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1. European Bank for Reconstruction and Development appraisal of economy of the Republic of Kazakhstan.

According to the report of European Bank for Reconstruction and Development (further as EBRD) for 2003, rate of growth of the economy of Kazakhstan for the mentioned period make 9%. The Bank notes, that oil and gas production, increased for 15% for 2003, still plays the dominant part in economy of the Republic of Kazakhstan, and growth of economy will continue until oil costs remain high. At the same time, the mentioned period is also characterized by low level of inflation and budget deficit.

The bank system of Kazakhstan has strengthened noticeably and infrastructure is being reorganized. Also dimensioned reorganization of legislation has been carried out; in particular, a new Law about joint stock companies has been passed. Higher minimum standards of capital adequacy have been introduced, what forced a number of employers to prefer less burdensome in this relation form of the limited company.

The main goal for the future is further integration of the Republic of Kazakhstan into the system of world economy ties. Widening of the regional collaboration and reduction of transit expenditures in the region will open up new possibilities in the field of foreign commerce and investments.

It is necessary to point out, that at present EBRD, together with competent authorities of the Republic of Kazakhstan, is developing the Strategy of actions of EBRD in the Republic of Kazakhstan for the period of 2004-2006 taking into account priority lines of development of economy of the Republic of Kazakhstan, reflected in the Strategy industrial – innovation development of the country for the period of 2003-2015.

The main directions of the developed by the Strategy of actions EBRD in the Republic of Kazakhstan, offered by the Bank, include development of the private sector, infrastructure, and financial sector. Development of the private sector presumes diversification of economy by means of realization of the projects, connected with ñ direct investments and leasing of farming plants.

Projects of the financial sector presume maintenance of average banks, development of nonbanking institutes (insurance, hypothec, leasing), pension funds, introduction of international standards of financial accounting.

2. Asian Development Bank

The economy continued to grow rapidly in 2003 with greater pace in manufacturing showing the first fruits of economic diversification. An Industrial-Innovation Development Strategy will help deepen economic diversification and maintain growth momentum in the medium term. Policy measures will need to avoid overreliance on capital-intensive sectors and continue their emphasis on employment creation by expanding an enabling environment for private sector development.

Economic Assessment

Early structural reforms and sound macroeconomic management laid the basis for the economic progress that the country has made in recent years. GDP growth, led by the oil sector, averaged 11.0% during 2000-2002, and continued in 2003 at 9.2%. On the demand side, most of the 2003 expansion was driven by a 15% increase in real private consumption, supported by public sector wage raises and an expansion of bank credit.

On the production side, industry and, especially, services played major roles. Industry sector output grew by 8.8%-with manufacturing at 8.9% and mining at 8.1%-revealing the first signs of economic diversification, as food processing, machinery building, oil refining, and chemicals all showed marked production increases. Construction climbed by 9.3%, remaining a dynamic sector fueled by vigorous investment in housing and infrastructure development in the new capital, Astana. The services sector continued its very strong growth, of 11.1%, mainly due to a large rise in transport and communications. A slight decline in the grain harvest in 2003, offset by the good performance in the livestock subsector, led to agricultural growth of just 1.4%.

Continued economic growth helped foster employment and improve living standards. In 2003, real incomes rose by 8.3% with average monthly wages totaling T23,250 ($156). For the first time, real wages increased in all sectors, unlike previous years when wages rose significantly only in the manufacturing and financial subsectors. Unemployment declined to 8.7% from 9.3% in 2002, mainly due to greater employment in construction, services, and agriculture (Figure 2.22). Sustained economic growth and targeted poverty interventions helped reduce the number of people living below the subsistence minimum (T5,200 or $35 a month) to 21.0% from 24.2% in 2002.

The fiscal position remained robust in 2003. Buoyant tax collections led the Government in May to revise upward both revenue and expenditure targets. For the year, the budget deficit amounted to 0.9% of GDP, well below the planned 2.0% target. The revenue-to-GDP ratio edged up to 22.6% from 21.4% in 2002, largely due to strengthened tax administration. General budget expenditures rose to 23.5% of GDP, 2 percentage points higher than in 2002, as the supplemental budget lifted wages and pensions and raised expenditures for social sectors and national security. Social assistance and education remained the major items of recurrent expenditures, together accounting for 45% of such expenditures.

The monetary policy of the National Bank of Kazakhstan (NBK) continued to be accommodative in 2003. Broad money supply (M3) rose by 26.8% in response to continued economic growth and financial deepening. Credit to the economy jumped by about 46% as banks became more responsive in meeting the credit needs of small and medium enterprises and households. End-of-period inflation rose to 6.8% (the annual average figure was 6.6%), 1 percentage point higher than the planned target, mainly due to higher prices for gasoline and bread products in the last months of the year. This was caused by a jump in the prices for gasoline in the Russian Federation, which led to an increase in exports of local gasoline to that country (Kazakhstan’s main trading partner), thus reducing domestic supply; and by government intervention to raise the price of grain.

