Kazakh President Nursultan Nazarbayev has announced yet another attempt to kick-start privatisation to revive the ailing economy.
Delivering a state-of-the-nation address on November 30, the president criticised the bloated state involvement in the oil-based economy and said that “massive privatisation” and competition were key instruments to “maximally” free up internal resources to ensure “stable” economic growth.
“First of all, a huge state sector, which is over 7,000 enterprises. The Samruk-Kazyna sovereign wealth fund and KazAgro agricultural holding company are inefficiently managing huge assets in industry and agriculture. Samruk-Kazyna’s assets alone account for 40% of GDP with over 500 ‘daughters’ and ‘granddaughters’,” Nazarbayev blasted. “All this is accompanied by bloated staff and consumption of enormous budget resources and at the same time drives out private investment and initiatives.”
The privatisation drive is designed to boost competition and replenish government coffers amid falling revenue because of low oil and other commodity prices. Reforms in the tax, pension and budget spheres are also expected to give a boost to the country’s economic development over the next decade “without super petro revenues”.
However, the Kazakh authorities have repeatedly attempted to reduce state involvement in the economy by kick-starting privatisation, but with meagre results so far.
In 2014, the government announced a programme to sell off hundreds of non-core subsidiaries of national companies run by Samruk-Kazyna; in late October 2015 officials reiterated the plans along with a wide range of incentives for foreign investors, including the adoption of English law to enable them to avoid dealings with the corrupt Kazakh justice system, and in November President Nazarbayev tried to use his visits to London and Paris to entice Western businesses to invest their money in Kazakhstan’s sluggish economy.
Since 2011 Kazakhstan has also tried to attract retail investors to the stock market via the “People’s IPO” programme which envisages floating part of state-owned stakes in national companies. However, the government has so far only managed to offer shares of the KazTransOil oil-shipping company in 2012 and Kegoc electricity grid operating company in 2014.
No priority rights
Should the plans succeed, Samruk-Kazyna and KazAgro, along with the Baiterek national holding for managing development institutions, “should be transformed into compact entities”, Nazarbayev noted. Privatisation encompassing “all organisations owned by the state” should also be open and competitive and state-owned stakes in companies should be offered on the stock exchange and auctions, he warned. “I order the government to cancel all shareholders’ priority rights to acquire assets on sale.”
However, it is not clear whether Nazarbayev’s order concerns the government’s priority right to acquire oil and gas assets: one such asset is BG’s 29.25% stake in the giant Karachaganak gas condensate field which the government may claim following Shell’s takeover of BG. Astana has an upper hand in this issue, given $2bn claims it had reportedly brought against the Karachaganak consortium.
Prices and taxes
The president also suggested the abolition of “artificially” regulated prices and agricultural subsidies that, according to Nazarbayev, reach up to $2bn a year, and instead adopt “market price-setting” in all sectors of the economy. Kazakhstan regulates the prices of octane-80 petrol and diesel fuel and sets the price of bread, but the government has floated the idea of abolishing the practice of subsidising bread for the entire population in 2016, and using the money to target socially-vulnerable groups only.
Nazarbayev also suggested the overhaul of the country’s taxation system, abolishing inefficient tax breaks and regimes. The president suggested retention of only three tax regimes – general; a patent for entrepreneurs whose income doesn’t exceed a certain amount (taxed at 2%) and a special tax regime for small and medium-sized businesses and farms (taxed at 3%) – to “bring the shadow economy into the light”.
The country’s State Statistics Committee estimates 28.5% of the economy was in the shade, including 2.3% was illegal, in 2014. The president noted that the deadline for legalising shadow capital and property (including in foreign countries) had been extended until December 31, 2016, and pledged “confidentiality and protection from prosecution” for those who take part in the campaign, launched in September 2014.
Nazarbayev also said that the Kazakh population would be forced to declare income and expenses starting from January 1, 2017, “after which measures will be taken to expose accounts and assets wherever they are to establish their source and taxation, including with help” from the Organisation for Economic Cooperation and Development.
