Mission Concluding Statement 

Kazakhstan Staff Concluding Statement of 2023 Article IV Mission

November 21, 2023

An International Monetary Fund (IMF) mission led by Mr. Nicolas Blancher conducted discussions for the 2023 Article IV consultation with Kazakhstan on November 7-21 in Astana and Almaty. At the end of the visit, the mission issued the following statement, which summarizes its main conclusions and recommendations:

Strong buffers and policy responses have helped Kazakhstan manage multiple shocks in recent years. Going forward, the economic environment is expected to be challenging both in the short term, including from external spillovers, and over the medium term, including due to global fragmentation and decarbonization. To confront these challenges, modernized economic institutions and policy frameworks are needed, and accelerated structural reforms are essential to raise economic growth while making it more resilient, inclusive, and green. Priorities in Kazakhstan are to reduce the state footprint in the economy, improve public sector governance, and promote the development of a more vibrant private sector driving job creation and economic diversification.

Recent developments, outlook, and risks

1. Economic activity has been strong and inflation has declined in 2023. GDP growth is projected at 4.8 percent for 2023, driven by both the oil and non-oil sectors, while the impact of the war in Ukraine remains limited. Inflation has dropped since it peaked at 21 percent in February and is projected at about 10 percent by the end of 2023. On the external front, a current account deficit of 3½ percent of GDP is projected for 2023. Real wage growth has stabilized following sharp increases in the last two years. Strong credit growth has also supported activity.

2.Growth is expected to moderate in 2024 in an uncertain economic environment. It would slow to 3.1 percent in 2024, mostly due to delay in the Tengiz oil field expansion. In the medium-term,non-oil GDP growth would stabilize at around 3½ percent, and inflation would ease gradually to reach 5 percent by 2025-26. Downside risks include oil price declines, oil export disruptions, and slow growth in trading partners. Spillovers from the war in Ukraine and geopolitical fragmentation, including through secondary sanctions, could weaken activity and investor confidence. Should social tensions resurface, they could delay reform implementation. Finally, climate-related risks, especially from rapid global decarbonization, could negatively impact the economy and financial system. Upside risks include accelerated reform implementation, immigration of skilled labor and relocation of foreign firms to Kazakhstan, as well as higher oil prices.

Monetary and exchange rate policy

3.A prudent monetary policy stance is warranted amid persistent inflation pressures. Together with lower global food prices, tight monetary policy since late 2022 has helped reduce price pressures. Yet, inflation is still well above the National Bank of Kazakhstan’s 5 percent target while inflation expectations are elevated, the near-term economic outlook is uncertain, and domestic energy and utility prices should rise in the coming months. As such, monetary policy should not be relaxed prematurely, i.e., before inflation is close to target and inflation expectations are well anchored.

4.The effectiveness and credibility of monetary policy can be further strengthened, including by increasing the National Bank of Kazakhstan (NBK)’s independence. The NBK has recently improved the transparency of monetary policy, including by better communicating its decisions and by publishing quarterly inflation forecasts. Its credibility in conducting monetary policy would be further bolstered by eliminating its quasi-fiscal activities (e.g., subsidized loans), avoiding perceptions of political influence on the policy rate level, and securing greater personal independence for senior NBK officials.

Financial sector stability

5.The banking system remains sound overall. In 2023, banks reported strong average capitalization, profitability, and liquidity positions. However, there is some heterogeneity among banks regarding capital and liquidity buffers, credit risk exposures, and asset quality. The level of bank loan and deposit dollarization has decreased further, and continued progress has been made in implementing risk-based supervision in recent years.

6.The 2023 Financial Sector Assessment Program (FSAP) identified several reforms to enhance the sector’s resilience and policy framework. These focus in particular on:

·Crisis preparedness. The crisis management and bank resolution frameworks need to be enhanced to limit the risks of bank bailouts by the state. The independence of the resolution authority (ARDFM) should be reinforced, its resolution tools and powers should be strengthened, and its resources and capacity to use them effectively should be secured.

