Kazakhstan: Staff Concluding Statement of an IMF Staff Visit
IMF News, November 28, 2018
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- Published: November 28, 2018
Overview
- An IMF staff team visited Kazakhstan during November 6-14, 2018 to review developments, prospects, and policies. Discussions focused on the outlook and risks, monetary policy and operations, the financial sector, budget execution, the 2019 budget, the fiscal framework, and structural reforms.
- The team thanks the authorities and other counterparts for excellent cooperation and productive discussions.
Developments and outlook
- Growth and projections:
- Growth was strong in the first half of 2018 at 4.2 percent, led by manufacturing, oil, and a recovery of credit growth.
- The team forecasts growth of 3.7 percent in 2018 and 3.1 percent in 2019 (as oil production gains moderate).
- For the medium term, the team projects a pickup of non-oil growth to 4 percent, reflecting structural reforms and financial sector repair.
- Inflation and external:
- Inflation has come down to 5.3 percent in October.
- Stronger exports, especially oil, have supported improvement of the current account.
- Risks:
- From lower commodity prices, geopolitical and trade tensions affecting major trading partners, and possible gaps in implementation of reforms.
Monetary and exchange rate policy
- Objectives and recent actions:
- Monetary policy has continued to focus on price stability.
- The NBK cut interest rates until October, when the policy rate was raised due to an escalation of inflation risks, including from ER developments.
- The tenge has been under pressure recently, mainly reflecting spillovers from Russia.
- The NBK stayed out of the FX market until September, when it sold FX due to severe short-term pressures.
- Assessment and recommendations:
- The team viewed the September FX sales as appropriate given transitory pressures, and supported the latest policy rate decision as justified by domestic and external risks and expected ER pass-through to prices.
- The team welcomes publication of new data and other information by the NBK.
- Improve monetary transmission: NBK has managed a structural liquidity surplus through notes; staff sees merit in continued use and suggests moving from daily note auctions to lower frequency issuance of 7-day notes.
- Pass-through issues: Policy rate reductions have had limited pass-through to lending and deposit rates; credit growth has been under pressure from structural banking-sector changes.
- On state interventions in credit (examples: “7-20-25” mortgage program, a KZT 200 billion bank bond program, new initiative to provide KZT 600 billion), the team recommends support be targeted and temporary and come from the budget, not the NBK or the pension fund (UAPF). Scale and timing matter because credit is picking up and further boosts could fuel inflation.
Financial sector
- Recent stability and actions:
- Assisted by the NBK’s Bank Recovery Program (BRP), banking system stability has been preserved. Capitalization, asset quality, liquidity, and profitability have been improving.
- Accounting for significant write-off of nonperforming loans, there has been an increase in credit, particularly retail loans.
- The NBK revoked licenses of several small banks for systematic non-compliance with prudential requirements.
- Concerns and recommendations:
- Recent additional financial support for Tsesna Bank raises concerns:
- Purchase of KZT 450 billion of bad assets by the Problem Loan Fund (PLF) at face value.
- Tsesna’s shareholders remain in place and have agreed to provide new share capital.
- The bank is undergoing comprehensive restructuring, including improved credit risk management.
- The NBK must use new supervisory powers effectively and shift to risk-based supervision.
- The NBK’s aim to complement risk-based supervision with an external asset quality review (AQR) is commendable; an AQR is key to assess capital adequacy and establish follow-up actions.
- State support to banks should be limited to systemic, viable banks and linked to strict conditions: loss recognition before state capital is added, a robust restructuring plan and corporate governance, enhanced supervision, and transparency.
- Increased confidence in banks would lower uncertainty, reduce deposit volatility, and support channeling longer-term liquidity to the real economy.
Capital markets
- Opportunities and cautions:
- Launch of the Astana International Financial Center (AIFC) provides an opportunity to deepen capital markets.
- AIFC is expected to handle IPOs of several major state-owned enterprises in 2018-20 and to take a lead role in the government securities market.
- Operating two exchanges with potentially overlapping instruments risks confusion and distortions.
- The team urges all stakeholders (government, NBK, AIFC, KASE) to lay out a clear vision for market operations and development, including pensions and plans for private pension management.
- A clear statement by government and the NBK on objectives, principles, and plans in the pension area would be helpful.
Fiscal policy
- Recent stance and 2019 budget:
- With economic recovery, fiscal policy is focused on adjustment and rebuilding of buffers after large-scale support measures in 2014-17 (Nurly Zhol, Nurly Zher) and support for banks.
- Revenues are expected to increase in 2018, reflecting the improved economic environment, higher oil production and prices, and measures to strengthen administration and collections.
- Spending is set to remain broadly constant in nominal terms, allowing for a lower non-oil deficit and an increase of balances in the National Fund (NFRK).
- The 2019 budget continues consolidation while making room for new initiatives announced in September by the President; it envisages higher VAT and corporate income tax revenues.
- Increases of personal income tax rates for higher-income earners were reviewed and postponed, due to concerns with evasion and collections.
