Country Economic Update KAZAKHSTAN Spring 2017 The Economy Has Bottomed Out: What is Next? Macroeconomics & Fiscal Management Global Practice KAZAKHSTAN The Economy Has Bottomed Out: What Is Next? Country Economic Update Spring 2017 Government Fiscal Year: January 1 – December 31 Currency Unit: Kazakhstani Tenge (KZT) Currency Equivalents: Exchange Rate Effective as of April 1, 2017 US$1 = 313.73 KZT Weights and Measures: Metric System Abbreviations and Acronyms EMDEs Emerging market and developing economies FDI Foreign direct investment FX Foreign currency IFRS International Financial Reporting Standards NBK National Bank of Kazakhstan NPLs Nonperforming loans R&D Research and development SMEs Small and medium-sized enterprises SOEs State-owned enterprises SPV Special-purpose vehicle ii| Table of Contents Foreword ................................................................................................................................................................................... iv Overview ..................................................................................................................................................................................... 1 A. Recent Socio-Economic Developments ..................................................................................................................... 2 B. Macroeconomic Policies and Structural Reforms ................................................................................................. 7 C. Economic Outlook and Risks........................................................................................................................................ 12 D. Focus Section: Agriculture as a Potential Growth Driver ................................................................................ 14 Annex Table 1. Selected Macroeconomic and Social Indicators, 2013-19 ..................................................... 21 Figures Figure 1. Headline inflation peaked in Q3 2016, but inflationary pressures eased since then ............... 3 Figure 2. Prices of imported goods drove inflation in 2016 .................................................................................. 3 Figure 3. The NBK has not intervened in the FX market since September 2016 .......................................... 5 Figure 4. The stock of total official reserved decreased due to a drawdown of the Oil Fund .................. 5 Figure 5. The nonoil deficit has remained elevated .................................................................................................. 9 Figure 6. Government’s net financial assets have declined since 2014 ............................................................ 9 Figure 7. The official policy rate has been lowered gradually since May 2016 ........................................... 10 Figure 8. Repo-market interest rates have stabilized but remain elevated .................................................. 10 Figure 9. Share of agricultural in GDP declined steadily until 2010 ................................................................ 15 Figure 10. The share of individual farms in agricultural production has increased over time............. 16 Figure 11. Government support to agriculture has risen sharply since 2001 ............................................. 16 Figure 12. The government’s agriculture sector strategy continues to be dominated by subsidies .. 17 Figure 13. The agro-food trade deficit has narrowed somewhat in recent years ...................................... 17 Figure 14. Yields are low across major agricultural commodities .................................................................... 18 Figure 15. Spending on agriculture R&D represents a fraction of the agriculture ministry’s budget 18 Figure 16. FDI in agriculture represents a small share of total FDI in Kazakhstan. .................................. 19 Figure 17. Capital investment in agriculture has stagnated over the past decade..................................... 19 Tables Table 1. Contribution to Real GDP Growth, 2013-16................................................................................................ 3 Table 2. Balance of Payments and Official Reserves, 2013-16 ............................................................................. 4 Table 3. Consolidated (General Government and Oil Fund) Fiscal Accounts, 2013-16 ............................. 8 Table 4. Key Numbers of the Comprehensive Privatization Plan for 2016-20 ............................................ 12 Table 5. Baseline Scenario: Selected Macro-Fiscal Indicators, 2016-19......................................................... 13 Boxes Box 1. How to Promote Job Creation in a Difficult Economic Context ............................................................... 7 |iii Foreword This edition of the Kazakhstan’s Country Economic Update (CEU) is part of a semi-annual series designed to monitor socio-economic developments in Kazakhstan. It presents a concise analysis of political, economic and social developments, as well as the progress achieved with the implementation process of structural reforms during 2016. It also includes a special section highlighting the high potential of the agriculture sector as a strong, diversified driver of growth. This edition’s main authors are Ilyas Sarsenov (Senior Country Economist for Kazakhstan) and Talimjan Urazov (Senior Agricultural Specialist). The CEU benefited from the valuable inputs provided by Rakhymzhan Assangaziyev (Senior Country Officer), Colleen Mascenik (Financial Economist), Sarosh Sattar (Senior Poverty Economist), Aibek Baibagysh Uulu (Poverty Consultant), Alma Nurshaikhova (Public Sector Management Specialist), Yeraly Beksultan (Private Sector Development Specialist), Tatyana Chursova (Private Sector Development Consultant), Aliya Bizhanova (Education Operations Officer), Yohei Okawa (Development Policy Economist) and Azamat Aldiyarov (Macro-Fiscal Management Consultant). The authors are grateful for the guidance and comments provided by Ato Brown (Country Manager for Kazakhstan) and Christos Kostopoulos (Lead Economist for Central Asia). Gulmira Akshatyrova (Program Assistant in Astana) and Sarah Nankya Babirye (Program Assistant in Washington, D.C.) provided administrative support. Shynar Jetpissova (Communications Officer) and Kubat Sydykov (Online Communications Associate) helped with report dissemination. María De los Angeles González-Miranda Practice Manager Macroeconomics and Fiscal Management Global Practice iv| Overview In 2016, The economy continued to suffer from a protracted slowdown in global oil Kazakhstan’s GDP prices and weak domestic demand, resulting in a real GDP growth rate growth continued estimated at 1 percent in 2016. The current account deficit widened as a to slow and real result of lower oil prices and oil output. However, this was more than offset wages declined by higher inflows of foreign direct investment (FDI), particularly to expand further, negatively oil production. The improved overall external position enabled the central affecting poverty bank to partially replenish its international reserves, which it had drawn rates. down to finance foreign exchange interventions in previous years. Private consumption weakened considerably in 2016 due to the pass-through effect of currency devaluation, which pushed the inflation rate to an average of 14.6 percent for the year and undermined the purchasing power of households. Official data suggest that average real wages declined by 0.9 percent in 2016. As real incomes fell, the poverty rate (measured at the international poverty line of US$5 per day) rose to an estimated 19.8 percent in the year. The authorities Seeking to stimulate domestic demand and the nonoil economy, the reacted by government’s macroeconomic policy stance remained accommodative in extending 2016. As the slowdown continued, the authorities postponed a planned fiscal additional consolidation and extended economic support measures, financed by the oil spending measures fund and additional borrowing. The economic support program is focused on and easing fostering domestic demand through