## 1kazea2021001

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---

### Foreword — mission purpose and partners
- Mission dates: September 2 through 13, 2019.
- Mission leader: short-term IMF expert on GFS, Dalia Budko.
- Primary goal: provide assistance to the Ministry of Finance (MF) of the Republic of Kazakhstan (RK) in further improving government finance statistics (GFS).
- Chief objectives included:
  - analysis of progress attained – fulfillment of the previous mission’s recommendations;
  - expanded coverage of the general government sector;
  - issues of budget classification (BC);
  - expanded data coverage – line items for stocks of nonfinancial and financial assets and liabilities;
  - consultations on completing the annual questionnaire packet on GFS;
  - assistance in compiling and disseminating quarterly government sector debt for the shared World Bank/IMF database.
- Principal technical partner: Department of Reporting and Government Finance Statistics (DRS) of the MF.
- Other institutions consulted: Department of Methodology and Accounting, Audit, and Assessment; Bureau for the Establishment of Budget Classifications and Budget Planning Methodology; Public Debt Department (PDD); Committee for State Property and Privatization of the MF RK; Statistics Committee (SC) of the Ministry of the National Economy of the RK; Problem Loan Fund (PLF); Social Medical Insurance Fund (SMIF); National Bank of Kazakhstan (NBK).

### Summary of mission results and priority findings
- Progress noted:
  - updated bridge tables are used when generating statistics;
  - National Fund (NF) data are recorded separately from national budget (NB) data;
  - GFS are disseminated through the IMF Integrated Data Collection System.
- Urgent issue: expanding institutional coverage of the general government sector (GGS).
  - Draft law “Economic Sector Classifier” uses terms consistent with SNA 2008 and GFSM 2014 but requires a sequential algorithm for practical application.
  - Recommendation: create an interagency working group including the SC, MF, and NBK to address borderline cases in sector assignment.
- State-owned enterprises and nonmarket producers:
  - Special attention needed to determine the economic sector of state-owned enterprises; nonmarket producers should be assigned to the GGS.
  - Many entities performing government tasks are financed from the treasury but legally are state enterprises (SE); treasury funds to such enterprises are recorded as acquisitions of goods and services, inflating that category while understating wages and other categories.
- Specific entities assessed:
  - Problem Loan Fund (PLF) and Social Medical Insurance Fund (SMIF) should be assigned to the GGS.
  - Coverage expansion implemented: include the SMIF beginning with 2018 reports (implemented in 2019) and include the PLF beginning with 2017 reports (implemented in 2020).
- Conceptual difference in “deficit”:
  - RK budgetary statutes differ from GFSM 2014: RK’s concept includes government-funded lending and transactions with other financial assets.
  - GFSM 2014: net lending/net borrowings = revenues minus expenses and net acquisitions of nonfinancial assets; transactions with financial assets, including payments and repayment of public loans (repayment realistically expected), should not affect the deficit.
- Budget classification issues:
  - BC contains features difficult to map to GFSM 2014 economic categories (e.g., targeted deposits, special expenditures).
  - Many budget resources recorded as “acquisition of goods and services” when economically they are government assistance (subsidies or capital transfers), distorting comparisons with other countries.
- Stocks and flows consistency:
  - Need to systematically verify consistency between stock flows and positions.
  - Mission analyzed consistency for public loans issued from the national budget and for assets of the National Fund; recommended extending checks to other assets and liabilities and to revise 2017 tables using 2018 compilation practices.
- Public sector debt statistics:
  - Not yet compiled at MF according to international methodology.
  - MF capable of completing World Bank questionnaire for central government and for debt securities and credits/loans of local government bodies; NBK communication needed for liabilities of other public sector entities.
  - Residency concept in government debt statutes is not consistently applied when separating domestic and foreign liabilities.
- Timeliness and benchmark data:
  - Timely receipt of benchmark data is essential; close cooperation needed within MF and with NBK, PLF, SMIF, and State Social Insurance Fund (SSIF).

### Priority recommendations (timing and responsible party)
- Q4 of 2019
  - Include the Social Medical Insurance Fund (SMIF) in the Social Security Funds subsector, beginning with reports for 2018. — MF
  - When recording financial assets and liabilities, verify consistency between positions on stocks and flows, distinguishing transactions and other flows. — MF
- Q4 of 2020
  - Include the Problem Loan Fund (PLF) in the “Central Government subsector (extrabudgetary), starting with reports for 2017. — MF

### A. Expanded coverage of the General Government Sector (GGS) — scope, magnitude, and classifier issues
- GFSM 2014 definition: GGS primarily occupied with nonmarket activities; consists of all units of government administration and all resident nonmarket, noncommercial organizations controlled by government administrative units; includes state enterprises that are legally corporations but do not satisfy statistical criteria to be considered corporations.
- Magnitude of state sector:
  - Number of state-owned enterprises (September 2019): 6,349 state-owned enterprises.
- State-Owned Enterprises (counts by type/form and ownership, September 2019):
  - JSC: 124 (Property of state holding companies), 132 (National property), 50 (Municipal oblast property), 6 (Municipal raion property), 0 (Municipal, local government), Total 312
  - SE under operational management (state-owned): 0, 97, 1,039, 2,395, 814, Total 4,345
  - SE under economic control: 0, 125, 745, 477, 3, Total 1,350
  - Closed JSC: 1, 0, 0, 0, 0, Total 1
  - Open JSC: 0, 0, 1, 0, 0, Total 1
  - LLP: 8, 13, 114, 205, 0, Total 340
  - Total by ownership columns: 133, 367, 1,949, 3,083, 817, Total 6,349
- Coverage gap:
  - Current RK GFS cover only the national budget, budgets of local government bodies, the National Fund, and the State Social Insurance Fund.
  - To align with international requirements, market and nonmarket producers in the government sector must be delineated and nonmarket producers included in the GGS.
  - Market producer criterion referenced (the “50 percent rule” for assigning market vs. nonmarket).
- Classifier of Economic Sectors:
  - SC prepared a “Classifier of Economic Sectors” project planned for passage in 2020; founded on SNA 2008 principles.
  - Theoretical sections are well-prepared, but practical application lacks a clear implementation algorithm and clarity on required data sources and data providers.
  - Recommendation: develop and approve a precise algorithm and facilitate cooperation between MF, NBK, and SC for classifying institutional entities by economic sector.
- Practical implication:
  - Principle of predominance of economic content over legal form should guide sector decisions.
  - Most SOPE likely fall under the GGS because they operate in conditions devoid of competition with private producers, are funded by public funds, and have prices set by an authorized body.

