In our opinion, the new development plan for Kazakhstan will not be able to solve the problem of the «lost decade» because it does not propose fundamental changes to the current development model, writes Halyk Finance.

We believe that the current approaches of the «new» Kazakhstan are not significantly different from the «old» ones. Over the past twenty years, Kazakhstan has built an economic system called «state capitalism» instead of a full-fledged market economy, which is based on the distribution of oil rents. Currently, the authorities are trying to make only minor adjustments to the existing economic system, avoiding a fundamental transition to a full-fledged market economy.

The author of this article, Murat Temirkhanov, participated in the discussion of the National Development Plan until 2029 (NDP). Unfortunately, due to the large number of speakers, the regulated time for speaking was very short, which did not allow for a proper description of the document’s problems. Below are the key comments of Halyk Finance on the draft National Development Plan of Kazakhstan until 2029.

There is no justification for a sharp acceleration of economic growth

In early February of this year, the draft National Development Plan of Kazakhstan until 2029 (NDP) was published, which stated that «In 2023, in the President’s Address to the people of Kazakhstan, a new course of the country aimed at qualitative economic growth at a rate of 6-7% per year with a doubling of GDP by 2029 was outlined.» In this regard, in the new development plan of Kazakhstan, this task of the president became the main one. However, this document does not provide an explanation of how such a sharp acceleration of economic growth will occur and through what new reforms such growth will finally become qualitative.

After the publication of the NDP in mid-February, the World Bank (WB) published its report on the economy of Kazakhstan, which used materials from an extensive analytical work program on Kazakhstan, including the results of the «Country Economic Memorandum 2022» and the «Public Finance Review 2023». The report analyzed the growth problems and structural deficiencies of the Kazakhstani economy. In our opinion, it is precisely this kind of analysis that is lacking in the new NDP for everyone to understand how the authorities will be able to sharply accelerate economic growth.

Over the past 10 years, the average economic growth of Kazakhstan has been less than 4%, and, according to estimates, the potential economic growth of Kazakhstan with the current economic structure is around 3-4%, closer to 3%. In these ten years, there has been no obvious success in diversifying the economy, and there has been no progress in the complexity of the economy. For example, for more than 20 years, agriculture in Kazakhstan has been considered a «new» growth point (as stated in the NDP), but despite the fact that the state has spent huge amounts of money on this sector of the economy, there has been no progress in it.

One does not need to be an economist to understand that the main task of the NDP (to sharply accelerate economic growth and make it qualitative) is impossible without fundamental structural reforms. However, even if there are fundamental reforms, in any case, it will not be possible to quickly increase economic growth. The transition from one model of economic development of the country to another will be difficult and very painful. It is quite possible that during the transition period, economic growth may even slow down.

The NDP states that «the qualitative component of economic growth will be a multiple increase in investment in fixed capital and labor productivity,» but there are no clear and specific justifications for how this can happen.

One of the key problems of the NDP is that this document does not contain a critical analysis of why all past efforts of the authorities to diversify and qualitatively grow the economy have not led to the desired results and how «new» government plans differ fundamentally from the «old» ones.

If you prepare a table of all measures taken by the authorities to develop public administration, entrepreneurship, agriculture, and industrialization in Kazakhstan since 2008 (when there was a rollback from market approaches to economic development) and compare them with the «new» measures proposed in the NDP, then you can find that all this has already been done and more than once.

Need for fundamental reforms

The WB and the IMF in their reports on Kazakhstan also repeatedly stated that the acceleration of qualitative economic growth is possible only thanks to two interconnected directions: through an acceleration of investment growth in the economy and through an increase in the total factor productivity (TFP) in Kazakhstan.

As for the growth of investment in the economy, the WB and the IMF believe that it is impossible to accelerate the economic growth of Kazakhstan by two times only through a sharp increase in investments, as the government constantly plans. The main role in the qualitative growth of the economy of Kazakhstan should be played by the growth of total factor productivity — TFP, which in turn will lead to an increase in private investments.

In addition, according to the draft NDP, it is not clear how the government will be able to sharply increase investments in Kazakhstan. Investments in fixed assets in Kazakhstan in recent years have been declining (as a % of GDP). If investments of the National Welfare Fund «Samruk-Kazyna» and other state-owned companies are considered not private (as statistics do), but state-owned, then it turns out that the majority of investments were made at the expense of state and quasi-state, and not at the expense of the private sector. And again, there is no critical analysis of why private investments (domestic and foreign) are slowing down in Kazakhstan.

When it comes to the growth of productivity in Kazakhstan, the World Bank report mentioned earlier notes that total factor productivity (TFP) has been stagnant in Kazakhstan for over 10 years. If Kazakhstan cannot break the productivity stagnation, and considering the impossibility of sharply increasing investments, the potential economic growth will remain around 3-4%, closer to 3%.

