International Conference

«Conflicts in the Caucasus: History, the Present and Prospects for Resolution»

Baku (Azerbaijan) 22-23 October, 2012 and Tbilisi (Georgia) 25-26 October, 2012

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ECONOMY

Larissa SIDOROVA

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Larissa Sidorova, Academic secretary, Kazakhstan Institute for Strategic Studies under the President of the Republic of Kazakhstan (Almaty, Kazakhstan)

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Macroeconomic Trends

In 2005, the republic pursued a policy of deepening the economic reforms launched in the early 1990s. In 2003-2005, the average GDP growth rate was over 9%, with a steady increase in industrial production, investment and other key indicators. Living standards in the country rose accordingly. Per capita GDP—an aggregate indicator characterizing the country’s economic development level—increased 1.7 times in 2003-2005, reaching $3,620 at the end of 2005 (compared to $1,052.1 in 1995 and $2,713.8 in 2004). The main efforts in 2005 were focused on a reform of the tax and tariff sphere and further development of the banking system, the insurance sector, the accumulative (financial defined contribution) pension system and the stock market. Steps were also taken to enhance the efficiency of the fuel-and-energy and extractive sectors, find new ways of ensuring economic growth, develop government support for business activity, promote regional economic policy, etc.

In recent years, virtually all international ratings assigned to Kazakhstan have been upgraded. For example, in terms of the Growth Competitiveness Index of the World Economic Forum (WEF), in 2005 the republic ranked 61st among 104 countries. This rank results from Kazakhstan’s 41st place in terms of the macroeconomic environment index and its 76th and 77th places, respectively, in terms of the public institutions index and the technology index. On 20 December, 2005, Fitch Ratings agency upgraded the country’s long-term foreign currency rating to “BBB” and its long-term local currency rating to “BBB+” and reaffirmed its F3 short-term foreign currency rating, with a stable outlook for all these ratings. According to the agency’s latest report, Kazakhstan has good economic prospects.

The present stage of qualitative transformations in the republic is primarily associated with the development of the industrial innovation component. In the drive to improve the economy and enhance its efficiency, the government and President Nursultan Nazarbaev have set a number of new tasks: to diversify production; to increase the share of high value added industries in the gross domestic product; and to carry out structural transformations aimed at bringing Kazakhstan’s economy closer to the standards of the developed industrial countries.

Real Sector

According to the Statistics Agency of the Republic of Kazakhstan, GDP in 2005 grew by 9.4% compared to the previous year, which was due to an increase in production in virtually all sectors of the economy: by 4.6% in industry, 6.7% in agriculture, 34.1% in construction, 4.8% in transport, 27.7% in communications, and 12.4% in trade. The increase in fixed capital investment compared to the previous year was 22.1% (see Fig. 1).

Main Macroeconomic Indicators for 2004-2005 (as % of previous year)

S o u r c e: RK Ministry of Economy and Budget Planning.

In assessing the results of the republic’s development, one should note the changes in the structure of economic growth. Whereas in 2004 industry accounted for 32.3% of total GDP growth, in 2005, according to the RK Ministry of Economy and Budget Planning (MEBP), its share fell by more than half, to 14%. The main reason here was slower growth in the export-oriented sectors, which mostly include mining and metallurgy (in 2005, crude oil production increased by only 1.1% compared to 2004, while production in metallurgy fell by 6.2%). As a result, the contribution of these industries to overall GDP growth shrank from 21.4% in 2004 to 2.7% in 2005.

In these conditions, according to the MEBP, a significant contribution to GDP growth was made by construction: its share in overall GDP growth increased from 9.3% in 2004 to 27.1% in 2005. One should also note the successful development of agriculture, whose 2005 contribution to GDP growth was 4.6%. The share of trade in GDP growth fell from 13.5% to 11.9%, and that of transport, from 10.4% to 7.6%, while the share of the communications sector increased from 5.2% to 6.2%.

Industry

In January-December 2005, industrial production in the country totaled 5,124.1 billion tenge (KZT), or 104.6% of the amount for the same period of 2004 (see Fig. 2). Due to higher demand in the domestic and foreign markets, production in the mining industry increased by 3.2%, and in manufacturing, by 6%. The production and distribution of electricity, gas and water rose by 2.2%.

Figure 2

Industrial Growth in 2000-2005 (as % of previous year)

S o u r c e s: RK Statistics Agency; RK Ministry of Economy and Budget Planning.

