Kazakhstan: ECONOMY

Overview: Because Kazakhstan’s economy was closely linked to Russia’s in the centrally planned system of the Soviet Union, the breakup of that union in 1991 caused a severe economic downturn in the years that followed. In the 1990s, the contribution of industry to the gross domestic product (GDP) fell from 31 percent to 21 percent, and GDP fell by 36 percent between 1990 and 1995. By 2002 new oil extraction operations restored the GDP share of industry to about 30 percent, and overall economic indicators rose substantially. The government engaged in widespread privatization, although many profitable enterprises went to members of the government-connected elite. The economy has remained poorly diversified; beginning in the early 2000s, oil has accounted for more than half of Kazakhstan’s industrial output, and many other industries are dependent on it. Between 1994 and 2003, frequent changes of prime minister made government economic policy inconsistent and commitments to economic reform and diversification ineffectual. In the post-Soviet era, the labor-intensive agricultural sector became steadily less productive. The machine-building sector, producing construction equipment, agricultural machinery, and some defense items, has grown, however. As much as 30 percent of Kazakhstan’s GDP is accounted for by the “shadow economy,” particularly in rural areas. A key economic goal is membership in the World Trade Organization by 2006.

Gross Domestic Product (GDP): Kazakhstan’s GDP has increased every year since 2000. In 2004 the estimated GDP was US$39.8 billion, an increase of 9.3 percent over 2003. Forecasts of GDP growth in 2005 ranged between 8.5 and 9.2 percent. In 2004 per capita GDP was US$2,650. Services contributed 54.8 percent, industry 37.8 percent, and agriculture 7.4 percent of the 2004 GDP.

GOVERNMENT Budget: After the national budget ran deficits of 3 to 4 percent of gross domestic product in the late 1990s, in the first years of the 2000s revenues and expenditures were approximately equal because of increased oil revenue and currency reform. In 2004 tax cuts and increased expenditures brought a budget shortfall of about US$1.2 billion. The shortfall in 2005 rose to US$6.4 billion. The 2006 national budget called for revenues of US$109.6 billion and expenditures of US$118.0 billion, creating a shortfall of US$8.4 billion. In 2004 Kazakhstan reduced its value-added and payroll tax rates, while the corporate tax rate remained the same.

Inflation: In 1999 devaluation of the national currency caused inflation to rise dramatically, but the rate for 2000 was 9.8 percent, and it has remained below that level in subsequent years.

In 2004 Kazakhstan’s inflation rate was 6.9 percent, the same as in 2003. The official inflation projection for 2005 was 6 percent.

Agriculture, Forestry, and Fishing: Agriculture is the single largest employer, but between 1990 and 2004 its share of gross domestic product shrank from 35 percent to 7.4 percent. Few agricultural products have export value. The main agricultural products are grain, sugar beets, sunflower seed, fruits and vegetables, beef, and wool. Kazakhstan has agricultural land of good quality, but its continental climate, exacerbated by soil-depleting agricultural practices, limits exploitation. Land privatization has been uneven and inefficient. In 2003 landholding law reforms failed to encourage trading in land, which would improve agricultural efficiency.

Of the 4.8 percent of Kazakhstan’s territory that is forested, about 9 percent is nominally protected. Forest land is concentrated along the Chinese and Kyrgyz border and north of the Fergana Valley. Kazakhstan produces a small amount of timber for export, but imports of timber products far outnumber exports.

The desiccation of the Aral Sea ruined a prosperous fishing and fish-processing industry. In the Caspian Sea, stocks of sturgeon and other fish have been depleted sharply by pollution, poaching, and overfishing. Kazakhstan, however, has developed some sturgeon farms to replace the wild stock. In 2001 the total catch was 31,000 tons.

