Oil Crash: Will Agriculture Become the Locomotive of Kazakhstan's Economy? | FinReview
27 May 2020

Oil Crash: Will Agriculture Become the Locomotive of Kazakhstan's Economy?

The ongoing crisis caused by the Coronavirus pandemic has shown how interconnected the economies of different countries with a commodity focus are. Now a ton of flax costs more than a ton of North Sea Brent oil. This means that the world commodity and food markets are seriously destabilized. However, on the other hand, taking into account that Kazakhstan is the world leader in flax production, the fall of oil quotations showed high potential of agriculture for the country’s economy. In addition to the fact that about 42% of the population lives in rural areas, which indicates the social importance of the sector, a wide range of quality agricultural products manufactured in the country, in the long term, can become the locomotive of Kazakhstan’s economy. However, new incentives are essential for this.

The agro-industrial complex is one of the key sectors of Kazakhstan’s economy that shapes the country’s food and economic security, as well as the labor and residential potential of rural areas.

The agro-industrial complex of Kazakhstan has good prospects for further development – the country occupies the second place in the world by the area of arable land per capita, and it is one of the largest world exporters of grain and flour.

Our country’s membership in the Eurasian Economic Union and the World Trade Organization also creates opportunities and at the same time sets high requirements for competitiveness both in domestic and foreign markets.

Thus, the regular meeting of the Supreme Eurasian Economic Council, which was held on May 19, 2020, focused on the strategic development of the Eurasian Economic Union. Given the particular importance of this project, which affects virtually all sectors of the economy, Head of State Kasym-Zhomart Tokayev in his speech noted the need to ensure the traffic of goods without barriers and restrictions, the gradual construction of a single market for services, the development of transport and logistics services and preparation for common energy and financial markets. This, in turn, enhances the role of state regulation of agriculture and creates promising opportunities for the development of the market for agricultural production.

Despite the existing potential for the development of the agro-industrial complex, its share in the country’s GDP has not exceeded 5% in the last ten years and has been steadily declining in recent years

Since independence, ten policy documents have been elaborated, based on which the state policy in the sphere of agriculture was implemented:

  • Socio-economic development “Aul” for 1991-1995 and for the period up to 2000;
  • Agro-industrial complex development for 1993-1995 and up to 2000;
  • Agricultural production development for 2000-2002;
  • State agricultural and food program for 2003-2005;
  • Rural development for 2004-2010;
  • Sustainable development of agricultural sector for 2006-2010;
  • priority measures to implement the Concept of Sustainable Development of the agro-industrial complex of the Republic of Kazakhstan for 2006-2010;
  • Agro-industrial complex development for 2010-2014;
  • Agro-industrial complex development “Agrobusiness-2017”;
  • Agro-industrial complex development for 2017-2021.

Currently, agriculture accounts for about 5% of the country’s annual GDP. And at the end of the first quarter of 2020, the share of agriculture was 2.2% of GDP. At the same time, this year’s output grew by 62.4 billion tenge compared to the first quarter of 2019, amounting to 496.6 billion tenge. The growth was mainly due to livestock production.

It is obvious that the development of agriculture will accelerate diversification and strengthen the competitiveness of the national economy. However, over the last five years the already low share of agriculture in the GDP structure has been steadily declining. Therefore, the level of labor productivity also remains weak. In 2019, this indicator was about 6 thousand USD, while in Russia, the labor productivity reaches 17 thousand USD; in South Africa – more than 11.5 thousand USD; in Turkey – 15.7 thousand USD and in some developed countries, the value reaches 80-90 thousand USD.

The domestic market is largely represented by imported products – the share of imports for a number of goods exceeds 50%

The output of food products in general does not cover consumer demand. As a result, the free niche in the market is compensated by imports, its share in domestic consumption remains very significant, and for those types of food products that have traditionally been produced at domestic enterprises. For example, producers of cheese and cottage cheese cover only 55% of the needs of Kazakhstanis, fish – 51%, poultry – 57%.

However, the Government is implementing a set of measures aimed at developing the agro-industrial complex and improving the competitiveness of domestic agricultural products. According to the target indicators of the program for the development of the agro-industrial complex for 2017-2021, the volume of food imports by 2021 should decrease by 14.6% and not exceed 2.1 billion USD. In turn, exports of processed agricultural products, on the contrary, should more than double exceeding 2.4 billion USD.

Nevertheless, in the first quarter of 2020, exports of processed products amounted to 287.7 million USD. If this trend continues, the target indicators will not be reached on time

About 80% of agricultural output is marketed as raw materials, without processing, and the finished product has weak competitiveness. In 2019, the volume of processed products exports even decreased by 20.7% as compared to 2018. However, due to currency revaluation in monetary terms, the decline was only 2.3% up to 1.1 billion USD.

