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Current State Of Affairs
Kazakhstan is the largest economy in Central Asia and has vast mineral resources: oil, gas and enormous economic potential. They are world’s largest producer of uranium and have favorable agricultural landscape for livestock and grain. Kazakhstan’s economic freedom score is 65.4, and ranks 59th in the 2019 economic freedom index (Heritage Foundation, 2019 & Exhibit 1). Due to its recent poor fiscal health, its overall score has decreased by 3.7 points and is at 41 percent (Heritage Foundation, 2019 & Exhibit 2). However, the nation’s overall score is above the regional and world averages and is ranked 12th among 43 countries in the Asia-Pacific region (Heritage Foundation, 2019).
Kazakhstan has a growing labor productive force with significant development potential in some economic sectors. In recent years, the government has made some attempts to diversify its spending in industrial and manufacturing production away from mining, which added to its GDP growth to 4.0% in 2019 (Heritage Foundation, 2019). Due to its stronger oil net-exports and improved domestic goods demand, countries real GDP is steadily growing around 4.1 percent since 2018 (World Bank, 2019). Higher oil prices since 2018, coupled with massive foreign demand added surplus of 0.5 percent in 2018 GDP and is expected to slow down in next 2 years.
On the capital account side foreign direct investment and net international reserves were up by 9.8 percent and US$30.9 billion (18.1 percent of GDP) respectively in 2018. The government’s spending in last 2 years was quite moderate and for short time negative to reduce inflation by 1.4 percent in 2018 (Asian Development Bank, 2019) and to fund major infrastructure projects in the same year. On the revenue side, corporate income tax and value added tax increased by 16.2 percent in 2018 (World Bank, 2019).
The overall fiscal deficit is estimated at 0.6 percent of GDP (down from 4.6 percent in 2017) and due to additional government borrowings in last 2 years total debt inched to an estimated 21.90 percent of GDP from 20.4 in 2017 (Kazakhstan Government Debt to GDP, 2019). Lastly, the unemployment rate is around 4.9 percent in 2019 and the poverty rate declined to around 7.4 percent in 2018 from 8.6 percent in 2017 (Heritage Foundation, 2019). Overall, we believe that Kazakhstan’s economy is growing slow and steady, but is definitely moving in the right direction and is now ranked 28th among 190 countries in the World Bank doing business index (Trading Economics, 2019).
GDP growth is projected to either remain the same or decelerate marginally in 2019-2020. Due to low level of competition and uneven regulatory conduct of enterprises the outlook reflects slow productivity growth and slight weakness in the economy. This would dampen growth in 2019 between Kazakhstan’s key trading partners – China, EU and Russian Federation. Rise in the domestic goods and increase in consumer spending will continue to boost the economy in 2019-2020. The government spending would increase to develop SME’s as the foundation for their economic prosperity. As per government’s 2050 strategy – “In 2020, SME’s will produce almost 50% of GDP and labor productivity will be increased up to 126 thousand dollars” (Kazakhstan Strategy-2050, 2019).
To attract foreign investment into the country, Kazakhstan has also opened the doors for Belgian companies that will be investing estimated US$55 million to build a lime factory at the Saryopan mine in the Karaganda Region (Yergaliyeva, 2019). Similarly, the Kazak IT start-ups have attracted nearly US$76 million in investments since 2018 and are estimated to reach US$176.4 million by 2022 (Satubaldina, 2019). To avoid any type of sovereign risk, government is implementing its fiscal consolidation strategy, due to which the non-oil fiscal deficit is expected to decline in next 2 years and would help the government to use these savings to provide subsidized mortgage and business loans to support foreign institutional investors.
The government is expected to keep a very close watch on country’s inflation level and may also raise its policy rate to counter pressures from real wage growth. Special measures have been put in place to steady the poverty rate at around 5 percent by 2021. Execution of this strategy is well underway by increasing minimum wage in January 2019 followed by tight labor market regulations in coming months. Lastly, it would be interesting to see how new sanctions on Russia would be implemented that could negatively influence Kazakhstan’s trade and investment and may place downward pressure on the national currency, resulting in further degrading the GDP growth.
Recommendations to improve future competitiveness:
Kazakhstan’s economy and business is highly dependent on natural and mineral resources, and the global economic reforms has made it more challenging for the nation to stay competitive. This is the right time for Kazakhstan to explore and innovate new opportunities and deepen more partnerships both nationally and internationally. Their strategy should be to venture into new growth areas, primarily focusing on the innovation, modernization and transforming technology in some key economic sectors. This would not only add to GDP growth but would, also enhance and diversify sector value in the long run.
