Kazakhstan Staff Concluding Statement of the 2021 Article IV Mission
IMF News, November 17, 2021
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- Published: November 17, 2021
Recent developments, outlook, and risks
- Kazakhstan’s economy contracted by 2.5 percent in 2020 due to reduced oil production and domestic activity.
- Real GDP growth in 2021 through October was 3.5 percent, returning output to its pre-Covid level.
- Inflation exceeded the NBK target band (4-6 percent) and stood at 8.9 percent in October, driven mostly by food prices.
- Credit growth accelerated to 16 percent in September 2021, reflecting rapid growth in consumer lending and large state support programs.
- Unemployment remained stable at about 5 percent.
- Authorities’ policy response included: regulating prices for socially important goods; cash transfers to vulnerable households; targeted assistance to hard-hit sectors and SMEs (including subsidized lending and tax exemptions); “Employment Roadmap” projects; accommodative monetary policy after an early 2020 rate increase; eased regulatory and prudential bank requirements and encouragement of loan repayment deferrals.
- Outlook: Growth should reach 3.7 percent in 2021 and converge to potential (4 percent for the non-oil sector) over the medium term.
- Inflation may remain elevated in the near term but should ease towards the NBK’s target band in late 2022.
- After improvement in 2021 due to favorable commodity prices, the current account would gradually return to a deficit of about 3 percent of GDP in the medium term.
- Main downside risks: lower-than-expected vaccination rates, slower growth of trading partners, lower oil prices, and persistent inflationary pressure potentially requiring further monetary tightening.
- Main upside risk: higher-than-expected oil prices strengthening buffers.
Monetary and exchange rate policy
- Further monetary policy tightening may be needed in the short term to contain inflation.
- Headline inflation and inflation expectations rose well above target during 2020–2021 due to rising international food prices, pent-up domestic demand, and imported inflation.
- Gradual increases in the policy rate in recent months were warranted; further tightening may be necessary to anchor inflation expectations.
- Given weaknesses in monetary transmission, coordinated monetary and fiscal implementation and government initiatives to mitigate domestic supply chain disruptions should help curb inflation.
- Progress toward full-fledged inflation targeting includes:
- Policy transparency: publication of the NFRK’s FX transactions and increased communication.
- Policy independence: new Monetary Policy Committee and NBK’s planned exit from subsidized credit programs.
- Enhanced analytical capacity to inform policy decisions.
- Further steps needed: develop domestic capital markets, reduce dollarization, coordinate with fiscal policy, manage excess bank liquidity, eliminate non-core mandates and quasi-fiscal activities of the NBK, and improve regular surveys of inflation expectations.
Financial sector stability
- Financial sector policy should balance supporting recovery and safeguarding stability.
- Following the 2019 asset quality review and supervisory interventions, the banking system has weathered the COVID shock; bank profitability, liquidity and capitalization remained strong.
- Authorities plan to unwind most anti-crisis regulatory measures by end-2021; careful monitoring of new risks is needed, including fast-growing consumer lending which may require targeted macroprudential measures to prevent excessive household debt build-up.
- Recent efforts to strengthen financial oversight:
- Creation of a financial regulatory agency (ARDFM) building capacity to align with international standards.
- Introduction of regular asset quality reviews and stress tests in collaboration with financial institutions.
- Need for close cooperation between ARDFM and NBK, clearer accountability, and more formalized information-exchange protocols.
- Bank resolution framework:
- Upgraded in 2019 with special resolution tools introduced, but mandate and scope of the resolution authority could be clarified further; staff should be granted stronger legal protection.
- ARDFM revoked licenses of several small banks and relied on court-based liquidation procedures, signaling changes in policy implementation and manager responsibilities.
- Ongoing efforts to develop a distressed asset market are welcome.
- Continued efforts are needed to strengthen the resolution framework for effective and orderly resolution of failing banks.
- The next FSAP for Kazakhstan, expected in 2022, will be an opportunity to fully assess the financial stability framework.
Fiscal policy and framework
- Kazakhstan used substantial buffers to cushion the pandemic’s impact.
- Projected non-oil fiscal deficit for 2021 is 8½ percent of GDP, striking a balance between prudence and targeted support.
- Government net financial assets projected to decline to 5 percent of GDP by end-2021 from 14 percent of GDP in 2019.
- Authorities plan to reduce the non-oil deficit to 6 percent of GDP by 2025, requiring an additional adjustment of 1-2 percent of GDP to remain a net creditor and foster intergenerational equity.
- Medium-term consolidation options include:
- Increasing non-oil revenues to avoid undue spending cuts.
- Strengthening revenue administration, reducing informality, promoting digitalization.
- Broaden tax base (e.g., streamline CIT exemptions, tax capital income), raise tax rates (e.g., VAT rates), introduce a progressive income tax and possibly a carbon tax consistent with the Paris agreement.
- Increase public expenditure efficiency via detailed performance reviews, streamline public employment, and improve civil service efficiency.
- Fiscal rules: authorities’ goal to introduce new fiscal rules is welcome; recommended features:
- Simple, easy-to-monitor set of rules.
- Long-term anchor preserving positive net financial assets for the public sector.
- Complementary limit on the non-oil deficit as a share of non-oil GDP, or on government expenditure growth.
- Incorporate escape clauses for flexibility.
- Create an independent fiscal council to monitor implementation.
