82628 Kazakhstan: Solid Growth, Unsettled Global Environment Kazakhstan Economic Update Fall 2013 Kazakhstan: Solid Growth, Unsettled Global Environment Kazakhstan Economic Update Fall 2013 KAZAKHSTAN ECONOMIC UPDATE  –  FALL 2013 Government Fiscal Year: January 1–December 31 Currency Equivalents: Exchange rate effective as of September 30, 2013 Currency Unit = Kazakhstan Tenge USD 1.00 = KZT 153.62 KZT 1.00 = US$ 0.0065 Weights and Measures: Metric System Abbreviations CEM Country Economic Memorandum CES Common Economic Space CIS Commonwealth of Independent States CU Customs Union between Belarus, Kazakhstan and Russia DB Doing Business EBRD European Bank for Reconstruction and Development EU European Union FTA Free trade agreement GDP Gross domestic product IPO Initial public offering LiTS Life in Transition Survey MEBP Ministry of Economy and Budget Planning NBK National Bank of Kazakhstan NPLs Non-performing loans NTMs Non-tariff measures OECD Organisation for Economic Co-operation and Development PFM Public finance management PPP Public-private partnership PPP Purchasing power parity SMEs Small- and medium-size enterprises SPS Sanitary and phytosanitary measures TBT Technical barriers to trade US United States of America WEF World Economic Forum WTO World Trade Organization ii  │  KAZAKHSTAN: SOLID GROWTH, UNSETTLED GLOBAL ENVIRONMENT Contents Abbreviationsii Acknowledgmentiv Overviewv A. Refocusing the Long-Term Development Objectives 1 Emphasis on institutional and human capital and integration into the world economy  1 B. Gaining from a Strong Macroeconomic Performance  2 Solid economic growth is driven primarily by services, while oil output is recovering 2 Rapid per-capita income growth led to lower poverty and shared prosperity 3 Inflation and the exchange rate were kept under control  4 The external position worsened, mainly due to lower oil export revenue  5 Kazakhstan’s trade performance is experiencing significant adjustments  6 Lending modestly up, but problem loans remain a drag on the economy  7 C. Building on Favorable Medium-Term Prospects 8 The dominance of oil will continue to influence economic performance  8 Continued reliance on oil exposes the country to possible external shocks 9 To strengthen the macroeconomic foundation for sustainable growth, the authorities have adopted ambitious long-term fiscal and debt targets  10 The longer-term economic sustainability will require improving productivity through structural transformation  12 D. Implementing Structural Reforms  13 The authorities continue implementing important institutional reforms in the regulatory, justice and PFM areas 13 To better address human resource needs of the future economy, the authorities are also working on a comprehensive human capital agenda  14 E. Integrating into the Global Economy 16 Taking better advantage of global opportunities would require a prioritized trade policy strategy, improved institutional capacity and more effective public-private consultation  16 Analysis shows that joining the WTO, based on a tariff schedule similar to that used by Russia, would have gains for the Kazakh economy  18 To benefit fully from WTO membership and regional and bilateral agreements, the government will need to ease the burden of regulations that affect non-tariff measures  18 Appendix22   │  iii KAZAKHSTAN ECONOMIC UPDATE  –  FALL 2013 List of Figures Figure 1. Economic activity has been driven primarily by services since 2010 2 Figure 2. Growth in industry and construction is still depressed due to poor demand 2 Figure 3. Private consumption remains the key driver of economic expansion 3 Figure 4. Investment activity is recovering, supported by credit expansion 3 Figure 5. Poverty incidence in Kazakhstan improved dramatically  4 Figure 6. Prosperity has been well shared in Kazakhstan 4 Figure 7. Price increases in non-tradable services are outpacing inflation in tradable goods  5 Figure 8. The exchange rate trends were aligned with neighboring Russia 5 Figure 9. Current account balance narrowed due to less favorable terms of trade 5 Figure 10. Monetary reserves declined further, while fiscal reserves keep expanding  5 Figure 11. Exports are driven by mining/petroleum products 6 Figure 12. In imports EU loses market, China gains and CU moderates 6 Figure 13. Credit to the economy is expanding, especially in the consumer segment  7 Figure 14. The NPL ratio remains high, albeit with some moderate improvement recently  7 Figure 15. The oil sector will remain the key driver of economic growth in Kazakhstan 8 Figure 16. The fiscal balance will remain strong, while the external balance may deteriorate 8 Figure 17 . The non-oil deficit is unlikely to return to the pre-crisis level of 3 percent of GDP  11 Figure 18. National Fund assets are expected to expand faster than total public debt 11 Figure 19. The number of NTMs in Kazakhstan and comparator countries 19 Figure 20. Non-tariff measures are potentially more burdensome in Kazakhstan 19 Figure 21. Agri-food products and chemicals are subject to multiple non-tariff measures 19 List of Tables Table 1. Potential External Negative Shocks for the Kazakh Economy in the Short-Term 9 Table 2. Government’s Key Fiscal Targets—2020 10 Table 3. Mean and Dispersion of Tariffs before and after Joining the CU and the WTO 18 List of Boxes Box 1. Kazakhstan’s Trade Policy Objectives 17 Box 2. Good Regulatory Practices in Trade 20 Acknowledgment This economic update was prepared by the Kazakhstan country economists, Ilyas Sarsenov and Dorsati Madani. Support and comments were provided by Sebnem Akkaya (Country Manager), Ivailo Izvorski (Sector Manager), and Francisco Carneiro (Sector Leader). The outlook section has benefited from the macroeconomic simulations of exogenous risks conducted by the Bank’s Development Prospects Group. The last section of the report with a special focus on trade and integration issues was based on inputs provided by the Bank’s International Trade Team. The formatting of the report was done by Budy Wirasmo. iv  │  KAZAKHSTAN: SOLID GROWTH, UNSETTLED GLOBAL ENVIRONMENT Overview While the world economy continues to be unsettled, economic growth in Kazakhstan has been solid. Strong domestic demand, coupled with increased oil output and favorable weather conditions, is likely to boost economic growth from 5 percent in 2012 to about 5.8 percent in 2013. An expansion of credit was the key driver of growth in private consumption and investment activity in 2013. Income growth in the country had a positive impact on poverty indicators, with prosperity shared broadly. Prudent macroeconomic policy has helped the economic performance. Prospects of additional oil output with Kashagan coming on stream should help boost economic activity in the coming years and increase Kazakhstan’s vulnerability to external shocks unless the country succeeds in diversifying its endowments from natural resources to stronger institutions and higher quality human capital. In his recent speech on the strategic vision ‘Kazakhstan-2050’, the President of Kazakhstan highlighted the need to diversify the endowments of the country to achieve its development objectives. To implement this vision, the authorities are undertaking extensive structural reforms that will define the nature of their human and institutional capacity for the next two decades. These critical reforms will help the country build up on the solid economic performance since the start of the century. The institutional reforms focus on improving public finance management and the regulatory framework and strengthening the justice system and service delivery to the population. The human capital agenda covers reshaping the pension system while at the same time working on a multi-sector reform program to modernize the social sector. Trade policy will remain a central instrument to help the country integrate into the global economy, but Kazakhstan will face a complex trade policy environment in the medium-term. The economy is adjusting to the Belarus-Kazakhstan-Russia Customs Union which it joined in 2010 and is pursuing an accelerated schedule of further integration into the Common Economic Space by 2015. Kazakhstan is also expected to join the World Trade Organization in the near future while its trade strategy lists several free trade agreements to be negotiated. To benefit from the opportunities presented by these integration efforts, the authorities will need to build institutional, negotiations and analytical capacity within the government. They should encourage private sector capacity building in this area as well. Reform of the non-tariff measures/regulations will enhance the gains from global and regional integration. Overview  │  v This page is intentionally blank. KAZAKHSTAN: SOLID GROWTH, UNSETTLED GLOBAL ENVIRONMENT A. Refocusing the Long-Term Development Objectives Emphasis on institutional and human capital and integration into the world economy The President of Kazakhstan reiterated the key development priorities for the country to become one of the top 30 developed countries by 2050. The new strategic vision ‘Kazakhstan-2050’ sets joining the ranks of the top 30 developed countries by 2050 as an overarching goal for the country. The president emphasized that to achieve this goal Kazakhstan will have to transform itself to a knowledge-based economy that is open, fair and