Regions and Countries

	Table of Contents
p. 2 of 20 BACK | NEXT I. Country Performance Assessment A. Economic Performance Assessment B. Pverty Assessment C. Assessment of Socio-Environmental Performance D. Governance E. Implementation Assessment II. Country Operational Strategy III. Sector Strategies IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Kazakhstan : I. Country Performance Assessment

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A. Economic Performance Assessment

1. The economy began to recover from the recession caused by the weak world commodity markets and the Russian crisis in the second half of 1999. Gross domestic product (GDP) grew by 1.7 percent in 1999, compared with a 1.9 percent contraction in 1998. This resulted from a bumper harvest, a rebound in industrial production, an increase in capital investment, and rising world prices for the country’s major commodity exports such as oil and metals. Growth in GDP accelerated to about 10 percent in the first half of 2000 because of growing domestic consumption, strong exports, and the economic recovery in Russia.

2. Progress has been made in moving towards macroeconomic stabilization. The fiscal situation has improved, helped by strong economic growth, higher oil export revenue and the Government’s efforts to strengthen tax collection and improve public expenditure management. Military expenditure fell in 1999 and accounted for 0.9 percent of GDP compared with 2.2 percent of GDP a year earlier. The budget deficit was reduced from 8 percent of GDP in 1998 to 3.5 percent in 1999. A budget surplus (1.8 percent of GDP) was achieved in the first half of 2000. Since late 1999, the monetary policy has been designed and implemented to stimulate economic recovery while keeping inflation under control. The refinancing rate was cut three times from 25 to 18 percent in 1999 and further to 14 percent in the first half of 2000. Inflation recorded 17.8 percent in 1999, largely due to the effect of currency devaluation. However, inflation has subsided since the second half of 1999 and was 5.1 percent in the first eight months of 2000. The national currency, the tenge, depreciated sharply against the US dollar after the authorities floated it in April 1999, but has largely stabilized since the second half of the year. The balance-of-payments situation has experienced encouraging developments. The external current account deficit was reduced from 5.6 percent of GDP in 1998 to 1.1 percent in 1999 as imports declined more sharply than exports. Exports have climbed since late 1999 due to the rising world prices of oil and metals, increased oil export quota through the Russian pipeline, and the effect of currency devaluation. As a result, a current account surplus (7.9 percent of GDP) was achieved in the first half of 2000. Detailed economic indicators are given in Appendix 1.

3. Despite the recent economic recovery, Kazakhstan needs to address three major issues so as to realize sustained, equitable economic development. First, efforts should be made to diversify the economy since it is highly dependent on the exports of oil and metals. Such an economic pattern not only raises the risk of “Dutch-disease”, but also makes the country vulnerable to world price fluctuations. Second, the Government needs to improve external debt management. Kazakhstan’s external debt situation is severe. By the end of 1999, external public debt amounted to $4.1 billion (25.3 percent of GDP) and interest payments in the 2000 state budget account for 21 percent of revenues. The large external public debt can place macroeconomic stability in jeopardy and will have adverse effects on the sustainability of economic growth, because a sizeable portion of government expenditures must be used for debt servicing and thus limited resources are left for public investment projects and other development purposes. Third, despite the Government’s initial enterprise reform, the corporate sector remains weak, as reflected by extensive corporate losses and inter-enterprise arrears. Strong efforts are required to develop an efficient corporate sector through the enforcement of bankruptcy and merger proceedings, accelerated enterprise restructuring, and improved corporate governance.

4. The Government has developed an economic program for 2000-2002 aimed at promoting economic growth and achieving macroeconomic stabilization. The program, supported by the International Monetary Fund (IMF) under a three-year Extended Fund Facility (EFF) approved in December 1999, focuses on consolidating public finances, reducing inflation, maintaining a free-floating exchange rate, and accelerating structural reforms. In the fiscal area, Parliament approved a more prudent government budget for 2000, which requires raising tax revenue, reforming the tax code, strengthening tax and customs administration, and improving public expenditure management. The central bank will strengthen its supervisory activities to ensure that all banks comply with prudential requirements, and will continue to intervene on the currency market to prevent excess short-term exchange rate fluctuations. The Government will enhance its efforts to liberalize the trade system by removing the tariffs imposed on its major trading partners in early 1999 and further reducing trade barriers. Moreover, the Government will restructure the financial and corporate sectors, accelerate privatization of medium-size and large state-owned enterprises (SOEs), improve governance, develop legal and regulatory frameworks necessary for a market-based economy, and fight corruption. These steps will help improve the quality of public services and promote private sector development.

5. The short-term economic outlook for Kazakhstan is positive. GDP for 2000 is projected to grow by about 7 percent, driven by the upward trend in world prices for major commodity exports and by continuing economic rebound in Russia, the major trading partner of Kazakhstan. The budget deficit for 2000 will likely shrink to about 3.0 percent of GDP, as the Government is committed to achieving medium-term sustainability of public finance. Inflation is projected to decline to about 9 percent in 2000, provided the central bank keeps tight control on credit growth and money supply. The balance-of-payments situation should continue to improve, as exports are expected to grow steadily and inflows of foreign capital should increase. The economy over the medium term, however, will depend on development of the domestic oil sector, the world commodity markets, and economic performance in Russia.

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