During 2003, the tenge strengthened against the dollar by 12.6% in real terms, driven by large export earnings and foreign exchange inflows from increased private external borrowing and FDI. Under the managed float arrangement, NBK continued its policy of intervening in the market to prevent undue appreciation of the currency, though with limited tools for sterilization this led to a 52.2% expansion in reserve money. In contrast to its performance against the dollar, the tenge recorded real devaluations against the Russian ruble by 5.3% and the euro by 6.9%, which helped sustain the competitiveness of domestic producers.

Major Economic Indicators, Kazakhstan, 2001-2005, %
Item 2001 2002 2003 2004 2005
GDP growth 13.5 9.8 9.2 9.5 9.5
Gross domestic investment/GDP 26.9 27.3 26.3 25.1 25.3
Inflation rate (consumer price index) 8.4 5.9 6.6 5.4 5.0
Money supply (M3) growth 45.1 32.8 26.8 23.4 18.4
Fiscal balance/GDP -0.4 -0.3 -0.9 -1.9 -1.0
Merchandise export growth -3.9 12.3 32.0 6.0 6.0
Merchandise import growth 11.1 1.6 18.4 12.4 6.8
Current account balance/GDP -5.0 -2.8 -0.2 -1.1 -0.6
Debt service ratio 37.5 35.2 34.2 33.6 32.3
Sources: Ministry of Economy and Budget Planning; Ministry of Finance; National Bank of Kazakhstan; National Statistical Agency; staff estimates.

The balance-of-payments position strengthened because of high world oil prices. The current account deficit was reduced from 2.8% of GDP in 2002 to 0.2% ($69 million) in 2003, reflecting a much improved trade balance. Merchandise exports soared by 32.0%, driven mainly by buoyant world oil prices; the increase in oil volume was only 7.9%. Imports surged by 18.4%, led by greater imports of capital goods and construction materials. Gross international reserves (including the assets of the National Fund of the Republic of Kazakhstan, which accumulates part of the Government’s oil and mineral revenues for stabilization purposes and savings for future generations) leaped by 69.3% over the year to $8,565 million at end-2003. The National Fund’s assets jumped by 89.0% to $3,606 million due to the strong hydrocarbon exports while NBK’s net international reserves shot up by $1,820 million or 58.1% to $4,959 million (4.8 months of imports). While public external debt continued to fall in 2003, by 3.5% to $3.4 billion (equivalent to 12.4% of GDP), private external debt rose by 5.5%, pushing total external debt to $19.9 billion at end-2003, including intracompany debt (mainly among oil companies) that accounts for about 70% of private external debt. However, excluding intracompany debt, the debt-to-GDP ratio is 29.3%, representing a low external debt burden.

Policy Developments

The new Government, formed in June 2003, endorsed the existing policy of maintaining rapid economic growth, increasingly fostered through economic diversification. It adopted an Industrial-Innovation Development Strategy to 2015 that targets 8% average annual growth in manufacturing and a threefold gain in manufacturing productivity by 2015. The strategy also sets up priority sectors, namely oil refining, agriculture, and space and information technology. The Government created five institutions to help implement the strategy, i.e., the Innovation Fund, Investment Fund, the State Insurance Corporation for Export Credits and Investment, the Engineering and Technology Transfer Center, and the Marketing-Analytical Research Center.

The Government continued to implement an adaptive, sound fiscal stance while advancing structural fiscal reforms. The 2003 budget revision in May reflected policy by raising wages and pensions and providing initial capital to the four newly created institutions. The 2004 budget has expanded government efforts to stimulate growth through tax rate reductions. The VAT rate is to be reduced from 16% to 15%, personal income tax from 30% to 20%, and the social (payroll) tax from 21% to a range of 7-20%. The tax cuts, effective 1 January this year, are estimated to reduce revenues for 2004 by about 1.2% of GDP, though the simultaneous introduction of a new tax on oil exports, which doubles the tax burden for new oil contracts, is expected to be fully offsetting. In terms of institutional change, the Government began preparing its first medium-term fiscal policy plan for the period 2005-2007, and started revising the budget code to promote better planning and transparency in budgeting, greater fiscal independence of local governments, and a clearer delineation of responsibilities between the various levels of government.

