Analytical materials / Kazakhstan

Yevgeniy Khon: Kazakhstan’s strategy of economic development during a time of crisis

14.04.2016

“In Kazakhstan’s economic policy a special emphasis is being made on maximizing the country’s existing potential for transit and transport in order to form a major business and logistics hub linking the markets of Europe and China. In this sense, capital-intensive infrastructure projects both within the country and abroad are expected to see rapid growth in the coming years,” independent analyst Evgenny Hon writes in an article on the country’s anti-crisis policies exclusively for CABAR.asia.

KhonChallenges to the global economy wrought by low prices for mineral resources have had an especially strong impact on Kazakhstan. Since June 2014 the price of Brent crude oil – a regularly cited benchmark for the industry – has fallen rapidly. In January 2016, according to the US Nasdaq stock exchange, Brent slumped to a 13-year-low of US $28.21 dollars per barrel.

This trend negatively affects the stability of Kazakhstan’s economy, due to high dependency on raw materials and thus on price volatility in world commodity markets. The share of Kazakhstan’s mining industry in the domestic economy accounts for about 15% of GDP. Fuel and energy products are Kazakhstan’s main export, accounting for around 72 % of total (Figure 1). In connection with the drop in prices for Kazakh oil, the country’s foreign trade turnover in 2015 decreased by 37.1 % to US $75.9 billion from US $120.8 billion.[i]

Fig. 1 Export structure by trade categories from January to December 2015

диаграмма Хона engl

Source: Committee for Statistics, Ministry of National Economy, Republic of Kazakhstan

Considering that two-thirds of the state budget is composed of revenues from the oil and gas sector external stress on the local economy has been profound. Real GDP growth was just 101.2% in 2015, which is significantly lower than the previously forecasted level of 4.8% while some analysts have predicted the economy will shrink this year.[ii]

With the decline in external demand and lower world prices for key exports, the Government of the Republic of Kazakhstan has actively pursued counter-cyclical policies to ensure positive GDP growth, stimulate domestic demand and prevent unemployment.

In December 2015, the Government of the Republic of Kazakhstan and the National Bank of Kazakhstan adopted an anti-crisis action plan to ensure economic and social stability in 2016-2018. The plan consists of two parts: the formation of a new economic structure within the framework of the five basic areas outlined in the address of the President of Kazakhstan “Kazakhstan in the new global reality: growth, reform and development” and swift action to stimulate growth and lending to the economy of Kazakhstan.

Measures undertaken to form the new economic structure include the stabilization of the financial sector, the streamlining of fiscal policy, privatization and stimulation of economic competition, creating conditions for investment and a new social policy.

Taking into account the deterioration of the global economy and pessimistic forecasts for the development of the national economy, additional measures have also been taken by the Government to stimulate economic growth, support employment and incomes. These measures encompass a focussed support for the real economy – the part of the economy that excludes the financial sector, namely the implementation of key projects related to the state program for infrastructure development “Nurly Zhol – Path to the Future”, provision of support for small and medium-sized businesses, ensuring affordability of housing for the population, enabling the implementation of agribusiness projects, an ongoing state program of forced industrial-innovative development (PFIID), social stability and employment support.

“Nurly Zhol”, designed for 5 years and coinciding with the second five-year plan of the PFIID is viewed by the government as a central tool of anti-crisis economic policy. To speed up the implementation of infrastructure projects under the program this year, the government has allocated an additional US $538 million.

Government use of funds formed due to “excess” or additional revenues from the export of natural resources or other sources during periods of economic growth is a common international practice during times of economic crisis. Such stabilization funds, funds for future generations and budget reserve funds exist in Venezuela, Colombia, Kuwait, Nigeria, Norway, Chile, Oman, Papua New Guinea, Hong Kong, Singapore, Estonia, South Africa, Alaska and Alberta (Canada).

