Republic of Kazakhstan: Selected Issues and Statistical Appendix

This Selected Issues paper analyzes Kazakhstan's recent trends in the fiscal position of general government; the fiscal and oil price vulnerabilities; the fiscal framework; and tax administration. The paper also describes the development of activity in capital markets, the growth of pension funds, and examines the trade movements, exchange rate, and presents an evaluation of external competitiveness of the country. It also provides a statistical appendix report for the Republic of Kazakhstan.


This Selected Issues paper analyzes Kazakhstan's recent trends in the fiscal position of general government; the fiscal and oil price vulnerabilities; the fiscal framework; and tax administration. The paper also describes the development of activity in capital markets, the growth of pension funds, and examines the trade movements, exchange rate, and presents an evaluation of external competitiveness of the country. It also provides a statistical appendix report for the Republic of Kazakhstan.

I. Key Aspects of Fiscal Vulnerability in Kazakhstan1

A. Introduction

1. Since the start of the transition and up to 1999, the government of Kazakhstan had accumulated a sizable stock of debt used to finance successive public deficits. Moreover, owing to the impact of two external shocks in 1998, the Russian crisis and the fall in price of. oil and other commodities, net debt rose sharply to reach 31 percent of GDP at the end of 1999. However, thanks to a recovery in the oil price and a phasing out of the effects of the Russian crisis, and as the authorities have prudently managed the windfall from significantly higher revenues from oil, the fiscal position has improved remarkably. Following this turnaround, the issue of fiscal vulnerability needs to be reassessed.2 After an analysis of the recent trends in the fiscal position of general government, this section shows that the single most important element of vulnerability is the price of oil and that barring any dramatic fall in oil prices, the potential risks that could jeopardize the fiscal sustainability in Kazakhstan are limited. Finally, a set of policy recommendations for limiting the impact of the oil price on the fiscal position are suggested.

B. Recent Trends in the Fiscal Stance

2. While data on the general government fiscal position show a marked improvement, an analysis of the underlying fiscal position which is derived by adjusting the revenue numbers from the oil sector for deviations in long run oil prices indicates a deterioration in the fiscal stance. Owing to high international oil prices and the rapid rebound of the economy following the Russian crisis in 1998,3 the general government position on a cash basis is projected to be almost balanced for this year while the primary position is projected to show a surplus of 1.5 percent of GDP. However, this number is not a good indicator of the fiscal stance as revenues from the oil sector represent a significant share of total revenues and consequently, the fiscal position is largely dependent on the oil price. Therefore, instead of using projected budget deficit numbers for 2000, the initial fiscal stance will be assessed based on deficit numbers adjusted for the difference between the average price of oil in 2000 and a long run price of oil defined here arbitrarily as the average price for the last 15 years.4 According to this methodology, the underlying overall cash deficit of the general government in 2000 has deteriorated from an underlying fiscal deficit of 3.1 percent of GDP in 1999 (with a primary deficit at 2.0 percent) to 3.8 percent projected for this year, with a primary deficit of 2.2 percent, reflecting some limited spending of the revenue windfall.

3. The decomposition of the general government position shows that the relative deterioration of the underlying fiscal position was due to central government policies and that subnational governments have run a balanced position. After adjustment for deviation of the oil price from a long run average, the underlying overall deficit of the central government is estimated at 3.4 percent of GDP in 2000, with a primary deficit of 1.8 percent of GDP. For subnational governments, the underlying overall and primary deficits are both around 0.4 percent of GDP.5

C. Oil Price and Fiscal Vulnerability

4. Since Kazakhstan is a major oil producing and exporting country, the fiscal position is becoming dependent on revenues from the oil and gas sector and is therefore volatile. During the last four years, for which comparable general government data are available, the share of general government tax revenue6 in GDP fluctuated between 16.9 percent in 1998 and 21.1 percent projected for 2000. In the first quarter of 1999, the share of general government tax revenue was 14.9 percent of GDP, while it reached 20.1 percent in the first quarter of 2000.7 While the share of other tax revenues remained rather stable, at around 15 percent of GDP since 1998, the large variation in the overall level of tax revenue is mainly explained by the volatility of corporate income tax (CIT) due to fluctuations in oil and commodity prices.8 After reaching 0.9 percent of GDP in 1999, estimated revenues from the oil sector for 2000 are 6.1 percent of GDP. Due to the rapid increase in the share of the oil sector in the economy, the price of oil is becoming the most important factor explaining the volatility of government revenues in Kazakhstan.

