Kazakhstan’s Reform and Development Play

President Nursultan Nazarbayev delivered a state-of-the-nation address on 11 November at a session of the Nur Otan Party, outlining an expansionary policy of infrastructure investment and economic diversification for the coming years under the name of “Nurly Zhol” Bright Road. This was an unexpected move and signaled the immense pressure that Kazakhstan is experiencing with political risk spiking as western pressures cause capital flight and the free-float of the Ruble in Kazakhstan’s closest neighbor Russia. Since 2013 where real GDP growth totaled 6%, Kazakhstan has seen a drop in projected growth to 4.6% in 2014 and 4.7% in 2015 according to a recently released report from the IMF. Though nearly half of this reduction in growth is driven by a plummeting oil price, more than half of it is caused by a more uncertain investment climate. In an effort to stoke sustainable growth in the economy this meeting was held, with the president citing the impact of the report stating “The World Bank and IMF had re-evaluated their global growth forecast for 2014. That is why we need to quickly examine our positions and adjust plans for the coming years”.

The policy shift includes growth-boosting aspects of the economy, financial services development, spurs to industrial production, and improvements to social welfare. Nonetheless, the key focus of the policy shift is the development of infrastructure and shovel-ready construction projects utilizing money from the Kazakh National Fund, a sovereign wealth fund which was created in 2000 through the channeling of proceeds of exports of oil, gas, and other natural resources exports. Currently, there is $77 bln in the National Fund, having utilized $10 bln from 2007-2009 during the global financial crisis for financial and economic stabilization measures. President Nazarbayev stated that the infrastructure projects will be funded with $3 bln annually for up to three years towards transportation, energy, and other infrastructure projects as well as supporting small and medium enterprises.

In 2014-2015, the president had five objectives. The first was to allocate $560 mil will be allocated for below-market lending to SMEs and to ensure the development of the food, chemical, mechanical engineering, and services sector. The second would add $1.4 bln to the government-run “bad bank” to help purge the non-performing loans from the financial system of Kazakhstan. This signals that the efforts to resolve the financially challenged banks from the global financial crisis are still not enough and require additional funds to repair. In an attempt to harness the potential of China. $477.7 mil will be used to create the Khorgos special economic zone (SEZ) as well as creating petrochemical parks in the cities of Atyrau and Taraz. Signaling the President’s continued penchant for expositions, $220 mil will be devoted to the creation of the EXPO 2017 complex in Astana. Finally, $160.2 mil will be utilized to build up the infrastructure of Astana in the light of EXPO 2017.

In addition to the aforementioned expenditure, the government hopes to attract $33.1 bln of which 85% would be a foreign investment to boost the Kazakh economy’s economic and innovative capacity outlined in the Program of Accelerated Industrial and Innovative Development.Nevertheless, these plans seem to overlook part of what the International Financial Institutions state in their reports – that structural reforms have to take place to improve the performance of the economy. Though Kazakhstan is the highest performer of the oil exporting countries of Eurasia, oil importers such as Georgia, Armenia, and Kyrgyzstan have more efficient economic structures, demonstrating the economic reforms which are required without the extractive resource is driven profits.

McDonald’s decision to invest in Kazakhstan is a signal of the wooing power of President Nazarbayev and his understanding of the power of signals in attracting international investment. Making such huge investments requires a lot of courage because he is making a huge risk and he knows that he can easily lose the invested money. Of course, no matter where you invest your money, you will always have to deal with certain risks that will affect you if something goes wrong. However, without investing in risky things, we wouldn’t be anywhere now. Therefore, if you look at the big picture it is always worth trying to invest your money, especially if you have more than you need. Despite that, Kazakhstan still is far from the easiest country in Eurasia in which to do business. So, sealing any type of agreement about a business idea will be a very complicated process that will take time and patience. Just as investments, business ideas are risky because they require some investment, and the process of getting anything out of it can be quite long.
Thus, structural reforms and the suturing of the wounds from the global financial crisis must be done soon to assure the inflow of capital and know-how to boost innovation, investment, and growth. While infrastructure development will move the needle, if Kazakhstan aims to be a developed country in several decades, it must work to develop more fully many of its idiosyncratic regulations and assure the legitimacy of its parochial institutions.