Republic of Kazakhstan: Staff Report for the 2017 Article IV Consultation

Kazakhstan continues to withstand challenges from lower oil prices and slower growth in Russia, China, and Europe. While buffers are strong, the shocks exposed vulnerabilities, including dependence on oil and other commodities; gaps in public administration, the business environment, and competitiveness; and long-standing banking weaknesses. The authorities' response-targeted fiscal support, exchange rate (ER) adjustment, enhanced monetary policy management, and structural reforms focusing on the business climate and the public sector-has stabilized conditions. Growth in 2016 was positive, and a pickup is expected in 2017. Medium-term prospects are subdued, due to continued lower oil prices and conditions in key trading partners. Growth is projected to reach 2.5 percent in 2017 and non-oil growth should reach 4 percent by 2021. This will reflect the implementation of announced reforms, unlocking of bank lending, and a further increase in oil production. Uncertainty is high, given exposure to commodity price developments.


Kazakhstan continues to withstand challenges from lower oil prices and slower growth in Russia, China, and Europe. While buffers are strong, the shocks exposed vulnerabilities, including dependence on oil and other commodities; gaps in public administration, the business environment, and competitiveness; and long-standing banking weaknesses. The authorities' response-targeted fiscal support, exchange rate (ER) adjustment, enhanced monetary policy management, and structural reforms focusing on the business climate and the public sector-has stabilized conditions. Growth in 2016 was positive, and a pickup is expected in 2017. Medium-term prospects are subdued, due to continued lower oil prices and conditions in key trading partners. Growth is projected to reach 2.5 percent in 2017 and non-oil growth should reach 4 percent by 2021. This will reflect the implementation of announced reforms, unlocking of bank lending, and a further increase in oil production. Uncertainty is high, given exposure to commodity price developments.


1. Kazakhstan’s economy is continuing to recover from negative shocks experienced since late 2014. Lower oil prices and weaker demand in Russia, China, and the EU, along with significant exchange rate (ER) depreciation and heightened market volatility in late 2015 and early 2016, have affected performance. The shocks exposed underlying vulnerabilities, including in the business environment and competitiveness, the banking system, and public administration. The authorities’ response—fiscal support, notably under the flagship “Nurly Zhol” initiative, which has targeted infrastructure, utilities, housing, and SMEs, an overhaul of the monetary and ER policy framework, and structural reforms focusing on the business climate and the public sector (transparency, accountability, and efficiency)—has helped mitigate the impact of the shocks and stabilize conditions. Fiscal and external buffers, accumulated during the period of strong growth and high oil prices, have been instrumental in implementing anti-crisis policies. Recovery is underway, supported by increases in oil prices. However, to sustain the positive momentum, key challenges need to be addressed, notably the fragile situation in the financial sector and the economy’s high dependence on oil.

2. Constitutional reforms that would redefine powers among the president, the government, parliament, and the judiciary are moving ahead. These involve presidential responsibilities focused on national security and foreign policy, delegation of responsibilities for social and economic programs to the government, and a greater role for parliament in the formation and oversight of the cabinet. The reforms are in line with the authorities’ objectives of modernizing the state and placing Kazakhstan among the world’s 30 most advanced countries. Presidential and parliamentary elections were held in 2015 and 2016, respectively.

Recent Developments

3. Growth decelerated in 2016, but has remained positive. Growth slowed to 1.1 percent in 2016, from 1.2 percent in 2015 and 4.3 percent in 2014. The deceleration was driven by the decline in oil prices and weaker demand in key trading partners, and it was particularly marked in mining and manufacturing. Growth was weaker in the first half of 2016, but picked up, especially in construction, transport, and agriculture. The official unemployment rate remained at 5 percent.


Growth Rates, 2016 y-o-y and 2016 relative to 2014

(In percent)

Citation: IMF Staff Country Reports 2017, 108; 10.5089/9781475598704.002.A001

Sources: World Economic Outlook; and IMF staff calculations.

4. While fiscal policy has aimed to support activity and advance medium-term objectives, the headline overall and non-oil deficits declined in 2016. The authorities provided targeted near-term support via Nurly Zhol in areas that will also promote diversification and medium-term growth. In 2016, Nurly Zhol spending amounted to 3 percent of GDP, partly off budget (Annex I). Budgetary current spending increased, as wages were increased to compensate for higher inflation. However, the authorities also recognized that the external shocks could be long-lasting and restrained spending in other areas. Budgetary capital spending remained at 2015 nominal levels. The tenge depreciation and strengthened revenue administration supported higher non-oil revenues, especially VAT and interest income from the National Fund (NFRK). On balance, while the authorities aimed to provide fiscal support, the non-oil deficit declined from 12.9 percent of GDP in 2015 to 8.3 percent in 2016, and the overall deficit was reduced from 6.3 percent of GDP in 2015 to 4.1 percent in 2016. As noted, however, part of the fiscal support was provided off-budget, and NFRK assets decreased from $63.5 billion to $60.0 billion last year, continuing to constitute a strong buffer (45 percent of GDP). 1

Fiscal Indicators 2014-17

(In percent of GDP)

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Includes a transfer to KazMunaiGas of 1.8 percent of GDP in 2015 and support to the financial sector of 4 percent of GDP in 2017.

