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p. 37 of 68 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asia Azerbaijan Kazakhstan Kyrgyz Republic Tajikistan Turkmenistan Uzbekistan The Pacific III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia : Central Asia

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Kazakhstan

Overall economic performance remained strong in 2002, and the medium-term prospects are good, though they continue to depend heavily on the oil sector and thus remain vulnerable to external shocks. Effective management of large government oil revenues and continued structural reform will be necessary to ensure long-term sustained rapid growth, economic diversification, and employment creation.

Macronomic Assessment

In 2002, the economy continued its strong performance, despite weak world commodity markets; GDP growth of 9.5% exceeded the 7.0% government target. Fueled by past large investments and an improved transport infrastructure, production of crude oil and gas condensate expanded by 17.3% to 47 million metric tons in 2002, resulting in a 9.8% increase in industrial output (which accounts for about 30% of GDP). Growth in the manufacturing subsector slowed to 7.7% from 14.8% in 2001, mainly due to moderation in external demand. Agriculture sector output grew by 2.7%; growth in the livestock subsector was strong, but the grain subsector recorded only a modest rise due to a decline in crop productivity. Construction output rose sharply by 19.3%, largely as a result of rapid infrastructure development for the new capital, Astana, and rapid continued growth (at over 9%) in the services sector, mainly due to large rises in transport and telecommunications.

Fixed capital investment at 19.0% of GDP remained high, though somewhat below the 21.0% of GDP peak recorded in 2001. Investment in oil and gas activities increased to 53.0% of total investment from 41.0% in 2001. Transport and communications and manufacturing were also important investment destinations, accounting for 11.0% and 8.4%, respectively, of total investment. Domestic private investment continued to be the largest source of investment at 67% of the total, while foreign and public sector investment accounted for 25.0% and 8.0%, respectively, of the total.

Living standards improved as continuing economic growth helped raise real incomes by 7.4% from the year earlier level. In 2002, average monthly wages reached T20,305 (equivalent to $131), a 16.6% increase over the 2001 figure in nominal terms and 10.0% in real terms. However, regional income inequality remained, with wages in oil-rich regions double the country-wide average wage. Sustained economic growth and targeted poverty interventions helped reduce the proportion of the population living below the subsistence minimum of T4,734 ($31) per month from 28.4% in 2001 to 27.0% in 2002. The state law on targeted social assistance became effective on 1 January 2002, providing allowances for those with incomes below T1,853 ($12) per month. The unemployment rate declined from 10.4% to 9.4% in 2002, mainly due to greater employment in construction and services (Figure 2.20). However, unemployment is still a major problem, especially in rural areas and among women. While GDP growth has averaged over 10% in the past 3 years, employment growth has averaged only about 3%, largely because of the capital-intensive nature of the oil sector-led expansion.

The fiscal position continued to strengthen in 2002, aided by faster than expected economic growth. The general government (central and local) budget was essentially balanced (with a negligible surplus), compared with a small deficit of 0.4% of GDP in 2001. While tax revenues substantially exceeded budget targets, the revenue-to-GDP ratio fell as expected by about 1 percentage point to 21.9% of GDP, mainly because, in a classification improvement, privatization proceeds were treated as a financing item in 2002, rather than revenues as in 2001. Similarly, the expenditure-to-GDP ratio fell to 21.9% of GDP from 23.4% in 2001, mainly reflecting reduced allocations to the road and transport subsector after large increases and underbudget expenditures during the year.

While this presentation of the budget includes net balances of nonbudgetary accounts, it does not include revenues of the National Fund of the Republic of Kazakhstan (NFRK), which recorded a surplus of 1.4% of GDP in 2002; with this, the inclusive overall government surplus would have been 1.4% of GDP. The NFRK, which was established in 2001, accumulates a part of the Government's oil and mineral revenues for future investment to achieve economic diversification. While the mechanism used to calculate allocations of government revenues between the budget and the NFRK is complex, use of conservative baseline oil and mineral prices in planning, as well as provision for stabilization payments from the NFRK in case of lower than expected prices, works to assure that budget revenue assumptions are achieved. General government debt, including both external and domestic debt, was reduced to 15.0% of GDP from 17.3% in 2001, due to early repayments.

