Almazing KZ Blog

Kazakhstan

is a middle-income country with an estimated gross national income per person of $5,010 in 2007 (GNI, Atlas method). It is the largest country in Central Asia and one of the most sparsely populated in the world. The country has considerable mineral wealth and vast areas of arable land. Kazakhstan inherited significant amounts of infrastructure from the Soviet times and has a relatively well-educated population.

Kazakhstan has enormous economic opportunities. The projected expansion of oil production, an abundance of other natural resources, strong oil prices, responsible macroeconomic policy, and other policy improvements set the stage for a very promising future. However, the country also faces significant risks, both in the shorter and medium term (maintaining macroeconomic and financial sector stability) and for the longer term (increasing Dutch disease complicates diversification).

Although income per person is expected to rise, some inequalities remain. In 2006 overall poverty headcount ratio (at national poverty line) was estimated at 18 percent of population. However, poverty rates exceeded 37 percent in oil-rich Kyzylordinskaya oblast and 25 percent in two other oblasts, grain-producing Akmolinskaya oblast and oil-rich Mangistauskaya oblast. The latter is leading in terms of rural poverty which was over 63 percent in 2006. The country also has some of the lowest social indicators in the Europe and Central Asia region, such as access to safe drinking water as well as incidence of tuberculosis. HIV/AIDS infection rates are increasing very fast, although from a small base.

In addition, Kazakhstan is facing a number of environmental challenges, including industrial pollution, land degradation and desertification, and the nuclear heritage of the Semipalatinsk polygon. However, significant improvements have occurred in the environmental situation in the Northern Aral Sea area, which were achieved with the construction of the Northern Aral Sea dam, Syrdarya River regulation, and the initial revival of the Northern Aral Sea.

Kazakhstan joined the World Bank in July 1992. In the first few years after independence, the World Bank focused on helping the country to implement financial and private sector reforms. After 1997, the focus shifted to public administration reform, with specific attention on improving the country's welfare and social protection policies. At present, the World Bank is assisting the country with reforming agriculture, protecting the environment, upgrading infrastructure, with the aim of fostering sustainable economic growth and reducing poverty.

Economy

Developments since independence

Following independence in 1991, Kazakhstan was one of the earliest and most vigorous reformers among the countries of the former Soviet Union. In the early years of transition, prices were liberalized, trade distortions reduced, and small- and medium-scale enterprises (SMEs) privatized. The treasury and budget processes were significantly improved. Kazakhstan scores much less favorably, however, in the areas of land reform in the rural areas, in the creation of an enabling environment for the small and medium sized enterprises, and in the elimination of corruption.

The government has established a basic framework to attract foreign direct investment (FDI) into its resource-rich oil and mineral sector. Banking reforms and state-of-the-art pension reform followed, together with the unbundling and partial privatization of the electricity sector.

More recently, a framework for public resource management was introduced. It lays the foundation for a modern civil service, as well as for the creation of a National Fund to save part of the revenues from oil and other extractive industries.
Recent economic developments 

In 2006 and the first half of 2007, the non-tradable sectors of the economy (construction, finance) became increasingly heated, reflecting extremely rapid growth in foreign borrowing and commercial credit expansion. Recent changes on international financial markets have changed the economic picture in the country. Foreign borrowing has become more limited and expensive.

The credit and construction expansion in the country has slowed considerably, implying that economic growth may be slowing as well (roughly half of GDP growth in recent two years was due to finance and construction sectors). The National Bank spent around 1/4 of its reserves defending the Tenge in August-October 2007. Much more modest capital inflows could drive the Kazakhstan balance of payments into deficit.

Supply-side constraints are also increasingly binding on growth. There are clear shortages of labor at many skill levels. Infrastructure inadequacy and bottlenecks are becoming more apparent in such forms as frequent blackouts and traffic jams in large cities. Regions outside of the two main cities and resource-rich areas may be falling behind in growth and development.
Challenges ahead 

Despite major achievements, the following issues still need to be addressed:

Managing oil revenues effectively. Good management of oil revenues and sound public spending are essential to improving competitiveness and productivity. Oil flows need to be managed to avoid inflation as well as to develop the non-oil sector.

