NUR-SULTAN – World Bank Vice President for Europe and Central Asia Anna Bjerde paid a working visit to Kazakhstan to discuss the investment policy issues to achieve carbon neutrality with the government.
According to the Kazakh Prime Minister’s Office, more than 55 projects worth $8 billion have been implemented in finance, infrastructure, housing and communal services, energy, small and medium-sized businesses, agribusiness and IT sector over the three decades of Kazakhstan’s cooperation with the World Bank. The current investment portfolio of the World Bank in Kazakhstan consists of 13 projects worth $3.6 billion.
The Astana Times spoke with World Bank Vice President Bjerde to learn more about the bank’s priorities in Kazakhstan in the medium term and how the bank will support the country on its green agenda.
How does the World Bank assess the economic situation in Kazakhstan today, including in the context of the pandemic? What problems remain urgent and cannot be resolved in the coming years?
The COVID-19 pandemic has hit every country hard, and Kazakhstan is no exception. In fact, the pandemic has caused the worst economic contraction in Kazakhstan in 25 years, and it is still impacting the pace of recovery.
Earlier this fall, the World Bank updated its economic projections, and the update shows that Kazakhstan’s economy recovered faster than we had forecast in the spring. We now predict Kazakhstan’s GDP to expand by 3.5 percent in 2021 and by 3.7 percent in 2022.
Moving forward, what matters are timely policies that can boost growth and ensure a sustainable, green, and inclusive growth trajectory.
First, Kazakhstan needs to continue to focus on expanding the covid vaccination rate. The current rate of 40 percent is a good basis for reaching higher levels. We know from other countries that around this rate of vaccination, many countries run into hesitancy among the population, and increases in the vaccination rate become more difficult. The way we see it, widespread vaccination is critical to sustained economic activity and is a necessary step for businesses and schools to remain open.
We know from past pandemics that their effects linger for decades. Before COVID-19, Kazakhstan was on a path to substantially improve health and education. Here, I am referring to the country’s human capital. Before the pandemic, a child born in Kazakhstan could expect to be only 63 percent as productive as they could be if they enjoyed access to complete education and full health. That means that more than one third of the people’s potential was not realized. There is no doubt that the pandemic will make the goal of improving education and health care even more difficult, and we are worried that children are suffering learning losses and that health outcomes will be impacted by the need for the healthcare system to focus so much on treating COVID-19 patients. We advise governments to protect education and health care budgets and invest more, focus on teachers and their skills – this includes being prepared to teach using technology and pay attention to those students who are likely to fall behind or are already doing so.
Another important area for Kazakhstan to focus on is transitioning to a greener economy. In a country like Kazakhstan that relies on fossil fuels, a green transition is complex and challenging. However, the announced 2060 target date for carbon neutrality and increased use of renewable energy are instrumental in this effort, and what is needed now are clear actions, sequence and time plans for the transition. We urge that people be at the center of these efforts, especially when it comes to phasing out coal. This is what we call a “just transition” whereby all of society participates, including government, the private sector, local communities, academia, and civil society and careful attention is paid to new sources of growth and jobs for people affected. The green transition offers new opportunities including jobs and services which will contribute to economic recovery.
How effectively do you think the budgetary expenditures of Kazakhstan and the National Fund are being managed today? Currently, the law sets the minimum level of the National Fund at 30 percent of GDP. In your opinion, should it be reduced or, on the contrary, increased? And why?
According to our assessments, Kazakhstan has done a good job in managing its budget and macroeconomic stability. Public debt is relatively low and there are ample fiscal and foreign reserve buffers to cushion the negative impact of a potential crisis.
However, there is always room to improve the effectiveness of public spending. One area of possible improvement is around equitable growth, which is based on strong human capital and an inclusive society. Another issue is avoiding inefficiencies, for example, by not creating the wrong incentives for inefficient firms and state-owned enterprises (SOEs). The bottom line here is that Kazakhstan needs to let unproductive firms exit and pave the way for more productive ones. This will also help a vibrant and stable financial sector to develop, including enhanced access to finance by firms and management of levels of non-performing loans.
As for the National Fund’s minimum level, I think the focus of the conversation should be on a consensus about how best to use the Fund to support Kazakhstan’s development. This is important considering the challenges that Kazakhstan is facing from the COVID-19 pandemic, global decarbonization, and the energy transition.
Kazakhstan has set the target of reducing the state share in the economy to as low as 14 percent by 2026. How effective is the country in pursuing this target?
Reducing the role of the state in the economy is vital for creating a level playing field for private sector investment and innovation. In Kazakhstan, the level of state control over key sectors is higher than the OECD average. This can hamper effective regulation by protecting unproductive state-owned enterprises (SOEs).
The decision to create an independent Agency for the Development of Competition is an important milestone that can ensure that the government has a “competitive-neutral” policy that does not favor SOEs or any particular entities.
The government should ensure that it is only active in sectors where it is absolutely needed. This means defining, rationalizing, and optimizing its role to set proper expectations and limits, and exiting sectors where private companies are active and better suited to invest and provide services. By providing an ownership rationale and policy that is uniform to all SOEs, the government can ensure that the SOEs have effective remits, standards, and governance practices.
There are several hurdles to such reforms. Vested interests make reforms difficult, while high barriers for entry and price distortions make it harder for private firms to enter sectors dominated by SOEs. By facilitating private innovation and investment, while removing distortive support programs, including subsidies, the government can facilitate this important transition.
