The downturn of the oil prices in 2014 produced profound negative effects on the economy of Kazakhstan. The GDP growth in 2015 slowed down to 1.2% for the first time since 2009 and it contracted further in 2016 reaching 1%, which had never happened since 1998. The sudden drop of the oil prices produced an immediate and devastating effect on the currency of Kazakhstan (tenge) since over two thirds of its exports consists of oil and gas products. As a result of it, tenge depreciated by over 80% by the end of 2015. Moreover, the situation was aggravated by the spillover effect of the Russian economic crisis due to the fact that nearly one fifth of the total external trade of Kazakhstan is carried out with Russia. Already in 2014, the impact of the Russian crisis had severely damaged growth in all Central Asian countries primarily through close trade relations (Schenkkan, 2015).
In order to cope with the situation, the government of Kazakhstan had to introduce a package of stimulatory measures sustaining the demand side of the economy. Declines in private sector consumption and investment have been smoothed by the government’s fiscal stimulus measures. Transfers from the National Fund to the budget amounted to 6% of GDP in 2015 and 8% of GDP in 2016 (Samruk Kazyna and BCG, 2016). Contracting net exports and increasing public spending also led to serious structural changes in the GDP of Kazakhstan. The share of net exports shrank from 13.7% in 2014 to 4.0% in 2015, and to 3.6% in 2016. On the other hand, the share of the aggregate consumption in the economy went from 59.2% in 2014 up to 66.1% by 2016. Thus, in 2016, the aggregate consumption composed over two thirds of the country's GDP. The aggregate consumption is primarily composed of the private household consumption, which makes about 53.2% of the total GDP, whereas the share of the public consumption is only 11.8%. Therefore, despite the vital importance of exports, the private consumption makes the largest share of the national economy of Kazakhstan. Hence, changes in the private internal consumption also plays an important role in determining the overall economic situation in the country. The fluctuations of the private consumption have always been very closely correlated with the fluctuations of the overall GDP. During 1990s, its share was as big as it is now, around two thirds of GDP. During the years of accelerated economic growth caused by high oil prices, its share went down to 40-45% of GDP. Yet after 2014, it started to recuperate again. The fluctuation of the GDP and private consumption are depicted in Figure 1 below.
From 2010, there has been a rapid real growth of both real GDP and real private consumption. Starting from 2013 these growth rates slowed down. During 2013-2014, the annual real GDP growth rate went down from 6.0% to 4.2% while that of private consumption fell from 10.6% to 1.1%. Such a sharp response of the private consumption reflected the overall negative expectations and lack of confidence of the population. Slower growth was driven by the impact of lower income and profitability (reflecting regional developments) on private consumption, and domestic investment (IMF, 2015). This had a dramatic negative effect on the overall economy of Kazakhstan, which is not often seen very clearly from statistical data. During 2012-2013, the contribution of the net exports to the GDP growth was in fact negative and turned positive in 2014 whereas the contribution of the private consumption to the GDP growth remained positive all over the period from 2012 to 2015 (IMF, 2015). In other words, during 2012-2015 at least the role of the private consumption was more important in the economic growth than the role of new exports. From 2014, the real growth of both GDP and private consumption has continued but at a slow pace. Measured in nominal terms, the amount of the GDP in 2016 reached 46.2 trillion tenge and that of private consumption exceeded 24.5 trillion tenge. Another important fact that can be seen from Figure 1 is that the private consumption dropped significantly before 2014 when oil prices fell. Thus, the economic downturn of 2014-2015 was primarily caused by the contraction of the private consumption in the economy. The downtrend of the oil prices that followed in 2014, only contributed to the overall negative economic situation. This contradicts to the generally accepted idea of primary role of the oil prices in determining the economic growth in Kazakhstan during recent years.
Figure 2 helps us to have a look on the crisis of 2014-2016 in terms of the real income growth. As we can see, the slowdown of the growth of the real income in Kazakhstan began already in 2012. In 2013, the real income grew by only 2.9% and, by 2016, it turned negative. Surprisingly, if we analyze the private consumption expenditure from Figure 3 we can see sudden rise of expenditures in 2016. This was preceded by a gradual decline of private consumption expenditures during 2013-2015, which is consistent with the change of the real income.
The sudden rise of expenditure in 2016, however, does not fit into this framework. Logically, falling real income must have been pulled the expenditure down. In order to find out the reason for this we should analyze changes in the structure of private consumption expenditure. One of the possible reasons could be inflation. The official inflation rate in 2015 was 3.6% and in 2016 it accelerated to 8.5%. Such a sudden increase could have caused increase in expenditure as consumers spend more money in order to maintain their consumption not being able to adjust rapidly.
