{
  "title": "Kazakhstan: Staff Concluding Statement of the 2017 Article IV Mission",
  "publication": "IMF News, February 8, 2017",
  "sourceUrl": "https://www.imf.org/en/news/articles/2017/02/08/mcs02082017-kazakhstan-staff-concluding-statement-of-the-2017-article-iv-mission",
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  "summary": "2016 growth: 1 percent, driven by an increase in oil production and supportive policies (notably Nurly Zhol).",
  "publishDate": "2017-02-08",
  "sections": [
    {
      "heading": "Context and outlook",
      "content": "- 2016 growth: 1 percent, driven by an increase in oil production and supportive policies (notably Nurly Zhol).\n- NBK reserves increased by $2 billion in 2016 owing to strong financial inflows.\n- Growth outlook:\n  - Projected growth in 2017: 2.5 percent.\n  - Projected non-oil growth by 2021: 4 percent.\n- Inflation outlook: expected to fall within the NBK target band of 6 to 8 percent in 2017.\n- External and medium-term risks: subdued prospects due to continued lower oil prices and weak conditions in key trading partners; uncertainty significant because of commodity price dependency.\n- Policy emphasis: continue addressing external and structural conditions; reduce the nonoil deficit in the medium term with higher non-oil revenues to support sufficient social and capital spending."
    },
    {
      "heading": "Monetary and exchange rate policies",
      "content": "- Progress:\n  - Transition to inflation targeting and conduct of monetary policy including a flexible ER noted as significant progress.\n  - After reinstatement of the policy rate in early 2016, NBK kept short-term market rates within its corridor via open market operations, standing facilities, and NBK notes.\n  - After FX purchases in the first half of 2016, NBK largely stayed out of the FX market consistent with inflation-targeting.\n  - ER flexibility has helped absorb external shocks.\n- Challenges and observations:\n  - Excess liquidity: increased tenge liquidity associated with deposit dedollarization and public spending; likely structural as bank lending has stalled.\n  - Yield curve: NBK notes have built the short end of the tenge yield curve; need cooperation with the Ministry of Finance to develop longer maturities, deepen the market, enhance market liquidity, and encourage institutional investor participation.\n  - Long-term FX swaps: most remaining NBK long-term FX swaps expire in 2017 and should not be renewed as banks now have ample tenge liquidity.\n  - Exchange rate policy: authorities should refrain from FX market intervention except to dampen excess volatility; NBK should communicate that the tenge will be flexible.\n  - Analytical capacity and communication: NBK has made substantial progress; this should continue.\n- Monetary policy guidance:\n  - Focus should remain on inflation as primary objective.\n  - NBK reduced its base rate by 500 basis points since February 2016.\n  - Lower expected inflation in the 12-to-18-month horizon would allow NBK to continue easing to support activity.\n  - A change in the NBK mandate to explicitly include growth is not advisable; monetary policy is not well-suited to address structural issues such as lack of “bankable” projects."
    },
    {
      "heading": "Financial sector — vulnerabilities and recommended actions",
      "content": "- Current situation:\n  - Financial sector weaknesses persist; bank lending is depressed.\n  - NBK intervened at two small banks; other banks may need additional capital to address high non-performing loans (NPLs).\n  - Banking sector historically characterized by complex and opaque finances and operations.\n- Key recommended actions:\n  - Reporting and diagnostics:\n    - Re-establish consolidated reporting to present a clear picture on NPLs and capital adequacy.\n    - NBK should proceed with diagnostics (stress testing, asset quality review).\n    - Develop internal risk-based supervisory methodology and assess bank reporting practices and audit quality in final supervisory evaluation.\n  - Additional capital and mergers:\n    - Recognize loan losses and obtain capital injections by shareholders.\n    - Further forbearance on capital requirements should be strictly limited.\n    - Banks should raise required capital or exit; mergers should be voluntary and backed by robust due diligence.\n    - Credible capital and business plans essential, especially for large mergers with competition/concentration implications.\n  - Liquidity provision:\n    - Accelerate work on NBK’s Lender of Last Resort (LoLR) provisions.\n    - NBK should not provide unsecured funds to banks.\n    - Government and SOEs should review placement of bank deposits.\n    - Pension fund (UAPF) should not place deposits in weak banks and should focus on strong investment returns.\n    - Emergency liquidity support should be available only to viable banks, be fully collateralized, include MOF guarantee where needed, be provided at penalty rates, and include time-bound repayment plans.\n  - Intervention and resolution:\n    - Timely intervention at weak banks necessary to avoid larger losses.\n    - NBK should have strong support from the presidential administration and government and necessary resolution tools, including adequate legal basis for powers and actions.\n    - NBK may need authority to replace bank management and require pre-approval of transactions.\n    - Fast-track legislation may be necessary to ensure NBK can act quickly and decisively, including bail-in of shareholders, assumption of management authority, and resolution of assets.\n  - Capital support:\n    - Public financial support for bank resolution should be provided only under strict conditions, with robust due diligence.\n    - Public funds should be used only for viable, systemic institutions and when financial stability is at risk.\n    - Shareholders should be fully diluted on a consolidated basis before public funds are used; shareholders should not retain claims on assets.\n    - Capital support should come from the state budget—from the NFRK or from domestic or international debt issuance—and not from the NBK (or the UAPF).\n    - MOF should consider providing capital support in the form of regular marketable, liquid government securities.\n  - Liquidation of bad assets:\n    - Bad assets obtained from banks, including land and real estate, should be liquidated quickly by the Problem Loan Fund (PLF) via a transparent, auction-type approach.\n    - Legal and regulatory changes and external advisors may be needed to support stepped-up PLF operations.\n- IMF staff position: supports strong and timely actions to deal with weak institutions."
