Here’s what you need to know about Kazakhstan’s new economic model
One key message from the address is that Kazakhstan needs a completely new economic model. The nation can no longer rely on oil and gas - which has driven its rapid growth in the 2000s. Kazakhstan’s leadership recognizes the need to keep up with global trends toward economic diversification, a knowledge-based economy, and transparent and accountable public administration. While a lot needs to be done to turn Kazakhstan into a country, which Tokayev describes in his address, some steps will soon be taken.
Transparent public procurement
Public procurement plays an important role in the provision of public services, including in areas such as health, education, and infrastructure.
President Tokayev called for a reform of the public procurement system to make it more transparent and efficient. He proposed that a single electronic platform be created for public procurement and that all procurement contracts be subject to public scrutiny.
According to the latest OECD data from 2019, public procurement accounts for 6.6 percent of Kazakhstan's GDP, which is relatively low compared to the OECD average. It accounts for 43 percent of total government budget expenditures, which is higher than the OECD average.
According to the Kazakh Ministry of Finance, the volume of purchases through the electronic web portal amounted to 5.9 trillion tenge.
Tokayev raised the need to create a fundamentally new public procurement system back in September 2022. The move is needed to address the shortcomings of the existing framework, which include lengthy lead times, frequent appeals, and a lack of transparency.
In his last year’s address, Tokayev tasked the government to draft new legislation aimed at ensuring the rational and accountable use of budget resources, saying the «priority should be the quality of purchased goods and services, not the minimum price.»
The same message was repeated this year. «Additionally, this new system should bolster domestic entrepreneurship and address urgent issues efficiently through budgetary financing. Streamlining the procurement process is essential. We must prioritize quality over price, thereby effectively countering dumping practices and fully automating the procedures,» he said.
Kazakhstan has a website that allows tracking of all public procurement contracts. As of 2023, more than 100,000 suppliers and more than 24,000 customers have been registered on the website.
Some challenges, however, sit deeply, including corruption, a major problem in Kazakhstan and an obstacle to efficient and transparent procurement.
Tokayev also tasked the government to bring the share of Kazakhstan-produced content in regulated procurements to at least 60% within the next three years.
«Additionally, it is vital to expand the proportion of domestic goods in regulated procurement and fully execute the off-take system. The share of off-take contracts with domestic manufacturers should increase to at least 10%, amounting to an annual 2 trillion tenge,» he said.
The problem of public procurement has been discussed for a long time, said Kazakh economist Arman Baiganov.
«In my opinion, it would be more correct to carry out a separate reform, where procurement in the public sector and national companies would be handled by a separate company, with a commission not affiliated with the public sector and national companies. This commission can include 1-2 specialists from the interested party - customers,» noted Baiganov.
He also spoke about the frequent problem of price dumping.
«One of the very pressing problems in procurement is price dumping. The price for a certain product is set, but whoever provides the lowest price offer wins. At the same time, the quality decreases. Therefore, the President said that in this matter we need to stop chasing the price; we can choose the average price, where the quality remains,» he said.
Lack of investment inhibits economic growth
In his address, Tokayev emphasized Kazakhstan lacks investments. Investments are needed in almost all areas strategically important for Kazakhstan.
In 2022, investments in fixed capital amounted to 15.3 trillion tenge, an increase of 9.2% compared to the previous year. Between January and July, the volume of investments in fixed assets amounted to 8.1 trillion tenge, 12.4 percent more than between January and July last year.
The main share of investments in fixed assets falls on industry (49.2 percent), including mining and quarrying, real estate operations, transportation and warehousing and agriculture, forestry and fishery.
Tokayev first touched upon the need to attract private investors in the mining sector, saying that in most countries, private companies are the main drivers of the industry. In the case of Kazakhstan, private investors can play a critical role in «unlocking the sector's potential.»
«This requires a flexible regulatory and fiscal environment,» said the Kazakh President.
He suggested foreign and domestic investors should be exempted from taxes and other compulsory payments for the first three years of their investment.
Kazakh economist Olzhas Khudaibergenov stressed the need to focus on local investors.
«Of course, the economy may not have enough money for large-scale projects. In such a case, attracting investors or raising loans from outside is necessary. At the same time, we have our own domestic investors. If the right conditions were created for them, they would invest their money in large-scale projects,» he added.
Tokayev emphasized that the primary focus should be on the rapid development of the manufacturing sector. Yet, according to the Astana-based Economic Research Institute, investment in the manufacturing industry continues to fall.
The share of investments in the manufacturing industry from the total volume of investments in the industry decreased to 11.1 percent over the period. The main source of financing in the manufacturing industry is the funds of businesses. The Karaganda region accounts for 23 percent (154.6 billion tenge) of the total volume of investment in the manufacturing industry.
Foreign direct investment (FDI) in Kazakhstan reached a record high of $28 billion in 2022, up 17.7 percent from 2021. This was the highest level of FDI in Kazakhstan since 2012. Yet, half of that, 56 percent of the gross inflow of FDI ($15.8 billion) was accounted for by the debt obligations of Kazakhstan’s enterprises to their foreign owners.
The top investing countries in Kazakhstan in 2022 were the Netherlands ($8.3 billion), the United States ($5.1 billion), Switzerland ($2.8 billion), Belgium ($1.6 billion), Russia and South Korea (both $1.5 billion) and China ($1.4 billion).