Mining and Minerals: Kazakhstan has rich deposits of chromium, coal, copper, gold, iron ore, tungsten, uranium, vanadium, and zinc. Coal mining, which has declined sharply in the post-Soviet era, is centered in the north-central Karaganda (Qaraghandy) Province, and copper mining, which has received substantial South Korean investment, is centered in Dzhezkazgan (Zhezqazghan) Province directly south of Karaganda. Phosphates are mined in Dzhambul (Zhambyl) and Chimkent (Shymkent) provinces along the southern border. Gold deposits in the northern provinces and at Zhambyl have not been fully exploited.

Industry and Manufacturing: Kazakhstan’s industries are concentrated in the northern and northeastern provinces. In the first five years of the 1990s, the production of Kazakhstan’s industrial sector fell by 52 percent compared with the last years of the Soviet era. The defense industry, which made a significant contribution to the Soviet system, virtually disappeared. Beginning in 2000, increased oil output stimulated industrial growth, although growth in other industries remained flat. High domestic fuel costs have hindered industrial expansion. Aside from oil-related activity, the main industries are metals processing, machine building, and the manufacture of construction materials. Substantial foreign investment has bolstered the metallurgy industries, and privatization has revived some enterprises. Since 2000 the construction industry has been stimulated by the need for new oil and gas infrastructure and the building of a new capital city at Astana. The most important light industrial products have been beer, cigarettes, and wheat flour.

Energy: The government maintains a virtual monopoly on energy industries. Despite its fossil fuel riches, Kazakhstan is a net importer of electricity, mainly from Russia. In 2004 Kazakhstan’s 71 power plants produced 66.8 billion kilowatt-hours of electricity, 5 percent more than in 2003. Demand was about 5 billion kilowatt-hours higher than production. Between 1996 and 2005, the share of thermoelectric generation declined steadily and the share of hydroelectric generation increased, reaching 20 percent in 2005. The main fuel for thermoelectric power generation is coal from the Ekibastuz mines in the northeast. A major cause of the energy imbalance is an extremely high ratio of energy consumption to gross domestic product output. Payment arrears to source countries lead to periodic power cuts. Because of an inefficient domestic delivery system, Kazakhstan also imports natural gas from Uzbekistan, again incurring power cuts when payments lag. In 2004 domestic infrastructure improved sufficiently for domestic output to equal consumption, at the level of 16 billion cubic meters. In the first half of 2005, Kazakhstan became a net exporter of natural gas for the first time, as production continued to increase. Beginning in the late 1990s, foreign investment has stimulated rapid development of the oil industry. The state-owned oil and gas company, Kazmunaigaz, provides 20 percent of output, with the remainder accounted for by three major foreign consortia: Tengizchevroil, the Karachaganak Integrated Operation, and the Agip Kazakhstan North Caspian Operating Company. In the early 2000s, the government attempted to improve the terms of foreign ownership in the oil and gas industries, although substantial restrictions remain on ownership of Caspian operations.

Services: Since 1995 Kazakhstan’s banking system has been consolidated, partially privatized, and streamlined, but the financial services sector does not play a major role in financing the national economy or individual prosperity. After increasing constantly in the early 2000s, between 2003 and 2004 the amount of bank credit increased by 50 percent to a total of US$9 billion, and banks deposits increased by 70 percent. The proportion of deposits in tenge rather than foreign currency increased substantially. Most industrial lending goes to the fuels industries. The level of corporate deposits increased substantially in the early 2000s, but personal deposits remained low. The three major banks are the privately owned commercial Kazkommertsbank; the state-owned Turan-Alem Bank, which specializes in foreign exchange; and the state-owned Halyk Bank.

Other service industries have grown rapidly from the low level of the Soviet era. Because they are small-scale, however, the value of these services often is not reflected in official statistics. Services often are targeted by protection rackets and corrupt officials. The retail sales sector is dominated by small shops and kiosks. The tourism industry has been minimal because Kazakhstan lacks sites of interest, and the infrastructure is undeveloped. Hotels serve mainly businesspeople.

