Kazakhstan’s economy: moderate growth amid double deficit

main conclusions

• ACRA presents its macroeconomic forecast for 2025–2027. The Agency has considered the most likely scenario for the development of Kazakhstan’s economy in the medium term, taking into account the impact of external and internal factors, as well as in the context of the implementation of a number of economic and political decisions in the country.

• Real GDP growth in the specified period will be around 3.8–4.2%. This year, the growth trajectory of the Kazakh economy has stabilized at just below its potential (around 3.8%). In 2025–2027, the drivers of economic growth will be manufacturing, construction and services, while after 2026, in ACRA’s opinion, the extraction of raw materials may become more of a constraining factor than a stimulating one. The 6% annual real GDP growth target set by the country’s leadership demands larger investments and higher volumes of extraction of the key exported commodity. However, this could result in the economy overheating, which would threaten a new spike in consumer inflation.

• Monetary conditions remain rather tight, but are gradually being loosened; by 2026 they will probably be neutral. The influence of previously relevant proinflationary factors (including inflation expectations and global food price dynamics¹) continues to decline, but the impact of fiscal stimulus at the beginning of the forecast period will remain. Among the deflationary factors, we highlight the still tight monetary policy and gradual stabilization of transport and logistics schemes. In general, the slowdown in inflation dynamics is stretched out over time, since, unlike commodity inflation, which is largely imported, service inflation received an impetus later and is still quite high.

• The possibility of new risks and structural changes materializing remains, which concern Kazakhstan’s foreign trade geography and the state’s role in the economy.  Taken together, this could significantly affect the potential for economic growth, the foreign exchange market, as well as consumer and industrial inflation. In addition, the geography of foreign trade and international sources of investment continue to change, with the Chinese economy beginning to take a more important role. The external sector remains a long-term source for strengthening economic activity in the country, although the international situation concerning raw materials has weakened somewhat and, as ACRA believes, will remain at the current levels on the forecast horizon, while the relative stability of the tenge acts rather as an aggravating factor for external accounts. The economy of Kazakhstan will thus experience a double deficit — a budget deficit and a current account deficit.

¹ In 2024 (January to September), the FAO Food Price Index averaged 120 points, down from 145 points and 125 points in 2022 and 2023, respectively.

² Real growth rate according to the World Bank’s methodology
³ Economically active population

ECONOMIC ACTIVITY

Kazakhstan’s economy in 2023 and H1 2024. Last year, the country’s economy showed growth of 5.1% in real terms amid active dynamics in various industries, in construction and in services. In H1 2024, growth rates in the extractive sectors were not so high due to delays in expanding oil production at fields, which occurred against the backdrop of subdued growth in the economies of major trading partners and moderate external demand. Low investments in fixed assets also acted as a restraining factor. As a result, the country’s economy grew by 3.2% in real terms in H1 2024, and the main drivers of this growth were manufacturing and construction (growth of 5.1% and 8.6%, respectively).

Kazakhstan’s economy from 2024 to 2027. ACRA assumes that during the specified period, economic growth in real terms will range from 3.8% to 4.2% annually, which generally corresponds to the potential of the country’s economy (Fig. 1). The drivers of growth will most likely be agriculture, manufacturing, construction, and the extractive industries (from 2025).

This year, monetary policy will remain relatively tight, while consumer inflation will gradually slow down, which will also be observed next year, given the protracted phase of overcoming the consequences of the inflationary shocks of previous years. From 2026, ACRA assumes that monetary conditions will approach a neutral level in the absence of new shocks for the economy. This is one of the reasons why direct foreign investment and internal funds will remain the main investment sources for companies. The first option will be relevant for sectors associated with external sources of financing (primarily mining), and the second — for industries that mainly use internal financial sources. 

EXTERNAL ACCOUNTS AND EXCHANGE RATE

Foreign trade is under pressure due to difficulties in the extractive sectors. In 2024, the dynamics of the raw materials industries will have a restraining effect on the current account of the balance of payments. However, as production expands from 2025, commodity exports will partially recover (Fig. 5).

Commodity imports will also partially recover over the forecast horizon, but the trend will be restrained, given the moderate aggregate growth of consumer and investment demand, as well as the relatively strong tenge. Net exports will remain moderately positive, including against the backdrop of increased trade with China.

From the point of view of international services, Kazakhstan’s positions are becoming more balanced — from 2001 to 2010, the average negative balance in this segment was -6.7% of GDP, from 2011 to 2020 it was -2.8% of GDP, and in 2024, the Agency assumes that it will reach -1%. This trend is most likely to remain over the forecast horizon due to a higher volume of provided services (especially in the transport sector and tourism) and imported services (taking into account growth of the population’s welfare in dollar terms).

