Asian Development Bank Country Director for Kazakhstan Giovanni Capannelli: Covid-19 could cause Kazakhstan’s economy to contract 1.5%-2% in 2020

Question: In your opinion, what is the difference of the current crisis from the crises in 2008 and 2015?

Answer: The crisis we are facing, in Kazakhstan and globally, is of a different nature from previous economic and social crises we experienced in recent times. While the 2008-2009 global financial crisis originated from subprime real estates and toxic assets in banks’ portfolios and the 2014-2015 crisis was induced by the lowering of commodity prices and economic slowdown in major trading partners, the ongoing Covid-19 pandemic is of a more fundamental nature as it affects human capital through the health sector, with negative implications both on the demand and supply sides of the economy, creating unprecedented social and economic challenges.

Being Kazakhstan such an oil and gas dependent economy, the health crisis is aggravated by the drop in oil prices experienced since March, creating a compounded negative effect which is being felt particularly by the most vulnerable part of the population and those small and medium-sized enterprises (SMEs) operating in the service sector. The aggregate demand has been shrinking as people were locked down in their homes and a large share of the labor force was laid off from work. Moreover, quarantine measures caused disruptions to supply chains, limiting production activities and substantially reducing the supply side of the economy. According to recent Asian Development Bank (ADB) estimates, as a result of the novel Covid-19 pandemic, the global economy could experience losses in an amount between $5.8 trillion and $8.8 trillion—equivalent to 6.4% to 9.7% of the global gross domestic product (GDP).

In such a situation, local authorities need to introduce bold measures to weather the crisis. They also need to be ready to make continuous adjustments to fine tune policy interventions as they assess the impact of the crisis on their economic and social systems. In case of Kazakhstan, the government, the Central Bank and other authorities have overall done a very good job in this regard with a total anti-crisis support program estimated at more than 9% of GDP. Communication, however, could have been more effective in some cases, both in terms of explaining the nature of the pandemic to the population and in stressing the need to maintain social distancing rules even after the lifting of the state of emergency and of quarantine measures in different locations.

Q.: Earlier, ADB has lowered its forecast for Kazakhstan’s GDP growth to 1.8% in 2020 due to the economic impact of Covid-19 and reduced oil production. What are the ADB forecasts for the economic growth of the country and the region now (taking into account the fact that the emergency regime has dragged on for 2 months and it is still not clear when the quarantine in the country will end?

A.: The referenced forecast was published in early April in the ADB’s Asian Development Outlook. Figures were produced as an outcome of an economic analysis performed in early March, when the ongoing crisis was still in its very early stages. At the time, President Tokayev did not yet introduce the state of emergency and strict social distancing and quarantine measures were not yet imposed across the country. Since then, we have been lowering our economic forecasts for Kazakhstan’s GDP as we are closely monitoring the situation.

Our new forecast will be published on 18 June 2020. I expect the new GDP figures to be in a negative territory, between -1.5% and -2.0% for the year 2020. Such forecast still reveals a relatively more optimistic view on Kazakhstan’s ability of to manage the crisis compared to that of other agencies.

We used an internal dataset created for the Global Trade Analysis Project (GTAP) and adopted a model where we simulated the Covid-19 overall impact on the Asian economy, including of course also Central Asian countries and Kazakhstan. We created two scenarios, one where the containment measures introduced to face the Covid-19 pandemic are relatively long and corresponding to a six-month period; and a second scenario where such measures are maintained for a shorter period of three months. The results of our analysis suggest that in the case of six-month containment measures, the impact of the crisis on Kazakhstan’s economy will be considerably large, resulting in negative growth close to 3% of GDP. However, in the case of three-month containment period, the decline in GDP will be more contained at close to -1.6%.

Although it remains quite difficult to produce accurate economic forecast due to the complex nature of the crisis and its uncertain development, our relative optimism on economic growth is predicated on the authorities’ capacity to maintain containment measures within a relatively short period of time. At the same time, we are also quite confident that the various policies introduced by the government and the National Bank of Kazakhstan will be able to stimulate the restart of economic activities sooner than later.

In terms of shaping of the curve depicting economic growth in 2020 and 2021, we are projecting that Kazakhstan will follow a U-shaped recovery, implying a gradual rebound next year. However, for the country to be able to recover in a sustainable manner, the authorities need to introduce a number of focused economic policies together with a broad package of structural reforms. Investment is needed in the health sector, in advancing digitalization, and in expediting the shift to the green economy.

Q.: In your opinion, what are the potential risks for the economy of Kazakhstan and the region in the near future? What are the scenarios for the development of the economy of Kazakhstan and the region according to your assumptions?

A.: As discussed above, one of the key risks related to the Covid-19 pandemic, in Kazakhstan and other countries as well, is the procrastination of lockdown measures with the related implications in terms of demand and supply side. Our recent report: Updated Assessment of the Potential Economic Impact of Covid-19 finds that economic losses in Central Asia could range from $21 billion under a short containment scenario of three months to $34 billion under a long containment scenario of six months.

At the same time, developments in the health sector, such as the availability of a vaccine against the coronavirus will be a major factor prompting economic recovery.

The restarting of international flights is also an important factor for the stimulation of the regional economy, with its direct implications on tourism as well as on the capacity for workers to enter Kazakhstan. The country is still building its technical expertise in a number of production activities and sectors. Effective technology transfer will be difficult in the absence of foreign experts who will be able to operate in Kazakhstan.

Q.: How do you assess government measures aimed at supporting and restoring the economy? In particular, how do you rate the support measures for SMEs?

