Section VI: Environmental protection and natural resources

Section VI: Environmental protection and natural resources

Stabilisation of quality of the environment.

Environmental situation in main population habitats remains unsatisfactory. The major factors affecting health of the population are shortage of quality potable water and air pollution. These factors are considerably aggravated by a progressing accumulation of industrial and household waste products, contaminated drains.

Presence of heavy industries in the country created during the Soviet Union, loaded with outdated technologies, suggests that decrease of emission of pollutants in the environment can not be expected.

2.1. Strengths

The framework of environmental protection legislation is developed, a number of international conventions on environmental protection are signed, and the management system of environmental protection activity is established.

Military ground test sites are closed, nuclear-weapon tests are banned, and the activity of the non-governmental ecological organisations is boosted.

The State registers of all sources of contamination and maps of their location are drawn up.

The system of charges for pollution of environment is developed. The accumulated volumes of finance from charges for pollution of the environment comprise a significant sum commensurable with the flows of receipts from royalty.

2.2. Weaknesses

Deficit of water resources in Kazakhstan is an essential factor hindering development of natural resources, development of the productive forces and economic growth as a whole. The situation is aggravated by the fact that similar problem persists in other states of the region.

Kazakhstan is one of the countries in the Euro-Asian continent that is most poorly endowed in water resources. Of all the volume of surface water resources, about half originates outside the territory of the Republic, one third goes in transit through Kazakhstan on to the territory of neighbouring states. With increase of the transboundary effects on the international rivers a tendency of reduction of surface water resources of Kazakhstan is observed.

In the long-term with increase of the economic activity in basins of transboundary rivers of the Republic and neighbouring states, especially in the zone of formation and primary use of water resources, water shortage problem will be growing.

Taking into account the shortage of this resource in the region of Central Asia, it is necessary to solve the issue of quality of transboundary water-flows as well.

First of all, reduction of water volumes and increase of water contamination in transboundary water-flows related to intensive industrial and agricultural activity will have an effect on the agrarian sector of the South of the Republic.

The environmental problem of Aral and the rivers of Syr-Darya and Amu-Darya basins is acute, the same is true in regard of the issue of a common use of the large international waterworks facilities and technological equipment of the irrigation networks.

At the intergovernmental level there has not yet been developed a comprehensive mechanism providing a stable rational use of the water resources.

The rivers feeding the southern and eastern parts of the Republic with water are formed mainly outside the country, including such large rivers as Syr-Darya and Irtysh. These rivers cross through the territories of several states and are vital economic groundwater arteries for the latter. Depending on industrial and sectoral specialisation of the region connected to the basins of the rivers, they acquire a significant strategic value for the states.

The state of quality of nearly all water storage establishments of the country remains unsatisfactory. The main contaminants come with effluent of petrochemical, mechanical engineering industries and non-ferrous metallurgy enterprises.

The acuteness of the problem related to provision of potable water to the population persists. In the majority of settlements the quality of potable water does not meet the requirements of national and international standards.

The level of atmospheric air pollution in cities and industrial centres of the country remains high. An ever-increasing amount of the motor-vehicle transport, use of off-standard petrol is aggravating the situation even further.

The availability of huge areas with soil of sand-mechanical composition and non-systematic use of pastures contributed to wind and water erosion of soils.

The process of desertification that includes degradation of soil and vegetative layer tends to expand.

As a result of extensive agriculture activity, the country’s natural landscapes of steppes and forest-steppes are disappearing. The fertilisers in use are not balanced in main nutritious elements. Outdated, water-intensive technologies predominate in irrigated farming.

Practically there is no management system for utilisation of production and consumption, including, including dangerous and radioactive ones. Poorly-defined system of collection, storage, utilisation and processing of household wastes results in contamination of the natural environment.

Pollution in the regions of oil extraction is becoming a severe environmental problem. The standards on comprehensive rock processing are violated in mining of useful raw material by closed method.

Insignificance of a share of specially protected natural territories in the total territory of the country does not provide for effective preservation and rehabilitation of especially valuable landscapes and the nature-reserves of the country.

Absence of regulation mechanisms of inter-state distribution of water resources impairs the interests of the Republic.

The existing system of water management does not respond to reform objectives.

The existing standards of environmental protection legislation practically are not being enforced.

The network of posts for environmental pollution surveillance is insufficient.

Areas under the forests are diminishing as a result of fires, forest cutting, as well as reduction of the volume of forest rehabilitation and protective afforestation.

2.3. Opportunities

Allocation of financial resources generated from mining of natural resources for environmental protection. Interest of industrial countries in cooperation with Kazakhstan in mining sector, provides a possibility for attracting financial resources and technologies to address ecological problems.

Adoption by the developed countries of obligations on rendering assistance to less developed countries. Kazakhstan has a possibility of receiving financial assistance for implementation of environmental protection measures.

Use of accumulated world experience in environmental protection.

2.4. Threats

A potential increase of water consumption related to a development of economy of Kazakhstan, can aggravate the problem of water deficit, especially in the transboundary river basins. Different viewpoints in relation to the issue of water resources distribution and absence of a comprehensive mechanism for water distribution can turn water from the instrument of attainment of the economic growth of Central Asia states into a pivotal problem of the inter-state disputes in the region.

An increased risk of disputes around the problem of water distribution while the boarder issues are not entirely regulated.

