1. Kazakhstan, which has a population of about 18 million, has made enormous social and economic progress since it became independent in 1991. The economy grew at an annual rate of 6.6 per cent during the decade up to 2014, driven by the development of oil and gas and other mineral resources. Income per capita in US dollars multiplied by ten times during the period up to 2014, and poverty was reduced to 4 per cent of the population. A new capital city – Astana – with a population of more than a million inhabitants has been built in the centre of the country. The President has set the goal that Kazakhstan should become one of the 30 most developed countries in the world by 2050. Every effort continues to be made to provide a stable economic environment which will facilitate the flow of inward investment needed to develop other industries alongside oil, gas, and mining operations. Meanwhile, the economy continues to be dominated by the hydrocarbon sector, which accounts for at least 20 per cent of GDP and about 60 per cent of export revenue. Changes in world oil prices inevitably have a substantial impact on government revenue, making it very difficult to forecast. Agriculture continues to account for about 20 per cent of employment, but only 5 per cent of GDP.
2. During the period of rising oil prices up to 2014 Kazakhstan generated substantial fiscal surpluses held in the National Fund of the Republic of Kazakhstan (NFRK) and invested them to a large extent in foreign assets. Resources were thus available to increase public spending to counter the impact of the 2008 global financial crisis, and the 2014 collapse in oil prices. But the country’s currency (Tenge – KZT), which had been kept at a rate of about 150 KZT to the US dollar (USD), had to be floated to stem the capital outflow occasioned by the contraction of the oil industry; since 2016 it has stabilised at around 330 KZT to the USD, and the inflation which resulted from the depreciation has now subsided to about 6 per cent. During 2015-17 the Government provided substantial help to the economy through additional investment in housing and infrastructure, and recapitalisation of the secondary banking system, financed in part by drawing on the accumulated reserves of the NFRK. Current medium-term fiscal plans are based on relatively cautious assumptions about future oil prices: if oil remains at its present (June 2018) level the result should be the accumulation of further surpluses provided the use of oil revenue is capped at two trillion KZT per year from 2021 onwards as expressed in present plans.
3. This assessment was initiated in March 2018. Where the performance ratings are based on three years of PFM statistics, the period is 2015-17, with 2017 as the most recent completed fiscal year. Administrative arrangements and practices are assessed as they were in the second quarter of 2018. The assessment focuses on the Central Government’s Republican Budget (RB), covering subnational governments, which are responsible for about 40 per cent of spending on public services, and public corporations only to the extent required by the PEFA criteria. It is intended to contribute to ongoing Government planning of public services in pursuit of the Government’s ambitious development objectives, taking into account the more turbulent economic environment of recent years, and complements the World Bank’s (WB) 2017 Public Finance Review. It will need to be considered alongside the report of the OECD’s Governance Review which was initiated shortly before the PEFA assessment began.
4. The PEFA assessment shows that the Government is able to maintain aggregate fiscal discipline in difficult times, and that taxation, financial control and payment and accounting systems all work efficiently. Investment planning is under effective central direction as is demonstrated by city development and infrastructure improvements achieved since 2000. However, as the WB review points out, the share of GDP absorbed by government expenditure is low compared with the OECD average, leaving much scope for improvement in health and education services. Strategic planning is well-established throughout Government, contributing to a more strategic allocation of resources, but greater clarity is needed in demonstrating the links between policy instruments and objectives, with a fuller explanation of the performance targets and results. Medium-term forecasts cover only the three years immediately ahead, and there are no projections beyond that horizon which would demonstrate how fiscal sustainability is to be maintained, given the development of the Government’s assets and liabilities.
5. Kazakhstan has devoted great efforts to the application of information technology to government operations of all kinds, so as to improve the efficiency of service delivery, and this remains a Presidential priority. It also seeks to achieve high standards in financial reporting in both government and corporate sectors. Because economic development has been driven by publicly-owned oil and gas operations, a high proportion of economic activity remains in Government ownership, notably but not exclusively through the three major state holdings. The Baiterek holding plays a particularly important role on behalf of Government in supporting the financing of industrial expansion and the provision of housing, almost entirely outside the Republican Budget. The use of corporate structures has been extended into wide areas of government activity which in other jurisdictions are normally undertaken directly by Ministries or Government agencies or fully transferred to the private sector. Public reporting by these Republican State Enterprises (RSEs) does not extend beyond making individual company reports available on a Government website.
6. There are other limits to the transparency of Government operations. Much of the documentation submitted to Parliament with budget proposals is not available to the general public, while only a summary is published of the external audit report on budget execution. Information is published about individual public procurements, but with no consolidated presentation of the overall picture. The emphasis has been on formal compliance with international standards rather than on partnership with Parliament and the general public in developing and presenting policy as is done in most OECD countries.
7. Recent constitutional changes have reduced the extent of exclusive Presidential authority. The Parliament now has an important role in the appointment of the Government, and the Accounts Committee (AC – the country’s Supreme Audit Institution) now reports to the Parliament as well as the President. Public Councils have been established by each Ministry in order to widen the range of people consulted in the formulation of policy. However, the impact of these changes is limited by the narrow limits on the AC’s resources imposed by the Government, and the difficulty encountered by NGOs concerned with the transparency of economic and fiscal policy in securing membership of the Public Councils.
8. Although there remains considerable scope for improvements in the transparency and accountability of public finance, significant progress has been made in these areas since the previous PEFA assessment in 2009. Strategic planning and results-oriented budgeting have been developed, and public investment planning systematised. Financial reporting has been developed, and responsibilities for internal financial control and internal and external audit redefined in a way consistent with good international practice. The Concept “On the new budget policy of the Republic of Kazakhstan” issued by Presidential decree in 2013 set the framework for policy up to 2020, with the objectives of establishing the foundations for budget balance and budget efficiency, and then ensuring fiscal sustainability in the longer term. Although this does not list a series of specific measures of PFM reform, a number of initiatives are under way which should yield improvements. There are plans to increase revenue by improving the efficiency of collection under the new code introduced in 2018, and by the introduction in 2020 of a universal obligation on residents to make an annual declaration of their income and assets, thereby restricting the scope of the informal economy. A new civil service pay system now being piloted at both Central Government and regional levels should improve efficiency by making rewards more dependent on performance. The Civil Service and Anti-Corruption Agency (CSA) envisages that this will be applied at Ministry level as well as to individuals: thus a Ministry’s total provision for the payment of bonuses to staff will depend on the achievement of its performance targets.
9. The introduction for the first time in 2017 of internal audit throughout Government as a service to management, directed in accordance with good international practice at improvement of systems for service delivery, should also contribute to better performance by Ministries in the execution of their functions. The process under way of moving progressively to consolidated Government financial reporting on an accruals basis offers the opportunity to improve the transparency and accountability of government operations, provided that the consolidation of the different elements – central and subnational governments, RSEs and State-Owned Enterprises (particularly the national holdings Samruk-Kazyna and Baiterek) is transparently presented.