Preliminary Diagnosis

We only discuss what we consume ourselves, and as consumers we are naturally most interested in changes in the prices of essential goods. But that is only the surface. We do not even realize that a deeper analysis of vital products carries far more information about our economy.

The latest reports on changes in fuel prices have left in the shadows another curious fact: the cut in gasoline prices in February this year did not lead to an increase in consumption. Moreover, wholesale gasoline sales in March, that is, immediately after the price cut, were lower than in the previous month and lower than in the same period in 2012–2014 (see Figure 1). The same figure shows that wholesale sales in the first quarter fell steadily from 2012 to 2015, even though prices remained unchanged until the summer of 2014.

There are several possible explanations for this phenomenon, and we will consider them now.

The first explanation is that consumption did not actually fall. Smuggling and gray imports, which are not captured, or only poorly captured, by statistical agencies, have simply grown. If so, the announced price increase will only lead to more illegal imports of gasoline, primarily from Russia. As is well known, Russia is increasing its oil production and refining. Accordingly, fuel prices in Russia, both wholesale and retail, are lower than in Kazakhstan. With virtually open borders, this creates favorable conditions for smuggling in border areas. Sales of such fuel do not reach the statistical agencies for recording, unless indirect methods are used to estimate this smuggling.

The second explanation is the low elasticity of demand for motor fuel with respect to price. Indeed, gasoline, as an essential good, is not very sensitive to price changes. Its consumption depends more on overall business activity: the higher it is, the more trips are made, both personal and commercial, and vice versa. In other words, a decline in fuel consumption is an indirect indicator of declining business activity and of consumption by the population.

There are worrying indicators pointing to a decline in business activity. Figure 2 shows that the business confidence index in industry fell throughout last year and in the first quarter of this year dropped to 0. It should be noted that this is the first time since 2011 that the index has fallen to zero, which is not a pleasant signal.

Another indicator is also of interest: the share of transport company managers reporting a decline in freight turnover. Figure 3 shows data for the first quarters starting in 2011. We can see that this year the share of such managers has risen significantly: 42 percent of transport company managers report a decline in freight turnover.

Most likely, we are facing a general loss of confidence in Kazakhstan's business community. Of course, it is premature to draw far-reaching conclusions from two indicators, and the problem requires deeper study. But there is one more indicator confirming that uncertainty has gripped not only business but society as a whole: the slowdown in the growth of household final consumption. Figure 4 shows that after several years of steady growth, household final consumption fell in 2014 compared with the previous year. A decline in household final consumption is the most accurate indicator that our economy is clearly not very healthy. Reduced consumption affects demand for products, and therefore production and the country's GDP.

As a working hypothesis, we consider a deterioration of the market environment in Kazakhstan as a whole. A number of factors point to this: 1) the growing role of the state and quasi-state enterprises in the economy; 2) a stagnating financial market; 3) small business marking time.

To move from hypothesis to theory, we need to look in more detail at how the market in Kazakhstan works over time. This is serious research that requires considerable effort.

However, we must understand that simply stimulating the economy through greater state participation will not yield great dividends. Kazakhstan's programs of accelerated industrial and innovative development did not produce the desired effect. The new program, which is no longer "accelerated," is supposed to stimulate the production of non-resource exports in a limited number of sectors.

Instead of developing direct mechanisms of stimulus and creating conditions for doing business, the state for some reason tries to influence the economy through direct, hands-on management. At the same time, we do not have a properly functioning monetary policy, fiscal policy remains on the sidelines altogether, and institutional reforms are limited to a couple of criminal corruption cases and a pro forma performance review of civil servants.