Diversifying the economy by improving the business environment. The country needs to attract private investment, both foreign and domestic, into non-extractive industries to increase job opportunities and incomes. To lower investment risks and the cost of doing business, red tape and rent-seeking behaviors such as licensing and inspections must be reduced, and reform of key institutions such as the tax and customs administrations must continue.

Building human capital. Given the country's acute skills shortage, it is essential to invest in education and make the system more responsive to the needs of a market economy. It is also necessary to replace the quotas on the import of skilled foreign professionals by a system that attracts highly qualified labor.

Adopting a sound agricultural policy. Adoption of a support policy that defines the degree and modalities of state intervention in agriculture is essential. Land restructuring and management will require significant attention. Policies to encourage the development of water-user associations and related water-management policies also need attention.

Developing institutions that can implement a sound spending policy. The Government needs to bolster its capacity to conduct effective project analysis, evaluation, and design, and to implement targeted social assistance and sectoral development strategies.

Improving infrastructure for a better business environment. Businesses can be helped to become more profitable if key infrastructure in telecommunications, roads, and irrigation facilities is improved.

Annual Real GDP Growth (%)
World Bank Program
The World Bank's mission in Kazakhstan is to support the country's efforts to achieve long-term economic growth that translates into more jobs and better social services for all citizens. We do so through project financing, analysis and advice that support the country's development agenda.

  Landmark Projects

Northern Aral Sea and Syr Darya
Electricity Transmission
Road Transport

Program to date Landmark Projects

Northern Aral Sea and Syr Darya
Electricity Transmission
Road Transport

Since joining the World Bank in 1992, Kazakhstan has been supported by the institution in various spheres. The Bank assisted in upgrading and modernizing the country's power transmission systems, helped increase agricultural productivity by rehabilitating deteriorating irrigation systems, and encouraged the rural community to diversify into non-traditional areas by nurturing their business skills. In addition, people in the country's western region, who have suffered from a shortage of good quality water, now enjoy better health as a result of improved water supply and sanitation.

Since 1992, total World Bank commitments to Kazakhstan have amounted to more than $2 billion for 31 projects. In fiscal year 2008, the commitments to Kazakhstan totaled almost $150 million, bringing total overall commitments for active projects to $708 million.

Going Forward

Given the country's reduced need for external financing, the World Bank program has shifted toward more focused investment loans, policy dialogue, and knowledge transfer. The second round of the three-year Joint Economic Research Program, an innovative mechanism for planning and financing analytical work, is currently being implemented by the Bank and the Government of Kazakhstan under a cost-sharing arrangement.

The Bank’s Country Partnership Strategy Progress Report (CPS Progress Report) with Kazakhstan, approved in 2008, is built on the lessons learned in earlier years and on renewed efforts to strengthen the policy dialogue.

The Bank’s strategy will focus on the following areas:  

In the last year, the once-shrinking Northern Aral Sea has filled up again and fishermen have been able to catch ten times more fish.



Prudently managing oil revenues and increasing public sector efficiency. The National Fund of the Republic of Kazakhstan was established in 2000 to prudently manage oil revenues. The Government has since focused on the optimal size of the National Fund, as well as on the level of public spending and ways to increase its efficiency. The Bank is offering best-practice experience and analytic studies on oil-fund management to help the Government manage oil windfalls.
Strengthening the Government’s capacity to identify and reduce barriers to businesses and private investors. To ensure economic diversification, the government is committed to reducing the barriers for new businesses and to maintaining the country's liberal trade regime. WTO accession and greater regional cooperation, particularly in areas such as infrastructure as well as customs and trade facilitation, are seen as vehicles to help Kazakhstan’s firms to link into the global marketplace.
Building the foundation for future competitiveness by investing in human capital and basic infrastructure. Consensus has recently been reached in the Government that capital and labor productivity must be enhanced to achieve the country’s long-term vision of development. With this aim, the Bank is helping the Government identify options for reforming railways, road management, telecommunications, and electricity markets.
Sustaining competitive growth through a focus on the environment. Kazakhstan inherited significant environmental liabilities related to past military, industrial, and mining activities. It also faces land degradation and desertification and water scarcity. The National Environmental Action Plan for Sustainable Development prepared in 1999 sets out remedial investments that are now being undertaken by the government. The World Bank supports the Government’s activities through the implementation of four ecological projects that address the management of drylands, preservation of the northern part of the Aral Sea, cleaning up the pollution of river and underground water, and industrial waste treatment.