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Wednesday, 15 May, 2002, 11:23 GMT 12:23 UK
Boom time in Kazakhstan
Oil drums
The economy is heavily dependent upon oil
test hello test
By James Schofield
in Kazakhstan
line

The economy of Kazakhstan, the gigantic Central Asian oil-producing republic five times the size of France, is surging ahead.

Last year it posted stunning Asian Tiger-style growth of 13.2%, according to recent government figures, up from an already impressive 9% growth in 2000.

That comes largely thanks to continued strong global demand in recent years for oil and metals, the nation's main exports.

Kazakhstan has also benefited from the devaluation of the tenge, the national currency, in 1999.

That gave domestic industry a much needed competitive boost as hard currency export revenues remained strong while domestic operating costs in tenge more than halved.

Fiscal Prudence

As oil exports have ballooned in recent years, Kazakhstan's trade surplus has quadrupled to over $4bn since 1998 and tax revenues have soared.

The government has been quick to take advantage of the windfall and has won widespread praise for curbing the budget deficit and balancing the nation's books by the end of 2001.

The International Monetary Fund (IMF) in particular has been impressed with the government's determination to clean up the country's shaky finances

"Although a favourable external environment, including high oil prices, contributed to such a positive outcome, the prudent stance of macro economic policies adopted by the authorities played an important role," says a recently released IMF report on Kazakhstan.

"Kazakhstan is in a much better position now to confront a downturn in the external environment," the report continues.

Oil country

Much of Kazakhstan's good fortune, a rare island of economic and inter-ethnic stability in the fractious central Asian region, stems from the nation's enormous energy reserves.

Oil pipeline
Government plans to start selling exploratory blocks in a new oil field
In the last decade, the country has attracted some $13bn in foreign direct investment, the lion's share directed into the oil industry.

The single biggest development is the Tengiz oil field, a $20bn investment by TengizChevroil which accounts for a third of the nation's current output of 800,000 barrels per day.

Last year Tengiz alone earned the government $1bn.

All eyes have now turned to the undeveloped Kashagan field, reported to be the world's largest find of oil since the discovery of Pruhoe Bay in Alaska in 1967.

With a reported 10 billion barrels of reserves, Kashagan promises to guarantee continued strong growth in future and officials estimate that Kazakhstan will receive some $40bn of investment into the oil sector alone by 2015.

The government plans to start selling off exploratory blocks in the field later this year and western oil majors are keen to take part in the auctions.

Meanwhile oil production is set to explode to more than 3 million barrels per day by 2010, according to some estimates.

That would position Kazakhstan as a major new player on the international oil scene.

Reforms

While generally praising Kazakhstan's recent economic performance, the IMF report also stressed "the need to consolidate the recent gains and strengthen the basis for sustained diversified economic growth by stepping up the implementation of structural reforms."

But much has been done already.

The government has cut red tape and today the economy is the most liberal of all the five central Asian republics.

Key successes include banking and pension sector reform while last summer progressive tax and VAT legislation was introduced that won applause from international investors.

In acknowledgement of the structural reforms already undertaken, in October 2000, the EU formally recognised Kazakhstan as a market-based economy.

That status brings with it important economic dividends for trade, and increased protection for Kazakhstan against anti-dumping legislation.

Higher living standards

Amid the dramatic rates of growth and positive figures, life for the people of Kazakhstan is slowly improving as well.

In the nation's three main population centres of Astana, Almaty and the Caspian oil port of Artyrau, restaurants and bars are opening and new construction sites are sprouting every month.

Though the nation's enormous wealth is still concentrated in just a few hands, money has finally started to trickle down to the man in the street.

While recent rampant inflation has been lowered to just 6% last year, down from over 20% the year before, salaries have jumped 14% during the same period to $114 per month, the highest average income of any of the CIS countries

Spreading the risk

Despite all the good news though, Kazakhstan faces significant problems.

The economy is heavily dependent upon oil, which accounts for over 60% of government revenues. That figure could rise to more than 90% if projected production increases materialise.

Aware of the problem, the government last year established a National Stabilization Fund to help manage state finances and protect the budget from volatile oil prices.

Kazakhstan is also vulnerable to the so-called Dutch Disease, where strong hard-currency oil revenues force the exchange rate and inflation higher.

That can strangle the ability of fledgling domestic industries to compete with imports and limit the development of other sectors of the economy.

Market Kazakhstan
Money has started to trickle down to the general public

By its own admission the government has made little headway in stimulating growth in new industries, and small and medium sized business accounts for just a small fraction of the economy.

Despite the economic growth, fears of worsening political repression and widespread corruption are also tarnishing Kazakhstan's image as the region's star performer.

In the last couple of months a series of prominent opposition and independent media figures have been arrested and an independent TV station TAN was forced off air when an unidentified sniper shot the channels feeder cable.

Corruption allegations

The increasing role played by relatives of the President of Kazakhstan Nursultan Nazerbayev has raised eyebrows and led to claims of clan style favouritism in business.

One analyst in Almaty, who asked not to be named for fear it would damage his relations with government officials, says he has been dismayed in recent months by the turn that political events have taken this year.

"The family circle is so corrupt that Kazakhstan is turning into a central Asian version of Indonesia's Suharto regime."

Perhaps most worryingly, last month Prime Minister Imangali Tasmagambetov made the stunning public admission that more than $1bn was transferred offshore in 1996 to accounts in President Nazerbayev's name.

Top government officials have explained that the diverted money was being reserved for troubled financial days and that the devaluation of the tenge in 1999 would have wiped millions off the value of the fund anyway had it remained in Kazakhstan.

But with no further concrete details forthcoming over the nature of the funds and exactly how and when they were to be used, many say the explanation is unconvincing.

See also:

08 Mar 02 | Country profiles
Country profile: Kazakhstan
28 Jan 02 | Asia-Pacific
New premier for Kazakhstan
22 Dec 01 | Asia-Pacific
US and Kazakhstan sign oil deal
28 Nov 01 | Asia-Pacific
Caspian pipeline from Kazakhstan opens
09 May 01 | Asia-Pacific
Kazakhstan tackles locusts from space
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