1. Overview of output developments

Little progress has been made to improve the coverage and economic content of the official statistics on output during the past two years. Output data reported by the Kazakh statistical agency, Goskomstat, cover only the non-service activities of the state sector, and thus do not include: (i) the state-operated service sector (education, health care, general government management); (ii) production by newly established private enterprises or joint ventures; and (iii) private sector activity in the services sector or in agriculture. There are indications, based upon employment statistics, that the state service sector is declining at a rate far lower than that of the non-service sector, and that private business activity is actually growing. However, no data yet are available concerning output developments for these unreported activities, thus neither for the whole economy. The indicators mentioned below therefore may overstate the actual output decline.

According to such information, production continued to decline throughout 1993 and in the first nine months of 1994 (Chart 2). Real output fell by 12 percent in 1993, and further by an estimated 17–20 percent in January-September 1994, as compared with the same period of 1993. The contraction was especially pronounced in the construction and transportation sectors (Tables 2 to 4), although output decline was severe in all areas.

KAZAKHSTAN: REAL SECTOR INDICATORS, 1993–94

Citation: IMF Staff Country Reports 1995, 999; 10.5089/9781451820751.002.A001

Source: Data provided by the authorities; and staff estimates.

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KAZAKHSTAN: REAL SECTOR INDICATORS, 1993–94

Citation: IMF Staff Country Reports 1995, 999; 10.5089/9781451820751.002.A001

Source: Data provided by the authorities; and staff estimates.

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KAZAKHSTAN: REAL SECTOR INDICATORS, 1993–94

Citation: IMF Staff Country Reports 1995, 999; 10.5089/9781451820751.002.A001

Source: Data provided by the authorities; and staff estimates.

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The main contributing factors behind the decline in 1993 were the sharp drop in interstate trade, especially following the Russian currency conversion, increasing interenterprise arrears, a lower grain harvest (a reduction of 25 percent, compared to the peak 1992 harvest), sharp increases in input prices, notably for energy products, and major cuts in capital outlays from the budget (Table 5). In 1994, two additional factors contributed to the output decline: first, a domestic payment crisis which emerged at the beginning of 1994, and second, a further drop in agricultural output in July-August, owing to poor weather and shortages of equipment and fuel. The 1994 grain harvest could be just 80 percent of its 1993 level.

2. Output developments by sectors

The extent of output decline during 1993–94 varied among sectors. Industrial production in the state sector fell by 33 percent from its end-1992 level by September 1994, while agricultural output dropped by 23 percent over the same period. Output decline was more pronounced in the construction and transportation sectors where production levels were nearly halved during this period. Construction activity fell rapidly as investment activities were virtually halted, while transportation was hampered by sharp increases in energy-related costs and by the lack of improvement and maintenance of the road and railway infrastructure.

3. Price developments

The monthly rate of inflation, as measured by the change of the consumer price index (CPI), averaged around 30 percent during January 1993-July 1994 (Tables 10 and 11). Inflation averaged about 25 percent until September 1993, but accelerated in the period before the introduction of the new currency in November. Following the adoption of tighter monetary policy in 1994, the monthly inflation rate declined to 17 percent in March; however, with the extension of credit to clear interenterprise arrears in March-May 1994, monthly inflation accelerated in April-June 1994. Credits enabled enterprises to purchase foreign currency, so that the value of the Tenge fell, and also to grant substantial wage increases, with the nominal average wage increasing by almost 70 percent in April. Adjustments of oil prices and the prices of regulated services in April further fuelled inflation, and monthly inflation peaked at 46 percent in June. Another tightening beginning in June 1994 resulted in a steady decline of monthly inflation from July 1994 onwards, reaching a level of less than 10 percent in September. The stabilization of the nominal exchange rate from the end of May, together with deceleration of nominal wage increases, has helped bring about a trend fall in inflation. Lower prices for fruit and vegetables and stability of administered and energy prices also helped.

In addition to the overall monetary stance, the main factors behind the inflationary process in Kazakhstan were nominal wage increases, adjustments in administered prices, increased prices of energy imports (Tables 8 and 9), and imported inflation from other FSU countries, Russia in particular. Until the breakup of the ruble zone in July 1993, price developments in Kazakhstan closely reflected monetary policies in the ruble zone as a whole. In the following period, and until the introduction of the Tenge in November 1993, Kazakh inflation was fuelled by the depreciation of the Kazakh ruble versus the Russian ruble, on top of high inflation rates in Russia itself. The sharp fall of the Tenge in early 1994 contributed to another round of strong price increases.

The process of generalized price increases has masked significant changes in relative price structure. During January 1993-September 1994, prices of dairy products increased almost twice as fast as the average price level, while administered prices for rent, water and power were increased by a rate seven times greater than the increase of the CPI. Prices for clothing, footwear and household goods rose substantially less than the average.

The pattern of price increases at the wholesale level was broadly in line with the one at the retail level, although wholesale prices increased less than consumer prices in the weeks preceding the introduction of the new currency, an indication that consumer goods were more affected by speculative behavior in that period. The liberalization of energy prices in April 1994 contributed to a monthly increase of the producer price index that was more than four times greater than the increase of the CPI for that month. The April 1994 price liberalization, together with substantial price adjustments in the preceding period when prices were still set administratively, resulted in strong increase of wholesale energy prices relative to the other wholesale prices.

4. Investment and consumption

Investment data show a continuous decline of investment expenditure in real terms. Real investment during 1993 amounted to just 61 percent of 1992 levels, and investment was halved again during the first six months of 1994 (Table 5). The volume of investments in 1994 was less than one-sixth of the volume in 1991. The sharpest fall of investment since 1991 has been in the agricultural and construction sectors, while investment in energy-related sectors has become relatively more important. The share of total investment by state enterprises and organizations declined from about 85 percent in 1992 to around 69 percent in the first half of 1994, while the proportion of total resources provided by centralized state funds has remained at approximately 20 percent (22 percent in 1992, 24 percent in 1993 and 19 percent in the first half of 1994). Internally generated funds of state enterprises and organizations are the most important source of investment financing, accounting for 49 percent of investment by source in the first half of 1994 (Table 6).

