Kazakhstan to deregulate prices to boost market competition

Kazakhstan to deregulate prices to boost market competition
By Naubet Bisenov December 15, 2015

Amid massive belt-tightening prompted by low commodity prices, Kazakhstan is on course to abandon its Soviet-era controls over the economy and prices. As part of wide-ranging reforms – which also include the privatisation of state-owned stakes in blue-chip companies and tax changes – the government intends to abolish price controls in 2017. The authorities explain that price-setting is inefficient and hinders “free and healthy” competition.

Delivering a state-of-the-nation address on November 30, President Nursultan Nazarbayev suggested abolishing “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. “The distortion of market stimuli in form of the artificial regulation of prices should be eliminated,” Nazarbayev said.

The government first began talking about abolishing controls over the price of bread in early November when the agriculture ministry announced government plans to abandon subsidising the so-called social bread to the tune of KZT15bn a year for the whole population and replace it with targeted subsidies to vulnerable population groups costing KZT1.5bn a year. As a result, the ministry explained, the government would make savings by making better-off people pay the fair price for their bread as the price is expected to go up by about 50% to about $0.30 a loaf.

Earlier, in September, the government stopped regulating the price of octane-92/95 petrol while retaining controls over the prices of octane-80 petrol and diesel fuel. By regulating fuel prices the government tried to reign in inflation as transport costs are believed to account for nearly half of the costs of goods and services produced in the country.

But the government’s regulations of petrol prices had occasionally led to shortages of petrol as the country relies on imports from Russia for about a third of its consumption. This dependence made the Russian imports unprofitable when the wholesale price of petrol increased in Russia along with the price of oil. The price-setting also meant that the country’s national oil and gas company KazMunayGas had to supply oil to local refineries at reduced prices: the producer is now expected to sell oil at KZT17,100 per tonne ($7.9 per barrel) to the Atyrau refinery and KZT28,802 per tonne ($13.3 per barrel) to the Pavlodar refinery.

The government has resorted to the price deregulations after low oil and other commodity prices forced President Nazarbayev to admit that the country was experiencing a “real” crisis that was worse than the 2008-2009 global economic crisis. It has cut non-essential government spending and allowed the national currency, the tenge, to float freely in August. Since then the tenge has devalued by about 65%, accelerating inflation and pushing consumer prices up.

However, the abandonment of price controls doesn’t mean that the government will completely leave prices to the mercy of the market, explains Zhanna Sisembayeva, spokeswoman for the Kazakh Committee for the Regulation of Natural Monopolies and Protection of Competition. “The state regulation of prices in regulated markets will be replaced with instruments of anti-monopoly response and this will help form price competition and allow new players to enter the market,” she tells bne IntelliNews.

As part of the move to deregulation, the country amended legislation this year to increase the committee’s role as an anti-monopoly agency and granted it powers over entities with state involvement of 50% and over.

The spokeswoman says that before this happens in 2017 her committee will watch the activities of entities with regulated prices and tariffs operating in the spheres of railways, electric power and heating, petroleum products, oil shipment, civil aviation, port activities, telecom and postal services. “In these spheres the activities of entities are regulated at the moment, which means their prices and tariffs have to be endorsed,” Sisembayeva explains. “The number of such entities is actually not that big.”

In 2016 the committee will monitor prices and tariffs in these sphere and in January 2017 the regulation of prices will also be abolished for these entities, the spokeswoman notes. “This means they will operate in a free, competitive market and their activities will be regulated only by the market.”

At the same time, the deregulation of prices doesn’t necessarily mean that “they will go up because the market and competition will regulate prices”, Sisembayeva concludes.

In order to back up her arguments, the spokeswoman cited the example of deregulation in the air transport sphere, which led to the entry of the fourth domestic carrier, Qazaq Air, in the market with one-way fares for as little as $30 on the busiest route between Almaty and Astana. This forced the flagship carrier Air Astana to offer $40 one way.