What Should We Do About the Economy

Let us think through the question: "What should we do about the economy?" In any case, we are now facing sharply falling consumer demand and, as a result, a sharp drop in profits in virtually every sector of the economy, because when demand contracts, supply contracts too. But while demand can fall at no extra cost, halting production, or even scaling it back, is no simple matter and requires certain expenditures. Rising unit costs amid falling demand lead to losses and other consequences.

Oil producers were the first to suffer: in the United States, some grades of oil now have a negative price, which means that producers are paying extra to have their oil taken off their hands. It is hard to say what lies behind this, but most likely it is the potential fines for environmental pollution, which make it easier to pay extra for storage than for disposal. The failure of Russia and Saudi Arabia to reach an agreement certainly played a role in the decline in oil prices, but in my view prices would have fallen to current levels anyway, since global oil demand has dropped because of the coronavirus. Naturally, demand in the current situation will be determined by the duration of quarantine and the fight against the virus. If a vaccine or an effective treatment is not developed soon, the fight will last at least another six months. That means oil prices will stay low throughout that time and even longer, because afterward all the accumulated stock will still have to be sold.

Such a shock will undoubtedly lead many oil fields to be mothballed or closed altogether, as they will not be able to survive in the current situation. Supply will fall in the coming months, and the countries with the lowest production costs will take over the market. But once the virus is defeated, we will see oil prices rise, and in the future the extent of that rise will depend on how long the pandemic lasts: the longer it lasts, the higher the price.

In essence, the oil industry is fundamental to Kazakhstan; our entire economy was built on it. More than half of all budget revenues are tied to the oil sector one way or another, directly or indirectly, and in the current situation we will see a decline in budget revenues.

However, when consumer demand falls, it has to be replaced or compensated for. Demand in our country will contract mainly for two reasons: 1) falling household incomes, and 2) the uncertainty of the crisis and the tendency to consume less during such periods.

Once quarantine is introduced in a number of large cities, the services sector will begin to suffer: restaurants, tourism, hotels, passenger transport, shopping center owners, various leisure centers and the like. Services account for a relatively modest share of our GDP, but the sector provides a large number of jobs. That is why making up for lost income in services is now one of the key tasks.

The next sector likely to be affected by the pandemic is residential construction. In times of uncertainty, people are reluctant to buy housing, and those who planned to buy apartments with a mortgage will most likely put those plans on hold, given the uncertainty about their future incomes.

As demand falls, imports will shrink significantly. That may have a positive effect on the tenge exchange rate (pressure will ease), but it will hurt the logistics sector. Fewer goods consumed means less transportation needed.

The contraction of the construction sector will, of course, affect producers of building materials: cement, dry mixes, reinforcing bars and so on.

In short, every industry will be affected by the pandemic in the near term, one way or another.

Naturally, the question arises: "What should we do, and how should we proceed?" In the current situation, the tasks boil down to short-term ones, which require quick implementation, and medium-term ones.

The short-term task is to stop the spread of the virus so that we can return to our normal rhythm of work. I believe that all effective measures are now being taken to this end. What matters most now is to follow all the recommendations we are given: stay at home, wash our hands, wear masks, keep our distance, avoid touching things, and call an ambulance if there are symptoms. There is no other way to defeat the virus.

Short-term tasks also include temporary compensation for the lost income of those segments of the population that have suffered from the coronavirus. Two tasks are addressed here: sustaining demand and providing social support.

SMEs and large businesses will suffer no less and will also need help. There are many options, but it is better to study each sector separately and propose support measures accordingly.

While a package of measures has already been announced for SMEs, mainly aimed at cutting costs or deferring payments, there are as yet no measures for large businesses. I think we should already be thinking about the construction sector. What matters most in construction now is to complete what has been started and to sell what will be built.

I think it would be advisable to allow off-plan sales of apartments with mortgage financing for all projects already under way, and to raise the price ceiling on housing eligible under the 7-20-25 mortgage program.

Natural monopolies will be affected to a lesser extent, since electricity, water and heat are consumed regardless of the crisis. The same goes for solid minerals subsoil users, where prices have not fallen as sharply. In the long term, however, those sectors will see declines too.

Agriculture and the food industry will also not be hit very hard.

Developing anything now will be difficult, but to sustain domestic demand we need to raise household incomes.

It would therefore make sense to focus now on building projects that create many jobs but do not require high qualifications, or where the necessary skills can be acquired very quickly. The only industry that can expand in the current situation is agriculture. So we could, for example, restore irrigation systems and increase the area of irrigated land. We could also start building rural roads, as well as roads to markets.

We could take a close look at the cost structure of natural monopolies. After all, tariffs generally include investment expenditures, which could be postponed for the short term, lowering costs for a certain period, say a year or two. More attention should be given to cheap electricity producers, so that they can sell more and bring tariffs down. This needs some study, but I think it is not a difficult task. The same applies to gas, the price of which is regulated by the state.

The sowing season begins very soon, and it would be reasonable to give more money to farms so that they can increase sowing volumes and create additional jobs. The key here is not to miss the window and to do this quickly and well; there is still a month to do it.