Country Economic Work for Kazakhstan - Islamic Development Bank

Islamic Development Bank Country Programs Department

COUNTRY ECONOMIC WORK “Enhancing Competitiveness and Diversiﬁcation of the Kazakhstan Economy”

Muharram 1432 / December 2011

IslamicDevelopment Development Bank Islamic Bank Country Programs Department Country Department

COUNTRY ECONOMIC WORK “Enhancing Competitiveness and Diversification of the Kazakhstan Economy Kazakhstan`s economy”

Muharram 1432 / December 2011 December 2011

Table of Contents

ABBREVIATIONS ………………………………………………………………………………... iv-v EXECUTIVE SUMMARY…………………………….…………………………………….…… vi-xx SUMMARY OF DIAGNOSTICS AND RECOMMENDATIONS………………………...xxi-xxiv I.

INTRODUCTION ………………………………………………………………………………..1

II.

COUNTRY CONTEXT…………………………………………………………………….…...2

Geography and Land………………………………………………………………………………...2 People and Demographic Structure………………………………………………………………...2 Government and Political System…………………………………………………………….….....3 III.

RECENT ECONOMIC AND SOCIAL DEVELOPMENTS………………………….….….3

Economic Backgrounds in the 1990s…………………………………………………….....….…...3 Production…………………………………………………………………………………………...5 Expenditure on Gross Domestic Production……………………………………………………....8 Employment and Incomes………………………………………………………..………………...11 Poverty Reduction and Social Developments………………………………………..………. .... .13 IV.

DEVELOPMENT STRATEGY AND MANCROECONOMIC MANAGEMENT…...…..17

Long-term Development Strategy…………………………………………………………............17 Overview of the Macroeconomic Management……………………………………………...........20 Fiscal Policy Issues…………………………………………………………………………….........24 Monetary and Financial Policy Issues………………………………………………………..........28 Anti-crisis Program........................................................................................................................... 30 External Trade Relations……………………………………………………………………...........32 V.

DEVELOPMENT CHALLENGES: Competitiveness and Diversification…………………35

Effect of Macroeconomic and Exchange Rate Policy on Competitiveness………………............37 Business and Investment Climate……………………………………………………………..........39 Efficiency of Markets…………………………………………………………………………..........41 Key Sector Policies to Enhance Competitiveness and Diversification……………………….......43 Oil and Gas Sector……………………………………………………………………..........44 Agriculture Sector………………………………………………………………………......46 Transport Infrastructure……………………………………………………………...........51 Telecommunication Sector…………………………………………………………............53 Power Sector………………………………………………………………………...............54 Innovation and Technology Commercialization……………………….............................55 Education Sector ...................................................................................................................57 Health Sector .........................................................................................................................59 Environmental Issues…………………………………………………………....................61 i

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COUNTRY ECONOMIC WORK - December 2011

VI.

GROWTH PROSPECTS OVER 2011-2015………………………………………………..63

The State Program of Accelerated Industrial-Innovation Development………………............64 The Growth Target of the Government of Kazakhstan……………………………………...... 65 Targets for Agriculture…………………………………………………………………………....66 Targets for Manufacturing…………………………………………………………………... ......67 Target for Local Content…………………………………………………………………….........67 Inflation Target………………………………………………………………………………........68 The Unemployment Rate…………………………………………………………………….........68 Target for NFRK Balances………………………………………………………………..............69 Underlying Philosophy of the SPAIID Strategy………………………………………................69 STATISTICAL ANNEX .....……………………………………………………………………71-80 BIBLIOGRAPHY …………………………………………………………………..........….....81-82 LIST OF FIGURES Figure 1 : Growth rates for sectoral GDP………………………………………...……................5 Figure 2 : Sectoral GDP indexes……………………………………………………………..........5 Figure 3 : Agriculture production indicators…………………………………………….……....6 Figure 4 : Composition of expenditure on GDP………………………………………….……...9 Figure 5 : Investment and saving ratios……………………………………………………….....10 Figure 6 : Growth of employment by economic activity…………………………………..…....12 Figure 7 : GDP per capita……………………………………………………………………..….12 Figure 8 : Main indicators of labor remuneration…………………………………………...….12 Figure 9 : Lowest and highest average wages by sector and region………………………...….13 Figure 10: Share of population with income under subsistence……………………………...…14 Figure 11: GDP, oil output & CPI growth rates……………………………………………...….20 Figure 12: NEER & REER indexes…………………………………………………………...…..23 Figure 13: Percent of firms reporting a specific problem…………………………………...…..41 Figure 14: Wheat production cost…………………………………………………………...……46 Figure 15: Percent of firms reporting labor shortage……………………………………….......58 Figure 16: Per capita health expenditure……………………………………………………..….59

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LIST OF TABLES Table 1 : Population indicators……………………………………………………………….....2 Table 2 : Sectoral structure of GDP……………………………………………………………..2 Table 3 : Growth of industrial production by subsector……………………………….............7 Table 4 : Labor force and employment………………………………………………………...11 Table 5 : Macroeconomic Indicators…………………………………………………..……….22 Table 6 : Competitiveness index for Kazakhstan and FSU countries………………………..35 Table 7 : Kazakhstan’s competitiveness indicators…………………………………........…...39 Table 8 : Corruption perception index for Kazakhstan……………………………………....40 Table 9 : Kazakhstan’s rankings in “Ease of Doing Business”……………………….……....40 Table 10: Wheat yields by country……………………………………………………………..47 Table 11: Cost of beef production and transport to Russia…………………………………..50 Table 12: Freight turnover of all transport modes in Kazakhstan…………………………...52 Table 13: Selected health indicators…………………………………………………………....59 Table 14: Macroeconomic Projections………………………………………………………….63 Table 15: Targets of SPAIID and Kazakhstan-20…………………………………………..... 65

LIST OF BOXES Box 1: Labour productivity and competitiveness stagnation....................................................8 Box 2 : Kazakhstan’s progress in achieving MDGs……………………………….………....15 Box 3 : The National Development Strategy of Kazakhstan -30 Program………………….17 Box 4: The Fertilizer Sector in Kazakhstan..............................................................................45 Box 5: Cotton Harvest Fails to Provide Rich Pickings.................................................48

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ABBREVIATIONS ACP

Anti-crisis Program

CPI

Consumer Price Index

EBRD

European Bank for Reconstruction and Development

CAREC

CU

Central Asia Regional Economic Cooperation

Customs Union

EITI

Extractive Industries Transparency Initiative

FSA

Agency on Regulation & Supervision of Financial Markets & Organizations

ESO FDI

FSU

GCI

GDP

Energy Supply Organization

Foreign direct investment/investor Former Soviet Union

Global Competitiveness Index Gross Domestic Product

GII

Gender Inequality Index

GSM

Global system for mobile communications

GOK HDI

IMF IPO IT

KEGOC KZT

MCOs

MDGs

MSMEs

Government of Kazakhstan

Human Development Index

International Monetary Fund Initial public offering

Information technology

Kazakhstan Electricity Grid Operating Company Kazakhstan tenge (national currency) Microcredit organizations

Millennium Development Goals

Micro, small- and medium-sized enterprises

MTEF

Medium-term Expenditure Framework

MTMF

Medium-term Macroeconomic Framework

MTFF NBK

NEER

NFRK

NPLs

Medium-term Fiscal Framework National Bank of Kazakhstan

Nominal Effective Exchange Rate

National Fund of the Republic of Kazakhstan

Non-performing loans

OECD

Organization for Economic Cooperation and Development

PC

Primary care

OPEC PPP

R&D

REER

Organization of the Petroleum Exporting Countries Purchasing Power Parity

Research and development

Real Effective Exchange Rate iv COUNTRY ECONOMIC WORK - December 2011

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REKs

Regional Distribution Companies

SMEs

Small- and medium-sized enterprises

S-K

SPAIID TVE

UNDP

Samruk-Kazyna

State Program for Accelerated Industrial-Innovation Development Technical and vocational education

United Nations Development Program

USAID

United States Agency for International Development

WB

World Bank

WHO

World Health Organization

VAT

WEF

WTO

Value-added Tax

World Economic Forum

World Trade Organization

CURRENCY EQUIVALENTS Currency Unit = Tenge US$1 = 146 Tenge (August 2011)

Acknowledgment

Country Department Director, Country Department: Manager, Central Asia & Europe Division:

Br. Mohamed AlSaati Br. Hikmat Aliyev

Team Leader/Country Manager for Kazakhstan (Report Author):

Dr. Sobir Komilov

Peer Reviewers:

Dr. Ahmed Zubair & Dr. Abdoulie Jallow Br. Ramil Maharramov Br. Erjan Jalmukhanov Dr. Reza Ghazal Br. Botir Kobilov

Kazakhstan MCPS Team: Summer Intern: IDB Regional Office in Almaty Director, ROA: Country Officer: External Consultant:

Br. Hisham Maarouf Br. Nurlan Sembiyev Dr. Mete Durdag

Results of this CEW was presented in the Seminar on “Competitiveness Improvement Issues” within 5th Astana Economic Forum, held in Astana on 24 May 2012

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EXECUTİVE SUMMARY I.

INTRODUCTION

1. The Islamic Development Bank is initiating a new economic reporting on its member countries with the title of “Country Economic Work” (CEW). The Kazakhstan CEW is the first report in this series, and hence will serve as a pilot for future CEWs. Being the first CEW, its coverage is comprehensive, while also focusing on the country’s key development issues, namely, enhancement of the competitiveness and diversification of its economy over the medium- to long-term. The CEW, first, gives a brief account of main developments of the Kazakhstan economy over the 1990s and then presents a more detailed review of developments in key economic and social sectors as well as major economic policies over 2000-2010. The main focus of this CEW being the competitiveness and diversification of the Kazakh economy, this subject is discussed in greater detail in a separate chapter at both macro- and sector-level. To keep the length of this Executive Summary as short as possible while giving due emphasis on the main theme of this report, the summary of the initial chapters had to be capsuled into a page-and-a-half. II. COUNTRY CONTEXT AND RECENT DEVELOPMENTS 2. The Republic of Kazakhstan, with a territory of 2.7 million square kilometer, is the ninth largest country and also the largest landlocked country in the world. Kazakhstan has great potential for arable farming and livestock husbandry. It also has rich extensive reserves of oil, gas and various minerals. Kazakhstan’s population was 16.5 million in February 2011 with Kazakhs making 63.1 percent of the population, Russians 23.7 percent, and Uzbeks, Ukrainians, Uighurs, Tatars and others the rest. 3. After gaining independence in 1991, Kazakhstan experienced severe economic contraction as a result of the cut-off of budgetary supports from Moscow and the collapse of demand from the Former Soviet Union (FSU) countries for its traditional exports. With the liberalization and stabilization policies adopted from mid-1990s, the Government stabilized the economy and made significant progress in adopting necessary deregulation policies and a new regulatory framework to move to a market economy. In this context, most of small and medium-sized enterprises (SMEs) have been privatized, though only limited progress could be made in the privatization of large enterprises. 4. In its second decade of transition, the Kazakhstan economy steadily grew at an annual rate of over 10 percent through 2007, when a global financial crisis hit hard the country. The production indexes in all sectors have been on a rising trend since 2000. Agricultural value added recorded a 50 percent increase during ten years since 2000, but its share in GDP gradually declined from 8.6 percent to below 6 percent over the same period. Similarly, the manufacturing index doubled during 2000-2010, but its share in GDP declined from 13 percent to 11.4 percent in the same period. Behind this structural change in production was great expansion in oil, gas and other mining-related production and the growing share of mining in GDP. 5. During most years in the 1990s, Kazakhstan had to rely on net resource inflow to augment its GDP in order to meet domestic consumption and investment. This situation has changed from 2000 as GDP sharply increased with rapid expansion in the production and export of oil, gas and metal products. The ratio of total consumption to GDP, which stood between 80-84 percent in the 1990s, sharply dropped to 74 percent in 2000 and continued steadily falling below 60 percent by 2010. Since the public sector consumption ratio has been kept around 11 percent of GDP through 2010, the falling share of private consumption was the main reason for the decline in the ratio of total consumption to GDP. Gross fixed capital formation sharply declined over the 1990s from 27.2 percent of GDP to 16.2 vi COUNTRY ECONOMIC WORK - December 2011

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percent. It has since grown to 30 percent in 2006 and 2007, but then declined to 27 percent in the following two years due to restraining effects of the financial crises. 6. Kazakhstan’s labor force increased 22 percent during 2000-2010 compared with only 8 percent growth in population. People who had stayed out of the labor market because of disenchantment with lack of job opportunities and low wages in the 1990s started returning to market from 2000 encouraged by new opportunities and rising incomes. The unemployment steadily declined from 13.5 percent in 1999 to below 6 percent in 2010. Per capita GDP in Kazakhstan doubled in real terms during 2000-2010. In USD terms, this corresponded to an increase from USD 1,230 in 2000 to USD 9,000 in 2010. This improvement in per capita GDP was reflected in a five-fold growth in average monthly earnings, from KZT 14,374 (USD101) in 2000 to KZT 77,611 (USD527) in 2010. This overall good level of earnings, however, conceals great disparities in inter-sectoral and inter-regional wage comparisons. 7. Kazakhstan has achieved within the past decade a significant reduction in poverty and remarkable improvements in its social development indicators. The number of people with incomes below the subsistence level steadily increased in the 1990s, reaching as high as 46.7 percent in 2001 and 2002 before it started rapidly declining to 6.5 percent in 2010. Contributing to this decline were: the annual increases in the minimum wage; doubling of the average monthly earning in real terms since 2002; sharp increases in pensions; targeted social assistance to the poor since 2002. These encouraging developments are, however, spoiled by the widening gap between urban and rural poverty rates. Poverty reduction has been highly uneven also across the regions. 8. Social development indicators of Kazakhstan registered noteworthy improvements in 2000-2010. The gender inequality index (GII) improved by 33 percent over 2000-2010. Kazakhstan has already attained the first three out of eight MDGs and has been making good progress on the remaining goals. In 2010, the UNDP’s Human Development Index (HDI) for Kazakhstan ranks at 66 th out of 169 countries, which is one step worse than Russian’s and three steps better than that of Ukraine. III.DEVELOPMENT STRATEGY AND MACROECONOMIC MANAGEMENT 9. Long-term development strategy: President Nazarbayev announced in 1997 his vision of Kazakhstan’s long-term development, envisaging various policies grouped under 6 pillars as follows: (i) Integration in the world economy; (ii) sustainable growth through diversification, infrastructural development, and creation of high-technology industries; (iii) Providing education and professional training at international standards to meet development prospects of the labor market; (iv) to meet housing, health-care, social security and employment requirements of the population; (v) to build an open, democratic and law-abiding State; and (vi) strengthening Kazakhstan’s regional and geopolitical responsibilities. The GOK has been striving to implement these directions through a plethora of plans and programs at macro and sector levels, but without a comprehensive framework/plan to ensure their consistency with each other and with macroeconomic stability requirements of the economy. Nevertheless, they provide all State agencies with an impetus and the directions for the medium- to long-term development of their sectors. At the same time, such development spending zeal augments the responsibility of the central economic ministries and the importance of macroeconomic programs (e.g., MTMF, MTEF and MTFF), which the GOK is lacking. 10. Overview of the macroeconomic management: During the past decade, Kazakhstan attained remarkable economic growth through effective use of its oil windfall, while also maintaining a stable economic environment and continuing with the second-generation of market reforms, albeit at a slower pace than in the 1990s. Behind this performance, there were several factors, including: (a) The sharp expansion of oil and gas production; (b) commodity exporters generally, and oil and gas exporters particularly, enjoyed favorable prices in world markets; (c) favorable external financial environment vii

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facilitated Kazakh banks’ access to external credits at modest cost; (d) a number of structural and institutional reform measures, even though falling much short of what should have been done, contributed to the development of SMEs in agriculture and non-extractive sectors; (e) success of the macroeconomic management in maintaining the right balance among the fiscal, monetary and exchange rate policies. This policy-mix has, however, faced two important risks in the form of fluctuations in world oil prices and negative effects of the “Dutch disease” on competitiveness of the non-oil sectors. 11. The GOK established the National Fund of the Republic of Kazakhstan (NFRK) in 2000 to reduce impact of fluctuating world oil prices and to save part of the national oil income for the benefit of future generations. There are, however, two more sources of major inflows, namely FDI and the external borrowing by the private sector, which cannot be as effectively regulated as oil and gas revenues. Due to capital-and-import-intensive nature of oil, gas and other mining projects, large annual inflows of FDI should have caused only limited pressure on the demand management policies during 2000-2010. But the same cannot be said for external borrowing by the private sector, particularly by domestic commercial banks. On the basis of large external liabilities, banks were funding domestic credit growth at an annual rate of 70 percent from end-2004 to mid-2007, mostly to the construction sector. With the onset of the global financial crisis, however, the banking sector’s structural weaknesses have become manifest, calling for a major rescue operation by the Government. 12. Fiscal policy issues: The fiscal policy of the GOK over the past decade has been molded in line with the “National Development Strategy of Kazakhstan-30. In this context, the execution of prudent budgets during the oil revenue boom in 2000-2007 and an effective Anti-Crises program (ACP) since 2007 should particularly be mentioned. In addition, there have been significant structural and institutional developments in public finances as briefly presented below. 13. The GOK established the NFRK in 2000 in order to save part of the oil income for future generations and also to ensure a stable flow of oil revenues to the Government budget, thus having both saving and stabilizing roles for the economy. Oil revenues’ share in total revenues (including grants) went up from 13 percent (3.2 percent of GDP) in 2000-2001 to 44.0 percent (11.1 percent of GDP) in 2008-2009. The NFRK balance, sharply increased in 2010 and 2011, reaching over USD38.0 billion by mid-2011. The NFRK is managed by the NBK by using three guiding principles: First, the NFRK should be fully integrated with the budget and treasury. Second, all central government oil revenue should accrue to the NFRK. Third, the decision of how much of the oil income to be used for budget support should be transparent and based on objective criteria. This amount is linked, through a legislative act and a formula, to the development spending while keeping the rest of the budget in balance. 14. Tax reductions were made in favor of certain sectors or commodities in order to strengthen competitiveness of the economy. Such tax reductions, however, might do more harm than good if adopted without comprehensive evaluation of their impact on relative cost structure of production in the economy. Tax reductions made on sector, industry, and enterprise basis would create loopholes for tax avoidance and thus reduce tax discipline. Moreover, tax reductions on the non-oil sectors would run the risk of requiring more oil revenue to be transferred to the budget. 15. One of the main concerns of the GOK over the past decade has been how to alleviate poverty without jeopardizing the macro balances of the economy. During the first half of the decade emphasis was placed on developing the social safety net and pension reform measures. Also public sector wages and salaries have been substantially increased. Large differentials between government and private sector salaries were both causing social injustice and making it difficult to attract qualified staff to the public viii COUNTRY ECONOMIC WORK - December 2011

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sector. However, the fast pace and large size of the increases may have caused severing their link to performance, merit, and regional cost of living differences. 16. Establishment of the National Welfare Fund Samruk-Kazyna (S-K) by the GOK in 2008 by merging Samruk (the state asset holding company) and Kazyna (the sustainable development fund) had the immediate objective of strengthening their positions to play a central role in the implementation of the ACP. The S-K’s long-term mission, however, is much broader and important, envisaging to contribute to the growth of the Fund’s companies as well as to stable development, diversification, and modernization of the economy. 17. Monetary and financial policy issues: The main function of the monetary and financial policies in 2000-2007 was to support output growth while controlling inflation and maintaining exchange rate stability. The NBK adopted an expansionary monetary policy in 1999 to pull the economy out of the doldrums caused by the 1998 Russian crises, and continued the expansionary policy in 2000 to stimulate domestic demand and output growth. In the following years through mid-2007, the monetary expansion continued mainly to meet increasing liquidity demand of a rapidly expanding economy. This resulted in bank credits rising from 12 percent of GDP in 2000 to almost 60 percent in 2007. The NBK has, however, become increasingly concerned since 2004 over growing credit risks and deteriorating quality of loans. Doubtful bank loans amounted to almost half of the total in 2005. With the onset of the world financial crisis by mid-2007, the underlying weaknesses of the financial system had been fully exposed. The monetary authorities had to save the banking system from collapsing and also to boost domestic demand, particularly for the worst hit sectors. 18. Despite great inflationary pressure during 2000-2007, the NBK was successful to maintain a moderate rate of inflation. Three factors contributed to this: (i) During this period, the economy has undergone a strong financial deepening and re-monetization as indicated by a steady decline in the velocity of broad money from 7.5 in 2000 to 2.7 in 2007; (ii) the NBK pursued a flexible exchange rate policy, easing the burden on the monetary policy to control inflation; (iii) the supply side was well supported by growing imports and productivity increases in domestic production. 19. The NBK has also undertaken significant reform measures in the banking system, including, among others: (i)The NBK’s supervision of banks was strengthened with the adoption in 2001 of consolidated supervision of bank subsidiaries and affiliates, and the establishment of “Agency on Regulation and Supervision of Financial Markets and Organizations” (FSA) in 2004; (ii) Kazakhstan’s first credit bureau was established in 2005; (iii) “Almaty Regional Financial Center” (ARFC) was established in 2005 to spearhead development of the securities market; (iv) an amendment to the Budget Code in mid-2005 allowed capital injections to the NBK to cover its losses related to monetary operations; (v) the FSA’s capacity has been continually strengthened through administrative and legislative measures; (vi) In 2009, Kazakhstan adopted a law on Islamic finance and established the first Islamic bank (Al Hilal) in the country. Legislation also allows Islamic financial instruments to be listed on the Kazakhstan Stock Exchange; (vii) in April 2011in order to enhance regulatory framework of the financial sector, supervisory role previuosly undertaken by FSA and the ARFC`s mandate to develop Almaty as a regional financial center were unified under the National Bank`s autority; (viii) to further devlop pension fund and local stock exchange, the GOK approved a “Road Map for Development of Cumulative Pension System and Stock Exchange” in 2011; (ix) Ministry of Finance and other resident legal entities are currently authorized to issue sovereign Sukuks and related regislation is being reviewed by the GOK. 20. Anti-crisis program (ACP): Developments in the financial sector of Kazakhstan during 2000-2007 created two main sources of risks: banks’ heavy dependence on external borrowing, and high exposure ix

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to the real estate sector. These factors have exposed domestic commercial banks to liquidity risks with the onset of the global financial crisis. The tightening of credit conditions in international markets has cut off Kazakh banks’ access to foreign loan markets, and credit expansion to the economy sharply dropped from the second half of 2007. As a result, both the banking and construction sectors have been badly hit by the crisis. 21. The NBK and the government had to intervene to protect the banking system and to prevent crisis in the real sectors, particularly construction, from deepening further. The NBK injected funds into the banking system, and the government allocated channeled funds through banks to construction companies, industrial projects and SMEs. In addition,t he GOK had to impose administrative controls on prices and tariffs and to eliminate import duties on some food-items. Also the NBK had to intervene to maintain the then exchange rate of the tenge, but at a great loss of reserves. In November 2008 the Government announced a new stimulus package to develop SMEs, to support industrial and infrastructure projects, and to stimulate agriculture further. S-K provided resources to recapitalize banks, established a distressed-asset fund as well as a real-estate-support fund. But the slump in the property market was continuing as expansion in construction tumbled to 1.9 percent from 16.4 percent in 2007. This was a bad omen for the stability of the bank system, as the share of non-performing loans (NPL) in total bank loans was going up, with further deterioration in the offing. These facts together were pointing to the approaching of foreign debt service failure by banks in 2009. Therefore, in February 2009, the GOK took control of the first and fourth largest banks and provided capital to the second and third largest banks. To stop further reserve losses and also to maintain competitiveness of local producers the NBK had to devalue the tenge by about 20 percent and set up a fluctuation corridor of ±3 or 5 KZT at the exchange rate of KZT150/USD1 in February 2009. 22. The ACP has helped to calm domestic markets and to gradually re-establish public confidence in the recovery of the economy. Nevertheless, credit expansion remained to be very modest both in 2009 and 2010 mainly because of banks’ and investors’ risk aversion, particularly in view of the growing share of NPLs (30 percent in 2010) in total loan portfolio of banks. Thus, the impact of global financial crisis on Kazakhstan’s financial system has left behind three important issues to be addressed: (i) The need for restructuring and governance reform in the banking system; (ii) addressing the issue of increasing volume of NPLs to about 30 percent of total loan portfolio of banks; and (iii) the paradox of liquidity abundance against weak credit demand in the banking system. 23. External trade relations: The economic development of Kazakhstan over the past decade has revolved around its balance of payments. Merchandise exports (mainly oil, gas and metals) increased from USD9.3 billion in 2000 to USD USD72.0 billion in 2008, i.e. 8 fold.. The corresponding increase in merchandise imports was from USD7.1 billion to USD38.5.0 billion, which mainly included capital goods and equipment for the extractive sector projects and modernization investments by enterprises in other sectors. With the impact of global financial crisis on commodity prices and demand in international markets, Kazakhstan experienced in 2009 sharp declines in all items of its current account. However, improved global economic environment and higher commodity prices from the 4th quarter of 2009 turned the flows upward again with exports and imports rising 38.5 percent and 10.3 percent, respectively, in 2010. 24. Annual changes in Kazakhstan’s exports are largely determined by a combination of price and volume changes in export of oil, gas and metals. Opening up of new transportation routes and production fields has enabled Kazakhstan to more than double oil and gas output during 2000-2004 and to obtain an additional 30 percent increase in the next five years. With the scheduled opening in 2012 (or 2013) of the Kashagan oil field, one of the world’s largest, Kazakhstan’s economy will have a new boost over the medium-term. Non-mineral exports currently account for only 25 percent of total exports x COUNTRY ECONOMIC WORK - December 2011

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(2011). Their importance, however, lies in the fact that Kazakhstan’s development strategy emphasizes diversification of the economy towards non-extractive sectors. The annual changes in Kazakhstan’s merchandise imports were reflecting mostly changes in demand for capital goods and equipment of the extractive sector investment projects as well as strong domestic demand for construction materials and consumer goods in the boom years of 2000-2007. 25. A major weakness in Kazakhstan’s foreign trade is very limited economic relations with other Central Asian countries, whose share in Kazakhstan’s merchandise exports and imports was only 3 percent and 2 percent, respectively. There are several reasons for this, including: (i) similar commodity-based structures; (ii) high tariffs and restrictive trade policies; (iii) underdeveloped infrastructure; (iv) heavy transport costs; and (v) cross-border political barriers, particularly persistent tensions over water and energy issues. With its rich natural resources and relatively more advanced economic and financial structures, Kazakhstan may become an engine of growth in Central Asia if these difficulties could be gradually eliminated. On the other hand, the GOK has been pursuing a policy of close cooperation with all major international economic organizations. In this context, Kazakhstan joined the Extractive Industries Transparency Initiative (EITI) in June 2005, and has been negotiating since 1996 for entry to the World Trade Organization (WTO). Kazakhstan completed membership negotiations with Russia and Belarus for a Customs Union (CU), which became effective on January 1, 2010. The CU has already enforced a common external tariff, resulting in an average tariff rate of 11.5 percent compared to Kazakhstan’s previous rate of 6.7 percent. From January 2012, a Common Economic Space (CES) for about 170 million people will be established among the three countries. The CU will lead to higher cost of imports and thus displace some imports from third countries. On the other hand, it will: (i) strengthen Kazakh exporters’ position in the Russian and Belarus markets, and (ii) increase budgetary revenue from customs duties. IV. DEVELOPMENT CHALLENGES: Competitiveness and Diversification 26. The broad objectives and strategies of the Kazakhstan-30 Program can be grouped under three areas of (a) macroeconomic management; (b) enhancing competitiveness of the economy; and (c) development of the social sectors. Of these three areas, the emphasis is on competitiveness, and the progress in the first and third areas is meant to help enhance competitiveness in addition to achieving the objectives of their own. Kazakhstan has achieved significant capacity building in macroeconomic management and a stable economic growth through prudent fiscal, monetary, and exchange rate policies. Similarly, the country has made remarkable progress in social areas as well, including in employment, poverty reduction, gender equality, and MDGs. It is, however, paradoxical that Kazakhstan has been loosing ground in competitiveness and diversification. In the World Economic Forum’s Global Competitiveness Index (GCI) for 2005, Kazakhstan had a ranking of 51 among 120 countries. In the following two years, the competitiveness ranking of Kazakhstan deteriorated to 56/121 and 61/131. Against this, the government announced in 2008 its objective of placing Kazakhstan among the 50 most competitive countries, while its ranking has since deteriorated to 72/132 in 2010. The GCI is a composite index of 12 pillars, each measuring a different aspect of economic competitiveness. Kazakhstan’s ranking for each pillar in the last three years’ GCIs has recorded progress in only one pillar (macroeconomic environment); maintained its position in another (market size), and lost ground in the remaining 10 pillars. Whatever reasonable margin of error could be allowed, these indexes certainly point to serious obstacles Kazakhstan now faces in diversifying towards non-extractive sectors. 27. The competitiveness of individual goods and services depend on their relative prices and relative profitability, the latter determining the relative margin for price competition. Here two matters deserve particular emphasis: The first is the conversion of original prices in different currencies into a common xi

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currency; hence the great importance of the exchange rate in determining competitiveness of an economy. Second, given relative prices, relative profitability will depend on relative costs of production and distribution, which in turn depend on physical productivity and relative prices of factors of production. Any review and evaluation of Kazakhstan’s competitiveness should therefore look into the potential impact on relative prices of goods and services, particularly in non-extractive sectors, of the following, among others: (a) Macroeconomic management and policies, especially the exchange rate policy; (b) business and investment environment; (c) the efficiency of markets for goods, capital and finance, and labor; and (c) sector development policies to enhance competitiveness and diversification. 28. Effect of macroeconomic management and exchange rate policy on competitiveness: Although the overall macroeconomic environment over the past decade was favorable to the enhancement of competitiveness and diversification of the economy, this has not been realized due to, among others, the following reasons: a. The GOK’s macroeconomic management is not adequately assuring of its programs over the medium- to long-term. This is due to: (i) the government introducing too many programs without a comprehensive framework (e.g., an indicative five-year plan or a MTEF) encompassing them all; and (ii) the budget estimates and other planning magnitudes are treated as projections rather than targets and are easily and frequently revised. b. Although average rate of inflation was kept at a moderate level, the large inflow of oil revenue and commercial bank credit boom resulted in higher relative price of non-tradable to tradable goods. Hence, the bulk of both foreign and domestic private investment outside extractive sectors was going to non-tradable sectors. c. The share of non-extractive sectors (e.g., manufacturing, food processing) in total exports has not shown any significant improvement, which is a clear indication that Kazakhstan’s non-extractive tradable sectors are not competitive against foreign goods. d. Recognizing the above problems, the GOK has tried to improve competitiveness of nonextractive tradable sectors by tax and credit concessions to them. This, first, attempts to address the symptoms but omits the underlying problem (i.e., the overvaluation of the tenge) and, second, creates loopholes for tax evasion and credit misuse, leading to inefficiency in resource use. e. The GOK has opted for state-driven (forced) industrialization to diversify development of the economy towards non-extractive sector. This approach has long been discarded in economic literature as an inefficient and unsustainable model of development. 29. With its given factor and natural resources (other than oil and gas) endowment, Kazakhstan would have had a market determined realistic exchange rate (i.e., non-oil equilibrium exchange rate) that would have provided a much stronger and healthier import protection and export promotion to the nonextractive sectors than provided through the current macroeconomic policies. On the other hand, Kazakhstan’s “good fortune” of having rich oil and gas resources is a reality that cannot be overlooked. Its use, however, strengthens the tenge, whose every minute overvaluation compared to the non-oil case renders one non-oil sector product at the margin uncompetitive. Recognizing this fact, the following policy directions should be considered in the use of oil and gas revenues: (i) Gradually reduce the annual amount of oil revenue support to the Budget and eliminate it by, say, 2020; (ii) in order to gradually minimize the injection of oil-and-gas related foreign exchange into the local currency market, use some part of oil funds directly from the bank accounts abroad for the financing of high-technology capital goods imports, including for the education and health sectors, which would not create competition with local products; (iii) maintain the nominal exchange rate of the tenge at a level that would result in a small, steady annual decline in the REER; and (iv) diversification could come xii COUNTRY ECONOMIC WORK - December 2011