As noted above, 2005 brought a decline in the rate of industrial development. Whereas in 2001-2004 the average annual growth rate in industry was 10.4%, in 2005 the figure was 4.6% (2.3 times lower), largely due to a decline in output in a number of mining and manufacturing industries. In the chemical industry, the volume index for January-December 2005 compared to the same period of the previous year was 95.3%, and in metallurgy and the manufacture of finished metal products, 93.7%. The production of oil, coal and ore declined as well.

The sectoral composition of industry has not undergone any significant changes in recent years. Natural resource industries still prevail. In 2005, the mining industry accounted for 58.6% of industrial production (compared to 44.5% in 2000), the manufacturing industry, for 35.7% (46.5% in 2000), and the production and distribution of electricity, gas and water, for 5.6% (9% in 2000).

The persisting natural resource character of the economy remains a big problem for the republic. The high level of world prices for its export products (oil, ferrous and nonferrous metals) is the key factor of economic growth and of the increase in the country’s nominal gross national income. As a result, the contribution of the oil and gas sector to the economy and to overall GDP growth has tended to increase, just as the share of oil and gas condensate in the country’s total exports. According to MEBP estimates, the contribution of the oil and gas sector to GDP growth has reached 49.5% (compared to 25.4% in 2001), while the share of oil and gas condensate in total exports increased from 36.5% in 1999 to 62.5% in 2005, which makes the country’s economy more dependent on the state of world natural resource markets.

The level of investment activity in the processing industries remains low. For example, over 50% of total fixed capital investment goes into the mining sector and metallurgy. The share of the mining industry in the total amount of foreign direct investment (FDI) inflows has ranged from 27% to 75% in different years. In 2005, according to the National Bank of the Republic of Kazakhstan, FDI inflows into this sector amounted to $1,766.4 million out of a total of $6,416.4 million. In the event, about 94% of FDI flowing into the mining industry went into the production of crude oil and natural gas.

Low investment activity in the processing industries on the part of both foreign and domestic investors leads to inadequate capital renewal and an increase in the proportion of worn out and obsolete equipment. Experts also note a decline in labor productivity in many branches of the economy, especially in agriculture. Overall, the products of the country’s processing sector are still insufficiently competitive in foreign markets.

In the foreseeable future, the country’s economy will undoubtedly retain a certain degree of dependence on the operation of the fuel-and-energy and extractive sectors. At the same time, as the head of state pointed out, it is necessary to make efficient use of these sectors for priority development of high value added industries directly connected with the mining industries. In this context, priority is currently given to the above-mentioned tasks of modernizing and diversifying the economy, enhancing its competitiveness, developing the processing sector and high value added industries, and ensuring conditions for accelerated economic growth and for the implementation of new technologies.

Agriculture

In 2005, total agricultural production increased by 6.7% compared to 2004, including by 8.4% in crop production and by 4.5% in livestock production (see Fig. 3).

Figure 3

Agricultural Growth in 2000-2005 (as % of previous year)

S o u r c e: RK Ministry of Economy and Budget Planning.

The years 2003-2005 were declared a period of regeneration of the aul (village). Government programs of great importance for the development of rural communities (an agro-food program and a program for the development of rural areas) were approved in that period. In these three years, budget allocations for the Aul Support Program exceeded KZT 100 billion. During that time, the situation in the agricultural sector was to some extent stabilized: the number of profitable farms multiplied 2.3 times, while that of loss-making ones was reduced by a third; there was a recovery in the production of all kinds of produce; and a part of the machinery and equipment used in agriculture was renewed through loans and leasing.

At the same time, according to experts, national agriculture is still based on uncompetitive petty commodity production. About 80% of its output is realized in the form of raw materials, while the sector itself is in need of further capital renewal. In view of this, the country’s leadership has formulated the task of raising the agroindustrial complex to a fundamentally new level. In order to enhance the competitiveness of this complex as Kazakhstan seeks to join the WTO, the country’s authorities aim to develop an effective agribusiness sector, to rationalize government support for agricultural production, and to optimize the management of the agro-food complex.

An important task for the immediate future is to attract investment into the agro-food sector for the purpose of technological innovation at its processing enterprises.

Transport and Communications

Since 2000, a number of programs for the development of transport of both national and regional importance have been adopted in the country, with the result that this sector has entered a period of growth.

In 2005, freight transportation increased by 4.8% due to an increase in rail traffic by 5%, road traffic by 4.6%, and air traffic by 14.7%. River transport carried 825.0 thousand tons of cargo, and main pipelines, 191.0 million tons, including 65.6 million tons of oil and oil products and 125.3 million tons of gas.

