How a decrease in oil price is affecting economy of

Kazakhstan?

by

<Your Name>

<Date>

 <Your Name> 2016 1 of 32

 Introduction

The economy of the Republic of Kazakhstan has faced numerous difficulties in

the recent two years. Its activity, which slowed sharply in 2015, is expected to

remain low in 2016. Industrial production, dominated by the oil sector,

demonstrates very little progress. The start of operations of the offshore fields

continues to experience significant delays and may not occur before the end of

2016. The major investment projects, particularly work for the international

exhibition EXPO-2017 should support the activity of construction and services.

Consumption, the main engine of growth will be constrained (such as investment)

by the credit crunch as well as rising prices. Export is expected to suffer from the

slowdown in the Chinese economy and recession in Russia, but especially to low

oil prices. Inflation, fueled by the effect of the depreciation of the tenge against the

dollar, could exceed the ceiling of the target zone (6-8%) set by the central bank

(NBK). Price controls on some food products could be lifted, accentuating the

upward pressure. The central bank should, in this context, maintaining high interest

rates (16% in October 2015) to limit inflation.

The fiscal and current account deficits which emerged in 2015 are not expected

to reverse in 2016. The country remains vulnerable to external shocks, the debt of

banks and companies are mostly denominated in foreign currencies. But the

amount of foreign reserves (5 months of imports, excluding gold) and assets NFRK

(USD 64 billion in October 2015 1/3 of GDP) provide him some leeway in terms

of liquidity. The banking sector is weakened by the impact of the depreciation on

 <Your Name> 2016 2 of 32

 bank debt and the deterioration of the portfolio quality. The government has

however taken support measures which should limit the risk of systemic crisis.

Kazakhstan's export markets: the EU, China and Russia. Imports are expected

to remain high due to the need of equipment, foodstuffs and energy. After the

decision of the NBK in August 2015, to introduce a floating exchange system,

causing a depreciation of more than 20% of the tenge, the currency continued to

weaken and lost nearly 20% against the dollar between August and November

2015. The downward pressure expected to continue in 2016, although they are

more moderate, depending on the evolution of the Russian ruble (largest export

market excluding hydrocarbons). The depreciation of the tenge leads to higher

inflation rate, because of more expansive products from abroad. Although

government will restrain this situation with price control, in order to hold the costs.

In this situation banking sector will have high currency risk based on unstable

currency rate by owing loans in foreign currency (Country Report, 2015). Another

source which is Country report (2015) of Kazakhstan shows that previous growth

of GDP connected to rise in oil and gas revenues without eliminating of its

structural and competitive weaknesses. Many authorities are arguing that

information about sanctions is suitable to finish the military conflict, as these

sanctions making high economic pressure on Russia and its trading partners. The

exchange rate is related to the economic performance of country to with trading

partners. This price in oil per barrel led to devaluation of currency in Kazakhstan

as GDP in Kazakhstan mainly based on exporting crude oil and gas. Based on this

situation export revenues sharply declined which brings us to weakening of

 <Your Name> 2016 3 of 32

 domestic demand, incomes and credits. The Russian rouble drop happened before

the devaluation in Kazakhstan and the situation build differences in exchange rate.

As correlation between currencies was different from previous period people

switched to Russian products for some period. However devaluation of tenge

should give a temporary wave to export as previously tenge lost its competitiveness

faced to Russian rouble decline. This will somewhat cover the damage from

downshift of oil price.

In the present work using the literature and statistical data we will try to predict

the further impact of low oil prices on Kazakhstan economy and find possible

solutions.

Literature review

The relationship between oil price and macroeconomy has been examined by

using different approaches. The relevant source for my paper is Country report of

Kazakhstan where statistical information written also useful material. The will

focus on theory about effect of oil price change. The theoretical model differs that

we consider that Kazakhstan is non-OPEC developing economy and how in this

case price change affected revenue which is determined from supply side using a

production function.

The literature research is based on economic theory. The theoretical view of

effect of oil price to economy is changing over time and theoretical researches does

not provide a clear picture of decrease in oil price should or should not have

substantive effect on economy of Kazakhstan.

 <Your Name> 2016 4 of 32

 According to Kliesen (2008) the price elasticity of the demand for oil is low in

case of short term; the reason is that the industries and firms with in it cannot

change their production or service quickly. The effect of increase or decrease on

GDP might be insignificant. However if the demand is reduces for oil depend

industry’s products then it may affect labour demand negatively and that will have

large impact on economy even if country’s GDP does not depend on oil output.

The Eurasian Economic Union members should stabilize its inflation level, level

of unemployment, however the demand in labour market was mainly created by

high development of some major oil fields located in Western Kazakhstan which

where local employee supply is less than its needed. The recession is narrowed this

gap as many large companies have to fire employees as this companies after

decrease in oil price. (Country Report, 2015)

The oldest literature reviews such as Olson (1988) argues that the price of oil as

a part of GDP is not significant and should not have large macroeconomic effect.

