An Extensive List of Reforms

Many people ask me what could be done to improve the country's economic situation. There is no magic recipe: we need to follow global best practice and adopt what "works" everywhere in the world. Unfortunately, that is not how things go here: we want everything to work, but we also want everything to stay under control and be managed by hand. I have yet to see a single country that has pulled this off.

If we are going to carry out reforms, they must be done quickly, and it will be extremely painful. Many people will not be thrilled, because it is "hard to see the forest for the trees."

We need many reforms, and we need to start on them now, systematically. Unfortunately, there is still not enough will to let the economy go into a free market.

Here is a partial list of what could be done:

Limit the influence of National Fund dollars on the foreign exchange market in order to establish the real tenge-to-dollar exchange rate. This will weaken the tenge, but it will allow us to:

• stimulate the non-resource sectors of the economy;
• increase budget revenues;
• reduce the current account deficit.

Prepare a comprehensive national tax policy aimed at raising tax revenues and making taxation fairer, with the following parameters (each needs to be set out in more detail separately; I am listing only some of them):

• introduce progressive taxation for individuals, with tax deductions for home purchases, mortgage interest, education, medical services and domestic tourism;
• abolish most CIT exemptions while introducing a higher depreciation rate for fixed assets and intangible assets to stimulate investment;
• switch to royalties in subsoil use taxation and reduce the royalty rate depending on the processing stage, with royalties cut to zero at the 4th–5th stages of processing;
• introduce an inheritance tax and raise property taxes for individuals on assets worth more than USD 500 thousand;
• merge the social tax, social contributions and mandatory social health insurance contributions into a single social tax to cut red tape and reduce the burden on businesses;
• raise the VAT rate to 14–16%, switch to the cash method of calculating it, and cut the VAT rate for the food and agricultural sectors to 8–10%; abolish most VAT exemptions;
• optimize taxation of small business, with an emphasis on simplified taxation for micro-businesses; keep patents only for certain types of activity, and maintain a separate tax regime for peasant farms.

Optimize subsidies to the economy to reduce market imbalances:

• end subsidies to all non-tradable sectors;
• cut subsidies to sectors with a low level of production localization; subsidies should be allocated according to the level of localization;
• adopt a plan to phase out subsidies entirely over a 3–5 year horizon, except for agriculture.

Introduce the Yellow Pages principle and privatize all non-strategic assets:

• transfer the stakes in the TCO, Kashagan, Karachaganak and CNPC projects directly to Samruk-Kazyna, and privatize KazMunayGas by placing a controlling stake on the market;
• privatize Samruk-Energo and create a transparent electricity market;
• privatize Air Astana;
• privatize Kazpost;
• privatize Tau-Ken Samruk;
• privatize parts of KTZ, where private companies can operate;
• privatize the assets of Samruk-Kazyna Invest, Samruk-Kazyna Ondeu and Samruk-Kazyna Construction;
• privatize the subsidiaries of Kazakhtelecom (Kcell, Tele2 and Altel).

Reform the Baiterek holding:

• merge the Kazakhstan Housing Company and Otbasy Bank, and move away from direct mortgage lending. Only the function of developing the market and working with socially vulnerable groups would remain. Abolish subsidies on savings deposits;
• merge Kazagro and the Damu Fund to create an entrepreneurship development institution focused on guarantees and agricultural subsidies, as well as the distribution of non-credit subsidies. Transfer all remaining subsidies to a centralized body in the form of Damu;
• merge the Development Bank of Kazakhstan (DBK) and the Industrial Development Fund, and transfer the loan portfolios of all other subsidiaries to DBK, in order to cut costs and create a single credit operator for state funds (the direct loans of Kazagro, Damu and the Export Agency would be transferred to DBK);
• merge the equity funds into one, move it to the AIFC and review its operating principles.

Overhaul the process of granting and administering subsoil use rights to make it simpler and more transparent, in order to attract investment to the sector:

• create a liberal market for trading subsoil use rights. Approval by the authorized body should be retained only for strategic assets; all other rights and stakes should be freely pledged and sold without its consent. Oversight would be exercised through the work program;
• make all geological information publicly available, to raise interest in subsoil resources and increase spending on geological exploration, and thereby expand the number of attractive projects;
• transfer all arbitration disputes in subsoil use to the AIFC, to make the sector more attractive.

Ease the requirements for establishing neobanks and niche banks, including capital requirements, in order to increase competition in the market. This will make it possible to set up niche banks and neobanks with low operating costs, which will boost competition.

Create a market for electronic grain receipts and other exchange-traded commodities, so that derivative securities can be pledged to obtain financing.

Shorten the time banks need to foreclose on collateral and allow collateral to be sold without a court ruling, to make corporate lending more attractive.

Reform the Government by cutting functions, streamlining processes and increasing the number of ministries to give them greater autonomy and functionality. Ministries should be compact and sharply focused, which will improve efficiency and oversight.

Raise the salaries of senior officials in ministries and akimats several-fold, to fight corruption and improve efficiency.

Create unified compliance rules for the AIFC and banks, to build a regional hub. Many banks are now overly cautious, and as a result we are losing a great deal of investment from neighboring countries. The AIFC now has a unique chance to become a regional hub.

Introduce direct elections of municipal and district leaders and allocate part of taxes to them, so that they can form and use their own budgets.

Simplify migration legislation and increase the number of countries with visa-free entry.

Increase investment in infrastructure several-fold, for example by building a high-speed railway between Astana, Almaty and Shymkent, as well as roads, ski infrastructure and so on.

Adopt a separate law on urban agglomerations and a dedicated program for their development, to encourage people to move to cities.

Liberalize the electricity market and create a mechanism that allows any consumer to buy electricity through the market.

Merge the Anti-Corruption Agency and the AFM (Financial Monitoring Agency) into a single body, to optimize costs and shift their way of working toward preventing crime through proactive work and preventive systemic measures, rather than reactive action.

And so on...

This list is not exhaustive and can be added to and expanded. It is just an outline of ideas that need to be discussed critically and worked out one by one, because the devil is in the details. Please share your own ideas in the comments.