## 1kazea2020002 ## Source details **Canonical URL:** [1kazea2020002](https://www.imf.org/-/media/files/publications/cr/2020/english/1kazea2020002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1kazea2020002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1kazea2020002.pdf.json) --- ### A. Introduction and objective - Kazakhstan would benefit from higher non-oil revenue to create fiscal space for additional social and capital spending, enhance resilience, and support fiscal consolidation to rebuild buffers and support long-term sustainability. - Oil revenues made up almost half of general government total revenue before late 2014 and remained sizable at 32 percent of total revenues during 2015–18. - Non-oil taxes such as the personal income tax (PIT) and value-added tax (VAT) have been relatively weak. - Paper focus: PIT and other taxes on labor — reviewing effective burden, progressivity, efficiency, and interaction with formal employment versus self-employment. - Data limitations (notably household income information) preclude calibrating magnitude of tax policy changes and estimating corresponding revenue impacts. ### B. Effective tax on labor — who pays and how much - Overall taxes and mandatory contributions on labor: - Current combined burden: between 22–31 percent of gross income. - Expected medium-term range: around 29–38 percent of gross income. - Components (as reported): - Employer-paid: social tax; social insurance contributions (fully creditable against social tax); obligatory social medical insurance (OSMI); proposed employer share of obligatory pension contributions (OPC). - Employee-paid: personal income tax (PIT); a share of OPC. - Historical and planned changes (preserve original phrasing and numbers): - 2007–08: progressive PIT and regressive social tax replaced by flat rates at 10 percent (PIT) and 11 percent (social tax). - 2018: social tax decreased from 11 percent to 9.5 percent; flat OSMI imposed. - 2019: PIT made two-tier by reducing the rate for low-income individuals to 1 percent. - OPC rate payable by employees constant at 10 percent (2007–2020). - Starting in 2020: 1-percent employee contribution to OSMI and 0.5-percentage point increase in employer OSMI contributions. - Additional 5-percent employer contribution to the pension fund initially scheduled for 2020, likely delayed to 2023. - Selected parameter entries (preserve source phrasing): - OPC: Gross income capped at 50 times the minimum wage; 10% (2007–2020) with additional employer OPC postponed to 2023 by presidential decision. - OSMI: Gross income with OPC deduction, capped at 15 times the minimum wage; rates include 1% and increases noted. - Social Insurance Contribution: Gross income capped at 10 times the minimum wage; 5% (2007) and 3.5% thereafter. - Monthly minimum wage for 2019: KZT 42,500 ($112). ### C. Progressivity of labor taxes - Source of progressivity: - Progressivity arises only from PIT via deductions for the minimum wage and obligatory pension contributions reducing PIT base for low-income individuals. - Flat-rate and capped design: - All other taxes/contributions are flat and income-capped, becoming regressive at high income levels. - 2019 PIT reform specifics: - Lower PIT rate of 1 percent introduced in 2019 for employees with monthly earnings below KZT 63,125 (25 MCIs; 1 MCI = KZT 2,525 in 2019). - Minimum wage increased from KZT 28,000 to KZT 42,500. - 1-percent PIT applies to monthly earners between KZT 42,500–63,125; earners below KZT 42,500 exempt; earners above KZT 63,125 not eligible for lower rate. - Measured effective PIT rates and distributional impacts (preserve exact figures): - 2018 average effective PIT rate: 6.9 percent (aggregate table shows 6.9% in 2018). - 2019 average effective PIT rate: 6.1 percent (aggregate table shows 6.1% in 2019). - Text notes average effective rate decreased from 6.9 percent in 2018 to 6.0 percent in 2019. - Example: Individual earning KZT 750,000 annually (monthly KZT 62,500) — effective PIT rate decreased from 4.5 percent to 0.2 percent. - Approximately 8-15 percent of wage earners likely affected by the PIT reduction to 1 percent. - Share of PIT liability of the bottom 70 percent of employees decreased from 32 percent to 27 percent in 2019. - Micro vs macro gap: - Estimated average tax rate in 2018: 6.8 percent. - Total PIT collected was approximately 5 percent of aggregate wages (compensation of employees), indicating tax incentives, informality, and incomplete compliance. - Combined effective labor tax: - Social tax and OSMI raise the effective tax level without changing progressivity shape driven by PIT. - At the median wage, effective labor tax rate could be as high as 15.7 percent, not including obligatory pension contributions (10 percent). - Pension contributions typically not considered a tax but may act as an additional forced burden. ### D. Self-employed vs employed — regimes, burdens, compliance - Employment composition and collection: - Total employed: 8.7 million. - Employees with labor taxes withheld at source: around 6.6 million. - Self-employed: about 2 million, with 94 percent categorized as "own-account workers." - Withholding at source collects 90 percent of PIT revenue. - Self-assessment PIT from self-employed accounts for only 9–11 percent of total PIT revenue, despite self-employed being almost 25 percent of employed population. - Regimes available to self-employed: - General regime for registered individual entrepreneurs (IE). - Several special tax regimes for small and medium enterprises (SMEs). - Since 2019, unified cumulative payment regime for those neither registered as IE nor having employees. - Unified cumulative payment and parameters (preserve numbers): - Unified cumulative payment: 1 MCI—Cities; 0.5 MCI—Other areas. - Revenue distribution under unified cumulative payment: 10% as PIT; 20% as ST; 40% as OSMI; 30% as OPC. - Eligibility: individuals not registered as IE, with no employees, selling goods/services to other individuals and annual income below 1,175 MCI. - Example differential burden (preserve example): - Monthly income KZT 100,000: - IE general regime monthly tax liability (with one additional labor): ≈ KZT 17,000. - Formal employment combined taxes and social contributions: KZT 26,750. ### E. Efficiency, distributional, and compliance concerns — mitigation options - Identified risks: - Lower tax rates and limited enforcement mean SMEs/entrepreneurs may enjoy significant benefits relative to formally-employed taxpayers. - High-income individuals may have incentives to register as self-employed to limit tax obligations. - Policy levers and recommendations: - Unified cumulative payment (2019) could help bring low-income self-employed into the tax net. - Limit use of simplified regimes by high-income self-employed to widen the tax base. - Capture income via third-party information: vehicle registration, property registration, credit registry. - Use risk-based audits and improved administration. - Specific PIT design recommendations: - Non-rate measures may be more viable than headline rate increases (base, deductions, administration). - Consider expanding deductions targeted by marital status, household size/composition (currently all taxpayers allowed same deduction). - Expand PIT base to include non-wage personal income (interest, dividends, capital gains); dividends not already exempt taxed at 5 percent. - Prefer a single tax rate on all forms of capital income to avoid arbitrage across rates. - Address PIT threshold arbitrage: - Apply lower threshold to sum of all employment income (prevent splitting across jobs). - Consider applying threshold to equivalent annual income rather than monthly incomes. - Eliminate the "notch" between 1 percent and 10 percent PIT rate by applying 10-percent rate only to part of income in excess of threshold. - Information reporting and enforcement: - Gradual implementation of universal income and property declaration; combine with credible corrective action on evasion. - Cross-check declarations with vehicle, property, and credit registries. - Third-party reporting and withholding should cover more transactions (capital income reporting to revenue committee even if untaxed). - Payment card companies could report aggregate POS transaction volumes to prevent evasion under turnover-based special tax regimes. ### F. Investment efficiency and "Nurly Zhol" transport program — empirical evaluation - Program and financing: - "Nurly Zhol" launched in 2015 as fiscal stimulus; goals: affordable housing, modernizing infrastructure, entrepreneurship, competitiveness. - Financing: $9 billion for 2015–17 from the National Fund of the Republic of Kazakhstan (NFRK); additional central/local budgets, IFI borrowing, and state companies. - Empirical strategy and data: - Balanced panel of 1,379 firms (Q1:2014–Q1:2019); firms account for about 5 percent of total employment and value added; oil-sector firms excluded. - Infrastructure dataset: 1,769 km of roads and 1,376 km of railways through 2018. - Exposure: geo-coded points every 10 km; baseline distance d = 50 km (alternatives 25 km and 100 km). Cumulative exposure TransExp_d_c,y; binary TransEverExp50_c defined where 2018 exposure ≥2 (median in 2018 is 2). - Baseline regression (lagged exposure, firm & time fixed effects) and identification strategies described. - Key empirical findings (preserve coefficients and statistics): - Being exposed to an additional transportation project associated with: - KZT 63 million increase in revenues (coefficient 62.98; standard error (36.59); mean dependent variable for Revenue = 1689). - KZT 22 million increase in gross profits (coefficient 21.69***; standard error (6.632); mean dependent variable for G. Profit = 420). - Employment: coefficient 0.115; standard error (3.176); mean dependent variable for Employment = 299 (no significant response). - Representations relative to means: 4 percent revenue increase; 10 percent profit increase. - Observations: 28,959; Clusters (cities): 210. - Winsorization: all dependent variables winsorized at the 1 percent level; robust standard errors clustered at city level. - Distance sensitivity: - Revenue coefficient increases from 63.0 (d = 50 km baseline) to 108.2 when d = 25 km (significant at 1 percent). - Effect disappears at d = 100 km. - Interpretation and policy implications: - Improved connectivity and reduced transport costs raise revenues and especially profits for proximate firms. - Lack of employment response may reflect timing, labor mobility constraints, housing market shortcomings, bureaucratic restrictions, or skills shortages. - Recommendations to increase value from infrastructure investment: - Strengthen public investment management across all stages; IMF analysis suggests countries lose on average about 30 percent of returns on investment due to inefficiencies. - Rigorous project appraisal and risk assessment. - Effective and transparent procurement; strengthen project management, oversight, and ex post evaluations. - Use IMF tools: Public Investment Management Assessment (PIMA) framework. - Private sector participation and PPPs can bring efficiency but entail fiscal risks; current PPP footprint: KZT 570 billion contracted from private investors and government obligations close to KZT 178 billion. - Use PFRAM to assess PPP fiscal costs and risks. ### G. Fiscal framework, NFRK, and fiscal rules — status and recommendations - NFRK role and size: - NFRK receives bulk of fiscal oil revenues; at end-2018 assets ≈ 32 percent of GDP. - 2016 decree changed NFRK transfer system; operational rules included a declining path for maximum annual guaranteed transfers for 2017–19 and an annual limit of KZT 2 trillion from 2020 onward. - Targeted transfers only by Presidential decision for anti-crisis programs or significant national projects. - Fiscal rules architecture (2013 decree and 2016 decree features): - 2013 Decree No. 590: budget balance rule and two debt rules; state budget deficit to be reduced to 1 percent of GDP from 2018; state debt and quasi-sovereign debt below 60 percent of GDP; from 2020 state debt and central government debt not to exceed 