Setting the scene for tax reform in Kazakhstan. This chapter sets the scene for tax reform in Kazakhstan. The economy remains dependent on natural resources, multiple inflationary pressures continue to pose risks and seemingly positive labour market outcomes may mask deeper challenges. While the authorities are focused on reducing the non-oil budget deficit, the current targets may be ambitious and discretionary targeted transfers to the budget from the National Oil Fund remain significant.
OECD Tax Policy Reviews: Kazakhstan 2020
OECD Tax Policy Reviews
2. Setting the scene for tax reform in Kazakhstan
Abstract
2.1. Despite relatively strong growth in recent decades, Kazakhstan faces several economic risks
Following the financial crisis and then oil price collapse, the economy had started to show some signs of recovery. Kazakhstan is the largest economy in central Asia (Beazley, Downes and Nicol, 2019[1]). The country has been growing relatively faster than OECD countries in recent decades. Between 2000 and 2018, the compound annual growth rate (CAGR) of gross national income (GNI) per person in Kazakhstan has been 6.9%, which is more than twice that of the OECD average (Figure 2.1). Similarly, GDP per capita represented 31% of the OECD average in 2000, 56% in 2010 and 61% in 2018. In 2018, GDP per capita had increased to USD 26 147 (in PPP) compared to USD 45 624 in the OECD. However, GDP per capita includes oil exports, among other things, and is not necessarily indicative of the incomes of the average person in Kazakhstan (for more discussion on this, see section 2.1.2). Despite the relative increases in GDP per capita, the absolute gap between Kazakhstan and the OECD has remained roughly stable since 2000 and, since 2014, has increased. In more recent years, GDP per capita slowed in 2015 and 2016 due to a terms of trade shock after a sharp decline in the oil price but has since recovered growing by 4.6% and 5.2% in 2017 and 2018 respectively. Some of the reasons for this growth include high domestic demand driven by oil and gas investments in addition to government and household consumption which is supported by both wage increases and consumer lending (IMF, 2020[2]).
Figure 2.1. The economy had started to show some signs of recovery
GDP per capita in Kazakhstan and OECD countries, in PPP US $, 1990 - 2018
Note: PPP refers to purchasing power parity. The top and bottom of the grey background in the graph show the GDP per capita of high-income economies and upper middle-income economies respectively.
Source: World Development Index World Bank.
2.1.1. Multiple inflationary pressures may pose a risk to the economy
Tax policy reforms should be considered in the context of the level of inflation. This section examines selected inflationary pressures in the economy including rising government debt and expenditures in addition to rising real wages and consumption. Inflation should be taken account of in considering tax rate increases for example on VAT since a VAT rate increase represents in effect a once-off increase on consumer prices (discussed further in section 4.5).
Government debt has been rising in recent years from a low base. As shown in Figure 2.2, debt as a percentage of GDP has increased sharply from 10% in 2010 to 17% in 20161. The debt-to-GDP ratio was 24.9% in 2018 and 23.7% in 2019 according to data from the Ministry of National Economy. The authorities expect this to increase to 28.6% by 2025.
Figure 2.2. The debt-to-GDP ratio has been rising but remains low
Central government debt-to-GDP ratio, 2010 - 2016
Source: International Monetary Fund, Government Finance Statistics Yearbook and data files, and World Bank and OECD GDP estimates.
Government expenditures could add to relatively high levels of inflation. Inflation has declined in recent years but remains relatively high at 5.4% in 2019, despite remaining within the National Bank of Kazakhstan’s target band of 4 – 6 percent. By comparison, inflation was higher than the Kyrgyz Republic (2.0%), Armenia (3.0%), Azerbaijan (3.7%) and Georgia (4.3%) but lower than Tajikistan (8.0%), Turkmenistan (13.4%) and Uzbekistan (15.0%) (Asian Development Bank, 2020[3]) At the same time, budget expenditures are high – budget expenses from the republican budget as a share of GDP are 15.6% in 2018 and 17.3% in 2019. Table 2.1 shows selected government expenditures on additional initiatives of 1.3% of GDP between 2019 and 2021. Additional spending, which by itself may be warranted, will further increase the NOD and therefore the need to raise additional tax revenues. In addition, additional public expenditure from the government sector is expected to contribute to high levels of inflation.
