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A W O R LD B ANK COUNTRY S TU DY

Kazakhs tanThe Transition to a MarketEconomy

The World BankWashington, D.C.

Copyright i 1993The Intemational Bank for Reconstructionand Developmen/TFHwoRLD BANK1818 H Street, N.W.Washington, D.C. 20433, USA.

All rights reservedManufactured in the United States of AmericaFirst printing August 1993

World Bank Country Studies are among the many reports orginally prepared for intemal useas part of the continuing analysis by the Bank of the economic and related conditions of itsdeveloping member countries and of its dialogues with the governmens. Some of the reports arepublished in this series with the Ieast possible delay for the use of govenments and theacademic, business and financial, and development communities. The typescript of this papertherefore has not been prepared in accordance with the procedures appropriate to formal printedtexts, and the World Bank accepts no responsibility for errors.

The World Bank does not guarantee the accuracy of the data included in this pub' cation andaccepts no responsibility whatsoever for any consequence of their use. Any maps that accompanythe text have been prepared solely for the convenience of readers; the designations andresentation of material in them do not imply the expression of any opinion whatsoever on the

part of the World Bank its affiliates, or its Board or member countries concerning the legal statusof any country, territory, city, or area or of the authorities thereof or concerning the delimitationof its boundaries or its national affiliation.

The material in tiis publication is copyrighted. Requests for permission to reproduce portionsof it should be sent to the Office of the Publisher at the address shown in the copyright noticeabove. The World Bank encourages deion of its work and will normally give permissionpromptly and, when the reproduction is for noncommerial purposes, without asking a fee.Permission to copy portions for classroom use is granted trough the Copyright ClearanceCenter, 27 Congress Street, Salem, Massachusetts 01970, U.SA

The complete backlist of publications from the World Bank is shown in the annual Index ofPublicatiom, which contains at alphabetical title list (with full orderng information) and indexesof subjects, authors, and countries and regions. The latest edition is available free of charge frmthe Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washingtonr,D.C. 20433, U.SA, or from Publications, The World Bank, 66, avenue d'lena, 75116 Paris, France.

FZN.: 0253-2123

Libray of Congress Cataloging-in-Publication Data

Kazakbstan: the transition to a marlket economy.p. ar. - (A World Bank country study, ISSN 0253-2123)

ISBN 0-8213-2644-91. Kazakhstan-Economic conditions. 2. Kazakhstan-Economic

policy. . Intemational Bank for Reconstruction and DevelopmentIL Series.HC420-5.K293 1993338.958'45'-dc2O : 93-32013

CP

Preface iii

PREFACE

Kaakbstan became a memter of dte World Bank on July 23, 1992. This report is basedon the work of two economic missions that visited Kazakhstan in January and April 1992 led by WafilkGrais and Chandrashekar Pant, respectively. The report was discussed with the authorities in October1992 and distributed to the first Consultative Group (CG) meedng for Kazakhstan, which took place onDecember 14, 1992. The staff that prepared this report wishes to thank the authorities in Kazakhstan fortheir excellent support and cooperation.

Country Economic Reports are prepared as part of the normal work of the Bank to meetseveral needs. They provide analysis relevant to the Bank's own lending activities. They are a usefulsource of information for other donors. Ih addition, the analyses and recommendations are an importantinput into the economic dialogue between officials of the country and Bank staff. The report is basedmainly on official data, but where necessary it draws upon independent estimates. Although statisticalmaterial has been prepared with care, the methods and concepts were not always familiar to Bank staff,and the data should be interpreted carefully. The judgements and recommendations in the report areentirely the responsibility of the Bank.

This report was put together by Isabel Guerrero, John Holsen and Keith Lloyd. The maineconomic mission included: Craig Andrews, Homayoon Ansari, Paul Apthorp. Mohinder Berry, JamesBond, Earl Brown, Lily Chu, Patrick Conway, Heinz Henlriks, Ann Ishee, Ernst Lauridsen, ThurvaraS. Nayar, Brian O'Connor, Barbara Ossowicka, Salem Ouahes, Joseph Saba, Ossi Rakhonen, MarcelScoffier, Inderjit Singh, Kuti Somel, Kalanidbi Subbarao, Alfredo Thome, Jacques Toureille, HasanTuluy, Jurgen Voegele. Other staff conibuting to the wrting of the report included Suzanne Barnes,Christina Leijonhufvud, Klaus Lorch, Michael Mills, and Michael Walton. The study was carried outunder the general supervision of Kadir Tanju Yurukoglu, Division Chief and Russell J. Cheedham,Director.

Since the report was distributed to the CG, many reform measures, addressing key areasdiscussed in this report, have been undertaken by the Government. A brief update on key developmentsin recent months is presented below, while the rest of the report remains as it was presented to the CGmeeting. The report therefore reflects the Bank's assessment of Kazakhstan's economy at the end of1992.

Important structural reforms that have been approved since this report was distributed tothe CG include: (i) the adoption by Parliament of a new Constitution in January 1993, which establishesthe legal basis for private ownership; (ii) the design and implementation of an ambitious privatizonprogram. By April 1993, approximately 10 percent of state assets had been privatized. The majority ofthese, were small-scale enterprises-in the trade and services sedors; (iii) the elimination of most legaland institutional barriers to private sector participation in trade and distribution; and (iv) the adoptionby Parliament of new statutes for the National Bank of the Republic of Kazakhs giving it increasedindependence, a law on banking activities and a new foreign currency law.

The Goverment of Kazakhsan has agreed to the elements of an initial stabilizationprogram, allowing Kazakhstan access to the use of the Systemic Transformation Facility with the IMF.The program was presented to and approved by the IM Board on July 23, 1993 and oovers a 12- monthperiod starting in July 1993. The program targets sharp reductions in the rate of inflation to sigle digitmonthly rates by the end of 1993, a contaction in the budget deficit (from 9 percent of GDP in 1992 to6 percent in 1993) and growth of broad money and domestic credit.

kV Abbreviations

GLOSSARY OF ABBREVIATIONS

ACU - Aid Coordination UnitAMC - Anti-Monopoly CommitteeBAC - Bank Advisory CommitteeBOP - Balance of PaymentsCBR - Centra Bank of RussiaCEE - Central and Eastern Europecs - Commonwealth of ndepennt StatesCMEA - Council for Mutual Economic AssistaCPI - Consumer Price IndexEBRD - European Bank for Reconstuction and Developm1tEC - Europem CommunityEA - Enviromental - AmmentERP - Economic Reform ProgramFDI - Foreig Direct InvstmFSU - Former Soviet UnionG-7 - Groutp of Seven ndustrial NationsGDP - Gross Domestic ProductGNP - Gross National ProductGoskmprda - State Committee for Enviromnental ProtectionGoskomstat - State Committee on StatisticsIBRD - Itenational Bank for Reconstruction and DevelopmentICSID - Intenational Centre for Settlement of lIvestment DisputesIDA - hiternational Development AssociationIFI - International Financial InstitionsIMF - Inteational Monetary FundPAE - Miistry of Foreign Ecnowmic RdationsMIGA - Multilateral Inetment Guaantee AgencyMOC - Ministry of CommunicationsMOH - Ministry of HealthMoU - Memorandum of Un ningNAFI - Natioal Agency to Foreign InvesumentNBK - National Bank of KazakhstanNMP - Net Material ProductNGO - NonGovemmental OrganizationOECD - Organization for Economic Cooperation and DevelopmePIP - Public Investment ProgramSB -Savings BankSOE - State Owned EntepriseSPC - State Property CommitteeTA - Technical AssistanceTCP - Tedcnical Cooperation Program-UNEP - United Nations Enviro nt ProgrammeUNICEF - United Nations Children's FundVAT - Value-Added TaxVPF - Voluntary Pension FundWHO - World Health OrganizationWI! - Wholesale Price Index

cunncy Euivaleas v

CUBENCY EOUIVALENTS

Currency Unit = ruble1 ruble = 100 kopecks

I SDR = USS 1.36855US$ I SDR 0.7307

Rubles per US Dollar

Official Ecba e Re(average)

1987 0.62381988 0.60801989 0.62741990 0.58561991 0.5819

MIFCE Rate (averan AIMYAuctiLnRt h

JamWr 1992 110 n.Febiay 1992 103 n.aMarch 1992 93 n.aApril 1992 100 n.a.May 1992 94 n.a.June 1992 90 138July 1992 143 155August 1992 168 164Setmber 1992 220 254October 1992 354 365November 1992 426 441December 1992 415 480Jamnzy 1993 484 S45February 1993 572 704March 1993 665 785April 1993 767 870May 1993 949 949

vi

CONTENTS

EXECUIJ sSUMMAtRY .......................... .. i

PART I: T1E FRAMEWORK 1.

CHAPER 1: Disintegration of the Union .3

CHiAPTElR 2: The Mlacroeconony ............................... ,.... 7Kazakhstan in Perspective . 7Recent Economic Performance . 10

CHAPITER 3: The Refom Program and the Medium Term Outlook . ......... 24The Reform Program: Stabilization and Strucural Adjustment . 24Economic Proepects. 28Extenal Trade Prospects .35The Major Risks .37Alternative Scenarios ......................................... 39

CHAPTER 4: Extenal Flancing and Debt Mna.me.. 41Kazakhstan's Estimated Extnal Financing Requirement .41Deferral and Rescheduling of Debt Service .47External Financing Overview .51Institutional Arrangements Aid Management and Coordination .52

Part U: THE AGENDA FOR STRUCTURAL REFORM

CHIAPTER 5: Establshing Competitive Markets and Facilitating Resource Mobility...... 54The Labor Market .54Microeconomic Functioning .61The Financial Market .62

CHAPTER 6: Private Sedor Development and Privazatin .69The Business Enviromnent of Private Sector Activity .69

CHAPIER 7: The Frmework for Social Protection .92The Social Safety Net ...... 92The Health Sector ........................................... 99

Part HI: THE TRANSFORMATION OF TEE REAL ECONOMY

CHAPTER 8: Energy and Aiing Sectors ............................... 106The Energy Sector .......................................... 106Mining and Metallurgy ................ 125

Contents vii

CAPrr= 9: Agriuen ....................................................... 130

CI1AP`TEI 14k The Infrastructure for Production ....... . . . ......................... . 144Transportation ............................................ 144Te leoo m m u nicatio ns ......................................... 147

CIAFIER 11: Environment .. d ....................... s........ 152The Environmt Prblems .................................... 152Sector Oraizon ........................................... 155

ANNEX 1: Transitional Trade & Payments Arrangemns ......... . . . . * . . . .... . 159

srATrISKCAAPPENDIX ....................... 179

MAP BRD

Tt Tables2.1 Kazakhstan: Mineral Endowmens and Energy Production .. 2.2 Kazakstan . 102.4 Indicators of Output and Exps, 1990.92. .122.5 Trends in Retail Prices and Wages, 1991-92 ........................ 132.6 Goverment Ffinncial Operations, 1988-91 .162.7 Central Govenment Fiscal Opemons in 1992.162.8 Montary Accounts for National Bank and Banking Systen .202.9 Balace of Payments Eimates for 1992.233.1 Kazakhstan Key Economic Projetio - Central Scenario. .284.1 Kazakhstan - Exrnal Fmancg R i nad Disbursemnts for 1993 .... 424.2 Medium-Ten Projections: Kazakhstan Extend Fanci Rq n,

Centrl Adjustmn Scenario, 1995, 1997, 1999 . 434.3 Katan - Projected Committments and Disbuenns for 1993 ..454.4 Medium-Term Projections: Kazakhstan Extemal Financing Requirements,

Low Case Scenario: Slower Reform d Delayed Investmen. .505.1 Changes in Employmet, 1988-92 .586.1 Size Structure of the StaEnteErpris Sector, End 1991 .756.2 The Structure of Industry ................ 7.................... 76.3 Privaizati and Corporadzion untl August 31, 1992 .807.1 Government Exnditrson Cash Benefits Kazakbstan and OECD Countries ... 937.3 Budget of the Pension Fund, 1992 .958.2 ProjectionsforEnergyCowsumpion .1138.3 Energy Trade Balance.1148.4 Energy Trade .1158.5 Kazakhstan Ener Prices. .1189.1 Selected Indicators in Agriculture, 1990.1329.2 Kazakbstan - Distibution and Productivity of Major Crops,

1987-1990 average .13........ . .. 3.9.3 Average Prpni edr costs in Agriculture, 1991 ...... ........... 136

viii

9.3 Average Prices and Direct Costs in Agriculture, 1991 . ................ 136A2. 1 Total and Intraregional Foreign Trade as a Percentage of GNP Former Soviet States,

Eastern Europe CMEA and EC Members ......................... 163

Text Fges4.1 Kastan, Potential Sources of Exteral Financing Requirements .... ....... 455.1 Total State Employment, 1980-92 ............................... 565.2 Non-state Employment 1980-92 ................................ 565.3 Sectoral Employment, 1980-92 ................................ 575.4 Real Wages, 1984-1992 ..................................... 575.5 U.S. in the Great Depression, 1927-1943 .......................... 596.1 Employees by Sector, 5f1992 ................................. 766.2 Book Value of Assets by Sector, 12/1991 .......................... 769.1 Overview of Agricultual Land ............................... 131

Text Boxes2.1 Deregulation of Prices ...................................... 143.1 Public Investment Progrm ................................... 354.1 Inter-republican Debt Agreements and the Current Payments Situation .... .... 465.1 Financial Sector Technical Assistane ............................ 686.1 Core Business Legislation as of 5/1992 ........................... 706.2 Support Services Needed by Private Industry ........................ 736.3 Priority Technical Assistance Needs for Private Sector Development, 1993 .... . 746.4 Methods of Privatization - Lessons from Intenational Experence .... ....... 786.5 Priority Technical Assistance Needs for Privatization and Restuturing, 1993 ... 917.1 Technical Assistance to Improve Social Protection .................... 997.2 Technical Assistance to the Health Sector in Kazakhstan ................ 1048.1 Kazakhstan Energy Sector Technical Assistance ..................... 1249.2 Areas of Technical Assistance ................................ 143

10.1 Main Technical Assistance Requirements in the Transportadon Sector .... ... 1472A.1 Different Types of State Trade ................................ 1652A.2 Interrepublic Oil Subsidies vs. Transfers ......................... 1682A.3 Export Tax vs. Export Licenses ................................ 1712A.4 The Ca for Moderate Transitional Tariffs ........................ 1742A.5 Clearing Unions vs. Payments Union ............................ 1752A.6 Customs Union vs. PTA ................................... 177

EXECUTIVE SUMMARY

Kazakhstan became the 163rd member of the Bank on July 23, 1992, seven months afterbecoming independent as a result of the dissolution of the former Soviet Union. It has a population of17 million inhabitants, and ranks second only to the Russian Federation in size, with 2.7 million squarekldometers. Covering a vast geographical area stretching from the Caspian Sea to China. Despite itslarge territory, Kaakhstan is a land-locked country which depends on its neighbors for access tointrnational markets. The country is endowed with rich natural resources, including oil, gas and non-ferrous metals

By 1993, real output in Kazakhstan will have most probably dropped by over 30 percentas compared to 1990; prices will have increased by over 20 times. The huge contraction in output hasbeen caused by factors mostly beyond Kazakhstan's control. The instability in the trade and paymenesmechanisms that has occurred with the disintegration of the Former Soviet Union (FSU), coupled withthe extem horizontal itegration of the productive sucture with the other republics, has led to apronounced slow down in inter-regional trade and economic activity. A severe drught in 1991, whichhas now ended, aggravated output decline. The massive adjustment in prices was partially a correctionof artificial micro distortions inherited from a price controlled economy, accenuated by the existence ofmonopolies. In addition, the breakdown of the former system of moneary control became a source ofinflation, as budget deficits in the FSU were moneized within the ruble zone.

The Govemment's immediate response to the crisis has been to emphasize stabilizafionefforts. Having chosen to remain within the ruble zone, it has implemented a strong contraction in creditin real terms. It has also implemented budget deficit reduction measures, in order to pardy compensatefor the elimination of the large transfers (9 percent of GDP in 1988-90) it used to receive from the Union.The Government has liberalized nearly all prices since January 1992, leaving only a small list of essentialgoods under price controls.

The top leadeship of the country is committed to a market-based and externally orienteddevelopment strategy, and has begum pursuing the dual objectives of economic stabilization and tiz designand implemenation of systemic reforms. The large output contraction and the unprecedented changesin relative prices, have exps more deep-seated pmblems relating to the structure of Kazakhstan'seconomy - a legacy of seventy years of central planning and a rigid command economy. Despite therapid progress in reform that the authorities have already made, the transition to a strong, market onentedeconomy is likely to take several years.

Although the agenda and the challenge of reform is enormous, the country has majoradvantages: significant oil and natural reserves that bave already attracted foreign investment,comparatively low debt ratios, and a reasonably well educated workforce. These advantages, coupledwith a leadership which is commited to a strong reform agenda, will probably result in a faster transitionthan that of the other republics of the FSU. Indeed, increased exploitaton of the oil reserves is expectedto underpin investm and output growth over the mid-to late 1990s. In addition, there are significantreserves of minerals, copper, lead, and gold. Furthermore, Kazakhstan is practically self sufficient infood. In per capita term, tis resourc endowment is even larger, since this is one of the most under-populated countries in the world. In the medium-term, foreign investment may bnng about substantialincreases in both exports and fiscal revenue, and the country is expected to have, maybe even substantial,terms of trade gains.

ii Executive Summary

Kakhstan has recently bcen at the forefront of foreign investment agreements in theFSU, following the announcent of three significant deals since the middle of the year. In May anagreement was finalized with Chevron to develop Kazakhstan's Tengiz oilfield, with recoverable reservesranking along side some of the bigger fields in Saudi Arabia. In June, British Gas and Agip wonexclusive negotiating rights to develop the Karachaganak field with 20 trillion cubic feet of gas and 2billion barrels of oil and condensate. The field is one of the biggest in the world, four times the size ofthe UR's largest gas field. Moreover, th-e estimates of oil reserves probably represent a minimum, basedon curent extraction technology. A third deal, concluded with a Turkish group involves developinganother large oil field in exchange for the construction of increased electricity production capacity.

In spite of its favorable resource endowment, the reasons to move ahead rapidly withsystemic reform are compelling. First, without systemic reforms airned at increasing the flexibility ofthe economy, the expansion in the oil and gas sector could result in the development of an "oil-eonomy"with stmctral dutch disease problems. The development of a broad export base, reduces the economy'svulnerability to large terms of trade shocks arising from fluctations in the intional mieral andcommodity prices. Second, the economic structure emergig from the systemic reform should ensurethat rents arising from natural resource exploitation are efficiendy reallocated. The example of some oil-produig counties vividly illustrates how resource surpluses may be wasted sustaining extraordinarilyiefficient state enterprise production that both fails to meet the short-run employment requirements ofthe pop;:!ation. and the long-run growth requimn of the economy.

A FEASIBLE SCENARIO

Prospects for output growth are low for the nex tbree to four years. Like many otherreforming former Eastern block economnies it will take some time to adjust to the huge relative price shiftsoccurring in the reform process and for resources to be mobilized towards areas of comparativeadvantage. Since resonrces need to be reallocated from a massive state enterprise sector to a new, muchsmaller private sector, even spectacular growth in the private sector is unlikely to compensate for thedecline in state enterprises in the short-term.

The strongest output response in UtD short run is expected to come from the energy sector.Industrial output is expected to decline by around 20 percent in real terms in 1993, given the restructuringneeds of the sector. Agricultural output may revert to downward trends in yields following the 1992reboud from the drought. It could decline by up to 5 percent in 1993 as traditional supply anddistribution channels are disrupted. Merchant trade in the scrvice sector, however, is epected to growin the short term and cushion some of the industrial output decline.

A marked acceleration of growth could come in the second half of the nineties from threesources. First, the country's natal resources specially minerals, oil and gas, could serve as a base forsustainable growth in both exports and fiscal revenues. Second, rapid growth could be generated throughthe privauization of small scale businesses, trade and commerce and the promotion of private sectordevelopment. Although the private sector is small, it could be an important source of growth for the laterpart of the decade. Third, moderate growth could be expected in agriculture provided reforms areimplemeited and no major droughts disrupt production.

Executive S&nmary iii

The construction of a new economic structure also involves the destruction of an oldsystem, wvhich will imply heavy dislocation costs in the transition. A substa decline in industry isinevitable and it should be phased over several years. This may bring about an initial rise inunemployment up to 10 or 20 percent of the labor force in 1993 and 1994, gradually decining therafter.Inflation should drop but is expected to remain high in 1993; any lower forecast would be unrealistic.Finally, the reform process will inevitably bring about a rise in inequality and poverty. An appropriatesafety net will be able to moderate the reduction in welfare of the most vunerable groups throughbudgetary transfers.

HOW TO ACHIEVE 1T?

Although the reform agenda is more extensive, this summary focusses on the most urgentmeasures that need to be undetake in dte next eighteen months. The Govemment of Kazakbstan facestwo critical issues: the stabilization of the economy and structural adjustment to provide the basis for arapid supply response in the productive sectors.

Structurl Reforms

An important element of the systemic reform program is the redeJfinion of the role ofthe Governmue. The Goverment has inherited a structre designed for a centrally planned economy,and moreover, one directed from Moscow rather than from Alma-Ata. The Government will need temanage a program that enis the progressive privatzation of virtually the entire productive econwmy,reasserting state property rights, re-ordering public expenditure priorities, maintaining essential services,and providing an acceptable social safety net. In addition, the Government needs to ensure that externalresources provided in support of the reform program are efficiently utilized and coordinated. This willinvolve building that capacity as well as linking the management of extnal assistance to econonmic policymaking and day-to-day management, and the development of a procurement capacity to ensure theefficient use of those resources.

The Govermnent faces the enornaiiis &Utige of putting in place a legalfwework thatis representative of the country's new philosophy and principles. While Parliament is to review a newconstitution this year, a number of laws have either, been passed (eg. privatization law) or, are in theprocess of being drafted. The emerging legal system will need to be coherent, and frame the enormoustransfonnation process that the country has embarked upon. Urgent legislation requring immediateattention to underpin and promote private sector activity are; (i) commercial codes and laws that recognizeprivate sector property, deregulate entry and ent, define bankruptcy procedures, and provide aframework for legal remedy in the event of contract failure; (ii) a banking law which provides the CentalBank with adequate control over the soundness of the fnancial sector; (iii) petroleum and mining lawsthat ensure an adequate common framework for all new exploration and developments, (some of whichhave already started); (iv) a legislative framework to promote privatization and com alion of theeconomy; and, (v) the amendment, of existing laws to clarify the regulation of foreign capital and profitflows. While the govenmment's objective of attracting foreign investment is commendable, special taxholidays or exemptions for foreign investor tha are not equally available to domestic investors shouldbe avoided. A stable binding legal framework and a consistent set of macro and micro economic policiesare more effective at attracting foreign investment compatible with the long-run growth objectives of aneconomy than fiscal incentives.

iv Executive Summary

Adoption of a coherent legal firamework is not sufficient. Without the appropriateinstiudonal sd-up for enforcement, the laws on paper have very litdte maning. It will be important torevamp the judicial system so that the new legislation underpinning the reform program can be enforced.Bankruptcy and contract laws are only effective when there is a court system which can litigate disputes.Similarly, adoption of commercial code and accounting standards are effective only when there aretrained and qualified accountn who can apply these sta.ndards in the corporate sector. Unless there areuniform accouning standards, the functioning of a stock market, one of the key elements in theprivatization process, will be in question.

In addition to the legal framework, the minimum requirements for an appropriateincentive system in the short run is the completion of price lTeralirai-n and the implemenation of atradefwnework where there are no quantitative restictions on exports nor imports. Less than completeeconomv-wide liberalization has the danger of creating distortions in relative prices which might affectthe short-term viability of certain activities which might otherwise have been profitable, or even have acomparative advantage. The Government's plans to liberalize all prices, wih the exception of rents,passenger transport, and some public utilities such as household heating and electricity does reflect anapproprite transitional response to current crmsances.

Correction of relative prices in the economy needs to be supported by trade reform andthe rationalization of the vast array of implicit and explicit subsidies and taxes in the existing system.These take the form of inteest rate and foreign exchange subsidies, extra-budgetary funds, andconsumption and input subsidies. The system needs to be rationalized with two objectives in mind: (i)a reduction in the waste of fiscal resources through targeting; and (ii) trsparency. Trade protectionshould be uniform and tramsparent. An import tariff in the range of 25 to 15 percent should be the maininstrment of protection.

Becase of political constraints, or development objectives, the Govermment wishes touse some subsidies to soften the social costs of adjustment. This should be done explicitly through thebudget, and not through the banking system or the foreign exhange market, and should be targeted atvery specific objectives. -Towards this end, the Goverinment has ak-eady moved to a one-rate foreignexchange market. Furthermore, positive real interest rates sbould be maintained, subsidies through thebanking system should be eliminated, and all extra-budgetary finids should be integrated into the budgetof the central government.

For the successful completion of price liberalization, state orders need to be elininated,including the elimination of import and export state orders. The market, not state order, should provideproducers and suppliers with the inputs they need, and consumers vith the flaai goods they demand.Experience with state orders has shown that they are likely to become a source of rents and corruptionand that they do not provide appropriate inceives to increase productivity. Government's ownprocenment of goods and services should be undertaken through competitive bidding and at marketpnces.

The overall succe3s of the refbrm program will depend on the country's ability tocounteract the inevitable output drop in industry with a positive supply response in other sectors of theecono-my. Three key sectors of the Kazakhstan economy will shape the nature of the supply response -energy and mining, agriculture, and restrctured industry sectors.

Executve Summary v

Across all sectors, the supply response will heavily depend on the removal of obstaclesto the development of the privatc sector. In 1991, the registration of a new business required ninedifferent signatures from govenal agencies, which was a daunting task Recent legislationeliminated many steps and fees, and suppressed bureaucratic inference. Nevertheless, registrationremains a lengthy task in several oblasts and Alma Ata. Chikent, by contast, has established anexensive data base and a one- stop model that has allowed over 3,500 registrations. The Chimkent modelshould be reviewed, strngthened, and used as a model for a country-wide registration system.Difficulties in access to physical space for business facilities, lack of competition, state domination ofdistibution structures, and lack of know-how on technology, management, finance, quality control, andmarketing are the oJier main obstacles to private sector development.

The rich e,er and mineral resources of the country are the largest source of potentialoutput and export growth. In this area, there are three supportive policy msum that need to beImplemented in the next eighteen monts. First is the need to increase domestic energy prices to their

true economic value. Although steps have been taken to raise energy prics during 1992, inflation hasoffset most of this increase, and domestic energy prices remain at only a fraction of world market pricingand domestic economic costs of supply. Energy consumption is also far too high m relation to economicoutput and must be reduced. Domestic oil pnces, wbich have been leading the energy pricig policyshould be raised to reflect the cost of interrpublican oil imports. At a minimum domestic oil pricesshould be incrased to 50% of equivalent world market prices by December 1992, and to 100% by March1994, and should not fall below domestic prices in Russia Second, it will be imortant for theGovernment to develop the capacity to coordinate the large foreign invesmet iflows into the oil sector,including ensuring the construction of an oil export pipeline with non-discriminatory access and stndardiernational tariffs. Third, it is importa that the Governmen establish a clear legal and regulatoryframework m the petoleun sector, and implement a profit based petroleum taxation system to widen theGovenmment's ta base in a neutral manner.

Although less dratic than enrgy, the supply response in aqicdtre could be veiyimportant. Kmkbstan is already self-sufficient in food. However, productivity and crop yields are lowand fertdlir utilizaon is excessive. While measures designed to increase productvity and reduceunnecessary fertili application may be expected to yield results over the longrW-te, sigificant short-run supply gains may still be achieved if famers are given approprate pnce and profit icentves. Thissupply response will not eventuate if increased ral retuns are absorbed by trading and distibuionmonopolies. It will be a dcallenge for the Govenment to manage the transition so that inefficiencies arerapidly eliminated while at the same time availabilty of food to the low income population is assured.As a first step towards achieving the desired supply response, state control should be immditlyreduced, production quotas should be eliminated, the private sector given commeril access to storage,distribution, and marketing activities and all producers both pnvate and state given equal access to inmputs,services, and financing. The second important measure is the eiminaton of input and output subsidies.A short to medium term program of phasing out subsidies should be implemented, with any remainingsubsidies going explicitly through the budget. The third crucial action is the privatization of land.

Some output and employment loss is inevitable in industry. However, rapid rss Aa cragand privatifion will speed the supply response and avoid unnecessay disruption. The eastern euopeanexperience shows that one of the biggest losses of reform have resulted frm the confused ownership andincentive system under which SOE's were operating. Early privatzaion and introduction of corporate

vi Executive Summary

govemance should avoid these type of unnecessary costs. In Septmber 1992, a joint World Bank,EBRD. and USAED mission working in close cooperation with the State Property Committee and variousother agencies proposed a detailed program of privatiaon in Kazakhstan

Under the proposed program pnvatizon would be cared out in three components.First, small isism would be auctioned off against cash and unused housing vouchers. Second, mostmedium and large enteprises would be sold against 'invesme points in a mass privatization programthe complexity of which is mduced through the central role of investment finds. Finally, most yv lagg.eerflMpjL (more than 5.000 employees) and special enterprises - natural monopolies and firms with non-commercial functions or exploitng non-renewable natural resources - would be sold on a case-by-casebasis, ohfen with prior sector studies, regultoy work, and some restrucring.

The early privaion of small scale enterprises can yield rapid benefits in terms ofimproved servie and availability of goods, and hence also popular support for economic reform. Theproposed approach reflects the successful implementation experiences of a growing number of cities inCzechoslovakia, Poland and Dow Russia. The enterprises would be liquidated and their business spacesold in open auctions; the equipment and inventory would then be offered to the winning bidder at pre-announced prices, or auctioned off separately for both cash and housing vouchers.

In order to avoid a crisis in the i diat futre and to support the supply response inthe- productive sectors the financial sector will need to be revamped. Ina te next eighteen months,implemention of policy measures in two areas are urgently required. First, stronger control over thefinancial system is needed if a financial crisis is to be avoided. Currenty, the Central Bank has litdecontrol over the banking system. Like m the rest of the FSU, most of the newly created banks are ownedby SOE's. High exosure levels to one client, or to the owner, are currenty impossible to control andbanks will not exercise prudent lending practices under these conditions. A more stringent legal andsupervisoxylregulatory framwork needs to be put in place as soon as possible in line with interationalnorms. Second, the Central Bank shodd mpose direct credit controls during the transition, while theinstitutional and finandal market fiamework is developed, before moving to a more indirect form ofmonetary control. Significant institutional sting and training will be required for both theNational Bank of Kmkhstan and commercial banks. Finally, privatization of banks should be phasedin gradually only after sound prdential regulations are in place.

Managing the Social of the Reform Program

Lauoe market policies need to ensure that dte lack of labor mobility does not generateunnessary frictional umployment duinng the transition to a new productive structure. Workers needto have full fireedom to move both between geograpbical locations and betweenjobs when enterprises areconfronted with employmen retrenchment. To allow this, the residence requirement to get a job("propisla") should be eliminatd as soon as possible. Housing policies, to both increase supply andencourage the development of a rental market, are also priority measures. Allowing the private sector intothe construion industry is another important measure which would generate employment.

Unemployment increases shoud be moderated through the management of copleymacro and trade policies. Altiough expected to subsially increase in the next two years, too largeunemployment would have high political and socidal costs and could jeopardize the attainability of fiscalstability. This constrint should be taken into account when designing the structure anspeed of trade

Executive Summary vii

reform: some activities might need some transitional protection during the next two years. In addition,to control inflation and avoid excessive unemployment over the next eighteen months there should bemoderation in benefit levels, and tax-based wage controls in the context of an overall incomes policy.

Adequate resources should be avaiablefor essentiad socia needs. The reform processis expected to lead in the short run to large increases in frictional unemployment; already the real valueof fixed incomes is falling as a result of continued inflation; and social services are beginnming to beundermined as a result of expenditure cutbacks. An adequate social safety net is, therefore, critical toensure that the vulnerable population is protected. Given the large number of households which will needto be covered and the scarcity of fiscal resources, targeig of social spending is particularly important.In Kazakbstan the most vulnerable groups identified so far are pensioners and large families. Theexperience in other countries shows that in times of adjustment there are additional groups which arevulnerable: the children and the unemployed. In order to identify the poor more accurately, it is necessaryto define a minimum consumption basket, further analyze existing data, and organize monitoring systems.

Although some resources will come from additional budget allocations, given the likelymagnitade of safety net requirements, some re-allocation of expenditures from existng social services willneed to be implemented. Savings may be adieved by protecting the pensions of only the lowest incomegroups against the worsening of inflation; tightening up eligibility requirmnets for receiving a pension;reducing unemployment benefits for certain kinds of beneficiaries (such as reentrants, or those that weretrained and are employed); and requiring employers to pay for at least the first 20 days of sick leave.The existing health system should be prevented from collapsing. In the very short-term foreign exchangeis needed to finance the imporaion of critical drugs and vaccines to avoid a health emergency.

The Macroeconomic Framework and External FIancing Req ents

All these strucural measures will not be effective if they are not undertaken within amacro framework which ensures the sustainability of the new system. Moreover, Kazakhstan has to takemeasures to adapt to the loss of the large transfers it was receiving from the union, both to the budgetand the balance of payments. The country will need financial support from the international communityin the initial transition. Otherwise, even sharper drops in output and consumption will take place,endangering the susainabiity of the reform program.

In the short term, Kazakbstan has only limited control over macroeconomicdevelopments. As long as it remains in the ruble zone, monetary and exchange rate policies will dependon the policies of the Cetral Bank of Russia. Theoretically, clear rles could be adopted that wouldenable credit policy within the zone to fumntion effectively. However, this is far from being achieved atthe moment. This has increased the incentives to enter into barter arrangements, increase inter-enterprisearrears, and turn to other means of non-monetary financing. This further erodes the National Bank ofKazakhstan's control over the monetary and banking system. Furthermore, within a non-regulated rublezone dtere is little incentive to attain lower budget deficits than other countries in the zone.

If monetary instability confinues in the rest of the ruble zone, and in particular, in Russia,Kazakhstan will need to consider the negative impact this will have on their attempts to stabilize over thenext 18 months to two years. Given the importance of long-run p:ice stability, the authorities may needto consider establishing their own currency as a means of regaining monetary control, and achieving pricestabilization. If, because of inflationary expectations and speculative demand, the exchange rate continues

viii Executive Summary

to seriolusly undervalue the ruble, then the otherwise desirable open economic policies could lead tosubstantial imported inflation. The principal benefit of a separate national currency is the ability topursue an independent monetary and exchange rate policy, and thus have direct influence over thenational inflation rate.

Currency reform, however, would only be effective if it is accompanied by appropriatelyfirm macroeconomic policies that help build confidence in the new currency and stabilize its value.First, the goverrnent would need to maintain appropriate control over fiscal policy. Continued fiscaladjustment and restraint would be critical to the overall success of the stabilization and reform program.The government would therefore need to focus on linmiting budgetary deficit financing from the monetarysystem to a level consistent with achieving the inflationary control objectives. Confidence would bediminished, and the value of the new currency eroded if the government finances budget deficits byprinting money- This could potentially lead to capital flight out of the new currency back into the ruble-

Secondly, monetary policy would need to focus on reducing inflation. Therefore it shouldbe designed to limit the expansion of net domestic credit to a rate consistent with a convergence ofKazakhstan's rate of inflation over time to that prevailing internationally. Interest rate policy would needto be consistent with exchange rate policy under either a fixed or flexible exchange rate regime. Fiscalpolicy would need to be controlled tightly in order to support the new currency and avoid the need forinflationary financing. For post-currency reform credibility, it would be important that priceliberalization, the removal of subsidies, and other relative price adjustments be nearly complete by thetime of the introduction of the new currency. If not, the job of monetary policy would be much moredifficult in the presence oi future adverse price adjustments. Furthermore, it would be extremelyimportant that the National Bank has the technical ability to successfully operatz monetary policy withthe new currency. In particular, it would be essential that the National Bank possess the skills andinstruments necessary to analyze economic developments, formulate appropriate monetary policies, andimplement them.

The medium-term outlook for the economy of Kazakbstan depends critically on thesuccess of the stabilization and systemic reforn program, and on the support of the international financialcommunity. If the key elements of the reform program begin to take root, the decline in output may berestricted to 5-7 percent in 1993, after a decline of around 14 percent in 1992. To achieve this, however,significant amounts of external assistance need to be mobilized over the next eighteen months, since thecurrent account deficits corresponding to these levels of activity are estimated at around US$950 andUS$890 million for 1992 and 1993 respectively.

First, the technical assistance requirements to implement these reforms are large. Thetransformation of institutions from the old Soviet system to a system compatible with a market-basedeconomy will require a massive restructuring of the political and institutional framework. Newinstitutions and functions that did not exist under the old system will have to be created. A significantelement of the technical assistance will need to take the form of training. Specific needs are addressedin each of the chapters of this report. Second, balance of payments financing will be crucial to arrestfurther declines in output and consumption. Imports are required not only to complement limiteddomestic supplies, but also to ensure that inputs and intermediate goods for domestic production areavailable. Third, projectfinancing wil be needed for import requirements of cntical investment projectsin basic infastucture and public services. Investment requirements in the oil sector, in particular, willbe relatively large in the next few years in order to develop new oil and gas fields and to ensure that

Executive Summary ix

sufficient export pipeline capacity exists to transport the new production. There is a large scope for directforeign investment in these areas. The telecommunication agency has very little resources available forthe capital development required to support the desired economic growth. Capacity utilization ofavailable lines is extremely high (98 percent) and the average age of the network is 25 years. Inagriculture, projects supporting decentralization of agricultural marketing and input distribution,rehabilitation of irrigation systems, and research and extension to support land privatization will alsorequire large external assistance.

The external financing requirements, including Kazakhstan's debt service obligations forits share of the external debt of the FSU, reserve build-up and clearing of arrears, are estimated atbetween US$2.2 and US$2.4 billion in 1993, and is expected to be between US$1.7 and US$2.0 billionin 1995. Whether or not FSU debt repayments are deferred, the interational financial community,including multilaterals, will need to finance between US$l.5 and US$1.7 billion in 1993.

Mobilizing these levels of external resources will reqiire a major effort on the part of theGovernment, the Il's and the donor community, including possibly debt relief. The role of directforeign investment, estimated to rise from between US$380 and US$580 million a year in 1993 to justunder a billion in 1995, will be particularly important in the energy sector. However, foreign directinvestment will not be en important source of net inflows in the short run (large imports are associatedwith these flows), unless it is used for purchasing assets that are being privatized. The remainderfinacing of the gap will need to come from multilateral sources, bilateral programs, export creditagencies, and commercial creditors. Technical assistance requirements, estimated at $60 million - $70million a year are expected to be mostly met with grant type financing. Some concessionality, forbalance of payments and project financing, should be secured at least for the initial years of the transition.

The medium-tern creditworthiness of Kazakhstan depends on both the success of theoverall reform program and a timely increase in oil exports - The Government of Kazakhstan w1il needto develop a track record of unwavering reform effort. Moreover, if existing energy sector developmentsoccur as envisaged, the additional oil exports should be capable of financing Kazakhstan's developmentin the medum-term. The Government of Kazakbstan must therefore manage this process carefully, andensure that existing commitments made to joint-venture partners are met, within budget and on time. ForKazakbstan's full potential to be reached, the international financial community will need to provideconcessional support in the short-term. This will underpin the adjustment program and provide criticalsupport during the difficult early stages of transition. With international support in the initial stages,Kazakhstan has a real possibility of moving to a sustainable growth path which does not require on-goingextemal financial assistance.

Kazakhstan's inidal stock of extermal debt, which corresponds in around 30 to 45 percentof GDP, is comparatively low by international standards. With principal debt deferral over the periodto in 1995, the debt service ratio is expected to remain under 15 percent. Provided that new oilproduction can be brought on stream for export over the next three to four years, Kazakhstan's foreignexchange earning capacity is expected to be sufficient to meet future debt servicing obligations arisingfrom the financing of the projected external gaps. If Kakhstan agrees with Russia to exchange its claimon FSU foreign assets for its share of FSU debt (and obligations), then Kazakhstan's creditworthiness willbe significantly improved, and the economy would be able to sustain a higher level of imports over thetransition period.

x Executive Summary

Condcsion

Failure to resolve outstanding issues on the ground rules and operation of the ruble zone,lack of solution to the collapse of the inter-republican payments system, slow progress on structural andinstitional reform, slippage on the fiscal front, restricted access to foreign exchange and the inabilityto bring to fruition plamned investments in the energy sector, would jeopardize the success of the reformprogram. The success of the program also hinges upon the building up of the institutional capacity toimplement it.

The dual challenge of stabilization and structural reform that Kazakstan, along with theother FSU countries, is facing is historically unprecedented. The Govermment has moved decisively andadopted an ambitious program to achieve both objectives. As output and consumption contracts, therewill be pressures to move away from the fiscal austerity dtat stabilization requires. Further pressure toderail the refonr program will come from those who have a vested interest in maintaing the status quo.It is critical to maintain the political support and the momentam of the reform program. Populistspending policies to address discontent are likely to destabilize the economy and breed uncertainty. Thepath that the Goverment has embarked on has a lot of rislk, yet the most critical risk is to waver.

PART I

THE FRAMEWORK

Part I of the report discusses the political and macroeconomic conditions under whicheconomic reform in Kazakhstan has begun (chapters I and 2), and then considers the adjustment path andexterial financing requirements of the economy over the medium term (chapters 3 cnd 4).

Although the existing economic structure, which is orientated toward the supply of rawmaterials and intermediate goods, will make adjustment to market conditions a much less painfulexperience for Kazakhstan than for other former Soviet Union (FSU) countries, macroeconomicstabilization and extensive structural reform are essential if Kazakhstan is to adjust quickly to the realitiesof a market economy. The dissolution of the Union has come at some cost for Kazakhstan, as it hasdisrupted pre-existing trade within the FSU and has cut off fiscal support from the center. Priceliberalization has accentuated the existence of monopolies in the short run, and the ruble zonearrangements have heightened the need for fiscal discipline. The medium-term outlook may be promnisingif the reform program can be implemented successfully, and Kazakhstan is able to develop its rich energyand mineral resources. Adjustment will not be easy, and Kazakhstan will need the assistance of theinternational financial community over the next three to four years to smooth its transition to a marketeconomy.

CHAPTER 1

THE DISINTEGRATION OF THE UNION'

In December 1990, the International Monetary Fund (IMF), the World Bank, theOrganization for Economic Cooperation and Development (OECD), and the European Bank forReconstruction Development (EBRD) published The Economy of the USSR: Summary andRecommendations. This study (known as the Joint Study of the Soviet Economy, or JSSE) made specificreconmuendations for economic reform in the USSR and suggested a framework within which Westernassistance could be rendered; it was the first comprehensive study of the USSR economy in which theWorld Bank participated. Yet the timing of the JSSE coincided with the beginnings of a dual system ofgovernment authority, and, consequently, with divergent tracks of economic reform. This chapteroutlines the political sources of that divergence and its ultimate impact on the economic reform processin the Soviet Union from mid-1990 to the end of 1991.

Hopes for a single reform. process in the Soviet Union could not be sustained muchbeyond mid-1990. The first democratic competitive elections at local and republican levels ofGovermnent in the Soviet Union were held in March 1990. While the openness of the elections did notprevent communists from gaining a majority of seats in many institutions (as they had in the March 1989elections to the Union legislature), the 12-month time lag between the Union and republican-levelelections led to a situation in which most republican legislatures were significantly more reformist thanthe Union Supreme Soviet. This in turn meant that the more committed refonners conceived theirpolicies and programs in a republican, rather than a Union, context. Thus, while it was not necessarilyeven the reforners' original intention to dismantle the Union, the republican structure in which thesereformers were operating conflicted with the imperatives driving the Union Government to maintain itsinstruments of power for the very purpose of conducting reforms. The eventual emergence of multiple'tracks" of reform was inevitable.

Thus by September 1990 two competing programs were under active discussion: theUnion "Ryzhkov" Plan (named after the Union Prime Minister at the time, Nikolai Ryzhkov), and the"Shatalin" Plan (named after its primary author, Academician Stanislav Shatalin). The Shatalin Plan wasin many ways a challenge from the Russian leadership to the Union authorities' claim to be the arbitersof economic reformn. Although its authors were drawn from both the Union (President's) and Russian(President's) groups of advisers, the plan had initially been presented to the Russian Supreme Sovietrather than the Union Supreme Soviet. The Ryzhkov Plan, formulated shortly thereafter, was the Union'sresponse to that challenge.

Not unexpectedly, the Shatalin Plan gave greater freedom of decision making to therepublics, and in many ways was more radical than the Ry-Nrkov Plan. The Shatalin Plan was also calledthe "500-Day Plan" because it envisaged a very specific timetable of reforms-particularly regardingprivatization and price liberalization. It also assigned primary taxing authority to the republics, with theUnion budget to be funded through negotiated shares of the republic budgets. The Ryzhkov Plan, bycontrast, advocated a slower pace of reforms and did not cede significant powers to the republics.

This chapter is taken frinm World Bank, Russian Econonzc Refonn, World Bank Country Study, 1992, Chapter 1.

4 Chapter 1

The so-called Presidential Guidelines issued in the fall of 1990 represented the fairlynarrow field of consensus between these two programs. That consensus, however, was limited to somegeneralized goals and failed to specify a timetable for achieving these goals. In p-ticular, the Guidelinesgranted republics considerable freedom over the pace of reform and the formation of republican fiscalpolicies-without political agreement as to how or whether republican actions could be limited when suchactions threatened the Union reform program. Meanwhile, the economic situation in 1990 had beenmarked by strikes, inter-ethnic strife, the collapse of the Union-wide market owing to the raising ofrepublican and even local barriers to trade, and a breakdown of the system of state orders. As the partyapparatus-the core mechanism of informal coordination and management in a planned economy-beganto be deliberately weaned from its central role in the economy, the inflexibility within the Soviet economybecame apparent through the first decline in output in the peacetime history of the Soviet Union.

Significantly, none of the alternative recommendations for economic reform advocatedfinding a "third way,' or a "controlled market," as a solution to the USSR's economic ills. The RyzhkovPlan, the Shatalin Plan, and the Presidential Guidelines differed, not on the need to achieve financialstabilization, price reform, or privatization, but on the ways in which (and at what pace) these goalswould be achieved. Although the JSSE was critical of the gradual pace of reform envisaged in thePresidential Guidelines, it recognized the fact that the Guidelines did not seek a half-way approach toreform. As it tumed out, however, the critical difference between the Shatalin and Ryzhkov programswas that the Shatalin Plan proposed to resolve the general govermnent deficit by curtailing the Union'sindependent revenue-raising capacities while the Ryzhkov Plan foresaw no such devolution of fiscalcontrol. It was a difference that the Presidential Guidelines could not bridge, and this failure eventuallymanifested itself in the bankruptcy of the Union budget. Moreover, the Guidelines could not reconcilethe allocation of fiscal revenues and responsibilities between the Union and the republics-not so muchbecause such a compromise was economically infeasible, but because the center's political power andauthority to resolve that contradiction and enforce an effective compromise was being continuously erodedin 1990 and 1991.

By the latter half of 1990, republican unrest had increased considerably, and PresidentMikhail Gorbachev was widely viewed as being susceptible to increased pressure from conservatives.The crackdown in the Baltics confirmed these suspicions and served to flrther fuel separatist tendencies.In tune with these political and military measures, the economic policies of the Government took aconservative turn; in October 1990 the Govermnent decreed that all enterprise ties were to be frozen, andin January 1991 the Government authorized police and state security agencies to investigate businessesfor violations of state laws and regulations.

Thus, even as some of the objectives outlined in the Presidential Guidelines of 1990 werepassed as laws in t991, general economic, political, and legal disarray precluded their implementation.Economic relations between the Union and the republics for 1991 had been agreed upon in April 1990(and confirmed in January 1991), but the republics avoided implementation of the law by signing treatiesand economic cooperation agreements with each other anc by withholding tax revenues due to the Unionbudget. A so-called War of Laws began in which republican authorities began drafting and enactinglegislation in areas which were also the subject of Union legislation. In Russia, the same Shamalin Planthat had ultimately been rejected by the Union legislature had been approved by the republican legislature.Of greater consequence was the fact that the tax laws of the Union began to be defied as the Russianrepublic began issuing independent republican tax regulations. For example, the Union tax lawestablished a profit tax rate of 45 percent, but the Russian Federation offered enterprises a 38 percent

The Disintegration of the Union 5

rate. In the process the Russian Federation also undertook to retain a greater share of that tax than hadbeen agreed to with the Union in 1990. By 1991 it was clear that the republics' blatant disregard of theUnion's attempts to achieve macroeconomic stability had the`r basis in political desires for independencerather than in any differences of economic thinking.

By April 1991 the Union budget had already reached the projected deficit lvel for thewhole year, and was, in practice, bankrupt. The "Anti-Crisis" program, based on the agreement of ninerepublics, sought "the unconditional fulfillment [of obligations of Union bodies and republics outlined inthe economic agreement of 1991] primarily as regards budgets and the formation of extra-budgetaryfunds." It also sought to carry out a tough anti-inflationary monetary policy, to further liberalize prices,to take various measures to halt output drop. and to secure the social safety net. Although in some casesthe program made expedient concessions to political pressures-such as its willingness to consider wageindexation-this program was understood to be necessary to sustain economic reform, politically as wellas economically. The agreement of the nine republics could nu: be sustained; the "Anti-Crisis" programwas almost immediately preempted by other arrangements arrived at in the course of negotiations towarda Union Treaty between April and August of 1991.

Thus, by the spring of 1991, a crisis of governance began to supersede the economicreform program in the Soviet Union. There was no clear authority left in the Union to implement anyprogram of reform, however promising. One of the last Union plans for economic reform was drawnup in May 1991-the "Window of Opportunity,' better known as the Aliison-Yavlinsky Plan, after itsmam authors, Graham Allison and Grigory Yavlinsky. This program acknowledged the crisis ingovernance by positing that political restabilization was a prerequisite to economic reform. To that endit recognized the impossibility of achieving economic reform without the explicit consent of republicanauthorities; it proposed basing economic reform on a "Nine-Plus-One" agreement, and incorporated thesigning of a Union Treaty and the adoption of a new constitution as an integral part of an economicreform program. In addition, it detailed stages and scales of Western economic assistance to the Union.The drawback, nf course, was that the plan proposed to delay many economic reforms until after thestabilization of a new political union.

The very process of drafting a new political basis for the Union consolidated theopposition of the conservative forces. The opposition's coup attempt of August 1991 succeeded indestroying the very thing the coup had set out to preserve-the Union. The political authority of theUnion and of President Gorbachev himself were seriously undermined by the coup; in tum, only BorisYeltsin, who had been elected to the newly created presidency of the Russian republic two months earlier,emerged as the defender of democracy and the Russian republic. The two-mont hiatus that followed wasmarked by enfeeoled union Treaty negotiations and some puzzling inactivity on the part of the Russianleadership. While the Russian republic continued its policy of bankrupting the Union Government, theleadership did not appear as opposed to the Union Treaty as was the Republic of Ukraine.

In November 1991, the Russian leadership announced the appointment of a newGovernment, and oudined its commitment to radical economic reforn. The program included: (i) priceand wage liberalization by end-1991; (ii) commitment to a tight monetary policy, fiscal reform, and rublestabilization; (iii) privatization of up to 50 percent of all small- and medium-size enterprises within threemonths; (iv) the halting of the funding of defense, foreign economic aid, and 73 all-Union ministries andcommittees; (v) the supplementing of the social safety net; and (vi) a qualified commitment to an inter-republic Central Bank. Of these objectives, only the fourth was implemented without delay, thus

6 Chapter 1

completing the process of extending Russian Govermnent control over Union government functionsdtrough their forced dependence on the Russian Government for funds.

The Soviet Union was declared dissolved on December 8 by the signatories to the MinskAccord (Belarus, Ukraine, and Russia). The dissolution was finalized upon the resignation of Gorbachevas President of the USSR on December 25, 1991.

CHAPTER 2

THE MACROECONOMY

KAZAHSTAN IN PERSPECTIVE

Kazakhstan's Parliament declared independence on December 16, 1991. PresidentNursultan Nazarbayev was re-elected President of the Republic as a result of the general ballotpresidential elections. The current Parliament, whose term expires in 1994, is preparing a newconstitution for the republic. The President publicly endorsed the Government's intention to design andimplement a refonn program in order to transforn the economy of Kazakhstan into a market-basedsystem. Since independence, the President and the Government have been strong proponents of theprinciple of maintaining economic ties with the other republics of the former Soviet Union (FSU).Kazakhstan applied for membership in the IMF and the World Bank Group in January 1992, and becamea member of the IMF, IBRD, IDA, MIGA, and ICSID in July 1992.

The first part of this chapter provides a brief overview of Kazakchstan: its people,geography, and economic character. The latter part provides an assessment of macroeconomicdevelopments during 1991 and 1992.

Geography and Demography

Kazakhstan has the second largest land mass in the FSU. With a 1991 population of 16.7million, or 6.1 per square kilometer, it is one of the most sparsely populated regions in the world. Thisrelatively small population lives on a proportionately large share of FSU arable land, as wel' as on largeendowments of precious minerals. Its landmass is five times that of France, but with only one-third ofF*rance's population.

This land is full of contrasts: fertile valleys border on dry and barren endless steppes.There are high mountains and depths that reach below sea level. The climate is sharply continental withthe difference between the coldest and the hottest day of the year at times reaching 162 degreesFahrenheit.

The largest ethnic group, the Kazakhs, draws roots from the Mongols, who conqueredthese lands in the thirteenth century and mixed with the various local tribes of nomads. Before theOctober 1917 revolution, the Kazakhs were nomads. Animal husbandry was their main occupation.There were neither schools nor books, since the Kazakhs did not have a written language of their own.Today, more than a hundred nationalities live in Kazakhstan. Kazakhs and Slavs constitute the two mostimportant ethnic groups. Significant German and Korean conununities are setded in the Republic as well.Currently Kazakhs rTepresent slightly more than 40 percent of the population and Russians slightly lessthan 40 percent with the remaining 20 percent distributed over the other nationalities.

The country borders Turkinenistan, Uzbeldstan, and Kyrgyzstan in the south, and isbounded by the Volga River, the Ural Mountains and the west Siberian regions of Russia in the north.Kazakbstan has a common border in the east with the Xinjiang Province of China and reaches as far westas the Caspian Sea.

8 Chapter 2

Economic Structre

Kazakhstan is richly endowed with natural resources. It is an important producer of gold,iron ore, and coal, copper, chrome, wolfram, and zinc. Although Kazakhstan has only 6 percent of theFSU total population, it has 90 percent of the total reserves of chromium, and close to half of the totalreserves of lead, wolfram, copper, and zinc. It has about r percent of the FSU iron ore reserves (Table2.1). In 1989 it produced about one-fifth of the FSU gold and coal. Other mineral resources found inexploitable amounts within the economy are oil, natuiral gas, nickel, titanium, tungsten, molybdenum,lead, zinc, manganese, and aluminum.

The countryTable 2.1: KAZAKESTAN: MINERAL ENDOWMENTS AND is a producer and net

ENERGY PRODUCTION exporter of oil and gas..__ __ ___ __ __ ___ __ ___ __ __ ___ __ ___ __ _ Recoverable oil reserves are

Cenual estimated at 12 billionAsian KAZ/ barrels. The current level of

Kazakhstan Republics* Russia FSU production is 470,000

Gold Production 69.0 43 344 20% bbl/day. Kazakhstan ranks(Metric Tons, 1980) second in oil production after

Russia. Although it accountsIon Ore Reserves 7.6 0 45.5 17.5% for only 6 percent of FSU(billion r-ons, 1990) production, its petroleum

OR Producuion 1989 34.0 6 607 6% potential is considered(mil. metric tons. 1989) exceptional by the

Natural Gas, 1989 7.0 131 796 1% international petroleum(billion cubic meters) industry. Production isCoal, 1989 130 18 740 19% located in the westem part ofCnilion m. tons) the republic while most of its

population and the two* Kyrghyzstan, Tadjikistan, Turkmenismn, and Uzbekisrn largest refineries are located

in the eastern part. Themajority of the country's production is, therefore, exported to western Russia, while crude oil for itsrefineries is imported from central Siberia. Much higher production levels are expected as newsupergiant oil fields are brought on stream by international petroleum companies.

Industry which accounted for about 40 percent of GDP in 1991, it is dominated by miningand processing activities, largely geared to exploiting the rich natural resource base. There are processingplants for both ferrous and nonferrous metals, especially in the northern and eastern sections of theeconomy close to the mineral deposits. Local industries produce heavy machinery and tools. Refineriesand petrochemical plants also take advantage of the existing hydrocarbon resources. Besides theseindustries, Kazakhstan has a variety of agro-processing industries, including meat and fish canneries,wineries, and footwear and textile manufacture.

The Temirtau Karaganda Metallurgical Combine, which operates a number of blastfirnaces and steel mills, is the republic's largest industrial enterprise in terms of output value. In 1989it had 28,200 employees and its output was valued at over US$2.0 billion. In terms of number ofworkers, however, it is much smaller than the Karaganda Ugol anthracite coal mines (with 65,200

The Macroeconomy 9

workers). There are five other large enterprises, each with more than 10,000 workers, in mining andminerals (copper, lead, zinc, iron ore, and coal). In the machinery and equipment subsector, the largestsingle enterprise is the Paviodar Tractor Works (20,000 employees and a 1989 output valued at close toUS$1.0 billion).

Kazakhstan has about 20 percent of the arable land of the FSU. This vast area supportsa wide variety of rainfed and irrigated agriculture and the country is a significant producer and exporterof agricultural products. Livestock husbandry is the traditional industry of the indigenous population,based on the extensive opportunities for grazing. Agricultural production constituted about 34 percentof GDP in 1991. The most important agricultural products include wheat, maize for fodder, livestockproducts, cotton, and wool. Agro-industries exploit the production of cotton and sugar beets in the southas well as the fruits and vegetables grown throughout the economy.

As with other FSU republics, Kazakhstan's economy is closely linked with the economiesof other FSU republics, especially Russia. Exports to Russia comprised about 60 percent of total exports,while imports from Russia accounted for over two-thirds of total imports in the late 1980s. About lbpercent of exports, and 12 percent of imnports, were to countries outside the Commonwealth ofIndependent States (CIS) in 1991. China has been the largest of these trading partners, followed by someEastern European countries.

The traditionally close economic ties with other FSU republics is reflected in therepublic's infrastructure, which is largely geared to serving the economy of the CIS without regard torepublican borders. The transmission/distribution networks for electricity in the north and south ofKazakhstan are not connected for exchanging electric energy, although the southern network is connectedto the Russian grid and the northern network to the grid of the southern republics. The transport andcommunications system connects Kazakbstan with Russia, rather than with points within Kazakhstan.

Kazakhstan within the FSU in the 1980s

Kazakhstan's NM growth rate during 1986-89 averaged 1.9 percent per annum, lowerthan that for Russia and lower than the average for the Central Asian Republics (Table 2.2).Kazakhstan's per capita NMP grew at 0.9 percent during 1986-89, compared with an average of 1.8percent during 1971-85.

As can be suggested by its relatively constant share of total FSU population and economicactivity, Kazakhstan's economic structure changed little during the 1980s (Table 2.3). Citizens receivedincome and amenities that were about average for the Soviet Union. although slightly below those ofRussia. The comparable wages for Russians were 1.052, 1.059, and 1.08 of the Union average in 1980,1985 and 1990 respectively. The corresponding wages and amenities for citizens of the Central AsianRepublics were less than those for Kazakhstan. The average monthly wages for Uzbekistan, for example,were 0.92, 0.86 and 0.78 of the Union average for the respective three years.

Social indicators are high by Western standards and compared with the rest of CentralAsia. However, they are slightly lower than the average for the FSU (Tab,- 2.2). Infant mortality is

10 Chapter 2

26 per 1,000, lower than in Europe (30per 1,000), but higher than in Russia Table 2.2 KAZAKISTANa n d t h e _FSU'. Life expectancy is 69 years, CARwhich is similar to the average in upper Kazakhstan & KAZ. Russia FSUmiddle income countries, is higher thanEast Asia, and is one year lower tan in hvesmenrt/GDP (1989) 29% 26% 30% tr305)Russia and the FSU. Adult literacy is Average growth (198-89) 1.9% 2.8% 2.5% 2.7%comparable with that in economies with Populaton Growth (197949) 1.2 2.4 0.7 0.9per capita GDP above US$6,000 in Infan Mortality (per 1000)1988. (1989) 25.9 38.7 17.8 22.7

Uft Expectancy (years. 1989) 68.7 68.2 69.6 69.5Because of the country's Km of Railways(thousand kIn)

size and low population density, its (1988) 5.4 4F/ 5.1 6.5infrastructure per 1,000 square Hard surface roadkilometers is similar to that of Russia, (per thousand bms. 1988) 38 57.8F1 36.3 58but is lower than that for thfe rest of the Land area (million sq. kn) 2,717 3,994 17,075 22,402FSU, including Central Asia. There are Populaton (millions. 1989) 16.5 49.3 147.4 2895.4 kilometers of railways per 1,000 F= Averagesquare kilometers, and 38 kilometers ofhard surfaced road per 1,000 square Kyrghyzstan, Tadjikismn, Turkmenistn, Uzbekistnkilometers (while Central Asia has anaverage of 57.8). However, when multiplied by the country's total area, this network is very substantive.For example, within the FSU, Kazakhsran Railways is the third largest railway system after Russia andthe Ukraine in terms of traffic volume and rolling stock.

RECENT ECONOMIC PERFORMANCE

Kazakhstan's transition to a market economy began in 1991 with tentative privatizationand institutional measures. The reform gathered momentum in January 1992 with extensive priceliberalization. The process has been sustained during 1992, with a number of initiatives across all areasof state involvement in the economy. Price liberalization brought about a massive adjustment in relativeprices, partially correcting the distortions inherited from the previous price controlled economy.However, the monopolistic structure of many economic activities seemns to have accentuated the priceincreases which followed the January price liberalization. In addition, as a member of the ruble zone,Kamzkhstan shared the effects of the monetization of the large budget deficits that have occurred in otherruble zone republics.

The main macroeconomic trends, discussed in greater detail in the following pages, canbe briefly summarized as follows: GDP in real terms is expected to decline by 14 percent in 1992. Thisbrings the cumulative decline since 1990 to about 21 percent. While this is smaller than the declines inin Russia and some other republics, it still means a significcnt decline in consumption and investmentlevels. Retail prices jumped by 235 percent in January 1992 when most prices were liberalized.

I WDR 1992, Tablc 28.

The Macroeconomy 11

Although the rate of inflation decreased sharply in the following monfts, the most recent figures (forSeptember) indicate a monthly rate above 10 percent, and the cumulative increase between December1991 and December 1992 is expected to be about 1600 percent. Rcported wholesale prices haveincreased far more rapidly than retail prices. Real wages, production of consumer goods, and privateconsumption expenditures were all falling in 1992. Although the state budget registered a modest surplus(on a cash basis) through the month of August, the deficit in the state budget for the year as a whole isexpected to be about 1 percent of GDP. However, when extrabudgetary expenditures and funds are takeninto account, the consolidated deficit for 1992 will probably increase to about 6 percent of GDP on a cashbasis. Comparing the amual average for 1991 with the projected average for 1992, the increase in thelevel of retail prices is expected to be 1,200 percent. The increase in the GDP deflator is expected tobe substantially greater because of the relatively more rapid increases in wholesale and energy prices.

The ruble money supply is expected to grow by nearly 540 percent during the year;because of the increase in velocity, this is only about one-third of the rate of inflation (as conservativelymeasured by the retail price index). Although credit to the economy is growing more rapidly (e.g., itis expected to increase by about 1,135 percent during the year), the increase in credit is running wellbehind the increase in the nominal level of economic activity. Consequently entexprises perceive thesituation as one of tight credit. Most of KazakbsEan's external trade has been with Russia and other CISrepublics; as a result, the trade figures expressed in US doilars are strongly influenced by the exchangerate changes that have taken place. Although the exchange rate had been overvalued in 1991, by thelatter part of 1992 the ruble haJ become seriously undervalued. Kazakhstan is expected to run a currentaccount deficit of nearly US$3.0 billion in 1992, of which US$324 million will be in convertiblecurrencies and the balance will be in rubles. The large mble deficit is being financed primarily by netcredits from Russia. The convertible currency deficit is financed by a combination of direct foreigninvestment, some net long-term borrowing (after debt deferral), and a large increase in arrears.

Aggregate Demand and Output

Developments in 1991. Kazakhstan experienced a drop in GDP of just under 7 percentin 1991, beore price liberalization and other market reforms. The output decline in 1991 was not,therefore, primarily a consequence of market reform. The 1991 contraction resulted prinarily from thedisruption of economnic ties with traditional sources of supply and markets. A severe drought alsocontributed to poor economic growth in 1991, as agricultural production fell by 14 percent in real terms.

There are two main factors behind the contraction in output in Kazakhstan and other FSUrepublics: (i) the breakdown of supply links between enterprises within the FSU, and (ii) the fall in non-CIS foreign trade, when export trade with Eastern Europe, in particular, collapsed Under the previoussystem, the Government ensured that firms received the inputs necessary to fulfill their output plans. Asthe centralized system partially disintegrated under the pressure of political developments, firms had tobuild up their own links with suppliers and customers in an enviromnent of widespread scarcity andincreasing reliance on barter trade. The breakdown of inter-enterprise links, coupled with the collapseof export trade, resulted in major shortages of intermediate inputs. Under the earlier system of centralplanning, there was considerable regional specialization in industial activity, and the republics of theUSSR were more than ordinarily dependent on their neighbors for intermediate inputs. Consequently thebreakdown of established trade relations led to supply disruptions that were quickly translated into largeoutput drops.

12 Chapter 2

Developments in 1992.Table 2.4: Indicators of Output and Expenditures The decline in economic activity(Jan.-Sept. as percent of same period of prior year) accelerated in the first three-quarters of

1992. However, the preliminary1992 1991 Goskomstat ( State Committee orover over Statistics) indicators available for this1991 1990 period (see Table 2.4) do not tell a

consistent story. If the first nine monthsGross National Product 87.3 92.0 of 1992 is compared with the smne periodIndustrial Production 85.2 99.1 of 1991, the decline in GNP is estimated

at 12.7 percent and the decline inConsumer Goods Production 76.0 99.1 industrial output is estimated at 14.8Retail Turnover (constant prices) 58.5 86.9 percent. This difference is small and is

more than explained by the improvedState Construction 68.5 78.3 agricultural output (after the previous

(placed in service) year's drought). The available indicatorsof both consumption and investment

Source: State Committee on Statistics. expenditures, however, suggest that thedeclines may have been larger.

Consumer goods production was down by 24 percent from the same period for the previous year andretail trnover (measured in constant prices) was down by over 40 percent. The decline in the volume(in square meters) of state-financed constuction placed in service also suggests that investment demandwas substanially reduced. Given the inconsistencies in the available data, substantial uncertainty mustsurround any estimates for the year as a whole. The decline in the volume of retail trade is probably lessthan is indicated in Table 2A because of the increasing volume of trade taking place in free markets.Pending more complete information, we are estimating the decline in GDP in 1992 at 14 percent. Therecovery in agricultural crop production (following the drought-induced drop in 1991) and themantenance of existing oil production levels helped lmit the decline during this year.

The resources available for consumption and investment in 1992 were affected not onlyby the decline in output, but also by the decline in the net inflow of real resources from abroad. Theresource balance (the deficit in the BOP on goods and non-factor services) fell from 18 percent of GDPin 1991 to an estimated 15 percent in 1992. We estimate that (when 1991 data are expressed in 1992prices and exchange rates) the decline in investment between 1991 and 1992 will be about 24 percentwhile the decline in consumption will be at least 6 p.acent. If the resource balance falls below thepresently projected 14 percent of GDP, the decline in consumption will be correspondingly greater. Itis estimated that fixed investment expenditures are falling to close to half of the previous year's level,but total investment expenditures are held up by an unusually high level of mventory investment. As aresult of reduced demand and tighter budgetary control in the public sector, new capital investment inmost sectors came close to a halt in the second half of 1992.

The Macroeconomy 13

Table 2.5: Trends in Retail Prices and WagesBase for Indices: December 1991 = 100

-Retail Prices- Average Wages-% Change from Nom. Real

Prior Jan. Rb per Wage WageIndex Month 1991 Month Index Index

1991:January 43 - - 2654 60-2 141A4Febuary 46 7.5 7.5 265.4 60.2 131.5March 48 4.4 12.3 265.4 60.2 126.0April 77 60.5 80.2 303.9 68.9 89.9May 81 5.2 89.6 303.9 68.9 85.4June 82 1.5 92.5 303.9 68.9 84.2July 82 0.0 92.5 335.5 76.1 92.9August 83 1.0 94.3 335.5 76.1 92.0September 84 1.5 97.2 335.5 76.1 90.7October 88 4.3 105.7 440.8 100.0 114.2Noveiber 92 5.5 117.0 440.8 100.1 108.2December 100 8.3 134.9 440.8 100.0 100.0

1992:January 335 235.3 687 1280 290.4 86.6February 457 36.1 972 1340 304.0 66.6March 579 26.7 1259 1584 359.3 62.1April 693 19.8 1527 2016 457.4 66.0May 805 16.1 1789 2593 588.2 73.1June 921 14.5 2063 3599 816.5 88.6July 1034 12.3 2329 3630 823.5 79.6August 1141 10.3 2581 3862 876.1 76.8September 1292 13.2 - - - -

Source: State Committee on Statistics

Prices and Wages

Before 1991, prices were remarkably stable throughout the Soviet Union. The retail priceindex was only 8.3 percent higher in 1990 than in 1985. After 1987 rising pressures on demand beganto be felt as a result of both increased nominal wages and budgetary deficits. But prices were kept undercontrol, so that the result was a combination of shortages, growing black markets, rationing by queuing,forced saving by households, and a "monetary overhang." Retail prices started to increase in April 1991when, in an effort to control budgetary expenditures, subsidies on many consumption goods were largelyeliminated. While wages rose at the same time, the increases were not sufficient to keep up with prices,and thus real wages fell below the levels at the beginning of 1991.

14 Chapter 2

On January 3, 1992 it was decreed that prices of all but a limaited number of essentialgoods and services would be determined by supply and demand. About 80 percent of wholesale pricesand 90 percent of consumer prices were freed in January. Essential goods and some critizal inputs whererapid producer adjustment was difficult (such as energy and freight) remained administered, but wereincreased by three to seven times. In May, wholesale crude oil and coal prices were decontrolled, raisingoil prices, in particular, from 350 rubles per ton to around 6,000 rubles per ton in July. This representedthe cost of importing petroleum from Russia (since the refineries, located in the eastem part of therepublic, are supplied from Siberian fields even though Kazakhstan is a net oil exporter). But it was stillonly a fraction of the world price- Average nominal wages have risen, although less rapidly thaninflation. The minimum wage increased to 600 rubles on May 1. 1992, but remained far below theaverage monthly wage in the government sector of 1,393 rubles/month for the first quarter of 1992.

Retail prices rose sharply inPrices of all but a limited nuaber of esssidal toods and srwic weir January 1992. The increase of 235 percentiberaed in lanuay 1992. Most of reaining pric contrels werSUb=eUeny tco)Vcd, ath0ough a few items skil reain under contL reflected both what was needed to absorb the

monetary overhang" and the increased monetaryTrice Controk Pcmoved Aftcr May 1992 demand resulting from the large wage increases

Consumer Pducts Producer Prducts which accompanied the January priceliberalization measures. Prices continued to

.miLl and daizy produs of lowr cleanc and Ih poera-fat cmn doal m increase in the following months, but at a.table sh oi1. oil and gas coi2entates progressively slower rate until monthly inflationsugar -namral nd liquiied gasv-egeable il omorw ad boiler mmfi, dropped to 10.3 percent in August (see Tablevodka mi drinking acoh1 kerosene 2.5). The monthly increase iu retail prices rosebeatng fueis (for consuwer use) preeious meals and albysatchcs preciousand siprecos slightly in September, to 13.2 percent Assuming

meicns n- - that inflation averaged 10 percent a month in the

artidci lints; prosphycri crg tansita(nil. motor last three months of the year, by December 1992adw oter aids for rehabiliation river, air and pipdine) retail prices would be 1,600 percent above theof invalids" level of the previous December. On an annual

average basis, the inflation would be somewhatRemainins Controlled Prices less - but still over

s tme s orf brd and flour 1,200 percent.children's nutrition, including

rood p tns it d buic Price liberalization has improvedcorruunicadon services the availability of goods. There are generally

-~tWI. *liesci Rick. kerosene good supplies of meat, fnuits, and vegetables.If Provided truh social safety net rgememns Those relatively few products still under price

controls may be difficult to find in state shops butBox 2.1: Deregulation of Prices are available in informal markets. However, the

remaining controlled prices pose another type ofproblem: the interaction of price decontrols with

price ceilings still applied on some goods (mainly on some basic foods, energy, rents, utilities, andtransport) gives rise to new distortions in relative prices. Partial price liberalization could lead to adeterioration in the financialsituation of the producers of those goods that remain administered.Alternatively, it could lead to a buildup in subsidies, which would worsen the budgetary situation andfiuther fuel inflation.

The Macroeconomy 15

By August 1992 real wages, as conventionally measured, had fallen to less than 60percent of the average level in the first quarter of 1991 (i.e., before the first steps were taken to reducesubsidies and liberalize prices). However, the conventional measure (of dividing nominal wages by a costof living index) is seriously misleading in the present case. In 1990 and early 1991 wage earners wereforced to save (in the form of increased cash balances) a substantial portion of their earnings simplybecause the goods were not available in the stores. Assuming that 25 percent of wages went into suchforced savings, the adjusted index of real wages would be 100 for the first quarter of 1991 rather thanthe conventionally calculated figure of 133 (see Table 2.5). The price increases that had taken place byFebruary 1992 may be assumed to have eliminated the monetary overhang. Consequently, the trends inthe real wage index shown in Table 2.5 for the period since January can be taken as an indication of themovements in effective real wages. While it's still significantly below the adjusted level for the firstquarter of 1991, the decrease has been much less than would be indicated by indices not adjusted forforced saving and the monetary overhang. The observed decrease in effective real wages reflects the factthat, although output fell, enterprise managers generally kept all workers on the payroll. The fall in realwages is, in effect, a way of paying for this particular form of social safety net. Minimum wages fellmore sharply than the average wage. The minimum wage was Rbs342 when at the beginning of 1992but was increased to Rbs600 in the second quarter and again to Rbs900 in the fourth quarter. However,this is an increase of only 163 percent during a period when the retail price index was expected to growby about 1,600 percent.

The most important explanations for the rapid inflation in 1992 clearly are the absorptionof the monetary overhang, the initial increases in wages, and the subsequent monetary expansion (seeparagraphs 2.45 to 2A47 below). Some complementary factors should also be mentioned. First, a highdegree of economic concentration was convenient under central planning, but it meant that the economywas highly monopolized. Part of the increase in prices (and especially the increase in wholesale pricesof industrial products, which increased more rapidly than e retail price index) probably resulted fromthe abuse of monopoly power. Second, price liberalization took place when one of the few altemativeassets to money was the buying of consumer durables or the holding of inventories. The holding ofinterest-bearing monetary assets was unattractive given the low nominal interest rate and inflationaryexpectations. Third, insofar as the systemn of state orders remained in effect, the command nature of thesupply of many goods may have prevented an automatic supply response to moderate the pressures fromrising demand. Prices will not be able to fully fulfill their role in resource allocation until the state ordersystem is dismantled.