Nevertheless, in general, agricultural exports, taking into account the sale of raw materials, have shown stable growth over the past five years. According to the results of 2019, the volume of exports grew by 5.9% up to 3.3 billion USD. At the same time, plant products account for 72.9% of goods sales.

Over the year, Kazakhstan’s export position in a number of product groups has strengthened with significant growth in animal products (export growth of 47.8%), flaxseed (+22.7%), sunflower seeds (+66.2%), oils of animal or plant origin (+23.8%).

This creates a positive trend in the agricultural market, as the sale of highly profitable crops such as flax, sunflower, soybeans, and lentils can provide a 2.5-fold increase in profitability of the sector by 2022. For example, for flax production, the price of which is 4 times higher than the cost of wheat, Kazakhstan is already a world leader producing about 1 million tons of seeds per year. Moreover, for soybean export, which is 2 times more expensive than wheat, more than 30 thousand tons are sold annually.

The coronavirus pandemic, which began in 2020, has jeopardized the sale of agricultural products to foreign markets

As early as March 2020, agricultural producers in Kazakhstan faced problems selling melon crops to foreign countries. Therefore, the Government made a decision to sell products inside the country through regional akimats.

In addition to the issue of selling products to foreign markets, there was a threat of sufficient agricultural products to meet domestic demand. To prevent possible shortages of food products in the country, restrictions were introduced on the export of grain and flour, as well as certain types of vegetables (cabbage, onions, and carrots). This has made it possible to provide the country with a food supply sufficient for a week to several months in different commodity groups. As a whole, the volume of food stocks in stables, warehouses and at the enterprises-manufacturers as of the beginning of April made 960 thousand tons. That is, no shortage of food products is anticipated in the near future.

Further development of the agro-industrial complex is hindered by insufficient wholesale, distribution and logistics infrastructure.

In Kazakhstan, there is a significant lack of storage facilities for agricultural products, poorly developed warehouse infrastructure, almost no places for pre-sale preparation of products. This, in turn, leads to higher prices of products.

According to preliminary estimates, 1,300 fruit and vegetable storage facilities with a capacity of about 1.9 million tons are in operation in the country. However, according to current needs, there is a demand for storages with the filling capacity of 2.8 million tons, i.e. 1.5 times more than the available ones.

A project on construction of complexes of wholesale and distribution centers is already being implemented to solve this problem. It is planned to complete the project by 2022, having built more than 24 storage facilities.

Stimulation of entrepreneurs to build storage facilities is based on allocation of subsidies and preferential crediting. In 2019, more than 34,000 enterprises received subsidies for a total amount of 243.8 billion tenge. Most of them were allocated for investment subsidies – 106.2 billion tenge or 43.6% of the total amount of funds. In addition, 43.3 billion tenge were spent on livestock breeding and 26.8 billion tenge – on the production and use of pesticides.

Thus, the issue of financing of agriculture remains topical, as at present, the main source of funds for the industry remains subsidies, investments and soft loans.

In 2019, 10.1 million USD of foreign investments were attracted, but in the last four years investment income has been decreasing by 37% per year

Foreign investors have become less interested in Kazakhstan’s agriculture. While in 2015, the volume of foreign direct investment was at the level of 71.5 million USD, in 2019, it dropped to 10.1 million USD. That is, in five years, the decline was 7-fold.

However, it is important to note that the decline in FDI flows is a global trend. In 2019, due to the slowdown of macroeconomic indicators and high political risks for investors, including trade wars, their volume fell by 1% to 1.39 trillion USD. At the same time, Asian countries experienced a 6% decline.

On the other hand, there is a positive trend in Kazakhstan with regard to accumulated foreign investments – at the end of 2019, their volume amounted to 588.2 million USD, having increased by 3.9% as compared to 2018. The main flow of funds came from Russia (147.4 million USD) and the Netherlands (124.2 million USD).

It is evident that the growth of capital investment is necessary for the development of the sector, and in the conditions of the modern market system, FDI is of high importance for the national economy, as an increase in exports of Kazakhstan’s products and investment flows by 10% ensures GDP growth by 9.2%. Kazakhstan has already established and effectively operates a modern infrastructure for attracting investments represented by financial institutions, stock market and special economic zones. These institutions not only finance new projects, but also help existing ones to enter the capital markets to attract funds for their development. They include the Eurasian Development Bank, the Development Bank of Kazakhstan, the European Bank for Reconstruction and Development, Astana International Financial Centre, BCC Invest, KazakhExport, Kazyna Capital Management, Damu Fund and others.