The principal objective of the Kazakhstan Government's economic strategy is to have an efficiently and effectively operating open market economy in the country.

Since 1996, Kazakhstan's economy has been undergoing a crucial phase of market transformation. There have been significant changes with respect to ownership. In 1996-97, work was intensified in the area of institutional reform, in order to match the accelerating pace of the case by case privatisation programme. The divestiture process has recently extended to transport, and electricity and social sectors, providing for accelerated re-structuring of the infrastructure sector. To date, the sector specific privatisation programmes have been formulated and approved by the Government.

The assets under privatisation programmes are being sold on a competitive bidding basis, to investors of good financial standing who can offer the best terms for quick recovery of the business.

The total direct investment attracted to the Kazakhstan economy over the past four years is 3.4 billion tenge. The case by case privatisation programme is 75 per cent complete in the oil and gas sector, 67 per cent in the metal producing sector, and by 76 per cent in the electricity production sector. As few as three enterprises remain unsold in the coal producing sector to date. The larger investor companies originate from the United States of America (USA), lJK, Turkey, the Republic of Korea, France, Japan, India, Belgium, Indonesia, Malaysia, Canada, China, Russia and Switzerland.

Notable success has been recorded in the operations of such companies as Ispat International, Whiteswan Limited, Ivedon International, Japan Chrome Corp, Traktebel S.A., Specialty Metals Comp., Hurricane Kumkol Ud. By the year 2001, an estimated total of capital inflow under long-term investment programmes is expected to reach $4.8 billion. To date, more than 80 per cent of enterprises are privately owned.

Kazakhstan is among the pioneer reformers of the pension system in the Commonwealth of Independent States (CIS). The crux of the new policy lies in the shift away from a 'solidarity' system, in which the welfare funds are totally provided by the working population, to a pension system based on a savings account scheme. The existing welfare system is unable to work in the new economic conditions, due to its lack of an appropriate mechanism for handling capital flows. Thus, while the State is prepared to bear the responsibility of providing for old age within reasonable standard of living based limits, it wishes to encourage individual participation of the future retiree in making a respectable old age life affordable.

In 1997, maintaining financial stability and providing impetus to enhanced investment activity were the priorities of the Kazakhstan Government. Further steps were taken under the reform programme, embracing the budget and banking systems as weII as the industrial sector. Progress was made toward the completion of enterprise re-structuring and institutional build-up, segmentation of monopolies and securing growth of production output.

There is agreement among analysts that Kazakhstan is now past the hardship it experienced during the stage of structural reform, that following the achievement of macroeconomic stabilisation, it has since made substantial progress in implementing its independently formulated long and short-term policy of economlc reform.

The primary achievement of Kazakhstan in 1997 was to strengthen the favourable economic trends of the preceding year. The GDP has grown by two per cent, in contrast to a decline of 8.9 per cent in 1995, and against a growth of only 0.5 per cent in 1996. Industrial output has recorded an increase of four per cent, as compared with 0.3 per cent growth in 1996. The construction sector grew by ten per cent, while transport, communications and trade sectors posted some growth. Growth has been recorded for ferrous and non-ferrous metallurgy, the oil and gas extraction industry and the food processing sector. The past year marked the highest ever oil output, with a year-on-year growth of 11.2 per cent. However, the decline of output continued in machine-building, chemical and woodworking industries, and the cattle breeding sector.

Capital investments grew by 20.2 per cent, amounting up to tenge 114.9 billion. There has been a reduction in interest rates, reflecting the trend toward lower rates of inflation. Over the past year the inflation rate decreased by more than a half, reaching as low as 11.2 per cent against the forecast 17 per cent rate. As a result, the National Bank re-finance rate became 16.5 b.p. lower. The 1998 forecast has an inflation rate of 9.5 per cent, while the target for the year 2000 has been set at around 34 per cent.

The standard of living has improved on a par with consumer price stabilisation and output growth. The average nominal pension has grown, while the increment in the average wage amount represents an increase in real terms. With respect to the average real wage level, Kazakhstan is among the leaders in the CIS, with a significant potential for improvement. The average wage is targeted at tenge 9,783 ($119.5) in 1998, representing an increase of 42 per cent compared to 1996. There is now more public trust in banks, as indicated by an annual 30 per cent growth of capital on savings accounts at the second tier banks.

