Economy of Kazakhstan

Kazakhstan is intensively searching for new ways to exit the deep economic and social crisis which has arisen during the last years. The main way is to improve the basic branches of economy. The transfer of large industrial enterprises to contract management of local and foreign companies is considered to be one direction to overcome that crisis. During two last years, 42 contracts were concluded, 30 of which operated to the end of 1995.

Kazakhstan is used as an intermediate zone for the transportation of natural gas of the republics of Central Asia to Russia. The natural gas of Kazakhstan is transferred to Russia without any processing, but not to its users, even in the western region where the gas is extracted. Because of this, the main problem of Kazakhstan is the necessity of the improvement of usage within the republic and the modernization of the present infrastructure.

An extensive territory, large differences in climate and geographic conditions, and a low population density make the problem of transport in Kazakhstan more important and significant. Though during the Soviet regime large quantitative and qualitative improvements to transport infrastructure took place. The total length of railroads on the territory of the republic reached 14,500km; the total length of paved highways was 82,000km; air routes were 108,000km; and internal navigable waterways, 4,000km. However, the main type of transportation for most cargo and passengers (including international connections) is by motor vehicle, which is not a very effective means of conveyance. Even in the best years, the share of railway transport has been small; only 12% of dispatched cargo and less than 20% of passengers on inter-city routes. The share of aviation and river transport is very insignificant in cargo transportation. As for passenger departures, air and water routes represent less than 4% of the total volume of passenger service. Nevertheless, one can confirm that transportation in our republic, even according to "Soviet" standards, is not badly developed. If one can take into account that the transportation infrastructure of the current state must correspond with world standards, the necessity of urgent and deep modernization becomes clear.

In spite of its remoteness from any ocean, being the bridge between Europe and Asia and having a huge territory laden with the high potential for transport (transit) between other states, Kazakhstan can form a world land bridge via its territory. Even in ancient times, the people who inhabited the territory of modern Kazakhstan and Central Asia completely took advantage of the neighborhood, establishing a route of the Great Silk Road. The total length of the Silk Road is 6,500km, from southeast China to the Mediterranean coast of Turkey. A large quantity of goods and the exchange of advanced culture passed through these lands. Realizing these advantages, Kazakhstan has managed to make the first steps in the restoration of the route, using the most modern transport means.

Currently, Kazakhstan is connected with China by all types of modern transport (railway, highway, aviation) Practically, Kazakhstan can deliver cargo from European and Asian countries to any province of China, or to the countries of Southeast Asia. Sea transportation has been established through Iran, and mixed connections (railway and road) have been opened with Turkey. In May 1996, a short railway which extends to Iran and the borders of Turkmenistan was established. Thus, the Great Silk Road has been restored in a railway variant from the Chinese Far East to Europe. Kazakhstan is working together with China to develop the station "Druzhba".

Millions of tons of cargo from many countries of the world will pass via this station in the near future. The electrification of the railways of the southern and northern sections is nearly completed. The radical reconstruction and development of Almaty international airport and other airports of the republic have already begun. Plans for the increase of the capacity of the harbor on the coast of the Caspian Sea are already in effect. "But for the speeding up of all these wide-scale measures, which are also of international significance, Kazakhstan needs investment. For one thing, investments are necessary for the development and modernization of the railways in the south, then for the modernization of ground routes and the system of aviation management.

 

 

2. Analysis of a current state of economy of Republic of Kazakhstan

 

According to the report on socio-economic development of the Republic of Kazakhstan, over the first half of 2011 the real GDP increased by 7.1 percent against the similar period of 2010.

Kazakhstan's trade turnover in the first half of 2011 made USD 615.59 bln, increasing by 44.7 percent against the first half of 2010. Export made USD 449.16 bln, import - USD 16.64 bln.

Gold and foreign assets of Kazakhstan as of May 1, 2011 made USD 73 bln.

In 2011 pensions, scholarships and salaries of public sector employees were increased by 30 percent. In 2009-2010 they were increased by 25 percent.

In July, 2011 the number of unemployed made 5.3 percent of the economically active population (461.7 thousand people).

In 1994 the per capita GDP in Kazakhstan made USD 700, in 2006 - USD 4,500, and as of January 1, 2011 this index exceeded USD 9,000.