The impact of mining on the environment. The main difficulty in the nature protection activity is determination of a ratio between damage incurred to the nature and the sizes of indemnification for that damage.

In some cases technical cooperation with developed countries attempts to impose additional obligations on Kazakhstan, which do not contribute to national economic growth.

Convergence of charges for the environmental contamination to mere customary taxes discredits the original idea and may result in a negative reaction on the part of enterprises-pollutants.

In Kazakhstan, alongside with changes in the society and economy, a process of transformation of the attitude to regulation of nature management issues is going on. Therefore, it is necessary to ensure the adequacy of the state regulation of the process of environmental management to the needs and expectations of the society.

In the next ten years, it is necessary to solve the following strategic objectives in the field of the environmental protection and natural resources:

To reduce deficit of water resources, to raise the level of water supply;

To improve current legislation and develop international cooperation;

To optimise the system of environmental management and environmental protection;

To raise the level of waste processing and utilisation;

To ensure ecological education.

4.1. Reduction of deficit of water resourcess, increase of the level of water-supply

To develop comprehensive mechanisms of rational use of transboundary waters on a multilateral basis with definition of clear mechanisms of realisation, including precise implementation measures and sanctions.

Taking into account an acute need of the neighbouring states in the resources available in Kazakhstan and the transit potential of the country, it is necessary to search for a complex conciliatory solution of the issue of transboundary waters use.

The water management authorities shall stand on protection of the interests of the country in distribution of flows and strengthen cooperation in effective control of the waters of transboundary rivers.

To develop actions on improvement of potable water supply at the expense of intensification of use of all kinds of water resources, first of all, the underground water sources as the most protected from contamination.

In the nearest future, to create a uniform system of the state monitoring of the quality of potable water. To carry out planning of the state investment policy in the sphere of provision of potable water for the population.

To conduct water-savings activities, limit the rates and volumes of development of water-consuming productions in river basins, reconsider distribution of areas under crop.

To implement measures on regulation and inter-regional distribution of river flows.

To promote increased use of underground waters.

In conditions of a considerable deficiency and a strategic importance of water resources, the transition to economic methods of the sector management shall be carried out in compliance with the programs of privatisation.

4.2. Improvement of current legislation and development of international cooperation

To participate in establishment of global and regional systems of environmental protection on the basis of a steady observance of the international and regional documents.

To develop a qualitatively new approach to examine obligations of the international agreements, ensuring effective and informed decisions on signing these agreements and to impose state control over the obtained resources.

To solve the problem of ensuring a total and efficient management of the process of the international cooperation and projects of external and mixed financing.

To create stable mechanisms of cooperation with the states of Central Asia in the field of development of the regional ecological policies for addressing transboundary environmental problems.

To ensure improvement of the mineral resources and other legislation in accordance with ratified international conventions.

On the basis of the world experience, to develop a system of ecological insurance and extra-budgetary ecological funds.

4.3. Optimisation of the system of environmental management and environmental protection

To develop a uniform automatic information system of environment and natural resources monitoring.

To conduct ecological zoning of the country territory. To determine ecologically acceptable limits of natural resources use and pollution limitations. To develop criteria for estimation and comparison of various territories.

To create automatic databases and a system of management of the state registers on natural resources.

To increase the budget financing for the geological exploration of the subsurface, allocating the funds generated from tax receipts on the mineral resources use and royalties.

To introduce effective methods and technologies of forecast and exploration of mineral deposits. To create scientific grounds of identification of new competitive fields.

In order to preserve the biological variety in the region of the Caspian Sea to study the status of water and biological resources, determine the sources of contamination of the environment and reasons of reduction of the biological variety, to conduct an ecological zoning of the reserved zone. In the coastal part and on the sea to carry out the monitoring and analysis of the quality of water and biological resources on a regular basis.

To develop the system of hydro-meteorological maintenance of the economic complex of the Republic with creation of an effective system of data processing and issue of hydro meteorological forecasts.

To elaborate the program of development and accommodation of specially protected natural territories, development of the routes for ecological tourism.

To fix rigid norms and standards on activity of the economic agents with the purpose of inclusion of innovations and a rational use of the natural resources.

4.4. Increase of the level of waste processing and utilisation

A transition shall be required to stable systems of the agricultural production, founded on organic or ecological agriculture with constant reproduction of fertility of soils, with increase of quantity and quality of the organic matter of soils, on the background of a decent reclamation condition of the agricultural systems.

To carry out the monitoring of waste products and consumption, to evaluate the effect of dumping of harmful waste products in the environment.

To introduce in an active manner the resource-and energy saving technologies to stimulate activity on waste processing and utilisation.

4.5. Ecological education

To promote rational use of the natural resources in the society.

To expand sensitisation and awareness raising role of mass media.

To establish a system of ecological education. To develop and issue the educational literature. To create a system of preparation and improvement of the professional skills of environmentalists.

To create legal and regulatory framework of ecological education and training.

To increase the interaction between civil society organisations and state bodies in the field of environmental protection.

To create conditions for development of civic ecological movements, associations, groups.

SECTION VII: THE MONETARY POLICY

The purpose of the policy is to create favourable macroeconomic conditions for achievement of a stable economic growth, strengthening of competitiveness of the domestic economy, further development of the bank sector and its integration in the international financial markets.

A favourable business environment of the world financial and commodity markets and change of policy of Tenge exchange rate made in April 1999 continued to influence positively the macroeconomic situation in the country in 2000.

