Kazakhstan economy.   About Kazakhstan economic development

Kazakhstan is important to world energy markets because it has significant oil and natural gas reserves. With sufficient export options, Kazakhstan could become one of the world's largest oil producers and exporters in the next decade. But Kazakhstan's strategic aspiration is to become a modern, diversified economy with a high value added and high-tech component, well integrated in to the global economy.

The energy sector is viewed as a good basis to achieve this goal.

The perspective of the Kazakhstan economy is closely connected with further integration into international economic relations, utilization of unique reserves of energy and mineral resources, vast possibilities to export industrial and agricultural products, optimum employment of country's transit potential and also with availability of highly qualified specialists in different spheres.

During the Soviet period Kazakhstan was an agrarian, raw materials supplier of the former Soviet economy, where the military industry played the major role. The main economic content of more than 10 years of independence has become transition from the central command planning to a market system. During these years, Kazakhstan has made considerable progress in implementing complex political, economic and social reforms to establish a democratic state with a market economy. While the country has not experienced political disturbances during the transition period, it has faced numerous economic, social and environmental challenges.

The first few years of Kazakhstan's independence were characterized by an economic decline (mostly due to the destabilizing force of disintegration of the Soviet Union): by 1995 real GDP dropped to 61,4% of its 1990 level. This economic deterioration exceeded the losses experienced during the Great Depression of the 1930s. The wide-ranging inflation observed in the early 1990s peaked at annual rate of up to 3000% in mid-nineties. Since 1992, Kazakhstan has actively pursued a program of economic reform designed to establish a free market economy through privatization of state enterprises and deregulation and today is generally considered to be more advanced in this respect than most other countries of the CIS. Kazakhstan remains one of the most successful reformers in the CIS, though its record is less strong when compared with more advanced transition countries of Central and Eastern Europe, and it has the strongest banking system in Central Asia and CIS.

The main goals of current structural policy are diversification and the strengthening of the non-oil sector. A number of development agencies and research centers (Development Institutions) have been established and the Government is looking at establishing techno and science parks to support the diversification of higher-value added industries. But there are certain obstacles inherited from the past to quickly achieve this.

The EU and USA have recognized Kazakhstan (first in CIS) as a country with market economy in 2001 and 2002 respectively. In October 2002 international rating agency Moody's upgraded Kazakhstan by two notches to Baa3, thus Kazakhstan has become the first country in the CIS to reach investment grade status. Standard & Poor's in 2004 upgraded Sovereigns rating to BBB/Stable/A-3. In October 2004 the Fitch upgraded Kazakhstan's local currency rating to BBB/Stable. In January 2005 the Organization for Economic Cooperation and Development (OECD) has upgraded Kazakhstan's country export risks rating, moving it from the 5^th to the 4^th group of risks. Kazakhstan has enjoyed impressive economic growth over the past five years, buoyed by increased oil exports, as well as by bold economic reforms, prudent fiscal policies and economic initiatives that were instituted in 1999.

This results in stable level of inflation (2002 - 6.6%, 2003 - 6.8%, 2004 - 6.7%, 2005E - 6.6%), a budget surplus, a firm currency, and a decreasing unemployment rate (2003 - 8.8%, 2004 - 8.4%). After posting moderate growth of 2.7% in 1999 as a whole, Kazakhstan's real gross domestic product (GDP) rose 9.6% in 2000, 13.2% (2001), easily the country's best year of economic performance since independence, 9% in 2002, 9.1% in 2003, 9.3 in 2004 and according to The Economist Intelligent Unit Kazakhstan is within Top 10 world fastest-growing economies in 2005.

The main driver behind Kazakhstan's economic growth has been foreign investment, mainly in the country's booming oil and natural gas industries. Since independence from Soviet rule in 1991, Kazakhstan has received more than 30 bln. US$ of foreign direct investment - the highest per capita indicator in the former Eastern Bloc.

Hard currency reserves of the National Bank and National Fund combined have reached US$ 14.4 bln. in 2004 (growth 66.3%). In 2004 the minimum wage in comparison with 2003 grew by 32% and average wages grew up by 21.4%.

Real income during this period grew by 13,5%. Real growth of average monthly pension was 23.4% and there has been a significant increase in the social payments by the state. As US Under-Secretary of state for Economic Business and Agricultural Affairs Mr. Alan P. Larson said recently in his address to the American Chamber of Commerce in Kazakhstan: "Since its independence in 1991, Kazakhstan has been in the midst of a remarkable transition from communism to free markets. When completed, this transformation could bring Kazakhstan into the global marketplace in a way not seen since Central Asia dominated international trade routes hundreds of years ago.

Kazakhstan's current leaders are laying the foundation for its integration into the global economy.