The National Plan for Development (NPR) project notes the following: «A high degree of state participation is one of the key characteristics of the Kazakhstani economy. Involvement is expressed both in direct participation in markets as a player and in distorting market mechanisms through regulation.» However, the document itself does not mention any radical measures to reduce state participation in the economy, and most of the measures for economic development proposed in the NPR are fundamentally anti-market in nature.

It is necessary to start with tax and budget policy

From the perspective of macroeconomic reforms, radical reforms in tax and budget policies are primarily necessary for Kazakhstan, but the NPR pays very little attention to this, and the proposed measures are quite inadequate — they are a repetition of what has been said for many years. Most importantly, it is not clear from the document how the plans for a very high increase in government spending and investments (budgetary and extrabudgetary) for the social and economic development of the country over the next 5 years will be financed.

Budget policy

From the perspective of budget policy, in order to reduce the economy’s dependence on the commodity cycle and stimulate business activity in our oil country, it is extremely important to implement countercyclical budget policy. In the «new» Kazakhstan, much is said about this, but countercyclical budget rules have never been followed. If we look at the president’s election program, his messages, and individual instructions, we can see that they constantly talk about increasing government spending and investments in the social and economic development of Kazakhstan, which contradicts countercyclical budget policy. That is, today the government is faced with a choice between countercyclical policy and the president’s promises, which lead to a large increase in government spending. In this case, the government primarily increases government spending and investments through the National Fund in accordance with the president’s instructions and postpones the implementation of countercyclical budget policy.

In general, it can be noted that the described problem of state planning and budget strategy is just one of several fundamental problems in Kazakhstan’s budget system.

Tax policy

In the National Development Plan until 2029, insufficient attention is paid to tax reform. The NPR has only two tasks related to tax policy — increasing the efficiency of tax administration and improving the mechanism for tax incentives. There has been a lot of discussion about tax administration in the «old» Kazakhstan, and now it exists in the «new» Kazakhstan. Unfortunately, there has been little progress in this direction so far.

Talk about revising tax incentives only started in «new» Kazakhstan more than three years ago. However, apart from words about «analyzing and optimizing tax incentives to increase tax revenues and strengthen the budget revenue base,» nothing has happened yet, and there are no specific plans in this direction in the NPR.

We believe that the government should return most tax rates to the level they were before 2007. However, before that, the authorities must take a number of serious measures, including: a fundamental budget reform, a thorough analysis and cancellation of non-market and inefficient tax incentives, and a real improvement in tax administration. The fact that the government has decided not to raise the VAT rate again is a populist decision that will only exacerbate the problems of the budget deficit.

How strong is the «foundation» of the economy?

The National Development Plan project until 2029 has a separate chapter «A Strong Foundation of the Economy,» which describes the construction of a strong foundation of the economy in such sectors as oil, gas, metals, electric power, and manufacturing. However, the strength of this foundation raises big questions due to the anti-market intervention of the state in these sectors of the economy, the key problem of which is low internal prices regulated by the state.

The very definition of the economic foundation raises questions. In our opinion, today the foundation of the economy of Kazakhstan is only the export of oil, metals, and other natural resources of the country. In order to prevent this foundation from crumbling, it is necessary to increase private investment to support the volume of raw material exports, but there are quite serious problems with this now.

Investments in the export of oil, metals, and other natural resources

Let’s consider the key foundation of our economy — the export of oil. This foundation is not being destroyed only thanks to three oil megaprojects (Tengiz, Kashagan, and Karachaganak). Thanks to the terms of the production sharing agreements for these projects with major foreign investors, all oil produced at these fields is exported, so foreign investors are willing to invest new investments in these projects to expand oil production.

However, there are serious problems with private investments in new fields. New investments in oil exploration and production will be limited due to the significant difference between export and domestic oil prices, and due to the government’s requirement for subsoil users to allocate a certain share of extracted oil to the domestic market at a low price. Such a condition is not beneficial to private investors, which is why investments in new fields are stagnating. Moreover, domestic oil consumption in Kazakhstan is rapidly increasing, and there is no guarantee that in the future the government will not start pressuring subsoil users to increase oil sales to the domestic market at a loss to investors.

To discover new fields and expand oil production in Kazakhstan, tens of billions of US dollars are needed. The government does not have such money, so the question arises: where will the money come from to maintain this economic foundation at least in its current state?

The same situation is happening in metallurgy. In order to fulfill the president’s anti-market instruction that domestic industry should receive local raw materials at adequate prices, the Ministry of Industry is planning to introduce mandatory discounts for the sale of basic raw materials to domestic processing enterprises into legislation. Now it will be cheaper than when supplied for export. Today, new investments are already poorly going into exploration and extraction for new metal and other mineral deposits. However, after the introduction of mandatory discounts for the sale of local raw materials to domestic processing enterprises, such investments may come to a complete halt.

