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.
- The coronavirus pandemic and the collapse in exports have taken a severe toll on the Kazakh economy. GDP fell for the first time in two decades, down by 2.6 percent in 2020, due to reduced domestic demand and mobility and health safety restrictions. Inflation moved up, driven by higher food prices and the depreciation of the tenge. With employment and incomes negatively affected, the poverty rate increased to 14 percent in 2020.
- Economic growth is expected to rebound to 3.2 percent, driven by a resumption in domestic activity, a recovery in global demand for oil, continued fiscal support measures, and a successful national vaccination campaign against the COVID-19 virus. With the continued pace of recovery, the economy is expected to grow within the 3–4 percent range in 2021.
Recent Economic Developments
The nationwide mobility restrictions due to COVID-19 led to a contraction in consumer demand and investment. Consumer demand fell 5.0 percent, along with a drop in retail trade, while investment dropped by 3.4 percent, largely because of a sharp fall in FDI. Economic activity experienced a severe contraction in April–June of 2020 at the peak of restrictions, followed by a growth rebound in manufacturing, trade, and transportation services in the second half of the year.
A sharp fall in exports and a commensurate reduction in imports left the current account balance broadly unchanged at 3.4 percent of GDP in 2020. Reserves of the National Bank of Kazakhstan (NBK) rose by almost US$6.7 billion in December to reach US$35.6 billion because of higher gold prices, despite heavy foreign exchange market interventions. The tenge fell by 15 percent against the U.S. dollar by April 2020 because of the collapse in oil prices but has since regained a third of its losses following the pickup in oil prices and foreign exchange interventions by the NBK.
To fund the anti-crisis package, the Government reallocated existing budgetary funds, tapped into Oil Fund reserves, and scaled up domestic borrowing. Budget spending surged to an estimated 23.2 percent of GDP from a pre-crisis 19.5 percent. The budget deficit rose to 4.0 percent of GDP from a 1.8 percent a year earlier, and public debt moved up to 24.4 percent of GDP.
In February 2021, inflation rose to 7.4 percent year-on-year, up from 6.0 percent a year earlier, largely because of an 11.6 percent increase in food prices in January. Higher inflation also reflects the impact of the tenge depreciation. Despite higher inflation, the NBK kept its policy rate at 9.0 percent in January 2021.
Even with the crisis, the banking sector recorded a positive return to assets of 2.3 percent, thanks to strong growth in consumer loans, while corporate lending remained subdued. Nonperforming loans (NPLs) remained little changed at 6.8 percent of the loan portfolio in December. Government support measures, such as loan guarantees, moratoria, and subsidized loans, helped halt mass corporate insolvencies during the lockdown. However, the true size of NPLs might emerge higher than officially reported when support measures taper off after the pandemic.
In 2020, the official unemployment rate changed little from the pre-pandemic level. However, the rate of temporary leave, especially among low-income workers, rose sharply during the national lockdowns. As a result, the poverty rate is estimated to have increased to 14 percent in 2020.
Growth is likely to bounce back in 2021 as disruptions associated with the pandemic dissipate and external demand picks up. The pace of recovery remains vulnerable to the course of the pandemic.
Private consumption spending is likely to pick up in 2021, driven by the release of pent-up demand as incomes rebound and retail lending continues apace. Higher demand for housing is expected to support residential investment, as a government program allows pensioners to use some of their savings to purchase a house or pay down mortgages.
The Government is likely to continue an expansionary fiscal stance in 2021 due to rising spending on social assistance, education, and infrastructure. The nonoil deficit is projected to decline to nearly 9.0 percent of GDP in 2021 but remain above the mid-term target of 6 percent. Government debt is likely to increase to 27 percent of GDP due to higher domestic borrowing and the disbursement of external loans to finance the deficit.
Inflation is expected to moderate in 2021, as supply disruptions and the precautionary food buying wane. However, an expansionary fiscal stance with significant direct lending provisions can sustain the pressure on inflation.
The current account deficit is projected to improve modestly, supported by stronger exports thanks to higher oil prices, a rebound in global demand for oil, and a gradual pickup in imports.
Despite the recovery in growth, the poverty rate is expected to decrease only gradually before reaching its pre-crisis level.
However, the economic recovery could lose momentum if progress on vaccinations slows, mobility restrictions last longer, and external demand is weaker than expected. Business insolvencies and layoffs could hit incomes, increase poverty, and expose the banking sector to higher NPLs.