Kazakhstan slashes budget, blaming 'global crisis'

By bne IntelliNews February 11, 2015

Naubet Bisenov in Almaty -


Kazakh President Nursultan Nazarbayev has ordered his government to adopt new "anti-crisis" measures including cutting budget spending by 10% in order to overcome the current economic difficulties. Nevertheless he claimed that "there is no economic crisis in Kazakhstan" and blamed the "global" economic crisis for the country's economic troubles.

At a government meeting on February 11, Nazarbayev announced a 10% cut in central budget spending, or KZT700bn ($3.78bn), which should not affect government spending on social programmes. Nazarbayev also said that the Samruk-Kazyna sovereign wealth fund and national companies it runs would cut their spending by KZT337bn ($1.8bn), including capital spending by KZT240bn ($1.3bn).

One of the areas where the country could save money, Nazarbayev suggested, are the preparations for the Universiade in Almaty in 2017, which many regard as nothing more than a PR exercise, and the construction of the underground in Almaty. The former's price tag is, according to Nazarbayev, KZT100bn ($540mn), while the second stage of the Almaty underground requires funds worth KZT227bn ($1.23bn).

The low prices of oil and other minerals and a weak Russian ruble are the main factors of the global crisis that are hurting the Kazakh economy, Nazarbayev admitted. According to S&P - which downgraded Kazakhstan's credit rating to BBB on February 9 because of the fall in the oil price - oil accounts for up to 30% of Kazakhstan's GDP, over 50% of revenue and 60% of exports, while Russia is the country's largest supplier, accounting for a third of its imports.

At the same time, he fended off criticism that the country's membership of the Moscow-led Eurasian Economic Union was the source of the problem. "The weakening Russian ruble and growing pressure on goods on the Kazakh domestic market are damaging our local producers, but this has nothing to do with the Eurasian Economic Union," the Kazakh president said, adding "to believe this is the fault of the Eurasian Economic Union or the Customs Union is complete amateurship". Kazakhstan and Russia along with Belarus set up the Customs Union in 2009, which transformed into the Eurasian Economic Union in January 2015. Armenia joined the free-trade bloc in 2015 and Kyrgyzstan is expected to follow suit in May.

He noted that the Western sanctions against Russia imposed over its continuing support for rebels in Eastern Ukraine had resulted in Russia ending up in a "complicated situation". The Russian economic troubles are in turn hurting the Kazakh economy, which seems to have led Nazarbayev to harden his rhetoric on the economic war between Moscow and the West.

"These barbaric sanctions are not helping anyone as Europe is losing $25bn while Russia is losing $41bn," Nazarbayev said in unusually undiplomatic remarks carried by the nur.kz website. "I am sure and we are sure that Russia will overcome this situation with honour and will be developing and flourishing, as will we along with it."

The oil price and the ruble are putting significant pressure on the Kazakh currency to devalue but the governor of the National Bank of Kazakhstan, Kairat Kelimbetov, reassured the president at the meeting that he would not allow sharp fluctuations, ie a one-off devaluation, of the tenge.

"If there are changes in the foreign capital markets then we correspondingly will not allow a single-step shock devaluation but will work within a smooth and flexible change in the exchange rate," Kelimbetov said.

The National Bank has over $100bn in foreign currency and gold reserves which it can use to support smooth "correction" of the exchange rate, Kelimbetov noted. "I have no grounds not to trust the National Bank," Nazarbayev reassured. "I tell the Kazakh people again that we won't conceal anything," he said in reference to previous unannounced devaluations of the tenge.

The president also urged Samruk-Kazyna national companies to support the exchange rate of the national currency, even though a weak tenge benefits them as their products become more competitive on foreign markets.

"Kazakhstan will try not to allow sharp fluctuations of the exchange rate of the tenge and take into account your interests," Nazarbayev said. "I understand what is the point." Major metal companies operating in Kazakhstan, namely copper producer KAZ Minerals and steel smelter ArcelorMittal Temirtau, have announced plans to either suspend unprofitable enterprises or cut wages for their personnel, citing financial difficulties.

Expectations of a devaluation of the tenge in February - the previous two single-step devaluations took place in February 2009 and February 2014 - has led to a high level of dollarisation of the Kazakh economy. According to National Bank figures, Kazakh citizens are stacking away their savings in foreign currency, the share of which in total retail deposits increased to two-thirds at the end of 2014.

Kelimbetov said that the central bank and the government would in the near future announce anti-dollarisation measures by tightening controls over payments, foreign currency and foreign exchange players.

While pledging KZT250bn ($1.35bn) in emergency funds to support local machinery, small and medium-sized businesses, agriculture and exporters, as he did during the previous crisis, Nazarbayev called on Kazakh consumers to keep spending to support the economy - this time, however, on local products. "Let's appeal to all Kazakhs to be patriots in this complicated situation and buy our Kazakh goods. This will be help to our economy from our citizens," Nazarbayev said.

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