Government plans
Unpopular measures need to be taken right now, including budget sequestration and economic liberalization. What else needs to be done in a situation where our reserves are almost empty, budget expenditures are only increasing, and revenues are falling? TAJ.report listened to experts – participants in the discussion at the Center for Applied Research TALAP on the topic “Is Kazakhstan facing a public finance crisis?” As the reader has already understood from the spoiler, we are not just waiting – we are already in it. As reported by Deputy Minister of National Economy Azamat Amrin, the new government is reviewing budget priorities.
“The tax and budget policy aims to reduce the non-oil deficit to 5% of GDP and ensure the growth of the National Fund's foreign assets to 100 billion dollars by 2030. The draft of the new Budget Code simplifies the budget process and creates a methodological basis for managing public finances, ensuring accountability for the revenue part of the budget,” the official reported, sharing what his superior had previously reported.
The budget planning process has become bureaucratized, and there has been criticism of strategic and budget planning due to their disconnection from each other and the lack of opportunity to reallocate budget funds in the next financial year.
“Now this will change. The new Code has become framework, block-based (following the example of Singapore), flexible, its content has been optimized by 28%, and the process of planning the republican budget will be reduced from the usual 8-10 months. A block of basic constant expenses is established, including administrative costs for providing public services, pension payments, benefits, and subsidies. They will not be examined in detail every year,” Amrin said.
Askar Amrin - Deputy Minister of National Economy of the Republic of Kazakhstan
The second block will constantly consider the increase of unconditional basic expenses within the existing budget programs. The third block – expenses for new initiatives, the fourth - formation of a reserve for presidential initiatives, government reserves, and local akimats.
“We have introduced a rule prohibiting the opening of a second or third budget program for one goal. Previously, up to 13 budget programs could be planned for one goal. We analyzed the budget at that time of the Ministry of Industry: 6 strategic goals, 41 target indicators, 35 budget programs, and 67 subprograms!” the deputy minister stated.
Such disconnection did not allow budget program administrators to effectively and promptly manage budget funds.
“There is much talk about the fact that expenditures of the republican budget are growing disproportionately to revenues, that there are benefits, preferences, withdrawals from the National Fund, public debt; off-budget funds, the quasi-public sector, and state support measures, which are funded from the budget, are not taken into account. As a result, the full picture of the real financial capabilities of the state is not visible, and forecasting is distorted. The new code is based on ensuring transparency, publication of documents, and their accessibility. For quasi-public sector entities, the obligation to publish information about loans and accountability for their use has been introduced,” the deputy minister of national economy said, acknowledging that the country still lacks a single basic document on which budget planning work is based. Programs and concepts are not linked to strategic goals and indicators.
... And reality
Economist of the TALAP Center Rahim Oshakbaev noted after the official's speech that the government is setting a contradictory task: it is critically important for us to invest in infrastructure, but our financial capabilities are limited.
“On the other hand, we set the task of accumulating 100 billion dollars. Why exactly that amount? Is it a beautiful number? In the best of times, the National Fund accumulated 77 billion dollars. So we face a dilemma - either save or spend. It is obvious to me that we should spend,” Oshakbaev said.
To which Amrin replied – the figure was derived after calculations of forecasts for revenues and withdrawals from the National Fund over the long term.
“There is volatility, but we approached the calculations quite conservatively. There is a margin of safety overall. Revenues to the National Fund are growing: in 2023 - 6.5 trillion tenge, and we expect 7.5 trillion tenge in 2024,” said the deputy minister of national economy.
Oshakbaev continued: over the past three years, budget expenditures have increased by 60% or 10.5 trillion tenge. At the same time, money is being spent on current tasks, while strategic goals are being sidelined.
“The previous year's budget, according to expert estimates, was balanced in part due to increased advance payments from businesses – about 2.5 trillion tenge. All these figures clearly indicate a crisis in public finances,” the economist noted.
Rahim Oshakbaev - economist
The Ministry of National Economy does not think so.
