Kazakhstan macro: government considering reform agenda amid overspending and fiscal difficulties
The Kazakh Ministry of Finance recently released the budgetary statistics for full-year 2024. The figures didn’t look impressive, either for the republican budget or the National Fund, because their revenues strongly depend on the exchange rate. Local budgets, however, performed very well because their revenues do not directly depend on oil prices or the exchange rate. Rising inflation helped to inflate their revenues, while economic activity looked good. Despite massively amended local budgetary expenditures, the deficit of the combined local budgets was close to zero. It looks as though the role of budgetary spending has grown significantly in recent years as it has become much more generous than previously. Instead of being countercyclical and accumulating reserves in “fat years,” it turned much more procyclical as spending grew significantly amid rising oil prices. On the one hand, this supported economic growth. On the other hand, it fueled inflation, resulting in interest rates hikes. It eventually appeared that the National Fund stopped growing, and last year, it even decreased in dollar terms. Even though the tenge weakened in recent months and will help with revenue collection, it appears interesting that the authorities seemingly dislike this natural trend, i.e., the weakening of the tenge. The National Bank of Kazakhstan repeatedly mentions that it would be ready to “support” the currency and intervene in the FX market, and it does. Hence a kind of vicious circle.
At the end of January, the Kazakh president met the government, and they discussed the need to break the vicious circle of rising expenditures and insufficient tax revenues. It will take time to come up with certain proposals, but the message from this meeting was clear—the government should be thriftier. Hence, one can expect no massive expenditure amendments this year. The authorities also discussed various measures aimed at reshaping taxation. A broader range of economic policies was also considered, including encouraging more foreign investment, etc. However, at this stage, it is too early to envisage how the taxation of individuals and corporations may evolve. In any case, these hypothetical changes could come into effect in 2026 at the earliest. This year, we may expect some more interventions from the NBK and the government to boost revenues unless they refrain from “supporting” the tenge, letting it settle in an equilibrium zone on its own.
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