By the end of 1997, efforts to create the infrastructure needed for the growth of three comprehensive market systems have produced 83 banks (598 branches), 61 licensed insurance companies, three stock exchanges and 27 commodities exchanges.

The consumer market remained stable throughout 1997. Retail sales, including food catering, grew by 23.2 per cent in adjusted prices over the past year. Tho tight budgetary policy currently pursued by the Government has provided for a possibility to maintain the regular budget deficit at a comfortable level of two to four per cent of GDP over recent years. It is worth noting that the EU membership reference value for industrially advanced Western European countries is a Government deficit of three per cent of GDP.

However, implementation of the first stage of the pension reform programme caused the budget deficit to rise up to 3.6 per cent of GDP in 1997. In 1998, the budget deficit is to widen to 5.5 per cent of GDP, in response to a scheduled transfer of 52 billion tenge to the State Pension Fund and an allocation of another 23 billion tenge to meet the social welfare needs.

Direct lending from the National Bank to the Government will be discontinued in 1998. Financing of the budget deficit is going to be based solely on non-inflationary sources and commercial loans at both domestic and foreign capital markets.

Steady progress is being made to establish Kazakhstan securities market. Kazakhstan Ministry of Finance currently intends to have the maturity of treasury notes extended. This year will see the issuance of three and five year notes.

Greater effort has recently been placed in the creation of the national corporate securities market. An advisory committee has been set up specifically for the placement of blue chips. The committee's responsibility is to negotiate mandates with the investment banks which have won the bidding for placement of the Government equity shares of Dzheskazgantsvetmet (five to 20 per cent), Ust-Kamenoorsk Titanium and Manganese Combinat (16.5 per cent), Mangistaumunaiaz (five to seven per cent), Kaztelecom (two to 4.5 per cent), Aktobemunaigaz (five to 15 per cent). The auction will be held at the pre-listing stage in the nearest future at the Kazakhstan Stock Exchange.

The development of the regulatory framework for the operation of the Kazakhstan stock market and the trading of corporate securities is scheduled for completion by the year 2000.

Foreign investors have been participants in Kazakhstan treasury notes market since 1996. The default free record that Kazakhstan has earned over the past two years has considerably enhanced its reputation as a reliable business partner that the country enjoys in the international community .

Vis-a-vis the Asian financial crisis, Kazakhstan's long-term rating was raised this year from BB to BB- by international rating agencies. This is evidence that Kazakhstan retains its potential as an investment attractive country, while many countries in south-east Asia, and even Czechia, have had similar ratings lowered as a result. The Fitch-lBCA rating agency has retained Kazakhstan's short-term rating with respect to foreign currency. The first ever rating, triple B-, has been awarded to Kazakhstan's national currency, the tenge. This should be interpreted as demonstrative of international trust in the Kazakhstan currency and the market opportunities that Kazakhstan can offer.

Kazakhstan is among the five leading per capita recipients of foreign direct investment (FDI) among the Central and Eastern European as well as CIS countries. According to the European Bank of Research and Development (EBRD), between 1989 and 1996 the cumulative FDI inflow to Kazakhstan has been to the tune of $2,761 million. A measure of the extent to which the current FDI environment is hospitable is reflected in the year on year rise of foreign equity ratio in the first half of 1997, from 0.4 to 7.5 per cent. Over the same period of time, the ratio of foreign investment enterprises has grown from 9.5 to 33.3 per cent.

Kazakhstan is among the five leading per capita recipients of foreign direct investment among both the central and eastern European countries and the CIS. Between 1989 and 1996 the aggregate FDI inflow to Kazakhstan was, according to the EBRD, $2,761 million. The extent to which the current FDI environment is hospitable is reflected in the year on year rise of foreign equity ratio in the first half of 1997, from 0.4 to 7.5 per cent. Over the same period of time, the ratio of foreign investment enterprises has grown from 9.5 to 33.3 per cent.

Kazakhstan has the required legal framework and institutional capacity to be able to compete successfully for FDI internationally, and to utilise the acquired funds effectively. The law making effort over the past few years has produced legislation that aims to implement the adopted FDI policy. The body of relevant law includes the tax, customs and banking law, the laws on foreign investment, foreign currency regulations, the budget system and the bankruptcy laws.

