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Dealing with Inflows: Kazakhstan’s Experience, 2004-06 Aasim M. Husain April 2007 Outline Impressive macro performance Volume and types of inflows Outflows Scaling the net inflows Policy responses Lessons Macro Achievements Real GDP growth around 10% or more since 2000 16 14 12 10 8 Construction and services Agriculture and manufacturing Oil 6 4 2 Other 0 GDP growth -2 -4 1999 2000 2001 2002 2003 2004 2005 2006 Per capita quadrupled; unemployment fell 6000 16 14 5000 12 4000 10 3000 8 6 2000 4 1000 2 0 0 1999 2000 2001 2002 2003 2004 2005 GDP per capita (dollars; left scale) Unemployment (percent; right scale) 2006 Social indicators improved 40 36 35 34 30 25 32 20 30 15 10 28 5 0 26 1999 2000 2001 2002 2003 2004 2005 Inequality (GINI index; right) Poverty (share of population with income lower than subissitence level; left) Inflation was tamed 14 (In percent) 12 10 8 6 4 2 0 1999 2000 2001 2002 2003 2004 2005 2006 Confidence in banks improved, dollarization declined 35 70 30 60 25 50 20 40 15 30 10 20 5 10 0 0 1999 2000 2001 2002 2003 2004 2005 2006 Total deposits (In percent of GDP; left) Forex deposits (In percent of total deposits; right) Kazakhstan’s Forex Inflows Types of inflows, 2004-06 Oil export receipts Non-oil exports FDI Bank borrowing Volume of inflows 30 (In billions of dollars) 60 25 50 20 40 15 30 10 20 5 10 0 0 Average 2002-03 Oil exports 2004 2005 Non-oil exports 2006 FDI 2004-06 Cumulative (right scale) Bank borrowing Types of outflows Imports (goods and services) FDI debt amortization Income to direct investors Bank lending abroad Volume of outflows 0 (In billions of dollars) 0 -10 -20 -20 -40 -30 -60 -40 -80 -50 -100 Average 2002-03 2004 2005 Imports of goods and services FDI debt amortization Income to direct investors Bank lending abroad 2006 2004-06 Cumulative (right scale) Net inflows 18 (In billions of dollars) 36 16 32 14 28 12 24 10 20 8 16 6 12 4 8 2 4 0 0 Average 2002-03 2004 2005 2006 2004-06 Cumulative (right scale) Scaling the inflows 25 1400 20 1200 15 1000 10 800 5 0 600 2002-03 (avg.) 2004 2005 2006 2004-06 cumulative (right scale) Net inflows (In percent of GDP) Net inflows (in percent of end-2003 reserve money) Policy Responses Handling the monetary impact Policy: offset through NFRK Other outflows (bank assets, E&O, labor rem.) Result: reserve increase (one half of net inflows) Policy: partial sterilization through: – Issuance of paper – NBK deposit window – Reserve requirements Monetary impact of inflows 5000 (In billions of tenge) 4000 3000 Net inflows 2000 NFRK 1000 0 Other -1000 NIR increas e -2000 -3000 2004 2005 2006 2004-06 Cumulative Monetary response to inflows 2500 (In billions of tenge) 2000 NIR 1500 Paper 1000 500 NBK deposits 0 Required reserves Other -500 Reserve money -1000 -1500 -2000 2004 2005 2006 2004-06 Cumulative Result: rapid money growth 140 120 100 80 60 40 20 0 Jan-02 Jan-03 Jan-04 Bank credit to economy Jan-05 Jan-06 Reserve money Jan-07 Broad money Prudential measures Open forex limits Forex liquidity Tighter classification and provisioning Risks weights for cross-border lending External borrowing limits Exchange rate policy 120 (Index; Jan 2000=100) 115 110 105 100 95 90 85 Jan-00 Jan-01 Jan-02 Dollar/tenge Jan-03 Jan-04 Rouble/tenge Jan-05 Jan-06 REER Jan-07 Tenge: De Facto Flexibility (Proportion of monthly exchange rate changes that were less than +/- 1 percent) 120 110 100 90 80 70 60 50 40 30 20 10 0 Jan-00 Jan-01 Jan-02 1-year centered band Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 6-month centered band Tenge appreciation has helped with inflation 20 (In percent) 18 16 14 12 10 8 6 4 2 0 Jan-02 Jan-03 Jan-04 Inflation w/o appreciation Jan-05 Jan-06 CPI inflation Jan-07 Fiscal policy—saving oil revenue 20 (In percent of GDP) 15 10 5 0 2002 2003 2004 2005 2006 -5 -10 Oil revenue NFRK accumulation Overall surplus 2007 (proj.) Fiscal policy—prudent stance but monetary impact 8 24 6 22 4 20 2 18 0 16 2002 2003 2004 2005 Overall balance (in percent of GDP; left) 2006 2007 (proj.) Expenditure (% change; right) Lessons and Policy Implications Managing the inflows Monetary, exchange rate, prudential, and fiscal policies have played a role But money/credit growth remains very high External indebtedness of banks continues to rise (rapidly) And inflation persisting at a relatively high level Implications for near-term policy mix Further monetary tightening absorb liquidity Further prudential tightening to mitigate risks – Measures to slow external borrowing – Measures to slow credit growth and maintain loan quality Exchange rate appreciation/flexibility – Help with inflation – Remove one-way bet to facilitate flexibility – Which should reduce speculative inflows These steps needed to permit the planned fiscal easing without pushing up inflation