Kazakhstan: Budget 2025 delays fiscal consolidation, political agenda remains paramount

• Headline deficit broadly unchanged at 2.7% of GDP, but higher in nominal terms at KZT 4.1tn
• Macro assumptions see high GDP growth, forecast arguably rigid in context of uncertainty
• FinMin's tax receipt estimate lower after recent collection issues, risks still apply
• Targeted sovereign fund transfer doubles, fiscal balance relies on fund's depletion as policy remains pro-cyclical
• Expenditure hiked by KZT 1.7tn, social spending accounts for 38% of total
• Debt payment set at KZT 2.5tn, domestic issuance continues to rise in order to finance deficit
• Framework goes against official claims of consolidation, delay may also affect 2026 and beyond

Last week the cabinet presented a fiscal framework for 2025-2027 in parliament. At this stage, it is still not final and may be subject to certain revisions as MPs were active in their criticism of spending plans, depletion of the sovereign fund, and continued debt accumulation. Nevertheless, we believe the fundamental aspects will not be reconsidered due to the current political environment. Specifically, we think fiscal parameters have been designed to get as close as possible to President Tokayev's demands for annual medium-term growth of 6%. The social spending and reconstruction entailed in his reform agenda are among the priorities as well.

Budget 2025 sets the headline deficit at 2.7% of GPD or KZT 4.1tn. The fiscal framework for 2024 features a 2.6% deficit estimated at KZT 3.5tn, though we note that recent developments suggest the FinMin is preparing to revise the current budget. More generally, the close projections reflect a presumed expansion of economic growth, as opposed to upcoming fiscal prudence in 2025. Overall, next year's budget sees a 7% spending increase, with a consistent focus on social spending. The latter will amount to KZT 9.8tn, up KZT 794bn compared to 2024. While the minimum wage will remain unchanged, an 8.5% pension hike is on the agenda. The minimum pension will ultimately reach KZT 62,771.

Meanwhile, budget revenues are projected to increase by 5.9% compared to 2024. The FinMin believes this increase will be driven by changes in the macroeconomic environment (+ KZT 1.4tn), digitisation and administrative improvements with regard to tax collection (+ KZT 1.3tn), and less extensive VAT refunds (+ KZT 594bn). In addition, after the Tengiz oilfield's expansion ends in 2025, the volume of taxable oil exports should rise to 46.8mn tonnes (from 39.1mn). This implies a KZT 306bn hike of revenues. In general, we believe the revenue item of the 2025 budget is subject to downside risks again, which could lead to performance difficulties similar to those seen in 2023 and 2024.

Macroeconomic framework

The fiscal framework forecasts GDP growth at 5.6% in 2025, down from 6% in 2024. We once again reiterate skepticism about the attainability of this year's target, but the EconMin has insisted on it even in its most recent reports. Next year's forecast is technically below the target set by Tokayev (6%), though we note that it is still more optimistic than the forecasts presented by IFIs at this stage. As outlined above, the authorities believe changes in the macroeconomic environment will contribute to growth and revenue collection next year. It is not entirely clear whether this refers to possible geopolitical stabilisation, rerouting of trade flows that could benefit Kazakhstan, and/or any other factors. In this context, we think the uncertainty is a risk in itself, even though the expansion of oil production is a clear upward factor.

In terms of a potential connection to global price dynamics, the fiscal framework seems to dismiss that. Specifically, next year's oil price assumptions is lower at USD 75 per barrel (from USD 80). At the same time, some MPs criticised this assumption, particularly highlighting the lower 2025 forecast by Fitch (USD 70). According to the FinMin, its forecast is based on the average of 19 IFI projections, which posted USD 78 per barrel. In the context of recent oil price dynamics, the budget assumption could have been more conservative in order to guarantee a stable fiscal performance. We remind that over Jan-Aug 2024, budget receipts only amounted to 84% of the original plan. Lower-than-expected metal prices and the more recent decrease of oil prices were named as the decisive factors behind this outcome. In theory, there is a counterbalance in place for 2025 as the government will rely more on transfers, though this is also a clear obstacle to fiscal consolidation.

