Very large budget adjustments in 2017

Murat Temirkhanov, Assan KurmanbekovFebruary 15, 2017

Minister of finance presented the amendments to the Republican budget for 2017 that were made expeditiously, to the large extent were determined by the need of rehabilitation of the banking system. From the KZT2.6 trillion increase of budget expenditures, for banks recovery was allocated KZT2.1 trillion ($6 billion at the exchange rate of 330 per USD) or 80%.   

On February 13, the Minister of national economy presented an updated forecast of socio-economic development of Kazakhstan in 2017. The changes primarily have touched the oil prices and the exchange rate of tenge to US dollar (table 1). As a result, nominal GDP rose by 3%. In the previous, forecasted growth in 2017 was 1.9%, and now was declared as not less than 2%, which may indicate a slight impact from anticipated changes on the growth of the economy.

On the same day, the Minister of finance presented in Majilis the amendments to the Republican budget for 2017 (the current budget for this year was approved on November 29, 2016). Income part was corrected because of growth of tax revenue by half a trillion tenge associated with a change of macro indicators and increased rate of export customs duty on oil from $35 to $50 per ton. The expenditures were adjusted according to 5 priorities from the Republic of |Kazakhstan President’s address, which by 95% determined the budget expenditures correction (table 2).

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As can be seen from table 2 changes in the Republican budget, that were made expeditiously, to the large extent were determined by the need of rehabilitation of the banking system. From the KZT2.6 trillion increase of budget expenditures, for banks recovery was allocated KZT2.1 trillion ($6 billion at the exchange rate of 330 per USD) or 80%.  

In addition to the priorities set by the President of the Republic of |Kazakhstan, Republican budget expenses amounting to KZT164 billion, were allocated toward housing projects, the development of education and health, and the energy complex.

Budget revenues excluding transfers from the National Fund have been increased to KZT554 billion and expenditures by KZT2 615 billion. Therefore excluding transfers from NF the Republican budget deficit increased by KZT2 061 billion. Additional target transfer in the amount of KZT1 093 billion reduced the deficit, it nevertheless increased by 3.5 times compared with the current budget for the 2017.

The presentation of the Republican budget did not disclose the sources of funding of dramatically increased budget deficit. However, we believe that there will be two main sources of financing: banks and the pension fund.

Banks liquidity attracted by the NBK through its liquidity withdrawal operations, consistently exceeded the KZT3.2 trillion recently, and some of that money can be used by banks to purchase securities of the Ministry of finance. Assuming that the Finance Ministry is considering the possibility of attracting needed financing from banks, it would have to offer adequate return that will significantly increase the cost of servicing the debt. It is also possible that the Finance Ministry, might resort to the foreign loans.

Another consequence of the increase of budget expenditures is the growth of non-oil budget deficit. By our assessment, it will reach 11% of GDP in 2017 excluding bond issues of National state companies. Non-oil deficit, taking into account National bond issues amounted to 11.9% of GDP in 2015 and 9.6 per cent of GDP in the past year. 

 Our view

As a whole, due to sharp increase in the expenditures, the 2017 budget situation severely worsened. At the same time, the potential amount of bond issues by the state companies to the National Fund is still unknown. The national holdings’ bonds purchases by the National Fund included Samruk-Kazyna KZT97 billion, and "Baiterek" KZT255 billion in 2016. Investment of national fund assets in such bonds increases the deficit of the consolidated State budget, calculated on the basis of international standards.

It should be noted, that an injection of supplementary target transfer in the amount of 1 trillion tenge (2% of GDP) carries potential inflation risks for the economy, which is already experiencing increased inflationary pressures. In this regard, the National Bank may adopt a more conservative policy toward reduction of the base rate.