National Bank of Kazakhstan (NBK) monetary policy was generally accommodative during 2002. Broad money supply (M3) rose by about 33% in response to continued economic growth and financial deepening. A 36% surge in bank deposits in 2002 reflected rising public confidence in the banking sector, though the bulk of deposits continued to be held in foreign exchange-denominated accounts. NBK policy action during the year was evident in the easing of the refinance rate to 7.5% from 9.0% in 2001. This led to a reduction in the average weighted interest rate for the corporate sector from 16.3% in 2001 to 15.5% at end-2002, and helped boost credit to the economy by 37.0% from the year earlier level.

Strengthened central bank control over reserve money and monetary growth kept the exchange rate stable and reduced annual inflation, measured by the CPI, to 5.9% from 8.4% in 2001. The tenge depreciated by 3.2% and 0.1% against the dollar, in nominal and real terms, respectively, in 2002; the average exchange rate was T153.5 to the dollar. The tenge also depreciated in real terms by 5.5% against the Russian ruble, thus helping keep domestic industry competitive vis-Ã -vis the country's main trading partner.

Kazakhstan's external position improved in 2002. The trade surplus increased to $2.1 billion from $1.2 billion in the previous year. Merchandise exports grew by 12.0%, after a 2.8% decline in 2001, mainly due to the marked increase in production and export volume of oil and metals that offset weaknesses in their international market prices. Imports rose by only 2.0%, following the large increase of 14.6% in 2001.

Reflecting the improved trade balance, the current account deficit narrowed sharply to $200 million (around 1% of GDP) from $1.2 billion in 2001. Although net FDI inflows were substantially less than the exceptionally high amount recorded in 2001, a capital account surplus continued to ensure an overall payments surplus. Gross international reserves (including assets held by the NFRK) increased over the year by $1.3 billion to $5.1 billion at end-2002. The NFRK's assets increased by about $700 million to $1.9 billion, while NBK's official reserves rose by about $600 million to $3.1 billion, a level equal to 3.5 months of imports of goods and services. Total external debt is estimated at about $18 billion at end-2002 (about 74% of GDP); public sector debt accounted for only $2.9 billion of the total. The fact that official reserves exceed public sector external debt reflects one aspect of Kazakhstan's striking success in attracting FDI in its development effort.

Policy Developments

The Government continued with its policy effort to encourage fiscal consolidation. The new tax code, which codified all previous tax laws and reduced rates on SMEs, came into force on 1 January 2002. Administrative reforms included setting up a monitoring unit for large taxpayers and introducing an electronic registration of taxpayers and a tax reporting system. Modernization of the treasury system enhanced transparency of the fiscal system. Fiscal management improved through the adoption of a medium-term fiscal framework that will ensure a planned stable flow of resources to carry out the medium-term development strategy (2002-2004). In this regard, the framework sets the education and health sectors as priority budget areas for improved services, as their shares in expenditures have declined in recent years.

The central Government has initiated steps to reform fiscal relations among the various levels of government by approving a new delineation of powers among the levels along with changed fiscal relations based on a functional review. Corporate income taxes, which were previously shared equally between the central and local governments, are now to be collected by the central Government and transferred to local governments following guidelines, both to reduce the vulnerability of local budgets to revenue fluctuations and to distribute revenues among the regions more equitably. In an effort to promote customs administration reform, the Customs Committee was upgraded to an independent agency reporting directly to the prime minister.

On the monetary side, NBK continued to target the growth of reserve money as its main monetary policy instrument and is preparing to move toward an inflationary targeting framework. Reserve money increased by 19.0% as planned, and inflation remained within the 5.0-7.0% target range. The policy on exchange rate management was unchanged with periodic interventions by NBK to prevent excessive appreciation of the tenge in the auction exchange market.