What measures has Kazakhstan taken for creation of favorable conditions for implementation of socio-economic and domestic policy reforms?

On December 2, 1991, Nursultan Nazarbayev presented main directions of Kazakhstan's foreign policy at a press conference.  In N.Nazarbayev's opinion, Kazakhstan which is located between Europe and Asia should become a bridge between them, developing economic and political ties with all states of the world.

A foundation of Kazakhstan's foreign policy is the two principles: multi-vector and Eurasianism.

By definition of President N.Nazarbayev, multi-vector means "development of friendly relationships with all states, which play an important role in the world affairs and represent practical interest for our country."

Establishment of the Eurasian Economic Community by Kazakhstan, Russia, Belarus, Kyrgyzstan and Tajikistan on October, 2000 became practical implementation of the Eurasian strategy. Then Belarus, Kazakhstan and Russia established the Customs Union on January 1, 2010. Presently, these three countries actively work over creation of a legal framework on transition for the next stage of integration - the Single Economic Space.

Kazakhstan solved the territorial-boundary problems with all neighbor states.

Kazakhstan made a number of initiatives on creation of regional integration associations in central Asia.

Kazakhstan constructed equal and mutually beneficial relations with leading state of the world - the USA, Russia, China, the EU countries.

We consider the People's Republic of China as a leading foreign partner. We plan to increase the trade turnover twofold in the nearest years. Transport projects allow to expand exports of the Chinese production through Kazakhstan to EU an Middle East.

Kazakhstan is the first post-Soviet state with predominantly Muslim population, which chaired the OSCE in 2010.

Kazakhstan is geographically the largest of the former Soviet republics (save Russia) and the largest economy in Central Asia. With a nominal GDP of USD 138bn and 16 million inhabitants, GDP per capita amounts to USD 8,406. As such, Kazakhstan is classified as an upper middle income country by the World Bank. Kazakhstan’s economic welfare is mainly derived from the country’s vast endowment of natural resources, such as hydrocarbons and numerous types of minerals. Kazakhstan’s economy is therefore highly dependent on extractive industries and on the oil sector in particular, which accounts for 60% of total exports and more than 25% of GDP. On the one hand, Kazakhstan’s oil reserves will provide the country with income for years to come. Oil production is expected to double from today’s level when the Kashagan Caspain Sea oil field comes online between 2015 and 2020. On the other hand, however, the wellbeing of the economy therefore hinges on developments in international commodity (oil) markets, leaving the country vulnerable to external shocks. Moreover, diversification efforts are undermined by symptoms of Dutch disease, which makes the non-oil and gas tradable sectors uncompetitive internationally. Also, a weak infrastructure and unreliable energy supply undermine the country’s economic potential. The agricultural sector’s contribution to GDP is relatively small (5% of GDP), but in terms of employment the sector is important, as nearly 30% of the labor force works in the agricultural sector. Industry contributes a relatively large 43% to GDP while the services sector accounts for the remaining 52%.

The global credit crunch and subsequent economic downturn worldwide strongly and negatively affected Kazakhstan’s economy, as capital inflows slowed drastically and international oil prices plummeted. Banks’ balance sheets weakened as a result of the economic slowdown and problems on the real estate market, combined with a strong devaluation of the tenge that strongly increased the banking sector’s external debt burden in tenge terms. A large fiscal support program, amounting to some 7.5% of GDP, supported the banking sector and measures were taken to support economic activity as well. As a result, a positive growth rate (1.2%) could be maintained in 2009. In 2010, Kazakhstan’s economy recovered mainly on the back the global economic recovery and resulting higher commodity prices, although ongoing government stimulus and investment also added to the recovery. Fixed investment and private consumption rebounded and grew by 7% and 7.5% last year, respectively, and the external sector contributed positively to growth again. In all, Kazakhstan’s economy grew 7% in real terms last year. In the coming years, increasing oil, gas and mineral output, and the government’s investment program will continue to support growth. However, at the same time, economic activity will be subdued by nearly stagnating credit growth as the banking sector remains weak. As a result, economic growth is expected to fall to between 5 and 6 percent in the coming years.

