The Chairman of the National Bank of Kazakhstan, Galymzhan Pirmatov, spoke about the development of the economy and financial sector of the country in 2022 and the tasks for the coming year 2023 during the enlarged Government session chaired by President of Kazakhstan Kassym-Jomart Tokayev.

As the Head of the National Bank noted, in 2022 the economy and financial sector of Kazakhstan faced an unprecedented shock and developed in conditions of extremely high uncertainty.

The combination of significant growth in global energy, food and commodity prices with supply disruptions intensified inflationary processes.

"Rising inflationary pressures caused a rapid and synchronised tightening of monetary conditions by central banks around the world. The US Federal Reserve's aggressive rate hike has led to a strengthening of the US dollar to its highest level in 20 years, putting pressure on the currencies of developing countries," Pirmatov said.

But, he said, despite the unprecedented nature of the shock, the National Bank managed to achieve the following results in 2022:

1. prevention of destabilisation of the financial system. Prompt measures of the National Bank made it possible to preserve the stability of the financial system;

2. preserve and increase confidence in tenge assets, bringing deposits to a historic high of KZT 30 trln in October of this year

3. ensuring balanced foreign exchange market (supply and demand in the market are determined by market participants);

4. maintain long-term yield of assets under the NBK management in the positive zone, despite significant capital outflows from emerging markets;

5. start up the National Payment System to service retail payments of the population and develop and successfully test a digital tenge technology platform with real participants.

"Inflation in the country accelerated due to the geopolitical shock. Annual inflation reached 19.6% in November this year," Pirmatov said.

According to him, the greatest contribution to the process is still made by rising food prices, which accelerated to 24.1%. Non-food inflation reached 18.6% and growth of prices for paid services 14.1%.

The inflation rate in Mangistau region, Astana city, Akmola, Ulytau and Karaganda regions is above the national level.

At the same time, according to the head of the National Bank, the inflation rate continues to rise amid external inflationary pressures, supply chain restructuring, record inflation expectations, fiscal stimulation of demand, and increased lending.

By the end of the year, inflation is expected to rise to 20-21% with a peak in Q1 2023.

"To stabilise the situation, the National Bank continues to implement a disinflationary monetary policy. Given the impact of the measures taken and the growth of the real rate as inflationary pressure eases in 2023, inflation is projected to fall to 11-13%," Pirmatov said.

According to him, the increase of base rate was accompanied by increase of marginal rates of KFGD for tenge deposits of population.

Together with the government is implementing a programme to protect tenge deposits, which provides for the accrual of compensation on deposits of individuals in tenge.

Also at the beginning of the year, we increased the maximum amount of guaranteed reimbursement for savings deposits in tenge from 15 million tenge to 20 million tenge.

"The measures taken allowed to prevent reduction of tenge deposits of population, stabilize funding base of STBs, reduce dollarization of deposits from 38.4% in February to 35.3% in October this year," Pirmatov said.

According to him, increasing confidence in tenge assets stimulates a shift in the model of behavior of the population from consumer to savings, which helps reduce inflationary pressures.

At the same time, worsening geopolitical situation and unfavourable conditions on global financial markets inevitably influenced the dynamics of the national currency. After a record weakening to 512.17 in March, the tenge strengthened to 414.79 in May.

The currency market was better balanced by changing the National Bank's exchange rate policy by allowing bilateral exchange rate volatility and further expanding market-based principles of foreign exchange trading.

"The tenge was also supported by sales of foreign currency proceeds by entities of the quasi-state sector, which amounted to $4.8 billion, sales of currency to ensure transfers from the National Fund in the amount of $3.9 billion, currency interventions NBK in the amount of $1.4 billion," Pirmatov said.

He also noted that the global strengthening of the U.S. dollar amid aggressive tightening of monetary policy by the U.S. Federal Reserve has a negative impact on currencies of both developing and developed countries. The DXY US dollar index has strengthened by 9.5% since the beginning of the year.

With high commodity prices, the current account is expected to move into surplus territory in 2022 and remain in surplus territory due to higher commodity exports due to high global oil, metal, uranium and grain prices. In 2023, the current account surplus is expected at $1.9 billion and in 2024 at $1.2 billion.

