Golden Opportunity for Central AsiaA commentary by David Owen
Senior Advisor, Middle East and Central Asia Department
International Monetary Fund
Published in AKIpress (Kyrgyz Republic)
May 19, 2006
Central Asian countries are currently enjoying exceptional economic growth. With prices of the region's commodity exports at high levels and global growth running at its strongest pace in thirty years, the near-term prospects for Central Asia look bright. This presents an excellent opportunity for the governments of the region to move forward with reforms that will lock in continued rapid growth, rising living standards, and declining poverty over the long term.
Growth in the region averaged over 8 percent last year and has exceeded 7 percent in each of the past six years. Last year's growth was achieved despite a soft patch in the Kyrgyz Republic in the wake of the March 2005 Tulip Revolution. Flows of money into the region—whether in the form of export earnings, workers' remittances, private capital flows, or official financing—picked up, boosting foreign exchange reserves. Fiscal policy in the region also improved, permitting a reduction in countries' public debt burdens. However, relatively loose monetary policy and high oil prices pushed up inflation.
Looking forward, the strong economic performance is set to continue, at least in the near term. Growth in Kazakhstan, Tajikistan, and Uzbekistan should come in at 7-8 percent or more this year, and continuing recovery in Kyrgyz Republic is likely to push up growth to 5 percent. Global economic conditions—especially growth in Russia and China—are expected to remain favorable and should act as a strong support.
However, economic policy makers in the region will need to play their part in securing lasting economic success. Limiting inflationary pressure with tighter monetary policies is an important priority for the near term in all four countries. So is allowing more nominal exchange rate appreciation in response to continuing foreign exchange inflows. But more importantly, over the longer term all the countries still face a daunting agenda of reforms needed to boost productivity, improve governance and the business climate, and raise investment spending. These reforms are essential to increase growth potential and reduce the region's high level of poverty.
With fiscal and debt positions having improved markedly in recent years, governments are now well placed to undertake the necessary reforms. The opportunity afforded by the favorable economic conditions is a rare one, and should be seized. The precise package of economic policies will, of course, vary for each country.
• In Kazakhstan, high oil prices have helped boost economic growth to an average of 10 percent a year over the past half decade, and will enable fiscal and trade surpluses to continue in 2006 and beyond. But bank credit growth is currently running at over 70 percent and inflation has risen to almost 9 percent. Under these circumstances, the main priority is to tighten monetary policy and strengthen banking regulation and supervision. That should help limit risks in the banking sector and curb inflation. If adequate tightening is undertaken on the monetary and banking side, there is plenty of room in the government budget to use more of the country's oil revenues to improve infrastructure and address social priorities.
• In the Kyrgyz Republic, economic activity is recovering. Inflation is still relatively low, but it is rising. Fiscal performance is strong and the country has recently become eligible for further debt relief under the Highly Indebted Poor Countries (HIPC) Initiative. Here, the key priorities include a tighter monetary policy to keep inflation in check and more progress with financial sector reform. Also, reform of the energy sector—where deficits remain large and pose a serious potential threat to public finances—is crucial. Most importantly, tackling corruption and improving the regulatory environment is essential to help foster private sector-led growth. Debt relief under HIPC, and subsequently under the Multilateral Debt Relief Initiative (MDRI), would help the government to press ahead with these essential reforms. At the same time, opportunities for external financing of large investment projects will need to be balanced against the need to avoid another cycle of excessive borrowing.
• In Tajikistan, growth has averaged 9 percent over the past three years, although inflation has risen slightly. Tax performance and spending discipline so far in 2006 point to a strong fiscal position. Debt relief, including recently under the MDRI, has sharply lowered the public debt burden. Looking forward, the priority is to make good use of increased donor support to achieve development objectives while avoiding a recurrence of excessive borrowing. Completing reforms to tax administration and public expenditure management will be conducive to long-term growth.
• In Uzbekistan, growth has picked up since 2004 and is expected to remain high this year. Although the external surplus should stay very large, the government has budgeted a deficit for this year and the monetary aggregates have accelerated sharply. As a result, inflation has increased noticeably. The key challenges, therefore, are to bring down inflation and stimulate private sector development. The economic policy package will need to include tighter monetary conditions, greater exchange rate flexibility, liberalization of the trade and exchange systems, and financial sector reforms.
In addition to the policy agenda for each economy, there are steps that the region can take collectively to boost all countries' prospects. Closer regional cooperation, especially through greater trade liberalization and removal of impediments to trade, will help secure sustained economic and social gains in each country. The potential benefits of increased economic integration of Central Asia with neighbors Russia and China are clear. The Central Asia Regional Economic Cooperation (CAREC) program provides a valuable forum for promoting integration in the areas of trade policy and trade facilitation, energy, and transport. Increased cooperation through CAREC and other groups would benefit the whole region.