Inexorably rising oil revenues and a leadership committed to a market economy have put Kazakhstan on an upward course that is expected to continue well beyond the next decade, when the volume of oil and gas exports may finally plateau.
“Consumption alone will drive this economy for the next 20 years,” says Pedro Rodriguez, senior economist at the World Bank in Almaty. “Our projections show that the big income from oil will start in 2020.”
Although oil production is expected to triple by 2015, contracts with the oil companies provide for early payback of capital expenditures, which are exceptionally high in the north Caspian region. This is expected to delay the influx of most royalties and taxes for the first five years or so.
“The economy is on track,” says Anvar Saidenov, governor of the National Bank of Kazakhstan (NBK), the central bank. “Growth was the same as last year, 9.4%, and it showed in all sectors of the economy.”
The economy has been growing at that rate on average for six years.
Dampening signs
There are some clouds in this sunny picture though: inflation is heating up, the lower-middle class is suffering, reforms have slowed to a crawl and president Nursultan Nazarbayev is said to be focusing more on rivalries among the business elite than on completing the impressive reforms that he drove forward in the past decade.
The Consumer Price Index in 2005 was up 7.6%, higher than planned, and a building boom in both housing and oil-related facilities has pushed the producers price index past 20%.
“We are very concerned about inflation,” says Nina Zhussupova, chairman of Kazakhstan’s largest bank, Kazkommertsbank. “Western countries have experienced several cyclical crises and nobody denies economic cycles, so those countries must have more extensive experience in curbing inflation than Kazakhstan and we should use their methods,” she says. “I think that our problem is that we believe that we are able to come up with our own way to curb inflation.”
André Küüsvek, director for Kazakhstan of the European Bank for Reconstruction and Development (EBRD), is more sanguine. “Inflation is inevitable,” he says. “Before, everything was controlled and prices were at a low level, and now they are high. When you have huge GDP growth, you have to choose between inflation or foreign exchange stability. If you push inflation down, then the currency appreciates against the dollar and that will kill diversification. The steel sector, for instance, is doing very well and nearly all its production is exported.”
Income erosion
Inflation is also the culprit in the eroding buying power of the lower-middle class families living on an income of $500 or so. “Their salaries are going up but not as fast as their costs,” says Mr Rodriguez. “The lower-middle class is being pauperised and the prosperity is more and more being appropriated by the top.”
Ms Zhussupova is also concerned about the real estate bubble. “If things go wrong, we will be affected ultimately because we are quite aggressive in financing the construction sector, where we have been acting as an end risk taker, making mortgage loans that are now very popular.”
She and other bankers say that although the top three banks are generally more prudent, smaller ones that are seeking market share are being less than diligent with their clients, leading to fears of instability.
The reform movement appears to be stalled. One of its key participants was Grigory Marchenko, who served as central bank governor from 2000 to 2004. He went on to serve a short, unhappy stint as deputy prime minister for economic affairs – a post that is usually given to high-level reformers but that yields little power when not backed by a reformist prime minister. Current prime minister Daniyal Akhmetov is not known as a reformer.
“Things are going well in quantitative terms but not in qualitative terms,” says Mr Marchenko. “Diversification is not happening as fast and profoundly as we would like to see, so we are not seeing any significant results. The trade and financial sectors are growing strong but that’s not the diversification we had in mind.”
After President Nazarbayev, who has been in power since 1989, was re-elected to a further seven-year term in December, Mr Marchenko expected marked changes. “I expected that there would be a new government with new faces, with a new round of economic, social and political reforms,” he says. “But it didn’t happen and I don’t know or understand why.”
Mr Akhmetov was reappointed prime minister and the deputy PM job was given to Karim Massimov, another reformer, who Mr Marchenko gives little chance of success.
But Mr Massimov says: “If I wasn’t optimistic that I could succeed, I would not have accepted this job.” One of his tasks is telecoms reform. “I started on this a few years ago when I was transportation and telecommunications minister and I expect to do it this year, or at least I will try my best.” Civil service reform is also a priority, he says.
Out of the driving seat
According to several senior officials who declined to be identified, Mr Nazarbayev no longer chairs key meetings and has taken to giving tasks with short deadlines to competing officials. “The collegiality we had in the 1990s has gone,” says a former official. And there is broad agreement that the best and the brightest, who were recruited by Mr Nazarbayev in the 1990s to replace the sclerotic communist administration, have reacted by flocking to the private sector that they helped to create and have not been replaced.
“It’s very hard to implement reforms in a boom,” says the World Bank’s Mr Rodriguez.
Overdue reforms include ending the near-monopoly of Kazakhtelekom, which is known for its high telephone and internet rates; reforming a peculiarly central Asian system of civil service pay, in which base salaries are kept artificially low and bonuses each month are allocated by senior managers to each individual (a time-consuming and inefficient process); rooting out corruption in education (bribes for grades and admission are the rule rather than the exception); and overhauling the health system.
Reform progress
Mr Saidenov says that two key reforms will be implemented this year. First, the way money pours in and out of the offshore National Fund, the oil fund modelled on Norway’s, will change. The fund, which has $8.5bn, has not made any disbursements. The budget was based on a certain oil price and all funds in excess of that price were put into the fund to alleviate inflation.
“Now all taxes paid by oil companies will go into the fund,” says Mr Saidenov. “The government will then have a non-oil budget deficit. All current expenditures will be financed by non-oil revenues and there will be back transfers from the oil fund to the investment and social development budgets. The idea is to increase the efficiency of the non-oil budget.”
The second reform involves creating a holding company that will manage the top state companies, including the railways and the national oil company, Kazmunaigaz.
Although the two reforms may improve efficiency, they could also create an extra layer of bureaucracy. The holding company’s vice-president is to be Timur Kulibayev, a wealthy son-in-law of Mr Nazarbayev. He previously reorganised the state oil companies into one entity, Kazmunaigaz, of which he was also the deputy head.
Foreign input
Although Kazakhstan is awash with cash and has reserves of about $17bn, roughly equivalent to the total foreign debt, and so does not need foreign investment per se to diversify its economy, it does need the know-how that comes with it, experts say. “Kazakhstan needs the foreign investment to learn from example by working with foreign partners,” says Mr Küüsvek. “That’s the critical question that will decide whether diversification will actually work.”
Instead of choosing the path taken by Australia and Canada – which are also vast, sparsely populated countries with rich mineral resources – and bringing in foreign companies to boost value in metallurgy and oil products, Kazakhstan is driving out foreigners and choosing a more low-tech approach that it can do on its own, says Mr Rodriguez.
Mr Massimov insists that attracting non-oil companies to Kazakhstan is a priority. “We will gather together all our development institutions under one umbrella, the development bank, the investment fund and the innovation fund, and then we can use it as a vehicle to invite private companies here to buy companies worldwide,” he says.