D. Indebtedness and Sustainability

5. Both the level and composition of net public debt are not currently a major source of fiscal vulnerability in Kazakhstan. Moreover, thanks to its holdings in the oil and gas sector, Kazakhstan has potential sizable non liquid assets which it can dispose of. However, despite the introduction of a new system of monitoring guarantees which will improve the monitoring of newly issued guarantees, Public dept levels could be affected by existing guarantees.

6. Net indebtedness of general government is limited and declining. Owing to a sharp improvement in the overall fiscal balance mostly due to the strong economic recovery, total net public debt9 is projected to decline sharply from 30.9 percent of GDP in 1999 to 22.4 percent by the end of the year. This level of net indebtedness represents less than one year of revenues of the general government and in order to keep the net debt ratio at this level, the general government would have to maintain an average primary surplus below that of the projected primary surplus for 2000 (1.5 percent of GDP). This favorable change in debt dynamics was acknowledged by investors as the spread between the rates on Kazakhstan Eurobonds and U.S. rates narrowed significantly this year (Figure 1).

Figure 1.
Figure 1.

Kazakhstan: Eurobond Spreads

Citation: IMF Staff Country Reports 2001, 020; 10.5089/9781451820812.002.A001

Source: Pastor and Damjanovic, 2000 (unpublished paper).

7. In addition to the accumulated liquid financial assets, the government has some other nonliquid financial assets. It has sizable equity holdings in state-owned enterprises and joint-ventures, some of which, in particular its holdings in oil and gas companies, are highly marketable. As regards the longer term prospects, a large oil deposit has been discovered in the Caspian sea and some of the other oil fields are being developed. These developments will undoubtedly result in a rapid increase in the value of marketable government assets.10

8. As public debt in Kazakhstan is limited and with long maturities, the refinancing risk is small. The average maturity of public debt at the end of 1999 was 8.5 years.11 With the exception of the Eurobonds, the total outstanding stock of which is $1 billion, most of the foreign loans of the government are from international or official bilateral financial institutions. Therefore, the refinancing risk is rather limited, and more than adequately covered by foreign assets of the government.

9. Most of the stock of government debt is denominated or indexed to the dollar. At end-1999, 86 percent of total public debt (of which 78 percent was foreign debt) was denominated in, or indexed to, a foreign currency, mostly the U.S. dollar.12 The foreign debt service obligations of the government are projected to be in the range of $250-300 million a year (around 1.5 percent of GDP), with the exception of 2002, 2004 and 2007, when due to the repayment of three Eurobonds issues, it will be in the range of $630-650 million (about 3 percent of GDP). Moreover, at the beginning of 2000, a large part of domestic debt ($244 million) was refinanced through an issue of a 7-year Eurobond. A $100 million loan from a domestic company is likely to be repaid this year, and the rest ($114 million at the end of 1999) remains mainly in form of short-term securities, which needs to be rolled over regularly.

10. A significant share of general government revenues are due from the oil and gas sector and therefore a large part of revenues are dollar linked. A sizable proportion of total government revenue is from corporate income tax and royalties from oil and commodity exporting companies and from rental income fixed in U.S. dollars. From the oil sector alone, the projected revenues from corporate income tax and royalty are projected to reach more than a billion dollars per year for the coming years with an oil price staying at around $25 to $28 a barrel. On the expenditure side, only investments and purchased goods have significant import components.

11. Much of the assessment of debt sustainability hinges on the level of the oil price. As indicated by the assessment of the underlying fiscal position, the budget remains highly vulnerable to volatility in oil and commodity prices. If the oil price were to fall to $ 18 per barrel in 2001 and to an average of $ 16 per barrel for 2001–2005, the overall balance of the general government would deteriorate rapidly and without any policy adjustment, net public debt could be expected to rise to 40 percent of GDP by 2005 Figure 2.

