Macroeconomics, Trade & Investment Funding the Future: Boosting Revenues for Lasting Investments Kazakhstan Economic Update – Winter 2024-2025 Macroeconomics, Trade & Investment FUNDING THE FUTURE: BOOSTING REVENUES FOR LASTING INVESTMENTS Kazakhstan Economic Update – Winter 2024-2025 TABLE OF CONTENTS Foreword and Acknowledgements 5 Overview 6 Economic outlook 8 The External Environment 8 Economic growth 11 Inflation 12 Monetary policy and lending activity 13 External sector and exchange rate 15 Fiscal policy 16 Risks to the outlook 18 Special topic section: Boosting Revenues for Lasting Investments 20 Tax revenues and income level 20 Maximizing the potential of CIT, PIT, and VAT 30 Corporate income tax 31 Personal income tax 34 Rationalizing tax incentives 36 Value-Added Tax 38 Excise Tax 40 References 41 4 Funding the Future: Boosting Revenues for Lasting Investments FOREWORD AND ACKNOWLEDGEMENTS The Kazakhstan Economic Update (KEU) is a report analyzing recent economic developments, prospects, and policy issues in Kazakhstan. The report draws on data available through December 2024 as reported by the authorities, and additional information collected as part of the World Bank’s regular economic monitoring. This report was authored by Azamat Agaidarov (Economist) with contributions from Natasha Sharma (Senior Economist), incorporating findings from the Public Finance Review 2023: Strengthening Public Finance for Inclusive and Resilient Growth (led by Sjamsu Rahardja, Kathrin Plangemann) and elaborating on fiscal policy issues featured in the previous Kazakhstan Economic Update: Shaping Tomorrow: Reforms for Lasting Prosperity. The team would like to thank Ralph Van Doorn (Lead Economist, Program Leader), David Stephen Knight (Lead Economist, Program Leader), Cindy Audiguier (Senior Economist), Daniel James Besley (Senior Climate Change Specialist) and Arbind Modi (Tax Expert) for their valuable comments and suggestions. The team is grateful for guidance received from Tatiana Proskuryakova (Country Director for Central Asia), Andrei Mikhnev (Country Manager for Kazakhstan), and Antonio Nucifora (Practice Manager). Gulmira Akshatyrova (Program Assistant in Astana) and Mismake D. Galatis (Program Assistant in Washington, DC) provided excellent administrative support, and Shynar Jetpissova (External Affairs Officer) provided the team with guidance on publication and outreach. The views and opinions herein are expressed using the information obtained from official sources. Any errors and omissions are solely those of the author. Kazakhstan Economic Update – Winter 2024-2025 5 OVERVIEW The economy is estimated to have grown by 4.0 percent in 2024, primarily supported by fiscal expansion and increased household borrowing, despite weak real incomes and flat investment. In 2025, a temporary growth acceleration is projected, fueled by a one-off expansion in oil production and associated export growth and further fiscal stimulus. Growth may moderate to 3.0–3.5 percent post-2025, due to persistently low productivity and declining investment levels, underscoring the need for policies to diversify the economy and support new levers of economic growth. Inflation is gradually moderating but remains above the target of 5 percent. In 2024, price pressures eased as pandemic-era supply chain disruptions, post-reopening demand surges, and the inflationary spillovers from Russia’s invasion of Ukraine began to subside. Inflation is projected to decline further, reaching 7.5–8 percent in 2025 and 6 percent in 2026 but remain still above the 5 percent target. The inflation outlook remains highly uncertain as fiscal expansion and ongoing currency depreciation risk prolonging price pressures. Fiscal policy continues to be expansionary with the deficit expected to remain elevated. With expenditure growth outpacing revenue gains, the overall fiscal deficit is projected at 3.1 percent in 2025 before easing slightly to 2.7 percent in 2026. A new Tax Code underway now offers an opportunity to raise revenues through modernizing tax policy. While public and publicly guaranteed debt remains low and manageable at 24 percent of GDP, high domestic borrowing costs can reduce fiscal space. The current account deficit is projected to widen in 2025–2026 as exports moderate and the trade surplus is expected to shrink. The outlook faces several downside risks. First, a decline in global oil demand/prices would harm exports, fiscal revenues, and growth, and further increase exchange rate volatility. Second, prolonged fiscal expansion may further strain the fiscal balance, contribute to inflationary pressures, and necessitate a prolonged period of tight monetary policy, keeping borrowing costs high. Continued domestic borrowing risks crowding out the private sector and adding to debt servicing cost. Third, the growing frequency of extreme weather events threatens agricultural productivity, critical infrastructure, and economic stability, potentially stoking inflation and prompting further fiscal intervention. Kazakhstan’s tax revenues remain significantly below those of aspirational and structural peers, emphasizing an urgent need for revenue mobilization reforms. Between 2015-2022, tax revenues constituted just 17 percent of GDP, compared to an OECD average of 34 percent, and lagged notably behind resource-rich peers. As Kazakhstan aspires to reach high-income status, some indicators like GNI per capita are converging with high-income countries. However, tax revenues continue to lag, which could result in underfunding essential public services and missing vital opportunities for long-term growth. Growing expenditure pressures due to social programs and revitalizing infrastructure will continue to sustain the deficit unless new revenues are secured through tax reform. Recurrent budget revenue shortfalls have led to overreliance on the National Oil Fund, undermining the credibility of fiscal rules and jeopardizing Fund’s long-term sustainability. This report’s special topic section will delve into Kazakhstan’s fiscal challenges, exploring pathways for strengthening revenue mobilization and ensuring fiscal sustainability. To tackle fiscal challenges and strengthen revenue mobilization, Kazakhstan must embark on a comprehensive and strategic tax reform agenda. Key reforms should target income taxes by gradually increasing rates, transitioning to a progressive system, and improving tax administration. Inefficient 6 Funding the Future: Boosting Revenues for Lasting Investments tax incentives must be phased out, supported by a transparent tax expenditure report and a rigorous evaluation mechanism to measure their impact. Value-added tax reforms should include a gradual rise in the standard rate, lowering registration thresholds, and better compliance. Excise tax should align with environmental goals by shifting to carbon-based taxes on transport fuels. Establishing a sustainable framework for National Oil Fund utilization, paired with an updated fiscal rule and a robust debt management strategy, will be critical to closing fiscal gaps and ensuring long-term stability Targeted Tax Reforms to Boost revenues Addressing the Fiscal Gap • Adopting a sustainable framework for National Oil Fund usage • Revise and implement a fiscal rule Corporate Income Tax • Consider a gradual hike in CIT rate • Improve administration and collection mechanisms Personal Income Tax • Implement a progressive PIT • Consider introducing a wealth or inheritance tax Tax Incentives • Publish a comprehensive tax expenditure report • Phasing out ineffective incentives • Implement a monitoring and evaluation framework Value-Added Tax • Consider a gradual increase in the standard VAT rate • Lower VAT registration thresholds • Strengthen compliance and enforcement Excise Tax • Transition to a carbon-based excise tax Kazakhstan Economic Update – Winter 2024-2025 7 Economic outlook THE EXTERNAL ENVIRONMENT Global economic growth is estimated at 2.7 percent in 2024 and is projected to stabilize through 2025-26. Growth remains below the 2010- 19 average on 3.2 percent, keeping global output under its pre-pandemic trajectory. This restrained outlook reflects the lingering effects of recent economic shocks and structural slowdowns in key drivers like trade and investment due to ongoing geopolitical tensions and policy uncertainty.1 Growth prospects among Kazakhstan’s key trading partners, crucial markets for its energy exports, are mixed.2 In the euro area, after a challenging 2024 marked by high energy costs, modest growth of about 1.1 percent in 2025-26 is projected, supported by a recovery in consumer spending and investment as inflation eases and real incomes recover. In China, growth is projected to decelerate further, from 4.9 percent in 2024 to 4.5 percent in 2025 and 4.0 percent in 2026, due to a cooling property market, rising debt burdens, slowing productivity gains, and demographic challenges. Growth is also expected to slow in 2025-2026 in Russia to 1.6 and 1.1 percent respectively, nearing its lower potential level. Tight monetary policy and high borrowing costs aimed at controlling inflation, will likely limit investment, while fiscal spending and energy exports will remain key growth drivers (Figure 1). Global risks remain tilted to the downside. Potential shifts in U.S. economic policy, persistent geopolitical tensions, and fragmented global trade and investment networks could disrupt supply chains and dampen growth prospects for export-oriented economies like Kazakhstan. Additionally, further deterioration in China’s real estate market could erode further consumer confidence, reduce global commodity demand, and weigh on growth prospects of many developed and developing economies alike 1 World Bank. 2025. Global Economic Prospects, January 2025 2 European Union is the largest export market for Kazakhstan, accounting for 40 percent of total goods exports in 2023. China followed as the second with an 18.5 percent share, while Russia ranked third with 13 percent of exports. 8 Funding the Future: Boosting Revenues for Lasting Investments Kazakhstan Economic Update – Winter 2024-2025 9 growth of about growth 1.1 percent of about in 2025-26 1.1 percent in 2025-26 is projected, is projected, supported by a by supported a recovery recovery in consumer in consumer spending spending and investment and investment as inflation as inflation eases and real eases and incomes real incomes recover. recover. In China, In China, growth is projected growth to decelerate is projected to decelerate further, further, 4.9 percent fromfrom 4.9 percentin 2024 to 4.5 in 2024 4.5 percent topercent in 2025 in 2025 and 4.0 4.0 percent andpercent in 2026, in 2026, due to due cooling a to a cooling property property market, market, rising debtdebt rising burdens, burdens, slowing slowing productivity gains, productivity gains, and demographic and demographic challenges. challenges. Growth Growth is also is also expected expected to slow to slow in 2025-2026 in 2025-2026 in Russia in Russia to 1.6 toand andpercent 1.6 1.1 1.1 percent respectively, respectively, nearing its lower nearing its lower potential potential level.level. TightTight monetary monetary policy and high policy and high borrowing borrowing aimed costscosts aimed at controlling at controlling inflation, will likely inflation, will likely investment, limit limit while investment, while fiscalfiscal spending spending and energy and energy exports exports will remain will remain key growth key growth drivers drivers (Figure (Figure 1). 1). Global Global remain risksrisks remain tilted to the tilted the downside. to downside. Potential Potential shifts in U.S. shifts in U.S. economic economic policy, policy, persistent persistent geopolitical geopolitical tensions, tensions, and and fragmented fragmented global trade global trade and and investment investment networks networks could could disrupt supply disrupt supply chains chains and dampen and dampen growth prospects growth prospects for export-oriented for export-oriented economies economies like Kazakhstan. like Kazakhstan. Additionally, Additionally, further further deterioration deterioration in China’s in China’s real estate market real estate could market could erode further erode further consumer consumer confidence, reduce confidence, reduce global global commodity commodity demand, demand, weigh and and weigh on growth on growth prospects prospects of many of many developed developed developing and and developing economies economies given China’s alike alike given China’s China’s given significant significant footprint significant in global footprint footprint trade. in global Third, ifin trade. global inflation Third, trade. in Third, advanced if inflation if inflation economies advanced insuchin as advanced the economies economies such as such as the U.S. the U.S. and and Eurozone Eurozone remainsremains high longer high than longer expected, than expected, U.S. and Eurozone remains high longer than expected, central banks may be forced to delay monetary central banks central may banks be be may forced forced to normalization. policy delay monetary to delay This policy monetarycould normalization. policy normalization. weaken confidence,This This could tighten could weakenweaken financial confidence, confidence, andtighten conditions, tighten heightenfinancial financial market conditions, conditions, and and volatility. Such heighten heighten market developments market may volatility. volatility. threaten SuchSuchdevelopments financial developments stability and may may exacerbate threaten threaten financial exchange financial stability rate stability pressuresand in and emerging markets. exacerbate exacerbate exchange exchange rate pressures rate pressures in emerging in emerging markets. markets. Figure Figure Figure 1. 1. Growth Growth 1. Growth prospects prospects prospects in in key key in markets Figure key markets markets Figure 2. Crude Figure 2. 2.Crude oil price Crude oil price projections oil price projections (U.S. (U.S. projections (y-o-y, (y-o-y, (y-o-y, percent) percent) percent) Dollar Dollar per barrel) per barrel) (U.S. Dollar per barrel) 2023 2024 2023 2025 2024 2026 2025 2026 Historical Historical BaselineBaseline escalation ConflictConflict escalation OPEC+increase OPEC+ supply supply increase 6 6 100,0 100,0 5 5 90,0 90,0 4 4 80,0 80,0 3 3 70,0 70,0 2 2 1 1 60,0 60,0 0 0 50,0 50,0 Euro Area Euro Area China China Russia Russia 2022 2023 2022 2023 2024 2025 2024 2026 2025 2026 Source: Source: Bank. Bank. World World Source: Source: Bank Bank World World Source: World Bank. Source: World Bank Energy Energy prices are projected prices to weaken are projected to weakenin 2025-2026 in 2025-2026 onback on the the back of improved of improved supply supply conditions conditions and moderate and Energy global moderate prices global are economic economic projected growth. growth. to weaken Brent in Brent oil prices, 2025-2026 oil onprices, which the back averaged which an supply averaged of improved an estimated estimated US$80 conditionsUS$80 per per and barrel barrel in 2024, moderatein 2024, are projected globalare economic to projected dipto to growth. dip to US$72 oil in US$72 Brent in which 2025 prices, and averaged 2025 and to US$71 inestimated to US$71 an 2026. in 2026. This forecast This US$80 forecast per reflects reflects barrel in anticipated anticipated 2024, areweaker demand weaker projected to demand dip fromfrom to US$72China, in China, 2025creating and creating to US$71 surplus a substantial a substantial in 2026. This surplus through forecast through reflects2026.2026. RisksRisks anticipated to this to this weaker demand from China, creating a substantial surplus through 2026. Risks to this outlook are primarily on the outlook outlook are primarily are primarily on the the downside, on downside, with with a weaker-than-expected a weaker-than-expected slowdown slowdown in global in global economic economic downside, with a weaker-than-expected slowdown in global economic growth, particularly in China, which could depress oil demand and prices further in 2025–26. Potential supply cuts by OPEC+, if unmatched 2 European 2 European the largest Union is Union is the largest export export for Kazakhstan, marketmarket accounting for Kazakhstan, accounting for 40 percent goods of totalof for 40 percent in 2023. total exports goods exports inChina China followed 2023.followed as the second as the second by with anwithreductions percent 18.5an share, 18.5 percentelsewhere, share,Russia while could Russia while ranked exacerbate ranked third with third 13with the 13 percent ofsurplus, percent exports. putting additional downward pressure on prices. of exports. Meanwhile, a major escalation of Middle East conflicts could threaten Red Sea shipping routes, posing an upside risk that might drive a sharp and sustained increase in oil prices.3 (Figure 2) 5 | P a5 Page g| e 3 World Bank. 2024. Commodity Markets Outlook, October 2024 10 Funding the Future: Boosting Revenues for Lasting Investments Kazakhstan Kazakhstan Economic Update –Update Economic 2024-2025 Winter – Winter 2024-2025 growth, particularly growth, in China, particularly which could in China, which depress could depress oil demand oil demand and further and prices in 2025–26. prices further Potential in 2025–26. Potential cuts by supplysupply OPEC+, cuts if unmatched by OPEC+, if unmatched by reductions by reductions elsewhere, could exacerbate elsewhere, the surplus, could exacerbate putting the surplus, putting additional additional downward pressure downward on prices. pressure on prices. Meanwhile, Meanwhile, a major major escalation a escalation of Middle of Middle East conflicts East conflicts could could threaten Red Sea threaten Red shipping Sea shipping routes,routes, an upside posingposing an upside risk that risk might might that drive sharp adrive aand sharp sustained increase and sustained increase in oil prices. in oil prices. 3 (Figure 3 2) (Figure 2) ECONOMIC GROWTH Economic Economic growth growth Economic growth Economic slowed growth to an estimated slowed to an estimated4.0 percent 4.0 percent in 2024, 2024, down in down from 5.3from 5.3 percent percent in 2023. in 2023. An increase An increase in fiscal fiscal spending inspending was the wasmain main of thedriver driver economic of economicgrowth. Economic growth slowed to an estimated 4.0 percent in 2024, down from 5.3 percent in 2023. An The government growth. The government intensified intensified spending in the spending increase in the second in fiscal second spendinghalf of washalf 2024, theof 2024, with main consolidated with driver ofconsolidated budget economic budget growth.outlays rising by outlays The government roughly rising by roughly 5.5spending intensified percent 5.5 percent inyear-on-year year-on-year in real the second in half real terms of in terms 2024, 2024. withinconsolidated Consumer 2024. Consumer activity budget remained activity outlaysremained robust, rising byrobust, propped roughly propped 5.5up mostly percent mostly by strong upyear-on-yearby strong borrowing in amid weak borrowing real terms amid in weak growth growth 2024. Consumerin real incomes, in real incomes, activity with domestic with domestic remained robust, trade—a propped proxy for trade—a up mostly proxy household by for household strong spending— spending— borrowing amid growing by growing weak 8.2 by growth 8.2 percent, in real percent, though incomes, though down from down11.3 with domestic from percent in 2023. 11.3 percent trade—a proxy forinhousehold 2023. Investment Investment activityactivity showed spending—growing showed abylittle 8.2a little percent, though down from 11.3 percent in 2023. Investment activity showed a little change over the same change over the change same over theperiod same perioddue to due to a fall inaFDI fall in FDI in mining in mining and weakerand weaker residential residential investment. Exports investment. Exports period due to a fall in FDI in mining and weaker residential investment. Exports likely provided modest provided likely provided likelysupport modest boosted bymodest support rising boosted support shipments boosted ofby rising metals, by shipments ofother rising shipments chemicals, and metals, of metals, chemicals, chemicals, non-oil products, and and non-oil other although other this was non-oil products, products, although partially this although offset by an was partially this increase was partially offset On in imports. offset by the by an increase increase in industrial an supply side, imports. in imports. On theOn productionsupply the grew side, by a industrial supply side, industrial muted 2.7 production production percent, grew by weighed grew muted adown by a muted by2.7 2.7 percent, percent, a 2.0 percent weighed decline weighed indown by down oil output, awhile 2.0bypercent a 2.0 the percent decline services decline in oil sector in oil output, output, decelerated while to 4.0 while the services the services percent decelerated sector sector growth, down decelerated from to 4.0 percent to 4.0 percent 5.4 percent in growth, 2023. growth, down fromdown from 5.4 percent in 2023. 