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about only through relative price changes in the goods and factor markets through some prices going up more than others; hence, the NBK’s inflation target should be high enough to accommodate this process. 30. Business and investment climate: Kazakhstan’s competitiveness index is particularly poor in the financial market efficiency, business sophistication, and innovation. The World Economic Forum’s above-mentioned indicators are largely supported also by the results of the IFC’s “Enterprise Surveys: Kazakhstan -2009”. This rather worrying picture of Kazakhstan’s business and investment environment should be somewhat moderated by recent indicators of the Transparency International’s Corruption Perception Index and the World Bank’s “Doing Business” data. On the whole, Kazakhstan’s corruption perception index during 2001-2008 was indicating that corruption is a major issue in the country. However, there is a hopeful sign of steady improvement over 2007-2010, when the index sharply improved year-after-year from 151 in 2007 to 106 in 2010 (out of 180 countries). This should be indicating the positive results of the GOK’s anti-corruption policies and measures in recent years. To maintain this declining trend of corruption will make a strong contribution to the improvement of the business and investment environment in Kazakhstan. Moreover, the World Bank’s data show that Kazakhstan’s overall “Ease of Doing Business” rank (out of 183 countries) substantially improved from 74 in 2010 to 59 in 2011. 31. Efficiency of markets: The enhancement of competitiveness and healthy diversification of the Kazakh economy would require improving the efficiency of its markets for goods, labor, and finance. Kazakhstan had a poor ranking (80/134) in the goods market efficiency among 134 countries in 20082009. This deteriorated to 84/133 in 2009-2010 and to 89/139 in 2010-2011. Kazakhstan has adopted almost all the necessary legislation for the operation of a market-based economy. Its poor ranking is therefore due not so much to an inadequate legal system as to non-compliance of the government with enforcement rules and to heavy state intervention in the operation of markets. Moreover, the Government tries to offset the adverse effects of the overvalued tenge by distortionary taxes and incentives. Without significant changes in such fundamental issues, only limited improvement could be achieved in the goods market efficiency through some institutional and technological improvements and through reduced tariffs and restrictions on foreign trade. 32. Kazakhstan has a very good record of labor market efficiency as summarized by the WEF’s GCI, even though it has been losing some ground over the past two years. The Kazakhstan labor market has significant wage differentials by geography and by economic sector. This might be conducive to efficiency improvement provided that labor mobility is not hindered by market and/or social segmentations. Nevertheless, some tempering with wage differentials might be needed on social grounds, as has been done through significant increases in public sector wages in recent years. The efficiency concerns would also call for improving the match of education and technical skills of the labor force with market requirements. 33. Among the 12 competitiveness indicators of the GCI, Kazakhstan has the poorest and deteriorating ranking in the financial market efficiency. This had not attracted much concern during 2002-07, when Kazakh banks had easy access to foreign borrowing until the global financial crisis erupted. The State has since been heavily involved in the banking system through various rescue operations. To avoid similar crises in the future, the banking system has now been going through a major restructuring. The financial market in Kazakhstan needs improvement also in the provision of financing to micro, small and medium-sized enterprises (MSMEs). The current Law on Microcredit Organizations (MCO) allows only banks, credit unions, and MCOs to provide micro-financing. While the first two can also take deposits, MCOs cannot mobilize deposits without obtaining a full banking license, for which the minimum capital requirement (MCR) is USD 33 million. Hence, in order to promote micro-financing, xiii

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either MCOs should merge and consolidate to meet the MCR for deposit taking, or the NBK should create a separate regulatory window with lower MCR for strong MCOs to engage in deposit taking. Related bills and draft laws are being reviewed in the Parliament to improve the regulatory framework of the MCO and it is envisaged to introduce a Microfinance Organization (MFO) concept with higher MCR. At the same time, the issue of regulation of MCO/MFO needs to be looked at carefully to ensure efficient functioning of the MFO in future. 34. Kazakhstan’s financial sector does not have adequate support of a developed capital market. Most trade in the Kazakhstan Stock Exchange (KASE) is in repos and foreign exchange, while bond and equity trading is very low. One reason for this is the limited need for domestic borrowing by the GOK. Also, the prevailing regulations constrain the issue of non-government debt instruments to institutional investors (e.g., pension funds). To address these issues, (i) the government bond market initiative should continue in order to generate secondary trading and to facilitate collateral-based operations; and (ii) the non-government bond market should meet demand from pension funds by facilitating private placements and institutional offerings. 35. Key sector policies to enhance competitiveness and diversification: The previous sections looked into some macro issues with important bearings on enhancing the competitiveness and diversification of the Kazakhstan economy. This section now focuses on key sector policies for improved competitiveness in non-extractive sectors. 36. The oil and gas sector: The long-term development strategy of Kazakhstan for the enhancement of competitiveness and diversification of the economy also applies to augmenting the local value-added content in the oil and gas sector. The GOK has adopted two main policies to enhance the value added content of the hydrocarbon industry: (i) to develop the oil refinery and petrochemicals industries; and (ii) to stimulate and/or force the subsurface users to increase local content of their production and exports. There are three oil refineries operated by KazMunaiGaz (KMG), which is now carrying out an investment program for modernization and reconstruction of them. The Kazakh oil processing industry also needs the construction of new refineries in view of the growing domestic demand, particularly for light-end oil products. The GOK has also created an industrial park with all functions of a special economic zone for the development of petrochemicals and pharmaceutical industries. 37. The GOK gives major priority to the promotion of “local content” in its policy for development of the oil and gas industry. It has been taking significant measures to this end since mid-1990s, including the special clauses in: (i) the 1995 Petroleum Law; (ii) the 1996 Law on Subsurface Use; (iii) the 2005 Law Concerning Production Sharing Agreements; (iv) the 2007 Public Procurement Law; (v) the Concept on Further Development of Local Content (September 2009), and (vi) the new Law on Subsurface Use, which is now in Parliament. The new legislative system stimulates subsurface users to find domestic suppliers and contractors and to invest in capacity building and technology transfer. Target for the level of product procurement from Kazakh suppliers is set at 50 percent by 2012 (for services, up to 90 percent). The achievement of these targets, however, will require addressing the following issues: (i) Lack of domestic producers of specialized products needed by subsurface users; (ii) shortage of qualified human resources; (iii) limited contact between domestic producers, subsurface users and state bureaucracy; and (iv) administrative sanctions and termination of contracts due to non-compliance with local content requirements might be counterproductive. 38. The Agriculture sector: Agricultural development is an important pillar of the Government’s diversification policy because the agriculture sector has a significant potential for improved competitiveness and development. Contributing to this potential, among others, is the availability of: (i) abundant agricultural land; (ii) qualified labor force; (iii) low production cost and freight advantage; xiv COUNTRY ECONOMIC WORK - December 2011

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and (iv) the growing government support to the sector. To take advantage of this favorable potential, however, both the government and enterprises should deal with the following factors: (i) impact of harsh climate; (ii) instability of agricultural commodity prices in the world markets; (iii) the overvaluation of the tenge; (iv) less than favorable business and investment environment; (v) relatively high cost of labor; and (vi) limited access to know-how, technology, and finance. 39. Kazakhstan has the greatest potential in the grain, meat and dairy sub-sectors to successfully compete in the world markets. There are three categories of farms in Kazakhstan: private peasant farms, subsidiary household plots, and agricultural enterprises. Peasant farms are mostly smaller than 1,000 hectares and produce almost 35 percent of the country’s grain. Household farms are small plots (on average 0.15 ha.) producing grain, livestock and poultry essentially for family consumption; they produce less than 1 percent of the country’s grain but account for 50 percent of poultry inventory and 85 percent of the cattle. There are about 5,000 agricultural enterprises with an average size of 3,000 hectares each and accounting for about 65 percent of Kazakhstan’s grain production. In recent years, there have been important farming method/technology developments in Kazakhstan contributing to competitiveness in grain production, including the following: (i) The reduced-tillage or moisturesaving technology, which eliminates both moldboard plowing and the fallow year in crop-rotation; (ii) application of mineral fertilizers increased nearly six fold during 1999-2007, due in part to subsidized prices; (iii) increase in the use of certified seed to almost 100 percent of producers. The Government supports this development by paying 40 percent of the research costs for certified planting seeds; (iv) efficiency of Kazakhstan’s farm machinery fleet has been increasing through the replacement of aging machinery; (v) grain area has been expanding in recent years through the recovery of potentially productive but currently idle land. 40. Global demand for meat and meat products has been growing steadily over the past three decades, and emerging economies have been expanding their share of meat exports. Kazakhstan could also join this trend by taking advantage of its regional relations, abundant pastures, low production cost, low labor and land costs, low processing costs, and access to premium markets (e.g., Russia). For this, however, Kazakhstan needs to further upgrade standard of its meat products by promoting compliance with international standards and regulations through producers’ organizations. Despite having very large livestock resources relative to its small population, Kazakhstan is import-dependent for dairy products. Import of dairy products increased over five-folds during 2003-2008. The Kazakhstan dairy industry has relatively low costs of milk production, but its low product quality is the main obstacle for moving up the value chain. This is largely due to the fact that almost 90 percent of total milk production takes place in smallholder farms with limited know-how and inadequate financial resources for yield improvements. To improve milk quality, Kazakhstan should (i) raise the share of pedigree livestock; (ii) increase the inventory of milk animals; (iii) improve the quality of feed; (iv) apply innovative technologies; and (v) promote modern retail chains. The GOK could promote this process by supporting producer organizations and extension services; by facilitating dairy producers’ access to finance; and by improving the dairy sector’s subsidy level, which is currently near zero. 41. Transport infrastructure: Kazakhstan’s large size and geography constitute a disadvantage for competitiveness because they entail high transport costs. This disadvantage could be overcome through a combination of (i) reducing costs of production and marketing; (ii) given the prevailing transport infrastructure, reducing all time and money expenditures for moving a consignment to market (i.e., economic versus physical distance); and (iii) taking advantage of the disadvantageous geography as providing a healthy protection to import substitution industries. Kazakhstan has a significant potential for trade with Europe, China, Middle East and South Asia in addition to current trade with

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Russia. Recognizing this potential, the Central Asia Regional Economic Cooperation (CAREC)1 designated six strategic road corridors in Kazakhstan as the CAREC corridors. This includes the corridor linking Europe and Russia to China through Kazakhstan. Improvement of Kazakhstan’s relations with the neighboring countries and the development of transport corridors connecting them to China, Russia and Europe through Kazakhstan will interact to promote each other. The Government could further support this momentum by (i) promoting preventive rather than reactive maintenance practices; (ii) ensuring better quality of road construction; (iii) strengthening road safety regulations and compliance; (iv) improving conditions of local road networks; (v) ensuring supply of adequate services to transporters along the transit corridors; and (vi) eliminating non-physical barriers in the form of unofficial payments and unscheduled inspections for transit traffic. 42. During the Soviet era, Kazakhstan’s trade flowed along the north-south corridor because of its link with Russia and the rest of Central Asia and these flows were served mainly by rail. Rail freight transport dominated the market in Kazakhstan over the past decade as well, accounting for between 55-60 percent (TBC) of the combined freight turnover of of rail and road. The Kazakhstan State Railways (Temir Zholy- KTZ) was incorporated as a joint stock company in 2002 to develop, operate and maintain railroad transportation in the country. The potential of Kazakhstan to act as a transit in the trade between China and Europe is being enhanced by the ongoing and planned road and rail connections. Current rail transport between China and Europe, going over the Trans-Siberian railway, is lengthy and requires bogie exchanges. A new rail link to China is being developed through a CAREC project from Jetygen to Korgas, which is expected to be operational in 2013. CAREC has also programmed for 2015-2018 three more rail projects in the Eastern region of Kazakhstan, which will provide an additional link to China at Dostyk. On the other hand, there are no direct rail links with Tajikistan and Kyrgyz Republic, and transit traffic with these countries has to be carried by road transport. 43. The telecommunication sector plays a central role in fostering the competitiveness and diversification of Kazakhstan economy. At present, Kazakhstan has a high penetration of fixed line service, with six operators providing service to about 3.8 million subscribers. 90 percent of the fixed line market is controlled by the state-owned KazakhTelecom. The number of mobile services exceeded fixed-lines in October 2004, and mobile penetration reached 100 percent by early 2010. Another healthy development in the telecommunication sector is the rapid growth of internet users, with the increasing share of the high speed internet and broadband subscribers. The number of broadband users reached 76 percent by end-2009. Behind the above development, there has been a right policy-mix pursued by the GOK, which included the following: (i) market liberalization to promote greater access by additional fixed and mobile operators; (ii) tariff rebalancing to encourage investment for broad-based development of the sector; (iii) facilitate connectivity among domestic and international operators; (iv) the establishment of an independent regulator and preparing KazakhTelecom for a liberalized market; and (v)aiming at universal access through subsidizing rural consumers and expansion of the network toward peripheral areas. 44. The power sector: The availability of reliable and cost-effective electricity supply is fundamental to Kazakhstan’s medium- to long-term development strategy focusing on competitiveness and diversification of its economy. Kazakhstan has sufficient generation capacity to meet domestic power demand, although the supply-demand situation has become rather tight in recent years. There are regional imbalances in supply and demand of power as two third of supply is generated in the northern part of the country. Hence, power shortages occur in the booming areas of the southern part of the country. All transmission assets (lines and substations) are owned and operated by the State-owned 1

CAREC countries include Afghanistan, Azerbaijan, PR of China, Kazakhstan, Kyrgyz Republic, Mongolia, Tajikistan and Uzbekistan.

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Kazakhstan Electricity Grid Operating Company (KEGOC). The Regional Distribution Companies (REKs) own smaller sized generation units, transmission lines at 110 kV, and electricity and heat distribution networks. Kazakhstan ranks one of the best in power sector reforms among the FSU countries. The main focus of reforms, which started in 1996, has been to introduce private sector participation and a competitive power market. The large national level electricity generation plants were mostly privatized to foreign and local strategic investors, some on concession basis. Most of the REKs have also been privatized, some under concession contracts. The wholesale of the electricity market is fully liberalized and operates on the basis of bilateral contracts under strong competition and, hence, the Government established a spot market (KOREM) with more than 100 participants. The key issues now facing the power sector in Kazakhstan include: (i) outdated plants and equipment; (ii) system designs aimed at meeting regional rather than national power needs; (iii) rising costs due to high capital investment and inefficiency in system operations; (iv) partly as a result of these, growing regional imbalances in supply of and demand for power. Recognizing these issues in its sector development program for 2010-2014, the Government now focuses on the expansion of generation capacity, modernization of existing capacity, and extension of related transmission network. 45. Innovation and technology commercialization: To become a competitive and diversified economy, Kazakhstan needs to promote upgrading of technologies used by the non-oil sectors. This in turn requires establishing close links between the domestic enterprise sector and the domestic research and development (R&D) institutions; and between the both and their foreign counterparts. On the other hand, the R&D system Kazakhstan inherited was designed to work within a command economy to serve national defense and centrally planned rapid industrialization. Hence, it cannot respond to the requirements of a modern and high-tech economy with necessary flexibility and innovativeness. To reform its R&D sector, the GOK has to address a number of challenges, including the following: (i) The average age of both scientists and equipment in Kazakh research institutes is close to “retirement”; (ii) the quality of research equipment is generally very poor; (iii) R&D spending is small relative to other countries with similar GDP per capita; (iv) Kazakhstan ranks low also in the private sector’s share of total R&D spending; (v) the ratio of researchers per million of population is very low compared to most of competitive economies; (vi) research institutes and universities do not collaborate with each other and with domestic and global markets. 46. With the “Industrial and Innovation Development Strategy for 2003-2015” and the “State Program for Accelerated Industrial-Innovative Development of Kazakhstan (SPAIID) for 2010-2014”, the GOK has been promoting involvement of R&D institutions in non-oil sectors. The Government has also established several institutions to help implement these programs, including: the National Innovation Fund, National Investment Fund, the Center for Marketing and Analytical Research, Center for Engineering and Technology Transfer, Development Bank of Kazakhstan; the Science Fund, and Samruk-Kazyna. An encouraging development in the area of innovation and technology commercialization is taking place in the information technology (IT) sector. The GOK has made a strong commitment to education development in IT. Also a high level of broadband penetration and mobile connection as compared to its neighbors make Kazakhstan a potential market for IT outsourcing in Central Asia. However, Kazakh innovation policy is still preoccupied with scientific, technological and training institutions that undertake technological activities on behalf of industrial firms. Policy measures designed to strengthen R&D and technological activities of firms themselves are virtually non-existent. 47. The Education Sector: Investment in human capital is designated as one of the five pillars in the national development plan Kazakhstan-20. Similarly, one of the objectives of the “Industrial and Innovation Development Strategy for 2003-2015” is to triple labor productivity from 2000-2015. The Government recognizes that a basic driver of the country’s innovation and increased productivity is xvii

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human capital, which could be augmented through modernizing the education system, including the technical and vocational education (TVE) system. According to a recent labor market survey, 64 percent of employers reported an insufficient level of education and lack of skills as one of the principal hindrances for business development. On the other hand, two-thirds of the surveyed firms reported vacancies, with greatest demand for skilled workers (44 percent of firms) and technicians (40 percent) compared with for accountants (9 percent) and engineers (5 percent). This indicates that the present TVE system does not produce sufficient graduates with the competencies required by the market. To reform the TVE system in Kazakhstan, it would be necessary: (i) to enhance the economic relevance of TVE to requirements of the labor market; (ii) to establish a participatory model of TVE governance with the inclusion of all important stakeholders; (iii) to improve the quality of both training of trainees and teaching materials and equipment; and (iv) to increase budgetary allocations to TVE and to provide incentives to the business sector for greater investment in and donations to the TVE system. 48. The Health Sector: Kazakhstan inherited from the Soviet Union a health system that was stateowned, centrally planned, and free and accessible to everyone. As a result of the loss of budgetary transfers from Moscow, and sharply declining GDP and public revenues, the health care system remained underfunded during the 1990s. All health-related indicators as well as the infrastructure and quality of health care services deteriorated over the 1990s. However, with the rapid growth of the economy and public revenues, per capita public expenditure on health doubled from 2000-2005 and has since been improving. Despite such increased health spending, Kazakhstan has still to make significant efforts to achieve its 2015 MDGs for maternal mortality ratio, infant mortality and underfive mortality rates, and combating HIV/AIDS and tuberculosis. 49. The GOK adopted an ambitious State Program for Health Care Reform and Development for 20052010; whose priorities included (i) modernization of medical education and training; (ii) focusing more on prevention and health education; and (ii) strengthening primary care (PC) services. An important element of PC reforms is to develop the specialty of family medicine by retraining district therapists and providing them with continued education to become family doctors. This would expand clinical services at the primary level particularly in the areas of maternal and child health, reproductive health and cardiovascular screening. PC premises, equipment and transport facilities, especially in rural areas, are also being improved. Nevertheless, PC in Kazakhstan is still in a transition state. The GOK is now giving a new impetus to its ongoing health care reform program by adopting a health care program for 2009-2013. This new program aims at improving collaboration on public health issues among related government agencies; strengthening preventive care and sanitary services; improving medical and pharmaceutical education and introducing innovative technologies; and increasing accessibility and quality of pharmaceuticals for the population. 50. Environmental issues: Kazakhstan’s independence from the Soviet Union came together with severe environmental damages that had been caused by the irresponsible use of natural resources by the Soviet regime. These cases include (i) the desertification in the Aral Sea region caused by the irrigation schemes and the heavy use of agricultural chemicals for cotton farming; (ii) exposing of nearly one million people to radiation caused by the nuclear testing; and (iii) the heavy pollution of air, soil and rivers by uncontrolled release of industrial and agricultural effluents. Particularly the first two cases are considered as the worst (and best) examples of how severely the ecological mismanagement can harm both the environment and human lives. With their exceptionally extensive negative impacts on natural and human resources, addressing these environmental issues poses a major challenge to the GOK in its endeavor to enhance competitiveness and diversification of the economy.

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51. The GOK has adopted a number of environmental protection programs and action plans, including: National Environmental Action Plan (1998), National Biodiversity Strategy and Action Plan (1999), Conception of Environmental Safety for 2004-2015, Ecology Code of Kazakhstan (2007), and Conception of Sustainable Development for 2007-2024. To address the water management problem of the Syr Darya, Kazakhstan and other basin states established in 1998 the Framework Agreement on the Use of Water and Energy Resources of the Syr Darya Basin. The GOK also established, with support from the USA and the EU, an independent, nonprofit, and nonpolitical Regional Environmental Center (REC) in Almaty in 2001. The REC is expected to promote public awareness of and civil society participation in environmental decision-making among the Central Asian countries. The reversal of environmental disasters that Kazakhstan has faced will take decades, probably even a century if right policies are implemented effectively. The above plans, strategies, and conceptions should be deemed successful if they can first arrest the deterioration of and then set out improvements in environmental conditions of Kazakhstan. GROWTH PROSPECTS OVER 2011-2015 52. This report has repeated time and again significant achievements of the Kazakhstan economy over the past decade. But there are two objectives with crucial importance for the long-term development of the country, namely, competitiveness and diversification of the economy, toward which no meaningful progress has yet been made. This is recognized by the GOK, with a new resolve to progress towards them, in the SPAIID. The growth prospects of the SPAIID are reviewed in this report with some comments based on the analysis of the economic performance over the past decade made in the previous chapters. This review encounters an interesting handicap that neither SPAIID nor its predecessors has a macroeconomic framework to ensure consistency of various sectoral and macro targets with each other and with resource availability. 53. Target for GDP growth: The SPAIID envisages a 7 percent average annual rate of growth of GDP over 2008-2014. Considering the low growth rate in 2009 (1.2 percent), Kazakhstan should attain 8.5 percent annual growth of GDP during 2011-2014 in order to fulfill the Program target. Given the current forecasts for world oil prices over the medium-term, Kazakhstan could attain the Program target if its oil and gas condensate output increases at the same average rate (i.e., 6 percent p.a.) obtained during 2006-2010. This should be attainable particularly if the Kashagan oil field is opened in 2012, or the latest 2013, as scheduled. 54. Growth target for agriculture: Although agriculture’s share in GDP is too small (about 5 percent in 2008-10) to make any significant difference in the growth rate of GDP, its growth prospect is still important because of its relatively large share in employment (almost 30 percent), its linkage to the food processing industry, and its potential role in the diversification of the Kazakh economy. The SPAIID set a target for labor productivity in agriculture to double its 2008 level in US dollar terms by 2014. This seems, however, too far beyond what could be achievable. Considering that the size of agricultural workforce is likely to remain more or less the same and that the cumulative dollar inflation would probably be about 20-25 percent over the period, the SPAIID target for agricultural labor productivity implies about 9.5 percent annual growth in agricultural GDP during 2011-2014. This is not plausible. A more plausible, and still optimistic, assumption would be an annual growth rate between 2-3 percent compared to 2 percent attained in 2006-2010. 55. Target for manufacturing GDP: Another target of the SPAIID in line with the Government’s economic diversification strategy is the increase in the share of manufacturing in GDP from 11.8 percent in 2008 (cf., 12.2 percent in 2003-07) to 12.5 percent in 2014. For this, manufacturing GDP should grow at a slightly higher pace than overall GDP. The SPAIID envisages labor productivity in xix

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manufacturing to grow at the same annual rate (7 percent) as overall GDP. However, employment in the manufacturing sector has been growing on average about 1.5 percent a year since 2005, which can be expected to continue in 2011-14 as well. Both productivity and employment growth in manufacturing as envisaged in the SPAIID seems to be plausible considering the past performance of the sector and the Government’s drive for State-led industrialization. 56. The inflation target: The SPAIID does not have a quantified inflation target. This shows that its other targets have not been checked for consistency with its objective of “creating a favorable macroeconomic environment”. Nevertheless, it can be assumed that the SPAIID agrees with the Kazakhstan-20’s target that inflation will be between 5-8 percent by 2020. This is within the range of annual inflation rates attained during 2000-2010, if the financial crisis years of 2007 and 2008 are excluded. The IMF forecasts a steady decline in inflation from 9.2 percent in 2012 to 6.1 percent in 2015. The budgetary and monetary accounts underlying the Fund’s inflation trajectory is based on a lower growth rate for oil and gas output and for GDP. It is considered as a major concern in the GOK’s management of the economy that its development programs, including SPAIID, do not come with appropriate macroeconomic consistency framework. 57. The unemployment rate: The SPAIID does not specify a target for reducing the unemployment rate. But Kazakhstan-20 envisages the unemployment rate to be 5 percent or less by 2020. Kazakhstan was already very close to the 2020 target by 2010 when the unemployment rate was 5.8 percent. With the Government being directly involved in lowering the unemployment rate through specific public works programs and other incentives for labor-intensive production, the unemployment rate will continue dropping further over 2011-2014. The main issue in this context is rather the composition of both employment and unemployment. The enhancement of competitiveness and diversification of the economy will require shifting of resources towards non-extractive sectorsThere is an increased demand for skilled workforce among business community and private sector in Kazakhstan and education and training system should meet this increased demand in coming years. Thus the Government policy of emphasizing TVE in recent years can start easing the education mismatch in the labor market through 2015. 58. Underlying philosophy of the SPAIID strategy: Starting with Kazakhstan-30 and maintained with the subsequent programs, including the SPAIID, the GOK has been pursuing a State-led “forced” industrialization strategy. The SPAIID clearly states that this strategy had to be adopted because of the failures of the market and the business sector to satisfy the State priorities. This was the basis of the development strategies of underdeveloped countries in the 1960s, 1970s, even 1980s. They were criticized by the international development institutions mainly for leading to the creation of inefficient industries which are unsustainable in the long-term; and hence, causing waste of both domestic and international resources with adverse effects on the suppliers of foreign aid and credits. Those same international agencies are cooperating today closely with the GOK in the implementation of its stateled development strategy. What is the difference between the past and present practices of this strategy by underdeveloped countries of the 1960s and today’s Kazakhstan. There is a major difference: Kazakhstan can afford to waste its own and borrowed resources without harming the global economy. This means that the GOK has to rely on its own sound assessment of the resource cost of the “forced” industrialization strategy. The basis of this assessment has to be the realization that the Kazakh economy is faced with a ”structural overvaluation of the tenge” problem and that the policy of “forced industrialization” is tantamount to pursuing a mixed policy of the multiple exchange rates and state-capitalism (étatism).

xx COUNTRY ECONOMIC WORK - December 2011

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SUMMARY OF DIAGNOSTICS AND RECOMMENDATIONS DIAGNOSTICS

RECOMMENDATIONS

1. Improving Macroeconomic Management Too narrow-based programs without comprehensive macroeconomic framework

Introduce Medium Term Macroeconomic Framework (MTFF) and Medium Term Expenditures Framework (MTEF) to ensure favorable macroeconomic environment and consistency with medium to long term development goals.

Risks related with “Resource curse”

Gradually reduce the annual amount of oil revenues directly transferred from NFRK to the Budget; In order to gradually minimize the injection of oil&-gas related foreign exchange into the local currency market, use the oil funds directly from bank accounts abroad for the financing of hightechnology capital goods imports, including for the education and health sectors, which would not create competition with local producers; Maintain the nominal exchange rate of the Tenge at a level that would result in a small, steady annual decline in the REER; NBK should introduce inflation target high enough to accommodate relative price changes in the goods and factor markets, thus contributing to diversification of the economy.

Risk of creation of inefficient and unsustainable industries due to State-led “forced” industrialization causing waste of financial resources

Involve active participation of the private sector in both industrialization and innovation processes through creating market incentives and easing administrative/bureaucratic burdens; Tackle overvaluation of Tenge (appreciation of REER) to allow non-extractive companies in tradable sectors to enhance their competitiveness in both domestic and foreign markets.

2. Enhancing Efficiency of Markets (Labor and Financial) Increased demand for skilled workforce among business community and private sector in Kazakhstan

Reduce education-job market mismatch through improving technical and vocation education system, including the following: (i) to enhance the economic relevance of TVE to requirements of the labor market; (ii) to establish a participatory model of TVE governance with the inclusion of all important stakeholders; (iii) to improve the quality of both training of trainees and teaching materials and equipment; and (iv) to increase budgetary allocations to TVE and to provide incentives to the business sector for greater xxi

xxi


investment in and donations to the TVE system; Vulnerability of the financial sector

Shift from excessive wholesale funding to increased domestic funding by expanding small deposit base of local commercial banks; Diversification of projects portfolios/pipelines through incentivizing banks to lend more nonextractive tradable sectors; Improvement of micro-financing – either MCOs should be encouraged by the monetary authorities to merge and consolidate to meet the minimum capital requirements for deposit taking, or a separate window should be created with lower minimum capital requirements that strong creditonly MFIs can meet for engaging in deposit taking; To develop capital market, the following actions are needed: (i) the government bond market initiative should be continued to generate secondary trading and to facilitate collateral-based operations; and (ii) the non-government bond market should meet the demand from pension funds by facilitating private placements and institutional offerings.

3. Sector Policies to enhance competitiveness and diversification Further development of local content in Oil & Gas sector

Support domestic suppliers producing specialized products needed by subsurface users; Increase technology capacity of domestic suppliers; Improve mechanism of interaction between domestic producers, subsurface users and state bureaucracy; Tackle shortage of qualified human resources and ensure proper technology transfer and capacity building.

Enhancing competitiveness of the Agriculture sector

Use best practices of improved farming methods, technology, machinery and marketing to enhance productivity of grain production and assist small enterprises to benefit at affordable prices such practices; Continue to support peasant farms through subsidized prices of inputs and easy access to finance; Continue to increase application of mineral fertilizers, replace aging grain harvesters and tractors and expand area sown under grain through recovery of potentially productive but idle land; Further upgrade standard of local meat products by promoting compliance with international standards and regulations through producers` organizations; Increase competitiveness of dairy industry through (i) raising the share of pedigree livestock, (ii) increasing the inventory of milk animals, (iii) improving the quality of feed, (iv) applying innovative technologies, (v) promoting modern xxii COUNTRY ECONOMIC WORK - December 2011

xxii

retail chains, (vi) increasing dairy producers` access to finance schemes and (vii) improving the dairy sector`s subsidy level. Further develop transport and storage infrastructure to better connect the north with the south and reduce regional imbalances in satisfying growing demand of the north in fruits and vegetables which are mainly produced in the southern regions of the country. Improving regional trade through modernized Transport infrastructure

Improve organization structure and institutional capacity; Promote preventive rather than reactive maintenance practices; Ensure better quality of road construction; Strengthen road safety regulations and compliance; Improve conditions of local road networks; Ensure supply of adequate services to transporters along the transit corridors; Eliminate non-physical barriers in the form of unofficial payments and unscheduled inspections for transit traffic.

Modernizing the Power sector

Modernize outdated plant and equipment used for electricity generation and distribution; Accelerate system redesigning to meet national power needs (north-south) rather than regional needs; Minimize high distribution losses to reduce cost of electricity for final beneficiaries; Reduce growing regional imbalances in supply of and demand for power.

Promoting Innovation and Technologies used by non-extractive sector

Continue to replace both old cadres in Kazakh research institutes by younger and energetic researchers, as well as re-equip them with modern laboratory equipment; Increase the share of the R&D spending by the Government to catch those countries with similar GDP per capita; Adopt necessary policy measures designed to strengthen technological and innovative activities of firms (enterprise-based innovation), while continuing enhancing linkages between R&D and enterprises through focus on technoparks; Improve collaboration mechanisms between institutes and universities, local and domestic markets, as well as with private enterprises.

Developing Social Sectors (Education, Health and Environment)

Education: Improve economic relevance of Technical and Vocational Education with requirements of the labor market; Establish a participatory and flexible model of TVE governance with inclusion of all stakeholders (especially employers); Improve the quality of both training (including that xxiii

xxiii


of teaching staff) and teaching materials and equipment; Increase budgetary allocations to TVE Provide incentives to the business sector for greater investment in and donations to the TVE system. Health: Improve provision of quality primary care services through tackling transportation difficulties and shortage of physicians in widely dispersed villages and towns; Continue to actively support capacity building initiatives to ensure efficient and proper implementation of a 5-year health care program (2009-13) by regional and district authorities. Environment: Continue to address (i) the desertification in the Aral Sea region; (ii) mitigating consequences of the radiation caused by the nuclear testing during the Soviet period; and (iii) the heavy pollution of air, soil and rivers by uncontrolled release of industrial and agricultural effluents.

xxiv COUNTRY ECONOMIC WORK - December 2011

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I.

INTRODUCTION

1. The Islamic Development Bank (IDB) is initiating new economic reporting on its member countries with the title of “Country Economic Work” (CEW). The Kazakhstan CEW is the first report in this series, and thus serves as a pilot for CEWs that will be prepared for other countries. Being the first CEW on Kazakhstan, its coverage is comprehensive, while also focusing on the country’s key development issues, namely, enhancement of the competitiveness and diversification of its economy over the medium- to long-term. The CEW is intended to serve as a main source of reference in the preparation of the IDB’s Member Country Partnership Strategy (MCPS) and project appraisal reports. 2. The CEW on Kazakhstan is arranged into six chapters. After this Introduction, Chapter II on “Country Context” provides brief information on the country’s land, people and political system. Recent economic and social developments are reviewed in Chapter III, first, with an overview of economic collapse and recovery in the 1990s and then an analysis of achievements and structural changes in production, saving-investment, employment, incomes, poverty reduction and social developments over 2000-2010. Chapter IV presents, first, the main objectives of the Government’s long-term development objectives and strategies and, then, an analysis and assessment of the macroeconomic management, fiscal policy, monetary and financial policy, and international trade relations over the past decade vis-à-vis the objectives and strategies. Chapters III and IV identify both achievements and structural vulnerabilities of the economy as well as the challenges facing the Government at the macro- and sector-level, particularly with respect to the enhancement of competitiveness and diversification of the economy. These issues are taken up by Chapter V on “Development Challenges: Competitiveness and Diversification” at two levels: First, at the macro-level, effects on competitiveness and diversification of the macroeconomic policy, particularly the exchange rate policy; the present state of the business and investment climate; and efficiency of the goods, labor and financial markets are discussed. Second, sectors of key importance for the enhancement of competitiveness and diversification of the Kazakh economy are each reviewed with particular emphasis on the structural issues which constitute a hindrance or opportunity to the sector’s development. Finally, Chapter VI presents a brief assessment of Kazakhstan’s growth prospects over 2011-2014 in terms of the key targets of the “State Program for Accelerated IndustrialInnovative Development for 2010-2014”.

1

1


II.