The Tenge exchange rate was maintained rather stable. In 2000 the decrease of the Tenge exchange rate versus the USD has comprised 5.2 %. A relative stability of the Tenge exchange rate, as well as a significant growth of production have preconditioned a twofold decrease of inflation during one year from 17.8% down to 9.8%.

It is for the first time in the four years that the balance of payment has achieved a considerable prophetic, and the gold-value reserves have considerably increased.

The growth of the international reserves has ensured an advanced and complete redemption in May 2000 of the National Bank commitments before the International Monetary Fund.

Besides, in 2000 other favourable changes occurred in the financial market:

The rate of re-financing has reached the lowest level since Kazakhstan gained its independence (down to 14%) and became one of the lowest rates among the CIS countries;

The terms of placement of the state liabilities have considerably increased, while the yield from them has decreased. All the borrowings in the home market are presently carried out exclusively through Tenge securities;

The confidence of the population in the banking system has considerably strengthened due to introduction of the security system (insurance) of deposits of the population. Within one year the deposits of the residents have grown by 72%, and the deposits of the population (including deposits of non-residents) increased by 66.7%. Currently, the average amount of the deposits per capita in Kazakhstan made 6.2 thousand Tenge or 42.6 US Dollars which is a rather high parameter among the CIS countries after Russia;

The structure of the deposit portfolio of the banks has improved owing to increased share of deposits from 39.3% to 55.5%;

Due to a more intensive growth of the bank reserves the creditability of the banks has increased. During one year the volume of the banking credits in the economy has grown by 85.6%, including the middle term and long-term credits that have decreased by 81.2%;

The interest rate on the credits given to the legal entities in the national currency since the beginning of the year has decreased from 20.8% to 18.8%, as for the foreign currency it has decreased from 20.4% up 14.7%; and these are the lowest rates among the CIS countries;

The quality of the loan portfolio of the banks has improved considerably, it is proved by the decrease of the share of the outstanding credits from the total amount of credits in the economy from 6.6% to 1.7%.

Consolidation and increase of the banks’ capitalisation promoted the strengthening of the banking system holding a leading position in the financial market of the country. The total own capital of the banking sector in 2000 has grown by 43.0% - up to 98.7 billion Tenge.

The banks through their subsidiaries actively enter the market of securities, the insurance market and in the activity of the pension funds.

In Kazakhstan in 2000 the first rediscount of the NAC “Kazatomprom” was conducted.

The Government of the Republic of Kazakhstan approved the Concept of a long-term financing of the housing construction and development of the system of mortgage in the Republic of Kazakhstan. The CJSC “Kazakhstan Mortgage Company” established in December 2000 will have the main function of refunding of second-tier banks through issue and placement of mortgage bonds in the secondary market.

The legislative base was created in the field of financial leasing and development of the system of the housing-construction savings allowing to attract the temporarily free funds of the population in the financial system.

A developed payment system is functioning in the country responding to international standards. The inter-banking system was introduced of remittances representing a system of gross payments within a real time, and a single processing centre was created providing a compatibility of various systems of payment cards.

The legal conditions are created in the filed of insurance to ensure development of the infrastructure of the national insurance market and an institutional consolidation of the insurance organisations. A conceptually new law meets the international requirements.

2.1. Strengths

The National Bank of Kazakhstan pursues an independent monetary policy aimed to maintain low inflation rates through regulation of the monetary base using the indirect instruments of the monetary policy.

Since 1998 the National Bank had stopped the practice of direct crediting of budget deficit.

By the results of the last 5 years (1in respect of devaluation and inflation, Kazakhstan is in one line with such East-European countries as Poland and Hungary. Low rates of inflation and unavailable revaluation of the national currency render a positive influence on the growth of production and export.

A rational use of the rich natural resources enables the country to provide a sufficient inflow of the foreign currency promoting strengthening of the Tenge rate and maintenance of the surplus of the current account of the balance of payments.

A more stable two-tier banking system is formed in Kazakhstan, more advanced in comparison with the banking systems of the neighbouring foreign countries. Transition of the two-tier banks to the international standards of activity and accountability, access of foreign banks in the domestic market, consolidation of the banking capital and a further increase of the banking sector capitalisation will increase competitiveness of our banks, stimulate integration of the bank capital of Kazakhstan in the world financial flows. The number of domestic banks having credit ratings from the international rating agencies has increased to eight.

The stability of the banking sector, performance of the system of obligatory collective insurance of personal deposits will gradually enhance the confidence of the population in the commercial banks’ activity contributing to the increase of the banks’ reserves.

In turn, the growth of the bank reserves, growth of competition between the banks and reduction of re-financing rate will create favourable conditions for extension of crediting of the economy.

Currently, the net international reserves exceed the monetary base by 2.3 times providing stability of the national currency. Furthermore, Kazakhstan is a gold mining country and has a possibility to replenish its gold-value reserves through procurement of gold from the domestic producers.

2.2. Weaknesses

An insufficient level of development of the financial system is revealed in quite a low level of monetisation of the economy and a high share of the cash turnover.

As a result of primary raw-material-focus of the economy, the volume of revenues in the foreign currency obtained from export largely depends on the world prices on raw materials and is extremely volatile, and it directly influences the balance of payments and stability of the national currency.

Keeping of quite high level of dollarisation of the economy reduces an effectiveness of the monetary policy, increases vulnerability of the banking system and the economy and reduces state revenues.

