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Kazakhstan: IMF Warns Of Global Crises

Washington, 3 July 1998 (RFE/RL) -- The Executive Directors of the International Monetary Fund (IMF) have told Kazakhstan that getting through current global financial crises and realizing the country's vast potential will require "skillful and determined" policies and actions by the government.

The Board of Executive Directors' assessment was made as part of Kazakhstan's annual review, known as an Article Four consultation, which has just been released by the IMF.

The 24 executive directors are the daily decision makers for the fund. Eight represent the fund's largest member countries individually, the rest represent the other IMF member nations in groups known as constituencies.

The annual review includes an IMF staff visit to the country to prepare a background report, which is used by the board for its discussions.

The fund's staff noted that Kazakhstan has made "substantial progress in transforming" its economy into a market based system, with real GDP (gross domestic product) growth reaching two percent in 1997 and the first quarter of 1998, and with inflation having fallen to less than 10 percent by May, 1998 (from a high of over 3,000 percent in mid-1994.)

It noted that Kazakhstan has benefited from large foreign direct investment inflows, mainly into the oil and gas sectors, which have helped Kazakhstan finance its deficit.

However, the report countered, weaknesses in tax collection have allowed the accumulation of arrears, especially on wages, utilities and pensions, equivalent to three percent of GDP.

Kazakhstan, like many other developing and transition nations, has been hit by the turmoil in financial markets in Asia and Russia, says the report. It says Almaty had to sell substantial amounts of foreign exchange, allow its currency, the tenge, to depreciate some at the start of this year, and substantially increase treasury bill yields to get through the worst periods.

The executive directors noted that the "uncertain" external financial environment had already weakened Kazakhstan's external account position, and welcomed the government's keeping the current managed floating exchange rate system to enable it to react quickly to shocks.

Still, the directors "underscored" their concerns that to get through the global financial crises, Almaty will have to be determined in its reform policies and skillful in implementing them.

For example, they emphasized the importance of keeping the budget deficit within the programmed ceiling and of reducing it significantly over the next year.

The Kazakh deficit is unusually high by international standards because of the costs of implementing the country's new pension system, the directors say, and that is understood as an inevitable result of starting this necessary reform.

However, they say, there is some room for further expenditure cuts in the short run, and the government must press ahead quickly to adopt a new tax code and get tax collection revenues moving up. Several directors expressed special concern about continued tax arrears as well as inter-enterprise arrears in Kazakhstan, which risks undermining general economic stability.

The directors expressed concerns about delays in Kazakhstan's privatization program, especially coming from the uncertainty which has emerged in the government's policies toward privatization in the energy sector. The Kazakh government has neither the financial resources nor the technical expertise to fully develop the oil and gas sector on its own, the directors say. They urge the authorities to adopt a liberal stance toward private participation in this sector, including foreign investors.

The directors say Kazakhstan still must implement additional measures to improve the general investment climate in the country, including better governance and transparency in government and business transactions. They say they found Kazakhstan's "slippage" in adhering to its commitments to reduce import tariffs "worrisome" and urged the government to at least adopt the tariff's it has already promised.

The directors praise Kazakhstan for its "bold steps" in replacing the old pension system, but say a shortfall in collection of contributions is of "particular concern." They say it is good the government is not allowing new pension arrears to emerge, but say it is equally as important to get contributions coming into the system and to make sure they are accurately allocated to the individual accounts of participants promptly.