COUNTRY CONTEXT

Geography and Land 3. The Republic of Kazakhstan, with a territory of 2.7 million square kilometer, is the ninth largest country in the world. It is also the world’s largest landlocked country, surrounded by Russia (6,846 km), Uzbekistan (2,203 km), China (1,553 km), Kyrgyzstan (1,051 km), Turkmenistan (379 km) and the Caspian Sea. The vast terrain of Kazakhstan is characterized by its extensive steppes with large areas of grasslands and sandy regions occupying one-third of the country. Kazakhstan’s vast terrain offers immense potential for arable farming and livestock husbandry, and also contains rich extensive reserves of crude oil, gas and various minerals. Kazakhstan has the largest recoverable oil reserves in the Caspian region, significant gas reserves, and extensive resources of uranium, chromium, lead, zinc, manganese, copper, coal, iron and gold. The economic future of the country necessarily depends on the success of the Government of Kazakhstan (GOK) in designing and pursuing right development strategies and policies to realize the great potential offered by the country’s rich natural resources. People and Demographic Structure 4. According to the official estimates, Kazakhstan’s population was 16.5 million in February 2011, yielding a population density of 6 people per square kilometer. 54 percent of the population lives in urban areas. Male population accounts for 48.3 percent of the total population. A population decline that started after 1989, particularly due to the emigration of Russians and Volga Germans, came to halt from 2000 with increased birth rates in the Kazakh population and immigration of ethnic Kazakhs from China, Mongolia and Russia. Table 1: Population Indicators 1990 1995 2000 2005 2009 2010 Total population (mil.) 16.4 15.8 14.8 15.1 15.7 16.0 Population density 6.0 6.0 5.0 6.0 6.0 6.1 Population growth (%) -1.6 -2.0 -0.3 0.9 1.4 1.3 Urban population (%) 57.0 55.7 56.3 57.1 53.5 Population aged 0-14 (mil.) 5.2 4.8 4.1 3.7 3.7 Female population (%) 52.0 52.0 52.0 51.9 51.9 Life expectancy at birth 68.8 64.6 65.8 65.9 68.6 Women (%) 73.4 70.4 71.6 71.7 73.6 Men (%) 63.9 59.3 60.2 60.4 63.6

Source: The Agency of Statistics of the Republic of Kazakhstan (RK)

5. Kazakhstan has ethnically and culturally a highly diverse population. Kazakhs are the largest group (63.1 percent of the population), followed by Russians (23.7 percent), Uzbeks (2.8 percent), Ukrainians (2.1 percent), Uighurs (1.4 percent), Tatars (1.3 percent), and others (5.6 percent). The Kazakh language is the State language, though Russian is also used as an official language since it is spoken by all Kazakhstan citizens. Freedom of religion is fully respected by the State and people. About 70 percent of the population is 2


2

Muslim and 26.6 percent Christian, and the rest belongs to other faiths including Buddhism and Judaism. Government and Political System 6. Following the collapse of the Soviet Union, Kazakhstan declared its independence in December 1991. Administratively, the country is organized into 14 provinces. In addition, the cities of Almaty and Astana have special status of “State importance” and are not attached to any province, and the city of Baikonur is currently being rented to Russia until 2050 because of Baikonur Cosmodrome. The capital was moved in 1997 from Almaty, the country’s largest city, to Astana, which is being developed with enormous investments as a symbol of modern Kazakhstan. 7. Kazakhstan is a presidential republic and has a bicameral Parliament composed of the Majilis (the lower house) and the Senate (upper house). The Cabinet of Ministers is chaired by the prime minister, who serves as the head of government. There are three deputy prime ministers and 16 ministers in the Cabinet. The governors of Kazakhstan's 14 provinces are appointed by the president. The incumbent president Nursultan Nazarbayev came to power in 1989 as the head of the Communist Party of Kazakhstan and was elected in 1991 as the first President of the new Republic. He was re-elected in 1998, 2005 and 2011, all in landslide victories. III.

RECENT ECONOMIC AND SOCIAL DEVELOPMENTS

Economic Background 8. After gaining independence in 1991, Kazakhstan experienced severe economic contraction as a result of the cessation of budgetary transfers from Moscow and the collapse of demand from the Former Soviet Union (FSU) countries for its traditional exports, including heavy industry products. This was reflected in about 40 percent fall in real GDP over the first half of the 1990s. This dramatic decline in GDP was accompanied by a complete loss of control over the payment mechanisms in the economy, resulting in hyperinflation of prices as high as 2,000 percent in 1993 and above 1,000 percent in 1994. 9. With the stabilization and liberalization policies adopted from the mid-1990s, the government succeeded in stabilizing the economy. The output performance turned upward from 1996, and inflation steadily declined to single digits from 1998. Liberalization of most prices (including interest rates and foreign exchange rates) and trade regime (through elimination of quantitative restrictions and rationalization of import tariffs) has largely been completed in the second half of the 1990s. The Government has made significant progress by the end of the first decade of transition in adopting deregulation policies and a new regulatory framework for the normal operation of a market economy. On the other hand, only limited progress has been made in the privatization of large enterprises, even though most of small and medium-sized enterprises have been privatized. 3

3


Reforms for opening up and deepening the financial sector also progressed to an advance stage of implementation. 10. The stabilization effort in the 1990s has been successful mainly through tight monetary policy, even though the underlying fiscal conditions were not conducive to financial stability. Public sector borrowing requirements were systematically high as a result of the persistent public sector deficits between 4 percent and 9 percent of GDP since independence. Privatization proceeds have also been used to finance the public deficit, but they have met only half of the public sector borrowing requirements in the last few years of the 1990s. Public sector debt ratio thus reached its safe limits (30 percent of GDP) by 2000. Since the mid-1990s, the GOK has taken measures to strengthen fiscal structure and management and thus reduced government spending from around 35 percent of GDP at the time of independence to about 22 percent by the end of the decade. In 1998, a rationalization of public administration was started to reduce the number of public employees and to prepare the ground for a more comprehensive public service reform. 11. During this transition and Table 2: Sectoral structure of GDP (percent) stabilization process, Kazakhstan's 1993 1995 1998 2000 2005 2010 economy underwent a major Agriculture 16.3 12.3 8.6 8.1 6.4 4.4 structural change. The agriculture Industry 28.6 23.5 24.4 32.6 29.8 32.8 and manufacturing sectors collapsed Construction 8.2 6.5 4.9 5.2 7.8 7.7 both in absolute and relative terms, Services 40.8 53.3 56.1 47.5 49.8 49.7 while the mining/extractive sector Gross value added 93.9 95.6 94.0 93.4 93.8 94.6 (mainly oil and gas) took a dominant Net taxes on products 6.1 4.4 6.0 6.6 6.2 5.4 place in the industrial sector. While GDP 100.0 100.0 100.0 100.0 100.0 100.0 agriculture’s share of GDP declined Source: The Agency of Statistics of the RK from about 30 percent in 1991 to 8.6 percent in 2000, the share of industry (including energy and mining) increased from about 20 percent to almost 35 percent over the same period. This was mainly reflecting both the sharp decline (e.g. about 24 percent both in 1991 and 1995) in agricultural production, as large-scale state farms (e.g., kolhozes) were disintegrating, and the rapidly expanding production in petroleum, gas, mining and the related sub-sectors. This change in the production sectors, together with the liberalization of markets and privatization of state farms and small and medium-sized enterprises, has led to proliferation and diversification of business services and supporting activities. The share of the services sector in GDP thus went up from 43.3 percent in 1991 to 47.5 percent by 2000. On the other hand, the services sector (including the informal economy), which was of tertiary importance in the Soviet period, has expanded to become the largest source of employment and income for the population. Structural and stabilization policies have protected the social sectors in a relative sense. In fact, notwithstanding the streamlining of public expenditures in the second half of the 1990s, Kazakhstan still allocated about 60 percent of total expenditures to the social sectors (education, health, and social security), of total public compared to 46 percent and 54 percent in middle- and high-income countries, respectively.

4


4

12. Kazakhstan’s economic recovery in the second half of the 1990s stalled due to slumping oil prices, the Russian financial crisis, and bad harvests at the end of 1998 and early 1999. The combinations of these events had a major impact on the country's balance of payments, resulting in a 2 percent decline in real GDP, fiscal difficulties, and an increase in external debt to 37.5 percent of GDP in 1999 from 19 percent in 1997. The recession was rather short-lived, thanks to a quick recovery of world oil prices in 1999, combined with bumper grain harvest and a well-timed devaluation of the tenge. Production 13. Kazakhstan’s economy entered its second decade of transition in 2000 following a strong recovery from the Russian financial crisis and weak world commodity markets in 1998-99. The economy has since showed robust performance through mid-year 2007, when a global financial crises hard hit the world markets and economies, including Kazakhstan. During this period, Kazakhstan’s GDP has steadily grown at an annual rate close to 10 percent in real terms (except in 2001 and 2006, when the rates were 13.5 percent and 10.7 percent, respectively). Growth decelerated to 3.2 percent in 2008 and further to 1.2 percent in 2009. However, the economy recorded a respectable growth of 7 percent in 2010 (Figure 1 and Table 3). Figure 1: Growth rates for sectoral GDP 2000-10 (percent)

percent 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 -5.0

2000

2001

2002

2003

Source: Statistical Annex Table 3

index 500.0

2004

2005

2006

2007

2008

2009

2010 year

Agriculture

GDP

Construction

Service activities

Industry, including, energy

Figure 2: Sectoral GDP indexes 2000-10 (1999=100.0)

450.0 400.0 350.0 300.0 250.0 200.0 150.0 100.0 2000 2001 Source: Statistical Annex Table 3

2002

2003

Agriculture

2004

2005

GDP

2006

2007

Industry, including, energy

2008 Construction

2009

2010 year

Service activities

14. Production indexes in all sectors of the economy have been on a rising trend since 2000, but increases in some lines of production have been outpacing that of others, whose shares of total production have therefore been diminishing. While total agricultural value added has recorded a 50 percent increase during ten years since 2000, its share of GDP has gradually declined from 8.1 percent to 4.4 percent over the same period (Figure 2 and 5

5


Annex Table ). Similarly, the manufacturing output index has doubled during 2000-10, but its share in total value added has declined from 16.5 percent to 11.4 percent in the same period. Behind these changes were great expansion in oil, gas and metal-related production of the mining sector and its growing share in GDP, which has been the driving force of development of the economy during transition. Rapidly growing mining sector output and resulting injection of purchasing power into the economy were naturally promoting demand for supply of all sorts of services, including transportation and travel, communications, health, education, financial and insurance services, etc. This has resulted in the share of services in GDP gradually edging up from 47.5 percent in 2000 toward 50 percent by 2010. Figure 3: Agriculture production indicators (index 1990-1992=100.0)

percent 140 110 80

50 20 1993

grain Source: Statistical Annex Table 9

Grain area

2000

Grain productivity

2005 cattle

2010 Sheep & goat year

15. The agricultural sector in Kazakhstan is characterized by sharp ups-and-downs in its annual production levels as depicted by Figure 3. Unfavorable weather, and resulting poor harvest, was behind the decline in agricultural output in 2000, 2004, 2008 and 2010. On the other hand, favorable weather and ensuing bumper grain harvest led to 17 percent (2001) and 13 percent (2009) increases in agricultural output (Annex Table 3). This is mainly due to the fact that the production of cereals, which accounts for about a third of agricultural output, takes place mostly in the north through rain-fed farming. Since wheat represents about 60 percent of all agricultural exports (6.3 percent of non-oil exports in 2008) of Kazakhstan, fluctuations in its production also significantly affects export earnings of the country. Area sown under grain crops has been expanded by more than 40 percent during 2000-10 while grain production increased about 17 percent over the same period 2. Among crops other than grain, cotton has special importance (despite having only a 3 percent share in total agricultural output) because it accounts about 30 percent of total agricultural exports. Cotton production has, however, been declining as the area sown under cotton has been shrinking rapidly since 2005 (Box 4 and Annex Table 10). The livestock sector has been steadily recovering since 2000 following great livestock losses suffered during the 1990s, though the cattle stock in 2010 was still at two-thirds and sheep and goats at half of their respective levels in 1990-91 (Annex Table 9). 16. The industrial sector, comprising the mining, manufacturing, and electricity, gas and water

subsectors, accounted for about 30 percent of GDP in 2008-10. The industrial sector started the second decade of transition with a strong performance in production, which grew in volume terms by 15.5 percent in 2000 and 13.8 percent in 2001. Despite a gradual drop in

2

17 percent is the growth of the 2008-10 grain production on the 1999-2001 production.

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6

growth rates over the next three years, on average industrial output grew by about 12 percent per annum during 2000-04. This momentum, however, could not be maintained during 2005-2009, when the average annual growth rate was only 4.5 percent. This picture was shared by all the subsectors of industry (Table 3). Underlying the good performance in the first five years was a combination of favorable world prices for oil, gas and metals; capacity increases in oil and gas production; large public investments in the sector; and strong demand from the neighboring countries for Kazakhstan’s machinery, textiles, leather and chemical products. There was a significant slow down, on the other hand, in all these factors in the next five years, particularly during the global financial crises from mid-2007 through mid-2009. In addition, the growth of manufacturing production is being hindered since 2005 by transportation bottlenecks, capacity constraints, and the real appreciation of the national currency (tenge), which are each experienced to some degree by different subsectors. Table 3: Growth of industrial production by subsector (at constant prices & in percent) 2000 2001 2002 2003 Total industry 15.5 13.5 10.4 9.1 Mining and quarrying 21.0 14.0 15.9 10.2 Manufacturing 17.4 15.0 8.1 7.9 Electricity, gas & water 5.8 8.6 1.9 10.3 Source: The Agency of Statistics of the RK

2004 10.5 13.4 9.2 2.0

2005 4.8 2.7 7.6 4.4

2006 7.3 7.0 8.1 2.8

2007 5.0 2.6 7.8 9.2

2008 2.0 5.5 -2.9 5.4

2009 3.3 7.2 -2.9

2010 9.2 5.3 18.4

17. The services sector was the most dynamic component of Kazakhstan’s non-oil economy over the past decade. Three factors were behind this performance: The first is the generally observed development of trade and personal/household services that usually accompany transition from the centrally planned to the market-based economy. The second is the important role that transport and communication play in Kazakhstan owing to the very large size of the country and its location on cross-roads from Europe and Russia to the East and South Asia. In telecommunication, fixed-lined service is provided to almost 4 million subscribers and mobile line penetration reached 100 percent in 2010. The third is rapid development of the real estate services as a result of the population’s newly developing interest in house ownership, the public sector’ housing and trade and business center development schemes, and the banking sector’s rapidly growing investment in the real estate sector. Social and health services, education, and public administration have also grown, which was largely due to the hiring policies of the Government. Nevertheless, they could not keep pace with GDP growth fueled by oil and gas windfall, and their shares in GDP have declined over 2000-2010 (Annex Table 2).

7

7


Box 1 –Labour productivity and competitiveness stagnation Kazakhstan is currently faced with the double challenges of a downwards-trending labour productivity (economy-wide) and stagnation in its competitiveness as measured by the Global competitiveness index which has been stuck at 4.1 for the past three years. Fig 8 - Labour productivity

GCI Index for Kazakhstan (2006-2010)

140

4.6 4.4 4.2 4 3.8 3.6 3.4 3.2 3

120

100

80

60

2006

2007

2008

2009

2010

Tajikistan

Russia

Kyrgyz Republic

Kazakhstan

40

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Economy level

Agriculture, hunting, forestry

Industry

Financial activity

Government administration

Education

Linear (Economy level)

Linear (Economy level)

The main drivers of competitiveness in the economy are weak. Labour productivity in agriculture is now heading upwards after an erratic behavior in the 1990s, but that in the financial sectors suffered significantly in the crises and that of eduction, which is critical for enhancing competitiveness, is slightly below its early 1990 levels. It is therefore not surprising that industry innovation performance, as revealed by the issuance of patents is relatively low. Total factor productivity (TFP) has declined over last 2-3 years and but is still relatively better than other former Soviet bloc countries such as Georgia, Russia, Belarus, but not as good as Azerbaijan's. It decreased in 2008, which can be explained by the effect of the crisis. Similarly, the global competitiveness index (GCI) of Kazakhstan has also been trending downwards since 2006 from 4. 2 to 4.1 where it seems to tank for the past three years. This is despite the massive public investments that have been injected into the economy and all the pro-business policies adopted by the government. In terms of rankings, the situation is even bleaker. Its rank has been worsening since 2006 when it was ranked 56th and it is 72. This is moving away from its declared goal of being among the top 50.

Expenditure on Gross Domestic Production 18. The successful growth performance and structural changes on the supply side of Kazakhstan’s economy over the past decade have been supported and sustained by corresponding changes on the demand side. During most years in the 1990s Kazakhstan had to rely on net resource inflows to top up its domestic resources (i.e., GDP) in order to meet total domestic consumption and investment expenditures (Figure 4 and Annex Tables 5-6). This situation, however, has changed from 2000 as a result of sharp increases in domestic resources with rapid expansion in the production and export of oil and gas and metal products. Despite highly buoyant consumption and investment spending by the both public and private sectors, Kazakhstan has been saving a growing share of GDP since 2000, which is used partly to pay for net income transfers abroad and partly to invest in foreign assets (Figure 5 and Annex Table 8). 8


8

% of GDP 140.0

Figure 4: Composition of expenditure on GDP

120.0 100.0

GDP = 100

80.0

Capital formation

60.0 40.0

household consumption

20.0

government consumption

0.0

Source: Statistical Annex Table 6

year

19. The ratio of total consumption expenditure to GDP, which stood between 80-84 percent in the 1990s, sharply dropped to 74 percent in 2000 and continued steadily falling below 60 percent by 2010. This should not be misread as representing deterioration in living standards. On the contrary, as will be explained in due course, there are remarkable improvements in the general well-being of the population. The picture that emerges here regarding the falling share of private consumption in GDP is the reflection of the fact that the good fortunes of Kazakhstan as a mineral-resource-rich country is being tactfully shared by the Government between the present and future generations of the nation. In fact, the development of Kazakhstan’s economy over the past decade has been largely boosted by the presence of strong demand, both from the private (domestic and external) and public sectors. In this context, large increases in household incomes in line with substantial growth in per capita GDP and rapid expansion of bank credits have fueled a strong private consumption demand during most of the past decade till the break of the global financial crisis in mid-2007. This process has been further supported by a surge in government spending from 2004 for improvement of pensions and some allowances, higher minimum wages, larger and better targeted social programs, and social and economic infrastructure projects. This surge in fiscal expenditures has also boosted private consumption demand, which was a major source of the economy’s advance until the financial crisis erupted. The financial crisis has, however, revealed the excesses and weaknesses of the demand management policy pursued in recent years, which will be reviewed in relevant sections below (pp.28-32). 20. Consumption expenditure of the public sector (General Government) amounted to 12.5 percent of GDP in 2000-2001 and has since been kept around 11 percent through 2010, in contrast to the declining share of private consumption (Annex Table 6). This indicates that Government current expenditures, which are largely (by two-thirds) spent on public health and education services, social security and social aid, and cultural, sports and tourism activities, have increased almost in parallel with GDP growth over the past decade. This expansionary fiscal policy has also been pursued more strongly with respect to public 9

9


capital spending and has caused strains on the effectiveness of the tight monetary policy in dealing with the financial and banking crisis since mid-2007. 21. Kazakhstan’s economy has been undergoing a major transformation over the past two decades from a centrally planned Soviet-type economy towards a market-based economy fully integrated with world markets. To this end, it has been adopting major institutional reforms as well as extensive structural changes in its production, distribution and trading systems. The latter could be realized through capital investments to rehabilitate and modernize the existing industries and infrastructures and to establish new ones. Favorable world commodity prices, particularly for crude oil, natural gas and other metals, and reform policies of the GOK for liberalizing and opening up the economy have boosted both foreign and domestic investors’ and banks’ interest in major investment projects of the country. The GOK has been supporting such potential investors through both its own investment programs and the support it gives to domestic and foreign private investors. As a result, gross fixed capital formation, which declined from 27.2 percent of GDP in 1991 to 16.1 percent in 1999, has since grown to 30 percent in 2006 and 2007, but then declined to 27 percent on average in the following three years due to restraining effects of the financial crises on domestic and foreign private investments. 22. The growth of fixed capital formation has mainly been fueled by domestic and foreign private investments in the oil and gas sector, which has accounted for around a half of total fixed investment over the past decade. In terms of the share of total capital formation, the oil and gas sector was followed by transport and communications (10-11 percent) and manufacturing (8-9 percent). This sector composition of fixed capital formation would need to be reviewed and assessed for its consistency with the Government’s long-term development strategy for economic diversification. In terms of the ownership pattern, domestic private investors have contributed about 60 percent of fixed capital formation, foreign direct investors 25-30 percent, and the public sector around 10 percent. Domestic private investors are particularly interested in housing and other construction projects, infrastructure and manufacturing investments. Large FDIs mostly come in for oil and gas, metal-related projects, and also for large infrastructure projects. Public investments largely go to social sector projects, infrastructures, and manufacturing. as % of GDP

Figure 5: Investment and saving ratios (as % of GDP)

50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

Gross domestic saving (GDS) Gross national saving (GNS) Gross domestic capital formation

1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Statistical Annex Table 8

year

Memo: GDS-GNS = net factor income + current transfers

10


10

23. The funding pattern of Kazakhstan’s gross domestic capital formation over the past decade has significantly changed from that in the 1990s. During 1993-99 (inclusive), in five years (out of seven) Kazakhstan had to increase its indebtedness and/or draw down net international reserves in order to cover the gap between national saving and domestic capital formation. On the other hand, this was the case since 2000 only in three years (2001, 2006 and 2007) out of eleven. For most of the period, gross domestic saving was large enough to cover gross domestic capital formation as well as net income transfers abroad, representing mostly dividend and income payments arising from FDI in Kazakhstan and interest payments on external debt, and still leaving some surplus to augment the country’s international assets and reserves and reduce its external indebtedness (Figure 5 and Annex Table 8). Employment and Incomes 24. The rapid growth of the Table 4: Labor Force and Employment Kazakhstan economy and its 2000 2004 2008 2009 2010 structural change, as described Labor force (mil.) 7.1 7.8 8.4 8.5 8.6 above, have brought about both Labor force change (%) 0.7 2.5 2.3 0.5 1.9 increases in employment and Labor force participation 66.0 69.9 71.1 70.7 n.a. some adjustments in the rate (%) Employed (mil.) 6.2 7.2 7.9 7.9 8.1 composition of the labor force. Unemployed (mil.) 0.9 0.7 0.6 0.6 0.5 Kazakhstan’s labor force increased Unemployment rate (%) 12.8 8.4 6.6 6.6 5.8 21 percent during 2000-2010 Youth unemployment rate compared with only 8 percent (%) 14.3 7.4 6.7 5.2 Source: The Agency of Statistics of the RK increase in population. The increase in the labor force was particularly high (11 percent) in 2000-2004 when the population stagnated at about 15 million. Considering that labor force is defined as active population (including unemployed) above a certain age (15 years), its faster increase than population points to the possibility that people who had stayed out of the labor market because of disenchantment with lack of job opportunities and low wages in the 1990s were now returning to market encouraged by new opportunities and rising wages. Despite the rapid increase in the labor force, its unemployed portion (i.e., the unemployment rate) has steadily declined from 12.8 percent in 2000 to below 6 percent in 2010 as a result of the growth of the economy and the government policies encouraging small- and medium-sized enterprises (SMEs) and similar labor-intensive activities. The agriculture, manufacturing and mining sectors have not made any significant contribution to reducing the unemployment rate. The construction and services sector, particularly, real estate, financial services, and education subsectors, were the main sources of growth in employment. The Government has also been putting pressure on local governments and large regional employers to limit lay-offs in return for tax and some other benefits.

11

11


Figure 6: Growth of employment by activity (percent)

percent 20.0 14.0 8.0 2.0 -4.0

2001

Source: statistical annex Table 14

2002

2003

2004

2005

Total employment

2006

2007

2008

2009

2010

Employment in agriculture, hunting and foresty, fishing year Employment in construction

Employment in industry, including energy

25. The doubling of the per capita Figure 7: Main indicators of labor GDP in real terms over the index USD remuneration 600 period 2000-2010 has brought 300 (index, 2000=100.0) with it substantial improvement 250 500 in living standards. The 200 400 importance of this increase in the 150 300 per capita GDP would be better 100 200 revealed if it is put in US dollar 50 100 terms, showing that it increased 0 0 from USD 1,230 in 2000 to USD 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 year 9,000 in 2010. This index of real wages index of minimum real wages Average monthly earnings, in USD improvement in the trend of per Source: The Agency of Statistics of the RK capita GDP during 2000-2010 was also reflected in a steady rise Figure 8: GDP per capita index percent in wages. Average monthly 250.0 16.0 earning increased more than five 14.0 times in this period, rising from 200.0 12.0 KZT 14,374 (USD101) in 2000 150.0 10.0 to KZT 77,611 (USD527) in 8.0 2010 (Figure 8 and Annex 100.0 6.0 Table). This overall good 50.0 4.0 2.0 performance, however, should 0.0 not conceal great disparities 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0.0 -50.0 -2.0 among sector and regional wages. Source: Statistical GDP per capita in real terms (index, 1999=100,0) year Annex Table 4 GDP per capita growth rate (%) In the first quarter of 2011, the economy-wide average monthly earning was KZT 80,195; yet the average wage in agriculture, the lowest paid sector, was only KZT 33,210. The next lowest paid two sectors were education and water supply and sewerage, where the average monthly earnings were only about KZT 50,000. On the other hand, in the highest paid three sectors, namely extraterritorial organizations, financial services, and mining, average monthly earnings were KZT 236,000; KZT 164,000 and KZT 160,000, respectively (Figure 9). Similar disparities can also be observed among regional 12


12

wage levels. In the highest paid two regions with large mining (oil and gas) related activities (Atyrouskaya and Mangistauskaya regions) and in Astana the average monthly earnings were two to three times the average earnings in the lowest paid three regions (S.Kazakhstanskaya, Zhambylskaya and Akmolinskaya). Figure 9: Lowest & highest average wages by sector & region ths. tenge

236

250 200

160

164

145

150

113

100 53 50

160

53

50

56

50

33

0 1

Sectors agriculture Regions S.Kazakstan.

2

education Zhambylska .

3

4

water Akmolins .

extra-ter. Atyrauskaya

5

6

financial mining Mangistau. Astana City

Source: The Agency of Statistics of the RK

Poverty Reduction and Social Development 26. Kazakhstan’s rich mineral resources have been the driving force behind the remarkable growth of its economy since mid-1990s. With its macroeconomic and social development policies, the GOK has been striving, particularly over the past decade, to make this growth as stable and broad-based (diversified) as possible. The success in diversifying the economic development from oil-and-gas-based to non-oil sectors and spreading benefits of growth among the economic sectors and regions more widely was rather limited as revealed above. This matter will be further discussed below in the context of competitiveness of the Kazakhstan economy. Nevertheless, Kazakhstan has achieved within the past decade a significant reduction in poverty and remarkable improvements in its social development indicators. The number of people with incomes below the subsistence level was between 35-39 percent of the population during the second half of the 1990s. This ratio went up to as high as around 45 percent in 2001 and 2002 before it started declining rapidly year after year falling to 6.5 percent in 2010. Several factors contributed to the decline in poverty level, including: a. The minimum wage has been increased annually, at particularly high rates in 2004 (32 percent), in 2006 (31.3 percent) and 2009 (28 percent); b. The average monthly earning in the economy has more than doubled in real terms since 2000 (Annex Table 15); c. Pensions have been increased sharply; d. The State Law on Targeted Social Assistance, which became effective in January 2002, has been providing allowances to people with income below a certain minimum level; and, e. The government has been implementing public-works programs in order to reduce unemployment. 13

13


Figure 10: Share of population under subsistence level

percent 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0

Share of population with income below subsistence line %

Urban

Rural

year

Source: Statistical Annex table 16

27. The decline in the poverty rate3 has also been accompanied by a reduction in the intensity of poverty both country-wide and in the regions. This is shown by the poverty gap index 4 which declined from 14.8 in 2001 to 1.1 in 2010 (Annex Table 16). This means that people with earnings below the poverty line (i.e., the subsistence level) in 2010 had incomes much closer to that line than in 2001. The poverty gap index for the regions also shows that the number of regions where poverty was much more intense than the country average declined from six regions in 2001 to three in 2010. All these encouraging developments in poverty reduction are, however, spoiled by the widening gap between urban and rural poverty. The rural poverty rate was about 10 to 25 percent higher than the urban rate during 1998-2000, but it has steadily grown to become almost three times higher than the urban rate in 200910 (Figure 10). Poverty reduction across the regions has also been highly uneven, with some provinces having cut their poverty rate by half or less since 2000 while others reduced it to a quarter or even one-fifth of the 2000 level. 28. Kazakhstan’s social development indicators other than unemployment and poverty reductions are also quite impressive, particularly in the areas of gender equality and Millennium Development Goals (MDGs). The Kazakh Constitution and the present legislation recognize that women and men must have equal access to benefits of economic growth. Women are relatively well represented (about 48 percent) in the labor force, and female participation in the labor force is 74 percent compared to 80 percent for men. 92 percent of adult women have secondary or higher education compared to 95 percent of their male counterparts. They receive good maternal health care, and have about 12 years longer life expectancy at birth than men. Women hold 12 percent of parliamentary seats and about 34 percent of all management positions. As a result, using the 2008 data, Kazakhstan has a Gender Inequality Index (GII) of 0.575, ranking it 67th out of 138 countries5. Ukraine and 3

The official estimate of poverty in Kazakhstan is based on the number of people with income below the minimum subsistence level. This includes “the food basket cost” plus 43 percent for other expenses and amounted to USD41.75 per month or USD1.40 per day in 2004. A lower poverty line estimate takes the food basket cost, which was equal to USD1.0 in 2004. This is used to measure incidence of extreme poverty. 4 The mean distance below the poverty line as a proportion of the poverty line where the mean is taken over the whole population, counting the non-poor as having zero poverty gap. 5 UNDP, “Kazakhstan: Human Development Report 2010” : http://www.undp.kz/en/pages/9.jsp .

14


14

Russian Federation are ranked at 44 and 41 respectively on this index. On the other hand, women’s wages are on average equal to about two-thirds of men’s wages, and their unemployment rate is higher than men’s, particularly in rural areas. 29. One of the best indications of social development of a country is its success in achieving the Millennium Development Targets (MDGs). The MDGs are numerical targets with assigned indicators to which the international community, including Kazakhstan, has subscribed to: by 2015, to halve poverty, reduce child and maternal mortality, expand educational opportunities for all, promote gender equality, halt the spread of HIV/AIDS and other major diseases, and improve the environment. Kazakhstan has already achieved the first three MDGs and has set more ambitious (MDGs+) targets to halve poverty among the rural population; achieve universal secondary education; ensure gender mainstreaming in national planning and budgeting; prevent violence against women; and increase women’s representation in legislative and executive bodies. The UNDP’s Kazakhstan Office has recently posted on its website 6 a brief review of Kazakhstan’s progress in each of the MDGs (summarized here in Box 2) and the additional measures that the Government would need to take in order to attain the targets by 2015. Box 2: Kazakhstan’s Progress in Achieving MDGs Goal 1: Reduce poverty Target 1: Reduce by half the proportion of people whose daily consumption is below USD 4.30, measured in average PPP (parity purchasing power), as compared with 2001. Kazakhstan achieved Target 1 in 2004. However, poverty is still a serious issue for the country, especially in rural areas. For this reason, the 2007 Report proposed a new MDG 1+: to halve the proportion of people in rural areas whose income is below the subsistence minimum. Target 2: Reduce the share of the poor by one third (based on the nationally defined poverty level) This goal in its original version was achieved in Kazakhstan already in 2004. Therefore, Target 2 was adapted to halving the proportion of people without access to balanced nutrition. Goal 2: Achieve universal primary education Target 3: Ensure that, by 2015, children everywhere will be able to complete primary schooling. MDG 2 has already been achieved. It was therefore decided that there is a need for the assessment of the secondary education system as a whole, with a focus on the quality of education and the enrolment of children with special needs and students from socially vulnerable groups. GOAL 3. To Promote Gender Equality and Empower Women Target 4. To eliminate gender disparity in primary and secondary education, preferably by 2005 and at all levels of education no later than 2015. This target has been achieved. Therefore the new targets of 4+ are: (i) Increasing representation of women in legislative and executive bodies; (ii) prevent and eliminate violence against women; and (iii) Minimising the gender wage gap. Goal 4: Improve maternal health and reduce child mortality Target 5. To reduce by two-thirds, between 1990 and 2015, the under-five mortality rate. MDG 4 progress report has exposed challenges governed by Governmental resolutions and orders of the Ministry of Healthcare. Unfortunately, they are not enforced well enough locally.

6

UNDP, “MDGs in Kazakhstan” based on the “2010 Millenium Development Goals in Kazakhstan” report: http://www.undp.kz/en/pages/9.jsp

15

15


GOAL 5. To improve Maternal Health Target 6. To reduce by three quarters the maternal mortality ratio and achieve universal access to reproductive health by 2015. In Kazakhstan maternal health indicators are still quite low and the maternal mortality ratio is several times as high as that in the WHO European Region. During the next five years Kazakhstan needs to reduce its maternal mortality ratio (MMR) almost by half compared to the current indicator. GOAL 6. To combat HIV/AIDS and Tuberculosis Target 7. To halt, by 2015, and begin to reverse the spread of HIV/AIDS. Since 1987, there has been an increase in HIV cases every year other than 2009.Though Kazakhstan restrain the epidemic at its initial stage (injection drug users), the possibility remains for deterioration.Target 8. To halt, by 2015, and begin to reverse the incidence of tuberculosis. In Kazakhstan, tuberculosis is considered to be an established disease, and Kazakhstan is one of 18 priority countries for TB in the WHO European Region. GOAL 7. To Ensure Environmental Sustainability Target 9. To integrate the principles of sustainable development into the country’s policies and programmes and reverse the loss of environmental resources. The lack of an ecosystem approach in developing and implementing economic and social programmes, and noncompliance with the principles of comprehensive and balanced environment quality management have been named as the main issues in achieving the environmental sustainability. However, Kazakhstan has achieved some progress across a number of indicators during the reporting period. Target 10. To halve, by 2015, the proportion of people without sustainable access to clean drinking water and main sanitary technical facilities. Kazakhstan is one of the Eurasian countries suffering from water deficit. The main issue is related to the safe water supply and waste management. As of today, at least 10 percent of households do not have running water and about a quarter of the population has no access to a proper sewage system. Target 11. To achieve, by 2020, a significant improvement in the lives of the rural population residing in the most unfavourable social, housing and ecological environment. Addressing this target seems quite challenging when it comes to rural areas. In spite of a number of programmes implemented by the government to enhance villages and develop the agricultural sector, the living standards of rural population are much lower, compared to those of the urban population Goal 8. Develop a global partnership for development Partnerships at the national and international levels are important factors for achieving development goals and objectives. Kazakhstan is an active player in the international arena as well as in different regional and international organisations.

