IMF Staff Concludes Visit to Kazakhstan

IMF News, June 14, 2023

Source details

Mission conducted by an IMF team led by Nicolas Blancher during May 31–June 7, 2023.
Press Release No. 23/207.
Next IMF mission to Kazakhstan for the 2023 Article IV consultation is expected to take place in late October.

2022: high oil prices supported Kazakhstan’s fiscal and external accounts; strong non-oil revenue collections contributed to a reduction in the non-oil fiscal balance.
2023 GDP growth projection: 4.8 percent (from 3.3 percent in 2022).
Inflation dynamics:
- Inflation is declining due to a large base effect, lower food prices, exchange rate appreciation, and recent monetary policy tightening.
- Considering increasing domestic fuel and utility tariffs, strong economic activity, and growing government spending, inflation should ease gradually to about 12 percent for 2023 (against 20 percent at the end of 2022).
External sector: Lower international oil and metal prices should lead to a weaker external position and reduced oil fiscal revenues this year.

Downside risks:
- Slower growth of trading partners could affect exports and growth, including through further oil price declines.
- Sustained disruptions to the CPC pipeline would be a major external shock.
- Inflation pressures could require maintaining the tight monetary stance for longer than currently anticipated.
- Spillovers from the war in Ukraine could escalate through trade, foreign investment, and exchange rate channels.
- Secondary sanctions, if imposed on domestic entities, could affect domestic and international investor confidence.
- Social tensions may surge again and delay fiscal consolidation and reforms.
Upside risks:
- Continuation of the strong growth momentum.
- Reversal of the recent oil price decline.

Assessment:
- Monetary policy tightening, especially in late 2022, helped avoid an adverse spiral of exchange rate, inflation, and dollarization pressures.
- The National Bank of Kazakhstan’s continued commitment to inflation targeting and efforts to improve communications on monetary policy decisions are commendable.
Recommendations:
- Monetary policy should remain tight in 2023 until inflation is firmly on a downward trend and inflation expectations are re-anchored.
- Continued efforts are needed to further strengthen the NBK’s credibility and independence.
- Plans to fully eliminate the NBK’s subsidized lending programs by early 2024 are welcome.
- A removal of capital flow management measures is also recommended.

Assessment:
- The expansion of public spending in the revised 2023 budget is substantial.
- With the economy already experiencing strong growth in the initial months of the year, the additional stimulus risks delaying fiscal consolidation and undermining efforts to contain inflation.
- High expenditure growth, coupled with increased transfers from the National Fund, appears to undermine the recently introduced fiscal rules, negatively impacting the credibility of the government’s medium term fiscal commitments.
Positive developments:
- Continued progress in improving revenue administration and non-oil revenue collection.
- Ongoing work to revise the tax and budget codes.
- Government’s plan to follow up on recent recommendations from the Fiscal Transparency Evaluation.

Assessment:
- Continued efforts by the Agency for Regulation and Development of the Financial Market (ARDFM) to implement risk-based financial supervision have helped strengthen the resilience of Kazakhstan’s banking sector despite multiple shocks.
Recommendations and ongoing work:
- Further progress needed to address remaining vulnerabilities and prepare the system for future economic and financial shocks by:
- Strengthening the resources and operational independence of the ARDFM.
- Completing the implementation of the Basel II/III frameworks.
- Strengthening the bank recovery and resolution regime.
- The ongoing Financial Sector Assessment Program for Kazakhstan will provide a comprehensive assessment and roadmap for reforms.
- Regarding risks of secondary sanctions, authorities should continue to closely monitor risk management practices of financial institutions.

IMF Staff Concludes Visit to Kazakhstan — Press Release No. 23/207 (June 14, 2023).