However during the time, importance of oil has changed and those countries are

importing large amount of crude oil has different oil share in GDP. The empirical

point of view suggests that oil price change is predictable and limited effect in case

of importance of oil price to macroeconomic situation.

According to CIA Kazakhstan had 9th place by oil exporting in 2010 and

exported 1,406,000 barrel per day. Kazakhstan’s one of the main trading partners

Russia has 2nd place from this list (Cia.gov, 2015). Russia is one of the leaders of

the oil supplier; however industrial level of development is not highly developed.

 <Your Name> 2016 5 of 32

 For instance, more than 65% of total export and more than 50% of the budget

depends on oil and gas revenues. (Dreger, etc. 2015)

Previous sources they have looked of impact of developed counties. In addition

based on another source oil price should be considered as driver of exchange rates

which is one of the macroeconomic elements in developed countries as well as in

oil dependent countries (Chen and Chen, 2007;Benassy-Quereet al., 2007; Coudert

et al., 2007).

Jimenez-Rodriguez and Sanchez (2005) have written that rise in oil price affect

to macroeconomics in different ways and impact on oil importing Organization for

Economic Cooperation and Development (OECD) countries in negative and

positive ways. For instance, in the UK change of price had negative effect and

Norway positive.

According to CNBC Central Bank of Kazakhstan transferred its currency to

free floating rate which is when market balances exchange rate based on demand

and offer. The official currency dropped by 26.2% which is 255.26 per dollar at

twentieth of august. This is because that Kazakhstan suffered 40% decrease in

export between beginnings of the year to July 2015. According to Prime Minister

of Kazakhstan Karim Masimov the low price for the export materials of

Kazakhstan may last for 5-7 years. (CNBC, 2015)

The development of the world economy

Many expert opinions on the world economy situation for 2015 are similar.

World GDP will grow up to 3%. Additional incentive tendencies in the form of

 <Your Name> 2016 6 of 32

 a drop in oil prices should spur the slowing Asian economies. (Commodities:

Latest Crude Oil Price & Chart, 2016)

Currently, the price of West Texas Intermediate (WTI) crude oil is 43.77 per

barrel. The price of oil started its dramatic decline in July 2014. From the peak of

the oil price in June 2014 to the end of March 2015 oil price per barrel declined

around 55 percent. (Melek, NÇ, 2015) At this stage the country should switch to

other type of the resources, however the former countries of Soviet Union still

depend on each other as one country was transferring raw materials and the second

was producer of particular product. (Kazakhstan floats tenge, currency tumbles,

2015) This structure is still keeping in Soviet Union and under pressure and

pressure by China as it is second main trading partner. Kazakhstan is provider of

raw materials and transfers this material, Russia and China is producers of product

from raw materials and sales back this material to Kazakhstan. In this case

Kazakhstan cannot move to producing the products as it will lose economically and

politically beneficial partner. (Almadiyev, 2015)

The parts connected to each other as it has chain reaction as change economic

environment in one country directly affects its trading partner and change in oil

price has impact on all countries, but in different ways. The members of the

Eurasian union are likely to create official currency for the Eurasian Economic

Union. In this case theory will be about future predictions and expectations

economic situation in Kazakhstan and will consist from different cases where

results of each action will be demonstrated. The issues with new currency will be

that will be it beneficial for Kazakhstan, also other advantages and disadvantages

 <Your Name> 2016 7 of 32

 of this union. (The World Factbook, 2016) This argues that these trading partners

in union were same as before creating this union and what are benefits from this

union. In case of Greece the best decision will be devaluation of currency and as

euro union has same currency they could not devaluate their currency. (Kazakhstan

floats tenge, currency tumbles, 2015)However it will not be an issue if there is a

same fiscal policy for all countries. This means that to introduce fiscal policies

country should lost its political weight another case consist theory when there will

not be same currency. (Almadiyev, 2015)

These devaluations in Russia and Kazakhstan affected Eurasian Economic

Union. The devaluation in 2015 has directly affected on import prices as well as

the wage and social welfare payment increases. There is possibility that tenge will

devaluate another in the near term, this case depend on that inflation is clouded by

unclear situation in the economic environment. As previously mentioned, the

government will introduce the new steps of increase of non-investment GDP

growth. However, exporting product with massive potential a hydrocarbon

resource will be main type of the pusher of the economic development. (The World

Factbook, 2016)

Table 1

 <Your Name> 2016 8 of 32

 This paper will use the articles to examine role of oil price to economy of

Kazakhstan. It will use both type of quantitative and qualitative methodology,

however main focus will be on quantitative method. It will involve statistical,

financial or econometric modelling. It will use forecasting data analysis to illustrate

importance of oil price to country which GDP grows mainly based on crude

products. I will examine the impact of economic policy on employment, GDP and

inflation rate and discuss future predictions. (Kazakhstan floats tenge, currency

tumbles, 2015)

