Fallout from the Global Crisis for Central Asia: the Growing Imperative for Cooperation
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Janna Nauryzbayeva, Kazakh-British Technical University, Almaty, Kazakstan
Central Asia: Manifestations of the Crisis
The countries of Central Asia (CA) - Kazakstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan as the rest of the World did not have an option to avoid a strike of the global crisis. The economies of CA countries are hit significantly and yet, there is not the bottom of the decline. Central Asia is the region with a vast array of social, political, economic, environmental, and security challenges. And the crisis of this scale may serve as a trigger not only for negative economic tendencies, but also for a dramatic aggravation of existing problems.
Quite a positive annual macroeconomic statistics reported by some of CA countries in 2008 should not be considered as a sign of slowdown of the crisis in the region. In 2008 GDP of Tajikistan, Uzbekistan, and Turkmenistan grew at rates of 7.9%, 9%, and 10.5% respectively. Hence, a careful consideration of a broader socio-economic context of those countries shows that it is not the averting, but only the postponement of damaging consequences of the crisis.
In CA it is obvious that the crisis is distributed via the same channels that before served for the redistribution of wealth. The most vulnerable to the frst wave of the crisis turned out to be the most open economies deeply integrated in the global financial system. However, the countries, which were not severely tied with the global capital market, in their turn, are receiving an adequate blowback through the ways that they were benefiting before. As an open economy with the largest share of FDI in the region and a highly developed banking system and substantial foreign borrowing Kazakstan was hit by the very first wave of financial crisis. Collapse within the global capital market has reduced money flow to the economy dramatically. In September-December of 2007 Kazak banks sharply decreased their lending activities. Hydrocarbons, mostly crude oil, and metals comprised about 80% of Kazakstani export. Thus, in 2008 following the financial crisis, fall of demand and commodities` prices brought the country to the next stage of the crisis. Aggravated with decreasing oil revenues, liquidity shortage has weakened domestic consumption and propelled decline through the main value adding chains.
Last year Kazakhstan’s foreign trade turnover in comparison with 2007 has increased by 35.5%. However, in January 2009 it fell by 41.6% compared with the frst month of 2008. Retail commodity turnover decreased 2.2% in January-February compared with the same period in 2008. By 2009 gross external debt has reached 80% of GDP, and 98% of that is the debt of private sector (corporate and banking).
Speedily expanding fnancial, construction, and services sectors have been fueling a rapid GDP growth of the country since 2004. In 2008, due to shortage of lending previously booming sectors experienced a sharp turn down. As a result of the shrink of key sub-sectors, in 2008 GDP growth dropped by 3.2% from 8.9% in a year earlier. The prospects of GDP dynamics for 2009-2010 also are not optimistic as the factors, which let Kazakstani economy boost during past years will not be present in the nearest future. A relatively small and open economy of Kyrgyz Republic with the banking system closely tied to the Kazakstani one is experiencing a decline as well. In January-February 2009 industrial output fell by 25% compared to the same period in 2008, and GDP growth declined at an estimated rate of 1.1%. Export and import rates signifcantly decreased within the two frst months of 2009, by 29.4% and 19.5% respectively. Compared with the same period of time of 2008 the export rates grew by 19%, while import grew 1.5 times more. IMF mission in Kyrgyzstan is expecting a sharp slowdown of the county`s GDP by 1% in 2009.
Tajikistan – a former Soviet republic so far tackles the consequences of civil war. Notwithstanding GDP growth at an average rate of 8.7% in 2000-2007 more than a half of the population of the Republic lives under the poverty line. According to Human Rights Watch unemployment rate reaches 40% and more than 12% of the population have leaved the country for job mostly to Russia and Kazakstan. In 2008, economic problems in those countries have led to the fall of remittances from migrants by about 20% in January, year on year, and projected to go down by about 30% this year . Furthermore, export earnings of the country, which mostly come from cotton and aluminum, will also drop due to fall of commodities prices. In January of 2009 compared with the same period of time in a year earlier export decreased by 41.8% and foreign trade turnover dropped by 6.7%. In Q1 of 2009 industrial production declined by 8.7 % compared with Q1 of 2008. According ADB, prospects of GDP growth in Tajikistan are positive for 2009, although, expectations for infation rate are the highest in the region (15%).
