The World Bank in Kazakhstan

Country Context

Kazakhstan has a land area equal to that of Western Europe but one of the lowest population densities globally. Strategically, it links the large and fast-growing markets of China and South Asia with those of Russia and Western Europe by road, rail, and a port on the Caspian Sea. 

Since independence in 1991, Kazakhstan has experienced remarkable economic performance. Rapid growth, fueled by structural reforms, abundant hydrocarbon resources, strong domestic demand, and foreign direct investment (FDI), has helped reduce poverty and transform the country into an upper-middle-income economy. 

But given that half of the country’s population lives in rural and economically isolated areas with poor access to public services and vulnerability to poverty, the COVID-19 pandemic is likely to exacerbate Kazakhstan’s economic and social vulnerabilities.

The Government responded early to the COVID-19 crisis and introduced a fiscal stimulus package of roughly 6 percent of GDP directed at small and medium-sized enterprises (SMEs) and individual households. To further support a strong, sustainable, and inclusive economic recovery, the authorities need to advance structural reforms while dealing effectively with the pandemic. The policy imperatives are multifold. The first is to diversify the economic base by improving the competitiveness of the non-extractive sectors, including through reforms in the financial sector. The second priority is to limit the outsized role of state-owned enterprises, enhance competition, and create a level-playing field for the private sector. The third priority is to improve the quality and progressivity of public spending to address inequality. Finally, it would be essential to strengthen public sector institutions and reinforce the rule of law to attract much-needed investment in the non-extractive sector.

Strategy

The Country Partnership Framework for 2020–25

The partnership between Kazakhstan and the World Bank Group (WBG) is outlined in the Country Partnership Framework (CPF), developed in consultation with counterparts and civil society to guide a new investment program and quality technical assistance to the Government for 2020–25.

The CPF is fully aligned with the Government’s reform program and Kazakhstan’s 2050 development strategy to accelerate the country’s transformation into a modern society with a knowledge-based, diversified, and private sector–driven economy.

The CPF focuses on the following priority areas:

• Promoting inclusive growth by strengthening the environment for private sector development, promoting the market-led transformation of the agriculture sector, and bolstering the connectivity infrastructure
• Strengthening human capital by closing the gap along regional and rural-urban divides in the delivery of education, health, and social protection services
• Securing sustainable, resilient, and low-carbon growth by managing natural capital, including land and water resources, promoting less energy intensity, and strengthening institutions and service delivery

Underlying these focus areas is the cross-cutting theme of more effective governance and strengthened market and social institutions.

Key Engagement

Since 2003, the World Bank has significantly extended its Advisory Services and Analytics (ASA) provided under the Joint Economic Reform Program (JERP). Over the years, the program has proven to be an innovative solution, with a client-driven knowledge agenda and Bank-selected work, bringing in and building up international experience.

The JERP is structured around the Government’s strategic priorities and focuses on development gaps in growth, governance, and the public service delivery agenda. The program is designed to ensure strong government ownership while enhancing the Bank’s contribution to the country’s development in a way that goes beyond funding.

It works on a cost-sharing arrangement between the Bank and the Government to ensure relevance and ownership on both sides of the table. The areas of focus and scope of the economic research program are determined by the Government in consultation with the World Bank.

The high-level brainstorming sessions, co-chaired by the prime minister, have become a highlight of the JERP. 

Since 2003, over 20 brainstorming sessions have provided direct input into the Government’s ambitious reform agenda. These forums make use of the Bank's technical expertise and international experience to build capacity in reform formulation and implementation. The notable comparative advantages that the Bank brings to the JERP include the ability to draw on a global network to find best practice examples and an outside neutrality that is critical to proposing changes and navigating political land mines.

The 2020–23 JERP Technical Cooperation Agreement with the Government was signed in early January 2020. The Reimbursable Advisory Services (RAS) Annual Program for FY22 was signed in June 2021 for roughly US$1.4 million. The current JERP program is focused on support for development of the new Agglomeration Law, capacity building on economic modeling for policy analysis, and a framework for reform implementation. The scope of the RAS Annual Program for FY22 will be further negotiated in the event that adjustments to the potential support are needed.

Economy

AT A GLANCE

• Over the past decade, Kazakhstan has made strong policy strides and responsibly absorbed large natural resource–based earnings by implementing a rules-driven fiscal framework. However, diversification remains a challenge for a country with the ninth-largest oil reserves in the world, as hydrocarbon output constituted 21 percent of GDP and about 70 percent of exports in 2020. 
• GDP grew by 2.3 percent in the first half of 2021, boosted by household consumption, the easing of COVID-19 restrictions, and supportive fiscal measures. Higher food prices and the release of pent-up demand raised inflation. The poverty rate is expected to fall in 2021 but currently remains above the pre-pandemic level.
• The economy is projected to recover further as restrictions ease and aggregate demand improves. However, the pace of recovery remains vulnerable to the pandemic and to external demand for hydrocarbons.

Recent Economic Developments

The economy is bouncing back from its pandemic-driven decline in 2020. GDP expanded by 0.4 percent quarter-on-quarter (seasonally adjusted) in the second quarter of 2021, following 1.3 percent growth in the first. Real GDP in the second quarter of 2021 was still 0.8 percent below the pre-crisis level.

Consumer demand, supported by reduced COVID-19 restrictions and continued fiscal and credit support to households and enterprises, has been the key driver of GDP dynamics. Solid growth in retail trade by 7.6 percent suggests a strong rebound in household consumption in January–June. Investment has remained weak, however, and contracted by 1.8 percent in the first half of 2021, mainly due to inadequate FDI inflows. Nevertheless, reopening the economy is leading to increased activity in the service sectors, while growth in housing and infrastructure projects is supporting construction and manufacturing.

