Increasing levels of debt became a common concern for many advanced and developing countries. Debt-to-GDP ratios are historically high in the United States, Germany, France and other advanced economies. Rapid growth of government expenditure as the result of many social programs, lower tax revenues, increasing share of elders among population and political problems caused budget deficits and higher amount of debt [Yared, 2020]. This year, despite significant reduction of economic activity due to the pandemic-induced lockdowns, more than 100 developing countries will still have to pay a combined $130 billion in debt service. Expenditures for debt service will worsen their economic performance. As a result, many of them can default, while others will postpone much needed social expenditure [Stiglitz and Rashid, 2020].
Government debt also remains one of the frequently discussed issues in Central Asia. In many debates, politicians and the public refer to the debt as one of the main economic and political challenges. According to data from the World Bank’s (2020) International Debt Statistics report, foreign debt in Central Asia (except Turkmenistan) increased during the last decade (Figure 1). Uzbekistan shows the highest growth rate of total external debt. If in 2009 this indicator equaled $7 billion, in 2019 it reached $21.7 billion, increasing by more than 3 times. Total external debt stock of Kazakhstan is significantly higher than the combined indicators of all other regional countries. In 2019, Kazakhstan’s external debt amounted to $156.3 billion, while it equaled $109.7 billion in 2009, increasing by more than 1.4 times. In 2019, indicators of Kyrgyzstan and Tajikistan were equal to $8.3 billion and $6.6 billion, respectively. In these countries, debt volume increased by almost 2.4 times compared to the indicator of 2009. For the same period, Turkmenistan could reduce its debt stock from $0.7 billion to $0.6 billion.
In order to understand the debt-related economic challenges for the region, the analysis should primarily focus on dynamics of the publicly guaranteed debt (Figure 2).
Figure 1. Total external debt stocks of Central Asian countries, billion $
Source: The Author’s compilation based on the World Bank (2020)
Figure 2. Publicly guaranteed debt of Central Asian countries, billion $
Source: The Author’s compilation based on the World Bank (2020)
The volume of the public debt in Central Asia increased in all countries, except Turkmenistan. During the last decade, Kazakhstan demonstrated substantial growth in this indicator, which increased to $24.7 billion in 2019 from $2.5 billion in 2009. Therefore, the debt volume grew by almost 10 times, which was the highest ratio in Central Asia. For the same period, public debt in Uzbekistan increased by 3.6 times and in 2019 amounted to $11.8 billion. Growth rates of the indicator in Kyrgyzstan and Tajikistan were lower than in other countries of the region. In Kyrgyzstan and Tajikistan it increased by 1.6 and 1.75 times, respectively. In 2019, the public debt in Kyrgyzstan equaled $3.7 billion, while in Tajikistan it achieved $2.8 billion. Only in Turkmenistan the volume of public debt decreased from $0.5 billion in 2009 to $0.4 billion in 2019.
Forecasts show that as the result of the current economic crisis, caused by low commodity prices, sharp decline in remittances, higher costs of fiscal support packages and the implemented lockdowns, debt-to-GDP ratio in the region will grow in 2020. The indicators of Kazakhstan and Uzbekistan, which have higher levels of international reserves, will increase by 3 and 8 percentage points and reach 23.1% and 36.9% of GDP, respectively. The indicators of Tajikistan and Kyrgyzstan will also rise by 7% and 15%, respectively. As a result, the debt-to-GDP ratio will be equal to 51.8% in Tajikistan, while this number for Kyrgyzstan’s will reach 69.2%. Moreover, higher levels of indebtedness can put some countries at additional risks. For instance, dollarization of Tajikistan’s and Uzbekistan’s debt is 100% and 97%, respectively. This means that exchange-rate depreciation can trigger debt-related economic crises, handling of which for Tajikistan can be extremely difficult given insufficient level of international reserves [OECD, 2020].
In fact, countries of the region demonstrate higher than predicted levels of debt. According to data from the Central Bank of Uzbekistan, the country’s total external debt reached $27.6 billion as of 1 July. Compared to the beginning of 2020, the level of foreign debt increased by 12.7%, or by $3.1 billion. Debt of the public sector grew by $1.7 billion and reached $17.4 billion, while debt of the private sector increased by $1.4 billion and equaled $10.1 billion [UzDaily, 2020]. Recently, members of Kazakhstan’s parliament addressed their concerns to the government. According to their data, debt-to-GDP ratio of Kazakhstan will increase to 29.2% this year. In 2021 and 2022, this ratio will reach 30.3% and 30.5%, respectively. Moreover, in 2025, the government debt will double compared to the indicator of 2019. At the same time, debt service expenditures are rising in Kazakhstan’s budget. Forecasts show that they will increase from 12.9% in 2019 to 23% in 2022-2023 [Karimova, 2020]. Debt service expenditures have already account for the bulk share of Kyrgyzstan’s budget. During 7 month of 2020, its government spent 24.2% of its budget for debt service, which was the second item in the country’s budget after education expenditure and more than 12 times higher than expenditure on healthcare. At the same time, the government of Kyrgyzstan borrows from internal market with extremely high interest rates up to 20% [Ulukbek uulu, 2020], ignoring findings of some studies, which show that low interest rate loans will have small fiscal and welfare costs [Blanchard, 2019]. However, other studies show that the long-run welfare costs of expansionary debt policies might be significant [Evans, 2020]. Moreover, higher volume of debt poses many major risks, including much higher taxes and lower future incomes, inflation and intergenerational inequity [Boskin, 2020].
