The State budget of the country - in the recovery phase

Assan KurmanbekovNovember 02, 2017

The State budget revenues in January-September this year (excluding National fund transfers) grew by 8.2% yoy to T5 trillion due to an increased tax revenue at 11.2% yoy and lower non-tax revenues. 

The State budget revenues in January-September this year (excluding National fund transfers) grew by 8.2% yoy to T5 trillion due to an increased tax revenue at 11.2% yoy and lower non-tax revenues. Tax revenues collection amounted to 70% of the annual plan, which corresponds to the normal value for this period. The National fund transfers due to an additional allocation of T1 trillion on improvement of banks and faster use (86.6% for 9M2017 vs 52.6% 2017 for 9M 2016) doubled to T4 trillion. The breakdown by tax revenues demonstrate the rise: for CIT +10.5% yoy, for individual income tax +7.9% yoy, social tax +9% yoy, VAT +2.7% yoy, with receipts of VAT on goods and services produced in Kazakhstan down by almost 22% and VAT from import up by 17% yoy.

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The increase of revenues for individual income and social tax is accompanied by a rise in nominal wages in the economy by 7.6% yoy in the first half of 2017. Revenue growth of 17% for VAT is comparable to the increase in imports at 9.7% yoy in January-August of 2017.

Receipts of VAT on goods and services produced in Kazakhstan by nearly 22% yoy is not matching the growth of retail trade turnover at 16% yoy for 9M this year. In part, the difference is due to the high proportion of imports in retail trade turnover, on the other hand, it might indicate an overvaluation of retail sales growth given the high share of trade realized through bazaars and IE.

Corporate income tax receipts is secured by activity in the economy, in our assessment, the growth of nominal GDP for 9 months of this year amounted to 8%. Also, the Ministry of Finance have noted improvements in tax and customs administration, in particular, the 98% of all taxes have been paid without imposing administrative penalties.

Improvement of oil prices by 24% yoy in January-September this year and the increase of the export customs duty on oil had a positive impact on the flow of oil revenues that grew by 30.6% yoy. Currently, the share of oil revenues in the consolidated revenues of the State budget has increased to 41%, from 34% in Jan-Sep 2016. While non-oil revenues even decreased by 3.6% yoy, reflecting a weaker recovery of non-oil sector of the economy. It should be noted that the growth of tax revenues was offset by a decline in non-tax revenues, in particular other non-tax revenues item (T160 billion for 9M2016 vs T18 billion for 9M2017)

The State budget expenditures increased by 11% yoy to T7.3 trillion for 9M2017 (excluding T2.1 trillion to Fund of non-performing loans) as compared to the same period last year. According to the plan costs for the year amounted to 70%.

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The spending on education, health and culture in January-September 2017 increased by about 15% compared with the same period of the previous year and is in line with the annual plan. It should be noted that the costs of these articles correspond to one third of all costs of the State budget.

Expenditure on social security increased by 15% yoy, partly because of the increase in pensions, which provided growth at a level of up to 28%. Due to an increase of pensions the decline in real wages is partially offset while staying in the negative zone since 2015. At the same time, this creates the ground for faster growth in prices  

Financing of public services such as defense, public order and other services increased approximately by 7% yoy with a slight lag from the plan for this year.

A strong growth of 30% remains on costs for financing the economy including items: agriculture (68% of planned; 66% in 2016), infrastructure (60% of planned; 64% in 2016), industry, housing and communal services (66% of planned; 60% in 2016) etc. Based on the schedule from the plan and given that the highest weight of expenditures is allocated in infrastructure and housing, we see about adequate growth. Major areas are transport and housing sphere, due to the implementation of the State program "Nurly Zhol. The implementation of this program, starting from 2015 averaged almost half a trillion tenge per year, in 2018 approximately T400 billion is planned to be spent on the program.

Under the item of debt servicing, costs have decreased by about 12% yoy. This apparently influenced by the strengthening of tenge in the first half of this year, given that more than a third of the State debt accounts for external loans.

Under the budget category "budget credits", expenses have increased by 38% yoy. The main article is crediting of Agrarian Credit Corporation to support agricultural producers (T60, billion) and lending to Baiterek amounting to T116 billion for various State programs. Small amounts are also allocated to enterprise development and employment.

By budget category "financial assets acquisition" costs increased by 55% yoy. T132 billion was directed to the capital injection to State-owned companies in the space, military, infrastructure and finance.

The State budget deficit (excluding the National Fund) for the first nine months of 2017 reached T1.1 trillion, while T1.5 trillion is planned for the year as a whole. The size of the public debt for 9 months of the year increased slightly by 1pp yoy to 26% of the country's GDP.

The consolidated balance of the State budget (taking into account the National Fund) moderately worsened to -5.7% of GDP, from -5.2% of GDP in 2016. According to our estimates, the general government deficit would reach 7% of GDP in the current year. As it is already noted, a significant budget outflow this year stemmed from a one-off allocation of T2.1 trillion to the banking system, without this amount the size of the deficit could potentially have fallen to more acceptable 3% of GDP.

The non-oil budget deficit (excluding T2.1 trillion to non-performing loans fund) in January-September of 2017 rose to 9.6% of GDP from 8.4% of GDP in the same period of 2016.

The National fund revenues in January-September of 2017 were up by 33% yoy to 1.5 trillion.  Growth is ensured by an  CIT inflows by 33% yoy,  MET +167% yoy, other taxes + 58% yoy, with a decrease in non-tax inflows by 56% yoy. If proceeds of CIT is consistent with rising prices and volumes of oil production, the strong growth in MET is probably associated with a large one-time payment, in particular for January when 60% of the amount of income for 9 months of the current year received.

The use of funds of the National Fund has reached T3.9 trillion in January-September of 2017. The total for the year plan stands at T4.4 trillion. The following year, the size of the transfer from the National Fund is reduced to T2.6 trillion, and later cut to T2 trillion a year from 2020 on, thus the current year should be the final in a series of escalating use of its funds for anti-crisis measures of the Government.

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Our opinion

As does the statistics on economy, the data on budget income indicates a weaker restoration of non-commodity sector. The effect of rising prices for raw materials virtually disappears in the last quarter of 2017, if its growth will not materialize, particularly for oil prices. The budget expenses are a little ahead of incomes, which is reflected in the increase in the deficit.

The increase in non-oil deficit without adequate growth of non-oil revenues, in our view, is a negative development, contributing to the unbalanced state of the budget.  

In the coming years, the Government plans to substantially reduce the use of funds of the National Fund and reduce dependence on oil revenues. However, until now the preconditions for the successful implementation of such a plan are not visible.