Astana, Kazakhstan
November 22, 1999

Dear Mr. Camdessus,

The attached memorandum describes the economic policies that the Government of Kazakhstan intends to follow during the period from January 2000 through December 2002 and provides the details of the government's objectives and policies during the first year of the program. These policies aim at fostering the conditions for sustainable long-term, growth, which include macroeconomic stability, sustainability of public finances, a robust financial sector, a well-targeted social safety net, high-quality public institutions, and good governance.

In support of this program, the Government of Kazakhstan requests financial support from the International Monetary Fund in the form of a three-year extended arrangement in an amount equivalent to SDR 329.1 million (90 percent of quota).

The Government of Kazakhstan believes that the policies described in the attached memorandum are adequate to achieve the objectives of the economic program, but it stands ready to take any additional measures as necessary for this purpose. During the period of the arrangement, the authorities of Kazakhstan will remain in close consultation with the Fund, in accordance with the Fund's policies on such consultations.

Sincerely yours,

Attachment

1.    The economic reforms pursued since 1992 have achieved substantive results. Comprehensive structural reforms and extensive efforts to rebuild public institutions have laid foundations for a vibrant market economy. At the same time, macroeconomic stability was progressively restored. As a result, the large decline in output experienced at the start of the transition process was halted and the economy was put on a growth path.

2.    In the second half of 1998, however, the Kazakh economy was severely affected by a series of negative shocks, which disrupted output recovery and created severe macroeconomic tensions. In the face of these difficulties, we adapted, albeit with some delays, our macroeconomic policies to the new external environment, while remaining firmly committed to a strategy focused on maintaining macroeconomic stability and completing the transition to a market economy. Positive results from this approach, including renewed output expansion, are now becoming apparent.

3.    Now our main challenge is to build upon these earlier efforts and improve further the economic environment to enable high, sustained, private sector-led growth. This will require continued implementation of prudent macroeconomic polices and resolute pursuit of a broad array of structural reforms, including the protection of the most vulnerable segments of the population. We are convinced that steadfast implementation of these policies is the best route to higher output, greater employment, and steadily rising living standards for the population.

4.    Over the next three years, we will aim for sustained real GDP growth of 3–4 percent per annum and a steady decline in inflation from about 17 percent (on a 12-month basis) in 1999 to 4 percent in 2002. We expect the current account deficit in 2000 and 2001 to remain close to the level of some 2 percent of GDP forecast for 1999, with a higher level of imports and investment being supported by increased export earnings. By 2002, owing to a further rise in the country's capacity to export, the current account deficit is forecast to shrink to less than 1 percent of GDP. The National Bank of Kazakhstan (NBK)'s international reserves will be maintained at a level equivalent to more than 3 months of imports and more than 100 percent of short-term external debt.

5.    To achieve these objectives, we will pursue prudent macroeconomic policies and, in particular, strengthen public finances to ensure their medium-term sustainability. We will also implement an ambitious reform agenda. These policies are expected to improve profitability of private economic activity and, in turn, to induce a rebound of private investment. At the same time, rising incomes and private sector earnings should result in greater private savings. Together, these developments would feed back to support economic growth and further improvements in external accounts over the medium and long term. At the same time, the resilience of the economy and its ability to withstand external shocks in the period ahead will be enhanced.

6.    During the program period, monetary policy will be focused on reducing inflation. Interest rate policy and monetary operations of the NBK will support this objective. The NBK refinance rate will continue to be the primary indicator of the monetary policy stance. The NBK's open-market operations will be based on intermediate monetary targets, established on the basis of the inflation targets and price and exchange rate developments.

7.    With the implementation of sound financial policies, we expect that the remonetization of the economy, which started in April 1999, will continue in 2000 and beyond. We also expect that the process of remonetization of the economy, rooted in an increase in confidence in the banking sector, will be accompanied by growth in deposits and a greater willingness of banks to lend to creditworthy clients. Net domestic assets of the NBK will be controlled in line with the targets set out in Table 2.

8.    We remain convinced that the floating exchange rate regime adopted in April 1999 has been an important positive factor in the economic turnaround; it will be maintained as one of the cornerstones of our economic strategy. To complete the switch in exchange rate regime initiated in April, we will eliminate the surrender requirement on foreign exchange earnings by December 1, 1999. The NBK will intervene in the foreign exchange market exclusively for the purposes of maintaining orderly market conditions and strengthening its international reserves position in line with the targets set out in Table 2. The NBK will continue the policy of transparency of its operations, including in regard to the sales of external loan proceeds on behalf of the government.