### Interagency coordination on sector delimitation
- All macroeconomic statistics datasets must define sectors in the same way and each institutional entity may be assigned to only one economic sector.
- A concerted decision among the MF, SC, and NBK is especially needed in borderline cases where applying an algorithm is insufficient.
- Logical step: create an interagency working group to assign institutional entities to sectors.

### B. National Management Holding Companies (NMHC) — scale, transactions, and sector guidance
- Kazakhstan has three national management holding companies: Samruk-Kazyna National Prosperity Fund, JSC; NMHC Bayterek, JSC; and NMHC KazAgro, JSC; the sole shareholder of which is the Government of the RK.
- NMHC influence and financial scale (end-2018):
  - Value of assets managed by NMHC was about KZT 32 trillion.
  - Samruk-Kazyna— KZT 25,6 trillion.
  - Bayterek—KZT 4,7 trillion.
  - KazAgro—KZT 1,6 trillion.
  - Gross domestic product of the RK in 2018 amounted to KZT 58.8 trillion (NBK statistical bulletin No. 10 of 2019).
  - In 2018, Samruk-Kazyna paid out KZT 12,7 billion in dividends to the republican budget.
  - NMHC Bayterek and NMHC KazAgro did not pay out dividends in 2018.
- NMHC functions and sector implications:
  - NMHC implement national economic policy, strategic government programs, company development plans, and financial recovery of enterprises.
  - Government regulation implies limited independence, negligible risk assumed directly by NMHC and their subsidiaries, and government assistance delivered primarily through NMHC.
  - Sector assignment: NMHC sector is defined by the sector of the majority of subsidiaries—identify economic sector of each subsidiary first.
  - Holding companies may be classified as nonfinancial or financial corporations depending on subsidiaries.
  - Special-purpose entities (SPE) that are asset/liability keepers and not involved in production are assigned to the subsector “Captive Financial Institutions and Lenders” within financial corporations.
- Examples of 2018 transactions illustrating nonmarket support and quasi-fiscal activities:
  - Samruk-Kazyna financed NMHC Bayterek by acquiring bonds for KZT 70.1 billion; the difference between acquisition cost and fair value as of acquisition date was KZT 31.34 billion and was declared as a transaction with a shareholder (change in capital).
  - Samruk-Kazyna acquired bonds of AO “Tsesna Bank” at a nominal value of KZT 38.5 billion, while fair value was KZT 6.8 billion; the difference of KZT 31.7 billion was declared as a loss from discounting financial assets at initial recognition.
  - Samruk-Kazyna financed various social projects for a total of KZT 64.7 billion, of which KZT 31 billion was directed to construction of social facilities.
  - In 2018, JSC NMHC KazAgro sustained losses amounting to KZT 117,9 billion (they were KZT 126 the previous year) but nonetheless, KZT 400.1 were channeled to support the agro-industrial sector.

### C. Social Medical Insurance Fund (SMIF) — entity features and sector assignment
- Context and legal form:
  - MSMI launched with a guaranteed amount of free medical assistance and mandatory social medical insurance (MSMI).
  - SMIF is a nonprofit joint-stock company whose sole founder and shareholder is the Government of the RK.
  - The Fund has a seal, bank accounts, its own balance sheet, and may acquire and exercise ownership rights and other personal rights in its own name, bear obligations, and be a plaintiff or respondent in a court of law.
- Funding and operations:
  - SMIF assets are created via contributions/withholdings by employers, employees, sole proprietors, self-employed and unoccupied persons—the majority of the population participates.
  - The amount of medical services in the MSMI is not dependent on the size of individual withholdings.
- Sector-assignment conclusion and timing:
  - SMIF is a separate institutional entity that should be assigned to the general government sector and the Social Security Funds subsector.
  - MSMI assets began to be generated as of July 1, 2017, while the SMIF began to operate at full capacity in 2020.
  - Representatives of the SMIF committed to providing data to the Ministry of Finance for compilation of GFS.
  - SMIF data will be included in the Social Security Funds subsector when compiling GFS for 2018.

### D. Problem Loan Fund (PLF) — transactions, valuation issues, and sector rationale
- Background:
  - JSC Problem Loan Fund created in 2012; managed by NBK from 2012 through 2017; transferred to be managed by the MF in 2017.
  - Sole shareholder is the Government of the RK.
  - PLF activities focus on banking sector recovery and putting idle redeemed assets into economic circulation.
- Large transactions and valuation discrepancies:
  - July 1, 2017: purchase of problem assets from JSC “BTA Bank” based on MF RK order dated June 29, 2017, for KZT 2.6398 trillion.
    - Purchase price set on balance-sheet cost to seller without appraisal.
    - Independent appraiser found market value at purchase date was KZT 267.7 billion.
    - In 2017, PLF received a targeted transfer from the NB in the amount of KZT 2.0929 trillion to finance the BTA transaction, recorded as additional paid-in capital in financial statements.
  - September 2018: PLF acquired problem assets from JSC Tsesnabank totaling KZT 450 billion.
    - Independent appraisal determined market value of repurchased claims was KZT 45.7 billion as of purchase date.
    - Difference between purchase amount and market value was KZT 404.3 billion.
    - Transaction was financed by a securities issue of KZT 450.0 billion, acquired by JSC “Kazakhstan Stability Fund”, whose sole shareholder is the NBK.
  - Independent auditor opinions:
    - The BTA transaction is set apart as an emphasis of matter in the PLF’s 2018 financial statements audit.
    - The Tsesnabank transaction is noted as a key audit issue in the PLF’s 2018 financial statements audit.
- Sector-assignment rationale:
  - PLF is a resident institutional entity controlled by a state body and can be placed in the government sector.
  - Applying GFSM 2014 items 2.129-2.131 on restructuring institutions: entities that (i) intentionally purchase assets at prices higher than market prices with government support; (ii) are principally occupied with reallocating national revenues (and property); (iii) do not function independently from government agencies and do not expose themselves to risk, are not market producers and should be assigned to the general government sector.
  - Transactions with BTA and Tsesnabank are not on market terms; transactions are by shareholder decision and funds are not raised on financial markets.
  - Conclusion: JSC PLF is a GGS entity and all its losses should be included in the GGS shortfall.

