Recent Economic Developments

This paper reviews economic developments in the Republic of Kazakhstan during 1993–97. During 1993–94, price liberalization was virtually completed, most of the restrictions on foreign trade were eliminated, and a new currency with a unified rate was introduced. At the same time, state orders were phased out and privatization initiated. Since early 1996, the authorities have accelerated privatization, extending it to many large enterprises. Kazakhstan has also taken major steps toward banking and financial sector reform, through withdrawal of bank licenses, bank consolidation, introduction and enforcement of prudential regulations, and enhanced supervision.


This paper reviews economic developments in the Republic of Kazakhstan during 1993–97. During 1993–94, price liberalization was virtually completed, most of the restrictions on foreign trade were eliminated, and a new currency with a unified rate was introduced. At the same time, state orders were phased out and privatization initiated. Since early 1996, the authorities have accelerated privatization, extending it to many large enterprises. Kazakhstan has also taken major steps toward banking and financial sector reform, through withdrawal of bank licenses, bank consolidation, introduction and enforcement of prudential regulations, and enhanced supervision.

I. Introduction and Overview

1. Kazakstan has followed a determined policy of economic reform since the first comprehensive macroeconomic stabilization and reform program was launched in 1993. Although policy implementation has at times been uneven, significant progress has been made in transforming the economy into a market-based system and toward achieving macroeconomic stabilization.1

2. Kazakstan has made substantial progress in financial stabilization since independence (Box 1). An initial effort to bring down inflation failed, due to the monetization of the interenterprise arrears netting operation in early 1994. However, since late 1994 inflation has fallen continuously, albeit with some fluctuations mostly due to adjustments in administered prices. Real GDP, according to official statistics, declined by 35 percent during 1992–95, but began to recover in 1996. The output composition changed significantly during this period, with the shares of industry and agriculture falling sharply and those of trade and services expanding rapidly.

3. Kazakstan has been among the stronger reformers in the CIS. During 1993–94, price liberalization was virtually completed, most of the restrictions on foreign trade were eliminated, and a new currency with a unified rate was introduced. At the same time, state orders were phased out and privatization initiated. Since early 1996, the authorities have accelerated privatization, extending it to many large enterprises. Kazakstan has also taken major steps toward banking and financial sector reform, through withdrawal of bank licenses, bank consolidation, introduction and enforcement of prudential regulations, and enhanced supervision.2 In recent years, the National Bank of Kazakstan (NBK) has gained an increasing degree of independence. Major progress has been made in the development of monetary policy instruments, debt management and budgetary procedures. The government has introduced an appropriate framework for restructuring financially distressed enterprises, and the reform of natural monopolies and utilities, including the adjustment of their tariffs to full recovery of actual costs, has progressed quickly. Plans for radical reform of the pension system are currently being elaborated, while reforms of the health and education sectors have been drawn up and are now being implemented. In the external sector, all export tariffs have been abolished and the average import tariff level has been reduced significantly. The process to join the WTO is well advanced and, following the submission of the application in early 1996, is expected to be completed by end-1998.

Basic Data

article image

Goods and nonfactor services

Includes net surplus of extrabudgetary funds and quasifiscal operations for 1994–96.

Annualized quarterly GDP/end-period broad money.

4. The reform process in Kazakstan has been aided by significant foreign direct investment (FDI) inflows during 1991–96. Kazakstan was the leading per capita recipient of FDI among the CIS countries, though the cumulative inflow of less than US$200 per capita is small compared with most central and eastern European countries and Estonia. This investment was mainly concentrated in the areas of oil and gas, and ferrous and nonferrous metals, characterized by long investment horizons, and, to a lesser extent, in the food- processing and tobacco industries, where first-mover advantages are important. Foreigners have been hesitant to invest in other sectors, despite the creation of a framework for FDI early in the transition period, an ambitious privatization program, and the attempt to bring in foreign management and technological expertise through the management contract system.

5. The implementation of financial policies continued to be mixed during 1996 and early 1997. In the monetary policy area, the authorities had to struggle with the impact of the banking sector problems on money demand and foreign exchange market developments, while the continued weakness of tax revenue collection and an increasing problem of budgetary expenditure arrears created difficulties for the implementation of fiscal policy. The authorities were, however, quick to react to unforeseen developments and to correct policies when needed, and macroeconomic developments were broadly satisfactory. Also, further significant progress was made in the area of structural reforms over this period.

6. The authorities’ economic program for 1997 envisages a further significant reduction in inflation to 17 percent (end-period) and continued, albeit modest (1½ percent), economic growth, while the external current account deficit is expected to widen significantly in response to the pick-up in activity and in imports of capital goods associated with the restructuring of the economy. Following the clearance in late 1996 of virtually all central government expenditure arrears, the authorities plan to clear all the arrears of the pension fund during 1997 as preparation for the introduction of a comprehensive pension reform from January 1, 1998. The authorities also plan to deepen the structural reform efforts, with particular emphasis on continued restructuring of the banking sector, rationalization of the state organizations and public employment, better targeting of the social safety net, and a speeding up of large-scale privatization.

II. Real Economy, Prices and Wages

7. As noted above, Kazakstan has made steady progress towards macroeconomic stabilization in recent years. Inflation has been brought under control and, in 1996, output grew for the first time since independence.

A. Output

8. Real GDP increased by 1.1 percent in 1996 after a cumulative decline of around 35 percent during 1992–95 (Appendix Table 1).3 There were three main sources of growth: (i) systemic reforms, including price and trade liberalization as well as privatization, which promoted private business activities, particularly in the trade sector and the industrial production of households;4 (ii) foreign investment which revitalized enterprises, especially in the fuel and the nonferrous metallurgy sectors; and (iii) a recovery of the grain harvest after the bad performance in 1995. However, problems remained, such as the poor financial condition of many enterprises, the continuing decline in investment, and widespread payment arrears. In 1996, 42 percent of enterprises experienced a decline in output, while 51 percent operated at a loss. Capital investment declined in real terms by 35 percent in 1996 after having fallen by 43 percent in 1995.5 Overdue accounts payable in relation to GDP amounted to 38 percent in December 1996, up from 35 percent at end-1995;6 and wage arrears increased significantly during 1996.7 Under these circumstances, many enterprises were closed, or their workers laid off. The composition of sectoral output has changed significantly since independence, with the shares of industry and agriculture decreasing and those of trade and services increasing (Appendix Table 1 and Figure 1).

Figure 1.
Figure 1.

Kazakstan: Output, 1992–96

(1992 = 100)

Citation: IMF Staff Country Reports 1997, 067; 10.5089/9781451820775.002.A001

Sources: Data provided by the Kazak authorities; and Fund staff estimates.

9. Real GDP increased by 0.3 percent in the first three months of 1997 compared to the corresponding period of the previous year. The low growth reflected the temporary shutdown of the Pavlodar refinery for repair as well as a deceleration in trade activity.

Industrial production

10. After several years of decline, industrial production recovered slightly in 1996, mainly because of a significant recovery in food and light industry (Appendix Table 2). All of this recovery was recorded in the household sector, while production in the enterprise sector continued to decline mainly due to the operating and financial difficulties experienced by many enterprises. Enterprises in the machine-building sector faced additional difficulties because of the cutbacks in defense-related expenditures due to severe budget constraints. Shortages of raw material and interruption of electricity supply because of nonpayment of bills resulted in declines in production of most other sectors. Among major subsectors, only the fuel and nonferrous metallurgy sectors posted positive growth due to export demand and foreign investments. Production of the ferrous metallurgy sector fell because of the initial impact of enterprise restructuring. By the end of the year, however, production recovered as restructuring proceeded.

Energy production

11. After having stabilized in 1995, production of oil and gas condensates increased by 11 percent in 1996 (Appendix Table 3). The increased extraction was mainly due to foreign investment, especially in the Tengiz oil field, higher oil prices and improved relations with CIS countries, primarily Russia, in the areas of transportation, payments and supplies of spare parts and equipment.8 Joint-ventures accounted for 23 percent of oil and gas condensate production in 1996. Production of oil derivatives also rose in 1996 due to higher export prices. However, the capacity for refining domestic oil remains limited because there are only three refineries (located in Pavlodar, Shymkent and Atyrao). Moreover, the Pavlodar refinery treats exclusively Russian oil given its location (northeastern Kazakstan) and the Kumkol crude has to be mixed with Siberian crude in order to decrease its pour point temperature, thus allowing it to be pumped to the Shymkent refinery during the winter.

12. There were important structural changes in the oil sector in 1996. First, in April 1996, a new protocol on restructuring the Caspian Pipeline Consortium (CPC) was agreed between Kazakstan, Russia, and Oman (see Chapter III). Second, Kazakstan initiated the privatization process in the oil sector in 1996, offering for sale Aktyubinskneft, Yuzhneftegaz, two oil producing companies (operating the Zhanzhol and Kenkiyak oil fields and the Kumkol oil field, respectively), and Shymkentnefteorgsynthez, the oil refinery in Shymkent. Privatization provided a new route for foreign investors to gain a foothold in the industry while joint- ventures had been the only avenue until 1995.

13. Overall extraction of natural gas increased by 8 percent in 1996 because production of oil-gas9 rose as oil extraction increased. Kazakstan’s gas industry is far less developed than its oil industry, notwithstanding the huge reserves. Despite foreign investment in the Karachaganak gas field, Kazakstan’s natural gas reserves will remain underutilized in the near future because of the lack of a pipeline network for export, the absence of natural gas processing facilities, and the availability of cheaper natural gas from Russia, Uzbekistan and Turkmenistan. At present, Kazak natural gas is processed at the Orenburg Gas Refinery in Russia. The volume of coal production declined in 1996 due to weak demand in both domestic and foreign markets. The amount of electric power generated continued to decline in 1996, reflecting energy savings by privatized enterprises and the cut-off of nonpaying customers. Frequent power stoppages were experienced for a number of reasons, including lack of working capital to acquire fuel and the poor state of repair of power generating blocks and boilers.


14. The crop sector is dominated by grain, whose share in overall crop output increased to 51 percent in 1996.10 Wheat accounted for about 70 percent of the total grain harvest. Grain is among the major agricultural products for export, together with meat and wool. Kazakstan harvested 11.2 million tons of grain in 1996, up from 9.5 million tons in 1995, when the harvest was severely affected by bad weather (Appendix Table 4). The crop yield for grain increased from 0.5 tons per hectare in 1995 to 0.65 tons per hectare in 1996. This productivity level is, however, still quite low compared to the pre-independence level (the average crop yield was 1.0 tons per hectare during 1986–90). The area under grain cultivation declined to 17.2 million hectares in 1996, from 18.9 million hectares in 1995, because the low-yielding areas were put off-production.

15. Production of the major livestock products slowed down in 1996, as a result of decreases in both the number of animals and the yield (Appendix Table 5).11 Particularly sharp declines were recorded for production of livestock and poultry for meat, milk, and eggs, mainly due to a decline in demand associated with the falling real income of the population.12 The production decline was more severe for agricultural enterprises than for households and independent farmers. Indeed, a growing number of livestock is owned by households and independent farms. The yield of milk and wool production declined by 16 percent and 4½ percent in 1996, respectively, while the yield of egg production increased slightly, but it still remained around 25 percent below the 1992 level. The yield of livestock production was low by international standards because of the lack of heating and the spreading of disease.

16. Agricultural enterprises have been facing a number of demand and input shortage problems, which have forced a reduction in the number of livestock and in the cultivated area and decreased productivity. This situation has undermined growth prospects for the near future. Use of agricultural products as a means of payment in kind to settle the purchase of fuel, equipment and other material resources—a practice that has become widespread given the shortage of liquid assets—has been an obstacle to establishing normal market relations in the rural area. Approximately three-fourths of livestock and poultry products and 62 percent of grain output were bartered and sold to people working on the same farms. Procurement organizations continued to hold a significant share of the total volume of sales of agricultural products only with regard to products such as milk (52 percent), wool (44 percent), and fruits and berries (46 percent).

Other sectors

17. Output of the construction sector fell by 23 percent in 1996 due to the low investment activity. As of October 1996, 1,733 construction contractors were operating in Kazakstan (not counting those with fewer than 21 employees), 13 percent less than in on October 1995. The share of private contractors in total construction turnover increased to almost 40 percent by October 1996, up from 28 percent in 1995. Freight transportation turnover fell slightly in 1996 due to a decline of demand by the material sector. Railway transportation, which accounted for 75 percent of total freight transportation, declined by around 9 percent. In contrast, passenger transportation turnover increased in 1996, mainly due to the expansion of motor vehicle and railway transportation. Shuttle trade between Kazakstan and China and travel by foreigners contributed to this growth. The trade sector grew by 17 percent in 1996, reflecting the expanding number of trading businesses set up by laid-off workers.

B. Prices

18. Inflation continued to decelerate in 1996, with consumer prices (end-period) increasing by 28½ percent, down from 60½ percent during 1995 (Appendix Table 6 and Figure 2).13 Excluding administered prices,14 the decline was even more pronounced during 1996. More than two-thirds of the inflation recorded during 1996 was caused by increases in the prices of paid services. The latter more than doubled, while prices of food and nonfood products rose by 16½ percent and 7 percent, respectively. Among paid services, rents and the tariffs of communal services (utilities), which include electricity, natural gas, hot and cold water, and heating, rose most, reflecting the government’s policy of achieving full recovery of actual costs.15 Large increases in rent and the tariffs of communal services were effected in April, June, July and October 1996 when 100 percent cost recovery was achieved for hot water, central heating, cold water and sewage in almost all oblasts (Appendix Table 7). Together with moderate increases in the other months, rent and communal services tariffs rose by 200 percent during the year.16 Large price adjustments were implemented also for transportation and communication services during the year. Tariffs on passenger transportation were raised by 15 percent in July and by 40 percent in August while communication tariffs were increased by 37 percent in January and by 17 percent in October. Inflation decelerated further in early 1997. The CPI increased only by 6 percent during the first four months, with inflation in the twelve months to April falling to 22 percent.

Figure 2.
Figure 2.

Kazakstan: Consumer Price Inflation and Average Wages, 1993–96

Citation: IMF Staff Country Reports 1997, 067; 10.5089/9781451820775.002.A001

Source: International Monetray Fund, European II, Common database.

19. Industrial producer prices increased by 18½ percent during 1996 (Appendix Table 8). Prices in the power engineering sector recorded the largest increase, while prices in the fuel sector rose less than those of industry as a whole. Higher price increases for coal were offset by steadier prices for oil extraction, oil processing and gas extraction. The average price of crude oil at wellhead was T 3,676 per ton (US$50) at end-1996, which was equivalent to around 35 percent of the world price, taking into account transportation costs and quality differences (Appendix Table 9).17 Industrial producers’ input prices recorded an increase of 15 percent during 1996, and the terms of trade18 of industry improved. The terms of trade increased particularly in the electric power engineering and machine building sectors and decreased most for oil production, natural gas production, and the coal mining industry.

20. Agricultural producer prices rose by nearly 23 percent during 1996. Crop prices increased by 53 percent, far outpacing the increase in prices of livestock products (16 percent). The large adjustment of crop prices was mainly caused by an increase of grain prices in excess of 60 percent, reflecting higher prices in the world market. The domestic grain price was 60–65 percent of the world price at end-1996.

C. Wages and Employment

21. Total employment averaged 4.6 million persons in 1996. About 4.4 million were employed by medium- and large-scale enterprises, organizations and institutions, kolkhozes and other collective agricultural enterprises; 28,800 by joint-ventures; and 147,000 by small businesses. Of those in medium- and large-scale enterprises and kolkhozes, 23 percent were employed in the agricultural sector and 21 percent in the industrial sector (Appendix Table 10). Employment in medium- and large-scale enterprises and kolkhozes declined by 11 percent in 1996, mainly due to privatization and enterprise restructuring. Major contributors to the decline were industry, transport, municipal services and education, while forestry was the only sector that recorded an increase in employment (10 percent).

