IMF Mission Concluding Statement Finds Countercyclical Policies, Work With Multilateral Development Banks Laudable; Urges More Structural Reforms

ASTANA – The Concluding Statement by the International Monetary Fund (IMF) delegation that visited Kazakhstan from May 13–26 found slowing growth and tightening financial conditions in the country, according to the statement published on the IMF website on May 26. The statement largely blamed external shocks for the growth slowdown, but counselled fiscal consolidation, a more flexible exchange rate and the continuation of structural reforms to keep the country on an economically even keel.IMF Greece Financial Crisis

Division Chief for the Middle East and Central Asia Hossein Samiei led a delegation to Almaty and Astana, where they met with government and National Bank officials and representatives of the private sector and civil society to discuss the policy response to external shocks, the IMF reported, including the implications of the fiscal stimulus for medium-term sustainability and overhauling the monetary and exchange rate policy framework.

External shocks remain a risk as growth predictions are scaled back

The statement finds slower than expected growth and a less favourable outlook for future growth, with risks including unpredictable oil prices and “regional uncertainty,” plus prolonged credit tightness.

“Against the backdrop of mostly external shocks, economic growth has decelerated, financial conditions have tightened considerably, and external imbalances are emerging,” the statement reads. “Real [gross domestic product] growth slowed to 2.2 percent year-on-year in the first quarter of this year, down from 4.3 percent in 2014 and 6 percent in 2013, driven by spillovers from the slowdown in key trading partners, lower oil prices and output and weaker domestic demand.” Low oil prices, weaker demand from Russia and China and continuing delays in bringing the Kashagan oil field online are contributing factors to the fall of growth rates to 2 percent this year, the statement said, and into the medium term. The IMF now estimates potential growth at around 4.75 percent, down from the 5.5–6 percent estimated previously.

Bank lending growth has also slowed, the statement notes, and is pointing to a 1 percent year-on-year private sector credit contraction. Inflation has fallen as a result, to 4.6 percent year-on-year to April, below the country’s target range of 6–8 percent. The statement predicted a current account deficit of around 4 percent of GDP by end the 2015, mostly due to lower oil revenues.

Countercyclical policies justified, but must be accompanied by consolidation, enhanced fiscal policy framework

The statement called the Nurly Zhol Economic Policy, expected to total $20 billion or 7.3 percent of GDP over the next 3–5 years, “justified on countercyclical grounds and infrastructure needs, and given large buffers,” but said it is not enough to push growth beyond 2.5 percent, in the IMF’s estimation. However, the statement welcomed the involvement of multilateral development banks (MDBs) in selecting and monitoring infrastructure projects.

Nurly Zhol must be accompanied by medium-term fiscal consolidation, the statement said.  “[T]o maintain a reasonable expenditure path, measures to boost the revenue base are needed, which will also help reduce the reliance on oil revenue.” These measures might include reducing tax exemptions, including those associated with the Special Economic Zones, strengthening the enforcement of tax collection and making income taxes more progressive, the statement suggested.

Transparency and medium term stability will need to be supported by an enhanced fiscal policy framework, the IMF statement said, which means addressing a current framework “fragmented with ambiguous anchors,” despite improvements introduced in 2013. “Key priorities include integrating fiscal policy into a broader macroeconomic policy framework and expanding the budget coverage to all fiscal activity.”

High interest rates may become a liability; flexible exchange rates, new monetary policy instruments are needed to check imbalances

Interest rates of 11–13 percent have helped stabilise the tenge, the IMF noted, but weak lending conditions, declining inflationary pressures and weaker output growth call for a careful evaluation of the tradeoffs between containing currency pressure and reviving lending and economic activity and bringing inflation to within the target range.

The IMF called for greater flexibility in the tenge exchange rate and new monetary policy instruments to alleviate imbalances, help absorb external shocks and improve monetary policy infrastructure. “[Increasing flexibility] is also a precondition for a successful introduction of inflation targeting and an effective channel for the transmission of interest rate policy. Greater exchange rate flexibility could be introduced by widening the exchange rate band initially, with the aim of removing the band altogether when conditions allow.”

The statement called Kazakhstan’s efforts to strengthen communication and the coming introduction of enhanced governance and a policy interest rate supported by open market operations “laudable” and welcomed the proposed establishment of a monetary policy committee and greater National Bank independence in policy decisions. It said the National Bank should also establish a money market committee to implement monetary policy, including assessing banking liquidity and interbank market developments daily.

“Modernising the monetary policy framework will also help the plans to develop Astana as an international financial centre,” the statement noted.

Financial sector needs support for resilience

Further actions will be needed to support a resilient financial sector, the IMF said, as limited liquidity is hurting bank profitability. “Moreover, dollarisation and tenge shortages are increasing balance-sheet vulnerabilities, with potential widening of currency and maturity mismatches,” the statement read. The statement welcomed Kazakhstan’s plans to increase risk weights on foreign currency loans, as well as progress made toward implementing the IMF’s Financial Sector Assessment Programme (FSAP) recommendations.

The statement encouraged limits on loan concentration and urged the NBK to make risk-based supervision a priority and implement crisis resolution recommendations.

The IMF also praised Kazakhstan’s efforts to reduce its nonperforming loans (NPLs), which have fallen from 34 percent of loans a year ago to 23.5 percent today. The statement offered support for recapitalising the country’s Problem Loan Fund (PLF) and its continued operation on a commercial basis. However, it cautioned that weakened economic growth could give rise to new NPLs. It urged an asset quality review of banks by an independent party. The use of public funds to resolve NPLs should be transparent, the IMF counselled, and the merged entity should continue to operate on a commercial basis.

Structural reforms urgently needed for ongoing, balanced prosperity

Structural reforms, including economic diversification, are urgently needed to ensure long-term growth and balanced prosperity, the statement said, as socio-economic indicators are slowing with the economy. “Despite concerted efforts, income disparities persist along the urban-rural divide and between regions. Diversification away from the extractive industry and the reduction of the state footprint in the economy are necessary to sustain improvements in public welfare and to help create jobs for the growing population.”

Key steps are easing infrastructure bottlenecks, strengthening human capital, building institutions, bolstering the rule of law, enhancing financial intermediation and improving business climate, the statement said. “In this regard, we welcome the planned project finance and budget support programmes with the multilateral development banks, which offer a framework for implementing structural reforms in these priority areas,” the statement said.

A Concluding Statement describes preliminary findings of an IMF team following an official staff visit, according to the IMF, and do not necessarily represent the views of the IMF’s Executive Board. IMF official visits or missions are undertaken as part of regular consultations under Article IV of the IMF’s Articles of Agreement, either in the context of a request to borrow from the IMF resources, as part of discussions of staff monitored programmes or as part of other staff monitoring of economic developments.

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