inclusive for its citizens and for innovative private sector development. He also emphasized that the government’s long-term strategic agenda should be focused on improving the quality of human capital and building more fair and inclusive institutions for such transformation in a sustainable manner. The human capital agenda would focus on development of skilled and healthy workforce demanded by the labor market. This will require improving the quality of education through development of professional and motivated teachers and modernization of the educational infrastructure, and also improving the quality of life through preventive healthcare and better access to safe water and air. The institutional reform agenda would focus on improving the business environment through fair competition and an equal access to justice and other services provided by the public sector. This will be dealt by reducing the role of the state through partial privatization (so called the ‘People’s IPO’), better accountability of state-owned enterprises, and reduction of administrative barriers, and also strengthening the rule of law through better transparency of the judicial system, decentralized and more efficient public administration, and anti-corruption measures. The need to strategically manage Kazakhstan’s natural capital has also been prioritized. The president encouraged the government to consider a more conservative scenario for oil extraction to support more broad- based growth of the non-oil economy (including utilization of agricultural potential and development of the high- tech industry) and to prevent the spread of the Dutch disease. As part of the country’s green growth strategy, the president also suggested increasing the use of alternative renewable energy (to 50 percent of total energy sources by 2050) and reducing power intensity (by 2.5–3.5 percent a year). Regional and multilateral economic integration is considered as an efficient instrument to mitigate potential external risks. A more open and active economic integration with the members of the Belarus- Kazakhstan-Russia Customs Union, the World Trade Organization and the other countries in Central Asia will facilitate more stable economic development and will help to mitigate potential risks associated with drug- trafficking, terrorism, religious extremism and ethnic conflicts in the region. Kazakhstan will use its transit potential to improve connectivity with its neighbors and the rest of the world. A. Refocusing the Long-Term Development Objectives  │  1 KAZAKHSTAN ECONOMIC UPDATE  –  FALL 2013 B. Gaining from a Strong Macroeconomic Performance Solid economic growth is driven primarily by services, while oil output is recovering Services remain the key driver of the economy, while industry and construction recover slowly. After two years of a strong post-crisis rebound, officially reported real GDP growth slowed to 5 percent year-on- year (y/y) in 2012 and 5.1 percent in the first half of 2013 (Figure 1). The preliminary official estimate of GDP growth for the first nine months of the year was 5.7 percent. Services became the main driver of the economy, accounting for most of real GDP growth during the first half of 2013. Oil production rose 3 percent y/y due to larger extraction of on-shore petroleum (Figure 2). Meanwhile, there was another delay in first commercial oil production in the off-shore Kashagan oil field, shifting its positive contribution to GDP growth to 2014. The manufacturing sector growth slowed, affected by lower metal prices due to the sluggish growth in the global economy. The contribution from construction was almost nil during the first half of 2013 after a sharp decline in housing investment in 2012. Following favorable weather conditions, the agricultural output resumed to its normal levels. Figure 1. Economic activity has been driven Figure 2. Growth in industry and construction primarily by services since 2010 is still depressed due to poor demand Real GDP growth composition by sectors Construction and industrial contribution to GDP growth percentage points/percent percentage points 10 3.5 8.9 3.0 8 7.3 7.5 2.5 6 5.1 5.0 2.0 4 3.3 1.5 1.0 2 1.2 0.5 0 0 -2 -0.5 2007 2008 2009 2010 2011 2012 2013 H1 2007 2008 2009 2010 2011 2012 2013 H1 JJ Agriculture JJ Industry & construction JJ Trade & transport JJ Construction JJ Manufacturing JJ Mining JJ Other services ▬▬ GDP growth Source: Statistical Agency of Kazakhstan. Source: Statistical Agency of Kazakhstan. From the expenditure side, consumption—and of late investment—are the main drivers of economic activity, more than offsetting negative net exports. During the first half of 2013, private consumption increased by 17 percent y/y, contributing 7 percentage points to real GDP growth (Figure 3). While real salaries grew by 0.5 percent, compared to 12 percent in 2012, consumer loans, supported by more relaxed lending terms, grew at a higher pace of about 48 percent y/y (in nominal terms), compared with 26 percent a year ago, and thus fuelled consumer spending. Consumption-led growth continued further in 2013, as reflected by 50 percent y/y growth in consumer lending in August and by 12.5 percent expansion in retail trade during the first eight months of the year. Meanwhile, investment in fixed assets, also supported by credit expansion, 2  │  B. Gaining from a Strong Macroeconomic Performance KAZAKHSTAN: SOLID GROWTH, UNSETTLED GLOBAL ENVIRONMENT grew by 7 .3 percent during the first eight months of the year (Figure 4). The expansion of domestic demand, however, was offset partially by weaker external demand (i.e. net exports), as reflected in lower metal prices. For a second year in a row, the contribution of net exports to growth has been negative in real terms. Figure 3. Private consumption remains the key Figure 4. Investment activity is recovering, driver of economic expansion supported by credit expansion Real GDP growth composition by expenditure Investment in fixed capital percentage points percent change constant tenge (2012=100) 20 60 6,000 50 15 5,000 40 10 30 4,000 20 5 3,000 10 0 0 2,000 -10 -5 1,000 -20 -10 -30 0 2013 Jan–Aug 2007 2008 2009 2010 2011 2012 2013 H1 2009 2010 2011 2012 (annualized) JJ Statistical discrepancy JJ Net exports JJ Government (C+I) JJ Retained earnings JJ Budget JJ Credit JJ Foreign JJ Private investments JJ Private consumption ▬▬ Consumer credit growth, rhs Source: Statistical Agency of Kazakhstan. Source: Statistical Agency of Kazakhstan. Rapid per-capita income growth led to lower poverty and shared prosperity Fast per-capita income growth contributed to a substantial reduction in poverty. Over the last year, the share of the population living in poverty went down from 5.5 percent in 2011 to 3.8 percent in 2012, as measured by the national poverty line. This is a significant improvement from 47 percent officially registered in 2001. Similarly, at the international poverty line, as measured by the PPP-corrected $2.5 a day per capita, poverty in Kazakhstan fell from 41 percent in 2001 to 4 percent in 2009 (Figure 5). At the PPP-corrected $5 a day per capita (that is a more appropriate variable for countries with a higher level of income per capita), poverty in Kazakhstan dropped from 79 percent in 2001 to 42 percent in 2009. While, this is indeed a substantial improvement, Kazakhstan can still do better as other countries in the Commonwealth of Independent States (CIS) have made faster progress than Kazakhstan. For example, only about 10 percent of the population in Russia and Ukraine lives below $5 a day, while Belarus recorded 4 percent of its population living at less than $5 a day. A comparison of Kazakhstan’s performance in the World Bank’s indicator of shared prosperity with other countries in the region shows significant progress. The shared prosperity indicator is measured by the growth rate of consumption per capita of the bottom 40 percent of the population. In Kazakhstan, the average consumption growth for all households was about 5 percent, while the growth rate of consumption per capita of the bottom 40 percent was about 6 percent during 2006–2010 (Figure 6). While Russia and Belarus outperformed Kazakhstan in per-capita consumption growth, including the bottom 40 percent of population, Ukraine and Turkey were behind. The Kyrgyz Republic and Moldova were the best performers in terms of shared prosperity, compared to other countries in Eastern Europe and Central Asia. B. Gaining from a Strong Macroeconomic Performance  │  3 KAZAKHSTAN ECONOMIC UPDATE  –  FALL 2013 Figure 5. Poverty incidence in Kazakhstan Figure 6. Prosperity has been well shared improved dramatically in Kazakhstan Headcount poverty rates Shared prosperity validation percent of total population percent change 100 15 80 10 60 5 40 0 20 0 -5 2001 2009 2001 2009 2001 2009 2001 2009 2001 2009 SVK POL TJK RUS BLR ROU LVA KAZ KGZ MDA EST LTU UKR TUR BGR HUN KSV CZE SVN ALB MNE ARM GEO MKD SRB HRV Kazakhstan Turkey Russia Ukraine Belarus JJ Poverty headcount ratio at $2.5 a day (PPP) JJ Poverty headcount ratio at $5 a day (PPP) JJ Consumption growth of the bottom 40 percent QQ Consumption growth of total population Source: World Bank. Source: World Bank. Inflation and the exchange rate were kept under control Consumer price inflation was driven by non-tradables, while prices for tradables increased moderately. Kazakhstan’s 12-month