Kazakhstan needs to unleash potential of non-oil sectors - World Bank Chief Economist

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ASTANA. KAZINFORM - Hans Timmer, Chief Economist for the Europe and Central Asia region of the World Bank, believes it is high time for Kazakhstan to integrate new high technologies and unleash potential of non-oil sectors. He gave an exclusive interview to" Kazinform" International News Agency during his working trip to Kazakhstan.

Mr. Timmer, how would you characterize the relationship between Kazakhstan and the World Bank?

I would characterize the relationship as a very good partnership, an exciting partnership for 25 years. We are working in many different areas. The first set of areas is just helping Kazakhstan building up capacity. That is capacity through infrastructure. I think we have been involved in more than 3,000 kilometers of roads and supporting programs to improve the quality of education. We also cooperate with Kazakhstan in difficult times. So that's the second area. For me the third area is the most exciting of all and that is working with Kazakhstan to achieve transition of the economy. We are a bank that helps countries develop and development is never producing more of the same, but development is transforming. That is the process you see in the whole of Central Asia at the moment, and especially in Kazakhstan. And that for us is the most important part. We learn from cooperating with Kazakhstan.

In what form do Kazakhstan and the World Bank cooperate?

The way I experience the interaction with the Government is much more that we are a discussion partner. Together we try to find solutions. One good example is the discussion that we have on reducing the non-oil deficit.

What is the economic situation in Kazakhstan? What are the development trends that are characteristic of our country as of now?

On the surface, the short-term developments are quite positive. As many others we have upgraded the growth for this year. You see that Kazakhstan is coming out of the very difficult period of the first oil price shock. But that's on the surface, because it is still largely driven by an increase in oil production which is temporary. In terms of more fundamental underlying challenges of transforming the economy, there is still a long way to go. So, if you dig deeper into the numbers, then you are seeing that some of the changes that you would like to see are not yet happening. That is an increase in non-oil exports, it is the more vibrant private sectors, new companies starting up. The macroeconomic environment should be inducive now to become more competitive because there have been huge exchange rate depreciation. There are untapped possibilities in agriculture. In that sense there is still a long way to go.

Previously, the World Bank forecasted the growth of GDP rate up to 3.7% in 2017. What are the forecasts for the economic growth for the next years to come? Is it going to change?

For this year we still think it is 3.7% which is an upgrade from earlier. Because of that additional oil production for the next 2-3 years we expect growth of just below 3% which is not the best that you can imagine.

It signifies the challenges. But for me more important than the GDP growth is the underlying structure - what is happening with investments, what is happening with new sectors, what is happening with non-oil exports.

The inflation rate forecasted by the National Bank for 2018 is going to be between 5-7%. What is your perception of that? What do you think can contribute to bringing the inflation rate down in the coming years?

In our forecasts we expect inflation to be at the bottom or even just below the lower end of that range. But you have to realize that in oil exporting countries it is very complicated to have monetary policy that is completely geared at stabilizing inflation rate. The reason is that relative prices can change dramatically in oil exporting countries, the real exchange rates, the cost of your goods vis-à-vis the cost of goods abroad. The relative price can change dramatically reacting to volatility in your price. That means, for example, that when oil prices fall the real exchange rate depreciates and import prices are going up.

And that's not necessarily something that the Central Bank has to react to, because it's just a necessary change in relative prices. That means that the consumer price index is not necessarily the best target for the Central Bank, although there are not many alternatives. But what they should target is the cost of domestic production and wage price spiral.



Speaking about the need for economic transformation and expanding the role of the private sector in the economy, where exactly this can be implemented? In which sectors the role of private sector may grow?

That's ultimately for the private sector to find out. This is not something that we as an organization or even the Government can just determine.

It is incredibly important to create an environment where new companies can grow and young people can explore things. In the current macroeconomic situation there are huge opportunities in horticulture and agriculture in general.

I think for Kazakhstan there are also opportunities in the ICT sector. Even the fact that you are landlocked and you have a well-educated population, the new technologies provide opportunities in the higher-end service sectors. But I truly think that it's much more important to see what are the bottlenecks at the moment and to take away those bottlenecks instead of determining where investment should take place.

With our private sector we are looking for the opportunities, especially in agriculture, livestock, and to some extent, in transportation. But, from my point of view, what is most important is not so much just to select it, but to understand what is needed to unleash that potential that we think is there.

What is the impact of Chinese economy on Kazakhstan? What are the trends in that respect? Will this impact potentially grow in the future?

I see three big trends in the Chinese economy. One is an overall slowdown of production growth and productivity growth. The second is rebalancing of the economy away from heavy industry towards services, away from manufacturing to innovation. And the third big trend is the internationalization of Chinese companies which means instead of inward FDI investments abroad outward FDI.

So, let's look in all three cases at the impact on Kazakhstan. First, the overall slowdown of the Chinese economy. I think a year ago we wrote a report for this region on the impact of that slowdown. While many argued that would lead to a slowdown in many other countries, our assessment was a lot more optimistic. And the reason why we are much more optimistic is that we see that slowdown not as a slowdown of demand, but as a supply side shock. China is running out of cheap factors of production and, as a result, for other countries it becomes much easier to compete with China in the Chinese markets, in their own markets and in third markets. For Kazakhstan that means that that part of the changes in China increases your opportunity outside of the oil sector.

The second part - the rebalancing of the economy moving towards the service sector, moving towards a greener economy, obviously reduces the demand for oil, the demand for metals and all other commodities. That will reduce the price of that commodities and that is not good news for Kazakhstan.

On the third part, the fact that increasingly China is investing abroad instead of depending on FDI into China. That's where Kazakhstan can benefit a lot. I recently saw the new ranking called Going Global China Investment Index where they rank countries according to how much they benefit from the outgoing investments out of China and Kazakhstan ranks now number 12.

To summarize, I think that all these changes in the Chinese economy have increased the opportunity for Kazakhstan to integrate more and benefit more from the dynamism in China and all of Asia actually.

What is the World Bank forecast for oil prices next year? In your opinion, what factors will affect commodity prices next year?

At the World Bank we look at an average of three oil prices - WTI, Brent and Dubai. That average is estimated to be around $53 this year. We expect it to gradually go up in the coming years to $57-58 a barrel. It is important to note that whatever that policy is of OPEC plans to cut production, they will unlikely be successful in significantly increasing the oil price.

You can try to stabilize the oil price, you can try to increase it a little bit in the short run, but in the long run the oil price is driven by other factors. Factors like new explorations, the cost of shell production in the U.S., new explorations in Africa, but also the reactions on the demand sides moving towards much more energy efficient production. In that sense, whatever the policy of OPEC is I don't think very quickly we can go back to where we were with $100 or more per barrel.

Thank you for the interview!

 

 

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