Stepped-up reforms are key to diversifying Kazakhstan's economy

• Author: Anna Ter-Martirosyan
• Position: IMF Middle East and Central Asia Department
• Pages: 30

Page 30

With proven and probable crude oil reserves amounting to 30 billion barrels, and oil production expected to almost triple to about 3 million barrels a day by 2015, Kazakhstan is poised to become one of the world's major oil-exporting countries. The emergence of the hydrocarbon sector has also served as a major engine of growth for the country's economy, which grew by an average of 6 percent between 1996 and 2004.

A reliance on oil revenues, however, also poses challenges. Economies dominated by natural resource sectors tend to have lower long-term growth, higher income inequality, and larger volatility associated with changes in commodity prices.

An antidote to these problems is greater economic diversification.

Kazakhstan, which began to see non-oil output growth increase in 2000, benefited from the positive side-effects of booming oil revenues. The authorities are intensifying diversification efforts to ensure that the non-oil sector can sustain its growth, independent of volatile oil revenues. This will help the country achieve balanced economic development, create more jobs, and further reduce poverty.

Non-oil sector performance

According to national accounts data, Kazakhstan's non-oil sector has grown on average by about 9 percent a year since 1998. In 2004, the sector's share in the economy, in real terms, stood at about 95 percent of GDP. These data tend to overstate the sector's true size and growth, however, because they include services linked to the extraction of oil-such as the construction of extraction facilities and transportation of petroleum-which have grown particularly rapidly. Adjusting for these services, the share of non-oil output in the economy is significantly smaller-84 percent of GDP in 2004. Even after the adjustment, however, estimated non-oil output shows remarkable growth, averaging more than 8 percent a year since 1998.

For the Kazakh authorities, however, key questions are how the non-oil sector's growth fared relative to its potential (or trend) growth and what the future holds. Data for 1998-2004 indicate that, although non-oil output remained below its estimated trend level in 1999-2002, it has exceeded that level since then, indicating a possible emergence of capacity constraints.

An examination of the sources of growth-capital, labor, and total factor productivity-sheds some light on the sector's growth prospects. Both gains in total...