Document of The World Bank Report No: ICR00004236 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-85530) ON A LOAN IN THE AMOUNT OF US$ 1 BILLION TO THE REPUBLIC OF KAZAKHSTAN FOR THE FIRST MACROECONOMIC MANAGEMENT AND COMPETITIVENESS PROGRAMMATIC DEVELOPMENT POLICY LOAN November 23, 2017 Macroeconomics and Fiscal Management Global Practice Central Asia Country Management Unit Europe and Central Asia Region REPUBLIC OF KAZAKHSTAN Government Fiscal Year January 1 – December 31 Currency Equivalents (Exchange Rate Effective as of November 1, 2017) Currency Unit = Kazakhstani Tenge (KZT) US$1.00 = 334.71 KZT Weights and Measures Metric System Abbreviations and Acronyms BEPS Base erosion and profit shifting CPS Country Partnership Strategy DPL Development Policy Loan EAEU Eurasia Economic Union FDI Foreign direct investment GFS Government Financial Statistics GoK Government of Kazakhstan JERP Joint Economic Research Program ICR Implementation Completion and Results report IFRS International Financial Reporting Standard KIDI Kazakhstan Industry Development Institute MCI Monthly calculation index M&E Monitoring and evaluation NBK National Bank of Kazakhstan NFRK National Fund of the Republic of Kazakhstan NPLs Non-performing loans OECD Organisation for Economic Co-operation and Development PDOs Program development objectives RAS Reimbursable advisory service RIA Regulatory impact assessment SK Samruk-Kazyna, JSC SMEs Small and medium-sized enterprises SOEs State-owned enterprises SPIID State Program for Industrial and Innovative Development SPV Special-purpose vehicle TSA Targeted social assistance VAT Value-added tax WTO World Trade Organization Senior Global Practice Director: Carlos Felipe Jaramillo Practice Manager: María De los Angeles González-Miranda Project Team Leaders: Christos Kostopoulos and Sona Varma ICR Team Leader: Ilyas Sarsenov REPUBLIC OF KAZAKHSTAN THE FIRST MACROECONOMIC MANAGEMENT AND COMPETITIVENESS DPL CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring 1. Program Context, Development Objectives and Design ............................................ 1 2. Key Factors Affecting Implementation and Outcomes .............................................. 6 3. Assessment of Outcomes ............................................................................................ 8 4. Assessment of Risk to Development Outcome ......................................................... 24 5. Assessment of Bank and Borrower Performance ..................................................... 25 6. Lessons Learned........................................................................................................ 27 7. Comments on Issues Raised by Borrower ................................................................ 27 Annex 1. Bank Lending and Implementation Support/Supervision Processes............. 28 Annex 2. Summary of Borrower's Inputs and Comments to the Draft ICR ................. 30 Data Sheet A. BASIC INFORMATION Kazakhstan Programmatic Country: Kazakhstan Program Name: Development Policy Financing Program ID: P154702 L/C/TF Number(s): IBRD-85530 ICR Date: 11/23/2017 ICR Type: Core ICR REPUBLIC OF Financing Instrument: DPL Borrower: KAZAKHSTAN Original Total USD 1,000.00M Disbursed Amount: USD 1,000.00M Commitment: Revised Amount: USD 1,000.00M Implementing Agencies: Ministry of National Economy Cofinanciers and Other External Partners: Not Applicable B. KEY DATES Revised / Process Date Process Original Date Actual Date(s) Concept Review: 03/26/2015 Effectiveness: 12/31/2016 Appraisal: 10/02/2015 Restructuring(s): Approval: 11/03/2015 Mid-term Review: Closing: 12/31/2016 12/31/2016 C. RATINGS SUMMARY C.1 Performance Rating by ICR Outcomes: Moderately satisfactory Risk to Development Outcome: Moderate Bank Performance: Satisfactory Borrower Performance: Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Implementing Quality of Supervision: Satisfactory Satisfactory Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance: Performance: iii C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Rating Performance any) Potential Problem Program No Quality at Entry (QEA): None at any time (Yes/No): Problem Program at any Quality of Supervision No None time (Yes/No): (QSA): DO rating before Closing/Inactive status: D. SECTOR AND THEME CODES Original Actual Sector Code (as % of total Bank financing) Public Administration Central Government (Central Agencies) 45 45 Financial Sector Banking Institutions 11 11 Industry, Trade and Services Other Industry, Trade and Services 44 44 Theme Code (as % of total Bank financing) Economic Policy Economic Growth and Planning 6 6 Migration, Remittances and Diaspora 6 6 Engagement Fiscal Policy 24 24 Fiscal sustainability 6 6 Public Expenditure Policy 6 6 Subnational Fiscal Policies 6 6 Tax policy 6 6 Macro-financial policies 18 18 External Finance 6 6 Macroeconomic Resilience 6 6 Monetary and Credit Policies 6 6 Finance iv Financial Stability 11 11 Financial Sector oversight and policy/banking 11 11 regulation&restructuring Human Development and Gender Labor Market Policy and Programs 6 6 Labor Market Institutions 6 6 Private Sector Development Business Enabling Environment 22 22 Regulation and Competition Policy 22 22 Jobs 6 6 Youth Employment 6 6 Public Sector Management Rule of Law 11 11 Legal Institutions for a Market Economy 11 11 E. BANK STAFF Positions At ICR At Approval Vice President: Cyril E. Muller Cyril E. Muller Country Director: Lilia Burunciuc Saroj Kumar Jha Practice Manager/Manager: María De los Angeles González-Miranda Miria Pigato Christos Kostopoulos and Program Team Leader: Ilyas Sarsenov Sona Varma ICR Team Leader: Ilyas Sarsenov ICR Primary Author: Aristomene Varoudakis F. RESULTS FRAMEWORK ANALYSIS Program Development Objectives (from Project Appraisal Document) The objective of the proposed DPL is to support the Government of Kazakhstan to implement reforms that: (i) strengthen the sustainability of the macroeconomic framework while protecting the vulnerable; and (ii) help improve competitiveness of the non-oil economy. Revised Program Development Objectives (if any, as approved by original approving authority) Not Applicable v (a) PDO Indicator(s) Original Actual Value Target Values Formally Revised Achieved at Indicator Baseline Value (from Target Values Completion or approval Target Years documents) Non-oil deficit (percent of No larger than 8.6 (1) (2017 10.5 (2014) - GDP) 9 (2017) estimate) Increase of 42 Non-oil revenue of the State 4,649.4 billion Increase of 24 - percent (2017 budget tenge (2014) percent (2017) estimate) Share of persons covered by the active forms of employment support to More than 50 34 (2015) - 89 (2017 estimate) eligible employable (2017) recipients of targeted social support (percent) 10 percent 90 percent Lowering the volatility of 100 (2015) reduction - reduction (first half the money market rates (2017) of 2017) Number of corporate rehabilitation cases initiated 298 (2016) and 13.2 in calendar year, and the 43 and 2 percent 200 and 10 - percent (first 8 percentage of total (2014) percent (2017) months of 2017) corporate bankruptcies which they represent Weighted average Tier-1 to 15 percent 16 percent (as of risk-weighted assets of the 13.2 percent (2014) - (2017) September 2017) banking system 6 (to be developed Number of Cluster after government Development Actions Plans None (2014) 2 (2017) - approval of conducted clusters) Improved performance on the Citizen Engagement in 3.0 (2014) 3.5 (2017) - 4.6 (2017) Rulemaking indicators (on a scale from 0-6) Number of recommendations of the Competition Commission implemented by the Government following the subsidiarity methodology to 26 (as of first half None (2014) 4 (2017) - guarantee that SOEs limit of 2017) their role to the provision of goods and services that could not otherwise be provided by the private sector Note: (1) exluding one-off transfers. vi (b) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised Target approval Completion or Values documents) Target Years Not Applicable G. RATINGS OF PROJECT PERFORMANCE IN ISRs Actual Date ISR No. GEO IP Disbursements Archived (USD millions) 01 08/01/2017 Satisfactory Satisfactory 1000.00 H. RESTRUCTURING (IF ANY) Not Applicable vii 1. Program Context, Development Objectives and Design 1.1 Context at Appraisal The Macroeconomic Management and Competitiveness Development Policy Loan (DPL) was designed as the first operation in a programmatic series of DPLs to the Republic of Kazakhstan. The World Bank’s Board approved the loan on November 3, 2015. As further explained below, the second DPL in the programmatic series was cancelled in July 2017. This Implementation Completion and Results report (ICR) evaluates therefore the first DPL as a stand-alone operation. The operation was initiated at a time when Kazakhstan was adjusting to the sharp decline in oil prices. In 2010-14, during the rebound from the 2009 global financial crisis, when oil prices averaged US$102 per barrel, the Government of Kazakhstan (GoK) was able to reduce the tax burden on the private sector, expand the role of the state sector, and more than double the FX assets of the Oil Fund, the National Fund of the Republic of Kazakhstan (NFRK), from US$31 billion to US$73 billion. But high oil prices also served to delay structural reforms. The drop in oil prices in 2014 and 2015, which resulted in a halving of Kazakhstan’s export and fiscal revenues, showed that the fiscal deficit and well as the state-owned enterprise (SOE) sector were not sustainable and could not adjust quickly. At the same time, in 2014 Russia’s economy almost stopped growing and China’s growth had also begun to slow. Both developments hit Kazakhstan’s exports. As a result, Kazakhstan’s GDP growth slowed to 4.2 percent in 2014 and to 1.2 percent in 2015. Moreover, 2015 was the first year since 2009 when Kazakhstan posted twin, external current account and fiscal, deficits. The twin deficits meant that the tenge’s peg to the US dollar was unsustainable. From mid- 2014 through mid-2015 the National Bank of Kazakhstan (NBK) spent more than US$30 billion of foreign exchange reserves defending the exchange rate. Lower oil revenues also threatened the sustainability of the SOE sector, as key SOEs depend on oil revenues to service external debt and benefit from budget transfers to implement state programs.1 Additionally, the oil price drop exposed the weight of unresolved non-performing loans (NPLs) issues in the banking sector, which presented solvency risks but also hampered lending to the economy. The Government reacted to the macroeconomic developments in 2014 and early 2015 with a three-pronged strategy: • First, on the fiscal front, it launched a counter-cyclical support program, and, at the same time, initiated a fiscal adjustment aimed at medium-term consolidation. a) The counter-cyclical support consisted of two economic support programs funded from an exceptional drawdown from the NFRK and additional foreign borrowing. The ‘One trillion tenge’ program (approximately US$6.2 billion) 1 SOEs’ assets represent about a half of Kazakhstan’s annual GDP and the SOE sector employs more than 30 percent of labor force. 1 launched in 2014, stretched to 2015 and included funds for the resolution of NPLs and support to the business sector (SMEs and SOEs). The second support program, known as Nurly Zhol (of more than US$9 billion), included significant infrastructure investments, support to social sectors (including housing), and support to the business sector. b) In early 2015, the Government reduced its reference oil price for the planned 2015 budget (from US$80 to US$50 per barrel), forcing a containment of the budget, and went through a re-prioritization of capital expenditures. • Second, in August 2015, the NBK introduced a new monetary policy framework, with inflation-targeting principles, along with the adoption of a flexible exchange rate. The purpose of floating the tenge was to improve macroeconomic sustainability through absorbing the negative impact of the external shocks. • Third, in May 2015, the Government launched a broad-based institutional reform program “One Hundred Concrete Steps: Modern State for All”. The program encompassed reforms in public administration, the regulatory framework, public finance management and accountability, management of the SOE sector, sectoral reforms, with the aim of strengthening governance and reducing the role of the state in the economy. A privatization program was also introduced. Overall, the support extended to the economy, the SOEs, and the financial sector had a direct impact on the non-oil deficit of the consolidated budget, which increased to 12.7 percent of GDP in 2015 from about 8.8 percent of GDP during the period of high oil prices 2010-13. At the same time, the resources transferred from the NFRK rose from US$11 billion in 2013 to US$13.5 billion in 2014 and to almost US$16 billion in 2015, far exceeding the annual (regular) guaranteed transfer to the budget of US$8 billion. The Government financed a large part of the anti-crisis program in 2014 and 2015 from external sources. Two Eurobond sovereign issues took place in 2014 and 2015 of US$4.0 billion and US$2.5 billion, respectively. The programmatic series of the two DPLs, for an amount of US$1.0 billion for each operation, responded to the Government’s request for financing, addressed to the Bank on December 26, 2014. These loans were to be complemented by an ADB loan of US$1.0 billion. The DPL program was appraised in September 2015 and negotiated in October 2015. The DPL was underpinned by policy reform measures that drew directly on the Government’s three-pronged strategy to adjust to the crisis. It was also fully aligned with the Country Partnership Strategy (CPS) for 2012-2017, approved in March 2012. The CPS supports government priorities to improve competitiveness and foster job creation; strengthen governance and public services; and ensure development is environmentally sustainable. The CPS’s main instrument to support the government’s program is a set of programmatic knowledge products and capacity building complemented by selective investment projects in strategic high-impact areas. The CPS includes the possibility of deploying development policy lending to counter external shocks to the economy. 