Kazakhstan’s economy has been moving under the influence of two powerful forces – active government spending and a growing dependence on imports.
A recent study by the National Bank of Kazakhstan (NBK), published in April 2023 (No. 2023-05), provided the first quantitative assessment of how fiscal policy affects the country’s external balance and trade flows. The paper’s authors – Berdibek Turabay, Azat Uskenbayev, Zhasulan Muratov, Meruert Almagambetova, and Nurlan Ospanov – analyzed data covering 2015–2022 and reached a clear conclusion: a 1% increase in government spending leads to a 0.6% rise in imports in the following month, and within five months, the total effect reaches 1.42%.
In other words, Kazakhstan’s fiscal policy operates through the import channel, intensifying the deficit of the current account. This confirms the “twin deficit” hypothesis – when higher budget deficits are closely linked to worsening external balances.
Between 2014 and 2021, Kazakhstan’s current account was almost constantly in deficit. Only in 2013 and the first nine months of 2022, thanks to higher oil prices, did the country record a temporary surplus. On average, the current account deficit during this period amounted to around 4% of GDP, and in some years reached as high as 6.3%.
The main reason is persistently high imports, which show little reaction to economic slowdowns. Even in 2015, when the tenge lost almost 92% of its value, the volume of imports declined only slightly. This demonstrates the low elasticity of import demand – Kazakh consumers and businesses continue to buy foreign goods because domestic production cannot meet demand.
The National Bank conducted a VAR (Vector Autoregression) analysis to examine the relationship between government spending (excluding debt servicing) and imports (excluding purchases by oil producers classified under OKED 06100). The results showed a high R² = 0.71, meaning that about 71% of import fluctuations can be explained by changes in government expenditures. Granger causality tests confirmed that changes in fiscal spending cause changes in imports, not the other way around (p = 0.0006). This is strong empirical evidence that fiscal policy is the driving factor behind import growth.
For comparison, similar studies in advanced economies show smaller effects. According to research by the European Central Bank (Funke & Nickel, 2006), in G7 countries a 1% increase in government spending raises imports by about 0.4%. In Kazakhstan, the effect is 0.6%, meaning the fiscal-to-import link is 50% stronger.
The reason lies in the structure of Kazakhstan’s budget and economy.
The republican budget accounts for about 83% of total government expenditures. In 2021, total spending reached US$35.7 billion, compared with US$11.6 billion in 2015 – more than a threefold increase, despite the weaker tenge. Social spending rose from 24% to 29% of the budget during that time. Spending on education, which had fallen to 4% in 2017, recovered to 9% by 2021. Health care accounted for 10–14%, defense and legal activities for around 11%. In total, roughly one-third of the budget goes to social support, and another third to transfers and subsidies.
The budget deficit remained persistent: –1.6% of GDP in 2016and –3.1% in 2020. Without transfers from the National Fund, the deficit would have exceeded 5% of GDP in both 2017 and 2021. Since 2017, financing of the deficit has shifted toward domestic borrowing.
Before that, Kazakhstan relied mainly on foreign loans; now the focus has moved to domestic bond issuance. While this reduced currency risks, it did not decrease dependence on oil-related revenues.
The analysis also shows that while most government spending targets the non-oil sector, it has not yet translated into higher exports. Even large state-funded investment projects have failed to produce a meaningful rise in non-oil exports. The non-oil current account has remained negative throughout the entire period, while the oil sector’s balance stayed positive. From 2014 to 2021, the share of income repatriated by foreign investors averaged 37% of total export earnings.
This means that almost one-third of Kazakhstan’s export revenues flow back abroad, rather than staying in the domestic economy. In this context, any increase in government spending – even socially justified – adds pressure to the external balance. Imports remain high regardless of oil prices or currency fluctuations. They are supported by steady budget payments, public-sector wages, and social benefits.
In 2021, according to the Bureau of National Statistics, the average Kazakh household spent 76.5% of its income on consumption, with 36% going to imported goods. That means over one-third of consumer spending effectively leaves the country.
The National Bank describes this dynamic as a form of fiscal stability with external vulnerability. While government spending smooths economic cycles and supports domestic demand, it also makes imports less sensitive to downturns – keeping pressure on the current account even during recessions. The multiplier effect further amplifies this trend. A 1% rise in fiscal spending not only increases imports by 0.6% immediately but pushes the cumulative effect to 1.42% over five months.
The logic is simple: state investments create income, and higher incomes trigger more consumer demand – for cars, electronics, construction materials, and other imported goods. In short, Kazakhstan’s budget stimulates imports more than domestic production. Every tenge injected into the economy circulates but eventually flows abroad through foreign trade channels. In 2021, with total government spending at US$35.7 billion, that 0.6% impact translates into roughly US$214 million in additional imports per month.
The National Bank’s report emphasizes that the main channel through which government spending affects the external balance is the import of goods, not services or income flows. In 2021, Kazakhstan’s total merchandise imports reached US$43.1 billion, up from US$32.5 billion in 2015. Even after the tenge lost nearly half of its value, the physical volume of imports continued to rise – clear evidence of inelastic demand for foreign goods. Machinery, equipment, and vehicles account for about 42% of total imports, followed by food and agricultural products (13%), chemicals (12%), and construction materials (8%). This means that a large share of government-funded projects – from infrastructure and health care to education – directly fuels demand for imported goods.