Information about earnings and expenditures of the population are available, based on Goskomstat’s income surveys. Monetary income of the population (nominal) rose by more than 8 times in 1993, as compared with 1992, with an increase of monetary expenditure by almost 10 times, and with a period average increase of consumer prices of about 16 times (Table 7). These data would indicate both a decrease in the savings ratio and a decline in income and expenditure in real terms in 1993. However, underreporting of income, in particular from self-employment, and of purchases from outlets outside the state retail system suggests that conclusions about personal income and consumption from available data should be made with caution. A fall in the officially recorded savings ratio therefore illustrates a decline of savings through the traditional instruments, namely Sberbank deposits. Data from the period January-June 1994 regarding the population’s monetary income and expenditures implied a further substantial decline of both in real terms, and recorded savings fell to an extremely low level. With real interest rates having become positive in the summer of 1994, financially intermediated domestic saving is expected to begin to recover.

5. Wages and employment

Periodic adjustments of the minimum wage and a steady growth of average nominal wages prevented a strong erosion of wages in real terms in the first ten months of 1993; however, in conjunction with the acceleration of inflation at the time of the monetary reforms of November 1993, real wages sharply declined. Real wages stabilized afterwards, and the real wage decline during 1993–94 as a whole has been broadly in line with the fall in output (Chart 2 and Table 14). As long-run unit labor costs did not increase, total employment in the state sector remained virtually constant until the summer of 1994 (Table 16). Growing tensions in the labor market, however, are reflected in hidden unemployment and in a slow but steady increase in the number of officially registered unemployed (Table 17).

The decline in real wages in the aftermath of the introduction of the new currency was facilitated by the adoption of a new wage policy at the beginning of 1994. ^1/ A levy of four times the profit tax rate was imposed on payments for labor in excess of a productivity-based wage norm. During the first two months of operation, the wage policy had a clear impact, and the excess wage penalty led to a rate of growth in nominal wages that was substantially below the increase of the CPI. Financial and wage policy were relaxed after February, however, in the context of the arrears clearing operation, and enterprises granted substantial nominal wage increases in March and in April (see Chart 2). The minimum wage also was raised by 150 percent on April 1. After a small decline in real terms in June, the peak month for price inflation, nominal average wages increased broadly in line with the increase of the CPI in July-August. The minimum wage was adjusted again by 50 percent on July 1, and by 33 percent on October 1. As of end-September 1994, the real average and minimum wages stood at 74 percent and 21 percent of their January 1993 levels, and 77 percent and 45 percent of their November 1993 levels, respectively.

Sectoral wage differentials were fairly constant prior to the introduction of the Tenge, but increased rapidly thereafter. Differences in sectoral financial conditions, in particular in agriculture, and competitive pressures from the private sector resulted in rapidly widening wage differentials among state-employed workers (Table 15). Prior to end-October 1993, the average wage in state financial institutions was less than twice the average wage in state farms; by end-March 1994, a gap of more than four-fold had developed and has persisted.

The level of employment in the state sector and the number of officially registered unemployed remained virtually constant during the first nine months of 1993, and declined slightly in the fourth quarter. Total employment declined slowly throughout the first nine months of 1994, while the official number of unemployed increased gradually from around forty thousand at the end of December 1993 to about sixty thousand at the end of September 1994, about half of whom received benefits. The decline of real output since 1991 has clearly not been matched by a concurrent fall in total employment or by an increase in official unemployment. While the above-mentioned longer-run decline in real wages certainly played a role, this can be mainly explained by the insufficient level of and difficulty in obtaining unemployment benefits, and by the provision of social services and other non-monetary benefits by enterprises, which provides incentives to accept compulsory furloughs or other reductions in work without seeking new employment or unemployment benefits. Private sector employment is believed to be growing, but no detailed information is available.

In spite of the stability of the levels of total employment and registered unemployed, other measures reveal considerable pressures and activities in the labor market in Kazakhstan. For example, there have been sectoral shifts in employment, including a net outflow from the agricultural and construction sectors and an inflow into the state services sector, while the availability of positions, as measured by the number of reported vacancies of enterprises, was strongly impacted by the financial crisis of early 1994. The number of vacancies fell from 56 thousand in October 1993 to only 25 thousand in February 1994, although there has been a recovery since that time. Finally, the Government’s estimates of the number of hidden unemployed--including people not working but not registered as unemployed, or those working reduced schedules--rose from less than 180 thousand at end-October 1993 to almost 775 thousand at end-February 1994 (more than 10 percent of the labor force). Although the authorities’ estimate of hidden unemployment declined to approximately 500 thousand by August, this figure still represented 7 percent of the labor force.

6. Privatization and structural reform

Progress on structural reforms during 1993–94 was significant. In addition to the completion of price liberalization mentioned already, a new privatization program was introduced in 1993 and is now being implemented, while the “state needs” procurement system has been eliminated, except for grain purchases. There has been progress in initiating land reform and in introducing the necessary legal framework for private sector commercial activity. More limited progress has been made in the areas of demonopolization and state enterprise restructuring.

1. Fiscal policies in 1993

The fiscal position improved dramatically in 1993 relative to 1992, reflecting tighter budgetary policies, but also the positive impact of the “zero option” agreement reached with Russia. The overall budget deficit, on a commitment basis and including grants, was limited to T 384 million, or 1.2 percent of GDP in 1993, as compared with a budget deficit target of 4.3 percent of GDP, and with the 7.4 percent of GDP deficit in the previous year (Table 18 and Chart 3). Expenditures were cut sharply, while revenues were broadly maintained in real terms. After some repayment of arrears that were incurred in 1992, the cash deficit was 1.3 percent of GDP in 1993. The 1993 deficit was financed in large part from domestic sources (1.1 percent of GDP), almost exclusively from credit from the National Bank of Kazakhstan; the external financing of the budget was relatively small (0.2 percent of GDP).

KAZAKHSTAN: FISCAL INDICATORS, 1993–94

Citation: IMF Staff Country Reports 1995, 999; 10.5089/9781451820751.002.A001

Source: Data provided by the authorities; and staff estimates.

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KAZAKHSTAN: FISCAL INDICATORS, 1993–94

Citation: IMF Staff Country Reports 1995, 999; 10.5089/9781451820751.002.A001

Source: Data provided by the authorities; and staff estimates.

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KAZAKHSTAN: FISCAL INDICATORS, 1993–94

Citation: IMF Staff Country Reports 1995, 999; 10.5089/9781451820751.002.A001

Source: Data provided by the authorities; and staff estimates.

