Countries and Regions

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Country Strategy and Program Update 2005-2007: Kazakhstan

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I. Current Development Trends and Issues

A. Recent Political and Social Developments

1. In June 2004, the Government announced reforms relating to Parliament, local governments, and courts. Elections to the lower house of Parliament (Majlis) took place in September 2004. Elections to half the seats in the Senate are scheduled for 2005. The President has already announced his intention to run in the next presidential election—expected in 2006. If reelected, he will remain in office until 2014.

2. Continued economic growth has created new employment opportunities and improved living standards. In 2003, real per capita incomes rose by 8.3%. Sustained economic growth and targeted poverty interventions helped reduce the number of people living below the subsistence minimum¹ from 24.2% in 2002 to 19.8% in 2003. Unemployment declined from 9.3% in 2002 to 8.7% in 2003. Reducing disparities between rural and urban areas is now a key challenge. Rural poverty remains three times as high as in the urban areas, and the Government is making efforts through priority programs to develop rural areas. Progress toward the Millennium Development Goals (MDG) and targets is shown in Appendix 1, Table A1.1.

B. Economic Assessment and Outlook

3. Early structural reforms and sound macroeconomic management provided the foundation for Kazakhstan’s economic progress in recent years. Gross domestic product (GDP) growth, led by the oil sector, averaged 11.0% during 2000–2002, and strong growth continued at 9.2% in 2003.² Industry and services played major roles in economic growth. The fiscal policy was expansionary in 2003 with the budget deficit widening to 0.9% of GDP from the small deficit (0.3% of GDP) in 2002.³ Public development spending in the medium term is projected at 4–5% of GDP raising the level of public spending will be essential for achieving development objectives. Public external debt fell—by 3.5%—to $3.4 billion or 12.4% of GDP at the end of 2003 due to limited new borrowing by the Government.

4. Monetary policy was accommodative in 2003 in response to sound economic growth. The inflation rate rose to 6.6% at the end of 2003, one percentage point higher than the planned target. During 2003, the tenge strengthened against the dollar, driven by large export earnings and foreign exchange inflows from increased private external borrowing and foreign direct investment. In 2003 the balance-of-payments position strengthened because of high world oil prices. The current account recorded a small deficit (0.2% of GDP, or $69 million) in 2003, reflecting a much improved trade balance. Gross international reserves including the assets of the National Fund rose by 69.3% to $8.6 billion at the end of 2003; this was equivalent to 29% of GDP. The country economic indicators are in Appendix 1, Table A1.2.

5. The medium-term outlook is positive provided that foreign direct investment inflows remain strong in the rapidly expanding oil sector, and the Government continues its efforts to diversify the economy. GDP is projected to grow at 8–10% over the medium-term. The development of the industrial innovation strategy to 2015 was the Government’s major action in 2003. The Government made progress with structural reforms in 2003 and early 2004, including the adoption of a new land code, which provides for private ownership of agricultural land, better coordination of state budget planning and budget execution, and the establishment of an agency for integrated financial sector supervision. The Government’s key priorities for 2004–2006 include rural and agricultural development, development of the financial sector, promotion of small and medium-sized enterprises (SMEs), industrial innovation, and housing sector reform.

C. Implications for the Country Strategy and Program

6. The CSP remains in line with the Government’s medium-term priorities. The recent strong economic growth has underscored the need for inclusive, pro-poor growth. The Government’s decision to strengthen financial sector governance and increase the role of nonbank financial institutions provides opportunities for intensified cooperation in these areas. The Government has also embarked on housing reforms through a state housing program for 2005–2007. Its implementation may be an area for collaboration.

7. The continued inflow of oil revenues has increased the Government’s own resources significantly. The need for external borrowing for financing investment priorities has decreased accordingly. This trend is expected to continue in the medium term. The Government has adopted a medium-term fiscal framework for 2005–2007 targeting reduction of the budget deficit to 0.5% by 2007, and identifying domestic resources of the public and private sectors as major means to deliver the Government’s priority development programs. The Government’s capacity to develop sound investment programs and ensure sound management of public assets needs to match the availability of domestic funds. Significant knowledge transfer is needed to facilitate the process. The medium-term program of the Asian Development Bank (ADB) must be responsive to such needs.

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