KAZAKHSTAN: GOVERNMMENT INTERESTED IN EXTENDING PROGRAM

UNCLAS SECTION 01 OF 02 ASTANA 002547 DEPT FOR SCA/CEN, EUR/ACE, EEB PLEASE PASS TO USTDA DAN STEIN SIPDIS SENSITIVE E.O. 12958: N/A TAGS: PGOV ECON EFIN EIND ENRG EPET KTDB KZ SUBJECT: KAZAKHSTAN: GOVERNMMENT INTERESTED IN EXTENDING PROGRAM FOR ECONOMIC DECELOPMENT (PED) ASTANA 00002547 001.2 OF 002 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: The primary Kazakhstani government counterpart for the Program for Economic Development (PED),Deputy Minister of Economy Marat Kussainov, informally requested USAID to prepare a concept paper which would outline the parameters under which the PED could be extended. In FY 2009, the last fiscal year under which the PED will receive funding, the Governments of Kazakhstan and the United States will each contribute $5 million to the program. In principle, the Deputy Minister agreed that the Government of Kazakhstan would cover 80% of program costs if the program is extended. Post supports this offer and requests preliminary commitment of funds required for an extension of the successful PED program. END SUMMARY. KAZAKZHSTAN-U.S. PROGRAM FOR ECONOMIC DEVELOPMENT ¶3. (SBU) Originally envisioned as a Public Private Partnership under the Houston Initiative -- a joint program launched in October 2002 following the summit with President Nazarbayev and President Bush -- the Kazakhstan-United States Program for Economic Development evolved into a four-year bilateral agreement to promote Kazakhstan's broad-based economic development and diversification. ¶4. (SBU) The four-year, $40 million PED is co-financed by the two governments, with the Government of Kazakhstan's contribution rising over a four year period from 25% in 2005 to 50% in 2009, the final year of the agreement. PED was formally inaugurated on May 5, 2006, by then-Minister of Economy Masimov (now Prime Minister) and Ambassador Ordway and is implemented under the auspices of the U.S. Agency for International Development (USAID). Each year, the PED Annual Work Plan is jointly developed and approved by both governments and the Kazakhstani government contribution is transferred to USAID. The program is coordinated by the Ministry of Economy and Budget Planning (MEBP) on behalf of the Government of Kazakhstan, and by USAID on behalf of the U.S. Government. HIGH-PROFILE PROGRAM WITH DEMONSTRABLE IMPACT ¶5. (SBU) PED currently comprises a set of strategically important activities covering regional energy market development, Kazakhstan's 
accession to the WTO, customs reform, economic diversification through small and medium enterprise (SME) development, business environment improvement and corruption reduction, trade capacity building, and tax and budget reform. PED activities provide critical support which is recognized at the highest levels of the Government of Kazakhstan. PED activities have also achieved consistently positive coverage in private and public media including television interviews, magazine articles, specialized publications, and numerous websites. CAVEATS TO PHASE-OUT OF U.S. ECONOMIC GROWTH ASSISTANCE ¶6. (SBU) The August 30, 2007, Sub-PCC meeting concluded that there is no reason to obligate Freedom Support Act funds for economic assistance programs in Kazakhstan beyond FY 2009. However, given the strategic importance of the energy sector, the Coordinator determined that funding, not to exceed $1 million per year, shall, if necessary, be budgeted beyond FY 2009 to support regional energy and electricity integration programs. In addition, the United States should explore continued Kazakhstani funding of economic growth assistance building on the successful PED partnership agreement. The Coordinator will continue to monitor the economic environment in Kazakhstan and reserves the right to re-start funding for economic growth programming at any later date if conditions warrant. NEED FOR CONTINUED ECONOMIC GROWTH SUPPORT ¶7. (SBU) Except for the area of energy, where $1 million has been requested in FY 2010, there is currently no USAID Economic Growth ASTANA 00002547 002.2 OF 002 funding budgeted for Kazakhstan. Under the current scenario, all economic growth activities, except for the Regional Electricity Market Assistance Project (REMAP),which would be implemented as a stand-alone contract, would be closed in FY 2010. ¶8. (SBU) Kazakhstan currently meets or exceeds only seven of the 16 Monitoring Country Progress (MCP) indicators. Large gaps still exist in the area of external debt as a percentage of GDP, trade and foreign exchange, and the share of employment in small- and medium-sized enterprises. Poor indicators for trade and trade regulations reflect Kazakhstan's non-member status in the World Trade Organization and associated non-compliant legal policies and practices. With the current financial crisis, fall in commodity prices, and slow-down in economic growth, it is likely that these indicators will further deteriorate over the next few years. PROPOSED APPROACH ¶9. (SBU) Building on the Sub-PCC recommendations outlined above, Post recommends that in addition to the current $1 million annual request for REMAP, an additional $1 million a year be made available for a three-year extension of PED through FY 2012. With $6 million over the three-year period ($1.5 of which would be used for program support costs),USAID would be able to leverage an additional $18 million from the Government of Kazakhstan and maintain the viability of a very significant instrument for policy reform. CONCURRENCE REQUESTED ¶10. (SBU) Post requests EUR/ACE support for an extension of the Program for Economic Development. With the support of the Coordinator's office, the Embassy and USAID will work quickly to explore funding options. The Kazakhstani budget cycle for 2010 begins in January 2009 and it is important to be able to formally convey our ability to provide funding for a program extension early in their budget process. Once we receive approval from the Coordinator, Embassy Astana and USAID will develop a concept paper and draft appropriate amendments to the PED MOU. ¶11. (SBU) COMMENT: There is a clear and convincing need for continued external assistance in the area of economic policy reform. The Government of Kazakhstan recognizes this need and is appreciative of U.S. Government assistance in this area. Kazakhstan, with its vast natural wealth, is nevertheless poor in human capacity. The United States has a clear role to play in helping to ensure that this country's vast wealth is used in a manner that supports broad-based economic growth, human development and democracy. END COMMENT. HOAGLAND