5. While the 2017 budget does not introduce major new initiatives and Nurly Zhol is winding down, the authorities expect to provide substantial support to the banking sector. In 2017, current and capital expenditures are expected to remain broadly at 2016 levels, while higher oil prices are expected to boost revenues. Accordingly, the underlying fiscal deficit will be cut to 2.3 percent of GDP. However, support to the banking sector (KZT 2.1 trillion-$6.4 billion or 4 percent of GDP) means that the headline deficit will reach 6.3 percent of GDP. Financing will come from NFRK transfers and domestic debt.

6. In December 2016, the authorities approved a new framework for the NFRK that aims to reduce fiscal dependence on oil, set explicit anchors, and sustain strong buffers and savings. The new framework sets non-oil deficit targets of 7 percent of GDP by 2020 and 6 percent by 2025 (Box 1)—2-3 percentage points below the current level. The deficit path is consistent with staff’s estimates of a long-term sustainable non-oil deficit level, which allows for sizeable accumulation of savings in the NFRK (see Selected Issues Papers).

The New Concept of the National Fund of the Republic of Kazakhstan (NFRK)

The NFRK is used to manage Kazakhstan’s oil revenues and to minimize the impact of volatile oil prices on public finances, support targeted capital spending, and save for future generations. The current NFRK concept (2010) sets an annual guaranteed transfer at $8 billion± $1.2 billion, depending on the cycle and financing needs. Additional “targeted” transfers financed recent stimulus packages. The NFRK should maintain a minimum balance of 20 percent of GDP and may acquire domestic securities.

A new NFRK concept, agreed in 2016 introduces changes. The guaranteed transfer will be in tenge and decline to KZT 2 trillion ($6 billion) by 2020 to reduce oil revenue dependence and hedge against ER changes. The minimum balance should be 30 percent of GDP, and the budget should target a non-oil deficit of 7 percent of GDP by 2020 and 6 percent by 2025. Acquisition of domestic securities is no longer permitted, although targeted transfers may take place.

7. The external position has deteriorated with lower exports and is moderately weaker than implied by fundamentals. The current account deficit deteriorated from 3 percent to 6 percent of GDP in 2016. The ER depreciation compressed imports, especially of consumer durables and investment goods, but exports also declined sharply. FDI increased significantly—from $3 billion in 2015 to $14 billion in 2016—mostly in oil and gas. The current account worsening has weakened Kazakhstan’s external position. The depreciation has largely corrected ER misalignment; however, its full effect on competitiveness and the current account will come with a lag. Thus, the gap between the actual current account and its norm, as derived from the IMF’s CA model, translates into some overvaluation of the real ER, although the IMF ES and REER methodologies suggest undervaluation (Annex II). Foreign reserves, at around $30 billion or 9 months of imports of goods and services, remain adequate for a country with a floating ER. Gross external debt is high—over 120 percent of GDP. However, intercompany lending—concentrated in commodities—comprises over 50 percent of total debt.


Exchange Rate and NBK FX Interventions

Citation: IMF Staff Country Reports 2017, 108; 10.5089/9781475598704.002.A001

Source: National Bank of Kazakhstan

8. Inflation has declined as ER pressures have subsided. After floating the tenge and a period of sharp exchange and interest rate volatility in late 2015 and early 2016, the NBK undertook measures to stabilize markets and improve liquidity. It restored regular monetary operations and the base rate, setting it initially at 17 percent in February 2016. The NBK also eased reserve requirements, raised the recommended interest rates on tenge deposits, and improved communications. With greater stability and a pickup of oil prices, the tenge strengthened, and there was a reflow of deposits back from dollars. The NBK purchased foreign exchange (FX) in February-May; sold FX in July-August to prevent sharp ER fluctuations, and has since stayed out of the market. Inflation peaked at nearly 18 percent in July, before falling to 7.8 percent in February, within the NBK’s 6-8 percent target range. 2 The anchoring of the inflation expectations has allowed the NBK to reduce its policy rate from 17 to 11 percent.

9. Since mid-2016, monetary policy has been challenged by high tenge liquidity. Dedollarization, significant expenditures of the public and quasi-public sectors, weak activity, and limited lending opportunities resulted in surplus of tenge liquidity, which the NBK has been absorbing through issuing short-term notes.


