As a highly globally integrated, resource-rich, upper-middle income country, Kazakhstan has been facing significant challenges in the current global environment. Kazakhstan’s major challenges include managing its public finances to preserve fiscal stability and generating broad-based economic growth.
According to the World Trade Organization , Kazakhstan’s total trade to gross domestic product (GDP) ratio was 69% in 2014, with per capita trade of $8,720. It exhibited a relatively large surplus of $37 billion on merchandise trade, with nearly nine-tenths of the exports under the “fuels and mining” category, of which about three-fourths were destined for the European Union. In contrast, little over four-fifths of its imports were in the “manufacturers” category, with the Russian Federation accounting for one-third, and the European Union accounting for around one-fifth of the total imports. In 2014, Kazakhstan had a service trade deficit of $6.3 billion. This suggests that while Kazakhstan is highly integrated globally, its trade profile lacks diversification, and it is vulnerable to slowdowns in oil and metal cycles, as is currently being experienced globally.
The global economic growth remains subdued, with a further downside risk. Thus, in its April 2016 World Economic Outlook report, the International Monetary Fund projects baseline global real GDP growth of 3.2%, 0.2 percentage points below its January 2016 projections  (Table 1.1, page 2). The report has downgraded growth for the Central Asia and Caucasus region, which includes Kazakhstan, due in part to slower growth in the People’s Republic of China and negative growth of 1.8% in the Russian Federation, two of Kazakhstan’s important economic partners. The same report (Table 1.1, page 2) projects oil prices in US dollars to decline by 31.6% in 2016 (on top of a 47.2% decline in 2015), but projects an increase by 17% in 2017. For nonfuel commodities, the projection is for a decline of 9.4% in 2016 (on top of a 17.5% decline in 2015), and a further decline of 0.7% in 2017. Saudi Arabia’s ambitious $2 trillion program  to prepare for the post-oil economy is illustrative of the far-reaching changes being contemplated.
According to the World Trade Organization , world trade during the 2012–2016 period is set to grow roughly at the same rate as global GDP, rather than twice as was previously estimated. This trend, unfavorable for Kazakhstan, is also unlikely to be reversed in the near future.
The Asian Development Bank  has projected real GDP growth of 1.0% for 2015, as compared to 4.3% achieved in 2014 by Kazakhstan; and its projections for 2016 and 2017 are for a similar rate as 2015.
The Key Challenge
The key fiscal challenge arising from the current global environment is the sharp deterioration in Kazakhstan’s non-oil budgetary deficit. The World Bank  estimates this deficit for only the central government, thus understating it, to be 8.5% in 2011, 9.8% in 2012, 8.4% in 2013, and 10.8% for 2014 and for 2015. The estimates by the International Monetary Fund  are similar. The above deficit is projected at 11.4% of GDP for 2016, more than twice the sustainable rate of 5.5% (page 12 ).
Any significant help in addressing this deficit from global developments is unlikely. Therefore, the country cannot continue to sustain such a large non-oil budget deficit in the medium term. A fiscal adjustment of at least around 4% of GDP is the next 2–3 years is required.
To address the fiscal challenge, a combination of measures involving the following four areas will be essential.
(i) Enhancing the rate of growth and diversifying the economy. While immediate growth prospects will be subdued, efforts to diversify the economy have not been met with requisite success, as policy makers acknowledge.
Development of the Astana International Financial Centre (AIFC) represents a major initiative to diversify the economy. The aim appears to be to leverage accumulated financial assets of some of Kazakhstan’s institutions. As of March 2016, Kazakhstan’s official net international reserves  were $27.6 billion (a decline from $27.9 billion in March 2015), and assets of its National Oil Fund were $64.3 billion (a decline from $69.0 billion in March 2015).
The objective appears to be to undertake international financial services from the AIFC, and to obtain higher returns. The AIFC is in its early stages, so this diversification initiative is at best of medium-term benefit in addressing the current fiscal challenge. There is scope to pursue public enterprise reforms focusing on better value for money rather than merely a change in ownership. Encouraging a shift to higher value added activities in services, especially in education and healthcare, merits greater focus.
(ii) Reforming conventional taxes. Kazakhstan’s non-oil tax revenue, at 9.5% of GDP in 2015, is too low, and has been declining (Appendix Table 3 ). There are several opportunities. The individual income tax base is currently too narrow in terms of the type of income covered, the proportion of income reported, and the number of taxpayers. The value-added tax exemption limit, equivalent to around $180,000 at the current exchange rate, is too high, even compared to eurozone countries, and is thus limiting revenue generation. Property tax is underutilized. In addition, the potential for generating revenue from short-term professionals in entertainment, sports, consulting, and others could be explored. A shift toward a broader based income, consumption, and asset tax structure merits consideration.
(iii) Revenue generation from non-conventional sources. This includes using state assets more productively. Besides better value for money from state enterprises, there is revenue potential from auctioning of assets generated through regulations such as air-space rights.
(iv) Better expenditure management. This includes reforming current procurement practices—a selective shift to accrual accounting and toward budgeting for results.
The need is therefore to carefully choose packages with an appropriate combination of measures providing short-term and medium-term benefits from the wide range of the public financial management toolkit. Kazakhstan’s past record of overcoming economic challenges provides grounds for optimism that the country will manage the current fiscal challenge reasonably well.