headline inflation stood at 5.8 percent in August 2013 compared to 4.7 percent in August 2012, still below the central bank’s target range of 6–8 percent for the year. The headline inflation has slowed markedly from the February peak of 7 percent. Overall, the contribution to higher inflation this year came from non-tradables, with utility tariffs and the cost of education rising by about 11 percent y/y, and prices at restaurants and hotels by 6.3 percent (Figure 7). The adjustments in administered prices for utilities and education were delayed from 2012. On the other hand, as pressures from international food inflation eased, food price inflation in Kazakhstan went down to 4.3 percent y/y in August, from a peak of 5.3 percent in December 2012–January 2013. Price increases for other tradables were also below the average price increase of the aggregate consumer basket. The authorities have introduced more exchange rate flexibility. In the second half of 2012, the tenge was kept almost flat at about 150 KZT/USD, despite a weakening external trade balance. The exchange rate policy in Kazakhstan became more flexible in 2013, as the tenge depreciated against the US dollar, in line with the Russian ruble (Figure 8). Both currencies have depreciated by 2–3 percent y/y since the beginning of 2013, triggered by less favorable terms of trade that led to narrowing of the trade surpluses in these countries. Following these trends in the external sector, in September 2013, the National Bank of Kazakhstan (NBK) announced moving to a more flexible peg of the tenge against a basket of three currencies (instead of the US dollar solely): US dollar (70 percent), Euro (20 percent), and Russian ruble (10 percent). 4  │  B. Gaining from a Strong Macroeconomic Performance KAZAKHSTAN: SOLID GROWTH, UNSETTLED GLOBAL ENVIRONMENT Figure 7. Price increases in non-tradable services Figure 8. The exchange rate trends were aligned are outpacing inflation in tradable goods with neighboring Russia Consumer price inflation in August 2013 Trends in the nominal exchange rates in RUS and KAZ USD/RUR USD/KZT Utility services 0.034 0.0067 Education Alcohol & tobacco 0.033 Restaurants & hotels Transport Healthcare 0.032 Communication 0.0066 Other goods & services 0.031 Apparel & footwear Food & soft drinks Household goods 0.030 Leisure & culture All goods & services 0.029 0.0065 Aug Oct Dec Feb Apr Jun Aug 0 3 6 9 12 2012 2012 2012 2013 2013 2013 2013 Percent change year-on-year ▬▬ USD/RUR, lhs ▬▬ USD/KZT, rhs Source: Statistical Agency of Kazakhstan. Sources: Central Banks of Russia and Kazakhstan. The external position worsened, mainly due to lower oil export revenue As international prices for Kazakhstan’s main exports decreased, the trade surplus narrowed. Oil prices decreased 5 percent in January–June 2013 from a year earlier and prices for base metals eased by 6 percent, reducing export revenues from $44 billion in the first half of 2012 to $41 billion in the first half of 2013. Together with rising merchandise imports, this led to narrowing of the trade surplus (Figure 9). At the same time, the lower export revenues led to a slower pace of income repatriation by multinational oil companies operating in Kazakhstan. Consequently, less favorable terms of trade reduced the current account surplus from $4.5 billion in the first half of 2012 to $1.7 billion in the first half of 2013. Nevertheless, this was an improvement from the current account deficit of $4 billion registered in the second half of 2012. Figure 9. Current account balance narrowed due to Figure 10. Monetary reserves declined further, less favorable terms of trade while fiscal reserves keep expanding Current account balance Total official international reserves US$ billion US$ billion 50 100 40 30 80 20 10 60 0 -10 40 -20 -30 20 -40 -50 0 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep 2008 2009 2010 2011 2012 2012 H1 2012 H2 2013 H1 2008 2009 2010 2011 2012 2013 JJ Trade balance JJ Income and transfers balance JJ FX monetary and gold reserves JJ FX fiscal reserves JJ Services balance ▬▬ Current account balance Source: National Bank of Kazakhstan. Source: National Bank of Kazakhstan. B. Gaining from a Strong Macroeconomic Performance  │  5 KAZAKHSTAN ECONOMIC UPDATE  –  FALL 2013 Net capital inflows declined in the first half of 2013 and along with unrecorded resident outflows led to a negative balance of payments. As a result, gross international reserves fell from $28 billion in December 2012 to $26 billion in June 2013 and further to $24 billion in September 2013 (Figure 10). Nevertheless, the stock of total official foreign exchange reserves has expanded further due to a continued accumulation of fiscal reserves in the oil fund. The stock of foreign exchange reserves in the oil fund increased from $58 billion at the end of 2012 to almost $67 billion by the end of September 2013. Consequently, total official foreign exchange reserves went up to $91 billion, or about 43 percent of GDP . Kazakhstan’s trade performance is experiencing significant adjustments Kazakhstan experienced trade diversion upon joining the Customs Union in 2010, but this initial impact may be abating. As of end 2012, Kazakhstan’s exports to the Customs Union (CU) partners show a steady decline, most likely accelerated by and associated with a period of adjustments to new regional regulations, as reported by Kazakh businesses. On the other hand, overall Kazakh exports are still driven by demand from petroleum products and by a rebound in the European Union (EU) demand and increased exports to the rest of Europe and Central Asia (ECA), including Turkey (Figure 11). China remains a solid client. On the import side, while Kazakhstan experienced an initial surge of imports from the CU partners in 2010–2011, the longer term dynamics of Kazakhstan’s imports remain multilateral. First, much of the import surge from the CU appears to be thanks to a doubling of transport equipment from 6 percent of total imports to 12 percent of total imports share (HS-2 import category). Secondly, there was a rather pronounced shift of import partners from the EU to China as far back as 2005 (Figure 12). This shift was accentuated after the creation of the CU: it impacted negatively the EU-27 exports to Kazakhstan in almost all HS-2 import categories, while China made inroads in almost all the same sectoral markets. This shift is a projection of how competitive China remained in view of new CU tariffs affecting its imports compared to the EU. Finally, the role of smaller suppliers, such as North America and the rest of Asia, remains steady in the import structure of Kazakhstan. Figure 11. Exports are driven by mining/petroleum Figure 12. In imports EU loses market, China gains products and CU moderates Kazakhstan’s exports by markets Kazakhstan’s imports by markets percent of total percent of total 60 60 50 50 40 40 30 30 20 20 10 10 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 ▬▬ EU27 ▬▬ CU partners ▬▬ Other ▬▬ China ▬▬ Non-CU CIS ▬▬ EU27 ▬▬ CU partners ▬▬ Other ▬▬ China ▬▬ Non-CU CIS ▬▬ Rest of Europe and ECA including Turkey ▬▬ MENA ▬▬ Rest of Asia ▬▬ N. America ▬▬ Rest of Europe and ECA including Turkey ▬▬ MENA ▬▬ Rest of Asia ▬▬ N. America Source: Statistical Agency of Kazakhstan. Source: Statistical Agency of Kazakhstan. 6  │  B. Gaining from a Strong Macroeconomic Performance KAZAKHSTAN: SOLID GROWTH, UNSETTLED GLOBAL ENVIRONMENT Lending modestly up, but problem loans remain a drag on the economy The growth of the banking sector, which dominates Kazakhstan’s financial sector, has resumed with an uncertain outlook due to high problem loans and low profitability. Growth in total credit has slightly improved to 14.8 percent y/y in August 2013 compared with 13.4 percent in August 2012 (Figure 13). Credit to individuals was the main contributor to this improvement, with an increase of 28 percent y/y in August 2013 (of which the consumer lending segment was up by 50 percent), compared to 19 percent in August 2012. Banks’ liquidity has remained comfortable with the loan to deposit ratio at 108 percent in August 2013. Meanwhile, non-performing loans (NPLs) remain high, showing only a marginal decrease from 37 percent in May 2012 to 35 percent in May 2013 despite the large increase in the overall level of lending (Figure 14). The average banking capital adequacy ratio has remained above minimum regulatory requirements (17 .5 percent by end- 2012); however, it will remain under pressure due to the weak capacity of banks to generate capital. Profitability measured as return on assets has remained low and it is expected to stay at 1 percent on average during 2013. Figure 13. Credit to the economy is expanding, Figure 14. The NPL ratio remains high, albeit with especially in the consumer segment some moderate improvement recently Banks’ lending flows and stocks Banks’ non-performing loans and provisions billion tenge billion tenge percent of loans 1,000 11,000 40 800 10,000 30 600 9,000 20 400 8,000 10 200 7,000 0 6,000 0 Jan May Sep Jan May Sep Jan May Jan May Sep Jan Jan Sep Jan May Sep Jan May Jan May May Sep May Sep Jan May Sep Jan Sep May Sep Jan May 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 JJ New lending to individuals JJ New lending to firms ▬▬ Credit to the economy, rhs JJ Non-performing loans ▬▬ Provisions Source: National Bank of Kazakhstan. Source: National Bank of Kazakhstan. Due to a limited progress with problem loans in the banking sector, the National Bank decided to postpone imposing a NPL ceiling for each bank. The National Bank of Kazakhstan planned to impose a ceiling for NPLs (90 days overdue) at 20 percent of each banks’ loan portfolio in 2013; this has now been postponed for a year, until 2014.1 This decision was made based on a limited progress with NPL write-offs by at least six large and medium-sized banks that do not meet this criterion so far: Kazkommertsbank (25 percent of NPLs over 90 days overdue), BTA Bank (78 percent), ATF Bank (43 percent), Alliance Bank (46 percent), Nurbank (28 percent), and Temirbank (44 percent). The aggregate ratio of NPLs (overdue of 90 days and over) amounted to 30 percent in July 2013. 