NBK Net Open Market Operations and Deposit Dollarization

Citation: IMF Staff Country Reports 2017, 108; 10.5089/9781475598704.002.A001

1/ Share of FX deposits in total.Source: National Bank of Kazakhstan

10. Bank vulnerabilities are high, following the depreciation and slowdown. These factors affected asset quality, lending, and profitability, and therefore growth.3 Deposit dollarization remains elevated at 55 percent, although it fell in 2016, while loan dollarization has stabilized at around 35 percent. Bank lending contracted by 3 percent in real terms last year, and the quality of portfolios worsened, with restructured loans surging from 10 to 25 percent of total loans. Official NPL and capital ratios have not deteriorated, however, likely reflecting deconsolidation of reporting and other reporting gaps or lags, definitional issues, and evergreening. Considering restructured loans and NPLs in off balance-sheet SPVs (particularly in BTA, a large, troubled former bank that is now an off-balance sheet entity owned by Kazkommertzbank (KKB), the system’s largest), a broader definition suggests a level of underperforming loans of over 40 percent of total loans. Accordingly, additional capital will likely be needed.4 The authorities have provided substantial support to banks via deposit placements and subsidized lending programs, including via the national pension fund (UAPF) (Box 2).

Kazakhstan—Exposure of the Public Sector to Local Banks

Public funds in local banks are estimated at 22 percent of sectoral liabilities in 2016 ($15.7 billion or 11 percent of GDP). Exposure increased by 15.5 percent last year, mainly reflecting new subsidized lending programs for SMEs and agriculture and deposits of SOEs.

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Source: Annual Financial Reports.

11. Delays in a system-wide Asset Quality Review (AQR), closure of a small bank, and difficulties at the largest bank—KKB—have contributed to uncertainty. In early 2016, the NBK announced its intention to complete an AQR, but resistance has led to delays. The NBK now aims to complete the AQR by end-2017. The NBK intervened at two small banks in late 2016, closing one, leading to deposit flows to banks perceived as safe. KKB has operated under growing uncertainty since acquiring BTA from the state in 2014. In December 2016, KKB received a KZT 400 billion ($1.2 billion) loan from the NBK, which was partially repaid and extended. KKB may be purchased by Halyk, the second largest bank, with the state expected to provide substantial financial support (based on results of due diligence) to clean KKB’s balance sheet. Halyk would ensure that the KKB is fully capitalized, a substantial financial commitment. If the transaction goes ahead, the majority of bad assets from KKB-BTA would go to the Problem Loan Fund (PLF) for resolution, although a substantial share of BTA bad assets may be retained by current KKB-BTA owners. If completed, the combined Halyk-KKB would control 40 percent of the market. Mergers or acquisitions are under consideration by other banks—for example, the third largest bank, Tsesnabank, is acquiring BCC, the sixth largest.

12. Ambitious structural reforms are advancing, although implementation is complex. The reforms aim to address underlying gaps in public administration, the business environment, and competitiveness, notably commodity dependency. A flagship “100 Concrete Steps” program was adopted in 2015 to support diversification and competitiveness and improve transparency, accountability, and efficiency of public administration. The program is comprehensive and well designed, although specific actions are taking time to prepare, put forth for legislative and regulatory consideration and approval, and implement. A key area is reduction of the state’s role in the economy and privatization of major assets by 2021. A first set of transactions, involving “blue chips” Air Astana, Kaztelekom, and the nuclear fuel firm, Kazatomprom, is expected to begin later in 2017 or in 2018 via IPOs.

Outlook and Risks

13. Growth prospects are expected to improve. A pickup of growth in 2017 and over the medium term reflects, in part, an increase of oil production as development of the huge Kashagan field gathers speed. Non-oil activity is also expected to gain strength, reflecting the lagged effects of Nurly Zhol spending, structural reforms, and a restarting of bank lending. Staff estimates potential growth at 4.0 percent, down from 4.75 percent previously; lower medium-term growth prospects for Russia and China, together with lower oil prices have affected capital accumulation. Inflation is projected to remain within the NBK’s target band of 6-8 percent. While the fiscal deficit is assumed to adjust gradually, a full adjustment, in line with the new NFRK rules, will require specifics by the authorities of their medium-term revenue and expenditure plans. The current account is expected to improve with higher exports, but a return to surplus will be gradual.

14. Uncertainty is high. Kazakhstan is highly vulnerable to swings in commodity prices and a significant further slowdown in China (exports, FDI). In particular, a sustained decline in oil prices represents a high-impact downside risk (Annex V). Further tenge appreciation could reverse non-oil competitiveness gains. Failure to resolve decisively banking issues is a key risk to growth and public finances. The high total external debt level is another risk, although the significant share of parent company debt is a mitigating factor. Upside risks include enhanced regional cooperation (e.g., on “Silk Road” initiatives), opening and growing economic relations with Uzbekistan, and a stronger recovery in Russia.

