dealing with inflows: kazakhstan’s experience, 2004-06 aasim m. husain april 2007

Dealing with Inflows:Dealing with Inflows:Kazakhstan’s Experience, 2004-06Kazakhstan’s Experience, 2004-06

Aasim M. HusainAasim M. Husain

April 2007April 2007

OutlineOutline

Impressive macro performanceImpressive macro performance Volume and types of inflowsVolume and types of inflows OutflowsOutflows Scaling the net inflowsScaling the net inflows Policy responsesPolicy responses LessonsLessons

Macro AchievementsMacro Achievements

Real GDP growth around 10% or more since Real GDP growth around 10% or more since 20002000

-4

-2

0

2

4

6

8

10

12

14

16

1999 2000 2001 2002 2003 2004 2005 2006

Constructionand servicesAgriculture andmanufacturingOil

Other

GDP growth

Per capita quadrupled; unemployment fellPer capita quadrupled; unemployment fell

0

1000

2000

3000

4000

5000

6000

1999 2000 2001 2002 2003 2004 2005 2006

0

2

4

6

8

10

12

14

16

GDP per capita (dollars; left scale)Unemployment (percent; right scale)

Social indicators improvedSocial indicators improved

0

5

10

15

20

25

30

35

40

1999 2000 2001 2002 2003 2004 200526

28

30

32

34

36

Inequality (GINI index; right)

Poverty (share of population with income lower than subissitence level; left)

Inflation was tamedInflation was tamed

0

2

4

6

8

10

12

14

1999 2000 2001 2002 2003 2004 2005 2006

(In percent)

Confidence in banks improved,Confidence in banks improved,dollarization declineddollarization declined

0

5

10

15

20

25

30

35

1999 2000 2001 2002 2003 2004 2005 2006

0

10

20

30

40

50

60

70

Total deposits (In percent of GDP; left)

Forex deposits (In percent of total deposits; right)

Kazakhstan’s Forex InflowsKazakhstan’s Forex Inflows

Types of inflows, 2004-06Types of inflows, 2004-06

Oil export receiptsOil export receipts Non-oil exportsNon-oil exports FDIFDI Bank borrowingBank borrowing

Volume of inflowsVolume of inflows

0

5

10

15

20

25

30

Average2002-03

2004 2005 2006 2004-06Cumulative(right scale)

0

10

20

30

40

50

60

Oil exports Non-oil exports FDI Bank borrowing

(In billions of dollars)

Types of outflowsTypes of outflows

Imports (goods and services)Imports (goods and services) FDI debt amortizationFDI debt amortization Income to direct investorsIncome to direct investors Bank lending abroadBank lending abroad

Volume of outflowsVolume of outflows

-50

-40

-30

-20

-10

0

Average2002-03

2004 2005 2006 2004-06Cumulative(right scale)

-100

-80

-60

-40

-20

0

Imports of goods and servicesFDI debt amortizationIncome to direct investorsBank lending abroad

(In billions of dollars)

Net inflowsNet inflows

0

2

4

6

8

10

12

14

16

18

Average2002-03

2004 2005 2006 2004-06Cumulative(right scale)

0

4

8

12

16

20

24

28

32

36(In billions of dollars)

Scaling the inflowsScaling the inflows

0

5

10

15

20

25

2002-03(avg.)

2004 2005 2006 2004-06cumulative(right scale)

600

800

1000

1200

1400

Net inflows (In percent of GDP)

Net inflows (in percent of end-2003 reserve money)

Policy ResponsesPolicy Responses

Handling the monetary impactHandling the monetary impact

Policy: offset through NFRKPolicy: offset through NFRK Other outflows (bank assets, E&O, labor rem.)Other outflows (bank assets, E&O, labor rem.)

Result: reserve increase (one half of net Result: reserve increase (one half of net inflows)inflows)

Policy: partial sterilization through:Policy: partial sterilization through:– Issuance of paperIssuance of paper– NBK deposit windowNBK deposit window– Reserve requirementsReserve requirements

Monetary impact of inflowsMonetary impact of inflows

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

2004 2005 2006 2004-06Cumulative

Netinflows

NFRK

Other

NIRincrease

(In billions of tenge)

Monetary response to inflowsMonetary response to inflows

-2000

-1500

-1000

-500

0

500

1000

1500

2000

2500

2004 2005 2006 2004-06Cumulative

NIR

Paper

NBKdeposits

Requiredreserves

Other

Reservemoney

(In billions of tenge)

Result: rapid money growthResult: rapid money growth

0

20

40

60

80

100

120

140

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

Bank credit to economy Reserve money Broad money

Prudential measuresPrudential measures

Open forex limitsOpen forex limits Forex liquidityForex liquidity Tighter classification and Tighter classification and

provisioningprovisioning Risks weights for cross-border Risks weights for cross-border

lendinglending External borrowing limitsExternal borrowing limits

Exchange rate policyExchange rate policy

85

90

95

100

105

110

115

120

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

Dollar/tenge Rouble/tenge REER

(Index; Jan 2000=100)

Tenge: De Facto FlexibilityTenge: De Facto Flexibility(Proportion of monthly exchange rate (Proportion of monthly exchange rate changes that were less than +/- 1 changes that were less than +/- 1 percent)percent)

01020

30405060

708090

100

110120

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

1-year centered band 6-month centered band

Tenge appreciation has helped with Tenge appreciation has helped with inflationinflation

0

2

4

6

8

10

12

14

16

18

20

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

Inflation w/o appreciation CPI inflation

(In percent)

Fiscal policy—saving oil revenueFiscal policy—saving oil revenue

-10

-5

0

5

10

15

20

2002 2003 2004 2005 2006 2007 (proj.)

Oil revenue NFRK accumulation Overall surplus

(In percent of GDP)

Fiscal policy—prudent stance but Fiscal policy—prudent stance but monetary impactmonetary impact

0

2

4

6

8

2002 2003 2004 2005 2006 2007(proj.)

16

18

20

22

24

Overall balance (in percent of GDP; left) Expenditure (% change; right)

Lessons and Policy ImplicationsLessons and Policy Implications

Managing the inflowsManaging the inflows

Monetary, exchange rate, Monetary, exchange rate, prudential, and fiscal policies have prudential, and fiscal policies have played a roleplayed a role

But money/credit growth remains But money/credit growth remains very highvery high

External indebtedness of banks External indebtedness of banks continues to rise (rapidly)continues to rise (rapidly)

And inflation persisting at a And inflation persisting at a relatively high levelrelatively high level

Implications for near-term policy mixImplications for near-term policy mix

Further monetary tightening absorb liquidityFurther monetary tightening absorb liquidity Further prudential tightening to mitigate Further prudential tightening to mitigate

risksrisks– Measures to slow external borrowingMeasures to slow external borrowing– Measures to slow credit growth and maintain loan Measures to slow credit growth and maintain loan

qualityquality Exchange rate appreciation/flexibilityExchange rate appreciation/flexibility

– Help with inflationHelp with inflation– Remove one-way bet to facilitate flexibilityRemove one-way bet to facilitate flexibility– Which should reduce speculative inflowsWhich should reduce speculative inflows

These steps needed to permit the planned These steps needed to permit the planned fiscal easing without pushing up inflationfiscal easing without pushing up inflation