The United States will be a leader and engine of economic growth. The anti-

crisis program of the Federal Reserve System was successful in the previous

year. However, the Federal Reserve lowered its forecast for US economic growth

in 2015 to 2.3-2.7% from the previously expected 2.6-3%. The main drivers of

recovery are among other such diverse industries as IT and hi-tech sectors, oil,

aviation, medical goods and services. Strengthening of the US economic growth

 <Your Name> 2016 9 of 32

 will cause widespread capital outflows from emerging markets. Global investors

in 2016 will be able to make big profits at lower risks of investing in the US

economy. Furthermore, the Federal Reserve turns off the program of

"quantitative easing", which largely contributed to the inflow of investment in

developing countries. Given this background information, experts forecast the

strengthening of the US currency. (Kazakhstan floats tenge, currency tumbles,

2015)

The slow growth of the EU economy will have a negative impact on export

revenues of Kazakhstan and the flow of investment from these countries. Against

this trend of continuing stagnation the exports from Kazakhstan to the EU could

be reduced in real terms, as if to take into account the extremely low oil prices,

export revenues will be significantly less than in 2015. (Commodities: Latest

Crude Oil Price & Chart, 2016)

China in 2015 shows the lowest growth rate since 1990 i.e. a little more than 7%.

Contrary to the illusions of rapid growth in 2015, China will not achieve

economic recovery, and substantially lag behind the US in absolute terms the

formation of GDP per capita. In addition, 49% of Chinese GDP, generated by

investment activity; it is a very dangerous bet on the long-term rapid growth of

production and consumption. In addition, China is the largest player in the metals

market. The slowdown of the economy and the decline in demand may adversely

affect the level of prices for metals, which constitute a large part of Kazakhstan's

exports. (Almadiyev, 2015)

 <Your Name> 2016 10 of 32

 Russia is in the situation of recession, the slowdown of the Russian economy and

the fall of the ruble exchange rate will significantly affect the macro-economic

development of Kazakhstan. First of all, the possible decline in demand for the

goods from Kazakhstan shall affect the export from the Russian industries. The

cheap ruble reduces the competitiveness of Kazakh domestic enterprises and the

growth of Russian imports. In the context of the Eurasian Economic Union as

there are new risks associated with unrestricted movement of capitals.

The situation in the oil market

As a result of a number of factors, among which there is the growth in the US

shale oil production and increased supplies from Iran, against which economic

sanctions were partially lifted and Libya, where, after the stabilization of the

situation in the country the oil production increased, the situation in oil market

changed drastically. There was a decrease of world oil prices mark Brent from $

115 for barrel at the end of June 2014 to 50 - 60 dollars for barrel at the end of

2014.

Despite these trends in the world market, OPEC refused to reduce quotas on raw

materials production at its meeting in November 2015. Further development of

the situation in the oil market depends on many factors. The experts of the

International Energy Agency stated that in 2016 the excess oil may rise to more

than 1 mln. of barrels every day.

The World Bank experts in their report assess the situation in the oil market.

They come to the conclusion that the increase in oil prices is not likely in the

near future. 2015 was the year of low oil prices, and in 2016 they will grow only

 <Your Name> 2016 11 of 32

 slightly. This situation jeopardizes the exploration and development of new oil

deposits, including shale areas, as well as the output of "black gold" on the sea

shelf. It is expected that the volume of oil production in the US will be reduced

by at least 30% this year compared to 2014. Significant reduction of oil output

is also possible in Canada. A number of companies in the country, producing

about 50% of all oil, announced the plan to produce per day by approximately

300-350 000 barrels less than last year. (Almadiyev, 2015)

But in the case of deterioration of the geopolitical situation in the Middle East,

oil prices are likely to rise temporarily. Increasing of the export of Libyan oil is

very possible. The oil fields in Iraq are being bombed, if they come under control

of radical groups this will also increase prices. Lifting of sanctions against Iran

will change the balance of supply and demand in the oil market in 2016. In this

case, the oil market proposal will add about 1 million barrels per day. Having

into consideration all these developments, the average oil price will probably be

in the corridor of 30-50 dollars per barrel.

II. Anatomy of a slowdown in economic growth in Kazakhstan

Summary of economic policy in 2014

The slowdown of the economy is the most prominent trend in the state’s

development over 2015 though Kazakhstan's economy has grown rapidly in

recent years. This happened due to the rise of oil prices, fiscal and tax incentives

and the growth of consumer credits, which supported the demand of the

population. But the oil prices fell down, respectively, income growth slowed, the

National Bank has limited consumer loans, and as a result of the liquidity

 <Your Name> 2016 12 of 32

 conditions, the market deteriorated. Aggregate demand began shrinking. As a

result, Kazakhstan's GDP growth has slowed down, and this slowdown was

observed in all sectors of national economy, but the industry turned out to suffer

most of all. Subsequently, the slowdown has spread to non-tradable sectors of

the economy which depend on the income and business: services, construction,

and transport.