### Recommended actions (explicit list)
- supplement the classifier of economic sectors with explanations on how to use it (develop a sequential algorithm)
- in borderline cases, make a consensus decision among the MF, SC, and NBK
- classify the FSMS and PLF in GGS
- establish a sector of the economy for national management holding companies (and, accordingly, their subsidiaries)
- compile a list of GGS entities and publish it

### C. Budget classification — structure, inconsistencies, and implications
- Aligning the RK budget classification (BK RK) with GFSM 2014 principles would improve data quality for budget policy analysis.
- GFSM 2014 divides transactions into: revenues, expenditures, transactions with nonfinancial assets, and transactions with financial assets and liabilities.
- Differences and inconsistencies in BK RK:
  - (i) Definitions of revenues and expenditures differ from GFSM 2014.
  - (ii) Transactions with nonfinancial assets are not set apart in a separate group but are part of revenues and expenditures.
  - (iii) Publicly funded loans are set apart in a separate category from financial assets.
  - (iv) Publicly-funded lending and transactions with financial assets are recorded “above the line” and affect the surplus/deficit.
- GFSM 2014 note: only issued loans whose repayment may be realistically expected are considered financial assets.
- GFSM 2014 analytical foundation: net lending (+)/net borrowing (-) is revenues minus expenditures and minus transactions with nonfinancial assets; equals net result of transactions with financial assets and liabilities.

### Goods and services — classification inconsistencies and evidence
- The BK RK “Expenditures on goods and services” class includes not only acquisition of goods and services, but also wages (subclasses 110-130) and transfers (features 166, 167, and 169), causing inconsistency with GFSM 2014’s “Use of goods and services”.
- BK RK subclass structure (excerpt):
  - Subclass 110 “Wages”: 111 Wages; 112 Additional monetary payments; 113 Compensation payments; 114 Mandatory professional pension contributions.
  - Subclass 120 “Employer contributions”: 121 Social tax; 122 Social deductions to the State Social Insurance Fund; 123 Mandatory insurance contributions; 124 Deductions for mandatory social medical insurance.
  - Subclass 130 Payment of wages to specific categories of citizens and deduction of contributions per regulations of the Republic of Kazakhstan (131–137 various specific wage and travel items).
  - Subclass 140 Inventory purchases (141–149 specific purchase items).
  - Subclass 150 Purchases of work and services (151–159 specific service payments).
  - Subclass 160 Other current expenditures (161–169 various items including 166 Dedicated contributions; 167 Special expenditures; 169 Miscellaneous current expenditures).
- Problems identified:
  - Kazakhstan’s GFS expenditure line includes a substantial share of use of goods and services and greatly exceeds respective expenditures of other countries.
  - Features BC 159, 166, 167, and 169 are insufficiently specific; cannot be precisely assigned to GFSM 2014 expenditure types.
  - There is no “miscellaneous” or “other” item in the GFSM 2014 economic expenditure classification; BK RK features must be more specific and classify expenditures according to economic substance.
- Comparative IMF portal data note:
  - According to IMF portal data, in 2015-2017, the percentage of GDP going to all expenditures or use of goods and services in the RK comprised, respectively, 16.6, 17.6, 20.5, and 7.0, 7.6, and 11.1.

### Box 1 — Feature 169 “Other Current Expenditures” — definition, observations, and data
- Definition and scope:
  - Feature 169 reflects current expenditures not assigned to other features, including:
    - expenditures for burials of members of the armed services and employees of special bodies of state, internal affairs agencies, and the financial police, and persons whose rights to possess special titles and civil service ranks or wear a uniform have been rescinded, as well as convicts;
    - expenditures on burials of residents of residential care facilities of the social welfare agencies;
    - costs of representation;
    - penalties and fines for late payment of individual income tax;
    - penalties and fines for late payment of mandatory pension contributions;
    - fines, late fees, commissions, and membership fees;
    - payment for environmental emissions, stamp duties, taxes and other mandatory payments to treasury, and fines and penalties on the latter (other than social tax that is paid under feature 121);
    - funding activities of political parties;
    - conducting elections (appearances of candidates on government information media outlets; public pre-election events with candidates and releases of campaign materials; transportation costs of candidates (leased transport, fuels, and lubricants));
    - prizes, promotional gifts, monetary awards to winners and participants in cultural, athletic, other events in accordance with statutes, and other monetary payouts to individuals;
    - transit tickets purchased for persons released after serving prison sentences or periods of arrest, to their place of residence;
    - expenditures associated with conducting offsite events (travel, lodging, meals), other than business travel expenses of employees of government institutions;
    - expenditures on meals for conscripts at oblast-level assembly stations (cities of national status, capital cities);
    - expenditures on reduced-fare travel during vacation periods for certain categories of students studying under government educational contracts;
    - presentation of grant for the “Best Secondary Education Organization”;
    - presentation of government grant to a private business in the framework of the “Business Roadmap 2020” Program.
- Observations on government assistance to enterprises:
  - Mechanism for providing government assistance to enterprises in the RK is confusing; specific amounts are difficult to see in budget expenditures.
  - It may be assumed most budget funds allocated to support enterprises are recorded as acquisition of goods and services, not as subsidies or capital transfers (primarily features 159, 166, 167, and 169).
  - In 2017, PLF funding went through feature 169 “Other current expenditures”.
- Table 5 — Change in Execution of Expenditures of the RB for 2016-2018 by Economic Classification (KZT Billions):
  - Expenditure classes and features 2016 2017 2018
  - Current expenditures 7 037,3 9 669,6 8 396,3
  - Spending on goods and services 2 525,3 4 942,2 2 239,1
  - 159 Payment for other services and work 1 097,0 1 519,9 900,2
  - 166 Targeted contribution 107,0 86,5 60,0
  - 167 Special expenditures 224,8 284,7 366,9
  - 169 Other current expenditures 375,9 2 308,2 107,6
  - Remuneration payments 523,2 458,8 585,3
  - Current transfers 3 988,8 4 268,6 5 571,9
  - 311 Subsidies to individuals and legal entities, including peasant (farming) enterprises 88,4 89,3 93,4
  - 322 Transfers to individuals 505,0 545,7 548,8
  - Capital expenditures 830,1 968,4 816,8
  - 418 Material and technical equipping of state enterprises 7,7 4,9 13,4
  - 423 Capital repairs to premises, buildings, and structures 0,2 1,9 1,6
  - 435 Construction of new facilities and reconstruction of existing facilities of state enterprises 1,1 0,3 0,8
- Examples recorded under “other expenditures”:
  - expenditures to attract overseas specialists to higher education institutions under the State Program to Development Education in the Republic of Kazakhstan for 2011-2020;
  - innovation grants;
  - targeted transfer to the autonomous cluster fund, an organization specializing in improving the quality of credit portfolios of second-tier banks;
  - other expenditures not classified under other features.
- Recommended actions related to classification and consolidation:
  - Consider the budget deficit/surplus to be consistent with GFSM 2014—that is, not including transactions with financial assets.
  - Record publicly funded loans, repayment of which (or of a portion of which) cannot realistically be expected, in expenditures.
  - Make changes to the economic classification of expenditures, following the classification structure of the GFSM 2014. Features must include fungible expenditures.