Authorities’ views

15. The authorities broadly shared staff’s assessment. They see growth in the same range and hold similar views on risks, in particular on oil prices and bank credit. Key growth drivers in their projections are agriculture, mining, and construction, with construction benefitting from a new housing program “Nurly Zher.” The authorities underscored their commitment to the wide-ranging reforms under the 100 Concrete Steps initiative to boost and diversify growth.

Policy Discussions

16. Discussions focused on the continued response to lower oil prices, including further strengthening of the fiscal and monetary policy frameworks, addressing financial sector issues, and accelerating structural reforms. Staff’s views are that (i) fiscal support was justified in a period of subdued demand, but gradual consolidation is needed going forward, underpinned by a clearer fiscal framework; (ii) significant progress has been made in monetary policy, and gains with inflation targeting and ER flexibility should be consolidated; (iii) public support to the financial sector—if it goes ahead—should be carefully designed and proceed with a substantial strengthening of regulation, oversight, and governance to ensure that problems do not reoccur; and (iv) decisive implementation of the authorities’ ambitious structural reform program is critical for diversification and growth.

A. Fiscal Policy

17. In the near term, fiscal policy remains broadly supportive of activity. Staff assesses the supportive fiscal stance in 2016 as appropriate, although it urged that extrabudgetary spending be avoided. Given the fragility of the recovery, staff and the authorities agreed that substantial consolidation is not desirable in 2017-18. While the overall deficit is expected to be lower in 2017—excluding support to the banking sector, this is driven by oil revenues. Staff also observed that there are few new revenue or expenditure initiatives in the 2017 budget, noting that this was appropriate, as Nurly Zhol (and 100 Concrete Steps) will continue in 2017, and the authorities are working on a new tax code. Higher tax rates without changes to tax bases or treatments could impede growth. One new initiative is “Nurly Zher,” which redirects a portion of planned Nurly Zhol spending to construction of affordable housing. Moreover, staff and the authorities agreed that the very sizable envisioned banking support would be beneficial for growth if credit is unlocked and bad assets are sold to new investors. Importantly, no extrabudgetary spending is planned.

18. While Kazakhstan has substantial fiscal space, strong buffers should be maintained, and medium-term consolidation is needed. Despite increased NFRK transfers and issuance of public debt to support the financial sector, the overall fiscal position remains strong, and the government has substantial fiscal space. Financing and fiscal adjustment risks are mitigated by Kazakhstan’s relatively large sovereign wealth fund; NFRK assets amount to 45 percent of GDP, and public debt is expected to remain below 25 percent of GDP (Annex VI). However, renewed oil price shocks, slower growth, persistently higher fiscal deficits, or a materialization of contingent liabilities could erode buffers. As the shocks are likely to continue, adjustment over the medium term is needed. Moreover, the authorities should continue to pursue inter-generational equity and savings objectives. Staff recommended adjustment in line with an oil price-based approach to anchor medium-term policies (Selected Issues Papers). This could target levels of the structural non-oil primary balance at predetermined benchmark prices, helping to limit volatility and achieve savings objectives. Staff welcomed the new NFRK rules, noting that they should help guide the non-oil deficit to sustainable levels estimated by staff (5-7 percent of non-oil GDP).

19. With the new NFRK rules providing guidance, staff urged the authorities to develop and implement credible medium-term consolidation plans. Staff stressed that the consolidation should be focused on non-oil revenue mobilization to protect and increase social and capital spending. More progressive tax rates should be considered.

  • A new tax code under preparation presents an opportunity to reduce distortions and raise revenues. The new code aims to rationalize exemptions and preferential treatments, thus broadening tax bases and supporting consolidation. Changes envisage greater reliance on indirect taxes, including increases in excise taxes and expansion of the VAT by reducing the registration threshold. Natural resource taxation will also be reexamined. Staff welcomed the approach and suggested that the code could benefit from IMF TA.

  • Fiscal policy would also benefit from enhanced reporting and coverage. The headline fiscal accounts include central and local government operations, but not extrabudgetary funds or initiatives, oil-related revenues, or fiscal operations of the UAPF or SOEs. These should be fully integrated in the accounts, and adoption of IMF Government Financial Statistics (GFS) standards remains a priority. Improved coordination, analytics, and communications by and between the ministries of Economy and Finance would enhance policy clarity.

Authorities’ views

20. The authorities acknowledged the need for medium-term fiscal consolidation. Given the long-lasting nature of the oil price shock, they see the case for adjustment and pointed to the medium-term targets in the new NFRK framework, welcoming staff’s analytical work on price-based rules. They also agreed that non-oil revenues should be increased over the medium term, as spending cuts alone would not ensure a credible fiscal path or support diversification and robust non-oil growth. Further gains in revenue administration will generate additional revenues, along with tax policy measures in the new tax code. The authorities expressed interest in IMF TA in tax policy and in adopting the GFS reporting standards.

