Republic of Kazakhstan: 2007 Article IV Consultation—Informational Annex

The 2007 Article IV Consultation on the Republic of Kazakhstan focuses on the appropriate policy response to mounting banking sector risks and continuing inflation pressures. Banking sector risks are mounting and inflation remains relatively high. The authorities intend to continue raising policy interest rates gradually. The Financial Supervision Agency’s (FSA) powers have been enhanced and a sizable increase in its resources is expected shortly. Monetary tightening and exchange rate appreciation are needed to contain risks and dampen inflation.


The 2007 Article IV Consultation on the Republic of Kazakhstan focuses on the appropriate policy response to mounting banking sector risks and continuing inflation pressures. Banking sector risks are mounting and inflation remains relatively high. The authorities intend to continue raising policy interest rates gradually. The Financial Supervision Agency’s (FSA) powers have been enhanced and a sizable increase in its resources is expected shortly. Monetary tightening and exchange rate appreciation are needed to contain risks and dampen inflation.

Annex I. Kazakhstan: Relations with the Fund

(As of April 30, 2007)

I. Membership Status: Joined: 07/15/92; Article VIII

II. General Resources Account

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III. SDR Department

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IV. Outstanding Purchases and Loans None

V. Financial Arrangements

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VI. Projected Obligations to the Fund


VII. Safeguards Assessments

Not applicable to the National Bank of Kazakhstan (NBK) at this time.

VIII. Exchange Rate Arrangements

The currency of Kazakhstan is the tenge, which was introduced in November 1993. The official exchange rate is determined on the basis of foreign exchange auctions that are held daily. Auctions are held for U.S. dollars, euros, and Russian rubles, and official rates are quoted for over 30 other currencies on the basis of cross-rates. Since late 1999, the exchange rate regime has been a managed float with no pre-announced path. On April 30, 2007, the tenge/U.S. dollar rate was 120.2. The exchange rates at numerous exchange bureaus are very close to the auction rate, and the spread between buying and selling rates is very small. The exchange system is free from restrictions on payments and transfers for current international transactions.

IX. Article IV Consultation

Kazakhstan is on the standard 12-month consultation cycle. The last consultation was concluded on June 14, 2006 (see IMF Country Report No. 06/244).

X. FSAP Participation and ROSCs

Kazakhstan participated in the Financial Sector Assessment Program (FSAP) in 2000. The staff report on the Financial Sector Stability Assessment (FSSA) was issued on November 27, 2000 (FO/DIS/00/142). The FSSA included the following ROSC modules: Basel Core Principles for Effective Banking Supervision, Core Principles for Systemically Important Payment Systems, Code of Good Practices on Transparency in Monetary and Financial Policies, IOSCO Objectives and Principles of Securities Regulation, and IAIS Insurance Core Principles. An FSAP update mission took place in February 2004. The fiscal transparency module was completed in October 2002 and the final report published in April 2003. A data module mission took place in April/May 2002, and its final report was published in March 2003. An update of the data ROSC was undertaken in 2006 and the report is being finalized (see Annex 5).

XI. Technical Assistance

Kazakhstan has received technical assistance and training by the Fund in virtually every area of economic policy, including through about 75 technical assistance missions provided during 1993-2003 by FAD, LEG, MFD, STA, and the IMF Institute. In addition to short-term missions, the Fund has provided resident advisors to the National Bank of Kazakhstan, to the Agency of Statistics of the Republic of Kazakhstan, and to the Ministry of Finance. Other international agencies and governments, including the World Bank, EU TACIS, EBRD, UNDP, and OECD, also are providing a wide variety of technical assistance.

The following list summarizes the technical assistance provided by the Fund to Kazakhstan since 2002.

Monetary and Financial Systems

Technical assistance has enabled steady progress to be made in a number of areas related to monetary and exchange affairs, including banking legislation, central bank accounting, payments system reform, central bank organization and management, foreign operations and reserve management, banking supervision, monetary statistics, currency issuance, monetary operations, and money-market development.

Fiscal Affairs

The Fiscal Affairs Department of the IMF has given comprehensive advice to Kazakhstan in the areas of tax and expenditure administration, the establishment of a treasury system, and the introduction of a social safety net.


The Fund’s technical assistance program in statistics has focused on the development of the institutional framework appropriate to the needs of a market economy. The assistance has concentrated on establishing procedures for collecting and compiling monetary, government finance, balance of payments (including external trade), and national accounts.