2 1.2 Original Program Development Objectives (PDO) and Key Indicators The DPL was designed to reflect the Government’s priorities, as stated in the Kazakhstan 2050 strategy, as well as initiatives to secure macroeconomic stability, stimulate private sector investment, and bolster the stability of the financial sector. The PDO of the operation were to support the Government to implement reforms that: (i) strengthen the sustainability of the macroeconomic framework while protecting the vulnerable; and (ii) help improve competitiveness of the non-oil economy. The PDOs of the DPL were aligned with the CPS objectives of securing macro-economic stability and sustainability and promoting competitiveness of the economy. The results framework of the DPL included a vast array of outcome indicators covering the main policy areas of the operation: (i) the non-oil fiscal deficit in percent of GDP; (ii) the non- oil, non-mineral revenue of the state budget; (iii) the number of persons covered by the active forms of employment support as a share of eligible employable recipients of targeted social support; (iv) the volatility of money market interest rates; (v) the number of corporate rehabilitation cases and the percentage of total annual corporate bankruptcies that they represent; (vi) the capital adequacy ratio of the banking system; (vii) the number of cluster development action plans conducted; (viii) the performance of the Citizen Engagement in Rulemaking indicators; and (ix) the number of recommendations of the Competition Commission implemented by the Government. Based on the lessons from the 2010 single-tranche DPL, the operation was designed as the first in a programmatic series of two DPLs, with the aim of improving the Bank’s ability to support a sustained program of reforms. As such, the results framework also included a set of 10 triggers for the follow-up operation. These triggers were to be achieved by July 2016. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification There were no changes in the PDOs and the results framework of the DPL. 1.4 Original Policy Areas Supported by the Program The DPL supported a reform program under two pillars, corresponding to the operation’s PDOs. The first pillar of the DPL included fiscal consolidation measures as well as steps to enhance transparency of budget formulation, revenue mobilization measures, and the rollout of an enhanced social protection strategy. Enhanced macroeconomic stability was appropriately seen as an anchor to private sector competitiveness and sustainability. The second pillar focused on a range of measures to promote private sector development, including financial sector reforms, measures to improve regulatory governance, the business environment and steps to rationalize the role and improve the governance of the large public sector in Kazakhstan. Sustained development of the private sector was seen as a precondition for job creation and shared prosperity. All of the nine prior actions of the DPL were fulfilled by the Government upon approval of the operation by the World Bank’s Board (Table 1). 3 Table 1. DPL Prior Actions Prior Actions Status Pillar 1: Strengthen sustainability of the macroeconomic framework while protecting the vulnerable 1. The GoK has made the following fiscal adjustments: (a) revised the 2015 Republican Budget expenditures and gross lending downwards by almost 8 percent from 7,855.1 to 7,244.5 billion tenge, to avoid an excessive widening of the non-oil deficit; (b) amended its Guidelines for the Preparation of the Medium-Term Macroeconomic and Fiscal Framework, so that the definition of the Fulfilled non-oil deficit more accurately measures the fiscal stance by: (a) comprehensively covering the consolidated budget (comprising the Republican Budget, regional budgets, and the NFRK); and (b) properly including customs duty on oil exports as an oil revenue item. 2. The GoK submitted to the Parliament for approval draft legislation aiming to increase non-oil revenues by reducing the VAT registration threshold for VAT payers from an annual turnover of approximately Fulfilled 30,000 Monthly Calculation Index (MCI) equivalent to 3,234 MCI equivalent. 3. The NBK undertook the following actions in accordance with the Monetary Policy of the Republic of Kazakhstan to 2020: (a) adopted a floating exchange rate regime; (b) adopted a new policy interest rate in the process of transitioning to inflation targeting; and, Fulfilled (c) submitted to the Parliament for approval a draft law, which regulates the adoption of the rules of conducting open market operations for effective monetary policy management. Pillar 2: Enhancing the competitiveness of the non-oil economy 4. The GoK enacted legislation to establish the legal framework for corporate insolvency that: (i) establishes a strong corporate insolvency legal framework; and, (ii) enables the implementation of the corporate insolvency framework, which: (a) provides for reimbursement of taxes owed by the insolvent corporations and costs of bankruptcy administration; (b) establishes the rights of bankruptcy administrators in the context of cameral Fulfilled control activities in rehabilitation and bankruptcy; (c) establishes the basis for a bankruptcy administrator’s accountability for violations and sanctions; (d) establishes minimum payouts to a bankruptcy administrator; (e) sets up the registration of bankruptcy administrators; and (f) establishes the rights and procedures for carrying out electronic auction of seized assets. 4 Prior Actions Status 5. The NBK issued revised prudential norms and accounting requirements that improve the risk management of banks by: (a) amending the NBK Board Regulation No. 358 to revise risk weights toward alignment with Basel III, increase authorized capital of banks, and require banks to form conservation capital buffers; and, Fulfilled (b) issuing the NBK Board Regulation No. 256 to require banks to align with the International Financial Reporting Standard (IFRS) 13 for market-based, fair-value disclosure, and to call for more consistent, frequent, and electronically documented valuations of collateral. 6. In line with WTO commitments, the GoK submitted to the Parliament amendments to national legislations to limit the minimum amount of Fulfilled local content in works and services. 7. The Ministry of National Economy introduced mechanisms of regulatory impact assessment through: (a) adoption of rules on conducting regulatory impact analysis; and, (b) establishment of a regulatory oversight unit located in the Ministry of Fulfilled National Economy with allocated positions reflecting adequate staffing. 8. The GoK strengthened its competition policy framework by: (a) amendments to the existing anti-cartel enforcement provisions in the Competition Law and the Code on Administrative Offenses; Fulfilled (b) adoption of market definition techniques that include relevant market criteria. 9. The GoK approved the “Corporate Governance Code of Samruk- Kazyna”, consistent with good international practice. Fulfilled 1.5 Revised Policy Areas There were no changes in the policy areas supported by the DPL. 1.6 Other significant changes There were no changes in the operation’s design, scope, scale, implementation arrangements, and funding allocations. The loan amount was disbursed in June 2016 further to the Bank’s review of the macroeconomic framework, which was found adequate for disbursement, and to the satisfactory review of progress in the implementation of the reform program supported by the operation. However, the second operation in the programmatic DPL series did not materialize as initially expected by June 2016 and was cancelled by the World Bank in July 2017. The anti-crisis program implemented by the Government in 2014 and 2015, partly financed from external sources, led to an escalation of Kazakhstan’s foreign debt burden. The depreciation of the tenge, as a result of its floating, also contributed to increasing the burden of foreign debt. Total 5 debt rose from about 10 percent to 20 percent of GDP, while the share of foreign debt increased to 50 percent, posing risks owing to the floating of the exchange rate. At the same time, in 2016, Kazakhstan’s sovereign credit rating was downgraded (see section 3.2.a). These developments led the Government to rethink its debt policy, towards substituting domestic debt to foreign debt. The whole IBRD pipeline portfolio was impacted by this change, which eventually led to the cancellation of the second DPL. 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance The DPL program was delivered in a timely manner and funds were fully disbursed in June 2016. Disbursement was contingent on a satisfactory medium-term macroeconomic framework and satisfactory progress on the reform agenda, which has been the case throughout the effectiveness period of the operation. 2.2 Major Factors Affecting Implementation: The DPL supported the ongoing reform agenda of the Government, which is driven by the development vision laid out in the development strategy Kazakhstan 2050 and its related implementation programs. The development strategy and reform programs were developed in consultation with the private sector and civil society at the regional and city levels. Generally, government representatives provided regularly information and updates about economic developments, intended reforms or programs and results. For example, the President announced major changes in macro-fiscal and budgetary policies, with the Minister of National Economy and Minister of Finance providing further information and details. This improved the understanding of the reform program, a significant part of which was supported by the DPL, and facilitated its implementation. The Government also maintained a regular dialogue with the Chamber of Commerce and foreign direct investors to hear their perspectives on current economic developments and their impact on the private sector activities and proposals for reform. The design of the DPL built on the rich knowledge base resulting from a series of reimbursable advisory service (RAS) activities under the Joint Economic Research Program (JERP), a knowledge building activity implemented by the World Bank for the Government of Kazakhstan. The identification of prior actions was informed by existing analytical work. The design of the DPL also benefited from the lessons learned from the 2010 DPL. The 2010 operation highlighted that in the absence of a second DPL operation, the engagement that characterized the Bank-government relationship at the height of the crisis was not sustained. The 2015 DPL supported a set of two programmatic operations, to ensure that a number of key reforms on macro management and competitiveness are appropriately implemented and followed through. As already noted, the increase in foreign indebtedness led the Government to revise its debt policy, which eventually led to the cancelation of the second operation in the DPL series. Although this could have affected the implementation of the reform program supported by the DPL, the Government’s firm commitment to the reforms undertaken, especially for fiscal sustainability and macroeconomic management, ensured a continuation of 6 progress on the reform agenda. In some areas, however, such as in competition policy and banking system reform (see below), the commitment to reforms lost momentum. The World Bank collaborated closely with the IMF and ADB during the preparation of the operation. In Kazakhstan, the IMF performs annual article IV economic surveillance and analysis. Also, it provided technical assistance to the NBK on monetary policy issues, especially on the implementation of inflation targeting—a policy area supported by the DPL. The World Bank team discussed the macro-economic framework and the content of the first pillar of the operation with the IMF team at length. It also kept regular contact with the ADB, which had received a similar request for financial support from the Government. The policy content of the DPL series was coordinated with the ADB, which had approved a US$1 billion loan for Kazakhstan in August 2015. The design of the operation was properly focused on two key policy areas critical for macroeconomic stability— (i) medium-term fiscal consolidation and comprehensiveness of the budget; and, (ii) support to the implementation of the inflation targeting framework. Measures in these two areas were realistic and properly anchored in the Government’s policy priorities. Measures to strengthen the banking system involved the improvement of insolvency legislation and of the prudential norms of the banking system. In this area the commitment to reform was probably overestimated, as progress has been slower than expected (see below). Similarly, on competition policy the commitment to implement an ambitious reform agenda was weaker than initially expected. When appraising the operation the Bank team correctly identified: (i) macroeconomic; and, (ii) capacity and implementation risks. • The macroeconomic risk was rated substantial as Kazakhstan was experiencing a difficult adjustment to the large oil shock and the slowdown of its main trade partners, Russia and China. The authorities responded through fiscal consolidation and exchange rate flexibility. However, there was significant risk that, in the short run, the fiscal adjustment could cause an economic slowdown, while tenge depreciation in the wake of the float of the currency could lead to higher inflation. Mitigation mechanisms of the effects of the adjustment included Government measures to increase wages for health and education workers, higher social benefits for the vulnerable groups, and control of prices of some basic food products. Stronger prudential regulation was expected to mitigate the systemic impacts of some banks’ asset deterioration as a result of the depreciation of the tenge. Close work with the Government and the IMF, to provide support as needed on economic management, was seen as another mitigating factor of this risk. • The institutional capacity of implementation and sustainability risk was also rated as substantial. Despite progress, the varied quality of institutions was seen as a factor affecting the capacity to implement complex reforms. It was recognized that the DPL reform program spans several ministries where capacity is sometimes limited. A risk that delays would occur in reform implementation was clearly identified. Technical assistance and capacity building provided by the Bank through the Joint Economic 7 Research Program as well as capacity-building projects was seen as partly mitigating this risk. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: M&E design. The DPL included in the policy matrix end-program result indicators for prior actions. The matrix did not propose interim results indicators. Result indicators matched the availability of statistics provided by the Government and other publicly available sources of information. The design of the result indicators was generally appropriate to monitor progress toward the PDOs. In a few cases, however, more accurate indicators could have been sought. In particular, non-oil fiscal revenue in percentage of GDP would have been a more appropriate indicator than the nominal amount of non-oil revenue. The increase in inflation caused by the depreciation of the exchange rate of the tenge artificially boosted nominal non-oil fiscal revenue and contributed to meeting the end-program target despite the postponement of the VAT reforms envisaged in the program. M&E implementation. The Bank agreed with the Government on monitoring arrangements that included an assessment of the macroeconomic framework and of progress towards the reform agenda, based on the policy matrix and the Letter of Development Policy. The Ministry of National Economy was responsible for the coordination, monitoring, and ensuring completion of the prior actions supported by the DPL. In addition, the Ministry of Finance set up an inter-governmental working group, including the NBK, which was coordinating the reform program. The NBK was responsible for actions regarding monetary policy. M&E utilization. The Government adopted the non-oil deficit, as defined by the results indicator of the DPL, as its main target for fiscal management. The new target, based on the IMF Government Financial Statistics (GFS) principles, consolidates the budgets at different levels of government and excludes the customs duty on oil export from the definition of non- oil revenue. The Government has also been using the number of corporate rehabilitation cases as an indicator for the efficiency of the corporate insolvency framework. 