1 Source: http://www.kursiv.kz/news/details/finansy1/Pervye-po-nevozvratam. B. Gaining from a Strong Macroeconomic Performance  │  7 KAZAKHSTAN ECONOMIC UPDATE  –  FALL 2013 C. Building on Favorable Medium-Term Prospects The dominance of oil will continue to influence economic performance With stable world oil prices and promising off-shore oil production, the oil sector will remain as a reliable source of revenue for the country. The off-shore Kashagan oil field is expected to start commercial oil production (75 thousand barrels a day) by the end of 2013, if the emerged gas leakage issue is resolved by then. Nevertheless, Kashagan will have a limited impact on GDP growth in 2013. Real GDP growth is estimated to be about 5.8 percent for the year. The pickup in growth from 5 percent growth in 2012 is supported by an increase in on-shore oil production and by normalization of agricultural output. It is anticipated that oil production at Kashagan will increase gradually to 180 thousand barrels a day within the next two years. This will translate into growth of the oil sector of about 4–6 percent a year, with a contribution to GDP growth of 1.5 percentage points a year on average during 2014–2015 (Figure 15). These developments in the oil sector will have a positive impact on domestic demand and will support growth in the non-oil sector at about 6 percent a year, with 4.5 percentage points’ contribution to GDP growth. Therefore, the economy is projected to grow at about 6 percent a year in 2014–2015 (see Statistical Appendix 1). Any significant variations from the assumed oil production and oil prices will certainly have an impact on economic growth outlook. Figure 15. The oil sector will remain the key driver Figure 16. The fiscal balance will remain strong, of economic growth in Kazakhstan while the external balance may deteriorate Real GDP growth and oil price developments External and fiscal balances outlook percentage points US$ per barrel percent of GDP US$ per barrel 7.5 140 8 140 6.0 120 6 120 100 4.5 4 100 80 3.0 2 80 60 1.5 0 60 40 0 20 -2 40 -1.5 0 -4 20 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 JJ Oil sector JJ Non-oil sector ▬▬ Export oil price, rhs JJ CAB JJ Fiscal balance ▬▬ Export oil price, rhs Source: World Bank staff estimates. Source: World Bank staff estimates. The fiscal balance is expected to remain in surplus, while the current account deficit is likely to widen. Based on key macroeconomic assumptions and the recently adopted New Budget Policy of Kazakhstan,2 the overall fiscal balance will remain positive at about 2–3 percent of GDP a year during 2014–2015 (Figure 16). Total budget revenues are expected to be about 25–26 percent of GDP , with some declines in oil revenues (due to stable oil prices) to be offset by increased revenue inflows from the non-oil sector (due to an anticipated 2 See Presidential Decree #590 dated June 26, 2013, On Approval of the Concept of the New Budget Policy of Kazakhstan. 8  │  C. Building on Favorable Medium-Term Prospects KAZAKHSTAN: SOLID GROWTH, UNSETTLED GLOBAL ENVIRONMENT increase in certain tax rates). Budget spending is expected to increase to 23 percent of GDP during 2014–2015, since the government is planning to spend additionally $1 billion per year from the National Fund for three transport projects3 and the EXPO-2017 site construction. On the other hand, the current account is likely to shift to a small deficit this year, with further widening during 2014–2015.4 Despite an expected stability of the trade balance, rising oil income repatriation is expected to widen the current account deficit, from an estimated $0.7 billion (0.3 percent of GDP) in 2013 to $3 billion (1.3 percent) in 2014 and $4 billion (1.7 percent) in 2015. If this scenario materializes and assuming no significant changes/inflows in the capital/financial account, then the gross international reserves would go further down and would put more pressure for the tenge to depreciate. Several other possible scenarios are considered in the next section. Continued reliance on oil exposes the country to possible external shocks Kazakhstan can be affected by different Table 1. Potential External Negative Shocks for the exogenous shocks. As the simulations presented Kazakh Economy in the Short-Term in the World Bank report on fiscal policy highlights,5 Real GDP Current Fiscal while there are a multitude of such potential Account Balance shocks, the following three extreme scenarios (percent change (percentage point change, in level) in percent of GDP) were chosen to illustrate the possibility for external (i) Impact of Euro Area crisis events to seriously affect Kazakhstan’s economic Euro Area -1.4 0.4 -0.8 performance through external demand for Kazakh World -0.8 0.0 -0.5 exports: (i) a serious Euro area crisis resulting from a Kazakhstan, of which: -1.6 0.0 -1.1 financial sector breakdown; (ii) a US-centered shock Commodity effect -0.3 -0.3 -0.3 stemming from fiscal paralysis in the US government (which has been settled temporarily recently); Confidence effect -1.1 0.3 -0.7 and (iii) a China-centered shock stemming from a Slowdown in -0.2 0.0 -0.1 Portugal and Spain collapse of Chinese investment (Table 1). Although (ii) Impact of US fiscal paralysis China is a larger direct trade partner of Kazakhstan in US -2.0 0.5 -0.7 comparison with the US and the EU, the impact of a Chinese slowdown on Kazakhstan is smaller due to World -1.2 0.0 -0.6 the smaller role of China in the global economy when Kazakhstan, of which: -1.7 -0.5 -1.2 compared to the US and the EU. The transmission Commodity effect -0.4 -0.8 -0.5 channel in all of these scenarios is the demand for Confidence effect -1.2 0.2 -0.6 and the price of oil. The real activity in Kazakhstan, US Fiscal Cliff -0.1 0.0 0.0 however, is more affected by “confidence” impacts, (iii) Impact of a fall in Chinese investment as domestic households cut back on expenditure, China -0.1 0.9 -0.2 while business responds by delaying investment. World -0.4 0.0 -0.2 Kazakhstan -0.7 -0.2 -0.5 Source: World Bank staff calculations. 3 The three planned transport projects comprise two road construction projects, Astana-Almaty and Astana-Ust-Kamenogorsk, and one railway construction project, Zhezkazgan-Beineu. 4 The NBK has made a significant revision of the historical exports data for 2011–2012, which led to a substantial revision of the current account surplus in 2012, in particular. The 2012 current account surplus was adjusted down from $7 .7 billion (3.8 percent of GDP) to $0.6 billion (0.3 percent of GDP). These revisions of the base year influenced our earlier positive estimates, which now turned to be negative for 2013–2015. 5 See World Bank (2013), Oil Rules: Kazakhstan’s policy options in a downturn, Washington, DC. C. Building on Favorable Medium-Term Prospects  │  9 KAZAKHSTAN ECONOMIC UPDATE  –  FALL 2013 To strengthen the macroeconomic foundation for sustainable growth, the authorities have adopted ambitious long-term fiscal and debt targets To ensure macroeconomic stability and fiscal sustainability, the authorities have set very ambitious fiscal and debt targets to be reached by 2020. Following the President’s Address to the Nation of Kazakhstan,8 the government has developed and recently approved a Concept on the New Budget Policy of Kazakhstan.9 According to the new policy, the government intends to maintain its debt below 13.7 percent of GDP by gradually lowering deficit of the state budget from almost 3 percent of GDP in 2012 to 1.4 percent by 2020 (Table 2). At the same time, non-oil deficit is planned to be cut significantly from 9.5 percent of GDP in 2012 (or 7 .5 percent of GDP , if customs duty of oil exports is included into the non-oil revenue base, as per the government methodology) to below 3 percent by 2020. This sharp reduction of the non-oil deficit will be partially achieved through planned broadening of the tax base and improvements in tax administration. In addition, there are plans to improve Table 2. Government’s Key Fiscal Targets—2020 equity and neutrality of the tax system by increasing In percent of GDP tax burden on wealthier segments of the population. 