Experts are concerned about transfers from the National Fund of Kazakhstan

The National Fund of Kazakhstan, which has long been seen as a financial salvation for the country's future, is now under increasing scrutiny from experts due to the significant dependence of the country's budget on remittances.

President Kasym-Jomart Tokayev repeatedly emphasized the need to introduce stricter rules governing transfers, in particular in his September address to the people.

What is the National Fund?

The National Fund was created in 2000 to stabilize the economy and preserve significant hydrocarbon revenues. The fund is managed by the National Bank of Kazakhstan (NBK).

The fund performs two main functions: saving and stabilizing.

The savings function ensures the accumulation of financial assets with long-term profitability at moderate risk. The stabilizing function mitigates economic overheating and inflation during periods of high commodity prices by channeling excess revenues from oil and gas taxes into foreign assets. When commodity prices fall, these assets are converted back into transfers to the budget to support spending and economic growth.

The National Fund pays out funds through guaranteed transfers to the state budget and targeted transfers for socially significant projects.

Assets are kept in a state account at the NBK. The fund's assets peaked at $77.2 billion in 2014, according to NBK data, but have been slowly declining since then. By December 2022, this figure will drop to $55.7 billion. As of September, the fund's assets reached $62.7 billion.

Transfers from the National Fund

The National Fund pays out funds through guaranteed transfers to the state budget and targeted transfers for socially significant projects. According to NBK data, between 2020 and 2022, transfers from the National Fund ranged from 575 billion tenge (1.2 billion US dollars) in January 2020 to 455 billion tenge (937.5 million US dollars) in December 2022.

According to the Ministry of Finance, in 2023, 4.1 trillion tenge ($8.4 billion) were transferred from the National Fund to the state budget in the form of transfers.

According to Kazakhstan's draft budget for 2025-2027, withdrawals from the National Fund will amount to 5.4 trillion tenge (US$11.1 billion) in 2025.

Timur Suleymenov, head of the National Bank of Kazakhstan, which manages the fund, assured that the volume of transfers in the following years will be much smaller. In 2026-2027, transfers are expected to amount to 2 trillion tenge ($4.1 billion), targeted transfers are not planned, Suleimenov said at a government meeting on August 27.

Suleymenov noted that if significant tax reforms do not lead to significant and systematic measures to increase state budget revenues, additional withdrawal of funds from the National Fund may be necessary in 2026-2027.

If there were no withdrawals or bond investments, the fund's assets could have grown to $262.4 billion, or 100.4% of GDP, according to analysts' forecasts.

Data from analytical materials prepared by the School of Analytics, an initiative of the Senate, the upper house of the Parliament of Kazakhstan, showed that the first large withdrawal of funds from the fund took place in 2009 to mitigate the impact of the global financial crisis of 2007-2008. crisis. A total of 1.2 trillion tenge (US$2.4 billion) was allocated to the Development Bank of Kazakhstan, Samruk Kazina Sovereign Welfare Fund and KazAgro holdings for bank recapitalization, real estate market stabilization and real sector project financing.

In 2014, one trillion tenge (US$2 billion) was distributed in two tranches to support small and medium-sized businesses (SMEs). Of this, 500 billion tenge (1 billion US dollars) was used to solve problem loans, finance industrialization projects and help the development of SMEs. The remaining 500 billion tenge (US$1 billion) recapitalized the Troubled Loans Fund to stabilize the banking sector, obtain toxic loans, provide soft loans to small and medium-sized businesses, and finance the construction of the EXPO 2017 complex.

From 2015 to 2017, $9 billion was withdrawn at a rate of $3 billion per year. In 2021, the fund allocated 1.8 trillion tenge (US$3.6 billion) in targeted transfers to support health care, the Nurly Zher public housing program, and the Employment Roadmap.

Between 2009 and 2023, the fund issued another 3.5 trillion tenge (US$7 billion) in bond loans. The largest withdrawal, 8.1 trillion tenge (US$16.3 billion), took place between 2020 and 2023 to fight the Covid-19 pandemic and meet other social obligations.

In 2024, the fund began to support the new program "National Fund for Children", which annually provides funds to citizens under 18 years of age. The program is financed at the expense of 50% of the average investment income of the fund for 18 years. In 2023 and 2024, targeted transfers accounted for 45% of the total volume of transfers, reflecting the growing role of oil revenues in fulfilling social obligations.

Three trillion tenge (US$6.2 billion) has already been spent in the first seven months of 2024 — 83% of the 3.6 trillion tenge (US$7.2 billion) budgeted for the year.