Payments on primary income of non-residents in net terms continues to be an important factor for the country’s external accounts — from 2022 to 2023 they totaled USD 51.5 bln, or 10–11% of annual GDP, almost completely offsetting the USD 55 bln total net trade balance for 2022–2023⁴. This suggests that Kazakhstan’s economy is not fully converting the financing previously attracted primarily through foreign direct investment into obtaining external assets. This trend explains the negative balance of the current account of the balance of payments in 2024, and will remain relevant in 2025–2027, according to ACRA. At the same time, by the end of the forecast period, the negative balance of the current account will decrease from -3.3% of GDP in 2023 to -1.5% in 2027.

Taking into account the described factors, the Agency does not see any preconditions for serious pressure on the national currency on the forecast horizon, although it allows for the possibility of a slight depreciation of the tenge due to correction of the exchange rate, which in turn is associated with a long period of increased inflation and a decrease in the interest premium in tenge.

⁴ The difference between merchandise exports and merchandise imports.

MONETARY POLICY AND INFLATION

Inflation is gradually stabilizing. Stabilizing inflation expectations, prolonged and quite tight monetary conditions, stabilized international food inflation, and the relatively stable exchange rate of the tenge (Fig. 6) contribute to a slowdown of inflation in Kazakhstan. However, price growth deceleration is quite slow, which is due to the prolonged effects of monetary policy, as well as an active fiscal policy aimed at increasing social expenditures and the government wage fund. In 2023, nominal cash incomes increased by 15.8% year-on-year, while the nominal average wage grew by 17.6%; these trends are continuing in 2024, although to a lesser extent⁵. Real cash incomes of the population increased by 1.1% last year, and the real growth of average wages amounted to 2.7%, which supports domestic demand. Additionally, factors restraining the inflation slowdown include the rise in various utility tariffs and excise duties on tobacco products, as well as short-term episodes of tenge depreciation during the summer.

According to the Agency’s estimates, the CPI will be 7.5% by the end of 2024, which brings average annual consumer inflation to 8.5%. Consequently, the regulator’s 5% inflation target for the end of this year will be exceeded by 2.5 pps. The economy will be able to approach this target by the end of 2025 in the absence of new significant shocks.

Currently, the most significant contribution to inflation dynamics comes from service prices, which is the only segment where double-digit inflation is still observed on a year-on-year basis. This has resulted from the process of adjusting internal costs in the economy to the outcomes of imported inflation from previous years (Figs. 2 and 4).

Next year may be the last year of elevated inflation in this cycle (since the beginning of 2022). ACRA believes that in 2026 and 2027, inflation will approach the regulator’s target, provided there are no new inflationary shocks, whether imported or related to another fiscal expansion.

Achieving the target inflation level implies both the maintenance of the current monetary conditions⁶ and the presence of positive interest rates in real terms.

ACRA does not expect substantial or frequent currency interventions from the regulator, as there are currently no reasons for deviating from the principles of the exchange rate regime. In the absence of external currency shocks, the regulator will adhere to this approach throughout the forecast horizon.

Monetary policy will remain tight until at least mid-2025. Against the backdrop of slowing inflation dynamics, the NBK has lowered the base rate four times this year, by a total of 1.5 pps. The regulator has the potential to make further minor adjustments to the rate (likely by 0.25–0.5 pps) by the end of the calendar year. Given the expected stabilization of inflation around the target level starting in 2026, monetary policy is likely to be neutral thereafter, provided there are no new significant shocks in the economy.

⁵ In January to July 2024, the nominal incomes of the population grew by 105% year-on-year, while real incomes grew by 1.7%.
⁶ Slow lowering of the base rate by the National Bank of Kazakhstan (NBK) with the invariable rate corridor. 

FISCAL POLICY AND PUBLIC DEBT

The state budget deficit is projected to stabilize in 2026–2027. At the beginning of September, the budget’s expenditures and revenues were fulfilled by 60% and 63%, respectively, relative to the annual plan. Taking into account the actual level of budget items fulfilled by revenues and expenditures, as well as the estimated balance of the transfer part of revenues, a deficit of about KZT 3.9–4 tln, or about 2.9–3% of the projected GDP, can be expected this year.

In the future, moderate economic activity and the government’s budget programs will cause a slight increase in the deficit in 2025 and its weakening in 2026–2027 (Fig. 3).

For eight months of 2024, the Kazakhstan’s budget received the largest portion of the transfer from the National Fund of the Republic of Kazakhstan (NFRK)⁷— KZT 3.45 tln out of KZT 3.6 tln allocated for the year. Consequently, this type of revenue has already been almost completely exhausted.

In 2025, the combination of guaranteed and targeted transfers to the budget is expected to total KZT 5.25 tln, and in 2026 and 2027, only KZT 2 tln of the guaranteed part of transfers will be used annually.

The Agency notes that since 2020, there has been more frequent use of the transfer part as state budget revenues, which contradicts previous statements about budget consolidation and a reduction in the volume of these transfers.