9.    We are convinced that a sustainable public finance position is an essential pre-condition to long-term growth. The lack of proper budget execution and sufficient budget finance in the past was in large part responsible for the decline in the efficiency of public expenditure and resulted in a deterioration of the availability and quality of public services, a virtual halt in public investment, substantial expenditure arrears, and a sizeable welfare loss. Our aim is to re-establish fiscal discipline and increase the quality of public expenditure and services. This will be achieved through the orderly execution of well-formulated budgets set out in the framework of a medium-term program of fiscal consolidation. We are determined to take the necessary measures to improve budget planning and execution as well as to adhere to the fiscal targets set out in the program.

10.    Our medium-term consolidation efforts will be divided roughly equally between revenue increases and expenditure reductions. On the revenue side, we will focus our attention on simplifying and rationalizing the tax code, eliminating tax exemptions and privileges, and improving tax and customs administration. On the expenditure side, we will enforce a freeze in real terms on large categories of spending, redesign fundamentally the social safety net by orienting it solely toward poverty alleviation, and eliminate programs that are not consistent with the role of a modern market-oriented state.

11.    Through a sustained consolidation effort, we aim to steadily reduce the general government deficit so that by 2002 the ratio of public debt to GDP will be stabilized. The medium term fiscal framework, which was adopted by parliament on October 11, 1999, is consistent with this objective.

12.    The 2000 general government budget provides for a deficit of no more than 6 percent of GDP (IMF methodology). The main new revenue measure in the 2000 budget is a 5 percent payroll surtax, assessed on accrued wage costs. In addition, greater revenue is expected from increases in excise rates on alcohol and gasoline products, improvement in excise duty collection, and revision of the tax code. As a first step, excise rates on vodka, vodka products, and beer were increased in September 1999. Excise rates on vodka and vodka products will be further increased from T 80 to T 90 per liter effective December 1, 1999 and to T 100 per liter effective March 1, 2000. A new method of collection of excise and VAT on petroleum products will be introduced by January 1, 2000.

13.    We are aware that substantial uncertainties surround the projections for both central government revenue and financing. In order to ensure a smooth budgetary execution and to avoid recourse to across-the-board expenditure sequestration, we have designed an explicit expenditure contingency mechanism. This mechanism, which shall be fully described in the government decision on budget implementation, provides for a list of budget programs that can be executed only if actual quarterly revenue and financing conform with projections. Total budgeted expenditure on programs subject to this procedure is approximately ½ percent of GDP.

14.    We attach great importance to the elimination of expenditure arrears. Beyond adoption of a realistic budget, we are proceeding on several fronts to achieve this goal. First, we have introduced strengthened expenditure control mechanisms which will ensure that no new arrears are accumulated. In particular, through prior registration of contracts, expenditure commitments of budgetary institutions or local governments will be kept within their budgetary allocations. This improved system of expenditure commitment control, which has been in place since January 1999 has already proved its effectiveness as no new arrears on accounts payable of these institutions were recorded in 1999 despite the extremely tight budgetary situation. Thus, we are in a position not to accumulate any new expenditure arrears. Second, we attach high priority to settling all pension arrears as soon as possible in line with the disbursment of the relevant World Bank financing; accordingly, there would be no accumulation of additional pension arrears through end-1999 and all pension arrears would be repaid by end-March 2000. Third, as regards the accumulated stock of nonpension arrears, a schedule for clearance of these arrears has been established. The stock of nonpension arrears will be reduced by no less than T 10 billion in 2000. Adherence to the schedules will be included among the performance criteria under this program (Table 2).

15.    The past issuance of government guarantees for private investment projects has distorted investment decisions and has resulted in large budget losses. Accordingly, we are determined to control strictly the issuance of any new guarantees. As a first step in this direction, the limit set in the budget law on the amount of new government guarantees that can be issued in 2000 was reduced to $235 million compared with the 1999 limit of $500 million. Out of this limit, $185 million is related to international financial institution loans to rehabilitate the electricity grid, which were originally expected to be contracted in 1999 and which we now expect to be delayed until early 2000. In addition, guarantees are to be restricted to investment projects included in the public investment program. From 2001, we undertake not to issue any new government guarantee without full provisioning. By end-1999, we will conduct a full review of existing arrears and defaults on repayments of loans guaranteed by the state and, by end-March 2000, we shall set up a system of continuous monitoring of the financial standing of the companies to which guarantees have been issued. Based on this review, we shall make proper allocations in the 2001 and 2002 budget to provision for guarantees that are likely to be called. If payment on called guarantees in 2000 exceeds the amount allocated for this purpose, allowable expenditure allocated to the programs included in the contingency expenditure referred to in paragraph 13 will be correspondingly reduced. Efforts to recover assets from enterprises that defaulted on government-guaranteed loans have been intensified.