Fiscal Developments

Background. Major changes are taking place in Kazakhstan's fiscal system. Both theincreasing market orientation of the economy and the breakdown of the old Union revenue sharingmechanisms make these changes necessary. In the earlier centrally planned system, public finances weredominated by allocative and distributional concerns. Macroeconomic stability was maintained (at leastuntil near the end of the 1980s) by other means. The successful transition to a market economy needsto be based on a major transformation of fiscal policy instruments and objectives.

A large portion of budget revenues was collected through the public enterprise sectorthrough profit or tumnover taxes. Public enterprises also financed a wide range of expenditures that ina market economy would be fianced by the public sector. At the same time, the elaborate system ofproduct-specific turnover taxes and subsidies resulted in a substantive redistribution of resources among

16 Chapter 2

Table 2.7: Centrl Governmet Fiscal Operations in 199I(fm billions of curent rubles)

State Budnet Expected Outcome ofJune Budget Expectd Outcome Consolidated Accounts

Total Revenue and Grants 171.7 174.5 219.7

Tax revenues L51.7 163.7 186.5Non-tx revenues 20.0 10.8 10.8Grans - - 22.4

Total Expenditure 190.3 193.4 358A

National economy 41.6 46.1 46.1InvesUment Fund 24.1 23.4 23.4Socii-cultnral activities 71.8 70.0 70.0Public order and defense oudays 28.3 32.8 32.8Law enforcement 6.7 7.8 7-8General administration 7.1 9.2 9.2Other expenditures 10.7 4.1 81.7Stategic defense 10.8Soi safely net 43.4ifterest on external debt 33.2

Deficit (-) -18.6 -18.7 -138.7

Domestic fancing 18.6 18.8 98.8Foreign fmancing - - 39.8

Source: Intemational Monetary Fund staff estimates and Muiistry of Finance

households. Until 1990, the profit tax system was based on centrally established norms for contnbutionsto the budget, payments to workers, and the plan-determined investment needs of the enterprises.Turnover taxes also presupposed the Government's conttol over the prices of inputs and outputs.

The fiscal system was veryTable 2.6: Government Fmancial Operations cenalized at the Union level and

(% GDP) Kazakhstan was a net recipient of Unionsubsidies. Up to 1990, any deficit in therepublican budget was covered by the

1988 1989 1990 1991 transfer from the Union without anyinterest obligations. Transfers from the

Total revenue 25.8 25.7 22.8 21.1 republic to the Union were made as part ofTotl expenditures 34.6 36.6 33.4 36.0 upward revenue sharing arrangements, butNet tansferf. IUnion 8.2 9.8 9.3 6.7Balance excel. gants -8.8 -10.9 -10.6 -14.7 they were more than offset by the

subsidies from the Union to the republicanbudget. Total transfers to the budget wereover 10 percent of GDP in 1989 and 1990.

The Macroeconomy 17

In 1991, when republics began to hold back on the traditional upwards revenue sharing, the Union'ssubsidy to Kazakhstan dropped to under 7 percent of GDP (Table 2.6).

Almost 25 percent of state budget expenditures are for the "national economny" whichincludes subsidies to households and enterprises as well as transfers to public enterprises. Whilecapturing profits as budget revenues, the government has also supported inefficient monopolies andenterprises, through a variety of subsidies and transfers. Price controls also called for large outlays onconsumer and input subsidies. Socii-cultural expenditures, which include education, culture and the arts,health, and social security, account for over 35 percent of total expenditures in the 1991 budget.However, most of the social security programs were administered through extrabudgetary funds such asthe pension fund, the social insurance fund, and the employment fimd. The Union budget also financed"Group A" enterprises, such as transport and heavy industry.

In 1991, as the Union dissolved and the transition to a market economy began, the oldrevenue system became inadequate and decision making was transferred to the republics. Effective July1991, new comprehensive tax laws were introduced. Enterprises are now subject to profit taxes atproportional rates; individuals are subject to progressive income taxes. A sales tax (VAI) levied on theconsumption of commodities was also introduced. Finally, most Group A enterprises were shifted to thebudgets of the republics.

In 1991, the fiscal deficit, even after receipt of transfers from the Union, reached about8 percent of GDP; before ransfers, the deficit was over about 15 percent of GDP. This was a result oflower revenues, higher expenditures, and a drop in transfers (Table 2A6). In contrast with the past, whenthe republican Govemment covered all its operations wi transfers, the Government had to resort toborrowing from the National Bank in 1991, but at a relatively low interest rate of 6 percent. Thisinflationary financing of the 1991 deficit contributed to the repressed inflationary enviromnent beforeprice liberalization and accentuated the post-refonn adjustment.

The fiscal picture changes substantially when extrabudgetary accounts are added. Whilecurrent account receipts increase as a result of grants and taxes on international trade, the increase inexpenditures is far greater. On a consolidated basis the expected 1992 deficit rises to Rbs138.7 billion.

18 Chapter 2

The Outlook for 1992. In December 1991, the 1992 budget deficit was projected atRbs7.7 billion, or 8 percent of expenditures. In June, in light of the higher inflation rates, the statebudget was revised (see Table 2.7).3 In the June estimates, the deficit rose to Rbsl8.7 billion, but thiswas still less than 10 percent of projected expenditures. As a result of strict controls on spending, thestate budget actually showed a surplus at the end of August. However, expenditures were expected toincrease substantially in the last quarter of 1992. Although both revenues and expenditures may beslightly above the levels set in June, Government officials expect that the final deficit in the State Budgetwill be almost identical with the target set in June. The projected deficit of Rbsl8.7 would amount to9.7 percent of expendituresand only 1.0 percent of Table 2.8: Monetary Accounts for National Bank andprojected GDP or nearly 8 for Banking Systempercent of GDP. If put on (In Billon of Rubles)

a cash basis, theconsolidated budget deficit 12131/91 12 1311 92F Change

would drop to about 6percent of GDP because of LNational Bankthe exclusion of interest, Net Foreign Assets 15 -208 -223which is not being paid, on Foreign Exchange 0 0 0the external debt. Gold 0 102 102However, domestic deficit Ruble Accounts 15 -310 -325

financing would be Net Domestic Assets 47 444 397unchanged (and foreign Cr:dit to GovernmenL (net) 17 64 47financing of the deficit Credit to Banks 31 419 388

Credit to the Economy 0 30 30would fall by the amount Other Items (net) -1 -69 -68of unpaid interest).Kazakhstan has been more Liabilties 61 236 175successful than Russia in Currency Outside Bank 14 124 110

Reserves 4 49 45the control of its fiscal Excess Reserves 24 16 -8deficit. This has no doubt Savings Bank 18 27 9also contributed to the Deposits 1 19 18

relatively lower inflation H Colidatd Baing Systemrates.

Net Foreign Assets 15 -182 -197

T h e Foreign Assets 2 129 127authorities have had to Ruble Accounts 14 -310 -324

introduce major changes in Net Domestic Assets 39 615 576budgetary management in Credit to Govermnent (net) 11 30 19order to adjust to the Credit to the Ec-n2my 57 705 648abrupt termination of Other Items (net) -29 -120 -91

transfers from the Union Liabilities 54 433 379and to the revenue effects Currency in circulation 14 123 109

of the decline in the level Deposits 4D 221 181olw Savings Bank 21 37 16of economic activity. Price Foreign Currency Deposits 1 89 88

r ProjectedSource: NationaI Bank of Kazakhstan and IMF staff estimates.

2 The State Budget combines the revenues and expendiures of dth national government wit those of regional and localgovernments. However, it does not include a number of important exta-budgetary transacions. The principal extra-budgetmyflows are included in the "consolidated accounts" column shown on Table 2.7.

The Macroeconomy 19

liberalization has been accompanied by the elimination of substantial subsidies. Public transfers will belimited to the financing of operational deficits of the public transportation system and the pharmaceuticalsector as long as the prices for these sectors remain administered. On the wage front, new hiring hasbeen frozen and civil servants leaving the public sector are not being replaced.

To deal with the pressures to increase spending, the Govermnent has taken importantmeasures to strengthen budgetary control. First, the monthly cash management system has beenreinforced by being extended to the local governments and by the addition of an accounting andmanagement system on a commitment basis. These two systems should permit a better control ofexpenditures and should help avoid the creation of payment arrears. Second, local governments havebeen limited in their ability to use bank credit to finance of their budget deficits.

Third, extrabudgetary funds are being integrated into the budget to increase thetransparency of the fiscal accounts. No new extrabudgetary funds - except for the environmental fumd-are to be created. As a result, the general government now includes the central government and the localgovernments, as well as the privatization fund, the roads fund, and all investment funds that werepreviously extrabudgetary funds. The activities of the Pension Funds and the Employment Fund will bereported separately from the budget (but are included in the consolidated account shown in Table 23n)

To offset the negative effects on revenues, the taxation system should be strengthened.The tax base should be broadened as much as possible. Broad-based taxes with lower rates are betterthan narrowly focused taxes with high rates, since the later induce distortions and encourage evasion.Incomes of new entities have to be included in the tax net, although revenue collections from thesesources would not be very high in the initial stage. In light of possible high inflation, it is desirable thatthe tax system generate an increasing amount of revenues (i.e, a tax system, that would help to meetincreasing demands for expenditures without raising effective tax rates or establishing new taxes). Theintroduction of the VAT has been a very important step, because the VAT is relatively inflation resistantowing to its consumption base. However, it is crucial to avoid collection lags.

Structural measures to strengthen the tax system have been identified by the IMFincluding revisions to the personal and corporate income taxes, the strengtening of excise taxes andVAT, and the introduction of a business license tax. The personal income taxes may be strengthened byunifying the various schedules of tax rates, eliminating most exemptions, repealing preferential treatmentfor certain categories of taxpayers, and adjusting the tax brackets. The corporate income tax reformsinclude unifying the tax rate to the standard rate of 35 percent, and reducing the number and extent ofexemptions. Changes are also required in the calculation of profits to bring them in line with modernaccounting practices, and depreciation norms have to be clarified. On the VAT, exemptions need to bereduced and a single rate retained, with the exception of a zero rate for exports outside the CIS.

Public savings can also be generated by further reducing subsidies (for example forbread, milk, energy, and public housing), by controlling the public sector wage bill (limiting wages aswell as employment), and by postponing public sector investments on non-priority infrastructure needs.Some savings may also be generated by reforming existing social programs. Furthermore, with theincreasing market orientation of the Kazakh economy, public expenditure policies have to be reorientedfrom direct investment, or subsidizing of production, to the provision of economic infrastrucure topromote private production and distribution. Expenditures for the social safety net must be expected toincrease when unemployment increases as part of the transitionals cost of the necessary economicrestructuring-

20 Chapter 2

Money and Credit

Expected Outcome in 1992. Kazakhstan expenenced rapid monetary expansion in 1992.By the end of the year, the banking system's ruble monetary liabilities were expected to reach Rbs344billion, an increase of Rbs290 billion, or 540 percent, over the level when the year began (Table 2. 8.).This monetary expansion is more than fully explained by the increase in credit to the economy, whichincreased by Rbs648 billion, over 1,100 percent. By contrast, additional banking system net credit tothe Govermnent is not expected to exceed Rbsl9 billion. Half of the expansionary impact of the increasein credit to the economy is expected to be offset by the decrease in net foreign assets, particularly in theform of credits from Russia (which have permitted Kazakhstan to run a substantial deficit oninterrepublican trade). The projected decrease in the ruble accounts included in net foreign assetsamounts to Rbs324 billion or about 18 percent of GDP.

The growth of commercial bank credit is being financed primarily by the increase inCentral Bank credit to the commercial banks. Thus the latter is expected to rise by Rbs388 billion, or60 percent of the projected increase in total monetary system credit to the economy. It will be notedfrom Table 2.8 that, although currency in circulation is expected to increase by nearly 800 percent duringthe year, the projected increase in domestic currency deposits is only 450 percent. By comparison,inflation (as conservatively measured by the retail price index) is expected to be about 1,600 percentbetween December 1991 and December 1992. Thus, inflation in Kazakhstan is being accompanied bya rapid increase in the velocity of money, particularly in the case of deposit money.

Although credit to the economy is expected to grow by 1,140 percent during the year,this is somewhat less than the expected 1,600 percent December-to-December increase in the retail priceindex and far less than the reported increase in wholesale prices and the increase in the ruble equivalentof convertible currency trade. As most credit to the economy consists of short-term loans, the ratio ofbank credit outstanding to the level of economic activity is one indicator of the relative tightness of credit.Even taking into account the decline in the real level of economic activity during 1992, it is clear thatby this measure the stock of credit has decreased in real terms. The observed decline in the real levelof cash balances is an adjustment to be expected, since price liberalization eliminated the monetaryoverhang and inflation naturally led people to reduce their real cash balances. However, there has beenno equivalent desire on the part of borrowers to reduce their real stock of credit. Indeed, the fact thatreal interest rates have been strongly negative has no doubt increased the demand for credit. Thus, theauthorities have faced a situation with conflicting tendencies - pressures to reduce the real monetaryliabilities of the baning system with at the same time, pressures to maintain, if not increase, real credit.While the large decline in net foreign assets reduced the conflict in 1992, this can hardly be a permanentcharacteristic of Kazakbstan. A major challenge now facing the authorities is how to bring about thenecessary slowing down of monetary expansion without creating a liquidity crisis that would furtherreduce output and productive employment.

Monetary Policies. The future of the ruble zone is a major concern for Kazakhstan'seconomic management. As a comparatively smuall member of the ruble zone, Kazakhstan has limitedshort-run control over monetary policy and inflation outcomes. If the mble zone is to fimctionsuccessfully, its republics will have to maintain a much greater degree of cooperation on monetary andfiscal policy and will have to be willing to pool their foreign exchange resources (so that a unifiedexchange rate can prevail). As the dominant member of the zone is clearly Rus-ia, it is crucial thatRussia succeed in implementing its own economic and financial stabilization progran. Until the futureof the ruble zone becomes clear, the Kazakhstan authorities will have to manage in difficult

The Macroeconomy 2i

circumstances. While the National Bank of Kazakhstan (NBRK) cannot directly control the volume ofcurrency in circulation, it can influence nominal aggregate domestic demand by control the volume ofcredit .o the Government and to enterprises, and indirectly through interest rate policy and rediscounting.In practice, despite the shift toward Russian rates, interest rates currently provide little effective monetarycontrol, as they are highly negative in real terms.

Reserve requirements were first introduced at the beginning of 1991. In early 1992 thesewere increased to 18 percent for all deposits. In addition, banks are required to hold correspondentaccounts in the NBRK. Although correspondent accounts are used for clearing purposes, they havemainly served to limit domestic credit expansion and to fund NBRK refinancing credits. As of April 1,1992, refinancing credits from the NBRK accounted for over 60 percent of total credit granted in thefinancial system. Interest rates, although nominally liberalized, remain under strict control. The NBRKprovides the banks with most of their liabilities through refinance credits at artificially low interest rates.For instance, NBRK charges a nominal interest rate of 3 percent on its loans to the Govenunent, and 10percent on its loans to state agricultural cooperatives, while its cost of borrowing from the Central Bankof Russia (CBR) was much higher. Following the increase in CBR rediscounting to 80 percent in earlyMay, the rediscount rate from NBRK was raised from 28 percent to 65 percent in July. Finally, lendingrates are also limited through a requirement that the spread between average deposit and lending ratesbe no more than 3 percent.

Inter-enterprise arrears have increased enormously since 1991, in part because of theliquidity squeeze. The lack of payments discipline left over from the previous system is also an importantcause. In the latter part of 1991, when credit was abundant, producers setded inter-enterprise accountswith deposit money. However, they could not convert deposit money into cash money. Over time, lackof final sales led to arrears, at first from sellers to suppliers and from republic to republic as most state-owned enterprises have arrears with state-owned enterprises in other republics. Although there are noexact statistics on the magnitude of inter-enterprise arrears in Kazakhstan, they have been one of the mostimportant sources of both domestic and foreign financing for enterprises, particularly after the dissolutionof the FSU.

Given the rate of price changes expected in 1992, the existing stock of arrears is likelyto decrease significantly in real terms. The most worrisome aspect of these arrs, therefore, is theircontinued buildup rather than the existing stock. To prevent their future accumulation, enterprises shouldreceive a credible message that they will face a hardening of budget constraints and that credit will notcontinue to be available at highly negative real interest rates. Given the fact that such a high proportionof enterprises is involved, and that these enterprises are responsible for such a large share of output andemployment, a policy of suddenly and drastically tightening credit would probably not be sustainable.However, if inflation is to be brought under control, then credit expansion will have to be reduced. Therealistic alternative to a generalized bailout of practically all enterprises may be a policy that seeks toconcentrate new credit on enterprises that have serious restructuring plans and that show promise of futureeconomic viability. Such a program will not be easy to design and implement, but there seems to be noclear and more desirable alternative.

External Trade and Payments

With respect to both ruble area and convertible currency transactions, the collection andprocessing of information on Kazakbstan's external trade and payments is still in its initial stages. Inaddition, the effective nominal exchange rate (which was strongly influenced by trade taxes and subsidies

22 Chapter 2

in the first half of 1992) varied from an average of 10. 83 Rbs/US$ in the first quarter of 1992 to over400 Rbs/US$ in November. There is uncertainty about some of the underlying data and also about theexchange rates used when ruble and dollar transactions are consolidated. Consequently, conclusionsdrawn from the presently available data must be interpreted with caution. Table 2.9 shows the projectedoutcome in 1992 as estimated in mid-November by the IMF staff.

Kazakhstan has traditionally run a substantial deficit in its trade with other FSU republics(primarily Russia), which was financed by budgetary transfers from the Union (see Table 2.6). Althoughthey were no longer being received through the budget, in 1992 these transfers were replaced in thebalance of payments by a massive extension of credit by Russia through the Central Bank correspondentaccounts. The inflow in 1992 is estimated at Rbs336 billion, or nearly 19 percent of Kazakhstan's GDP.This is partially offset by net inter-enterprise arrears due to Kazakhstan, but net interrepublican credit stillamounts to 11 percent of GDP. As much of this credit through correspondent accounts is expected tobe received in the last quarter of the year, the estimates for the year as a whole are subject to some error.

Exports in convertible currency are expected to increase from US$774 million in 1991to US$1,546 million in 1992. Convertible currency imports, however, remain constrained by availableforeign exchange. Kazak.hstan's 3.87 percent share in the debts of the FSU means that the republicbegins with a heavy debt service burden. Scheduled interest and principal payments in 1992 amount toUS$607 million; this is 38 percent of earnings from exports in convertible currencies. The currentaccount deficit on convertible currency transactions is estimated at US$324 million for 1992. This deficitwas financed by a combination of deferral or arrears in debt service, disbursements from new loans, andthe beginning of what is expected to be a major inflow of direct foreign investment (primarily inDonnection with the petroleum sector). Net international reserves in gold and convertible currencies are

expected to increase by US$70 million, largely from Kazakhstan's gold production.

The data in Table 2.9 indicate that merchandise exports and imports will reach,respectively, 47 and 59 percent of GDP -- when convertible currency transactions are valued at theaverage nominal exchange rate. When the latter are valued at the 1989 parity exchange rate, thesepercentages fall to 35 and 47 percent respectively. In either case, these are comparatively high figuresand indicate a substantial dependence upon external trade. If these figures are real. ,!:d they willrepresent a large increase in interrepublican trade even when 1991 trade is valued at 1992 prices andexchange rates. While this seems inconsistent with reports earlier in 1992 regarding the continuingbreakdown of interrepublican trade in the FSU, the projected higher levels might be realized as a resultof the credits received plus the rubles earned by selling wheat from the year's bumper cror. The currentaccount deficit of 13 percent of GDP at the "1989 parity" exchange rate and over 15 percent of GDP atthe average nominal exchange rate is clearly far higher than can be sustained if it must tE financed onnormal commercial terms. Fortunately, as is discussed in the next chapter, the prospects are for asubstantial improvement in export earnings primarily as a result of increasing petroleum exports.

The Macroeconomy 23

Table 2.9: Balne of Paymenta Eutas fer 192

Convertible Percent of GDPIntenpnublicmn Trade Currencies Totil 'Nominal' "1989 Parity'

Rbs mil US$ mil US$ mil US$ mil X-Rate X-Ratc

Mcrchandise Exports 582110 6453 1546 7999 4618 35.4Merchandisc Imports 786910 8837 1608 10495 58.7 46.9Non-Factor Scrviccs (nct) -18342 -219 -145 -364 -2.4 -1.3

Resource Balance -222142 -2653 -207 -2860 -14.3 -12.8

Factor Services (interst) 0 0 -. 9 -169 -1.5 -0.3Current Transecrs 0 0 52 52 05 0.1

Current Account Balance -222142 -2653 -324 -2977 -IS4 -13.0

Direct Foreign Investment 0 0 100 100 0.9 0.2Long-Term Loans (net) 0 0 -308 -308 -2B -0.6

DisbasemeAs 0 0 130 130 1 2 0.2Repaynnts 0 0 -438 438 4.0 -0.8

Trade Credits 0 0 70 70 0.6 0.!Emrs and Omissins -11142 -276 -75 -351 -0.1 0.5

Total CapitalAccount -11142 -276 -213 -439 -1.3 0.2

Oval BWlance -211000 -2929 -537 -3466 -16.7 -12.8

Total Finncming 211000 2929 537 3466 16.7 12.8

Increcse (-) Net Reserves - - -70 -70 -0.6 -0.1Internterprisc s -125000 -145 - -145 -7.0 -7.0Correspondent accounts 336000 2783 - 2783 IBS It8

Exceptional Financing 0 0 607 607 5.6 1.1Debi defernl - - 273 273 2.5 0.5Arrears (+ is incease) - - 334 334 3.1 0.6

Source: Intemational Monetary Fund staff estinates. In calculating percentgs of GDP. non-CS trade was converted to rubles at bot dienomninal rate of 164 Rbs/USS and the constant 199 purity cxchnge ratc of 32.6 Rbs/USS.

CHAPTER 3

TIE REFORM PROGRAM AND TIE MEDIUM-TERM OUTLOOK

Kazakhstan's success in the transition to a market economy through the implementationof the reform program will depend critically on the following:

(i) The capacity to re-design and adjust the program in response to unexpected shocks,without losing sight of the key objectives

(ii) The ability of the Govermnent to bring to fruition energy sector investment proposals(iii) Careful management of the potential economic rents from resource extraction, and

sustainAble development of the non-resource based sectors of the economy(iv) The mobilization of international financial support in the short term (an important factor)

In the short term, Government policy needs to focus on stabilizing the economy, throughthe implementation of relatively firm monetary and fiscal policies: in the context of either an overallstabilization program within the ruble zone, or an independent currency. Similarly, rapid progress in thekey structural and sectoral reform areas will be required to underpin the desired medium-term supplyresponse in the economy. Of the utmost importance is accelerated privatization and enterprise reformin the short term and the development of an appropriate institutional and legal framework compatible witha market economy. Over the medium term, Government policy will need to focus on maintaining a stablemacroeconomic environment, effectively managing oil sector development, and supporting thedevelopment of the non-oil sectors of the economy.

The Refonu Program: Stabilization and Structural Adjustment

The Government is determined to move rapidly on the reform program. The sustainedsuccess of the systemic reforms depends on the establishment of a stable macroeconomic environment anda long-mun supply response. As has been discussed in chapter 2, the Govermnent has already movedquickly in a number of areas. Of particular note have been the following actions:

- Tne removal of price control on 80 percent of wholesale, and 90 percent of consumerprices at the beginming of 1992

- Tne reduction of expenditure and the introduction of stronger fiscal budgetary control inthe first half of 1992

- The enactment of a number of new laws in key areas, including, privatization anddenationalization, foreign direct invesitment, and property rights

- The privatization of 3,500 establishments as or August 1992- The increased targeting of family allowances in mid-1992

Emphasis must be given to macroeconomic stabilization over the next few years. Thelikely measures and targets agreed with the IMF under the standby arrangement should help to create astable macroeconomic framework by supporting the initial steps to reduce the fiscal deficit, curb creditexpansion, and restore external viability.

The Reform Program and the Medium-Term Outlook 25

Stabilization Program

The shape of the stabilization program will depend on the monetary and exchange ratearrangements to be adopted by Kazakhstan. While remaining within the ruble zone, Kazakhstan will needto adopt the same credit, exchange, and interest rate policies as those of the rest of the zone, in particular,the policies of the dominant central bank, CBR. Russian monetary policy, and by implication inflation,will be "imported" through the standard fixed exchange-rate price arbitrage mechanism. To the extentthat Russian credit and interest rate policy is inconsistent with short-run stabilization objectives,Kazakhstan will experience similar inflationary consequences. While there may be short-run divergencesbetween Russian and Kazakh inflation, Kazakhstan's inflation rate will converge over time to thatprevailing in the center. Agreement with Russia on the distribution of seigniorage consistent with agradual disinflation in the ruble zone will be critical to the success of the statilization program.

Under these monetary arrangements, the balance of macro-stabilization will fall onfiscalpolicy. The required reduction in the fiscal deficit will free scarce resources for private use and isconsistent with the drive to diminish the government's influence on the economy. At a time ofconstrained credit, the Government must reduce its own claim on credit in order to prevent the "crowdingout" of the emerging private sector. -The Kazakh authorities are likely to agree to a fiscal stabilizationplan which requires a significant reduction in the fiscal deficit in 1993, and to sustainable non-inflationarydeficit levels over the remainder of the transition period provided an agreement can be reached withRussia and the other memnbers of the ruble zone on conmmon seigniorage and fiscal policies.

Ambitious fiscal targets are essential if a stable macro enviromnent is to provide anincentive for growth. These stringent fiscal targets require both a widening in the tax base and a decreasein real expenditures. A number of steps have already been taken in both areas, such as the introductionof a VAT and the removal of various subsidies and budgetary transfers. However, further significantmeasures are required. Further consolidation of tax reform measures is needed, in particular, firtherwidening of the tax base, unification of corporate and personnel rate schedules, elimination ofexemptions, and strengthening of institutional and administrative capacity. These revenue measures areexpected to be complemented by stricter expenditure control, involving increased targeting of benefits,rationalization of government expenditure in non-core areas, and further reductions in subsidies. Input,production, price, and credit subsidies are to be phased out and Government social/income objectives areto be meet through explicit targeted fiscal transfers in the budget.

Altenatively, if monetary instability is expected to continue in the rest of the ruble zone,and, in particular, in Russia, Kazakhstan will need to consider the negative impact on its attempts tostabilize over the next 18 months to two years. Given the importance of long-rmn price stability, and theimpact of short-run hyperinflation on the price incentive structure in the economy, the Kazakh authoritiesmay need to consider establishing their own currency as a means of regaining monetary controi andachieving price stabilization. If, because of inflationary expectations and speculative demand, theexchange rate continues to seriously undervalue the ruble, then the otherwise desirable open economicpolicies could lead to substantial imported inflation. The principal benefit of a separate national currencyis the ability to pursue an independent monetary and exchange rate policy, and thus have direct influenceover the national inflation rate. Currency reform will be effective only if it is accompanied byappropriately arm macroeconomic policies that will help build confidence in the new currency andstabilize its value.

26 Chapter 3

Both arms of macro-policy are equally important under this scenario. First, theGovernment needs to maintain appropriate control overfiscal policy. Continued fiscal adjustment andrestraint will be critical to the overall success of the stabilization and reform program. The Governmentwill therefore need to focus on limiting budgetary deficit financing from the monetary system to a levelconsistent with achieving the inflationary control objectives. Confidence will be diminished, and thevalue of the new currency eroded, if the Government finances budget deficits by printing money. Thiscould potentially lead to capital flight out of the new currency back into the ruble.

Second, rmonetary policy must be appropriately focused on reducing inflation. Monetarypolicy must therefore be designed to limit the expansion of net domestic credit to a rate consistent withan inflaticn target that will reduce Kazkhstan's rate of inflation over time to that prevailinginternationally. Interest rate policy will need to be consistent with exchange rate policy under either afixed or a flexible exchange rate regime. Fiscal policy will need to be controlled tightly in order tosupport the new currency and avoid the need for inflationary financing. It will be important for the post-currency reform credibility of monetary policy that price liberalization, the removal of subsidies, andother relative price adjustments be nearly complete by the time of the introduction of the new currency.If not, monetary policy will be much more difficult to maintain in the presence of future adverse priceadjustments. Furthermore, it will be extremely important that the National Bank has the technical abilityto successfully carry out monetary policy with the new currency. In particular, it will be essential thatthe National Bank possess the skills and instruments needed to analyze economnic developments, formulateappropriate monetary policies, and implement these policies.

Continuing relative pice adjustrzts are expected to occur in the short term. Correctionof relative prices in the economy needs to be supported by trade reform and the rationalization of the vastarray of implicit and explicit subsidies and taxes in the existing system. These take the form of interestrate and foreign exchange subsidies, extrabudgetary funds, and consumption and input subsidies. Lessthan complete economy-wide liberalization has the danger of creating distortions in relative prices whichmight affect the short-term viability of certain activities that might otherwise be profitable, or might evenhave a comparative advantage. In pardcular, the remaining administered prices are to be decontrolled withthe exception of natural monopolies and public goods or goods involving externalities. Domestic energyprices are to increase quickly to full cost recovery; oil and petroleum products should progressively beincreased to the equivalent of world levels at an appropriate exchange rate. Housing rentals are also tobe liberalized.

Significant measures are also required in the area of trade policy. These include theintroduction of a trade system with no quantitative restrictions on exports or imports. The trade system,just like other incentives in the economy, should be formulated with two objectives in mind: uniformityand transparency. Trade protection should be both uniform and transparent. An import tariff in the rangeof 25 to 15 percent should be the main instrument of protection. Over the medium term the reform shouldbring relative prices in Kazakhstan increasingly in line with those of trading partners. A free trade policyshould be actively promoted as a means of opening up the economy and generating competition in thenon-oil sectors. Trade policy should be aimed at promoting free trade with both CIS and non-CIS tradepartners. This requires the re-calibration of existing barriers and the complete removal of artificialinpediments, to trade. A program for the phased reduction of these barriers is needed. As is discussedbelow, the external sector is expected to underpin a recovery in output in the middle to late 1990s, andtrade policy has an important part to play in that transition.

The Reform Program and the Medium-Term Outlook 27

Stuura Reform Program

Macroeconomic stabilization by itself will not lay the foundations for reviving sustainablegrowth and generating employment. The success of the reform program will ultimately depend on theGovernment's ability to implemnent a comprehensive program of structural and sectoral reforms. Themajor elements of the reform program (which are discussed in Parts II and D) include: (i) theestablishment of an appropriate legal and institutional framework compatible with a market economy; (ii)successful enterprise restructuring through privatization and corporatization; (iii) the development of theareas with greatest supply response and with comparative advantage potential in the energy, mining, andagricultural sectors; (iv) the implementation of policies which will ensure appropriate competition; (v)the reform of the financial sector; (vi) the targeting and strengthening of social protection; and (vii) thedevelopment of economic management capacity. The core systemic elcments of the reform program areas follows:

I-tins ional Reform: The development of a legal framework consistent with ademocratically oriented market economy is required. In addition to a civil code,conunercial, bankruptcy, collateral, corporatization, and privatization laws need to bedeveloped, together with a strengthened law on property rights.

-Enterprise Reform: Widespread privatization and corporatization of state assets across allsectors of the economy is required. A thee-pronged approach to privatization isenvisaged involving i) the rapid auctioning and sale of small enterprises, ii) the massprivatization of mediun-size to large enterprises through some form of voucher system,and iii) a case-by-case approach to the restructuring and sale of large enterprises. Thoseenterprises and activities remaining under the control of the Government (eithertemporarily or permanently) are to be restructured and subjected to strict financialconstraints and an improved accountabiity framework. The housing stock is to beprivatized rapidly and an appropriate mechanism for agricultural land lease transfer is tobe developed.

Financial Sector Reforms: These should be aimed at creating a modem and efficientcommercial banking system. This requires the restructuring and rationalization of theexisting financial system, improved conmmercial and central bank laws, strengthenedsupervision capacity, a more efficient payments system, aid the development of asecurities market.

- Social Safety Ner- A comprehensive review of the level and targeting of benefits isrequired to ensure that the most vulnerable groups of society are protected while thefiscal costs of the safety net are kept within budgetary constraints.

Central to the success of the reform strategy is the development of Kazakhstan's vastenergy resources, which offer the best prospects for generating the external creditworthiness and fincialsurpluses needed to transform the rest of the economy. Expanding petroleum production and growingexport eaniings offer the potential of financing a nmch higher level of imports to sustain activity in theshort run, underpin new investment activity, and "import" new technology.

28 Chapter 3

The priority in agnriure is to change the institutional structure of production,eliminating compulsory production and distribution quotas. The strengthening of the delivery of inputsand services, and the revamping of the marketing, distribution, and agro-processing systems, is to beachieved through the breakdown of Government control and the introduction of private ownership in theseareas.

Industrial restructing is likely to be the most difficult part of the reform program, giventhe combination of declining output and large labor force retrenchment that are likely to occur in responseto the reform program. Several stages are involved in the enterprise reform process. While the detailsof the privatization strategy are currently being developed, the full transfer of ownership and individualresponsibility for performance is critical. Enterprises should no longer rely on the Government to directproduction and make business decisions.

Privatization must be the driving force for this process, but some tine will be needed,especially in the large-scale industrial and state farm sectors, before efficiency gains begin to show.Significant gains are, however, expected from small-scale privatization. It is vital to give managers andthe collectives a clear and unambiguous signal that adjustment needs to occur. The privatization andcorporatization progam must be implemented promptly to hasten the adjustment period and mininize theoutput contaction over the medium term. The imposition of hard budget constraints on enterprises,including measures to address both the stock and the flow of inter-enterprise arrears is necessary to startthe restructuring process, as well as to control credit growth in the economy and achieve macroeconomicstabilization.

Economic Prospects

The responsiveness of the economy to the reform measures, the speed of resourceswitching, the extent of capital redundancy, and the scale of labor market shedding are uncertain. Theprojections in Table 3.1 reflect our current assessment of the most likliy adjustment path of the economyover the period 1993-1996 if the stabilization and structural adjustment programs are implementedsuccessfully. This central scenario assumes that the Government moves quickly on the reform package,imvplements consistent macroeconomic stabilization policies, and brings to fruition currently agreed orenvisaged energy investments. It also assumes that the donor community will finance the balance ofpayments requirements of this transition.

Table 3.1: Kazahbstan Key Economic Projections - Centrl Sceario

(Percentage change)' 1993 1994 1995 1996

Growh Real GDP -10 to -12 -4 to -6 -I tD I I to 3Agriculture -3 to -5 -I to -3 -I tD I 0 tD 2Inlustzy -18 to -20 -8 to -10 -2 to -4 1 to 3

Consution -4 to -7 -1 t -4 -1 t -4 -1 to Inwesunent -30 to -34 2 cc 5 2oS 2 bo 5

Currit Account (bin) -0.76 to -0.9 -0.9 to -1.1 -1.1 to -1.3 -0.85 to -1.05

I/ Percentage change unless otherwise indicated.Source: World Bank Staff Estimates.

Tne Reform Program and the Medium-Term Outlook 29

The Supply Response and Its Iinks to the Reform Program

In 1993 the decline in output is projected to decelerate to between 10 and 12 percent, inreal terms (Table 3.1). This decline is consistent with the experience of other reforming socialisteconomies which have undergone adjustment in the past few years. The balance of risks may be on thedown side, in spite of the fact that output might have already declined by up to 30 percent between 1990and 1993. A return to a more nonnal growing season is expected in 1993, following the strong drought-related rebound in the agricultural sector. The contraction of activity in the industrial sector shoulddominate the decline in GDP in 1993. The short-mn negative impact on output and employmentassociated with increased enterprise restructuring and privatization in 1993 may be significantly higherthan assumed in the central adjustment scenario. In particular, there appears to have been little laborshredding in the second half of 1992, and surplus production has been translated into a buildup in stockssupported by an expansion in NBRK credit and an increase in inter-enterprise arrears. Investment inflowsassociated with new oil developments and increased efficiency and productivity in the small but expandingprivate sector should partially prevent a larger output decline in 1993.

The prospects for output growth are low in the short term, until investment in theresource-based sector of the economy provides a stimulus to growth in other areas of the economy in thesecond half of the 1990s As with many other reforming former Eastem Bloc economies, it will takesome time before there is a positive supply response to the huge relative price shifts currently under way.Resources need to be reallocated not only away from a massive state enterprise sector to a new muchsmaller private sector, but also away from industries that may have a much reduced role in the next stageof economic development. The transition will involve heavy dislocation costs. Even spectacular growthin the private sector is unlikely to compensate for the decline in state enterprises in the short term.

Continued resource reallocation, the restructuring of large enterprises, and sharp increasesin unemployment are expected to offset the rise in oil exports and the expansion of private sector activity:a fiuther 4 to 6 percent decline in real GDP is expected in 1994. A more stable macroeconomicenvironment should emerge by the mid-1990s. This would be underpirmed by an unwinding of the largestock accumulation over the period 1992-93, by new investment, by a recovery in private consumption,and by moving of the trade balance into suIplus as oil exports increase in response to new production andexpanded pipeline capacity. Provided the reform program proceeds as currently envisaged, obstacles toprivate sector activity and free trade are removed, and various energy investments are bought to fnuition,GDP may plateau in 1995 (at between -1 and 1 percent), before a moderate growth of between 1 and 3percent is experienced in 1996.

Development of the oil sector will be particularly capital-intensive, with only limitedspillover to the rest of the economy in the shortterm. The prospects for recovery in the medium termwill, therefore, depend critically on the Government's efficient reinvestment of oil revenues in sustainabledevelopment of the non-oil sectors. The promotion of strong diversified growth in the non-oil economyis likely to require a concerted policy effort on two key fronts over the medium term. First, theGovernment will need to develop well-defined sector strategies for increased production, and second, theGovernment will need to actively pursue policies supporting private sector development.

30 Chapter 3

Development of Well-Defined Seaor Strategies

Responses to the reform program will not be homogenous across sectors. The strongestsupply response is expected to come initially from the energy sector. The mining and service sectors,and some segments of the existing industrial base, however, also offer significant potential over themedium-term. Development in these areas is not only expected to underpin the economic recovery inthe non-oil sector but is also critical for the generation of sufficient employment opportunities toaccommodate the rise in numbers of dislocated workers over the adjustment period.

The foreign capital that has already been attracted is expected to increase oil and gasoutput in the second half of the 1990s: it will generate a trade surplus and govermnent revenues - in theform of either increased taxation receipts or profit dividends. These funds should be used to supportprivate sector activity in the non-resource based sectors of the economy. The Goverunent should supportthe development of the necessary infrastructure, such as telecommunications and transport networks. Itshould also ensure that there is an adequate incentive and legal framework for private sector development.

The large oil revenue flows provide the Government with the opportunity to acceleratethe opening up of the economy and thus promote faster adjustment in the non-oil sectors of the economy.If it is not managed appropriately, Kazakhstan's mineral and energy wealth may constrain thedevelopment of the other sectors, as a potential resource-induced appreciation in the real exchange ratemay make the other sectors uncompetitive. This phenomena, known as "Dutch-disease", may bring abouta sluggish growth in the non-resource sectors. Given international fluctuations in oil prices, the economyneeds a broad expansion of its export base, beyond oil products. International experience shows that thebest way to achieve a diversified export sector is through an open trade regime that does not penalizeexport growth.

Support for Private Sector Development

The development of policies aimed at supporting private sector development will not onlywill require the maintenance of a stable economic and legal environment, but, as the oil sector begins todominate Kazakhstan's external position in the second half of the 1990s, the Government will need toconsider the competitiveness of the non-oil sectors. The "Dutch-disease" phenomenon may lead toupward pressure on the nominal exchange rate and make the non-oil sectors of the economyuncompetitive. An appreciation in the real exchange rate, however, may not be inappropriate if it isaccompanied by increased efficiencies in the non-oil sector.

The potential negative sectoral impact of a strong, dominant oil sector poses a medium-tenn risk which will require carefil policy management. A problem may arise if strong growth in onesector significantly reduces the competitiveness of other sectors leading to stagnation and decline. Thisproblem takes its name from the experience of the Netherlands following the development of new naturalgas fields under the Norti Sea. Increased natural gas profits depressed production in the other tradedgoods industries. That is, the development of the natural gas industry came at the expense - or the "de-industrialization" - of the rest of the industrial sector. Similar problems have affected the developmentof natural resources to various degrees in Australia, Mexico, Norway, and the United Kingdom.

The Reform Program and the Medium-Term Outlook 31

Increased natural resource exports may erode profits in the industrial sector through twomain channels. First, high returns in the new industry bids resources away from the rest of the industrialsector. That is, the export sector bids away labor and capital from other industries by putting upwardpressure on wages and interest rates, respectively. Second, increased foreign currency earnings may leadto an appreciation in the exchange rate, maling other exports less competitive. Higher costs and reducedcompetitiveness restrict activity in the non-resource sector. Increased economic dependence on theresource sector exposes the economy to international commodity price volatility and reduces theresponsiveness of the economy to a range of economic shocks. However, since the ruble appearsundervalued at the present exchange rate, the "Dutch-disease" issue is a potential longer-term concern,and not necessarily an immediate policy issue.

Government policy, therefore, should promote increased competition in the non-oil sectorin an effort to promote efficiency gains. This may be achieved by opening up the economy to increasedforeign competition, through a liberal trade regime, and by removing all internal barriers to competitionby freeing domestic market arrangements. The latter will require the rapid breaking up of existingmonopolies and the removal of restrictive trade practices. Equally important will be the introduction ofgreater flexibility into the labor market through the removal of all restrictions on labor mobility and byfurther liberalization of labor market practices. Increased flexibility in both the goods and labor marketsshould allow the non-oil sector to respond to increased domestic market competition and remaininternationally competitive in the face of any resource-induced appreciation in the exchange rate.

Sectoral Composition

Industrial real output, including the oil and mineral sectors, is expected to decline bybetween 18 and 20 percent in 1993. This decline is driven by the inpact of restructuring on apredominately state-owned industrial and manufacturing sector. Corporatization, with the inposition ofbinding financial constraints, and privatization, with increased governance and control over the productionprocess, are likely to lead to a supply-induced contraction in output. This is likely to be compoundedby the reduction in consumer demand discussed below, and the turning of consumers towards potentiallycheaper/higher quality import goods if access to foreign exchange and imports is successfully attained.

Continued supply disruptions associated with enterprise restructuring are expected tooffset the slight strengthening in the oil sector and the initial expansion of privaLe activity in industry.Industrial output may, therefore, contract by up to another 10 percent in 1994. While the private sectoris expected to play a larger role in the economy by 1995, restructuring of the last major Governmententerprises and a sluggish non-oil export sector are expected to contribute to a further slight fall inindustrial output of between 2 and 4 percent. Increased oil flows, substantial development in the mineralssector and increased activity in the strengthening private sector are expected to lead to a rebound in realindustrial sector growth of between 1 and 3 percent in 1996. Sustained strong growth rates may beexpected in this component of the economy to the end of the decade as the mining and energy sectors playan increasingly dominant role in the economy.

After the 1992 rebound in the crop harvest, following the 1991 drought, agriculturaloutput is expected to revert to the downward trend in yields experienced in the pre-1991 period. Thiscontraction is expected to be magnified by the removal of most input and output subsidies in theproduction process, and by the remnoval of state controls over marketing, storage, and distribution.

32 Chapter 3

Agricultural output may therefore decline by up to 5 percent in 1993 as traditional supply and distributionchannels are disrupted and economic returns to farmers are reduced.

The removal of Govermment influence in the sector, while promoting a short-runcontraction in output, is necessary if agricultural resources are to be diverted to those products in whichKazakhstan has a comparative advantage. Like many industrial enterprises, some agricultural productionuay be uneconomic when the complex web of Government support is removed. Other types of farm

output, however, will experience a positive terms of trade improvement, and these activities are likelyto flourish in the medium term. A similar transition process to that experienced in other sectors of theeconomy, involving the reallocation of scarce resources, is therefore expected in the agricultural sector.

While the short-run transition of effective ownership may also lead to a temporarycontraction in agricultural output, as farmers adjust to the economic realities of direct ownership andeconomic responsibility, the experience of other countries with similar land reform suggests that medium-term returns may be s.gnificant- Short-run transition costs are expected to lead to a further I to 3 percentdecline in real agricultural output in 1994, before the impact of increased private control of thedistribution and marketing networks on farmer profit incentives may elicit a positive production responsein 1995. In the absence of a positive commodity price shock, only moderate growth is expected over1996 and probably 1997, before large efficiency gains and improving yields in the second half of the1990s promote renewed growth in the agricultural sector.

The service sector response is expected to cushion the decline in industrial output and theinitial impact of privatization is expected to be felt most strongly in this sector. Entrepreneurial skill maybe expected to develop quickly in the retailing, wholesaling and distribution side of the economy, ascompetition is intense and little initial financial capital is required to conmnence trading. While themerchant-trade sector of the economy is expected to show initial signs of recovery in the second half of1993, the remainder of the services sector will be exposed to the negative short-run impact ofrestructuring.' Contraction in these areas is expected to outweigh the positive impetus coming from themerchant-trade sector. Thus, service sector output is expected to decline by between 10 and 12 percentin 1993, and by between 4 and 6 percent in 1994. Positive growth rates are expected beyond 1994, asprivate enterprises flourish in this sector.

Domestic Demand

Domestic demand is projected to decline by between 3 and 5 percent in 1993, driven inpart by a further real decline in investment to around 15 percent of GDP. This fall in investment, fromaround 26 percent of GDP in 1990, reflects both the immediate contraction associated with restructuringand increased fiscal stringency, and a correction from the over-investment in the former Soviet economy.

The service sector not only includes the emerging merchant-rade sector, but also the govetment service sector and(unKer the GDP classification used here) other residual sectors of the economy not captured in agriculture or industry. Bothof these other "service sector' components are expected to be in strong decline during the initial tansition sage.

The Reform Program and the Medium-Term Outlook 33

Investment

The decline in gross fixed investment is expected to be offset by continued stock buildupin the first half of 1993 as enterprises fail to adjust to demand conditions. This stocks overhang will notonly tie up valuable financial working capital, but will also dampen the investment response in the mid1990s when demand is expected to recover slightly. Despite the large amounts of net direct foreigninvestment expected to flow into the energy sector, aggregate investment as a percentage of GDP isexpected to remain relatively flat over the next four years. Short-run efficiency gains derived fromrestrcturing, the presence of large excess capacity in some areas of the economy, the constrained demandoutlook, and the contraction in Govermnent investment, are all expected to restrict investment expenditureto around 16 percent of GDP over the period to 1996. Indeed, shifts in output niix may be achieved witha minimum of investment in such circumstances, and growth may accelerate while aggregate investmentremains static.

The large investment inflows associated withforeign direct investment (FDI) in the energysector, estimated at around US$400 million in 1993, and an annual average of around US$775 millionover the 1994-97 period, will prevent a sharper contraction in aggregate investnent expenditure. Thedecline in real investment is expected to bottom out in 1994-95. Investment should recover over thesecond half of the 1990s and should underpin the recovery in output. The prospects for future foreigninvolvement in Kazakhstan are good; there is already a large amount of foreign interest in the oil andninerzi sectors.

In May 1992, Chevron and the Kazakh government reached an agreement to develop theTengiz oil field, with recoverable reserves estimated at between 6 and 9 billion barrels of oil. This fieldranks alongside some of the larger oil fields in Saudi Arabia. Total investment in this project is estimatedat around US$1.5 billion. In June, British Gas and Agip, won exclusive negotiation rights to developthe Karachagnak field, with an estimated 20 trillion cubic feet of gas and another 2 billion barrels of oiland condensate. If negotiations are successfully concluded, this agreement will involve significant newinvestment, of the same order of magnitude as the Chevron arrangements. In July, a US$1.7 billionagreement with Turkish investors was announced, involving the development of a power generation plantin north east Kazakhstan in exchange for the right to a share of oil export revenues from a nearby oilfield. Other foreign investors are exploring the potential development of an oil export pipeline whichwould connect Kazakhstan with interational markets.

Kazakhstan also has significant deposits of chrome, copper, lead, zinc, gold, silver, tin,titanium, bauxite, magnesium, tungsten, molybdernm, uranium, vanadium and bismuth. While in thissector no agreements have yet been reached with foreign investors, there is the potential, once the legal,tax, and investment rules have been clarified, for large inflows of capital.

ICazakhstn's success with FDI will depend critically on the Goverment's ability tomanage the inflows and to foster the transition of the non-resource sector of the economy. Carefulmanagement of the resource export receipts is required if an excessive output contraction in the non-resource sector of the economy is to be avoided. Strong net FDI in the first half the 1990s will bepartially offset by rising prbfit and dividend remittances towards the end of the decade.

The Government's role in investment is expected to decline over the period. This shouldreflect both the withdrawal of the Government from productive activities which are best undertaken by

34 Chapter 3

the private sector, and a general contraction imposed by tight fiscal constraints. In particular, theGovernment's role in the mobilization and direction of private financing should be restricted to the designand maintenance of an appropriate institutional enviromnent. Excessive state intervention should beavoided. The Govermnent should elaborate on the basic requirements for foreign investment, the termsand criteria for on-lending of the export credits to users, and the channels through which the latter areto be made available. The recently created National Agency for Foreign Investments (NAFI) shouldpromote foreign investmnent and restrict itself to limited screening of proposals. NAFI should have aspecific interest in public policy objectives in health, safety, and environmental standards.

Given the present business environment, the weaknesses in the management and appraisalcapacities of banks, and the current inadequacies in the regulation and supervision of the bankcing systemthere may be potential for an inefficient allocation of scarce resources in the short run. Thus, during thetransition stage, limited Govermnent supervision over the use of export credits and guarantees may bedesirable. It will be important, however, for the Government to identify, and spell out priority uses forthese funds which are likely to include funds directed to the promotion of the development program, tothe completion of on-going projects, and to the rehabilitation of assets.

TIhe focus of Government investment should also shift over the period towardinfrastructural investment. To facilitate this shift, and to promote some external financing of necessarystructural developments, the Government will prepare a public investment program (PIP) which willidentify investment priorities. The PIP is expected to provide the blueprint for Government investmentactivity, and should be revised on a regular basis to reflect evolving needs over the period to 1996. Auler discussion of the PIP is contained in Box 3. 1.

Project investment needs in basic infrastructure and public services are large. Mostinvestment will have to be provided from domestic savings in the earlier years before the Governentis in a position to recycle oil revenues. Project finance from multilateral organizations will also plav animportant catalytic role by financing investment in basic infrastructure and public services, which areoften constraints on expanded private investment. External support needs for such investments couldamount to between US$200 and US$300 million per year over the short term. The World Bank hasalready identified a number of potential projects in the energy, telecommunications, and agriculturalsectors that may be pursed over the next two to three years.

Consumption

The combined effect of the decline in household disposable income and fiscal contractionis expected to continue to depress total consumer demand in 1993. Unemployment is expected to riseas enterprises initially seek increased efficiencies through the release of excess labor. Increasingunemployment, and a contraction in fiscal welfare transfers ( in part, through better targeting of the socialsafety net) is expected to reduce the real disposable income of households and force a further erosion ofany remaining savings balances. Consumer recourse to residual savings, the increased inflow of foreignsavings associated with investment in the energy sector, and external financial assistance in the short runshould restrict the decline in private consumption to between 4 and 6 percent in 1993, and to between1 and 3 percent in 1994. However, given the relative size of the Government in the economy, largedeclines in Govenunent consumption should drive down aggregate consumption in line with the declinesin real GDP over the period.

The Reform Program and the Medium-Tenn Outlook 35

Bolx 3J: Publc Investment P}ipgm.

--he Goveune s' developme.tobjctivesand strtegies for th variou sectors of the econmy need to be tralatinto invesment projec. After a ccroeing process, tese are aggegated into a public investment program (PMP). Inmost countries, this prcs is sharedbetween fth soctor and planning ministries. The PIP serves as a basis forattracting exteral financing.:

In Karakstan, the State Economic Commuitee (SEC). fomerly the Kazkhstan brmnch of Gosplan, is primarilyresponsible. for prepaing te public investment progrwn, which includs all investments by stare enterprises whetdhthey are self-financed or not. While untl recetly the PIP was prepared on a branch (subsector) basis, this is now doneon a regional basis. ln 1991. almost two thirds of total investment was for projects in the productive sectors.

- The Goverment's own corinbixion to investment is funded through a tx on the cost of production of all statee-n:lterprises, wbichhis deposited in an iestmt Fund. Under ncurnt arrangemnts it appeas that the budget and thePIP are prpared virtually indpendenty -of each other. The budget allocadton for investnent is determined by how muchis collected under dhe special tax,rand is not the outcome fa trd-off which considers the relativ merits of invesmentv tersus other expenditure as wellasthe intc-reftionship between the two. -The resource envelope of the PIP (local and

- * al) . needs to be determined within the context of the overall fisc framework and the ERP. It is essat fli: closer links he esraNisbed betw t Ministry of Face and th SEC or that they be cmd one ni.

Screening cngoing and new s is a vital function.. It should be based on developmmat stratcgies for individual-sectors nd on the se-of -apropriate sectoucritei Paiarly iportant, in tba prent cont of price uncerta-and resourceconstraint-is- thechice betwen completing ongoing projects verus starting new oncs, and between the:r-hatbiitadon' of esnapy veisus.the creation Of new capacity.

Teco i oftPIP at present havly l wrsthe productive sctows. -As implementation of e ERPr ,t..h:e Govern ti uld ireingly focusits resources on invesmenit:i -social and physical infrastructrecaving

:- :investmentinthe productive sectorsto be financed:from non-budgetyresources.; Prepiaratonand imrlemetation of-_t ihe PIP will shiaway t c i s c rpriseso ve tiries and agencies. -

Wbile household use of finnial savings and other assets will help sustain consumptionduring the initial stages of the transition, a desire to rebuild savings balances once income recovers willmost likely dampen the strength of the economic recovery in its early stages in the second half of the1990s. Furthermore, there may be a prolonged period of adjustment before the anticipated expansion inthe private sector can absorb dislocated labor. Sharp real contractions in Government consumptionexpenditure are expected before stabilizing in 1996. This contraction is required to achieve generalmacroeconomic stability.

Exteral Trade Prospects

Economic recovery and the trade surplus in the second half of the 1990s are underpinnedby oil exports. The stength and speed of the recovery will depend critically on Kazakhstan's ability totransfer resources into the tradables sector. The strong trade performance is expected to supportincreased domestic absorption over the short term, allowing a higher level of consumption and criticalcapital goods imports. Higher imports should help prevent a sharper contraction in GDP, and shouldreduce the social costs of the adjustment. Increased capital goods imports, in particular, should speedthe retooling of the economy, increase capital efficiency, and promote a faster recovery.

36 Chapter 3

Export

Kazakhstan's export structure is expected to be dominated by oil, with other exportsslowly growing over the 1990s. Export potential also exists in the gas and minerals sectors of theeconomy. The shift to liberalized oil prices and the promotion of oil developments, should lead to anincrease in production from around 25.7 million tons of crude oil in 1992 to approximately 36 milliontons in 1996. The net exportable surplus will also be deternined by trends in domestic demand.2 As isdiscussed in chapter 8, these projections assume that domestic energy pricing reform will lead tosignificant declines in domestic consumption (Kazakhsrn currently has one of the highest per capitaconsumption levels in the world). The net exportable oil balance is expected to increase from 7.8 milliontons in 1992 to around 16.7 million in 1994, and 23.3 million in 1996. Oil exports may expand fromaround 11 percent of all exports in 1991, to over 50 percent by 1996.A By 1996, Kazakhstan may beproducing about 37 million tons of oil yielding a tradable oil export surplus of approximatelyUS$2.9 billion.

After real declines in non-oil exports to CIS republics in both 1991 and 1992, further falls areexpected in 1993 as the short-run negative impact of restructuring continues to constrain activitythroughout the CIS. Both the disruption to trade links and the significant resource reallocation expectedin the near future should restrict the potential for a strong rebound in exports to CIS destinations in theshort term. While implicit aggregate export prices, excluding oil, suggest that CIS trade was occurringat close to world prices, there were significant relative price distortions between individual components.In addition, the adjustment of Kazakhstan's tradables sector to the new incentive structure is expected todisrupt supply in the short term. The problems in this sector may be compounded by the focus ofgovernmental resources on the promotion of the energy sector. These factors suggest that non-oil CISexports may experience only limited real growth, of around 1.5 percent per annum, over the period to1996.

With the exception of energy products, exports to non-CIS economies are also expectedto grow slowly in the short term. While the elimination of implicit and explicit export taxes and otherimpediments to free trade should provide a new incentive to increased trade, Knzakhstan exporters nowhave to compete in a global market, determined not only by price, but also by non-price factors, suchas quality, maintenance, and delivery. In the short run, manufacturing exporters are likely to be price-takers, with limited production flexibility to respond to emerging market needs. Furthermore, shouldKazakhstan introduce its own currency, the external price competitiveness of this sector could, as wasdiscussed earlier, be adversely affected by a "resource-induced' real appreciation of the exchange rateover the medium term. While the prospects for a sustained real growth to non-CIS destinations of above1.5 percent per annum over the next three years appears restricted, the strengthening of growth beyond1995 may be expected as producers' reorient toward foreign markets.

2 The production and processing configuration in Kazakbstan results in nearly aO production being exported, while atIhe same time domestic refining demand is met with imported crude from Russia.

The Reform Program and the Medium-Term Outlook 37

An increasing proportion of Kazakhstan's oil exports is expected to be sold to countriesoutside of the FSU. This growth in non-ruble zone exports should provide Kazakhstan with sufficientaccess to hard currency to meet its external debt service obligations and promote its entry to internationalfmancial markets.

imports

Both the contraction in the economy and disruptions in inter-republic trade had a negativeinfluence on imports in 1992. Non-CIS imports, in particular, are estimated to have fallen sharply in1992 in response to the decline in investment activity and the scarcity of hard currency. Such a positionis unsustainable and, as was noted above, capital goods imports are essential if the economy is to quicklyadjust to a new growth path. Indeed, the connencement of large new investments in the oil sector isexpected to boost these imports by as much as US$270 million in 1993, and by between US$400 andUS$600 million a year over the period to 1996. Further newv import demand is also expected to bestimulated by multilateral sectoral project lending on infrastructLural developments.

While traditional import-output relationships have been distorted by the exchange rate andrapid adjustment, the experience of Eastern European economies suggests that some rebound in importscan be expected after two years of decline. The provision of extemal financing assistance and a returnto normal trading conditions within the FSU, resulting from improvements in the arrears situation andthe settlement system, are expected to underpin a small rebound in real import demand in 1993- Non-CISimport penetration into Kazakhstan's domestic market is expected to increase in 1993 as consumerssubstitute higher quality foreign imports for competing domestic, and other CIS imported, produCts.4 Thereturn to a more normal trading environment within the CIS is also expected to lead to moderate realgrowth in nun-oh imports from CIS trade partners in 1993. Oil imports to the refineries are expectedto decline in response to the decline in domestic energy consumption.

Rising oil export revenues, increasing import demands associated with increasedrestructuring and retooling of enterprises, and the provision of external financing assistance are expectedto underpin further real import rises in 1994, from both CIS and non-CIS sources, at around 5 percent.COer the medium term, Kazakhstan's export generation potential is expected to support continued realimport demand growth from non-CIS suppliers in the order of 5 percent per annun, and from CISsources in the order of about 2.5 percent.

The Major Risks

Three key actions are necessary for the central scenario to materialize. First, the mosturgent short-run issue is the clarification of ownership: farmers, managers, and workers must perceivethat they have a stake in the long-rn viability of this enterprise or farm if they are to invest in it,otherwise they will distribute returns in the form of wages, or in selective "spontaneous privatization"for short-rmn gain. This is why the reform of enterprises and farms is urge-nt Second, the Governmentmust ensure that the projected increase in oil production flows materializes. This will require continuedcommitment to the joint-venture investment agreements already signed with foreign parners to facilitate

4 This excludes imports associated with the new oil investment projec and multilateral developmein lading for criticalimports.

38 Chapter 3

the importation of new technology and to speed the development of Kazakhstan's vast energy reserves.And third, the Government must remain committed to both the substance and the timing of thestabilization and systemic reform program outlined above.

The success of macroeconomic stabilization depcnds critically on the complementarystructural reform of the economy. As the alternative scenarios discussed below suggest, failure to adjustwould close off investment, reduce access to intemational capital markets and, in all likelihood, lead toa sharp supply-led contraction. Without adjustment, consumption may be temporarily higher andinvestment lower. The output decline may therefore be temporarily less in the short run than thatenvisaged in the central adjustment scenario if Kazakhstan carn maintain access to foreign credit to supportthe correspondent import flows. Beyond the very short run however, output growth would again turnnegative as the lack of investment caused supply to contract.

Four main risks and uncertainties for the overall success of the reform program may bereadily identified- These comprise the following:

(i) Policy slippage in the stabilization and structural reform program(ii) Limited policy implementation capacity(iii) Adverse changes in the external economic environment(iv) Restricted access to exteral financing in the short term.

Policy Slppage. Failure to speed the reform process would pose a significant risk to theoverall success of Kazakhstan's transition. The Government needs to remain comniitted to the overallprogram to speed the economic recovery. In particular, slippage on the macro-stabilization front wouldpostpone the development of a stable enviromnent in which producers could respond to clear price signalsand undertake new investments with some certaity. Similarly, rapid progress on the structural andsystemic front is necessary to provide enterprises and individuals with the right institutional and marketincentive structures. Slippage in structural reform would slow the supply response in the economy andreduce potential energy export revenues that might be used to facilitate adjustment in other sectors.

Slippage on the fiscal side might pose a risk to the economy. The fiscal deficit may bemuch worse than projected if anticipated revenues do not materialize and/or expenditures increase. Ahigher deficit could not be financed by borrowing from the monetary system while Kazakhstan remainsin the ruble zone. In such circumstances, the only choices open to the authorities would be to increasearrears or increase domestic borrowing. By increasing arrears, the Government could reduce the cashdeficit, but this would not change the underlying fiscal position - and the need for adjustment. Thesemeasures would work only temporarily, as a buildup in arrears precludes access to further borrowing,and thus requires either fiscal adjustment or monetization of the deficit in the next period. Domesticborrowing at high interest rates, even when feasible, would lead to a debt spiral and to de-stabilizing andcomplete crowding out. Loss of fiscal control would lead inevitably to economic decline, as is shownby the experience of many developing and developed economies. Only long-run fiscal adjustment andan unwavering commitmnt to enterprise reform can create the conditions for stabilization and therecovery of growth.

Implememadon Capacity. The reform program is ambitious, and the Government isattempting rapid reform across many areas of the economy simultaneously. Given the complexity ofmany of these changes, and the need to implement appropriate institutional arrangements to support them,

The Reform Program and the Medium-Term Oudook 39

there is a significant risk of delay in the reform timetable. In particular, given the limited experiencewith a market economy, many of the reforms may take substantially longer to succeed than is currentlyanticipated. Furthermore, the pace of change may be constrained by the ability of the Governmentstructure to inplement the policy measures. In such circumstances, the assumed timing of the supplyresponse built into the projections above may be too optimistic. Simnilarly, there is a danger that the sharpchange in the economic operating environment may initially "freeze" economic decisionmaking ashouseholds and enterprises retrench in response to the wide array of changes confronting them. If thistemporary inaction is more prolonged than is assumed above, the output decline may be deeper, and moresustained than is suggested in the central scenario.

External Envronment. Like all economies, Kazakhstan is exposed to developments inthe economies of its key trading partners, and more generally, to developments in the global economy.Given its close economic integration with the rest of the FSU, and in particular Russia, Kazakhstan is

very vulnerable to adverse developments in the FSU. As was noted earlier, as long as Kazakhstanremains within the ruble zone it will be exposed to the negative macroeconomic effects of large Russianfiscal deficits and relaxed monetary and credit policies. Macroeconomic instability in Russia will hinderKazakhstan's attempts to stabilize its own economy. Moreover, since many enterprises remain closelyintegrated with suppliers and end-users in other parts of the FSU, the fortunes of some sectors of theeonomy will be closely linked to the pace of economic recovery throughout the FSU. If continuingpayments problems lead to a decline in interrepublican trade, and if domestic demand within key marketsin the FSU continues to fall sharply, then the gradual economic recovery suggested in the central scenariomay be more prolonged. To reduce this risk, enterprises should be encouraged to seek alternativesuppliers and markets outside the FSU. While this may be relatively easy for producers of mineral andother resource based products, producers of manufactured and other consumer goods will initially findit difficult to compete internationally.

Exvernal Financng Constraint. Should Kazakhstan be unable to mobilize sufficientexternal financing in the short term, then the economy would be exposed to a binding foreign exchangeconstraint on trade. This would lower imports in the short term and would reduce the future growthpotential of the economy. This would impose a harsher adjustment on the economy, would lowerincomes and would reduce consumption more than was suggested in the central adjustment scenario.Reduced imports might also constrain Kazakhstan's ability to import capital goods, thus slowing the rateof investment and technological transfer. (The external financing issue is discussed more extensively inthe next chapter.) The analysis suggests that Kazakhstan's dependence on the international financialcommunity and its efforts to achieve relative creditworthiness may continue substantially longer if theabsence of external financing slows the pace of the economic recovery.

Alternative Scenarios

Two specific downside scenarios have been identified. First, under a slower re.formscenario, output declines might continue for a longer period, since the expected private sector responsewould be delayed. Resource switching into Kazakhstan's areas of comparative advantage would beslowed down, and efficiency gains derived from increased domestic competition would be delayed.Slower reform perpetuates existing enterprise structures and prevents the rapid release of resources to newoperations. This locks valuable resources into industries in decline and dampens the expected supplyresponse in emerging sectors. Lower domestic production would increase import needs to satisfy

40 Chapter 3

minimum consumption and would reduce the exportable surplus for many products. As a result, the tradeimbalance would widen and external financing requiremnents would increase.

In particular, should reform of domestic energy pricing be delayed, the exportable oilsurplus would be lower as the current high levels of domestic energy consumption are sustained.Reduced oil export receipts would widen the projected trade balance in both the short and medium tenns.While the increase in supply associated with the new energy investments would offset some of this impactfrom the mid-1990s onward, the short-term reduction in oil export receipts would raise Kazakhstan'sexternal financing requirements and would have a negative impact on growth. Although the externalfinancing implications are discussed more extensively in chapter 4, the rising debt and debt servicepayments stream might prompt an externally imposed balance of payments constraint.

Lower external financing would reduce Kazakhstan's ability to import capital goods, thusdelaying access to new technology and increased production efficiencies. As an externally imposedconstraint on inmorts is likely to restrict investment in new capital, it would reduce the economy's long-run growth potential. In addition, it could also prompt further supply disruptions and cause a sharpercontraction in consumption than expected above. The net positive contribution from the external sectoris thus expected to be substantially lower under this scenario, and the adjustment profile more prolonged,at a higher cost.

The second scenario, tIe delayed inveament scenario, also results in slower growth.Delays in the development of oil production would result in a slower supply-induced increase in theexportable oil trade surplus. If domestic energy pricing reforms proceed as expected, a slower investmentprofile would have the greatest impact on Kazakhstan's growth potential in 24 to 36 months tine. Whilethe reducLon in domestic consumption associated with price reform would increase the exportable oilsurplus in the short term, the delayed output response would fail to provide the expected surge in exportreceipts required to arrest the centinued buildup in debt service obligations. Lower exports and anincreased debt service schedule would set off the same dynamics discussed above - constrained accessto external financing would restrict imports, lower domestic demand, and prolong output adjustment.In the short term, the lower investment profile would lower domestic demand and slow down thedevelopment of the private construction sector and associated activities. This reduction in activity islikely to be transmitted through to the labor market, with less employment in the short term on theconstruction of these major projects. "Downstream" activity is also likely to be lower.

While the timing of the impact of each scenario is difterent, the potential inmpact on theexportable oil surplus is of the same magnitude. A third potential scenario may capture both of theseinfluences. A prolonged delay in the release of exportable oil surpluses is likely to have a far largerimpact on activity than that implied by the first two scenarios. Reduced access to external credit wouldenforce a sharper contraction in imnports and would create more widespread supply problems. Thedynamic effects of this scenario on the adjustment path of the economy would be more severe. Thepotential external financing implications of this combined scenario are considered in chapter 4.

CHAPTER 4

EXTERNAL FINANCING AND DEBT MANAGEMENT

Kazakhstan should be able to access international capital markets over the medium tennprovided that: (i) the Govermnent remains committed to rapid economic reforms and (ii) the internationalconmmunity supports such efforts in the future through financial assistance. The reforms would involveensuring that an efficient use is made of economic rents from resource extraction, that energy investmentscome to fruition, and that the non-natural resource based component of the economy is developed. Aswas discussed in chapter 3, if reforns were to proceed at a slower pace. foreign resources would not beavailable to the extent assuned in the central scenario, which would potentially impose a foreign exchangeconstaint on the economy. This would be translated into lower GDP growth and larger drops in percapita consumption. Similarly, should the proposed energy investments be delayed, Kazakhstan's demandfor fuTids from the international financial community would be far greater and more prolonged.

Despite the anticipated secular improvement in Kazakhstan's extenal position, thecountry's needfor external assistance is sigmficant in the short term- Failure to obtain the requiredexternal financing will deepen the already sharp output drop projected under the central scenario. Ashortage of financial resources will not only endanger the sustainabiity of the reform program but it mayalso prevent the exploitation of the country's areas of comparative advantage in the short term. Thiswould prolong the country's dependence on the international financial co=mmuity.

Kazakhstan is well placed to receive significant financial support from the internationalcommunity during the transition. Medium-term prospects are favorable, the authorities are committedto the refonn program, and the rescheduling needs posed by FSU debt are limited. Should Kazalkhstan,like other republics of the FSU, agree with Russia on an exchange of its claim on FSU assets for its shareof liabilities (the zero-variant), then overall financing requirements would be significantly lower, andKazakhstan's creditworthiness would improve significantly improved. This chapter discusses the likelyevolution of external financing requirements over the 1990s and briefly discusses the desirableinstitutional arrangements relating to the Government's management of external aid and debt.

Kazakhstan's Estimated Exteral Financing Requiremens

Estimates of 1993 financing requirements are presented in Table 4.1, assuming thatKazakhstan retains its share of FSU debt obligations. Two medium-term scenarios, based on the centraland alternative scenarios discussed in chapter 3, are also presented below; these provide some insight intothe general sensitivizy of Kazakhstan's external position and potential demand for financing over thelonger term. The cewral scenario reflects our current assessment of the most likely transition path. Thesecond, low case, scenario attempts to quantify the impact of slower reform and lower trade surplusesstemming from delayed investment and higher domestic energy consumption: it assesses the combinedimpact of the alternative scenarios discussed in paragraphs 3.64 to 3.68. The financing requirements andpotential funding sources for Kazakhstan are considered under each scenario up to the year 1999. Whileconsiderable uncertainty surrounds these estimates, the medium-term scenario analysis provides a usefulassessment of Kazkhstan's likely debt profile and servicing capacity over the decade.

42 Chapter 4

External Financing Requirements for 1993 and the Medium-Tenr Central Adjustment Scenario

Setting aside the staistical uncertainties in Kazakhstan's extemal accounts, externalfinancing requiremnents for 1993 are estimated in the range of US$2.2 to US$2.4 billion (Table 4.1). Thiscomprises a non-interest current account of between US$410 and US$710 million, a US$460 to US$560million buildup in gross foreign reserves (including an estimated US$210 million in the form of an IMFstand-by), the elimination of between US$400 and US$600 million in arrears, and debt service paymentsin the order oA¶ US$700 to US$800 million. Assuming that Kazakhstan remains responsible for its shareof FSU debt service obligations, the central scenario medium-tenn projections in Table 4.2 suggest that,with the removal of arrears in 1993 and the rescheduling of FSU principal obligations out to 1995, thefinancing requirement falls sharply over the rest of the decade.

In particular, whencapital goods imports associated with Table 4.1: Kazakhstan - External Financingforeign investment projects peak in Requirements and Disbursements for 1993

1995, the external financing US$ milions 1993requirement is estimated at betweenUS$1.7 and US$2.0 billion. Non nterest Current Account 410 to 710Thereafter, in the absence of an Debt Serviceoffsetting expansion in impmo, the - Amordzadon 400 to 600

external financing requirement is - Intent 150 to 250expected to decline sharply as oil Chage in GrossReserves 460 to 560exports grow and the trade balance Change_in_G_os__Reserves_ 460_to_56

moves into surplus. KaEakstan's Total Financing Needs 2200 to 2400financing requirement is expected todecline in 1997 in line with the rising Direct Foreign Investment 380 to 580external trade surplus to between MultilateralUS$1.2 and US$1.3 billion, and to - World Bank 100under US$1.0 billion in 1999 and - 2102000. Increased debt servicing Bilateral 200 to 300commitments associated with Export Credits 0 to 100

Granml ~~~~~~~0 to 50rescheduled debt agreements OtS3 o to 50accumulated during the earlytransition years underpin the external Note: The ranges indicated above reflect uncertainties around thefinancing requirement at around $1.0 midpoint of each of the components rather than alternative policybillion in the latter half of the 1990s. scenarios. Thus, neither the low ends nor the high ends of the ranges

can be added up to portay an independent balance of payments

These projections scenario.

assume that the reform package " Positive value implies repayment of arrearsproceeds as planned, that the a Compriss both humanitria and Technical Assistance grantsGovernment undertakes energypricing refonn (thus rationalizing energy consumption), and that the foreign direct investment deals thathave already been announced for the oil sector proceed as currendy envisaged. As has been discussedin chapter 3, the movement to world oil prices by 1994, the rise in oil production associated with newenergy sector investment, and the contraction in domestic oil consumption in response to reduced demand,would lead to a rise in net oil exports from approximately US$0.4 billion in 1992 to US$1.4 billion in1993, US$2.4 billion in 1995, and US$3.5 billion in 1997.

External Fmancing ana Debt Management 43

Table 4.2: Medium-Term Projections: Kazakhstan External Financing Requirements, Central Adjustment Scenario.

1995 1997 1999Lower Upper Lower Upper Lower Upper

US$ Billions Bound Bound Bound

Non-Interest Cunren Account 0.78 0.96 0.20 0.24 -0.30 -0.36Debt Service

- Amortization 0.50 0.61 0.49 0.60 0.64 0.78- Net Intereste 0.29 0.35 0.35 0.43 0.42 0.52

Change in Arrears2 0 0 0 0 0 0Change in Gross Rcserves 0.09 0.11 0.09 0.11 0.09 0.11

Total Financial Needs 1.66 2.03 1.13 1.38 0.86 1.05

Direct Foreign Investment 0.79 0.96 0.70 0.85 0.21 0.26Debt Deferral

- Amortization 0.29 0.36 0 0 0 0-Interest 0 0 0 0 0 0

Multilatal Financint3 0.23 0.28 0.11 0.13 0.07 0.09Bilateral Loans 0.20 0.24 0.18 0.22 0.23 0.28Export Credits 0.13 0.16 0.14 0.17 0.35 0.43Grants' 0.03 0.04 0.01 0.01 0 0

Footnotes:'Net of Kazaklistan's share (US$19m) of debt repayments due to tie FSU.2 Positive valuc implies repayment of arrears.3 ncludes IBR]D, IMF and EBRD fimnncing.4 Comprinses both grant finance, and explicit Technical Assistance' grns.

