Republic of Kazakhstan: 2008 Article IV Consultation—Informational Annex

The Republic of Kazakhstan’s 2008 Article IV Consultation shows that banks have lost access to new external financing, credit extension has stalled, and growth has slowed. Nevertheless, Kazakhstan has considerable public financial resources to help it weather the current situation and the country is benefiting from high oil and commodity prices. A realistic assessment of the health of banks needs to be made and steps taken to mitigate risks, including by bolstering capital bases, strengthening bank supervision, and further developing the financial safety net framework.


The Republic of Kazakhstan’s 2008 Article IV Consultation shows that banks have lost access to new external financing, credit extension has stalled, and growth has slowed. Nevertheless, Kazakhstan has considerable public financial resources to help it weather the current situation and the country is benefiting from high oil and commodity prices. A realistic assessment of the health of banks needs to be made and steps taken to mitigate risks, including by bolstering capital bases, strengthening bank supervision, and further developing the financial safety net framework.

Annex I. Kazakhstan: Relations with the Fund

(As of June 12, 2008)

  • Mission: Article IV consultation discussions were held April 21-30, 2008 in Astana and Almaty. The concluding statement of the mission is available at

  • Staff Team: Messrs./Mmes. Callen (head), Laframboise, Oner, and Hasanov (all MCD), and Lohmus (MCM). Messrs. Kiekens and Orynbaev (both OED) joined the policy discussions.

  • Country Interlocutors: Prime Minister Massimov, National Bank of Kazakhstan Governor Saidenov, Minister of Economy and Budget Planning Sultanov, Vice Minister of Finance Yergozhin, Financial Supervision Agency Chairwoman Bakhmutova, and other officials, parliamentarians, private sector participants, and the press.

  • Fund Relations: Kazakhstan accepted the obligations of Article VIII, Sections 2, 3, and 4 in 1996 and maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions. The exchange rate regime has been classified as a conventional peg (previously a managed float).

  • Statistical Issues: The authorities subscribe to the SDDS and the provision of data is adequate for surveillance purposes.

  • Outreach: The mission met with the local press.

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 preannounced path, although since October 2007 the exchange rate has effectively been pegged to the U.S. dollar. As a result, the classification of the tenge exchange rate has been changed to a conventional peg. On June 12, 2008, the tenge/U.S. dollar rate was 120.8. 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 July 10, 2007 (see IMF Country Report No. 07/235).

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 and a second FSAP Update mission took place in March 2008. 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 was published in February 2008 (see Annex V).

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 1993-2007 by FAD, LEG, MCM, STA, and the IMF Institute. In addition to shortterm 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 Capital Markets

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.

  • 1. December 2002: Sequencing of Capital Account Liberalization and Financial Sector Supervision.

  • 2. January 2003: Assessment of the CPSS Core Principles for Systematically Important. Payment Systems and Transparency of Payment System Oversight.

  • 3. September 2004: Bringing Banking Prudential Regulation up to EU Standards.

  • 4. September 2004: Implementing Inflation Targeting: Next Steps.

  • 5. November 2007: Strengthening Banking Supervision and Risk Assessment.

Fiscal Affairs

The Fiscal Affairs Department 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.

  • 1. April 2003: Customs Administration.

  • 2. 1997-2004 Treasury Modernization.

  • 3. September 2004: Treasury Reform Process.


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.

  • 1. November 2002: International Reserves Template.

  • 2. January 2006: Real sector and balance of payments statistics.

  • 3. August 2006: Real sector statistics.

  • 4. December 2006: ROSC Update mission (and DQAF).

  • 5. April 2008: GFSM 2001 Implementation.

Legal Department

December 2003: Draft Law on Mandatory Reporting on Certain Financial Transactions April 2008: Reforms to Tax Law.

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. Seminars and training sessions have also been conducted by MCM and STA technical assistance missions.

XII. Resident Representatives

Position terminated in August 2003.

Annex II. Kazakhstan: Relations with the World Bank Group

(As of January 31, 2008)

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 this year was revived with four new approved projects which will start implementation in FY09. In addition to new lending activities, there is an expanded program of economic research which allows the Bank to respond to the government’s critical development needs. In FY08 the total financing of the Joint Economic Research Program (JERP) amounts to just under $3 million, of which about 66 percent is directly financed by the government. The research under this extended umbrella is build around four main activities aligned with the government’s development priorities: (i) public finance management review; (ii) administrative reform; (iii) modernization of communal services; and (iv) private sector development initiatives.