16.    We are determined to implement with vigor a wide array of structural reforms. Our program in this area has three main objectives: (i) to provide the necessary support to our fiscal and monetary policies in order to entrench macroeconomic stability; (ii) to create conditions conducive to private sector initiatives so as to foster job creation and growth; and (iii) to support the most vulnerable segments of the population during the transition process. Consequently, we will focus on strengthening the financial sector, improving tax and customs administration, restructuring the social safety net, building a professional civil service, strengthening the rule of law, increasing policy transparency, improving statistical information, completing the privatization process, enhancing public enterprises' governance, reforming the energy, transportation, and telecommunications sectors, and completing the liberalization of the trade regime.

17.    We are committed to policy initiatives aimed at deepening the financial and capital markets. Further remonetization of the economy based primarily on increasing confidence in the banking system requires progress on several fronts. Continued prompt supervisory intervention to eliminate weak banks is necessary to ensure that customers can expect that the banks accepting their deposits are sound. Furthermore, individuals and companies should be assured that information about their transactions will not be released or their bank deposits seized without due legal process. In this context, clarification of the powers of the tax authorities will be made by December 31, 1999. Introduction of deposit insurance scheme could also help improve the maturity structure of deposits. We are fully aware that, the design of deposit insurance should not result in the creation of large, implicit public sector liabilities in the banking system or reduce weak institutions' incentives to improve their financial situation. To avoid these potential difficulties, we will introduce a deposit insurance fund, which will be based on the following principles: (i) only banks that are in full compliance with the enhanced prudential norms could participate in the scheme; (ii) only term deposits of households would be covered; (iii) compensation would be limited; and (iv) there would be no explicit or implicit contingent claims on the government.

18.    The NBK will continue to oversee the further strengthening of the commercial banking sector through prudential standards that meet international best practices, including the use of International Accounting Standards for financial reporting. The first group of 11 commercial banks, which includes the five largest domestic banks, has been in compliance since end-1998, and the other commercial banks are required to meet interim targets in their progression towards the new standards. The NBK has revoked the banking licenses of institutions that have not met the end-1998 interim target of risk-weighted capital of 8 percent, and will intervene promptly to close any bank unable to adhere to the end-1999 interim target of 10 percent or the new standards set for end-2000. A revised prudential norm has been drafted to include tenge-denominated instruments indexed to foreign currencies in the calculation of banks' foreign exchange risk exposure and it will be implemented by December 31, 1999. The NBK is also in the process of preparing a prudential norm, to be implemented by end-June 2000, which will require banks to prepare consolidated financial statements, and clarify that prudential requirements apply on a consolidated basis. The new norm will also clearly provide a legal basis for the NBK to require owners, subsidiaries, and affiliates of banks to provide such information as may be required for the NBK to undertake effective consolidated supervision of banking groups.

19.    In order to ensure that banking supervision resources are focused on the most likely sources of systemic risk, the five largest domestically-owned banks, which collectively account for about two-thirds of commercial banking assets, are being closely monitored and will be inspected more frequently than smaller banks. Limited scope examinations were undertaken on the three largest domestically-owned banks immediately following the floating of the tenge, and all five systemically important domestic banks will be the subject of full-scale on-site examinations during the remainder of 1999 and the year 2000. As a general principle, the NBK will conduct a special on-site review of the loan portfolio of any commercial bank requiring ongoing liquidity support to confirm its solvency. Should it be determined that a bank is insolvent, liquidity support will be withdrawn and the bank will be placed in conservatorship or under liquidation. In any event, liquidity support will only be provided on a fully collateralized basis. By March 31, 2000, we will introduce in parliament amendments to the Law on Commercial Banks so as to ensure that the NBK has full authority to revoke banks' licenses.