Figure 2.
Figure 2.

Kazakhstan: Net Public Debt, 1993–2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2001, 020; 10.5089/9781451820812.002.A001

Source: Staff estimates.Note: Net Public debt, including government guaranteed foreign debt, net of liquid government assets.

12. Despite some notable improvement in the monitoring of guarantees, guarantees are still a potential problem. The total amount of government guaranteed foreign debt was $694 million at the end of 1999. The 2000 budget allowed for only $50 million of new guarantees, but this has created a strong pressure on the central government as demand for new guarantees turned out to be considerably larger than this amount. The 2001 budget submitted to parliament increased this limit to about $300 million, which would result in a substantial increase in the stock of outstanding guarantees. In 1999, the central government paid T 12.8 billion (0.7 percent of GDP) on called guarantees, and both the 2000 and the 2001 central government budgets have allocated a similar share of GDP. Called guarantees have in the past created major difficulties, resulting in arrears, including pension and wage arrears. To improve the monitoring of guarantees, the government has set up a new system thereby reducing the credit risk involved in public guarantees (Box 1). However, the new system covers only newly issued guarantees and therefore there is still an exposure to guarantees issued prior to the introduction.

Kazakhstan: A New System of Monitoring Loan Guarantees by the Government

As one of the structural benchmarks of the three-year EFF arrangement, the government set up in March 2000 a new system to continuously monitor the financial positions of debtors to whom new government guarantee would be issued. The system involves two main components, the monitoring system and the payment enforcement mechanism. The monitoring system is based on a continuously updated data base which contains information on the balance sheets, the profit and loss statements and the bank accounts of the companies involved. This data base is updated quarterly using information collected by the central statistical agency and from the companies involved. A regular analysis of the liquidity and solvency of the companies participating in the system is carried out jointly by the Ministries of Finance and Economy. The analysis is based on the standard liquidity and solvency ratios, comparing the companies to the averages in their industries. If a potentially insolvent or illiquid company is identified, the Ministry of Finance proposes measures to minimize the loss of the government. In addition to the information mentioned above, the companies also have to submit yearly business plans and monthly information on their balance sheets and profit and loss statements to agent banks, which are obliged to analyze their financial positions regularly.

The payment enforcement mechanism includes two bank accounts, an escrow reserve account, on which a certain percentage of the largest semi-annual payment has to be kept until the guaranteed loan is fully repaid, and a service account, on which the guaranteed borrower has to accumulate funds required to make the next debt service payment. In addition to keeping these accounts with agent banks, guaranteed loans have to be fully collateralized. A guarantee can only be issued if agreements have been signed between the guaranteed party and the government, the Ministry of Finance and the agent bank, and the guaranteed party and the agent bank stipulating the modalities of the system described above.

The new system is one of the most sophisticated systems of this kind. If it is properly administered, it will greatly reduce the risk involved in issuing government guarantees. The overall degree of fiscal vulnerability will however be reduced only if the government pursues a prudent policy on issuing new government guarantees and improves the management of the state-owned companies which receive guarantees.

E. Medium-Term Fiscal Framework

13. The lack of a well-developed medium-term fiscal framework is an important source of fiscal vulnerability. The lack of such framework is in large part explained by the very volatile fiscal developments in the last couple of years and by the fact that most expenditure commitments and entitlements are not clearly defined and have been subject to major changes. With gradual fiscal consolidation, the development of a medium-term fiscal framework becomes very important. Though in 1999, for the first time, the annual central government budget was approved together with deficit targets for the consecutive two years, these targets were not derived from and supported by a well-developed medium-term fiscal framework.

F. Tax Administration

14. The sudden upsurge in tax arrears during periods of economic distress and the limited capacity of the tax administration to collect on tax arrears is a major source of fiscal vulnerability in Kazakhstan. In 1998, as the economy was hit by the double shock of the Russian crisis and the low price of crude oil, the extent of tax arrears worsened and reached T 117 billion, or 6.8 percent of GDP by the end of 1998. Since then, they have been reduced only marginally.

