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p. 35 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asian Republics Azerbaijan Kazakhstan Kyrgyz Republic Tajikistan Turkmenistan Uzbekistan The Pacific III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia : Central Asian Republics

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Kazakhstan

Economic growth improved in 2001 to over 13%. Manufacturing performed well while production and exports of oil and other minerals were buoyed by high prices in the first three quarters of the year. However, the economy, dependent on a narrow range of exports, remains vulnerable to external factors. The medium-term outlook hinges on the pace of structural reform, economic diversification, and commodity prices, particularly those of oil.

Macronomic Assessment

Economic performance in 2001 remained strong, with real GDP growth accelerating to 13.2% from 9.8% in 2000. Continued rapid growth was driven by buoyant world oil and other mineral prices (until the fourth quarter of 2001), robust regional demand for exports, and strong investment. The pace of growth, however, slowed to 11.7% in the fourth quarter from 16.6% in the second due to the softening of prices for oil and other minerals and uncertainty following the September 11th attacks in the US.

The easing of these prices was largely responsible for a slight deceleration in industrial output growth to 13.5% in 2001 from 15.5% in 2000. Manufacturing output rose by 14.8%, benefiting from strong regional demand for Kazakhstan’s machinery, textile, leather, and chemical products. Agricultural output grew by 16.9%, compared with a contraction of 3.3% in 2000. Aided by good weather and an extension of the sown area, grain production increased by 37% to 15.9 million tons from 11.6 million tons in 2000. Cotton production rose by 45% in 2001, also partly because of an extension of the sown area. The services sector accelerated to 13.6% growth in 2001 from 9.3% in the previous year as private sector activities in wholesale and retail trade, hotels, restaurants, and housing continued to expand.

Capital investment remained strong, rising by 21%. More than half the total capital investment went to the oil and gas sector, followed by manufacturing, transport and communications, and construction. Major sources of capital investment were private domestic and foreign investment, which accounted for 58% and 30% of the total, respectively, while public investment made up the balance.

Rapid economic growth contributed to an improvement in the population’s standard of living. Per capita income rose by over 10% relative to 2000. Average nominal monthly wages in 2001 were T17,258 (equivalent to $117), a 25.4% rise over the 2000 level. In real terms, average monthly wages went up by 9.5%. As a result, the share of the population living below the subsistence minimum of T4,637 (equivalent to $31 a month at the end of 2001) declined from 31.8% in 2000 to 28% in 2001. The actual unemployment rate fell to 10.4% from 12.8% in 2000, but despite the decline, unemployment is still a major problem in rural areas and among women (Figure 2.22).

The fiscal position remained stable, supported by continued growth as well as by enhanced tax collection and the expansion of the tax base. Total government revenues rose to 24.2% of GDP from 22.6% in 2000, as a result of strong receipts from income and social insurance taxes and from VAT. Nontax revenues, accounting for roughly 10% of the total, rose by 88%, largely due to the rent paid by the Russian Federation for use of the Baikonur space complex. In contrast, capital revenues amounted to only 49% of the target due to slow progress in privatization. In line with total revenues, government expenditures increased to 24.7% of GDP from 23.1% in 2000. The Government raised spending for the social sectors and capital investment, which accounted for 46.4% and 11.5%, respectively, of total government expenditures. Overall, the budget deficit widened to 0.6% of GDP in 2001 from 0.1% in 2000, due to the sharp expansion of public spending and budgetary transfers to the National Fund. The transfers totalled 3% of GDP in 2001, and the Fund had accumulated nearly $1.24 billion by the end of 2001 (equivalent to 6% of GDP). The Fund was established in May 2001, both to reduce the volatility of budgetary revenues caused by fluctuations in world oil prices and to consolidate savings for future generations. Budgetary contributions to the Fund are made if the price of Kazakhstan oil exceeds $19 a barrel (or $23 a barrel for Brent crude).

The central bank followed a somewhat expansionary monetary policy, keeping pace with the liquidity demand of a rapidly expanding economy. The refinancing rate was reduced from 14% in 2000 to 9% in 2001, the lowest level since independence in 1991. This led to a cut of the average weighted interest for the corporate sector from 18.8% in 2000 to 16.3% at the end of 2001, and consequently a rise in commercial bank lending by 77.3% compared with the previous year. A capital amnesty, announced by the central bank in 2001 to encourage money illegally transferred to foreign banks to return to the country tax free, brought over $500 million back into the banking sector. As a result, money supply grew by 40.2% over the course of 2001, but the sterilization efforts of the central bank, continued monetization of the economy, and increased produc- tivity helped keep inflation under control. Slower increases in the prices of nonfoodstuffs and services (4.5% and 3.5%, respectively) and a 15.5% decline in the price of gasoline contributed to lower inflation, which, as measured by the consumer price index, fell to 8.4% in 2001 from 13.2% in 2000. The tenge remained fairly stable in 2001, with a depreciation of 3.2% against the dollar in nominal terms.

Lower prices of oil and other minerals in the international markets, together with rapidly increasing imports, reduced the size of the trade surplus, which shrank to about 4% of GDP from 15.2% in 2000. Exports—almost 90% of which were oil and other minerals—declined by 3.5% in 2001 from the prior year level, while imports surged by 23.5%, mainly due to rising capital goods imports. As a result, the balance of payments suffered, with the current account recording a deficit equivalent to 4.6% of GDP. Nevertheless, the heavy presence of oil multinationals in the country ensured a steady inflow of FDI to cover the current account deficit. The sharp rise in gross FDI to $3.6 billion in 2001, contributed to an increase in the capital account surplus, from 5.6% of GDP to about 7% over the same period. International reserves of the central bank rose by 22% to $2.56 billion, while gross official reserves (including the National Fund) soared by 79% to $3.75 billion (equivalent to 4.2 months of imports of goods and services). Total public external debt continued to fall, from $4 billion (21.9% of GDP) in 2000 to $3.4 billion (16.6% of GDP) in 2001 due to limited new borrowing by the Government and its continued repayments of the outstanding external debt. The public debt service ratio declined to 17.3% from 24.6% in 2000.

