Kazakhstan

major macro economic indicators

(e): Estimate (f): Forecast *Including transfers from the NFRK sovereign fund

Risk assessment

Risk of economic recession

In 2022, the fallout from the war in Ukraine, including international sanctions against Russia, will affect Kazakh growth. Indeed, due to Kazakhstan's close integration with the Russian economy and its expected recession, GDP growth will slow significantly, with a risk of recession as well. Russia accounts for 10% of Kazakhstan's exports and more than one-third of its imports (3% and 7.5 % of GDP). The severe recession in Russia will hurt demand for Kazakh goods and services, while the shortage of Western inputs will hurt Russian supply. The country is trying to redirect some of its trade by boosting exports and imports to/from China (18% and 25% of the total, respectively, in 2020) and by substituting the Transcaspian International Transport Route (TITR), which links Kazakhstan to the Mediterranean via Azerbaijan, Georgia, and Turkey, to the traditional route via Russia. However, using this trade route to its full potential will be more expensive and cannot be accelerated. In addition, slower growth in the Eurozone and China will reduce demand from its other major trading partners. Nevertheless, the compression of imports, as well as the high prices of exported commodities, should prevent the trade balance from turning into a deficit, and provide some support to the economy. The COVID-19 pandemic and the worsening of social tensions at the beginning of the year have created significant uncertainty about the country's economic outlook. Growth is being negatively impacted by the decline in domestic demand. Indeed, the high level of inflation caused by the rise in international commodity prices has led to a decline in private consumption (62% of GDP). Moreover, the current uncertain climate is causing a decline in foreign investment (3.3% of GDP). Since the Russian invasion, which led to a depreciation of the tenge, as well as the ruble, the policy rate has been raised several times, reaching 14% in June 2022. This tightening of monetary policy will have an impact on domestic credit (-6.6% in 2022) and consequently on consumption and investment. The National Bank of Kazakhstan (NBK) has an inflation target range of 4-6%, but it is projected at 8.5%. The ongoing consolidation of the banking sector may be slowed by sanctions on local subsidiaries of Russian banks.

Major social reforms underway

Social unrest in January 2022, following an increase in the price of liquefied petroleum gas, has given new impetus to structural reforms. Emergency measures and reforms addressing income inequality, corruption, and public sector governance have been announced. Key measures include the cancellation and postponement of LPG price liberalization for one year, price controls on LPG, gasoline, diesel and basic foodstuffs for 180 days, and increases in excise duties on wholesale fuel sales (except for aviation) and the mining tax. Other measures include reducing tax evasion, privatizing state-owned enterprises and creating a new fund to support social programmes financed by private contributions. Despite these additional social expenditures, better management of public spending will stabilize the budget compared to 2021. High energy prices will allow the government to increase its revenues. As a result, the budget deficit is expected to narrow. However, a resurgence of social tensions, particularly due to high inflation, could lead to fiscal slippage and a slowdown in reforms. Public debt is expected to increase by about two percentage points, but the debt burden will remain low. The current account is expected to return into positive territory thanks to the trade balance surplus, and external debt will remain stable (89% of GDP, 80% of which is private). The country benefits from large sovereign wealth funds: the combined external assets of the National Oil Fund (NFRK) and the NBK amounted to 46% of GDP at the end of 2021 and net foreign sovereign assets (NFS) to 36.6%.

New strategic partnerships in the region 

In response to social protests in January, the president dismissed the government and reinstated the price ceiling. As the violence continued, President Tokayev invited peacekeeping troops from the Russian-led Collective Security Treaty Organization (CSTO). Once order was restored, he replaced former president Nazarbayev, who had been in power for 29 years, and head of the country's Security Council, and replaced the Council's executives with his own members. He announced a series of political reforms aimed at limiting presidential powers in favour of parliament in an effort to improve pluralism. Given the government's limited tools to respond to rising prices and declining economic activity, these reforms are a way to contain discontent. They may meet some resistance from the elites, further jeopardizing Tokayev's status. Internationally, after Russia's invasion of Ukraine, it will be difficult for the country to remain neutral. At the beginning of June 2022, it ratified the protocol on the termination of the agreement between the governments of the Commonwealth of Independent States (CIS) on the agreed principles of fiscal policy of 1992, marking a clear move away from Moscow. China and Turkey are trying to get closer; they have signed military cooperation agreements with Kazakhstan (including the relocation of ANKA attack drones production to Kazakhstan). Finally, Kazakhstan probably fears a military intervention by Russia, given the presence of a large Russian-speaking minority living in the country.

Last updated: July 2022