The capital amnesty that ended in Kazakhstan in mid July resulted in legalization of about $480 million, according to officials. National Bank Chairman Grigoriy Marchenko reported that 88 percent of all deposits were made in cash and that about 3,000 Kazakhstani citizens participated in the month-long program. Government leaders say the capital amnesty will promote more transparency in economic affairs. But some observers suggest it is too early to tell whether the measures will help reduce the size of the shadow economy.
Activity in the capital legalization campaign peaked in the last few days leading up to the July 13 deadline, when roughly $250 million was deposited in banks. In addition to the capital amnesty, the government has erased all income tax records for the past five years. Minister of State Revenues Zeinulla Khakimjanov hailed the measures, saying they would "enable all citizens of the republic from 1 January 2002 to start over with a clean slate."
Like many other transitional states, Kazakhstan experienced substantial capital flight during the past decade, primarily due to the turbulent regulatory and tax regime. The Kazakh government came up with the capital amnesty plan to encourage the reintroduction of assets held abroad back into circulation in the domestic economy. Original proposals to charge a flat 12 percent tax on legalized funds gave way to a tax-free solution, and opposition from senior government representatives, including Marchenko, ended.
Marchenko developed into an enthusiastic supporter of capital amnesty, asserting the move would increase the trustworthiness and effectiveness of Kazakhstan's banking sector. Other ministers also actively backed the measure, with Khakimjanov even announcing that he too was going to legalize the shadow capital he himself had accumulated during his "entrepreneurial" past. Clearly, officials like Marchenko and Khakimjanov gain legitimacy from the successful program. They may also gain personally, which is a cause for concern among some observers.
The government has taken other steps to legitimize shadow capital most notably, the new Tax Code, adopted on June 22, does not oblige citizens to declare large purchases. Citizens with personal incomes need only declare them as of January 1, 2001. Speaking last week, President Nursultan Nazarbayev suggested that the state was drawing a line, beyond which businesses would have to function "honestly" and "transparently." In particular, Nazarbayev urged businessmen to move wage payments out of the shadow economy. But he is forgiving a lot of past mischief to achieve this goal.
In the aggregate, the economic effects of the amnesty will not be enormous. Half a billion dollars will not carry dramatic implications for a country the size of Kazakhstan, although the infusion of additional liquidity into the banking system will be beneficial. Since much of the legalized funds were cash dollars, it is reasonable to expect a measure of tenge appreciation in the short term. However, Kazakhstani officials, perhaps responding to relatively weak volumes of legalized funds in the first weeks of the amnesty, have stressed its less tangible effects, such as improvements in the country's business climate, increased trust in the banking sector, and perception of the new rules of the game introduced across the economy.
One clear, though indirect, consequence of the amnesty is the increased institutional role of the National Bank. There are signs that in return for Marchenko's support for the capital amnesty plan, the government granted the National Bank enhanced powers. Officials recently announced plans to abolish the National Securities Commission, scrap a pension fund oversight committee and transfer the functions of both agencies to the National Bank. If these plans are implemented, Marchenko will emerge as the dominant force in Kazakhstan's financial sector.
But to benefit the country at large, the amnesty program must come across as a unique measure accompanied by government policies focused on strict law enforcement. It will not succeed if people see it as an escape hatch for corrupt officials. The tax amnesty, after all, penalizes law-abiding citizens and institutions and favors tax dodgers. Furthermore, in the eyes of many ordinary citizens, the capital amnesty might have benefited the bureaucratic class that accumulated substantial funds abroad as a result of dealings with foreign energy companies.
Kazakhstan has carried out such amnesty once before, in 1995, when the government wiped out tax records. Turning this sort of measure into a regular policy could end up having serious negative consequences.
Alexander Zaslavsky is the Director for Research and Consulting for the Eurasia Group. Founded in 1998, Eurasia Group promotes understanding, development, and investment in the states of Eurasia.