Real GDP fell throughout the first half of the 1990s in all newly independent states, declining by about half in Kazakhstan. The country was also adversely affected towards the end of the decade by the Asian and Russian crises as well as by fluctuating world market prices for energy. However, Kazakhstan’s economic performance has significantly improved since late 1999, due partly to capable macroeconomic engineering, partly to the rebound of world energy prices, and partly to spillover effects from energy-sector growth taking hold in the domestic economy.

Background to Kazakhstan economic promise

Although Kazakhstan’s GDP grew by only 1.7 per cent in 1999, in 2000 it was up 9.6 per cent over the previous year, with the figures being 13.2 per cent for 2001, 9.5 per cent for 2002, and 9.2 per cent for 2003 (the last figure an upward revision from 7.3 per cent expected). Despite these impressive figures, the vast majority (well over four-fifths) of GDP growth comes from the energy and energy-related sectors. Consequently, one of the most important policy measures taken over the past two years was the creation of the National Fund of the Republic of Kazakhstan (NFRK), which helps to balance financial flows in the resource sector and can act as a cushion whenever commodity prices fall. Kazakhstan’s national economy and budget are less vulnerable to externally induced shocks than heretofore.

The agreed delimitation of national sectors in the northern Caspian Sea between Kazakhstan and Russia has given birth to cooperation among firms from the two countries in the development of resources of offshore border structures. Kazakhstan will probably become one of the top ten oil producers in the world by the middle of the next decade, with a daily output likely to exceed three million barrels. The government’s longstanding policy in favor of increasing domestic content in the oil and minerals sector is unlikely to change and unlikely to impede growth.

Implications for Kazakhstan economic promise

The country’s current accounts deficit in 2003 was negligible, down from the 2.5 per cent of GDP in 2002. Kazakhstan was designated a “market economy” by the U.S. Department of Commerce in early 2002, and performance is at such a level that the American government plans to phase out economic assistance to the country.

In late summer 2003, Moody’s Investors Service raised Kazakhstan’s foreign currency debt ceiling to a Baa3 rating to and its foreign currency deposits ceiling to Ba1. This followed a similar rise in international ratings by Standard and Poor’s. Remarkably, in a worst-case scenario projected by Standard and Poor’s, even if oil prices fell to $12 per barrel for a year, macroeconomic growth indicators would remain at about 4 per cent and the state budget deficit would not exceed 3 per cent.

The low domestic income (under $2000 per capita annually) and large disparities among geographic regions and economic sectors nevertheless cast a question mark in the background of any eventual political succession to President Nazarbaev, whose term ends in 2006. Foreign direct investment, which is expected to continue growing at an annual rate of 6 to 7 per cent, should create possibilities for fast income growth, so long as exploitation of the country’s energy resources remains efficacious and new export routes for them are found.

At present, the Caspian Pipeline Consortium (CPC) is the pipeline of choice, and Kazakhstan intends later this decade to put oil production into the Baku-Tbilisi-Ceyhan (BTC) now under construction, turning it into the ABC (for Aqtau-Baku-Ceyhan) route. It is likely that the country will require still another export route later on: current options include China, Iran and through Russia to the Baltic.

Conclusions for Kazakhstan economic promise

Years of work to improve the regulation and supervision of the Kazakhstan’s banking system seem ready to pay off in the wake of continuing foreign direct investment in the energy sector and new pipeline export capacity. In recent years, however, the energy sector has attracted between two-thirds and nine-tenths of all FDI, depending on how the calculation is made. It remains imperative to draw FDI to other sectors. One way to do this is to promote foreign investors’ relations with domestic suppliers. Another is to improve transparency and corporate governance in the metals and mining sector, which remains exceptionally cliquish and opaque despite recent consolidation.

A third is to lift protection from selected domestic SMEs, which are protected from foreign competition. This would allow more dynamic growth by the most competitive enterprises, even challenging established domestic companies and importers through new economies of scale. That would in turn lead to the emergence of new social and political strata capable of playing a stabilizing role in the eventual post-Nazarbaev political transition.

[First published in Central Asia – Caucasus Analyst vol. 6, no. 2 (14 January 2004): 4–5.]