2.4 Expected Next Phase/Follow-up Operation: No follow-up DPL operation is envisaged further to the cancellation of the second DPL in the programmatic series. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The relevance of objectives, design and implementation to current country priorities and Bank assistance strategy is high: • The objective of strengthening the sustainability of the macroeconomic framework while protecting the vulnerable is highly relevant in view of the significant drop of oil 8 prices and the increase in the poverty rate due to a decline in the growth rate.2 The objective of improving the competitiveness of the non-oil economy is also highly relevant in view of the need to diversify the economy and ignite new growth engines in the context of low oil prices. • The design of the reform program supported by the DPL was highly relevant as the prior actions included in the program were key to achieving the objectives of sustainability of the macroeconomic framework and improving the competitiveness of the non-oil economy. The selected outcome indicators and targets were also relevant and matched the expectations of the Government. • The implementation of the operation was relevant as the DPL provided critical substance to the objectives set by the Government in the areas of intervention— especially in fiscal management, inflation targeting, targeted social assistance programs, development of territorial clusters, and corporate governance of SOEs. The DPL and parallel Bank activities helped design, implement, and monitor the Government’s reform agenda in these areas. 3.2 Achievement of Program Development Objectives PDOs were achieved to a large extent and most targeted outcomes and outputs were delivered. Kazakhstan stayed the course on most fronts of the reform agenda supported by the DPL, and by mid- or end-2017 it had met most of the operation’s outcome indicators or was well on track to reach them. Progress in the implementation of the reform program supported by the DPO and the achievement of the targets of the program is reviewed below. (a) Macroeconomic Performance and the Policy Framework Since the approval of the DPL in November 2015 Kazakhstan has continued to experience difficulties due to the continuing weakness of oil prices. However, the macroeconomic framework remained adequate in 2016-2017, underpinned by two major policy shifts: (i) the shift to a flexible exchange rate regime and to inflation targeting; and, (ii) the medium-term fiscal adjustment initiated in March 2015 in parallel with the 2014-15 stimulus package financed with one-off transfers from the NFRK. Both the shift to inflation targeting and the planned medium-term fiscal adjustment were supported by the prior actions of the DPL (see next section). In 2015-16, falling export oil prices led to a large terms-of-trade shock and a decline in domestic demand, while China’s growth slowed further and Russia’s recession continued, dampening external demand. Real GDP growth slowed down to nearly 1 percent in 2015 and 2016, but is projected to pick up to 3,7 percent in 2017 (Table 2). This reflects a better than expected oil sector performance in 2017, driven by the commissioning of the Kashagan oil 2 The poverty rate (measured at the international poverty line of US$5 PPP per day) rose to an estimated 19.8 percent in 2016, up from 19.5 percent in 2015 and 16.1 percent in 2014. 9 field and higher oil prices.3 Improved consumer confidence and higher domestic demand will drive growth in the non-oil economy. Over the medium term, GDP growth is forecast to hover at around 3 percent per year, as the oil sector’s contribution to economic growth declines relative to 2017. Lower oil prices overturned Kazakhstan’s external surpluses with a current account balance deficit of 2.8 percent of GDP in 2015, which further increased, hovering at around 6 percent of GDP in 2016 and 2017. More favorable terms of trade will drive improvements in the current account balance with the deficit projected to decline to below 3 percent of GDP. Table 2. Kazakhstan: Selected Macroeconomic Indicators, 2014-20 2014 2015 2016 2017e 2018p 2019p 2020p GDP growth and Prices (Annual percentage change) Real GDP 4.2 1.2 1.1 3.7 2.6 2.8 3.0 Oil sector growth -1.0 -4.5 2.3 7.6 0.9 1.6 1.3 Non-oil sector growth 5.4 3.7 0.9 2.7 3.0 3.1 3.4 Real GDP (projection at DPL appraisal) 4.4 1.0 1.7 3.3 Consumer price inflation, period average 6.7 6.6 14.6 7.6 5.9 4.4 4.6 Consumer price inflation, year-end 7.4 13.6 8.5 7.8 4.3 4.5 4.7 Consumer price inflation, year-end 7.4 8.1 7.0 4.8 (projection at DPL appraisal) External Accounts (Percent of GDP) Current account balance 2.8 -2.8 -6.5 -4.0 -1.6 -1.1 -1.2 Current account balance (projection at 2.1 -0.6 -0.4 0.6 DPL appraisal) Source: WB staff calculations and estimates/projections based on data published by the Statistical Office of Kazakhstan, the Ministry of Finance of Kazakhstan, and the National Bank of Kazakhstan. Note: e=estimation; p=projection. The floating exchange-rate regime has been adhered to consistently by limiting interventions on the foreign-exchange market. This triggered large adjustments in the nominal and real exchange rates. After depreciating from 188 KZT/US$ before switching to the floating exchange rate regime, in August 2015, to a peak of 384 KZT/US$ in January 2016, in a context of substantial market uncertainty, the nominal exchange rate stabilized, hovering between 310 and 345 KZT/US$ so far in 2017 as oil prices leveled off. The sharp depreciation of the tenge fuelled average annual inflation, which rose from 6.7 percent in 2014 to 14.6 percent in 2016 for the year as a whole. However, average annual inflation receded more recently and is projected at 7.4 percent in 2017, further expected to decline to 4.6 percent in 2018. Despite the shift to a floating exchange rate and timely response to adjust the budget to lower oil prices, market sentiment has weakened. Owing to the deterioration in the external and fiscal accounts caused by the sharp drop in oil prices, and the greater banking risks posed by the economic slowdown, Kazakhstan’s sovereign credit rating was downgraded in 2016. However, 3 Kashagan is a large off-shore oil field in the Caspian Sea where oil came on stream in October 2016. 10 as public finance adjustment to lower oil prices has advanced (see below), Kazakhstan’s credit rating outlook has more recently improved from negative to stable.4 The macroeconomic framework underpinning the DPL at appraisal properly predicted the continuation of the slowdown of real GDP growth until 2016 and the pick up in growth in 2017. It predicted the deceleration of inflation, although at a faster pace than observed so far. This is because the inflationary impact in 2015-16 of the exchange rate depreciation was underestimated. It fell short of predicting the deterioration in the external current account, projecting a virtually balanced current account during 2015-17. (b) Pillar 1: Strengthening sustainability of the macroeconomic framework while protecting the vulnerable (b.1) Ensure fiscal sustainability by reducing the non-oil fiscal deficit while maintaining social spending commitments As it became clear that oil prices would remain low over the medium-to-long term, the Government continued to consolidate the fiscal accounts in line with the medium-term fiscal adjustment launched in March 2015 when some lower priority capital spending was cut. The budget plans for 2016-18 envisaged a significant decrease in government spending, including a substantial reduction in the net acquisition of nonfinancial assets, which in practice are primarily cash transfers to SOEs. At the same time, however, the Government implemented a series of counter-cyclical support measures with the aim of stimulating domestic demand by: (i) increasing pensions and other social transfers; (ii) a 30 percent nominal increase in public sector salaries in 2016; (iii) providing subsidies to SOEs and SMEs — including a one-off transfer from the NFRK to the budget in 2015, equivalent to 1.8 percent of GDP, to support the ailing national oil company; and, (iv) more recently, in 2017, extending support to the banking sector through a recapitalization of the Problem Loan Fund, equivalent to 4 percent of GDP, financed by another one-off transfer to the budget from the NFRK. The overall fiscal deficit declined from 8 percent of GDP in 2015 to an estimated 6.7 percent of GDP in 2017 and is projected to further decline to around 2 percent of GDP over 2018-20 as oil prices are projected to recover (Table 3). The non-oil fiscal deficit remained at an estimated 12.6 percent of GDP in 2017, virtually unchanged compared to 2015. However, excluding the one-off transfers from the NFRK to the budget in order to finance the Government’s special economic support measures, the non-oil deficit followed also a downward trend, declining from 10.9 percent of GDP in 2015 to an estimated 8.6 percent in 2017, below the 9 percent-of-GDP target envisaged by the results indicator of the DPL (Table 4). About two-thirds of the fiscal consolidation (excluding one-off spending) reflects increases in non-oil revenue with the rest attributable to expenditure downsizing. 4 At DPL appraisal at the end of 2015 Kazakhstan’s credit ratings were as follows: S&P: BBB negative outlook; Moody’s: Baa2 stable; Fitch: BBB+ stable. As of 2017 the most recent ratings were as follows: S&P: BBB- stable; Moody’s: Baa3 stable; Fitch: BBB stable. 11 Table 3. Kazakhstan: Government’s Consolidated Budget, 2014-20 2014 2015 2016 2017e 2018p 2019p 2020p (Percent of GDP, unless otherwise indicated) Revenues 21.7 14.8 16.6 18.0 18.3 18.4 18.2 Oil revenue /1 10.3 4.0 4.5 5.7 6.0 6.1 5.8 Non-oil revenue /2 11.4 10.8 12.2 12.3 12.3 12.3 12.4 Expenditures 22.4 23.5 22.1 24.9 20.7 20.4 20.4 Current expenditures 15.4 16.6 17.2 16.7 16.2 16.1 16.2 Capital expenditures and net lending 6.9 7.0 5.0 8.2 4.5 4.3 4.2 Overall fiscal balance -0.7 -8.7 -5.5 -7.0 -2.4 -2.0 -2.2 Non-oil deficit -11.0 -12.7 -10.0 -12.6 -8.4 -8.1 -8.0 One-off NFRK transfers to budget 1.8 4.0 Non-oil deficit excluding one-off NFRK -11.0 -10.9 -10.0 -8.6 -8.4 -8.1 -8.0 transfers Net financial assets of the government 18.6 12.5 25.0 15.3 11.9 9.1 6.2 NFRK FX reserves 33.1 34.4 44.6 33.5 30.5 28.9 27.9 Total government debt 14.5 21.9 19.6 18.2 18.6 19.8 21.7 Source: WB staff calculations and estimates/projections based on data published by the Statistical Office of Kazakhstan, the Ministry of Finance of Kazakhstan, and the National Bank of Kazakhstan. Note: Some sums may not add up due to rounding; e= estimation; p=projection; 1/ Excluding FX gains/losses of the NFRK; 2/ Excluding sale of state property and land. Despite this adjustment effort, the non-oil deficit still needs to be reduced, to secure an appropriate level of long-term savings and medium-term fiscal sustainability. Simulations show that the stock of net financial assets may continue falling by 2020 if the government maintains the non-oil deficit at about 8 percent of GDP in 2018-20 (Table 3). The Government announced recently plans to reduce the non-oil deficit to 7.1 percent of GDP in 2018, 5.9 percent in 2019, and 5.1 percent in 2020. The measures underlying this adjustment plan are still to be spelled out. In line with DPL commitments, the Government amended the budget code (and in September 2017 the budget law) by modifying the definition of the non-oil deficit to exclude customs duties on oil exports as these tax collections should not be included in non-oil tax revenue. It also improved the comprehensiveness of the consolidated budget by including the central government budget (Republican budget), the regional budgets, and financial transfers from the NFRK. However, the extra-budgetary funds remain still outside of a unified General Government budget account. An important step towards strengthening fiscal management was taken in December 2016 with the revision of the NFRK concept, which is expected to regulate its operations for the period 2018-2030. According to this reform, to support the fiscal consolidation effort, as from 2020, the guaranteed transfer to the national budget will be fixed in absolute terms in tenge and set in the amount of KZT 2,000 billion (US$6.3 billion), which is about 20 percent lower than the guaranteed transfer under the previous concept.5 The flexibility to increase or decrease the 5 In order to smooth the transition to the new lower amount of the guaranteed transfer from the NFRK to the state budget, the guaranteed transfer will be gradually reduced: KZT 2,600 billion in 2018; KZT 2,300 billion in 2019; and KZT 2,000 billion in 2020 and subsequent years. 