Calculations on Doubling GDP

Our economy faces the task of doubling GDP (in nominal US dollar terms) from USD 220 billion (2022 GDP) to USD 450 billion. There is no escaping the laws of macroeconomics, and they allow for some interesting calculations. GDP in 2023 came to USD 263 billion at an exchange rate of 456 tenge. Six years remain until the end of 2029, and with US inflation averaging 2%, GDP will grow by 12.6% through inflation alone, or by roughly USD 33 billion (i.e., to USD 296 billion). Real growth must then do the rest. Assuming real growth of 4.5% in 2024, reaching a GDP of USD 450 billion in 2029 would require annual growth of about 7.8%. In macroeconomic terms, over the long run the exchange rate adjusts by the inflation differential: if US inflation is 2% and ours averages roughly 7%, then over six years the tenge should depreciate by about 34%, from 456 to 611 per US dollar. Of course, the tenge could be held at around 500 through 2030, but this imbalance will catch up with Kazakhstan in the following years, as it already did in 2009, 2014 and 2015, and the cost will be very, very high.

For the real exchange rate not to weaken, and even to strengthen, all else being equal, labor productivity would have to grow faster than in the United States. That is possible in principle, but not with our economic structure.

Reaching economic growth of 7.8% is therefore extremely difficult, given that most of our growth is driven by a fiscal impulse to the economy.

Let me try to describe, very superficially, how our economic growth is actually produced. Take 2023 GDP as an example. Total GDP was KZT 119 trillion, of which KZT 8 trillion is net taxes on consumption and KZT 111 trillion is value added. Of the KZT 111 trillion, KZT 67.5 trillion comes from services and KZT 43.5 trillion from goods production, including construction. Within services, trade accounts for the largest share, at KZT 21 trillion. This is essentially the profit of trading companies from the resale of goods, works and services, and besides households, the state takes part here too, through public procurement and purchases of various goods, including by Samruk-Kazyna holding. The large fiscal impulse drives growth in trade and in the profits of trading companies, which are counted in GDP. Education, healthcare and professional and scientific activity together contribute KZT 13 trillion, which is essentially government spending, and the more is spent in these sectors, the greater their contribution to GDP.

Mining, which includes oil production, accounts for KZT 15 trillion. It should be understood that roughly half of this KZT 15 trillion goes to the budget in the form of taxes, which then become government spending that directly affects GDP. Construction is also growing rapidly, with a significant contribution from National Projects such as Comfortable Schools and road building, which is likewise a fiscal impulse. Logistics also contributes, including through tariff increases by the main carrier, KTZ. So if government spending were removed, GDP growth would be under heavy pressure. Growth of 5% in GDP is roughly KZT 6 trillion, and this year KZT 6.2 trillion was drawn from the National Fund. I hope these fiscal funds will be enough to achieve such growth, although so far, with manual control, growth has only been brought up to 4%.

In other words, our growth is achieved mainly through the redistribution of oil rents via the fiscal channel, which is the classic pattern of Dutch disease. Current withdrawals are already barely covered by current oil revenues. Sustaining growth of 7% or higher through government spending is simply impossible, because we do not have such revenues, even counting oil income. Growth above 7% requires structural change in the economy, foreign investment and quite painful reforms. These take time to put in place (even two years is very little to implement them), and their effect may only appear after 3-4 years, with a possible recession in the early years.