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p. 13 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia Newly Industrialized Economies Central Asian Republics, Azerbaijan, and Mongolia Kazakhstan Kyrgyz Republic Tajikistan and Turkmenistan Uzbekistan Mongolia People’s Republic of China Southeast Asia South Asia The Pacific III. Asia's Globalization Challenge

Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia : Central Asian Republics, Azerbaijan, and Mongolia

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Kazakhstan

Economic performance in 2000 improved considerably, mainly due to a favorable external environment. However, to promote sustainable long-term growth and maintain macroeconomic stability, the Government needs to ensure greater diversification of the economy.

Recent Trends and Prospects

Economic performance was vigorous in 2000. The economy, which in the second half of 1999 began to recover from the recession caused by weak world commodity markets and 1998’s Russian crisis, experienced even stronger growth in 2000. GDP grew by 9.6 percent compared with 2.7 percent in 1999 (see Figure 2.3). The rapid growth was primarily due to favorable external factors, including rising world prices for oil, natural gas, and metals (the major exports) and the robust recovery in the Russian Federation, Kazakhstan’s main trading partner.

Growth of industrial output accelerated to 14.6 percent in 2000 from 2.8 percent in 1999, mainly because of sharp increases in the production of crude oil, natural gas, and metals. As a result of high world prices, the value of crude oil and natural gas output expanded by 15.8 percent and 23.2 percent, respectively. The manufacturing sector, which accounts for half of total industrial output, rose by 15.6 percent due to increased government investments. The Government regards import substitution of capital and intermediate goods as the key to achieving rapid industrialization, and has therefore allocated sizable resources to this area.

Agricultural production contracted by 3.3 percent in 2000, largely because the output of grain fell by 18.2 percent to 11.6 million tons; this was due to unfavorable weather conditions. Despite the decline, grain production was not only adequate for domestic consumption but also generated a surplus of about 4 million tons that were exported to Iran, Turkmenistan, and Ukraine. In contrast, the output of cotton rose by 15.0 percent, due to an extension of the sown area.

Official statistics show that the services sector expanded by 7.9 percent in 2000, due mainly to a growing private sector. However, official data still do not fully cover the private services sector. Trading, restaurants, hotels, information technology, and construction have grown significantly over the past few years as a result of small-scale privatization and the Government’s policy of encouraging private sector development.

After a modest increase of 3.8 percent in 1999, capital investment rose steeply by 29.4 percent in 2000, driven by both the public and private sectors. The major areas of capital investment were oil and gas, transport and communications, and construction. In particular, activities in the oil and gas and construction subsectors were strong, as reflected by work on an export pipeline in the Caspian Sea area and the continuing building of Astana, the country’s new capital.

Savings grew sharply in 2000 as a result of improved economic performance. Gross domestic savings as a proportion of GDP increased to 20.8 percent in 2000 from 16.9 percent in 1999. Better collection of revenues and a prudent fiscal policy contributed to higher public savings, while rising profits in the corporate and financial sectors, particularly among oil companies, stimulated private savings. Since domestic savings grew more rapidly than domestic investment, a resource surplus equivalent to 3.8 percent of GDP emerged in 2000, compared with a resource gap of 1.1 percent of GDP in 1999.

Economic growth contributed to an increase in wages and a marginal decline in official unemployment. Average nominal monthly wages at the end of 2000 were T14,174 (equivalent to $97.5), a rise of 19.6 percent over the 1999 level. This represented an increase in the real average monthly wage of 5.7 percent. The official registered unemployment rate at the end of 2000 was 3.8 percent, slightly lower than the rate of 3.9 percent at the end of 1999. Employment generation was led mainly by the expansion of the services and education sectors. Growth in manufacturing and mining had little impact—and so unemployment remains a major problem with the actual level estimated at 13.5 percent of the labor force, much higher than the official unemployment rate.