2012 actual 2020 target This would include re-introducing progressivity in State Budget deficit -2.9 -1.4 personal income tax and applying market rates for Non-oil deficit -9.5 -2.8 5 property taxes. Tax regimes in the agricultural sector National Fund assets 32.4 32.0 are also to be reformed: the special tax regimes for Public sector debt 28.5 22.0 the agricultural sector will be abolished from 2015 Government 12.4 13.7 onwards and there will a higher land tax applied National Bank 0.9 0.2 to land used for agricultural purposes. Excises on SOE sector 15.2 8.1 tobacco, alcohol and oil products will be gradually Net financial assets 6 20.0 18.3 adjusted upwards. There are also plans to streamline Source: Kazakhstani authorities. current expenditures and finance them exclusively from non-oil revenue (from 2018 onwards). Based on the government’s assumptions, government debt and oil fund reserves are projected to remain stable, as a share of GDP . According to the official estimates, while total government debt will stay below 14 percent of GDP , assets in the National Fund are expected to be maintained at 32 percent of GDP (or increase to US$180 billion) by 2020. Based on these assumptions, government’s net financial assets (i.e. National Fund assets net of government debt) are estimated to remain positive at around 20 percent of GDP . In the meantime, the government intends to fix annual guaranteed transfers from the National Fund at $9 billion equivalent during 2014–2017 and then lower them to $8 billion during 2018–2020. Additionally, the government is planning to use $3 billion as targeted transfers from the National Fund to finance three transport projects10 and to build the EXPO-2017 site during 2014–2016. 6 The government calculates non-oil deficit by including customs duty on oil exports into the non-oil revenue side and then subtracting government spending from the mixed (non-oil and oil) revenue base. 7 Net financial assets = National Fund assets – Government debt. 8 , Astana. See President’s Address to the Nation (December 14, 2012), “Kazakhstan-2050” 9 See Presidential Decree #590 dated June 26, 2013, On Approval of the Concept of the New Budget Policy of Kazakhstan. 10 The three planned transport projects comprise two road construction projects, Astana-Almaty and Astana-Ust-Kamenogorsk, and one railway construction project, Zhezkazgan-Beineu. 10  │  C. Building on Favorable Medium-Term Prospects KAZAKHSTAN: SOLID GROWTH, UNSETTLED GLOBAL ENVIRONMENT The fiscal consolidation path assumed by the authorities is very ambitious and the World Bank estimates the outcome to be different by 2020. Based on key fiscal reform variables provided, the World Bank estimates that the resulting projected outcomes would be far below the budget targets set by the government. yy First, non-oil deficit is estimated to be cut only by a third, from around 9.5 percent of GDP in 2012–2013 to about 6 percent in 2018–2020. This will be achieved by an anticipated expansion of non-oil revenue from 13 percent of GDP in 2011–2012 to 15 percent in 2018–2020 (Figure 17) and by streamlining current expenditures from 17 percent of GDP currently to the level of non-oil revenue of 15 percent, as the new budget policy suggests. In other words, the government will start financing current expenditures exclusively by non-oil revenues, while the capital budget of the government will be financed by oil proceeds, either by transfers from the National Fund or by net borrowing. As we assume that the capital budget will be at the level of 5½-6 percent of GDP a year, thus non-oil deficit will be around this level too. Meanwhile, the government hopes that public-private partnerships (PPPs) will allow it to shrink the capital budget and non-oil deficit to 2.8 percent of GDP by 2020, which seems to be a very ambitious goal, especially given the forthcoming extension of the industrialization program for the next five years. yy Second, deficit of the state budget will be maintained at about 3 percent of GDP , based on the assumptions of $8 billion annual guaranteed transfers from the National Fund in 2018–2020 and real GDP growth of 6 percent a year on average (with oil price estimated to stay slightly below $100 per barrel and oil production profile to assume the current targets for oil extraction at the off-shore Kashagan oil field). In any case, any variations in oil revenue transfers from the National Fund to the budget will influence balance of the state budget but will not impact the government’s net financial assets’ position much. Lower stocks of debt (if deficit of the state budget is lowered) will mean higher savings of oil revenue in the National Fund, bringing virtually no change to the net financial assets’ position of the government. The World Bank estimated net financial assets of the government to reach 30 percent of GDP by 2020, of which the National Fund stock is estimated to reach 55 percent of GDP (higher than the government estimate due to differences in oil price and oil production assumptions) and government debt to expand almost twice to 25 percent of GDP (Figure 18). Figure 17. The non-oil deficit is unlikely to return to Figure 18. National Fund assets are expected to the pre-crisis level of 3 percent of GDP expand faster than total public debt Trends in government revenue and spending Stocks of government debt and fiscal savings percent of GDP percent of GDP 30 60 25 50 20 40 15 30 10 20 5 10 0 0 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 JJ Oil revenue saved JJ Oil revenue spent JJ Non-oil revenue ▬▬ Government spending JJ Government debt ▬▬ National fund assets Source: World Bank staff estimates. Source: World Bank staff estimates. C. Building on Favorable Medium-Term Prospects  │  11 KAZAKHSTAN ECONOMIC UPDATE  –  FALL 2013 yy Finally, although we did not make any assumptions for the state-owned enterprise (SOE) debt trajectory, but halving SOE debt from 15 percent of GDP in 2012 to 8 percent in 2020 (assuming a cap for total public sector debt of 22 percent of GDP , as the new budget concept suggests) does not seem to be realistic and may contradict the forthcoming industrialization plans to be partly financed by an SOE investment expansion. The macroeconomic simulations suggest a more cautious approach in setting long-term fiscal and debt targets. The government may consider adopting the following suggestions for fine-tuning the targets: yy Revisit the non-oil deficit target to make it more realistic. Moreover, any calculations of non-oil deficit should not include revenue from customs duty on oil exports, as it is a pure oil revenue item; yy Adopt a notion of ‘net financial assets/debt’ to address an isolated targeting of the National Fund and the government debt stocks; yy Revise the ceiling for aggregate debt of the public sector, based on realistic investment programs and debt patterns in the SOE sector. The longer-term economic sustainability will require improving productivity through structural transformation The World Bank’s Country Economic Memorandum also looks into the issues of addressing macroeconomic volatility and managing natural resource endowments of the country, but highlights that further structural transformation and economic development in Kazakhstan will require a sharper focus on the country’s less abundant endowments. In this context, the Country Economic Memorandum (CEM)11 looks at the quality and provision of human capital and the gaps and opportunities for improving the quality of institutions. While diversifying these endowments, especially institutions, is a long-term proposition, the CEM argues that there can be some quick wins. Consider fixing the education system, or improving the business environment further, or giving people more economic freedom, or enabling innovative finance through nonbank financial institutions, or even accepting the idea that a “business failure” is not an economic disaster but a market signal about allocative efficiency. If Kazakhstan uses the right policy levers well, it could move forward fast and become a model of economic development and diversification in Eurasia. ” Kazakhstan Country Economic Memorandum, The World Bank, 11 See World Bank (2013), “Beyond Oil: Kazakhstan’s path to greater prosperity through diversifying, Washington, DC. 12  │  C. Building on Favorable Medium-Term Prospects KAZAKHSTAN: SOLID GROWTH, UNSETTLED GLOBAL ENVIRONMENT D. Implementing Structural Reforms The authorities continue implementing important institutional reforms in the regulatory, justice and PFM areas yy Improving the regulatory framework The authorities have worked steadily in the past few years to improve business environment in Kazakhstan. This has translated into noted improvements in the overall ratings of the Doing Business (DB) from 58th place in DB 2011 to 50th place (out of 189 countries) in DB 2014. In September 2013, the World Economic Forum (WEF) reconfirmed this progress by ranking Kazakhstan as the 50th most competitive country (out of 148 countries). The authorities are launching a major regulatory reform to reduce the burden of licenses and permits on formalization, growth and competitiveness of enterprises in Kazakhstan. To alleviate this regulatory burden, the authorities adopted the “Concept of State Regulation of Entrepreneurial Activity 2020” to be fully implemented by the end of 2020. The authorities are currently developing a new law on permits and notifications to this effect. The new concept outlines a new business regulation policy aiming to establish a balanced, predictable, affordable, efficient and transparent system of state regulation. The objectives of the concept are three folds. First, it is to drastically reduce the number of licenses following an orderly and risk- based approach. Second, the concept is to help