Potential Financing Somrces

Despite the considerable foreign invesunent flows over the early years, a large proportionof Kazakbstan's initial financing requirements need to be met from the following: (i) official sources inthe form of bilateral loans, export credit finance, and grants; (ii) multilateral institutions, such as theWorld Bank, IMF, and EBRD; and (iii) favorable official and commercial creditor rescheduling ofexisting FSU debt. To access these potential sources of funds, Kazakhstan needs to develop andimplement an appropriate macroeconomic and structural adjustment program with the support of the IMFand the World Bank. Contingent on such agreements, the following sources of external financing maybe identified.

Private Finncing

Foreign direca investment (FDI) flows into the oil and mineral sectors are expected to bethe most important private financing source over the next two to five years. Despite some uncertaintyabout rules and regulations on foreign investment, a mmber of significant agreements have already beenentered into with foreign companies (see chapters 3 and 8). The resulting net capital inflows should playa significant financing role from 1993 onward. After negligible estimated inflows of around US$30million in 1992, PDI is expected to increase to between US$380 and US$580 million in 1993, rising to

44 Chapter 4

a peak of around US$875 million in 1995.' Sustained inflows of around US$800 million are exectedover both 1996 and 1997. Unless other investment projects come on stream, existing major projectswould have been completed toward the end of the decade which would result in a sharp fall in inflowsand a rise in profit remittances. By that time, however, a strong trade position and improvingcreditworthiness should provide Kazakhstan with - at first - limited access to commercial borrowing tooffset this contraction in FDI fiancing if required.

Official Sourc

In the short term, the balance of Kazakhsn's financing requirement will need to be metthrough recourse to official sources and debt rescheduling. Specifically, nmltilateral finance, exportcredit, bilateral loans, and grants are expected to be the primary available fimding sources.

The internationalfinancial institutions are expected to play a significant role in supportof the reform program. As was noted above, agreement with the IMF on a standby arrangement willprovide the framework for bilateral and multilateral efforts to finance short-term requirements as itprovides creditors with an assurance that funds are being utilized in a manner consistent with desirablestabilization objectives. Agreement on an IMF standby is expected in early 1993, at which point theWorld Bank would propose additional assistance in the form of a fast-disbursing rehabilitation loan.Further World Bank lending in the energy, agriculture and telecommunications sectors is anticipated overthe next two to three years. Multilateral organizations are expected to provide up to US$320 million in1993, and around US$250 million annually over 1994-96. A steady stream of development lending isexpected from these institutions over the remainder of the decade.

Equally important will be access to bikteral loan finance. An estimated US$200 toUS$300 million in bilateral loan disbursements are required in 1993, and current projections suggest thata similar magnitude will be required annually over the remainder of the decade. The provision of grantand concessional bilateral loan financing to ensure the availability of critical imports will be essential ifKazakbstan is to successfully negotiate the difficult post-liberalization stage of its transition to a marketeconomy. Technical support to help build institutional structures is also essential to the success of thereform program (see below). The 'Other" financing source in Table 4.1 captures additional bilateralfinancing needed to fund the estimated deficit on interrepublican trade in 1993. This will need to befinanced either within the ruble zone, or externally, with hard currency. The nature of this componentwill change if Kazakhstan exchanges its share of the outstanding liabilities of the FSU for its claim onthe assets of the FSU with Russia (the zero-variant debt option), or if Kazakhstan introduces its owncurrency.

Export Credt Agences are expected to play an important role in meeting Kazakhstan'sfinancing needs over the decade. New financing in the form of loans or insurance/ guarantees is currentlyavailable only to the signatories of the Memorandum of Understanding of October 1991, and is dependenton the adoption of an IMF stabilization program and the existence of credible state guarantees for thesenew loans. A number of foreign government export credit agencies have established credit and guaranteelines for the entire FSU. For example, the Japanese Government has made a US$1.8 billion equivalentmedium- and long-term export credit insurance line available to the FSU, while approximately a third of

2 aac associatd incrmase in imports of capial goods has been built into te bance of payments projections.

Extenal Financing and Debt Management 45

Fig. 4-1: Potential Sources of External Finacing Requirements

U8S mn.2000-_

1600-h

1000-i .1.

600 - __

1994 1996 1996 1997 1998 1999 2000

Source of Funds

1Z3 Debt Ddf FDI i MultI-LaterallZl Bltsural _ Grants i Export Credlts

the Italian Govemment's US$1.2 billioncredit line to the FSU is available to Table 4.3: Kazakhstan - Projected

republics outside of Russia. Commitnents and Disbursementsfor 1993

While export credit is Form of Fmancing Comminments Disbursementsexpected to play a small role in 1993 and1994, the improving creditworthiness of Balance of Payments' 450 to 630 280 to 390Kazakhstan is likely to result in a largercontrbution from this source in the P'wect Assistance 115 lo 210 80 to 145

second half of the 1990s. This type of Technical Assistance 60 to 80 40 to 60financing is expected to grow frombetween US$100 and US$200 million in Humantaria' O to 3 o to 31995 to over US$400 million by the endof the decade. Specific commitments Total 625 to 925 400 tD 600

already made to Kazakbstan include a Includes both bilateral loans and export credits.

DM300 million export credit line from 2 Prmarily in the form of pharmaceutical products.Germany, US$200 million from Turkey,US$100 million from Oman, and a

46 Chapter 4

Box 4-1: Inter-republican Debt Agreements and the Current PaymentsSituation

Inter-republican Memorandum of Understanding (Mole), October 1991. The MoU committed thesignatories to the following:

- to be jointly and severally liable for the external debt of the FSU. It is generally understood thatthis liability is to cover all debt obligations contracted by the Government of the USSRoutstanding at the date of the MoU. So far the agreement has been signed by nine republics(including Kazakhstan) which, according to the Debt Allocation Treaty (see below) account forabout 90 percent of the debt.

-. to designate the VEB (or any successor to be determbied) as the Debt Manager with full authority to be thesole interlocutor with creditors, negotiate and enter into commitments on their behalf, and service the debtas agent on behalf of tie republics.

-..- - .. to conclude an agreement on tie procedures and mechanism for debt service and another on thepartcipation in the settement of the debt-on a joint and several basis-of the three Baltic states.

Inter-republican Debt Alocation Treaty, December 1991. The Treaty allocated specific shares of theFSU debt to the fifteen former republics. Russia was allocatd 61 percent; Ukraine 16 percent; Belarus, Kazakhstan,

:-and Uzbekistan, about 4 percent each:'and ot.herrepublics less than 2 percent each. Tbese shares were determiniedmainly on die basis:of the republics' shares in NMP/GDP. So far, the Treaty has been signed by eight republics

-(.ncluding Russia and-Ukraine). The Treaty aso makes some specific prpvisions about debt management and debtservice procedures. It

-: :: prescribes tbe establishment of an Interstate Council for Foreign Debt Servicing and Utilization. of Assets(IC) as a controlling body over external debts and asset management, while confinuing the VEB'sresponsibility for externl debt service as agent on behalf of the republics;:

'- ----- charges the IC with reorganizing dLe VEB; and' :--- ' 'obliges the signatories tL set up special accounts in the VEB for sCvi" gthe debt. to make

advance payments according to an agreed schedule into these accounts, and to set up insurancefunds for the special accounts with the VEB.

Inter-republican Debt Management Agreement, March 1992. On March 13, 1992, the Prime Miistersof nine republics (including Kazakhstan) reached agreement as foliows:

.- :-: ThIe IC. with rsponsibility for setting policies for and generally managing-te externl debts and asses of'-'-. di-the' ;SU, was established with three co-chairs,. two permanent ones (Russia and Ukraine), and. one rotaing

among,the other membm. Voting powersare proportional to the members' shares of the debt. Policydecisions require a qualified majority of,80 percent

:.--- :: :The VEB was confirmed as the sole Debt Manager, with a newly created deparinent solely responsible forthe management of existing FSU externa debL

..Current Payments Situation. Between January aad the end of May 1992, the Interstate Council made:approximatel$717.2milion in debtservice payments, principaUly in coniecton wihfood .credits. Arrears on altcategories of debt have begun to. accumulate to a significt extent. Exd udingoverdue mporta pyments, arrearsstood-at approxiately $4.3 billion at the end: of.May 1992. -Sine the icption of the currentairangements with

..respect to :he former USSR debt, all amoumts remitted to teEl in its capacity as.DebtMaager' have:been by:.- issia (approximately $583 million). T-lhe onrly other source of:payment ihs periodhas been i die form of

.1temporary drawings by` the VEB on its clients' balances- in.s G;iveninsfienit rign exchange to meetal expayent obliptions,:the-stated picipleof the Deb anager hs -b t i ayments to cedm::: ade available for.'th supply of food, medicie2nd "ofther essen ip':s:

,,,,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ..,, ., ,,-:. -. -. 0:-......

External Financing and Debt Management 47

US$70 million line of credit from the EC tied to food and pharmaceutical imports. Other commnitmentshave been made by Pakistan and Portugal. While collectively these alternative sources offer significantfinancing support, their cost-effectiveness and financing implications need to be assessed carefully.

Significant amounts of tecimical assistance (TA) are expected to flow into Kazakstanover the next two to three years. While the institutional absorptive capacity may provide some constrainton the amount of TA in the very short term, large amounts of assistance are required to developKazakhstan owing its relative isolation from international experience and knowhow. Given the experienceof other economies in transition, up to US$50 to US$60 million TA disbursements per year may berequired over the short to medium term. Of this, a core technical assistance package of US$30 millionhas been identified by the authorities. Grant-financed technical assistance will be required in areas ofcritical infrastructural development, such as privatization, accounting and auditing standards and practices,the legal system, and the social safety net. These projects are crucial to the success of the reformprogram and should be a priority for the Consultative Group to finance.

Specific TA requirements are presented in each of the relevant chapters of this report.The World Bank has already extended considerabile TA to Kazakhstan under the Bank's TechnicalCooperation Program (TCP) in such areas as privatization, energy pricing, and economic management.Further TA initiatives are planned for the remainder of 1992. and also for 1993 and 1994. Otherorganizations have also provided similar TA in other fields. The EC, for example, has already allocatedapproximately US$23 million to Kazakhstan for TA. While the urgency of targeted TA cannot beunderstated, it is not a substitute for the buildup of the Government's own capacity. The current limitedcapacity of the Government to implement the reform program is a significant risk to the overall successof the adjustment.

Kazakhstan is likely to receive humanitarian and other grant assistance from both privateand official agencies during the initial transition stage. Grants of this nature will be in the form of tiedfinancial assistance or in goods such as pharmaceutical products.

An indicative allocation of comnmitments and disbursements between the alternativeexpected fonns of financing in 1993 is presented in Table 4.3. Bilateral and multilateral commitmentsof between US$450 and US$630 million will be required to generate disbursements in the order ofUS$280 to US$390 million over the year. While the Govermment does not yet have a fully integratedpublic investment program (PIP) (see Box 3.1), the authorities have submitted a list of projects for theconsideration of the Consultative Group as a first step toward the development of a PIP. Projectfinancing of between US$80 and US$145 million may occur, mainly in the second half of the year.These projects, although not yet assessed by the Bank, are of the type which support the private sectorby providing the necessary infrastru.-ure for development. Some of these projects are critical to supportan early supply response. Others will need feasibility studies which could be financed by the donorconmmunity. Of the technical assistance requirements identified by the Government, between US$40 andUS$60 million may be expected to be disbursed in 1993, while a small amount of humanitarian aid -largely phannaceutical - may also be received in the early part of the year.

Deferral and Rescheduling of Debt Service

In the absence of a zero-variant debt agreement with Russia, the balance of Kazakhstan's1993 financing requirements would need to be met with fiurther debt deferral and rescheduling of pre-

48 Chapter 4

cutoff FSU debt. Following the dissolution of the USSR, Kazakhstan assumed responsibility for a shareof the FSU's external debt and foreign assets. Kazakhstan has been a signatory to all interrepublicanagreements on the allocation and management of the FSU's external debt since October 1991. Theseagreements include: (i) the Memorandum of Understanding (MoU) on the Debt to Foreign Creditors ofthe Union of Soviet Socialist Republics and its Successors of October 28, 1991; (ii) the Debt AllocationTreaty of Succession on Foreign Debt and Assets of the USSR of December 4 1991; and (iii) the DebtManagement Agreement among CIS countries of March 13, 1992 (see Box 4 1).

Under the Debt Allocation Treaty, Kazakhstan became liable for 3.87 percent of theFSU's debt as of January 1, 1991, and assumed an equivalent claim on the FSU's foreign assets. Noagreement has yet been reached on the allocation of disbursements made after that date. In the absenceof such an agreement, Kazakhstan's share of inherited debt is assumed to be 3.87 percent of alloutstanding liabilities of the FSU, estimated at US$70 billion. Of the inherited debt stock of US$2.7billion, nearly 60 percent is owed to, or guaranteed by, official creditors, 30 percent is owed tocommercial banks, and 10 percent is owed to other private creditors. As of January 1992, external debtwas estimated at between 30 to 35 percent of GDP.

In November 1991, the Group of Seven (G-7) signed a conmnunique with the originaleight signatories of the MoU whereby the official creditors agreed to a partial deferral of amortizationpayments on medium- and long-term debt due in 1992. This understanding was formalized in January1992 when the Paris Club agreed to defer 100 percent of anortization payments due between December5, 1991 and the end of 1992 on the "concerned debts" until January 1, 1993. Interest payments were notdeferred, and trade arrears were to be paid off in two installments in 1992.

The January agreement has been reviewed by the Paris Club. In March, with arrears oninterest and non-rescheduled principal payments accunulating, the deferral of principal due, (on pre-cutoffdate credits) was prolonged until end June 1992 when a further deferral was agreed upon until the endof September 1992. The Interstate Council has also engaged in similar discussions with its commercialbank creditors, represented by a group of major creditor institutions referred to as the Bank AdvisoryCommittee (BAC). On December 16, 1991, on March 26, 1992, and again on June 25, 1992, the BACagreed to a roliover of principal payments due on pre-cutoff date credits, in each case for a 90-dayperiod. As with official creditor debt, no deferral of interest payments was agreed.

While rescheduling negotiations are currently under way, under the central scenario it isassumed that Kazakhstan is to receive a further rollover of principal payments due on both Paris andLondon Club FSU debt until the end of 1992. Given the short-run financing difficulties of the transition,further principal rollover on pre-cutoff FSU debt would be required over the period to 1995. The centralfinancing scenario considered here assumes a further rollover of principal in 1994 of between US$300and US$400 million in 1994 and 1995. The expected improvement in Kazakhstan's external accountssuggests that no further debt relief is required over the remainder of the 1990s. Should Kazakhstan agreeto the zero-variant debt option on its share of FSU debt, then its debt obligations would fall significantlyand the traditional creditworthiness indicators would improve dramatically. This would increaseKazakhstan's ability to carry a higher debt load during the transition and would underpin higherinvestment and consumption levels.

External Financing and Debt Management 49

External Debt Management and Creditworthiness

While the outlook for debt appears encouraging, Kazakhstan will need to manage its debt stock efficiently(both its existing debt and new external borrowings) if external creditors are to maintain confidence inthe economy and if the country is to sustain its relative creditworthiness. Creditors will be looking forassurances that an adequate debt management capacity is in place. This requires debt and capital flowsreporting and monitoring mechanisms, as well as a coherent debt strategy. The recording of publicexternal debt in Kazakhstan is currently undertaken by the Alem Bank (Bank for Foreign EconomicRelations), formerly a branch of the bank by the same name in the USSR, which traditionally handledall of Kazakhstan's foreign exchange transactions. The responsibility for external debt recording has beentransferred to the National Bank of Kazakhstan. Given the NBRK's lack of experience in this area, itwill require technical assistance in setting up and operating the unit. Debt management models have beendeveloped by both the World Bank and other agencies and should be made available to the Governmentunder TA arrangements.

Under the central scenario, Kazakhstan's total external debt (including FSU debt) isexpected to peak at around US$5.1 billion in 1996. Thereafter, diminishing financing requirements andrising amortizion payments should stabilize the debt level at around US$5.0 billion over the remainderof the period to the year 2000. While the rising amortization payments would fail to offset the slightincrease in annual borrowings (as FDI inflows diminish), the debt service to exports ratio would fall tounder 14 percent over the latter half of the period.

Medium-Term, Low Case Adjustment Scenario: Slower Reform and Delayed Investment

While the most likely scenario sees Kazakhstan's dependence on international donorseffectively disappearing in the second half of the 1990s, the slower adjustment scenario envisages a needfor substantial, prolonged assistance well into the 2000s.

As has been discussed above, if enterprise restructuring and domestic energy pricingreform proceed at a slower pace than is envisaged at present, the reduction in domestic energyconsumption will not materialize. Moreover, a delay of up to two or three years in the announced energyinvestment projects will also reduce the exportable oil surplus. The resulting reduction in the oil exportsurplus - to around US$1.4 billion in 1995, compared with US$2.4 billion in the altemative scenario -would prevent the trade balance from moving into surplus until the year 2000. The turnaround in thecurrent account balance would be delayed even fiurther, as rising interest and principal payments in thesecond half of the 1990s, and in the early 2000s, would outweigh the trade balance improvement.

Estimated financing needs under this scenario would increase sharply over the period tobetween US$2.8 and US$3.4 billion in 1995, and would continue rising over the period to betweenUS$4.0 and US$4.5 billion by the year 2000 (Table 4.4). Even with further principal and interest reliefover the period, the delay in foreign direct investment capital inflows would result in a larger need forbilateral assistance over this period. In particular, total bilateral requirements would increase frombetween US$200 and US$300 million in 1993 to around US$1.5 billion in 1994 and US$1.8 billion in1995.

50 Chapter 4

Table 4.4: Medium-Term Projections: Kaakhstan Extemal Financing Requirements,Low Case Scenario: Slower Reform and Delayed Investment.

1995 1997 1999Lower Upper Lower Upper Lower Upper

Non-Interest Current Account 1.51 1.85 1.04 1.27 0.63 0.77Debt Service' 1.16 1.41 1.70 2.08 2.61 3.19Change in Rese; .es 0.09 0.11 0.09 0.11 0.09 0.11

Total Financial Needs 2.75 3.37 2.83 3.46 3.33 4.07

Direct Foreign Invcstment 0.48 0.58 0.91 1.11 0235 0.42Debt Deferral 0.29 0.36 0 0 0 0Multilateral Credie 0.23 0.28 0.11 0.13 0.07 0.09Bilateral Loans 1.60 1.96 1.67 2.04 2.57 3.14Export Credits 0.13 0.16 0.14 0.17 0.35 0.43Grants3 0.03 0.04 0.01 0.01 0 0

Footnotes:'Net of Kazakhstan's share (US$19m) of debt repayments due to the FSU.2 lncludes IBRD, IMF and EBRD financing.3 Comprises both gant finance, and explicit 'Technical Assistance' grants.

Such higher financing requirements wvould probably not be met if they were the outcomeof a lack of reform. Kazakhstan's growth possibilities would inevitably be affected during the 1990s andin the early 2000s. If, on the other hand, higher financing needs were the result of lower oil exports, thecountry could try to borrow at more favorable terms. However, on the basis of realistic assumptions,this would still result in growing debt service obligations over the latter half of the 1990s. The potentialescalation in debt service commitments is clearly illustrated by the projected increase in these obligationsto approximately 80 percent of total financing requirements by the end of the decade. In this scenario,foreign debt continues to increase to around US$15 billion by the year 2000.

Under this scenario increases in foreign direct investment flows over the period 1995-98would fail to offset the heavy danand on bilateral funding sources. By the end of the 1990s,Kazakhstan's sustained current account imbalance and exclusion from conmercial borrowing would resultin the country's financing liability being carried by the bilaterals or in a sharp contract. in imports.With lower imports, the net flnancing requirement would be lower than that suggested by theseprojections. This would occur at the expense of a lower standard of living and a significant rise in thesocial and economic costs of the adjustment phase.

External Financing and Debt Management 51

External Financing Overview

The balance of payments projections and the resulting financing requirements are subjectto considerable uncertainty. Both export supply and import demand are susceptible not only to theinplementation of reforms but also to relatively exogenous factors. A slower transition, for examnple.may increase the trade deficit in the short mun and weaken capital inflows, while a faster adjustment maystimulate a more rapid supply response in the tradables sector and promote greater inflows of directforeign investment. The level and direction of trade, and the nature of potential financing flows. mayalso change significantly if Kazakhstan moves to its own currency. Other important uncertaintiessurround Kazakhstan's trading relationship with Russia and the other FSU republics, its short-run oiltransportation capacity, and the likely external tariff structure.

Despite these uncertainties, the two sharply contrasting alternative financing scenariospresented above highlight important points that need to be considered by the Government of Kazakhstanand by potential external financing sources. These include the following:

(i) The costs of slowv macroeconomic and mnicroeconomic adjustnent may be particularlyhigh. The Government must move quickly on both cverall systemic reform measures andenergy pricing reform in an effort to enhance efficiencies in production processes and inenergy consumption. The opportunity cost of subsidized energy pricing is explicit in thetwo scenarios described above.

(ii) The medium-term creditworthiness of Kazakhstan also depends on the timely increase inoil exports. If existing energy sector developments occur as envisaged, the additional oilexports should be capable of financing Kazaldksran's development in the medium term.The Government must therefore manage this process carefully and must ensure thatexisting comnmitments made to joint-venture partners are met, within budget and on time.

(iii) For Kazakhstan's full potential to be reached, the international financial community willr-eed to provide concessional assistance for technical assistance and humanitarian aid. Inaddition, until petroleun exports are increased, some continuing debt relief would berequired on Kazalhstan's share of FSU debt. This would underpin the adjustmentprogram and provide critical support during the difficult early stages of transition.

(iv) With international support in the initial stages, Kazakhstan has a real possibility ofmoving to a sustainable growth path that would not require ongoing external financialassistance. At that time, Kazakhstan would be able to choose between (i) still higherlevels of imports, investment, and growth, supported by continuing external assistance,or (ii) a more modest rate of growth with reduced reliance on external assistance.

52 Chapter 4

Institutional Arrangements Aid Management and Coordination

Assistance should be closely matched with priority needs. While close coordination hasbeen maintained among the IMF, the Bank, the EC, EBRD, OECD, and other multilateral agencies toensure the efficient use of technical assistance, overall coordhnation has yet to be achieved in Kazakhstan.When foreign assistance begins to play a substantial role in a country's development process, failure tomanage and coordinate these inflows can be costly. At this stage an effective coordinating mechanismwill be critical to ensure that scarce aid resources will not be misdirected, duplicated, or wasted.

Effective aid management must meet a number of requirements. First, policymakers musthave a clear grasp of key development objectives, policies, and critical programs, and must communicatethis understanding to aid managers: this is essential if aid is to be used to meet priority needs. The publicinvestnent program (PIP) traditionally plays an important part in ensuring that the use of aid is consistentwith the broad development strategy. Second, aid must be fully integrated into the Government budget.The preparation, presentation, and execution of the budget must reflect the demands of the aid program.Third, responsibility for aid management/coordination should be clearly assigned and should beconcentrated in one body. Finally, sound financial management is critical. If the Government is to keeptrack of aid utilization in an orderly way and maintain proper external debt records, accurate Governmentaccounts must also be maintained. Government procurement and audit are also important aspects offinancial management. To meet a mber of these objectives the Government of Kazakhstan is movingquickly to establish an Aid Coordination Unit (ACU): the initiatives in this area are discussed in theManagement of External Assistance paper presented to the Consultative Group by the Government. Ina similar vein, the Government has set up a project implementation unit (PIU) to ensure the efficientdisbursement of the anticipated World Bank rehabilitation loan.

PART H

THE AGENDA FOR STRUCTURAL REFORM

Transition to a market economy in Kazakhstar began on January 3, 1992, with the eliminationof price controls for most consumer and producer goods. This price liberlization introduced a greaterdegree of competition for retail activities, and has led to some private sector participation in the supplyof foodstuffs and consumer goods. However, most economic activity remains far from the competitiveideal. The vertically integrated structure of production within the FSU provides little scope for immediatecompetition, and the scarcity of foreign exchange precludes effective competition from foreign suppliers.Structural reform is therefore required to complement price liberalization.

The agenda for structural reform focuses primarily on increasing resource mobility, so as to allowfactors of production to respond to market prices, and on targeting social spending, in order to protectthe poor. Resource mobility will be achieved by the reform of goods, labor and financial markets, bycreation of anti-monopoly regulation, by the breakdown of enforced transactions with the state, and bytrade liberalization. Labor market flexibility needs to be increased, with respect to both wage settlemnentsand labor mobility within Kazakhstan. Financial market reform should increase the NBRK's ability toregulate and supervise banks, and should force banks to re-capitalize and follow sounder lending policies.Bank restructuring must consider the breaking up of large institudons into smaller banks subject toincreased competition. Analogously, and-monopoly regulation in the goods market should examine thepossibility of breaking up busincsses with dominant market positions. This should prevent cartelagreements and other noncompetitive behavior. The competitive enviromnent is to be enhanced by adetailed tariff review designed to increase external competition.

These measures will complement the development of a vibrant private sector created through rapidprivatization and the elimination of barriers to entry. Private sector investment will be furither elicitedby a reorganization of the legal environment and the establishment of a mutually consistent set of lawsthat will enforce property rights and decentralizes contract agreements. Finally, the social safety net willaim at protecting the living standards and health conditions of the poor, and help reduce the costs offrictional unemployment during the transition. The main focus of the reform in this area is to increasethe efficiency of spending and improve targeting. Support from abroad may help avoid shortages ofessential drugs, vaccines and medical equipment during the early years of transition.

Each of these areas is discussed in Part II, while an annex on transitonal trade and paymentsarrangements discusses the current FSU trade enviromnent within which Kazakhstan is undertakingreform.

CHAPTER 5

ESTABLISHING COMPETITIVE MARKETSAND FACILITATING RESOURCE MOBILITY

Despite the impressive reforms already undertaken by the Government, there remain anumber of important measures that still need to be taken to release constraints, promote efficient markets,and generate the desired positive supply response. While the government is aware of these constraintsmuch of the critical structual reformn is yet to occur. A number of important deregulatory, andinstitution building, measures need to be taken in all markets of the economy. This chapter focuses onthe labor and financial markets.

The Labor Market

Kazakhstan needs to effect radical changes in the functioning of labor markets underconditions of severe shocks. Prior to the current changes, the state accounted for over 95 percent of totalemployment, there was zero unemployment, and workers received a mixture of controlled cash wagesand other benefits that bore little relation to hur.m caiDtal or productivity. While basic social serviceswere provided by the state irrespective of employment, many other aspects of non-wage benefits arelinked to employment: housing, for example, has often been provided by enterprises, while socialprotection, including pensions, disability payments and unemployment benefits, are financed by(extraordinarily high) payroll taxes. While the right to employment formed part of the ideology of thesocialist stare, it was underwritten by an incentive structure that rewarded production of output with noregard to costs. Enterprises had every reason to take on and hoard labor. This led to the apparentlyparadoxical combination of overmanning and labor shortage. And while labor turnover in firms is quitehigh, there are widespread legal and effective restrictions on labor mobility-

All this will have to change if KazakiLstan is to successfully shift to a market-basedeconomy and effect the reallocation of resources that will take it on to a viable growth path. Both theright to employment and the predominance of the state in provision of employment will have to go.Wages will need to reflect scarcities of different categories of labor. Part of the non-monetized socialwage (housing, for instance) will have to become monetized-i.e. workers should receive the cash topurchase the services; while the social protection system will need to be reformed to take account of theloss of the state employment guarantee. Labor will need to be mobile-between finms, and often alsobetween sectors and locations-in response to economic demand, and not through an artificially creatzdlabor scarcity. Labor market ins:itutions and the behavior of firms and workers will need to develop tofacilitate information flows between employers and jobseekers to support job matches. Contracts betweenemployers and workers will need to have the flexibility to allow the market to work, including short termcontracts with no severance pay costs.

Such a transition is a huge undertaking. It is made much more difficult because it isstarting under conditions of severe economic shocks. While Kazakhstan, like Russia, will probablyexperience a positive terms of trade shock once prices shift to world levels, it is now suffering a majoradverse shocks due to the crisis in previously state-managed economic relations between republics andenterprises. As discussed elsewhere, the Kazakhstan government has not suffered the radical loss inlegitimacy that was suffered by the Soviet state and now by the Russian state-and this may hold outgreater hope for moderating supply-side disruptions due to a collapse in traditional inter-enterprise

Establishing Competetive Markets and Facilitating Resource Mobility 55

relationships. But this is small comfort for a country whose imports traditionally amounted to over athird of GNP, with very high dependency on inter-republic transactions for industrial production. Thismatters for the transition in the labor market because effective adjustment to a macroeconomic declinethat is already of the order of 30 percent requires a combination of falling real wages and at leasttemporary rises in unemployment. This is on top of expected employment declines with the shaking outof ovenmanming (some estimates for other republics of the FSU put this at 20-25 percent in the industrialsector, but it is no doubt highly variable across sectors and firms) and the liquidation of grossly inefficientfirms. And Kazakhstan also faces, like the other republics, a huge nominal price shock due to thecombination of price liberalization and the loss in macroeconomic control (especially in Russia). Wageadjustment mechanismns are having to enter a new world with at least a big nominal bang.

A distinction is drawn here between labor issues tied up with the macroeconomy and thoseconcerned with the microeconomic functioiing of the labor market. These affect each other, of course:the greater the progress in developing a well-functioning labor market at a microeconomic level, theeasier will the macroeconomic transition be. These links will be drawn out. But while full-fledgedmarket behavior and institutions could take years to develop, the govemment is already facing two keylabor market issues that will have a powerful bearing on both macroeconomic adjustmnent and theinitiation of economy-wic ' restructuring of production-the management of wages and of employment,or rather unemployment. l his is critical to support the overall adjustment process. Unemployment couldalso place severe strains on the system of social protection, threatening macroeconomic stability and otherpublic spending needs.

Labor markers are not only about resource reallocation. They matter so much becausethey directly affect people, and consequently will have a powerful influence on changes in welfare andon the social and political sustainability of the transition.

The links with the macroeconomy, the system of social protection, housing and welfarehave all been emphasized here. The other central linkage lies with the perfonnance and behavior of theenterprise sector-both the state sector and the emerging private sector. Firms will increasingly takeresponsibility for hiring and firing and for offering wages-often in negotiation with workers'representatives. Enterprise restructuring is intimately tied up with labor market change.

Workers in Kazakhstan in 1990

Of the total 1990 population of 16.6 million people, 7.3 million are in the workforce i.e.each worker supports, on average, somewhat over 2 dependents. The participation rate of the workingage populiaon is 79 percent-a high rate by intemational standards, reflecting high activity rates amongstadult women. Employment is effectively guaranteed, with less than 4000 registered unemployed in 1992.Although employment in the state sector dominates, already the proportion working outside the statesector has risen to 7 percent, up from around 4 percent in the 1980s.

Huge industrial firms, ferrous metals and coal for example, are high profile employers-the Karaganda Coal Complex alone employs around 70,000 people. But the industrial sector onlyaccounts for a fifth of total employment, with almost another fifth in agriculture, around tenth each intransport, construction and trade, and the remaining 30 percent in other services, notably teachers.

56 Chapter 5

Average annual wages are 3200 rubles, equivalent to USS3,000'. GNP per worker isdouble average wages, a low wage share by the standards of market economies, reflecting the high levelof non-cash social wages in the economy. hdustrial workers earn slightly more than wor'kers in othersectors, at 3500 rubles. Their families have on average two workers, earning a total annual income of7100 rubles (US$6,600), with somewhat over 2 dependents.

Finally, a high proportion of workers are not Kazakhs-around two-thirds of all workersand ahnost 80 percent of industrial workers are of other nationalities, with Russians accounting for a highshare of these.

Wage and employment trends

State employment is already Fgure 5.1: Total State Employmentadjusting significantly to the adverse shocks of thepast few years. Total employment in the statesector peaked in 1988 and started a slow decline Jthat rapidly accelerated in 1991: it fell by 87,000 J°° _ _ -_people between 1988 and 1990, but by over -c -…-

800,000, equivalent to 12 percent of the OOo… _workforce, between 1990 and the first quarter of 4e _…_1992 (Figure 5.1). This represents a scale of -…-

adjustment comparable to other socialist countries -…-

in transition-with an output drop leading, in theshort rn, to an employment drop of about halfthe size (i.e. a short-run employment elasticity of °aN ma_I m e I me icoI mm mI inaround 0.5). In the context of a history of a 1l ln rawau4i Blait 47L71. 441kwAvrtual employment guarantee, this represents aconsiderable adjustment.

It is unclear what has happened to fgrre 5.2: Non-state Emloymentworkers who left, or lost, state jobs. The rise inthe proportion of the labor force (based onhistorical activity rates) outside the state sectorhas been remarkable (Figure 5.2): it was already 1 -

rising in the late l980s and then jumped to an 12. -…

extraordinary 20 percent of the workforce in the -…0! …

first quarter of 1992. This comprises both laborshed from the state sector and new entrants, that _are running at about 50,000 per annum on a net a - _ -

basis. Yet transition to open unemployment hasso far been small. Registered unemployed hadrisen from 4000 in January to 10,000 in April1992, by which time there were 1.4 million * * , -wpotential workers outside state employment. It is

Based on the exchange rate implicit in an estimated per capita GNP of $2600 in 1990.

Establishing Competetive Markets and Facilitating Resource Mobility 57

highly unlikely that so many could have found work in the nascent private sector. There is someevidence that women have left the labor force. It is probable that a high proportion will soon registeras unemployed in order to receive the associated benefits. Information may be quite unreliable, butKazakhstan certainly faces further employment shake outs, and already an unemployment rate of 20percent looks a possibility.

The employment decline varies sharply by sector. (See Figure 5.3 and Table 5.1)Industrial employment started declining from 1988, falling by 4 percent by 1990 and a further 9 percent(over 100,000 workers) by the first quarter of 1992. But the largest absolute declinesince 1990 occurred in the non-material sectors, Figure 5.3: Secrorai Employmentthat shed almost half a million workers, followed (thousands)by construction, that contracted by 25 percent, oralmost 200,000 workers. Both state enterprisesand government have indeed adjusted sharply to 2000

the adverse shocks. The one area of employmentexpansion in the state sector was in agriculture,.that took on an extra 93,000 workers, no doubt inresponse to the agricultural recovery brought by .

good weather.

In the industrial sector the overall I , , decline of 9 percent from 1990 to first quarter of . . .1992 compares with an output decline of over 30percent. Other countries, such as Poland alsodisplayed a smaller employment decline thanoutput, but Kazakhstan's response has beenrelatively swift. Declines also vary sharply acrosssubsectors-being high in both consumer goods Figure 5.4: Real Wagesand capital goods, but low in intermediates, andwith employnment increases in most energy-relatedactivities (see Statistical Appendix). Employmentchanges are quite highly correlated with outputdeclines providing fiurther evidence of a high . . . ...

degree of responsiveness. It is noteworthy, .. .however, that in some sectors, such as ferrousmetals, there has been no employment declinedespite falling output.

Wage changes show marked U1 - -differences across sectors. In all sectors nominalwages rose sharply, but at very different paces. Inindustrial firns workers enjoyed wage increasessubstantially in excess of price rises, whereas in both the agriculturl and educational sectors the increaseswere much less and workers suffered large real wage declines. (Figure 5.4)

58 Chapter 5

How should these initial changes in the labor market be interpreted?

- First, there has been a high degree of responsiveness of employment levels to adversemarket conditions by state enterprises and to fiscal stringency by the republic government. Employmentfalls following output declines is a standard pattern of response in both transition and market economies.

- Second, there appear to be quite different patterns of wage detennination. Enterprisesnow operate under conditions of substantial de facto worker control. It is plausible to conclude thatworkers in industry quickly incorporated accelerating inflation into wage understandings, and preferredto maintain real wages rather than maintain full employment. It is highly probable that profits are beingsqueezed as a consequence (with negative feedback effects on governent revenues). Real wage falls inother sectors probably reflect imperfect short-run indexation of administered adjustments to acceleratinginflation as much as a conscious policy to reduce real wages, both up and down, though tightening budgetconstraints could also be a factor. Sharp changes in real wages are likely to continue to occur in thecoming quarters.

Managing employment and wages

Reduced state employment is a necessary feature of the adjustment process: initial employmentdeclines should indeed be interpreted as positive evidence of response to the shock that will facilitateadjustment. Yet, given the near-absence of a private sector and generalized decline in aggregate demand,it is likely that a high fraction will either leave the labor force or move into unemployment. There maybe a rise in the outmigration rate, especially for the non-Kazakh population. However, the economicmotivation for this is unlikely to be large given the collapse in labor demand throughout the former SovietUnion. Sharp rises in unemployment have heavy welfare and political costs, while rises in both theunemployed and pensioners have potentially large fiscal costs.

Table 5.1 Changes in Employment, 1988-92

Employment in Absolute change Rate of change1990 (-000) (%)

No. Share 1988- 1990- 1988- 1990-('000) C%) 90 1992Q 90 1992Q

I I

Industry 1468 21.7 -57 -136 -3.7 -9.3Agriculture 1219 18.0 -68 93 -5.3 7.6Transport 702 10.4 21 -79 -8.7 -11.2Construction 780 11.5 21 -198 2.7 -25.4Trade 555 8.2 -15 -41 -2.7 -7.4Other!a 2051 30.3 99 -478 5.1 -23.3Total 6775 100.0 -87 -839 -1.3 -12.4

/a Mainly other services.Source: Goskomat (see Statistical Appendix)

Establishing Competetive Markets and Facilitating Resource Mobility 59

How high could unemployment Flgre 5.5: U.S. in the Great Depressiongo? It is close to 15 percent and rising in Cm percent)Bulgaria and Poland. The experience to datesuggests large employment declines but smallunemployment increases. This is encouraging butit would be foolhardy to project this into thefuture. More plausible is a relatively large initialadjustment in labor force participation followedby a rising shift into open unemployment. The USin the Great Depression, had unemployment risingway above 20 percent in the wake of an outputdecline amounting to 30 percent over three years. .(Figure 5.5). Equally important, if , ......unemployment were to rise so high, how soon onOW e 1 nmight it go down? Even in the US, with a . ,* -

flexible labor market and deep private sector, ittook the large positive shock of the economicbuild up in the Second World War to bring the rate down to low single digits. And in Europe, Spain hasbeen stuck with an unemployment rate in the mid-to high-teens despite steady economic growth.

Such international experiences suggest unemployment is tough to get down once it goesup: there can be irreversibilities, or hysteresis, notably because it is harder to get the long-termunemployed back to work and because those wlho keep jobs prefer to keep t.eir wages up than getunemployment down. The experience also- finds that unenmployment rates are influenced by the level ofunemployment benefits. Mexico experienced a severe shock to the labor market after 1982, but, withno social protection to speak of, unemployment peaked at 6 percent. Unemployment benefits inKazakhstan are reasonably generous, but timebound: for laid-off workers they are 50 percent of theirprevious basic wage for 36 weeks (see Chapter 7). While the time limit should in principle encouragere-entry, the prospects of the long-term unemployed finding jobs in a situation of high unemployment maybe dim.

The outlook is disturbing: even a scenario following the trajectory of US unemploymentin the 1930s could be optimistic. What can be done to moderate unemployment increases and preventa rising unemployment rate getting stuck? It is useful to distinguish between systemic issues-benefit andwage rates, and sectoral policies.

Lower unemployment benefits and lower wages are, other things equai, good foremployment. As Chapter 7 discusses, there is a case for reducing benefit levels both to provideincentives to move into lower-paying work and on fiscal grounds. Take a replacement rate? of 50 percentand a 20 percent unemployment rate. Since average wages are 50 percent of GNP per worker, thisamounts to a transfer of 5 percent of GDP. At a replacement rate of 25 percent and 10 percentunemployment rate this declines to 2 percent of GDP-still sizeable under conditions of fiscal stringency.There is a strong case for limiting the size and duration of benefits, and excluding new entrants, who

2 The ratio of benefits to wages,

60 Chapter 5

could still be eligible for other transfers-such as suggested schemes for the indigent or workforce at lowwages.

Wage policy is more complex. On the one hand, real wages should rise as some of thenon-pecuniary benefits that now form part of the reward for labor is transferred to the market. On theother, real wages need to fall to acconmmodate the large adverse shock the economy has experienced.And there is also the difficulty of managing, nominal wages in an environment in which a wage-pricespiral could swiftly make inertial inflation a resident feature of the economic landscape. Meanwhile thesituation to defacto worker control in enterprises makes for strong pressure for higher real wages andlower profits. This will continue to be an issue until enterprises are either privatized or effectivelycorporatize.

Under these conditions wage controls designed to moderate nominal wage growth-probabiy sufficiently to reduce real wages-are desirable. The most successful such controls-such as thePACTO/PECE in Mexico-are based on corporate agreements between unionized labor, representativesof management and goverrnent. While every effort should be made to get wage targets agreed withlabor (as in Bulgaria in 1990), it is unlikely that labor organizations will be anywhere near powerfulenough to hold to such agreements in Kazakhstan in the short term. This implies the need to supplementsuch understandings with taxes on wage increases beyond a norm-as in the Polish scheme. Wagecontrols bring distortions and should be considered a transitional instrument. The scale of distortions canbe reduced by appropriate design: it is particularly important to avoid the popular existing temptation touse controls to compress differentials (as in Bulgaria, for example). With high and uncertain inflationsuch mechanism can cause unexpectedly rapid compression, when differences between wages almostcertainly need to rise relative to the past. And it is also preferable to have the norm based on the averagewage, rather dtan the wage bill (so as not to have an anti-employment bias) and not to link it to firmproductivity (more productiv.e firms should get higher profits, to encourage expansion).

While moderating benefits and norms may help, they are unlikely to be enough to preventa large rise in unemployment. The underlying problem is that the capital stock is fixed in the short runand might even decline. In many sectors capital-labor ratios arre likely to be inflexible downwards,however low the wage goes, especially coming out of a situation of overmanning. Wage subsidies havebeen suggested in some countries (in the former East Germany, for instance), they will run into the samelimits of low capital-labor substitutability as low wages, even if fiscal constraints are not binding. Yetthe thinking behind them is right-in the transition the opportunity cost of labor is going to be very low,given the prospect of pervasive unemployment.

Avoiding employment declines which would go beyond what the central govermnentbudget can afford in the short term, will require an active employment poliicy It is useful to distinguishbetween four broad groups:

(i) the existng commodity-producing enterprise sectors (around 2-5 million workers).These are likely to be hardest hit by competition-especially in industry-whether they end up privatizedor corporatized (see Chapter 6). Rather than subsidize wages, a strategy of moderate protection for somelarge scale enterprises in the transition would make sense, provided it is combined with a hard budgetconstraint and avoidance of capturing rents by workers. This would sustain profits and employment atthe cost of a degree of inefficiency in ivsource allocation. Sustaining profits has the added, critical

Establishing Conpetetive Markets and Facilitating Resource Mobility 61

benefit of sustaining revenues, and maling the imposition of hard financial budgets by the emerging banksa realistic proposition.

(ii) new pivate commodity-producing activities (probably now a few thousand workers).This is the area of the future . The non-state sector has been a powerful source of employment growthin China in the 1980s, for example. All the measures needed to support private sector developmentdiscussed in Chapter 6, including very importantly flexibility in labor contracts, are of the greatestpriority here.

(iii) economic servces-trade, transport and construction (around 1 million workers).Labor demand will be heavily influenced by aggregate demand, but there is prubably scope for fallingcapital-labor ratios and rapid employment rises, for example with the expansion of snall-scale tradingand transport services and housing construction. Again rapid privatization and an environment supportiveof enterprise expansion are essential.

(iv) other services (around 2 million workers). Most teachers, nurses and govenmentworkers are likely to continue to be a state responsibility in the 1990s. There is some evidence ofovermaming in these sectors, for example in low student-teacher ratios and already evidence that thegoverment is reducing employment levels (Table 5.1). Moderating employment losses could make senseuntil non-state economic activity picks up, subject to two constraints: the fiscal position and themaintenance of service quality, through adequate spending on complementary inputs (textbooks and drugs)and real wage levels.

The suggested policies in the second and third areas are standard fare. The first andfourth are not, since it amounts to managing excess employment levels during the transition. However,this could represent a more realistic strategy than one which leads to a very large unemployment shakeoutcombined with a safety net for the unemployed that can not be financed by the central government or thedonor community. Moderate protection in the transition would be the equivalent of a broad economic taxin the form of lost efficiency. Although not a first best solution, it maybe worth sharing the burden ofexcess employment between consumers and the Government, since the costs of becoming a high-unemployment economy may become too high (irreversibilities discussed in para. 5.20).

Finally, two other areas of action can play a large role in reducing open unemployment:the use of workforce schemes at low wages (that can be an efficient screening mechanism for the needywith a capacity to work); and measures to encourage labor mobility. We turn to the latter now.

Microeconomic Functioning

The required transformation in the functioning of the labor market is just as fimdamentalas the pressing macroeconomic problems just discussed. Wage-setting needs to be transferred to finns,and to be based on recognized credentials that are linked to productivity of different kinds of humancapital. Also needed are mechanisms for providing the information that will underlie matchcs betweenfirms and workers, incentives for actual or future workers to acquire higher-return training, andinstitutions for bargaining between workers and managers on employment conditions and wages wiDl allevolve. These issues were not analyzed for the Kazakhstan labor market, but some general conclusionscan be drawn.

62 Chapter 5

The priority in the short run should be on measures that encourage labor movement intojobs. By far the most important area of action lies in reducing current impediments to labor mobility,both legal restrictions on the geographic location of work and restrictions due to the link between housingand jobs-with the associated problems of the housing shortage and the underdeveloped housing market.Two other areas of "proactive" labor market policy are frequently recommended: retraining schemes andlabor exchanges. The international experiences on special retraining schemes is not especiallyencouraging. In countries ranging from the United States to Mexico they have been found to have littleor no effect on the wages of retrained workers (and training should, in principle, improve skills) thoughthere is some evidence that it reduces the duration of unemployment. The latter would be an importantbenefit for Kazakhstan, and for this reason alone they are worth trying, subject to careful evaluation.It may be more effective to devote the training resources to general training institutions-that are alsoavailable to adults. Labor exchanges usually have limited coverage and are largely irrelevant to jobmatches.

In the longer term, probably the major priority is educational reform, to shift anexcessively specialized education system in the direction of more generalized education that will produceworkers will great flexibility to shift between activities.

Conclusion

The labor market will be at the center of the transformation. Effective labor reallocationis necessary for restructuring; there is already evidence that the required labor shedding has begun. Yethigh unemployment could be an area of crisis - in terms of welfare, political sustainability, and fiscalaffordability. The most pressing issues in the short run concern the management of employment andwages, with the multiple objectives of supporting macroeconomic transition, economic restructuring andmoderating unemployment rises. The urgency of employment generation only underscores the need tomake every effort to support private enterprise activity in the commnodity-producing and economric servicesectors. But more will be needed in the management of the trnsition. Moderation in benefit levels, tax-based wage controls, moderate protection for the large-scale enterprise sector in the transition, themaintenance of a degree of excess manpower in govermnent services, and the use of workfare schemesare recommended as instruments that can firther help meet the rmultiple objectives. Of equal importancefor the fiture will be the development of the basis for a well-functioning labor market in which jobs areeffectively matched to job-seekers and rewards are matched to skills. Measures to encourage labormobility, through the abolition of residential requirements and housing policy that wili increase supplyand will encourage the development of a rental market are also recommended as high priorities measures.In the medium to long term there is no substitute for good education and training in raising theproductivity and earnings of present and future workers.

The Financial Market

Since 1988 when, a two-tier banking system was established and private and state-ownedbanks were allowed to operate, there has been a rapid growth in the financial system. In 1988 there wereonly 5 specialized banks (apart from the NBRK) which lent for particular activities. By April 1992 therewere 115- However, this growth has not led to greater bank competition or more efficient creditallocation, and most credit is still accounted for by the former specialized banks. Moreover, bankers lackthe managerial skills needed in a market economy and some banks, particularly the large ones, have beenaccumulating non-performning loans.

Establishing Competetive Markets and Facilitating Resource Mobility 63

The Structure of the Financial System

The financial system consists of the National Bank of Kazakhstan (NBRK), the 5 fonnerspecialized banks which becamejoint-stock banks when specialization was abolished in December 19903;20 other joint-stock banks; 45 commercial banks; 13 cooperative banks; and 25 private banks.4 Bankshave been established by State-owned Enterprises (SOEs) and by private enterprises (and individuals),primarily to obtain refinance credit from the NBRK and to pool resources among owners for lending toowner-clients. Banks lend largely to their own shareholders and rely heavily on the NBRK foraugmenting their own resources for on-lending.5 Although the former specialized banks are now joint-stock banks, this transformation was achieved by selling shares to former SOE clients.

In addition to the banling institutions, there are some other non-banking institutions suchas insurance companies, commodity stock exchanges and two stock markets. With the exception of thestate-owned insurance company, the non-banking financial institutions still account for a small proportionof total financial transactions.

Despite the increase in the number of banks, the financial system is still dominated bythe central bank and the five former specialized banks. As of April 1, 1992, these five banks accountedfor 78 percent of total loans (excluding NBRK), 50 percent of total deposits, 57 percent of total NBRKrefinance credit and 57 percent of total capital. Moreover, despite the abolistanent of banks' sectorspecialization, these banks continue to specialize and lend almost exclusively to SOEs. The Savings Bankis still a deposit-taking bank specializing in granting credit to individuals; the Agriculture Bank lendsalmost exclusively to state-owned cooperatives; the Industrial Bank lends primarily to the industrial SOEs;the Foreign Trade Bank still specializes in foreign exchange transactions; and the Construction Bank lendsalmost exclusively to SOEs in the industrial and construction sectors.

The Financial Condition of Banks.

The financial situation of banks is undem-ined by their large proportion of non-performingloans and their relative under capitalization. This is particularly true of the former specialized banks.Banks hold two types of non-performing loans or assets. First are the 'missing" assets, or those assetslost as a result of the breakup of the FSU specialized banks. In 1991, when the FSU former specializedbanks broke up, some of the branches based in Kazakhstan lost more assets than liabilities, as thesebranches were net creditors with the rest of the CIS. Although CIS countries have agreed to honor these

3 These are the former branches of the All-Union specialized banks which are the Savings Bank (Sber Bank), theAgriculmre Bank (Kazagroprom Bank), the Industrial Barnk (Turan Bank), the Foreign Trade Bank (Kazvnesheconom Bank) andthe Construction Banks (Kredsots Banks).

4 The main difference between joint-stock, commercial, cooperative and private banks lies in the different capital andprudential regulation requirements and in the type of shares ihat they can issue. Although joint-stock banks are subject to highercapital and stricter prudential regulations, they are entitled to issue shares to individuals and/ or enterprises.

5 For instance, one forner specialized bank reported granting 70 percent of their loans to their shareholders.

64 Chapter 5

debts, it is not clear that they will. The banks most affected are the Savings Bank and the Foreign TradeBank: it is estimated that their lost assets may account for over 30 percent of total loans .6

The second source of this poor financial situation is the loans granted to nonviable or loss-making enterprises. These are the loans granted to enterprises that were nonviable but were targeted aspriority activities by the Central Plan. In addition, there are loans made to enterprises that will becomenonviable as a result of the recent realignment of relative prices and the intensification of competitior.The size of these non-performing loans will only become apparent when new accounting standards andprudertial regulations are introduced. However, since the former specialized banks were responsible forgranting loans to the priority sectors, it is likely that they will hold a larger proportion of non-performingloails.

Large banks are also undercapitalized in comparison with international standards and withrespect to the other domestic banks. This is true even before bank capital is adjusted for non-performingloans. Although international standards require a ratio of risk-adjusted capital to total assets of 8 percent,the average capital to asset ratio of the NBRK and the, Agriculture, Industrial and Construction Bankswas only 2 percent.7

The Role of Banks in Credit Allocation

The predominant role of the NBRK in credit allocation, the lack of incentives for banksto attract deposits and the lack of skilled bankers have undermined ie role of banks in the allocation ofcredit.

The NBRK directly influences credit allocation through refinancing credits. As of April1, 1992, NBRK refinance credit accounted for over 60 percent of total credit granted. These credits aregranted to banks for on-lending to specific priority activities or enterprises, and at preferential (andnegative real) interest rates. By providing low-cost resources to banks for on-lending, the NBRKdiscourages banks from attracting deposits and promoting domestic savings. In addition, interest rateson individual savings with the Savings Bank are controlled, furither discouraging the mobilization ofsavings. Maintaining artificially low lending interest rates (which are very negative in real terms) alsodiverts financial resources to inefficient uses.

The lack of skilled bankers is another constraint to the efficient allocation of credit. Veryfew banks have the expertise to assess risks and identify potentially creditworthy clients.

6 The case of the Savings Bank is rather dramatic because of the total Rbl 28bn in assets in April 1, 1992, Rbl 20bn werelost as a result of the break up of the former Soviet Union's Savings Bank.

7 The average capirS. -o 5fet ratio of domestic banks was 4 percnt.

In March, for instance, the NBRK granted Rbl 7bn at 10 percent interest to the Agriculture Bank for on-lending to thest-owned Cooperatives. The NBRK maintains low interest rates by paying no interest on reserves and other accounts that banksmust maintain wit the NBRK.

Establishing Competetive Markets and Facilitating Resource Mobility 65

The Regulatory and Supervisory Framework

The existing prudential regulations are inadequate for analyzing banks' financialconditions. They do not provide any measure of the quality of banks' assets - nor do the accountingstanda-ds provided for by the existing regulations. Prudential regulations require no provisioning for non-perforning loans.

Moreover, the regulations are too liberal in terms of capital requirements, licensingrequirements for banks, and limits on exposures to a single client and lending to bank shareholders.' Thebanling law provides only three grounds for refusal of a bank license: absence of proper documentation,shortage of minimum capital, and unqualified management. Maximum exposure to a single customer islimited to 50 percent of capital and reserves, and to a single shareholder to 30 percent of capital andreserves.

Formally, the Commercial Banks Departmnent (CBD) of the NBRK is responsible forsupervising banks and for granting bank licenses. Bank supervision is very deficient. This has allowedbanks to avoid compliance with the existing prudential regulations, and has led to the proliferation ofbanks. Several facters have contributed to the deficiencies in bank supervision. The most im-,portant are:insufficient and unqualified staff (the CBD has only 13 professionals); inadequate organization(supervision is conducted by NBRK's regional offices with very little communication with headquarters);insufficient infonnation for zonducting off-site supervision and insufficient qualified staff for conductingon-site supervision; and inadequate sanctions for enforcing compliance with bank regulations (the bankinglaw only provides a sanction for banks failing to comply with the 18 percent reserve requirement).

Reform Isues and Recommendations

The objective of reforms is to create a financial system that can mobilize domesticfinancial resources efficiently and allocate these resources to productive users. This will be facilitatedby creating more effective competition among financial institutions for mobilizing savings and allocatingcredit. Existing banks may need to be restructured (and subsequendy privatized) to improve theirmanagement and remove the inefficiencies in lending practices arising from the burden of past mistakes.

Establishing a Competitive Environment

Competition may be intensified by introducing and implementing an appropriateregulatory and supervisory framework that will encourage banks to become more efficient. As a firststep, the supervision department of the NBRK should be reorganized and strengthened to enable it tostrictly enforce existing prudential regulations. The following measures are important steps to take:

9 The mhuim legal capiml requirenents are Rbl 50,000 for private banks, RbI 500000 for cooperative banks and Rbl5 million for commercial banks. Using the exchangc rarc of 110 RbI per 1$, these requirements are: $454; $4,545; and $45.454,respectively.

66 Chapter 5

i) introduce stricter assessment of bank's business plans and of the skills of the bankmanagers before granting licenses; increase the minimum capital requirement. '0 In timeexisting banks will be required to meet the higher standards;

ii) enforce the limits on bank lending to any single shareholder to 30 percent of capital andreserves, as established in the Banking Lawv, and set a timetable for meeting internationalprudential regulation standards;

iii) enforce the limit on maximum exposure to, a single client to the 50 percent of capital andreserves established by the Law, and set a timetable for meeting international prudentialregulation standards;

iv) limit the maximum ratio of total liabilities to capital, as required by Law. This willensure that banks meet the capital adequacy ratios.

The supervision depa.tment of the NBRK should be strengtl-ned by tackling newprofessionals and by extensive training. The department should be set up to cond-uct on-site and off-siteexaminations as a way of effectively ensuring that banks are complying with the existing regulations.

The government is in the process of preparing several new laws on the financial system.These include the following:

i) the Central Bank Law, which will make the NBRK more independent and define the roleof NBRK supervision depamet;

ii) the Banking Law, which will elaborate regulations for commercial banks in conformitywith internationally acceptable standards;

iii) the new Accounting Law, which will define the standard of accounts and role of audits;and

iv) the legislation on negotiable instuments defining property rights and contractualobligations.

The introduction of these regulations will force banks to restructure to meet newstandards. This can only be done over time. To encourage early compliance, the Government shouldgrant full bank licenses only to banks that comply with all the new regulations; banks that need some timeto meet these regulations may be granted a restricted bank license.

Restructuring and Privatizaton of Banks

It is apparent that at least some of the large banks have a large volume of non-performingloans. Unless this situation is addressed appropriately, the existence of these bad loans will create anincentive for these banks to continue to lend to inefficient and risky activities. Restructuring may involvefinancial restructuring, changes in mnanagenint and workers, and, in some cases, a change in ownership.

The restructuring of banks may be implemented in two phases. In the first phase, theauthorities could focus on the following, which complement the regulatory measures:

10 Current plans are to increase minimum capital requirements to Rbl 50 million for joint-stock banks, to Rbl 20 millionfor conmmercial banks, to Rbl 10 million for cooperative banks and to Rbi I million for private banks.

Establishing Competetive Markets and Facilitating Resource Mobility 67

i) banks should be required to have an adequate governing structure, responsive to theshareholders' concem for maximizing shareholder returns. Private banks should beexpected to establish an external or supervisory board in which the main shareholders arerepresented, and to have direct control over bank managers. This, together with theincrease in the minimiu bank capital and the limit on the exposure to a singleshareholder, will help shareholders to force managers to maximize shareholder returns.

ii) banks adversely affected by the "missing" assets, or assets were banks lost as a resultof the breakup of the Soviet Union, should be scaled down". No fresh capital should beprovided 'I these banks since many of them are either in a poor financial and managerialsituation, or arc no longer needed because commercial banks are performing most of thetasks they were created for. Altemative mechanisms to provide assistance to depositorsor share-holders could be devised'2 .

.ii) the restructuring and privatization of bankls should be linked to enterprise restructuringand privatization. To facilitate this process, preparatory work may be initiated in threeareas: the mechanism for privatizing and restructuring enterprises; the framework forliquidating enterprises; and the mechanism for dealing with enterprises' bad loans andinter-enterprises arrears.

iv) establish a framework for dealing with the growing inter-enterprise arrears. This shouldbe done within the franework of enterprise and bank restructuring and privatization. Inorder to deal immediately with this problem while avoiding an inter-enterprise debt bail-out the authorities should take the following measures. They should establish a creditrisk bureau to enable creditor enterprises to assess the creditworthiness of the borrowerenterprises' creditworthiness. This should record enterprises' accumulation of inter-enterprise arrears and information should be provided directly by enterprises; and (ii)identify the most indebted non-viable enterprises and encourage them to restructure; andif necessary, force their restructuring by enforcing direct state control on theirmanagement.

In the final analysis, the success in restructuring banks depends on the recovery ofenterprises. Therefore, the more rapid the restructuring and privatization of enterprises is, the better itis for the banks. Thus, any financial restructuring of banks should be conditional on actions intendedto facilitate enterprise restructuring and/or privatization.

11 For instance, in the case of the Savings Banks out of Rbl 28bn in total assets, Rbl 20bn were lost as a result or thebreakdown of the former Soviet Union. This operation. therefore, can shrink Savings Bank balance sheet to Rbl 8bn. that is, thesize of a typical large private commercial bank.

12 For example, the Govement can offer specialized banks' depositors to swap their deposits for Government debt; or forvouchers that can be used to bid at preferential conditions for state-oawned property (e.g., houses or small shops or enterprises)during privatization; or dte Govrmen can sell these deposits to other banks by offering these banks Government securities asassets;

68 Chapter 5

During the second phase of restructuring, after the magnitude of the problem of non-performing loans in the major banks is identified, a detailed strategy and action plan for restructuring andprivatization should be designed and subsequently implemented. The strategy should seek to imposediscipline on banks, and use banks' bad loans and inter-enterprise arrears to impose discipline onenterprises. For instance, the Government may make the recapitalization of banks conditional on arestructuring and a privatization program. The Government could also require that banKs take appropriatelegal measures to force their insoivent client enterprises to restructe or face closure (for example,t-hrough the Rehabilitation and Bankruptcy legislation).

The Government should also establish a scheme for collecting the bad loans of banks thatare state owned or that end up in Government hands and that the Government it wants to privatizequickly. Banks could be given incentives to recover loans, such as commissions on the amount of loansrecovered. Or an institution specializing in recovering bad loans could be established.

Finally, the Government should reconsider the role of the inefficient specialized bankswhose functions have been taken over by the commercial banks. A strategy to be considered would beto break them up into smaller banks competing in contestable markets. This would avoid the wastefuldiscarding of SWs existing networks, while allowing them to be restructured in a market orientatedenvirornent.

5.1: :nandBal Sector Techical Assistancef t (6.9milion-:$8.9-ndion). . . . . . :: --- . . . . . :.-.

; -fXX. . . -- .. . . :-0- . . . . . d ii-Finacia SecorReiew:Assist the government- to dsgn a strategyi6to evlop the sector,includingpolicy, regulatDry, and operational recommendaions, and a detaiedA mplementation plan.

.: -. :: . : . , -. ::: .. ..- .: . . '. .. . .- , -, , .- : .: : -= .. ,- .- : k.

Bat Legislation: Assistinth drafting ofI awswhich will suppotamnd complement banking legislationOPed un eri e World CA Bn 0 -grant.

