The Government's Stalemate: 6–7% Growth Versus 3–4% Inflation

A closer look at the government's current position shows that it is not an enviable one. The government is in a stalemate. It must deliver GDP growth of 6–7% this year while keeping inflation at 3–4%.

Everyone understands that the foundation of the economy is oil production. For 2014, the hopes rest on Kashagan. The cause of the accident will only be made public in February, and it is unclear how long the recovery will take. Since this is a subsoil user, once the cause is established it will take no less than 2–3 months just to hold a tender and select a contractor. That means repair work can begin only closer to summer. The work itself will go on all summer, given all the procedures and safety standards. So production will resume no earlier than the fall, which means we cannot count on growth in output from Kashagan. Oil production will therefore add nothing to economic growth. On top of that, Iran is emerging from its blockade, and if Iran opens up, oil prices will drop, so in monetary terms oil will even show a decline.

Industry. 2014 is the year the first five-year phase of industrialization under the State Program for Accelerated Industrial-Innovative Development (SPAIID) comes to an end. In theory, the bitumen plant should start operating, the reconstruction of the Atyrau refinery should be completed, and the petrochemical plant should be launched. I think that of all these, only the bitumen plant will start up, and even then only because, of the 1 million tons of Karazhanbas crude it processes, 600,000 tons will leave for export as gas oils and various blends with a low tax burden, unlike crude oil (though here the export railway tariff will eat up everything). The rest will not be ready in time.

Growth could be secured through the development of industry and SMEs, but then the question of inflation arises. What is to be done about inflation? We must be clear that our producers can be competitive only through growth in labor productivity, and if that is not achieved, then only through currency depreciation, because our competitors are not asleep.

Because of our proximity to Russia, China and Kyrgyzstan, which have chosen the path of currency depreciation, their goods are becoming cheaper than ours. This puts pressure on our producers, who must either work at a loss or leave the market altogether, to say nothing of growing.

Today the ruble stands at 4.4 tenge. Only about half a year ago it was 4.8, which means Russian goods have become 10% cheaper relative to ours. Average profitability in manufacturing is around 20% or less, which means profits have been cut by half.

On the other hand, a depreciation of the tenge would cause inflation, because Kazakhstan is heavily dependent on imports. Moreover, many things in Kazakhstan are priced in foreign currency: salaries, houses, apartments, cars, expensive goods and so on. All of these would become more expensive by the amount of the depreciation.

Even when a product is made in Kazakhstan, the share of imported content in it is high.

All the hope for growth rests solely on state-funded construction (EXPO and the like) and on state investment in building large-scale industrial facilities with unclear economics.

Any measures taken now will have an effect only in 2015 and later, so all that remains is to hope that commodity prices rise.