Legal Department

December 2003: Draft Law on Mandatory Reporting on Certain Financial Transactions

IMF Institute

Kazakhstani officials have participated in courses in Washington and at the Vienna Institute in the areas of macroeconomic management, expenditure control, financial programming, taxation, statistics, and other areas. In addition, the Fund’s Institute has conducted courses in the region.

XII. Resident Representatives

Position terminated in August 2003.

Annex II. Kazakhstan: Relations with the World Bank Group

(As of April 30, 2007)

Kazakhstan became a member of the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA) in July 1992 and of the International Finance Corporation (IFC) in September 1993. The Bank’s lending program has been curtailed in recent years as a result of the country’s reduced borrowing needs, but the program of economic research has expanded and in FY07 it amounts to US$4 million, of which about 75 percent is directly financed by the authorities. The research under this umbrella focuses on issues of overall competitiveness, fiscal and expenditure management, human development, infrastructure, and the environment.

At present, there are ten active projects (nine IBRD loans and one Global Environmental Facility (GEF) grant) with a total commitment of US$648 million, of which US$370 million has been disbursed. In the active portfolio, there are five old loans (Uzen Oil Field Rehabilitation, Road Transport Restructuring, Electricity Transmission Rehabilitation, Syr Darya Control and Northern Aral Sea – Phase I, and Nura River Clean-Up) with a commitment of US$454 million, one old GEF grant (Drylands Management) of US$5 million, and four new loans which have gone to the board since FY06 (Agricultural Post–Privatization Assistance – Phase II, Agricultural Competitiveness, North–South Electricity Transmission, and Forest Protection and Reforestation) with a commitment of US$189 million.

The Bank is also preparing seven new loans (Ust–Kamenogorsk Environment Remediation, Irrigation and Drainage—Phase II, Syr Darya Control and Northern Aral Sea—Phase II, Technology Commercialization, Customs Service Modernization, Health Sector Technology Transfer and Institutional Reform, and Territorial Development) with an expected financing envelope of about US$368 million.

Kazakhstan is IFC’s largest client in Central Asia. IFC’s net committed projects there, which amount to US$277 million for its own account plus US$75 million in syndicated loans, are concentrated primarily in the oil, gas, mining and financial sectors. To date, US$252 million have been disbursed. IFC has also been active in the promotion of small and medium enterprises, leasing, and the provision of Technical Assistance in the areas of corporate governance, housing, leasing, and SMEs.

The Bank is assisting the government in attracting grants from the Global Environmental Facility, the International Fund for Agricultural Development, and, together with UNAIDS, the Global Fund to Fight AIDS, Malaria, and TB.

Annex III. Kazakhstan: Relations with the EBRD

(As of December 31, 2006)

1. The EBRD is the largest investor outside the oil and gas sector in Kazakhstan. As of December 2006, the Bank has signed 50 projects (on a net cumulative basis) worth €2.8 billion, including EBRD financing of €1.4 billion. The EBRD’s gross cumulative disbursements amounted to €1170.4 million. During 2006, the Bank provided direct financing of €242.0 million to Kazakhstan’s private sector. The Bank continues to be actively involved across a number of sectors in private and public sector projects with a concentration in the financial sector. The Bank expects to sign new project agreements in Kazakhstan worth about €200 million per year. Operations in Kazakhstan are focused on building earning assets in the oil and gas sector and on development of the small and medium-sized enterprise (SME) sector. There is also a well-established, effective relationship between the Bank and the government for financings in the transport and general industry sectors. About 70 percent of all investments are now in the private sector.

Bank involvement in the country is guided by the Bank’s most recent country strategy for Kazakhstan, approved in November 2006.

Strategic priorities for 2007–2008

The Bank’s Strategic priorities comprise:

  • Engaging actively in the further reform process by working with both private and public sectors.

  • Broadening the Bank’s operations and increasing its impact with a special focus on the corporate sector, including SMEs, to support the diversification of the economy and to promote competition.

  • Continuing to finance infrastructure, with a strong emphasis on the transport and power sectors.

  • Staying engaged in the financial sector, with a clear focus on enhancing competition and supporting nonbank financial services as well as capital markets.

  • Promoting higher transparency and governance standards, and FDI.