Living within one’s means
The president noted that almost $20bn, or equivalent to 14% of the country’s GDP, had been spent from the National Oil Fund on diversifying the economy and supporting employment, building roads and propping up the banking sector, agriculture and small and medium-sized businesses since the global financial crisis hit the country’s economy in 2008-2009.
As a result, the processing sector increased by 30%, the chemical and construction materials industry by 70%, machine-building by 110% and exports of finished products by 200% in the past five years, according to Nazarbayev. However, the government should now adopt the “living within your means” principle as tax collection fell by 20%, VAT by 25% and corporate tax by 13%, the president warned.
“Increasing taxes is not a way out from the current situation because this means additional pressure on business, while covering budget expenditure from the National Oil Fund is short-sighted,” he said. “That’s why my position is fundamental, which is the use of money from the National Fund to cover current expenses should be ceased.”
The low prices of oil and other export commodities as well as the stagnant economy, which is expected to grow by a meagre 1.2% in 2015 against 4.3% in 2014 and 6% in 2013, have forced the government to redraft its budget and cut non-essential spending.
However, despite severe belt-tightening, Nazarbayev, who styled himself a “guarantor” of social stability on the back of high oil prices, showed some generosity towards public-sector workers and socially-vulnerable people: he pledged a 28% increase in healthcare wages, 29% in the education sphere, 30% for lower-level civil servants, 40% for social security workers and a 25% hike in social benefits and student grants, as well as a 2%-above-inflation increase in pensions.
“Money for these purposes we will save from optimising budget expenditure,” the president bragged. “As a result, we will find money for increasing wages and are fulfilling our social obligations before people.”
Free-floating exchange rate
These increases in wages will take place almost five months after the authorities announced a free-floating exchange regime for the national currency, the tenge, on August 20, which has resulted in an over 60% devaluation of the tenge. Since the switch to inflation targeting, whereby the National Bank should reduce the rate of inflation to 4% in the “medium term” by employing flexible interest rates, the Kazakh currency lost nearly 40% of its value against the dollar.
Nazarbayev hailed the adoption of a free-floating exchange regime as “fundamental” and said there would be no return to the “infinite” propping up of the national currency at the expense of the National Oil Fund. At the same time, in order to help the banking sector adapt to the free float, the president suggested that commercial banks should be allowed to write off non-performing loans, a move they had advocated for a long time, and said that banks that could not increase their capital should “leave” the market.
The National Bank should also reform, Nazarbayev warned, “relinquishing control over the Single Pension Fund, the Fund for Distressed Assets and other financial institutions”. The president’s suggestion marks the dismantling of the legacy of the bank’s previous governor, Kairat Kelimbetov, who presided over the merger of a dozen private pension funds with a state-run fund into the current Single Pension Fund, which now sits on KZT5.4tn (€16.7bn) as of October 1, 2015, an 18.6% increase between January and September. In 2016, according to Nazarbayev’s plans, this money will be managed by private Kazakh or foreign companies.
Goals for the next decade
In the following decade, the plans, announced by Nazarbayev, should translate into an annual economic growth “at the level of 5%”, increase exports of finished products “by at least 100%” compared to 2015 to reach “$30bn a year”, increase annual investment “by $10bn” a year and “by at least $100bn” in 10 years, create “over 660,000 new jobs” and increase productivity “by 100%”.
All this, in the president’s opinion, should be achieved via the attraction of private investment, including from multinationals, and the Astana international financial centre, which will become “a regional hub in the spheres of Islamic banking, private banking and re-insurance”, via further reforms to improve the investment climate, the development of six “macroregions” – southern, northern, central-eastern, western, Almaty and Astana – in the country which should be linked by transport, logistics and telecom infrastructure.
The president also hopes these goals will be achieved by attracting foreign funds, capturing export niches in neighbouring giants such as China, Russia, India, Pakistan and Iran, developing technical and vocational education and the innovation potential of the Kazakh economy.