General Background

It is the ninth largest country in the world with a land area equal to that of Western Europe, but with one of the lowest population densities globally. Strategically, it links the huge and fast-growing markets of China and South Asia with Russia and Western Europe by road, rail and ports on the Caspian Sea. Oil reserves (proven) are the ninth largest in the world; hydrocarbon output is the equivalent of nearly a quarter of GDP and accounts for over two-thirds of exports.

Kazakhstan is increasingly conscious of its regional potential in energy and trade transit. Large cross-regional energy and transport investments are envisaged. Kazakhstan formed a Customs Union with Belarus and Russia in 2010. Global integration is pursued through membership of the World Trade Organization (WTO). Kazakhstan became a donor in the World Bank’s International Development Association (IDA) in 2010.

The country’s development strategy focuses on modernization and a shift towards growth from non-oil sources. It is based on diversification, innovation, investment in human capital, and international trade integration for job creation. Increasing emphasis is also being put on strengthening governance (modernizing the judiciary and civil service), the business-enabling environment and private-sector enterprise. Following the parliamentary elections of January 2012, the President of Kazakhstan outlined the key government priorities within this overall strategy. An improvement in the quality of public services and in skill levels of the workforce are key goals. Finally, renewed emphasis would be placed on raising standards in education, including vocational education, and regional development and diversification in one-industry towns.

Kazakhstan weathered the global financial crisis well through a dexterous response combining fiscal relaxation with bank stabilization measures. In 2009, the Government announced large-scale support measures such as recapitalization of banks and support of the real estate and agriculture sectors, as well as small and medium enterprises (SMEs). The total value of the stimulus programs represented 14 percent of the country’s GDP ($20 billion). As a result of the global economic crisis, the GDP of Kazakhstan slowed down to 1.2 percent in 2009, but according to results in 2010 and 2011, the growth rate has increased to 7.3 and 7.5 percent respectively.

Kazakhstan’s external position has improved as commodity prices have strengthened. Terms of trade gains have led to a strengthened external position; the current account surplus is estimated at 7.3 percent of GDP in 2011. Gross international reserves climbed to $35.4 billion in February 2012 from $33.7 billion in January 2012, on the back of about $1.2 billion of purchases in the spot market. Also, the assets of the National Oil Fund increased from $45.5 billion to $47.4 billion in February 2012. Total reserves currently stand at $82.7 billion – an all-time high.

Inflationary pressures resulting from commodity price shocks and an accommodating fiscal stance were contained by the end of 2011. By December 2011, CPI inflation decelerated to 7.4 percent year-on-year (from nine percent registered in the middle of the year), below the eight percent target. The monetary regime of a crawling exchange rate pegged to the dollar and inflation targets will exert counter-inflation pressures.

The fiscal position has improved significantly since the crisis. The non-oil deficit improved from over 10 percent of GDP in 2008-09 to about eight percent of GDP in 2011. The state budget deficit (determining net government borrowing) improved notably and is estimated at 2.1 percent of GDP in 2011. Fiscal policy is intended to be supportive of the anti-inflationary stance with the goal of bringing the non-oil deficit down to pre-crisis levels over the coming period. The government has already increased excise rates and reintroduced customs duty on oil exports. This is complemented by cuts in non-priority spending and the removal of crisis spending (such as reduction in subsidies to state-owned enterprises and a 15 percent downsizing of public administration), with budget outlays down to precrisis levels at around 22 percent of GDP (from 27 percent of GDP during 2008-09).

Conditions in the banking sector constrain credit flows to productive non-oil activities. Although bank
liquidity is ample, non-performing loans (NPLs) remain at about 33 percent of all loans. Unresolved NPLs constrain investments and operations of affected firms, the majority of which are in the non-oil sector. The Government of Kazakhstan is improving the insolvency regime and developed a strategy in 2011 to reduce the burden of the NPL on the banking system.