B. Monetary and Exchange Rate Policy

21. While the transition to inflation targeting has advanced, key challenges remain. Staff commended the progress made in changing the monetary and ER policy framework and operations over the past year, noting that the NBK has kept short-term money market rates in the interest-rate corridor and enhanced analytical capacity and communications. Discussions focused on:

  • Excess liquidity. Tenge liquidity surged in 2016 and the NBK responded with repos and short-term notes. Sterilization reached KZT 3 trillion ($9 billion or 7 percent of GDP) in March 2017. However, market rates have stayed close to the lower bound of the corridor, suggesting that surplus liquidity may be due to structural factors. Real sector lending has stalled, reflecting weak demand by creditworthy borrowers, and banks have also encountered difficulties in matching asset and liability maturities (Annex IV). Staff suggested unwinding FX swaps and tightening reserve requirements, along with the notes issuance, to sterilize excess liquidity.

  • Yield curve. Besides their use in monetary policy, NBK notes have played a role in building the tenge yield curve. In addition to 7- and 28-day maturities, the NBK has issued longer-maturity notes (up to 1 year). Staff welcomed these efforts as well as cooperation with the MoF to extend the yield curve and develop the market.

  • Long-term FX swaps. More than half of the long-term FX swaps that the NBK arranged with local banks two years ago (originally $8 billion) have been unwound, and most remaining swaps are set to expire later in 2017. Staff noted that these should not be renewed, as they are costly for the NBK.

  • ER policy. The adoption of a floating ER is an important landmark in the NBK’s monetary policy overhaul, and it has helped the economy adjust to the negative terms of trade shock. Staff underscored the benefits of continuing this policy—especially if adverse pressures reemerge. Given the importance of ER flexibility for inflation targeting, interventions should be used primarily to avoid disorderly market conditions.

  • Analytical capacity and communication. Staff commended progress made by the NBK in strengthening analytical capacity and communications. Models developed with support of IMF TA are being continuously improved to better inform decisions. Additional short-term forecasting tools have been introduced. Communication of policy decisions has been strengthened, including through press releases, interviews, meetings with market experts, the inflation report, publication of forward-looking policy guidelines and more data. Transparency has increased, including through publishing monthly data on FX interventions and daily data on open positions of the NBK’s operations. These efforts should continue.

22. Staff stressed that monetary policy should continue to focus on inflation, with due consideration to growth and employment. Staff assessed monetary policy as appropriate and noted that recent data and expectations surveys suggest that disinflation continues, with inflation expectations increasingly anchored. This should allow the NBK to continue its easing cycle, thus providing support to activity within its existing mandate of price stability. Staff advised against changing the NBK’s mandate to explicitly include growth. A dual mandate can be operationally complex and may send confusing signals to the public and markets. Moreover, a central bank’s instruments are aimed at managing liquidity; they are not well suited to address structural challenges or imbalances.

Authorities’ views

23. The authorities concurred with staff’s views. They appreciated the open discussions and staff’s analytical work on ER pass-through and interest rate rules (Selected Issues Papers). The authorities reiterated their commitment to inflation targeting and ER flexibility. Managing and unwinding excess liquidity is a challenge, particularly given financial sector issues. The NBK agreed with staff that central bank notes, expiry of FX swaps, deepening of the T-bill market, and possibly, changes in required reserves would help, along with regularization of lending conditions. More broadly, the use of long-term instruments and structural changes in the economy to address excess liquidity would help avoid potential adverse developments. The NBK stressed that its cooperation with MoF has grown, especially on bond market development.

C. Financial Sector Policies

24. Weak balance sheets will continue to drag on the banking sector’s ability to support the economy in the near term; prompt action, based on clear principles, is needed. The sector has long been clouded by poor lending and reporting standards, opacity of ownership, and reliance on state support, with high NPLs worsening bank profitability and ability to extend credit. This has inhibited investment in banks and their contribution to growth. Also, banking sector contingent liabilities are an important risk to public finances. Addressing long-standing issues will be critical.

  • KKB-Halyk transaction. Staff welcomed the authorities’ possible actions to address issues at KKB, but expressed regret that measures had not been taken earlier. Problems of KKB-BTA have been long standing—their combined NPLs account for over 35 percent of sectoral problem loans. Actions should decisively address these problems and thereby avoid future state support. Staff outlined key principles to guide actions and noted concern with some aspects of the authorities’ approach. Staff stressed that the KKB-Halyk transaction should proceed only after robust due diligence and any issues with KKB’s assets have been fully identified, so that the combined institution will not become another bad bank. Existing KKB shareholders should not retain assets, and the NBK should not provide new funds but should be repaid for past liquidity support. To avoid a potential future burden on state resources, a clear viability assessment should be made of the combined bank; proper supervision of the new, systemically-important institution will require additional resources and more intervention powers for the NBK, bringing the regulatory and supervisory framework into line with international best practices. This would also help ensure that the KKB-Halyk transaction does not have negative implications for competition.