12 guaranteed transfers by 15 percent was removed but the new concept provides for the possibility of discretionary targeted transfers from the NFRK. To promote savings of oil revenue by the NFRK, a minimum balance of NFRK resources is set at 30 percent of annual GDP. Moreover, in order to maintain the country's financial stability, the amount of government debt, including guaranteed debt and quasi-public sector external debt, should not exceed the amount of foreign currency assets of the NFRK. A central element of the new NFRK concept is that fiscal policy will be formulated on the basis of a gradual reduction of the non-oil deficit relative to GDP, which thus becomes an anchor of the fiscal framework in line with long-standing recommendations of the World Bank. However, the new fiscal framework still leaves room for discretion in transferring resources from the NFRK beyond the guaranteed amounts. This may have a potentially negative impact on savings over time as well as on investor confidence and the cost of borrowing for the Government and for the economy as a whole. Additionally, off budget lending from the NFRK to SOEs appears to have ceased after 2016, when the last approved allocation of KZT 351.5 billion was disbursed to Baiterek, a joint-stock national management holding company, and the Samruk-Kazyna holding, as part of the Nurly Zhol anti-crisis program. The discontinuation of the off-budget lending practices contributed to better budget transparency and accountability, as supported by the Bank and the IMF. There are also plans to invest NFRK assets in liquid financial instruments at market rates, including bonds issued by SOEs in the domestic market. Concerning the Government’s commitment to bolster non-oil tax revenue, amendments to the tax code (passed in October 2016) postponed to 2018 the implementation of the reduction of the VAT registration threshold, supported by the DPL under prior action 2. The reduction will be phased in over a 5-year period, during 2018-22. The phased in implementation of the reform was justified by the need to facilitate the transition of small and micro businesses into the VAT payment regime, as well as to ensure effective administration of the increased number of VAT payers. Despite the slippage in the implementation of this reform, the target for the results indicator concerning the increase in non-oil tax revenue was achieved with an increase of 42 percent in 2017 compared to the 2014 baseline (Table 4). The higher than initially forecast increase in inflation, owing to the depreciation of the tenge, boosted non-oil tax revenue and contributed to reaching the target. Moreover, consistently with the indicative triggers for a follow-up program associated with the DPL, the Government has been pursuing more comprehensive tax policy reforms and tax administration modernization to enhance non-oil revenues over the medium term. The main purpose of a recently proposed bill is to replace the 2008 tax code and improve both tax policy and tax administration. The Government has launched a review of certain tax policies, such as the corporate income tax and its numerous exemptions, as well as the tax framework for SMEs. It aims at optimizing the tax treatment at three levels: the general taxation, the patent system for individual entrepreneurs and the special tax regime for small and medium-sized businesses, as well as the agricultural sector. There are also several proposals to improve tax administration through e-governance in tax administration, simplifying the tax procedures, and strengthening audit mechanisms. 13 Kazakhstan has also started implementing the base erosion and profit shifting (BEPS) guidelines of the Organisation for Economic Co-operation and Development (OECD). A special team at the State Revenue Committee is working with the Global Forum on an action plan to introduce automatic exchange of information on tax matters with other countries. Kazakhstan and the United States have signed a Model 1 Foreign Account Tax Compliance Act (FATCA) Intergovernmental Agreement (IGA), which will enable the automatic exchange of financial information on each country's resident taxpayers to support tax enforcement efforts. The agreement was signed in Astana on September 11, 2017 and is awaiting ratification by the Parliament. The Model 1 FATCA IGA requires financial institutions in Kazakhstan to report information to a government agency, which will then pass this information on to the US Internal Revenue Service (IRS). The agreement is reciprocal, requiring US financial institutions to also provide certain information about Kazakh citizens back to Kazakhstan. Following the agreement Kazakhstan financial institutions will no longer need to sign a Foreign Financial Institution Agreement with the US, although they will still need to register with the IRS's FATCA Registration Portal. Kazakhstan is also in the final stage of signing the OECD’s Common Reporting Standard Multilateral Competent Authority Agreement (CRS MCAA) on automatic exchange of financial account information. The target date for signing is December 31, 2017. The signing of the CRS MCAA will enable Kazakhstan to exchange information with more than 90 signatory countries including 20 offshore jurisdictions. Table 4. DPL Status of Results Indicators for Fiscal Sustainability Results indicators Baseline 2014 Target 2017 Status 2017 Non-oil deficit in percent of GDP 10.5 No larger than 9 8.6 (1) Non-oil non-mineral revenue of 4,649.4 billion Increase of 24 Increase of 42 the State budget tenge percent percent Note: (1) excluding one-off transfers (b.2) Enhance the social assistance programs to protect the vulnerable Because the decline in growth increased household vulnerability, the DPL supported a Government commitment to enhance Kazakhstan’s cash transfer program. This was part of the indicative triggers for a follow-up operation, although no prior actions were included in this area. The Government continued to implement mechanisms to improve and expand its primary means-tested program of Targeted Social Assistance (TSA), which was rebranded as “Orleu” and implemented in phases based on pilot programs. From mid-2015 until mid-2016, the Orleu program had been implemented in 3 oblasts and 38 pilot districts (rayons) all over the country. By end-2016 the Orleu project had been implemented in 90 percent of rayons throughout Kazakhstan, with 90.5 percent of able-to-work Orleu recipients participating in activation measures. In 2016-17, the Orleu program was modified and administration of the program was changed to improve it based on the evaluation of pilot results. In September 2017, the number of Orleu recipients reached 148.8 thousand persons and significantly exceeded the number of enrolled recipients in the same period in 2016 (27.1 thousand persons). The Ministry of Labor and Social Protection of Population expects the number of Orleu participants to surpass 150 thousand persons by the end of 2017. Starting from January 1, 2018, after completing the piloting stage of the Orleu project, the so- called “Targeted Social Assistance of a new format” will be rolled out nationwide in the 14 following way: (i) it will integrate three types of assistance, namely TSA, child benefits, and special state allowance for big families, in one Guaranteed Minimum Income-type benefit; (ii) it will provide conditional cash transfers for families with working age able to work members while continue to provide unconditional cash transfers to poor and vulnerable households without working age able to work members; (iii) eligibility criteria will be improved to increase targeting; (iv) benefit duration will be extended to one year. Awareness raising campaigns have been launched to improve the Orleu program’s efficiency and population’s understanding of the new TSA approaches. The relevant results indicator of the DPL has been largely surpassed (Table 5). As of June 1, 2017, active forms of employment support covered 17,252 persons out of 19,415 employable Orleu recipients. Table 5. DPL Status of Results Indicators for Enhancing Social Assistance Programs Results indicators Baseline 2015 Target 2017 Status 2017 Share of persons covered by the active forms of employment support to eligible employable recipients of 34 More than 50 89 targeted social support (percent) (b.3) Support transition towards inflation targeting The introduction of the new monetary policy regime increased the volatility of money market rates, especially in the first six months after switching to the floating exchange rate regime in August 2015, as technical capabilities and policy instruments were developed. The policy base rate was established as the overnight repo market rate. After a temporary suspension of the base rate in September 2015, when market conditions normalized, in February 2016, the NBK resumed its monthly policy announcements. In May 2016, in view of reduced volatility of the exchange rate and subsiding inflationary pressures, the NBK reduced the policy rate to 15 percent and tightened the fluctuation band to +/- 1 percentage point. The policy rate is perceived as a credible monetary policy instrument and has been reduced to 10.25 percent currently. The NBK implemented legal and technical changes needed for transition to inflation targeting, also with technical assistance from the IMF. The draft law that regulates the adoption of the rules on conducting open market operations was adopted by Parliament in late 2015. In 2016 the National Bank finalized its own platform, particularly the classic repo auction functionality, which allows holding auctions to sell securities with repurchase (classic repo auctions) using own software.6 NBK has also developed and is using a model to project inflation and a liquidity forecasting model. The latter can determine the direction of short-term liquidity imbalance at the money market and estimate the required volumes of open market transactions to address it. A technical committee composed of the governor, the vice-governors and selected department directors is guiding the transition. The NBK has become more transparent, 6 Also, through its own platform the National Bank can hold auctions to purchase securities with sell-back (credit auction) and standing facility transactions (reverse repo transactions). In addition, in 2016 the National Bank jointly with Bloomberg introduced a swap instrument at the interbank market, which allows holding auctions both for provision and for withdrawal of tenge on the security of foreign exchange. 15 significantly expanding the list of published statistical and analytical information on monetary policy, introducing the practice of holding press conferences and meetings with experts and media, and broadening the audience using online mobile application NBK Online. Also, when decision on base rate is made, the National Bank issues a press release with justification of this decision, as well as quarterly press release with technical details, in-depth analysis and mid- term projections. These measures aim to achieve correct understating of financial market processes among economic agents and guide expectations about inflation, exchange rate and other macroeconomic indicators. The NBK introduced new instruments of open market operations and standing facilities to improve the interest-rate transmission mechanism. It also expanded the list of eligible collateral for open market operations. To enhance the government securities market and its role for the transmission mechanism, the NBK began building a reliable risk-free yield curve in the 2 to 5 years maturity segment. These efforts positively influenced the money market, with interest rates declining and their volatility decreasing substantially. As a result, the end-2017 target for the reduction of volatility of money market interest rates (defined as the standard deviation over a 12-month rolling period) was easily surpassed (Table 6). Table 6. DPL Status of Results Indicators for Inflation Targeting Results indicators Baseline 2015 Target 2017 Status 2017 10 percent 90 percent Lowering the volatility of the money market rates 100 reduction reduction (c) Pillar 2: Help improve competitiveness of the non-oil economy (c.1) Strengthen the financial sector by improving the legal framework for insolvency, strengthening prudential norms The Corporate Insolvency law has been amended twice since its enactment in 2014, to regulate the appointment and supervision of Insolvency Trustees, and to improve the process efficiency, in line with World Bank recommendations. Several secondary regulations have also been enacted subsequent to these amendments. Further, a law has been submitted to the Parliament regulating the profession of bailiffs, aiming to convert public officers in charge of judgment enforcement into private professionals. In the area of personal insolvency, of which an executive endorsement of the concept was done in April 2016, a legal framework has been approved and the resulting legislation should support a more efficient workout of some 70 percent of NPLs in the banking system provided to individuals. Consistent with the international experience, this concept law contains several useful provisions including regulating the insolvency of sole entrepreneurs as well as the insolvency of consumers; establishing an initial out-of-court stage where a debtor may achieve an amicable settlement with creditors under the supervision of a financial manager; and limiting the courts’ intervention in personal insolvency. In 2016 and during the first 8 months of 2017, 2,262 cases of bankruptcy have been declared. Rehabilitation procedures have been applied in 298 cases 16 (206 in 2016 and 92 in the first 8 months of 2017), representing 13.2 percent of bankruptcies, surpassing the target for the DPL results indicator over the whole period (Table 7).7 The authorities initiated efforts to deal with insufficient capital and large volumes of NPLs in a few of the largest banks. However, the revision to Prudential Regulation No. 358 that called for increasing from January 2016 the required authorized capital of banks (from 30 billion to 100 billion tenge) was postponed, owing to concerns about banks’ increasing vulnerabilities due to the tenge depreciation and the economic slowdown. Also, in 2015, there was a simultaneous transfer of assets between the parent bank Kazkommertsbank and its subsidiary BTA Bank. As a result of this simultaneous operation of the exchange of assets and liabilities between these banks and the subsequent withdrawal of BTA Bank from the banking system, there was a significant reduction in the NPL level in the banking system. Moreover, in 2017, Halyk Bank acquired a controlling stake of the shares (97 percent) of Kazkommertsbank. Additional provisions have been formed, based on the results of asset quality review conducted by the NBK and Halyk Bank. Halyk Bank has injected additional capital into Kazkommertsbank. As a result of banks’ efforts to improve the quality of their loan portfolios, the share of NPLs in total gross loans of the banking system decreased from a 2014 peak of 33.7 percent to 12.8 percent in September 2017. The capital adequacy ratio of commercial banks increased to 16 percent of their risk-weighted assets as of September 2017 (Table 7). However, the relaxation of prudential regulations calling for consolidated financial reporting in line with IFRS, the dramatic increase in the sale of distressed assets into special-purpose vehicles (SPVs), leniency in loan classification, and under-provisioning of NPLs, suggest that official data may need to be taken with caution and supplemented with additional information to properly assess the health of the commercial banks.8 It will be critically important to re-introduce the requirement for consolidated financial reporting, and to carry out an asset quality review of the largest banks, including their special- purpose vehicles. Table 7. DPL Status of Results Indicators for Strengthening the Financial Sector Results indicators Baseline 2014 Target 2017 Status 2017 Number of corporate rehabilitation cases initiated in calendar year, and the percentage of total annual 43 200 2981 corporate bankruptcies which they represent, as (2 percent) (10 percent) (13.2 percent) measured by the Ministry of Finance of Republic of Kazakhstan Weighted average Tier-1 to risk-weighted assets of 15 percent 16 percent as the banking system, as measured by National Bank 13.2 percent end-2016 of Sep-2017 of the Republic of Kazakhstan (K1-2 ratio) Note: 1 Sum of rehabilitation cases in 2016 and the first 8 months of 2017 (in percent of bankruptcies over the same period) 7 Rehabilitation cases represented 16.4 percent of bankruptcies in 2016 and 9.1 percent of bankruptcies in the first 8 months of 2017. 