22. Over the first ten months of 1996, 1.05 million persons left their jobs in enterprises and organizations, of which 23 percent was in connection with layoffs. Some of those who were laid-off became self-employed, including as farmers. The self-employed totaled 1.17 million persons in 1995, of which 102,000 persons were peasants.19 The ratio of people placed in jobs to job placement inquiries through the public employment service was 18 percent in the fourth quarter of 1996, down from 22 percent in the same quarter of 1995. Officially registered unemployment increased to 282,400 persons in December 1996, 172,800 of which received unemployment benefits. This corresponded to 4.1 percent of the economically active population, up from 2.3 percent in December 1995 (Appendix Table 11). Open unemployment (both official and unofficial, but excluding hidden unemployment) accounted for 11 percent of the economically active population in 1995.20 Hidden unemployment, the number of persons on forced-leave, whether paid or unpaid, amounted to 4.5 percent of the economically active population as of December 1996.21

23. The minimum wage was raised from T 300 (US$5) in December 1995 to T 2,000 (US$27) in December 1996 (Appendix Table 12). The average wage rose from T 5,634 (US$87) in January 1996 to T 7,506 (US$99) in January 1997, which implied an increase of 6 percent in real terms. The increase in the real wage was accompanied by a significant decline in employment during the same period. Average wages varied significantly among sectors (Appendix Table 13). In 1996, finance, credit and insurance had the highest average wage (twice the national average) while the agricultural sector had the lowest average wage (52 percent of the national average). Wages in industry were 53 percent higher than the average.

24. Wage arrears peaked at almost T 45 billion in November 1996, followed by a sizable decline in January 1997. Wages overdue for more than three months, excluding those of budgetary organizations, amounted to T 43 billion (about 3 percent of 1996 GDP) in December 1996, up from T 19 billion (about 2 percent of 1995 GDP) in December 1995. The largest share of arrears was in industry (37 percent), followed by agriculture (31 percent). Wage arrears fell by 0.8 percent of GDP in January 1997.

D. Savings and Investment

25. Investment continued to decline in 1996, albeit at a slower pace, partly due to high interest rates and the unavailability of long-term credit. Long-term loans were not extended because the government severely curtailed the provision of guarantees to foreign banks, and domestic banks preferred purchasing treasury bills to commercial lending. Capital investment declined by 35 percent in real terms in 1996 following a fall of 43 percent in 1995 (Appendix Table 14).22 Investment in nonproduction facilities contracted more than investment in production facilities.23 In real terms, budgetary investment remained unchanged in 1996, while investment by the state sector as a whole declined by 56 percent. Enterprises and organizations of the nonstate sector carried out 64 percent of the total volume of capital investment, while investment by foreign-owned firms or firms with foreign participation accounted for 18 percent of the total, up from 6 percent in 1995.24 The central and local governments financed only about 6 percent of capital investment (Appendix Table 15). Of total capital investment, three-fourths was used for construction of production facilities, with the oil production sector accounting for the largest part (Appendix Table 16).

26. Gross fixed capital formation declined to 11½ percent of GDP in the first nine months of 1996, down from 17½ percent in 1995 and 19 percent in 1994. Taking into account the outcome for capital investment in the fourth quarter of 1996, gross fixed capital formation for the year as a whole is estimated to be about 12 percent of GDP (Appendix Table 17). Gross capital formation (gross fixed capital formation plus change in stocks) is estimated at about 14 percent of GDP in 1996, down from 20 percent of GDP in 1995. Investment by the public sector decreased to nearly 3 percent of GDP while investment by the private sector declined to about 9 percent.

27. The decline in investment in relation to GDP matched the decline in savings, both national and foreign. Foreign savings, equal to the current account deficit, amounted to 3.7 percent of GDP, down from 4.3 percent in 1995. National savings, estimated as a residual, amounted to 10.3 percent of GDP, down from 15.8 percent in 1995, as a result of both lower public and private savings.

28. A new law on “State Support of Direct Investment” was adopted in February 1997. This law clarifies the rules, and regulations governing direct investments (both foreign and domestic) and provides government guarantees to protect the interests of investors. The law also strengthens the coordinating role of the State Committee on Investment with the aim of facilitating the investment process in Kazakstan. The new function of the Committee will streamline investment procedures, provide information, assistance and support, and eliminate bureaucratic obstacles for new investors. The law also authorizes the Committee to provide tax privileges on a case-by-case basis for new investors in priority sectors of the economy. These sectors are: (i) production infrastructure; (ii) processing industry; (iii) all activity related to the relocation of the capital to Akmola; (iv) housing, social sector and tourism facilities; and (v) agriculture. Investors may obtain tax relief from the corporate income tax, land taxes, property taxes, and customs duties, with tax holidays of up to 100 percent for the first five years and 50 percent for an additional five years.

III. Structural Reform

29. Since independence, Kazakstan has made significant progress in reforming the structure of the economy. The regulation of prices, except for natural monopolies, has been eliminated and the trade regime has largely been liberalized. A series of ambitious privatization programs have been implemented and substantial progress has been made in establishing a legal and institutional framework necessary for the effective functioning of a market economy.

30. The pace of structural reforms intensified at end-1995 when a new medium-term program for the deepening of reforms during 1996–98 was launched. The scope of the privatization program was widened to include strategic sectors such as energy and metallurgy. Programs for efficient pricing and regulation of natural monopolies were initiated. The restructuring of loss-making enterprises, including through closure of those without prospects for a return to viability, was stepped-up and steady progress was made in addressing sector- specific structural issues.

A. Privatization

31. Actual progress in privatization was mixed during 1996; although delays were experienced in some areas, the case-by-case privatization program proceeded well. The implementation of the small-scale and mass privatization programs was not completed in 1996 as expected. Except for the electricity sector, the sector-specific plans under the third stage privatization program, launched in early 1996, were also not finalized by October 1996 as originally envisaged. The preparation of these plans was, however, subsequently completed in early 1997. In contrast, the case-by-case privatization program, aimed at some of the largest formerly state-owned enterprises, proceeded well throughout 1996 as numerous enterprises, mainly in the nonrenewable resources sector, were successfully privatized.

32. With regard to the small-scale privatization program, 12,908 enterprises had been sold as of November 1, 1996, accounting for 97 percent of the total initially planned and 88 percent of those offered for sale up to that date. However, the process is not expected to be completed soon for a number of reasons. First, the total number of entities to be privatized has increased; in April 1996 the list was expanded to 14,634 from the 13,256 initially included in 1995. Second, many entities offered for sale are not attractive for potential buyers due to debts, poor physical conditions, remote locations and other negative attributes that offset the effect of significantly lowered starting prices in the auctions. Third, the work of the State Committee for Land Utilization, the sole body responsible for evaluating land plots, has been less efficient than envisaged. As such, all the preparations required for sales have not been finalized. Finally, local offices of the State Property Committee have leased a number of entities through short-term contracts. These contracts do, however, extend rights for subsequent buy-outs by the leaseholders. The authorities have taken measures to tackle the problems encountered, including by eliminating minimum prices in December 1996, which has recently resulted in an increase in the sale to offer ratio. A Presidential decree was issued in early 1997 setting end-June 1997 as the date to finalize the small-scale privatization program.

33. With regard to specific sectors within the third-stage privatization program, 2,082 farms and agricultural enterprises had been sold as of November 1, 1996, accounting for 92 percent of the total planned.25 The auction of trucks was also completed. Privatization of health care and education facilities was initiated in late 1996 when 6,359 facilities were selected for privatization. By mid-February 1997, 139 facilities had been sold.26

34. The mass privatization program was also not completed in 1996 as envisaged. Although the coupon privatization scheme was completed, the money auction program encountered some delays. Under the coupon privatization scheme, 1,724 enterprises were sold in 22 auctions and the investment privatization funds collected 67 percent of all coupons allocated to individuals (Appendix Table 18). Under the money auction program, which began at the end of 1995, state-share packages in 823 joint-stock companies had been sold by end-1996, amounting to around 70 percent of the total offered (1,235 joint-stock companies). Under this program, 44 share packages were sold on the stock exchange. Major constraints in completing the money auction program included lengthy and complicated procedures for the documentation of parcels of shares offered for sale, delays in preparing lists of facilities for sale—partly related to the revocation of state shares subject to privatization—and the unattractiveness of most joint-stock companies selected for privatization. In 1997, special priority has been given to the privatization of warehouses, storage houses and agricultural facilities in the context of the mass privatization program.

35. The case-by-case privatization program accelerated in 1996 with the sale of state shares in 17 joint-stock companies and the sale of the property of 11 enterprises. Most firms sold under this program were based in the renewable resource sector and they accounted for 18 percent of the enterprises and properties slated for sale under the program. The privatization of the coal industry was close to completion: many of the mining enterprises in the Karaganda basin were privatized as were four open-pit coal mines. In the electricity sector, nine power stations were sold, and in the oil sector, two enterprises were sold. The further enhancement of the institutional capacity to conduct the case-by-case privatization program has also been under consideration by the government. At end-1996, the government had almost fully replaced the previously favored management contract approach with outright privatization. The case-by-case privatization program also proceeded well in the first quarter of 1997 with many energy and mining facilities being sold.

36. The preparation of sector-specific action plans, envisaged under the third-stage privatization program announced in March 1996, was not completed by October 1996 as originally expected with the exception of a plan for the electricity sector established in May 1996. However, plans for the oil, gas, transport and communications complexes, for the Ministry of Industry and Trade (mining and metallurgy), and enterprises in the education, health care, science, culture and sports sectors were finalized in January 1997. In order to start implementing these plans, local governments began to complete and submit, with approval of the sectoral ministries, lists of the names of all facilities in the health care, education, science, culture and sports sectors indicating those to be privatized by December 1997. Additionally, the list of facilities owned exclusively by the government, which were to be precluded from privatization during 1996–98, was in the process of being revised to allow for privatization of certain groups of properties.

B. Enterprise Reform and Restructuring

37. Recent reform efforts have concentrated on improving various aspects of the operational environment for enterprises, and on streamlining and strengthening the functioning of the specialized agencies set up in the past to deal with problem enterprises. Improvements in the operational environment have included institutional reforms as well as efforts toward improved management and governance. Efforts to strengthen specialized agencies handling problem enterprises have proceeded along two lines: the adoption of specific operating guidelines, and stepped-up restructuring and liquidation of individual enterprises under their purview.

Improvements in the operational environment

38. Important recent institutional reforms pertinent to the operational environment of enterprises have been the adoption of appropriate accounting standards and the preparation and submission to parliament of revisions to the bankruptcy law which are expected to better facilitate the closure of bankrupt enterprises. Steps aimed at improving management and governance have included the improvement of the competitive and investment climate for natural monopolies and the preparation of regulations concerning investment privatization funds (IPFs); the restructuring of state holding companies; the divestiture of enterprises’ social assets; and the conduct of a thorough review of management contracts.

Institutional reforms

39. In mid-November 1996, the National Accounting Commission (NAC) approved twenty accounting standards through resolutions that conform substantially with international accounting standards. These standards, which took effect on January 1,1997, cover, inter alia, the appropriate treatment of depreciation, profit and loss statement, income tax, and foreign currency transactions. While the lack of Civil Code provisions on nontangible assets have precluded provisioning for the appropriate treatment of some items, including research and development costs, these issues are expected to be addressed in an accounting standard planned for 1997–98. A new general chart of accounts for business entities was also approved by the NAC in November 1996.

40. The draft law on bankruptcy was amended to allow for extensive elaboration of implementation details and submitted to parliament in early 1996. The amended law should be more enforceable and is expected to better facilitate the liquidation of defunct enterprises and ensure proper collection by creditors. The lower house of parliament improved upon some of the earlier weaknesses of the draft and passed it onto the Senate in November 1996. Further improvements in the treatment, inter alia, of the claims and voting powers of secured creditors and the liabilities of joint stock owners, are currently under consideration.

Improvements in management and governance

41. A number of improvements were made regarding the competitive and investment climate for natural monopolies. First, the set of special procedures for regulating natural monopolies is now universally applied in setting prices and tariffs regardless of the form of ownership.27 Fixed prices are applied to most of the services while the price cap system is applied to communication services.28 Second, in October 1996 prices of communal services were raised to 100 percent cost recovery levels, determined according to conventional accounting standards. Such prices will be further adjusted to reflect true economic costs in line with the new enterprise accounting system introduced in January 1997. Third, price differentiation among different types of customers for cold water supply and sewage was terminated and the elimination of tariff differentiation for cargo railway transportation and communication is in progress. The cross-subsidization of passenger transportation at the expense of cargo transportation is to be eliminated and a protocol was issued in 1996 on the elimination of remaining price differentiations among customers during 1997. Fourth, with regard to privatization of natural monopolies, the sales of the coal and electric power sectors are almost completed and the privatization of the communication sector is in progress. Fifth, a draft Law on Natural Monopolies and a draft Law on Unfair Competition are under preparation and are expected to be submitted to parliament in June–September 1997.

42. The government’s strategy for the reform of enterprises not in financial distress has been to facilitate the emergence and proper operations of specific types of IPFs—institutions that handle firms in which the state does not have a controlling interest—and to restructure state holding companies that manage the state’s majority shares in enterprises. In the case of IPFs, the strategy has been to create conditions for effective governance through the emergence of a core group of IPFs in which strategic investors will have a larger interest, and the reorganization of noncore IPFs. To this end, large strategic investors were allowed to increase their equity in core IPFs beyond the previous level of 39 percent starting in January 1996 and the government has prepared regulations governing, inter alia, the modalities concerning the sale of shares in these IPFs. The government has also announced its plans to offer IPF shareholders the choice of transforming their funds into investment companies with rigorous portfolio restrictions or permitting them to directly operate the companies they own without such restrictions.

43. With respect to state holding companies, the government’s strategy has been to accelerate the dismantling of monopolies and the segmentation and privatization of competitive components of other companies. All remaining state holding companies will be dismantled by end-1997.

44. An element of the government’s strategy to streamline enterprises along market economy lines has been the divestiture of enterprises’ social assets, primarily pre-school and health care facilities. Local governments began to assume ownership of these assets on the basis of a strategy which: (i) identified essential services; (ii) outlined minimum service standards; (iii) determined the main characteristics of the reform and their likely financial context; and (iv) defined options for merging redundant facilities, restructuring remaining assets, cutting operating costs, and extending user fees. Local divestiture commissions were set up at the oblast-level during 1996, facility descriptions and lists of those to be liquidated or preserved were prepared, and financing sources (user fees, privatization revenues from the divestiture program itself, contributions from enterprises, and local government resources) for the continuing operation of certain facilities were identified. On this basis, by early 1997 the divestiture of these social assets was virtually completed. The divestiture process for housing owned by enterprises is also well advanced, although some issues remain unresolved. At end-1996, legal responsibility for the accumulated debt of enterprise housing at the time of divestiture (estimated at T 20 billion, or 1½ percent of 1996 GDP) remained to be determined.

45. The government has recently improved upon the modalities of the management contract approach and made the process more transparent. The Law on Privatization, enacted in December 1995, stipulated that management contracts should be established on a tender (competitive) basis, otherwise contracts would be deemed invalid. The Law also included a provision for management companies to be given the right of first refusal of the state’s shares so that efficient operations of the enterprises would be undertaken and abuses of assets would be minimized during the contract period.

46. Around 60 management contracts had been established by end-1996, including 21 contracts agreed to during 1996. As of February 1997, 46 contracts were effective.29 Some contracts were canceled either because management companies failed to meet contractual financial obligations or because the companies themselves withdrew from the contracts due to higher-than-expected accumulated arrears of the enterprises. During 1996, twelve management contracts were revised so that a portion of the shares that had been under trust management was sold to the managing companies. Establishment of new management contracts has recently almost ceased because the government now counts on privatization to speed up enterprise reforms.

