87855 Kazakhstan: Short-Term Vulnerabilities, Positive Prospects Kazakhstan Economic Update Spring 2014 Kazakhstan: Short-Term Vulnerabilities, Positive Prospects Kazakhstan Economic Update Spring 2014 KAZAKHSTAN ECONOMIC UPDATE  –  SPRING 2014 Government fiscal year: January 1–December 31 Currency equivalents: Exchange rate effective as of March 31, 2014 Currency Unit = Kazakhstan Tenge (KZT) USD 1.00 = KZT 182.04 KZT 1.00 = USD 0.0055 Weights and measures: Metric System Abbreviations BRIC Brazil, Russia, India, China CES Common Economic Space CIS Commonwealth of Independent States CPI Consumer price index CU Customs Union between Belarus, Kazakhstan and Russia EU European Union FDI Foreign direct investment FX Foreign exchange GDP Gross domestic product KASE Kazakhstan Stock Exchange NBK National Bank of Kazakhstan NPLs Non-performing loans OECD Organisation for Economic Co-operation and Development PPI Producer price index PPP Purchasing power parity SMEs Small- and medium-sized enterprises SOEs State-owned enterprises US United States of America ii  │  KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS Contents Abbreviationsii Acknowledgmentsiv Overviewv A. Revealing Imbalances in the External Accounts 1 Higher credit-driven economic growth was partially offset by weaker external demand  1 Weaker external demand led to a deficit in the current account  3 Lower tenge liquidity and lower food prices pushed inflation down 4 Unemployment and poverty ratios continue to decline  5 B. Maintaining Prudent Macroeconomic and Structural Policies 7 Fiscal policy remained conservative and neutral to inflation 7 Exchange rate policy remains the main monetary policy instrument 8 Imbalances in banks’ lending portfolios are being addressed by new prudential norms 9 Structural reforms are focusing on improving the quality of the country’s endowments 10 C. Benefiting from Positive Medium-Term Prospects  12 Global economic recovery is continuing, but regional prospects are mixed  12 Kazakhstan’s economy will grow on the back of the oil sector  13 The external position will remain strong  13 Fiscal policy is set to be more expansionary and pro-cyclical 14 D. Special Focus—Coping with the Devaluation Impact on the Economy  17 The devaluation was a response to new regional and global economic realities  17 The devaluation can impact the banking sector and inflation  18 Higher inflation can affect household consumption and savings patterns  19 Some domestic policies can help mitigate inflationary pressures  20 Annex22 Annex 1. Government’s Longer-Term Development Priorities 22 Annex 2. Selected Economic and Social Indicators 24   │  iii KAZAKHSTAN ECONOMIC UPDATE  –  SPRING 2014 List of Figures Figure 1. Higher growth in agriculture and the oil sector offset lower growth in services 2 Figure 2. On-shore oil output resumed growing due to a record high production at Tengiz 2 Figure 3. Tenge liquidity was affected by transfers of tenge deposits and cash into FX savings 4 Figure 4. Inflation moderated due to lower food prices and a decline in core inflation 4 Figure 5. Unemployment rate declined, as labor force participation increased further 5 Figure 6. Poverty incidence has improved, but the urban-rural gap has widened 5 Figure 7. The government has kept its total spending under a strict control 7 Figure 8. Government’s FX savings are almost twice as large as its total debt 7 Figure 9. The managed float regime in Kazakhstan was more rigid than in Russia 8 Figure 10. The ER policy rigidity did not help the tenge to adjust to the changing environment 8 Figure 11. Lower non-oil growth will be offset by higher oil supply in the medium-term 13 Figure 12. The oil sector will be expanding on the back of Kashagan oil from 2015 onwards 13 Figure 13. The overall external position will become stronger 14 Figure 14. The external debt to GDP ratio will increase due to lower denominator in dollars 14 Figure 15. Adults who saved money in 2010 20 List of Tables Table 1. Kazakhstan—Contribution to Real GDP Growth by Expenditure, 2008–2013 1 Table 2. Kazakhstan—Balance of Payments, 2008–2013 3 Table 3. Kazakhstan—Selected Indicators of the Banking Sector, 2007–2013 9 Table 4. Kazakhstan—General Government Fiscal Accounts, 2011–2016 15 List of Boxes Box 1. Government measures to mitigate the impact of the devaluation 19 Box 2. Determinants of inflation in Kazakhstan 21 Acknowledgments This economic update was prepared by the Kazakhstan country economists, Ilyas Sarsenov and Dorsati Madani. Support and comments were provided by Sebnem Akkaya (Country Manager) and Ivailo Izvorski (Sector Manager). Megumi Kubota (Consultant) provided inputs to the inflationary impact analysis. The formatting of the report was done by Budy Wirasmo. iv  │  KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS Overview In 2013, stronger credit-driven domestic demand from the private sector contributed to higher GDP growth, while external demand remained weak. Kazakhstan’s economic growth increased from 5 percent in 2012 to 6 percent in 2013, driven by stronger private consumption and investment. At the same time, weaker external demand led to a deficit in the current account in 2013 and to a sharp devaluation of the local currency in February 2014. The devaluation is expected to put additional pressures on the banking sector, burdened with non-performing loans, and lead to higher inflation in 2014. Global economic recovery is continuing, but prospects for the Eurasia region are mixed. Economic recovery in high-income countries will have a positive impact on trade with emerging markets, including Kazakhstan. Despite a projected slowdown of economic growth in China, its demand for Kazakhstan’s hydrocarbons is expected to remain stable. Economic growth in Russia, however, appears likely to slow in 2014 and—in the event of a further worsening of the geopolitical situation around the Crimea crisis, and possible sanctions applied by the United States and the European Union—may potentially, shift to a contraction, negatively affecting economic developments in Kazakhstan in the short-term. Despite the short-term vulnerabilities accentuated by an uncertain regional economic outlook, Kazakhstan’s medium-term prospects look promising. In 2014, GDP growth of Kazakhstan is estimated to be close to its potential of about 5½ percent, supported by improvements in the external balances. In the medium-term, the economy will continue to grow on the back of the expanding oil sector, while the expansion of the non-oil economy will be lower, due to lower domestic demand. Pro-cyclical expansionary fiscal policy is set to boost economic growth beyond its estimated potential, but is expected to normalize after the EXPO- 2017 . In the long run, structural reforms envisioned by the development vision Kazakhstan-2050 are set to foster competitiveness of the economy by improving the country’s endowments—human capital, infrastructure and institutions. This economic update is structured as follows:  Section A describes the recent economic developments, with a focus on emerged imbalances in the external accounts, which led to growing depreciation expectations and resulted in the one-off tenge devaluation in early 2014. Section B provides an overview of recent macroeconomic policies and the government’s forward-looking vision of moving toward a diversified knowledge-based economy by improving the country’s endowments. Section C outlines the medium-term economic prospects for Kazakhstan, which is expected to benefit from the global economic recovery, but face risks, both external and domestic. Section D discusses possible short- to medium-term impacts of the devaluation on the economy and suggests a set of policy measures to mitigate inflationary pressures. Overview  │  v This page is intentionally blank. KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS A. Revealing Imbalances in the External Accounts Higher credit-driven economic growth was partially offset by weaker external demand Stronger domestic demand from the private sector was driven by credit and contributed to higher GDP growth, while contribution from external demand remained negative. Kazakhstan’s real GDP growth increased from 5 percent in 2012 to 6 percent in 2013, due to much stronger domestic demand from the private sector (Table 1). While the government contribution to GDP growth was negligible, the private sector drove the economy up. Both private consumption and private investment grew much faster in 2013 than in the preceding year. Private consumption growth was supported by a rapid expansion of consumer lending (46 percent increase), while real salaries grew only modestly (1.6 percent increase) in 2013. The boost in investment activity is also explained by an increased availability of credit. According to the official data, the share of credit, as a source for fixed capital investment funding, increased from 12 percent in 2012 to over 20 percent in 2013. At the same time, net exports contributed negatively to real GDP growth. While imports continued growing in 2013, exports decreased slightly due to a weaker external demand for oil, metals, and wheat. Table 1. Kazakhstan—Contribution to Real GDP Growth by Expenditure, 2008–2013 in percentage points 2008 2009 2010 2011 2012 2013e GDP growth 3.3 1.2 7.3 7.5 5.0 6.0 Domestic demand -1.0 1.1 6.0 7.0 9.0 7.5 Consumption 3.2 0.4 5.5 5.6 6.2 4.8 Government 0.3 0.1 0.3 1.2 1.4 -0.2 Private sector 2.9 0.3 5.2 4.5 4.7 5.0 Investment -4.2 0.7 0.5 1.3 2.8 2.7 Government -0.1 0.9 0.5 -0.1 0.4 -0.1 Private sector -4.1 -0.2 0.1 1.4 2.4 2.8 External demand 5.5 0.7 0.5 -0.6 -3.4 -1.5 Exports of goods and services 0.5 -5.7 1.4 0.2 2.1 -0.1 Imports of goods and services 5.0 6.4 -0.9 -0.8 -5.5 -1.4 Statistical discrepancy -1.2 -0.6 0.8 1.1 -0.6 0.1 Sources: Statistical Agency of Kazakhstan; World Bank staff calculations and estimates. Note: Some sums may not add up exactly due to rounding. On the production side, despite higher