Regions and Countries

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Country Strategy and Program Update 2006-2008: Kazakhstan

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I. Current Development Trends and Issues

A. Recent Political and Social Developments

1. The pro-presidential party won a majority in the Lower House (Majilis) elections on 19 September 2004. The Upper House (Senate) elections are scheduled in late 2005. The President will run in the next presidential election in December 2005. If reelected, he will remain in office until 2014.

2. Continuing growth, job creation in the private sector, and pro-poor growth have raised living standards. In 2004, real per capita incomes rose by 13%. The percentage of people living below the subsistence minimum¹ fell from 19.8% in 2003 to 15.0% in 2004. Unemployment declined from 8.8% in 2003 to 8.4% in 2004. Reducing rural-urban disparities is now a key challenge and the Government has priority programs to develop rural areas. Progress toward the Millennium Development Goals (MDGs) and targets is shown in Appendix 1, Table A1.1.

B. Economic Assessment and Outlook

3. High oil prices, foreign investment, and good macroeconomic management underlie the continuing economic boom in this oil-rich export economy. Gross domestic product (GDP) growth, led by the oil sector, averaged 9.5% in 2002–2004 and 9.1% in the first quarter of 2005. Furthermore, with 65% of GDP, the private sector is increasingly driving growth in the economy.² A windfall in oil revenue has meant that the general government budget recorded a surplus of 2.3% of GDP in 2004. The cautious fiscal stance helped restrain aggregate demand and mitigate inflationary pressures in the context of large current and capital foreign exchange inflows during the year.³ Public development spending in the medium term is projected at 4–5% of GDP, which is essential for achieving development objectives. Total external debt was $32 billion at end 2004. Public external debt remained stable at about $3.4 billion (8% of GDP) at end 2004.

4. In 2004, monetary policy was expansionary in response to rapid growth. Inflation rose to 6.9% in 2004 at the limit of the Government target of 5.6–7.0%. The tenge appreciated against the dollar, driven by large export earnings and foreign exchange inflows from increased private external borrowing and foreign investment. The current account remained in surplus (1.3% of GDP), reflecting higher oil export earnings and moderate growth in imports. Gross international reserves including the assets of the national fund rose to $14.3 billion at the end of 2004. The country economic indicators are in Appendix 1, Table A1.2.

5. The medium-term outlook is positive assuming buoyant oil prices, foreign direct investment inflows, continuation of economic diversification, good macroeconomic management, and political stability. GDP is projected to grow at around 9% over the medium term. Implementation of the industrial innovation strategy to 2015 and prudent macroeconomic management were priorities in 2004. Actions include the first medium-term fiscal policy, financial sector development (e.g., an independent financial supervision agency), and streamlining of small and medium-sized enterprise (SME) start-up procedures. The Government policy priorities for the medium term are to diversify the economy and pursue balanced and equitable development.⁴ It has set a medium-term development target of doubling per capita GDP to $5,800 (up from $2,700 in 2004). The overarching program for economic diversification is the cluster development initiative, which seeks to encourage the creation of priority sectors (such as food, textiles, metallurgy, construction materials, tourism, transport and logistical services, and downstream oil and gas activities). To support economic diversification and ensure balanced and equitable development the Government is also emphasizing social security, education, health care, housing, agriculture, and financial and private sector development. Infrastructure development, which includes both energy and transport, is vital for private-sector-led growth; the Government aims to improve labor productivity and lower resource utilization to make its products competitive in the international markets. A key priority for the financial sector is the development of Almaty as a financial hub for Central Asia.

C. Implications for the Country Strategy and Program

6. The resource windfall from higher oil prices has increased the Government’s own resources significantly. Accordingly, the need for external borrowing for financing investment priorities is reduced; this trend seems set to continue in the medium term. The Government has formulated an ambitious policy agenda that includes infrastructure investments and economic diversification. In May 2005, it approved an expansionary medium-term fiscal policy for 2006– 2008, which targets a budget deficit of 1.7–1.9% of GDP in 2005–2007; and has emphasized domestic public and private sector resources as major means to deliver 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 in products and services from development partners is needed to facilitate the process. The medium-term program of the Asian Development Bank (ADB) must be responsive to such needs.

7. The country strategy and program (CSP)⁵ remains in line with the Government’s medium-term priorities. Private sector operations, which began in 2005, will be at the forefront of future ADB operations in the country. Such operations will gradually expand over time and focus on infrastructure and the financial sector. This new thrust toward private sector operations will be supported by public sector technical assistance (TA) and investments to create an enabling environment for the private sector, and selected, flexible public sector lending programs in rural development and water supply aimed at poverty reduction.

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