Investment Environment of the Agro-Industry Sector in Kazakhstan

In 2003, Kazakhstan newly enacted the Act for New Foreign Investment after abolition of the Act for Foreign Investment and the Law on State Support for Direct Investment. Under the new law, there is no discrimination between domestic and foreign investors. Investment favors are provided in priority sectors, which include following sectors: industrial infrastructure, processing industry, agriculture, agro-industry, housing, the social sector and tourism infrastructure. The incentives for direct investments in the priority sectors are: property tax and income tax exemptions for up to five years respectively, and exemptions or reductions in customs duty on materials necessary for completion of the investment project.

In 2002, the new law on taxation was enacted. Taxation system of Kazakhstan generally seems to be coincident with international standards. However, there are so many taxes imposed on enterprises, which may distort profit structure of enterprises. The maximum tax rates are different across according to sources of taxes: 30 percent for corporate tax, 15 percent for value added tax, 21 percent for social security tax. It is estimated that 32-35 percent of total revenue accounts for taxes paid by enterprises, implying that the tax burden is high.

Table 1. Selected Tax Rates in Kazakhstan

Types	Tax Rate
Corporate Tax Value Added Tax Land Tax Property Tax Social Security Tax Commodity Tax Transportation Tax Auction Tax	Up to 30% Up to 15% varies by use 1% Up to 21% varies by commodities varies by transportation types 3%

Source: Korea EXIM Bank, 2005

Kazakhstan has tried to improve the investment climate to attract FDI to more sectors including oil industry since its independence from the Soviet Union in 1991. For this purpose, Kazakhstan enacted four major legislations relating to foreign investment, such as the Act for Foreign Investment in 1999, the Act for State Support for Direct Investment in 1997, the Act for Government Procurement in 1997 and the Tax Code in 2001.

As a result, Kazakhstan has been fairly successful in attracting FDI, which supported economic recovery. During the period from 1993 to 2003, gross FDI inflows to Kazakhstan totaled USD 23.4billion. As of 2003, crude oil and natural gas extraction accounted for 51.8 percent of gross FDI, while agriculture, forestry and fishery accounted for 0.04 percent. Food industry, which is based on agriculture, is predominantly domestic market oriented and not lucrative due to low market demand for the local food products, implying that it is less attractive to foreign investors.

Table 2. Foreign Direct Investment (FDI) in Kazakhstan by Sector
Unit: million USD, ( %)

	1993-2000	2001	2002	Jan.–Jun.2003
Agriculture etc. Mining Manufacturing Transport, etc Finance Real estate Electric power Others	7.4(0.1) 7,841.2(62.4) 1,766.4(14.1) 160.0(1.3) 206.4(1.6) 1,432.8(11.4) 433.0(3.4) 715.0(5.7)	5.0(0.1) 3078.1(67.7) 641.4(0.7) 161.1(161.1) 44.4(1.0) 456.5(10.0) 33.8(0.7) 124.3(2.7)	2.5(0.1) 2107.7(51.7) 829.5(20.4) 95.2(2.3.) 11.8(0.3) 841.4(20.7) 17.5(0.4) 167.9(4.1)	1.1(0.04) 1148.4(51.8) 433.3(19.5) 45.0(2.0) 7.8(0.4) 433.6(19.6) 58.4(2.6) 91.2(4.1)
Total	12,562.2(100.0)	4,544.6(100.0)	4073.5(100.0)	2218.8(100.0)

Source: National Bank of the Republic of Kazakhstan

Review of Agriculture and Agro-Industry Sector in Kazakhstan

Although the share of agriculture (and agro-industry) out of GDP is only 8 percent, agriculture (and agro-industry) is a very important sector in Kazakhstan, since over 40 percent of population still resides in rural areas and 20 percent of labor is employed by the agricultural sector.

Kazakhstan is one of the world’s largest grain producer and exporter. The main grain crop is wheat. It is specialized in the cattle-breeding and fruit-growing. Livestock production accounts for about 40 percent of the agricultural production in value. Livestock production has been a key economic activity in Kazakhstan for centuries and will continue to be a major source of employment, food supply, and income for the rural population. The production of meat and milk satisfies domestic demand, while vegetables and fruits partially satisfy domestic demand because of the logistic difficulties associated with transportation and storage.

Agricultural input industry such as agricultural machinery, fertilizer and agro-chemicals have not been developed due to the lack of investment. Thus, the availability of agricultural input is too low, limiting yield increase across all agricultural sectors.

Food processing in Kazakhstan is one of the strategically important industry in provisioning high quality food for the population. Food processing industry consists of more than 30 specialized sectors, sub sectors and separate manufactures. It includes about 5,151 plants and manufacturers, 80 percent of which are small and medium–size enterprises. The SMEs employs 69.4 thousand people that is 10.3 percent of total employees in all industries of the country.

The major segments of food processing industry include flour-and-cereals, meat processing, dairy, fruits and vegetables processing. Flour and cereals account for 74.3 percent of the total enterprises in terms of the number of enterprises.

Table 1. Distribution of Agro-industry by Commodity Types in Kazakhstan, 2004

Sectors of Agro-Industry	Ratio (%)
Flour and cereal Meat processing Dairy Fruits and vegetable processing Others	74.3 14.1 8.5 2.7 0.4
Total	100

Source: Ministry of Agriculture, Kazakhstan

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