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The International Monetary Fund (IMF) has cut its forecast of Kazakhstan's economic growth in 2014 to 4.3% from the earlier projection of 4.6%. "A challenging external environment is weighing down on economic growth," the IMF said in a statement on December 9 following a review of economic and financial sector developments and policies. "Growth is slowing down from 6.0% in 2013 to a projected 4.3% in 2014, driven by weaker domestic and external demand (especially from Russia, China, and Europe), continued regional uncertainty, as well as falling oil prices."

In its October outlook, the fund forecast the Kazakh economy to slow down to 4.6% in 2014 from the 6% growth posted in 2013. It also forecast economic growth to stand at 4.7% in 2015. "Despite the recently announced fiscal stimulus measures, sustained weakness in global outlook, including lower oil prices, as well as production delays in the Kashagan oil field are expected to keep growth at around 4½ -5½% in 2015-16," it said in the statement. "Risks to the outlook are predominantly on the downside, mostly related to oil prices and regional uncertainty," the IMF explained.

In October the slowdown in the Russian economy and falling oil prices forced the Kazakh government to reduce a target of GDP growth from 6% to 4.3% for 2014 and to redraft the budget. This, in turn, prompted President Nursultan Nazarbayev to announce a package of economic stimulus measures in November. The president pledged to draw an extra $3bn annually from the country's oil fund to support the ailing economy over the next three years. He also noted that international financial institutions such as the World Bank, the Asian Development Bank, the European Bank for Reconstruction and Development and the Islamic Development Bank were ready to allocate "about $9bn for 90 priority projects".

"Given slowing growth and large buffers, the augmented fiscal stimulus is justified, but strong and sustained commitment to fiscal sustainability and macro stability is essential," the IMF statement said. It added that the stimulus, financed from the National Oil Fund and multilateral development banks, totalling up to 7% of GDP over the next three to five years, is expected to increase the economy’s potential through modernising physical infrastructures, promoting private sector development and reviving the financial sector, but to be successful the stimulus requires consistency with:

1) the authorities’ commitment to the existing medium-term sustainable non-oil deficit target;

2) the authorities’ assurances of avoiding a pro-cyclical bias over the medium term, including by conditioning spending in 2017 on economic performance in the prior two years;

3) ensuring macroeconomic and financial stability in light of potential absorptive capacity constraints; 

4) guaranteeing high-quality spending through improved project appraisal and procurement policy with help from multilateral development banks.

The country's economic troubles and the rapidly depreciating Russian ruble are prompting observers to talk about an imminent devaluation of the national currency, the tenge. The National Bank of Kazakhstan, the central bank, devalued the tenge by 19% in February in response to the weakened ruble in late 2013 and early 2014 to protect the country from cheap Russian imports. The IMF urged the National Bank to abandon a pegged float of the tenge, and instead adopt a policy of inflation targeting. The bank set a fluctuation corridor at KZT170-188 to the dollar. The current exchange rate is KZT181.7 to the dollar.

"We strongly support the National Bank’s plans to overhaul its monetary policy framework and operations. The medium-term objective is to adopt an inflation-targeting framework," the IMF said. "To this end, the authorities, in the immediate future, intend to introduce a new policy interest rate supported by open market operations to more effectively guide key money market interest rates, and better contain inflationary and exchange rate pressures."

A new policy rate will allow for greater exchange rate fluctuations within the existing band and widen the band over time, the IMF suggested.