Kazakhstan: Staff Concluding Statement of the 2018 Article IV Mission
IMF News, June 28, 2018
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- Published: June 28, 2018
Context and outlook
- Recovery continues after shocks beginning in 2014; real GDP increased by 4 percent in 2017.
- Growth drivers in 2017: strong exports (oil and metals), new supply from the Kashagan field, mining, manufacturing, and investment.
- Current account deficit reduced by export growth; inflation has remained within the NBK target band and expectations stabilized.
- Credit recovery underway: lending to households has picked up more than corporate credit.
- Growth prospects and risks:
- Non-oil growth projected to increase to 4 percent over the medium term.
- Downside risks: commodity prices, reduced reform impulse from higher oil/metal prices, pressures on the tenge, slower growth in Russia or China, tighter/volatile global trade or financial conditions.
- Upside opportunities: Belt and Road Initiative (BRI) and reforms in Uzbekistan.
Growth strategy and structural reforms
- Ongoing initiatives:
- “100 Concrete Steps” to improve business climate, public administration, and governance; more than half of the steps completed.
- Small-scale privatization and preparations for IPOs for major SOEs in aviation, telecoms, and nuclear materials.
- Astana International Financial Center (AIFC) to open in July as a regional financial hub.
- “Kazakhstan 2025” strategic plan focusing on high-quality growth, productivity, competitiveness, modernization, technical upgrades, and public administration improvements.
- President Nazarbayev’s “5 Social Initiatives”: affordable housing, lower tax burden for lower-income earners, higher education access/quality, expanded SME financing, and a gas pipeline to Astana.
- Implementation challenges and priorities:
- Reduce the state’s footprint to foster a dynamic private sector and avoid cementing a culture of reliance on state subsidies.
- Emphasize infrastructure modernization (rail, road), performance of state holding companies and SOEs, trade liberalization, competition, land use and agricultural infrastructure, and well-designed public-private partnerships (PPP).
- Improve coordination among agencies, regular reporting on implementation, and comprehensive evaluation of results.
Fiscal policy
- Consolidation underway as countercyclical spending winds down and oil revenues improve; adjustment envisaged this year with lower spending on goods/services and investment.
- Reform measures affecting public spending:
- New “capitation” funding approach for health and education service providers.
- Review of public sector jobs and wage alignment with private-sector remuneration; new performance recognition system.
- Reduction of transfers from the National Fund (NFRK); consideration of a tenge-denominated Eurobond to attract foreign investors and establish a benchmark.
- Medium-term fiscal outlook:
- Non-oil deficit expected to decline toward IMF staff estimates of the sustainable long-term position.
- Adjustment driven by higher revenues, mainly from tax administration gains (improved VAT administration, enhanced technology).
- Tax and revenue measures:
- Recent tax code changes: simplification, clarifying ambiguities, reducing compliance burden, improving dispute resolution.
- Measures to enhance compliance by small businesses and the self-employed; expand electronic invoicing and filing.
- As part of the “5 Social Initiatives,” the effective personal income tax rate for low-income earners will be cut from 10 percent to 1 percent.
- IMF staff view: support for administration and policy measures, but projected revenue gains from tax administration reforms may be ambitious.
- Considerations: moderate increase of PIT rates for higher-income earners, universal income declaration requirements, review of tax holidays/exemptions/incentives/zones, targeted and time-limited incentives linked to investment, possible moderate VAT rate increase once administrative improvements are in place.
- Recommendation to consider additional high-quality capital spending in tandem with higher non-oil revenues.
- Extractive industries fiscal regime revisions:
- Oil and gas: introduction of an optional, “alternative” tax for deep-water exploration; elimination of discovery bonus; more favorable tax treatment of exploration expenses; licensing round for deep-water areas planned for later this year.
- Mining: removal of an excess profits tax and increased reliance on regressive ad valorem royalties.
- Recommendation: comprehensive tax regime review for mining, possibly with IMF technical assistance; increase transparency around contractual arrangements.
- Fiscal transparency and risk management:
- Align fiscal reporting with international standards; adopt IMF GFSM methodology.
- Strengthen risk management for PPPs and SOEs; introduce a more comprehensive and detailed medium-term fiscal framework.
