Experts' Meeting with the Prime Minister: Budget, SEZs, Exchange Rate, Taxes and Banks

Each participant was given 3 minutes; the more senior ones got 5.

In three minutes it is impossible to say everything you want to say, and just as impossible to understand what was said.

Everyone spoke about their own issues, so it was almost impossible to catch the essence of what was said. The meeting could therefore be called simply an introduction to the expert community, nothing more.

The experts had not met before the meeting with the prime minister, so the speeches were not coordinated, and everyone said what they thought.

That is what being independent means: we have our own points of view, so I do not agree with every expert's proposals.

I do not entirely agree with the current emphasis on a balanced budget and cutting expenditure while also increasing spending on education. On one side, a speaker proposes cutting spending, and on the other, raising it. Then something else has to be cut even more. I agree that some expenditure items need to be optimized, but I think this is not the main task right now. The main task is to stimulate economic growth and, as a consequence, growth of the tax base.

I also disagree that the work of special economic zones (SEZs) and industrial zones should be suspended. That would be burying the money already spent. In the current situation, on the contrary, the work of SEZs and industrial zones needs to be strengthened. I agree that we should not create any more of them. It is better to have a small number of zones that work than many that do not.

We have experience with industrial zones: we had to invest so much additional money that we could have built the facility anywhere else.

I suggest visiting any zone. You will see that the infrastructure is unfinished and the sites are uneven and require huge sums for earthworks. Infrastructure is not extended to the plots, and in the local akimats, spending on industrial zones is not a priority and is always subject to cuts. Yet a properly functioning zone will, in the future, deliver more than, for example, spending on building houses or roads where they are not particularly needed.

I also disagree with the proposed exchange rate policy. First, we championed a freely floating market rate, and now people are talking about a fixed one again. Yet just before the devaluation we were talking about a managed rate and a depreciation of the currency that would be controlled. We got there, but now there is an argument about making the tenge as weak as possible against the currencies of our main partners. I consider this utterly unreasonable, and I have written about it many times. We need a moderately strong tenge during the investment phase if we want a more or less advanced country, rather than a country of manual labor that belongs among the third-world countries. Devaluation and depreciation of the tenge will never give a competitive advantage, but that would take long to explain.

I also disagree with the proposal to grant additional tax deductions that have no real basis. For example, it was proposed to introduce double coefficients for interest expenses; in other words, if you pay KZT 1 in interest, you can claim a deduction of KZT 2. This would trigger a great deal of tax optimization and evasion.

To stimulate the economy through taxes, completely different methods are needed:

1. VAT reform, not abandoning VAT, but reforming it.
2. Reform of subsoil use taxes.
3. Reform of personal income tax (PIT) with the introduction of a progressive taxation system.
4. Reducing the number of social taxes and merging them into a single tax.
5. A complete reform of SME taxation.

Whenever a tax reform carries some political risk, it is immediately rejected, and people busy themselves with all sorts of things other than reform.

On the banking sector: the problem is much deeper than the need to recapitalize banks. The banks' problem is the absence of sound borrowers. The banking sector is a minefield, because most problem loans are hidden, there is no proper collateral policy on the part of the National Bank of Kazakhstan, and collateral-based lending now prevails, since it is practically impossible to assess a borrower's quality. Institutional reforms are needed here.

For my part, I proposed reconsidering how state funds are used to stimulate the economy: not by stimulating supply, but by stimulating demand.

I also asked that attention be paid to taxation of the uranium industry, taxation of subsoil users, and switching VAT from the accrual method to the cash method. All three issues are very complex and political in nature, which is why they never come up in tax proposals, even though these are the taxes that would have the greatest effect for the country.

This is very brief; more detail will follow in upcoming posts.

I hope such meetings will be held regularly.