A Critique of the Plans to Introduce Export Duties

When it comes to government revenue, we now have to choose between a bad solution and a very bad one. I see more and more people voicing opinions on public finances. The problem is that government revenue is always household expenditure (of individuals and legal entities), so no solution can satisfy everyone. Any proposal will therefore be criticized, or even lobbied against, by those it affects. The original plan was to raise VAT. A group of businessmen somehow managed to convey that this was a bad decision that would cause inflation, arguing that there were reserves, that tax administration should be tightened and that Samruk's efficiency should be improved. I have written before that improving administration is a long process and requires changes to the taxes themselves, so we should not wait for results from administration. Samruk is unlikely to pay much more in dividends, given that it is a state behemoth that is not managed all that efficiently, and the accumulated debts of KTZ and a number of other subsidiaries leave little room to count on higher profits in the long term. Next, it was decided to raise CIT to 25%, which is logical: VAT had been fended off, and the second-largest tax is CIT. But here too, an increase turned into a reduction. Incentives were introduced for the manufacturing industry, while the rate was raised only for banks and the gambling business. Yet the high profits of banks are largely a product of government policy, and what needs to be addressed there is that policy, not the rate. None of the other taxes brings in much revenue, except the export customs duty. And now I have read online that export duties are planned. A draft order is circulating in chats. It is unclear how authentic it is, but if we go by it, duties are planned on practically all exports.

This decision is even worse than raising VAT. But reversing decisions is very hard in government, especially once they have been announced publicly. That is how politics works, so no official will voluntarily throw himself on the embrasure, and so it was decided, once again, to solve the budget problem at the expense of exporters.

Naturally, as a one-off measure it may help, but the medium- and long-term consequences will be far from rosy, and I will try to explain why.

First, a very large share of our exporters are foreign companies. I remember that when export customs duties were introduced, only those who had signed production sharing agreements (PSAs) managed to fend them off, and the duty is simply deducted from Kazakhstan's share. All the other foreign investors suffered. As a result, we see that the oil sector has no large new companies that have come into oil production. That is why oil production is stagnating and waiting only for the expansion of Tengizchevroil.

Solid minerals companies are now growing, but if export duties are introduced for them, foreign companies will once again read this as instability in tax legislation and an inability to forecast their cash flows. That will immediately give them grounds to revise their investment programs. Stability matters more to foreign companies. Say a project has an IRR of 40%, and the risk of a duty being introduced lowers its profitability to 25%. Compare it with a project in another country with an IRR of 30%, where foreign companies are confident that everything will be stable. It is no secret that foreign companies will choose the second.

Second, an export duty is a hidden subsidy for entrepreneurs who have processing capacity. But it has no correlation with efficiency, because domestic producers will simply lower their purchase prices by exploiting the duty arbitrage. In some cases this will become profitable for domestic producers, but given that our domestic market is very small, it will not do much to increase production. Exporters whose economics were on the verge of profitability, on the other hand, will begin to cut production. That could undermine the plans for 6% economic growth and reduce CIT receipts, which in the end will not help the budget much in the coming years.

Third, creating new processing capacity is not a simple process, and it takes enormous work, including promoting exports abroad. An investment decision requires sales markets, and there we will have to compete, which is an entirely different skill requiring entirely different effort. Selling a manufactured product (and these are mostly non-exchange-traded goods) can sometimes be much harder than producing it, unlike exchange-traded goods. So between the phase of building processing capacity and the introduction of the export duty, anywhere from 3 to 7 years may pass, depending on the industry. During that period our economic indicators will deteriorate. Moreover, there is no guarantee that we will be able to build such processing complexes at all, because the world does not stand still, our investment climate is not the best, and we have neither our own nor borrowed capital to create such projects.

If export duties are to be introduced at all to support manufacturing, this should be done after in-depth analysis of each industry, in a targeted manner, and such plans should be announced 2-3 years before they take effect so that businesses can adjust. Done in haste, it looks as though, under cover of raising the share of manufacturing, we are trying to solve the budget problem while creating enormous risks for the economy in the coming years.

There is no simple solution for government revenue. What is needed is a comprehensive plan aimed both at cutting expenditure and at raising revenue. For now, the most adequate option is the one proposed by the previous Government: raising VAT while reducing tax incentives. It would affect inflation, but would have less effect on the country's economy and investment climate, because it is an indirect tax paid by end consumers. Businesses perceive it as a tax on themselves only because there are exemptions for SMEs that allow them not to pay VAT, which creates unequal conditions for business.