The fiscal situation continued to improve in 2000, helped by strong economic growth, higher revenues from exports of oil and minerals, as well as the Government’s efforts to strengthen tax collection and administration and to improve public expenditure management. For the first time since independence in 1991, Kazakhstan achieved a budget surplus, equivalent to 0.1 percent of GDP. Total government revenues rose to 23.1 percent of GDP from 21.1 percent in 1999. Tax revenues accounted for 20.2 percent of GDP, up from 17.1 percent in 1999. As a result of its rationalization efforts, government expenditures declined to 23.0 percent of GDP in 2000 from 24.6 percent in the previous year, but despite this decline, the shares of development investment and social sector spending in total public expenditures in 2000 remained relatively high. Social assistance accounted for 28.7 percent of total expenditures, followed by education (14.2 percent) and health (9.1 percent). However, interest expenses accounted for 6.0 percent of revenues in 2000, with external public debt amounting to $4.0 billion. To reduce the volatility of budgetary revenues, which are highly dependent on earnings from oil exports, the Government plans to establish an offshore state oil fund to maintain stable resource flows to the budget and preserve national wealth generated from the oil sector for future development.

The National Bank of Kazakhstan (the central bank) pursued an expansionary monetary policy to stimulate growth. This included reducing the refinancing rate from 18 percent in 1999 to 14 percent in 2000, and lowering the reserve requirements for commercial banks from 10 to 8 percent of demand and short-term time deposits. As a result, the monetary position eased and growth of monetary aggregates continued. Money supply (M2) and bank credits increased by 45.9 percent and 85.6 percent, respectively, in 2000. Because of financial sector reform, depositors have regained their confidence in the banking system. The reforms included the adoption of international banking standards and depositors’ insurance for household deposits, and the application of a law on banking secrecy and confidentiality. Largely as a result, bank deposits rose sharply by 60.2 percent in real terms in 2000.

Despite the relaxed monetary policy stance, inflation by the end of 2000 had fallen to 9.8 percent, from 17.8 percent 12 months previously, due mainly to increased productivity, an improved fiscal position, and a stable currency. The national currency, the tenge, which had depreciated sharply against the dollar after the authorities floated it in April 1999, was relatively stable in 2000, fluctuating in a range of T138.25–T145.40 to the dollar, and depreciated by only 5.2 percent against the dollar during the year.

The balance-of-payments situation improved significantly in 2000. The current account achieved a surplus equivalent to 3.8 percent of GDP in 2000, compared with a deficit equivalent to 1.1 percent of GDP in the previous year. This resulted mainly from a doubling of exports (largely oil and metals) as a result of higher world prices, increased oil export quotas through the Russian Federation’s pipeline, and the positive effects of the currency devaluation in 1999.

With the beginning of a turnaround in investor confidence after the Russian crisis, as reflected in the increase in foreign direct investment (FDI) inflows to $1.6 billion in 1999 from $1.1 billion in 1998, in April 2000 the authorities issued the country’s fourth Eurobond in an amount of $350 million. In addition, due to improved economic performance, in July 2000 Standard & Poor’s raised its long-term foreign currency and local currency ratings, which will further boost investor confidence in the economy.

Strong export growth, renewed inflows of FDI, and the issuance of the Eurobond helped strengthen the gross international reserves position, which improved to $2.1 billion (equivalent to 3.3 months of imports) at the end of 2000, the highest level since independence. External public debt fell from $4.1 billion (24.1 percent of GDP) at the end of 1999 to $4.0 billion (21.8 percent of GDP) at the end of 2000, mainly because of debt repayment to the International Monetary Fund ahead of schedule. The debt repayment requirement, particularly debts accumulated by joint ventures in the oil and gas sector, rose in 2000. As a result, despite a doubling of export revenue, the debt-service ratio declined only moderately from 27.3 percent in December 1999 to 24.6 percent one year later.

The economic outlook for 2001 remains positive, though GDP growth is projected to slow to about 4 percent, mainly due to an anticipated leveling-off of world prices of crude oil and minerals. Industrial production is forecast to improve by 8 percent as production of these commodities continues to surge on the back of growing FDI and the expansion of oil export capacity (largely due to increased quotas in the Russian Federation’s pipeline network). The fiscal balance will likely switch to a deficit of 2.2 percent of GDP, despite the Government’s commitment to achieving medium-term sustainability of public finance.