30. Kazakhstan’s good performance over the past decade across various economic and social development areas, as indicated above, has secured for it a high ranking in the Human Development Index (HDI) of the United Nations. The HDI is a summary measure for assessing long-term progress in three basic dimensions of human development: a long and healthy life, access to knowledge and a decent standard of living. The first dimension is measured by life expectancy at birth; the second is measured by (i) mean years of adult education and (ii) expected years of schooling for children of school-entrance age; and the third dimension by GII. Between 1990-2010, Kazakhstan’s life expectancy at birth decreased by over one year; both mean years of schooling and expected years of schooling increased by almost three years; and GNI per capita increased by 33 percent. Based on this, Kazakhstan’s HDI is calculated to have risen from 0.650 in 1990 to 0.714 in 2010, which ranks it at 66th out of 169 countries. Kazakhstan’s HDI of 0.714 is slightly below the average for countries in Europe and Central Asia and for high human development countries. Kazakhstan’s ranking in HDI is three steps better than that of Ukraine, but one step worse than Russia’s (Annex Tables 17-18). 16


16

IV.

DEVELOPMENT STRATEGY AND MACROECONOMIC MANAGEMENT

Long-term Development Strategy 31. In his annual speech to the nation in 1997, President Nazarbayev announced, on the back of rapidly growing prospects for major windfall of oil revenues, his vision of Kazakhstan’s long-term development to integrate into the regional and global economy and to close the development gap with the advanced countries by 2030 7. The President has since been reviewing the progress made on his vision and developing it further in his annual speeches delivered early in the year. In 2007, the tenth anniversary of his 1997 speech, he has delivered a comprehensive presentation of the Kazakhstan’s development strategy. This strategy envisages 30 major directions for domestic and foreign policies grouped under six pillars as follows (Box 3): i. Integration in the world economy; ii. Sustainable growth of the economy through diversification, infrastructural development, and creation of high-technology industries; iii. Providing education and professional training at international standards to meet development prospects of the labor market; iv. Social policy to meet housing, health-care, social security and employment requirements of the population; v. Political and administrative developments to build an open, democratic and law-abiding State; and vi. Strengthening Kazakhstan’s regional and geopolitical responsibilities. Box 3: THE NATIONAL DEVELOPMENT STRATEGY OF KAZAKHSTAN – 30 PROGRAM In 1997, in his annual address to the people of Kazakhstan, President presented his vision of the future of society and State’s mission in the Strategy of Development of the country through 2030. President defined 30 major directions as the main priorities of comprehensive modernisation of Kazakhstan as follows: I. Kazakhstan’s successful integration in the world economy 1. 2. 3. 4. 5. 6. 7.

The development of a strategy for steady growth of competitiveness of the economy; Gaining Kazakhstan’s “niches” in the world economy; Participation in large scale and “breakthrough” projects; Restructuring State holdings and their operations by international standards; Substantial increase in efficiency and economic returns of the extractive sector; Stability and competitiveness of the financial system through liberalization; Accession to the WTO on conditions favourable to Kazakhstan.

II. Achieving sustainable economic growth through diversification, infrastructural development, and creation of hi-tech industry 7

The “Kazakhstan-2030, strategy at a new stage of development of Kazakhstan”, address by the President of the Republic of Kazakhstan Mr. Nursultan Nazarbayev to the People of Kazakhstan, February 28, 2007.

17

17


8. 9. 10. 11. 12. 13. 14. 15. 16.

Diversification of the economy and development of non-raw materials sector; Carrying out a unified strategy for introduction of high technologies and innovations; Establishing regional centres for economic growth and competitiveness; Development of strategic infrastructure on the basis of public-private partnership; Development of electric power generation and nuclear energy; Supporting of small and medium sized businesses; Introduction of technical standards meeting international requirements; Strengthening the institution of private property and contractual relations; Develop the basis for further industrialization of Kazakhstan.

III. Providing of education and professional training at international standards to meet development prospects of the labour market 17. Improving elementary and secondary education, and retraining of personnel up to world standards; 18. Certification of educational institutions at international standards, with priority given to natural and engineering sciences in higher education; 19. Development of the basis of a “smart economy”. IV. Modern social policy focusing on demands and needs of people and job creation 20. Consistent policy on housing availability and development of real estate market; 21. Improvement of health service quality and development of high-tech healthcare system; 22. Development of a cumulative pension system. V. Political and administrative development in accordance with new conditions of an open and democratic State 23. Development of the political system; 24. Realization of administrative reforms and modernization of executive power; 25. Increasing the role of the Assembly of Peoples of Kazakhstan to further strengthen public accord and stability; 26. Spiritual development of the peoples of Kazakhstanm and the tri-lingual policy; 27. Improvement of the legal procedures and the enforcement of law and order. VI. New regional and geopolitical responsibility of Kazakhstan 28. New international responsibility of Kazakhstan, development of multi-vectoral foreign policy and participation in combating global threats; 29. Kazakhstan’s active role in ensuring regional stability, developing economic integration of Central Asian states and a dynamic market in the Caspian and Black sea zones; 30. Confirmation of Kazakhstan’s position as a centre of inter-cultural and inter-religious accord in the development of the “dialogue of civilizations”.

32. The GOK has been striving to implement these directions through a plethora of plans and programs at macro and sector levels, but without a comprehensive framework/plan to ensure their consistency with each other and with macroeconomic stability requirements of the economy. Nevertheless, they serve a valuable purpose of providing all State agencies with an impetus and the directions for the medium- to long-term development of their sectors. At the same time, such development spending zeal of public agencies augments the responsibility of the central economic ministries and the importance of macroeconomic programs (e.g., MTFF) in maintaining the macro balances and stability of the economy. 18


18

The sector programs will be referred to when the key sector developments are discussed below (pp 44-61) and the macroeconomic programs will be noted in this section. 33. The long-term National Development Strategy of Kazakhstan-30 is implemented through ten-year indicative development plans, which are also made public through the annual speeches of the President. A careful and detailed review of these plans reveal that the following strategies and policies would need to be emphasized: i. Macroeconomic management should ensure steady, sustainable and broadbased growth and development of the economy; ii. Broad-based development should be attained through diversification of production towards non-mining sectors, particularly towards industries using innovation and high technology; iii. Kazakhstan has completed in the 1990s almost all first-generation reforms for transition to a market economy, but has been rather slow in moving on a series of further reforms which are essential to enhancing business and investment climate of the economy; iv. Kazakhstan should become integrated in the global and regional economy through improving competitiveness of its economy; v. The private sector, especially SMEs, should play the leading role in the industrialization; vi. State holdings and enterprises should operate efficiently and profitably by international standards; vii. Competitiveness of the economy should be studied comprehensively at sector, commodity, and enterprise levels in order to design appropriate competition policies; viii. Development of the education sector (i.e., investment in human capital) should be designed to meet prospective demands of the labor market in line with the above strategies; ix. In order to enhance both welfare and competitiveness of the Kazakh population, the social policy of the State should focus on meeting their housing, health-care, social security and employment needs; x. Finally, political and administrative reforms that would improve Kazakhstan’s international standing as an open and democratic society with an independent judicial system would greatly contribute to building a business and investment environment most conducive to external and domestic private investors. 34. The above policies could be grouped under three closely interrelated broad subjects: a. Macroeconomic management and policies should ensure that the country’s wealth of mineral resources would be used judiciously to achieve a sustainable and broadbased economic growth at a high rate while maintaining the external and internal balances of the economy. b. Enhancing competitiveness of the economy, which is crucial to the successful integration of Kazakhstan into the global and regional economy, would require furthering infrastructure developments and the reform efforts for strengthening 19

19


efficiency and productivity of State enterprises and the private sector, particularly SMEs. c. Development of the social sectors, particularly education, health and social security, would not only help distribute the benefits of the mineral wealth to the population more evenly, but also make a substantial contribution to enhancing the competitiveness of the human capital of the economy. Hence, this subject will be discussed below in the context of improved competitiveness of the economy. Overview of the Macroeconomic Management 35. During the past decade, Kazakhstan has achieved remarkable economic growth through effective use of its oil windfall, Figure 11: GDP, oil output & CPI growth rates while also maintaining a stable (percent) Percent economic environment and 35 continuing with the second- 30 generation of market reforms, albeit 25 at a slower pace than in the 1990s. 20 Its growth performance was 15 particularly strong during 2000 2007 when the annual rates of 10 growth in real GDP ranged between 5 9 percent and 13 percent, averaging 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Real GDP growth at 10 percent (Table 5 and Figure Crude oil & gas condensate growth 11). Despite the presence of strong Source: Table 4 of this reportCPI (eop, y-y) year consumption and investment demand in the economy throughout the period, both underlying and arising from the high growth in GDP, inflationary pressures have been kept under control with the annual rate of inflation remaining below 10 percent except in 2007 (18.8 percent), when the global financial crisis erupted. 36. Behind this successful growth performance there was a combination of several factors, including: a. The sharp expansion of oil and gas production, particularly during 2000-2004 when production volume increased by 125 percent as a result of the opening of new fields and improved productivity. An additional 50 percent increase in oil and gas output has been attained by 2010. In the general government budget, oil and gas revenues accounted for 40 percent of total revenues during 2007-2009. Similarly, in the same period, about 55 percent of total export earnings (USD176 billion) came from oil and gas exports. b. Commodity exporters generally, and oil and gas exporters particularly, enjoyed favorable prices in world markets. Kazakhstan’s terms of trade increased by over 40 percent between 2003 and 2008. This enabled Kazakhstan to compensate the slowing down of growth of its oil and gas production since 2005 by sharp increases in world oil prices (e.g., 32 percent in 2005 and 36 percent in 2008). c. A favorable external financial environment with abundant liquidity has facilitated Kazakh banks’ easy access to large external credits at relatively modest cost. This was 20


20

being helped by the international rating agencies’ inflated8 rating of Kazakhstan as a rapidly growing oil-rich country. d. A number of structural and institutional reform measures (e.g. a new tax law, land code, establishing special State financial institutions, simplifying and reducing business regulations), even though falling much short of what should have been done, have still contributed to the development of SMEs in agriculture and non-extractive sectors. e. Perhaps most importantly, the role of the successful macroeconomic management should be noted in maintaining the right balance among the fiscal, monetary and exchange rate policies throughout the period, especially in the design and implementation of the Anti-Crisis Program (ACP) during 2009-2010.

8

The international rating agencies had all failed to detect the growing “buble” in the leading economies and international financial markets for several years prior to the eruption of the global financial crisis from 2007. They were also missing the development of bubles in the financial and real estate sectors in Kazakhstan, particularly during 2004-2007.

21

21


Table 5: Macroeconomic Indicators

2000 Real GDP growth Crude oil & gas condensate output CPI (end of period -eop)

Exchange rate (eop, tenge/USD)

Exchange rate (eop, tenge/ruble) REER (eop, y-on-y in %) Monetary accounts Reserve money

2001

2002

9.8

13.2

9.3

33.3

12.5

145.4 -7.0

2003

2004

2008

2009

2010

8.9

3.2

1.2

7.0

3.7

5.1

5.6

9.3 147.5

9.7

10.7

20.5

8.8

15.6

3.4

6.3

150.9

155.9

143.3

130.0

133.8

127.0

120.3

120.8

148.5

0.9

-3.8

-3.6

5.8

3.1

7.7

2.2

7.0

-6.2

5.3

30.9

18.1

52.2

82.3

14.7

126.4

4.2

60.7

7.5

6.5

5.8

5.3

4.5

4.1

3.1

2.6

2.3

9.8 5.2

6.4 5.1

4.9

4.9

4.7

34.9

45.6

52.4

NBK refinancing rate (eop, %)

14.0

9.0

7.5

7.0

7.0

19.6

27.0

6.7

78.9 16.6

32.8

6.8

81.0 12.0

45.1

6.6

Credit to the economy

General government accounts

2007

9.4

45.0

Credit to the economy (% of gdp)

2006

9.2

Broad money

Broad money velocity

2005

(annual change in percent)

23.3

69.7

27.9

7.5 4.7

25.2

8.4 4.8

18.8

4.9

-2.5

9.5 4.2

78.1

25.9

35.4

73.2

84.0

55.2

5.2

8.0

9.0

11.0

37.4

51.1

2.7

6.2 5.2

7.8 5.1

5.0

17.9

15.7

7.2

0.9

2.4

59.9

49.0

51.0

41.8

10.5

7.0

7.0

(in percent of GDP)

Revenues and grants

21.7

27.1

22.6

26.3

26.0

28.1

27.5

29.3

27.9

22.5

25.3

Total expenditures & net lending

22.9

24.2

21.2

23.3

23.3

22.6

20.2

24.6

26.9

23.9

23.8

Total expenditures (eop, y, %)

21.1

21.1

???

6.3

-2.5

30.5

24.4

22.0

50.4

40.7

-8.4

22.8

Exports of goods & services

10.6

10.4

11.6

Imports of goods & services

-8.9

-10.4

-11.5

0.8

-0.9 2.5

of which: oil revenues

Overall fiscal balance

Allocated to NFRK (- = increase) External accounts

Oil & gas condensate

FDI, net (in % of GDP)

Current account balance

Current a/c balance (% of GDP)) NBK gross reserves (eop)

NBK gross reserves (import/mo.)

NFRK (eop) External debt (excl. İntracompany debt)

1.8

-1.2 n.a.

4.4 7.0 4.2 2.1 2.4

2.9

4.5

13.9 -4.0 2.6

4.4 1.4

6.2 3.1

-5.5

7.4 2.7

-2.6

10.6 5.6

30.7 -5.3

(in billions of USD)

10.2 7.3

-6.9

9.6 4.7

-7.0

12.4 1.1

-3.3

9.3

11.8

-1.5

1.5

-1.7

-4.4

14.9

22.6

30.5

41.6

51.9

76.4

48.2

65.1

-13.3

-18.8

-25.5

-32.8

-45.0

-49.6

-39.0

-43.3

-1.0

-0.3

0.5

-1.1

-2.0

-8.3

6.3

-4.4

4.3

3.1

5.0

9.3

7.1

19.1

17.6

19.9

23.1

28.3

8.0

14.1

21.0

27.5

24.4

30.6

5.0 8.8

-4.2

7.0 7.2

-0.9 3.2

2.8

12.6

1.1 4.4

3.7

-1.8 2.6

23.6 8.2

-2.4 5.1

28.1 7.7

-8.1 4.3

43.5 9.7 4.7 6.1

26.2

9.4

37.0 1.5

-3.8

3.1

6.4

6.1

5.7

6.3

7.6

11.0

15.3

24.2

48.6

66.8

67.7

63.0

66.0

Nominal GDP (billion USD)

18.3

22.1

24.6

30.9

43.2

57.1

81.0

103.1

135.2

113.6

139.9

Oil price (USD per barrel)

28.2

24.3

25.0

28.9

37.8

53.4

64.3

71.1

97.0

61.8

79.0

3.8

3.5

3.6

5.1

17.4

1.9

3.9

3.7

11.4

1.3

o.w.: Publicly guaranteed debt

n.a

4.5

3.4

2.3

2.2

1.4

1.6

1.7

1.7

Memorandum items:

Source: The IMF, “Republic of Kazakhstan: Staff Reports for Article IV Consultations” for 2002 through 2011

37. The guiding principles of the GOK’s macroeconomic policy have been to: (i) avoid macroeconomic imbalances; (ii) use oil and gas resources efficiently; and (iii) distribute the benefits of oil-and-gas windfall equitably across society and between present and future generations. As already noted above, the fiscal and monetary authorities have been successful to avoid macro imbalances by using a right policy-mix, based on a prudent 22


22

budgetary policy to avoid the need for an unduly tight monetary policy and/or an excessively fluctuating exchange rate. The successful implementation of this policy mix has faced two important risks in the form of fluctuations in world oil prices and negative effects of the Dutch disease9 on the competitiveness of the non-oil sectors. Oil price declines in 2001-02 and in 2009-10 were not persistent, and their impact was mitigated through increasing oil and gas output and further tightening the fiscal and monetary policies.

38. For the efficient use of oil and gas Figure 12: KZT/USD & REER Indexes windfall revenues, the GOK (1999=100.0) index established the National Fund of the 120 Republic of Kazakhstan (NFRK) in 100 2000 to reduce impact of fluctuating 80 60 world oil prices and to save part of 40 the national oil income for the 20 0 benefit of future generations. In 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 addition, a number of special State reer financial institutions and funds (e.g., Source: Table 5 of this report Development Bank of Kazakhstan, Investment Fund of Kazakhstan) have been established to support non-extractive and innovation oriented projects, particularly by SMEs, in line with the GOK’s diversification and competition policies. As for the Dutch disease, the GOK aimed at minimizing its adverse effects through implementing appropriate demand management policies, which succeeded to stabilize both the nominal exchange rate over the periods of 2000-2003; 20042008, and 2009-2010, and the real effective exchange rate first on a slightly declining (2000-2003) and then a rising course (2004-2008). However, cumulative appreciation of real effective exchange rate (REER) of the tenge over 2004-08 was 29.3 percent, which must have done considerable negative impact on competitiveness of the Kazakh economy. 39. Although adequate care and attention were being given by the fiscal and monetary authorities to the efficient use of oil and gas revenues and to their possible adverse impact on the macroeconomic balances, there were two more sources of major inflows, namely FDI and the external borrowing by the private sector, which were not as effectively regulated as oil and gas revenues. FDIs were coming mainly for exploration and extraction projects in the mining sector10 and not much affected by short term fluctuations in the world commodity and financial markets. The ratio of net FDI to GDP over 2000-10 fluctuated quite widely, depending on the progress of the projects. Due to capital-and-importintensive nature of the oil and gas and other mining projects, large annual inflows of FDI should have caused only limited pressure on the Government’s demand management policies during 2000-2010. But the same cannot be said for external borrowing by the 9

The term refers to the case of a large increase in foreign exchange revenues of a country from natural resources (or any other source) making its currency stronger compared to that of other countries (manifest in an exchange rate), resulting in the country’s other goods becoming more expensive and less competitive in foreign trading. The term was first used in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959. 10 In 2009, about three quarters of all FDIs were in oil and gas projects, and only about 10 percent went to nonextractive sectors.

23

23


private sector, particularly by domestic commercial banks, for infrastructure and construction projects. 40. In 2000-2001, Kazakhstan’s total external debt (excluding intra-company debt) was about USD6.0 billion (32 percent of GDP), with public debt (including publicly guaranteed debt) accounting for about two-thirds. Over the next ten years, while public debt steadily declined to USD1.6 billion (1.4 percent of GDP) in 2009, total debt sharply increased, particularly during 2004-2007, reaching USD66.8 billion in 2007 and more or less maintaining that level (47 percent of GDP) through 201011. The banking sector has played a central role in this rapid growth of external debt. On the basis of such large external liabilities, banks were funding a very rapid domestic credit growth at an annual rate of 70 percent from end-2004 to mid-2007, mostly to the households, trade and construction sectors. With the onset of the global financial crisis, however, the banking sector has been cut off from its external funds and its serious structural weaknesses have become manifest, calling for a major rescue operation by the Government. Fiscal Policy Issues: 41. The fiscal policy of the GOK over the past decade has been molded with a view to the objectives and strategies of the “National Development Strategy of Kazakhstan-30”. More specifically, the fiscal policy during this period aimed at a combination of several objectives, depending on external and domestic economic conditions faced by the country, which included the following: i. To facilitate the absorption of external shocks and provide countercyclical impact on the economy; ii. Promote diversification of the economy towards non-extractive sectors; iii. Reduce disparities in the distribution of national income and social welfare by the income groups and regions; iv. Reduce public debt; and v. Achieve intergenerational equity in the use of the nation’s natural wealth. 42. In addition to the execution of prudent budgets during the oil revenue boom in 2000-2007 and an effective Anti-Crises program (ACP) since 2007, there have been significant structural and institutional developments in the public finances of Kazakhstan in pursuit of the above objectives. The following ones are particularly important in view of their potential contribution to the realization of the Kazakhstan-30 objectives: a) Establishment of the National Fund of the Republic of Kazakhstan (NFRK): 43. The GOK established the NFRK in 2000 in order to save part of the oil income for future generations and also to ensure a stable flow of oil revenues to the Government budget irrespective of changes in world oil prices. Oil revenues’ share in total revenues (including grants) of the general government went up from 13 percent (3.2 percent of GDP) in 20002001 to 44.0 percent (10.5 percent of GDP) in 2009-2010. Oil revenues contributed to the 11

Including intracompany debt, Kazakhstan’s total external debt amounted to about 100 percent of GDP in 2010.

24


24

budget’s sizeable fiscal balance in most years during this period, which was largely transferred to the NFRK (Table 4). In some years, the amount allocated to the NFRK was larger than the fiscal balance, and allocation was made even in deficit years. The reason for external borrowing rather than drawing on NFRK funds in some years was mainly to develop relations with international markets. The NFRK balance, which declined in 2009 because of funding the ACP, sharply increased in 2010 and 2011, reaching over USD43.0 billion by the end of 2011. 44. The NFRK is managed by the NBK. The rules used by the NBK for managing oil funds are quite complex and have evolved over the past decade on three guiding principles: First, the NFRK should be fully integrated with the budget and treasury. Second, all central government oil revenue should accrue to the NFRK. Third, the decision of how much of the oil income to save in the NFRK and how much to be used for budget support should be transparent and based on objective criteria. The current rules applied since mid-2007 meet these criteria. They have integrated the NFRK with the budget and thus improved the transparency of oil revenues and their use. NFRK’s assets mainly come from direct oil taxes, including corporate income tax, royalties, the state’s share under production-sharing agreements (PSAs), rent tax on exports, and from its investment earnings. Also, proceeds from the privatization of state assets in the mining and manufacturing sectors, as well as funds from the sale of agricultural land are allocated to the Fund. NFRK places its assets abroad mainly in two different portfolios: (a) a stabilization portfolio of USD5.0 billion in short term debt securities, and (b) the rest in an investment portfolio in longer-term debt and securities. The amount to be used for budgetary support is linked, through a legislative act and a formula, to the development spending (capital expenditures) while keeping the rest of the budget in balance. 45. The above concept for the management of the NFRK plays a valuable role by restraining expenditures and sterilizing foreign exchange inflows. The fact that NFRK’s guaranteed transfer to the budget is only for spending on the development budget and is determined by a statutory formula effectively sets a ceiling on the annual transfer to the budget and eliminates the possibility of extra-budgetary use of the NFRK. Moreover, the new rules establish a target of 3 percent of GDP for the non-oil deficit by 2020 against 9 percent in 2009. This will result in increasing the proportion of oil revenue to be saved over the next decade. b. Tax reductions to strengthen competitiveness of the economy: 46. Substantial tax reductions were made across the board (VAT, and social tax) in early 2004. Further tax reductions were made in 2005 benefiting certain industries (e.g., petrochemicals) and firms located in techno-parks and Free Economic Zones. Nonetheless, non-oil tax revenues expanded at a faster pace in 2005 than non-oil GDP because of brisk economic conditions and improvements in the tax administration. As from 2007, the fiscal strategy has focused on reducing the tax burden to support the diversification of the economy. The VAT rate has been reduced 1 percent to 14 percent and new tax concessions introduced for high-value industries and projects in the Free Economic Zones. A new tax 25

25


code has been enacted to shift the tax burden more onto the subsoil and raw materials sector to promote diversification and to simplify the tax system. In this context, in 2009 (i) duties on crude oil exports were imposed ( and there is consideration to do the same on other raw material exports as well); (ii) the corporate tax rate was cut for non-extractive companies; and (iii) VAT rate was further cut to 12 percent. 47. Although the GOK purports to promote economic diversification through the above mentioned tax measures, such tax reductions might do more harm than good if adopted without adequately whether they would create tax loopholes and incentives for tax evasion and avoidance, and thus reduce tax discipline. Moreover, excessive tax reductions on the non-oil sectors would run the risk of further expanding the non-oil fiscal deficit, hence requiring a greater share of oil revenue to be transferred to the budget. It would therefore be important to maximize revenue from non-oil sectors without affecting their competitiveness through (i) reducing taxes on labor and capital rather than on selected sectors or commodities; (ii) expanding the tax base by eliminating exemptions; (iii) lowering tax rates across the all taxpayers to encourage compliance; and (iv) further strengthening the tax administration. c. Increased expenditures on social programs: 48. One of the main concerns of the GOK over the past decade has been how to alleviate poverty without jeopardizing the macro balances of the economy. During the first half of the decade emphasis was placed on developing the social safety net and pension reform measures. In order to address the unemployment problem, especially among the youth, a special program has been introduced for income generating skills through training and microcredit programs. The social jobs program of the Local Authorities has been providing temporary employment to the socially vulnerable. In fact, all social programs for financially vulnerable members of society are being broadened since 2005. Another major expenditure category which has been constantly on the agenda of the fiscal authorities was public sector wages and salaries. Large differentials between government and private sector salaries were both causing social injustice and making it difficult to attract qualified staff to the public sector. In the health and education sectors, for instance, public sector salaries were half the non-agricultural average wages in 2005. There have been significant salary increases over the past several years as a vehicle to transmit the impact of oil-wealth to the public sector employees and also to boost domestic demand as a countercyclical measure. 49. Sharp increase in public sector pensions and wages was needed to: (i) reduce the large gap with private sector salaries; (ii) maintain social stability; and (iii) support household incomes. However, such across-the-board and large hard-to-reverse expenditure increases on public salaries should cause concern for efficiency and consistency with growth objectives. The fast pace and large size of the increases may cause severing their link to performance, merit, and regional cost of living differences. In addition, the public sector pay increases could intensify inflationary pressures, especially if they lead to acceleration in private sector wages. 26


26

d) Establishment of the National Welfare Fund Samruk-Kazyna: 50. Samruk-Kazyna (SK) was formed in September 2008 by merging Samruk (the state asset holding company) and Kazyna (the sustainable development fund). Samruk was established in early 2006 to improve the government asset-management efficiency and set a new benchmark for corporate governance. To carry out these functions, it was bestowed with full or part ownership of the total shares of major state corporations. Kazyna Fund was formed in April 2006 to manage state investments, stimulate investment and innovation activities, and improve competitiveness of the economy. It was also identifying investment opportunities in non-extractive sectors and local partners for foreign and domestic private sector investors as well as providing administrative support and long-term financing in the form of debt and equity. 51. The immediate objective of merging the two funds in 2008 was to strengthen their positions so that they could play a central role in the implementation of the ACP. SK’s long-term mission, however, is much broader and important. It is envisaged by the GOK to contribute to the growth of national welfare via increasing the long-term value of the Fund’s companies as well as to stable development, diversification, and modernization of the economy. With 404 subsidiaries and associates and more than 260,000 employees, SK spreads across key sectors of the economy, including energy, mining, telecoms, transportation, finance and banking. The state is the sole shareholder of the S-K Fund, which owns, either in whole or in part, many important companies in the country, including the national rail and postal service, the state oil and gas company KazMunayGas, the state uranium company Kazatomprom, Air Astana, and numerous financial groups. The Fund is the largest owner of economic assets in the country, the largest employer, and the operator of the government’s anti-crisis program. It accounts for about 60 percent of Kazakhstan’s GDP. 52. In order to achieve its mission, the Fund operates in three key strategic areas: (i) Contributing to diversification and modernization of the national economy; (ii) increasing the long-term value of the Fund’s companies; and (iii) managing the government programs for stabilization of the financial sector. The extent and composition of its business coverage in the economy gives the Fund an influential position vis-à-vis the private sector and the government. For instance, through the movement of its companies’ deposits, it could influence liquidity position of the major commercial banks. Similarly, owing to its wide ranging and large-size operations, it has close and effective interaction with the Government in several areas, including: i. ii. iii. iv. v.

Stabilization of the financial sector; Problems in the real estate market; Support for SMEs; Agribusiness development; and Implementation of innovation, industrial and infrastructure projects. 27

27


Such state-driven industrialization, however, may carry risks of favoring certain firms or discouraging others. This aspect of SK operations will be looked into below in sections where the private sector development is discussed in the context of competitiveness and diversification of the economy. Monetary and financial policy issues 54. The main objectives of the monetary and financial policies during rapid economic growth in 2000-2007 were to support (i.e., to accommodate) output growth while keeping inflation under control and maintaining exchange rate stability. During this period, the annual rates of growth in real GDP were between 9-13 percent, averaging at 9.5 percent, and annual inflation rates were kept below 10 percent, except in 2007 (18.8 percent). The exchange rate of the tenge slightly depreciated in nominal terms from T145/USD1 in 2000 to T155/USD1 in 2002 and then appreciated first rather sharply in 2003 and 2004 and then in gradual steps to T120/USD1. In terms of REER, however, the tenge first had a 12 percent cumulative depreciation during 2000-2003 and then steadily appreciated through 2008 by 29.3 percent. With the onset of the world financial crisis by mid-2007, the underlying weaknesses of the Kazakhstan’s financial system, developed during the boom years since 2000, had been fully exposed and came close to collapsing. The monetary and financial policy, as part of the Government’s ACP, had to save the banking system from collapsing and also to boost domestic demand, particularly for the worst hit sectors. The following paragraphs will present a brief account of these two different phases of the monetary and financial policies in Kazakhstan over the past decade. 55. The NBK adopted an expansionary monetary policy in 1999 to pull the economy out of the doldrums caused by the 1998 Russian crises, and continued the expansionary policy in 2000 to stimulate domestic demand and output growth. Output responded well in both years with a 2.7 percent and 9.8 percent growth, respectively, in real terms. In the following years through mid-2007, the monetary expansion continued mainly to meet increasing liquidity demand of a rapidly expanding economy fueled by substantial influx of oil revenue. Buoyant oil-related business incomes and rapidly rising household incomes based on growing per capita GDP and increased public spending on wages, pensions and social programs were behind sharp annual increases in commercial bank credits, ranging from 35 to 85 percent. This resulted in bank credits rising from 12 percent of GDP in 2000 to 60 percent in 2007, with concentration in consumer, construction and SMEs loans. The NBK was initially stimulating credit expansion by continually lowering refinancing rate from 25 percent in 1999 to as low as 7 percent in 2004 and minimum reserve requirement from 10 percent to 6 percent over the same period. 56. The NBK has, however, become increasingly concerned since 2004 over growing credit risks, in the form of deteriorating quality of loans due to rapid credit growth. Doubtful or bad bank loans amounted to almost half of total bank loans in 2005. To slow down the growth of commercial bank lending, the NBK reversed the use of the same levers (i.e., refinancing rate and reserve requirement) it had used to stimulate credit expansion. Refinancing rate has been raised from 7 percent in 2004 to 11 percent in 2007 and reserve requirement from 6 percent to 10 percent over the same period. The effect of refinancing 28


28

rate in checking the growth of bank credit was, however, thwarted by Kazakh banks’ having easy access to borrowing from foreign banks. Raising the reserve requirement also had limited effect because of its narrow coverage. Finally, NBK’s use of open market operations also could not have significant effect because of the shallowness of the domestic money and debt markets. 57. The rapid expansion of commercial bank credit was being made possible by sharp annual increases in both reserve and broad money (M3)12. Reserve money in 2007 was 11 times that in 2000. Behind this increase was the oil-related influx of foreign exchange, even though its potential effect on reserve money was substantially obviated through sterilization of oil receipts in the NFRK. The exceptional growth in reserve money, supported by strong monetization demand of the economy, has served as the basis for a sharp increase in bank deposits from 11 percent of GDP in 2000 to 30.3 percent in 2007. As a result, broad money has expanded almost 12 times over 2000-2007 (or from 15 percent to 37.3 percent of GDP). 58. Simultaneously with its intensive efforts for effective demand management during 20002007, the NBK has undertaken significant reform measures in the banking system. Without going into specifics, some of them are listed here just to indicate Government’s recent reform efforts in the banking system before highlighting its major weaknesses revealed by the latest financial crisis. i. The NBK’s efforts to strengthen supervision of banks have progressed well with the adoption in 2001 of consolidated supervision of bank subsidiaries and affiliates. The real progress in this matter, however, was made with the establishment of “Agency on Regulation and Supervision of Financial Markets and Organizations” (FSA) in early 2004 as an independent and unified financial sector supervisory agency. FSA has focused its attention on measures to reduce risks associated with banks’ increased borrowing abroad and real estate lending. The NBK could thus focus better on monetary and financial sector policy issues. ii. Kazakhstan’s first credit bureau was established in 2005, which provides credit information on households and small enterprises, thereby facilitating appropriate classification of their loans. iii. “Almaty Regional Financial Center” (ARFC) was established in 2005 to spearhead development of the securities market. This was part of Government plans to enhance the regional role of Kazakhstan’s financial sector by upgrading infrastructure and regulatory frameworks over the medium-term. iv. The NBK’s ability to conduct monetary policy has been strengthened with an amendment to the Budget Code in mid-2005 envisaging capital injections to the NBK to cover its losses related to monetary operations. v. The FSA’s capacity for prudential regulation and banking supervision has been continually strengthened through administrative and legislative measures.