15. The low level of overall tax revenue in Kazakhstan is attributable to ill-designed tax incentives and to the low yields of taxes explained by weak tax administration. The average effective tax rate on personal income is slightly above 10 percent, but the yield of the tax has been only around 2 percent of GDP. Similarly, a 26 percent payroll tax yields only around 4 percent of GDP.13 A VAT with a 20 percent regular rate and a 10 percent preferential rate on certain basic foodstuff yields less than 5 percent of GDP.14 These numbers indicate that a large part of economic activities is not covered by the tax net.

16. Capital flight through under-invoicing (Box 2) is a form of tax evasion which deserves special attention in Kazakhstan. Such capital flight is largely due to the lack of capacity on the part of the tax and customs administration to properly assess the transaction values of export and import transactions. The revenue loss due to this form of tax evasion could be as high as 0.6–0.8 percent of GDP.

Kazakhstan: Capital Flight, Transfer Pricing and Under-Invoicing

In recent years, a widening divergence between recorded export values and those suggested by published international market values has emerged, especially for petroleum. The staff has attempted to estimate the extent of this under invoicing of exports of Kazakhstan’s principal export commodity for the 1999–2000 period. While an under-invoicing phenomenon may also exist for other commodity exports (largely minerals), the estimates have been limited to the petroleum sector owing to the difficulty of obtaining reliable standardized international price estimates for many products. Staff estimates suggest under invoicing of around $280 million in 1999 and S410 million in 2000, or 1.8 and 2.5 percent of GDP, respectively. At a marginal tax rate of 30 percent, budget revenue would be higher by 0.6 and 0.8 percent of GDP, respectively. This compared to total budgetary revenue from the sector of 0.9 and 6.1 percent of GDP, respectively.

The staff estimates are based on published international oil benchmark levels, adjusted for average quality differentials. An assumption is also made for average transportation costs from the Kazakhstan border to world markets in northern Europe to obtain a border price. Given its land-locked position and just emerging large scale production potential, export infrastructure is underdeveloped and transport cost are high. Transport costs range from about $2.70 per barrel through the Russian pipeline system to $5–$7 per barrel for the overland railroad transport. Over the medium-term, particularly with the coming into operation of the Caspian Pipeline Consortium in 2001 transportation costs are expected to be reduced considerably, with the attendant increase in profitability and tax revenue.

The authorities have placed a high priority on addressing this issue and have established a working group headed by the anti-dumping control committee at the Ministry of Energy, Industry and Trade. Draft transfer pricing legislation has been submitted to parliament. It is important to note that, as under-invoicing is primarily a tax avoidance strategy, the preferred remedy would be to strengthen tax and customs administration. Suitable remedial actions would primarily target enhanced tax administration through training and a focused group of tax auditors to work on the most important cases. The legal aspects can best be dealt with under existing provisions of the tax code rather than through a separate new law. Giving discretionary powers to official agencies to enforce anti-transfer pricing activities, for example in the area of export controls, could easily lead to abuses and harm confidence of foreign and domestic investors in Kazakhstan. Restrictions and new taxes on exports, which in addition to being potentially unclear and confusing, could reduce economic efficiency, hurt the investment climate, and provide opportunities for corruption.

However, under-invoicing may also represent capital flight, for which other factors may play a role, notably the 15 percent withholding tax on profit transfers, gaps in coverage of bilateral taxation treaties and ineffective administrative procedures hereunder, and legal or practical restrictions on capital transfers.

G. Revenue Assignments of Subnational Governments

17. The distribution of CIT is a major source of fiscal imbalance as it is shared equally between the central government and the regions (oblasts)15 but unevenly between regions. Revenues from CIT are projected to bring in over 30 percent of general government tax revenue this year and over 30 percent of the total tax revenue of subnational governments. Unfortunately, this tax is not only the most volatile source of tax revenue but its base is distributed unevenly among subnational governments. Subnational governments receive half of revenues from the CIT collected on companies according to the location of their headquarters. As a result, revenues from CIT are concentrated in regions where companies are located. This puts pressure on the system of horizontal equalization even in an average year, but becomes a major source of fiscal vulnerability when CIT revenues are high or low.16

