IMF Executive Board Concludes 2018 Article IV Consultation with the Republic of Kazakhstan
IMF News, September 17, 2018
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- Published: September 17, 2018
Overview and Recent Developments
- Date: September 16, 2018
- Growth has strengthened in Kazakhstan supported by higher oil production and increased activity in trade and manufacturing.
- Robust exports have contributed to an improvement of the external current account.
- Inflation has declined and remained within the target band of the National Bank of Kazakhstan (NBK), allowing the NBK to undertake several interest rate cuts.
- Steps have been taken to address weaknesses in the banking sector, including purchase of non-performing assets, capital support, withdrawing licenses of banks that were in violation of prudential regulations and legal changes aimed at strengthening the NBK’s supervisory powers.
- With the winding down of fiscal stimulus programs and following the provision of funding to the banking sector in 2017, fiscal consolidation is envisaged, underpinned by improvements in tax administration and expenditure reforms, notably in health and education.
- The authorities’ structural reform agenda aims at addressing dependence on natural resources by making public administration more efficient and the business environment more favorable, addressing governance issues, advancing privatization, fostering greater competition, and investing in infrastructure.
Executive Board Assessment and Outlook
- Recovery is continuing from shocks that began in 2014, with a pick-up of growth in 2017.
- Growth is expected to remain solid, although there are risks:
- Overall growth will likely slow as the increase of oil production moderates.
- Non-oil growth should increase further over the medium term, reflecting structural reforms and financial repair and deepening.
- Non-oil growth could be higher if far-reaching reforms are implemented decisively.
- Risks to the outlook include:
- Commodity price volatility (both higher prices that may reduce reform impetus and lower prices that reduce export earnings and fiscal revenues).
- Pressures on the tenge.
- Policy slippages.
- Slower growth in key trading partners (Russia and China).
- Tighter or volatile global financial conditions.
- Deepening of global trade or geopolitical tensions.
- Upside opportunities include the Belt-Road Initiative (BRI) and reforms in Uzbekistan, offering greater integration, trade, investment, and diversification.
Fiscal Policy and Public Finances
- Fiscal consolidation is underway as countercyclical spending has been completed and buffers need to be restored.
- Ambitious and complex reforms are underway in health and education, PPPs and outsourcing, and public employment; these should be carefully rolled out.
- The authorities are considering issuance of a tenge Eurobond to attract foreign investors and establish a benchmark.
- Further fiscal adjustment is expected in the medium term, with the non-oil deficit reaching levels consistent with long-term sustainability, driven by higher revenues mainly from tax administration gains from the VAT and enhanced technology. Projected gains may be ambitious.
- The authorities’ plan to reduce the personal income tax (PIT) rate for low-income earners is positive; to further enhance progressivity, a moderate increase of PIT rates for high-income earners could be considered.
- Review of tax incentives and the tax regime for mining should be undertaken.
- The level of budgetary capital spending is low by international standards; additional, high-quality outlays should be considered in a deficit-neutral way, in tandem with higher non-oil revenues.
- Efforts to strengthen fiscal transparency and risk management, including monitoring of state-owned enterprises and PPPs, are needed.
- Note: The fiscal accounts in 2017 include a state support to the banking sector of 4 percent of GDP.
Monetary Policy, Financial Markets, and Banking Sector
- The focus of monetary policy should remain on price stability.
- Declining inflation and stabilization of expectations have allowed the NBK to undertake interest rate cuts, which has been broadly appropriate and consistent with keeping real interest rates close to neutral levels.
- A cautious approach to further accommodation is warranted given the changing balance of risks.
- Quasi-fiscal initiatives aimed at providing longer-term financing should be targeted and temporary, incorporate robust risk-sharing and market funding arrangements, and be undertaken by the budget and not the NBK.
- As recovery gains momentum, bank balance sheet issues are resolved, and structural reforms advance, credit should pick up more broadly, allowing the large stock of NBK notes to be unwound.
- Efforts to improve monetary operations and domestic financial markets should continue:
- NBK notes have helped manage liquidity and build the short end of the yield curve.
- Money-market rates have stayed within the NBK’s corridor, close to the lower bound.
- There is scope for strengthening cooperation between the NBK and the government on liquidity management and market issues, including management of SOE funds.
- A review and changes to the complex system of reserve requirements are warranted.
- The flexible exchange rate regime has served Kazakhstan well by helping to absorb changes in the macro environment and support dedollarization.
- The NBK would benefit from strengthening transparency and communications with respect to foreign exchange purchases and sales, including on behalf of the NFRK and the national pension fund (UAPF).
- Banking sector challenges and required actions:
- Banks need strengthened business models, with enhanced governance, management, and operations.
- The sector continues to experience difficulties from weak credit-risk management and NPLs.
- Actions are needed in asset quality and governance, supervision and regulation, emergency liquidity assistance, credit subsidies, collateral and foreclosure, and disposal of distressed assets.
- Legal, institutional, and operational constraints affecting the Problem Loan Fund should be addressed.