define a clear process for creation of new licenses/permits in the future. Finally, the objective of the concept is to create a strong institutional framework for regulatory supervision while decreasing public expenses related to regulation of entrepreneurial activity. Building quality monitoring and evaluation and feedback systems is also an integral part of the reform. yy Strengthening the justice system While the authorities have noted that improving the rule of law will be key to the successful development of the country, the justice sector has not performed as well as expected. In his September 2013 speech at the Eurasian Forum of Emerging Markets, President Nazarbayev reiterated the importance of the rule of law in successfully achieving a developed, knowledge-based economy. He noted that the rule of law is guaranteed by good governance, transparency of the judicial system and the full awareness that all are equal before the law. As of 2012, the country scored 28 out of 100 on the Transparency International Corruption Perceptions Index. The Life in Transition Survey (LiTS) reports that 27 percent of Kazakhstan respondents were satisfied with service delivery of civil courts, compared to an EU-10 average of 45 percent. The authorities are developing a reform agenda to address a selected set of challenges in the justice sector to improve the provision of key judicial services to citizens and firms. These challenges appear to constitute constraints to: (a) implementation/enforcement of key laws; (b) modernization of the legal and institutional framework for a modern justice system in a market economy; and (c) professionalism and operational effectiveness in the selected entities. Therefore, the authorities are focusing on strengthening the institutional capacity, operational effectiveness and public trust of selected entities in the judicial and executive branches. D. Implementing Structural Reforms  │  13 KAZAKHSTAN ECONOMIC UPDATE  –  FALL 2013 yy Improving public finance management As part of the new budget policy, the government is aiming to further strengthen the public finance management (PFM) system. The new policy aims to enhance budget efficiency during 2014–2017 (phase I) and improve fiscal sustainability during 2018–2020 (phase II). The budget efficiency phase envisages reforms across a large number of functions and objectives. The government aims to streamline current expenditures by addressing issues of financial sustainability of the pension system; introducing per-capita financing in education and healthcare; reforming the public service pay system; and improving targeting of the social assistance programs. It hopes to achieve better capital expenditure efficiency by improving the public investment system; developing new PPP mechanisms for infrastructure development; introducing public monitoring and oversight over the SOE debt; and reforming the intergovernmental targeted capital transfer system. It also intends to further strengthen the inter-linkages between strategic planning and results-based budgeting; and enhance the public audit function. There are plans to improve equity and neutrality of the tax system and increase the efficient use of transfers from the National Fund. The subsequent phase will focus on an expanded PPP implementation; improved efficiency of local governments; and fully functioning public audit system to improve fiscal sustainability. To better address human resource needs of the future economy, the authorities are also working on a comprehensive human capital agenda yy Improving the pension system The Kazakh authorities have launched a reform of the national pension system to improve its coverage and sustainability. The plan includes the following broad steps: (i) creation of a single pension fund and increased effectiveness of the defined contribution (DC) system; (ii) unification of retirement ages for men and women; (iii) increase in the number of participants in the DC system; (iv) changes to the system of minimum guarantees for pension; and (v) making occupational system for those engaged in special labor conditions mandatory. Two of these steps have already been undertaken. First, starting on July 31, 2013, a single pension fund was established to be managed by the National Bank of Kazakhstan with investment decisions made by a council under the President of Kazakhstan. However, the actual transfer of pension assets from nine private pension funds to the state-owned single pension fund has been postponed by one year. Second, the retirement age for women is legislated to increase from 58 years at present to 63 years—the same as men—by 2028. This increase will start in 2018 and at the rate of 6 months per calendar year until retirement age equity is achieved. yy Modernizing the social sector Based on the presidential guidelines “Social Modernization of Kazakhstan: Twenty Steps towards a Universal Labor Society” , the government has developed a conceptual framework and strategy for social modernization until 2030. The key objectives of the strategy encompass objectives on education, health, social protection, employment and entrepreneurship, culture, housing and sports throughout the life cycle, with a special focus on the critical period of early childhood. The strategy seeks to achieve the following main 14  │  D. Implementing Structural Reforms KAZAKHSTAN: SOLID GROWTH, UNSETTLED GLOBAL ENVIRONMENT outcomes using a number of policy tools and government actions: (i) good first 1000 days of life; (ii) quality education at the school age; (iii) increase life expectancy to at least 78 years (from the current 69); (iv) protection, promotion and inclusion throughout the life-cycle of a Kazakh citizen; (v) fostering innovation and creativity; and (vi) promoting good jobs creation, ensuring proper macroeconomic and labor policy fundamentals and targeted public action to remove context specific constraints to good job creation. Given the magnitude of the reform, the authorities are also considering approaches to prioritizing the reform program ahead. D. Implementing Structural Reforms  │  15 KAZAKHSTAN ECONOMIC UPDATE  –  FALL 2013 E. Integrating into the Global Economy Kazakhstan faces a complex trade policy environment ripe with opportunities. Kazakhstan is experiencing the impact of the 2010 membership in the Belarus-Kazakhstan-Russia Customs Union (CU) and addressing an accelerated schedule to integrate further into the Common Economic Space (CES) by 2015. It is also finalizing its upcoming accession to the World Trade Organization (WTO) while its trade strategy lists a slew of free trade agreements to be negotiated. These agreements have the potential to provide unprecedented opportunities for the Kazakh economy to benefit from regional and economic integration. In fact, with its expected accession to the WTO the country will be finalizing its first generation trade reforms (tariff reforms) and should start focusing more on its second generation trade reforms. These include trade facilitation, regulations and non- tariff measures, competition policy, and other behind the border factors that affect competitiveness of the Kazakh producers. Taking better advantage of global opportunities would require a prioritized trade policy strategy, improved institutional capacity and more effective public-private consultation Kazakhstan’s current trade policy strategy is well developed and integrated within the national strategic vision but authorities are well advised to build capacity for analysis, implementation and monitoring and evaluation to address its complexities and take advantage of its potential benefits. Trade policy is a central instrument of diversification for the economy and for the country to reach its 2050 strategic objectives. To implement the trade strategy, it would be useful to first fully understand and account for the implication of membership in the CU, the WTO, and the creation of the CES in rapid sequence and their respective challenges and opportunities. Implementation time and monitoring and evaluation will help assess the full effects of these agreements on the economy. Capacity building in the public sector will help authorities properly assess and implement these agreements. In fact, to benefit from the opportunities presented by these integration efforts, the authorities will need to build institutional, negotiations and analytical capacity within the government. They should also encourage private sector capacity building. Also, the authorities may wish to consider further prioritizing the objectives of the trade strategy. For instance, it would be useful to assess and prioritize the proposed Free Trade Agreements (FTAs) negotiations with Turkmenistan, EFTA, and Serbia, and preferential trade agreements with Egypt, Jordan, Israel, Afghanistan, and the Gulf countries based on their strategic value to Kazakhstan. International experience suggests that integration is complex and prone to setbacks and even failures. MERCOSUR and SAFTA are two examples of FTAs that have not flourished. Even though regional integration in the European Union (EU) has spanned 50 years, it still faces difficulties and setbacks, as witnessed by the current multi-year financial crisis. ASEAN has decided not to try the full integration scheme of the EU and is moving at an even slower, more differentiated pace it calls “The ASEAN Way” . Therefore undertaking comprehensive analysis of the potential impacts of FTAs and other types of regional integration agreements before joining would be advisable. The EU has undertaken such an analysis for its FTA negotiations with India in 2009 and with Georgia in 2012. 