- On spending, wage increases will take place, along with higher social spending and support for SMEs and the agro-industrial and manufacturing sectors.
- The budget is in line with the deficit-reduction and buffer-rebuilding path in the 2016 NFRK concept.
- Assessment and recommendations:
- The team broadly supports the draft budget but notes a relaxation in 2019-21 relative to the previous baseline—reflecting higher wages and sectoral support—comes at a time of higher oil prices and raises concerns about procyclical policies and vulnerability to oil price changes.
- The team welcomes ambitious tax administration reforms and sees merit in greater tax progressivity.
- Concern with the relatively low level of capital spending going forward; this could adversely affect medium-term growth.
- PPPs in health, education and other areas could bring benefits if carefully designed and managed to limit risks.
- Further efforts should align the fiscal framework with best practices, especially in budget formulation and reporting; risk management and transparency should be strengthened.
Structural reforms
- Objectives and progress:
- Authorities aim to reduce the state’s footprint and diversify the economy by improving the business environment, making public administration more service-oriented and efficient, investing in enabling infrastructure (transport, IT), and undertaking PPPs.
- This represents a transition from substantial state support in recent years.
- Privatization is advancing, with over 400 firms sold since 2016, and hundreds more undergoing liquidation.
- High-quality IPOs of “blue-chip” state companies in natural resources, electricity, transportation, and communications will be key to show commitment and build confidence.
- Sectoral focus:
- Agriculture needs special attention due to poor risk management, ineffective operations, and high indebtedness that have placed pressure on banks, notably Tsesna. The sector should be transformed to become an engine of investment, exports, and growth.
- Structural reforms should aim to increase Kazakhstan’s attractiveness to foreign investors.
- Implementation:
- Decisive implementation is needed.
Article IV consultation
- The team proposes that the 2019 Article IV consultation mission be held in April or May.
- Possible focus areas: strengthening monetary policy operations and the inflation-targeting framework, continuing financial sector repair and deepening, the fiscal framework, and wage policy and competitiveness.
- The IMF initiative on strengthening governance and addressing corruption risks will also be a focus.
Concluding remarks
- Transition from strong state support is appropriate given the 2014-17 environment; pickup of oil prices has provided more breathing room but raises risks of complacency and pro-cyclical policies.
- Key challenges:
- (i) continuing development of the inflation-targeting framework;
- (ii) moving decisively past longstanding weaknesses among Kazakhstan’s banks;
- (iii) scaling back fiscal support to the economy, while increasing non-oil revenues and improving the quality of spending;
- (iv) addressing fiscal risks (including from external shocks, guarantees, state-owned enterprises, PPPs, PLF);
- (v) diversifying the economy and fostering new sources of private-sector growth, especially in agriculture and services.
- The authorities appreciate these challenges and have devised appropriate policies; implementation will be key.
- The Fund stands ready to provide further policy advice and TA in areas such as monetary operations, modeling and communications, banking supervision and regulation, asset management, tax policy and revenue administration, public finance management and the fiscal framework, fiscal risks and transparency, and PPPs.
Key selected economic indicators (from Table 1)
- Growth and components:
- Real GDP: 2016: 1.1; 2017: 4.0; 2018: 3.7; 2019: 3.2; 2020: 3.3; 2021: 3.1; 2022: 3.1 (Annual percent change, unless otherwise indicated)
- Real oil: 2016: -1.2; 2017: 10.7; 2018: 3.1; 2019: 1.2
- Real non-oil: 2016: 1.8; 2017: 1.9; 2018: 3.9