12

Includes currency in circulation and all deposits in commercial banks and other depository corporations.

29

29


vi.

In 2009, Kazakhstan adopted a law on Islamic finance and established the first Islamic bank (Al Hilal) in the country. Legislation also allows Islamic financial instruments to be listed on the Kazakhstan Stock Exchange.

59. During 2000-2007, there was great inflationary pressure in the form of demand-pull from the rapid growth in broad money and commercial bank credit boom. Compounding this was the presence of cost-push factors arising from upward adjustments in administered prices and tariffs, particularly for gasoline, transport services and utilities. In addition, there were production rigidities and bottlenecks in several sectors. Despite all these, it is remarkable that the NBK was successful to maintain moderate inflation until the global financial crisis hit the Kazakh economy. Three factors must have contributed to this result: i. Throughout the period under consideration, the economy has undergone a strong financial deepening and re-monetization as indicated by sharp and steady decline in the velocity of broad money from 7.5 in 2000 to 2.7 in 2007. This implies that expansion in money supply was largely being used for “greasing” new and increasingly sophisticated institutional mechanisms of the rapidly expanding economy instead of fueling effective demand for goods and services. ii. The NBK has pursued a flexible exchange rate policy tolerating moderate fluctuations around an appreciating trend of the REER for the tenge. This has helped moderate the burden on the monetary policy to keep inflation under control. iii. The supply side was well supported by rapidly increasing imports of consumer goods and productivity increases in domestic production. Anti-crisis program (ACP) 60. Developments in the financial sector of Kazakhstan during 2000-2007 have created two main sources of macro-financial risks, namely, banks’ heavy dependence on external borrowing and high exposure to the real estate sector. Commercial banks’ rapid credit expansion has relied substantially on foreign borrowing, which reached 44 percent of GDP at end-2007 compared to about 6 percent in 2002 13. This was the result of several factors, including the following: (i) The domestic deposit base was too small to support the strong credit demand of the rapidly expanding economy: (ii) interest rate on borrowing abroad was much lower than cost of domestic bank deposits; and (iii) as an upper-middle-income country with abundant natural resources, Kazakhstan has been rated as “investment grade country” by major rating agencies, which has facilitated Kazakh banks’ access to foreign loans. All these factors, however, have exposed domestic commercial banks to liquidity risks once conditions in foreign financial markets started deteriorating with the onset of the global financial crisis. 61. Additionally, the concentration of credit in the real estate sector (including residential mortgages, construction loans and other loans backed by real estate) represented significant 13

IMF, “Republic of Kazakhstan: Selected Issues”, July 2010, pp. 27-28.

30


30

risks. The share of real estate lending in total bank credit has doubled since 2004, amounting to about 30 percent of GDP at the end of 2007. Banks have become overexposed with 70 percent of their loan portfolio directly or indirectly connected to the booming real estate market. In a way, credit boom and rising real estate prices were mutually reinforcing. However, this could not continue because the tightening of credit conditions in international markets has cut off Kazakh banks’ access to foreign loan markets from August 2007. With borrowing costs rising, domestic banks were faced with liquidity squeeze, which has led to foreign debt service difficulties and higher interest rates on credits. The pace of credit expansion to the economy sharply dropped from the second half of 2007. Sales and prices in the real estate market have dropped sharply, and mortgage credit quality has also deteriorated with rising loan-to-value ratios. As a result, both the banking and construction sectors have been badly hit by the crisis. 62. The NBK and the government had to intervene to protect the banking system and to prevent crisis in the real sectors, particularly construction, from deepening further. The NBK injected USD18 billion into the banking system through its refinance windows and took several measures to facilitate banks’ recourse to NBK resources. In addition, the government allocated USD4.0 billion from the budget to a special facility administered by Kazyna and channeled through banks to construction companies, industrial projects and SMEs. Despite these efforts, continued rumors of bank failures and housing crush and the increases in global food prices brought both domestic prices and the tenge under pressure. The annual rate of inflation jumped from 8.4 percent in 2006 to 18.8 percent in 2007. The GOK had to resort to administrative controls in the form of ban on export of some food items, controls on some food price increases, and temporary freezes on utility and transport tariffs. Import duties on some food items were also eliminated or reduced. The NBK was determined to maintain the exchange rate of the tenge at its then level of T120/USD1 in order to sustain public confidence during economic crisis and to avoid placing further burdens on companies and banks in external debt servicing. The NBK intervention ensured the exchange rate stability but at a great loss (USD6.0 billion) of reserves. 63. Although banks were able to discharge foreign debt service obligations on time during the first half of 2008, they were again facing liquidity shortages in the second half as their capacity to tap external funding has been considerably diminished. The government announced in November 2008 a new stimulus package of USD17.0 billion, managed by SK, for developing SMEs, supporting industrial and infrastructure projects, and developing agriculture further. S-K provided resources to recapitalize banks, established a distressedasset fund as well as a real-estate-support fund. But the slump in the property market was continuing as expansion in construction, which had been fueled by several years’ rapid expansion in bank lending, tumbled to 1.9 percent from 16.4 percent in 2007. This was a bad omen for the stability of the bank system, as the share of non-performing loans (NPL) in total bank loans went up from 5 percent in mid-2008 to 9 percent in January 2009 with further deterioration in the offing. These facts together were pointing to the approaching of foreign debt service failure by banks in 2009. Therefore, in February 2009, the GOK took control of the first and fourth largest banks and provided capital to the second and third largest banks, which altogether accounted for two-thirds of banking system assets. 31

31


64. The exchange rate policy of the ACP in the form of maintaining T120/USD1 was continued in 2008 as well. But the NBK had to inject again USD6 billion from October 2008 to January 2009 to keep the tenge stable. However, to stop reserve losses and also to counter Russia’s devaluation of the rouble by 18 percent, the NBK had to devalue the tenge by about 20 percent to T150/USD1 in February 2009. 65. The ACP has helped to calm domestic markets and to gradually re-establish public confidence in the recovery of the economy. Inflation was also on a declining course in 2009 on account of low international commodity prices and weak domestic demand. This has led the NBK to easing monetary stance by lowering refinance rate from 10.5 percent at the beginning of 2009 in seven steps to 7 percent in September 2009. Reserve requirements for both local and foreign currency deposits were also reduced to 1.5 percent and 2.5 percent, respectively. This easy monetary policy was also continued in 2010 with a view to reviving domestic demand and output growth. Nevertheless, credit expansion remained to be very modest both in 2009 and 2010 (about 7 and 6 percent, respectively) mainly because of timidity of banks and investors’ risk aversion, particularly in view of the growing share of NPLs (30 percent in 2010) in total loan portfolio of banks. Thus, the impact of global financial crisis on Kazakhstan’s financial system has left behind three important issues to be addressed: i. The need for restructuring and governance reform in the banking system, which is now temporarily abated by government intervention; ii. Addressing the issue of increasing volume of NPLs; and iii. The paradox of liquidity abundance against weak credit demand in the banking system. External trade relations 66. The economic development of Kazakhstan over the past decade has revolved around developments in its balance of payments. Merchandise exports have increased almost eight-fold in as many years, from USD9.3 billion in 2000 to USD USD72.0 in 2008, almost 90 percent of which comprised oil, gas and metals. The corresponding increase in merchandise imports was five-and-a-half times over the same period, from USD7.1 billion to USD38.5 billion, which mainly included capital goods and equipment for the extractive sector projects and modernization investments by enterprises in other sectors. As a result, while Kazakhstan’s exports maintained their share of GDP around 44 percent over 20002010, imports’ share declined steadily from above 35 percent to 23 percent in the same period. The favorable trade balance was offset by 12-fold increase in deficit on the balance of services and incomes (from USD2.0 billion to USD25.6 billion), mainly due to services for natural resources related exports, imports, and FDI, including dividend transfers. With the impact of global financial crisis on commodity prices and demand in international markets, Kazakhstan experienced in 2009 sharp declines in all items of its current account, including 39 percent decline in exports and 25 percent in imports. However, improved global economic environment and higher commodity prices from the 4th quarter of 2009 32


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turned the flows upward again with exports and imports rising 35.1 percent and 11.0 percent, respectively, in 2010. 67. Annual changes in Kazakhstan’s exports are largely determined by a combination of changes in world prices and in domestic production and exports of oil, gas and metals. World prices for oil and gas, for instance, were rising, sharply or moderately, throughout the decade, except in crisis years. Oil prices rose continually from USD24.3 per barrel in 2001 to USD97.0 in 2008 and then declined to USD61.8 in 2009. When world prices for oil and gas were weak, Kazakhstan usually went for offsetting increases in the production and export of these commodities. Opening up of new transportation routes and production fields of oil and gas has enabled Kazakhstan to more than double oil and gas condensate output during 2000-2004 and to obtain an additional 30 percent increase in the next five years. Opening of the Caspian Consortium Pipeline in the early part of the past decade; a new pipeline linking the North Caspian oilfield to this pipeline; another new pipeline to China; and starting shipments through Baki-Tbilisi-Ceyhan pipeline, all around mid-year of the decade, have facilitated transportation of oil and gas at reduced costs. With the scheduled opening in 2012 (or 2013) of the Kashagan oil field, one of the world’s largest, Kazakhstan’s economy will have a new boost from the production and export of hydrocarbons over the medium-term. 68. Non-mineral exports currently account for only 10 to 15 percent of total exports. Their importance, however, lies in the fact that the long-term national development strategy of Kazakhstan emphasizes diversification of the economy and exports towards non-extractive sectors. Kazakhstan’s traditional export categories of grain, cotton, some machinery and equipment, textiles and leather products must serve as the nucleus of its long-term economic growth strategy through improved competitiveness and diversification. The overwhelming share of mineral resources in total exports and foreign exchange inflow, large inflow of FDI, heavy external borrowing by commercial banks and the private sector, and Kazakhstan’s participation in international and regional trade organizations all have important bearings on the country’s competitiveness in world markets. These as well as other macroeconomic and sectoral factors affecting Kazakhstan’s competitiveness in nonextractive exports will be discussed in the next chapter. 69. The annual changes in Kazakhstan’s merchandise imports were reflecting mostly demands for capital goods and equipment of the extractive sector investment projects, particularly by foreign direct investors, as well as strong domestic demand for construction materials and consumer goods in the boom years of 2000-2007. During the financial crisis from 2008 on, weak domestic demand, lack of credit, and temporary administrative controls contributed to deceleration (in 2008 and 2010) and decline (2009) of imports. 70. A major weakness in Kazakhstan’s foreign trade remains to be the presence of very limited economic relations with other countries in the Central Asia. In recent years, the Central Asian countries’ share in Kazakhstan’s merchandise exports and imports was only 3 percent and 2 percent, respectively. There are several important difficulties hindering stronger trade relations among the regional countries, including: (i) similar commodity-based 33

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structures; (ii) high tariffs and restrictive trade policies; (iii) underdeveloped infrastructure; (iv) heavy transport costs; and (v) cross-border political barriers, particularly persistent tensions over water and energy issues. With its rich natural resources and relatively more advanced economic and financial structures, Kazakhstan may become an engine of growth in Central Asia if these difficulties could be gradually eliminated. Should a political commitment for improved relations be first obtained among the regional countries, the other difficulties could be mitigated through investment in infrastructures and enforcement of liberal trade and transit policies. 71. In contrast to its weak economic relations with the regional countries, the GOK has been pursuing a policy of close cooperation and partnership with all major international economic organizations in order to facilitate its accession to wider financial and export markets and to promote foreign investors’ interest in the country. In this context, Kazakhstan joined the Extractive Industries Transparency Initiative (EITI) in June 2005. This shows Kazakhstan’s acceptance for greater openness and transparency in the receipt and spending of mineral wealth. Also, Kazakhstan has been negotiating since 1996 for entry to the World Trade Organization (WTO) with a view to expanding its export markets. But negotiations have lately been slowed down by differences between the parties on the issue of relaxation of protective measures, particularly high tariffs on agriculture, food processing and light industries’ products. In June 2009, Kazakhstan temporarily suspended talks on WTO membership in connection with its membership negotiation with Russia and Belarus for a three-country Customs Union (CU), which became effective on January 1, 2010. Kazakhstan is still pursuing a policy for accession to WTO, but this is now more difficult because of increase in Kazakhstan’s average tariffs as a result of joining the CU. Ideally, Kazakhstan’s accession to the WTO would best be resolved if all three countries of the CU could individually negotiate successfully their entry to the WTO. 72. The CU has so far removed duties on goods produced in member states and enforced a common external tariff, largely based on the Russian tariffs, on trade with third countries. As a result, Kazakhstan had to raise tariffs on about 45 percent of all imported commodities. This has resulted in an average customs tariff rate of 11.5 percent compared to Kazakhstan’s previous tariff rate of 6.7 percent applied to imports from most-favored nations. In July 2011, customs clearance and control procedures at the Kazakh-Russian border were abolished, reducing the cost of trade between Kazakhstan and Russia. Finally, from January 2012, a Common Economic Space (CES) for about 170 million people will be established among the three countries with a unified customs code, customs duties, and a VAT of 17 percent applied to third countries. The CU will lead to higher cost of imports and thus displace some imports from third countries. On the other hand, it will: (i) strengthen Kazakh exporters’ position in the Russian and Belarus markets, and (ii) increase budgetary revenue from customs duties. The CU’s revenue from import duties will be distributed according to a formula, which now gives 87.97 percent to the Russian Federation, 7.33 percent to Kazakhstan, and 4.7 percent to Belarus.

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V. DEVELOPMENT CHALLENGES: Competitiveness and Diversification 73. Over the past decade Kazakhstan has made significant progress in fulfilling some of the broad objectives and strategies of the Kazakhstan-30 Program but not so in the others. In paragraphs 34-35, the directions of the Program were first expressed in terms of 10 strategies and policies, which were then grouped under three broad subjects of (a) macroeconomic management; (b) enhancing competitiveness of the economy; and (c) development of the social sectors. Of these three areas, the emphasis is on competitiveness, and the progress in the first and third areas is meant to help enhance competitiveness in addition to achieving the objectives of their own. The review of recent economic and social developments above has shown that Kazakhstan has achieved significant capacity building in macroeconomic management and a stable economic growth through prudent fiscal, monetary, and exchange rate policies. Similarly, the relevant indicators show that Kazakhstan has made remarkable progress in social areas as well, including in employment, poverty reduction, gender equality, and MDGs. The significance of these favorable developments for competitiveness and diversification of the Kazakh economy, however, has not been discussed except for some remarks in passing. Nor was there any analysis of the issues and policies that would be needed for improving competitiveness and diversification of the major sectors. These will now be discussed below, starting with a paradoxical observation that Kazakhstan has been losing further ground in competitiveness and diversification. 74. Since 2005, the World Economic Forum publishes the Global Competitiveness Index (GCI) for measuring national competitiveness defined as the set of institutions, policies, and factors that determine the level of productivity of a country. In the GCI for 2005, Kazakhstan had a ranking of 51 among 120 countries covered by the index. In the following two years’ indexes the competitiveness ranking of Kazakhstan deteriorated to 56/121 and 61/131. Against this, the government has announced its objective of placing Kazakhstan among the 50 most competitive countries. However, as shown by Table 7, its ranking has further deteriorated to 72/132 in the 2010-11 GCI. Among the 8 FSU countries, Azerbaijan ranks best (57), followed by Russia (62) and Kazakhstan, in the 201011 index. Table 6: Competitiveness Index for Kazakhstan and FSU Countries Azerbaijan Russian Federation KAZAKHSTAN Ukraine Georgia Armenia Tajikistan Kyrgyzstan Total no. of Countries

2010-11 57 63 72 89 93 98 116 121 139

2009-10 51 63 67 82 90 97 122 123 133

2008-09 69 51 66 72 90 97 116 122 134

2007-08 66 58 61 73 90 93 117 119 131

Source: World Economic Forum, The Global Competitiveness Reports

2006-07 54 59 56 78 85 82 96 107 121

2005 62 53 51 68 86 81 92 104 120

75. The GCI is a composite index of 12 pillars, each measuring a different aspect of economic competitiveness. Kazakhstan’s ranking for each pillar in the most recent three GCIs is 35

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shown in Table 8. It is remarkable that Kazakhstan made progress in only one pillar (macroeconomic environment); maintained its position in another (market size), and lost ground in the remaining 10 pillars. On the other hand, a healthy and sustainable diversification of Kazakhstan’s economic development over the medium- and long-term could be achieved only through improved competitiveness, particularly in the nonextractive sectors. Whatever reasonable margin of error could be allowed in the interpretation of the above indexes, they certainly point to the presence of a serious obstacle that Kazakhstan now faces in achieving its national development objective of diversifying its economy towards non-extractive sectors. 76. The overall competitiveness of the Kazakh economy should be interpreted as a summary indicator of the competitiveness of its all economic sectors and all goods and services, both currently produced and potentially producible, vis-à-vis foreign goods both at domestic and export markets. The competitiveness of individual goods and services does in turn depend on their relative prices and relative profitability, the latter determining the relative margin for price competition. This definition applies to competition both among local goods and services, and between local and foreign goods and services. Here two matters deserve particular emphasis: What matters first, in the case of local and foreign goods, is the conversion of original prices in different currencies into a common currency; hence the great importance of the exchange rate between the two currencies in determining competitiveness of an economy. Second, given relative prices, relative profitability will depend on relative costs of production and distribution, which in turn depend on physical productivity and relative prices of factors of production. This textbook breakdown of competitiveness into its basic elements is meant to indicate that, given the resources/factors endowment of a country, its competitiveness in overall, sectoral and product basis, will be affected by a host of factors underlying its relative prices both in the goods and factor markets. Any review and evaluation of Kazakhstan’s competitiveness should therefore look into the potential impact on relative prices of goods and services, particularly in nonextractive sectors, of the following, among others: a. The government’s macroeconomic management and policies, especially the exchange rate policy; b. Business and investment environment; c. The efficiency of markets for goods, capital and finance, and labor; d. Sectoral development policies to enhance competitiveness and diversification. 77. In the following paragraphs, the impact of the above factors on competitiveness and diversification of the Kazakhstan’s economy will be discussed, particularly in light of some major developments and practices in recent years.

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Effect of macroeconomic management and exchange rate policy on competitiveness: 78. During 2000-2007, the macroeconomic policy of the GOK was successful to pursue a prudent fiscal policy, and a rightly balanced monetary policy to accommodate a booming economy’s credit demand while also maintaining a stable exchange rate and a moderate inflation rate. This macroeconomic stability is essential to the establishment of a business and investment environment which will be conducive for initiatives to improve competitiveness and diversification of the economy. During this period, the GOK has also built up the international reserves of the NBK and saved a large part of the inflow of oil and gas revenue in the NFRK. This has also helped to improve business and investment climate for initiatives to improve competitiveness and diversification in non-extractive sectors, and to weather the impact of the global financial crisis with less damage and earlier recovery than most countries. 79. Although the overall macroeconomic environment over the past decade was favorable to the enhancement of competitiveness and diversification of the economy, this has not been realized due to, among others, the following reasons: a. Despite the stable economic environment maintained over the past decade, the GOK’s macroeconomic management is not adequately assuring about its policies and programs over the medium- to long-term, which should be the basis for foreign and domestic investors interested in the non-extractive sectors. This is due to: (i) the government introducing too many narrow-based programs without a comprehensive framework14 (e.g., an indicative five-year plan or a MTEF15) encompassing them all; and (ii) the budget estimates and other macroeconomic magnitudes announced at the beginning of each year are treated by the GOK as projections rather than targets and are easily and frequently revised. b. Although average rate of inflation was kept at a moderate level, mainly through large inflow of imports and gradual appreciation of the tenge, the large inflow of oil revenue, commercial bank credit boom, and increased wages and social payments resulted in higher relative price of non-tradable to tradable goods. c. The bulk of both foreign and domestic private investment, outside extractive sectors, was going to non-tradable sectors, like housing and transportation, as higher relative prices were making them more profitable relative to tradable sectors. d. The share of non-extractive sectors (e.g., manufacturing, food processing) in total exports has not shown any significant improvement, which is a clear indication of lack of progress in enhancing competitiveness and diversification. In other words, the relative price and relative profitability of Kazakhstan’s non-extractive tradable sectors are not competitive against foreign goods.

14

(i) The Strategy of Kazakhstan Development till 2030; (ii) Strategic Plan for Development of Kazakhstan till 2020; (iii) State Program on Forced Industrial and Innovation Development of the Republic of Kazakhstan for 2010-2014; (iv) Business Road Map-2020; (v) Export-2020; (vi) Production Efficiency-2020; (vii) Investments2020; (viii) Concept of Financial Sector Development in the Republic of Kazakhstan during Post-Crisis Period. 15 The GOK adopted a three-year MTFF (much narrower in coverage than the MTEF) as the basis of its 2004 Budget, but this practice has not been maintained.

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e. Recognizing the above problems, the GOK has tried to improve competitiveness of non-extractive tradable sectors by tax and credit concessions to them. Some specific measures in this context will be referred to when discussing sectoral competitiveness issues below. Here it will suffice to note that this, first, attempts to address the symptoms but omits the underlying problem (i.e., the overvaluation of the tenge) and, second, creates loopholes for tax evasion and credit misuse, leading to inefficiency in resource use. f. The GOK seems to have opted for state-driven industrialization, which is also seen as an effective instrument to diversify development of the economy towards nonextractive sector. This will be discussed below in the context of business and investment environment whether state-driven industrialization could lead to a sound (efficient) and sustainable development of a competitive and broad-based (diversified) economy in Kazakhstan. 80. In the macroeconomic management of the Kazakhstan’s economy, the most crucial policy issue is how to make the best use of its natural resources windfall without succumbing to “the resource curse” (i.e., the Dutch disease). The establishment of the NFRK; putting a statutory limit on the annual amount of oil revenue support to the Budget; and keeping the overvaluation of tenge under control are all purported to minimize the risk of catching the Dutch disease. But the results of the implementation in terms of the competitiveness and diversification of the economy over the past decade are not encouraging at all. It is obvious that with the given factor and natural resources (other than oil and gas) endowment of Kazakhstan, a market determined realistic exchange rate (i.e., non-oil equilibrium exchange rate)16 would have provided a much stronger and healthier import protection and export promotion to the non-extractive sectors than provided through the current macroeconomic policies. On the other hand, Kazakhstan’s “good fortune” of having rich oil and gas resources is a reality that cannot be overlooked. Its use, however, strengthens tenge, whose every minute overvaluation compared to the non-oil case renders one non-oil sector product at the margin uncompetitive. Recognizing this fact, the following policy directions could be considered in the use of oil and gas revenues: i. Gradually reduce the annual amount of oil revenue directly transferred from the NFRK to the Budget, with a view to eliminating it by, say, 2020; ii. In order to gradually minimize the injection of oil-and-gas related foreign exchange into the local currency market, use the oil funds directly from the bank accounts abroad for the financing of high-technology capital goods imports, including for the education and health sectors, which would not create competition with local products. iii. Maintain the nominal exchange rate of the tenge at a level that would result in a small, steady annual decline in the REER. iv. Diversification of the economic development could come about only through relative price changes in the goods and factor markets. Relative prices can 16

It is interesting that the economic literature on oil-rich countries make free-use of the concepts of “non-oil GDP” and “non-oil government reveues” but not yet “non-oil equilibrium exchange rate”, which is neither less meaningful nor less important than the two former concepts.

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usually change by some prices going up more than others; hence, the NBK’s inflation target should be high enough to accommodate this process. Business and investment climate 81. Kazakhstan’s competitiveness index and its components (Table 7) indicate that the country has an unfavorable ranking in almost all the critical elements of the business and investment climate, with the exception of macroeconomic environment and the labor market efficiency. Its highly poor ranking in the financial market efficiency, business sophistication, and innovation should be of particular concern to the GOK. The World Economic Forum’s above-mentioned indicators are largely supported also by the results of the IFC’s “Enterprise Surveys: Kazakhstan -2009”17. In this survey, all corruption indicators (five of them) of Kazakhstan are much worse than the averages for Eastern Europe and Central Asia (ECA) and also for the upper middle income countries (UMIC). As for the finance indicators, Kazakh firms rely more on internal finance and less on bank finance for investment than the averages for firms of the two-comparator groups. On infrastructure, percentages of Kazakh firms identifying major constraints as transportation (38.6), electricity (44.9), obtaining a water connection (40.5), and obtaining a mainline telephone connection (42.0) were much higher than in the two-comparator groups. Kazakh firms spend more time to clear exports (8.5 days) and imports (14.0 days) through customs than ECA and UMIC firms. Table 7: Kazakhstan's Competitiveness Indicators 2010-11 2009-10 72 67 Global Competitiveness Index 69 74 Basic requirements Institutions 91 86 Infrastructure 81 75 Macroeconomic environment 26 59 Health & primary education 85 80 71 69 Efficiency enhancers Higher education & training 65 59 Goods market efficiency 89 84 Labor market efficiency 21 18 Financial market efficiency 117 111 Technological readiness 82 69 Market size 55 55 102 78 Innovation & sophistication factors Business sophistication 102 88 Innovation 101 64 memo: Total number of countries 139 133

2008-09 66 74 81 76 74 81 64 59 80 12 97 75 55 77 86 62 134

Source: World Economic Forum - Global Competitiveness Reports

17

This survey’s coverage for East Europe & Central Asia Countries is carried out jointly by the World Bank and EBRD and posted at the EBRD website as well under the name “Business Environment and Enterprise Performance Survey” (BEEPS) - (http:/www.enterprisesurveys.org)

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82. Nevertheless, the above-described situation should be somewhat moderated by recent indicators of the Transparency International’s Corruption Perception Index and the World Bank’s “Doing Business” data. On the whole, Kazakhstan’s corruption perception index during 2001-2008 was indicating that corruption is a major issue in the country. However, there is a hopeful sign of steady improvement over 2007-2010 (Table 9), when the index sharply improved year-after-year from 151 in 2007 to 106 in 2010 (out of 180 countries). This should be indicating the positive results of the GOK’s anti-corruption policies and measures in recent years. To maintain this declining trend of corruption will make a strong contribution to the improvement of the business and investment environment in Kazakhstan. Moreover, the World Bank’s data show that Kazakhstan’s overall “Ease of Doing Business” rank (out of 183 countries) substantially improved from 74 in 2010 to 59 in 2011. Table 9 shows that this improvement was the result of positive changes in the four out of eight components, including starting a business, dealing with construction permits, protecting investors, and paying taxes. There were no changes in the components of registering property and enforcing contracts, but Kazakhstan has already got very good rankings in them (28 and 36, respectively). One deteriorating rank is in “getting credit”, which probably reflects the aftermath of the recent financial and banking crisis. Finally, an interesting index relates to “trading across borders”, in which Kazakhstan improves (!) from the rank of 182 to 181 in 2011 (see also para.70). Table 8: Corruption Perception Index for Kazakhstan Year

Number of countries

Kazakh ranking

On 180 country basis

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

91 102 133 146 159 163 179 180 180 178

73 88 101 124 110 111 150 145 120 105

144 155 137 153 125 123 151 145 120 106

Source: Transparency International

Table 9: Kazakhstan's ranking in "Ease of Doing Business" Ranking topics 2011 Rank 2010 Rank Overall doing business Starting a business Dealing with construction permits Registering property Getting credit Protecting investors Paying taxes Trading across borders Incoming contracts Memo: Number of countries surveyed: 183 Source: WB/IFC, “Kazakhstan: Doing Business 2010”

59 47 147 28 72 44 39 181 36

74 85 156 29 69 57 53 182 36

Change 15 38 9 1 -3 13 14 1 no change

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Figure 13: % of firms reporting a specific factor to be a problem 73.8% 70.2% 63.6% 58.6% 55.8% 55.2% 54.0% 48.6% 48.4% 43.6% 41.8% 41.6% 38.2%

Macroeconomic instability Excessively high taxes Lack of skills and education of available workers high cost of financing Inadequate tax administrations Poor roads' quality Contract violations by customers and suppliers Difficulties in gaining business licences / permits Difficulty in accessing financing Inadequate labor laws / regulations Government intervention

Corruption Poor telecommunication' quality

21.2%

Organized crime / mafia Source: World Bank "RK:TVE Modernization Project"; June 2010

0%

10%

20%

30%

40%

50%

60%

70%

80%

83. Kazakhstan’s competitiveness and economic diversification would be enhanced by improving the country’s business and investment environment through addressing its main indicators, which need to be improved significantly should Kazakhstan achieve its aspiration of becoming one of the 50 most competitive countries by 2020. Most of the required improvements seem to be of bureaucratic or regulatory type, and should not pose a major difficulty to the GOK with necessary political commitment. Efficiency of markets 84. The enhancement of competitiveness and healthy diversification of the Kazakh economy would require improving the efficiency of its markets for goods, labor, and finance. Kazakhstan had a poor ranking (80/134) in the goods market efficiency among 134 countries in 2008-2009 (Table 7). This deteriorated to 84/133 in 2009-2010 and to 89/139 in 2010-2011. Healthy market competition, both domestic and foreign, is important for enhancing the goods market efficiency. Kazakhstan has adopted almost all the necessary legislation for the operation of a market-based economy. Its poor ranking is therefore due not so much to an inadequate legal system as to non-compliance of the government with enforcement rules and to heavy state intervention in the operation of markets. Moreover, the dilemma of making the best of oil-windfall without much hurting development prospects of the non-oil sectors forces the government to try to offset the adverse effects of the overvalued tenge by distortionary taxes and incentives. Without significant changes in such fundamental issues (i.e., heavy state intervention and the exchange rate policy), only limited improvement could be achieved in the goods market efficiency through some institutional and technological improvements (e.g., reducing license requirements and improving electronic communications) and through reduced tariffs and restrictions on foreign trade. The CU with Russia and Belarus will help improve the market efficiency, 41

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though at the expense of potentially a greater improvement that would have resulted from the entry to the WTO. 85. Kazakhstan has a very good record of labor market efficiency in international comparisons as summarized by the WEF’s Global Competitiveness Index, even though it has been losing some ground over the last two years (Table 7). The efficiency of the labor market is critical for ensuring that workers are employed in their most efficient use in the economy and provided with remuneration and incentives to do their jobs best. The earlier sections showed that the Kazakhstan labor market has significant wage differentials by geography and by economic sector. This might be conducive to efficiency improvement provided that labor mobility is not hindered by market and/or social segmentations. Nevertheless, some tempering of wage differentials might be needed on social grounds, as has been done through significant increases in public sector wages in recent years. The efficiency concerns would also call for improving the match of education and technical skills of the labor force with the market requirements, which is known to be a current weakness of the labor market in Kazakhstan. There is an increased demand for skilled workforce among business community and private sector in Kazakhstan and education and training system should meet this increased demand in coming years.

86. As already noted above, among the 12 indicators of competitiveness used by the GCI, Kazakhstan has the poorest and deteriorating ranking in the financial market efficiency (Table 7). This had not attracted much concern during the booming years of 2002-07, when Kazakh banks were enjoying easy access to foreign borrowing until the global financial crisis abruptly ended this from late 2007. The State has since been heavily involved in the banking system through various rescue operations, including taking majority and minority stakes in four banks (para. 63). To avoid recurrence of similar crises in the future, the banking system has now been going through a major restructuring of its balance sheet both on the liability and the asset sides. On the liability side, the external debt obligations of the four banks, in which the State was directly involved, had to be restructured, showing that excessive external wholesale funding is not a sustainable model for Kazakh banks. They should instead rely more on domestic funding, particularly by expanding their small deposit base. But the problem of small deposit base is exacerbated by the fact that only one-third of it was in tenge in 2007 (i.e., deposit dollarization). On the asset side, Kazakh banks have used their ample foreign funding for rapidly expanding their projects portfolio in a limited number of sectors, particularly in construction and real estate (mortgage lending), mostly in foreign currency lending (i.e., credit dollarization), even though these sectors do not have a stream of foreign exchange earnings. The resulting crisis of NPLs (30 percent of the total loan portfolio in 2007) has become a key impediment to bank lending 18. Restructuring of the asset side of banks’ balance sheet will, therefore, take time while they are building up a new portfolio of profitable projects in diversified sectors, including non-extractive sectors. 87. The financial market efficiency in Kazakhstan needs improvement also in the provision of financing to micro, small and medium-sized enterprises (MSMEs), particularly outside 18

The GOK has recently announced a plan to resolve NPLs consisting of a combination of a centralized fund established and owned by the NBK and enhanced efforts at the individual bank level.

