Kazakhstan's economy is set to experience one of its toughest years in over a decade as a result of low oil prices, the ongoing recession in Russia and slowing demand from China. The IMF and the government project GDP growth of just 0.1% and 0.5% respectively – down from an average of 5.5% over the past ten years – while The Economist Intelligence Unit projects the economy will contract by over 1% this year.

The country stands out among its regional peers in putting forward a clear anti-crisis package to both support demand in the near term, and address longer-term supply-side weakness in the economy. In the short term, reserves in the National Fund provide the fiscal room for a stimulus package to offset the fall in private investment and to boost lending to small and medium-sized enterprises (SME).

Kazakhstan is in a relatively advantageous position to weather the impact of low oil prices thanks to its sovereign reserves. The key question will be how effectively the stimulus funds will be spent, given high levels of state corruption. The state does not have a strong track record of effectively allocating resources, as illustrated by President Nursultan Nazarbayev’s complaint in 2013 that $10bn in assets from the National Fund used to support the economy following the global financial crisis could not be accounted for.

It is also worth noting that Kazakhstan’s short-term anti-crisis response runs against the longer-term aim of reducing state involvement in the economy. Given the weak position of the banking sector, the state will have to play a major role in driving investment and providing finance in the near term. In such circumstances, plans to partner with organisations such as the European Bank for Reconstruction and Development (EBRD) to ensure the effective allocation of resources are to be welcomed.

Beyond the initial stimulus programme, the government's reform package indicates that it recognises Kazakhstan is not just facing a cyclical downturn, but a fundamental challenge to its existing economic model that could lower trend growth.

In response, the government has also announced a package of supply-side measures aimed at diversifying the economy away from hydrocarbons, boosting infrastructure and international trade links, and improving the business environment. Some of these have already been implemented – most notably, Kazakhstan’s accession into the World Trade Organization, completed in 2015 after 20 years of negotiations. Two other flagship reforms are the creation of a new international financial centre in Astana – aimed at improving the availability of long-term domestic finance and boosting investment – and a major privatisation programme. According to the government’s plans, stakes in 783 companies are set to be sold off, including a number of “national champions” such as KazMunayGaz, KazAtomProm and Temir Zholy.

These are ambitious goals, but there are significant challenges to their successful implementation. The privatisation process must be conducted in a manner that is seen to be equitable and legitimate, but, this is difficult to achieve in the context of a closed political system with weak civic oversight of executive decisions. Past pre-existing privatisation schemes, such as the “People's IPO” programme to offer shares in major state companies to a large number of domestic investors, have proceeded far more slowly than planned.

Lack of trust

In this context the public protests in some cities in April and May against proposed amendments to the Land Code this year are significant. The protests illustrated the low level of trust in the government, and public anxiety over expanding foreign – in particular Chinese – ownership of the economy. Although the protests were relatively small in scale, the government quickly announced a moratorium on the land reforms, while the economy and agriculture ministers both resigned.

Given officials' anxiety regarding social unrest, it seems unlikely the government will undertake disruptive structural reform, particularly if this could lead to large-scale redundancies. As a result, it is unclear what formal or informal social obligations will be tied to the sale of state assets, which could have a significant impact of valuations and potential productivity gains. For example, will private owners be allowed to close loss-making enterprises in single-industry towns? The statement by Berik Beisengaliev, managing director of state holding company Samruk-Kazyna, that the purchasers of socially-important enterprises “will have to commit to maintaining jobs” suggests that the opportunity to restructure some companies will be limited.

More fundamentally, privatisation is not in itself a solution to the problems of low productivity and weak management, particularly when there is a symbiotic relationship between business, politics and the bureaucracy, as is the case in many sectors of Kazakhstan's economy. In such circumstances, it matters less whether assets are formally in state or private hands. Privatisation alone cannot break the link between business and political power, except possibly through the sale of a large share of the assets to foreign buyers, which may be undesirable for other reasons. Thus, while it is likely that Kazakhstan can achieve incremental improvements to its business and regulatory environment, fundamental institutional change is likely to prove elusive in the current political and social context.

Alex Nice is Regional Manager at The Economist Intelligence Unit covering Russia and Central Asia.