domestic demand, services grew slower in 2013. Slower growth in services is mainly explained by a sharp fall in growth of real estate transactions (from 7.7 percent growth in 2012 to 1.6 percent in 2013), due to lower growth of mortgages. Trade and transportation (especially of oil, metals and wheat) also grew slower in 2013. Real growth of the financial activity, mainly the banking sector, slowed from 11.7 percent in 2012 to 10.1 percent in 2013. As a result, the real growth rate of all services moderated from 10.4 percent in 2012 to 7 .1 percent in 2013. A. Revealing Imbalances in the External Accounts  │  1 KAZAKHSTAN ECONOMIC UPDATE  –  SPRING 2014 The lower growth in services was more than offset by higher output in agriculture and industry. Better weather conditions in 2013 helped the agricultural sector to partially compensate its negative contribution to economic growth observed in 2012 (Figure 1). Wheat output, in particular, was the main contributor to the 11 percent growth in agriculture, with 14 million tons harvested in 2013, up from 10 million tons harvested in the dry year of 2012. The recovery of industrial growth was characterized mainly by developments in the oil sector. While there was further delay in oil production at the off-shore Kashagan oil field, the on-shore oil sector grew by 3.2 percent in 2013, mainly due to a bumper oil production by Tengizchevroil in 2013 (Figure 2). The restorations made at the second-generation plants at the Tengiz oil field helped Tengizchevroil to boost its production by 12 percent, from 24 million tons in 2012 to 27 million tons in 2013. In the rest of the oil industry, however, oil production remains flat at around 55 million tons a year. Meanwhile, manufacturing growth slowed further (from 3.0 percent in 2012 to 1.8 percent in 2013), due to further declines in the metallurgy sector output, impacted by declining metal prices. Figure 1. Higher growth in agriculture and the oil Figure 2. On-shore oil output resumed growing sector offset lower growth in services due to a record high production at Tengiz Real GDP growth: Oil and non-oil contribution Oil production in Kazakhstan percentage point/percent million of metric tons 10 90 7.3 7.5 80 8 6.0 70 6 5.0 60 4 3.3 50 2 1.2 40 30 0 20 -2 10 -4 0 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 JJ Oil sector JJ Agriculture JJ Non-oil industry JJ Services ▬▬ GDP growth JJ Tengizchevroil (TCO) JJ Karachaganak (KPO) JJ KazMunaiGas E&D JJ CNPC-AMG JJ PetroKazakhstan JJ MangistauMunaiGas JJ Other (residual) Source: Statistical Agency of Kazakhstan. Source: Official websites of oil companies. Meanwhile, it was reported that Kazakhstan’s off-shore Kashagan oil and gas project is facing another delay affecting its projected revenue profile. Kashagan is one of the largest oil and gas fields in the world and is expected to bring huge profits to Kazakhstan and the developer companies. It is also considered as one of the most expensive energy projects in the world, with a revised total cost estimate of $136 billion (of which the first phase already cost over $40 billion and is still counting). Moreover, it has experienced several delays since 2005, due to the complicated structure of the field. Oil production at Kashagan off-shore field was launched on September 11, 2013. However, production has been stopped since October 9, 2013, due to pipeline leaks. Some experts believe that if the leaks were provoked by pipelines cracking, the whole pipeline of some 40 km would have to be replaced, delaying the restart of production until 2015 or even 2016. 2  │  A. Revealing Imbalances in the External Accounts KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS Weaker external demand led to a deficit in the current account While the overall external position remained strong, the current account went into deficit. The overall external balance of payments remained strong in 2013 and contributed to a further buildup of total official foreign exchange (FX) reserves, comprising FX reserves in the Oil Fund and FX reserves at the National Bank (Table 2). The total official FX reserves increased by $10 billion and reached $90 billion (41 percent of GDP) by the end of 2013. While the fiscal FX reserves in the Oil Fund continued expanding rapidly due to ample oil revenue inflows ($1 billion a month on average), the FX reserves held by the National Bank of Kazakhstan (NBK) decreased for the second year in a row. The sterilizations of FX inflows by the Oil Fund, accompanied by a sharp decrease of the current account surplus (from $10 billion in 2011 to $1 billion in 2012 and further down to a deficit of $0.1 billion in 2013), were the main reasons for the draw-down of the FX reserves at the NBK during 2012–2013. Over the past two years, the deterioration in the current account balance was driven mainly by developments in the merchandize trade surplus, which narrowed from $44.8 billion in 2011 to $33.7 billion in 2013. Although the terms of trade remained stable in 2012–2013, lower external demand for key commodities and an expansion of imports led to deterioration in the trade surplus. Table 2. Kazakhstan—Balance of Payments, 2008–2013 in millions of US dollars 2008 2009 2010 2011 2012 2013e Current account 6,250 -4,121 1,386 10,197 1,079 -118 Trade of goods 33,612 15,004 28,500 44,844 38,145 33,691 Exports f.o.b. 71,964 43,923 61,392 85,194 86,931 83,407 Imports f.o.b. 38,352 28,919 32,891 40,350 48,786 49,715 Services -6,927 -5,978 -7,250 -6,635 -7,948 -6,876 Income, of which: -19,375 -12,417 -19,376 -27,746 -28,108 -25,345 Income of direct investors (net) -17,316 -10,961 -17,997 -25,213 -24,740 -22,722 Current transfers -1,060 -729 -489 -265 -1,010 -1,589 Capital and financial accounts /1 2,395 3,471 9,933 2,748 8,755 10,484 Direct investments 13,115 10,083 3,665 8,583 11,825 7,790 Portfolio investments /2 -2,898 -25 15,082 -223 -3,247 2,816 Medium and long-term investments 1,084 -4,001 -15,593 27 4,127 5,375 Other investments /1/2 -8,907 -2,586 6,778 -5,639 -3,950 -5,497 Overall balance/Change in reserves /3 8,645 -649 11,318 12,945 9,835 10,366 Change in FX reserves at the NBK 2,165 2,469 4,706 300 -4,306 -2,412 Change in FX reserves in the Oil Fund 6,480 -3,118 6,612 12,645 14,141 12,778 Memorandum items: Total official reserves (stock) 45,357 44,958 56,203 68,802 80,048 89,671 NBK FX reserves 17,871 20,590 25,223 25,177 22,121 19,127 Oil Fund FX reserves 27,486 24,368 30,980 43,625 57,927 70,544 Notes: 1/ Including Errors and omissions. 2/ Excluding investments of the Oil Fund. 3/ “+” = reserve accumulation. Nevertheless, the financial account surplus more than offset the negative developments in the current account. Although net inflows of foreign direct investment (FDI) decreased from $11.8 billion in 2012 to $7.8 billion in 2013, mainly due to the finalization of the first-phase investments into Kashagan, net external borrowings by A. Revealing Imbalances in the External Accounts  │  3 KAZAKHSTAN ECONOMIC UPDATE  –  SPRING 2014 the state-owned enterprise (SOE) sector more than compensated the drop in FDI. According to the Kazakhstan Stock Exchange (KASE) data, during the third quarter of 2013, the national oil company KazMunaiGas issued Eurobonds in the amount of $3 billion and the national agricultural holding company KazAgro issued Eurobonds of $1 billion. These Eurobond issuances boosted net portfolio investment inflows (net of amortization) to $2.8 billion in 2013. Disbursements of the Chinese credit line to the national gas transportation company KazTransGas, a subsidiary of KazMunaiGas, for the construction of the Asian Gas Pipeline were reflected in the medium- and long-term investments/loans, where a $5.4 billion net inflow was recorded.1 Consequently, the financial account balance, net of short-term and other unidentified outflows and excluding investments of the Oil Fund, was estimated at $10 billion in 2013. Lower tenge liquidity and lower food prices pushed inflation down Uncertainties associated with US monetary policy created depreciation expectations worldwide and led to lower tenge liquidity in Kazakhstan. The US Federal Reserve indication of its tapering program in May 2013 led to heightened expectation of depreciation of emerging market currencies worldwide. The expected outflow of financial resources from many emerging markets led to exchange rates weakening in countries such as Turkey, Brazil and Russia. The depreciation expectation started mounting in Kazakhstan as well, and FX deposits in Kazakhstan started expanding rapidly during the second half of 2013 (Figure 3). As a result, the share of FX deposits increased from 32 percent of total deposits in April 2013 to over 37 percent by the end of the year. At the same time, although total money supply grew by 10 percent year-on-year in 2013, compared to 8 percent in 2012, cash and tenge deposit virtually stopped growing by the end of 2013. The growth of cash in circulation declined from 8 percent year-on-year in May 2013 to -1 percent in December. The stock of tenge deposits was almost flat in July–September 2013 and started shrinking since October. Figure 3. Tenge liquidity was affected by transfers Figure 4. Inflation moderated due to lower food of tenge deposits and cash into FX savings prices and a decline in core inflation Monetary aggregates Headline inflation and its decomposition billion tenge percent change, yoy 14,000 25 12,000 20 10,000 15 8,000 6,000 10 6.8 4,000 6.1 5.7 4.8 4.5 5 2,000 0 0 Q1 008Q3 009Q1 009Q3 010Q1 010Q3 011Q1 011Q3 012Q1 012Q3 013Q1 013Q3 an-14 2008 2009 2010 2011 2012 2013 2008 2 2 2 2 2 2 2 2 2 2 2 J JJ Cash (M0) JJ Tenge deposits JJ FX deposits JJ Contribution from food prices JJ Contribution from energy and utility prices JJ Contribution from others (core inflation) ▬▬ Headline inflation Source: National Bank of Kazakhstan. Source: Statistical Agency of Kazakhstan. 