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Almaty and Astana, where most banks are also active in micro-financing. Kazakhstan introduced a law on Microcredit Organizations (MCO) in 2003 (Law No.392) allowing only banks, credit unions, and MCOs to operate in providing micro-financing. While the first two are also deposit-taking institution, MCOs are expressly forbidden from mobilizing deposits. Since the law sets minimum capital requirements (approximately USD 9,500) very low for credit-only micro-finance institutions, Kazakhstan has had a proliferation of small MCOs (over 500). On the other hand, to mobilize deposits, an MFI must have a full banking license, for which the minimum capital requirements reach USD 33 million. In order to promote supply of micro-financing, either MCOs should be encouraged by the monetary authorities to merge and consolidate to meet the minimum capital requirements for deposit taking, or a separate regulatory window should be created with lower minimum capital requirements that strong credit-only MFIs can meet for engaging in deposit taking. In the provision of micro-financing, there are usually difficulties with collateral and credit information. These difficulties have now been considerably eased in Kazakhstan with the establishment of a unified collateral registry and of a private credit bureau that provides credit information services. 88. Kazakhstan’s financial sector does not have adequate support of a developed capital market. Although the Kazakhstan Stock Exchange (KASE) has a substantial trade volume, most trade is in repos and foreign exchange. Both bond and equity trading is very low. One reason for capital market underdevelopment is the limited need for domestic borrowing by the GOK. Also, the prevailing regulations constrain the issue of non-government debt instruments to institutional investors (e.g., pension funds). Existing options for private placement fall highly short of meeting diverse and complex corporate financing needs. Despite improvements in issuers’ disclosure and corporate governance, investors’ lack of confidence in these issues also limits the supply of non-government debt instruments. To address these issues, (i) the government bond market initiative should be continued to generate secondary trading and to facilitate collateral-based operations; and (ii) the nongovernment bond market should meet the demand from pension funds by facilitating private placements and institutional offerings. A private equity culture is also slowly emerging and expected to be enhanced by the planned privatization of minority shares in large State enterprises through the “people’s IPOs”. As noted before, the government is involved in the private equity market through the NIF and IFK. If this government involvement could be kept limited, and is supplemented with new initiatives to facilitate further entry into the market and to make target companies more transparent, the development of the private equity market would gain significant momentum over the medium term. Key sector policies to enhance competitiveness and diversification 89. The previous sections looked into some macro issues with important bearings on enhancing the competitiveness and diversification of Kazakhstan economy and thus reducing its dependence on oil and gas resources. This section now focuses on key sector policies for improved competitiveness in non-extractive sectors, including oil refinery and 43

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petrochemicals, agriculture, transportation, telecommunication, power, innovation and technology, education, health, and environment. 90. The oil and gas sector: Although the long-term development strategy of Kazakhstan emphasizes the enhancement of competitiveness and diversification of the economy toward non-extractive sectors, the underlying objectives of this strategy (i.e., raising the GDP growth rate, expanding employment, broad-based industrialization, improving income distribution) also applies to augmenting the local value-added content in the oil and gas sector. In the hydrocarbon sector in Kazakhstan, upstream exploration, production and export projects have been the most attractive investment projects, mainly because of their shorter payback period compared to that in oil refining or petrochemicals. This problem is also recognized in the analytical part of a recent (2009) legislation “Concept on further Development of Local Content”, which states that raw resources constitute major part of exports, while processed goods and produced products are not competitive enough. The reasons cited are: (i) limited supply of qualified labor compared to specific industry demand; (ii) lower investment potential of the processing industry; (iii) low level of tariff shelter on domestic market; and (iv) limited use of non-tariff measures (e.g., standards). 91. The GOK has adopted two main policies to enhance the value added content of the hydrocarbon industry: to develop the oil refinery and petrochemicals industries; and to stimulate and/or force the subsurface users (stakeholders) to increase local content of their production and export projects. There are three oil refineries in Atyrau, Shymkent and Pavlodar, producing fuel oil, diesel fuel, gasoline, jet fuel, and liquefied gas. They all are operated below full capacity, mainly due to a lack of demand for their products which are characterized by a low level of refining depth. Almost two-thirds of the country’s refining capacity as well as a large share of the fuel distribution network is owned and operated by the state-owned company KazMunaiGaz (KMG). All three refineries need substantial modernization and reconstruction, for which KMG is now carrying out an investment program to enable them to switch to new production standards and install new facilities. Dynamic development of the Kazakh oil processing industry will require further modernization of the existing refineries as well as construction of new ones, in view of the growing domestic demand, particularly for light-end oil products, The GOK has also been developing the petrochemicals industry and created an industrial park for this purpose with all functions of a special economic zone. It is expected to attract up to USD 7.5 billion of investments by 2015 as well as experience and technologies of the largest international companies to develop the chemicals, petrochemicals and pharmaceutical industry. China is a potential market for petrochemicals products, but Kazakh exporters are likely to meet fierce competition from the Middle East countries and from a number of Chinese petrochemical plants. 92. The GOK gives a major priority to the promotion of “local content” in its policy for development of the oil and gas industry. It has been taking significant measures to this end since mid-1990s, including the following:

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Box 4: The Fertilizer Sector in Kazakhstan.

Facts:  The global consumption of fertilizers is estimated to grow from 168 million tons in 2008 to 186 million tons in 2014, an increase of over 35 percent.  Asia and Eastern Europe lead fertilizer demand (more than USD 12 billion annually).  42 percent of mineral fertilizers producers in Kazakhstan see poor quality and price competition as the most significant barriers to export of mineral fertilizers.  50 percent of fertilizer companies surveyed said access to long-term financing was a major obstacle to development of their businesses. Sector Strengths: Kazakhstan has all of the basics in place for developing its fertilizer production: deposits of between 4 and 15 billion tons of phosphate rock, significant reserves of natural gas and sulfur, and low cost access to ammonia. Moreover, the large potential domestic market and major market opportunities in C. Asia, China and India remain untapped. Intensity of Fertilizer Sector Challenges: Use  Government subsidies to farmers for the purchase of domestically produced (2006-07 average) agricultural chemicals reduce incentives for local producers to improve quality. Kg per Country  Low level of investment, basic and outdated technology, low quality inputs ha and absence of know-how among farmers. Kazakhstan 5  Lack of awareness among foreign investors of Kazakhstan’s mineral Russia 13 fertilizer sector. Kyrgyz Rep. 22 Recommendations for Sector Reform: Ukraine 30  Simplify procedures for access to land for construction of new plants and India 139 extraction of minerals. United States 160  Offer incentives for introduction of new technologies.  Improve access to long-term financing for large-scale investment projects.  Raise awareness among foreign companies of sector specific business opportunities and investment clearance procedures.  Capture the domestic market through extension programs.  Open the market to competition and promote foreign investment. Source: Summarized from OECD, “Kazakhstan: Sector Competitiveness Strategy- Key Findings”, May 6, 2011, pp. 16-17.

i. ii. iii. iv. v.

The 1995 Petroleum Law obliged the contractors to engage their subcontractors largely from Kazakh organizations. The 1996 Law on Subsurface Use required tender proposals to indicate what percentage of total goods, work and services would be of Kazakhstan origin in value terms. The 2005 Law Concerning Production Sharing Agreements required that at least a 50 percent stake in all new PSA be held by the KMG. The 2007 Public Procurement Law states that preference is to be given to local manufacturers where the quotations presented are equal. “The Concept on further development of local content”, accepted by the GOK in September 2009, and the new Law on Subsurface Use, which is in Parliament, aim at the following goals in three stages:  Stage I (2009-10): setting minimal local content requirements for subsurface users and developing legislative provisions;  Stage II (2010-2011): Availability of state subsidies or credit schemes to promote domestic producers of prospective goods and services, including technology transfer, science support, and new skills acquisition; 45

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

Stage III (2011-onward): State support for domestic entrepreneurs’ access to international markets.

93. The new legislative system stimulates Figure 14: Wheat production cost by country subsurface users to find (USD per ton) domestic suppliers and 300 contractors and to invest 246 250 in capacity building and 202 190 200 175 technology transfer. 165 Target for the level of 150 105 product procurement from 100 Kazakh suppliers is set at 50 50 percent by 2012 (for 0 services, up to 90 US France UK Ukraine Russia Kazakstan percent). The Source:OECD, Kazakhstan Sector Competitiveness Strategy, May 2011 achievement of these targets, however, will require addressing a number of existing features of the extractive and related sectors, which would otherwise create hindrances. These features include: (i) Lack of domestic suppliers producing specialized products needed by subsurface users; (ii) slow growth of technology capacity of domestic suppliers; (iii) shortage of qualified human resources; (iv) limited contact between domestic producers, subsurface users and state bureaucracy; (v) long-term nature of investment for human resource development, technology transfer, and capacity building; and (vi) administrative sanctions and termination of subsurface users’ contracts due to non-compliance with local content requirements might be counterproductive if the above factors overlooked. 94. The agriculture sector: Agricultural development is an important pillar of the Government policy of diversifying the economy from dependence on the extractive sectors mainly because the agriculture sector in Kazakhstan has a significant potential for improved competitiveness and development. Contributing to this potential, among others, is the availability of: (i) abundant agricultural land; (ii) qualified labor force; (iii) low production cost and freight advantage; and (iv) the growing government support to the sector. To take advantage of this favorable potential, however, both the government and enterprises should be prepared to deal with the following negative factors: (i) impact of harsh and uneven climate; (ii) instability of agricultural commodity prices in the world markets; (iii) the overvaluation of the tenge (Dutch disease); (iv) less than favorable business and investment environment; (v) relatively high cost of labor; and (vi) limited access to know-how, technology, and finance.

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95. Kazakhstan has the greatest potential in the grain, Table 10: Wheat yield by countries, meat and dairy sub-sectors to successfully compete in 2008 Country kg/ha the world markets. Wheat accounts for 80 percent of 80.873 total value of the country’s grain production and 2 Germany Ukraine 36.698 percent of the total value of exports. Wheat US 30.177 production cost of Kazakhstan was USD105 per tone Canada 28.520 in 2008 compared to USD240 for the USA, and USD Russia 24.458 202 per tone in France (Table 10). On the other hand, Australia 15.788 9.714 Kazakhstan’s wheat yield was much lower than the Kazakhstan other major wheat producers’ (Table 10), which is Source: OECD, Kazakhstan: Sector somewhat offset by the relatively extensive area sown Competitiveness Strategy, May 2011 to wheat and lower production cost. Historically, Kazakhstan suffers from serious drought two out of every five crop seasons, resulting in sharp yearly fluctuations in grain yield and production. Grain area has almost halved during 1990s, dipping to 11.4 million hectares in 1999. This was partly due to the loss of markets and government subsidies for grains after the breakup of the Soviet Union and partly to the policy of the GOK to convert poor quality grain areas to permanent pastures. Also the sharp decline in the size of livestock herd during 1994-1997 led to a 75 percent drop in barley area. With a steady recovery in demand and State subsidies for agricultural inputs, grain area and herd size started to rebound from 2000 and both expanded by around 50 percent by 2010 (Annex Table 9). 96. Although grain yield in Kazakhstan is strongly affected by weather conditions, improved farm management practices and expanding State subsidies have contributed to higher and more stable wheat yields. The Government owns all agricultural land and leases farmland to farmers under 49-year leases. There are three categories of farms in Kazakhstan: private peasant farms, subsidiary household plots, and agricultural enterprises. Peasant farms are typically family farms and 95 percent of them are smaller than 1,000 hectares. About 200,000 peasant farms produce grains, accounting for about 35 percent of the country’s output. Grain yields on peasant farms are much lower than on agricultural enterprises because of their outdated machinery inventories and financial limitation to lease or purchase new equipment. Household farms are small plots (on average 0.15 ha.) used for producing grain, livestock and poultry essentially for family consumption. About 3 million household farms produce less than 1 percent of the country’s grain but account for 50 percent of poultry inventory and 85 percent of the cattle. There are about 5,000 agricultural enterprises with an average size of 3,000 hectares each. They account for about 65 percent of Kazakhstan’s grain production. 97. Enhancing competitiveness (productivity) of grain production would need the use of improved farming methods, technology, machinery and marketing. Especially peasant farms would need to be supported through subsidized prices of inputs and easy access to finance. Agro-holding companies, on the other hand, provide working capital and

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Box 5: Cotton Harvest Fails to Provide Rich Pickings South Kazakhstan is the country's only cotton-growing region, and the overall harvest total was projected to be around 320,000 tons in 2008. This is roughly 25 percent lower than previous year's 442,000 tons, which was slightly up on the 435,300 tons reaped in 2006. Reasons for the lower yield include the elements, which brought hail and rain but also drought, and a reduction in land sown with cotton in 2008. The 2007 harvest was reaped from 205,000 hectares, but 162,000 hectares were sown in 2008; the 21 percent reduction largely explains the fall in the harvest.

Main Indicators of Cotton Production in Kazakhstan, 2004-2008

Indicator

Sown area, thnd ha Total production, thnd tons Crop capacity, centner/ha Cost, KZT/ton Selling price, KZT/ton Profitability, %

2004

223.7 467.1 21.3 33,881 39,031 15.2

2005

204.2 465.0 23.1 38,353 39,442 2.8

2006

200.1 435.4 22.2 37,937 40,923 7.9

2007

178.6 441.7 22.1 44,696 52,591 17.1

2008

317.5 270.0 18.2 50,825 49,801 -2.0

The government moved to resolve water shortages in southern Kazakhstan, spending $500 million to create the Koksaray reservoir, with a capacity of 2-3 billion cubic meters. It would take water from the Syrdarya River in winter and spring, preventing floods in the wet season and providing irrigation water in the dry season. Koksaray is due for completion in 2012, but it has already started accumulating water. Local farmers are eyeing the new reservoir with hope, but many realize it will not solve all their problems. The main gripe of farmers and laborers is low returns for their toil. Cotton pickers were paid 10 tenge (8 cents) per kilogram during the early part of the 2008 harvest, while farmers said they struggled to get by on the prices they receive for the cotton. Some farmers said the going rate in 2008 at times was 50 tenge (42 cents) per kilogram, far below the 75 tenge (63 cents) which was officially recommended. One local farmer said “it needs to sell for at least 90 tenge (75 cents) for him to make a profit. The price doesn't justify the labor. The rate for pickers increased from 10 tenge per kilogram early in the harvest to 17 tenge (14 cents) later. Rates were low, but employment alternatives were few. "The male population is all unemployed. There's no work," said the local farmer. "Cotton's considered the main source of wealth here," he added. Much of the cotton in Kazakhstan is picked by Uzbek migrant workers, legal and illegal, who cross the porous borders, attracted by the higher wages that they can earn in Kazakhstan than back home. While Kazakhstani pickers complain about low rates, the migrants seem satisfied. Reports from Uzbekistan in 2008 suggested pickers were paid 40 sums (3 cents) per kilogram at state-set rates, far lower than Kazakhstan's market-set rates. State-set picking quotas were 60-80 kilograms per day in Uzbekistan, yielding a daily income of $1.80-$2.40. A laborer picking the same amount in Kazakhstan would earn in the range of $8.40 to $11.20. Source: Summarized from “Kazakhstan: Cotton Harvest Fails to Provide Rich Pickings”, published on www.eurasianet.org on November 13, 2008 - 7:00pm.

marketing channels to several enterprises operating under their umbrella. In recent years there has been an important farming method development in Kazakhstan known as reducedtillage or moisture-saving technology. This technology eliminates moldboard plowing, but increases reliance on chemical weed control; hence it reduces fuel costs but increases herbicide costs, which more or less offset each other. However, reduced tillage preserves soil moisture and reduces impact of drought. It also enables grain producers to eliminate the fallow year in crop-rotation and plant a crop every year. This substantially increases farm productivity. The necessary technology for reduced tillage (e.g., the replacement of 48


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outdated seeder and upgrading the machinery), however, seems to be prohibitively expensive for small enterprises or family farms. 98. Among other farming method/technology improvements contributing to enhanced competitiveness in Kazakhstan’s grain production, the following are particularly important: i. Application of mineral fertilizers increased nearly six fold during 1999-2007 and has since been increasing due in part to the subsidized prices. ii. Increase in the use of certified seed to almost 100 percent of producers, thus eliminating the use of common seed (seed reserved from the previous year’s harvest). The Government supports this development by paying 40 percent of the research costs for certified planting seeds. iii. Kazakhstan’s farm machinery fleet has declined significantly over the past two decades, but its efficiency has been increasing through the replacement of aging grain-harvesters and tractors. iv. Area sown under grain has been expanding in recent years through the recovery of potentially productive but currently idle land. Such lands are able to produce an average yield within two years. 99. Global demand for meat and meat products has been growing steadily over the past three decades. OECD countries account for a large, though declining, share of today’s world beef production, while emerging economies have been expanding their share of meat exports. Kazakhstan could also join this trend by taking advantage of its regional relations, abundant pastures, low production costs, low labor and land costs, low processing costs, and access to premium markets (e.g., Russia). Table 11 shows Kazakhstan’s advantageous position vis-à-vis selected beef producing countries in exporting to Russia. Similarly, Kazakhstan should focus on the high growth Middle East and Central Asia markets to develop its meat export potential, preferably with an emphasis on higher value-added beef products. For this, however, Kazakhstan needs to further upgrade standard of its meat products by promoting compliance with international standards and regulations through producers’ organizations.

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Table 11: Cost of beef production and transport to Russia, 2007-08 (USD per 100 kg carcass weight)

Country

Input cost

Capital cost

Labor cost

Transport To Russia

Total cost

France 440 60 30 25 555 Germany 350 50 100 20 520 Poland 270 10 50 15 345 Kazakhstan 233 12 61 8 314 Argentina 130 5 65 25 225 Source: OECD, Kazakhstan: Sector Competitiveness Strategy, May 2011, p.10

100. It is paradoxical that despite having very large livestock resources relative to its small population Kazakhstan is import-dependent for dairy products. Imports of dairy products increased over five-folds during 2003-2008. Kazakhstan’s competitiveness in agriculture should be improved not only in export markets but also in the domestic market for products in which the country has comparative advantage. Milk quality and yield (i.e., kg/animal) in Kazakhstan is very low by international standards. The Kazakhstan dairy industry has relatively low costs of milk production, but its low quality is the most important business challenge for moving up the value chain. This is largely due to the fact that almost 90 percent of total milk production takes place in smallholder farms with limited know-how and inadequate financial resources for necessary yield improvements. To improve milk quality, Kazakhstan should (i) raise the share of pedigree livestock, which is only 6 percent compared to 25-30 percent in the US and Canada; (ii) increase the inventory of milk animals; (iii) improve the quality of feed; (iv) apply innovative technologies; and (v) promote modern retail chains. The GOK could support this process by supporting the development of producer organizations and extension services; by increasing dairy producers’ access to finance schemes; and by improving the dairy sector’s subsidy level, which is currently near zero. 101. Finding new markets is Kazakhstan’s key challenge to both improving and sustaining the competitiveness of its agriculture. Competitiveness would not depend only on productivity and cost factors. Equally important are certified safe and quality products, particularly high standards of animal and plant health; meeting the sanitary and hygienic standards; and having sufficient harmonization of standards and adequate testing capacity. The establishment of the CU by Russia, Kazakhstan and Belarus would help improve standardization of Kazakh exports towards international standards. However, the full observance by Kazakh agricultural exports of international standards for food safety and quality would be achieved if and when Kazakhstan becomes able to access the WTO. The above matters of quality and standard controls (particularly in the dairy and meat sector) are also important for the development of a modern food chain in domestic market. Domestic demand for agricultural products is almost fully satisfied, except for specific high quality products, regional supply and demand imbalances, and seasonality of supply. With the development of transport and storage infrastructure, particularly if the south and north of the country is connected, these regional imbalances could be mitigated and the fruit and vegetable production potential of the southern areas could be better tapped to supply other regions of the country. 50


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102. Transport infrastructure: The enhancement of competitiveness and diversification of the Kazakhstan’s economy would be facilitated if entrepreneurs can get their goods and services to market in a secure and timely manner and workers can move to most suitable jobs through an effective transport network, including quality roads, railways, and air transport. Kazakhstan’s large size and geography (i.e., landlocked and remotely located relative to world markets) constitute a disadvantage for competitiveness because of high transport costs (both capital and operating costs) in moving goods to markets over long physical distances. This disadvantage could be overcome through a combination of (i) reducing costs of production and marketing; (ii) given the prevailing transport infrastructure, reducing (preferably minimizing) all time and money expenditures for the movement of a consignment to a market (i.e., economic versus physical distance); and (iii) taking advantage of its disadvantageous geography as providing a healthy protection to the development of import substitution industries. 103. The Government has adopted comprehensive development strategies (Kazakhstan-30; National Territorial Development Strategy; and Kazakhstan-20) with special emphasis on transport infrastructure as well as the sector specific development programs of the Transport Sector Development Strategy (TSDS) for 2006-2015 and the Road Sector Development Program (RSDP) for 2006-2015. The latter two documents contained investment programs for the rehabilitation of the Republican road network19 and for additional infrastructure, with a priority for the reconstruction of six strategic road transport corridors (totaling 8,290 km) that carry majority of the traffic on the Republican road network (including international transit roads). Much of the road network, which was constructed during the Soviet era, has significantly deteriorated due to the lack of adequate maintenance as a result of poor planning, limited institutional capacity and a rapid growth in the volume of traffic. Construction and periodic maintenance of Republican roads are contracted out to foreign and domestic private companies, but routine maintenance services are provided by the state-owned enterprise Kazakhavtodor. The RSDP reveals that the budget for maintenance has been increasing by 10 percent a year in real terms since 2006, and that this will continue until 2012, probably beyond. As a result, the backlog on maintenance will drop so that the share of roads rated unsatisfactory will be reduced from 47 percent of the Republican network in 2005 to 14 percent by end-2012.

19

Kazakhstan has three categories of road networks: The Republican road network (21,000 km) is the responsibility of the Ministry of Transport and Communications; local roads (about 65,000 km) are under the oblasts and rayons’ responsibility; and urban roads are the responsibility of municipalities or city authorities.

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Table 12: Kazakhstan: Freight turnover of all 104. Developments in Kazakhstan’s trade 20 transport modes relations over the past decade point to a 2000 2004 2008 2009 2010 significant potential for trade with (billion tons) Europe, China, Middle East and South Total: 324.4 350.0 438.1 403.1 472.3 Asia in addition to current trade with Railway 125.0 163.5 214.9 197.5 213.2 Russia. Recognizing this potential, the Other land 31.0 43.9 63.5 66.3 80.3 Central Asia Regional Economic River 0.0 0.1 0.1 0.1 0.1 Cooperation (CAREC)21 designated the Pipeline 50.9 75.6 90.3 71.7 88.6 six strategic road corridors in Air 117.5 66.9 69.4 67.6 90.1 Kazakhstan as the CAREC corridors. This includes the corridor linking Source: The Agency of Statistics of RK Europe and Russia to China through Kazakhstan. Improvement of Kazakhstan’s relations with the neighboring countries and the development of transport corridors connecting them to China, Russia and Europe through Kazakhstan will interact to promote each other. The Government could further support this momentum by (i) improving organizational structure and strengthening institutional capacity; (ii) promoting preventive rather than reactive maintenance practices; (iii) ensuring better quality of road construction; (iv) strengthening road safety regulations and compliance; (v) improving conditions of local road networks; (vi) ensuring supply of adequate services to transporters along the transit corridors; and (vii) eliminating non-physical barriers in the form of unofficial payments and unscheduled inspections for transit traffic.

105. During Soviet era Kazakhstan’s trade flowed along the north-south corridor because of its link with Russia and the rest of Central Asia and these flows were served mainly by rail. Rail freight transport dominated the market in Kazakhstan over the past decade, accounting for between 55-60 percent of the combined tonnage carried by rail and road. The Kazakhstan State Railways (Temir Zholy- KTZ) was incorporated as a joint stock company in 2002 to develop, operate and maintain railroad transportation in the country. The core railway activities have been largely unbundled and ancillary services have been privatized. Private companies may own or rent rolling stock that can use the rail system. There is, however, only limited participation from domestic private operators while foreign (mainly Russian) operators have significant presence. KTZ controls about 15,000 km rail track (2010) and manages over 80,000 wagons, 50,000 of which are state-owned and the remainder privately owned. While most of the hauling is done by diesel engines, electrification of track is continuing. KTZ is a profitable company and the largest employee in the country with about 150,000 employees. Kazakhstan has started to build wagons for KTZ and has recently signed an agreement with the Alstom Company to produce electric locomotives.

20

Freight turnover is a basic indicator of transport efficiency. It is the product of a certain quantity of cargo (in tons) and the distance of the transport (in km) and is measured in “ton/km net” without the weight of the rolling stock in which the cargo is transported. 21 CAREC countries include Afghanistan, Azerbaijan, PR of China, Kazakhstan, Kyrgyz Republic, Mongolia, Tajikistan and Uzbekistan.

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106. The potential of Kazakhstan to act as a transit in the trade between China and Europe is being enhanced by the ongoing and planned road and rail connections. Current rail transport between China and Europe, going over the Trans-Siberian railway, is lengthy and requires bogie exchanges because of gauge difference between the Kazakh and Chinese rail networks. In new projects the KTZ has been using the standard rail gauge to avoid costly delays at bogie exchange stations. A new rail link to China is being developed through a CAREC project from Jetygen to Korgas, which is expected to be operational in 2013. CAREC has also programmed for 2015-2018 three more rail projects in the Eastern region of Kazakhstan, which will provide an additional link to China at Dostyk. On the other hand, there are no direct rail links with Tajikistan and Kyrgyz Republic, and transit traffic with these countries is carried by road transport. 107. The telecommunication sector plays a central role in fostering the competitiveness and diversification of Kazakhstan economy. Recognizing this, the GOK has pursued a right policy-mix conducive to the rapid development of the telecommunication sector with an increasing participation of both domestic and foreign operators. The policy-mix has emphasized: (i) market liberalization to promote greater access by additional fixed and mobile operators; (ii) tariff rebalancing to encourage sustainable investment for broadbased development of the sector; (iii) interconnection to facilitate connectivity among domestic and international operators; (iv) the establishment of an independent regulator and preparing KazakhTelecom, the telecommunication operator controlled by the State, for a liberalized market; and (v) aiming at universal access through subsidizing rural consumers and expansion of the network toward peripheral areas. 108. Legislation passed in 2004 laid the groundwork for the liberalization and development of the telecommunication sector and to end the monopoly of KazakhTelecom. This has prompted several foreign suppliers to seek investment opportunities and partnership with local telecommunications companies. In 2005, four private operators were licensed to provide international and long-distance service in competition with KazakhTelecom. There had been long waiting lists for fixed-line telephone services, which certainly boosted the country’s mobile market to enter a boom phase. At present, Kazakhstan has a high penetration of fixed line service, with six operators providing service to about 3.8 million subscribers. 90 percent of the fixed line market is controlled by KazakhTelecom. The number of mobile services exceeded fixed-lines in October 2004, and the Government had to auction the fourth GSM license, which was awarded to NeoTelecom, a subsidiary of KazakhTelecom. The mobile market continued to grow in 2008 with an annual growth of 36 percent and mobile penetration reached 94 percent by March 2009 and 100 percent by early 2010. The country’s mobile market is expected to start saturating in the near future. Another sign of the healthy development in Kazakhstan’s telecommunication sector is the rapid growth of internet users, with the increasing share of the high speed internet and broadband subscribers. The number of broadband subscribers doubled in both 2008 and 2009; as a result the proportion of internet subscribers using broadband reached 76 percent by end-2009.

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109. In conclusion, the key drivers of the developments of Kazakhstan’s telecommunication sectors can be summarized as follows: i. Establishment of an independent telecoms regulator, responsible for both policy formulation and regulation; ii. Development by KazakhTelecom of a fully digital telecom network based on local and long-distance switches and fiber optic lines linking all major cities of the country; iii. Improved international connections and increased number of both mobile and fixed-line subscribers; iv. Further reforms in telecommunication legislation; and v. Continuing negotiations for accession to the WTO. 110.

The power sector: Kazakhstan’s medium- to long-term development strategy focuses on the diversification of the economy through enhancing the competitiveness of the non-oil sectors. This in turn involves improving the business and investment environment as well as increasing production capacity, human capital, and availability and quality of infrastructure in non-oil sectors. Fundamental to all these improvements is the availability of reliable and cost-effective electricity supply. Hence, the GOK has been investing significant sums and reform efforts in the rehabilitation, modernization and expansion of the power sector.

111.

Kazakhstan has sufficient generation capacity22 to meet domestic power demand, although the supply-demand situation has become rather tight in recent years. There are, also, regional imbalances in supply and demand of power. Four-fifths of power supply is generated in the northern part of the country, mostly in coal-fired plants, while most of power demand comes from the southern part, where generation facilities are limited to small hydro plants and a high cost gas/oil-fired power plant. Power shortages occur especially in the booming areas of the southern part (e.g., Almaty region) of the country, with adverse effects on regional economic development. All transmission assets (lines and substations) are owned and operated by the State-owned Kazakhstan Electricity Grid Operating Company (KEGOC). The transmission system of KEGOC has three regional power grids: (i) Northern grid connected to the Russian power system; (ii) Southern grid connected to the northern grid and to Central Asian power system (Kyrgyzstan and Uzbekistan); and (iii) Western grid which is currently isolated from the other two grids and import power from Russia to supplement local generation. Kazakhstan imports power from Russia and Central Asia and exports only to Russia, with total net imports of only 0.08 TWh in 2007.

112.

Kazakhstan ranks among the best in power sector reforms among the FSU countries. The main focus of reforms, which started in 1996, has been to introduce private sector participation and a competitive power market. The large national level electricity generation plants were separated from the State-owned monopoly of Kazakhstanenergo and largely privatized to foreign and local strategic investors, some on concession basis. 22

Comprising 60 plants, which generated 76,365 TWh in 2007. Coal-fired plants accounted for 84.3 percent, hydro power plants 10.6 percent, and gas-fired plants 5.1 percent of total power generation.

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KEGOC was formed to operate the high voltage transmission network, and the Regional Distribution Companies (REKs) were established to own smaller sized generation units, transmission lines at 110 kV, and electricity and heat distribution networks. Most of the REKs have also been privatized, a number of them under concession contracts. This notwithstanding, the GOK re-bundled in 2007 all state shares in electricity generation into S-K. 113.

The wholesale of the electricity market is fully liberalized and operates on the basis of bilateral contracts between generators and large consumers or Energy Supply Organizations (ESOs) for direct sale of power. There is strong competition in the bilateral contract market and, hence, the Government established a well-functioning spot market (KOREM) with more than 100 registered market participants. Strong competition among the generation companies, however, results in low prices and lack of sufficient revenue for investment in modernization and new capacity. KOREM has been working to attract Central Asian market participants as well. In the retail market, the single buyer (REKs) model has been replaced by a competitive market in which customers purchase energy from ESOs, which in turn pay KEGOC and the REKs for costs of transmission, dispatch and distribution.

114.

The responsibility for regulatory functions in the power sector lies with the Ministry of Energy and Mineral Resources. Kazakhstan has a modern Electricity Grid Code with a set of transparent rules for non-discriminatory access by the private sector to the transmission network and the services of the grid operator. The natural monopoly parts of the power sector (KEGOC and REKs) are regulated by the Agency for Regulation of Natural Monopolies (ARNM). KEGOC’s transmission tariffs are approved by the ARNM on justifiable costs (including the cost of new investment) plus a 10 percent rate of return on the regulated asset base. The Government interference in retail-tariff setting, however, prevents full recovery of justifiable costs, including that of modernization. Hence, the electricity distribution system suffers from technological obsolescence.

115.

The key issues now facing the power sector in Kazakhstan include: (i) outdated plant and equipment used for electricity generation and distribution; (ii) system designs aimed at meeting regional rather than national power needs; and (iii) rising costs due to high capital investment, inefficiency in system operations (e.g., high distribution losses); (iv) partly as a result of these, growing regional imbalances in supply of and demand for power. Recognizing these issues in its sector development program for 2010-2014, the Government focuses on the expansion of generation capacity through new investments, modernization of existing capacity, and extension of related transmission network. To this end, the sector development program consists of 13 major projects and also includes “incentive wholesale tariffs” provided to new investors in exchange for investment commitments.

116.

Innovation and technology commercialization: To achieve its goal of becoming a competitive and diversified economy, Kazakhstan needs to promote upgrading of technologies used by the non-oil sectors. This in turn requires establishing close links between the domestic enterprise sector and the domestic research and development (R&D) sector; the domestic R&D sector and international R&D institutions; domestic enterprises 55

55


and international technology markets; and SMEs and dynamic large enterprises, both at home and abroad. On the other hand, the science and technology system that Kazakhstan inherited from the Soviet Union was designed to work within a command economy to serve national defense and centrally planned rapid industrialization. Hence, it cannot respond to the requirements of a modern and high-tech economy with necessary flexibility and innovativeness. To reform the R&D sector, the GOK has to address a number of challenges, including the following: i. The average age of both scientists and laboratory equipment in Kazakh research institutes is close to “retirement”. In recent years, however, the old cadres of scientists are being replaced by younger and more energetic researchers. ii. The quality of equipment of research institutes and university laboratories are generally poor as there was almost no purchase of new equipment until mid-2000s. iii. R&D spending by the GOK is small relative to countries with similar GDP per capita. iv. Kazakhstan ranks low also in the private sector’s share of total R&D spending: 26.4 percent in 2005 against 30 percent of Russia, 38 percent of Turkey, 54 percent of Czech Republic, and 67 percent of China. v. The ratio of researchers in R&D per million of population is very low compared to the most competitive economies. Also, Kazakh researchers’ scientific productivity in terms of publications is very limited. vi. Institutes and universities do not sufficiently collaborate with each other and with domestic and global markets and private enterprises. 117.

As a result, Kazakh enterprises are not very innovative in the sense of introducing new products or production processes. While the above picture is being addressed by the new programs and policies of the GOK emphasizing R&D, Kazakh enterprises will have to acquire necessary know-how from abroad for the foreseeable future if they have to be competitive. But such knowledge absorption by Kazakh enterprises seem to be developing at very slow pace as indicated by few knowledge licensing from abroad.

118.

