FROM THE EDITORIAL STAFF: the following economic analysis was conducted by an institute that is tightly connected with the ex-Prime Minister Akezhan Kazhegelin. It is striking that this material was prepared before the introduction of the free-floating rate. It is obviously a very negative estimation of the economic situation in the country. However, the analysis is interesting enough and describes �more or less � the reasons for the float of the tenge.
March 1999
International Institute of the Central-Asian researches
In March 1999 the situation of the Kazakhstan financial system could be characterized as a shaky balance on the verge of collapse. Let�s compare some indices.
According to the optimistic prognosis, the revenues of the Kazakhstan�s budget in 1999 are supposed to be approximately US$ 3 billion. The gold and hard currency reserves of the republic will be US$ 1.6 billion. The total amount is US$ 4.6 billion.
At the same time, according to the official information of the National Bank Kazakhstan, the gross value of the Kazakhstan external debt exceeds US$ 6 billion. This figure includes the state�s direct debt and those debts guaranteed by the state, external debt in amount of US$ 3.5 billion. The state internal debt is about US$ 1 billion.
Thus, the total volume of the debt exceeds the annual revenues of the state budget and the GNP volume. A danger of default arises. In fact, the default has already happened, however, for the time being it only concerns external credits of some separate enterprises. Meanwhile, the volume of payments on the external and internal debts is increasing.
To avoid bankruptcy, the government hastens the emission of the state securities with annual returns of 25%. In the last year this allowed an imaginable stability to be achieved in the financial market, however it depressed the real economy. It is known that 82% of the all assets of the pension funds in the republic were invested in the state treasury bonds. Thus, all the free money resources in the domestic market were used to support �the financial pyramid� built by the government and the National Bank of Kazakhstan, and not to develop production capacities.
As a result, it is getting more and more difficult for the government to support the erected �financial pyramid�. According to the information of IRBIS agency, in the first quarter 1999 the Kazakhstan Finance Ministry received 13.4 billion tenge. The volume of reimbursement and debt servicing charges was .22.9 billion tenge, i.e. the negative financial balance was 9.5 billion tenge. The state of the National Bank is hardly better. In the first quarter, the NB managed to gain 17.1 billion tenge, while the reimbursement volume was 25.8 billion. The result is a negative balance in the amount of 8.7 billion tenge.
Thus, in the near future the volume of the state debts owed to internal creditors may exceed the ability to pay them off. In its own turn, the delay in repayment of the loans may provoke panic in the SS market as it occurred in Russia in August 1998.
The crisis of the financial system is happening against a background of the worsening balance of payments and trade balance of the country. In January 1999 the republic�s deficit was US$ 88.3 million. If this imbalance is the same by the end of the year, the index will be approximately US$ 1 billion. Today Kazakhstan does not have the financial resources to cover such an excess of import over export.
The banking system of the republic cannot be considered a potential source, as its monetary base is not significant. A total of 76 banks are working in Kazakhstan. The capitalization rate in the majority of banks is extremely low. The ten leading banks of Kazakhstan account for 66.6% of the gross capital, in the amount of US$ 389 million. The total deposit base of all Kazakhstan banks is a little more than US$ 1 billion.
Assets and capitals of the Kazakhstan banks.
Dynamics of the deposits and loans of the banks in Kazakhstan
The international credit and capital markets are becoming practically unavailable, not only for the banks but for the government as well. The international economic institutions and banks do not hide their irritation and anxiousness regarding default caused by inability of the big companies to pay off their debts. The �Kazakhstan temir zholy� company could not repay an extremely small amount owed to the German bank KFW. The �Katelko� company was unable to fulfil its credit responsibilities to the US Eximbank.
These defaults seriously damaged Kazakhstan�s image in the West. At the end of March 1999 in Cologne, an investment conference organized at Kazakhstan initiative for the German business circles actually failed. Potential investors were not interested in it and ignored the meeting. It is known that KFW bank, having incurred losses due to irresponsibility of the Kazakhstan state company, sent a letter to the representatives of German business elite notifying them about the risks in Kazakhstan.
Normal financial calculations are replaced with intricate financial schemes using the accounts of �own� commercial structures and barter operations. For example, the KEGGOK company pretends to have switched some of its clients to cheap electricity from Turkmenistan. However, payments for the electricity are being accumulated in the JV�s accounts, while Shymkent matches and Aralsk salt cover the debt to Turkmenistan.*
Practically, on the eve of the sowing campaign all three Kazakhstan oil-processing plants were stopped. Theoretically their products should have a stable demand in the domestic market, as favourable conditions were created (the reduced excise tax) for them to compete with the foreign producers. However, at present oil products are imported from Russia as contraband, without any excise at all. As a result, the prices of the Russian products are significantly lower than for the fuel produced in Kazakhstan.
Conclusion
The financial resources of Kazakhstan needed for normal functioning of the economy and minimum security of the state requirements and social sphere, are extremely limited.
The volume of the direct investments to the economy is being reduced.
Industrial volume declines by 5 to 6 %/month.
The illegal outflow of the hard currency resources from the republic is abut US$ 1.5 billion per year. The dollarization rate of money circulation is more than 60%.
The economic crisis in Kazakhstan is closely connected with the crisis of powerful structures and the entire political system. The state has lost hold of the control levers necessary to govern the most important economic processes.
* We would like to attract your attention to the negative attitude of the ex-Prime-minister towards the settlement for the Turkmenistan electricity with Kazakhstan goods. Besides the fact that this practice is used all over the world, it should be emphasized that no contract was signed. And it is obvious for everyone who knows the Kazakhstan reality that it is, roughly speaking, an attack on the Minister Muhtar Ablyazov. The relations of Akezhan Kazhegeldin and �Kazcommertsbank� during the privatization period are well known, and his accusations should be considered in this light, as a definite support of this banking structure. It does not matter much whether Mr. Kazhegeldin is busy or not, the main point is that we may watch a normal system taking shape in Kazakhstan, when the political issues are primarily influenced by economic interests.
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