Tax and budget, transit and transport: President Tokayev sets priorities for new government

President Tokayev
Photo credit: Akorda

In an extended government session in Astana on February 7, President Kassym-Jomart Tokayev outlined a comprehensive roadmap for Kazakhstan's economic and social development in 2024. With a new government composition at the helm, President Tokayev set forth ten priorities aimed at enhancing efficiency, fostering innovation, and ensuring sustainable development across various sectors of the economy. Here are some highlights from the meeting curated by Kazinform News Agency.

The meeting featured quite a lot of criticism from President Tokayev directed at the government for failure to take bold actions and propose an effective economic strategy.

The new government was appointed on February 6. It is headed by Prime Minister Olzhas Bektenov, former chief of the presidential staff and former head of the Anti-Corruption Agency.

“Last year, the growth of the national economy amounted to 5.1%. Most importantly, we managed to maintain a positive trend in the country's development. However, this is not a reason for complacency; there is much work ahead,” said Tokayev.

He noted the need for a “new impetus” for the government, as it faces a clear target to increase the economy to $450 billion dollars by 2029, a goal that Tokayev announced back in his address to the nation in September 2023.

“For this, the country's GDP must grow annually by at least 6 percent. It is important that macroeconomic indicators ensure a leading growth in citizens' real incomes. However, to make a qualitative leap in development, thoughtful and decisive actions are required,” he said.

Effective tax and budget policies

The top priority for the government will be the effective management of budget and tax policies.

Tokayev said over the past five years, the budget deficit has exceeded 11 trillion tenge. In 2022, the deficit of the republican budget amounted to 2.390 trillion tenge or 2.3 percent of GDP, according to the Supreme Audit Chamber.

The big risk stemming from the increasing budget deficit is that it directly impacts the level of government debt, which, as of January 1, 2023, stood at 25.3 trillion tenge or 24.6 percent of GDP, according to the chamber.

In its latest 2022 report published in June 2023, the Supreme Audit Chamber stated that it all starts from effective budget planning.

“The analysis of balance allows us to note the chronic budget deficit, which currently imposes special constraints on economic development. Ineffective use of budgetary funds necessitates the search for additional extrabudgetary revenues to cover it. Such a situation reflects the insufficiently effective structure of the national economy and is mediated by macroeconomic policy inaccuracies,” reads the report.

Tokayev said the fulfillment of last year's revenue plan by the Ministry of Finance was largely achieved through taxes for the current year.

“Another systemic problem lies in the budget allocation system, which is not oriented towards stimulating economic activity. Finances are spent on current tasks, while strategic goals take a back seat. The government will need to define clear spending priorities with a focus on achieving maximum economic returns," said Tokayev.

Indeed, this is what the Supreme Audit Chamber highlighted in its report. The temporary ability of the republican budget to cover expenses is only six months of the fiscal year. The budget heavily relies on transfers from the National Fund, a fund created in 2001 that accumulates windfall oil and gas revenues.

According to the report, on average, the National Fund provides 33 percent of revenues to the republican budget, and over the past 10 years, this share has not significantly decreased, which, in turn, indicates a high dependence of the budget on the oil sector.

Tokayev emphasized that the Kazakh government is facing an urgent task of “qualitatively and dynamically developing the national economy.”

“This is impossible without the introduction of a new system of profit and property taxation, stimulating reinvestment of income into business development, and changing tax regimes. Therefore, such a strategically significant document as the Tax Code should be developed not only by fiscal authorities but also by economists, with the involvement of representatives of the business community. At the same time, of course, the task of filling the budget remains relevant. Here, a clear principle should be applied: the stronger the economy, the higher the tax revenues,” said Tokayev, warning that simply increasing taxes is not an option.

Nurlan Sakuov, Deputy Director of the Kazakhstan Institute for Strategic Studies, noted that the President expressed dissatisfaction with a purely fiscal approach, emphasizing the importance of expert and business-backed arguments for stimulating investors.

"The ultimate goal is to ensure that businesses thrive and contribute to the economy," he said, highlighting the necessity for transparent and stable tax rules.

However, he noted that the current tax code falls short of these expectations and demands.