5.4 percent in 2023. Figure 3. Real Figure GDP 3. Real growth GDP growth Figure 3. Real GDP growth percent) (y-o-y, (y-o-y, percent) FigureFigure 4. Demand 4. Demand components components Figure 4. Demand components (y-o-y, (y-o-y, (y-o-y, percent) percent percent in real (y-o-y, in terms) terms) realin percent real terms) Non-oil Non-oil Oil sector Oil sector 2024 2023 11M 2023 11M11M 2024 11M Net taxesNet taxes Real Real GDP, GDP, growth, %growth, % -8 -6 -4-8 -2-6 0-4 2-2 4 0 6 2 8 4 106 128 10 12 6,0 6,0 5,0 Budget 5,0 Budget spending spending 4,0 4,0 3,0 3,0 Exports Exports 2,0 2,0 1,0 1,0 0,0 0,0 Investments Investments -1,0 -1,0 -2,0 -2,0 trade DomesticDomestic trade -3,0 -3,0 2019 20192021 2020 20212023 20202022 2022 2024e 2023 2024e 2025f 2025f 2026f 2026f Source: Bureau of National Statistics, Haver Analytics, Source: Bureau of National Statistics, Haver Analytics, Source: Source: Bureau National ofBureau Statistics,Statistics, of National Haver Analytics, Haver Analytics, National National Source: Bureau Source: National ofBureau Statistics,Statistics, of National Haver Analytics, Haver Analytics, National National National Bank, staff estimates National Bank, staff estimates. Note: Nominal exports of Bank, Bank, staff staff estimates estimates Bank, Bank, staff estimates. goods, staff estimates. Note: balance ofNominal exports Note: Nominal payment ofexports goods, basis for of 9M 2024.balance goods, Budget balance of of basis payment payment for 9M spending basis for 2024. refers to Budget 9M 2024. spending Budget consolidated spending refers fiscal to refers to outlays. consolidated consolidated fiscal outlays. fiscal outlays. Growth is projected Growth Growth is is to see projected projected a temporary to to seesee a temporary a temporary boostboostboost to 4.7 to 4.7 percent to 4.7 percent percent 2025, in in in fueled 2025, 2025, fueledfueled largely largely bybyincreased largely by increased increased oil production. oil production. oil The expanded The expanded production. The expandedTengizTengiz oil field Tengiz oil is field oil field projected is is projected projected to drive to to drive adrive a 7–8 a 7–8 percent 7–8 percent percent rise in the rise in rise volume the in theof volume volume of oil of exports. This additional output will provide a short-lived lift to growth, while a sustained expansionary fiscal oil exports. oil exports. This additional This additional will provide outputoutput will provide a short-lived a short-lived lift to lift to growth, growth, while a sustained while a sustained stance, highlighted in the government’s three-year fiscal plan through 2027, will also support growth. expansionary expansionary Beyond fiscal 2025, fiscal stance, real GDP stance, highlighted highlighted growth in the in is projected to the government’s slowgovernment’s three-year three-year to a more modest fiscal fiscal plan 3.0–3.5 percentthrough plan through as the 2027, will 2027, will economy also support also support reverts togrowth. Beyond growth. its long-term 2025, real Beyond potential, GDP 2025, held real backgrowth GDP growth by persistently toproductivity is projected is projected weak slow totoslow to a modest a more outside more 3.0–3.53.0–3.5 the modest extractive industries. A prolonged decline in investment—from 28 percent of GDP in 2001–2009 to just below 17 percent over 2012–2023—has been a major drag on productivity and potential growth, underscoring the 3 Bank. Worldurgent 3 Bank. World 2024. 2024. Commodity need Markets Outlook, for Commodity Markets policies that October Outlook, encourage 2024 October 2024 investment and diversify the growth drivers beyond extractives (Figure 3,4). e| P a g e 6|P a g6 Kazakhstan Economic Update – Winter 2024-2025 11 percent percent outside as the outside the economy as thethe economy extractive extractive reverts reverts industries. to its to long-term A prolonged industries. its long-term A prolonged potential, decline potential, in investment—from decline held back held by backpersistently by 28 persistently in investment—from weak percent 28 percent weak productivity productivity of GDP GDP ofin in 2001– 2001– outside outside 2009 to the 2009 to justextractive the justextractive below 17 industries. 17 industries. belowpercent A prolonged percent over A prolonged over 2012–2023—has 2012–2023—has decline decline in investment—from been inmajor a been investment—from drag on a major 28 drag on28 percent percent of and GDP productivity productivityofin 2001– GDP in 2001– and potential potential 2009 2009 to growth, growth, to just below just below underscoring17 the underscoring17 percent percent urgent the over 2012–2023—has urgent needover need for 2012–2023—has for policies policies thatbeen been a encourage encourage that major major on drag a investment on productivity draginvestment productivity and and diversify potential the and and diversify potential the growthgrowth growth, growth, drivers drivers underscoring beyond underscoring beyond the urgent the urgent extractives extractives (Figure need 3,4) (Figure for need policies . 3,4) for . policies that encourage investment that encourage investment and diversify the growth and diversify the growth drivers drivers beyondbeyond extractives extractives (Figure 3,4). 3,4). (Figure Inflation Inflation Inflation Inflation Inflation Inflation has shown has shown signs signs of easing, of easing, but underlying but underlying pressures pressures persist . By the persist end . By the of 2024, end inflation of 2024, inflation Inflation Inflation moderated moderated has toshown has 8.6 toshown signs percent 8.6 signs of percent of easing, y-o-y, easing, y-o-y, down butdownunderlying frombutfromunderlying 9.8 pressures 9.8 percent pressures percent persist in December persist in December . By the 2023, . By endthe 2023, as of as of 2024, end earlier 2024, inflation earlier drivers— inflation drivers— moderatedINFLATION moderated to 8.6 pandemic-induced pandemic-induced pandemic-induced pandemic-induced from Russia’s from Russia’s topercent invasion 8.6 percent supply supply invasion y-o-y, supply chain chain of supply Ukraine—began y-o-y, down disruptions, chain disruptions, chain of Ukraine—began down 9.8 percent from frompost-reopening disruptions, disruptions, 9.8 percent post-reopening post-reopening post-reopening to fade. to fade. However, in demand the However, December demand in demand deceleration the December demand 2023, surges, surges, deceleration lost 2023, as earlier and surges, surges, and as earlier logistics and lost logistics and momentum drivers— logistics logistics momentum drivers— shocks shocks in the shocks shocks in the from second halfRussia’s from Russia’s second of invasion half 2024. Realof wage Ukraine—began ofinvasion 2024. Real Ukraine—began of wage growth growth to accelerated acceleratedfade.to fade. However, to 2.7 the However, to percent 2.7 deceleration the deceleration percent y-o-y y-o-y in Q3,in lost upQ3, momentum fromlost up 1.7 momentum from percent 1.7in inin the the percent in second half second Q2, Q2, fueling Inflation of fueling 2024. half consumer has of Real 2024. consumer shown wage demand.Real signs growth wage Increased demand. of accelerated growth fiscal Increased easing, butaccelerated fiscal spendingto underlying 2.7in spendingto percent 2.7in the pressures percent the lattery-o-yhalf latter persist in y-o-y of Q3, .half the By in up of the Q3, the yearfrom end up 1.7 year offrom further percent further 2024, 1.7 amplified in percent amplified inflation in Q2, fueling Q2, fueling consumption consumption moderated consumer consumer pressures, pressures, to 8.6 demand. while percent demand. aIncreased while volatile y-o-y, aIncreased down fiscal exchange volatile from spending fiscal exchange 9.8 spending rate percent in the drove rate in in drove import latter December the latter half of prices import2023, half up asthe prices of byyear the 6.7 up earlier year 6.7further further bypercent amplified percent drivers—pandemic- y-o-y amplified in y-o-y in induced supply chain disruptions, post-reopening demand surges, and logistics shocks from Russia’s consumption consumption September. September. pressures, Food pressures, Food inflation while inflation easeda volatile while to a eased 5.5volatile exchange to percent exchange 5.5 percenty-o-yrate drove in rate y-o-y drove December in import December import prices 2024, prices 2024, and upnon-food by andup 6.7 bypercent 6.7 non-food percent slowed y-o-y to 8.3 slowed into 8.3 y-o-y in invasion of Ukraine—began to fade. However, the deceleration lost momentum in the second half September. y-o-yofSeptember. percent. y-o-y 2024. Food percent. Real Food inflation However, However, wage eased inflation services growth to eased services inflation 5.5to accelerated percent 5.5 inflationtopercent y-o-y remained 2.7 elevated remained in December y-o-y percent December in at elevated y-o-y in 13.3 Q3,2024, atpercent, up13.3 2024, and from non-food percent, and largely 1.7 non-food largely percent slowed driven in driven by Q2, slowed to 8.3to by sharp fueling 8.3 sharp y-o-y percent. y-o-y increases increases in percent. However, in regulated However, services regulated tariffs services tariffs for inflation essential for inflation essentialremained utilities utilities like elevated remained like at elevated electricity 13.3 electricity (21.7 consumer demand. Increased fiscal spending in the latter half of the year further amplified consumption at percent, 13.3 percent (21.7 largely percent, increase), percent largely driven heating increase), driven by sharp by heating (21.7), sharp (21.7), increases increases and water and in water pressures, in regulated supply regulated (43.1). supply while tariffs (43.1). a volatile tariffs for for essential essential exchange rateutilities drove like electricity utilities import like electricity prices up (21.7 by 6.7 (21.7 percent percent increase), percent y-o-y increase), heating in September. heating (21.7), Food (21.7), inflation eased to 5.5 percent y-o-y in December 2024, and non-food slowed to 8.3 y-o-y percent. However, and water and water supply (43.1). supply (43.1). Inflation Inflation is projected services is projected inflation to ease remained to to elevated ease 7.5-8to at percent 7.5-8 percent 13.3 percent,in 2025 in 2025 largelyand andby further driven to 6 percent further sharp to 6 percent increases in 2026, in in 2026, regulated though though tariffs Inflation Inflation risks risks is lean to for projected lean essential is the toprojected upside. the upside. utilities to easeto ease to WhileWhile like 7.5-8 electricity to the overall 7.5-8 the overall (21.7percent in percent trend trend is encouraging, percent 2025inis encouraging, increase), 2025 and and further heating further inflation (21.7), toinflation and6 percent to 6 is projected water in percent is projected supply 2026,in to stay (43.1). though 2026, toabove stay though above risks5the the risks lean lean 5to percent the percentto the upside. target. upside. Factors target. While While the overall such Factors asthe such trend overall as accelerated is encouraging, trend accelerated is encouraging, economic economic inflation growth, growth, is projected inflation continued is projected continued to fiscal fiscal stay toabove stay expansion, above expansion, Inflation is projected to ease to 7.5-8 percent in 2025 and further to 6 percent in 2026, though risks the the percent 5lean unanchored unanchored 5 the to target. percent inflation upside. Factors target. inflation While such Factors expectations, the expectations,and overall as such accelerated and recently trend as accelerated isrecently economic encouraging, economic tenge increased increased inflationgrowth, growth, volatility tengeis projected continued volatility againsttocontinued against the stay fiscal above the U.S. expansion, fiscal dollar theU.S. expansion, dollar may may 5 percent unanchored sustainunanchored sustain target. inflation inflationary Factors inflation inflationary expectations, pressures such expectations, pressures through as accelerated and through recently and exchange economic recently increased exchange tenge increased rate pass-through rate pass-through growth, continued tenge volatility effects. fiscal This against volatility against effects. expansion, the could This U.S. could delay unanchoredthedollar U.S. delay may dollar reaching reaching inflation may sustain the target the inflationary inflationary sustain inflation target expectations, pressures inflation rate, and pressures posing rate, recently through through ongoing posing increased exchange challenges ongoing tenge exchangerateto challengespass-through rate pass-through volatility to stabilizing againststabilizing the effects. prices U.S. effects. in prices dollar This the in Thismedium could medium maythe delay could sustain term delay termreaching reaching (Figure inflationary (Figure the target 5,6) . inflation the target . 5,6) pressures through rate, posing rate, posing inflation exchange ongoing rate ongoing challenges pass-through to stabilizing challenges effects. to stabilizing This could pricesprices delay in thein reaching the medium medium the target term (Figure term (Figure inflation rate, posing ongoing challenges to stabilizing prices in the medium term (Figure 5,6). 5,6). 5,6). Figure 5. Headline Figure 5. Headline inflation and its inflation andmain its main Figure 6. Inflation Figure 6. Inflation expectationsexpectations and policyand policy components components Figure Figure Figure 5. 5. (y-o-y, Headline 5. Headline Headline (y-o-y, percent) inflation inflation percent) and inflation and its and its main main its main rate (y-o-y, Figure rate (y-o-y, percent) 6. 6. Inflation Figure Figure 6. percent) Inflationexpectations Inflation expectations expectations and and and policy policy policy components components components (y-o-y, percent) CPI, % (y-o-y, (y-o-y, percent) y-o-y CPI, percent) % y-o-yFood Food rate (y-o-y, rate (y-o-y, rate percent) (y-o-y, percent) percent) Inflation Inflation target, yoy %, target, %, yoy 25 25 Non-foodNon-food CPI, % y-o-y CPI, Food Services Services % y-o-y Food Inflation Inflation %, expectations, Inflation expectations, yoy %, yoy target, Inflation target, %, yoy %, yoy Policy ratePolicy rate Inflation expectations, Inflation expectations, %, yoy %, yoy 25 25 Non-food ServicesServices Non-food 30 30 20 20 Policy ratePolicy rate 30 25 30 25 20 20 15 15 25 20 25 20 15 15 20 15 20 15 10 10 15 10 15 10 10 10 5 5 10 5 10 5 5 5 5 0 5 0 0 0 . . . . 0 0 0 0 2021 2021 2022 2022 2023 2023 2024 2024 . . 2022 2022 2023 2023 2024 2024 . . Source: Bureau Source: 2021 Source: of National Bureau 2021 Bureau of National 2022 Statistics, Statistics, of National 2022 Haver 2023 Statistics, Analytics, Haver 2023 Haver Analytics, 2024 National 2024National Analytics, National Source: Source: 2022 National Source:Bank 2022 Bank National 2023 Bank 2023 2024 2024 Bank, Bank, staff National staff staff estimatesestimates Bank, estimates Bureau Bureau Source: Source: of National of National Statistics, Statistics, Haver Analytics, Haver Analytics, National Source: Source: National National Bank Bank National Bank, Bank, staff staff estimates estimates While formal job creation rose by 2.1 percent y-o-y in Q3 2024, the unemployment rate remained unchanged at 4.6 percent in Q3. Employment data historically show limited response to economic cycle 7|P a g |P a g e 7e and likely underestimate the real situation in the labor market as many people in the informal services may not be registered with the government and thus wouldn’t be reflected in official employment 7|P a g |P a g e 7e figures. To ease the burden on living standards, the authorities once again raised the minimum wage, by 21.4 percent in nominal terms in 2024. This effectively doubled its level from 2021 (55 percent, real terms), exceeding inflation over the same period, and it helped to reduce the poverty rate to 7.6 percent (at USD 6.85/day) in 2024 down from 8.8 percent in 2023. 12 Funding the Future: Boosting Revenues for Lasting Investments MONETARY POLICY AND LENDING ACTIVITY Following a period of rate cuts in 2023-2024, the central bank shifted to a more restrictive monetary policy in response to mounting fiscal expansion and exchange rate pressures. Between January and October 2024, the central bank reduced its benchmark rate by a cumulative 100 basis points, lowering it to 14.25 percent. However, intensified government spending and a recent depreciation of the tenge— driven by a weakening ruble—prompted a sharp course correction with an abrupt 100 basis point hike to 15.25 percent, effectively reversing the easing cycle. The monetary stance remains firmly restrictive as inflation and expectations are still misaligned with the 5 percent target. The central bank is expected to maintain this cautious approach in 2025, proceeding with gradual rate cuts only if conditions allow, particularly given the ongoing rise in fiscal spending. Kazakhstan Economic Update – Winter 2024-2025 13 Lending activity is focused on loans to consumers. Real bank lending grew by 13.0 percent y-o-y in November, outpacing the 9.7 percent rise recorded a year earlier. Nearly 70 percent of this expansion stemmed from household borrowing, contributing 9.0 p.p. to overall growth in lending, while business loan growth contribution remains muted. Household lending has been fueled by short-term, high-cost consumer loans—primarily installment plans for durable goods and payday loans accessed via digital platforms, often with interest rates three to five times the inflation rate.4 As a result, in Q2 2024, household debt-to-wage ratios reached 47.3 percent, surpassing levels seen during the 2008–09 banking crisis, raising concerns about potential vulnerabilities among low-income families (Figure 7). Fueled by a surge in high-cost consumer loans, banking sector is experiencing record-breaking profitability. Return-on-equity soared to a multi-year high of 33.4 percent in September 2024, as banks aggressively capitalized on the consumer lending boom. In September 2024, households now account for nearly 60 percent of outstanding credit—a dramatic shift from just 20 percent in 2010. In fact, Kazakhstan stands out among many resource-rich economies for its reliance on household borrowing, posing potential risks to financial stability if debt levels grow unchecked.5 (Figure 8) Kazakhstan Kazakhstan Economic Economic Update Update – Winter 2024-2025 – Winter 2024-2025 Figure 7. Household debt Figure 8. Bank return on equity (percent) (percent, after tax) Household, Household, Debt-to-Wages Debt-to-Wages ratio, % ratio, % BRA BRA CAN CAN CHL CHL AUS AUS KAZ KAZ RUS RUS IDN IDN 50 50 35,0 35,0 45 45 30,0 30,0 40 40 25,0 25,0 35 35 20,0 20,0 30 30 15,0 15,0 25 25 10,0 10,0 20 20 5,0 5,0 . . 2008-2022 2008-2022 2023- 2023- 0,0 0,0 2024 q2 2024 q2 2018 2018 2019 2019 2020 2020 2021 2021 Source: Source: Bureau of National Bureau Statistics, of National Statistics, National National Bank, Bank, staff staff Source: Source: Development World World Indicators Development Indicators Source: Bureau of National Statistics, National Bank, staff Source: World Development Indicators estimates estimates estimates External External sector sector andand exchange rate exchange rate current The The currentaccount account deficit deficit is setistosetwiden to widen in 2025–2026. in 2025–2026. After After narrowing narrowing in 2024 in 2024 to reduced due due to reduced imports imports and a and lower a lower primary income primary deficit, income deficit, larger current larger account current accountdeficit deficit in 2025-2026 in 2025-2026 will stem will stem fromfrom projected projected declines declines in oil oil prices inprices which which is expected is expected to outstrip to outstrip plannedplannedproduction production gains. As exports gains. As exports moderate moderate and and sustained sustained domestic domestic consumption consumption supports supportsimport demand, import demand, the the trade surplus trade is is surplus expected expected to to shrink. shrink. While While foreign foreign investor investor income income repatriation repatriation will continue, will continue, its its pace pace may slow may 4 In August 2024, financial authorities revised the maximum interest rates that commercial banks may charge on various loan types, introducing new caps for annual rates. Under the updated regulation, banks may now charge a maximum annual rate of 46% for slow in in line line lower with with projected lower unsecured projected oil prices. oil prices. loans (reduced from Following Following 56%), 35% a dip a in dip2024 for collateralized as in 2024 loans a as a 40%), major (previously major oil25% project oil neared forproject neared mortgages, completion, and 46%completion, FDI FDI for microloans (down from 56%). inflows inflows are areexpected expected to rebound to rebound gradually, gradually, 5 Kazakhstan Monthly Economic Update November 2024. World Bank underpinned underpinned by sustained by sustained interest interest in mining in mining and and exploration exploration (Figure (Figure 9). 