Priority areas for the development of transport and logistics infrastructure

The program “Nurly Zhol” is aimed at improving internal infrastructure and laying the foundations for the development of Kazakhstan as a major transportation and logistics hub in Eurasia. The total investment portfolio of the program totals US $33 billion, and the state’s share is expected at 15%[iii]

Occupying a strategic geographical position between the two large markets of China and the EU, Kazakhstan has huge transit potential. Countries such as Singapore, the Netherlands, Hong Kong and others receive considerable income from the provision of transit services. However, to date, Kazakhstan has not fully realised this potential, and its volume of transit cargo is still relatively low. In a crisis, capital-intensive investments in transport facilities are particularly attractive in terms of enabling the expansion of business and driving job creation.

In recent years, Kazakhstan has implemented a number of important transport infrastructure projects. In 2014, the railway line Zhetygen-Khorgos (294 km) and a rail track running from Uzen to the state border of Turkmenistan (145 km) were completed while Zhezkazgan-Beyneu (988 km) and Arkalyk-Shubarkol (214 km) were put into operation the following year. The creation of new railway lines results in the improvement of the social sphere through the creation of new jobs and the construction of socially relevant infrastructure including houses, schools and kindergartens.

The December 2014 inauguration of the Kazakhstan-Turkmenistan-Iran rail route holds a special importance both in terms helping Kazakh producers access markets in the Middle East and in terms of strengthening “North-South” transit across a country where infrastructure is mostly concentrated in an East-West direction.

The role of this transportation corridor will only grow in the light of the removal of significant international economic sanctions against Iran. For example, during the recent visit of Chinese President Xi Jinping to Tehran, the two sides agreed to increase bilateral trade to $600 billion in the next 10 year[iv]

By way of comparison, in 2014 Iranian-Chinese trade turnover amounted to only $ 52 billion.[v] In facilitating this growing bilateral trade, the Trans-Kazakhstan route provides a strong alternative to the existing southern sea route, with average delivery speeds over land between 2 and 3 times faster.

Regarding road transport, Kazakhstan’s participation in the creation of the transcontinental corridor “Western Europe – Western China” is of major significance. Most of the Kazakh section of this corridor is already reconstructed and opened to traffic, but full commissioning is scheduled for 2017, once construction of a new crossing point on the border with China in the Almaty-Khorgos area is completed.

The opening of this transport artery has significant benefits for both Kazakhstan and neighbouring countries. “Western Europe – Western China” will significantly reduce transportation times vis-a-vis existing corridors.  With the journey from the Chinese port of Lianyungang to the EU expected to take around 10 days, experts say this optimization will spur an increase in freight traffic by 2.5 times up to 2020, and an average annual economic impact of $188.3 million based on benefits from reduction in delivery time and traffic accidents.

Another capital-intensive aspect of the “Nurly Zhol” program is the development of marine and dry ports. Currently, the process of expansion of Kazakhstan’s largest seaport Aktau in the west of the country will see the port’s capacity increased by 3 million tons of dry cargo and 1.5 million tons of containerized cargo. Aktau on the Caspian Sea is an important part of a multimodal logistic chain connected by rail to the dry port Khorgos-Eastern Gate on the country’s border with China.

In parallel, construction of a ferry terminal at Kuryk on the Caspian Sea with a capacity of 4 million tons of ferry cargo per year has been underway since 2015. This complex will focus on trans-shipment of consumer goods, grain, petroleum products, liquefied petroleum gas, fertilizer, chemicals, and much more. The same year saw a trial run for a new railway from Borzhakty-Ersai through which goods will be delivered to the port of Kuryk.

The importance of the construction of the “dry port” of “Khorgos – Eastern Gate” on the Kazakh-Chinese border is difficult to over-estimate. The Special Economic Zone (SEZ) contains several trans-shipment terminals and provides a variety of freight services such as wagon and container operations, loading operations, terminal handling and additional logistic services. The first phase of this project was put into operation on December 2015. In 2016 the port will process about 200 thousand containers, with a full capacity of 500 thousand containers expectable by 2020.

