Country Economic Update
Kazakhstan Spring 2018
The Quest for a New Growth Model:
The Urgency of Economic Transformation
Macroeconomics,
Trade & Investment
Global Practice
KAZAKHSTAN
The Quest for a New Growth Model:
The Urgency of Economic Transformation
Country Economic Update
Spring 2018
Government fiscal year: January 1 – December 31
Currency unit: Kazakhstani tenge (KZT)
Currency equivalents: Exchange rate effective as of May 1, 2018
US$1 = 327.25 KZT
Weights and measures: Metric system
Abbreviations and acronyms
EMDEs Emerging market and developing economies
FDI Foreign direct investment
FX Foreign currency
ICP International Comparisons Program
MID Ministry for Investments and Development of Kazakhstan
NBK National Bank of Kazakhstan
NPLs Nonperforming loans
PPP Purchasing power parity
PPPs Public-private partnerships
SOEs State-owned enterprises
Cover photo credit: Shutterstock.com: Horses at mountain meadows, Assy plateau, near Almaty,
Kazakhstan.
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Table of Contents
Foreword ................................................................................................................................................................................... iv
Overview ..................................................................................................................................................................................... 1
A. Recent Socio-Economic Developments ..................................................................................................................... 2
B. Macroeconomic Policies and Structural Reforms ................................................................................................. 8
C. Economic Outlook and Risks........................................................................................................................................ 11
D. Focus Section: The Strategy for Investment Attraction and Retention ..................................................... 14
Annex Table 1. Selected Macroeconomic and Social Indicators, 2014–20 .................................................... 19
Diagrams
Diagram 1. Strategy 2025’s core systemic reforms support the seven evolutionary paths of the
Kazakhstan 2050 Strategy ................................................................................................................................................... 2
Diagram 2. Three main pillars of Kazakhstan's investment strategy .............................................................. 16
Diagram 3. Investment lifecycle framework .............................................................................................................. 17
Figures
Figure 1. Net exports—driven by oil—was the main contributor to higher growth in 2017 ................. 4
Figure 2. Consumer price inflation moderated owing to lower food price inflation ................................... 4
Figure 3. Monetary easing continued as inflationary pressures subsided .................................................... 10
Figure 4. The NBK continued withdrawing liquidity through open-market operations ......................... 10
Figure 5. FDI inflows globally and regionally are still recovering from the global crisis ........................ 15
Figure 6. Investors are mainly motivated by natural resource-seeking FDI in Kazakhstan .................. 15
Tables
Table 1. Real GDP Growth by Demand, 2013–17 ....................................................................................................... 3
Table 2. Balance of Payments and Official Reserves, 2015–18............................................................................. 5
Table 3. Key Exposure Indicators of Top-15 Commercial Banks......................................................................... 6
Table 4. General Government Fiscal Accounts, 2015–20........................................................................................ 8
Table 5. Baseline Scenario: Selected Macro-Fiscal Indicators, 2015–20 ........................................................ 13
Boxes
Box 1. A Recent Adjustment to International Poverty Lines ................................................................................. 7
Box 2. The Importance of Differentiating Among Different Types of FDI for Diversification ............... 15
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Foreword
This edition of the Country Economic Update (CEU) for Kazakhstan is part of a semi-annual series
designed to monitor socio-economic developments in the country. It presents a concise analysis of
economic and social developments, as well as a progress report on structural reform implementation,
during the last six to twelve months. This edition includes a special focus section highlighting findings
of recent World Bank Group studies, focusing on (i) Increasing the Impact of FDI for Economic Growth
and Upgrading - National Investment Attraction and Retention Strategy of the Republic of Kazakhstan
(June 2017); and (ii) Attracting Investment to the Economy through the Development of Policy and
Institutional Mechanisms for PPP and Identification of Viable PPP Projects (June 2016).
The main authors of this CEU are Ilyas Sarsenov (Senior Country Economist for Kazakhstan) and
Azamat Aldiyarov (Research Analyst). The CEU benefited from valuable inputs provided by Rakhymzhan
Assangaziyev (Senior Country Officer), Eva M. Gutierrez (Lead Financial Sector Specialist), William
Hutchins Seitz (Poverty Economist), Alma Nurshaikhova (Public Sector Management Specialist), Yohei
Okawa (Development Policy Economist), and Gaziz Seilkhanov (Research Analyst). Yeraly Beksultan
(Senior Private Sector Specialist) and Aisulu Mailybayeva (Executive Assistant) prepared the special
focus section.
The authors are grateful for the guidance and comments provided by Ato Brown (Country Manager for
Kazakhstan) and Julio Revilla (Lead Economist for Central Asia). Gulmira Akshatyrova (Program
Assistant in Astana) and Sarah Nankya Babirye (Program Assistant in Washington, DC) provided
administrative support. Bronwen Brown (Consultant) edited the final CEU text. Azat Baidauletov (IT
Analyst) provided IT support and helped with the formatting of the CEU. Shynar Jetpissova
(Communications Officer) and Kubat Sydykov (Online Communications Associate) supported the CEU
team with report dissemination.
María De los Angeles González-Miranda
Practice Manager
Global Practice on Macroeconomics, Trade & Investment
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Overview
A recovery in the Real GDP growth accelerated from an annual average of slightly above
oil sector boosted 1 percent in 2015–16 to about 4 percent in 2017; this momentum carried
recent economic through to the first quarter of 2018 when GDP expanded by an estimated
performance. 4.1 percent. The improvement in economic performance was mainly the
result of an improved performance by the oil sector, as oil output was boosted
from oil fields not included in OPEC-led cuts. Together with more favorable
terms of trade, this generated positive spillover effects to the nonoil
manufacturing and services sectors. On the demand side, an improvement in
net exports was a key contributor to the higher rate of GDP growth. This
resulted in an improvement in the current account balance and more fiscal
revenue flowing to the Oil Fund. Consequently, the tenge continued
strengthening in real terms. Meanwhile, domestic demand remained
subdued, leading to a moderation in inflation.
The oil boost has Our real GDP growth forecast for 2018 has been revised upward, from 2.6
strengthened percent (in our previous Fall 2017 CEU issue) to 3.7 percent, owing to better-
macroeconomic than-expected oil prices and output. Over the medium term, the real GDP
outlook, but growth rate is expected to hover around 3 percent, as the contribution of the
downside risks to oil sector to economic growth declines relative to 2017–18 (when a structural
the current growth shift in oil output occurred). With oil prices projected to reach US$65/bbl on
model remain. average in 2018–20, the current account balance is also projected to improve,
from deficits in 2015–17 to surpluses in 2018–20. The fiscal position will
improve gradually in the wake of fiscal consolidation efforts. Downside risks
to the outlook include a potential weakening of the external environment
(driven by mounting geopolitical tensions), a worsening of problems in the
banking sector, and a government’s inability to implement needed structural
reforms. There is also an upside risk stemming from higher oil prices,
especially in the short term, due to a recently announced renewal of US
sanctions on Iran.
The authorities The successful implementation of structural reforms will be required to
should show a deliver more sustainable and inclusive economic growth going forward.
greater Ongoing structural and institutional reforms1 should aim to transform the
commitment to current oil-driven and state-run growth model—by reducing the role of the
transitioning to a state in the economy—to one that facilitates the development of a vibrant,
new growth model. modern and innovative tradable nonoil sector. In this context, efforts to
restructure and privatize state-owned enterprises (SOEs) would be expected
to focus on improving the efficiency of public administration, reducing fiscal
risks, and open competitive spaces for the private sector to act. Prudent fiscal
and monetary policies would support economic and price stability and
encourage investment in the nonoil economy. Attracting and retaining more
export-oriented and efficiency-seeking investment would be critical for
economic transformation.