  • Addressing issues at other banks. Staff stressed that an independent, forward-looking AQR will be crucial to evaluate financial conditions and capital adequacy and that state involvement in the KKB-Halyk transaction should not create a precedent for support to other banks. Loan-loss recognition and shareholder capital injections should be key elements to strengthen the sector, and banks that are unable to raise new capital should exit. Several important legislative changes are needed for the NBK to have the sufficient authority and tools to intervene quickly and decisively.

  • Use of public funds. SOE and UAPF deposits, subsidized loans, and other claims of public agencies (e.g., bank bonds) account for a large share of bank liabilities; however, rules guiding placement of funds do not account for risks or are overridden. Staff urged enhanced risk management and noted that with growth picking up, subsidized lending should be phased out promptly. On resolution, staff stressed that public support should be provided only for viable, systemic institutions and when stability is at risk. Shareholders should be fully diluted before public funds are used, and capital support should come from the budget and not the NBK or UAPF.

  • Problem loans. The PLF has been used so far as a pass-through for public deposits at banks, rather than to resolve bad assets. 5 Successful resolution of KKB-BTA NPLs will require providing the PLF with more resources, staff, authority, and flexibility. The PLF should have a mandate to maximize value recovery and operate in line with international best practices regarding independence, transparency, and accountability. As the regulator, the NBK should no longer be responsible for managing the PLF. More generally, stronger NBK supervision and regulation and changes in tax law would support NPL resolution.

25. Regulatory and reporting improvements are needed. Staff stressed that reestablishing consolidated reporting (covering SPVs) is crucial to present a clear picture of NPLs and capital adequacy. As recommended by the 2014 FSAP and subsequent IMF TA, NBK intervention and regulatory powers and the Lender of Last Resort (LoLR) and resolution frameworks also need urgent strengthening. Staff acknowledged that macroprudential measures implemented in 2014 helped reduce concentration and slow FX lending, and encouraged the authorities to consider further tools, such as higher risk weights and caps on exposures to corporates that are particularly sensitive to oil price and ER movements. Staff recommended that loosening of prudential measures from October 2015 be reversed and provisioning rules tightened further. For better risk monitoring, the quality of corporate and household balance sheet data should be enhanced. Increases in capital requirements, originally planned for 2016, were introduced in January 2017, and staff encouraged the NBK to proceed with further upward adjustments towards Basel III standards. Improving regulation and supervision is a prerequisite for a sound and more inclusive financial system that would foster growth.

Authorities’ views

26. The authorities agreed that prompt actions are needed and that the regulatory and supervisory framework should be strengthened. They shared staff’s diagnostics and pledged to move ahead with reforms, but also underscored the difficulties involved. They noted that a consensus has emerged that sectoral challenges should be addressed decisively, with the government working closely with the NBK on KKB and other issues. They stressed that KKB is a systemically-important bank that plays a key role in the payment system; accordingly, strong state actions are needed to safeguard financial stability. The authorities expressed confidence that acquisition of KKB by Halyk would put in place a strong management team with sufficient capital, and noted that a system-wide consolidation was necessary, given a large number of small, under-performing banks and a relatively small market size. They do not see the combined KKB-Halyk Bank as impeding competition, nor do managers of other local banks. To support NPL resolution, the authorities indicated that they were planning to capitalize the PLF and give it more powers and to enact tax law changes to facilitate write-offs of NPLs. These legal changes were approved by the President in February. The authorities also indicated that draft legal amendments were being prepared to strengthen the NBK’s resolution powers and that work was underway on the LoLR framework and on other supervisory and regulatory changes. These include reintroduction of consolidated reporting and further transition to risk-based supervision.

D. Structural Reforms

27. The authorities’ structural reform agenda aims to support more effective governance, diversification, and broad-based and inclusive growth. Reforms encompass a wide range of measures in public administration, rule of law and accountability, the business environment, and nation building. Diversification extends even to the energy sector through efforts to foster use of alternative energy and a goal of producing half of electricity from renewables by 2050. Another key area is transport, where development of road and rail corridors under Nurly Zhol complements international integration via the One Belt-One Road initiative. These efforts should boost logistics and processing, including agro-processing. The authorities see development of the Astana International Financial Center as important to developing financial markets and instruments and attracting investors. “Innovation clusters” in Astana and Almaty and support for R&D are seen as central to building human capital.

