ORDER OF THE GOVERNMENT OF THE REPUBLIC OF KAZAKHSTAN

of July 28, 2003 No. 753

About the Concept of development of the financial sector of the Republic of Kazakhstan

For the purpose of further development of the financial sector of the Republic of Kazakhstan and reduction of monetary policy of the Republic of Kazakhstan to the standards accepted in developed countries (in particular, to standards of the European Union), the Government of the Republic of Kazakhstan DECIDES:

1. Approve the enclosed Concept of development of the financial sector of the Republic of Kazakhstan (further - the Concept).

2. To National Bank of the Republic of Kazakhstan (in coordination) together with the Ministry of Economy and Budget Planning of the Republic of Kazakhstan in two-month time from the moment of adoption of this resolution to introduce in the Government of the Republic of Kazakhstan the Actions plan approved in accordance with the established procedure on implementation of the specified Concept.

3. This resolution becomes effective from the date of signing.

Approved by the order of the Government of the Republic of Kazakhstan of July 28, 2003 No. 753

Concept of development of the financial sector of the Republic of Kazakhstan

Introduction

At this stage the financial sector is at qualitatively new level of the development, and the majority of the reforms directed to creation of basis for its successful functioning further are already performed. Improvement of credit rating of Kazakhstan to the investment grade confirms that the financial sector of Kazakhstan develops successfully. Among financial systems of the CIS countries it is the most reformed. Thus, Kazakhstan advances the CIS countries on the level of development of the financial sector for several years.

Nevertheless, the Government of the Republic of Kazakhstan (daleepravitelstvo) and National Bank of the Republic of Kazakhstan (daleenatsionalny Bank) is considered correct not to be satisfied with what has already been achieved and to begin transition to the solution of tasks of the following stage: it is necessary to determine the directions of development for the medium term taking into account macroeconomic tendencies which will develop in the next years, and expected changes in the foreign exchange legislation.

The government and National Bank see further development of the financial sector in reduction of all its segments to international standards in the conditions of the forthcoming liberalization of the currency relations and possible implementation of single currency space with the certain countries.

The purpose of this Concept is forming of the steady and effectively functioning financial system satisfying to the needs of real production sector for financial resources and providing high-quality services by financial institutions in the conditions of free competition.

The concept assumes determination of the main objectives and the directions of development for the period from 2003 to 2006 and determines as the priority direction the maximum approach of monetary policy to the standards accepted in developed countries (for example, to standards of the European Union).

I. Development of National Bank of the Republic of Kazakhstan

1. New directions of monetary policy

a) Transition to the principles of inflation targeting

Purpose and task

For the period till 2006 the National Bank sets the task of decrease in the annual average rate of inflation, measured by consumer price index, to 4-5% per annum.

Such problem definition causes need of transition by National Bank from tool rules to the principles of inflation targeting of monetary policy. In case of inflation targeting as target indicator inflation is considered, and as the main operational indicator serves one of official short-term interest rates.

When targeting monetary policy for possibility of obligatory achievement of effective objective it is necessary to know how actions of operational indicator on target indicator change. Transfer of managing signals happens on various channels. Among them there are channels of the aggregate demand, aggregate supply, currency and percentage parities and others. The data set of channels of transfer and their interrelations among themselves carries the name of the transmission mechanism. Thus, transmission mekhanizmeto the mechanism of transfer of impact of managing signals on target indicator.

With transition to targeting of inflation the mechanism providing strict observance of obligations on achievement of effective objective that will increase trust to the pursued monetary policy will be created.

Current status

Now in Kazakhstan there are some prerequisites to start preparation for transition to the principles of inflation targeting:

- macroeconomic stability and steady condition of the budget;

- exchange rate stability;

- sustainable development of financial system;

- independence of National Bank, refusal of financing of deficit of the republican budget at the expense of means of National Bank;

- official fixing to National Bank of function of maintenance of the low rate of inflation;

- information openness.

Despite it, transition to the principles of inflation targeting is integrated to some problems of political, economic and technical nature.

Political problems include determination and forming of the legislation, degree of responsibility of authorized bodies for accomplishment of achievement of the undertaken obligations and some other aspects.

Among economic problems of the most essential insufficiency of securities portfolio of National Bank for carrying out full-scale transactions of repo in amount sufficient for support of official rates as main instruments of regulation of liquidity is.

The technical issue includes development of model of the transmission mechanism explaining process of impact of monetary policy on economy.

Main measures

For the purpose of transition to the principles of inflation targeting acceptance of the following measures is supposed:

- on assistance to development of the secondary security market;

- on considerable expansion of securities portfolio of National Bank;

- on development of new financial instruments which will increase the regulating possibilities of National Bank will increase flexibility of the financial market and will allow to reduce number of risks inherent in it;

- on creation of conditions for transition from liquidity regulation by notes of National Bank to use of transactions of repo and official rates as main instruments of regulation of the financial market;

- on development of technique of creation of the type of "the main inflation" (core i№flatio№) accepted in the conditions of Kazakhstan which would reduce the noise volatility of price indexes caused by not monetary factors and it could be used as reference point for monetary policy;

- on development of model of the transmission mechanism and determination of operational procedures of achievement of the target objectives;

- on specification of the general scheme of carrying out monetary policy with use of the principles of inflation targeting and its approbation during the certain period.

b) Enhancement of monetary statistics in the Republic of Kazakhstan

Purpose and task

Creation of the overview of the financial sector which will contain the consolidated data on all institutional units of the financial sector of the Republic of Kazakhstan.

Current status

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