It is not clear what Nazarbayev postulates as the third* priority of the new modernization. It seems to be either preserving or ensuring the macroeconomic stability in the country. We are not quite certain about this because we see several contradictions in the president’s formulation.

Elaborating on the subject, Nazarbayev says, “The recovery of our credit policy’s stimulating role and the procurement of private capital are the crucial tasks for us today”. Based on this phrase, we can reach a logical conclusion that the economic stability in the country has shattered. However, Nazarbayev’s (and the government’s) numerous statements made before contradict this conclusion.

This part of the president’s address starts with task assignments to the National Bank of Kazakhstan including the “development of an inflation targeting regime”, “gradual decrease in the inflation rate to 3-4% in the mid-run” and the “financial sector reload”.

In particular, Mr. Akishev and his team must “work out a comprehensive set of measure for the bank sector rehabilitation”. We can rest assured that this task will be completed with success. Moreover, knowing the routine of the Kazakh “superpresidential vertical”, we may suppose that a draft of the required document has already been written and is waiting to be signed and made public.

As for Nazarbayev’s statements, such as “we mush intensify clearing the banks of bad loans and, if necessary, ensure their additional capitalization on the part of the shareholders”, it follows that the Chairman of the National Bank has been given some sort of carte blanche.

In other words, Nazarbayev’s request to “switch from the formalized approach to the risk-oriented one in order to take remedial actions towards banks without waiting for their formal failure to comply with the rules” means that the regulator will be able to clear the bank sector of the weaker players without fear of the persons behind them.

Nazarbayev also requests to “work out comprehensive strategies for ensuring the availability of tenge funding in the mid and long-term” in order to “resolve the problems of the cash shortage in the economy and the issue of the high interest rates”. The thing is that this problem can only be resolved by large-scale foreign investments, intensified spending of the public funds including the National Fund resources, or pumping money into the economy. The first is highly unlikely, especially in the coming 2-3 years, the second is already impossible because Nazarbayev had ordered to put a limit on using the National Fund resources, the third can only happen in theory. Why? Because, if the National Bank (with Akorda’s approval, of course) would start financing the economy to provide it with the long-term money, it will unavoidably trigger a new inflation surge.

The president, however, perhaps for the first time in the history of the sovereign and independent Kazakhstan, states that the “National Bank must be responsible not only for the inflation targeting but also, together with the government, for the economic growth in the country”. Note that this statement commits the regulator to a lot including a possible use of the extreme measures. Of course, given the stagnation of the economy caused by the noncompetitive performance of the domestic producers and the weak composite demand, this may lead to unintended consequences as we have witnessed many times in the past years.

Then, the president touches upon the subject of the stock market development. He hopes that the on-going privatization of the state property and the yet another legalization of assets that ended last year will kick start this sector of the financial market.

Unfortunately, here the president repeats his old mistake yet again. Akorda is unable to realize that stock market is a product of a concrete economy. It is a sector that services the economy which is why it is necessary to start the process with building a foundation for attracting investments and not with creating a “superstructure” so to speak.

The “adaptation of the fiscal policy to the new economic realia” is another crucial issue, according to Nazarbayev. Among the tasks related to this issue, he mentions the necessity to “dramatically increase the effectiveness of the state budget expenditures”. Particularly, we first need to “examine the use of the funds by the ministries and departments” starting with the “Ministry of Labor and Social Protection, Ministry of Health, Ministry of Education and Science that account for 40% of the state budget expenditures”. These assignments will be completed with 200% certainty because they are nothing but a standard bureaucratic procedure.

As for the tasks to “redistribute the funds from the ineffective programs to the effective ones to ensure the success of the modernization” and to “simplify the budget procedures for a faster and more effective way to bring money to real economy”, we can say with the same degree of certainty that they will not be completed. The concrete decisions on the budget expenditures will be made the old way based on compromises of the elites or results of latest conflicts among them. Of course, a required report to the president will be made and its content will undoubtedly be optimistic.

Speaking of the “fiscal decentralization” policy postulated by Nazarbayev, we can say it is a nonstarter as well. For one, we cannot even call it decentralization. In fact, it means delegating the tasks top down together with transferring the rights of the non-important tax sources. This process is moving along slowly, indecisively, and poorly.

If the local governments had freedom of action, then we could talk about decentralization. Decentralization can be achieved only when the proper local administration has been established. We cannot say whether Akorda understands it. However, it is obvious that they, once again, substitute an exterior form for a real matter.

Nazarbayev’s request to “take a more rational approach to the use of the National Fund resources” concludes this part of his address. Among other things, the president encourages to gradually decrease the size of the guaranteed budget transfer to 2 trillion tenge by 2020. We doubt it can be achieved. If the large-scale foreign investments will not come and the National Bank will not bring itself to pumping the economy with money, Akorda will have no other choice but to spend the National Fund resources.

Of course, there is a chance that the state will be able to encourage the business to come out of the “shadow” and to expand the tax base which the president also mentions. However, it seems to be as likely as an arrival of extraterrestrial providers of capital with trillions of dollars in direct investments.

As for optimizing the current tax exemptions and tightening control of the external and internal borrowings by the quasi-government agencies, these assignments will certainly be completed. Since it will not bring joy to the old investors and will be accompanied by wide publicity in Kazakhstan and abroad, we can assume that new investors will choose countries with a better stability of tax laws.

*For information on the first and the second modernization priorities see articles On Nazarbayev’s Address to Nation,  Бизнес-среду тоже импортируем?