Kasakhstan Social-Economic development

On November 15, 2003 the national currency tenge will celebrate its 10^th anniversary, but work on its introduction has started much earlier.

In 1991 Kazakhstan gained independence and began to carry out market reforms. But the integrated monetary system functioning at that time was quite unsteady. Young states one by one were introducing their own national currencies or temporary ones, which would mean the beginning of the ruble zone breakdown. That is why in 1991-1992 the government of the country together with efforts to preserve the ruble zone was carrying out preparatory work on introduction of own currency.

The introduction of own currency by Russia in July 1993 resulted in actual division between Kazakhstani and Russian ruble and, in spite of signing the agreement in September 1993 with Russia about integration of monetary systems of Russia and Kazakhstan, Russian banknotes of 1993 issue were not introduced on the territory of Kazakhstan.

The State Commission on the National Currency Introduction, established on November 3, 1993, developed the Concept and the Scenario of the national currency introduction, in which the following items were determined: periods, introduction method, questions about delivery of new currency to foreign exchange offices, coefficients and limits on cash exchange, exchange rate regime and other important questions.

International organizations and governments of neighbor countries were promptly notified about the forthcoming event so that legitimating and civilization of the national currency introduction was maintained.

On the eve of the historic date the President of the Republic of Kazakhstan N.A. Nazarbayev addressed to the population through TV and radio with explanations on the forthcoming action.

In order to build a liquid foreign exchange, effective January 1, 1994, 50-percent export proceeds surrender requirement was temporarily introduced for all businesses . In order to satisfy the demand of population for cash foreign exchange a broad network of foreign exchange offices was created, which resulted in complete disappearance of  market of cash foreign exchange.

From its introduction tenge has been a current account convertible currency. As of now, the following goal has been set ?to achieve full convertibility of the currency over time. In July 1996, the restrictions on payments and transfers within short-term transactions were abolished which allowed to create the conditions for convertibility. The freedom of money transfers under foreign investment contracts was guaranteed, a free procedure for conversion and purchase of foreign exchange in the domestic market was introduced for conversion and purchase of foreign exchange by non-residents in the domestic foreign exchange market, individuals were allowed to export a certain amount of foreign exchange without submission of supporting documentation.

The process of exchange relations liberalization has been carried out over 10 years since the introduction of the national currency until present days. At present, the 2003-2004 Exchange Regime Liberalization Program is being implemented. The Program will create preconditions for the shift to the market forms of capital flows regulation. To alleviate the risk emerging for banks, accumulative pension funds, and insurance companies internal systems of risk management will be introduced. A range of measures will be aimed at the improvement in the appropriate effecting of foreign exchange transactions.

Existence of the national currency has allowed the National Bank to implement an independent monetary policy. For the purpose of achievement of the tenge stability the National Bank started carrying out stringent monetary policies. Loans to cover budget deficit and directive loans were no longer extended. Simultaneously the function of extending loans to the economy was fully transferred to second-tier banks.

The National Bank started accomplishing its main task of ensuring the external and internal stability of the national currency ^[2], i.e. maintaining low inflation rates and stable exchange rate. The set of monetary policy instruments was gradually expanding. In addition to the refinance rate, required reserves 9normative and interventions in the domestic foreign exchange market the National Bank began to issue its own securities (short-term notes), carry out open market operations and provide overnight loans. As a result, the inflation rate reduced from 2165% in 1993 to 1.9% in 1998.

The gold and foreign exchange reserves of the National Bank grew more then ten-fold over 10 years and as of September 1, 2003 constituted around USD 4.6 bln. (USD 452 mln. as of the tenge introduction date).

The Act 揙n the National Bank of the Republic of Kazakhstan?of March 1995 contributed to the effectiveness of the monetary policy. According to the Act the National Bank is subordinated to the President and independent in its activities within the limits of the powers conferred by the legislation.

Having been freed from the political pressure, the National Bank started its work on building the effective banking system, concentrating on supervision strengthening and improvement in reliability of commercial banks with the purpose of their future turning to the main channels of internal resources attraction for long-term economy investment. As a result, the transparent and stable banking system secured from the intervention of government bodies was created.

Currently the banking system of Kazakhstan is the most dynamically developing system in the CIS. As of September 1, 2003 there were 35 banks, including 2 state banks, 16 ?with foreign participation (including subsidiaries of banks-non-residents). Starting from 2003 all banks of Kazakhstan operate under international standard for accounting (IAS). Aggregate equity capital of banks was KZT 196.6 bln. (USD 1.3 bln.), aggregate assets ?around KZT 1500 bln. (USD 10 bln.). Around 58% of banking assets are credits to economy.

As a body responsible for regulation of banking system, the National Bank solves the following tasks: depositor protection and raising of population trust in banking system.

Set of important measures was taken to solve the task. Institute of bank secrecy was introduced in March 2000, action on capital legalization was taken in June-July 2001, deposits guarantee system was introduced in 2000. As of September 1, 2003 21 out of 35 banks of Kazakhstan were the members of the deposits guarantee system. The system is constantly improving and its funds are growing steadily. With respect of household deposits per capita (USD 140) Kazakhstan is on the second place (after Russia) among CIS countries.

Alternative for bank crediting is the mortgage refinancing system introduced in 2000. As soon as the Act 揙n Investment Funds?is passed, joint-stock and unit investment funds will be an effective mechanism for mobilization and redistribution of internal savings of population.