higher public wages and social transfers, monetary continued provision of subsidies to state-owned enterprises (SOEs) and small conditions. and medium-sized enterprises (SMEs), and, more recently, on extended support to the banking sector. The authorities are planning to address vulnerabilities in the banking sector by recapitalizing large banks, which are burdened by a high level of nonperforming loans (NPLs). The central bank also started easing gradually its contractionary monetary policy as inflationary pressures subsided in Q4 2016, but bank lending to the private sector remained depressed. Economic activity In the medium term, Kazakhstan’s economic growth rate is projected to pick is projected to pick up slowly, but it will remain below pre-2014 levels (when the oil price shock up slowly as oil hit the economy). Real GDP growth rates will hover around 3 percent in 2017- prices and output 19. With oil prices projected to recover gradually and additional production are expected to from the off-shore Kashagan oilfield to more than offset declines in traditional increase, and if oil output, export revenue will increase and impact positively on the current structural account and fiscal balances. Nevertheless, with the projected oil price level at transformation a low of $55-60 per barrel, both balances will remain in deficit. In the longer supports more term, Kazakhstan’s desire for an economic transformation to more sustainable and sustainable and inclusive growth will require completing the macroeconomic inclusive growth. adjustment, addressing the legacy of SOEs and financial sector issues, and fostering development of a more dynamic, export-oriented and productive private sector. |1 A. Recent Socio-Economic Developments Recent political events In early 2017, Under the recently enacted constitutional amendments, the presidency President retained its main responsibilities and major policymaking influence, while Nursultan devolving some powers to the executive government and parliament. The Nazarbayev president would continue to focus on strategic functions, including defense enacted political and security, but management of the socioeconomic policy would be reforms aiming to transferred to the government. The amendments also transfer the right to create a more approve state programs—and create or dissolve state agencies—from the balanced political president to the cabinet. The proposed changes would strengthen the system. Mazhilis, the lower chamber of parliament, by giving it greater power in the approval and dismissal of cabinet members. In line with an existing strategy of strengthening local governance and public accountability, Mr Nazarbayev also pledged to grant greater powers to local governments. Following the The president called for a new wave of economic transformation, the announcement of Modernization 3.0, with the goal of becoming more globally competitive and political reforms, joining the ranks of the world's 30 most developed countries by 2050. the president set President Nazarbayev outlined five priorities for economic transformation: out priorities for (i) accelerated technological modernization of the economy; (ii) improved economic business environment; (iii) increased macroeconomic stability; (iv) enhanced transformation. quality of human capital; and (v) strengthened institutions, security and anti- corruption efforts. The address underscored the need to diversify the economy away from commodity exports and to raise productivity and improve the effectiveness of the state apparatus. A strategic development plan, Kazakhstan-2025, will be developed to detail the actions that the government will take to achieve these priorities. Growth and inflation In 2016, Real GDP growth slowed from 1.2 percent in 2015 to an estimated 1 percent Kazakhstan’s in 2016 as oil prices continued to fall and domestic demand weakened. On the economy continued supply side, a deteriorating performance by the oil sector—the result of to suffer from a declining oil prices and oil output—and slowing growth in the services protracted sector—driven by a contraction in wholesale trade—hindered overall slowdown in global economic growth. However, this was partly offset by rising output from the oil prices and weak agriculture and metallurgy sectors. Construction activity also expanded, domestic demand. driven by large projects in the oil sector, boosting imports. On the demand side, while investment activity increased, private consumption continued contributing to the slowdown due to a pass-through effect of currency devaluation that fueled inflation and undermined the purchasing power of households (Table 1). 2| Table 1. Contribution to Real GDP Growth, 2013-16 (In percentage points, unless otherwise indicated) 2013 2014 2015 2016 e Real GDP growth (percent) 6.0 4.2 1.2 1.0 Domestic demand 6.9 3.8 2.7 1.3 Private consumption 5.1 0.7 1.0 -0.3 Government consumption 0.2 1.0 0.3 0.3 Gross capital formation 1.6 2.1 1.5 1.3 Net exports -1.0 0.1 -1.2 -0.2 Exports of goods and services 1.1 -1.1 -1.2 -1.0 Imports of goods and services -2.1 1.1 0.0 0.8 Statistical discrepancy 0.1 0.3 -0.3 -0.1 Source: World Bank staff calculations based on data published by the Statistical Office of Kazakhstan. Note: Some sums may not add up exactly due to rounding; e=estimate. Inflation surged in The depreciation of the Kazakhstani tenge (KZT) that began in the fourth 2016, driven by quarter of 2015—following the authorities’ move to a flexible exchange rate price increases for regime in August 2015—led to sizable adjustments of prices for imported imported goods. goods. The headline inflation rate averaged 14.6 percent in 2016, peaking in the third quarter (Figure 1). The key drivers of inflation were imported clothing and footwear, medicine, and household appliances, which registered price increases of over 20 percent in 2016 (Figure 2). The earlier removal of price controls for certain types of gasoline also contributed to higher prices for domestically-produced goods and services.1 The pass-through effects from the currency devaluation began to ease in the last quarter of 2016. The headline inflation rate almost halved from over 17 percent in the third quarter of 2016 to below 8 percent in early 2017. Figure 1. Headline inflation peaked in Q3 2016, Figure 2. Prices of imported goods drove but inflationary pressures eased since then inflation in 2016 (in percent, year-on-year) (in percent, year-on-year) Source: World Bank staff calculations based on official data Source: World Bank staff calculations based on official published by the authorities. data published by the authorities. 1 The removal of the price control for AI-92/93 (regular gasoline) in August 2015 allowed to avoid shortages in gasoline (by removing distortions in retail prices) but led to a higher contribution of gasoline prices to the headline inflation rate level from September 2015 through August 2016. |3 External sector The external While the current account deficit widened further due to the unfavorable position improved terms of trade, it was offset by higher net FDI inflows, mainly into the oil substantially in sector for production capacity expansion. In particular, lower oil prices and 2016, supported by oil output resulted in a significant widening of the current account deficit— higher FDI inflows. from US$5.5 billion or 3 percent of GDP in 2015 to US$8.2 billion or 6.1 percent in 2016 (Table 2). However, investments in oil production capacity expansion (by Tengizchevroil and Karachaganak) pushed up net FDI inflows to US$14.3 billion or 10.7 percent of GDP, more than offsetting the worsening in the current account deficit. Consequently, the overall deficit of the balance of payments (excluding investment by the Oil Fund) narrowed substantially—from US$10.6 billion in 2015 to $2.4 billion in 2016. Table 2. Balance of Payments and Official Reserves, 2013-16 (In US$ billion) 2013 2014 2015 2016 e Current account balance 1.2 6.0 -5.5 -8.2 Merchandise trade 34.8 36.2 12.7 9.4 Exports f.o.b. 85.6 80.3 46.5 37.2 Imports f.o.b. 50.8 44.1 33.8 27.8 Services -7.2 -6.3 -5.1 -4.8 Primary income -25.1 -22.7 -11.4 -12.5 Income of