27 percent and 25 percent of GDP respectively. - 2016 Decree No. 385: added four fiscal rules and two NFRK operational rules including nonoil deficit limits through 2025; government debt constraints linked to foreign exchange assets of NFRK; debt service of Republican Budget < 15 percent of budget revenue; NFRK assets floor of 30 percent of predicted GDP at year-end. - Amendments, compliance, and concerns: - 2018–19 amendments relaxed nonoil deficit limit for 2019; narrowed debt coverage to government external and guaranteed external debt; nominal limits on NFRK transfers for 2019–21 increased; medium-term KZT 2 trillion limit from 2020 replaced by commitment to gradually reduce transfers beginning in 2022. - Compliance mixed: nonoil deficit of Republican Budget not observed in 2017; state budget deficit in 2018 and projection for 2019 exceed relevant rule. - Decrees lack built-in formal enforcement procedures. - Desirable properties and recommendations for rules-based system: - Simplicity: prefer a debt anchor with one or two operational rules (e.g., sustainable nonoil primary balance (NOPB) and/or expenditure rule). - Broad coverage: extend coverage to general government to reduce creative accounting and shifting of fiscal operations. - Flexibility: transparent escape clauses, revision clauses, review clauses. - Enforceability and transparency: comprehensive reporting, roles for supreme audit institutions, independent fiscal institutions, and correction mechanisms requiring explicit corrective action. - Strategic reforms suggested: - Reform and streamline fiscal rules; consider parsimonious frameworks: NOPB rule and/or expenditure rule; floor on government net financial assets and/or debt constraint. - Extend coverage of rules; introduce escape and revision clauses; strengthen communication, transparency, and monitoring; embed rules in legal framework subject to parliamentary review. - Use IMF FTE and IMF TA to guide definition, calibration, specification of rules, and institutional reforms. ### H. Annex 1 — pros/cons, NFRK transfers, institutional coverage, and flexibility - Trade-offs in rule targets: - NOPB vs expenditure rules: NOPB insulates fiscal policy from resource revenue volatility but may be procyclical; expenditure rules control spending pressures but may not link directly to debt sustainability. - NFRK transfers and rigidity: - Frequent amendments of 2016 decree undermine predictability; maximum guaranteed transfers raised by amendments, weakening rule credibility. - Targeted transfers used: 2017: 2.9 percent of GDP; 2019 so far: 0.6 percent of GDP. - Recommendation: consider transfer design within overall fiscal framework; flexible transfer systems as in Chile and Norway suggested; avoid earmarking guaranteed transfers. - Institutional coverage and risks: - Current coverage narrower than general government: excludes nonmarket extrabudgetary units and public corporations; risks of shifting expenditures off-budget. - Recommendation: extend coverage to general government; preparatory work required (sectorization, reporting standards). - Flexibility elements: - Include clearly-specified escape clauses (measurable, ex ante) and periodic revision clauses to address structural changes. - Enforceability, transparency, and reporting: - Enhance FSED to explain fiscal rules and performance; specify correction mechanisms in legislation. - Require Accounts Committee to analyze accounting reliability and issue opinions on compliance. - Explore parliamentary budget office (PBO) role. ### I. Fiscal transparency — reporting, forecasting, and recommendations - Fiscal reporting and coverage: - National fiscal reporting limited to consolidated budget and components. - 2018 PEFA estimated expenditure outside fiscal reports in 2017 close to 11 percent of Republican Budget expenditure, or 2.25 percent of GDP. - Authorities report GFS data to IMF for: budgetary central government, budgetary local governments, NFRK, State Social Security Fund; coverage expanding to Compulsory Health Insurance Fund (2018 GFS) and Problem Loans Fund (expected 2020). - Sectorization and classifications: - Priority: apply GFSM 2014 criteria to allocate extrabudgetary units and state enterprises between general government and public corporations. - Budget classification system (2014) used at all levels but not fully consistent with GFSM 2014—recommend alignment. - Forecasting and MTBF: - MNE prepares FSED at least annually, with rolling five-year macro forecasts. - Forecast performance: one-year-ahead real GDP growth forecast absolute mean forecast error (2011–18) = 2 percent. - Growth in second and third forecast years tends to be overestimated. - Oil price forecasting errors: average error of initial forecast for the budget year in 2011–18 = 24 percent (absolute mean error 35 percent); second forecast year errors 26 percent and 53 percent respectively. - Recommendation: disclose methodology, reconcile forecasts with outturns, use market forecasts/futures where appropriate, set contingencies and safety margins. - Supplementary budgets and contingency reserves: - 2019 budget amended twice via SBs, raising expenditure relative to original by about 1.5 percent of GDP. - Budgetary reserves for 2019 and 2020 equivalent to 1–1.5 percent of expenditure, or 0.2–0.3 percent of GDP. - Recommendation: limit SBs (typically < 3 percent of budget), require midterm review, maintain contingency reserves. - Key policy recommendations (selected): - Conduct IMF FTE before upgrading rules-based framework. - Expand institutional coverage of fiscal reports; prioritize sectorization of state unitary enterprises and holdings. - Make budget classification consistent with GFSM 2014. - Define and disclose nonoil balance with detailed derivations. - Improve consolidated financial statement and audited consolidated accounts. - Extend public debt statistics to extrabudgetary units and public corporations. - Strengthen FSED presentation, methodology disclosure, and retrospective reconciliation. - Coordinate upgraded rules with accrual budgeting reforms. ### J. Fiscal risk management — macro risks, public corporations, and PPPs - Fiscal risks and past costs: - Public funds injected into banking sector in 2008–14 estimated at over 5 percent of 2014 GDP. - Support to banks since 2017 amounted to a further 8 percent of GDP. - Support to KazMunaiGas in 2015 to make external debt payments equivalent to close to 2 percent of GDP. - External debt of quasi-government institutions at end-2018 ≈ US$20 billion, or about 11.5 percent of GDP. - Macroeconomic volatility: - Volatility of consolidated budget revenue among highest in the region; nominal GDP volatility similar to Russia, lower than Azerbaijan and Turkmenistan, higher than non-petroleum-dependent peers. - Analytical gaps and recommendations: - Strengthen FSED sensitivity and scenario analysis (real GDP growth, oil price, currency depreciation/appreciation) with shocks based on historical volatility or standard deviations. - Publish DSAs and debt management strategy (last joint document covered 2013–15; update under preparation). - Long-term fiscal sustainability analysis (LTFSA) urgent due to decarbonization, technological change, decommissioning costs, aging; regional practice includes Armenia and Russia producing LTFSA. - Public corporations (PCs) and quasi-fiscal activities (QFAs): - PCs undertake significant QFAs creating implicit contingent liabilities; QFAs often outside parliamentary scrutiny and not transparently reported. - Recommendations: - Publish annual reports on aggregate PC sector performance, objectives, KPIs, debt statistics, and financial links with government (capital injections, subsidies, loans, dividends, guarantees). - Strengthen MNE central-level risk analysis; define common risk indicators; require PCs to report and cost QFAs using MNE methodologies. - Consider "budgetizing" QFAs or transparently compensating them with clear reimbursement methodologies; at minimum, publish regular reports on QFA nature and cost. - PPPs — status and transparency: - Legal framework: Law on Concessions (2006), Law on PPPs (2015), regulations; overlap prompted work on integrated PPP framework. - Supporting institutions: Kazakhstan Project Preparation Fund LLP and Kazakhstan Public-Private Partnership Center (KPPPC). - Limits and monitoring: - 2020 Republican Budget limit on PPP liabilities: KZT 2.1 trillion (≈ 3 percent of GDP). - Local budget limits: PPP liabilities 20 percent of own revenues; PPP service of concessional obligations limited to 10 percent of revenues in budget year. - Centralized monitoring: all PPP contracts registered with Treasury Committee. - Total PPP contracts signed ≈ 2.5 percent of GDP: 662 local contracts = 1.5 percent of GDP; nine central-level PPPs = 1 percent of GDP. - Recommendations: - Include explicit PPP liabilities in government debt statistics; disclose contingent PPP liabilities in budget documents and fiscal risk statement. - Publish rights, obligations, expected receipts/payments over contract life in budget documentation. - Avoid exchange rate guarantees in concessions without careful risk assessment given floating regime. ### K. NFRK governance, portfolio, and transparency recommendations - Governance and objectives: - NFRK established 2000 by Presidential Decree; Management Council chaired by President; NBK designated trust manager by 2001 resolution. - Objectives: stabilization and savings. - Portfolio structure and targets: - Foreign currency portfolio split into stabilization and savings portfolios. - Stabilization portfolio: - Cap: US$10 billion. - Permitted assets: money market instruments and fixed income securities. - End-2018 amount: US$9.2 billion (16 percent of foreign currency portfolio). - Savings portfolio: - Strategic allocation: bonds (80 percent) and shares (20 percent) historically; 2016 decree mandated shift to 60 percent bonds and 35 percent shares with up to 5 percent alternatives; subsequent amendment reduced shares to 30 percent to allow up to 5 percent in gold. - Transition began in 2017; target to be achieved in 3–5 years. - End-2018 amount: US$48.8 billion (84 percent of foreign currency portfolio). - Residual domestic portfolio: formed from pre-2017 policy-oriented extrabudgetary spending and lending; includes bonds issued by national management holding companies; not actively managed by NBK. - Current disclosure practices: - Monthly and annual accounts and succinct summary annual report published by MoF; NBK Annual Report includes NFRK management section. - Audited financial statements exist but have not been published. - Recommended transparency improvements: - Produce comprehensive "one-stop" quarterly and annual reports; provide dedicated website. - Include governance, operating rules, narrative on economy and fund, revenues/expenditures, investment strategy and performance, portfolio breakdowns, returns vs benchmarks, risk profile, fund budget execution, and externally-audited financial statements with auditors’ opinions. - Publish laws, decrees, monthly accounts, and audited reports on dedicated website. ### L. Sequencing, expected benefits, and support - Suggested sequencing with IMF TA: - Specify objectives and tradeoffs; identify shortcomings; examine design options for upgraded rules, flexibility, and enforcement; build internal consensus; progress on fiscal transparency, sectorization, public debt coverage, QFA strategy, PPP reporting, fiscal risk statement, PC reporting, and NFRK audited publication and website. - Expected benefits of implementing recommendations: - Strengthen fiscal discipline. - Increase predictability. - Guide medium-term fiscal policy more effectively. - Focus attention on fiscal risks. - Help contain spending pressures and address deficit bias. - Support: IMF FTE, IMF TA on PFM, fiscal framework, and fiscal rules recommended. ### M. Annex V — Public Financial Management requisites for effective fiscal rules (selected) - Key PFM requirements: - Annual budgets and MTBFs elaborated on detailed fiscal objectives consistent with rule. - Capacity to forecast revenues and baseline expenditure; prepare realistic financing plan. - Parliamentary approval process preventing amendments inconsistent with rule. - Effective expenditure control, intra-year correction capacity, timely reliable budget information. - Comprehensive chart of accounts, accounting and budget classifications, reporting requirements to prevent accounting manipulation. - Timely in-year and end-year reliable statistics; public release in line with pre-announced calendar. - Independent external scrutiny including external audit and enforcement/correction mechanisms. - Additional preconditions for resource-rich countries: - Clear fiscal accounting distinction between resource-related and other revenues/expenditures. - Significant budget flexibility and limited revenue earmarking/statutory minimum spending requirements. - Fiscal transparency on resource sector and revenues. *Source: IMF staff.