Page 55 - bne magazine March 2017 issue

bne March 2017 Eurasia I 55
low prices for its major export, natural gas, could prompt Ashgabat to follow in Tashkent’s footsteps.
Restrictions on foreign trade and foreign exchange operations have led to the cre- ation of a thriving black currency market in Uzbekistan, where there are several forex rates and most foreign investors face problems with repatriating earn- ings. President Mirziyoyev has instructed the government to study measures to ease the forex situation; if steps are tak- en, then Uzbekistan could see a boom in investment in its non-extractive sectors.
“That system has been built over a long period of time and that system is difficult to manage and it doesn’t contribute to
a broad-based growth,” says Horton, admitting that it might be extremely difficult to change it because of vested interests involved in maintaining the black currency market. However, he stresses that, “there are also interests in reducing some negative elements of the current foreign exchange system.”
The IMF official also believes that the forex reforms in Uzbekistan will even- tually lead to wide-ranging reforms to improve the business climate in the coun- try. “To start [reforms] with this shows the intention to address a whole range of business environment issues and this is the most important, the sharpest issue,” he says.
Financial sector remains under strain
Kazakhstan came out of the 2008 crisis relatively quickly on the back of high oil prices, but unresolved problems related to that crisis still haunt the economy.
The financial sector, for example, remains under strain because of the depreciation of the tenge – the national currency has been devalued three times since 2008, losing nearly two-thirds of its value – high interest rates, slow growth and too many bad loans.
The financial crisis caused the property markets in the country’s major urban centres to crash, especially in Almaty, the country’s largest city and its com- mercial centre. This caused the level of non-performing loans (NPLs) to soar,
which still weigh today on commer- cial banks’ balance sheets. The IMF believes the issue of NPLs, despite falling from nearly 34% in May 2014 to 6.7% in January thsi year, still remain a problem for the Kazakh banking sector. “In fact, that issue was never addressed decisively and banks with weak balance sheets have stayed with Kazakhstan for almost 10 years – that is a critical issue,” Horton notes.
One of Kazakhstan’s top three banks, BTA, was nationalised following the 2008 crisis and was then merged with the country’s largest lender Kazkom- mertsbank in mid-2015. However, the unresolved problems of the former have forced the merged bank to seek a rescue to the tune of KZT1.5tn ($4.5bn) from the central bank, according to Bloom- berg. Later, it emerged that Kazkom- mertsbank had entered into merger talks with the country’s second largest bank, Halyk.
In the concluding statement of the Article IV mission published on February 8, the IMF said the recognition of loan losses and capital injections by shareholders would be key to strengthening Kazakh- stan’s banking sector. “Further forbear- ance on capital requirements should be strictly limited. Banks should raise the required capital or exit. Mergers should take place on a voluntary, market basis, and mergers involving weak institutions should be avoided.”
In addition to bad loans, dollarisa-
tion remains a problem for the Kazakh financial system, where it still stands at around 60% despite the National Bank of Kazakhstan taking steps to lower it.
In November 2015, the central bank re- adopted an inflation targeting policy and has managed to bring down inflation
from 18% in July 2015 to 8% in January this year. “The National Bank is control- ling tenge interest rates in order to con- trol market interest rates to affect prices. When 60% of financial assets and liabili- ties are in dollars, you are only control- ling a small portion of the money supply, which makes it tricky,” Horton explains.
Taxes, land and transparency
Horton believes that the Kazakh govern- ment could, as a rule, improve its com- munications to the public around policy goals and policy intentions.
He suggests that a lack of communica- tion with the public led to the wave of large-scale protests against proposed land reforms last spring. Likewise, part of reducing inflation involves getting people to believe that it will come down. “That requires quite a lot of transparency from the National Bank of Kazakhstan and... the central bank should explain what it is doing and what its aims are.”
The IMF is advising the government
to improve tax collection by removing exemptions and eventually increasing taxes to reduce the non-oil deficit in order to maintain long-term sustain- ability. According to calculations by the Almaty-based Talap Centre for Applied Studies, the tax burden on employees will increase from 17.5% in 2016 to
19% in 2020 and on employers from 11% to 18% respectively, as the gov- ernment moves to adopt a compulsory medical insurance system. Tax collection increased by 23% in 2016, including VAT by 58%. Further increases in the
tax burden for small and medium-sized enterprises will lead to a practice of paying wages under the table, Talap’s Rakhim Oshakbayev believes. At the moment, Kazakh employees are taxed
at a flat rate of 10% on their wages.
Find more Eurasia content at www.bne.eu/eurasia
Selected headlines from past month:
· Azerbaijan’s Aliyev appoints First Lady next in line of succession · Foreign investors eye Iran’s grocery sector
· Armenia’s banks look to follow in Georgia’s footsteps
· Gazprom’s ‘iron embrace’ comes with a sting in the tail
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