9). By end By the of 2024, the end of 2024, the tenge the tenge about lost lost about 15 percent 15 percent of its its nominal ofnominal valuevalue against against the U.S. Dollar, the U.S. Dollar, reflecting 14 softer reflecting oil prices softer and and oil prices depreciating Funding depreciating the Russian ruble. Russian Future: Boosting ruble. for Given Given Revenues the extensive Lasting the extensive cross-border Investments trade cross-border trade ties ties Russian with with economy, Russian economy, weakened weakened ruble against ruble against U.S. Dollar U.S. Dollar has had has anhad an outsized outsized role in role in pressuring pressuring tenge tenge exchange exchange rate.rate. To stabilize To stabilize tenge volatility, tenge volatility, the NBK the NBK scaled up its scaled uppresence its presence in the in market by selling the market by selling EXTERNAL SECTOR AND EXCHANGE RATE The current account deficit is set to widen in 2025–2026. After narrowing in 2024 due to reduced imports and a lower primary income deficit, larger current account deficit in 2025-2026 will stem from projected declines in oil prices which is expected to outstrip planned production gains. As exports moderate and sustained domestic consumption supports import demand, the trade surplus is expected to shrink. While foreign investor income repatriation will continue, its pace may slow in line with lower projected oil prices. Following a dip in 2024 as a major oil project neared completion, FDI inflows are expected to rebound gradually, underpinned by sustained interest in mining and exploration (Figure 9). By the end of 2024, the tenge lost about 15 percent of its nominal value against the U.S. Dollar, reflecting softer oil prices and depreciating Russian ruble. Given the extensive cross-border trade ties with Russian economy, weakened ruble against U.S. Dollar has had an outsized role in pressuring tenge exchange rate. To stabilize tenge volatility, the NBK scaled up its presence in the market by selling foreign exchange (FX) from both its own reserves and the assets of the National Fund (NFRK).6 In August-November 2024, the NBK has sold about US$1.9 billion in FX from its international reserves to mitigate short-term exchange rate volatility (Figure 10). Additionally, introduced surrender requirements for commodity exporting SOEs, requiring them to convert a half of their FX revenues into tenge. Kazakhstan Kazakhstan Economic Economic Update Update – Winter – Winter 2024-2025 2024-2025 Figure Figure 9. Current 9. Current account account (percent (percent of GDP) of GDP) Figure Figure 10. The 10. The NBKNBK interventions interventions in FX in the the FX Figure 9. Current account (percent of GDP) Figure 10. The NBK interventions in the FX market market million) (US$ million) (US$(US$ market million) Current Current account account balance, balance, % of GDP % of GDP FX interventions FX interventions NFRK NFRK Oil US$ Oil price, per price, barrel US$ per barrel 0 0 4,0 4,0 120,0 120,0 -500 -500 2,0 2,0 100,0 100,0 -1 000 -1 000 0,0 0,0 80,0 80,0 -1 500 -1 500 -2,0 -2,0 60,0 60,0 -2 000 -2 000 -4,0 -4,0 40,0 40,0 -2 500 -2 500 -6,0 -6,0 20,0 20,0 -3 000 -3 000 -8,0 -8,0 0,0 0,0 . . 2016 2017 2016 2018 2017 2019 2018 2020 2019 2021 2020 2022 2021 2023 2022 2024 2023 2025 2024 2026 2025 2026 2020 20202021 20212022 20222023 20232024 2024 Source: Source: Bureau of National Bureau Statistics, of National Statistics, National National Bank, staff Bank, staff Source: Source: National National Bank Bank estimates estimates Source: Bureau of National Statistics, National Bank, staff Source: National Bank Fiscal Fiscal policy policy estimates Fiscal Fiscal policy has become policy has become expansionary, expansionary, contrary contrary to previously to previously announced announced consolidation consolidation plans. plans. The fiscal The fiscal deficit deficit is projected is projected to from to rise 1.6 percent rise from 1.6 percent of GDP in 2023 of GDP to an in 2023 to estimated an estimated 2.5 percent 2.5 percent in in 2024,2024, 6 driven largely driven The FX sales largely from by weaker-than-expected by weaker-than-expected National Oil revenue Fund have provided support to revenue collection and collection the currency amid fiscal sustained and sustained shortfalls spending nearly spending doubling to compared in 2024 address to address flood recovery flood efforts. recovery to previous year. efforts. Revenue Revenue underperformance underperformance stems stems lower fromfrom lower oil-related oil-related revenues revenuesas oil output as oil output remained remained flat and flat global and global prices softened prices softened in 2024. in 2024. The authorities’ overly The authorities’ overly optimistic optimistic growth assumptions growth assumptions underpins that that underpins fiscal fiscal revenue revenue collection collection forecasts forecasts also also contributed contributed to revenue to revenue shortfalls. shortfalls. actual WithWith actual 15 economic economic growthgrowth likely to fall likely to significantly fall significantly below projections, below the gap projections, the between gap between expectations expectations and reality and reality Kazakhstan Economic Update – Winter 2024-2025 highlights highlights the need the need for more for more realistic realistic planning practices planning (Figure practices 11). 11). (Figure -500 -500 2,0 2,0 100,0 100,0 -1 000 -1 000 0,0 0,0 80,0 80,0 -1 500 -1 500 -2,0-2,0 60,0 60,0 -2 000 -2 000 -4,0-4,0 40,0 40,0 -2 500 -2 500 -6,0-6,0 20,0 20,0 -3 000 -3 000 -8,0-8,0 0,0 0,0 . . 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023 2024 2024 2025 2025 2026 2026 2020 2020 2021 2021 2022 2022 2023 2023 2024 2024 FISCAL POLICY Source: Source: Bureau Bureau estimates estimates of National of National Statistics, Statistics, National National Bank, Bank, staff staff Source: National Source: Bank National Bank Fiscal Fiscal policy policy Fiscal Fiscal policy Fiscal policyhas policy has become become has become expansionary, expansionary, expansionary, contrary contrary contrary to to previously to previously previously announced announced announced consolidation consolidation consolidation plans.plans. plans. The TheThe fiscal fiscal deficit deficitis is projected projected to rise to from rise from 1.6 percent 1.6 percent of GDP of GDP in 2023 in 2023to to an estimated an estimated fiscal deficit is projected to rise from 1.6 percent of GDP in 2023 to an estimated 2.5 percent in 2024, driven 2.52.5 percent percent in in 2024, 2024, driven driven largely bylargely largely weaker-than-expected byby weaker-than-expected weaker-than-expected revenue revenue collection revenue collection collection and sustained andandsustained sustained spending spending spending to address to recovery flood address to address flood flood recovery recovery efforts. efforts. Revenue Revenue efforts. Revenue underperformance underperformance underperformance stems from stems stems lower from from lower oil-related lower oil-related oil-related revenues as revenues revenues oil output as as oiloil remainedoutput output flat and global prices softened in 2024. The authorities’ overly optimistic growth assumptions that underpins remained remained flat flat and and global global prices prices softened softened in 2024. in 2024. The authorities’ The authorities’ overly overly optimistic optimistic growth growth assumptions assumptions fiscal revenue collection forecasts also contributed to revenue shortfalls. With actual economic growth that that underpins underpins fiscal fiscal revenue revenue collection collection forecasts forecasts alsoalso contributed contributed revenue to to revenue shortfalls. shortfalls. With likely to fall significantly below projections, the gap between expectations and reality highlights the need With actual actual economic economic for more growth growth likely realistic to to likely planning significantly fall fall significantly practices below (Figure below projections, 11). projections, the gap the gapbetween between expectations expectations and and reality reality highlights highlights thetheneed needfor more for more realistic realistic planning planning practices practices (Figure (Figure 11) . . 11) Figure Figure Figure 11. Consolidated 11. 11. Consolidated Consolidated fiscal fiscal balance fiscal balance balance Figure Figure 12. 12. FigureChange Change in in 12. Changegovernment government in debt debt government debt (percent of GDP) (percent of GDP) (percent (percent GDP) of of GDP) (percent (percent GDP) of of GDP) Overal Overal fiscal fiscal % of balance, balance, of GDP %GDP (LHS) (LHS) Other Other debt-creating debt-creating flows flows Exchange Exchange rate rate depreciation depreciation Oil price, Oil price, $ per $ per barrel barrel r-gr-g 8,0 8,0 120,0 120,0 Primary Primary deficit deficit 4,0 4,0 6,0 6,0 Change Change in debt (p.p. in debt of GDP) (p.p. of GDP) 100,0 100,0 3,0 3,0 4,0 4,0 2,0 2,0 80,0 80,0 2,0 2,0 0,0 0,0 1,0 1,0 60,0 60,0 -2,0-2,0 0,0 0,0 -4,0-4,0 40,0 40,0 -6,0-6,0 -1,0-1,0 20,0 20,0 -8,0-8,0 -2,0-2,0 -10,0 -10,0 0,0 0,0 -3,0-3,0 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023 2024 2024 2025 2025 2026 2026 2023 2023 2024 2024 2025 2025 2026 2026 2027 2027 Source: Source: Bureau Bureau of National of National Statistics, Statistics, Ministry Ministry of Finance, of Finance, staff staff Source: Source: Bureau Bureau of National of National Statistics, Statistics, Ministry Ministry of Finance, of Finance, staff staff Source: Bureau of National Statistics, Ministry of Finance, Source: Bureau of National Statistics, Ministry of Finance, estimates estimates estimates estimates staff estimates staff estimates The government’s three-year fiscal plan through 2027 outlines ambitious spending increases across social assistance, healthcare, agriculture, and SME support. While oil production is set to grow, oil- P| 10 |10 aPgaeg e related revenues are expected to remain constrained amid forecasts of stable yet modest oil prices through 2027. Non-oil revenues will likely benefit from improving administration efforts and ongoing digitalization efforts, but expenditure growth is projected to outpace revenue gains, widening the fiscal deficit to 3.1 percent in 2025 before easing slightly to 2.7 percent in 2026. The deficit will likely be covered by a mix of domestic borrowing, external loans, and additional withdrawals from the National Oil Fund. Public debt is projected to rise gradually from an estimated 22.2 percent of GDP in 2024 to 24 percent by 2027—still low by global standards and within manageable limits (Figure 12). A new Tax Code is in development to bolster revenues to meet mounting expenditure demands in the medium term. Proposed reforms include higher taxes on the extractive and financial sectors, 16 Funding the Future: Boosting Revenues for Lasting Investments increased levies on luxury goods, and potentially a VAT rate hike, previously delayed. Reducing tax exemptions could also raise revenue, but due to uncertainty around the final provisions, potential gains have not been included in baseline projections. If endorsed by the authorities, a new Tax Code will only become effective in 2026. Growing demands for social programs and infrastructure renewal will continue to strain expenditures, sustaining the deficit unless new revenues are secured through tax reform. Recurrent budget revenue shortfalls have led to frequent ad hoc withdrawals from the National Oil Fund, undermining the credibility of Kazakhstan’s fiscal rules. Additional transfers from the National Fund have become routine, even during periods of above- potential economic growth, further undermining fiscal discipline. Despite government commitments to adhere to fiscal rules, the risk of non- compliance remains significant. This report’s special topic section will delve into Kazakhstan’s fiscal challenges, exploring pathways for strengthening revenue mobilization and ensuring fiscal sustainability. Kazakhstan Economic Update – Winter 2024-2025 17 RISKS TO THE OUTLOOK The outlook faces several downside risks. First, a decline in global oil demand/prices would harm exports, fiscal revenues, and growth, increasing exchange rate volatility. Second, increased budget spending and a pause on fiscal consolidation may strain the fiscal balance, sustain inflationary pressures, and necessitate a prolonged period of tight monetary policy, keeping borrowing costs high. Additionally, the growing frequency of extreme weather events (e.g., droughts, wildfires, floods) threatens agricultural productivity, critical infrastructure, and economic stability, potentially stoking inflation and prompting further fiscal intervention. On the upside, effective implementation of planned reforms could boost business confidence and catalyze investment across non-extractive sectors, including through FDIs, strengthening revenue streams and enhancing long-term growth potential. 18 Funding the Future: Boosting Revenues for Lasting Investments Table 1. Kazakhstan: Key Macroeconomic Indicators, 2020-2026   2020 2021 2022 2023 2024e 2025f 2026f             projections National income and prices               Real GDP growth -2.5 4.3 3.2 5.1 4.0 4.7 3.5 Oil sector growth -5.8 -0.4 -0.8 8.3 0.4 8.2 1.3 Non-oil sector growth -1.3 5.2 3.9 4.0 4.6 3.9 3.9 CPI inflation (end of period) 7.5 8.5 20.3 9.8 8.4 8.0 6.0 External accounts in percent of GDP Current account balance -6.4 -1.4 3.1 -3.3 -1.3 -2.2 -2.3 Exports of goods and services 28.8 36.4 41.5 34.3 32.9 31.2 29.1 Oil exports 13.9 15.8 20.8 16.1 15.2 14.7 13.7 Imports of goods and services 27.2 25.2 26.7 27.4 26.2 25.5 25.0 Foreign direct investment, net 4.2 2.3 2.2 2.0 0.8 1.4 1.7 NRFK assets, end-period 34.3 28.1 24.7 22.9 20.9 19.3 18.2 NBK reserves, end-period 20.8 17.4 15.6 13.7 14.2 ... ... Total external debt 95.8 83.3 71.3 62.0 58.5 56.3 54.3 Monetary accounts               Reserve money growth 41.8 12.1 8.4 -2.8 10.3 9.8 9.6 Policy rate, year-end (in %) 9.00 9.75 16.75 16.50 16.25     Consolidated fiscal accounts */ in percent of GDP Revenues 16.1 16.8 21.5 21.5 19.7 19.7 19.6 Expenditures 24.5 21.9 21.6 23.1 22.3 22.9 22.2 Consolidated budget balance -8.4 -5.1 -0.2 -1.6 -2.5 -3.1 -2.7                 Public Debt **/ in percent of GDP Government debt 24.9 23.7 22.5 22.0 22.2 23.1 23.9 External 10.7 10.0 8.6 7.0 7.0 6.6 6.2 Domestic 14.1 13.8 13.9 15.1 15.1 16.5 17.7 Government debt service (% of revenues) 6.8 7.3 6.5 7.4 8.2 7.3 7.3 Memoranda               Oil price - Brent (US$ per barrel) 42.3 70.4 99.8 82.6 81.0 75.0 73.0 Sources: Government and NBK data and WBG staff estimate and projections. f=forecast. Note: */ The consolidated budget comprises central and local governments as well as the NFRK **/ Includes only the debt of the state and local government and government guarantees. Does not include SOE debt. Kazakhstan Economic Update – Winter 2024-2025 19 Special topic section: Boosting Revenues for Lasting Investments TAX REVENUES AND INCOME LEVEL Tax revenues remain the backbone of Kazakhstan’s fiscal revenue streams, making up nearly 95 percent of total domestic revenue. In contrast, non-tax revenues contribute a mere 1.0 percent of GDP in 2022, primarily driven by irregular dividend payments from SOEs and interest income from the National Oil Fund’s foreign exchange reserves. Both sources are highly volatile, with SOEs, primarily in the extractive industries, experiencing fluctuating profits tied to global commodity price swings. This underscores the importance reforming and diversifying tax revenues as the most reliable means of generating sustained fiscal resources. Kazakhstan’s low tax revenues relative to both aspirational and structural peers underscore an urgent need for revenue mobilization reforms to bridge the growing fiscal gap. Between 2015 and 2022, the average tax revenues were only 17 percent of GDP, far below the level in high-income, mostly OECD countries, of 34 percent, lagging notably behind resource-rich peers like Australia, Canada, and Chile.7 This gap highlights missed opportunities to align public spending with the country’s economic potential. Kazakhstan made steady progress from 2000 to 2008 in raising its tax-to-GDP ratio from 20 percent to 28 percent of GDP, substantially narrowing the gap with high-income countries, which was 60 percent in 2000, and moved to 87 percent by 2008. The convergence, however, has stalled since then, revealing the need for more sustained tax mobilization to finance essential public services and development (Figure 1). Over the past decade, Kazakhstan shifted from a relatively high-tax to a low-tax economy, exacerbated by volatile policies and uneven economic growth. While tax revenues steadily increased until 2008, the trajectory changed dramatically between 2009 and 2022 due in large part to volatile tax 7 The consolidated budget tax revenues include aggregate taxes that are transferred to central and local budgets as well as the NFRK. 20 Funding the Future: Boosting Revenues for Lasting Investments Kazakhstan Economic Update – Winter 2024-2025 21 country’s country’s economic economic potential. potential. Kazakhstan made Kazakhstan steady made steady progress progress from 2000 from 2000 to 2008 to 2008 in raising its tax- in raising its tax- to-GDP to-GDP ratio from ratio from 20 percent to 28 20 percent topercent 28 percent of GDP, substantially of GDP, narrowing substantially narrowing the gap the gap high-income withwith high-income countries, countries, which which was was 60 percent 60 percent in 2000, in 2000, and and moved moved to 87 to 87 percent percent by 2008. by 2008. The The convergence, however, convergence, however, stalled has has since stalled since then, then, revealing revealing need the the need for more sustained for more sustained tax mobilization tax mobilization to finance essential to finance essential public public services services and and development development (Figure (Figure 1). 1). OverOver pastpast the the decade, decade, Kazakhstan Kazakhstan shifted shifted from a relatively from a relatively high-tax high-tax to ato a low-tax low-tax economy, economy, exacerbated exacerbated by volatile by volatile policies policies and andunevenuneven economic economic growth. growth. While While tax tax revenues revenues steadily steadily increased increased 2008, untiluntil 2008, the trajectory the trajectory changed changed dramatically dramatically betweenbetween2009 and and 2009 2022 2022 due due in large in large to to partpart volatile volatile tax reforms reforms tax and and and reforms inconsistent inconsistent inconsistent economic economic economic growth. Thisgrowth. 8 growth. 8 This This transition 8 transition transition became becamebecame especially especially apparent especially apparent in apparent 2020, whenin in 2020, 2020, when tax when tax revenues revenues hitrevenues tax a low hit ahit of 14.1lowa low percent of percent of 14.1 of 14.1 GDP of percent since GDP of GDP 2000s, since even since 2000s, as 2000s, even high-income asmanaged even high-income as high-income stable managed managed revenues stable stable revenues despite despite revenues despite the economic the shockeconomic the economic of shock COVID-19. shock 9 10 of of COVID-19. The COVID-19. shift from9 a10 The The 9 10 shift relatively shift from high-tax a from a relatively relatively economy high-tax to high-tax a low-tax economy economy regime to ato over a low-tax low-tax the past regime decade overover regime the the has eroded pastpast revenue decadedecade base. has has While erodederoded advanced revenue revenue economies base. While base. managed While advanced to advanced stabilize tax revenues during the COVID-19 pandemic, Kazakhstan’s fiscal fragility was exposed, with tax revenue economies economies managed managed to stabilize to stabilize tax revenues tax revenues during during the the COVID-19 COVID-19 pandemic, pandemic, Kazakhstan’s Kazakhstan’s fiscal fiscal levels diverging further from international norms (Figure 2). fragility fragility exposed, was was exposed, withwith tax revenue levels tax revenue levels diverging diverging further from further international from internationalnorms (Figure norms 2). 2). (Figure Figure Figure 1. Figure 1. Total taxrevenues 1. Total Total tax tax revenues revenues (percent (percent (percent ofof GDP)of Figure 2. Figure 2. Evolution Figure 2. of tax Evolution Evolution of tax of revenues taxrevenues revenues (percent (percent GDP)GDP) of GDP) of GDP) (percent of GDP) 50 50 HIC OECD HIC OECD average average Kazakhstan Kazakhstan 40 40 40 40 35 35 30 30 30 30 20 20 25 25 20 20 10 10 15 15 10 10 0 0 Rica Costa Rica Sweden Sweden Belgium Belgium Denmark Denmark Switzerland Switzerland Iceland Slovak Iceland Slovak Chile Chile Italy Italy Japan Lithuania Mexico Japan Lithuania Mexico Luxembourg Slovenia Luxembourg Portugal Slovenia Portugal OECD Korea Korea Greece Greece UK OECD UK Kazakhstan Kazakhstan 5 5 Costa 0 0 2000 2000 2002 2002 2004 2004 2006 2006 2008 2008 2010 2010 2012 2012 2014 2014 2016 2016 2018 2018 2020 2020 2022 2022 Source: Source: IMF, OECD, IMF, OECD, Bank estimates WorldWorld Bank estimates Source: Source: IMF, OECD, IMF, OECD, Bank estimates WorldWorld Bank estimates Source: IMF, OECD, World Bank estimates Source: IMF, OECD, World Bank estimates Despite Despite some income some convergence income convergencetoward toward high-income economies, high-income Kazakhstan’s economies, Kazakhstan’s tax revenues tax revenues have not not have keptkept pace, pace, creating creating a disconnect a disconnect between between income income levels levels and and revenue revenue collection. Data collection. Data Despite some income convergence toward high-income economies, Kazakhstan’s tax revenues consistently consistently demonstrates demonstrates a positive a positive correlation correlation between between GNI GNI per per capita capita tax-to-GDP and and tax-to-GDP ratios, ratios, as as have not kept pace, creating a disconnect between income levels and revenue collection. Data higher-income higher-income countries countries maintain maintain stronger stronger and more and resilient more resilient tax tax bases bases (Figure (Figure 3,4) . 