, staffing, and resourcing.
  - Improve the deposit insurance scheme and clarify roles and responsibilities of all authorities.
  - State participation in resolution of insolvent banks should be governed by more stringent conditions to minimize moral hazard.
  - Further strengthen the NBK’s Emergency Liquidity Assistance (ELA) framework and periodically test it through simulations.
  - Revise Lender of Last Resort (LOLR) collateral supervision and prepositioning of eligible nonmarketable assets (ARDFM); refine valuation methodology for non-marketable assets haircut (NBK); ensure government indemnifies NBK in case LoLR is granted where justified (MoF, MNE).

### Financial sector development and competition policy
- Policy recommendations to support private sector finance, competition, and capital market development:
  - Gradually rebalance the state's role away from direct interventions toward greater use of risk-sharing mechanisms and targeted support.
  - Improve market access for new entrants, control state support measures, and update antitrust rules for digital platforms to foster competition.
  - Reform pension fund annual guarantees; develop a predictable and consistent benchmark issuance program for government securities; and strengthen credit guarantee mechanisms to support the corporate bond market.

### Main recommendations (selected from Table 1)
- Systemic and Climate Risk Analysis:
  - Develop liquidity stress testing and monitor LCR in significant foreign currencies to better understand risks associated with potential liquidity drain from the system — ARDFM, NBK — MT (Medium Term).
  - Collect granular data on interest-sensitive assets and liabilities by maturity/repricing ladder for interest rate risk monitoring — ARDFM, NBK — ST (Short term).
  - Join the Network for Greening the Financial System — ARDFM, NBK — I (Immediate).
  - Strengthen interagency coordination and create an interagency working group on climate finance and climate risk analysis — ARDFM, NBK, AIFC, ASPR, MNE, MoF, MEGNR, MoE, MoA, MIID, MES — ST.
- Banking Supervision and Regulation:
  - Enshrine ARDFM’s independence in law, including authority over organizational structure, strengthen budgetary resources and independent use, and enhance legal protection of staff — ARDFM, MoF — ST.
  - Identify and quantify related party transactions; revise legal framework to eliminate exemptions and apply arm’s length principle for problem-asset transactions between parent banks and asset management companies — ARDFM — ST.
  - Extend prudential standards and strengthen consolidated-level risk management requirements — ARDFM — ST.
  - Expand NPL recognition criteria to IFRS9 stage 3 exposures and foreclosed assets — ARDFM — ST.
  - Strengthen effectiveness of risk-based AML/CFT supervision by ensuring adequate supervisory resources and technology — ARDFM — ST.
- Macroprudential Policy and Framework:
  - Amend legislation to clarify NBK and ARDFM roles on macroprudential policies and update Memorandum of Understanding on Financial Stability — NBK, ARDFM — ST.
- Financial Consumer Protection and Consumer Credit:
  - Strengthen regulatory requirements on creditworthiness assessment, business conduct, disclosure and transparency, including digital adaptations — ARDFM — ST.
- Regulation of Crypto Assets:
  - Upskill supervisors on crypto risks and continue monitoring; in event of significant domestic crypto growth, be prepared to replace broad prohibition with robust regulatory framework — ARDFM, NBK, AFSA — ST/MT.
- AIFC and domestic system:
  - Develop a financial stability protocol to enhance collaboration between domestic authorities and AFSA for information sharing and risk mitigation — ARDFM, NBK, AFSA — I.
  - Reinforce frameworks to clarify responsibilities and minimize duplication; apply harmonized approaches in line with international standards — ARDFM, NBK, AFSA — ST.
- Financial Safety Net and Crisis Management:
  - Revise resolution and liquidation decision-making to strengthen ARDFM’s operational independence and staffing; expand and clarify rules for capital injection into bridge banks during systemic episodes — ARDFM, MOF, MNE — I.
  - Specify forms and mechanisms of state participation in bank resolution and tighten conditions for public resource use — MoF, MNE, ARDFM, NBK — I.
  - Ensure intra- and interagency contingency plans, establish MoUs, engage in crisis-simulation exercises, and enhance legal protection of staff — ARDFM, NBK, MoF, KDIF, MNE — I.
  - Revise LOLR collateral supervision and prepositioning of eligible nonmarketable assets (ARDFM); refine valuation haircut methodology (NBK); ensure government indemnifies NBK where justified — ARDFM, NBK, MoF, MNE — ST.

- Timing legend from Table 1:
  - I Immediate (within 1 year)
  - ST Short term (1-3 years)
  - MT Medium Term (3-5 years)

*Source: EXECUTIVE SUMMARY, 1kazea2024003*

### 1.     The Kazakhstani economy has remained resilient to recent shocks. During 2022, the

### The Kazakhstani economy has remained resilient to recent shocks.

### Macroeconomic overview and outlook
- Growth reached 3.2 percent at end-2022 and is projected to reach 4.8 percent in 2023.
- During 2022 the economy was hit by violent protests in January, repeated damage to the Caspian Pipeline Consortium (CPC) pipeline (which transports about 80 percent of Kazakhstan’s oil export), and real and financial spillovers from Russia’s invasion of Ukraine.
- Main spillovers included disruption of supply chains, sanctions to Russian banks’ subsidiaries active in Kazakhstan, and the depreciation of the tenge.
- There are downside risks: increased risk of secondary sanctions linked to Russia’s invasion of Ukraine, slower than projected growth of trading partners, lower exports because of lower than projected oil prices, and disruptions to the CPC pipeline.