A state program for the development of roads for 2001-2005 was completed on schedule. In that period, out of a total of 16.5 thousand km of roads provided by this program, the country’s road workers reconstructed and repaired over 11.4 thousand km (69%), and also 45 bridges out of a total 65 (69.2%). In 2005, they built, reconstructed and rehabilitated 915 km of roads, and also carried out capital and intermediate repairs on 2,188 km of roads of national importance.

The reconstruction of the Ural-Caspian Canal was also completed in 2005, making it possible to provide reliable transportation services to companies engaged in the development of offshore oil fields and to ensure safe passage for ships to the estuary port of Atyrau. Work was also underway to develop the country’s Caspian ports aimed at expanding the existing Aktau seaport, completing the Kuryk and Bautino ports, and creating a national marine fleet.

The volume of communication services reached 127.7% compared to 2004, with a 65.3% increase in the volume of cellular communication services. A number of large infrastructure projects were implemented in this sector, and work was in progress to digitize networks, introduce new technologies and install telephones in rural areas.

The past year was the initial stage in the establishment of a new-generation data transmission network using IP MPLS technology and of new access networks based on Metro Ethernet technology. Broadband Internet access networks were deployed in all the big cities of the republic. New kinds of services such as mobile and satellite communications made rapid progress. The satellite communications system was expanded under a program for the development of the space industry in the republic and an intergovernmental agreement on the construction of a communications and broadcasting satellite for Kazakhstan (KazSat) signed in 2005 between Kazakhstan and Russia. In December, a ground mission control and communications monitoring center was put into operation in the city of Akkol, Akmolinsk Region.

Construction

The country’s construction complex is among the rapidly developing sectors of the national economy. In 2005, the volume of construction works (services) exceeded the 2004 level by 34.1%. Out of the 24,770 buildings with a total floor area of 6,430,700 square meters constructed in 2005, residential housing accounted for 20,204 buildings and 5,041,100 square meters (see Fig. 4). Total investment in housing construction amounted to KZT 241 billion (1.6 times more than in 2004).

Figure 4

Housing Construction in 2000-2005

S o u r c e: RK Ministry of Economy and Budget Planning.

The state housing construction program for 2005-2007 provides for the construction in the republic’s regions of public housing for socially protected categories of citizens, and also of debt-financed housing (at a cost of not more than $350 per square meter). In 2005, 183,700 square meters of public housing (2,302 apartments) was commissioned in the country, which comes to 140% of the target figure for the year.

However, the pace of housing construction does not fully meet the needs of the population, since the demand for housing far exceeds supply. In order to promote the development of the housing and public utilities sector by improving the quality of utility services and upgrading the legal framework in this area, the government has drawn up a program for the development of the housing and public utilities sector for 2006-2008. It is designed to help broad strata of the population gain access to affordable housing.

Business Sector

The development of business is seen as a key factor in the efforts to diversify the country’s economy. In particular, the government has adopted a program to accelerate the development of small and medium enterprises for 2005-2007. According to statistical data, in 2005 the number of small enterprises increased by 18% to 740 thousand, and the number of people employed in small business reached 1.5 million. The year was marked by the establishment of a Small Enterprise Assistance Fund, whose development concept for 2005-2007 and activity memorandum provide for the introduction of the principles of a “financial supermarket,” as defined in the Presidential Address to the Nation in February 2005. During the year, the Fund used its resources to finance 318 projects for the total amount of KZT 3,688 million. There is also a program for the development of microcredit, under which 19 microcredit organizations were set up in 2005 (in Astana, Almaty, Zhezkazgan, Semipalatinsk and Arkalyk).

At the same time, the business sector is in need of further improvement, primarily as regards juridical and tax registration and removal of barriers to the development of small business.

Investment Policy

One of the priority lines of economic policy is to attract more foreign and domestic financial resources for the country’s development. In this context, amendments and addenda to the law “On Investment” designed to simplify the procedure for granting preferences to private investors implementing investment projects entered into force in May 2005. This was coupled with the adoption of a Law on Amendments and Addenda to Some RK Legislative Acts Concerning Investment, which provides for an easing of the conditions for granting customs privileges in the import of equipment and component parts for the implementation of investment projects. A meeting held in 2005 within the framework of the Foreign Investors Council under the President of Kazakhstan was devoted to ways of enhancing the country’s investment image.

Fixed Capital Investment

Fixed capital investment in 2005 amounted to KZT 2,205.2 billion (a record figure for the republic), going up by 22.1% compared to 2004 (see Fig. 5).