In its operations, the Bank will continue to use traditional product instruments to achieve its strategic goals. However, to support the above-mentioned objectives, the Bank will emphasise innovation and the use of more sophisticated products, alongside traditional funding instruments, including:

  • Capital market transactions, including equity funds and securitisation

  • Energy efficiency related investments

  • Adequately structured public private partnerships (PPP)s

  • Equity and mezzanine financing

  • Financing micro and small enterprises in the rural and agricultural sectors

  • Local currency funding

  • Cofinancing with domestic banks

  • Expansion of TAM and BAS

2. The Bank will continue to increase the presence and efficiency of the Bank’s operations, improve the delivery of services, and enhance the policy dialogue by building up the Almaty Resident Office as the regional presence for Bank expertise in Central Asia. This will include strengthening the skills and seniority of Bank staff based in Kazakhstan, including sector team presence and experience and possibly certain support functions, such as economists, located in the field.

Strategic objectives for 2007–2008

The Bank’s main operational objectives comprise:

Enterprise sector—Support economic diversification and enhance competition by working directly with corporates across various sectors such as general industry, power, agribusiness, telecoms and property. Promote projects leading to higher energy efficiency and increase the capitalisation of enterprises through equity investments. Increase competition in the natural resources sector by working with smaller operators and on higher risk projects. Dedicate resources in order to directly finance smaller projects and to continue to provide micro financing and tailored capacity building using the Kazakhstan Small Business Programme (KSBP) and leasing facility. Promote high standards of corporate governance, integrity and transparency of ownership, including through FDI to Kazakhstan. Selectively support regional cross-border expansion of reputable companies to neighbouring markets.

Infrastructure—Increase support in transport, energy and telecommunication infrastructure development to satisfy the growing needs of the economy and promote respective sectoral reforms. The Bank will focus on nonsovereign projects. On a selective basis, it will take a leadership role in developing and actively engaging in appropriately structured public-private partnerships (PPPs) that involve competitive tender processes. Work with state holding company Samruk to find synergies between different parts of infrastructure and improve corporate governance in respective of state owned enterprises. Support further regulatory and tariff development that promotes investments and fair access to infrastructure. Given Kazakhstan’s remoteness from major markets and low population density, the Bank will continue to work closely with the private sector, government authorities and other IFIs on sustainable solutions for infrastructure, and to promote regional cooperation.

Financial sector—To promote strategic FDI in the financial sector and to open up the capital base of local banks to reputable financial investors through initial public offerings (IPOs) or private placements. To continue working actively with existing shareholders of the Kazakh banks to achieve better transparency of ownership and corporate governance. Facilitate competition in the financial sector by providing debt and equity, particularly to medium size banks and nonbank microfinance institutions (NBMFIs), supporting additional micro, small and medium-sized enterprises (MSMEs). On debt products, in view of the developed access to capital markets, the Bank will be particularly attentive in developing projects with specific attributes which meet additionality concerns and contribute to transition. A special emphasis will be on the provision of financial resources outside the capital cities, as well as improving the efficient delivery of financing to the micro and small sectors. The Bank will support the development of financial services such as leasing, mortgages, insurance and pensions, and facilitate the securitisation of assets by Kazakh financial institutions. The Bank will assist the Government in privatising the few remaining state-owned financial institutions concerned with pensions and mortgages.

Policy dialogue—Support the Government in their efforts to improve the investment climate and drive long-term economic diversification, leading to improved global competitiveness. Cooperate with newly created state holding companies Samruk and Kazyna to achieve corporate governance and operational improvements in state-owned enterprises. Promote adequate behaviour and transparent practices and fight corruption to improve the business environment. Promote adoption of the anti-money laundering (AML) legislation, especially in light of the government initiative to create the Regional Financial Centre in Almaty (RFCA).

Main trends in the portfolio over the past year

Enterprise Sector: The most notable progress was made in the General Industry sector: Two new industry projects were signed: an equity investment in Steppe Cement (EBRD finance €1.9 million), and a loan to Bericap Kazakhstan (EBRD finance €1.9 million). An additional project in the enterprise sector was signed: a loan to Savola Kazakhstan (EBRD finance €3.0 million). Agricultural producers received an additional support through the Warehouse Receipts Program to Alliance Bank, totalling € 3.8 million.

