Kazakhstan Completes IMF Consultation for 2022

Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the 2022 Article IV consultation ^[1] with the Republic of Kazakhstan and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis. [2]

Russia’s invasion of Ukraine has had modest impact on economic activity in Kazakhstan to date. Real GDP growth is projected to decline to 2.7 percent in 2022, from 4.3 percent in 2021, due mostly to temporary disruptions to oil production. Inflation has continued to rise to about 19 percent, reflecting global inflation, the depreciation of the tenge, and rapid wage and credit growth. High commodity prices have reinforced Kazakhstan’s large fiscal and external buffers, with the current account expected to post a surplus of 3.1 percent of GDP in 2022, against a deficit of 4 percent in 2021. Kazakhstan’s banking system is resilient and has coped well with the effects of the war, but rapid retail lending growth and increased concentration in the sector create potential vulnerabilities. The outlook remains subject to large uncertainty and downside risks from the war in Ukraine, especially regarding Kazakhstan’s oil exports through Russia, while inflation pressures could reignite social tensions. On the positive side, high commodity prices could continue strengthening buffers, and Kazakhstan could benefit from the relocation of foreign firms.

The authorities took multiple actions to preserve stability and support the economy. A key macroeconomic policy challenge being to contain inflation, the National Bank of Kazakhstan has raised its policy rate by 700 basis points since mid-2021, and indicated that further tightening may be necessary. In addition, the government established temporary export restrictions of essential goods and controls of energy and utility prices. In response to social demands and following the outbreak of the war, the government adopted a revised budget significantly expanding public spending. Notwithstanding, given strong oil and non-oil revenues, fiscal balances are expected to improve substantially in 2022, while fiscal consolidation in the coming years would be supported by newly introduced fiscal rules. The authorities have proactively addressed financial sector risks from consumer credit growth and the indirect impact of international sanctions on Russia.

In 2022, the authorities announced a set of new governance and economic reforms which would address some of Kazakhstan’s main development impediments. They relate in particular to limiting the concentration of presidential powers and increasing political representation, addressing governance and corruption vulnerabilities, reducing the role of the state in the economy, and supporting the development of small and medium enterprises. The authorities have also embarked on reforms of the tax code, the budget code, public procurement practices, the public-private partnerships law, and fiscal decentralization.

Executive Board Assessment [3]

In concluding the Article IV consultation with the Republic of Uzbekistan, Executive Directors endorsed the staff’s appraisal as follows:

Facing multiple shocks, Kazakhstan’s economy has slowed down and inflation has continued to accelerate. The post-COVID recovery has been hindered by a series of domestic and external shocks. Despite a limited impact of Russia’s war in Ukraine so far, temporary disruptions in oil production have held back GDP growth. Reflecting pressures from global prices, currency depreciation, and rapid wage and credit growth, inflation and inflation expectations have surged well beyond the 4-6 percent target band.

Downside risks to the outlook have increased, even though Kazakhstan benefits from strong buffers. Expanded oil production should drive higher growth next year, and non-oil growth would converge to 3.5 percent in the medium term, subject to continued reform implementation. Inflation is expected to subside gradually, remaining above target through 2024. High commodity prices would be a positive factor for Kazakhstan, which benefits from low public debt, large official reserves, and exchange rate flexibility, but intensified spillovers from the war are the main near-term risk, especially if they exacerbate inflation pressures or durably affect oil exports through Russia.

Well-coordinated macro-financial policies and strong policy frameworks will be important to preserve stability and promote economic growth. Strong buffers and forceful policy responses have helped Kazakhstan weather multiple shocks in recent years, including spillovers from the war in Ukraine. Looking ahead, effective coordination between fiscal, monetary, and financial sector policies will remain essential to manage near- and long-term challenges.

Monetary policy should remain tight until inflation is contained and inflation expectations are anchored. Despite continued policy rate increases in recent months, further monetary policy tightening may be needed to rein in inflation and protect the most vulnerable. Administrative measures to contain inflation, such as price freezes or exports restrictions should be avoided. The authorities’ continued commitment to exchange rate flexibility is commendable. The inflation targeting regime, which has served Kazakhstan well, should be further strengthened, including by phasing out the NBK’s non-core mandates and ensuring its independence. The upcoming introduction of a central bank digital currency could provide significant benefits and will require continued consideration of potential risks.

Continued gradual fiscal consolidation should help contain inflation and maintain buffers, while preserving essential social expenditures. The authorities are appropriately saving part of the current oil windfall and aiming to reach a non-oil fiscal balance of 6 percent of GDP by 2025. In addition to the ongoing strengthening of tax and customs administration, this will require increased non-oil revenues through reduced corporate exemptions, capital income taxation, higher VAT rates, and the introduction of progressive income taxation. There is also room to improve the effectiveness of public expenditure, including by leveraging digitalization to enhance the level and targeting of public support to the most vulnerable.

To strengthen fiscal policy implementation, a stronger institutional framework is desirable. The fiscal rules entering in effect next year could support a prudent and more counter-cyclical fiscal policy. To ensure their effectiveness, an independent fiscal council should be established, and proper escape clauses should be introduced, including to limit discretionary policy changes. More broadly, stronger public financial management will require incorporating quasi-fiscal activities in the fiscal accounts and improving public sector sectorization and budget classification. The introduction of statements on fiscal risks and long-term sustainability with the 2023 budget, as well as the government’s decision to conduct a Fiscal Transparency Evaluation, are welcome steps.

The banking sector has coped well with the fallout of international sanctions and ongoing progress in strengthening financial regulation and supervision is welcome. The ARDFM should continue coordinating with foreign regulators to avoid secondary sanctions. The recent introduction of regular asset quality reviews and supervisory stress tests are important steps towards establishing sound risk management practices and reducing risks of bank distress. In collaboration with the NBK, the ARDFM should monitor risks from rapid consumer lending growth and increased concentration in the banking sector and apply targeted prudential measures as warranted to preempt them. Finally, further strengthening the bank resolution framework will be important. The 2023 FSAP will be an opportunity to assess Kazakhstan’s financial stability framework.

Early policy action would help Kazakhstan meet its climate-related commitments. Kazakhstan’s large dependence on hydrocarbons will require phasing in important policy adjustments. A quick finalization of the government’s climate strategy should provide a clear roadmap towards compliance with the Paris Agreement targets in 2030 as well as the net zero emissions objective in 2060. This should include intermediate targets, specific actions to achieve them, and costing of investment needs. Fiscal policy will play a key role, including by gradually reducing large energy subsidies and introducing carbon taxation to provide adequate incentives, while raising revenue to finance the transition and support to affected vulnerable groups.

Sustaining long-term growth will require a greater role of the private sector, supported by improved public sector governance. Promoting greater private sector development will be critical to ensure economic diversification as the world moves towards a low-carbon economy. This will require a reduced state footprint in the economy, including by following through on large SOE privatizations. Building on recent announcements, efforts to improve governance and strengthen the fight against corruption should be accelerated. Priorities in these areas include legal and institutional reforms to strengthen fiscal transparency, independence of anti-corruption institutions and the judiciary, and enhancing the AML/CFT framework and leveraging it to combat grand corruption, including through effective monitoring of politically exposed persons and increased beneficial ownership transparency.