1 The Asian Gas Pipeline is a gas pipeline for transporting gas from Turkmenistan and Uzbekistan to China, via the territory of Kazakhstan. The total cost of the first phase of the Asian Gas Pipeline is estimated at $12.1 billion, which makes it one of the most expensive investment projects in the history of Kazakhstan. 4  │  A. Revealing Imbalances in the External Accounts KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS Lower international food prices and lower availability of cash in circulation pushed inflation down. Despite the higher consumption growth supported by credit, headline inflation fell from 6.8 percent year-on- year in the first quarter of 2013 to 4.8 percent in the last quarter of the year and further to 4.5 percent in January 2014, mainly due to lower international food and utility prices (Figure 4). Food inflation, in particular, fell from 5.3 percent year-on-year in December 2012 to 3.3 percent on December 2013. Inflation of non-food items also fell slightly from 3.5 to 3.3 percent during the same period. Prices for paid services increased by 13 percent year-on-year during the first quarter of 2013, mainly due to price adjustments for utility services, but their growth rate declined to 8 percent by the end of the year. The contribution of core inflation, excluding food and utilities/energy items, to overall inflation declined from 2.7 percentage points in the first quarter of 2013 to 2.0 percentage points by the end of the year, due to lower availability of cash in circulation. Unemployment and poverty ratios continue to decline Unemployment in Kazakhstan declined slightly due to the creation of jobs in the services sector. The unemployment rate declined from 5.3 percent of total labor force in 2012 to 5.2 percent in 2013 (Figure 5). An increase in officially employed labor was the main contributor to higher labor force participation in 2013. While the number of unemployed remained almost flat at about 0.47 million and the number of self-employed decreased from 2.69 million people in 2012 to 2.63 million in 2013, the number of hired/contracted employees increased from 5.81 million to 5.95 million, respectively. Additional jobs were created in the services sector, especially in retail trade and car sales, as well as in education and healthcare. Meanwhile, the agricultural sector saw a continued outflow of workers of 0.1 million in 2013, leading to higher urbanization. Figure 5. Unemployment rate declined, as labor Figure 6. Poverty incidence has improved, but the force participation increased further urban-rural gap has widened Labor force indicators Poverty headcount ratios percent of active population percent of labor force percent change, yoy 72 8 18 16 14 71 5 12 10 8 70 3 6 4 2 69 0 0 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 JJ Labor force participation, lhs ▬▬ Unemployment rate, rhs JJ Urban poverty JJ Rural poverty ▬▬ Total poverty Source: Statistical Agency of Kazakhstan. Source: Statistical Agency of Kazakhstan. Poverty incidence has improved dramatically overall, but the poverty gap between urban and rural areas has widened. The poverty headcount ratio, as measured by the national poverty line, declined from 3.8 percent A. Revealing Imbalances in the External Accounts  │  5 KAZAKHSTAN ECONOMIC UPDATE  –  SPRING 2014 of total population in 2012 to about 3 percent in 2013.2 Meanwhile, the gap in poverty incidence between urban and rural areas almost doubled during 2009–2013, compared to the period before the economic crisis of 2008. While the poverty ratio was below 1.5 percent in cities, it was about 5 percent in rural areas in 2013 (Figure 6). This can be explained by the expanding services sector in cities, which attracts the abundant labor force from rural areas. The highest poverty is recorded in rural areas of the densely-populated South-Kazakhstan Oblast, where the poverty ratio is about 9 percent, and in the oil-rich western regions with a poverty ratio in rural areas ranging from 5 percent in Western-Kazakhstan and Mangistau Oblasts to 7 percent in Atyrau Oblast. The lowest poverty ratios of less than 1 percent were registered in Astana and Almaty. 2 Although the national poverty line roughly corresponds to the international poverty line at $2.5 a day, an upper-middle income country like Kazakhstan should apply a higher poverty line at international $5. The latest available poverty estimate for Kazakhstan shows that the poverty headcount ratio at $5 a day was about 35 percent of total population in 2010. 6  │  A. Revealing Imbalances in the External Accounts KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS B. Maintaining Prudent Macroeconomic and Structural Policies Fiscal policy remained conservative and neutral to inflation The government continued following a conservative fiscal policy by controlling budget spending and accumulating oil revenue savings in the Oil Fund. As total government revenue leveled off at around 26 percent of GDP and total budget spending was maintained at around 21½ percent of GDP , the overall fiscal surplus stabilized at around 4½ percent of GDP in 2012–2013 (Figure 7). Recent changes to the rules of disbursements from the Oil Fund increased the amount of oil revenue transfer to the budget by 15 percent, from $8.0 billion a year in 2010–2011 to $9.2 billion a year in 2012–2013. Despite these changes, the Oil Fund accumulated around $1 billion a month during 2013 to reach a stock of 32 percent of GDP (Figure 8). Net of government debt of 13½ percent of GDP , the government’s net financial assets increased to 18½ percent of GDP , the largest fiscal buffer in recent history. Figure 7. The government has kept its total Figure 8. Government’s FX savings are almost spending under a strict control twice as large as its total debt Consolidated fiscal accounts Government debt and savings percent of GDP percent of GDP 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 JJ Capital expenses JJ Current expenses ▬▬ Total revenue JJ Total gov. debt JJ Oil Fund FX savings ▬▬ Net financial assets Source: Finance Ministry of Kazakhstan. Source: Finance Ministry of Kazakhstan. Conservative fiscal policy has had a neutral impact on inflation. Empirical analysis shows that lagged government spending to GDP ratio is positively and significantly related to inflation; therefore, larger government spending may induce inflationary pressure in the overall CPI inflation the following year (Kubota, 2013).3 Nevertheless, during 2010–2013 fiscal policy was neutral to inflation, as government spending has been growing less than or on par with GDP . In 2013 in particular, the government’s contribution to domestic demand and inflation was negligible, due to substantial under-execution of the capital budget. 3 ” Note #3 (Washington: World Bank). Kubota, Megumi, 2013, “Notes on inflation in Kazakhstan: The impact of fiscal policy on inflation, B. Maintaining Prudent Macroeconomic and Structural Policies  │  7 KAZAKHSTAN ECONOMIC UPDATE  –  SPRING 2014 To maintain macroeconomic stability and fiscal sustainability, the authorities set ambitious fiscal targets. The government recently approved a new Concept of budget/fiscal policy. According to the Concept, the non-oil deficit is to be cut significantly from 8 percent of GDP in 2013 to 2.8 percent by 2020. The envisioned measures cover both (a) increases in non-oil tax proceeds, and (b) cuts in current spending. The government has plans to improve equity and neutrality of the tax system (by increasing tax burden on wealthier segments of the population) and strengthen tax administration. The government also plans to streamline current expenditures and finance them exclusively from non-oil revenue (from 2018 onwards). Exchange rate policy remains the main monetary policy instrument As economic performance was solid in 2013, the NBK kept its refinancing rate unchanged throughout 2013, but tightly controlled the short-term tenge liquidity. The refinancing rate was lowered from 6.0 to 5.5 percent in 2012—when economic growth slowed—and has remained unchanged since then. Nevertheless, given that banks’ liquidity was impacted by the depreciation expectations, key money market/interbank rates experienced periodic spikes throughout 2013, reflecting adherence of the NBK to keeping the exchange rate stable. To support stability of the exchange rate, the NBK had to control supply of short-term liquidity, leading to volatility in interbank rates. According to the KASE data, there was a significant variation in interbank repo rates, ranging from 3 to 25 percent during 2013. The rigid exchange rate regime in Kazakhstan did not allow the external balances to adjust to changing external environment and led to depreciation pressures on the tenge. Despite the announced move to a managed float regime in March 2011, the exchange rate policy in Kazakhstan remained relatively rigid and resulted in NBK interventions that led to a draw-down of the FX reserves held by the NBK (Figure 9). Over the past two years, the FX reserves held by the NBK decreased by $6 billion, from $25 billion at the end of 2011 to $19 billion by the end of 2013. The exchange rate regime came under an increased pressure in the second half of 2013, following further deterioration in the external current account, depreciation of the Russian ruble, Figure 9. The managed float regime in Kazakhstan Figure 10. The ER policy rigidity did not help the was more rigid than in Russia tenge to adjust to the changing environment Exchange rates of USD/KZT and USD/RUR Kazakhstan: REER developments USD/KZT USD/RUR percent of GDP 0.0070 0.037 102 0.036 101 0.0069 0.035 100 0.0068 0.034 99 0.033 0.0067 98 0.032 0.0066 97 0.031 96 0.0065 0.030 0.029 95 0.0064 0.028 94 0.0063 0.027 93 10 ar-11 un-11 ep-11 ec-11 ar-12 un-12 ep-12 ec-12 ar-13 un-13 ep-13 ec-13 13 Jul-1 3 13 13 13 13 13 Dec- M J S D M J S D M J S D Jun- Aug- Sep- Oct- Nov- Dec- ▬▬ USD/KZT ▬▬ USD/RUR ▬▬ USD/KZT ▬▬ EUR/KZT ▬▬ RUR/KZT ▬▬ BYR/KZT ▬▬ REER Sources: Central banks of Kazakhstan and Russia. Source: National Bank of Kazakhstan. 