Compared with other CIS countries, Kazakhstan has an eminently liberal tax regime; effective taxes now number 11, against 45 taxes levied under the previous tax law. The tax rules are consistent with internationally accepted principles of simplicity, equity, fiscal neutrality and equal treatment. The taxpayer's burden has decreased from 96 to 50 per cent over the last two years.

The Government considers stability of Kazakhstan tax law to be a key objective. An element of the Government's strategy to streamline the tax law along the lines congenial to investment - with respect to the extraction sector as well as overall economy - has been an extensive revision of the Tax Code's mineral resource taxation provisions, made in December 1996. In particular, the law now provides that the mineral agreement is a sole document stipulating all the requirements relating to taxes and other revenue payments. The terms of a tax regime specified in a mineral agreement shall be inviolable throughout the duration of the contract.

In order to obtain beneficial use of Kazakhstan's natural wealth, Tax Code provisions regarding mineral payments, ie, bonuses, royalties and excess profits tax were also revised.

The purpose of providing a favourable tax environment in the area of natural resources exploitation is addressed in the Code through inclusion in it of the following incentives:

• a deduction is allowed in respect of any sums disbursed as provisions against reclamation and closing costs (shutting in operations fund);
• the cost of self-constructed assets required for purposes of a trade or business is an allowable deduction;
• the limiting rates of deductible depreciation allowances for fixed assets used in extraction and treatment of minerals have been raised;
• the carryover period has been extended from five to seven years for mineral producers.

The goal of maintaining a favourable tax climate for inward investment was also embraced in a new law on 'State Support of Direct Investment', adopted in February 1997. The Law provides for tax and customs duties privileges to be granted on a case by case basis to foreign and domestic investors in priority sectors of the economy, so as to assure accelerated development of such sectors.

A State Committee on Investment has been set up, which is invested with exclusive authority to co-ordinate the process of attracting inward investment from various sources. Since the Committee's stated objective is to provide the support of the state to investors, its directions have binding force for all Government entities.

The 'Law on State Support of Direct Investment' provides that investors may obtain tax holidays of up to 100 per cent for the first five years and 50 per cent for an additional five years. Investors are also entitled to government grants in the form of free land plots, to be built on for purposes of a trade or business.

Tax privileges are to be provided, particularly for investors in the priority sectors under the Presidential Edict of May 4, 1997. These sectors are: the production infrastructure; the processing industry (including ferrous and non ferrous final products, hi-tech aluminium shape, advanced construction units, frames and materials, and waste recycling); activity related to the development of Akmola; housing, social sector and tourism facilities; and agriculture.

Today there are four Special Enterprise Zones (SEZ) operating in Kazakhstan:

• Lysakovsk SEZ, Kostanaiskaya Oblast
• Kyzylordynsk SEZ, Kyzylordynskaya Oblast
• Akmollnsk SEZ, Akmoiinskaya Oblast
• Jayrem-Atasuiisk SEZ, Karagandinskaya Oblast

Businesses registered within enterprise zones are entitled to tax privileges allowed by the Tax Law of Kazakhstan, and in addition, to the free customs regime established for enterprise zones by the National Custom Law.

Thus an investment environment fairly hospitable to capital inflow is in place. Legal framework for private enterprise is established and adequate protection for private ownership is fully guaranteed; repatriation of profits and products is ensured; the Kazakhstan tenge is fully convertible. It is also important that the reform process in Kazakhstan proceeds at a steady pace. In the World Bank's judgement, Kazakhstan is a CIS leader in innovating and implementing reforms.

To date, a total of 630 licences have been issued to investors operating in the hydrocarbon, mining and other sectors. The projected total of capital inflow over the next 23 years is running up to $90 thousand million. However, this is not the limit of Kazakhstan extraction sectors capacity of capital absorption. A forecast of the potential demand in investment capital for working the explored fields is around $500 thousand million. A vast expanse in terms of investment is the agricultural sector, particularly the food processing industry.

Investment capital inflow also helps to abate unemployment. There is a real need for Kazakhstan to address the problem of unemployment, since the officially registered unemployed are expected to account for four per cent of the economically active population by the end of 1998.

