What kind of trap is Kazakhstan in

Director of the center of applied research TALAP Rahim Oshakbaev had a critical opinion of the issue of medium income trap. In his opinion, the so-called “resource curse” is a much more serious risk for the country.

WE continue telling you about the discussion that unfolded at the panel section “Medium income trap: challenges for Kazakhstan” that was part of the Astana economic forum that took place in early june. In the previous article How can Kazakhstan become Norway speakers spoke about theoretical approaches and threats, in this one however, we will talk of the concrete Kazakhstani issues.

“In my opinion, if we are choosing from the entirety of economic terms the one that best explains our economic situation, I think, that Holland illness fits as an individual manifesting of the so-called recourse curse, said Oshakbaev presenting his report on the situation in the country.

“Kazakhstan’s nominal GDP has fallen two-fold due to devaluation, thus right now we can’t say that we are part of the medium-income countries. Right now our GDP is $7.1 thousand per capita. We are hoping for serious growth, but for now we see serious almost two-fold fall since 2012” – he said.

Rates of GDP growth are also falling. “We see that from 2011, GDP has gradually fallen, rebound is just happening, and for now we significantly fall behind from average world rates of growth” – speaker noted, and in his words “optimistic plans that we build together with the government show that even in 2022 we will be falling behind from average global rates of growth”.

“It is a colossal challenge for Kazakhstan” – Oshakbaev noted and paid attention of participants to such aspect: “We found that from 2010 to 2016 economy has grown by 27.1% and a serious contribution was from the growth of consumption of households, government bodies and investments. The fact that we targeted in our economic policy – growth of export, development of industry, etc. had negative effect”.

“I think that our export numbers clearly show high vulnerability and dependency from oil prices. At its peak in 2011 it was $85  bil. now it fell down to $37 bil. Trade surplus fell twofold from $48 to $12 bil. Thus we see that, unfortunately diversification of export didn’t happen, and in my opinion, it couldn’t happen due to high oil prices” – Oshakbaev clarified.

The dynamic shows recovery in absolute terms, due to devaluation, but still in dollar terms (we understand that the function of export is a supply of currency for financing of imports) its is significantly weaker. Dependency on export of oil, when comparing 2010 to 2016, nominally has fallen, but it is still very high” – Oshakbaev stated.

He then said that based on methodology of Moscow Carnegie center, Kazakhstan is part of a group of countries with medium effectiveness levels and extraction of hydrocarbons and by the level of dependency is between Venezuela and Russia.

Nonetheless, speaker thinks that Kazakhstan still has budgetary stability: “Oil revenue has very big scale. If we look at comparison of Russia with Kazakhstan, since 2010 our profitability is noticeably higher”.

However, in Oshakbaev’s words, high concentration of taxes is evident of vulnerability of profits of the budget: “90% of all profits are paid by only 5000 enterprises”.

“That he noted, – is oil and the oil revenue, that we absorb in banks and quasi-government sector. But in net amount pure assets of Kazakhstan are going down”.

In his opinion, despite “lowering of the assets of National fund and growth of government debt, margin of safety in order to support the existing model, still remains”.

“Looking at the structure of income of republican budget we see that providing of healthy tax income goes down and the share of transfer from National fund of RK increases. If in 2010 it was just 33% now it is 46%” – speaker noted.

“Budgetary expenditures are beating new records. In our arguments two years ago we assumed that there will be budgetary consolidation, i.e. lowering of deficit, and expenditures, and much faster than now. But unfortunately this isn’t happening. We see that nominally since 2012 expenditures have risen almost twofold – by 93%. The last year growth was over 31%. Growth of spending by far exceed rates of GDP growth and overall tells us we aren’t in the medium income trap, but rather in some institutional trap, when a presence of large oil profits and its beneficiaries in the form of quasi-government sector, private sector, that receives subsidiaries, unfortunately gained significant institutional power, negotiation power and even the will of the head of the government, unfortunately cannot overpower it. A concrete reflection of this is republican budget” – Oshakbaev said.

Defending his thesis about the presence of institutional trap in Kazakhstan, Oshakbaev noted: “In december of last year indicators of formation and use of funds of the National fund of RK were confirmed. However, in 2017 the budget that Ministry of economy presented to the parliament, all parameters don’t even come close to those that were planned earlier”.

In his words, it was planned that “guaranteed transfer in 2017 will be lowered to 1.2 tril. tenge, but it grew over 2.8 tril… We see how optimistic we were with regards to our opportunity to accumulate oil profits: we planned to accumulate $180bil. by 2020, but now we have twice as little”.

“It becomes a challenge to withhold government debt. Pure government debt is already 53% and there is a question of whether we are withholding it within the limit of 60% of GDP” – speaker noted. In his words the reserve of pure currency assets of Kazakhstan is rapidly diminishes.