8  │  B. Maintaining Prudent Macroeconomic and Structural Policies KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS and uncertainties related to the US Federal Reserve monetary policy (Figure 10). The unsustainability of the exchange rate policy led to growing devaluation expectations and further draw-downs of the FX reserves held by the NBK during the second half of 2013. The NBK eventually reacted to the situation by announcing a one-off 19 percent devaluation of the tenge against the US dollar. The exchange rate of the tenge to the US dollar was adjusted from 155 to 185 in February 2014. Currently, the exchange rate has stabilized around 182 tenge per one dollar. A more detailed discussion on reasons and implications of the devaluation can be found in section D. Imbalances in banks’ lending portfolios are being addressed by new prudential norms Given the limited access of banks to long-term external funding, domestic deposits became the main source of funding credit. Following the recent external debt restructuring and deleveraging in the banking sector of Kazakhstan, domestic deposits became the main source of funding credit to the economy. Consequently, the loan-to-deposit ratio declined substantially from 187 percent in 2007 to 111 percent in 2012 and 2013 (Table 3). The lending activity resumed in 2012 when credit to the economy expanded by 8.2 percent year-on-year in real terms and continued to grow by an estimated 8.8 percent in 2013. The main driver of this credit growth was a higher rate of lending to households, while lending to small- and medium-sized enterprises (SMEs) has not recovered yet. Table 3. Kazakhstan—Selected Indicators of the Banking Sector, 2007–2013 End-2007 End-2008 End-2009 End-2010 End-2011 End-2012 End-2013 Deposits (in billion tenge) 3,890 5,409 6,574 7,334 8,387 8,994 10,089 Credit to the economy (in billion tenge) 7,258 7,460 7,644 7,592 8,781 9,958 11,292 Credit to the economy (percent change) 54.7 2.8 -6.8 -0.7 15.7 13.4 13.4 Credit to firms, of which: 48.3 9.4 -4.5 1.1 17.5 10.4 7.9 Loans to SMEs 74.8 4.3 -0.9 -18.9 -3.1 5.2 -9.1 Credit to households, of which: 68.0 -9.3 -11.7 -4.9 10.9 21.7 27.0 Consumer loans 55.4 -11.9 -12.7 -4.3 21.7 39.6 46.4 Mortgages 72.3 -4.7 -3.2 -0.8 7.2 9.8 7.2 Loan-to-deposit ratio (percent) 186.6 137.9 116.3 103.5 104.7 110.7 111.9 NPLs (percent of credit portfolio) 4.6 10.6 36.5 32.6 35.1 36.7 35.0* Provisions (percent of credit portfolio) 5.9 11.1 37.7 30.9 32.0 34.4 34.5* Capital adequacy ratio (percent) 14.2 14.9 -8.0 17.9 17.4 18.1 18.7 Liquidity (share of highly liquid assets in all 13.9 13.6 19.2 21.2 21.0 17.5 17.3 assets) Profitability - return on assets (percent) 1.9 0.1 -24.5 11.8 -0.3 1.6 1.7 Source: National Bank of Kazakhstan; World Bank staff calculations. Note: * Data as of May 2013; since the NBK has stopped publishing these data since June 2013. The shorter-term nature of deposits led commercial banks to issue more uncollateralized consumer loans. The volume of consumer loans grew by 40 percent year-on-year (in nominal terms) in 2012 and by more B. Maintaining Prudent Macroeconomic and Structural Policies  │  9 KAZAKHSTAN ECONOMIC UPDATE  –  SPRING 2014 than 46 percent in 2013, driven by higher consumption. Mortgages, on the other hand, grew moderately due to a lack of long-term funding. As a result, the share of consumer loans increased from 46 percent of total loans to households in 2011 to 61 percent in 2013, whereas the share of mortgages dropped from 31 to 24 percent, respectively. The rapid expansion of consumer lending created some concerns over further escalation of non- performing loans (NPLs), which already account for 35 percent of the total credit portfolio of the banking sector.4 To prevent a possible overheating of the consumer lending market and an escalation of NPLs, the regulator introduced a number of additional prudential norms. First, as of February 1, 2014, each bank has to maintain the rate of growth of collateral-free consumer loans at less than 30 percent. Additionally, the debt servicing ratio for each borrower should not exceed 50 percent of their income, to ensure that borrowers have sufficient funds to service their debt. Finally, the NBK increased the capital adequacy ratio for consumer loans from 75 to 100 percent, to prevent perverse incentives for banks to make risky decisions. All of these measures are supposed to bring growth of consumer lending back to a more sustainable path. Structural reforms are focusing on improving the quality of the country’s endowments The authorities continue with the formulation and implementation of policies that are to help the country become one of the top 30 developed nations by 2050. The January 2014 President Nazarbayev’s address to the nation, Kazakhstan’s Path—2050: Common Goal, Common Interests, Common Future, elaborated on the government’s long-term vision for Kazakhstan. The president laid out a two-phased approach for implementing the longer-term development strategy ‘Kazakhstan-2050’. The first phase is up to 2030, when Kazakhstan is to benefit from the growth of its traditional extractive sectors and the expansion of its manufacturing industry, while transitioning to a knowledge-based economic model. During the second phase, covering 2030–2050, the knowledge-based economy will ensure sustainable development of the country. The long-term development vision highlights seven priority areas for action by the government. These seven priority areas cover (i) innovative industrialization; (ii) efficient agri-industrial sector; (iii) improved potential of science; (iv) urban and infrastructure development; (v) SME development; (vi) an active, educated, and healthy population; and (vii) efficient public institutions. Each priority area is defined with objectives, outcome goals, and implementation guidance (Annex 1). Seven consecutive five-year industrial-innovation plans are to be the integrative implementation tool to achieve objectives of the Kazakhstan-2050 strategy. The emphasis placed by Kazakhstan on improved infrastructure, human capital, and public institutions is well supported by the findings of the World Bank’s new diversification report. The diversification report studies economic development in twelve countries of Eurasia, where six countries, including Kazakhstan, are rich in natural resources and the other six countries are not.5 The main observation of the report is that a diversified economy is the result of successful development and not the cause of successful development. The report suggests that better economic institutions in all Eurasian countries, including Kazakhstan, could 4 According to the NBK classification, non-performing loans amount is calculated as the sum of loans, classified as doubtful 5th category, bad loans and actual provisions for homogenous loans. 5 World Bank, 2014, Diversified Development: Making the Most of Natural Resources in Eurasia (Washington: World Bank). 10  │  B. Maintaining Prudent Macroeconomic and Structural Policies KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS enhance the stability and reduce the volatility of public finances, improve education and infrastructure to make workers more productive, and strengthen the competition regimes to encourage private enterprise and entrepreneurship. Macroeconomic stabilization, better education, and greater competition are identified as three priorities for the Eurasian countries for the next decade. On the other hand, the report argues that forced diversification (for example by subsidizing new industries), if it is not consistent with the country’s endowments, will almost always fail, as it usually results in economic inefficiency. B. Maintaining Prudent Macroeconomic and Structural Policies  │  11 KAZAKHSTAN ECONOMIC UPDATE  –  SPRING 2014 C. Benefiting from Positive Medium-Term Prospects Global economic recovery is continuing, but regional prospects are mixed Both high-income and developing economies are expected to resume a steadier growth path after several years of crisis and uncertainty, which will strengthen demand for Kazakhstan’s main exports. Growth in high-income economies is expected to strengthen from 1.3 percent in 2013 to 2.2 percent in 2014 and 2.4 percent in 2015 and 2016.6 This growth will translate into higher imports from developing countries and act as tailwind for them. Demand for Kazakhstan’s main exports—oil and mineral products—should firm up going forward. In the meantime, China, the other main client for Kazakhstan’s oil exports, is projected to grow slower at 7 .5 percent per year for the next three years, but will continue providing sustained demand for Kazakhstan’s oil. The end of the quantitative easing in the United States of America (US) is expected to follow an orderly trajectory, and the consequent higher interest rates and capital flow rebalancing are not expected to continue affecting strongly middle-income economies, including Kazakhstan. The strengthening economic activity in the Euro area will lead to a firming up of GDP growth in the Commonwealth of Independent States, especially those countries endowed with natural resources. The Commonwealth of Independent States (CIS) transition countries’ GDP growth will firm up from 3.5 percent in 2013 to 4.1 percent in 2016.7 The resource-rich countries who have undertaken major investments to expand their production capacity—such as Kazakhstan with the Kashagan oil field—will be able to respond to the increased external demand. While volumes may increase, improved technology is expected to dampen the price responses, so that oil prices in nominal terms will remain at about $104 a barrel in 2014 before dipping slightly in 2015 and 2016. However, the increased integration of Kazakhstan within the Customs Union will leave it more vulnerable to economic developments in Russia. As noted in section D, the Customs Union (CU) members are increasingly coordinating their economic policies and some experts view the February 2014 tenge devaluation as an attempt at re-aligning trade prices between Russia and Kazakhstan. By extension, the size and health of the Russian economy, as well as any shocks that affect it, will affect Kazakhstan’s economy, as its exports to Russia may suffer. Additionally, the Ukrainian crisis has led to disturbances in the Russian financial and exchange rate markets and its projected GDP growth for 2014 has been lowered substantially, with a projected 1.1 percent growth in a low-risk scenario, assuming a limited and short-lived effect of the Crimea crisis. If the geopolitical situation worsens, a possible 1.8 percent contraction of the Russian economy is projected in a high- risk scenario, assuming a more severe shock to economic and investment activities from the Crimea crisis.8 Political and economic sanctions by the US and the European Union (EU), related to the Crimea situation, may lead to a possible recession in Russia and may impact negatively on investment flows into the other CU countries, including Kazakhstan and Belarus. 