Increasing volume of debt in Central Asia is an important political problem as indebtedness increases political dependence on creditors. China remains the main source of loans in the region. Its share in external debt of Kyrgyzstan and Tajikistan equals 45% and 52%, respectively, or more than 20% of their GDP. The situation is better in resource rich countries. Loans from China account for 16%-17% of GDP of Turkmenistan and Uzbekistan, while the indicator of Kazakhstan is the lowest and equals 6.5% [Umarov, 2020]. These loans, which generally lack transparency, increase dependence of the region on China and might limit political maneuverability of the Central Asian countries. Consequently, China could also demand various economic preferences to create an advantageous position for its companies and investors compared with the local or other international investors.
Instead of focusing on raising domestic revenue, increasing spending efficiency through better prioritization and selection of projects, and strengthening debt management and transparency [IMF-World Bank, 2020], politicians of the region propose populist measures. Recently, a member of the parliament of Kyrgyzstan called for the public to repay external debt of Kyrgyzstan. The deputy plans to open a special bank account for this purpose. It should be noted that this is not the first attempt of the authorities of Kyrgyzstan. Earlier, the government opened special accounts for people, who want to help the country’s economy. However, these measures were not successful [24.kg, 2020].
Thus, the government debt became one of the most important challenges for the Central Asian region. Higher volumes of regional debt will restrict development of human capital and other important projects due to high expenditures for debt services, affect economic well being of the current and future generations and increase political dependence on key regional players. Therefore, in order to mitigate debt-related risks in the region, policymakers should implement structural economic reforms, develop institutions, call for transparency in debt accumulation and management and select profitable projects for financing. Decision makers should attract loans to develop and strengthen industrial and infrastructural capacity of the Central Asian countries.
References:
Blanchard, Olivier (2019). Public Debt and Low Interest Rates. American Economic Review, 109 (4): pp. 1197-1229.
Boskin, Michael (2020). Are Large Deficits and Debt Dangerous? AEA Papers and Proceedings 110: pp. 145–148.
Evans, Richard (2020). Public Debt, Interest Rates, and Negative Shocks. AEA Papers and Proceedings 110: pp. 137–140.
IMF-World Bank (2020). The evolution of public debt vulnerabilities in lower income economies. Retrieved from https://www.imf.org/en/Publications/Policy-Papers/Issues/2020/02/05/The-Evolution-of-Public-Debt-Vulnerabilities-In-Lower-Income-Economies-49018. Accessed on 22.10.2020.
Karimova, Jamilya (2020). The worries of the deputies grow along with the national debt of Kazakhstan. Retrieved from https://lsm.kz/gosdolg-k-koncu-goda-priblizitsya-k-limitu. Accessed on 21.10.2020.
OECD (2020). COVID-19 crisis response in Central Asia. Retrieved from https://www.oecd.org/coronavirus/policy-responses/covid-19-crisis-response-in-central-asia-5305f172/. Accessed on 18.10.2020.
Stiglitz, Joseph and Hamid Rashid (2020). How to prevent the looming sovereign debt crisis. Retrieved from https://voxeu.org/article/how-prevent-looming-sovereign-debt-crisis. Accessed on 20.10.2020.
Ulukbek uulu, Yrysbek (2020). Time to pay. Kyrgyzstan pays for debt repayment already every fourth som from the budget. Retrieved from https://rus.azattyk.org/a/30831427.html. Accessed on 11.09.2020.
Umarov, Temur (2020). China Looms Large in Central Asia. Retrieved from https://carnegie.ru/commentary/81402. Accessed on 21.10.2020.
UzDaily (2020). The total external debt of Uzbekistan makes up US$27.6 billion. Retrieved from https://uzdaily.uz/en/post/60195. Accessed on 23.09.2020.
World Bank (2020). International Debt Statistics. Retrieved from https://openknowledge.worldbank.org/bitstream/handle/10986/34588/9781464816109.pdf. Accessed on 14.10.2020.
Yared, Pierre (2019). Rising Government Debt: Causes and Solutions for a Decades-Old Trend. Journal of Economic Perspectives, 33 (2): pp. 115–140.
24.kg (2020). The deputy proposes to repay the external debt at the expense of ordinary citizens. Retrieved from https://24.kg/obschestvo/169829_pogasit_vneshniy_dolg_zaschet_sredstv_prostyih_grajdan_predlagaet_deputat/. Accessed on 19.10.2020.
Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.