Interview on the Financial Sector, 2024

Challenges and achievements in the financial sector in 2024. What do you expect from 2025?

The main challenge of 2024 was the budget. We are now seeing a budget crisis caused by flawed economic policy in previous years. A sharp rise in unproductive government spending, not backed by tax revenues, produced a huge budget deficit, which was covered entirely from the National Fund. The surge in government spending accelerated inflation within the country, which forced the National Bank to raise the base rate. A high base rate holds back lending to the real sector of the economy. At the same time, the state, which had been providing 6% loans to many industries, took on an additional burden, because the gap between the market rate and the state rate widened. Subsidies have not had much effect, and their efficiency is open to question. As a result of the large deficit and high rates, budget spending on servicing public debt increased. Large transfers from the National Fund kept the tenge relatively strong, which hurt industrial development and budget revenues, and as a result we saw a sudden, sharp devaluation of the tenge to 530 tenge per dollar.

An achievement of the financial sector, if one can call it that, was the growth in the banking sector's net profit. It was driven by the high base rate, by gaps in regulation that boost bank profitability, and by a lack of competition. On the other hand, the current capitalization of the banking sector means there is no need to worry about a possible banking crisis, and the current condition of second-tier banks will allow them to withstand potential economic shocks.

The budget deficit, unbalanced fiscal policy and constant subsidization of the economy have led to structural imbalances that now affect the exchange rate. Is current volatility driven only by internal factors?

The exchange rate depends not only on internal factors but also on external ones. The internal factors you listed do have a very strong influence on the rate, and their effect is long-term. External factors include prices for energy resources (oil, gas, uranium), metals and other minerals, which directly affect the country's trade balance and therefore the supply of and demand for foreign currency. The ruble exchange rate is also an external factor, since Russia is our main trading partner. For example, if the ruble weakens, Russian goods become cheaper than their Kazakhstani equivalents and imports of Russian goods rise. This worsens the trade balance and automatically puts our currency under pressure: to close the price gap on goods, the tenge depreciates. We are in the EAEU, so protectionist measures will not work for us.

Any depreciation of the currency of a country we trade with will, one way or another, affect our exchange rate.

Over the past 15 years the tenge has lost 400 times its value, and some experts say that without structural changes in the economy the dollar will rise to 2,000 tenge within 10 years. Is managing the tenge exchange rate beyond the capacity of the government or the National Bank? What should be the priorities for economic stability in tenge terms?

The structure of the economy does have a strong influence on the tenge. It makes no economic sense to manage the exchange rate of any currency if there is no understanding of how to change the economy structurally. The exchange rate directly affects the country's balance of payments, and for the rate to be stable we first of all need stable exports that do not depend on external factors. At present, our exports consist mainly of minerals, while manufacturing accounts for an insignificant share. To develop technology exports, we need productive industries whose labor productivity is higher than that of foreign counterparts. To attract technology companies that could bring technology and investment to Kazakhstan, we need a good investment climate, which depends on many factors: a functioning judicial system, law enforcement, antimonopoly legislation, the tax system, sector regulation and so on.

Equally, the growth of competitive companies depends not on subsidies, which discourage technological development, but on creating a level playing field for all entrepreneurs. Any benefits should be horizontal: if they are offered, every entrepreneur should be able to use them. For example, shared infrastructure would be available to all entrepreneurs, and export support could likewise be used by any entrepreneur engaged in exporting. In my view, we should draw on the experience of Canada and Australia and develop our mining industries, and that requires liberalizing subsoil use legislation. We can see major changes under way in this area, but conservative officials often hold them back on various pretexts.

The National Bank can influence the exchange rate only in the short term, whereas the government influences the long-term rate of the tenge through the country's economic policy.

What picture does the current tenge exchange rate bring to mind for you? Can the potential of our economy be compared with the tenge's current position?

The tenge exchange rate is a mirror of our economy. Our country is suffering from Dutch disease: economic growth is supported mainly by government spending, which is largely financed by the oil sector (through the National Fund), while technology industries are developing very weakly. This model does little for the stability of the tenge, because our producers cannot yet compete seriously with international players, and oil revenues, unfortunately, are not enough to sustain the current standard of living.

How can Kazakhstan's economy be lifted? What is the main problem holding back the development of the economy and the financial sector?

Kazakhstan's economic development requires more decisive structural reforms aimed at liberalizing the market, improving the institutional environment and removing barriers to entry for new players. State support for the economy itself must be completely rethought, because the current incentives are ineffective and every tenge the state spends has little multiplier effect. In this respect I like the example of Britain under Margaret Thatcher, who carried out radical reforms when she came to power. Britain's situation in the late 1970s and early 1980s strongly resembles ours today: over-regulated industries, a large state share in the economy and a government with a social orientation. We need to reduce the state's share in the economy through privatization, speed up price liberalization, speed up the liberalization of subsoil use, improve the investment climate and reduce sector-specific regulatory barriers.

In the banking system, we see that the state has created a setup in which banks can earn quite a lot of money without risk, and this holds back lending to the real sector. Our banks are technologically advanced when it comes to individuals, but lending to legal entities is done extremely reluctantly, for many reasons that in our country are the result of state policy. Let me give a few examples.

First, the ban on paying interest on current accounts means that as the base rate rises, banks' income rises. Since the main holders of zero-interest balances are budget organizations and individuals, these segments lose billions of tenge, which flow into the profits of second-tier banks. The same applies to foreign-currency deposits: banks attract them at 1% and place them without risk at 3-4%, because we have a cap on foreign-currency deposit rates. Or take the tax benefit on securities: it encourages banks to put money into securities rather than loans, because for lending to make economic sense its rate has to be 20% higher than the rate on securities, and such loans become unattractive. There are many more such examples, and on the whole they give the financial system no incentive to work for the country's economy.

Has Kazakhstan benefited from the exit of Russian banks?

In general, any reduction in competition is a loss for the country as a whole, because competition motivates the entire industry to develop. The exit of Russian banks unequivocally had a negative impact on the development of the financial sector. Russian banks were among the largest institutions lending to the real sector, and with their departure the availability of loans for entrepreneurs fell sharply. Barriers to entry into Kazakhstan's financial market are quite high, so we are not seeing any serious new players.

Amendments to the law on banks are now being planned, and the first initiatives announced by the ARDFM are encouraging, since they propose introducing limited licenses, which could significantly strengthen competition. But we will not see the results of the changes for at least 3-4 years.