Table 2.1. Government expenditure programmes starting in 2019
Selected government expenditures on additional initiatives, 2019 - 2021
Note: An estimate for nominal GDP for the years 2019 – 2021 is calculated by applying the forecasts of NAC Analytica for 2019, 2020 and 2021 (3.9%, 2.4% and 4.5% respectively) to 2018 GDP based on the Statistics Committee of Kazakhstan and then adding GDP for these years together. *Other programmes refers to two programmes as follows: (1) The ‘Nurly Zher’ programme includes building rental apartments, mainly for low-income families. (2) The ‘Auyl – Yel Bessigi’ programme includes financing for local villages including building, communication systems and social facilities.
Source: NAC Analytica, Nazarbayev University.
Household consumption is rising partly fuelled by credit. Consumption has increased in recent years and there is evidence to suggest that consumption may be fuelled in part by increases in bank lending to individual consumers. For example, in Q1 2018 and Q1 2019, consumer bank lending to individuals increased by 17% and 14% according to data from the National Bank of Kazakhstan.2 During the same quarter periods, nominal (and real) household consumption increased by 13% (11%) and 12% (10%). In addition, the overall value of consumer bank loans, which comprises 6.5% of GDP in Q1 2019, had increased on Q1 2018 (6.0%) and Q1 2017 (5.2%).
Growth rates in real wages and productivity are rising. In 2010, the growth rates in real productivity and wages were high. Between 2010 and 2014, real productivity growth declined sharply while real wage growth remained stable. Since 2015, the growth rates in real productivity and real wages have started to rise again and are currently growing at about the same rate. Between 2017 and 2018, the growth rate of real wages increased while the growth in real productivity fell.
Figure 2.3. Growth rates in real wages are rising
Source: Ministry of National Economy, Department of Macroeconomic Analysis and Forecasting.
2.1.2. Positive labour market outcomes mask deeper challenges
Labour market outcomes on unemployment and activity are positive. The unemployment rate in Kazakhstan, calculated as the number of people employed as a share of those actively seeking work, has been stable in recent years and is 4.9% in 2018.3 It is forecast to remain stable between 2019 and 2021.4 Figure 2.4 shows that the unemployment rate is one of the lowest among the Commonwealth of Independent States (CIS) countries and is similar to that of Uzbekistan, Azerbaijan and Moldova. The unemployment rate is similar to the OECD average of 5.2% in 2019. In addition, the labour force participation rate in Kazakhstan, that is the proportion of the population that is economically active (aged over 15 years), is 71% in 2018. It has also remained stable at about 70% throughout economic cycles over the past decade. Kazakhstan has a large and expanding working-age population, which represents an opportunity for the country (see section 4.4 on Financing the welfare system through Social Security Contributions).
Figure 2.4. Unemployment is low compared to CIS countries
Unemployment rate in CIS countries, 2016
Note: Data for Tajikistan relates to 2009.
Source: Statistics Committee of Kazakhstan.
However, these positive labour market outcomes mask challenges. The positive outcomes related to employment and activity mask a deeper set of labour market challenges in Kazakhstan. For example, incomes remain low for many workers and the poverty rate is high, particularly in rural areas. Furthermore, informality is widespread and informality and self-employment tend to be focused in some of the least productive sectors of the economy and among some of the most vulnerable groups including among the young, older workers and the low-skilled (OECD, 2017[4]).
Employee incomes are low. Figure 2.5 shows the gross monthly income distribution in Kazakhstan for 2017 based on grouped data. The median monthly income is KZT 82 977 (USD 215); the mean monthly income is KZT 162 673 (USD 423); the top 10% is KZT 236 350 (USD 615) and the bottom 10% is KZT 27 235 (USD 71). Two key income indicators are used in Kazakhstan for calculating certain taxes, benefits, social payments and administration fees. The first is the minimum monthly salary (MMS), which is the minimum wage for workers guaranteed by the State. The MMS is KZT 42 500 in 2019, having increased by 50% on last year. The second is the monthly calculation index (MCI) of KZT 2 525, which increased by 5% in 2019 (a table of information on income indicators is provided in the Annex). The low levels of employee incomes observed have implications for PIT reforms including the extent the equity of increasing PIT rates and the extent to which PIT revenues could be raised (discussed further in Chapter 5).
