2025: Decision time for the Kazakh economy

In 2025, the Kazakh economy will grow relatively well, about 4.6 percent, according to the IMF. This should allow the government to put the recent economic challenges behind it, such as the pandemic and the economic disruption caused by the war in Ukraine, and focus on the next phase of the country’s development. And it has a good plan for that.

Last year, Kazakh President Kassym-Jomart Tokayev adopted a target of doubling GDP to $450 billion by 2029, when his presidency is expected to end. Although extremely ambitious, the accompanying strategy sets out a credible plan to develop the economy and improve living standards.

At the heart of the strategy is the recognition that Kazakhstan must encourage greater domestic and foreign investment by reducing the role of the state, both as an actor and as a regulator of markets. This approach has long been advocated by leading local policymakers and international financial institutions.

However, last week Tokayev made comments that raised questions about his commitment to the plan and Kazakhstan’s long-standing ambitions to develop a market economy. During an interview with a local media outlethe described the work of his economic team as “mediocre,” adding that “there is too much rhetoric from international financial institutions and not enough concrete action.”

The statements reveal an underlying contradiction in the Tokayev government’s approach to the economy. On the one hand, it has developed an economic strategy aimed at liberalization. On the other hand, the country has called for a greater role for the state in the economy and has sometimes embraced economic populism.

The ‘social state’ has its limitations

During the interview, Tokayev described Kazakhstan as a “social state.” He’s right. State-owned enterprises generate about 35 to 40 percent of GDP, and state lenders provide subsidized credit across the economy, supporting everything from household mortgages to industrial projects. The government also uses price controls to limit the cost of key household commodities such as gas and electricity, as well as gasoline and other fuel products.

The Tokayev government has also introduced populist economic measures, such as offering car loans and paying off the personal debts of a significant part of the population. In his interview, Tokayev cited as a major policy win for 2024 a new plan that transfers 50 percent of National Oil Fund profits to savings accounts for every child born after 2006.

Given the recent economic shocks that Kazakhstan has faced, it is imperative to support its people. The Kazakh economy is particularly vulnerable to external shocks given its dependence on revenues from oil and other globally traded commodities.

However, the limitations of state intervention are becoming increasingly apparent. In 2022 and 2023, Kazakhstan experienced severe power outages across the country due to the severely dilapidated state of electricity generation facilities. The poor condition of these facilities can be attributed to government price caps on electricity, which have led to continued underinvestment in the energy sector. Shortages of electricity and gas will also make Kazakhstan more dependent on supplies from Russia this year.

Removing commodity price ceilings is essential to boost investment in the energy sector. Yet this means that the cost of utilities for businesses and – crucially – households will rise, a measure that the government has been reluctant to implement.

Although less immediately visible, government policies have other, more pernicious consequences for the economy and the living standards of the population.

A key issue is the role of government spending in driving inflation. Kazakhstan has a respected and relatively independent central bank, the National Bank of Kazakhstan (NBK). The economy performed well during the recent global inflation crisis, pushing headline inflation down from a peak of 21.3 percent in 2022 to 8.6 percent last year.

However, the country has failed to bring inflation below 8.3 percent, towards the 5 percent target. While global inflation dynamics play a role, NBK and independent analysts consistently point out that ever-increasing government spending remains a key driver of inflation.

Excessive government spending also has serious budgetary consequences. Given recent economic problems – as well as crises such as last year’s devastating floods – the government continues to spend beyond its means.

To plug budget deficits, the government has increasingly relied on the National Oil Fund, which provides between a third and a half of all budget revenues. Borrowing is also increasing, making debt an increasing concern. This year, the Kazakh government reports that it plans to spend 24 percent of its budget debts. It has also tried to close the deficit with tax reforms, but has consistently delayed the passage of a new tax law.

Privatization remains an ambition, but not yet a reality

The government has tried to promote greater competition and dynamism by reducing the role of the state in the economy. Yet the reality of the policy suggests that significant privatization is unlikely.

The government is likely to postpone the IPOs of QazaqGaz and Kazakhstan Railways – scheduled for 2025 – after disappointing IPOs of national oil company KazMunaiGaz and national airline Air Astana in the past two years. While market conditions may not be suitable for listings this year, there is also little evidence of the urgency within government to prepare these companies for listings.

The government has also passed legislation that allows it to increase the state’s presence in the economy. In late 2023, it approved amendments that would give national oil company KazMunaiGas a 50 percent stake in any new oil venture. According to media reports, similar measures for national uranium company KazAtomProm are also being considered and could be adopted in 2025.

Kazakhstan must show determination in the field of the economy

Despite the turbulence of recent years, the Tokayev government has made good progress on the economy. Much of this work has gone unnoticed, but measures to reduce the role of monopolies and develop internal (both regional) transport and infrastructure have stimulated economic activity. Digitalization is another area that has made good progress under Tokayev.

Tokayev has also signed strategic agreements with the United States and the European Union on new industries such as hydrogen and critical minerals. This year, it is possible that the government will improve the tax environment for such companies by introducing a royalty system in the mining sector.

Beyond the economic benefits, deregulation is also critical to achieving Kazakhstan’s goal of reaching net zero by 2060. Market prices in the electricity sector will drive the transition away from coal, on which the electricity grid currently depends. Currently, direct and indirect government subsidies have reduced the consumer price of coal by as much as 35 percent. Without such subsidies, it is possible that renewables and gas could become much more competitive.

This year, Tokayev will celebrate his sixth year in office. The constitution states that he only has four years to make his mark. By implementing these reforms, Kazakhstan could be transformed by 2029, even if its government falls short of its goal of doubling GDP.