18. Budgets of subnational governments do not have enough flexibility to adjust to fluctuations in revenues linked to the volatility in CIT. On one hand, when revenues from CIT are low, as in 1998 and in the first half of 1999, subnational governments suffer from a large revenue shortfall which cannot be financed as they have limited access to financial markets and as they are constraint by legislation from borrowing. Moreover, until the last quarter of 1999, they have not been able to accumulate liquid assets as their revenues were too low and given the present system of horizontal equalization (yearly subventions and withdrawals specified in the central government budget), they have no incentive to accumulate such assets. Thus, a revenue shortfall immediately translates into sequestration and expenditure arrears. On the other hand, when CIT revenues are high, subnational governments enjoy sizable extra revenue—for some of them the unexpected additional revenue from this source may be larger than the budgeted total revenue—which they can freely spend.

H. Expenditure Structure

19. Budgets at all levels of government are characterized by high shares of nondiscretionary expenditures.17 At the central government level, the 2000 budget allocates two-thirds of total expenditures, including transfers to lower levels of government, to nondiscretionary expenditures.18 This is somewhat lower than last year, but the reduction is mainly explained by unchanged levels of nominal wage and pension expenditures. The share of the remaining expenditures amount to less than 6 percent of GDP, greatly limiting the extent to which the central government can adjust to an unexpected revenue shortfall, without having to resort to arrears.

20. Major nondiscretionary expenditure items, such as pay-as-you-go (PAYGO) pensions (other than minimum pensions), social benefits and wages, are not indexed, thus their real level may—and did in the past—decline with inflation. Low minimum pension and minimum wage and a low level of employment have resulted in widespread poverty (Box 3), putting an increasing pressure on policy makers to raise expenditures on social benefits and poverty alleviating programs.

Kazakhstan: Poverty in Kazakhstan

As elsewhere in the region, and in the transition economies generally, poverty is a major concern. While in the aggregate Kazakhstan appears better off in terms of absolute poverty than most other countries of the BRO, over one-third of the population was estimated by the World Bank to live below a subsistence minimum in 1996. Some 6 percent of the population was estimated to live on less than $2.15 per day. Since that time, official statistics suggest that the incidence of poverty worsened to around 43 percent of the population in 1997, but appears to have stabilized in 1998/99 at around 42–43 percent.

Perhaps more worrisome yet is the wide geographical variance of poverty in Kazakhstan. Almost two-thirds of the poor live in the southern and eastern regions of the country, which are largely agrarian and rural. The northern and central parts of the country are better endowed with natural resources and more industrialized. Further, on average, residents of the south are much poorer. Rural poverty is more extensive and more pronounced than in urban areas, although subsistence farming compensates for low cash incomes.

Four social groups have been identified as most vulnerable to poverty, namely the young, households with many children, households with one parent, and the retired. The fiscal constraints evident on budgetary resources through 1999 have also resulted in wage and pension arrears which exacerbate the impact of low wages and especially pensions. The clearing in late-1999 of most wage and pension arrears was a welcome development. Unemployment is also closely associated with poverty, which reflects the ongoing restructuring of the traditional state enterprises. Strikingly, the self-employed also have high poverty incidence, perhaps indicating the difficulties and uncertainties associated with starting small-scale enterprises in Kazakhstan.

The poor are also at risk of receiving less public social services, on which they are more dependent. This reflects several factors including the degradation of delivery mechanisms for health and education, the introduction and rise in formal and informal user fees for many public services and the low population density in some regions, which may require significant travel to public services.

In addressing the plight of the poorest segments of the population, increased policy emphasis is being placed on better targeting of social assistance to the neediest. Social spending is also being examined to ensure it is adequate and to protect it from sequestration. Efforts are also underway to improve the environment for small and medium scale business, notably through efforts to reduce the plethora of overlapping licensing and regulatory requirements. A user survey of corruption in state services is also planned to attempt to identify and quantify this aspect of barriers to business development. As noted above, the last accurate and comprehensive survey of living standards was undertaken by the World Bank in mid-1996. Statistical data on poverty and the socio-economic effects of the transition process are inadequate for policy purposes. Efforts are underway to improve the statistical data base on poverty, supported by the World bank, through an ongoing family budget survey.