Employee gross incomes appear unequal when tax data are used due to many low-income employees. One way of measuring the concentration of income inequality is comparing inter-decile ratios, which have the advantage of being both direct and intuitive. These measures are internationally popular. (Piketty and Saez, 2014[5]) argue that the ‘simplest and most powerful measure’ of inequality is the share of total income going to the top decile. According to analysis of the income distribution, based on data from a study from (Institute of Economic Research, 2018[6]), the P90/P10 ratio is 8.7, which is high internationally while the P90/P50 ratio is 2.9, which is more moderate. On the basis of these gross income data, Kazakhstan would be regarded as unequal relative to OECD countries. This level of income inequality appears to be driven by those on low incomes. For example, over one-third of employees (2.2 million) earn KZT 60 000 per month or less and close to one-half (52.9%) earn less than KZT 90 000 per month, which is slightly above the median. Furthermore, 4 in 5 employees (83.8%) earn KZT 180 000 or less.
Figure 2.5. Income from employment is low
The distribution of employee monthly gross income in Kazakhstan by wage group, 2017
Note: Chart reproduced approximately based on visual inspection. Horizontal axis shows income brackets. The distribution of wages is based on 5.9 million hired workers. 4% of workers earn in excess of KZT 390,000 per month which is not shown for the purpose of this analysis.
Disposable income inequality is low having fallen in recent decades. Disposable income inequality, measured using the Gini coefficient, is low in Kazakhstan (Figure 2.6). It has fallen since 2000 and then stabilised since 2010. This places Kazakhstan close to the level of OECD members with the lowest inequality. Market income distribution data based on survey data also suggest that income inequality is low.
Figure 2.6. Disposable income inequality is low
Gini coefficient of disposable income, selected countries, 2000 – 2017
Note: Where figures for a given year were unavailable, data for the nearest year is used.
Source: World Bank development indicators; Statistics Committee of Kazakhstan.
2.2. Oil tax revenues fuel the National Fund and the budget
2.2.1. The economy would benefit from diversification
The economy relies heavily on natural resources. Much of the economic success of the country in recent decades is attributable to the oil and gas sector. At the macroeconomic level, exports of goods and services amounted to 19.9 billion in 2017. The value of fuels exports – largely oil, gas and minerals - represented half (51%) of all exports (Figure 2.9). A broader definition of the natural resource sector including materials could imply a contribution as high as three-quarters (76%) of all exports.5 Under this wider definition, exports from the oil and the natural resource sector represented about 29% of GDP comprised of fuels (19%) and materials (9.6%). According to data from the Statistics Committee, the gross value added (GVA) of the oil and gas sector represented 21.3% of GDP in 2018 (Figure 3.8). Therefore, the non-oil and gas sector represented 78.7%.
Figure 2.7. The economy relies on the oil and gas sector
Gross value added (GVA) of the oil and gas sector as a share of GDP, 2010 - 2018
Note: Figures for 2017 and 2018 based on new methodology.
Source: Statistics Committee of Kazakhstan.
GDP and exports are sensitive to global oil prices. GDP growth in Kazakhstan is correlated with changes in the global oil price over time (Figure 2.8). Similarly, exports and particularly fuel exports correlate with the global oil price. For example, between 2014 and 2015 when the global oil price fell by half (48%), the value of fuels exports fell in similar proportion (46%). Similarly, between 2016 and 2017 when the global oil price recovered (17%), so did the value of fuel exports (24%). Furthermore, non-fuel exports also correlate with the global oil price which reflects the integrated nature of the economy with the oil sector. With respect to imports, a significant two-thirds (in value terms) relate to goods related to industry, much of which is the oil and gas sector, such as machinery and vehicles (22%), material and other manufacturing (32%), chemicals (8%) and fuels (4%) in 2017. Taxes including CIT and taxes on goods and services are also sensitive to global oil prices (see section 3.3.1 for further discussion).
Figure 2.8. GDP is associated with the global oil price
GDP and the average annual crude oil price, 2001 - 2017
Source: Macro Trends data; World Bank databank.
Figure 2.9. Exports are associated with the global oil price
Fuel exports, non-fuel exports and the average annual crude oil price, 2000 - 2017
Note: Fuel includes petrol products and related materials and gas, natural and manufactured.
Source: Macro Trends data; "The Atlas of Economic Complexity," Center for International Development at Harvard University.
