Unlocking Central Asia’s Huge Potential

A Commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund

Published in Vedomosti, November 3, 2009

Resource-rich Central Asia, strategically located between East Asia and Europe, and South Asia and Russia, has tremendous potential—yet to be fully exploited. Since the outset of their transition to a market economy, the countries of the region have made visible progress towards decentralizing their economies, creating market institutions, expanding international links, and intensifying efforts to diversify and increase production and trade. As a result—and owing also to sound macroeconomic management, high commodity prices, and strong foreign inflows—this landlocked region, the size of the European Union and home to 60 million people, enjoyed near double-digit growth on average during 2001–07.

But, as elsewhere in the world, the global economic crisis has taken a toll on Central Asia, with average growth for the region as a whole sinking from 5.7 percent in 2008 to 1.2 percent in 2009. Nevertheless, this average masks important differences across countries. Two of the region’s three energy exporters—Turkmenistan and Uzbekistan—have weathered the global downturn reasonably well, thanks to fairly limited linkages to international markets, long-term energy contracts, and supportive government policies. These countries are projected to register robust growth in 2009, supported mainly by public spending made possible by ample public savings accumulated during previous boom years. Kazakhstan, however, will be held back by the lingering effects of its banking crisis and is likely to see negative growth of around 2 percent in 2009. With global energy demand increasing again, the energy exporters should see growth rates increase in 2010. In contrast, the two energy importers—the Kyrgyz Republic and Tajikistan—are facing deteriorating living standards largely as a result of a sharp drop in remittances from, and trade with, Russia; recovery in 2010 is projected to be slow and gradual.

Governments in the region have generally reacted appropriately to the setbacks brought on by the global economic downturn by increasing government spending, easing monetary policy, allowing their exchange rates to depreciate in response to lower foreign exchange inflows, injecting short-term liquidity to limit the credit crunch, and strengthening social safety nets. In the energy importers, where governments have little space to provide some of these measures, donors, including the neighboring states of Russia and China, and the IMF have provided support. With global growth just beginning to re-emerge, continued vigilance on these policy fronts will serve the region well.

Beyond short-term stabilization measures, Central Asia has still to tap into remarkable opportunities. The region is richly endowed with natural resources (oil, gas, copper, gold, uranium, and hydropower) and a young and educated labor force. This economic potential can be developed more quickly with a strong and vibrant private sector operating in an effectively and transparently regulated business environment. To this end, governments in the region must continue to improve the business environment by reducing excessive bureaucracy, improving governance, developing infrastructure, and strengthening economic institutions.

Moreover, to exploit this potential, Central Asian countries will need to cooperate regionally, as both markets and infrastructure projects often span frontiers. Addressing their political differences, particularly in the water and energy sectors, will be key to enhanced regional cooperation. Significant scope also remains for reaping the benefits of trade by liberalizing trade regimes.

Donors can also contribute to deepening cooperation within the region by stepping up their support for regional infrastructure and related projects. Support, however, should not be limited to financial assistance; it should also focus on creating mechanisms and developing institutions that can facilitate communication and dialogue. Along these lines, the Central Asia Regional Economic Cooperation program constitutes an important mechanism, which has already made significant progress, but can still be further developed. Within the next year, the IMF intends to establish a regional technical assistance center, which will constitute another venue for cooperation.

At the beginning of the 21st century, the time has come for a new global partnership with Central Asia. The international community has a strong interest in helping it move beyond the crisis and develop into a stable, secure, and prosperous region.



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