Oil sector played significant role in the improvement of the State budget in 2017
The oil sector has provided a crucial support to the consolidated budget of the country (which include National Fund) in 2017 – oil revenues increased by 60% while their share in revenues has increased to 30%. Against this background, growth in non-oil taxes by 11%, confirms the growing dependence of the consolidated budget on oil revenues.
The non-oil deficit of the Republican budget by our assessment amounted to 12.9% of GDP in 2017 and gone far beyond the limit outlined in the new concept of the National Fund, where the level of non-oil deficit of the Republican budget is indicated at not higher than 9.3% of GDP. Thus, under the pretext of emergency one-time support for the financial sector it was allowed to breach obligations on savings of National Fund.
A gradual reduction in the guaranteed transfer to the Republican budget is of concern, that could potentially lead to a reduction in economic activity in the face of still fragile state of the economy. This, in turn, could force the government to back away fr om plans of budgetary consolidation and thereby impede the process of public finances balancing.
The official State budget revenues not counting the National fund transfers rose by 11% to T7.2 trillion in 2017, due to increase in tax revenues by 13% with non-tax revenues shrinking by 20% (non-tax revenues are 3% in total revenues). The tax revenues collection exceeded the plan by 1.4%. Due to allocation of T1 trillion for the improvement of banks, the National Fund transfers increased by half to T4.4 trillion. The growth in tax revenues was 7.1% for CIT, 8.4% for PIT, social tax +8.7%, VAT +11.3%.
The increase in collection of PIT and social tax was accompanied by a rise in nominal wages. The revenue growth for CIT and VAT is comparable with the nominal growth of the economy by about 10% and an increase in imports by 13% in 2017. As we have already noted the structure of growth of the economy in the past year, depended little on non-commodity sector, as a result, income from VAT on goods and services produced in Kazakhstan have increased only by 1% yoy in nominal terms, while VAT on imports grew by 17% yoy. Improving tax and customs administration also played an important role in tax collection.
Increase of oil prices by 23% in 2017, growth of oil exports by about 10% and increased export duty on oil had a positive impact on the flow of oil revenues in the consolidated budget (which include National Fund) and have grown by 60%. At the same time, the share of oil revenues in the consolidated budget income had risen to 30%, from 22% in 2016, but so far below 32% in 2015. While non-oil taxes increased by only 11%.
Rising oil prices with moderate strengthening of tenge led to an increase in the nominal value of a barrel of oil up to a maximum of T20.5 thousand in 4th quarter of 2017. It previously reached the T20 thousand mark in the second quarter of 2014 when oil price stood at $110 per barrel. Thus due to the devaluation of tenge in 2014-2015, oil revenues of the State budget increased approximately by T1 trillion, which is comparable with the spending on defence or the financing of the State program "Nurly Zhol". The strengthening of annual average exchange rate of tenge from 342 to 326 tenge per US dollar, reduced oil revenues of the State budget, however, oil prices in KZT, due to exchange rate continues to offset lower prices for hydrocarbons as compared to $100 per barrel in 2011-2014.
The official budget expenditures rose by 10% to T10.4 trillion (excluding T2.1 trillion for non-performing loans fund) in 2017. The financing of public services such as defence, public order and other increased by 10.3%. Spending on education, health and culture increased by about 11%, the expenditure on these items take one third of all costs of the State budget.
Expenditure on social security increased by 16.4%, in view of the increase of pensions and social benefits. Thanks to increase of pensions, the decline in real wages of employed is offset to some extent and some stimulus is given to the consumer market.
A strong growth of 19% was observed on expenditures on the economy, which include: agriculture, infrastructure, industry, housing and communal services, etc. The largest weight in the expenses on the economy fall on infrastructure and utilities, due to the implementation of the State program "Nurly Zhol". The implementation of this program since 2015 cost almost half a T1 trillion on average per year.
Under the item of debt servicing, costs have decreased by about 12% in 2017. This was the result of strengthening in average annual exchange rate of tenge given that more than a third of the State debt accounts for external loans, and due to reduced rates in the domestic debt market following the reduction in the base rate by almost 2pp.
Under the budget category "Budget credits", expenses have decreased by 6%. Main articles are the loans to Agrarian Credit Corporation to support agricultural producers (T60 billion) and lending to Baiterek of T126 billion for various State programs.
By budget category "financial assets acquisition" expenses increased by 41% in 2017. T175 billion was allocated for capital increase of state companies in space, military, infrastructure and finance.
The official budget deficit according to the results of 2017 reached T1.5 trillion, or 2.9% of GDP, following 1.6% of GDP in 2016. The size of public debt increased by 2pp to 26% of GDP in 2017, driven by the issuance of bonds at T1 trillion and increase in the obligations of the National Bank of more than T600 billion under the support scheme for troubled banks. The T1 trillion in the T2.1 trillion package allocated for recovery of banks was the main driver of State budget deficit. When taking into account one-off expense on troubled banks one can notice the approach of public finances to the balance, without taking into account changes in National Fund.
Consolidated budget balance (which include National Fund) deteriorated to -7% of GDP, after -4.2% of GDP in 2016 and 6.3% of GDP in 2015. As was already noted, significant budget expenses last year stemmed from a one-off allocation of T2.1 trillion for the banking system, without this amount the size of the deficit drop to more acceptable 3% of GDP.
Non-oil deficit of the consolidated budget (which includes National Fund) rose to 12.5 percent of GDP in 2017 from 9 percent of GDP in 2016 and 12 percent of GDP in 2015 year (excluding T2.1 trillion to non-performing loans fund) it fell to 8.5% of GDP. In 2009, due to the support for the banks and the economy, the size of non-oil deficit reached 13% of GDP.
The National Fund revenues from the oil and gas sector rose by 77% in 2017 to T2 trillion (do not take into account export customs duty on oil). The revenue growth stemmed from CIT by 79%, MET +125%, other taxes + 43%. If proceeds from CIT and other taxes is somehow consistent with rising prices and volumes of oil production, the strong growth in MET is probably associated with a large one-time payment, in particular in January had been collected more than 50% of the amount for the entire year.
The use of the National Fund assets has reached T4.4 trillion or $13.5 billion in 2017, it is the largest withdrawal of resources from the National Fund. In the current year the transfer size decreases to T2.6 trillion, and later cut to T2 trillion a year starting from 2020, thereby the year 2017 should become the final in a series of escalating use of its funds for anti-crisis measures of the Government.
As for the whole economy, double-digit growth of oil prices and increase in oil production at the expense of Kashagan, was the basis of the consolidated budget income, wh ere oil revenues increased by 60% and their share had risen to 30%. Against this background, growth in non-oil taxes by 11%, confirms the growing dependence of consolidated budget on oil revenues.
The size of the non-oil deficit of the consolidated budget (include National Fund) significantly increased to 12.5% of GDP in 2017.
Non-oil deficit of the Republican budget, by our assessment amounted to 12.9% of GDP in 2017. At the same time, according to the new concept of the National Fund adopted in December 2016, the level of non-oil deficit of the Republican budget was capped at 9.3 percent of GDP. Thus, under the pretext of emergency one-time support for the financial sector it was allowed to breach obligations on security of National savings, whose foreign currency assets are on the decline since 2015. In this regard, there is no guaranty that the vulnerable state of the economy again would not require emergency support financed from the National Fund under one pretext or another.
A gradual reduction in the guaranteed transfer to the Republican budget is of concern, that could potentially lead to a reduction in economic activity in the face of still fragile state of the economy. This, in turn, could force the government to back away from plans of budgetary consolidation and thereby impede the process of public finances balancing.