In 2003, the Government adopted an Industrial and Innovation Development Strategy for 2003-2015. This program was re-affirmed and updated through the “State Program for Accelerated Industrial-Innovative Development of Kazakhstan for 2010-2014” approved in 2009. With these programs, the GOK has been striving to promote investment in non-oil sectors through: (i) enhancing the quality and economic relevance of R&D conducted in research institutes; (ii) helping research institutes obtain commercial contracts with foreign and Kazakh enterprises; and (iii) supporting a system of incubators and techno-parks to facilitate technology commercialization and link Kazakh scientists to global technology markets. In addition, the Government has established several institutions to help implement these programs, including the National Innovation Fund, National Investment Fund, Center for Marketing and Analytical Research, Center for Engineering and Technology Transfer, Development Bank of Kazakhstan; the Science Fund, and Samruk-Kazyna.

119.

An encouraging development in the area of innovation and technology commercialization is taking place not in traditional sectors but in a new sector, that is, the information 56


56

technology (IT) sector. The GOK has made a strong commitment to education development, particularly in IT. At present, the country’s 20,000 IT graduates annually meet only 40 percent of demand from Government, domestic businesses and foreign investors based in Kazakhstan. A high level of broadband penetration and mobile connection as compared to its neighbors make Kazakhstan a potential market for IT outsourcing in Central Asia. The diffusion of IT to SMEs can improve their capacities and performance and thus foster FDI to support transfers of know-how and technology from multi-nationals to SMEs. 120.

The key difference between the Kazakh national system of innovation and the systems in developed countries is that the R&D capabilities of the former are still mainly located in public organisations rather than enterprises. Kazakhstan has not yet made a significant transition towards an enterprise-based innovation and technology development system. The Government has attempted to overcome the Soviet-bequethed gulf between R&D and industrial enterprises by bringing them together in National Science Centres, responsible for the implementation of goal-oriented programs. It was hoped that in this way a direct link would be established between research organisations and industrial enterprises. The focus on technoparks represents a continuation of this goal by enhancing linkages between R&D and enterprises. However, Kazakh innovation policy is still predominantly preoccupied with the capabilities and resources of scientific, technological and training institutions that undertake technological activities on behalf of industrial firms. Policy measures designed to strengthen the technological activities of firms themselves are virtually non-existent. There are still no effective resource allocations or other mechanisms designed to increase firms’ abilities to implement their own technological learning; strengthen their own design, engineering and other technology development capabilities; or undertake their own innovative activities.

121.

Education Sector: Although the GOK is committed to place the country among the 50 most competitive economies by 2020, its ranking in the GCI has continually deteriorated since 2005 (see para. 74). The Government has been making efforts, as explained above, to address the major factors, including the slow growth of labor productivity, underlying the country’s unfavorable trend of competitiveness. In this context, investment in human capital is designated as one of the six pillars in the national development plan Kazakhstan30. Similarly, one of the objectives of the “Industrial and Innovation Development Strategy for 2003-2015” is to triple labor productivity from 2000-2015. The Government thus recognizes that a basic driver of the country’s innovation and increased productivity is human capital, which could be augmented through modernizing the education system, including the technical and vocational education (TVE) system. Public spending on human capital has, accordingly, been growing and social indicators improving.

122.

Kazakhstan has universal basic education through grade 9. Adult literacy rates are almost 100 percent for both men and women. Following basic education, students enter either general education or TVE. About 20 percent of students in grades 9-11 study in TVE institutions, namely vocational schools and colleges. Vocational school programs last two to three years and produce about 40,000 graduates annually. Vocational college programs 57

57


last three to four years and produce about 120,000 graduates yearly. Colleges provide more theoretical work in science and mathematics and prepare students as technicians, masters, and supervisors. 123.

According to a 2008 World Bank labor market survey of 500 firms, 64 percent of employers reported an insufficient level of education and lack of skills as one of the principal hindrances for business development (Figure 13). The shortage of skilled labor is reported to affect all sectors of the economy, particularly the primary sectors (Figure 15). On the other hand, two-thirds of the surveyed firms reported vacancies, with greatest demand for skilled workers (44 percent of firms) and technicians (40 percent) compared with for accountants (9 percent) and engineers (5 percent). This indicates that the present TVE system does not produce sufficient graduates with the competencies required by the market. Figure 15: % of firms reporting a skill shortage to be very significant problem (by economic sector)

oil/gas/extraction food production other industry construction pulp/paper/woodwork power/electricity finance/banking trade/services real estate transport/telecommunications hotels/restaurants

46.2%

40.0% 39.4% 39.3% 35.7% 33.3% 29.8% 27.6% 27.1% 25.5% 8.3% 0%

10%

20%

30%

40%

50%

Source: World Bank "RK:TVE Modernization Project";June 2010

124.

To reform the TVE system in Kazakhstan, it would be necessary: (i) to enhance the economic relevance of TVE, with its program content and educational standards, to requirements of the labor market; (ii) to establish a participatory and flexible model of TVE governance with the inclusion of all important stakeholders, especially employers, and with adequate budgetary flexibility to respond to changes in markets; (iii) to improve the quality of both training (including that of teaching staff) and teaching materials and equipment; and (iv) to increase budgetary allocations to TVE and to provide incentives to the business sector for greater investment in and donations to the TVE system. The Education Law of 2007 provides the framework for restructuring TVE, including better integration of secondary, vocational and general education. The Government plans to adopt a 12-year model with 10 years of basic education and two years of specialized education. Vocational and general secondary education will share the same courses of general subjects, providing vocational students with more transferable skills. Also, a separate postsecondary vocational education will be introduced to produce graduates with more advanced levels of technical skills. 58


58

125.

The Health Sector: Kazakhstan USD Figure 16: Per capita health expenditure inherited from the Soviet Union a thds. health system that was state-owned, 2 centrally planned, and free and accessible to everyone. As a result of the loss of budgetary transfers 1 from Moscow, and sharply declining GDP and public revenues, the health 0 care system remained underfunded 1995 2000 2005 2010 during 1990s. The system also source: WHO Kazakstan Kazakstan Regional average year suffered from obsolete practices, Health Profile outdated facilities, inefficiency and shortage of incentives to provide quality services. As priority went to political and economic reforms, health care reforms started relatively late and took effect slowly. All health-related indicators as well as the infrastructure and quality of health care services have deteriorated over the 1990s. However, with the rapid growth of the economy and public revenues from oil windfall, per capita public expenditure on health doubled from 2000-2005. Despite also recent increases in public health spending, the improvement in country’s health indicators is lagging behind the rapid pace of growth in per capita GDP. As shown in Box 2 (pp. 15-16), Kazakhstan has made remarkable progress towards achieving all MDGs other than health-related ones (Goals 4, 5, and 6). Significant efforts are still needed for Kazakhstan to achieve by 2015 MDGs for maternal mortality ratio, infant mortality and under-five mortality rates, and combatting HIV/AIDS and tuberculosis. Table 13: Selected Health Indicators Indicators Total population (thnds) Population living in urban areas (%) Gross national income per capita ( PPP int $) Life expectancy at birth (years)

Kazakhstan

Male Female Both sexes

Adult mortality rate (per 1000 adults 15-50 years) Both sexes Under 5 mortality rate (per 1000 live births) Both sexes Maternal mortality ratio (per 100,000 live births) Prevalence of HIV (per 1000 adults 15-49 years) Prevalence of tuberculosis (per 100,000 population) Source: WHO, Kazakhstan Health Profile, April 2010

126.

310 29 45 1 211

70 23,530 71 79 75 146 13 21 4 63

Global average

50 10,599 68 71 68 176 60 260 8 201

The GOK adopted an ambitious State Health Care Reform and Development Program for 2005-2010. The Program aimed at increasing the efficiency and quality of medical services by improving medical buildings and equipment as well as the technical and managerial expertise of the health care workforce. More specifically, its priorities included (i) modernization of medical education and training; (ii) focusing more on prevention and health education; and (iii) strengthening primary care (PC) services. In the second half of the Program period, efforts were made to reorganize and strengthen inpatient and 59

59

15,637 58 10,320 59 70 64

Regional average


emergency care services; improve continuity of service delivery, and introduce competition among providers. 127.

As with other government segments, policy-making in health care is strongly centralized, with the President playing a key role and the Minister of Health at the top of the hierarchical system of governance and management. The Ministry of Health draws up the health care budget (including allocations to regions and oblasts), controls the republican portion, supervises the national research institutes and national hospitals, and has ultimate control over the health system. The regional authorities, however, run their health services with relative autonomy and their health departments play a key role in managing the hospitals and most polyclinics. The district authorities are responsible for managing smaller secondary health care and most PC facilities. The State program for 2005-10 also envisaged that the devolution from national to oblast level would involve corporatization of health facility management, with a goal of 6,300 facilities to be corporatized or privatized by 2012. There were only 26 health care facilities corporatized/privatized by 2007. Privatization has been more limited in the health system than in other state-owned facilities and has mostly involved pharmacies and dental care.

128.

Competitiveness and diversification of Kazakhstan’s economy would be enhanced should health conditions of workers and their families country-wide be improved over the mediumto long-term. A most effective way of attaining this objective is to expand the primary care (PC) system throughout the country to deliver to population, particularly in rural areas, not only medical services but also health education and preventive care. In the Soviet health system, the emphasis was on narrow specialization and there was strict limitation of PC. After independence, Kazakhstan also continued ignoring PC, especially in rural areas, until recently. PC buildings and equipment are in poor condition, facilities understaffed, and medicines scarce. PC physicians and nurses have low prestige and receive no incentives to deliver quality PC service. These problems are even more serious in rural areas.

129.

The State Program on Health Care Reform and Development initiated PC reforms from 2005. An important element of PC reforms is to develop the specialty of family medicine by retraining district therapists and providing them with continued education to become family doctors. This would expand clinical services at the primary level particularly in the areas of maternal and child health, reproductive health and cardiovascular screening. PC premises, equipment and transport facilities, especially in rural areas, have also been improved. Nevertheless, PC in Kazakhstan is still in a transition state. In towns and cities, the old organization still dominates, and family group practices and integrated polyclinics are just beginning to emerge. In the countryside, provision of quality PC services remains to be a challenge. Transportation difficulties and shortage of physicians are still serious impediments for rural population in widely dispersed villages and towns for accessing medical services.

130.

The GOK is now giving an impetus to the ongoing health care reform by adopting a new five-year health care program for 2009-2013 at the cost of USD 296 million with USD 117.7 million borrowed from the World Bank to ensure technical and managerial expertise. 60


60

This new program aims at improving collaboration on public health issues among related government agencies; strengthening preventive care and sanitary services; improving medical and pharmaceutical education and introducing innovative technologies; and increasing accessibility and quality of pharmaceuticals for the population. There is, however, a general problem with the ability of regional and district authorities to fully implement new policies and standards that the Ministry of Health would adopt with the support of the World Bank. On the other hand, capacity building at the level of regional and district policy makers and managers is time consuming and costly in financial terms. It is therefore important that donors and international organizations continue providing active support to capacity building in the health sector of Kazakhstan. 131.

Environmental issues: Kazakhstan’s independence from the Soviet Union came together with severe environmental damages caused by the irresponsible use of natural resources by the Soviet regime. These cases include (i) the desertification in the Aral Sea region caused by the irrigation schemes and the heavy use of agricultural chemicals for cotton farming; (ii) exposing of nearly one million people to radiation caused by the nuclear testing; and (iii) the heavy pollution of air, soil and rivers by uncontrolled release of industrial and agricultural effluents. Particularly the first two cases are considered as the worst (and best) examples of how severely the ecological mismanagement can harm both the environment and human lives. With their exceptionally extensive negative impacts on natural and human resources, addressing these environmental issues poses a major challenge to the GOK in enhancing competitiveness and diversification of the economy.

132.

The Aral Sea between Kazakhstan and Uzbekistan once covered an area of 68,000 square kilometers and its water level was maintained by the inflow of waters of Amu Darya and Syr Darya. During the Soviet era, however, water was diverted from these two streams for the irrigation of cotton fields in Uzbekistan and also through a 1,200 kilometer-long canal to Turkmenistan. These diversions, combined with very high level of evaporation, have resulted, particularly from late 1980s, in rapid receding of the Aral’s shoreline. Dams built by Kyrgyz Republic and Tajikistan also decreases water discharge to the Aral Sea. Today, it has shrunk to about one-third of its pre-1960 size in three separate bodies of water. A Soviet-era biological weapons site, located on a former island in the Aral Sea, has become a threat because it is now connected with the mainland. The Aral Sea once had 24 species of fish, two important fishing ports (Arals in Kazakhstan and Moinak in Uzbekistan), and a fishing industry that has employed 60,000 workers, which have all gone today. The shrinkage of the Aral Sea’s surface area has exacerbated regional climatic extremes and agricultural land around the Sea has been damaged by salt deposits blown by wind. Desertification has caused both loss of large areas of agricultural land and destruction of wildlife habitat in the Aral Sea basin.

133.

For almost four decades since 1950, the Soviet government has carried out 470 nuclear testings, with above and under ground explosions, in the north-eastern Kazakhstan near Semipalatinsk (now Semey) without taking necessary precautions to protect inhabitants of nearby towns and villages against radiation. In the late 1980s, Kazakhs held large demonstrations against the nuclear testing. But tests did not stop until Kazakhstan gained 61

61


independence in 1991, and only then it has been realized how serious and extensive was the actual effect of the nuclear testing on the environment and the health of about one million people living in the area. One-third of children born in the Semey oblast is reported to have mental or physical defects, and about half the population have immune system deficiencies. 134.

Kazakhstan also faces the problem of general pollution from uncontrolled release of wastes into air, land and water resources by economic activities. Harmful emissions from lead and zinc smelters, uranium-processing mills, and other industries cause urban pollution, particularly in the eastern cities. Acid rain causes damages to environment both in Kazakhstan and neighboring countries. In 1992, Kazakhstan had a per capita level of 15.9 metric tons of industrial carbon dioxide emissions, which made it the 14th highest ranking country in CO2 emissions. With economic decline and slowing down of industrial activity in the 1990s, Kazakhstan’s record of CO2 emissions has steadily improved to 7.7 metric tons in 1999. This has, however, been reversed by increased extractive and industrial activities from 2000 with the country’s per capita carbon dioxide emissions rising to 14.8 metric tons by 2007. As reported again by UN sources, in Kazakhstan contamination of rivers by industrial metals is 160 to 800 times beyond acceptable levels. Some new oil operations on Kazakhstan’s Caspian coast add to already grave pollution of that Sea. Also Lake Balkash has been under growing impact of pollution for reasons similar to those affected the Aral Sea.

135.

The GOK recognizes the importance of addressing environmental problems mentioned above and has adopted a number of environmental protection programs and action plans, including: National Environmental Action Plan (1998), National Biodiversity Strategy and Action Plan (1999), Conception of Environmental Safety for 2004-2015, Ecology Code of Kazakhstan (2007), and Conception of Sustainable Development for 2007-2024. To address the water management problem of the Syr Darya, Kazakhstan and other basin states established in 1998 the Framework Agreement on the Use of Water and Energy Resources of the Syr Darya Basin. The GOK also established, with support from the USA and the EU, an independent, nonprofit, and nonpolitical Regional Environmental Center (REC) in Almaty in 2001. The REC is expected to promote public awareness of and civil society participation in environmental decision-making among the Central Asian countries. The reversal of environmental disasters that Kazakhstan has faced will take decades, probably even a century if right policies are implemented effectively. The above plans, strategies, and conceptions should be deemed successful if they can first arrest the deterioration of and then set out improvements in environmental conditions of Kazakhstan.

136.

V. GROWTH PROSPECTS OVER 2011-2015 Kazakhstan’s economic performance over the past decade can be credited with significant achievements, including, among many others, rapid growth in per capita real GDP, substantial growth of output and exports of the mining sector, significant achievements in transportation infrastructure, improvements in social indicators, maintaining price and exchange rate stability. There are, however, two objectives with crucial importance for the country’s development over the medium- to long-term, namely competitiveness and diversification of the economy, towards which no significant progress has yet been made. 62


62

Table 14: Macroeconomic Projections, 2011-2015 2009

Real GDP growth Crude oil & gas condensate output CPI (end of period -eop)

Exchange rate (eop, tenge/USD) Exchange rate (eop, tenge/ruble) REER (eop, y-on-y in %)

Monetary accounts Reserve money Broad money Broad money velocity (annual av.) Credit to the economy Credit to the economy (% of GDP)

NBK refinancing rate (eop, %)

General government accounts Revenues and grants of which: oil revenues

Total expenditures & net lending Overall fiscal balance Total expenditures (eop, y-on-y, %) Allocated to NFRK (- = increase) External accounts Exports of goods & services Oil & gas condensate Imports of goods & services FDI, net (in % of GDP)

Current account balance Current account balance (% of GDP)) NBK gross reserves (eop) NBK gross reserves (monthly imports) NFRK (eop) External debt (excl. intracompany debt) o.w.: Public/publicly guaranteed debt Memorandum: Nominal GDP (billions of US dollars)

2010

2011

2012

2013

1,2

(Annual change in percent) 7,0 6,5 5,6 5,9

5,6

9,3

6,1

2,3

7,8

9,2

6,2

2014 6,1

6,3

3,4

2,2

4,3

7,1

6,6

6,4

6,1

149 5,2

148 5,1

60,7 17,9

5,0 15,7

14,5 12,7

14,7 14,0

12,9 11,8

11,8 12,1

11,5 11,5

2,3 7,2

2,4 0,9

2,6 6,7

2,4 13,4

2,4 13,3

2,4 14,0

2,3 13,9

51,0

41,8

37,5

38,8

40,1

41,6

42,9

22,5 9,3

25,3 11,8

26,4 12,3

26,8 11,6

26,9 11,1

27,3 10,9

-8,4 -1,7

22,8 -4,4

10,2 -4,7

11,0 -4,8

48,2 26,2

65,1 37,0

19,1 10,0 10,5 -5,5 -4,4 -5,0 (In billions of US dollars)

105,0 56,4

112,7 57,6

-6,2

7,0

23,9 -1,4

1,5

7,0

23,8 1,5

(In percent of GDP)

23,8 2,6

89,5 53,9

-39,0 9,4

-43,3 1,5

-55,5

26,5 12,0 23,9 2,6

93,9 55,0

24,1 2,7

99,2 55,9

24,2 2,7

24,3 3,1

12,0

-70,1 2,4

-79,5

4,3

3,8

-62,0 2,9

2,2

-90,9 1,8

-3,8 23,1

3,1 28,3

7,1 38,8

5,6 45,7

5,2 50,7

3,9 50,7

2,8 48,7

6,4 24,4

6,1 30,6

7,5

39,9

7,8 48,1

7,7 58,5

6,7 69,3

5,6 81,7

63,1

66,0

65,2

67,1

77,3

82,6

88,6

1,7

1,7

1,7

1,7

1,7

1,8

1,8

113,6

139,9

169,0

188,5

208,3

230,7

257,5

-4,4

10,6

10,8

9,0

79,0 106,3 105,3 101,8 Oil price (USD per barrel) 61,8 99,5 Source: IMF, “Republic of Kazakhstan: 2011 Article IV Consultations- Staff Report”, June 2011

63

63

2015


7,2

98,8

This is recognized by the GOK, with a new resolve to progress towards these two objectives, in the “State Program of Accelerated Industrial-Innovation Development (SPAIIP) for 2010-2014”. In this chapter, an attempt will be made to assess the growth prospects envisaged in this Program with references to recent developments reviewed in this report. Also for reference purposes, the IMF’s projection of Kazakhstan economy’s key economic indicators for 2011-15 is presented below (Table 15). 137.

It must be stated at the outset that neither the Program for 2010-2014 nor its predecessors Kazakhstan-30, Kazakhstan-20, and Strategy of Industrial & Innovation Development for 2003-2015 have the usual macroeconomic framework required to ensure both the internal consistency of various parts of the Program and its consistency with resource availability. Without such a framework, the above documents would rather qualify as statements than programs23. The IMF projections, which are based on a consistency framework, will be used in discussing fiscal, monetary and external balance implications of the instructions of the Program 2010-2014.

138.

The State Program of Accelerated Industrial-Innovation Development (SPAIID): The long-term development strategy of Kazakhstan, which currently underlies all recent national and sectoral development programs, was first set out in 1997 in the “National Development Strategy of Kazakhstan until 2030” (Kazakhstan-30). The salient points of Kazakhstan-30 were summarized and reviewed above (paras. 32-35 and Box 3), which are almost all of them re-iterated in the subsequent programs, including the SPAIID for 20102014. These include the following:  Creating a favorable macroeconomic environment;  Improving the business climate and promoting investment flows;  Massive technological upgrading and development of the national innovation system;  Improving the quality of human capital;  Supporting the diversification of the economy through both economic policies at the macro and sector level and selective measures for specific sectors and projects;  Aiming the above strategies at improving productivity and competitiveness of the national economy.

139.

Table 16 reveals the development prospects envisaged by the GOK for 2014-2015. Some of the quantitative targets (e.g. the growth of GDP, inflation rate, unemployment rate, NFRK resources) could well be assessed in quantitative terms. On the other hand, most others (e.g., the local content, innovative firms, energy cost of national production, transportation costs’ share in the non-primary sector’s cost structure) could only be defined and quantified by the Government departments. They can, however, manifest to outside observers like IFIs the direction and intensity of changes that the GOK plans to attain in certain priority sectors through 2014-2015. This is how they will be used here.

23

Actually, they have all been delivered by President in his annual speeches to the nation.

64


64

140.

The growth target of the GOK is to increase GDP in real terms by half during 2009-2014. This means an average rate of growth of 7.0 percent per annum over a period of 6 years from 2008. Kazakhstan GDP, however, grew only 1.2 percent in 2009 because of the impact of the global financial crises. Even though the growth rate in 2010 recovered the target rate (7.0 percent), the average growth rate should, due to the 2009 backlog, be as high as 8.5 percent during 2011-14 in order to attain the SPAIID target. This is considerably higher than the average growth rate (about 6.0 percent) envisaged by the IMF (Table 15), Table 15: Targets of SPAIID and Kazakhstan-20 Target for 2014/1524 Target topic Target explanation SPAIID GDP growth Manufacturing GDP Non-primary exports Volume of non-primary exports Labor productivity in the Manufacturing sector Labor productivity in agriculture Local content Innovative companies Transportation costs in the non-primary sector Energy cost in overall production KAZAKHSTAN-20 Agricultural & agri-business exports Domestic demand for petroleum products Production & export volume of metallurgical products Production & export volume of chemical products Inflation Unemployment NFRK

2008 GDP x 1.5 As % of GDP in 2014 As % of total exports in 2014 As % of manufacturing exports 2008 labor productivity x 1.5

On average 7 % p.a. 12.5 % 40 % 43 % On average 7% p.a.

2008 labor productivity x 1.5 (USD 3,000 x 1.5) % of procurements by public Organizations and SOEs % of existing enterprises % of the non-primary sector’s cost structure As % of GDP

On average 7% p.a (USD 6,000 in 2014) 60% of goods & 90% of works & services 10 % 8 % or less

As % of total exports

8%

How to be met? Increase in 5 years

Fully by the national refinery Double (100%)

Increase in 5 years

Treble (200%)

The rate of, in 2020 The level in 2020 As % of GDP & total value

5% - 8% 5% or less 30% of GDP ($ 90 bn)

10 % or less

which would lead to about 37 percent cumulative growth of GDP by 2014 compared to the 2008 GDP level. The IMF’s growth projections are usually believed to be on the conservative side25. On the other hand, attainment of 8.5 percent annual growth would require substantially higher production and export of oil and gas condensate than projected in Table 15. Oil and gas output grew at an average annual rate of 6 percent in 2006-2010 against 3 percent projected in Table 15 for 2011-2014. Considering that the Kashagan oil 24

The SPAIID targets are for 2014 and Kazakhstan-20 targets are for 2015. Targets should be read as “....or more” unless otherwise is indicated. 25 This is due to that higher GDP projection would lead to higher estimate of public revenue, which would in turn encourage budgeting higher government expenditures, with a greater risk of ending up in a larger fiscal deficit.

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field, one of the World’s largest, is scheduled to become operational in 2012, Kazakhstan could well maintain the recent growth trend in its oil and gas output, particularly if there is no postponement in the opening of the field 26. A sustained global recovery and an increase in oil demand in the post-global-crisis period are expected to keep world oil prices moving up from about USD 80 per barrel in 2010 close to USD 100 in 2011 and higher in 2012. The US Energy Information Administration expects world crude oil prices to average USD 98.43 per barrel in 2011 and USD 102.50 in 2012, which are lower than those given in Table 15. For 2013-2015, it will be safer to assume a gradual easing of demand conditions and prices in the world oil market, because crude oil price outlook is too uncertain beyond a year or two. This seems to be reflected in oil price projections for 2013-15, as shown in Table 15. Among the major uncertainties that could push oil prices above or below the current forecasts are: risk of supply disruptions in producing regions; the willingness and ability of key OPEC-member countries to increase and sustain higher production in response to the global increase in oil demand; the rate of global economic growth; and fiscal issues facing the governments of both oil exporting and importing countries. On the whole, taking IMF’s oil price projections for 2012-15 and almost doubling its projections for the growth rate of oil and gas output, Kazakhstan can expect a major boost from its oil and gas sector to the growth of GDP during 2011-15.

141.

142.

Targets for Agriculture: Although agriculture’s share in GDP is too small (about 5 percent in 2008-10) to make any significant difference in the growth rate of GDP, its growth prospect is still important because of its relatively large share in employment (almost 30 percent), its linkage to the food processing industry, and its potential role in the diversification of the Kazakh economy. Recognizing such importance of agriculture, the SPAIID set a target for labor productivity in agriculture to double (i.e., 100 percent increase) its 2008 level (in US dollar terms) by 2014. This seems, however, too far beyond what could be achievable as explained below:  Based on the US inflation (CPI) rates since 2008 and forecasts for 2011 and 2012, it would be safe to argue that the cumulative dollar inflation over 2008-14 would be less than 20 percent. This means that the SPAIID envisages 80 percent cumulative (or 10.3 percent p.a.) increase in real terms in the productivity of agricultural labor in 2008-14.  The expected productivity increase in agriculture could come about as a result of an increase in the sector’s output, or a decline in the sector’s workforce, or a combination of the two.  Agriculture’s share in total employment has been declining (32.3 percent in 2005 against 28.2 percent in 2010), but this is due to a steady increase in total employment rather than a significant decline in agricultural labor force (fluctuating between 2.29 million and 2.45 million). Assuming that the GOK does not plan for a major reduction in agricultural workforce, the planned labor productivity increase should mostly come from growing output of the sector. 26

It is reported by Dow Jones (July 2011) that Shell and its partners will ask the Kazakh government for an extension to their 2013 production deadline for the Kashagan field.

66


66





Thus, the SPAIID’s target for labor productivity growth in agriculture implies an annual growth between 9-10 percent in agricultural GDP against the 7 percent growth target for GDP over 2008-2014. This is not feasible (cf., Figure 3). A more feasible, and still optimistic, assumption could be based on the hope that with 2008 and 2010 draughts Kazakhstan has had its share of two draughts in five years as the historical records show. If the next draught in 2013 or 2014 is a mild one, Kazakhstan should be able to post an annual growth in agriculture during 2010-14 at an average rate between 2-3 percent compared to 2 percent attained in 2006-10.

143.

Targets for Manufacturing: Another target of the SPAIID in line with the Government’s economic diversification strategy is the increase in the share of manufacturing in GDP from 11.8 percent in 2008 (cf., 12.2 percent in 2003-07) to 12.5 percent in 2014. For this, manufacturing GDP should grow at a slightly higher pace than overall GDP. The SPAIID envisages labor productivity in manufacturing to grow at the same annual rate (7 percent) as overall GDP. However, employment in the manufacturing sector has been growing on average about 1.5 percent a year since 2005, which can be expected to continue in 2011-14 as well. Both productivity and employment growth in manufacturing as envisaged in the SPAIID seems to be plausible considering the past performance of the sector and Government’s drive for State-led industrialization. As for the latter, two targets of Kazakhstan-20 provide good examples: Production and exports of metallurgical products will increase 100 percent and that of chemicals 200 percent, both in volume terms, in five years. These correspond to 15 percent and 25 percent annual growth, respectively. There is no point to ask whether this is feasible or not since the authorities have already decided to undertake necessary investments, incentives and subsidies for these growth rates. What is worth discussing here is whether this strategy is going to result in the creation of an efficient and sustainable industrialization in Kazakhstan.

144.

Target for Local Content: Another target in conflict with principles of the market-based economy is the statutory obligation for most enterprises and public organizations to observe a certain ratio of local content in their procurements of goods (60 percent) and works and services (90 percent). In a market-based and profit-oriented economy, firms will naturally prefer procuring locally if relevant goods are competitive with imported ones in terms of price and quality. Should the Government be interested in promoting higher local content in procurements by firms and organizations operating in Kazakhstan, the sound policy for this would be to improve business and investment environment, physical and social infrastructure, and public utilities so that local suppliers’ goods and services could compete with imported ones. Here again, the right issue to be discussed is not whether or not the GOK’s local content target is feasible or rightly formulated, but whether this is the best approach to promote a healthy development of higher local content in procurements of firms in the country.

145.

Inflation Target: Among the SPAIID’s salient features, the first place is given to the creation of a favorable macroeconomic environment. On the other hand, inflation is not included among its quantitative targets. To identify the Government’s inflation target (or 67

67


assumption) underlying its “favorable macroeconomic environment” policy during 201114, we should look into Kazakhstan-20, which envisages inflation to be between 5 – 8 percent by 2020. This is not much informative for reviewing the period of 2011-14. With the exception of financial crisis years of 2007 and 2008, the annual rates of inflation were between 6.2 percent (2009) and 8.4 percent (2006) over the past decade. The IMF projects a steady decline in the rate of inflation from 9.2 percent in 2012 to 6.1 percent in 2015. Given the GDP growth and external resource projections as indicated in Table 15, the projected trajectory of inflation would have to be backed by and consistent with particular monetary and budgetary accounts projections. Table 15 also gives these projected accounts for 2011-2014, which are estimated by the IMF using its “Financial Programming Model”. 146.

The Government might be interested to have an inflation path in 2011-2014 similar to that projected by the IMF. But it might also be willing to allow for a higher rate of growth in GDP that could be driven by a higher rate of growth in oil and gas production than envisaged by the Fund. This would require corresponding adjustments in the external accounts and re-working consistent accounts for the government budget and money and credit supply. It is a great deficiency in the GOK’s management of the economy that its development programs, including SPAIID, do not come with a consistency framework, if they have one. The long-term programs like Kazakhstan-30, Kazakhstan-20 and the Industrial-Innovation Development Strategy for 2003-2015 should be accompanied with a three-year moving Medium-term Macroeconomic Framework (MTMF) and Medium-term Expenditure Framework (MTEF) if the business world and the public ” is to be ensured of a “favorable macroeconomic environment.

147.

The Unemployment Rate: The SPAIID does not specify a target for reducing the unemployment rate. But Kazakhstan-20 envisages the unemployment rate to be 5 percent or less by 2020. Kazakhstan was already very close to the 2020 target by 2010 when the unemployment rate was 5.8 percent. With the Government being directly involved in lowering the unemployment rate through specific public works programs and other incentives for labor-intensive production, the unemployment rate will continue dropping further over 2011-2014. The main issue in this context, however, is not any longer the level of unemployment, but rather the composition of both employment and unemployment. The composition of employment will have to undergo a change over the medium- to long-term as the enhancement of competitiveness and diversification of the economy will require shifting of resources towards non-extractive sectors. There is an increased demand for skilled

workforce among business community and private sector in Kazakhstan and education and training system should meet this increased demand in coming years. Hence, the government policy of

emphasizing technical and vocational training in recent years, as reviewed earlier (paras.122-124), can start making its contribution to easing the education mismatch in the labor market during the period through 2015.

148.

Target for the NFRK Balances: Kazakhstan has established the NFRK in order to ensure prudent use of oil and gas revenues, particularly with respect to their accumulation and investment for benefits of future generations. Over the past decade, the accumulation of oil and gas funds (after the budgetary support) amounted to USD30.6 billion (21.8 percent of GDP) by end-2010. Kazakhstan-20 envisages the NFRK balances to reach USD90 billion 68


68

by 2020, which is estimated to be about 30 percent of the then GDP. The IMF projections in Table 15 show that, within the macroeconomic scenario underlying them, NFRK balances would reach USD69.3 billion (30 percent of GDP) in 2014 and USD81.7 billion (31.7 percent of GDP) in 2015. However, while reviewing GDP growth prospects above, it was noted that the Fund’s projection of the growth rate (about 3 percent p.a.) for oil and gas output during 2012-15 was too conservative and that it could well be twice as high (i.e., 6 percent p.a.). The Kazakhstan-20’s target implicitly expects that NFRK assets will increase by US$6.0 billion per year on average over the next decade. This is feasible, given prospects of higher oil prices, a significant increase in output, and higher investment revenue on NFRK assets. In addition, the Government has been making efforts to increase its options for taxing the oil and gas sector and to generate more tax revenue from non-oil sectors to reduce the dependence of the budget on oil revenue gathered in the NFRK. In this case, Kazakhstan-20’s target for the NFRK balance could be attained even much earlier than 2020. 149.

Underlying philosophy of the SPAIID’s strategy: Starting with Kazakhstan-30 and maintained with the subsequent programs, including the SPAIID, the GOK has been pursuing a State-led “forced” industrialization strategy. Concerns were expressed above on certain aspects of this strategy. The SPAIID clearly states that the State-led development strategy had to be adopted because of the failure of the market and the business sector to satisfy the State priorities. Some of its interesting observations are worth of specifically mentioning here:  Large Kazakh businesses were oriented toward earning quick profits from raw material exports. This has not allowed him to switch to the higher VA stages and/or to the domestic market.  State initiatives have not received adequate support of the business community.  A young national business is not strong enough (i) to make an active player in the diversification of the economy; (ii) to build a new and innovative business; (iii) to break through and compete in the global market; (iv) and to attract strategic partners from among leading companies of the world.  The priorities of the business sector did not correlate with the State priorities for the development of manufacturing in producing products with high value-added.