8 In an effort to reduce the credit risk and address the low level of loan provisions, the National Bank has approved the introduction of deductions from bank’s equity equivalent to the amount of the excess of regulatory provisions (calculated in accordance with prudential requirements of the National Bank) over the provisions formed by banks in accordance with IFRS. The decree is in the process of registration with the Ministry of Justice. 17 (c.2) Strengthen transparency and efficiency of the investment, regulatory, and competition policy regimes In the context of the reform program supported by the DPL, Kazakhstan started implementing its commitments as a full member of WTO (since July 2015); put in place the beginnings of a regulatory impact assessment implementation structure; took steps to reduce permits and simplify permit procedures; initiated a reform of its competition policy framework; and improved corporate governance for SOEs. The WTO accession process has provided an anchor for Kazakhstan’s trade and investment regime reform and allowed a balancing of regional integration efforts within the framework of the Customs Union and the Eurasian Economic Union (EAEU) with multilateral efforts. Even though many of the legal adjustments have already been made by Kazakhstan, including limiting the minimum amount of local content in works and services in line with the prior action of the DPL, full implementation of the WTO agreements will take several years, as agreed with WTO partners. Although local content rules are limited to the oil and gas sectors, in practice there are local content requirements related to the procurement of SOEs. The new FDI state program recently adopted by the Government on August 22, 2017 with the aim of increasing FDI is expected to ease these requirements. The DPL also supported strengthening of market-based approaches in the formulation of the Government’s industrial policy to promote economic diversification. As part of the indicative targets for the follow-up operation, the DPL supported a reform of the territorial clusters program of the State Program for Industrial and Innovative Development (SPIID) for 2015- 2019. In line with the expected outcomes in the indicative targets of the DPL, the role of the Kazakhstan Industry Development Institute (KIDI) in the development of territorial clusters was enhanced. In the autumn of 2016 KIDI became a center for SME-based territorial cluster development. It promoted outreach in all regions with business associations to get support for the territorial clusters program. Although the DPL provided impetus to the role of KIDI, the World Bank provided additional support through the “Enhancing SME Competitiveness in Kazakhstan” project — a US$46 million investment project approved by the Bank in December 2014, the implementation of which started in August 2016. One of the sub- components of this project includes the development of territorial SME clusters and supported KIDI in the evaluation of 18 received applications for territorial clusters. Requirements to create cluster associations in order to participate in the competitive selection of territorial clusters have been canceled in accordance with Bank recommendations. Any corporate groups may express interest in the competitive selection of territorial clusters from all regions of Kazakhstan. Among the 18 applications received, 6 were selected and have been approved by the Ministry of Investment and Development, therefore meeting the relevant results indicator in the DPL (Table 8). The GoK is taking steps to enhance the enabling environment for private sector investment in infrastructure through PPPs. The GoK enacted a Concession Law in 2006 (a form of PPP) and a new PPP Law in 2015, and implemented other enabling legislation. In line with the indicative trigger for the follow-up operation included in the DPL, amendments to the Concession law and the new PPP Law were introduced to incorporate broader concepts, such as early 18 termination and international arbitration for special projects. However, there still remain substantial legal barriers due to excessive regulation and lack of clarity in implementation arrangements. Consequently, there have been no major infrastructure projects under PPPs since 2015. The DPL also supported, as a prior action, establishment of regulatory impact assessment (RIA), which is already proving to be an asset to the authorities in screening proposed regulations. The authorities have been updating existing rules for RIAs in light of early piloting experiences with amendments in April 2016. To date (as of end-2016), 216 determination of RIAs have been completed. The authorities have started the process of rolling out this methodology to the subnational administrations. Moreover, the regulatory oversight unit, established at the Ministry of National Economy, is working and has already contributed to the review of proposed regulations, rejecting some 30 of them in favor of alternative approaches. The associated target for the results indicator, measuring the quality of regulatory governance and the extent of civic participation and government accountability in rulemaking, was met (Table 8).9 As part of the indicative triggers for a follow-up operation, the DPL supported a Government commitment to reduce permits and simplify permit procedures with the aim of reducing business barriers. Since 2015, starting a business has become simpler by eliminating registration fees for small and medium-size firms, shortening registration times, eliminating the legal requirement to use a company seal, and abolishing the requirement to notarize company documents and founders’ signatures. Dealing with construction permits also became easier by introducing a single window and streamlining procedures. Reflecting these changes, Kazakhstan's position in the Doing Business ranking improved from 77 in 2015 to 51 in 2016 and 35 in 2017. The Government recently prepared a draft law to improve the regulation of entrepreneurial activity, presented in October 2017. The bill aims to reform the state control of businesses; reform the permits system; develop self-regulation of business; identify and exclude norms that hinder competition; improve the mechanisms for identifying and eliminating price and tariff collusion. Legal changes in line with DPL commitments confirm the Government’s intention to strengthen the role of competition policy. The Yellow Page Rule Law (modeled on Singapore’s experience) amended the applicable regulation within the Competition Law and the State Property Law, introducing a positive competition principle to evaluate and rationalize direct government participation in markets. The Natural Monopolies Regulation &Competition Protection Committee of the Ministry of National Economy (the Competition Agency) is now mandated to assess whether a particular SOE complies with the subsidiarity principle that 9 The DPL indicator of “Citizen Engagement in Rulemaking”, monitored by the World Bank, has become part of a broader set of 5 indicators of Global Regulatory Governance, which include indicators of “Public Consultation in Rulemaking”, “Challenging Regulations”, “Transparency in Rulemaking”, “Impact Assessments”, and “Assessment of Laws and Regulations”. Kazakhstan’s rating on these indicators is available on: http://rulemaking.worldbank.org/data/explorecountries/kazakhstan#cer_consultation. 19 informs the direct participation of state in the economy.10 In May 2016, it adopted a procompetitive analytical framework to identify SOEs not fulfilling a subsidiary role and adopted market definition techniques that include relevant criteria. The authorities are planning amendments to the Entrepreneurial Code in order to empower the Competition Committee to develop and use ex-post and ex-ante assessment. However, other reforms that were expected to be accomplished, as part of the indicative triggers associated with the follow-up operation to the DPL, have stalled. The registry of dominant firms has not been eliminated so far but the authorities are planning to remove it by end 2018. The establishment of objective merger notification thresholds has not been adopted yet although the Bank provided capacity building through the Joint Research Program. A mandatory requirement to publish the decisions of the Conciliation Committee has been introduced but the information published does not provide the specifics of the decisions. The Bank also provided capacity building on the methodology to identify barriers to competition at subnational level, including in markets dominated by SOE natural monopolies, but not much implementation progress has been noted. Most importantly, the Competition Commission is a department of the Ministry of National Economy, which is impairing its formal independence, while its mandate doesn’t secure control of the enforcement of its decisions. Formally, the relevant results indicator of the DPL has been met, with 26 recommendations of the Competition Committee, following the subsidiarity methodology, implemented by the Government in 2017 (Table 8). Overall, however, the business community perceives that competition in local markets is weak compared to countries of similar GDP per capita with no tangible signs of progress. Kazakhstan ranks 114th regarding the intensity of local competition and 84th in terms of effectiveness of its anti-monopoly policy according to the Global Competitiveness Report 2017-2018. Kazakhstan’s rankings on these two metrics were respectively 94th and 68th according to the 2015-2016 Global Competitiveness Report. The Government, as sole shareholder, approved in April 2015 the new Corporate Governance Code of Kazakhstan’s largest SOE holding company, Samruk-Kazyna (SK) — on of the prior actions of the DPL. The Code contains elements of good international practice based on OECD guidelines, and some specific requirements given the local context. After approval, in 2015, SK conducted an analysis of compliance with the provisions of the Code (Gap-analysis) and developed mid-term programs to improve corporate governance in the SK and in its portfolio companies. In 2016, SK and portfolio companies were working on the implementation of mid- term programs. Additionally, according to the Code “compliance reports” of subsidiaries are being made available to the public in annual reports starting from 2017. A new methodology for corporate governance diagnostics was also developed, which SK is using for assessing all aspects of corporate governance in its subsidiaries. The methodology has been already applied to 6 subsidiaries and will be extended to all 12 first-level subsidiaries by 2018. Moreover, SK is preparing a Sustainable Development report, in compliance with the new Code, which will be published in 2017. It is still too early to say whether the greater transparency of SK subsidiaries, provided by the new corporate governance code, will lead to greater interest in these companies by potential private-sector investors. Nevertheless, in the long term, it is 10 According to this principle, the State has a subsidiary duty to perform only those tasks where private supply is not feasible and leave out those markets where private supply can attend demand. 20 expected that the overall corporate governance improvement will improve the companies’ effectiveness. Table 8. DPL Status of Results Indicators for Strengthening transparency and efficiency of the investment, regulatory, and competition policy regimes Results indicators Baseline 2014 Target 2017 Status 2017 Number of Cluster Development Action Plans conducted None 2 61 Improved performance on the Citizen Engagement in 3.0 3.5 4.6 Rulemaking indicators (on a scale from 0-6). Number of recommendations of the Competition Commission implemented by the Government following the subsidiarity methodology to guarantee None 4 26 that SOEs limit their role to the provision of goods and services that could not otherwise be provided by the private sector. Note: 1 to be developed after approval of clusters by Ministry. 3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory The Moderately Satisfactory rating is based on: (i) the DPL’s relevance of objectives, design, and implementation; and, (ii) achievement of objectives as previously assessed. The relevance of objectives, design and implementation to current country priorities and Bank assistance strategy is High. The objectives of strengthening the sustainability of the macroeconomic framework while protecting the vulnerable and of improving the competitiveness of the non- oil economy were both highly relevant. The design of the reform program supported by the DPL was highly relevant as the prior actions were key to achieving the objectives under the program’s two pillars. The implementation of the operation was relevant to the objectives set by the Government, especially in fiscal management, inflation targeting, targeted social assistance programs, and development of territorial clusters, and improvement of regulatory governance. Relevance of implementation was moderate in other areas, where the reforms have been less ambitious than initially expected, especially in strengthening the financial system and in competition policy. Overall, achievement of DPL objectives was moderately satisfactory. Achievement of the objectives under the first pillar of the DPL was satisfactory. Despite the crisis-response programs that raised the non-oil fiscal deficit, the Government took measures with the aim of ensuring medium-term fiscal sustainability and revised appropriately the NFRK concept. However, the implementation of the VAT reform supported by the DPL was postponed, although a more comprehensive program of tax reform is about to be introduced. The Government has successfully implemented inflation targeting and has introduced new instruments to improve the interest rate transmission mechanism of monetary policy. Moreover, the Government continued to successfully implement mechanisms to improve and expand the “Orleu” program of Targeted Social Assistance. 21 Achievement of program objectives under the second pillar of the DPL was more uneven, on average rated moderately satisfactory. The territorial development clusters and regulatory impact assessments were successfully introduced, while insolvency regulations were reformed, business permits were reduced, and the corporate governance code of Samruk-Kazyna subsidiaries is being reformed in compliance with good practice. Nevertheless, progress in strengthening prudential norms of the banking system has been insufficient, due to the relaxation of the consolidated financial reporting rules, the leniency in the classification of NPLs, and the absence of an independent asset management company for bad loans. Similarly, in competition policy, some key reforms have stalled while the current status of the Competition Committee is impairing its independence. Overall, 8 of the 9 results indicators of the DPL were met. However, this performance has to be nuanced because the non-oil tax revenue indicator does not adequately capture relevant features of the outcomes sought, as it should have been formulated in proportion to GDP. As shown in Table 3 above, an appropriate indicator would represent an increase of non-oil revenue from 11.4 percent of GDP in 2014 to 12.3 percent estimated for 2017. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development The DPL is expected to have positive poverty and social impacts in the medium term as it supported policies to strengthen macroeconomic sustainability and increase the competitiveness of the non-oil economy, which has been a source of rapid job creation. Poverty analysis indicates that growth rather than distributional changes has been the driving force behind the remarkable poverty reduction in recent years. However, the adjustment to a new environment of lower oil prices entailed social and economic stress in the short term. The poverty rate (measured at the international poverty line of US$5 PPP per day) rose to an estimated 19.8 percent in 2016, up from 19.5 percent in 2015 and 16.1 percent in 2014. The decline in real income was primarily the result of fewer employment opportunities for both wage earners and the self-employed. Total employment fell by 0.5 percent in 2016. Women were the first to experience the effects of the economic slowdown. The female labor market participation rate declined from 65.4 percent in 2014 to 64.1 percent in 2016. However, the DPL supported protection of social expenditures and enhancement of social protection through the Orleu program, while the Government remained committed to mitigating the social impact of the slowdown. In August 2015, the Government adopted a new Forecast of Socio-economic Development for 2016-2020, in which it listed fulfillment of its social engagements as a first priority. Measures included a 25 percent increase in benefits to elderly, students and the vulnerable population to compensate for the exchange rate adjustment and, from January 1, 2016, a 27 percent salary increase for education and health care workers. Moreover, to support employment and labor productivity, the government allocated additional funding to the Employment Road Map 2020 and adopted a Productive Employment and Mass Entrepreneurship Program for 2017-2021. The program will promote skills development, increased employment and SME development. Up to 200,000 beneficiaries will receive technical and vocational training as well as access to microcredit and public employment services. 22 Support provided by the DPL to revenue mobilization and the roll out of the Orleu program will positively impact the vulnerable. While measures to increase revenue mobilization would strengthen Government’s ability to finance social expenditures (including unemployment insurance), a lowering of the VAT registration threshold for firms will increase the cost for compliance for small businesses. The authorities have de facto mitigated this cost by allowing a phased implementation of this reform to support small businesses. (b) Institutional Change/Strengthening The DPO supported substantive institutional reforms in budget management, monetary management, industrial policy, regulatory oversight, competition policy, and SOE governance. • In line with DPL commitments, the Government amended the budget code to improve the comprehensiveness of the consolidated budget by excluding the customs duty on oil exports from the non-oil revenue base and prohibiting off-budget spending from the NFRK. Fiscal management was further strengthened with the revision of the NFRK concept, aimed at boosting savings of oil revenue and formulating a medium-term fiscal rule anchored on the reduction of the non-oil deficit. • The NBK implemented technical and legal changes needed to transition to inflation targeting, including by adopting rules on conducting open market operations and developing a liquidity and inflation forecasting models. New instruments of open market operations and standing facilities to improve the interest-rate transmission mechanism were introduced. • The role of the Kazakhstan Industry Development Institute (KIDI) in the development of territorial clusters was enhanced. With support from the DPL and other World Bank operations KIDI became a center for SME-based territorial cluster development. • Regulatory impact assessments have been introduced, which are used by the authorities in screening proposed regulations. This methodology is being rolled out to the subnational administrations. The regulatory oversight unit, established at the Ministry of National Economy, is appropriately staffed and operational. • The Competition Agency is now mandated to assess whether SOEs comply with the subsidiarity principle that informs the direct participation of state in the economy. It adopted a procompetitive analytical framework with relevant criteria to identify SOEs not fulfilling a subsidiary role. • The new corporate governance code of Samruk-Kazyna, based on good international practice, was adopted and the SK subsidiaries have been implementing action plans to ensure compliance with the new code. The Ministry of National economy has also started using some of the features of the new SK corporate governance code for the SOEs directly under its supervision. 23 (c) Other Unintended Outcomes and Impacts (positive or negative, if any) The DPL provided a catalyst for stronger coordination of economic, financial, and institutional reforms at the center of the Government. The Ministry of Finance set up an inter-governmental working group, including the NBK, which was coordinating and monitored the reform program supported by the operation. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops n/a 4. Assessment of Risk to Development Outcome Rating: Moderate There is still a risk to the development outcome of strengthening the sustainability of the macroeconomic framework while protecting the vulnerable. It reflects Kazakhstan’s continuing vulnerability to the low oil-price environment, global volatility, and the slower growth experienced by its main trade partners, Russia and China. However, this risk is mitigated by the Government’s commitment to keep fiscal policy prudent over the medium term, by pursuing a path of fiscal consolidation that aims to reduce the non-oil deficit and increase the net assets of the NFRK. To that effect, the new concept of the NFRK introduced in December 2016 has set strict rules for prudent management of the NFRK, banning off- budget use of its resources, circumscribing discretionary transfers to the budget, and setting limits to the accumulation of debt. The Government has also committed to making public spending more efficient and increasing collections of non-oil tax revenue through a comprehensive review of the tax code and the modernization of tax administration. Slow implementation of the strategy to address the NPLs of the banking system and to reinforce prudential rules is another source of risk, to both development outcomes of strengthening the sustainability of the macroeconomic framework and of improving competitiveness of the non-oil economy. At present, the NPL overhang presents a moderate risk, but that could change if a global slowdown and a new drop in oil prices exacerbate the problem. This could in turn pose fiscal risks as the Government has used repeatedly the NFRK to clean up the NPL stock. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory The DPL was prepared promptly and timely in response to the Government’s request for support in view of the persistent vulnerabilities caused by the drop in oil prices and the need to diversify away from oil by enhancing the competitiveness of the non-oil economy. The Concept Note of the operation was discussed on March 26, 2015, three months after the request 24 by the Government was received. Slightly more than six months separated the Concept Note discussion from the presentation to the Board on November 3, 2015. Despite the speed, the operation was thoroughly scrutinized within the Bank. The team was able to address reviewer concerns satisfactorily. During the preparation of the operation, the Bank insisted that the macro policy framework should include greater flexibility of the exchange rate regime in order to reduce external imbalances and promote competitiveness and stronger non-oil sector growth. Appraisal took place in October 2015, only after the move to a flexible exchange rate regime in August 2015. The DPL design responded to both the need to ensure macroeconomic sustainability and to lay a solid foundation for non-oil sector growth over the medium term. In view of the importance of SOEs in the Kazakhstani economy, the DPL team was rightly encouraged to include SOE- related actions and triggers as important complements to other measures envisaged in the operation. At the same time, however, the operation was selective. Sound JERP analytical work supported DPL design and the policy dialogue. The Bank had been involved in the analysis of financial sector challenges, especially on strengthening prudential norms and corporate insolvency, through JERP-related technical assistance to the National Bank, as well as through the Financial Sector Assessment Program conducted in 2012 and updates produced with the IMF. (b) Quality of Supervision Rating: Satisfactory The operation was supervised in the context of a continued dialogue in areas of Bank engagement while JERP studies and reviews have been a helpful instrument of dialogue. An active dialogue has been maintained on the Government’s fiscal consolidation strategy and the design of an appropriate fiscal framework for fiscal sustainability and savings for the future. The Bank’s supervision mission in June 2016 highlighted the increased vulnerabilities in the banking sector and emphasized the importance of reintroducing the requirement of consolidated financial reporting according to IFRS. The Bank also underscored the need to undertake an asset quality review of the largest banks including their special purpose vehicles. The Bank remained engaged on insolvency issues and has been advising the Government on options for dealing with the NPLs although the dialogue fell back during the program. The Bank also has been helping build the capacity for territorial development clusters, the methodology to identify barriers to competition at subnational level, including in markets dominated by SOE natural monopolies. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory 5.2 Borrower Performance (a) Government Performance Rating: Satisfactory The Government moved quickly to respond to the drop in oil prices with a coherent strategy that combined countercyclical response with medium-term measures for fiscal sustainability. 25 At the same time the NBK moved to a new monetary framework with exchange rate flexibility and inflation targeting, aiming to reinforce the competitiveness of the non-oil economy and preserve macroeconomic stability. In parallel, the authorities launched a program of institutional and structural reform with the aim to strengthening governance and reducing the role of the state in the economy. A privatization program was also introduced. The authorities maintained the cap on fiscal consolidation, taking further steps to reinforce the fiscal framework, despite occasional discretionary use of the NFRK to support SOEs and the banking system. Monetary management has been skillful and focused on the implementation of the new inflation targeting and flexible exchange rate regime, contributing to the stabilization of the economy and the decrease in inflation. Despite the cancellation of the follow-up operation of this DPL, the momentum of institutional and structural reforms was generally maintained. However, there have been also setbacks, especially in the prudential regulation of banks and insufficient progress on competition policy with the Competition Commission lacking independence. (b) Implementing Agency or Agencies Performance Rating: Satisfactory The Ministry of Finance, as the implementing agency of the operation, coordinated implementation efficiently and transparently, cooperated well with the line ministries in charge with the reforms supported by the program. The “State Borrowing Department” of the Ministry of Finance served as the anchor in the implementation of the program, organizing meetings with the participation of all relevant agencies. It brought promptly contentious issues to the attention of senior officials, including when necessary at a high level. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory 6. Lessons Learned Like the 2010 DPL, which had been designed to help Kazakhstan respond to the global financial crisis, the 2015 DPL sent a powerful signal to the international community about the Government’s capacity and commitment to address vulnerabilities and mitigate the impact of an external shock. The operation translated the World Bank’s trust in the Government’s commitment and capacity into a clear signal to the international community that Kazakhstan could navigate safely into the challenging environment created by the drop in the price of oil and look forward to renewed growth and stability over the medium term. The DPL was designed as the first in a programmatic series of two operations but because of the cancellation of the second operation it became de facto a stand-alone DPL operation. Although the operations were designed as a programmatic series to improve the Bank’s ability to support a sustained program of reforms, the cancellation of the second operation did not prove to be an obstacle to the continuation of the reform program. A stand-alone DPL operation can thus be effective when the design of the program is aligned with government priorities, ownership by the client is high, sufficient knowledge is available, and the short-term actions adequately address the main concerns. 26 The knowledge that the Bank acquired during its partnership with Kazakhstan, which has been anchored in solid analytical work, allowed it to provide guidance and judge relevance and prioritization of the reform program. The JERP has been key in this exchange of knowledge with the authorities and has helped to create trust in the Bank’s advice, including in the design of Kazakhstan’s fiscal framework and the priorities of the fiscal consolidation effort. The political economy of Kazakhstan’s banking sector presents a difficult terrain for an international financial institution to navigate for the purpose of improving transparency, public accountability, risk governance, and soundness. At the same time, this is an important policy area for stimulating lending, creating jobs, fostering entrepreneurship, and promoting foreign investment. The question of whether and with what instruments the WBG can engage meaningfully in this environment needs careful examination. Issues related to accountability in the banking sector, conflict of interests, and related party lending would need to be addressed heads on to achieve meaningful improvements in banking sector performance. 