Cumulative effect of external shocks began to make negative influence not only

on the private sector, but also on the willingness of Kazakhstan fiscal authorities

financed by the oil accumulation. While oil quotations remained at a high level

above 100 dollars per barrel, the oil budget surplus narrowed, and the non-oil

deficit widened. The government began to increase borrowing in the domestic

market and has attracted $ 2.5 billion in the Eurobond market. The effectiveness

of stimulating of economic growth through government spending continues to

decline, and more opportunities in fiscal policy become rigidly limited in

transfers from the National Fund of the Republic of Kazakhstan.

Monetary policy: decisions of the National Bank in the area of banking

regulation led to a slowdown in lending (speed limits, currency restrictions), and

in the long term can lead to the consolidation of the smallest banks. The National

Bank ordered banks to reduce the percentage of the second level of non-

performing loans to 15% by 1 January 2015 and to 10% by 1 January 2016.

The struggle for writing off loans have increased incentives to clear balance

sheets, but the resolution of bad loans is constrained not only due to complex tax

administration, but also the lack of capital for restructuring, lack of expertise and

 <Your Name> 2016 13 of 32

 ineffective bankruptcy procedures, and connectedness of large borrowers

before the banks. The devaluation of the tenge in February 2015 has increased

the trade balance and temporarily improved price competitiveness (profitability)

of the Kazakhstan enterprises, but this advantage disappeared after the rise of

wages.

The further consequences of the devaluation led to a loss of confidence in

monetary policy and the national regulator has not solved the key problems of

Kazakhstan's monetary policy. All the negative consequences of inflexible fixed

exchange rate regime strengthened: the dollarization of liabilities and

demonetization of the economy, lack of long-term funding in tenge, cyclicality,

recurrent liquidity crises, lost of confidence in the national currency. Monetary

policy has become even more tightly tied to the exchange rate. Official corridor

narrowed to less than 3%, the actual volatility of virtually not observed. In July

2015 the National Bank began issuing banks currency swaps, giving banks tenge

liquidity up to one year on bail currency at 3% per annum. It is only temporarily

eliminated the deficit of interbank liquidity, but the problem of distrust in the

national currency remained, the exchange rate regime has become more fragile,

and according to informative statistics international reserves of the National

Bank deteriorated.

Inflation remained within the 6-8%, reflecting weak domestic demand and

administrative control over prices, which held back the oozing devaluation. The

statistics of unemployment dropped to a historical minimum of 5.0%, but it has

practically ceased to reflect the realities of the labor market. Hidden

 <Your Name> 2016 14 of 32

 unemployment, particularly long-lasting, structural unemployment,

underemployment and the massive amount of self-employed people with low

incomes are very high. Lack of skilled labor force continues to be an urgent

problem of the investment climate in Kazakhstan.

Kazakhstan's positions in the world

The devaluation of national currency in February strengthened the trade balance

and temporarily improved price competitiveness (profitability) of the

Kazakhstan enterprises. Once there was a decrease of imports under the

influence of a rise in prices on the purchasing power of consumers, the trade

surplus increased from $ 15.6 billion in the second half of 2013 to $ 22.6 billion

in the first half of 2014.

Low demand for investment goods in the background of devaluation of the

national currency led to a drop in imports, which has a positive effect on the

current account, and will increase the volume of net foreign assets. However, in

the medium term, this factor is the most negative one. As a result, the

contribution of net exports to GDP growth increased significantly, to 2.7

percentage points in the first nine months of 2014, while in 2011-2013 it was

negative. In February the devaluation helped to improve the balance of

payments, eliminating its negative impact on GDP growth and increase foreign

exchange reserves of the National Bank of Kazakhstan by 17%. But the

devaluation also led to a decrease in investment and import growth of prices in

the economy. Prices of imported resources have become the main cause of rising

prices for goods produced in Kazakhstan.

 <Your Name> 2016 15 of 32

 III. Macroeconomic forecasts for 2016

The macroeconomic outlook for aggregate demand

In 2016, under the conditions of a possible decline in demand for basic

Kazakhstani export commodities, as well as the projected decline in prices for

oil and metals on world markets, the main risk to the economy of Kazakhstan is

a further slowdown of the real sector of economy of Kazakhstan, and later, and

industry sphere services. This will lead to a decrease in revenue to the National

Fund and the State Budget.

The macroeconomic forecast for 2016 on the factors of final demand, taking into

account the existing risks for the economy of Kazakhstan is pessimistic. Gross

fixed capital formation in 2016, as a result of the above-mentioned external

factors which occurred in the global economy may slowdown in investment

growth in fixed assets and domestic ones due to lower profits of domestic

companies, as well as external, due to the instability in the global economy.

The second tranche is planned in 2016 consisting of 500 billion of tenge for

concessional lending to SMEs and large enterprises, improvement of the banking

sector, the completion of the construction of a dry port SEZ Hargos and industrial

petrochemical technology parks in Atyrau and Taraz, continued construction of

the complex of the EXPO 2017, development of transport infrastructure Astana.