1 Such reforms include those under the 100 Concrete Steps program and the Strategic Development Plan 2025 (adopted in
early 2018), aiming to upgrade the current growth model and elevate the GDP growth rate to 5.5 percent on average.
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A. Recent Socio-Economic Developments
Recent strategic initiatives
The government The authorities adopted the Strategic Development Plan 2025 (Strategy
has identified 2025) in early 2018.2 The strategy provides a framework for the
priority reforms implementation of the previously-announced Modernization 3.0 initiative
for a new growth aimed at fostering better economic and social development outcomes.
model. Strategy 2025 is designed to transition the economy towards a new growth
model by focusing on improving workforce skills and capabilities, upgrading
technology and digitalization, supporting fair competition, ensuring the rule
of law for all, strengthening regional development and urbanization, shifting
public attitudes and perceptions, and improving public sector effectiveness.
These seven systemic reforms (targeted through 2025) set the foundation for
the implementation of the seven evolutionary paths contained in the
Kazakhstan 2050 Strategy (Diagram 1). Once implemented, these reforms will
put the country on a path of economic transformation towards more
sustainable and inclusive national development.
Diagram 1. Strategy 2025’s core systemic reforms support the seven evolutionary paths of the
Kazakhstan 2050 Strategy
Source: Kazakhstan Strategic Development Plan 2025.
New social and Following the adoption of Strategy 2025, President Nursultan Nazarbayev
environmental announced a new complementary program, Five Social Initiatives, targeting
initiatives have the improvement of social and environmental conditions. The initiatives are:
been announced. (i) a new “7-20-25” mortgage program for families in need of housing;3 (ii) a
reduction of the tax burden on low-income earners by (potentially)
introducing a progressive personal income tax scheme; (iii) improvements to
2 Presidential Decree #636 On Approval of Strategic Plan for Development of the Republic of Kazakhstan Until 2025,
February 15, 2018.
3 The key parameters of this program include a nominal interest rate capped at 7 percent, a down payment of up to 20
percent of the total loan amount, and loan maturities of up to 25 years.
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the accessibility and quality of higher education; (iv) an expansion of
microcredit financing to the self-employed and access to finance for small
business development; and (v) the extension of a gas pipeline to the north of
the country, including Astana, the capital, to expand gasification in the
regions. Through the Five Social Initiatives program, the authorities are
demonstrating their commitment to an inclusive and more environmentally-
friendly growth model. The authorities should be careful with fiscal risks and
other potential adverse effects on the weak banking sector that can be
generated by this initiative.4
Growth and inflation
Economic growth Kazakhstan’s economy has experienced a significant boost from the oil sector
accelerated on the in the last 18 months, driven mainly by the coming on stream of an off-shore
back of higher oil oil field, Kashagan, in the fourth quarter of 2016. Because the Kashagan field
production and was exempt from an OPEC-led production cut agreement, oil production rose
exports. strongly. Combined with more favorable terms of trade, the oil sector
generated positive spillover effects on the nonoil manufacturing and services
sectors, especially trade. As a result, annual real GDP growth recovered from
around 1 percent in 2015–16 to an estimated 4 percent in 2017 (Table 1).
This growth continued into the first quarter of 2018 as Kazakhstan, unlike
other OPEC countries, continued benefiting from oil price and output
increases (from Kashagan, in particular). On the demand side, a significant
improvement in the contribution of net exports (mainly driven by an increase
in oil exports to the European Union and exports of metals to China) drove
GDP growth while domestic demand remained subdued, despite
government’s programs to stimulate private-sector growth (Figure 1).
Table 1. Real GDP Growth by Demand, 2013–17
(In percent)
2013 2014 2015 2016 2017e
Real GDP growth 6.0 4.2 1.2 1.1 4.0
Domestic demand 8.2 4.5 3.0 1.7 1.9
Private consumption 10.7 1.4 1.8 1.2 1.5
Government consumption 1.7 9.8 2.4 2.3 2.1
Gross capital formation 6.7 8.6 5.5 2.5 2.4
Net exports
Exports of goods and services 2.7 -2.5 -4.1 -4.5 2.2
Imports of goods and services 7.8 -4.0 -0.1 -2.0 -4.5
Source: World Bank staff calculations based on official data published by the authorities.
Note: e=estimate.
4 Although a direct fiscal cost of the Five Social Initiatives program is estimated at just KZT 25.1 billion (US$76 million) in
the 2018 supplemental budget, contingent liabilities from the gas pipeline construction alone may exceed several billions
of U.S. dollars in the coming years. The state-owned oil & gas company KazMunayGas will be in charge of the gasification
project to be financed mainly by international financial organizations. Even if this financing is not backed up by an explicit
state guarantee, it will be representing a significant implicit fiscal cost for the government. The government estimated the
first phase of the project to cost KZT 267.3 billion (more than US$ 800 million) and the other three phases will add more
than KZT 100 billion (extra US$300 million). In addition to the inter-city gas pipeline network to be constructed by
KazMunayGas, municipalities will have to raise funds to build an intra-city gas pipeline infrastructure, to link households
to the main network. There are still no cost estimates available for the intra-city gasification.
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Headline inflation The annual inflation rate declined from 7.4 percent in 2017 to 6.6 percent in
moderated as the first quarter of 2018 and 6.5 percent in April 2018 as external pressures
external pressures faded—in the form of a pass-through from tenge depreciation—while
faded. domestic demand remained weak (Figure 2). Lower inflation allowed the
authorities to implement some monetary easing in early 2018 (as described
below). The slowdown in consumer price inflation mainly owed to lower food
price inflation, which slowed from an average of 8.6 percent in 2017 to 5.6
percent in the first quarter of 2018, as a result of a higher supply of staples
like sugar and flour. However, non-food price inflation remained elevated (8
percent year on year), and prices for paid services rose even more, driven by
higher fuel prices that led to utility and transport tariff adjustments in early
2018.
Figure 1. Net exports—driven by oil—was the Figure 2. Consumer price inflation moderated
main contributor to higher growth in 2017 owing to lower food price inflation
(In percent) (In percent)
Source: World Bank staff calculations based on official Source: World Bank staff calculations based on official
data published by the authorities. data published by the authorities.
External sector
The external Buoyed by more favorable terms of trade, the current account deficit
balance improved narrowed substantially, halving from US$8.9 billion (6.5 percent of GDP) in
due to more 2016 to US$5.4 billion (3.4 percent of GDP) in 2017 (Table 2). Preliminary
favorable terms of data for the first quarter of 2018 suggest that the current account improved
trade. further, nearing to almost a zero balance. The improvement in the current
account balance drove a strengthening of the tenge by about 10 percent in
real terms against the U.S. dollar in 2017. On the financing side, lower inflows
of foreign direct investment (FDI) and foreign borrowing by SOEs (as part of
portfolio investment) were mostly offset by short-term capital outflows. On
the latter, the National Bank of Kazakhstan (NBK) reported an increase in
assets held by residents abroad. As a result, gross international reserves of
the NBK and the government (in the Oil Fund) declined by US$4.5 billion (2.8
percent of GDP) in 2017. While the NBK continued converting part of its
foreign exchange (FX) reserves into gold, the government continued tapping
the Oil Fund to finance the fiscal deficit (as described below).
