STABLE, FREE MARKET ECONOMY

In overcoming the legacy of the Soviet centralized command economy, Kazakhstan is considered a model transition economy. It has reached this status through sustained commitment to economic liberalization, maintaining an attractive investment environment, making pragmatic policy choices, and pursuing cooperation with the West. The International Monetary Fund called Kazakhstan's strict macroeconomic stabilization measures "appropriate and far-sighted." Of all post-communist economies, Kazakhstan is ranked first in foreign direct investment as a percentage of Gross Domestic Product (GDP) and second only to Hungary in per capita Foreign Direct Investment (FDI). Because of its successful reforms, liberal trade policies, and ability to attract international financing, Kazakhstan has been granted Market Economy Status by the United States Department of Commerce and European Union, and begun serious work in a bid to join the World Trade Organization.

Kazakhstan has pursued a sound program of economic reform with positive results in many areas:

Budget: In the spring of 1999 Kazakhstan enacted a new Budget System Law, which introduced important changes to the fiscal system, including the elimination of the major extra-budgetary items, thus increasing budget transparency. The budget in recent years shows a steady trend towards a growing surplus.

Inflation is down: Inflation was driven down dramatically from a peak of 3000% in 1994 to 8% in 1998. Inflation in 1999 was 17%, largely due to the devaluation. In 2000, it was cut to 9%, and at the end of 2001 stood at 6.4%.

GDP Up: After a difficult, but expected phase of GDP decline that bottomed out in 1995, Kazakhstan's real GDP has recovered, growing 9.6% in 2000 and a scorching 13.2% in 2001. Industrial production rose 14.6% in 2000 and 13.5% in 2001.

Strong foreign direct investment (FDI): Kazakhstan's per capita FDI is the highest among Commonwealth of Independent States (CIS) members. Net FDI has been consistently above 5% of GDP in the last 5 years, in excess of any major emerging market economy. In 1999, FDI was $1.7 billion; in 2000, $2.5 billion; and in 2001, $3.5 billion. Kazakhstan's top investor is the United States, which has invested one third of the cumulative FDI in Kazakhstan that totaled over $17 billion by the end of 2001. FDI levels will remain fairly constant in the years to come, as commitments toward major oil projects have been made for the next several decades.

Financing: At the end of December 1999, the International Monetary fund approved a $453 million loan to support a program of economic reform until 2002 and praised the government's "commitment to achieve macroeconomic stabilization and accelerate structural reforms." Kazakhstan repaid the IMF loan ahead of schedule in 2000. Other loan agreements totaled $550 million with World Bank and $160 million with the European Bank for Reconstruction and Development (EBRD) to develop a number of critical industries, including the telecommunications, rail, and power sectors. The Asian Development Bank (ADB) has been steadily increasing its financial commitments to Kazakhstan. Kazakhstan also successfully placed a $225 million Eurobond issue in September 1999, first among former Soviet states after the Russian crisis.

Structural Reform: Kazakhstan's aggressive reform program has resulted in a growing private sector and a healthy investment climate. In 2000, the private share of GDP was 76.6%. Priority sectors of the economy where investment is desired are agriculture, infrastructure, telecommunications, mining, and metallurgy.

Entrepreneurship: To support the private sector, the government has established two assistance programs: a micro-credit lending program and a program of larger loans for small and medium businesses. In 1996 Kazakhstan became the first state of the former Soviet Union to adopt International Accounting Standards. Most of Kazakhstan's enterprises have converted to the new standards.

Business-Government Dialogue: Kazakhstan promotes business-government dialogue through channels such as the Foreign Investors Council (FIC) and its new counterpart, the Domestic Investors Council - the latter being a positive sign of a developing group of homegrown entrepreneurs. The government also encourages various industry associations through which dialogue on government policy towards business is conducted, such as petroleum, mining, power, and agriculture associations.

Taxation Policy: Kazakhstan's tax code has been cited by the IMF for eliminating favorable treatment of specific types of taxpayers and conforming to international standards and practices.

Future Generations Fund: With considerable foresight, Kazakhstan established this fund to accumulate revenues from oil exports and put them to work for the future. To ensure transparency, its board includes members of the Government, the President's Administration, and the Parliament. The Fund is managed by the National Bank of Kazakhstan, which has a strong record of being an independent institution. The value of the fund by mid-2002 had reached $1.5 billion.

Corruption: Kazakhstan adopted a law in 1998 to combat corruption and vigorous anti-corruption efforts are being implemented at all levels.

Pension reform program: Kazakhstan has been working closely with the World Bank since 1998 to implement an ambitious pension reform program designed on the Chilean and Polish models. The public pension fund (pay-as-you-go) has been replaced with 14 private pension funds managing $1.8 billion in assets.

Stock market: Trading volume on the Kazakhstan Stock Exchange (KASE) in the first half of 1999 exceeded the total for 1998 by 900%. This was largely due to investment from pension funds, the strengthened role of the KASE, and improved functioning of the market. Kazakhstan's National Securities Commission now requires that all trading in listed companies be undertaken on the KASE.