3,4) . Evidence Evidence 11 12 11 12 consistently demonstrates a positive correlation between GNI per capita and tax-to-GDP ratios, as higher- income countries maintain stronger and more resilient tax bases (Figure 3,4).11 12 Evidence suggests that as countries grow, so should their tax revenues, yet a corresponding increase in Kazakhstan’s tax-to-GDP 7 7 The consolidated The consolidated ratio has budget tax revenues budget not followed, include tax revenues include remaining aggregate aggregate taxes taxes that misaligned are that transferred with are to central to central its transferred income level and andlocal and budgets local budgets lagging as well as behind well the as NFRK. as other the resource-rich NFRK. 8 Average 8 Average growth, real GDP real GDP growth, which which was around was around 10 percent 10 percent duringduring 2000-2007, has halved 2000-2007, has halved less than to lessto 4 percent 4than percent in 2010-2022. in 2010-2022. One of the of One thecontributors main main contributors countries (Figure 5). This growing disconnect between income level trajectory and revenue collection is to thisto this slowdown slowdown has declining has been TFP and been declining TFP and the the marginal marginal productproduct of investment of investment close to zero. close zero. More to More can be can found: be found: Kazakhstan Economic Kazakhstan Update: Economic Update: Shaping concerning Tomorrow: Shaping Tomorrow: at Reforms time afor Reforms when for Lasting Lasting higher Prosperity Prosperity (English). revenues (English). are Kazakhstan essential Economic Kazakhstan Economic for Update. sustainable Update. World Bank Group. World Bank and long-term development.13 Group. 9 OECD 9 (2023), OECD Tax Policy (2023), Reforms Tax Policy 2023: 2023: Reforms OECD OECD and Selected Partner Partner and Selected Economies, OECD OECD Economies, Publishing, Publishing, Paris Paris 10 Oil sector 10 generates Oil sector on average generates on average about about 20 percent 20 percent of Kazakhstan’s of Kazakhstan’s GDP inGDP 2019-2023, in 2019-2023, revenues while while tax stemming tax revenues stemming from from the the sector sector accounted sectorsector accounted for 1/3 for rd of total 1/3 rd total oftax collection over the tax collection over same same period. the period. 118 Average 11 Vitor Gaspar, Vitor Laurareal Gaspar, GDP Jaramillo, Laura growth, Philippe Jaramillo, which Philippe was around Wingender. Wingender. “Tax Capacity 10 percent “Tax Capacity during and Growth: 2000-2007, Is there and Growth: Is a therehas Tipping halved a Tipping Point?” Point?” to less IMF, 31 IMF, than Dec. 314 percent Dec. 2016 2016in 2010-2022. One of the main contributors to this slowdown has been declining TFP and the marginal product of investment close to zero. More can be 12 OECD 12 (2023), OECD Tax Policy (2023), Reforms Tax Policy 2023: 2023: Reforms OECD OECD and Selected Partner Partner and Selected Economies, OECD OECD Economies, Publishing, Publishing, Paris Paris found: Kazakhstan Economic Update: Shaping Tomorrow: Reforms for Lasting Prosperity (English). Kazakhstan Economic Update. World Bank Group. 9 OECD (2023), Tax Policy Reforms 2023: OECD and Selected Partner Economies, OECD Publishing, Paris ag 13 | P 13 |Pea g e 10 Oil sector generates on average about 20 percent of Kazakhstan’s GDP in 2019-2023, while tax revenues stemming from the sector sector accounted for 1/3rd of total tax collection over the same period. 11 Vitor Gaspar, Laura Jaramillo, Philippe Wingender. “Tax Capacity and Growth: Is there a Tipping Point?” IMF, 31 Dec. 2016 12 OECD (2023), Tax Policy Reforms 2023: OECD and Selected Partner Economies, OECD Publishing, Paris 13 Tax-to-GDP ratios have generally risen across countries in recent decades, closely aligned with income levels. This trend also reflects policy adjustments driven by fiscal pressures from the global financial crisis, the pandemic, energy price shocks, and rising global interest rates. Despite these developments, the strong relationship between tax revenues and income levels remains evident. 22 Funding the Future: Boosting Revenues for Lasting Investments Kazakhstan Economic Update – Winter 2024-2025 Kazakhstan Economic Update – Winter 2024-2025 suggests that as countries grow, so should their tax revenues, yet a corresponding increase in suggests that as countries Kazakhstan’s grow, tax-to-GDP should so has ratio nottheir tax revenues, followed, yet misaligned remaining a corresponding with increase its incomein level and Kazakhstan’s tax-to-GDP ratio has not followed, remaining misaligned with its income level and lagging behind other resource-rich countries (Figure 5). This growing disconnect between income lagging behind other resource-rich countries (Figure 5). This growing disconnect between income level trajectory and revenue collection is concerning at a time when higher revenues are essential for level trajectory and revenue collection is concerning at a time when higher revenues are essential for sustainable and long-term development. 13 sustainable and long-term development. 13 Figure Figure Figure 3. 3. 3. Gross Gross Gross National National NationalIncome Incomeper Income per capita Figure percapita capita Figure 4. GNI 4.4. per Figure GNI per capita vs capita GNI per vs Tax-to-GDP Tax-to-GDP in capita vs Tax-to-GDP in in (constant (constant (constant 2015 20152015 thousand thousand thousandU.S. U.S. Dollars) Dollars) U.S. Dollars) 2022 2022 2022 Korea, Korea, 35 4,0 35 Rep. Rep. 4,0 Tax-to-GDP ratio (log of percent) Tax-to-GDP ratio (log of percent) 30 30 UMIC UMIC 3,5 3,5 25 25 HIC HIC 20 20 Poland Poland 3,0 3,0 HIC threshold HIC threshold 15 15 Kazakhstan Kazakhstan Chile 10 Chile 2,5 2,5 10 Kazakhstan 5 Kazakhstan 5 UMIC threshold 2,0 0 UMIC threshold 1,0 2,0 2,0 3,0 4,0 5,0 0 1,0 2,0 3,0 4,0 5,0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 GNI per capita (log of constant 2015 US$) 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 GNI per capita (log of constant 2015 US$) Source: Source:World WorldBank Bank Source: IMF, OECD, World Source: Bank IMF, OECD, World Bank Source: World Bank Source: IMF, OECD, World Bank Declining tax collection levels combined with rising public expenditures has forced the Declining Declining government tax to tax collection collection increase debt levelslevels combined combined financing with with rising and withdrawals rising public from expenditures thepublic National expenditures has forced Oil Fund, has the forced the government creating government fiscal imbalances. Since the 2015 currency crisis through 2023 the consolidated fiscal deficit averaged creating to increase debt to increase financing debt financing and withdrawals andfromwithdrawals the National from the Oil Fund, National Oil creating fiscal Fund, imbalances. Since the 2015 currency crisis through 2023 the consolidated fiscal deficit averaged 4 percent of GDP, fiscal 4 percent imbalances. of GDP, while the Since the 2015 non-oil currency deficit averaged crisis 10 through percent of 2023GDP the farconsolidated exceeding the fiscal deficit averaged 5 percent while the non-oil deficit averaged 10 percent of GDP far exceeding the 5 percent target set by the fiscal 4 percent target set by the GDP, offiscal while rule. Thisthe non-oil fiscal persistent deficit averaged deficit has driven10 percent of GDP government far exceeding debt—mostly drawnthe 5 percent rule. This persistent fiscal deficit has driven government debt—mostly drawn from domestic sources—to fromtarget by the set sources—to fiscal rule. This persistent fiscal deficit withdriven 2023, has government domestic surge from 14.5 percent of GDP in 2014 to 22 percent in 2023,debt—mostly with only drawn surge from 14.5 percent of GDP in 2014 to 22 percent in only one-third of the debt denominated one-third from in of domestic foreignthe debt currency denominated sources—to by 2024. surge 14 in foreign (Figurefrom currency 6,7)14.5 . While by percent 2024. Kazakhstan’s 14 (Figure of GDPdebt-to-GDP 6,7) in 2014 to 22. While ratio Kazakhstan’s percent remains in 2023, with relatively only low debt-to-GDP one-third compared ratio of remains the debt to structural relatively low compared denominated peers, especially foreign in among to structural currency oil peers, producers, especially 2024. by without 14 (Figure anamong 6,7) increaseoil in producers, . While Kazakhstan’s tax revenues, the without an increase debt-to-GDP reliance on debt is tax in ratio revenues, remains expected the reliance relatively to increase low over thedebt on compared medium toexpected is term. to structural increase peers, over the especially medium among oil producers, term. Kazakhstan Economic Update – Winter 2024-2025 without an increase in tax revenues, the reliance on debt is expected to increase over the medium Figure 5. Change in income level vs Change in Tax-to-GDP ratio in 1995-2022 Figure term. 5. Change in income level vs Change in Tax-to-GDP ratio in 1995-2022 (X axis - GNI per capita in constant 2015 thousand U.S. Dollars, Y axis - Tax-to-GDP ratio) (X axis - GNI per capita in constant 2015 thousand U.S. Dollars, Y axis - Tax-to-GDP ratio) Figure 5. Change Korea, Rep. in income level vs Change in Tax-to-GDP Poland Chile ratio in 1995-2022 HIC OECD Kazakhstan (X axis 30 - GNI per capita in37 26 U.S. Dollars, Y axis - 35 constant 2015 thousand Tax-to-GDP ratio) 31 36 24 28 26 34 35 22 25 22 34 20 22 33 13 across countries in recent decades, Tax-to-GDP ratios have generally risen 33 adjustments 18closely aligned with income levels. This trend also reflects policy19 18fiscal pressures from the global financial crisis, the pandemic, energy price shocks, and rising global interest rates. Despite these developments, driven by the strong relationship between tax revenues 32 and income levels remains16 evident. 16 32 13 Tax-to-GDP ratios have generally risen across countries in recent decades, closely aligned with 14 income levels. This trend also reflects policy adjustments 14 External SOE driven bydebt, fiscalincluding pressuresby state-owned from the banks, 31 global amounted financial to approximately crisis, the pandemic, 14 5 percent energy price of GDP in shocks, 2023. and This rising is primarily debt interest global associated rates. Despite 13 with these developments, entities such the as Samruk-Kazyna strong taxFund and Baiterek relationship between (80 and revenues 20income and of all SOE percentlevels external remains liabilities, respectively). evident. 10 30 12 31 10 5 15 25 35 0 5 10 15 20 5 7 9 11 13 15 20 25 30 35 40 2 4 6 8 10 14 External SOE debt, including by state-owned banks, amounted to approximately 5 percent of GDP in 2023. This debt is| primarily 14 P a g e associated with entities Source: Source: such IMF, as OECD, IMF, Samruk-Kazyna World OECD, Bank World and Baiterek Fund (80 and 20 percent of all SOE external liabilities, respectively). Bank With domestic financing now a primary source for deficit funding, Kazakhstan’s debt 14 service |P a g e costs have risen sharply. Elevated inflation—triggered by the pandemic’s aftermath and shocks from 14 External SOE debt, including by state-owned banks, amounted to approximately 5 percent of GDP in 2023. This debt is primarily the Russia’s associated invasion with of Ukraine—coupled entities such with tight as Samruk-Kazyna and Baiterek Fundmonetary policies (80 and 20 percent of allaimed at containing SOE external inflation, liabilities, respectively). have increased the policy rate and raised domestic borrowing costs. Despite these high costs, the government has leaned heavily on domestic borrowing, intensifying fiscal pressures. By 2024, the costs of servicing domestic financing climbed percent of to 1.6Economic Kazakhstan GDP,–compared Update to less than 1 percent before Winter 2024-2025 23 the pandemic. Increased borrowing cost is crowding out essential public investments, with the government now spending more on interest payments and recurrent expenditures than on critical 36 36 24 24 28 28 26 26 34 34 35 35 22 22 25 25 22 22 34 34 20 20 22 22 33 33 33 33 18 18 19 19 18 18 32 32 16 16 16 16 32 32 14 14 31 31 14 14 13 13 10 10 30 30 12 12 31 31 10 10 5 5 15 15 25 35 25 35 0 5 0 10 5 1510 2015 20 5 7 59 7 11 9 15 13 15 20 25 13 11 20 3025 3530 4035 40 2 4 2 6 4 8 6 10 8 10 Source: Source: IMF, OECD, IMF, OECD, Bank Bank World World With domestic With domesticfinancing financing now now a primary a primary sourcesource for deficit funding, for deficit funding, Kazakhstan’s Kazakhstan’s service debtdebt service costs havehave costs sharply. risenrisen Elevated sharply. Elevated inflation—triggered inflation—triggered by the the pandemic’s bypandemic’s aftermath aftermath and shocks and shocks fromfrom the the Russia’s With Russia’s invasion invasion domestic of Ukraine—coupled of Ukraine—coupled financing now a primary with tightfor with source monetary tight monetary deficit policies funding,policies aimed at containing aimed Kazakhstan’s at containing debt inflation, service inflation, costs have risen sharply. Elevated inflation—triggered by the pandemic’s aftermath and shocks from the increased havehave the policy increased the policyrate rate and andraised domestic raised domestic borrowing borrowingcosts. Despite costs. these Despite these high high costs, costs, the the Russia’s invasion of Ukraine—coupled with tight monetary policies aimed at containing inflation, have government government increased has the has leanedleaned policy heavily rate heavily andon on domestic domestic raised borrowing, domestic intensifying borrowing, intensifying borrowing costs. fiscal Despite fiscal pressures. pressures. these high By 2024, costs, Bygovernment the the costs 2024, the costs of servicing of servicing has domestic domestic leaned heavilyfinancing on financing climbed domestic to 1.6 climbed borrowing, to 1.6 percent percent of GDP, intensifying of GDP, compared compared fiscal pressures. to By less tothan less 2024, than the percent 1 percent 1 costs beforebefore of servicing the pandemic. the pandemic. domestic Increased Increased financing borrowing borrowing climbed to 1.6 cost cost is crowding percent of GDP, is crowding out essential out essential compared to less thanpublic 1 public investments, investments, percent before the with with the the pandemic. government government Increased now spending now borrowing spendingmore cost on interest is more on interest crowding payments outpayments essential and and recurrent recurrent public investments,expenditures expenditures with on critical than than the government onnowcritical spending more on interest payments and recurrent expenditures than on critical sectors like infrastructure sectors sectors like infrastructure like infrastructure development development thatgenerate that will will generate returns in the returns the future. infuture. This reliance This reliance on costly on costly development that will generate returns in the future. This reliance on costly domestic borrowing to domestic domestic borrowing borrowing to finance to finance deficits deficits is unsustainable is unsustainableand and underscores underscores finance deficits is unsustainable and underscores the need for improved revenue mobilization. the need the need for improved for improved revenue revenue mobilization. mobilization. Figure Figure Figure6.6. 6. Consolidated Consolidated Consolidated fiscal fiscal fiscal balance balance balance Figure 7. Gross Figure Figure 7.Gross 7. government government Gross debt government debt (percent debt (percent (percent of GDP) (percent of GDP) (percent (percent of GDP) of GDP) of GDP) of GDP) Fiscal balance, Fiscal balance, % of GDP 2015-2023 % of GDP 2015-2023 average average Oil Producers Oil Producers Kazakhstan Kazakhstan Middle-Income Middle-Income Countries Countries 9,0 9,0 70,0 70,0 6,0 6,0 60,0 60,0 3,0 3,0 50,0 50,0 0,0 0,0 40,0 40,0 30,0 30,0 -3,0 -3,0 20,0 20,0 -6,0 -6,0 10,0 10,0 -9,0 -9,0 0,0 0,0 2001 2003 2001 2005 2003 2007 2005 2009 2007 2011 2009 2013 2011 2015 2013 2017 2015 2019 2017 2021 2019 2023 2021 2023 2001 2003 2001 2005 2003 2007 2005 2009 2007 2011 2009 2013 2011 2015 2013 2017 2015 2019 2017 2021 2019 2023 2021 2023 Source: Ministry Source: Ministry of Finance, of Finance, Bureau of Statistics, Bureau of Statistics, World World Bank Bank Source: Source: IMF, Ministry IMF, Ministry of Finance, of Finance, Bureau Bureau of Statistics, World World of Statistics, Bank Bank Source: Ministry of Finance, Bureau of Statistics, World Bank Source: IMF, Ministry of Finance, Bureau of Statistics, World estimates estimates estimates estimates estimates Bank estimates National The The National Oil Fund, Oil Fund, a cornerstone a cornerstone of Kazakhstan’s of Kazakhstan’s fiscal resilience, fiscal is under resilience, strain is under as as strain withdrawals withdrawals continue The National to outpace continue Oil Fund, ato contributions. outpace cornerstone WithWith contributions. of Kazakhstan’s liquid liquid fiscal foreign foreign exchange exchange resilience, is under reserves strainreserves equivalent equivalent as withdrawals continue to outpace contributions. With liquid foreign exchange reserves equivalent to just 20 percent of GDP in 2023 the Fund allowed the government to sustain spending during economic downturns 15 15 | P a Page g| e without resorting to tax hikes afterward, ensuring fiscal continuity. However, the persistent drawdowns against the limits set by the fiscal rule have steadily eroded the Fund’s value relative to GDP (Box 1). At its peak in 2015, the Fund’s reserves surpassed 50 percent of GDP, enabling the government to hold a positive net financial asset position of nearly 20 percent of GDP—the difference between Fund’s reserves and government debt. By 2024, however, this margin has vanished, with government debt now nearly matching FX reserves. This erosion of fiscal space raises red flags about the Fund’s long-term sustainability and its capacity to serve as a buffer in future economic downturns in light of volatile oil prices (Figure 8). 24 Funding the Future: Boosting Revenues for Lasting Investments Kazakhstan Kazakhstan Economic Economic Update Update – Winter 2024-2025 – Winter 2024-2025 to just to just 20 percent 20 percent of GDP of GDP in 2023 in 2023 Fund the the Fund allowed allowed government the the government to sustain to sustain spending spending during during economic economic downturns downturns without without resorting resorting to tax to tax hikeshikes afterward, ensuring afterward, fiscal ensuring fiscal continuity. continuity. However, However, the the persistent persistent drawdowns drawdowns against against the the limits set set limits by the by the fiscal fiscal rulerule have steadily have steadily eroded eroded the the Fund’s Fund’s valuevalue relative relative to GDP to GDP (Box (Box 1). At Atpeak 1).its in 2015, its peak in 2015, the the Fund’s reserves Fund’s surpassed reserves surpassed50 percent 50 percent of GDP, of GDP, enabling enabling government the the government to hold to hold a positive a positive financial net net financial asset position asset position of nearly of nearly 20 percent 20 percent of GDP—the of GDP—the difference difference between between Fund’s Fund’s reserves andand reserves government government debt. By 2024, debt. however, By 2024, however,thisthis margin has has margin vanished, vanished, with government with government debt debt now now nearly nearly matching matching FX reserves. FX reserves.This erosion This of fiscal erosion of fiscal space raises space red red raises flags flags about about Fund’s the the Fund’slong-term long-term sustainability sustainability andand its capacity its capacity to serve to serve as a asbuffer a buffer in future economic in future economic downturns downturns in light in light of volatile of volatile oil prices (Figure oil prices 8). 8). (Figure Kazakhstan’s Kazakhstan’s infrastructure infrastructure gap represents gap represents bothboth a challenge a challengeand an opportunity and an opportunity economic for for economic Kazakhstan’s infrastructure gap represents both a challenge and an opportunity for economic transformation. transformation. Current Current infrastructure infrastructuregapgap demands demands increased increased government government investment investment essential essential to to transformation. Current infrastructure gap demands increased government investment essential to breaking breaking of the out out of the middle-income middle-income trap andand trap driving driving growth. growth. data TheThe show data showthatthat peer breaking out of the middle-income trap and driving growth. The data show that peer countries are not countries peer are are countries only not not onlyonly demonstrating demonstrating demonstrating higher higherhigherproductivity productivity productivity growth growth growth butbut are but are alsoalso are also delivering delivering delivering stronger, stronger, stronger,more more more resilient resilient resilient public public public services. services. Ample services. Ample Ample economic economic economic evidence evidence evidence underscores underscores underscores the the the transformativetransformative transformative impact of robust impact impact of of robust robust infrastructure infrastructure infrastructure investment investment investment on reducing onproduction on reducing reducing production production costs, costs, boosting costs, andproductivity, boosting productivity, boosting productivity, andand fueling growth. fueling fueling 15 16 growth. growth. Kazakhstan’s 15 15 Kazakhstan’s 16 16 Kazakhstan’s ambitious ambitious ambitious National National Infrastructure Infrastructure National Plan Infrastructure through 2029Plan through Plan through reflects the 20292029 urgencyreflects of thisthe reflects the urgency mission, urgency layingofout this of athis roadmap for projects across energy, transport, digital, and water infrastructure with nearly US$80 billion mission, mission, laying laying out out a roadmap a roadmap projects for for projects across across energy, energy, transport, transport, digital, digital, andandwater infrastructure water infrastructure in required public resources. Equally essential is ensuring the sustainability of social welfare programs to with nearly with raise US$80 nearly income of billion US$80 thosebillion poor in required in andrequired public vulnerable resources. public and Equally resources. Equally essential ease inequality. 