T ining of Bank Supervisors

Training of accountantisand&auditors-

~~~~~~~~~. -. . . ... .... . . = , ,,.. . ....................,.....,., .,.-..........----

Training ofBnkr~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. .. .. ...i . .-

Bank Audits: Conductaudt oftetna:s ankcordn to inernatona standards. Audfitsshould be carriedout.byes adt:should be carnoed-- outabw lishCd - nId' - idi,os . .... .... :. . .. .. ... .. ..-., S .............. ..... -., ..-.,. -.... ,..-;,.. ..-....... -.....-.-. -.

. . < ... , -~~~~~~~~~~~~- - - .,- -- . . . . . .- . .

CHAPTER 6

PRIVATE SECTOR DEVELOPMENT AND PRIVATIZATION

Kazakhstan is committed to developing a vigorous private sector, and has initiated broadstructural reforms toward that end. The legal framework is being overhauled, institutional structures arebeing transfonned, private business has been invited, and state enterprises are for sale. As of August1992, some 3,500 establishments had been privatized, mostly through transfer to employees; a few largeforeign investment agreements had been signed in the oil and gas sectors; and new private trade andservice businesses were emerging. However, the economy continues to be dominated by the state andother structures more appropriate to a centrally planned economy. Numerous constraints on the growthof the private sector remain; including unclear property rights and resistance from those with vestedinterests in the status quo. The authorities recognize that more comprehensive and better coordinatedstrategies and programs are needed, and they have requested the donor conmnunity to assist in prepanngplans, strengthening institutions, and commencing implementation.

The Business Environment of Private Sector Activity

Two key conditions for an economically productive private sector are not yet in place.One is a stable legal regime that will cover property rights, their transfer through contracts, entry intoand exit from economic sectors, and that will ensure competition. The second condition is a businessenvironment that is market friendly, providing simple and transparent market entry, and access to creditand business facilities, and that involves minimal state interference.

The Legal Framework

While the Government has enacted numerous laws aimed at the development of a marketeconomy, these measures address particular activities and institutions but do not as yet sufficiently alterthe overall economic system which is characterized by extensive state intervention. The following fourproblem areas should be noted. (i) Significant gaps in the legal framework remain, notably in the areasof contract law, secured transactions, and intellectual property. No code of obligations or contracts existsto support complex private agreements. There are no provisions for the creation of security interests inproperty including land to support normal credit facilities. (ii) Some new laws fall short of therequirements of a market economy; skilled drafting capacity is scarce. (iii) Laws are not mutuallyconsistent.' A plethora of new legislation is produced without a coherent legislative strateg as a basis.(iv) Particularly worrisome is the dichotomy between the law and its implementation. Judicial andenforcement reforms have yet to be agreed upon, and, without the certainty of fair enforcement, contractsare discouraged.

For example, the basic Law on Property of 111991 establishes de right of individual business entities to ownershipin productive property except land which is reserved for the state. However. the exercise of such rights is specificallysubordinated to the 'rights and legally protcled interests of citzens, legal entities and the state'. Since many lawspreferring stae interests remnain valid, without substantial and comprehensive re> -- 'E of the Civil Code and othr laws, dLislimitation casts serious doubt on the boundaries of ownership rights and on the ut. ut of government. Another example arelabor provisions in the Business Association Law are potentially in conflict with dte Labor Law.

70 Chapter 6

u.~ .b c mires izgclE.3l 7lEclsLanouis M.............. Recommendations: The private-O mm. - sector will thrive only in an environment of economic

legality (i.e., a mutually consistent set of laws in the:pxstinq-siA]slatton:j economic sphere and a belief on the part of the-- Law n ForBagnk and esnts (12190) I population in the stability and fair enforcement of* Laws on Entrepreneurship (12l°).7/92) these laws). This will require efforts in the following* Law on OwnershIp (1/91) /a arm, among others:

- -7*:Law an Competition / M4ono lies (6/91)/aLaw on Securities and Exchanges (6/91)Law on Envirormental Protection (6/91) i R

. Law on Destatization / Privatization. I) Rationalization and harmonization of the existing.;: -Law on (C91caA5ed Lft2) d 0 0 : reforns in the legal system and in new legislation,

Joint Stock Companies (10/91) built on appropriate legal traditions and principles,- l.ai0 o L n; Pledge (59Wtl2/{92}92l; 0 00- 0 arud with a view towardl retaining a certain harinorm y of*.: *1Law on Subsant Resourcesy W laws across the CIS.

to be drafted rea"jin:.

,_: cured .T.ransactiane C) ii) Elaboration and enactnent of amendments of new5 iR-: nstPruments -. legislation for contracts; recording of individual,

-:xntesentuai rdoerty Rights etcj business, and creditor property rights, including.,.Registrars: (of-Companies, Pledges, ietc.) ntellectual property; secured transactions; negotiable

m-,*t!varlous: further areas.- : - E -S *:f----=- vari-us furter are-s, -instruments; and real estate (commercial,F il eii prepared for the auttan session of condomnium, and agricultural).Tile Supreme -soviet.

iii) Wide dissemination of information on the reformmeasures, including the establishment of a legal data base, regular publication of business-related legalmformation, and efforts to educate the business community and the population about the emerging legalframework;

iv) Training of legislative and regulatory staff members in the drafting and harmonization of laws; andtraining of a core of lawyers and judges for the new commercial arbitration courts and for bankruptcy.

Facilitation of Private Sector Development

In addition to the legal framework, a variety of other factors are determining the businessenvironment. These factors are, in particular, various barriers to prvate business and the provision ofsupport services through private service businesses and public support infrastructure.

In 1991, the registrton of a new business required at least nine different signatures fromgovernmental agencies - a daunting task. Recent legislation has eliminated many steps and fees, and hasreduced the process to a ministerial one, thus suppressing bureaucratic interference. Nevertheless,registration remains a lengthy task in several oblasts and Almaty. Chimkent, in contrast, has establishedan extensive data base and a "one stop" model that have permitted over 3,500 registrations and that serveas a basis also for a broad corporatization program and for the orderly recording of pledges. TheChimkent model should be reviewed, strengthened, and used as a model for a country-wide registrationsystem.

Various licensing reqirements, especially for importing and exporting and relatedfinancial transactions, protract bureaucratic control over private business activity. They also inhibit

Private Sector Development and Privatization 7i

foreign investment and technology acquisition, depress trade, and jeopardize the market entry of would-besmall producers. In practice, only large state enterprises receive licenses.

Once registered and licensed, a business faces severe constraints in obtaining or expandingbusiness facilties, in particular physical space. Use rights for buildings and land are allocated by thestate authorities, often with priority given to their own staite enterprises or those fulfilling state orders;the leases are often for not more than one year; transfers to third parties or changes of 'profiles" (uses)are severely restricted; and renovations or expansions within a building or renovation are difficult owingto a lack of clear property rights in buiidings shared by different users. Moreover, commnunications,office, and transport equipment are in short supply, and private enterprises commonly lack access to theprivileged trade channels, cheap credit, and foreign currency needed to acquire these important items.

The growth of new private ventures is also constrained by lack of active corpedq:xifn.Many state enterprises have developed their supply base in-house (vertical integration) or are linked toa single supplier or single user. Wholesale and retail trade are still primarily in state control. Importsare rationed through the shortage of foreign exchange. Exports are subject to export taxes.Consequently, new enterprises have difficulties in getting inputs or in finding markets. Competition isalso impeded by the continued role of large 'associations" or "amalgamations" which are in effect cartelsthat set prices, allocate inputs, and otherwise function much as the branch ministries formerly functioned.The Anti-Monopoly Comnittee (AMC) is intended to prevent or to break up monopolies and cartels, toregulate doninant suppliers, and to encourage new, competing enterprises. Yet, to date the AMC hasbeen more active in controlling prices in concentrated markets dtn in preventing or dismantling cartelsand monopolies, or encouraging competition through open trade. Further reforms aimed at promotingcompetition, as has been discussed in chapter 3, should include liberalizing prices, foreign and intra-CIStrade, and the foreign exchange regime; ending the systemn of state orders; and reducing subsidies for stateenterprises from the budget or banks.

A particular constramit to the development of a vibrant private trade and services sector(which would tangibly improve living conditions and prce signals in the economy) is the continued statedomination of distribution structures. Although some warehouses have been given greater autonomy theauthorities have kept control of critical sections of the wholesale and import trade, as well as truckingand other cargo transport. Urgent steps would include the dissolution of those ministry-led structures,perhaps the mandatory sale of a minimum percentage of the trucks and stores of each large distributionand transport enterprise, and the segmentation and privatization of these enterprises.

Weaknesses in accouniing and lack of audit are further barriers to private sectordevelopment. These factors affect not only the internal management of companies but also cr-editors,shareholders, and potential investors, as well as tax collection. Beginning January 1993, commiercialenterprises in Kazakhstan are supposed to use new charts of accounts, based on a model that had beendeveloped with UNCTC-led assistance for joint ventures in the USSR, and was introduced for domesticfirms in Russia in 1992. To use these new charts effectively, Kazakhstan's enterprises also need newreporting formats, possibly by January 1993, so that firms begin the new accounts with a proper openingbalance. An extraordinarily extensive traiing effort will be needed to enable the accumntants ofthousands enterprises to apply the new system, and to help investors, creditors, and managers we P withthe new financial reports. Moreover, legislation needs to clarify the role of auditors and the professionalorganizations of accountants and auditors. In most market economies, such organizaions set detailed

72 Chapter 6

standards, help organize accounting education, certify accountants and auditors, and foster professionalethics.

An important element of the private sector should be foreign investment. It wouldcontribute not merely external capital but also competitive technologies, new management techniques andcorporate culture, international product and quality standards, access to foreign markets, and morecompetition that will push even domestic firms toward higher performance. In the short and mediumterms, most foreign interest will focus on the exploitation and processing of Kazakhstan's mineral andhydrocarbon resources, where foreign exchange earnings can be substantial. Still, attracting morepotential investors in these areas, and thus enhancing the Governrnent's negotiation position in sharingthe expected resource rents, would require, among other things, more secure tenure, clearer entry andexit rules, competitive taxation arrangements, more ready disclosure of information, and clarification ofenvironmental and social liabilities. To enhance foreign investment in these and other sectors, Kazachstanneeds to regulate, approve, and monitor foreign investments in a transparent and non-discretionarymann-r; remove bureaucratic barriers in many areas; promote the country as an investment location; andencourage private businesses to provide services to foreign investors. To accomplish this, the newlycreated National Agency for Foreign InvestmrAenst needs a proper policy framework, strengthened foreigninvestment legislation, and adequate institutional capacity.

Further critical steps to facilitating private business should be undertaken in thefinancialsector, as is discussed in Chapter 5. The access to short-term and long-term credit, the availability ofefficient financial services in trade, financing, and investment, and the orderly development of capitalmarkets will be essential improvements- As privatization accelerates and new private joint stockcompanies emerge, the increasing supply of securities will require that priority be given on thedevelopment of an orderly secondary market so that a central price-finding mechanism is in place beforepatterns of distorted and highly speculative trading of securities develop. The issuance and trading ofshares and other securities will require the development of an appropriate regulatory regime, anindependent institution such as the planned National Committee for Securities and Exchanges, and onecentral stock exchange (instead of the several municipal commodity exchanges in which securities aresporadically traded today).

To thrive, private enterprises need a variety of frther support services. Most of theseservices are best provided by private service enterprises. The state can enhance the entry and efficiencyof such service businesses through the removal of administrative hurdles and interference; access tobusiness facilities, credit, and foreign exchange; education and training efforts; and some financialincentives for the use of such services. In a few areas, the state itself may be in a position to provideservices effectively while private services are still emerging. Productivity-enhancing industrial extensionis one such area. It transmits knowhow on technology, management, finance, quality control, andmarketing to private industry through such tools as seminars, analyses of problems on site, extensivetechnical advice, acquisition of technologies for small firms, demonstration in pilot enterprises, productionor translation and distribution of manuals, and so forth. Standardization, product testing, pre-shipmentinspection, and quality labeling are firther areas in which the state could play a useful role.

The Fund for the Support of Entrepreneurship and Promotion of Competition and itsregional centers are providing new enterprises with some funding (mainly to producers of consumer goodsincluding food), training both locally and abroad, and technical advice, especially on management andmarketing. It is a useful first effort, although there is a risk that loan allocation may follow political

Private Sector Development and Privatization 73

Box 6.2: SUPPORT SERVICS rather than economic criteria. The institutional arranigementNEEDE) BYPRIVAT3 INDUSTRY for private sector development could probably be strengthened

:I the AMC were relieved of the ranaganent of this Fund so* Accounting and Audit that it could focus more on abating anti-competitive structures* Legal council* Legal enforcement & arbitration and practices. A seppmate small business agency could* Property security concentrate on stimulating and coordinating the promotion of* Insurance* Conpany & pledge registration private investment, while most of the actual promotion* Management consulting activities would be carried out by sector rministries and local* Investment banking services authorities as is typically the case in market economies.* Conmercial banking services* Investment & working cap. credit* Economic i nfamrnati on & forecasts Further, various associatic s of private

*Market research and data basesk Computer & cannunic. services businesses could facilitate understanding and collaboration* Engineering & architect.services between Govermment and business. Such entities are best* Product design & packaging* Advertising & merchandising constituted, led, and financed by voluntary members.* Exoort prootion Glambers of industry and commerce, industry-spec ic* Distribution and retailing b o i* Local & international shipping associations of enterprises, and clubs of business people play* Export finance & in.surance important roles in other economies* Shipment inspection* Standards and quality labeling* Metrology and testing Finally, there is an urgent need to build theTechnologyimport end adaptation basic commercal and managerial skills required in a marketTechnoilogy extension

* Entrepreneurship development economv. It would be desirable to train trainers in areas of* Management skills development business administration, including accounting, finance, law,* Operator and-supervisor training* Representation in policy making marketing, quality control, and trade; to plan and implement

the reform of existing training institutions and their programs;and to encourage the establishment of business training centers

on a commercial basis. The Govenment could also provide matching grants and other support for newenterprises seeking local or foreign advisers, trainers, or contract managers to supplement or strengthentheir own capabilities. Moreover, educational programs on fundamental business knowhow could bedeveloped and produced for dissemination through the mass media to a very wide audience, includingnew and potential entrepreneurs.

rvatization and Restructuring

The Govermnent of Kazakhstan is committed to privatizing all but a few state enterprisesand to strengthening the goveemance of those that will remain in its hands for some time. It recognizesthis sweeping return of ownership from the state to its citizens as an essential element of the transitionfrom a centrally planned and owned economy to a market economy with decentralized ownership anddecisionmaking. It also feels that private, noncollective ownership has proven worldwide to be the mosteffective enterprise governance, and that it provides the incentives that are most appropriate to the basicrestructuring required by most enterprises to adapt to the new environment.

By end August 1992, some 3,400 establishments, mainly small-scale trade and services,had been privatized. Most of these establishments had been given to their labor collectives. In addition,about 300,000 housing units had been passed to their residents, systematically against vouchers and cash,or spontaneously free of any charge. In addition, agr.cultural land is being transferred to private owners.

74 Chapter 6

Box 63- PIUORITY TECNICAL ASSISrANCE NEEDS FOR PRIVATE SECTOR DEVELOPME , 93

* Legal Infrastructure Development: Building central coordination, support. and review of legal: drafting- 'd r.tinggeneral economic laws: training; dissemination of leqal texts: etc.

= .Institutian-Building of Property Registrars:. Support for establishment of registrars for-busi'nesses. corporations. real -.estate.' pledges. and -intellectual property.

* Foreign.Investment.-Regulation and Promotion:- Support for laying policy, legal, institutional.-andskills basis: pilot promotion programs: systematic d asrntling of barriers: etc.

* Securities Markets Development: Support to writing a development program. draftipg regulations.- =establishing a regulatory body. training its staff. policy-makers, and brokers: etc.

* Strengthening ComuetltlonPolIcy: Enhanci-ngthe capabilities mainly of AMC to formulate and:.enforce anti -monopoly. fair trade, trade promotion. and consumer protection policies.

* Preparation of-Local Economic Recovery Programs:.Development of such programs for urban areas- jeopardized:by downsizing of a dominant enterprise/industry: fostering local institutions.

*,Urban Comuercial Real Estate: Developing long-term stable rights: facilitating transfer ofrights: assessing options of transfer to or use by enterDrises: industr-ial parks concept.

* Strengtbening Commercial Enterprise Accounting: Development of reporting formats: extensive. training of accountants. support to establishment- of a professional body. etc.

:*Developmentaof:'Audit: Deyelopment 'of 7IndustrilA Extension'Institutions'/Prograuus-* :Str4ategy :for- t-h-e -Private:. ind .Public Pr si.slon aot Managemiet Training

*DevEe,lopment and,Pilot.Inpliemnentati-n of Media-Based TinIng of -Busirness Skills:::Support to Business:Associations* Creation 'of a 'Sill. Business Institution.

-*JIprovement of. :Industry and-Enterprise -St.Zistics

The cumbersome and non-competitive privatization methods applied to date have severaldrawbacks, however, especially when applied to medium-size and large enterprises: they will not allowthe Government to accelerate privatization, and will no;. lead to effective governance and the socially fairdistribution of ownership opportunities.

The Govermnent envisages, therefor,e, adopting an improved enterprise privatizationprogram which it has developed in collaboration witl international donors.2 This program includes: (i)the rapid disposal of small-scale enterprises through munmicipal auctions, against cash and unused housingvouchers; (ii) the mass privatization of all regular medium-size and large enterprises against free"investnent points" that will be intermediated through investnent funds; and (iii) the case-by-caseprivatization of very large enterprises and of sectors dtat require particular rel-.Tlatory efforts.

To succeed, such a program needs to be accompanied by institutional strengthening, anappropriate mandate, and substantial external assistance; detailed implementation legislation; avast publicinformation effort; and rapid corporatization through streamlined procedures. Moreover, the newlyprivatizeci ixns should not be discriinated against by the legal, financial and support infrastucture, ashas been discussed above.

The present condition of the state enterprise sector, and the multiple chal:enges that itfaces as the economic transformation proceeds, will require profound restructuring measures beyond mereownership changes. Generally, the new private owners will have the most adequate incentives to setfirms on a new course adapted to the new prices and competition, and to employ the most capable

2 In September 1992, a joint mission of World Bank, EBRD, and USAID working in close cooperation with the StateProperty Committee and various odher ages has pzxposed a detaied program of puivauizaon in Kazakhstan.

Private Sector Development and Privatization 75

managers to carry out the restructuring. However, some restructuring will often be indispensable priorto privatization. This may entail improvements in ways in which the state as owner organizes andsupervises the portfolio of the largest enterprises; possibly some well-calibrated debt restructuring orliquidity support to sustain viable firms during the transition; the segmentation of some firms to enhancecompetition or to focus them on their core businesses; and downsizing of non-viable production units,accompanied by social measures. All such restructuring, however, will be limited, streamlined and timedso that it can be achieved with the limnited administrative capacity, and so that it will not delay theownership transfonnation-

Overview of the State Enterprise Sector

State enterprises accounted for 87 percent of Kazakhstan's employment in 1990. Sincepublic sector employment contracted subsequently by over 12 percent, state enterprises employ todaysome 75 percent of the work force. The historical book value of the physical assets of state enterprisesat end 1991 totaled close to Rbs200 billion, or about Rbsll,000 per citizen. Thereof, Rbs141 billionwere fixed assets (based on prices of the mid-1980s). Kazakbstan's economy is relatively capitalintensive. In 1989, fixed assets per capita were about 70 percent higher than in other Central Asianrepublics, and higher also than in Ukmine and the Caucasus, but some 20 percent lower than in Russiaor the Baltic republics.

The number of wholly state-owned enterprises was reported at 37,000 as of early 1991.If broken down into establishments without separate accounting, the number night be up to three timeshigher. The Government classified 10 percent of the enterprises as large, 30 percent as medium-size,and 60 percent as small.? The following rough estimates underlie the subsequent discussions onprivatization:

Table 6.1: SIZE STRUCTMRE OF THE STATE ENTEISE iECTOR, END 1991(Ft'late)

Category 1tinition Number of Fims Employees

Regular Small Enterprises 1-199 employees 27.500 74% 1,000,000 17%Regular Medium & Large Enterpr. 200-4.999 employees 8,000 22% 2,900,000 48%Very Iarge Enterprises 5,000 and nore enployees 200 0.5% 1.600,000 27%Enterprises in Special Sectors la 1,300 3.5% 500,000 8%

(except very large enterprises) _ _

TOTAL 37,000 100% 6,000,000 100%

ia Natural monopolies (power. water. heating, comnunication, etc.); enterprises that fulfil major non-cormmercial functions (social.national security, rcguaory rols, etc.); enterprises that exploit non-renewable natrl resources (oil, gas, minerals, etc.);and the processing of certain agricultural and forest products.

Source: Esftimate on the basis of data provided by Goskomst and State Property Committee

3 Medium size was defined as 200-2000 employees in industry and consnzcdon; 100-1000 in research; 50-500 in tradeand transport and 1-150 in non-material sectos.

76 Chapter 6

Employees and assets were distributed among the main economic sertors as follows:

Fig. 6.1: EMPLOYEES BY SECTOR, 511992 Fig. 6.2: BOOK. VALUE OF ASSETS BY SECTOR, 1211991

Non-Material & Other Non-Materlal & Other Agricultum27.9% Agrlrulture 10.1/ 22.%

Trade & Catering6.3%

Construction5.6%

Trade & Catering7%

Tranap. & Commun.

Construction 22X10%

Tranep. & Commun. ndtry1C04% 38.2%

Industry, including energy, accounted in 1991 for about 22 percent of total mloyment,41 percent of net material product and 38 percent of assets in the economy. Manufactring accountedfor over two-thirds of industry. Stereotypically for a planned economv, Kazakhstan's industry has beenpredominantly heavy, highly concentrated, and state owned. The largest industrial facilities are basedon the country's rich subsoil resources such as iron, coal, copper, lead, chromite, lime, and phosphate.Mining, metallurgy, and chemical plants together accounted for 57 percent of fixed assets inmanufacturing in 1991. However, in output tenrs, processed food and textiles/leather dominated thesector, with 27 percent and 21 percent, respectively. State enterprises accounted for about 90 percentof industial output. The remainder were enterprises under collective ownership, lease contracts, orpublic organizations and special finds. By end 1991, private entrepreneurs accounted for a minusculeshare of the recorded output.

Although it is difficult to make an assessment at this stage, large parts of Kazakhstan'sindustry might be economically viable after substantial restructuring. Moreover, as a major net exporterof oiL/gas and metallurgical Products, Kazakhstan's industry may see its terms of trade improve; but itneeds to win new markets so that its output does not remain entirely dependent on economicdevelopments in other CIS countries. Output has been dropping in the short term, however. Theproduction of non-food consumer items, for example, was 8 percent lower in the first half of 1992 thana year earlier, and 34 percent lower in July 1992 than in July 1991.

Private Sector Development and Privatization 77

Table 6.2: THE STRUCTURE OF INDUSTRY, 1991

No. of Enterprises Production Fixed Assets Share of Total [ndustnr Fixed Assets ProductionEstiblishmnets (m R) (m R) No. of Product-on Fixed Asses per per Fixed

Establishments Assets Establishmcnt Assets

Agri-Processing 3,17n 455 20,491 2.139 16.3% 23.6% 4.3% .67 9.58Wood & Paper 4,112 233 1,788 476 21.2% 2.1% 1.0% .12 3.76Chemicals 86 61 5,390 6.395 513.0% .84Building Matcrials 2.570 270 4.200 2.130 13.3% 4.8% 4.3% .83 1.97Porcelain,etc. 13 12 97 71 .1% .1% .1% 5.48 1.36Textiles, Leather 760 573 15.798 1.614 3.9% 18.2% 3.3% 2.12 9.79Metallurgy & Mining 70 69 12,670 10,536 .4% 14.6% 21.4% 150.51 1.20Machinery 3,720 435 9.918 4.849 19.2% 11.4% 9.8% 1.30 2.05Printing 40 33 146 145 .2% 2T .3% 3.63 1.01Other Manufacturing 1,192 96 2.073 478 6.1% 2.4% 1.0% .40 4.34Electricity & Heating 2,158 141 10.626 19,709 11.1% 12.2% 39.9% 9.13 .54

Total Idustry 19.393 2,458 86,912 49,344 100.0% 100.0% 100.0% 2.54 1.76

Source: State Committee on Statistics

The Government's Initial Privatization Program

The Government's original privatization progran was developed in 1991.4 It envisageda three-stage program for commercialization and privatization of virtually all enterprises. Phase I (1991-1992) was to establish the locus of ownership of all state property, the agent for the owner, and anadminiistrative framework for delegation of ownership rights. Phase I also envisaged the privatization of50 percent of small and medium-size industrial and agricultural enterprises, and most small shops, andtrade and service establishments. Phase 1 (1993-1996) would focus on the privatization of medium-sizeand large enterprises, and Phase El[ (1997-2000) would complete the process.

The original Law on Destatization and Privatizazion of June 1991 provides three methodsof privatization: leveraged buyout by workers, auction, and tender. A strong preference was given atthat time to the worker collective of the respective enterprises. As a result, at any time the collective orother group of workers within an enterprise can submit to the State Property Committee (SPC) a plan forprivatization. It is only when the workers of an enterprise do not wish to buy the enterprise that the SPCor the local Soviet can initiate the auction or tender of the enterprise.

4 The original strategy has been codified in several legislative texts, including: the Law on Destatization andPrivatization of 6/22/1991; Resolution No. 101 of the State Property Comnnitee (SPC) of 811/1991 providing die frameworkfor implementation of the this law; the President's Decision Concerning Phase I of 9/1991; Resolution 777 of 12/9/1991alocating specific property to the Republic and the oblasts; a Decree of 1125/1992 on agricultural privatization; and aresolution of 1/29/1992 expanding Phase I of the privatization program by increasing the number of firms to be privatizedand expanding SPC's authority to initiate privatization.

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METHODS OF PRIVATIZATION - LESSONS FROM INTERNATIONAL EXPERIENCE

The following lessons emerge from a review of privatization experience worldwide in the last decade./I Stateowned enterprise (SOB) efficiency suffers from the complex chain of authority from the people as the ultimate owner downto the managers; from multiple. conflicting objectives; and usually from a soft budget constraint. Thc governmcntrepresenting the owner interferes in qoerations instead of ensuring mamgers' accountbility and motivation. Reforms suchas well-developed performance supervision and rewards, and the convcrsion of SOEs into oDrporations ('corporatization').helps somewhat, but often not for a long time.

- Privatization of enterprise ownership, by contrast, is a comprehensive and sustainable solution. Experienceshows it increasing productivity, sales. and economic welfare. Moreover, it fosters entrepreneurship, and create aconstituency for reform. Budgetary revenue from divestiture itself is often limited once the costs of restructuring and thetransaction arc deducted, but usually subsidics can be cut back and tax ievenuc rises in the longer run. Privatization iseasier and more beneficial where the Government assures competition, stable economic grcth, and a market-friendlyenvironment. In some sectors, regulations have to bc strengthened to safeguard natural rcsources, social concerns, nationalseunity, or active conpetition as enterprises are being privatized.

A privatization program should combine several mehods of privatization, adapt them to local circumstances, andapply them to different situations.

-o- For small enterprises, programs of straightforward open auctions, managed locally or sectorally. can beaccomplished quickly. Poland privatized over 50,000 retail businesses in two years, relieving bottlenecks in-distribution.

0 *0; To the bulk of medium and large firms. some form of rapid privatization is needed to achieve privatization in ameaningful time. Limiled capacity and authority of central authorities may call for decentralized bottom-upprivatization initiative from the enterprise level. Segmcnting SOEs into smaller units or relieving them offinancial and social liabilities maikes divestitures easier, but also delays thtnL The cost of major physicalrestructring can rarely bc re-captured through a higher divestite price.

* i-iAFor a few very lame enterprises that can not easily be split up. privatization is often a tailored effort that includessecaor studies, restructuritv -ilans. ive search for local and forign buyers, and intensieve negotiations. Such

| 1 or ~- large-scae privatization' is highly complex and time-consuming. o

Where local savings are scaroe, SOEs can be sold at a discount, or against some form of vouchers that aredistributed free of charge. The participation of foreign and institutional investors can be facilitated, and some shares canbe held back for future public sale. Full of pitfls. by contrast, are payment or purchase in installments, or credit frombanks or special funds f..r share buyers I; some cases, an the nunagemenlt of Sl)Es ic 'privatized'. Such managementcontracts, leases. or concessions involve contractual problcms, though, and are unlikely to reap the benefits of ownership-transfer.

Whatever the method of privatization trnsparency, well-defied procedures, and central oversight are key forgaining the -confidence of quality investors. and for avoiding public-aversion against the program that could easily delay orderail privatization- and economic reforn. On the other hand, pivatization can stimulate commitment to efficiency and to-ecoomic reformif-privazition spreads ownership widey among the entprise employecs or the ciizens. Hawever, acontrolling block of shares should be concentated in one or fewhas to fcilit efective governance. To-this end,-Governents offer share packages to the investor community, or encourage pOOinig of rerces through invetmnt finds.

Often-i;, a pivatization pgram is followd by lay-offs. Their fundamental cause, however, is generally not thevdiestitur. itself but rather the historical inefficiency of the enterprises that it helps to reveal and rectify. Targeted

measures to alleviate the social burden should be well coordinated with the privatizaion program. Governments that shyaway from privatizing the bulk of their enterprises will ul;imately be unable to sustain suppoing their inefficiencies. Theownership composition of their economies will else change by default, trough the inevitr!le exit of inviable state-nterprises and-the entry of new private local and foreign cnterpriss.

Il The World Bank, ri- The Lessons.of Waig DC, 1992.

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Private Sector Development and Privr.ization 79

Upon receipt of the collectives' plan, the SPC organizes a special comm.ission composedof representatives of the buying workers' group, a banker, an auditor, and such othe: pcrsons as the SPCdeems appropriate. The commission is to value the tangible assets of an enterprise, largely on the basisof book values, with some adjustment for inflation. If the enterprise is to be purchased by its owncollective, the social assets of the enterprise (day care centers, vacation property) are gifted over and adiscount of 30 percent is taken off the value of fixed assets. The balance plus the value of financia:l assetsminus the value of enterprise debt is the sales price. The collective then pays a minimum of 20 percentof the sales price, with the balance due over a period of up to ten years (usually without indexation); theSPC retains some rights to direct the activities of the enterprise until the balance is paid. Uponprivatization, the new owners commonly reorganize the enterprise into a collective or, more frequently,a limnited liability entity whose shares are held by the collective, which in turn distributes its own sharesamong the employees according to the duration of their employment and further criteria.

The SPC has been entrusted with representing the state's ownership interests inprivatization. However, with the worker collectives initiating the divestitures, and with the valuationmethods legally predetermined and tied to book values, the SPC's real influence has been limited. Muchof the SPC's attention is focused on ensuring the continued production or distribution of certain goodsby the enterprises, through careful segmentation of larger finns and state retention of those importantcomponents, or through contractual agreement with the privatizing collective about the activity "profile'of the firm for years to come. The SPC's authority was weakened also after a December 1991 resolutionthat divided state property between the republic and the oblasts, depending largely on whether a firmmade most of its purchases and sales within or outside its oblast. This division led oblasts to establishtheir own property committees parallel with the SPC's oblast branches. Although the central SPC'sauthority was later reconfirmed, parallel structures persist in several oblasts. Moreover, all divestiturerevenue is collected in a special "privatization account" intended to be allocated as directed by theSupreme Soviet, without even a small fee going to the SPC for the funding of costly studies, audits,transactions, or public information.

In the second quarter of 1992, the authorities introduced a legal framework forincorporating medium-size and large state enterprises as joint-stock companies. In recognition of thecommon deficiencies of corporate governance in majority employee-owned large enterprises, the newprovisions are more careful not to give labor collectives the share majority in large enterprises. Uponcorporatization, the collectives of employees (and retirees) receive shares up to a total of 25 percent ofthe company's shares, with allocations based on years of service and with managers obtaining often fivetimes the number of shares as a worker. The remaining majority of shares is earnarked for differentcategories of future shareholders: for suppliers and clients of the firm; for foreign investors; for futuredistribution among citizens (presumably to certain professional categories such as doctors, teachers, andsocial workers); and for retention by the state. This fixed distribution scheme would unfortunatelyprevent any one shareholder or shareholder group from controlling the majority of shares. This wouldaffect governance and would discourage foreign or local investors. By end August 1992, some 205 suchjoint-stock companies had been created. Conmmonly, only the employee shares and, sometimes, theshares earmarked for suppliers or clients, have been allocated, which means that the state through theSPC still holds the majority of shares in these corporations. Thus, they are still state enterprises.

The privatization schedule was refined in April 1992 but retained it ambitious objectives.Its goal was to privatize in 1992 (i) 70 to 80 percent of small enterprises in the fields of retail trade (lessthan 160 square meters), restaurants (less than 50 seats), and services (less than 100 employees); (ii) 50

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percent of all small and medium-size (less than 500 employees) enterprises; and (iii) most housing. ByMarch 1, 1993, all small and rnedium-size enterprises, all housing, and all agricultural enterprises wereto be privatized.

These objectives were far too optimistic, especially in view of the privatization methodsused, despite the extraordinary efforts of the SPC. By end August 1992, one year after the program hadbegun, the SPC counted 3,664 enterprises whose ownership had been trarnformed. This figure is one-tenth of the number of enterprises, but many of the units were only parts of enterprises. The assets ofall transforned units, according to their 1991 book value, amounted apparently to Rbsl6 billion, or 8percent of tae total physical assets of state enterprises in 1991. All but two oblasts reported at least 90to 100 transformations, led by Chimkent (in terms of number of units) and Semipalatinsk (by asset value).The figures are somewhat misleading, however; the largest enterprises were merely transfonned intocorporations, with the state retaining the share majority.

Table 6.3: PVATEIIAON AD CORPORATATION UNL AUGUSr 31.1992

Sold to Transferred Transferred Leased Converted TOTAL PercentNon-State to Private to Employee into joint

Enterprises Individuals Collectives Stock Comp.

Agriculture - - 231 1 26 258 7%Industry 1 22 196 15 68 316 9%Construction 12 21 152 8 20 213 6%Transport 2 4 32 4 7 49 1%Trade, Retail 145 280 608 28 50 1111 30%Caring 48 68 167 6 13 302 8%Services 53 435 503 21 5 101 28%Municipal Facilities 28 35 60 6 - 129 3%Other Sectors 42 51 124 31 16 264 7%

TOTAL 345 916 2073 120 205 3664 100%Percent 9% 25% 57% 3% 6% 100%

Sourcz SPC

Two-thirds of the transformed units are engaged in trade, catering, and services. Also,some 77 percent of all transformed units were local rather than republican property which indicates thatthe enterprises were commonly small ones with few fixed assets. Industry, agriculture, and constructionaccounted for only 9, 7 and 6 percent of the transformed 'inits, respectively. Genuinely sold tononcollective private entities had beer. 1,261 enterprises, or 34 percent of the total (25 percent toindividuals, 9 percent to enterprises). As many as 57 percent of the enterprises had been transferred totheir employee collectives. Some 6 percent, usually larger firms, had become joint-stock companies, withcommonly 25 to 30 percent of the shares transferred to the collectives and the share majority still withthe state. In recognition of the problems of lease contracts for enterprises, leases were kept in only 3percent of the cases.

Private Sector Development and Privatization 81

Recent trends point to an acceleration of transformations, with 800 to 1,000 cases permonth. Moreover, sales to noncollective buyers have gone up to 46 percent of the enterprisestransformed, in August 1992. Small trade, catering, and service units still account for two-thirds of alltransformations, however.

The state has also begun to privatize housing. By mid 1992, about 10 percent of allhousing units, or 300,000 units with 16 million square meters, had been transferred to their residents.About 220,000 thereof had bcen bought with special housing vouchers, sometimes supplemented withcash; 11,000 units were sold against money only; and 69,000 units were given away free although thiswas not part of the Government's policy. However, the housing privatization has been slowed down byseveral factors. First, unrealistically low maintenance fees for leased flats are a disincentive to purchasingthe flats. Second, the allocation of housing vouchers is bureaucratic and slow, chiefly because thecomplex set of distribution criteria involves the collection and verification of many personal documents.Third, since some municipalities and enterprises have distributed housing free of any charge, themotivation for other citizens to spend their vouchers or cash for their flat has been undermined. TheGovernment should review the housing program and remove any disincentives for privatization (forexample, the low level of rents, the uncertainty about further changes in the privatization scheme, the fearof increased taxes on privatized housing). The Govermnent may also create a favorable legal andregulatory climate for facilitating the registration and enforcement of mortgages on real property,including land.

En sum, the enterprise reform effort to date has been strongly biased toward employeeownership and collective structures on the one hand, and unaccountable nomenclatura-led group structureson the other. Both biases tend not to generate effective control by owners which would maximize long-term value, and both tend to be seen as unfair by the population. Moreover, privatization on a case-by-case basis is cumbersome and, very costly, and would slow down comprehensive privatizationconsiderably, especially if fewer firms were given to their labor collective at a nominal price. In themeantime, the performance and assets of thousands of state enterprises would probably deteriorate furither,and their restructuring would be drven not by private owners but by largely unaccountable stateenterprise managers with a soft budget constraint. The pressure on the authorities to endorse more orless "spontaneous" privatization on the part of the collectives, and the withdrawal of enterprise groupsfrom effective supervision by the state as owner, would be likely to continue.

The Government realizes that a new privatization strategy is needed to achieve rapidownership transfer, more effective enterprise governance, and socially fair distribution of ownershipopportunities, and it is now considering adopting a new program along the lines sketched out below.

Outline of a Revised Privatization Program

The new program would follow three main tracks, as listed below. Agriculturalproducers and real estate would be privatized in separate programs. All three tracks would be preparedand launched without delay, but their implementation would take differing time periods.

(i) Small enterpnses would be auctioned off systematically on the municipality level, againstcash and unused housing vouchers. This would include all regular non-agriculturalenterprises with less than 200 employees and less than 1 million rubles of fixed assets asof end 1991.

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(ii) Rcgular mnedium-size and Large enterprises would be sold against "investment points" ina mass privatization program, the complexity of which is reduced through the central roleof investment funds.

(iii) Most very large enterprises with more than 5,000 employees, and special enterprises -defined as natural monopolies, firms with largely non-commercial functions, and theexploitation of non-renewable natural resources5 - would be sold in full or in part on acase-by-case basis, often with prior (sub-)sector studies, regulatory work, and somerestructuring.

The first component of the privatization strategy would be rapid small-scaleprivatizaion.Many of these small units are trade, catering, and other service enterprises whose early privatization canyield rapid benefits in terms of improved service and availability of goods, and hence also in terms ofpopular support for economnic reform. The proposed approach reflects the successful implementationexperiences of a growing number of cities in Czechoslovakia, Poland, and now Russia. The enterpriseswould be liquidated and their business space sold in open auctions; the equipment and inventory wouldthen be offered to the winning bidder at pre-announced prices, or auctioned off separately if the winningbidder declines. The auction sales would be for both cash and vouchers. The vouchers used here wouldbe related to the current housing voucher program; citizens could use their unused housing vouchers, andcould obtain the vouchers through a simplified procedure if they opted for using them for the smallenterprise auctions rather thrn for honing. Part of the cash proceeds from the auctions would be usedto fund special severance payments to those fonner employees who do not buy their enterprises but manyemployees would probably be re-employed in the same premises or business line after privatization.Employees would also be given a special discount if they chose to bid for their shop. For this small-scaleprivatization to be successful, it must be accompanied by early de-monopolization of wholesale andtrucking. This could be done through the break-ng up of ministry-led distribution stuctures, theauctioning of a minimum percentage of each large firm's trucks or stores, and the rapid privatization ofthe remaining enterprises.

The second component would be the massprivalization of some 8,000 regular medium-size and large firms. Such a program will require considerable effort to prepare and install, but it couldthen process a several times larger number of enterprises than would be processed case-by-casepLocedures. Moveover, privatization with the use of free vouchers or 'investment points" would helpto overcome the shortage of savings and liquidity among the public and could enhance popular supportfor the economic reform program by equitably giving every citizen a part of the nation's assets. As aspecial feature, one could consider also selling oblast-controlied enterprises (as compared with republicanenterprises) on a parallel route with the same procedures but open only to voucher holders who residein the oblast; in this way, citizens would benefit more directly from the wealth that they created in theiroblast.

Strorg emphasis is being put on designing a program that is streamlined, transparent, andmanageable. For example, citizens would put all their investment points into investment funds that theycould freely choose on the basis of their competence and, later, their initial performance. This would

5 Some agro-procsing enteiprises may also be included in this group becase of their linkages with dhe complexreform process oF the agricultual ecnona.

Private Sector Development and Privatization 83

greatly simplify the auctions of the enterprise shares, which would be attended only by these 50,000investment funds without directly involving millions of citizens.6 Moreover, these funds would be betterable than most citizens to assess the value of the enterprises. Finally, the investment funds will be in abetter position to exercise effective ownership of the firm, through their ownership of blocks of shares,through the professional capability that they will build, and through their ability to mobilize additionalcapital if needed. To ensure the proper conduct of the investnent fund managers and to enhance theirstake in good performance, the licenses for these funds will be sold against a very substantial fee, andthe funds will need to be strictly regulated and monitored, under special legislation, by a Government unitfor securities exchange control that would be established with high priority.7

The vouchers could be denominated in "points" instead of rubles. The auctioning of theenterprise shares would then result in market-based ruble values for the vouchers (or for shares in theinvestment that they helped to acquire). The Govermnent would not need to determine a ruble price forthe vouchers, which would need to be continuously adjusted for inflation and which could be wronglyperceived by the public.

It is recommended that at least 51 percent of the shares of each firm be sold to theinvestment funds, and that perhaps a 26 percent block thereof be auctioned to one fund, to permit moreeffective owner control. The Government may decide that employees of each firm can apply to receive25 percent of the share free of charge or at a discount after the firm has been converted by the state intoajoint stock company. This would be likely to enhance their support of the program. To avoid deterringforeign investors from acquiring the enterprises (from the ivvestment funds) later, the employees mightbe given non-voting preference shares rather than ordinary shares. The managers of the enterprise couldbe entitled to acquire a further 5 percent of the shares at a major discount at the time of the share auction,but only if they have properly prepared the privatization documents. If they wish to acquire majoritycontrol of an enterprise, the managers or employees could later buy additional shares from the investmentfunds.

Case-by-caseprivaizafon, although very time-consuming and costly, is necessary for theapproximately 200 very large enterprises because of their operational and financial complexity and theirimportance to the national or local economy. It is also warranted for so-lled special enterprises orsectors, estimated to total some 1,000 enterprises, because they require particular regulatory arrangementsbefore privatization. From the outset, the Govemment would classify all these enterprises into categoriesaccording the intended sale of shares, in the foreseeable future: sale of all shares, the sale of the majorityof shares, sale of a minority of shares, or sale of no shares. The privatization effort would be gearedtoward finding local or foreign core investors. rather than worker collectives, for the majority of theshares. Experienced consulting finms and investment banks would be employed to help prepare andimplement major transactions. In some cases, (sub-)sector-wide privatization could be used to reduce tosome degree, the time, cost, and mnanagement effort. Sector analyses would help the Government and

6 It thus faclitates also an iterative auctioning mechanism known as, Wairas or tatonnement mechanism, that helps finda proxy to a market price for the enterprise shares without die erratic price fcnnation that can occur in ordinary auctions.

7 For the oblast-controlled enteprises under te mass privtion component, smaller oblast levcl investment fundscould be licensed in a similar manner with lower minimum capital and license fees.

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managers to see the privatization and restructuring in a strategic context, and to systematically addresssectoral particularities.

Implementation Requrements for the New Privatization Strategy

The introduction of the proposed program will require a number of steps, including basicGovermment decisions; parliamentary approval in the context of the overall economic reform program,elaboration of component details and an implementation schedule, implementing legislation, and so forth.Further, the infrastructure to arrange and carry out the privatization progran will need to be enhanced:

(i) SPC's instiutional capacity should be strengtiened through a larger nunber of qualifiedstaff; technical training: an expanded budget, or retention of part of the divestitureproceeds; a clear legal mandate to proceed with the various components and activitiesunder the program; an appropriate status vis-a-vis the sector ministries; and extensivetechnical assistance.

(ii) An extensive and well-planned public information effort is needed to ensureunderstanding of and support for the program by the public, and to give the public thetechnical derails for their participation in the program.

(iii) To allow foreign investors to participate in the case-by-case privatization, or to buyenterprise shares from the investment funds after mass privatization, the regulatory andincentive framework for foreign investment needs to be reviewed. The institutionalresponsibilities for searching for, attracting, negotiating with, and monitoring foreigninvestors - in cases of privatization - need to be delineated between the SPC and thenewly established foreign investment unit.

(iv) The state also needs to reassert its ownership role in the enterprises as long as theyremain state owned, and to strengthen the goverance systems by which the stateexercises this role, as is explained below.

State Enterprise Governance and Management

A functioning market economy presumes the existence of owners interested in profitsthrough dividends or through increasing enterprise value, and able to exercise sufficient financial controito ensure that the enterprise management is aimed at those objectives. Although state enterprisesaccounted for about 88 percent of Kazakhstan's employment (in early 1991), the state has not exercisedits ownership rights clearly, effectively, and consistently. The state's appropriate exercise of such rightsis important both for enterprises slated to remain in state ownership and for enterprises whoseprivatization is imniinent and whose assets are in danger of rapid dissipation. Rectifying this situationwill require a number of measures including: clarifying the institutional responsibilities for exercisingownership; reorganizing the state enterprise sector to facilitate effective supervision; corporatizing stateenterprises, and establishing within them supervisory boards of external directors; improving the toolsfor financial supervision and management motivation; and instituting temporary measures to prevent thedissipation of assets and profits. In addition, the internal management of state enterprises needsstrengthening.

Private Sector Development and Privatization 85

The institutional responsibilities for exercising state enterprises ownership are at presentnot clear in practice. Ownership rights are still exercised in a shifting and imprecise manner amongmanagers, worker collectives, local authorities, enterprise associations or concerns, sector ministries, andthe SPC. First, local Soviets were delegated power to exercise all ownership rights over local property.Some created their own equivalent of the SPC, whereas others designated the SPC as their agent. TheSPC's finds it difficult to oversee local privatization to ensure a consistent, socially fair, and sustainableprogram.

Second, sector ministries still act as owners of the enterprises, thereby incurring conflictsof interest with their emerging roles as neutral regulators and promoters of their sectors. TheDestatization and Privatization Law of June 1991 intended the SPC to exercise all the state's ownershiprights of republican enterprises, to avoid the pitfalls of the competing ownership claims that have trippedprivatization plans in Central Europe. However, the SPC is too short of skilled personnel, resources,and de facto power to exercise its ownership responsibilities. Thus, in practice, it remains delegated to,and continually undermined bv, the sector ministries.

Third, when the small subsector ministries were absorbed into larger sector ministries,such as the Ministry of Industry, subsectoral "associations" were created to coordinate among the stateenterprises within such subsectors. These "associations" or "amalgamations" are often led by formerministry staff, and retain much of their former influence, albeit on a less formal basis (to paraphrase it,the ministries instead of the enterprises were privatized). Recently, such associations have been pressingthe Government to transform them into so-called "holding companies" and transfer to them the ownershipof the subsector enterprises. To further reduce state control, they often propose that the holdingcompanies in turn be owned in part by the enterprises whose shares they will own, and that their boardsof Directors be staffed largely with managers of these subordinated enterprises. Such pseudo-privatizationwould remove the enterprises from any accountability towards their ultimate owner, the state. It wouldalso prevent individual enterprises from breaking away from the grouping and would obstruct the eventualgemnine privatization of these firms. Moreover, such capture of enterprises by the nomenclatura mightaffect the population's attitude to economic reform.

Fourth, enterprise employees and managers use the confusion regarding the Govermment'sownership role to attempt to assume part of the ownership function themselves, although they have nodirect financial equity stake in the firms. This is the case in the almost 3,000 enterprises that the Kazakhauthorities inherited from the central USSR authorities-

Even with a clarified m.andate, the SPC will find it difficult to exercise its ownership overseveral thousand enterprises, and to do so in an unbureaucratic manner. Itmnay have to re-organize thest te enterprise sector. One possibility would be for the SPC to establish several holding companies andtnsfer the enterprise shares to them. These holding companies would be able to attract and retain highlyqualified financial and sectoral staff, and to supervise the firms financially in a business-oriented manner.The SPC in turn would closely monitor its holding companies, appoint their supervisory boards, and

provide many board members itself. To avoid building yet another layer of bureaucracy, the holdingstructure would have built-in incentives to strive for the privatizing of finns, with the SPC's assistanceand oversight. The holdings would have diversified portfolios across branches in order to encouragecompetition. Direct interference of ministries in enterprise operations could be reduced.

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To further clarify enterprise ownership, to facilitate the financial supervision ofenterprises by their owners, and to reduce interference in operational matters, all but the small stateenterprises should be corporatized. This would convert the enterprises into legal corporations,presumablyjoint stock companies, with a properly defined legal identify, capital, charter, and supervisoryboard of directors. Contrary to current practice, this need not entail a transfer of shares to new owners(for example, employees). It is important to note that a broad and rapid, and hence necessarily rigorouslystreamlined, corporatization progran will also be necessary for the mass and case-by-ase privatization.

Even after such corporatization the SPC, or the above-mentioned holding companies underit, would need to apply effective tools for supervising the enterprises financially from an owner'sperspective. Many enterprises have already been operating under a system akin to performance contracts,designed to give managing directors autonomy and incentives, while at the same time exercisingownership control, supervision and evaluating performance. Previously, these contracts were signed withthe ministries; now they are connonly signed with the relevant concerns, although in theory, they shouldbe signed with the SPC. With too little experience, it is difficult to see how this system works inpractice. The contracts appear extremely vague, with little guidance for evauating performance and nosystematic quantification of Government subsidies to compensate the firms for non-conunercial tasksperformed for the state. Moreover, they are not underpinned by an adequate accounting system andexternal audit, which makes them even more difficult to enforce. In sum, the authorities as owner seemsto lack effective tools for venitring, evaluating, projecting, and rewarding the financial performance ofits enterprises.

In the short term, until such new structures and tools of supervision will be introducedand effectively utilized, or until the enterprises have been privatized, it may be necessary to institutetemporary measures to prevent the further dissipation of state enterprise assets and profits. Suchemergency measures may include constraints on employee remuneration and tmporary approval liniitson certain types of large transactions.

Finally, the internal management of the state enterprises needs to be adapted to their newbusiness environment. This includes providing skills, systems, and internal structures in procurementand marketing, financial management, production management and quality control, personnelmanagement, and other areas. One of the possible, and complementary, ways of enhancing such skillswould be to implement an extensive program of overseas study tours with well-structured follow-up todisseminate the information locally (such a scheme benefited over 10,000 Western European managersunder the Marshall Plan). This, and fiurther business exchange and training programs, would expose keymanagers to a genumie market environment, to best practices, and to stimulating ideas. Anotherinstrment could be the employment of foreign contract management teams, or consultant teams, in asample of firms.

Enterprise Segnenttion and Competiton Policy

Many sectors of the Kazakh economy are highly concentrated. In industry, for example,one enterprise group or kombinat often accounts for more than two thirds of the domestic production.This is the case especially in heavy industries such as steel rolling, coal niiing, zinc, and fertilizers. Inlight industries such as textiles there are more producers, but owing to their extreme specialization, evencommon items are often produced by only one finm. The authorities are very conscious of the negativeeffects of what they regard as monopolies, especially of their ability to drive up prices. They also

Private Sector Development and Privatization 87

recognize that monopolies may defer adjustment and remain inefficient because of their ability to passon cost increases and inefficiencies. An Anti-Monopoly Law has been passed, and an Anti-MonopolyCommittee (AMC) has been created. Initially, the AMC has focused on controlling unjustified priceincreases and assisting the entry of new enterprises. Henceforth, it plans to more actively segmentexisting monopolies and contiol the formation of new ones.

One root of this high concentration was the Soviet system's obsession with scaleeconomies in production. With little or no regard for the managerial difficulties of giant organizations,the transport costs, and the system's vulnerability owing to lack of redundancy, materials were shippedacross the Soviet Union for processing in one place, and often shipped again for thousands of miles tothe sole client for further manufacturing. Active segmentation of enterprises is an option for redressingsuch a situation, but has not yet been actively pursued by the AMC.

One complicating factor stems from the division of the FSU: a firm may be the soleproducer of an item in Kazakhstan but may export all its output to one or to several firms in the rest ofthe CIS. Similarly, the sole producer of an item purchased by Kazakh firms or consumers may be a firmlocated in a neighboring CIS country. Anti-monopoly policy conducted by one state independently tendsto be of limited use under the circumstances. Opening up to trade outside the CIS and allowing free entryto new producers, however, are two key anti-monopoly tools.

This concentration in Kazakhstan's economy is further fostered by the combination ofenterprises in encompassing concerns, associations, kombinats, or holding company groups. In somecases, one such group includes most or all of the enterprises in an industrial subsector; in others, theenterprises are grouped into two or three clusters, but tend to specialize in different products. Thesubsector ministries, instead of tuly dissolving themselves and thus leaving the enterprises to competewith each other, have transformed themselves into kombinats and similar structures that exercise vastpower over the enterprises under their control and operate as cartels. Even smaller firms that have beensubmitted to the ownership authority of oblast Soviets belong often to such national groups and do notactively compete. The dissolution of these subsectoral group structures should be a high priority ofKazakhstan's competition policy.

Another factor that worsens the monopoly problem is the geographical size of the country,combined with its weak transport and communications infrastructure. Firms may simply not faceeffective competition from those in other oblasts. Bureaucratic and infrastructure bottlenecks in inter-oblast trade should be addressed. A fiuther obvious constraint to competition is the state order system.This system should be phased out fairly rapidly.

Vertical integration of firms may constitute another reduction of competition. If manyenterprises produce on their own a certain input for their production, then the market for that inputremains snall, and new entrants stay away because they fear that they may not find clients. At the sametime, the internal unts that produce this product within the integrated firms may regard their intemalmarket as captive and may begin to behave like monopolists within their firms, notably by avoidingefficiency enhancement. In both the past and the present, vertical integration has resulted fromdifficulties of transactions between firms. In the past, they were due to imperfections in the planning andorder process; to be sure of their supply or sales, firms preferred to do tiings themselves rather than relyon state allocations and procurement. In the current transitional economy, difficulties in transactions stemrather from lack of, or weaknesses in, marketing and procuremnt expertise, distribution systems, trade

88 Chapter 6

credit, inter-firm debt settlement, communications and transport infrastructure, law enforcement, andsundry further factors. As long as these constraints are not relieved, vertical integration may remain arational response: where markets do not work well, transactions become internalized into firms.

Competitive behavior is not shaped by the number of local producers or clients alone,however. First, a sole domestic producer may have little market power if it has to compete in themarketplace with suppliers from outside Kazakhstan. The landlocked location of Kazakhstan tends tohamper the prospects for trade. Still, the facilitation of imports should be a key measure for enlargingthe number of suppliers, and thus for stimulating competition. Similarly, the liberalization of export tradewould reduce the dependence of local producers on sole domestic clients. In addition, even a solesupplier may not exercise its apparent market power if it fears that its resulting profits would attract othersuppliers into the market, whether they are existing firms that diversify their product line, new firms thathave been created, or foreign firms that start to export to Kazakbstan. Reducing the barriers to newfirms, and assisting their creation, should hence be actively pursued in the context of private sectordevelopment (see the discussion earlier in this chapter). Assistance to firms for diversifying theirproduction would be another important measure, provided the enterprises can escape the problem of thecartels. Encouraging foreign investors to compete in the local market would also help, but this ishindered at present by the focusing of foreign investors' on export production to earn foreign exchangefor inputs and repatrution.

Recommendations:

:, The easiest and perhaps the most important measures to create competition would be tomake markets more "contestable' by facilitating the market entry of new enterprises,firms that diversify, foreign investors, enterprises from neighboring oblasts, andexporters from other countries. An open trade system is a crucial elernent in fosteringcompetition.

ii) The control of the creation of new dominant suppliers through mergers, acquisitions, orthe formation of enterprise groups (kombinats, concerns, 'associations", etc.) is anotherrelatively straightforward step toward ensuring competition.

iii) The active segmentation of dominant firms into smaller units would be a more drastic andcumbersome procedure, although some of it could be voluntary segmentation sought bythe enterprises rather than by the authorities. For individual enterprises, segmentationshould begin with spinning off or closing down non-core businesses, and withtransferring non-commercial facilities to local or central authorities. Separating divisionsthat manufacture different product lines would be the next step. More problematic mightbe efforts to divide upstream activities from downstream processing, because the resultingfirms would often still remain dependent on each other. Active segmentation should startby trade and transport enterprises, whose dominance or carteiization stifles localcommerce, services, and small industry and prevents arbitrage. Another high priorityshould be the breaking up of the subsectoral enterprise groups to give the enterprises trueoperational autonomy. Further, segmentation would be an essential element of therestructuring and privatization of very large enterprises, and of enterprises in the"special sectors mentioned earlier. The proactive segmentation of regular medium-size

Private Sector Development and Privatization 89

and large firms would be a lower priority and should not delay the mass privatizationprogram outlined earlier.

iv) The control of anti-competitive behavior in enterprises is perhaps the most difficult step.Such anti-competitive behavior comes under such headings as cartels, unfair tradepractices, misuses of dominant market positions, etc. Competition policy here requireshere high capacity and capabilities on the part of the AMC and the courts, which stillfiurter strengthening. The control of enterprise behavior is necessary also in sectors thatrequire substantial regulatory effort such as natural monopolies or companies that fulfilmajor non-commercial finctions in the interest of the state. Such sectors require asector-specific regulatory framework and regulatory institutions, a role that the sectorministries could play once they truly shed their ownership role (through privatization andthrough transfer of authority to SPC) to avoid conflicts of interest.

f) All the while, the state order system should be phased out. Moreover, the budget constraint ofstate enterprises needs to be further hardened to force the closure of inviable enterprises thatotherwise distort competition.

Sustaining and Restructuring Viable Enterprises

Kazakhstan's state enterprises require restructuring of enonaous scope and depth.Relative prices are changing fundamentally. New markets and suppliers need to be found as mnany supplylinks across the former Soviet Union have been interrupted. New foreign and local competitors areentering the domestic marlket as trade and regulations are being liberalized. New technologies arebecoming available. In response, restructuring includes the change of various structures of subsectorsand enterprises: ownership, legal structure, financing, staffing, technologies, physical assets, and so forth.Some of these measures need relatively modest financial resources, mainly to enhance implementationcapacity; this includes corporatization, privatization, segmentation, improved supervision of enterprisesthat will not soon be privatized. Other measures address existing liabilities of the firms, in particularinsupportable financial debts, environmental liabilities, and the cost of lay-offs that had been deferred inthe past. Further restructuring measures start building new productive assets, such as new equipment,technology, and skills.

To achieve economic viability in the new environment, such restructuring has to takeplace over the coming years - privatization alone is not sufficient. Experience in other countries showsthat restructuring is more likely to succeed, though, if the enterprises at- privatized at an early phase ofthe long restructuring process.

Newly privatized firms need an appropriate incentive framework and adequateinfrastructure support to undertake successful restructuring. Major price distortions such as they existin energy prices, interest rates, trade restrictions, and monopolistic positions need to be phased out.Moreover, they will need access to short and long tern credit facilities and various support services(consulting, legal advice, market information, trading services, and insurance). Until such privately rinsupport services unfolds, the state may have to facilitate technical help.

For some large enterprises with complex structural deficiencies, however, privatizationmay turn out to be difficult before substantial restructuring has taken place. Such firms need to be dealt

90 Chapter 6

with on a case by case basis. Given the magnitude of this task, and the limited familiarity of thegovernment with these new restructuring needs, it will be necessary to provide incentives and assist themanagement of these enterprises to undertake nmuch of this restructuring themselves. Incapablemanagement could be replaced by more professional management teams, ;n some cases even from abroad,on a contract basis. Within the Government, SPC as the owner of the firms, or more commerciallyoriented structures such as holding companies controlled by SPC, will need to oversee and guide thisprocess. Substantial foreign technical assistance will be needed.

Profound industrial restructuring takes much time. In the meantime, hundreds orthousands of finns will become insolvent (negative net worth) or illiquid (unable to pay their bills). orboth. In a well-fimctioning market economy, insolvent or illiquid finrns would be liquidated, on theinitiative of their owners or their creditors - unless the owners recapitalized thiem or the creditorsalleviated the debt burden because they believed that the firms were essentially viable and that they wouldhence be better off rescuing them. At present, however, economic viability is not easy to assess. Inparticular, insolvency and illiquidity say little about the real economic viability of these enterprises, fora number of reasons. Fist, the accounting system is still grossly inadequate for a market economy.Second, relative prices are still changing fundamentally, new competitors are only now emerging, andthe state enterprises themselves have only begun to enter into new markets - which means that thefinancial results of the past and the presence are unreliable indicators of future performance. Third, rapidinflation has reduced the book value of fixed assets in real terms to such an extent that an excess of recentaccounts payable over accounts receivable can easily lead to a negative new worth. Fourth, the shortageof liquidity and the delays in inter-enterprise payments especially across Kazakhstan's borders is creatingchains of inter-enterprise arrears that can make many firms illiquid.

The Governent could undertake a range of measures.

(a) The payment system within Kazakhstan may require further streamlining than the changesinstituted in early 1992. Potentially, a second round of debt clearing within Kazakhstan may haveto follow the first successful debt clearing exercise of early June 1992. Moreover, the imminentefforts to clear inter-republican enterprise arrears and improve inter-republican payments needto be pursued vigorously.

(b) The possibility of revaluing enterprise assets to account for the rapid inflation needs to beassessed.

(c) The system of enterprise accounting and audit needs to be thoroughly reformed, and theaccounting and audit professions need to be organized and trained.

(d) Bankruptcy procedures and institutions need to be developed.

(e) The social safety net may need to be strengthened; the development of the new prvate enterprisesand hence new employment opportunities needs to be fostered; and towns or regions threatenedwith severe depression in case of the failure of the major local enterprise(s) could prepare forspecial programs for preventing economic collapse and fostering recovery.

Private Sector Development and Privatization 91

PRIORIT-Y TECHNICAL ASSISTANCE NEEDS FOR PRIVATIZATION AND RESTRUCURY-'; 1993

Distinct technical assistance projects should address the following parts of the privatization program:*-Small-Scale Privatization. Pilot-Phase* Small-Scale Privatization. Multiplication Phase* S'egentation and Privatization of Trade and Trucking* Rapid Corporatization: of -State Enterprises- Preparation -and. Initial Impleeentatlon of Mass Privatization

Public.Inforwation for'Mass: Privatization'-Environnental Preparation of Privatizatlon- Regulation aid Privatizatlon.of Very Large or Special Enterprises* Preparing-the Privatization of AgricultLral Production and Distribution

. - =Privatization 'of Housing.' Finanrial Supervision of State Enterprises

.: . . *- Strengthening the Internal Management of Medii and Large Enterprises* Personnel Hainagement in Hed1um and Large. Enterprises'* Industrial Subsector Studies.* -Industrial- Restructuring

I.

CHAPTER 7

THE FRAMEWORK FOR SOCL PROTECTION

TE SOCIAL SAFETY NET

The reforn process is expected to lead in the short run to large increases in frictionalunemployment. The real value of fixed incomes is already falling as a cesult of continued inflation; andsocial services are beginning to be undermined as a result of expenditure cutbacks. An adequatu -ocialsafety net is, therefore, critical to ensure that the vulnerable population is protected. In view of the largenumber of households which will need to be covered and the scarcity of fiscal resources, the targetingof social spending is particularly important. In Kazakhstan the mcst vulnerable groups identified to dateare pensioners and large families. The experience of other countries shows that in times of adjustmentthere are additional vulnerable groups: children and the unemployed. In order to identify the poor moreaccurately, it is necessary to define a minimum consumption basket, to further analyze existing data, andto organize monitoring systems.

Although some resources will come from additional budget allocations, given the likelymagnitude of safety net requirements, some reallocation of expenditures from existing social services willbe needed. Savings ray be achieved by protecting the pensions of only the lowest income groups againstof inflation; by tightening eligibility requiremnents for sensions; reducing unemployment benefits forcertain kinds of beneficiaries (such as re-entrants, or those who have been trained and are employed): andby requiring employers to pay for at least the first 20 days of sick leave. The existing health systemshculd be prevented from collapsing. In the very short term foreign exchange is needed to finance theinporting of critical drugs and vaccines.

Current Statu

The most vulnerable groups in Kazakhstan are pensioners, the disabled, families withmany children, single mothers, and the unemployed. An elaborate network of social protection existsfor these groups. Government spending on cash benefits amounts to 10 percent of GDP - a sumcomparable to that in OECD countries and higher than in many developing countries (Table 7.1).

In view of the likely fiscal contraction, the country cannot afford to maintain the presentspending levels. However, there is an urgent need to maintain the most essential transfers (and socialservices) as cutting them would result in a substantial reduction in the living standards of the poor. Theefficiency of spending and targeting is of critical importance.

Estimates of the size of the vulnerable groups are not yet available and only roughinferences can be drawn. According to January 1992 prices (that is, immediately prior to priceliberalization) the population below a threshold household monthly income level of Rbs490 (or a percapita monthly income of less than RbslOO) could be regarded as vulnerable. On the basis of this norm,it was estimated that about 10 percent of the population would have found it difficult to purchase theminimum consumption basket in January 1992'. However, to the extent that goods were often notavailable at the official prices and that people had to queue or buy goods in informal markets, this

t Estima given by the State Committee on Statistics, based on dicir Household Survey Data. Its representativenessis open to question.

The Framework for Social Protection 93

underestimates the extent of poverty. The situation also changed dramatically during January-April1992, following the sharp escalation of prices of most cofmodities. According to the Ministry of Labor,while prices rose 3.7 times between January and April, the average household income rose only 2.4times, with many households suffering losses in real incomes.

According to the Ministry of Labor's calculations, the money income per capita neededto buy the minimum subsistence consumption basket during the first quarter of 1992 amnounted to Rbs535,of which Rbs447 (83 percent) may be needed to purchase food (Table 7.2)2. But the Ministry did notestimate the number of households with incomes lower than this threshold. An estimate of the vulnerablegroups was attempted by a visit to one district in Almacy. On the basis of house-to-house visits, theDistrict Social Protection Administration identified some 12,000 families, or 5.0 percent of the populationin Almaty as eligible for non-food coupons worth Rbs 240 per year to buy the subsistence commoditybasket, and about 5,000 individuals, or 0.5 percent, as the ultra-poor population, needing charity foodcoupons to obtain 24 free meals every month from the public catering facilities. These proportions mayhave risen further in the last quarter the year.

In view of the potential increase in the proportion of vulnerable population and thepressures on the budget following fiscal contraction, the Government needs to address the problem ofrestructuring its social expenditures and at the sane time protecting the most vulnerable groups. Thevulnerable population is supported by three Funds: the Social Insurance Fund, the Pension Fund, and

Table 7.1: Goverunent Expenditures on Cash BenefitsKazakhsan and OECD Countries

(% of GDP)

Social UnemploymentSelected Countries Security Pension Benefits Total

Kazakhstan ('92) 5.0 4.7 0.5 10.2Poland ('91) 2.9 7.9 2.0 12.8Hungary ('90) 6.2 9.9 0.5 16.6Germany ('86) 1.6 11.4 1.4 14.4OECD Lower Income ('86) 2.9 7.8 1.8 12.5OECD Welfare States ('86) 5.3 10.1 2.5 17.9United States ('86) 0.8 7.2 0.4 8.4Canada ('86) 1.5 5.5 3.2 10.2

N-tte: Social seuity spending excludes spending on social services such as health and education.

Sources: Kazakhstan Ministry of Finance and Ministry of Social Protection; World Bank,"Hungary-Reform of Yozial Policy and Expenditures", 1991; World Bank, 'Poland-Income Support and the Social Safety Net: Policies for the Transition", 1991.

2 From a 'nutritional minimunC perspective, this consumption basket is not appropriate.

94 Chapter 7

the Employment Fund. In addition, local governments raise charities and provide ad hoc payments tothe needy (such as children under guardianship). However, this armangement is largely untargeted andopen-ended. Moreover, the present structure does not support some other groups, such as the workingpoor, whdse living standards have fallen sharply following price liberalization and who are now also inpoverty.

It is clearly unrealistic to naintain the same level and structure of social expenditures asin the past. Undifferentiated reductions in social expenditures across the board would worsen poverty.If the Govermnent is to avoid an increase in poverty in the short run as the reform proceeds, bettertargeting and streamlining of the existing types of cash benefits will be imperative. Additional spendingwill be needed in some areas, for example on unemployment compensation including proactiveemployment services (as well as on essential social services). It will also be necessary to rationalize theinstitutional arrangements. In addition, It will be important to monitor the profile and incidence ofpoverty as social spending contracts and mass layoffs become the order of the day. Such monitoringshould be carried out through quick surveys of various kinds, and also through the reform of the existinghousehold survey system.

Pensions

There are now 3 million pensioners (18 percent of the population), and pensions accountfor nearly half of total cash benefit expenditures. Pensions are set at 60 percent of the average pay overfive consecutive years of employment. The minimum pension rose from Rbs342 prior to priceliberalization to Rbs950 in September 1992- Pensioners who worked all their lives, and those who didnot work at all, receive at least the minimum state pension at the age of 60 (55 for women)3 : therefore,the pension system does not provide an incentive to work. Notwithstanding the upward revision of theminimum pension, inflation has eroded the real value of pensions considerably, which has reduced theliving standards of most recipients of minimum pensions, especially very old single persons with norelatives.

An independent Pension Fund was created in January 1991. Pensions are financed bymost of the social insurance tax on enterprises (37 percent of wages), and by employees' contributions(1 percent of wages); any deficit is funded from the budget' (Table 7.3). The remainder of the socialinsurance tax on enterprises goes toward financing sick leave and other social activities (sanatoria, etc.)of the Social Insurance Fund (see paragraph 7.13 below).

To reduce claims on the budget as well as the burden on enterprises, the Governmentplans to introduce a Voluntary Pension Fund (VPF), the main features of which are as follows. Everyone(age 18 to 60) wishing to receive a pension higher than the minimum state pension would volunteer to

3 However. the average retirement age is lower (58 for men and 53 for women) since workers employed in particularlydangerous activities, or workLug in disadvantageous regions retire earlier, and women with several children have early retirementprivileges.

4 Projected transfers from the unified budget amount to 16 percent of total expenditures and are mainly used to coverthe cost of certain allowances which are paid through the Pension Fund. The unified budget for 1992 equals Rbl 120 billion,of which the SLate budget is Rbl 94.5 billion, die Social Insurance Fund is Rbl 23.4 billion and the Employment Fund is Rbl2 billion.

The Framework for Social Protection 95

contribute to the VPF on a monthly basis. The resources of the VPFs would be handled by Managing(Joint-Stock) Companies, which would have unlimited liability. As workers began to deposit with theVPF, the present 37 percent obligatory tax on the enterprises will be reduced. The basic purpose of thisinitiative is to limit the state's responsibility to the minimum pension, set at a basic consumption level,and to require workers to save and invest if want higher pensions at the end of their career. The statewould safeguard their investments via rigorous monitoring of VPF investments.

AMlowances

Four broad categories of cash allowances are given by the Government: (i) allowancesfor sipgle mothers; (ii) child allowances for families and for children abandoned by parents; (iii) lumpsum grants for the newbom; and (iv) allowances for soldiers' children. Some of these allowances aregiven annually (child allowances), and some are one-shot transfers (i.e., at the birth of the newborn). In1992 these allowances are estimated to cost the Government nearly Rbsl6 billion, or 13 percent of thecentral and local budget. They represent up to 22 percent of incomes of poor households5. Expendituresfor general children's allowances and for single parents' allowances are managed by the Pension Fundbut are financed from budgetary transfers. Other allowances, such as those for foster children and thechildren of soldiers, are paid for by local budgets. Lump sum payments for newborn are paid byenterprises through the Social Insuranrce Fund.

Table 7.3: Budget of the Pension Fund, l992

As ofJanuary 1992 Septenber 1992

Million Rbs % distribution Million Rbs % distribution

I. Income total 34,759 100-0 57,000 100.0of which:a. Enterprises contribution (37%) 18,318 52.7 55.500 97.4b. Worker's contribution (1%) 615 1.8 1,500 2.6c. Others 14 0.0d. From Republican budget 15,812 45.5

H1. Expenses total 34,759 100-0 62,490a. Pensions of non-working population 16,789 48.3b. Worldng pensioners 1,857 5.3c. Military pensions 294 0.1d. Distinguished persons' pensions 159 0.1c. Special allowances for families with children 15,212 43.8

under 18 years of agef. Single mothers 378 1.0g. Invalid children 11 0.0h. Othcrs 4 0.0i. Administrative expenses 55 0.2

HI. Deficit 5,490

Source: MiniiLZy of Finance

5 Poor households are households with per capita income of less tan Rbl 100 per month based on 1991 wage data.

96 Chapter 7

Social Insurance Fund

Until now, trade unions have been allowed to retain 19.5 percent of the social insurancetax levied on the payroll for sick leave, maternity leave, expenses for newborn children, burial expenses,and expenses for stays in sanitoria for rest and recuperation, as well as sundry expenses such as pioneercamps for children. The Fund was Rbsl.9 billion in 1991 and was projected at Rbs4.4 billion in 1992.A decree was recently passed transferring the Social Insurance Fund to the Ministry of SocialProtection - a desirable step, as it would avoid duplication of functions and, at the same time, allow theGovemment to coordinate the entire social protection system and introduce needed targeting principles.Ample scope exists to reduce expenses by reducing waste in the administration of benefits and bytransferring discretionary social expenditures out of the Fund to enterprises or trade unions.

Unemployment Benefit'W

Unemployment compensation is provided to persons registered with the EmploymentService. There were 4,000 persons registered in January 1992, rising to 10,000 (or 0.15 percent of thelabor force) by April (see Chapter 5). According to the Ministry of Labor, the level of unemploymentby the close of the current year is likely to be 300,000 (or 4.5 percent of the labor force), of which about100,000 may qualify for compensation. Compensation is provided for 36 weeks for those who lose theirjobs. They receive 50 percent of their average basic wage for the last 12 months. For new entrants tothe labor force, the period of compensation is only 13 weeks and they are paid 75 percent of theminimum wage. Re-entrants to the labor force receive compensation for 26 weeks and are paid theminimum wage for the first 13 weeks and 75 percent of the minimum wage for the next 13 weeks. Thosethat lose their jobs but are undergoing re-training are paid 100 percent of their wage in their last job.

Since Jamnary 1991, several employment offices have been opened in each district whosemain purpose is dissemination of employment information, training and retraining, and creation ofemployment for the unemployed. Of the 9,942 persons registered as unemployed during January-March1992, only 12.6 percent were covered under "training and refraining", and about 4 percent were under'public works", while 36 percent were eligible for unemployment benefits. As many as 75 percent ofthose who lost their jobs in recent months are women. Most of them had been employed in rawmaterial supply enterprises. Many of the unemployed women are educated. Pockets of the unemployedare regionally concentrated in small towns, where many uneducated men and women were previouslyemployed as manual laborers in military complexes. These cmoplexes have been closed, and in somesmall towns unemployment rose by 1.5 times in three months.

Issue and Recommendations

Given the fiscal pressures and the need to protect the living standards of the poor, themain focus of refonis must be on efficient of spending and œiproved targeting. For these purposes, itis important to assess the size and characteristics of the poor; three steps need to be taken. First, furtherwork is needed to define the appropriate minimm consumption basket, which should be context-specific,taking into consideration family size, family composition, location, etc. An appropriate basket may bedifferent from the one currently in use. Threshold income levels required to purchase this basket could

s The labor mrket is discssed in Chapter 5.

The Framework for Social Protection 97

then be calculated. Second, further analysis of existing household survey data is needed, in order toexamine actual living standards based on the appropriate consumption basket. Third, measures need tobe taken to monitor regularly the poverty situationregularly. As has been mentioned above, this shouldbe carried out through quick surveys and through reforming the existing household survey system. Atechnical cell should be set up for poverty monitoring purposes.

The threshold poverty level income thus derived should be used for targeting all benefits.It is recommended that the benefit be a cash benefit at the minimum consumption level, and it should befilly protected against inflation. In cases of serious food shortages, however, it may be necessary to issuefood coupons on a local level

Pensions

The proposed increase in the minimum wage to Rbs600 will impose a significantadditional burden on enterpnses and the budget. While the proposed VPF is welcome, it will have littleimmediate impact either on the enterprise budgets or on the Government budget. On the other hand, theadministrative responsibility of the state will increase many times. Moreover, in managing the resourcesof the VPF, extreme caution is needed in the choice of "most profitable" investments, especially whenmarket signals are still dormant.

The following recommendations are made regarding pensions: (i) the minimum pensionshould be lower than the minimum wage, but not lower than the minimum consumption basket level; (ii)only the minimum pension should be protected from inflation (which, in practice, means that mostpensions would soon be at the minimum level owing to the effects of inflation): (iii) pensions shouldconstitute a part of taxable income; (iv) once the employment situation improves, it would also benecessary to gradually increase the retirement age, by bringing women's retirement age up to men's, andthen raising both to some higher level, (65, for example); and, (v) private pensions should be encouraged,to supplement Government pensions. The Government's Reform Agenda includes the upward revisionof the retirement age, the introduction of VPF, and the merging of the Pension and Social InsuranceFunds. Progress on all these fronts is slow, and much more needs to be done to implement therecomnmnendations.

Cash Allowances

At present, child and family allowances are generous in Kazakhstan; for fiscal reasonsthey need to be reduced. Ideally, this should be undertaken through the improved targeting of theseallowances to the poorest groups only. Some targeting is in fact already taking place, as richer families(thosewith incomes over four times the minimum wage) are excluded. Over the longer term, it is maybe possible to introduce more rigorous means-testing. In the short term, it is recommended that theseallowances be kept as a flat-rate benefit but than their value be reduced in real tenms. As somevulnerable groups may be hurt as a result, this process needs to be monitored carefully so that additionalmeasures may be taken to assist these groups as necessary.

98 Chapter 7

Sick Leave Benefits

Sick leave benefits should be redesigned and enterprises should be made responsible forfinancing the first 20 days of sick leave. Only after this should the resources of the Fund be utilized.Such a system would permit closer monitoring of sick leave and would prevent abuse. It would alsodiscourage the current practice in which enterprises force workers to proceed on sick leave, using fundsfor sick leave as temporary wage payments7 . It should also be possible to reduce the overall expensesunder the Social Insurance Fund by eliminating such sundry payments as burial expenses, pioneer campsand the like. As the demands on the Fund are diminished, the heavy social insurance tax burden on theenterprises could also be reduced.

Unemployment Benefits

The level of unemployment compensation is too high for certain categories of theunemployed, for example, new entrants to the labor force, re-entrants (that is, chose looking for a betterjob), and job-seekers undergoing retraining. These levels of compensation are not only unsustainable butalso discourage participation in the labor force and can also contribute to misuse of training facilities.It is recommended that compensation levels for first time job-seekers be eliminated and that compensationfor re-entrants be reduced to 50 percent. Job-seekers that are trained and employed should defray a partof the expenses of their training so that the program becomes self-sustaining. The eligibility criteria forbenefits should be strengthened, and toleration of job refuisals reduced.

Caution should be exercised to ensure that the Employment Fund's resources are notquickly exhausted. Considering the anticipated rise in the unemployed, the Ministry of Labor shouldallocate substantial fumds for compensation in the immediate short run, and should avoid the possibilityof running out of funds by diverting them disproportionately to training, public works, or joint venturcs.

Public works are not recommended as a solution to structural unemployment, particularlysince substantial employment opportunities are likely to emerge in infrastructure building. Therefore,public works could be started in the short term only on an experimental basis in regions (small towns)to alleviate severe unemployment, and particular attention should be given to employing women wherethey are experiencing higher unemployment than men. To ensure self-targeting, wage rates for suchpublic works should be fixed at levels less than the market wage.

The Ministry of Labor is currently investing its resources (the Unemployment Fund) inshort-term deposits. It also plans to resort to joint-ventures and other direct job creation activities. Itis recommended that, rather than undertaldng entrepreneurial activities itself, the Ministry should playa facilitating role in the development of entrepreneurship. For example, the Ministry might encourageself-employment for currently unemployed educated women by facilitating credit and training facilities.

Urgent technical assistance is reconmmended to enhance the technical capacity of theMinistries of Labor and Social Protection, and for institutional development (see Box 1).

' As of April 1992, 126 enterprises that partially suspended production forced 8044 workers to proceed on sick leavewithout pay.

The Framework for Social Protection 99

THE HEALTH SECTORBox 1: TECHCAL ASSISTANCE TO

Status of Health IMPOVE SOCIAL PROTECTION

Given the anticipated mass lay-offs following the closureThe health care system of the of many enteprises. the Ministry of Labor will have topast, with universal access to free services and assume greater responsibilities than in the past. Theconsiderable investnents in curative medicine, technical capacity of the Ministry needs to be improvedprevention, and water and sanitation, has especially with respect to manpower demand forecasting.contributed substantial improvements in the health computcrization of its operations to cope with dheof the population. Over the last few years, anticptedea prlure of work, and for designing andimplementing labor market policies conducive to a markethowever, the socioeconomic and environmental economy (policies to stimulate migration. to help intcr-deterioration is putting strains on both the sectoral reallocation and redeployment of labor, etc.)population's health and the health care system.Unless immnediate refomis are introduced in health The proposed Technical Assistance is intended to send a

cae inncngand in drug procurement and drug few crtical staff members of the Ministry of Labor abroadcare financing anu m arug procltremen anu urug for apoopriate training so that when they reatum. they areuse policies, backed by appropriate technical and in a position to modiry the stncture of employmentfinancial assistance, past health improvements services and render them relevant to the changednay rapidly be eroded by increases in infant and economic, so -al and political envirounent.maternal mortality, and increased morbidity, If the Soca Isrce Fund is tansferred to th Mistyresulting in a gradual reduction in life expectancy. of Social Prtection as proposed, that Ministy's

responsibilities in providing the social safety net will belife expectancy in Kazakhstan is enhanced. Yet the Ministry's technical capacity is rather

64 years for males and 73 years for females, weak. The proposed Technical Assistance will alsoalthough it is reported that these figures may have encompass setting up of a cell in either the Ministry of

dro in recent years. lnfant mortality is 26 Social Protection or the Miistry of Labor or the StatedrOpPed ~~~~~~~~~~~~~~Statistical Commnittee (SSC) to monitor the-living standards

per 1000 live births, and is lower than that in of not just the pensioners but the whole vulnerableotlLer Central Asian republics, although somewhat populafion including the working poor. In any event,higher than that in Russia. The leading causes of technical assistance is essential fDr analyzing the householddeath are cardiovascular diseases, cancer and data (being colleaced by SSC) by specialists for theirrespiratory diseases. The classic epidemic representativeness and utility from the perspective ofdiseases (cholera, plague, typhus) are well under po cay montoring.control, except for tuberculosis, which is still Urgent Technical Assistance is also proposed to theprevalent among adolescents and young adults. * Ministry of Soil Protection for computerization of itsPreventable childhood diseases are under control operations, for designing the targeting initiatives of thethrough immunizations. The following factors, Ministy in pesions and child allowances, and Forthrog -advising thmn on the proposed voluntary Pension Fund.however, contribute to excessive morbility:enviromnental degradation (particularly connectedwith the shrinking of the Aral Sea, radiation from - _ --nuclear testing in Semipalatinsk, and air andwater pollution in Ust-Kamenorgorsk due to mining, heavy smelting and industrial activities); unsafedrinking water (30 percent of rural dwellers use water from shallow wells, often containing toxins);crowded housing; rudimentary rural waste disposal; and often poor hygiene.

The Ministry of Health (MOH) operates over 8,000 health service institutions. Patientsbelong to a health institution and are not free to seek medical attention elsewhere. There are no privatepractitioners or private clinics Patients need a referral to move to a higher level in the health system.

100 Chapter 7

Nevertheless, specialists see far more people than is the case in countries with well-developed familydoctor systems.

The system provides a high level of coverage, but the quality of care falls considerablybelow Western standards. The total number of beds per 1,000 population is 13.4, higher than in theEuropean countries. The average in patient stay of 12.5 days is twice as long as that in hospitals inNorthem Europe. On an average, patients pay six annual doctor visits in rural areas and about ten incities.

Most health facilities are fairly dilapidated. Maintenance budgets are totally inadequate.The quality of services in both outpatient and inpatient care has been declining, mainly owing to lack ofessential drugs. It is estimated that the current drug shortage is about 25 percent of past supplies. Thereare about 2,000 pharmacies, some of which undertake minor production and, distribution as well asretailing. Outpatients pay for drugs, but the price is still well below procurement or production cost.All inpatient drugs are free. Nearly all drugs come from Ukraine, Russia and Belarus; some come fromEastern Europe and some specialty drugs come from Europe and the United States. Kazakhstan has nolarge-scale pharmaceutical industry, and no spare parts or diagnostic and therapeutic equipment. At thesame time, irrational drug use is common (polypharmnacy, iMections instead of oral administation, drugtreatment of self-limiting diseases, irrational drug combinations, etc) and compounds the problem of drugshortages.

The health care system is financed almost exclusively from central government funds.Outpatients pay a nominal amount for drugs; enterprises and collectives contnbute equipment, materials,and sometimes cash for a small number of salaries. In 1992, it was estimated that expenditures from thebudget on health might be as low as 1.6 percent of GDP, which is close to the allocation for health inless developed countries. Whatev er the exact figure, it is clear that fuding for the health sector is lowand is dropping, and that additional resources are urgently needed. As part of a proposed reform of theentire health care system, a compulsory, state-administered medical insurance scheme is expected to beapproved by the Parliament shortly. The scheme, which is to be financed by contributions fromenterprises equivalent to 7 to 8 percent of their salary bill, will reimburse both public and private medicalcare. Students and pensioners, as well as indigent persons will be treated free. However, several criticaldecisions need to be made before the insurance svstem can be set on a path that would ensure the desiredoutcomes.

Iazakhstan has 135.4 hospital beds, 40 doctors, and 115 middle level personnel per10,000 population. There are nD doubt rural-urban and inter-regional differences: Almaty city has 73.2doctors per 10,000 compared to 40 for the country as a whole. Yet, these numbers are impressive andcompare favorable with the levels found in the high income countries. Despite the availability of theseinputs, the quality of care is low because of inappropriate use of drugs, outmoded medical practices andequipment, poor physical condition of facilities, and (as indicated below), serious shortage of drugs andsupplies. Further, the system is strongly biased towards curative care.

The Framework for Social Protection 101

Reform Issues and Recommendations

In early 1992, the Parliament enacted a new law on "Protection of the Population'sHealth". This law, together with the draft health concept and policy paper, envisages a health policy andsystem that will be fundamentally different from the present. The new health law and policy give priorityto primary health care, seek to eliminate the state's monopoly in health, introduces a basic health reforn,and seeks to change both health care management and financing. In the new system, decision makingwill be decentralized and private health care allowed. A system of family doctors will be introduced andpatients will have a free choice of health care providers. It is expected that the new system will beimplemented as soon as possible through a series of laws beginning with the health insurance law to beenacted by Parliament by early 1993. While the eagerness to refonn is welcome, the Ministry definitelyneeds technical assistance to formulate appropriate policies and implement them.

Pharmaceutical and Equipment

Scarcity of foreign exchange and disruption of trade among the CIS cuuntries led toserious shortages of essential drugs, vaccines and equipment. This is the most pressing problem facingthe health sector. The real spending on health in 1992 is expected to be 1.6% of GDP, compared to3.3% in 1990. Already the siuation is barely tolerable, and a further deterioration will result in muchsuffering, with loss of confidence in the health care system.

In the short run, the only solution to the acute problems is either reallocation of sufficientforeign exchange, or large international aid. Some external assistance has been discussed but no firmcommitments have been made. As a first step towards rationalizing drug supplies, it is recommeded

what a careful justification of the needs be undertaken. Drug requirements should be estimated on thebasis of medical needs and past consumption, and must follow the WHO essential drug concept. TheWHO has in fact developed priority lists for the region, which should be used to calculate the needs,irrespective of whether financing is provided from Kazakhstan itself or partly from external sources.

To ensure supplies in the long tenn, a number of steps need to be taken instead of rushingto invest in pharmaceutical and equipment manufacture. The first step, while the shortage is being dealtwith, is to develop a national drug policy, including a policy on local production, importation, pricing,estimation of drug requirements and distnbution to both the public and the planned private sector.Meanwhile the MOPH must take steps to introduce a more rational use of drugs, including a change frominjections to equally effective but less cosdy methods of drug use.

A reform of drug pricing policy should also be considered as part of a new policy andstrategy for the pharmaceutical sector and as part of the health reformn A first step would be to startprivatizing pharmacies on a pilot basis, in a few districts where health care is also being privatized.

The plans for creating a big phanraceutical and medical equipment industry should besubjected to considerable analysis. At a time when many other industries are not worldng well, this doesnot seem to be a good moment to launch a highitechnology industry that requires considerable inputs interms of technology, know-how, and not least capital. Kazakhstan, with a market of about 17 millionpeople and no assurances of export markets, may not have a comparative advantage in the production ofmodem pharmaceutical and high-technology medical equipment. Although the feasibility of producingintravenous solutions, formulating a range of essential drugs from imported raw materials, and producing

102 Chapter 7

such equipment and syringes and needles may be investigated, it is recommended that the issue of startingindustrial development on a large scale should be looked at in a regional context.

Health Care System

The major issue is the mere size of the health care system (in infrastructure and staff) andits curative bias. The new health law and draft policy are a sensible framework for shifting priority topreventive care, eliminating the state's monopoly in health, and introducing management and financingreforms. However, much more vigorous efforts are needed to mount effective prevention programs andto orientate health services to those most in need. This will be particularly important in the context ofthe macro-economic reform program and the need for an adequate safety-net for vulnerable groups. Thepresent obstacles lie not only in the declining health budget, but more importantly in the lack of a healthpolicy or program strategy, the failure to adopt modem preventive methods and the inadequate trainingof staff. Preventive health care and ways of financing it will remnain a Govermnent responsibility.Although an expanded and improved range of preventive programs integrated with the curative systemwould contribute more than anything else to better health, there is a danger that prevention will continueto be neglected.