### Integration between flows and stock positions (GFS consistency)
- Accounting identity: S₀ + F₁ = S₁ where S₀ and S₁ are the value of a specific type of asset/liability at the beginning and end of the reporting period, respectively, while F is the value of all flows during that period that affected that specific type of asset/liability.
- When flows are divided: S₀ + T₁ + OEF₁ = S₁ where T is the value of transactions, and OEF represents other economic flows (including holding gains and losses and other changes in the amount of assets).
- GFS take into account all events affecting financial indicators, financial position, or liquidity situation in the general government sector; changes in stock positions of debt obligations cannot be explained merely by monetary flows (examples: assumption of debt, debt forgiveness, exchange rate changes).
- Mission actions and recommendation:
  - Analysis of stock positions and flows of government loans issued from the national budget and NF assets was conducted.
  - Recommendation to analyze stock positions and flows of other assets and liabilities and use this when compiling the 2018 GFS and revise the respective tables for 2017.
  - When recording financial assets and liabilities, verify consistency between stock positions and flows and distinguish transactions and other flows.

### Government sector debt statistics and institutional issues
- Public sector debt statistics are not yet being compiled in Kazakhstan per the international methodology.
- Due to heavy workloads and/or absence of DPB personnel, the mission was not able to complete the World Bank questionnaire on public sector debt.
- The MF can complete the questionnaire on DS [Debt Securities] and credits and loans for central government and local government bodies; communication with NBK needed for liabilities of other public sector entities.
- Residency concept appears in statutes but is not applied in practice when separating liabilities into domestic and foreign.
- Government finance statistics compiled by the MF RK are not considered official statistical information; GFS are not mentioned in the “Statistics Work Plan for 2020” or the “Schedule for dissemination of official statistical information for 2020”.
- The “Official statistical information produced by government statistics agencies” schedule indicates the MF RK generates:
  - information on utilization and repayment of government and government-guaranteed loans, loans taken out under state guarantees (1-OPZ, and monthly memorandum);
  - report on official foreign loans (14-PB, quarterly memorandum).
- In the “Published data of departmental statistics” section, government finances are denoted as responsibility of the MF RK, but only data on the execution of the state, republican, and local budgets is included.
- Recommended actions:
  - Join the joint IMF/WB initiative to submit quarterly public sector debt statistics.
  - Include GFS in the schedule of statistics work plan and the schedule for disseminating official statistical information.

### Action Plan (selected items with priority and timing)
- Moderate (M) Supplement the economic sector classifier with explanations concerning its application (develop an algorithm for the sequence of actions). — 2020
- Moderate (M) When identifying the economic sector of GS entities in borderline cases, make a consensus decision among the MF, SC, and NBK. — 2020
- High (H) Determine the economic sector of national management holding companies (and of their respective subsidiaries). — 2020
- High (H) Include the Social Medical Insurance Fund (SMIF) in the Social Welfare Funds subsector, starting with the 2018 statements. — Q4 of 2019
- High (H) Include the Problem Loan Fund (PLF) in the Central Government subsector (extrabudgetary), starting with the 2018 statements. — Q4 of 2020
- High (H) Prepare and publish a list of GGS entities — 2020
- Moderate (M) When recording financial assets and liabilities, verify consistency between stock positions and flows and distinguish transactions and other flows. — Q4 of 2020
- Moderate (M) Join the joint IMF/WB initiative to submit quarterly public sector debt statistics — 2019

*Source: FOREWORD, 1kazea2021001.*

### FOREWORD ___________________________________________________________________________________ 4

### 1kazea2021001 - FOREWORD ___________________________________________________________________________________ 4

### Foreword and mission purpose
- Mission dates: September 2 through 13, 2019.
- Mission leader: short-term IMF expert on GFS, Dalia Budko.
- Primary goal: provide assistance to the Ministry of Finance (MF) of the Republic of Kazakhstan (RK) in further improving government finance statistics (GFS).
- Chief objectives included:
  - analysis of progress attained – fulfillment of the previous mission’s recommendations;
  - expanded coverage of the general government sector;
  - issues of budget classification (BC);
  - expanded data coverage – line items for stocks of nonfinancial and financial assets and liabilities;
  - consultations on completing the annual questionnaire packet on GFS;
  - assistance in compiling and disseminating quarterly government sector debt for the shared World Bank/IMF database.
- Principal technical partner: Department of Reporting and Government Finance Statistics (DRS) of the MF.
- Other institutions consulted: Department of Methodology and Accounting, Audit, and Assessment; Bureau for the Establishment of Budget Classifications and Budget Planning Methodology; Public Debt Department (PDD); Committee for State Property and Privatization of the MF RK; Statistics Committee (SC) of the Ministry of the National Economy of the RK; Problem Loan Fund (PLF); Social Medical Insurance Fund (SMIF); National Bank of Kazakhstan (NBK).