Despite of a stable development of the banking system, the volumes of crediting are still far from meeting the demand of the economy in credits, especially for the needs of the production equipment upgrade.

2.3. Opportunities

The growth of revenues in the foreign currency obtained from the extended oil export, on the one hand, will enhance the maintenance of the national currency value, and on the other hand, will ensure inflow of additional current assets directed as investments to the national economy.

Taking into account that the banking system of Kazakhstan leaves behind the banking systems of the neighbouring countries, it is necessary to consider ways and methods of a possible extension of the banking capital to the CIS regions. Besides, the availability of the large backbone infrastructure banks of the national scale in Kazakhstan shall create real conditions for transformation of Almaty in the financial centre of the Central-Asian region.

Introduction of the supervision based on the principle of consolidation shall considerably allow increasing accuracy of the financial status evaluation of the banks and limiting susceptibility of the banks to risks, including the risks of the affiliated parties, and in ultimately shall contribute to financial stability of the banking sector.

Creation of the National fund shall stabilise the receipts obtained from the oil development business and shall provide the required reserve of assets in case of critical situations in the economy.

A further strengthening of the resource bases of the banks shall be promoted by the improvement of the system of the obligatory collective guarantees (insurance) of the physical persons’ deposits and creation of the guarantee fund of the of the bank liabilities on the inter-banking credits.

The following will promote the growth of crediting in the sector of economy: widening of practice of bill refunding of the banks crediting the financially stable enterprises; functioning of the Bank of Development; activating the financial leasing; activity of the crediting partnerships, and as for the sphere of the house-building – the activity of the Kazakhstan mortgage company established in December, 2000, which shall conduct transactions on procurement of loans on mortgage from the two-tier banks.

Development of the monitoring of the economy shall considerably increase the effectiveness of the monetary policy of the National Bank through strengthening of its orientation on the real needs of the economy.

2.4. Threats

Based on the fact that the tendencies of the economic development of Kazakhstan are influenced by fluctuations in the economy of Russia, for our country the macroeconomic instability in Russia may become one of the possible threats.

In the nearest years the dependence of the economy of Kazakhstan on fluctuations in the world prices on raw materials will persist. With the anticipated growth of the raw material export within the following decades, our economy operating under the conditions of a free floating Tenge exchange rate may face a real problem: a significant strengthening of the national currency exchange rate that might cause, as a consequence, the “Dutch syndrome”, that is, the sector of the economy oriented on the internal market gets stagnated.

A low capacity of the internal financial market shall not allow it to devour a considerable inflow of the foreign currency otherwise it will incur a damage to the macroeconomic stability.

Access of foreign participants to the internal financial market, especially to the market of short-term speculative capital, will increase the degree of vulnerability of the economy before a possible economic crisis.

The monetary policy shall be focused on implementation of the following tasks:

­ Maintenance of the low level of inflation;

­ Realisation of the foreign currency policy preventing overestimation of the Tenge exchange rate;

­ Maintenance of a stable development of the banking system and the insurance market;

­ Assistance to a further growth of the bank reserves and extension of crediting of the economic sector;

­ Ensure of stabilisation and further development of the payment system.

4.1. maintenance of the low level of inflation

One of the components of the monetary policy is determination of acceptable level of inflation not hindering the economic growth. An excessively rigid anti-inflationary policy of the transitional economy with its’ multiple structural barriers undermining competition, creates an unneeded tension in the country, results in the growth of non-payments, fall of production. Thus, there are all grounds to consider that constraining of the inflation within the limits of 10% will not contradict set objectives, especially the achievement by the year 2007 of GDP level of 1990 and a further 7% growth of GDP.

In this connection, the main purpose of the monetary policy shall be maintenance of an annual inflation within the range of 5-10% that will promote the national economy to achieve maximum rates of the economic growth. According to the world experience the rates of the annual inflation growth, getting beyond the indicated limits, reduce the rates of the real growth of the economy.

Higher rates of inflation may render a negative influencing on the rates of the real production by virtue of a decrease of an efficient performance by the national currency of the price scale function and the means of the funds accumulation. Lower rates of inflation gravely affect the economic activity in the result of decreasing of the monetary reserves surplus required for a painless structural re-tuning of the economy.

Achievement of the average annual inflation rates within the range from 5 to 10 % shall be provided through regulation of the monetary base level using all the tools of the monetary policy available to the National Bank. At the same time the economic policy of the Government shall be focused on such rates of inflation.

The same direction shall be taken by the National Bank on development of the non-cash turnover.

4.2. Implementation of the foreign currency policy preventing revaluation of the Tenge

The foreign currency policy of Kazakhstan shall provide protection of the monetary system of the state and the whole economy from negative consequences of sharp fluctuations of the Tenge exchange rate. Objectively the definite exchange rate of the national currency is the fundamental basis providing a macroeconomic stability of the state.

In this connection, the main priority of the state in the sphere of the foreign currency control shall be the choice of the exchange rate policy not allowing the revaluation of the national currency and not affecting competitiveness of the domestic production in contemporary world business environment.

Increase in the world prices on raw materials and the devaluation of Tenge conducted in April 1999 promoted the growth of the mining and of some import-substituting sectors and revival of the state economy. The policy of the exchange rate shall adequately respond to fluctuations of the world prices, conditions of the foreign trade creating the foundation for progress of the domestic economy. Strictly adhering to this policy in combination with such factors as use of new technologies, equipment, improvement of the quality of labour, the state can enter accelerated progress.

