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Signs of Improvement in Kazakhstan

The discovery comes as Kazakhstan's economic prospects are looking better than at almost any time since the collapse of the Soviet Union in December 1991 ushered in the period of decline and painful adjustment known as reform.

Kazakh names are likely now to appear mostly as international borrowers.

The recent guarded optimism owes something to the rise in world oil prices as well as to prospects for future output. But Kazakhstan's economy is not as reliant on oil as is sometimes supposed. So it is the other elements to which one must look if revival is to be sufficiently broad-based to be sustained.

The first quarter of this year saw gross domestic product leap by around 9 percent, according to the central bank governor, Grigori Marchenko, speaking at the World Economic Forum. This followed nearly 2 percent growth for 1999, which made up for a roughly similar decline in 1998.

But the overall figures hide the fact that 1999 was a watershed year. The first half saw both low commodity prices and the impact of Russia's ruble collapse and economic crisis in the late summer of 1998. The combined impact forced Kazakhstan's central bank to abandon its dollar peg and adopt a floating currency exchange rate - effectively devaluing its currency from 85 tenge to the dollar to 142 to the dollar as of Thursday.

Although Russia now takes only about 20 percent of Kazakh exports, the fall in Russian import demand and the decreased competitiveness of Kazakhstan's industries forced the tenge off its dollar link. A year later, however, the country is feeling the benefits of both its own devaluation and modest growth in Russia.

Last year also saw a dramatic recovery in agricultural output after a disastrous 1998. Weather was the swing factor, but it underlined the fact that

agriculture remains an important part of the economy, accounting for some 11 percent of GDP. Despite its huge expanses of desert and grassland, Kazakhstan is a grain exporter. Agriculture is as important as oil is to its economy, and metals - copper, ferroalloys, alumina and others - are as important as energy is to its exports. The metal producers have been seeing some recovery in world prices and better demand from Russia.

Meanwhile, the tenge devaluation has increased demand for local products at the expense of imported manufactures.

None of this is to understate the difficulties that Kazakhstan faces. Light industries such as textiles and shoes have been almost wiped out since 1990. Massive overcapacity exists in activities such as coal and power generation, which used to help supply other regions of the former Soviet Union.

Unemployment remains high and profits low. Investment is woefully inadequate because of low savings and limited foreign interest outside the oil sector. Despite numerous trade and border agreements with neighbors and the post-Communist creation of the Commonwealth of Independent States, regional barriers have been tending to increase, adding to the already high costs of trade.

But the tenge devaluation showed that the financial sector was quite robust. Thanks to high liquidity and good supervision, no bank collapses followed, despite the existence of a large number of small banks. Inflation spiked to 17 percent but is expected to be back in single digits this year. The public-sector deficit remains too high for comfort, but efforts to rein it and press on with privatization and other reforms were good enough to get the International Monetary Fund to sign up to a new facility last December. By CIS standards, the country is almost a model of trade and currency openness.

Now, Kazakhstan has to build on this foundation. Most needed is a higher savings rate. Capital markets and the financial sector are developing soundly but from a small base. The ratio of bank deposits to GDP is low - and half of those deposits are in dollars. Banks are liquid, but lending rates are very high. Capital is flowing out as well as in. Many industries badly need to be re-equipped. Smuggling is rampant, undercutting government revenues and the few consumer-goods industries remaining. Privatization of several major enterprises has been only partial, so that state influence remains excessive and is a source of much corruption.

Still, prospects are now sufficiently bright that two state-linked companies are expected to borrow on international markets - Kazakhoil is reported to be looking to issue $60 million to 80 million in dollar bonds, and Halyk Savings Bank is to place a three-year Û100 million ($90 million) issue.

The nation has many problems, including history and geography. But it also has a lot of assets for a population of only 15 million that has inherited the good as well as the bad of the Soviet social and educational system.