* ### References ______________________________________________________________________________________15 ### 1kazea2020002 - References ______________________________________________________________________________________15 ### A. Introduction and Objective - Kazakhstan would benefit from higher non-oil revenue to create fiscal space for additional social and capital spending, enhance resilience, and support fiscal consolidation to rebuild buffers and support long-term sustainability. - Oil revenues made up almost half of general government total revenue before late 2014 and remained sizable at 32 percent of total revenues during 2015–18. - Non-oil taxes such as the personal income tax (PIT) and value-added tax (VAT) have been relatively weak. - The paper focuses on PIT and other taxes on labor, reviewing effective burden, progressivity, and efficiency, and how they interact with formal employment versus self-employment. - Data limitations, notably lack of sufficient household income information, preclude calibrating the magnitude of tax policy changes and estimating corresponding revenue impacts. ### B. Effective Tax on Labor — Who Pays and How Much - Taxes and mandatory contributions on labor combine to produce total taxes and mandatory contributions of between 22–31 percent of gross income and are expected to increase to around 29–38 percent over the medium term. - Taxes and contributions include: - Employer-paid: social tax, social insurance contributions (fully creditable against social tax), obligatory social medical insurance (OSMI), proposed employer share of obligatory pension contributions (OPC). - Employee-paid: personal income tax (PIT) and a share of OPC. - Major historical changes: - 2007–08 reforms replaced a progressive PIT and regressive social tax with flat rates at 10 percent (PIT) and 11 percent (social tax). - In 2019, PIT was made two-tier by reducing the rate for low-income individuals to 1 percent. - Social tax decreased from 11 percent to 9.5 percent in 2018, offset by imposition of flat OSMI. - OPC rate payable by employees has remained constant at 10 percent. - Planned contribution changes: - Starting in 2020: 1-percent employee contribution to OSMI and 0.5-percentage point increase in employer OSMI contributions. - An additional 5-percent employer contribution to the pension fund was initially scheduled for 2020, but is likely delayed to 2023. - Table and schedule details (selected entries preserved exactly as in source): - OPC: Gross income capped at 50 times the minimum wage; 10% (2007–2020) with additional employer OPC postponed to 2023 by presidential decision. - OSMI: Gross income with OPC deduction, capped at 15 times the minimum wage; rates include 1% and increases noted in table. - Social Insurance Contribution: Gross income capped at 10 times the minimum wage; 5% (2007) and 3.5% thereafter per table. - Monthly minimum wage for 2019 set at KZT 42,500 ($112). ### C. Progressivity of Labor Taxes - Progressivity arises only from PIT due to deductions for the minimum wage and obligatory pension contributions which reduce the PIT base for low-income individuals. - All other taxes and contributions have flat rates and income caps that make them regressive at high income levels. - 2019 PIT reform specifics: - Lower PIT rate of 1 percent introduced in 2019 for employees with monthly earnings below KZT 63,125 (equivalent to 25 Monthly Calculation Indexes (MCIs); 1 MCI = KZT 2,525 in 2019). - Minimum wage increased from KZT 28,000 to KZT 42,500. - The 1-percent PIT applies to monthly earners between KZT 42,500–63,125; employees earning below KZT 42,500 are exempt and those above KZT 63,125 are not eligible for the lower rate. - Effective PIT rates and distributional impacts: - 2018 average effective PIT rate: 6.9 percent (aggregate table shows 6.9% in 2018). - 2019 average effective PIT rate: 6.1 percent (aggregate table shows 6.1% in 2019). - Average effective rate decreased from 6.9 percent in 2018 to 6.0 percent in 2019 (text notes "average effective rate decreased from 6.9 percent in 2018 to 6.0 percent in 2019"). - Example: Individual earning KZT 750,000 annually (monthly KZT 62,500) — effective PIT rate decreased from 4.5 percent to 0.2 percent. - Approximately 8-15 percent of wage earners likely affected by the PIT reduction to 1 percent. - Share of PIT liability of the bottom 70 percent of employees decreased from 32 percent to 27 percent in 2019. - Gap between micro and macro measures: - Estimated average tax rate in 2018 is 6.8 percent but total PIT collected was approximately 5 percent of aggregate wages (compensation of employees), indicating tax incentives, informality, and incomplete compliance. - Combined effective labor tax (PIT + social tax + OSMI): - Social tax and OSMI raise the effective tax level but do not change progressivity shape driven by PIT. - At the median wage, the effective labor tax rate could be as high as 15.7 percent, not including obligatory pension contributions (10 percent). - Pension contributions are usually not considered a tax on labor but may act like an additional tax if viewed as a forced burden. ### D. Self-Employed vs. Employed - Labor tax burden disproportionately falls on employees in the formal sector: - Total employed: 8.7 million. - Employees with labor taxes withheld at source by employers: around 6.6 million. - Self-employed: about 2 million, with 94 percent categorized as "own-account workers." - Collection and compliance: - Withholding at source is the primary collection mechanism; 90 percent of PIT revenue is collected this way. - Self-employed self-assess and remit taxes; yet PIT revenue from self-assessment accounts for only 9–11 percent of total PIT revenue despite self-employed being almost 25 percent of employed population. - Recent years showed growth in PIT revenue share collected via self-assessment, but low levels underscore tax enforcement and administration challenges for self-employed individuals. ### E. Conclusions and Policy Directions (as presented) - A more equitable and efficient labor tax system would involve: - A targeted strategy for deductions and exemptions. - Expanding the tax base. - Continuing to improve tax design, administration, and collection enforcement. - Broader rationale: - Improving non-oil revenue (including labor taxes) is needed to close gaps in social and capital spending while maintaining long-term fiscal sustainability. - Labor taxes are relatively unresponsive to oil-sector fluctuations and thus enhance fiscal resilience to oil shocks. *Source: IMF staff.* ### 13. Self-employed individuals face different—and in most cases lower—tax rates than ### 13. Self-employed individuals face different—and in most cases lower—tax rates than regular employees ### Differences in tax regimes and fiscal impacts - Regimes available to self-employed individuals: - General regime for registered individual entrepreneurs (IE). - Several special tax regimes for small and medium enterprises (SMEs). - Since 2019, a unified cumulative payment regime for those neither registered as individual entrepreneurs nor having employees. - Example of differential tax burden for a monthly income of KZT 100,000: - Under the general regime for individual entrepreneurs, monthly tax liability amounts to around KZT 17,000 if the entrepreneur hires one additional labor. - Liability will be even lower if eligible for the other two regimes (special SME regimes or unified cumulative payment). - If formally employed, combined taxes and social contributions could be as high as KZT 26,750. - Given the significant share of the population benefiting from special regimes, these regimes materially narrow the tax base relative to formally employed taxpayers. ### Features of regimes (as presented) - Eligibility and key parameters (preserve original phrasing and numbers): - General Regime: Individuals who hire employees or have annual income greater than 12 MW must be registered as IE. - Special Tax Regimes: Multiple regimes for registered small/medium enterprises based on employment and income limits. - Unified Cumulative Payment: For individuals not registered as IE, with no employees, who sell goods and services to other individuals and annual income is below 1,175 MCI.(*) - Tax and contribution treatment (as presented): - Personal Income Tax (PIT): General Regime 10% ; Special Tax Regimes 1–3%. - Social Tax (ST): General Regime 2 MCI for themselves, 1 MCI per employee; Special Regimes 2 MCI for themselves, 1 MCI per employee or 1.5% of the simplified tax regime. - Obligatory Social Medical Insurance (OSMI): 2019—0% ; 2020—5% of 2 MW (applies to both general and special regimes as shown). - Obligatory Pension Contributions (OPC): 10% (both regimes). - Unified Cumulative Payment specifics: - 1 MCI—Cities; 0.5 MCI—Other areas. - Revenue Distribution: 10% as PIT; 20% as ST; 40% as OSMI; 30% as OPC. - Parameter values referenced: - Monthly Calculation Index (MCI) for 2019 is KZT 2,525. - Minimum Wage (MW) for 2019 is KZT 63,125 per month. ### Efficiency, distributional, and compliance concerns - Risks identified: - Lower tax rates combined with limited enforcement and administration capacity could mean SMEs/entrepreneurs enjoy significant benefits relative to the much larger, formally-employed population. - High-income individuals may have incentives to register as self-employed to limit tax obligations. - Potential mitigation and policy levers discussed: - The unified central payment introduced in 2019 could help bring low-income self-employed population into the tax net. - To increase tax collections and progressivity, consider limiting the use of simplified regimes by high-income self-employed individuals. - More adequately capture income and activities through third-party information sources (examples provided): vehicle registration, property registration, and credit registry. - Use risk-based audits. ### Broader PIT reform considerations and measures to increase revenue and progressivity - Context and constraints: - Combined effective tax burden on employees and employers in the formal sector is relatively significant. - Tax base is narrowed by various incentives (agriculture; capital income—see Box 1) and the simplified regime. - Non-rate aspects of the PIT regime (base, deductions, administration) may be leveraged to increase revenue and progressivity; these actions may be more viable than rate changes. - Differentiating deductions: - The PIT rate remained constant at 10 percent for almost a decade, but the effective tax rate decreased due to rising minimum wages being deducted from the PIT income base. - The annual revision of the minimum wage increases the threshold at which PIT becomes applicable and reduces the effective tax rate. - The government may consider using expanded deductions to further target tax breaks (examples cited in other countries: marital status, household size/composition); currently in Kazakhstan all taxpayers are allowed the same deduction. - Expanding the tax base: - Increasing the PIT rate at high income levels may not yield much benefit because high-income individuals may arrange to receive most income as non-wage sources. - The PIT base may be expanded by taxing non-wage sources of personal income, including capital income from interest, dividends, and