47. The economic performance of enterprises under management contracts varied. About 15 percent of the cases was deemed to have failed and subsequently those contracts were canceled. The twelve enterprises, whose contracts were revised for partial privatization, have been successful. In those enterprises the decline of production has been stopped and financial stabilization has been achieved while tax and wage arrears have been paid off.

48. The monitoring of management contracts has involved several government institutions. The initial payment of bonuses and repayment of arrears—to be undertaken within 120 days after the signing of the contract—has been monitored by the State Property Committee. The Ministry of Industry and Trade has been engaged in monitoring performance in general, including the fulfillment of contractual obligations concerning environmental liabilities. The State Property Committee, as the owner of shares of the enterprises under management contract, also makes scheduled and unscheduled on-site monitoring visits.

Dealing with problem enterprises

49. The government has better defined the roles and responsibilities of state agencies previously established to deal with problem enterprises. The performance of these agencies improved during 1996 with more active liquidation, merger, and restructuring of the individual enterprises under their purview.

50. The Rehabilitation Bank (RB) was established through a Presidential decree in April 1995 to deal with the most heavily indebted, very large state controlled enterprises in financial distress. The Bank was intended to control the financial transactions of the enterprises as the sole source of credit, including for the financing of operating deficits. Access to the Bank’s resources were to be on a declining basis and conditional upon presentation and implementation of a restructuring program—including privatization, or, for enterprises without viability, liquidation within four years. However, the absence of precise guidelines governing the Bank’s operations had hindered its effectiveness. Accordingly, the government, in February 1996, adopted the following operating rules for the Bank: any infusion of liquidity by the RB into a firm must be reduced by at least 25 percent in real terms compared with the liquidity infusion in the previous six months, and it shall be strictly conditioned on the implementation of benchmarks under the restructuring plans; RB funds shall be used mainly for downsizing actions such as severance pay and social asset disposal; any restructuring plan must include an employment reduction of at least 30 percent and a reduction of the negative operating cash flow by at least half within the first twelve months; and RB debtors can be privatized at any point in time.

51. During 1996, the Rehabilitation Bank initiated and otherwise pursued liquidation proceedings against three insolvent corporate debtors and reduced the employment of its other corporate debtors by more than 25 percent. The closure of five coal mines of an enterprise in the Karaganda basin was recently completed, a chemical enterprise was declared bankrupt by a court at the end of November 1996, upon applications by the RB, and a general shareholder meeting held in November 1996 decided upon voluntary liquidation of a machinery plant that had been placed under the RB. Of the 42 insolvent enterprises assigned to the RB for rehabilitation since its inception, only 17 remained under its control by mid- February 1997 with the rest having been withdrawn due to successful restructuring, bankruptcy or liquidation. Total employment in the firms still under the RB’s control as of October 1, 1996, had by then been reduced to about 42,500 compared with more than 64,000 a year earlier.

52. The Agricultural Support Fund (ASF) was set up in December 1994 to take over all directed credits previously extended to agricultural enterprises.30 During 1995, it had asked insolvent farms to submit restructuring plans and raised the specter of liquidation for noncollaborative or nonviable farms. However, the ASF lacked the necessary capacity and organization for case-by-case debt resolution of more than 4,000 farms. As a result, virtually no follow-up was initiated and essentially all loans were indiscriminately rescheduled at negative real interest rates. In mid-1996, however, the ASF adopted a detailed action plan on the resolution of the farm loans it had taken over. A key element of this plan was residual debt forgiveness in return for minimum partial payment, with the aim of reducing the number of insolvent farms. In line with this plan, the government wrote off the interest component of these loans in May 1996, and during May-December about 50 percent of the principal amounts were also canceled. By end-1996, the ASF had reached agreement with all farms regarding the repayment of the remaining outstanding amount by December 15, 1997.

53. The Enterprise Restructuring Agency (ERA), acting as both prosecutor and liquidator, assists in the restructuring of enterprises that are faced with claims by state-owned creditors. Successful restructuring occurs in the context of the preparation and execution of viable plans for the repayment of the firm’s obligations. Although the ERA was set up in 1995, weaknesses of the old bankruptcy law as well as numerous procedural hurdles had come in the way of its functioning and little had been accomplished before the end of that year. In 1996, however, the ERA began effective operations and, by February 1997, 92 firms had been rehabilitated, 98 had either been liquidated or were under liquidation and the decision regarding the liquidation of 23 enterprises was under consideration. In late 1996, the ERA also started finalizing the institutional arrangements providing for the sale of enterprise debt. It was envisaged that the enterprise restructuring program would benefit if a market for such debt could be created. In April 1997, the ERA was converted into a fully state-owned joint-stock company to enhance its operational efficiency.

C. Sectoral Issues


54. A key objective in the agricultural sector is to improve the incentive structure and encourage the rapid emergence of efficient and competitive markets by eliminating the wedge between domestic producer prices and world market prices arising from the existence of monopolistic and monopsonistic market structures. The following six measures were taken during 1996 to help obtain this objective. First, tariffs on grain exports were lifted in April 1996. Second, registration processes were simplified. In early 1996, the double registration of export contracts at the Ministry of Industry and Trade and at commodity exchanges was eliminated, leaving only the latter in place by end-1996. The mandatory registration of export contracts at these exchanges was also eliminated in early December but was reintroduced for a limited number of agricultural products (wheat, rice and cotton) at year-end. Post-shipment inspection of export contracts by the Customs Department was, however, introduced in July 1996 in order to prevent tax avoidance. Third, the Republican Price Commission and the practice of establishing minimum export prices for agricultural products were terminated in December 1996. Fourth, in May 1996 the government repealed the authority given earlier to local administrators (through, among other means, a decree issued in November 1994) to interfere in the procurement of agricultural commodities and in inter-oblast or export trade. In July 1996, the necessary legal and administrative framework was finalized to assure that market interventions by local authorities were on a competitive basis and did not restrict inter-oblast and export trade in any way. Fifth, all shares in eligible subsidiaries of the remaining seven holding companies in agriculture were sold. Sixth, competitive procurement methods were implemented for government grain purchases, the volume of which was limited to 1.1 million tons for the 1996 crop.

55. With regard to land reform, two important pieces of legislation were adopted at end-1995. First, a Presidential decree with the force of law was issued in December 1995 approving a revised land code. The new code defined various categories of property rights, the circumstances and procedures for granting and transferring these rights, and the role of the state in the process. Second, the approval of the land code was followed by the adoption of a law on the registration of property rights and real estate transactions.

56. During 1996, regulations providing implementation details were adopted for the development of land markets. These regulations granted private ownership rights to land plots, defined land use rights, allowed for the use of land as collateral for mortgages and issued land ownership certificates and permanent user rights to citizens and legal entities. They also approved rates on land to be sold to private owners or provided for their use by the state, the procedures for the seizure or buy-outs of land for state needs, norms for the allocation of land plots to citizens and legal entities, and a list of worker categories entitled to land allotments by enterprises. The transfer of ownership of parcels of state farms to farmers was also completed and 2 million certificates of ownership were issued.


57. The main issues in the oil sector related to the development of additional oil export capacity, the establishment of efficient tax arrangements for foreign and domestic operators, and privatization and increased efficiency in refining and marketing oil products. As regards the development of oil export capacity, the governments of Kazakstan, Russia, and Oman and a group of oil companies signed a final agreement in December 1996 to define the principles of the Caspian Pipeline Consortium. This consortium had been founded by the governments of Kazakstan and Oman in June 1992 to build a main export oil pipeline from the western site of Tengiz in Kazakstan to the Russian seaport of Novorossisk on the Black Sea. The first stage of the pipeline is expected to export 14 million tons a year, eventually increasing up to 35 million tons a year. Kazakstan and Iran also arranged for an oil swap under which Kazakstan will supply Iran with 2–6 million tons of oil in exchange for an equivalent amount of oil for export from the Gulf during 1997. As regards taxation, a new Law on Changes to the Tax Code on Natural Resources was adopted by parliament at end-1996. With regard to privatization of the oil industry, initiated in 1996, substantive progress has been made in selling shares of most major oil producing as well as refining companies.

58. In the coal sector, the government’s main objectives are the development of open-cast mining in the Ekibastuzkiy Basin and in similar smaller coal deposits, and the development of underground mining of coking coal in the Karaganda Basin. In order to attract investment for the rehabilitation of the coal sector and to ensure maintenance and development of mining facilities and infrastructure, the government in June 1996 determined the volume of investment needed for financial and economic rehabilitation of mines in the Karaganda Basin. Most of the enterprises in the Karaganda coal conglomerate were privatized during 1996. The procedures for the reorganization of a state joint-stock company were determined in September 1996, in which principles for restructuring through separation of structural entities from the company were established. Given the low profitability of mining power-generating coal, the closure of five to eight such mines during 1997 is under consideration.

59. The privatization and restructuring program for the electric power sector was adopted in May 1996 and is now being implemented. The plan calls for the reorganization of electric power plants into independent open-type joint-stock companies and for the establishment of power supply network companies in oblasts. Major power stations have already been withdrawn from the national electric company and have been transformed into independent joint-stock companies. A number of network companies have also been created. The privatization and transfer of individual plants to trust management has also proceeded well.

60. In order to provide state regulation of pricing of electric and thermal power and to create conditions for competition among energy producers, the government approved the provision of the State Regulation Commission for the Electric Power Sector and defined its membership in July 1996. Also, to streamline the cost structure of production, transmission, and distribution of electric and thermal power and to protect the rights of energy consumers and producers, special procedures applying to energy producers included in the State Register of Natural Monopoly Enterprises were established in July 1996. In view of the importance of efficient and consistent usage of resources, the government approved the Energy Saving Program and endorsed the Plan of Priority Measures for its implementation in April 1996.

Transportation and communication

61. The transport sector plays a critical role in Kazakstan because of the country’s large size and distance from foreign markets. However, it suffers from many inefficiencies and a rapidly deteriorating capital base. In order to strengthen the regulatory and management framework for road transport, decrees were issued on the management of general-use roads and the financing of the Road Fund. However, progress in the area of road regulation has been slow. There has, however, been a genuine effort to introduce appropriate tendering procedures and contracts for road works, largely with the cooperation of the Asian Development Bank, including the offer of tenders for the reconstruction of the Almaty-Akmola road.

62. In June 1996, a decree was issued on the demonopolization of urban public transport. It stipulated, inter alia, that buses, trolleys and other common-carrier urban passenger transport enterprises be granted the right to independently purchase equipment and spare parts and to participate in the submission of bids for the right to transport passengers on urban and intercity routes. The decree also stipulated that the state allocation of urban and intercity passenger transport routes among carriers be done only on the basis of competitive bidding. Tariffs for urban transport were raised to almost cost recovery levels in 1996.

63. In August 1996, a decree was issued on a phased transition during 1996–97 to uniform railway shipping rates on interstate and intrarepublic railways. In this respect, railway shipping rates would be raised in five steps over the period to October 1, 1997 with the aim of increasing the total tariff by around 50 percent. In compliance with the decree, marginal mark-up coefficients for railroad cargo tariffs were established by the Price and Antimonopoly Committee.

64. An effort has also been made to stabilize the civil aviation industry. The Almaty airport has been separated from the national airline and a contract entered into with a foreign carrier for its management. A strategy for privatization of Kazakstan Airline is under consideration.

65. With the objective of further development and modernization of the public telecommunication network and the provision of telecommunication services, an open tender for sale of 40 percent of the shares of the national telecommunication company is in progress.

Housing and communal services

66. The government took additional steps in 1996 in accordance with the Presidential decree on the removal of subsidies for housing and communal services. The aim of the decree was to improve conditions for the maintenance, operation and enhancement of services available to households. Through a decree issued in April 1996, the government set the objective of a phased transition in 1996 to prices ensuring the recovery of costs incurred by service providers. In order to promote competition in the provision of communal services, streamline relations between housing owners and service enterprises, and maintain state control over prices charged by natural monopoly enterprises, the government issued a decree on the demonopolization of housing and communal services and regulation of public utility bills in May 1996. In accordance with this decree, charges for water, central heating, and sewage were raised to full cost coverage in October 1996.

Health and education

67. In 1996, the government initiated work towards the introduction of major changes in the provision of health and education services. These were being provided predominantly by the public sector (including, in some cases, by state enterprises) largely free of charge. As these providers were facing severe financial crises, the quality and effectiveness of coverage of these services had been greatly reduced. The major focus of the reform effort has been to promote the most efficient use of available resources. As a first step, the government approved the program for the phased transfer of social facilities owned by legal entities to local executive authorities in July 1996.

68. In the case of health care, the government initiated work in 1996 on the development of a plan, in consultation with the World Bank and USAID and covering the period 1997–98, for the decentralization and rationalization of health services, the introduction of per capita financing mechanisms, and the provision for private sector competition. The introduction of a three-tier system for financing health care is in progress. It consists of: (i) a guaranteed package funded by general budget resources; (ii) a basic entitlement financed by an earmarked payroll tax for the Compulsory Medical Insurance Fund (CMIF); and (iii) additional services to be bought voluntarily. In accordance with the government action program for deepening of reforms in 1996–98, a government decree issued in April 1996 approved the proposal by the Ministry of Health to create a republican college for the training and retraining of mid-level medical personnel through the merger of existing medical training institutes.

69. With regard to education, the government is establishing, in consultation with the Asian Development Bank, a specific program for the period 1997–99 aimed at increasing the quality and efficiency of the educational and training sectors.

Legal reform

70. Legal reform in 1996 aimed at strengthening the environment for successful economic reform, with particular focus on civil law, bankruptcy, labor and social legislation, and the functioning of an efficient capital market. These reforms also sought to firmly establish the “rule of law” principle to guide the activities of all economic agents, including the government. Proposals for the strengthening of the judicial system and law administration and of improving legal enforcement via court reform were submitted to parliament as were proposals for the adoption of civil and criminal procedural codes and the enactment of a law to facilitate the legislative process. A law on Copyright Protection was approved in June 1996. Draft laws on the Budget System and Foreign Credit and Currency Regulation were submitted to parliament in 1996. A draft Labor Code and a draft Law on Immigration were also prepared.

IV. Monetary Developments

A. Overview

71. Monetary policy underwent a sharp overall tightening in 1995–96. Broad and base money grew in the range of about 100 percent in 1995 and by less than 20 percent in 1996 following growth rates of several hundred percent during 1994 (Appendix Tables 19 and 20). However, the pattern of monetary policy was somewhat uneven throughout the period due to both exogenous developments as well as short-term delays in the formulation and implementation of policy responses. On the whole, demand for real money balances recovered in 1995 as confidence improved and stabilization began to take hold. During 1996, however, money demand was subdued due, in large part, to widespread perceptions of severe weaknesses in the banking system.

72. The structure of Kazakstan’s banking sector has undergone significant changes since 1994. Reforms undertaken to address the systemic weaknesses of the commercial banking sector have led to a large reduction in the number of banks (Appendix Table 21). With regard to the conduct of monetary policy, the National Bank of Kazakstan (NBK) has markedly increased the use of indirect instruments. New credit facilities have been put in place, open market operations have been initiated and credit auctions have been largely phased out. However, due to their recent introduction, the scope of some of these operations has been limited and interventions in the foreign exchange market and transactions with the government continue to be important instruments of monetary policy.31

B. The Monetary System

73. As of December 31, 1996, Kazakstan’s banking system was composed of the NBK and 101 commercial banks. State shares were eliminated, through sales or the withdrawal of licenses, in all but 14 banks compared to the almost 90 banks that had state participation in early 1995. At end-1996, 5 banks were fully state-owned and about 23 banks had some foreign participation. Banks participate in interbank foreign exchange and credit markets and a daily foreign exchange auction is held. There are also exchange bureaus and Lombard institutions throughout the country.

74. The NBK has the exclusive right to issue bank notes and coins and shares the responsibility for the regulation of foreign exchange in Kazakstan. The government maintains foreign exchange deposits with the NBK and domestic commercial banks as well as abroad.