Policy Developments

The Government continued its efforts in 2001 toward fiscal sustainability. A new tax code designed to broaden the tax base was approved by Parliament in June 2001 and became effective on 1 January 2002. A number of tax exemptions were abolished and fiscal stimulus was provided through a lowering of the social insurance tax and VAT rates. In April and November 2001, the Government revised the state budget and increased revenues and expenditures: revenues mainly as a result of improved tax collection and buoyant prices for the country’s major exports; expenditures because of the Government’s decision to clear wage and pension arrears accumulated from previous years.

As budget revenues remain sensitive to oil and other mineral prices, the Government needs to restore fiscal balance in the coming years by expanding the tax base through diversifying the economy and accelerating privatization. Despite the adoption of a new tax code, it needs to strengthen the tax and customs administration by introducing simplified declarations and completing the computerization of the system. In addition, it needs to enhance the administration of transfer pricing, rationalize public spending, and prioritize capital expenditures.

Monetary policy developments were encouraging in 2001. A decline in inflation allowed the central bank to cut the refinancing rate to 9%, below its target of 11%. As a result, the primary lending rates by commercial banks were reduced to the lowest level since independence. Because of sterilization of capital inflows, the central bank was able to maintain a relatively stable exchange rate and to avoid an overappreciation of the tenge, which could have had an adverse effect on the non-oil sector.

Finance sector reform continued, with a focus on strengthening the banking sector. A sound regulatory system and a fairly stable national currency are contributing to the stability of the banking system, while the deposit insurance system, banking secrecy, and confidentiality of the capital amnesty all helped increase household confidence in the system. As a result, public deposits rose to T185.5 billion (or $1,223 million), as against the 2001 target of T135 billion (or $890 million).

To provide long-term financing to the corporate sector, including SMEs, the Government established the Kazakhstan Development Bank in July 2001. The development of nonbank financial intermediaries continued, since pension funds account for almost 6% of GDP. However, little progress was made in relaxing strict regulations on pension fund investments and diversifying investment instruments. In view of the weak domestic stock market, investment regulations should be amended, allowing pension funds to invest some of their assets abroad.

The Government maintained its liberal trade policy, as accession to WTO remains a priority. Selected customs tariffs were abolished, and further simplification of the tariff system is expected.

Outlook for 2002–2003

The economic prospects for 2002–2003 remain positive, though GDP growth is expected to slow to 7% in 2002 and to 6% in 2003, mainly due to moderate world prices for oil and other minerals. However, the impact of low oil prices will be mitigated by the expected growth of oil production due to the recent opening of the Caspian Consortium Pipeline. In addition, a new pipeline linking the North Caspian oil field to this pipeline is to be completed by 2005. Therefore, the oil sector and continued FDI inflows to the development and exploitation of hydrocarbon resources will continue to drive medium-term growth. Projected strong regional demand is also likely to boost GDP growth as the other economies in the Commonwealth of Independent States increase their imports of manufactured goods, including machinery, textile, and leather products.

A deterioration of the fiscal situation is expected in 2002–2003 as the Government will raise its budgetary spending to ensure a 25% increase in public sector wages and large external debt repayments in 2002 (mainly due to a $350 million eurobond redemption). Under the assumption that the oil price for Brent crude stays at $23 a barrel, the budget deficit is projected at 2.3% of GDP in 2002 and 2% of GDP in 2003. Nonetheless, if oil prices decline further, the National Fund will be able to provide some offset and support for the fiscal position. In 2002–2003, monetary policy should be expansionary in support of continued robust economic growth. The central bank has announced a medium-term monetary policy that focuses on inflation targeting rather than currency devaluation. It is likely to pursue a reserve money management regime to keep inflation in the 4–6% range in 2002–2003. Interest rates are expected to decline in line with the fall in inflation.

The trade balance is likely to remain positive over the next 2 years as oil production increases. Exports are expected to rise, reflecting an anticipated moderate global economic recovery in the second half of 2002. The current account deficit is projected to increase to about 5% of GDP in 2002–2003, as imports are likely to grow faster than exports. However, the expected increase in FDI inflows in the near term will likely cover the current account deficit. External public debt is projected to decrease, in view of the fact that the Government is committed to repaying its outstanding external debt and o limiting new external borrowing.

Despite recent achievements, the economy faces some major development challenges on two main fronts. On the first, limited economic diversification and high dependence on oil and other minerals make the country vulnerable to volatility in prices of these commodities. In addition, structural reforms have been very slow because privatization and restructuring of the corporate sector have been at a virtual standstill. Economic diversification is important for sustainable development. Equally, greater efforts are needed to raise the competitiveness of industry through accelerating the privatization process, restructuring or closing nonperforming enterprises, improving the legal and business environment, and building a system of good corporate governance. These measures will encourage greater investment in the non-extractive sector. On the second front, while projected strong growth is likely to further improve living standards, the Government needs to ensure that it benefits the whole population.

The Government is giving high priority to poverty reduction, and a comprehensive medium-term poverty reduction program for 2003–2007 will be developed by May this year. The realization of the Government’s commitments to increase public sector wages and to introduce a mandatory social insurance system in 2003 will also contribute to enhanced living standards. However, additional efforts need to be made in addressing regional inequality, particularly in rural areas where poverty is more prevalent.

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