- Fiscal framework and transparency:
- Fiscal rules should apply to a broad definition of fiscal accounts, encompassing the general government.
- Managing fiscal risks is essential; preparations of the first annual Fiscal Risks Statement (FRS) are welcome and should cover quasi-government entities.
- Public debt reporting should be expanded to cover substantial quasi-government debt.
- These efforts would benefit from a Fiscal Transparency Evaluation (FTE) by the IMF.
Structural reforms
- Long-term growth, resilience, and sustainability require greater economic diversification away from natural-resource reliance in the transition to a low-carbon global economy.
- Reform plans articulated in 10 National Projects (supporting agriculture and non-carbon sectors, promoting entrepreneurship, improving access to social services) will support the transition; prioritization is essential given multiple challenges.
- Private sector development requires public sector transformation:
- Reevaluate the rationale for state-owned enterprises (SOEs).
- Enhance SOE risk management, governance, and transparency.
- Authorities’ plan to resume privatizations post-COVID is welcome.
- Creation of an independent competition agency is promising to reduce barriers to market access, trade, and investment.
- Governance and anti-corruption:
- Continue focus on governance and anti-corruption reforms with measurable benchmarks to monitor the 2015–25 National Anti-Corruption Strategy.
- Digitalization of tax and customs administration will enhance public spending control.
- Amended public procurement law requires disclosure of beneficial ownership of entities contracting with the government to support transparency and competition.
- New asset declaration law has entered into force and can help fight corruption if properly implemented.
- Further efforts needed to align AML/CFT regime with international standards and improve efficacy in fighting corruption.
- Climate commitments and transition:
- Authorities committed to carbon neutrality by 2060.
- Challenges: large hydrocarbon sector, reliance on coal, high per-capita greenhouse gas emissions.
- Need to identify specific actions to meet goals and prepare for the transition to a low-carbon world.
- Incorporate costs of required public investments into macroeconomic and fiscal frameworks.
- Raise the price of carbon, including by gradually eliminating substantial energy subsidies, to align incentives and finance a just transition.
- Proceed gradually to allow development of social safety nets and provide room for private-sector structural transformation.
Kazakhstan: Selected Economic Indicators, 2019–23
- Real GDP growth (%): 2019: 4.5; 2020: -2.5; 2021 (est.): 3.7; 2022 (proj.): 3.9; 2023: 3.1
- Real oil: 2019: 0.1; 2020: -4.7; 2021 (est.): 0.5; 2022 (proj.): 1.6; 2023: 0.0
- Real non-oil: 2019: 5.9; 2020: -1.8; 2021 (est.): 4.6; 2022 (proj.): 4.0
- Crude oil and gas condensate production (million tons): 2019: 90; 2020: 86; 2021: 88
- Unemployment (%): 2019: 4.8; 2020: 4.9; 2021: 4.7
- Inflation (%): 2019: 5.4; 2020: 7.5; 2021 (est.): 8.5; 2022 (proj.): 6.0
- General government revenue (% GDP): 2019: 19.7; 2020: 17.5; 2021 (est.): 18.8; 2022 (proj.): 19.3
- Of which: oil revenue: 2019: 6.9; 2020: 3.4; 2021 (est.): 6.3; 2022 (proj.): 5.8
- General government expenditures (% GDP): 2019: 20.3; 2020: 24.6; 2021 (est.): 21.4; 2022 (proj.): 20.4; 2023: 20.0
- Fiscal balance (% GDP): 2019: -0.6; 2020: -7.1; 2021 (est.): -2.6; 2022 (proj.): -1.0; 2023: -0.7
- Non-oil fiscal balance (% GDP): 2019: -7.5; 2020: -10.5; 2021 (est.): -8.7; 2022 (proj.): -7.3; 2023: -6.5
- Gross public debt (% GDP): 2019: 19.9; 2020: 26.4; 2021 (est.): 24.7; 2022 (proj.): 25.7; 2023: 27.5
- Broad money (% change): 2019: 2.4; 2020: 16.9; 2021 (est.): 13.4; 2022 (proj.): 10.5; 2023: 9.5
- Credit to the private sector (% GDP): 2019: 21.3; 2020: 22.0; 2021 (est.): 20.9; 2022 (proj.): 21.1
- NBK policy rate (%, eop): 2019: 9.3; 2020: 9.0; 2021: …
- Current account (% GDP): 2019: -4.0; 2020: -3.8; 2021 (est.): -0.9; 2022 (proj.): -1.4
- Net foreign direct investments (% GDP): 2019: -3.2; 2020: -3.5; 2021 (est.): -2.3
- NBK reserves (in months of next year's imports of G&S): 2019: 7.7; 2020: 8.4; 2021 (est.): 8.3; 2022 (proj.): 8.1
- NFRK assets (in months of next year's imports of G&S): 2019: 16.4; 2020: 14.0; 2021 (est.): 13.6; 2022 (proj.): 14.1; 2023: 14.4
- External debt (% GDP): 2019: 87.6; 2020: 96.0; 2021 (est.): 83.0; 2022 (proj.): 79.5; 2023: 77.5
- Exchange rate (y-o-y percent chage; Tenge per U.S. dollar; eop): 2019: -0.8; 2020: 10.4
Staff Concluding Statement of the 2021 Article IV Mission for Kazakhstan, November 17, 2021.