17 is ensuring essential is ensuringthe the sustainability sustainability of social of social welfare welfare programs programs to raise to raise income income of those of those poor andand poor vulnerable vulnerable andandease inequality. ease inequality. 17 17 Figure Figure Figure8. 8. Net 8. Net Net financial financial financial assets assets assets (percent of of (percent Figure Figure 9. Government 9. Government Figure 9. investment Government investment (percent investment (percent GDP) GDP) (percent of GDP) of GDP) of GDP) (percent of GDP) debt, GrossGross debt, % of GDP % of GDP 2007-2014 2007-2014 2015-2023 2015-2023 Oil Fund Oil Fund FX reserves. FX reserves. % of GDP % of GDP 6,0 6,0 Net financial Net financial assets, assets, % of GDP % of GDP 5,0 5,0 45 45 4,0 4,0 30 30 3,0 3,0 15 15 2,0 2,0 0 0 1,0 1,0 -15 -15 -30 -30 2001 2001 2003 2003 2005 2005 2007 2007 2009 2009 2011 2011 2013 2013 2015 2015 2017 2017 2019 2019 2021 2021 2023 2023 Source: Source: Ministry Ministry of Finance, of Finance, Bureau Bureau of Statistics, of Statistics, staff estimates Source: staff estimates Source: IMF, Ministry IMF, Ministry of Finance, of Finance, staff estimates staff estimates Source: Ministry of Finance, Bureau of Statistics, staff Source: IMF, Ministry of Finance, staff estimates estimates 1. Rules-based Box Box framework 1. Rules-based hampered framework hampered by weak by weak implementation implementation enforcement and and enforcement 15 The Impact of Infrastructure on Development Outcomes: A Qualitative Review of Four Decades of Literature (English). Policy Research working paper; no. WPS 10343 15 The Impact 15 The Impact on Development of Infrastructure of Infrastructure on Development Outcomes: A Qualitative Outcomes: Review A Qualitative Review of Four Four Decades of Decades of Literature of Literature Policy (English). (English). Research Policy working Research paper; working paper; 16 International Monetary Fund. Research Dept. (2014). "Chapter 3. Is it Time for an Infrastructure Push? The Macroeconomic Effects of Public no. 10343 no. WPS WPS 10343 Investment". In World Economic Outlook. 16 International 16 International Fund.Fund. Monetary Monetary Research Research (2014). Dept.Dept. "Chapter (2014). "Chapter 3. Is 3. Is it Time it Time for an for Push? Infrastructure an Infrastructure The Macroeconomic Push? The Macroeconomic Effects of Public Effects of Public 17 The Effects of Infrastructure Development on Growth and Income Distribution. (2004) Policy Research Working Paper; No.3400. World Bank. Investment". Investment". In World In World Economic Economic Outlook. Outlook. 17 The Effects 17 The Effects Development of Infrastructure of Infrastructure Development on Growth and Income on Growth Distribution. and Income Distribution. (2004) Policy (2004) Policy Research Working Research Working Paper;Paper; No.3400. No.3400. World Bank.Bank. World 16 16 | P a |gPeage Kazakhstan Economic Update – Winter 2024-2025 25 Box 1. Rules-based framework hampered by weak implementation and enforcement Kazakhstan’s current fiscal rule has too many overlapping numerical targets that complicates effective fiscal management. It attempts to balance several operational rules and objectives, such as capping public expenditure growth below nominal GDP growth—calculated as the 10-year average real GDP growth plus expected inflation—and reducing the non-oil deficit to below 5 percent of GDP by 2030. Additionally, it incorporates targets for debt levels and debt service payments relative to central government expenditure. However, the complexity and redundancy of these targets hinder successful implementation. A significant limitation lies in the narrow scope of the fiscal rule, which applies solely to the central government budget, excluding local budgets and the balance of the National Oil Fund. Central to the rule are guidelines for withdrawals from the National Oil Fund, comprising guaranteed and targeted transfers. Guaranteed transfers are capped at KZT 2 trillion annually, but the criteria for targeted withdrawals remain ambiguous, granting the government excessive discretion. This lack of clarity allows for unsynchronized withdrawals, undermining the rule’s counter-cyclical intent. In practice, frequent discretionary withdrawals from the National Oil Fund, even during economic upswings, have derailed the fiscal rule’s objectives. These withdrawals have fueled inflationary pressures, forcing the central bank to maintain tight monetary policies, resulting in higher borrowing costs. The weak enforcement mechanisms are another limit to the rule’s effectiveness in ensuring fiscal sustainability. To bolster fiscal discipline, the government should streamline the fiscal rules and prioritize the non-oil deficit as the central anchor. Implementing a structural non-oil deficit target would be more effective, provided the government can accurately estimate potential non-oil GDP and the cyclical component of non-resource revenues. Flexibility could be enhanced by extending the non-oil deficit target over a two- to three-year horizon, reducing the need for abrupt policy adjustments during external shocks. Simplifying the fiscal framework by concentrating on the non-oil deficit and maintaining a consistent expenditure growth target would enhance transparency and policy coherence. Ultimately, a strong commitment from the government to adhere to fiscal rule requirements is crucial; without it, the rules risk becoming mere formalities rather than genuine guidelines for fiscal discipline. Source: World Bank 2023 Public finance review, staff assessment Kazakhstan must double government investment in the medium term to bridge its infrastructure gap. The country has long underinvested in public infrastructure, lagging both high-income nations and resource-rich peers with similar economic and geographic conditions. Government investment dropped sharply from an average of 5 percent of GDP in 2007-2014 to just 3 percent over the past decade, leaving critical infrastructure underfunded (Figure 9).18 This investment shortfall has eroded the efficiency and 18 The government has continued to priority welfare-enhancing programs aimed at alleviating the social impact of multiple crises over the past decades. As the fiscal envelope has got tighter, the share of budget investment has dropped from almost 1/4th of total expenditure before 2012 to less than 15 percent in 2015-2023. 26 Funding the Future: Boosting Revenues for Lasting Investments reliability of essential public services, from transport to utilities, limiting the country’s ability to meet rising demand for public services. To reverse this trend, the government must scale up public investment, prioritizing high-impact projects in transport, energy, digital and utility networks. These investments are essential not only for ensuring uninterrupted service delivery but also for improving energy efficiency and building resilience to mitigate the impacts of natural disasters on lives and livelihoods. The recent Kazakhstan Kazakhstan Economic Economic UpdateUpdate – Winter 2024-2025 – Winter 2024-2025 devastating floods serve as a stark reminder of the growing demand for substantial government investment in climate adaptation measures. (Figure 10-13). Additional public investment—estimated at 19 20 19 be 2-3 percent of GDP annually—will 20 necessary to meet infrastructure needs. 19 20 to meet to meet infrastructure infrastructure needs. needs. Figure Figure 10. Figure 10. Road density, 10. Road Road density, density, km/surface km/surface km/surface area areaFigure area 11. Quality Figure Figure11. Quality of roads, 11. Quality ofof roads, 1-7 roads, 1-7(best 1-7 (best (best score) score) score) Brazil Brazil Kazakhstan Kazakhstan ARE ARE Canada Canada Australia Australia CHN CHN 25 25 EGY EGY AUS AUS 20 20 FIN FIN GEO GEO EST EST 15 15 UZB UZB BEL BEL 10 10 PHL PHL COL COL KAZ; 3,6 KAZ; 3,6 5 5 PER PER CMR CMR 0 0 AGO AGO 2019 2019 2021 2021 2024 2024 0,0 0,0 1,0 1,0 2,0 2,0 3,0 3,0 4,0 4,0 5,0 5,0 6,0 6,0 7,0 7,0 Source: The Travel Source: Source: The The Travel & Travel Tourism & Tourism Development & Tourism Index Development Development (TTDI) Index Index 2024 (TTDI) (TTDI) 20242024 The Travel Source:Source: The Source: & Travel The Tourism && Travel Tourism Development Development Tourism Index Index (TTDI) Development (TTDI) 2024 Index 2024 (TTDI) 2024 Ramping Ramping up fiscal up fiscal revenuesrevenuesis not ismerely not merely a policy a policy option—it’s option—it’s an urgent an urgent and indispensable and indispensable step step toward toward ensuring ensuring long-term long-term fiscal sustainability. fiscal sustainability. Although Although low public low public Ramping up fiscal revenues is not merely a policy option—it’s an urgent and indispensable step debt debt relative relative to GDP allows to GDP allows room for further room toward for borrowing, further ensuring rising borrowing, long-term debt rising fiscal debt service cost Although service sustainability. cost outpaces that that low outpaces economic economic public growth debt relativegrowth tocould GDP undermine could allowsundermine room stability, stability, especially especially given given the the drag of drag of Kazakhstan’s Kazakhstan’s stagnant productivity. stagnant Sole productivity. reliance Sole for further borrowing, rising debt service cost that outpaces economic growth could undermine stability, reliance on on domestic domestic borrowing borrowing is costly, especially is costly, given if thenot ifproperly dragnot ofproperly mixed mixed Kazakhstan’s with with other other sources, stagnant sources, given productivity. given relatively Sole relatively high onhigh reliance inflationary inflationary domestic context borrowingcontext due due in is large in large costly, part to if not parthigh dependence to high properly dependence mixed with on imported on imported other sources, products given products and exchange relatively and exchange high rate volatility. inflationaryrate volatility. context Heavy due inHeavy use use large part to high dependence on imported products and exchange rate volatility. Heavy use of National Oil of National of National Oil FundOil Fund reserves, reserves, essential essential resources resources for future for future generations, generations, to cover to cover gaps,gaps, fiscalfiscal on the on the Fund reserves, essential resources for future generations, to cover fiscal gaps, on the other hand, could hand, otherother deplete fiscalcould hand, could deplete reserves fiscalfiscal deplete reserves prematurely, reserves prematurely, prematurely, especially especially as global especially as global as global decarbonization decarbonization decarbonization pressures reduce oil pressures pressures revenues. reduce reduce oil revenues. oil revenues. Strengthening Strengthening revenue Strengthening mobilizationrevenue isrevenue mobilization mobilization therefore is therefore imperative. is therefore Yet, imperative. these imperative. necessary Yet, steps these Yet, these demandnecessary necessary strong demand stepssteps politicaldemandstrong political strong commitment and commitment political tough choices. and tough commitment and tough choices. choices. Figure Figure 12. of 12. Use Use of basic basic drinking drinking water Figure water Figure 13. Broadband 13. Broadband internet internet subscribers subscribers (percent (percent of population) of population) in 2024 in 2024 (perpopulation) (per 100 100 population) 19 UN. ESCAP (2020). Infrastructure financing in Asian Landlocked Developing Countries: challenges, opportunities and modalities. Retrieved from: https://hdl.handle.net/20.500.12870/4107. 20 International Monetary Fund. Middle East and Central Asia Dept. (2020). Front Matter.  IMF Staff Country Reports,  2020(038), from https://doi.org/10.5089/9781513529288.002.A000 Kazakhstan Economic Update – Winter 2024-2025 27 Kazakhstan Economic Update – Winter 2024-2025 Kazakhstan Economic Update – Winter 2024-2025 Figure 12. Use of basic drinking water Figure 13. Broadband internet subscribers in (percent of population) 2024 (per 100 population) Upper-middle income 0 10 20 30 40 50 Upper-middle income 0 10 20 30 40 50 High-Income Economies High-Income Economies Canada Canada 100 100 Australia 99 Australia 99 98 High-Income 98 Economies High-Income Economies 97 97 Brazil 96 Brazil 96 95 Upper-middle income 95 Upper-middle income 94 94 Kazakhstan 93 Kazakhstan 93 Kazakhstan Brazil Australia Canada Kazakhstan Brazil Australia Canada Source: The Travel & Tourism Development Index (TTDI) 2024 Source: The Travel & Tourism Development Index (TTDI) 2024 Source:Source: The & The Travel Travel & Tourism Tourism Development Development Index 2024 Index (TTDI) (TTDI) 2024 Source: The Source: TheTravel Travel & Tourism Development & Tourism Development Index Index(TTDI) (TTDI) 2024 2024 The ongoing Tax Reform The ongoing is projected Tax Reform to bolster is projected revenue to bolster base, but revenue base, ambition its but falls short fallsof its ambition short of needed what iswhat to transform the revenue landscape. The upcoming Tax Code is needed to transform the revenue landscape. The upcoming Tax Code aims to streamline aims to streamline exemptions, their exemptions, reduce The ongoing scope, Tax Reform reduce theirand introduce is projected scope, higher to bolster and introduce levies revenue higher in base, levies key but sectors, laying the its ambition in key sectors, groundwork falls laying short of what foris for the groundwork needed to transform the revenue landscape. The upcoming Tax Code aims to streamline exemptions, a morearobust more fiscal framework. robust Government estimates suggestsuggest these measures could increase reduce their scope, fiscal framework. and introduce higher levies in key estimates Government these measures sectors, laying the groundwork for a more could increase robust revenues by a revenues fiscal mere framework. 1.0 by a merepercent of GDP 1.0 percent Government in 2026—a of GDP estimates suggest critical in 2026—a move toward critical move these measures rebuilding the toward rebuilding could increase tax revenues by base. the 21 tax base.21 a mere However, 1.0 even with However, percent of these even GDP withplanned changes, these planned in 2026—a critical movetax-to-GDP changes, toward ratio will tax-to-GDP rebuilding remain ratio the will tax below remain base. 21 mid-2000 beloweven However, with and levels mid-2000 levels and these are unlikely planned to significantly are unlikely to significantly alter the country’s low-tax status, leaving considerable room for further changes, alter tax-to-GDP the country’s ratio low-tax will remain below status, mid-2000leaving levelsconsiderable room and are unlikely to for further significantly revenue mobilization. alter the country’s low-tax status, leaving considerable room for further revenue mobilization. revenue mobilization. The Tax The Reform The Tax Tax should Reform Reform aim to should should aim foster aim togrowth, foster to foster ensure growth, growth, ensureequity, ensure equity,and equity,strengthen and the and strengthen strengthen the thecontract social social social contract contract between the between government the government and its and citizens. its In citizens.anIn oil-rich an economy oil-rich economy like Kazakhstan, like Kazakhstan, between the government and its citizens. In an oil-rich economy like Kazakhstan, where a significant where wherea significant a significant portion of government portion portion of governmentrevenues of government comes revenues revenues from comes natural from comes from resources, natural resources, natural the taxtax the resources, systemtax must system must balance balance reliance reliance on these revenues with efforts to diversify and broaden the tax base.the system A critical must objective is balance to build reliance a on theseonrevenues these with efforts revenues to diversify withbusinesses efforts and broaden to actively diversify the tax base. and broaden taxA base. the financescriticalA objective critical is to build a build a system where citizens and contribute to public through fairobjective is to and transparent system whereand, system taxation citizens where and citizens in return, businesses can expect actively public contribute and businesses high-quality actively services, toinfrastructure, contributepublic to finances publicand throughthrough finances fair and social protection. fair and This transparent taxation transparent reciprocal and, in return, taxationunderpins and, in return, relationship can expect can trust in high-quality expect public public high-quality institutions services, should services, and public infrastructure, and cultivate infrastructure, social a culture of shared and social protection. This reciprocal responsibility protection. relationship and accountability. This reciprocal underpins relationship trust in trust underpins public in institutions and should public institutions and cultivate a should cultivate a culture of shared responsibility and accountability. culture of shared responsibility and accountability. Global evidence highlights that well-targeted Tax Reforms can positively impact economic activity. Global evidence Global Studies highlights evidence consistently that well-targeted highlights emphasize that the typeTax that well-targeted Reforms of tax, Tax can economic Reforms prevailing positively impact impact can positively conditions, economic and—most economic activity. Studies consistently importantly—the emphasize allocation of tax that revenues thearetype key of tax, prevailing determinants of economic outcomes. conditions, Studies activity. Studies consistently emphasize that the type of tax, prevailing economic conditions, and— show and— that tax increases directed allocation most importantly—the revenues of taxdeficits, toward reducing most importantly—the allocation are key determinants enhancing of tax revenues education, and ofinvesting are key determinants outcomes. Studies Studies of outcomes. show in infrastructure that tend to show that tax increases directed tax increases reducing toward toward directed deficits, deficits, reducing enhancing education, enhancing and investing education, in infrastructure and investing in infrastructure generate tend totend positive spillovers over time. to generate positive spillovers over time. 22 23 22 23 increased public investments generate These These increased public investments generate productivity gains, boosting potential output and raising productivity gains, boosting potential output and raising the the capital public public stock, capitaland andsocial foster stock, foster social well-being, underscoring well-being, the long-term underscoring benefitsbenefits the long-term of effective revenuerevenue mobilization. of effective mobilization. 21 The government estimates released in media outlet. 21 The government estimates released in media outlet. 28 21 released inthe The government estimatesFunding outlet. Boosting Revenues for Lasting Investments Future: media 22 Chye-Ching Huang and Nathaniel Frentz, “What Really Is the Evidence on Taxes and Growth?” CBPP, February 18, 2014, 22 Chye-Ching Huang and Nathaniel Frentz, “What Really Is the Evidence on Taxes and Growth?” CBPP, February 18, 2014, https://www.cbpp.org/research/what-really-is-the-evidence-on-taxes-and-growth. https://www.cbpp.org/research/what-really-is-the-evidence-on-taxes-and-growth. 23 Nazila Alinaghi & W. Robert Reed, 2021, “Taxes and Economic Growth in OECD Countries: A Meta-analysis,” Public Finance Review 49(10), 3-40. 23 Nazila Alinaghi & W. Robert Reed, 2021, “Taxes and Economic Growth in OECD Countries: A Meta-analysis,” Public Finance Review 49(10), 3-40. generate positive spillovers over time. 22 23 These increased public investments generate productivity gains, boosting potential output and raising the public capital stock, and foster social well-being, underscoring the long-term benefits of effective revenue mobilization. Kazakhstan’s past focus on generous tax incentives for businesses has not produced the desired gains in productivity, economic complexity. Instead, these incentives have likely exacerbated income inequality, with overall growth masking the uneven distribution of benefits—particularly for lower- income households.24 A shift toward increased public spending, supported by a stronger tax base, would enable strategic investments in physical and digital infrastructure, education, and healthcare, ultimately improving social well-being. Such a shift could foster inclusive growth, reduce inequality, and provide the foundation for long-term productivity gains and prosperity. 22 Chye-Ching Huang and Nathaniel Frentz, “What Really Is the Evidence on Taxes and Growth?” CBPP, February 18, 2014, https://www.cbpp.org/research/what-really-is-the-evidence-on-taxes-and-growth. 23 Nazila Alinaghi & W. Robert Reed, 2021, “Taxes and Economic Growth in OECD Countries: A Meta-analysis,”  Public Finance Review 49(10), 3-40. 