Kazakhstan rolls out the reforms

Kazakhstan rolls out the reforms
The Bayterek tower in Astana.
By Ben Aris in Nicosia May 11, 2017

Kazakhstan is going through some of the toughest years since it achieved independence a quarter of a century ago, but the economic hardships have tempered the government’s resolve to push through a raft of extremely ambitious reforms.

The commodity-dependent Kazakh economy has been hard hit by the collapse of oil prices, and now the government is accelerating its diversification plans to boost the industrial and processing parts of its economy in what Minister of Finance Bakhyt Sultanov has called the third phase of its modernisation.

“Our goal is to bring Kazakhstan into the top 30 economies of the world by 2020,” Sultanov said in a country presentation at the European Bank for Reconstruction and Development (EBRD) annual meeting in Cyprus on May 10.

Following the plunge in oil prices, Kazakh economic growth eased sharply from 4.2% in 2014 to 1.2% in 2015 and just 1% in 2016. However, while the government originally expected growth to slow down further to 0.5% in 2016, instead it was boosted by an increase in oil production thanks to the relaunch of the giant Kashagan oilfield at the end of October.

The economy already seems to be coming out the other side of the crisis in 2017, according to both international observers and the Kazakh government. Following OPEC’s push to raise world oil prices, the hydrocarbon-reliant Central Asian country’s growth is mainly contingent on gradually ramping up its oil production to its previous levels.

Oil production declined by 1.7% to 79.6mn tonnes in 2015 and is expected go down further to 75mn tonnes in 2016. However, going forward the government expects Kashagan to add between 4mn-7mn tonnes of oil year to the country’s production, bringing up overall production plans to approximately 85mn tonnes. 

A narrow gauge of GDP, which accounts for 60% of the economy, saw 3.7% growth in January-February, reflecting expansion in the transport, telecommunication and trade sectors.

“Despite the numerous factors that have been negative for our trade indicators we nevertheless have tried to maintain a level of growth of 1% and this year we are going to get closer to 3%,” Sultanov said. “What we went through has been a very good lesson for our future plans.” 

The worst crisis years were 2014-2015 but since then the economy has stabilised. Now the focus is on fixing the economy and reducing its propensity to shocks by diversifying away from the over-dependence on oil. It's the same business strategy all the oil and gas producers in the region claim to have, but Kazakhstan seems to be making the most concerted effort yet.

Going their own way 

Kazakhstan-watchers say that what is unusual is that the Kazakh team have come up with their own ideas of how to proceed. Traditionally Moscow still dominates in the region, with most governments looking north for the intellectual lead. Russia introduces reforms such as sovereign wealth funds or deposit insurance schemes and the rest of the ex-Soviet republics follow suit. 

This differs from Central Europe, where countries long ago turned to Brussels for their lead, and indeed many of their reforms were carried out as part of the EU accession processes. Now, however, Kazakhstan is diverging from its neighbours and taking its own path. 

“Kazakhstan is trying a new model. They are going to invest heavily and try and take the short cut to fast growth by giving the economy a boost,” says Chris Weafer, CEO of Macro Advisory. “Moscow will be watching closely as if it works – and the Russians are proposing to take the longer road of boosting productivity – then it might change minds in the Kremlin.”  

Kazakh President Nursultan Nazarbayev has come up with a “new political paradigm” based on five priorities, according to Sultanov.

“The first modernisation [in Kazakhstan] happened 25 years ago at the start of independence when we introduced the market economy and the first round of privatisation. During the second decade we implemented reforms and developed strategic approaches. Now we are entering a new stage of change. We have to accelerate technical modernisation of the economy,” said Sultanov. “We know we can’t lag behind. If we did then it would be like death sentence.” 

Nazarbayev’s plan calls for an improvement to the business environment; investing into the quality of human capital; improving the quality of reforms; improving the security situation; and increasing the effectiveness of the fight against corruption.

None of the new measures are rocket science. The issue with most reforms needed in the Commonwealth of Independent States (CIS) is that they are obvious; the hard part is implementing them and that needs real political commitment.

The EBRD is impressed and has tripled its investment into the republic in the last four years to $1bn, invested into 33 projects.

“Two years ago the first question an investor would ask is: when will the currency devalue and how can we invest when the macro-economic situation is so unstable,” said EBRD country manager Janet Heckman. “The great success story in the last two years is in August the central bank delinked the currency switched to FX targeting. Now devaluation risk is not a topic.”  

Freeing the currency is one of the reforms where Astana did – belatedly – follow the lead of Moscow, which freed the ruble in November 2014 and saved its hard currency reserves when the oil price collapse that month halved the value of the national currency. Kazakhstan has reaped the same rewards of falling inflation and an improved export environment.

Kazakhstan has also been rising up the World Bank’s Doing Business ranking, soaring from 55th place to 35rd in the last two years.

Privatisation drive restarted

Now the country’s privatisation programme is due to be restarted in the autumn. Previously one of those “don't hold your breath” reform promises, Sergey Guriev, the EBRD chief economist, told bne IntelliNews in an interview that the state companies he has been talking to say there is real momentum to sell state companies and they expect it to begin towards the end of this year.

“We have a plan that includes specific enterprises that have to be privatised,” Sultanov said. “In some we have to increase the participation of the state but in many others we have to encourage private shareholding… There is a whole list of companies that have to be privatised in this second stage.” 

The government also intends to restructure the economy. The share of the social sphere, which remains huge in most former Soviet economies, will be reduced to 15% of GDP as per OSCE indicators, Sultanov said.

In addition, there is a string of business-friendly reforms planned, such as reducing taxes and investing into production.

“We know the raw materials sector has been one of the main sectors but lately we haven’t got that much income from raw materials,” says Sultanov. “So we plan to accelerate the diversification of our economy by drawing on the lessons from best practices from around the world.”  

All this activity will be made easier with the participation of the Chinese, who are investing heavily in the New Silk Road infrastructure that will connect Europe and Asia overland, and in which Kazakhstan will become an important way station. Much of Astana’s new investment programme is tied to or coordinated with the Chinese project.

“We have the New Silk Road cooperation with China’s programme. We managed to invest $9bn into projects which involved the experience of many countries,” says Sultanov.

All these things are due to be showcased at Kazakhstan’s Expo in September, into which the government has been pouring significant resources. To highlight the government’s commitment to improving the business environment, after the event is over the Expo town will be turned into a special business zone that will be a sort of diplomatic enclave for businesses where UK, not Kazakh, law will be applicable to incoming investors.

“Kazakhstan is very pragmatic but has very ambitious goals,” concluded Sultanov. “We already accumulated certain knowledge but we would like to learn more.”