Country Study, KAZAKHSTAN

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KAZAKHSTAN COUNTRY STUDY Jason Pugh jpugh@indiana.edu Cory Winchell cwinchel@indiana.edu Marina Yakolina myakol@indiana.edu Dmitri Maslitchenko dmitri@mailroom.com An Economic Overview Major changes are taking place in Kazakhstanís fiscal system. The breakdown of past revenue sharing procedures, under the centrally planned budgetary system require significant adjustments to the entire process. The banking scheme is currently being changed. The governmental accounting system is undergoing a complete overhaul. (Am. Embassy Rpt., April 1996) Currency stability continues to plague the country, and inflation remains a key concern. Investment is weak, and budgetary process reforms are stagnant. Discretionary government expenditures have fluctuated, while mandatory

expenditures are expanding rapidly. These are just some of the problems that plague Kazakhstanís government. A 1995 growth prospects index rated Kazakhstan last among other FSU countries. (Economic Overview of Kazakhstan, June 1996) The composite index considered ten different factors which contribute to a countryís capacity for growth. Some of the factors influencing this ranking, like the external deficits debt burden and relatively high inflation, may harm potential growth prospects. In industrial productivity, Kazakhstan was fourth from last with -34.2 change in industrial output per worker from 1990-1994. (Am. Embassy Rpt., February 1996) Budgetary Policies and Fiscal Developments Inflation Inflation is a problem that has plagued Kazakhstan since its

independence. There are several possible reasons that might explain this problem. The first is the movement in exchange rates. Another reason is the persistence of conventional budget deficits as well 1993 as quasi-fiscal deficits. And the final reason is attributed to monetary developments. (Kazakhstan: IMF Review, April 1995) Kazakhstan has gained more control over monetary policy, but with it comes more responsibility to maintain stability. In 1993, Kazakhstan introduced the national currency, the tenge. It is a free floating rate currency that has experienced large real rate deprecations. This rate of depreciation is common in the early years of economic liberalization, but it has continued to plague Kazakhstan recently. This problem provokes inflationary pressures that

destabilize the economy and discoural to 2.6% in 1994. (Kazakhstan Country Report 2nd Quarter, 30) Agricultural production in Kazakhstan remains a critical aspect of government subsidies, as the government is concerned about falling agricultural production. As agricultural production declines, the working class puts pressure on the government to maintain price controls on bread and other staple foods. These price controls only serve to increase inflationary pressures and undermine the governmentís fiscal austerity. Monetary Developments Restrictive monetary policies allow for stabilization, but in Kazakhstan the convertibility of the currency is still minor and structural liberalization is slow to take place. To allow restrictive policies to occur, the government must

desist in subsidizing industries. Loose monetary policies promote drops in output and are tied to hard budgetary constraints. The discount rate in real terms from 1992-1994 was -31%. However, the rate has climbed to 4% by the end of 1994, reflecting an improvement in the allocation of resources. (Kazakhstan Country Report 3rd Quarter, 25) The progression of reforms in Kazakhstan are reflected in the monetary policies and the movement in interest rates. Financial Intermediaries In any transitional economy, it is necessary to develop a system of reliable, stable financial intermediaries. There are currently about 200 banks in Kazakhstan, while only 20 have a license which permits them to correspond with foreign banking institutions. The largest banks serve as conduits for credits