direct investors, net -22.5 -19.8 -8.8 -10.0 Secondary income -1.3 -1.3 -1.6 -0.3 Capital and financial account balance /1/2 9.3 0.7 -5.2 5.7 Direct investment 8.0 4.8 3.4 14.3 Portfolio investment /1 2.8 1.4 -4.0 -2.9 Medium- and long-term investment 5.1 2.3 4.1 3.3 Other short-term investments -2.8 1.3 -3.2 -7.3 Errors and omissions -3.9 -9.0 -5.4 -1.7 Overall external balance 10.5 6.7 -10.6 -2.4 Change in FX reserves at the NBK -2.4 4.3 -0.8 -0.3 Change in FX assets in the Oil Fund 12.9 2.5 -9.9 -2.2 Memorandum items: Official reserves, stock 90.0 95.1 83.7 81.1 Stock of FX reserves at the NBK 19.2 21.8 20.3 19.9 Stock of FX assets in the Oil Fund 70.8 73.2 63.4 61.2 GDP 236.6 221.4 184.4 133.7 Source: World Bank staff calculations based on data published by the National Bank of Kazakhstan. Note: Some sums may not add up exactly due to rounding; e=estimate; 1/ Excluding net investment of the Oil Fund; 2/ Including errors and omissions. The improved The improved external position helped the central bank to replenish external position international reserves, which had been used for foreign exchange helped the central interventions in previous years and—more moderately—during some episodes in 2016. Reportedly, the National Bank of Kazakhstan (NBK) has not intervened in the foreign-exchange (FX) market since September 2016 4| bank to replenish (Figure 3). Consequently, the reserve replenishment allowed the NBK to its reserves. boost gross international reserves held at the NBK, while FX assets in the Oil Fund continued to decrease due to the implementation of the government’s medium-term economic support program (Figure 4). Figure 3. The NBK has not intervened in the FX Figure 4. The stock of total official reserved market since September 2016 decreased due to a drawdown of the Oil Fund (in US$ millions) (in US$ billions) 105 90 75 60 45 30 15 0 Mar Mar Mar Sep Dec Sep Dec Sep Dec Jun Jun Jun 2014 2015 2016 Gross international reserves at NBK Oil Fund FX assets Source: World Bank staff calculations based on official Source: World Bank staff calculations based on official data published by the authorities. data published by the authorities. Financial sector Activity in the Banking sector lending was flat in 2016, reflecting heightened bank risk banking sector aversion and increased attention to collections. Aside from disbursements remained under the government’s economic support program, there were few depressed, despite opportunities for new lending. The large banks continued to be sustained by ample liquidity. relatively strong liquidity flows from quasi-state sources and state-controlled companies. Despite a slight strengthening of the tenge in the first half of 2016, the share of FX in banks’ balance sheets remained stubbornly high throughout 2016—at 33 percent of total lending (the bulk, 29 percent of total lending, is represented by FX loans to legal entities; 3.6 percent is FX loans to physical persons). This reflected the challenges facing banks as they move away from FX exposures, many of which are now nonperforming. Vulnerabilities in In line with official mandates, the share of nonperforming loans (NPLs) to the banking system total gross loans has been reduced from a 2014 peak of over 20 percent to 6.7 persisted. percent in January 2017.2 However, severe shocks to the system—including currency volatility and the economic slowdown, the flat lending growth, as well as mounting banking crises in other oil-exporting countries (for example, Azerbaijan)—suggest that banks may be facing looming challenges. Furthermore, the relaxation of prudential regulations in July 2015 (for instance, of those calling for consolidated financial reporting by financial institutions in line with the International Financial Reporting Standards, IFRS), a dramatic increase in the sale of distressed assets into special-purpose vehicles (SPVs), leniency in loan classification, and under-provisioning, suggest that official data may need to be supplemented with additional information to properly assess the health of the commercial banks. 2 The central bank defines NPLs as being 90 or more days overdue. |5 The merger of A key requisite for economic recovery and sustainable enterprise investment vulnerable banks is a healthy banking sector. The authorities have initiated efforts to deal with may improve the insufficient capital and large volumes of NPLs in a few of the largest banks.3 health of the Consolidation is underway in the banking sector, but limited information has banking sector, but been provided to the public on the process and no change in governance of may also decrease these banks has been envisaged.4 Global best-practice policies on bank competition. resolution recommend a coordinated approach to achieve a least-cost resolution of systemically-important banks. Where governments have tried to intervene discreetly, this has often led to costlier solutions than necessary. To maintain depositor confidence—a top priority—coordination among safety-net players and appropriate public communication is essential. The creation of an accountable, efficient and transparent asset management entity for the workout of distressed assets is also important. Following the planned merger of two of the largest ‘too-big-to-fail’ banks in Kazakhstan, maintaining fair competition in the banking sector may become an issue. Social indicators The economic Following a decline of 2.4 percent in 2015, average real wages fell by a further slowdown put 0.9 percent in 2016. With real incomes declining, the poverty rate (measured downward at the international poverty line of US$5 per day) rose to an estimated 19.8 pressure on percent in 2016, up from 19.5 percent in 2015 and 16.1 percent in 2014. The household income decline in real income was primarily the result of fewer employment and negatively opportunities for both wage earners and the self-employed. Total affected the labor employment fell by 0.5 percent in 2016. Women and young people were the market. first to experience the effects of the economic slowdown. The female labor market participation rate declined from 66.4 percent in 2014 to 65.7 percent in 2015. Meanwhile, the youth unemployment rate rose from 6.8 percent in 2013 to 8.3 percent in 2015. The authorities An increase in social transfers primarily benefitted households receiving adjusted pensions pensions, and their income levels remained steady. As such, social assistance and other social did not perform a sufficient countercyclical role to support poverty reduction transfers, and through the slowdown. To support employment and labor productivity, the expanded government allocated additional funding to the Employment Road Map 2020 employment- and adopted a Productive Employment and Mass Entrepreneurship Program support programs; for 2017-2021. The program will promote skills development, increased although this was employment and SME development. Up to 200,000 beneficiaries will receive insufficient to technical and vocational training as well as access to microcredit and public sustain the past employment services. This concerted effort seeks to complement the wide 3 The capital position of QAZKOM, the system’s largest bank with 24 percent of lending and 18 percent of physical person deposits, fell below the minimum capital requirements including buffers with effect from January 1, 2017. As of January 1, 2017, QAZKOM’s ratio of Tier-1 capital to total assets stood at 9.3 percent (below the requisite 9.5 percent for systemically- important banks) and Tier-1 capital to sum of risk-weighted assets stood at 10.1 percent (below the requisite 10.5 percent). 4 An official announcement of the impending merger of QAZKOM with Halyk Bank, the first and second-largest banks by loan volume, respectively, followed several months of speculation. The mergers are expected to impact negatively on the fiscal accounts. In early 2017, the government released budget forecasts projecting a cost of US$6.5 billion to recapitalize QAZKOM, a half of which will come from the Oil Fund. Meanwhile, consolidation has been agreed between Tsesnabank and Bank CenterCredit. South Korea’s Kookmin Bank will sell its 42 percent stake in Bank CenterCredit to a group of investors including Tsesnabank, while IFC is also selling its 10 percent stake in the bank. Details about the pricing of these deals are not yet available. 