Kazak Budget Cuts Could Backfire

Plans by the Kazak government to slash government spending have raised fears of mass unemployment and recession.

In his annual state-of-the-nation address last month, President Nursultan Nazarbaev said “temporary” but swingeing cuts in government spending were needed to cool galloping inflation rates, which in December hit 18.8 per cent year on year.

“Everything that can wait, everything that we can do without for one or two years must be suspended,” said Nazarbaev, suggesting roads and construction projects as prime areas for cutbacks.

Growth predictions for 2008 have been revised downwards from 8.7 per cent to five per cent, reflecting a slowdown which Prime Minister Karim Masimov has blamed on the recent instability on world financial markets. (See Kazakstan: Projected Slowdown Could Sow Instability, RCA No. 527, 18-Jan-08.)

Many economists are dubious about the effects of this austerity programme.

Leading economist Peter Svoik told IWPR he doubted cuts in spending would solve Kazakstan’s economic difficulties.

“The problem is not a lack of money inside the country,’ he said, referring to the revenues the Central Asian state earns from oil and gas exports.

“A few days ago, the [parliamentary] budget commission revealed that money budgeted for last year didn’t even get spent.”

The real aim, Svoik went on, should not be to cut overall expenditure levels, but rather to target the spending more wisely instead of allowing funds to be eaten up by the bureaucratic machinery of government.

“The current top-down [state] administration isn’t terribly efficient, to put it mildly. But it has a habit of taking and consuming everything it can get,” he said.

Svoik said cuts in state-funded on construction could have a particularly unhelpful effect on the employment situation.

Last year’s global financial crisis hit the Kazak construction industry particularly hard, as much of the housing boom had until then been driven by mortgages bankrolled by cheap borrowing on international markets.

“A large proportion of the population have already lost their jobs due to the suspension of construction projects,” noted Svoik.

With the economic outlook uncertain, fears of a shortage of cash to repay Kazakstan’s foreign debts and purchase imports, and more and more building projects being halted, Svoik says “there’s a danger that huge numbers of people could lose their jobs”.

Employment has fallen in Kazakstan in recent years as oil profits were ploughed into ambitious government construction schemes. According to the ministry of labour and welfare, the unemployment rate dropped from 12.8 per cent in 2000 to 7.8 per cent in 2006.

Gulnur Rahmatullina, head of the economics department at the presidential Institute of Strategic Studies, defends the government’s broad approach as broadly the right one.

“A fight to the death against inflation has got to be a top priority of government economic policy,” she said.

She argued that cutting state-funded construction projects would have only a limited effect on the industry and its employees, as the private sector is increasingly taking on responsibility for assets that used to be managed by the state.

Government building projects ground to a halt in Kazakstan towards the end of last year, leaving thousands of people out on the street. Many are still on involuntary holiday without pay, and waiting anxiously for their employers to pay them the past wages they are due.

Kanat, an engineer in a big construction company in Almaty, was earning about 2,000 US dollars a month before he was laid off.

“My family had got used to a good standard of living, so it’s been really difficult for all of us,” he said. “The firm still owes me about 5,000 dollars but I don’t know if I’ll ever get the money.”

Peter Svoik believes cutting road-building projects is particularly self-defeating as a strategy.

“Roads are a necessity for Kazakstan in every respect, economically and socially,” he said. “This is not an area where we should be making economies. Just the reverse, we should be increasing our investment.”

Many businessmen and traders agree, saying that unless communications improve markedly in this vast country, free enterprise will never take off.

Almas, a wholesale market trader for the last seven years, says his business is currently flourishing. But he sees clouds on the horizon if Kazakstan’s rickety transport infrastructure does not continue to improve and new projects are abandoned in the name of savings.

“We always have problems with transporting our goods because of the state of the roads,” he said. “If this is allowed to continue, it could become impossible to run my business, which feeds my wife, children, and myself.”

Some analysts say the government is going in entirely the wrong direction and should be looking at ways of spending its way out of recession instead of tightening the purse-strings and thereby potentially triggering a bigger slump.

Political commentator Oleg Sidorov argues that Kazakstan should draw on the experience of the United States in the Depression of the 1930s, when President Franklin Roosevelt dumped the belt-tightening strategy of his predecessors and tackled unemployment and inflation through the New Deal.

“They tried to get money flowing into the economy by every possible means,” said Sidorov. “They started by building new transport routes, and then the economy began to pick up.”

What Kazakstan needs, Sidorov believes, is similar state investment in creating jobs and in stimulating growth.

Without bolder, growth-orientated policies, some economists believe businesses will react to rising inflation by shedding more and more workers.

The behaviour of Violeta Pak, who runs a small confectionery business, appears to bear this experience out - she has already cut her workforce by half.

“I used to have 23 people working for me and now I have only ten,” she said. “I can’t raise wages, as the cost of my raw materials has doubled, as have utilities.”

The only alternative to slimming the company down, she said, was to close it altogether.

Natalya Napolskaya is an IWPR contributor in Almaty.