KAZAKHSTAN
COUNTRY STUDY
Jason Pugh jpugh@indiana.edu
Cory Winchell cwinchel@indiana.edu
Marina Yakolina myakol@indiana.edu
Dmitri Maslitchenko dmitri@mailroom.com
An Economic Overview
Major changes are taking place in Kazakhstanís fiscal system. The breakdown of past revenue sharing procedures, under the centrally planned budgetary system require significant adjustments to the entire process. The banking scheme is currently being changed. The governmental accounting system is undergoing a complete overhaul. (Am. Embassy Rpt., April 1996) Currency stability continues to plague the country, and inflation remains a key concern. Investment is weak, and budgetary process reforms are stagnant. Discretionary government expenditures have fluctuated, while mandatory expenditures are expanding rapidly.
These are just some of the problems that plague Kazakhstanís government. A 1995 growth prospects index rated Kazakhstan last among other FSU countries. (Economic Overview of Kazakhstan, June 1996) The composite index considered ten different factors which contribute to a countryís capacity for growth. Some of the factors influencing this ranking, like the external deficits debt burden and relatively high inflation, may harm potential growth prospects. In industrial productivity, Kazakhstan was fourth from last with -34.2 change in industrial output per worker from 1990-1994. (Am. Embassy Rpt., February 1996)
Budgetary Policies and Fiscal Developments
Inflation
Inflation is a problem that has plagued Kazakhstan since its independence. There are several possible reasons that might explain this problem. The first is the movement in exchange rates. Another reason is the persistence of conventional budget deficits as well 1993 as quasi-fiscal deficits. And the final reason is attributed to monetary developments. (Kazakhstan: IMF Review, April 1995)
Kazakhstan has gained more control over monetary policy, but with it comes more responsibility to maintain stability. In 1993, Kazakhstan introduced the national currency, the tenge. It is a free floating rate currency that has experienced large real rate deprecations. This rate of depreciation is common in the early years of economic liberalization, but it has continued to plague Kazakhstan recently. This problem provokes inflationary pressures that destabilize the economy and discoural to 2.6% in 1994. (Kazakhstan Country Report 2nd Quarter, 30) Agricultural production in Kazakhstan remains a critical aspect of government subsidies, as the government is concerned about falling agricultural production. As agricultural production declines, the working class puts pressure on the government to maintain price controls on bread and other staple foods. These price controls only serve to increase inflationary pressures and undermine the governmentís fiscal austerity.
Monetary Developments
Restrictive monetary policies allow for stabilization, but in Kazakhstan the convertibility of the currency is still minor and structural liberalization is slow to take place. To allow restrictive policies to occur, the government must desist in subsidizing industries. Loose monetary policies promote drops in output and are tied to hard budgetary constraints. The discount rate in real terms from 1992-1994 was -31%. However, the rate has climbed to 4% by the end of 1994, reflecting an improvement in the allocation of resources. (Kazakhstan Country Report 3rd Quarter, 25) The progression of reforms in Kazakhstan are reflected in the monetary policies and the movement in interest rates.
Financial Intermediaries
In any transitional economy, it is necessary to develop a system of reliable, stable financial intermediaries. There are currently about 200 banks in Kazakhstan, while only 20 have a license which permits them to correspond with foreign banking institutions. The largest banks serve as conduits for credits and subsidies to farms and state owned enterprises. (Banks and Banking in Kazakhstan, November 1995) On September 25, 1995, the Bank and Banking Activity Law was passed by presidential decree, giving additional responsibilities to the NBK. The new law allows the NBK to issue licenses to banks. Importantly, it also permits foreign capital to enter into the banking system. However, it places restriction upon foreign banks wishing to enter the country. (Am. Embassy Rpt., October 1995) In an effort to strengthen the national banking system several mergers have taken place, presumably to prepare the system to withstand the entrance of foreign banks into Kazakhstan.