### Domestic demand, inflation, and monetary stance
- Domestic demand was supported by rapid credit growth, with consumer lending growth particularly strong.
- At end-2022, headline inflation reached 20.3 percent while the Central Bank raised the policy rate to 16.75 percent.

### Financial system structure and size
- The financial sector is relatively small with assets representing slightly more than 60 percent of GDP.
- Bank credit is around 20 percent of GDP (2022).
- The banking sector (21 commercial banks) had total assets representing 43 percent of GDP and almost 70 percent of total financial sector assets, as of end-2022.
- Banks’ liabilities are deposit-heavy (deposits are more than 80 percent of liabilities).
- The largest three banks represent about 53 percent of banking sector’s assets.
- Eight banks are subsidiaries of foreign banks and two are state-owned.
- Except for the Unified Accumulative Pension Fund (UAPF), the nonbank financial sector is relatively small; KASE had a stock capitalization of 20 percent of GDP (end of 2022).

### Key financial soundness and asset quality metrics
- Total capital adequacy ratio at 21.7 percent on average (as of December 2022).
- Capital weighted LCR and NSFR at 2.0 and 1.5 respectively.
- High-quality liquid assets at around 30 percent of total assets.
- Reported nonperforming loans (NPLs)—narrowly defined as 90 days past due—represented 3 .4 percent of total loans in December 2022, while IFRS9 Stage 3 loans publicly reported by ARDFM were 6.6 percent.
- By end-2022, the share of Stage 3 loans in consumer lending was 8.2 percent, with around 1.5 million borrowers with consumer loans 90 days or more past-due in the banking sector or who defaulted on loans granted by microfinancial institutions.
- DSTI data shows around 40 percent of consumer loans is granted to borrowers with DSTI higher than 40 percent (consumer lending is capped to 50 percent DSTI), though the accuracy of DSTI data is an issue.
- Dollarization has declined but remains relatively high on the funding side; system-wide net FX imbalances were estimated at around 80 percent of GDP, as of end-2021.
- NBK gross international reserves and the government’s National Fund of the Republic of Kazakhstan (NFRK) assets were 47 percent of GDP at end 2022.

### Market structure and recent ownership shifts
- Subsidiaries of three Russian banks, which represented 15 percent of total bank assets before Russia’s invasion of Ukraine, were subjected to international sanctions; two were acquired by local entities, increasing concentration; the third (0.4 percent of banking sector’s assets) was recapitalized and continues to operate.

### Systemic vulnerabilities (identified)
- Legacy stock of problem assets from previous crises has not been completely reabsorbed; related party transactions remain a source of concern.
- Rapid consumer lending is a potential source of credit risk and is concentrated in the two major banks.
- FX liquidity imbalances need monitoring; lack of monitoring of LCR by currency limits understanding of FX imbalances at the micro level.
- Nonfinancial corporates are exposed to refinancing risk, amplified by high reliance on nonresident funding.
- Climate transition risk is important given hydrocarbon production in 2022 amounted to almost 20 percent of GDP, more than half of exports, and oil sector revenues represented around 35 percent of the total.

### Macrofinancial scenarios and stress assumptions
- Baseline scenario aligned with April 2023 IMF WEO projection.
- Adverse scenario combines: (i) abrupt global tightening of financial conditions and ensuing slowdown; (ii) sharp correction of commodity prices and rising risk premia; and (iii) intensifying spillovers from regional conflicts, including economic sanctions and supply-chain disruptions.
- In the adverse scenario, cumulative two-year real GDP would be about 14 percent below the baseline by 2024 (equivalent to a 2-standard-deviation shock of the cumulative two-year growth rate with respect to the historical mean).
- Footnote correspondence: this corresponds to 4.3 and 4.9 percent growth rates in the baseline scenario and –1.5 and 0.9 percent growth rates in the adverse scenario in the first two years.
- Climate transition analysis:
  - Micro approach scenarios: baseline; NDCs; orderly 1.5°C; disorderly 1.5°C.
  - Macro approach: IEA ‘Net Zero Emissions’ (IEA-NZE) scenario, envisaging a steep decline in global oil prices up to 2030.

