Investment in the Republic of Kazakhstan: Trends in the Transition Period
Yuri Shokamanov, Master of Economics, First Deputy Chairman of the Statistics Agency of the Republic of Kazakhstan
Gross Domestic Product (GDP) per capita is the major indicator of the economic and social development of any state. It not only shows the standards of living of the population, but also gives knowledge about the internal resources of the country. A reduction in GDP results in decreasing gross capital formation, and consequently diminishing social programmes and investment in the economy from the state’s own funds. An increase in the GDP, in turn, allows the use of national savings along with foreign investment, and investments in the fixed assets that play a decisive role in ensuring economic growth in the country.
I. Trends in gross capital formation in the CIS countries
In the last decade of the 20th century, the economic development of the CIS countries was unstable. This was a result of the transformation of the economic system and the transition to a market economy. As a result, GDP in 1999 dropped by 30% in Kazakhstan, by 37% in Russia, by 31% in Kyrgyzstan and by 5% in Uzbekistan, in comparison with 1991.
Low investment activity in the countries caused a reduction in the share of gross capital formation. Compared with 1991, it dropped from one third to one fifth of GDP on average for the CIS countries. The gross capital formation in Russia, Ukraine and Kazakhstan made up less than one fifth of the figure of 1991 in fixed prices.
The norm of gross national savings, which is an internal source for investment, has greatly reduced. It makes up around one fifth of GDP in only five CIS countries (including Russia and Uzbekistan). In Kazakhstan, the norm of gross national savings is one sixth of the GDP. Net national savings (gross national savings less fixed capital consumption) are negative in Armenia, Georgia and Kyrgyzstan, and insignificant in Azerbaijan, Kazakhstan, Uzbekistan and Ukraine. This means that current expenses in economic sectors are financed by means of reducing financial assets (cash, deposits, etc.) and assuming liabilities (issues of money, securities, receipt of loans, etc.).
The investment climate in most of the CIS countries is not favourable enough for foreign business. Since 1996, however, the investment process has somewhat revived in the Transcaucasian countries, Kazakhstan and Kyrgyzstan. Over the last three years, the assets of foreign companies and joint ventures have made up 3-5% of overall investment in fixed assets.
The investment crisis resulted from the age and technological obsolescence of machinery and equipment, and the accrual of morally and physically obsolete fixed assets. This limited the possibilities of quick production growth. Under the conditions of a chronic shortage of funds, however, the CIS countries began using depreciation charges for the accumulation of tangible current assets, rather than for the purchase of new fixed assets or the modernisation of the existing ones. The increase in the output of major economic branches in 1991 was only possible thanks to a fuller load of the existing fixed assets without any renovation.
II. Investment in fixed assets in Kazakhstan for 1992-1999
More than one third of the overall investment in Kazakhstan’s non-financial assets is used for the replenishment of tangible circulating assets. Investment in intangible and other non-financial assets makes up only a small percentage. The greatest part of investment (over 60%) is made in fixed assets.
Despite a catastrophic slump in investment in fixed assets in 1992-1996 (investments made in 1996 amounted to only 9.5% of the 1990 level), the negative trend was stopped and turned to gradual growth in 1997 (Figure 1).
Over the last five years, more than 55% of overall investment in fixed assets has been made in various industries (73% in 1999), mainly in mining (59% of investment in industry in 1999).
Investment in capital construction takes up the largest share in investment made in fixed assets. The analysis of the investment reproduction structure for the last years shows an increase in investment made in new construction (growing from 24% in 1995 to 52% in 1998) due to the reduction of investment in the construction of individual facilities and the expansion of functioning enterprises (Table 1). Meanwhile, investment in technical re-equipping and the modernisation of functioning enterprises remains at one third of the investment in capital construction.
Over the last five years, the structure of investment in capital construction has radically changed in terms of sources of finance (Table 2). The share of the internal funds of enterprises and organisations reduced from 92% in 1995 to 45% in 1999, while the share of foreign investment increased from 1.5% to 43%. This shows that the shortage of internal funds for investment in fixed capital is compensated from external sources.
In 1999, a total of 110.4 billion tenge of foreign funds was used in the country. Together with Georgia, Kazakhstan ranks second among the CIS countries in terms of its foreign investment percentage in overall investment in fixed assets (in 1995, Kazakhstan was at the bottom of the list in the CIS). Kyrgyzstan is at the top (52%), followed by Azerbaijan (42%), Armenia (39%), Moldova (38%) and Uzbekistan (24%). Foreign investment is minor in Byelorussia (2%), Russia (5%) and Ukraine (3%).
III. Investment in fixed assets in Kazakhstan over the first six months of 2000
Based on preliminary estimates, in the first six months of 2000, investment in the fixed assets made up 153 billion tenge, which is 29% more than in the corresponding period last year (Table 3).