20.    We remain committed to enhancing the quality of prudential supervision. International technical assistance advisors will continue to work with the NBK supervision department through end-2000 to improve the capacity of the NBK examiners, and the available funding from multilateral and bilateral donors will be used for staff training and development. The conversion of all banks to International Accounting Standards will continue to be assisted through 2000 by technical assistance funded by bilateral donors.

21.    Nonbank supervision is being enhanced both through devoting additional resources and by ongoing revision to legislation and regulations. Amendments to the existing Insurance Law were enacted in August 1999 to provide the NBK with a clear legal basis to require prudential reporting by insurance companies and to establish the ability of the NBK to undertake basic supervisory actions. Further enhancements are required and to this end a new insurance law is in preparation and will be introduced in parliament by end-June 2000. New prudential norms have been introduced for credit partnerships which clearly differentiate them from banks by prohibiting them from dealing in foreign currency and from accepting deposits other than the equity contributions of the owners, who may not number more than 100. The government will continue to implement regulatory changes to improve disclosure, governance and financial reporting by publicly listed companies.

22.    The Government of Kazakhstan is committed to the gradual privatization of Halyk Savings Bank, and expects to complete by end-1999 the sale of a further 30 percent of the government's holding, leaving the government with a 50 percent plus one vote ownership stake. Full privatization will await development of a postal bank system.

23.    We view independence of the NBK and transparency of its operations as essential for effective implementation of monetary policy. The NBK will continue to publish on an annual basis its accounts audited in conformity with international standards.

24.    As part of our efforts to strengthen public finances and improve the environment for private business activity, we will revise the Tax Code in order to make it more business-friendly, more uniform across different types of business activities, and easier to enforce by tax authorities. We have identified areas where action is needed as follows: (i) repeal (on a prospective basis) of tax holidays and other preferences; (ii) repeal of the preferential VAT rate on foodstuffs and elimination of VAT exemptions; (iii) reintroduction of the registration threshold for VAT collection; (iv) broadening of the corporate income tax base by modifying treatment of inflation adjustment, earned interest, and depreciation write-offs, eliminating reduced tax rates, tightening the exemption for enterprises owned by organizations of the disabled, and by other adjustments; (v) making the corporate tax more business-friendly by lengthening the period for carry-forward of losses and other adjustments; and (vi) increasing the fairness and even enforcement of individual income taxation by taxing pension benefits under the solidarity system, repealing exemptions on payments to military personnel, strengthening presumptive taxation of small businesses, and other adjustments. Based on these findings, some amendments to the Tax Code will be submitted to parliament by December 31, 1999. The remaining measures will be introduced in parliament by end-June 2000, in conjunction with a revised Tax Code. Recognizing the importance of horizontal equity of taxation, the possibility of introducing taxation of exchange gains and losses, bank interest, and capital gains on sales of shares will be kept under review, taking into account its possible impact on the development of the banking system.

25.    We are continuing our efforts to eliminate the economic distortions, including budget revenue sharing arrangements, stemming from the existence of special economic zones. Three special economic zones have been eliminated already. The last remaining zone related to Astana will be eliminated by end-June 2000 and the 2001 budget will be prepared on that basis.

26.    Improving tax and customs administration is one of our top priorities. We are fully aware that progress on this front will be an essential determinant of our ability to achieve the required medium-term fiscal adjustment. The Ministry of State Revenue has prepared an action plan for the continuous improvement of tax administration. We shall press for progress on a broad front stressing the following areas: (i) strengthening tax administration at the central level in order to counteract the widespread allegiance of tax collectors to local administrations; (ii) improving the effectiveness of the large taxpayer unit (possibly a set of full service regional offices); (iii) reducing taxpayer filing requirements; and (iv) introducing an effective training program for tax inspectors. At the same time, we are aware of the urgent need to overhaul customs administration. Accordingly, we have requested technical assistance from the IMF's Fiscal Affairs Department to help us in reviewing the current position and developing a strategy for the reform of customs administration. Based on the recommendations of this technical assistance mission, we shall present by September 30, 2000 a specific program of actions.

