Following Visit to Kazakhstan, IMF Mission Praises Short-term Counter-Crisis Measures, Calls for Stronger Medium-Term Plan

ASTANA – The Concluding Statement of the International Monetary Fund (IMF) visit to Kazakhstan from Nov. 12–17 found the macroeconomic landscape of the region still “challenging” but praised efforts by the government and National Bank to manage the crisis at the moment, while calling for more work on creating a sustainable medium-term plan and on strengthening oversight, risk assessment, communication and transparency in financial activities.

The IMF mission to Astana and Almaty was led by IMF Mission Chief for Kazakhstan Hossein Samiei and reviewed economic and financial developments and policies. Their Nov. 17 statement commended the National Bank’s Aug. 20 move to a free-floating exchange rate and the decision announced in November to minimise intervention into the rate and create a new interest policy anchor, among other actions, as well as the government’s Nurly Zhol economic stimulus programme and privatisation plans.

They said, however, that further work is urgently needed to ensure medium-term financial stability.
The decision to float the tenge “set in motion the process of modernising the monetary policy framework. Subsequent minimisation of … intervention starting Nov. 5 allowed better accommodation of the shocks, thus moving the tenge more in line with fundamentals,” the report said. Modernising the monetary policy framework is crucial, the report said, “as the previous fixed exchange rate regime was unsustainable in the face of ongoing external shocks.”

Now, the IMF said, it is essential that the new interest rate policy anchor suspended temporarily on Nov. 6 be reinstated and that normal policy interest rate meetings resume. (The Czech National Bank website notes that high credibility is a prerequisite for the successful functioning of an anchor regime at a national bank. President Nursultan Nazarbayev has recently pointed out that Kazakhstan’s National Bank has lost credibility and must regain it.)

The IMF also called for transparency and consistency in setting and communicating financial policy. “Consistent communication about policy intentions, deliberations, and decisions is vital to strengthening policy transparency and predictability in the absence of an exchange rate anchor. Moreover, close cooperation with the Ministry of Finance on liquidity forecasting and debt issuance is critical for the success of the new framework.”

To help alleviate inflationary and speculative pressures on the tenge, monetary policy may need to remain tight for an extended period, the IMF said. To increase efficiency in operations and support the transmission mechanisms of monetary policy, the bank should unwind its current long-term foreign exchange swap agreements as they mature or extend them only at prevailing market rates, and remove the cap on commercial bank deposit rates on individual accounts or link it to the base rate.

Financial sector vulnerabilities resulting from weak growth and the tenge depreciation mean banking oversight must be strengthened, the IMF said, especially in risk assessment. Nonperforming loans remain a major issue in Kazakhstan. “In particular, despite some progress in adopting risk-based assessment tools and supervision, more work is needed, including by closely monitoring the emergence of systemic risks based on the current regularly conducted stress tests. … While mindful of the difficulties faced by the financial sector in the period ahead, we caution against regulatory forbearance. We also encourage a careful approach to implementing countercyclical banking sector measures, such as temporarily postponing the planned increase in the regulatory minimum on capital adequacy ratio.”

Current fiscal policy is supporting economic growth, the IMF noted, and the Nurly Zhol programme will help the country navigate today’s economic challenges, but it will also lead to increased fiscal deficits. The country requires a well-defined consolidation plan for the medium-term, the report said.

“The non-oil fiscal deficit of the general government (IMF definition) is projected to reach 11 percent of gross domestic product this year, compared to 9.3 percent of GDP in 2014. Over the medium term, the non-oil deficit is projected to decline only gradually to around 8 percent of GDP in 2020. To achieve a sustainable non-oil deficit (estimated at 5.5–6 percent of GDP), the authorities urgently need to formulate well-specified medium-term fiscal consolidation measures, especially on the revenue side,” the report reads.

Measures could include better enforcing tax collection, closing fiscal loopholes and reducing tax exemptions, including in Special Economic Zones, the IMF suggested.

The IMF said it welcomed Kazakhstan’s privatisation plans and the government’s efforts to consult with international experts on their implementation and their objective of implementing the programme competitively.

The report also urged the speedy implementation of the structural reform agenda. “The long-lasting nature of the current shocks requires steadfast implementation of previously announced growth-enhancing reforms, which include, in particular, strengthening human capital and institutions, and economic diversification.” The report pointed out Kazakhstan’s recent gains in the World Bank Doing Business report, and said it welcomed the country’s accession to the World Trade Organisation.

A concluding statement describes the preliminary findings of IMF staff following an official staff visit. Such missions are undertaken regularly as part of the IMF articles of agreement in the context of a request to borrow from the IMF, as part of discussions of staff monitored programmes, or as part of other staff monitoring of economic developments, according to the IMF. The views expressed in a concluding statement do not necessarily reflect the views of the IMF Executive Board. This mission will not result in a board discussion, the report said.