Gas, electricity, and others in the NPR — these are cost centers, not a foundation

As mentioned earlier, compared to other countries, today the foundation of our economy is the export of natural resources. The less such export, the weaker the foundation. From this point of view, the gas sector is not the foundation of the Kazakhstani economy, because starting from this year, domestic consumption will exceed the volumes of its own commercial gas. At the beginning of this year, the chairman of the board of QazaqGaz announced that a gas deficit in the domestic market would be observed already this year. In this case, there is a particularly acute problem with low regulated gas prices in the domestic market of Kazakhstan.

The gas sector is an extremely important basic infrastructure sector for any country. In Kazakhstan, the production of raw gas and its processing into commercial gas is completely unprofitable because it will all go to the domestic market at prices much lower than export prices. The contract for the export of gas from Kazakhstan to China is likely to be a re-export of gas from Russia. Due to low prices in the domestic market, the production and processing of raw gas into commercial gas in Kazakhstan is unattractive to private investors. Because of this, private investments do not go into the gas sector, and the government is forced to invest state funds in the development of the industry. Today, almost the entire gas sector is owned by the state (full state monopoly).

The same problems exist in the power, water, and railway industries. These are also basic infrastructure sectors of Kazakhstan with regulated low tariffs. And again, due to low domestic prices in these industries, private investments do not go into them. And again, the same question arises — where will the government get so much money to cover the rapidly growing demand for cheap electricity, water, railway transportation, and reduce the very high wear and tear of equipment and infrastructure?

Many questions

We have serious questions about the sections on entrepreneurship development, manufacturing, and agriculture in Kazakhstan. The NPR project did not conduct a critical analysis of why all past efforts by the authorities to develop these areas did not lead to the desired results and how the «new» plans of the authorities fundamentally differ from the «old» ones. An analysis of the document shows that all measures to support business in these sectors have already been in the past. Moreover, most of the measures to support business are fundamentally anti-market and only reduce the efficiency and productivity of business. This was also noted in the World Bank report, which spoke of a «lost decade.»

Agriculture

A vivid example of incorrect approaches to the development of an efficient and competitive business is agriculture. The NPR has a separate section on the development of the agro-industrial complex. All measures proposed in the document have already been in the past, and they have not led to the desired results.

The vast majority of state support for agriculture in Kazakhstan is inherently anti-market, leading to distortions in the market motivation of agricultural producers to increase their competitiveness (primarily by increasing productivity). Today, our agribusiness has turned into a budgetary dependent, which does not strive to survive through its clients and competitive struggle, but knows that the state will always help and give money even in the most favorable times for agriculture. In other words, the government effectively supported and supports the inefficiency of agriculture, and this support comes at the expense of consumers (rising food prices) and taxpayers (financial support from the state).

Issues with Kazakhstan’s Pension System

Judging by the draft NPR, there are no problems in the pension system, only the need to increase its efficiency. In our opinion, the current pension system has very serious problems that greatly worsen the long-term stability of the state budget and the macroeconomic stability of Kazakhstan. A fundamental pension reform is needed.

Kazakhstan’s two-tier pension system (pension payments from the budget and pension payments from the NPF) has always been unbalanced and has not had sufficient long-term stability. The relatively recent decision to allow working citizens to use a portion of their pension savings in the NPF to purchase housing and medical treatment has undermined the long-term stability of Kazakhstan’s pension system, sharply increasing the burden on the state budget in the medium and long term.

Today, the accumulative pension system (in the NPF) no longer makes sense, as it will not be able to provide adequate compensation for labor incomes with a pension when a person retires. As a result, in the near future, the burden on the state budget will unacceptably increase due to the accelerated growth of pension expenditures in the budget. Today, we need to talk not about modernizing the pension system (as the government voices), but about a complete reconsideration of its fundamental principles.

Issues with Affordable Housing Policy

The first chapter of the NPR is called «High Quality of Life.» It is difficult to say why this chapter comes first, as high welfare of the population is ensured by high labor productivity and factors of production. In this regard, it would be more logical to place this chapter after the NPR explains how the economic growth leap will be ensured and where the state will get the money for quality of life, for economic development, and for rapid growth in social spending.

One of the shortcomings of this chapter is the minimal attention to the government’s policy on affordable housing in Kazakhstan. The availability of affordable housing is a key element of quality of life in any country. In our opinion, there is no serious reform in this area, and this government policy remains very contradictory, ineffective, and inconsistent with advanced experience.

In conclusion, we would like to note that the above is only a part of the multitude of questions regarding the NPR project. In our opinion, the new development plan for Kazakhstan will not be able to solve the problem of the «lost decade» because it does not propose fundamental changes to the current development model. We believe that the current approaches of the «new» Kazakhstan do not differ much from the «old» one.

Over the past twenty years, Kazakhstan has built an economic system called «state capitalism» instead of a full-fledged market economy, which is based on the distribution of oil rent. Now, the authorities are trying to make only separate adjustments in the existing economic system, avoiding a radical transition to a full-fledged market economy.