At present, the Bank’s program comprises thirteen projects (twelve IBRD loans and one Global Environmental Facility (GEF) grant) with a total commitment of $713 million, of which $313 million has been disbursed. In the Bank’s portfolio, there are eight active loans (Road Transport Restructuring, Electricity Transmission Rehabilitation, Syr Darya Control and Northern Aral Sea - Phase I, Nura River Clean-Up, Agricultural Post-Privatization Assistance - Phase II, Agricultural Competitiveness, North-South Electricity Transmission, and Forest Protection and Reforestation) with a commitment of $534 million, one old GEF grant (Drylands Management) of $5 million, and four recently approved new loans (Ust-Kamenogorsk Environment Remediation, Customs Development, Health Sector Technology Transfer and Institutional Reform, and Technology Commercialization) with a commitment of $174 million. The Bank is also preparing five new projects (Irrigation and Drainage Improvement - Phase II, South-West Transport Corridor Road Rehabilitation, Vocational Education and Training, Territorial Development, and Syr Darya Control and Northern Aral Sea - Phase II) with an expected financing envelope of about $654 million.

Kazakhstan is the IFC’s largest client in Central Asia. As of end-February 2008, IFC’s total portfolio in Kazakhstan was $124 million, which is mostly in general manufacturing and financial sector investments. IFC will continue to expand its work by fostering dynamic private sector led growth in Kazakhstan, particularly in the nonextractive sectors and in the frontier regions of the country. This includes ongoing support to the financial sector, and when possible, investments to promote SME development, as well as investments in manufacturing, construction and construction materials, infrastructure, and the service sector. IFC will focus on: (a) further stabilization, diversification, and extension of the maturity of the funding base in the banking sector; and (b) establishment of the best international banking and corporate governance and regulatory environment.

Annex III. Kazakhstan: Relations with the EBRD

(As of December 31, 2007)

The EBRD is the largest investor outside the oil and gas sector in Kazakhstan. As of December 2007, the bank’s total business volume in Kazakhstan stood at €3.4 billion with EBRD investments totalling €1.7 billion. The bank’s gross cumulative disbursements reached €1.4 billion. During 2007, the bank signed 20 projects for total EBRD finance of €532 million. The sector allocation of business volume has shifted towards the corporate sector and more than 80 percent of all EBRD investments are now in the private sector. The portfolio private/public ratio is not expected to change much during the coming year. The bank aims to increase the share of equity in its annual business volume in Kazakhstan (which reached 21 percent of projects signed in 2007). EBRD involvement in the country remains guided by the Bank’s most recent country strategy for Kazakhstan, approved in November 2006.

The Bank’s main operational objectives for 2007—2008 are the following:

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 capitalization 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 continue to provide micro and small 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. Selectively support regional cross-border expansion of reputable Kazakh companies to neighbouring markets.

Infrastructure sector: Increase EBRD’s support in transport, energy, and telecommunication infrastructure development to satisfy the growing needs of the economy and promote reforms. The bank will focus on non-sovereign projects. On a selective basis, it will take leadership in developing and actively engaging in appropriately structured public-private partnerships (PPPs) that involve competitive tender processes. Work with state holding company Samruk on finding synergies between different parts of infrastructure and improving corporate governance in respective of state owned enterprises. Support further regulatory and tariff development that promotes investments and fair access to infrastructure.

Financial sector: To promote strategic FDI into the financial sector, but also to open up the capital base of local banks to reputable financial investors through initial public offerings (IPOs) or private placements. To continue to work actively with existing shareholders of 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-sized banks and nonbank microfinance institutions (NBMFIs), thus supporting micro, small-, and medium-sized enterprises (MSMEs). A special emphasis will be on the provision of financial resources outside the main cities and in rural areas. The Bank will support the development of leasing, insurance and pensions, the further deepening of mortgage markets (especially outside of the two main cities) and facilitate the securitization of assets by Kazakh financial institutions.

Policy dialogue: Support the Government in its efforts to improve the investment climate and to diversify the economic structure, leading to improved global competitiveness. Cooperate with the state-holding companies Samruk and Kazyna to achieve corporate governance and operational improvements of state-owned enterprises. Promote 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

The most notable progress was made in the General Industry sector. Two new industry projects started--an investment in Kazakhstan Kagazy project (EBRD finance €20 million), and a loan to Karcement Kazakhstan (EBRD finance €15.5 million). A loan was also signed in brewery production to EFES Kazakhstan (EBRD finance €30 million). One of the milestone projects signed in 2007 in Kazakhstan is the Mittal Steel Temirtau Health & Safety Loan (EBRD finance of €70.5 million) designed to support improvements to the health and safety practices at coal mines. The project is the first in a wider EBRD initiative to support improvements to environmental, health and safety practices in mines in the Bank’s countries of operations. Another important project is the equity subscription for €40 million EBRD share in Kazakhstan-Meinl Caucasus and Central Asia, a retail real estate investment fund/joint-venture.

