s, encourage appropriate asset valuation methods , transparency and accountability, and forego regulatory forbearance, especially regarding the banks under state control. The unwinding of public support to the financial sector will need to be carefully calibrated to minimize market impacts. Continued public sector support to promote lending to specific sectors such as SMEs should be well focused to avoid the emergence of future bad credits.
. Monetary policy will need to find the balance between keeping inflation under control and supporting the financial sector and real economy. In the presence of higher growth, inflationary pressures need to be continuously monitored and real interest rates kept positive to support depositor confidence and prevent inflation from surpassing the projected 6-8 percent range. Once the banking sector difficulties are addressed, the economy would benefit from greater market determination of the exchange rate and lower central bank intervention. This would enhance the effectiveness of monetary policy and the economy s response to external shocks, such as commodity price movements and exchange rate developments of trading partners. It would also promote better management of exchange rate risk and thus support dedollarization against an improved macroeconomic and financial sector backdrop. Efforts to deepen domestic financial markets-including liquid futures and forward markets in foreign exchange-and promote risk diversification are needed to encourage the demand for holding and transacting in tenge, and ensure that private domestic savings become the primary source of financing of productive activities.
. The authorities should withdraw fiscal stimulus gradually, while raising the efficiency of public spending. With large international reserves and low debt, the public sector is well positioned for continued support of the economic recovery, albeit at a lower level than in 2008 and 2009. However, the quality of public projects should be consistent with growth objectives, and hard-to-reverse outlays-including subsidies and excessive public sector wage increases-should be avoided. The economy will also benefit from improved tax administration to reduce tax evasion. Once the most pressing difficulties in the banking and real sectors are resolved, the fiscal position should be brought back to a conservative path with a phasing out of the contingent liabilities of the public sector. Importantly, the assessment of fiscal sustainability would benefit from an aggregate approach that comprises all fiscal transactions (including those that are off-budget) within a medium-term framework. This framework should reflect judgments on the optimal combination of savings and use of oil and commodity revenues-perhaps supported by an appropriately defined fiscal rule-to allow for countercyclical fiscal policy, and encourage economic di...
