Black Sea Disruptions, Oil Prices Threaten Kazakhstan’s Growth

Kazakhstan is expected to remain on a stable growth trajectory for the next two years, driven by continued carbon use and increased consumer spending, according to World Bank projections. At the same time, the bank suggests a new reform approach is needed to improve prosperity.The bank outlined Kazakhstan’s prospects in a recently published report, titled Preparing for Tomorrow: Reform for Long-Term Prosperity. As Kazakhstan continues to adapt to the shock created by Russia’s unprovoked invasion of Ukraine, growth is expected to moderate to 3.4 percent in 2024, due to lower-than-expected oil production/revenue. Real GDP is projected to pick up in 2025, reaching 4.5-5 percent.

An elevated inflation rate is expected to moderate yet remain above the central bank’s target this year and into next, the report states. Inflation pressures began to decline in late 2023 following monetary policy tightening, registering a 9.8 percent rate in December. WB analysts believe the National Bank of Kazakhstan’s (NBK) inflation-rate target of 5 percent is achievable in 2025 if there is no premature easing of monetary policy, and if fiscal consolidation plans are fully implemented. Continued efforts to phase out market-distorting subsidized interest rates will improve the effectiveness of monetary policy transmission, the report adds.

The state budget plan for 2024-2026 aims at fiscal consolidation. Economic stimulus measures, largely focused on social security programs, resulted in a consolidated budget deficit of 1.8 percent of GDP in 2023. The government wants to trim this deficit over the medium term, while maintaining adequate financial reserves, according to the report.Increased demand for imports and lower export earnings due to falling oil prices led to a current account deficit of about 3.3 percent of GDP in 2023. The current account deficit is projected to remain in the same range – at 3.0 percent of GDP this year and 2.3 percent of GDP in 2025.

The banking system is a bright spot, demonstrating resilience to external shocks, in particular the consequences of Russia’s invasion of Ukraine. In November 2023, the non-performing loan ratio was 3.2 percent. Banks have maintained uninterrupted funding and high levels of liquid assets in excess of regulatory requirements, the report states.

Between 2018 and 2022, average GDP per capita growth was 1 percent, well below the average of 3.3 percent for upper-middle-income countries. To improve the quality of life and increase the incomes of citizens in a global context striving for decarbonization, a reassessment of reform priorities is necessary, the report urged.

Looking ahead, the WB report says Kazakhstan’s growth prospects face several of downside risks. Disruption in the Black Sea region caused by Russia’s invasion of Ukraine may continue to hinder Kazakh oil exports, a major revenue driver for the state budget. Any large-scale unscheduled oil field maintenance and unexpected delays in the development of the Tengiz field could lead to reduced production and slower economic growth, the report cautions. Unforeseen external pressures and fluctuations in the tenge exchange rate could spur inflation. And given Kazakhstan’s economic ties with Russia, the risk of secondary sanctions remains a concern.