Investment growth has been reported in 12 regions of Kazakhstan, including 4-fold expansion in the Akmola region, by 2.5 times in Southern Kazakhstan, by 1.9 times in Eastern Kazakhstan, and by 1.7 times in the Atyrau region. Investment in the Aktyubinsk, Mangistau regions and Western Kazakhstan increased by 32-35%. Investment fell in the regions of Almaty (by 7%), Kyzylorda (by 11%) and Pavlodar (by 20%), and in the city of Almaty (by 19%).
In the first six months of 2000, investment in capital construction accounted for 130.6 billion tenge of the overall investment in fixed capital, exceeding the figure for the corresponding period last year by 1.9 times. Around 62 billion tenge of assets (26 billion tenge last year) were put into operation.
The major investment sources were business entities’ own funds and foreign investment, making up 58% and 36%, respectively. Budget funds amounted to 6% (10% in the corresponding period last year).
Most investment in capital construction was used by private enterprises and organisations (62%), and foreign businesses working in the territory of Kazakhstan (28%). The state sector’s share fell from 20% in 1999 to 10% in 2000. Oil production, transportation and communications, and metallurgy remain priority sectors for investment, accounting for 60%, 11% and 5% of the overall investment, respectively. Large investments in the creation and reproduction of fixed assets are provided by mining (59%), processing (11%) and real estate (8%) companies.
IV. Foreign direct investment in Kazakhstan in 1993-1999
In 1993-1999, foreign direct investment in Kazakhstan’s economy equalled $8.9 billion, reaching $1.5-1.7 billion in the last years (Table 4).
Practically all foreign direct investments in 1993-1994 were made in the oil and gas sector. The situation changed in 1995-1997, when oil production ($0.2 billion annually) was replaced by non-ferrous metallurgy ($0.3-0.5 billion annually). In 1996, ferrous metallurgy ranked third in terms of direct foreign investment ($184 million). In 1998-1999, the oil and gas sector regained its leading position (over $1 billion annually). Power engineering rose from third position in 1997 ($144 million) to second place ($153 million) in 1998. Agricultural processing ranked third in terms of direct foreign investment ($124 million) in 1998.
During 1993-1994 and 1998-1999, most foreign direct investment flowed in from the USA. In 1995-1996, leadership was gained by Korea, and transferred in 1997 to the UK, which ranked second in terms of foreign direct investment in Kazakhstan in 1995-1996 and 1998-1999. In 1999, a sound level of investment was made by Italy (Table 5).
V. Gross capital formation in Kazakhstan in 1992-1999
In 1990-1997, the percentage of gross fixed capital formation in GDP by final consumption in Kazakhstan gradually dropped from 37.7% in 1990 to 16.9% in 1997. In 1998, it rose to 17.9% (Figure 2 and Table 6).
Taking into account a higher rate of investment growth in the fixed capital than the growth in the GDP (103.8% and 101.7%, respectively, in 1999, and 129.2% and 110.5%, respectively, in the first six months of 2000), the share of investment in the fixed assets in the GDP by final consumption is expected to continue growing.
Tangible circulating assets ranged from +7.5% in 1990 to –8.2% in 1993. Since 1995, the fluctuation of tangible circulating assets has stabilised to within one percent of GDP.
Figure 2 shows a gradual reduction in imports and exports in respect of GDP beginning from 1993 (from 49% to 37%, and from 40% to 32%, respectively). In 1999, imports (in US dollars) decreased by 28% and exports by 5%, when compared with 1998. This, along with a more abrupt tenge devaluation in comparison with the price growth, will result in a further reduction of imports and exports in respect to GDP.
The dynamics of the components of GDP by final consumption during 1991-1998 varies. In 1998, GDP by final consumption made up 54% of the level of 1990, while expenses for gross capital formation reached only 19%. The index of the exports volume in 1998 amounted to 64% of the level of 1990, and imports to only 26%.
The stable growth of investment in fixed assets in 1997-1999 in Kazakhstan after their 10-fold reduction in 1991-1996 (compared with 1990) was explained by a higher mobilisation of internal sources and the attraction of foreign investment.
Higher rates of decline in the gross capital formation than in GDP in 1991-1996 resulted in a halving of the percentage of capital formation in GDP. Beginning from 1997, however, the percentage was growing, reaching one fifth of GDP in 1999 (based on preliminary estimates).
During recent years, the reproduction structure of investment in fixed assets has changed in favour of investment used for new construction (the percentage doubled) due to the reduction in investment made in the construction of individual facilities and the expansion of functioning enterprises.
Investment in technical re-equipment and the modernisation of functioning enterprises remained unchanged (one third).
Favourable conditions have been created for direct foreign investment, which has doubled over the last five years. The share of direct foreign investment in capital construction leapt from 1.5% in 1995 to 43% in 1999.
Higher growth rates in investment than in GDP during the first six months of 2000 (1.3 times and 1.1 times, respectively, as compared with the corresponding period in 1999) are evidence of a gradual restoration of a favourable ratio of investment and GDP.
The modernisation of the existing production facilities and the construction of new ones have commenced. The foundations have been laid for further sustainable growth in Kazakhstan’s economy.
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