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The virtual stability of revenue collection--revenue declined marginally from 22.9 percent of GDP in 1992 to 22.3 percent of GDP in 1993--masked two divergent trends. There was a sizeable decline in tax revenue collection, amounting to almost 6 percentage points of GDP, which, however, was almost fully offset by an increase in non-tax and capital revenue collection (Tables 18 and 19). The decline in tax collection reflected a number of factors: (a) a reduction in the general VAT rate from 28 percent to 20 percent, as of January 1, 1993; (b) the accumulation of interenterprise arrears, which negatively affected both VAT and profit tax payments; (c) a sharper decline in the traditional tax base--industrial production--than in GDP as a whole; (d) a decline in real revenue from foreign trade activity, largely due to the sharp drop in exports and a reduction in export taxes; and (e) continued tax erosion, due in part to weaknesses in tax administration.

While the drop in VAT collection was a major contributory factor to the tax revenue decline, it was partly an exogenous development for the Kazakh authorities, in particular, a reduction in the VAT rate in line with policies adopted in other CIS countries. Initially the Kazakh authorities intended to reduce exemptions as an offsetting measure, however, no exemptions subsequently were removed. VAT collection was also adversely affected by the interenterprise arrears crisis as it created a severe liquidity squeeze on enterprises. These factors explained the loss of some VAT revenue equivalent to 2.5 percent of GDP in 1993 as compared to the previous year; the shortfall in comparison to the budget target was 1 percent of GDP.

Excise tax collection was also reduced, due to two factors. First, there was a delay in introducing envisaged excise tax measures, in particular, the extension of the excise tax base to selected imports, including automobiles, textiles, apparel, cosmetics, footwear, electrical appliances, and furniture, was delayed from the beginning of the year until September 1993. Second, there was a decline in the production of alcoholic beverages, including vodka, which comprise the base of the bulk of domestic excise collections.

Revenue from income taxes declined by a little more than 1 percent of GDP in 1993 relative to 1992, reflecting a reduction in profit tax collection; collection from personal income taxes remained broadly unchanged. Profit tax collection was positively influenced by enlarging the tax base through eliminating the tax exemption for export companies. At the same time, however, the methodology for calculating corporate profits was changed by increasing depreciation allowances and by introducing a carry-over of losses for a period of three years. Moreover, the collection of profit taxes was hampered by the accumulation of interenterprise arrears. In contrast, personal income tax collection remained strong, reflecting high nominal wage increases, as well as a relatively efficient collection of this tax.

As a major offset to the decline in the collection of taxes, collection of revenue from non-tax items improved by 3 percentage points of GDP in 1993, relative to 1992. This mainly reflected the imposition of levies by local authorities and increased profit transfers from the National Bank to the budget, the latter in turn reflecting high seigniorage. Capital revenue collection, amounting to 2.5 percent of GDP, resulted mainly from privatization proceeds.

As mentioned above, the improvement in the fiscal performance in 1993 emanated from a contraction in expenditures, with total expenditures declining from about 32 percent of GDP in 1992 to 23.5 percent of GDP. This reduction reflected a combination of adjustment efforts and favorable external developments. Most of the decline reflected a contraction in expenditures in foreign exchange, as Kazakhstan benefitted from the zero option agreement with Russia concerning repayment of former U.S.S.R. external debt, and as allocations for centralized imports were curtailed. The Government also adopted an incomes policy which resulted in the containment of wages and salaries in real terms in the budgetary sphere, in spite of increases of the minimum wage. ^1/ While subsidies for bread and fodder continued to be provided by the budget, the number of subsidized agricultural products was reduced. Budgetary subsidies for transportation also were largely eliminated, as expenditures were financed from a local tax earmarked for the development of public transportation.

Public investment was also cut, to a level of just 1.4 percent of GDP in 1993. New investment projects were delayed and expenditure for ongoing projects was limited to levels significantly below the earmarked revenue of the Investment Fund and the Fund for the Replenishment of Natural Resources. A significant proportion of construction projects that were to have been initiated in 1993 were not undertaken, including those related to housing cooperatives.

2. The 1994 budget

3. The budget outturn through September 1994

In the first three months of 1994, the overall budgetary position deteriorated sharply, with the fiscal deficit exceeding 18 percent of GDP, as compared to expectations of a surplus, based on the experience of previous years. The deterioration was due to a sharp decline in revenues, increased outlays for regular expenditures, and payments for formerly quasi-fiscal operations that had not been envisaged in the budget. The decline in tax revenue collection continued and in contrast to 1993, non-tax revenues could no longer offset its adverse impact. In addition to reasons already listed, tax revenues declined further as certain tax measures that had been envisaged in the original budget were not implemented (e.g., the extension of VAT to non-CIS imports and the increase of the average import duty rate to 15 percent). Moreover, tax compliance and collection declined significantly, as a result of a switch to barter transactions by enterprises, following the emergence of payment arrears and delays in bank settlements. The State Tax Inspectorate estimated tax arrears in the first quarter of 1994 at about 2 percent of GDP. Finally, as problems with interenterprise arrears mounted, several large state enterprises were successful in obtaining permission from the Government to temporarily postpone tax payments.

The impact of lower revenue collection was exacerbated by an increase in real expenditures. Regular budgetary outlays rose by almost 5 percentage points of GDP in the first quarter, as compared to their 1993 level. The minimum wage was increased twice in four months, resulting in a larger-than-budgeted wage bill. Increases in petroleum prices and a particularly cold winter also increased outlays. Defense and security related expenditure also rose as Russian border troops began to withdraw, and the Kazakh troops took over their responsibilities. In addition, retail prices for bread and fodder were not fully adjusted in line with rising inflation, which resulted in larger-than-expected subsidies. These larger subsidies and net lending to enterprises more than offset savings resulting from lower levels of other transfers to state enterprises.

However, the main reason for the deterioration in the fiscal performance in the first part of 1994 was related to unforeseen budgetary outlays. Most importantly, the Government undertook an interenterprise arrears netting operation, which entailed extending credit to net debtor enterprises in March-May 1994 of T 18 billion. This credit was intended to have a term of 90 days and be repaid from the resources of the debtor enterprises or from liquidation proceeds. The Government financed this operation mainly through central bank credit, but also from the proceeds of dollar-indexed, 1-year maturity bonds, and from some foreign resources. Another major formerly unbudgeted expenditure item was payment of government guarantees on external debt of enterprises contracted in 1992–93.

The worsening of the fiscal position slowed in the second quarter, as the Government resorted to significant expenditure sequestration and cuts in order to limit the size of the deficit. All expenditure categories were affected, including subsidies, investment outlays, and allocations for operations and maintenance. Some arrears occurred in the payment of wages, pensions, unemployment benefits and external debt service. At the same time, however, outlays for formerly quasi-fiscal operations remained high, and the overall deficit in the second quarter was still 15 percent of GDP.