Financial Sector: The Bank has strengthened its efforts to improve transparency of ownership and integrity in Kazakhstan’s banking sector. By supporting the financial sector in the development of SME credit lines, the Team continued to support MSMEs through financial intermediaries. The new Kazakhstan KSBP III program started with a specific focus on the rural and agricultural sectors. Two credit lines to new partners, Kazakhstan Loan Fund (KLF), and Alliance Bank have been committed totalling €6.9 million. An additional SME loan through Alliance Bank was signed for financing of €7.6 million. The Bank promoted further development of the market for residential mortgages by providing a mortgage loan to Alliance Bank for € 18.0 million.

3. The Trade Facilitation Program (TFP) remained an important instrument in supporting a wide range of trade transactions of Kazakh enterprises, including long-term intra-regional imports. A new TFP line of €12.2 million was opened to Alliance Bank. In 2006, the Bank started two new trade finance advisory services projects, funded by the Government of the Netherlands and the EU, under which foreign consultants support Kazakh banks in the development of their domestic and international factoring business and marketing of all type of trade finance services. In 2006, the team committed further loans and guarantees under the Regional Trade facilitation program in excess of €100 million.

Energy sector: In 2006, the Bank financed a € 9.1 million loan to Bautino Atash Marine and Supply Base-Debt project. The project will respond to a wide range of off-shore oilfield operators’ needs, such as fuel & water provision, base infrastructure, and services and crew change facilities.

4. The overall quality of the Bank’s portfolio in Kazakhstan remains excellent, with performing assets representing 100 per cent of operating assets. The current portfolio in Kazakhstan has an average risk rating of 5.42. More than 70 per cent of all EBRD investments are now in the private sector. The private/public ratio of the portfolio is not expected to change much during the coming year. Although the focus of the Bank’s activities is on the private sector, there are a few large public sector projects in the pipeline.

EBRD Portfolio 31 December 2006 € million

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*P=PrivateS= State

Annex IV. Kazakhstan: Relations with the Asian Development Bank

(As of February 2007)

Kazakhstan became a member of the Asian Development Bank (ADB) in 1994. As of February 2007, total public sector loan commitments amounted to $483 million, covering 14 loans in agriculture and natural resources, education, finance, transport and communications, and water supply, sanitation and waste management. Kazakhstan is no longer eligible for concessional resources from the Asian Development Fund. As of January 17, 2007, total loan disbursements amounted to $435 million.

ADB’s focal areas continue to be private sector development, environmentally sustainable development, and regional cooperation.

Private sector operations, which commended in 2005, are the forefront of current and future ADB operations in the country. A Private Sector Operations Agreement between the Republic of Kazakhstan and ADB was signed in November 2004. It provided a basis for ADB’s business opportunities in the Kazakhstani private sector. In 2006, ADB granted three private sector loans in the amount of $225 million to boost financial sector development and SME support in Kazakhstan. These loans became ADB’s first private sector financings without a government guarantee in the country.

ADB operations for the private sector focus primarily on two sectors: (i) finance and capital markets, and (ii) infrastructure. In the financial and capital markets sector, ADB assists private sector intermediaries in banking, leasing, venture capital financing, merchant banking, micro credit, small- and medium- enterprises (SME), housing finance, private equity funds, mutual funds, insurance, securitization, credit enhancement, and credit rating. In the infrastructure sector, ADB’s focus is on telecommunications, power and energy, water supply and sanitation, ports, airports, toll roads, and support for subsovereign credit.

This new thrust towards private sector operations will be supported by public sector technical assistance, investments to create an enabling environment for the private sector, and selected public lending programs in rural water supply and water resources management aimed at improving livelihood in rural areas and reducing urban-rural gap.

The ADB has provided Kazakhstan with TA grants in several sectors, including agriculture, education, finance, pension reform, transportation, energy, water supply and sanitation, aid coordination and management, public investment programming, and poverty reduction planning and implementation. As of February 9, 2007, ADB’s TA program (since it started in l994) reached 63 technical assistance projects for a total of $27 million.

Annex V. Kazakhstan: Statistical Issues

The quality and coverage of the economic statistics are generally adequate for surveillance. Kazakhstan has made considerable progress since the 2002 data ROSC. On March 24, 2003, Kazakhstan became the 53rd subscriber to the Special Data Dissemination Standard (SDDS), marking a major step forward in the development of the country’s statistical system. Among the countries of the Commonwealth of Independent States, it is the first country to graduate from the General Data Dissemination System to the SDDS and the second to subscribe to the SDDS. Measures have been taken to address delays in disseminating SDDS data for different data categories, including the official reserve assets and government finance statistics.

