KAZAKHSTAN: AMBASSADOR'S MEETING WITH MINISTER OF

UNCLAS ALMATY 001404 SIPDIS SENSITIVE SIPDIS DEPARTMENT FOR SCA/CEN (J. MUDGE) E.O. 12958: N/A TAGS: ECON ETRD EFIN PREL KZ SUBJECT: KAZAKHSTAN: AMBASSADOR'S MEETING WITH MINISTER OF ECONOMY AND BUDGET PLANNING ¶1. (SBU) Summary: Minister of Economy and Budget Planning Kelimbetov reports that the GOK has almost finished its review of the draft MOU on the Program for Economic Development; he will push for completion before the upcoming VIP visit to Astana. Kelimbetov said that the Kazakhstani government was concerned that rising oil revenues, the credit boom, and increased state spending could overheat the economy. They were taking a series of fiscal and monetary measures to address the threat, as well as to promote economic diversification. Kelimbetov confirmed that the GOK is also considering increasing the reserve requirement for loans obtained by Kazakhstani banks abroad. End summary. ¶2. (SBU) In an April 17 meeting with the Ambassador, Minister of Economy and Budget Planning Kairat Kelimbetov said that the draft MOU on the Program for Economic Development (PED) was undergoing interagency review. He expected that process to be completed in approximately a week. Kelimbetov noted that the Kazakhstani government had already allocated the money to fulfill its obligations under the agreement. After approval by the government, the document would have to be ratified by the parliament; this normally took two months. In response to the Ambassador's observation that completion of the agreement would help create a positive atmosphere for the upcoming VIP visit to Astana, Kelimbetov said he would push for completion before the visit. ¶3. (SBU) The Ambassador asked about recent reports that the Kazakhstani economy is overheating. Kelimbetov indicated that inflation, although rising, was still under control. Three factors could combine to create serious problems in the future, however: an increase in the money supply due to rising income from oil exports (expected to triple in the near future from the current one million bpd); a credit boom; and rising state budget expenditures. There are definitely signs of some overheating, including rising inflation, lower unemployment rates, and increased illegal immigration. ¶4. (SBU) Kelimbetov commented that he is the "least favorite" minister at the moment due to his efforts to stop the rate of growth of state spending. He explained that rising oil revenues had created a sense of "budget euphoria" among ministries and the public. His task was to explain the risk of uncontrolled inflation from increased spending. President Nazarbayev's March 1 address to the nation had set out an agenda of budget increases in certain areas. After consultations with the Central Bank and the supervisory agency, Kelimbetov had decided to focus on restricting monetary policy this year and fiscal policy in the coming years. As of July 1, all oil revenue will go directly into the National Fund. The Budget Ministry will impose budgetary discipline on other ministries by examining the results of previous funding in key areas such as diversification and infrastructure development. The goal is to hold budgetary growth to no more than GDP growth. The creation of national holding firms Samruk and Kazina would serve to increase the budget transparency of firms such as KMG and Kazakhstan Temir Zholiy. ¶5. (SBU) Kelimbetov also noted the importance of economic diversification. This priority must be balanced with the need to control inflation, since anti-inflationary measures could affect the real exchange rate and harm non-oil sectors. He emphasized the need to address the non-oil budget deficit, which was 5-7% of GDP last year; the GOK was shooting for 1.6% next year. Kelimbetov said that the GOK had an ambitious fiscal reform agenda, which included plans to reduce VAT from the current rate of 15% to 10% by 2010, thereby leaving firms with more money for modernization. Reductions in the social tax rate would permit salary increases and decrease the incentive for off-the-books pay. Tax rates for SMEs are also being reduced drastically, said Kelimbetov. ¶6. (SBU) The Ambassador asked Kelimbetov about recent reports that Kazakhstan would increase the reserve requirement for loans obtained by Kazakhstani banks abroad. Kelimbetov confirmed that the proposal was under consideration. ORDWAY