Kazakh President Kassym-Zhomart Tokayev delivered his annual State of the Nation address on September 1. It focused heavily on economic reform and governance, and marked a welcome return to economic orthodoxy after a period of drift, likely a result of the Presidential Administration being distracted by geopolitical affairs and the fallout from the violent protests of January 2022.

The president outlined a number of market-led economic reforms that are critical to securing broader future growth. These included measures to diversify the economy away from the extractive sectors, like gas and coal, reduce the role of the state, increase finance for the real economy, develop infrastructure, and improve public administration — particularly the tax system.

A subsequent reshuffle has also seen a new focus on delivery. The Presidential Administration has been slimmed down and so-called superministries, such as the Ministry of Industry and Infrastructure Development, have been split into smaller ministries with more discreet portfolios. The president has also replaced several younger ministers with more experienced older figures – particularly those with a strong background in regional administration, who may be better suited to driving change through the sclerotic civil service.

None of the measures outlined by the president are new. However, the urgency for change is great. Inefficiencies throughout the economy have led to shortages of gas, fuel, electricity, and agricultural products such as sugar. The country’s power infrastructure is falling apart. Major blackouts seen last winter are likely to be repeated this year. These shortages mean that Kazakhstan is growing more dependent on imports of gas and electricity from Russia.

The population is also facing serious socio-economic challenges. While headline growth has been relatively good — even throughout COVID and the geopolitical fallout of the war in Ukraine — this growth has been extremely uneven, excluding large swathes of the country. Real incomes have also been devastated by inflation. According to the government’s own reporting, the average household now spends more than 50% of its income on staples.

Investors will be broadly supportive of the government’s agenda. The new focus on economic reform will bring genuine improvements to the operating environment and hopefully curtail some recent developments that have weakened investor sentiment. These include a movement away from international listings and international governance standards at state-owned enterprises, which have impacted state oil company KazMunaiGas and state uranium miner KazAtomProm.

However, to bring investors on board the government will have to demonstrate it is prepared to deliver the market-orientated reforms it has set out — reforms it has so far struggled to follow through on.

One area is taxation. Kazakhstan is actively moving from a flat tax system first implemented in the 1990s to a graduated system. This is a natural and realistic transition given the growing complexity of the economy. The government also wishes to raise money for new investments in infrastructure. However, it will likely mean significant tax increases for the extractives and banking sectors, two critical drivers of the economy. These reforms will have to be implemented carefully so as to not hamper growth and investment in these areas.

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Another area of potential tension is the government’s industrial policy, specifically its plans for import substitution and economic diversity. In his address, Tokayev stated that the government should adopt new “protectionist” measures to stimulate local manufacturing and services, measures that are likely to be targeted at the oil and gas, and mining sectors. In subsequent comments to domestic oil and gas service companies, he stated that project design in the industry should be localized to ensure that subsequent contracts are not awarded to foreign contractors. Such plans would add significant costs and risk the smooth delivery of new infrastructure projects in the oil and gas industry.

The president also reiterated longstanding plans to develop secondary industries off the back of its extractive industries. For the oil and gas industry, this will mean petrochemicals and, critically, new gas processing capacity. This will be a costly endeavor, especially if the government retains strict gas price controls. Already, the issue of construction of a plant at the Kashagan oil and gas field appears to be the subject of difficult negotiations between the government and investors.

The banking sector is also likely to see some upheaval. A key thread in the speech was the failure of banks to lend to the real sector of the economy. From the banks’ perspective, there are good reasons for this. Kazakhstan’s corporate sector is small and volatile. Yet the government views this market failure as a major problem. It slows the growth of the private sector and forces the state to get involved in lending – a costly and inefficient practice that also drives inflation.

Following the address, Tokayev appointed a new governor of the central bank, his deputy chief of staff Timur Suleimenov. He is the architect of Tokayev’s economic policy and was likely the primary author of Tokayev’s speech. His foremost task will be to resolve this challenge. Already, the government is preparing to implement a tax on what it terms excessive profits made by banks earning revenue from Kazakh government bonds – a tax-free alternative to corporate lending. The government is also considering proposals to increase corporation tax for the banking sector. Banks such as Halyk, Forte, and Jusan may find themselves in new wrangles with the regulator over these issues.

While the president was less forthright on the issue in his address, the regulator is also considering measures to cool the consumer lending market — another popular alternative to corporate lending. While the London Stock Exchange-listed Kaspi has been the market leader in consumer lending, other banks have followed and begun building their own lending and marketplace infrastructure. The government is also tightening up regulation in areas such as security to prevent prevalent fraud. All these changes may reduce profitability, yet these changes will have an outsized impact on smaller, less developed lenders. Market leaders such as Kaspi may benefit from a tighter regulatory environment in the long run.

All of the measures set out by the government are credible and ultimately in the interests of both the state and investors. Investors will be supportive of the agenda, but on the basis that adequate market reform also takes place. Without such reform, these measures could end up appearing like an unproductive squeeze on investors. If the two sides can move in concert, however, the changes could bring new prosperity to Kazakhstan.

Ben Godwin, Partner – PRISM Political Risk Management

Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.

Europe's Edge
CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America.
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