Currently Kazakhstan is working actively to establish its own international network of transport and logistics complexes (TLCs) in strategically important trade sectors. Creating a TLC network will enhance the flow of goods through the territory of the Republic of Kazakhstan, which will contribute to the establishment of Kazakhstan as a major transit hub between Europe and Asia. May 2014 marked the opening of the first stage of the Kazakhstan logistics terminal in the eastern Chinese port of Lianyungang.[viii]

State support for housing construction

A program supporting housing construction is another kernel of government anti-crisis measures. An additional US $995.8 million has been allocated this year from funds earmarked for the realization of the program “Nurly Zhol” in 2017. Of these funds, $146.6 million will be focused on the construction of rental housing by the holding concern “Baiterek”, $412.1 million for the construction of credit-purchased housing, including $60.9 million dollars for loans to depositors through local executive bodies and the financial institution “Zhilstrosberbank”. Furthermore, $268.3 million in the form of loans will be allocated to stimulate private construction companies from the “Samruk-Kazyna” sovereign wealth fund. Among the conditions stipulated for access to these loans are co-financing capacities, land availability, all relevant architectural and legal documentation and a fixed price for the finished properties. Local executive bodies, in turnm will receive $168.7 million for ensuring the development of mass housing infrastructure. These combined measures will introduce an additional 1.5 million sq. metres of housing in 2016 and provide a corresponding contribution to GDP growth.[ix]

However, inefficient management remains a serious obstacle to the realization of the goals set by the government. For example, according to the Ministry of National Economy, in the first 8 months of 2014 371 building contractors were fined due to construction of poor quality social housing and violations of various state building codes, with four companies deprived of their licenses. The national construction sector is the subject of numerous complaints from the public including building delays, excessive bureaucracy in the process of obtaining housing and rampant corruption[x]

Other priority areas for anti-crisis interventions

Additionally, the program “Nurly Zhol” provides for the implementation of anti-crisis measures to support specific sectors of the economy impacted by global economic volatility. In the current year investments from surplus accumulated by from pension savings to the tune of $4 billion will be invested in a number of different areas. Notably, $1.4 billion worth of local currency will be converted into foreign currency to invest in foreign markets in order to ensure the diversification of the Single Accumulative Pension Fund’s investment portfolio and improve the financial performance of pension savings.[xi]

A further $1.7 billion will be invested in bank bonds and national companie as loans subject to market conditions. In the future, these funds will be used to promote priority sectors of the economy such as the the small and medium-sized businesses sector, which will see around 700 projects financed to create 14,000 jobs. This is intended to result in a $1.5 billion increase in productivity resulting in roughly $166 million in taxes paid to the state budget.  Agribusiness projects of strategic relevance, including meat and dairy production, will also receive finance.

As demonstrated, the ultimate aim of anti-crisis socio-economic policies is to fuel job creation while supporting existing employment. This year approximately $276.6 million will be allocated to this end, with $174.3 million allocated for the implementation of the updated “Employment Road Map”, that includes the repair of social infrastructure and housing facilities, an expansion of microcredit activities, the construction of hostels for young workers and subsidies to employers to help preserve jobs. These measures are designed to enable the employment of about 60,000 people, including 18,000 workplaces through the implementation of infrastructure projects alone. [xii]

 Conclusions

These anti-crisis measures, in which the state assumes the role of the main customer and generator of economic processes are not unique to Kazakhstan. For example, during the 2008 crisis, the main purpose of China’s policy of active development of infrastructure was to improve living standards by stimulating consumer demand inside the country. Key priorities of the program Beijing adopted in November 2008 included raising wages for residents of towns and villages, developing innovative industries and improving infrastructure. The cost of the program amounted to approximately $4 trillion yuan (or $588 billion) and accounted for almost 18% of China’s GDP. [xiii]