### Stress test and liquidity analysis results
- Methods used: balance sheet analysis (BSA); solvency stress test (12 banks covering ~90 percent of banking system assets); liquidity stress test (all 19 banks subject to liquidity requirements); interconnectedness analysis; corporate liquidity analysis.
- BSA finds systemic liquidity and FX imbalances: a liquidity shock would affect nonfinancial corporates first, then likely propagate to banks, central bank, and general government.
- Under the adverse scenario, the aggregate CET1 capital ratio declines to 13 percent by 2024 from the starting point of 17.9 percent, but remains above regulatory hurdle rates (7.5 percent for D-SIBs, 5.5 percent for others).
- Some banks fall below regulatory thresholds; aggregate capital shortfalls over the risk horizon are small at less than 0.5 percent of GDP.
- Major driver of capital depletion is increased credit loss provisions due to deteriorating credit conditions; market risks appear mild because of relatively low duration in banks’ securities portfolios.
- Sensitivity analyses (higher initial capital depletion and higher consumer-credit default rates) indicate potential underestimation of capital depletion under the adverse scenario; aggregate capital remains above regulatory minimums in both analyses.
- Liquidity: aggregate LCR declines significantly when stressing outflows; while liquidity remains adequate for the majority of banks, deposit concentration poses risks—sensitivity indicates at least 25 percent of banks could face funding pressures if the largest five depositors suddenly withdrew their funding.
- Interbank contagion potential is limited: 11 banks participate in bilateral interbank borrowing and lending; related exposures are about 0.2 percent of total banking system assets.

### Ongoing and planned policy measures / institutional developments
- A new law on personal bankruptcy came into force in March 2023 to help qualified debtors obtain debt relief through debt-restructuring procedures.
- The NBK is planning to introduce a central bank digital currency, the digital tenge (DT), by 2025 to promote more efficient payments and increase innovation and competitiveness in the financial market.
- The Astana International Financial Center (AIFC) provides a jurisdictionally separated international financial center with its own regulator (AFSA); assets represented 0.6 percent of GDP at the end of 2023Q1.

*Source: IMF staff assessment as presented in the referenced IMF chapter.*

### 21.     FX liquidity appears to be constrained for

### 1kazea2024003 - 21.     FX liquidity appears to be constrained for

### FX liquidity and corporate sector
- Finding: FX liquidity appears to be constrained for a group of medium corporates.
- Finding: Summary statistics for a group of medium-sized corporates with cash ratio7 in FX lower than 1 showed a sharp increase of their FX debt-to-asset ratio in the last years (Text Chart).
- Recommendation: The authorities should build on the available datasets and create liquidity indicators, particularly in FX, to monitor refinancing risks in the non-financial corporate sector and their potential spillovers into the financial system.
- Note: Cash ratio = cash and cash equivalents / short-term liabilities.

### Top-down macroprudential solvency stress testing and data gaps
- Recommendation: Continue to enhance the top-down macroprudential solvency stress testing framework while closing data gaps.
- Recommendation: Collect and monitor risk-weighted assets data with a breakdown by major credit segments, both for performing and non-performing exposures to improve credit risk monitoring.
- Recommendation: Collect granular data on interest-sensitive assets and liabilities by repricing ladder, including for major portfolio segments, to enhance monitoring of interest rate risk in the banking book.

### Liquidity stress testing
- Recommendation: Strengthen the liquidity stress testing framework.
- Recommendation: Monitor liquidity (including via LCR) in significant foreign currencies to better understand risks associated with potential liquidity drains from the system and its impact on the functioning of the financial safety nets.
- Recommendation: Expand the framework to include a comprehensive cash flow analysis to gain a more granular view of the overall system and complement the LCR-based stress tests.
- Note: LCR calculated for year-end of 2022 in the system-wide LCR stress tests; regulatory scenario uses haircuts and outflow rates aligned with Basel standards. Haircut scenarios HC1 and HC2 assume more severe haircuts than Basel; RO and WO assume more severe run-off rates on retail (RO) and wholesale (WO) funding. RO+WO+HC2 represents the most severe scenario.

### Asset and deposit concentration
- Finding: Asset and deposit concentration risks require additional oversight.
- Recommendation: Put in place aggregate and bank-specific oversight measures to contain potential risks from concentrated funding and lending profiles.

### Consumer lending risk analysis
- Finding: Estimates of the credit-to-GDP gap confirm that lending to individuals is growing above trend; while the credit-to-GDP gap for total credit hovers around zero, all estimates8 confirm that individual lending is growing above trend.
- Finding: Around 40 percent of loans refer to borrowers with DSTI over 40 percent (Figure 8).
- Finding: Household indebtedness appears limited in aggregate at 11 percent of GDP.
- Concern: Quality of DSTI data is limited; high level of informal income and several exemptions to DSTI application limit assessment accuracy.
- Recommendations to ensure appropriate capture and management of risks:
  - Recalibrate the scope of consumer loans, dropping residential real estate from the definition.
  - Require banks to monitor the use of consumer loans to ensure they are not used for mortgages, SMEs, or repayment of overdue debt, and apply supervisory measures for banks that do not strictly monitor adequate use.
  - Redefine the DSTI indicator, dropping exemptions that narrow its scope, such as current exemptions on collateralized loans.
  - Strengthen the quality of DSTI data, including by collecting more information on borrowers’ informal income.
  - Strengthen regulatory requirements relating to creditworthiness assessment, business conduct, and disclosure and transparency, including appropriate adaptation for digital contexts.
- Note: The credit-to-GDP gap was estimated using Hodrick-Prescott, Hamilton, Christiano-Fitzgerald, and Moving Average filters over the period 1996Q1-2022Q4.