6| trend in poverty range of policies which support the private sector to invest in starting and reduction. expanding firms, developing skills, and innovating (Box 1). Box 1. How to Promote Job Creation in a Difficult Economic Context Kazakhstan created almost 2.5 million jobs between 2001 and 2016—mainly in non-tradable, service- oriented sectors—in the context of a favorable global environment, high oil prices and robust economic growth. However, the quality and productivity of many jobs remain relatively low. Moreover, about 30 percent of the employed are self-employed, and many self-employed workers are classified as “unproductive.” To create high-quality (and productive) jobs, Kazakhstan will need to overcome three key challenges. First, as oil prices are expected to recover slowly, and modest growth rates are projected over the medium term, policymakers cannot rely on external tailwinds (particularly those linked to the oil sector and its spillovers on services) to drive job creation as it happened during the oil boom. Second, the authorities will need to design policies to address the large share of self-employed workers who are underemployed or suffer from low productivity. Finally, starting around 2020, the job-creation rate will need to increase significantly, as a large cohort of young people will begin entering the labor force. A potential comprehensive strategy to create more and higher quality jobs must incorporate both short- and long-term objectives and actions (Box Diagram 1). Short-term policies will need to focus on adjusting to a context of persistently lower economic growth rates by adopting an appropriate set of macro-fiscal policies to mitigate economic volatility, allow the diversification of the exporting nonoil sector, while maintaining adequate fiscal space to invest in market-based stimulus programs and protect vulnerable workers. Medium-term policies should concentrate on advancing the economy’s structural transformation to create high-quality jobs and establish the necessary conditions to absorb the larger number of new workers entering the labor market over the coming decade. Box Diagram 1. A Strategic Framework for Employment Creation in Kazakhstan Source: World Bank Group (2016), Kazakhstan: Towards Development of a Jobs Strategy, Policy Note. |7 B. Macroeconomic Policies and Structural Reforms Assessment of fiscal and debt policies The fiscal policy To support economic growth, the government has maintained an stance remained accommodative fiscal policy in recent years. A series of economic-support accommodative in measures have also focused on stimulating domestic demand by: (i) support of increasing pensions and other social transfers; (ii) providing subsidies to domestic demand. SOEs and SMEs; and, more recently, (iii) extending support to the banking sector (to be implemented in 2017). While the overall fiscal deficit narrowed from 7.8 percent of GDP in 2015 to 5.3 percent in 2016, the nonoil deficit remained elevated at 10.2 percent of GDP in 2016, 2 percentage points above its pre-crisis level (Table 3, Figure 5). Table 3. Consolidated (General Government and Oil Fund) Fiscal Accounts, 2013-16 (In percent of GDP, unless otherwise indicated) 2013 2014 2015 2016 e Revenue and grants 24.1 21.9 15.7 17.4 Oil revenue, gross 12.0 10.4 4.7 4.9 Oil revenue consumed from the Oil Fund 6.2 7.6 10.2 8.5 Oil revenue saved in the Oil Fund, net /1 5.7 2.8 -5.5 -3.7 Nonoil revenue and grants 12.2 11.5 10.9 12.6 Expenditure and net lending 20.4 21.9 23.5 22.7 General government expenditures 19.7 21.2 20.9 22.0 Current expenses 15.1 15.4 16.6 17.6 Capital expenses and net lending 4.0 4.3 3.4 3.4 Transfers to SOEs 0.6 1.4 0.9 0.9 Off-budget lending to SOEs 0.7 0.7 2.5 0.8 Overall deficit 3.7 0.0 -7.8 -5.3 Nonoil deficit -8.3 -10.4 -12.5 -10.2 Nonoil deficit financing 8.3 10.4 12.5 10.2 External borrowing 0.2 1.2 2.4 1.6 Domestic borrowing and privatization 1.9 1.6 -0.1 0.1 Oil revenue consumed from the Oil Fund 6.2 7.6 10.2 8.5 Memorandum items: Government’s net financial assets, stock 17.4 18.6 12.5 25.7 FX reserves in the Oil Fund 29.9 33.1 34.4 45.8 Total government debt 12.6 14.5 21.9 20.1 Government’s net financial assets, stock (US$ billion) 41.4 41.7 37.1 33.6 FX reserves in the Oil Fund (US$ billion) 70.8 73.2 63.4 61.2 Total government debt (US$ billion) 29.4 31.5 26.3 27.6 Source: World Bank staff calculations based on data published by the Ministry of Finance. Note: Some sums may not add up exactly due to rounding; e=estimate; 1/ “+”=net savings, “-“=net dissaving of previous years’ oil revenue savings. Net fiscal reserves The government continued to use the Oil Fund to finance the economic continued to support package, with oil revenue consumed exceeding gross oil revenue decline as oil prices inflows. As a result, the Oil Fund FX stock declined from US$63.4 billion at remained low. end-2015 to US$61.2 billion at end-2016. With the government maintaining a moderate level of net borrowing at 2.2 percent of GDP (on average), the debt stock remained relatively flat at about US$30 billion. The government’s net financial assets (Oil Fund FX assets minus total government debt) 8| consequently declined from US$37 billion in 2015 to below US$34 billion in 2016 (Figure 6). Figure 5. The nonoil deficit has remained Figure 6. Government’s net financial assets elevated have declined since 2014 (in percent of GDP) (in US$ billion) Source: World Bank staff calculations based on official Source: World Bank staff calculations based on official data published and provided by the authorities. data published and provided by the authorities. The government Currently, the oil price level required for the government budget to achieve a should consider balanced position is approximately twice the current oil price (Brent) of about fiscal US$55 per barrel. As a result, there will be a further deterioration in the net consolidation. fiscal reserve position—undermining medium-term fiscal sustainability—if the government continues to maintain the elevated nonoil deficit. A simple simulation shows that the stock of net financial assets may be fully depleted (that is, Oil Fund FX assets will be equal to total government debt) by 2020 if the government maintains the nonoil deficit at about 9 percent of GDP in 2018-20. To restore fiscal sustainability, the government should urgently adopt a medium-term fiscal consolidation plan, including measures to increase nonoil revenue and streamline nonproductive public spending. Assessment of monetary policy The central bank In 2016 the NBK began easing monetary policy, which had been sharply eased monetary tightened to stabilize the FX market, as the floating exchange rate regime policy as proved effective and expectations of a devaluation subsided in the second inflationary quarter. Since May 2016, the NBK gradually has lowered its base rate—from pressures 17 to 11 percent—and narrowed the rate band (Figure 7). Since the fourth subsided. quarter of 2016, a weakening of inflationary pressures (as described above) has been the main driver in the NBK’s decision to ease monetary policy. The interest-rate The NBK introduced new instruments of open market operations and transmission standing facilities to improve the interest-rate transmission mechanism. It mechanism is also expanded the list of eligible collateral for open market operations. To improving. enhance the government securities market and its role for the transmission mechanism, the NBK began building a reliable risk-free yield curve in the 2-5- year maturity segment. These efforts positively influenced the money market, with interest rates declining and their volatility decreasing substantially (Figure 8). |9 Figure 7. The official policy rate has been Figure 8. Repo-market interest rates have lowered gradually since May 2016 stabilized but remain elevated (in percent) (in percent) Source: World Bank staff calculations based on official Source: World Bank staff