Within the next five years, it is expected to preserve floating Tenge exchange rate, which assumes an adequacy of devaluation to the inflation fluctuations both in the country and abroad, enhancing maintenance of the price competitiveness of the Kazakhstan goods on external markets, and hence strengthening the established favourable economic positions and creating preconditions for a future successful development of Kazakhstan.

Maintenance of the current foreign currency policy is dictated by the raw-material-focus of the country, which is not yet eliminated, inclusive of export. In other words, high dependence of the national economy on fluctuations in the world prices for raw materials is still persists. Besides, a share of Russia in the foreign trade turnover of the country is high; therefore, the development of the economy will depend on the situation in Russia.

If these dependencies of the economy will be overcome, certainly there might arise a necessity in alterations to foreign currency control through the national currency exchange rate.

There are some possible alternatives of the new foreign currency regime:

­ Binding to “the currency basket” (US Dollar, Euro, Yen, the Russian rouble etc.);

­ Transition to a single currency within the frames of the Euro-Asian economic community or the whole CIS, the Central-Asian Republics (Kyrgyzstan, Uzbekistan, Tadjikistan), and also the alliance with one of the neighbouring countries (Kyrgyzstan).

At the same time, the maintenance of competitiveness of the economy may not be solved only through the exchange rate policy. A main role shall played by the measures aimed at raising the labour productivity, quality of production, restructuring of the economy in the direction of increasing the production output with a high added value, and export diversification.

4.3. stable development of the banking system and insurance market

Development of the international aspect of the banking system requires an availability of a stable and solid banking system, increase of the culture of the banking business and quality of control of second-tier banks’ activity. That’s why it is necessary to ensure a financial soundness of the banking system. For this purpose it is necessary to implement a further improvement of the prudential regulations of the banks’ activity, strengthen of the mechanism of guaranteeing the deposits of the population and also e the institutional development of the whole financial system shall be ensured. Recommendations on the risk management in the banking system shall be introduced with the methods of supervision based on consolidation being improved.

The role of the banks as the financial centres of the new world order will grow pro rata the growth of globalisation and integration of the world economy. The tendency of the banks’ consolidation is observed in many countries. The main purpose of consolidation is concentration of the capital and strive to create a complex organisation capable to compete in the world market of the capital. Consolidation may take place through a merge and consolidation of the financial institutions, and through their natural growth.

Despite the gradual consolidation of the banking institutes, the target relating to creation of a tree-structured banking network shall be one of the priority targets of the state. Therefore, depending on the development of the financial system new specialised credit institutions are expected to emerge in the market endowed with special tasks (loan on mortgage, development and house-building) and a further development of other existing non-banking financial organisations.

The postal-saving system shall be formed for rendering qualitative financial services to the population in the regions. It shall also allow expanding the financial services rendered to the population, especially in the countryside and shall create favourable conditions for inflow of new savings in the financial sector. Therefore, it is important to improve the normative legal base for development of the sector of organisations carrying out separate banking operations, including the operations of the postal-saving service organisations, and promote creation of new financial instruments.

Thus, the financial market of Kazakhstan shall be represented not only by the banks engaged in servicing corporate clients, but also by the non-banking financial organisations engaged in business with small-business and private customers. In this connection it is expected to improve the quality and expand the range of the banking services rendered to the population and the enterprises, including the services based on introduction of new banking technologies. Strengthening of the branch network of the banks is expected in the regions, ensuring availability of the bank services.

Creation of the Guarantee fund of bank liabilities provided for the inter-banking credits shall ensure the stability of the concerned banks.

An accelerated development of the insurance market of the country is foreseen. Creation of the modern national insurance industry requires a development and a stage-by-stage implementation of the measures on achievement by the market of insurance services of a qualitatively new level of development. In this connection the main aspects and directions of the insurance industry development in Kazakhstan are reflected in details in the State Program of Development of Insurance in the Republic of Kazakhstan for . Whilst the realisation of this program new targets and actions shall be determined. They will stimulate expansion of duties of the insurance organisations and strengthen the role of the insurance market in development of the financial system of the country.

4.4. Assistance to further growth of bank reserves and extension of crediting of the sector of economy

A stable performance of the banking system of the country, improvement of the banking security system of deposits of the population in the banks shall result in a gradual growth of the bank reserves and strengthening of their crediting potential. The created loan on mortgage company shall operate in the same direction. It will result in expansion of the bank reserves through attraction of the monetary resources of the institutional investors (the pension and insurance funds) and in establishment of the fund of the inter-banking insurance of deposits.

In these conditions the effective utilisation of the financial resources becomes the most important task, therefore, it is necessary to implement the following conditions that will stimulate the inflow of the financial resources in the economy:

­ Effective activity of the Specialised Bank of Development for concentration of the state reserves allocated for the prioritised directions of the national economy;

­ Development and improvement of various mechanisms of crediting of the economy, considering an optimum share of the risks of unrecoverable loans;

­ Continuation of the work on improvement of the monitoring of the economy and strengthening of orientation of the monetary policy on the needs of the economy;

­ Improvement and development of the loan on mortgage system and house-building savings in the country;

­ Active development of the financial leasing in regions;

­ Expansion of the network of non-banking financial organisations, including the crediting partnerships, in regions;

­ Creation of equal conditions for both domestic and foreign investors;

­ Creation of favourable conditions for investments in the priority branches of the economy, i. e. granting of privileges and preferences (see. Section III. Industrial-technological policy);

­ Further development of the stock market (see. Section IX. Investment policy) etc.