6 World Bank, 2014, Global Economic Prospects: Copying with policy normalization in high-income countries (Washington: World Bank). 7 The CIS transition countries include Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyz Republic, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, and exclude high-income Russia. 8 World Bank, 2014, Russian Economic Report 31: Confidence Crisis Exposes Economic Weakness (Washington: World Bank). 12  │  C. Benefiting from Positive Medium-Term Prospects KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS Kazakhstan’s economy will grow on the back of the oil sector In the medium-term, the Kazakhstan’s economy is expected to grow close to its potential, on the back of the oil sector. According to the World Bank’s Global Economic Prospects (January 2014), the potential GDP growth of Kazakhstan is estimated at about 5½ percent a year. Our baseline scenario also assumes GDP growth to be around this estimate in the medium-term (Figure 11). Recent prudential limits placed on consumer credits and the devaluation induced inflation are expected to constrain short-term consumption, both of domestic and imported products, affecting overall demand and the growth of the non-oil economy. Government investments, on the other hand, are expected to partially offset slower growth in private consumption, due to an additional Oil Fund support program of 1 trillion tenge (equivalent of $5.5 billion) and the EXPO-2017 investment plans. As part of the Oil Fund support program, government plans to support private investment growth by facilitating lending to the manufacturing industry and SMEs, via state-owned and private banks. Net exports growth will continue to depend on the oil sector and the global economic recovery. If Kashagan finally comes on stream in 2015, it will contribute to a rapid expansion of the oil sector (Figure 12).9 Based, on these assumptions, GDP growth is expected to slow to 5.4 percent in 2014 and then increase to 5.7 percent in 2015 and about 6 percent in 2016. Meanwhile, the February devaluation will led to an inflation spike of around 10 percent in 2014, as discussed in section D, and then return to the range of 6–8 percent targeted by the NBK, barring any other external shocks. Figure 11. Lower non-oil growth will be offset by Figure 12. The oil sector will be expanding on the higher oil supply in the medium-term back of Kashagan oil from 2015 onwards Real GDP growth and inflation Oil production and oil price prospects percent contribution/change million of metric tons US dollar per barrel 20 160 120 18 16 100 14 120 80 12 10 80 60 8 6 40 4 40 2 20 0 -2 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 JJ Oil GDP JJ Non-oil GDP ▬▬ CPI inflation JJ On-shore JJ Off-shore (Kashagan) ▬▬ Oil price, rhs Source: World Bank staff estimates. Source: World Bank staff estimates. The external position will remain strong International savings by the public sector are expected to rise further. The recent tenge devaluation will positively impact the trade balance and the current account, as imports are expected to decline slightly in 2014 9 The most recent government’s optimistic scenario assumes Kashagan to come on stream in the second half of 2014. C. Benefiting from Positive Medium-Term Prospects  │  13 KAZAKHSTAN ECONOMIC UPDATE  –  SPRING 2014 and then resume growing moderately in the years after. As a result, no further significant draw-downs of the FX reserves at the NBK are anticipated. As a percent of GDP , the NBK FX reserves, including gold reserves, are projected to be in the range of 11–12 percent during 2014–2016 (Figure 13). At the same time, the FX savings in the Oil Fund are expected to continue growing, but less rapidly than before, due to the planned additional disbursement of $5.5 billion from the Oil Fund for financing the manufacturing industry and SMEs and investing into infrastructure projects during 2014–2015. Nevertheless, the stock of the Oil Fund is expected to increase from 32 percent of GDP in 2013 to 43 percent in 2016, maintaining a very solid external position of the government. Consequently, the total official FX reserves are expected to rise from 43 percent of GDP in 2013 to 55 percent in 2016. External debt of the public sector will decline, while external debt of the private sector will continue to grow slowly. External debt of the public sector, including SOEs, is expected to go down, due to availability of additional funding from the Oil Fund and planned privatization of problem banks and some SOE assets. As a percent of GDP , external debt of the enlarged public sector (including the SOEs) will decline from 16 percent in 2014 to 14 percent in 2016, the majority (83 percent) of which belongs to the SOE sector (Figure 14). The external indebtedness of the banking sector has declined considerably after two debt restructuring programs initiated by the government in 2010 and 2013, and will remain low. Meanwhile, the corporate sector is expected to continue expanding its balance sheet by borrowing externally, mainly for financing big infrastructure projects in the oil and gas sector (e.g. oil and gas pipelines financed by China). Although there will be an upward shift in the ratio of total external debt to GDP from 67 percent in 2013 to about 74 percent in 2014–2016, this shift is attributed to a lower GDP denominated in dollars, due to the tenge devaluation in February 2014. Otherwise, total external debt is anticipated to remain stable, as a share of GDP , in the medium-term. Figure 13. The overall external position will become Figure 14. The external debt to GDP ratio will stronger increase due to lower denominator in dollars Total official international reserves Total external debt percent of GDP percent of GDP 60 80 70 50 60 40 50 30 40 30 20 20 10 10 0 0 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 JJ Fiscal FX reserves JJ Monetary FX reserves JJ Intra-company loans JJ Corporate sector JJ Banking sector (private) JJ Public sector, incl. SOEs Source: World Bank staff estimates. Source: World Bank staff estimates. Fiscal policy is set to be more expansionary and pro-cyclical The overall fiscal surplus is anticipated to narrow as fiscal policy is set to expand pro-cyclically in the medium-term. Government spending will increase during 2014–2015 by appropriating an additional transfer 14  │  C. Benefiting from Positive Medium-Term Prospects KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS from the Oil Fund of about $5.5 billion. These additional funds will be allocated to finance the manufacturing industry, SMEs, and infrastructure projects envisaged by the second five-year industrial and innovation development plan, including the needs of the EXPO-2017 project. Current expenditures are also expected to grow. While in 2014, current expenditures will be adjusted to alleviate the impact of the devaluation on civil and public servants and vulnerable groups of the society, there will be real increases in the wage bill in 2015 and 2016, as well as more goods and services to be procured for the EXPO-2017 needs during the next three years.10 Consequently, the non-oil deficit is anticipated to increase from 8 percent of GDP in 2013 to about 10 percent a year in 2014–2016 (Table 4). Nevertheless, ample oil revenue proceeds, including the announced $20 increase in oil exports duty (from $60 to $80 per barrel), will keep the overall fiscal balance in surplus, though it is projected to narrow from 4 percent of GDP in 2014 to about 2 percent in 2015–2016. Table 4. Kazakhstan—General Government Fiscal Accounts, 2011–2016 in percent of GDP 2011 2012 2013 2014p 2015p 2016p Total revenue 27.7 26.4 25.5 26.5 25.4 24.8 Oil revenue 14.4 13.8 12.4 13.9 12.5 11.8 Oil revenue saved in the Oil Fund 8.2 7.3 6.5 5.9 5.4 5.8 Oil revenue spent by the State Budget 6.1 6.6 5.9 7.9 7.1 6.0 Non-oil revenue of the State Budget 13.3 12.6 13.1 12.6 12.9 13.1 Total expenditure and net lending 21.5 22.1 21.2 22.5 23.5 23.1 Current expenditure 14.9 16.1 16.3 16.3 17.3 17.8 Capital expenditure and net lending 6.7 6.0 4.9 6.2 6.2 5.4 Overall fiscal balance 6.2 4.3 4.4 4.0 1.9 1.7 State Budget deficit -2.1 -2.9 -2.1 -2.0 -3.5 -4.1 Non-oil deficit -8.2 -9.5 -8.0 -9.9 -10.6 -10.0 Oil revenue spent by the State Budget 6.1 6.6 5.9 7.9 7.1 6.0 Oil revenue saved in the Oil Fund 8.2 7.3 6.5 5.9 5.4 5.8 Memorandum items: Net government financial assets 12.8 16.1 18.5 24.5 24.0 24.2 Oil Fund FX reserves 23.2 28.5 32.0 38.7 40.5 43.2 Total government debt 10.4 12.3 13.5 14.2 16.5 19.0 Sources: Kazakhstan Ministry of Finance; World Bank staff calculations. Note: Some sums may not add up exactly due to rounding. Meanwhile, the net financial asset position of the government will remain strong, despite the pro-cyclical expansionary fiscal policy. Although total government debt is projected to grow (from 13½ percent of GDP in 2013 to about 19 percent in 2016), due to a growing