calculations based on official data data published and provided by the authorities. published and provided by the authorities. The authorities The implementation of the inflation-targeting regime remains a priority of the should continue NBK. A functional inflation-targeting regime requires an effective interest- transitioning to a rate transmission channel that signals changes in monetary conditions to fully-functional market participants and thereby influences economic activity. To improve the inflation-targeting effectiveness of monetary policy, the NBK should continue to enhance its regime. policy framework by further strengthening the interest-rate transmission channel, build a reliable yield curve with the Ministry of Finance and improve its external communication of policy changes. Maintaining flexibility of the exchange rate is also vital for fostering de-dollarization of the economy and increasing the effectiveness of the interest-rate transmission mechanism. Ongoing structural reforms The design of the The new wave of institutional reforms under the Modernization 3.0 builds on institutional the ongoing institutional reform program, the “One Hundred Concrete Steps, reform agenda is a Modern State for All” (100 Steps), launched in May 2015. Following criticism being scrutinized, to the legislative measures adopted in 2015 as part of the government’s 100 but stronger public Steps institutional reform agenda (which were considered inadequately consultation designed for implementation), new legislation now requires expert review mechanisms are and wide public consultation. However, effective public consultation and needed. feedback mechanisms are still lacking. Regulatory Impact Assessments are an important tool in these cases that the government should continue implementing. The public Public administration reforms implemented under the 100 Steps program to administration is date include the establishment of the Government for Citizens Corporation, working on the launch of an open data portal and the expansion of results-based reporting improving public requirements for ministry and regional heads. A review of government service delivery. functions to streamline operations, eliminate waste and decentralize core functions is underway; some functions have already been transferred to the private sector. The strengthening of local governance has gained prominence in the political agenda and a law increasing the power of local legislatures and self-governance institutions in the budgetary process has been proposed. 10| Judicial reforms Although much work remains to close efficiency and transparency gaps, are progressing justice sector reforms have begun to generate initial results. Since the slowly. introduction of a three-tier judicial system in 2016, the time to consider a case has been reduced by half with more than 82 percent of cases resolved at an initial hearing. A new Civil Procedural Code, which took effect in January 2016, has steadily increased the number of cases resolved using summary procedures and alternative dispute resolution measures. By assigning the role of the first instance court on investment disputes to the Astana City Court system—and the newly-created, specialized judicial collegium at the Supreme Court as the first instance court for large investors—Kazakhstan has also made an important step towards better resolution of investment disputes. The next priority will be to strengthen the capacity of investment court judges to analyze complex investment cases. Efforts to improve Kazakhstan’s ease of doing business ranking has improved in recent years, the business but there is scope for additional progress. Kazakhstan rose by 16 positions in environment the World Bank’s 2017 Doing Business ranking, to 35 of 190 economies remain legislative- globally. Significant improvements were also made on individual indicators, centric. including dealing with construction permits (ranked 22 globally), registering property (18), protecting minority investors (3) and enforcing contracts (9). Progress in the remaining six indicators was marginal. Key constraints remain, including an unreliable transport infrastructure, energy shortages and weaknesses in the banking system. Preliminary findings of the sub- national Doing Business assessment indicate that there is a disconnect between the reference point of Almaty—that has the most business-friendly regulation—and the other regions covered in the assessment. Despite improvements in legislation, implementation problems persist. Progress on President Nazarbayev has ordered the government to accelerate the privatization is implementation of the privatization program in order to complete it before being undermined the end of 2018. The program seeks to privatize (either fully or partially) by low more than 780 state-controlled entities between 2016 and 2018 (Table 4). An transparency and estimated revenue from privatization ranges from $4 to $7 billion, the main poor source of which will be privatization of state-owned national implementation. holdings/companies. Those entities in the privatization list that are not sold (if auctioned at least three times) will be subject for liquidation. The president has been critical of the slow progress on privatizations and encouraged the government to improve the transparency and efficiency of the program. As part of these efforts, the president instructed the government to transform and reorganize three national holding companies, Samruk-Kazyna, Baiterek and KazAgro. Under the privatization plan, ten large companies owned by Samruk-Kazyna will be publicly listed via an initial public offering facility.5 To prepare SOEs for privatization, timetables and road maps for each entity must be developed and approved. As of end-April 2017, the government reviewed and approved road maps of 754 SOEs (out of 784 in the privatization list). 5 These include KazMunayGas oil and gas company, Kazakhstan Temir Zholy railway operator, Kazatomprom nuclear company, Kazpost national operator of postal network, AirAstana national air carrier, as well as 5 companies belonging to Samruk-Energy. |11 Table 4. Key Numbers of the Comprehensive Privatization Plan for 2016-20 (Number of entities, unless otherwise indicated) Privatization list, Liquidated, Sold, Revenue, # of entities # of entities # of entities KZT M Property of the central government 53 4 18 7,219 Property of regional authorities 367 83 94 4,837 Property of national holding companies 258 72 46 35,045 Property of national companies 106 20 40 3,660 Total 784 179 198 50,761 Source: Website of the Ministry of Finance: http://privatization.gosreestr.kz/ru. Note: Official data as of end-April, 2017. Skills development The government is pursuing several reforms to improve employment quality is a priority and prospects, boost productivity and enhance workforce skills training. These reforms require the participation of stakeholders including the government (i.e. the labor authorities), private sector representatives and educational institutions (both public and private). At an institutional level, a national qualifications system was established in 2015. This system is developing a national qualifications framework, occupational standards in priority sectors, educational programs based on occupational standards and an independent certification system. C. Economic Outlook and Risks Global economic prospects Global economic Global economic growth is projected to recover after slowing in 2016, but growth will remain only gradually, from 2.4 percent in the last year to 2.7 percent in 2017 and 2.9 subdued. percent in 2018. Global economic activity is suffering from low investment, slow productivity growth and heightened policy uncertainty. Emerging market and developing economies (EMDEs) will see a recovery that is largely driven by increases in commodity prices and continued firm domestic demand in commodity importers. Heightened levels of policy uncertainty in major advanced economies and some EMDEs—as well as weakening investment—represent the main downside risks to global growth. Nonetheless, fiscal stimulus and other growth-enhancing policies in key