Building on the progress achieved since 2002, IMF missions in February and in August 2006 assisted in developing a more analytically useful disaggregation of the national accounts and balance of payments into oil and non-oil sector components. This should permit a better assessment of macroeconomic developments and policy formulation. STA also provided recommendations for improving the quarterly national accounts (QNA) data.

Sector specific issues

In the area of national accounts, several weaknesses remain in both the quality of GDP estimates by sector produced by the National Statistical Agency (NSA), and the quality and timeliness of GDP estimates by expenditure. First, the quality of GDP estimates by industry is affected by the limited coverage of small businesses in selected activities such as retail and construction. Second, while some progress has been made in making GDP estimates by final expenditure consistent with output-based measures, data compilation and dissemination of quarterly GDP series data should be conducted on a discrete basis only. The 2006 Multitopic Statistics Mission on Oil Activities made recommendations in a number of other areas, including: deflators, data sources for intermediate consumption and inventories, adjustments for holding gains for intermediate consumption, methods for deriving constant price estimates of changes in inventories, taxes and subsidies, and retail trade, and methods for recording work in progress. In addition, a November–December 2006 data ROSC reassessment mission noted acute staff shortages in the National Accounts Department.

Overall, the NSA utilizes sound statistical techniques to ensure the accuracy and reliability of the consumer price index (CPI). However, use of the geometric mean as elementary aggregate is recommended instead of the relative of average prices, as is the case for the producer price index. Also, there is scope for improving the imputation method used for some seasonal items in long time series for the CPI.

Progress has also been made in the classification of the fiscal accounts consistent with the Fund’s Government Finance Statistics Manual 2001 (GFSM 2001). However, as a result of the reorganization of the public sector, including the redefinition of budgetary units, difficulties have arisen with regard to the recording and reporting of expenditure arrears. Since 1997, the authorities have reported detailed data for publication in the GFS Yearbook. The latest data reported for publication cover consolidated general government and are presented using the new template consistent with the GFSM 2001. The Ministry of Finance also provides monthly indicators covering the general government for publication in International Financial Statistics (IFS).

The existing framework for compiling monetary statistics generally conforms to recommended Fund methodology, and data are compiled on a timely basis. Steps are being taken by the National Bank of Kazakhstan (NBK) to further improve the quality and coverage of data. In particular, the chart of accounts for commercial banks has been revised to enable the NBK to distinguish sectors and financial instruments in accordance with the Monetary and Financial Statistics Manual. The NBK has extended institutional coverage to compile a financial sector survey that includes the Development Bank. The authorities have started implementing the recommendations of past money and banking statistics missions regarding the use of residency criteria as defined in the Balance of Payments Manual, fifth edition (BPM5), including classifying foreign branches and foreign companies’ representatives as “resident.”

There are also shortcomings in external debt statistics. Public and publicly-guaranteed debt excludes external debt of public enterprises and development institutions, which is instead included in private debt.

In the area of balance of payments, the overall quality and timeliness of data are satisfactory. Considerable progress has been made in implementing Fund technical assistance recommendations. In particular, the coverage of trade data has been improved through a survey to determine the volume of shuttle trade and travel expenses. The NBK has also worked closely with relevant agencies, including STA staff, to update the ratios used for adjusting c.i.f. imports to an f.o.b. basis, which resulted in a revision of import data from 2000 to 2004. Compilation of export and import price indices has been initiated, and historical data are also now available. However, foreign direct investment statistics are not fully in line with the standards set forth in BPM5, as local branch offices of foreign companies operating in the construction sector are considered nonresident entities. This leads to discrepancies with national accounts statistics where this activity is treated as domestic production.

Kazakhstan: Table of Common Indicators Required for Surveillance

(As of May 17, 2007)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); NA: Not Available.

Reflects the assessment provided in the data ROSC published on March 18, 2003, and based on the findings of the mission that took place during April 16–May 3, 2002 for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 7, except referring to international standards concerning source data, statistical techniques, assessment and validation of source data, assessment and validation of intermediate data and statistical outputs, and revision studies.