Inflation is forecast to further decline to about 5.5 percent, provided the central bank keeps tight control of credit growth and money supply. Slower inflation will likely lead to a further reduction in the refinancing rate to 8–10 percent. The current account should remain in surplus in 2001, although it is projected to decline to about 3 percent of GDP as imports are likely to grow more rapidly than exports. Total external debt is expected to decrease, as the Government is committed to repaying a large portion of its outstanding external debt in 2001. The debt-service ratio is forecast to further decline during the year.

Issues in Economic Management

In 2000, to achieve macroeconomic stability, the Government made great efforts to strengthen fiscal management, including raising revenue collection and rationalizing public expenditures. A new tax code, designed to broaden the tax base, was submitted to Parliament. A program to improve collection of excise taxes on oil products and cigarettes was introduced, and a government decree was issued in March 2000 converting specific tariffs into ad valorem rates (except for alcohol) to strengthen excise tax collection. The Government implemented measures to closely monitor medium-sized and large corporate taxpayers and to simplify tax declaration procedures for small businesses. These helped raise tax collection by nearly 40 percent. The Government also conducted intensive training of tax collectors and officers. In the area of public expenditure, it focused on reducing current expenditures by undertaking civil service reform to reorient and downsize the bureaucracy, by limiting transfers to loss-incurring state-owned enterprises, and by better targeting social sector spending.

Despite such progress, the Government needs to make further efforts to restore the fiscal balance; for example, by ensuring that the new tax code is implemented effectively, and by improving collection of value-added tax on imported goods, excise tax on gasoline, and royalty payments in the oil and gas sector. It also needs to strengthen tax and customs enforcement systems through closer monitoring of taxpayers, computerization of tax and customs administration, mandatory preshipment inspections, postrelease control, and improvement of customs legislation. Privatization of large state-owned enterprises should be accelerated to generate greater revenue. Given limited domestic resource mobilization and debt repayment capacity, further government efforts are needed to reduce current spending and to prioritize capital expenditures. Finally, the Government needs to pay special attention to restraining the growth of public sector wages, phasing out subsidies through administered price adjustment and improved operational efficiency, and limiting sovereign-guaranteed borrowing.

Policy and Development Issues

Despite the recent economic achievements and positive short-term prospects, the economy faces a major development issue ith regard to globalization. Globalization has had a twofold impact on the economy: positive development trends in the world economy, favorable world commodity markets, and a recovery in regional demand have led to its strengthening through expansion of external trade and rising inflows of FDI.

On the other hand, the economy is highly dependent on production and exports of a few commodities such as crude oil, natural gas, and metals. Together, they account for about 70 percent of industrial output, nearly 90 percent of exports, about 60 percent of FDI, and about 30 percent of budgetary revenues. Such an economic structure raises not only the risk of Dutch disease, but also makes the country vulnerable to commodity price fluctuations, as in 1998 when weak world commodity markets tipped the economy into recession. A broad-based economic structure is essential to minimizing the risks related to globalization and to achieving sustainable development.

The Government has taken some initial steps to diversify economic activities, especially in nonextractive sector development, but greater efforts must be made to further this process and broaden the economic base. The Government needs to address three policy areas. First, it should develop a national strategy for economic diversification, based on an analysis of the country’s development priorities, strengths, and resource availability. In particular, decisions to develop any new sectors or industries must take into account financial affordability and economic viability to ensure the achievement of maximum development impact.

Second, the Government needs to adopt policies for facilitating the development of nonextractive sectors that have been identified as priorities by the national strategy. Public investment should be increased and private investment, both domestic and foreign, attracted through favorable incentives. These should include reduction in, or exemption from, taxes and duties in the initial period of operation; permission for the establishment of foreign firms and remittance of their profits abroad; improving the terms for foreign investors with regard to land use; security of property and contract rights; and simplified entry and exit procedures.

Third, the Government needs to promote production of processed products in the resource-based sectors (e.g., petroleum and petrochemical products), which are less affected by world price fluctuations and which have greater value added. Kazakhstan is in a good position to expand output of these processed products because of its rich natural resource endowments and its relatively high level of human capital.

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