advanced economies may boost global growth rates above expectations. US economic policies and performance will have a considerable bearing on the overall outcome. The global trade Average GDP growth in Kazakhstan’s main trading partners is expected to and financial flows decelerate to 2.5 percent in 2017 from 2.6 percent in 2016, pulled down by are recovering, but slower growth prospects in the euro zone and China. Weak investment in downside risks China and policy uncertainties in the euro zone will act as drags on growth. remain. Furthermore, although global trade growth accelerated in the second half of 2016—driven in part by strong import demand from EMDEs—and this trend showed signs of continuing in early 2017, heightened trade policy uncertainty increases the weight of downside risks to the outlook. Nonetheless, financial conditions for EMDEs are improving. A rapid increase in U.S. bond yields and U.S. dollar appreciation in the wake the U.S. presidential elections led to a 12| sudden tightening of financing conditions for EMDEs in November 2016, but capital inflows have shown signs of recovery in early 2017. The oil price Average global oil prices are projected by the World Bank to rise by 29 recovery will percent year on year in 2017, to US$55 per barrel. The projected increase benefit commodity- reflects rising oil demand, falling oil stocks and a recent production exporters. agreement between OPEC and non-OPEC oil producers. Crude oil prices jumped 10 percent in the fourth quarter of 2016, following agreements by both OPEC and non-OPEC producers to reduce output in the first half of 2017. The market is expected to tighten in 2017, particularly in the second half of the year, which will help reduce the large stock overhang. Prices are projected to increase to US$60 per barrel in 2018 assuming a balanced market and no additional OPEC supply restraints. Kazakhstan’s baseline scenario, risks and challenges Kazakhstan will Kazakhstan’s economic activity is projected to pick up gradually over the benefit from the oil medium term, but the GDP growth rate will remain well below its 2014 level, price recovery and when the oil price shock hit the economy. Real GDP is projected to grow by higher oil output, about 3 percent annually in 2017-19, reducing the poverty rate to a level of as well as from about 17 percent by 2019 (Table 5). A projected increase in oil prices will banking sector drive growth, supported by increased oil production, as rising output at the reforms. Kashagan offshore oilfield more than offsets declining output from older oilfields. As oil prices are projected to be lower than the pre-crisis levels, the current account and fiscal deficits will persist. In the sort-term, the government’s fiscal position is expected to deteriorate due to the banking sector support package. If implemented properly, timely measures to strengthen banking supervision, resolve serious capital weaknesses in the largest banks in a transparent and accountable way, and work out distressed assets efficiently should help a recovery in lending, positively impacting economic growth. Table 5. Baseline Scenario: Selected Macro-Fiscal Indicators, 2016-19 (In percent, unless otherwise indicated) 2016 2017 2018 2019 Real GDP growth 1.0 2.4 2.6 2.9 Oil sector -2.0 3.3 2.0 1.9 Nonoil economy 1.7 2.3 2.8 3.3 Consumer price inflation, period average 14.6 7.4 4.5 4.4 Current account balance (percent of GDP) -6.1 -2.4 -1.4 -1.2 Overall fiscal deficit (percent of GDP) -5.3 -8.0 -3.3 -3.4 Nonoil fiscal deficit (percent of GDP) -10.2 -13.2 -9.2 -9.1 Government’s net financial assets (percent of GDP) 25.7 14.6 9.3 5.4 Poverty rate ($5 per day at PPP terms) 19.8 19.0 18.1 17.0 Source: World Bank staff calculations and estimates. Better economic A gradual improvement in economic performance will allow Kazakhstan’s performance government to resume its fiscal consolidation process while maintaining should help the existing social spending commitments and efforts to strengthen social safety authorities to nets for households in extreme poverty. The government should also to make |13 normalize further progress on the restructuring and privatization of SOEs in 2017 and macroeconomic 2018, which will be critical for reducing fiscal risks. An improving economy policy. will allow the central bank to focus on inflation targeting. Going forward, the flexible exchange rate regime will help the economy to better absorb external shocks. As the inflationary pass-through effect of the recent currency depreciation fades, real wages and consumer purchasing power are expected to improve. This may help accelerate a reduction in poverty, although at a much slower pace than in previous years. The medium-term Downside risks to Kazakhstan’s economic outlook include the potential growth outlook is weakening of the external environment, institutional capacity constraints and subject to the loss of reform momentum. The economy’s vulnerability to external shocks downside risks, remains the major source of risk to medium-term growth and poverty both external and reduction. The anticipated political transition, including the ongoing domestic. constitutional reform process intended to rebalance the distribution of power in the country, may slow the transition to a new development model aimed at promoting more sustainable and inclusive growth. The successful implementation of the institutional and structural reforms included in the 100 Steps program will be vital to strengthen public institutions and improve the quality of human capital. If successfully implemented, these reforms will likely contribute to improved living standards, poverty reduction and shared prosperity. To achieve its long- Kazakhstan’s desire for an economic transformation to more sustainable and term goals, inclusive growth will require that the authorities: (i) complete the Kazakhstan has to macroeconomic adjustment, including through reducing the nonoil fiscal set the foundations deficit and continuing to implement inflation targeting; (ii) address the legacy for a new growth of SOEs and financial sector issues; and (iii) look at sector-specific public model based on investments and policy changes that encourage a more dynamic, export- dynamic tradable oriented and productive private sector participation and FDI in agriculture, sectors. manufacturing, mining, and transport and logistics, among others. These investments into tradable sectors would enable the Kazakhstani industry to either directly respond to global and domestic market signals or indirectly enable producers to plug into global value chains. The government considers agriculture as one of key tradable sectors with a strong potential for growth, particularly with greater export-oriented private sector participation. D. Focus Section: Agriculture as a Potential Growth Driver The agriculture sector comprises an important piece of Kazakhstan’s push to diversify its economy and generate employment. President Nazarbayev named agriculture “a new driver of the economy” in his 2017 address to the nation, the Modernization 3.0. Indeed, Kazakhstan has tremendous potential to raise rural incomes, create jobs and contribute to economic diversification by improving the competitiveness of its agriculture sector and adding additional value to output through processing. There are also significant opportunities to increase labor productivity in agriculture—which remains below that of Russia and Belarus—and to employ unutilized land, which represents almost 15 percent of the arable land area and an undetermined area of Kazakhstan’s rangelands. Kazakhstan is geographically well located to serve growing traditional markets in the region as well as new markets in China, India and the Middle East. This, along with the scale of agricultural resources available, makes Kazakhstan a potentially attractive investment for domestic and foreign investors. 