Fiscal policies were drastically tightened starting in July 1994. In view of a shortfall in foreign financing, regular as well as quasi-fiscal expenditures were severely limited. Expenditure cuts were made across-the-board, and the Government took an additional measure to contain the wage bill by allowing for only a partial spill-over of a series of minimum wage increases into the budgetary sphere. At the same time, revenue collection began to stabilize. As a result, according to preliminary data, the deficits of the first half of the year are estimated to have been transformed into a surplus of 4 percent of GDP in the third quarter of 1994.

4. The social protection system

Kazakhstan has faced a major challenge to provide for the social protection needs of its population during the transformation from a command to a market economy. At the beginning of the transformation process, about 17 percent of the population received retirement benefits while some 37 percent were under 18 years of age. Thus, the country’s dependent population was larger than its active work force.

In 1993, the social security and welfare system was characterized by general protection for most of the population. The system comprised of two types of arrangements: (i) subsidies and transfers, and (ii) cash benefits. Subsidies and transfers included not only those for essential goods and services, such as foodstuffs, heating, transportation, and housing, but also for cinemas, publishing, and circuses. In most cases, these subsidies were not targeted and were aimed at maintaining low prices for all consumers. Budgetary transfers were paid to producers to compensate for the difference between costs and controlled prices. Targeted subsidies, such as in-kind coal transfers, were also provided to particularly vulnerable groups. It is estimated that the budgetary cost of these subsidies and transfers amounted to 5.7 percent of GDP in 1993. In the 1994 budget, the Government shifted away from general subsidies toward targeted ones. It curtailed untargeted subsidies to producers (by 50 percent in the case of bread, fodder, and flour, and by over 50 percent in the case of heating, community services and housing) and replaced them with targeted cash benefits. Moreover, in October 1994, the Government eliminated all bread and fodder subsidies in tandem with the liberalization of bread and fodder prices, and provided for a monthly Tenge 60 cash allowance for only the most vulnerable groups of the population.

Cash benefits are targeted to certain vulnerable groups such as pensioners, children, the unemployed, and the disabled. These payments are administered by the budget (in the case of family allowances) and by three extrabudgetary funds: the Pension Fund, the Employment Fund, and the Social Insurance Fund. In 1993, these three extrabudgetary funds were financed through payroll contributions of 37 percent for the Pension and Social Insurance Funds, and an additional 1 percent payable by employees. Since these funds enjoyed a surplus equal to 19 percent of expenditures in 1993, the authorities decreased the employer contribution rates in the 1994 budget to 30 percent, while employee contributions were eliminated. The proceeds were split between the two funds, with 85 percent going to the Pension Fund and 15 percent going to the Social Insurance Fund. The Employment Fund is financed by a 2 percent payroll contribution payable by employers.

The Pension Law stipulated that old-age pensioners received benefits equal to 60 percent of earnings of the last year before retirement, with an additional 1 percent for each year of service above 25 years for men and 20 years for women. These benefits were increased annually in line with changes in the cost of living index and amounted to about 5 percent of GDP in 1993. These old-age benefits are available at the young age of 55 for women and 60 for men, in cases where special preferences did not apply. Women who raised large families, plasterers, house painters, shepherds, and members of many other occupations are able to receive old-age benefits at even younger ages.

The Social Insurance Fund provided various social insurance benefits amounting to 1.4 percent of GDP in 1993, including for sick leave, temporary disability, maternity leave (142 days at full pay), one-time child birth payments (four times the minimum wage), funeral payments, and sanatorium services. Sick leave and temporary disability benefits were determined on the basis of years of service and accounted for one quarter of spending by the fund in 1993. Nearly two-thirds of the expenditures in 1993 financed stays in sanatoriums and resorts for employees of state enterprises.

Unemployment allowances, training, public works programs, and payments to immigrants were provided by the Employment Fund, with expenditures totalling 0.2 percent of GDP in 1993. Despite an unemployment rate that is estimated to have reached 7 percent of the labor force in 1994, registration for Employment Fund benefits was limited to one-tenth of that level. This could be explained by the very low level of unemployment benefits--the replacement ratio was only 17 percent in September 1994--as well as by the fact that once unemployed, the person loses all social services which are currently financed by enterprises.

Families with children receive benefits under the family allowance program. This program, financed by the budget, provides monthly payments to families with children whose per capita income was less than twice the minimum wage. Families with a per capita income exceeding this amount receive no benefits. Additional benefits, which were not means-tested, are provided to single mothers, families with many children, and children with special needs. Overall, spending on family allowances amounted to roughly 0.6 percent of GDP in both 1993 and in the first half of 1994.

5. Structural changes in the fiscal area

Three major structural changes have occurred in the fiscal area since mid-1993. First, with the exception of the Pension Fund, all major extrabudgetary funds were incorporated into the budget, facilitating expenditure prioritization and better financial management in the government sector as a whole. Second, substantial progress has been made in setting up a Treasury. The project is near completion; once operational, the Treasury will largely improve the cash management of the budget. Third, work is well under way to modify the tax code. The aim is to revise completely the present code, which is largely based on the old central planning system, and to streamline the tax structure. In addition, it is important to note that, unlike in many other FSU countries, the financial relations between the budget and the NBK has been placed on market conditions: the Government pays a market-related interest rate on loans from the central bank (the refinance rate of the NBK), while it receives market-related interest on its deposits with the NBK. Central bank profit transfers are regularized on the basis of the law on the central bank and annual negotiations between the two government bodies.

1. Monetary policy and developments during the ruble era

Monetary policy in Kazakhstan was largely subordinated to Central Bank of Russia policies until Russia’s currency reform in July 1993. As in the rest of the ruble area, monetary and credit aggregates increased rapidly in Kazakhstan in 1993. Currency in circulation increased by 3.5 times, base money by 4.5 times, and broad money by 4 times during the first half of 1993. Most of the increase in lending was in the form of directed credits to state enterprises channelled via state banks, the bulk of which was for financing the grain harvest and for replenishing the working capital of state enterprises.