Kazakhstan's new health law and its strong motivation for reform are useful startingpoints for restructuring the health system, including privatizing services and introducing medicalinsurance. It is recommended that the Government should make firm commitments to preventiveprograms, especially as extra pressure will probably be exerted on it in the coming months to keep thecurative system working during the transition period. To accelerate implementation of reforms, theMOPH should develop a comprehensive national health policy and strategy and a carefully designed setof guidelines on integration of preventive, promotive programs with a more efficient and leaner curativesystem. Certain elements of such a policy and strategy (concerning cancer prevention, tobacco, nutrition,family planning, occupational and environmental health, etc.) have already been worked out by WHOand other international organizations, and tested in many countries. The MOPH could thus takeadvantage of foreign experts and existing international experience.

Health Service Efficency

The low and declining health budget makes it very important for the health system tofunction effectively. But previous budget processes, and the emphasis on quantity over quality, has ledto a dispersal of financial and other resources over an unnecessarily large number of facilities, requiringlarge numbers of staff. The many small hospitals, the long average stay, the inappropriate use of doctorsand nurses and the irrational use of drugs are all indicators of inefficiency. Moreover, the poor designand physical condition of facilities, the outdated equipment and the lack of drugs and reagent allcompromise quality.

A reduction in the number of health care facilities is specified in the new health law. Thefirst to be closed should be the smallest and oldest cottage hospitals, especially those that are near otherfacilities. They can be adapted to other uses, preferably in the social sector, as nursing homes,rehabilitation centers and orphanages. Radical cuts are also needed in the secondary facilities. A carefulmapping of both small, medium and large hospitals is recommended to determine which could be dosedwithout dramatically reducing access. The closing of small and medium-sized hospitals must beaccompanied by efforts to reduce the length of stay. It is recommended that a small number of medium

The Framework for Social Protection 103

and large hospitals should be selected to test the complex changes required for modernization of inpatientcare.

Fewer hospitals and greater efficiency will necessitate cuts in the number of doctors andmid-level health staff. As health manpower is reduced, the quality of new graduates should be improved,while those who remain in the system are retrained. A planned, phased reduction should aim to lowerthe number of doctors from the present 40 per 10,000 to perhaps as few as 20 per 10,000 by the year2000. There must be a similar reduction in the number of mnid-level staff, who will also need betterqualifications.

Women's Health and Family PI

The average national maternal mortality of 80 may actually be much higher in rural areas.Of Kazakhstan's 4.2 million women of child bearing age, 15 percent have had seven or more children.Abortion, which equals the mnmber of births, is the most common method of family planning. Modernmethods of contraception are in scarce supply and, if available, are highly priced, thus contributing torising abortion rates. Anemia among women is said to be pervasive. Oral iron and folate preparationsare unavailable. Women's health issues deserve more attention. Considering that fewer than 15 percentof women currently use family planning, it is reconmmended that steps be taken to spread family planningand also control anemia and improve maternal nutrition.

Health Financing

To avoid a collapse of the system, the decline and erosion of the 1992 health budget mustbe restored. A mere 1.6 percent of GNP simply cannot finance the present health systemn Eighty percentof this meager budget will need to be spent on salares and patients' food, leaving only about Rbl 200per person for all other services. The medical insi .ance scheme due to be approved by early 1993 isexpected to generate some resources from 1993, but these resources may not be enough to bridge thepresent financing gap. However, apart from plans to privatize about 30 percent of services, there areno other plans for cost recovery or alternative sources of finamce. This is a critical issue requiring moreattention. Moreover, while the proposed insurance has the potential for sustainable financing, theMinistry of Health would require technical assistance to implement its reforms. It is stronglyrecommended that central funds (both foreign exchange and rubles) should be found immediately to carrythe system through until both the reform and a new financing system can be implemented.

While the insurance scheme is being ratified, it is recommended that a system of directcost recovery should also be introduced. Clinics, ambulatories and hospitals should apply a flat rate forall outpatient visits and be allowed to use the cash themselves for critical inputs such as drugs, equipment,maintenance and perhaps incentive pay for staff. Any health financing system needs to determine the truecost of a service or intervention, in order to match direct charges or reimbursement from an insurancecompany with the real cost. At present Kazakhstan has no cost accounting system. Standard costaccounting methods have been developed in many countries and should be considered for use as part ofthe development of the medical insurance scheme and other financing schemes. It is recommended thatthe Governent take advantage of this experience while it develops a financing system that will graduallyshift the burden (directly or indirectly) to the users, and also contrbute to greater efficiency in thedelivery system. Appropriate technical assistance is urgently needed (see Box 2).

11: 1: 11111~.-la

i11 1 ! t li

ii ,l FNJ, 1. iij .!0tZX WA

I~~~~i i~~~~~:9

PART m

THE TRANSFORMATION OF THE REAL ECONOMY

Economy-wide measures must be complemented by sector-specific refonns in the key productivebranches and in social programs. This will help reverse output declines and clearly define the sectors thatwill need support during the transition period. Moreover, by providing a sense of relative sectoralpriorities, this will allow policy interventions to be sound, affordable and create the appropriate incentivesfor increasing productivity and avoiding waste.

Part m of this report addresses the issues of transformation of the real economy in four sectors:(a) energy; (b) agriculture; (c) infrastructure; and (d) environment. These sectors are critical to the reformprocess and, though much still remains to be done, an initial idea of sector design already exists.

The Energy Sector. Reform in the energy industry must assure the short run survival ofeconomically viable enterprises and create the necessary institutional and regulatory framework for therapid development of the private sector. Energy commodity prices need to be brought to world mnarketlevels in order to allow the enterprises in this sector to achieve financial and operational independence.This will help maintain current production levels and allow the country to develop new oil reserves.

Agriculture. The first step towards making agriculture in Kazakhstan internationally competitiveis to complete full price liberalization. In addition, state orders and restrictions on the development ofprivate marketing channels should be eliminated. The latter includes, among other things, facilitating theapplication process for land leases, providing credit at market interest rates to private farmers,encouraging private sector activities in food processing and distnbution, marketing, and storage. Inaddition, the export and import of all conmmodities and agricultural inputs should be liberalized.

The Infrastructure for Production. Private sector participation in the transportation andtelecommunications activities in Kazakhstan is being encouraged. Further reform requires theliberalization of tariffs, the separation of regulatory agencies from state trading operations, the removalof all remaining barriers to market entry, and an increase in standards to international levels. In addition,an investment strategy that elicits outside cooperations should be developed.

Environment. Overwhelming short-term economic imperatives should not diminish thehnportance of longer-term environmental concerns. Increased economic efficiencies, stemming fromincreased competition and the importation of new technologies should reduce the pressure on theenvironment. Over time, invesunents in pollution abatement technologies and in new enviromnentallysound technologies will also be required to offset some of the negative effects of macroeconomic reforms.The reform process needs to be complemented by an appropriate regulatory and legislative frameworkcapable of dealing with environmental liability issues arising in the privatization process.

CHAPTER 8

ENERGY AND MINING SECTORS

A. ITe Energy Sector

Introduction

Kazakhstan has abundant energy rtsources, including significant deposits of oil, naturalgas, and coal, ranking among the largest of the energy producers of the Former Soviet Union.Kazakhstan is the second largest oil producer, accounting for almost one half of the oil produced in theFSU, outside of Russia. It is also the third largest producer of coal and the sixth largest producer ofnatural gas in the FSU.

Kazakhstan is a net exporter of energy, with exports of oil and coal more than offsettingthe imports of natural gas and electricity. Due to the vast distances in the country and the geographicalimbalance between energy production and consumption centers however, the country has a substantialvolume of inter-republican energy trade. Because of the location of existing resources, and pipeline andtransportation routes, most of it's oil and coal exports are to the Russian Federation. A small volume ofoil has been sold to the world market during 1992, but without access to an international export route,Kazakhstan is dependent on Russia for this trade. Kazakhstan's largest oil refineries, Pavlodar andChimkent, are also solely dependent on importing Russian cnrde oil.

Currently, oil represents about 15% of total exports. Based on international prices and1991 volumes, energy exports would be valued at over US$ 5 biHlion, and the net energy trade balancewould be on the order of about US$ 0.5 billion. If the reform program and foreign investacut proceedunder the timetable planned, it is projected that oil could account for up to 60 % of exports by 1995. Thiswould permit Kazakhstan to run a surplus on merchandise trade by 1997. Revenues from oil exportsshould reach US$ 3-5 billion per year in the second half of the 1990's.

The potential to expand petroleum production and exports in the near term is significant;under proper management it should lead economic recovery. Very large oil and natural gas condensatefields have been discovered with sizeable undeveloped potential. If developed, the Government projectsthat oil production could be doubled by the year 2000. Expansion of the export potential requiressubstantial investment and policy measures. While the pricing of inter-Republican energy trade will bea critical factor in the near term, the construction of a pipeline for oil exports to world markets will bethe crucial factor for medium term development. During 1992, the country has been disadvantaged inoil price negotiations since the protocol on oil pricing parity for oil trade between Kazakhstan and theRussian Federation enterprises has not been met.

The Government has effectively placed a priority on attracting foreign investment intothe oil and gas sectors since the full development of discovered fields are beyond the scope of Soviettechnology and available capital. The development of the Tengiz and Karachagmnak fields in particular,are expected to have the single largest impact on the economy this decade. It is imperative, that theconditions necessary for these large investments proceed on schedule and that the timely construction ofan export pipeline, with non-discriminatory access and standard international tariffs, receive the toppriority of the Government.

Energy and Mining Sectors 107

Beyond attracting foreign investment, policy measures to promote the expansion ofpetroleum production and exports and to encourage the reduction of energy consumption wi,l be required.Growth in oil production has been slow in recent years. Serious delays have taken place in new fieldscoming onstream, while existing fields have started to decline. This is primarily due to the lack of capitaland equipment. exacerbated by the disruption in inter-Republican trade. Rehabilitation of existing fields,as well as introduction of enhanced oilfield management, will be required in coordination with thesignificant foreign investment anticipated to enter the sector. Energy consumption within Kazakhstan isalso far too high in relation to economic output and must be reduced.

Efficient restructuring of the energy enterprises, reform of energy pricing and taxation,increased energy efficiency, and careful government management of foreign investmnent inflows areessential if the energy sector is to flourish and underpin the government's reform program. Reforms andinvestment should go hand in hand, maintaining an equilibrium between the different objectives involved.For example, a profits based taxation system for the petroleum sector will be essential to widen the taxbase. However, it must also provide sufficient incentives for new investment in oil and gas exploratiorand development. Postponement of reforms or investments, even for one year, will have senor'.repercussions on the economy.

Despite the substantial potential in the oil sector, the energy strategy should not ioa1ateoil from other energy sources. In addition to coal, which is estimated to contribute close to 20% ug .otalcurrent energy exports, natural gas and electricity imports are also significant to the trade balance. Basedon international prices and 1991 volumes, net imports of natural gas and electricity would cost over US$1 billion. Future investment in these sectors will need to balance domestic and regional demand, as wellas least cost investment planning. Natural gas production should be expected to expand significantlyduring the decade. Natural gas exports will be dependent on reaching an agreement with Russia, and theother transit countries. on pipeline access and transit tariffs for the gas to reach international rnarkets.

Coal production, on the other hand, is not expected to grow in the 1990's. Although coalwill continue to fuel the domestic economy, where it currendy provides over one half of total primaryenergy supply, domestic consumption as well as export demand is expected to de-line. Presendy 50 mt,or about 40 % of coal production is being exported to Russia. Three fourths of these exports are steamcoal used in the large power plants in westem Siberia while the remainder is coking coal exported to theUrals steel plants. T'e future coal market is highly uncertain, particularly given the increased attentionof environmental issues. Under international rail transport costs, Kazakbstan coal is not expected to becompetitive beyond the Russian export market. Kazakhstan's coal is, however, assessed to be the lowestcost coal on the Asian continent. Restructuring of this industry, as well as domestic coal pricing andtaxation issues, will require careful attention of the Govermnent.

Energy Supply

Oil Sector

Oil production in 1991 reached 26.6 million ton (540 thou sand barrels per day), withnatural gas condensates contributing about 15 percent of this total. Productiun had been increasing byabout 3 percent per annum over the last several years, largely due to new production coming onstream.Despite significant investment in the oil extraction industry over recent years, 1 biflion rubles annuallyover the last three years, or 6 percent of Government spending, new production has been at a much

108 Cbapter 8

slower pace than expected. The Karachaganak and Tengiz fields in particular have had severedevelopment problems. Both have finally yielded production in 1985 and 1991, respectively, albeitrelatively small volumes in relation to potential, and years behind schedule. In part, this reflects theextremely complex geological and technical difficulties associated with production from the new fields.It is largely for these reasons that these fields, with large volumes of discovered reserves, have beenopened up to foreign investors. Although the fields are complex by any standards, the intemational oilindustry has operated successfully under similar conditions elsewhere.

New field production has somewhat masked the difficulties in the existing fields whereproduction is falling sharply. Production from the largest producing association, Mangyshlakneft, whichproduces 50 percent of Kazakhstan's oil, has declined by 11 percent or 1.5 million tons during 1992.Total oil production for 1992 has declined by about 3 percent from the 1991 level. Despite currentdifficulties, the near and medium term outlook for expanding oil production through foreign investmentis substantial. In addition to foreign investment the sector will require substantial institutionalstrengtening including restructuring of the industry. Rehabilitation and enhancing oil production in theexisting producing areas will be critical to the long term stability of the oil sectors.

The oil potential in Kazakhstan was developed relatively recently in comparison to othercountries of the FSU, and therefore there is vast unexplored potential. In 1991, Kazakhstan's provenrecoverable oil reserves were estimated at 1,600-2,100 mt (about 12-15 billion barrels), and gas reservesat about 1,600-1,800 billion cubic meters. New discoveries in the North Caspian Basin have more thanreplaced the countries reserve base in recent years. Geologic trends indicate that substantial hydrocarbonreserves remain to be found and that additional reserve figures are certain to be revised upwards aspetroleum exploration continues. Assistance in developing an exploration policy, timing of investments,and in promoting development of the exploration potential should be undertaken.

Foreign Investment Projects

A number of foreign investment ventures in the oil and gas sector have been advancing.The largest include the Chevron agreement for development of the Tengiz field, the British Gas/Agipconsortium, for the development of the Karachaganak gas condensate field, and an agreement with ElfAquitaine for exploration and development in the Aktyubinsk region. These large investment projects,will have a critical impact on future oil exports and Government revenue.

Chevron's investment in the Tengiz field is anticipated to start in 1993, provided thecommitments agreed by the Government of Kazakhstan (including completing the desulfurization plantfor the next stage of production) are met. Initial investment by Chevron is expected at $US 1.6 billionover the next five years. Investnent could reach up to $US 20 billion over the life of the project. Theoil and associated gas is extremely high sulfur (up to 25 %). Disposal of the sulfur is a critical issue tothis development. The British Gas/Agip agreememt is anticipated to be no-npleted during 1993, withinvestment on the same order of magnitude as the Chevron project to commence directly thereafter.Investment and production from the Elf Aquataine project is anticipated to start in the latter part of thedecade.

These projects are all critically dependent on the ability to export oil for foreign exchangeearnings. Currently, Kazakhstan crude oil can be exported outside the CTS only through an agreementwith Russia. This involves swaps and quality adjustnents with Russian producers tied into the export

Energy and Mining Sectors 109

pipeline network. The Government of Kazakhstan is discussing projects and investment options forconstruction of an export pipeline. The current priority option is to use the existing pipelineinfrastructure around the north of the Caspian Sea, with new construction completed to the Black Seaport of Novorossiysk in Russia. This project involves potential cooperation with Russia and Azerbaijan.Other options which have been studied involve a route across the Caspian Sea to Azerbaijan and onthrough Georgia or Turkey. A route South through Iran to the Persian Gulf has also been considered.The World Bank has offered to provide financing to the Government of Kazalkhstan, in order to obtainindependent expert advice on technical, legal/contractual, and financial matters connected to this project.Financing of a portion of the export pipeline project, assuming the project is appropriately structured,would also be considered by the Multilateral Institutions including the World Bank and the EBRD. Theconstruction of this export pipeline will be the linchpin to the future economic development of thecountry. It will be imperative that the Government ensures this project is completed in a fashion whichpromotes the long term petroleum development of the country.

Medium Term Outlook

The medium term outlook for the oil sector based on production, consumption and exportearnings is shown in Table 8.1. These projections are built into the medium-tern scenarios discussedin Chapter 3. The central scenario assumes that the major foreign investment projects currently underdiscussion move ahead as planned. Furthermore, it is assumed that the oil export pipeline will becompleted by the end of 1' 6, requiring a fiurther US$ 120 million investment within Kazakhstan. Anadditional foreign investment project in the oil sector is assumed, in these projections, worth around US$400 million, starting in 1996.

During 1993-1998, investment spending is projected to total close to US$ 3 billion. Thepeak in investment is expected to occur in 1996. Once the major spending has been completed on theseprojects, investment is expected to drop off near the end of the decade and stabilize at around US$ 200million. This could be expected to be revised upward as further foreign investrnent agreements arereached. Output from the largest two investments is expected to yield an additional 10 mt/yr of oil outputby 1996 (200 kbd), and a fiuther 9 mt/yr by the end of the decade (180 kbd). These projects areexpected to contribute close to 500 thousand barrels per day of oil production by the year 2000, or almostone half of the projected production levels at that time.

Economic Management

The potential negative sectoral impact of a strong dominant oil sector - poses amajor policy risk in the medium term which will require careful policy management. A problem mayarise if strong growth in one sector significantly reduces the competitiveness of other sectors in theeconomy, leading to stagnation and decline. This problem was first perceived in the Netherlandsfollowing the development of new natural gas fields under the North Sea. Increased natural gas profitsdepressed production in the other traded goods industries. That is, the development of the natural gasindustry came at the expense - or the 'deindustrialization' - of the rest of the industrial sector. Similarproblems have affected the development of natural resources to various degrees in Australia, Mexico,Norway, and the United Kingdom.

110 Chapter 8

Table 8-1: KAZAKHSFAN OIL PROSPECr('mi metic tLos)

1990 1991 1992 1993 1996 2000

Oil Prodction 25.6 26.6 25.7 29.5 36.2 45.9

Crude Oil Impors 13.0 11.2 11.3

Retined Product Imports- gasoline 2.2 1.7 1.0- diesel oil 3.7 3.2 1.9- fiel oil 1.7 1.6 1.2- other 0.5 0.4 02

TotlW Oil Product Impo 8.1 6.9 42

Toal Oil Imports 21.1 18.1 15.5 14.8 11.0 9.8

Refinery Losse 2.8 2.7 2.3 2.2 1.5 1.3

Domesti Consnmnption 19.6 18.3 15.6 14.9 11A 122

Crude Oil Export-ciS 20.4 20.7 16.2- ROW 0.0 0.0 6.0

Tolal Crude Oil Expors 20.4 20.7 22.2

Refined Product Expots-- gasoline 1.3 0.9- dieseloil 1.1 1.1- fiel oil 1.5 0.9-other 0.1 0.0

TralOilPoductExporns 39 2.9 1.1

Tot Oil Exprts 24.3 23.6 23.2 27.2 34.3 422Ne Oil Exports

- crude oil 7.4 9.5 10.9- refined productS 42 -4.0 -33

Total Net Oil expors 3.2 5.5 7.8 12A 23.3 32A

Export Easnings - -- 2.5 3.2 4.6 5.9(US$ billions)

Memorandum lbanInvesmes (US$ millions) 30 480 715 200

Note: Oil Production includes cnre oil and natual gas ctndesaExports. including those to CIS are valued at ineaional pnces

Source: Data provided by Kagas Karsknnntey,sidTct and staff estnates.Due to difficulties in oil consumption and trade data altenative esbmates eidst, which will be required to bereconcied prior to the fial versin of this reporL

Energy and Mining Sectors 111

Natural Gas

Current natural gas producdon is 8-8.5 billion cubic meters (bcm) per year. About halfof this amount is produced at the Karachaganak field which is exported to Orenburg Russia forprocessing. As ris is unprocessed gas the price received for these exports, at 200 Rb/tam is much belowthe current average price of inter-Republican gas trade of 2700 Rb/tem.

Currently, Kazakhstan imports about 15 biUlion cubic meters per year of gas fromTurkmenistan, Uzbekistan and Russia. As the potential for domestic development is vast, and the costsof these imports will be escalating rapidly, the Government has placed a priority on expanding domesticgas supplies. This will be realized through expanding production, reducing flaring and extending thepipeline network.

New domestic gas supplies are slated to triple through the foreign investment projects.As with oil, the Tengiz and Karachaganak projects will have the largest impact on production levels, asthe foreign investment agreements call for the construction of gas and condensate processing facilities.With the development of these and other fields, the Government projects that gas production will triplefrom the current 8 bcm per year to reach 16 bcm per year in 1995, and 27 bm per year by 2000. Forthis production to be viable, efforts Will need to be made to reach an agreement with Russia and the othertransit countries, on pipeline access and transit tariffs for the gas to reach international markets.

Coal Sector

Kazakhstan is a major coal producer with annual production of about 130 million tons. Ofthis, 40 percent is exported to other CIS states, mainly to Russia. There are about 30 coal occurrences,most of them located in a semi-circle of about 400 knm radius north of Karaganda. Only a portion of theoccurrernces are being mined, mainly by the Ekibastusz and Karaganda enterprises. Due to the thicknessof the coal seams and their proximity to the surface, they are among the lowest cost on the Asian conti-nent. The presently mined fields contain more than 100 years of reserves at the present extraction rate.

In 1991, Kazakhstn c' sumed about 85 million tons of coal of which about 75 milliontons were supplied domestically and l( million tons were imported, mainly for household use in easternKazakhstan. The main uses of coal are for power (about 6i mt/yr) followed by steel (12 mt/yr) andhousehold and communal use (7 mt/yr). During the sam year, Kazakhstan exported (mostly to Russia)about 38 million tons of steam coal and 13 million tons of coking coal. Kazakhstan's total coalconsumption did not decline between 1990 and 1991. During 1992, however, a decline of about 4percent is expected.

The Kazakhstan Coal Union akhstanugol) acts primarily as a producer associationwhich also exercises some of the Government monitoring and controlling functions. The most importantsurface mines -producing steam coal are located at Ekibastusz. Although production costs at below $5/tonare by far the lowest of any in the FSU, there is a problem of high ash content (40-50%), which puts thefuture markemtability in Russia at risk, given increasing concern to environmental issues. Considerationhas been given to completing a large storage/blending/washing operation. To address the high ashcontent issue, a thorough feasibility study would be required before such an investment could beundertaken.

112 Chapter 8

Kazakhstan's older coal mining district, Karaganda, has operated mainly undergroundmines, primarily to supply coldng coal for the steel industry, but in recent years, surface mining forsteam coal supply has become increasingly important. It contains about 8 billion tons of hard coal, ofwhich about 60 percent is coking coal. There are good opportunities to mine the steam coal at muchlower costs and safer operations than the surface mines. Coking coal production from the undergroundmines should also be reduced, in line with mrket developments. The Karaganda coal enterprise willrequire substantial restructuring, of which the expansion of the Shubarkol surface mine will be animportant element. As part of restructuring there may also be investment opportunities for enhancedrecovery and utilization of methane from coalbeds. Reorganization of the enterprise and divestiture ofnon-mining activities are also required.

Electricty

In view of the size of the country the power system is subdivided into three regionalpower grids: in the North; in the West connected to the Russian system; and in the South connected tothe Central Asian System. While the domestic supply of electricity has expanded rapidly during the lastdecade, Kazakhstan still imports about 20 percent of annual demand. Of the total installed generatingcapacity, about 87 percent is thermal, 12 percent hydro and about 1 percent nudear based. All majorthermal stations in Kazakhstan are coal-fired with the exception of a few gas or fuel oil fired stations incity areas.

Power plants are poorly maintained and over staffed by Westem standards. Plantoperation is plagued by the use of poor quality coal, the handling of large volumes of ash, the lack ofpoilution coDnrol equipment and outdated instrumentation and control technology- There are seriousconcerns about the availability and the price of spare parts since most of the equipment is imported, andsuppliers accept payment only in foreign currency, or barter. In 1991, the thermal plants achieved anaverage capacity factor of only about 59 percent, and this could worsen if maintenance is not sustained.

Current per capita consumption of electricity in Kazakhstan is high in comparison tocountries with similar GDP per capita. This reflects the over consumption and inefficient use of energy,particularly in the industrial sector, in response to the low relative price of electricity. Electricity tariffshave increased substanially for industry since 1991. Tariffs increased from 3 kopeks per kilowatt hourin 1991 to average 1.8 rubles per kilowatt hour in September 1992. Although this is above the industrialaverage tariff of 1.2 rubles/kWh in the Russian Federation it is only about 22 percent of intenmationalrates, based on an exchange rate of 200 Rb/US$, and is below the current imported cost of electricity of2.1 RbIkWh. The prices to households and agriculture are only a mere fraction of economic costs ofsupply. Electricity and heat prices will need to be raised significantly. The World Bank is providingtechnical assistance to the Government of Kazakhstan through the Technical Cooperation Program indeveloping a concrete program of reforming energy prices during the transition process. The results ofthe assessment and proposals for reform will be discussed with the Government in January 1993.

The decline in industrial electricity demand is unlikely to recover over the next 3 to 5years, while residential demand may also drop in response to higher prices, increased efficiencies andlower household incomes. The Goverunent is considering commissioning additional capacities of about6,500 MW (coal fired) and 2,400 MW (gas/fuel oil fired). The cost of these, at US$ 300 million, andUS$ 1.7 billion are clearly beyond Kazenegro's fhancing capabilities.

Energy and Mining Sectors 113

Efforts will be required to assist the Government in its efforts to restructure the electricityindustry, ensure rational and least cost investment planning, and to address the substantial distortions inthe electricity and heat tariffs.

Energy Demand

The size of the exportable energy surplus and investments into the sector will also dependon the level of domestic demand. Kazakhstan's economy is highly energy intensive, with per-capitaenergy consumption equivalent to that of Germany, despite a far lower per-capita GDP. It is the thirdlargest consumer of energy among the former Soviet republics. Industry accounts for nearly 40 percentof total consumption, with steel being the single largest user. Agriculture accounts for 35 percent of totaloil used in the economy and 50-55 percent of the motor gasoline and diesel oil consumed.

Kazakhstan's use of energy reflects the development of its natural resources base. Theeconomy is predominately coal based. Coal accounts for over 50 percent of total energy consumption,oil about one third and, unlike most of the republics of the FSU, natral gas provides only a minor share.

Energy derand should be expected to fall during the economic restructuring process.Initially this will be driven by falling industrial output and economic retrenchment as the initial stages ofthe reform are undertaken. In the medium term, reduced energy demand will result from higher relativeenergy prices, restructuring of enterprises, and an increase in energy efficiency. Energy demand isexpected to be largely affected by the sharp declines in industrial output in 1992 and 1993. Projectionsof primary energy demand have been prepared and are shown in Table 8-2.

Table 2-2: Projections for Energy Consumption(Mt)

1990 1991 1992 1993 1996 2000

Oil 19.6 18.3 15.6 14.9 11.4 12.2Natual Gas 11.0 9.2 10.2 8.7 6.5 7.2Coal 36.1 36.2 34.7 29.2 20.6 23.1Total Eer 68.2 66.5 62.8 55.1 39.9 43.7

Note: Based on the macroconomiic assumpfidos included in Chapter 3 of this report;Total energy includes esnmated refinery losses.

Source 1990-1991 data. Kazakhstan authorities. Oudook, staff projections

These projections suggest that primary energy demand in 1992 will be about 8 percentlower than in 1990. The combination of modest energy saving, in response to higher energy prices, anda further decline in domestic demand project that energy demand should be expected to decline by afurther 12 percent in 1993 over 1992 levels. This trend is illustrated by oil demand which is reportedto have fallen by 6% in 1991 and by an additional 15% in the first nine months of 1992 as compared tothe same period last year. Future energy demand is likely to be well below that assumed by theGovernment. Significant investments in expanding power, coal, and oil refining supply capacity shouldbe withheld until assessments of future domestic and regional demand and economic feasibility studiesare carried out.

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Energy Trade

Although Kazakbstan is self sufficient in energy on a fuel equivalent basis, its sheer sizeand the geographical imbalance of production and consumption centers, results in a significant percentageof its domestic energy supplies being met through energy imports from neighboring Republics. Asubstantial proportion of energy trade is within the FSU, with the Russian Federation being the mostprominent trading partner. Regional energy trade is expected to continue, and even increase as a resultof the economic restructuring process. Isolation of the domestic economy from changes going on outsideof its borders, by undertaking energy investments based on self sufficiency rather than economic factorsalone, should be avoided.

Table 5-3: ENERGY TRADE BALANCEIan-lime 1991 Jan-June 1992

Volume Value Volume Valuebill Rb bill Rb

IMPORTSCrude Oil (nit) 5.9 OA 6.0 13.2Refined Products(mt) 3.6 0.5 2.2 12.7NatnuA Gas (ban) 7.2 0.3 7.8 21.0coal (mt) 4.6 0.1 2.9 ZAElectricity (B Kwh) 15.0 0.6 14.6 17.6

Total Imports 1.9 66.9

EXPORTS CISCrude Oil (mn) 9.7 0.7 7-5 16.5Refined Products(mt) 1.9 0.3 0.9 5.2Natural Gas (bcm) 2.3 0.1 2.1 0.2Coal (mt) 26.1 0.8 21.0 11.2Electriciy (B Kwh) 6.5 0.3 6.8 9.8Total Exports - (S 2.2 42.9

World MarketCrude Oil (nit) 0.4 5.6 2.5 35.0Rcfied Producrs(nv) 0.1 4.1 0.0 04Coal (mt) 0.4 1.6 0.6 2.5Total Exports- World Market 11.3 37.9Total Exports 13.5 80.8

NET TRADE BALANCECrude Oil (mtl) 4.2 5.9 4.0 38.3Refined Products (tn) -1.6 -0.3 -1.3 -7.1Naurl Gas (bcm) -4.9 40.2 -5.6 -20.8Coal (mt) 21.9 2.3 18.7 11.3Electricity (B Kwh) -8.4 -0.3 -7.8 -7.8TRADE BALANCE 11.6 13.9

Source: High Economic Council. August 1992Nas: 1. Inpons and exports inside the CIS determined by averag prices

2. Exports to the world market denrined based on the following:crudc oil 14,000 Rublmtcoal 4,000 Rub/mtoil prod 25,900 Rub/mt

Energy and Mining Sectors 115

Table W4: arp Trade

1990 1991 hagJune 91 Jan-June 92

Imports- Oil (mt) 21.1 18.1 9.5 8.2- Namral Gas (ban) 12.8 12.8 7.2 7.8Coal (mt) 12.3 9.2 4.6 2.9

- Elecaricity (B KWh) 29.2 28.2 15.0 14.6

Exports- Oil (mt) 24.3 23.6 12.2 10.9- Naulal Gas (bam) 4.1 4.2 2.3 2.1- Coal (Ul) 54.0 52.0 26.5 21.6- Electricity (B KWh) 11.9 12.7 6.5 6.8

Net Exports- Oil (VUt) 32 5.5 2.7 2.7- Nnmal Gas (bmn) 4.7 -8.6 4.9 -5.7-Co (mt) 41.7 42.8 21.9 18.7- Electricity (B KWh) -17.3 -15.5 4.5 -7.8

Note: Oil includes cude oil, natur gas con aes, and reined productsSource: High Econonic Council, August 1992

Oil exports to non-CIS destinations, although only a small proportion of the energy tradein volume terms at 0.6 mt, (16 kbd), was the most significant factor in the overall energy trade balance.In the first half of 1991, these exports contributed 9.7 billion nrbles out of the total 11.6 billion rubletrade surplus. Inter-Republican energy trade for the first six months of 1991 was in surplus by only 100million rubles.

Energy Pricing

Guiding priniples for energy pricing policy

Any assessment of energy prcing policies in Kazakhstan must start from the tradingrelationships between Kazakbstan and Russia and between Kazaktn and its Central Asian neighbors.The legacy of central planning is a complex of energy supply relatonships which tie the northern partof Kazakbstan to Russia without much regard for the border between the two countries and which tie thesouthern part of Kazakhstan to Kirgastan and Uzbekst (though somewhat less tightly than in the caseof Russia). Ecooniic considerations and limnted investment resources mean that these lnks will weakenonly gradually over the net decade, so that, for the time being, Kazakbstan is an archetypal openeconomy with the modification that its reference point is the Russian market rather than the world market.

As shown in Table 8.4, Kazakhstan exports a significant proportion of domestic energyproduction and likewise imports a substantial amount of energy requirements. Eighty percent of domesticoil production, for examrple, is exported, mainly to the Russian refineries closest to Kazakhstan'sproduction fields, while the refineries located in eastem Kazakhstan, thousands of kilometers fromdomestic oil production, import thi oil supplies from Russian producers in central Siberia. Similarly,about 15% of domestically generated electricity is exported, while 30% of supplies are met through im-ports.

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The closest parallel elsewhere is the relationship between Canada and the U.S.Unfortunately, Kazakhstan is in an even more vulnerable position than Canada because currently thereare no routes by which it could export its oil and coal that are not controlled by Russian monopolies.The options are slightly greater in the case of gas since it has the option of importing from bothUzbekistan and Turlanenistan in south as well as importing from Russia in the north, but again the limitedrange of transport options imposes fundamental constraints on the country's freedom of action. Theimplications of these constraints for energy pricing policies are discussed below. The following sectionthen examines recent developments in Kazakbstan's energy pricing policies in the light of this analysis.

There is a strong regional element to energy pricing policies. The opportunity costs ofmost forms of energy vary substantially between the westem, northern and southern parts of the country.The system of nearly uniform pricing for energy products across the country is inefficient and should notbe continued.

Exports of crude oil are heavily tied to the demand from Russian refneries, which haveno reason to pay a price higher than the Russian domestic price of comparable oil from Siberia.Kazakhstan may be able to sell a proportion of its crude oil production on the world market, exportingit via the Russian pipeline system to Novorossysk on the Black Sea. However, while the domesticRussian price is below the equivalent world market price, there will always be a strong incentive forRosnefttransport (the Russian monopoly which operates the oil pipeline network) to exploit its monopolypower by capturing a large share of the difference between the border prices for exports to Russiarefineries and for exports to the world market in the form of discriminatory transmission charges. Evenwhen Russia's domestic price reaches the export parity level, Kazalkhstan will still be vulnerable todiscriminatory pricing for access to the Russian pipeline system. Thus, unless Russia adopts a regulatedcommon carrier approach in operating its pipeline systen, there are strong reasons ror Kazakhstan todiversify its options for transporting oil and, in due course, gas to export markets. An export pipelinefor Kazakhstan will also be required by the mid-1990s to handle the increased volume of crude oil exportscoming from fields now under development. The immediate implication of these constraints is thatKazakhstan must operate on the basis of an export parity price linked to the domestic price for Siberianoil delivered to refineries in the Urals region.

The country imports crude oil from Russia along a pipeline that runs south from Siberiato refineries at Pavlodar in the north and Chimkent in tle south-eastem region. The minimum importparhy price for these supplies is equal to the price of Siberian oil at Russian refineries plus transportcharges to the two refineries. However, Siberian producing associations have negotiated prices for crudeoil exports to Uzbekistan and Turkmenistan in which case these prices would set the import parity pricefor Kazakhstan. This will be considerably higher than the export parity price for oil transported fromthe Caspian basin in the west, which means that the into-refinery price paid by the refinery at Gur'yevwould be well below that paid by the refineries at Pavlodar and Chimkent. Note, however, that the ex-refinery prices of petroleum products will also be lower for Gur'yev than for the other two refineries.

Kazakhstan relies heavily upon imports of petroleum products from Russia, especially intothe northern part of the country. For example, in 1991 the country imported 40-45 percent of its totalconsumption of gasoline and diesel from Russia, though these imports have fallen sharply in 1992. Thistrade means that import parity prices should be the base for petroleum product prices throughout thecountry. Prices in the north should be lower than those in the south to allow for transport costs. Russiaimposes quite heavy taxes - notably the road fimd tax - on gasoline and diesel fuel. Kazakhstan could

Energy and Mining Sectors 117

choose to impose lower taxes on these products but this would be ill-advised since this is likely toencourage cross-border trade with Russian enterpises and individuals buying from Kazakhstan. BecauseOmsk and other major large urban centers are quite close to the Kazakhstan border, the magnitude ofsuch trade could grow rapidly. On the other hand, since the bulk of Kzakhstan's population does notlive close to the Russian border, the govermnent could choose to impose heavier taxes on petroleumproducts provided that it ensured that bulk deliveries of products were recorded and taxed at the Russian-Kazakh border. Such taxes would be a valuable source of revenue at a time when revenue from profitsandi turnover taxes is declining sharply.

A large proportion of raw gas production is exported to Russia for processing withmatching imports of gas into the northem and western regions. At the same time, about two-thirds ofthe gas supplies to the southern region come from Turknenistan along a pipeline through Uzbekistanwhich supplies the remaining one-third of gas imported into south Kazakhstan. As with crude oil, thispattern of trade means that producer prices for gas should be set at the export parity price - withappropriate allowances for differences in the amount of natural gas liquids and other processing costs -while consumer prices should be based on the import parity prices for different regions.

Kazakhstan's coal industry is closely integrated with the electricity sector in Russia andKazakhstan and with the Urals metallurgy industry. Coldng and steam coals from Karaganda areexported by rail to the main industrial cities in the Urals, so that their export parity prices must bedetermined by reference to the delivered prices of competing Russian coals, primarily from the Kuznetsand Kansk-Achinsk coal basins. The demand for coking coal is likely to fall substantially in the nearfuture because total Russian demand for iron and steel will decline. The Urals steel industry, which usesoutdated technology and is a major source of environmental damage, may bear the brunt of the resultingcontraction in supply. This means that the export parity prices for coking and hard coal will probablydecline in future as supplies have to be switched to more distant export markets.

The low quality coals produced at Ekibastuz are primarily suitable for use in powerstations. Some of the mine's output is exported, though its high ash content and low calorific valuemeans that such exports are unlikely to make economic sense if the railways in Kazakhstan and Russiawere to charge economic tariffs for the transport of coal. Most of the rest of its output is used for powergeneration locally with a substantial fraction of that power output being exported to Russia as part of asystem of power wheeling from Siberia to cities in the Urals. Again, the long run economics of thisoperation may be rather poor, though writing down the existing investment in generating and transmissionequipment would probably justify its continuation on a short run marginal cost basis. The implicationof this situation is that the appropriate mine-mouth price for Ekibastuz coal in the short and medium mnis whichever is the greater of (a) the export parity price for coal exported to Russia - based on projectedrail tariffs for the period under consideration, or (b) the implicit netback value of coal used to produceelectricity exported to Russia.

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Table 8.5: KAZAHSTAN ENERGY PRECES

Russian WorldFed. Markt.

1991 Jan92 Sep92 (Jun92) (S=Rb200)

Crude 0 (Rbtmt)- producer 80 350 650 180- CS import 80 448/a 2816000/a 2200 24000- CIS export 70 448/a 2560/a

Relined Oil Prodcts (Rb/mt)Ex-refliey/a

- gasoline (A-76) 95 1057 6480 6518 37750- diesd ol 154 932 4640 4365 33100- fuel oil 59 413 2880 2346 13400

Natur GasW1000 cm)-producer 15 75 198 717-import 45 870 2700e-xport 50 75 200/b 16G0 16400

- industry 45 870 3450 325 24000residentil 23.8 73.8 310 61200

Electricity (Rb/h)- industry <750 kwh 0.03 0.27 1.8 1.2 9.8- agriculture 0.02 0.08 0.32-resideatal 0.04 0.12 0.24 0.24 16.2

- CIS Expors 0.04 1.05 2.10

steam Coal (Wn)-producer 31 235 2200 950 7S00- industny 31 235 2200 950 12500- residential 11 55 3000

SDurce: Kazakhstn prices: Pice Comminttee, High Ecnomic CouncilRussian pices: RF World Bank Country Econonic MemorandumWorld prices : IEA Enry Pries and Taxes, 1991

a/ icluding VATh/ price for sour gas expoted for fiuther processing

As noted above, there is a large flow of electricity from Siberia through northemKazakbstan to the Urals region. This implies that the opportumity cost of electricity in the north of thecountry is the export parity price for electricity from Ekibastuz. The westem and southern gnds relyheavily upon inmps from Russia and Central Asia (especially Kirgizstan), which yield import paritypriets that should provide the base for setting electricity tariffs in the areas of the country which theycover.

Recent Developments

The uneven progress of price liberlization and economic reform in Russia during thecourse of 1992 has lead to two fundamental changes in mechanism for setting energy prices in Russia,

Energy and Mining Sectors 119

especially oil prices which are regarded as the key indicator of energy pricing policy. These changeswould have made it difficult for Kazakbstan to pursue a consistent policy of price liberalization in theenergy sector. In addition, the govenment's commitment to freeing energy prices seems uncertain,though a weakening of rigid mechanisms for setting prices has already occurred and is likely to continueas a result of the move towards negotiated crude oil prices that occurred in Russia in mid-September1992.

Kazakhstan's producer price for crude oil followed the Russian producer price up toSeptember 1992. During the first 4 months of 1992 Russian producing associations were permitted tosell a proportion of their output on the commodity exchanges, so that, if they were awarded exportlicenses, they were able to capture the margin between the export price (adjusted for the export tax andspecial transport charges) and the domestic price. This provided additional revenue to finance investmentand the purchase of imported supplies. It seems that Kazakhstan's producing associations were requiredto deliver all of their production under state orders at the controlled prices, so that their financial positionwas correspondingly weaker. During this period inter-republican trade in cmde oil occurred partly atthe official Russian price into-refinery price and pardy at the much higher prices established on theconmnodity exchanges for oil with inter-republican export licenses. Under the trade agreement withRussia, Kazakhstan imported almost all of its crude oil during this period at the official Russian price.

In mid-May 1992 the Russian government tried to re-establish central control over crudeoil prices and trade by establishing a band from Rb 1800-2200 per ton for the into-refinery price of crudeoil with a high taxes on the margin above Rb 1800 per ton. The right of producing associations todispose of a proportion of their output was removed and trading of crude oil on the commodity exchangeseffectively ceased. In practice, the producing associations received a net well-head price for their oilequivalent to Rb 1800 per ton into-refnery less transport charges and various other levies. Thisamounted to Rb 1380 per ton, including Rb 780 per ton allocated to finance investment expenditure. Theproducing associations in Kazakhstan were in a similar position, receiving Rb 650 per ton excludingpayments credited to the investment fund, from a price of Rb 2560 per ton (Rb 2000 + VAT at 28%)for exports to Russia. Through Kazakhstamnunaigas and the Ministry of Foreign Economic Relationsthe government captured the fill surplus between this price for exports to Russia and the much higheraverage price received for exports to the rest of the world, including those under the trade agreement withOman.

The arrangements for setting producer prices for gas in Russia followed those for oil untilSeptember, when the gas price was held constant despite a large increase in the oil price. Clearly, theresulting large differential between the prices for the two fuels cannot be sustmined for long, but thecharacter of any new pricing formula for gas remains under debate. The future of Gazprom's pipelinemonopoly is critical for the gas industries in both Russia and Central Asia. For as long as the CentralAsian republics are forced to rely upon Gazprom to transport their gas to external markets, they will bevulnerable to pressure from Gazprom which may undercut any attempt to increase the price charged toWestern republics (as happened in March 1992 when negotiations between Turknenistan and Ukrainebroke down) or which may extract monopoly rents for use of its pipelines. However, in the short run theexport price for Kazakhstan's gas will remain tied to the domestic Russian price which has been Rb 1100-1600 per thousand cu.m. (tem) since May 1992. The prices for imports of natural gas fromTurkmenistan and Uzbekistan is negotated with each republic. It is reported that the price of gas for thefinal quarter of 1992 from Turkmenistan is Rb 3400 per tem plus transport costs from the Turkmenistan

120 Chapter 8

border. This is reasonably comparable with a price of Rb 3000 per tcm plus transport costs agreed inlate September 1992 between Turkmenistan and Ukraine for a much large volume of supplies.

Producer prices for coal have followed Russian domestic prices since the beginning of 1992, andthis will continue as long as Kazakhstan exports nearly 40% of its production (in volume terms) toRussia. Prices for some domestic sales seem to be higher than export prices, but lack of infonnationabout the allocation of transport costs and the specific arrangements for Kazenergo's purchases of coalfrom Ekibastuz mean that it is not possible to establish whether this is really a case of pricediscrimination.

Energy enterprises have considerable discretion in setting prices charged to industrial anddomestic consumers. This operates by controlling the 'profit' margins made by such enterprises. Ingeneral these may not exceed 50%, though lower margins are set for some industries. The manner inwhich an enterprise's 'profit' margin is computed is somewhat obscure because there are many detailedrules governing whether certain items are allowable in the cost base used to compute the 'profit' margin.For example, enterprises may only include wage payments up to wage levels laid down by the Ministryof Labour in their cost base; additional wage costs must be met out of the enterprise's 'profit' margin.The enterprise must pay an amount equal to 5 percent of its gross sales revenue into one of the state-runinvestment funds. This is included in the cost base but self-financed investment expenditures must befinanced out of profits.

The net outcome of this system is that most energy enterprises set the overall levels oftheir prices to cover their current operating expenses, but there is no coherent method for dealing withcapital costs or for differentiating between the prices charged to different categories of consumers.Agricultmal and domestic users of electricity and gas are heavily cross-subsidized at the expense ofindustrial consumers - see Table 8.5. Since the cost of supplying industry is generally much lower thanthat for households and agriculture, it is imperative that the differentials between the prices charged tothe two groups should be not be permitted to increase. Prices for domestic and other privilegedconsumers should be increased more rapidly than for industry over the next 3-4 years with the goal ofestablishing a price structure which reflects the marginal costs of supplying different -onsumers. Thisis particularly important for electricity whose marginal cost of supply - basically imports from Russia andKirgizstan - is much higher than the average cost per kwh received by Kazenergo.

The ex-refinery prices (including VAT but excluding excise taxes) of most petroleumproducs in Kazakbstan have followed those in Russia quite closely. However, until t:-; end of August1992 there were no specific excise taxes applied to petroleum products. New excise taxes were imposedon gasoline, diesel oil and similar petroleum products on September 1st in order to rais_ revenue for theBudget, though in late September there still seemed to be considerable confusion about the rates andadministration of these taxes. The goverrnment's reluctance to levy excise taxes on these products - andparticularly on diesel oil - seems to have been linked to their concern about the terms of trade foragriculture and the financial state of many collective flnms. It was argued that raising the price of dieselwould induce collective farms to abandon a substantial proportion of the harvest which would thus resultin a loss of earnings from sales of grain and other agricultural crops to Russia and foreign markets. Thisis a familiar but mistaken view, which has lead to misplaced subsidies for fuels supplied to agriculture,fishing and certain energy-intensive industries in many countries. Experience shows that it is a veryinefficient way of assisting the agricultural sector, since the appropriate response is to eliminate thefactors which hold down the output prices received by farmers and not to attempt to subsidize tieir inputs

Energy and Mining Sectors 121

- whether of fuel, fertilizers or machinery. Before next year's harvest the governnent can take steps toprovide more appropriate incentives to agriculture and they should certainly not continue any policy ofholding down the fuel prices paid by collective farms. This would give the government substantial scopeto raise excise taxes on gasoline and diesel fuel substantially, both to encourage more efficient use ofthese fuels and to raise revenue.

Policy Reform

Reform Issues and Recommendations

Kazakhstan's energy policy is torn between two exigencies, in some ways contradictory:how to navigate the coming months of maior dislocation with the least damage to energy productioncapacity; and how to initiate policies that will increase the energy sector's contribution to the economy.Moreover, in view of the close inter-relationship between the economies of Kazakhstan and Russia,Kazakhstan's energy policies cannot be determined in isolation from what is happening beyond itsnorthern borders.

The following section smmarizes the Bank's recommnendations for policy reform in theenergy sector. It is recommended that these reforms be implemented quicldy (i.e. starting in theremainder o. 1992) as an integral part of the macroeconomic stabilization program. An inherent partof these policy reforms is focussed on expanding petroleum exports. In addition, implementation of awell managed program of energy pricing and taxation, which will promote energy efficiency and therebyreduce domestic energy consumption, will also contribute to increasing the energy surplus available forexport. The proposed policies in these areas will not have the desired impact on production andconsumrption, however, unless they are part of a much broader institutional reform of the energy sector.

Institutional Issues

Sector Organization and Management

Institutional reform in the energy sector is urgently required. The implementationcapacity of the Government to undertake the necessary reforms in the energy sector, including managingthe required foreign investment, restructuring and privatization of the energy enterprises, and inimplementing pricing taxation and legislative reform, will require substantial institutional strengthening.High level advisors to assist in this process should be taken on.

Under the supervision of the Ministries, energy activities have been delegated to existingmonopolies - Kazenergro for electricity, Kazakhmunaigaz for petroleum production and refining, andKazakgasprom for natural gas production and transmission. The Government should assign unambiguousresponsibilities for energy matters among Ministries and other agencies, particularly in regard to activitiesand enterprises in the oil and gas sector. A clear legal relationship between the Government and thesector enterprises should be developed and a framework for their commercialization and restructuringshould be established.

For energy producing enterprises, statutory monopolies are likely to be incompatible withefficient development of the sector. Operations in the sector should be commercialized, with explicitoperating autonomy and fmancial accountability. More specifically:

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(a) in electriiy: the Energy Unions (EUs) that are responsible for building and operatinggenerating plants, transmission systems, distribution networks etc. should be commer-cialized and non-core activities of both the EUs and Katep (the state corporation incharge of all activities related to uranium ore mining, refining and operation of nuclearreactors) divested and privatized;

(b) in petroleum: Kazakhmunaigaz should be split into separate autonomous production andrefining companies, Kazakhgazprom and Kazakhgaziflkatya commercialized, andcompetition introduced into petrolewn product distribution (through privatization ofKazakhnenefteprodukt, for example); and

(c) in coal: the two producers should be made operationally and financially autonomous ofthe production association.

Energy Prcing, Taxation and Financl Iss

The pricing of energy, and the path and speed of energy price liberalization is a central issue inthe economic refonn process. Energy pricing policies will influence the terms of trade, the financialviability of energy enterprises, the restructuring of industry and the efficiency of energy use. Taxationpolicy will need to balance the needs for Govenment revenue against the retention needs of producersto continue and develop energy production. Under the current situation of rapidly escalating input costs,energy enterprises which are subject to regulated energy prices, including the electricity and natural gassector, are encountering financial difficulties. It is becoming increasingly difficult to acquire equipmentand supplies and to continue maienance and routine operations. Under these conditions there is aserious risk that energy supply could deteriorate sharply in the near term.

Although the shock of moving energy prices to international levels will be significant for theeconomy, the Government should consider urgent action to move energy prices to reflect costs of supplyas rapidly as is politically feasible. Experience from other countries facing energy price shocks such asthe OECD countries during the 1970's and the central and eastern European countries over the last fewyears, suggests that economic restructuring has been most successful when the fufll level of increasedenergy prices has been passed onto industry and final consumers as rapidly as possible. Pricing energyto reflect the cost of supply and distribution, will provide a signal to industry to restructure efficiently.Being an energy exporter, the overall economy of Kazakhstan should benefit from higher energy prices

Despite the energy price adjustments already made, most domestic energy prices remain at onlya fraction of economic cost and severe sectoral distortions exist. Pricing distortions between industrialand household users have been increasing and the impact on the fiscal budget has been growing. Stepstaken thus far have attempted to shield the population and agriculture from increased energy prices.

As a general rule, energy prices should be fully increased to reflect economic costs of supply or:-import costs from other Republics. For tradeable fuels (crude oil, refined products, and solid fuels)prices can, and should be decontrolled rapidly. Restructuring and commercialization of these sectorsshould be undertaken as rapidly as possible. Producer, wholesale and consumer prices of oil and solidfuels should be filly liberalized. This should be done in parallel to abolishing the system of state orders -for these comnmoditi-s. Ful price liberalization is not expected to lead to world market prices in the near -term as prices in Russia will continue to constrain prices in Kazakhstan. (However it is possible the:Russian Federation will accelerate the move to world prices in its oil trade with Kazkhstan and thus,accelerate the move t) world market prices in Kazakhstan.)

Energy and Mining Sectors 123

For natural monopolies (natural gas, heat, and electricity transmission and distribution) theGovernment will need to develop price and tariff structures for the regulation of these industries.Comprehensive studies by international experts will be required to assess costs and determine appropriatestructures for price and tariff designs. When this is completed, regulatory bodies will need to be estab-lished. These studies should be initiated as rapidly as possible. In the interim, prior to establishing aregulatory framework, natural gas, heat and electricity prices should be determined on cost plus pricingprinciples, and increased to fully reflect import, transportation and distribution costs. A short to mediumterm progran to elininate household energy subsidies should also be adopted. At a minimum thecurrent differences (in absolute tenrs) between industrial and household prices of electricity, heat, andgas should not be allowed to increase.

Until a proper system of tation for petroleum is adopted, an export tax is recommended forcrude oil and refined product exports outside the FSU. The export tax is expected to be a brief andtransitional measure and is intended to capture the difference between domestic and world market pricesfor oil. This should only be applied to existing production to ensure adequate incentives for foreigninvestment.

A systen of royalties and profit based taxes should be developed and put into place. Petroleumlegislation is being drafted supported by technical assistance by the World Bank financed through theTechnical Cooperation Program. A legislative package including petroleum taxation mechanism, isexpected to agreed with Parliament within the first quarter of 1993 and enacted by 1 March 1993.Petroleum legislation will be the primary catalyst for foreign investment in the oil and gas sectors. Anexcise tax on consumers of petroleum products, with a focus on automotive fuels, should also beestablished.

Foreign Investment and Private Sector Participation

The responsibility for management of existing assets, as well as investment in new assets shouldbe increasingly transferred to the private sector, particularly for petroleum and coal. This is essential inorder to mobilize the financing needed to rehabilitate existing installations, to develop new capacity, andto introduce modem technology and management techniques. Where major foreign exchange financingis required (e.g. development of petroleum resources), it will be necessary to call upon foreign investors.

Foreign participation and investment will require, as z4 necessary but not sufficient condition,establishing an appropriate envimnment consisting of a framework of well defined laws and fiscal terms.More generally, it will also require an outward orientation by the Government of Kazakhstan; anopenness in dealing with foreign finns; and an understanding of what motivates an investor.

Regional Integration

Despite the temptation to seek self-sufficiency, the Govemment must not loose sight of the realityof the outward orientation of the country's energy trade balance, and the fact that it will continue to beclosely linked to its neighbors for the foreseeable future because of the configuration of crude oilpipelines and electricity transmission lines. Also, much of Kazakhstan's installed equipment in the energysector was mnufactured in the former Soviet Union and spares will inevitably come from this region.in any case, because Kazakhstan is both a significant potential exporter of crude oil and a land-locked

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Energy and Mining Sectors 125

B. Mining and Metallurgy

Structure and Recent Performance

Kazakhstan has an abundant supply of mineral resources and a reasonably well diversifiedextraction and processing industry. It is the largest copper producer in the former Soviet Union and, asan independent country, ranks tenth in the world. Kazakhstan is also a world class producer of chromiteore, chronmum compounds, andferrochromium. Lead and zinc metals comprise a third mineral resourcethat is actively mined but the low grades of these deposits and the damage to the environment caused bythe smeltinglrefining operations raises questions about their long term viability.

Cold offers the possibility to attract new exploration and development investment byforeign companies. Producing mines would appear to be under producing relative to the sizeable reservesthat are classified as proven. Kazakhst ranks tenth in world reserves of iron ore but grades are lowto mediocre and the long term comparative advantage on world markets is likely to be limited.Xazakhstan is the third largest coal producer in CIS, after Russia and the Ukraine. Forty millions areexported annually to other CIS republics, primarily steaming coal. It has 31 percent of total CIS reservesof phosphate rock and produces substantial quantities of mineral ferfilizers. Other mmeral and metalcommodities currently produced include manganese, mranium sponge, baudite, wngsten, uradum, andrare earths.

In 1989 exports from Kazakbstan of ferrous and non-ferrous minerals and metal productscomprised 55 percent of the country's industrial exports to destinations other than the CIS. The sectoroffers the possibility of increasing export earings in both the near term (next 1-2 years) andmedium/nong term (3-5 years and beyond).

Employment in the sector is substantial. The ferrous and non-ferrous mining andmetallurgy industries employ 252,000 persons, some 19 percent of the industrial workforce. To thisfigure may be added personnel at certain govanment ministries such as the Ministry of Geology whose60,000 employees are engaged in the sector. Substantial mnmbers of personnel at the Ministry of Industryare also engaged in the sector but which may not be included in the figures above. The reform of thesector may lead to a significant reduction in employment for such institutions and to the transfer of someskills from the ministries to producing entities.

The mining sector is a significant contributor to govermment revenues. The newlyenacted tax on exports requires that exporting enterprises surrender roughly 40 percent of their foreigncurrency earnings to the government. Under the existing export plans for 1992, this suggests fttminerals industry could contrbute over US$500 million to govermnent revenues, approximately 25percent of government revenues in foreign exchange. While this tax may provide immediate fiscalinflows, it is a significant deterrent to new investors and will likely severely constain re-invesment ofexisting state operations. The design of a satisfactory, sustainable fiscal regime for minerals is thereforea key priority.

For much of the mining and metallurgical industry, infirnmation regarding ore-bodycharacteristics is considered secret and access to such information is restricted by the goverment. TheGovermment recognizes that this is a significant constraint to understanding the sector and a review of

126 Chapter 8

restrictions is currently underway with a view to making this information more available. The presentlyavailable information indicates that the potential for development of identified ore-bodies is significantand the overall geology highly prospective for exploration conducted on a commercial basis. Attractinginternational risk capital investnent for exploration would be desirable. Further, the Ministry or Geologyhas identified a relatively large portfolio of mineral reserves that are classified as proven but as yetundeveloped which could be attractive to foreign mining conpanies.

Certain segments of Kazalhstan's mineras and metallurgical industries could enjoy asignificant comparative advantage on world markets. For this, basic transportation networks would needto be up-graded and coordination problems (particularly in respect of port and rail facilities) resolved withneighboring republics. The mining and metallurgical workforce is abundant and well trained. However,many workers will need to be re-deployed as the industry is rationalized to operate on a commercialbasis. Energy, water, and most raw material inputs are also available in adequate quantities. However,existing minerals production and processing technologies will need upgrading since they are antiquatedand, in man instances, poorly maintained. This is especialy true of technologies to control emissionsof air pollutants and to properly dispose of mine tailings and wastes.

At present, the new administrative structure for the sector is still being fonnalized butthere remains considerable confusion as to reporting relationships, responsibilities, and lines of authority.The Ministry of Geology is responsible for minerals and oil and gas exploration in the Republic and isresponsible for the granting of mining titles, as per the new Law on Land, Natural Resources, and Water.The Ministry of Industry used to be responsible for managing the indusria extraction, beneficiation,processing, and smelting/refining of all mineral resources, except coal and hydrocarbons. Now, theMinistry sets industrial sector development policies in coordination with other ministries, such as the HighEconomic Council of the President's office, which also claims responsibility for negotiation of jointventure and other agreements with-potential investors. The- High Economic Council in the President'soffice, the newly formed Foreign Investment Agency, the Ministry of Ecology, the Academy of Sciences,the State Committee for State Property, and various committees in Parliament also intervene in the sectorin various capacities. Given the increasing level of concem about enviromnental damage caused by thesector the Ministry of Ecology and the Parliamentary committee reviewing this issue will play a key, butas yet undetermined, roles. The Ministry of Energy and Fuel Resources is responsible for productionof energy, including oil, gas, and coal operations. The operation of coal mines has been placed sinceindependence in a newly created state coal company, Kazakhugol. The mining of an ore body and/oroperation of a metallurgical plant is conducted through vertically integrated kombinats. Over the pastfew years an attempt has been made to give them kombinats greater autonomy over operations andfinances. The Kombinats cannot engage directly in exploration for new deposits but rather suggestprograms for follow up by the Ministries of Industry and Geology.

A basic Law on Land, Natal Resources, and Water has been passed recently byParliament. It governs title holdings to sub-soil resources, including hydrocarbons. The Law on ForeignInvesunent establishes basic definitions of foreign investment, guarantees the rights and protection of theinvestor, sets-up procedures for registration, provides for five year income tax holiday, and guaranteesrights of transfer of fmancial results. The Law provides for an investment agreement (concessioncontract) to detail the investment obligations, tax treatment, period of contract, accounting and recordkeeping, and other financial arrangements of the venture. Concession contracts and investmentagreements to clarify details may be signed prior to exploration under the terms of the Law onConcessions. Royalties (ad valorem) will be stipulated in the law. Government officials did not express

Energy and Mining Sectors 127

a policy for mandatory government participation in exploration and/or production operations. But, inpractice it would be difficult for the local or foreign investor to avoid an association with a governmnentowned Kombinat.

The present tax regime as it applies to minerals and metals products is very ambiguous.Tax laws, regulations, and rates are changed frequently and the sitation is compounded by the fact thatthe inspectorate of taxes has only recently been formed. Depreciation schedules are linear but a new lawin preparation reportedly will provide for an accelerated depreciation. Tax loss carry forward and carryback are not known. Ad valorem royalties on the value of minerals produced are to be stipulated in thenew Law. Presently, royalties are a fixed ruble amount per volume unit and vary by commodity.

Reform Lssues and Re natioos

Policy Environment

Ownership

The State Committee for State Property (SCSP) was created by the Privatization andDenationalization Act of June 1991 to exercise ownership rights over Republican property. Presently,the ownership picture in many mines and metllurgical combinates is confused by competing claims ofmanagement, the workforce, and various govemment ministries. The SCSP should become moreassertive in exercising its ownership mandate under the law organizing as an initial step enterprises asstock (limited liability) companies with the SCSP holding all of the shares. To enable the Comnittee tomore effectively exercise its responsibilities as owner, a small mmiber of mining and metallurgicalindustry specialists drawn from other government departments should be attached to the Conmittee. Thefunctions and role of these specialists would be related to the work of the Committee as well as themanagement of the enterprise.

The specialists would:

provide technical guidance and advice concerning the commercialization of theenterprises;undertake on behalf of the Committee studies on the long term viability and competitiveadvantage of the enterprises;assess the costs and benefits with respect to the sector of various re-structuring proposals;initiate and coordinate training and technical assistance to managers of enterprises; and,establish criteria for the evaluation of teder and joint venture proposals.

With respect to the minig and metallurgical enteprises, functions may include:

- evaluation of joint venture and/or other deals with foreign partners;- approval of annual work programs, operational and capital budget;- review annual strategic and business plans of the enteprise;- review of quarterly and yearly accounts and financial statements.

128 Chapter 8

Institutional Reform

The assertion by the Committee on State Property of its responsibilities as owner ofRepublican assets has several implications for the roles and functions of the govermnent oversightisitutions for the sector. Currendy, these institutions are overstaffed, have conflicting and confusinglines of authority, and lack clear mandates. Under the new organization, the Ministry of Industry, whichcurredy exercises strong central control over the day to day management of the enterprises, wouldinstead have two principal mandates. First, the Ministry would help formulate, in coordination with otherrelevant government departments, overall policy recommendations for the sector in matters such asdei'mingjurisdiction over mineral resources, exploration and mining rights, the fiscal regime and financialincentives applicable to the sector, state participation (if any), comnercialization and marketing ofmineral products, and envirownental controls on the sector, among others. Second, the Ministry ofIndustry would be responsible for administration and enforcement of laws and regulations pertaining tothe sector. In this role it would perform the duties of processing and granting of mining titles, technicalsupervision of compliance with rules and regulations by enterprises, assessment of taxes and royalties dueby enterprises, and registration of various mining titles. The Ministry of Geology, which is currentlyresponsible for general as well as detailed exploration for petroleum and mineral resources, would beresponsible instead for regional geological surveys and reconnaissance, basic research into the earthsciences, collection of geology base line data, preparation of geology maps, and compilation andmaintenance of a modem geology database. The Ministry of Geology would also be the lead governmentagency to promote geology and investment possibilities to outside investors. Other govementdepartments involved with the sector currently, such as the High Economic Council, the ForeignInvestment Agency, the Academy of Sciences, and various committees of Parliament could usefillly defineroles and functions to play as subsidiary agencies to the State Committee on Property, the Ministry ofIndustry, and the Ministry of Geology.

Legislative and Regulatory Reform

An internationally competitive legal and regulatory framework for the minerals sector isessential if Kazakhstan is to attract and retain investment as well as to facilitate the tansformation ofexisting enteprises to a market economy basis. The legislation and fiscal regime pertaining to the miningsector (Law on Foreign Investments, Law on Concessions, and the recently passed Law on Land, Sub-Soil, and Water Resources), are useful first steps but are neither sufficient nor entirely consistent withthe objective of fostering private investment in the sector. In particular, mnining legislation and taxpolicies in most countries typically:

- applies without discriminaton to all natural or juridical persons, local or foreign;- provides for security of tenure (progression from exploration to exploitation) as well as

defines the obligations of the title holder;- stipulates clear, tanparent, and rapid issuance of mining titles;- ensures that land under permit is worked efficiently or relinquished;- limits government discretionary powers to refuse issuance or to revoke mining titles;- designates government oversight institutions;- provides for appeal procedures for resolution of disputes;- establishes taxes based on corporate earnings and income rather than output or export

taxes; and,- sets environmental, health, and safety guidelines.

Energy and Mining Sectors 129

Enterprise Reform

The managers of the mining and metallurgical combinates are skilled at operating in theold command economy system but lack the experience and skllls to compete in the internationalcommercial environent. New management skills and organizational structures need to be put into placeto enhance efficiency and build on inherent comnparative advantages. The SCSP, as owner of theenterprises, must work closely with enterprise management to set profitability and performance criteriaand develop commercially based business plans. In particular:

- investment decisions must be based on financial and economic viability, taking intoaccount world market prices;

- current levels of staffing need to be reduced through a carefully crafted and sociallysensitive programs;

- employees should pay reasonable charges to reflect the full cost for benefits in kindprovided by the enterprise such as housing, health care, vacation resorts, and others;

- financial and management accounting systems need to be introduced; and,knowledge and access to international markets needs to be enhanced.

CHAPTER 9

AGRICULTURE

Introduction

Agnculture is the second largest sector in the Kazakhstan economy, contributing 36percent of the NMP and employing 18 percent of the labor force in 1991. The productive structure ofthe sector reflects past central planning mandates rather than the country's apparent areas of comparativeadvantage. More than 60 per cent the arable land (about 25 million ha) was brought under cultivationduring the Virgin Lands campaign of the 1950s, as a means of both reducing the Soviet Union'sdependence on cereal imports and sedentaring the traditionally nomadic herdsmen of the Central Asiansteppes.

Among the two major issues to be addressed to promote agricultural development are thelong run comparative advantage of agriculture and the maagement of the transition to private markets.The successful transition to a market economy will entail reconsidering past political decisions andrestructuring agricultural production. It will be a challenge for the Government to manage the transitionin the agricultural sector in such a way that inefficiencies are eliminated rapidly, while at the same time,adequate availability of food to the low income groups of the population is assured. Food availabilityis a prerequisite for the political stability needed for the smooth transition of the economy.

Despite being a net exporter of basic food products, there are indications that productionis inefficient. Crop yields are low when compared with other intrnational areas with similar climate andgeographic conditions.1 Inefficient irrigation techniques and other management deficiencies have causedsome valuable land to lose productivity. Intensive rather than extensive livestock production hasincreased dependence on fodder production and has failed to appropriately exploit Kazakhstan's widenatural grazing lands. About 30 percent of the land cultivated during the Virgin Lands campaign is notsuitable for cultivation and its use contnrbutes to soil degradation.

The sector is facing output contraction both currently and in the immediate future. In1991, production fell by 14 percent. In 1992, production is projected to grow in real terms relative to1991, however, it will still fal short of the 1980s avenge by around 10 percent. Although the 1991 fallis partly explained by a severe drought in that year, agriculture also suffered a severe terms of tradedeterioration and a trade shock. Agricultural input prices have increased by 12 to 25 times whileagricultural commodity prices rose by an average of 8 to 10 times since March 1991. The rapiddeterioration in the terms of trade and some breakdown of trade with other FSU countries have resultedin declining profitability in agriculture.

Once the State allows the market to work, production should adjust in the medium termto reflect the country's resource endowments. In the immediate term, however, priority must be givento mobilizing resources to assure an adequate level of production. At the beginning of the 1992 growingseason there were shortages of selected pesticides, seed treatment, and fuel and spare parts for harvestingequipment. Not all these shortages have been rectified, with some of the demand for inputs reduced due

1 Kaaks aveage col yidd in 1986-90 was 0.98 MTIIHA, comed to the Canadian praiies with anavenge yield of about 15 MTria.

Agriculture 131

to price increases. However, these shortages, particularly fuel and inadequate spare parts are likely toaffect production and yields in 1992 and in 1993.

Approximately 82 percent of the 220 million ha of agricultural land in Kazakhstan aregrazing lands, pastures and rangeland (Figure 9.1). The remaining 35 million ha are cultivated. Infinished product, the crop sector contributes about 40 percent of annual agricultural output and thelivestock sector nearly 60 percent. However,the above does not take into consideration Figure 9.1: OverAew of Agricultural Lndagricultural production (fodder and grain)utilized in livestock production. Agricultural Fadder Crop. 2R

production is organized in about 7,000 to m,.a Oth.r.

8,000 state and collective farms, averaging Laui_mm LOrl ic,

around 35,000 - 40,000 ha in size. Besidesland, which is all state owned, the means of Foll 1lS

production belong to the collective oncollective farms and to the state on statefarms. The private farm sector in Kazakhstanis very smnall, currently estimated to holdabout 1.5% of arable land.

The state controls everything in agriculture from supply of inputs, equipment. andservices to food processing, marketing of output and pricing. Rigid state input use and price controlshave deterred output adjustments and price increases, thus, hindering necessary changes in the quantityand composition of agricultural production. Traditionally, the state has purchased around 50-70 percentof cereal output and livestock products through state orders. Although the remainder is consumed onfarms as feed or food, some is probably used in barter trade or on the black market. Despite priceliberalization, 50 percent of this year's output will still be purchased by State Order at negotiated prices,the remainder to be sold at market prices.

The livestock sector comprises mainly cattle and sheep. Small nmninants, including 36million sheep and goats, make up the largest animal population in Kazakhstan and offer a potential forgrowth and export. However, currently and in the immediate future, the sector faces problems ofproduction decline and low productivity. Meat production fell slightly in 1991 and is expected to fall byabout 20 percent in 1992. In the first half of 1992, production of milk and eggs was 79 and 88 percentof the 1991 levels. Possible caLses of falling production are lack of protein feeds and veterinarymedicines as well as the terms of trade deterioration for agriculture. As for productivity, cattle areintensively managed for beef production. High amounts of fodder are allocated to beef and dairyproduction yet the productivity of catte and cows is relatively low at 350 kg liveweight and 2100 kglyearof milk. One explanation is that state orders have resulted in production in areas that are sub-optimal.In addition, milking equipment and cold storage on farms is limited, most milking is done by hand, andhygienic conditions are generally inadequate.

132 Chapter 9

Table 9.1: Selected Indicalors In Agriclture, 190

Tractor & ucks per 100 ba arabl land (1): 1.01Exports agricultura products (million rbl): 1.764Impot agricult products (million rbl): 392

Crop Prduction (1990) Area '000 ha Production '000 tons

Aable land 39617.9Fallow 4435.8Ccreals 23355.9 28487.7of UAch %*em 14069.7 161.8

Raw coto 119.7 323.9Sugar beets 43.6 1043.7Sunflower 136.9 140.9Vegetables, Poatoes. etc. 320.9 3762.2Fodder crps 11065A

Source: Goskomstat (SSC), April 1992.

Crolp production is diverse, but clearly dominated by cereals (see Table 9.1). Over 1987-91, 67 percent of the cultivated land was allocated to the production of grain crops and pulses. Of thisarea, wheat accounted for slightly more than 60 percent and barley was grown on 28 percent. Theremaining area grew millet (4 percent), rye (2 percent), oats (2 percent), buckwheat pulses, corn and rice.Cereal yields in rain fed areas were extremely low in the last five years, before 1991, (0.98 MT/ha)(Table 9.2). Production, on the other hand, averaged 20 m MT with an output variability of 20 percent.

Crop yields are low and with large variations across regions. Wheat yields dropped aslow as 0.5 MT/ha in 1991 as a result of the drought. Although the problem of low yields is morecritical, high yield variability also prevents any predictable estimates of output for a given year. Thereason for the large variations in yields seems to lye on the irregularity in the level and distribution ofrainfall. Other important crops include oil grains, cotton, sugar beets, and fruits and vegetables.Average sugar beet yields between 1987 and 1990 were low at 31.6 MT/ha. Average raw cotton yieldsare respectable at 2.6 MT/ha but again exhibit a 16 percent yield variability, which is large for anirrigated product. Cotton production has averaged 369,000 MT, with a low yield variability of 5 percent,however associated with falling productivity of land, inefficient irrigation, and poor harvest and storagepractices. A result of state orders sought to maximize output, irrespective of the amounts of inputsrequired, with the goal of developing a Central Asian cotton belt.

Fodder production, mainly for catle and sheep, used the remaining 30 percent ofcultivated land. This reflects the FSU policy of promoting intensive livestock production at all cost. Lowyields for many crops are associated with the inefficient use of resources in order to fill state orders.Producers have lacked the incentive to miimize costs with such low prices of inputs, especially land andwater. Outdated machinery and equipment, inefficient storage and distnrbution networks, andagroecological damage compound the problem of low yields.

Agriculture 133

Table 9.2: Kaakbstan - Dtrlbuixon and Productivity oF Major Crops1987-190 aeage

Crop % of Culoivated Crop Yieldland MVba'

Cereals 67.2 0.98of iach

Whet 40.8 0.94Barely 19.2 0.98

Raw coton 0.3 2.58Sugr beets 0.1 31.58ad crps 0.8 0.73Vegetables. Potoes, etc. 0.9 11.44Fodder cups 30.6

1/ The 1991 crp was not ind because yields wer extardirily low (c.g. 0.53 MT/ha cereals)due sevae drought

Resource Use

Irrigation. Around 2.4 m ha or 6.5 percent of arable land is irrigated. While irrigationis not organized under the large schemes typical of the former Soviet Union, some irrigationinfrastructure is characterized by extremely large engineering strucures, carrying water over longdistances.2 As for field distribution systems, they need improvement. It is to the credit of the StateCommittee on Water Resources that al current irrigation investment programs have been suspendedpending a thorough review. In addition, irrigation basin specific water charges have been introduced inthe 1992 season to cover operation and mainteance costs, indexed to cost changes.

A complete reassessment of the utilizaion of the irrigated areas will be necessary toaddress irrigation efficiency and environmental issues.' Valuable irrigated areas, particularly in theNorth, are allocated to fodder production in support of the intensive livestock systems. To a large extent,this can be justified due to the need for land-improving rotation and the problem of salinity, fbrestallingcrops other than alfalfa. In the South, the waters of the Aral Sea basin suffer from pollution and excessiveevaporation from the irrigation techniques employed.

The decrease in farm sizes that will accompany privatization will necessitate updating fielddistribution systems. Kazakhstan will require new technologies as well as an incentve stucture thatpromotes efficient water use. Eventually, market prices should provide the signals as to which crops areprofitable and suitable under irrigated production.

Although the drying up the Aral Sea is not purely an agricultural problem, the effects ofunrestricted use of water in that area lends evidence to the need to overhaul irrigation patterns. The

2 For example, in the center of the county near Kmaganda, around 50,000 ha are irnigated though a canal bingwater over 450 kn and raising it 250 m with 35 pumping stations.

3 The problems of the Aral Sea basin, of course, entail considerably mor fthn simple irigation and agriculturalelements. These cwnf'tx problems will require major sructural adjustments invlving social and economic dimensions.

134 Chapter 9

reduction in the surface area of the Aral Sea, the dramatic increases in salinity and decline in aquatic life,and the serious public health prohlems arising from salt and sand storms are largely results of the massivediversion of Aral Sea waters for irrigation.

Fertlzers adPesticides. Overall fertilizer use in irrigated agriculture has been relativelymodest and is lower when compared with Westem and Middle-Easten crop production systems. Forexample, fertilizer use in the irrigated areas amounts to 167-295 kg/ha for rice, 250 kg/ha for cotton, and273 kg/ha for sugar beets. There is, however, a shortage of good quality phosphate and potassiumfertilizers, which in some cases is being compensated by relatively high dosages of nitrate fertilizer tomaintain yield levels. For pesticides, total application rates per hectare have declined considerable sincethe mid-1980's, due to the lack of foreign currency and increased awareness of the ecological risks. Forexanple, biological control of cotton pests is increasingly being used. There is evidence that agriculturalresearch in Kazakhstan is slowly moving away from the focus on scientific production as was promotedby the FSU, and more towards a more ecological approach.

In 1991 agriculture employed 18 percent of the laborforce and contributed about 26percent of gross domestic product. These figures would suggest high labor productivity in agriculture.However, the statistics are misleading because the value of production on private plots is included in GDPwhereas the labor on these plots is not factored into the employment figure. Furthermore, there is noperformancebaed wage policy to provide labor with the incentive to be more productive. Productionper worker reportedly feil by about 11 percent in 1991. This probably reflects the reduction in outputcaused by the severe drought in that year and shortages of key inputs. There may be a tendency toimpose a labor absorption role to agricultre that is disproportionately higher than other sectors. Thisshould be avoided. If agriculture in Kazakhstan is to become competitive, some labor wili probably haveto be released from the sector.

Agdeculw machinery and eqpment is built on outdated technology, highly fuelinefficient, and a large portion does not function. Major problems are highly inefficient pesticideapplication equipment, an inefficient irrigation system, and low quality harvesting equipment. Inaddition, most equipment is designed for large fields in stat and collective farms and is not appropriatefor smaller scale prate farming To compound the sitation, diesel fuel and spare parts are in shortsupply.

The supply of inputs is monopolized by state enterprises that purchase inputs through theState Order system and distribute theM to collective and state farms.4 Moreover, production is dispersedover a vast area. Farms, therefore, have no leverage on the prices of inputs. Timely availability ofinputs of adequate quality is increasingly a problem due to distribution and import problems, andprocurement of even the most basic inputs has fallen to a mininmm.

Aglcutural processing and disbibution is the weakest link in the agriculture sector.Due to limited invesment in drying and storage facilities, processing plants, equipment, and technology,most facilities are inadequate or obsolete. Considerable amouns of seed and feed grain, and foodproducts spoil during storage. Food distribution is also inefficient and much of the product that reaches

4 Examples ane the Concern for Grain Storage, Concern for Agarian Repair Shops, sate Fishing CooperativesAssociatio and Agi-Chemical Services.

Agriculture 135

consumers is of poor quality. Since there is limited practice of canning, freezing, packaging, and otherfood preservation methods, availability of many foods is resticted to the growing season when they arestill fresh.

There are four serious constraint to povement in product processing and distribution.First, the high degree of monopolization. Second, the lack of managers tained in basic market andbusiness concepts such as supply and demand, risk, uncetinty, and marketing. lTird, accounting,financial, and insurance systems are inadequate. Finally, the general legacy of state ownership leavesno one accountable: trkes are not responsible for making shipments on time; managers are notresponsible for food that spoil in the storeroom; and no one is responsible to the consumer.

Rura Jlnwce continues to be administered by the State despite the presumedcommercialization of Kazagroprombank. In the past. credit was extended to agricultural and agro-industrial production through Govemment dies at cxtremely low interest rates (1-5 percent) and withfrequent large wri-offs on bad debts. According to a March 1992 Government decree, preferentialrediscount facilities would be proved to banks for on-lending to collective and state farms at subsidizedinterest rates (10 percent). On the oher an, credit to private farmers, although still highly negativein real terms, was made more expensive (up to the equivalent of 56 percent) through obligatory insuranceand other requirements.

Public Adniflzwtin in Agricruwr. The current institutional structure reflects therequirements of managig a command economy and is not geared for the reuirements of a marketeconomy. The implementaton of reforms will require the Government to take a new role in guiding thetransition, new objectives, an appropriate legal and regulatory framework, tained staff and adequatefnancial rcsources. The legacy of numerous hiVy specialzed and poorly interlinked mminstries,organizations and institutes will have to be addressed quickly. One of the fundamental requiements fora successful implementation of the reform program will be the development of a streamlined institutionalfiameworkL

Incentive Framework

The State intends to continue to purchase most farm output at negotiated prices. Thusprices for otput supplied to the State under "agrements even after the January 1993 ending of StateOrders, will continue to be administratively set and will bear no relation to international prices or relativescarcities. This system of setting prices on a cost-of-production plus basis encourages inefficient, highcost production. In addition, it gives little incetive to increase production through better managementas there are no premia for quality.

In March 1991, producer prices for agricutral commodities were increased by anaverage of 250 percent and, at the beginning of 1992,furtfh by 600-800 percent. These still fall shortof the (12-25 fold) increase in inut prices. The 1991 harvest, howenr, was largely sold at the oldprices. As a resnlt, some producers refused to purchase equipment.

136 Chapter 9

A study of 1990 prices reveals that State Order prices varied considerably among oblastsand in some cases high prices contained a social subsidy component.5 In 1990, markups over costs rangefrom 49 to 296 percent and oblast prices ranged from 66 to 336 percent of average prices for Kaza-khstan. A recent initiative to imp;_ment uniform prices nationwide does not address the role of relativescarcities or costs in determining prices. Nevert .eitss, it may reduce production in sub-optimal areasthat were previously supported by differential pricing. Until recently, levels of profitability were high andvariable (see Table 9.3). Dramatic changes in profitability levels will probably ensue with the openingto international markets.

Foreign trade in agriculture

As prices adjust to international levels, trade pattems in Kazakhstan are bound to changebased on new indications of comparative advantage. The old system of inter-republican trade resultedin extreme interdependence, which was defined by State Order rather than market signals.

In 1991, Kazakhstan ran a surplus in agricultural trade with the CIS amounting to aboutUS$1.2 billion and comprising mainly net grain exports. Average yields of only 0.8 MT/ha, however,raise doubt on the competitiveness of much ofKazakhstan's cereal production. Furtherexamination may show that some of the about Talk 9fl tAnime Pat and are Co us7 million ha of the marginal areas used Ag'knlr, 1991currently for cereal production would bebetter suited for grazing lands. Higheraverage cereal yields supporting self- Product Production Purchasing Level ofsufficiency and exports could then be Cost Price Profitabilityachieved through better agronomy in areasendowed with better soil resources and _ {JNp (rbl/t) CS)precipitation. Cereal crops 323.0 894.0 176.8

of Nch Whea 261.0 856.0 228.0

Land reform and privatization Sufo r 236.0 6D3.0 105.6Sugar beds 160.0 17.0 10.6Raw ctton 1246.0 2468&0 98.1

Agricultural production is Potatoes 495.0 864.0 74.5organized around some 8,000 State and Vegetables 646.0 1101.0 70.4collective fam which are large integrated Fruits, berries 830.0 1356.0 63.4collective frms which ar large mnted LivestockQlivew) 4247.0 4946.0 16.5units of around 35,000 ha on average and pis 4235.0 4598.0 8.6which are owned or controlled by the State. Sheep and goats 2635.0 4150.0 57.5By mid-1992, about 1.5 percent of these Poulwj 3621.0 4150.0 14.6Homes 2893.0 400.0 65.9farms were transferred to some form of camels 2867.0 4626.0 61.4private ownership. The Government supportsa policy of land reform that includes long

Oblas wth ifficit producs on average covered themr high costs with higher state order pnces. Also, nettransfes tbrough state orders seem to be concentraed in a limited numiber of oblasts in te north of the country. However,oblast level pnces have recently not been followg any pattem for critical commodities; e.g.. a commodity may be Laxedone year at the oblast level (Stae Order pnce less than cost of production) and be sulject to net tansfers the next year. Thisreduces the effectiveness of prices as signals to guide productiot

Agriculture 137

Bor:9.1: FuN pufaeofders u ble long ter lases duing the fnns Mon

K:akstaas positio on land reormdesrves specal menionu as it differs from ote reformingsocialist co0uTie,i impotant factors ini aastn cause resistance to laxdpruvaddeni: The fir is not uniqueto Kazalhstm cadresD who manage the stare farms. The second is that a consideable pan of the land coloized duringthe XSovieera, particularly during te Virgin Lands campaign is managed by non-Kazakh ethnic groups. Most of thefertile irrigated lands in the North ar occupied by non-Kazakh etmic grops. Due to the ethnic social problms that itcan- entail, te Government of Kakstan supporu for the time being an agricultural- reform short of ful land

-privatizadon:

-In this contex, long-tem leases of land whichhave already begun from theState tofamiers. inldingrights:to transfer'to heirs, should be acceleeid. As long as the outputmarketn and iut supply sysm are notreliable,workerswil bereluIctant to become private fanrs. And as long as tese systems am monopolistic due to state-- ownershp thy ill e tmost r -nandpro fr com e fi-farms squeezcd in between monopolists.-

: Hencec thiere is the ned'to port thedevelopmet of competitive privatemakeing. Ln usi-the- -gted will- bavelaely l s (s ay hv to go o o-production), an s rhase o lpra--ownershipmay notimme-diatelybenecessy btoringforwird land investm ndcolal f Lcr eifpriate: -family fai ai created: rapidly, it may be preleibl e to griv ahem tRadeable liind leas orufc rights for a nmber

:Of -:years. Providingfiil tradoreudeas sfut rights optionsopeforftdshtre. andwherecreditand landrental marketsdevelop- rapidly. iihe Eadeble usfct rht can bbe:used as a collateral for loan.':

On t1he other JaE ong*'-ferseFse,shuld be considered atransiorcy phseuntil-legal and technical:preparations arema;defor complee prvatiztion of lamd inthe long run. Ina- market economy, mobiriy ofesourIs necey for to respond to market forces. -he mobilit of lan as-a reoure implies the possiniity totransfer land bys ental, -or-: sharecropping othose who can use-the: ln. most efficienty and ivei it forzmprOvems. If theiState miain tiowneship of lnd, the possibW t itmyiae the ladb:akwould'discourge:farmers from adequazelyInvestigad usi it-io an ccooilyndhcay otial manncr. t a :to overexloitationOf land in an efort to get as muk -out of i i a-" short t s

tenn leases of land with the nght to lease the land being tradeable. Full privatization of land is notconsidered feasible immediately for a number of political and social reasons (Box 9.1). The Governmentshould nevertheless develop a comprehensive program of farm restructuring for different types land ofownership such as private, collective, communal or state ownership, including the phasing out andprivatization of inefficient state and collective farms. In addition, successful privatization will requirechanges in the current system for providing agricultural services, credit, technical assistance, waterdistribution in irrigated areas, and the privatization of inputs.

In the meantime, the following measures are recommended to improve the environmentfor private farming in the critical near futture:

- State orders should not only be eliminated, but State negotiated contracts should reflectprices resulting from a competitive market;

- members of collective farms should be given the right to leave the collective to establishprivate farms without the approval of all collective members;

- the application process for land leases should be facilitated and sufficient land should bemade available to private farmers;

138 Chapter 9

- a special line of credit at market interest rates should be established for private farmers,untl a competitive financial system is in place (under the present system, state andcollective farms can crowd out private farmens);

- the current allocation of 10 percent of equipment, machinery, spare parts, and majorinputs such as fuel, lubricants, fertilizers, and pesticides to private farmers by the stateprocurement agency should be enforced, until channels of commercial input supplies areestablished; and

- restrictions on the development of private marketing channels for agricultural inputs andoutput, including storage, distribution, retail and wholesale sales. should be identified andeliminated; furthermore, these activities should be explicitly allowed.

Availability of water is one of the most serious constraints in agiculture. Therefore,clarification of water rights and how to make them temporarily or permanently tradeable may be asimportant as the land rights issues. The introduction of water law that alows for tadeable water nghtswould be quite important in this respect. As an initial Gonvnent action the existing water rights couldbe codified and the consumptive water could be made eradeable with a certain amount of water reservedfor ecological uses. Water charges should ideally cover the opportui costs of water, but the currentsystem of water charges to cover O&M costs is a good beginning.

The Government should also encourage nd facitte development of private sectorcvies in food processing and dsibution, amrkein, storge, ad capea and impors of

commodities and inputs. This requires the development of an adequate including a legalsystem that recognizes private property and business contracts; an rion system that collects anddisseminates information on food prices and quantities; a credit system to provide loans with competitiveterms and conditions to food enterprises; and a regulatory system to control monopolies, predatorypractices and quaty control in the food industry. By makin owners responsible for the success of theirbusiness, privatization of retail stores and processing and distributon ceners will increase competitionamong firms and widen the choices available to consumers. In addition, hard currency fumds should bemade available to prrvate firms to support their development andcorage the use of modern technologyand management practices. Finally, as a first step, the Government, private businesses, associations, andlabor organizations should consider coopabng with each other to develop and fund an array of formaland informal management development courses, workshops, and learing experiences designed to teachpresent and potential food industry managers how to organize and operate food processing plants,distnrbution centers, and retail stores in a market economy.

Long Run Policy Considerations

The long run policy objectives should be consistent with the structural changes impliedin these comparatve advantages and shold be aimed at creating a competve agricultural sector:

- to bring prices close to i il prices;- integrate the sector fully ito iternational trade for inputs and outputs;- nmake marketng of inputs and outputs highly competitve; and,- target any remaining production subsidies to the poor, for financing of public goods such

as research and small frmer extension, or for correcting environmal externalities.

Agriculture 139

The above objectives will be automatically achieved with privatization and with the liberalization ofdomestic and international trade, with only the last condition above requiring direct government action.

There is a clear need to restructure the entire farming system, including separating thesocial and communal structares now prevalent in the state and collective farms from the productionsystem. Farms need to concenate on those activities for which they have comparative advantage andallow their other activities to be taken up by other private enterprises or by government, as is appropriate.In the long run, Government support that distorts relative prices and maintains unprofitable farms retards@he adjustment process in the sector. Farms and enterprises that fail to reorganize and drop unprofitableactivities or cannot be profitably restructured will have to close or will depend on steadily growingsubsidies. This adjustment process will, however, take some time and may require some temporary,phased intervention by the Government to manage this transition.

As input prices approach international prices and State control of land use and inputs end,there could be changes in X han's cropping patterns. Adjustments will probably involve a reductionof fodder production and a replacement of cereal production on marginal cultivated lands by increasedproduction in areas with higher yields. Apart from-the production of food for the local markets from itsirrigated areas, Kazakhstan's main comparative advantage will most likely be in etensive livestockproduction from improved pastures with less reliance on fodder production. It may also have comparativeadvantage in extensive grain production from those areas with highest preciitation and where soil fertilityis improved through improved agronomic practices. In addition, the irrigated sector may produce somecommodities for export, based on intensive use of labor and chemical inputs. Given its remote locationand low population, the irrigated sector is unlikely to be able to compete in developed countries' marketsfor fruits and vegetables, but can succeed in regional trade.

Management of the Transition

The objectives in the transition to private market-based agriculture should be twofold:(i) assure adequate food consumption of the poor groups (availability of food in the market is notsufficient to ensure this); and (ii) ensure sufficient incomes in the agricultural sector so that the objectivesof agricultural reform are achievable, namely privatization of the farm sector, retention of a sufficientrural labor force and sound credit policies based on positive real interest rates and repayment of credit.It is inevitable, however, for the transition to entail hard and painful adjustments. The discussion of theSocial Safety Net provides some of the measures to address these issues-

From an efficiency viewpoint input subsidies or producer subsidies in the agriculturalsector should be phased out. During the transition period, the need to eLsure food availability particularlyfor poor groups of the population may justify temporary intervention by the Government. Certainly, oneimportant issue during the transition is to avoid a major political crisis which would tbreaten the entirereform program. Food consumption problems in the city, and income problems in specific agriculturalregions where people have few altenative options locally and cannot migrate in the short run, cangenerate massive political crises. However, these interventions can lead to highly adverse supportstructures that are undesirable in the long rumn. Any measures to manage the tansion period have to bechosen carefillly and should under no circum ces be inconsistent with the long run policy objectives.