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Table 2. Balance of Payments and Official Reserves, 2015–18
(In US$ billions)
2017 2018
2015 2016 2017
Q1 Q1
Current account balance -5.1 -8.9 -5.4 -1.4 -0.1
Merchandise trade 12.7 9.2 17.4 4.3 6.1
Exports f.o.b. 46.5 37.3 49.3 11.0 13.8
Of which: Oil and gas 31.1 22.3 30.5 6.1 ..
Imports f.o.b. 33.8 28.1 31.8 6.7 7.8
Services -5.1 -4.8 -4.4 -0.9 -1.1
Primary income -11.1 -12.9 -17.9 -4.7 -5.0
Of which: Income of direct investors -8.6 -10.9 -15.6 -4.1 -4.4
Secondary income -1.6 -0.4 -0.5 -0.1 -0.0
Capital and financial account balance /1/2 -5.4 6.4 0.8 2.4 0.1
Direct investment 3.1 13.3 3.8 1.9 2.6
Portfolio investment /1 -3.9 -2.9 2.5 0.3 -0.9
Medium- and long-term investment 4.1 4.2 0.4 0.1 -0.1
Short-term investment -3.8 -8.1 -3.7 0.9 -1.3
Errors and omissions -5.0 -0.1 -2.3 -0.8 -0.2
Overall external balance -10.6 -2.4 -4.5 1.0 0.0
Change in FX assets in the Oil Fund -9.8 -2.2 -2.9 1.5 0.9
Change in FX reserves at the NBK -0.8 -0.3 -1.6 -0.6 -0.9
Memorandum items:
Stock of total official reserves 91.3 90.9 89.1 92.5 89.9
Stock of FX assets in the Oil Fund 63.4 61.2 58.3 62.8 59.3
Stock of FX reserves at the NBK 20.3 20.1 18.2 19.1 17.5
Gold reserves 7.6 9.6 12.5 10.7 13.2
Terms of trade (2014=100) /3 78.9 77.9 82.9 82.9 91.1
Nominal GDP 184.4 137.3 159.4 32.3 35.9
Source: World Bank staff calculations based on data published by the authorities.
Note: Some sums may not add up exactly due to rounding; 1/ Excluding net investment of the Oil Fund; 2/ Including errors
and omissions; 3/ Annual estimates.
Financial sector
Unresolved poor Official data grossly underestimate the stock of nonperforming loans (NPLs),
asset quality which the IMF estimates at 40 percent of all loans system-wide.5 In 2017, the
remains a critical government allocated KZT 2.1 trillion (4 percent of GDP) to address NPLs at
issue in the the largest systemically-important banks, and the NBK additionally allocated
banking sector. KZT 500 billion (1 percent of GDP) to bail out five medium-sized banks owned
by politically-influential individuals.6 Financial sector concentration
increased substantially following the takeover of Kazkommertsbank by Halyk
Bank as part of the NPL resolution process; the merged financial institution
now controls one-third of banking system assets (Table 3). The authorities
should act more decisively to accelerate the resolution of NPLs, curtail
related-party lending, and strength central bank supervision to avoid further
problems.
5IMF 2017 Article IV Consultation, Staff Report, May 2017.
6 Bank RBK was the main recipient of NBK support as problem loans surpassed a critical threshold. The other four banks
that received support were Tsesnabank, Bank CenterCredit, ATFBank, and Eurasian Bank.
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Table 3. Key Exposure Indicators of Top-15 Commercial Banks
(In percent of total)
Top 15 commercial Share of Share of Share of problem Share of NPLs
banks by assets /1 system assets system lending loans /2 past 90 days
Halyk Bank of Kazakhstan 9.6 8.3
34.9 32.0
and Kazkommertsbank /3 39.4 35.4
Tsesnabank 9.0 13.2 6.2 4.3
Sberbank of Russia 7.4 8.6 10.9 6.6
ForteBank 6.6 4.4 15.8 7.4
Kaspi Bank 6.4 7.6 14.2 7.9
Bank CenterCredit 6.0 7.7 19.1 7.1
ATFBank 5.5 6.2 25.3 11.5
Eurasian Bank 4.2 4.7 24.3 8.9
Citibank Kazakhstan 2.7 0.7 n.a. n.a.
Bank RBK 2.3 1.7 46.3 17.4
Nurbank 1.8 1.7 15.9 6.0
Altyn Bank 1.8 1.0 1.4 0.4
Alfa-bank 1.8 1.5 13.4 6.8
Bank of Astana 1.5 1.4 31.4 6.6
Qazaq Banki /4 1.5 1.4 22.3 4.4
Source: World Bank staff calculations based on official data published by the authorities.
Note: Data as of April 1, 2018. 1/ Excluding state-run (noncommercial) Housing Construction Savings Bank of
Kazakhstan; 2/ Loans with overdue payments (principal and/or interest); 3/ Kazkommertsbank is subject to a merger
with Halyk Bank following its acquisition in July 2017; 4/ On April 28, 2018, the NBK temporarily withdrew a banking
license from Qazaq Banki (until July 27, 2018).
Bank insolvency Since the banking crisis of 2007, banks continue to follow cautious lending
and associated practices, reflecting the high level of NPLs accumulated during the downward
risk-aversion phase of the business cycle. NBK liquidity provisions and multiple, large
continued to act as government credit programs have been ineffective in stimulating credit
a drag on credit growth. Using bailouts and regulatory forbearance to resolve the banking
growth. crises has allowed weak banks to continue operating, resulting in a
widespread moral hazard and additional contingent fiscal liabilities. In early
April 2018, the NBK announced plans to allocate an additional KZT 200 billion
(US$600 million) from the Unified Pension Fund to boost bank lending.7
Following a slight recovery during August-November of 2017, credit growth
came to a standstill at end-2017 and remained stagnant through to the first
quarter of 2018. The de-dollarization trend continued in 2017 and the first
quarter of 2018, with foreign currency loans declining from 32 percent of
total loans at the beginning of 2017 to 25 percent by end-March 2018, driven
by real appreciation of the tenge.
Social indicators
Real wages Despite the higher economic growth rate and improved consumer confidence,
continued to fall. household income remained under pressure in 2017 as the labor market
struggled to recover and domestic demand remained relatively weak. Real
wages and salaries declined by 2.1 percent year on year in 2017. Although
real wages rose in two regions—by 1.2 percent in Aktobe oblast and 0.6
percent in Kostanay oblast—these gains were more than offset by falling real
7 Presumably, most of these funds will be channeled to support smaller-scale ailing banks. The authorities have identified
the following three small-scale banks that are in trouble: Bank of Astana, Qazaq Banki, and Eximbank Kazakhstan.
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wages in the rest of the country, including Astana (by 1.1 percent) and Almaty
(by 1.5 percent). The first quarter of 2018 showed some improvements (an
overall increase of 2 percent year on year), but these gains are not enough to
compensate losses incurred during 2015–17. The official unemployment rate
remained unchanged at 4.9 percent in 2017.
The poverty rate Despite falling slightly from its 2016 peak, the poverty rate remains high.
remained Using the $5.5/day international poverty line (Box 1) the poverty rate rose
relatively high. from 5.6 percent in 2013 to 7.9 percent in 2016; it is estimated to have
declined to 6.9 percent in 2017. The incidence of poverty increased in all
regions of Kazakhstan between 2014 and 2015, the last year for which
household survey data are available. Poverty rates in the most vulnerable
southern regions more than doubled during this period, jumping from 5.2
percent to 13.9 percent in Kyzylorda oblast and from 5 percent to 12.5
percent in Jambyl oblast.
