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EBRD warns Khazakstan that time is running out to reduce dependence on the oil trade

Editorial Staff

A new report from the European Bank of Reconstruction and Development looks at Kazakhstan, reliant on oil exports for about half of its revenues, and concludes that things aren't looking good for the country’s finances in the light of a of a global shift away from fossil fuels.

The changing dynamics in global energy markets are likely to put pressure on fossil fuel exporters such as Kazakhstan, the EBRD says.

The changing dynamics include the development of alternative energy sources, the falling costs of cleaner energy technologies, and countries’ commitments to achieving global climate goals.

This will mean that export revenues may fall – due both to lower exports and lower oil prices – by up to 40 per cent in the next 20 years, leading to unsustainable levels of public debt in Kazakhstan.

As oil is a major source of government revenue, this may in turn put pressure on the state budget. Therefore, good risk management on the fiscal side will be an important priority for fossil fuel-exporting countries.

The EBRD's report, “The fiscal implications for Kazakhstan of worldwide transition to a greener global economy”, looks at three possible scenarios: business as usual, a partial green transition and a full transition to a low-carbon economy across the globe.

The first two scenarios would mean that the world falls far short of the goal to contain global warming to 2°C; however, this may also mean that oil demand remains buoyant in global markets, in which case Kazakhstan’s fiscal position would not be under threat.

However, if there is a worldwide shift to a greener economy, and oil prices settle in the region of USD65, then over the course of the next decade this could lead to depletion of the country’s national savings from oil.

The most significant fiscal impacts are projected to occur in the late 2020s, suggesting that there is a window of opportunity of around a decade in which Kazakhstan could take action to address these impacts.

The report proposes four areas of reform for Kazakhstan, which are also relevant to most other emerging markets reliant on oil exports:

1) Diversify revenue sources. Structural transformation that supports growth in the non-oil economy will reduce reliance on fossil fuels, building resilience to the fiscal risks of commodity price movements, strengthening the private sector and helping job creation.

2) Manage the revenues from oil more effectively. Kazakhstan has built up large savings from oil in its sovereign wealth fund, which the country should now avoid depleting for current consumption, and should follow examples (including from Norway and Saudi Arabia) of investment in sectors not correlated with oil prices.

3) Fiscal policies should exploit revenue-raising opportunities, providing incentives for economic development and cutting wasteful expenditure. As an example, distortionary fossil fuel subsidies may be reduced.

4) Plan public finances over the medium and long term, rather than the short term. The government has already introduced legislation to allow for a medium-term budget frameworkb but it now needs to develop the tools to help manage its expenditure more effectively.

Further Reading: The full report is at https://www.ebrd.com/documents...

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