The Kazakh monetary authorities were not fully prepared for the currency reform in Russia in July 1993. While recognizing the merits of using the opportunity to establish a national currency, the authorities first opted for negotiations and preparations to establish a new monetary union with Russia. They accordingly started the legal and administrative changes necessary for membership in a new ruble area. An agreement was signed with Russia on September 23, 1993, aimed at eventually reunifying the monetary systems of the two countries. The agreement called for harmonization of financial policies and institutions, coordination of price policy and the movement of trade, labor and capital, and creation of a joint fund of gold, foreign exchange and other liquid assets for the support of the Russian ruble. In the interim, Kazakhstan shared the use of pre-1993 rubles with other former ruble area countries that had not yet established national currencies; among neighboring countries, only the Kyrgyz Republic had a separate national currency at that time. Nevertheless, Kazakhstan continued to implement credit policies aimed at lowering inflation, while resorting to currency controls to stem the inflow of old ruble notes. The growth rates of monetary aggregates remained high, however, with base money rising by 40 percent and broad money by 60 percent during the third quarter as commercial banks drew down excess reserves with the NBK to expand credit to the economy. Pending clarification of the country’s position in the ruble area, the NBK built up its foreign reserves through the accumulation of domestically produced gold and the suspension of foreign currency auctions.

While pre-1993 and new Russian notes had been circulating at par until the July currency conversion, the rate between them widened to around 2:1 by September. Despite efforts to stop the inflow of old notes, the anticipation that the NBK would carry out a currency reform led to a move to hoarding, barter trade and use of foreign currencies. Together with substantial adjustments in the domestic prices of energy and bread, the monthly inflation rate accelerated (Chart 4), and the exchange rate between pre-1993 and Russian rubles widened to about 5.1. By end-October, with dimming prospects for agreement on a new ruble area, confidence in the pre-1993 ruble collapsed, with the exchange rate against the U.S. dollar dropping from Rub 2,700 in late-October to Rub 7,000–10,000 in the week of November 8.

KAZAKHSTAN: MONETARY INDICATORS, 1993–94

Citation: IMF Staff Country Reports 1995, 999; 10.5089/9781451820751.002.A001

Source: Data provided by the authorities; and staff estimates.1/ Effective Refinance rate for 1993 is based on average maturity of 12 months.

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KAZAKHSTAN: MONETARY INDICATORS, 1993–94

Citation: IMF Staff Country Reports 1995, 999; 10.5089/9781451820751.002.A001

Source: Data provided by the authorities; and staff estimates.1/ Effective Refinance rate for 1993 is based on average maturity of 12 months.

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KAZAKHSTAN: MONETARY INDICATORS, 1993–94

Citation: IMF Staff Country Reports 1995, 999; 10.5089/9781451820751.002.A001

Source: Data provided by the authorities; and staff estimates.1/ Effective Refinance rate for 1993 is based on average maturity of 12 months.

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2. The introduction of the Tenge

Kazakhstan introduced its national currency, the Tenge, on November 15, 1993. The period for conversion to the Tenge took place during November 15–20, with the circulation of large denomination ruble notes suspended on November 15, and circulation of small denomination notes suspended on November 18. Individuals could exchange cash only up to 100,000 rubles per person (equivalent to the average wage in October), at a rate of 500 rubles per Tenge; ^1/ amounts in excess of the limit could be deposited in special accounts, which would be frozen for 6 months, pending an examination of legitimacy. Deposits also were converted at T 500 per ruble. ^2/

Legal entities could exchange cash only through deposits at commercial banks. For enterprises engaged in retail trade, the limit on amounts to be converted was set at their average daily balance for July 1993 multiplied by a factor of 1.3; for other legal entities, the limit was their average daily cash balance. Banks were prohibited from accepting deposits in excess of these limits, and enterprises were limited to a single conversion transaction (except for enterprises involved in retail trade and services). Amounts in excess of the above limits were to be placed in special accounts blocked for a period of six months, pending the results of an inspection of the sources of the funds.

The National Bank exchanged slightly less than Rub 1 trillion of pre-1993 notes during the conversion period, compared to an estimate of Rub 1.2 trillion for currency in circulation at end-October. ^3/ To insure that the introduction of the new currency would not lead to price increases during the conversion period, the Government introduced penalties for (i) discrepancies between the prices of goods as expressed in Tenge and in rubles; (ii) refusal to sell goods for Tenge; (iii) the sale of goods for foreign currencies by non-licensed organizations; and (iv) deliberate closure of businesses. ^1/ In order to bolster confidence in the new currency, controls on the use of cash were removed; cash controls had been used during the ruble area period, as the receipt of ruble notes from the Central Bank of Russia typically had fallen short of local needs. Price and profit controls introduced at the time of the conversion were removed shortly thereafter.

3. Monetary developments following the introduction of the Tenge

With the introduction of the Tenge, the National Bank was for the first time in a position to conduct an independent monetary and credit policy, and policies aimed at reducing inflation were put in place. The National Bank reduced the growth in credit, increased commercial bank reserve requirements from 20 to 30 percent, and increased the proportion of central bank credit allocated through credit auctions, which were held on a monthly basis. The NBK refinance rate was increased administratively from 170 percent to 240 percent on December 12, 1993, exceeding for the first time the refinance rate of the Central Bank of Russia, and further to 270 percent on January 10, 1994 (Table 21). As a result of these policies, the quarterly growth rate of NBK credit to banks fell from more than 25 percent to less than 10 percent in the fourth quarter of 1993. The quarterly growth in broad money slowed from almost 64 percent in the third quarter of 1993 to less than 25 percent in the fourth quarter. Moreover, a large portion of the increase in base money reflected a significant strengthening of the NBK’s net foreign asset position. Inflation dropped during in the early months of 1994 (Chart 4), accompanied by a rapid slowdown in the depreciation of the nominal exchange rate (Chart 5).

KAZAKHSTAN: EXCHANGE RATE DEVELOPMENTS, 1993–94

Citation: IMF Staff Country Reports 1995, 999; 10.5089/9781451820751.002.A001

Source: Data provided by the authorities; and staff estimates.1/ Kazakhstan Interbank Currency Exchange.

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KAZAKHSTAN: EXCHANGE RATE DEVELOPMENTS, 1993–94

Citation: IMF Staff Country Reports 1995, 999; 10.5089/9781451820751.002.A001

Source: Data provided by the authorities; and staff estimates.1/ Kazakhstan Interbank Currency Exchange.

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KAZAKHSTAN: EXCHANGE RATE DEVELOPMENTS, 1993–94

Citation: IMF Staff Country Reports 1995, 999; 10.5089/9781451820751.002.A001

Source: Data provided by the authorities; and staff estimates.1/ Kazakhstan Interbank Currency Exchange.

