Mining sector provides more than 40% of state income and 15% of GDP | FinReview
13 February 2020

Mining sector provides more than 40% of state income and 15% of GDP

In 2019, Kazakhstan’s GDP growth was 4.5% due to increased demand on the consumer market, increased industrial production and increased investment activity. Which sectors of the economy were able to stimulate GDP growth and what economic development prospects do we expect Kazakhstan to have in the next five years?

In recent years, the world economy has been facing foreign policy tensions associated with the intensification of trade wars, worsening geopolitical situation, a decline in turnover in global commodity markets. As a result, there has been a global decline in the rates of economic development of countries. Thus, according to forecasts, the average growth rate of Kazakhstan’s main trading partners – the European Union, China and Russia – fell from 3% in 2018 to 1.7% in 2019.

Despite the decline in global economic growth, Kazakhstan’s economy continued to strengthen. Thus, according to preliminary estimates, GDP growth was 4.5% in 2019. At the same time, GDP reached 44.3 trillion tenge in gross terms for nine months. While GDP per capita for the same period increased from 2.2 million tenge in 2018 to 2.4 million tenge in 2019.

The main driver of economic growth was the expansion of consumer and investment demand. Thus, the growth of social spending strengthened household incomes and, combined with government support to reduce the debt burden of poor households, helped to achieve real growth in consumption. At the same time, the debt burden of citizens was reduced by writing off debts for servicing loans for 443,000 citizens and increasing social spending to 5% of GDP in 2019, compared to 4.4% in 2018. As a result, household income in the third quarter of 2019 amounted to 598.9 thousand tenge, having increased by 9.8% for the year.

In addition, the key factor of the national economy growth was the country’s investment policy.  At the end of 2019, investments in fixed assets increased by 12.7% over the year and amounted to 12.5 trillion tenge, while the inflow of foreign direct investment in the country for the first nine months of 2019 increased by 4.8% over the year to 18.4 billion US dollars.

The contribution of investment flows to the country’s economy is that the growth of FDI by 1 percentage point in a year may lead to an increase in gross output by 0.11 percentage points, and in two years, the accumulated effect may reach 0.15 percentage points. The effect of the growth of investment in fixed assets has been observed since the second quarter in the form of additional 0.07 percentage points to GDP, and in a year, the accumulated effect may reach 0.10 percentage points.

Accordingly, disclosure of the investment potential of Kazakhstan will allow the country to accelerate the economic growth rates. The Astana International Financial Centre has been established for this purpose. The direct effect from the AIFC development in the long term will be up to 1% of annual growth of hydrocarbon-free external gross product up to 2025, or about 13.4 billion US dollars of cumulative absolute GDP growth. An additional effect is the acceleration of GDP growth by an average of 1% annually due to the inflow of foreign direct investment into Kazakhstan’s capital markets, the implementation of new economically profitable projects and productivity growth. Thus, the total cumulative effect from the creation of AIFC, taking into account the direct and indirect impact on GDP, may be about 40 billion US dollars. For example, a similar center in Dubai (DIFC) has increased its contribution to GDP from 5.5% to 12% over a decade.

AIFC has become a hub for over 350 companies from 35 countries around the world. AIFC members operate in such economic sectors as banking, stock market, asset management, private banking, Islamic finance, credit rating activities and others.

Mining and quarrying account for 15.7% of the total GDP. Moreover, the sector’s contribution to government revenues reached 44%. The three sectors also include wholesale and retail trade, as well as car and motorcycle repair – 15.6% and manufacturing industry – 11.7%. The other top five sectors with the largest share in GDP are transport and warehousing (7.7%), and real estate operations (6.8%).

Meanwhile, the largest economic growth is observed in the construction sector (+13.5% per year). In trade, volumes grew by 7.6% due to wholesale sales. In agriculture, livestock production increased by 3.5%. In the service sector, the growth was 4.4%. The growth in industry amounted to 3.3%. In the manufacturing industry, the largest growth was achieved in light industry, machine building, beverage production and pharmaceuticals.

Moreover, the policy of economy diversification actively conducted in the country allowed to increase competitiveness of Kazakhstan. In other words, the current course of industrial production aims at reducing raw material dependence and transition to the development of processing technologies. Therewith, the key impulse of development of industrial production became implementation of the new industrial policy aimed at creation of highly productive and export-oriented manufacturing industry. Thus, over the years of implementation of the two five-year state program of industrial and innovative development, manufacturing industry attracted 7.5 trillion tenge (3 trillion tenge were attracted to State Program for Industrial and Innovative Development-1 and 4.5 trillion tenge – to State Program for Industrial and Innovative Development-2). Effective core industry was created through the modernization of 35 enterprises, the emergence of new areas of the economy and new products with high export and innovation potential.

Moreover, during the years of industrialization from 2010 to 2019, 500 new types of products previously not produced in Kazakhstan were introduced. These include freight and passenger cars, trucks, cars and buses, electric locomotives, transformers, LED lighting fixtures, X-ray equipment, pharmaceuticals and others. The number of goods produced in Kazakhstan and competitive in foreign markets has increased, they include steam turbines, copper products, radiators, batteries, drinks, confectionery, etc. Also during this time, metallurgy has made a transition from production of base metals (copper, lead, zinc, etc.), half-finished and semi-finished products to production of finished products such as steel pipes, metal structures, rails and wires. Over the years of industrialization, 54 projects have been implemented in the chemical industry, more than 4,000 jobs have been created, and 302 new production facilities have been put into operation for the production of construction materials, with a total cost of 458.8 billion tenge and more than 20,300 jobs created. Over the years of implementing industrial programs, domestic enterprises have exported manufacturing products worth 163 billion US dollars.

In 2019, the industrial production index for the manufacturing industry rose to 4.4% (in 2018, 4%). The production of beverages (10.2%), oil products (6.6%), basic precious and non-ferrous metals (6.8%) and mechanical engineering (20.9%) increased. In general, in 2019, the manufacturing industry produced goods worth 11.2 trillion tenge.

In the presence of aggravation of geopolitical situation and global trade wars, for a qualitative industrial breakthrough and creation of a competitive manufacturing industry, it is necessary to conduct a consistent and balanced state policy. To this end, the State Program of Industrial and Innovative Development of the Republic of Kazakhstan for 2020-2025 has been developed being a logical follow-up of the long-term course on economic diversification.

As a result, the World Bank forecasts that Kazakhstan’s GDP will grow by 3.7% in 2020, 3.9% in 2021 and 3.7% in 2022. While in Central Asia, the economic growth rate will be moderate, at 4.4% level.