 

 

The banking sector experienced major problems during the global economic downturn and continues to be one of Kazakhstan’s major weaknesses. With the banking sector borrowing heavily abroad while exposure was concentrated in the nontradables sector, the reduction of foreign capital inflows led to a domestic credit crunch at a time that the domestic economic environment was weakening. As the banking sector’s weaknesses were exposed, three major banks needed restructuring (BTA, Alliance and Temir) and the country’s national development agency, Samruk-Kazyna, took equity stakes in four large banks. The price for foreign creditors was high, as they had to accept a major haircut. The restructuring effort, the government support (including a USD 9bn capital injection and USD 4bn in refinancing and loan support programs), a more stable exchange rate and the economic recovery have supported the banking sector since and, at the moment, signs of stabilization are visible. Even so, total non-performing loans (NPLs) remain high, reportedly at 26% of total loans in November last year, and credit conditions remain weak, as annual credit growth remained marginal at 7% in 2010 and an expected 9.6% in 2011, compared to 65% in 2008. Further government support seems unnecessary though, as the banking system’s capital adequacy ratio is around 18% (not taking into account the restructured banks) and provisions are relatively sound at 17.2% of the loan stock. In addition, the banking sector’s domestic deposit base has strengthened following an increase of public sector deposits (amounting to 20% of total liabilities) and a contraction of lending in foreign currency. In October 2010, the share of foreign currency lending fell to around 53% of total loans. However, to structurally reduce the financial sector’s vulnerabilities, which include risky lending practices and weak governance, regulation and supervision have to be improved.

President Nursultan Nazarbayev is the first and only ruler of Kazakhstan since the country became independent from the USSR in 1991. In the past 20 years, Nazarbayev has solidified his power base and, through changes of the constitution, established an authoritarian political regime that effectively guarantees his rule forever. Political opposition is weak and support for Nazarbayev in Kazakhstan’s parliament is very strong, as exemplified by the fact that it has given Nazarbayev the title “Leader of the Nation” (which exempts him from legal prosecution for life) in June last year. However, Kazakhstan’s authoritarianism differs somewhat from that in neighboring countries such as Belarus and Uzbekistan, as it relies less on coercion and allows for some (economic) freedom. However, press freedom is strictly limited, reflected by the press freedom ranking of 162 (out of 178 countries), and corruption remains a major problem with Kazakhstan ranking 105^th out of 178 countries on Transparency International’s corruption perception index. An “independent” group of citizens tried to propose a referendum that would allow Nazarbayev to remain in office until 2020, thereby circumventing two elections. While 55% of the electorate supported this proposal, it was deemed unconstitutional by Kazakhstan’s Constitutional Court. In response to the decision, Nazarbayev brought forward the upcoming presidential elections, which had been scheduled for December 2012, to April 2011. As expected, Nazarbayev secured a victory with more than 90% of the vote and extended his rule until 2016. With Nazarbayev at the helm, Kazakhstan’s political environment has been very stable in the past decades and this will remain as long as he is in change. The recent unrest in the Middle-East has not spilled over into Kazakhstan and the risk that it will do so in the future seems small. Succession, however, is a potentially large problem. Nazarbayev is 70 years old and there is no clear successor. This is partly due to the fact that Nazarbayev himself seems oblivious to the problem, as he stated he will run again in the 2016 elections. However, with no clear successor, an untimely death of the Leader of the Nation could lead to increased political instability, as it may lead to infighting amongst the Kazakhstani elite. The importance of China in Kazakhstan’s international relations has increased in the past years, particularly after the global economic downturn, and maintaining good relations with China is currently a top-priority in Kazakhstan’s foreign policies. Both countries stand to benefit, as China is willing to invest heavily in Kazakhstan to secure access to its energy reserves while Kazakhstan wants to secure new export routes. Economic links to Russia will also remain strong as a result of the customs union between Kazakhstan, Belarus and Russia, which has been in place since January 2010 and will expectedly lead to a single economic space by early 2012. WTO accession is being pursued, but will also depend on the progress regarding WTO membership of the other customs union members, although each country is negotiating its membership with the WTO separately.