capital gains. - Currently, some capital income is taxable, but exemptions allow most to go untaxed; dividends not already exempt are taxed at a lower 5 percent rate. - Advantage of taxing capital income: capital taxes may be withheld and reported by third parties. - Enhancing information reporting: - Kazakhstan has leveraged third-party information for reporting and withholding by employers; authorities have access to other information sources that could address evasion. - The government will gradually implement a universal income and property declaration; to be effective, declaration should be combined with credible corrective action if evasion is found. - Cross-checking declarations with vehicle registration, property registration, and credit information will help identify evasion. - Third-party reporting and withholding should be incorporated in other transactions (capital income reported to the revenue committee even if untaxed). - Increased use of debit cards, credit cards, and online portals allows greater information reporting; payment card companies could report aggregate POS transaction volumes to prevent evasion under turnover-based special tax regimes. - Combatting evasion—specific issues and remedies: - Varying tax rates across capital income sources may encourage arbitrage; a single tax rate on all forms of capital income is preferred. - The income threshold for the 1-percent PIT rate currently applies separately to multiple jobs, enabling taxpayers to split income across jobs to reduce liability. Example: - Individual earning KZT 126,250 would have a PIT liability of KZT 7,113. - If reported as two jobs paying KZT 63,125 each, tax liability would drop to KZT 286. - Recommendation: lower threshold should apply to the sum of all employment income; consider applying threshold to equivalent annual income rather than monthly incomes. - Tax "notch" between 1 percent and 10 percent PIT rate creates sharp jump in tax liability: - Individual earning KZT 63,125 has a tax liability of KZT 143. - Individual earning KZT 63,126 has a tax liability of KZT 1,431. - Recommendation: eliminate the notch by applying the 10-percent PIT rate only to the part of income in excess of the threshold. ### Key statistics and figures (as presented) - Example monthly incomes and liabilities: - Monthly income: KZT 100,000 → IE general regime monthly tax liability ≈ KZT 17,000 (with one additional labor). - Formal employment combined taxes and social contributions: KZT 26,750 (for same income example). - Policy parameter values: - PIT headline rate historically: 10 percent; low-income PIT rate introduced: 1 percent (from 2019 for low-income taxpayers). - Dividends tax rate (for dividends not already exempt): 5 percent. - MCI 2019: KZT 2,525. - Minimum Wage (MW) 2019: KZT 63,125 per month. - Unified cumulative payment annual income threshold: below 1,175 MCI.(*) *Italicized attribution line below the content unit.* ### 3. Efficiency is key to maximizing benefits from investment. Investment inefficiencies are ### 1kazea2020002 - 3. Efficiency is key to maximizing benefits from investment. Investment inefficiencies are ### Overview: investment efficiency and infrastructure needs - Investment inefficiencies are prevalent in developing countries; the gap between the unadjusted and efficiency-adjusted public capital stock can be large (Gupta et al., 2014; Crivelli, 2017). - Investment booms can exacerbate absorptive capacity constraints, manifested in declining marginal returns to investment and lower project success (Presbitero, 2016). - Kazakhstan’s infrastructure challenge: vast territory and relatively small population, with opportunities from proximity to China and Russia. - Strategic objectives in “Kazakhstan 2050” and SPTID-2020 (2014–20) focus on global integration and increased internal connectivity; SPTID-2020 set targets of increases in cargo and passenger transportation of 81 percent and 85 percent over 8 years. ### “Nurly Zhol” program design and financing - Launched in 2015 as a large fiscal stimulus and countercyclical measure in response to 2014 external shocks. - Program goals: affordable housing, modernizing infrastructure, promoting entrepreneurship, increasing competitiveness. - Financing: - Allocation of $9 billion for 2015–17 from the National Fund of the Republic of Kazakhstan (NFRK). - Additional sources: central government and local budgets, borrowing from international financial institutions, and funds from state companies. - Transport infrastructure component emphasized macro regions with hub cities: Almaty, Nur-Sultan, Aktobe, Shymkent, Ust-Kamenogorsk. - Project selection based on the “ray” principle: prioritize roads between hubs and connecting hubs to other large cities; targeted reduction in average travel time between hub cities by over one-third. ### Empirical strategy and data - Objective: evaluate impact of roads and railroads under “Nurly Zhol” on output, employment, and firm profits using spatial variation in project timing and location (difference-in-difference design). - Micro-level data: - Balanced panel of 1,379 firms (anonymized survey data from the National Bank of Kazakhstan). - Quarterly data on operating revenue, cost of sales, assets, and employment for Q1:2014–Q1:2019. - Firms in sample account for about 5 percent of total employment and value added in Kazakhstan. - Oil-sector firms excluded. - Infrastructure project dataset: - 1,769 km of roads and 1,376 km of railways included through 2018 (sources: KazAutoZhol and the Ministry of National Economy). - Exposure variable construction: - Geo-coded points every 10 kilometers along renovated/constructed road/rail segments; city considered exposed if within d kilometers of any point. - Baseline d = 50 km; alternative d = 25 km and d = 100 km. - Cumulative exposure (TransExpd_c,y) = sum of road and rail exposures across projects and years. - Alternative binary variable TransEverExp50_c equals one if location’s 2018 exposure ≥2 (definition based on the median transportation exposure in 2018 which is 2). ### Empirical specifications and identification - Baseline regression (lagged exposure, firm and time fixed effects): Y_f,c,q,y = β TransExp_d_{c,y−1} + α_f + μ_{q,y} + ε_f,c,q,y - Lag ensures project completion before measurement; roads/rail commission data available at annual frequency. - Alternative non-parametric specification compares firms ever exposed vs never exposed (equation (4)) to avoid dominance by locations with many projects. - Identification assumption: absent projects, exposed and unexposed firms would follow the same trend. - Mitigating factors for endogeneity: - Most Nurly Zhol road projects renovated pre-independence Soviet-era roads. - Analysis includes smaller en route cities unlikely to have influenced road placement decisions. - Rail projects mainly build >1,000 km line through sparsely populated center; rail exposure is zero for most firms, reducing endogenous placement bias. ### Key empirical findings - Main effects (baseline, lagged TransExp with d = 50 km): - Being exposed to an additional transportation project is associated with: - KZT 63 million increase in revenues (coefficient 62.98; standard error (36.59); mean dependent variable for Revenue = 1689). - KZT 22 million increase in gross profits (coefficient 21.69***; standard error (6.632); mean dependent variable for G. Profit = 420). - These represent a 4 percent and a 10 percent increase relative to the mean, respectively. - Employment shows no significant response (coefficient 0.115; standard error (3.176); mean dependent variable for Employment = 299). - Sample and estimation details reported: - Observations: 28,959; Clusters (cities): 210. - All dependent variables winsorized at the 1 percent level; robust standard errors clustered at the city level. - Dynamics: - Alternative specification (ever-exposed binary) indicates impact of transport exposure tends to increase over time (Figure 4). - Distance sensitivity: - Effects on revenue and profits are stronger for shorter cut-off: - Revenue coefficient increases from 63.0 (baseline, d = 50 km) to 108.2 when d = 25 km; significance at 1 percent level. - At d = 100 km the effect disappears, suggesting limited impact for relatively distant firms. - Interpretation: - Improved connectivity and reduced transportation costs manifest in higher revenues and especially higher profits for proximate firms. - Lack of employment response may reflect timing (recent project completion) or structural labor mobility constraints (traditions, housing market shortcomings, bureaucratic restrictions, skills shortages). ### Conclusion and policy recommendations - Short-term assessment: - Transport infrastructure component of “Nurly Zhol” yielded positive short-term results on firm revenue and gross profits; closer proximity and higher project counts lead to larger benefits. - No strong evidence that exposed firms hire more workers within the sample period. - Recommendations to increase value from infrastructure investment: - Strengthen public investment management across all stages to reduce inefficiencies; IMF analysis suggests countries lose on average about 30 percent of the returns on their investment due to investment inefficiencies (IMF, 2015). - Rigorous project appraisal: decisions based on sound economic and financial analysis and risk assessment, particularly when choosing among competing projects. - Implement effective and transparent procurement systems to reduce costs and improve implementation quality. - Strengthen project management, oversight, and ex post evaluations to ensure on-time and on-budget delivery and to inform future investment decisions. - Use IMF tools: the Public Investment Management Assessment (PIMA) framework for assessing processes and institutions related to infrastructure provision. - Private sector participation and PPPs: - Potential benefits: efficiency in resources, technology, service quality, budget savings, and risk-sharing. - Risks: weak PPP design can expose public finances to large fiscal costs if contracts rely on overly optimistic usage assumptions or government guarantees. - Current PPP footprint in Kazakhstan (as reported): KZT 570 billion contracted from private investors and government obligations close to KZT 178 billion. - Recommendation: careful assessment and management of PPP risks using tools such as PFRAM (IMF and World Bank) to evaluate fiscal costs and risks arising from PPPs. *Source: IMF staff analysis prepared by Faizaan Kisat and Rossen Rozenov, “Nurly Zhol” transport infrastructure evaluation (excerpts).