### Summary of mission results and priority findings
- Progress noted:
  - updated bridge tables are used when generating statistics;
  - National Fund (NF) data are recorded separately from national budget (NB) data;
  - GFS are disseminated through the IMF Integrated Data Collection System.
- Urgent issue: expanding institutional coverage of the general government sector (GGS).
  - Draft law “Economic Sector Classifier” uses terms consistent with SNA 2008 and GFSM 2014 but requires a sequential algorithm for practical application.
  - Recommendation: create an interagency working group including the SC, MF, and NBK to address borderline cases in sector assignment.
- State-owned enterprises and nonmarket producers:
  - Special attention needed to determine the economic sector of state-owned enterprises; nonmarket producers should be assigned to the GGS.
  - Many entities performing government tasks are financed from the treasury but legally are state enterprises (SE); treasury funds to such enterprises are recorded as acquisitions of goods and services, inflating that category while understating wages and other categories.
- Specific entities assessed:
  - Problem Loan Fund (PLF) and Social Medical Insurance Fund (SMIF) should be assigned to the GGS.
  - Coverage expansion: include the SMIF beginning with 2018 reports (implemented in 2019) and include the PLF beginning with 2017 reports (implemented in 2020).
- Conceptual difference in “deficit”:
  - RK budgetary statutes differ from GFSM 2014: RK’s concept includes government-funded lending and transactions with other financial assets.
  - GFSM 2014: net lending/net borrowings = revenues minus expenses and net acquisitions of nonfinancial assets; transactions with financial assets, including payments and repayment of public loans (repayment realistically expected), should not affect the deficit.
- Budget classification issues:
  - BC contains features difficult to map to GFSM 2014 economic categories (e.g., targeted deposits, special expenditures).
  - Many budget resources recorded as “acquisition of goods and services” when economically they are government assistance (subsidies or capital transfers), distorting comparisons with other countries.
- Stocks and flows consistency:
  - Need to systematically verify consistency between stock flows and positions.
  - Mission analyzed consistency for public loans issued from the national budget and for assets of the National Fund; recommended extending checks to other assets and liabilities and to revise 2017 tables using 2018 compilation practices.
- Public sector debt statistics:
  - Not yet compiled at MF according to international methodology.
  - MF capable of completing World Bank questionnaire for central government and for debt securities and credits/loans of local government bodies; NBK communication needed for liabilities of other public sector entities.
  - Residency concept in government debt statutes is not consistently applied when separating domestic and foreign liabilities.
- Timeliness and benchmark data:
  - Timely receipt of benchmark data is essential; close cooperation needed within MF and with NBK, PLF, SMIF, and State Social Insurance Fund (SSIF).

### Priority recommendations (from Table 1)
- Q4 of 2019
  - Include the Social Medical Insurance Fund (SMIF) in the Social Security Funds subsector, beginning with reports for 2018. — MF
  - When recording financial assets and liabilities, verify consistency between positions on stocks and flows, distinguishing transactions and other flows. — MF
- Q4 of 2020
  - Include the Problem Loan Fund (PLF) in the “Central Government subsector (extrabudgetary), starting with reports for 2017. — MF

### Detailed technical assessment — A. Expanded coverage of the General Government Sector
- Definition and scope:
  - GFSM 2014: GGS primarily occupied with nonmarket activities; consists of all units of government administration and all resident nonmarket, noncommercial organizations controlled by government administrative units; includes state enterprises that are legally corporations but do not satisfy statistical criteria to be considered corporations.
- Magnitude of state sector:
  - Number of state-owned enterprises (September 2019): 6,349 state-owned enterprises.
  - Table 2 (State-Owned Enterprises, September 2019) — counts by type/form and ownership:
    - JSC: 124 (Property of state holding companies), 132 (National property), 50 (Municipal oblast property), 6 (Municipal raion property), 0 (Municipal, local government), Total 312
    - SE under operational management (state-owned): 0, 97, 1,039, 2,395, 814, Total 4,345
    - SE under economic control: 0, 125, 745, 477, 3, Total 1,350
    - Closed JSC: 1, 0, 0, 0, 0, Total 1
    - Open JSC: 0, 0, 1, 0, 0, Total 1
    - LLP: 8, 13, 114, 205, 0, Total 340
    - Total by ownership columns: 133, 367, 1,949, 3,083, 817, Total 6,349
- Coverage gap:
  - Current RK GFS cover only the national budget, budgets of local government bodies, the National Fund, and the State Social Insurance Fund.
  - To align with international requirements, market and nonmarket producers in the government sector must be delineated and nonmarket producers included in the GGS.
  - Market producer criterion referenced (the “50 percent rule” for assigning market vs. nonmarket).
- Classifier of Economic Sectors:
  - SC prepared a “Classifier of Economic Sectors” project planned for passage in 2020; founded on SNA 2008 principles.
  - While theoretical sections are well-prepared, practical application lacks a clear implementation algorithm and clarity on required data sources and data providers.
  - Recommendation: develop and approve a precise algorithm and facilitate cooperation between MF, NBK, and SC for classifying institutional entities by economic sector.
- Practical implication:
  - When identifying economic sectors, principle of predominance of economic content over legal form should guide decisions.
  - Most SOPE likely fall under the GGS because they operate in conditions devoid of competition with private producers, are funded by public funds, and have prices set by an authorized body.

*Source: FOREWORD, 1kazea2021001.*

### part in the process of delimiting the financial sector. The MF too must participate in

### part in the process of delimiting the financial sector. The MF too must participate in

### Interagency coordination on sector delimitation
- All macroeconomic statistics datasets define sectors in the same way and each institutional entity may be assigned to only one economic sector.
- A concerted decision among the MF, SC, and NBK is especially needed in borderline cases, where applying an algorithm is insufficient and a more careful analysis is required.
- It would be logical to create an interagency working group to assign institutional entities to sectors.

