How Much Are We Talking About?

How much will be spent on the Five Initiatives announced by the Kazakhstan President on March 5, 2018, at the Parliament meeting. Since, this time, the President’s plans miraculously coincide with the hopes of many Kazakhstanis, we have decided to calculate the cost of their realization.

So, in total, Nursultan Nazarbayev announces five social initiatives. Let us consider who, how, and to what extent will finance them.

Here is the first initiative – “The New Possibilities to Acquire Lodgings for Every Family”.

“We need the mechanisms to provide cheap resources when every working citizen can get a mortgage and pay this loan within the possibilities of the family budget. Therefore, I suggest launching the “7 – 20 – 25” program.

Every working Kazakhstan citizen will have the possibility to obtain a mortgage loan in tenge upon the following conditions. Interest rate – not more than 7% per annum, not 14% like it is now. If today the banks demand the initial payment to be up to 30%, sometimes even 50%, then, according to this program, the initial payment is not to exceed 20%. The loan will be given not for the period of 10-15 years but for the period up to 25 years to decrease monthly payments. To do so, we must use the possibilities of the National Bank, the commercial banks, and the stock market.

The National Bank must create a special company that will attract not less than 1 trillion tenge and channel this money to buy out the new mortgage loans granted by the banks upon the aforementioned conditions”.

Judging from Nazarbayev’s words, the National Bank of Kazakhstan is to create a special company, in the fashion of Zhilstroysnerbank JSC, to finance commercial banks via the mechanism of buying out the newly granted mortgage loans. However, the fact that the new company will be created not under authority of the government but under the authority of the National Bank of Kazakhstan tells us that it is not to receive the state budget resources. Therefore, here is the question. From where will the “not less than a trillion” tenge come to the regulator?

For the end customer, the effective interest rate of the loan must not exceed 7% per annum, according to the President’s directive. By our estimate, based on the usual Kazakhstan practice, in order to be interested in participating in this mortgage program, commercial banks must obtain the National Bank’s special company’s resources at 4% interest rate. By the way, the banks received the National Bank funding for the latest banking sector rehabilitation program at exactly this rate.

Further deliberations on the subject involve taking wild guesses.

On the one hand, there is the oversupply of the liquid tenge in the country (over 4 trillion) but it is unlikely that Kazakhstan banks funded from the market at a higher rate will agree to sustain direct losses. And the National Bank itself is unlikely to allow for this to happen since such a practice will deliver an immediate blow to the capitals and will threaten the very stability of the banking sector as a whole.

On the other hand, nothing precludes the National Bank from simply “printing” a trillion tenge and passing it to the account of its special company. Especially since it is unlikely to be a one-time withdrawal. Since we cannot calculate how many Kazakhstan citizens will rush to get additional mortgage loans at a lower rate, let us say the program will continue for at least five years. In this case, the yearly need in the monetary resources will constitute 200 bln tenge and the money will be granted not indefinitely but to be returned after 25 years at 7% annual interest rate.

There is, of course, yet another viable scenario – to make the six banks that received the state support (primarily, we are talking about Halyk Bank) participate in funding of the new company. But then, the regulator would have to give them back the monetary funds they had received as part of the state support program and then invested in the National Bank securities at a much higher interest rate. We think it very unlikely especially considering that the profit from this operation is intended for the “rescued” banks’ capital increase.

As a result of our calculations, it turns out that the special company created for the purpose of buying out the mortgage loans newly granted by commercial banks as part of the implementation of the five Presidential initiatives will be directly funded by the National Bank or the structures whose money is managed by the regulator – the National Fund of the Republic of Kazakhstan and the Unified Accumulative Pension Fund.

It is worth mentioning that, since, as of February 1, 2018, the volume of the mortgage loans granted by Zhilstroysberbank of Kazakhstan JSC constituted only 919 bln tenge, the volume of the citizens’ state support in that regard will grow twice which one can only cheer.

Here is the second initiative – “Decreasing the Tax Burden for the Purpose of Increasing Low-Paid Workers’ Wages” from 10% to 1%. According to the President, the initiative will affect more than 2 mln Kazakhstan citizens.

“To support working Kazakhstan citizens receiving relatively low wages, I suggest, starting from January 1, 2019, to decrease their tax burden 10 times – to 1%. Decreasing the tax burden via paying the individual income duties is to affect those whose wages do not exceed the 25-fold size of the minimal monthly index. Having said that, it is necessary to make sure that the resources released thanks to such a decrease are to be used for increasing the wages. As a result, not less than one third of the working citizens (more than 2 mln people) will increase their wages without increasing the burden on their employers”.