75. During 1995–96, Kazakstan elaborated and implemented a comprehensive plan for addressing the weaknesses of the financial system (see Appendix I). Prudential norms for commercial banks were strengthened, proper legal and accounting frameworks required for the efficient functioning of a market economy were laid and nonperforming loans were removed from balance sheets. The authorities also sought to streamline the banking system and numerous banks had their licenses revoked; the number of commercial banks was almost halved between end-1994 and end-1996. These highly visible actions to close weak banks as well as the failure of some very large banks—not only in Kazakstan but also in neighboring countries—appear to have, somewhat paradoxically, heightened concerns about the banking system in the short run.

76. The NBK also streamlined its own functions during 1996 and most of its client-service operations were relegated to the newly created Budget Bank. By eliminating commercial banking functions, the NBK expects to improve its day-to-day liquidity management and better focus on its core monetary policy functions. The Budget Bank, founded as an intermediate step toward the setting up of a full-fledged treasury, has taken over the handling of all republican and local government revenue, expenditure and other operational accounts throughout the country. The Ministry of Finance maintains a central treasury account at the NBK and regularly transfers its net deposits at the Budget Bank into this account.

77. With a view to the creation of the infrastructure needed for the growth of a comprehensive financial sector—encompassing the development of investment banks, stock markets, pension funds, and mutual funds—numerous regulatory measures were taken in 1995–96. These included, inter alia, the establishment of a regulatory framework for secondary markets for treasury bills, clarification of the regulatory roles of the NBK and the National Securities Commission, the promotion of dealers associations to govern market practice, the establishment of a code of conduct for foreign exchange dealers, and improvements in defining the membership criteria and the regulatory framework of the Almaty Clearing House. The government has also proposed legislation addressing foreign credit and currency regulations, the capital market and regulations governing securities transactions.

C. Trends in Monetary Policy

78. Following the explosion in domestic credit in early 1994 associated with the inter- enterprise arrears clearance operation and the resultant pick-up in inflation, the goal of monetary policy more recently has been to rein in monetary expansion and to bring down inflation. In this endeavor, the authorities have been confronted with two challenges. During 1995, foreign exchange inflows significantly greater than expected led to a rapid expansion of base money which threatened to reignite inflation. During 1996, the challenge has been to strike a proper balance between monetary and credit policies, on the one hand, and exchange and interest rate policies, on the other hand, in response to the marked weakening in the demand for Tenge balances.

79. The large capital inflows in 1995 occurred in response to an improved trade balance, reflecting a pick-up in world market prices for Kazakstan’s major exports; the signing of a number of management contracts with foreign investors; and some reversal of capital outflows following initial successes at stabilization. The NBK initially pursued a policy of letting the exchange rate depreciate steadily against the U.S. dollar at a rate slightly less than the inflation differential between Kazakstan and the United States. As a result of this policy, gross reserves increased by over US$370 million as net NBK purchases in the foreign exchange auctions picked up through the first half of the year (Appendix Table 22). The growth in base money was confined by limiting domestic credit expansion. During the first half of the year, credit to government increased by only about 3 percent of the stock of base money at the beginning of the period, and net credit to banks declined by half in nominal terms. The latter was restrained by the introduction of a new instrument, the sale of short term NBK notes.

80. Nevertheless, following a further upsurge in foreign exchange inflows in June—July of 1995 and a rapid increase in base money, the authorities adjusted exchange rate policy to place greater emphasis on base money targeting. This involved limiting foreign exchange purchases to an amount commensurate with sales of NBK notes and letting the exchange rate appreciate somewhat. Credit to banks was also maintained at low levels, inter alia, by reducing the frequency of credit auctions (including by suspending them for about a month) and credit to government was kept below what had been envisaged. Subsequently, the capital inflows ceased, pressures in the foreign exchange market abated, and the Tenge started to gradually depreciate again. NBK interventions in the foreign exchange market began to be largely made in order to smooth out short-term exchange rate fluctuations. During the first quarter of 1996, a further tightening of credit policy followed on the heels of a temporary surge in base money at end-1995—caused this time by large capital expenditures by the NBK. This policy ensured continued restraint in monetary expansion and relative calm in the foreign exchange market.

81. As a result of these policies, the growth in base and broad money were limited to 92 percent and 106 percent, respectively, during 1995 and declines of 3½ and 3 percent, respectively, were recorded during January—March 1996. Velocity declined by 8 percent over 1995 (Figure 3) which, as inflation continued its downward trend, suggests that some increase in the demand for real balances occurred. The money multiplier increased by about 7½ percent in 1995, due to a decline in the reserve-to-deposit ratio and despite an increase in the currency-to-deposit ratio. The decrease in the former ratio was due to more efficient reserve management by commercial banks, aided by the process of consolidating bank reserves at the NBK into a single account for each bank. The increase in the currency-to-deposit ratio, however, occurred largely during the second half of the year and continued into early 1996. This development appears to have been an early indication of the deterioration of confidence in the soundness of commercial banks.

Figure 3.
Figure 3.

Kazakstan: Selected Monetary Indicators, 1994–97

Citation: IMF Staff Country Reports 1997, 067; 10.5089/9781451820775.002.A001

Sources: Data provided by the Kazak authorities; and Fund staff estimates.1/ Old definition through end-1996. New definition thereafter.2/ Due to devolvement of Budget Bank from the NBK, data for the multiplier starting from the fourth quarter of 1996 are not comparable to those from earlier periods.3/ Annualized quarterly GDP/end-period broad money.4/ End-period broad money/end-period base money.

82. A striking feature of developments since the first quarter of 1996 has been the weakening of the demand for real money balances; while cumulative inflation during 1996 was about 28 percent, broad money increased by less than 15 percent.32 Whereas lack of confidence in the commercial banking system played a large part in the decline in real deposits and the associated increased preference for holding cash foreign exchange by the population, delays in implementing a consistent set of policies also invited speculative attacks upon the Tenge at times. In a reversal of the policies followed during 1995, the NBK sold large amounts of foreign exchange throughout the second and third quarters of 1996 and in early 1997. These sales, however, by contributing to the soaking up of some of the excess liquidity in the system, de facto, became important instruments of liquidity management.

83. The implications of the banking sector difficulties for the conduct of monetary policy became pronounced starting in April 1996. Uncertainties surrounding the outcome of the Presidential election in Russia, in combination with the increased visibility of the inherent weaknesses of the banking system, led to some loss of confidence and a weakening of financial intermediation. Currency in circulation increased and deposits in the banking system, particularly foreign exchange deposits, declined sharply in April—May leading to a fall in broad money. The failure of Tveruniversal Bank in Russia, with whom a number of Kazak banks had close dealings, and the imminent failure of Kramds Bank, one of the five largest banks in Kazakstan, also heightened concerns about deposits in the banking system and further contributed to a lowering of money demand.33

84. The decreased demand for money balances was largely addressed in the foreign exchange market where the NBK intervened heavily by selling reserves. This enabled the mopping-up of liquidity; however, this policy required maintaining a consistent interest rate, exchange rate and credit policy, which was not always the case.

85. The NBK initially followed a policy of maintaining the exchange rate relatively stable and lowering the bellweather interest rate, the refinance rate, in line with inflation. Credit policies were, however, relaxed as indicated by the rapid increase in base money (of 6 percent) during the second quarter, due in part to the redemption of all outstanding NBK notes. Substantial increases in credit to the government by the NBK also occurred during the third quarter. Despite a lowering of the reserve requirement at the beginning of May, commercial bank deposits at the NBK did not decline significantly; the money multiplier decreased; and total banking system credit to the economy fell in real terms despite successive lowerings of the refinance rate. Yields in the government treasury bill market also started rising as fears of inflation were reignited (Figure 4). The policy mix had, therefore, become unsustainable and liquidity in the system began to exceed what could adequately be sterilized through sales of foreign exchange. Furthermore, as the NBK continued its policy of defending the exchange rate, speculative attacks on the Tenge intensified, leading to very large reserve losses.

Figure 4.
Figure 4.

Kazakstan: Consumer Price Inflation and Interest Rate Developments, 1995–97

Citation: IMF Staff Country Reports 1997, 067; 10.5089/9781451820775.002.A001

Sources: Data provided by the Kazak authorities; and Fund staff estimates.

86. The NBK took corrective actions in October by raising the refinance rate to 35 percent, issuing substantial amounts of short term NBK notes (which increased to 12 percent of base money by end-1996), and letting the exchange rate depreciate at a faster rate. These policies met with some success as the speculative attacks on the Tenge ceased, tight liquidity conditions returned, and further losses in reserves were halted. Reserves were further bolstered by the purchase from the government of US$200 million in receipts from a Eurobond issued in late-December.

87. The harmonization of policies and instruments enabled the NBK to successfully neutralize an unanticipated surge in base money toward the very end of 1996, resulting from the arrears clearance operation of the republican government, through sterilization in the foreign exchange market during January 1997. Due to the maintenance of a high refinance rate throughout the first quarter and continued tight credit policies (the outstanding stock of NBK notes increased to 12½ percent of base money at end-March 1997 and the government assisted by building up deposits), the loss of reserves was minimized in January and they increased thereafter.

88. Velocity developments in 1996 reflected the lackluster demand for deposits with the banking system and increased by about 17 percent over the year. Further pointing to the weakened state of money demand throughout 1996, the money multiplier decreased by about 4 percent over the year due to an increase of 26 percent in the currency-to-deposit ratio. In line with the experience in 1995, the reserves-to-deposit ratio decreased during the first quarter of 1996 as banks continued to improve managing their reserves. However, despite the lowering of the reserve requirement in May 1996, this ratio did not decrease further during the year as banks found it prudent to maintain excess reserves in the face of banking sector difficulties. Velocity at end-March 1997, however, was only about 4½ percent higher than a year earlier, indicating that the decline in money demand had begun to moderate. The money multiplier also increased as both the reserves-to-deposit and the currency-to-deposit ratios decreased pointing to some return in confidence.

D. Credit Market and Interest Rate Developments

89. NBK credit to the government is largely dictated by budgetary needs arising from the seasonal pattern of revenues and expenditures and the mismatch in the timing between expenditures and bulky receipts of foreign financing. The NBK has steadily reduced its direct lending to the government for budgetary finance, although during 1995–96 it extended sizeable special short-term credits as bridge loans. Through its participation in the secondary market, the NBK has also sought to increase its stock of treasury bills. However, the size of this portfolio has generally been limited and has not been sufficiently large to enable it to conduct extensive open market operations through the use of treasury bills. Furthermore, at the end of 1996, the Ministry of Finance redeemed its entire portfolio of treasury bills leaving the NBK with no government debt instruments that could readily be used for liquidity management.

90. The extension of gross credit to the government from commercial banks takes place in the form of treasury bill purchases. The decline in inflation has enabled the Ministry of Finance to introduce bills with longer maturities; bills with maturities of six and twelve months were introduced in July 1995 and July 1996, respectively. The share of bills with maturities of six months in the total outstanding stock of bills increased rapidly during 1996, from about 20 percent at end-March to over 50 percent at year-end. Despite the notable increase in the stock of treasury bills held by commercial banks during 1996, net credit to government from this sector was negative for the year due to the build-up of sizeable government deposits, largely associated with privatization receipts.

91. With regard to credit to banks, the number of credit auctions by the NBK was reduced sharply to only five in 1996 from a peak of three per week during the first half of 1995. The commencement in mid-1996 of operations of repurchase (repo) and reverse repo facilities using government treasury bills has largely been used to satisfy the short-term liquidity needs of banks. For open market operations purposes, the NBK has, therefore, continued to rely on the sale of short-term NBK notes to commercial banks. Efforts to maintain tight liquidity for extended periods of time through the use of these notes has been difficult as their term to maturity is typically less than one month. The Lombard facility of the NBK has also been open to commercial banks since August 17, 1995 when 17 banks, the primary dealers of treasury bills, were allowed access. Starting in November 1995, secondary dealers were also allowed access to the facility. Use of the facility has, however, waned following the introduction of the repo and reverse repo operations.

92. The interbank credit market was founded by the 15 largest banks in Kazakstan and started operations in April 1995. The NBK’s involvement in the market has largely been to smooth interest rates so that they reflect changes in the refinance rate. NBK involvement in the market was heavy during 1995; however, interventions largely ceased during 1996. Overall activity in this market dried up significantly during 1996 due to increased concerns about the health of the financial system.

93. Credit to the economy from the banking system recorded declines, in nominal terms, of 36½ percent in 1995 and 11 percent in 1996. While the preference of commercial banks for holding excess reserves rather than increasing lending in the face of banking sector difficulties no doubt played a part in this decrease in 1996, the decline in credit during 1994–96 is overstated due to the failure and closing of banks and the removal from the balance sheets of banks of sizeable amounts of nonperforming loans in foreign currency associated with the extension of trade credits under government guarantees during the early years after independence. Credit increased by 12 percent during the first quarter of 1997 as banks reduced excess reserves and confidence began to return.

94. With regard to interest rate developments, the NBK followed a conservative policy in 1995. The refinance rate was gradually lowered from over 200 percent at the end of 1994 to 45 percent in September 1995. This movement initially reflected reductions made in the rate in response to declining inflation while maintaining it at positive real levels. Following the surge in capital inflows at mid-year, the NBK further accelerated the reduction in the refinance rate. Toward the end of the year, however, the rate was increased to 52½ percent and further to 59 percent in early 1996 as the capital inflows ceased, and the NBK attempted to respond to the excessive growth in monetary aggregates in late 1995.

95. Starting in February 1996, the NBK resumed the policy of reducing the refinance rate and the frequency of cuts increased (Appendix Table 23). By mid-September, the rate stood at 30 percent. While this course of action may appear to have been justified on the basis of strictly backward looking inflation adjustment, it was not fully consistent with market sentiments as evidenced by developments in monetary aggregates and foreign exchange markets. Furthermore, developments in the treasury bill market appear to suggest that the pace of interest rate adjustment may have been too steep. While yields on three-month treasury bills had typically closely tracked and followed movements in the refinance rate in earlier periods, the link broke down with yields on three-month bills actually increasing at times. In September, the treasury bill yield started rising rapidly and by mid-October had increased by almost 8 percentage points in testimony to market sentiments regarding inflationary expectations and lack of confidence in the authorities’ interest rate policy. The package of corrective monetary policies adopted during the fourth quarter, however, included an increase in the refinance rate in two steps to 35 percent. This correction instilled confidence in the market and the treasury bill yield started to decline once again, decreasing to 32 percent by year-end. The yield continued to fall to 24½ percent at end-March 1997 despite the continued maintenance of the refinance rate at 35 percent. With calm returning to the foreign exchange market, declining inflation, and yields on treasury bills continuing to fall, the NBK reduced the refinance rate to 30 percent on May 1.

V. Public Finances

96. In recent years, the main fiscal problem in Kazakstan has been the revenue decline, although it has not been as sharp as in most other CIS countries (Figure 5). General government revenues fell from almost 30 percent of GDP in 1993 to 24½ percent of GDP in 1996 (including gross revenues of the extrabudgetary funds). As in other countries, the main reasons for the revenue decline were the troubled financial position of many enterprises, the difficulties in capturing the private sector in the tax net, and weak tax administration. In the face of declining revenues, reductions in the fiscal deficit were achieved through expenditure compression that has led to the emergence of substantial arrears on wages, utilities, and pensions. Virtually all central government expenditure arrears were eliminated by end-1996; moreover, the authorities have established a plan to pay off all pension arrears by end-1997 and are committed to clear all general government arrears by end-1999.

Figure 5.
Figure 5.

Kazakstan: General Government Revenue, 1993–96

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 067; 10.5089/9781451820775.002.A001

Source: International Monetary Fund, European II, Common database.