### Climate-related risk analysis
- Methodology: Two approaches used — a “micro” approach (dynamic computable general equilibrium model IMF-ENV + firm-level model) and a “macro” approach (macroeconomic model of the solvency stress test to derive PD and LGD evolution across bank portfolios).
- Micro approach findings:
  - Transition risks concentrated in carbon intensive sectors.
  - Cumulative losses on corporate loans across 17 banks over 2023-2030 would be 18.1 percent higher in the disorderly transition scenario relative to the baseline, with some banks experiencing more than 30 percent additional corporate loan losses (Figure 9).
- Macro approach findings:
  - Transition to net-zero by 2050 implies significant drops in oil price and production, leading to GDP losses and currency depreciation.
  - Considering all loan portfolios, cumulative bank loan losses across 12 banks in the solvency stress test over 2023–2027 are 18.4 percent larger in the net-zero transition than in the baseline, with heterogeneous impact across banks (Figure 10).
  - Over the 2023–2025 time horizon of the solvency stress test, cumulative bank loan losses would be approximately 600 billion KZT, roughly half of the losses estimated in the solvency stress test under its adverse scenario.
  - Caveat: The comparison affected by the short time horizon; solvency stress test simulates a cyclical downturn followed by recovery, while transition risk impacts are expected to persist and potentially worsen over time.
- Recommendations:
  - Further assess implications of climate change for the financial system.
  - Engage in international debate (e.g., join the Network for Greening the Financial System) to raise awareness and build capacity.
  - Strengthen coordination between financial regulators, ministries, and other stakeholders; develop an interagency working group on climate finance and climate risk analysis.
  - Improve and harmonize data for assessing climate-related risks as a first step to improve interagency coordination.
  - Develop capacity to conduct climate stress testing in the long run.

### Macroprudential framework and governance
- Recommendation: Amend the legal framework to clarify roles and responsibilities for macroprudential policy and update the 2007 Memorandum of Understanding on Financial Issues to reflect recent institutional changes and clarify FSC member responsibilities.
- Recommendation: Close data gaps, expand the macroprudential toolkit, and integrate top-down stress testing in the macroprudential framework.
- Data priorities: Improve measurement of DSTI; collect more reliable information on household income, non-bank corporate lending, and commercial real estate prices to improve monitoring of systemic vulnerabilities.
- Recommendation: Broaden the scope of top-down stress testing conducted by the NBK, which currently only covers corporate loans.
- Recommendation: Refine monitoring conditions for activation of the CCyB and prepare for its triggering if robust evidence of unsustainable growth emerges; interest in exploring a positive neutral CCyB is welcome.

### Banking regulation and supervision
- Finding: Framework for banking supervision has been reinforced since the 2014 FSAP, including introduction and strengthening of risk-based supervision, annual stress test and internal desk-based AQR complementing SREP.
- Recommendations and issues identified:
  - Guarantee the independence of the ARDFM and its operational autonomy in deciding organizational structure; recurring reorganizations cause institutional instability.
  - Make the ARDFM financially independent (e.g., by levying fees on supervised entities) as it is currently funded from the government’s budget.
  - Address tensions from ARDFM’s dual mandate of promoting financial stability and development by legally prioritizing safety and soundness of the banking system over promotional objectives.
  - Improve prudential framework for problem assets and provisioning: align NPL definition with international standards by including all IFRS9 Stage 3 loans and foreclosed assets; introduce write-off requirements for uncollectable loans.
  - Investigate related party lending practices (e.g., thematic review) and propose legal amendments to ensure transfers of distressed assets to subsidiaries occur at market terms.
  - Phase out residual COVID-19 capital and liquidity forbearance measures as quickly as possible.
  - Introduce the leverage ratio requirement; increase the Capital Conservation Buffer to 2.5 percent (from 2 percent) for non-domestic systemically important banks.
  - Complete Pillar 2 methodology by introducing capital and liquidity buffers based on a bank’s overall risk profile.
  - Establish an effective consolidated supervision framework: risk management and key prudential requirements currently apply only on a solo level; risk management expectations for banking groups need to be set.

### Crypto assets
- Finding: Currently limited short-term financial stability implications from crypto assets, but situation can change quickly.
- Finding: Circulation of many types of crypto assets is currently prohibited in Kazakhstan; enforcement and supervision of the ban are difficult.
- Finding: Share of total population buying or selling crypto assets estimated at approximately 1–3 percent as of March 2023.
- Finding: A crypto pilot project exists in the AIFC jurisdiction allowing users to buy and sell crypto assets from regulated exchanges registered in the AIFC; most resident transactions occur on global exchanges not subject to regulation.
- Recommendations:
  - Prepare for possible substantial crypto market growth and potential need to change regulatory stance if domestic ban becomes untenable.
  - Strengthen legal powers and upskill staff to improve oversight.
  - Improve domestic collaboration and international cooperation on crypto assets.
  - Improve user education through joint communication to markets and consumers.