Thus, in 2016 it is expected positive growth of consumption of the public sector,

which will be the main driver of the economy in the current year in Kazakhstan

compared to other components of GDP. (Almadiyev, 2015)

 <Your Name> 2016 16 of 32

 Exports of goods and services in 2016: the average price may be reduced to the

level of oil 40 - 30 $ for barrel. In this scenario the export of goods and services

is expected with a negative growth in 2016.

Imports of goods and services are expected in a view of reduction in export

volumes. As a result, we should expect a decline in imports of capital goods, in

the form of machinery and equipment. Reduced purchasing power of the

population, narrow the rate of consumer goods and services imports in 2016.

Having in mind the above mentioned we may conclude that the presented GDP

forecast demand for 2016 has three scenarios for development: optimistic, basic,

and pessimistic ones. Each of them is based at oil price of 50, 40 and 30 dollars

per barrel. What can be seen from the forecast is the expectedly low rates of

economic growth in Kazakhstan in all scenarios. (Juza, 2016)

Macroeconomic forecast for oil sector

In order to maintain aggregate demand, as mentioned above, the state adopted a

package of measures to counter the impact of crisis. The head of state decided to

use money from the National Fund up to $ 3 billion (tenge 540 bn.) Actually for

the period from 2015 to 2017 the second tranche will be directed to complete the

ongoing projects and address the most pressing issues in the economy of funds

from the National Fund in the amount of 500 billion tenge, including 360 billion

tenge by means of the republican budget. The impact of additional resources in

the economy, spread chains of cross-sectorial linkages, and cause direct and

multiplicative macroeconomic effect. Low growth rates continue to be in the

service sector, even if oil prices fall to $ 20 for barrel. The state program "Nurly

 <Your Name> 2016 17 of 32

 Zhol", the second five-year plan and support of SMEs and large businesses in

the framework of the second tranche of the National Fund, will be the main

drivers of economic growth in 2016. According to calculations of the Institute

for the allocation of transfer from the National Fund in the amount of $ 1 trillion

tenge in 2016 for the implementation of anti-crisis measures of exposure can lead

to an increase in GDP growth by 1.6 percentage points.

Thus, the fall of the world average oil prices of up to 50, 40 and 30 dollars for a

barrel, taking into account the effect of the impact of additional government

spending ("Nurly Zhol") on economic growth, in 2016 the growth of

Kazakhstan's economy is expected to reach 103.2% , 101.8% and 100.8%

Forecast of revenues to the State Budget and National fund

Situation in the State Budget revenues excluding transfers from the National

Fund will be:

at an oil price of 50 USD 3619 billion (5% higher than in 2015),

at a price of $ 40 - 3334 billion (1% lower than in 2015),

at a price of $ 30 - 3178 billion (3% lower than in 2015).

It should be noted that the effect of reducing the cost of oil revenues in the budget

line will be replaced by transfers from the National Fund.

Thus, in view of the above transfers from the National Fund of the state budget

revenues will amount to:

with an average annual oil price of $ 50 5056 billion.

 <Your Name> 2016 18 of 32

 at a price of 40 dollars - 5,771 billion tenge.

at a price of 30 dollars - 5,615 billion tenge.

Forecast revenues to the National Fund by reducing the price of oil will decrease

the growth rate of assets. For example, if in 2011 - 2014 years, the average

increase in money of the National Fund amounted to 25-30% per year, this year

when oil price scenarios for 50-30 dollars in revenue growth will decrease to 1.5

- 6%. By reducing the cost of oil to 30 dollars, the revenues of the National Fund

at the end of the period decreased by 0.6% compared with the previous year, due

to significant reductions in tax revenues from the oil and gas sector. (Kalieva,

2012)

IV. Priorities for the economic growth

Modern model of economic growth in Kazakhstan

1. In the 2000s Kazakhstan formed the model of economic growth, focused on

the transformation of the oil windfall in domestic demand. This model has

provided the rapid growth of production, increase in the level of income and

social transfers, maintenance of macroeconomic stability. The other side of this

model is a high vulnerability to the volatility of the world oil market.

According to the method of accounting (cash basis) of the Ministry of Finance

of the Republic of Kazakhstan Kazakhstan's model in the distribution of national

income has been steadily increasing share of the business revenues and declining

share of wages. The share of net profit / net mixed income business has grown

since 2000 from 41.5% to 48.4%. The share of wages in GDP has declined from

 <Your Name> 2016 19 of 32

 38% in 2000 to 31.4% in 2013. The low level of wages is observed in a large

proportion of the population.

Wages below the national average revenue receive:

90% of those employed in agriculture,

83% of those employed in education

64% of the employed in manufacturing.

The share of working poor persons (less than 2/3 of the median income - ILO)

amounted to: more than 45% in agriculture, more than 33% in education, more

than 14% in the manufacturing industry.