The Bank strengthened its efforts to improve transparency of ownership and integrity in Kazakhstan’s banking sector. The Bank made a €15 million equity investment for a 20 percent stake in Kazinvestbank. Equity market development was also supported through investments in two funds, Centras Private Equity (€8 million) and Barings Vostok Fund (€6 million). The Bank promoted further development of the market for residential mortgages by providing a mortgage finance facility to Bank Centre Credit for €3 million. EBRD also signed a €219 million syndicated A/B loan to Kazkommertsbank, one-third of which for its own account. The Trade Facilitation Program (TFP) remained an important instrument in supporting a wide range of trade transactions of Kazakh enterprises, including long-term intraregional imports. In 2007, the EBRD committed loans and guarantees under the Regional Trade facilitation program in excess of €93 million.

Priorities for the coming year

Power shortages are becoming an important constraint on private sector development, especially in Southern Kazakhstan. To support the Government with regulatory improvements and tariff reform should be the key focus of the Bank’s operations in this area, leading to investments in power generation, transmission and distribution.

The transport and communication infrastructure will be key to the country’s long term competitiveness and regional cooperation and integration. Rehabilitation of the road network, including the South-West transport corridor, will play an important role, as will the necessary improvements of airport infrastructure.

The Bank will aim to capitalize from its improved presence in the corporate sector, making long-term funding and equity finance available to corporates, especially now that commercial bank funding has slowed down significantly. The focus here should be on value-added processing, for instance in agribusiness, and manufacturing industries. This should include projects with energy efficiency and safety components.

In the financial sector, the Bank’s assistance is needed in light of the global credit crunch, the resulting large repayment obligations of Kazakh banks, and the related slowdown of bank lending in Kazakhstan. The Bank will continue to provide long-term debt, to support the equity of banks, to facilitate the entry of strategic investors, and will aim to reconnect Kazakh banks to the international financial markets through arranging syndicated loans (A/B structure). For 2008, the focus will be on SME and micro lending, as well as the introduction of energy efficiency credit lines. In addition, the Bank will have an important role to play in working with private equity funds and nonbank financial institutions to promote the development of the local capital market as a complement to bank lending. Transparency of shareholding structures and the willingness to improve corporate governance will be a precondition to any future Bank financing in Kazakhstan.

EBRD Portfolio December 31, 2007 Euros million

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Annex IV. Kazakhstan: Relations with the Asian Development Bank

(As of March 5, 2008)

Kazakhstan became a member of the Asian Development Bank (ADB) in 1994. As of March 2008, 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 2008, 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 are at the forefront of current and future ADB operations in the country. A Private Sector Operations Agreement between the Republic of Kazakhstan and the ADB was signed in November 2004. It provided a basis for ADB’s business opportunities in the Kazakhstani private sector. During 2006-2007, seven private sector financings in the amount of $550 million were approved by the ADB for Kazakhstan to boost financial sector and SME development in the country.

ADB’s debut local currency bonds (in Tenge) in Kazakhstan were issued in August 2007. The issue had a principal amount of 6 billion Tenge (equivalent to $49 million). Proceeds of the Tenge bond issue were used to finance ADB’s private sector banking activities in the country (ADB’s first local currency loan to JSC Bank Center Credit to support small- and medium-sized business was approved on August 7).

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, micro credit, small- and medium-enterprises (SME), private equity funds, insurance, and securitization. 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. The latter will be in rural water supply and water resources management to improve livelihood in rural areas and reducing urban-rural gap. After the successful completion of water resources management and land improvement project in South Kazakhstan Oblast in December 2006, the Government requested the ADB to assist with a second phase project to complete irrigation on the remaining 87,000 ha in the project area. ADB approved a Project Preparatory TA in December 2007.

Annex V. Kazakhstan: Statistical Issues

The quality of the economic statistics is generally adequate for surveillance. Kazakhstan has made considerable progress since the 2002 data ROSC, as reflected in the update published on February 2008. On March 2003, Kazakhstan became a subscriber to the Special Data Dissemination Standard (SDDS), marking a major step forward in the development of the country’s statistical system.

Sector specific issues

Building on the progress achieved since 2002, IMF missions in February and August, 2006 assisted in developing a more analytically useful disaggregation of the national accounts and balance of payments into oil and nonoil 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.

However, 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, 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.

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 (GFSM2001). 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 a format consistent with the GFSM2001. There is no program for transition to the accrual methodology of 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 the methodology in the IMF’s Monetary and Financial Statistics Manual (MFSM), and data are compiled on a timely basis. Steps are being taken by the National Bank of Kazakhstan (NBK) to further improve the quality 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 MFSM. The NBK compiles monetary statistics based on the Standardized Report Forms (SRFs), which are published in the IFS Supplement. 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 the previous STA 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.” The NBK is now addressing the issues raised by MCD and STA regarding the inconsistencies in the positions between the NBK (reported in SRF 1SR) and the other depository corporations (reported in SRF 2SR).

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 balance of payments, the overall quality of data is 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. In general, the balance of payments is compiled in concordance with the fifth edition of the Balance of Payments Statistics Manual (BPM5). 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 June 12, 2008)

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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 update of the data ROSC published in February 2008, based on the findings of the mission that took place during November 29–December 13, 2006 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, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.