Answers to a Journalist's Questions on the New Economic Model

Answers to the journalist's questions:

The transition to a new economic model is not a quick process. It may take several years, or even longer. What matters most is carrying out the economic and institutional reforms that will actually lead the country to that model. Many reforms have been launched, and the task now is to finish them. Here, reforms depend not only on the documents that are adopted, but also on their content and implementation, which in turn depend largely on having a properly functioning bureaucracy. A few years ago, if we recall, the country had several decision-making centers. As a result, by the time documents were adopted, the substance of a reform had been hollowed out, even though the Government bears responsibility for reforms. I think increasing the Government's autonomy and giving it more powers in drafting documents was a very sound decision. We can also see an effort to resolve the question of the powers of ministries and agencies. This is a very important and necessary reform if reforms are to be implemented quickly and well.

I think the goal is achievable, but quick wins are not enough. We need fundamental reforms that would deliver exponential economic growth. Besides attracting global investors and companies, this requires institutional reforms in the investment climate, and adherence to market mechanisms in monetary, fiscal and budget policy and in business regulation. In each of these areas we seem to see some changes under way, but we will see the results only in a couple of years. For example, the effectiveness of the new Tax Code and Budget Code will become visible only a year after they take effect. The state is now trying to be responsive, but unfortunately there is a lot of pressure from populists who do not always understand the subject, and this harms the country as a whole. The Government needs to be immune to such voices, and perhaps it should involve more experts in developing and introducing a given document. In developed countries, nobody would argue, for example, with the policy of the National Bank or the Ministry of Finance on monetary policy, because these are the professionals in that field. Perhaps only a narrow circle of macroeconomists can offer feedback on a particular issue. Here, everyone has become an expert on the base rate, inflation or the Tax Code. Understanding how a given decision affects the economy requires deep knowledge. I am very glad that common sense is beginning to show in the state's approach to monetary and tax policy.

I recently read that Kazakhstan is among the top 25 countries in the world for cheap fuels and lubricants. There cannot be non-market tariffs, because these are industries like any other, and any distortion in pricing leads to problems and stagnation in the sector. I remember that about five years ago, in an effort to fight inflation, electricity and heat tariffs were forcibly cut, and this led to what we see now: shortages and breakdowns. Market tariffs not only fund the renewal of assets but also make the sector attractive. New players come in, bringing new technologies and cutting costs, profit margins shrink, and prices naturally come down. This is why we need competition. Only through competition can and should prices be lowered. Competition is the engine of progress. We need proper market systems for electricity, heat, rail services and fuels, and we should pay more attention to these issues. There is still room to improve market mechanisms in all of them.

Any tax system must perform several tasks, for example fiscal and stimulating functions. It must also rest on certain principles, such as fairness, rationality and equal treatment. There are now many questions about the Tax Code, and it is very important to build a balanced system. I am against any taxes that violate the principles of taxation. For example, if one party is allowed to pay 3% and another 20%, this creates an uncompetitive advantage that later holds back development. We can see this clearly in the current Tax Code. For example, companies in the same industry are now splitting up to avoid paying taxes, and both competition and the budget suffer. The second point is that taxes must cover budget expenditure. We have a very socially oriented budget that is hard to cut. If we position ourselves as a welfare state, and we are one, then taxes must be at a level that lets us fund this spending. At the moment it looks as though we want to receive everything for free while not paying taxes. Since we are a socially oriented state, we should probably look to comparable countries. Improving the efficiency of public spending is a separate matter, but that is another question.

The electricity shortage is critically important and is the most pressing issue if we want to double GDP. Without solving it, development will be extremely difficult. This bottleneck needs to be addressed, and very quickly. I do not strongly believe that renewables will solve the problem. Renewables should certainly be developed and will take a worthy share of generation, but our main capacity must still come from conventional sources such as gas and coal. As for a nuclear power plant, I believe that, with the right approach and a 30–40-year horizon, Kazakhstan needs one, but the issue must be handled in a thoroughly professional manner, without a political dimension. A country that produces more uranium than any other in the world and has no nuclear power plant of its own will not be able to build processing stages in the uranium industry up to the production of fuel pellets.

A lot is being done for SMEs, even a great deal. I have not seen such a level of support anywhere else in the world, but it seems to me that we are ignoring basic factors that hold back SME development. First, SMEs can grow only alongside large businesses, since in many respects they are an extension of large business. If we neglect large business, we will hit a ceiling in SME development. Second, SMEs lack access to financing. The main problem is not subsidies but the lack of collateral and of creditworthy formal companies that meet the requirements of banks and IFRS 9. Third, SMEs can grow, for example, with the growth of large cities, so we need to pursue urbanization and the creation of agglomerations.

For a country that is one of the largest in the world by territory, logistics and transport are a key sector, and development is simply impossible without them. There are three key aspects here. First, our proximity to the world's largest economies, such as China and Russia, makes us a very attractive transport corridor and allows us to earn substantial revenue from transit. It also supports SME development, since hotel and food infrastructure is needed along the route. Second, to realize the potential of our natural resources, we need developed transport infrastructure that will attract investment into industries that depend on roads, for example mining, ecotourism, agriculture and so on. Third, the development of urban agglomerations and urbanization is impossible without competent transport infrastructure. As is well known, the development of large agglomerations is one of the key drivers of economic growth. Therefore, road construction along the Silk Road, the Caspian transport corridor, new railway lines, the construction of an airport in Almaty, BAKAD (the Big Almaty Ring Road), the Almaty metro, LRT and so on are among the most important projects for developing the country's potential. Setting up a separate Ministry for transport issues is also a logical step.