24 Kazakhstan Economic Update: Shaping Tomorrow: Reforms for Lasting Prosperity (English). Kazakhstan Economic Update. World Bank Group. Kazakhstan Economic Update – Winter 2024-2025 29 Kazakhstan Economic Update – Winter 2024-2025 Kazakhstan’s past focus on generous tax incentives for businesses has not produced the desired gains in productivity, economic complexity. Instead, these incentives have likely exacerbated income inequality, with overall growth masking the uneven distribution of benefits—particularly for lower-income households.24 A shift toward increased public spending, supported by a stronger tax base, would enable strategic investments in physical and digital infrastructure, education, and healthcare, ultimately improving social well-being. Such a shift could foster inclusive growth, reduce inequality, and provide the foundation for long-term productivity gains and prosperity. MAXIMIZING THE POTENTIAL OF CIT, PIT, AND VAT Maximizing the potential of CIT, PIT, and VAT Kazakhstan’s tax revenue structure is heavily reliant on CIT and VAT, highlighting a fiscal composition that contrasts sharply with global benchmarks. In 2022, CIT alone represented 37 percent of total tax revenue—over Kazakhstan’s twice tax revenue structure the OECD is heavily average reliant of VAT, on CIT and 16 percent—while VAT highlighting a fiscal contributed 25 composition percent of revenues, lower than the one-third share typical in OECD countries. Together,total that contrasts sharply with global benchmarks. In 2022, CIT alone represented 37 percent of and VAT CIT tax revenue—over twice the OECD average of 16 percent—while VAT contributed 25 percent of revenues, account for nearly 60 percent of Kazakhstan’s tax base, compared to less than half in most high-income lower than the one-third share typical in OECD countries. Together, CIT and VAT account for nearly 60 economies, while percent PIT and excises of Kazakhstan’s tax base,are notably compared tolower than less than in peer halfin and aspirational most high-income countries. economies, while This reliance reflects both the country’s dependency on resource-driven sectors and its relatively PIT and excises are notably lower than in peer and aspirational countries. This reliance reflects both narrow the country’s dependency on resource-driven sectors and its relatively narrow revenue base, underscoring base, underscoring revenue potential potential vulnerabilities and areas for reform (Figure 14). vulnerabilities and areas for reform (Figure 14). Additionally, the extensive system of tax incentives, while designed to stimulate investment and Additionally, the extensive system of tax incentives, while designed to stimulate investment and economic activity, economic in practice activity, reducethe reduce in practice effective the effective taxtax base. base. This section This section examinesexamines the and structure the structure and performance performanceofof CIT,PIT, CIT, PIT, VAT, excises, VAT, excises, as well as well as role as the theofrole tax of tax incentives, incentives, to to explore explore how reformshow reforms could improve revenue mobilization. could improve revenue mobilization. Figure 14. Tax structure in 2022 (as percent of total tax revenue) Figure 14. Tax structure in 2022 (as percent of total tax revenue) Corporate income tax VAT Personal income tax Others 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: IMF, Ministry of Finance, World Bank estimates Source: IMF, Ministry of Finance, World Bank estimates 30 Funding the Future: Boosting Revenues for Lasting Investments Kazakhstan Kazakhstan Economic Economic UpdateUpdate – Winter 2024-2025 – Winter 2024-2025 CORPORATE INCOME TAX Corporate Corporate The The income tax tax income dominance dominance of corporate of corporate incomeincome tax intax in structure tax tax structure conceals conceals a troubling a troubling decline in its decline in its contributions, contributions, which which reflects reflects low tax tax buoyancy low buoyancy and anda constrained a constrained revenue base. revenue base. 25 Although Although 25 CIT CIT revenue Therevenue averaged averaged dominance nearlynearly 5 percent 5 percent of corporate of GDP income of GDP tax in between tax 2018 between and 2022—slightly 2018 structure and 2022—slightly conceals above a troubling above the the high-income high-income decline in its average—the average—the contributions, past decade past which decade shows reflects a steady shows low tax downward a steady buoyancy downward and trend trend (Figure a constrained 15) (Figure . This 15). slide revenue This slide base.began 25 following began Although CIT a following a 20092009 CIT rate revenue CIT cut ratefrom averaged cut from 30 percent nearly 530 percent percentto 20 of topercent, GDP20 percent, aimed between aimed at boosting 2018 andat boosting competitiveness 2022—slightly competitiveness above and productivity. the and productivity. high-income average—the past decade shows a steady downward trend (Figure 15). This slide began following a 2009 these Yet, Yet, hoped-for these hoped-for economic economic gains gains havehave not materialized not materialized as anticipated. as anticipated. Instead, Instead, the rate the rate cut cut CIT rate cut from 30 percent to 20 percent, aimed at boosting competitiveness and productivity. Yet, permanently permanently these lowered hoped-for tax revenue lowered economic tax revenue gains by an have by not an estimated estimated materialized2.5 as 2.5 percent of GDP, percent anticipated. of GDP, limiting Instead, thegovernment rate government limiting resources cut permanently resources essential for essential forlowered tax investments investments revenue by in an in infrastructure infrastructure estimated 2.5 and and of development percent development (Figure GDP, limiting 16). Had (Figure government16). Had the CIT therate resources CIT remained rate for remained essential at at original its original its investments level level inthe government the government infrastructure andwould havehave would been development able 16) been able to .allocate (Figure Had the anCITadditional to allocate an remained additional rate US$6-7 at itsbillion US$6-7 billion original in 2023 level in 2023 the government would have been able to allocate an additional US$6-7 billion in 2023 alone to growth- alone to growth-oriented alone to growth-oriented priorities. priorities. shortfall This This shortfall highlights highlights the critical the critical needneedfor afor a balanced balanced fiscalfiscal oriented priorities. This shortfall highlights the critical need for a balanced fiscal strategy in re-evaluating strategy strategy in re-evaluating in re-evaluating the CIT CIT structure the structure — one — onethat that carefully weighs carefully the benefits weighs the CIT structure — one that carefully weighs the benefits of stimulating growth against the imperative the benefits of stimulating of stimulating of growth growth against securing thesustainability. against fiscal imperative the imperativeof securing fiscalfiscal of securing sustainability. sustainability. Figure Figure 15. Cross-country 15. Cross-country comparisons of of Figure comparisons 16. CIT Figure 16.collection CIT collection vs tax tax rates vsrates Figure 15. Cross-country comparisons of Figure 16. CIT collection vs tax rates taxes paidpaid taxes by corporations by corporations (percent (percent of GDP, taxes paid by corporations (percent of GDP, (percent (percent of GDP, of GDP) of GDP) (percent of GDP) 2018-2022 2018-2022 average) average) 2018-2022 average) Corporate Corporate income income tax, tax, % of % of GDP GDP Corporate Corporate income income tax tax rate, LHS % LHS %rate, HIC OECD HIC OECD median median Corporate Corporate income income tax, tax, % of % of GDP GDP 7,0 7,0 35 35 14 14 6,0 6,0 30 30 12 12 5,0 5,0 25 25 10 10 4,0 4,0 3,0 3,0 20 20 8 8 2,0 2,0 15 15 6 6 1,0 1,0 10 10 4 4 0,0 0,0 5 5 2 2 Germany Germany Spain Spain Iceland Slovakia Iceland Slovakia Belgium Belgium Hungary Lithuania Hungary Lithuania Chile Chile Türkiye Türkiye Korea Korea France France Kazakhstan Kazakhstan 0 0 0 0 2000 2002 2000 2004 2002 2006 2004 2008 2006 2010 2008 2012 2010 2014 2012 2016 2014 2018 2016 2020 2018 2022 2020 2022 Source: Source: IMF, Source: OECD, IMF,IMF, Ministry OECD, OECD, Finance, Ministry of of Ministry World of Finance, Finance, World Bank World estimates Bank Source: Bank estimatesSource: World Bank World Source: estimates Bank World estimates Bank estimates estimates Moreover, Moreover, CIT revenue CIT revenue shows significant shows significant volatility, volatility, particularly particularly in comparison in comparison to other to other resource- resource- rich rich countries. countries. Moreover, CITFrom 2010 From revenue to 2023, 2010 shows to 2023, CIT revenues significant CIT revenues fluctuated fluctuated volatility, within particularly a comparison with standard a standard to deviation deviationotherof ofa 1.6, level 1.6, a level resource-rich of of instability instability countries. surpassing farFrom surpassing far 2010 the relative to 2023, the consistency relative CIT revenues consistency fluctuatedseen seen with in countries in acountries standard like Brazil like of deviation Brazil (0.5) 1.6, a (0.5) and of level Mexico and Mexico (0.7),(0.7), instability though though far somewhat surpassing the less somewhat less erratic relative erratic than than consistency Norway seenNorway (4.2).(4.2). in countriesThe volatility The like volatility Brazil of and (0.5) Kazakhstan’s ofMexico Kazakhstan’s (0.7),CIT revenues CIT revenues though largely somewhat largely reflects reflects less the influence erratic the thaninfluence of the Norway the of oil (4.2). The oil sector, where sector, volatility CIT collections ofwhere CIT collections Kazakhstan’s are largely are highly CIT revenues sensitive highly tothe sensitive reflects to global global oil price influence oil price of shifts. shifts. the When oil prices When oil sector, oil prices where surge, so do surge, CIT collections soCITdo arerevenues; CIT revenues; highly when sensitivewhen prices fall,oil prices to global revenues fall, revenues price decline shifts. decline When oil sharply. sharply. This prices This heavy heavy surge, so do CIT revenues; when prices fall, revenues decline sharply. This heavy dependence on oil amplifies dependence dependence on oil oil amplifies onamplifies volatility, volatility, exposing exposing the budget the budget to substantial to substantial external shocks external (Figure shocks (Figure volatility, exposing the budget to substantial external shocks (Figure 17,18). 17,18) 17,18) . . Figure Figure 17. CIT 17.by CIT by sectors sectors (percent (percent Figure of total) Figure of total) 18.from 18. CIT CIT from oil sector oil sector vsprice vs Oil Oil price 25 The 2023 Kazakhstan Public Finance Review indicates that the CIT exhibits the lowest buoyancy among the analyzed tax types. CIT buoyancy, measured as the ratio of the growth rate in tax revenues to the growth rate of the tax base (in real terms), was found to be 0.49. 25 The 2023 25 The Public Finance Kazakhstan 2023 Kazakhstan Public Finance ReviewReview indicates indicates that that the CITthe CIT exhibits exhibits the lowest buoyancy the lowest the analyzed buoyancy among among tax types. the analyzed types. taxCIT buoyancy, measured CIT buoyancy, measured as the as the ratio the growth ofratio of the growth rate in rate tax revenues to the growth in tax revenues rate of rate to the growth the tax of the base (in tax real(in base terms), real terms), was found found wasto to be 0.49. be 0.49. Kazakhstan Economic Update – Winter 2024-2025 31 21 21 | P a Page g| e Kazakhstan Kazakhstan Economic Economic Update Update – Winter 2024-2025 – Winter 2024-2025 Figure 17. CIT by sectors (percent of total) Figure 18. CIT from oil sector vs Oil price CIT non-oil, CIT non-oil, % of total % of total sector, CIT oil CIT % oil sector, % Oil price, Oil price, US$ per barrel US$ LHS LHS per barrel CIT oil-sector, CIT oil-sector, % of GDP % of GDP 100% 100% 120 120 7,0 7,0 80% 80% 100 100 6,0 6,0 5,0 5,0 60% 60% 80 80 4,0 4,0 60 60 40% 40% 3,0 3,0 40 40 2,0 2,0 20% 20% 20 20 1,0 1,0 0% 0% 0 0 0,0 0,0 2001 2003 2001 2005 2003 2007 2005 2009 2007 2011 2009 2013 2011 2015 2013 2017 2015 2019 2017 2021 2019 2023 2021 2023 2001 2003 2001 2005 2003 2007 2005 2009 2007 2011 2009 2013 2011 2015 2013 2017 2015 2019 2017 2021 2019 2023 2021 2023 Source: Source: Bureau Source: Bureau Bureau of Statistics, of Statistics, Ministry of Statistics, Ministry of Finance, Ministry of Finance, World of Finance, World Bank World Bank Source: Bank Source: of Finance, Ministry Ministry Source: of of Ministry Finance, WorldWorld Bank Finance, estimates Bank World estimates Bank estimates estimates estimates estimates Standard Standard raterate CIT CIT is notis not onlyonly below below OECD the the OECD average but but average lagslags alsoalso behind behind rates in several rates in several resource-rich resource-rich peer peer economies. economies. While many While many countries countries implement implement differential differential CIT rates CIT rates across sectors, across sectors, Kazakhstan Kazakhstan 32 maintains a Funding maintains flat flatpercent a 20 percent 20Future: the rate rate applied Boosting across applied Revenues the across for sectors Lasting the Investments sectors lower thanthan lower the OECD the OECD average average weighted weighted by size by size of GDP of GDP at 26.2 at 26.2 percent in 2023. percent Corporate in 2023. 26 26 Corporate gains capital capital and and gains interest interest income income are are taxed taxed at same at the the same 20 percent 20 percent though rate,rate, though dividends dividends are fully exempt, are fully exempt, providing providing attractive incentives attractive incentives 0% 0 0,0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Source: Bureau of Statistics, Ministry of Finance, World Bank Source: Ministry of Finance, World Bank estimates estimates Standard CIT rate is not only below the OECD average but also lags behind rates in several resource-rich peer economies. While many countries implement differential CIT rates across sectors, Kazakhstan maintains a flat 20 percent rate applied across the sectors lower than the OECD average weighted by size Standard CIT of GDP rate is notat 26.2 only below percent in 2023. the OECD average Corporate 26 but also lagscapital gains behind rates in and interest several income are resource- taxed at the rich same peer While rate, 20 percent economies. countries dividends many though are fully exempt, implement differential providing CIT rates across sectors,attractive Kazakhstan incentives maintains a flat 20 percent rate applied across the sectors lower than the OECD average weighted by size for investors. of GDP at 26.2 percent ina Additionally, preferential 2023. 26 CorporateCIT rate capital of and gains 6 percent is applied interest income to the are taxed at theagricultural same 20 sector, supporting percent rate,development rural though dividends are food and production, fully exempt, while providing an excess attractive profit incentives tax levies for investors. rates from 10 to Additionally, 60 percent to capture windfalls, depending on profitability levels. This combination of uniform CIT a preferential CIT rate of 6 percent is applied to the agricultural sector, supporting rural development and food production, while an excess profit tax levies rates from 10 to 60 percent to capture windfalls, depending rates and incentives, on profitability though levels. business-friendly, This combination of uniform CITmay dilute rates the revenue and incentives, though base needed for business-friendly, may long-term fiscal resilience and development dilute the revenue base needed for (Figure long-term 19) . resilience and development (Figure 19). 27 fiscal 27 Figure 19. Comparative statutory 19. Comparative Figure CIT statutory CIT andand PIT rates PIT rates 2024-2025 (percent) (percent) 2024-2025 60,0 High-income economies 50,0 South Africa Headline PIT rate (%) 40,0 Colombia Türkiye Mexico 30,0 Brazil 20,0 10,0 Kazakhstan 0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0 40,0 Headline CIT rate (%) Source: PWC, World Bank Source: PWC, World Bank CIT productivity has improved since 2020, nearing the levels of top-performing resource-rich 26 Corporate tax rates around the world, 2023 (2023) Tax Foundation. Available at: https://taxfoundation.org/data/all/global/corporate-tax-rates-by- economies.28 This positive trend underscores gains in efficiency within the existing tax framework, yet country-2023/. 27 there World Bank. remains 2023. considerable Kazakhstan: room strengthening for public further finance progress. for inclusive Boosting and resilient CIT Public growth. productivity through finance review. enhanced World Bank. collection efforts and an overhaul of CIT-related incentives could reduce reliance on volatile sectors and expand fiscal capacity. These improvements would not only reduce dependency on volatile sectors but 22 | P a g e also provide the government with greater flexibility and increase the fiscal space (Figure 20). 26 Corporate tax rates around the world, 2023 (2023) Tax Foundation. Available at: https://taxfoundation.org/data/all/global/corporate- tax-rates-by-country-2023/. 27 World Bank. 2023. Kazakhstan: strengthening public finance for inclusive and resilient growth. Public finance review. World Bank. 28 CIT productivity is a ratio of CIT collection to GDP divided by the standard CIT rate Kazakhstan Economic Update – Winter 2024-2025 33 Kazakhstan Kazakhstan Economic Economic Update Update – Winter 2024-2025 – Winter 2024-2025 CIT productivity CIT productivity improved has has improvedsince 2020, since 2020, nearing the levels nearing of top-performing the levels of top-performing resource-rich resource-rich economies. economies. 28 This This 28 positive positive trend underscores trend gains underscores in efficiency gains in efficiency within within the existing the existing tax framework, tax framework, yet yet there remains there remains considerable considerable room for further room for further progress. progress. Boosting Boosting CIT productivity CIT productivity through through enhanced enhanced collection collection efforts efforts and and an overhaul of CIT-related an overhaul of CIT-related incentives incentives could reduce could reduce reliance reliance on volatile sectors on volatile sectors but alsoPERSONAL INCOME TAX and expand and expand provide but also capacity. fiscal fiscal provide capacity. These the government These the government improvements improvements with with greater would greater not only would flexibility and and flexibility not only increase reduce increase dependency reduce dependency the fiscal the fiscal space on volatile (Figure space on volatile sectors sectors (Figure 20). 20). Personal Personal income income tax tax Personal Personal Income Personal Income collections Tax Tax Tax Income collections collections are are among among areamong thethe lowest the globally lowest lowest globally globallyandandand have have have steadily steadily steadily declined declined declined over overover the past the past the decade, past reflecting decade, decade, reflecting reflecting significant significant significant gaps gaps gaps in revenue in revenue in revenue mobilization. mobilization. mobilization. OverOver Over the last the lastthe five last years, five five years, the the years, the PIT- to-GDP ratio has averaged just 1.3 percent, far below the OECD average of 8.1 percent during the same PIT-to-GDP PIT-to-GDP ratioratio has averaged has averaged justpercent, just 1.3 far below 1.3 percent, far below the OECD the OECD average average of 8.1 8.1 percent ofpercent during during the the period. This marks a drop from an average of 1.7 percent before 2007, driven largely by policy changes. same period. same This This period. marks marks a drop fromfrom a drop an average an average of 1.7 ofpercent 1.7 percent before 2007, before driven 2007, Prior to 2007, Kazakhstan operated a progressive PIT system with tax brackets ranging from 5 percent to driven largely by policy largely by policy changes. changes. PriorPrior 30 percent. to to 2007, 2007, However, theKazakhstan Kazakhstan shift to operated a flatoperated a progressive 10 percent a tax PIT progressive rate in PITintended system 2007, system with with tax to tax brackets brackets simplify the ranging ranging system, from from failed 5 percent 5 percent to to 30 boost topercent. However, 30 percent. revenues. Instead, However, the shift it cemented shift the oneto a to offlat the a 10 flat 10 effective percent lowest tax rate percent tax burdens rate in 2007, tax intended in 2007, on intended labor to simplify income insimplify to the the system, the system, region. failed 29 failed (Figure to boost to 21,22) boost revenues. revenues. Instead, Instead, it cemented it cementedone one of the the lowest of lowest effective effective tax burdens tax burdens on on labor income labor incomein thein region. the region. 29 (Figure 29 21,22) (Figure 21,22) Figure Figure Figure 21.Personal 21. 