A. Fiscal Developments in 1995

97. After the slippages experienced in 1994, the aim of fiscal policy in 1995 was to underpin the continuing stabilization effort and to deepen structural reforms, including the removal of government-guaranteed directed credits, which were a major source of quasi-fiscal deficits in the past, and the introduction of a new and modern Tax Code.34 The revised budget aimed to halve the fiscal deficit of the general government in relation to GDP, from 7 percent in 1994 to 3½ percent in 1995.

98. In the event, fiscal policy made a substantial contribution to the stabilization effort in 1995. The fiscal outcome was tighter than planned, with the general government recording an overall deficit of about 2 percent of GDP (Box 2). Revenues of the general government (including gross revenues of extrabudgetary funds) actually stabilized in 1995, as budgetary revenues fell by about 1 percentage point of GDP compared with 1994 (Appendix Tables 24 and 25). The corporate profit tax, VAT, export duties, and rents from natural resource enterprises performed well, while accelerated proceeds from the privatization program boosted nontax revenues in the last few months of the year. The introduction of the new Tax Code had a relatively small negative impact in the short-run. Payroll contributions, the main source of revenues for the extrabudgetary funds, increased as a share of GDP, reflecting the rising share of wages in GDP.

99. Expenditures of the general government (including gross expenditures of extrabudgetary funds) reached almost 28 percent of GDP, while budgetary expenditures (including net lending) were equivalent to 20¾ percent of GDP. Domestic expenditure arrears, which stood at over 2 percent of GDP at end-1994, were reduced significantly, to around 1 percent of GDP at end-1995. However, some important expenditure needs were not adequately met, particularly those relating to capital investment (including rehabilitation and maintenance) and the social safety net. Quasi-fiscal operations in 1995 recorded a small surplus equivalent to ½ percent of GDP, reflecting the impact of the net settlement of transactions undertaken in the context of the interenterprise arrears clearing operation of 1994. The extrabudgetary funds remained in approximate financial balance in 1995.

Key Fiscal Indicators, 1994–97

(In percent of GDP)

article image

Approved budget

Total domestic financing

B. Fiscal Developments in 1996

100. Fiscal policy in 1996 aimed at consolidating the adjustment achieved in 1995, while raising revenue to meet additional expenditures associated with economic restructuring. The deficit of the general government was targeted to increase somewhat to 2.8 percent of GDP in 1996, and was to be financed largely from external official sources and the domestic non-bank sector. Direct borrowing from the NBK was planned to be gradually phased out.35 In the event, the cash deficit was equivalent to 2.6 percent of GDP, and was financed entirely from foreign sources.36 A shortfall in official foreign financing, due to administrative difficulties and rephasing of disbursements on the part of lenders, was made up late in the year by a US$200 million Eurobond issue (with three-year maturity and 350 basis points above the U.S. treasury bond rate). Net domestic financing of the budget was negative in 1996, indicating an accumulation of government deposits primarily with commercial banks. In its debt management strategy, the Ministry of Finance continued to be concerned by the high, albeit declining, domestic interest rates.37 Therefore, the issue of domestic treasury bills (of three-, six-, and twelve-month maturity) was relatively modest, and a significant amount of treasury bills was redeemed ahead of schedule in late-1996.


101. Revenues were lower in relation to GDP in 1996 compared to the year before, led by declines in tax revenues (over 2 percent of GDP) and nontax revenue (1½ percent of GDP) that were only partially offset by higher capital receipts and payroll taxes (Appendix Table 24 and Figure 5). The composition of budgetary revenues in 1996 differed considerably compared with 1995, with a large decline in current revenues being partially offset by higher capital revenues stemming from increased privatization. Collections were lower than planned for all categories of taxes. The main reasons for the difficulties in revenue collections appear to have been: the weak tax administration, which is unable to capture the growing nonstate sector, and continued financial difficulties in the state enterprise sector.

102. Policy actions, otherwise commendable, but with negative revenue impact, such as the abolition of the Investment Fund, the elimination of export duties at mid-year, and the reduction in import tariffs, also contributed to the decline. To compensate for the loss of revenue stemming from these actions, a package of measures (about 1 percent of GDP) was implemented in July 1996. These measures were designed to increase the fiscal contribution from the taxation of goods and services and from the natural resource sector and reflected the authorities’ desire to minimize major changes to the Tax Code adopted only a year earlier. The revenue package included: (i) the abolition of zero-rating for VAT on precious metals and on exports of certain primary products to Russia; (ii) elimination of the personal exemption for the importation of one automobile; (iii) the imposition of excise taxes on all goods imported from Ukraine and on alcohol products imported from the CIS; (iv) the extension of the excise tax base to technical spirits; (v) increases in the excise tax rate for diesel fuel; (vi) improvements in the regime of natural resource taxation and collection of additional bonuses from natural resource companies; (vii) a reduction in the list of non-dutiable imports by imposing a minimum import duty rate of 5 percent; (viii) the imposition of fees on kiosks; and (ix) the auction of property confiscated by the State Tax Committee.

103. A strengthening of tax administration to address the weak effective collection rate has been a key policy objective. Accordingly, the authorities have taken steps to improve the efficiency of their tax administration in 1996, with the assistance of international advisors, including from the Fund. Specific measures in this area have included: (i) a pre-shipment inspection scheme for imports, introduced in January 1996; (ii) completion of the program of taxpayer registration and identification by end-1996; (iii) additional resources and training provided to the State Tax Committee and the State Customs Committee; and (iv) the extension of computerization of the tax administration, with the aim of covering all taxes and the entire country by end-1997. The manpower of the State Tax Committee (approximately 11,000 including the tax police) is deemed adequate, but efforts are continuing to improve its management and to effectively inspect taxpaying units. The creation of a large taxpayers unit is being considered (see below).

104. There was some recovery of revenues in the fourth quarter of 1996, which partly reflected these efforts. Thus, the better-than-expected performance of the corporate income tax was partly due to the intensification of collection efforts by regional tax service authorities. However, the main reasons for the better-than-expected revenue performance were: (i) the repayment of central government wage arrears which led to higher personal income tax receipts; and (ii) the increased recourse to the practice of mutual settlements between taxpayers and the government, whereby tax obligations are netted out against obligations owed to taxpayers by the government. About 16 percent of total taxes collected in the fourth quarter reflected such settlements, up from 9 percent in 1995. Many of the enterprises resorting to this practice are illiquid38 and would not be able to pay their tax obligations in any other way.


105. In the face of declining revenues, fiscal adjustment in Kazakstan has relied mainly on expenditure compression, which has led to accumulation of expenditure arrears, including on wages, utilities, and pensions. This pattern continued in 1996, when expenditure compression was extremely strong until October. Expenditures of the general government (including gross outlays of extrabudgetary funds) reached 27 percent of GDP, about 1 percent of GDP less than in 1995. Budgetary expenditure declined by over 2 percent of GDP, while extrabudgetary fund spending increased by nearly 1 percent of GDP to 9 percent of GDP. Social and cultural expenditures were higher than budgeted, reflecting mainly higher education outlays, as were outlays for the national economy and for state authorities. Expenditure savings were achieved by lower outlays for defense and law and order, state administration, bank recapitalization, and other expenditures (Appendix Tables 24 and 25).

106. Cash budgetary expenditures in the first nine months of 1996 were compressed to about 17 percent of GDP, well below the budgeted release rate. This outcome was the result of a postponement of budgetary wage increases, and lower expenditures for state administration, operations and maintenance, investment, science, defense, and law and order. Expenditures for social and cultural areas, including health, social protection, and in particular education, were slightly higher than budgeted. VAT refunds owed to exporters of raw materials, amounting to more than 1 percent of GDP, were not effected and are scheduled to be repaid at least in part in 1997. Fourth quarter outlays were higher due to the clearing of all outstanding central government wage and utility arrears, which had increased to the equivalent of 1 percent of GDP after the increase of most utility tariffs to full recovery of actual costs in October.

107. While the central government repaid its entire stock of wage and utility arrears at the end of 1996 and also committed to prevent the emergence of any new arrears, significant expenditure arrears remain at the local government level, including the equivalent of nearly 1 percent of 1997 GDP in overdue wage and payroll contributions, and other arrears amounting to about 1½ percent of 1997 GDP. In addition, accumulated contribution and expenditure arrears of the pension fund are substantial (see below).

Structural reform

108. Institution building in the fiscal area has included the further development of the treasury system. As part of this process, a Budget Bank was established on the basis of the cash clearing centers formerly managed by the NBK; the activities of this bank are strictly limited to cash management of government and extrabudgetary accounts. Following the decision to move the capital to Akmola, an extrabudgetary fund was established to deal with the financial transactions related to this move. The costs of the move are to be financed by loans and/or grants from individuals, corporations and friendly governments, as well as, possibly, transfers from the budget. During 1996, the Akmola fund had receipts of US$42 million and expenditures of US$26 million. The move of the capital to Akmola is planned to be phased in over several years, and expenditures on the transfer are not expected to exceed US$250 million in 1997. The authorities intend to incorporate all Akmola-related receipts and expenditures into the budget starting from 1998.

C. The 1997 Budget

109. The 1997 budget, approved by parliament in late-December 1996, projected revenues at 15½ percent of GDP, expenditure and net lending at 18¾ percent of GDP (including an additional ¾ percent of GDP in new foreign-financed investment projects through the Public Investment Program (Box 3)), and a deficit at 3¼ percent of GDP. Domestic financing of the budget deficit was projected to rise to ¾ percent of GDP, more than in previous years despite the relatively high interest costs, while financing from external sources was planned at 2½ percent of GDP. While, as mentioned, all republican budget arrears were cleared at end-1996, the 1997 central government budget did not include allocations for the repayment of local government or pension fund arrears.

Public Investment Program (PIP)

A major element incorporated in the budget and the balance of payments projections for 1997 and the medium term is the PIP approved by the government at the end of 1996.

The program incorporates 75 projects (of which 45 were already being considered and 30 are completely new) for a total cost of US$7.8 billion. US$2.2 billion of this amount is expected to be implemented during 1996–98. External financing equivalent to US$6.7 billion (or 85 percent of the total cost) is estimated to be required. At the Consultative Group meeting for Kazakstan in Tokyo in November 1996, creditors and donors pledged US$1.35 billion in support of the 1997 program.

The program focuses mainly on infrastructure investments (including rehabilitation of roads, bridges and railroads) but also includes a number of public utility, energy, oil, and gas sector projects, as well as a few projects in the areas of health, education and social protection.

Regulations have recently been issued by the government, which provide an adequate framework for the implementation of the investment program. The program will be updated and revised annually.

110. A revised budget was presented to parliament in May 1997 that incorporates measures to repay pension fund arrears equivalent to 2.1 percent of GDP. Part of the expenditures for the arrears clearance operation is expected to be covered from additional privatization revenues and expenditure cuts, while the remainder will be reflected in an increase in the deficit to 4¼ percent of GDP, to be financed from foreign sources.


111. The 1997 budget incorporated a number of revenue-enhancing measures, including a new excise tax for crude oil and higher rates for the gasoline excise tax and for property, land, and vehicle taxes. In addition, the VAT legislation was amended to deny credit on VAT paid to other CIS countries, implying that Kazakstan has moved closer to the generally accepted international principle of VAT taxation (destination principle) for CIS trade. Measures were also taken to fight smuggling of excisable goods, and amendments were passed to enforce collection of excise taxes on excisable goods in Kazakstan, regardless of whether or not such taxes have been paid elsewhere in the CIS. However, parliament has not yet approved additional increases in property and vehicle taxes (which were also scheduled to take effect with the budget) and it has rejected to introduce an excise tax on electricity and a revision of the personal income tax that would have raised the average effective PIT rate. Some revenues from users of natural resources, from bonuses and fixed rental charges, are projected to decline, although higher income tax receipts are expected from this sector. Overall, the revenue-enhancing measures are intended to raise tax revenues by about 2 percent of GDP, but this is partially offset by lower anticipated nontax revenues due to smaller projected NBK profits and the aforementioned expected reduction in bonuses and other natural resource revenues.

112. Revenue-sharing arrangements between the republican and local governments were also changed in 1997. The VAT and excises on crude oil and gasoline were allocated to the republican budget, and the republican budget shares of the corporate income tax and the personal income tax were set at 60 percent and 15 percent, respectively. The centralization of VAT collections at the republican level will help improve administration of the VAT, particularly ensuring prompt payment of VAT refunds to taxpayers.

113. As no additional major tax policy initiatives are expected in 1997 in the wake of the revisions to the Tax Code implemented in January 1997, further revenue enhancement in 1997 will primarily focus on improving tax administration and collection of tax arrears. The authorities have announced their intention to implement a specific set of measures during 1997–98 which includes the strengthening of criminal liability for taxpayer violations of tax legislation, the adoption of programs to detect unregistered taxpayers, to detect and control the largest stopfilers, and the tightening of procedures for granting tax deferrals. However, the large taxpayer unit has not yet been established, although all large enterprises that have been privatized or are under management contracts are already subject to a special schedule of STC inspections.


114. The budget envisaged an increase in investment outlays and net lending in support of small- and medium-sized businesses, and higher outlays for bank restructuring. The government wage bill was projected to rise at the rate of inflation, but the ongoing reform of the government was expected to bring about reductions in the government workforce of around 20 percent on average, which would therefore enable average real budgetary wages to rise. Retrenched workers are to receive two months pay at their last wage and be eligible for unemployment benefits. Regarding transfer payments, the average pension is planned to increase by 17 percent, which is broadly unchanged in real terms. Finally, the budget provides for the equivalent of about 1 percent of GDP for interest payments. The 1997 budget law “protects” some categories of expenditure (on wages, pensions and stipends) from sequestration. Thus, the expenditure cuts envisaged in the revised budget include investment and nonpriority expenditures, including purchases of materials and equipment, and capital repairs. The authorities also plan improvements in budgetary control over local government operations during 1997.

115. Subsequent to the adoption of the budget by parliament, the President ordered the government to establish plans for the clearing of local government wage and payroll tax arrears during the first half of 1997. No additional budgetary allocations were provided from the republican budget for the clearance of the local government wage arrears, but existing allocations (subventions) from the budget were earmarked for this purpose. In light of the inability of local governments to borrow, this measure has forced local governments to rely on their own revenue-raising capacities to meet other local expenditures or to cut such expenditures. A significant reduction in local government arrears was recorded in the first quarter of 1997.

116. In the area of housing and communal services, untargeted subsidies were reduced through the adjustment of tariffs to full recovery of actual costs on October 1, 1996, although many categories of citizens receive substantial discounts from ordinary tariffs, with budgetary costs projected at 0.6 percent of GDP. A transfer program amounting to 0.3 percent of GDP is targeted to families that spend more than 30 percent of their income for housing and communal services. The increase in tariffs was accompanied by the creation of a targeted housing subsidy scheme to replace untargeted subsidies. The services covered are gas heating through the district heating systems, hot and cold water, electricity, sewage, and the monthly apartment maintenance fee. Since individual metering is not possible in most cases, the targeted subsidy establishes space norms depending on household size and income. Qualified households are thus able to limit their monthly utility bill payments to no more than 30 percent of their income, with the difference being covered from the budget. However, due to the lack of experience with the new system and administrative difficulties, the coverage of the targeted subsidy program remained very narrow at end-1996.

D. Fiscal Developments in the First Quarter of 1997

117. After a substantial expansion in the last quarter of 1996, underlying budgetary policies were restrained in the first quarter of 1997, and the deficit reached about 1½ percent of quarterly GDP,39 in line with the budget. Excluding the recapitalization of a troubled bank, which was brought forward from the third to the first quarter of the year, the budget would have been balanced. In the face of revenue shortfalls and unanticipated expenditures related to the recapitalization operation, the deficit was kept in check through expenditure compression. Due to a sizable shortfall in foreign loan disbursements, the budget deficit was financed by domestic sources, mainly treasury bills and a drawdown of government deposits with the banking system.

