Responding to External Shocks Hitting the Economy of Кazakhstan

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Responding to External Shocks Hitting the Economy of Кazakhstan ASIAN DEVELOPMENT BANK REGIONAL-CAPACITY DEVELOPMENT TECHNICAL ASSISTANCE (R- CDTA) STRENGTHENING KNOWLEDGE MANAGEMENT IN CENTRAL AND WEST ASIA RESPONDING TO EXTERNAL SHOCKS HITTING THE ECONOMY OF КAZAKHSTAN 3 March 2017 This report has been prepared under the Region-wide Study, “Good Jobs for Inclusive Growth in Central and West Asia.” The study is undertaken under R- CDTA-8936, “Strengthening Knowledge Management in Central and West Asia.” This report has been prepared by study consultant Olzhas Khudaibergenov. The overall Study task manager is Giovanni Capannelli, Country Director, KARM, ADB. Contents List of acronyms ...................................................................................................................... ii 1.Introduction and Background .............................................................................................. iii 2.The impact of external macroeconomic shocks on the economy of Kazakhstan ................. 3 3. Policy Response ................................................................................................................ 11 3.1 Monetary Policy ........................................................................................................... 11 3.2 Fiscal Policy ................................................................................................................. 17 3.3 Structural Policies ........................................................................................................ 29 4. Operational support from ADB and other IFIs ................................................................... 32 5. Conclusion and Recommendations ................................................................................... 34 6. References ........................................................................................................................ 36 7. Appendices ........................................................................................................................ 36 List of figures Figure 1.Merchandise trade of KZ in 2013-2016 (bln. $, quarterly) .......................................... 4 Figure 2. Export and Import Growth Rates (Annual Percent Change) ..................................... 4 Figure 3.Trade Diversification by Countries (2012-2016) ......................................................... 6 Figure 4. The share of commodities in Kazakhstan's exports .................................................. 7 Figure 5.Monthly indices, nominal US dollars, 2010=100 ........................................................ 7 Figure 6. Share of deposits and loans in foreign currency, share of NPLs in Banking Sector . 7 Figure 7. Monetary Policy Rates in Kazakhstan ....................................................................... 8 Figure 8. Decomposition of the incremental GDP growth by components obtained using the production method, YOY, bln. tenge ........................................................................................ 8 Figure 9.Growth rates of physical production and real GDP .................................................... 9 Figure 10. External debt of Kazakhstan and Payment on External debt of Kazakhstan (principal and interest), in $ billion) ........................................................................................................ 10 Figure 11. TONIA (Tenge OverNight Index Average) indicator .............................................. 15 Figure 12. TONIA (Tenge OverNight Index Average) indicator, base rates and targeted ranges ................................................................................................................................................ 15 Figure 13. USD/KZT Exchange Rate ..................................................................................... 16 Figure 14. Annual Inflation rate (Forecast after February 2017) ............................................ 17 Figure 15.Credits to the economy, trln. tenge ........................................................................ 17 Figure 16.Government revenues and GDP, trln. tenge .......................................................... 20 Figure 17.Contribution of receipt components to annual incremental growth, bln. tenge ...... 20 Figure 18.Tax revenue components (percent in tax revenues) .............................................. 21 Figure 19.GDP, primary expenses and interest payments (2011=100) ................................. 21 Figure 20.Components of government expenditure (2011=100) ............................................ 22 Figure 21.Fiscal Indicators (percent of GDP) ......................................................................... 22 Figure 22.Public Debt (percent of GDP) ................................................................................. 23 Figure 23. Annual change of households’ nominal and real cash income in KZT and USD, YOY ................................................................................................................................................ 28 ii List of tables Table 1. Key economic indicators of Kazakhstan in 2010-2016 3 Table 2.Components of the External debt ................................................................................. 10 Table 3.Monetary Policy Instruments in 2014-2016 .................................................................. 12 Table 4.Foreign currency operations of the National Bank, $ bln.* ........................................... 14 Table 5.Distribution of 1 trillion tenge from National Fund (in billion tenge) .............................. 18 Table 6.Changes made in republican budget, bln. tenge .......................................................... 18 Table 7.Improved utilization of the planned funds in the framework of the state program "Nurly Zhol" (in billion tenge) ..................................................................................................... 24 Table 8.Improved utilization of the planned funds in the framework of the Plan for additional anti-crisis measures in 2016 (in billion tenge) ........................................................................... 25 Table 9.Potential sources of financing additional measures (in billion tenge) ........................... 25 Table 10.Entrepreneurship support package ............................................................................ 26 Table 11.General Government Fiscal Operations, 2012-2020 ................................................. 26 Table 12.Total lending, grants and technical assistance approved by ADB since 1994 ........... 32 Table 13.Loans taken from IFIs ................................................................................................. 33 List of acronyms and abbreviations GIR – Gross International Reserves NPL – Nonperforming Loan IL – Intercompany Lending SEZ-Special economic zones SME – Small and Medium-sized Enterprise KBD – Kazakhstan Bank of Development MC “KMC” – Kazakhstan Mortgage Company ECI – Engineering and Communication Infrastructure SPIID – State Program of Industrial-Innovative Development RB – Republic Budget MFI – Microfinance organizations JSC “HCSBK” – Joint-stock company Housing Construction Savings Bank of Kazakhstan SAPF – Single Accumulative Pension Fund STB – Second-Tier Bank NMH – National Managing Holding NC "KTZ" – National Company Kazakhstan Temir Zholy KEGOC – Kazakhstan Electricity Grid Operating Company UCC – United Chemical Company NF, NFRK – National Fund, National Fund of the Republic of Kazakhstan BMNF – The Board of Management of the National Fund of the Republic of Kazakhstan GT – Guaranteed Transfers CT – Central Transfers IFI – International Financial Institutions iii Executive Summary 1. The shock. Challenging environment of global oil market has different effects on countries depending on the diversification level of economy in general as well as how flexible an economy will respond to external shocks. Undiversified industry and a big proportion of oil in total export of Kazakhstan posed challenging issues to policy makers. Thus falling world prices of oil resulted in decreased revenues of the country from oil export. At the same time, devaluation of Russian currency increased import. Even though Kazakhstan decreased import and export of industrial goods overall, inability to apply protectionist measures against surged cheap imports of consumer goods from Russia due to common borders and integration within the Eurasian Economic Union led to the deterioration of trade balance. 2. In general, external shock posed headwinds to the economy through two main transmission channels: trade and financial channel. 3. An impact of the external shock on the economy of Kazakhstan was reflected by two threats through the trade channel. The first one is a decrease of net export resulted from fall of oil export.The second type of harm to the economy was found from trade analysis with main partners, namely Russia, China, and EU. If the overall trade with China and EU projected same decelerated pattern, fall of large imports relative to export volumes from Russia led to positive windfall gain through contraction of negative net export. 4. The growth rate of real GDP decreased dramatically and comprised 1.2% compared to 4.2% in 2014. Government support programs helped to increase household consumption, mitigate the negative wealth effect and reduced internal demand caused by high inflation, and devaluation of national currency by 100%. Despite the reduced average real income in the economy, household
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