deficit of the state budget, it will be more than offset by fiscal savings in the Oil Fund (expected to expand from 32 percent of GDP in 2013 to 43 percent in 2016), as external demand for oil firms up and the Kashagan oil field comes on line. Consequently, the net financial asset position of the government will increase from 18½ percent of GDP in 2013 to about 24 percent during 2014–2016, including an exchange rate gain (of about 6 percent of GDP) occurred in 2014, due to the tenge 10 The government has already announced a 10 percent increase of salaries of civil and public servants from April 1, 2014 and an additional 5 percent increase of pay-as-you-go pensions from April 2, on top of the 9 percent increase implemented from January 1, 2014. Additional increases to the government’s wage bill are expected during 2015–2016 (see Annex 1). C. Benefiting from Positive Medium-Term Prospects  │  15 KAZAKHSTAN ECONOMIC UPDATE  –  SPRING 2014 devaluation. This means that higher government spending envisaged during the next three years will neither harm the medium-term fiscal sustainability nor the net debt position of the government. Nevertheless, the pro- cyclical fiscal policy may create additional inflationary pressures, if the economy is pushed to grow beyond its estimated potential in the medium-term. 16  │  C. Benefiting from Positive Medium-Term Prospects KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS D. Special Focus—Coping with the Devaluation Impact on the Economy The devaluation was a response to new regional and global economic realities The authorities announced that the tenge devaluation was partly undertaken to improve the competitiveness of the economy. “Competitive devaluation”—as this policy practice is known—is believed to help the competitiveness of national products directed to domestic and export markets in the short- term. The devaluation is expected to lead to an increase in import prices, thus curbing imports, helping the competitiveness of domestic products, and improving the trade balance of the country. However, to the extent that each industry is dependent on imports of intermediate and raw products, the rise in import prices will affect their production costs, making their gains in competitiveness short-lived. In fact, the producer price index (PPI) rate already increased sharply from 0.9 percent year-on-year in February 2014 to 9.1 percent in March. Moreover, following recent salary increases for civil and public servants (as of April 1, 2014), wages in the private sector were adjusted upwards and will partially erode some of gains in competitiveness, unless labor productivity gains outstrip these additional production costs. The suggestion that Kazakhstan needs to improve its competitiveness is also associated with the creation of the Customs Union between Belarus, Kazakhstan, and Russia. The CU led to trade diversion, with CU exports to Kazakhstan rising from 32.5 percent of total imports in 2009 to about 39.9 percent of total imports in 2012. In comparison, imports from EU fell from 27.4 percent of total exports in 2009 to 16.9 percent in 2012. However, Kazakhstan’s exports to Russia and Belarus fell from 8.3 percent of total exports in 2009 to about 7 .4 percent in 2012. The private sector has faced costly non-tariff barriers when trying to export to Russia. The 11 12 devaluation is expected to help domestic producers compete against CU imports, while helping Kazakhstani exporters who face the cost of the CU non-tariff barriers. The deepening regional economic integration initiative has most likely played a role in the devaluation of the tenge. While Kazakhstan has retained its international trade and investment relationships, the authorities are working to coordinate their economic policy more closely with Russia and Belarus in light of their joint regional integration efforts. As of February 2014, the Common Economic Space (CES) negotiations package includes trade policy, technical regulations, natural monopolies, and cooperation in the field of transport, energy, industry, and agriculture, as well as currency policies. These policy alignments are translating into closer alignment of the Kazakhstani and Russian economies, including closer ties between the ruble and the tenge in the past year. Russia remains one of the largest trade partners for Kazakhstan, and is facing subdued growth prospects, worsening external and fiscal balances, and a sharply weaker ruble. As of February 2014, the ruble depreciated by 17 percent against the dollar from a year earlier. Of this 17 percent, 7 percent happened during 2013 and almost 10 percent during the first two months of 2014, following the political tensions with Ukraine. 11 COMTRADE data, World Bank staff calculations. 12 Analysis by the World Bank suggests that unless trade facilitation and trade related regulatory reforms are undertaken within the CU, Kazakhstan would experience a welfare loss of -0.1 percent of GDP per year as a result of joining the CU. D. Special Focus—Coping with the Devaluation Impact on the Economy  │  17 KAZAKHSTAN ECONOMIC UPDATE  –  SPRING 2014 Finally, global economic realities appear to have influenced the decision to devaluate the tenge. First, the gradual withdrawal of quantitative easing in the US has caused an outflow of financial resources from many emerging markets, with exchange rates weakening in countries such as Turkey, Brazil and Russia. Second, the uncertainties related to the global economic recovery and softening petroleum and metal prices appear also to have been major contributors to this devaluation. For instance, prices are down almost 9 percent from a year earlier, pulling down natural gas prices in Eurasia. As reported earlier, softer international metal prices in the past two years have already impacted the metallurgy industry and will continue to do so in 2014. The devaluation can impact the banking sector and inflation The devaluation could increase the risk associated with NPL situation in the banking sector. The banking sector has experienced a slow recovery from the 2007–2009 crisis and remains vulnerable. Furthermore, about 30 percent of bank loans in 2013 were in foreign currency. The devaluation may lead to further increases in NPLs and to an overall pressure on the banking system through its retail loan portfolio. Preliminary reports show that NPLs (of over 90 days overdue) increased from 31.2 percent of total loans at the end of 2013 to 33.6 percent in February 2014. Even before the devaluation, the quality of retail loans appeared to be deteriorating. The devaluation also shift demand for tenge holdings. The last three quarters of 2013 saw a 24 percent growth of bank deposits denominated in foreign currency while tenge-denominated accounts declined by 4 percent, indicating increased devaluation expectations. As of end-February 2014, the dollarization of deposits increased further, with FX deposits accounting for 47 percent of total deposits, compared to 30 percent a year ago. To lower incentives for holding FX deposits, in March 2014 the authorities increased the maximum ceilings for interest rates on tenge-denominated deposits from 9 to 10 percent and decreased them for dollar- denominated deposits from 4½ to 4 percent (within the deposit guarantee scheme). Inflation in Kazakhstan will rise in the short run. The actual data on inflation indicate that the consumer price index (CPI) rate increased from 4.5 percent year-on-year in January 2014 to 5.4 percent in February and 6.2 percent in March. For the short run, our estimates suggest a higher inflation rate than the government has announced: yy The authorities estimate that the exchange rate devaluation will increase inflation by about 3.3 percentage points, and that the overall inflation rate for 2014 is expected to remain within the 6–8 percent range targeted by the NBK.13 To help control the inflationary impact of the devaluation, the government has announced price controls over food and energy prices affecting the majority of citizens (Box 1). yy We estimate that the inflation rate to reach about 10 percent in 2014, based on our assumption of a pass- through of about 36 percent from nominal exchange rate to inflation by the end of 2014. Consequently, 13 This means that a pass-through (the percent change in inflation due to percent change in the exchange rate) will be about 17 percent. The low inflation estimate is based on the 2009 devaluation experience. The government estimate of additional impact should be considered a lower bound estimate of the impact of the devaluation. First, the 2009 devaluation occurred in a recession, so its inflationary effects would have been dampened by the lack of demand. In contrast, the economy in 2013 was growing at close to its potential growth rate (assessed at about 6 percent), where inputs and factors are supposed to be close to fully used. The impact of a large devaluation on such an economy should be higher. Secondly, while the new government policy measures may keep prices of specific items in check in the next few months, these measures will eventually run out and the prices of food, transport, and energy will adjust up. 18  │  D. Special Focus—Coping with the Devaluation Impact on the Economy KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS Box 1. Government measures to mitigate the impact of the devaluation In the aftermath of the devaluation the government has announced a number of broad based measures to counter the impact of the devaluation: Price controls. Prices for 33 essential food products have been capped. Gas prices are also to be held fixed in the short run. The national air company Air Astana and the national railways operator Kazakhstan Temir Zholy have committed not to increase their rates for domestic transport for the time being. In addition, all utility tariffs will be frozen until May 1, 2014. Wage increases. A 10 percent wage increase will go into effects as of April 1, 2014 for all