Another notable aspect is the USD/KZT rate, which is set at 470, as opposed to 460 in the 2024 budget. This has positive implications for budget revenues due to the importance of exporters that mostly generate profit in FX. Yet, the weaker tenge also implies inflationary tendencies, so the NBK will be under continued pressure with regard to inflation management. Its end-2025 inflation forecast is set at 5.5-7.5%, in line with out expectations that the reduction of inflation below 5% would be delayed beyond 2025. The bank still sees monetary easing next year and the base rate is currently estimated at 11.9%, as opposed to 14.25% currently. We believe rate cuts will be pursued to accommodate growth plans, but the balancing of inflationary factors will be difficult amid ongoing tariff reform, fiscal stimuli, and strong internal demand.

Budget revenues

Budget revenues are projected at KZT 21.4tn, of which transfers will account for KZT 5.8tn. Tax receipts are in turn estimated at KZT 15.19tn, down from KZT 15.76tn in 2024. This is a significant change after two years of problems with tax collection. According to official data, in Jan-Jul of this year the authorities collected KZT 6tn, while the original target was KZT 7.75tn. Corporate income tax and VAT are the two crucial areas where collection lags behind. Yet, next year's corporate income tax receipts are projected at KZT 5.1tn, up from KZT 4.8tn in the 2024 framework. This is despite current evaluations suggesting annual collection is likely to be much lower this year (possibly by over KZT 1tn). While the prospects for next year's receipts from the extraction sector are more favourable, it is not entirely clear how the FinMin comes up with its estimates. They have been far off in recent times, which makes the significant hike presumed in the 2025 budget concerning, in our view.

Conversely, VAT receipts are estimated at KZT 6.51tn, which represents an 11.3% decrease compared to 2024. The current conservatism is a positive step as the FinMin's generalised assumptions of revenue boosts thanks to digitisation and 'growth in all sectors' have been the crux of fiscal issues in the last two years. According to the Kazakh audit chamber, revenues from both VAT on imports and VAT on domestically produced goods fell short of official estimates in 2023. Despite presumed import growth, the former came short by over KZT 400bn. The FinMin has also admitted issues due to 'lower import levels' this year, so the projected growth of imports in 2025 does not guarantee anything in itself. With regard to VAT on domestically produced items, there is scope for increase if the government can keep up with its growth targets. As a whole, the lower VAT revenue estimate is reasonable, but not a decisive balancing factor.

The fiscal balance actually relies on transfers from the sovereign fund in the first place. We remind that the planned tax reform was delayed to 2026, so the absence of extra revenues had to be compensated to make the president's agenda attainable. In 2025, the guaranteed budget transfer will remain unchanged at KZT 2tn, though the targeted transfer has doubled, reaching KZT 3.25tn. In theory, the targeted funding is only approved to support strategic projects. Yet, a statement by EconMin Baybazarov noted next year's hike is also meant to stimulate regional economic growth. This virtually confirms our understanding that fiscal planning is dominated by political goals, which are sometimes populist in nature. We believe this is why targeted transfers from the sovereign fund are not subject to regulation by the fiscal rule (unlike the guaranteed transfer) and are instead determined by the president.

As a result, next year's transfers from the fund (KZT 5.25tn) exceed its projected receipts (KZT 4.88tn) by KZT 370bn. Essentially, the government maintains a pro-cyclical stance despite claiming commitment to consolidation and supposed reforms of the budget code. The 2025 budget is not in violation of any fiscal rules, but the existence of convenient loopholes continues to prevent meaningful change. In theory, the authorities intend to refrain from using targeted fund transfers in 2026 and 2027, which is highlighted as a balancing measure. Yet, when commenting on these plans, NBK governor Suleimenov admitted there are 'strong risks' of additional transfers in both years. Indeed, this would not be surprising given Tokayev's medium-term reform goals and the consistent delay of austerity with regard to the fund's management.

Budget expenditure

Budget 2025 entails an expenditure hike of KZT 1.7tn compared to the current fiscal framework. This is identical to the hike seen in 2024 and the total spending volume will equal KZT 25.75tn. It amounts to 17.1% of GDP. As outlined above, social spending remains a priority, which was typical even before Tokayev assumed power. Apart from the pension hike, the authorities will also raise university scholarships as well as certain disability payments and other benefits. Apart from direct social welfare payments, the FinMin also takes into account spending on education, healthcare, and culture when calculating social expenditure. The latter thus amounts to 9.78tn in 2025 or 38% of all spending.