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Progress toward price stability was derailed in March 1994 when the National Bank began providing financing to clear massive domestic interenterprise arrears. The implementation of tight credit policies following the introduction of the Tenge, combined with loose financial discipline in the enterprises sector, had contributed to the rapid development of large-scale arrears among domestic enterprises that threatened to undermine the banking and payments systems. The Government formulated a plan that included the use of credit to clear the arrears in mid-February 1994. ^2/ Gross arrears covered by the operation amounted to T 38 billion, and the amounts remaining after the netting operation was T 18 billion owed by net debtor enterprises, and T 11 billion owed to net creditor enterprises. ^1/ The Government lent net debtor enterprises T 18 billion at a (simple annual) interest rate of 200 percent, about half of which was due in September 1994 and the remainder of which was due by the end of 1994. As for the net creditor enterprises, some energy sector firms were immediately given T 1.1 billion as settlement of their claims, and the remaining net creditor enterprises were given one-year Treasury bonds carrying an annual interest rate of 3 percent, with the principle indexed to the Tenge/U.S. dollar exchange rate of April 22, 1994. Government resources amounting to T 2.6 billion in 1994 were earmarked for the exercise. The National Bank was called upon to finance about T 7.6 billion by mid-year, an amount equivalent to about one-half of base money at the time.

The emergence of interenterprise arrears also had an adverse effect on tax collections, helping boost the Government’s borrowing needs. Domestic credit increased rapidly, and together with a further build-up of net official international reserves, base money increased by almost 170 percent in the first quarter of 1994 (Table 20). Growth in broad money also was high, even though commercial banks held sizeable deposits with the National Bank; part of the increase in deposits was the result of raising bank reserve requirements in January.

Following the sharp increase in March-April, the National Bank severely restricted new credit to the economy; and base money expanded by just 24 percent during the second quarter of 1994. However, the momentum from the growth during March-April resulted in a still substantial increase of bank credit to the economy and of broad money, the latter expanding by 72 percent in the second quarter. Base money increased by over 60 percent during the third quarter, as the Government repaid the National Bank the principal borrowed for the arrears clearing operation. Almost all of the increase in National Bank credit during the third quarter was either auctioned or directed to the needs of the agricultural harvest. The tightening of credit policies after April led to a break in the inflation-exchange rate depreciation cycle of the first five months of 1994, when credit obtained at NBK credit auctions had been used for speculation in the foreign exchange market, which had led to a decline in the foreign exchange value of the Tenge and boosted the cost of imported commodities, thus further fueling inflationary expectations and adding to credit demand.

4. Credit auctions and interest rates

Steps toward the introduction of a market-based system of credit allocation system and interest rate determination were started while Kazakhstan was still in the ruble area. In 1993, the National Bank began to move away from extending credit at highly subsidized interest rates, and adjusted its refinance rate generally in line with that of the Central Bank of Russia. Except for a two-year Rub 400 billion loan for the replenishment of working capital of state enterprises extended at 25 percent per annum in January 1993, virtually all NBK credits were extended at the official refinance rate of 65 percent per annum (Table 21). The National Bank’s average lending rate rose from 21 percent per annum during the last quarter of 1992 to about 50 percent during the first quarter of 1993; however, real interest rates remained highly negative, as monthly inflation averaged 32 percent at that time. The first credit auction was held in September 1992, and only two auctions were held that year. The NBK started holding credit auctions on a monthly basis as of January 1993, although the amount of credit sold on the auction initially remained small (Table 22). ^1/ Between the beginning of 1993 and June, immediately prior to the currency reform in Russia, auction interest rates rose from 105 percent (per annum for three-month credits) to 185 percent, an effective monthly rate of 15 percent. On July 5, 1993, the NBK’s refinance rate was raised (with retroactive effect to July 1) from 65 percent per annum to 110 percent and to 140 percent on July 23, 1993, leaving a gap of 20 percentage points in comparison with the CBR refinance rate.

The movement towards deepening the credit auction slowed in the third quarter of 1993. Adjustments in the National Bank’s official refinance rate, at which the bulk of its credits were extended, were also delayed, as the refinance rate was raised to 170 percent on September 22, about ten weeks following a similar move by the Central Bank of Russia. The refinance rate was maintained at that level until the introduction of the Tenge, even though the monthly inflation rate reached 55 percent in November. Although the share of auctioned credit in total credit extended to banks remained at a level of approximately 10 percent, the September and October auctions yielded rates of 265 percent and 263 percent for three-month maturities, respectively. Besides Kazakhstan’s uncertain position with regard to the ruble area, part of the central bank’s reluctance to raise its refinance rate and to intensify the use of credit auctions stemmed from pressures to provide loans to certain sectors of the economy, such as agriculture, which were dependent on subsidized central bank financing; credit obtained through the auctions was primarily used by trading enterprises.

Following the introduction of the Tenge, credit auctions began to acquire a more central role in the credit allocation process. The NBK’s refinance rate was more closely linked to the interest rate resulting from the auction in December 1993, ^2/ and the rate applicable to rolled-over credits extended to banks was set equal to the refinance rate. The interest rate charged on new lending to the Government and the rates paid on government deposits were raised further to the level of the National Bank’s refinance rate in January 1994. Credit auctions were also held more frequently, and their share in total credit extended by the National Bank rose to 21 percent in December 1993 and to 62 percent in January 1994 (Table 22). Interest rates increased rapidly in the first quarter of 1994, with auction rates averaging over 300 percent per annum during January and February, ^1/ and peaking at 426 percent for credit of three-month maturity (equivalent to an effective monthly rate of 27 percent) at the end of May. ^2/

The National Bank was less successful in raising the share of auctioned credit in total credit to banks after the initial increase in December 1993-January 1994. In the period from February through August 1994, this share fluctuated at around 25 percent, as a result of demands for directed credits from the agricultural sector and from utility companies. However, the frequency of auctions was increased, with nine auctions held in August, several in regional centers outside Almaty. Almost all non-auctioned National Bank lending, including to the Government, has been extended at the official refinance rate; the only exceptions were the deferral of repayment of agricultural and coal credits due in 1994, and a credit for the payment of agricultural wages extended at 25 percent per annum. Interest changes on credits extended for the financing of the inter-enterprise arrears netting operation were calculated on the basis of the official refinance rate, even though the Government charged net debtor enterprises a lower rate. Concurrent with the decline of monthly inflation, the average credit auction rate declined gradually to 287 percent by end-September 1994, equivalent to an effective monthly rate of 20 percent. The refinance rate of the NBK, which had been increased to 300 percent in March, was correspondingly lowered to 280 percent as of September 1, and to 270 percent as of September 20. Given the more rapid decline in inflation during the period, interest rates became positive in real terms (Chart 2).

