…WHILE IMF URGES CAUTION WITH WINDFALLS AND S&P RAISES ITS RATINGS.

The IMF has urged Kazakhstan to use its revenues from the oil and commodity price windfall to reduce the budget deficit. The state budget reported a 19.5 billion tenge surplus in the first half of 2000, equivalent to 2.7 percent of GDP (Reuters, August 2). It appears, therefore, that fiscal policy is very much under control. Kazakhstan has the added benefit of having paid, earlier this year, US$385 million in debt due to the IMF four years ahead of schedule. The country has a further US$400 million IMF facility at its disposal which it has said it has no intention of using. The fact that Kazakhstan met all its payment obligations following the Russian financial crisis (unlike Russia) has also allowed the country to return to international financial markets, as its successful placement of a US$350 million Eurobond in April demonstrated. Borrowing costs for the government should be reduced slightly given the rise in Standard & Poor’s recent upgrade in its ratings of Kazakhstan’s foreign and local currency debt. S&P cited strong exports and prudent fiscal and monetary policies over the past 12 months as reasons for the upgrades. The country’s foreign currency debt went up one notch to “BB-,” three notches below investment grade (Bloomberg, July 28).

On the monetary side, the National Bank of Kazakhstan (NBK) reduced the key refinancing rate in June to 14 percent from 16 percent to make credit more accessible to industry and further boost growth. The NBK took into account inflation levels, falling treasury bond yields, and the demand and supply of credits in making its decision. Since inflation appears to be slowing (to 15 percent year-on-year in May from 18 percent at the end of 1999), rate cuts should not be problematic. Foreign currency reserves at US$1.9 billion at the end of June should also keep the tenge stable. Instead, the NBK had to intervene on the foreign exchange market in August to prevent the tenge from rising due to surging export revenues (Reuters, August 4). Again, stability in macroeconomic balances will be dependent on commodity prices and stability in neighboring countries.

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