* ### 1. Kazakhstan’s fiscal framework incorporates elements of a rules-based system and has ### 1. Kazakhstan’s fiscal framework incorporates elements of a rules-based system and has ### Overview - The fiscal framework includes rules on fiscal balances, on the minimum stock of assets of the National Fund of the Republic of Kazakhstan (NFRK), and on measures of public debt. - A medium-term budget framework (MTBF) is intended to incorporate policy objectives and guide expenditure beyond the initial budget year. - Macroeconomic forecasts covering five years are produced at least once a year. - The paper provides a strategic overview and preliminary recommendations; it is selective and does not offer a comprehensive in-depth assessment of institutional, legal, and public financial management (PFM) issues. An IMF Fiscal Transparency Evaluation (FTE) with the resource revenue management pillar, and IMF technical assistance (TA) are noted as beneficial. ### Role and status of the NFRK - The NFRK receives the bulk of fiscal oil revenues and makes transfers to the budget. - At end-2018, NFRK assets were equivalent to approximately 32 percent of GDP. - The 2016 decree changed the system of NFRK transfers to the budget and set minimum assets and other operational rules. - Operational rules in the 2016 decree included: - A declining path for the maximum annual size of NFRK guaranteed transfers for 2017–19, set in local currency, followed by an annual limit of KZT 2 trillion from 2020 onward. - Targeted transfers can be allocated only by Presidential decision to finance anti-crisis programs during economic downturns or slowdowns in economic growth, and significant national projects where no alternative sources of financing are available. - A previous 2010 Presidential Decree had set a fixed annual guaranteed NFRK transfer to the budget of US$8 billion (amended in 2012). ### The system of fiscal rules (main features) - The 2013 Presidential Decree No. 590 established a budget balance rule and two debt rules: - The state budget deficit was to be reduced to 1 percent of GDP from 2018. - State debt (i.e., central and local governments and the NBK) and debt of quasi-sovereign entities was to be kept below 60 percent of GDP. - From 2020, state debt and central government debt should not exceed 27 percent of GDP and 25 percent of GDP, respectively. - The 2016 decree (No. 385) added four fiscal rules and two operational rules for NFRK transfers, including: - The nonoil deficit of the Republican Budget as a share of GDP subject to annual limits on a declining path set through 2025. - Government debt (including government-guaranteed debt) and the external debt of the quasi-sovereign entities to be kept below the foreign exchange assets of the NFRK. - Debt service of the Republican Budget to be kept below 15 percent of budget revenue. - Assets of the NFRK to exceed a floor of 30 percent of predicted GDP at the end of the year. ### Changes, compliance, and coverage - Amendments to the 2016 decree in 2018–19 changed ceilings and definitions: - The nonoil deficit limit for 2019 was relaxed. - Coverage of the rule limiting debt to the foreign assets of the NFRK was narrowed to cover only the government’s external and guaranteed external debt, excluding domestic debt. - The nominal limits on NFRK transfers to the budget for 2019–21 were increased, and the medium-term nominal limit of KZT 2 trillion from 2020 onward was replaced by a commitment that the transfer will be gradually reduced beginning in 2022. - No official explanations accompanied the amendments. Further changes to the ceilings on the guaranteed transfers are expected to be introduced in the near future. - Compliance has been mixed: - The nonoil deficit of the Republican Budget was not observed in 2017. - The state budget deficit in 2018 and the projection for 2019 exceed the relevant rule. - The decrees do not have built-in, formal enforcement procedures. ### Rationale and desirable features of rules-based systems (as applied) - Fiscal rules aim to commit policymakers to fiscal sustainability, enhance transparency, and signal fiscal policy direction. - Key desirable properties of effective fiscal rules identified: - Simplicity: debt anchor with one or two operational rules; commodity exporters should consider a comprehensive indicator of government net wealth (sustainable nonoil primary balance (NOPB)) and constraints on debt or floors on net financial assets. - Broad coverage: wide institutional and aggregate coverage to reduce creative accounting and shifting of fiscal operations. - Flexibility: transparent and well-specified escape clauses, revision clauses, review clauses, and expenditure rules that allow automatic stabilizers to operate. - Enforceability and fiscal transparency: comprehensive, clear, reliable, and timely reporting; roles for supreme audit institutions and independent fiscal institutions (IFIs); and correction mechanisms requiring explicit corrective actions within pre-specified periods. ### Assessment of Kazakhstan’s framework and strategic recommendations - Improvements introduced by the 2016 decree: - Inclusion of the nonoil deficit as a key target. - NFRK prohibited from directly financing extrabudgetary spending; all transfers must go to the budget. - NFRK cannot invest in domestic financial instruments. - Stronger reporting requirements on NFRK operations. - Identified shortcomings and suggested enhancements: - The system is complex, with redundancy and overlaps: seven fiscal rules and two operational rules for NFRK transfers. - Complexity hampers management, monitoring, and public understanding. - Recommended strategic reforms: - Reform and streamline the fiscal rules; simplification should be a key reform objective. - Consider parsimonious frameworks with one or two rules to guide annual fiscal policy, for example: - A NOPB rule and/or an expenditure rule informed by long-term sustainability estimates and medium-term considerations. - A floor on government net financial assets and/or a constraint on government debt. - Extend coverage of rules. - Introduce elements of flexibility, including clearly specified escape and revision clauses. - Strengthen communication, transparency, and monitoring arrangements. - Introduce correction mechanisms to promote compliance and public understanding. - Accompany the new framework with supporting PFM reforms. - Specific actions—definition, calibration, and specification of rules and institutional reforms—would usefully be guided by an IMF FTE and IMF TA. *Prepared by Rolando Ossowski. (Source: IMF content unit 1kazea2020002)* ### Annex 1 discusses the pros and cons ### 1kazea2020002 - Annex 1 discusses the pros and cons ### Targets and design of fiscal rules - Annex 1 compares NOPB and expenditure as targets of fiscal rules and notes trade-offs. - The targets for a revised fiscal rules system should be calibrated in light of medium- and long-term fiscal objectives and analysis, taking into account fiscal risks, including macroeconomic risks. - The definition of government debt to be kept below NFRK foreign assets was recently narrowed to external debt; this: - weakened a rule originally closer to a net government financial assets rule, - may provide incentives for accumulation of domestic debt for reasons unrelated to optimal government debt management, - may be limited by a deficit rule but domestic debt can still be acquired via occasional, large operations (e.g., assuming debt obligations from non-government borrowers). - Consideration should be given to a net government financial assets rule. - Overall, primary, or current balance rules would not be recommended because balance rules are procyclical everywhere, and in countries heavily dependent on oil revenue this is exacerbated by transmission of revenue volatility to the economy. ### NFRK transfers, rigidity, and earmarking - The 2016 decree on NFRK transfers has been amended several times without public explanation; frequent amendments undermine predictability and credibility. - The operational rule on the NFRK’s guaranteed transfer to the budget is not working well: - Initial design specified nominal limits for several years without reference to macroeconomic, fiscal, or asset-liability objectives and without flexibility. - Maximum levels for the guaranteed transfer were raised by amendments, signaling to markets and the public that the guaranteed transfer can be changed and undermining the objective of the rule. - Further changes to the limits to the guaranteed transfers are expected to be introduced shortly. - Discretionary targeted transfers have been used: - 2017: 2.9 percent of GDP - 2019 so far: 0.6 percent of GDP - Targeted transfers provide flexibility but at the cost of less certainty, predictability, and greater discretion. - In practice, constraints on the total annual transfer are not firm; changes introduced entailed potentially significant reputational and credibility costs for the fiscal framework and the standing of the NFRK. - The rationale for simultaneous use of fiscal rules and limits on NFRK transfers should be reviewed; the system appears overdetermined and limits can complicate fiscal and asset-liability management and impede financing strategies. - Design recommendation: - Consider the NFRK transfer design within the overall fiscal framework. - An upgraded rules-based framework could include fiscal rules to delink expenditure from oil revenue volatility, promote sustainability, and possibly establish a floor on NFRK assets. - Given fiscal rules constraining policy, consider a flexible transfer system as in Chile and Norway (IMF recommendation): - Norway: the fund receives all net oil revenue and automatically finances the budget’s resulting nonoil deficit. - Chile: stabilization fund receives budget surpluses; if the budget has a deficit, the ministry of finance decides flexibly on transfers considering macroeconomic, fiscal, and asset-liability management objectives. - Earmarking parts of the NFRK’s guaranteed transfer to specific expenditures is not advisable: - The 2016 decree allows earmarking by presidential decision, but earmarking would introduce rigidities, complicate budget management, protect some expenditures from competition, risk demonstration effects and pressures for other earmarking, and could lead to inefficiency or unmet needs. ### Institutional coverage and risks of narrow coverage - Institutional coverage of fiscal rules in Kazakhstan is relatively narrow: - Overall balance rule applies to the state budget (Republican Budget and local budgets). - Nonoil balance rule applies to the Republican Budget. - Coverage excludes nonmarket extrabudgetary units at central and local levels and public corporations (i.e., narrower than general government). - Coverage of debt rules is also narrower than general government or nonfinancial public sector debt. - Extrabudgetary units and public financial and nonfinancial corporations perform wide-ranging public policy activities (examples: banking support off budget, housing support via interest rate subsidies and construction managed off budget by subsidiaries of a national management holding company, agriculture arrangements, social and infrastructure projects funded by state enterprises and national holdings). - Distinction needed between extrabudgetary activities that are compensated through budget transfers and quasi-fiscal activities that are not or not fully compensated. - Narrow coverage may provide incentives to shift expenditures to non-covered parts of the public sector, undermining rule objectives and weakening ability of nonoil primary balance or expenditure rules to decouple spending from oil revenues. - Objective: extend coverage to general government under fiscal rules. - Preparatory work required before introducing new rules: sectorization of extrabudgetary units, setting reporting requirements, extending coverage in fiscal reports. - There is time until introduction of the new system for this preparatory work. - Additional rationale for general government coverage: need to cover public-private partnerships (PPPs), significant at the local government level. ### Flexibility elements for resilience - Kazakhstan’s fiscal rule system should include clearly-specified flexibility elements: - Escape clauses for properly-justified short-term relaxation or suspension in case of large, unpredictable, and temporary shocks; conditions to invoke should be specified ex ante and verifiable using measurable variables outside the government’s control. (Annex 3 provides examples from several countries.) - Periodic revision clauses to address significant and long-lasting changes in circumstances; rules should be valid for extended periods but include provisions for periodic review and possible revision (examples of structural changes: discovery of additional oil reserves, large migration, beneficial structural reforms with short-term fiscal costs). ### Enforceability, transparency, and reporting - Upgraded framework requires strong fiscal transparency and robust communication of plans, implementation, and compliance. - Current shortcomings in reporting on fiscal rules and compliance reduce visibility to stakeholders; 2013 and 2016 decrees may not be widely known and are not easily referenced on MNE or MoF websites, including in English. - The FSED (Forecast for Social and Economic Development) accompanying budget submissions is useful but does not clearly present fiscal rules and outcomes: - Recommendation: enhance the FSED to systematically explain variables targeted by fiscal rules, performance against the rules, factors affecting performance, and show that proposed annual and medium-term budgets comply