2.2.2. Oil revenues fuel the National Fund and the budget
The assets of the National Fund remain significant as a share of GDP despite a decline in oil prices in recent years. Kazakhstan’s oil wealth is managed through the National Fund, which operates according to legislative criteria and is managed by the National Bank. The Fund was established in 2000 as both a stabilisation fund and a savings fund. The National Fund accumulates part of the revenues generated by the extractive sector of the economy so that they can be saved for future generations and used to maintain the necessary level of government spending (including social spending) in the event of a fall in oil prices (EITI, 2018[7]). Oil tax and non-tax revenues generated by the extractive sector are paid to the National Fund (with the exception of export customs duty on crude oil which goes directly to the republican budget). The overall assets of the National Fund as a share of GDP have been rising steadily over the past two decades, with the exception of a fall in 2010 due in part to the financial crisis and between 2016 to 2018 due to the fall in oil prices. Assets of the National Fund represent 33% of GDP in 2018. The assets of the National Fund are accumulated in a number of ways. They include taxes from oil sector organisations including CIT, alternative subsoil use tax, mineral extraction tax, bonuses, export rental tax, excess profit tax. They also includes other revenues from operations carried by organisations of the oil sector, including for example violations of the terms of oil contracts in addition to other proceeds (EITI, 2018[7]).6
Figure 2.10. The assets of the national fund remain significant
Note: The assets of the national fund are taken from January of each year.
Source: National bank of Kazakhstan; World Bank databank.
Oil revenues flowing in to the National Fund may be less than transfers flowing out to the budget. A goal of the authorities is to reduce budgetary dependence on oil revenues. This is reflected in, for example, the adoption of a number of rules for transfers to the budget including the ‘Concept for the Formation and Use of the National Fund’ and the introduction of a limit on the amount of guaranteed transfer to the budget each year to commence in 2020. However, budget revenues remain supported by transfers from the National Fund. In 2017, transfers to the budget represented 8.3% of GDP. There are two types of transfers - guaranteed and targeted. Targeted transfers are allocated for financing anti-crisis programs during periods of economic downturn, socially significant projects of a national scale and strategically important infrastructure projects. A key difference is that the latter have a discretionary element - they provide the authorities with the flexibility to increase the overall transfer of resources beyond the guaranteed amounts. Figure 2.11 shows that oil revenues flowing in to the National Fund are less than the transfers flowing out to the budget between 2015 and 2017, which resulted in a significant drop in the assets of the National Fund.
Figure 2.11. Oil revenues flowing in to the National Fund may be less than transfers flowing out to the budget
Oil tax and non-tax revenues to the National Fund and transfers to the budget, as a % of GDP, 2015 - 2017
Note: Oil tax revenues to the National Fund are equal to tax revenues in OECD revenue statistics that go to the National Fund. Oil non-tax revenues are estimated at 14.5% of total oil tax and non-tax revenues based on data from (EITI, 2018[7]).
Source: OECD revenue statistics; Ministry of National Economy.
References
[3] Asian Development Bank (2020), Asian Development Outlook 2020, What Drives Innovation in Asia?, http://dx.doi.org///....../FLSSSSSSS-- (accessed on 11 September 2020).
[1] Beazley, I., R. Downes and S. Nicol (2019), Budgeting in Kazakhstan A roadmap for continued for continued budgetary governance reform.
[7] EITI (2018), Extractive industry transparency initative.
[2] IMF (2020), Republic of Kazakhstan : 2019 Article IV Consultation-Press Release; and Staff Report, https://www.imf.org/en/Publications/CR/Issues/2020/01/29/Republic-of-Kazakhstan-2019-Article-IV-Consultation-Press-Release-and-Staff-Report-49002?cid=em-COM-123-41052 (accessed on 11 February 2020).
[6] Institute of Economic Research (2018), Assessing the macroeconomic effects of reforming individual income tax.
[4] OECD (2017), Building Inclusive Labour Markets in Kazakhstan: A Focus on Youth, Older Workers and People with Disabilities, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264273023-en.
[5] Piketty, T. and E. Saez (2014), Inequality in the long run, http://topincomes. (accessed on 21 November 2018).
Notes
← 1. International Monetary Fund, Government Finance Statistics Yearbook and data files, and World Bank and OECD GDP estimates.
← 2. Based on the Bank of Kazakhstan, ‘Consumer Loans extended by banks to individuals and interest rates for January to May 2019’ available here: https://nationalbank.kz/?docid=3370&switch=english.
← 3. Statistics Committee of Kazakhstan.
← 4. The NAC Analytica forecast unemployment to be 4.8% in 2019, 9.1% in 2020 and 9.6% in 2021.
← 5. Based on the combined value of fuels, material manufacturing (metals, iron and steel) and crude materials (ores and metal scarp and minerals).
← 6. For example, proceeds from the sale of agricultural land and investment income from the management of the National Fund.