21. Personal Personal income income income tax tax revenue revenue tax revenue Figure Figure 22. Evolution 22. Evolution Figure 22. of of PIT ofrevenues Evolution PIT revenues (percent PIT revenues (percent (percent of GDP in 2022) (percent of GDP) (percent (percent of GDP of GDP in 2022) in 2022) of GDP) of GDP) 16,0 16,0 Introduction Introduction of a flat ofPIT rate a flat PIT rate 14,0 14,0 PIT revenue, PIT revenue, % of GDP % of GDP 12,0 12,0 2,5 2,5 10,0 10,0 2,0 2,0 8,0 8,0 6,0 6,0 1,5 1,5 4,0 4,0 1,0 1,0 2,0 2,0 0,0 0,0 0,5 0,5 Latvia Belgium Belgium Poland Latvia Poland USA USA Germany Iceland GermanySpain Lithuania Lithuania Iceland Spain Slovakia Slovakia Ireland Estonia Ireland Estonia Czechia Türkiye Czechia Türkiye OECD OECD Portugal Portugal Australia Australia Kazakhstan Kazakhstan France France 0,0 0,0 2000 2002 2000 2004 2002 2006 2004 2008 2006 2010 2008 2012 2010 2014 2012 2016 2014 2018 2016 2020 2018 2022 2020 2022 Source: Source: IMF, OECD, IMF, OECD, Bank estimates World World Bank estimates Source: Source: IMF, OECD, IMF, OECD, Bank estimates World World Bank estimates Source: IMF, OECD, World Bank estimates Source: IMF, OECD, World Bank estimates Capital Capital income income tax system tax system is characterized is characterized by numerous by numerous exemptions exemptions erode thatthat its revenue erode its revenue potential potential and and diminish diminish its fairness. Capital its fairness. Capital gains, gains, nominally taxed nominally at 10 taxed atpercent, 10 percent, are exempt are exempt for for Capital income tax system is characterized by numerous exemptions that erode its revenue potential securities securities longer heldheld longer thanthan three years three years and and for shares for shares in non-extractive in non-extractive firms.firms. Dividends Dividends enjoy similar enjoy similar and diminish its fairness. Capital gains, nominally taxed at 10 percent, are exempt for securities held preferential preferential treatment, treatment, longer than including three years including and for in for exemptions exemptions shares securities for securities non-extractive listed on listed firms. the theenjoy on domestic domestic Dividends stock similarstock exchange. exchange. preferential Interest Interest income income faces faces even fewer even obligations, fewer obligations, remaining remaining almost entirely almost untaxed entirely untaxed except except for treatment, including exemptions for securities listed on the domestic stock exchange. Interest income for earnings earnings foreign fromfrom banks, foreign banks, resulting in a in resulting narrow a narrow and and underutilized tax base. underutilized tax base. Moreover, Moreover, Kazakhstan imposes Kazakhstan imposes no taxes no taxes on net on wealth net wealth or inheritance. Coupled or inheritance. Coupled with with the flat the personal income flat personal tax rate, income the absence tax rate, of of the absence 29 OECD data from 2018 reveals that Kazakhstan’s implicit tax rate (ITR) on labor—measuring taxes and social security contributions 28 28 relative CIT CIT productivity isto productivitytotal a ratio is aemployee ofratio compensation—was CIT collection of CIT collection to GDPtodivided byjust GDP divided 24.5 the by percent, standard the standard significantly CIT rate CIT rate below the EU-28 average of 36.3 percent. 29 OECD29 OECD data data2018 from 2018 reveals fromreveals that Kazakhstan’s that Kazakhstan’s implicit tax rate implicit tax(ITR) (ITR) rateon labor—measuring on labor—measuring social taxes and taxes social security and security contributions contributions relative to total relative to total employee employee compensation—was compensation—was just just 24.5 24.5 percent, percent, significantly significantly below below the EU-28 the EU-28 average of 36.3of average 36.3 percent. percent. 34 Funding the Future: Boosting Revenues for Lasting Investments ag 23 | P 23 eage |P faces even fewer obligations, remaining almost entirely untaxed except for earnings from foreign banks, resulting in a narrow and underutilized tax base. Moreover, Kazakhstan imposes no taxes on net wealth or inheritance. Coupled with the flat personal income tax rate, the absence of wealth taxation exacerbates the inequity and regressivity of the tax system. These gaps present a critical opportunity for reform. The current flat PIT rate could be restructured into a progressive, graduated system with 4–5 brackets, including an exempt bracket. Such a reform would enhance revenue generation from this critical tax instrument while improving equity. The highest marginal rate in the proposed PIT structure could be aligned with the standard CIT rate. In parallel, it would be essential to introduce an annual inflation adjustment mechanism for the exempt bracket, deductions, and income credits to maintain fairness over time. The introduction of a wealth or inheritance tax could be considered as a mid-term reform. Enhancing compliance with the existing annual recurrent property tax, along with instituting asset taxes on luxury properties or vehicles, could approximate a wealth tax and improve the overall fairness of the tax system. To further streamline taxation, a unified 10 percent tax rate on all forms of capital income—covering interest, dividends, and capital gains—could be implemented, regardless of the source. Over time, this unified capital income tax rate could be gradually increased, complementing the transition to a progressive PIT structure with higher marginal rates as part of a dual income tax regime. This approach would support more equitable revenue generation and strengthen fiscal sustainability. Kazakhstan Economic Update – Winter 2024-2025 35 RATIONALIZING TAX INCENTIVES Kazakhstan’s extensive system of tax incentives was introduced to stimulate business activity and attract investment. Concentrated mainly in corporate income tax and value-added tax, these incentives allow businesses to significantly reduce their tax burdens through exemptions, reduced rates, accelerated depreciation, deferrals, and partial tax relief. Tailored incentives are also granted to priority sectors, expanding fiscal support and offering policy flexibility. However, while these incentives were intended to catalyze growth, their effectiveness in enhancing productivity and economic diversification has come into question. The true cost of fiscal incentives has grown considerably, crowding out fiscal space needed for critical spending. Kazakhstan does not currently publish a tax expenditure report as part of its fiscal reporting framework, making it difficult to assess the full scope of fiscal support channeled through these incentives. In 2021, government estimates put the revenue loss from VAT and CIT incentives alone at 11 percent of GDP, with figures from the Global Tax Expenditure Database suggesting it may be closer to 17 percent (Figure 24).30 31 This means that nearly half of Kazakhstan’s total tax revenue is foregone due to incentives—yet the economic benefits remain uneven, with limited improvements in productivity and diversification. Such a heavy fiscal cost demands a critical reassessment, focusing on whether these incentives are achieving their intended impact or simply eroding public revenue without sufficient returns. Figure 23. Corporate income tax productivity Budget Figure 24.Kazakhstan revenue Economic Kazakhstan foregone Economic Update Update – by – Winter tax2024-2025 2024-2025 Winter types (percent of GDP) Australia Australia Canada Canada Russia Russia CIT CIT VAT VAT Others Others Mexico Mexico Kazakhstan Kazakhstan 18 18 0,25 0,25 16 16 14 14 0,20 0,20 12 12 10 10 0,15 0,15 8 8 6 6 0,10 0,10 4 4 2 2 0,05 0,05 0 0 2020 2020 2021 2021 2021 2021 0,00 0,00 Global Global Tax Expenditures Tax Expenditures Database Database Government's Government's 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 assement assement Source: Source: IMF, Ministry IMF, Ministry of Finance, of Finance, World BankBank World estimates. estimates. Source: Source: Global Expenditure Global Database, Expenditure Database, data data by authorities, World by authorities, World Source: IMF, Ministry of Finance, World Bank estimates. estimates BankBank estimates Source: Global Expenditure Database, data by authorities, World Bank estimates Global Global evidence evidence underscores underscores that thattax tax incentives incentives often fall fall often shortshort of of delivering delivering sustained sustained economic economic benefits. benefits. In aInstudy a study of over of over 40 Latin 40 Latin American American countries, countries, whilewhile tax holidays tax holidays attracted foreign attracted foreign direct direct 30 The investment, investment, information they announced rarely they rarely by resulted resulted authorities in in sustained the in sustained media. investment investment or long-term or long-term productivity productivity gains. gains. 32 32 Similarly, Similarly, research research in Europe in Europe shows that shows special that tax tax special regimes regimeswith reduced with reduced rates CIT CIT 31 The data was retrieved from the Global Expenditure Database and excludes tax incentives on exports. rates for small for small firms cancan firms inadvertently inadvertently trap trap businesses businessesin ain a “small “small business” business” category, category, stifling stifling growth growth to maintain to maintain eligibility. eligibility. 33 33 These These examples examples illustrate illustrate a common a common trend: trend: while while incentives incentivesmay may bring bring short-term short-term gains, gains, theythey 36 frequently frequently the the lacklack durability durability to support to support long-term long-term growth growth and, in many and, in many cases, cases, may may even hinder even it. it. hinder Funding the Future: Boosting Revenues for Lasting Investments carefully By By carefully scaling scaling back redundant back redundant or or ineffective ineffective incentives, tax tax Kazakhstan incentives, cancan Kazakhstan unlock unlock Global evidence underscores that tax incentives often fall short of delivering sustained economic benefits. In a study of over 40 Latin American countries, while tax holidays attracted foreign direct investment, they rarely resulted in sustained investment or long-term productivity gains. 32 Similarly, research in Europe shows that special tax regimes with reduced CIT rates for small firms can inadvertently trap businesses in a “small business” category, stifling growth to maintain eligibility. 33 These examples illustrate a common trend: while incentives may bring short-term gains, they frequently lack the durability to support long-term growth and, in many cases, may even hinder it. By carefully scaling back redundant or ineffective tax incentives, Kazakhstan can unlock significant revenue gains that can strengthen public finances without compromising economic growth. While certain incentives may still be necessary to support strategic sectors, the sheer scale of current tax expenditures points to a substantial, untapped opportunity for revenue mobilization through reform. This revenue could be channeled toward sustainable public services and essential infrastructure investments that foster long-term development. The government’s New Tax Code attempts to partially streamline tax benefits, minimize inefficiencies, and automate reporting. These measures can enable more targeted incentive use and increase transparency, providing a clearer view of which incentives deliver real economic value. In many developed countries fiscal incentives are subject to systematic assessment based on clear and objective criteria. Regular review of tax incentives ensure they contribute effectively to economic goals while improving governance and maintaining a level playing field. Kazakhstan can adopt a similar approach by implementing a robust monitoring and evaluation framework, utilizing detailed firm- level data to assess the impact of incentives. Comparing the performance of beneficiaries with non- beneficiaries would allow policymakers to identify and retain effective incentives while eliminating those that fail to deliver. Such a data-driven approach would not only enhance transparency and accountability but also reduce reliance on short-term incentives, strengthen public revenue collection, and ensure that incentives are aligned with the country’s broader economic objectives. 32 Klemm, Alexander and Van Parys, Stefan, Empirical Evidence on the Effects of Tax Incentives (July 2009). IMF Working Paper No. 09/136, Available at SSRN: https://ssrn.com/abstract=1438845 33 Benedek, Dora, and others (2017). The Right Kind of Help? Tax Incentives for Staying Small. IMF Working Paper, No. 17/139. Kazakhstan Economic Update – Winter 2024-2025 37 Kazakhstan Kazakhstan Economic Economic Update Update – Winter – Winter 2024-2025 2024-2025 Kazakhstan Economic Update – Winter 2024-2025 revenue revenue and and collection, collection, ensure ensure that that incentives incentives are are alignedaligned withwiththe the country’s country’s broaderbroader economic economic objectives. objectives. revenue collection, and ensure that incentives are aligned with the country’s broader economic objectives. TaxTax Value-Added Value-Added VALUE-ADDED TAX Despite Despite being Value-Added significantly significantly the the being second-largest Tax underperforms underperforms second-largest compared compared contributor contributor to international to international to government to government standards. standards. revenue While revenue VAT VAT While after afterCIT, CIT, is a critical is a critical VATVAT revenue revenue Despite source, source, being it generated it generated the just just second-largest 4 percent 4 percent of GDP of GDP contributor in 2022—far in 2022—far to below government below the high-income the high-income revenue countries’ after countries’ CIT, average average ofVATof significantly Despite 7 percent. 7 percent. being underperforms the Before second-largest 2009 the VAT compared contributor relied heavilyto international to on government imports, standards. with revenue import Before 2009 the VAT relied heavily on imports, with import VAT making up nearly 80 percent VATWhile after CIT, makingVAT VAT upis a critical significantly nearly 80 revenue percent underperforms compared to international standards. While VAT is a critical revenue source, it generated source, of total of just total it VAT generated revenue. just Over percent 4past the past of GDP decade, in 2022—far however, thisbelow thehas dependency high-income has nearly countries’ halved, average due due primarily of 4 VAT revenue. percent of GDP Over the in 2022—far decade, below the however, high-income this dependency countries’ average nearly of 7 halved, percent. primarily Before 2009 tothe 7 percent. toVAT reduced reduced VAT relied Before VAT rates 2009 rates heavily the structural on and and VATwith relied structural imports, shifts. heavily shifts. While import on While VAT imports, reducing reducing making up with import reliance reliance nearly on 80 onVAT importimport percent making VAT VAT aligns of total up nearly aligns VATwith 80 percent with policies policies revenue. aimed of total aimed Over at economic the VAT revenue. at economic past decade, Over the diversification, diversification, however, past this it hasdecade, has also it also dependency however, exposed hasexposed this dependency vulnerabilities nearly vulnerabilities halved, in domestic primarily has nearly in domestic due to halved, VAT VAT reduced VAT primarily To due collection. collection. rates To andto structural strengthen strengthenreduced VATitVAT rates shifts. VAT While efficiency, and structural reducing efficiency, broader broader shifts. reliance reformsreforms While on are import are reducing VAT necessary necessary reliance aligns to with capture on to capture import policies a larger a strengthen larger VAT aimed share aligns at share with economic policies of domestic diversification, has also exposed vulnerabilities in domestic VAT collection. To VATof domestic efficiency, aimed consumption consumption broader at economic and reduce and are reforms diversification, reduce necessary to gap the the gap withwith capture it has also exposed a international international larger share norms norms of vulnerabilities (Figure (Figure domestic 25). 25). consumption in domestic VAT and reduce the gap collection. To strengthen with international VAT efficiency, norms (Figurebroader 25). reforms are necessary to capture a larger share of domestic Figure Figure 25. 25. Value Value added added taxes taxes (percent (percent of of Figure Figure 26. VAT 26. VAT collection collection vs VAT rates consumption and reduce the gap with international norms (Figure 25). vs VAT rates GDP) GDP) (percent (percent of GDP, of GDP, percent) percent) Figure Figure 25. 25. Value 12,0 12,0 of GDP) Value added taxes taxes (percent of added Figure Figure 26. VAT 26. VAT collection collection vsvsVAT VAT ratesrates (percent (percent of VAT, %GDP, VAT, percent) % of of GDP GDP VAT %, VAT rates, rates, LHS%, LHS GDP) (percent of GDP, percent) 10,0 10,0 25,0 25,0 6,0 6,0 12,0 VAT, % of GDP VAT rates, %, LHS 8,0 8,0 5,0 5,0 10,0 20,0 20,0 25,0 6,0 6,0 6,0 4,0 4,0 8,0 15,0 15,0 5,0 20,0 4,0 4,0 3,0 3,0 6,0 4,0 10,0 10,0 15,0 2,0 2,0 2,0 2,0 4,0 3,0 0,0 0,0 5,0 5,0 10,0 1,0 1,0 2,0 SwedenSweden Colombia SlovakiaSlovakia Poland Poland HungaryHungary Chile Chile Germany Greece Greece Korea Korea 2,0 SloveniaSlovenia Norway Norway Kazakhstan Sweden Colombia Slovakia Poland Hungary Chile Germany Greece Korea Slovenia Norway Kazakhstan 0,0 0,0 5,0 0,0 0,0 0,0 1,0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Colombia Germany Kazakhstan 0,0 0,0 Source: Source: Source:OECD,OECD, OECD,IMF, IMF, IMF, World World Bank World BankBank estimates estimates estimates Source: Source: OECD,OECD, Source: PWC, OECD,PWC, World PWC,World Bank Bank World Bank 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 A low VATVAT A low raterate partpart in large in large limits limits the the tax base tax base and andhinderhinder the the government's government's abilityability to fully to fully Source: OECD, IMF, World Bank estimates OECD, Source:the PWC, World Bank mobilize A low mobilize VAT revenue. rate revenue. in large A key key driver A driver part limits of Kazakhstan’s the tax of Kazakhstan’s base and low VAT-to-GDP hinder low VAT-to-GDP ratioratio is itsis government’s its relatively ability relatively to low standard fully mobilize low standard VAT VAT rate A low revenue. rate of 12 of VAT key rate A percent, driver 12 percent,one inoflarge one part Kazakhstan’s of theof lowest limits the lowest the low VAT-to-GDP among peerpeer among tax baseratio economies economies and hinder is its relatively and and well the well government's low standard VAT ability below the OECD rate of 12 average to fully of 20 percent, one of the lowest among peer economies and well below the below OECD the OECD average of average 20 percent.of 20 mobilize percent. revenue. Initially set Aat key 15VATdriver percent, of Kazakhstan’s rate rate thelowered VAT low VAT-to-GDP ratio is its relatively low standard VAT percent. InitiallyInitially set at 15set at percent,15 percent, the thewas rate VAT wasto was loweredlowered 12 percent toin12to 200912and percent percent in 2009 has and and in 2009 remained has has remained remained unchanged rate unchanged unchanged since. of 12 Although percent, since.since. this one of Although Although lower the thisaims rate lowest this lower lower to among rate aimsaims rate stimulate peer economies consumerto stimulate to stimulate spending,and consumer well consumer it also below the spending, spending, limits the OECD also average it also limits itgovernment’s limits the ofthe 20 percent. government’s government’s ability Initially to fully set ability ability mobilize at fully to VAT to15 percent, fully mobilize mobilize revenue VAT from the VATrevenue VAT domesticrate revenue was from consumptionlowered from to domestic domestic (Figure percent 12consumption consumption 26,27) . in 2009 (Figure (Figure and has 26,27) . remained 26,27) . unchanged since. Although this lower rate aims to stimulate consumer spending, it also limits the TheFigure Figure 27. 27. Standard Standard is alsoVAT VAT rates (percent) Figure 28.preferential VAT Registration Thresholds in ability to rates (percent) Figure 28. VAT Registration (Figurein Thresholds VAT base burdened by a web of exemptions and treatments embedded government’s fully mobilize VAT revenue from domestic consumption 26,27). in the tax system. Currently 47 categories of goods 2024, and U.S. U.S. 2024, Dollars services Dollars are exempt from VAT. In contrast to Figure 27. Standard VAT rates (percent) global best practices, which typically limit exemptions Figure 28. VAT Registration Thresholds in to essential sectors like healthcare, education, and financial services. These exemptions, particularly for Special Economic Zones, while designed to 2024, U.S. Dollars incentivize growth, significantly narrow the tax base and complicates enforcement. Frequent refund audits are required to ensure compliance, increasing administrative costs and reducing overall system efficiency. Streamlining these exemptions would simplify compliance, reduce administrative burdens, and allow for a more consistent and productive revenue stream. In addition to the low rate and extensive exemptions, high VAT registration threshold further narrows its tax base. VAT system features one of the highest registration thresholds compared to peer aspirational and structural peers. As of 2023, with a mandatory threshold of $150,000 (and nearly P 26 26 |US$1 ag ea g e |P 26 | P a g e 38 Funding the Future: Boosting Revenues for Lasting Investments million for individual entrepreneurs under special tax regimes), only larger businesses are required to register for VAT, excluding many small and medium-sized enterprises. While businesses below this threshold may voluntarily register, the high bar effectively keeps many firms outside the VAT system. base butEconomic Lowering the registration threshold would not only expand the taxKazakhstan also Kazakhstan increase Update Economic compliance, – Winter Update 2024-2025 – Winter 2024-2025 capturing a wider spectrum of economic activity (Figure 28). 