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Journal Issue

Republic of Kazakhstan

International Monetary Fund
Published Date:
November 2004
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I. Introduction: The Policy Challenge1

1. Following a substantial decline during the early transition phase, Kazakhstan’s economy has achieved real growth of more than 10 percent on average during 2000-03. Economic growth has been broad-based, comprising both the oil and the non-oil sectors. While growth had been mainly productivity driven in the mid-1990s, since the end of the decade, large scale capital investment has become the dominant factor. Investment grew sharply during 2000-03, mainly on account of the petroleum sector, which recorded a substantial increase in production during this period. Based on conservative estimates, the share of the oil economy, including associated services, has now reached about 25 percent of GDP and 50 percent of exports. Growth in the non-oil economy has also been significant since 2000, despite continued low productivity in agriculture and some sub-sectors of manufacturing. Real wages increased along with real GDP and unemployment declined to about 9 percent in 2003, compared with 13 percent in 2000.2

2. Economic development has benefited from prudent macroeconomic management. Inflation has been brought down to the single digits despite renewed growth in monetary aggregates, as continued remonetization has facilitated the conduct of monetary policy. Since the beginning of the decade, Kazakhstan has maintained a tight fiscal stance. Over the period 2001-03, an average surplus of 2½ percent of GDP was recorded with an underlying average non-oil deficit of 3½ percent of GDP. In recent years, the revenue-to-GDP ratio has largely reflected fluctuations in oil prices and large bonus receipts.

3. Also as a result of increasing oil production and, more recently, high oil prices, external sector developments have turned very favorable. The external current account, which had been substantially negative in 2001-02, was largely balanced in 2003. Gross official reserves reached the equivalent of $6.5 billion in May 2004, equivalent to 4½ months of merchandise imports, with an additional $3.7 billion accumulated in the NFRK. Since 2000, FDI has picked up from a low level, reaching 9 percent of GDP on average, concentrated in the resource extracting industries. Public external debt has declined and Standard and Poor’s Kazakhstan Foreign Currency Sovereign Credit Rating was upgraded to investment grade/BBB- in May 2004. Since early 2002, the tenge has effectively been pegged to a basket of 24 currencies of key trade partners.

4. Kazakhstan has benefited substantially from rising oil production. The oil sector has attracted large scale FDI (about $3-4 billion per annum), stimulated construction, transportation, and other services sectors, and generated large budget revenues. However, at the same time, the challenge of how to cope with the rapidly rising oil wealth is mounting as a two- to three-fold increase in oil production over the next 10-15 years is projected. Already as of now, oil revenues are accumulating in the NFRK in substantial amounts, for basically two reasons: (i) governmental institutions can not yet assure the appropriate and efficient use of the very large income flows, and it will take time and institutional development to change this; and (ii), with the economy already growing very rapidly and massive foreign exchange purchases taking place in order to prevent the exchange rate from appreciating, it has fallen to the budget to contain aggregate demand. With the 2004 budget, the fiscal position has eased somewhat and this puts price stability at risk in the absence of a more flexible exchange rate policy or stepped up sterilization. Since a real appreciation will be unavoidable over the medium term, non-oil export sectors and import competing industries will be exposed to increased competitive pressures and will need to become more productive.

5. In many natural resource based economies, economic growth has been less rapid than in other economies, as a result of the “natural resource curse,” which goes well beyond what is commonly labeled as Dutch disease. While exchange rate appreciation and its impact on the non-oil sectors is an important aspect, the natural resource curse has more important features. The flow of income to the government from oil and other natural resources has often allowed the government rather than the private sector to take a central role in the economy. Weak institutions, corruption, lack of transparency, and political pressures have often led to serious misuse and misallocation of resources, misguided investment strategies, and spending on prestige objects. Moreover, as governments have become less dependent on collecting taxes from the population, they have often become less transparent and democratic as they have had no need to seek consent for their policies from the population.

6. Some governments responded with procyclical spending policies to changes in natural resource earnings. Others even anticipated future earnings increases, which led to severe crises when these earnings failed to materialize. Only a few countries have so far succeeded in steadying budgetary expenditures through the use of oil funds.

7. This study seeks to contribute to the debate on the optimal policy response on the part of the Kazakhstani authorities to the prospective oil inflows. It will argue that:

  • An abundance of natural resources, if not managed carefully, can lead to disappointing outcomes.
  • Kazakhstan has large hydrocarbon resources that will result in substantially increased fiscal resources over the next two to three decades.
  • Oil output and foreign investment in the oil sector have increased rapidly in recent years. Additional investment is expected over the longer term, although there are downside risks.
  • Real appreciation is an equilibrating phenomenon under Kazakhstan’s circumstances, and resisting it will put the economy on a lower growth path. Trade liberalization will enhance growth prospects and facilitate adjustment of the Kazakhstani economy and structural reforms.
  • Permanent Income Hypothesis and Bird-in-Hand rules suggest very different fiscal paths, but can be seen as implying a broad range for the appropriate budget balance.
  • Government intervention in the economy may lead to suboptimal outcomes. In particular, the case for development institutions in Kazakhstan to address market failures is weak; the experience elsewhere has not been favorable.
  • Good governance and transparency are associated with better economic performance; Kazakhstan has made some progress but still lags behind on many fronts.

8. The paper is organized as follows: Chapter II surveys the literature on the so-called natural resource curse (possible adverse effects of natural resource prevalence and economic growth); Chapter III offers an analysis of Kazakhstan’s petroleum potential; Chapter IV analyzes the impact of the oil boom on the non-oil sector, based on a general equilibrium model; Chapter V provides an analysis of fiscal rules and fiscal sustainability and assesses the possible role of fiscal policies in addressing the “natural resource curse”; Chapter VI reviews the debate about the potential contribution of state-owned development institutions in diversifying the economy; and Chapter VII evaluates the status of transparency and governance in Kazakhstan.

1Prepared by Katrin Elborgh-Woytek and Peter M. Keller.
2ILO definition.

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