Kazakhstan: Staff Concluding Statement of an IMF Staff Visit
IMF News, November 19, 2020
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- Published: November 19, 2020
Mission summary
- IMF staff conducted a virtual mission to Kazakhstan during November 2–13, 2020 to review economic developments, prospects, risks, and policies, with discussions focused on the impact of the Covid pandemic and oil price shocks, policy responses, and post-Covid reform priorities.
- The authorities consented to publication. The views expressed are those of IMF staff and do not necessarily represent the IMF’s Executive Board.
Economic developments and outlook
- Output contracted by about 2.8 percent in the first nine months of 2020, driven by declining activity in service sectors and oil production cuts under the OPEC+ agreement; agriculture, manufacturing, and construction maintained positive growth supported by government programs.
- Inflation was 7 percent in October, above the National Bank’s (NBK) 4-6 percent target band, reflecting a recent spike in food prices and tenge depreciation.
- The external current account is expected to post a deficit in Q3, mainly due to weak oil exports; official reserves have increased, supported by rising gold prices.
- The IMF team projects:
- Activity will contract overall by 2.7 percent in 2020.
- Growth will return to positive territory in 2021.
- Key risks include the evolution of the pandemic, oil price volatility, and trade tensions involving major trading partners.
Monetary and exchange rate policies
- After the March oil price drop, the NBK raised the policy rate to 12 percent (from 9.25 percent), widened the interest rate corridor, intervened in the FX market, and adjusted regulations for FX purchases to limit short-term exchange rate volatility.
- As FX pressures abated and activity concerns rose, the NBK lowered the base rate to 9 percent by the summer, expanded lending programs at preferential rates, and launched a new program for SMEs; these measures helped maintain credit flow to the private sector.
- Policy observations and recommendations:
- The NBK’s commitment to inflation targeting is commended; it implies maintaining a flexible exchange rate as a shock absorber while promoting policies to reduce dollarization and reforms to reduce exchange rate pass-through to inflation.
- Enhanced policy credibility would benefit from strengthening the NBK’s independence, setting a credible target, and improving monetary policy transmission to better anchor inflation expectations.
- Given uncertainties about a second pandemic wave, anti-crisis measures may need extension but should be gradually unwound to scale down state involvement and enable a market-led recovery.
- A medium-term monetary policy strategy under discussion will be key to identifying and addressing constraints to effective monetary policy implementation.
Financial sector policy
- Most banks entered the Covid crisis with relatively strong capital buffers, as confirmed by the asset quality review (AQR) concluded in early 2020, and have remained resilient.
- Temporary regulatory forbearance during the pandemic included reduced capital and liquidity requirements, lower risk weights, and frozen loan classification for certain exposures; these measures mitigated the crisis impact but should be phased out as the economy recovers to limit risks to financial soundness.
- Recommendations:
- Banks should produce credible medium-term plans to restore capital and liquidity buffers and address recapitalization needs identified by the AQR.
- The Agency for Regulation and Development of the Financial Market has strengthened financial oversight in coordination with the NBK and should continue efforts to align Kazakhstan’s regulatory and supervisory framework with international standards, strengthen banks’ risk management, and build its institutional capacity and independence.
Fiscal policy
- Authorities pursued countercyclical fiscal policy to respond to the pandemic; the IMF staff supports using available fiscal buffers to safeguard the population.
- Fiscal outcomes and projections:
- The overall deficit for the general government (including local governments and the NFRK) is expected to widen to 5½ percent of GDP in 2020, reflecting weaker revenues and additional spending on healthcare, transfers to vulnerable households, and support to SMEs and affected industries.
- Fiscal policy is expected to remain accommodative in 2021 to support recovery.
- The fiscal stimulus will result in an increase in public debt of 4 percent of GDP between 2019 and 2021.
- Debt levels remain well below the assets accumulated in the NFRK.
- Medium-term priorities and recommendations:
- Rebuilding fiscal buffers is a medium-term priority; fiscal consolidation is expected to resume in 2022, aiming to reduce and maintain the non-oil deficit below 6 percent of GDP beyond 2023.