The main sectors that attracted FDI in Kazakhstan in 2022 were traditionally oil and gas, mining, manufacturing, financial services, infrastructure and renewable energy.
According to the National Bank of Kazakhstan, in the first quarter of 2023, gross FDI inflows amounted to $7.6 billion, net inflow of investments - $2.5 billion, and investment outflow hit, which the central bank indicated as a negative 5-year trend in the outflow of foreign investors’ funds from Kazakhstan.
The government of Kazakhstan has been actively promoting FDI in recent years and has implemented a number of reforms to make the country more attractive to foreign investors. These reforms include improving the investment climate, reducing bureaucracy, and providing tax incentives.
The government is targeting $150 billion in FDI by 2029.
Corporate lending
Kazakh banks need to boost their lending to businesses. This is what Tokayev said in his address.
«Business lending should be subject to more favorable prudential and fiscal regulation than other types of banking activities. I am aware that this is a difficult and sensitive issue. I instruct the government and financial regulators to give their final opinion on this important issue within a year,» said the President.
According to Assel Aben, chief expert at the Economic Policy Analysis Department of the Kazakhstan Institute of Strategic Studies, the country’s financial system requires the development of measures that will stimulate banks to lend to the real sector and not to the consumer sector.
According to the National Bank, in July 2023, bank loans to businesses reached 9.9 trillion tenge (40 percent), growing by 26.5 percent, and to the population - 14.9 trillion tenge (60 percent), increasing by 30 percent. Tokayev set the task of ensuring annual growth in lending to the real sector at more than 20 percent.
«This can be achieved by easing monetary policy and ensuring economic stability. In conditions of high uncertainty, second-tier banks are not yet interested in long-term lending. An alternative source of funding may be the funds of a fund created under the law on the return of capital or other funds, such as the National Fund or the Industrial Development Fund. However, the task of the financial system is to ensure the flow of capital and provide production with the necessary financial resources,» said Aben.
Agricultural development
President Tokayev criticized the development of the agro-industrial sector, saying the industry needs a «real breakthrough.»
«The potential of the domestic agricultural sector is enormous, but we have not yet fully tapped into it. Large markets surround Kazakhstan that require quality food products. Our country's strategic goal is to become one of the leading agricultural centers on the Eurasian continent. This will only be possible with a gradual transition from primary production to higher value-added products,» said the Kazakh leader.
The country targets increasing the share of processed products in the agro-industrial complex to 70 percent within three years.
«To do so, we will need to revise tax policy to stimulate processing,» he added.
Total agricultural output in Kazakhstan made 9.5 trillion tenge in 2022, up from 7.5 trillion in 2021. The country's historical connection to the Soviet Union, during which Kazakhstan's agriculture was primarily focused on grain production and operated under a heavily collectivized system, has left an enduring imprint on the sector, making the transition to a market-oriented system challenging.
Infrastructure and technology gaps are another critical issue. Kazakhstan's vast expanse and challenging climate necessitate substantial investment in transportation and irrigation systems. Outdated farming practices and equipment further hinder productivity and efficiency.
Tokayev stressed that modern agriculture is a high-tech industry.
«Land and climate are no longer the determining factors for the success of agrarians; innovative solutions have come to the fore. Without modern science, the industry will not just stagnate but deteriorate. Measures should be taken to develop agro-science, especially its practical application in agriculture,» he said, tasking to merge the National Agricultural Research and Education Centre into a vertically integrated agro-technological hub.
Lack of investment is a persistent problem. The agricultural sector has not received sufficient funding for research, technology, and infrastructure development. Limited access to credit and capital compounds the issues, preventing farmers from modernizing their operations.
Supporting small farms is crucial. Tokayev cited the Auyl Amanaty program as an example. It is a government program that aims to increase the incomes of rural residents by providing them with microcredits and other support.
The program is being implemented in all regions of the country. According to the Kazakh Agriculture Ministry, the project received more than 12,000 applications from villagers worth 73 billion tenge. Of them, 4,600 microcredits worth 25 billion tenge have been issued.
In 2023, Kazakhstan allocated 100 billion tenge for preferential micro crediting. With an interest rate of 2.5 percent, the loan term is up to 5 years, and for livestock projects - up to 7 years. The maximum amount of loans is 8.6 million tenge, and the development of agricultural cooperatives - up to 27.6 million. All these measures involve the creation of more than 18 thousand new jobs in rural areas.
According to Talgat Kaliyev, director of the Institute of Applied Ethnopolitical Studies, the agricultural sector does not fulfil even a tenth of its potential.
«(...) which is inherent in it because there are giant markets near us, which we can provide with food. We must take advantage of this. But first, we need to solve a lot of problems, starting from modernization of the agricultural sector, ending with water supply, irrigation, roads, and introduction of new technologies,» said Kaliyev.
One of the foremost challenges is the outdated and inefficient methods of irrigation still prevalent in many regions. Traditional flood irrigation, while widely used, often leads to water wastage due to runoff and evaporation.
President Tokayev's state address represents a comprehensive roadmap for Kazakhstan's near future. However, the success of these initiatives will depend on effective implementation. One can only hope that the recent reshuffles would make difference in advancing the voiced initiatives.