A.: The government of Kazakhstan was able to promptly develop an articulated anti-crisis plan and acted firmly upon it. Support was offered to people losing jobs and incomes by provision of social payments. Small and medium-sized enterprises (SMEs) play an important role in the economy of Kazakhstan. In 2019, they generated nearly 30% of the country’s GDP, employing more than 3.3 million people. To promote the development of SMEs, the government has been introducing over the years a wide range of programs, providing financial support and technical assistance in a number of areas including financial access, marketing, technology, and business development. Based on our recent research focused on SMEs in the Kostanay region, such programs show mixed results in terms of their effectiveness. In many cases they fail to reach out a large number of SMEs as they tend to be used by a relatively small number of potential beneficiaries.

As SMEs in Kazakhstan are predominantly operating in the service sector, including in the trade and the hospitality industry, they have been disproportionately affected by the state of emergency and the quarantine measures imposing social distancing and limiting the movement of people. Apart from a variety of policies that apply to business activities in general, including the deferral, reduction and cancellation of tax and other types of payments, the government introduced a KZT1 trillion program to provide soft loans at 6% interest rate specifically targeted for SMEs, channeled through commercial banks.

Eventually, as these credit lines are used by beneficiaries, SMEs will be provided with a relatively large amount of liquidity to help financing their business operations. As of today, it is too early to assess whether this program is working or not. As usual, the devil is in the details. Assuming banks will be able to disburse the money quickly without compromising the quality of loans, the effectiveness of this scheme will depend on its implementation mechanisms and the selection of target areas. In general, however, I am optimistic that this scheme will have a very positive impact on local SMEs.

Q.: In the current situation, the government has significantly increased funding from the National Fund. Do you think this is justified? What measures can be taken to preserve the Fund?

A.: The most recent figures from the National Bank of Kazakhstan suggest that, as of end-March, the estimated value of the National Fund assets corresponds to about $58.5 billion. At the end of 2019, such figure was close to $62 billion. Based on the plan included in the revised government budget recently approved by President Tokayev, this year the National Fund is expected to transfer about $11 billion to finance the government budget, which is approximately 19% of the current estimated value of the fund. Moving forward, the issue is how will the National Fund evolve and preserve its value so that it can fulfill its intergenerational mandate.

Given the exceptional circumstances of the economic shocks affecting Kazakhstan, transferring such a large amount of money from the National Fund to support state support programs is the right thing to do, the alternative being to cut the amount of the economic rescue package or sourcing from external borrowing. At the same time, however, the authorities have to make sure that the National Fund will not deplete its resource in the coming decade or so. The rule of thumb of the International Monetary Fund (IMF) is that, in the case of Kazakhstan, the total value of the Fund should not go lower than 30% of the GDP. Obviously, an economic scenario with low oil prices and negative global capital market outlook will not help.

Despite the uncertain macroeconomic situation Kazakhstan is facing in the aftermath of the global pandemic, I believe the National Fund can remain of a considerable size and it should be used to support future generations. It goes without saying that this requires to continue properly managing the fund and to strictly respect fiscal rules in normal times, when transfers to the government budget need to remain limited within strict parameters and sound principles. Considering that the estimated value of the fund was 34.5% at the end of 2019, I believe that by following such rules, the Fund will be able to remain above 30% of the country’s GDP, as projected by the IMF. Let me repeat, however, that it is very important that the Fund’s resources are used wisely and will not be used to finance the government’s structural deficit.

Q.: In your opinion, what other measures can be taken to restore the economy?

A.: Apart from further strengthening health systems, digitalization, and inducing a decisive shift toward low-carbon economic growth, it is important to continue improving social benefits and the revenue side of the government budget by reducing the shadow economy and increasing tax payments. The government should also accelerate the creation of an ecosystem to nurture startups and innovation through venture capital. At the same time, authorities should assist those who have been laid off from work with training and retraining programs to develop the necessary skills in the new economic sectors which are expected to expand in a post-Covid-19 environment, such as agriculture, IT, and e-commerce.

Economic diversification becomes an urgent priority to reduce overreliance on mining sector. In 2018, ADB published a book entitled Kazakhstan: Accelerating Economic Diversification which identified underutilized opportunities in agriculture, among other sectors. In 2019, agriculture generated only 4.5% of GDP, while employing 13.5% of the labor force, according to official statistics. At present the level of productivity in agriculture remains structurally low, with average monthly income at only 63.3% of the average nominal income in the country. Structural reforms are needed in the agriculture sector to increase productivity, including the introduction of new equipment and practices, modern technologies, and various types of services, from veterinary, traceability and extension services.

Q.: It is known that ADB planned sovereign financing for 2020 in Kazakhstan in the amount of about $640 million in sectors such as agriculture, transport, water supply and sanitation, as well as finance. Please tell us how the implementation of projects is proceeding? Has ADB reviewed or intends to review its projects in Kazakhstan and the region due to the economic crisis?

A.: Yes, we are currently preparing the projects in these sectors and we are planning to present them for approval by ADB’s Board of Directors later this year. Due to the Covid-19 outbreak, we are also preparing a large budget support facility for Kazakhstan and we are considering additional technical assistance to help the country with the creation of a Solidarity Fund for the most vulnerable parts of the population.

Q.: ADB mainly invests in projects for the development of transport infrastructure, construction and reconstruction of roads. Does ADB plan such projects in 2020 in Kazakhstan?

A.: Yes, investing in the transport sector remains one of ADB’s priorities in Kazakhstan. This year we plan to sign a loan agreement for the reconstruction and expansion of a road between Aktobe and Kandyagash. The project is expected to upgrade a 89-km two-lane category II and III road to a four-lane category I road. It will help the country integrate into the regional economic system and improve road safety. We are also in discussion with government agencies on the preparation of other projects in the transport sector planned for approval in the next two or three years.