Box 1. A Recent Adjustment to International Poverty Lines
As part of its mandate, the World Bank regularly produces internationally comparable estimates of poverty.
In the fall of 2017, the World Bank updated all such estimates to a new set of poverty lines and, at the same
time, began applying new purchasing power parity (PPP) conversion factors for each country.
The most common official poverty approaches in the region consider local patterns of income or
consumption and are often more appropriate for country-specific analysis. However, despite their many
advantages, national official poverty measures are not comparable with the approaches used in other
economies, in part because they are uniquely tailored to a specific country context. Comparisons across
countries require a harmonized approach, such as that conducted by the World Bank. The World Bank also
uses a stand-alone approach to measure internationally comparable poverty rates to account for differences
in the cost of living between economies. The World Bank leads the International Comparisons Program (ICP),
a global effort to measure differences in the goods and services a unit of one economy's currency can
purchase in another economy. The ICP exercise was most recently completed in 2011, which led to important
updates to previous PPP measures.
Changes to PPP require updates to the international poverty line. As in previous rounds, for the most recent
revision in 2011 the new line was estimated using the national poverty lines of the poorest economies. The
result was a line set at $1.90/day. This new global line is not the same as taking the previous line and
adjusting for inflation. However, in most economies (including Kazakhstan) it is quite close. In addition to
the international poverty line, the World Bank has introduced income-class poverty lines, which facilitate
comparisons between economies at similar stages of development. The lines are defined at $3.2/day for
lower-middle-income economies and $5.5/day for upper-middle-income economies (including Kazakhstan).
In the past, regional poverty lines were used to compare poverty rates and trends within regions. The World
Bank will no longer use these; it is important to note that the new income-class poverty lines are not
comparable to the old regional poverty lines.
Patterns of poverty reduction using the previous poverty line of $1.25/day 2005 PPP and the new
international poverty line of $1.90/day 2011 PPP result in similar trends: rapidly declining poverty between
2001 and 2005 and to poverty rates indistinguishable from zero after that. Despite a similar trend, the
poverty rates for the extreme poverty line differ between the old and the new methods. However, for all
relevant lines, updating to the new approach yields the same overall poverty trends in Kazakhstan.
Source: World Bank.
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B. Macroeconomic Policies and Structural Reforms
Assessment of fiscal and debt policies
The government To reduce budget reliance on oil revenue and improve fiscal sustainability the
started government has phased out the fiscal stimulus of 2014–17, lowering public
implementing its spending to about 20 percent of GDP from 2018 onwards (Table 4).
fiscal consolidation Consequently, and in accordance with a new Oil Fund Rule, annual oil revenue
strategy. consumption in the form of annual guaranteed transfers is to be cut from KZT
2.6 trillion (the equivalent of US$8 billion or 4.5 percent of GDP) in 2018 to
KZT 2 trillion (US$6 billion or 3 percent of GDP) by 2020.8 These measures
will drive an improvement in the overall fiscal balance and narrow the nonoil
deficit to a more sustainable level (to be cut to 7 percent of GDP by 2020).
Table 4. General Government Fiscal Accounts, 2015–20
(In percent of GDP)
2015 2016 2017 2018 2019 2020
Projections
Total revenue and grants 18.6 19.7 21.2 21.6 22.2 21.8
Oil revenue 4.0 4.5 6.2 6.8 7.2 6.8
Oil Fund gross revenue /1 2.3 3.0 4.5 5.2 5.2 4.9
Customs duty on oil exports 1.7 1.5 1.7 1.5 2.0 1.9
Nonoil revenue 14.6 15.2 15.0 14.9 15.0 15.0
State Budget revenue /2 10.8 12.2 11.9 11.9 12.0 12.0
Other extra-budgetary funds’ revenue /3 3.7 3.0 3.1 3.0 3.0 3.0
Expenditure and net lending 24.7 24.1 25.9 20.4 19.8 19.7
State Budget spending, excluding Oil Fund flows 14.9 15.3 16.6 14.9 15.5 16.1
Oil Fund consumption 8.6 6.8 8.5 4.5 3.7 3.0
Other extra-budgetary funds’ spending /3 1.1 1.9 0.8 1.0 0.6 0.6
Overall fiscal balance -6.1 -4.4 -4.7 1.3 2.3 2.1
State Budget deficit /2 -2.4 -1.7 -2.9 -1.5 -1.6 -2.2
Oil Fund fiscal savings, net -6.3 -3.8 -4.0 0.7 1.5 1.9
Other extra-budgetary funds’ balance /3 2.6 1.1 2.3 2.0 2.4 2.4
Nonoil deficit of the Consolidated Budget /4 -12.7 -10.0 -13.1 -7.5 -7.3 -7.0
One-off expenditure /5 1.8 - 4.0 - - -
Nonoil deficit, excluding one-off expenditure -10.9 -10.0 -9.1 -7.5 -7.3 -7.0
Memorandum items:
Stock of net financial assets 12.5 25.0 16.0 13.8 13.0 12.1
Stock of FX assets in the Oil Fund 34.4 44.6 36.6 33.5 32.7 32.5
Stock of total government debt /6 21.9 19.6 20.5 19.6 19.7 20.4
Source: World Bank staff calculations based on data published by the authorities.
Note: Some sums may not add up due to rounding; 1/ Including FX gains/losses; 2/ Excluding sale of state property and
land; 3/ Excluding the Oil Fund; 4/ The Consolidated Budget comprises the State Budget and the Oil Fund consumption; 5/
One-off expenditure covers a US$2.7 billion transfer to the national oil company KazMunayGas in 2015 and a US$6.5 billion
transfer to the Problem Loans Fund in 2017; 6/ Including state guarantees.
8Presidential Decree #385 On the Concept of Formation and Use of the National Fund of the Republic of Kazakhstan,
December 8, 2016.
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More efforts are It addition to the fiscal adjustment, the strengthening of global oil prices will
required on the stabilize the stock of government’s net financial assets (i.e. fiscal savings in
nonoil revenue the Oil Fund net of total government debt; see memorandum items in Table
side. 4). To strengthen the credibility of the fiscal consolidation strategy the
government will need to counterbalance the spending adjustment with
additional measures to raise nonoil revenue, by eliminating inefficient tax
expenditures and benefits and further improving tax administration.9 So far,
the government budget for 2018–20 contains no concrete measures for
raising nonoil revenue (as a share of GDP).