7. Comments on Issues Raised by Borrower The ICR team (see Annex 1) is grateful to the authorities for providing valuable inputs and comments to this document (see Annex 2). The ICR team has updated and made some clarifications to the fiscal data provided by the Ministry of Finance of Kazakhstan, and incorporated the editorial suggestions provided by the National Bank of Kazakhstan. 27 Annex 1. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending Christos Kostopoulos Lead Economist GMF09 Co-task team leader Sona Varma Lead Economist GMF09 Co-task team leader Dorsati Madani Senior Economist GMF09 Monetary policy Ilyas Sarsenov Senior Economist GMF09 Macro-fiscal policy issues Juan Pradelli Senior Economist GMFDR Macro framework Javier Suarez Lead Economist GTC T&C coordination Martha Martinez Licetti Senior Economist GTC Competition policy Graciela Miralles Murciego Economist GTC Competition policy Asset Bizhan Consultant GTC Cluster initiative Joao Pedro de Azevedo Lead Economist GPV Poverty reduction Judy Yang Consultant GPV Poverty reduction Saida Ismailakhunova Economist GPV Poverty reduction Keiko Inoue Senior Education Specialist GED Skills and jobs Dingyong Hou Senior Education Specialist GED Education reforms Katerina Petrina Sr Social Protection Specialist GSP Targeted social assistance Lead Human Development Robert Chase GSP Human development Specialist Thomas Farole Lead Economist GCJ Productive employment Mohamed Ihsan Ajwad Senior Economist GSP Social Protection Aliya Bizhanova Operations Officer GED Education reforms Marcelo Bortman Senior Public Health Specialist GHN Health reforms Baktybek Zhumadil Operations Officer GHN Health reforms Private Sector Development Melissa Rekas GTC Cluster initiative Specialist Harald Jedlicka Senior Investment Policy Officer GTC Investment policy Lead Private Sector Development Regulatory impact assessment Peter Ladegaard GGO Specialist (RIA) Jieun Choi Economist GTC Public investment efficiency Jyoti Bisbey Infrastructure Finance Specialist GCP PPP issues Christopher David Miller Senior Operations Officer GTC Private sector development Jacques Bure Lead Transport Specialist GTI Roads and connectivity Alexander Pankov Lead Financial Sector Specialist GFM Financial sector reforms Colleen Mascenik Financial Economist GFM Financial sector reforms Private Sector Development Qahir Dhanani GTC SME reforms Specialist Private Sector Development Yeraly Beksultan GTC SME reforms and competition Specialist Tatyana Chursova Consultant GTC Cluster initiative Amitabha Mukherjee Lead Public Sector Specialist GGO Justice reform Alma Nurshaikhova Consultant GGO Non-oil revenue issues Rajul Awasthi Senior Public Sector Specialist GGO Non-oil revenue issues Jay-Hyung Kim Adviser GGO Public resource management Ekaterina Romanova Social Development Specialist GSU Social protection Lisa Lui Lead Counsel LEG Legal support 28 Nagaraju Duthaluri Lead Procurement Specialist GGO Public procurement Nurbek Kurmanaliev Procurement Specialist GGO Public procurement Sr Financial Management Arman Vatyan GGO Financial management Specialist Aliya Kim Financial Management Specialist GGO Financial management Eric Ranjeva Finance Officer WFA Disbursement support Sr Financial Management Andrei Busuioc ECC SOE corporate governance Specialist Peter Goodman Sr Agricultural Specialist GFA Agriculture strategy Talimjan Urazov Senior Operations Officer GFA Agriculture strategy Rakhymzhan Assangaziyev Senior Country Officer ECCKZ CMU quality assurance Irina Galimova Country Program Assistant ECCCA JERP coordinator Shynar Zakir Consultant GGO Program support Gulmira Akshatyrova Program Assistant ECCKZ Program support Valeriya Marufi Team Assistant ECCCA Program support Supervision/ICR Ilyas Sarsenov Senior Economist GMF11 ICR team leader Aristomene Varoudakis Consultant GMF11 ICR team member Azamat Aldiyarov Consultant GMF11 ICR team member Alma Nurshaikhova Public Sector Mgmt. Spec. GGO15 Non-oil revenue Senior Financial Sector Colleen Mascenik GFM09 Financial sector Economist Katerina Petrina Sr. Social Protection Specialist GSP03 Targeted social assistance Anna Baranova Consultant GSP03 Targeted social assistance Graciela Miralles Murciego Senior Economist GTCTC Competition policy Yeraly Beksultan Private Sector Specialist GTC10 Competition policy Jyoti Bisbey Infrastructure Finance Specialist GTPPP PPP issues Elena Timusheva Consultant GTPPP PPP issues Lead Private Sector Development Regulatory impact assessment Peter Ladegaard GGO28 Specialist (RIA) Gaukhar Ospanova Private Sector Specialist GTC10 RIA Asset Bizhan Consultant GTC10 Cluster initiative Rakhymzhan Assangaziyev Senior Country Officer ECCKZ CMU quality assurance Gulmira Akshatyrova Program Assistant ECCKZ Program support (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage USD Thousands (including No. of staff weeks travel and consultant costs) Lending (FY15-16) 130 697.6 Supervision/ICR (FY17-18) 10 24.8 Total 140 722.4 29 Annex 2. Summary of Borrower's Inputs and Comments to the Draft ICR A.2.1 Borrowers’ Inputs to the Draft ICR: Ministry of Finance 1. Information on the development of a draft law of the Republic of Kazakhstan concerning the «Bankruptcy of Legal Entities». According to the legislation-drafting plan of the Republic of Kazakhstan for 2017 (approved by the Government Decree #905 dated December 29, 2016), relevant draft laws were negotiated with the relevant government bodies and submitted to the Government on September 20, 2017. The draft laws will be submitted to the parliament is November 2017. 2. Information on the quantity of cases on financial rehabilitation of companies, launched in 2016 and 2017 (up to the present moment), and the percentage of the overall annual corporate bankruptcies according to the data of the Ministry of Finance. 2,262 debtors are declared bankrupt in 2016 and 8 within months of 2017, of which 1,253 in 2016, and 1,009 within 8 months of 2017. That said, the rehabilitation procedures have been applied to 178 debtors in 2016 and within 8 months of 2017, of which 108 in 2016 and 70 within 8 months of 2017. Furthermore, 120 corporate debtors went through the new rehabilitation procedures as for September 1, 2017, including: - insolvency regulation procedure has been used by 111 debtors, of which 93 in 2016, 18 within 8 months of 2017; - agreements has been reached between 4 corporate debtors, of which 2 in 2016, and 2 within 8 months of 2017; - transition from bankruptcy to rehabilitation has been achieved by 4 debtors, of which 2 in 2016, and 2 within 8 months of 2017; - enterprise sale has taken place for 1 debtor in 2016. Quantity of debtors, to Quantity of debtors, whom financial Period Ratio, % deemed bankrupt rehabilitation procedures have been applied 2016 1,253 206 16.4 8 months of 2017 1,009 92 9.1 Total 2,262 298 13.2 30 3. Information on the reasons of postponing the measure on decreasing the VAT threshold until 2018, which has originally been planned within the previous DPFL Activity 2. According to the Article 3 of the Law #26-VI concerning the «Introduction of Amendments and Additions to Some Legislative Acts of the Republic of Kazakhstan Concerning the Issues of Taxation and Customs Administration», dated November 30, 2016, a staged decrease of the VAT turnover threshold is envisaged starting from January 1, 2018. That said, in order to retain the existing tax burden on small and medium business, a staged decrease of the VAT turnover threshold has been canceled in accordance with the Ministry of National Economy decision, stipulated in the letter # 20-16/07-531 (2.1-t.), dated September 14, 2017. Respective amendments, effective from January 1, 2018, are duly reflected in the new draft Tax Code concerning «Taxes and Other Obligatory Payments to the Budget” (the Tax Code), which is currently being discussed at the parliament. 4. Information on any initiatives taken in 2016-17 (or future plans) to make the operation of the Problem Loans Fund more transparent or to transform it into an Asset Management Company independent from the central bank. In order to withdraw JSC Problem Loans Fund (hereinafter referred to as the Fund) from the jurisdiction of the National Bank of Kazakhstan, the Law of the Republic of Kazakhstan (hereinafter - the Law) of February 27, 2017 No. 49-VI "On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on Issues Improvement of Civil Code, Banking Legislation and Improvement of Conditions for Entrepreneurial Activity " was adopted. The main objective of the Fund within the framework of the strategic direction of its activity is the improvement of the banking sector by purchasing non-performing loans from commercial banks. In implementing this Law, the shares of the Fund have been transferred to the Government of the Republic of Kazakhstan. At the moment, the sole shareholder of the Fund is the Ministry of Finance of Kazakhstan. Ministry of Labor and Social Protection 5. Information on the measures to improve the efficiency of the targeted social assistance in Kazakhstan, originally initiated in 2016-2017, including any respective legislation drafted to launch the “Orleu” conditional transfers system at the national level. Within the Step 84 of the Nation’s Plan 100 Concrete Steps on the implementation of the five institutional reforms, presented by the Head of the State at the extended meeting of the Government on May 5, 2015, the Law # 369 concerning the “Introduction of Amendments and 31 Additions to Some Legislative Acts of the Republic of Kazakhstan on the Issues of Social Protection of the Population” (further the Law) was adopted on October 28, 2015. The Law provides for the introduction of the new order of targeted social assistance (TSA) provision starting from January 1, 2018 for the families with income levels lower than 50% of the subsistence minimum (today it is 40%) for each family member instead of the existing ones, provided that every employable family member actively pursues employment opportunities: – special state allowances to large families; – state child allowances up to 18 years for low income families; – targeted social assistance for low income households. The new TSA is divided into two types: unconditional and conditional monetary assistance. Unconditional monetary assistance is provided to the families with no employable members (for example, families with disabled members or elderly pensioners), or the families with temporarily unemployable members (for example, single mother with school aged children). These families do not need to participate in the employment facilitation measures in order to be eligible for allowances. Conditional monetary assistance is provided to the families with at least one employable member, provided the social contract is concluded with this member and the obligatory participation of all family members in the employment facilitation measures. Under the social contract the parties take mutual liabilities: the social service shall facilitate employment and pays out allowances, whereas the employable family members diligently participate in the employment facilitation measures. The new targeted social assistance model for persons who concluded the social contract to facilitate employment is implemented within the Orleu pilot project. It shall be mentioned that the project has originally been launched in 2014 in three regions of Kazakhstan (Akmola, East Kazakhstan, and Zhambyl), in 2015 in 38 rayons, whereas in 2016 the Project’s geography doubled as opposed to 2015 and reached 182 rayons and towns, thus covering 91.5% of the country’s territory. The Project covered all regions in 2017. According to the information of the local executive bodies, the Orleu Project enrolled 148,8 people as of September 1, 2017, which is 5,5 times more than in 2016 for the same period (27.1 thousand people). To further expand the Project, the Republican budget envisages to allocate KZT 7.1 billion to cover approximately 150 thousand low income people. For the Project’s implementation period within 2014-16, the following outcomes have been observed: - sustainable increase in the number of participants (from 20.5 thousand to 39 thousand people), as well as the share of employable participants, advised to join active employment facilitation measures (2014 – 87.9%, 2015 - 90%, 2016 – 90.5%). 32 Furthermore, the Project positively impacts the following indicators: - sustainable decrease in the number of passive TSA beneficiaries from 56.1 thousand (in 2014) to 29 thousand people (in 2016); - increase in incomes of the participants more than 2.9 times, decrease in the share of employable population in the TSA beneficiaries pool, as well as decrease in the number of low income families. At present, awareness raising campaigns are being launched to improve the Orleu Project's efficiency as well as train the population on the new TSA approaches. Ministry of Investments and Development and the «Kazakh Industry Development Institute» JSC 6. Information on the status of 2016-17 activities on the development of a cluster policy within the SPIID 2015-2019. Within the State Program of Industrial and Innovative Development (further the SPIID), the Ministry of Investments and Development (further the Ministry), in collaboration with the «Kazakh Institute of Industry Development (further the KIDI) and with the support of the Ministry of National Economy, is taking part in the implementation of the cluster development component within the World Bank project on «Improving the SMEs Competitiveness in Kazakhstan» (further the Project). In accordance with the revised SPIID, the new approaches to cluster development have been adopted in line with the World Bank’s recommendations, to be implemented in the course of the Project. In 2016, the Ministry of National Economy attracted international expertise on cluster initiatives development within the Project, to include the European Foundation for Cluster Excellence (responsible for the transfer of competencies on the cluster initiative implementation), and Infyde company from the Basque country (Spain), one of the first European regions that adopted the cluster approach (responsible for the technical support and consultations in the process of work with the six selected clusters). The Ministry, in accordance with the Bank’s recommendations from October 2016 to March 2017 has introduced amendments to the Rules on the competitive selection of territorial clusters (the Minister of Investments and Development Decree # 873 dated December 23, 2016, registered at the Ministry of Justice on March 1, 2017), which have been duly negotiated with all relevant state bodies, akimats, business associations and the Business Association Atameken. A special methodology on the proposals assessment for the competitive selection of territorial clusters has been developed in March 2017 by the KIDI in collaboration with the Project consultants. On April 10, 2017, the Ministry (as the tender organizer) launched the competition on the selection of proposals from corporate groups in the regions of Kazakhstan to participate in the Project in accordance with the competitive selection rules. Based on the tender results, the 33 proposals have been assessed by the KIDI in collaboration with Infyde international consultants based on 18 proposals from various regions of Kazakhstan. This work has been fully supported and positively assessed by the World Bank. The Commission on the Industrial Development under the Prime Minister received the recommendations based on the competitive selection of territorial clusters (further the Commission). On September 26, 2017, the Ministry submitted the expert assessment outcomes to the PM Office. It is planned that (in line with the PM schedule) the Commission's session will take place, which would also involve the World Bank. After the selection procedures and the identification of the six pilot territorial clusters, the KIDI team in collaboration with international experts will start the Project activities for 2017-2019, to include: - diagnostics of the current status of the selected territorial clusters and the involvement of a broad range of stakeholders' clusters; - organizational work on structuring and managing the clusters; - development of strategic tasks and Plans on the territorial clusters development, development of state support measures to clusters; Development of the Action Plan on the territorial clusters development will be the result of this work (2018-2019) (individual Action Plan for each pilot cluster) as well as the implementation of practical measures from this Plan for each cluster within the state support measures. 