4.5. Stabilisation and further development of the payment system

Increase of the technological level and organisation of the payment system shall be focused on ensuring the conformity to the international standards on the system of payments.

The National system of payment cards shall be formed for the purposes of extension of the range of services rendered by the banks, development of the non-cash transactions, and increase of transparency in retail transactions.

In order to secure the payment system from risks the following measures shall be undertaken: foundation of the reserve centre providing a continuous performance of the payment system, increasing of the capacity of the system and increase of the safety level.

Section VIII: TAX - FISCAL POLICY

The purpose is to achieve the balance of interests of the state and legal entities in their financial mutual relations, in order to provide the necessary inflows of revenues in the state budget for execution of the governmental tasks and for formation of a stable budgetary system, definition of the social and economic priorities supporting a conformity of strategic and budget planning of the Republic of Kazakhstan.

2.1. strengths

Currently, Kazakhstan has achieved some success in the tax system, the budget execution, and a stabilisation of the main macroeconomic parameters has been achieved. Significant steps have been undertaken for creation of an effective budget system.

According to the accounting data for 1999, the state budget revenues have made 19.8% to GDP, the costs and crediting have comprised 23.2% to GDP. The deficiency of the state budget has made 3.5% to GDP and has decreased by 0.7 %, in comparison with 1998. In 2000, by the accounting data (without the accounting period), the state budget revenues made 23.1% of GDP, the costs and crediting – 23.0% of GDP with an insignificant proficiency of the state budget about 0.1 % to GDP.

Kazakhstan was one of the first states among the CIS countries that has passed the law on taxes. Its adoption in 1995 has played a significant role in establishment of the financial system of the Republic, structuring of all the obligatory budgetary payments, definition of the methods of tax charges and tax collection.

The reforming processes in the system of public revenues have been successfully implemented, including concentration of all fiscal bodies related to each other by control of state budgetary revenues under one authority.

The work on improvement of tax legislation is being conducted. The new Tax Code is adopted, which is focused on creation of favourable environment for an optimum combination of interests of the state and tax payers, and grouping of all regulatory norms under the framework of one legislative act.

The rates of value-added tax were reduced down to 16% and social tax down to 21% in the year 2001, in order to decrease the tax load.

Measures on creation of an effective system of spending were undertaken. The work of the Treasury is set properly. Kazakhstan was one of the first states among the CIS countries that has achieved a duly and targeted financing of the budget programs through the Treasury system.

The National Fund of the Republic of Kazakhstan and the Bank of Development were established in Kazakhstan.

The new budgetary classification of profits and losses was introduced in accordance with the world standards.

Important actions were carried out on improvement of the system of spending.

Since 1999, all extra-budgetary funds were abolished, and their receipts and expenditures were consolidated in the state budget. Measures on improvement of the preliminary control were undertaken; control of registration of state bodies’ liabilities was introduced. A long-term practice of granting privileges to certain categories of population of the Republic in the form of in-kind payments, which was a heavy burden for the budget, is replaced by a monetary compensation paid to selected categories of citizens. The budgets of all levels are approved at the level of the budget programs, and the funds allocated from the budget are assigned for execution of the budget programs rather than financing of separate ministries and departments.

Within the framework of improvement of the process of state budget revenues management, amendments were introduced in the budgetary legislation in 1999 with respect to state financial management. The Law of the Republic of Kazakhstan “Оn Budget System” as of April 1, 1999 has determined new mechanisms of the inter-budgetary relations.

As a result of functional analysis conducted in public sector, organisations financed from the state budget were transformed into state bodies and the state enterprises. The respective alterations were introduced in the civil and budget legislation. Since 1999, selected state functions were passed over to the private sector and now they are rendered as services to the state. The budget programs aimed at realisation of such functions are implemented in the form of a state order (public contract).

2.2. Weaknesses

Even international organisations note that the large foreign companies operating in Kazakhstan frequently violate the tax legislation by avoiding tax payment.

Activities on reconciliation of debts to the budget are poorly implemented, although there are significant reserves to increase revenues in this particular sphere.

The order on provision of tax holidays on budget payment also needs to be revised, because at present a head of any fiscal body can enjoy the right to defer a tax payment through a mutual agreement with an appropriate head of a financial body.

The rights of taxpayers are extremely difficult to protect through common courts owing to the overload with work of the latter and luck of special training among judges.

A possibility of importing goods in Kazakhstan from the adjacent states beyond the customs control seriously damages the state from the economic point of view.

With an annual growth of GDP, the volume of the state budget in general remains low, which is less than 25 % from GDP. Having such a level of expenditures, the state budget can’t cope with the performance of all the state functions.

Incomplete decentralisation of the budgetary system still remains a critical problem of the inter-budgetary relations.

The imbalance of the budget is aggravated by absence of a clear differentiation of the authorities of the budgets.

There is a disproportion between the decentralisation of the budget reserves and centralisation of the budget authorities.

The current conditions complicate decentralisation of the budgetary system. It is related primarily to adherence to the concept of vertical budgetary line.

Serious interregional disparities undermine advantages of decentralisation of budget system.