Government debt is The recently adopted supplemental budget for 2018 led to a widening of the
modest, but the projected State Budget deficit to 1.5 percent of GDP (from initially-planned
government should 1 percent of GDP).10 Nevertheless, government debt, including explicit state
address rising guarantees, is expected to remain stable at about 20 percent of GDP. Although
contingent outstanding government debt is modest by global standards, fiscal risks from
liabilities. SOEs are significant and may raise further, stemming from the planned
gasification project (as discussed above; see footnote 4), as well as
government’s plans to build a forth refinery in the country (presumably, also
to be executed by SOEs). The public-sector debt to GDP ratio is about 47
percent, almost half of which is SOE debt. While refinancing risks are modest,
substantial currency depreciation in recent years has highlighted
Kazakhstan’s exposure to FX debt and the consequent need to improve debt
management capacity. To address the SOE debt issue, the government has
developed and adopted new rules for limiting FX debt accumulation by key
SOE holding companies.11
Assessment of monetary policy
Monetary easing Following its downward adjustment to the policy rate in August 2017 (to
has resumed, but 10.25 percent), the NBK maintained a neutral stance for the rest of the year,
the NBK will owing to a weakening tenge, temporarily rising inflation and inflationary
remain cautious. expectations, and shocks in the fuel market. However, as inflationary
pressures subsided, the NBK opted for a more aggressive approach in early
2018, lowering the policy rate by 50 basis points in January, 25 basis points
in March, and 25 basis points in April, to stand at 9.25 percent (Figure 3). The
NBK is likely to continue monetary easing in response to slowing inflation,
albeit cautiously, as the volatility of price levels and inflation expectations
would pose major risks to actual inflation. The authorities' new inflation
targets are 5-7 percent in 2018, 4-6 percent in 2019, and 3-4 percent in 2020
onwards (down from the previous target range of 6-8 percent).
The tenge remains Following a marked depreciation in the third quarter of 2017 (amid rising
sensitive to devaluation expectations), the tenge appreciated during much of the fourth
external factors. quarter reflecting favorable dynamics in the oil market. According to official
statistics, the NBK sold US$500 million between August and October, while
9 World Bank. 2017. Kazakhstan Public Finance Review: Enhancing the Fiscal Framework to Support Economic
Transformation. Washington, DC: World Bank, November 2017.
10 According to the 2018 supplemental budget, the additional borrowed funds will be allocated for the implementation of
the Modernization 3.0 program (KZT 293 billion), the Five Social Initiatives (KZT 25.1 billion), and other budget obligations
(KZT 98.9 billion).
11 Order of the Minister of National Economy #157 On Approval of Rules for Defining Limits for External Debt of the State-
owned Enterprise Sector and List of SOEs Subject for Setting the Debt Limits, April 18, 2018.
|9
the second half of the announced amount of US$1 billion has not been utilized.
Since the interest rate transmission channel remains ineffective in influencing
the exchange rate (owing mainly to low capital mobility and the fractured
dollarized banking sector), the nominal exchange rate is heavily influenced by
the trade balance, particularly the price of oil, the currency fluctuations of
Kazakhstan’s major trade partners, and inflation. Furthermore, exchange rate
dynamics asymmetrically influence inflation—consumer price inflation is
sensitive to currency depreciation, but not to appreciation—which may force
the NBK to actively intervene in response to external shocks.
Countercyclical Although yields on NBK notes have been falling, the NBK has continued to
policies are withdraw excess liquidity from the banking system using open market
struggling to boost operations (Figure 4). Importantly, however, the NBK has been unable to spur
the real economy. banks to provide more loans rather than accumulating liquidity. As a result,
the volume of bank loans fell in the fourth quarter of 2017, wiping out the
growth observed in the third quarter and resulting in flat year-on-year
growth at end-2017 and in the first quarter of 2018. The NBK’s attempts to
support financial sustainability through its injections—together with the
increase in public spending—have raised liquidity and resulted in a further
stagnation of bank lending.
Figure 3. Monetary easing continued as Figure 4. The NBK continued withdrawing
inflationary pressures subsided liquidity through open-market operations
(In percent; KZT/USD) (In KZT billions)
Source: World Bank staff calculations based on official Source: World Bank staff calculations based on official
data published by the authorities. data published by the authorities.
Ongoing structural reforms
Civil service Kazakhstan continues to reform its government apparatus as part of the
reforms are implementation of its 100 Concrete Steps institutional development program.
progressing well The authorities introduced additional transparency measures in civil service
but they are yet to recruitment and rotation and launched a career path model to promote
show results. meritocracy and professionalism in the civil service. A performance-based
remuneration system, which aims to make the civil service competitive with
the private sector, is being piloted in four government agencies in 2018, with
a full government rollout planned for 2019. Transforming the civil service
requires not only a technically-competent cadre with good judgment and
effective leadership but also an institutional structure that encourages civil
servants to reach their full potential. Line ministries’ mid-level staff are
overloaded by daily correspondence and urgent directives from the center
10|
with very tight deadlines, leaving little space for developing analytical and
policymaking capacity in the ministries. Low salaries also undermine the
attractiveness of a civil service career.
Fiscal The government deepened fiscal decentralization reforms in 2017 by
decentralization increasing the independence of local self-governance bodies.12 New
measures target legislation on local self-governance introduced mandatory participation of
citizen citizens in the management of local budgets and communal property, an
engagement. important step towards stronger citizen engagement. The authorities have
also obliged the leadership of central and local executive bodies to deliver
annual reports to the public (with mandatory online transmission) and
opportunities for the public to ask questions. These measures will require a
sustained, long-term effort to be operationalized within the state apparatus
and build a truly active citizenry.
A process of The Supreme Court announced a new Judicial Modernization Concept for
judicial 2018–20 that aims to strengthen public trust in the judicial system, increase
modernization is the quality of court decisions, and improve the system’s efficiency and
underway. transparency. The judicial modernization process goes hand in hand with
reforms in prosecution—a special Coordination Council is exploring a series
of new measures to humanize the criminal justice system. The Ministry of
Justice continued its push to transfer its key justice services (bailiffs, property
valuation, and registration) to a self-regulated private sector with the aim of
increasing quality and cost-efficiency.
Kazakhstan is The authorities are working to improve the business environment in all
building a feedback regions of the country. The recent Subnational Doing Business assessment
mechanism to helped the government to obtain feedback from the business community and
improve the fine-tune the design of business regulatory reforms. The inaugural
business Subnational Doing Business report, which covered eight regional centers,
environment showed that uniform national laws are applied differently in different
nationwide. locations and that delays and procedures are also determined by the level of
coordination between government agencies and other bodies (such as utility
operators). The next report will include the rest of Kazakhstan’s regions to
facilitate the closing of reform implementation gaps further.
C. Economic Outlook and Risks
Global economic prospects
Global economic Following a stronger-than-expected performance in 2017, global growth is
growth is expected projected to accelerate to 3.2 percent in 2018, supported mainly by robust
to peak in 2018. growth in major advanced economies and commodity-importing emerging
market and developing economies (EMDEs); economic growth will continue
to recover in commodity-exporting EMDEs. Fiscal stimulus in the United
States is expected to provide a near-term lift to economic activity, but gains
could be muted as the economy is already operating at close to its full
capacity. Average GDP growth in Kazakhstan’s main trading partners is
12 Settlements with a population of more than 2,000 people are now entitled to an autonomous budget and communal
property, as well as to collecting and retaining 13 types of tax and non-tax revenues for local budgets.
|11
estimated to have peaked at 3.2 percent in 2017 and is projected to slow to
2.6 percent in 2018 (as activity decelerates in China and the euro area).
Growth in China is expected to remain robust but to continue to slow amid
policy tightening and deleveraging pressures. China’s rate of real GDP growth
will slow to 6.5 percent in 2018 (from a stronger-than-expected rate of 6.9
percent in 2017). Economic growth in the euro area is projected at 2.3 percent
in 2018, with investment and export growth easing following substantial
gains in 2017. The Russian Federation is forecast to experience stable growth,
with real GDP expanding by about 1.8 percent annually in 2018–20.