### AIFC and domestic financial system
- Finding: AIFC remains small but has ambitious plans to expand activity, particularly towards Kazakhstani residents; AIFC seeks relaxation of restrictions on domestic intermediation.
- Finding: Some services (capital market activities, Islamic finance) can be provided by domestically-regulated firms or AIFC-registered firms; some services (crowdfunding, multi-currency trading and settlement, services offered by regulated exchanges under the crypto asset pilot) can only be provided from the AIFC.
- Recommendation: Strengthen regulatory arrangements and collaboration between domestic authorities and AFSA to mitigate risks of financial spillovers, regulatory arbitrage, and gaps between domestic and AIFC systems.
- Suggested elements for a financial stability protocol between domestic authorities and AFSA:
  - Each authority implements and upholds international standards and best practices of regulation, supervision, recovery and resolution, and enforcement.
  - Confirm financial stability in Kazakhstan as the primary objective for all prudential authorities (all additional objectives subordinate to this primary objective).
  - Ensure clarity of regulatory perimeters between domestic authorities and the AIFC, with clear delineation of responsibilities and boundaries.
  - Continuous monitoring of risks and regulatory responsibilities and boundaries, adapting frameworks quickly to avoid regulatory gaps.
  - Prefer one regulatory authority responsible for each activity; where activities can be provided under two authorities, implement a common—ideally harmonized—approach based on international standards to prevent arbitrage.
  - Enhance sharing of information and collaboration between domestic financial authorities and AFSA on risk assessment and policy responses, including participation in FSC discussions in relevant cases.

*Source: IMF staff calculations and text from the chapter.*

### 45.     Risk-based AML/CFT supervision should be prioritized, along with measures to improve

### 1kazea2024003 - 45.     Risk-based AML/CFT supervision should be prioritized, along with measures to improve

### AML/CFT supervision, beneficial ownership, and virtual assets
- 2023 assessment of Kazakhstan’s AML/CFT framework and its effectiveness found it "very effective" in some areas (such as the investigation of ML/TF) but identified other areas needing strengthening.
- Priority actions recommended:
  - Enhance risk-based AML/CFT supervision of financial institutions.
  - Strengthen market entry controls.
  - Improve understanding of TF risks associated with legal persons.
  - Implement measures to verify beneficial ownership information submitted to the state registry.
  - Ensure sanctions applied to financial institutions are proportionate and effective in deterring violations of AML/CFT obligations across the sector.
  - Ensure that all virtual asset service providers (VASPs) implement AML/CFT preventive measures, including the travel rule.
- Footnote: The assessment was conducted by the Eurasian Group on Combatting Money Laundering and Financing of Terrorism (EAG); the mutual evaluation report was published in July 2023.

### Financial crisis management and resolution
- Main findings:
  - The Financial Safety Net framework revealed inefficiencies in the resolution regime and the Early Interventions Measures (EIMs).
  - EIMs tend to be triggered too late, causing delays in reaction and response and ultimately lower recovery rates on insolvent bank’s assets.
  - There remain multiple ways for the state to intervene in banking crises (e.g., special purpose loans, Problem Loans Fund).
  - The resolution authority should be operationalized and made independent from ARDFM’s Department of Banking Regulation with full-time management and staff.
- Recommended reforms:
  - Introduce contingency plans at agency and inter-agency levels, memoranda of understanding, and periodical crisis management tests.
  - Conduct resolvability assessments and recovery and resolution planning.
  - Avoid any expansion of the national financial safety nets to the AIFC.
- Deposit insurance recommendations:
  - Align the deposit insurance framework fully with IADI principles.
  - Address KDIF governance and independence: KDIF is fully owned by the NBK, which dominates its board and represents it in the FSC; this limits KDIF’s operational independence.
  - Agree MoUs between the KDIF and NBK to formalize requirements on backstop facilities.
  - Bring the legislative 35-day period for the start of a payout into line with the IADI Core Principles.
  - Consider gradually aligning the coverage limit for foreign currency deposits with those for tenge deposits (current divergence: higher coverage for tenge deposits could incentivize foreign currency runs).
  - Extend legal protection (currently provided only to those KDIF employees appointed as members of temporary administrations and liquidation commissions) to other participants directly involved in the resolution process.
- Central bank funding and ELA/LoLR:
  - Clarify the role of central bank funding.
  - NBK’s organic law enables emergency liquidity assistance (ELA), but conditionality (e.g., collateral criteria) seems too restrictive and could be enhanced.
  - The law should grant NBK the power to provide ELA in foreign currency, subject to stringent conditions.
  - If LoLR must be provided for financial stability to a bank that may not fully comply with ELA criteria (e.g., significant uncertainty over ability to repay, or adequate collateral cannot be mobilized timely), an indemnity should be sought from the government.