28. Staff considers the authorities’ agenda to be well intentioned, but also very wide-ranging and ambitious, and accordingly stressed the importance of implementation. The reforms will tax capacity and require consensus-building among groups and individuals that have benefited from the status quo. Lack of clarity on prioritization, benchmarks, and timetables should be addressed, and progress should be systemically reported domestically and internationally. Some observers noted a tendency for the authorities to unveil new flagship plans before existing initiatives are concluded. Indeed, some of the “100 Concrete Steps” have been drawn into a new “Third Modernization” strategy and the constitutional reforms. Staff also recommended that the approach to privatization be clarified: IPOs should be launched where the likelihood of success is greatest, while retention of a government majority or “golden” share may dampen investor interest. Delays in land reforms following protests in 2016 are understandable, but may also postpone or limit prospects for Kazakhstan to harness its immense agricultural potential, especially exports to China. Clear and decisive implementation, continued dialogue with IFIs and regional counterparts, and regular communications will be key to instilling accountability and creating an environment conducive to growth.

Authorities’ views

29. The authorities stressed that reform implementation is proceeding, with responsibilities under each measure assigned to ministries, offices, and agencies. The reforms also receive high priority for budget appropriations. While capacity within ministries is a challenge, working groups make progress, meet regularly, and report to the President.

Staff Appraisal

30. While Kazakhstan has faced significant challenges since 2014, the authorities’ response has helped mitigate the impact of shocks. The authorities rightly recognize that favorable factors that boosted growth over the decade-and-a-half prior to 2014 have changed: commodity prices are likely to be lower for an extended period, along with growth in key trading partners—particularly Russia and China. Their response has included: targeted fiscal stimulus that provided funding to infrastructure, SMEs, and housing; ER flexibility in the context of transition to inflation targeting; and structural reforms focused on improvements to public administration and the business climate, including privatization. Growth decelerated in 2015-16, but is expected to pick up in 2017 and further over the medium term, supported by higher oil production and the authorities’ ambitious reform agenda. The external position has deteriorated and is moderately weaker than implied by fundamentals; with the recovery of oil prices, the current account is expected to improve. Key risks are commodity prices and the financial sector.

31. Fiscal policy has appropriately been supportive of activity, but with recovery, the focus should shift to ensuring long-term sustainability. Nurly Zhol has helped support demand, but as growth picks up and projects under this initiative are completed, the case for continuing support is less compelling, despite substantial fiscal space. Moreover, there is a need to maintain a sizeable buffer in view of high revenue volatility and uncertainty, and inter-generational/savings objectives. The 2017 budget envisages higher revenue and broadly unchanged expenditures, excluding fiscal support for the financial sector, which can be justified as long as the necessary measures are in place to ensure a lasting solution of banking issues. Over the medium term, fiscal adjustment should be gradual, so that headwinds on growth are minimized. The new NFRK framework, which targets a lower non-oil deficit and lower NFRK transfers over the medium term, is a step in the right direction. Consideration should be given to a price-based rule to anchor the medium-term deficit. It will be important to work out the specifics of the fiscal adjustment and follow up with decisive action. To protect capital and social outlays important for inclusive growth, focus should be on increasing non-oil revenues. The new tax code presents a key opportunity to do so. Further strengthening of the fiscal framework requires improved coverage and reporting, and the authorities should fully integrate the NFRK and other operations in the budget and the fiscal accounts, and they should adopt the IMF’s GFS reporting standards to enable a comprehensive assessment of fiscal operations. Direct NFRK and UAPF involvement in fiscal initiatives should be limited. Improved analytics and communications are also important.

32. Monetary policy should continue to focus on price stability within the inflation-targeting framework. Adopting an explicit dual mandate to target both inflation and growth is not recommended. The NBK should continue to build credibility in its new policy regime, including by maintaining ER flexibility which has played an important role in adjusting to the oil price shock. Achieving low, stable inflation will support further reductions of the policy rate and the savings and investment needed for diversification and growth. The NBK efforts to further enhance analytical capacity and strengthening communication of policy decisions are strongly supported.

33. Financial sector weaknesses call for decisive actions. Coordinated efforts to resolve the challenges of high NPLs and of KKB, Kazakhstan’s largest bank, are needed. Previous interventions during the past decade have not been successful. This time, a resolute approach is needed. State support to the sector should be subject to strict conditions to limit costs and reduce moral hazard, and weak, non-systemic institutions should not be bailed out. An independent AQR remains a key component of the strategy to restore the health of the banking sector. Bank shareholders should fully bear losses before public funds are used. Mergers between banks should take place only after due diligence is completed and only if the resulting institutions are strong and do not pose risks to competition or financial stability. The authorities should ensure that the acquisition of KKB by Halyk complies with these principles. Bad assets obtained from banks should be transferred to the PLF and liquidated in a transparent, auction-type approach, in line with international best practices. Legal and regulatory changes are needed to support PLF operations, along with capacity improvements. The authorities have already made important steps in that direction, including by transferring PLF ownership to the government and providing more favorable tax treatment of NPL write-offs. Although TA from the IMF and other international institutions has been provided, progress in key areas of bank resolution, regulation and supervision has been slow. The priority given to strengthening of the bank supervision and resolution frameworks is welcome; concrete measures will be needed to avoid the recurrence of problems. Crucially, consolidated reporting should be reinstated, and the LoLR framework should be clarified and strengthened. This is particularly important given possible requests for support from other banks following the KKB-Halyk transaction.