To enhance the stability of the financial sector, NBK continued to strengthen prudential regulations as well as its own ability to conduct effective banking supervision. These efforts resulted in a reduction in the number of commercial banks from 57 in 2000 to 38 in 2002.

WTO accession remains a priority for the Government and moves toward negotiations on membership have been gaining momentum. However, much work needs to be done to relax protective measures, including high tariff rates for agriculture, food processing, and light industry.

The Government continued its efforts to improve the investment climate. A new investment law was promulgated, which stipulates equal investment incentives to both domestic and foreign investors. To increase spillover effects from FDI, the Government is seeking to increase procurement from domestic firms; however, a deliberate phasing-in of measures will be necessary for smooth implementation. Notably, in September 2002, Moody's upgraded the sovereign credit rating of Kazakhstan to investment grade, the first in the Commonwealth of Independent States to achieve this distinction.

Outlook for 2003–2004

The underlying assumptions of the following forecast are that the global economic recovery will continue; world commodity markets will be stable, at least to the level of 2002; the Russian economy will grow at about recent rates; and subregional stability will be maintained.

The outlook is expected to stay positive and the Government has projected GDP growth in the range of 6-7% over the next 2 years. The economy will continue to be driven by the oil sector where annual production growth is likely to exceed 10% during this period, causing industrial output to grow by 8-10%. GDP growth is expected to slow from the over 10% average rate of the last 3 years, which was achieved by large oil and infrastructure investments coming on line, though growth on the upper side of the 6-7% range appears likely if global and oil market conditions are relatively benign. Agricultural output is projected to grow by 2-3% annually in 2003-2004; however, as rural development is a key government priority for 2003-2005, performance may be higher if the Government is successful in expanding its budgeted development program for rural areas and in strengthening the relevant legal framework, especially in terms of handling the complex issue of introducing private land ownership.

The fiscal position is expected to continue to be strong. General government revenues are projected at 20.9% of GDP in 2003 and 20.5% in 2004 in the government budget forecast, which assumes a cautious baseline oil price for Brent crude of $19 per barrel. General government expenditures are projected to grow essentially in line with nominal GDP, with spending at 22.9% and 22.4% of GDP in 2003 and 2004; thus, the general fiscal deficit is expected to be about 2% of GDP in both years. However, government projections indicate very substantial savings of oil and mineral revenues in the NFRK, especially in 2003. Consequently, the overall government fiscal balance, including the NFRK, should likely show a strong surplus, perhaps averaging at least 1-2% of GDP over the 2 years.

The central bank intends to implement policies that would keep inflation within the range of 4-6% over the forecast period. Given its growth and inflation objectives and accounting for changes in monetization, money supply is expected to grow by 22.4% and 16.6%, respectively, in 2003 and 2004. In these circumstances, the exchange rate is likely to be largely stable with a nominal yearly depreciation of about 4%.

The trade balance is likely to stay positive as oil production increases. In this context, exports are forecast to grow by about 5% in 2003 and by about 4% in 2004 as demand from subregional trading partners strengthens and as recovery of the global economy continues. Imports are projected to grow by about 6% in each year, mainly reflecting developments in capital goods imports related to oil sector investment. The current account deficit is likely to increase only slightly from the 2002 level and remain at less than 2% of GDP. Anticipated foreign investment inflows and other capital flows are expected to more than fully cover the current account deficit.

Continued economic growth is expected to improve living standards as the average real wage is projected to rise by 8-9% annually over the 2002 level. The Government recently approved a state program on poverty reduction for 2003-2005, which aims to bring down the number of people living below the subsistence minimum to 25.0% in 2005 from 27.5% in 2002.

To this end, the Government expects economic growth to raise GDP per capita from the current $1,631 to $2,000 in 2005. In addition, given the Government's medium-term priority for rural development, its efforts should produce an accelerated reduction in poverty in rural areas through targeted social assistance and through the promotion of rural microcredit and public works that enable more rapid economic development.

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