- Further strengthening of the resilience of the banking sector will contribute to sound macro-financial linkages and growth, while reducing risks.
Structural Reforms and State Role
- Reducing the state’s footprint and advancing governance reforms are critical to fostering a thriving private sector and achieving the authorities’ aspiration of joining the world’s thirty most developed countries by 2050.
- The state remains predominant despite comprehensive reform initiatives; the challenge is ensuring changes on paper lead to deep and meaningful changes in practice.
- With recovery underway, extensive state support risks cementing a culture of reliance on subsidies; the growth impetus should move firmly to the private sector.
- Priorities include:
- Facilitating the business environment.
- Enhancing infrastructure, connectivity, and inclusivity.
- Successful initial public offerings (IPOs) of “blue-chip” SOEs to send a strong signal.
- Modernizing rail and road networks.
- Liberalizing trade and enhancing domestic competition.
- Improving land use and agriculture infrastructure.
- Seizing opportunities to enhance connectivity and diversify under the BRI.
- Far-reaching efforts to professionalize the civil service, enhance use of technology in public administration, and strengthen accountability.
Key Statistics and Selected Economic Indicators (2015–19)
- Population (2017): 18.2 million
- Per capita GDP (2017 - est., US$): 8,762
- Quota: SDR 1,158.40 million
- Literacy rate: 99.8% (2015)
- Main export: crude oil, metals, minerals
- Poverty rate: 2.7% (2015)
- Key export markets: EU, China, Russia
- Output — Real GDP growth (%)
- 2015: 1.2
- 2016: 1.1
- 2017: 4.0
- 2018: 3.7
- 2019 (proj.): 3.1
- Real oil
- 2015: -2.6
- 2016: -1.2
- 2017: 10.7
- 2018: 3.3
- 2019 (proj.): (not provided)
- Real non-oil
- 2015: 2.5
- 2016: 1.8
- 2017: 1.9
- 2018: 3.8
- 2019 (proj.): (not provided)
- Crude oil and gas condensate production (million tons)
- 2015: 79
- 2016: 78
- 2017: 86
- 2018: 89
- 2019 (proj.): 90
- Unemployment (%)
- 2015: 5.0
- Inflation (%)
- 2015: 13.6
- 2016: 8.5
- 2017: 7.1
- 2018: 6.0
- 2019 (proj.): 5.2
- General government finances 1/
- Revenue (% GDP)
- 2015: 16.6
- 2016: 16.1
- 2017: 18.8
- 2018: 20.3
- 2019 (proj.): 20.4
- Of which: oil revenue
- 2015: 6.6
- 2016: 4.1
- 2017: 6.2
- 2018: 7.6
- 2019 (proj.): (not provided)
- Expenditures (% GDP)
- 2015: 22.9
- 2016: 21.5
- 2017: 25.2
- 2018: 19.0
- 2019 (proj.): (not provided)
- Fiscal balance (% GDP)
- 2015: -6.3
- 2016: -5.4
- 2017: -6.5
- 2018: 1.5
- 2019 (proj.): 1.4
- Non-oil fiscal balance (% GDP)
- 2015: -12.9
- 2016: -9.5
- 2017: -12.7
- 2018: -6.1
- 2019 (proj.): (not provided)
- Gross public debt (% GDP)
- 2015: 21.9
- 2016: 19.7
- 2017: 20.8
- 2018: 17.8
- 2019 (proj.): 16.8
- Money and credit
- Broad money (% change)
- 2015: 33.8
- 2016: 15.6
- 2017: -1.7
- 2018: 9.5
- Credit to the private sector (% GDP)
- 2015: 34.0
- 2016: 29.6
- 2017: 27.0
- 2018: 24.5
- 2019 (proj.): 24.9
- NBK policy rate (%, eop)
- 2015: 16.00
- 2016: 12.00
- 2017: …
- Balance of payments
- Current account (% GDP)
- 2015: -2.8
- 2016: -3.4
- 2017: -0.1
- 2018: 0.0
- Net foreign direct investments (% GDP)
- 2015: -9.7
- 2016: -2.4
- NBK reserves (in months of next year's imports of G&S )
- 2015: 8.3
- 2016: 8.1
- 2017: 8.4
- NFRK assets (in months of next year's imports of G&S)
- 2015: 19.5
- 2016: 17.2
- 2017: 15.3
- 2018: 15.9
- External debt (% GDP)
- 2015: 83.2
- 2016: 119.2
- 2017: 105.1
- 2018: 96.7
- 2019 (proj.): 95.3
- Exchange rate (y-o-y percent chage; Tenge per U.S. dollar; eop)
- 2015: 86.2
- 2016: -1.8
- 2017: -0.3
- 2018: 1/ (not provided)
1/ The fiscal accounts in 2017 include a state support to the banking sector of 4 percent of GDP. Sources: Kazakhstani authorities and Fund staff estimates and projections.
IMF Executive Board Concludes 2018 Article IV Consultation with the Republic of Kazakhstan (September 16, 2018).
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