Kazakstan's Overheating Economy

Kazakstan is awash with petrodollars, and this is causing rampant inflation and an increasingly distorted economy. If the government is to reduce the negative impact of oil revenues, it will have to find ways of employing them to develop other economic sectors, and of making non-oil exports more competitive.



Prime Minister Danial Akhmetov highlighted the government’s concern in August, when he outlined eight glaring signs of an overheated economy. The most important of these are inflation, an increase in the money supply due to a sharp rise in consumer credit, and economic growth indicators which are higher when expressed in nominal figures than in real terms.



Experts polled by NBCentralAsia say that the 9.3 per cent year-on-year growth in gross domestic product, GDP, seen in January-June 2006 is almost entirely attributable to raw materials production and the rise in the world price of oil. Last year, oil revenues accounted for 30 per cent of the government budget, five times higher than in 1999.



Analysts suggest that Kazakstan’s image as an oil Klondike – an idea promoted by its political elite - is making it even more difficult to reduce the dependence on petrodollars.



The overheated economy is fueling inflation, a rise in the cost of basic consumer goods, greater social stratification, and growing economic instability caused by over-dependence on the world energy prices.



In the first half of 2006, the nominal growth rate of GDP was nearly three-and-a-half times the rate expressed in real terms; in other words prices rose about three times faster than production volumes.



At present, the government is developing a strategy for identifying seven main sectors or “clusters” of the economy that will become priorities for development. Petrodollars that cannot now be absorbed by the economy will be diverted into these areas.



But experts hold out no guarantees that this approach will work, for two main reasons. First, the government does not have total control over revenues from the oil industry, most of which is controlled by commercial investors, so it will find it hard to redirect this income into non-oil sectors.



Secondly, alternative economic sectors such as tourism, textiles, or timber processing are not competitive on the world market, given high labour costs and low levels of technology. So investing oil money here could amount to little more than localised small business development projects. Investing in alternative sectors can only be justified if they become more competitive on the world market.



Some observers argue that there is currently no realistic possibility that the economy can be made less dependent on raw materials, although they accept that diversification is vital. They say Kazakstan should focus its energies on one or two hi-tech economic niches, rather than trying to develop various economic “clusters” at once.



(News Briefing Central Asia draws comment and analysis from a broad range of political observers across the region.)