Kazakhstan’s long road to recovery

ASTANA (TCA) — Growth in Kazakhstan is projected to recover gradually over the medium term, but the economy will continue to face substantial headwinds, says the World Bank’s Kazakhstan Economic Update Summer 2016.

The baseline scenario rests on the assumption that oil prices will average around US$ 41 per barrel in 2016, then rise to US$ 50 in 2017 and reach US$ 53.3 in 2018. Under the baseline scenario, GDP growth is expected to remain near zero in 2016, before rising to 1.9 percent in 2017 and 3.7 percent in 2018, as production commences at the Kashagan oilfield, global oil prices rebound, renewed consumer and investor confidence supports the recovery of the non-oil sectors, and inflation eases to an average of 6-8 percent per year. Meanwhile, both fiscal and external conditions are expected to improve, the report says.

However, this medium-term outlook is subject to significant downside risks, including risks to the health of the financial sector, sluggish global growth, and the potential for a deeper or more protracted recession in Russia, a further slowdown in China, continued instability in global oil markets, or production delays at the Kashagan oilfield, the World Bank warns.

A challenging external environment has caused a broad-based economic slowdown in Kazakhstan, along with an adjustment in income and domestic prices. GDP growth slowed from 4.1 percent in 2014 to 1.2 percent in 2015, and the economy contracted by an estimated 0.2 percent during the first five months of 2016.

Falling export oil prices led to a large terms-of-trade shock, as China’s growth slowed and Russia’s recession continued, weakening both external and domestic demand.

The move to a floating exchange-rate regime in August 2015 led to a steep depreciation of the Kazakhstani tenge (KZT) and a steep increase in the inflation rate, which rose from 3.8 percent, year-on-year, in August 2015 to 16.7 percent in May 2016, eroding real wages and consumer purchasing power.

In 2015, the Kazakhstan government’s macroeconomic policy stance was mixed, but in 2016 it became more consistent with lower medium term oil prices. The authorities adopted a proactive fiscal policy stance in 2015, while a fiscal consolidation is planned for 2016.

The 2016 monetary policies indicate progress toward the full adoption of the new monetary regime. The reintroduction of the policy rate in early February 2016 stabilized the money market, while exchange rates also steadied and began to appreciate as oil prices rose. The authorities are moving ahead with further measures to enhance the effectiveness of the new monetary policy framework, the report said.

Sergey Kwan