Being created three-tier system of crediting allows to provide a broader range of individuals and organizations in different regions with financial services. The system consists of second-tier banks, organizations rendering separate banking services (mostly credit unions), and micro-credit organizations. The development of micro-credit organizations is especially actual at present, as they will allow to expand financing of small businesses.

Postal savings system will also attribute to the expansion of the financial services coverage at the regional level.

To solve social problems in Kazakhstan the two-level mortgage lending system was introduced in 2001. Its first level is represented by primary creditors as banks and non-banking organizations extending mortgage loans, and its upper level ?by the Kazakhstan Mortgage Company, the main goal of which is refinancing of banks on the secondary market.

Housing savings system is more acceptable for population with average incomes to improve housing conditions. According to the system a client accumulates a certain amount of money in the Housing Savings Bank (established in April 2003), and afterwards he or she acquires the right for a loan. At that the government pays an extra premium on deposits in the Housing Savings Bank.

Accumulative pension system created in a short period of time made the highest contribution. As of September 1, 2003 there were 5.9 mln. depositors of the accumulative pension system (or around 80% of economic active population). At present accumulative pension funds are the biggest institutional investors. Pension assets are growing at high rates, and as of September 1, 2003 the assets amounted to KZT 329.1 bln. (8% of GDP).

Developed credit and deposit markets are functioning in the country. As of September 1, 2003 the total volume of residents?deposits was KZT 703.1 bln. (around USD 4.8 bln.). Individual deposits are growing at high rates, and totaled KZT 306.7 bln. (around USD 2.1 bln.). The total volume of credit debt of banks to economy made up KZT 825.7 bln. (around USD 5.6 bln.). Long-term credits to economy are also growing (the proportion accounted for 62.8%). Interest rates are decreasing.

One of the most developed financial sector segments is the government securities market. The market of corporate securities is also growing. As of September 1, 2003 there were 58 emissions of corporate bonds with principal value of KZT 116.9 bln. (3% of GDP) and 3529 emissions of shares with total principal value of KZT 1300 bln. (around 32% of GDP).

Insurance market started developing relatively recently. Though the insurance market has achieved high rates of development, its level does not correspond with the economy needs. As of August 1, 2003 there were 32 insurance companies licensed to operate, including 7 companies with foreign participation and 1 life insurance company. Total assets of insurance organizations constitute KZT 24.4 bln., total equity capital ?KZT 7.8 bln.

Financial sector achievements are the result of regulation and supervision over activities of financial sector agents.

In accordance with the standards of the Basle Committee on Banking Supervision in the beginning of 2001 the National Bank is authorized to carry out consolidated supervision over banking activities.

Based on world experience, an integrated control over all financial institutions is the most effective approach. Therefore, the National Bank was gradually delegated with functions and authorities of the insurance supervision body (1998), the National Securities Commission which controlled the activities of broker companies, pension assets management companies and banks-custodians (2001), the Committee on Accumulative Pension Funds Regulation of the Ministry of Labor and Social Security (2002). Thus, at present time the National Bank plays a key role in regulating the financial market of the country. In January 2004 the supervision functions will be span off into a single agency subordinate to the President of the Republic.

Infrastructure of the financial sector is also highly developed, that is the payments system, the Kazakhstan Stock Exchange, the Kazakhstan Center for Interbank Settlements, the Central Depository of Securities, the Banknote Factory, the Kazakhstan Mint and the Center for Cash Operations & Valuable Storage.

The base for payments system of Kazakhstan are the Interbank System of Money Transfers and the automated System of Retail Payments. These systems provide for timely and smooth interbank settlements in electronic format, maintain correspondent accounts of second-tier banks and other financial organizations rendering separate banking services. International financial organizations highly evaluate the payments system of Kazakhstan which corresponds with almost all principles of the Bank for International Settlements determined for important payments systems.

A significant progress is observed in the development of payment systems servicing plastic cards. The number of payment cards issued by Kazakhstani banks amounts to 1.8 mln. items, i.e. almost 1/4 of economic active population has plastic cards. Today it is possible to pay with plastic cards in almost every restaurant, hotel and in most trade outlets. The Program for creation of the National interbank system of payment cards was adopted. The Program realization will allow to create an integrated payments area on servicing of population and trade enterprises with use of electronic money.

The National Bank attaches a significant importance to the improvement of accounting. Given results of 2002 separate banks are recognized to correspond with international accounting standards as concerns the automation. Starting from January 1, 2003 financial reports in banking, insurance and pension systems, in organizations carrying out separate licensed activities in the securities market are formed in accordance with international standards.

Statistics compiled by the National Bank also meets the international standards. Kazakhstan was the first CIS country to join the IMF system of data dissemination (General Data Dissemination Standard (1999), Special Data Dissemination Standard (March 2003)). Monetary statistics, statistics of balance of payments and statistics of external debt is published on a regular basis in the IMF web-site, published in the official publications of the IMF and the World Bank of Reconstruction and Development and in the official publications of the National Bank.

The main direction for financial market development for a short-term period is the further approaching of its level to the international standards. The Concept on financial sector development stipulates for full approaching of regulation mechanism and supervision over financial market participants, payments system of Kazakhstan and other sectors of financial market to the European Union standards by 2007.

Maximum approaching to the European Union standards in monetary policy will ensure transition to inflation targeting, the main feature of which is rientation to future? and further foreign currency liberalization. By 2007 full convertibility of tenge is planned to achieve, i.e. its current account and capital account convertibility.