Budgetary Trends
Despite these serious developments there has been some headway in reforming fiscal policy. Some main extrabudgetary funds have been incorporated into the budget and the project to set up a Treasury is complete. Throughout 1993 and 1994 efforts focused on containing the overall fiscal budget deficit. In 1993, the government made significant improvements over 1992 in expenditure control and revenue collection. The overall budget deficit was just 1.2% of the GDP, as compared with the 7.4% in 1992. Most of the deficit was financed through borrowing, sales of treasury bills, and foreign financing. (Kazakhstan: The Transition to a Market Economy, 24)
1994 saw a sharp increase in the deficit over the previous year at 6.8%. The extrabudgetary funds widened to include the Road Fund, the Employment Fund, the Pension Fund, the Social Insurance Fund, the Fund for the Protection of Natural Resources, and the Fund for Promoting Entrepreneurship. However, in mid-1994 the Pension Fund was detached from the budget. The inclusion of these funds is important to ascertaining the extent of government liabilities, without which the deficit numbers will continue to be skewed. The deficit target for 1994 was 4.6% of GDP. The gap between the actual and predicted deficit is accounted for by unexpected expenditures and declining revenues. (Kazakhstan : IMF Economic Reviews, 17)
In 1995, Kazakhstan had many difficulties with some sixty enterprises that defaulted on loans guaranteed by the government. The Deputy Prime Minister expects that the government will have to repay the obligations out of budgetary appropriations. This type of problem is common to transition economies, which privatized poorly managed enterprises. Kazakhstan also experienced continuing inflationary problems with an annual rate of 60.3%, and the tenge continued to fall against the dollar. The Treasury project finally received approval and began the process of transition. The Treasury was established as part of the Ministry of Finance, rather than the Ministry of Economics, perhaps signaling a shift in budgetary power. President Nazarbayev struck back by criticizing the lack of ìproper coordination among the activities of the economic ministries, the government, and the national bank.î(Am. Embassy Rpt., December 1995) He cited the lack of coordination of macroeconomic policies at the regional level, as the reason for his censure.
Following elections in 1995, the legislature also created several new committees to oversee and facilitate the budgetary process. The economic, finance, and budget committees were instituted as a means to check the growing power of the President in budgetary issues. The Prime Minister summarized the three primary features of the economic policy: 1) to defeat inflation, 2) to roll back certain legislation passed by the previous parliament, which could not be supported under current conditions, and 3) to increase government financing to non-producing sectors. This approach signaled the shift towards concentrating on entitlement programs. (Am. Embassy Rpt., January 1996)
In 1996, President Nazarbayev struck back at the legislature by Issuing a decree which established an economic commission and effectively neutralizing the legislatureís monetary policy influence. The edict placed the NBK firmly under the Presidentís authority and erased all mention of Parliament from the constitution. With this decree, the President can change monetary policy or allocation of credits at will. (Am. Embassy Rpt., January 1996)
Other significant developments in 1996 were the shift to a focus on investment, from inflationary stability, and the establishment of accounting reform measures. Another important focus was on substantially increasing minimum wages, as well as pensions and allowances. Social protection issues will likely dominate the foreseeable future.
The Shadow Economy in Kazakhstan
In Kazakhstan estimates on the shadow economy range from the conservative to the outrageous. However, corruption, fraud, theft, extortion, and tax evasion remain crucial problems for the government. There are many ways to combat the shadow economy, but it is first important to understand it. Information on the shadow economy in Kazakhstan is still spare, but some general principles apply. Reform in the tax structure and revenue collection process are necessary to alleviate some of the problems encountered with the presence of an extensive shadow economy.
Tax Policy, Tax Structure, Tax Administration
The taxation system in Kazakhstan is constantly changing as part of the development of a young sovereign state. The new tax code came into force on 1 July 1995, and was considered to be among the most comprehensive pieces of tax legislation in the former Soviet Union.
Income Tax for Legal and Physical Persons
Business Profits
The new tax code prescribes a tax base similar to that in western countries, upon which tax is levied at a rate of 30% (unless the income is derived from the utilization of land when a 10% rate applies). Expenses are generally deductible to the extent that they relate to the realization of taxable income. The most significant deductible expenses are:
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