According to McKinsey’s, five catalysts for growth and productivity framework, Kazakhstan is required to bring some changes in its key business sectors/operations. Below are some of the recommendations:
- Mining operations digitization: To stay competitive, Kazakhstan should improve the level of digitization in the oil and gas industry. This would help in-line the volatile global oil prices and integrate/connect them globally. Oil and gas companies in Kazakhstan have substantial potential to improve asset and reduce operating costs using digital technologies. To implement these digital projects these companies require massive investments, and therefore require government/private funding or revision of existing investment programs, which were recently cut down due to low oil prices.
- Upgrade transportation system: The transportation sector needs to be transformed and require significant R&D investments from private investors in digital railways, aviation sector and ports. To keep the cost low and generate more revenue, the national railway should integrate a digital technology to enhance customer services and traffic management. Similarly, Kazakhstan’s national airline operator should adopt automated revenue management system, allowing airlines to adjust prices based on load factors and volume on routes. The country should also expand and upgrade its ports, so that they can handle the goods faster and be more efficient. They should also look into privatizing these ports to make more revenue and funds for the government. This would certainly gain some points in overall competitiveness.
- Agricultural privatization: Agricultural land should be privatized to improve its efficient use. Before this is implemented, land code and related legal acts should be amended. Improvement of tax and customs policies and procedures and implement the “single window” taxation slab for both exporters and importers. Beside this, electric power industry should be re-organized and single purchasing agent system should be introduced to decrease the gap between region tariffs.
- Create tax breaks for start-ups: Start up companies plays a big role in developing country’s GDP. To boost its SMEs and increase its GDP year over year, the government must focus on supporting start-up exporters and importers in the manufacturing sector. Trade policy should be equally balanced for both markets as well.
- Business diversification: The government should also develop artificial intelligence technology with the help of its research institutes to tap into future economy such as alternative energy, biomedicine, block chain and big data etc. This would create more jobs and potentially open doors for some direct foreign investments in retail, manufacturing, health care and government services.
- Kazakhstan’s development banks: Government should strengthen the role of financial and insurance sector to ensure long-term macroeconomic stability. Given the current situation, they should lend more to the businesses, especially to manufacturing sector and SMEs, which will contribute to GDP and boost employment nationally.
- Asian Development Bank. (2019, April 11). Kazakhstan: Economy. Retrieved from https://www.adb.org/countries/kazakhstan/economy
- Business Regulations Across Kazakhstan. (n.d.). Retrieved from https://www.doingbusiness.org/en/reports/subnational-reports/kazakhstan
- Ease of Doing Business in Kazakhstan. (n.d.). Retrieved from Trading Economics https://tradingeconomics.com/kazakhstan/ease-of-doing-business
- Kazakhstan Government Debt to GDP. (n.d.). Retrieved from https://tradingeconomics.com/kazakhstan/government-debt-to-gdp
- Kazakhstan. (n.d.). Retrieved from Heritage Foundation, 2019 https://www.heritage.org/index/country/kazakhstan
- Overview. (n.d.). Retrieved from World Bank, 2019 https://www.worldbank.org/en/country/kazakhstan/overview
- Robert D. Atkinson and Stephen J. Ezell, Innovation Economics: The Race for Global Advantage, (New Haven: Yale University Press, 2012), Chapters 2 (pp. 18-56) & Chapter 10 (pp.301-337)
- Satubaldina, A. (2019, June 28). Kazakh IT startups attract $76 million in investments in two years. Retrieved from https://astanatimes.com/2019/06/astana-hub-startups-attract-76-million-in-investments-in-two-years/
- Session 3 slides: National competitiveness and economic institutions – David Detomasi (Smith School of Business, Queen’s University)
- Kazakhstan Strategy, 2050. (n.d.). Retrieved from http://mfa.gov.kz/en/roma/content-view/strategia-kazahstan-2050-14
- Yergaliyeva, A. (2019, May 24). Kazakh business has potential to open three-billion-person market, says Belgian honorary consul. Retrieved from https://astanatimes.com/2019/05/kazakh-business-has-potential-to-open-three-billion-person-market-says-belgian-honorary-consul/
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