Regions and Countries

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Country Strategy and Program Update 2003-2004: Kazakhstan

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I. Development Situation

A. Recent Political and Social Developments

1. The political situation in Kazakhstan remains generally stable. In late 2001, however, the country witnessed some political disturbance and pressure for democratization. In November that year, a number of senior government officials, members of Parliament, and businessmen formed the Democratic Choice of Kazakhstan and called for political liberalization and decentralization, which led to the Government's reshuffles that month and in January 2002. Democratization began with experimental elections of heads of rural districts in October 2001. Such elections will gradually be introduced throughout the country. Despite the frequent changes in senior government officials, Kazakhstan's medium-term priorities outlined in the 2010 development strategic plan and the Government's program for 2002-2004, as approved by President Nursultan Nazarbayev, are not expected to alter. Kazakhstan pays serious attention to regional security, and cooperates militarily with neighboring countries to ensure border security and territorial integrity.

2. Continued strong economic performance since the end of 1999 has helped improve the standard of living. Those living below the officially determined subsistence minimum¹ declined to 28.4% in 2001 from 31.8% in 2000. The unemployment rate fell to 10.4% in 2001 from 12.8% in 2000. However, an increase in the self-employed (mostly small farmers) hides the declining job opportunities in the large and medium-sized enterprises. The economy's high dependence on the oil sector, which is capital intensive and has fragile linkages with the nonoil economy, weakens the relationship between economic growth and development, especially employment and poverty reduction. The country's progress toward the Millennium Development Goals (MDGs) and targets is in Appendix 1, Table A1.1.

B. Economic Assessment and Outlook

3. After severely depressed economic activity until 1999, Kazakhstan achieved an impressive turnaround, with gross domestic product (GDP) at constant prices growing at 9.8% in 2000 and 13.2% in 2001. Growth in the first half of 2002 points to strong economic performance for the year. Substantial additional oil production and transport capacity contributed greatly to the economic turnaround and resulted in a structural upward shift in the external sector and fiscal position of the Government. Sensible public investments in social and economic infrastructure will enable the Government to redistribute the resource rents to a large portion of the population, thus increasing the potential to achieve sustained high levels of pro-poor growth.

4. The Government has a cautious fiscal policy. The 2001 budget was in surplus, without counting the transfers to the National Fund of Kazakhstan.² Under the medium-term budget framework being finalized, Government development spending during 2003-2005 will remain in the range of 2% to 3% of GDP, which is inadequate to achieve development objectives, particularly generating momentum for pro-poor growth in the nonoil sectors. The public external debt declined by 3.6% to $3.8 billion or 16.9% of GDP at the end of 2001 due to limited new borrowing by the Government. The public domestic debt declined significantly to less than 1% of GDP.

5. Monetary policy succeeded in substantially consolidating macroeconomic stability. The inflation rate declined to 6.4% at the end of 2001. The tenge depreciated by only 3.2% against the dollar in nominal terms in 2001 and has moderated inflation. Improved macroeconomic stability was reflected in upgrades of sovereign ratings on the long-term foreign currency loans by key international rating agencies, and a corresponding reduction in the cost of borrowing.

6. In 1999-2001 exports and imports jumped sharply, by about 50%. Given substantial net outflows under factor incomes and services, the current account deficit was equivalent to 7.8% of GDP in 2001. High levels of foreign direct investment, most of which went to the oil sector, increased international reserves, which, together with the National Fund, amount to over 4 months of imports and are in excess of 100% of the short-term external debt. The country economic indicators are in Appendix 1, Table A1.2.

7. Kazakhstan is widely acknowledged as the leading reformer among the transition economies in Central Asia. Structural reforms continued in 2001, although their pace slackened. The new tax code is the highlight of reform measures in 2001. The momentum of reform in the financial sector was maintained. Large-scale privatizations and trade policy reforms suffered set back in 2001. The Government has recently established a Special Commission to amend the land law by including the private ownership of agricultural land, with the draft amendments to be considered by the Government in the fourth quarter of 2002. The Government's economic vision as reflected in 2010 development strategic plan envisages a proactive State to manage economic development.

C. Implications for the Country Strategy and Program

8. New external borrowing is being limited due to the Government's (i) improved resource base, (ii) significantly improved external liquidity position, and (iii) cautious fiscal stance. The establishment of the Kazakhstan Development Bank, which provides medium- and long-term finance for investments in the priority sectors, has reduced the pressure on the Government to take out direct external loans.³ The Government prefers to shift, as much as possible, from sovereign to nonsovereign borrowing modalities. The Government's decision to finance from internal resources, at least in the near term, education and health sector investment projects has also affected the Asian Development Bank (ADB) assistance program. Frequent changes in senior government officials exacerbated uncertainties in processing the agreed-upon assistance program. The Government's recent decision⁴ to accord high priority to reviving the rural sector is important to consider in preparing the forward program.

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