Briefing Notes for the Launch in Almaty, March 2008
Growth performance and medium-term prospects
- Kazakhstan’s GDP grew by 9.7% in the first nine months of 2007, with a good wheat harvest at more than 20 million tons – 3 million tons more than in 2006. Retail trade of the economy grew by 10.0% in 2007, as domestic demand advanced swiftly despite banking sector problems. Owing to improved grain harvest agricultural production was expected to grow by 8.4 per cent in 2007.
- The economic growth in Kazakhstan was 10.6 per cent in 2006. The slowdown in the pace of economic expansion could be attributed to a deceleration in industrial output growth from 7 per cent in 2006 to 4.5 per cent in 2007.
- Kazakhstan’s growth is expected to slow from an estimated 9% in 2007 to an average 8.0% annually in 2008-2009, due to rising inflation and banking sector liquidity problems. However, spill-over effects from the development of the oil sector should continue to benefit services sectors such as communications and retail trade.
Fiscal policy developments
- Fiscal position of the country remained sustainable in 2007 and easily financed owing to accumulation of assets in the National Fund of the country. The Fund’s resources were used to control growth in expenditures and to target spending to most needed programmes. Kazakhstan was expected to report a small deficit of 0.8 per cent of GDP in 2007 due to increases in public sector wages, agricultural subsidies and government spending on regional development.
- The budget deficit is expected to widen in 2008-2009 due to measures to support the banking sector, spending on regional capital investment programmes, continued growth in public wages, and tax reduction.
- Consumer price inflation was expected to rise in Kazakhstan from 8.6% in 2006 to 10.8% in 2007 -- the fastest rates since 2000. The main factors behind the acceleration in inflation were higher food prices and rapid growth in monetary aggregates.
- Annual average consumer price inflation in Kazakhstan could further accelerate in 2008 due to demand-side pressures such as public-sector wage hikes, rising social expenditures, and continued impact of high food prices. Tighter monetary and credit policies, together with a strengthening exchange rates could encourage disinflation and reduce the average rate to around 9% in 2009.
- Kazakhstan owed its substantial foreign trade surpluses for 2007 to rising volumes of oil and gas exports and high global hydrocarbon prices. The economy recorded a $10.1 billion merchandise trade surplus in the first nine months of 2007 (compare with $11.9 billion for 2006). The surplus on trade in goods is expected to grow further in 2008-2009, to $16 billion, as a result of rising oil prices and growth in oil export volumes.
- The current account deficit of 2.2 per cent of GDP recorded in Kazakhstan in 2006 is set to widen to 3.2 per cent of GDP in 2007 due to higher invisibles transactions and strong profit and dividend outflows from foreign investors.
- Kazakhstan meets its financing obligations relatively comfortably owing to continued large-scale inflows of foreign direct investment (FDI). In the fist nine months of 2007, the economy attracted about US$6 billion of FDI compared with total inflows of US$6.2 billion in 2006. Annual FDI inflows will remain strong in the coming years and are expected to average around US$7.5 billion in 2008-2009, given the need for foreign machinery and equipment.
Key policy issues and responses
- Kazakhstan was hit by the international liquidity crisis due to a growth in credit financed by foreign banks. The banking sector’s liquidity problems lifted the people’s demand for foreign currency. A growth of monetary aggregates, sparked by increased bank lending, in turn put upward pressure on prices. The Government intervened quickly to stabilize the slowdown in banking sector credit growth, with a positive effect on prices. But tighter lending policies risked dampening growth in the non-oil economy, thereby jeopardizing the diversification targets identified in the government’s published development strategy (Kazakhstan 2030). Growth in monetary aggregates was expected to slow in 2008 due to greater reserve requirements for commercial banks.
- The main focus of the “Kazakhstan 2030” development strategy is an economic policy aimed at ensuring Kazakhstan is one of the 50 most competitive countries in the world. This is to be achieved by way of economic modernisation, diversification and modern social policy. The diversification programme aims at broadening cooperation between the public and private sectors and implementing large projects in power generation and infrastructure.
- Slowing world GDP growth could dampen demand for industrial raw materials from 2008, leading to a modest downturn in prices, including for metals and oil – the main sources of export revenue of Kazakhstan. A weaker than expected US dollar may have the same impact as a drop in oil and metal prices.
Agriculture and poverty reduction
- Chapter 3 of the Survey 2008 diagnoses Asia’s waning agriculture and assesses the impact of agricultural productivity growth on poverty. The chapter also analyses agriculture’s role in reducing poverty and inequality and proposes a two-pronged strategy to make agriculture economically and socially viable: first, revitalizing agriculture and second, facilitating migration out of agriculture.
- One of the conclusions of the Survey is promoting agricultural development in the region, particularly food production and generally rural development that promotes off-farm employment, can make the biggest contribution to reducing poverty in the Asia-Pacific region.
- As for Kazakhstan, the proportion of people living below the national poverty line fell from 43.4 per cent in 1998 to 18.2 per cent in 2006. However, the Gini coefficient (a measure of income inequality, with higher values denoting more unequal incomes) increased from 25.74 in 1988 to 33.85 in 2003. Income inequality remains a major challenge for the economy.