5. Structural reform of the financial system

Institutional reforms of the banking system gained momentum in the course of 1993. The legal foundations of the NBK were strengthened through adoption of new statutes, and new banking and foreign exchange laws were approved by Parliament in April. These measures were accompanied by an overhaul of the instruments of bank supervision and a tightening of commercial bank capital requirements and licensing procedures. More recent efforts focused on modernizing the accounting systems for the National Bank and commercial banks, auditing the commercial banks, and on improvements to the payments system.

The banking sector in Kazakhstan had by 1993 evolved into a system where five formerly specialized state banks (in agricultural, foreign trade, construction, savings and industrial operations) coexisted with about 200 smaller banks that were established in 1991–92. ^1/ Many of the smaller banks had been set up by state-owned enterprises in order to access refinance credits from the NBK. Most banks, including Agroprombank, were dependent on refinance credit rather than deposits; banking activities in 1993 were also characterized by insider lending to shareholders of small banks and by easy roll-over of both refinance and bank credits.

The process of structural reform in the financial sector accelerated after the introduction of the new currency. As mentioned earlier, the NBK moved to reduce the role of refinance credit following the introduction of the Tenge, to increase the share of credit allocated through the auction and to align the refinancing rate with the rates determined by the auctions. To provide additional incentives for banks to meet the prudential norms set by the National Bank, only commercial banks which met these norms were allowed to participate in the credit auctions. To further reduce dependence on directed credits, the NBK reduced the maximum maturity of its credits from nine to six months in March 1994, although a limited amount of credit with maturity of nine months was provided during the summer of 1994 to meet the needs of the agricultural sector.

In 1994, progress in structural reforms included a strengthening of the banking supervision operations of the NBK and implementation of a wide range of prudential measures. Prudential measures included: (i) increasing minimum capital requirements, which were denominated in U.S. dollars; ^2/ (ii) setting the minimum capital adequacy ratio on risk-weighted assets at 8 percent; (iii) raising the reserve and liquidity ratios to 30 percent on domestic deposits. In addition, as of October 1, 1994, a 15 percent reserve requirement was imposed on foreign currency deposits with commercial banks; (iv) imposing single outsider and insider borrowing exposure limits; (v) introducing ceilings on foreign exchange positions; (vi) initiating audits, in July 1994, of the ten largest banks, to be completed by January 1995; and (vii) expanding the NBK’s banking supervision department. The strengthening of the NBK’s supervisory role, together with the increase in capitalization requirements, resulted in a sharp reduction in the licensing of new banks, the closure of problem banks, and the encouragement of bank mergers. The total number of licensed banks fell from 204 on January 1, 1994 to 190 on August 1. The implementation of these regulations was expected to help address growing arrears to commercial banks. At the end of 1993, arrears of T 1.7 billion on bank loans were equivalent to 11 percent of bank credit to non-government borrowers; these arrears were not included in the February 1994 arrears clearing operation. Arrears to banks increased to T 3.7 billion by end-March 1994, and further to T 8.5 billion by end-July, equivalent to 20 percent of bank credit to the economy.

Substantial progress has been made in reducing the state’s holdings in banks and in restructuring the five large, formerly specialized banks. At the end of 1993, the state remained an important shareholder in most banks, directly or indirectly through ownership of enterprises that in turn owned bank shares. The state maintained a majority position in the agriculture and industrial banks (Agroprombank and Turanbank) and the full ownership of the Sberbank. The state’s shareholder position began to be diluted during 1992-93 through issuance of new shares to non-state entities and has been reduced further with the implementation of the privatization program, as bank shares have been privatized indirectly when the state enterprises that own bank shares were privatized. ^1/

The authorities have moved more recently to reorganize four of the five formerly specialized banks: Agroprombank will be split into two banks, one taking over performing loans and onlending directed agricultural credits (only with explicit state guarantees), and one for collecting bad debts; Alembank will be broken up into a state-owned Eximbank and a private commercial bank; Sberbank was privatized in January 1994 as the “People’s Bank”, with market-determined deposit interest rates and lending resources channeled through NBK credit auctions; and in early September 1994, Turanbank was reestablished as the Reconstruction and Development Bank, following divestiture of some commercial activities. ^2/ The state guarantees for deposits held at Sberbank were not extended to new People’s Bank deposits. Sberbank’s housing loans were transferred to a new Housing Construction Bank, which also obtained the state guarantee deposits formerly granted on Sberbank.

Other financial sector reforms since the beginning of 1993 include the promotion of foreign banking activity and payment system reform. A new Banking Law adopted in April 1993 eliminated may restrictions on the establishment and activities of banks with foreign participation. The legislation distinguishes three forms of foreign participation: “national” banks have foreign capital of less than 35 percent of initial capital; “joint-venture” banks have foreign participation of between 36 to 50 percent of share capital; and “foreign-owned” banks have foreign capital participation of more than 50 percent. The registration procedure of “national” banks is the same as for domestic banks with no foreign participation. Joint-venture and foreign-owned banks are required to submit a number of additional legal documents to obtain NBK approval. At the end of September 1994, 5 joint-venture and 4 foreign-owned banks were operating in Kazakhstan with aggregate initial capital of US$37.4 million. Seven representative offices of foreign banks also have been opened in Almaty, and the number of foreign shareholders in domestic bank is growing. Banks with foreign participation are almost exclusively engaged in the financing of foreign trade activities.

The payment system still suffers from a number of major weaknesses. Transactions via regional clearing centers in the nineteen oblasts require up to three weeks to process and settle, resulting in a high negative float, a net reduction in banks’ monetary assets, and reduced availability of working capital of enterprises. Measures were taken in the first half of 1994 to introduce more appropriate payment procedures. Commercial banks were instructed not to execute clients’ payments orders that are not covered by adequate funds, and the use of irrevocable letters of credit as a payment instrument is being facilitated.

Since July 1994, the National Bank has remunerated commercial bank average monthly holdings of required reserves--with the exception of required reserves on foreign deposits--at 50 percent of the official refinance rate: this has helped improve the banks’ financial position. All banks were instructed to consolidate the correspondent accounts of their branches. Required reserves have been included into the correspondent accounts, and the reserve requirement is now computed on a consolidated basis, including all branches. Reserve requirements on foreign currency deposits with commercial banks introduced in October 1994 are not remunerated.