Temporary frames of the budget planning are short-term both at the central and at regional levels.

Own sources of revenues are not fixed at rayon and oblast budget levels.

Over-execution of the local budget revenues part through partial entry of the revenues to the Republican budget often generates free funds of the state budget.

The local executive and representative bodies face a problem of impossibility to increase the plan of revenues on these sources and re-allocate the funds on additional expenditures.

The spare funds cannot be timely involved in a turnover and directed to solution of serious social and economic problems.

Overestimation or under-estimation of the forecast data on different sources of revenues occur frequently and destabilises the budget performance at different levels.

The legislatively defined procedures of defining long-term budget withdrawals and subventions are insufficiently realised in practice.

The expenditure part of local budgets is mainly focused on current expenses; there is an uncertainty as far as capital costs are concerned.

The current mechanism of transfers does not contain any important criteria for evaluation of the status of regions; it lacks transparency and needs to be constantly updated by the centre.

As a matter of fact the acting system of transfers duplicates the old mechanism “patch up the holes” through regulation of withdrawals and subventions and thus equalises budgets of oblasts.

The plans of spending often ignore the priorities of the country development.

Insufficient transparency in the performance of the state and local budgets results in a poor control of the state expenditures.

The budgetary expenses do not separate between the current expenses and the costs on development.

The system of the internal and external audit is inefficient.

There is no monitoring system of budgetary funds spending efficiency-wise.

The unused budgetary funds increase as a result of a poor control of the budgetary funds at a level of administrators of the budget programs and their subordinated establishments, and also due to untimely held tenders for procurement of goods and services.

It often happens that a successful tenderer is selected from a single source on the ground of an assumption that other potential suppliers were not available.

The budgetary savings generated through a competitive award of a contract to a successful supplier of the goods and services through tenders remain non-transparent.

The requirements relating to servicing of execution of the local budgets by the territorial bodies of the Treasury do not completely provide for a rational and effective utilisation of the funds.

The costs of consultancy services related to borrowings from foreign sources still remain very high.

2.3. Opportunities

Expansion of taxation base owing to growth of the production and improvement of tax management.

Decrease of selected tax rates.

Simplification of the taxation system.

Forming of a stable system of inter-budgetary relations accompanied by a clear definition of the stable sources of revenues.

Availability of assistance of the international organisations, review and introduction of foreign experience.

2.4. Threats

Deterioration of the social and economic spheres of the state.

Imperfection of the tax legislation and the tax management do not promote an increase of the payment discipline.

Numerous types of collections and other obligatory payments and procedures of their collection complicate the tax system.

Regional disproportions in social development.

Growth of the national debt.

The main strategic tasks for years in the field of the tax-fiscal policy shall be as follows:

Maintenance of a stable tax system;

Provision of the growth of tax proceeds in the budget up to 30% of GDP;

Improvement of the tax legislation;

Systematisation of the tax privileges;

Provision of an effective state control of the foreign trade activity of the enterprises;

Realisation of the principles of the budget decentralisation;

Orientation of the budget policy on development of the social and economic spheres of the state in correlation with the strategy of development;

Improvement of the system of the inter-budgetary transfers;

Achievement of stabilisation and a gradual reduction of the national debt in relation to GDP;

Improvement of the system of budget planning;

Provision of the budgetary transparency.

4.1. Maintenance of a stable tax system

It is necessary to consign a principle of stability of tax legislation in compliance with the order of legislation since numerous amendments in the tax legislation affect the economic environment of the country.

It is necessary to adopt a new revision of the Tax Code following strengthening of the financial and banking system, agricultural sector, establishment of small entrepreneurship as the middle class of the society, strengthening of the economic basis of the social sphere.

With increase of revenues and growth of the state budget capacities it will be necessary to switch from the policy of self-survival of the population and granting of tax privileges to selected sectors of the economy to strengthening of direct state support to socially vulnerable population groups as well as to inefficient economic sectors of a significant social value.

4.2. Provision of the growth of tax proceeds in the budget up to 30 % of gdp

The growth of tax proceeds to the state budget shall be provided through improved tax management and a strict observance of tax legislation.

Within the following years the level of tax and non-tax receipts in the state budget shall achieve 30% of GDP, considering that with every decade a ratio of GDP distributed in all the advanced countries gradually grows and totals up to 50% of GDP.

4.3. Improvement of tax legislation

Within the following 5-7 years the following reforms will be implemented in the tax system:

­ Social tax, which is similar to the income tax in terms of administration, shall be converted into instalments paid to state insurance funds. In this case the payers of instalments will know how and for what purposes the funds are used as opposed to social tax, which is unspecified in the budget. (Section IX. Investment Policy);

­ The mechanisms shall be introduced providing disincentives for avoiding tax payment, through a total declaration of the incomes of physical persons and through tightened taxation of persons with highest incomes. This will considerably improve the situation with collection of taxes from this category of taxpayers;

­ Priority consideration shall be given to expedient introduction of the retail sails tax, which is one of the most important sources of revenues for local budgets in the world practice. This will contribute to expansion of the taxation base and a more balanced distribution of tax load on the real sector of the economy.

4.4. Systematisation of tax privileges

The balanced and fair distribution of the tax load among taxpayers is of principle significance. It is necessary to establish a uniform system of privileges encouraging business activity in priority branches.

Discreet individual tax privileges are being eliminated as they infringe a principle of justice of the tax system in respect to those tax payers who do not enjoy any fiscal privileges. Preferential taxation for the part of taxpayers increases tax burden for the others.