Kazakhstan’s economic policies are rather prudent and the government finances are one of the country’s strengths. However, the government’s attitude towards foreign investors and creditors is cause for concern, which reflects negatively on the business climate, as there have been many examples in which foreign investors and creditors were left in the cold in times of trouble. Foreign creditors were forced to accept a large haircut during the restructuring of the banking sector, despite earlier statements that this would not be the case. In addition, Kazakhstan’s government has taken a tougher stance towards foreign oil companies in recent years, making use of environmental laws to force them to accept changes to earlier agreements. An export duty on crude oil and petroleum products was reintroduced mid-2010 (the initial duty introduced in May 2008 was set at zero in January 2009). Besides increasing government revenues from the oil and gas sector, the new approach is also meant to force oil companies to contribute to Kazakhstan’s diversification drive, forcing them to cooperate with the government’s industrialization program and requiring them to use more local labor. In March 2011, the government adopted a law that details the procedure for nationalization of property. The law states that this can only be done in 
case of a threat to national security and that any actions taken by the state in this regard will be on a non-discriminatory basis and prompt and adequate compensation will be made. However, given Kazakhstan’s authoritarian political environment, there is a risk that these law will be used arbitrarily.

As the oil and gas sector was developed in the past decade, Kazakhstan’s government has seen a dramatic increase of government revenues from the oil and gas sector. These currently account for around 40% of total government income. At the same time, expenditures remained more or less steady around 22% of GDP, except in 2005 and 2007 when expenditures increased to nearly 27% of GDP. The extra oil-related income was used to lower public debt and to build up the National Oil Fund (NFRK). The NFRK was set up in 2000 to reduce the economic impact of volatile oil prices and to save part of Kazakhstan’s oil income for future generations. It holds around USD 30bn in assets (end-2010), all of which are invested abroad. In response to the economic slowdown in 2009 and problems in the domestic banking sector, the government implemented a large support program for the banking sector, tax cuts for the non-extractive industry and increased expenditures on pensions, public sector wages and social benefits. The total fiscal support effort is estimated at 4.5% of GDP (7.5% of GDP when off-budgetary spending is taken into account), partly financed by drawing on the NFRK and partly by increased public debt. The fiscal support in combination with lower revenues led to a widening of the budget deficit from 2% of GDP in 2008 to 3% of GDP in 2009, while public debt increased from 9% of GDP in 2008 to 16% of GDP in 2010. A gradual improvement of the fiscal balance, as expenditures will continue to grow steadily while revenues will increase more rapidly on the back of relatively strong GDP growth, is estimated to lead to a balanced budget by 2014. Public debt, meanwhile, will increase to nearly 20% of GDP by 2013 before starting to decline thereafter.

Inflation fell sharply during the global economic downturn, from a very high 17% in 2008 to slightly over 7% in 2009 and 2010, as falling demand and lower commodity prices reduced price pressures. This allowed the National Bank of Kazakhstan to embark on a monetary easing cycle to support the economy. Interest rates were lowered to 7% by September 2009 and remained equal in the following 18 months. However, rising food and fuel prices are now starting to push up inflation. In February 2011, inflation accelerated to 8.8% year-on-year and the central bank responded the first rate increase in three years, raising the policy interest rate by 50bp to 7.5%. Inflation is expected to peak in 2011 at 8.5% before easing to around 6% in 2012. In spite of officially abandoning the trading corridor of the tenge, the central bank’s exchange rate policies are still aimed at maintaining a stable exchange rate of the tenge vis-à-vis the US dollar. The downside, however, is that dollarization is high at 43% (in 2009). Following sustained downward pressure on FX-reserves, the central bank devalued the tenge by around 20% from 120 KZT/USD to nearly 150 KZT/USD in 2008. At the moment, however, there is an appreciating pressure on the tenge, as the global recovery and higher oil prices have improved market sentiment towards Kazakhstan’s currency. As inflation has increased, the central bank is allowing some appreciation to help reduce imported inflation, and the tenge is expected to appreciate to slightly below 140 KZT/USD by 2012 as a result. A structurally more flexible exchange rate would benefit Kazakhstan, as this would help to absorb external shocks and enhance the effectiveness of monetary policies. Given the current dependence of Kazakhstan’s economy on the oil and gas sector, economic diversification is important to guarantee sustainable economic development in the (very) long term. In this regard, the government is implementing a broad economic development program intended to improve the country’s infrastructure and develop the non-oil sector. In 2010 alone, around USD 10.5bn will be spent on 200 projects and a total of USD 55bn will have been spent by 2020. Main sectors targeted under diversification program are pharmaceuticals, telecommunications and petrochemical and food processing.