with rules. - Explanatory Notes and annual execution reports should provide needed information on fiscal rules; budget documents and annual execution reports should show whether outturns for relevant fiscal variables were consistent with targets and limits. - Correction mechanisms for deviations from rules should be specified in legislation; examples vary from detailed/automatic mechanisms to procedural approaches (Annex 4 provides country examples). - Reliable fiscal data subject to effective external scrutiny is essential: - Improve quality of government financial statements to support fiscal management and external scrutiny. - Compliance with numerical and procedural fiscal rules should be subject to continuous monitoring, external audit of government financial statements and fiscal accounts, and certification of legal observance with fiscal rules legislation. - The Accounts Committee (AC) should be required by statute to analyze reliability of accounting information and provide formal opinions on compliance with accounting and reporting instructions of annual reports required by the fiscal rules system; AC would assess compliance and issue an opinion on whether the rules were observed. - The potential role of a parliamentary budget office (PBO) could be explored to provide regular assessments of macroeconomic and fiscal forecasts, reviews of fiscal policy, and analyses of compliance with fiscal rules (examples: Georgia and Armenia have PBOs). ### Public Financial Management (PFM) reforms and comprehensive strategy - IMF TA has stressed that satisfying PFM preconditions is vital for success of fiscal rules; rules-based systems raise the bar for PFM institutions due to reputational and financial costs of noncompliance. - Annex 5 sets out important PFM requirements for effective fiscal rules; this chapter provides selected specific PFM recommendations but not a thorough assessment of Kazakhstan’s PFM system. - A comprehensive assessment and identification of reform priorities and key PFM areas needing upgrading is important, ideally with IMF TA. - Authorities should consider options carefully and comprehensively; changing the system of rules is complex, multidimensional, and will involve significant preparatory work to align with best practices. - Merit in testing new systems internally during a transition period and making needed adjustments before formal implementation. - Implement reforms through a comprehensive strategy rather than incremental or piecemeal approach; international experience suggests incremental reforms can complicate operations, whereas Kazakhstan should aim for greater simplicity and effectiveness and internal consistency among rules. - Communications strategy: - Avoid perception that changes weaken the fiscal framework. - Restate commitment to fiscal discipline and communicate a clear, simple message on objectives and key features of the revamped framework, emphasizing benefits (greater fiscal discipline, containing spending pressures, enhanced predictability and shock management, reduced vulnerabilities) and elements retained from the existing framework. - Strategy should avoid fragmented communication and focus on audiences and communication products. - Legal embedding: - Embed the upgraded fiscal rules within a legal framework subject to parliamentary review and approval to enhance bindingness and credibility. - So far, fiscal targets have been adopted by presidential decrees that have been amended several times; fiscal rules should be set to enhance implementation and provide strong longer-term guidance. - Many national fiscal rules are enshrined in statutory norms; consideration should be given to embedding fiscal rules, monitoring, reporting, external scrutiny, flexibility, and enforceability mechanisms in a legal framework reviewed and approved by parliament. *Source: 1kazea2020002 - Annex 1 discusses the pros and cons.* ### 41. Fiscal transparency plays a critical role in a rules-based framework. Parliament, citizens ### 1kazea2020002 - 41. Fiscal transparency plays a critical role in a rules-based framework. Parliament, citizens ### Fiscal transparency: overview and context - Fiscal transparency is critical to a rules-based framework to strengthen accountability of the government for fiscal management. - A comprehensive review of Kazakhstan’s fiscal transparency is desirable—ideally in the context of an IMF FTE—before introducing an upgraded rules-based framework. - This section provides a preliminary evaluation and recommendations on selected fiscal transparency topics under the headings: fiscal reporting, fiscal forecasting and budgeting, fiscal risk analysis and management, and the transparency of the NFRK. It is not a full assessment; an FTE would provide a full assessment and specific recommendations. - Progress to date: - The FSED that accompanies budget submissions has been gradually expanded. - Explanatory Notes to budget submissions and budget execution reports are being published. - Citizen’s Budgets are being produced. - Open Budget Index: Kazakhstan ranks about average among regional peers; progress assessed by average scores in recent years has been moderate. ### Fiscal reporting: institutional coverage, sectorization, classifications, and statements - Institutional coverage: - Current national fiscal reporting is limited to the consolidated budget and its components. - The 2018 PEFA estimated that expenditure outside fiscal reports in 2017 could have amounted to the equivalent of close to 11 percent of Republican Budget expenditure, or 2.25 percent of GDP. - The authorities report GFS data to the IMF for: budgetary central government, budgetary local governments, the NFRK, and the State Social Security Fund. Coverage is being expanded to include the Compulsory Health Insurance Fund (2018 GFS) and the Problem Loans Fund (expected 2020). - Sectorization of public sector units (high priority): - Apply GFSM 2014 criteria to correctly allocate extrabudgetary units and state enterprises between general government and public corporations in the nonfinancial public sector. - Benefits: more complete picture of government activity; correct legal status; appropriate governance arrangements; public sector accounting and reporting standards for non-commercial entities; improved treasury coverage. - Requires inter-agency cooperation; IMF TA recommended prioritizing sectoral classification of state unitary enterprises and national holding companies and their subsidiaries. - Reporting standards for extrabudgetary units should be established and enforced to generate timely fiscal reports for the general government. - Budget classification: - A single budget classification system established by MoF in 2014 is used at all budget levels, but it is not fully consistent with GFSM 2014. - Authorities are encouraged to make the classification system consistent with GFSM 2014, with IMF assistance. - Nonoil balance disclosure: - The nonoil balance should be explicitly defined (consistent with IMF advice) and its derivation from fiscal accounts shown in the FSED, budget documentation, and fiscal reports via detailed derivation tables. - Normalization by nonoil GDP would avoid problems associated with the volatility of oil prices and revenues and therefore total GDP. - Economic classification of budget expenditure: - Annual budget and MTBF submissions to Parliament are broken down by administrative, functional, and program classifications, but do not include an economic classification. - In-year and annual budget execution reports include an economic breakdown but without a possibility of comparison to the original budget. - Inclusion of an economic classification in budgets and the MTBF is desirable. - Consolidated financial statement improvements: - The 2018 report to Parliament included for the first time a pilot consolidated financial statement for the Republican Budget. - The AC plans to audit the consolidated financial statement for 2019 and present a formal opinion to Parliament. - Further work is needed to improve the consolidated financial statement—fundamental for a future consolidated balance sheet of the public sector. - Public debt statistics: - Currently published quarterly statistics cover central government debt, aggregate local government debt, NBK debt, and state-guaranteed debt, broken down into external and domestic debt. - Debt statistics should be extended to include debt of extrabudgetary units and public corporations; relevant information is internally available. - Public debt statistics for the public sector are not produced though financial statements of major national management holding companies contain assets and liabilities information. ### Fiscal forecasting and budgeting: institutions, forecasts, errors, and practices - Institutions and documents: - MNE prepares the Forecasts for Economic and Social Development (FSED) at least annually. - The FSED sets out economic objectives and policies for the next five-year period and fiscal objectives for the next three years; after government approval it is submitted to Parliament with the budget and is published. - The FSED includes a rolling five-year macroeconomic forecast covering GDP, production by sector, the price of oil, inflation, monetary and balance of payments indicators, state and government debt, and social indicators. - Forecast performance: - Real GDP growth one-year-ahead forecast seems unbiased; absolute mean forecast error one year ahead in 2011–18 was 2 percent. - Adjusted for volatility, the absolute forecast error is higher than in European countries but broadly similar to countries such as Colombia, Georgia, and Mexico. - Growth in the second and third years of the forecast tends to be overestimated. - Variability of macroeconomic forecasts partly explained by the large and unforeseen oil price shock of 2014–15. - Presentation and discussion of macro forecasts (areas to strengthen): - Present and comprehensively discuss performance of key macroeconomic and fiscal variables in the last few years; include outcomes for the three previous years, including the forecast for last year, in forecast tables. - Disclose forecasting methods and provide greater information on assumptions, key drivers and relationships used in forecasts. - Include comparisons with other external forecasts produced by regional and international financial institutions and rating agencies. - Medium-term budget framework (MTBF) and ceilings: - Kazakhstan has an MTBF covering the budgeted year and two forward years; presented with budget submissions for the Republican Budget, local budgets, and NFRK (together the Consolidated Budget). - Expenditure ceilings for the two outer years in the MTBF are indicative rather than binding. - Revenue and expenditure forecast biases and errors: - State budget revenue was, on average for 2011–18, higher than initial forecast for the budget year by 1.4 percent of GDP; higher by 2.2 percent of GDP and 2.6 percent of GDP for the second and third years of the MTBF respectively. - This underforecasting of revenue is not directly due to oil price understatement because the budget is shielded in the short run by the NFRK. - Expenditure tends to be underestimated in outer years: for 2011–18 actual state budget expenditure was close to 10 percent higher on average than the initial estimate for the second year, and close to 14 percent higher than the initial estimate for the third year—or by 1.7 percent of GDP and 2.3 percent of GDP respectively. - Large revisions to outer years’ spending ceilings limit their effectiveness in setting credible and predictable medium-term constraints. - Oil price forecasting: - MNE uses various international agency forecasts for the five-year Brent oil price forecast in the FSED and applies a discount factor of varying size to introduce safety. - Resulting forecast performance: average error of the initial forecast for the budget year in 2011–18 was 24 percent (absolute mean error 35 percent). For the second forecast year, forecast errors were 26 percent and 53 percent respectively. - The practice of conservatively low oil price projections can generate