140 Chapter 9

In Kazakhstan, the two transition objectives have to be pursued in a very uncertainenvironment where linkages to international prices are extremely tenuous. Except possibly for grains,the sector cannot export to Western markets for some time, until quality and sanitary conditions can befilled for meat, fruits and vegetables. Apart from expanding trade with developing countries, the mainexport markets will be the countries of the FSU. These countries' agricultural price structures are notyet defined relative to international markets. Moreover, they will continue for some time to engage inbarter and managed trade at prices which cannot be known in advance. With international prices that donot represst real trading opportunities, it is not clear what constitutes a subsidy. The internationalrelative prices, net of the very large transport costs, may indicate where domestic relative prices mightbe headed in the long run. Even that requires reliance on uncertain long run price projections.

Existing domestic subsidies6 are complex, pervasive and do not serve as policyinstruments to stimulate changes in the agricultural sector. As a first set of measures through thetransition, agricultral subsidies should:

(a) be explicitly included in the Budget and not be channeled through the financialsector or imposed on enterprises; any explicit support should be carefully assessed intms of its budget implications and only considered if it can be clearly targeted;

(b) be used to minimize eventual output contraction, while providing the incentivesto bring about the desired structural changes toward market comparative advantages.Any commitments that create strong vested interests should be avoided.

Provided they are consistent with general macroeconomic objectives and constraints, theinstruments to guide agrculture include three sets of policies:

(a) agricultural policies such as price and export support, tariffs, credit, inputsubsidies, direct income support payments;

(b) general food subsidies; and

(c) targeted income transfers or food and nutrition programs.

The choice of instruments depends on the natLure of the short run problem which needsto be addressed. The following examples illstrate potential problems that may arise during thetransition, and suggest temporary government acdons that may be appropriate.

(a) If the purchasing power of the poor is very low, but there is good foodavailabiity, the government might increase the targeted income or food transferprograms. If those do not function, support of the consumption of a basic staple couldbe considered;

h In tis case, subsidies are defined as: (i) inu price which are lower ta financi costs of producton anddelivery w the farm; (i) service charges lower than the finanal costs of operation mainnance; and. (iii) output pnceslower than financial costs of production.

Agriculture 141

(b) ff there are no inputs available from FSU, these have to be imported from theworld market. If the exchange rate devaluation has overshot and it is clear that theaffected subsector has a comparative advantage in the future, selected critical inputs fora single short period or even a single shipment of inputs could be subsidized;

(c) If certain basic staple imports are unavailable, the government could get food aidor import on emergency basis. Again, if the exchange rate is totally unrealistic, the saleof the imported staple could be subsidized for a short period;

(d) If there is inadequate capacity to transport exports or imports via rail, thegovernment could mobilize parastatal or army trucks; and,

(e) Where there is insufficient supply response from domestic agriculture because oflack of profits, only commodities with a long term comparative advantage should beconsidered for support.

Special care should be taken that these or other government market interventions are onlyfor the short run, If there is little prospect for specific commodities, price support is inappropriate anddomestic supply should gradually be replaced by imports from the cheapest source (FSU or internationalmarkets). The income problem of the farmers should be addressed by assisting them to move to producsin which they can have comparative advantage. if there are few of these products, farmers should beassisted through temporary and targeted income trnsfers and supporting migration to other regions. Ifthe prospects are good, the preferred policy is to raise output prices to increase profitability of the farmerand bring forth the supply. Such output price increases may have to be temporarily compensated byhigher targeted consumer subsidies to the poor; this should be consideredex-antz.

Transition management for the agriculural sectors has significant operational implicationsand strong intersectoral and macroeconomic repercussions. Therefore, the issues should not be managedby the agriculture related ministries in isolation. They should be prepared by some high level committee,with the analytical capacity and technical assistance to look at the issues intersectorally, and with a viewof minimizing overall costs. The Government should allow such a committee discretion on the choiceof instrmts to achieve the transition objectives. It has to be clear, however, that the above discussionof policy instuments refers to the transition period only and that this high level committee is created fora limited period of time only.

New Role for the Government

The transition from a centrally planned to a market economy entails a fundamental changein the Government's role away from direct production intervention. Instead, the Government shouldacfively manage the transition and act as a regulator facilitating the operation of markets. In agriculture,this will require the removal of state controls on iput, equipment, and service supply; food processingand distribution via State Orders; and price deemination.

The following actions and associated schedule are recommended to reduce state controlsin agriculture: (a) the State would purchase products for limited purposes at market prices throughcompetitive procedures such as closed bidding; (b) producers (agricultal or procesing) providing

142 Chapter 9

deliveries to the State would not have preferential treatment in the allocation of inputs, credit, etc., andall such programs would end in 1992; (c) fixed quota allocations of inputs, equipment, and services toany group of producers to the advantage or disadvantage of others would end in 1992; (d) legislationwould be submitted to the Supreme Soviet in 1992, developing the regulaory framework explicitlyallowing and facilitating private commerce in agricultural products, inputs, machinery and equipment,services, transport, storage, exports and imports, including easy licensing and access to credit; and (e)research and extension would be refocused and strengthened to serve an emerging market economy.

Agricultural credit policy need to change to ensure that financial resources go to thosewho will put it to best use. Within the framework of financial arangements in the Ruble Zone, ruralfinance from rediscount facilities would not be accorded preferential treatment. Commercial bank fimdsfrom other sources should be lent to agriculture and agro-industry at negotiable rates, based on risk andfeasibility considerations of the customers' operations. However, these transactions should be transparentand not subject to artificial or hidden costs- All discrimination in access to credit should end and ruralfinance should be based on competitive criteria such as risk and rate of return

Public agricultural investment in productive capacity cannot be based on sound economiccriteria until prices are left to be determined by market forces. Therefore, it is recommended that (a) theState should focus on investment in agricultual infrastructure (roads, reservoirs, communications, etc.),eventually leaving productive ivestments to the private sector; and (b) an inventory of on-goinginvestments should be prepared by end-1992; this inventory should be assessed with a view towardcurtailing and halting economically inappropriate imvestments and investents in areas that would be inthe domain of the private sector in market economies.

The Role of International Assistance

During the transition from a central command system to a market economy, theGoverment will require significant technical and financial assistance in support of its reform program.Until now, the agricultural structure in Kazakhstan reflects the regional specialization developed in theformer Soviet union to promote interdependence among the Union republics. This also includes agro-industrial production and the production of agricultural inputs, machinery and equipment. The changesin the former Soviet relations have caused disruptions in these areas, in processing and in marketing anddistribution. Areas of major concern to agricultural development include the current incentive s=ucture,all aspects of privatization and enterprise reform, the current inppropriate structure of publicadministration in agriculture, the lack of expertise in agricultua economics, management and marketing,and the inefficient irrigation sector. These areas need to be immediaely studied and reviewed to formthe basis for policy and institutional changes (Box 9.2).

Foreign expertise would also be useful in helping design a viable rural credit system, anagricultural extension system geared to the needs of the emerging private sector, and in the medium termin establishing a land cadastral system. A regional approach (possibly at the oblast level) in areas of highcomparative advantage could provide a whole package of assistance in integrating production, marketing,storage, transport, research, extension and credit. Provided a suitable legal and regulatory fiameworkcan be established relatively soon, ways should be explored to channel foreign and local investment topromising subsectors. The international donor community could play a major role in directly supportingthe private sector.

Agriculture 143

BRex 9.2- -Anseof TeclnicelAssisonc

-he ob:ective ofeoposed isis is port t overnment in the development(poihcy-and implemenaion capacity reqired to inmi the transition ED a markt ecnmy. This will inclde studies.a.dvice, t-ining and financiaassistanI to undestadand descrbe the aDret stm_tuxe of the a-s discussed above andto develop and impklent poosas for agricultural:d4vopmentbased o- bet financial, ecownmic and envir_onenta

(a) The historical and potetial futue incentive urucae hve -to be assesd to develop policies for guiding the-M;agricultural seator through the tansition to areas: of comative advanuage. be hioria suc of agricultWal

ncetives (mi d pies, physicalcontrol, state.orders etc) has rsulted in distorio and an ineffiienproduction snare whichM now fac A serez terms-of-olae shock TA would develop propoa and suport progams-- -nSM --yb -r1X :=caadt5b fto nsrethtprices are determined primaril by.mark sorereflecting relative scarcities and that any subsides are

of a teoa n.ature. transparent. afforabk :and cleary rete

-s--lb) ---:-- lmental to thtransition fm a ceral pl amaet ecoyillbe the om ofopening the econmy to the private-seor. 'Die praz.atnof arndsipproduction facts will havetobe s wispecial emphasonenterprinn as well asmall-pcta e secto development, farm and.,s.e, .acagmem, .artedug and sustainb,, ag,ic,,I .- (nui integratd pt m. smal-

scale cbiny. etc.) and thec:supportinginstT1;1bial fimnewtTA' in miva viowuldseek to ensure as smooth aIramztzon as ;osibleaudio ers thlat ivatdout: ontl basisoffnca andeconomic vibility.

(c) Thee is tued for he resructurig of pulic itagrcltr towardsprvdnpoiygdacand- playg a-reliiatoryole, divegitself of n o tin prod ; processing, marketing and

: - .... - - . ~~~~~~~k=~~t .: of .. .-e z- Da. .e =& -.an-d. .AL dlstrib n TA :would mdmakeproposlad supporttheimpt-of, program of ruing andang, includngj the most efficient approachtothedivestireofis ertiioal a' '

-agrculural -economc:s:and i radas ui as-agrirtual poi, accs g ad arketng. TAwol fousonthe. sinbe otntnipennaioof ftrtaingndsed,sddevelop m8iD

_ -. ,.S.,-Mool- cot. ,smk. ; -; ;-- .-- : t=

f r-- ricula cag 'ap;. '- ropriate ton condition;.

-. (e) --.- t ilizad of -irrigated areas, irigationtechnologies,water ine eficiemcy; and water-tariffs would need tobe assessed. -Rehblitationwould needit be sessed with t ilfodiers tio otd croppigpattens:to t et cditonsintoconsid ion TAwolid : s a progranm for thereabilittio of the.rngatio infiifungscte basd on economic s d fiaton of crop prduction based on comparative

adatae -

CHAPTER 10

THE INFRASTRUCTUYRE FOR PRODUCTION

Trasportation

Strucure and Recent Performance

Kazakhstan is a very large country with a widely dispersed population and resouarce base:transport is of critical importance for the functioning of the economy. The railways fonn the backboneto Kazakhstan's transport system. In 1991 it carried 90 percent of the freight (ton-kan), while passengertraffic was more equally divided between road (50 percent), rail (30 percent) and air (20 percent).

Within the countries of the former Soviet Union, Kazakhstan Railways (KZR) is the thirdlargest after Russia and the Ukraine, with 13,600 route kn of which 5,500 kn are double tr and 4,000kn are electrified. It's fleet comprises 3280 locomotives and it has a passenger stock of 2685 coaches.

The railways is suffenng from a severe shortage of spare parts and permanent waymatenals (mainly sleepers and fasteners), wlich in the past have predominantly been supplied by Russia.One third of the railway network is behind in complete overhaul, and repair facilities of locomotives androlling stock is in poor condition with much of the plant outdated. The situation is made more difficultby the fact that 95 percent of spare parts, workshop equipment and rolling stock originates from outsideKazakhtan (mainly Russia and Ukraine).

Road freight transport is undertaken by a fleet of 400,000 vehicles, including tractors andother frm vehinces owned by agricultural enterprises. However, overall vehicle capacity is inadequatein terms of quality, dimensions, reliability and size. Tractors and trailers available to road haulageoperators are small, underpowered and in a poor state of repair. Lack of spare parts (especially fromRussia and Belarus) has lead to considerable restrictions in long distance operations. Kazakhstan has notrck manufacturing capacity of its own.

During 1991, there were 25,500 passenger buses in operation. With no new buses addedto the fleet since 1988, and replacements lagging behind needs since 1984, the size of the fleet is smallerthan what it was in the early 1980s. The shortages of spare parts has further worsened the operationalcondition of the buses. ' Bus services are also hindered by the regulation of local passenger bus fres(which cover only 10 percent of the cost of providing transport service) and the inability of nmnicipalgovernments to fund the subsidies required to cover costs of bus companies.

Road infrastructure is adequate, but maintenance is lacking partly because of shortage ofroad maintenance equipment and partly due to the lack of appropriate pavement design and materials.testing facilities. Construction and maintenance activities are performed by more than 70 different;construction companies and plarts that are owned and operated by the Ministry of Construction and:Transport. There is no private domestic construction industry.

The problem of spare parts is more serious than in the case of tbe railways because most of the buses are of Hunarian.origin and spares have to be financed in hard currency. It is estimated dFt about 15 prcent of the buses are pmneny out ofordcr for lack of spare parts.

The Infrastructure for Production 145

Air transport to other CIS republics is mainly provided by Aeroflot, although republicanairlines from the Ukraine and Uzbekistan have started operations, to regional airports. KazakhstanAirlines is being established using the 100 aircraft Kazakhstan obtained in apportioning of the Aeroflotfleet. Turkish Airlines and Lufthansa have started flying to Alma Ata and there are plans to permitseveral other foreign airlines to start operating. However, the instrumentation, air control andconmnication facilities of the airport need to be brought up to international standards.

From the beginning of 1992 all transport activities, including the railways, have beenconslidated into two ministries: Ministry of Transport, which covers the railways and road transport andaviation: and the Ministry of Construction of Transport nfrastucture, which deals with highways, butincludes also constuction of sea- and air-ports, as well as several construction materials plants and specialstructures and buildings.

Transport industry and infrastructure are almost entirely publicly owned and operated.Road tansport is being slowly privatized, with about 1,000 buses, 14,000 cars and an unknown nmuberof trucks being privately owned and operated. Legislation is being introduced for licensing of private roadtransport operators.

Overall, freight transport volumes dropped by about tO percent in 1991 from the previousyear. The decline in traffic was sharper in the first quarter of 1992 when traffic volumes for therailways fell about 20 percent compared to the first quarter of 1991. The decline for road and air trafficwere somewhat smaller, between 5 and 10 percent. The main reason for the drop in traffic was thedecline in demand from industrial users in Russia for coal and other raw mates produced byKazakhstan.

Reform Issues and Recommendatons

Priate Sector Participation and Licensmg of Road Transport Operators

The Government is seeking to privatize its road transport operations. So far, however,the privafization of trucking has only resulted in the transfer of ownership from the state to thecommunity at the ooblast level, which does not create private ownership. Also, with the Government'sdecision to allow private road transport operators, licensing is being considered to protect the interestsof consumers and operators. Draft legislation has been prepared for this purpose which will require thatoperators meet certain professional, managerial and financial standards.

Recommendation. A relatively free and open entry to the transport market is one of theprimary conditions for developing an efficient and competitive transport industry. It is thereforerecmmended that prior to adoption of the draft legislation, experience from other countries be studiedto ensure that while the legitimate needs for regulation to ensure safety are met, these regulations are notso onerous as to discourage private sector activity.

It is also recommended that the govermnent accelerate privatization of road transport.With respect to trucking, genumine privatization would entail the transfer of trucks and equipment toprivate operators, rather than a transfer from the state to the "community". Privatization of constuctionactivities undertaken on behalf of the Ministry of Construction and Traosport Infrastucture should alsobe encouraged (see below).

146 Chapter 10

Rail and K- ad Tariffs

Long distance road freight and passenger tariffs were liberalized in March 1992.However, railway tariffs continue to be regulated by the government, as do local passenger tariffs (roadand rail). The maintenance of low levels of railway tariffs will not only jeopardize the financial situationof the railways but it will also distort the development of an efficient inter-modal transportation network.

Local road and rail passenger traffic is heavily subsidized and tariffs do not cover the truecosts of providing service. Given the pressures on the budget, subsidies may have to be scaled back.Moreover, keeping tariffs low discourages private operators.

Recommedaton. It is recommended that local road and rail passenger tariffs shouldbe progressively increased to reduce the size of budgetary subsidies. Moreover, to determine an adequatelevel of tariff for rail and road transport, costing studies should be initiated immediately, and a propercost accounting system should be set up for the railways, if necessary with technical assistance frominternational experts.

Road Trasport Regulations

Road transport regulations are presently either nonexistent or follow the standardsestablished in the former Soviet Union, which are to a large extent outdated-

Recommendaion. With the modernization of the road transport industry and expandinginternational traffic, it is recommended that road transport regulations be brought up to internationalstandards and harmonized with the laws and regulations of the European Community (EC) over a ten yeartransition period. For this purpose, EC may be requested to provide the required technical assistance.

Investment Program In Transport

Investment programs in transport do not exist in any systematic form. There are onlya few large investment proposals in each of the main modes (rail, road and aviation). These proposalsemphasize Kazakhstan's concern for international access, in particular for ocean ports. Another featureof investment proposals is the desire to reduce dependance of the other CIS republics in repair andmanufacturing and capital repair capabilities.

Recommndadon. It is important to ensure that large and expensive investment projectsare not undertaken solely to reduce dependence on other CIS republics. These should be based on soundeconomic and financial analysis. Technical assistance will be required to both evaluate these plans andto provide trining in economic evaluation and costing for managers in each of the main modes, includingassessment of major capital repair and manuhcturing facilities.

The Infrastructure for Production 147

Construction Industry

The Ministry of Construction of Transport inrastructure is presently the only agency -public or private - which is undertakdng construction and maintenance of transport projects outside therailways.

Reconmwndation. The development of a modem construction industry should bepromoted through the following steps: (i) introduction of competitive contracting and bidding procedures;(ii) conversion of many of the 70 entities belonging to the Ministry into public corporations; and (iii)encouraging the development of a private construcdon industry by privatizing some of the entities andplants belonging to tie M isr.

TELECOMMUNICATIONS lox 101: lain-Technical Assiane Requirements in theTraspotatpaSector

the lazakDh s telecomunu- .. - f ' : of*lication infirastrucnte is insuficient to j-.ftFor, I :iseo!etve isto improve cablityof tisis insufficient to :sr~~e_ pricing andi loconiotie mainteamnce-Tisupport die desired economic growth rnin level sf o -anagementthe country. Capacity utilization of avail- -:accoting systems to eaab l railway toable lines is extremely high, indicating e iec ofiC._!!spw services and giving operationalvirtually no room for expansion of the ad-- womaercn emaa asisnce. Other eas- amexisting subscriber base without additional to' iz- systs:and fiacilises for ( rationalizing

l *iaintenanc t 1_ and (ii)-establisig capaciy-l ocaryoutcapital investment. The quaity ofo ser- , o [ err f

vice is poor. The average age of the .... . . ...

network is approximately 25 years andparts of it need to be replaced. Local and 2 Ft ina transport'industry, the -mrin obnjective is to

regulting ramew rk rb oad taprtand to improveinterregional communications between . dpn dpP.stte in the CIS are available to all sub thfT and road

trnsnport_], cmaisTiswill involve formulation -of -basicscrbers but until recently ie on :tuspart o ehilesen ~ ~ ~ ~~~illltOll reuain rgriglicensin oradtnso pearsvhiclecommunications were extremely resticted -d sions,- echnical stadards, and labor practices.with all traffic routed through Moscow. j Trining d ig ; inchlingmad transport operators,Iinthe

:ziC4 suibjects relevant -to. ort in market -economes with. . - R~~~~~~~~~epasis ax -commerca andoeratiol maementar oter.a u ^ r O .- - { -- - :~~~~~~~~~~~~~~amoder-:-:Structur and Recent Performance

As of December 31, 1991

telephones were available to 2 million tcm of the Minsy f Constucsubscribers, or about 13 of every 100 . 'rujor oecive ist improve its capabiliw in planig andpeople in the country. This density mpleion. This wiN inu establishment:of sysmatic.people : p'fcedurs ro civi uorks, including fomulation -of aropriatecompares favorably to other Central : dimren of specification and-Asian republics but is actually slightly .tcsigtnmciodscl. Ther is a need also for preparation ofalegaland-lower than the northern CIS countries. s adnistve framework for cotracting ot civil wofks,incliding.The capacity utilization is approxcimately 4 ign of' prequalifcatioon, tendering procedures, co.ntrt udocume, nt

98 percen which leaves virtualy no rom and taining of cn s, consuls, and g stf;:. :iroveent.-.o, -planu ;ysts fcr. ra- :ltXn-

for expansion. Specialized networks are - o plannitig stem s for road tlbfiionprovided to cusomers such as the - of hit arailways, security services, etc. They add ; . . -approimately 2 to 3 percent capacity to

148 Chapter 10

the country's network but would be difficult to convert for use on the public network. The averageyearly fault rate is not known but is thought to be quite high.

The network mostly use analogue transmission techniques over coaxial and symmetricalpair cables and electromechanical switches. Overtime, equipment has become obsolete and themanufacture of it and spare parts is rapidly being discontinued worldwide. Digital and fiber optictechniques exist in about 8 percent of the exchanges. Practically all equipment is from the former SovietUnion and Eastern Europe. Much of it was installed in the 1970's and early 1980's and is reaching theend of its useful life.

The network connects to CIS republics via 3000 channels and to the rest of the world via100 channels, which is extmely low. International communications are through Moscow and recentlyestablished satellite links with Austalia and Israel.

The Ministry of Communications (MOC) is the monopoly provider oftelecommunicationsservices in Kazakhstan. The MOC is responsible for strategic planning, regulation, policy, and day-to-day implementation and operations activities for telecommunications. It has accountability for local,national, and intemational telephone, telex, telegraph, and data conmnunication activities. In addition,MOC has responsibility for postal services, press, radio sound and television broadcasting, constructionof buildings for affiliated enterprises, money transfers, and educational institutions. Planning and day-to-day operations are done at a regional level. Thirty five districts operate as separate profit and loss centersthough results from all activities (i.e. post, telecommunications, press, etc.) are combined in the regionaland consolidated financial statements.

Technically, the network appears to operate poorly. The fault rate (average yearly numberof faulty lines per 100 subscribers) is not known but is thought to be above 60 which is very high. Thetraffic congestion on the lines at peak hours is quite high. There are only about 16,000 lines availablefor transfers and no room for new subscribers. The registered waiting list amounts to 1 million applicantsand the unexpressed demand is apparently twice that.

Until recently, the telecommunication sector was financially profitable, despite low tarifflevels. However, in recent months, enses have risen faster than revenues leading to extremely low,and in some regions negative net income. The telecommunication entity has very little resources availablefor capital development.

Refonn Issues ad ecommendatons

During 1991, the Ministry began revising their strategic plan in light of the politicalchanges within the former Soviet Union. They have recently installed a new international link viaAustralia that substantially relieved international congestion. In this period, they als 'aoncentrated onmainutning the existing level and quality of service to their subscribers.

Secor Re wg

The organizaton structure is ill suited to support market oriented activities. Strategicplanning, regulatory, and policy functions are merged within the Ministry. Limited countrywide strategicplaning is done by functional area (i.e. telecommunications, post, press, etc.) Functional actvities are

The Infrastrcture for Production 149

merged by region, preventing clear profit and loss reporting. It is thus difficult for managers to controlcosts for individual operations. Like other sectors of the economy, managers do not have autonomy todeternine staff salaries and bonuses to improve productivity.

Recommendadon. To introduce market orientation will require developing a new sectorsategy that includes clear sector objectives, priorities among objectives, and a short-and medium-termimplementation plan. A first step in this process would be to commercialize and modernize operations.Important initial steps to consider in commercializing will be to:

a) establish telecomnunications and postal activities as separate, independent, andautonomous operating entities with separate financial statements. Regionaloperating entities could function as separate profit and loss centers and, in timepossibly as separate firms;

b) establish separate entities and then privatize ancillary, independent activities suchas the press, sound and television broadcasting, constnction activities, moneytransfers, and educational institutions; and

c) provide improved telecommunicaton services to subscnbers who will promoteoverall economic development and who have an ability to pay. Important issueswill be to i) improve service, ii) identify priority sectors and identify how tomeet their requirements given limited resources, iii) introduce payment forintemational communications in foreign currency for entities with access toforeign exchange (i.e. hotels, embassies, international trade, etc.), and iv)reinvest a significant portion of foreign exchange income into the sector.

Oer important sector restructuring activities would include:

a) establishing an appropriate regulatory structure and policies;

b) performing a thorough tariff and demand analysis; and

c) restucturing the operating entity along more commercial lines.

Reguatory Framwork

Currently, regulatory functions are poorly defined with critical fimutions such as tariffpolicy being set by operating entities, without any regulations framework.

Recom mdaion. It is recommended that the Government adopt a sound L;stitutionaland regulatory frmework for telecommuication, separating operational activities from regulatory andpolicy actirvties. The regulatory body should aim to promote an imvestor friendly environment, i.e. withappropriate laws on property ownership, competition, repatriation of profits, tariff setting policies,licensing, fequency allocation, etc..

A legally separate, commercial firm, with the Ministry as the sole or primary shareholdercould carry out operating activities. This would enable the Ministry to retain indirect control of the firm

150 Chapter 10

through regulations and through its role as a stockholder, while enabling the firm to establish commercialoperations, improve efficiency, and possibly attract private investment. Furthermore, such a frameworkwill enable the Ministry to begin to possibly privatize the operating firm and introduce competition invalue added services (mobile communications, data transmission, access to data banks. and informationfacilities, electronic mail, etc.).

Tariff Policy

Tariffs are grossly insufficient to cover telecommunication operating costs and financeeven a minimum capital investment program. A segulatory body does not exist nor is there aneconomically sound policy to determine tariff levels that are sufficient to cover operatn costs but arefair to customers. The current tariff policy, with 70 percent tariffs fully controlled and 30 percentcompletely unregulated is not satisfactory.

Recommendation. A regulatory body should be established to define and regulate tariffsin an economically sound and equitable manner. Analyses of consumer demand patterns should beincluded in considering tariff restrutring proposals.

Retructuring of Operating Entity

Consistent with the overall restructuring of the sector along market oriented lines, it isrecommended that a thorough review of the existing operating entity be done so as to facilitate itscomnmercialization and restructuring. This would include reviewing financial and accounting policies andprocedures, operations practices, and human resource requirents, particularly training. Based on thereview, inernational financial and accounting policies, procedures, and control tools should beintroduced. Restructuring should inciude establishing marketing, sales, and customer service groups;revmping existing departments; and revising the relationship between the headquarters and regionaloperating entities. TMe planning and coordination acfivities should be done in close cooperation betweenheadquarters and the regional operan firms while the day-to-day activities are done by the regionalstaff. Thcse regional entities should continue to operate as separate profit and loss centers though the costallocation methods (allocation of revenue and expenses) should be reviewed. A major staff retainingprogram is also required.

Investment Strategy

Due to historical reasons, the Mimistry lacks adequate development planning,procurement, and implementation capabilities. Currendy, no comprehensive development plan exists.The main emphasis in planning thus far has been to devise a method to develop internationalcommunication capabilities which are independent of Moscow. There is wide recognition, however, ofthe need to rehabilitate and expand the existing local and regional networks. Regional communicationswill *.ed to be strategically and technically planned in cooperaton with the regional cooperative venture,huertelecom, particularly since Kazakhstan is a transit exchange for most of Central Asia. Outsideassisce will be required to advise on and strngthen the Ministry's and operating entities developmentplanning, procurement, and implementation capabilities.

Recommendaton. Given the expected contraction of the economy, in the next 1-2 yearsthe Ministry should concentrate on expanding higher revenue generating international services, providing

The Infsructure for Production 151

service to emerging business subscribers, and maintaining and improving the existing quality of national,inter-republic, and local services to business and residential subscribers. In 1993 and possibly 1994, itis likely that some telcphone lincs currendy used by govenmnent agencies will become available as thesize of government activities shrinks. These telephone lines can be made available to emerging businesssubscribers. An invesunent of about $6 million will be required for cables and other equipment toconnect these subscribers and repair existing problems. There is an urgent need, however, to developadditional telephone capacity to provide additional services to business as well as residential subscribersin urban and rural areas as well as to replace obsolete equipment.

If 20 percent of Kazakhstan's telecounication investment requirements were providedfrom iterally generated funds and they were not requird to pay fixed contributions to the governmentbudget other than taxes, the telecomunnication eotiy could finance an snnual investment program ofapproximately Rbl 560 million. This would amount to 4,000 new lines, which is grossly insufficient.Therefore, tariffs will need to be raised substantially to cover part of their investment program. Revenuefrom international traffic will be quite important in their future cash genating ability. If tariffs areincreased on a monthly or quarterly basis in the future to cover the effect of inflation and are increasedgradually in real terms, their overall profitability woud drmatically improve.

CHAPIER 11

ENVIRONMENT

The Emvironment Problems

Causes

The degradation of Kazakstan's enviromnent can be largely attributed to the inherentinefficiencies of a centrally planned economy. State ownership of productive sectors operating on thebasis of quantitative production targets coupled with central allocation of funds within a framework ofsoft budgetary constraints did not encourage enviromentally rational use of resources. Below costpricing, in particular for fuel and energy', and extensive recourse to subsidies did not favor investmentsin pollution controliabatement, adequate maintenance of existing plant, or recycling. The resultingcomposition of output has favored heavy industry (metallurgy, power, chemical industries) over lesspolluting services and consumer goods. Obsolete technologies used in Kazakhstan, often dating to the1950s, have relied on extensive use of resources that generate high amnts of waste.

The lack of regard for environmental issues mirrored events elsewhkre in the USSR.Centralized, ineffective enforcement of environmental laws and standards, inefficient system ofenvironmental management, and lack of public participation in the process of environment protection andmanagement resulted in the degradation of Kazakhstan environment.

Water pllution. Kazakhstan has one of the lowest mobilizable water resources of theCIS republics, a problem compounded by localized pollution of water sources. Data suggest that surfacewater quality overall is only moderately polluted2. However, stretches of surface water, in particular nearurban and industrial centers show high degree of contamination due to industrial effluents, minig slurriesand inadequacy of wastewater treament. Frequent reccurse to "lagoons" for wastewater discharges andextensive agricultural run-off, in particular in the southem part of the country, also leads to localizedgroundwater problems.

Not all major population centers have wastewater treatment facilities in Kzstan.Seven large cities, of a total population of nearly 1 million persons, do not have wastewater treatmentplants. In other cities plants have been under construction, some for extensive periods, but are not yetcompleted. Of the nearly 1,200 major industrial enterprises in Kazakhstan, less than half havefunctioning pre-treatment facilities. The others discharge directly into the municipal treatment ordischarge systen3.

As a result heavy metal pollution of surface waters is a major localized problem. Thesefindings are confirmed by the public record of actions taken against polluters. In 1990 of the 5,500 plantsinspected nearly 4,800 were found to be in violation of standards, 43 of which were found to be in such

Early estimates suggest that most fuels (gasoline, coal, and heavy fiiel for power) were priced at only 10 percent oftheir longrun emic prices.

2 Kazakhstan establishes a composite index for water pollution ranging from 1 (very clean) to 7 (extremely polluted).

3 In a sample of 24 major cities (65% of urban popolation), industry discharged on average, some 25-30% of effluentsium the municipal wastewater system. In certain cities such as Semipalatinsk the figure is much higher at nearly 50%.

The Enviromnent Problems 153

serious violation as to call for a stop of production. In addition, in particular in the southem parts ofKazasan, agricultural runoff of pesticides and fertilizers are a major problem.

Water use efficiency for all categories of users appears to be low. Householdconsumption is not metered. Furthermore, until the recent introduction of water charges, agriculture didnot pay for water either.

Air poauudon. Available data show very high, yet localized ambient pollutionconcenrdon levels.

Among stationary sources, major polluters are power/co-generation and ferrous and non-ferrous metallurgical facilities. Coal, which is the predominant fuel for power generation, though of lowsulfur content, has a high fly ash content (45-55 percent). Wet scrubbers and electrostatic precipitators(ESP) are commonly used for particulate control. However, ESPs are reported not to be workingefficiently - the average efficiency reported for a sample is 96 percent ranging as low as 92 percent.

A major issue with the metallurgical facilities (mainly the non-ferrous industries) is thesize and age of the facilities. The iron and steel plants in Ust Kamenogorsk, for instance rely on dated,resource intensive and polluting open-hearth technology, with limited, ineffective pollution controltechnologies. Thus in the main cities of metallurgical industry (Temirtau, Karaganda, Ustkamhinagorska,Cbimkent, Djezkazgan, and Balkash) atmospheric concentration levels far exceed acceptable air qualitystadards. In these large cities, industrial enterprises, in addition, contribute large quantities of toxic(e.g. phenols, formaldehyde, benzo-pyrene, mercury, and other heavy metals) emissions. The dataconfirms large extent of violations of air quality standards. Of the nearly 17,000 facilites inspected in1990, nearly 11,000 were found to be non-compliant with standard, of which 143 bad to be shut down.

Automotive air pollution (smog, lead, CO, and benzo-pyrene) is highly localized andaffects in particular Alma-Ata where the problem is particularly severe due to the siting of the city, andin Karaganda, Pavlodar and Chimkent. A major source of the automotive air pollution is the low octaneof the fuels used in Kazakhstan (as low as 76 octane) which results in inefficient combustion, and thelimited capacity to refine low-lead fuels.

Waste. The magnitude of hazardous solid wastes generated in Kazakhstan is a source ofconcem. The stock is estimated at 17 billion tons in landfills, with an annual generation of solidhazardous waste of 800 million tons. The inventory of such wastes is not comprehensive, and waste siteshave not been ranked as to the risk they represent to human health. There is little systematic recyclingof these wastes by industry. Nonetheless the presence of such metals as gold, platinum, vanadium, andcopper in some of these wastes should be viewed as an opportunity for the cleanup of these sites and, forresource recovery. Whereas collection of municipal wastes appears to be satisfactory, disposal isessentially in umlined landfills that are not particularly well managed. As with industrial wastes, thereis no systematic effort to encourage "source separation" and recycling prior to collection of municipalwastes.

In addition to the above media-specific concerns, there are two special cases ofenvironmental damage: the Senipalatinsk nuclear testing range and the Aral Sea.

154 Chapter 11

The Siask nuder tsting rwge occupies anarea of some 1.8 million ha. in theoblasts of Semipalatinsk, Pavlodar, Karganda, and East Kazakhstan, with a population at risk of nearly2 million inhabitants. There, from 1949 until 1989, the former USSR detonated some 470 nucleardevices, of which until 1963, some 115 were above ground. As the tcstng was secret, residents werenot formally informed until early 1992. and as a result were not moved. The earliest epidemiologicalstudies in 1957-59 indicate high levels of oncologies. These studies were discounted by Union authoritiesand oncology was attnbuted to other local conditions, particularly nutritional status. Archival materialsnow indicate exposure levels of 100 tmes permissible levels. Since then additional medical data pointto high levels of oncologies and genetic abnormalities of second genertion. Tests reportedly suggest thatthere is no seepage of radioactivity into groundwater, though they suggest concem as to continuedexposure due to contmination of food chain. The Kankh goverment has drafted a decree to declarethe affected area as an "ecologically disaster area which, if accepted by parliament. would entailconsiderable financial outlays to compensate and relocate exposed people. There were in addition,reportedly some 30 other nuclear explosions on Kazakhstan territory, the extent of their impact is not yetfully known'.

The Arnl Sea once the world's fourth largest inland sea, today symbolizes one of the mostacute examples of enviromneDtal imtin the former USSR. Continuous and rapid expansionof cotton production in the Central Asian Republics over the past dtree decades to about 8 millionhectares in 1989 has led to a severe reduction of freshwater inflows, and a 14.5 meter drop in the sealevel corresponding to a 40 percent decline in surface area The Sea's once rich fishing industry, whichused to provide some 400,000 mt of catch and supported a large industry, has all but disappeared. Saltflats have developed resulting in salt-dust storms, blowing as much as 100-150 million tons of salt. Thewaters of Aral, believed to be contaminated by pesticides and fertilizers, are used by local populationsfor household consumption and have brought about a notable degradation of health indicators in particularfor children. The affected population in Kazakhst is estimated to be approximately 1.4 million (seeAnne)

Noan censen'aon. Less than 0.5 percent of Kazakhstan's territory (800,000 hectares),has been designated as restricted reserves with stnctly resticted humn actvity. Kazakbstan has onesmall national park (Mount Aul) of 50,000 ha. An additional 5 million hectares are designated asprotected area, where human activity is permitted bu nominally regulated. The operating budget islimited, authority is fragmented among various departments. As a result, in reality enforcement ofregulations is largely ineffective. Overall it is reported that 800 plant and 200 animl species are on theendangered list (Red Book, 1982).

Effects

Pabc Hea. Epidemiological data are incomplete and long-term health monitoring isnot available except in some particularly acute cases such as Aral and Semipalatinsk. More work willbe needed under control conditions to isolate the enviromental factor from other social (smoking,

4 These 'non-mility explosions wer conducd in Anu (Gryev). Mangisauoblastz Uraist oblasL Abubinsk oblast.Cbimknt oblast, Tselinogradski oblast, and Kokcauu over the as 30 years.

s From about SSm km3 in 1960 to Sm t3 in 1989.

The Environment Problems 155

drinking, nutrition) and occupational factors. Nevertheless, available data are suggestive of serious healthconcerns related to broad environmenal factors.

While there has been a notable improvement in health statistics over the past two decades,with infant mortality for instance declining from about 39.1 per 1000 (1975) to 25.9 (1989), suchindicators are sdll high in comparisonL to other Republics (e.g. Ukraine 20, Czech and Slovak 11).Furthermore local health conditions in Kazakhstan indicate large vanations with infant mortality as highas 30-34/1000 in Guryev, Turgay and Mangistau oblasts. Similarly, whereas in 1991 the nationalaverage for spontaneous abortions was 9.2 per 1000, such figures were significantly higher inTaldakurgan, Kizilorda, and Pavlodar oblasts. Birth abnormalities averaged 19.1 per thousand births in1991, though in Alna-Ata Oblast, Chimkent, Leninogorsk, abnormalities reach 30-34.

Available data also indicates high levels of morbidity in some cities. Morbidity data fromdte Ministry of Health provides evidence of extensive illness. In 1991 48,000 adults and 75,800 childrenper 100,000 contracted various illnesses per annum - resulting in extended absences from the work placeand schools. Nonetheless, in heavily polluted cities such as Semipalatinsk and East Kazakhstan, 100percent of the children, were ill at least once a year. Many of the diseases were upper respiratoryinfections (14.500/100,000), hepatitis 366, dysentery 108.5 and oncologies 189.5'. In addition, foodcontamination, iough co ted water sources and unsafe pesticide and fertilizer use is also a majorconcern.

Destucton of prodctive natural resources. The degradaion of the environment is alsothreaiting the productive base of certain communities. As already indicated the Aral Sea fisheries havebeen destroyed. The rich Caspian Sea fisheries - the source of sturgeon - is thratened as a result ofincreased pollution and excessive fish catches over the past 15 years, with catches reportedly havingdeclined six-fold. Loss of soil fertility due to erosion and salinity is also reported, especially in the south-western oblasts, that depend on irrigated agricultural production.

SECTOR ORGANIZATION

The State Committee on environmental protection which had been created in 1988, wasreorganized in 1990 as the Ecology and Natural Resource Uses Committee, and in early 1992, it becamethe Ministry of Ecology and Bio-Resources. The Ministry of Ecology is the body entrusted with settingKazakhstan's environmental policy, the coordination of environmental activities of other public andprivate entities, with monitoring and enforcing compliance, and with limited implementationresponsibilities. It is organized along the lines of thematic (Forestry, Wildlife Protection, Fisheries andRadioecology) and functional (Expertise, State Control/Supervision, Resource Economics, Scientific andTechical Progress, International Cooperation and Information and Administraive) departments. TheMinistry of Ecology's field activities are conducted by local agencies in each of the 19 oblasts and eachrayon within these oblasts, with organizational structures essentially replicating the one in the capital,

h As would be anticipatd dte range of data indi tt the igly poIlume4 indusil cities have morbidity indicatorsweln above the averge. Upper respiatory dsases were 20,2001100,000 in Sempat, 21,000 in EastKazakbstanand 23.000in Kuaaganda Sinilarly the mcidence of hepatis 437 i Magistau, 538-548 Turpy and Chimkent, and 735 in Gwuyev.

156 Chapter 11

Alma-Ata. The Ministry seeks to involve the public in its policies and publishes two newspapers and aquarterly ecological summary. There are over 20 active environmental NGOs in Kazakhstan.

Whereas signficant progress has been made in defining new environmental legislationand regulations in the past year, and further pieces of legislation and regulations are in progress ofpreparation, a number of important shortcomings persist. Perhaps most importandy, environmentalauthority and responsibility is not fully clear nor uanimously accepted by all sector ministries andagencies.

Ambient standards for air, water and soil quality unique to the FSU are exceedinglystringent and not compatible with Kazakhstan's capacity to comply with them. Maintenance of thesestandards would either fiuther non-ompliance and thereby question the credibility of environmentalpolicy, or lead to the closure of much of Kazakbstan's industry.

Responsibilities for monitoring are fragmented among vranous institutions including theMinistries of Ecology, of Geology, of Water Resources, and the Hydrometeorologial Service. A proposalby the Ministry of Science and Technology to consolidate all ecological monitoring activities under oneagency is apparently under discussion. Monitoring data, as a result, is available from a variety ofsources. Ambient air quality monitoring appears to be of sound quality and coverage. Wastewaterdischarge and air emission monitoring on the other hand, is delegated to the Oblast level. Independentverification of enterprises self-monitoring also appears to be very limited in frequency. The quality andcoverage of emission and discharge monitoring data could not be evaluated but is reportedly not fullyreliable. Furthermore, these monitoring data are not reported to the Central Departments of the Ministryof Ecology in "real-time", which does not have a satisfactory mechanism for quality assurance.

Impleentation of a stnct public environmental impact assessment (EIA) - whensystematically applied to all sectors irrespective of ownership (including municipalities) - is a major toolof preventive environmental enforcement in many Western economies. Kazakhstan requires that allinvestments up to 50 million rubles obtain an "expertise" (EIA) from Oblast authorities, and largerprojects be reviewed by the central expertise department of the Ministry of Ecology. Of the nearly 1,500EIA under consideration in 1991, 470 were reportedly rejected. At present there is no enviromnentalauditing of industrial plants and mining facilities in Kazakhstan.

Kazakhstan is in the process of introducing economic instruments of environmntlmanagement based on the polluter and user pays principles to progressively alter unsustainable behaviorand generate much needed resources for environmental activities. Authorities have elected to decentralizemanagement of such instrumet, by allowing local authorities to set the level of such economicinstruments differenially. In addition, it is anticipated that revenues from such instruments, and finesfor non-compliance would be used to constitute an Environmental Fund that would be shared betweenthe Central and local authorities. Implementation details of these instruments have not yet been fullyworked out, but are already in effect in some other Republics of the former USSR.

Rec o mmenl da ionlls

Improving the state of the enviromnent is an essential element of the process of overalleconomic transformation. Iprovements in broader economic efficiency sought through macro-economicreforms will reduce the pressures on the environment at a minimm additional financial burden. Over

The Environment Problems 157

time however, investnent in pollution abatement technologies to reduce existing pollutants, and in newenvimnmentally sound technologies will also be required to enhance the antivipated effects ofmacroeconomic reforms.

The central elements of the economic reform program - pricg, enterprise and regulatoryreforms, industrial restructuring - will provide the underpinning for efficiency gains in energy andmaterials use and thereby direcdy improve environmental performance. The move away from centralallocation of resources towards a market-framework including in particular economic pricing and bindingbudget constraints will provide producers and consumers strong incentives to effect real choices betweenfuels and technology in a manner that reduces costs. Economic pricing and managerial freedom to makesuch economic choices will give enterprises the incentive and ability to respond to market signals in anefficient manner. This will entail: (i) a progressive elimination of subsidies to energy-intensive, heavyindustry; and, (ii) economic pricing of natural resources, including price increases for raw materials,energy and water, to an adequate level in order to recover long-run economic costs.

These reform measr will need to be comlemented by the establishment of an ifecfiAveregulatory and legislative framework and a revision of standards that reflects the country's adminisive,technical and financial capacity. Kazakhstan will require substantial resources to correct its pollutingproductive structure and to reverse the inherited stock of accumulated environmental problems. Sincethe environment sector is not likely to get all resources to correct all current and past problems, it isimperative to carefully develop a stategy that will allow the setting of clear priorities and that is acceptedby all sectors of the economy. An environmental strategy could, in addition, serve as a framework tofacilitate the coordination of intemational assistance to the sector. The instituions for enviromnentalmnanagement should be developed to effectively implement this common national strategy.

The issue of environmental liability for accumulated pollution will become importantduring the privatization process. Lack of clarity on this issue could induce unnecessary delays inconcluding p:-ivatiztion contracts. C!ear guidlincs need to ',e esblished on the sharing of known andpotential pollution costs between the State and the prospective new owners. This will require thecom-pletion of a thorough inventory and an estimate of the least-cost measures for mitigation. Whereasthe State as past owner of productive sectors might wish to consider assuming liability forpast pollution,liability for 'new' pollution that would be generated by the privatzed activities should be solely theresponsibility of the new owners. It is also strongly recommended that the Ministry of Ecologyparticipate in all privatization discussions, and review all major conucts for their environmental aspect.

More realistic (attainable) standards should be set for Kazakhstan, with the establishmentof interim standards at wili pernit the transition of existng industry and municipalities within areasonable time (e.g. 5 years). New plants should be required to meet the more stringent stndardsimmediately. In this context, emission standards should be applied for the operation of all freign andnational companies, as well as other interested investors to minimize potential damage to the enviromment.

Pollution fees and fines should be increased to reflect economic costs at revised standardsin a regionally differentiated manner and indexed to inflation. Air and water pollution fees and finesshould be progressively increased and collected on the basis of airsheds and river basins to seek least-cos!solutions to water pollution problems. Airshed and river basin management models could iniially beintroduced on a pilot basis. The system of economic instruments should be kept simple foradministative ease, by for instance, establishing a single ratio for revenue sharing, irrespective of the

158 Chapter 11

nature of the polluted resource. The proposed Enviromnental Fund should be on-budget, managed bya Board under the authority of the Minister of Ecology and subject to an ariual independent audit.Whilst local authorities have been delegated the authority to set the level of relevant fees and fines, theMinistry of Environment should verify that the combination of economic incentives, sanctions set by thelocal authority and the regulatory franework, does indeed ensure that the inimumn environmentalstands are met.

Once appropriate norns and standards and fines and users charges have been agreedupon, adherence should be monitored and environmental regulations and laws uniformly enforced. Thiswill require technical and financial support to agencies and instiutions called to implement theenvironmental policies. It will also require some functional consolidation of the current monitoring andenforcement responsibilities. An infomiation management system that will ensure a simultaneous flowof the source emission and discharge, and ambient monitoring data to the Central Office should also beset up. These recommendations can be effectively implemented only when the legal framework clarifiesthe responsibility and authority of the Ministry of Ecology with regard to enforcement.

Greater public participation should be sought dunng preparation of the EIA processthrough extensive consultation and the publication of evaluation results in a widely circulated media. Thecurrent EIA threshold of Rbl 50 million determining local versus Central review responsibilities shouldbe indexed to avoid overloading the Ministry's central department. Environmental auditing to (i) identifythe environmental problems associated with the facilities or sites in question; (ii) recommend solutions(including waste minimization and pollution prevention measures) to these problems; and (iii) estimatethe cost of environmental compliance is an essential ingredient of a cornpliance plan and should beinstituted. hnplementation of an environmental audit program to assess environmental liability couldfacilitate the privatzation process. Enterprises should be brought to bear the full cost of environmentalaudits, although in the early years of transition to the market economy, environmental audits could bemade available to industry as a service - with some level of cost sharing.

Finally, it wilt be essential to provide continued training to Ministry of Ecology and selectline Ministry staff at all levels, in environmental impact assessment, enviromntal auditing, monitoringinformation systems management, and the implementation of me na laws and regaons. Somelimited management equipment will also be necessary for the enviomental institutions to satisfactorilyfulfill their prescribed role.

Annex

TRANSMONAL TRADE AND PAYMENTS ARRANGEMENTSI

The transition to a market economy requires fimetioning markets where relative pricesprovide meaningful signals for restruchtring. But prices today renain seriously distorted - and thepattern of production is not consistent with oomparative advantage. Open international competitionestablishes an appropriate set of relative prices. It induces efficient resource allocation and thuscontributes to rapid growth. What happens to trade is crucial given the high degree of economicinterdependence in the Former Soviet Union (FSU) potential gain from exports and from a closerintegration to Western markets, and the prevalence of domestic monopolies.

The present trading system continues to be hampered by significant impediments to trade,especially various restrictions of exports for convertible currency and excessive regulation of interstatetrade relaiions. While the future levels and pattems of trade among states will be quite different thanthose prevailing in the recent past, too abrupt a disruption in these patterns is going to compound existingsupply constraints. At the same time, it is recognized that it would be difficult to move immediately fromthe present system to one characterized by fiully convertible currencies and liberalized trade. Hence thereis need for policies of transition.

Refonn of the trade reme

Over the last few months steps have been taken to introduce a competitive trade regime.It is clear that additional measures to facilitate trade within the FSU are required - and there is evidencealready that disruption in this trade has had a negative impact on output. Trade with third countriescontinues to be hampered, especially by various restrictions of exports for convertible currency.L'iberalization and deregulation must continue in both interstate and third country trade.

Common to both interstate and third country trade is the need to link changes in the traderegime with reform and restructuring in the enterprise sector, especially privatization and the removalof barriers to entry. To avoid an output collapse which would undermine the reforn program, certaintransitional measures in FSU trade are advisable. This transition only makes sense if the underlyingproductive structure is indeed changig. Reform in the trade system cannot he separated from theintroduction of hard budget constraints to enterprises, the elimination of subsidies and privileged accessto credit, and privatization. This argues for strong up-front measures which give clear signals about theultimate priority of structural transformation so as to induce enterprise adjustment to the new economicenvironment.

Change must come in four areas: (1) in the regime towards third countries; (2) in the useof state orders in trade among the FSU states; (3) in the payments arrangements, and; (4) in thecoordination of trade policies among the states of the FSU.

Trade wit tbud coutiies. The government of Kazakhstan has recognized exports area key to rapid growth (see chapter 3). This is especially the case in the short-run when domestic demandis and will remain depressed. To achieve export growth quantative restrictions or licensing should notbe used to restrain exports. Export taxes are the appropriate instmen to use when domestic prices

This is a slighty edited version of Chapter 8, yellow cover of the Russia CEM.

160 Transitional Trde and Payments Arrangemcats

are below intenational prices and should decline to zero as the domestic price moves toward the worldprice. Moreover, exporters should not be penalized by having to surrender foreign exchange earingsat below market exchange rates. With current account convertibility (which entails the elimination ofmultiple exchange rates, free access to foreign exchange for importers without quantitative restrais oniWorts) exporters wili sell foreign exchange directly to the banking system. In this case, rules forcompulsory surrender would not tax exports.

Imports may be taxed on a temporary basis through low and preferably relatively uniformtarif 2 . Free trade at a reasonable exchange rat would cause a massive shock to the economy. Tariffsare a useful transitional device to provide a modest degree of protection to low but positive value-addedindustries. But to encourage restructuring they should be phased out within a few years. High tariffs(above 25 percent) are counterproductive even on a transition basis; they tax exports, may protectnegative value-added industries and wili induce trade diversion. It may also be necessary to use tariffsas a method of generating fiscal revenue. This is an effective but distortionary means of taxation, andit should be phased out of the domestic tax system.

State tradng. State orders are used to meet bilateral trade protocols with neighboringstates. When domestic prices are adjusted to world prices, there will be no reason to maintain thispractice. In the interim, bilateral agreements are a pragmatic response to sustain trade. Even so, theagreements should eliminate compulsory state orders in favor of al indicative trade list. The use ofindicative lists should be restricted to those products adjusting to world prices over time. To the extentpossible, trade arrangements should be made on an enterprise-to-enterprise basis at freely negotiatedprices which are not subject to prior govermmental approval. Bilateral balancing of accounts betweenstates must be abandoned in favor of more efficient multilateral payments arrangements.

New Ent. Entry of new finns in trade operations should be encouraged. This wouldeffectively eliinate the monopoly position of state trading organizations (STOs). STOs should berestructured into competing multi-purpose and multi-product traders. They could diversify, for example,into procurement agents for the Government's purchases for its own consumption needs. Improvementin government procurement is critical for efficient use of Western import assistance. Competition is,however, essential for efficien procurement; the new agencies must have to compete with privatecompanies and may be encouraged to privatize themselves. Similarly, the "concerns" should not be giventhe monopoly right to allocate state procurement. The allocation of state procurement provides theconcers with power over its producer members in enforcing collusive arrangements. Such restrictionsto free trade would be difficult to sustain in more competitive markets. To ensure adequate trade flowsof bulk commodities (grains, for example) state agencies may be needed. But in all such cases, statetrading should stop once private firms and distribution channels develop. Governments must encouragethe growth of pnvate trading and should take steps, such as making trade credits available, to ensure thatprivate traad are given equal opporunity to participate in trading activities.

Payment arrangements. Currentdy settlement of balances due between commercialbanks across state borders may take three months - and the Central Bank of Russia clears nearly everytransaction. Within the ruble zone, there is a need to strengthen the system of payments amongenterpnses. Bilateral settlements through the Central Bank favor the control of trade by limiting the

2 There may be a case for dif&rentiated trif fr revenue reason and as a transitory lument of indusal policy.If tariffs are differentiated, at most two or three tariff categories should be established with Hnle dispersion.

Annex 2 161

outstanding balances that each state may maintain. As a first step, a multilateral rather than bilateralsystem of balancing should be introduced.

A problem with the present system, either with bilateral or multilateral clearing, is thatthere may be persistent creditors or debtors within the system. One or another state may fid itself ina position of providing or receiving real transfers of goods and services in exchange for monetary assets.The answer to this problem should not be sought in curtailing trade. Rather, the efficient solution is toestablish monetary coordination in a properly functioning ruble zone. Monetary coordination wouldinvolve at a minimum, aggregate ceilings on money and credit expansion with shares allocated toindividual states.

Efforts are urgently needed to reach agreement armong those Central Banks that areinterested in participating in a ruble zone on the rules regarding fair distribution of the seignorage,currency emission and monetary policy as well as rules regarding the levels of outtanding balances thateach may be able to maintain. In this way, the free rider problem that significantly contnibutes to theimbalances would be controlled; stabilization and convertibility of the ruble would be facilitated. Withina coordinated ruble zone a recalcitrant debtor (on a regional not bilateral basis) could be penalized. Apenalty rate of interes would be levied on balances outstanding between central banks beyond areasonable clearance period. The higher cost of borrowing would induce monetary restraint on the partof the deficit country and would act to correct the imbalance. Monetary coordination and a movementtoward convertbility of the ruble is the desirable way of dealing with imbalances, not restraints on trade.

Trade among states which have introduced new currencies (which are for a timeinconvertible) presents a special problem. A system of multilateral clearing should be introducedsimukaneously with the new currencies - with short settlement periods without the provision of credit

and settlement of outstanding balances in hard currencies.

Prferentia trade areas. Interstate trade relations should avoid beggar-thy-neighborpolicies which result in diminution of total trade. Unforumately, these practices have increased in recentmonths in the FSU. Oil inporters, though they will suffer with price liberalization and movement toworld prices, must not attempt to compesat by exploiting monopolistic positions in other areas, as forexample in trans-shipment services and territorial transit. An effort must be made to reach agreementfor a phasing-in of major prices increases, as is being pursued in energy pricing. Since a customs unionor free trade arrangement in the FSU would bias trade towards inerstate trade - the amngement shouldbe limited in time3. A free trade arrangement, like mporary protective tariffs, will ease the speed oftansition. Ultimately, however, the economies -ust adjust - and benefit from - their long runcomparative advantage in interuational trade. This certainly will involve less trade dependence on eachother.

In sum, the highest priorty to trade reforms are: first, elimination of restraints anddisincentives of all kinds against export to third countries, except for export taxes for those limitednumber of goods adjusting to world prices on a gradual basis. Second, elimination of state obligationsand orders in interstate trade, retaining indicative list trade for only those items subject to domestic price

3 Thefree f ade arrangement should be open to all fifteen sates irrespecdve of wheder they desire to remain in the rublezone. If this cannot be anranged, more narrow arrangements (for example among Russia, Belarus and Kazakhstan) would bewoth exploring.

162 Transitional Trade and Payments Arrangmen

controls, while shifting all other trade to enterprise-to-enerprise trade. Third, monetay coordination andrestraint within the ruble zone, coupled with the formation of a clearing (not payments) union forfacilitating trade among the emerging countries with new but inconvertible currencies. Fourth, formationof a preferential trade area among as wide a group of former Soviet states as possible.

Appropriate sequencing of the refonrs is critical. Eliminating export restraints of allkinds should be done immediately. Monetary coordination within a ruble zone is also a step that isessential to achieve rapidly. Regarding interstate trade based on lists, those reforms nmy be accownlishedwith the negotiation of the new agreements, if any, for 1993. The formation of a clearing union is a stepthat should await the adoption of new currencies by independent states. Finally, any tariffs that areadopted for third countries should not be applied to independent states even if they have adopted newcurrencies, provided reciprocal treatment is offered.

The Current Situation

The Existing Web of Interdependence.

In 1991 total exports of the fifteen states of the forner USSR territory to the rest of theworld amounted to US$70.2 billion, a decline of 32 percent from 1990. Declines in exports to otherforner CMEA countries in Eastem Europe were especially large, with the largest drop in machinery andrelated products.

Trade armong the fifteen sutes accounted for up to 90 percent of their total trade. Withthe exception of Russia, interstate trade accounted for over 80 percent of total trade for all other FSUrepublics (see Table A. 1) For Kazakhstan, the share of interstate trade was above average, at 88.7percent. No finu estimates on the evolution of interstate trade in the last year are available. But someprelininary estimates indicate that interstate trade has declined by more than 20 percent, and it is widelyreported that such trade has declined even more than trade with third countries.

The Eastem European experience of the demise of the CMEA is instructive for the futureevolution of trade among states of the FSU. A number of studies have estimated that although the totalexternal trade of the CMEA countries was not out of line, intraregional trade within the countries of theformer CMEA was excessive; and that such trade will decline when it is placed on an equal market basedfooting with other trade, by as much as 60 percent.

It has been argued that for the purpose of analyzing trade flows, the FSU can be viewedas an intra-national CMIEA among its states, except that unlike the real CMEA, there was a supra-nationalpower planning both trade flows and the pattem of investnent and specialization. The central plannersinvestment preferences, however, only peripherally reflected comparative advantage. In particular, basedon the collapse of sales of the machinery and related sectors in Eastern Europe in 1991, these sectorsappear to lack cornparative advantage. Thus, it is likely that a very significant portion of the inter-industry trade -- iorig the states of die former Soviet Union in is based on trade diversionwhich will vanis .n the long rtm without preferential treatment.

Although where are multiple explanations for the output decline in Eastern Europe, andit is difficult to allocate the relative importance of the various factors, the recessions of Easten Europeduring 1991 have been attributed in significant part to the rapid decline of trade among the countries of

Annex 2 163

the former CMEA. Adjustment costs have been greater for the countries that were most heavilydependent on the Soviet market (e.g., Bulgaria has had a more difficult adjustnent than Hungary). Thestates of the FSU are even more dependent on interstate trade than the countries of Eastem Europe on

Table A1: TaJ and IabxrqiomalJrvlgxf t as a percentagr of GNPformer Soviet sfttes, EastErn Europe CME4 andEC wember.

Foreisn Trade

Share ofIntraregional

Total* Intramregional in Total Trade

Former USSR**lRussian federation 13.3 11.1 60.6Ukraine 29.0 23.8 82.1Bdarus 47.3 41.0 86.8Uzbekistan 28.5 25.5 89.4Kazakhsta 23.5 20.8 88.7Geo.gia 28.9 24.8 85.9Azerbaijan 33.9 29.8 87.7Lithuania 45.5 40.9 89.7Moldova 33.0 28.9 87.7Latvia 41.4 36.7 88.6Kyrghyzsun 32.3 27.7 85.7Tadjlkiskin 35.9 31.0 86.5Arienia 28.4 25.6 90.1Turkmenistan 35.6 33.0 92.5Fsronia 32.9 30.2 91.6

Eastern EurGpe (CMEA)Bularia 30.1 16.1 53.4Czechoslovakia 23.0 10.9 47.2Huingary 34.1 13.7 40.3Poland 19.6 8.4 43.1Romania 17.6 3.7 21.0

Western EaopeCermany 29.8 14.4 48.2France 23.3 13.0 55.6Nedhelands 54.4 342 62.9Portugal 42.1 24.6 58.4United Kigdom 26.0 10.7 41.2

Souces: Former USSRl: Goskomstat for trade dara in foreign trade prices; umpublished WorldBank estimates for GNP; Eastern Europe: UNECE (190) for trade data, and WorldBank Atls fr GNP, Pisant-Fery and Sapir for die EC. 1990 data are used for theformer USSR and the EC; 1989 data for Eastern Europe.

* Trade is measured by the average of exports and imports as percent of GNP.

* Intrauegiomal rade refers to tade within the former USSR, the CMEA or the EC,repetverly.

*6* Statstcl reporting by Goskomstat of the convertbk currency btade of the USSR issignifican biased downward by the use of a highly overvalued exdcange rate.Thus, when the convertible curency tmde is properly valued the total foreign tradedependence of the firmer Soviet states would increase, and the share of intaregionaltrade wopild be lower tm inated in the table.

164 Transitional Trade and Payments Arrangements

CMEA trade (see Table A.1). Thus, the poten for output decline induced by a trade decline in thefonner Soviet Union is substantial.

To the extent that inefficient, trade diverting trade is a significant component of interstatetrade, a "Prisoner's Dilemma" faces each of the fifteen states during the transition4. For any individualcountry, the optimal stategy would be to export its inefficienly produced manufactured commodities toits traditional markets witiin the former USSR (especially if it can get convertible currency for them),and maximize imports from least cost suppliers which are likely to be developed market economies.However, if al countries adopt this strategy, their income would collectively decline becase they wouldhave no market for a significant part of their exports during the transition. The key quesdon then is notso much whethr interstate trade will decline in relative terms in the longer run, but the pace at whichit will do so.

The Main Causes for Concern

By early 1992, trade among the countries of the former Soviet Union verged on thechaotic. Governments have attempted to "protect republic resources' by establishing export controlsthrough quotas and licenses on the bulk of their exports both to third countries and for interstate trade.There has been a significant deterioration in the payments system and continued uncertainty as to howmuch the ruble is worth Moreover, although in 1991 it was envisaged that intetaate trade would beconducted prinarily on the basis of bilateral agrements and protocols whicb specified in detail specificgoods to be exchanged up tc fixed volume limits during the 1992, implementation of the detailedprotocols was delayed until March 1992 and contain many problems as discussed below.

As a result, trade flows have been reduced to levels significantly lower than previouslyenvisaged. Three developments have emerged from this chaos: (1) the widespread use of export licenses,(2) increased emphasis on bilateral trade agreements between states, and (3) the increase in barter trade

Quantitative Rstmints on Experts. Perhaps the most significant barrier to trade duringearly 1992 is the widespread use of export licenses. The states of the former Soviet Union are makingwidespread use of this device, and generally license exports both for interstate and convertible currencyarea trade.

The motivation for export licenses derives from a number of considerations. Because ofthe variance in the extent of price liberalization adopted in different republics, there are significant pricedifferentials in a number of products across republics. In the presence of a common currency andbasically open borders, governments have intervened to mainutain these differentials by establishingquanitadve export restraints for many products. Furhermore, there are a number of products, notablyenergy, whose prices are kept below the world level.

Export icening has also been prompted by most states' desire to try to keep "goods athome." Even today, many states are relucta to accept rubles for goods because they fear that currencyreform in other states will render any accumulated ruble balances worthless. Fmally, bureaucratic

4 The Prisoner's Dileman problem in game dieory refers tD the situation in which cooperative action by both playersresults i an improvement in the welfam of bodt; but given a stegy of an opponent, the optimal strategy for the other playeris to play non-cooperatively.

.

Annex 2 165

interests rule that export licensing be maintained as a tool for continued state control of economic activity.

'IOihli'atoyn categ tradeis conducted' onthe basis of a Largeintergo'enmeta baerof-otIhe mostimportantproductsin intertate trade. This type of traderesembles (but ..s notidenticalto), he. oldstylstate oitoy t of the C'ouncilf Mutual Economic;::Assistance(CMA). .Forexample, fuel and.energy.prducts arer in this caegoy. Commitents made

under this cateory :cary withthe teobligation, of the state -to fufl-h onrc.Alexports wzdethis.categoy are l id~by the state andgcalymust be-soldsto designatedspecific erprises in the.

g se. A ffort. is n goti to gbly t poon of th trade, by-. asgnmg.pncsandadjustngvolume. Inp prxces are set et world maret prices;- but, in fact, for

theupoofete ttra sare valtued fromdbllnrs in bls modity.basis in a negotitiotthat takes: the.domestic:pnce in rubles- into conideration. Thuss notional irelatve-prices in-rubles are dosertodomestic prices*thnlte dolars. many products underthe obligao liss -i --maximum p p

2. kilAtivelitI d I With som imotatdiffrne,the indicative list trade-is ̀similar to theldcaftye littae. thtcaaceie Esen ropeawtade" iil191after the demisie ofthe CMEFA..

Entepries i tie dffernt tattmayengge n cotrats ith eahotehere.they defineaM theterm... of thesalesJ.ncludn prcdncelcniiosieedn nte spcfccutyteeare O100050p.'duct thataeontheindicativelists. TheState.has.no bligation fort-his par of:the;i f d e bu these< .pmd.uctnsubjecttoexport licensing. BE6dstatesim thi:biateralproool agree to automaticaly *ovide

exprtlicnss fr ll ntrprsetoentrpiseneotite cotrctsl!tothde ,quota. amounts that arespecifie inthe rotocols ~Givnthe uncetaintie somensindced eprlIcesn the guarantee. . t~~~~~. .; ...... .- . WIOI. -eM _e

3. La-..qii.W.cuteipriE.nsc k- AUIproducE thbt ate neithernon the obligatory-nor-indicative:lists-

I. tradedbetween ide)pendent 2s.e ihu ite moto pr etansbutithe mot~ iportant'..pout ar nth ist twocteoies

!ff--.if..b"e~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.. ....tfe w - "-'

Box A.l: Differnt Types of State Trade.

Biateral State TradingAnwgemems. Most govenments appear to believe that the bestway to maintain interstate trade is to focus on attempts to enforce the bilateral arrangements that theyhave concluded, rater than to free trade and create an enviromnent for decentralized, enterprise-basedtransactions. By March 1992 an extesive network of bilateral trade agreements among the independentstates of dte FSU had been signed'. These protocols followed the pattern of dividing trade into threecategories: (1) obligatory list trade; (2) 'indicative list' trade; and (3) enterprise-to-enterprise trade.These categories are discussed in (Box 6-1).

s The Ministers of Trade and Maerial Resources of tde 15 fbrmerSovietrepublics agreed in May of 1991 to mainaintrade in 1992 at 70 percent of the level of 1991. Afier the demise of the union, however, the implementation of any tradeagreements became primarily a maner of bilaeral negotiation among the independent states. Although in some cases Geucgiais reported to not have actually signed agreemn, ade with Georgia is being conducted on an analogous basis.

166 Transitional Trade and Payments Armngements

There are two additional institutional features of interstate trade that are important: (1)this trade is not subject to export taxes that apply to third countries (even export taxes to the Baltics havebeen waived), and (2) many of the products under the lists are subject to maxmum price controls.

The absence of export taxes provides an incentive to enterprises to divert exports tointerstaic trade. Nonetheless, significant problems have been observed regarding lack of fulfillment ofthe obligatory trade in the agreements; this is primarily due to price controls, which reduce the incentiveto export. At the same time, however, the previous system of state orders has either broken down orbecome less effective. As a consequence, enterprises, which either do not find it profitable or do nothave the needed inputs, often do not supply the agreed upon quantities.

For a number of reasons the obligatory lists are clearly incompatible with a marketeconomy. First, the govenmments ultimately are responsible for choosing, in a bilateral negotiation,which products are on the lists. Since intersuate trade is likely to be a significant portion of trade for themedium term, the governments would define and cntrol a significant portion of the industrial tradethrough the obligatory lists. Second, experience with obligatory lists in the CMEA has shown that theprocess leads to losses of dynamic efficiency. It is exemely difficult to obtain the value of an improvedproduct through the government negotiation process, reslIting in little or no product innovation.

On the other hand, since the indicative lists do not convey a government obligation toexport or import, and prices on the lists would only be suggestive (dthy are included primarily for thepurpose of roughly estimantg bilateral balance in the trade while actual pnces would have to be agreedat the enterprise-to-enterprise level), indicative lists are a useful transition device. The guarnee ofexport licenses up to the quantities on the lists is the only really binding aspect of indicative lists, and thisguarantee is a useful feature to help overcome the licensing problems discussed above.

With respect to either kind of list, major questions remained as of early 1992. Forexample, how fiequently and how would trade imbalances among the states be settled. Proposedsettlement periods ranged from a month or shorter to a year. Convertible currency, rubles as well asadditional goods shipment have been proposed as means of payment but the issue is not resolved. Morefindamentally, as long as trade is conducted on the basis of bilateral government agreements, there is atendency for governents rather than markets to impose choices; the result is inefficiency and thenegation of the very objectives of establishing a market system.

Barter. During 1991, the fiscal deficit in the territory of the former Soviet Union wasreported to be at 20 percent of GDP, and as the deficit was monetized, inflation accelerated rapidly. Tomake matters worse, price controls were in place on most products, so that the hyperinflation wasrepressed (i.e., not measured in price increases but in incrased quantity shortages). This resulted inextensive queuing and massive resource loss (time and other resources) by consumers in an effort toobtain the goods under severe shortage. When price controls result in shortage, enterprises will tum tobarter to obtain both their needed inputs and consumer goods for their workers6. In effect, price controlscombined with the extensive monetization led to a situation where the ruble was not a viable money.

6 Underpnce conwols, the goods have a vahl in excess of e pricem rublcs. T'he sale ofa good at the official pricein rubles. Thus, when enteprises sell goods, they atmpt to capure some of tat rent by acquiring price controled goods inretu at the official price in rubles. If an enterprise were to spbly sell all its ouput for the controlled p in rubles underthe state order system. it would have little to bargain with when it amemDed to acquire its productive inputs. Moreover, ff meenterprise did not provide some consumer goods to its employees, it would have difficuly attracting them to the workplace.

Annex 2 167

Were it not for enterprise-to-enterprise barter the output decline of 1991 is likely to have been muchgreater.

With the liberalization of prices in early 1992, the pressure for barter within a swte wassignificantly reduced. Some preliminary and rough esimates indicate that the percentage of sales amongenterprises within Russia that are based on barter declined by over 50 percent in March 1992, from 80percent in January 1992 and an even higher percentage in late 1991. Barter has not been totallyelininated in trade within states because, for a variety of reasons, prices for many products did not yetappear to be market clearing in many of the states7.

Barter in interstate trade, however, remains at a much higher level. This is for a numberof reasons. First and foremost, due to constraints in the intergovenmental protocols, price controls aremuch more prevalent in interstate trade than in domestic trade. Second, with the dissolution of the Unionand Gosbank in particular, there has been a decline in the efficiency of the intrste banking system, atthe same time that the Gosbank guarantee for these transactions has been removed and that credit hasbeen tightened. The increased delays in an environment of high inflation implies greater risks and costsof using the banldng systm Third, inter-enterprise arrears is a large and growing problem throughoutthe FSU. Enterprises ship goods and discover that there are no funds in the bank account of the buyer.Often less infonnation and additional risks are involved in trading with enterprises farther away. Courtsto resolve commercial disputes are national and are biased toward the home country enterprise, so thatoften two national tribunals reach opposite conclusions.

Some Additional Compiatious in the Ner Future

In addition to these issues, two developments loom in the very near term which are likelyto cause fiurther difficulties in interstate trade: (a) the intrduction of inter itional prices in the valuationof tradeables; and (b) the introduction of separate inconvertible currencies by various states.

Intenationda Pricing. There is no doubt that the introduction of international prices inthe valuation of products that enter interstate trade is an essential step towards inmroving resourceallocation and the integration of these economies into world trade. The problem aises because the widedivergence between present domestic and international prices means that basing trade transactions on thelatter woJd result in significant terms of trade gains and losses among different states. Furthermore, tothe extent that intemational prices are passed on to the final user, this could require considerableeconomic restrcturing in activities which were dependent on underpriced inputs. The terms of tradeadjustment is ultimately unavoidable. The only question is the pace at which it occurs.

The case of oil pricing by Russia is an important example. Russia has declared itsintention to raise energy prices in three steps ending in 1993 and to introduce intemational prices in itsinterstate trade If it were to do so in its expors of oil to other stae of the CIS, it would result in theprice of crude oil moving fr-om 350 rubles per ton plus a 28 percent value-added tax to about US$130per ton. At the quasi-market exchange rate of about 110 rubles to the dollar this amounts to a 32 foldincrease. Such an increase could have severe adverse consequences for energy intensive enterprises in

7 If domestic production of apparel is taxed at 10 percet. dhen impor -pparel should be also taxed at 10 percent.To tax imports either above or below 10 perient would bias dhe consumption deasnm toward the lower taxed variety, inresigdistorons while generatg less revenue.

168 Trausidonal Trade and Paymuent Arrangements

other states. Their governments could attempt to cushion this impact in the short run via the provisionof temporary subsidies; but their capacity to do so would be obviously constrained by the need to containpublic sector spending and fiscal deficits. As a consequence the Russian Government has indicated thatit would be prepared to provide energy to the CIS states at the internal price during the transition period.

While the notion of cushioning the drastic shift in terms of trade for the former Sovietrepublics has some clear benefits, it is not dear that cushioning can actually be accomplished in practice.On purely economic grounds, the provision of subsidies on inter-republican oil and gas exports remainsa very poor way of maintaining trade with and making transfers to the other republics. This is true evenif the mechanics of equalizing domestic and inter-republican export prices can be solved. Basiceconomics demonstrates that subsidies in kdnd - via subsidized energy prices - have a much lower realvalue than money transfer or income subsidies.

New Curencies. For a variety of reasons - to allow conduct of an independent monetarypolicv, exert claims over seignorage and assert national identity - various states. in particular, Ukraineand the Baltics appear determined to introduce their own currencies. Others might do so in the future.The inoduction of new currencies poses no problems to intenational trade if these currencies areconvertible for trade transactions. If, however, they are not, a further impediment to trade may be

[...-- The - SLexcess cost of providing a given real tthsfer via a prcesusidy rthrhan an-incomesubsidy depends upon ffie importance of the ubsii ite ie ditureand the (unompprice elasticity -of de for the item. Though the price ela oil andgas d nd m;y be low. inl-die sort n, tihe longer run elasticity isimuch larger's r Di ieacrpublic.is muichhfherbhn- irwould be under an efficient pricing regiime. ! .hue valueof y ssidies-to :the.--.imnp;ordr;g republics is considerably lower Owen thei nomiale even i992 while h6e long- tem cost(of z n:g ief ficien pricir- regime should not b u.- edi

I- There is a futhe consideration which is highlighita u e irud the.. curnt mmsg.-ts --Russias poliey forme- al l i. s d z c .-TadTksatai can bE defended n idistributional as well aorotr - Thr

ipos ieeacargEr-onomy. Oil-prduing b'Kazakszan also find dtemselves in the anomalous. position of. pu a net exporable surplus inphyiics terrms bi losing -heavily on- the excangeofR cr oilur peleum-pout- eause ofdistortionsinrelitivepncs crated by thereglatory e. Thisprovides an inetive to eldminate such trade rather i of energy productionand sver the former. Soviet Union as. a whole.

V-ar this means is that charging dollar prices for inter bla o foildgasco tindw--ith aexici transf.er of foreig exchange to the ene-imporin rel ics.would ib a more efficient-

`-methoddof` assbistigthemn thani subsidized oil m--idgpres

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. . . . . '. :. . ---f 9. .

Box A.2: Interrepublic Oil Subsidies vs. Transfers.

created; in the absence of convertibility, trade transactions will not occur among enterpris - excepttrugh continued barter. Alternatively, trade may have to continue to be channelled, as in the past,through bilateral state-to-state agreements.

Annx 2 169

In sum, the dissolution of the USSR poses a variety of linked problems. Licensing andquantitative controls are linked in part to the conduct of trade through bilateral state-to-state agreement;the reduction of barter is linked to the establishment of a suitable payme mechanism and thestabilization of the ruble; and the establishment of new, possibly inconvertible currencies raises additionalpayments questions for the conduct of inter-enterprise trade.

Traitional Trade and Payments Angemets

hi the longer term, it is clear that trade would be facilitated by the estabLishment ofconvertible currencies - including perhaps a convertible ruble zone and possibly other currencies - andthe adoption of a trade regime with low and uniform tariffs, as free as possible of non-tariff barriers andquantitative restraints. In such an environment, eterprise-to-eterprise trade would flourish uninibitedby goveramental regulations. Of course, whether in such a setting tariff preferences should be extmendedto comodities produced in other states of the former Soviet Union and what form such preferencesshould take would have to be detennined. The optimal solutions are clear in theory. But the currentsituation is so far removed from this longer-term scenario that the key questions relate primarily to thetransition and to second best arrangements which nonetheless would represent an improvement andhopefully move policies in the direction of the loager term optimal enviromnent. First, overall tradepolicies are discussed and then questions of policies regardig interstate trade and payments areaddressed.

Policies Regarding Export Controls

Export restaints of all linds (most notably licenses, taxes and surender of convertiblecurrency at below market rates) to the convertible currency area hurt Kazakhstan becse they reduceforeign exchange earnings. Given prevailing market exchange rates of over 100 rubles to the US dollarin early 1992, workers were earning only about US$10 per month, demonsng the very high value ofconvertible currency. Without the convertible currency to import key inputs, some industries may beforced to close.

By restraining exports to the convertible currency area, Kazakhsan loses the convertiblecurrency eanings which, if available, would appreciate the real exchange rate and make inports lessexpensive for its residents. In effect, the restraints on exports impose a significant implicit tax onimports. Although Kazakhstan has not imposed significant tariffs on imports, the policy of exportrestaints has the effect of restricting imports and providing protection for import competing industies.Moreover, export restaints, by rtducing export earnings, raise the amount of financing countries needto obtain from abroad to maintain imports at levels required to sustain domestic production.

For certain commodities, notably oil, the country would need to continue to maintainexport restrictions to keep the domestic prices below world price levels for the time being. The principaltool for export restraint preferred by most of the governments is export licensing. However, for suchcommodities export taxes rather than export licenses are a preferable instrument of export restraint fora number of reasons.

The principle of rapidly convertig quantitave restaints on exports to eot taxet ad thengradually reducing export taxes to the convertible currency area has gained acceptac in Russia.Reservations however, have been expressed regauding applymg these principles in interstate trade in thenear term. There are several problems in this regard.

170 Transitional Trade and Paymet Arrgements

First, price liberalization has not been pursued in a coordinated fashion among the stateswhich continue to be in the ruble area. Without export restraints, it is feared that goods would flow toother states where prices are not controlled especially since there are no customs or other barriers amongthe states. Imposing a differential export tax structure in such a setting for a large number ofcommodities appears administratively far more cumbersome than simply continuing the previous exportcontrol mechanism. Yet a far superior approach would be to extend price liberalization to virtually allcommodities. Such an approach is inherently desirable in any case. By avoiding price controls exceptin very few commodities on which export taxes could be levied, a more efficient overall outcome isreached. An iferior arrangement, which is also cumbersome, is to try to negotiate a coordinatedapproach to the existing large number of commodities whose prices are controlled by various states.

For those few commodities that are supposed to adjust to world prices during a transitionperiod, it may be necessary to apply export restraints in interstate tade, for example, through quotas orlicenses. This is to prevent reexporting by other states of products underpriced domestically in relationto world markets as well as hoarding of these products because their price will increase according to anannounced tmetable. However, with export taxes to third counties and export controls in interstate tradef(wo instuments already in use for these commodities), goverments should then be in a position toremove two additional insuments of control which are redundant: quantitative restraints on exports totuird countries and price controls i domestic and inerstate markets.

Second, and perhaps the most findamental reason for quanttative controls in interstatetrade, is govemments' desire to avoid surpluses or at least maintain balance in interstate ruble payments.

mhis is being accomplished through licensing and quantitative export controls at the bilateral level andpossibly in the near future through the banldng system. The motives for seeking to maintain balance varydepending on the situation of various states. Russia, which expects to be running a significant surpluson interstate trade basically does not wish to provide extensive transfers to other states in the ruble zone.Other states are afraid that any accumulated ruble balances may become worthless when they adopt newcurrencies.

Any attempt to balance trade bilaterally puts tadig relations in a straitjacket and isinimical to the development of markets and the allocation of resources according to comparativeadvantage. Bilateral balancing in ruble trade is a short-term expedient during the current instability. Itis due to the unceraies regarding the fimctiomng of the ruble zone and its relations with the potentiallyemerging new currencies, and to the fact that the central banks of all fifteen states independently issuenon-cash rubles. The lack of a coordinated monetary policy in the ruble zone causes two seriousproblems; for Russia, which expects to be the principal creditor in the system, this implies thecontinuation of transfers to other states which Russia would wish to limit. More generally, each separatecentral bank can independendy issue non-cash ruble credits, creating a free-rider problem whereby theexpansionary policies result in obtaining goods from the other countries. These concerns may have beenbehind Russia's repudiation of the agreement on monetary coordination in the ruble area concluded May21, 1992 in Tashkent between the former Soviet republics.

Unless the uncertainties regarding monetary policy coordination for the ruble zone areaddressed, imposing limits on the amount of aggregate credit offered the other states through thecoespondence accounts of the central banks may be the least inefficient method of avoiding large rubletrade surpluses, with the resultng loss of income and control of its money supply. The alternative, whichis less desirable, is controls on exports at the micro-level.

Annex 2 171

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.- ., . . .. .. ... . ... .. .. ..-.

.. First, Max onexPotsirpt.e The Go, and the public know how much the exrttax-Enc:. is costing in foregne rig exchange per sold In some: cases. -restraining exports to the

* required levl mxove0 p Such high and uneven incentives in the trade.reiE are- well i to cause great: d iinxlve to a more neutial trade tax regime and should

'be avoided. T s o higf and uneven taxes wil. likly indue a reduction in the very high-export taxs: producers who arespecially dis vaged wil justifiablycomplain and the obvious. a . f -: -... :- f S, le .:- ;g......... . '.. : .. -. : :: - : _ :. . .... :.. -;;: ., =- un:fairnes of such a dispretastructuewll lie difl¢ca to jutif.- ;

* S S -" -.iS 0 = -s- 5. --- ; S .---~~~~~~~~~~~~~~~~~~~~~~~~~~~~ .. .. ..

Seco, e a . -on'ens t with cer'a.inty of the abilty to

delivser,..suibject to the tax.isafly contracts are offered with-a specfic trme deadline, an exortercan not]S liver theproduct witld t hespecified time period, either the bofr is notvalid or penalty clausesbegin.to take effect The uncertainty of whether -anexport licnse wll be -receid has an extremelydebilitating- effct 'n Sth Ai of.... eo s to ea i.

- S;- - - ~~~~~~- ..... ... ... . -::SS -..:-

Tr s t wse r thrugh lobbying forI the licenses and othert-.:- --if- fi-- g-.- --- -f '-- .S ;--:.-S--f -.~ .---..-.. - ---- -- y -

formsof"rntseekinustexendrsou tootainthelicense. If the license.carries with it conside.able -nue (re pentiw devote considerable resources to: -obtaining:the license, .especially ie is e exporters for-the license. Thiscompetition to obtain the licenmse resu n sble wtofsocietsresorces. Finally, an export.tax during the trnsiton generates. oer ntv hr ei o t fthe significant fiscal

problems o f most of.te staes.

Maintenac of quantitatve export controls for commodities is ecesar ony here the country-:- faas intermafd agrentto ohero. such as for eample ntheMFA ior specific makesin theWBC. I u m i t isha system ofauctioningof export li.cne. Suca system woul sur olyed are exported, b uthe rents gencrated by the licenises a te sr th- sae time redu.g-:die amount of wasieful rentng activityoner at theauction wold result in tie licenses being lotet iem ici o tic suppliers, thereby

..maximizing -the.a,o : o rents ri ti country.

Box A3: Export Tax vs. Export lcemses.

Monetary coordiation and restraint would directly address the free-nder problem whichcontributes significantly to the imbalances. Once a coordinated ruble zone starts functioning any countrythat remained a significant debtor within the zone could be addressed by penalty interest rates betweencentral banks, which should induce monetary restaint on the part of the deficit country that would correctthe imbalance. Monetary coordination would also facilitate stabilization and the move toward mibleconvertibility. If the ruble were convertible, bilateral imbalancs would not be a concem for surpluscountries. Thus, appropriate monetary coordination and restaint should allow trade among the membersof the ruble zone to be uncosataied by the need to maintai bilateral balance

As to mintaining balance with the countries that would potentially leave the mble zone,again this is a temporary problem until these coutries leave the zone, which could well occur during1992. The issue of mantaing balance with these countries afer they leave the zone is discussed belowin the section on clearing and payments agements among countries with inconvertible currencies. Theproposed framework would allow nterstate made to be conducted without quantitative restraints.

172 Transidonul Trade and Payments Arrangements

The Reduction of state htg and promotic of enterpriseto-eterprise trde

There are some institutional arrangements that may be employed to reduce the role ofstate tadn durg the transition and increase the role of enterprise-to-enterprise trade.

As long as export licensing and quantitative restaints are employed !7y governments, thefirst option, as a transition device, is to move products from the obligatory lists to the indicative lists inintergovernmental protocols. This would be the appropriate way to trade products such as oil, which areadjusting to world prices on a gradual basis, and possibly for a basket of goods in return by the oilimportng counties. There would be no state obligation for the trade under the indicative lists, andenterprises in the respective counties would negotiate their best terms on price, credit and other aspectsof the deal. The indicative lists would nonetheless play a useful role as a transition device because theycommit governments to provide export licenses for the products in the agreements up to the amountsspecified while providing a check against reexporting and hoarding. It would also remove the productfrom intergovernmental price controls. This helps to overcome two of the principal problems inhibitinginterstate trade: export licenses and price controls.

Over time, as domestic prices are permitted to rise to international levels, export taxesto third countries and interstate export lir-sing would no longer be rcessary. As this is done, they maybe removed from either the obligatory or indicative lists and shifte. ato the category of enterprise-to-enterprise trade without government regulation. This would also eliminate the need for "lists." Theproblem of aggregate balances within the ruble zone would, however, remain and would need to beaddressed through monetay policy coordination. Also, arrangements outside the ruble zone would beneeded to cope with payments among countries with inconvertible currencies (see below).

lImprControls

To the extent that import controls will be employed, tariffs are preferable to quantitativerestraints on imports for all the reasons elaborated above regarding the advantages of export taxes overexport licenses. Explicit tariffs, in fact, are Ei most cases virtually non-existent, but they will need tobe considered for either revenue or protecion purposes. -

Tariffs for revenue purposes. A fundamental principle if commodity taxation is thattaxes which do nat discriminate between imports and domestic sources of production are the mostefficient at generating revenue. Thus, subject to qualifications mentioned below, a tariff should not beused for revenue purposes alone. In some cases, it may be more advantageous for a tax on the importedvariety of a given good to be collected by the customs authority. However, if the domestic tax is a taxon cuasumption, it, would violate the neutrality principle to also collect a customs duty for revenuepurposes. When the country's domestic tax system is inefficient in general, but it is able to collect importtaxes efficiently, the relative efficiency of tax collection may dominate the neutrality principle and importtaxces could be used for revenue purposes.

Ta ffsforprotection. Although explicit taiffs are virtually nonexistent, defacto thereare powerful restraints on imports due to the extensive restraints on exports. As discussed above, exportrestaints impose a high uIplicit tariff on all imports from the convertible curency arta. In addition, theexchange rate for the ruble is so high that it provides poweftd protection for most sectors of theeconomy. Moreover, various retention schemes for convertible currency exporters remain in place, sothat central allocation for some of the foreign exchange exists in virtually all the states. This results in

Amnex 2 173

non-tariff barrier protection because experience shows that authonties tend to protect the domnestic importcompeting industries through their allocation decisions. The mirror image of thlis high protection fromconvertible currency imports is the excessive incentive to import from within the ruble zone rather thanfor convertible c,uirency. As long as enterprises are trading with each other within a ruble zone: in anenvironment of export restraints outside the zone, a further twisting of incentives toward internalpurchases by applying tariffs to convertible currency imports is not necessary. Moreover, since tariffsare an additional implicit tax on exports which reduce foreign exchange earnings, they would becounterproductive.

The incentive structure for trade will change markedly once the countries of the FSUcreate new currencies, and settlements between them are balanced on the basis of hard currency. Thesecircumstances make the use of nwderate, relatively uniform tariffs on imports from third countriesdesirable for protection of intstate trade on a prefrmia and interim basis; the case is elaboratedbelow. The preferential trade area need not overlap with the ruble zone; on the contrary, it is preciselyto facilitate trade among states with different currenies that the preferential trade area is recomeznded.

Based on experience of trade policy reform, the World Bank recommends that anytransitional tariff protection should be moderate, not to exceed tariffs in the 15-30 percent range. Bothtariffs and devaluation of the exchange rate protect the import competng industries, but the differencebetween the two is that an exchange rate that is not overvalued also encourages exports. Thus, lYc anud policy perspectiv the exchange rate is preferred to a aiff as a means of achving ternalbahace.

Despite the above considerations some would propose very high tariff protection on aninterim basis for socialist economies in transition for the purpose of protecting industries with negativevalue-added. If an industry has negative value-added at world prices, the economy would earn foreignexchange by selling the inputs on world markets and importing the output; it costs less to pay workersto do nothing than to emloy them in negative value-added industries, and the primary factors ofproduction used in the industry would be available for other uses. Thus, the argument only makes senseif the negative value-added industri;s will become efficient competitors on world markets in the fiture.Without govermment intervention this would not occur because of externaty considerations. Then, theargument is a special case of the inant industry argument, which would also apply to positive but lowvalue-added industries.

The industries of Russia, however, have received protection for decades, and as we haveargued above, the evidence indicat that there is a need for very significant realignment of the industrialstructure, with more trade with third comuies. It is hard to visualize these old negative value-addedindustries as ones which should be classified as infant, i.e., ones in which externalities to investment existthat camnot be captured by the firms.

On more general grounds, protection will generally not address the externality problemand is therefore the wrong instument when there is an infant industry. Although protection raises thedomestic price of the firm's product, the firm is still vulnerable to competitors copying any newtechuology at no cost. so that the firm may still be unable to recover the costs of investing in newtechnology. Moreover, if pmtection improves welfare, there are altemative policy interventions that aresuperior (Box 5.4). Finally, a review of experience with infant industry protection indicates thatprotection is usually not associated with increasing efficiency over time and frequendy has the oppositeeffect; thus, on pragmatic grounds protection should not be given to support infa industries.

174 Tansional Trade and Payments AangMements

f - i - ;; f -X -; -...~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. ....... .Tazfs duig th niio,hud be sez ati lo leesbe

.r uc en. .- E.... ~~~~~~~~~~. ... ........... ....

.. ,~~~~~~~1 -b. E. zat-i- T

Ps ', .b w .' ; , tan_~ ....... .......; . :.. - . ! ' 0 . 0

Se .:. con,:if protection :is intended to improve welfare, a:poucin suibsidyoa tariff conibinedwilh a suibsidoncsupion will Improve wlremote . :-.: ::-i:

. . : .: . ...................~ ~ ~ ~~~.. .. .... . .. 7 . .....