Figure 4 presents the structure of consumption expenditure at quarterly basis since 2013. These consumption expenditures make more than 90% of the total household expenditures. It includes expenditure on consumption and excludes taxes and expenditures not associated with consumption. During the period from 2013 to 2017, we can see a relative increase of the expenditure on foodstuffs at the expense of expenditures on other goods. In the first quarter of 2013, consumers spent on foodstuffs on average 47.0%. By the second quarter of 2017, this share rose to 51.5%. The percentage of expenditures on services did not change considerably during this period. From the point of view of the general microeconomic theory, this is considered to be a negative pattern, which leads to a decline of the welfare of the consumers.
As we can see, foodstuffs make about a half of the private consumption expenditures. Thus, changes in eating habits produce significant economic effects on the economy of Kazakhstan. In order to find out the real changes in food consumption we consider Figure 5, which depicts yearly changes per capita average consumption of some of the most widely consumed food items in Kazakhstan during 2011-2016.
Figure 5: Consumption of some products in per capita terms in Kazakhstan during 2011-2016
Looking at the Figures 5 a) to 5 j) we can state that the consumption of certain vitally important food items changed differently throughout 2011-2016. In general, consumption of many of them increased. However, in 2016, in particular, consumption of some important food items like meat, seafood, fruits, vegetables and confectionary products decreased in per capita terms. On the other hand, consumption of such products like bakery products, dairy products, eggs, butter and fats increased significantly in 2016.
Given these data, we can admit that the crisis of 2014-2016 produced certain changes in the consumer behavior in Kazakhstan. However, we cannot contrast these data to the change of welfare of consumers of Kazakhstan as a consequence of the economic slowdown of 2014-2016 due to two reasons. Firstly, this will require consideration of the change of prices of each product under consideration separately. The change in consumption might result from a change of real income as well as from the change in price. Secondly, we do not know the normality of these food items within the theory of consumer behavior applied to Kazakhstan. Comparison of the changes in consumption to data from Figure 2 (decreasing real income) and Figure 3 (increasing consumption expenditure) leads to ambiguities in interpretation. On the one side, we can see a clear descending pattern in real income of the population in 2016. On the other side, in 2016 there was a significant increase of expenditure in spite the fact that real income has fallen. At the same time, looking at the change in consumption of the most important foodstuffs during 2011-2016, we can see that the quantity consumed of certain foodstuffs is increasing, whereas the quantity consumed of other foodstuffs is declining in 2016. However, Figure 4 shows a growing relative share of consumer expenditure on foodstuffs, which is a robust evidence of decreasing welfare of the population. This allows us to assume with a high degree of probability that the ambiguous changes in the consumption of certain foodstuffs that occurred in 2016 were attempt of the consumers of Kazakhstan to adjust their food consumptions to their falling real income switching from relatively more expensive food items to cheaper ones.
The given issue has profound implications from many points of view. For instance, it leaves space for research on poverty from the point of view of consumption. One of the most recent studies on this issue states that the level of poverty in Kazakhstan decreases (Zhusupova, 2015). If we consider it from the point of view of the Eurasian Economic Union, Kazakhstan’s economy faces the challenge of adjusting to a large terms-of-trade shock in a context of declining domestic and external demand (World Bank, 2015). From the perspective of the economic policymaking, the findings presented above question the current concept of the government, which is focused largely on stimulating exports associating the economic trends primarily with changes in prices of exported commodities. This vision, however, underestimates the potential of the internal consumption in determining the economic growth in Kazakhstan. More profound studies in this field might lead to very important findings that will be of high value in terms of economic policymaking.
IMF, (2015): “Republic of Kazakhstan 2015 Article IV Consultation—Press Release; Staff Report For The Republic Of Kazakhstan”, IMF Country Report No. 15/241.
Samruk Kazyna, and Boston Consulting Group, (2016): “Kazakhstan’s Macroeconomic Outlook& New Investment Horizons in Digitalization”, Joint Publication 2016-2017.
Schenkkan, N. (2015): “Impact of the Economic Crisis in Russia on Central Asia”, Russian Analytical Digest, No. 165, pp. 3-6. 17 March-2015
World Bank, (2015): “Kazakhstan: Adjusting to Lower Oil Prices; Challenging Times Ahead”, Economic Update No.2 | Fall 2015
Zhusupova, A. (2016): “Динамика социального неравенства в Казахстане (Dinamika Sotsialnogo Nieravenstva v Kazahstanie)”, Institute of World Economics and Politics, July-2016.
Note: The views expressed in this blog are the author's own and do not necessarily reflect the Institute's editorial policy.