KAZAKHSTAN – EMBRACING THE NEXT TRANSFORMATION

 

Speech by Christine Lagarde – Managing Director, IMF

Nazarbayev University, Astana, May 24, 2016

As Prepared for Delivery

 

Good morning—Qayırlı tañ.

President Shigeo Katsu, thank you for inviting me; and thank you, distinguished guests, faculty members, and students, for the warm welcome.

I am glad to be here on my first visit to the Central Asia region as the IMF’s Managing Director, and on my first visit to Astana. I had a very pleasant stay so far, and the futuristic architecture of your city is really breathtaking!

But most importantly, I would like to congratulate the people of Kazakhstan on the 25th anniversary of your country’s independence.

Your country, and the region as a whole, have made great strides since independence. Growth has averaged more than 7 percent per year over the past two decades. In a single generation, living standards – in terms of per capita GDP – more than tripled, and many countries, including Kazakhstan, achieved middle-income status.

You also seized the opportunity of high commodity prices to build substantial financial buffers. This has been a remarkable transformation!

But 2016 is also a momentous year in another way. The growth model that has delivered success over the past 25 years is being challenged by a less friendly global backdrop, above all a reduced outlook for revenues from oil and other commodities.

Forging a path for future prosperity therefore requires unleashing new drivers of growth. To remain successful, Kazakhstan will have to go through another transformation that may also take a number of years to complete.

What do I mean by that? Imagine a future where growth is no longer driven by oil and commodities, but by entrepreneurship, technology and trade. A future with a thriving private sector, supported by efficient and transparent public institutions. A future where the region is increasingly connected with the world, enriching it and learning from it.

Far-fetched? I would say not. This vision is very much aligned with President Nazarbayev’s aspirations for the country’s future: Kazakhstan 2050, “Nurly Zhol” and “100 Concrete Steps.”

But visions do not deliver themselves—they must be acted upon. And this is where you come in. Armed with your knowledge and energy, Kazakhstan can build a new, efficient, and inclusive growth model. I know you can do it.

Just look at Astana, a city where the future emerged seamlessly from the steppes, in a layout and with a skyline that drew on the world’s best architects. Or even closer – look at this university. An emerging, inclusive, and meritocratic institution with great promise of talent and leadership.

You – the young people in this audience – are enjoying the fruits of discipline and hard work by the previous generation. You must now lead by example and carry the baton of securing prosperity for the next generation.

I would like to discuss this with you from three perspectives:

• First, what are the global challenges and opportunities for the region, and for Kazakhstan?

• Second, how can you set in motion a virtuous circle of policies to support the next transformation for the region?

• And third, how can your generation contribute to implementing this vision?

1. Global challenges, regional opportunities

Let us start with the big picture – the region and the global economy.

Over the past two decades, the Central Asia and Caucuses region has become more integrated with the world. International trade flows are now around $230 billion, up from just $30 billion in 1996, and foreign direct investment grew from just $20 million to $20 billion per year. These flows have played a major role in driving growth and raising living standards.

Greater openness, of course, means greater sensitivity to external shocks. There are several developments that are of concern to policymakers around the world—and this region is no exception. These include slower global growth, especially in Europe; the sustained low outlook for commodity prices; and China’s rebalancing toward domestic growth.

These developments have contributed to rising financial market volatility and a sharp deceleration in capital and trade flows. At the same time, trade growth has weakened around the world. During 2012-2015, most countries have been importing less relative to their incomes than in the years leading up to the financial crisis in 2008.

Clearly, these trends have held back the global economy. Our most recent forecast has global growth largely unchanged at a subdued rate of 3.2 percent this year, with only a slight increase to 3.5 percent in 2017. Overall, the outlook has softened and downside risks have increased.

There is a similar picture in Central Asia. Growth in the region has slowed to a two-decade low of just one percent this year, and is expected to pick up to only 3.7 percent over the medium-term—well below the average recorded in previous decades. Lower commodity prices and weaker growth in key trading partners, especially China and Russia, are profoundly impacting the region. Unfortunately, some of these changes are likely to be lasting.