150.

These are the principles that served as the basis of the development strategies of underdeveloped countries in the 1960s, 1970s, even 1980s. They were criticized by the international development institutions mainly on two grounds: (i) A state-led development strategy based on the above considerations are likely to cause large resource wastes and lead to the creation of inefficient industries which are unsustainable in the long-term; and (ii) Hence, such strategy will cause waste of both domestic and international resources with adverse effects on the suppliers of foreign aid and credits. It is interesting that those same international agencies are working today in close cooperation with the GOK in the implementation of its state-led development strategy. What is the difference between the past and present practices of this strategy by underdeveloped countries of the 1960s and today’s Kazakhstan. There is a major difference: Kazakhstan can afford to waste both own and borrowed resources without harming the global economy. This means that the GOK has to rely on own sound assessment of the resource cost of the “forced” industrialization strategy. The basis of this assessment has to be the realization that the Kazakh economy is faced with a ”structural overvaluation of the tenge” problem (see para. 80) and that the policy of “forced industrialization” is tantamount to pursuing a mixed policy of the multiple exchange rates and state-capitalism. 69

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KAZAKHSTAN COUNTRY ECONOMIC WORK STATISTICAL ANNEX

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Kazakhstan Country Economic Work: Statistical Annex Annex Table 1: Gross domestic product by the production method Sectors

2000 1,193.0 210.9 206.9 4.0 847.6 339.1 428.9 79.6 134.6 1,234.1 323.5 14.8 298.5 260.2 38.3 57.0 280.9 60.7 96.2 52.5 49.2 0.9 2,427.1

2001 1,458.4 283.6 278.2 5.4 997.1 371.5 534.6 91.0 177.8 1,567.5 392.9 18.9 362.6 314.7 47.8 74.2 392.4 65.6 118.2 68.3 65.5 9.0 3,025.9

2002 1,654.3 301.9 295.9 6.1 1,113.0 457.7 547.4 107.8 239.4 1,850.2 459.5 25.8 437.8 380.9 56.9 74.8 474.1 74.5 131.4 77.5 85.2 9.6 3,504.4

2003 1,980.2 362.6 358.0 4.6 1,341.5 557.7 655.7 128.0 276.2 2,318.6 536.9 39.0 570.8 496.2 74.6 74.5 662.6 86.4 159.8 83.6 98.7 6.3 4,298.9

2004 2,493.3 418.1 412.3 5.8 1,719.4 799.6 781.6 138.3 355.8 3,023.4 731.6 51.6 691.2 590.0 101.3 62.2 901.2 127.6 218.9 113.5 116.1 9.4 5,516.7

2005 3,339.7 483.5 477.4 6.0 2,261.2 1,198.9 914.0 148.3 595.0 3,783.0 897.9 68.1 896.8 741.9 154.9 80.1 1,142.8 157.9 263.5 129.8 135.9 10.4 7,122.7

bn tenge 2006 2007 2008 2009 2010 4,581.1 5,575.7 7,314.7 7,581.7 9,724.2 561.3 727.3 853.3 1,045.4 945.4 554.1 717.0 840.8 1,034.8 7.3 10.3 12.5 10.6 3,018.5 3,635.1 5,162.6 5,194.8 7,101.8 1,646.6 1,934.8 3,003.6 3,036.3 4,174.6 1,188.1 1,476.6 1,890.1 1,849.1 2,469.7 183.8 223.7 268.9 309.4 457.5 1,001.2 1,213.2 1,298.7 1,341.5 1,677.0 4,866.8 6,354.4 7,612.9 8,643.6 10,763.3 1,164.7 1,587.7 1,965.7 2,076.0 2,834.0 84.2 114.5 132.0 143.3 174.2 1,178.8 1,481.6 1,769.1 1,874.4 2,408.4 951.4 1,160.2 1,372.1 1,408.8 1,746.6 227.4 321.5 397.0 465.6 661.8 69.5 147.6 97.1 304.3 387.0 1,515.7 1,896.2 2,404.8 2,707.4 3,140.5 190.9 249.7 272.3 348.6 417.1 321.7 418.9 452.2 550.7 687.1 158.8 213.4 237.4 304.9 376.8 171.1 231.1 268.9 320.3 322.0 11.4 13.6 13.3 13.8 16.2 9,447.8 11,930.1 14,927.6 16,225.3 20,487.5

Production of goods Agriculture, hunting, foresty, fishing Agriculture, hunting, foresty Fishing, fish-breeding Industry Mining Manufacturing Electricity, gas and water Construction Production of services Trade & repair services Hotels and restaurants Transport and communications Transport Communications Financial activities Real estate activities Government administration Education Healthcare and social services Community/social/personal services Services on housekeeping Total for sectors FISIM Gross value added 2,427.1 3,025.9 3,504.4 4,298.9 5,516.7 7,122.7 9,447.8 11,930.1 14,927.6 16,225.3 20,487.5 Net taxes on products and imports 172.7 224.6 271.8 313.0 353.3 467.9 665.8 919.6 1,125.3 782.3 1,160.2 Taxes on products and imports 174.5 228.7 273.7 316.7 358.2 474.6 674.7 929.6 1,138.8 808.3 Subsidies on products and imports 1.8 4.1 1.9 3.6 4.9 6.7 8.9 10.0 13.6 26.0 Gross domestic product 2,599.8 3,250.6 3,776.2 4,611.9 5,870.0 7,590.6 10,113.7 12,849.7 16,052.8 17,007.6 21,647.7 Memo: FISIM (financial intermediation services indirectly measured) is included in "Financial services". Source: The Agency of Statistics of the RK

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Kazakhstan Country Economic Work: Statistical Annex Annex Table 2: Sectoral structure of GDP, 2000-2010 (percent) Sectors Production of goods Agriculture, hunting, foresty, fishing Agriculture, hunting, foresty Fishing, fish-breeding Industry Mining Manufacturing Electricity, gas and water Construction Production of services Trade, and repair services Hotels and restaurants Transport and communications Transport Communications Financial activities Real estate activities Government administration Education Healthcare and social services Communy/social/personal services Services on housekeeping Gross value added Net taxes on products and imports Gross domestic product Source: The Agency of Statistics of the RK

Sector GDP Growth rate over previous year; % Index (1999=100,0) Agriculture Growth rate over previous year; % Index (1999=100,0) Industry, including, energy Growth rate over previous year; % Index (1999=100,0) Construction Growth rate over previous year; % Index (1999=100,0) Service activities Growth rate over previous year; % Index (1999=100,0)

2000 45.9 8.1 8.0 0.2 32.6 13.0 16.5 3.1 5.2 47.5 12.4 0.6 11.5 10.0 1.5 2.2 10.8 2.3 3.7 2.0 1.9 0.0 93.4 6.6 100.0

2001 44.9 8.7 8.6 0.2 30.7 11.4 16.4 2.8 5.5 48.2 12.1 0.6 11.2 9.7 1.5 2.3 12.1 2.0 3.6 2.1 2.0 0.3 93.1 6.9 100.0

2002 43.8 8.0 7.8 0.2 29.5 12.1 14.5 2.9 6.3 49.0 12.2 0.7 11.6 10.1 1.5 2.0 12.6 2.0 3.5 2.1 2.3 0.3 92.8 7.2 100.0

2003 42.9 7.9 7.8 0.1 29.1 12.1 14.2 2.8 6.0 50.3 11.6 0.8 12.4 10.8 1.6 1.6 14.4 1.9 3.5 1.8 2.1 0.1 93.2 6.8 100.0

2004 42.5 7.1 7.0 0.1 29.3 13.6 13.3 2.4 6.1 51.5 12.5 0.9 11.8 10.1 1.7 1.1 15.4 2.2 3.7 1.9 2.0 0.2 94.0 6.0 100.0

2005 44.0 6.4 6.3 0.1 29.8 15.8 12.0 2.0 7.8 49.8 11.8 0.9 11.8 9.8 2.0 1.1 15.1 2.1 3.5 1.7 1.8 0.1 93.8 6.2 100.0

2006 45.3 5.6 5.5 0.1 29.8 16.3 11.7 1.8 9.9 48.1 11.5 0.8 11.7 9.4 2.2 0.7 15.0 1.9 3.2 1.6 1.7 0.1 93.4 6.6 100.0

2007 43.4 5.7 5.6 0.1 28.3 15.1 11.5 1.7 9.4 49.5 12.4 0.9 11.5 9.0 2.5 1.1 14.8 1.9 3.3 1.7 1.8 0.1 92.8 7.2 100.0

Kazakhstan Country Economic Work: Statistical Annex (at constant prices) Annex Table 3: Growth of GDP by economic sector 2000 2001 2002 2003 2004 2005 2006 2007

2008 45.6 5.3 5.2 0.1 32.2 18.7 11.8 1.7 8.1 47.4 12.2 0.8 11.0 8.5 2.5 0.6 15.0 1.7 2.8 1.5 1.7 0.1 93.0 7.0 100.0

2009 44.6 6.1 6.1 0.1 30.5 17.9 10.9 1.8 7.9 50.8 12.2 0.8 11.0 8.3 2.7 1.8 15.9 2.0 3.2 1.8 1.9 0.1 95.4 4.6 100.0

2010 44.9 4.4 0.0 0.0 32.8 19.3 11.4 2.1 7.7 49.7 13.1 0.8 11.1 8.1 3.1 1.8 14.5 1.9 3.2 1.7 1.5 0.1 94.6 5.4 100.0

2008

2009

2010

9.8 109.8

13.5 124.6

9.8 136.8

9.3 149.6

9.6 163.9

9.7 179.8

10.7 199.1

8.9 216.8

3.3 223.9

1.2 226.6

7.3 243.2

-3.2 96.8

17.1 113.4

3.2 117.0

2.2 119.6

-0.1 119.4

7.1 127.9

6.0 135.6

8.9 147.7

-6.2 138.5

13.2 156.8

-11.6 138.6

15.5 115.5

13.5 131.1

10.4 144.7

9.1 157.9

10.5 174.5

4.8 182.9

7.3 196.2

5.0 206.0

2.0 210.1

3.3 217.1

9.2 237.0

14.0 114.0

27.4 145.2

19.5 173.6

9.8 190.6

14.4 218.0

39.5 304.1

36.4 414.8

16.9 484.9

4.0 504.3

-3.2 488.2

2.4 499.9

8.4 108.4

12.3 121.7

9.8 133.7

11.0 148.4

10.8 164.4

10.4 181.5

10.9 201.3

13.2 227.8

4.2 237.4

-1.5 233.8

7.0 250.2


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Kazakhstan Country Economic Work: Statistical Annex Annex Table 4: Gross Domestic Product (GDP) per capita 2000 Gross domestic product p.c., thsnd tenge Gross domestic product p.c., USD

174.7

2001

2002

218.8

254.1

2003 309.3

2004 391.0

2005 501.1

2006 667.2

2007

2008

2009

2010

829.9 1,024.2 1,070.5 1,326.8

1,229.0 1,490.9 1,658.0 2,068.1 2,874.2 3,771.3 5,291.6 6,771.6 8,513.5 7,257.4 9,004.2

Volume index of GDP p.c. Index: 1999=100 Growth, % to previous year Deflator of GDP per capita, y-on-y in %

110.2

125.3

137.6

149.8

163.0

177.2

194.0

209.0

213.1

212.7

221.6

10.2

13.7

9.8

8.9

8.8

8.7

9.5

7.7

2.0

-0.2

4.2

17.4

10.1

5.8

11.8

16.2

17.9

21.6

15.5

21.0

4.7

18.9


Final consumption expenditure households government administration Gross capital formation gross fixed capital formation changes in inventories Net export of goods and services export of goods and services import of goods and services (-) Statistical discrepancy Gross domestic product

1990 79.5 67.1 12.4 46.7 39.0 7.7 -22.7 7.8 30.5 -3.5 100.0

Kazakhstan Country Economic Work: Statistical Annex Annex Table 5: Structure of GDP by final use, 1990-99 1991 1992 1993 1994 1995 1996 1997 72.3 82.9 84.8 88.3 84.7 80.2 82.9 60.8 68.4 70.9 77.6 71.1 67.3 70.5 11.5 14.5 13.9 10.7 13.6 12.9 12.4 27.7 23.7 20.0 28.7 23.2 16.1 15.6 27.3 27.2 27.9 26.1 23.0 17.2 16.3 0.4 -3.5 -7.9 2.6 0.2 -1.1 -0.7 -12.5 -16.1 -8.8 -10.0 -4.5 -0.7 -2.5 77.0 28.5 37.9 37.1 39.0 35.3 34.9 89.5 44.6 46.7 47.1 43.5 36.0 37.4 12.5 9.5 4.0 -7.0 -3.4 4.4 4.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

(percent) 1998 1999 84.1 84.0 73.3 72.4 10.8 11.6 15.8 17.7 15.7 16.2 0.1 1.5 -4.6 2.4 30.3 42.5 34.9 40.1 4.7 -4.1 100.0 100.0


Final consumption expenditure households government administration Gross capital formation gross fixed capital formation changes in inventories Net export of goods and services export of goods and services import of goods and services (-) Statistical discrepancy Gross domestic product

Kazakhstan Country Economic Work: Statistical Annex Annex Table 6: Structure of GDP by final use, 2000-2010 (percent) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 74.0 71.3 66.2 65.8 65.1 61.1 55.9 56.2 54.3 59.0 56.1 61.9 57.9 54.6 54.5 53.5 49.9 45.7 45.1 44.1 47.3 45.2 12.1 13.4 11.6 11.3 11.6 11.2 10.2 11.1 10.2 11.7 10.9 18.1 26.9 27.3 25.6 26.3 31.0 33.9 35.6 27.6 29.5 25.3 17.3 23.7 24.0 23.0 25.1 28.0 30.2 30.0 26.8 27.8 24.2 0.8 3.2 3.3 2.6 1.2 3.0 3.7 5.6 0.8 1.7 1.1 7.5 -1.1 0.0 5.4 8.7 8.8 10.7 6.6 20.1 8.2 14.9 56.6 45.9 47.0 48.4 52.6 53.5 51.2 49.4 57.2 42.0 44.3 49.1 47.0 47.0 43.0 43.9 44.7 40.5 42.8 37.1 33.8 29.4 0.4 2.9 6.5 3.2 -0.1 -0.9 -0.5 1.6 -2.0 3.3 3.7 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0


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Kazakhstan Country Economic Work: Statistical Annex Annex Table 7: Saving and investment balance, 1993-2010 (bn tenge at current prices) 1995 1999 2000 2001 2002 2003 GDP 1,014 2,016 2,600 3,251 3,776 4,612 Total consumption 859 1,693 1,923 2,319 2,500 3,032 Gross domestic saving 155 324 677 932 1,276 1,580 Net factor income from abroad -9 -63 -162 -167 173 -261 Net current transfers from abroad 4 19 35 35 17 -25 Gross national saving 150 280 550 800 1,467 1,294 Gross domestic capital formation 234 326 450 771 907 1,063 Gross national surplus -84 -47 100 28 559 232

2004 5,870 3,824 2,046 -388 -66 1,591 1,472 119

2005 2006 2007 2008 2009 2010 7,591 10,214 12,850 16,053 17,008 21,648 4,638 5,710 7,216 8,625 10,037 12,151 2,952 4,504 5,634 7,428 6,970 9,496 -713 -1,192 -1,588 -2,325 1,900 2,522 -55 -152 -265 -119 -133 60 2,184 3,160 3,781 4,985 8,737 12,078 2,123 3,084 3,857 4,309 4,727 5,477 62 76 -76 676 4,011 6,601


Kazakhstan Country Economic Work: Statistical Annex Annex Table 8: Saving and investment balance, 1993-2010 (percentage, at current prices) 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 GDP 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Total consumption 84.7 83.9 74.0 71.3 66.2 65.7 65.1 61.1 55.9 56.2 53.7 59.0 56.1 Gross domestic saving 15.3 16.1 26.0 28.7 33.8 34.3 34.9 38.9 44.1 43.8 46.3 41.0 43.9 Net factor income from abroad -0.9 -3.1 -6.2 -5.1 4.6 -5.7 -6.6 -9.4 -11.7 -12.4 -14.5 11.2 11.7 Net current transfers from abroad 0.4 0.9 1.4 1.1 0.5 -0.5 -1.1 -0.7 -1.5 -2.1 -0.7 -0.8 0.3 Gross national saving 14.8 13.9 21.2 24.6 38.8 28.1 27.1 28.8 30.9 29.4 31.1 51.4 55.8 Gross domestic capital formation 23.1 16.2 17.3 23.7 24.0 23.0 25.1 28.0 30.2 30.0 26.8 27.8 25.3 Gross national surplus -8.3 -2.3 3.8 0.9 14.8 5.0 2.0 0.8 0.7 -0.6 4.2 23.6 30.5 Source: The Agency of Statistics of the RK

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Kazakhstan Country Economic Work: Statistical Annex Annex Table 9: Agricultural Production (Indexes: 1990-92=100.0) Years

Grain Production m. tons index

Area-under Grain Grain Productivity mn ha index tons/ha. index

1990 28.5 23.4 12.2 1991 12.0 22.8 5.3 1992 29.8 23.4 22.6 22.9 13.2 1993 21.6 92.2 22.2 96.8 9.7 1994 16.4 70.0 20.7 90.3 7.9 1995 9.5 40.5 18.9 82.4 5.0 1996 11.2 47.8 17.2 75.0 6.5 1997 12.4 52.9 15.7 68.5 8.7 1998 6.4 27.3 13.5 58.9 5.6 1999 14.2 60.6 11.4 49.7 13.0 2000 11.5 49.1 12.4 54.1 9.4 2001 15.9 67.9 13.2 57.6 12.2 2002 16.0 68.3 14.0 61.0 11.5 2003 14.8 63.2 13.9 60.6 10.8 2004 12.4 52.9 14.3 62.4 8.8 2005 13.8 58.9 14.8 64.5 10.0 2006 16.5 70.4 14.8 64.5 11.7 2007 20.1 85.8 15.4 67.2 13.3 2008 15.6 66.6 16.2 70.6 10.1 2009 20.8 88.8 17.2 75.0 12.6 2010 12.2 52.1 16.6 72.4 8.0 Source: The Agency of Statistics of the RK

10.2 94.8 77.2 48.9 63.5 85.0 54.7 127.0 91.9 119.2 112.4 105.5 86.0 97.7 114.3 130.0 98.7 123.1 78.2

Cattle mn.

9.8 9.6 9.6 9.3 8.1 6.9 5.4 4.3 4.0 4.0 4.1 4.3 4.6 4.9 5.2 5.5 5.7 5.8 6.0 6.1 6.2

Sheep & Goat

index

9.7 96.2 83.8 71.4 55.9 44.5 41.4 41.4 42.4 44.5 47.6 50.7 53.8 56.9 59.0 60.0 62.1 63.1 64.1

mn.

35.7 34.6 34.4 34.2 25.1 19.6 13.7 10.3 9.5 9.7 10.0 10.5 11.3 12.2 13.4 14.3 15.4 16.1 16.8 17.4 18.0

Kazakhstan Country Economic Work: Statistical Annex Annex Table 17: Cotton Production 2003 2004 2005 2006 2007 2008 Cotton Production, thsd tons 402.1 467.1 465 435.4 441.7 317.5 Area sown; thsd tons 199.9 223.7 204.2 200.1 178.6 139.8 Productivity, ton/ha 0.50 0.48 0.44 0.46 0.40 0.44 Source: The Agency of Statistics of the RK

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index

34.9 98.0 71.9 56.2 39.3 29.5 27.2 27.8 28.7 30.1 32.4 35.0 38.4 41.0 44.1 46.1 48.1 49.9 51.6

2009 270 137.2 0.51

2010

Kazakhstan Country Economic Work: Statistical Annex Annex Table 11: Freight turnover of all transport modes (billion tons) Modes

2000

Railway

125.0 135.7 133.1 147.7 163.5 171.9 191.2 200.8 214.90

Other land*

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

197.5

213.2

31,0

33.0

37.6

40.2

43.9

47.1

53.8

61.5

63.5

66.3

80.3

0.0

0.0

0.1

0.1

0.1

0.1

0.0

0.1

0.1

0.1

0.1

50,9

56.6

61.5

70.4

75.6

77.1

83.3

87.8

90.3

71.7

88.6

Air

117,5

43.7

52.5

93.9

66.9

96.7

69.9

88.1

69.4

67.6

90.1

Total

324.4 269.0 284.8 352.3 350.0 392.9 308.2 438.3

438.1 403.1

472.3

River Pipeline


Kazakhstan Country Economic Work: Statistical Annex Annex Table 12: Employment by economic activity Sector

2005

2006

2007

2008

2009

2010

Total employment

7,261.0

7,403.5

7,631.1

7,857.2

7,903.4

8,114.2

Agriculture, hunting and forestry

2,353.0

2,334.7

2,382.8

2,369.8

2,326.4

2,294.9

891.8

904.5

926.0

938.0

939.3

948.8

mining

184.3

186.8

193.5

200.3

197.9

149.7

manufacturing

540.5

554.8

569.8

572.9

570.6

565.6

Electricity, gas and water

167.1

161.9

162.7

164.8

170.8

189.5

415.5

460.8

517.9

548.9

551.8

569.8

1,038.5

1,066.5

1,070.9

1,150.3

1,170.6

1,224.2

87.2

90.7

100.0

103.1

101.6

104.1

529.0

538.5

552.9

588.9

586.4

621.1

Industry

Construction Trade and repair services Hotels and restaurants Transport and communications Financial activity

66.5

73.8

87.7

96.2

96.6

104.7

Real estate activities

291.9

319.0

354.6

378.1

394.3

455.7

Public administration

330.4

335.4

343.7

352.5

373.1

376.5

Education

689.5

720.5

732.9

754.3

769.5

816.2

Health and social work activities

328.2

331.5

335.9

347.3

351.4

370.2

Community, social and personal services

203.0

198.2

197.4

205.4

220.9

204.3

36.3

29.2

28.4

24.4

21.4

22.6

0.3

0.2

0.1

0.1

0.1

0.3

Housekeeping activities Activity of extra-territorial organizations Source: The Agency of Statistics of the RK

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Table 13: Labor Force and Employment 2000-10

Labor force (mil.) Labor force annual change (%) Labor force participation rate (%) Employed (mil.) Unemployed (mil.) Unemployment rate (%) Youth unemployment rate (%)

2000 7,1 0,7 66.0 6,2

2001 7,5 5,2 70,2 6,7

2002 7,4 -1,1 70,1 6,7

2003 7,7 3,5 70,0 7,0

2004 7,8 2,5 69,9 7,2

2005 7,9 0,8 69,4 7,3

2006 8,0 1,5 69,7 7,4

2007 8,2 2,5 70,4 7,6

2008 8,4 2,3 71,1 7,9

2009 8,5 0,5 70,7 7,9

2010 8,6 1,9 n.a. 8,1

0,9 12,8

0,8 10,0 19,1

0,7 9,3 17,3

0,7 8,8 14,5

0,7 8,4 14,3

0,6 8,1 13,4

0,6 7,8 12,1

0,6 7,3 9,4

0,6 6,6 7,4

0,6 6,6 6,7

0,5 5,8 5,2


Kazakhstan Country Economic Work: Statistical Annex Annex Table 14: Growth of Employment by economic sector (percent) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total employment 8.0 0.2 4.1 2.8 1.1 2.0 3.1 3.0 0.6 2.7 Employment in agriculture,foresty, fishing 22.1 0.0 3.5 -2.3 -2.2 -0.8 2.1 -0.6 -1.8 -0.7 Employment in industry, including energy 2.9 -0.8 3.8 1.7 2.6 1.4 2.4 1.3 0.1 -3.7 Employment in construction 16.8 1.6 22.8 15.5 9.1 10.9 12.4 6.0 0.5 3.3 Employment in service activities 1.7 0.4 3.1 5.6 2.1 2.9 2.7 5.2 2.1 5.9 Source: The Agency of Statistics of the RK

Kazakhstan Country Economic Work: Statistical Annex Annex Table 15: Main Indicators of Labor Remuneration Wages 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Average monthly earnings, thsnd tenge 14.4 17.3 20.3 23.1 28.3 34.1 40.8 52.5 60.8 67.3 77.6 Average monthly earnings, in USD 101 118 133 155 208 256 324 428 505 456 527 Increase in nominal wages, Y-Y, % 21.2 20.4 17.5 13.8 22.5 20.2 19.8 28.7 15.9 10.7 15.3 Increase in real wages, Y-Y, % 7.1 11.1 10.9 7.0 14.6 11.7 10.3 16.1 -1.0 3.2 7.6 Minimum wages, thsnd tenge 2.7 3.5 4.2 5.0 6.6 7.0 9.2 9.8 10.5 13.5 15.0 Source: The Agency of Statistics of the RK

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Kazakhstan Country Economic Work: Statistical Annex Annex Table 16: Indicators of standart of living of the population Indicators 1996 Share of population with income 34.6 below subsistence line, % Urban, % Rural, % Share of population with income below subsistence food basket, % Urban, % Rural, % The poverty gap 11.4 The severity of poverty 5.2 Index of income concentration 0.32 (Gini index)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 38.3 39.0 34.5 31.8 46.7 44.5 37.5 33.9 31.6 18.2 12.7 12.1 8.2 6.5 32.7 38.5 32.9 30.0 36.0 33.0 24.7 23.4 20.2 13.6 6.9 8.1 4.1 3.7 46.0 47.7 37.1 34.2 59.4 58.4 53.2 47.1 45.6 24.4 18.1 15.9 12.1 10.1 12.7 16.2 14.5 11.7 16.1 13.8 9.1 10.7 8.6 4.9 22.6 20.1 14.2 12.1 12.8 13.7 10.3 14.8 13.3 10.2 3.1 3.8 5.5 4.0 6.5 5.5 3.9

6.3 3.9 9.4 8.3 2.9

5.2 2.4 8.5 7.5 2.5

2.7 1.8 3.8 3.9 1.3

1.4 0.7 2.1 2.4 0.8

1.2 0.6 1.7 2.3 0.7

0.6 0.2 0.9 1.3 0.3

0.4 0.3 0.6 1.1 0.3

0.34 0.35 0.33 0.31 0.34 0.33 0.32 0.31 0.30 0.31 0.31 0.29 0.27 0.28


Kazakhstan Country Economic Work: Statistical Annex Annex Table 17: Kazakhstan's HDI trends based on new methodology

Year 1990 1995 2000 2005 2010

Life expectancy at birth 66.7 63.9 63.6 64.8 65.4

Expected years of schooling 12.5 12.1 12.3 14.9 15.1

Means years of schooling 7.7 8.8 7.7 10.1 10.3

GNI p.c. (PPP USD)

HDI value

7,676 4,837 5,452 8,479 10,234

0.650 0.620 0.614 0.696 0.714

Note: The 2010 Human Development Report introduced several adjustments in the indicators and methodology used to calculate the HDI. Hence, the HDI values in these two tables are different from those in the earlier HD reports.

Annex Table 18: Kazakhstan's HDI indicators compared to selected countries Countries Kazakhstan Ukraine Russian Federation Czech Republic Europe & C. Asia High HDI

HDI value

HDI rank

Life expectancy at birth

0.714 0.710 0.719 0.841 0.717 0.717

66 69 65 28 _ _

65.4 68.6 67.2 76.9 70.4 72.6

Expected years of schooling 15.1 14.6 14.1 15.2 13.9 13.8

Means years of schooling

GNI p.c. (PPP USD)

10.3 11.3 8.8 12.3 9.4 8.3

10,234 6,535 15,258 22,678 12,555 12,286

Source: UNDP, Human Development Report 2010, Kazakhstan Section.

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Kazakhstan Country Economic Work: Statistical Annex Table 19:Balance of payments, 2000-2010 (in billion USD) Current account Trade balance Exports (f.o.b.) Oil and gas condensate non-oil exports Imports (f.o.b.) Services and income balance Services, net Income, net o.w.: Income to direct investors Current transfers Capital and financial account Capital transfers, net Foreign direct investments Portfolio investments, net other investments Errors and omissions overall balance Net international reserves (increase -)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 7.7 -9.0 -10.2 -2.7 0.46 -1.1 -1.9 -8.3 6.3 -4.4 4.3 26.2 15.2 19.9 36.8 6.79 10.3 14.6 15.1 33.5 15.0 28.9 94.7 91.2 100.3 132.3 20.60 28.3 38.8 48.4 72.0 43.9 60.8 44.3 44.6 50.3 70.2 11.42 17.4 23.6 28.1 43.5 26.2 37.0 50.4 46.6 50.0 62.1 9.20 10.9 15.2 20.2 28.5 17.7 23.9 -68.5 -76.1 -80.4 -95.5 -13.82 -18.0 -24.1 -33.3 -38.5 -29.0 -32.0 -21.0 -26.4 -31.3 -37.9 -5.84 -11.0 -15.3 -21.3 -26.2 -18.6 -24.1 -8.7 -15.2 -20.0 -20.4 -3.03 -5.3 -5.9 -8.2 -6.7 -5.8 -7.1 -12.3 -11.3 -11.3 -17.5 -2.82 -5.7 -9.4 -13.1 -19.5 -12.8 -17.1 -10.5 -10.5 -10.2 -14.5 -23.32 -4.6 -7.6 -11.3 -17.0 -10.7 -14.9 2.5 2.3 1.1 -1.7 -4.88 0.4 -1.2 -2.2 -1.0 -0.7 -0.4 8.1 -2.9 12.8 -0.6 -1.2 -9.9 5.9 -5.9

22.1 -1.9 30.7 -13.2 6.5 -9.3 3.9 -3.9

12.4 -1.2 21.6 -12.5 4.4 3.2 5.4 -5.4

27.4 44.89 -0.3 -0.20 22.1 53.92 -18.9 -4.18 24.3 -4.18 -9.3 -9.45 15.3 39.99 -15.3 -39.99

0.9

16.1

8.3

1.6

7.9

-1.0

2.1 -4.0 2.8 -1.8 -1.9 1.9

6.6 -4.5 14.0 -3.1 11.1 -11.1

8.0 -4.6 5.2 -3.0 -3.0 3.0

13.1 -9.4 -2.3 -5.7 2.2 -2.2

10.7 3.0 -5.8 -1.1 2.5 -2.5

2.2 8.7 -19.8 1.4 4.7 -4.7

Source: IMF, "Republic of Kazakhstan: Article IV Consultation- Staff Report" for 2001 through 2011.

Kazakhstan Country Economic Work: Statistical Annex Annex Table 20: General government fiscal operations, 2000-2010

Total revenue Tax revenue of which: Oil revenue Nontax revenue Income from capital transactions

2000 2001 565 833 521 724 86 215 42 101 2 9

(million tenge) 2002 2003 2004 2005 2006 2007 2008 2009 2010 848 1,169 1,441 2,132 2,804 3,706 4,542 3,766 5,223 793 1,071 1,307 1,998 2,709 3,393 4,269 3,365 4,931 165 275 413 803 1,039 1,208 2,024 1,563 2,425 46 86 114 101 64 277 238 375 243 10 13 21 32 31 36 35 26 49

Total expenditure and net lending Total expenditure Current expenditure Capital expenditure Net lending

584 567 524 43 17

746 725 634 91 21

794 776 649 126 18

1,044 993 764 230 51

1,297 1,274 955 319 23

1,695 1,687 1,319 368 7

2,067 2,060 1,562 498 8

3,106 3,098 2,318 779 8

4,369 4,326 3,336 991 42

4,002 3,971 2,975 997 31

4,915 4,805 3,625 1,180 110

Overall budget balance Statistical discrepancy Financing Domestic financing, net Foreing financing, net Privatization receipts National Fund of the RK

-20 11 31 -21 30 22 0

88 -5 -93 -23 29 82 -181

54 -13 -67 65 -56 19 -95

125 16 -121 74 9 59 -255

144 -9 -153 40 -46 7 -154

437 -63 -499 18 -127 15 -405

736 -1 -738 -85 2 48 -703

600 53 -546 274 0 60 -880

173 -55 -228 277 0 24 -529

-236 35 271 469 76 17 -290

308 -68 -375 380 148 12 -915

Source: IMF, "Republic of Kazakhstan: Article IV Consultation- Staff Report" for 2001 through 2011.

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Kazakhstan Country Economic Work: Statistical Annex Annex Table 21: Monetary Survey, 2004-2010 Assets/Liabilities (end of period)

2004

2005

2006

2007

1,192

1,200

2,296

1,961

811

2,806

4,601

Net domestic assets

647

1,126

2,394

3,446

5,993

5,756

4,941

Domestic Credit

1,099

1,822

5,583

8,580

9,575

10,146

-2,649 43 7,574 615

223 34 7,970 353

-72 228 8,544 875

16 824 8,619 687

-451

3,592 -998 1,914 47 34 2,709 4,881 64 592 -696 1,199

-2,137

-2,586

-3,819

-5,204

1,635 379 1,255 9 196

2,065 3,678 412 601 1,654 3,077 30 129 231 883

4,630 740 3,890 90 688

6,267 858 5,409 80 457

7,386 914 6,473 92 1,084

8,546 1,148 7,398 116 879

Net foreign assets

Net claims on central government Net claims on other government Credit to the private sector Other claims on the economy Other items, net Broad money Currency in circulation Total deposits Non-liquid liabilities Statistical discrepancy

-609 26 1,555 126

2008

(bn. Tenge) 2009 2010

Source: The IMF, Republic of Kazakhstan: Staff Reports of 2009 and 2011 Article IV Consultations

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