Central Asian economies highly depend on revenues from mineral resources and migrant remittances. This fact is a major disadvantage, which regional governments try to address. However, many programs of industrialization insignificantly contributed to economic diversification. As a result, following the oil shock that coincided with the Ukrainian crisis, the region experienced a significant downturn. The COVID-19 pandemic worsened the economic situation and increased a number of challenges for regional economies. Therefore, this commentary aims to review major economic threats to the countries of Central Asia.
The main economic challenge for the region is an uncertainty on the energy markets. World prices of oil, natural gas and metals, which account for the substantial part of Central Asian exports, remain low. In September 2020, oil prices were fluctuating around $40 per barrel, which was significantly lower than in the boom periods. For instance, in June 2008, the world oil prices reached $166 per barrel [Macrotrends, 2020]. Additionally to the price shocks, the economic slowdown of main trade partners affected the countries of Central Asia. In March 2020, China issued a force majeure note to its Central Asian suppliers of natural gas to halt supplies as the result of the global economic downturn. In 2019, Kazakhstan, Uzbekistan and Turkmenistan exported 7.1 bcm, 10 bcm and 33.2 bcm of natural gas, respectively. The d ecrease in demand led to a 15-25% reduction of production in Uzbekistan and Kazakhstan. Nevertheless , authorities of the most affected country, Turkmenistan, hope that this situation is a short-term shock [Hashimova, 2020]. At the same time, China’s infrastructural projects, which the Central Asian states perceive as potential economic growth drivers, became dubious as Beijing is engaged in many international conflicts, including the confrontation with the Western countries and its neighbors such as India. Lockdown in Russia also negatively affected countries dependent on migrant remittances such as Kyrgyzstan, Tajikistan and Uzbekistan. According to data from the National Bank of Kyrgyzstan (2020), during March and April 2019, migrant remittances from Russia to Kyrgyzstan were equal to $192 million and $196.3 million, respectively. In the same period of 2020, they decreased to $138.2 million and $74.3 million and started to recover since June 2020. One of the reasons for the reduction in remittances is unemployment among migrants caused by lockdowns. As a result, those migrant workers had to return to Central Asia, which increased pressure on local labor markets.
The pandemic-induced lockdowns led to closures of many businesses, breakdowns of supply chains, shortages of workers, and bans or restrictions of exports. As a result, incomes of the population of all affected countries decreased. Therefore, governments had to play a more active role on the market in order to mitigate consequences of the economic shocks. Responses to this crisis from both advanced and developing countries were different. Many experts recognize South Korea’s policies as the best one. It is expected that the country’s GDP growth would be 0.8%, while real GDPs of other members of the OECD will contract by 7.6% [O’ Neill, 2020]. In general, governments around the world have spent an additional $11 trillion in response to the pandemic. However, a major difference between advanced and developing countries is that rich countries spend whatever it takes, while developing countries spend whatever they can [Velasco, 2020]. The current crisis is an especially difficult challenge for poor countries, some of which will have long lasting negative economic consequences and face the possibility of losing a chance of development for a decade. As a result, prolonged recessions in lower-income countries will cause higher levels of debt and inflation crises. Moreover, the coronavirus crisis will affect not only economic growth and employment, but also lifelong behavior of people [Rogoff, 2020]. Therefore, many economists and experts forecast the increasing role of governments in the post-pandemic period. The history shows that the western countries emerged stronger from the Great Depression and the devastation of World War II using government support [Skolimowski, 2020].
In general, governments of all countries affected by lockdowns tried to protect workers and firms. They applied unemployment benefits, grants, transfers, low-rate loans and tax deferrals. However, these policies are temporary, and after lockdowns, governments need to transform their policies from protection to reallocation in order to limit the pain of adjustment [Blanchard et al., 2020]. The Central Asian countries announced similar measures. However, as Stronski (2020) shows, the pandemic revealed major weaknesses of the region, including structural and governance problems, corrupt public health, slow assistance to affected enterprises and population despite adopted programs. L ockdowns led to the breakdown of supply chains, inflation, and shortages of basic goods. The regional governments responded with higher government expenditure. Some states of Central Asia started to spend their reserves (e.g., the National Fund of Kazakhstan), while others called for international assistance. However, higher public spending policy has its limits. For instance, assets of Kazakhstan’s National Fund are decreasing due to higher transfers to support the social sector and economic activity. Kazakhstan’s authorities plan to continue increasing government expenditures, which will further decrease assets of the National Fund to the level of irreducible balance, which equals 30% of GDP, by the end of 2023 [Gorbunova, 2020]. Therefore, besides using internal reserves, the largest regional countries , Kazakhstan and Uzbekistan, started to borrow from other countries and international financial institutions. Lower revenues from mineral resources, higher needs for state intervention and postponed reforms will increase government debt in the region, which will restrict future economic development. Kyrgyzstan is a good example, where government debt became an economic and political problem. During seven months of 2020, the government of Kyrgyzstan spent 24.2% of its budget on servicing the debt . Debt service expenses are the second item in the country’s budget after education expenditures. While the government spent 19.9 billion som (more than $250 million) on education, debt service expenditures equaled 18 billion som (more than $226 million), which was more than 12 times higher than expenditures on healthcare. It should be noted that besides foreign debt, the government of Kyrgyzstan borrows from the internal market with extremely high interest rates up to 20% [Ulukbek uulu, 2020]. As Kyrgyzstan’s situation shows, the current model of handling the economic difficulties with mainly state intervention methods prevents the governments from investing more in human capital and makes it quite difficult to achieve strong and sustainable economic growth rates and transform resource dependent economies. High rates of debt accumulation will restrict not only current rates of growth, but also future economic development. In order to continue debt services, the regional governments will further decrease public expenditures on human capital or other important projects or increase taxes. Higher taxes will negatively affect business activity. At the same time, the debt burden will increase the region’s dependence on major creditors such as China. It is therefore not surprising that some c ountries of the region made several requests to their Chinese creditors asking them to delay debt payments [Toregeldi uulu, 2020].
Targeted government policy and aid help firms to overcome consequences of negative shocks and to retain their employees [Bennedsen et al., 2020]. However, there are needs for certain conditions to obtain positive results from the state intervention policies. The government support increases state ownership, which can be a source of distortions through unfair advantages to state-owned enterprises (SOE) relative to domestic or foreign competitors. Moreover , the possibility of appointing board members whose political knowledge is greater than their economic one might not be an economically efficient decision for these SOEs. In order to minimize such kinds of risks, the OECD countries developed guidelines for corporate governance of SOEs and built a product market regulation indicator on the quality of SOE governance [Abate et al., 2020]. In Central Asia, interactions between the state, SOEs and private business lack transparency and openness. Higher levels of financial or other support of business from the governments could give an unfair competitive advantage to SOEs against other businesses and bring more corruption. Consequently, such kind of interaction can lead to market distortions with lower productivity of firms, underinvestment and a lack of incentives to innovate. As efficiency of any policy, including state aid, depends on the strength of existing institutions and rule of law, the regional governments should implement institutional reforms to improve the existing system. B usiness, which operates in a transparent system and has social values, can mitigate consequences of many economic shocks.
Thus, the r egional governments should address all these challenges without postponing reforms. As practice shows, g overnments, which operate during crise s and shocks, have much higher responsibility. Their decisions on economic policy affect not only the wellbeing of the current generation, but also of the future ones. They must develop better policies, which will focus on human development as a single source of positive economic changes.
References:
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Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.