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IMF urges Kazakhstan to act quickly to fix banks

Business Materials 28 July 2009 23:58 (UTC +04:00)

The International Monetary Fund on Tuesday urged Kazakhstan to restore confidence in its banking sector through additional measures and called for an independent assessment of the country's largest banks, Reuters reported.

In its annual review of Kazakhstan's economy, the IMF said it was important to deal "promptly" with the losses at the country's largest bank BTA BTAS.KZ and No. 4 lender Alliance Bank (ALLBq.L: Quote, Profile, Research).

A slowing economy and an exchange rate devaluation in Kazakhstan have added to pressures on bank balance sheets, the IMF said.

"While supporting recent measures to improve the banking resolution framework, (IMF) directors called for further action, including providing the Financial Supervision Agency with the legal authority, independence and resources needed to carry out its mandate to intervene early and forcefully when needed," the IMF said.

"They also emphasized the need to ensure effective operation of the deposit insurance fund," the IMF said.

In May, Kazakhstan, which has responded to the economic crisis with a $10 billion package, warned it could let BTA and Alliance fail if creditors did not agree to restructure debt.

Both banks were nationalized and are in talks with creditors to restructure their debt. Alliance announced in May that it had defaulted on more than $10 million in debt.

The country's financial watchdog should be granted legal authority, independence and resources to carry out its mandate to intervene early and forcefully when needed, the Fund said.

"They (IMF directors) also emphasized the need to ensure effective operation of the deposit insurance fund," it said.

"Directors called for strengthened financial sector regulation and supervision, including through improved on and off site supervision and further restrictions on foreign currency lending to unhedged borrowers."

The IMF said Kazakhstan's economy is likely to contract by 2 percent this year and lower oil prices are set to push the budget into a deficit for the first time since 2000.

It said monetary policy was "appropriately" geared toward supporting economic activity, including through the reduction in reserve requirements and policy rates.

The Fund said staff assessments showed that the exchange rate was "broadly in line with fundamentals." It also said that preserving a stable exchange rate was important for regaining confidence in the banking sector, while also limiting the risks from the corporate sectors' large foreign exchange exposure.

The IMF said there were benefits to moving toward a more flexible exchange rate once economic conditions stabilized.

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