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Country Context

Since the 2000s, Kazakhstan has experienced significant economic growth due to market-oriented reforms, mineral resource extraction, and strong foreign direct investment, transforming it into an upper middle-income economy with improved living standards and reduced poverty. 

However, growth has slowed from 10% (2000-2007) to below 4% in the last decade, revealing vulnerabilities in an economy reliant on hydrocarbons and experiencing stagnant productivity. 

To regain momentum and achieve 6% growth in the medium term, the government must implement key reforms to diversify growth and enhance inclusion. This includes enhancing competition by removing market distortions, improving state-owned enterprise efficiency, addressing infrastructure gaps, strengthening human capital, and supporting decarbonization. These measures will stimulate investment, facilitate technology transfer, and enhance firm competitiveness and service quality. 

Strategy

The Country Partnership Framework for 2020¨C25

The partnership between Kazakhstan and the World Bank Group is outlined in the?Country Partnership Framework?(CPF), developed in consultation with counterparts and civil society to guide a new investment program and quality technical assistance to the Government of Kazakhstan for 2020¨C25. The CPF is fully aligned with the government¡¯s reform program and??to accelerate the country¡¯s transformation into a modern society with a knowledge-based, diversified, and private sector¨Cdriven economy.

The CPF focuses on the following priority areas:

• Promoting inclusive growth by strengthening the environment for private sector development, promoting the market-led transformation of the agriculture sector, and bolstering the connectivity infrastructure
• Strengthening human capital by closing the gap along regional and rural-urban divides in the delivery of education, health, and social protection services
• Securing sustainable, resilient, and low carbon growth?by managing natural capital, including land and water resources, promoting less energy intensity, and strengthening institutions and service delivery

Underlying these focus areas is the cross-cutting theme of more effective governance and strengthened market and social institutions.

Key Engagement

Since 2003, the World Bank has significantly extended its Advisory Services and Analytics (ASA) provided under the Joint Economic Reform Program (JERP). Over the years, JERP has proven to be an innovative solution, with a client-driven knowledge agenda and World Bank-selected work, bringing in and building up international experience.

The JERP is structured around the government¡¯s strategic priorities and focuses on development gaps in growth, governance, and the public service delivery agenda. The program is designed to ensure strong government ownership while enhancing the World Bank¡¯s contribution to the country¡¯s development in a way that goes beyond funding.

Economy

Recent Economic Developments

Kazakhstan¡¯s economy slowed to 3.2% year-on-year (YoY) in the first half (H1) of 2024, down from 5.3% a year ago, with notable weaknesses in investment and government spending. Investment declined by 3.5% Yoy in real terms (compared to +13.3% in H1 2023), and government spending fell by 4.5% YoY (+17% previously). Consumer spending, proxied by total sales growth, slowed to 3.9% YoY (+10.4% in H1 2023), reflecting waning consumer demand.

On the supply side, industrial production grew tepidly at 2.7% YOY in H1 (+3.8% in H1 2023) due to lower oil production (-1.6%). Construction growth edged up to 8.6% (+7.7%), while services slowed to 3.3% YOY (+5.5%). The official unemployment rate remained constant at 4.7% in Q2. To bolster living standards, the government implemented a 21.4% nominal increase in the minimum wage, effectively doubling the amount since 2021 (+70% in real terms).

Consumer price inflation decreased from 9.7% in December 2023 to 8.5% YoY in August and September, still above the target rate of 5%. The central bank trimmed its policy rate by 25 basis points to 14.5% in June, maintaining a tight policy stance. A reduction in goods imports and an increase in service exports improved the trade balance, shifting the current account to a surplus of $0.8bn in H1 2024, compared to a deficit of $5.0 billion in H1 2023. FDI inflows declined by 56.3% YoY to $2.2bn. The fiscal deficit expanded to 1% of GDP from 0.4% in 2023 due to slower economic growth hitting revenues. The banking sector remains resilient, with real bank loans increasing by 13.8% YoY in June, driven primarily by consumer borrowing.

Economic Outlook

Economic growth in Kazakhstan is projected to temporarily rise to 4.7% in 2025, driven by increased oil production, before gradually slowing to a long-term potential rate of 3.0¨C3.5%. Private consumption and net exports, particularly higher oil exports, will be the primary growth drivers, while investment activity is expected to remain subdued, contributing modestly in 2025¨C2026.

Inflation is anticipated to decline gradually in 2025 as energy and food prices stabilize, but persistent service sector inflation will keep it above the 5% target until late 2026. Ongoing tariff adjustments and potential fiscal imbalances may hinder the disinflationary trend.

The current account deficit is projected to narrow in 2025 and beyond, supported by higher oil exports. The fiscal deficit is expected to decrease gradually from 2.1% of GDP in 2024 to 1% in 2026 through increased revenue mobilization, primarily via tax code reforms, and more targeted budget spending. The revised tax code is likely to include higher income taxes for businesses and households, along with increased levies on luxury items. However, uncertainty around revenue gains and growing pressures for social and infrastructure spending may pose risks to meeting these fiscal goals.

Poverty is expected to fall to 7.6% in 2024, 6.3% in 2025, and 5.7% in 2026 as growth continues and inflation subsides. 

Significant downside risks to economic growth include a decline in global oil demand and prices, increased budget spending, reversal of fiscal consolidation, and the growing frequency of extreme weather events, which threaten agricultural output, infrastructure, and economic stability.