14| Agriculture is an Growth in Kazakhstan’s agriculture sector averaged 4.4 percent annually in important sector 2001-16. This is a robust growth rate that has outpaced overall economic for raising growth in recent years, despite falling below average GDP growth during employment and most of the period, and being uneven owing in part to climatic factors. The reducing poverty. share of agriculture in Kazakhstan’s GDP declined steadily until 2010, and has been remarkably stable since then at about 4.5 percent (Figure 9). The sector employs nearly one-fifth of the working-age population and, as such, is critical for addressing food security and poverty reduction. Kazakhstan has a total cultivated area of 23.48 million hectares (ha) and 181 million ha of rangeland, one of the largest areas in the world. About 55 percent of the 2.4 million ha irrigated during the Soviet period is currently in use. Although areas planted with agricultural crops dropped dramatically in the 1990s (by 20 million ha) following the withdrawal of low quality feed grain areas, the cropped area has increased by about 6 million ha since then. Figure 9. Share of agricultural in GDP declined steadily until 2010 2,500 10 2,000 8 KZT billion 1,500 6 Percent 1,000 4 500 2 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Ag. GDP (in current prices) Ag. GDP (constant prices of 2001) [a] Share of Ag. GDP in total GDP (percent) Source: World Bank staff calculations based on official data published by the authorities. Non-registered Kazakhstan has a diverse farm structure. Household plots, a non-registered subsistence activity subsistence form of agricultural production, are estimated to produce more dominates than half of total output and nearly three quarters of total milk and meat agriculture production. The livestock sector, which is dominated by household plots, production. represented 44 percent of agricultural output in 2015. In contrast, over half of grain production is concentrated in large agricultural enterprises of over 10,000 ha. The three largest holding companies in the northern wheat region control more than 700,000 ha each and the 15 top holding companies comprise 35 percent of the region’s sown wheat-growing area. Three poultry companies control 30 percent of supply to the domestic market. As a simplified version of agricultural enterprises, individual farms vary significantly in size. Although they could be as small as a single household, they represent a formal means of participating in agricultural production. The share of individual farms in agricultural production has increased over time and currently surpasses the share of agricultural enterprises (Figure 10). |15 Figure 10. The share of individual farms in agricultural production has increased over time Share of Output by Farm Type (2005) Share of Output by Farm Type (2016) Agricultural Agricultural 24% Enterprises 23% Enterprises Individual 48% Individual 54% farms farms 22% 29% Households Households Source: World Bank staff calculations based on official data published by the authorities. The government The government recognizes the enormous untapped potential of the sector. A heavily subsidizes recent increase in production has been supported by significant budget agriculture. allocations in the form of various subsidies and subsidized credits, which are not always most-efficient and well-targeted. Funds have also been channeled to the sector through the national holding, KazAgro, which was established in 2006 and uses charter capital for various subsidy and credit programs through its subsidiary organizations. Government support to the agriculture sector increased in 2006 and has remained at an elevated level (Figure 11). Indeed, total subsidies, credits and transfers to KazAgro represented more than 80 percent of the Ministry of Agriculture’s budget in 2016; water management and forestry related expenditures are excluded. Figure 11. Government support to agriculture has risen sharply since 2001 Subsidies 100 100% 90 90% 80 80% Kazagro 70 70% Charter KZT billion 60 60% Capital Increase 50 50% Credit 40 40% Programs 30 30% 20 20% Share of 10 10% Subsidies and Credits in 0 0% MOA budget 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Right Axis) Source: World Bank staff calculations based on official data published by the authorities. Subsidy programs An overarching strategy for budgetary support to the agriculture sector was focus mainly on laid out in the Agricultural Sector Development Program for Kazakhstan access to credit and 2013-2020: Agribusiness 2020, recently updated as the National Program for livestock Agro-Industrial Development 2017-2021. A review of the composition of development. spending suggests no fundamental change in the approach to supporting the sector, which continues to be dominated by subsidies. In recent years, there has been a re-composition in subsidy types and modalities, with large increases in livestock and investment subsidies as well as a capital increase for KazAgro, most likely for credit provision (Figure 12). 16| Figure 12. The government’s agriculture sector strategy continues to be dominated by subsidies Source: World Bank staff calculations based on official data published by the authorities. Despite support to Despite an increase in agricultural production and large injections of agriculture, the budgetary support, Kazakhstan became a net agro-food importer in the 2000s agro-food trade as the economy continued to grow and the real exchange rate appreciated. balance remains The overall volume of agro-food trade increased notably in the mid-2000s negative. with erratic increases in exports of wheat and flour and increases in imports of dairy, sugar and processed food products. With regards to markets, however, trade has diversified somewhat, through a decline in the share of exports to Russia and an increase in the share of exports to Afghanistan, Central Asia, Turkey, the Middle East and Egypt. The agro-food trade deficit peaked in 2011 but has slowly fallen since then as import spending has fallen owing to a depreciation of the tenge (Figure 13). Figure 13. The agro-food trade deficit has narrowed somewhat in recent years 5,500 4,500 3,500 US$ million 2,500 1,500 500 -500 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -1,500 -2,500 Export Import Trade Balance Source: UN COMTRADE Database. Agro-food industry Notwithstanding significant government support during the past decade, development is modest agricultural GDP growth in real terms suggests that agricultural necessary to make production alone is unlikely to significantly increase the sector’s share in the agriculture a new economy. To become a real growth driver, development of the agro-food growth driver. industry (or processing agriculture)—which currently represents only about half of total agricultural production—will need to pick up significantly.6 6Agro-food industry, including agro-logistics and processing, covers the range of activities between producer and (final) retailer and includes packing, processing, transport and distribution. In mature agriculture economies, it is the largest |17 While the government’s Agro-Industrial Development Program 2017-2021 recognizes the significance of the agro-food industry, it lacks sufficient detail on practical ways to support the industry’s development. Specific measures and policies could include special funds to leverage private investment in the industry and boost investors’ confidence such as standards of production facility as well as financial access, guarantee and insurance support schemes. The focus on Among the most risk-prone sectors in Central Asian economies, agricultural research, production has serious limitations as climatic conditions are unfavorable, the innovation and domestic market is small, and the country is landlocked. The legacy of a education in centrally planned economy left yields low across major agricultural agriculture should commodities (Figure 14); producers find it difficult to sustain the average help to increase yield levels, as about a third of the yield variance in agricultural production is productivity. driven by climate conditions, compared to only 5 percent of the variance in the EU. Faced with these obstacles, the primary means of raising agricultural output should be through productivity growth that is based on research, innovation, dissemination and the adoption of appropriate