21. Regional budgets are also characterized by high shares of non-discretionary expenditures, including education19 and health care20 expenditures. In the 2000 budget, the latter two categories of expenditures account for more than one half of total expenditures. On the other hand, social benefit payments are not based on established entitlements, but rather on ad hoc payments which explain why they are often used as an adjustment mechanism by local governments.

22. As in other BRO countries, budget execution in Kazakhstan has been characterized by large and recurrent expenditure arrears at every level of government (Text Table 1) especially in periods when government revenue declined rapidly. At the end of 1998, in the midst of the Russian crisis, the total stock of expenditure arrears reached almost 20 percent of general government revenue, more than half of which at the subnational level. Since government revenues started to pick up, the stock of arrears has been gradually reduced, though a new form of arrears, on VAT refund to exporters, has emerged as a source of government finance.

Text Table 1.

Kazakhstan: Government Expenditure Arrears, 1998–2000

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Source: Ministry of Finance; and Fund staff estimates.

23. Since the beginning of 2000, the treasury has tightened the rules applying to budgetary commitments. Newly recorded arrears are mostly related to liabilities created in the past which had not been registered with the treasury, or to payments awarded to public sector employees related to services delivered. So far, new commitments seem to be fully backed by existing budget allocations and authorizations. The only exception is arrears on VAT refund to exporters, where procedures to avoid the accumulation of new arrears are still not in place and the existing stock has not yet been reduced. Though there were several attempts to build up a centrally managed roster of existing arrears, an additional T 3 billion(0.1 percent of GDP) of previously accrued arrears, surfaced at the central government level, which clearly indicates that the process has not yet been completed.

24. The lack of control over expenditure commitments has been a major source of fiscal vulnerability in Kazakhstan. The treasury modernization and the tightening of the rules for commitments is a major step towards eliminating this source of vulnerability. However, a more aggressive approach is needed, especially on eliminating the existing stock and on moving more rapidly toward tightening the procedures involved in refunding VAT.

I. Conclusions and Policy Recommendations

25. As Kazakhstan has made commendable progress in improving the quality of budgetary institutions and has pursued a disciplined fiscal policy following the Russian crisis, fiscal vulnerability has been reduced. However, there are still risks coming from a large and increasing reliance on oil and commodity exports, a weak underlying fiscal position and remaining institutional weaknesses. It is therefore important for Kazakhstan to develop a proper mechanism in order to smooth the fluctuations of the oil price on the fiscal stance and to reduce the fiscal vulnerability. To achieve this, further progress is needed in 6 areas toward: (i) strengthening tax administration and broaden the tax base to nonoil sources; (ii) ensuring the transparency of oil revenues to the budget; (iii) adapting intergovernmental relations to ensure that there is a proper system of co-insurance between regions; (iv) increasing the share of discretionary expenditures; (v) setting up an oil fund for stabilization; and (vi) improving the monitoring of guarantees. Text Table 2 summarizes the key aspects of fiscal vulnerability.

Text Table 2.

Summary of Key Aspects of Fiscal Vulnerability in Kazakhstan

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26. Tax and customs administrations need to be strengthened in order to broaden the tax base. Concerning corporate income tax, the capacity of the tax and customs administrations to assess the transaction values of export and import transactions needs to be improved. The capacity of the tax administration to collect on tax arrears should also be greatly enhanced. Increased tax yield could be used to improve the underlying fiscal position, lower high tax rates, and increase spending on targeted poverty alleviation.

27. The high degree of dependence on revenues from the oil and commodity exporting sectors will remain an inherent characteristic of the budget. As such, it is important to ensure the transparency of revenues from the oil sector in order to enable the budget administration to improve the quality of revenue projections, the latter being a precondition for an improved budget execution. Moreover, a tax expenditure table21 could provide valuable input to tax policy discussions and the assessment of tax arrangements involved in contracts with foreign investors.

28. Intergovernmental fiscal relations and contingent liabilities are also important sources of fiscal vulnerability in Kazakhstan. A reform of the tax assignment of subnational governments aimed at providing them with more stable and equally distributed tax revenues is essential in order to ensure that subnational governments have the revenues to meet their expenditure responsibilities.