~~~~~~~~~~~~~~~~~~~~.. .. .. .= ... .. .

- .tarffs on: an;ndustrnby-indut basisorsply hare: s ti boaiaif will presere thenefficn tindstia str -W[teo"ietad

outward-oriented 'e'u conomies wile lost

.F'.a',y, tarisimposeiplcitx oepotjii si aie

.. ~more itreae.input. .eatn th. a. thog..trabc..e:aiss is often::t.-

* ' wi.di exportting inustrie s.d'

Box A.4: The Case for Moderate Trnstonal Tariffs.

Payments Aragmments

Wihi te nien zone. In order to redulce the role of barter it will be neesr to reduceand eliminate price controls in interstate trade, establish nionetay stability, reduce inflation, and imtprovethe system of payments among republics in the ruble zone. Major institutonal improvements are neededin strengthenin the systems of interbank settleme>nts bot within and among republics. In order tofacilitate inte-etrprise trade, settement centers should be pemtted to clear intestate payment orderswithout going through central banks, and banks in each state should establish correspondent bank accountsin other states. If monetary coordinatio9n is achieved, then the correspondent accounts of the centalbanks would not be used as a means of retaining trade.

Wit states with new: cwrncies. If newv currencies are convertible for current accoutiransactiinns, and assumn that vthe rtuble is convertible as well, then interstate paymenlts arrangemenltswould be no problem- Enterprises eng aging in foreign trade could obtain and convert to foreign fuhdsfrom national currency with*out going through an inter-cental bank clearing arrngeet. Clearly,moving rapidly towards curet account convertibility of the ruble and ay new curenis introduced isthe best guarantee against a payments-induced collapse of trade.:

If convertibility is not possible, however, it is not necsr to retain the cumbersomesystem of bilateral agrent and state trading. It is possible to devise a simple multilateral ;jw c'ingmehnism with limited short-em credit and short settlement periods which would still permit et --*'s

A:rx 2 175

: ~~dif-a --E--. no AU --:h-: . : .ln--earng umion, it -s the mihultilatrl balance-witiint union- dim is settled, not all the

bilaeralbalaces.Settemens unongthe.cnrlbnbwudb md inard.currencyate hrttm.intervls. The shorttiemeitervalsa neededsothathe vouefcredit ti s lmited. Sucha systes would also economize on the use of scarce bard cUrrencyr less would be neededto settle mXultiaterl balancesthroughthecleating mechanism than:if.'all thetrnsactions hbd to bedenomi bk Mer and. .inmportantly,since iSue mila b et s of i mion, the incentivetobalan ade- bi y isremed. As io a ,oer rn tt, even w'itin:a clrgunion, will reduce the demand fo om ther pars fi teP511 because it wl transform:incentive i t states whc Dw no o--.nge-l- find it cheapert to import from

another state in the Pear8V --.a-beel' addition to relatily -Sil ceari out above,j the ihave bna.

r ofproposalsrtheestablshmetofmoree- nio arrangedme. The main

..... < s ' iS. - ' , s , ttW be '~~~~~~........diffeence heserrangmentswould maei htwhl etenet ol emade piodically_-in-hard

currencies,: Igdeipiiofoxdwfhneuinudberid.thrae severa!polm

lon, itilsnecssaiy gto find a country willingto provide cout iet reditto memiber: of the-union<atog tmyb aigspfcn vrallio scrct o orin xnag i'stselI thprsn situation,-

usRsiaisikelytobethe persistentcreditorandisfearfofextendinglargeamounts ofsuckhcredit Ifa alleina hs tne- in er toavoid etn- ncredit: Itis. ig m that Iyssid witoeted redit -to'staes that are

.. i, wi<tY:y ia=== tS,2 ,:~~~........ .'.'

* : w a W leaving. tii theo =ubldzoriect ibis problemel * -b'e solved ypet But

the uestionzis.whether--- th xenlceiti pial loct.Aeteecountrie havin

oniitinueddefisc .of ineflfctive ovawl macroenomic policies? Is.it not more aopate 1that-what amounts essentiay to balance of payments assistaice be extended on condition that anippr-pna :'. ad,ja , program is in place and their overall balance of paymentsmis stustainble?

..... . .. -...-- --s-

Final.',ily, ,a payments "ion of the type discuistd abovc rwns the risk that deficitcuies..choose tomitize thirpaymeu union credit rather than rake steps to introduce convertibiltadiegrare

withthe international itrade system. lIoroder. for a country to induce its agents to internalizet sess,.;,Of payments .within the'union, it is necessary- for the: coun"y to intwfere in .the tradingsystem through

tariffs, 'n,on-tariff barriers or subsidies. For:some countries this may represent a retreat firothedsired Inorelibeai l tring environment. Tere, is, thus,a adageri a -. n.anon and the a nssociaied credit .vouldinduce countries toocis tade witin the payments rerthrn't.h

"divrsif .. d compete.internationally. On the odterhand. defri icounties may.iquildy cir~terui on'time the payns uion offers no assistane in easing the transition. Ths rcredit se whichtsundnofbsn-asita6e a

suggest'that we must search fbr tools other than a ts ion. to help with the tn

Box A.S: Clearing Unions v. Payments Union.

to enterprise trade. I For this purpose. it is necessary to establish a clearing union that would permitsimultaneous settlement of claims bween participating central banks that arise from enterpnse-to-enterprise trade among the various states.

176 Transitional Trade and Paymcnts Arrangemens

The Scope for Cooperation on Interstate Trade

Cooperation on interstate trade could ease economic adjustment and enhance prospectsfor future trade between the formers Soviet republics. A key question that remains to be addressed iswhether adequate measures are being taken to strengthen collaboration among the republics. Critical inthis regard is how states would react to the expected terms of trade adjustment accompanied y- themovement of trade, notably of energy, to international prices. It was noted above that Russia hasindicated a willingness to phase the adjustment of energy prices to other CIS states to parallel the paceof adjustment in its own industries. Such an approach would indeed be quite helpful in easing theadjustment in oil importing states such as Ukraine and the Bahics. Before agreement on this issue hadbeen reached, these states have apparently considered countervailing action that would have permittedthem to offset the terms of trade deterioration. Such action, usually focused on Russia, may entail raisingtransit fees for Russian trade through these states. It is unclear at this juncture whether the existingstructure of transit fees, port charges and the like is compatible with international charges for similarservices in international trade. However, it would be unfortunate if the move to international pricespreciitated monopoly pricing or controls in the provision of these services by the tramsit states. Suchan approach is likely to lead to confrontation and reduction in trade which would hurt all. Instead. it isclear that cooperative solutions such as the one entailed in Russia's phasing the oil price adjustmentshould form the basis for cooperative approaches in other areas, such as transit fees that have a bearingon interstate trade.

Trade Preferences. Some have also suggested that the region which encompasses theformer Soviet Union is a good candidate for a preferential trade area (PTA), such as a customs union offree trade area. Given the extensive network of export controls that were in place witiin the ruble zoneduring early 1992, 'however, there is no need in the immediate future for a preferential trade agreementbased on tariff preference. PTAs which are traditionally based on tariff preferences are intended toprovide an incentive to ne importer to purchase the product wit-hin the region of preference. Aselaborated above, however, the export controls to third countries impose a verv high implict tariff onal imports for convertible currency; the export controls combined with the relative softness of settlementwithin the ruble zone, have resulted in importers having a very strong, if not excessive, incentive, toimport from within the ruble zone. It is to counteract these incentives that the export controls have beenestablished, and these export controls themselves pose a problem to trade. Thus, additional incentivesto import within the ruble zone are not required and may be counterproductive at present. The moreserious problems for limiting trade in the ruble zone derive from the export controls, monetar-y andpaymes questions that have been discussed above.

A permanent PTA could only be justified if the scope for trade creation is consideralygreater than the scope for trade diversion. As mentioned above, however, the evidence strongly indicatesthat there is a need in the long run for a major reorientation of inter-industry trade, -with much more tradewith the rest of the world and less with the other states of the fonmer Soviet Union. That is, much ofthe interstate trade of the past was trade-diverting, especially in the machinery sector. A preferentialtrade area for the former Soviet Union tha offiers significant intra-union trade preferences into theindeLiite future will tend to retard adjustment from the inefficient pattern of trade that is the legacy ofthe former Soviet Union and will encourage other trade-iverting investment. Thus, based on traditionatrade creatien s. tade diversion considerations, it appears ill-advised to suggest a pennawnetpreferentid bode area for the fonrer Soviet Uion.a

During the transition period, however, since many industries are not competitive on worldmarkets, they would be expected to contract significantly under open world competition. Most states

Am=x2 177

If. ,TA wee to e citourage onatmporazy bass icolbebased on -a common exftenal,triff (a csom -s uniodn) oron diffteiariffstructureswith respect tothird coiies in:i r parting -;

stat'e with ne 'nternal tariffsi(a free trade area). Implionis a-prle,h ve-'P - orfither-ctoms imion or aife trade aea in- the FSU. A customs unionr e a-co exern tariff and

inerstat tariff commission,- and may be very difficult to negotiate at thisjunctute. Given coordinationiproblems amog the indepedent stat6s, the lack of required agreement on the extal tariff may appearto 'be:a large -advantage of. a free trade area . If tariffs to third countries in aifre: triad area differ

-sigificanly among the states, however, transshipment is likely to occur from low tariff wuntries to high:a:iff ountries, :allowing the low tariff countries to capture the tariff revenues.

~:S>it.::Tocounteract ;transshipment i a fre trade area, a system of rles of origin would :ee to be-h-- .ini&cL -But a- certificate of orgin= system imposes bureaucratic costs tbait are ibest oided,i ad given

e vastn tofth iontis ivolved tha previously had no cuioms fi it is-liky t if iffdiffeences among the- states are large, significant tnsshipmt (smuggling) wd o even wt a-systemyofcctficates- of origin.: Another- problem with a free trade are am contries with lar.:divergences in taris ithat ihe high tariff countries:bear: a: oo e di'versionf-costs, because the high tariffs induce omoe trade -diviimportsf- do the pes.: Thespsoblem sugges t thatomoderate :tariffslevels shouldbe chosen in e Iree trade-

Box A.6: Customs Union vs. PrA.

expected to adjust and reorient output. On the other hand, under preferential trade agreements therewould be scope for continued intra-uuion trade in these less than fully competitive products.

The problem is how to accommodate the long-nm reorientation while at the same timeeasing the twansition. A temporary preferential trade area appears to accommodate both concens. Ifpreferences are based on tariffs, intra-union trade would initially not be subject to external tariffs. Extra-union trade, however, could be subject to tariffs of about 15-20 percent initially, declining by a certainpercent per year to a long run lower level. When the long-rin lower level is reached, intra-union tradewould also be subject to the tariff, that is, the preferential trade area would be terminated. Thus,production of uncompetitive products would be phased out, but would generate intra-union exporteanings and trade during the transition period.

In settng up such an arrangement, high tariff rates should be avoided even on atemporary basis for the reasons elaborated above. The experience of the Central American CommonMarket shows that average external tariff rates of 25 percent or more can lead to significant problems.The higunent for temporary preferential protection is based on reducing adjustment costs within the FSU;it is hot based on Infant-industry protection. High tariff rates may protqct industries with negative value-added; but even the adjustment costs will be higher if negative value-added industries were protected.The best way to provide protection for only positive value-added industries is to utilize moderateprotection.

It must be emphasized that the ruble zone need not coincide with the preferential tradearea; on the contrary, it is the introduction of new currencies that motivates the need for a preferentaltrade area.

178 Transitional Trade and Payments Arrangemeats

Condclsion

In summary, the highest priority trade reforms are the following. First, restraints anddisincentives of all kinds against exports to third counties should be eliminated, except for export taxesfor those limited number of goods adjusting to world prices on a gradual basis. Second, state obligationsand orders in interstate trade, retaining indicative list trade for only those items subject to domestic pricecontrols should also be eliminted, retaining indicative list trade only for those items subject to domesticprice controls, while shifdng all otler trade to enteiprise-to-entexprise trade. Third, monetarycoordination and restraint should be exercised within the ruble zone, coupled with the formation of aclearing (not payments) union for facilitading trade among the emerging countries with new butinconvertible currencies. Finally, the fornation of a preferential trade area among as wide a group offormer Soviet states is desirable.

In terms of sequencing, the first reform above can and should be done as soon aspossible. Monetary coordinaton within a ruble zone should also be achieved rapidly. Interstate tradebased on lists may be accomplished with the negotiation of the new agreements, if any, for 1993. Theformation of a clearing union is a step that should await the adoption of new currencies by the formerSoviet republics. Any tariffs that are adopted for third countries should not be applied to independentstates even if they have adopted new currencies, provided reciprocal treatment is offered.

Statistical Appendix 179

Tab LI: KazltaD - T tiryawl dNnmmbr of Admiuaatvo-Terrai Units offJanry 1, 1991

Teritoty Towns Distuics(thusnds TownS Submitted in Town Typo Rural

of kIm2 Districts Total to Districts towns Settlements Settlements

KAZAKHSTAN 27173 217 84 48 24 214 2447Aktubinskaya 292.7 15 7 1 3 150AIma-Atinsiya 105.1 11 4 2 9 131Alma-Ata (city) 1/ 1 8 1East-Kaz.khstmnskya 97.3 12 6 4 2 20 101Atyrausays 1i3n5 a 1 1 16 56Dzambulslaya 144.2 10 4 4 2 13 138Dzezkazgmnlskya 313.4 7 4 4 21 63Karagandinskaya 117.9 9 6 5 5 16 103Kzyl-Ordinskaya 228.1 8 3 1 11 97Leninsk (city) 21 1 1Koketa vslrya 78.1 16 4 2 9 191Kustanaiskaya 114.5 14 4 4 13 204Maistauskay3 165.1 3 3 3 12 19Pavlodarskaya 127.5 12 4 3 2 13 158North-Kazakhstansky 44.3 12 4 1 1 149Semipalatinshayn 179.6 15 3 2 2 13 146Taldy-Kurgansaya 118.5 12 6 2 9 133Turgaiskaya 111.9 10 3 1 1 140Uralsikya 151.2 15 2 1 6 159Tselinogradskaya 92.1 12 6 2 16 148Chimkeatskaya 116.3 16 B 5 3 10 161

1/ Ternory of Alm-ta is vhun withi AIma-Ainsay obast (distri).2/ Tertiy ofLainkis pvan wih KzyI-Ordmayz obIet (dsfrict)Sour- Sistiscal Yeabwooko t , 199L

180 Statistical Appedix

Table 1.2- K.akhsm - Eu#oyment

1980 198S 1986 1987 1988 1989 1990 1991 1992

(n thousands)

Tolabmor rourcus £560.2 8954.1 8935.1 9016.2 9113A 9202.9 9262.1

Fml-ti eqmoyment 6502.1 6999.8 7067.1 7132.2 7178.7 7237.0 7257.7 ..

Emplaymet In the "a setr 6223.8 6719.1 6788.9 6840.1 6862.3 688.8 6775.3 6442.1 S936.8

Maeial spher 4616.6 4990.2 5014.2 5040.7 5043.2 4914.2 4851.9 4605.S 4489.7Industry 1388.5 1497.1 1509.3 1513.5 1525.1 1496.9 1468.3 1406.9 1331.9Agrcultumr 1170.3 1271.5 1262.4 1283.7 1271.4 1209.1 120S.2 1182.1 1298.1Formby 15.8 15.6 15.6 15.2 15.0 13.8 13.4 13.6 13.7Traport and communkation 763.0 82.7 829.5 803.6 768.9 703.2 701.7 683.8 622.9Camtrucdaa 652.0 688.2 702.2 727.3 759.5 801.4 780.2 665.3 S82.0Trade 548.7 575A 576.1 575.2 570.3 556.5 555.1 526.6 514.3computing amice 17.0 20.0 21.9 20.7 25.5 22.8 20.3 19.4 IDAOthr type of activityof muaterialspheo 61.3 94.7 972 101.5 107.5 110.5 107.2 120.9 1162

N@nmsete1 sphere 1607.2 1728.9 1774.7 1799.4 1819.1 1874.6 1923.4 1833.6 1447.2

Employment oud of the aze sect 278.3 280.7 278.2 292.1 316.4 448.2 512.4

cm perccnt)

Employma in the sf sector 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Mat sphere 74.2 74.3 73.9 73.7 73.5 72.4 71.6 71.5 75.6Ldusty 22.3 22.3 22.2 22.1 22.2 22.0 2IL 21.8 22A

AgPiclt 18.8 18.9 18.6 13.8 18.5 17.8 17.8 18.3 21.9Foreqty 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2Trnspt and commuicata 12.3 12.3 12.2 11.7 11.2 10.4 10.4 10.6 10.5Coastruction 10.5 10.2 10.3 10.6 11.1 11.3 11.5 10.3 9.8Trade 8.8 8.6 8.5 8.4 8.3 8.2 82 8.0 8.7CompDing swvice 0.3 0.3 0.3 0.3 0.4 0.3 0.3 0.3 0.2Oter typcs of activityof maral sper 1.0 1.4 IA 15 1.6 1.6 1.6 1.9 2.0

Nomat sphere 2S.8 25.7 26.1 26.3 26.5 27.6 2t4 28.5 24.4

1/ Fhtgaua*r.

Sor IMFaudWordakMiio.

StLtistical App=nI ' Bl

Table 1.3: KazkhStn - DisbWibu of PopuaFdon by Spwe of Ecomic Actiiiyand by Soda (iuth Stdcts)

1980 1985 1986 1987 1958 1989 1990

Total in national economy 100.0 100.0 100.0 100.0 100.0 100.0 100.0Material sphere 72.9 72.6 72.2 72.2 72.3 72.3 71.9Non-material sphere 27.1 27.4 27.8 27.8 27.7 27.7 28.1

Total in national economy 100.0 100.0 100.0 100.0 100.0 100.0 100.0State sector 93.7 94.2 94.2 93.8 92.7 91.6 88.4Copertives 4.2 3.9 3.8 3.9 4.1 5.8 6.5Sphereofindividual hbor 2.1 1.9 2.0 2.3 3.2 2.6 5.1

Souce:DlMfFd World BntkMission.

182 Statistical Appedix

Table 1.4? Kaakhsan - Dolkpomaat of Sills of Employees(number of persons)

1980 1985 19J6 1987 19s8 1989 1990

Total raining for - profenloo 522,344 496,294 472.500 444.329 419,609 366,082 323,618

Number of the woking 510.605 479,296 460,415 434.520 414.048 364.003 321.595

Told who luamod qual m .. .. 2,187.619 2,245,162 1,782,454 1,701,234 1.405,964

Nuzbcrof daoe workng 1,173,137 1,512.393 1.569,813 1.610.444 1.328,839 1,236260 1,013,973

Sore: IBF Mission.

Stttc Appendix 183

Table iS: £-akhakn - Lsduad Gm" Amb iLeM ASwMwr

1910 1915 1917 1918 1989 1990

labor-ago ppulatiom- vocaliond D)

includi college ados 110.6 791.5 M.6 773.2 772.4 770.1 M.4

Annawl Productivity Grow& pwrps

inbduty 101.4 102.3 104.4 104.0 103.8 10.3 101.4Conanchica 101.6 10.4 103.1 105.8 105.2 103.5 99.8Agicultur 98.0 113.4 116.4 9S.7 115.8 93.5 117.8

Produc1ivt per pose

-n_y 24646 24988Conm-cllS7C115 11548

Sw Sams Eecs* a

184 Siatistical Appendix

Table 2.1: Kazu&htn - agw Out, put nd Net Malaria Puct by!S?lw I/(in miliawg of curnut ruls)

1989 1990 1991

IndustyGros Ouput 32,339 36,269 80,500Material Input 26,680 26,621 S6,954Not Product 5,659 9,648 23,546

AgricultureGross Outpu 13,105 22,248 37,013Materil Inpt 7,669 8,311 16,767Net Product 10,435 13,937 20,246

CostructionGross Output 11,078 10,140 12,003Material input 5,459 4,803 6,602Net Product 5,618 5,337 5,401

Transport and CommunicationGross Output 5,034 5,858 7,739Mateijal Input 2,400 2,602 5,520Net Product 2,634 3,257 2,219

Other SocorsGross Output 4,930 3,764 7,130Material Inpot 869 982 1,379Net Product 4,111 2,732 5,251

Total EconomyGrass Output 2V 71,536 78,279 144,386Material Iut 43,077 43,318 37,723Net Product 23,458 34,961 56,663

1/ Matial inpu inclde capita dprecitio2 Without a and hlnces ofme fkm fxiV trade rmcions.Sourw Skta Ecouomic & C0ommi, Srasl Yeabook for Kakhm, 1991.

Stistical Appendix 195

Table Z2- KmUahsf - Not Maeal Pmdat at Cuwt Pice

1990 1991

(in millions of ruble)

Totl Net terial Product 34961.0 56662.9

By source:industry 9647.9 23546.0Aricultu 13937.0 20246.0Fortry 24.6 55AC <ntuctin 5337.5 5401.0Tnspot 3138.6 2106.7Communication 118.1 112.1TnSd 1601.S 3085.0Ot3hr 1155.8 2110.7

(in percent of Net Material Product)

Totbl Net Materid Product 100.0 100.0

By somce:27.6 41.6

Agriculture 39.9 35.7Forety 0.1 0.1Constructio 15.3 9.5Tra t 9.0 3.7Commtwication 0.3 0.2Trad 4.6 5.4Other 3.3 3.7

Soure: Slab Ecoomic Commite

186 Staidical Appendh

Tabl : Kmkhskh - Mi imw(amlin of rbs)

1990 1991

Gross Social Product I/ 76676.3 145613.7Material Input 43318.4 37722.3Natioal nme Produced (GSP-MI) 333S7.9 57390.9Total Net Maeil Product 34961.0 56662.9Gros Social Poduct 21 71279.4 14435.7

Net MateIa Produt by sorce:Industry 9647.9 23546.0Agriculture 13937.0 202460Forstry 24.6 55.4Costructio 5337.5 5401.0Tansport 3138.6 2106.7Com^muicatio IILI 112.1Trade 1601.S 3085.0Othor mateial product. 1155.8 2110.7

Net income frm forcing actvties 1041.2 687.0Turover tax 4653 3881.0Value addled laxExcise taxsaw t9 .. 1477.0Subsidies -732.6 -4824.0

Imports mnm eoto 7590.2 7361Loss 0.5 1300.0National expditue 40145.2 63959.0

Cnsumption 2852.2 43225.0Saving 11693.0 15734.0

Deprciation 7254.4 1130D.0Non-material service and expea 2050.S 3310.0GNP of productive po ms3 3 64s80.GNPof ive sre 605.1 12784.0Gross Nainal Product 4063.4 77364.9By and use: 40145.2 63959.0

Ccmsumpfia 3452.2 48225.0Personal 2441.6 40789.0Social 4010.6 7436.0

Not capital fomation 11693.0 1S734.0Fixed capital 5.0 7465.0Changes i. stoc 6099.0 8269.0

Stadsdica Appondix 187

Table 2Z.: Kszakhslw - M BaJm, ctawd(im perot of Not Matra Product)

1990 1991

Total Not Material Product 100.0 100.0

By source:Indusay 27.6 41.6AgicultUre 39.9 35.7Foresty 0.1 0.1Construction 15.3 9.STranort 9.0 3.7Communicaiom 0.3 0.2Trade 4.6 5.4Other material production 3.3 3.7

By end use: 114.8 112.9Coumption 81.4 35.1

Personal 69.9 72.0Social 11.5 13.1

Net capital formation 33.4 27.8Fixed capital 16.0 13.2Changes in stcks 17.4 14.6

Trade baance 21.7 13.0

Memorandum IRem: GNP/NMP 1.33 1.37

1/ WThh txe ad nt income fum fmga trde fracthw.21 Wtt aesad not mcome fm tiipv ud. fasc6daSow St Eomic Commitos ad orWdBank MissinaL

188 Statistical Appendix

Table 2.3b; K:aut - Macrocwaomic Balnces(mi raia of 1990 mblos)

1990 1991 ImplicitDeflatorfor 1991

Gross Social Product 76676.3 71811.3 102.77 145613.7

National Income Produced 11 34961.0 30919.3 87.23 57890.9

lndus"q 9647.9 9465.0 148.77 23546.0Agriculhtr 13937.0 11958.0 69.31 20246.0Construction 5337.5 4030.0 34.02 5401.0Transport 3138.6 2919.0 -27.83 2106.7Trade 1601.5 1405.0 119.57 3085.0Other material production 1298.5 1142.3 99.45 2278.2

Net income from foreing activities 1041.2 625.0 9.92 687.0Tumover tax 4658.3 4805.0Value added taxExcise ta.xSales taxSubsidies -7302.6 -6684.0 -27.83 -4.0

Loss 803.5 751.0 73.10 1300.0

National expenditure 40145.2 34477.0 85.51 63959.0Consumption 28452.2 26063.0 85.03 48225.0Savings 11693.0 8414.0 87.00 15M4.0

Depreciation 7254.4 7290.0 55.01 11300.0

Non-mterial services and expenses 2050.5 2069.0 59.98 3310.0

GNP of productive sphere 37758.3 34135.0 89.19 64580.9

GNP of non-productive sphere 8605.1 8718.0 46.64 12784.0

Gross National Product 46363.4 42853.0 80.54 77364.9

1/ Puducton sphe.SourWc: Slate Ecoomic Commtee.

Statisfical Appendix 189

Tabl 2.4: Kaz tm- Grossa nacA Xwt at Cmuutpics

1990 1991

(in milions of rubles)Not Material Product by Industrial Origin:Agriculture

Net Value-Added 13937.0 20246.0Industry

Not Value-Added 9647.9 23546.0Construction

Net Value-Added 5337.5 5401.0Transport and Communications

Net Value-Added 3256.7 2218.8Other Material Production

Not Value-Added 2781.9 5251.1

Total Net Material Product Factor Cost 34961.0 56662.9

Net Indirect Taxes 1/ -2644.3 541.0Indiret Taxes 4858.0 5365.0

Turnover tax 4658.3 3888.0Value addled taxExcise taxSales tax 1477.0

Subsidies -7302.6 -4824.0

Total Net Material Product Market PAice 32316.7 57203.9Non-Material Services (-) 2/ 2050.5 3310.0Losses (-) 803.5 1300.0Total Depreciation (-) 7254.4 11300.0GDP of Productive Sphere 36717.1 63893.9Output of Non-Productive Sphere 8605.1 12784.0

Total CGss Doustic Product 45322.2 76677.9

Net Factor Income 1041.2 687.0

Gross National Product 46363.4 77364.9

National Incone Used 31 40145.2 63959.0Consumption 28452.2 48225.0

Personal Consumption 24441.6 40789.0Public Consumption 4010.6 7436.0

Gross Domestic Investment 11693.0 15734.0Gross Fixed Ilvestment 5594.0 7465.0Increase in Stocks 6099.0 8269.0

(continued)

190 Statistical Appendix

Table 24j: Karahtaa - CwDomesic Pductat Curetpnces

1990 1991

(in millions of rubles)How 3/ is derived:

National Income Produced 33357.9 57890.9Total Not Material Product Market Price 32316.7 57203.9Net Factor Income 1041.2 687.0

Export-Import Balance (Net Exports) -7590.8 -7368.1

Losses (-) 103.5 1300.0

National Income Used 40145.2 63959.0

I/ Indirect Taxes minus Subsidies.2/ Paymens of entrprises and organiztiofs for non-matrial services

given to their workers and employees such as: payment for eepnditwson buess trips, for cultural/socia services, e&G

3/ National acome Used is equad "Natiowl Income Produced"plus/minus Export-Import Baknce minus Losses.

Sourc State Economic Committee.

Statistical Appendix 191

Tabl 246: ICarkhstun- rns Domec PwgbrtatCostatPdce(in millions of 1990 ubles)

1990 1991

Net Material Product by Industrial Origin:AgricultureNet Value-Added 13937.0 11598.0

IndustryNet Value-Added 9647.0 9465.0

ConstructionNet Value-Added 5337.5 4030-0Trport and CommunicationsNet Value-Added 3256.7 3040.5

other Material prodtction

Net Value-Added 2782.8 2425.7

Total Net Material Product Factor Cost 34961.0 30919.2

Net indirect Taxes 1/ -2644.3 -1879.0Indirect Taxes 4658.3 4805.0

Tumnover tax 4658.3 4805.0Value added taxExcise taxSales tax

Subsidies -7302.6 -6684.0

Total Net Material Product Market Pric 32316.7 29040.2

Non-Material Services (-) 2/ 2050.0 2069.0Losses (-) 803.5 751.0Depreciation ) 7254.0 7290.0

GDP of Productive Sphere 36717.2 33510.2Output of Non-Productive Sphere 8605.1 8718.0

T.tal Gross Domestic Product 453 42228.2

Net Factor Income 1041.0 625.0

Cross National Product 46363.3 42853.2(continued)

192 Statistical Appendix

Tae 2.4b: Kardkhs_a - Gaos Domesic Pmdactat COaDSt PrCes(a milion of 1)990 xubIa)

1990 1991

National Incomn Used: 3/ 40145.2 34631.2Consumption 28452.2 26D63.0

Personal Consumption 24441.6 21973.0Public Consumption 4010.6 4090.0

Gross Domestic Investment 11693.0 8414.0Gros Fixed rinvestment 5594.0 4755.0lncrcase in Stocks 6099.0 3659.0

How 3/ is derived:National Income Produced 33357.7 29665.2

Net Mateial Product Market Price 32316.7 29040.2Net Factor Income 1041.0 625.0

Export-Import Balnce (Net Exports) -7591.0 -5717

Losses (-) 803.5 751.0

National Income Used 40145.2 34631.2

I/ Indrect Taxcs minus Subsdies.2/ Payments of entiprises ad organirtons for no-materil services

given to their woArrs and employees such as: payment Aor erpeuditrson busies trips, for culdalsocial services, etc.

3/ Nationl line Usedis eqal National Acome Prduced'pwl/miius Expozt-lmport Balmc minus Losse.

Source Statoe conomic Comnmi.

Statisfical Appendix 193

Tabl 2.5: -a ea2t.£ w 1990-91

1990 1991 11

(in millions of 1992 rubles)

All financing Gov't Investment AU finacing Gov't. Investment:Sources Total Equipment Sources Total Equipment

Total 19,164 16,036 5,177 18,060 16,881 4,864

Productive Investment 13,203 11,402 4,953 12,520 11,391 4,513imcluding

ndustry 5,863 5,080 1,991 5,160Machine-building 499 237 167 257 .

Agriculture 4,375 4,059 1,903 4,650Trnsort and Communicatio 1,810 1,240 658 1,730 .. .

Construction 822 760 311 650 .Tradetand Public Services 238 122 39 225

Non-productive Investment 5,961 4,634 224 5,540 5,490 351including

Housing 3,912 3,153 40 3,670 .

(in percent of total invesment)

Totl 100.0 83.7 27.0 100.0 93.5 26.9

Productive Investment 68.9 59.5 25.8 69.3 63.1 25.0including

hdustry 30.6 26.S 10.4 28.6 ..

Machinc-building 2.6 1.2 0.9 1.4Agriculture 22.8 21.2 9.9 25.7Transport and Communicatio 9.4 6.5 3.4 9.6 ..

Construction 4.3 4.0 1.6 3.6 ..

Trade and Public Services 1.2 0.6 0.2 1.2 .

Non-productive Investment 31.1 24.2 1.2 30.7 30.4 1.9including

Housing 20.4 16.5 0.2 20.3 ..

Souce: Stte Satstici Commitee

194 Satisdical Appendix

TaMle 2.6t Kazkhabu - CaitalCstncda(i millions of cu tzubles)

1990 1991

Total investment from all sources 11666 14000

of which installation andbuilding works (IBW) 5732 8050

Productive sphere 8260 8600of which IBW 2892 4110

Non-productive sphere 3406 5400of which IBW 2839 3940

Investment put into operationi 9849 12336of which state investment 9225 11545

State investment 10946 12800of which IBW 5325 6200

Productive sphere 8062 7990of which JBW 3200 3110

Non-productive sphere 2884 4810of which IBW 2125 3090

Agricultual Complex 4323 5844related JEW 2440 3290

of which:Productive sphere 2823 3814

related JEW 1159 1710

Non-productive sphere 1501 2031related IBW 1281 1580

Source: ricpl ldicators, Stat Ecoomic Commitee.

Statistical Appendix 195

Tabla 17: KaiDkstm - SccoDI Iwsumt(i millo Of cw Smtmhie)

Total Installation and Buildiag

Sector 1990 1991 1990 1991

Fuds and Power 2569 2625 1132 1390Ectricity 361 776 166 486Petaum ExtrcDt Industy 1099 1042 376 560Petroleum processing 34 41 21 26Gas Industry 352 204 252 6BCoa Industry 723 562 366 250

Resource-based Industries 965 1153 400 569Mtiluru Industr 526 733 231 352Gold and Diamnd Extrction Industy 49 79 24 28Chemical and Petro-clineical ndut 266 211 113 116Elcto-temical Industy 32 35 9 16runber and Wood Processing Industy 19 11 6 6Ccdulosc and Papcr Industry 0 4 0 2T rwtaCuttig Industry 0 0 0 0Building Mateas Industy 72 81 17 St

Machine-building Industries 79 76 24 20Heavy and Tnsport Machine Buildig 9 2 0Tractor and Ag. Machine Building 70 75 22 20

Scrvice ldusties 1057 776 260 223Constrction and Architwece 271 126 84 64Geology and Prospcting 364 299 1 1Matera and Technical Suply (GOSSNAB) 6 21 4 16Ligh Indust 140 IS0 32 53L. a Industry 24 20 7 8Consumer sevices 35 34 14 20Trade and Publc Catcring 214 95 117 60Hydro Dam, zone _watcrcoved 2 1 1 1

Agro-based lIdusties 2841 3553 1238 1560- 2544 3117 1035 1350Food Industry 55 106 37 42Meat and Dairy Industry 104 182 73 100Fish Industry I 15 10 5Flour and Ccreal Industry 100 105 74 56Forestry Industry 10 7 4 2Micrdiological Industry 9 5 5 2Medical Indusry 0 0 0 0Printing and Publshing Indusby 10 16 1 3

Tranwsport and Communication 793 750 279 326Auto Transport 212 201 30 9Road Constvcto 206 192 104 162RailwyTransport 167 153 73 S2River Trwport 6 4 4 0Air Transport 18 20 6 10Pctro and products Tasport 29 30 12 20Communication 157 150 49 44

Constrution 2774 3798 2393 3051Housing Constmtio 2424 3184 2125 2561Communail Construction 350 614 269 490

Health, Education d Wdfare 583 1143 425 834National Educafion 367 660 276 500Culure 51 105 35 75Natina Hcalth 153 360 111 255Sciatffic IsL and AmL Sclace 11 17 4 4

-Other Industies 45 86 21 55

TOTAL 11705 139:59 6224 8029

Sour= Pdtciplldicasto, St Ecmomic Commitffo, November 1991.

196 Ststistical Appendix

Tale ZR: Kaznksbn - wzuctestc of SiA MeatmentPmgram

Share of Totdal GrowthInvestment in rates

1990 1991

Fuels and Power 21.9 2.2Resource-based Industries 8.3 19.5Machine-building Industries 0.7 -4.8Service Industries 9.0 -26.6Agro-based Idusties 24.3 25.1Transport and Communication 6.8 -5.5Canstrction 23.7 36.9HealbEdication/Welfare 5.0 96.1Other Industries 0.4 93.7

Total 100.0 19.3

Memorandum ItomIwestment Deflator 41.0

So=- Coway (1992)anZ d InvcytmetPrgm.

Statiulica Appedix 197

Table 3.1: Kmkbstan - Baslnce ofPAymAtcm raNe of ruble)

Nwn-Cm nw i _commonweal Cothlid1991 1991 1991

Current Accomt -61W -7368

Trade BalneR 11 -205D -6100 -8150Exports 1750 22100 23W0Import 3800 28200 32000

Servicos, net 0 782Transport 0Tavel 0

Not Transfrs 0 0 0

Capital Accoun 7368

n-m DebtShboflm DebtDebt ReliefNBK ForeigL Exchago

Holdigs

MemorndumItenr

GNP (m millions of cumat rbles) 77365

ExportsIGNP Ratio (curent) 30.8%

ImportsIGNP Ratio (cure) 41.4%

I/ Consolidatad Tade Balace enlistes d&mn frm Baoic B .Suwmre Stat Ecmic Comudtte, Shita Stitca Commite and Miui&y ofFonig Economac Refrds.

198 Statistical Appendix

Table 3.2. Kaza&stau - Imports of Vaious GooCds ad Senricesfrom Outside tc Commnwealth(m millos of no-convertible zubles)

1990 1991

Nitroammonium phosphate 0.00 14.27Automobiles 0.00 6.27Food Processing Equipment 0.06 6.26Automobile Spare Parts 0.00 5.96Medical Equipment 0.00 3.43Linoleum 2.47 3.03Polypropylene sacks 1.79 2.33Construction Equipment 0.00 1.42Batteries 0.00 1.18Light Industial Equipment 0.00 0.84Printing Equipme-nt 0.16 0.22Commiunications Equipment 0.00 0.21Steel Bars 0.00 0.21Chemical Catalysts 0.28 0.18Hops 1.06 0.18Autobuses 0.00 0.10Machine Tools 0.00 0.03Sausage Covers 3.02 0.00Repair and restoratioLn work 0.82 0.00Other goods 26.16 41.36

Total 35.82 87.47

Source: State Statistial Committee.

Statistcal Appendix 199

Table 3.3: - Expuiw of Vale Gao aod Srvicto Na N<2 w th Dcti&zaudw (am milivms of _hamrcmtbbe zubles)

1990 1991

Mineral Fertilizer 25.06 37.01Coal 2.52 27.84Cotton fiber 0.07 6.93Gasoil 2.06 6.48Fiished ferrous metals 0.00 4.05Sheet steel 4.17 3.26Raw leather 3.67 3.10Mazout 0.00 2.74Furnace oil 3.2!4 2.5Yeliow Phosphorus 1.718 2.00White conmdum 0.02 1.45Oter goods 0.71 1.41Diesel Fuel 0.00 1.20Vitrol copper 0.31 0.63Batties 0.00 0.56Rus 0.05 0.29Steel for roofing 0.12 0.29Wooden frames 0.00 0.28Honey 0.09 0.23Whole timber 0.00 0.17Animal grease 0.48 0.17'Machinery for light industry 0.00 0.11Egg powder 0.23 0.10Flour 0.00 0.10Granite blocks 0.00 0.06Technical grease 0.00 0.02Agricultural machinery 0.00 0.02Natual iron-acid pigment 0.00 0.02Licorice 0.00 0.02Sheeps' ds 1.05 0.00Other petrol products 0.57 0.00Cast iron 0.22 0.00Corrugated paper 0.10 0.00Alpine training arena 0.10 0.00Shepskin (after cutting 0.10 0.00Lubricating oil 0.03 0.00Asbestos products 0.07 0.00Bee wax 0.06 0.00Cheese 0.02 0.00Hooves 0.01 0.00-Six-legged yurts 0.01 0.00Total 46.96 103.10

sow=c Ste Stical Camitee.

