Kazakhstan has achieved many of its goals by transforming itself into a market economy, unleashing the productive capacity of its citizens and creating the conditions for the country to benefit from international trade and investment. In addition, it has discovered large quantities of oil reserves that will allow it to sustain a tripling of oil production in the next two decades. The international experience suggests that oil wealth is notoriously difficult to manage. Several elements come in to complicate matters:
- Dutch disease
- Resource curse
The Government of Kazakhstan has stated that one of its priorities is the diversification of its economy. This represents a major challenge in light of the dynamics that oil wealth tends to create. An economic policy that is able to achieve diversification will have to use many of its limited degrees of freedom to achieve it. Hence, all policy instruments should be used.
This report is a collection of policy memos that deal with the choices the government faces going forward in the broad area of macroeconomic policies, including fiscal policy and institutions, monetary and exchange rate arrangements and policies, financial policies, industrial policy, trade policy and broad issues in institutional development.
Oil exporting countries tend to have strong and volatile real exchange rates that conspire against their ability to diversify the economy. Real exchange rate appreciation and its associated Dutch Disease have received ample attention. Less well known is the fact that a recurring feature of oil exporting economies has been a real exchange rate cycle associated with the ups and downs of oil revenues. The central bank and the government can fight what they deem to be unwarranted real appreciation through an arsenal of potential tools that include fiscal contraction, unsterilized intervention, reserve requirements, capital adequacy requirements, requirements on foreign borrowing and the regulation of pension funds.
This memo discusses the determinants of the real exchange rate and discusses alternative options for the choice of monetary regime, such as floating exchange rates, fixed exchange rates, and various alternative nominal anchors for monetary policy (including the currently popular regime of inflation targeting). Two polar cases are rejected, as likely to turn out to be too constraining for Kazakhstan while a newly proposed regime, called Peg the Export Price (PEP) would accomplish the desired shifts in the terms of trade automatically. The goal would be to achieve the benefits of a nominal anchor, and yet remain robust with respect to changes in the terms of trade that an uncertain future could bring.
Exchange rate and monetary policies in a country like Kazakhstan can be guided by many objectives, but there ought to be four priority goals: to provide a nominal anchor for the economy; to insulate the economy as far as possible against foreign nominal shocks, such as inflation in trading partners' economies or sharp movements in the nominal exchange rates of economies with which Kazakhstan is closely associated; to insulate the economy as far as possible against foreign real exchange rate shocks; and to allow the relative price non-tradables to rise as the role of oil in Kazakhstan's economy grows and the economy's purchasing power rises. The previous discussion suggests that a fixed exchange rate (even if the peg is to a basket) and a purely floating exchange rate (with no concern whatsoever for the course of the real exchange rate) are probably inappropriate policies for Kazakhstan. The objectives outlined above could in principle be achieved by one of the two regimes: A crawling exchange rate with wide bands around it or an inflation target married to a managed float. This memo explores these policy options.
Developing countries confront two sorts of growth challenges. The first revolves around the problem of igniting growth. Luckily, this is not Kazakhstan's problem. The economy is growing rapidly and there is a foreign investment boom driven by oil discoveries. The second kind of growth challenge is that of sustaining growth. Comparative experience suggests that sustaining growth is usually harder than igniting it. Kazakhstan must meet this challenge if the country is to converge to the living standards that prevail in the advanced economies. The institutional transformations can be summarized under two headings: (i) institutions that provide resilience to shocks; and (ii) institutions that maintain productive dynamism.
Both in its scope and its achievements, the process of financial sector reform in Kazakhstan over the past few years has been remarkable. A decade of ambitious measures including banking consolidation, the provision of deposit insurance, the establishment of an independent regulator, and pension reform have led to a sharp rise in financial intermediation and a high degree of confidence in the banking system. These accomplishments have fetched rich dividends for the economy. However, recent developments also reveal that further and deeper reforms are required to consolidate and sustain the rapidly expanding financial sector as it seeks to support and facilitate an even larger and more diversified economy. This note examines a selected set of issues within the financial sector of Kazakhstan that might require reform, and makes related recommendations. The main issues that will be addressed in this note are as follows:
- Deposit insurance and the credit boom
- Foreign currency borrowings and reserve requirements
- Pension fund investment options
This memorandum deals with three related issues. The importance of integrating trade policies into Kazakhstan's overall economic strategy; the opportunities created by Kazakhstan's entry into the WTO; and Kazakhstan's regional trading arrangements.
There is a long list of “Institutions” that common sense suggests would help a country grow. However, beyond the obvious (and some exceptions noted below), there is no evidence suggesting that some institutions are better than others. Though, the importance of institutions is a key lesson emerging from the analysis of market reforms in Latin America and Post Soviet economies there is little agreement amongst economists as to which institutions are deemed to be most relevant. Unfortunately, people at the World Bank, Davos, and others have to talk about institutions. This creates the false impression that there is some magic solution out there that countries should adopt. The evidence in favor of decentralization or raising wages to deter corruption – two institutional reforms that Kazakhstan is considering – is not great. In this spirit, Kazakhstan faces a challenging agenda for institutional reform. We must tackle the problem of institutional reform at two distinct conceptual levels: we can think of concrete rules and legislation that contain the workings of the economy - call this, institutions type 1 – or at a more general level, we can think of the belief systems that citizens have as containing the institutions and the market interactions – call this institutions type 2. This memo explores these two institutional types in more depth.