### Financial sector development and competition
- Structural and policy findings:
  - Need to revisit the role of the state to tackle deep structural challenges hindering finance for the private sector.
  - State’s role should be gradually rebalanced away from direct interventions towards greater use of risk sharing mechanisms and better targeting.
  - The state footprint, increased market concentration, and the emergence of conglomerates call for more pro-competition policies.
- Recommended measures to foster competition and market development:
  - Ensure more effective market access for new entrants.
  - Implement better control of state support measures.
  - Update antitrust rules for digital platforms.
- Capital market development recommendations:
  - Address demand- and supply-side issues.
  - Target reforms on the annual guarantee for pension funds.
  - Develop a predictable and consistent benchmark issuance program for government securities.
  - Implement more effective credit guarantee mechanisms to support the corporate bond market.

### Authorities’ views and implementation status
- General reception:
  - Authorities appreciated the FSAP’s assessment and found engagement useful for risk analysis and exploring emerging issues.
  - They broadly agreed with the systemic risk assessment that the financial system is overall resilient to severe shocks and has a comfortable level of liquidity, with some heterogeneity among banks.
  - Authorities committed to strengthen data collection for stress testing and monitoring of consumer lending.
- On regulatory and supervisory framework:
  - Authorities considered that the FSSA does not sufficiently reflect progress since the 2014 FSAP in enhancing bank stability and aligning risk-based supervision with international best standards.
  - They acknowledged that the NPL definition needs revision to align with international standards but noted a large share of problem loans from previous crises has been resolved and NPL and Stage 3 loans are declining rapidly.
  - Authorities noted related party lending exposures are no longer a systemic issue due to shifts to risk-based supervision and methodological enhancements; they will consider a thematic review to substantiate the claim.
  - Implementation under way: authorities have commenced implementing recommendations to bring consolidated supervision of banking groups in line with Basel Standards and have requested technical assistance.
- On crypto/crypto asset regulation:
  - Authorities concurred with recommendations on crypto asset regulation approaches and the need to reinforce collaboration with AFSA.
  - They agreed on the importance of upskilling supervisors to recognize risks from crypto markets and enhancing collaboration between financial authorities and AFSA to facilitate information sharing and risk mitigation.
- On crisis management and emergency liquidity:
  - Authorities have started to implement FSAP recommendations on the crisis management and resolution framework and provision of emergency liquidity.
  - They sought technical assistance to address identified deficiencies.
  - Authorities appreciated recommendations on roles and responsibilities of stakeholders, specifying forms and mechanisms for using public funds and tightening underlying conditions; in particular, clarifying the role of the MoF in injecting capital during episodes of systemic risk and in indemnifying the NBK when emergency liquidity is granted to protect financial stability, subject to clarification of justified circumstances.

