Twenty Years of Evolving ADB Support for Economic Growth in Kazakhstan

WestfallASTANA – The Asian Development Bank (ADB) works in developing countries in Asia and the Pacific region to alleviate poverty and support sustainable growth. Country Director Matthew Westfall spoke with The Astana Times about what the ADB stands for and its role and objectives in Kazakhstan.

“The ADB was founded in 1966, driven by a desire to improve people’s lives in developing Asia and the Pacific,” Westfall explained. The organisation’s headquarters are in Manila, Philippines and its mission in Kazakhstan is one of 28 such offices around the region.

“In partnership with our developing member countries and other stakeholders, we try our best to target resources effectively, with a sharp focus on alleviating poverty and helping create a world in which everyone can share in the benefits of sustained and inclusive growth. It’s a big task, fraught with challenges, but we carry on important development that strives to make the world a better place,” Westfall said.

The ADB does this through investing in infrastructure, health care services, financial and public administration systems, as well as helping nations prepare for the impact of climate change and better manage their natural resources. ADB assistance comes mainly through loans, grants, policy dialogue, technical assistance and equity investments, Westfall said. The bank provided about $21.57 billion in financing across the Asia and Pacific region in 2012.

“The end game for us is a region where our developing member countries have been able to evolve and graduate into thriving, modern economies that are well integrated with each other and the world,” said Westfall.

Following is a question and answer with Matthew Westfall.

What are the ADB’s main objectives in Kazakhstan? Since 1994, what have been the most significant projects the ADB has supported in Kazakhstan?

The ADB’s partnership with Kazakhstan began after the collapse of the Soviet Union and has been underway for 20 years. In the early years of this partnership, the ADB provided much-needed support in agriculture, education, finance and delivery of social services to help the country’s transition from a centrally-planned economy to a free market system.

By 2004, the ADB’s public sector lending activities paused as oil revenues filled the government’s coffers and the need for external finance declined. However, the global economic crisis in 2007 prompted the government to once again access external concessional resources, and our activities quickly picked up. We responded with a $500 million counter cyclical loan, followed by support for operations in road transport, small and medium-sized enterprise development and the private sector.

More recently, the ADB and Kazakhstan jointly launched an innovative knowledge and experience exchange programme, which aims to help the country diversify its economy and achieve more equitable and sustainable growth.

Our country partnership strategy for 2012-2016 has been designed to help make the economy more competitive and diverse in order to sustain growth and create jobs, defining a new development partnership that is relevant and responsive to Kazakhstan’s goal of transitioning to a high-income country.

Our public sector lending operations are increasingly selective, focusing on modernising infrastructure and utilities and improving access to finance for small and medium-sized enterprises. Our private sector operations, on the other hand, target trade finance, transport, energy and agribusiness, as well as opportunities for selected equity investments in banks and equity and debt financing of investment funds.

Over time, as Kazakhstan continues on its impressive development trajectory, our growing knowledge partnership will take a more prominent role and will increasingly define our relationship in the years ahead.

How would you characterise the investment climate in Kazakhstan at the moment?

Kazakhstan’s gross domestic product per capita has grown by more than 17 times in the past 20 years, from about $700 to $13,000, and the country has graduated from a lower-middle income country to an upper-middle income country.

This stellar performance has been the result of both sound macroeconomic policies and a favourable investment climate. The country has also successfully weathered challenges and implications of the global economic crisis and has managed to maintain its investment grade rating.

All that said, there is still much to be done. Improvements in infrastructure and human capital and greater transparency in legal and regulatory environment have all been flagged by investors as the most important reforms that will help increase Kazakhstan’s competitiveness.

The importance of strengthening institutions and implementing reforms in the financial and other sectors is also critical. Risks remain in the banking sector, especially the problem of non-performing loans. Continued risk aversion of the banking sector could continue to restrict the private sector’s access to credit and hamper investment.

We hope to see the private sector taking the lead in transforming the economy, which can increase productivity and diversity through innovation and entrepreneurship. For this to happen, a sustained improvement in the business environment to promote greater private investment is needed. Clear, firm and decisively executed policies that are important for building confidence in the private sector are needed, and this applies to both foreign and domestic investors.

What are the positives and negatives of this huge, land-locked, resource-rich country?

Kazakhstan is endowed with abundant oil, gas and mineral reserves. It has a forward-looking development strategy that focuses on industrialisation and the diversification of the economy, perhaps the two most critical aspects to ensuring that growth can be sustained over the long term. It has embraced an ambitious vision through the Kazakhstan 2050 Strategy, which will help guide the way. It also has a vast arable area for agriculture, as well as a young and educated population. And, its strategic location allows it to provide a land bridge between Europe and Asia. These are all important factors to achieving its vision of the future.