In socio-political terms, this trend creates for workers and their families feeling

that they are not getting the proper portion of the wealth they create. Attempts to

compensate for the missing part of the income realized through the increase in

consumer lending and the growth of informal employment. Under these

conditions, the system of the foundation of a sustainable society i.e. the secured

and well-educated middle class eroded very quickly. In the developed countries

constant efforts were necessary o maintain the middle class development. For

example in the United States in January 2015, President Obama proposed a

package of financial, tax and systematic measures for the support and

development of the middle class. No economic wonder in Kazakhstan happened.

Against the background of long-term growth of Kazakhstan's business income,

there is a downward trend of the dynamics of investment from 30% of GDP in

2007 to 21.2% of GDP in 2013. This trend undermines the pace and

 <Your Name> 2016 20 of 32

 sustainability of future economic growth by reducing business investment

activity. Basically, a business strategy focused on expanding production and

improving the efficiency and modernization were not a priority. (Juza, 2016)

This all require transition to a new model of economic development of

Kazakhstan. In the near future is difficult to expect the return of favorable

conditions that have shaped the model of the "oil growth" of the 2000s. The long-

term dynamics of world oil prices is a trend that grows slowly and it periodically

superimposed cyclical fluctuations. The period of these oscillations was in the

last decade about 30 years. (Kalieva, 2012) Who passed the next peak in oil

prices began their phase of decline, it can last for about 10-15 years. But even

the growth of oil prices in the medium term up to 60-80 USD. It will not provide

the former high rates of economic growth and the usual level of business income,

population and budget. (Krichene, 2006)

After only 15 years, from 2030 is expected to reduce the volume of oil production

in Kazakhstan and, accordingly, while maintaining the current model of growth, it

will lead to the extinction of Kazakhstan's economic growth, if not to find new

growth drivers. According to our calculations, by 2020 the share of exports of oil

and gas condensate to GDP will remain at the level of 2012. In the future, this share

will be significantly reduced, and by 2040 the share of exports of oil and gas

condensate to GDP dropping to less than 10%. (Haerens, 2010)

Meanwhile, there was a systemic dependence on oil prices in the Kazakh

economy. According to the calculations of the Institute, the increase in oil prices

 <Your Name> 2016 21 of 32

 of Brent 1% entails: real economic growth by 0.08%; the real growth of domestic

demand by 0.1%; increase in net capital inflows by 0.83%. According to our

calculations, from 2002 to 2013 in Kazakhstan windfall from oil exports (i.e.,

only due to the increase in oil prices) amounted to a total of 253 billion of US

dollars. The correlation between the windfall from oil exports and the real

growth of the economy before the crisis of 2008-2009 is clear and direct. It

amounted to almost 0.93, and the post-crisis period rose to 0.97. This

demonstrates the growing contribution of the price factor the country's oil

revenues to the real growth of the economy and a decrease in the effectiveness

of the non-oil sector after 2009. (Lewis, Churchill and Tate, 2014)

The current crisis in the oil market could be a dress rehearsal for Kazakhstan: what

should be the economic model of the country without increasing the inflow of

petrodollars. Changed external conditions (lower oil prices), is expected to change

the internal environment (reduction of oil production), which will reduce the flows

of income and slow growth: the need to consume less and work more. This is a

reaction to the decline in state revenue from natural resource rents. (Haerens, 2010)

Short-term measures have been taken into consideration, the scale can only

partially solve the systemic problems of the economy. Almost all measures are

aimed at expanding domestic demand, which will only temporarily extend the old

growth model, but cannot promote the formation of a new growth model. The

problems of the economy are chronic and fundamental and cannot be solved by

point measures, such as the easing of monetary policy or the correction of

budgetary expenditures. These measures may bring short-term success. The

 <Your Name> 2016 22 of 32

 reasons for the above problems are as weak market environment caused by the

domination after the 2008-2009 crisis government regulation of the market

environment ("manual control") and the growth of quasi-public sector and

development institutions. (Haerens, 2010)

The basis for a new model of economic growth should be to create a strong

incentive to improve the efficiency of both the business and for the public

administration system. It is necessary to ease the burden of regulation and to

ensure complete protection of property rights. It is necessary to ensure a rigid

and equal responsibility of all market companies for the results of its activities

regardless of their affiliation, to which a sector of the economy. (Krichene,

2006)According to our estimates, in order to achieve acceptable rates of growth

in the coming years, the share of gross fixed capital formation to GDP should

grow significantly: up to 22% - by 2016 and to 27% - by 2020 five-year plan

2015-2020 will be decisive for long-term economic outlook. If during this period

will be found the resources to maintain a high level of investment in fixed assets,

despite the growth of specific capital intensity, it will have a chance to go beyond

the 2020 sustainable development trajectory until 2050 with an average annual

rate of 4% per year. Otherwise, the average annual growth rate will decrease

range. It is necessary to carry out a series of reforms, but not be limited to a set

of specific measures. (Lewis, Churchill and Tate, 2014)

Complex system of measures proposed

Ensuring macroeconomic stability and consistency is possible through the

priorities and measures of monetary and budgetary tax policy. Money and credit

 <Your Name> 2016 23 of 32

 policy the main focus of which in the field of monetary policy in the medium

term should be phased introduction of a new transmission mechanism. This will

require the improvement of existing and introduction of new instruments of

monetary policy, to change the approach to permanent arrangements for the

provision / withdrawal of liquidity, operations on the open market. (Dreger,

2008)