30 30 27. Standard VAT rates (percent) Figure Figure 28. VAT Registration Thresholds in 000 160 160 000 2024, U.S. Dollars 140 000 140 000 25 25 120 000 120 000 20 20 100 000 100 000 15 15 80 000 80 000 60 000 60 000 10 10 40 000 40 000 5 5 20 000 20 000 0 0 0 0 Sweden Sweden Sweden Sweden Latvia Latvia Canada Canada Belgium Belgium Latvia Latvia Hungary Hungary Iceland Iceland Spain Slovakia Spain Chile Slovakia Chile Finland Israel Israel Finland Portugal Portugal Italy Italy Ireland Ireland UK Slovenia Slovenia UK Portugal Portugal Slovenia Slovenia Norway Norway Kazakhstan Kazakhstan France France Kazakhstan Kazakhstan Poland Poland Source: OECD Source: Bureau of Statistics, Ministry of Finance, World Bank Source: Source: OECDOECD Source: Source: Bureau Bureau of Statistics, of Statistics, Ministry of Finance, Ministry World of Finance, Bank World Bank estimates estimates estimates The VAT The VAT Broadening base is also base the is also base burdened burdened and by by athe a web increasing web of exemptions of exemptions standard rate and and offerspreferential preferential Kazakhstan a treatments powerfulembedded treatments embedded tool for boosting fiscal revenue. Even a modest rate increase—alongside compliance improvements and base in the in the system. taxtax system. Currently Currently 47 categories 47 categories of goods of goods andand services areare services exempt exempt fromfrom VAT. In contrast VAT. to to In contrast broadening—could generate significant revenue gains without substantially impacting economic growth. global global With best VAT practices, best practices, productivity typically at which which 0.33, limit typically limit exemptions a 3-percentage-pointexemptions to essential to essential rate hike could sectors yield sectors likelike an healthcare, additional healthcare, 1 percenteducation, of education, GDP in revenue, assuming minimal behavioral changes. Studies consistently show that, as a consumption- to to and financial and financial services. services. These These exemptions, exemptions, particularly particularly 34 for Special for Special Economic Economic Zones, while while Zones, designed designed incentivize incentivize based tax,growth, VATgrowth, significantly significantly is generally narrow narrow less distortive the the base tax tax to economic base andand complicates complicates activity than income enforcement. enforcement. taxes, Frequent as it does Frequent not refund refund directly discourage investment or labor, except where exemptions are applied.35 Additionally, the cross-country audits audits required areare requiredto ensure to ensure compliance, compliance, increasing increasing administrative administrative costs costs and and reducing reducing overall overall system system analysis show that the impacts of VAT on economic growth are highly non-linear, and at an already low efficiency. efficiency. rate of small these Streamlining Streamlining the effects these changes exemptions exemptions in would VAT on growthwould simplify simplify are compliance, compliance, essentially reduce reduce insignificant. 36 administrative administrative burdens, burdens, and allow and for for allow a more a more consistent consistentand productive and productive revenue revenue stream. stream. The VAT reforms present an underutilized tool that offer untapped fiscal potential to raise revenues. addition In addition InTargeted to the to the low reforms—raising low rate and rate the extensive and rate extensive modestly, exemptions, exemptions, lowering high registration VAT high VATregistration thresholds, registration threshold and limiting threshold exemptions— further further narrows narrows can its its transform base. taxtax the base. VAT VAT VAT into system features system features a cornerstone of one one fiscal of the of the revenuehighest highest base. registration registration Aligning thresholds thresholds Kazakhstan’s VAT compared compared rate and to to peer aspirational peer aspirational structure with and those structural and of structural Nordic peers. and As of peers. As 2023, Baltic of 2023, countries, withwith which a mandatory a mandatory sustain threshold high threshold rates of $150,000 of $150,000 without stifling(and(and nearly growth, nearly US$1US$1 million million for for individual individual entrepreneurs entrepreneurs underunderspecial special tax tax regimes), regimes), only only would provide a sustainable revenue source. Strengthening VAT in this way will not only increase revenue larger larger businesses businesses areare but also reduce dependency on volatile oil-related revenues and help to finance the country’s ambitious required required to to register register for VAT, for VAT, excluding excluding manymany small small and medium-sized and medium-sized enterprises. enterprises. infrastructure development agenda. At Kazakhstan’s already low VAT rate, the economic impact of a WhileWhile businesses businesses below below rate this threshold this increase thresholdmay would likely voluntarily maybe voluntarily register, register, minor, especially the if the high barbar high accompanied effectively effectively by measureskeeps keeps many many to broaden firms outside firms the base outside andthethe VAT system. VAT system. streamline Lowering Lowering exemptions. the registration the registration Tightening threshold threshold compliance to would not would ensure the only not only expand expand effectiveness the the tax of any tax base rate butbut base increase also increase also increase certainly compliance, compliance, remains key capturing to capturing the a wider success a wider of spectrum the spectrum reforms. of economic of economic activity activity (Figure (Figure 28)28) . . Broadening Broadening thethe base base and and increasing increasing thethe standard standard raterate offers offers Kazakhstan Kazakhstan a powerful a powerful tool tool forfor boosting boosting fiscalfiscal revenue. revenue.Even a modest Even a modest rate rate increase—alongside increase—alongside compliance compliance improvements improvements and base and base broadening—could broadening—could 34 VAT productivity calculated generate generate significant as the ratio significant of revenue to GDPgains revenue VAT collection gains divided without by without the substantially standard substantially VAT rate. impacting impacting economic economic growth. 35growth. With Nguyen etWith al.,VAT VAT 2021, productivity “The productivity Macroeconomic at 0.33, at 0.33, Effects of a 3-percentage-point a 3-percentage-point Income and Consumption Tax rate hike rate hike could Changes,” American yield could Economic an an yield additional additional Journal: Economic 1 1 Policy 13(2) percent 36percent ofet Gunter GDP of al., GDP 2019, in revenue, revenue, in “Non-linear assuming assuming Effects minimal minimal of Tax Changes behavioral behavioral on Output: changes. The Role of changes. the of Studies Studies 34 34 Initial Level consistently consistently Taxation,” NBER Workingshow show Paper that, that, 26570. as as a consumption-based a consumption-based VAT tax,tax, VATis generally is generally less distortive less distortive to economic to economic activity activity than than income income taxes, taxes, as it as it doesdoesnotnot directly directly discourage discourage investment investment or labor, or labor, except exceptwherewhere exemptions exemptions areareapplied. applied. Additionally, Additionally, 35 35 Kazakhstan Economic Update – Winter 2024-2025 39 exemptions— and at stifling an already growth, can wouldtransform low rate the provide the VAT into a effects a cornerstone of small sustainable changes revenue in source.ofVATfiscalon revenue growth base. Strengthening are VAT Aligning essentially in this way Kazakhstan’s insignificant. will not The VAT VAT rate and reforms structure present with an underutilized tool that offer untapped fiscal potential to raise only The increase VAT revenue reforms but presentalso those reduce of Nordic and dependency an underutilized onBaltic tool volatile that countries, oil-related offer which untapped sustain revenues fiscal andhigh helprates potential without to finance to raise revenues. Targeted reforms—raising the rate modestly, lowering registration thresholds, and limiting stifling therevenues. growth, country’s provide a sustainable wouldreforms—raising ambitious Targeted infrastructure development the rate revenueagenda. modestly, source. At Strengthening Kazakhstan’s lowering registration VAT already inlowthis thresholds, VATway and will rate, not the limiting exemptions— can transform the VAT into a cornerstone of fiscal revenue base. Aligning Kazakhstan’s only increase exemptions— economic VAT rate impact revenue can and structure but transform of a rate with also increasereduce the those VAT dependency would into of Nordic a on cornerstone likely and be minor, volatileof oil-related fiscal Baltic especially revenue countries, if which revenues base. accompanied and Aligning sustain high help Kazakhstan’s by measuresto finance rates without to VAT the broaden rate country’s and structure ambitious with those infrastructure of Nordic development and Baltic agenda. countries, At which Kazakhstan’s sustain already high low rates VAT without rate, the stiflingthe and streamline base would growth, provide a sustainable Tightening exemptions. revenue source. compliance to ensure Strengthening VATthein effectiveness this way willof not stifling economic growth, impact would of a rateprovide increase a sustainable would revenue likely be minor,source. Strengthening especially if accompanied VAT in this by way measures will not to any rate increase certainly remains key to the success of the reforms. only increase revenue but also reduce dependency on volatile oil-related revenues and help to finance only increase revenue but also reduce dependency on volatile oil-related revenues and help to finance broaden the country’sthe base and streamline ambitious infrastructure exemptions. development Tightening agenda. compliance At Kazakhstan’sto ensure the effectiveness already low VAT rate, of the Excise the country’s economic any Tax ambitious infrastructure development agenda. At Kazakhstan’s already low VAT rate, the impact of a rate increase would rate increase certainly remains key to the success of the reforms. likely be minor, especially if accompanied by measures to economic impact of a rate increase would likely be minor, especially if accompanied by measures to Kazakhstan's excise tax collection remains strikingly low compared to peer nations, hindered of broaden the base and streamline exemptions. Tightening compliance to ensure the effectiveness broaden the base and streamline exemptions. Tightening compliance to ensure the effectiveness of Excise Tax EXCISE TAX by any rate a narrow increase tax base.certainlyTax remains key to the success base concentrated on tobacco, of thealcohol, reforms. any rate increase certainly remains key to the success of the reforms.and petroleum products, and Kazakhstan's domestically Excise Tax excise tax produced goods collection are taxed remains strikingly on a per-unit low compared volume basis rather to peer than ad nations, valorem hindered rates. byExcise Despite a Tax narrow steady tax growthbase. in Tax excise base concentrated revenues from on 2015 tobacco, to 2023, alcohol, reaching and 0.7 petroleum percent of products, GDP in 2023,and Kazakhstan's excise tax collection remains strikingly low compared to peer nations, hindered Kazakhstan's domestically excise produced tax goods collection are taxedremains on strikingly a per-unit low volume compared basis rather to peer nations, than hindered ad valorem hindered rates. collections by a narrow Kazakhstan’s remain tax excisedisproportionately base. Tax base tax collection low—nearly concentrated remains strikingly 4.5 on times low tobacco,below compared the to OECD alcohol, peer and average petroleum nations, (Figure 29,30) products, by a . and by a narrow tax base. Tax base concentrated on tobacco, alcohol, and petroleum products, and Despite domestically This narrow steady shortfall tax stems base. growth produced Tax from base ina excise goods combination concentrated revenues are taxed onof from on tobacco, a factors,2015 per-unit including alcohol, to and 2023, volume reaching basis a constrained petroleum 0.7 tax rather products,percent than base, of adlow GDP valorem and domesticallyrates,in 2023, rates. and domestically produced goods are taxed on a per-unit volume basis rather than ad valorem rates. Despite steady collections remain growth in excise disproportionately revenues low—nearly from 2015 4.5 to 2023, times below reaching the OECD percent 0.7rates. average of GDP (Figure in 2023, 29,30) . weak produced compliance. Despite goods Given are taxed the administrative on a per-unit simplicity volume basis of excise rather taxes, than broadening ad valorem the base—particularly Despite steady collectionsin steady remain growth in excise disproportionately 2015revenues from 2015 low—nearly 4.5 to 0.7 times 2023, below reaching the OECD 0.7 percent average of GDP (Figure in 2023, 29,30) and . growth excise revenues from to 2023, reaching percent of GDP in 2023, collections remain This to shortfall include collections stemsfuels all remain fossil fromto a combination reflect disproportionately their of factors, 4.5 environmental low—nearly including a constrained impact—represents times below OECD the29,30) tax a base, low significant average rates, untapped (Figure 29,30) . This shortfall stems disproportionately from a combination low—nearly 4.5 times below factors, of the OECD including average (Figure a constrained tax base, . This shortfall low rates, and stems weak opportunity. This from compliance. shortfallSuch reforms a combination stemsGiven of from the factors, administrative could a boost revenue combination including simplicity of a constrained of mobilization factors, tax excise including base, taxes, while low a broadening aligning constrained rates, and weak the base—particularly with Kazakhstan’s tax base, compliance. low climate rates, Given and weak compliance. Given the administrative simplicity of excise taxes, broadening the base—particularly toweakinclude commitments the all compliance. administrative fossil and fuels Given global simplicity to the reflect sustainability their of administrative excise taxes,goals. environmental simplicity the broadening impact—represents of excise base—particularly to include all fossil fuels to reflect their environmental impact—represents a significant untapped taxes, broadening a to includesignificant the all fossiluntapped base—particularly fuels to include opportunity. to reflect theirall Suchfossil fuels could reforms environmental toimpact—represents reflect boost their revenueenvironmental mobilization a significant impact—represents while untappedaligning with opportunity. aKazakhstan’s significant Such reforms untapped climate opportunity. Such reforms could boost revenue mobilization while aligning with Kazakhstan’s Figure 29. Excise opportunity. could boost Such revenue tax collection reforms mobilization could (percent boost while of with revenue aligning Figure 30. Composition mobilization Kazakhstan’s while aligning climate of excise with commitments tax (percent Kazakhstan’s of climate and global climate commitments commitments and and global global sustainability sustainability goals. goals. GDP) sustainability goals. commitments and global sustainability goals. total) Figure Figure 29. 29. Excise Excise tax tax collection collection (percent (percent ofof Figure Figure 30. 30. Composition Composition ofof excise excise taxtax (percent (percent ofof Figure 29. 29. Excise OECD tax collection average (percent of Kazakhstan Figure 30. 30.Composition Alcohol Tabocco of excise Pertoleum tax (percent of Other GDP) Figure GDP) Excise tax collection total) total) Figure Composition of excise tax GDP) of GDP) (percent total) (percent of total) 3,5 100% OECD average Kazakhstan Alcohol Tabocco Pertoleum Other OECD OECDaverage average Kazakhstan Kazakhstan Alcohol Tabocco Pertoleum Alcohol Tabocco Pertoleum Other Other90% 3,0 3,5 100% 3,5 3,5 80% 100% 100% 90% 2,5 3,0 70%90% 90% 3,0 80% 3,0 2,0 2,5 60%80% 80% 70% 2,5 2,5 50%70% 2,0 60% 70% 1,5 60% 2,0 50% 2,0 1,5 40% 60% 1,0 1,5 50% 30%40% 1,0 50% 40% 1,5 30% 0,5 1,0 20% 40% 30% 0,5 20% 1,0 10%20% 30% 0,0 0,5 10% 0,0 0% 10% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 0,5 0,0 20% 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2020 2020 2021 2021 2022 2022 2023 2023 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2020 2021 2022 2023 10% 0,0 Source: Source: IMF, IMF, Source: OECD, OECD, IMF, Ministry Ministry OECD, of Finance, of Ministry Finance, World World of Finance, Bank Bank World estimates. Bank estimates. Source: Bureau Source: Source: of Statistics, Bureau Bureau Ministry of Statistics, of Statistics, of Finance, Ministry Ministry World of Finance, of Finance, Bank World World Bank 0% Bank 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 estimates. Source: IMF, OECD, Ministry of Finance, World Bank estimates. estimates Source: Bureau of Statistics, Ministry of Finance, World Bank estimates estimates 2020 2021 2022 2023 estimates Modernizing Source: IMF, OECD, excise theMinistry tax of system Finance, World by expanding Bank estimates. it to all fuels Source: Bureauprovides an Ministry of Statistics, opportunity to World raise Bank of Finance, revenue efficiently while contributing to Kazakhstan’s estimates development goals. The government can consider transi- 36 Gunter et al., 2019, “Non-linear Effects of Tax Changes on Output: The Role of the Initial Level of Taxation,” NBER Working Paper 26570. 36 tioning to a carbon-based excise tax for transport fuels. This would apply excise taxes based on the carbon Gunter 36 et al., 2019, “Non-linear Effects of Tax Changes on Output: The Role of the Initial Level of Taxation,” NBER Working Paper 26570. Gunter et al., 2019, “Non-linear Effects of Tax Changes on Output: The Role of the Initial Level of Taxation,” NBER Working Paper 26570. content of the fuels rather than purely their volume. Excise could then be expanded to all fuels (such as 28 | P a g e coal and natural gas) based on carbon content. Much like for transport fuels, this could be done upstream28 28 | P a|Pg aeg e 36 Gunter et al., 2019, “Non-linear Effects of Tax Changes on Output: The Role of the Initial Level of Taxation,” NBER Working Paper 26570. at the point of fuel supply, making the tax simple to administer and difficult to evade, while capturing the informal sector. It would also help Kazakhstan capture revenue that would otherwise be lost under the Eu- 28 | P a g e ropean Union’s Carbon Border Adjustment Mechanism. If implemented, this change could raise substantial additional revenue up to 2.0 percent of GDP and recover and estimated US$77 million of revenue per year 37 that would otherwise go to the EU. Additional revenue can be recycled to offset potential impacts on low- er-income families, by redirecting a portion of the revenue to social assistance and public investment. By re- ducing fossil fuel use at home, these reforms would free-up fossil fuels for export, enhancing revenue to the oil and gas sector and, in turn, to the government. These reforms align with the country’s goal of achieving carbon neutrality by 2060, providing a foundation for accelerating the transition to a low-carbon and more diversified economy. 37 With a $25 carbon price. The excise formula would be: volume of fuel x emissions factor x carbon price. 40 Funding the Future: Boosting Revenues for Lasting Investments REFERENCES Benedek, Dora, and others (2017). The Right Kind of Help? Tax Incentives for Staying Small. IMF Working Paper, No. 17/139. Chye-Ching Huang and Nathaniel Frentz, “What Really Is the Evidence on Taxes and Growth?” CBPP, February 18, 2014, https://www.cbpp.org/research/what-really-is-the-evidence-on-taxes-and-growth. Gunter et al., 2019, “Non-linear Effects of Tax Changes on Output: The Role of the Initial Level of Taxation,” NBER Working Paper 26570. International Monetary Fund. Middle East and Central Asia Dept. (2020). Front Matter. IMF Staff Country Reports, 2020(038), from https://doi.org/10.5089/9781513529288.002.A000 International Monetary Fund. Research Dept. (2014). "Chapter 3. Is it Time for an Infrastructure Push? The Macroeconomic Effects of Public Investment". In World Economic Outlook. Kazakhstan Economic Update: Shaping Tomorrow: Reforms for Lasting Prosperity (English). Kazakhstan Economic Update 2024. World Bank Group. Klemm, A., & Parys, S. van. (2009). Empirical evidence on the effects of tax incentives. IMF Working Papers, 09(136), 1. https://doi.org/10.5089/9781451872835.001 Nazila Alinaghi & W. Robert Reed, 2021, “Taxes and Economic Growth in OECD Countries: A Meta- analysis,” Public Finance Review 49(10), 3-40. Nguyen et al., 2021, “The Macroeconomic Effects of Income and Consumption Tax Changes,” American Economic Journal: Economic Policy 13(2) The Effects of Infrastructure Development on Growth and Income Distribution. (2004) Policy Research Working Paper; No.3400. World Bank. The Impact of Infrastructure on Development Outcomes: A Qualitative Review of Four Decades of Literature (English). Policy Research working paper; no. WPS 10343 UN. ESCAP (2020).  Infrastructure financing in Asian Landlocked Developing Countries: challenges, opportunities and modalities. Retrieved from: https://hdl.handle.net/20.500.12870/4107. World Bank. 2023. Kazakhstan: strengthening public finance for inclusive and resilient growth. Public finance review. World Bank. Corporate tax rates around the world, 2023 (2023) Tax Foundation. Available at: https://taxfoundation. org/data/all/global/corporate-tax-rates-by-country-2023/. Kazakhstan Economic Update – Winter 2024-2025 41 Funding the Future: Boosting Revenues for Lasting Investments Kazakhstan Economic Update – Winter 2024-2025 Macroeconomics, Trade & Investment 42 Funding the Future: Boosting Revenues for Lasting Investments