27.    The sizeable revenue shortfall experienced in the first half of 1999 was largely attributable to a sharp drop in excise revenue. Therefore, we decided to formulate programs for the two major product groups subject to excise duty, alcohol and oil products. We started to implement the first program aimed at improving the collection of excise duty on alcohol products in August 1999. Tax collection numbers for the first two months of the program are encouraging. We are in the process of finalizing the program covering oil products and an appropriate government resolution will be issued by December 31, 1999. We expect these two programs to greatly increase our capacity to collect excise duty. These programs, together with the increase in excise rates for alcohol and gasoline products, are expected to enable the tax authorities to meet the ambitious revenue target for excise duty in the 2000 budget.

28.    We are determined to improve the social safety net in order to help the population adapt to the new economic environment. Our efforts in this area have two main prongs: strengthening of the funded pension system introduced on January 1, 1998; and a fundamental re-design of social assistance centered on the sole objective of alleviating poverty.

29.    Introduction of a fully-funded pension system two years ago was a major achievement, holding the promise of financial security for the future generations of the elderly. We are committed to keep strengthening the funded pension system to ensure that this promise is realized. To this end, we will move in the following directions: (i) improving the marketability of financial assets held by the pension funds; (ii) compelling pension funds to use internationally accepted accounting and valuation standards; and (iii) considering allowing pension funds greater freedom to invest in high-quality foreign assets, subject to appropriate safeguards.

30.    In light of the limited budgetary resources that are available, we consider essential to target social assistance to the truly needy. To achieve this result, we have introduced in parliament a large package of amendments whose main effects would be: (i) with very limited exceptions, to adopt poverty as the sole criterion for provision of social assistance (except for self-targeting programs, e.g., public works); (ii) to discontinue unemployment registration as a means of identifying eligibility for social assistance; and (iii) to create public works. The republican government does not presently have fully adequate means to control budgetary execution of social assistance programs since their implementation is the exclusive responsibility of local governments. We will examine potential remedies to this situation and present to parliament appropriate legislative amendments by end-June 2000.

31.    We are determined to improve governance and fight against corruption, actions we view as essential to economic development. In particular, we are focusing on building a professional civil service, strengthening the rule of law, improving information on economic and financial developments as well as on government policies, and streamlining licensing and other regulatory requirements.

32.    We view as a major achievement the adoption of a new Civil Service Law in July 1999, which, among other elements, created a clear distinction between political and civil service appointments and instituted recruitment and promotion of career civil servants on the basis of open and transparent competition. In the immediate future, we will finalize a set of regulations required for implementation of the Civil Service Law. We are reviewing remuneration policy in the civil service with a view to create a coherent, fair, and transparent scheme and to reduce the turnover of qualified civil servants without increasing the public sector wage bill. To reconcile these objectives, we are ready to consider further cuts in the size of public administration. Looking ahead, we intend to formulate before end-2000 a strategy to transfer to local administrations the reforms already conducted at the republican level.

33.    We are conscious that respect for the rule of law has to enhanced. In this regard, we are committed to improving the administration of justice. Assisted by bilateral and multilateral donors, initiatives have been undertaken to enhance the independence of the judiciary, strengthen the enforcement of judicial decrees, improve the access to law of all segments of the population, increase the expertise of judges, and improve the clarity of legal statutes.

34.    Our efforts to streamline the regulatory framework and licensing aim at reducing substantially the cost of doing business, especially for small-and medium-size enterprises. Specifically, the scope for automatic issuance of business licenses has been expanded and licenses are now issued with unlimited terms of validity. We have strengthened the legal base for audits and inspections of economic activity of private agents. Lastly, we have initiated the process of separating fully regulatory functions from state enterprises; the process is expected to be concluded by June 2000.

35.    We are intensifying our efforts to root out corruption. The key instruments of this program are transparency of the public sector operations, including state enterprises, and legal acts that aim at eliminating opportunities for corruption. Transparency is being enhanced by increasing the flow of information to the public, especially by independent audits (see below) and reducing sharply the scope of information subject to the law on state secrets. Eliminating opportunities for corruption is carried out under anti-corruption and civil service laws (e.g., prohibition of nepotism).

36.    In replacement of the existing legislation inherited from pre-independence times, we are determined to adopt a Labor Law that will promote labor market flexibility and, thus, encourage employment. We are conducting active consultations with labor unions, employers' organizations, and international institutions in order to devise a draft Labor Law that is compatible with the objectives outlined above. We intend to present this draft law to parliament by March 31, 2000.

37.    In addition to improving the judicial system, we intend to review some important laws that govern economic contractual relations and introduce amendments to these statutes, as needed. In particular, we will conduct a review of the laws relating to bankruptcy, collateral pledges, and leasing by September 30, 2000 with a view to identifying necessary improvements.

