Kazakhstan New Economic Model: Critical Analysis

Kazakhstan

Kazakhstan’s New Economic Model

Most recently, President H.E. Kassym-Jomart Tokayev of Kazakhstan showcased a “holistic” and “comprehensive” New Economic Model (NEM) for achieving the desired goals of Just Kazakhstan.

It is timely, “integrative”, “interactive” and “futuristic” covering all possible fundamental factors and sectors of a stable and sustainable macro-economy, progressive society, and pragmatic political system in the country. It is indeed a new strategic “road map” for new structural reforms. 

In this regard, the NEM mainly focuses on massive   “industrialization”, “diversification”, “green energy transformation”, “reduction & simplification” of taxation, and “digitalization” along with a focus on good governance, transparency, and fairness. It vividly reflects the “proactive” approach of Kazak president Tokayev to attract more and more inflows of foreign investments and enhance economic ties globally through further “competitiveness”, “connectivity”, “economic diplomacy” and appropriate operationalization & channelization of available resources. 

Moreover, it seems that the NEM mainly rests on further   diversification and “self-sufficiency” through introducing befitting propositions in “mining & metals”, “oil”, “gas” and “coal”, “manufacturing” and “heavy engineering” which will definitely further transform Kazakhstan’s business and economic status as an ideal destination of FDIs in different lucrative sectors in the future. 

Kazakhstan

In this regard, “qualitative industrialization”, “modernization”, “digitalization”, “e-commerce”, “artificial intelligence”, “EVs” and “big data” & “quantum technologies” would be effective for the quick economic recovery in the post-COVID period in which extended cooperation with China would be mutually useful for both the countries in the days to come.

The Republic of Kazakhstan has been champion of doing business in the Central Asia and beyond since 1990s. It has been constantly simplified the state procurement process due to which it used to receive the largest portion of FDIs in the region. According to latest official data (October 2023), it received US$28 billion FDIs during 2022, clearly demonstrating its unmatched economic conditions and incentives to foreign investors and companies to make investments. 

It hopes that after the implementation of the series of new structural reforms “quality” will be dominated over “quantity” through full automation of procedures, reduction of bureaucratic hurdles, corruption, and increasing transparency, thereby encouraging foreign businesses to participate in state tenders and projects. Certainly simplifying these bureaucratic processes makes Kazakhstan more investor-friendly, a factor often considered by foreign enterprises before venturing into new markets.

Obviously, the president Tokayev focuses on stable economic growth of 6-7 percent with the aim to double the volume of the national economy to $450 billion by 2029 is ambitious but upholds a strong commitment to macro-economic stability in the country. Its GDP has reached to US$226 billion in 2022, total trade volume US$136 billion (exports US$84) and external revenue up to US$ 100 billion which is commendable. 

The NEM also encourages easy and smooth supplies of “corporate lending” through domestic and foreign banks. In this connection, channelization of domestic deposits of the banking industry along with pledged US$5 billion from the state shows strong commitment of the policy makers toward increasing the sufficient liquidity in the market, which is often a green flag for investors. It is suggested that activation of “Islamic Banking” in the country may also be an effective tool to generate more and more funds for corporate lending.  

It appears that newly announced series of “tax” reforms/incentives/exemptions aimed at further digitalization and simplification will reduce the number of tax types, offer a more straightforward and less cumbersome tax environment thus provide supportive environment for national and foreign investors to make investments in the country.  

In this regard, new qualitative service model of interaction between tax/fiscal authorities and taxpayers and the progressive taxation system are essential steps that associate well with the international norms. Hopefully these newly announced structural and administrative adjustments would be vital for creating a beneficial environment for foreign investors, who often prefer regulatory simplicity and clarity. 

It seems that focus on renewable energy and even opening up the possibility of a nuclear power plant through a national referendum, Kazakhstan is opening the way for massive investments in sustainable technologies in the days to come. It is a smart move which has regional as well as global strategic orientations. 

Geographically, Kazakhstan’s strategic location provides it an ideal position to project it as a significant transit hub between Asia and Europe presenting an invaluable proposition for foreign investors. In this regard, the proposed development of the Trans-Caspian route and the North-South Corridor would further enhance its internal logistics system and make it an attractive destination for international companies looking to improve their supply chain efficiencies.

Moreover, further digitization with goals to transform into an IT nation, will attract high-value foreign investments in technology. It is looking to increase the export of IT services to US$1 billion by 2026 and aims to become a platform for selling computing power to global players. Hopefully, it could attract significant FDI flows into Kazakhstan, especially from countries that are leaders in technology.

Unfortunately, average real GDP growth has declined to less than 4 percent since the 2008 banking crisis and subsequent construction bubble burst, down from 10 percent annual expansion in 2000-2007 however, the NEM would foster economic productivity in the country.

Kazakhstan the biggest economy of Central Asia is current confronting with declining human capital which has been further worsened by the pandemic. The closure of schools and disruptions in teaching during COVID has likely erased previous gains made by investing in education. The social unrest during 2022 also called for further reforms to improve inclusivity in the development of human capital across the country. The policy makers should chalk out a comprehensive approach to improve access to quality education in the country. 

It seems that massive qualitative industrialization, manufacturing capacity and further growth of non-oil sectors will be game changers in the days to come. In this context, metals processing, engineering and energy production, will receive attention and investment. Furthermore, streamlining state procurement processes, increasing geological exploration, tourism, services, real estate and fostering a friendly environment for domestic and foreign banks will contribute to economic growth. 