A sizable outflow of profits from FDI-linked projects and a pickup in imports led to a 2.2 percent of GDP deficit in the current account in the first half of 2021. In August, the reserves of the National Bank of Kazakhstan (NBK) reached US$36.8 billion due to the US$1.6 billion new SDR allocation. The tenge depreciated slightly through April but subsequently recovered some of its losses as oil prices rose.

Fiscal policy remained supportive in the first half of 2021. In April, the Government adopted a supplementary budget with an additional US$3.0 billion (1.7 percent of GDP) support package for COVID-19 measures and the economic recovery. The authorities included a further transfer from the Oil Fund in the package and financed the deficit by increased borrowing. As a result of higher spending, the deficit increased to 3.5 percent of GDP in the first half of 2021 compared to 2.8 percent in the first half of 2020. Government debt rose to 25.2 percent of GDP.

Yearly inflation rose to 8.7 percent in August 2021, up from 7.5 percent in December. A surge in global food prices, logistical disruptions, and pent-up demand contributed to the rising prices across the board. The Government set price caps on some staple food products and introduced export quotas on grain. The NBK tightened monetary policy and increased the policy rate by 0.25 percentage points to 9.5 percent in September.

The banking sector is weathering the COVID-19 crisis. In June 2021, banks recorded a return to assets of 3.5 percent and maintained minimum capital adequacy requirements. The authorities continue to implement reform measures and revoked the licenses of two small banks. Nevertheless, pre-existing vulnerabilities and risks stemming from higher nonperforming loans (NPLs) because of the COVID-19 crisis call for vigilance.

The employment level recovered, and real wages increased in the second quarter of 2021. Although the rate of temporary leave among low-wage workers is still high compared to other income groups, it showed a declining trend. As a result, the poverty rate is expected to fall to 13 percent in 2021.

Economic Outlook

Economic activity is projected to recover to its pre-pandemic level by end-2021, with growth of 3.2–3.7 percent in 2021 and 3.7 percent in 2022. Growth will be supported by the resumption of domestic activity, a supportive fiscal stance, and the rollout of vaccines. Improving growth prospects in foreign markets will buoy external demand for commodities.

Household consumption growth will continue, aided by a rebound in income. A recovery in exports and improved prospects for FDI in the mining sector, along with planned housing and infrastructure projects, are expected to restore investment growth.

Fiscal policy will remain supportive over the medium term. The budget will continue to prioritize spending on social assistance, education, human capital, infrastructure, and support to SMEs. Government debt is projected to increase further through 2023 as the authorities slowly withdraw the fiscal support to the economy.

Inflation will remain above the target range of 4–6 percent in 2021 and is expected to decline gradually in the following years, as the effect of the temporary pandemic-linked factors wanes. However, the rising cost of intermediate goods, real wage growth, and an expansionary fiscal stance with significant direct lending provisions could keep inflation high.

With only a third of the population fully vaccinated by end-August, the vaccine rollout remains a prime concern. Without higher coverage, COVID-19 will continue to threaten the recovery, and increasing prices and absences from work could delay the reduction in poverty. Volatile oil prices and uncertainty over the scale of global demand for hydrocarbons are additional risks that could weaken exports and put pressure on the exchange rate. The recent increase in housing prices is making homeownership less affordable, and a steady rise in mortgage lending, along with the lifting of forbearance measures, could expose the banking sector to higher NPLs in the event of future shocks. Moreover, with its heavily reliance on hydrocarbons, the country faces challenges arising from the need to reduce emissions and to promote a low-carbon transition.

Project Spotlight

Fostering Productive Innovation in Kazakhstan

Whether it happens among students in a classroom or engineers in a laboratory, innovation is a process that begins with an idea and results in transformative trends and business start-ups that can boost a country’s economic development.  For Kazakhstan, innovation has the potential to unleash the private sector as the country strives to build a more diversified and competitive economy.

Launched by the Kazakh Ministry of Education and Science and the World Bank, and building on the impressive achievements of the Bank’s Technology Commercialization Project over the past 12 years, the Fostering Productive Innovation Project (FPIP) promotes and develops commercial innovations in Kazakhstan by providing grants to entrepreneurs and start-ups seeking to improve the quality of people’s lives.

The primary objective of the FPIP for Kazakhstan is to promote high-quality, nationally relevant research on, and the commercialization of, new technologies.

The projects that receive the inclusive innovation consortia grants are varied in their nature and application. 

“X-matrix,” which produces biological dressings with highly efficient healing properties for the treatment of burns and wounds based on an extracellular xenogenic matrix, is one of the many successful grantees. ReLive, a start-up company based at Nazarbaev University and another grantee, has developed a unique platform designed to rehabilitate patients after a stroke through groundbreaking artificial intelligence–supported neuro-rehabilitation robotic software. The United Nations has recognized the start-up’s invention as one of the world’s top 20 innovative solutions.

The FPIP has helped to improve the quality of scientific research in Kazakhstan and its relevance to market needs, research and development spending, and collaboration between universities and industry.

The project has also strengthened the capacity of key institutions of the National Innovation System by introducing market-oriented approaches to the selection and support of innovation projects and technology start-ups. Moreover, it has contributed significantly to the country’s ability to effectively collaborate in funding international-level research and development and in changing the mindset of the scientific community and policy makers to look more closely at Kazakhstan’s economic development through direct engagement and dialogue with the private sector.

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All projects in Kazakhstan