Context: Over the past two decades, Kazakhstan has successfully harnessed its oil resources to bolster economic growth, increase buffers, and reduce poverty. However, in the face of recent large and likely long-lasting external shocks?lower oil prices, Russia slowdown, and corollary exchange rate (ER) movements (ruble depreciation, dollar appreciation)—growth has decelerated rapidly, financial conditions have tightened, and pressures on the balance of payments and exchange rate have built up. The shocks have also increased financial sector vulnerabilities, where nonperforming loans (NPLs), while declining significantly, remain high, and rising balance sheet risks and tight exchange rate management, have put further drag on banks’ lending and economic activity. Nevertheless, more recently, and in response to reduced currency pressures and reduced spreads, the authorities successfully tapped the international capital markets and widened the ER band. Focus of consultation and key recommendations: The consultation focused on calibrating the policy response to address Kazakhstan’s near-term challenges and long-term goals of becoming a dynamic emerging market economy. Principally, there is need to (i) identify credible medium-term fiscal consolidation measures to ensure sustainability; (ii) introduce greater exchange rate flexibility to help the economy absorb current and future external shocks; (iii) bolster financial sector resilience to limit adverse spillovers back to the real sector; and (iv) implement structural reforms to ensure durable growth and shared prosperity. Previous consultation: During the 2014 Article IV Consultation, Directors stressed the importance of restoring confidence in the post-devaluation environment and further strengthening the policy frameworks to bolster the economy’s resilience to shocks. Specifically, Directors (i) urged appropriate supervisory actions to enforce the NPL ceilings effectively, while ensuring adequate provisions; (ii) highlighted the need to speed up the introduction of a new policy interest rate instrument; (iii) stressed the need to enhance fiscal coverage and integration into a consistent macro-fiscal framework; and (iv) noted the priority of strengthening human capital and institutions, and lowering the role of the state in the economy. Since then, the authorities’ resolute efforts on lowering NPLs have begun to pay off, and important early steps have been taken to enhance monetary policy operations, ...