uncertainty and reduce credibility of forecasts and the consolidated budget; it can generate pressures for supplementary budgets when actual oil prices are higher than the biased forecast. - Recommendation: seek protection from oil price risk by planning spending prudently, setting formal or explicit budget contingencies, including safety margins, and ensuring targeted medium-term nonoil fiscal policy maintains net financial assets above the floor with high probability. - Best practice examples: Alberta (Canada), Australia, and Norway use market forecasts, futures prices, and expert analysis for resource price forecasts. - Disclosure and reconciliation in the FSED: - The FSED should provide full information on oil price forecast methodology, sources, calculations, and discount factor applied. - The FSED should include analysis of differences from macroeconomic and fiscal forecasts (a reconciliation of forecasts versus outturns) to document lessons and improve credibility—this analysis is already done internally and should be published. - The FSED should include a forecast reconciliation explaining differences between successive forecasts and other budget documents. - Accrual budgeting coordination: - Introduction of an upgraded fiscal rules system must be closely coordinated with ongoing efforts to introduce accrual budgeting, including agreement on the accounting basis of fiscal aggregates used in the fiscal rules. - Supplementary budgets (SBs) and contingency reserves: - Annual budgets are frequently amended via SBs. Example: 2019 budget was amended twice through SBs that raised expenditure relative to the original budget by about 1.5 percent of GDP. - The nonoil deficit limit for the Republican Budget for 2019 in the 2016 decree was raised from 7.2 percent of GDP to a range of 7–8.5 percent of GDP through an amendment to the decree to accommodate higher spending. - Budget Code (Article 107) limits SBs to one a year, with exceptions (including instructions from the President); overuse of SBs affects credibility and predictability. - Recommended good practices: - SBs should be rare, limited in size (typically less than 3 percent of the budget), and prescribed in advance. - Require a formal midterm review of budget execution by the legislature, which may lead to an SB and use of contingency reserves. - Limit revisions to one mid-year point, allowing SBs at other times only in exceptional circumstances. - Set aside an unallocated contingency reserve to fund unanticipated spending without recourse to SBs. - In Kazakhstan, budgetary reserves in the Republican Budgets for 2019 and 2020 were equivalent to 1–1.5 percent of expenditure, or 0.2–0.3 percent of GDP. Reserves can be allocated by government resolution during execution. - Supplementary budgets such as those in 2017 and 2019 raised expenditure by more than these reserve amounts. ### Key policy recommendations and actions (selected) - Conduct a comprehensive fiscal transparency review, ideally an IMF FTE, before upgrading the rules-based framework. - Expand institutional coverage of fiscal reports to clarify boundaries between general government, the rest of the public sector, and the private sector; include extrabudgetary units in reporting. - Prioritize correct sectorization of state unitary enterprises and national holding companies and their subsidiaries using GFSM 2014 criteria. - Establish and enforce reporting standards for extrabudgetary units to enable timely fiscal reporting for the general government. - Make the budget classification system consistent with GFSM 2014, with IMF assistance. - Define and disclose the nonoil balance explicitly and show detailed derivations from fiscal accounts in the FSED and fiscal reports. - Include an economic classification of budget expenditure in annual budgets and the MTBF to enable comparison with original budgets. - Continue improving the consolidated financial statement and pursue audited consolidated accounts for the public sector. - Extend public debt statistics coverage to include extrabudgetary units and public corporations. - Strengthen presentation, methodology disclosure, and retrospective reconciliation in the FSED (including oil price forecasting methodology and forecast evaluation). - Coordinate the introduction of upgraded fiscal rules with accrual budgeting reforms and agree on accounting bases of fiscal aggregates. - Reduce reliance on artificially conservative oil price projections; instead plan spending prudently, set formal contingencies, and use safety margins to protect the budget. - Limit supplementary budgets by requiring midterm review, prescribing size limits (typically < 3 percent of the budget), and maintaining adequate contingency reserves (current reserves were equivalent to 1–1.5 percent of expenditure, or 0.2–0.3 percent of GDP in 2019–2020). *Source: Excerpt from IMF country report chapter on fiscal transparency for the Republic of Kazakhstan.* ### 67. In a resource-rich economy like Kazakhstan there is a need for a risk-based fiscal policy ### 67. In a resource-rich economy like Kazakhstan there is a need for a risk-based fiscal policy ### Fiscal risk overview — key findings - Well-designed fiscal rules and fiscal institutions, informed by analysis of fiscal risks, can guide: the appropriate fiscal stance, the proper size of financial buffers, and the level of savings from resource revenues. - Major fiscal risks materialized frequently in the last decade and entailed sizable fiscal costs: - Public funds injected in the banking sector in 2008–14 estimated at over 5 percent of 2014 GDP. - Support to banks since 2017 amounted to a further 8 percent of GDP. - Support to KazMunaiGas in 2015 to make external debt payments was equivalent to close to 2 percent of GDP. - The external debt of quasi-government institutions at end-2018 amounted to close to US$20 billion, or about 11.5 percent of GDP. - The government’s explicit contingent liabilities are small: - The annual budget law limits outstanding government guarantees; the budget for 2020 sets a limit on guarantees of 1.25 percent of GDP. - Debt formally guaranteed by the government at end-2018 was equivalent to 0.9 percent of GDP. - The quasi-government sector (public corporations, PCs) undertakes considerable quasi-fiscal activities (QFAs) that create implicit contingent liabilities and fiscal risks. ### Macroeconomic risks — findings and analytical gaps - Kazakhstan has relatively high macroeconomic volatility by regional standards: - Macroeconomic volatility measured by the standard deviation of the annual percentage change of nominal GDP is similar to Russia, lower than Azerbaijan and Turkmenistan, but higher than countries in the region not heavily dependent on petroleum exports. - The volatility of Kazakhstan’s consolidated budget revenue is among the highest in the region. - The FSED’s analysis of macroeconomic risks and sensitivity of forecasts should be strengthened: - The FSED for 2020–24 highlights risks from oil prices, exchange rates, and external demand but provides only very limited sensitivity analysis (only a single consolidated budget balance variation for a slightly higher oil price). - Internal MNE work exists; examples of countries publishing sensitivity analyses include Armenia, Brazil, Colombia, Georgia, Lithuania, Peru, and the Philippines. - Recommended enhancements to sensitivity and scenario analysis: - Examine the impact of changes in real GDP growth, the oil price, and currency depreciation/appreciation on baseline fiscal forecasts (revenue, expenditure, balances, financing), NFRK assets, and government debt. Shocks could be based on historical volatility, one standard deviation, or historical forecast errors. - Expand scenario analysis in the FSED (optimistic, baseline, pessimistic) to quantify implications for fiscal projections, NFRK assets, government debt, transmission channels, and potential policy adjustments. The FSED currently reports limited scenario impacts (GDP growth, exports in 2024, and NFRK assets in 2022) without broader quantification. - Debt management transparency: - Debt sustainability analyses (DSA) are done internally in the MNE and the MoF but should be published (in the FSED or as a separate annual report) including current debt stock, baseline medium-term scenarios, debt projections, and stress tests. - The government could publish its debt management strategy; the last published joint document covered 2013–15 and an updated strategy is under preparation. ### Long-term fiscal sustainability analysis (LTFSA) - Doing LTFSA is increasingly urgent because of long-term fiscal risks: - Decarbonization and global transition risks. - Technological change in the energy sector. - Future decommissioning costs in the oil sector. - Aging-related challenges including future budget support to the pension system and rising health costs. - Regional practices: - Armenia and Russia produce LTFSAs. - An EBRD study estimated a significant potential impact on Kazakhstan’s fiscal revenues from a long-term “green” scenario consistent with the Paris Agreement and the Sustainable Development Goals (EBRD, 2018). ### Public corporations (PCs) — risks and disclosure gaps - The large and complex quasi-government sector is a major source of fiscal risks: - PCs undertake QFAs and have links to government that can create implicit contingent liabilities (e.g., KazMunaiGaz support in 2015). - QFAs often lie outside parliamentary scrutiny and are not transparently reported. - Current controls and reporting: - A 2017 decree established procedures for coordination of foreign borrowing by quasi-sovereign entities and annual borrowing limits for national holdings. - All PCs report at least annually to sponsoring ministries, the MNE, and the State Property and Privatization Committee; the MoF and MNE regularly monitor PC finances and borrowing. - Information gaps and recommendations: - Aggregate information on PC operations, financial performance, financial position, and QFAs is not publicly disclosed; internal information availability suggests publishing is feasible. - The government should publish at least annual reports on the aggregate performance of the PC sector that include: - Objectives for each PC (or at least larger PCs) and key performance indicators (KPIs). - Data for the whole PC sector and PCs by sector ministry, including debt statistics. - Financial links between the government and PCs: capital injections, subsidies, loans, dividends, and guarantees. - The MNE should strengthen central-level risk analysis and financial oversight of PCs: - Define and apply common risk indicators. - Require PCs to report QFAs and cost them using MNE-set methodologies. - Options for handling QFAs: - Best practice: “budgetize” QFAs to improve transparency and predictability. - Alternatively, transparently compensate QFAs from the budget with guidelines for measuring QFA costs and full, timely reimbursement via subsidies/transfers. - At minimum, issue regular reports detailing the nature and cost of QFAs. - Transparent compensation of QFAs may have lower immediate budget impact than appears because the budget already partly “pays” through lower dividends/profits from PCs and the NBK, and PCs may finance QFAs by borrowing (creating contingent liabilities) or running down public sector capital. ### Public-Private Partnerships (PPPs) — status, risks, and transparency - Legal and institutional framework: - Framework comprises the Law on Concessions (2006), the Law on PPPs (2015), and regulations; overlap and interpretation issues prompted work on a single integrated PPP legal framework. - Supporting institutions include the Kazakhstan Project Preparation Fund LLP (Baiterek subsidiary) and the Kazakhstan Public-Private Partnership Center (KPPPC) under the MNE. - Project appraisal and fiscal risk assessment: - Proposed PPPs should be subject to robust appraisal, risk allocation to the party best able to manage them, and fiscal risk assessments (example: Colombia mandates project-specific risk assessment and reporting as part of budget documentation). - Limits, monitoring, and recent trends: - Annual budget law sets limits