Risks to global While global merchandise trade growth picked up significantly in 2017, rising
trade are rising, by 4.6 percent, it is expected to moderate in 2018 as the recovery in global
and financial investment and manufacturing activity matures. On the policy front, the risk
conditions have of escalating trade protectionism increased following tariff announcements
begun to tighten. by China and the United States. The impact of these measures will depend on
their ultimate scope; however, a rise in trade policy uncertainty could itself
weigh on confidence, financial market sentiment, and eventually on global
trade activity. After a prolonged period of low and stable long-term yields,
rising inflation expectations and prospects of further hikes in U.S. policy
interest rates have put upward pressure on yields in the United States and led
to a slowdown in capital inflows to EMDEs. With the expected normalization
of monetary policy in the United States and the euro area, external financial
conditions are projected to tighten further in 2018. Disorderly financial
market developments remain a risk and could be triggered by a reassessment
of inflation risks and monetary policy expectations in advanced economies, a
sudden correction in asset valuation, or financial stress in EMDEs.
Oil prices are Commodity prices strengthened in the first quarter of 2018. According to the
expected to rise, April 2018 issue of the World Bank’s Commodity Markets Outlook, both
but downside risks demand and supply factors supported broad-based price increases.
remain. Accelerating global growth lifted demand for commodities, while some
commodities faced supply constraints. For oil, concerns about mounting
geopolitical risks also drove prices higher. Crude oil prices are expected to
average $65/bbl in 2018 (up from $53/bbl in 2017) and remain at $65/bbl in
2019–20—an upward revision from the October 2017 forecast. Looking
ahead, policy actions currently under discussion—such as additional tariffs,
production cuts, and sanctions—present risks to the short-term outlook.
There is also an upside risk stemming from higher oil prices, especially in the
short term, due to a recently announced renewal of US sanctions on Iran.
Kazakhstan’s baseline scenario, risks and challenges
The oil sector will Our real GDP growth estimate for 2018 has been revised upward to 3.7
continue to drive percent (from 2.6 percent in the Fall 2017 CEU), mainly owing to higher-than-
economic growth. expected oil prices and output. If oil prices continue increasing due to the anti-
Iran sanctions, the 2018 growth outcome may be higher than in the baseline
scenario. As oil output growth stabilizes from 2019 onward, real GDP growth
is expected to moderate to an average annual rate of 3 percent (Table 5).
Growth in the non-tradable services sector will be supported by stronger
domestic demand as real incomes start to recover. Moreover, planned
investment in oil output expansion projects will drive an increase in
12|
construction activity. Assuming that there are no external shocks and that the
authorities continue their inflation-targeting regime, consumer price
inflation will stabilize at around 6 percent in the medium term.
More favorable With average oil prices projected to increase from US$52.8/bbl in 2017 to
terms of trade will US$65/bbl in 2018–20, the current account balance is forecast to improve,
lead to better switching from deficits in 2015–17 to surpluses in 2018–20. The fiscal
economic and position will also improve gradually in the wake of fiscal consolidation efforts.
poverty outcomes. As the overall fiscal balance improves, the government should not derail its
efforts to reduce the nonoil deficit in support of economic transformation. The
government is planning to cut the nonoil fiscal deficit from over 13 percent of
GDP in 2017 to 7 percent by 2020. As the economy continues to grow, labor
income—the primary driver of poverty reduction in Kazakhstan—is forecast
to return to positive real growth. As a result, the poverty rate is projected to
decline to 5 percent by 2020.
Table 5. Baseline Scenario: Selected Macro-Fiscal Indicators, 2015–20
(In percent, unless otherwise indicated)
2015 2016 2017 2018 2019 2020
Projections
Real GDP growth 1.2 1.1 4.0 3.7 3.3 2.8
Oil sector -4.5 2.3 7.4 3.7 2.7 0.0
Nonoil economy 3.7 0.9 3.8 3.8 3.6 3.5
Consumer price inflation, period average 6.6 14.6 7.4 6.2 5.5 5.8
Current account balance (percent of GDP) -2.8 -6.5 -3.4 1.4 1.2 0.8
Overall fiscal balance (percent of GDP) -6.1 -4.4 -4.7 1.3 2.3 2.1
Nonoil fiscal balance (percent of GDP) -12.7 -10.0 -13.1 -7.5 -7.3 -7.0
Net financial assets (percent of GDP) 12.5 25.0 16.0 13.8 13.0 12.1
Poverty rate ($5.5 per day at PPP terms) 7.8 7.9 6.9 6.2 5.6 5.0
Source: World Bank staff calculations and estimates.
The medium-term Both external and domestic factors present risks to Kazakhstan’s medium-
outlook has term economic outlook. The economy’s vulnerability to external shocks
downside risks. remains the primary challenge to achieving stable and sustainable
development. External demand from China and Russia, Kazakhstan’s main
trading partners, as well as global oil demand and prices will remain the key
external factors impacting Kazakhstan’s economic performance. Domestic
factors include the pace of implementation of structural and institutional
reforms, especially in anticipation of a political transition over the medium
term. The potential worsening of problems in the banking sector is also a
concern.
Upside risks from While the recovery in global oil prices would have a welcoming effect for
higher oil prices Kazakhstan in terms of enhancing the economy’s buffers and supporting
may lead to certain growth, it may also reduce the perceived urgency for transitioning to the new
challenges for the growth model, including the strong need of continuing the macro-fiscal
new growth model. adjustment (by reducing the nonoil deficit over the medium term) and
pressing ahead with structural reforms. More generally, a return to any
procyclical macro-fiscal policies during the upswing (due to an insufficient
fiscal consolidation) risks developing a Dutch-Disease type of episode that
could reduce economy’s competitiveness and lower opportunities for
diversification away from oil and other non-tradeable goods and services
|13
with dynamics positively correlated to oil price movements. The authorities
should not miss the current window of opportunity to adjust the macro-fiscal
framework, clean up the banking sector, and deepen structural reforms. To
transit to a new growth model and facilitate a sizeable expansion of the
tradable nonoil sector’s role in the economy, the government must
demonstrate significant improvements to the rule of law, the quality of human
capital, and the investment climate. The latter is discussed in more detail in
the next section, which focuses on Kazakhstan's strategy for attracting
domestic and foreign investment.
D. Focus Section: The Strategy for Investment Attraction and Retention13
Kazakhstan is an attractive investment destination for a host of foreign direct investment (FDI) projects
seeking to access the country’s rich natural resource base. Kazakhstan’s real challenge, however, is to
attract more export-oriented, efficiency-seeking FDI. This highly mobile type of investment seeks to
compete in international markets and global value chains by benefiting from factors that make
Kazakhstan a competitive investment location. Efficiency-seeking investments provide a composite
bundle of capital stock, know-how, and technology that enables an economy to upgrade and diversify
its production capabilities to achieve economic diversification. While this kind of investment has the
greatest potential to facilitate economic diversification and play a transformative role in Kazakhstan’s
economic development, it is also the most challenging to attract. This type of investment is highly mobile
and requires a clearly articulated value proposition. It will not be ‘pulled’ into the country in the same
way as resource-seeking FDI. Attracting and retaining efficiency-seeking FDI will require the
strengthening of both Kazakhstan’s international competitiveness and its investment climate.
