Budget Execution at Just 82%

I recently went through the country's budget data. The Ministry of Finance regularly publishes execution figures for both the republican and local budgets. I haven't had much time to analyze the budget in depth, but even aggregated data allows a preliminary diagnosis.

Execution of republican budget revenue over two months came to just 82%, which is an extremely low figure. I cannot recall execution ever being this low. The biggest shortfalls are in CIT, VAT and ЭТП.

The budget deficit was financed by issuing short-term bonds, of which as much as KZT 1.4 trillion were issued against a plan of KZT 1 trillion.

Data on cash flows in the National Fund is already out, and the situation there is even more alarming. Despite quite heavy borrowing on the market, KZT 1.450 trillion has already been drawn from the National Fund over three months, against a plan of KZT 1 trillion.

With borrowing rates this high, public debt is becoming more and more expensive for the state.

Meanwhile, local budgets are significantly overperforming on revenue. The main overperformance comes from income tax, which includes PIT, payments by individual entrepreneurs, the retail tax and CIT paid by small and medium-sized businesses.

The data for two months already shows that the country has a revenue problem, and so far there is no solution for it other than drawing on the National Fund. No one has yet seen the new tax policy, and it is unclear what the new Tax Code will look like. As I understand from public comments, the emphasis will be on tax administration and bringing businesses out of the shadows in order to raise revenue. I have seen that a higher rate is planned for the banking sector, and I have not heard of many other changes so far.

Introducing better administration mechanisms requires enormous investment and time, a change in the logic of audits, and a data analysis system for desk audits.

The across-the-board introduction of the retail tax immediately led to a CIT revenue shortfall in the republican budget and an overperformance in local budgets. The retail tax was introduced under pressure, under the banner of simplifying administration for SMEs and bringing part of the business sector out of the shadows. It is hard to estimate how many businesses actually came out of the shadows, but one can say for certain that businesses have become even more active in splitting themselves up and using the preferences on offer. In my view, the retail tax was introduced without sufficient thought and without a comprehensive tax policy.

The second reason for the fall in CIT, in my opinion, is a decline in profits across the country as a whole, caused by a rather strong currency. Over the past two years the currency has strengthened considerably in real terms once inflation is taken into account. For example, cumulative inflation over three years is about 43%, whereas the exchange rate against the dollar has changed by only about 4–5% over the same period, while cumulative inflation in the US over three years is about 17.8%. In other words, comparable goods from the US have become 20% cheaper in Kazakhstan.

In Russia, cumulative inflation over three years is 30%, while the ruble has even weakened against the tenge by 15% over three years. In other words, comparable Russian goods have become 28% cheaper in Kazakhstan. For example, a liter of milk in Russia cost 50 rubles, or 290 tenge, in 2021. Now it would cost 65 rubles, or 320 tenge, in Russia, whereas in Kazakhstan, if milk cost 290 tenge, then with our inflation it would now cost 414 tenge. But because of the open market, our producers will have to compete with Russian milk at 320 tenge and will most likely incur heavy losses. The same will happen in many industries.

But back to the budget: because of the strong tenge, the budget is losing out on enormous sums. Any depreciation of the tenge would increase everyone's nominal profit in tenge, and exporters' most of all. With tenge-denominated costs fixed, any depreciation goes straight into higher profit, and therefore higher CIT revenue. For example, our total exports are about USD 78 billion. If the exchange rate rose by 30 tenge (say, to 480, a level we have already seen), the budget would receive roughly KZT 468 billion more, and that is without counting the growth in profits within the country.

But if we are to believe the official data, and the NBK really is not intervening in exchange rate formation and sells all its foreign currency on the open market (which, incidentally, it did not do before; you can see this in the Ministry of Finance reports, and I have written about it), then the exchange rate is being driven by National Fund sales. These are growing because the Ministry of Finance is placing large transfer orders, because it faces a tax revenue shortfall, which arose because of the strong tenge, which arose because of high sales from the National Fund, which sells currency at the Ministry of Finance's request. It is a vicious circle that leads either to devaluation, or to a colossal budget deficit and stagnation, which will then lead to devaluation anyway.

That is why the budget, tax policy and monetary policy urgently need to be addressed. If we do not deal with them now, we will get another August 2015.