200 Statistical Appendix

Table 3.A KaDhstn - Ncz-Commonweatb Tmde, 1991

Export Import Export Import

(in millions of non-convertible rubles) (in percent of total)

China 54.02 50.98 52.4% 58.3%Hungary 25.17 0.17 24.4% 0.2%Finland 6.48 0.21 6.3% 0.2%YugDslavia 4.03 1.52 3.9% 1.7%Cyprus 2.74 .. 2.7%Greece 2.30 .. 2.2%France 1.87 2.03 1.8% 2.3%Japan 1.45 0.32 1.4% 0.4%Turkey 1.44 . 1.4%SSweden 1.20 .. 1.2%Bulg 0.56 0.09 0.5% 0.1%Afganistan 0.50 0.48 0.5% 0.5%Czechoslovakia 0.46 0.40 0.4% 0.5%Belgium 0.25 0.83 0.2% 0.9%Mongolia 0.21 0.07 0.2% 0.1%South Korea 0.20 3.80 0.2% 4.3%Germany 0.17 3.25 0.2% 3.7%Liechtenstein 0.07 .. 0.1%Poland .. 6.05 .. 6.9%Great Brtaitn .. 5.12 .. 5.9%Austria .. 4.47 . 5.1%Netherlands . 3.82 .. 4.4%North Korea .. 1.67 .. 1.9%Switzerland . 1.44 .. 1.6%Singapore .. 0.41 .. 0.5%USA .. 0.21 .. 0.2%Spain .. 0.11 .. 0.1%

Canada .. 0.04 0.0%

Totdal 103.10 87.47 100.0% 100.0%

Source: State St*bstcal Commite.

Statistical Appendix 201

Table 3S: Kazdakstau - Snrvhrre of lmportedandE Exportedpducts 19S9(C ain iw of zu;bes)

imports Exports Structure (in percent)

AU USSR Other AUl USSR Other Balance Imports Exports

TOTAL 17569.0 14570.7 2998.3 9094.0 8201.2 892.8 -8475.0 100.0 100.0Indusrial 16948.9 14214.7 2734.2 7730.6 6861.6 869.0 -9218.3 96.5 85.0

Elctrical Energy 370.8 370.8 .. 223.5 223.5 .. -147.3 2.1 2.5Petr-Gas industies 1446.8 1443.2 3.6 875.0 860.1 14.9 -571.8 8.2 9.6Coal 154.6 154.6 .. 311.5 311.5 .. 156.9 0.9 3.4Ferros Metallurgy 1039.7 976.6 63.1 1077.0 288.7 188.3 37.3 5.9 11.8Non-Ferrous Mealurgy 272.2 251.8 20.4 790.5 492.0 298.5 518.3 1.5 8.7Chemical and Per-

Chemiad l cl. Medicin 1703.0 1577.0 126.0 1121.1 967.8 153.3 -581.9 9.7 12.3Machine and Metalwork 5358.7 4753.6 605.1 836.5 790.0 46.5 -4522.2 30.5 9.2

Timber & Timber Prod. 983.0 904.7 83.3 25.9 25.6 0.3 -962.1 5.6 0.3Construction Mater. incl.

Glas & Porcelain 313.2 285.2 28.0 145.4 143.5 1.9 -167.8 1.2 1.6ight Indstry 3113.2 1849.2 1264.0 1625.0 1495.1 129.9 -1488.2 17.7 17.9

Food hIdustryIncluding Gains 1871.3 1346.5 524.8 617.5 582.2 35.3 -1253.8 10.7 6.8

Otter 317.4 3015 15,9 81.7 81.6 0.1 -235.0 1.8 0.9Agricutue 457.5 193.6 263.9 1146.0 1122.8 23.2 688.5 2.6 12.6Other 162.6 162.4 0.2 217.4 216.2 0.6 54.8 0.9 2.4

Source: State Economicommite.

t~~~~~ gg 3ib

< R n 3 t i iuw 1mm l

4w 1j{1Xa1 a1ttl'l{s}| llitlzil'lti1

Statistical Appendix 203

Table 3.6: Kazakhstua - nteriodal Trade in 1991i tlouSed, of rubles at comercial rate)

Export Import

Textiles and tcxtile good. 55.205 557.387Salk 931 6,S04Wool and horse-heir yam 5 232Cello 44.954 123.933Chemical thread. 3.346Cbeil fibers 5.73 1,021Cdco, fell. sti MA ruP. 763Capet, sd lnoorcoverizga 1.299 10.913Special fabrics 1,329Stunted ilcs 5P.246Knitted fabrics 137Cloths sad knitted clothes 53 93.4g7Clothe and textile clohes 1.671 219.544Other ttles and used textilts 252 36.636

Headwear, footwrd incidenlas 679 109.082Footwear nd pas W6 107.327Headdrs And part 53 1.254

toe glas and cerasic good. 7.608 15,510Stone good. 5,893 1,1W0Cemnics good. 1.69g 9g4

lans goods 11 13,346

Pear and precious wises 42 394

Metals and produ 509,36B 22.737erous metals 255.335 6,741

Perraza-setal prouts 85.171 9.966Coper ad copper product 111.671 26Aluminum ad pmduct. 1.3 137Lead ad prducts 54,053 sSZinc d producs 541Bnr and products 79Otber norferros metabl 1.456Tools. knive., spoons, etc. 284 3.076OUthr ood. 190 1.464

Machinery 19,429 938.363Producer goods (nuclea reactors) 15.86 685.031Consmer elecuonice 3,543 253,337

Trmrport machinery 20.03B 133,1BSLocomotives and track equip. 3.763Other land bansport mean 20.033 133.294Air travcl eas and part 1.131tips, boats d pau t

Optica a=d precision cquipmt 683 225,695Optical d controI devices 652 224,S12Watcher, clock. nd part. 124Musical instrument, and pat 31 1.059

Other indusrl eomdities 689 116.956Funiture, linen, light fxu 22 108,961Toys. games an spt goods 563 676Othe prpaed good 100 7,319

Wort of at and coiectbe 60

Soww State Sotatstcal Commite.

204 Sflsd -

Tabl 3.7: JDarw- -bro J/fmod lhido inlg9l

Cont Expmb Import Balance Exot Import. Balance

( millio of rubles) (C mllions of US dollas)

Rusia 16,938 14,597 2,341 13,434 11,144 2,339Uloi e 2,057 1,786 271 1,381 1,556 (175)Bllns 1,526 1,128 398 1,006 884 122Uzbokiulsa 4,489 1,97S 2,514 2,609 1,402 1,207K 2yrgymm 853 620 233 403 298 110Tujilists 1,352 302 550 605 392 213Turkmnsistan 716 791 (15) 3" 330 (36)

Tota 27,931 21,699 6,232 19,837 16,056 3,780

Suwc SA Econoc C nemmf

Statistical Appendix 205

TablO 4.1: RAZkhisiau - Budet FnuSt Quartr 1992(m mifiaoss of curet zrbles)

First Share SharePlan Quarter 1992 of Total of Pian

(April 1, 1992) (Percent) (Percent)

Total Revenues: 17625.80 18910.30 100.00

Value Added Tax 5168.30 5468.30 28.92 105.80Profit Tax 3341.50 4074.20 21.54 121.93Excise Tax 1415.70 953.80 5.04 67.37Tunover Tax 0.00 457.20 2.42Sales Taxes 0.00 495.10 2.62Income Taxes

Wages 1543.20 2342.20 12.39 151.72Personal Profits 45.40 44.20 0.23 97.36

Foreign Economic Activity 550.80 30.80 0.16 5.59Forest Receipts 18.60 16.80 0.09 90.32Stamp and Local Taxes 59.80 70.80 0.37 118.39Water Receipts 11.50 16.40 0.09 142.61Investnent Fund Revenue 2023.80 1026.00 5.43 50.70Commonwealth Transfers 58.80 0.00 0.00 0.00Commodity Remainder Revenue 1571.20 1591.20 8.41 101.27Sales of State Property 0.00 2.40 0.01Enterprise Taxes 13.50 5.10 0.03 37.78Receipts of Geological Survey 505.60 345.70 1.83 68.37Receipts from Lotteries 330 0.10 0.00 3.03Loan Payments 268.40 6.50 0.03 2.42Sale of Shares 8.00 0.00 0.00 0.00Collective Liquidation 0.00 0.00 0.00Land Tax 4.70 5.70 0.03 121.28Natural Resource Tax 65.40 46.50 0.25 71.10Rental Receipts 69.10 71.30 0.38 103.18Fees and Non-Tax Income 206.10 1378.70 7.29 668.95Remainder Budgeted 493.00 461.20 2.44 93.55Borrowing of Remainder 159.40 0.00**Added to Balance** 20.60 0.00

(continued)

206 Statistial Appendix

Table 4.1A: Kazabs& - Bade First Quartr 1992(im millions of cunt nuibls)

First SharePlan Quarter 1992 of Total

(April 1, 1992) (Percent)

Total Ependibtues 22702.30 13986.40 100.00

National Economy 4915.6D 3573.40 25.55Reproduction of win. & 50.CO 345.70 2.47

raw mat. res.Foreign Econmic Activity 1380.00 1.30 0.01Socio-Cuai ProetsEducation 5171.20 4622.60 33.05Culture 630.90 540.00 3.86Health, phys.& sport 2669.80 282.10 17.03Youth 0.30 0.10 0.00Social Security 4114.30 165.00 1.18

Science 113.00 112.90 0.31Defense 214.60 166.60 1.19Law Enforcement 932.70 877.80 6.28State Authorities 45.00 34.30 0.25Stats Administration 557.40 513.90 3.67Other Projects 1451.50 650.70 4.65

Budget Balance -5076.50 4923.90

Sourc: Miisty of Finace

Statistical Appendix 207

Table 4.2- Karakbsa - Bt4eK 19(a0 m;ii OfCWUUIbIS

Forecast Forecat PercentW Share12a26/91 6/29/92 Icrease of Total12/16/91

Total Revenues 86830.60 174699.24 201.20 100.00

Value Added Tax 25841.46 40955.90 5L249 23.44Excise Tax 7078.40 10590.55 149.62 6.06Profit Tax on Entrprises 134563 31708.63 235.64 18.15Payment for Natural Resouces 339.84 339.34 100.00 0.19Profit Tax on Cooperatives 371.00 706.38 190.40 0.40income Tax 535.00 14780.00 275.85 8.46Stat Fees, Local Taxes and Other Taxes 335.00 363.00 103.36 0.21Revenues from State Bonds 3025.00 3000.00 99.17 i.72Revenus from Loteries 20.00 60.00 300.00 0.03Water Fees 50.00 50.00 100.00 0.03Wood Revenus 9.00 140.00 1555.56 0.08Fes and Other Non-Tax Tncome 500.00 200.00 400.00 1.14Lease Tax 345.75 1199.30 346.87 0.69Ravenues from Hard-currency Sales 424.00 424.00 100.00 0.24Reveaus from Sales of Imported Grin and Food 2900.0W 2900.00 100.00 1.66Tax on Import/Export 55.60 0.00 0.00 0.00Customs Duty/Fees 29.00 29.00 100.00 0.02Land Tax 1220.44 1220.44 100.00 0.70Revenues from Geological Explorations 2528.00 8638.00 341.69 4.94Revenues from lvestment Fund 8095.30 24122.29 297.98 13.81Revenues from Sales of Goods Pucased firom

the Republican Currency Fmd 13085.61 13085.61 100.00 7.49Other 1762.59 18386.30 1043.14 10.52

(cn

208 Statistical Appendix

Tabe42 flZ-aMua. - .h4. 1.9(m w of cuntrSW")

Forecast Forecast Percentage Share12/26/91 6/29/92 Increase of Total12/16191

National Econmy 18322.07 65729.40 358.74 34.53of which:Social Expeditures 1181.40 2607.73 220.73 1.37Price Subsidies 3345.00 10763.00 321.91 5.66

St Scurity 618.59 1095.61 177.11 0.58Fund for Reproduction of Mineral Reuces 2528.0D 8638.00 341.69 4.54Hard Currency Pmurhases 9224.00 1270.00 13.77 0.67Soca-Culturda Expenses 51013.34 71802.69 140.75 37.72of which:Sociad Saftty 16474.47 16091.26 97.67 8.45Heakth 10828.64 17648.01 162.98 9.27Education 21463.94 33025.00 153.86 17.35

Scienc 597.90 1779.62 297.64 0.93Maintenanc of the Mkinisry of Intifor 3059.17 4820.95 157.59 2.53Expenses on LoAtties 0.00 45.00 0.02Reserve Fund of tho Cabinet 1126.56 2073.97 184.10 1.09Armed Forces 0.00 19092.22 10.03Repubican Guard 150.00 263.47 175.64 0.14Militia 867.86 1219.93 140.57 0.64Executive Organs 2144.15 6750.38 314.83 355Interest Paymnet and Inernal Debt Service 702.08 867.03 123.49 0.46Odter 4157.14 4889.47 117.62 2.57

Tota 94510.36 190337.71 201.39 100.00

Deficit -7680.00 -15639.00

1/ he 'Leas Tar' is a sdadl tar fr the oil ihdwty.Somw MLstzy ofFia

Sttstic Appendix 209

Table 4.3: AKzasaw - DeFiiuuxcia Oporlu of do GaumW Gomm.4 1955-91 ICm mions ofmbles)

1985 1986 1987 1988 1989 1990 1991

Tol revenuo 11,325 11,955 12,783 14,098 15,963 18,32 26,070

Value addedtax - - - - - - -

Tunove tax 4,164 3,845 4,108 4,142 4.438 4.925 4.420Exd ze - - - - - -Sales tax - - - - - - 1,477

Corporat incom tax on entrpnses.asociatios and orgmaitiow 2,667 2,602 2,290 2.130 2,080 2,682 6,373

FEd Nd e=ery complcx 226 163 286 285 229 231 -

Memoury complac 357 319 - - - - -

Cheica and wood induste complex 25 33 28 -3 - - -

Construction complex and geology 299 328 304 214 206 231 -

Agroindustil complex 556 S88 53S 496 364 550Trnsportation complex an

comsnications 380 437 433 353 304 455Mwacha bullding complex - - - - - - -Social complx 409 361 293 348 358 423 -

Not includd above 414 372 358 332 214 283 -Paments of union eeprisnot inaading above - - 3 53 193 507 -

Payments of publican enterpris net including abov - - 45 51 210 1 -

UswrfeepAymatsfor ndaralrcsourw - - - - - - 201Corporate income tax on

-operltive and publc orgaxizaons 86 98 104 102 143 187 405Stat taxes imposed oan population(imdividual income tax) 1,571 1,646 1,722 1.891 2,170 1,370 3,088

Psoceed from sae of tke 1982S1*t IzDateUI LOW 21 37 37 39 37 44 56

Sale offix. 1992 State InternaLon of KIzacbn (to

Receipts from ale of hardcurrency - - - - - -

SalsM of impord grain, fodder.and food pzoducts - - - - 28 22 49

Export and importtaxes - - - - - - -

Ctoms duties - - - - - - -

Contrbutions to budget forgeological survey expndtre - - - - - - 340

Rcvenue of the ivestmnt fud - - - - - - -Sale of goods in free prices,purchased through the had

wncyfud - - - - - - -Auctions of foreigncunrey - - - - - - -

Transfer from Union budget tofnanceprograms - - - - - - _

Revcnu for social Jinsura8 1,138 1,262 1352 1,6 1,573 1.85 -Otr tax and noatx revcnu 777 598 686 595 892 1,264 3,628Assets reced from the Unionbudget for repaymntof iffrnce in prices 318 366 235 260 912 - -

For finacing of USSR progrm ofeconomic and cial develpomet 479 423 813 2,541 2.698 - -

'CQItSUcd)

210 Statisical Appedix

Tabe 43: - DctadIAIPiz Opa&w ofdo Gb=! 0omsu 1985-91 I1(im mille of1mblos)

1985 1986 1987 1988 1989 1990 1991

For payment of ePiIa chorg onpurchasopicc- for non-profltao mrmu 104 ISO - - - - -

Mean of mcid support ofpozpulato - - - 2,503

Trnsfers recived from theUion budge - - - - - 3,793 3.500

Addiional fnancial resoure. 449 929 1,430 931 991 2,260 30

Total epndi 11.512 11,765 12.498 13499 15,377 17,055 32,758

Fnancing of tho onomy 6,701 6,63 6,61S 7,323 8,696 9.009 10.924of whicLuFuel and eaycQs omplux 75 203 240 281 82 -Metourgy cOMPl 92 163 - - - - -Agroindusrilw complx 2,697 2,606 2,275 2,0 1,836 2,369 -C n.uc oia.cmplex an pb 0 63 103 217 135 263 143 -Tranpowtoon complx andcommunications 461 SI1 491 498 S54 653 -

Soa comlox 106 70 109 I55 199 437 -Not ncuded In complexes aboe 2628 2,436 3303 3.899 SS30 5.306 -Chemicalmd wod complex I 5 10 8 - - -

Expndluronnsmauce 6 7 8 a 27 19 -

Fiacing of soca ad cudprogms, Including: 4,37 4,676 4,999 S,315 S.830 6.498 14,156Publi educa6o and prefesuom! taining 2,174 2,30 2,430 2,635 2768 3,01 6,252

Culre andm - - - -Mans media - - - - - 628Heath car 92 938 990 1,108 1,283 1.473 2.987Grant to fali havfing many

hldren and slglomothcr 48 SO 52 54 S 4 58 82Socid Secri 1,26 1,375 1.470 1,581 1.715 1,956 4,207of whichv Allocations to

dat soia; _smm= fimdfor pcnion 1,142 1.2S7 1,341 1,456 1,579 1,763 -

Other 7 7 7 7 10 11 -Other expenditure 313 271 258 Z76 373 553 5,836Transfer to tho Uion budget 12 136 625 SIS 479 995 1,842

Rovue minus epeditur 313 190 285 599 5S3 1,296 -668

In p arcca of c_ondturs 3 2 2 4 4 3 -20

I/ KazIpwsenadc; inldes do apt lAnd loa bu*&Scuc.: Kazuh authoride (thmqgh DM.

Statistical Appendix 211

Table S l.: Kazakhsn - Mdofa t do Nat i BaACm mdio of cmat suble, a ofD Dcewber Jt)

989 1990 1991

Aset Liabilities Assets Liabilities Assts Liabilities

Rank Funds 40.5 1.9 30.7 202.0 74.5

MactyT rwkat ad Cah Rnemd for UseMactay Mea 2.2 2.5 137.5Prcious Metl

Foreign Currey Accounts for Foreign OpeatiosAccounts w/Stmtc Budge an Budgets of dsiuto 573.2 24.9 694.7 635.2 1151.1 1745.0Accounts wlCredit Echlishmeu of USSR 27.5 219.7 1013.2 96845

F-icing oflzzvcsnctCapiltd 3.1 4.4 1.9 2.9 15.3 9.9Opations with Valued PapesCrdtandAcountOperations 11.7 14.4 9.8 16.9 47.5 137.9Operao of Canilird AccentsAccount. of Differcc in WorthMeans and Operationof Social Or0nkatiom 0.8 48.1 27Z.7Savigs and Dexmts Accounts of Citizens 0.!Long Tem Invetmes 2.8 1.9 2.5 3.6 2.0lag Tem Credis to Forei SbtsOther Long Term Investments 14174.0Acounts with Foreg Banks 5.6 5.3 115.1 45.0 26029.3 6138.0

Cetralized Peanon Accounts 5014.9 57623Mutuld Intr Brn Accunts 41913.7 42445.6 39460.4 39366.3 146370.7 169757.3Ddeat and Credito (Forgiveness) 1.1 0.1 2.2 0.9 58.5 226.0EcomomAr Expditures 51.8 2.6 32.9 3.6 67.9 9.1

Absract MeansProfits and Losscs of the Banks 4.0 3.3 5.2 0.9 61.3 400.7

TOtal 42571.4 4257134 40328.5 40328.5 194424.9 194225-1

Sowum Natioal B Ks

212 Statistical Appedix

Table Sa± Kakstn - Icom Staemnent of tbe NJatkl BankCm miioDs ofrnbles, Decmber 1, 1991)

Resources Uses

Bank Profits 339.4 Short TerM LANS 47.5Bank Funds 72.3 Long Term Loans 3.6Calcuated Means of Enterprises Credits Assigned in a Particular Order 0.0and Economic Orgaizations 139.8 Credits Assigned to the Minisary

Calcuated Means of Social of Finance of the Republic 6000.0and Other Organizations 0.8 Other Assets 263.9

Means of the Pension Fund 747.9 Credits Assigned to Other Banks 25991.3Means of the Stabilization Fund 549.3 State Debt 8174.0Meas of the State Fund

of the Employment of the Population 178.8 Total Uses of Funds 40480.3Oter Liabilities 238.9Estimated Means 9228.6Means of the State Budget 10.5 Statistical Diceacy -3420.9Corspoding Calculation 8487.1Means in the Deposits of the Savings

Balance for the Beginning of the Year 14158.0Resources Acquied at Other Banks 2908.0 Regulatory Fund 3420.2

Total Resources 37059.4

Sow3= Nationa Ran of Kazkhsta.

Stdstical Appadix 213

Tabl 61: K.azKbusan - Ibdztial Promdu(valm hiass dit&d)

Unit 1980 1985 1986 1987 1988 1989 1990 1991

Prduction ofEecrIcty loW 61530 81263 8509S 88490 88417 89657 87379 78033

ElectrIcity 1MKW 72104 91825 95392 99668 101662 103655 104717 101596Coal fl 115375 130516 137799 142053 143017 13835 131443 130382oil 17 - 22036Natural Ga. NM 4314 5456 5824 6311 7134 6710 7114 7585Irn Oroe Tr 25763 Z2977 23630 24224 24342 23764 23846 21993Cast Iron Tr 4710 4932 4890 4797 4940 5279 5226 4953Steot Tr 5967 6155 6496 6555 6766 6831 6754 6327Roled Sel Tr 4114 4182 4566 4580 4374 S011 4399 4660Coke (6% Humidity) IT 4321 4100 4237 4191 4169 4137 3711 3404M'al CuRing

afchine Tools U 3017 2343 2630 2155 2214 2307 2S78 2389ExcaaWors U 1803 1877 1843 1045 570 578 710 618BuMhhdzes U 88G3 13670 14504 15220 14810 15308 13328 10298Trctors U 34131Agricltue Machines T rub 212417 366238 388994 399096 322868 223731 214983 355914Primary Oi

Procecors Tr 11381 13919 17555 13149 17603 18406 17854 18002Sulphurir Acid 17 1891 1671 1850 2008 2063 1896 3151 2815Feeinz3 77 1262 1430 1520 1603 1737 17C5 f56 SIS16Artficialbers T 19268 21007 23552 23352 21834 20568 17406 11280Syndthec Rubber T 34381 33205 33952 34269 34363 33438 31950 25614Tires TU. 30294Cement .7 7575Buldig Brics M 1989 1947 2055 2268 2354 2463 228R 2146Ferro-Concrete

Construcion T 6067 6575 6824 7535 7747 7717 7504 6950Stbsct of Asbesms mU 591 643 652 668 681 691 722 721Fabrics-Total TMll 178112 289114 300048 288174 313Sf7 329811 325461 249122Hosiey TP 68963 76707 77154 78205 0517 82579 87716 83162Knimtd Wear TU 95554 100259 102265 105298 10897 122589 126772 111800Sboe I7 30199 32262 35967 3273s 34083 35189 36464 34051Carpet TM2 1722 2384 2213 2236 2343 2235 2234 2103Meat, Ist Quality T 6W7773 665440 807227 848102 868699 946238 898583 847100Sausage T 120949 125783 131340 139185 146970 15244 154933 152332Butter T 60035 69267 74443 75943 79628 3329S 85056 7S824Who Milk T 1107 1225 1269 1433 1471 1491 1469 1377Sugar (Powder) T 271626 3M3999 342275 348597 313996 377315 319134 306814Margarine T 75934 83970 83330 79332 86936 86129 71376 47706Washing Machines U 175170 183300 188190 176810 166217 264400 367363 391072Tape Recordnes U 78100 124200 130225 1383SS 150425 162100 20D500 130674

Sowe: Sae utisidca Comaift

214 Statistical Appendix

Table 62. Kaziehsn - Indnazl tiodcdc.(mdcx: 198S=100)

1980 1985 1986 1987 1988 1989 1990 1991

Production ofElecricty 75.7 100.0 104.7 108.9 108.8 110.3 1075 96.0

Coniumpton ofElectricity 78.5 100.0 103.9 108.5 110.7 112.9 114.0 110.6

Coal 88.2 100.0 105.3 108.6 109A 105.8 1005 99.7OilNaurd CGas 79.1 100.0 106.8 115.7 130.3 123.0 130.4 144.5Irna OMe 112.1 100.0 1028 105I4 105.9 103A 103.8 95.7Cast rmn 95.5 100.0 99.2 97.3 100.2 107.0 106.0 100.4Sted 96.9 100.0 IDS5 106.5 109.9 111.0 109.7 103.6Reled Stee 9tA 100.0 109.2 1095 116.6 119.8 117.2 111.4Coke (6% Humidity) 105.4 100.0 103.3 102.2 101.7 10039 90.5 83.0McI Cutting

Machine Tods 105.9 100.0 92.3 75.7 77.7 81.0 905 83.9Excavators 96.1 100.0 98.2 55.7 30.4 30.8 37.8 32.9Bulldozers 64.8 100.0 106.1 111.3 108.3 112.0 97.5 75.3Tractors .. .. -. ..

Agriculture M&achne 58.0 100.0 106.2 109.0 88.2 62.5 S8.7 97.2Prnmzy Oil

Processors 81.8 100.0 126.1 130.4 126.5 132.2 128.3 129.3Sipheric Acid 113.2 100.0 110.7 120.2 123.S 113S 188.6 168.5Felizers 38.3 100.0 106.3 112.1 121.5 119.2 115.8 106.0Articich Fixes 91.7 100.0 112.1 111.2 103.9 97.9 82.9 53.7Synthetic Rubber 103.5 100.0 102.2 103.2 103.5 100.7 96.2 77.1

Com .. .. .. ........

Building B:cas 102.2 100.0 1055 116.5 120.9 126.8 117.4 110.2Fcrro-Conrcrc

CoratuCtion 92.3 100.0 103.8 114.6 117.3 117.4 114.1 105.7Sheets of Asbesto 91.8 100.0 101.4 103.9 105.9 107.4 112.3 112.1Fabrics-Totals 61.6 100.0 103.8 99.7 108.4 114.1 112.6 86.2Hodezy 89.9 100.0 100.6 102.0 105.0 107.7 114.4 108.4Knitued Wear 95.3 100.0 102.0 105.0 107.8 122.3 126.4 lll.SShoes 93.6 100.0 115 1015 105.6 109.1 113.0 1OS.5Carpet 72.2 100.0 92.8 93.8 98.3 93.8 93.7 88.2me lt, Quaity 91.3 100.0 121.3 127A 1305 142.2 135.0 127.3Sausage 96.2 100.0 104.4 110.7 116.8 121.2 123.2 121.1Butter 86.7 100.0 107.5 109.6 1 S.0 120.3 122.8 109.5Whl Milk 90.4 100.0 103.6 117.0 120.1 121.7 119.9 112.4Sugar (Powder) 80.6 100.0 101.6 103.4 93.2 112.0 94.7 91.0Margarin 90.5 100.0 99.8 95.1 103.6 102.6 85.0 56.8Washing Mahdines 95.6 100.0 102.7 96.5 90.7 144.2 200.4 213.4Tape Recorders 62.9 100.0 104.9 111.4 121.1 130.5 161.4 105.2

Sow= rsble 6.1.

Stlutcal Appedix 215

TablO 7.1: Kmkhutau - uR&cm ofSehcbfApicul*ra COqx(m lW& n)

1982 1983 1984 - 1985 1986 1987 1988 1989 1990 1991

CeralS 1/ 18.8 22024.6 14826.1 22693.7 26561.3 25721.0 20970.3 18797.2 28487.7 11991.7Whlat 11566.3 13.2 8537.3 14191.1 16743.1 16108.4 12161.7 10783.6 16196.8 688.8Barley 4539.4 646.4 4186.7 5954.8 7095.2 68.7 5850.6 5309.4 8500.2 3085.1Rye 112.9 393.6 213.1 135.5 368.7 338.1 548.4 745.1 838.8 480.3Rice 578.9 S90.8 629.9 620.2 585.9 605.6 626.1 554.7 578.7 521.0Millet 409.3 388.4 288.1 401.9 390.4 549.2 577.1 459.3 939.3 234.3Buckwheat 57.8 78.0 104.9 111.6 74.4 72.2 117.0 53.1 173.9 136.2Corn 460.2 513.0 476.2 597.7 504.5 477.0 560.7 4785 442.0 330.2LT EgwiU5 103.2 116.6 97.7 112.5 150.1 144.7 131.7 107.3 154.4 65.9oats 431.2 400.2 269.6 539.0 615.7 458.9 344.8 251.0 610.6 230.9Sorqg .. 0.1 .. 0.4 0.8 0.4 0.2 1.7 .. O.SMix of gnrin crops 9.6 32.3 22.6 29.0 33.0 37.8 51.0 53.5 53.0 20.3

Raw coton 283.4 280.0 296.2 30S.1 332.9 311.9 325.1 315.2 323.9 291.1Sugpr beets 10455 1628.6 1697.3 1901.0 1721.1 1768.2 1311.8 1188.1 1043.7 673.9Tobacco 7.7 8.6 L1 9.0 8.1 7.8 7.1 4.7 4.6 3.9Oil crops 107.5 137.7 137.4 128.6 139.0 182.2 216.1 167.2 229.8 154.8

Sunflower 79.0 93.9 108.5 93.1 833 116.9 139.2 105.0 140.9 108.5Potatos 1895.0 1907.6 2077.9 2197.0 2136.5 206S.8 2260.3 1783.4 2324.3 2143.2V.egdabes 1127S 1168.7 1209.6 1084.7 1210.5 1190.0 1354.0 1254.3 1136.4 954.9Melon crops 301.2 319.2 318.1 300.7 267.1 336.9 393.8 367.1 3015 302.7Fruits and berries 311.8 283.3 218.7 132.8 386.1 209.1 275.6 118.2 301.2 93.3Grapes 150.5 193.3 145.1 69.3 157.6 141.2 93.7 48.3 138.6 65.8

216 Sbtistica Appendix

Table 7.2: EanrsM - PRducio of Salectd Agricadtaa Crop(id 1982 =1WC)

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

Cereals 1/ 100.0 120.6 81.2 124.2 145.4 140.8 114.8 102.9 155.9 65.6Wheat 100.0 112.8 73.8 122.7 144.8 139.3 105.1 93.2 140.0 59.6Barley 100.0 142.3 92.2 131.2 156.3 152.6 128.9 117.0 187.3 68.0Rye 100.0 348.6 188.8 120.0 326.6 299.5 485.7 660.0 743.0 425.4Rice 100.0 102.1 108.8 107.1 101.2 104.6 108.2 95.8 100.0 90.0Millet 100.0 94.9 70.4 98.2 95.4 134.2 141.0 112.2 229.5 57.2Buckwheat 100.0 134.9 181.5 193.1 128.7 124.9 202.4 91.9 3W.9 235.6Con 100.0 111.5 103.5 129.9 109.6 103.7 121.8 104.0 96.0 71.8yLeguinous 100.0 113.0 94.7 109.0 145.4 140.2 127.6 104.0 149.6 63.9

oats 100.0 92.8 62.5 125.0 142.8 106.4 80.0 58.2 141.6 53.5Sorgo . 100.0 .. 400.0 800.0 400.0 200.0 17W0.0 .. 500.0Mix of grain crops 100.0 336.5 235.4 302.1 343.8 393.8 531.3 SS7.3 S52L1 211.5

Rav cotton 100.0 98.8 104.5 107.7 117.5 110.1 114.7 111.2 114.3 102.7Sugar beets 100.0 155.8 162.3 181.8 164.6 169.1 125.5 113.6 99.8 64.5Tobacco 100.0 111.7 105.2 116.9 105.2 101.3 92.2 61.0 59.7 50.6Oi1 crops 100.0 128.1 127.8 119.6 129.3 169.5 201.0 155.5 213.8 144.0

Sunfower 100.0 118.9 137.3 117.3 105.4 i48.0 176.2 132.9 178.4 137.3Potatoes 100.0 100.7 109.7 115.9 112.7 109.0 1193 94.1 122.7 113.1Vegetables 100.0 103.7 107.3 96.2 107.4 105.5 120.1 111.2 100.8 84.7Melon crops 100.0 106.0 105.6 99.8 88.7 111.9 130.7 121.9 100.1 1003.Fruits and berries 100.0 90.9 70.1 42.6 123.8 67.1 88.4 37.9 96.6 313Grapes 100.0 128.4 96.4 46.0 104.7 93.8 62.3 32.1 92.1 43.7

f I/ wghts afthr atonaI prc .Source: State Statsical Commite.

Statistical Appendix 217

Tablo 7.3: IaSawtn - Aema of Ap*euilmal Crops'Cm 'whaf)

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

Cultivable had 40057.8 40616.1 40845.4 40654.9 40933.6 40818.1 40621.5 40017.8 39617.9 39231.5Fallow 3759.7 4662.4 4313.2 4358.8 5315.6 5227.6 4963.1 4789.0 4435.3 4296.1Cultivated land 36298.1 35953.7 36032.2 35796.1 35618.0 35590.5 35658.4 35228.3 35182.1 34935.4Cereas 25390.6 25270.9 25401.9 25128.9 24563.3 24524.9 24290.6 23811.9 23355.9 22752.5Wheat 16500.4 16067.4 16223.6 16162.0 15599.8 15311.1 14376.1 14390.3 14069.7 13455.7Baley 6682.8 6785.2 6881.3 6825.5 6726.6 6871.2 7063.3 6772.7 6659.8 6614.1Rye 333.0 4395 407.1 229.7 431.7 489.3 575.1 722.9 768.4 561.8Rice 133.8 134.5 138.7 142.4 128.8 133.3 134.8 133.3 124.4 118.4Miluet 782.3 815.6 768.9 825.0 692.0 677.3 699.6 774.3 781.1 847.5Buckwheat 191.3 196.9 190.7 206.2 176.5 178.6 177.3 214.9 218.0 317.9Corn 110.5 146.1 126.7 134.2 118.6 118.5 137.0 133.7 126.6 121.4Leguninous 156.3 176.1 190.6 166.4 1644 184.6 182.4 172.2 159.4 152.1oats r 471.3 459.8 423.1 351.1 449.8 483.1 350.3 408.3 381.9 511.7Sorgo 0.2 0.2 0.1 0.5 0.9 0.9 1.6 2.0 3.1 2.2Mix of grain crops 28.7 49.6 51.1 85.9 74.2 77.0 93.1 87.3 63.5 49.7

Industial crops 410.8 454.1 466.8 435.3 394.4 434.6 480.3 459.6 439.9 474.6Raw cottn 126.3 125.8 140.2 130.5 128.6 128.0 128.1 119.2 119.7 116.6Sugar beets 60.1 60.3 71.0 71.5 61.7 56.4 41.5 44.5 43.6 45.6Tobacco 6.4 6.4 6.4 6.3 5.2 5.2 4.8 3.2 2.6 3.0

Oil crops 205.0 249.3 236.0 214.4 192.8 239.3 300.7 285.5 266.5 303.2Sunflower 98.8 108.8 107.2 103.1 95.6 104.0 121.9 130.5 136.9 189.5

Vegetables, potkaes, etc. 303.9 314.5 315.6 296.5 292.8 299.1 327.6 335.7 320.9 336.5potatoes 193.4 203.2 203.2 190.8 191.3 190.7 201.7 208.1 205.9 216.8Vegetables 67.7 69.1 69.6 64.9 65.1 69.7 77.6 77.2 70.8 75.1Melons 37.4 36.7 37.2 35.5 30.5 32.9 41.5 41.9 35.9 38.1

Fooder crops 10192.8 9914.2 9847.9 9935.4 10367.5 10331.9 10559.9 10621.6 11065.4 11371.8Fruits and berries 95.3 96.5 95.3 95.5 93.9 92.8 97.6 96.2 96.5 91.5Grapes 26.8 27.0 26.9 27.3 26.8 26.3 26.1 25.6 24.9 21.9

Soffcm: SLI Stitics aCmmitt

218 Statistical Appendix

Table 4* Knaakfstan - Aum ofApicultua Cu(mpar cent of cultivted ado

1982 1983 1984 198S 1986 1987 1988 1989 1990 1991

Cultivated lmad 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0Cereals 70.0 70.3 70.5 70.2 69.0 68.9 68.1 67.6 66.4 65.1

Wheat 45.5 44.7 45.0 45.2 43.8 43.0 41.7 40.8 40.0 38.5Barley 18.4 18.9 19.1 19.1 I3.9 19.3 19.3 19.2 18.9 18.9Rye 0.9 1.2 1.1 0.6 1.2 1.4 1.6 2.1 2.2 1.6Rice 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.3Millet 2.2 2.3 2.1 2.3 1.9 1.9 2.0 2.2 2.2 2.4Buckwheat O.S O.S 0.5 0.6 05 O.S 0S 0.6 0.6 0.9corn 0.3 0.4 0.4 0.4 0.3 0.3 0.4 0.4 0.4 0.3Leguminous 0.4 0.5 0.5 0.5 O.S O.S O.S O. 0.5 0.4oats 1.3 1.3 1.2 1.0 1.3 1.4 1.0 1.2 1.1 1.SSorgo 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Mix of grain crops 0.1 0.1 0.1 0.2 0.2 0.2 0.3 0.2 0.2 0.1

Industrial crops 1.1 1.3 1.3 1.2 1.1 1.2 1.3 1.3 1.3 1.4Raw cotto 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.3 0.3 0.3Sugar beets 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1Tobacco 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Oil crops 0.6 0.7 0.7 0.6 O.S 0.7 0.8 0.2 0.8 0.9Sunflower 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.4 0.4 0.5

vegetables, potatels, etc. 0.3 0.9 0.9 0.8 0.3 0. 05.9 i.C 0.9 1.0Potatoes 0.5 0.6 0.6 0.5 0.5 0.S 0.6 0.6 0.6 0.6Vegetables 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2Melons 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Fooder crops 28.1 27.6 Z7.3 27.8 29.1 29.0 29.6 30.2 31.5 32.6Fruits and berries 0.3 0.3 03 0.3 0.3 0.3 0.3 0.3 0.3 0,3Grapes 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

SowUe; State Slatisia Committ

Staistical Appendix 219

Table 7.5: Xaskftumn - PzAUtdI6if of Agcnrtxl Cw up(centflsala; 1 cetzer= 0.1 MT)

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

Carets 7.2 8.7 5.8 9.0 10.8 10.5 8.6 7.9 12.2 5.3WYheat 7.0 .1 5.3 : 3 10.7 10.5 8.2 7.5 11.5 5.1Barley 6.8 9.5 6.1 8.7 10.5 10.1 8.3 7.8 12.8 4.7Rye 3.4 9.0 5.2 5.9 8.5 6.9 9.5 10.3 10.9 8.5Rice 43.3 43.9 45.4 43.6 45.5 45.4 46.5 41.6 46.5 44.0Millet 5.2 4.8 3.7 4.9 5.6 8.2 8.2 5.9 12.0 2.8Buckwheat 3.0 4.0 5.5 5.4 4.2 4.0 6.6 2.5 8.0 4.3corn 41.6 35.1 37.6 44.5 42.5 40.3 40.9 35.8 34.9 27.2Leguminous 6.6 6.6 5.1 6.8 9.1 7.8 7.2 6.2 9.7 4.3Oats 9.1 8.7 6.4 15.4 13.7 9.5 9.8 6.1 16.0 4.5Sorgo .. 5.0- .. 8.0 8.9 4.4 1.3 8.5 .. 2.3Mix of grain' -ps 3.3 6.5 4.4 3.4 4.4 4.9 5.5 6.1 8.3 4.1

Raw cotton 22.4 22.3 21.1 23.4 25.9 24.4 25.4 26.4 27.0 25.0Sugar beets 174.0 270.0 239.0 264.0 279.0 320.0 316.1 266.9 259.9 147.8Tobacco 12.0 13.4 12.6 14.3 15.6 15.0 14.8 14.7 17.7 13.0Oil crops 5.2 5.5 5.8 6.0 7.2 7.6 7.2 5.9 8.6 5.1

Sunflower 8.0 8.6 10.1 9.0 8.7 11.2 11.4 8.0 10.3 5.7Potatoes 98.0 94.0 102.3 115.1 112.0 108.3 112.0 85.7 112.9 98.9Vegetables 160.0 163.0 168.0 161.0 179.0 165.0 169.0 156.2 154.4 127.2Melon crops 80.0 84.0 84.0 81.0 86.0 102.0 94.0 88.0 84.0 79.4Fruits and berries 47.6 42.6 29.4 18.4 53.6 29.6 37.9 16.1 41.9 14.6Grapes 71.7 89.7 68.2 32.8 77.4 73.2 49.9 25.6 80.5 38.5

Source: Stt Statisical COrMi.

220 Stnfis Appedix

Tabl 7.X& Kazak - LiwstckPndrdau 1/

Unit 1981 1982 1983 1984 1985 1986 1937 1988 1989 1990 1991

PRODUCnIONCatl th. heads 1S0 on s.m 9,on 9,065 9SMi 9.67 9,752 9,513 9,756 9.701

Cows th. head 3.201 3.112 3.147 3.14S 3.07 3.161 3.207 3.73 3.327 3367 3,

pip th. heads 2.L5 2S6 2.790 2.6b 2.968 3.221 3.237 1U 36 3.224 3.9

Sheep and Goats di. heads 33.693 35.6m1 36,6t3 36.057 35.45 36.401 36.31U 36.491 36.223 35.657 34.426

Hons di. heads 1.6 IM90 1.437 1.449 1.455 1,S33 I.540 1.581 1,619 1,626 -

CamMI a lheds 124 125 I7V 125 133 139 140 I" 143 143

Poultry at hads 49.091 48,710 50,903 52316 55.436 57,S42 57.667 5.436 59.216 59,19 .

Rad Meat Prod (carcass MT 16! 1.03 1.171s 2199 1.133 1,300 i399 1.493 1.5 1.S4 1.550

Milk Producel tIlL MT 4.652 4S11 4,582 4,635 4,763 5.042 5.135 S.mI s5. s,6a SMSso

Egg Productio mh. pCL. 3.475 3.414 3.516 3.726 3.303 4.09 4US 4'2C 4,253 4.115 4.053

wald Produainacl MT 105.013 103.045 107.376 10S.56 97.623 106.013 106.442 101373 109.942 107.80 302O3

PRODUCrVrIY

Milkper cow peryear kg 2.026 1.161 1.,32 1.200 199N 2.163 2. 236 2347 2.37

Egs per layor pc. 217 217 mnz 220 231 m r237 4 229 ..

Wool per m1ep kg 27 2.5 2.7 ZS 2.3 Z6 2.6 Z6 .7 .6

Cate livoewt at dagtr kg 369 342 340 323 311 363 262 366 363 357

P llvowdght at slughtwrkg Ss 83 U6 83 :9 97 99 99 [02 101

hespandgostlbwow Bkg 35 33 34 33 33 38 31 31 31 37 .

ITATE PURCHASES

Met (rad meat & poultry) dt. MT 1.460 3.319 1.442 1,467 1,37S 1.606 1.73S I.t26 295 1.184 4

Milk ti MT 2.377 2,305 2.425 2.SW 2,662 2.356 2Z961 3.215 3.=7 3.3M4 .

Mlk(% ofproducdon) 52 51 53 54 56 57 57 59 59 51

Eggs mil pcm. Z033 Z037 2147 2.196 2.262 2.436 2.541 2.S52 2.S44 2.573 ..

Egps(%ofproducdoa) 59 s5 60 59 59 59 61 62 60 61

Wod MT 55.294 55,04t D,6D0 57.621 S3.33S 56934 57.012 59.63 61.406 601,66

Wool (% of production) 53 53 54 55 55 54 54 55 56 S6

Ksrmkul thi. p.L 2,427 Z955 2.27 2.621 1.670 1.541 1.303 1.59 1.660 1.51.

Cattlhides pesL z2m Z,620 z720 2.933 2,s33 2,366 3,003 3.055 3,096 3.013

Small hdeB tiL pcs. I2Z679 1L922 1M3S 14.159 14M2 I4.540 13156 13,013 13.196 12.107

Pig skin th. pa.m 1.731 1.49 5 1.551 1.376 1.692 1.905 2,752 1,666 1.739

I/ Year nd datSUwU= Sal Stadaifd Committ

Statistical Appendix 221

Tablo I.1: Kmkhfan - hi&cesafRetai rA ws by oups of Goods in 1991

V/92

ANNUAL 1/ QUARTERLY 2/ OVER

1991 1/91 11191 M1/91 IV/91 192 IV/9131

All Good. 188.0 112.4 195.8 206.1 227.3 711.7 304.7

Food 184.9 108.8 187.0 199.0 246.7 841.6 381.1Meat and Fowl 216.2 114.8 258.3 245.8 272.5 15023 S78.4Sausag. and Smoked Food 200.9 115.8 285.4 275.5 258.9 1594.7 658.9rnod Meat 237.3 111.8 290.0 2993 329.6 1701.0 5Z7.4Fish 222.4 106.5 261.9 304.7 2826 1675.3 516.1Herring 160.6 103.6 203.1 186.1 184.2 755.6 508.1Tinnd Fish 198.4 105.3 247.9 240.4 220.8 947.7 312.1Butter 209.1 102.2 242.6 247.8 246.3 1650.2 728.7Vcgetable 0Oi 101.9 101.8 180.5 177.9 200.6 602.0 348.0Lard and Other Fats 164.3 106.8 175.2 182.6 161.3 90D.0 S62.1Magadn and Marprin Goods 2183 102.3 269.7 279.0 273.3 1188.9 552.9Mlk and Milk Goods 196.7 102.2 218.9 227.5 243.8 678.5 313.6ChCeae 191.0 103.0 224.4 216.7 220.6 958.7 411.2r od an Canned Vegetable. 251.8 168.5 307.2 241.7 322.s 906.3 268.8Fruis and Benies 232.5 169.8 257.9 194.5 256.4 482.1 199.3Eggs 193.5 104.7 232.3 218.8 231.1 1180.8 504.7Sugar 213.7 102.0 269.9 259.7 260.6 894.1 353.1Codactianary Sugar 221.0 104.7 264.3 171.1 294.9 14;75 483.8Jam, Honer and Marmalade 238.7 127.7 225.1 253.4 261.6 92.2 273.3Natua Tea 200.8 104.S 229.5 241.1 252.9 797.4 305.0Salt 231.1 104.1 316.0 292.5 236.4 1139.9 381.9Flour 263.4 102.3 343.0 339.1 346.0 1353.9 389.6Branod 224.3 102.2 246.0 266.1 257.7 771.6 302.6CereIas nd Legumes 239.7 103.2 310.0 296.0 301.3 1014A 335.7MacaronI 256.6 102.3 318.3 320.6 332.2 2211.3 617.9Poato 309.9 174.7 218.7 312.1 479.0 687.2 173.0Vegeables 324.4 202.8 211.9 375.2 511.4 714.2 183.8Fruits, BDeies and Melons 254.5 141.8 171.9 302.8 339.8 814.5 256.1Vodka and Alohalc Drinks 120.0 103.2 116.5 119.7 127.7 573.9 482.1Winc 145.0 105.4 131.5 154.5 216.6 801.2 313.8Cogac 151.8 102.3 147.4 160.6 172.8 598.7 268.4Champagno 150.2 .104.5 164.5 172.2 160.9 857.1 459.3Beer 179.1 104.4 193.3 2154 196.0 947.7 4594Soft Drinls 216.9 105.4 249.3 265.8 260.9 958.1 340.1Ice Cream 246.7 102.0 322.9 305.6 321.5 1917.3 57.9Other Kids of Food 173.9 104S 203.9 184A 2254 713.3 296A

(caab_o

222 Statistical Appendix

Tabl 8.1: Kazak* sta - Indices of Retai Pricos by Grons of Goods in 1991

1192ANNUAL 1/ QUARTERLY 21 OVER

1991 J9l m11 DC191 IV/91 192 IV191 3/

Non-Food Goods 190.9 115.3 2035 211.6 236U7 642.8 267.4

Cotton Fabric 202.9 114.9 252.2 236.2 257.4 1036.6 38S.9Woolen Fabric and Kerchiefs 216.7 108.7 261.1 24U.0 309.0 934A 275.0

ladc. Woolen Kerchidf. 203A 107.7 269.7 270.2 258A 600.9 241.9Silk 208.6 112.2 224.0 252.6 246.0 1056.4 297.4Linen 227.6 112.0 302.3 247.9 292.3 947.7 274.1Clod.s and Underwear 210.7 110.7 244.3 258.1 231.1 894.1 266.9Furs and Fur Goods 210.5 119.6 245.2 229.8 296.4 1011.3 262.9Head-Dresse (exceptFur and Knit) 192.8 110.6 231.1 239.3 242.0 S22.4 2335

Knit Wear 212.9 111.S 231.9 249.4 302.8 926.5 273.9KnRited Underwear 187.2 109.1 238.6 239.6 234.8 850.5 349.8Stoking. Socks 187.8 112.6 200.6 217.0 235.1 655.5 299.2Leather, Fabric, and

Combined Footwear 189.3 114.4 210.1 216.5 238.4 780.5 253.1Rubber Footwear .189.7 114.9 196.4 237.9 254.6 417.8 194AFelt Footwear 221.S 102.1 258.1 313.8 325.4 882.2 262.6soap 203.7 102.2 218.8 22S.7 303.5 1136.0 311.1Syndtheic Detergents 165.2 106.9 194.4 203.5 179.0 596.6 325.5Beauty Soap 167.3 103.3 198.8 221A 209.8 510.3 242.6Perfume and Cosmetics 168.7 109.8 196.7 186.9 200.1 653.0 244.3Haberdashery 176.5 112.3 210.0 208.3 227A 54.3 213.9Thread 185.5 106.0 219.2 217.9 226.9 576.9 238.9Tobacco and CIguettes 162.7 107.1 177.2 181.1 184.4 713.3 419.3Matches 5M6 600.0 601.8 600.0 622.0 1233.1 423.8Exrcise - Books 384.0 107.5 476.3 600.0 S96.5 1550.0 278.9Paper and Stationary 199.4 1075 218.8 240.4 269.5 578.9 229.6Prinftd Mlattr 179.0 1315 186.2 195.2 212.9 318.3 223.7Sports Goods 1I855 112.S 199.7 210.0 229A 403.0 229.7Radio Goods 1754 113.9 182.6 182.3 224.0 689.6 255.1Mus Intrumnents 206.6 116.3 193.0 2S5.4 351.0 593A 243.9Toys and Christms Decortions 162.5 115.4 172.4 170.4 190.7 479.3 276.1OtherRecreation Goods 179.8 110.3 167.8 191.8 248.3 420.9 185.2Furniure 205.S 136.1 221.0 216.1 253.3 672.8 298.3Carpets mad Carpet Goods 217.3 139.7 298.2 259.5 226.1 409.0 233.6MetaUic Dishes and

Kitchen Utsils 187.9 108.5 217.8 22S.7 23L5 610.9 291.4China Wareand FPas 193.4 118.5 231.1 232.5 234.5 7625 324.6

lases and Glas Things 188.6 129.2 191.9 215.0 219.3 701.3 313.5Cockis and Watches 163.7 117.1 193.9 170!5 182.3 559.4 297.4Electric Goods 187.2 1159 202.4 211.7 236.2 91123 362.7Bicyces and Motorcycles 183A 135.9 210.2 203.0 238.9 496.6 222.2Building Mhatrials 193.8 122.2 217.4 215.0 251.3 691.0 322.5IJwelry 259.1 252.0 260.1 240.6 269.1 414.6 269.0Household Chemical Goods 171.3 110.0 182L4 194.7 220.3 380.8 178.7Cars 153.6 107.0 170.0 163.4 170.7 65t.7 476.3Harness 143.6 102.5 164.9 159.4 165.0 536.7 255.9Pharmaceuticals :1020 116.9 107.1 101.5 101.9 400.6 401.5

1/ AwNUAL. Pcrcat lean n averag hm L990 tD 1991.2/ QUARTERLY: Peaibtue ofprkesibgnVim q ouswr_ c raht.priceshRAssm qwzin csfpzcvlusyrfi.312 OVERPV191: Percnt in duwri firqts-of 1992.41 f12 OVER 11Z2 Pcrcatiacamn durig tohe e m frofI99±Ss S SM&E6dm Wa

Statistiil Appadix 223

Tae &Z Kazhstw - A _ggegt Mdus of Wholalo Prie of ErEnatuTem ii 1991 ad 1592 I1@uacteatincuu, 1991 over.990 and 1992 ov4r 1991)

JAN FEB MAR APR MAY JUN JUL AUG SEP ocr NOV DEC

1991

Enwray Industry 143.1 126.7 16L0 185.0 150.5 182.6 210.6 175.8 17S.5 138.0 189.1 155.3Fuels ndusty 221.4 229.3 229.6 230.1 229.7 231.7 234.2 231.7 232.0 232.0 232.0 232.0Coal Mining 257.9 259.1 259.2 259.2 258.7 259.2 265.7 259.2 259.2 259.2 259.2 259.2Feimus Metalurgy 1595 203.6 197.7 203.3 2D1.7 205A4 218.9 223.9 219.9 2.6 226.6 228AChemical Indusy 161A4 166.7 167.0 179.1 130.2 180.6 189.7 188.6 202.2 258.5 344.4 3895Machineobulding 167.6 175.3 179.6 177.3 1835 186.7 135.4 189A4 199.1 206.8 2475 294-9Tier, Wood Procea,Paper Industris 140.7 145.4 161.B 173.3 173.6 192.0 215.3 240.1 244.S 307.4 3384 350.3

Bulding baterials lad. 174.0 21039 2Z7.2 229.1 230.8 234.1 25S5.2 266.1 253.1 263.0 268.6 354.2LightIndusty 167.3 172.0 190.3 250.6 254.8 261.4 344.0 389.2 376.7 40.LZ 421.9 460.7Food bIdusty 131.3 140.9 156.7 21918 231.4 250.2 253.8 248.6 266.6 233.3 280.6 366.2Mea 100.5 101.8 99.5 618. 601.5 657.0 654.0 652.0 648.4 47.0 644.2 625.8Butter ad Dairy 100.1 99.3 98.9 425.3 472.3 421.0 423.5 433.2 432.7 437.2 438.1 443.0Fisk Industris 198.7 21S.7 205.6 194.3 208.3 197.9 214.0 221.1 210.7 238.3 245.0 234.1Mi11ng lndustr1 252.5 253.1 255.7 255.4 259.7 2628 249.0 236.4 221.2 203.1 201.4 201.2Mixed Fodde Industry 143.3 153.7 195.8 218.6 210.6 208.3 2013 170.3 162.0 170.5 175.0 173.1

Total 181.7 181.6 191.3 255.0 2S7.8 273.9 300.5 293.0 301.4 310.5 343.4 367.9

1992

EneWr ldustry 599.5 812.0 2,388.8 2,394.4 2,387.7 5,163.0 6,300.6 5.8872 5,811.9Fuds Idu1 632.7 649.9 664.0 670.2 669.0 3,261.8 3,418.9 4,016.9 4,084.6Coad Mining 747.3 839.9 839.0 839.9 339.9 5,153.8 4,302.3 5,255.4 S,255.4 .. .. ..

Frous Metallurgy 413.3 2,912.0 3,031.3 3,031.3 3,1043S 4,086.1 3,906.9 4,647.7 4,826.9Chemical Indusbty 2,108.8 2,956.S 3,111.5 318135 3,202.1 3,149.8 4,319.2 4,956.3 4,7402Mlachine-bulding 784.3 1,572 1,327 1,490.7 1,562.1 1,629.7 1,793.3 2,168.5 2,0545 uimber, Wood Process.,Papcr Indushics 1,122.0 1,29135 1.435S 1,719.8 1,591.1 1,602.9 1,729.7 1,332.7 1,320.1

KuiIdiCg Materis lId. 756.1 947.1 1,109.2 1,126.6 1,249.9 1,626.7 1,02.2 1,319.1 1,865.7*lgt Industry 928.3 908.3 1,142.2 925.8 816.3 933.7 1,103.4 1,042.1 947.9.ood Indusbty 967.1 1,097.3 1,236.6 903.0 1O0S.3 1,071.6 1,9305 1,983.7 1,905.5[eat 1,763.2 2,222.0 2,26.9 1,143.1 69S.9 132S.3 1,676.0 1,659.6 1,704.5

"onr and Dairy ;,331A 1,491.8 1,613.8 635.7 84S4 671.4 1,147A 1,110.4 1,139.8ishLdlusties 390.9 749.0 830.1 81837 626.7 74118 768.4 88S.3 1,1534'SlUg Industy 969.9 950A 1,0441 774.0 811.0 814.1 LS,01 969.3 2,756.3uxed Fodder Industry 601.8 686.2 677.9 776.6 875.9 907.7 1,S71.7 901.3 1,501.1

atcu 1,443.5 1,475.3 1,719.6 1,593.3 1,590.3 2,110.8 2,659.8 2,753.0 2,093.3

I/ W ,itout turAovar i

:nave: Sa Staistcal CommiIta

224 Sttistical Appendix

Table S3. K:aak - l92 AgraAb Idices of WaoIeslo Picw of Etnymis If(mpecstflb gwprviwowsfm)

JAN. FED. MARCH APRIL MAY JUNE JULY AUG. SEPr.

Ergy Industry 343.1 242.2 313.6 100.9 100.2 309.3 173.9 100.9 100.9Fuels Industry 579.5 142.3 103.1 101.7 101.7 482.0 272.1 106.0 100.3Coal Mining 7473 100.0 100.0 100.0 100.0 650.0 100.0 105.8 100.0Ferrous Mallurgy 225.5 992.3 161.4 104.9 105.3 120.4 123.9 111.2 104.3Chemical Idustry 1014.0 171.7 121.3 128.0 124.4 119.0 162.1 143.8 113.2Machn-building 458.0 248.1 128.9 110.2 105.1 106.3 117.5 119.5 112.0Tinber, Wod Processing mnd

Paper hnustries 484.9 193.0 145.7 114.6 100.9 106.9 112.6 103.1 114.9Buildin Matrial. Industry 402.5 143.2 123.6 113.8 114.8 145.1 117.2 115.6 115.9LigT Industry 297.7 129.6 146.3 110.0 104.5 114.6 107.0 106.3 112.7Food lIdus2ry 371.8 119.9 117.2 123.3 119.6 113.3 162.1 122.0 135.6Meat Industry 445.1 127.7 110.5 109.3 122.8 110.4 211.9 124.6 99.9Butter and Dairy Industry 313.3 109.5 101.7 117.7 116.0 118.9 252.7 106.0 101.1Fih hndustries 539.7 111.1 101.5 103.1 98.2 111.1 103.5 103.9 145.5Milling lIdustay 579.9 122.1 103.3 99.9 111.7 104.1 111.8 105.3 305.0Mixed Fodder Industry 406.9 181.2 110.5 167.3 120.5 104.3 102.5 100.6 157.0

Total 530 218S 1333S 111.0 110.0 159.3 152.3 113.4 1163

I/ Without turovr &r.

Souwnc Sbt. Statst Committe.

Statistica Appedix 225

Toablt Kazukftan - ilce Indxcs af Paud Services RmMwed tbdo PepukhM(ratio ofr3ce4 If mpeCeQ

1990 1991 1-92 -92 11-92 1-92 FI 1m-921989 1990 1-91 11-91 m-9i IV-91 I1-2 H-92

Paid Services:

Consumer Services 107.0 208.1 909.6 729.0 902.6 403.4 1673 154.6Passenger Transport 101.4 103.2 597.9 718.1 1132.0 305.9 234.1 156.8Comunuications 105.1 131.1 547.2 555.2 923.9 351.0 154.5 140.2Housing 99.9 111.4 344.6 361.7 654.3 288.2 155.3 129.0Cultual SerVices 105.4 141.5 378.3 487.1 586.1 261.4 151.5 143.2KindergarteIs .. 100.0 157.2 814.7 853.8 157.2 687.5 109.5Tourism and Excursions .. 151.7 648.9 734.4 1009.7

Health Care .. 165.5 602.2 679.4 906.4 463.5 164.4 135.0Hledth Resorts .. 212.9 1036.9 943.2 1041.9 418.0 125.6 165.6Legal and Banking Servixs .. 101.7 109.0 112.8 231.3 106.2 115.9 119.7Communal Sevices .. 105.1 344.6 450.5 798.0 288.2 151.5 168.8

Total 103.4 159.1 632.4 6573 958.8 333.9 199.0 154.5

Consumer Goods and PaidServices to the Population .. .. 695.3 637.7 987.4 307.9 138.2

including:

Consumer Goods .. .. 711.7 634.5 993.0 304.7 136.1

Paid Services .. .. 632.4 657.3 953.8 333.9 199.0 154.5

Soure: State StWatfcd ComaImi

226 Statistical Appendix

Tablo 8US: Kazakhstn - Avweago MuMyyNomial Wagps of Workms ad Employees

1984 1985 1986 1987 1983 1989 1990 1991 1992 1/

CM curret rubles)

Total 167.1 186.S 192.7 199.3 214.6 233.6 265.4 433.3 13932

Industr 187.6 212.4 218.0 223.5 244.6 266.6 296.0 531.2 2255.3Agriculture 1670 197.5 210.9 217.2 225.3 243. 292.4 406.4 813.5Foretry 113.6 120.8 123.3 127.4 155.0 180.9 1822 3165 992.2Transport 205.8 220.6 226.0 234.7 255.1 272.7 302.7 493.3 18262Communication 133.7 145.1 146.9 156.3 185.0 197.B 227.5 388.9 1194.6Constuctio 205.9 233.8 240.3 249.7 276.0 304.6 330.3 5385 1922.1Trade supply 128.4 137.0 139.8 140.4 149.3 163.9 212.6 352.5 997.4Computing 119.6 123.6 142.8 147.3 164.3 205.1 240.6 376.2 1275.0Odier material spher 107.0 121.2 126.3 136.5 143.8 160.5 176.1Houin and commu srvices 130.0 141.7 143.9 148.2 164.1 173.3 198.9 337.9 1083.5Hedth and socia insuranc 120.7 125.2 127.2 134.4 140.9 158.2 178.0 351.3 841.2Education 1254 1392 143.7 156.0 161.9 1713 182.1 319.0 859.6Clure 102.4 10S.4 106.4 109.3 117.6 129A 161.1 237.9 774.8Art 1143S 120.0 122.3 125.8 130.7 1412 169.5 287.9 774.8Science and researh 182 202. 212.6 220.8 260.9 292.5 320.2 457.8 1241.8Credit and stae insurance 144.0 158.2 168.9 173.3 175.8 202.0 354.2 741.3 2179.6Man_gcmcnt staff 1475 154.5 160.7 173.2 197.2 223.2 334.7 474.0 1214.0

:eCoenag chaos.)

Totd .. 11.6 3.3 3.4 7.7 8.9 13.6 63.5 221.2

ndutry .. 13.2 2.6 2.5 9.4 9.0 11.0 79.5 324.6Agiculur .. 18.3 6.8 3.0 3.7 8.2 19.9 39.0 100.2Forsy .. 6.3 2.1 3.3 21.7 16.7 0.7 73.7 213.5Trnsport .. 7.2 2.4 3.8 8.7 6.9 11.0 63.0 270.2Commnition .. 8.5 12 64 18.A 6.9 15.0 70.9 207.2Consuc .. 13.6 2.8 3.9 10i5 1OA 8A 63.0 256.9Trade, matcriald-tc ply .. 6.7 2.0 0.4 6.3 13.1 25.9 65.8 133.0Computing .. 3.3 15.5 3.2 11.5 24.8 17.3 56.4 238.9Other maerid phere .. 13.3 4.2 8.1 5.3 11.6 9.7Housing and commun svces .. 9.0 1.6 3.0 10.7 8.7 11.6 69.9 220.7Health and soc Irance .. 3.7 1.6 S.7 4.8 12.3 12.5 97.4 139.5Edation .. 11.0 32 8.6 3.8 6.2 5.9 752 1695culure . 2.9 0.9 2.7 7.6 10.0 245 78.7 169.1Art .. 4.8 1.3 2.9 3.9 8.0 20.0 69.9 169.1Science and rcsearch .. 10.9 4 3.9 18.2 12.1 9.5 43.0 171.3Credit and satre inranc .. 93 6.8 2.6 1.4 14.9 75.3 109.3 194.0Managemnt doff .. 4.7 4.0 7.8 13.9 15.7 46.7 41.6 156.1

IJ First quarterSour.e State Stacd Commite .

Statistical Appendix 227

Table Karkhuta - Numler andAvag Moenty Wage of Workein the Govrnment Sect of die Faomy

1991 1991 First Quarter 1992Workers WagelMonth Workers WagelMonth

Total 6,442,141 434 5,936,849 1,393

Industy 1,406,892 531 1,331,911 2,255Agricndue 1,182,104 406 1,298,088 814Forestry 13,578 317 13,737 992Tranport 594,728 493 534,312 1,826Communication 89,024 389 88,597 1,195Construction 665,262 539 582,042 1,922Trade, Material-Technicd Supply 516,616 353 514,320 997Information Services 19,378 376 10,435 1,275Housing and Communal Services 258,222 338 157,437 1,084Health Careand Social Insurance 448,121 351 413,473 841

Education 765,914 319 613,796 860Culture and Art 113,616 288 75,412 775Science ad Research 92,543 458 77,569 1,242Credit and Stae insurance 41,984 741 38,262 2,180M4anagemDetStaff 113,238 474 109,473 1,214

Workrs: in person.Wage/Month: in current zabes.Soon: state Stb;jaca CommiItee

228 Statistical Appendix

Taf b!. £7: Kazakbsta - Liozus of Populadwicm ules)

1970 1980 1985 1990 1991

Average moathly wages:

National Economy 123.7 167.1 186.5 265.0 433.8Industzy .. 186.7 212.4 296.1 531.2Construction .. 204.0 226.8 315.2 538.5Stat farmers .. 169.3 201.2 298.0Colective faumers .. 139.0 167.0 246.0

Minimum wage: .. .. .. .. 342.0

Average monthly pensions: .. 58.1 11 .. 101.7

i/ Far 1981.Soure: Statistcaf Yearbook of Kazakhsta, 1991 and Stat. Statistical Committa

Stwisucal Apo.dix 22

Tabh. & X.: KszaMst - I,rof 5.1kd Fm (aswwppar Emily in cmtzihhqmryjwr)

Year Eidustidm Stao Farm FarmWorker Worker Workr

1980 5,292 4,078 3,8411981 5,347 4,107 4,0771932 5,531 4,181 4,1811983 5,556 4,426 4,4421984 5,682 4,713 44503198S 5,632 4,727 4,4341986 5,877 5,049 4,7551987 5,968 5,369 4,9451988 6,349 5,573 5,3841989 6,730 5,555 4,7951990 7,173 6,228 5,678

1991q2 4,658 4,424 4,2191991q3 8,323 7,547 7,470

Swrcw IMPad World darMw&

230 Statistical Appedix

Tabla 8.* R sKarLt - Moey Ioes nd EDrpdiWs oft. Pop ade,ati mllionjs of currt ables)

1985 1986 1987 1988 1989 1990 1991

INCOMES

TOTAL LABOR INCOMlE 17,796 18.253 18,950 20,548 23,160 26.697 44,47B

Regulr wages 15,424 15.961 16.585 17,940 19.522 21.166 35.942Wages pid by co-ops .. .. .. 116 684 1,167 1,712

Other wages & compensatoks 530 538 547 630 742 850 1,945nc. paid by coloctive farms 564 572 606 618 614 702 1,701Lnc fromsdaeof&fam products 1,278 1,182 1,212 1.2A4 1,598 2.112 3.178

TOTAL TRANSFER RECEIPVS 3.491 3.734 3,928 4.447 4,611 5,606 16,231

Pensions and alowanxcs 2,399 2.575 2,693 2,861 3.012 3,430 13,467Sbchlarships IS3 153 159 167 166 184 546tc, fixnn fumackl sm . 657 641 700 946 795 1,286 1,329

Other inoome 282 365 376 473 638 706 889

Adjustcent 0 0 0 0 0 0 0

TOTAL INCOME 21,217 21,987 22.878 24,995 27,771 32,303 60.709

OUTLAYS

TOTAL PURCHASES 17,235 17,594 18,375 19,620 21,366 24,039 41.236RetaWd badepuchascs 15,515 15,731 16,365 17,383 18,545 21,512 35.591Purchased srvices, of which: 1,721 1,363 2,010 2,237 2,421 2.527 5.646

Rent and utflities 557 598 626 656 693 667 760Communications 125 145 159 177 195 214 306HCaILh & CUIcr S. les 30 28 27 27 29 39 343

Coopereantiv .. 3 53 78 111 725

TRANSFRS3 AND SAVINGS 3.253 3.658 3.922 4,373 5,139 6,349 11,012Taxes, foes, duties, oth 2,425 2,536 2,653 2901 3,256 3.864 4,716

Savings 616 932 !,054 1.244 1.692 2,274 6,061Odher 212 190 215 228 191 211 235

Adjustment 0 0 0 0 0 0 0

TOTAL OUTLAYS 20,4$8 21,252 22,297 23,993 26,505 30,388 52,248Inconr less expcnditure 799 735 581 1,002 1,266 1,91S 8,461

Soure Stat. StaDtS6IiC COMmittee

Sbcail Appeni 231

e9.1bs: KxzaMmwtua - iwt, IP-P

1990 19911/

(in millaias of 1992 rubl.)

AUl AllFmmng Gov'L vestmmt: Fia_in Gov't nvesbtentSou Toel Equip_nt Sour Total Equipment

Total 19,164 16,036 S,177 18,060 16,887 4864

Productive Iv0stment 13,20 11,402 4,953 12,520 1,391 4513Including

induslry 5,t63 S,080 1,991 5,160Machia-Buldig 499 237 167 257

Agricu1bur 4,37S 4,059 1,903 4,650 ..Transport andCommunication 1,310 1,240 658 1,730zConstuction 822 760 311 650Trade and PublicServices 233 122 39 225 ..

Nan-Productive hnostment 5,961 4,634 224 5,540 5,490 351

Houing 3,912 3,153 40 3,670

(n prcent of toa inctnet)

Total 100.0 83.7 27.0 100.0 93.5 26.9

Ptoductive Invstment 68.9 595 25.8 69.3 63.1 25.0

Industry 30.6 26.5 10.4 28.6Mching-Buildiug 2.6 1.2 0.9 1.4

Agriultue 22.3 21.2 9.9 25.7Transxot adCOmmunicatico 9.4 65 3.4 9.6Construction 4.3 4.0 1.6 3.6Tnde and PublicServices 1.2 0.6 0. 1.2

Non-Productive Ihvtmt 31.1 24.2 1.2 30.7 30.4 1.9Including

Housing 20.4 165 0.2 20.3

15efStatesd sta

.. MM .& -bsk . ml

232 Statistical Appendix

Table 9.2 KRaksfa - Capial mwtvwmz(m mliWma aof cunt rzul)

1990 1991

Total Investments from All Sources 13,059 18,747of which Installation and Buildig Works (IBW) 6,418 9,094

Productive Sphwe 9,137 12,821of which IBW 3,378 4,320

Non-Productive Sphere 3,922 5,926of which IBW 3,040 4,274

Slats Investment 12,142 16,891of which JEW 5803 7915

Prducti Sphor 8,661 11,841of which IBW 3,166 4,407

No-Productive Sphere 3,481 5,050of which IBW 2,637 3,508

Agrcidclal Complex 4,290related IBW 2,354

of which:

Productive Sphere 3,043 5,097related IBW 1,296 2,237

Non-Productive Spleo 1,297related IBW 1,058

Source SIa Saistcal Commsiu

SltLis6cal Appendix 233

Table 9.3: Karae - Swan Inesm etCmr mdih, of czrot -)

Total ihtllaion and BuddingSector 1990 1991 1990 1991

Fabds a 2a . 1u182 1ctdd*t 361 776 2I6 436

PWlm UuSm hah 199 1.042 376 56DPd'Pm 1aceel 34 41 21 26O. hdn7 352 204 252 68CH d 723 562 366 250

Reuoucr*a.d J*nIu 96s 1,U3 600 s5

MD py 526 735 231 352Gold aid DI.mIDNaCUbl 49 79 24 28

aka dPcuo kme 266 211 113 116_ce-odiulcal 32 33 9 16

iu bbrd W e"d PMOGe 19 11 6 6tmlo ad Paper 0 4 0 2

Ti1bwsWlg 0 0 0 0klbdlqM.dula 72 at 17 51

NacHo-bglgk hAsh. 79 76 24 20ewyudTN MwMyldsdl 9 a 2 0

Taa, mad Agucme Mam70 7S 2Z 20

Seico hduaia 1.057 776 26D 223cdJ Ecaa ad 271 126 U 640moIe ad Pr _oaot 364 2XW 1 1UMak na bdTa Sqlwy Leub) 6 21 4 16IJa Iba1 140 1tO 32 53Lads! -f 24 20 7 a

ta~u3myhea 35 36 14 21TM& NWdF uiCeo$ 214 ff 117 4s:4y. Dw Zo W _atmoed 2 1 1 1

Aam4aadhAtrie 2.541 3. 1.238 1,_ 1 2.544 3.17 L.OS 1,350

Food 55 1O0 37 42oamdDala 104 182 73 100

Fb 11 i5 10 5Phorfad Ca na 105 74 56Pans 10 7 4 2MJcroboIa WiOW 9s 5 S 2MD" bctuy 0 0 0 0

FdPt -d PWbIMh 10 16 1 3

T- a_ md Caumlka 793 750 279 326Ai" Thosp - 212 201 30 9RoCad _ Cs I26 192 10w 162RaflW Tz _qmt 167 153 73 221=7s;_ 6 4 4 0AlrTrsnaqea I1 20 6 10PatraadProhcamqz 29 30 12 20CouAuMMlcatm7 1I5 49 44

co _aucie. 2.774 3.798 Z393 3t051Hoeft 2.4 3,1U4 2,125 2.561C4_an c 350 614 269 490

HoSt Edae an W6d6e so 1.143 425 834N tldue Maci 367 660 27 SCO0e 51 105 35 75Nadhn! Nca* 1 360 111 235

_sffiehdISemd 11 17 4 4Acdmy of tim

Otbetw_ 45 86 21 !5

XOrAL 13,70S 221959 6cx AwQ

Sown ncjp,ahdkakrs, Stab Ecoaic Committee, Novomber 1991

234 Statistical Appedix

Table 9.4: Kars&hs?am - awnr*dwf Sbtd aCqdIImwft

Shm in Total Jnvatmmat 1991in porcnt

1990 1991 1992 It of 1990 2r

Toa 100.0 10.0 100.0 97.9

of whichi

Productive SoCr. 70.0 63.4 65.9 97.1

Industry 31.2 30.0 .. 95.5Electraomrgy 3.3 3.2 5.3 96.7Mining 15.1 14.7 11.4 95.7Machine-Buding & Met Work 2.9 1.9 .. 69.9Light ldustby 1.1 0.3 0.5 71.0Agro-Pwcsing Industry 20 2.7 1.9 130.1

Agriculture 22.S 27.2 .. 116.5Transport and 9.6 S.3 .. 54.9Constrction 4.9 3.6 .. MO0Trde, Caering, Material-Teehnical

Supply and Salo 1.3 1.3 .. 105.3Oilier Pnroutive Branch O.S 1.0 .. 186.9

Non-Productive Sector. 30.0 31.6 34.1

Housing Cnstruction 19.4 21.0 22.4 100.8Othor Non-Productive Branches 10.6 10.6 11.7 97.8

1/FPist hfofthe yer.2&T camplio pie.Souwe: State Sat ica Cosine.

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