At independence in 1991, Kazakhstan had a promising resource base, from its sizable hydrocarbon reserves to its well-educated workforce. More importantly, though, it had the wisdom to move quickly away from the failed policies of the past. Kazakhstan's leadership embarked on a new - transformational-course. In a little over ten years, Kazakhstan implemented a series of broad-based reforms that brought Kazakhstan from planned to market economy.

Kazakhstan undertook a process of demonopolization, privatization, debt restructuring, price liberalization, customs reform, and tax restructuring. Kazakhstan established a securities and exchange commission, liberalized trade, enacted laws on investment, established a new government procurement process, and reformed the banking system.

The United States formally recognized this achievement when, in March 2002, it accorded Kazakhstan the status of a market economy, and these reforms yielded impressive results at home. The Government of Kazakhstan has privatized much of the economy, although much work needs to be done to restructure major sectors such as telecommunications. The banking sector has flourished. The financial system has been a leader in innovation, including the emergence of successful private pension funds, the establishment of a national fund to preserve oil wealth for future generations, and a budding mortgage-lending market Unemployment, while still high in Western terms, is lower than elsewhere in the region.

These impressive reforms took place against a background of internal political stability and gradual advance of democratic reform and a civil society. We are heartened to see that economic reform is continuing. Introducing diversity into Kazakhstan's economy and freeing its human potential will require a huge national effort and, a renewed commitment to democratic and market reforms; and a key objective will be making this new economy open to outside investors.

The United States has decided to support this effort through the Houston Initiative - a comprehensive partnership with Kazakhstan to build a modern, market-based economy, with particular emphasis on small and medium enterprises. We look forward to working with the Government of Kazakhstan, with local governments throughout the country, and especially with individual entrepreneurs to realize the full potential of Houston Initiative.

Now country's investment potential is based on minerals and raw materials. Because their exploitation creates more than a half of the gross product, the quality and extent of deposits utilization and the reproduction of raw material reserves play decisive role in the present and future of Kazakhstan. For example, it is supposed that exploitation of the oil and gas field Kashagan which is one of largest fields in the world will make Kazakhstan one of the major producers of hydrocarbons not only on the regional, but also on the international level.

According to certain estimates, in the next 10 years the oil and gas sector of the country, particularly the Kazakh sector of the Caspian Sea, could attract between to 150-200 bln. US$. At the same time, Kazakhstan Government's top priority is to encourage foreign direct investments into industry, agriculture, innovation, processing sectors in order to decrease the dependence of the Kazakhstan economy on energy and extracting sectors and to ensure continued growth of Kazakhstan's economy.

Aiming at attracting foreign direct investments Kazakhstan carries out the policy of ensuring stable macroeconomic environment and realizes other measures which contribute to the improvement of investment climate in the country. The Government and the National Bank pursue the co ordinated policy directed to ensuring sustainable economic growth with low inflation rate and budget deficit not higher than it is envisaged.

The new Tax Code which has recently been adopted secures principles of liberal market economy and, therefore, creates favorable conditions for all businessmen. Beginning from the 1st of July 2001 the rate of the VAT was decreased from 20% to 16% and the social tax rate from 26% to 21%. For the purpose of meeting current requirements and those of future generations at the account of reserve resources the National Fund has been formed in Kazakhstan in 2000 accumulating external proceeds to the budget from the activity of Kazakh and foreign enterprises in the oil sector and aiming at stabilization of state budget revenues.

Now there is about 5,3 bln. US dollars (2004) on the account of the National Fund. Besides, the National Development Bank with the charter capital of about 250 mln. US dollars has been established in 2001. Its activity is directed to crediting investment projects, which ensure economic diversification and upgrade of industrial infrastructure in the country. Now with Fitch rating upgraded in 2004 to BBB-/Positive the Development Bank is able to attract worldwide investments for further activity. In addition to the above two development institutions and to stress the importance of building a modern non-oil dependent economy the Government of Kazakhstan has adopted in 2003 the "Innovative Industrial Development Strategy until 2015" which among other things provides for the early establishment of three new development institutions: Industrial Investment Fund with charter capital of over 160 mln. US$, Innovation Fund with about 70 mln. US$ and Export Credits Corporation with over 55 mln. US$ all deriving money from oil revenues.

All these institutions serve for further development and diversification of the economy of Kazakhstan. Thus, during these years Kazakhstan has covered not an easy path, and has achieved significant results. Having created and strengthened socio political stability by implementing democratic and market reforms on the steady basis, Kazakhstan has gained macroeconomic stability, formed legislation essential for conducting successful business, realized structural reforms which while being unpopular initially created firm basis and favorable environment for accelerated development of the country in the mid and long terms.

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