ASTANA, May 31, 2018 – Projected real GDP growth for Kazakhstan in 2018 has been revised upward, from 2.6 percent to 3.7 percent, due to better-than-expected oil prices and output, according to the spring edition of the Kazakhstan Economic Update. While the recovery in global oil prices may have slowed the urgency to transition to a new economic growth model, the changing global pattern of foreign direct investment presents both challenges and opportunities for Kazakhstan.
Over the medium-term, the country’s economic growth is expected to hover around 3 percent, as the contribution of the oil sector to economic growth declines relative to 2017–18. With oil prices projected to reach an average of US$ 65 per barrel in 2018–20, the current account balance is 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 weakening of the external environment, worsening of problems in Kazakhstan’s banking sector, and protracted implementation of structural reforms. An upside risk may lead to higher oil prices, boosting growth in Kazakhstan.
“A delay in macro-fiscal adjustment and a slowdown in the implementation of structural reforms may undermine the competitiveness of Kazakhstan’s economy and affect the government’s plans to enter the world’s top economies,” said Ato Brown, World Bank Country Manager for Kazakhstan.
For Kazakhstan to transit to a new growth model and facilitate a sizeable expansion of the tradable non-oil 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.
Kazakhstan is an attractive destination for foreign direct investment (FDI) projects seeking to access the country’s rich natural resource base. The country’s real challenge, however, is to attract more export-oriented, efficiency-seeking type of investments, which have the greatest potential to enable diversification and transform Kazakhstan’s economy.
Similar to some of its immediate competitors, Kazakhstan’s FDI performance has shown signs of a recovery since 2016, yet the inflow of FDI is below the average for transition economies, and the share of efficiency-seeking FDI in Kazakhstan remains low.
Analysis also shows that reinvested earnings constitute an unusually low share of gross FDI inflows in Kazakhstan. To attract more efficiency-seeking FDI, there is a need to articulate Kazakhstan’s competitive advantages for export-oriented investment. Unlocking re-investments from Kazakhstan’s existing base of investors will also be critical.
For an extractive economy, Kazakhstan’s high share of the public-sector in the economy is not surprising. Yet, it covers almost all sectors of the economy and accounts for 30–40 percent of GDP. The success of a large-scale privatization program underway in Kazakhstan will depend on the ability to attract efficiency-seeking FDI.
Under its new investment strategy, Kazakhstan has prioritized reforms to increase the attractiveness of the country for all types of investment. Key priorities in this direction include investment climate reforms, investment promotion and positioning in international markets, and privatization and public-private partnerships. Strengthening institutional frameworks and coordination will be necessary for investment attraction and retention.
This edition of the Country Economic Update is part of a semi-annual series designed to monitor socio-economic developments in Kazakhstan.