Supported by commodity exports, which account for nearly 90% of total exports, Kazakhstan’s trade account generally shows a large surplus of between 14 and 20 percent of GDP. As trade decreased strongly in 2009, the trade surplus narrowed to USD 15bn (13.6% of GDP), which pushed the current account back into a deficit. In 2010, on the back of an improved external backdrop exports rebounded strongly and the trade surplus widened to USD 29bn (20.6% of GDP). In the coming years, the trade surplus is expected to continue to hover around USD 30bn, but will decline as a percentage of GDP (to around 16.5% in 2012) as nominal GDP increases. In spite of the substantial trade surplus, the balance on the current account is subdued by large deficits on the services and income accounts due to the many foreign companies that are active in Kazakhstan. After the current account deficit of 3.8% of GDP in 2009, it recovered in line with the trade surplus and registered a surplus of 3.7% of GDP in 2010. In the coming years, the current account will show a steady surplus of around 4% of GDP.

FDI inflows slowed in the past years, as Kazakhstan’s economic outlook deteriorated, from nearly USD 16bn in 2008 to around USD 10bn in 2010. At the same time, outward direct investment increased. As a result, net investment inflows decreased sharply from USD 15bn in 2008 to only USD 2.8bn in 2010. A recovery of net investment inflows to around USD 12bn is foreseen by 2012, as investor confidence returns slowly and the second stage of the Kashagan Caspain Sea oil  field will start to be developed. Meanwhile, the strong net portfolio outflow seen in the years before the global economic downturn slowed from USD 15bn in 2007 to USD 2.5bn in 2010, and even turned into a net inflow briefly in 2009, but will increase steadily again in the coming years. The problems in the banking sector, a heavy external borrower, is reflected in the amount of debt inflows. Whereas a strong net debt inflow of nearly USD 15bn was registered in 2008, this amount fell sharply to around USD 3.4bn in 2009 and 2010. A small net debt outflow is anticipated in the coming years, as foreign liabilities of the banking sector are further reduced. In the coming years, FDI inflows, with those originating from China expected to grow in importance, and bilateral government lending will support the capital account in the coming years.

 

 

 

 

 

3. Directions and prospects of development of economy of Kazakhstan

 

Kazakh President Nursultan Nazarbayev addressed the people of Kazakhstan with a statement titled “Socio-economic Modernization: the Main Vector of Kazakhstan’s Development.” In what now resembles an American state-of-the-union address, Nazarbayev outlined ten main priorities that will shape the country’s development in the next decade. Some of these priorities feed on the long-standing agenda of promoting a more diversified, innovative and industrialized economy able to compete in the globalizing world. Others reflect the lessons learned from recent events and the need to better tackle domestic socio-economic challenges that are also increasingly a function of fragile global conditions.

The choice of words in the statement’s title is not coincidental. The strategy now also puts emphasis on the social component without discarding the important role of the economic constituent, aiming for “optimal balance between economic success and provision of public goods.” A series of recent developments have shown that Kazakhstan’s general economic successes overshadowed its uneven regional development, lack of socio-economic opportunities in the periphery, and sluggish progress on the political front, indicating the need for socially significant policies amid uncertainty in global markets (Interfax, January 27).

Some of these developments are worth highlighting to understand the vision laid out in the presidential address. In 2011, Jund al-Khilafa group, whose leadership is based in Afghanistan-Pakistan border areas, carried out a number of deadly attacks against the government and civilian targets, shaking the perception of a secure Kazakhstan. In December 2011, clashes between striking oil workers and police left more than a dozen killed in the small oil town of Zhanaozen, further exposing vulnerability of the relatively more stable country in the region. In January 2012, the government came under criticism for reportedly fraudulent parliamentary elections, which some observers argue should still help with the government-sanctioned transition to a multi-party system at a later date. Some critics also note the government’s struggling efforts to bring the economy to the pre-crisis growth of more than 9 percent and bolster investment climate amid lingering ills in the banking system. This is despite reports of the arguably solid macroeconomic indicators (economic growth in 2011 was 7 percent; inflation – 8.3 percent; unemployment – 5.2 percent) attained following the global financial crisis that hit the Kazakh economy hard.