Harnessing the Power of Integration: A Path to Prosperity in Central Asia
IMF News, September 11, 2024
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- Published: September 11, 2024
Overview and key messages
- Distinguished remarks delivered in Bishkek on first visit to the Kyrgyz Republic, emphasizing that raising living standards in the Caucasus and Central Asia (CCA) requires bold, concerted action: strengthen stability and resilience, promote regional integration, and launch a new wave of reforms.
- The current favorable macroeconomic conditions create a promising window for structural reforms because "structural reforms yield greater growth dividends during economic expansions."
Global and regional macroeconomic context and projections
- Global growth: bottomed out at 2.3 percent in 2022 and is expected to rebound to 3.2 percent in 2024 and 3.3 percent in 2025.
- Global inflation: projected to decline to 5.9 percent in 2024 and 4.5 percent in 2025, with advanced economies returning to inflation targets before emerging market and developing economies.
- Regional performance:
- CCA region growth in 2023: 4.9 percent.
- April Regional Economic Outlook projection for 2024: growth slowdown to 3.9 percent.
- Actual developments: inflows of income, capital, and migrants from Russia, and rerouting of trade through the region, have boosted growth to "impressive high single digits so far this year" in oil importing CCA economies, including the Kyrgyz Republic.
- Kazakhstan: growth expected to slow to 3.1 percent in 2024 before picking up to 5.6 percent in 2025 as production increases from the Tengiz oil fields.
- Medium-term expectation: growth in the region expected to moderate to under 4 percent and inflation stabilize in mid-single digits.
- Risks to the outlook:
- Escalation of the war in Ukraine and the Gaza conflict could cause commodity price volatility and a reversal of recent trade patterns.
- Other risks include geopolitical tensions, rising trade protectionism, increasing inequality, and financial market volatility.
- Inflation dynamics within the region:
- Inflation fell in most CCA countries amid exchange rate appreciations and a decline in commodity prices.
- Inflation remained more persistent in Kazakhstan and Uzbekistan due to strong domestic demand, elevated inflation expectations, and energy price reforms in Kazakhstan.
Regional integration, trade, and connectivity
- Potential gains from reducing barriers and improving infrastructure:
- Reducing nontariff trade barriers, boosting infrastructure investment, and enhancing regulatory quality could increase trade by up to 17 percent on average in the CCA region.
- Key infrastructure priorities highlighted:
- Transportation networks (roads, railways, ports) to facilitate cross-border trade.
- The planned China-Kyrgyzstan-Uzbekistan railway cited as an example of cross-country cooperation to improve East-West connectivity.
- Energy projects (example: Kambarata-1) to diversify the energy mix, reduce fossil-fuel dependence, improve water availability, and create export opportunities.
- Collective requirements:
- Mobilizing expertise and financing for major projects while sustaining macroeconomic stability.
Climate change, low-carbon transition, and green jobs
- Vulnerability and projected losses:
- Unabated climate change could cause a loss of annual output of nearly 6.5 percent in the region by 2060.
- Mitigation and adaptation benefits:
- Joint actions to cut emissions, adapt to climate change, and manage transition risks could substantially reduce projected losses.
- Scaling back energy subsidies and introducing carbon-pricing mechanisms can contribute to global mitigation efforts.
- The Kyrgyz Republic’s commitment to raising electricity tariffs and gradually eliminating energy subsidies is highlighted as an example.
- Labor market and job quality:
- Green jobs that pay 7 percent more on average.
- Policy emphasis:
- Promote green technologies, improve energy efficiency, manage natural resources sustainably, and enhance regional energy cooperation.
Structural reforms to boost growth and inclusivity
- Aggregate reform impact:
- Research finds structural reforms could lift output by 5-7 percent in the next 4 to 6 years.
- Priority reform areas:
- Governance: Strengthening governance, property rights, and the rule of law; governance reforms yield the highest growth dividends and amplify other reforms.
- State-owned enterprises (SOEs): Prudent management; retain SOEs that serve essential public-policy objectives but ensure efficiency; privatize non-essential SOEs to foster competition and private-sector-led job creation.
- Private sector development: Simplify regulations, foster competition, and combat corruption to build confidence and attract private investment.
- Human capital and digital infrastructure: Investments in education, health, and digital infrastructure to boost productivity and unleash the potential of a young population.
- Social protection and inclusivity:
- Well-targeted social assistance is essential to shield the vulnerable from impacts of energy subsidy reforms and climate change.
- Benefits should incentivize work, be targeted and timely during downturns, and scale back when recovery takes hold.
- Empowering women and promoting gender equality can unlock significant economic potential.
IMF engagement and capacity development
- IMF role: Provide policy advice, financing, and technical assistance to help CCA members stabilize economies, develop sustainable growth, and reduce poverty.
- COVID-19 response: IMF assistance helped members weather the crisis and lay groundwork for recovery.
- Capacity development: Establishment of the Caucasus, Central Asia, and Mongolia Regional Capacity Development Center to provide technical assistance and training to build stronger institutions and implement sound economic policies.
- Commitment: IMF stands by member countries in both prosperous and challenging times and will continue partnership efforts in the region.
Conclusion and call to action
- The CCA region has laid foundations for a prosperous, peaceful society since independence but now faces new global challenges.
- Embrace continued market-oriented reforms, deepen regional integration, and pursue collective climate and infrastructure initiatives to durably raise growth, create jobs, and improve living standards.
- The IMF pledges continued support in partnership with the region.
Source: IMF speech "Harnessing the Power of Integration: A Path to Prosperity in Central Asia", September 11, 2024.