On the Challenges Ahead of the 2024 Address

Every field of activity has its own calendar, but in our country's political life the year begins on 1 September. By tradition, the Head of State delivers an Address in early September in which he announces his initiatives for the coming year. This year will be one of challenges for Kazakhstan, as sizeable imbalances continue to build up in the economy.

It is clear that reaching economic growth of 6% will be practically impossible this year, and it will be a miracle if we manage even 4%. In fairness, it should be stressed that the main failure is in oil production, which has significantly affected growth in the country as a whole. Manufacturing is showing encouraging dynamics, but it should be noted that the main drivers of growth are construction and logistics. I have written many times that construction is not a multiplier industry: it is always used as a channel for fiscal stimulus to the economy, which is not efficient in the long term. This year, I think, it is the result of the national projects. The growth in logistics is most likely due to higher tariffs on monopolised transit freight, but there is a global threat here, since China, together with Kyrgyzstan and Uzbekistan, has started building a railway that bypasses Kazakhstan. Instead of creating a competitive environment in transit transport, for some reason we are trying to monopolise it through KTZ (Kazakhstan Temir Zholy).

But the biggest problem for Kazakhstan in the near term will be tax and budget policy. It is clear that this year even the manoeuvres involving the sale of Kazatomprom shares from the balance sheet of Samruk-Kazyna to that of the Ministry of Finance, funded from the National Fund, will not do much to save the situation, and additional borrowing or transfers from the National Fund will most likely be needed. The Ministry of Finance's brief analytical note shows that spending cuts have already begun, and the Ministry of Health has been the first to take the hit. Its expenditures have been financed at only 67%. I recently met a friend of mine, a well-known surgeon. For the first time in a long while he took a holiday of more than two weeks, because his clinic simply has no money to finance expensive operations. People have not started falling ill less often; they are simply being asked to wait until the money appears.

Against this background, what is most surprising are the initiatives in the new Tax Code, which still point towards the inefficient granting of benefits and preferences that will not work. Creating unequal conditions within and between industries discourages competition and slows growth, for several reasons:

• Favourable conditions for enterprises of a certain size lead to further fragmentation of businesses. They have no incentive to formalise and build properly functioning corporations with corporate governance, which reduces labour productivity and overall efficiency.

• Different rates across industries will lead to tax optimisation schemes through affiliated companies, but this will have little effect on development, since what matters more to companies is equal competitive opportunity, not preferences for selected firms.

• Complex tax systems will give rise to harsher forms of administration, which will introduce subjectivity into audits (for example, in determining affiliation) and hold back the development of the companies being audited.

There are many such examples. Moreover, any increase in the tax burden should come alongside greater efficiency of public spending. That requires not just cutting expenditures by administrative means, but also pursuing structural changes more actively: handing many functions over to the market, raising labour productivity in the civil service and making public procurement more efficient.

It is very important to analyse how the instructions given in the last Address were carried out, especially those concerning structural changes. In financial infrastructure, there is still no clarity on merging the exchanges, even though this does not seem such a difficult question. Maintaining two full-fledged exchanges in such a small market is clearly inefficient. In terms of regulation and alignment with international standards, AIX is much closer, so it would be more logical for KASE to join AIX, and it might be even better to transfer regulation of the securities market to the AIFC. The same applies to the reform of Baiterek holding: there have been many initiatives, but no major changes are visible. It still has a multitude of subsidiaries, whose upkeep is not always justified.

Banking regulation will for now remain rather complex, and the current regulatory environment is not attractive for new players entering the market. Corporate lending is not growing at a pace that would secure the necessary growth trajectory. Meanwhile, attracting foreign investment by hand-picking deals has so far not produced major results, which is obvious, since foreigners need more institutional guarantees in the form of working institutions (the work of akimats, tax and regulatory bodies, law enforcement and the judicial system). It would be logical to put the emphasis on the existing AIFC and unify the work of all these bodies. For example, despite the AIFC's efforts to attract investment, many foreign companies face ambiguous compliance controls, which now play a key role. There are no uniform approaches among banks, and the Financial Monitoring Agency (AFM) takes a tougher stance, while other countries use the situation to their own advantage. The UAE, Oman, Türkiye, Georgia, Armenia, Kyrgyzstan and others are drawing more and more regional foreign investors to themselves, and as a country we are losing our appeal. In this respect, the AFM, in coordination with the Agency for Regulation and Development of the Financial Market (ARDFM), should adopt common compliance control principles in order to effectively separate the wheat from the chaff.

If the question of attracting investment is not resolved systemically, achieving economic growth will be extremely difficult.

One could list many more problems and shortcomings, but the most important tasks are reducing the budget deficit, tax policy, reforming the public and quasi-public sectors, attracting investment and further liberalising the economy.