IMF Executive Board Concludes 2011 Article IV Consultation With the Republic of Kazakhstan
June 16. IMF
The economic recovery gained speed in 2010. Aided by favorable commodity prices and continuing public sector support, real GDP expanded by 7 percent, up from 1? percent in 2009. Growth was substantially higher than expected by the authorities, the Fund, and many economic analysts. The external position strengthened, with the current account returning to a surplus of 3 percent of gross domestic product (GDP) in 2010, and foreign inflows began to pick up. Driven largely by rising global food prices, inflation pressures intensified, and annual inflation was 8? percent at end-April 2011, exceeding the official objective range of 6-8 percent.
The official unemployment rate was not affected by the crisis, and resumed a declining trend as the economy started to recover. The official poverty rate also continued to decline, but poverty remains relatively high in rural areas, contributing to the migration to large cities.
The banking and corporate sectors have not recovered from the crisis despite the return of strong economic growth. Nonperforming loans on a 90-day overdue basis remain high at over 25 percent of total loans. Banks have been reluctant to write off bad loans, given expectations of economic recovery, difficulties of managing collateral, and tax disincentives. As a result, banks’ lending activity remained weak, lagging the pace of economic recovery.
The authorities began to adjust policies to the increase in commodity prices and related inflows. The National Bank of Kazakhstan (NBK) raised its policy rate by 50 bps to 7? percent in March, signaling a reversal of the easing cycle implemented during the crisis. The overall fiscal balance went back to a surplus of 1? percent of GDP in 2010. Emergency support to the financial sector was significantly reduced, although deposits in the banking system, subsidized lending to priority sectors, and increases in wages and pensions continued.
Staff projects real GDP growth to remain strong at about 6? percent in 2011 and the medium term. Growth is expected to become somewhat more balanced, as the non-oil sector continues to recover. With global food prices remaining high and potential demand pressures beginning to emerge, inflation is likely to exceed the objective range, reaching 9-10 percent by the end of the year. The external current account balance and the oil fund assets are projected to strengthen further. A deterioration of external economic conditions, particularly developments in major trade and financial partners and/or a fall in commodity prices, presents the main downside risk to the outlook.
Executive Board Assessment
In concluding the 2011 Article IV consultation with Kazakhstan, Executive Directors endorsed staff’s appraisal, as follows:
Executive Directors welcomed the swift pace of economic recovery, which is now more broad based and mainly driven by favorable external conditions, but noted that a full recovery of non-oil sector activity remains restrained by banking sector difficulties. Directors commended the authorities’ appropriate response to the increase in commodity prices and related inflows by tightening the fiscal stance and signaling a move away from monetary accommodation toward a more neutral stance. A combination of decisive action to resolve banks’ nonperforming loans, sound macroeconomic policies to address the emerging inflationary and spending pressures, and structural reforms to encourage economic diversification are the key pillars for success of the ambitious and commendable medium-term development plan.
Directors stressed the need for action to forcefully resolve banks’ problem assets, which has become a protracted problem and poses risks to the outlook. They noted that the new plan to address this problem is a step in the right direction. However, it needs to ensure in a more comprehensive way that loans are adequately provisioned and properly valued, banks’ losses are transparently recognized, restructuring is undertaken by professional managers, and tax impediments to the writing off of band loans are removed. This process should be based on a forward-looking, independent and rigorous assessment of banks’ balance sheets, accompanied by strong supervision, and followed by credible plans for any needed recapitalization. Ownership and partial financing of the envisaged centralized distressed asset fund by the NBK poses risks to the integrity of monetary policy, and may create conflicts with its new supervisory powers.
Although domestic demand-based price pressures appear relatively contained, Directors urged the authorities to continue to keep inflation under control by gradually withdrawing monetary accommodation, and tightening policies more forcefully if headline inflation keeps increasing or core inflation starts to rise. They emphasized the importance of fully implementing the announced macro-prudential measures and enhancing liquidity management practices to manage a possible increase in capital inflows.
Directors noted that there is no clear evidence that the tenge deviates significantly from its long run equilibrium, although the real exchange rate appears slightly undervalued given the prospect for medium-term capital and oil related inflows. Looking forward, greater exchange rate flexibility would enhance the economy’s ability to absorb shocks and support monetary policy. In the short term, however, the likely implications of further flexibility for the balance sheets of banks and corporates should be carefully assessed.
Directors supported the plans for fiscal consolidation through better tax administration and expenditure restraint. Fiscal management should incorporate the enlarged government, including all public and quasi public enterprises, while giving priority to investment and social outlays, including enhancing existing social safety nets. This would allow reduced reliance on administrative measures to contain price increases. Directors stressed the importance of efficient public financial management, and a medium term framework that ensures that the use of oil resources and accumulation in the oil fund are aligned with appropriate intermediate targets for the non-oil balance.
Directors welcomed plans for economic diversification, and noted the importance of structural reforms to ensure positive spillovers of Kazakhstan’s mineral resource wealth to the domestic economy. These reforms include improving the business environment, removing barriers to trade, building institutions, and enhancing governance in the banking and corporate sectors. Similarly, large public and quasi public enterprises should be commercially oriented and professionally managed, and statistics transparently disseminated.
Kazakhstan: Selected Economic Indicators, 2008-12
|(Changes in percent)|
|(In percent of GDP)|
|Government revenue and grants||27.9||22.5||25.3||26.4||26.5|
|General government balance 2/||1.1||-1.4||1.5||2.6||2.6|
|General government non-oil balance||-11.4||-10.7||-10.3||-9.8||-9.4|
|General government debt (end-of-period) 3/||6.7||10.4||11.3||12.4||13.0|
|(Changes in percent)|
|Money and credit 4/|
|Credit to the economy 5/||5.2||7.2||0.9||6.7||13.4|
|NBK refinance rate (eop; percent)||10.5||7.0||7.0||…||…|
|(In percent of GDP)|
|Balance of payments 6/|
|Current account balance||4.7||-3.8||3.1||7.1||5.6|
|Excluding intra-company loans||50.1||55.5||47.2||38.6||35.6|
|Gross international reserves|
|In billions of U.S. dollars, end of period||19.9||23.1||28.3||38.8||45.7|
|In months of next year’s imports of goods
and nonfactor services
|(Changes in percent)|
|Exchange rate 7/|
|Tenge vs. U.S. dollar (end of period)||-0.4||-22.9||0.6||…||…|
|Tenge vs. Russian ruble (end of period)||16.5||-19.7||1.6||…||…|
|Real effective exchange rate (p.a) 8/||7.0||-6.1||1.5||…||…|
Sources: Kazakhstani authorities; and IMF staff estimates and projections.
1/ Staff projections.
2/ Privatization revenues are treated as a financing item.
3/ Gross domestic and external government debt, including government guaranteed debt.
4/ Reflects data available at the time of the mission.
5/ Source: Monetary Survey of the Banking System.
6/ The GDP in U.S. dollars is calculated using the period average exchange rate.
7/ A positive sign indicates appreciation.
8/ IMF staff estimates.