Kazakh tenge is so-called commodity currency; its behavior depends on the

prices of exported raw materials. The goal of innovation is to intensify the credit

channel of the transmission mechanism of monetary policy and reduce the value

of its currency channel. The new mechanism will create a healthy reaction to the

decrease in prices of the main export product, help to reduce the dollarization of

the economy, volatility of interest rates, the speculative component in the money

market and, as a consequence - to increase the flexibility and effectiveness of

liquidity management and the conduct of monetary policy as a whole. (Krichene,

2006) This will require a change in the interest rate corridor of the National Bank

of the Republic of Kazakhstan. His limits will match rates as a permanent

mechanism (the lower bound - deposits of the National Bank of the Republic of

Kazakhstan, the upper limit - loans continued access). The introduction of new

operations and tools within the transmission mechanism of monetary policy will

increase the efficiency of management and liquidity regulation. Monetary policy

in such circumstances will be aimed at maintaining a balance between the

internal and external competitiveness of Kazakhstan's economy. At the same

time, the exchange rate policy will adequately respond to changes in world

 <Your Name> 2016 24 of 32

 prices, terms of trade, creating thereby a foundation for the development of the

domestic economy. (Invest In Kazakhstan, 2016)

Budget - tax policy. The current trend is the increased dependence of the budget on

oil revenues will require institutional reforms in the public sector, increase the

transparency of its expenditures. In the medium term it will require consolidation

of the National Fund in the fiscal accounts in accordance with international

standards and the reduction of budgetary spending in the context of improving the

transparency of the public sector. (Kalieva, 2012) In this regard, the primary task

is to increase the non-resource revenues and the expansion of the tax base, together

with the improvement of tax administration in order to maintain the budget at a

stable level. In the medium term need to improve the tax policy in relation to the

taxation of income, progressive taxation and taxation of resource rent. (Haerens,

2010)

Application in terms of growth in inflation of the administrative regulation of

prices, as a tool to protect vulnerable groups, should be replaced focused

targeting of social transfers. Achieving transparency in public spending on

development programs and diversification in accordance with the highest

standards of efficiency, will require a gradual transition to the direction of public

funds for the programs of industrialization and diversification through the

budget. Loan programs through quasi-fiscal institutions and commercial banks

will require careful planning and control of implementation. Liabilities and

obligations arising from lending and its conditions must be market-oriented and

clearly disclosed. (Krichene, 2006)

 <Your Name> 2016 25 of 32

 Short-term measures

In order to improve the situation immediately the government should provide tax

breaks for hiring additional workers to be unemployed as a result of current

market conditions and being in a state of long-term unemployment (over 1 year)

or an increase in employees' salaries. That is, if the company hires new

employees or plans to increase the wage bill, in this case, the company is exempt

from paying taxes on the amount of the increased wage bill; Establishment of a

temporary moratorium on the control and inspection of small and newly

established businesses, as well as improving their access to the preparation of

financial capital shall be required. The reduction of personal income tax for all

kinds of small and medium-sized businesses by 50%, to reduce the share of the

shadow economy and increase tax revenues and the possibilities of refinancing

loans at low interest rates to boost domestic consumption. (Dreger, 2008)

Long-term measures:

In the long run it is necessary to fulfill the next basic requirements: to provide

tax credits for businesses that increase the levels of investment in R & D

initiatives to improve skills, support for infrastructure projects; to restore the

possibility of training in a bachelor degree in the leading foreign universities at

the expense of "Bolashak" program and an increase in time working out in

Kazakhstan for the graduates of the program; to complete coverage of the

population access to the Internet in Kazakhstan, increased the speed of the

wireless network, as well as the ubiquity of free wireless Internet access in all

regions of Kazakhstan; to create opportunities for further training and skills of

 <Your Name> 2016 26 of 32

 faculty and student body, by creating educational online portals in the Kazakh

and Russian languages on the type of «Coursera» and «EdX», enjoying wide

popularity in the United States and Western Europe; to provide targeted social

assistance to cover the costs of services of preschool institutions for women who

are on maternity leave and having the opportunity of employment. Social

contributions from the state budget will be possible due to the redistribution of

income inflow of income tax and indirect taxes, as a result of revenue growth in

the labor and consumption of this category of the population. (Dreger, 2008)

"Center for Applied Economics Research" held forecast of economic

development of Kazakhstan in Q1 2016, as well as in 2016. The basis of forecast

was used by the average target price of Brent crude oil and the state of the

Chinese and Russian economies. For the basic scenario used the price of oil at $

35 per barrel. Two other scenarios pessimistic ($20 per barrel) and optimistic

($50 per barrel) - represent the lower and upper boundaries of the likely range of

realistic scenarios. (Invest In Kazakhstan, 2016)