What does this mean for Kazakhstan and Central Asia?

In many ways, the changing global environment is a wake-up call. Like other countries in the region, Kazakhstan faces a set of important policy challenges:

• how to nurture new drivers of growth while strengthening institutions and policy frameworks;

• how to diversify away from oil and commodities into new products and services, while making growth more inclusive; and

• how to capitalize on its strategic location at the heart of Asia – reviving its role as a vital hub for the exchange of goods and cultures for the New Silk Road.

To do all this, both Kazakhstan and your neighbors need to embark on the next generation of reforms.

2. Kazakhstan’s next transformation—toward a virtuous circle of policies

Some of these reforms have already been set in train. Countries in the region have taken important steps to deal with the impact of external shocks. Many have allowed the value of their currencies to adjust.

Kazakhstan has opted to float the tenge. This was a painful but necessary step to respond to growing financial pressures. I know it means that the goods you import are more expensive. It has also put pressure on inflation and on those who have borrowed in dollars.

Yet it also means that foreign currency reserves are not being used to defend an exchange rate that is out of line with the new realities. And it means new opportunities for exporters because they are now more competitive, and there could be more jobs in sectors that compete with imports.

Think not only of the big players who export grain and machinery, but also of the smaller companies and entrepreneurs who will benefit from new opportunities in light industrial goods, biotech, green products, and services.

These businesses also need the appropriate environment to succeed and flourish. This means that actions need to go further – in four key areas.

First area: stronger macroeconomic frameworks.

First, floating the currency is just the beginning to a modernization of macroeconomic policies. Given the hurtful side effects that I mentioned before, it is important that monetary and fiscal policy frameworks are upgraded to work efficiently in a world of greater exchange rate flexibility.

This includes establishing a clear mandate for the central bank to pursue price stability, and strengthening the tools, instruments, and practices to support this mandate. Deeper and more developed financial markets can also improve financial intermediation and foster an inclusive financial system.

At the same time, a consolidated and transparent fiscal framework is also essential – covering not only the state budget, but also local governments, state companies, and non-budgetary funds. Only then can decisions be made and evaluated on the basis of full and timely information.

If you would like to read more on this issue, I encourage you to look at some research we have just published on exchange rate policies in Central Asia and the Caucuses and the necessary frameworks to support them.1

Second area: more effective and transparent institutions.

The second-most important element for successful policy management has to do with sound and independent institutions. And here we need to address an uncomfortable perception about the region – that economic opportunities are not open to the same degree for everyone, and that institutions suffer from either corruption or a lack of transparency, or both.

Just to give you one example, the World Economic Forum’s 2015–16 Global Competitiveness Report notes that countries in the region, including Kazakhstan, have made some progress in improving competitiveness. Yet limited access to financing and corruption are still reported as the most binding impediments to doing business in Kazakhstan.

There are other reports that come to similar conclusions. This means that there is a premium on ensuring that there are fair and transparent laws and rules, with proper fiscal and business accounting, and that they are implemented through impartial regulators and backed up an independent judiciary.

Third area: a more open and integrated economy.

Third, the economies in your region would benefit from opening up. Intra-regional trade in Central Asia stands at less than 6 percent of total trade, the lowest share in Asia. At the same time, Kazakhstan is a very large country with a relatively small domestic market and high costs of doing business.

Some would say that Central Asia faces a predicament because it is landlocked. I would say it is blessed with systemic and dynamic neighbors on all sides: China and Russia on one side, Europe, India and South Asia on the other.

So, if the region is to become the main artery of the “One Road, One Belt” initiative, it needs to deepen integration both internally and globally. Kazakhstan’s recent accession to the WTO is an important step in this direction. By some estimates, accession would translate into gains of about 3.7 percent of GDP in the medium term and close to 10 percent in the long run.2

Even so, actions will need to go further if the region is to become a hub for new goods and services along the way. This means modern, efficient and low cost transportation and logistics services. It also means an environment where new investment can thrive and that is open for everyone – entrepreneurs, foreign investors, and women.