    },
    {
      "heading": "Fiscal policy",
      "content": "- Recent stance:\n  - Fiscal policy has been supportive of growth; Nurly Zhol bolstered activity in SMEs, housing, construction, and transportation.\n  - Spending under Nurly Zhol will be reduced as it is phasing out; some spending categories, notably social expenditures, are expected to rise.\n  - Tenge depreciation supported non-oil revenues in 2016, especially VAT receipts.\n  - Pickup of oil prices expected to boost revenues in 2017.\n- Financing and buffers:\n  - Deficit financing will continue to rely primarily on transfers from the NFRK.\n  - Fiscal buffers remain large; public debt remains relatively low.\n  - New NFRK rules aim to reduce dependency on oil and maintain strong buffers.\n- Medium-term consolidation and targets:\n  - New NFRK concept envisages decline of the non-oil deficit to 7 percent of GDP by 2020 and 6 percent by 2025.\n  - IMF staff view: this path aligns with long-term estimates of a sustainable non-oil deficit but will require adjustment of around 4-5 percent of GDP.\n  - Adjustment should come through cuts in low-priority spending and especially increases of non-oil revenues.\n  - New tax code should rationalize tax exemptions and preferential treatments; higher and more progressive tax rates are likely to be needed.\n  - A comprehensive review of non-oil and oil tax regimes by the IMF Fiscal Affairs Department would be important to identify revenue-raising options.\n  - Staff calls for full adoption of IMF Government Financial Statistics reporting standards and more comprehensive coverage of fiscal accounts; IMF stands ready to provide technical assistance.\n- Contingent liabilities:\n  - Close monitoring of SOE debt (30 percent of GDP) and other contingent liability risks is warranted."
    },
    {
      "heading": "Structural reforms",
      "content": "- Reform agenda:\n  - Ambitious reform program underway to support diversification, broad-based growth, and improved public administration efficiency.\n  - Flagship 100 Concrete Steps initiative aims to adopt legal and regulatory changes and spell out implementation actions.\n  - Key assets have been identified for privatization.\n- Implementation challenges and priorities:\n  - Success hinges on coordinated, decisive implementation as reforms reinforce each other.\n  - Not all items have detailed legislation or action plans; in some cases follow-up implementation plans are not yet clear.\n  - Authorities should develop and communicate strategy and step up implementation to ensure positive effects materialize.\n  - Key milestone: successful conclusion of the first wave of IPOs (Air Astana, KazakhTelekom, KazAtomProm).\n  - Other IPOs and asset sales should follow (e.g., KazMunaiGas, Samruk Energy and electricity distributors).\n  - Special attention needed for reforms and productivity in agriculture and transportation sectors."
    },
    {
      "heading": "Closing and IMF role",
      "content": "- The IMF mission team thanked the Kazakh authorities for hospitality and constructive discussions.\n- IMF staff stands ready to provide additional policy advice and technical assistance to Kazakhstan.\n\nIMF Communications Department. Kazakhstan: Staff Concluding Statement of the 2017 Article IV Mission. February 8, 2017.\n\n---\n\n Content in this bundle\n\n- Mcs02082017k (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- Republic of Kazakhstan and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2017/02/08/mcs02082017-kazakhstan-staff-concluding-statement-of-the-2017-article-iv-mission"
    }
  ],
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    "Published: February 8, 2017",
    "2016 growth: 1 percent, driven by an increase in oil production and supportive policies (notably Nurly Zhol).",
    "NBK reserves increased by $2 billion in 2016 owing to strong financial inflows.",
    "Growth outlook:",
    "Inflation outlook: expected to fall within the NBK target band of 6 to 8 percent in 2017.",
    "External and medium-term risks: subdued prospects due to continued lower oil prices and weak conditions in key trading partners; uncertainty significant because of commodity price dependency.",
    "Policy emphasis: continue addressing external and structural conditions; reduce the nonoil deficit in the medium term with higher non-oil revenues to support sufficient social and capital spending.",
    "Progress:",
    "Challenges and observations:",
    "Monetary policy guidance:",
    "Current situation:",
    "Key recommended actions:",
    "IMF staff position: supports strong and timely actions to deal with weak institutions.",
    "Recent stance:",
    "Financing and buffers:",
    "Medium-term consolidation and targets:",
    "Contingent liabilities:",
    "Reform agenda:",
    "Implementation challenges and priorities:",
    "The IMF mission team thanked the Kazakh authorities for hospitality and constructive discussions.",
    "IMF staff stands ready to provide additional policy advice and technical assistance to Kazakhstan.",
    "[Mcs02082017k (PDF)](/external/lang/kazakh/np/sec/pr/2017/mcs02082017k.pdf){rel=\"external\" type=\"application/pdf\"}",
    "[Republic of Kazakhstan and the IMF](http://www.imf.org/external/country/KAZ/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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