### B. National Management Holding Companies (NMHC)
- Particular attention should be devoted to national management holding companies (NMHC) — one type of government-owned enterprise.
- Kazakhstan has three national management holding companies: Samruk-Kazyna National Prosperity Fund, JSC; NMHC Bayterek, JSC; and NMHC KazAgro, JSC; the sole shareholder of which is the Government of the RK.
- NMHC influence and financial scale (end-2018):
  - Value of assets managed by NMHC was about KZT 32 trillion.
  - Samruk-Kazyna— KZT 25,6 trillion.
  - Bayterek—KZT 4,7 trillion.
  - KazAgro—KZT 1,6 trillion.
  - Gross domestic product of the RK in 2018 amounted to KZT 58.8 trillion (NBK statistical bulletin No. 10 of 2019).
  - In 2018, Samruk-Kazyna paid out KZT 12,7 billion in dividends to the republican budget.
  - NMHC Bayterek and NMHC KazAgro did not pay out dividends in 2018.
- NMHC functions and implications for sector classification:
  - NMHC implement national economic policy, strategic government programs, company development plans, and financial recovery of enterprises.
  - Government regulation of NMHC implies limited independence, negligible risk assumed directly by NMHC and their subsidiaries, and government assistance delivered primarily through NMHC.
  - When determining economic sectors, relationships/transactions among the Government, NMHC, and their subsidiaries must be carefully analyzed.
- Examples of 2018 transactions illustrating nonmarket support and quasi-fiscal activities:
  - Samruk-Kazyna financed NMHC Bayterek by acquiring bonds for KZT 70.1 billion; the difference between acquisition cost and fair value as of acquisition date was KZT 31.34 billion and was declared as a transaction with a shareholder (change in capital).
  - Samruk-Kazyna acquired bonds of AO “Tsesna Bank” at a nominal value of KZT 38.5 billion, while fair value was KZT 6.8 billion; the difference of KZT 31.7 billion was declared as a loss from discounting financial assets at initial recognition.
  - Pursuant to a directive from the shareholder, Samruk-Kazyna financed various social projects for a total of KZT 64.7 billion, of which KZT 31 billion was directed to construction of social facilities.
  - In 2018, JSC NMHC KazAgro sustained losses amounting to KZT 117,9 billion (they were KZT 126 the previous year) but nonetheless, KZT 400.1 were channeled to support the agro-industrial sector.
- Sector-assignment guidance:
  - The NMHC sector is defined by what sector the majority of the subsidiaries belong to—identify economic sector of each subsidiary first.
  - Holding companies may be classified as nonfinancial or financial corporations depending on subsidiaries.
  - Special-purpose entities (SPE) that are asset/liability keepers and not involved in production are assigned to the subsector “Captive Financial Institutions and Lenders” within financial corporations.
  - For SPE such as organizations engaged in specialized management of asset and liability portfolios and restructuring agencies, consider residency status, conformance to criteria of institutional entity, and degree of state control.

### Social Medical Insurance Fund (SMIF)
- Context:
  - Medical insurance in Kazakhstan was voluntary for many years; a new model with a guaranteed amount of free medical assistance and mandatory social medical insurance (MSMI) was launched.
  - A non-profit joint-stock company, the “Social Medical Insurance Fund” (SMIF), was established.
- Legal and institutional features:
  - SMIF is a nonprofit organization structured as a joint-stock company whose sole founder and shareholder is the Government of the RK.
  - The Fund has a seal, bank accounts, its own balance sheet, and may acquire and exercise ownership rights and other personal rights in its own name, bear obligations, and be a plaintiff or respondent in a court of law.
  - SMIF assets are created via contributions/withholdings made by employers, employees, sole proprietors, self-employed and unoccupied persons—the majority of the population participates.
  - The amount of medical services in the MSMI is not dependent on the size of individual withholdings.
- Sector-assignment conclusion:
  - SMIF is a separate institutional entity that should be assigned to the general government sector and the Social Security Funds subsector.
- Timing and data provision:
  - MSMI assets began to be generated as of July 1, 2017, while the SMIF began to operate at full capacity in 2020.
  - Representatives of the SMIF committed to providing data to the Ministry of Finance for compilation of GFS.
  - When compiling GFS for 2018, SMIF data will be included in the Social Security Funds subsector.

### Problem Loan Fund (PLF)
- Background:
  - JSC Problem Loan Fund was created in 2012 to provide assistance in recovery of the national economy.
  - From 2012 through 2017, the PLF was managed by the NBK. In 2017, the PLF was transferred to be managed by the Ministry of Finance of the RK.
  - The sole shareholder is the Government of the RK.
  - PLF activities focus on banking sector recovery and putting idle redeemed assets into economic circulation.
- Large transactions and valuation discrepancies:
  - July 1, 2017: purchase of problem assets from JSC “BTA Bank” based on MF RK order dated June 29, 2017, for KZT 2.6398 trillion.
    - Purchase price set on balance-sheet cost to seller without appraisal.
    - Independent appraiser found market value at purchase date was KZT 267.7 billion.
    - In 2017, PLF received a targeted transfer from the NB in the amount of KZT 2.0929 trillion to finance the BTA transaction, recorded as additional paid-in capital in financial statements.
  - September 2018: PLF acquired problem assets from JSC Tsesnabank totaling KZT 450 billion.
    - Independent appraisal determined market value of repurchased claims was KZT 45.7 billion as of purchase date.
    - Difference between purchase amount and market value was KZT 404.3 billion.
    - Transaction was financed by a securities issue of KZT 450.0 billion, acquired by JSC “Kazakhstan Stability Fund”, whose sole shareholder is the NBK.
  - Independent auditor opinions:
    - The BTA transaction is set apart as an emphasis of matter in the PLF’s 2018 financial statements audit.
    - The Tsesnabank transaction is noted as a key audit issue in the PLF’s 2018 financial statements audit.
- Sector-assignment rationale:
  - PLF is a resident and meets criteria as an institutional entity; controlled by a state body, so can be placed in government sector.
  - Using GFSM 2014 items 2.129-2.131 on restructuring institutions: entities that (i) intentionally purchase assets at prices higher than market prices with government support; (ii) are principally occupied with reallocating national revenues (and property); (iii) do not function independently from government agencies and do not expose themselves to risk, are not market producers and should be assigned to the general government sector.
  - Transactions with BTA and Tsesnabank are not market terms; transactions are by shareholder decision and funds are not raised on financial markets.
  - Conclusion: JSC PLF is a GGS entity and all its losses should be included in the GGS shortfall.