Evidently, Kazakhstan’s economic stability and sustainability depends good governance, modernization, inclusiveness and pragmatism. The newly announced economic model mainly focuses on competitiveness, doing business facilitations, skilled labour, easy availability of productive channels, resources and technology.

Kazakhstan the biggest economy of Central Asia is currently confronting with declining human capital which has been further worsened by the pandemic. The closure of schools and disruptions in teaching during COVID has likely erased previous gains made by investing in education. The social unrest during 2022 also called for further reforms to improve inclusivity in the development of human capital across the country. The policy makers should chalk out a comprehensive approach to improve access to quality education in the country. 

Comparative study reveals that GDP of Kazakhstan is expected to reach US$230.99 by the end of 2023. In the long-term, the Kazakhstan GDP is projected to trend around US$242.77 and US$258.31in 2024 and 2025 respectively and hopefully the doubling of its GDP would also be achievable in the future.  

In summary, President Tokayev’s NEM shares new road map and a blueprint that will further enhance its development prospects, diversification and self-sufficiency and align Kazakhstan well with global economic trends. Hopefully business and investment friendly environment will attractive more inflows of the FDIS in the country. Moreover, diversification of FDIs in the newly announced sectors of the national economy would also be effective poly in this regard. 

It is suggested that encouraging SMEs, micro-financing, Islamic banking, community development, balanced regional economic development, planned urbanization, drastic anti-climate change policies, green energy revolution, privatization, increasing role of private sector and public IPOs are essential steps towards fostering entrepreneurship and innovation in Kazakhstan. These measures aim to create a friendly environment for both foreign and domestic investors.

It is suggested that government of Kazakhstan should invest in green energy and sustainability aligns with global trends. Thus investments in renewable energy (solar, wind), blue/green hydrogen generation and carbon trading will play a pivotal role in the clean energy transition.

Continued foreign direct investments into mining and the government’s housing program will likely sustain investment activity. Meanwhile, high inflation, rising borrowing costs and increased household indebtedness may dampen growth in consumer spending which should be tackled through the easy & smooth corporate lending, concept of community development and rigorous social safety networking system.

It predicts that the persistent high domestic inflation is a serious economic challenge, particularly for the common people in the country which should be mitigated through continued monetary tightening and tighter control of fiscal spending and last but not least, initiation of social programs throughout the country.  

 As a policy matter, diversifying trade-logistics routes and developing alternative supply-chain links is crucial for maintain elements of stability and sustainability in the national economy of Kazakhstan. It needs to continue with structural reforms to address its medium-term development challenges (high inflation, price hike, food & energy insecurity, low production output).

Moreover, considerable regional gaps in opportunities and competitiveness should be addressed through holistic and comprehensive socio-economic policies that are tailored to the needs of each locality. In this regard, supportive policies could help unlock the potential of all regions, boost inclusive growth, and improve the quality of life for people across the country. The government may consider providing flexible guidelines to adapt programs to local needs and strengthen implementation capacity of subnational authorities. The fiscal redistribution system needs improvement to take into account residents’ quality of life and to motivate regional and local authorities to raise living standards.

Last but not least, to achieve a prosperous, inclusive, resilient, and sustainable economic model the policy makers must initiate numerous policy measures to accelerate the growth of the Islamic finance sector in Kazakhstan which has been low over the next few years, There are only two Islamic banks in Kazakhstan (including Al Hilal Islamic Bank JSC), with limited product offerings and distribution channels; this creates supply-side constraints. Sukuk issuance is embryonic which should also be further developed. 

Serious efforts should be started to enhance public awareness, sharia-sensitivity and confidence in the sharia-compliance of products in Kazakhstan.

In this regard successful models of Indonesia, Malaysia, Qatar, Iran and even UAE should be thoroughly studies and replicate in the country. It would be a giant step toward financial diversification and transform Kazakhstan the Islamic finance hub of Central Asia. 

Kazakhstan is actively pursuing the Middle Corridor (MC) in order to secure vital logistics routes in the face of an uncertain outlook for trans-Russian connectivity.

It runs from Central Asia, across the Caspian Sea to Azerbaijan, and continues either to the Port of Poti in Georgia or to Türkiye through the Baku-Tbilisi-Kars (BTK) line thereby avoiding Russian soil.

Greater regional connectivity, trade & commerce activities, rail and transport systems and joint ventures would be useful for the entire region.

Kazakhstan has always been a bridge between the East and the West, lying along the old Silk Road. Today, not only is it bridging the divide between the East and the West, but also between the Global North and the Global South and hopefully the NEM would further enhance its economic potential and regional connectivity. 

Since 2002, the GDP per capita has registered six-fold expansion and is now at levels similar to that of some OECD countries, such as Chile, Greece and Turkey, at purchasing power parity (PPP) which is good omen.

The percentage of the population living below the national poverty line has fallen from 46.7 percent in 2001 to just 2.5 percent in 2017, and life expectancy at birth has risen from 65 years in 2000 to 73 in 2018. 

It is suggested that further integration in Global Value Chains (GVCs) can help Kazakhstan build a more diversified and dynamic economy.

Kazakhstan is ideally placed to become integrated into GVCs as it occupies a key geographical position at the crossroads of Western Europe, South Asia, the Russian Federation and the People’s Republic of China. Central Asian markets are vital for Kazakhstan’s non-extractive industries which should be further developed. 

This article is written by Dr. Mehmood Ul Hassan Khan; Executive Director at the Center for South and International Studies, Islamabad. Regional Expert Kazakhstan and Central Asia. 

China BRI

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