For comparison: in the forecast of the Ministry of National Economy of the

Republic of Kazakhstan for 2015-2019 years, taking into account the changes of

November 17, 2015 (Minutes №47) for the development of the scenario options

on the price of oil was adopted the next level: the basic scenario in 2016-2017 is

projected to decrease to $ 40 price levels per barrel with a consequent increase

in 2018-2019 to $ 2015 level of 50 per barrel; the pessimistic scenario, the oil

price in 2015 will develop at the level of 50 dollars per barrel, followed by a

decrease to $ 30 per barrel in 2016-2019 years; the optimistic scenario, in 2015-

 <Your Name> 2016 27 of 32

 2017 years the world oil price is at US $ 50 per barrel in 2018-2019 will increase

to US $ 60 per barrel. (Lewis, Churchill and Tate, 2014)

Given the current trends of development of the country's economy since the

beginning of the year and the situation which is taken as a background for basic

scenario in the global economy, the parameters of which are the most likely to

be with a slight deviation from current expectations, we may conclude the

following. (Victoir, 2014)

The basic scenario: in the 1st quarter of 2016 is expected to decline in GDP in

real terms by 0.8% compared to the same period of 2015, due to the deterioration

in comparison with the similar period of 2015 the situation in the trade (5.8%

reduction) and industry (down 19%). According to forecasts this scenario, the

resumption of growth in trade is not expected until the end of 2016. The recession

is expected to more in-depth in real monetary income - 10.4% compared to the

same period of 2015; inflation index in the same period will increase by 20.8%.

The nominal exchange rate is projected at 389.41 tenge per 1 US dollar. (Dreger,

2008)

In 2016, the decline in GDP in real terms will be 0.2% compared to the previous

year. Reducing drop compared to Q1 2016 due to the improvement of the

situation in individual sectors of the economy due to the reduction of inflation to

109.9% and the strengthening of tenge to 384.04 tenge per 1 US dollar.

The pessimistic scenario: in the 1st quarter of 2016 the decline in GDP in real

terms, due to the reduction of the volume of trade by 5.9% and industry by 3.4%,

by 1.3% compared to the same period of the previous year. In this scenario until

 <Your Name> 2016 28 of 32

 the end of the year the resumption of growth in industry and trade is expected.

Factor in reducing the population's real cash income by 13.1% to maintain high

rates of inflation. CPI in this period will grow by 23.4%, the nominal exchange

rate will fall to 475.66 tenge per 1 US dollar. (Invest In Kazakhstan, 2016)

This scenario assumes that in 2016 over a fall in real GDP growth of 1.0%. The

annual CPI basis was 113.7%, the nominal exchange rate - 470.29 tenge per 1

US dollar. The decline in real money incomes by 4.4% would lead to a reduction

in demand from the population for goods and services, which will affect the

reduction of the volume of trade by 11.7% compared with the previous year.

(Juza, 2016)

The optimistic scenario: in Q1 2016 real GDP growth of 0.2% compared to the

same period of 2015. Later, by the end of 2016 will mark a positive GDP growth

of 0.5% due to higher production volumes sectors except trade (down 9.0%) and

communications (2.8% decreased)

Conclusions

Budget revenues, coming to more than half of the oil sector, should be affected

by the slow growth of hydrocarbon production and lower oil prices. The currency

depreciation could, however, offset the decline in oil revenues in dollar

denominated in tenge in the budget. Non-oil tax revenues are expected to increase

slightly. Wage increases in the public service, initially planned for 2015 have been

announced for 2016. The infrastructure projects should also be maintained. These

expenditures should nonetheless be mainly financed by the oil fund (NFRK) and

 <Your Name> 2016 29 of 32

 pension funds, limiting their weight in the budget. The state, however, should

continue to support indebted public companies (including national energy company

KazMunaiGaz). Oil exports (75% of total) should not increase, given the

difficulties of production and low oil prices. The application should also remain

sluggish in major. The question of the succession of President Nazarbayev remains

very uncertain which adds vulnerability to the future of nation’s economy. (Invest

In Kazakhstan, 2016) The country is run since 1991 by N. Nazarbayev and his party

(Nur Otan) which holds a large majority in the Assembly. (Juza, 2016) N.

Nazarbayev was re-elected for a fifth term in early elections of April 2015 (initially

scheduled for 2016), with 98% of votes. The political stability of the country

remains a source of uncertainty because of the risk of conflicts that might erupt

between factions of power, whether the estate of President (74 years) was

precipitated in case of incapacity of Nazarbayev to stay in power. (Kalieva, 2012)

The public discontent is growing over the low level of wages, rising prices and

corruption. The organization of mass movements remains unlikely, given the

weakness of the opposition. Moreover, security measures, which were reinforced

by fear of terrorism and religious extremists, limit large-scale protest opportunities.

(Juza, 2016)

Despite real progress, the business environment remains highly constrained by

the interference of the state in the economy, ineffective institutions and corruption.

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 <Your Name> 2016 30 of 32

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