Page last updated at 09:04 GMT, Thursday, 12 March 2009

Turbulence for the Kazakh economy

By Rayhan Demytrie
BBC News, Almaty, Kazakhstan

Despair has led to public protests in Kazakhstan

On a cold winter afternoon a group of about 300 people gather in one of Almaty's parks. They are demanding the resignation of Prime Minister Karim Masimov.

Public anti-government protests in Kazakhstan are extremely rare, and difficult to stage, but in recent weeks the people's discontent has been bubbling up to the surface.

Despite the small numbers, these people are determined to voice their disapproval of how their government has so far handled an economic crisis that is causing despair for the country's often impoverished people.

"We had to show the authorities that things are getting worse," says Vitaliy Yakovlev, a spokesman for the opposition Azat party, which organised the meeting.

"The banking sector is in tatters, those who invested in new housing are left in the streets, the money promised by the government has not ended up in the right accounts."

Late devaluation

After years of economic success, Kazakhstan - Central Asia's biggest economy and the second largest oil producer in former Soviet Union after Russia - has almost hit rock bottom.

We are targeting two issues; macroeconomic stability and creating more job opportunities
Prime Minister Karim Masimov

In early February, Kazakhstan's central bank devalued the national currency, the tenge, by 22%.

For almost two years it had been spending billions of foreign currency and gold reserves to support the currency at a fixed rate.

But critics say the decision to devalue the tenge came too late.

It should have happened when Kazakhstan's largest trading partner, Russia, began its gradual depreciation of the rouble last October.

"Devaluating the currency like they've done it is hooliganism," says deputy chairman of Kazakhstan's chamber of commerce Serik Turjanov.

"Those at the top knew what was coming and they exchanged their own money. When the devaluation happened it was the business community and regular folks who lost the most."

Banking sector

One of the key reasons for Kazakhstan's success was a highly developed banking sector that flourished on foreign borrowings before the worldwide credit crunch.

Kazakh currency board
Kazakhstan's currency, the tenge, has been sharply devalued

Saddled with huge debts, banks are now struggling to survive and devaluation will make it even more difficult to repay their foreign creditors.

The government has taken controlling stakes in two of the country's top banks, BTA Bank and Alliance Bank.

Other commercial banks have also been handed lifelines.

The pressure on the Kazakh economy has mounted as global oil prices began falling during the second half of 2008.

This year, oil production is still expected to increase, but low prices for crude mean the state has much less to spend on its budget.

Economic targets

In an interview with BBC News earlier this year, Prime Minister Masimov, insisted his government would create more jobs in order to overcome the crisis.

"We are targeting two issues; macroeconomic stability and creating more job opportunities," he said.

"This is the only way to get through this year."

Kazakhstan's official statistics agency states that the unemployment rate currently stands at about 7%. Unofficially the figure is much higher.

"Most of the employment in Kazakhstan is in small and medium businesses - in the service sector or small shops," says Renaissance Capital's chief CIS economist, Ekaterina Malofeeva.

"They will have to restructure the way they work."

But the recent outlook for small and medium businesses looks bleak.

In February, 70% of small and medium businesses in the country were on the brink of bankruptcy, according to Serik Turjanov, head of Kazakhstan's Chamber of Commerce.

"First we were talking about the financial crisis, then the real estate crisis," he says.

"Today we are talking about the crisis of the whole economy.

"Out of the $10bn required to support small and medium business the government is allocating only $1bn."

Diversify or die

The International Monetary Fund has forecast that the Kazakh economy will grow by 1% this year, down from the almost 10% annual growth rate that Kazakhstan enjoyed between 2000 and 2007, thanks largely to its oil revenues.

The global contraction in demand is now forcing the Kazakh government, which has long been criticised for its over-reliance on oil and other commodities, to seek ways of diversifying its economy.

"It is true that the main resources and capital was concentrated in the banking, construction and extractive industries," said Prime Minister Masimov in the BBC interview, stressing that the nation could develop its IT industry and become a regional IT hub.

But some observers think the government has left it too late, and failed to fix the roof while the sun was shining.

"Up to 2006, when the tenge was strong, there was a feeling of euphoria, it was boom-time," says Prasad Bhamre, former vice chairman of the government investment fund and now working in the private sector.

"They missed several opportunities," he says.

"There was no real spending on infrastructure, such as trains and roads that are vital for a landlocked country.

"And they had an opportunity to build the oil service hub on the Caspian that could have been the main maintenance and repair centre for oil companies throughout the region. But it never happened."

Kazakhstan, however, has saved for a rainy day.

Ahead of its currency devaluation it had an estimated $29bn put aside, equivalent to 40% of the country's annual economic output.

Some $10bn has been earmarked for a rescue package aimed at helping put the economy back on track.

That puts the Central Asian economy in a far better position than some of its less wealthy neighbours.

But having come so far, Kazakhstan now has far more to lose.

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