civil and public servants. Major state-owned enterprises and private sector employers were encouraged to follow suit with wage increases for their blue color workers. Pension, social assistance and student stipends increases. Starting April 2, 2014 the authorities were to increase pensions for the year to 14 percent (pensions were increased by 9 percent in January 2014, so the new measures are to add another 5 percent increase). Starting from April 2014, targeted social assistance was to be boosted by a total of 12 percent for the year, student allowances by a total of 10 percent. The Oil Fund to support the economy. The authorities plan to use the Oil Fund to support SMEs, the manufacturing industry, and the banking sector. Out of $5.5 billion allocated from the Oil Fund for 2014–2015, $2.7 billion of the amount will be allocated in 2014. The 2014 support package will comprise of $552 million being spent to support SMEs, another $1.3 billion will be directed to the Problem Loans Fund to help deal with NPLs in the banking sector, and $828 million is to support the Industrial Development Program. Additionally, over $535 million will be earmarked in the 2014 budget to finance the Employment Roadmap Program to support the current employment rate. Source: World Bank staff notes, based on government announcements. the 19 percent increase in the nominal exchange rate could lead to a 6.8 percentage point jump in inflation, and cause overall inflation to rise above the 6–8 percent range targeted by the NBK.14 Higher inflation can affect household consumption and savings patterns The medium-term impact of the devaluation on consumption will depend on how households react to higher inflation. Those who held bank accounts in tenge have experienced a negative wealth effect, and their consumption is expected to be affected. Moreover, increased prices will affect consumption. Price increases for food and non-food items were the main contributors to the CPI increase in March 2014, while price controls for paid services somewhat offset the increase in overall consumer prices. Consumption changes will depend on how much households can substitute away from more expensive imports into cheaper imported or domestic products, and, otherwise, how much they can reduce consumption. Poorer households will be more vulnerable 14 From a preliminary VAR analysis, we also did a basic calculation to identify an impact range, based on a 25 percent and a 37 .5 percent pass-through ratio. A 2012 IMF study found that a one percent change in exchange rates can on average lead to an increase of 0.63 percent in import prices among emerging economies in the first three months; for countries rich in natural resources (such as Chile) this pass-through is estimated to be 0.85 percent. Applying the average pass-through 0.63 estimate to the 19 percent devaluation by Kazakhstan would translate into potential jump of a 12 percentage point change in import prices. Kazakhstani economy is dependent on imports— goods imports constituted 22.5 percent of GDP in 2013 while overall imports stood at 27 .9 percent of GDP for the same year. Assuming a pass through from import prices to domestic prices of 0.4 to 0.6 percent will translate into an impact of 4.8 and 7 .2 percent, respectively. So in the short run the overall inflation could range from 10.6 to 13 percent. D. Special Focus—Coping with the Devaluation Impact on the Economy  │  19 KAZAKHSTAN ECONOMIC UPDATE  –  SPRING 2014 to the price increases, especially as only about 30 percent of the population receives some form of social assistance. This low coverage is related to the low value of the income-eligibility threshold, which is set per person at about $1 per day. The devaluation can affect domestic savings and Figure 15. Adults who saved money in 2010 investment. Private savings matter as they provide percent of 15 years+ funds for future investments and consumption. 80 Already, Kazakhstani private savings are estimated 70 to have fallen from 24 percent of GDP in 2008 to 60 20 percent in 2012–2013 (Annex 2). A 2011 World 50 Bank survey also shows that only about 22 percent 40 of Kazakhstani respondents (15 years and older) 30 had saved in 2010.15 This is a relatively low ratio of 20 savers compared to regional comparators, selected 10 resource-rich and developed countries (Figure 0 15). If the devaluation erodes savings and savings TUR BGR TJK BRA KAZ IND RUSUKR BLR CHL MEXARE UZB ZAF IRN SAUKGZCHN IDN TKMMYSTHAKORCANUSA incentives, the authorities should consider policies Source: World Bank staff calculations, based on the FINDEX survey data, 2011. to counteract it, such as higher deposit rates and insurance against risks. Some domestic policies can help mitigate inflationary pressures These domestic policies are:  yy Adhere to macroeconomic policies that are neutral to inflation. An increase in economic activity beyond potential output can lead to higher inflation. In the case of Kazakhstan, the growth potential is assessed at about 5½ percent.16 The economy is already growing at close to its potential. Therefore, both monetary and fiscal policies should remain neutral to avoid creating additional pressures on inflation (Box 2). A further increase in domestic demand may push up the price of non-traded goods. This, in turn, could create inflationary pressures and possibly also adversely impact the non-resource tradable sector, leading to Dutch disease. yy Move to a more flexible exchange rate regime in the medium-term. A more flexible exchange rate regime helps mitigate the effects of external shocks on domestic inflation. There is, in fact, strong empirical evidence from case studies that in open economies a pass-through from exchange rate changes to inflation is weak and declining. In the case of Hong Kong, Saudi Arabia and Kuwait, which share similarly open economies and exchange rate regimes, the pass-through from exchange rate changes to domestic 15 2011 World Bank FINDEX survey. 16 World Bank, 2014, Global Economic Prospects: Coping with policy normalization in high-income countries (Washington: World Bank). 20  │  D. Special Focus—Coping with the Devaluation Impact on the Economy KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS Box 2. Determinants of inflation in Kazakhstan Recent inflationary episodes in Kazakhstan have been driven by external shocks. Higher international energy and food prices led to short-run inflationary shocks. As Kazakhstan is dependent on imports of food and intermediate goods, higher international food prices, in particular, are likely to increase inflation, as was the case in 2008 and to a lesser extent in 2011. This high correlation is mainly explained by a significant weight of food items in the CPI basket (38 percent). Energy and related utility prices also have a material weight (17 percent) in the CPI basket and are usually excluded in the calculation of core inflation in Kazakhstan. Macroeconomic fundamentals and policies affect inflation. Our analysis uses Kazakhstan’s quarterly macroeconomic data from 1994 to the third quarter of 2013. The analysis finds that inflation increases are associated with (i) an increase in the previous year of economic activity beyond potential output; (ii) depreciation of the Kazakhstani tenge, and (iii) a significant extent of inflationary inertia in the country (as lagged CPI inflation is positive and statistically significant).17 Also, lagged government spending to GDP ratio is positively and significantly related to the inflation. Therefore, larger government spending may induce inflationary pressure in the overall CPI inflation next year. The (lagged) primary fiscal balance to GDP ratio is negatively and significantly related with inflation. Consequently, our findings show that larger primary government deficits are correlated with greater inflationary pressures on the overall CPI in the next year. Lagged current spending to GDP ratio shows positive but insignificant while both current and capital spending show an unexpected significant and positive coefficient estimate (Kubota, 2014).18 The findings above support the macroeconomic prudence shown by the authorities in the past few years. During the crisis years, higher government spending and more liquidity provided by the central bank to stimulate economic activity where shadowed by higher core inflation. These fiscal and monetary stimuli were phased out during the post-crisis period. In fact, lately fiscal policy has been neutral to inflation, as government spending has been growing less or on par with GDP . The phasing out of these fiscal and monetary stimuli is mirrored by a gradual fall of the core inflation in recent years. Based on our calculations, contribution of core inflation to headline inflation in Kazakhstan was almost halved from about 4 percentage points in 2008–2009 to about 2 percentage points in 2012–2013. Source: World Bank staff notes, 2014. prices is about 20 percent. A move towards more flexible arrangements requires reducing the extent of dollarization of the economy and deepening local currency debt markets. yy In the longer-term, gains in productivity in the non-commodity sector will counter the inflationary pressures of labor costs increases. Kazakhstan has experienced high labor productivity between 2000 and 2010 compared to the members of the Organisation for Economic Co-operation and Development (OECD) and the BRIC countries (Brazil, Russia, India and China). However productivity growth was highest in oil producing regions, driven by large investments in the sector. As Kazakhstan seeks to diversify into a knowledge-based economy, the non-oil economy needs to become and remain competitive in the regional and global markets. For such a competitiveness to be achieved, wage increases should match or be outstripped by labor productivity gains. This can be achieved through investment in physical capital, but also through market oriented human capacity building, such as demand driven technical training.19 17 A one percent increase in output beyond it GDP sustainable potential leads on average to 0.9 percent increase in inflation the following period; a one percent depreciation of nominal exchange rate leads to a 0.20 percent increase in inflation and, 0.33 percent of last period’s inflation will be transferred to the current period (inflation inertia). 