118. After the surprisingly strong revenue performance in the last quarter of 1996, first quarter revenues fell short of targets by over 10 percent. This reflected primarily the weakness in collections of corporate income tax (CIT), VAT, and nontax revenues, while the personal income tax, excises, international trade taxes and other taxes were on target and privatization receipts exceeded expectations. Seasonal weakness, especially in January, also played a role; however, collections picked up in February and March. Tax arrears rose by 0.7 percent of GDP during the first quarter, from 1.1 percent of 1997 GDP at end-1996. Tax arrears are concentrated in the VAT (67 percent) and the CIT (21 percent). Expenditures and net lending in the first quarter of 1997 were about 10 percent lower than programmed, including the recapitalization operation. Apart from protected expenditures on wages, social benefits, and food, other expenditure categories have been compressed, in particular investment outlays, net lending, and national economy outlays.

E. The Social Protection System and Extrabudgetary Funds

119. The extrabudgetary funds had a small cash deficit (T 300 million) in 1996, on revenues and expenditures amounting to 9 percent of GDP. The largest extrabudgetary fund is the pension fund, with 1996 revenues and expenditures of about 7 percent of GDP. There are 2.8 million registered pensioners in Kazakstan, of which approximately 9 percent are working pensioners, and 5 million workers making payroll contributions, corresponding to a dependency ratio of 0.56 which is high by international standards. Old age pensions, granted on the basis of age and years of service, account for 2.1 million recipients. Labor invalidity pensioners total about 0.27 million and survivor pensioners 0.24 million. The pension fund has accumulated considerable arrears on contributions of about T 50 billion (2.9 percent of GDP), and pension arrears of T 30 billion (1.7 percent of GDP at end-March 1997).40 There is considerable geographic disparity in the pension arrears, with poor oblasts being significantly behind in pension payments while more prosperous ones are rarely missing any payment. However, the relative position of pensioners in Kazakstan has been improving, as pensions have been rising faster than wages since late 1995. The average replacement rate rose significantly, from 30 percent in the fourth quarter of 1995 to slightly over 43 percent by mid-1996. The pension bill has been growing in nominal terms and in relation to GDP.

120. The government is intensifying efforts to collect contributions and contribution arrears in order to avoid incurring any new arrears on benefits. It is envisaged to institute another amnesty on interest and penalties on overdue obligations, but this would be only marginally effective.41 Despite Kazakstan’s relatively young population, one of the major difficulties faced by the pension fund is the low coverage of the working population which results in the high dependency rate. The World Bank has identified two sectors, agriculture and retail trade, where major numbers of new contributors can be found. Improvements in the administration of the contributions to the pension fund could also help increase the efficiency of collections over the medium term. Presently, the withholding of pension fund contributions is not coordinated with the withholding of income taxes. Information could be exchanged between the tax administration and the pension fund to cross check payers.

121. A major reform of the pension system has been under way since the passage of the new pension law in mid-1996. Two important changes have been made to the existing pay-as-you-go (PAYG) system. First, beginning in 1997 the retirement age will be increased by six months every year until a minimum retirement age of 63 years for men and 58 years for women is reached in the year 2002. Second, the contribution rate will be increased from 5 percent to the standard 30 percent for most categories of contributors receiving preferential treatment up to now. However, owing to low payroll tax compliance and substantial increases in pensions granted in 1996, pension arrears, which stood at 1.4 percent of 1997 GDP at end-1996, rose by 0.3 percent of GDP during the first quarter of 1997. As mentioned above, the authorities plan to pay all the arrears of the pension fund before the end of the year as preparation for the introduction of a comprehensive pension reform from January 1, 1998.

122. The share of payroll contributions allocated to the Social Insurance Fund was lowered in 1996 from 15 percent to 5 percent of the payroll tax. The remaining 10 percent of the payroll tax was allocated to the newly established Compulsory Medical Insurance Fund. The present system of social assistance is being reformed. In addition to adopting the concept of the poverty line, the targeting of cash and in-kind social transfers will be enhanced by the introduction of additional wealth based indicators and by extending coverage to presently uncovered vulnerable groups, such as indigent single people without children.

123. Payroll contributions to the Employment Fund (EF) are 2 percent, but with the prospect of the restructuring of budgetary organizations and downsizing of government payrolls in 1997, starting in January 1997 budgetary organizations, which were previously exempt, were to contribute 1 percent of their payroll to the EF. The system of unemployment benefits is being modified with a view to improving benefit levels while at the same time strengthening the finances of the EF. As a result, it is expected that the replacement ratio (the ratio of the average unemployment benefit to the average wage) will increase from around 17 percent in 1996 to 30 percent in 1998. In addition to the extension to all economic sectors of the standard payroll contribution rate of 2 percent in 1996, the finances of the EF will be bolstered by the transfer of housing and other programs for immigrants to the budget in 1997 and by the eventual introduction of an employee contribution.

VI. External Sector Developments

A. Balance of Payments


124. Kazakstan faced a relatively comfortable balance of payments position during 1995–96, buoyed by a strong expansion of exports and a substantial rise in foreign direct investment (Appendix Table 26). Although imports increased at a relatively healthy pace, reflecting the liberalization of trade, increased foreign direct investment and, more recently, a turnaround in economic growth, the current account deficit declined from US$0.9 billion in 1994 to about US$0.7 billion in 1995–96 (or from 8 percent of GDP in 1994 to 4 percent of GDP in 1995–96). At the same time, owing primarily to the acceleration of foreign direct investment, but also the Eurobond issue of US$0.2 billion in 1996, the surplus in the capital account increased from US$1.2 billion in 1994 to US$1.8 billion in 1996. In any case, as a result of sizable unidentified outflows in both years (recorded as errors and omissions), the overall balance of payments registered a small deficit in 1995 (about US$80 million) and a small surplus in 1996 (about US$75 million). Nevertheless, with the aid of debt relief from Russia in 1995 and the purchase of gold from domestic producers in 1995–96, the net international reserves of the National Bank of Kazakstan (NBK) increased by US$0.3 billion in 1995 and US$0.2 billion in 1996; gross official reserves rose from 3.2 months of imports of goods and nonfactor services at end-1994 to 3.5 months at end-1996.

Current account

125. The sizable drop in the current account deficit in 1995 reflected a marked improvement in the trade balance, which in turn reflected a strong rebound in exports (Appendix Table 27). After collapsing by about a third in 1994, exports rebounded strongly, increasing by 58 percent in 1995. Moreover, the expansion was broad-based, partly because of a general improvement in world commodity market conditions, but also because trade liberalization—including the elimination of export quotas and licenses, and the lowering export duties—encouraged a vigorous volume response (trade liberalization is discussed in Chapter VII). Oil exports rose by some 50 percent in 1995, owing to both more favorable prices and a rebound in volume. Exports of grain more than tripled, largely on account of a price increase from US$27 per ton in 1994 to US$86 per ton in 1995. Ferroalloy exports nearly doubled while iron and steel exports increased by half, both benefitting from substantial price increases as well as volume gains. In addition, copper exports rose on account of price rises.

126. Imports had been compressed in 1994 as well, falling by about 20 percent, reflecting tight domestic credit policies, an 18 percent drop in real GDP, and a shortage of export earnings (Appendix Table 28). However, imports rebounded in 1995 to about the 1993 level (an increase of 29 percent), reflecting the impact of trade liberalization and greater availability of foreign exchange from exports and foreign direct investment. But with export growth far outpacing import growth, the trade deficit narrowed from US$0.9 billion in 1994 to US$0.2 billion in 1995. However, the services account deficit widened considerably and offset a large part of this improvement, mainly as a result of higher scheduled interest payments to Russia.42 In addition, transfers fell because of the changing relations with other CIS countries. As a result, the reduction in the current account deficit was limited to US$0.2 billion.

127. In 1996, the trade deficit widened, as export growth (in U.S. dollar terms) slowed to 8 percent (from a high base) while imports (in U.S. dollar terms) continued to rise at a strong pace (11 percent). The robust growth of imports in 1996 reflected mainly an expansion of shuttle trade imports to US$2.2 billion from US$1.4 billion in 1995, which in turn reflected an increase in travel allowances in early 1996 from US$500 to US$10,000 per trip. In addition, a significant real appreciation of the Tenge during the first three quarters of 1996 is likely to have fueled import demand.43 Data indicate that oil imports also rose substantially on account of the rise in oil prices and the resumption of positive real growth in 1996.

128. The growth of exports in 1996 was accounted for entirely by the continued expansion of oil exports. The price of crude oil rose from US$70 per ton in 1995 to US$87 per ton in 1996, while the volume of oil exports increased from 14 million tons to 16 million tons in response to the higher prices. This volume increase was facilitated by a rise in crude oil production from 21 million tons in 1995 to 23 million tons in 1996, owing primarily to greater production by Tengizchevroil (4.9 million tons in 1996 compared with 2.6 million tons in 1995) which exports all of its production.44 Non-oil exports declined by 5 percent in 1996, partly because of a downturn in world commodity prices. In particular, exports of coal and ferrous alloys declined significantly, as their prices declined by about 24 percent and 22 percent, respectively.

129. The deficit in the services account narrowed slightly to offset some of the deterioration of the trade balance. This narrowing reflected largely a reduction in scheduled interest payments to Russia, which fell from about US$200 million in 1995 to zero in 1996, based on the assumption that the January 1995 Protocol on the Settlement of Mutual Financial Claims Between the Republic of Kazakstan and the Russian Federation effectively eliminated debt service to Russia from 1996 (more details on the Protocol are provided in Section D). In addition, current transfers increased to about US$130 million in 1996 on account of US$77 million of “unidentified” transfers (possibly bonuses linked to deals in the oil sector).

130. In the first quarter of 1997, exports continued to grow, albeit at a modest pace, but imports remained stagnant with no growth compared with the first quarter of 1996. While imports from non-CIS countries continued to expand at a strong pace, imports from CIS countries declined sharply owing to the change on January 1,1997 to a destination-based VAT, effectively resulting in the double taxation of imports from important CIS partner countries.45 As a result, the trade deficit narrowed to US$50 million from US$66 million a year earlier, but the current account deficit widened slightly to US$124 million compared with US$112 million in the first quarter of 1996, owing mainly to a fall in private transfers.

Capital account

131. The capital account surplus increased substantially from US$1.2 billion in 1994 to US$1.8 billion in 1996, reflecting mainly a doubling of foreign direct investment from US$0.6 billion to US$1.2 billion over this period. Official loan disbursements rose only slightly from US$330 million in 1994 to around US$350 million a year in 1995–96, although their composition shifted more toward multilateral financing. In 1995, multilatetals (excluding the Fund) accounted for about 55 percent of official loan disbursements, about the same as in 1994, but their share increased to more than three-quarters in 1996. This increase reflected largely the disbursement of US$90 million each from the World Bank’s Structural Adjustment Loan and the Financial Sector Adjustment Loan, but also an increase in disbursements from the EBRD and the ADB (these two institutions disbursed a total of US$130 million during 1995–96, their first two years of operations in Kazakstan). However, trade credit drawings declined significantly during this period from US$425 million in 1994 to US$144 million in 1996, reflecting partly the cessation of trade credits from Russia but more recently a reluctance on the part of the government to provide guarantees for such credits, discouraged by the frequency with which these guarantees were being called in. At the same time, repayments of principal increased from US$60 million in 1994 to US$180 million in 1996, in line with the accumulation of external debt.46 In December 1996, Kazakstan successfully issued US$200 million of three-year Eurobonds.

132. In the first quarter of 1997, the surplus in the capital account amounted to US$250 million, compared with US$330 million in the first quarter of 1996. This decline was due largely to a slowdown in official loan disbursements and lower foreign direct investment.

Migrant transfers, errors and omissions, and international reserves

133. Notwithstanding the substantial improvements in the current and capital accounts, the overall balance of payments recorded a deficit of US$80 million in 1995 and a small surplus of US$75 million in 1996, on account of large and unidentified outflows recorded as errors and omissions. Migrant transfers, which is a component of other capital and errors and omissions, declined sharply from US$1.1 billion in 1994 to US$0.3 billion in 1996, with the tapering off of the number of emigrants. However, the unidentified outflows noted above amounted to US$0.4 billion in 1995 and US$0.7 billion in 1996. Some portion of the outflows is likely to reflect unrecorded imports47 and would be expected to increase in line with measured imports. The sharp rise in unidentified outflows in 1996 could also reflect a move out of the Tenge (currency and bank deposits) into cash foreign exchange in the face of uncertainties currently surrounding the banking system.

134. Although a small balance of payments deficit was recorded in 1995, net international reserves of the NBK rose by about US$290 million owing to the purchase of US$140 million of gold from domestic producers and US$220 million of debt relief from Russia. Net international reserves of the NBK rose further by US$230 million in 1996 owing to the balance of payments surplus of US$75 million and additional purchases of gold of about US$170 million. About US$20 million of external arrears (including interenterprise arrears) were cleared in 1996.

135. In the first quarter of 1997, migrant transfers continued their declining trend, but sizable unidentified outflows remained, possibly reflecting some hoarding of foreign exchange after the loosening of credit conditions at the end of 1996. The overall balance of payments recorded a deficit of about US$50 million.

Direction of trade

136. The share of exports headed to CIS countries continued to decline from about two-thirds in 1993–94 to. 58 percent in 1995 and 55 percent in 1996.48 However, the share of imports from CIS countries remained steady at about 60 percent during 1994–96, after falling from above 70 percent in 1993. The share of total trade with CIS countries fell from 69 percent in 1993 to 59 percent in 1994–95 and to 57 percent in 1996. This trend reflected, inter alia, relative price and exchange rate developments as well as a shift in the relative availability of trade and other financing (including foreign direct investment) from CIS and non-CIS sources. With regard to the geographical distribution of trade with non-CIS countries, about 70 percent of Kazakatan’s exports in 1995–96 were to the following seven countries compared with 58 percent in 1994: China, Germany, Italy, the Netherlands, Korea, Switzerland, and the United Kingdom (Appendix Tables 30 and 32). However, the sources of imports have become more diversified in recent years; the share accounted for by the four largest countries (China, Germany, United Kingdom and United States) fell from about 40 percent during 1993–94 to 30 percent in 1996. Particularly notable is the decline in the share of China from 17 percent in 1993 to 3 percent in 1996 (Appendix Tables 31 and 32).

Foreign direct investment

137. There has been a marked acceleration of foreign direct investment in recent years, from about US$0.6 billion in 1994 to US$0.8 billion in 1995 and US$1.2 billion in 1996. Most of these investments during 1995–96 (78 percent in 1995 and 87 percent in 1996) came in the form of loans from partner companies abroad to their respective joint-owned companies in Kazakstan. While these loans have a schedule of repayments, according to the authorities these repayments tend to be flexible and dependent on profits made by these joint-owned companies. The remaining amounts were in the form of cash or goods and equipment.

138. By country of origin, the United Kingdom and Korea were by far the largest investors in 1996, accounting for 35 percent and 31 percent of total disbursements, respectively (Appendix Table 34). Other important investors in 1996 included the United States (9 percent) and Ireland (7 percent). Over the last four years (1993–96), the largest investors have been the United States (41 percent of the total), Korea (16 percent), the United Kingdom (15 percent), and Turkey (6 percent). By industrial sector, nearly two-thirds of total disbursements in 1996 went to the ferrous and nonferrous metals sectors, as almost all of the disbursements from Korea and the United Kingdom went to these sectors (Appendix Table 35). The oil and gas sector accounted for 17 percent of 1996 disbursements. During 1993–96, however, the oil and gas sector dominated foreign direct investment, accounting for just above half of total disbursements, while the ferrous and nonferrous metals sectors accounted for about 30 percent.

