- Kazakhstan's economy and financial sector have remained resilient, but downside risks to the outlook are substantial.
- Monetary policy should remain tight until inflation is close to its target. The fiscal stance is expected to tighten this year and reforms are needed to enhance fiscal policy credibility. A robust bank resolution framework and macroprudential policy capacity should be developed.
- Accelerating structural and climate-related reforms is essential to raise future economic growth and diversification.
Astana: An International Monetary Fund (IMF) staff team led by Nicolas Blancher visited Kazakhstan during May 23-31, 2024, to discuss recent economic developments, the economic outlook and risks; policy priorities; and capacity development support by the IMF. Mr. Blancher issued the following statement:
"Kazakhstan's economy has remained resilient. Real GDP expanded by 5.1 percent in 2023, and inflation declined to 8.7 percent in April 2024, including as a result of lower international food prices and prudent monetary policy. For 2024, growth is projected to moderate to about 3½ percent, supported by robust activity in manufacturing, construction, and services, while inflation would be close to 8 percent by the end of the year. The financial sector has maintained strong capital and liquidity levels amid elevated credit growth, especially for consumer lending. The current account deficit is expected to narrow to about 3 percent of GDP in 2024. In the medium term, non-oil GDP growth would be in the 3-3½ percent range, in line with its estimated potential, while a current account deficit would persist due to lower oil prices.
"Downside risks to the outlook remain substantial. External risks include slower than projected growth of trading partners or higher imported inflation pressures; adverse spillovers from the war in Ukraine through trade, foreign investment, and exchange rate channels; lower than projected oil prices; and secondary sanctions stemming from transactions with Russia, despite continued efforts by the authorities to avoid any circumvention of these sanctions. Domestic risks include the impact of the recent floods; inflation pressures (e.g., from energy and utility tariff increases), which could fuel social tensions and delay reform implementation. Upside risks include higher oil prices and higher-than-expected foreign investment in new sectors (e.g., critical minerals, green energies, or information technologies).
"Monetary policy has been appropriately tight and should remain so until inflation is close to its 5 percent target. The National Bank of Kazakhstan lowered the policy rate to 14.5 percent on May 31, 2024. Room for further rate cuts is constrained by strong domestic demand and the prospect of further energy and utility tariff increases. More broadly, the NBK's commitment to inflation targeting is commendable and would benefit from further efforts to enhance its institutional independence and the effectiveness of monetary transmission.
"For 2024, the fiscal stance is expected to tighten, and reforms are still needed to enhance policy credibility. The fiscal stance was expansionary in 2023, with the structural non-oil deficit widening from about 8 to 8.7 percent of GDP due strong spending growth. For 2024, while the budget appropriately envisages a tighter fiscal stance, revenue shortfalls in early 2024 and the need to address the impact of the recent floods could make it difficult to achieve this goal. To bolster the credibility of medium-term fiscal commitments, the new budget code under preparation should strengthen fiscal rules by establishing strict escape clauses and rule out any discretionary transfers from the National Fund of the Republic of Kazakhstan. The forthcoming introduction of a new tax code is an opportunity to raise non-oil revenues, and the mission recommends raising the value-added tax rate and accelerating the elimination of onerous tax exemptions.
"To preserve the soundness and resilience of Kazakhstan's banking sector, the bank resolution framework and macroprudential policy capacity need to be strengthened. The mission welcomed recent progress in bolstering the independence of the Agency for the Regulation and Development of the Financial Market (ARDFM) and in strengthening consolidated supervision and the oversight of related party transactions, in line with the 2023 FSAP recommendations. Key priorities ahead are to develop a robust bank resolution framework and capacity at the ARDFM and to strengthen NBK's macroprudential policy mandate, including in coordination with members of the Financial Stability Council.
"Accelerating structural and climate-related reforms remains essential to raise future economic growth and diversification. The recently adopted decree for economic liberalization lays out important goals and steps to reduce the role of the state and increase competition in the economy, and its timely implementation would bring about significant progress. Meeting Kazakhstan's climate objectives and commitments will also require decisive efforts and incentives to promote green energy sources and decarbonization, including through continued energy tariff adjustments, improved functioning of the emissions trading system, and upgraded energy infrastructure.
"The IMF team is grateful to the authorities and other counterparts for their cooperation and hospitality."