The essence of the medium-term economic strategy in Kazakhstan during this extended period of crisis is no different: active public investment in the domestic economy. In terms of economic policy a special emphasis is being made on maximizing the country’s existing potential for transit and transport in order to form a major business and logistics hub linking the markets of Europe and China. Thus, capital-intensive infrastructure projects both within the country and abroad are expected to see rapid growth in the coming years. In parallel, the Government will continue to allocate additional resources, including resources from the National Fund of Kazakhstan, to stimulate domestic demand and job creation, through support for small and medium-sized enterprises, improving access to credit and the implementation of public projects in the social sector.

A high dependence on commodity markets has left the economy exposed, meaning the need for deep diversification is increasingly urgent. The experience of leading industrialized countries shows that only active government support in the form of significant investments in the non-primary sector of the economy can provide results to this end. However, fundamental obstacles preventing the implementation of programs developed by the government exist in the shape of ineffective management and systemic corruption. According to the Corruption Perceptions Index published annually by Transparency International, Kazakhstan placed 128 of 168 countries in 2015, and recent years have not offered hope that significant progress will be made in stemming graft.

Sustainable economic growth in conditions of crisis will therefore require a thorough restructuring of existing institutions, including government bodies, civil society and the domestic legislative framework. In particular, it is necessary to create a system of incentives, primarily legal incentives, through which representatives of government agencies will be rewarded economically for acting in accordance with the law, as opposed to bypassing it. Moreover, institutional restructuring will be impossible without the active participation of civil society in decision-making and monitoring of the state programs’ implementation. Lastly, there is a pressing need for fundamental changes to the judicial system of the Republic of Kazakhstan, since today there is no concept of proportionality of punishments and major corruption crimes are either ignored or lightly punished, promoting an atmosphere of impunity. The implementation of these reforms will vastly increase the state’s efficiency in executing key development programs, which is never more important than during a prolonged period of crisis.

References:

[i] Data from the statistics committee under the Ministry of National Economy of the Republic of Kazakhstan – www.stat.gov.kz

[ii] Ibid.

[iii] Official website of the President of the Republic of Kazakhstan – www.akorda.kz

[iv] “Iran and China agree to become strategic partners”

https://lenta.ru/news/2016/01/23/partnership/

[v] “Iran and China agree on the construction of a nuclear power station and the delivery of oil”

http://www.interfax.ru/business/491255

[vi] “Strategy 2050: Kazakhstan revives the Great Silk Road”

 https://strategy2050.kz/ru/news/474

[vii] “SEZ Khorgos-Eastern Gate Centre of Development of Transit

 http://www.zakon.kz/4780571-sjez-khorgos-vostochnye-vorota-centr.html

[viii] Kazakhstan Temir Zholy (Kazakhstan Railways) clarifies the cost of construction for the Chinese terminal at the port of Lyanyungan

http://tengrinews.kz/money/ktj-utochnili-stoimost-stroitelstva-kitayskogo-terminala-254621/

[ix] Erbolat Dosaev briefs the government of RK on additional operative anti-crisis measures for 2016 http://economy.gov.kz/ru/news/detail.php?ELEMENT_ID=69127

[x] The other side of “affordable housing”: problems and the path to their solution

http://www.kn.kz/article/7970/

[xi] Erbolat Dosaev briefs the government of RK on additional operative anti-crisis measures for 2016 http://economy.gov.kz/ru/news/detail.php?ELEMENT_ID=69127

[xii] Ibid.

[xiii] China’s future will be determined by the next decade

http://www.ifes-ras.ru/massmedia/21/261-budushhee-kitaya-reshitsya-v-blizhajshie-dve-pyatiletki

Author Evgenny Hon, Independent analyst (Kazakhstan, Astana)

The opinions of the author may not coincide with the position of CABAR.asia.

 

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