Regions and Countries

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p. 1 of 7 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. The Government's Development Strategy III. The Asian Development Bank's Development Experience IV. The Asian Development Bank's Strategy V. The Asian Development Bank's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program Update 2004-2006: Kazakhstan

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Executive Summary

Helped by an oil boom, Kazakhstan enjoyed unprecedented growth of nearly 37% in gross domestic product (GDP) during 2000–2002. GDP growth and sound macroeconomic management sharply improved macro-prudential indicators. Medium-term prospects for GDP growth appear to be bright unless the oil price collapses to $12–13 per barrel or lower. Kazakhstan aims to double 2000 GDP by 2010, and the Government sees no difficulty in achieving this target.

The agenda for poverty reduction remains large. While progress has been achieved in the primary education and gender-related targets specified in the Millennium Development Goals (MDGs), concerted action is required to preserve these achievements. Systematic rethinking is required to address the challenges in achieving poverty, health, and environment targets. The scorching pace of growth during the past 3 years has magnified these challenges. Income poverty has no doubt declined in response to GDP growth, but not so much that it could be called pro-poor. The countrywide poverty incidence also masks wide regional variations. The oil-rich western and southern regions are home to most of the poor. While the Government has initiated a series of measures to promote rational use and management of natural resource, environmental degradation, closely related to poverty, is rapidly constraining inclusive growth.

While foreign direct investment of nearly $6.5 billion (about 10% of GDP) did come during 2000–2002, most of it was destined for the oil sector. In hindsight, structural policy reforms were not sufficient to attract private investment because matching institutional reforms were not in place. These often involve changing mindsets, unlike policy reforms that can be speedily implemented through executive decrees. The poor investment climate combined with diversion of investment funds to feed the oil boom explains the lack of private investment in the non-oil sectors. The lack of quality infrastructure and skills also discouraged private investment.

The risks of not achieving MDGs, environmental degradation, and growing concentration of investment in the oil sector are the most important development challenges. The Government’s response to them is an accelerated development strategy, which has two key components:

1. Shift from an overly cautious fiscal policy (budget surplus, low public investment of 1.5–3.5% of GDP) to a more proactive policy of recycling mounting fiscal revenues to fund development. The Government has announced that beginning in 2004 public investment will be increased by 2% of GDP each year in the medium term. To ensure fiscal sustainability of this measure, the budget deficit would be capped at 2% of GDP. The central focus of Asian Development Bank (ADB) support for this measure will be to strengthen national and subnational planning and sector and project management capacities to implement the accelerated development strategy. ADB project loans will help fund a part of the budget deficit.
2. The Government is becoming more interventionist in economic management, rolling back some reforms while deepening others. The Government is aware that interventionism should not mean replacing private with public investment. Interventionism appears to be directed at speeding up the emergence of a competitive market economy. In the current context, ADB will focus its efforts on helping to build institutions, improve infrastructure provision, catalyze rural private investment, and alleviate funding constraints on investment by small and medium-sized enterprise (SMEs). ADB private sector operations will complement public sector operations.

Assistance for regional cooperation through the Central Asia Regional Economic Cooperation Program (CAREC) is a key element of ADB operations in the Central Asian republics (CARs). CAREC activities in Kazakhstan will be an integral component of the strategic agenda underpinning this Country Strategy and Program (CSP). Assistance through CAREC will help Kazakhstan progress in the CSP’s three focal areas as illustrated in the framework on the next page.

Considering Kazakhstan’s robust fiscal position, the CSP proposes modest lending from the public sector window of about $50 million per annum during 2004–2006. Four loans totaling $190 million are proposed, including two standby loans for $100 million. While the CSP anticipates scaling down the indicative planning figure (IPF) for lending, the IPF for technical assistance (TA) grants has been broadly maintained at amounts provided during the last three years. Besides the country TA IPF, a substantial program of assistance is planned through CAREC.

The CSP foresees a major role for ADB private sector operations in helping Kazakhstan achieve the CSP’s strategic objectives, in line with the Government’s emphasis on non-sovereign private sector borrowing. Some procedural hurdles have held back ADB from directly assisting the private sector. Their resolution by the Government is expected shortly.

The key risk to CSP implementation is weakening of government consensus on the value added of assistance from international financial institutions (IFIs), including ADB. Sustained high oil prices could trigger such a weakening, even though the raison d’etre for ADB assistance is not fiscal but institutional and knowledge support. ADB will have to be responsive to client needs to help maintain the Government’s positive perception of ADB’s value added to development.

The drafting of the CSP followed extensive consultations with the Government, development partners, private sector, and civil society as shown in the CSP Formulation Process and ADB Operational Strategy and Appendix 2.

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