Having forged a successful career in both the public and private sectors, Rakhim Oshakbayev possesses an intimate and unique understanding of the Kazakhstan economy. Before becoming Vice Minister for Investment and Development, he was a Project Manager for the International Finance Corporation, Director General of the Analytical Centre of Economic Policy under the Ministry of Agriculture, Managing Director of Kazakhstan’s Samruk Kazyna National Welfare Fund and, most recently, Deputy Chairman of Atameken National Chamber of Entrepreneurs. He has spent this spring in Washington, DC on the Rumsfeld Fellowship programme – a six-week professional exchange at the Central Asia-Caucasus Institute at Johns Hopkins University’s School of Advance Studies.
Oshakbayev’s time as Vice Minister from August 2015 to March 2016 coincided with the downturn in crude oil prices. When asked what were the three most important implications of this dramatic fall, he notes “the high volatility of the exchange rate; the weak state of the financial sector, including the limited availability of credit; and the rising non-oil deficit in the state budget.” He adds that, unfortunately, “these developments are felt most strongly by small and medium enterprises (SMEs).”
With respect to the exchange rate, Kazakhstan’s National Bank at first tried to maintain a fixed exchange rate, but developments in Russia and around the world exerted pressures on Kazakhstan’s economy that ultimately forced the bank to readjust its monetary model in August 2015. The Central Bank of Kazakhstan moved the tenge from a managed float to a free-float. Consequently, the average monthly exchange rate swung from 187 tenge per dollar in July 2015 to 345 tenge per dollar in March 2016.
During the summer of 2015, the ruble continued to depreciate under pressure from falling oil prices. While the average ruble/dollar exchange rate in June 2014 was 34.39, by June 2015 it was 54.59. In the same period, the average Kazakh tenge/dollar exchange rate rose only slightly, from 181.48 to 183.61. This created a disparity that discouraged SMEs in Kazakhstan from using locally manufactured products, as cheaper Russian equivalents were favoured. More importantly, as Oshakbayev emphasises, “It became harder for Kazakh SMEs to continue normal business with their Russian partners.”
Meanwhile, the Chinese economy began to show signs of stagnated growth. Beyond financial indicators, the weaker tenge reduced government budget revenues, forcing it to rebalance the 2016 budget based on an average oil price of $30 per barrel, down from the original $90. The collapse in world oil prices also prompted the government to tap into the National Fund. “According to March 2016 statistics published by the National Bank of Kazakhstan, the total value of the National Fund amounted to $64.3 billion, which is 17 percent less than its August 2014 level of $77.2 billion,” Oshakbayev points out, adding that, even in 2016, “Fifty-seven percent of state budget will be covered by oil-related revenues.”
These factors – the fall in global oil prices, and economic recessions with Kazakhstan’s primary trading partners Russia and China – created monetary, structural and financial volatility and ultimately prompted the move to free-float the tenge in August 2015. However, Oshakbayev stresses that, in spite of the short-term volatility, this move was necessary for the long-term development of Kazakhstan’s financial system.
The Long-Term Picture
Notwithstanding the developments in 2014-2015, Oshakbayev notes that Kazakhstan’s financial sector still faces serious, long-term challenges. First, while the state has successfully reduced the amount of non-performing loans (NPLs) on banks’ balance sheets from 35 percent in 2013 to around 8 percent in the last quarter of 2015, additional measures must be taken to ensure long-term financial stability, as many of the underlying assets are of poor quality. The NPL cleaning process has also pressured banks’ capital ratios.
“The growth of money supply actually stopped in mid-2013, and since mid-2014 has decreased by 1.5 trillion tenge or almost 20 percent,” says Oshakbayev. “Lending in the economy has fallen by 357 billion tenge since January 2015 while interest rates, denominated in tenge, have sharply increased from 10 percent to 19.1 percent, in line with monetary pressures in order to cover risk premiums.”
The recent uncertainty has provided an impetus for diversification and new economic development policy. As Vice Minister, Oshakbayev helped to conceive several state programmes and roadmaps, emphasising the importance of development based on trade liberalisation, a reduction in state participation in the economy, and recognition of the need to foster SMEs and human capital development. In one industry-focused programme, Oshakbayev set out to improve the investment climate and change the state from an active participant to a more supportive role that interferes minimally with natural market processes. His approach to policymaking was driven by his experience in business. “As a former representative of Kazakhstan’s business community, I know the importance of financial and structural conditions,” says Oshakbayev. “Arguably, these factors are more important than state programmes themselves.”
Oshakbayev also sought to eliminate barriers and bottlenecks for the manufacturing industry, particularly with respect to market access and achieving a regional competitive advantage with respect to costs. He opposed programmes that use taxpayer funds to support a particular business entity and therefore distort free market by eliminating competition.
“While it is important for the government to support business, it is also important for the government to allow free market forces to work. Supporting weak and failing enterprises with low investment returns that have substantial market share not only impedes macroeconomic growth, but presents a barrier to entry for smaller, independent and potentially more efficient actors to gain market entry.”
Oshakbayev is optimistic regarding the future stabilisation and development of Kazakhstan’s economy. The country’s ranking on the World Bank’s Doing Business Index has consistently improved over the past few years, reaching the 41st spot in 2015, and there is a genuine willingness and desire by government officials to implement significant reforms. President Nursultan Nazarbayev last year adopted the so-called Plan of the Nation, ‘100 Concrete Steps to Implement Five Institutional Reforms’ which prioritises the creation of a modern and professional civil service, upholds the rule of law, advances industrialisation and economic growth, and advocates measures to ensure the state’s transparency and accountability.
“Overall, Kazakhstan’s economy has achieved enormous success since 1991,” Oshakbayev says confidently. No country experiences a perfect growth trajectory, and Kazakhstan certainly has significant challenges ahead. But, according to Oshakbayev, these problems are normal for an upper-middle income developing economy, and can be solved as long as the country remains willing, open and eager to realise the necessary reforms. “We still have work to do,” he says.
This article is a featured preview for the upcoming “Invest in Kazakhstan 2016” publication.