NBK announced that it would adopt EU monetary policy standards by 2007 and focus on the single objective of price stability in the medium term. However, in 2003 it continued to pursue a difficult twofold task-moderating inflation and preventing a real appreciation of the tenge against the dollar. The accumulation of a large part of oil revenues in the National Fund and NBK’s intervention in the market to make large foreign exchange purchases helped limit appreciation of the tenge against the dollar. NBK recognizes that it will be increasingly difficult to carry out sterilized intervention in view of expected rising oil export earnings, and some real appreciation of the tenge can no longer be avoided. Moreover, NBK’s move to an inflation targeting framework would preclude intervention (except to calm a disorderly market). While this change will reinforce the tenge’s strengthening, the National Fund remains available to limit undue movements. With the establishment of an independent financial market supervisory and regulatory agency in January 2004, NBK has been freed to concentrate solely on its macroeconomic policy functions. The banking sector continued to strengthen, with the ratio of total assets to GDP increasing to 37% at end-2003 from 25% a year earlier. Growing public confidence in the banking system was reflected in a 30% rise in household deposits. Public response to the first ever appreciation of the tenge against the dollar made foreign currency deposits less attractive and helped raise the share of local currency deposits in total deposits to 52.6% from 40.0% in 2002. A slight reduction of the refinance rate (from 7.5% to 7.0%) led to a 1 percentage point decline in the commercial interest rate, from 15.2% to 14.2%. Despite declining in recent years, lending rates are now high in real terms as inflation has fallen. This appears to be due to high deposit rates demanded by customers, stemming from their experience of previous bank defaults, untested creditor rights, and weak competition both among banks and from other financial institutions. The Government made progress in implementing structural reforms in 2003 when a Land Code and a Law on Joint-Stock Companies were enacted. The Land Code provides for private ownership of agricultural land, which lays the foundation for strengthening productivity and competitiveness of the agriculture sector by enhancing incentives and opportunities for both investment and financing. During 2003, the Government succeeded in selling its share in the two largest mining sector companies and in one of the largest banks, the Halyk Saving Bank.

Outlook for 2004-2005

The medium-term outlook is positive, as likely strong FDI inflows continue to rapidly expand development in the oil sector and as the Government steps up its efforts to diversify the economy. Although the Government remains cautious in its projections for GDP growth at 7-7.5% in the medium term, it will likely be higher due to the phased start of production at Kazakhstan’s largest gas and oil projects at Karachaganak and Kashagan in 2004-2005. Also, regional demand is expected to remain strong. Accordingly, ADO 2004 forecasts that average annual GDP growth will remain at about 9.5% in 2004-2005. While the oil sector will continue to be a driving force, growth in the non-oil sector is also expected to pick up due to the projected increases in capital investment in manufacturing. Services are likely to remain dynamic, with annual average growth of 7-8% over the medium term. Agricultural output is forecast to expand by 3-4% due to ongoing reforms as well as increased budget allocations for rural revival during the next 2 years (total government investment is expected to be 2-3% of GDP).

The fiscal stance is likely to remain cautious with the Government’s projections for the general budget deficit at 1.9% of GDP in 2004 and 1.0% in 2005. Budget revenues are expected to be around 23% to GDP over the forecast period, based on conservative budget assumptions for world oil prices. The expenditure-to-GDP ratio is projected to decline from 25.2% of GDP in 2004 to 23.1% of GDP in 2005 as expenditure growth is to be held to less than nominal GDP growth. Social sectors and rural development will be the major expenditure items in 2004-2005.

In view of large projected foreign exchange inflows, the tenge is likely to continue appreciating and NBK expects a real appreciation of about 4-5% against the dollar over the next 3 years. The Government will seek to foster greater productivity in the non-oil sector to help prevent loss of competitiveness. NBK projects inflation in the range of 3-6% over 2004-2005 and will adopt monetary policies tailored to this objective. The expected substantial increases in public sector wages and pensions will likely keep inflation at the higher end of this range.

Exports of goods and services are forecast to grow moderately (about 6% each year), reflecting cautious assumptions on the world oil price. Imports are projected to rise faster than exports due to the increase in capital goods imports, led by implementation of the large oil and gas investment projects and expected technological modernization of enterprises. The current account balance is projected to remain in deficit, at 1.1% of GDP in 2004 and 0.6% of GDP in 2005.

Enhancing living standards remains a key government objective. Through its programs on medium-term poverty reduction (2003-2005) and rural development, it plans to reduce the number of people living below the subsistence minimum to 18% from the current 21%. To this end it is expected that the minimum wage will increase by 32% and the pension level by 30% over the period 2004-2005. The unemployment rate is projected to fall but at a moderate pace and expected to be around 8.0% by 2005, as overall growth will continue to be driven by capital-intensive sectors.