29. The combination of a relatively large underlying primary deficit combined and a rigid expenditure structure is one of the major sources of fiscal vulnerability in Kazakhstan. As long as oil and commodity prices remain high, the weak underlying fiscal position will not cause a major problem. The expenditure structure however needs to be changed by reducing the share of nondiscretionary expenditures both at the central and the subnational levels.

30. An oil fund (Box4) may prove to be a useful instrument to deal with the impact of large fluctuations in budget revenues from the oil sector, but only if the objectives of the fund are clearly defined, its operation is cast in the context of a comprehensive medium-term strategy, it is an integral part of the budget, and its design provides for transparency and public oversight.

31. In order to limit its exposure to the credit risk involved in guarantees, the government will have to be cautious when extending guarantees and will have to ensure that the newly introduced system of monitoring government guarantees is properly administered.

Kazakhstan: Creating an Oil Fund

In recent months, the authorities have been working to establish an Oil Fund—the National Fund of the Republic of Kazakhstan (NFRK). A presidential decree in May 2000 set out the basic objectives of the fund and a government decree in August established a special committee charged with drafting the law. The committee is to present a draft law to parliament. While the formal objectives and detailed operational procedures of the NFRK are still under discussion, three objectives have been put forward: to stabilize budget revenue, to finance priority infrastructure and social projects, and to save for future generations.

The stabilization of budget revenue raises certain theoretical and practical considerations relating to the predictability of oil prices. Given the non-renewable nature of natural resources, a permanent income objective suggests that some of the oil revenues be saved for future generations. International experience suggest however, that in those funds that have retained a development objectives, the latter tends to dominate the saving objective. In practice it is difficult to resist social or political pressures for large development projects, often of dubious economic viability. In these respects, it is essential that the operation of the NFRK be cast in the context of a comprehensive medium-term fiscal strategy. It is important that outflows from the NFRK to the budget not be treated as fungible with other sources of budget financing, as this would be inimical to the heritage objective.

Over the longer term, as the strong output potential of the petroleum sector is developed, a fourth objective will dominate, namely the need to sterilize the large foreign exchange earnings to prevent a crowding out of the nonoil tradable goods sectors (the so called “Dutch disease”). To accomplish this sterilization objective the fund’s resources will need to be domiciled abroad.

Best international practices would suggest that all amounts should pass through the republican budget, be determined through the budgetary process and held at the National Bank. Further, clear and transparent operational rules on sources of inflows and conditions for outflows would need to be established. The fund would need to provide for transparency and public oversight and accountability of the resources it held. The performance of independent external investment managers would be evaluated regularly against established investment guidelines and suitable performance benchmarks set. The NFRK should not be allowed to borrow, pledge its assets as collateral, or use its resources off budget. The NFRK Board should include representatives of the state, the NBK, parliament, and civil society, which would issue quarterly reports on operations. There should be regular external audits of the NFRK (at least annually) and the audit and report on the NFRK’s operations should cover both past years and a projection for the forthcoming year; and include operating costs of the fund and Board members’ remuneration.


  • Berengaut, Julian, and others, 1999, Kazakhstan, IMF Staff Country Report No. 99/95, Washington: International Monetary Fund.

  • Buiter, Willem, 1985, “A Guide to Public Sector Debt and Deficits,Economic Policy, Vol. 1, pp. 1461.

  • Hemming, Richard, and Murray Petrie, 2000, “A Framework for Assessing Fiscal Vulnerability,IMF Working Paper 00/52 Washington: International Monetary Fund.

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  • Pastor, Gonzalo and Damjanovic, Tatiana, 2000, “The Russian Financial Crisis and its Consequences for Central Asiaunpublished; Washington: International Monetary Fund.

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Prepared by István P. Székely, Paul Mathieu and Paul Ross.


The analysis of fiscal vulnerability in the paper follows the methodology suggested in Hemming and Petrie (2000) which recommends that the initial fiscal stance should be assessed on the projections for the current year.


According to the latest WEO projections, the average price of oil on international markets will be S29 per barrel in 2000, Economic growth in the first half of 2000 was 10.5 percent (year-on-year), and for the year as whole, it is projected at 8 percent.