Figure 5

Fixed Capital Investment in 2000-2005

S o u r c e: RK Ministry of Economy and Budget Planning.

The main sources of fixed capital investment were the own funds of economic entities (56.8%) and foreign investment (25.2%). Budget funds amounted to 12.6%, and borrowings, to 5.4%. These investments mostly went into the oil and gas production sector (33.9% of total fixed capital investment), real estate operations (21.1%), transport and communications (14.8%) and the manufacturing industry (10.4%).

Foreign Direct Investment

In 1993-2005, the gross inflow of foreign direct investment amounted to $40.5 billion, including $6,416.4 million in 2005.

During the year, 115 contracts were signed with foreign investors, or 31 contracts more than in 2004. These funds are to be applied, on average, over a period of 1.5-2 years.

In 2005, the republic carried on work with more than 20 states under bilateral agreements for the promotion and reciprocal protection of investments.

Public Investment Projects

Budget allocations for the implementation of priority projects (programs) totaled KZT 320.5 million.

Overall, a number of major projects with foreign and national capital are now underway in the republic. At the same time, it should be noted that the current investment situation has brought some problems into sharp focus. This is primarily connected with the geographical disproportions of investment activity, uneven inflow of investment into various sectors of the economy, insufficient fixed capital investment and, in some cases, inadequate efficiency of foreign investment for the country’s economic development. These weaknesses should be eliminated in order to implement the government policy aimed at developing the manufacturing sector and creating high technology industries.

Trade Policy

Domestic Trade

According to the RK Statistics Agency, the retail turnover in January-December totaled KZT 1,312.9 billion, going up by 12.4% (in constant prices) from the same period of 2004 (see Fig. 6).

Figure 6

Retail Turnover in 2000-2005

S o u r c e: RK Ministry of Economy and Budget Planning.

Sales of goods by private enterprises and individual entrepreneurs amounted to KZT 1,301.5 billion (99.1%), and by other states, their legal entities and citizens, KZT 11.2 billion (0.9%). The share of state trade in the republic is insignificant.

Foreign Trade

The republic’s annual foreign trade turnover, according to customs statistics (excluding informal trade), totaled $45.2 billion, with an increase of 37.8% compared to 2004 ($32.8 billion); exports reached $27.8 billion (up 38.6%), and imports, $17.4 billion (up 35.8%) (see Fig. 7).

Figure 7

Foreign Trade in 2000-2005

S o u r c e: RK Ministry of Economy and Budget Planning.

At the present stage, the country’s foreign trade is characterized by exports of fuel and energy resources and imports of investment goods (see Fig. 8). That is, the republic for the most part imports machinery, industrial equipment and transport vehicles while exporting products of the natural resource sector. All of this shows that trade exchanges between Kazakhstan and other countries remain unbalanced.

Figure 8

Export Structure       Import Structure
in January-November 2005, %     in January-November 2005, %

  

S o u r c e: RK Ministry of Economy and Budget Planning.

Organizationally speaking, the country’s foreign trade policy was marked by more intensive efforts in the WTO accession process. As part of these efforts, Kazakhstan held bilateral negotiations with member countries of the Working Party on Kazakhstan’s accession to the WTO (European Union countries, Turkey, Japan, the U.S., Canada and the Republic of Korea), and also negotiations with a number of countries on market access for goods and services. The republic has virtually brought its national legislation in the area of protection of intellectual property rights into conformity with the standards of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights. In accordance with one of the key WTO principles—transparency in the development and implementation of trade and economic policy—the government has adopted a new methodology for calculating fees for state registration of legal entities, import licensing and customs clearance of goods. Under this methodology, fees are based on actual expenses incurred in rendering the respective services.

Inflation

In recent years, the government and the RK National Bank have perfected their methods of fighting inflation. At the time of the adoption of the Government Program for 2003-2005, the main goal of the National Bank’s monetary policy was to contain average annual inflation in 2003-2004 within the limits of 4-6%, and then to reduce it to 3-5% by 2005 and to 4.5% in 2006. However, 2003-2005 brought a rise in inflation. According to the RK Statistics Agency, its average annual rate rose from 5.9% in 2002 to 7.6% in 2005 (see Fig. 9).

Figure 9

Inflation in 2000-2005

S o u r c e: RK Ministry of Economy and Budget Planning.

Faster inflation was due to a number of micro and macroeconomic factors, including a significant inflow of foreign exchange, growing budget expenditures and rising household income.