“Public debt as of January 2020 was 23% of GDP, in 2021 – 29, in 2022 – 26, in 2023 – 24, and we expect 22% in 2024. Is Kazakhstan facing a public finance crisis? Probably not. If we look from the perspective of long-term forecasts, we will analyze and always approach the budget conservatively,” the deputy minister of economy stated.
Chronic deficit and budget eaters
Director of the TALAP Center Askar Kysykov, meanwhile, stated without long preambles: we are already in a crisis.
“There is no comprehensive approach to managing the public finance system in the country. State revenues amount to 41 trillion tenge - almost 40% of GDP. This includes the state budget, the quasi-public sector, and off-budget funds. Thus, the role of the state in the financial system is very high, but each element is managed differently. Financial flows are increasing bypassing the budget, off-budget funds are growing, but they are excluded from budget procedures. We are talking about ENPF, GFSS, FSMS. Almost 3.3% of the country's GDP is redistributed through these funds. Accordingly, the burden on the wage fund (WF) is increasing - it currently stands at 36%. This is more than in OECD countries. Such a gigantic penalty for employers for creating jobs,” Kysykov emphasized.
The quasi-public sector should play an important role in replenishing the budget - Samruk Kazyna, but in fact, this is not the case, he continued.
“Only 10-15% of the net income of ‘SK’ goes to the budget, the rest is redistributed for other purposes by government decision, mainly for social ones. According to ‘SK’, cross-subsidization of the economy amounts to almost 1.2 trillion tenge! Social issues are being resolved through the quasi-public sector, which should be addressed through the budget and go through parliament,” the economist emphasized.
The second problem is the chronic budget deficit and the reduction of net assets.
“Despite the fact that we have a stable trade surplus and high oil revenues, we have observed a consolidated budget deficit for the last 5 years. This means we are spending our assets rather than saving them. How are expenditures financed? - Public debt is increasing. Over 5 years, it has grown by 77%. As of the beginning of 2024, it amounted to 27.2 trillion tenge (in the presentation, internal debt is highlighted in blue, external in red). More than 2 trillion tenge is spent on servicing public debt. If we take the National Fund and subtract public debt, we are close to a zero indicator - our net assets equal 1.6% of GDP or 1.9 trillion tenge. This raises the question of whether we should spend or save - in essence, we already have nothing to spend because our debt obligations have equaled our savings,” said the head of TALAP.
Askar Kysykov - director of the TALAP center
Considering the debt of the quasi-public sector - almost 7 trillion tenge - the balance is already negative, we owe more than we have in assets. Expenditures on servicing public debt have increased 2.7 times over 5 years.
“And already in the budget, 2 trillion tenge is planned for servicing public debt. We have a high base rate, the interest is gigantic, and servicing the debt is becoming increasingly expensive, while the deficit is growing,” the economist concluded.
Mission impossible
Another problem highlighted by the expert is the increase in budget expenditures without improving their efficiency.
“They have increased by 60%, the main items being education, social security, and servicing public debt. These are important areas, but if we look at the structure of the increase, 80% is current, not capital expenditures. This means we are consuming without investing in development. We are told about the increase due to salary and pension increases, but the number one growth area is the acquisition of works and services through tenders. The main argument of the government is that 52% of budget expenditures go to social needs. But according to the economic classification of 2023, only 35% of budget expenditures go to payments to the population, while 65% of expenditures are for construction, repairs, purchases, transfers, and subsidies. This means that 2/3 of the budget can possibly and should be optimized. And according to the plan of the Republican budget for 2024, huge expenditures on subsidizing the quasi-public sector remain,” Askar Kysykov reported.
Against the backdrop of rising expenditures, the country has low tax collection, he continued. The task of increasing tax collection through raising taxes or expanding the tax base is difficult, and in the current format, experts do not see a solution.
“In addition, there is a failure to meet the tax plan, especially for the Republican budget - almost 20%, failure to meet the revenue plan for all key taxes - corporate income tax, VAT. The deficit may worsen this year,” the economist believes.
He emphasized the ineffectiveness of the current budget rules, which have put the budget in dependence on the National Fund through transfers.