How inclusive is distribution of oil profits through government and quasi-government sectors? In Oshakbaev’s words “considerable funds of the budget and National fund are allocated to financing of the quasi-government sector: since 2007 $34.3 was allocated”.

“This is our specificity – oil revenue, oil profits go into economy. Not only through budget expenditure, but first if all through quasi-sector. And in reverse, if you look at how much money government has allocated and received in the form of dividends, it is $1.6 bil.” – Oshakbaev noted.

Despite all initiatives, the share of the government in economy is growing, and this trend, in speaker’s words is upsetting. “Assets of the government sector are growing and I assume that in 2017 they will be nominally higher”.

In his words, “30% of cumulative annual income is formed by quasi-government enterprises, and we assume, that statistics of the small business, which at the moment is around 24% of GDP, can be corrupted.

If you look at what companies are part of our small and mid-size business, you will see that at least a quarter of them cannot be attributed to classic understanding of SME (small and mid-size enterprise thus it is either government or raw material sector” – Oshakbaev said.

“There is another negative effect, related to growing share of quasi-sector, it is formation of the money market. Recently there was a presentation of a great report of the accounts committee. Unfortunately, it wasn’t very resonant and didn’t cause a discussion in Kazakhstan. Nonetheless, we see that as of July 1st 2016 quasi-sector consists of 3 largest companies, that had on their cash deposits and bank ones, a liquidity in the amount of 5.3 tril. tenge. It turns out, that from year to year pump out quasi-sector out fo the budget, it places funds in the banking sector, and banking sector has excess liquidity, which National bank is forced to sterilize by issuing notes, raising base rate, since it rightfully fears that this money overhang  of 5.3 tril. can leave to currency market and thus situation with 380 for a dollar rate may repeat. This right away poses a question of relevance of approaches of inflation targeting”.

“Participation of the quasi-government sector is significant– 32% of all monetary funds, placed by the population and legal entities into banks. And over 50 percent of deposits of legal bodies. Thus, we say that possibly the country got into a tactical trap, when the growth rates are low, and they get slower, government is forced to revive it with fiscal stimuli, growing expenditures, developing various programs, increasing funding of quasi-sector, which is in essence a narrow bottleneck in the situation” – he says.

As a result, national bank, in his words, seeing excess liquidity, keeps a high rate and absorbs budgetary surplus. “National bank recently announced that, it is entering a wholesale market with its notes. What is it: a fashion statement or Nat. bank sees that liquidity through fiscal expansin is so high, that it is forced to absorb it directly from the population?” – he posed the question.

“Lending stagnates here, the last year and a half it barely grows, investments go down and the government is forced to do something again using fiscal stimuli” – Oshakbaev thinks.

Rahim Oshakaev also spoke of the situation on the labor market.

“In Kazakhstan, there are 12.8 economically active people. Since the last year we have been trying to discuss adequacy of official statistic on unemployment. We outline the risk group, people who have low income and who don’t mind finding a job, but do not register as unemployed. We think this group of people comprise around 1.5 million people. Or 15%, which is pretty pessimistic. We took the indicator which in our opinion reflects adequate state of the labor market from the OECD: the number of employed higher workers in general among economically active population is 82%, our level is 66%. Thus, we can make a hypothesis from this that by 2030 we need additional million and a half work places considering our demographic trends” speaker forecasted.

In his words, a big threat is posed by the “age pyramid”.

“We see that in Kazakhstan, due to growth of oil prices and well-being, birth rate has increased significantly. Every year, we have over 250 thousand people entering the labor market, 350 starting first grade of school, and 400 thousand born. Thus, already by 2020 a number of children in schools will increase by 700 thousand plus 30%. This will put a strain on school system, which is why we need to focus on it in the first place. If we want to ease the burden on teachers, we will need additional 100 thousand teachers. Our system can create around 40 thousand teachers, thus the deficit by our estimates will soon make up around 60 thousand” – Oshakbaev supposes.

But, speaker noted, salaries in the education system aren’t appealing. If you look at the data for the third quarter, you will see that teachers have the lowest salaries among all sectors of economy – 88 thousand tenge. In order to make this profession appealing, we have nothing else left but to increase spending on education, salaries of teachers. We made a comparison of spending on education in Kazakhstan and in the world, and with those countries to which we look up to in regards to development. And it is clear that we are lagging behind. Our current level is 3.2% of GDP expenditure, which is much lower than in South Korea in the period of its active industrialization and transfer to the medium income group  of countries. Our conclusion: we need to make a goal of spending no less than 5% of GDP annually and regardless of market conditions on education” – Rahim Oshakbaev announced.

“I repeat, our specific is oil revenue, which unfortunately doesn’t give us an opportunity to currently do anything else, rather than its exploitation. Until we solve out structural problem – big participation of the government in the economy, all our efforts on diversification of economy, on development of other sectors, I think will be futile” – Oshakbaev sumarized.


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