34. Structural reforms are key to diversification and broad-based and inclusive growth, along with improvements in public administration and governance. The authorities have adopted an ambitious reform agenda, and an important challenge is to ensure decisive implementation, with objectives, actions, and progress effectively communicated to the public, markets, and investors to help ensure that desired positive effects materialize. To promote private sector development and diversify the economy away from oil and the state, it will be important to attract investors in non-resource sectors. This calls for resolute actions to improve the business environment, encourage competition, and strengthen governance. An important milestone will be successful conclusion of the first round of blue-chip IPOs; these will set the tone for other actions.

35. It is proposed that the next Article IV consultation take place on the standard 12-month cycle.

Figure 1.
Figure 1.

Kazakhstan: Economic Developments

Citation: IMF Staff Country Reports 2017, 108; 10.5089/9781475598704.002.A001

Sources: Kazakhstani authorities and IMF staff estimates.
Figure 2.
Figure 2.

Kazakhstan: Banking Sector Developments

Citation: IMF Staff Country Reports 2017, 108; 10.5089/9781475598704.002.A001

Source: Authorities data, IMF Staff calculations
Figure 3.
Figure 3.

Kazakhstan: Key Financial Soundness Indicators, Cross-Country Comparison 1/

Citation: IMF Staff Country Reports 2017, 108; 10.5089/9781475598704.002.A001

Sources: Financial Soundness Indicators; World Economic Outlook; and IMF staff calculations.1/ Official data.
Figure 4.
Figure 4.

Kazakhstan: Capital Markets Indicators

Citation: IMF Staff Country Reports 2017, 108; 10.5089/9781475598704.002.A001

Source: Bloomberg.
Figure 5.
Figure 5.

Kazakhstan: Monetary and External Sector Developments

Citation: IMF Staff Country Reports 2017, 108; 10.5089/9781475598704.002.A001

Sources: Kazakhstan authorities, Bloomberg, and IMF staff estimate.1/ NBK policy rate is refinancing rate through September 2015, then base rate.
Figure 6.
Figure 6.

Kazakhstan: Fiscal Developments and Outlook

Citation: IMF Staff Country Reports 2017, 108; 10.5089/9781475598704.002.A001

Sources: Kazakhstani authorities and IMF staff estimates.
Figure 7.
Figure 7.

Kazakhstan: Business Environment and Governance Indicators

Citation: IMF Staff Country Reports 2017, 108; 10.5089/9781475598704.002.A001

Table 1.

Kazakhstan: Selected Economic Indicators, 2013–22

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Sources: Kazakhstani authorities and Fund staff estimates and projections.

For 2015 it includes a transfer of USD 4.5 billion to KazMunaiGaz to make external debt payments.

For 2017 it includes the support of the banking sector of about $6.4 billion.

Private sector includes nonbank financial institutions, public and private nonfinancial institutions, nonprofit institutions,

Refinancing rate through 2014 and base interest rate of the NBK from 2015.

Gross debt, including arrears and other short-term debt.

Based on a conversion factor of 7.6 barrels of oil per ton.

Table 2.

Kazakhstan: Balance of Payments, 2013–22

(In billions of U.S. dollars, unless otherwise indicated)

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Sources: Kazakhstani authorities and Fund staff estimates and projections.

Estimates and projections are based on GDP at market exchange rates.

The number reflects months of same year’s imports of g&n.f.s. in 2022.

Table 3.

Kazakhstan: Financial Soundness Indicators of the Banking Sector, 2013–16

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Source: IMF Financial Soundness Indicators (FSI) database
Table 4.

Kazakhstan: Monetary Accounts, 2013–22

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Sources: Kazakhstani authorities and Fund staff estimates.

Private sector includes nonbank financial institutions, public and private nonfinancial institutions, non-profit institutions, and

Does not include oil fund resources.

Commercial banks only.

Table 5.

Kazakhstan: General Government Fiscal Operations, 2013–221/

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Sources: Kazakhstani authorities and Fund staff estimates and projections.

General Government includes republican and local budgets plus the NFRK.

Oil Revenues include items such as royalties, export duties on oil and corporate income and social taxes levied on oil companies.

Non-tax revenues include items such as income from business activities and properties as well as the interest earned by the NFRK

For 2015 it includes a transfer of USD 4.5 billion to KazMunaiGaz to make external debt payments.

For 2017 it includes the support to the banking sector of about $6.4 billion.

National Fund of the Republic of Kazakhstan. (-) is accumulation in the Fund.

General government, including republican and local budgets.