Public Information Notice: IMF Executive Board Concludes 2013 Article IV Consultation with the Republic of Kazakhstan
IMF News, August 14, 2013
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- Published: August 14, 2013
Background / Process
- On August 2, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Kazakhstan and considered and endorsed the staff appraisal under the lapse of time procedure.
- Press Release No. 13/308.
- Contact: IMF COMMUNICATIONS DEPARTMENT, Media Relations, E-mail: media@imf.org, Phone: 202-623-7100.
Macroeconomic conditions and inflation
- Real GDP growth:
- slowed from 7½ percent in 2011 to 5 percent in 2012;
- recorded 4.6 percent year-on-year during the first quarter of 2013.
- Employment expanded at about 2½ percent annually over the last three years.
- Headline inflation:
- Has fallen to just below the 6-8 percent target range, helped by moderating food prices.
- Core inflation:
- Remained stable at around 5-5½ percent.
- Monetary policy stance:
- Following a cumulative 200-basis points cut early in 2012, the authorities have kept the central bank’s official refinancing rate on hold at 5½ percent since August 2012.
Financial sector
- Recovery and profitability:
- Banks’ profits have improved over the past year but remain weak.
- Return on assets ratio for the largest banks (excluding BTA and Alliance banks) reached just 1 percent last year.
- Capital adequacy:
- System’s capital adequacy ratio increased from 17 percent to 18 percent in 2012, following external debt restructuring and state-funded recapitalization of BTA.
- Credit growth and NPLs:
- Private sector credit growth remains moderate overall; consumer lending is expanding rapidly (from a low base), concentrated in small- and medium-sized banks.
- Efforts to resolve the large stock of nonperforming loans (NPLs) are ongoing but with limited impact so far.
- Non-bank sector:
- Kazakhstan’s 11 pension funds, with total assets of US$21.2 billion (11 percent of GDP), are being unified under partial management of the central bank following a Presidential decree early in 2013.
Fiscal position and public finance
- 2012 fiscal changes:
- Fiscal position worsened somewhat in 2012, mainly due to weaker oil sector performance and tax exemptions for new oil projects, accompanied by a rise in expenditures of 0.8 percent of GDP.
- Non-oil deficit:
- Deteriorated slightly from 8.8 to 9.0 percent of GDP, compared to an estimated medium-term sustainable level of 6 percent of GDP.
- Early 2013:
- Revenue performance was relatively weak while expenditures were also subdued.
- Medium-term plans:
- Authorities planning large investment projects in the broader public sector to boost economic development and diversification.
- Fiscal consolidation priority:
- Directors stressed lowering the non-oil deficit over the medium term via a credible fiscal consolidation strategy.
- Consolidation plans in the medium-term fiscal framework must be consistent with announced (but non-budgeted) large scale public spending plans.
- Assumptions underlying expenditure and revenue projections must align with a macroeconomic framework accounting for envisioned fiscal measures.
- Transparency and governance:
- Authorities should integrate fully the National Fund of the Republic of Kazakhstan (NFRK) with fiscal accounts and use consolidated budget balances to guide fiscal policy.
- Need for improved transparency of quasi-fiscal operations, including those related to development and diversification programs.
- Intention to monitor more closely external debt of the broader public sector welcomed.
- Pension fund unification caution:
- Unification of private pension funds must avoid exacerbating fiscal risks and undermining earlier reform efforts.
- Authorities should adopt a clear and sound market-based investment strategy for the assets and ensure individual accounts are maintained.
Growth outlook and risks
- 2013 outlook:
- GDP is expected to grow at 5¼ percent in 2013, only moderately above 2012, reflecting a recovery in oil and agricultural output.
- Medium term:
- Full scale production in the Kashagan oil field, projected to commence in 2015, will strengthen overall growth.
- Downside risks:
- A potential slowdown in the global economy, particularly in Russia and China.
- Lower oil prices than currently projected.
Executive Board Assessment — Key points and policy recommendations
- Growth and policy architecture:
- Directors welcomed sustained growth and noted average growth of 8 percent over the past decade.
- Urged authorities to strengthen policy architecture to achieve durable and inclusive growth and reduce vulnerability to shocks.
- Financial stability and NPL resolution:
- Greater determination needed to resolve the NPL problem and counter financial stability risks.
- Recommendations included:
- Follow through on consideration of redesigning the Problem Loans Fund.
- Strictly enforce the new ceilings on NPLs to achieve full compliance.
- Ensure risk management and lending practices are sufficiently robust, given rapid consumer lending growth.
- Further strengthen supervision and macroprudential tools: shore up on-site supervision, enhance liquidity and credit risk assessments, and step up the Early Warning System.
- Ensure planned exit from troubled banks is market-based and transparent.
- Monetary policy framework and communication:
- Welcomed NBK’s enhanced regulation of banking system liquidity.
- Urged introduction of a new policy interest rate that signals better the stance of policy.
- NBK should communicate transition plans to active open market operations (OMOs) and elaborate publicly on factors guiding interest rate decisions.
- Encourage close NBK–Ministry of Finance collaboration to increase financial institutions’ participation in the market for government paper to support active OMOs.
- Suggested re-evaluating the role of the exchange rate within the broader monetary policy framework to allow greater flexibility over the medium term.
- Diversification and public investment:
- Urged further action to reduce dependence on oil.
- Successful diversification requires bolstering human capital, the business environment, and institutions.
- Highlighted importance of carrying out critical public investment in line with absorptive capacity and high standards of efficiency and oversight.
Kazakhstan: Selected Economic Indicators, 2010–14 (as presented)
- Real economy (Changes in percent)
- Real GDP: 7.3, 7.5, 5.0, 5.2, 5.3 (Proj. 1/)
- CPI (end-of-period): 7.8, 7.4, 6.0, 6.2
- Public finance (In percent of GDP)
- Government revenue and grants: 23.9, 3..9, 27.7, 27.0, 25.6, 24.3
- Government expenditures (and net lending): 22.5, 21.8, 21.1, 20.6
- General government balance 2/: 1.4, 5.9, 4.5, 3.7
- General government non-oil balance: -10.3, -8.8, -9.0, 0..0, -8.6, -7.8
- General government debt (end-of-period) 3/: 10.7, 10.4, 12.4, 13.4, 13.8
- Money and credit 4/
- Base money: 10.3, 1.9, 17.9, 15.8
- Broad money: 13.3, 15.0, 7.9, 10.8
- Credit to the economy 5/: 5.8, 15.2, 11.3, 19.5
- NBK refinance rate (end-of-period; percent): 7.0, 5.5, ...
- Balance of payments 6/
- Trade balance: 19.3, 24.9, 21.3, 18.8, 15.7
- Current account balance: 0.9, 6.5, 3, 3.1
- External debt: 79.9, 66.7, 67.7, 66.0, 62.8
- Excluding intra-company loans: 44.5, 34.5, 34.9, 31.8, 28.4
- Gross international reserves (In billions of U.S. dollars, end of period): 28.3, 29.3, 34.4, 41.0
- In months of next year’s imports of goods and nonfactor services: 6.6, 5.7, 6.1, 6.9
- Exchange rate 7/
- Tenge vs. U.S. dollar (end of period): -0.7, 0.4, 1.5
- Real effective exchange rate (p.a) 8/: 0.3, 3.6
Sources: Kazakhstani authorities; and IMF staff estimates and projections. Staff projections and IMF staff estimates noted in original table.