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How Will the Economy of Kazakhstan Recover From the Coronavirus?

Economists predict global economic collapse amid the coronavirus pandemic. Kazakhstan, an oil-producing country with a non-diversified economy will be adversely affected.

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According to the International Monetary Fund (IMF), as a result of the pandemic, the global economy is projected to contract sharply by 3% in 2020, much worse than during the 2008–2009 financial crisis.

Oil exporting countries could not decide on prices and adjust production volumes, which caused a sharp drop in commodity prices. From mid-January to end-March, natural gas prices declined by 38% and crude oil prices dropped by about 65%. In addition, the ‘freezing’ of tourism around the world has led to an unprecedented contraction of oil demand.

According to the IMF assessment, all these conditions will negatively affect the oil exporting countries with non-diversified economies, including Kazakhstan. In 2020, the country’s GDP is expected to fall by 2.5%, prices will rise by 6.9%, and unemployment rate will increase from 4.8% to 7.8%. Introduced quarantine left most of the active population unemployed, closed the businesses, and forced the migrant workers to go home.

According to economists, Kazakhstan will experience hard times. Both the coronavirus pandemic and the drop of oil prices adversely affect its economy.

“To be fair, our economy was weak even before the pandemic. Its recovery will be difficult and slow. After the drop in oil sales, Kazakhstan will desperately seek new growth models at the state level,” said economist Rasul Rysmambetov.

Rasul Rysmambetov. Photo: matritca.kz

He believes that some small and medium-sized enterprises will close or change their business model. Almost everyone’s revenues will fall and the catering will suffer the most. The luxury goods niche will be affected less.

Nevertheless, the expert believes that reduced trade with other countries will give a good incentive to local companies. Kazakh companies will now expand their market by penetrating into other regions of the country, which may be less profitable than exports, but less risky.

“Recovery will depend on the vaccine invention. If quarantine is eased, then the recovery will be slow and not all companies will survive until it is completely cancelled,” says Rysmambetov.

Photo: A. Akhmetullin

Governmental Anti-Crisis Plan

The government has reacted to complaints from businessmen and people left unemployed by its own means. For those who lost their income due to quarantine, they offered to apply for social assistance of 42,500 tenge ($102), and promised to exempt the business from certain taxes.

At the end of March, President Kassym-Jomart Tokayev announced general anti-crisis measures, which excluded tax preferences and local support in the amount of 4.4 trillion tenge or $10 billion. At the same time, he noted that the state should take bold and effective measures to combat the consequences of the crisis.

Murat Temirkhanov. Photo from personal Facebook page

However, independent experts believe that the measures taken by the authorities can hardly be considered effective, and the allocated amount is not sufficient. Kazakh economist Murat Temirkhanov analyzed the pre-crisis budget and the budget adjusted to anti-crisis measures in 2020.

According to the new budget, tax revenues will decrease significantly – by 21%. However, according to the economist, the budget revenues will most likely drop even more drastically.

In addition, according to the adjusted budget, the government states that the cost of anti-crisis measures amounted to 1 trillion 789 billion tenge ($4.29 billion). However, this figure is challenging to find in the approved budget.

“If counted, these numbers do not match. In addition, there is double-entry accounting, when in the same state program, one article increases expenses and another decreases them,” Temirkhanov said.

In general, according to Temirkhanov, no more than 1.5 trillion tenge ($3.6 billion) will be allocated from the state budget for anti-crisis measures.

In addition, the economist believes that expenses of industries not related to the fight against the crisis unreasonably increased by 120 billion tenge ($287.99 million), such as, for example, the budgets of the Ministry of Finance, the Ministry of Foreign Affairs and the Astana International Financial Center.

“The National Security Committee increased expenditures for “Ensuring National Security” by 52.7 billion tenge ($126.48 million). It is also planned to allocate money for soft loans for housing construction; supposedly, it will provide jobs for people. However, this will lead to the fact that the money will be spent, although there will be no one to buy new apartments during the crisis. That is, certain companies will make profit, and that is all,” Temirkhanov said.

In addition, within the framework of the anti-crisis plan, the ‘Economy of Simple Things’ – soft loans program, which has existed for more than a year, will be boosted with 400 billion tenge ($959.97 million). Previously, less than 150 billion tenge ($359.99 million) out of the planned 600 billion ($1.44 billion) were allocated. The program worked very slowly before the crisis, and currently it works even slower.

“The same applies to other state loans programs. There, the announced amounts are very large as well, but their actual allocation will be many times smaller. It is interesting to note that all these state programs will be credited not from the budget, but from the money printer of the National Bank, which is an extremely unreasonable economic policy,” Temirkhanov said.

In addition, at the end of April, the government announced the allocation of 237.5 billion tenge ($569.98 million) to state wholesale distribution centers to avoid overpricing. However, economists consider such measures to harm free market: instead of creating an environment for existing business, the state starts another business, which is unlikely to be profitable.

Thus, budget revenues have now dropped sharply, while spending has risen. To save the budget, the authorities doubled money transfers from the National Fund up to 4 trillion 770 billion tenge ($10.8 billion). However, its resources are not endless.

“In 2020, the savings of the National Fund, where 57.5 billion dollars were accumulated, will be reduced by 3.7 trillion tenge, or 8.5 billion dollars. Maintaining low oil prices, state subsidies for business activity and increasing new tax benefits for businesses will lead to significant losses for the budget. Attracting external loans will further aggravate the situation. With such withdrawal speed, the assets of the National Fund can be exhausted in less than 3-4 years,” said Mazhilis deputy Amanzhan Zhamalov (quote from Tengrinews.kz).

The Resource Course

In late April, the Kazakh authorities announced the gradual quarantine easing and the start of individual enterprises’ work. It was reported that more than 450 industrial plants were tested for compliance with sanitary standards and resumed their work.

The authorities also spoke about the agriculture potential as an alternative to oil. However, Kazakhstan considers this since independence. The country launched programs to support agribusiness and agriculture; large companies are supported. However, Kazakh companies did not succeed in increasing the export to significant volume, except for a few companies.

Spring fieldwork in the Akmola region of Kazakhstan. Photo: primeminister.kz

According to Murat Temirkhanov, the agribusiness of Kazakhstan lags behind developed countries in terms of productivity and efficiency. The share of agriculture in tax revenues of the state is less than 0.5%.

“At the same time, in relative terms, agriculture is the largest recipient of state support, which is allocated both through direct cash subsidies and indirectly through preferential interest rates, preferential taxation, preferential prices for oil and fertilizers, etc.,” says the economist.

According to him, one of the biggest problems of the Kazakh economy is that the state’s share is too large. This leads to the fact that market mechanisms and competition cease to work.

“Our country is ‘cursed’ in terms of raw materials.  We can pay pensions, social obligations and live relatively better than our neighbors, thanks to the National Fund. However, we do not have a dynamic private sector, which is the main driver for the successful development of the country’s economy. There is no need to reinvent the wheel, we need to apply successful models of the developed countries,” the economist believes.

This article was prepared as part of the Giving Voice, Driving Change – from the Borderland to the Steppes Project

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