3. Appraisal of the International Monetary Fund of economy of the Republic of Kazakhstan.

In accordance with article IV of the Conclusive statement of the International Monetary Fund for 2003 reached results of early structural reforms and reasonable macro-economical management, caused at leading hand of the oil sector and considerable maintenance from the direction of favorable environment, growth of gross domestic product. Thus, growth of gross domestic product in 2002 makes 9,5%. In spite of paying off of big sum of Eurobonds, reserves of the National Bank made 3,1 billions US dollars (3,3 months of import) by the end of 2002 and assets of the National fund increased up to the sum, more than 2 billions US dollars, in the beginning of 2003. International Monetary Fund points out, that strict budget policy of the Republic of Kazakhstan regarding supply at increased oil prices caused not complete withdrawal of planned budget sums of investments in the state sector and other important categories.

Monetary and credit policy in 2002 is characterized by macro-economic stability. The policy of the National Bank of ROK (further as – NB ROK) was directed to prevention of increase of the real exchange rate of tenge and inflation control.

Considerable growth of production and export of oil and gas in medium-term perspective completely compensate reduction of oil prices. At present, further accrual of income from high prices on world market in the National Bank is quite reasonable to create a protective buffer against unforeseen pressure on the budget, including eventual future periods of low oil prices.

4. Appraisal of international rating agencies

Moody’s Investors Service, Standard and Poor’s and Fitch Rating’s Ltd of the political and social-economical position of the Republic of Kazakhstan.

Government of the Republic of Kazakhstan during 1996-1997 had concluded Agreements with three leading international rating agencies, such as Moody’s Investors Service, Standard and Poor’s è Fitch Rating’s Ltd for rendering by the given agencies of services on giving and reconsideration of the independent credit rating of the Republic of Kazakhstan.

Appraisal of the international rating agencies Moody’s Investors Service, Standard and Poor’s è Fitch Rating’s Ltd reflects solvency of the country as a whole and is one of the most important indicator of economical and investment climate of the country, influences the price of its borrowing, also borrowing of companies-residents. Thereupon, the Government of the Republic of Kazakhstan constantly interacts with mentioned rating agencies.

In September of 2002 international rating agency Moody’s Investors Service has increased the independent rating of the Republic of Kazakhstan up to the investment level. On results of the visit in 2004 agency Moody’s Investors Service has confirmed the investment credit rating of the country, on the level «Baa3» on long-term obligations in foreign currency and on the level «Baa1» on long-term obligations in local currency, bank deposits in foreign currency were appraised on the level «Ba1», according to all ratings the forecast was raised from «stable» up to «positive».

In accordance with officially published news release of the rating agency Standard & Poor’s dated May 20, 2004, the long-term independent credit rating of the Republic of Kazakhstan in foreign currency was raised from «BB+» up to «BBB-», the short-term credit rating in foreign currency was raised from «B» up to «A-», and credit rating in the national currency – from «BBB-/A-3» up to «BBB/A-3»,all ratings are considered as “stable”. Besides, on results of the visit and on the basis of the report of rating Committee Standard & Poor’s Republic of Kazakhstan is the ninth country, realized transition from “speculative” class into “investment” one.

Republic of Kazakhstan is the first from the countries of CIS has reached investment rating. At present Republic of Kazakhstan is the first country of CIS with investment rating from two leading international rating agencies.

Presence of investment rating from two leading international rating agencies causes the following advantages for the republic:

1. Low investment risk for obligations of the Republic of Kazakhstan and sufficient ability to pay debts.

2. Widening of investment base. Many institutional investors can buy obligations of only investment class, and volume of obligations issue can be appreciably widened.

3. Reduction of the price of borrowing at distribution of independent obligations. Profitability of European obligations with investment rating is much lower, as the risk and expenditures, connected with it for creation of necessary provisions becomes lower.

4. Creation of the guide line of the profitability for developing countries with speculative rating. At present, at new issue of Kazakhstan European obligations, they will become a guide line for developing countries with lower rating.

5. In opinion of Standard & Poor’s, increase of the rating reflects continuing strengthening of foreign and fiscal position of the Republic of Kazakhstan, along with the reasonable financial policy and stable medium-term economic perspectives. Continuing strengthening of the financial position of the Government, improvement in management and business sphere, speed-up of structural reforms will promote the further strengthening of solvency of the country.

International Rating Agency Fitch Rating’s Ltd has revised the forecast of the credit rating in foreign and local currencies from “stable” up to “positive”, having confirmed the current rating on long-term obligations in foreign currency on the level «BB+», on short-term obligations on the level «B», and on long-term obligations in national currency - "BBB-"

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