The average price of oil was calculated in 1999 U.S. dollars for the period 1985–99. The average calculated this way is S20.35 per barrel, which in current dollars is $20.77 per barrel for 2000.


Subnational governments have negligible interest expenditures.


The numbers on tax revenues mentioned here refer to consolidated general government, which for 1997–98 includes the extra budgetary funds, and are corrected for tax policy changes during the period under investigation using tax rates prevailing in 2000.


Corrected for changes in tax rates, as described above.


The average oil price on international markets fluctuated between $11.80 per barrel in the first quarter of 1999 and $29.0 per barrel in the third quarter of 2000.


Total public debt includes government guaranteed foreign debt. Net public debt is calculated as gross public debt less government liquid deposits at the National Bank of Kazakhstan. In calculating public debt, general government includes central and subnational governments.


Buiter (1985) argues for the use of the net worth to GDP ratio as an indicator of sustainability. While theoretically this is indeed a better indicator of the sustainability of fiscal policy, this indicator is not directly applicable in a transition economy due to (i) the lack or poor quality of data on the value of government assets, (ii) the enormous difficulties involved in revaluing assets in a transition economy and (iii) the low efficiency of public investments. The assets referred to here are marketable equity holdings of the government in companies which deliver private goods. Thus, when the capacity of the government to service its debt is calculated, these assets should be taken into account.


The average maturity of foreign debt was 9.8 years, while that of domestic debt was around 4 years. In 2000, a large part of domestic debt, a special state bond issued to the pension funds was refinanced through a new eurobond issue, and the government has gradually increased the issuance of government bonds with longer maturities and reduced the amount of short-term T-bill issues. Therefore, the average maturity of domestic debt has increased significantly in 2000.


57 percent of domestic debt was denominated in, or indexed to, a foreign currency (U.S. dollar). Also, 80 percent of foreign debt was denominated in U.S. dollars and the domestically issued foreign currency denominated (or indexed) government securities were all denominated in U.S. dollar.


These revenue numbers suggest a total gross wage bill in the range of 15–25 percent of GDP which seems very low.


Given the lack of reliable national accounts data on the expenditure structure of GDP and data on the structure of final consumption, it is very difficult to properly estimate the potential yield of VAT. Nonetheless, a comparison with other transition economies with similar per capita incomes suggests that the yield of VAT in Kazakhstan is relatively low. In Bulgaria, a uniform 20 percent VAT rate is projected to yield 9 percent of GDP revenue in 2000; in Romania, an 18 percent standard rate and two preferential rates of 9 and 11 percent is projected to yield 6 percent of GDP revenue in 2000. In the Baltic countries, the yield is even higher, an 18 percent standard rate (with a 5 percent preferential rate in Estonia) yielded 9.8 percent of GDP revenue in Estonia, 9 percent in Latvia and 8.1 percent in Estonia on average between 1995 and 1998. On the other hand, similar rates in other CIS countries in the region yielded similar or lower revenues. In assessing the yield of VAT, it should be taken into account that within the customs union formed by some of the CIS countries, VAT collection is based on the origin principle, and that part of the refunded VAT (to exporters on zero rated goods) is not deducted from the revenue numbers.


For a detailed description of the revenue assignments of subnational governments and the system of horizontal equalization in Kazakhstan, see Berengaut, and others, Kazakhstan, 1999.


Due to the lack of a well-developed analytical framework, and the volatility of oil and commodity prices, revenue projections, in particular the projections on CIT revenue are surrounded by a large degree of uncertainty in Kazakhstan. In 1999, the actual revenue from CIT was 55 percent higher than the budget projection; in 2000 it is expected to be 234 percent higher.


For a detailed breakdown of general government expenditures, see Tables 25–27 in the Statistical Appendix.


Nondiscretionary expenditures include wages, pensions, state social benefits (which are based on established entitlements), transfers to subnational governments, interest payments and payments made on called guarantees.


Expenditure on education is determined by expenditure norms set by the central government. In 1999, 84 percent of total expenditure on education was made by subnational governments.


Every citizen is entitled to a basic package of health care services.


A tax expenditure table shows the subsidy equivalents of tax holidays and other preferential tax treatments granted to certain tax payers.