16  │  E. Integrating into the Global Economy KAZAKHSTAN: SOLID GROWTH, UNSETTLED GLOBAL ENVIRONMENT Box 1. Kazakhstan’s Trade Policy Objectives The Trade Policy of Kazakhstan is focused on promotion of export development and diversification and protection of the country’s interests in global trade through: • Completing accession to the WTO in order to ensure market access and attract foreign investment. • Finalizing the Russia, Belarus, Kazakhstan CES by 2015. This agreement along with the current CU is seen as a major platform for the development and diversification of exports as well as the attraction of foreign investment. • The initiation of negotiations of free trade agreements with Turkmenistan, EFTA, and Serbia, and preferential trade agreements with Egypt, Jordan, Israel, Afghanistan, and the Gulf countries. • Enforcing treaty obligations to resolve trade disputes or to undertake rules-based retaliatory measures as necessary. • Undertaking research aimed at proposing to the Eurasian Economic Commission needed adjustments of the Common External Tariff to protect domestic industry or facilitate needed imports. • Providing informational and support services to exporters, including analysis of world trade trends, reviews of countries’ economies , industries and products, develop trademarks, promote abroad enterprises and their products and provide specialist training in export management. • Providing financial support to reimburse exporters for part of the costs of promotional activities aboard and the development of new products for foreign markets as well as provide export credit and insurance. Using diplomatic missions and the assignment of special counselors to those missions to develop new distribution channels for Kazakhstan exporters. Improving public-private consultations and capacity building within the private sector will help it take full advantage of the global and regional integration efforts. While the principle of public-private consultations is heeded in Kazakhstan, the nature of the consultation can improve through better information sharing and more content-rich regular consultations. The majority of the private sector has not been an active partner in the public-private consultation up to now, and some have noted that when consulted the process has been ad-hoc and not very informative. Looking forward, a number of actions can strengthen the consultative process around the trade policy agenda. The authorities should consider different types of consultation mechanism including formal and informal networks, structured, time limited/permanent. The law on the National Chamber of Entrepreneurs, enacted in the summer of 2013, can strengthen the entire consultation process in content and structure if it effectively operationalized. Educating and training the private sector about the effects of trade agreements will serve the country well. To improve public outreach, the authorities would benefit from a new communications program to disseminate the government’s trade policy and strategy. In the case of trade negotiations the private sector should mirror the thematic nature of the trade agenda. E. Integrating into the Global Economy  │  17 KAZAKHSTAN ECONOMIC UPDATE  –  FALL 2013 Analysis shows that joining the WTO, based on a tariff schedule similar to that used by Russia, would have gains for the Kazakh economy If Kazakhstan were to join the WTO by adopting a tariff schedule similar to that used by Russia, tariff rates would decline substantially. The current un-weighted mean tariff rates would decline from 10.6 percent at year-end 2012 to 7.9 percent in 2020 (Table 3). Average trade-weighted rates will fall from 8.9 percent back down to 5.5 percent by 2020, similar to the pre-CU rates of 5.3 percent in 2009. Most of the reductions will occur by the year 2016.12 This rebalancing of the tariff structure is expected to lead to a rebalancing of trade away from the CU and towards international partners. Table 3. Mean and Dispersion of Tariffs before and after Joining the CU and the WTO Year N Mean Standard Deviation Simple Trade weighted Simple Trade weighted 2009 10,853 6.7 5.3 9.8 8.3 2012 11,313 10.6 8.9 13.8 8.8 WTO–2020 11,557 7.9 5.5 9.3 5.0 Note: 2009 statistics are based on author’s computations performed for World Bank report (2012). They use the same methodology; therefore can be compared with the computations performed in this study. Trade weights are computed based on import statistics of Kazakhstan for 2009 (2009 rates) and 2012 (2012 and 2020 rates). Reducing tariffs would engender gains for the economy, and reducing trade facilitation costs would enhance these gains. The recent analysis13 finds that tariff reductions will improve aggregate welfare (as percent of GDP) by 0.1 percent per year. While aggregate trade grows by 0.5 percent by 2020. As tariff rates decline, tariff revenues as percent of GDP will drop by 0.9 percent. If in addition to reducing tariffs, trade facilitation costs are reduced by one-third, the welfare gains will increase to 0.9 percent of the GDP. Aggregate trade will grow by 0.9 percent by 2020.14 To benefit fully from WTO membership and regional and bilateral agreements, the government will need to ease the burden of regulations that affect non-tariff measures Kazakhstan has an intermediate level of frequency ratio of non-tariff measures. The frequency ratio of non- tariff measures (NTMs) captures the percentage of products that are subject to one or more NTMs. Analysis of a new NTM database shows that roughly 55 percent of tariff lines in Kazakhstan are currently affected by NTMs, representing around 60 percent of overall import value in 2012.15 By comparison, China and the European Union have the highest values of frequency (more than 80 percent), while Chile and Japan have the lowest values (Figure 19).16 94 percent of Kazakhstan’s current NTMs are concentrated under four ministries, which 12 See Shypotylo (draft, 2013). 13 See Trade Report (2013), Joint Economic Research Program, Astana. 14 See Tarr, et.al. (2008). 15 The data base was created in 2012 and updated in 2013 by the Ministry of Economy and Budget Planning, with the assistance of the World Bank. 16 NTM data is not available for all countries. The data base contains data on approximately 40 countries. The comparators were chosen this database, based on data availability. 18  │  E. Integrating into the Global Economy KAZAKHSTAN: SOLID GROWTH, UNSETTLED GLOBAL ENVIRONMENT Figure 19. The number of NTMs in Kazakhstan and again is comparable to other countries: The Ministry comparator countries of Health (35 percent), the Ministry of Agriculture China (35 percent), the Ministry of Economy and Budget European Union Planning (13 percent) and Ministry of Industry and Brazil New Technologies (10 percent). Mexico Kazakhstan However, the risk of duplication and burdensome Indonesia administrative procedures are high in Kazakhstan Venezuela as about a third of products are affected by Chile three or more trade regulations. The Coverage Japan Ratio captures the percentage of imports that are 0 20 40 60 80 100 120 subject to one or more NTMs. In Kazakhstan, the JJ Coverage ratio JJ Frequency ratio coverage ratio is about 60 percent, compared to Source: World Bank staff calculations. over 80 percent for EU and China. Only Indonesia and Chile have much lower ratios. In Kazakhstan, half of the products for which an NTM applies are affected by a single type of NTMs, 30 percent are affected by two types of NTMs, and the remainder by three or four types (Figure 20). By comparison, in higher income economies such as the EU and Japan, more than 90 percent of the products for which an NTM applies are affected by one to two NTMs, with more than 70 percent affected by only one NTM. Agri-food products and chemicals have the highest shares of products subject to multiple NTMs (Figure 21). Figure 20. Non-tariff measures are potentially more Figure 21. Agri-food products and chemicals are burdensome in Kazakhstan subject to multiple non-tariff measures ratio multiple NTMs, in percent 100 100 90 80 80 70 60 60 40 50 40 20 30 0 Footwear/ Headgear Transportation Miscellaneous Stone/ Glass Textiles Mineral Products Machinery/ Electrical Metals Wood & Wood Products Raw Hides, Skins, Leather & Furs Plastics/ Rubbers Chemicals & Allied Industries Vegetable Products Animal & Animal Products Foodstuffs 20 10 0 China Brazil Venezuela Indonesia Kazakhstan Japan EU JJ 1 NTM JJ 2 NTMs JJ 3 NTMs JJ 4+ NTMs Source: World Bank staff calculations. Source: World Bank staff calculations. Joining the CU has led to a large number of regulatory changes, among them 5 new NTM challenges stand out. These are: (i) issuance of more stringent regulations; (ii) additional mandatory certifications, (iii) new state product registration requirements; (iv) the new requirement of registering third country suppliers; and (v) the prevalence of quantitative controls. Compliance with these requirements may be very costly for both companies seeking to export and those that source their inputs abroad, especially in emerging and developing