ASTANA – The primary factor driving GDP growth in 2024 in Kazakhstan is expected to be domestic demand, supported by government spending on the construction of educational facilities, infrastructure projects, and the modernization of housing and communal services, said the National Bank of Kazakhstan in a written response to The Astana Times.
The building of the National Bank in Astana. Photo credit: National Bank of Kazakhstan press service
“Investment projects in the oil sector and other sectors of the real economy are expected to continue,” said the National Bank.
However, forecast uncertainties linger, particularly concerning oil production in 2024-2025, casting a shadow over the otherwise positive economic outlook.
In September 2023, Chevron, operating Kazakhstan’s giant Tengizchevroil field, announced a delay in its Tengiz Future Growth Project, which some international financial institutions, including the International Monetary Fund, said might be a reason for downward economic projections.
This was also the reason driving the downward revision by the National Bank to 3.2-4.2% in 2024.
“Economic growth was expected in the range of 4.2-5.2% in 2023. The GDP growth statistics for the previous year have not yet been published, but preliminary estimates, the so-called short-term economic indicator, demonstrate a GDP growth of 5.1% for the past year, which is generally within our forecast,” said the National Bank.
2023 saw a positive dynamic of economic activity, propelled by robust growth across key sectors.
“Against the background of increased production of crude oil and gas condensate, there is a growth in production volumes in the mining industry,” said the bank.
The government meeting on Feb. 5 reported that economic growth reached 5.1% in 2023. The data also indicates construction grew by 13.3%, trade by 11.3%, information and communication services by 7.1%, transportation services by 6.9%, and the industrial sector by 4.3%.
Inflation rate
Inflation stands at 9.5% as of January, down from 20.7% in January last year. The medium-term target that the central regulator set is near 5%.
“As part of inflation targeting with a freely floating exchange rate, the National Bank of Kazakhstan employs the key instrument of monetary policy – the base rate – aiming for a gradual reduction and stabilization of inflation. Rate decisions will be made based on the analysis of macroeconomic data and forecasts,” said the National Bank.
Under the latest decision adopted on Jan. 19, the base rate was reduced to 15.25%.
“Work will continue to improve the manageability of economic agents’ expectations through a proactive communication strategy, which will allow the market to better understand the future direction of monetary policy. As a result, a predictable environment for businesses and the public will be provided,” said the country’s central bank.
It also highlighted close cooperation with the government and other state entities is crucial. Inflation reduction is not solely the responsibility of the central bank; fiscal policies and overall economic strategies play a vital role.
Despite the reduction in the inflation rate, the National Bank is cautious of remaining risks. These include increased fiscal stimulus, non-anchoring of inflation expectations, a possible increase in food prices due to the effect of a low harvest in 2023, as well as the direct effect of an increase in tariffs for housing and communal services.
“To ensure a further reduction in inflation, the National Bank will continue to take measures in the field of monetary policy. Our decisions will be consistent, transparent, and in line with the evolving macroeconomic situation,” said the regulator.
Banking system
Second-tier banks in Kazakhstan fell under President Kassym-Jomart Tokayev’s criticism for their poor lending dynamics to the real sector. Specifically, he noted that “amid the decline in lending to the real sector, the focus of banks’ activities shifted to consumer loans.”
This, in turn, “led to an increase in risks for the financial system and to excessive borrowing by citizens,” said Tokayev in his address to the nation in September 2023.
According to the National Bank, up to 2020, the portfolio of loans issued to businesses showed multidirectional dynamics.
“The deceleration of business activity in Kazakhstan was influenced by the deterioration of the external economic environment and imposition of quarantine restrictions. At the same time, as quarantine measures weakened and economic activity recovered, the dynamics of the loan portfolio began to show growth in 2021,” it said.
As of December 2023, 46.7% of the total loan volume was loaned to businesses. The remaining 53.3% were consumer loans.
“The growth of business loans in annual terms accelerated from 8.3% year-on-year in February to 13.7% year-on-year in November 2023. The primary contribution to the growth of business loans came from loans to small business entities, which increased by 23.8% year-on-year. In November 2023, loans to medium-sized business entities increased by 3.6% year-on-year, while loans to large businesses grew by 4.6% year-on-year,” said the National Bank.
The fate of base rate
The base rate is a linchpin in Kazakhstan’s monetary policy framework, influencing inflation, interest rates, exchange rates, and overall economic stability.
According to the National Bank, decisions on the base rate are made on the basis of a comprehensive analysis of macroeconomic parameters.
“This mainly pertains to the alignment of actual inflation with forecasts, the dynamics of inflation expectations, and the balance of risks in both the external sector and the domestic economy,” said the National Bank.
The bank’s Monetary Policy Committee (MPC) is in charge of determining the level of the base rate, and this process takes place eight times a year.
“Since the second half of 2023, in the context of declining inflationary processes, we have begun a gradual reduction of the base rate. Following the results of the last three decisions in 2023 – Aug. 25, Oct. 6 and Nov. 24, the base rate was reduced by a total of 100 basis points from 16.75% to 15.75%. In 2024, as part of the January decision of the MPC, the rate reduction was continued by 50 basis points, from 15.75% to 15.25%,” said the National Bank.
As inflation continues to decelerate, the National Bank will assess the possibility of a gradual decrease in the base rate. This evaluation will consider the need to maintain moderately tight monetary conditions in the medium term to return inflation to the 5% target and anchor inflation expectations.