38.    We attach great importance to improve Kazakhstan's statistical systems, which would help both government officials and private individuals take more informed decisions. Our participation in a General Data Dissemination System (GDDS) pilot program has led to the development of a complete set of metadata. On this basis, we will design by end-June 2000 a program of priority improvements to our statistical systems. In parallel, we will implement a number of specific actions identified earlier. As regards fiscal statistics, we will improve the classification of government operations especially receipts from privatization and breakdown for total financing. As concerns monetary statistics, by spring 2000 we will fully implement the newly introduced chart of accounts for commercial banks. As regards external statistics, the Government of Kazakhstan will authorize the NBK to introduce a revised survey forms for services by November 15, 1999; the NBK will amend the residency definition in the Law of Currency Regulation in line with international practice; and, by March 31, 2000, the customs service will start the process of changing the recording of imports and exports according to the date of crossing the border.

39.    In parallel with improvements to the statistical system, we will continue increasing the flow of economic and financial information to the public. The NBK will publish its gross and net international reserve position, details of its total gross sales and purchases in the foreign exchange market, including those in its capacity of fiscal agent for the government, and purchases and sales of treasury bills and NBK notes in the primary and secondary markets. This information will be published weekly with a lag of less than one week. We will also strive to improve public access to decisions taken by the Government of Kazakhstan or the NBK. As a first step, the Government of Kazakhstan will consolidate all laws and regulations that pertain to external trade, including the complete tariff schedule at the nine-digit level, in a single repository; by March 31, 2000, it will make this depository easily accessible, including by placing it on an internet site.

40.    On June 1, 1999, the Government of Kazakhstan adopted a comprehensive program of privatization and improvement of the management of state property. This program envisages sales of State shares in ten "Blue Chip" companies by end-2000, privatization of fifty-eight large enterprises, and completion of privatization of so-called "second echelon" enterprises. We are committed to take all necessary actions to implement this program in full. By March 31, 2000, we intend to complete the sales of all State shares in four Blue Chip companies. In addition, by December 31, 1999, we anticipate selling part of the State holdings in Kazakhtelekom and Halyk Savings Bank. In 2000, we will place special emphasis on the sales of remaining State holdings in "Blue Chip" companies as well as on the privatization of companies in the electricity sector. We aim to complete privatization of all electricity producers and all regional electricity distribution companies by December 31, 2001.

41.    We intend to maintain full public ownership in 17 national companies, which are active in strategic branches of the economy. We are determined to ensure that public ownership in these companies does not act as a constraint on private sector initiative. To this end, by December 31, 2000, we will develop and publish mission statements for these national companies which will clarify their relations with the republican and local governments. To increase transparency of their operations, we will also require all 17 national companies, to publish annually accounts audited in conformity with accepted international standards. In enterprises where this practice is not already in place, the first set of financial statements subject to such audits will pertain to the year 2000.

42.    We are committed to introducing private ownership of land. However, as demonstrated by the negative public reception to the draft law on private land ownership presented to parliament earlier this year, acceptance of this reform will require greater efforts at forging public consensus. As an interim measure, we are developing an approach that would clarify existing rights to cultivate land, which were given either for 99 years or in perpetuity. The main elements of this approach are two: first, to complete assigning holders of notional land shares a specific land plot; and, second, to give these individuals the possibility of choosing between delineating their assigned land plots and cultivating them on their own, on the one hand, and, on the other hand, joining commercial partnerships and transforming their rights into shares of such entities. We intend to present to parliament legislation that will codify this approach by March 31, 2000.

43.    Consistent with our view of the proper role of the state in a market-based economy, the government will no longer engage in grain purchasing or marketing operations, with the exceptions of operations related to the use and renewal of the State Reserve. These latter operations will be fully accounted for in the budget, starting in 2001.