“The government is in a situation where it can balance the budget in three ways: taxes from the oil sector, dividends from the quasi-public sector, and loans. The government is taking the easiest path - borrowing and increasing public debt. Budget rules need to be revised. Kazakhstan is an oil-dependent economy, and if there are revenues from oil, then an instrument should be introduced so that part of the taxes goes to the budget not through transfers, but directly, and the government balances the budget based on the price. Money from the National Fund should only be taken for super-priority development budgets - important national projects that will go through parliament,” the head of the analytical center is convinced.
Excerpts from the presentation of the TALAP center - current problems of the public finance system
And the goal of accumulating 100 billion in our reserves he considers unattainable.
“Given the current parameters and the growth of budget expenditures, maintaining even existing assets is a big task. We have calculated various budget scenarios, and the sustainability of the National Fund under the current conditions is seen at the level of 5-8 years,” the economist voiced a grim forecast.
Quasi-public, ENPF, and K should play by common rules
He does not harbor illusions about the status quo and the foreseeable future, and advisor to the chairman of the board of Halyk Finance Murat Temirkhanov. He was part of the parliamentary working group discussing the new Budget Code, but then for some reason he stopped being invited.
“There are 6 fundamental problems in Kazakhstan's budget system: the lack of accountability for finances across the entire public administration sector. The republican budget should include absolutely all state finances, except for the budgets of the ministries of industry and others. Second - the Budget Code, and thus parliament, does not regulate all principles and rules of financial management across the entire public administration sector (principles and rules of the consolidated budget). Third - there are significant problems with transparency and reliability of information on public finances, as accounting and reporting are conducted according to local rules, not according to international standards. They can be changed at any time and cannot be controlled,” the expert listed the pain points of the system.
He also reminded that in oil-exporting countries, counter-cyclical budget rules play a key role.
“Our budget rules do not conform to the best global practices. The government has extremely low discipline in executing budget plans, and the low quality of economic forecasts for compiling the country's medium-term budget leads to constant budget adjustments and incorrect planning. We have forecasts from the National Bank and the SESR (forecast of socio-economic development) - two different stories. The exchange rate of the tenge against the dollar is set at 450 for 5 years. How can one forecast the budget with such an approach?..,” the economist reasonably noted.
In general, medium-term state planning of the socio-economic development of the country is detached from medium-term budget limits. As a result, the government constantly digs into the National Fund, the expert stated.
Murat Temirkhanov - advisor to the chairman of the board of Halyk Finance
“The new Budget Code project includes an excellent definition of public finances. Essentially, this definition encompasses all revenues, expenditures, assets, and liabilities of the entire public administration sector. This means that public finances should include local and republican budgets, all state off-budget funds: the National Fund, the GFSS, the FSMS, the FPK, Kazakhstan Halkyna, asset recovery funds; quasi-fiscal operations of national holdings; state expenditures financed by the National Bank. Yet we have officials who are again deciding that Kazakhstan Halkyna should not be included, nor the FPK, nor the National Bank. When there was a crisis, the National Bank financed programs worth trillions of tenge, or when troubled banks (received money from the budget – Ed. note.) - again everything bypassed the parliament and the consolidated budget,” emphasized Murat Temirkhanov.
He reminded: FPK, which is part of the budget system, provided assistance to banks.
“For BTA, Kazkommerts paid 2.6 trillion tenge, while the actual market value is 300 million tenge. The expenditures bypassed the budget, parliament ‘did not see’ - this should not be the case,” the economist emphasized.
The spring effect
The head of the NGO ‘Desht’ Kuanish Zhaikov believes that the problem with public finances is that there is no unified line in the country: we have many state bodies that, like piranhas, attack businesses.
“They have ramped up social spending, tightened individual income tax, while on the other hand, the Ministry of Health is increasing OSMS. And we do not have a strong political force, like in the West, where such a force controls all state bodies simultaneously. In Kazakhstan, it is pure opportunism: in the relationships between the principal and agents, the latter act at their discretion. The principal, represented by the population and businesses, cannot do anything,” the economist commented.
