Kazakhstan strategy overview

Full strategy  (0.4Mb) Approved 21  Nov 2006

Стратегия для Казахстана  (1Mb) (RU)

Summary of public comments  (0.1Mb)

Over the last two years Kazakhstan has continued to make progress towards implementation of the principles envisaged in Article 1 of the Agreement Establishing the Bank. Economic transition was visible and widely acknowledged, but there are many challenges in the political field. Strong presidential power is not adequately balanced by legislature and judiciary. Corruption and lack of transparency remain a problem, as recognised by the authorities. There are restrictions on the independent media. The latest amendments of the media law represent a setback for media freedom in Kazakhstan. The 2004 parliamentary and the 2005 presidential elections fell short of a number of international standards for democratic elections, although reflecting an improvement over previous polls.

Strong economic growth

The economy remained robust during the strategy period, underpinned by sound macroeconomic policies. As a natural resource based economy, the medium and long-term macroeconomic challenge is to adopt an appropriate policy mix that will maintain the diversification of the economy and insulate itself from commodity price volatility. Recent tightening of regulations in the financial sector to restrain externally financed credit growth should relieve pressure on the foreign exchange and decelerate the growth in domestic demand.  However, further strengthening of banking regulation is needed, as the sector is increasingly vulnerable to shocks. Fiscal policy should also move towards non-oil revenue deficit targeting. 

The previous strategy highlighted the importance of a diversified economic structure which will be resilient to oil price fluctuations in line with the objectives of “Industrial-Innovation Development Strategy of the Republic of Kazakhstan for 2003-2015” and the challenge to develop a competitive private sector. In the strategy period, the authorities have demonstrated a great capacity for institutional innovation and adaptation, e.g. through the establishment of the two state holding companies Samruk and Kazyna. While acknowledging the potential of these initiatives to contribute to sustainable development, the difficulties and risks should also be recognised.  Institutional experience is not easily transferred across countries and, once established, dysfunctional organisations are not easily phased out.

Investment climate

The overall investment climate for the private sector has improved in some areas, as evidenced by various surveys including the Business Environment and Enterprise Performance Survey (BEEPS) conducted jointly by EBRD and the World Bank (WB). The transparency of revenue flows from the oil and gas sector is expected to improve as Kazakhstan joined the Extractive Industries Transparency Initiative (EITI) in 2005. However, specific challenges identified in the previous strategy are largely unaddressed and should continue to be the focus of the authorities during the forthcoming strategy period in order to achieve the stated medium-term goal for the country to become one of the world’s 50 most competitive economies (under the World Economic Forum’s rankings).

Key challenges

Create fair and competitive environment for businesses. Ownership of private businesses is increasingly becoming concentrated, potentially stifling competition and entrepreneurship. The authorities should focus on establishing an effective competition policy framework enhancing access for new competitors and protecting markets from restrictive business practices.  Efforts must also be made to create an enabling environment for SMEs, in particular by reducing the regulatory burden. Addressing the issue of corruption is critical and essential in order to improve the investment climate.

Increase openness to foreign trade and investment in order to further strengthen competition and competitiveness of enterprises. WTO accession should be the priority to improve access of local companies to international markets and increase the attractiveness of the country for investments, especially in non-extractive industries. As a landlocked country, increased regional co-operation on trade and transport is also important to improve access to international markets.

Improve corporate governance of enterprises and banks in order to enhance access to long-term debt and equity capital. As credit conditions ease, banks and enterprises are increasingly gaining access to local and international capital markets, but access to strategic equity continues to be very limited due to lack of transparency and inadequate corporate governance standards.  Recent overseas listings by some Kazakh private companies are expected to demonstrate the benefits of increased transparency and corporate governance standards, and similar rigorous disclosure standards should be adopted in the domestic market in order to mobilise savings accumulated in the local pension funds.