Even programs designed to support local industries often end up stimulating imports rather than domestic output. Purchases of agricultural machinery, laboratory tools, and medical devices are still primarily made abroad. In effect, government investment in the real sector creates external demand, a paradox for a country seeking import substitution.
The NBK notes that fiscal stimuli magnify the import multiplier effect: the more money flows into the economy, the larger the outflow through trade. This is due to the structural composition of Kazakhstan’s economy: only about 20% of value added is generated in manufacturing, while over 60% comes from services and trade. As a result, any rise in investment or consumer demand quickly leaks out through imports instead of boosting domestic production.
The current account balance remains highly sensitive to changes in public spending. In 2019, the deficit was –4.1% of GDP; in 2020, –6.3%; and in 2021 it improved slightly to –2.6%. However, the non-oil balance remained negative throughout, showing that the rest of the economy cannot offset the import burden. Imports consistently account for 30–35% of GDP, while non-oil exports make up less than 15%. This structural gap explains the chronic external imbalance.
The report further reveals that fiscal spending doesn’t just influence goods imports – it also affects the services and income balance. Many public projects involve payments to foreign contractors and consulting firms, which increases the outflow under services. In other words, fiscal expansion transmits through multiple channels – goods, services, and income – amplifying its overall external effect.
From a macroeconomic perspective, these results mean Kazakhstan’s fiscal stability does not automatically ensure external sustainability. When the state boosts domestic demand through higher spending, it simultaneously boosts imports. This pattern shows that internal stability often comes at the cost of external vulnerability.
Social expenditures play a central role in this mechanism. Roughly 30% of the national budget goes to direct transfers to households – pensions, benefits, and subsidies. Most of this money ends up in retail consumption, where about 40% of goods are imported. Thus, social policies indirectly fuel foreign demand, even as they serve domestic welfare goals.
The NBK study provides clear numerical evidence. The short-term fiscal-import elasticity is 0.6, and the cumulative effect reaches 1.42 over several months. In the non-oil sector, the elasticity is even higher – around 0.7, showing that import dependence is strongest where diversification is most needed.
Converted into absolute terms, a 1% increase in government spending (roughly US$357 million) produces an immediate US$214 million rise in imports, and a total of about US$500 million after five months – equal to roughly 1% of GDP. This makes fiscal policy the dominant driver of external fluctuations in Kazakhstan. Unlike monetary factors – such as interest rates or exchange rates – it is the budget that primarily shapes import dynamics and, consequently, the balance of payments.
The National Bank stresses the importance of spending composition. Infrastructure, defense, and social transfers have very different external effects. Infrastructure projects may raise imports of machinery in the short run but could strengthen domestic capacity later. Social transfers, however, lack any export return and immediately raise consumer imports.
In 2021, budget allocations were distributed as follows:
• Social protection and assistance – 29%
• Education – 9%
• Health care – 10%
• Defense and public security – 11%
• Transport and infrastructure – 8%
• Transfers and subsidies – 27%
Of these, only about 15% can be classified as investment spending with long-term productive impact. The remaining 85% are current expenditures, most of which directly translate into import demand.
The NBK study states explicitly: “The impact of government spending on Kazakhstan’s current account is transmitted mainly through the import of goods, confirming the twin-deficit hypothesis in the national context.” This is one of the few cases where Kazakhstan’s central bank has quantitatively confirmed the fiscal–external link, providing hard evidence for a long-debated issue. It highlights that fiscal and external policies cannot be viewed in isolation.
When the government spends more without creating local supply, imports rise and currency pressure follows. In the long run, this typically leads to one of two outcomes: spending cuts or currency depreciation. However, the authors emphasize that the solution is not to reduce spending, but to improve its structure.
Redirecting funds toward industries that replace imports or build export capacity can reverse the pattern. The key question, they write, is therefore not how much to spend, but what to spend on. For Kazakhstan, this is a strategic crossroads. The country has maintained high public investment levels but achieved limited transformation into export capacity.
Non-oil exports grow slowly, while imports continue to accelerate. In 2022, merchandise imports rose by 17.4%, compared to only 4.8% growth in non-oil exports. Meanwhile, the national budget remains heavily dependent on transfers from the National Fund. In 2021, these transfers reached KZT 4.5 trillion, or about 40% of total budget revenues. Most of this money covered current spending, not productive investments – deepening the import channel effect.
For this reason, the National Bank’s paper is more than just an academic exercise. It is a diagnosis of structural dependence – showing how each wave of fiscal expansion, unless tied to domestic production, weakens Kazakhstan’s external resilience.
Government spending stimulates not only GDP growth but also external vulnerability. In the short term, it supports employment, income, and social stability. But over the long run, it contributes to a persistent current account deficit, growing debt, and exchange rate pressure.
Kazakhstan’s economy, as the NBK authors conclude, faces a “fiscal paradox” – the very budget that stabilizes society internally is exporting part of its wealth abroad. These currency outflows are not always offset by oil revenues, especially when energy prices decline.
For the first time, the National Bank has quantified this mechanism, showing that the budget is not only a tool of domestic policy but a structural force shaping the country’s external position.
The key lesson is straightforward: Sustainable external balance is impossible without improving the quality of fiscal spending.
If public money continues to feed imports, every tenge of stimulus becomes another line in the current account deficit. But if those funds are channeled into local production and export growth, the budget could become a genuine source of long-term stability and national resilience.