Regarding the quasi-public sector, he sees further conflict: now it performs state functions, but its own budget is ‘tearing apart’, and it receives transfers from the state.
“At some point, the choice will arise - either to raise tariffs to save the quasi-public sector so that it continues to subsidize the economy. Then an incredible story unfolds, where it is unclear who is saving whom and why. Or liberalize prices, and not only equalize prices in sectoral private markets but also in the quasi-public sector, so that it continues to implement subsidy programs,” Zhaikov shared his opinion.
He does not believe that budget expenditures will be reduced or their growth will be frozen.
“It is impossible to finance social goods, invest in infrastructure in such a territory with low taxes, current revenues, and expenditures. We have accumulated a spring effect - in the 2000s, oil was sold at a good price, and the Soviet infrastructure was still functioning. At that time, it was necessary to invest in new infrastructure and social needs. But it was not done. As a result, the state is forced to raise salaries - this is compensation for what was not done. And the last thesis - we will inevitably come to an increase in the revenue part of the budget, and this will have to be done at the expense of taxes. The oil sector is reaching a plateau, the National Fund cannot be touched. Now there will be a massive assault on non-resource markets, taxes will be squeezed from SMEs, which is already happening. But the problem is different: all these codes are just paper. Supporting institutions are always important,” the economist concluded.
The law of diminishing returns and what does the matryoshka have to do with it
Financier Arman Beisembaev, in turn, expanded the discussion of the budget to a more global context.
“The wars happening in the modern world seem local to us, but they are mostly conceptual. The world is deglobalizing, and the previous world order will not exist. Is Kazakhstan ready for this? These 100 billion from here - we must prepare, because the country will not have money in the future. This is an attempt to lay straw under our country. But the budget deficit we are discussing is subject to the law of diminishing returns: no matter how much money you invest, each tenge invested will yield us less and less return. The economy is clearly degrading, more and more money is allocated only for current consumption,” the financier stated.
The years 2025-2026, according to his forecast, will be crisis years, and this will be related to the rupture of relations between the Russian Federation and the EU, exacerbation in the Middle East, and other processes.
Arman Beisembaev - financier
“In the short term, according to Bank of America, oil is on an upward trajectory. And by 2030, we may see oil even at 250 dollars per barrel. At the same time, we are living in the last decades of high energy prices - such prices will not exist due to the energy transition in the world,” the analyst voiced future scenarios.
And the peak oil prices may push developed countries towards energy transition. Green technologies, wind turbines, solar panels – all this is good, but there is a problem of energy storage. Relevant technologies are developing, the problem will be solved by 2030, the expert believes.
“By the same deadline, the problem of hydrogen combustion will be solved. Oil will be needed, in addition to its main function, it brings - by-products - plastic, components, and so on. But by 2030, oil will not be needed in the current volumes of production. And Kazakhstan, with its oil dependence, will find itself in a trap: not only is the world cracking at the seams, but also cross-border money transfers are complicated due to divided currency systems,” Beisembaev believes.
A big question is what currency system we will find ourselves in. Apparently, in the ruble currency zone: there are basically no alternatives, the expert believes.
“By 2030, Kazakhstan will be in a state of matryoshka crisis: one - internal crisis, the need to allocate money to solve it from the budget, the National Fund, we will be spending more and more. I don’t know if we will be able to accumulate up to 100 billion tenge. The second ‘matryoshka’ - external situation. Commodity imports will be complicated due to sanctions on our neighbor. Sooner or later, the party will end, and so will the money,” Beisembaev emphasized.
So either we make unpopular decisions now - we sequestrate the budget, increase the efficiency of its expenditures, or radically liberalize the economy.
“It seems to me that the Norwegian model could be a way out for our country. They are also an oil-producing state, but they live as if they do not extract oil – all money goes to the National Fund, where 1.6 trillion dollars have now accumulated. In the first quarter, they earned 6.3% return - that’s 110 billion dollars,” the financier said.