44.    Substantial progress has already been made in restructuring the electricity sector. In particular, eighty percent of the generating capacity has been privatized. Nevertheless, substantial difficulties remain in this sector, as exemplified by the low level of payment collection in some regions, the tenuous financial situation of most electric utilities, and the existence of large arrears to tax authorities and suppliers. Faced with this situation, we are committed to pursue restructuring efforts with great determination. We will complete privatization of electricity generating capacity by December 31, 2001. With the assistance of multilateral development banks and donors, we will establish a competitive wholesale market for electricity. To enhance payments discipline, improve commercial management, and stimulate investment, we are committed to privatize all regional electricity distribution companies by December 31, 2001 through open and transparent tenders. We will make certain that mechanisms and regulations for establishing electricity and heating tariffs ensure full cost recovery. To this end, we will conduct a thorough review of existing procedures with the involvement of all interested parties by June 30, 2000, paying particular attention to the rules covering depreciation allowance, rate of return on assets, size of technical losses, and inclusion of the cost of investments. Based on this review, necessary adjustments to legislative acts or regulations will be introduced by September 30, 2000.

45.    Given the size and location of Kazakhstan, development of the transport and telecommunications sector is essential to long-term economic prosperity. Our current main objectives are demonopolization of railways, establishment of a competitive environment for air transport, and privatization of the major telephone operator, Kazakhtelekom.

46.    We are committed to maintaining a liberal trade regime. As a prior action, the government will abolish all the remaining trade restrictions that were imposed in February 1999. During the program, trade policy reform will be aimed primarily at eliminating specific and mixed tariffs, reducing the number of tariff bands, the highest tariff rates and non-tariff barriers. In this regard, by end-March 2000, the government will convert all specific tariffs to ad valorem rates, except for alcoholic beverages; reduce the number of tariff lines (9 digit level) with mixed tariffs from 1,118 at present to no more than 865, 671, 447, 224, and zero by end-June 2000, end-December 2000, end-June 2001, end-December 2001, and end-June 2002, respectively; reduce the number of tariff lines (9 digit level) above 20 percent from 391 at present to 312, 235, 156, 78, and zero by end-June 2000, end-December 2000, end-June 2001, end-December 2001 and end-June 2002 respectively; reduce the number of tariff bands (including the zero rate) from 11 at present to 9 by end-December 2000, 6 by end-December 2001, and 5 by end-June 2002. Except for alcohol products, import licensing will continue to be used solely for health, environmental, and security concerns. Absent such concerns, licensing would be automatic and issued within 10 working days. The licensing procedures for alcohol will be subject to a review that will be concluded by end-June 2000.

47.    We are determined to press ahead with accession to the World Trade Organization (WTO). We will re-invigorate the negotiations towards WTO accession, taking concrete steps towards strengthening our offer especially in the area of market access and by making our laws and regulations WTO-consistent. We will also press for trade liberalization in our discussions with other members of the customs union.

48.    The government is committed to maintaining the exchange rate regime free of restrictions on current account transactions, in accordance with its Article VIII status under the IMF's Articles of Agreement. As noted above, the NBK will eliminate, as a prior action, the 50 percent surrender requirement on export proceeds. By December 31, 1999, the government will also eliminate the recently introduced tax on foreign exchange purchases by households. The tax on imports of cash foreign exchange will be reconsidered in the context of the preparation of the 2001 budget.

49.    The implementation of the measures listed in Table 1 will be a prior action for consideration of Kazakhstan's request by the IMF's Executive Board.

50.    The Government of Kazakhstan and the National Bank of Kazakhstan will provide the IMF with the information needed to monitor the implementation of the program. Fulfillment of the program will be monitored on the basis of: (a) quantitative performance criteria covering (i) net domestic assets of the National Bank of Kazakhstan, (ii) net international reserves of the National Bank of Kazakhstan, (iii) overall balance of the general government, (iv) domestic arrears of the general government, (v) net disbursement of short-term external debt, (vi) contracting and guaranteeing of medium and long-term non-concessional debt at all maturities and at maturities of one to five years, and (vii) non-accumulation of external payment arrears; (b) indicative targets covering (viii) reserve money growth, and (ix) general government revenue; (c) structural benchmarks. Performance criteria for items (i)-(vi) and indicative targets for items (viii)–(ix) have been set for end-December 1999, end-March 2000, and end-June 2000 (Table 2). Criterion (vii) applies on a continuous basis. Indicative targets for items (i)–(vi) have also been set for end-September 2000 and end-December 2000. Structural benchmarks have been set for end-December 1999, end-March 2000, end-June 2000, and end-September 2000 (Table 3). In addition, the program contains six semi-annual reviews to be completed by end-June and end-December of each year. The first review will focus on fiscal developments in the first quarter of 2000, including the operation of the contingency mechanism and the possible need for additional measures, and the implementation of structural reforms.