·Financial sector oversight. Greater independence, legal protection, and resources for the ARDFM and its staff are also needed to support systemic risk monitoring and effective supervision, including on a consolidated basis and covering related party transactions. Furthermore, the authorities should continue to close data gaps and integrate top-down stress testing to upgrade the macroprudential policy framework.

·Institutional responsibilities. The financial oversight and crisis resolution mandates of the ARDFM and other public entities (including the NBK, Ministry of Finance, and Ministry of National Economy) should be delineated clearly to improve inter-agency collaboration and policy effectiveness. Expanding the AIFC’s activities with residents would raise risks of financial spillovers and regulatory fragmentation, and appropriate safeguards should be introduced ex-ante to limit these risks.

Fiscal policy

7.The government’s commitment to fiscal consolidation is welcome and should be underpinned by more conservative economic projections and specific reform plans. Reducing the non-oil deficit to 5 percent of GDP by 2030 would support disinflation and help preserve large fiscal buffers. Currently, this is predicated on optimistic growth and spending projections for which concrete measures have yet to be articulated. The new tax code under preparation is an opportunity to enhance non-oil revenues, and the mission welcomed several reforms proposed in this context, including an increased VAT rate, a progressive personal income tax, and the elimination of distortive tax exemptions and incentives. There is also room to further strengthen revenue administration, including by better addressing taxpayer compliance risks.

8. Stronger public institutions would help improve the credibility of fiscal policy. Building on progress in assessing fiscal risks and the recent fiscal transparency evaluation, the mission welcomed the preparation of a new budget code, including measures to increase budget autonomy and clarity for government units and to report on tax expenditures and National Fund of the Republic of Kazakhstan (NFRK) activities. The mission also highlighted several areas for progress, including public sector data quality and transparency in the natural resources sector. The activities of numerous public entities have weakened fiscal accountability – as recently with the NFRK’s purchase of KazMunayGas shares used to generate fiscal revenues. The mission supported the authorities’ plan to reinstate fiscal rules in 2024 and recommended simplifying and better enforcing them through the creation of an independent fiscal council and stronger escape clauses to limit discretionary spending (including transfers from the NFRK).

Structural reforms

9.The role of the state in the economy needs to be reduced and refocused to bolster future economic growth. Downsizing the state’s footprint in the economy would promote competition and private sector participation, and the announced resumption of privatizations in 2024 is encouraging. Reforms to strengthen public governance and reduce corruption-related vulnerabilities should also be prioritized as they can deliver large growth benefitswhile also increasing the impact of other reforms. Increasing financial inclusion of small, and medium size enterprises also requires refocusing state interventions, including by streamlining large-scale loan subsidy programs and improving credit market infrastructure, such as collateral and insolvency frameworks. The introduction of the digital Tenge is expected to contribute to higher financial inclusion and, as it is implemented, further analyses of its macroeconomic and financial stability implications will be desirable.

10.Broader reforms to improve the business environment should facilitate private sector-led economic diversification. Reforms are needed to address obstacles to efficient labor allocation and productivity, education and skill mismatches, market contestability, and tariffs and price controls that discourage investment, including foreign direct investment. Upgraded transport infrastructure would also help develop new value chains and the mission welcomed the authorities’ recent efforts to support the diversification of trade partners, routes and hubs, with support from international financial institutions.

11.Climate policy implementation is progressing, but further efforts are needed. Following the adoption of a national strategy for carbon neutrality in early 2023, planned increases in domestic energy prices will help reduce carbon emissions from current high levels, generate public revenues, and support Kazakhstan’s transition to a low-carbon global economy. More broadly, reforms should accelerate to meet the government’s objectives of increasing domestic energy efficiency standards and further developing renewable energy sources. Large exposures to climate-related risks in the financial sector also need to be monitored and managed.

12.Ongoing improvements to social safety nets will help mitigate the potential social costs of economic transformations. Poverty levels in Kazakhstan are comparatively low, but there is room to strengthen the targeting of social spending, including toward informal workers and through means testing, as well as the monitoring of social program outcomes. The implementation of a new social code and increased reliance on comprehensive digital platforms are opportunities for substantial progress in this area.

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The staff team is grateful to the authorities and a broad range of public and private sector counterparts for their hospitality and candid discussions.