It should be separately noted that in 2023 and 2024, the NFRK’s funds were used to buy back shares of state-owned companies in the fund’s portfolio for budget purposes. At the end of 2023, 20% of the shares of KazMunayGas were purchased for KZT 1.3 tln, and 12% of the shares of Kazatomprom were purchased for KZT 467 bln in mid-2024. These tranches replenish the national budget, but are not reflected in statistics as the use of sovereign reserves.

The Agency does not expect a noticeable increase in Kazakhstan’s public debt, given the projected dynamic growth of nominal GDP in 2024–2027 and a more moderate projected budget deficit in 2026 and 2027. According to ACRA’s estimates, the public debt will range within 26.5–28.5% of the country’s GDP during the forecast period.

⁷ The National Fund of the Republic of Kazakhstan (NFRK) is a sovereign fund established to accumulate financial resources for future generations (savings function) and to reduce the dependence of the national economy and budgets at all levels from the impact of adverse external economic factors (stabilization function). The sources of the fund’s income include revenues from direct taxes paid by companies in the oil sector, income from the state’s share in production-sharing agreements with foreign companies, other revenues from privatization and the sale of land plots, as well as investment income of the fund itself.

The NFRK makes annual transfers to the state budget of Kazakhstan, which can take the form of an annual guaranteed transfer to the budget on a guaranteed basis, or a targeted transfer, which is made taking into account specific economic policy objectives.

FORECAST SCENARIO RISKS

In 2023 and H1 2024, structural risks, including stagnation in the extractive industries, fiscal expansion instead of the previously announced consolidation, the import of inflation and subsequent adjustment of service inflation, materialized in the economy of Kazakhstan.

ACRA identifies four main risks for the forecast scenario on the forecast horizon until 2027.

1. Possible complication of the situation in expanding mineral extraction and the complication of export and trade routes. The route through the Novorossiysk Commercial Sea Port remains Kazakhstan’s the main oil transportation corridor from the Caspian region. If logistics difficulties arise with this corridor in the short term, it would not be possible to substitute this channel of access to international markets with commensurate volumes. Such a situation would negatively affect the current account and increase pressure on the tenge, becoming a deterrent to the growth of the country’s economy. In addition, the price dynamics for the basic export commodities of Kazakhstan are relatively weak and tend to slightly decline further, although without increased volatility. Along with delays in the planned expansion of production at the Tengiz field, this weakens the dynamics in the extractive industry (growth in real terms amounted to 0.3% year-on-year in H1 2024,).

2. Weak budget discipline in terms of the focus on the consolidation of fiscal policy in the medium and long terms. The growth of the budget’s expenditure side in 2022 and 2023 by 20% and 24%, respectively, comparable to the crisis year of 2020, has already affected inflation expectations and increased the time lag in the manifestation of price behavior effects in the economy. This scenario may happen again in 2025, taking into account the planned growth of expenditures by 15%, which gives reason to expect further deviation from the principles of fiscal policy consolidation. A prolonged double-digit increase in the expenditure part of the budget may strengthen these trends and maintain them for a long period of time.

3. Probability of secondary economic sanctions at the sectoral level is the third risk factor in order of priority and probability of materialization, which may negatively affect the infrastructure of the financial sector, undermine the investment attractiveness of the country, and negatively affect the growing opportunities of the Kazakhstan’s manufacturing industry and the volume of foreign trade.

4. Potential weakening of the Russian currency, which carries the risk of increasing commodity imports amid reducing exports to Russia. This risk could create additional pressure on Kazakhstan’s trade balance and increase the negative current account balance. Such a situation is possible in the case of both a relatively more stable tenge exchange rate and a more pronounced depreciation of the ruble relative to the base currencies, which would lead to a certain currency pressure on the tenge cross-rate through a higher current account imbalance.

The individual probability of these risks is not high, but they will be relevant throughout the forecast period, and their combination, in case of concurrent materialization, may become a source of significant negative consequences for the economy of Kazakhstan on the forecast horizon.

Figure 1. 2024 GDP growth is supported by the construction industry and the agriculture sector

Note: F — forecast
Sources: Bureau of National Statistics of the Agency for Strategic Planning and Reforms of the Republic of Kazakhstan (BNS ASPR RK), ACRA

Figure 2. Inflation is being driven by service price dynamics in 2024

Note: SEI is a short-term economic indicator amounting to about 60% of GDP.
Sources: NBK, BNS ASPR RK, ACRA

Figure 3. The budget’s dependence on transfers from the NFRK

Sources: Ministry of Finance of the Republic of Kazakhstan, ACRA

Figure 4. Price indices (December 2021 = 100)

Sources: BNS ASPR RK, ACRA

Figure 5. Current account

Note: F — forecast
Sources: NBK, ACRA

Figure 6. KZT exchange rate volatility⁸

⁸ 30-day volatility is calculated on the basis of the standard monthly deviation, while the percentage of exchange rate variation is calculated on the basis of the first difference of logarithms.