technologies. However, the fundamental gap in the support program is that research and development (R&D) and other science-related expenditures are not high on the agenda of policy makers and are not reflected in important policy and technical documents. Science-related government expenditures have been stagnant in recent years and the share of the Ministry of Agriculture’s budget committed to agricultural research and development is extremely small (Figure 15). This is partly due to efficiency concerns as a clear link has not been established between applied research and actual production. At the same time, an important source of R&D—the private sector—is currently not present in Kazakhstan in general (an in agriculture in particular); its future will depend on whether market-based structure and a supportive business environment makes it feasible for larger investors to come into the sector. Figure 14. Yields are low across major agricultural Figure 15. Spending on agriculture R&D represents a commodities fraction of the agriculture ministry’s budget 10 4.0% 6 8 3.0% KZT billion Tons/Ha 6 2.0% 4 3 1.0% 2 0 0 0.0% Wheat Soybean Rice 2010 2011 2012 2013 2014 2015 2016 Research and Development Spending Kazakhstan Brazil USA Share in the total MOA budget (Right Axis) Source: WB staff calculations based on data from FAO Stat Source: World Bank staff calculations based on official data database. published by the authorities Creating an The enabling environment for agro-business development in Kazakhstan, enabling including in relation to land regulation, the investment climate, rural infrastructure, and access to finance, is an area of concern. The government source of agricultural value-added, for example in the Netherlands—the second-largest agriculture exporter in the world— the agro-food industry is 2.5 times larger than the agriculture production industry. In France, the food industry is the largest industrial employer (with half a million employees) and the second largest exporter. 18| environment for recognizes that the inefficient use of land is an issue, but much of the land is agriculture is key. still under long-term leases and demand for private ownership remains low. Allowing the sub-leasing of land could be a useful approach to raise the potential for an efficient use of this resource, as the absence of an established land market is a serious constraint to productive agriculture and limits its ability to attract medium and long term financing. Furthermore, FDI in agriculture and the agro-food industry is only a small share of total FDI flowing into the country, hovering between 0.5-2 percent (Figure 16). Raising the attractiveness of the sector for investors should be a policy priority. Particular attention should be given to reducing investment-entry constraints (such as the provision of various licenses and permits) and investor- protection constraints (such as those relating to fair and equitable treatment of investor grievances). These constraints are exacerbated by a perceived lack of transparency in the application of regulations. Private-led capital investment in the agro-food industry has been stagnant during the past decade and remains significantly below capital investment in primary production, which is subsidized by government programs (Figure 17). Figure 16. FDI in agriculture represents a small Figure 17. Capital investment in agriculture has share of total FDI in Kazakhstan. stagnated over the past decade. 200,000 4.0% 350 3.5% 150,000 3.0% KZT million US$ million 250 2.5% 100,000 2.0% 150 1.5% 50,000 1.0% 50 0.5% 0 0.0% -50 2008 2009 2010 2011 2012 2013 2014 2015 -0.5% 20082009201020112012201320142015 Agriculture Production Agriculture Production Agro-Food Processing Agro-Food Industry Share of Agriculture and Agro-Food in total FDI Share of Agriculture and Agro-Food in total Capital (Right Axis) Investment (Right Axis) Source: World Bank staff calculations based on official data published by the authorities. Access to finance In a recently-published World Bank report, “Enabling the Business of also remains an Agriculture 2017,” Kazakhstan scored poorly in the areas of transport (55 out important agenda of 62) and finance (50 out of 62) for agro-business, underscoring the serious to address. constraints the sector is facing in both areas. Agricultural productivity depends heavily on public investment in rural roads, utilities and communications; productivity declines significantly where travel time to markets exceeds four hours. For farms serving export markets, improved rail and port facilities will be important; for farms serving domestic markets, better secondary roads will be needed. Such investments can take the form of public-private partnerships to encourage increased private investment in storage, distributional infrastructure and processing facilities. Furthermore, although subsidized credits from government resources are available, access to finance remains limited for most small and many medium- size farmers. The recently-announced government policy of gradually phasing out direct crediting of agricultural producers by state-owned |19 enterprises (subsidiaries of KazAgro) while increasing wholesale funding of second tier banks and other financial intermediaries is commendable, as it should allow producers to leverage private financial resources. However, experience from different regions demonstrates that the biggest increase in access to finance for farmers can be achieved through the development of commercial relationships between small farmers and the food industry as these can provide significant finance to small farmers through structural financing. 20| Annex Table 1. Selected Macroeconomic and Social Indicators, 2013-19 2013 2014 2015 2016 2017 2018 2019 Projections (Percent, unless otherwise indicated) National Income and Prices Nominal GDP (billion tenge) 35,999 39,676 40,884 45,732 50,053 53,343 56,914 Nominal GDP per capita (US$) 13,891 12,807 10,510 7,511 8,948 9,723 10,241 Real GDP growth 6.0 4.2 1.2 1.0 2.4 2.6 2.9 Private consumption growth 10.7 1.4 1.8 -0.5 1.0 1.5 2.0 Gross investment (percent of GDP) 24.6 25.8 27.9 28.4 27.5 27.2 27.3 Consumer price inflation, year-end 4.8 7.4 13.6 8.5 6.2 4.3 4.5 Consumer price inflation, average 5.8 6.7 6.6 14.6 7.4 4.5 4.4 GDP deflator 9.5 5.8 1.8 10.8 6.8 3.9 3.6 Real exchange rate change (KZT/US$) 2.2 -10.8 -13.9 -26.7 17.3 6.4 2.9 (Current US$ billions, unless otherwise indicated) External Accounts Merchandise exports, of which: 85.6 80.3 46.5 37.2 45.7 49.4 51.2 Oil and gas exports 57.2 53.6 26.8 19.4 26.1 29.0 30.4 Merchandise imports 50.8 44.1 33.8 27.8 31.9 33.0 34.2 Current account balance 1.2 6.0 -5.5 -8.2 -4.0 -2.5 -2.3 as percent of GDP 0.5 2.7 -3.0 -6.1 -2.4 -1.4 -1.2 Foreign direct investment, net 8.0 4.8 3.4 14.3 4.1 4.2 4.2 Total official international reserves 95.5 102.5 91.3 90.7 81.2 79.2 79.4 External debt, total 150.0 157.4 153.5 171.6 177.2 181.6 184.6 excluding intra-company loans 75.9 78.0 71.6 76.5 78.4 80.2 81.6 as percent of GDP 32.1 35.2 38.8 57.2 48.6 45.1 43.0 (Percent of GDP, unless otherwise indicated) Consolidated Fiscal Accounts Revenues 24.1 21.9 15.7 17.4 17.4 17.9 17.8 Expenditures 20.4 21.9 23.5 22.7 25.3 21.3 21.2 Overall balance 3.7 0.0 -7.8 -5.3 -8.0 -3.3 -3.4 Nonoil balance -8.3 -10.4 -12.5 -10.2 -13.2 -9.2 -9.1 Net financial assets, stock 17.4 18.6 12.5 25.7 14.6 9.3 5.4 (Percent, unless otherwise indicated) Monetary Accounts Base money growth 10.2 10.5 34.3 15.7 -1.2 3.9 5.4 Real growth of credit to the economy 2.9 -3.3 -13.2 -7.8 -2.2 -0.6 1.4 Policy rate, overnight repo .. .. 12-16 12-17 9-12 .. .. Social Indicators Population, total (millions) 17.0 17.3 17.5 17.8 18.0 18.3 18.5 Population growth (percent) 1.5 1.5 1.5 1.4 1.4 1.4 1.3 Unemployment rate (percent) 5.2 5.0 5.0 5.0 .. .. .. Poverty rate, national (percent) 2.9 2.8 2.7 2.6 .. .. .. Poverty rate, US$5/day PPP (percent) 15.2 16.1 19.5 19.8 19.0 18.1 17.0 Inequality – Gini coefficient 27.6 27.8 27.8 27.8 .. .. .. Life expectancy (years) 70.5 71.6 72.0 .. .. .. .. Sources: World Bank staff calculations and estimates based on official data published and provided by the authorities. |21