Recent Economic Developments
Supported by robust oil production, the economy expanded at an annual rate of 4.1% in the first half of 2018, down slightly from a growth rate of 4.3% in the same period of 2017. Oil output rose by 6.2% year-on-year in January–June, supported by stronger-than-expected production from the Kashagan oil field, but expansion was below that posted in the same period of 2017 (9.7%). The services sector also contributed to growth, benefiting from spillovers from favorable terms of trade. Although output from the agriculture sector rose by 4%, construction sector activity remained flat. On the demand side, economic growth continued to be driven by net exports fueled by rising oil exports and higher oil prices.
The external position improved markedly in the first half of 2018, reflecting higher growth in oil exports due to favorable terms of trade and a modest recovery in imports. As a result, the current account deficit narrowed to 1.9% of GDP in the first half of 2018, down from 4.3% of GDP in the same period one year earlier. On the financing side, strong inflows of foreign direct investment (FDI) were offset by short-term capital outflows. As a result, international reserves had declined by around 2% by mid-2018 compared to end-2017. The tenge remained broadly stable against the U.S. dollar in the first half of 2018 owing mainly to the improved external position.
Rising revenue from the oil sector and continuing fiscal consolidation drove an improvement in the fiscal position in the first half of 2018. The fiscal deficit narrowed markedly, falling to 3.9% of GDP in the first half of 2018 (from 6.7% of GDP in the same period of 2017, largely on account of substantial capital injections to the banking sector). The non-oil fiscal balance improved, as the Government continued to curtail transfers from the National Fund to the state budget.
In the absence of external shocks, inflation continued to moderate. Annual consumer price inflation fell to 6.4% in the first half of 2018 (from 7.6% in the same period of 2017), within the Central Bank’s inflation target range of 5–7%. Subsequently, the Central Bank cut its policy rate from 10.25% at the beginning of 2018 to 9% in June.
Kazakhstan is slowly recovering from a 2016 spike in the poverty rate, which rose from 5.6% in 2013 to 7.8% in 2016 (using the US$5.5/day international poverty line). Poverty rates in the most vulnerable southern regions more than doubled during this period. The poverty rate is estimated to have fallen to 5.9% in 2018.
The fiscal balance will improve, assuming the Government maintains its fiscal consolidation plan. The non-oil deficit is expected to moderate as well, but maintaining a lower non-oil deficit in the long term will require bold steps to boost non-oil revenue.
Labor income—the main driver of poverty reduction in Kazakhstan—will continue to rise in tandem with economic growth. As a result, the poverty rate is projected to fall to 5% by 2020.
The authorities have initiated a series of reforms—including civil service reforms, fiscal decentralization, judicial modernization, and measures to improve the business environment—in an attempt to address key structural weaknesses. The full implementation of these reforms will accelerate Kazakhstan’s transition to a new growth model and boost market confidence.
Favorable external conditions, which have supported strong economic growth in Kazakhstan over the past year, could be impacted by rising uncertainty, geopolitical risks, and the potential of a looming trade war.
At the same time, positive trends in the terms of trade provide an opportunity to tackle key structural bottlenecks. Decisive moves to reform the business environment, reduce the state’s economic dominance, and level the playing field for all firms should be at the forefront of public policy.