In your opinion, has the investment climate improved in Kazakhstan in recent years, in terms of both infrastructure development and overcoming administrative and legislative barriers?
The investment climate has certainly improved. Kazakhstan eased foreign direct investment (FDI) regulations and moved closer to aligning standards with the OECD countries. For example, the administrative burdens faced by businesses were reduced, and Kazakhstan enhanced the system of protection for foreign investors.
However, the country has had limited success in attracting foreign direct investment outside the oil and gas sector, which provides few spillover benefits to the rest of the economy and is vulnerable to commodity price swings.
We would advise that Kazakhstan prepare a comprehensive strategy that will improve the business environment for all types of investment and raise productivity. FDI would be a component of such a strategy. The World Bank is ready to help with this, as we do in many countries.
The issue of energy efficiency and low-carbon development is increasingly on the global agenda. How does the World Bank support Kazakhstan on its path to decarbonization and carbon neutrality?
Kazakhstan has acknowledged that a growth model that disregards the environment and climate implications is no longer viable. We were pleased to hear that Kazakhstan joined a number of important climate commitments at the 26th UN Climate Change Conference of the Parties in Glasgow, UK.
For Kazakhstan, the key challenge is to combine decarbonization with growth. In other words, Kazakhstan needs to pursue an inclusive, market-based economic growth model that is based on efficient and sustainable use of natural resources. If implemented well, it can unlock opportunities for greater innovation and investment and by so doing create jobs for the future
Tackling climate change is a top priority for the World Bank Group. Through our recently adopted Climate Change Action Plan, we are working with coal-producing countries of all sizes to help national, regional, and local governments develop clear roadmaps to phase out coal, protect workers, their families and communities, and the environment, while also supporting investments in energy efficiency, low-carbon and renewable energy. We are proud to note that we, the World Bank Group, are the largest multilateral funder of climate action.
Since 2014, we have provided technical advice to the government of Kazakhstan on reducing emissions and meeting its targets. We are ready to help the government to green the economy through technical advice and investments across sectors. This includes alternative energy resources, energy efficiency, building resilience in the forestry sector, in water and irrigation management, and in livestock development.
What new projects does the World Bank intend to implement in Kazakhstan in the medium term?
The partnership between Kazakhstan and the World Bank spans three decades. During this time, we have witnessed strong policy strides, and the country has implemented a rules-driven fiscal framework. Our country partnership strategy which runs through 2025 is aligned with both the government’s reform program and its 2050 development strategy. We implement projects aligned with our country partnership strategy and focus on three priority areas: inclusive growth, human capital development, and sustainable low-carbon growth. These themes are underpinned by important cross-cutting enabling priorities such as good governance, markets, and institutions.
There are, however, vital areas for reform, and much of the work over the medium term will focus on one of the country’s biggest priorities – green growth. For a country with the ninth-largest oil reserves in the world, and an economy dominated by fossil fuels, it is vital that we support actions that help the economy move away from commodities. This will also ensure more resilience in times of commodity price shocks.
We are collaborating in several important areas. We are completing the preparation of a budget support operation to the Ministry of Finance whereby the World Bank provides funding against a number of reforms that will enable more inclusive and sustainable growth driven by a more vibrant private sector and a more accountable and transparent public sector.
We also look forward to the ratification by the Parliament of Kazakhstan of the Sustainable Livestock program that has already been approved by the World Bank Board. This program will help Kazakhstan realize its agricultural potential through environmentally sustainable, inclusive, and competitive beef production in the country.
Given the complexity of a green transition, we approach environmental and climate issues from various angles. Thus, describing our support in this area would need a series of interviews. To be brief, let me name just a few upcoming initiatives. We are planning a five-year Resilient Landscape Program to help restore land and forest ecosystems. This work will revive agricultural land and benefit rural communities.
We are launching a Country Climate and Development Report to aid the government in developing a roadmap and formulating policy to improve resilience and achieve emission reduction targets and implement its low emission strategy.
On the education front, we have identified inequitable access to quality education as a critical risk to human capital development in Kazakhstan. And on top of that, COVID-19 threatens to erode a decade of human capital gains. In this context, we welcome the National Education Project and its focus on equity and accessibility of quality education for the people of Kazakhstan. We intend to increase our support to the Project along the following key priorities: focus on equity, accelerating learning post-COVID-19, enhancing the system’s capacity to implement the Project, promoting efficient use of finance, and rigorous monitoring and evaluation to continuously improve approaches to education and learning.
Other areas where we are engaging with the Government include digital development for better service delivery and regulation, transport and connectivity, energy efficiency, and the North Aral Sea development.
Will the World Bank’s priorities for supporting projects in the Central Asia region change? Will the focus shift?
Central Asia will remain an important region and partner to the World Bank for years to come. We are proud to be celebrating 30 years of partnership with all of the countries in the region.
We are committed to supporting Central Asian countries on their path to a strong recovery, sustainable and equitable growth, and poverty reduction. In the short term, this means using our knowledge services and financing to boost health, education, and social assistance, including unemployment support to address the impacts of COVID-19. In the medium term, we will stay the course to help Central Asian countries protect human capital, support private sector development and entrepreneurship – with a special focus on women and youth – and help ignite a green and inclusive recovery.
Our priorities are not shifting; instead, they are intensifying. The pandemic has underscored the importance of cooperation, so our regional program will only get stronger. We want to help the countries in this region to connect better to each other and to neighboring markets, to trade more, to build on each other’s strengths, and to exchange knowledge and experiences.