7. Information on lifting the requirement to create cluster associations to obtain SPIID benefits. Requirements to create cluster associations in order to participate in the competitive selection of territorial clusters in accordance with the World Bank’s recommendations have been canceled. Any corporate groups may express interest in the competitive selection of territorial clusters from all regions of Kazakhstan, to include on behalf of managing companies in Free Economic Zones (FEZ), regional chambers of entrepreneurs, business associations and any other corporate groups, having submitted the joint proposal. These provisions are stipulated in the Rules on the competitive selection of territorial clusters, approved by the Ministry of Investments and Development Decree #873 dated December 23, 2016, registered at the Ministry of Justice on March 1, 2017. In general, all procedures of competitive selection of territorial clusters as well as the implementation of the Project, are being monitored by the World Bank specialists. 8. Information on expanding the role and the powers of the KIDI in identifying the cluster selection and facilitating their development, including any Road map on building the capacity of the Institute, as well as any major bottlenecks. In accordance with the SPIID revised provisions (dated September 6, 2016), the KIDI has been identified as the operator of territorial clusters development. In order to build the KIDI's capacity, the Ministry of National Economy has attracted the European Foundation for Cluster Excellence which has launched capacity building activities at the KIDI and regional 34 specialists on the issues of cluster development. So, in June 2017, the first training module has taken place in Astana, involving the world-known experts. In general, five more training modules are planned to be launched in 2017-18 in the regions, which would include the representatives of fix pilot clusters in addition to the KIDI's experts. 9. Information on increasing the number of pilot territorial clusters. In accordance with the new SPIID provisions (dated September 6, 2016), the development of six pilot territorial clusters is envisaged (the previous SPIID version provided for 3). Based on the expert assessment of proposals for the competitive selection of territorial clusters, the Ministry reported to the PM Office on the outcomes achieved. So, the World Bank recommendations on increasing the number of pilot territorial clusters have been duly taken into consideration. 10. Information on the number of Action Plans on clusters’ development for 2015 - 2017. In accordance with the World Bank’s project and the planned activities, the action plans development will be carried out after the selection of six pilot territorial clusters and the diagnostics of the current status of the selected clusters in 2018. This is also stipulated in the SPIID Implementation Action Plan for 2018. National Bank of Kazakhstan 11. Information about steps taken by NBK to create technical infrastructure for regulation of interest rate within inflation targeting (especially development of software for auctions on repo and foreign exchange swap market and for bank liquidity projections). As part of its inflation targeting policy and further improvement of monetary policy tools, in 2016 the National Bank of Kazakhstan (NBK) finalized its own platform, particularly classic repo auction functionality, which allows holding auctions to sell securities with repurchase (classic repo auctions) using own software. Also, through its own platform the NBK can hold auctions to purchase securities with sell-back (credit auction) and standing facility transactions (reverse repo transactions). In addition, in 2016 the NBK jointly with Bloomberg introduced a swap instrument at the interbank market, which allows holding auctions both for provision and for withdrawal of tenge liquidity based on foreign exchange collateral. Moreover, the NBK developed a model to forecast short-term liquidity, which can determine direction of short-term liquidity imbalance at the money market and estimate the required volumes of open market transactions to address it. 35 12. Information about implementation of inflation targeting communication strategy of NBK. An important component of inflation targeting is proactive and quality communication policy of the central bank. The NBK significantly expanded the list of published statistical and analytical information about its monetary policy, introduced the practice of holding press conferences and meetings of the NBK leadership with experts and media, and broadened the audience using online mobile application NBK Online. These measures aim to achieve correct understating of financial market processes among economic agents and form rational expectations about inflation, exchange rate and other macroeconomic indicators. The increasing role in communications is attributed to Overview of Inflation, a quarterly publication of the NBK covering trends and factors, which influence the inflation, as well as macroeconomic forecast. Also, when decision on base rate is made, the NBK publishes a press release with justification of this decision, as well as quarterly press release with technical details, in-depth analysis and mid-term projections. 13. Information about draft Law of the Republic of Kazakhstan “On the National Bank of the Republic of Kazakhstan” aiming to create the inflation targeting institutional framework, as well as any other steps taken in this area. The NBK has been working on creation of the inflation targeting institutional framework since 2003, particularly for determining the stability of prices as the main goal, and for independence of the central bank. According to Article 7 of Law of the Republic of Kazakhstan “On the National Bank of the Republic of Kazakhstan”, the main goal of the NBK is to ensure stability of prices. According to Article 21, the NBK, within the powers assigned thereto by legislation of the Republic of Kazakhstan and acts of the President of the Republic of Kazakhstan, is independent in its activities. Representative and executive bodies cannot interfere in activities of the NBK, its branches, representations, departments and organizations, which are carried out for implementation of its legal powers. According to Article 27, the NBK cannot acquire ownership of state securities of the central authorized body for budget execution when they are placed at the primary market. According to Article 3, the NBK reports only to the President of the Republic of Kazakhstan. According to Decree # 30 of the Board of the National Bank of the Republic of Kazakhstan dated February 24, 2017 “On Official Refinancing Rate”, from April 1, 2017, the value of official refinancing rate is made equal to the value of base rate set for corresponding date. 36 14. Information about weighted average of Tier-1 to risk-weighted assets ratio in the banking system according to data of the National Bank of Kazakhstan (K1-2 coefficient). As of September 1, 2017, Tier 1 capital adequacy ratio in the banking system was 16.0%. 15. Information about actions taken by NBK to improve quality and completeness of prudential reporting and measure the risk, particularly: a. Normative legal acts that require financial institutions to maintain financial reporting based on consolidated reporting in accordance with IFRS; According to Article 16 of the Law11, organizations, whose activities are regulated by the NBK, shall produce financial reporting in accordance with International Financial Reporting Standards (IFRS). Besides, Clause 8 of Rules #4112 of the NBK defines requirements to financial organizations regarding provision of financial reporting, including consolidated financial reporting, in accordance with International Financial Reporting Standards. b. Revision of prudential norms of NBK that require introduction of control bank reserves by banks to ensure sufficient capital to cover market and other risks; On September 25, 2017, in accordance with Guidelines for Formation of Provisions (Reserves) for Impairment of Assets of Second-tier Banks in Form of Loans and Accounts Receivable (hereinafter referred to as Guidelines), regulatory provisions were introduced. They are based on existing methodologies of formation of bank provisions according to principles of IFRS 39, but use a more conservative approach. Introduction of the Guidelines will allow assessing the extent of potential losses in a second-tier bank. The Guidelines are based on conservative approach and criteria of credit risk assessment, which are applied in NBK’s inspections of loans (credits). Positive difference between regulatory provisions as per the Guidelines and provisions (reserves) formed in accordance with IFRS will reduce the regulatory equity as follows: from 25.09.2017 – 5% of the value of positive difference; from 01.12.2017 – 16.67% of the value of positive difference; from 01.09.2018 – 33.33% of the value of positive difference; from 01.09.2019 – 49.99% of the value of positive difference; from 01.09.2020 – 66.67% of the value of positive difference; from 01.09.2021 – 83.33% of the value of positive difference; from 01.09.2022 – 100% of the value of positive difference (from capital assets). This approach ensures phased recognition of potential (hidden) losses for purpose of bank capitalization by shareholders and maintaining of stability of the entire financial system. Law # 243-III dated February 28, 2007 “On Accounting and Financial Reporting”. 11 12 Decree # 41 of the Board of the National Bank of the Republic of Kazakhstan dated January 28, 2016 “On Approval of the Rules of Submission of Financial Reporting by Financial Organizations, Special Financial Companies, Islamic Special Financial Companies, and Microfinance Organizations”. 37 c. Revision of methodology of classification of non-performing loans. In effort to reduce the credit risk, as well as to address the low level of loan provisions, the NBK has approved introduction of deductions from bank’s equity to the amount of excess of regulatory provisions (provisions calculated in accordance with requirements of the National Bank) over provisions created by banks in accordance with IFRS. At present, the decree is in process of registration with the Ministry of Justice of the Republic of Kazakhstan. In addition to the above decree, there are plans to revise the approach to assessment of operational risk for purpose of calculation of capital adequacy ratios in accordance with international standards. A.2.2 Borrower’s Comments on the Draft ICR National Bank of Kazakhstan The National Bank of Kazakhstan suggested several editorial comments, including the following ones. All of these comments were incorporated in the main text of the ICR. In the section Strengthen the financial sector by improving the legal framework for insolvency, strengthening prudential norms: 1) Forth, fifth, and sixth sentence of the second paragraph should be edited as follows: “Also, in 2015, there was a simultaneous transfer of assets between the parent bank Kazkommertsbank and its subsidiary BTA Bank. As a result of this simultaneous operation of the exchange of assets and liabilities between these banks and the subsequent withdrawal of BTA Bank from the banking system, there was a significant reduction in the NPL level in the banking system. Moreover, in 2017, Halyk Bank acquired a controlling stake of the shares (97 percent) of Kazkommertsbank. Additional provisions have been formed, based on the results of asset quality review conducted by the NBK and Halyk Bank. Halyk Bank has injected additional capital into Kazkommertsbank. As a result of the work done by banks to improve the quality of loan portfolios in the period from 2014 to June 2017, the share of NPL in the loan portfolio of banks decreased from 32.9 to 10.7 percent.” 2) We suggest removing the following sentence from the third paragraph: “The NBK is planning to launch an asset quality review of the banking sector in 2018”. Ministry of Finance The Ministry of Finance provided official fiscal data in Excel format, including the following summary table: 38 Table 9. Oil and non-oil revenue data of the Consolidated Budget (in KZT billions) 2017 plan of Description 2014 actual 2015 actual 2016 actual 01.11.2017 Revenue 10,825.9 16,972.0 7,436.6 8,737.1 Tax revenue 8,583.1 6,497.1 7,153.3 8,299.7 Non-tax revenue 215.4 241.4 377.3 191.0 Capital revenue 72.4 70.9 61.1 50.4 Transfers received 0.0 0.0 0.4 0.0 NFRK investment income 1,955.0 10,162.6 -155.1 196.0 Revenue (% of GDP) 27.3 41.5 15.8 16.8 Customs duty on oil exports (106110) 716.9 647.7 639.0 794.6 Non-oil revenue 10,109.1 16,324.3 6,797.6 7,942.5 Non-oil revenue (% of GDP) 25.5 39.9 14.5 15.3 NFRK revenue 3,504.6 1,631.0 1,138.8 1,574.3 Oil revenue 4,221.5 2,278.7 1,777.7 2,368.9 Oil revenue (% of GDP) 10.6 5.6 3.8 4.6 Memo: Nominal GDP 39,675.8 40,884.1 46,971.2 51,855.3 Revenue, excluding NFRK investment income 8,870.9 6,809.4 7,591.7 8,541.1 Share of GDP 22.4 16.7 16.2 16.5 Based on the above official revenue data provided by the Ministry of Finance, the ICR team has updated actual fiscal data in Table 3 and cited differences in fiscal accounts consolidation approaches. Specifically, the ICR team applied the IMF GFS methodology by excluding from the revenue base (1) FX gains/losses of the NFRK which should not be part of the cash flow statement (the Consolidated Budget) of the government; and (2) sale of state property and land which should be part of privatization in the deficit financing side of the budget. 39