- Real consumption: 2016: 1.6; 2017: 1.7; 2018: 2.9; 2019: 3.5; 2020: 3.0
- Real investment: 2016: 2.7; 2017: 2.5; 2018: 2.8; 2019: 3.4; 2020: 3.8
- Real exports: 2016: -4.4; 2017: 2.3; 2018: 4.3
- Real imports: 2016: -1.9; 2017: 1.3
- Output gap (in percent of potential GDP): 2016: -1.8; 2017: -0.7; 2018: -0.5; 2019: -0.3; 2020: 0.1; 2021: 0.5
- Consumer price index (eop): 2016: 8.5; 2017: 7.1; 2018: 6.2; 2019: 5.5; 2020: 4.4
- GDP deflator: 2016: 13.7; 2017: 6.4; 2018: 10.9; 2019: 5.2
- Official exchange rate (Tenge per U.S. dollar; eop): …
- General government fiscal accounts (In percent of GDP, unless otherwise indicated):
- Revenues and grants: 2016: 16.1; 2017: 18.8; 2018: 20.2; 2019: 21.0; 2020: 21.4; 2021: 21.1
- Oil revenues: 2016: 4.1; 2017: 7.5; 2018: 7.6; 2019: 7.0
- Non-oil revenues: 2016: 12.0; 2017: 12.6; 2018: 12.8; 2019: 13.5; 2020: 13.9; 2021: 14.2; 2022: 14.6
- Expenditures and net lending: 2016: 21.5; 2017: 25.2; 2018: 19.6; 2019: 18.9; 2020: 19.1; 2021: 19.0
- Current expenditure 1/: 2016: 18.0; 2017: 21.3; 2018: 16.7; 2019: 16.2; 2020: 16.0
- Capital expenditure: 2016: 2.4
- Overall fiscal balance: 2016: -5.4; 2017: -6.5; 2018: 0.6; 2019: 2.1; 2020: 2.2; 2021: 2.0
- Excluding the financial support to SOEs and banks: 2016: -2.5; 2017: 1.4
- Gross public debt (percent of GDP): 2016: 19.7; 2017: 20.8; 2018: 18.1; 2019: 16.3; 2020: 14.8; 2021: 13.4
- Non-oil fiscal balance (percent of GDP): 2016: -9.5; 2017: -12.7; 2018: -6.9; 2019: -5.2; 2020: -4.8
- Non-oil fiscal balance (percent of non-oil GDP): 2016: -11.8; 2017: -15.8; 2018: -9.1; 2019: -7.0; 2020: -6.6; 2021: -5.9; 2022: -5.3
- Structural non-oil fiscal balance (percent of non-oil GDP): 2016: -12.0; 2017: -10.7; 2018: -9.0; 2019: -7.1; 2020: -6.8; 2021: -6.2
- Monetary accounts (Annual percent change, eop, unless otherwise indicated):
- Reserve money: 2016: 8.7; 2017: 7.3; 2018: 8.1; 2019: 7.7; 2020: 7.9
- Broad money: 2016: 15.6; 2017: 10.1; 2018: 9.2
- Credit to the private sector: 2016: 0.9; 2017: 10.3; 2018: 11.2
- Credit to the private sector (percent of GDP): 2016: 29.6; 2017: 27.0; 2018: 23.6; 2019: 23.9; 2020: 24.7; 2021: 25.5; 2022: 26.2
- NBK policy rate (eop; percent) 4/: 2016: 9.3
- External accounts (In billions of U.S. dollars, unless otherwise indicated):
- Current account balance (percent of GDP): 2016: -3.4; 2017: -0.4
- Exports of goods and services: 2016: 43.6; 2017: 55.9; 2018: 69.4; 2019: 70.9; 2020: 71.4; 2021: 72.1; 2022: 73.3
- Oil and gas condensate (exports): 2016: 19.3; 2017: 26.6; 2018: 37.1; 2019: 37.4; 2020: 36.2; 2021: 35.1; 2022: 34.5
- Non-oil exports and services: 2016: 24.3; 2017: 29.3; 2018: 32.3; 2019: 33.5; 2020: 35.2; 2021: 37.0; 2022: 38.9
- Imports of goods and services: 2016: 39.1; 2017: 43.0; 2018: 45.9; 2019: 47.0; 2020: 48.5; 2021: 50.1; 2022: 51.5
- NBK gross reserves (eop): 2016: 29.7; 2017: 30.7; 2018: 30.2; 2019: 31.1; 2020: 32.1; 2021: 33.1; 2022: 34.1
- NFRK assets (eop): 2016: 61.2; 2017: 58.3; 2018: 59.5; 2019: 62.9; 2020: 67.0; 2021: 74.9
- Total external debt (percent of GDP) 5/: 2016: 119.0; 2017: 104.9; 2018: 96.8; 2019: 94.6; 2020: 93.2; 2021: 91.0; 2022: 88.1
- Excluding intracompany debt (percent of GDP): 2016: 42.9; 2017: 39.6; 2018: 36.1; 2019: 35.9; 2020: 36.8; 2021: 36.6
- Memorandum items:
- Nominal GDP (in billions of tenge): 2016: 46,971; 2017: 51,967; 2018: 59,790; 2019: 64,912; 2020: 69,489; 2021: 74,579; 2022: 80,417
- Nominal GDP (in billions of U.S. dollars): 2016: 137.3; 2017: 159.4; 2018: 183.8; 2019: 195.3; 2020: 209.1; 2021: 224.4; 2022: 242.0
- Total Gross Transfers from the NFRK (in billions of U.S. dollars): 2016: 8.3; 2017: 10.2; 2018: 8.0; 2019: 6.9; 2020: 6.0
- Exchange rate (tenge per U.S. dollar; eop) 6/: 2016: 333.3; 2017: 332.3; 2018: 372.7
- Crude oil, gas cnds. production (millions of barrels/day) 7/: 2016: 1.62; 2017: 1.79; 2018: 1.85; 2019: 1.87; 2020: 1.89; 2021: 1.92; 2022: 1.94
- Oil price (in U.S. dollars per barrel): 2016: 42.8; 2017: 52.8; 2018: 68.8; 2019: 65.7; 2020: 63.1; 2021: 61.3
Source: IMF staff concluding statement of an IMF staff visit to Kazakhstan (November 6–14, 2018).