Transcript Sustaining accelerated growth and stability in Kazakhstan

Achieving diversified
growth and sustaining
economic stability in
Kazakhstan: Challenges
and opportunities
The Kazakh economy continues its strong
performance
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Eight years of strong growth (10.2 % over 2000-2007)
$100 billion economy, $6,600 per capita by end 2007
High investment rates (fixed capital investment reached
28% of GDP in 2006)
Strong financial position of the government
Foreign trade and balance of payments in surplus
Rapid accumulation of foreign exchange reserves and
National Oil Fund
Inflation has edged up but remains moderate at 8%
Prospects for a major expansion of oil output over the
medium term
Yet Kazakhstan face a number of development
challenges
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Low competitiveness outside of oil and resource-oriented
industries
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Resource dependence generally associated with slower growth, more
instability, and inequality
Some recent sources of growth (finance, real estate) not
sustainable at current levels, and also pose short and mediumterm risks
Growing supply bottlenecks in infrastructure and skilled labor
Barriers to the mobility of labor, goods, and services
Low level of competition on many markets
Low effectiveness of many public services
Some good news for diversification prospects: the
tenge has been under less pressure for appreciation
than the currencies of many of other oil exporters
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Responsible fiscal policy and the accumulation of
surplus resources in the National Fund have slowed the
real appreciation of the tenge
Rapid import growth and outflows of foreign income
have also worked in this direction
Current large capital inflows of foreign debt should
become more moderate, and pressures on the tenge
may ease
The tenge remains weaker than in the latter 1990s
Real Effective Exchange Rate of the Tenge (up=appreciation)
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0
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Yet, low productivity relative to wage growth in tradable sectors
may have limited the ability of the Kazakh economy to exploit this
relative advantage in recent years
Value added per worker relative to average wages in resource
extraction and manufacturing
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Resource extraction
manufacturing
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3
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2006
Competitiveness also appears to suffer from some
other problems in the Kazakh business environment
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Kazakhstan has some of the highest administrative costs of
doing business across borders (ranked 172nd out of 175
countries in the 2007 World Bank Doing Business Survey)
Relative to other CIS and Eastern European countries, Kazakh
firms are subject to a relatively large number of various
inspections, often of long duration (World Bank BEEPS 2005)
Kazakh firms tend to complain less about these and many other
administrative obstacles to business than is the case on average in
the CIS or Eastern Europe, yet this is not necessarily a positive
sign (more efficient firms competing on world markets tend to
complain more about such administrative costs)
There is much room for improving the quality of governance in
Kazakhstan (Governance Matters 2007)
Dutch disease effects could become more serious in
the future with the rapid expansion of oil: now is the
time to exploit a window of opportunity for
diversification
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mln bbpd
Potential oil production
Overheating in real estate market and
growing risks in the banking sector are
causes for concern
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Fifty percent of current GDP growth is accounted for
by construction and finance: not sustainable
The pace of commercial credit expansion in
Kazakhstan is enormous by international standards, is
financed largely through foreign borrowing, and poses
serious risks
The majority of the current credit expansion consists
of consumer loans, many of which are unsecured
Real estate markets exhibit high volatility, and are
subject to speculative bubbles
Four topics of primary relevance for achieving
diversification and stabilization
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Administrative reform: improving the effectiveness of
governance and the quality of public services
Addressing overheating: Mitigating the risks from,
the rapid expansion in foreign borrowing, credit
expansion, and real estate
Programs to ignite growth and competitiveness
outside of resource industries
Housing and communal services: addressing
bottlenecks in infrastructure and barriers to labor
mobility
Reforming Government
Administration: Toward a
Performance-Oriented, Transparent,
Empowered, Efficient, and
Accountable Public Management
Administrative Reform: Lessons
from World Experience
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It isn’t easy anywhere, and a particular challenge in the face of
corruption, low capacity, weak information, and low civil service
pay
Administrative reform has taken many years, even in the most
developed countries, and remains an on-going process
Start from a deep understanding of where you are today and
what you can realistically achieve; not some abstract view of
global best practice
Basic principles of good public administration travel well
between countries, but require a careful adaptation to local
conditions
Importance of a strong long-run commitment of the
government in policy and resources
Implementing results oriented public
management will involve changes to:
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Governance including roles of ministers, professional
advisers, managers and service delivery personnel
Systems of accountability and transparency
Allocation of functions amongst ministries and between
levels of government and forms of public and private
organisation
Budgeting and financial management systems
Civil service laws, structures, processes and remuneration
Strategic planning, policy analysis and evaluation
Methods of management: away from compliance towards
quality, responsiveness to citizens and continuous learning
Resources
Culture
Some issues to consider
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Management of the reform process
Prioritising and sequencing reform initiatives and
projects
Achieving balance in practical terms between
responsibility and accountability
Making the joint stock companies and social business
corporations achieve results
Making performance management work across other
state institutions in this constitutional and cultural
environment
Some issues cont.