### Recommended actions (explicit list)
- supplement the classifier of economic sectors with explanations on how to use it (develop a sequential algorithm)
- in borderline cases, make a consensus decision among the MF, SC, and NBK
- classify the FSMS and PLF in GGS
- establish a sector of the economy for national management holding companies (and, accordingly, their subsidiaries)
- compile a list of GGS entities and publish it

### C. Budget classification — General structure
- Aligning the RK budget classification (BK RK) with GFSM 2014 principles would improve data quality for budget policy analysis.
- GFSM 2014 divides transactions into: revenues, expenditures, transactions with nonfinancial assets, and transactions with financial assets and liabilities.
- Differences and inconsistencies in BK RK:
  - (i) Definitions of revenues and expenditures differ from GFSM 2014.
  - (ii) Transactions with nonfinancial assets are not set apart in a separate group but are part of revenues and expenditures.
  - (iii) Publicly funded loans are set apart in a separate category from financial assets.
  - (iv) Publicly-funded lending and transactions with financial assets are recorded “above the line” and affect the surplus/deficit.
- GFSM 2014 note: only issued loans whose repayment may be realistically expected are considered financial assets.
- GFSM 2014 analytical foundation: net lending (+)/net borrowing (-) is revenues minus expenditures and minus transactions with nonfinancial assets; equals net result of transactions with financial assets and liabilities.

### Goods and services — classification inconsistencies
- The BK RK “Expenditures on goods and services” class includes not only acquisition of goods and services, but also wages (subclasses 110-130) and transfers (features 166, 167, and 169), causing inconsistency with GFSM 2014’s “Use of goods and services”.
- Table of subclasses and features (excerpted structure in BK RK) includes:
  - Subclass 110 “Wages”: 111 Wages; 112 Additional monetary payments; 113 Compensation payments; 114 Mandatory professional pension contributions.
  - Subclass 120 “Employer contributions”: 121 Social tax; 122 Social deductions to the State Social Insurance Fund; 123 Mandatory insurance contributions; 124 Deductions for mandatory social medical insurance.
  - Subclass 130 Payment of wages to specific categories of citizens and deduction of contributions per regulations of the Republic of Kazakhstan (131–137 various specific wage and travel items).
  - Subclass 140 Inventory purchases (141–149 specific purchase items).
  - Subclass 150 Purchases of work and services (151–159 specific service payments).
  - Subclass 160 Other current expenditures (161–169 various items including 166 Dedicated contributions; 167 Special expenditures; 169 Miscellaneous current expenditures).
- Problems identified:
  - Kazakhstan’s GFS expenditure line includes a substantial share of use of goods and services and greatly exceeds respective expenditures of other countries.
  - Features BC 159, 166, 167, and 169 are insufficiently specific; cannot be precisely assigned to GFSM 2014 expenditure types.
  - There is no “miscellaneous” or “other” item in the GFSM 2014 economic expenditure classification; BK RK features must be more specific and classify expenditures according to economic substance.
- Evidence of heterogeneity in feature 169 (“Other current expenditures”): includes funeral expenditures for members of armed services, representation expenses, funding activities of political parties, compensation of reduced fares during vacation periods for certain students, innovation grant awards, etc.
- Comparative IMF portal data note:
  - According to IMF portal data, in 2015-2017, the percentage of GDP going to all expenditures or use of goods and services in the RK comprised, respectively, 16.6, 17.6, 20.5, and 7.0, 7.6, and 11.1.

*International Monetary Fund — Republic of Kazakhstan mission report (excerpt).*

### Box 1. F eature 169 “Other Current Expenditures”

### Box 1. Feature 169 “Other Current Expenditures”

### Definition and scope of Feature 169
- This feature reflects current expenditures not assigned to other features, including:
  - expenditures for burials of members of the armed services and employees of special bodies of state, internal affairs agencies, and the financial police, and persons whose rights to possess special titles and civil service ranks or wear a uniform have been rescinded, as well as convicts;
  - expenditures on burials of residents of residential care facilities of the social welfare agencies;
  - costs of representation;
  - penalties and fines for late payment of individual income tax;
  - penalties and fines for late payment of mandatory pension contributions;
  - fines, late fees, commissions, and membership fees;
  - payment for environmental emissions, stamp duties, taxes and other mandatory payments to treasury, and fines and penalties on the latter (other than social tax that is paid under feature 121);
  - funding activities of political parties;
  - conducting elections:
    - appearances of candidates on government information media outlets;
    - public pre-election events with candidates and releases of campaign materials;
    - transportation costs of candidates (leased transport, fuels, and lubricants);
  - prizes, promotional gifts, monetary awards to winners and participants in cultural, athletic, other events in accordance with statutes, and other monetary payouts to individuals;
  - transit tickets purchased for persons released after serving prison sentences or periods of arrest, to their place of residence;
  - expenditures associated with conducting offsite events (travel, lodging, meals), other than business travel expenses of employees of government institutions;
  - expenditures on meals for conscripts at oblast-level assembly stations (cities of national status, capital cities);
  - expenditures on reduced-fare travel during vacation periods for certain categories of students studying under government educational contracts;
  - presentation of grant for the “Best Secondary Education Organization”;
  - presentation of government grant to a private business in the framework of the “Business Roadmap 2020” Program.