The head of the National Bank also noted that imports of goods will remain at high levels amid high demand and fiscal spending. Between 2023 and 2024, imports of goods will surpass the historic highs, increasing twofold compared to 2016.

The projected narrowing of the surplus in 2023-2024 will be driven by a sustained increase in import demand. Gross international reserves stood at $89.7bn as of December 1 this year. Gold and foreign exchange reserves for 2022 declined by $467m due to lower gold prices, government debt repayments, and currency interventions in the first quarter of this year.

The National Fund assets grew to $55.8bn due to a rebound in the oil price and correspondingly high revenues amounting to 6 trillion tenge, including $9.8bn in foreign currency. Despite the downturn in financial markets, the National Fund's annualised yield since inception is 3.08%.

As far as pension assets are concerned, as of November 30, 2022 they amounted to 14.4 trillion tenge, having increased by 1.3 trillion tenge or 10.3% YTD.

Investment income amounted to 806 billion tenge from the beginning of the year, pension contributions amounted to 1.5 trillion tenge and pension payments amounted to 240 billion tenge.

In 2022 more than 865 thousand applications for 881 billion tenge were fulfilled for early withdrawal of pension savings in order to improve living conditions, treatment and transfer to private management.

"Despite the negative macroeconomic situation, the yield on pension assets since the beginning of 2022 was 5.8%. At the same time, over the past five years, the accumulated yield exceeds the inflation rate," Pirmatov reported.

Turning to tasks for the forthcoming period the National Bank chairman said that for 2023 the National Bank set the following priorities:

1. Inflation stabilization.

Inflation is projected to fall to 11-13% due to monetary-credit policy measures.

"It is important to continue the anti-inflationary policy together with the Government with the continuation of a systematic set of measures," Pirmatov said.

In this context, he said, the National Bank proposes to pay special attention to the balanced development of food markets, to support effective reorientation of the supply chains. These measures will make the process of adjusting domestic prices to external conditions less painful.

2. Exchange rate policy and balance of payments

Implementation of a flexible exchange rate regime will continue in order to increase the effectiveness of the exchange market, avoid accumulation of imbalances in the economy and preserve international reserves.

The vulnerability of the balance of payments and the economy in general to external shocks can only be reduced through the development of domestic production of high value added goods.

3. Development of the securities market.

On behalf of the Prime Minister A. Smailov, measures will be taken to give all depositors the right to transfer part of their pension savings to private companies for management. These measures will allow depositors to realize their right to choose investment strategies that meet their risk and profitability criteria, eliminate monopolization in the market of pension assets management services and as a whole will have a positive effect on the local securities market.

In addition, measures will be implemented to gradually transfer assets under the NBK's trust management to a competitive environment. This will improve conditions for the formation of a competitive environment, which will have a positive impact on the domestic securities market, increasing its liquidity and efficiency, including the expansion of the funding base for the economy by increasing institutional demand.

4. Development of the payment system and digital infrastructure

Thanks to systemic government measures and the active digitisation of financial services, non-cash transactions by the public have increased 37-fold over the last 5 years. The network of non-cash payment acceptance was significantly expanded: the number of businesses accepting non-cash payments increased by more than 2.1 times, up to 508,500 in 2022.

To optimize inter-bank fees, the National Bank has reached an agreement with the International Payment Systems to gradually reduce the inter-bank fees by 2 times until 2025.

"The work on scaling services of the National Payment System, modernization of the biometric identification infrastructure, introduction of open standards of Open API and Open Banking will be continued, which will increase the availability of financial services to citizens and businesses," Pirmatov said.

He also said that the project "Digital Tenge" was successfully tested in October 2022 technological platform of digital tenge. As part of the pilot project real consumers and trade and service businesses were able to carry out more than 3,500 transactions with digital tenge, using applications of financial market participants.

According to the results of the population survey, more than 60% of respondents are ready to use digital tenge.

A report will be published by 15 December 2022 with the results of a comprehensive study and a final recommended decision on the need to introduce the national digital currency.

In case of a positive decision, industrial application of digital tenge for social payments and public procurement scenarios is proposed in Q4 2023.