on total PPP liabilities at the Republican Budget level; the budget for 2020 limits these liabilities to KZT 2.1 trillion, or about 3 percent of GDP. - For local budgets: - Limit on PPP liabilities is 20 percent of own revenues. - Annual local budget PPP-related service of concessional obligations is limited to 10 percent of revenues in the budget year. - Centralized monitoring: all PPP contracts must be registered with the Treasury Committee at the MoF, which checks liabilities against limits. - Total value of PPP contracts signed so far is equivalent to about 2.5 percent of GDP: - 662 out of 671 PPP contracts signed by local authorities, total contract value 1.5 percent of GDP (majority in social infrastructure: pre-school education and health care). - Nine central-level PPPs signed with contract value of 1 percent of GDP. - Disclosure and fiscal treatment recommendations: - Explicit PPP liabilities should be included in government debt statistics. - Contingent PPP liabilities should be disclosed in budget documents and the future fiscal risk statement. - Budget documentation should disclose all rights, obligations (including contractual contingent liabilities), and other exposures under PPP contracts, and the expected annual receipts and payments over the life of the contracts (example: Chile publishes an annual statement of contingent liabilities including revenue guarantees). - Medium-term budgets should consider the potential implications of PPPs on public finances. - The FSED for 2020–24 indicates intent to provide contractual protection of currency risk in concession agreements; given the floating exchange rate regime and exposure to recurrent external shocks, provision of exchange rate guarantees could entail substantial risk for the government. *Source: Excerpt from IMF chapter on Kazakhstan fiscal risk management and institutions* ### 94. More information on the PPP contracts should be made available. PPP contracts should ### 1kazea2020002 - 94. More information on the PPP contracts should be made available. PPP contracts should ### PPP contracts and disclosure - PPP contracts should be published, possibly with omissions permitted by freedom-of-information laws, so observers can assess them (Irwin and others, 2018). - Guidelines on project disclosure developed by the World Bank Institute (World Bank Institute, 2013) could provide useful input for an upgraded approach. - Examples of jurisdictions that publish PPP contracts: local jurisdictions in Australia, Brazil, and Canada; governments in Chile, India, Peru, South Africa, and the United Kingdom. ### NFRK: governance and operational framework - The NFRK’s governance arrangements and operational rules are specified in legislation; the fund was founded in 2000 by Presidential Decree. - Objectives: stabilization and savings. - Management Council: chaired by the President; functions specified in the Budget Code (art. 25). - Trust manager and asset implementation: NBK designated by a 2001 government resolution as the fund’s trust manager and responsible for implementing the fund’s asset investment strategy. - Latest operational rules for transfers to the budget: set out in the 2016 decree, with amendments. ### NFRK investment strategy and portfolio structure - Investment strategy and eligible financial instruments: published; list of eligible instruments set out in a government resolution; investment guidelines approved by the Board of the NBK and published; last changed in 2019. - Foreign currency portfolio split into two sub-portfolios: - Stabilization portfolio: - Objective: maintain sufficient liquidity in the fund. - Cap: US$10 billion. - Permitted assets: money market instruments and fixed income securities. - At end-2018, stabilization portfolio amounted to US$9.2 billion, or 16 percent of the foreign currency portfolio. - Savings portfolio: - Objective: save funds for future generations and ensure long-term returns subject to maximum risk levels. - Recent strategic asset allocation: bonds (80 percent) and shares (20 percent). - 2016 decree mandated gradual shift to 60 percent in bonds and 35 percent in shares and allow up to 5 percent in alternative instruments (e.g., private equity). - Subsequent amendment reduced allocation in shares to 30 percent to allow up to 5 percent of the portfolio to be invested in gold. - Transition began in 2017 and the targeted allocation was to be achieved 3–5 years later. - At end-2018, savings portfolio amounted to US$48.8 billion, or 84 percent of the foreign currency portfolio. - Residual domestic portfolio: - Formed when the fund engaged in policy-oriented extrabudgetary spending and lending prior to 2017. - Includes bonds issued by national management holding companies. - Not actively managed by the National Bank. ### Current public information and disclosure practices for the NFRK - Information available from the MoF, the NBK, and the government. - Published materials: - Fund’s monthly and annual accounts and a succinct summary annual report (published by the MoF). - NBK Annual Report includes a section on management of the NFRK’s assets with summary information on: - investment objectives; - purposes of stabilization and savings portfolios; - total asset market value and values of sub-portfolios; - annual and cumulative returns since inception; - comparison of sub-portfolio returns with benchmark portfolios. - Legislation and regulations available on MoF, NBK, and government websites. - Annual financial statements: - Externally audited by international audit companies selected based on tenders. - Audited financial statements have not been published. ### Recommended improvements to NFRK transparency and reporting - Produce comprehensive “one-stop” quarterly and annual reports on the fund’s activities and finances and provide the fund with a dedicated website to consolidate dispersed information. - Examples of resource funds that publish regular comprehensive reports with audited financial statements and dedicated websites: Alberta (Canada), Alaska (U.S.), Australia, Azerbaijan, Chile, Mexico, Norway, Panama, Timor Leste, Trinidad and Tobago. Suggested contents for the reports (quarterly and annual): - Governance, transparency and accountability (references to relevant legislation, regulations, inter-agency agreements). - Management of the fund and its operating rules. - Narrative on the national economy and the fund. - Fund’s revenues and expenditures. - Investment strategy and performance. - Investment portfolio breakdowns by asset classes. - Returns on the portfolio and comparisons to benchmarks. - Fund’s risk profile and risk management. - Fund’s budget and its execution. - Attach externally-audited financial statements and auditors’ opinions to annual reports. Suggested contents for a dedicated website: - Laws, decrees, regulations, guidelines, management agreements, codes of conduct. - Monthly accounts. - Quarterly and annual reports and financial statements. ### Next steps and sequencing for fiscal framework reforms - Sequencing and prioritization of reforms would benefit from IMF TA. - Authorities could initially: - Specify objectives and tradeoffs. - Identify shortcomings of the current framework. - Examine design options for upgraded fiscal rules, flexibility, and enforcement mechanisms. - Build internal consensus and build on existing efforts to strengthen fiscal transparency. Priority short-term steps to strengthen fiscal transparency (with IMF TA where indicated): - Improving reporting on the fiscal rules. - Broadening the coverage of the FSED and providing more information and analysis. - Making progress toward proper sectorization of extrabudgetary units (high priority). - Extending coverage of published public debt statistics. - Developing a strategy to deal with QFAs. - Designing a strategy and assigning responsibilities to produce a fiscal risk statement, with IMF TA. - Making progress toward publication of a periodic report on PCs, starting with the largest ones. - Assigning institutional responsibilities and setting up a schedule to produce a comprehensive periodic report on the NFRK; publishing the audited financial statements; and setting up a dedicated website for the fund. ### Expected benefits and support - Implementation of recommendations would: - Strengthen fiscal discipline. - Increase predictability. - Guide medium-term fiscal policy more effectively. - Focus more attention on fiscal risks. - Help contain spending pressures and address the deficit bias more effectively. - The authorities’ efforts would benefit from an IMF FTE as well as TA on PFM, and on the fiscal framework and fiscal rules. ### Annex highlights: fiscal rules pros/cons and country examples - Nonoil Primary Balance (NOPB) rules — pros include insulating fiscal policy from volatile resource revenues and direct link to sustainability analysis; cons include potential procyclicality and incentives for off-budget operations. - Expenditure rules — pros include direct control of expenditure pressures, clear operational guidance, and relative simplicity; cons include no direct link to debt sustainability and potential incompatibility with earmarking or minimum spending requirements. - Annex II and III provide multiple country examples of fiscal rule targets and escape clauses (selected country listings are included in the source text). - Annex IV outlines correction mechanisms, including EU Fiscal Compact automatic corrections, Swiss and German “debt brakes,” Poland and Slovak Republic debt-rule triggers, and U.S. sequestration mechanics. *Source: 1kazea2020002, IMF* ### Annex V. Public Financial Management Requisites for ### Annex V. Public Financial Management Requisites for Effective Fiscal Rules ### Key PFM requirements for fiscal rules - Elaboration of annual budgets and Medium Term Expenditure Frameworks based on detailed fiscal policy objectives consistent with the rule. - Capacity to forecast revenues and the endogenous component of expenditures (or baseline estimates), and to prepare a realistic financing plan. - A parliamentary approval process that prevents the introduction of amendments inconsistent with the fiscal rule. - Capacity to ensure an appropriate execution of the budget, including effective expenditure control mechanisms and the ability to introduce intrayear corrections if needed—which requires the timely availability of reliable information on budget developments. - Comprehensive and firmly enforced chart of accounts, accounting, and budget classification systems, and reporting requirements to forestall the use of accounting manipulation that would threaten and undermine the effective operation of the fiscal rule. - Budget information mechanisms capable of generating timely (in-year and end-year) and reliable statistics and reports. - In-year reports allow internal monitoring of the adherence to the rule and provide an opportunity to signal to policymakers in time if changes are needed. - Fiscal data consistent with the budget reporting system should be publicly released in line with a pre-announced calendar to allow external monitoring of the rule. - Effective independent external scrutiny, including external audit, to ensure that public resource use is fully accounted for. - Enforcement and correction mechanisms. ### Additional preconditions for resource-rich countries - A clear fiscal accounting distinction between resource-related revenues and expenditures, and other revenues and expenditures, and the capacity to monitor them with assurances of integrity, to avoid ambiguities and prevent misclassification. - Significant budget flexibility and limited revenue earmarking or statutory minimum spending requirements. These budget rigidities can be inconsistent with the fiscal rule to a greater degree than in other countries, because revenue earmarking and spending requirements can transmit significant resource revenue volatility and procyclicality to spending. - Fiscal transparency in the provision of information on the resource sector and resource revenues. *Source: Based on Corbacho and Ter-Minassian (2013).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1kazea2020002.pdf_