In 2023, the fund acquired shares in the national oil and gas company KazMunayGas for 1.3 trillion tenge (2.6 billion US dollars). In 2024, the government decided to purchase Kazatomprom shares for the state budget support fund.

The NBK also plans to sell between $1.3 billion and $1.4 billion in foreign currency from the National Fund this October, based on the government's previous requests for transfers from the national budget.

Government strategies to limit withdrawals

To reduce withdrawals, the government introduced spending consolidation measures in the mid-2010s. In September 2022, the Concept of Public Finance Management until 2030 was approved, which establishes countercyclical fiscal rules to limit transfers of funds.

The government is also working on new Budget Codes and Tax Codes aimed at simplifying the budget process, improving tax administration and implementing digital solutions.

Efforts to combat the shadow economy include updating legislation, further digitizing customs administration, creating a national tracking system for goods, promoting cashless payments and strengthening currency controls.

Factors of the fall of the fund

The director of the Institute of Economic Policy Kairbek Aristanbekov told about the factors that influenced the reduction of the fund in the profitable years of 2014-2016.

"In 2014, the assets of the National Fund exceeded $77 billion. Since then, they have decreased due to various internal and external factors," he told Kazinform IA. "One of the important external factors was Kazakhstan's accession to the Eurasian Economic Union in 2015. Before accession, prices in Kazakhstan were 30-50% lower than in Russia. After joining the union, Russian goods flooded the Kazakh market, raising the cost of living here, while prices in Russia remained stable. This has affected our social sector, ultimately leading to increased public spending.”

The expansion of the social sector coincided with a slowdown in economic growth. Economic performance worsened from 2015 to 2021, and increased social spending in response to the Covid-19 pandemic added additional pressure. As a result, the fund did not grow and government spending continued to rise, necessitating further withdrawals from the fund.

Currently, 40% of the state budget of Kazakhstan is allocated to social spheres, while the salaries of teachers, medical workers, military personnel and firefighters are significantly increased. This created an additional burden on the budget.

Oil prices also played an important role in the government's dependence on the National Fund. In 2014, oil prices were high, with Brent reaching $100 per barrel, but in 2016 they fell to $30 per barrel. Today, oil costs about $70 per barrel. If prices remained at $100 per barrel, withdrawals from the fund could stop altogether.

Reliance on the National Fund

Kazakh economic and financial expert Rasul Rismambetov assessed the current state of the fund, stressing that global turbulence creates risks.

"For the past ten years, the fund has been fluctuating and we have actually dipped into it with both hands," he told The Astana Times.

"There are guaranteed and targeted transfers, and now the funds of the National Fund are also used to buy national companies. This practice needs to be curtailed. But we found ourselves in a difficult situation, because a significant share of public expenditures, especially social expenditures, is growing, and development budgets are being reduced," he said.

In his opinion, serious and possibly unpopular measures will need to be taken quickly to prevent the fund from being depleted. He estimated that about 5.4 trillion tenge (US$11.1 billion) would be withdrawn from the fund, while transfers could amount to seven to eight trillion tenge (US$14-16 billion).

Rismambetov stressed that depending only on the National Fund for Long-Term Economic Development is unsustainable, as the country withdraws more than it invests, leading to eventual exhaustion.

He emphasized the need for a comprehensive audit of social expenditures to identify inefficiencies and misuse of funds.

"The government is working on digital tools, such as the electronic family card, business card and digital tenge , to better monitor who receives financial assistance and make sure they are eligible. By increasing the transparency and accountability of social spending, we can potentially reduce spending by 20-30%," he said.

To reduce dependence on the fund, Rismambetov called for long-overdue economic reforms. He warned that the political leadership often prioritizes social support at the expense of the fund, which is unsustainable.

"Courageous actions and unpopular reforms are needed. We should see significant progress by 2025, and these initiatives should be fully operational by the end of the year. The key steps forward will be the monitoring of public spending and increased budgetary discipline," he said.

According to him, another way to reduce dependence on the fund is diversification of the economy. While efforts to invest in infrastructure and build new factories continue, the country must also reduce its dependence on oil.

"Oil was our lifeline, and the National Fund is built on oil revenues. However, we should explore other sectors such as agriculture, engineering and IT. Diversification is crucial, and oil revenues should be no more than 20-25% of our budget," said Rismambetov.

President Kassym-Jomart Tokayev recently called for improvements to the Tax Code during his address to the nation, which Rismambetov believes is necessary. He noted that few people pay taxes in Kazakhstan and there are many special tax regimes. The new Tax Code is expected at the beginning of 2025.

"If we manage to collect more taxes, maybe we won't have to rely so much on the National Fund," Rismambetov said.