New Kazakh Prime Minister outlines key tasks

Kazakh Prime Minister Imangaliy Tasmagambetov addressed a joint session of parliament on 25 February and outlined what he believes are the biggest challenges facing the new government for 2002 to 2004.

Tasmagambetov was appointed last month after the resignation of Qasymzhomart Toqaev as prime minister, which prompted the entire government to step down.

Although he said economic growth of 10 to 12 percent over the next three years is needed to effect a perceptible change in the population's standard of living, Tasmagambetov said annual growth of 5-7 percent is more realistic.

He also said one of the goals of the cabinet is to reduce the percentage of the Kazakh population living below the poverty line, to less than 20 percent. In 1999, the World Bank estimated Kazakhstan's poverty line at 35 percent.

Kazakhstan's economy has been expanding in recent years thanks largely to strong world demand for oil and minerals. In 2001, Kazakhstan's gross domestic product (GDP) increased by more than 13 percent -- the highest growth rate in the Commonwealth of Independent States.

With sufficient export options, analysts say Kazakhstan could become one of the world's largest oil exporters in the next decade. With major new oil fields being brought on line, the Central Asian republic's oil production could reach 3.5 million barrels per day in 2010, up from 800,000 barrels last year. Over the next decade, it is widely believed that fuel and metals exports could top 80 percent of Kazakhstan's total export earnings, up from 60 percent now.

Dafne Ter-Sakarian is an analyst at the London-based Economist Intelligence Unit (EIU), which expects a range of 6-7 percent year-on-year real GDP growth in Kazakhstan over the next three years.

Ter-Sakarian says Kazakhstan's reliance on the export of natural resources, especially oil, may leave the country vulnerable to sudden fluctuations on the international market. She believes the main risk involves possible disputes with non-Organization of Petroleum Exporting Countries (OPEC) producers, who could undermine the cartel's efforts to maintain oil prices at around $20 a barrel.

She says Russia's commitment to cooperate with OPEC is of particular concern, since a breakdown in negotiations between Russia and OPEC could trigger a "price war."

Ter-Sakarian says Kazakhstan has taken successful measures to prevent the so-called "Dutch disease" scenario, in which reliance on the export of natural resources results in inflation and higher exchange rates and stunts the development of other sectors, such as agriculture.

"It's [the Dutch disease] a threat, but it's one that Kazakhstan has so far managed sufficiently well. They have set up an oil fund to withdraw hard currency from the country, thereby preventing excessive real appreciation of the local currency. And this oil fund seems to be working reasonably well. "

To guard against the danger of a sharp drop in oil prices, the Kazakh government did, indeed, establish an oil stabilization fund last year that today amounts to around $2 billion. The fund is financed by oil revenues and is designed to allow the government to fulfill its budget commitments in case oil prices fall.

Tasmagambetov said this week the government should cut the country's dependence on the export of raw materials by attracting investors to other sectors of the economy. Tasmagambetov expressed his intention to develop what economists call "downstream activities," so that the processing of oil and gas extracted in Kazakhstan does not take place outside the country.

Tasmagambetov also said the government's future economic priorities will emphasize the development of small and medium-sized enterprises, or SMEs.

Ter-Sakarian says the Kazakh central bank has tried for some time to encourage lending to non-oil companies, without much success. She says the government faces two major hurdles. That is, foreign investors are mainly interested in oil and gas, and the business environment outside the oil sector is problematic.

"To really get the non-oil sector started, we would have to see much more -- greater -- political will to reform really, and greater respect for contractual law, stronger judiciary to enforce contracts -- just a better business environment. So there's a lot of political measures that need to be taken, as well as economic ones."

Martin Raiser is a senior economist for the European Bank for Reconstruction and Development (EBRD) who is working on Central Asia. He says the EBRD does not have a view on particular sectors or policies. He believes, however, that the government should create "fundamental conditions" that would make investment in the country profitable and allow market participants to choose which sectors provide the best opportunities.

"Policies that are useful in that regard, of course, are investments in education, investments in research and development. But there are also policies that relate essentially to the way that investors are treated in Kazakhstan, the kind of regulatorian tax regime that they face, and in particular the way that the government behaves towards investors on a day-to-day basis. And I think numerous studies have shown that there is room for improvement in Kazakhstan."

Raiser notes that support of SMEs has been one of the pillars of EBRD activities in Kazakhstan and said the EBRD is extending a $150 million SME finance facility originally launched in 1998.

Raiser says the development of the financial sector in Kazakhstan -- which has led to the creation of some of the strongest banks in the region -- has been crucial for the country's SME sector. He says, however, that there is room for improvement, notably concerning tax administration, licensing procedures, and customs administration.

"It can take SMEs a very, very long time to get necessary documents to operate, and I think all of these procedures could be streamlined far more effectively. That implies better coordination between the central and the local government in terms of who has responsibility for what."

He notes, however, that East Asian countries, such as Malaysia, began as exporters of raw materials and became exporters of electronics. He adds that there are "numerous opportunities" for Kazakhstan to diversify, not only on the world market but also at the regional level.

"So in principle, yes, I think it is possible [to diversify]. There are some constraints on Kazakhstan's ability to diversify, which are largely geographic. The country is far away from its most important markets, so it will need to invest in infrastructure to improve market access. There are also constraints in terms of the availability of cheap labor. Kazakhstan is not very densely populated, and that means that -- unlike East Asia -- it can't go down the route of a labor intensive industrialization strategy as easily."

Gregory Gleason is a professor of political science at the University of New Mexico in the United States who specializes in Central Asia. In an interview with RFE/RL, he says Kazakhstan's national stabilization fund and economic diversification measures are important steps in the country's strategy to avoid oil dependence in the years ahead. Gleason says he believes the most promising step is that Tasmagambetov realizes Kazakhstan's long-term strategic development depends heavily on its ability to integrate into the world economy.

In that sense, Gleason says Kazakhstan strongly supports regional integration projects, such as the Eurasian Economic Community (EEC), which consists of Belarus, Kyrgyzstan, Kazakhstan, Tajikistan, and Russia. In a meeting on 26 February of the Interstate Council of the EEC, Tasmagambetov recommended increasing coordination between the customs services of the member states.