4.5. Provision of an effective state control of the foreign trade activity of the enterprises

The growth of the foreign trade activity by Kazakhstan citizens, active transformations in the foreign trade activity increase the role of the customs authorities of the Republic of Kazakhstan in securing economic safety on the customs borders, imposing barrier to smuggling, collecting customs duties and taxes in full amount.

The improved quality of customs management shall be ensured through introduction of a single automated information system of the Customs Service of the Republic.

In addition to the above, it is necessary to reform the system of wages paid to the employees of customs authorities. It is necessary to pay particular attention to check points located on customs borders since low level of wages here becomes a reason of low-quality customs control, and, as a consequence, result breeds corruption among the staff.

4.6. Realisation of the principles of budget decentralisation

It is necessary to implement the following:

­ To create an effective system of the inter-budgetary relations by giving a maximum independence to the local budgets;

­ To achieve an accurate legislative differentiation of spending authorities and respective accountability;

­ To develop and adopt the Budget Code of the Republic of Kazakhstan that will ensure a single legal provision for development, approval and execution of budgets;

­ To assign taxes and tax collections to definite levels of state budget;

­ To create an effective system of transfers;

­ To provide regions with independence in defining priorities of social and economic development within the framework of the state development strategy and spending of budgetary funds in compliance with these priorities.

4.7. Orientation of budget policy towards development of social and economic sphere of the state in conformity with development strategy

It is envisaged to create a new structure of the Republican budget, split into the current budget and the Budget of Development.

The current budget of the Republic of Kazakhstan (further referred to as “the current budget”) shall finance the current expenses of functional groups and service national debt.

The expenditure part of the current budget shall be formed on the basis of budget programs with indication of targets.

The main priority of the current budget expenses shall be on expenses allocated for the social sphere.

Expenditure on education shall commit 8% of GDP, health care - 4% of GDP, social security and social assistance - 9% of GDP, defence - 1% of GDP.

By 2010 expenditure of the state budget will attain about 30% to GDP. The state expenditures in the European countries increased in average from 34.5% of GDP in 1970 up to 46.6% in 1997. Presently the similar parameters are observed in the USA and Japan - 34% and 35% of GDP, respectively.

The Budget of Development of the Republic of Kazakhstan (further referred to as the Budget of Development) shall become a constituent part of the state budget. This constituent part shall be generated in the structure of capital costs and shall be used for financing of investment programs (see. Section IX. Investment policy).

The Budget of Development shall provide financing of the following programs:

- Crediting of the economy;

- Establishment of new institutions in the branches of the budget sphere;

- Transport infrastructure;

- Purchase of the upgraded equipment and technical equipping of the budget sphere;

- Revival of the national and cultural values.

The report on execution of the development budget shall be submitted to the Parliament of the Republic of Kazakhstan as part of the report on state budget execution.

The annual receipts from the clearing account of the National Fund of the Republic of Kazakhstan shall be considered one of the sources of the Budget of Development.

4.8. Improvement of the system of interbudgetary transfers

The method of determination of the official transfers shall be improved.

The system of transfers shall guarantee a minimum security of the social services in the regions and at the same time shall stimulate the regions to expand their tax base.

The current budget shall provide the subordinated budgets with the necessary transfers at the expense of the Fund of transfers provided for the regions, per capita, considering the main objective factors (the population, number of pupils, aged, climatic conditions, the level of poverty, extent of highways etc.).

4.9. Achievement of stabilisation and a gradual reduction of national debt in relation to gdp

Measures on ensuring of the state solvency shall be undertaken.

It is necessary to achieve a stabilisation and gradual reduction of national debt in relation to GDP.

While reducing the level of budget deficit it is necessary to improve control mechanism of the state borrowings and the borrowings under the sovereign warrantees and the debt of Government.

4.10. Improvement of the system of the budget planning

The following shall be ensured:

- Improvement of the methodologies of the budget planning, including those based on evaluation of the results of fulfilment of the budget programs;

- Development of a system of middle-term planning of the budget indices up to 3-5 years with the maximum of balance of the liabilities of the state and its resources;

- Distribution of the resources between the central and local administrations for adequate solutions of their problems;

- A continued financing of the state services and an effective financial planning.

4.11. Provision of budgetary transparency

It is necessary to achieve precise and clear information about the budget financing.

­ The principle of openness of budget financing shall be carried out through:

­ Publication of the legislative and normative documents;

­ Publication of the annual financial and operational reports and other reports (by the administrators of the budget programs);

­ Publication of complete information on public finances.

Control of the use of budgetary funds shall be increased for the purpose of evaluation of the budgetary funds’ efficiency.

The monitoring of expenses shall be carried out under a rigid and improved system.

Both the internal and external audit shall play an important role as they not only allow revealing cases of embezzlements and falsifications, but also promote structural reforms. An impartial audit helps to determine redundant factors and to disseminate innovations and best practices.

The work shall be continued on improvement of the legislative base for development of internal and external audit of the state sector.

It is necessary to achieve the determination of efficiency evaluation; to reveal outdated regulations, which are becoming difficult and expensive to apply; and also to fine-tune provisions of earlier reforms.

The control of tenders for supply of required goods and services for the budget sphere shall be strengthened.

It is expected to increase the role of the Accounting Committee that is expected to control the budget performance.