Structural Reforms in Kazakhstan

On April 28, 2004, the Carnegie Endowment for International Peace hosted a discussion of the structural reforms in Kazakhstan with Grigory Marchenko, Assistant to the President of Kazakhstan. The speaker focused on the country’s economic and financial sectors. Carnegie Senior Associate Martha Brill Olcott chaired the meeting.

In the first years of its independence, Kazakhstan - currently the ninth largest country in the world with one of the fastest growing economies - simply followed Russia’s lead, reluctant to leave the Soviet Union. At that time, Kazakhstan saw Russia as “a locomotive force” with 7-8 percent annual gross domestic product (GDP) growth. Kazakhstan even adopted a legislation code similar to Russia’s. Today Russia remains Kazakhstan’s main ally and guarantor of security.

By 1994, Kazakhstan had started its own macroeconomic reforms, according to international standards. In 1995, Grigory Marchenko introduced a consolidation program and an auditing system for Kazakhstan’s National Bank. Then the National Bank established the National Fund of the Republic of Kazakhstan with stabilization and savings portfolios, created with the assistance from the Norwegian Central Bank. The stabilization portfolio keeps extra oil revenues when the oil price is above $19 per barrel. If the prices were to fall below $19, these savings would go in the state budget. The savings portfolio has about $3.7 billion, 40 percent of which is invested in North America, 40 percent in Western Europe, and 20 percent in Asia, particularly in Singapore, Japan, Australia, and New Zealand.

The government of Kazakhstan has adopted the 9 requirements set by the Group of 30 concerning the securities market. It has also introduced tariff liberalization, adopted local currency, the tenge, and with the assistance from the International Monetary Fund adopted a Tax Code. In 2000, Kazakhstan implemented standards for the insurance market set by the International Association of Insurance Supervisors (IAIS), an organization representing insurance supervisory authorities of some 100 jurisdictions.

In addition, Kazakhstan has started privatizing large companies in the export-oriented oil, gas, mining, and semi-processing sectors, allowing partial foreign ownership of these industries. As a result of that policy, net foreign direct investment (FDI) has been averaging 7.5 percent of the GDP. Marchenko emphasized the importance of attracting FDI into other sectors of the economy and of developing small and medium enterprises (SME) in Kazakhstan. Marchenko mentioned that the SME sector now makes up about 20 percent of the country’s GDP, compared to 13 percent in the 1990s. The European Bank for Reconstruction and Development has successfully supported the Kazakh SME sector over the last eight years. Furthermore, the government has discussed the possibility of creating a special fund, which would guarantee 50 percent of the principal to banks lending to the SME sector. Another option would be for the Kazakhstan Development Bank to allocate about 20 percent of its resources for lending to SME.

The Kazakh government has also implemented two reforms in the housing finance sector as recommended by the World Bank: mortgage financing, adopted from Malaysia and the U.S., and housing savings banks, adopted from Germany. Out of 34 commercial banks in Kazakhstan 17 are foreign owned. As for the social security, a fully funded pension system with mandatory contributions of 10 percent from employees was adopted from a Chilean model starting in 1998, but is not yet set to international standards.

In the last four years Kazakhstan has been going through a period of rapid economic growth with an average annual GDP growth of 10.5 percent and budget expenditure of 20-23 percent of the GDP. Nominal GDP has grown from $15 billion in 1999 to $30 billion in 2003. Marchenko sees much potential, not only in the energy sector itself, with a daily oil production of over 1 million barrels per day, but also in the area of services and supplies to the sector. To diversify the economy, the government created several institutions, including a Development Bank, Export Insurance Company, Innovation Fund, and State Investment Fund that is supposed to invest in non-energy sector. Over the last ten months, the Kazakh government has adopted three programs to break down natural monopolies and increase competition in the telecom, railroad, and energy sectors.

Kazakhstan plans to adhere to international standards in the social sphere by reforming education, health, social security, and housing systems. All of these areas were neglected in the 1990’s, but, according to Marchenko, are in the process of reform. In 2003, the President of Kazakhstan approved an “Innovative Industrial Development Strategy for 2003-2015.” This document sets up a plan to reform the social infrastructure. In addition, two conceptual papers are currently being discussed. One concerns education, focusing on improving professional training and preschool education. The other involves the introduction of an electronic government. The latter would allow the reduction of physical contact between local bureaucrats and entrepreneurs, creating a transparent, service and quality-oriented administrative system. A computerized system would also ease the process of property right registration and transactions, as well as the use of land as collateral.

As for its regional integration, Kazakhstan is currently a member of the Single Economic Space within a free trade economic area, the Shanghai Cooperation Organization, the Central Asian Economic Community, and the Eurasian Economic Community. The latter replaced the Commonwealth of Independent States Customs Union in October 2000.

Marchenko concluded by emphasizing that Kazakhstan will continue with structural reforms to strengthen the market economy, democracy, and the rule of law in the country.

Summary prepared by Kate Vlachtchenko, Junior Fellow with the Russian and Eurasian program at the Carnegie Endowment.