Fourth area: a more inclusive economy.

And fourth, let me turn to women, a subject that is dear to my heart. Kazakhstan ranks 47th out of 145 in the World Economic Forum’s Gender Gap Index, and ranks even higher on economic participation and opportunity. This is commendable.

Still, most women are less active in the formal sector and opportunities for them lie mainly in the informal sector where incomes are lower. Kazakhstan can do better to encourage women’s participation in the formal sector.

So with stronger policy frameworks, more transparent institutions, greater openness, and more inclusive policies, Kazakhstan can set in motion a virtuous circle of policies to achieve growth that is sustainable, diversified, and inclusive. What can you do to help?

3. Kazakhstan’s youth: enlightened, empowered, and engaged

Your country is the largest economy in the Central Asia region and its second most populous. It is also one of the youngest, with close to 7 million people below the age of 25.3 So there is a lot that you can do!

What do I mean in practice? I am thinking about education, embracing technology, and connecting with the world.

Think education. Abay Qunanbayuli, the father of modern Kazakh literature, once said: «A strong man may defeat one hundred enemies. But a learned man-one thousand».

Fortunately, there are no enemies in sight, but there will be new challenges that must be conquered. Creativity and innovation will increasingly determine success for your generation. Striving for excellence in math and sciences will equip you with the range of skills necessary to create innovative products and services.

For example, this could involve software applications, bio-medical innovations, or satellite-tracking devices to ensure the efficiency of cargo traversing across Kazakhstan from China to Germany and beyond. But who am I to say—I trust there are already many more and better ideas among you in this room!

Embrace technology and green industries. Digitization makes for more openness and transparency. Embrace it as the key to positioning the country as a logistics hub.

I am confident that Kazakhstan can deliver. During my visit, I was impressed to learn about the success of your national carrier – Air Astana – in precisely the area of technology and logistics. A world class company that emerged in a short period of time.

Connect with world. The late Steve Jobs, the father of many of the “apps” you now use to connect with each other, once said: “Stay hungry, stay foolish” – which I interpret as: let your curiosity be insatiable, and dare to be different.

For any country or region that wants to be the bridge between Asia and Europe, there is nothing better than understanding the languages, customs, and business needs of its trading partners. Embrace the world, travel, and connect with people from different cultures.

And finally, connect with the IMF. As an institution, we were established 70 years ago with 44 members. Shortly after its independence in 1991, Kazakhstan became our 165th member. In April, we welcomed our 189th member, the Pacific island of Nauru.

Today, we are a multilateral institution with near universal membership that provides world class expertise in three areas: policy analysis on fiscal, monetary and financial issues; financial assistance to smooth the impact of external shocks; and capacity building.

Despite our “age”, we never cease to adapt to changing realities. For example, in recent times we have upgraded our policy analysis to some of the newer challenges that confront our members – such as inequality, gender, and climate change. We have modernized our lending framework to include instruments for insurance purposes.

We have also ramped up our training and capacity development activities. In Kazakhstan for example, over the past few years, we have been supporting efforts to improve public financial management and fiscal accounting. These are key to enhance transparency and accountability.

We have been a partner for Kazakhstan and the region for the past 25 years, including the turbulent period just after independence, through the Russian and Asian financial crises of the late 1990s, and the global financial crisis in 2008. We will deepen our engagement through building institutional capacity in a range of areas, such as customs and tax administration, monetary policy, and banking supervision and regulation.

This is your IMF. We are by your side.

Conclusion

Let me conclude by saying how I was struck by the Bayterek – the national monument – and the symbolism it embodies. The tree of life as a symbol of the eternal shifts between night and day, summer and winter – the transformations that are part of the eternal quest for shared prosperity.

In many ways, this is the story of Kazakhstan—going through several transformations over the years. This year in particular marks a successful transition from a centrally planned economy to more market-based institutions.

The world today is very different from the one 25 years ago, and will be even more different down the road. The time is now for your next transformation. A prosperous future awaits you.

Thank you - Raqmet sizge.