### Selected projections and key financial indicators (excerpted)
- Output and prices (annual percent change):
  - Real GDP: 4.3 (2021), 3.2 (2022), 4.8 (2023), 3.1 (2024), 5.7 (2025), 2.2 (2026), 3.6 (2027), 2.3 (2028)
  - Real oil-: -0.6 (2021), -1.7 (2022), 7.1 (2023), 0.1 (2024), 14.4 (2025), -2.0 (2026), 4.0 (2027), -2.0 (2028)
  - Real non-oil: 5.5 (2021), 4.7 (2022), 4.2 (2023), 3.9 (2024), 3.4 (2025), 3.4 (2026), 3.5 (2027), 3.5 (2028)
- Contributions to GDP growth (percent):
  - Private consumption: 2.6 (2021), 2.6 (2022), 6.4 (2023), 2.9 (2024), 1.6 (2025), 0.8 (2026), 0.6 (2027), 0.5 (2028)
  - Government consumption: 0.3 (2021), 0.6 (2022), 0.5 (2023), 0.2 (2024), 0.3 (2025), 0.2 (2026), 0.5 (2027), 0.4 (2028)
  - Gross fixed capital formation: 0.4 (2021), 1.2 (2022), 1.8 (2023), 1.1 (2024), 1.4 (2025), 1.1 (2026), 1.3 (2027), 1.2 (2028)
  - Net Exports: 0.8 (2021), -1.0 (2022), -3.9 (2023), -1.1 (2024), 2.4 (2025), 0.1 (2026), 1.1 (2027), 0.3 (2028)
- Prices and labor:
  - Consumer price index (end-of-period): 8.4 (2021), 20.3 (2022), 9.8 (2023), 7.7 (2024), 6.2 (2025), 5.5 (2026), 5.1 (2027), 5.1 (2028)
  - Consumer price index (average): 8.0 (2021), 15.0 (2022), 14.6 (2023), 8.7 (2024), 6.9 (2025), 5.9 (2026), 5.2 (2027), 5.1 (2028)
  - Unemployment rate (average, percent): 4.9 (2021), 4.9 (2022), 4.8 (2023), 4.8 (2024), 4.8 (2025), 4.8 (2026), 4.8 (2027), 4.8 (2028)
- Fiscal accounts (In percent of GDP):
  - Revenues and grants: 17.1 (2021), 21.8 (2022), 23.1 (2023), 20.7 (2024), 20.6 (2025), 20.2 (2026), 20.0 (2027), 19.7 (2028)
  - Oil revenues: 4.3 (2021), 8.0 (2022), 6.4 (2023), 5.3 (2024), 5.4 (2025), 4.9 (2026), 4.7 (2027), 4.2 (2028)
  - Non-oil revenues 1/: 12.9 (2021), 13.8 (2022), 16.7 (2023), 15.4 (2024), 15.1 (2025), 15.3 (2026), 15.4 (2027), 15.5 (2028)
  - Expenditures and net lending: 22.1 (2021), 21.7 (2022), 22.9 (2023), 21.8 (2024), 21.5 (2025), 21.4 (2026), 21.5 (2027), 21.6 (2028)
  - Overall fiscal balance: -5.0 (2021), 0.1 (2022), 0.1 (2023), -1.2 (2024), -0.9 (2025), -1.2 (2026), -1.5 (2027), -1.9 (2028)
  - Non-oil fiscal balance: -9.3 (2021), -7.9 (2022), -6.3 (2023), -6.4 (2024), -6.4 (2025), -6.1 (2026), -6.1 (2027), -6.1 (2028)
- Public debt and financing:
  - Gross public debt: 25.1 (2021), 23.5 (2022), 22.7 (2023), 23.0 (2024), 25.1 (2025), 27.7 (2026), 29.8 (2027), 32.4 (2028)
  - Foreign financing, net: 2.9 (2021), -2.8 (2022), -1.2 (2023), -1.8 (2024), -3.3 (2025), -2.6 (2026), -2.3 (2027), -1.8 (2028)
  - NFRK withdrawal (+) / accumulation (-), net: 1.7 (2021), -2.6 (2022), -1.9 (2023), -1.9 (2024), -3.3 (2025), -3.1 (2026), -2.9 (2027), -2.6 (2028)
- Balance of payments and reserves:
  - Current account balance: -1.4 (2021), 3.1 (2022), -3.5 (2023), -3.9 (2024), -2.3 (2025), -3.3 (2026), -3.4 (2027), -3.9 (2028)
  - Trade balance: 12.3 (2021), 15.5 (2022), 7.6 (2023), 6.3 (2024), 7.4 (2025), 6.3 (2026), 6.0 (2027), 5.3 (2028)
  - Gross international reserves (in billions of US dollars): 34.4 (2021), 35.1 (2022), 36.5 (2023), 37.1 (2024), 38.2 (2025), 38.9 (2026), 39.3 (2027), 39.7 (2028)
  - Gross international reserves (in months of imports): 6.9 (2021), 5.9 (2022), 6.0 (2023), 5.8 (2024), 5.9 (2025), 5.9 (2026), 5.9 (2027), 5.9 (2028)
- Memorandum items:
  - Nominal GDP (in billions of tenge): 83,952 (2021), 103,766 (2022), 117,265 (2023), 135,806 (2024), 152,180 (2025), 164,539 (2026), 180,072 (2027), 193,856 (2028)
  - Nominal GDP (in billions of U.S. dollars): 197.1 (2021), 225.5 (2022)
  - Crude oil and gas condensate production (million tons) 3/: 85.7 (2021), 84.2 (2022), 90.0 (2023), 90.3 (2024), 103.0 (2025), 101.0 (2026), 105.0 (2027), 103.0 (2028)
  - Oil price (in U.S. dollars per barrel): 69.2 (2021), 96.4 (2022), 80.5 (2023), 79.9 (2024), 76.0 (2025), 72.7 (2026), 69.9 (2027), 67.5 (2028)
- Notes in source:
  - 1/ Non-oil revenue in 2023 includes a one-off dividend from Samruk-Kazyna of 1.1 percent of GDP from the sale of shares to the NFRK.
  - 2/ Excluding reserve movements.
  - 3/ Based on a conversion factor of 7.5 barrels of oil per ton.

_Italic: Source: IMF staff summary of chapter content._

### Appendix VII. The Digital Tenge

### Appendix VII. The Digital Tenge

### Project status and timeline
- The Digital Tenge (DT) project continues with the aim of achieving an operational model by 2025.
- The NBK established an exploratory group in 2020 that developed DT prototypes during 2021 and 2022.
- A pilot is currently underway to finalize the operational model, including roles and responsibilities of participants in the DT ecosystem, identify challenges such as legal and regulatory barriers ahead of any launch of DT, and test DT’s use in cross-border payments.
- Footnote: The Digital Tenge was launched in November 2023, after the conclusion of the FSAP missions. This Appendix was finalized in July 2023.

### Design and technical features
- NBK’s 2022 whitepaper (2022b) outlined key design features that are being further explored.
- Structural design:
  - DT will be structured under a two-tier hybrid infrastructure where second tier banks (commercial banks) and payment providers will open wallets and distribute DT to end users.
  - The DT architecture will have elements of both centralized and decentralized technologies, with DT itself operating as an unremunerated token on DLT.
- Stated purpose and functionalities:
  - The stated purpose of DT is to facilitate payments by individuals and legal entities.
  - Additional functionalities will include programmability, offline capability, and customizable anonymity.
  - Customizable anonymity refers to the ability for users to be anonymous to the recipient of any transaction; the user’s own wallet provider/commercial bank will always verify their identity.
- Business model and pilot focus:
  - The authorities continue to explore potential business models around distribution.
  - The pilot is exploring use cases including cross-border use, social payments, and integration of DT with decentralized financial services (DeFi).