Monetary and exchange rate policies
- Monetary policy focus: price stability.
- NBK interest rate cuts have been undertaken as inflation declined and expectations stabilized; most recent cut to 9 percent in June.
- Cuts are consistent with keeping real interest rates close to neutral levels; NBK should resist calls for further accommodation given changing balance of risks.
- Exchange rate regime:
- Existing flexible exchange rate regime supports inflation targeting, helps absorb macro changes, and supports dedollarization.
- ER movements reflect fundamentals, including oil prices and Russian ruble dynamics.
- Recommendation: NBK should strengthen communications and transparency on FX purchases/sales, including on behalf of the NFRK and UAPF.
- Monetary operations and market development:
- NBK notes have helped manage liquidity and build the short end of the yield curve; money-market rates have stayed within the NBK corridor, close to the lower bound.
- Clearstream project to facilitate foreign-investor access and enhance local securities market.
- Scope to strengthen NBK-government cooperation on liquidity management and market issues, including management of SOE deposits/funds.
- Review of reserve requirements recommended: consider unifying resident and non-resident reserve requirements, possibly higher rates, remuneration, maintaining differentiated rates for FX and tenge liabilities, and gradual elimination of cash from eligible reserves.
Financial sector policy
- Recent sector support and reforms:
- State-supported merger of Halyk and KKB; five banks received capital support through NBK subordinated loans.
- NBK has withdrawn/suspended licenses of several smaller banks; legal changes to enhance NBK supervisory/regulatory powers under consideration by parliament.
- Remaining challenges:
- Need for banks to adopt strengthened business models with enhanced governance, management, and operations.
- Weak credit-risk management and problem loans persist in some banks.
- Priority policy actions:
- Asset quality and governance:
- Updated assessment of bank assets to clarify magnitude of possible problem loans, followed by prompt write-off of bad loans.
- State support should be followed by decisive operational improvements.
- Strengthening supervision and regulation:
- Adopt amendments to the Law on the NBK and the Law on Banks and Banking Activity to address regulatory deficiencies.
- NBK to issue follow-up regulations to formalize broader powers and improve transparency of supervisory judgment.
- Area for possible IMF technical assistance; improve loan-classification regulations.
- Emergency liquidity assistance (ELA):
- Strengthen ELA framework; ELA should be provided only to solvent institutions, collateralized, and—in the IMF staff view—provided under government guarantee.
- Credit subsidies and state-supported initiatives:
- Programs such as the “7-20-25” mortgage program and support to SMEs and agriculture should be targeted, transparent, temporary, budget-funded (not NBK-funded), not compromise commercial bank credit assessment, and be rigorously evaluated ex post.
- With recovery in place, limit state funding and subsidies to avoid cementing reliance on state support; utilize existing agencies where possible.
- Financial sector infrastructure:
- Improve collateral valuation, foreclosure, and disposal of distressed assets.
- Address legal, institutional, and operational constraints affecting the Problem Loan Fund (PLF) to enable resolution of bad assets from the KKB-Halyk merger.
- UAPF:
- Pension fund asset management should aim for sound returns with appropriate risk management and transparency, not support fiscal or monetary objectives.
- Efforts to return part of UAPF assets to non-NBK management with safeguards are welcome.
- Measures to unlock credit:
- Policies should foster a dynamic private sector and stronger banks.
- Some contemplated measures (allowing banks to sell securities connected with past state funding; possible UAPF purchase of commercial bank bonds) could help with appropriate risk-sharing and market terms, but constraints on credit demand limit effectiveness.
- Recommended focus on reducing dollarization, phasing out loan subsidies, removing interest rate regulations, and strengthening banking sector to improve monetary transmission.
Concluding remarks
- With economic recovery gaining strength, Kazakhstan should move decisively with reforms to transform the economy and bring it closer to development goals.
- Key recommendations: shift growth impetus to the private sector, restore fiscal buffers through consolidation and revenue administration/expenditure optimization, finalize legislative amendments addressing regulatory gaps, conduct bank asset-quality assessments, and ensure any state support is targeted, transparent, temporary, and budget-funded.
- The IMF staff stands ready to provide additional policy advice and technical assistance.
IMF Communications Department — Staff Concluding Statement of the 2018 Article IV Mission (June 28, 2018).