As we can see, Kazakhstan is transforming from a land-locked to a land-linked country. For example, Kazakhstan was previously dependent on Russia for its oil exports, but has been able to reduce this with exports to the Mediterranean via Azerbaijan and Turkey; by barge and rail to Batumi, Georgia; and by building a pipeline to China. Kazakhstan now serves as a transit country for natural gas from Uzbekistan and Turkmenistan to Russia and China. Diversification of transport routes is a way to protect against unforeseen circumstances. To diversify transport routes, Kazakhstan is heavily investing into pipelines, roads and railways, creating important links to its neighbours and the region beyond, via Turkmenistan and Iran to the Persian Gulf and via China to the Lianyungang port.

At the same time, the country’s heavy reliance on oil causes downside risks, including a possible drop in energy prices and a weakening in external demand. This makes it all the more important for Kazakhstan to diversify its economy and reduce its dependence on oil and other extractive minerals. To diversify, the productivity and competitiveness of the economy has to be increased. Kazakhstan’s productivity level is still low by developed countries’ standards. Regional and rural-urban disparities within Kazakhstan remain significant. Growth and industrialisation need to be underwritten by strong governance and environmental sustainability.

What are your economic predictions for the next 5-10 years?

Kazakhstan’s prospects are also strong. In 2014-2015, we project that the economy will maintain the pace and will grow at 6.0 percent and 6.4 percent, respectively. In the longer run, much depends on the success of industrialisation and development through innovation, improving infrastructure, encouraging investment, upgrading human capital [and] boosting productivity as well as targeted support to help priority sectors.

A recent study by the ADB finds that no country has achieved high-income status without its manufacturing sectors reaching at least an 18 percent share of total employment and output over a sustained period of time.

Industrialisation is not about manufacturing only; it is relevant for promoting economic sectors other than manufacturing, including agriculture and services. Given its natural advantages, Kazakhstan has a large potential in developing oil processing and agribusiness industries.  Upgrading these sectors can create the jobs necessary to keep Kazakhstan’s growing labour force employed.

We, through our country partnership strategy, will continue supporting the country’s drive toward a more competitive and diversified economy by investing in energy, transport, SME programmes, the private sector, and deepening the knowledge partnership between the government and the ADB.

Why was Astana chosen to be the host of this year’s meeting of the ADB board of governors? What does this mean for the Kazakh capital and the ADB?

The meeting will look at connecting Asia to the rest of the world, an idea inspired by the famous Silk Road, which for centuries was one of the world’s most important trade routes.

Today, growing international trade in an increasingly globalised world means that a new Silk Road connecting Europe and Asia is a reality once again. This is an exciting opportunity for Kazakhstan and the rest of Central Asia, and we’re excited to be a part of making this possible.

The ADB’s annual meeting will attract top policymakers, including central bank governors, finance ministers and private sector leaders, to the country. The meeting will help affirm Kazakhstan’s profile as a desirable, stable investment destination and as a leader in regional and global discussions on key economic and development issues.

The ADB is one of the major players in CAREC, with a total of $8 billion in investments. How would you describe Kazakhstan’s role in CAREC? In the Central Asian region?

Kazakhstan has been an active participant in the CAREC [Central Asian Regional Economic Cooperation Programme] Programme since its launch in 2001. [CAREC includes Afghanistan, Azerbaijan, China, Kazakhstan, the Kyrgyz Republic, Mongolia, Pakistan, Tajikistan, Turkmenistan and Uzbekistan as well as institutional partners the ADB, European Bank for Reconstruction and Development, the International Monetary Fund, the Islamic Development Bank, the United Nations Development Programme and the World Bank.]

Kazakhstan recognises the important role of regional cooperation and integration in expanding its markets and diversifying its economy. The country can benefit from leveraging its strategic location to facilitate global trade and transit between Asia and Europe along four CAREC transport corridors passing through its vast area.

Given its location, Kazakhstan is central to enhancing regional transport connectivity. From 2001 to the end of 2013, CAREC invested almost $8.0 billion in loans and grants (35 percent of the CAREC total) in Kazakhstan, with the ADB contributing almost $1.6 billion and the remaining $6.4 billion contributed by the Kazakhstan government and other CAREC multilateral partners.

In 2013, Kazakhstan also successfully hosted the 12th CAREC Ministerial Conference on October 23-24, 2013, in Astana as well as the Senior Officials’ Meetings and sector committee meetings.

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