Liberalisation and decentralisation of foreign trade have been implemented as a consistent set of policies. Export duties on all goods, including grain, were eliminated in August 1996. The foreign trade turnover amounted to $9.6 billion, with respective shares of exports and imports being five and 3.8 billion. The overall trade balance is positive.

A major package of medium-term measures to be implemented by the Ministry of Finance relates to reforming the public finance management system, in order to streamline the system along market economy lines. The Government's strategy in this area primarily aims to maintain financial stability, activate inward investment, improve budget revenues, reduce wages and pension arrears, bring about a turnaround in improvement of the standard of living, securing its subsequent growth, and achieve sustainable economic growth.

Major reduction of public expenditure is being sought through the implementation of reform programmes embracing the re-structuring and streamlining of the central government system, rationalising the framework for intergovernmental administrative relations, the enhancement of the effectiveness of the social safety net by improving its basic structure, and reform of the housing and communal services management. These measures are expected to reduce the budget deficit and improve the stability of the country's financial system.

The Government's plan is to complete implementation of all of the radical reforms within the next two years. By then the Kazakhstan economy must complete the entire cycle of transition from a command economy toward a market economy, and join the class of established economies. All of the conditions for this to occur are in place.

Kazakhstan is a country of high potential, rating high in the CIS, where it occupies third place after Russia and the Ukraine. In terms of the wealth of natural resources, Kazakhstan rates CIS' second, while with regard to certain minerals such as chromium, rare earth metals, lead and silver, its leadership is absolute.

Today, the seeds of Kazakhstan's prosperous future are sown. Establishment of a framework for a market oriented economy, development of techniques to implement budgetary, fiscal, monetary and anti-inflation policies, and management of relations in the sphere of economy, as well as the area of societal relationships, are the cornerstones laid in the foundation of an economy with a significant potential of sustained growth.

Most importantly, Kazakhstan has a powerful intellectual potential. This potential reassures us that we can face the future with certainty and expect absolute realisation of the most ambitious plans.

A strategic programme to build an independent, prosperous and politically stable Kazakhstan has now been developed for the period ending 2030. The programme focuses on achieving the following seven long-term objectives: national security; internal political stability and consolidation of the society; economic growth based on an open market economy, with a high level of external investment and domestic saving; public health, education and welfare; energy resources; infrastructure, transport and communications, in particular; and professional public administration.

The outline of a long-term budgetary policy is also being developed. In the near term (1999-2000), the budgetary policy will envisage measures building on the achieved economic and financial stabilisation. The anticipated overall improvement in the economic, social and investment environment should make it possible to conduct a more effective budgetary policy. By that time, the positive impact from implementing the Tax Code will have been realised.

The agenda for the next two to three years includes:

• establishment of modern procedures for projection of national budgetary revenues and rationalisation of expenditures;
• incorporation into a consolidated State budget of extra budgetary funds and state-owned enterprise accounts;
• conduct of cost benefit analysis regarding the funding and delivery of key governmental services;
• establishment of contract relationships between publicly funded entities and service providers;
• development and implementation of a system to manage budgetary liabilities and liquidity;
• development of auditing standards and establishment of routine audits of publicly funded entities;
• completion of the treasury modernisation and computerisation programme;
• streamlining of the overall accountability of the State budget;
• completion of a programme to implement public procurement on competitive bidding principles.

The conceptual basis of budget development will be changed. Beginning in 1998, the budgetary needs will be determined on the basis of programme review and analysis of budget requests. The budgetary spending will be built around execution of specific projects and programmes, targeted at the accomplishment of the country's strategic goals.

It should be noted that from 1998 onwards, the implementation of the Government's strategy with respect to external debt management will be conducted along the lines established in the 'Law on External Borrowing and External Debt Management', enacted in April 1997. According to the Law, the Ministry of Finance may not exceed the limits provided in the yearly budget law on the amount of the Government debt or the external loans made under Government guarantees.

In terms of the outstanding external debt, Kazakhstan ranks among the medium debtor nations. Kazakhstan's powerful exports potential constitutes a counterbalance to external debt ratio, and the ratio will be falling as exports expand, providing for the country's improved credit control. Today, Kazakhstan's external borrowing policy is being made along clear cut and prudent lines. Trade credits have been eliminated, followed by a sharp reduction in the issuance of loan guarantees. The focus of the current government policy is on the creation of a favourable investment climate and attracting direct investment.