In accordance with the November 30, 2017 law “On the Republican Budget for the Years 2018-2010”, the “monthly index for calculating social benefits and other social payments as well as  punitive sanctions, tax duties, and other payments will 2405 tenge this year. Thus, the individual income tax will be lowered for the citizens earning not more than 60125 tenge per month. Per 2 mln Kazakhstanis, it constitutes 69 bln tenge.

Note that the estimated sum of the individual income tax collected from the physical body earning 60125 tenge per month will amount to 3184 tenge. The thing is that the income within the limits of the minimal wage (which now amounts to 28284 tenge) is not subject to the individual income tax. Since the existing mechanism is unlikely to be changed, it looks like, starting from January 1, 2019, such a person will only pay 318 tenge to the state budget. Therefore, the state losses will constitute 2866 tenge per month or 34392 tenge per year.

Here is Nursultan Nazarbayev’s third initiative – “Increasing the Accessibility and the Quality of the University-Level education and Improving the Lodging Accommodations for the Students”. It stipulates easing the grant accessibility for young people and building new dormitories.

“To increase the accessibility and the quality of the university-level education, I suggest taking the following steps. “In the years 2018-2019, 20 thousand grants must be distributed in addition to the 54 thousand grants distributed every year. Of them, 11 thousand grants must be given to the students of the technical specialties. This will enable us to prepare thousands of professionals that will be demanded by the new economy under the conditions of the fourth industrial revolution. Primarily, we are talking about engineers, specialists in the IT-field, robotronics, nanotechnologies. And this, too, is how the state takes care of its young citizens.

We must increase the value of the new grants at all the technical and agricultural colleges to the national level”. “To solve this task, we must work on building dormitories by the universities, colleges, development companies on the basis of the public-private partnership. The state, in its turn, will guarantee the gradual return of a part of the investments in building the dormitories through the Ministry of Education and Science. Till the end of 2022, I order to build new student dormitories with no less than 75 thousand lodging stations”.

We will not try and calculate the exact additional expenditures for the initiative implementation. But, by the rough estimate, if the average size of the grant equals 1 mln tenge per year, then, only 20 bln tenge will be needed for the 20000 additional state-paid spots in the universities.

We can only guess how much Akorda will spend on the 75 new lodging stations in the dormitories, but, since the President mentioned the public-private partnership mechanism, it is unlikely that we are talking about some large sums of hundreds of millions tenge. We are probably talking about tens of billions tenge for constructing the public utilities network of cold and hot water supply, electricity, and sewer connection. So, roughly, we are talking about additional 10 bln tenge.

The fourth initiative, “Increasing Microfinancing” is to receive additional 20 bln tenge in 2018 on Nazarbayev’s orders.

“In 2018, I order to allocate additional 20 bln tenge. Thus, the total sum of microfinancing will reach the 62 bln tenge mark. As a result, the total scope of microfinancing will include more than 14 thousand people which exceeds the 2017 level by two times”.

Here is the fifths initiative – “The Further Gas Infrastructure Development in the Country”.

“We must complete the project of building the Karaozek (Kyzylorda region) – Zhezkazgan – Karaganda – Temirtau – Astana main gas pipeline. To do so, we must attract the necessary resources including those from the international financial institutes. This will allow us not only to guarantee gas supply for 2.7 mln people but also to create new production units for small and medium enterprises”.

We cannot say for certain how much this large-scale investment project will cost but it will, undoubtedly, be a commercial enterprise judging from Nursultan Nazarbayev’s directive to attract investments from the international financial institutes, i.e. EBRD, WB, Eurasian Bank, IMF, etc. Therefore, the state expenditures on this initiative cannot be regarded as such and we will not include them into our calculations.

Thus, about 318 bln tenge per year will be required for the realization of the five presidential initiatives. The lesser part of this amount represents the state budget losses and additional state expenditures, the bigger one represents funding of commercial banks on a repayable basis.

Note that this amount, however large, constitutes less than one tenth of the volume of the state support given by Akorda to the six Kazakhstan banks. This pertains to Akorda’s current preferences in terms of the socio-economic policy.

This is why we cannot agree with Head of the Mazhilis of the Kazakhstan Parliament Nurlan Nigmatullin who, on March 5, 2018, said (text in bold by Kazakhstan 2.0).

“Today’s address of President Nursultan Nazarbayev is the convincing confirmation of the firmness of his strategic course for the social modernization of our society. The five social initiatives of the President are an awe-inspiring program of social reforms. This is a system of the unique and unprecedented measures aimed to increase the welfare of all Kazakhstan citizens. And the most important thing is that, as always, the presidential initiatives are thought-through, realistic, and rest on the precisely calculated abilities of the national economy”.

Unfortunately, this is not the case and our calculations confirm it.


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