### Monetary and financial stability implications
- DT implementation should preserve monetary and financial stability while ensuring operational resilience and functionality.
- Potential effects:
  - If CBDCs induce switching away from bank deposits, commercial banks (deposit-takers) may need to seek alternative sources of financing; this could impact the cost of credit and level of lending in Kazakhstan’s economy.
  - CBDC might provide a tool to enhance the effectiveness and flexibility of monetary policy (for example through remuneration).
  - A non-remunerated CBDC may have monetary policy implications, such as hardening the effective lower bounds of monetary policy (as physical cash today does).
- Design considerations to mitigate risks:
  - Many central banks explore CBDC designs with holding limits (at an individual/entity level) or pricing controls (i.e., remuneration).
  - NBK has focused on a non-remunerated form, with the potential use of limits on holdings.
  - NBK assessments to date of this design lead them to see minimal implications for financial and macroeconomic stability.
- Uncertainty:
  - The extent of impacts is difficult to predict ahead of clear design choices and may change as developments arise.

### Domestic financial system composition and modelling
- The composition of the domestic financial system will shape DT ecosystem dynamics and financial stability implications.
- Customer deposits form a material part of the funding base of Kazakhstan’s banking sector.
- Banks’ responses:
  - Banks will need to consider responses to a loss of customer deposits, including access to alternative market-based finance and responses to increased market competitiveness from new players (fintechs) emerging as part of the DT system.
- NBK commissioned an economic assessment using DSGE modelling under a monopolistic banking sector (where user demand has been varied based on user preferences).
- Additional analysis needs:
  - Further scenarios could assess distribution of impacts across different banks in Kazakhstan.

### User demand, scenarios, and operational preparedness
- Need for scenario analysis:
  - NBK could consider a range of potential user demand scenarios under both ‘steady state’ and stress conditions.
  - CBDCs in production have yet to establish user demand at scale, so ex-ante analysis is required.
- Survey evidence:
  - Kazakh authorities commissioned user surveys in 2022 which indicated potential demand and willingness to use DT by 60 percent of the representative sample.
- Operational implications:
  - Demand for CBDC may require a flexible approach by the central bank to manage rapid fluctuations in demand, likely requiring more active monetary policy operations.
  - Central banks need to consider 'steady-state' demand alongside demand evolution during transition periods (particularly at introduction/launch) and periods of stress (e.g., shocks to confidence in the banking system which may trigger a flight to safety).

### Wholesale, cross-border holdings and DeFi integration
- Wholesale and business holdings:
  - Although DT is broadly targeted at retail use, commercial banks that enable distribution may in principle also hold DT for ‘wholesale use’ (as their own balances of CBDC, not customer balances).
  - Businesses holding large amounts of CBDC could have greater impacts of disintermediation.
- Cross-border considerations:
  - Enabling cross-border holdings of CBDCs (non-resident holdings) or establishing interoperability among different countries’ CBDCs introduces additional factors, such as possible external policy or currency spillovers, and potential capital flow and exchange rate volatility.
  - The extent of impacts depends on the scale and speed of movements into and out of DT.
- DeFi integration risks:
  - The role of CBDCs in strengthening connections between traditional financial services and DeFi could be a significant source of operational and economic risk.
  - Consensus across several central banks is that CBDCs must be interoperable with other forms of money such as cash and commercial bank deposits.
  - Limited analysis exists on implications for direct convertibility of CBDCs with crypto assets that are not denominated in the same unit of account.
  - Direct integration with DeFi may enable innovative functionality but could introduce further economic and operational risks.
  - The ongoing DT pilot will cover technical integration of CBDC with DeFi to provide insights into how direct integration could open or amplify channels of risk that require management.

### Policy implications and recommended analytical work
- Continue pilot testing to finalize operational model and to identify legal, regulatory, and cross-border challenges.
- Preserve NTK’s objective of DT as an additional secure payment channel while assessing design choices that limit disintermediation risk (e.g., non-remuneration, holding limits, pricing controls).
- Expand scenario and stress analysis to include:
  - A range of user demand scenarios under ‘steady state’ and stress conditions, including transition dynamics at launch.
  - Wholesale holdings by banks and businesses, and cross-border/non-resident holdings.
  - Distributional impacts across banks and implications for deposit funding, cost of credit, and lending.
- Assess implications of DT–DeFi interoperability and direct convertibility with crypto assets not denominated in the same unit of account; establish safeguards for operational and economic risks.
- Prepare for operational needs:
  - Ensure readiness for active monetary policy operations to manage rapid demand fluctuations.
  - Consider tools and safeguards to support wholesale or cross-border usage of DT, particularly during times of stress.

*Appendix VII. The Digital Tenge — IMF Financial Sector Assessment content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1kazea2024003.pdf_