Mission Concluding Statement 

Kazakhstan: Staff Concluding Statement for the 2024 Article IV Mission

October 1, 2024

Washington, DC: An International Monetary Fund mission led by Mr. Nicolas Blancher conducted discussions for the 2024 Article IV consultation with Kazakhstan on September 18-October 1, 2024, in Astana and Almaty. At the end of the visit, the mission issued the following statement, which summarizes its main conclusions and recommendations:

Recent developments, outlook, and risks

1. Economic activity has been robust and inflation has declined gradually in 2024. GDP growth is projected by staff at 3.9 percent for 2024, against 5.1 percent in 2023, driven in large part by high public spending. Inflation dropped to 8.4 percent in August and is projected at 8.3 percent by the end of 2024. On the external front, a current account deficit of 1.3 percent of GDP is projected for 2024. The banking system remains sound overall amidst still high credit growth.
2. Growth is expected to accelerate in 2025 in a still uncertain environment. It would reach 4.8 percent in 2025 driven by continued strong budget spending and the Tengiz oil field expansion. In the medium-term, non-oil GDP growth would stabilize around 3½ percent, and inflation would gradually decline to 5 percent by 2027-28. This outlook is subject to downside risks, including from a growth slowdown in major economies; an intensification of regional conflicts and secondary sanctions; and, higher commodity price volatility or CPC pipeline disruptions. On the domestic front, delays in implementing infrastructure projects would reduce near-term growth, while failure to reintroduce fiscal discipline could fuel renewed inflation pressures and social tensions.

Monetary and exchange rate policy

3. Monetary policy should remain tight in the coming months. The National Bank of Kazakhstan’s prudent approach to reducing the policy rate has led to continuous progress in reducing inflation from its peak in February 2023, supported by global conditions. Yet, the pace of disinflation has slowed most recently, including because of high budget spending. In the period ahead, domestic demand is expected to remain strong, with utility tariffs increasing, and inflation still above the NBK’s 5 percent target.
4. Several measures would help increase the effectiveness and credibility of monetary policy. Despite multiple shocks in recent years, Kazakhstan has benefited from an increasingly effective monetary policy, including due to the authorities’ commitment to exchange rate flexibility. Looking ahead, monetary policy effectiveness and credibility could be further strengthened by increasing the NBK’s legal independence, autonomy, transparency, and accountability. The authorities should also refrain from intervening in the foreign exchange market in the absence of disorderly market conditions.

Financial sector stability

5. The mission commends the authorities for their continued efforts to enhance the financial sector’s resilience. Building on recommendations from the 2023 Financial Sector Assessment Program, a detailed roadmap was approved in December 2023. Since then, the institutional independence of the regulatory agency (ARDFM) has been reinforced, and enhancements to consolidated and risk-based supervision have been underway. In the macroprudential policy area, new policy tools have been introduced, and the NBK’s mandate has been strengthened. However, data gaps need to be addressed to better assess vulnerabilities in the household sector given rapid retail lending growth. Finally, expanding the AIFC’s domestic activities raises risks from regulatory fragmentation, and appropriate safeguards should be introduced to limit these risks.
6. Introducing a fully-fledged framework for bank resolution, including through strong interagency coordination, is critical to limit the risk of bank bailouts by the state. Resolution tools and powers aligned with best international practices need to be introduced, and the ARDFM should secure sufficient resources to deliver on its mandate as bank resolution agency. In addition, it will be important to establish clear mechanisms for collaboration in resolving distressed banks among key public entities, including the ARDFM, NBK, Ministry of Finance, and Ministry of National Economy.

Fiscal policy

7. Recurrent fiscal underperformance is a growing concern, including because it leads to over-reliance on National Fund resources. The government’s commitment to fiscal consolidation has been undermined by inadequate budget planning and lower-than-expected tax revenues in recent years. The introduction of a new tax code is a major opportunity to enhance non-oil revenues, including by eliminating distortive tax exemptions and raising the value-added tax rate. However, its adoption has been delayed, raising risks of persistent large deficit, further reliance on NF financing, and procyclical fiscal policy until at least 2025.
8. Urgent action is needed to strengthen the fiscal policy framework and credibility. Improved macro-fiscal projections should underpin medium-term fiscal consolidation plans, and reforms to make the fiscal framework more rules-based and transparent are increasingly pressing in light of recent developments. An independent fiscal council and stricter escape clauses than provided for under the revised budget code are needed to limit discretionary spending. Finally, public sector statistics should be better aligned with international standards to support effective fiscal policy. In particular, the quasi-fiscal, off-budget activities of numerous public entities (e.g., state-owned enterprises) should be limited to help enhance the monitoring, evaluation, and efficiency of public spending programs.

Structural reforms

9. A determined implementation of structural reforms is a key condition to meet the authorities’ growth objectives. Priorities include reducing the state footprint in the economy, including by restructuring and privatizing state-owned enterprises to promote competition and private sector development. Stronger public governance is also needed, including improved anti-corruption laws regarding asset disclosure, liability for corruption, and judicial independence and integrity. More broadly, liberalizing labor and product markets, trade diversification and integration in global value chains, investment in human capital, the elimination of external restrictions, and upgraded infrastructure are also priorities. In several key areas, specific reforms laid out in the 2024 presidential decree on economic liberalization will need to be implemented steadfastly.
10. More comprehensive climate policies are needed to accelerate the transition to a sustainable economic model. Climate risks materialized this year through catastrophic floods. The price of carbon in Kazakhstan is among the lowest in the word, and ongoing increases in domestic energy prices are thus welcome. A more effective emission trading system should also help reduce carbon emissions from current high levels, generate public revenues, and support the transition to a low-carbon economy. Under the national strategy for carbon neutrality, progress is underway to improve incentives for investment in renewable energy. Yet, more ambitious policies are needed to meet the country’s commitments, including in the areas of fossil fuel subsidy reforms, adaptation measures, and transition and physical risks in the financial sector.

* * *

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

Sources: Kazakhstani authorities and IMF staff estimates and projections.

1/ Non-oil revenue in 2023 includes a one-off dividend from Samruk-Kazyna of 1.1 percent of GDP and in 2024 includes a one-off dividend from Kazatomprom of 0.4 percent of GDP from the sale of shares to the NFRK.

2/ Excluding reserve movements.

3/ Based on a conversion factor of 7.5 barrels of oil per ton.