Seven steps advised to Kazakhstan government after devaluation of national currency

The National Fund for Development of Financial Services has offered its plan for tackling the situation created by the depreciation of the national currency and transition to the floating exchange rate of the tenge, Tengrinews reports.

The Fund was established in November 2014. Its main objectives are to help customers use banking and financial services, control the quality of services provided by banks and financial institutions, and improve the financial literacy of the population of Kazakhstan.

Their official statement was published on 29 August on nfond.kz and the Fund’s Facebook page. Its main insistence is on regulating the economic processes through legal mechanisms. The plan is formulated in seven steps.

Firstly, the Fund stresses the necessity to return the money from abroad to fill in the government budget deficit. A big chunk of the funds syphoned off from Kazakhstan to foreign accounts are illegally obtained assets. The annual outflow of capital from Kazakhstan is estimated at $6 billion in the next 5 years. There were attempts to return the assets through legalization programs, but the Fund believes them inefficient.

“This was due to the fact that under the current legislation property received through corruption is subject to confiscation. However, given the low trust in the investigation and justice in Kazakhstan, even those persons who have not committed any corruption offences fear to be held accountable for flimsy corruption offences and to lose their property as a result of confiscation,” the Fund explains.

This is why it recommends making legalization by amnesty for all persons and eliminating the confiscation option altogether.

Secondly, it is necessary to ensure the capital does not outflow in the future. “It is necessary to develop a simple and clear legal mechanism for legal acquisition of assets abroad along with creation of a special state body that would track all the foreign assets, including those sheltered from the legalization and acquired to bypass the regulations,” the Fund says. Only the assets found undeclared after the entire system is in place will result in sanctions, including confiscation and bringing those responsible to justice.

Thirdly, the Fund sees it crucial to transfer all foreign currency loans into tenge and to limit the number of new currency loans, except for those who have stable foreign exchange earnings.

It points out that “contrary to Article 127 of the Civil Code, citizens de facto prefer making transactions using foreign currency.” This places considerable pressure on the reserves of the National Bank and provokes tenge devaluation if oil prices drop. Massive lending to the population is a source of free funds, so the ban on issuance of foreign currency loans is essential.

In addition, recommendations include considering the possibility of introducing legal regulations to confiscate all the currency assets that were obtained in transactions bypassing the existing currency legislation. Also, the Fund says the government needs to ban the practice by which prices are indicated in foreign currency.

Fourthly, the Fund suggests introducing a countervailing duty on currencies that depreciated during the year by more than 20 percent.

“The fact that the EEU is an integration project implies lack of mechanisms to protect the national economy, it is necessary to introduce protective instruments to be used in case of strong fluctuations of the national currency of any of the participating countries,” it notes. Depreciation of the national currency reduces the cost of goods produced by the country, pushing out the goods of the manufacturers from the neighboring countries out of their markets.

Therefore, the Fund advises making changes to the EEU Treaty and to the regulation on the commitment of each country to pursue sound monetary policies, in the absence of which the rest of the participating countries must have the right to apply countervailing duties.

According to the fifth step, the share of non-cash payments should be significantly increased in Kazakhstan. About half of retail trade is currently in the “shadows." Repeated attempts to mandatory introduce POS-terminals were followed by refusals on the part of the business community. Eventually the shadow economy has grown to the size threatening the economic security of the country.

Hence, the Fund recommends using stimulating measures (not punitive) to develop non-cash payments. For example, introducing a provision on return of 2 percent of the value of the goods into the tax legislation, provided that payment has been made non-cash, should do the trick. The government will win since benefits from reducing the huge shadow economy will completely override the expenditures on the tax refunds.

The sixth step involves cleaning the banks of bad loans. On July 1, 2015, the National Bank announced the reduction of the share of non performing loans from 33 percent to 9.9 percent.

“But in fact it was a fiction, since 15 percent of the 25 percent reduction is due to the merger of BTA bank with Kazkommertsbank, and the remaining 10 percent decrease are due to the banks writing the loans off the balance, as well as the practice of formal revival of loans when banks exchange the loans, as a result of which these loans cease being called bad, the Fund points out.

One can conclude then that the situation has not changed and might grow worse in the future. Investors might face problems, social tensions might escalate as insolvency grows and banking products become more expensive.

The only solution the Fund sees is changing the tax laws (for Personal Income Tax and Corporate Income Tax) to allow the banks to write off all the problematic loans in one step thereby clearing their portfolios, and get them to start real action lending to both individuals and businesses on favorable and comfortable terms.

The final recommendation on the Fund’s list is for the government to compensate for part of the funds actually lost by investors during the devaluation, provided the return of money on deposits. Compensation in cases of foreign currency fluctuations should be a law, the Fund says. Return of money as a result of such measures will close the "hole" in tenge liquidity in the future, will return confidence in the banking system and will be a major step in de-dollarizin of the Kazakh economy.

By Dinara Urazova, editing by Tatyana Kuzmina