18 Kubota, Megumi, 2013, Notes on inflation in Kazakhstan: The impact of fiscal policy on inflation, short note #3 (Washington: World Bank). 19 World Bank, 2013, Beyond oil: Kazakhstan’s path to greater prosperity through diversifying (Washington: World Bank). D. Special Focus—Coping with the Devaluation Impact on the Economy  │  21 KAZAKHSTAN ECONOMIC UPDATE  –  SPRING 2014 Annex Annex 1. Government’s Longer-Term Development Priorities Development Priorities Objectives Outcome Goals Implementation Actions Innovative Industrialization • Increase efficiency of • GDP growth of not less than • Develop the second (out traditional extractive 4% on average; of 7) five-year Plan of industries (oil and gas, • GDP per capita at $60,000 Accelerated Industrial and metals); (by 2050); Innovative Development for • Develop new industries • Increase investment share in 2014–2019. (mobile, multimedia, GDP from 18% to 30%; nano-tech, space, robotics, • Increase share of non- genetic engineering, energy resource produce in total of the future). exports to 70%; Efficient Agri-Industrial Sector • Increase efficiency of the • 15% of crop area to apply • Update the Development agri-industrial sector by water-saving technology (by Plan for the Agri-Industrial applying new technology and 2030). Sector. best international standards; improving efficiency of the land market; improving access to finance. Improved Potential of Science • Increase scientific • Science financing of not less • Submit to the Parliament capacity by improving the than 3% of GDP . legislation on venture legislative base; attracting capital, protection of FDIs; facilitating transfer intellectual property, R&D of knowledge and new support, and technology technology; activating commercialization (by operation of technological September 1, 2014). parks. Urban and Infrastructure • Develop agglomerations • Increase urban population • Draft strategies for Development with urban centers in from 55% to 70%; developing agglomerations Astana, Almaty, Shymkent • Improve connectivity in Astana and Almaty until and Aktobe; and streamline customs 2030 (by the end of 2014); • Improve connectivity by clearance procedures; • Complete construction building modern high-ways • Halve the power intensity of of high-ways (Astana- and high-speed railways; production. Karaganda-Almaty, Astana- and developing logistical Pavlodar-Ust-Kamenogorsk, services; Almaty-Kapchagai-Ust- • Improve energy-efficiency by Kamenogorsk), railways developing the power sector (Zheskazgan-Shalkar-Beineu); (power stations, a new oil • Conduct feasibility studies refinery, a nuclear power for building a new oil refinery station). and a nuclear power station. SME Development • Support SMEs by improving • Increase SME share in GDP • Harmonize the Road Map business environment; from 20% to 50%. Business-2020 with the Plan ensuring property rights; of Accelerated Industrial and and developing effective Innovative Development for mechanisms of support. 2014–2019. 22  │ Annex KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS Development Priorities Objectives Outcome Goals Implementation Actions Active, Educated, and Healthy • Improve quality of • Ensure 100% enrollment in • Develop proposals for Population education by introducing pre-school (by 2020); a two- technical and vocational modern teaching methods; shift education in schools (by education (by June 1, 2014); developing professional 2017); access to technical • Increase stipend by 25% cadres; promoting cognitive and vocational education; (from January 1, 2016); thinking; academic and management • Consider introducing a • Improve primary healthcare autonomy of universities; mandatory health insurance by considering introduction • Increase life expectancy to system; of a mandatory health 80 years and more; • Develop a long-term insurance system; • Further reduce poverty and Concept of Cultural Policy; • Develop Kazakhstani culture unemployment. • Develop and introduce a by forming competitive new pay system for the cultural mentality and public service and increase developing modern cultural salaries of medical staff by clusters; 28%, educational staff by • Improve incentives in 29%, public servants in the the public sector by social support area by 40% reconsidering social (from July 1, 2015); packages for public servants • Increase social support to in education, healthcare, and disabled people and families social protection; that lost a breadwinner by • Improve life of disabled 25% (from July 1, 2015) people by removing physical and improve legislation for barriers and providing associations of disabled employment. people. Efficient Public Institutions • Improve efficiency of public • Ensure rule of law and • Develop proposals for institutions by promoting access to justice; administrative reforms (by fair competition, justice, • Develop and implement a July 1, 2014); and the rule of law; and new anti-corruption strategy. • Increase salaries of civil enhancing link with NGOs servants of corps ‘B’ by and businesses. 15% (from July 1, 2015) and provide another 15% increase a year after (from July 1, 2016). Source: World Bank staff notes, based on the President’s speech of January 17, 2014. Annex  │  23 KAZAKHSTAN ECONOMIC UPDATE  –  SPRING 2014 Annex 2. Selected Economic and Social Indicators 2008 2009 2010 2011 2012 2013 2014 2015 Income and Economic Growth GDP growth (percent) 3.3 1.2 7.3 7.5 5.0 6.0 5.4 5.7 GDP per capita (in US dollars) 8,514 7,165 9,071 11,358 12,121 12,933 12,134 12,987 Private consumption (percent change) 6.8 0.7 11.8 10.8 11.0 12.5 7.0 8.5 Gross fixed investment (in percent of GDP) 27.5 29.4 25.4 22.5 24.8 26.2 27.1 27.5 Public 4.4 5.5 5.1 4.2 4.6 4.1 4.5 4.6 Private 23.1 23.9 20.3 18.3 20.2 22.1 22.6 22.9 Savings (in percent of GDP) 32.3 25.7 26.3 27.9 25.3 26.1 27.2 26.9 Public 8.2 6.8 6.4 5.4 5.4 4.8 5.3 5.5 Private 24.1 18.9 20.0 22.5 19.9 21.3 21.9 21.5 Money and Prices Consumer price inflation (percent change, year-end) 9.5 6.2 7.8 7.4 6.0 4.8 10.1 8.9 Consumer price inflation (percent change, annual average) 17.2 7.3 7.1 8.3 5.1 5.8 8.3 8.6 Refinancing rate (percent, annual average) 10.8 8.4 7.0 7.4 6.2 5.5 .. .. Nominal exchange rate (tenge per dollar, end-year) 121 148 147 148 150 154 .. .. Real exchange rate (2008=100) 100 114 108 102 100 98 .. .. Fiscal Accounts (In percent of GDP, unless indicated otherwise) Revenues 29.7 22.7 25.0 27.7 26.4 25.5 26.5 25.4 Oil revenues 12.9 8.6 10.9 14.4 13.8 12.4 13.9 12.5 Non-oil revenues 16.8 14.1 14.1 13.3 12.6 13.1 12.6 12.9 Expenditures 27.2 23.5 22.1 21.5 22.1 21.2 22.5 23.5 Current 14.2 16.1 15.0 14.9 16.1 16.3 16.3 17.3 Capital and net lending 13.1 7.4 7.1 6.7 6.0 4.9 6.2 6.2 Overall fiscal balance 2.5 -0.8 2.9 6.2 4.3 4.4 4.0 1.9 Non-oil state budget balance -10.5 -9.4 -8.0 -8.2 -9.5 -8.0 -9.9 -10.6 Total government debt 6.8 10.2 10.7 10.4 12.3 13.5 14.2 16.5 External 1.6 2.4 2.7 2.6 2.6 2.6 2.9 2.7 Domestic 5.2 7.9 7.9 7.8 9.7 10.9 11.3 13.8 Oil Fund FX reserves 20.6 21.1 20.9 23.2 28.4 32.0 38.7 40.5 Oil Fund FX reserves (in billions of US dollars) 27.5 24.4 31.0 43.6 57.8 70.5 81.1 92.0 24  │ Annex KAZAKHSTAN: SHORT-TERM VULNERABILITIES, POSITIVE PROSPECTS 2008 2009 2010 2011 2012 2013 2014 2015 External Accounts (In billions of US dollars, unless indicated otherwise) Export growth (percent, constant prices) 0.9 -11.9 3.1 0.4 4.7 -0.2 0.7 4.8 Import growth (percent, constant prices) -11.5 -15.7 2.9 2.8 20.9 5.2 0.0 3.0 Merchandise exports 72.0 43.9 61.4 85.2 86.9 83.4 83.1 84.3 of which: Fuel and oil products 48.9 30.0 42.5 65.3 64.5 63.1 62.7 63.9 Merchandise imports 38.4 28.9 32.9 40.3 48.8 49.7 50.5 52.6 Net services -6.9 -6.0 -7.2 -6.6 -8.0 -6.9 -6.6 -6.5 Net workers' remittances -2.5 -2.4 -1.9 -1.7 -1.8 -1.6 -1.5 -1.4 Current account balance 6.3 -4.1 1.4 10.2 1.1 -0.1 0.5 -1.0 as percent of GDP 4.7 -3.6 0.9 5.4 0.5 -0.1 0.2 -0.5 Net foreign direct investment 13.1 10.1 3.7 8.6 11.8 7.8 8.2 8.1 Total external debt 107.9 112.9 118.2 125.3 136.9 148.8 157.0 166.7 Public 2.2 3.7 5.1 5.5 5.9 6.1 6.5 6.6 Private 105.8 109.1 113.1 119.8 131.0 142.6 150.4 160.1 of which: Intra-company loans 40.2 49.6 52.3 62.6 67.6 72.7 78.0 83.2 Population, Employment and Poverty Population (million people) 15.7 16.1 16.3 16.6 16.8 17.0 17.3 17.5 Population growth (percent) 1.2 2.7 1.4 1.4 1.4 1.5 1.4 1.3 Unemployment rate (percent of labor force) 6.6 6.6 5.8 5.4 5.3 5.2 .. .. Poverty headcount ratio (percent of the population) at national poverty line 12.1 8.2 6.5 5.3 3.8 2.9 .. .. at US$ 1.25 a day (PPP) 0.1 0.1 0.1 .. .. .. .. .. at US$ 2.50 a day (PPP) 3.3 4.2 2.4 .. .. .. .. .. at US$ 5.00 a day (PPP) 41.3 42.3 34.7 .. .. .. .. .. Gini coefficient (income) 0.288 0.267 0.278 0.290 0.284 0.276 .. .. Life expectancy (years) 67.1 68.4 68.5 69.0 69.6 70.3 .. .. Other GDP (in billions of tenge) 16,053 17,008 21,816 27,572 30,347 33,521 38,134 42,025 GDP (in billions of US dollars) 133.4 115.3 148.1 188.0 203.5 220.3 209.5 227.2 Doing Business rank /1 .. 74 58 56 53 50 .. .. Human Development Index rank /2 .. .. 69 68 69 .. .. .. CPIA (overall rating) 3.6 3.7 3.7 3.8 3.8 3.8 .. .. Economic management 4.0 4.2 4.3 4.3 4.3 4.5 .. .. Structural policies 3.5 3.5 3.5 3.7 3.7 3.7 .. .. Social inclusion and equity policies 3.6 3.6 3.6 3.7 3.7 3.8 .. .. Public sector management and institutions 3.4 3.4 3.4 3.5 3.5 3.4 .. .. 1/ The DB indicator is ranked out of 181 countries in 2009; 183 in 2010; 185 in 2011–2012; and 189 in 2013. 2/ The Human Development Index is ranked out of 169 countries in 2010,187 in 2011 and 186 in 2012. Annex  │  25 This page is intentionally blank.