Social Sphere

High rates of economic growth serve to raise living standards in the republic. Real household income in January-November, according to the RK Statistics Agency, rose by 11.4% from the same period of 2004. The average monthly wage was 32,957 tenge, going up by 19.2% (in real terms, by 10.8%) from the same period of 2004. The minimum wage was increased from 7,000 tenge on 1 January, 2005, to 9,200 tenge from 1 July 2005. From that date, wages in the public sector were increased on average by 32%. Pensions and state benefits paid out to disabled persons, to families that have lost their breadwinner (survivor benefits), and to veterans and disabled veterans of the Great Patriotic War. The implementation of the Poverty Reduction Program for 2003-2005 was completed (all its main targets were met).

The country’s high rates of economic growth and the measures taken to create new jobs help to reduce unemployment. Thus, the number of unemployed persons fell from 906 thousand in 2000 to 641.3 thousand in 2005, and the unemployment rate was down from 12.8% in 2000 to 8.2% in 2005 (see Fig. 10). However, unemployment among young people remains quite high.

Figure 10

Unemployment in 2000-2005

S o u r c e: RK Statistics Agency.

In order to create a multitier social security system, in 2005 the government launched a program for deepening social reforms in Kazakhstan for 2005-2007.

Growth Prospects

As noted above, the successes of Kazakhstan’s socioeconomic development are recognized by international financial and rating agencies. At the same time, a qualitative analysis of the country’s economic performance in recent years shows that quite a few problems still remain to be solved, adding urgency to the task of further structural change. For Kazakhstan, this implies the need for qualitative development. As the head of state noted in his Address to the Nation, accelerated modernization calls for a qualitative breakthrough in all development areas, a breakthrough based on innovations, creation of new lines of economic growth, and better use of the country’s traditional competitive advantages. This will make it possible to improve the people’s quality of life and to build a competitive economy. A great deal of work has already been done to promote industrial innovation processes. Thus, an appropriate legal framework has been created for implementing the state’s policy in this sphere, and the necessary infrastructure is taking shape.

The past year was the final year of the first preparatory stage for the implementation of the Industrial Innovation Development Strategy, adopted by presidential decree in 2003. Nine sectoral and intersectoral programs were approved at that stage. These include programs for the creation and development of a national innovation system for 2005-2015, for the development of the construction industry, energy saving, and others. Over 20 new laws were adopted in this area, including laws On Technical Regulation, On Investment Funds, On the Regulation of Trading Activities and On the Kazakhstan Investment Fund, and amendments were made to the Tax Code, to the laws On Investment, On Education, On Special Economic Zones, etc. This went hand in hand with the establishment of appropriate development institutions: JSC Kazakhstan Development Bank, JSC Kazakhstan Investment Fund, JSC National Innovation Fund, JSC Small Enterprise Assistance Fund, JSC State Insurance Corporation for Export Credit and Investment Insurance, and JSC Engineering and Technology Transfer Center. Their main purpose is to finance (together with private investors) promising high technology projects and to take part in creating the key elements of the innovation infrastructure (technology parks, business incubators, research parks).

According to the RK Ministry of Economy and Budget Planning, as of 1 January, 2006, the institutional investment portfolio consisted of 130 investment projects approved for funding worth a total of $3,263.5 million, including with the participation of development institutions for the amount of $873.8 million, which is more than double the figures for 2004. In 2005, funds were disbursed for 90 projects worth a total of $2,222 million, including with the participation of development institutions for the amount of $725.1 million. Work was also in progress to develop the infrastructure of technoparks, and a Model for the Development of Regional Technology Parks in the Republic of Kazakhstan was prepared and approved.

Great hopes for a diversification of the economy are associated with Kazakhstan’s cluster initiative, designed to enhance the competitiveness of domestic products both at home and abroad. In 2005, plans were approved for the creation and development of seven pilot clusters: Tourism, Food Industry, Oil and Gas Engineering, Textile Industry, Transport Logistics, Metallurgy, and Building Materials. These sectors can help Kazakhstan enter world markets and will become new growth points in the republic’s economy. In the context of cluster ideas, a promising instrument that could be used by the state to promote real production is the creation of industrial zones. Another important task facing the government is to develop the petrochemical industry, likewise in the form of a regional cluster.

On the whole, accelerated modernization of the economy is becoming a key priority for the republic. Here is how President Nazarbaev has formulated Kazakhstan’s strategic goal: to join the ranks of the top 50 most competitive countries of the world. In view of this, the next stage of structural reforms will require changes in sectoral and regional policy, greater support for domestic producers, including small and medium enterprises, a breakthrough in creating an innovation infrastructure, and a more active stance in foreign markets.