1. Balance of payments developments in 1993 and early 1994

2. The foreign exchange market

From July 1992 until the Tenge was introduced in mid-November 1993, official exchange rates in Kazakhstan were set on the basis of a par rate to the Russian ruble, and the exchange rate of the ruble to foreign currencies as set by the Moscow Interbank Currency Exchange. ^2/ Although the official rates were used as the basis for the surrender requirement, interbank foreign currency transactions and auctions held in Almaty at the time produced rates consistently more depreciated than those implied by the official par to the Moscow rate. The gap between the Moscow and Almaty exchange rates widened to 40–50 percent by August 1993, and reached five to ten-fold in the weeks preceding the introduction of the Tenge. However, the local auction was thin, and practically nonexistent from the end of August until November. ^3/ Exporters were penalized at that time by payment of the domestic currency counterpart to the surrender requirement on the basis of the official par exchange rate to the Russian ruble; but with payments made in the rapidly depreciating Kazakh ruble.

From mid-November 1993, auctions for U.S. dollars and Russian rubles were held at least once per week to determine the official exchange rate of the Tenge. Foreign exchange transactions outside the exchange auction, predominantly cash sales and direct foreign exchange sales between banks, are estimated to have declined from a peak in October-November 1993 of almost 100 percent of total volume, to around one-tenth of the market by September 1994. In the first two months after introduction, the Tenge depreciated in nominal terms by 35 percent relative to the Russian Ruble and by 90 percent relative to the U.S. dollar, but remained stable in real terms. Following the arrears clearing operation in the spring, there was a sharp real depreciation of the Tenge between March and May 1994. As a result of tightened financial policies from early May 1994, the nominal exchange rate virtually stabilized at the end-May level, and the real exchange rate returned back to its level existing at the time of the introduction of the Tenge (Chart 5).

The NBK has refrained from major interventions in the foreign exchange market since January 1994. The average volumes traded on auctions have exceeded US$70 million in each month since February 1994. Since the beginning of 1994, the Government’s foreign exchange needs have been covered from the foreign exchange auctions. The level of central bank net foreign reserves, which was under US$100 million at the end of 1992, has improved over the period under review to reach over US$650 million, or almost two months of imports, by mid-1994. ^1/

3. External debt

Kazakhstan’s management of external debt in the period immediately following independence was neither coherent nor efficient. As a result, credits were contracted and government guarantees extended at an unsustainable rate, mainly to finance consumer goods imports. Debt management has improved substantially from mid-1993, and especially during 1994. Kazakhstan signed the “zero option” agreement with Russia and regularized its debt incurred through the central bank correspondent accounts with Russia. In addition, in several rounds, outstanding government guarantees in excess of US$2 billion were canceled on credits that had not yet reached the disbursement phase, reducing the stock of such guarantees by more than half. The Government has tightened the procedures for undertaking foreign loans and imposed a temporary moratorium on most new guarantees. The Ministry of Finance, in cooperation with the Ministry of Economy, has set up a unit to monitor the contracting and guaranteeing of external debt; the unit became operational in mid-1994. ^1/ As a result, the stock of external debt as well as its composition and the implied debt service profile can be regarded as sustainable over the medium term.

Kazakhstan’s external debt stock at the end of 1993 was approximately US$1.9 billion, excluding disbursements from the Fund (Table 29). ^2/ Of this, US$1.25 billion was owed to Russia as a result of the July 1993 conversion of outstanding correspondent account balances into medium-term intergovernmental debt, with a floating interest rate tied to the LIBOR. ^2/ Russia also provided credits under a Rub 150 billion intergovernmental loan in the first half of 1994, so that Kazakhstan’s overall indebtedness to Russia, as of end-June 1994, was approximately US$1.32 billion. Total debt stock as of mid-1994 is estimated at around US$2.3 billion, excluding Fund disbursements taking into account: (i) additional disbursements of trade credits in the form of commodity credits or bank credits supporting exports to Kazakhstan on market terms; ^4/ (ii) disbursements by the World Bank to Kazakhstan under the Import Rehabilitation Loan of US$117 million; and (iii) an official credit of US$22 million from Germany. Kazakhstan is estimated to have made external debt service payments (both amortization and interest) in excess of US$100 million in 1993, and US$50 million in the first half of 1994.

Kazakhstan has reached several important agreements that have influenced, or are expected to influence, its external debt obligations in the future. These agreements are the following:

(i) “Zero option” agreement with Russia. On September 6, 1993, Kazakhstan concluded an agreement (“zero option”) with Russia regarding the external debt of the former U.S.S.R., which stipulated that: (a) the definition of the external debt of the former U.S.S.R. was as agreed in a December 4, 1991 Interstate Agreement, signed by the U.S.S.R. and its successor states; ^5/ (b) Kazakhstan’s share of the debt was 3.86 percent; (c) Russia accepts responsibility for repayment of Kazakhstan’s share of the debt; ^1/ and (d) Kazakhstan relinquishes claims over its share of the assets of the former U.S.S.R. ^2/

(ii) Agreements on debt with other FSU states. During the summer of 1993, Kazakhstan has reached agreement with Georgia, Turkmenistan, the Kyrgyz Republic, Tajikistan and Uzbekistan on the clearance of outstanding central bank correspondent account balances or their conversion into intergovernmental credits denominated in U.S. dollars. A similar agreement was reached with Ukraine in April 1994. With Turkmenistan, the agreement was to clear outstanding balances in Turkmenistan’s favor through commodity deliveries; in all other cases the balances were in Kazakhstan’s favor. The agreements were structured similarly to that reached between Kazakhstan and Russia, with varying length of grace periods and interest rates set at a margin over LIBOR.

(iii) The agreement on the Baikonur space center. Lengthy negotiations on the use by Russia of the Baikonur space station, which was built during the Soviet era on the territory of Kazakhstan, have resulted in an agreement under which Kazakhstan would lease the space center to Russia for at least 20 years. The annual lease payments would be US$115 million, and payments will be made to Kazakhstan for costs incurred for upkeep and maintenance during 1992 and 1993. ^3/ Following a signature of the framework lease agreement on the Baikonur space facility, a possible debt write-off will take place, which could reduce Kazakhstan’s total debt outstanding by a significant amount (up to the full amount of Kazakhstan’s intergovernmental debt to the Russian Federation).