The FINANCIAL — Kazakhstan urgently needs to adopt a fiscal consolidation strategy and refocus its macro-fiscal policy to promote more diversified growth and high-quality job creation, says the World Bank in its Kazakhstan Public Finance Review.
The Review aims to help the authorities identify key areas for improvement of Kazakhstan’s fiscal policy framework to ensure fiscal sustainability in the medium-term and support economic transformation in the long-run.
“Fiscal consolidation efforts to be undertaken over the medium-term would provide an opportunity to review the Kazakhstan’s fiscal policy framework and the work of institutions with the goal of strengthening their coherence, credibility, and flexibility,” says Ato Brown, World Bank Country Manager for Kazakhstan. “Successful fiscal consolidation would require two things: reducing inefficient expenditure that distorts private sector incentives which will allow redirecting savings toward productivity-enhancing spending; and eliminating inefficient tax benefits that result in an uneven playing field for investment.”
Kazakhstan benefited greatly from the oil boom of 2000–14, which led to income growth and poverty reduction and helped build a fiscal cushion to stabilize the economy during downturns. As oil output more than doubled during the oil price super-cycle, the Government of Kazakhstan accumulated substantial fiscal savings in its oil fund, the National Fund of the Republic of Kazakhstan (NFRK). These savings were used for anti-crisis programs in 2007–10 and 2014-17. As a result, the NFRK balance has fallen from a peak of US$73 billion in 2014 to a projected level of US$53 billion by the end of 2017.
The oil-price shock in 2014 highlighted a structural shift to a “new normal” that requires more structural rather than countercyclical fiscal measures. Unlike a temporary crisis that can be managed by a countercyclical response to restore the macroeconomic stability, this structural shift—to a new, low oil-price environment—may persist for many years.
To adjust to the new normal, the authorities moved to a floating exchange rate regime in the second half of 2015 to stop the drawdown of foreign exchange reserves. However, an accompanying fiscal adjustment has not materialized yet. Some policy makers may still believe that the shock is cyclical and maintain hope that oil prices will recover.
The countercyclical fiscal stance adopted in 2014 led to an increase in the non-oil fiscal deficit, which is too high to ensure medium-term fiscal sustainability and threatens the long-term growth potential of the non-oil tradable economy.
The key challenge for economic policy now is to enhance the fiscal policy framework, improve efficiency and effectiveness of public spending, mobilize non-oil revenue, and strengthen fiscal policy institutions.