While many in Kazakhstan and abroad are wondering whether a large financial crisis is in store for this oil-rich giant, others are hoping that this could be a window of opportunity to bring about reform that embodies transparency, inclusiveness, rule of law and accountability, all key elements in ensuring long-term stability and prosperity. Some have praised Kazakhstan as a rock of stability and a regional leader in economic growth, however its current troubling developments point to the danger of the contrary.
Recent political and economic trends in Kazakhstan have disappointed many well-wishing international observers, who view the country as having significantly drifted away from openness and transparency and embraced strong-armed tactics in the political arena as well as the economy. These trends are disturbing not only because they stifle channels of civic participation in the policymaking process, essential for democratic progress, but also because they discourage investment and undermine the sustainability of Kazakhstan’s hailed economic boom. If a crisis can lead to reform, then one can hope that this situation presents such an opportunity.
Today, business laws in Kazakhstan typically favor the top-heavy Government and its loyal financial groups, which emerged as a result of the opaque privatization of the 1990s. State interests, including state-owned businesses, have a high stake in ensuring that the ruling party stays as strong as possible: August 2007 Parliamentary elections, which by most accounts were flawed, cemented the ruling party’s hold on the nation. In the last six months, Kazakhstan’s policy has shifted harshly toward increasing government intrusion into business activity in the energy sector, enacting laws that substantially boost the position of domestic government-loyal business groups’ stake in the energy sector and granting the government power to unilaterally cancel any contract with a foreign company that it deems to endanger the nation’s interest.
Due to the closed nature of government, one is left to believe that the decision of “endangerment” will be left to the arbitrariness of high officials to be made behind closed doors. These types of policies with short-term gains that benefit a handful of individuals, have widely been proven to be harmful to nations’ long-term sustainable development by thwarting investment, jeopardizing stability, undermining predictability, halting growth, threatening progress and reflecting negatively on the country’s image abroad. In addition, the closed policymaking process currently in place in Kazakhstan contributes to these problems by weakening the government’s support among the population and undercutting the possibility of adopting reform-oriented measures to design and implement sound investment policy.
Many indeed believe that Kazakhstan is experiencing the beginning of a financial crisis. President Nazarbaev vaguely and uncommittedly alluded to this in his address to the nation on February 6, 2008. Independent observers, however, are more pessimistic. Reports from the region unilaterally point to symptoms of an economic slowdown and a rising predicament that has not and cannot be solved by large reserves of energy resources. Local economists and business leaders offer the following evidence of trouble on the horizon and a crisis in the making:
- The construction boom has slowed drastically. Anyone who has visited Almaty in the last few years could not help but notice the omnipresent construction sites (and resulting traffic jams that at times paralyzed the city). Today, cranes have stood motionless for months in Almaty and a number of large construction companies face bankruptcy, dramatically cutting staff. Cost of housing in Almaty fell by 30% and in Astana by 20% according to some estimates. This is particularly significant as construction has highly contributed to GDP growth.
- Lack of mortgage loans has led to a drastic fall in demand for housing.
- Changes in the construction and mortgage sectors have led to deep decreases in personnel in other industries, cutting upward of 30% of staff in some large companies.
- Banks have been unable to provide credit to businesses, leading to shortages in working capital for businesses and difficulty in turnaround. Although the government has pumped large amounts of cash into the banking system through the Central Bank, this has led to a slight decrease, but not eradication of this problem. There are rumors that many banks will have to substantially alter the compositions of their Boards and management. The Central Bank is currently unable to mitigate the banking sector problems.
- Interest rates charged by banks do not cover the inflation rate.
- Locals estimate that the unemployment rate has reached 20%.
Fortunately, to-date there has not been a massive movement to withdraw deposits from banks. This is primarily due to two reasons: (1) The President and his Government command a relatively high degree of trust on behalf of the population and more disturbingly, (2) the population lacks the knowledge on the fundamentals of financial issues and the ramifications such problems can have. The fact that massive withdrawals have not yet occurred, does not mean that it cannot happen in the near or even not-so-distant future.
To his credit, the President has undertaken some laudable means to avert disaster. On February 14, the President of Kazakhstan issued a moratorium on all inspections of small- and medium-sized businesses. This decision was based directly on the advocacy efforts of CIPE partners, the Almaty Association of Entrepreneurs (AAE) and the Kazakhstan Forum of Entrepreneurs (KFE), specifically on the recommendations that they provided to the Government on January 15, 2008. The Government also began to organize courses for shareholders and the general population on investment opportunities. People are seeking out new ways to invest with domestic crediting sources. However, this is clearly not enough.
To truly avert crisis and ensure sustainable long-term growth, Kazakhstan must not go the way of other energy-rich nations that have embraced authoritarian top-down political and economic structures, eschewing reform and discarding alternate policy strategies to promote good governance and long-term prosperity. Kazakhstan must undertake a series of reforms to strengthen democratic institutions, establish an inclusive policymaking process, reinforce rule of law and advance the principles of economic and political openness. As Kazakhstan prepares to take the helm of the OSCE in 2009, it is even more imperative that its leadership does not waste this opportunity to undertake substantial measures to lead its nation and the region toward sound policy reform.
Published Date: February 26, 2008