B. Exchange Rate Developments and Competitiveness

139. As explained in more detail in Chapter VII, Kazakstan maintains a floating exchange rate regime. After massive depreciation in 1994,49 the Tenge continued to depreciate steadily against the U.S. dollar in 1995–96, but at a much slower pace: 15 percent in 1995 and 13.5 percent in 1996.50 This slowdown reflected a sharp reduction in inflation from more than 1,100 percent in 1994 to about 60 percent in 1995 and 29 percent in 1996 (end-period basis). With inflation in the United States at around 3 percent per annum during this period, the real exchange rate vis-à-vis the U.S. dollar appreciated by 32 percent in 1995 and 8 percent in 1996 (Figure 6). Against the Russian ruble, after depreciating by 72 percent in 1994, the Tenge appreciated in nominal terms by 17 percent in 1995 and by a further 4 percent in 1996. This reversal in the trend mirrored developments in inflation—consumer price inflation in Russia remained high at 132 percent in 1995 compared with 60 percent in Kazakstan, although it fell to 22 percent in 1996, i.e. below the rate in Kazakstan. Consequently, the real exchange rate vis-à-vis the Russian ruble depreciated by 19 percent in 1995, but appreciated by 9½ percent in 1996.

Figure 6.
Figure 6.

Kazakstan: Nominal and Real Exchange Rate Indicators, 1993–97

Citation: IMF Staff Country Reports 1997, 067; 10.5089/9781451820775.002.A001

Sources: Data provided by the NBK, and Fund staff estimates.1/ An increase in the index is a real appreciation. December 1994=1.

140. An estimate of the real effective exchange rate for the Tenge, which combines the real exchange rates vis-à-vis the U.S. dollar and the Russian ruble with equal weights, indicates real appreciations of 6½ percent and 8½ percent, respectively, during 1995 and 1996 (Figure 7). The sizable appreciation of the effective exchange rate, when seen in conjunction with the lackluster performance of non-oil exports in 1996, does highlight the need to maintain external competitiveness. In this regard, although the nominal exchange rate continued to depreciate, the real effective exchange rate appreciated by about 12 percent during the first ten months of 1996, reflecting an effort by the NBK to partially support the Tenge through foreign exchange sales in the face of a decline in the demand for money. However, between October 1996 and March 1997, the real rate depreciated by 5 percent.

Figure 7.
Figure 7.


(December 1994=100)

Citation: IMF Staff Country Reports 1997, 067; 10.5089/9781451820775.002.A001

Sources: Data provided by the NBK, and Fund staff estimates.1/ Estimated as an equally weighted average of the real exchange rate of the tangs versus the dollar and the ruble.2/ An increase in the index is a real appreciation.3/ December wages excludes estimated bonus payments.4/ The average wages from January 1996 cover collective farms and therefore are not comparable with those before the period.

141. In terms of cost competitiveness, average U.S. dollar wages in Kazakstan and Russia remained relatively close to each other up to the breakup of the ruble area in mid-1993. However, subsequently, a large gap opened up with the average U.S. dollar wage rising much more quickly in Russia (Figure 7). Compared with some other neighboring CIS countries, the average U.S. dollar wage remains higher in Kazakstan than in Ukraine and Uzbekistan, although the gap has narrowed substantially in the last two years.

C. External Debt

142. Kazakstan’s outstanding stock of external debt (including to the Fund and Russia)51 rose considerably from US$2.7 billion at end-1994 to US$3.9 billion at end-1996, although in relation to GDP it declined from 25 percent to 19 percent (Appendix Table 36). About US$0.5 billion of this increase resulted from large disbursements from multilateral development institutions. Official bilateral creditors provided net disbursements of US$0.2 billion during this two-year period, nearly all by Japan (JEXIM co-financing with the Fund and the World Bank). Another US$0.2 billion is accounted for by the Eurobond issue in December 1996. Most of the remaining increase in the stock of debt reflects net purchases of about US$270 million from the Fund under stand-by arrangements. While the outstanding stock of trade credit drawings continued to rise quickly in 1995 (amounting to US$1.1 billion at end-1995), it fell significantly to US$0.9 billion by end-1996, reflecting the recent and ongoing reluctance on the part of the government to provide guarantees for such credits. As a result of these developments, the creditor composition of Kazakstan’s external debt shifted noticeably toward multilateral institutions; the share accounted for by the development institutions more than doubled from 7 percent at end-1994 to 17 percent at end-1996, while the share owed to the Fund rose from 10 percent to 14 percent. At the same time, the share accounted for by official bilateral creditors declined from 52 percent to 41 percent over this period, notwithstanding the increase in disbursements from Japan, as new credits from Russia ceased. The share accounted for by trade credits fell from 31 percent at end-1994 to 23 percent at end-1996.

143. Notwithstanding the sizable increase in the stock of external debt, external debt service remained at a manageable level. Reflecting the rapid expansion of exports in the last two years, the rise in the debt service ratio was limited to 8½ percent of exports in 1995 (excluding the Fund) compared with about 3 percent of exports in 1994. The ratio fell to 5½ percent of exports in 1996. Including the Fund, the ratios for the last two years were 9 percent and 6 percent, respectively.

144. The above-noted reluctance on the part of the government to provide guarantees for trade credits reflects additional pressures that have been placed in recent years on the budget from called-in guarantees. In the initial years following independence, Kazakstan’s debt monitoring and control mechanisms were quite weak and the responsibility for tracking external borrowing was spread among several institutions. This led to a haphazard issuance of large amounts of such guarantees on external borrowing by public enterprises in 1992–93, which were frequently called in as many public enterprises found it difficult to make debt service payments in an environment of declining output. However, progress continues to be made in the area of external debt management. After the designation in early 1994 of the Ministry of Finance as the sole government agency authorized to issue loan guarantees, a Committee for Utilization of Foreign Capital was created in March 1995 under the Cabinet of Ministers with explicit responsibility for coordinating and managing Kazakstan’s overall relations with external creditors. In October 1995, the Committee was placed under the auspices of the Ministry of Finance, and all loan records on government-guaranteed loans previously kept by Alem/Exim Bank and Turan Bank were made available to the Ministry. More recent efforts in this area include a cómplete stock-taking by the Ministry of Finance of all government-guaranteed debt by July 1996, the implementation of the UNCTAD system for external debt management by late 1996,52 and the adoption in February 1997 by parliament of a new law on external debt, that provides comprehensive guidelines on foreign borrowing.

VII. Exchange and Trade System

A. Exchange System

Exchange rate arrangements

145. The currency of Kazakstan is the Tenge, which was introduced in November 1993. The authorities maintain a floating exchange rate system, with the rate being determined on the basis of market developments. The major foreign exchange markets in Kazakstan are the Kazakstan Interbank Currency Exchange (KICEX) and the Interbank Market. In addition, over 2,000 exchange bureaus have been established throughout Kazakstan. Rates at these bureaus as well as in the Interbank Market are very close to the auction rate, and the spread between buying and selling rates is very small.

146. Daily auctions started to be held at the KICEX starting in May 1995. In the past, auctions were conducted for the U.S. dollar, the deutsche mark, and the Russian ruble. However auctions for rubles ceased to be held in August 1996. The market for deutsche marks at the auction has been fairly limited; for the year as a whole, turnover was less than 1 percent of the turnover for U.S. dollars. The KICEX has been charging a commission of 0.04 percent and is open to commercial banks that hold licenses to conduct foreign exchange operations in convertible currencies. The auctions are conducted in the Frankfurt-type system where participants submit bids and offers for specified amounts at the desired buying and selling rates and the auctioneer selects the exchange rate (cut-off rate) that allows the highest volume of trade. In addition to the spot transactions, the KICEX from early 1996 has begun to trade futures for U.S. dollars. Banks may participate in auctions on their own account or on behalf of clients. Banks and enterprises are also allowed to conduct spot and cash transactions at freely negotiated rates outside of the KICEX.

147. The importance of the Interbank Market has increased significantly at the cost of the KICEX since the abolition of the obligatory surrender requirement on export earnings. The commission charged by the KICEX may have played an additional role in this development. The share of transactions in the Interbank Market has increased from an estimated less than one-third of total turnover in late 1995 to about two-thirds at present. While the NBK has historically intervened largely at the KICEX, intervention in the Interbank Market has picked up, especially during the second half of 1996.

148. The NBK calculates the official exchange rates vis-à-vis the U.S. dollar, the deutsche mark and the Russian ruble. Official rates of 30 other currencies are determined on the basis of cross-rates in international markets. Prior to August 1995, the official rate was set on the first working day after periodic auctions at a rate equal to the auction rate. Since then, however, the rate has been discussed by the Technical Committee of Monetary and Exchange Rate Policy (TCMEP) of the NBK every Friday and then set for a period of a week effective from the following Monday. In determining the rate, the NBK takes into account developments in both the KICEX and the Interbank Market. The official exchange rate is used as an accounting device to determine assessments for customs duties, taxes, penalties, and for the valuation of the NBK’s foreign currency denominated balance sheet items as well as for settlement of transactions with the Ministry of Finance. The official exchange rate for the Tenge moved from T 4.68 per U.S. dollar in late November 1993 to T 75.4 per U.S. dollar at end-April 1997.

Exchange regulations

149. The Foreign Exchange Act of April 1993 had established the principle of convertibility for current international transactions and this was subsequently legislated by the law “On Foreign Exchange Regulation” of December 24, 1996. All remaining T-type Tenge accounts which were not freely transferable abroad were eliminated in June 1996 in preparation for the acceptance by Kazakstan of Article VIII of the Fund’s Articles of Agreement in July. The removal of these restrictions enabled all individuals and enterprises, regardless of residency status, to make and receive international payments and transfers in any convertible currency as well as in Russian rubles. Residents and nonresidents may also maintain convertible foreign exchange accounts at authorized banks. These accounts may be credited with export earnings and foreign exchange transferred from abroad, and balances in these accounts may be freely used for any purpose. Residents may also maintain convertible currency accounts abroad with permission from the NBK.

150. Article 56 of the law on the National Bank of Kazakstan provides for the regulatory role of the NBK with respect to foreign currency transactions. It empowers the NBK, inter alia, to determine the sphere and procedures for the circulation of foreign exchange in Kazakstan; establish the rules for conducting foreign exchange operations between residents and nonresidents; establish procedures for residents to receive, transfer, and make payments in foreign exchange; and issue licenses to banks to engage in foreign exchange transactions and supervise over these activities. The law of December 24, 1996 further identifies foreign exchange control authorities as state entities authorized under the legislation of the Republic of Kazakstan to discharge foreign exchange regulation functions. While the scope of the latter law codifies the regulatory role over foreign exchange transactions exercised by other government agencies, such as the Ministry of Finance, the NBK remains primarily responsible for exercising this function.

151. Purchases by residents of foreign exchange for tourism purposes are limited to US$10,000 per person. Foreign exchange in excess of US$10,000 to be taken out of Kazakstan must be certified with the appropriate documents. There are no limits on withdrawals from convertible currency accounts for the same purposes. Restrictions also apply to taking out foreign exchange for business travel abroad. The level of business travel expenses for state organizations and enterprises is based on country-specific norms for accommodations and subsistence expenses. Foreign exchange may be purchased without limit for purposes of study or medical treatment abroad if the appropriate documents are produced. Remittances for family maintenance purposes are subject to certain limits. Nonresident workers in Kazakstan are free to make transfers abroad of funds invested in Kazakstan, as well as dividends and profits. In June 1996, the government removed restrictions on the making of pre- and post-delivery import payments.

B. Trade System

152. Trade with the Baltic countries, Russia and the other countries of the former Soviet Union under trade agreements is conducted through acquisitions and shipments by financially independent state trading organizations, whose monopoly rights were canceled in February 1995, and by other trading organizations. Trade with other countries is also effected under a system of intergovernmental trade agreements, as well as in accordance with contracts and agreements concluded by juridical persons.

Nontariff restrictions

153. Kazakstan made substantial further progress in eliminating nontariff trade restrictions in 1995–96. In February 1995, the government abolished all export quotas, and all export and import licenses were also abolished except for a short negative list of goods for reasons of national security, health and safety.53 The government also annulled the monopoly rights of 14 state-owned external trade organizations dealing with strategic commodities.54 Export surrender requirements, which had been increased progressively from 10 percent to 30 percent in mid-1993 and to 50 percent in January 1994, were abolished in August 1995.55 More recently, in December 1996, the government abolished the requirement on the registration of export contracts at commodity exchanges, although it reinstated this requirement before the end of the year for grain, grain products, and a few other agricultural products.

Customs union, export/import duties, and WTO

154. In January 1995, Belarus, Kazakstan and Russia agreed to form a customs union in two stages.56 The first stage, involving the elimination of tariffs between member countries, was completed in March 1995. The second stage, however, establishing common external tariffs vis-à-vis nonmembers, has yet to be fully implemented. While the tariffs on many commodity groups were unified by October 1995, there have also been some unilateral adjustments of tariffs (including by Kazakstan). Efforts to achieve common external tariffs continue, and representatives of member countries met in February 1997 to clarify the further steps that are needed for the establishement of an effective customs union. Member country representatives have been discussing a general approach, which effectively splits the second stage into three progressive steps by differentiating between three lists of goods. The first of these lists would consist of goods that would have uniform tariffs in the near future. The second list would include goods for which the aim would be to achieve a uniform average tariff. A third list would be limited to goods for which it would be difficult to move to uniform tariffs in the near future. However, the composition of these lists and other details have yet to be agreed upon and further discussions between the members are to focus on specifying these lists and deciding on timing issues.

155. At the beginning of 1995, prior to the customs union, there were ten different export duty rates in Kazakstan ranging from 0–30 percent, with most products falling in the 5–30 percent range. By October 1995, only seven different export duty rates remained and the maximum rate had been reduced to 25 percent. In addition, the number of major commodity groups subject to export duties was reduced from 70 to 27, including three new groups mainly related to military equipment. In July 1996, export duties were eliminated on all goods except grain and, in August 1996, export duties on grain were also eliminated.

156. As regards imports, there were 12 bands of tariff rates at the beginning of 1995, ranging from 1–100 percent, with duties for most commodities falling in the range of 5–50 percent.57 With the formation of the customs union, the 2 percent band was eliminated, although a new rate of 80 percent was introduced.58 The number of bands has since increased to 13 as of January 1, 1997, but rates above 50 percent have all been eliminated. Moreover, the 50 percent rate applies only to pearls and the 40 percent tariff band was eliminated on December 31, 1996, causing the spread of tariff rates to have been effectively reduced to 0–30 percent. In addition, although some tariff rates were raised and others reduced in 1996, the simple average tariff rate has declined from 15.2 percent on January 1, 1996 to 13.3 percent on January 1, 1997, while the weighted average tariff rate has fallen from 13.9 percent to 12 percent (Appendix Table 37).

157. Also in the context of the customs union, Kazakstan adopted a preferential list of developing countries (effective January 1, 1997), for which only 75 percent of the normal tariff will apply; for 46 low-income countries, the tariff will be zero. In addition, a number of resolutions/decrees were adopted on November 14, 1996 (effective January 1, 1997) which: (i) abolished customs duties on goods not produced in Kazakstan (e.g., technological equipment, pharmaceuticals, and medicines); (ii) abolished customs duties on imports financed by foreign trade credits guaranteed by the government; (iii) reduced customs duties on goods produced in Kazakstan, but in quantities insufficient to satisfy domestic demand; and (iv) abolished customs duties on goods used in export production (e.g., metals and chemicals). In addition, a new law was adopted on December 31, 1996, that provided for a more objective and systematic approach to the valuation of shuttle trade and thus improved the collection of customs duties.

158. Kazakstan has applied to become a member of the World Trade Organization. To date, the government has sent a memorandum on the foreign trade regime in Kazakstan to the WTO (in July 1996) and supplied the WTO with the answers to the questionnaire in early 1997. The first negotiation meeting with the WTO Working Group took place in March 1997 in Geneva.

APPENDIX I: Banking System Reform in Kazakstan During the Period 1994–96

Initial conditions

1. A two-tier financial system emerged in the last years of the Soviet Union, composed of the Gosbank and five specialized state banks.1 The Gosbank exercised typical central banking functions including formulation and implementation of monetary policy. The specialized banks, nominally independent from line ministries, performed commercial banking functions and were expected to operate as profit centers. In 1988, the establishment of commercial banks operating outside the central plan was also authorized. Local branches of the Gosbank had the responsibility for licensing these new banks and monitoring their operations.