Labor: In 2004 the total labor force was estimated at 7.95 million. In 2002 the labor force was divided by sectors as follows: 32 percent worked in agriculture, 14.7 percent worked in industry and construction, 14.4 percent worked in trade and catering, and 6.8 percent worked in transport and communications. Some 36.2 percent were self-employed. Between 1998 and 2004, the unemployment rate dropped from 13.7 percent to 8 percent. In 2004 the minimum wage was US$37 per month, and average wages increased by 14 percent compared with 2003. In recent years, substantial numbers of illegal Uzbek immigrants have joined the workforce.

Foreign Economic Relations: Because it relies heavily on oil exports, Kazakhstan’s landlocked position increases the cost of trade substantially. As a result of improved relations with Russia, in 2003 trade with that country increased by 30 percent over 2002, reaching US$5.6 billion. That figure decreased slightly in 2004, to about US$4.8 billion. Pipelines through Russia continue to carry the largest volume of Kazakhstan’s exported oil, and Kazakhstan will not be connected with the Baku-Tbilisi-Ceyan pipeline bypassing Russia until 2008. Kazakhstan has not been able to revive economic interdependence among the former Soviet states in the Eurasian Economic Community (formerly the customs union of the Commonwealth of Independent States), which instead has insulated members from world prices and discouraged outside competition. Kazakhstan’s manufactured goods have not been competitive on Western markets.

Since 1999 oil exports have provided Kazakhstan a substantial trade surplus; in 2004 export values totaled US$20 billion and import values, US$12.8 billion. The main export commodities are oil, natural gas, vegetable products, metals, and chemicals. The main import commodities are machinery and equipment, mineral products, chemicals, and semi-finished metal products. In 2004 the main purchasers of Kazakhstan’s exports were Switzerland, Italy, Russia, and China. The main suppliers of Kazakhstan’s imports were Russia (dominated by coal and electricity), Germany, China, and Ukraine. In 2004 exports to Russia amounted to 14.1 percent of Kazakhstan’s total, and imports from that country accounted for 37.7 percent of total imports. The imbalance of Kazakhstan’s domestic economy makes non-petroleum producers vulnerable to competition from imported goods. Poor border controls have encouraged the smuggling of goods into Kazakhstan, as well as unrecorded small-scale trade along the borders with Kyrgyzstan, Russia, and Uzbekistan.

Balance of Payments: In 2003 the overall balance of payments was US$1.53 billion. Beginning in 2000, Kazakhstan’s current account balance improved steadily because of its favorable trade balance and substantial increases in foreign direct investment (which is the highest in the former Soviet Union). In 2004 the current account balance was positive for the first time in four years because of increased of oil prices and borrowing, and the capital account surplus increased because of increased direct foreign investment. After increasing steadily for the previous decade, the foreign exchange reserve reached US$9.3 billion in 2004. The balance of portfolio investment, on the other hand, has been increasingly negative in the early 2000s.

External Debt: After rising steadily for several years, in 2004 the external debt reached US$26 billion. This figure had been US$17.5 billion in 2002 and US$22 billion in 2003. Most of that debt is inter-company loans rather than public debt. Kazakhstan has borrowed regularly on international markets, and its bond rating was raised to “investment” level in 2002, improving access to international capital markets.

Foreign Investment: In the post-Soviet era, Kazakhstan has received about 80 percent of foreign investment in Central Asia. Led by the international oil industry, foreign investment has increased steadily during that time; between 2003 and 2004, foreign direct investment increased by 83 percent, to US$8.4 billion. In the early 2000s, the largest investors have been from the United States (US$3.1 billion in 2004), the Netherlands, and Britain. ChevronTexaco, a major investor since 1993, has a US$3 billion investment commitment for Kazakhstan’s oil industry in 2003–5. In the early 2000s, investment also grew rapidly in the consumer goods and transportation and communications industries.

Currency and Exchange Rate: The national currency is the tenge. In September 2005, the exchange rate was 134 tenge per US$1.

Fiscal Year: Calendar year.

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