Recent Economic Developments
Kazakhstan has been seriously affected by external shocks, including lower oil prices. GDP growth slowed from 4.1% in 2014 to 1.2% in 2015 and 0.1% during the first half of 2016. Falling oil prices led to a large terms-of-trade shock, while China’s growth slowed further and Russia’s recession continued, weakening both external and domestic demand.
Following the shift to a floating exchange rate in August 2015, the external balance improved from a deficit of over US$10 billion in 2015 to a surplus of over US$2 billion in the first half of 2016. Preliminary data suggest that although the current account remained in deficit, it was offset by increased foreign direct investment inflows and a reversal in capital outflow. The improved external position allowed the central bank to replenish its official international reserves. Meanwhile, the exchange rate stabilized, averaging below 340 tenge against the U.S. dollar since April 2016, with some temporary spikes observed in mid-summer.
The move to a floating exchange rate regime and a consecutive removal of administrative price controls initially led to a sharp depreciation of the tenge and an increase in the inflation rate from 3.8%, y-o-y, in August 2015 to 17.7% in July 2016, eroding real wages and consumer purchasing power. Low-income households are particularly vulnerable to increasing prices, declining real wages, and dampened employment opportunities. Progress in poverty reduction has stalled, and the national poverty headcount rate (measured at US$5/day PPP terms) remained at an estimated 14% during 2014–15. The official unemployment rate rose slightly from 5% on average in 2015 to 5.1% in summer 2016, indicating that the slowdown has started to affect the labor market. Moreover, stagnating employment indicates that no new jobs are being created on a net basis.
Efforts to readjust the economy to lower medium-term oil prices have intensified in 2016. The Government has continued to consolidate its fiscal accounts by further cutting lower-priority public investments and transfers to state-owned enterprises. The authorities have also launched a privatization program to cover the fiscal gap and lower the state footprint in the economy. The 2016–18 budget calls for a reduction in the nonoil deficit to 7–8% of GDP, improving fiscal sustainability. Meanwhile, social sector spending has been ring-fenced, thus protecting expenditures that benefit the poor.
The central bank has taken steps toward the full adoption of inflation targeting; it reintroduced the policy rate in early February 2016 and worked on stabilizing the money market, targeting year-end inflation of below 8%. The currency depreciation has affected the banking sector and its credit activity, as it increased banks’ relative exposure to foreign exchange lending. To support the banking sector, the authorities postponed the introduction of Basel III standards, including measures to increase the authorized capital ratio (initially scheduled for January 2016).
Under the baseline scenario, Kazakhstan’s GDP growth rate is projected to remain close to zero in 2016, due to low oil prices and the continued sluggishness of the global economy. The ongoing fiscal adjustment is expected to keep public sector consumption subdued. Weak domestic demand will slow the recovery of production and retail trade, while low oil prices will continue to inhibit the growth of ancillary subsectors such as transportation and wholesale trade. Both the fiscal and current account positions are expected to improve somewhat from their 2015 levels but will remain in deficit in 2016. Against this backdrop, poverty is estimated to increase slightly in 2016 (using the US$5/day poverty line).
Over the medium term, a moderate recovery of oil prices and higher oil production are expected to boost domestic demand. Under the baseline scenario, GDP growth is projected to rise to 1.8% in 2017. The current account deficit is expected to narrow significantly, as oil prices increase and the Kashagan oilfield begins production in 2016. Rising oil revenues and continued fiscal consolidation will improve the overall fiscal balance. In 2018, GDP growth is projected to accelerate to 3.4% as rising oil output bolsters consumer and investor confidence, and further improvements are expected in the fiscal and current account balances. Barring any new external shocks, inflation is projected to remain modest over the medium term. Concurrent with improvements in the economy, poverty is expected to gradually decline in 2017–18. However, the rapid poverty reduction seen in earlier years appears to have come to a halt.