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Clarifying the roles of ministers and administrative executives
Linking strategic planning to budgets and reporting systems
Accountability system: what is appropriate to the constitutional
environment?
Accountability must be based on understanding of the linkages
between action and outcome within the complete management
environment
Avoid badly chosen performance indicators that can be very
damaging
Building capability needed for better public sector performance
– remember Bismark
Addressing overheating and
maintaining financial stability
Improving the allocation of risks
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Alleviating moral hazard: international
creditors and Kazakh banks should not
perceive that the government is implicitly
insuring their risky activities on the real estate
market
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Commitment needed to bank problem
resolution procedures that allocate a good share
of the risk of failure to the private (commercial)
sector
Improving the management of risks by
AFN and the government
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Macroeconomic policy measures to absorb liquidity
(restrictive fiscal and monetary policy)
Regulations to ensure soundness and to slow risk
accumulation in the financial sector
Strengthened supervision to enable monitoring and
enforce regulations
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Strengthening the capacity of AFN
Enhancing consolidated supervision
Moving to risk based supervision  strengthen
governance
Readiness to manage financial sector problems: contingency
planning and problem bank supervision and regulation
Financial Instability has been quite
common in emerging markets: many
countries have endured bouts of
instability and rebounded quickly
Effective regulation and contingency planning can
reduce the economic costs of financial
instability, as well as prevent the contagion of
the entire banking or financial system from the
insolvency of individual organizations
Government programs to promote
competitiveness and diversification
There exist a number of important policy
directions for promoting competitiveness and
diversification
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Investment in human capital: human capital is a primary
determinant of productivity and competitiveness. Public
education and support for professional training in Kazakhstan is
under-funded and (in many cases) outmoded.
Lowering tax and other administrative burdens on
business.
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The presence of resource revenues can support the compensation of
non-resource sectors for higher costs associated with a stronger Tenge
through a lower overall tax burden (although the dependency of state
finance on oil should not become too great).
The foreign trade regime is in need of simplification and the alleviation
of exceedingly high non-tariff barriers
Facilitating opportunities for fair competition, including the
entry to, and exit from, markets
Industrial policy
Industrial policy
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Kazakhstan can profit from careful attention
to world experience, which is very mixed
The process should be understood as an
interactive search of all levels of government
and business to identify and exploit growth
opportunities
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Incentives of government officials and businesses for
decentralized initiatives are key to success
The government can play a potentially important role in
supplying specific public goods and coordination
Important characteristics of effective
industrial policies to support
diversification
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Very high level political support and monitoring
Clear channels of communication with the private
sector
Mechanisms for transparency and accountability
Clear benchmarks and criteria for success when
providing support to the private sector
Sunset clauses to force the system into letting losers go:
“success will be determined not by how well the system
picks winners, but on how effectively it lets losers go”
Reforming Housing and Communal
Services in Kazakhstan
Key Constraints Currently Faced by Communal
Service Providers in Kazakhstan
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Tariff structure
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Financial/regulatory environment
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No mechanism for lending to utilities
Sector is not attractive for private investment due to tariff, regulatory constraints
Old and inefficient infrastructure
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Cost-based, no allowance for rehabilitation/investment or incentives to reduce costs
Progressive tariffs not permitted.
Over-designed from soviet-era norms-based demand criteria
Population shifts following independence
Little investment in maintenance, rehabilitation
Internal apartment networks especially poorly maintained
Institutional arrangements following decentralization
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No apex body providing coordinated policy, strategic guidance
Need for strengthened institutions, management capacity at local level and in utilities.
Reforming housing and communal
services: lessons from international
experience (1)
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The reform process requires the full commitment of its
policy makers to correctly balance financial and political
objectives.
Success is often unattainable without reforming the
external environment, especially the role of the owner.
Fundamental reforms are not a quick fix and cannot be
substituted by private sector participation.
There must be an adherence to financial sustainability
objectives.
Other external stakeholders may be important to balance
potentially conflicting objectives.
Reforming housing and communal
services: lessons from international
experience (2)
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Housing management and maintenance are not natural
monopolies, thus are inherently different from CSs.
Apartment owners need to own and be responsible for
apartment buildings.
Separating CS functions (ownership, oversight, service provision)
and arm’s length transactions are important to the institutional
setup
Customers can be an important voice for improving CS
providers performance
Guidance/regulations should not be overly restrictive. Utilities
do not necessarily have to adhere to all that is prescribed in order
to succeed. Each case is unique, with each utility possessing a
mix of attributes that has worked for it in its own institutional
setting.