Businesses have repeatedly raised concerns, particularly regarding VAT, which could exacerbate capital flight.

"If such a fiscal approach is adopted without clarity, businesses will further fragment and move into the shadows," he said.

Explaining the need for a new tax code, the expert pointed out its complexity and lack of clarity for businesses, often necessitating the hiring of accountants.

"Many have fragmented due to lowered VAT thresholds, contributing to a significant shadow economy, estimated at 18-19 percent, which some believe could be even higher," he explained. He cited examples like Georgia, where simplifying the tax code led to increased transparency and participation, contrasting its 310-article structure with the complexity of their own.

New investment cycle

Another priority outlined by the Kazakh President is to launch a new investment cycle. The revised format of the Investment Headquarters is in charge of achieving this goal.

In December 2023, President Tokayev signed a decree giving more powers to the investment headquarters. Specifically, it has the power to make binding decisions on both central and local government bodies and entities in the quasi-public sector. It can also develop temporary regulatory legal acts with the force of law, supplementing the government’s efforts to create a conducive environment for investment.

Tokayev stressed the importance of accelerating work to attract external and domestic investments.

"The hub is tasked with forming a comprehensive ecosystem for attracting investments, activating the work of development institutions, establishing clear interaction between foreign missions, the center, and regions, and building effective dialogue with the business community. And most importantly, making necessary decisions in a timely manner,” said the Kazakh leader.

Problems with implementing investment projects are particularly evident at the local level, he added. This is because local governors often resort to traditional methods of seeking budget funds instead of attracting private investments.

According to the World Investment Report 2023 prepared by the UN Conference on Trade and Development, Kazakhstan had an 83 percent increase in net foreign direct investment (FDI) flows in 2022, reaching $6.1 billion. This comes amid a sharp decrease in global investment flows in 2022.

The nation is also leading in the region of Central Asia, which overall attracted $10.1 billion in 2022.

According to Kazakh Invest national company, in 2022, the gross inflow of FDI in Kazakhstan reached $28 billion, increasing by 17.7 percent compared to 2021.

As of the first half of 2023, the net inflow of FDI into Kazakhstan amounted to $4.1 billion, 86 percent higher than the same period of the previous year. Investments in the manufacturing industry increased by 60 percent.

At the government meeting, Tokayev warned that the level of accountability for fulfilling the set tasks will be fierce.

He also noted another source of investment should be the return of illegally acquired assets. “The funds received should be directed towards implementing projects that are important for the country. At the same time, I want to warn once again that excessive zeal in this work is unacceptable, and abuse by law enforcement agencies will not be tolerated. There will be a harsh reaction from my side to any such signal. This work is of great importance in terms of ensuring social justice and is aimed at solving an important economic task, so it is imperative that no one discredits it," said Kassym-Jomart Tokayev.

Kazakhstan has made significant strides in the return of illegally withdrawn assets. In July 2023, Tokayev signed a law on the repatriation of illegally appropriated assets. This bold legislation targets the subjects of large-scale corruption and oligopoly groups entwined with those who wield administrative and power resources.

According to the General Prosecutor's Office of Kazakhstan as of January, illegally acquired assets totaling approximately one trillion tenge have been returned to the state, including $589 million from abroad.

Boosting industrial development

With a focus on diversification and value addition, Kazakhstan seeks to revitalize its industrial base. Through targeted incentives, infrastructure investments, and technology transfer initiatives, the government aims to enhance the competitiveness of key industries, promote innovation, and foster export-oriented growth.

However, the task is quite challenging. Tokayev said despite the creation of a separate ministry last year, there are no concrete results.

“The ministry should develop benchmarks for the industry and investors. Concrete measures and approaches that would stimulate investments in new high-tech productions have not yet been developed. A list of breakthrough projects has been prepared but requires thorough refinement. These productions should change the structure of the economy, create a strong industrial framework, and points of technological growth. None of this has happened yet," said Tokayev.

Indeed, the report of the Supreme Audit Chamber indicates the contribution of the industrial sector to GDP has been declining since 2012 - from 30.1 percent in 2012 to 29.3 percent in 2022, which may indicate insufficient government involvement in implementing policies aimed at industrialization.