More specifically, spending on education will rise by 7.14%, reaching KZT 1.8tn. In addition to the scholarship hike, the government has allocated extra funding for grants. It also continues to develop programmes aimed at refurbishing schools and increasing access to education in rural areas. A more modest 5.3% hike applies to spending on healthcare, while the expenditure on law enforcement and defence is virtually unchanged relative to 2024. The small hike regarding defence spending was another contentious point in parliament as MPs warned not enough funding is available to prepare the army for an actual war. The FinMin seemed receptive to these comments, so there might be a revision in the end.

The most significant decrease concerns spending on housing and communal services (-52.27%), though we suspect the targeted sovereign fund transfer will be used to finance infrastructural upgrades in the sector anyway. Conversely, next year's spending on agriculture will increase most notably, which is in line with the president's push for farmers to be supported. Yet, his recent speech in parliament actually called for more active use of private financing to develop the sector. He specifically said the role of the state should be reduced, though this does not seem to be reflected in the current fiscal framework.

More generally, the authorities have allocated a total of KZT 2.1tn in support of the real sector. Regional bodies will also get KZT 7.4tn from the republican budget, which represents an increase of KZT 348bn relative to 2024. Meanwhile, public debt payments are set at KZT 2.5tn, up from KZT 2tn this year. Predictably, the matter was heavily debated in parliament as well. Kazakhstan's audit chamber and various MPs have expressed concern about the debt burden's steady expansion. Previous FinMin officials had pledged careful management, but in practice there is little done to reverse the trend. In general, the FinMin mostly highlights the low level of public debt relative to peers. At end-2023, it equaled KZT 27tn or 22.7% of GDP, which is low indeed. Yet, it is seen reaching 25.1% of GDP at end-2025. We remind that in 2021 the FinMin referred to an 'abstract' limit curbing public debt at 27% of GDP. During this year's parliamentary discussions, deputy EconMin Amrin claimed this 'limit' actually stands at 29% and the uncertainty is rather symptomatic of how the issue has been handled so far.

Financing needs

The government will need to finance a KZT 4.1tn headline deficit in 2025. Domestic borrowing persists as the main source of funding, which is in line with the official strategy in recent years. Concerns about inflationary pressures due to the current volatile environment do not seem to have made much of a difference. The total domestic issuance in 2025 will exceed KZT 6.4tn as repayment commitments have risen accordingly. Meanwhile, the contribution of external borrowing is actually negative as inflows are set to remain broadly stable, while repayment becomes more substantial in this case as well. At this stage, the parameters do not indicate plans for eurobond issuance, in our view. We remind that a placement was considered as a possible means of handling fiscal pressures in the current year. Yet, it now seems less likely as well since the government has announced it will tap the sovereign fund for an additional KZT 1.5-2tn.

Conclusion

As a whole, the 2025 fiscal framework goes against the authorities' rhetoric about countercyclical policy and more reasonable spending. Meaningful consolidation was supposed to begin next year, but has been delayed once again as the president's strategy is a priority. We have doubts about the professed shift to austerity in 2026-2027 because Tokayev's agenda actually presumes consistently accelerating results in the medium term. After the Tengiz expansion, oil production and the associated revenues will grow, which could easily tempt the government to make use of the extra funds, as opposed to saving them. The new tax code should be implemented in 2026, but at this stage the scale of the reform appears insufficient to fund the ongoing increase of social spending and large economic projects on top of that.

In the near term, risks arguably apply due to uncertainty regarding some crucial assumptions in the budget. The projection of corporate income tax revenues is a case in point, but it is also not clear what metal prices have been assumed by the FinMin. When discussing the 2025 budget, the NBK's governor did say favourable prices are expected to provide a boost. Yet, this was the case for 2024 as well, but the reality of market dynamics has actually spurred fiscal pressures. In addition, the authorities rely very heavily on the solid GDP growth forecast for next year. While it is not too far off the available IFI projections, it is still somewhat rigid in the context of muted global prospects, ongoing geopolitical tensions, or just unforeseeable events like this year's floods. Small disruptions to the baseline scenario will already pose a challenge to public finance management as the fiscal framework is not shaped to handle volatility. To an extent, however, the reliance on sovereign fund transfers favours stability, so the government may be able to avoid budget revisions in the absence of radical deterioration.