- Authorities are working to increase non-oil revenues through improved tax administration and digital technology, and to raise public spending efficiency.
- The IMF team sees scope for tax reforms to support higher non-oil revenues and improve equity, including through VAT improvements and progressive income and property taxation; these reforms should be well prepared and accompanied by measures to reduce informality.
- Efforts are underway to update rules on NFRK resource use, introduce a countercyclical mechanism for government expenditure, and prepare a fiscal risk statement for the 2022 budget covering major macroeconomic and long-term risks, including from the quasi-government sector.
- An effective fiscal framework needs to be supported by proper fiscal transparency and public financial management arrangements.
Structural reforms
- Continued structural reform implementation is required for a post-Covid recovery and hand-off to sustained inclusive growth.
- Priority areas supported by the IMF team, as identified by the authorities’ new development strategy:
- Increasing competition and reducing the state’s footprint.
- Developing non-extractive sectors.
- Enhancing efficiency of public administration.
- Strengthening governance.
- Improving health and education systems.
- Specific reform emphases:
- Progress in privatizing companies in oil and gas, telecommunications, aviation, energy, and railways will be important.
- Adoption of new digital technologies and addressing environmental concerns could open opportunities for future growth and job creation.
- The IMF commends prompt policy actions and supports commitment to more sustainable and inclusive growth; continued efforts are needed to address structural constraints that limit private sector emergence, growth, and job creation. The IMF stands ready to provide policy advice and increased technical assistance.
Selected economic indicators (2018–22)
- Real GDP growth (%): 2018: 4.1; 2019: 4.5; 2020: -2.7; 2021: 3.3; 2022 (proj.): 3.8
- Real oil: 2018: 0.1; 2019: -6.0; 2020: 2.4; 2021: 3.6
- Real non-oil: 2018: 4.0; 2019: 5.7; 2020: -1.8; 2021: 3.5
- Crude oil and gas condensate production (million tons): 2018: 90; 2019: 85; 2020: 87
- Unemployment (%): 2018: 4.9; 2019: 4.8; 2020: 5.5; 2021: 5.2; 2022: 5.0
- Inflation (%): 2018: 5.3; 2019: 5.4; 2020: 7.5; 2021: 5.9
- Revenue (% GDP): 2018: 21.4; 2019: 19.7; 2020: 17.2; 2021: 18.5; 2022: 18.8
- Of which: oil revenue: 2018: 7.4; 2019: 6.9
- Expenditures (% GDP): 2018: 18.9; 2019: 20.3; 2020: 22.6; 2021: 21.5; 2022: 20.1
- Fiscal balance (% GDP): 2018: 2.5; 2019: -0.6; 2020: -5.4; 2021: -3.0; 2022: -1.4
- Non-oil fiscal balance (% GDP): 2018: -4.9; 2019: -7.5; 2020: -9.9; 2021: -8.4; 2022: -6.8
- Gross public debt (% GDP): 2018: 19.9; 2019: 23.6; 2020: 24.0; 2021: 24.9
- Broad money (% change): 2018: 7.0; 2019: 8.8; 2020: 8.6
- Credit to the private sector (% GDP): 2018: 22.7; 2019: 21.3; 2020: 23.0; 2021: 24.1
- NBK policy rate (%, eop): 2018: 9.3; 2019: …
- Current account (% GDP): 2018: -0.1; 2019: -4.0; 2020: -3.5; 2021: -3.1; 2022: -2.9
- Net foreign direct investments (% GDP): 2018: -2.6
- NBK reserves (in months of next year's imports of G&S): 2018: 7.2; 2019: 7.8; 2020: 9.0; 2021: 8.4
- NFRK assets (in months of next year's imports of G&S): 2018: 13.5; 2019: 16.5; 2020: 14.6; 2021: 13.7; 2022: 13.6
- External debt (% GDP): 2018: 89.1; 2019: 87.3; 2020: 96.9; 2021: 91.4; 2022: 85.3
- Exchange rate (y-o-y percent change; Tenge per U.S. dollar; eop): 2018: 15.6; 2019: -0.8
Kazakhstan: Staff Concluding Statement of an IMF Staff Visit, November 18, 2020.