Attract private sector investment in infrastructure services and improve public sector tendering process. As the economy expands, bottlenecks in infrastructure are increasingly becoming evident. Authorities have opted in recent years to address this issue through channelling funding both directly from the budget and investments by state-owned infrastructure companies.  However, whilst building on the strengthened capacity of the network infrastructure regulator the authorities should also consider attracting more private sector involvement in infrastructure. This should also help address regional disparities in the availability of basic infrastructure services.

Strategic orientations

Considering these challenges, the Bank’s strategic orientation is to support the Government’s priorities by addressing transition challenges in a context of high global and local market liquidity. In particular, the Bank would:

Engage actively in further reforms by working with both private and public sector.

• Broaden the Bank’s operations and increase its impact with a special focus on the corporate sector to support the diversification of the economy of Kazakhstan, and to promote competition.
• Increase its role in financing infrastructure, supporting transport and power sectors.
• Stay engaged in financial sector, enhance competition in the banking sector and develop non-bank financial services.
• Promote higher transparency standards and support foreign direct investment (FDI).

Operational objectives

The Bank’s main operational objectives for 2007-2008 are the following:

• Enterprise sector
  Support economic diversification and enhance competition by working directly with corporates across various sectors such as general industry, power, agribusiness, telecoms and property. Promote projects leading to higher energy efficiency and increase the capitalisation of enterprises through equity investments. Increase competition in the natural resources sector by working with smaller operators and on higher risk projects. Dedicate resources in order to directly finance smaller projects and continue to provide micro and small financing and tailored capacity building using Kazakhstan Small Business Programme (KSBP) and leasing facility. Promote high standards of corporate governance, integrity and transparency of ownership, including through FDI to Kazakhstan. Selectively support regional cross-border expansion of reputable Kazakh companies to neighbouring markets.
  
  
• Infrastructure
  Increase its support in transport, energy and telecommunication infrastructure development to satisfy the growing needs of the economy and promote respective sectoral reforms. The Bank will focus on non-sovereign projects. On selective basis, it will take leadership in developing and actively engage in appropriately structured public-private partnerships (PPPs) that involve competitive tender processes. Work with state holding company Samruk on finding synergies between different parts of infrastructure and improving corporate governance in respective of state owned enterprises. Support further regulatory and tariff development that promotes investments and fair access to infrastructure. Given Kazakhstan’s remoteness from major markets and low population density, the Bank will continue to work closely with the private sector, government authorities and other IFIs on sustainable solutions for infrastructure, and promote regional co-operation.
  
  
• Financial sector
  To promote strategic FDI to the financial sector, but also open up the capital base of local banks to reputable financial investors through initial public offerings (IPOs) or private placements. To continue to work actively with existing shareholders of the Kazakh banks to achieve better transparency of ownership and corporate governance. Facilitate competition in the financial sector by providing debt and equity, particularly to medium size banks and non-bank microfinance institutions (NBMFIs), supporting additional micro, small and medium-sized enterprises (MSMEs). On debt products, in view of the developed access to capital markets, the Bank will be particularly attentive in developing those projects with specific attributes which meet additionality concerns and contribute to transition. A special emphasis will be on the provision of financial resources outside the capital cities and in the rural areas, as well as improving the efficient delivery of financing to the micro and small sectors. The Bank will support development of financial services such as leasing, mortgages, insurance and pensions, and facilitate the securitisation of assets by Kazakh financial institutions. The Bank will assist the Government in privatising the few remaining state-owned financial institutions concerned with pensions and mortgages.
  
  
• Policy dialogue
  Support the Government in their efforts to improve the investment climate and drive long-term economic diversification, leading to improved global competitiveness. Co-operate with newly created state holding companies Samruk and Kazyna to achieve corporate governance and operational improvements of state-owned enterprises. Promote adequate behaviour and transparent practices and fight corruption to improve the business environment. Promote adoption of the anti-money laundering (AML) legislation, especially in light of the government initiative to create the Regional Financial Centre in Almaty (RFCA).