Deputy Managing Director of IMF Tao ZHANG:
THE ECONOMIC GROWTH OF KAZAKHSTAN WILL BE DRIVEN BY NON-OIL SECTORS IN THE FUTURE

In 2017, there was a major increase of oil production, higher global oil prices and expansion of output, which allowed Kazakhstan’s GDP to increase by 4%. In the future, growth will be mainly driven by non-oil sectors, Deputy Managing Director of IMF Tao ZHANG told Interfax-Kazakhstan in an interview.

- According to the latest IMF forecast, the Fund expects GDP growth in Kazakhstan in 2018 to be 3.2%, which is significantly lower than the government's forecast. What, in your opinion, are the main challenges for Kazakhstani economy this year?

- Firstly, let me thank you for this interview. It is great to be in Kazakhstan again. Overall growth in Kazakhstan reflects developments in oil and other sectors, including services, industry, construction, and agriculture. In 2017, there was a major increase of oil production, higher global oil prices and expansion of output. Such factors are exceptional. In the future, growth will be mainly driven by non-oil sectors.

For that, we see non-oil growth gradually increasing from 3 percent in 2017 to around 4 percent in the next few years. In our projections, we see some opportunities and some challenges.

Let me start with the opportunities. These include the potential for (i) further development of the agricultural sector, with prospects for exports to China; (ii) projects under China’s big Belt-Road Initiative; and (iii) new trade and investment opportunities in Uzbekistan, which is opening up and rebuilding relations with the region. All of this could help increase growth rates and diversify the economy.

For the challenges, the Kazakh government will be reducing its spending in 2018. Meanwhile, bank credit has been restrained in the past two years, as Kazakhstan’s banks are dealing with non-performing loans and other challenges. These will dampen growth.

- New anti-Russian sanctions, trade wars between the US and China -  this is going to affect Kazakhstan, as Russia and China remain our key trading partners. The tenge, in particular, has already subsided slightly against the backdrop of the announcement of sanctions against a number of Russian companies. How do you think these external factors will affect the growth of the economy and the economic situation as a whole in the short term.

- Indeed, as you have seen, the sanctions had some effect on the exchange rates of the ruble and the tenge. Albeit, less on the tenge. Also, direct effects of the sanctions are possible for Kazakh businesses that have dealings with Russian companies or with Russian businessmen that are subject to the new sanctions.

There may also be indirect effects such as a reduction of growth in Russia and Kazakh exports growth to Russia.

- Recently, the problems of three more banks - the Bank of Astana, Qazaq Banki and Eximbank of Kazakhstan - have been revealed. Now the question of providing them with liquidity either by the National Bank or by third-party investors is being decided. How do you assess the current situation in Kazakhstani banking sector? What, in your opinion, led to this situation?

- Before discussing the current situation, let’s step back a bit. Difficulties for some Kazakh banks started around the time of the global financial crisis—back in 2008-09. Problems were compounded by the decline of oil prices in 2014, and the subsequent depreciation of the tenge in 2016. Other reasons for difficulties have included insufficiently strong governance and management at some banks, a high level of non-performing loans, weak profitability, and low capital. In addition, there have been some areas where the regulatory and supervisory framework of the National Bank has needed strengthening.

In 2017, the government and the NBK have stepped in to provide critical financial support to the sector, including to facilitate the acquisition of KKB by Halyk Bank and to provide loans to other large banks. This funding has helped stabilize the Kazakh banking system and make it secure.

However, underlying challenges remain. Banks need to strengthen their governance, management, business models, and the regulatory and supervisory framework. Shareholders are committed to providing more funding and legal amendments and regulatory changes have been proposed by the NBK. The NBK is also revamping its framework for provision of liquidity to banks, making it more transparent and secure. It is important that these changes progress, so that the Kazakh banking system is stronger and helps support growth and jobs.

- What is your opinion on the impact of Iran joining Eurasian Union's free trade zone will have on the regional trade?

- As you know, the IMF supports open trade and regional interconnectedness. Iran is one of the largest economies in the region but its trade relations with the Eurasian Economic Union (EEU) are now fairly limited. A free trade agreement between EEU and Iran could give a boost to mutual trade in the medium term. Of course, Iran and the largest EEU members – Russia and Kazakhstan—are major producers and exporters of oil and petrochemicals, but there is scope to expand trade in non-oil goods and services among these countries and in the region.

- Thank you for your time!

May, 2018
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