Republic of Kazakhstan: Selected Issues

December2022 IMFCountryReportNo.22/368 REPUBLICOFKAZAKHSTAN SELECTEDISSUES ThisSelectedIssuespaperontheRepublicofKazakhstanwaspreparedbyastaffteamoftheInternationalMonetaryFund.ItisbasedontheinformationavailableatthetimeitwascompletedonNovember18,2022. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.orgPrice:$18.00perprintedcopy InternationalMonetaryFundWashington,D.C. ©2022InternationalMonetaryFund November18,2022 REPUBLICOFKAZAKHSTAN SELECTEDISSUES PreparedbyShantArzoumanian(MCD),OlivierBasdevant(FAD),andGregorioImpavido(MCD). ApprovedBy MiddleEastandCentralAsiaDepartment CONTENTS REVISITINGTRENDOUTPUTGROWTH3 A.Short-TermEstimates3 B.Long-TermEstimates6 C.TheImportanceofStructuralReforms8 D.Conclusions9 FIGURES 1.GDPTrendandCycle4 2.ContributionstoTrendGrowth5 3.GDPLevelandProjections6 4.GDPGrowthandProjections6 APPENDICES I.OutputDecompositionInMixedFrequencies10 II.TheProductionFunctionApproach12References13 SPILLOVERSFROMRUSSIA:BUILDINGRESILIENCETOFUTURESHOCKS15 A.StylizedFacts15 B.QuantifyingtheEffectofShocksfromRussia17 C.TransmissionChannels22 D.TheRoleofEconomicFundamentals,Diversification,andInstitutions23 E.Conclusion28 REPUBLICOFKAZAKHSTAN FIGURES 1.KazakhstanHasStrongTradeLinkageswithRussia,ParticularlyThroughImports16 2.Cross-BorderFinancialLinkageswithRussiaareSmall17 3.SovereignSpreadsareStronglyCorrelated17 4.ImpactofShockstoRussianGrowthonCISEconomies19 5.ImpactofShockstoEUGrowthonCISEconomies20 6.RoleofEconomicFundamentals,Diversification,andInstitutions257.PartnerDiversificationDampensthePassthroughoftheRussianBusinessCycle27 8.ImprovingResiliencetoExternalShocks28References29 REDUCINGVULNERABILITIESTOCORRUPTIONTHROUGHIMPROVEMENTSINFISCALGOVERNANCE30 A.BudgetStructuresandRules,andFiscalPolicyEffectiveness30 B.StrengtheningFiscalTransparency34 C.FosteringaRiskManagementCulture36 BOXES 1.Quasi-GovernmentEntitiesinKazakhstan31 2.ImprovingthePolicyonPublicWageBill32 FIGURES 1.DelineatingthePublicSector31 2.FiscalCouncilsinEmergingMarketsandAdvancedEconomies,202133 3.EnergySubsidies,201934 4.InfrastructureQuality,202035 5.PerceptionofCorruptioninPublicProcurement35 6.GovernanceVulnerabilitiesinRevenueAdministration,202038References39 2INTERNATIONALMONETARYFUND REVISITINGTRENDOUTPUTGROWTH1 TrendgrowthinKazakhstanhasdecreasedto2–3percentduetodecliningcontributionsoflaborandtotalfactorproductivity(TFP).COVID-19mayhavereducedthelong-termtrendGDPlevel,butitisunlikelytohaveaffectedtrendGDPgrowth.Structuralreformstoreducethestatefootprintintheeconomy,strengthenpublicandcorporategovernance,diversifytheeconomyandexportsawayfromextractivesectors,andpromotetechnologicalchange,arecriticaltoincreasefuturetrendGDPgrowth.Themonthlytrend-cycledecompositiondevelopedinthisSelectedIssuesPaper(SIP)mayhelpexpandtheinformationsetavailabletopolicymakerswhentakingbaseratepolicydecisions. 1.ComplementarymethodstodecomposeGDPintoitstrendandcycleareexploredinthisSIP,includingpurelystatistical,semi-structural,andstructuralmodels.2First,usingquarterlydatabetween1999Q1and2022Q1,trendandcycleareestimatedwithanHPfilter(HodreyPrescott,1980)andsmoothingparameterlambdavaluesassuggestedbyRavnandUhlig(2002).3Second,astructuraltimeseriesmodelàlaHarveyJaeger(1993)(HJinwhatfollows)isusedtocompareresults.TheHJset-upisalsoadaptedtoworkwithmixedfrequenciestoestimatetrendandcycleatamonthlyfrequency(AppendixI).Finally,usingannualdatabetween1999and2021,GDPtrendandcycleareestimatedwithaproductionfunctionapproach(AppendixII). 2.TheSIPisstructuredasfollows:SectionBpresentsandcomparesalternativeshort-termestimatesoftrend-cycledecompositionsandtheirgrowthrates,highlightingthebenefitsofmonthlyestimations.SectionCdiscussestheusefulnessoftheseshort-termestimatesinassessingfuturetrendlevelsandgrowthrates.Inparticular,sectionCaddressestheend-pointproblemaffectingtwo-sidedfilters,thelikelylong-termeconomicimpactofCOVID-19,andalternativetrend-cycledecompositions.InsectionD,priorityareasforstructuralreformsareconsidered.Inconclusion,asummaryandpolicyrecommendationsareproposed. A.Short-TermEstimates 3.TrendGDPgrowthhasbeendecreasingsince2005andquarterlydatasuggestitiscurrentlyatabout2–2½percent.ThetoppanelsofFigure1reportthemonthlyestimatesoftrend(𝑚𝑢𝑚)andcycle(𝑝𝑠𝑝𝑝𝑚)usingthemixedfrequencyversionoftheHJ,thequarterlyestimatesusingthebaseHJ(𝑚𝑢�and𝑝𝑠𝑝𝑝𝑞),andthequarterlyestimatesusingtheHPfilter(𝑚𝑢ℎ𝑝�and𝑝𝑠𝑝𝑝ℎ𝑝𝑞).Headwindepisodes(shadedareasingray)correctlycoincidewithbusinesscycletroughs(toprightpanel).4Inthebottompanels,thefigurereportsthegrowthratesofthesetimeseriesestimates.Inparticular,thebottomleftpanelsuggeststhatannualizedtrendgrowthisnowabout2-2½percent(seealsoTable1). 1PreparedbyShantArzoumanianandGregorioImpavido. 2Forreviewsofdifferentmethods,seeCotisetal.(2005),Ladirayetal(2003),orAlvarezandGomez(2018). 3RavnandUhlig(2002)statethatlambdashouldvarybythefourthpow