2. At the time of independence, the financial system in Kazakstan was composed of the National Bank of Kazakstan (formally a branch of the Gosbank), the five specialized banks and 72 new commercial banks. Immediately, four of the five specialized banks (all except the Savings Bank) were reestablished as joint-stock companies and permitted to operate in all sectors of the economy.2 Licensing requirements for banks were lax and a period of rapid expansion in the banking system followed. Enterprises established their own banks to attract resources to finance their own operations and independent commercial banks were rapidly established.

3. By 1994, the banking system had grown to 191 financial institutions. The number of private commercial and joint-stock banks had grown to 183, including two of the specialized banks that had been privatized (the Industry Bank became Turan Bank and the Industry and Construction Bank became Kredsoz Bank). However, the government continued to control a number of financial institutions, retaining partial control of Agroprom Bank and Alem Bank (previously Vneshekonombank), full control of Narodnyi Bank (previously the Savings Bank) and of an additional five state banks established to provide specialized services: the Housing Construction Bank, the Rehabilitation Bank (established to deal with the most heavily indebted insolvent enterprises), the Budget Bank (established in 1996 for handling treasury functions), the Exim Bank and the Development Bank.3

4. At the end of 1994, total assets of the commercial banking system, before loan provisioning, were reported to be T 172 billion, equivalent to US$3.1 billion, with banking system capital standing at T 14 billion or US$200 million. However, at mid-1994, international auditors estimated that 50–55 percent of all commercial loans were doubtful or lost. If appropriately adjusted, therefore, the capital of the banking system as a whole at the end of 1994 would have been negative T 50 billion or US$900 million. Furthermore, nonperforming loans were not distributed evenly within the financial system and it is likely that a number of banks were severely undercapitalized and insolvent.

Strategy for banking system restructuring

5. Faced with a weak financial system, the authorities sought to adopt an array of microeconomic, legal and regulatory measures. Emphasis was put initially on adopting microeconomic reforms aimed at dealing with both the nonperforming loans inherited from the Soviet period and closing the clearly nonviable banks. State banks were either to be privatized or closed. If a bank were considered “too big to fail” it would be thoroughly restructured, including the introduction of new management, and privatized in part or as a whole. The National Bank of Kazakstan (NBK) was to restrict its financial support to providing temporary lender-of-last resort financing, provided within the context of operational reforms in the bank. Public sector money, if considered necessary for the recapitalization of a bank, would only be provided by the government.

6. Restructuring existing banks was not sufficient to ensure a sound financial system. Once the stock problem of the nonperforming loans was addressed, reforms in the operating environment were needed to support the development of a profitable banking system. Legal and regulatory reforms sought to establish an appropriate framework for banking operations. New laws were introduced and accounting and prudential regulations were modified, aimed at bringing local practices in line with international standards. The NBK was charged with the design and implementation of the reform program.4

Nonperforming loans

7. The amount of nonperforming loans was considered too large for the banks to manage unaided. Accordingly, in 1995 a portion of the bad loans were removed from the banks’ portfolios and shifted to two newly-created debt resolution institutions: the Rehabilitation Bank (RB) and the Agricultural Support Fund (ASF). The RB took over the nonperforming loans of 45 of the largest insolvent debtors, receiving an equity position in the enterprises. Those commercial banks that had intermediated the government’s directed credits removed both the nonperforming credit to the enterprises and the liability owed to the government, thus, in effect, shrinking their portfolios. The ASF took over virtually all of the agricultural loans to farms (totaling some 4,000 farms) from Agroprom Bank and other banks. Finally, Exim Bank took over from Alem Bank most of the outstanding loans funded by foreign export credit agencies that carried government guarantees. In practice, the Ministry of Finance began servicing those loans. Overall, loans totaling 11 percent of GDP were shifted from the original banks to specialized institutions (of which 1 percent to the RB, 4 percent to the ASF, and 6 percent to the Exim Bank).

8. The debt resolution institutions have sought to recover these nonperforming loans rather than provide debt forgiveness. The RB specialized in very large enterprises that dominated company towns located far from alternative employment sources. It formulated restructuring plans for each enterprise. Resources from the RB were used to finance downsizing activities such as severance pay and social asset disposal. By December 1996, 28 enterprises had been either privatized (22) or liquidated (6). The ASF required that the farms submit a restructuring plan. In the absence of feasible plans, the ASF’s intention was to liquidate the farms and to sell the assets. However, restructuring of the farms has been difficult and, in effect, all loans have been rescheduled at negative real interest rates.

Dealing with individual problem banks during the period 1994–95

9. The nonperforming loans made to small- and medium-sized enterprises, other than farms, remained in the portfolios of the lending banks. Commercial banks were urged to establish internal work-out units to deal with such problem loans rather than rely on government assistance. When a bank was unable to manage its portfolio or if the NBK determined that the bank was nonviable, liquidation proceedings were initiated.

10. By end-1994, the NBK began the systematic liquidation of nonviable banks. Although the accounting and disclosure standards were deficient, the banking supervision staff was able to identify clearly nonviable banks. Initially, the NBK had difficulties in implementing liquidation proceedings because of the lack of a clearly defined legal framework and uncertain stockholder rights. The NBK responded by creating special liquidation units in the banking supervision department (which was later made independent, see below) and a Presidential decree issued in 1995 gave the NBK effective tools to deal with problem banks. In 1995, some 50 banks were liquidated (Box 1). The bulk of these banks was small and had low reported capital. Had appropriate loan provision been applied, all of these banks would have had negative capital.

Number of Banks by Bank Capital

article image

11. Notwithstanding this progress, a number of banks were considered by the NBK to be “too big to fail”. These banks played a key role in the financial sector or represented a large percentage of the total assets of the entire financial system. For such banks, the NBK worked out a specific restructuring program. Agroprom Bank: First, the financial position of Agroprom Bank was significantly improved when the nonperforming agricultural loans totaling T 31 billion were transferred to the ASF. Bad loans to the agro-industrial sector, however, remained on the books of Agroprom Bank. Second, the NBK agreed to suspend prudential requirements while the bank underwent restructuring. The owners then increased paid-in capital, reduced staff and began to rationalize the branching network. Turan Bank: The bank’s portfolio had been dominated by loans to large insolvent clients, previously considered key industries during the period of the Soviet Union. The bulk of these loans was transferred to the RB but the overall quality of Turan Bank’s portfolio remained poor. The Bank developed a downsizing plan aimed at rationalizing its branch networks and its staff. Alem Bank: The portfolio of Alem Bank was improved when, in 1994, the bulk of credits with government guarantees and loans funded by foreign credit agencies was shifted to the Exim Bank. However, the portfolio remained dominated by nonperforming loans, some of which represented directed credits from the government. In mid-1995, Alem Bank faced a severe liquidity crisis. While the NBK provided the required liquidity, it took over management of the bank for a two-week period and then replaced bank management.

Structural reforms during the period 1995–96

12. Measures to reduce the stock of nonperforming loans were combined with measures aimed at improving the profitability or the future flow of resources of the banks. Such measures focused on strengthening prudential regulation by the NBK and institutional and legal reforms.

Reform of prudential standards

13. In 1995, the NBK began to reform its supervisory practices and put in place a modern system of prudential norms and regulations. These norms, and the responsibility of the NBK to enforce them, were laid out in the 1995 Presidential decrees on the National Bank of Kazakstan and on banking. Prudential regulations were established on capital, liquidity, lending limits, insider transactions and reserve requirements. The capital norm, established at 8 percent of risk-weighted capital, as well as the other regulations, were nominally in line with international practices. Prudential regulations were further modified in early 1996 and brought fully in line with international practices.5

14. Although the prudential norms in place met international standards, compliance by the banks was difficult. Banks needed a period of supervisory forbearance as they developed and implemented restructuring plans. In early 1996, the NBK announced a timetable for enforcing the prudential regulations, aimed at giving greater transparency to the transition period. The NBK required that, beginning in 1996, loan provisioning be fully enforced and that full enforcement of all other prudential norms be phased in over a five year period. The NBK also issued regulations that more carefully defined a number of the prudential ratios, including connected borrower and the limit on the exposure of all connected borrowers (100 percent of capital).

15. In May 1996, the NBK announced a program of incentives aimed at shortening the transition period to international standards by banks from five to three years. Banks wishing to participate must submit a plan for restructuring and recapitalization. The plan must address all areas of a bank’s operations. Banks enrolled in this program are permitted to participate in the following activities: (i) own stock in investment companies; (ii) participate in NBK credit auctions; (iii) conduct international operations; (iv) issue bonds, certificates of deposit, and checks; and (v) act as custodian in the corporate securities market.

16. In mid-1996, the NBK required all banks to submit a business plan, detailing the present state of the bank’s financial operations, its compliance with prudential standards, and its program for meeting all prudential requirements within three or five years. The Supervision Department reviewed these plans and required revisions where necessary. If a bank is unable to develop a business plan acceptable to the banking supervision staff, it will be liquidated.

Legal and institutional reform

17. Development of a sound banking system required a series of legal and institutional reforms. Reforms were introduced to strengthen the legal foundations for lending and to remove regulatory barriers to competition. In 1995, Part One of the Civil Code was approved by parliament, which clarified property rights.6 In April 1995, a Presidential decree on bankruptcy was issued, introducing both norms for enterprise reorganization and out-of-court settlement procedures and establishing creditor rights. In addition, a Presidential decree with force of law on mortgages was issued in December 1995.

18. The poor quality of accounting and financial disclosure limited the ability of the NBK to monitor the conditions of the banking system. Furthermore, the lack of a standardized reporting format limited the ability of the NBK to monitor banking system developments. To address these problems, a new chart of accounts for enterprises and for commercial banks was developed in 1995. New accounting instructions and manuals were drafted to assist in the training of accountants in modern practices. An intensive program of training in accounting was begun. In 1997, all commercial banks are expected to run both the new and the old charts in parallel and, by mid-1997, shift to the new chart. In addition, a Presidential decree issued in November 1996 established an Accounting Commission. The Commission was charged with the development and implementation of accounting standards that are in line with Internationally Accepted Accounting Practices (IAAP). By December 1996, 20 new accounting standards had been approved and will be implemented together with the new chart of accounts.

19. Together with the strengthening of prudential and accounting norms, the NBK sought to improve its banking supervision staff. The size of the staff of the Banking Supervision Department was increased from 16 to 112 between 1994 and 1995 and a considerable effort was made at improved training. The Supervision Department was reorganized in 1996 into teams in charge of large clusters of banks and the oblast-level supervision was moved to headquarters. Furthermore, an autonomous division in the NBK, separate from the Banking Supervision Division, was established in February 1996 to supervise the liquidation of commercial banks. This division maintains close contact with the liquidation committees for each bank in liquidation and seeks to ensure that the process conforms to national regulations.

Banking system developments in 1996–97

20. The NBK continued its policy of identifying nonviable banks in the financial system. On-site inspections were intensified; a total of 32 on-site inspections were held during 1996. Off-site inspections were enhanced with the introduction of a standardized reporting form. Although accounting standards had not been introduced, the revised reporting form offered a short-hand method for evaluating the financial condition of the banks. Finally, the NBK carefully revised the comprehensive business plan submitted by the banks to identify nonviable banks. As a result of this intensive evaluation of the banking system, the NBK continued the process of liquidating small and nonviable banks. An additional 33 banks were liquidated during the year, the bulk of them having paid-in capital of less than T 5 billion before loan loss provisioning, and the total number of banks fell from 130 at the end of 1995 to 101 by the end of 1996.

21. In addition to the liquidation of small nonviable banks, a number of large banks faced serious financial difficulties during the year. In part, this development reflected the impact on bank profitability of the fall in yields on treasury bills and the stability of the exchange rate.7

22. Kramds Bank, the fourth largest bank in the financial system, faced a series of liquidity crises. In early 1996, the NBK provided lender-of-last resort financing and required the bank to undertake restructuring measures. Notwithstanding these remedial steps, liquidity problems emerged again at mid-year. In October 1996, the NBK refused further liquidity support, the bank’s license was withdrawn and the bank closed. Household depositors are expected to be fully reimbursed as the assets of the bank are liquidated; other creditors are likely to face some losses.

23. In October 1996, Alem Bank also faced a liquidity crisis. Some emergency support was provided while the NBK evaluated the bank’s financial position. In late 1996, it was decided that the bank’s problems required substantial reforms but that its portfolio was not a total loss. The Banking Supervision Department put Alem Bank under intensive monitoring and required that a series of restructuring measures be taken. Similar difficulties emerged in Turan Bank in 1996 and, in September, the Bank was put under conservatorship by the NBK. Under conservatorship, progress was made in reforming the operations of Turan Bank through rationalization of its branch network and intensified efforts to reduce nonperforming loans.

24. In January 1997, the NBK decided that the financial difficulties of both Alem Bank and Turan Bank could be best addressed by merging the two institutions, rehabilitating the new bank and then privatizing it. Accordingly, on January 8, 1997, the Turan-Alem Bank (TAB) was established. The NBK opted not to transfer the nonperforming loans of TAB to an asset management company such as the Rehabilitation Bank because of the lack of adequate staff to manage such a large number of problem loans. However, the NBK rescheduled its loans to the newly merged bank and injected US$30 million into the bank. In March, the NBK injected an additional US$60 million, some of which was used to repay external liabilities of the bank and the remainder to increase the bank’s capital. At the same time, a restructuring plan was adopted. The first step under the plan is to complete an audit of TAB based on international accounting standards. The results of the audit, expected in the second quarter of 1997, will provide a more accurate estimate of the full recapitalization needed. The next step will be to obtain specialized technical assistance to help improve the internal operations of the bank. Advisors will provide assistance on the full range of banking procedures such as credit analysis, risk management and liability management. Finally, the bank will close unprofitable branches and remove nonperforming loans from its balance sheet. Once the restructuring process is completed, the NBK expects that the new bank will be privatized.

25. As a result of these actions, progress has been made in reducing the stock of nonperforming loans and increasing loan loss provisioning in the banking system. By December 1996, the estimated share of nonperforming loans in the banking system portfolio had fallen to 41 percent from 55 percent at the end of 1994 and the actual level of provisioning had increased to 50 percent of the required amount. The growth of assets, however, had been slow. Total assets of the commercial banking system had grown by only 7 percent in nominal terms over the two year period from T 172 billion in 1994 to T 184 billion and the dollar equivalent of total assets had fallen from US$3.1 billion to US$2.6 billion. Banking system capital also remained low, but plans are in place for 18 banks to bring capital, as well as all prudential norms, into compliance within at least five years. Approved plans are expected for all of the banks before the end of 1997.


Kazakstan: Summary of the Tax System as of January 31, 1997

article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image


Table 1.

Kazakstan: Value Added in the Main Production Sectors, 1993–97

article image
Sources: National Statistical Agency; and Fund staff estimates.

Preliminary estimates.

Mainly services.

Table 2.

Kazakstan: Industrial Production, 1993–97

article image
Sources: National Statistical Agency; and Fund staff estimates.

Preliminary estimates.

Table 3.

Kazakstan: Production of Selected Industrial Goods, 1993–96

article image
Sources: National Statistical Agency; and Fund staff estimates.

Includes gas condensates.

Consists of both gas from oil wells (gas-oil) and gas from gas wells.

Table 4.

Kazakstan: Production of Selected Agricultural Goods, 1993–96

article image
Sources: National Statistical Agency, and Fund staff estimates.
Table 5.

Kazakstan: Livestock Population, 1993–96

article image
Sources: National Statistical Agency; and Fund staff estimates.
Table 6.

Kazakstan: Consumer Prices, 1994–97

article image
Sources: National Statistical Agency; and Fund staff estimates.