Tokayev highlighted the urgent need to modernize existing production facilities, starting with metallurgical plants. It is equally important to have strict control over maintaining the technical condition of enterprises. Referring to multiple incidents at ArcelorMittal enterprises in Kazakhstan, Tokayev said the country has firsthand seen the situations where investors extracted profits while ignoring issues related to the modernization of the enterprise, environmental concerns, and occupational safety.

On multiple occasions, Tokayev also urged the need to boost the manufacturing industry and deep processing to move away from the hydrocarbons sector, on which Kazakhstan has relied for decades.

Nurlan Sakuov said that the main challenge for oil-exporting countries, including Kazakhstan, is transitioning to an economy independent of natural resource rents as the era of oil comes to a close. Renewable energy sources and alternative technologies are gradually replacing the age of oil. This transition has accelerated due to the global energy crisis triggered by the conflict between Russia and Ukraine.

“According to McKinsey forecasts, by 2050, renewable generation is expected to reach 80–90 percent of the global energy balance. According to calculations by the Massachusetts Institute of Technology (MIT), by 2030, 40 percent of cars sold in China will be electric,” he said.

He brought examples of oil and gas exporting countries in the Arab world who have adopted strategies to reduce their economies' dependence on oil, recognizing that oil prosperity is short-lived.

“For example, in 2016, the Saudi Arabian authorities approved an economic reform plan to diversify the economy away from the oil and gas sector. The plan, known as Saudi Vision 2030, aims to increase the share of non-oil exports in Saudi Arabia's non-oil GDP from 18.7 percent to 50 percent,” he said.

Strengthening transport and logistics potential

Uncovering the nation’s transport and logistics potential was also the focus of Tokayev’s address. Tokayev said Kazakhstan could become a full-fledged power in the transport and transit and logistics hub of Eurasia. This is what he also said in his address to the nation in September 2023.

Indeed, Kazakhstan's strategic location gives all the opportunities for that but is fulfilled only with investments in transportation infrastructure, logistics hubs, and trade facilitation measures.

In his September address, Tokayev tasked the government to bring the share of the transport and logistics sector’s contribution to the national GDP to 9 percent within the next three years. As of 2022, the figure stood at 6.2 percent, going down to 5.9 percent in the first half of 2023.

According to the Ministry of Transport, over the past 15 years, Kazakhstan has allocated $35 billion towards the development of its transport and logistics sector. The country possesses an extensive network of transit and transcontinental corridors, as well as various routes. Thirteen international corridors pass via Kazakhstan, comprising five railway corridors and eight road corridors.

One of the key routes poised to unlock the nation’s transit potential is the Trans-Caspian International Transport Route. It is a multimodal route that starts in China, passes through Kazakhstan, the Capsian Sea and further on to Europe. It carries various types of goods, including oil.

The recent Global Gateway Investors Forum on Central Asia - European Union Connectivity witnessed the signing of major agreements aimed at boosting transport and connectivity in Kazakhstan and Central Asia.

Minister of Transport Marat Karabayev said freight turnover is growing at an accelerated pace. For example, transit shipments with China doubled by the end of 2023, and the overall volume of transit increased by 43 percent. Karabayev proposed using Kazakh platforms as the main and most sustainable transit route between Europe and Asia. He stated that over the next five years, Kazakhstan intends to attract investments of 40 billion euros for the implementation of major infrastructure projects in the transport sector.

To further develop the sector, President Tokayev instructed the government to adopt a program document aimed at addressing key challenges in the railway sector.

“In particular, it is necessary to expedite the renewal of rolling stock and eliminate the shortage of own container fleet. All planned projects to expand the main network need to be implemented. Total digitization of processes is required, which will significantly increase the efficiency and productivity of the industry and save budgetary funds,” said Tokayev.

Overall, much of what President Tokayev said in his address to the new government is not new. Many initiatives lack decisive actions from the previous government headed by Alikhan Smailov. It is now a matter of time to see whether the new government is indeed good at taking bold actions, as Tokayev prioritized.

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