Kazakhstan’s Kazakhstan has launched its new investment strategy14 at a time when the
inflows of FDI are world economy was still recovering from the global financial crisis. Although
below the average global FDI flows fell by 16 percent in 2017—as global economic growth
for transition remained weak and world trade volumes posted sluggish gains15—economic
economies. activity is projected to increase in 2018, particularly in emerging markets and
developing economies.16 Despite the positive economic outlook, however,
new geopolitical realities and rising tensions also have implications for global
economic growth. Economic uncertainties aside, the changing global pattern
of FDI presents challenges as well as opportunities to Kazakhstan. Similar to
some of its immediate neighbors and competitors, Kazakhstan’s FDI
performance shows signs of a recovery since 2016 (Figure 5).
The share of In general, efficiency-seeking FDI is the most suitable type of FDI for
efficiency-seeking diversification (Box 2). As Kazakhstan’s economy is strongly reliant on
FDI in Kazakhstan resource-oriented FDI in the extractive industries (oil and gas, mining,
remains low. metallurgy, and associated service industries), it is exposed to substantial risk
due to its lack of economic diversification. The composition of FDI flows into
Kazakhstan has not changed much over the last decade (Figure 6). The bulk
of FDI (between one-half and three-quarters) goes to the extractive sectors,
including related services such as geological prospecting and exploration.
13 A World Bank private sector development team led by Harald Jedlicka and Yeraly Beksultan and comprising Robert
Hejzak, Jana Krajcovicova, Anuar Buranbayev, Adina Mamrayeva, and Aisulu Mailybayeva, helped the Ministry for
Investments and Development with the framing of a new National Investment Strategy, which was adopted in August 2017.
14 Government Resolution #498 On Approval of the National Investment Strategy, August 22, 2017.
15 UNCTAD Global Investment Trends Monitor, January 2018.
16 World Bank Global Economic Prospects, January 2018.
14|
Between 19 and 40 percent goes to market-seeking sectors such as the
financial, insurance and retail sectors. Between 2 and 24 percent goes to
efficiency-seeking sectors, in particular to metal manufacturing. Basic metal
industries have traditionally accounted for the bulk of FDI in efficiency-
seeking sectors in Kazakhstan.
Figure 5. FDI inflows globally and regionally Figure 6. Investors are mainly motivated by
are still recovering from the global crisis natural resource-seeking FDI in Kazakhstan
(In US$ billions) (Relative share of total)
Source: World Bank staff calculations based on Source: World Bank staff calculations based on official
data published by the UNCTADstat (2018). data published by the authorities.
Existing investors Reinvested earnings constitute an unusually low share of gross FDI inflows in
typically do not Kazakhstan. In transition countries in general, reinvested earnings typically
reinvest in the account for between one-quarter and one-third of inward FDI. Although
country. several factors may be at work, low ratios of reinvested earnings imply high
repatriation of profits and suggest lower retention of funds for productive
expansion purposes. The lower contribution of reinvested earnings may
signal challenges in retaining existing foreign investors, undermining their
ability to continue or expand operations in the country.
Box 2. The Importance of Differentiating Among Different Types of FDI for Diversification
While FDI is essential for economic growth, not all FDI is the same. Different types of investments have
different investor motivations and are characterized by distinct benefits, opportunities, and challenges. One
way to differentiate FDI is by investors’ motivations using the following framework established by John
Dunning, a British economist:
x Natural resource-seeking investment: Motivated by investor interest in accessing and exploiting
natural resources (such as mining, oil and gas, and so on).
x Market-seeking investment: Motivated by investor interest in serving domestic or regional markets
(such as non-tradable services, retail, and so on).
x Efficiency-seeking investment: Motivated by an investor seeking to benefit from factors that enable it
to compete in international markets (such as manufacturing, IT services, and so on).
x Strategic asset-seeking investment: Motivated by investor interest in acquiring strategic assets
(brands, human capital, distribution networks, and so on) that will enable a firm to compete in a given
market. This kind of investment often takes place through mergers and acquisitions. This type of FDI is
the most relevant for Kazakhstan regarding inward FDI.
Source: World Bank.
|15
The public-sector In an economy like Kazakhstan, which is heavily reliant on the extractive
share in the sectors, it is not surprising that SOEs play such a significant role. However, it
economy remains is surprising just how pervasive SOEs are in all sectors of Kazakhstan's
high. economy, including in critical services (such as electricity) and in products
and services that have traditionally supported a broad range of diverse
suppliers at all enterprise levels. The assets of the more than 750 national and
municipal corporatized SOEs in operation are valued at 30–40 percent of GDP
and the share of the quasi-public sector in GVA is about 19 percent.17 The
government is implementing a massive privatization program to reduce the
public sector's share in the economy.18 A total of 892 SOEs—including 378
assets of national holdings and companies (of which 65 are large state-
controlled companies in the oil and gas, transport, and nuclear sectors worth
US$10 billion)—are to be sold between 2016 and 2020.19 This plan will see a
reduction in assets of the SOE sector to 15 percent of GDP and the transfer of
about 5 percent of companies owned by local governments to the private
sector. The extent to which private ownership of major assets attracts
efficiency-seeking FDI into the Kazakhstan economy will be one of the
principal measures of success of the large-scale privatization.
The government Kazakhstan's new investment strategy leverages three different and
has prioritized interlinked approaches: (i) attracting new types of FDI, particularly
reforms to increase efficiency-seeking FDI; (ii) increasing the benefits of existing FDI, mainly
the attractiveness increasing reinvestment; and (iii) maximizing the economic impact of
of the country for privatization by involving foreign investors. Specifically, the government will
all types of focus on implementing actions under three main pillars: (i) investment
investment. climate reform; (ii) investment promotion and positioning in international
markets; and (iii) privatization and public-private partnerships (PPPs). Each
pillar will be led by the respective lead agency, namely the Ministry for
Investments and Development (MID), Kazakh Invest, and Samruk-Kazyna,
respectively (Diagram 2).
Diagram 2. Three main pillars of Kazakhstan's investment strategy
Reform pillar Goal Lead agency
Implement a series of fundamental
Ministry for
Investment climate investment climate reforms to
Investments and
reforms strengthen Kazakhstan’s investment
Development
competitiveness
Improve the efficiency and effectiveness
Investment promotion
of the country’s investment promotion
and positioning in Kazakh Invest
efforts, as well as its positioning in
international markets
international markets
Privatization and Effectively leverage its privatization and
public-private public-private partnership programs for Samruk-Kazyna
partnerships the attraction of strategic investment
Source: Government of Kazakhstan.
17 World Bank. 2018. "Kazakhstan Systematic Country Diagnostic: A New Growth Model for Building a Secure Middle Class."
World Bank, Washington, DC.
18 Government Resolution #1141 On Selected Issues on Privatization for 2016–2020, December 30, 2015.
19 For more information, see the Kazakhstan privatization website: http://privatization.gosreestr.kz/en.
16|
I. Investment climate reforms
Strengthening Creating an investment climate that is conducive to the attraction and
Kazakhstan’s retention of investment is at the core of the new strategy and will contribute
investment climate to an economically vibrant, industrialized and knowledge-based Kazakhstan.
to boost The government will focus on improving all major areas of an effective policy
investment. framework for investment, including policies, laws and regulations, and
institutions and mechanisms aimed to ensure their proper implementation.
The government will establish an appropriate environment for all
investment, particularly efficiency-seeking investment, that is export-
oriented and the most efficient form of investment.