### Observations on budget classification and government assistance to enterprises
- The mechanism for providing government assistance to enterprises in the RK is rather confusing and it is difficult to see specific amounts in budget expenditures.
- It may be assumed that most budget funds allocated to support enterprises are recorded as acquisition of goods and services, not as subsidies or capital transfers (see Table 5 “Movement in executing RB expenditures for 2016-2018 by economic classification”).
- For the most part this concerns feature 159 “Payment for other services and work”, 166 “Targeted contribution”, 167 “Special expenditures”; and 169 “Other current expenditures”.
- It should be noted that in 2017, PLF funding went through feature 169 “Other current expenditures”.

### Table 5 — Change in the Execution of Expenditures of the RB for 2016-2018 by Economic Classification (KZT Billions)
- Expenditure classes and features 2016 2017 2018
- Current expenditures 7 037,3 9 669,6 8 396,3
- Spending on goods and services 2 525,3 4 942,2 2 239,1
- 159 Payment for other services and work 1 097,0 1 519,9 900,2
- 166 Targeted contribution 107,0 86,5 60,0
- 167 Special expenditures 224,8 284,7 366,9
- 169 Other current expenditures 375,9 2 308,2 107,6
- Remuneration payments 523,2 458,8 585,3
- Current transfers 3 988,8 4 268,6 5 571,9
- 311 Subsidies to individuals and legal entities, including peasant (farming) enterprises 88,4 89,3 93,4
- 322 Transfers to individuals 505,0 545,7 548,8
- Capital expenditures 830,1 968,4 816,8
- 418 Material and technical equipping of state enterprises 7,7 4,9 13,4
- 423 Capital repairs to premises, buildings, and structures 0,2 1,9 1,6
- 435 Construction of new facilities and reconstruction of existing facilities of state enterprises 1,1 0,3 0,8

### Examples of items recorded under “other expenditures”
- expenditures to attract overseas specialists to higher education institutions of Kazakhstan in the framework of the State Program to Development Education in the Republic of Kazakhstan for 2011-2020, approved by Order of the President of the Republic of Kazakhstan No. 1118, dated December 7, 2010;
- innovation grants;
- targeted transfer to the autonomous cluster fund, an organization specializing in improving the quality of credit portfolios of second-tier banks, a nonprofit organization that secures the conditions for the activities of state agencies and their organizations, as well as participants in the international financial center;
- other expenditures not classified under other features.

### Recommended actions related to classification and consolidation
- Consider the budget deficit/surplus to be consistent with GFSM 2014—that is, not including transactions with financial assets
- Record publicly funded loans, repayment of which (or of a portion of which) cannot realistically be expected, in expenditures
- Make changes to the economic classification of expenditures, following the classification structure of the GFSM 2014. Features must include fungible expenditures.

### Integration between flows and stock positions (GFS consistency)
- Accounting identity: S₀ + F₁ = S₁ where S₀ and S₁ are the value of a specific type of asset/liability at the beginning and end of the reporting period, respectively, while F is the value of all flows during that period that affected that specific type of asset/liability.
- When flows are divided: S₀ + T₁ + OEF₁ = S₁ where T is the value of transactions, and OEF represents other economic flows (including holding gains and losses and other changes in the amount of assets).
- GFS take into account all events affecting financial indicators, financial position, or liquidity situation in the general government sector; changes in stock positions of debt obligations cannot be explained merely by monetary flows (examples: assumption of debt, debt forgiveness, exchange rate changes).
- Mission actions: analysis of stock positions and flows of government loans issued from the national budget and NF assets; recommendation to analyze stock positions and flows of other assets and liabilities and use this when compiling the 2018 GFS and revise the respective tables for 2017.

Recommended actions:
- When recording financial assets and liabilities, verify consistency between stock positions and flows and distinguish between transactions and other flows

### Government sector debt statistics and institutional issues
- Public sector debt statistics are not yet being compiled in Kazakhstan per the international methodology.
- Due to heavy workloads and/or absence of DPB personnel, the mission was not able to complete the World Bank questionnaire on public sector debt.
- Providing central government data is the minimum requirement, but the MF has opportunity to complete the questionnaire on DS [Debt Securities] and credits and loans for central government and local government bodies.
- Communication with the NBK is needed for liabilities of other public sector entities.
- Although the concept of residency appears in statutes on the public debt of the RK, in practice it is not applied when separating liabilities into domestic and foreign.
- Government finance statistics compiled by the MF RK are not considered official statistical information; GFS are not mentioned in the “Statistics Work Plan for 2020” or the “Schedule for dissemination of official statistical information for 2020”.
- The “Official statistical information produced by government statistics agencies” schedule indicates the MF RK generates:
  - information on utilization and repayment of government and government-guaranteed loans, loans taken out under state guarantees (1-OPZ, and monthly memorandum);
  - report on official foreign loans (14-PB, quarterly memorandum)
- In the “Published data of departmental statistics” section, government finances are denoted as responsibility of the MF RK, but only data on the execution of the state, republican, and local budgets is included.

Recommended actions:
- Join the joint IMF/WB initiative to submit quarterly public sector debt statistics
- Include GFS in the schedule of statistics work plan and the schedule for disseminating official statistical information

### Action Plan (selected items)
- Moderate (M) Supplement the economic sector classifier with explanations concerning its application (develop an algorithm for the sequence of actions). — 2020
- Moderate (M) When identifying the economic sector of GS entities in borderline cases, make a consensus decision among the MF, SC, and NBK. — 2020
- High (H) Determine the economic sector of national management holding companies (and of their respective subsidiaries). — 2020
- High (H) Include the Social Medical Insurance Fund (SMIF) in the Social Welfare Funds subsector, starting with the 2018 statements. — Q4 of 2019
- High (H) Include the Problem Loan Fund (PLF) in the Central Government subsector (extrabudgetary), starting with the 2018 statements. — Q4 of 2020
- High (H) Prepare and publish a list of GGS entities — 2020
- Moderate (M) When recording financial assets and liabilities, verify consistency between stock positions and flows and distinguish transactions and other flows. — Q4 of 2020
- Moderate (M) Join the joint IMF/WB initiative to submit quarterly public sector debt statistics — 2019

*Source: 1kazea2021001 - Box 1. Feature 169 “Other Current Expenditures”*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1kazea2021001.pdf_