countries. Countries imposing them may end up hurting their own competitiveness by making it difficult for domestic producers and exporters to access critical inputs in a timely fashion. E. Integrating into the Global Economy  │  19 KAZAKHSTAN ECONOMIC UPDATE  –  FALL 2013 Box 2. Good Regulatory Practices in Trade Good regulatory practices encompass principles of transparency, efficiency and increased competition. These good practices are recommended by the WTO and implemented by OECD countries. Regulatory transparency has been at the forefront of the international trade agenda at the multilateral, bilateral, and regional levels. The WTO addresses the NTM agenda through both the transparency obligation and the guidelines to reconcile governments’ policy objectives with the requirement that the regulations do not restrict trade unnecessarily or are used purposely for protectionist measures. The OECD Efficient Regulation Principles provide guidance to policy makers designing and implementing rules and regulations, including those that may impact trade and firms’ competitiveness. In this perspective, regulatory impact analysis is a key instrument at the disposal of regulators. The OECD also recognizes the benefits of regulatory reform, which is about improving regulation, not necessarily through less regulation. Increasing competition should be recognized as a goal of regulatory reform such that there should be mechanisms to identify anticompetitive practices and to address complaints from consumers and new or potential firm entrants. The “Efficient Regulation Principles of the OECD” are summarized in nine points: (1) Transparency and openness; (2) Non-discrimination; (3) Avoidance of unnecessary trade restrictiveness; (4) Use of performance-based regulations (rather than design or descriptive characteristics). It is easier and less costly when firms have flexibility to meet requirements as this allows for innovation and improved efficiency; (5) Use of regulatory impact analysis; (6) Administrative simplification to minimize the administrative burdens on firms in complying with regulations; (7) Use of internationally harmonized measures to minimize the burdens on firms that come from having to comply with different standards and regulations for like products in international trade; (8) Appropriateness of the quality of conformity assessment procedures; and (9) Incorporation of competition principles into regulatory practices. To relieve the overall burden of regulation, review and—when deemed advisable—reform of the NTM system is necessary. The review of the system is needed to understand the complex regulatory framework. It can help reduce the number of the most trade restrictive and costly NTMs prevalent in Kazakhstan, in particular quantitative restrictions, non-automatic licenses, and pre-shipment inspection. It can also support the process of simplifying conformity assessment requirements for sanitary and phytosanitary measures (SPS) and technical barriers to trade (TBT) measures. Finally, it can help to limit the number of mandatory standards. On licenses and permits, the new reform initiative “Concept of State Regulation of Entrepreneurial Activity 2020” is certainly a positive step, as especially if it includes removal of unnecessary permits and licenses on exports and imports. This review and reform effort should include capacity building, information transparency and strengthening overall standard quality enforcement. Capacity building should include training on regulatory impact assessments, and design and implementation of trade regulations. Ensuring transparency and 20  │  E. Integrating into the Global Economy KAZAKHSTAN: SOLID GROWTH, UNSETTLED GLOBAL ENVIRONMENT information availability is also a key component of a functional regulatory system: the launch a trade information portal can help with this effort. Engagement in a public-private dialogue where the private sector is more systematically involved helps design that are more efficient and less burdensome. Finally, strengthening the overall standard quality enforcement in Kazakhstan will help create a system that will help protect consumers without being overly burdensome on the private sector activities. E. Integrating into the Global Economy  │  21 KAZAKHSTAN ECONOMIC UPDATE  –  FALL 2013 Appendix Appendix 1. Kazakhstan—Economic and Social Indicators (2005–2015) Selected Indicators 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 projections Income and Economic Growth GDP growth (percent change) 9.7 10.7 8.9 3.3 1.2 7.3 7.5 5.0 5.8 5.9 6.0 GDP per capita growth 8.7 9.5 7.7 2.0 -1.4 5.8 6.0 3.5 4.7 4.8 4.9 (percent change) GDP per capita (in US dollars) 3,771 5,292 6,771 8,514 7,165 9,070 11,357 12,119 12,985 13,632 14,497 Private consumption 9.9 11.9 9.4 7.2 -0.6 10.7 9.9 11.1 12.0 10.0 9.0 (percent change) Gross fixed investment 31.0 33.9 35.5 27.5 29.4 25.4 22.5 23.2 23.6 24.0 24.2 (in percent of GDP) Public 4.3 4.2 5.1 4.5 5.5 5.2 4.3 4.6 4.6 4.7 4.8 Private 26.7 29.7 30.4 23.0 23.9 20.2 18.2 18.7 19.0 19.3 19.5 Savings (in percent of GDP) 28.8 30.9 29.5 30.4 29.4 30.4 31.7 28.4 29.5 27.8 25.9 Public 10.5 9.1 9.2 8.2 7.9 10.2 11.9 12.3 11.3 11.1 10.3 Private 18.3 21.9 20.3 22.2 21.5 20.2 19.9 16.2 18.1 16.7 15.6 Money and Prices (percent change, unless indicated otherwise) Consumer prices, end year 7.4 8.4 18.8 9.5 6.2 7.8 7.4 6.0 4.9 5.6 5.8 Consumer prices, average 7.6 8.6 10.8 17.2 7.3 7.1 8.3 5.1 5.9 5.4 5.7 Refinancing rate, average 7.8 8.6 9.2 10.8 8.4 7.0 7.4 6.2 5.5 .. .. (percent) Nominal exchange rate (KZT/USD) 134 127 121 121 148 147 148 150 153 157 159 Real exchange rate (1998=100) 100 90 81 71 81 76 72 71 69 68 67 Fiscal Accounts and External Debt/Assets (In percent of GDP; unless indicated otherwise) Revenues 28.0 28.3 29.2 29.7 22.7 25.0 27.7 26.5 25.5 24.9 25.2 Oil revenues 9.4 10.0 8.1 12.3 8.1 10.4 14.0 13.3 11.9 11.0 10.3 Non-oil revenues 18.6 18.3 21.1 17.4 14.7 14.6 13.8 13.3 13.6 14.0 14.9 Expenditures 22.3 20.3 24.2 27.2 23.5 22.1 21.5 22.1 22.6 22.9 22.9 Current 15.8 14.2 14.8 14.2 16.1 15.0 14.9 16.1 17.3 17.4 17.3 Capital and net lending 6.5 6.1 9.4 13.1 7.4 7.1 6.7 6.0 5.3 5.5 5.6 Overall fiscal balance 5.6 8.0 5.0 2.5 -0.8 2.9 6.2 4.4 3.0 2.0 2.2 Non-oil state budget balance -4.0 -2.5 -3.7 -10.5 -9.4 -8.0 -8.2 -9.5 -9.5 -9.6 -8.8 Total government debt 7.6 6.3 5.9 6.8 10.2 10.7 10.4 12.3 14.7 17.1 18.7 External 3.7 2.5 1.9 1.6 2.4 2.7 2.6 2.6 3.3 3.3 3.1 Domestic 3.9 3.8 4.0 5.2 7.9 7.9 7.8 9.7 11.4 13.8 15.6 Foreign exchange fiscal reserves 14.1 17.4 20.0 20.6 21.1 20.9 23.2 28.4 32.1 35.8 38.0 External Accounts (in billions of US dollars) Export real growth (percent, yoy) 0.4 6.8 9.1 0.9 -11.9 3.1 1.5 4.0 1.3 4.5 4.2 Import real growth (percent, yoy) 12.1 12.6 26.1 -11.5 -15.7 2.9 3.5 20.2 5.0 4.3 4.5 Merchandise exports 28.3 38.8 48.3 72.0 43.9 61.4 85.2 86.9 81.5 80.6 83.2 of which: Fuel and oil products 19.5 26.3 31.5 48.9 30.0 42.5 65.3 64.5 61.2 60.5 62.8 22  │ Appendix KAZAKHSTAN: SOLID GROWTH, UNSETTLED GLOBAL ENVIRONMENT Selected Indicators 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 projections Merchandise imports -17.9 -24.1 -33.1 -38.4 -28.9 -32.9 -40.3 -49.1 -51.0 -54.3 -57.3 Net services -5.4 -6.1 -8.4 -6.9 -6.0 -7.2 -6.6 -8.0 -7.9 -7.8 -7.7 Net workers' remittances -1.1 -1.9 -2.9 -1.9 -1.4 -1.4 -1.5 -1.7 -1.8 -1.9 -2.0 Current account balance -1.0 -2.0 -8.4 6.3 -4.1 1.4 10.2 0.6 -0.7 -3.0 -4.2 as percent of GDP -1.8 -2.5 -8.0 4.7 -3.6 0.9 5.4 0.3 -0.3 -1.3 -1.7 Net foreign direct investment 2.1 6.7 8.0 13.1 10.1 3.7 8.6 11.7 8.7 8.2 8.1 External debt 43.4 74.0 96.9 107.9 112.9 118.2 125.2 137.1 148.4 158.0 167.0 Population, Employment and Poverty Population, total (million people) 15.1 15.3 15.5 15.7 16.1 16.3 16.6 16.8 17.0 17.1 17.3 Population growth (percent) 0.9 1.1 1.2 1.2 2.7 1.4 1.4 1.4 1.0 1.0 1.0 Unemployment rate 8.1 7.8 7.3 6.6 6.6 5.8 5.4 5.3 5.2 5.1 5.0 (percent of labor force) Poverty headcount ratio 31.6 18.2 12.7 12.1 8.2 6.5 5.3 3.8 .. .. .. at national poverty line (percent of population) at US$ 1.25 a day (PPP) .. 0.4 0.2 0.1 0.1 .. .. .. .. .. .. at US$ 2 a day (PPP) .. 3.3 1.5 0.9 1.1 .. .. .. .. .. .. at US$ 5 a day (PPP) .. 54.0 42.3 41.3 42.3 .. .. .. .. .. .. Inequality – Gini coefficient 0.304 0.312 0.309 0.288 0.267 0.278 0.290 0.284 .. .. .. Life expectancy (years) 65.9 66.2 66.4 67.1 68.4 68.4 69.0 69.6 .. .. .. Other GDP (In billions of tenge) 7,591 10,214 12,850 16,053 17,008 21,816 27,572 30,347 33,490 36,227 39,684 GDP (In billions of US dollars) 57.1 81.0 104.8 133.4 115.3 148.1 188.0 203.5 220.3 233.7 251.2 Doing Business rank /1 .. .. .. .. 74 58 56 53 50 .. .. Human Development Index .. .. .. .. .. 69 68 69 .. .. .. ranking /2 CPIA overall rating 3.7 3.7 3.7 3.6 3.7 3.7 3.8 3.8 .. .. .. Economic management 4.2 4.2 4.2 4.0 4.2 4.3 4.3 4.3 .. .. .. Structural policies 3.7 3.7 3.7 3.5 3.5 3.5 3.7 3.7 .. .. .. Social inclusion and equity 3.5 3.5 3.5 3.6 3.6 3.6 3.7 3.7 .. .. .. policies Public sector management 3.4 3.4 3.4 3.4 3.4 3.4 3.5 3.5 .. .. .. and institutions 1/ The Doing Business indicator is ranked out of 181 countries in 2009; 183 in 2010; 185 in 2011–2012; and 189 in 2013. 2/ The Human Development Index is ranked out of 169 countries in 2010,187 in 2011 and 186 in 2012. Appendix  │  23 This page is intentionally blank. This page is intentionally blank. This page is intentionally blank.