Enhancing For the benefits of efficiency-seeking FDI to materialize, alignment of the
institutional investment policy framework with the specific requirements of this type of
framework and FDI is required along the various stages of the investment lifecycle. FDI is not
coordination a one-time transaction between the host government and a foreign firm. It
would be key to entails an ongoing relationship with many stakeholders at different stages of
success. a foreign investor’s lifecycle in the country (Diagram 3). The FDI lifecycle
begins with setting the economy's investment vision and priorities; continues
with policies for investment attraction, entry and establishment; supports
retention through adequate levels of protection; and ends with the
development of sustained linkages with the local economy.
Diagram 3. Investment lifecycle framework
Source: World Bank.
II. Investment promotion and positioning in international markets
Enhancing By definition, efficiency-seeking investors—which are at the core of
Kazakhstan’s investment attraction and retention efforts under this strategy—have a
investment choice of locations. They can choose between many competing economies.
promotion efforts. Unlike resource- and market-seeking investors which are “pulled” into
Kazakhstan for its natural endowments or markets, efficiency-seeking FDI
must be “persuaded” into considering the country as a location proposition.
Kazakhstan must be strongly proactive in its approach to successfully attract
|17
and retain such investors. The attraction of efficiency-seeking FDI will require
a concentrated effort to articulate Kazakhstan’s competitive advantages for
export-oriented investment. It will also require highly-targeted investment
promotion efforts led by a world-class investment promotion agency, and it
will also require renewed and strengthened efforts to unlock more
reinvestments from Kazakhstan’s existing base of investors.
Positioning in Efficiency-seeking FDI is, by definition, export-oriented and an appealing
international value proposition because it requires easy access to target export markets.
markets. Trade policy is, therefore, an essential pillar for an efficiency-seeking FDI
strategy model. Aligning trade policy and export strategy with the
requirements of efficiency-seeking investment will be required to increase
and diversify exports to existing export markets (including China, Russia, and
Western economies), but also to expand to new markets, such as the Middle
East (mainly for foodstuff and agriculture). Determining specific export
markets for particular products will also be important in articulating and
improving Kazakhstan’s value proposition for FDI. The government have
established a specialized technical unit on trade policy, the Center for Trade
Policy Development, but more coordination is needed with the MID to assess
and foster synergies between trade and investment policy agendas and to
present reports and reform proposals to the high-level council.
III. Privatization and public-private partnerships
Leveraging FDI for Leveraging FDI for privatization and PPPs holds significant potential for
privatization and Kazakhstan’s economic diversification agenda. FDI has the potential to
PPPs. generate benefits beyond the objective of increasing the role of the private
sector in the national economy. As the experiences of many economies show,
the privatization of state assets to strategic foreign investors in both
competitive industries and regulated markets can unleash additional
greenfield FDI above and beyond the original entry of the strategic foreign
investor. Similarly, PPPs, if successfully executed, can provide a much-needed
financial boost to strategic projects, such as in transport, power, municipal
services, and social infrastructure. Furthermore, boosting
telecommunications interconnectivity will be a central precondition of
efficiency-seeking FDI in Kazakhstan's services sectors.
Leveraging PPPs PPPs can provide new opportunities for private participation in Kazakhstan's
for investment economy, including opportunities for FDI in sectors where SOEs are still
attraction. dominant. Kazakhstan stands to benefit from a financial boost from PPPs to
develop projects in sectors that are key enablers for attracting more efficiency
seeking investment. Priority sectors for PPPs (including those involving
foreign investors) will be transport, power, municipal services, and social
infrastructure, among others. The government has implemented several
reforms to facilitate PPPs, including establishing a PPP Center in July 2008
and adopting a new PPP Law that provides a legal framework for cooperation
between the state and business entities in the delivery of PPP projects.20 The
ongoing implementation of a big ring-road PPP project in Almaty will serve
as a litmus test to effectiveness of the current PPP framework.
20 Law #379-V On Public-Private Partnerships, October 31, 2015.
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Annex Table 1. Selected Macroeconomic and Social Indicators, 2014–20
2014 2015 2016 2017 2018 2019 2020
Projections
(In percent, unless otherwise indicated)
National Income and Prices
Nominal GDP (billion tenge) 39,676 40,884 46,971 51,967 58,087 62,429 67,108
Nominal GDP per capita (US$) 12,807 10,511 7,715 8,837 9,782 10,388 10,978
Real GDP growth 4.2 1.2 1.1 4.0 3.7 3.3 2.8
Private consumption growth 1.4 1.8 1.2 1.5 1.7 2.0 2.2
Gross investment (percent of GDP) 25.8 27.9 27.8 27.1 25.1 25.7 26.3
Consumer price inflation, year-end 7.4 13.6 8.5 7.1 5.3 5.6 6.0
Consumer price inflation, average 6.7 6.6 14.6 7.4 6.2 5.5 5.8
GDP deflator 5.8 1.9 13.6 6.3 7.8 4.0 4.6
Real exchange rate change (KZT/US$) -10.8 -13.9 -26.7 10.4 5.0 3.9 3.6
(In current US$ billions, unless otherwise indicated)
External Accounts
Merchandise exports, of which: 80.3 46.5 37.3 49.3 61.5 63.0 63.8
Oil and gas exports 53.6 26.8 19.4 26.4 35.8 36.3 36.1
Merchandise imports 44.1 33.8 28.1 31.8 33.3 34.7 36.2
Current account balance 6.1 -5.1 -8.9 -5.4 2.5 2.3 1.7
as percent of GDP 2.8 -2.8 -6.5 -3.4 1.4 1.2 0.8
Foreign direct investment, net 4.6 3.1 13.3 3.8 4.0 4.8 4.8
Total official international reserves 102.4 91.3 90.9 89.1 93.0 96.9 101.6
Total external debt 157.6 153.4 163.7 170.0 157.5 161.7 165.5
excluding intra-company loans 78.0 57.3 59.4 64.7 68.6 70.5 72.1
as percent of GDP 35.2 31.1 43.2 40.6 38.4 36.7 35.1
(In percent of GDP, unless otherwise indicated)
General Government Fiscal Accounts
Revenue 24.5 18.6 19.7 21.2 21.6 22.2 21.8
Expenditure and net lending 23.0 24.7 24.1 25.9 20.4 19.8 19.7
Overall balance 1.5 -6.1 -4.4 -4.7 1.3 2.3 2.1
Consolidated Budget nonoil deficit -11.0 -12.7 -10.0 -13.1 -7.5 -7.3 -7.0
Net financial assets, stock 18.6 12.5 25.0 16.0 13.8 13.0 12.1
(In percent, unless otherwise indicated)
Monetary Accounts
Base money growth 10.5 34.3 15.1 -1.7 9.0 7.7 7.0
Real growth of credit to the economy -3.3 -13.2 -11.2 -5.8 0.1 1.9 1.8
Policy rate, year-end .. 16.0 12.0 10.3 .. .. ..
(In percent, unless otherwise indicated)
Social Indicators
Population, total (millions) 17.3 17.5 17.8 18.0 18.3 18.5 18.7
Population growth 1.5 1.5 1.4 1.4 1.3 1.2 1.1
Poverty rate, international US$5.5/day 6.2 7.8 7.9 6.9 6.2 5.6 5.0
Poverty rate, national 2.8 2.7 2.6 2.6 .. .. ..
Inequality – Gini coefficient 27.8 27.8 27.8 28.7 .. .. ..
Official unemployment rate 5.0 5.1 5.0 4.9 .. .. ..
Life expectancy at birth (years) 71.6 72.0 72.3 72.9 .. .. ..
Sources: World Bank staff calculations and estimates based on official data published and provided by the authorities.
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Kazakhstan
Country Economic Update | Spring 2018