The other countries of the region – Uzbekistan and Turkmenistan have demonstrated an impressive growth of GDP and domestic capital investments in 2008. Both countries are the main natural gas exporters in the region and during past years they have been increasing their earnings with raising gas prices. The economies of these two countries are relatively not open and their banking sectors yet are not integrated enough into the global market. Accordingly, they have not suffered from the fnancial crisis directly. Nonetheless, both countries have already felt the crisis with the fall of commodities` prices (natural gas, aluminum, and cotton). According to Economic and Social Commission for Asia and the Pacifc (UNESCAP) Uzbekistan's GDP is expected to grow at 7% in 2009 . European Bank for Reconstruction and Development (EBRD) forecasts GDP growth at the rate of 5-7%. However, these forecasts seem to underestimate interdependence of such the factors as labor migration, migrant’s remittances, domestic consumption and GDP growth. Uzbekistan is the most populated country and the largest labor force exporter in the region. And the issue of returning migrant workers and declining remittances might turn into critical for the country in the foreseeing future.
The Challenge: Poverty, Unemployment, and Growing Risk of Destabilization
In 2008, Federal Migration Service of Russia registered about 2 mln Uzbek, 1 mln Tajik and 0.5 mln Kyrgyz citizens entered the country. In 2007 remittances composed about 27% of GDP of Kyrgyz Republic, and 8-12% of Uzbekistan`s GDP . IMF mission in Tajikistan reports that in 2008 migrant workers remitted to Tajikistan about $2.2 bln, what made 45% of the country’s GDP . Kyrgyz migrants remittances exceeded $1.2 bln in 2008, it is about ¼ of the republic`s GDP .
Taking into consideration that in 2008 GDP per capita in Tajikistan was $697, in Kyrgyzstan - $959, and in Uzbekistan - $950, the infow of millions of unemployed and shortage of billions U.S. dollars of their remittances can be defned as one of the most dangerous triggering effects of the crisis to the region. Increasing poverty, unemployment, and rivalry for the resources by and large for land and water in the poorest and most densely populated sub-regions of Central Asia can become a fuel for ethnic and cross-border conficts, social and political instability, growing drag and weapon traffcking, and religious extremism.
At a glance, Kazakstan and Turkmenistan so far look comparatively more defendable to the endogenous social stresses in a midterm period. Turkmenistan is a leading natural gas exporter in the region. In 2008, natural gas production of the country is estimated at 70.5 BCM and export – at 47 BCM. In 2009 Turkmenistan is setting up to produce 75 BCM and export 51 BCM of natural gas. Gas prices are less volatile than oil prices so that the country is going to keep pace of GDP growth in 2009-2010. Rough estimations show that the country`s gas export in 2008 was at least $1000 per capita .
In 2008 Kazakstan demonstrated the most negative GDP dynamics in the region. Yet, the composition of a relatively small population, $8 450 GDP per capita, and substantial international reserves makes the country itself less exposed to catastrophic socio-political scenarios. However, growing risks of economic and social instability as a consequence of growing poverty and unemployment in neighboring Kyrgyzstan, Uzbekistan, and Tajikistan make pressure on stability in the region and exaggerate security challenges for Kazakstan and Turkmenistan.
Hence, one of the key lessons that might be learnt from the crisis by the countries of the region is obvious and, unfortunately, not new: In the globalized world with a high degree of economic interdependence of countries and regions no one could stay secured at the time of a global disaster. To defeat the crisis it is crucial to coordinate and act strategically although the circumstances bring at the face of ad hoc political and economic decisions. As in many other regions an existent imperative for CA countries is not only to overcome the crisis at home, but also to take feasible measures and advance regional and international cooperation to face spinning-off social, economic, and security strains.
Taking a broader context it should be mentioned that the region is an important supplier of hydrocarbons to Europe and potentially to Western China. Thus, the stability in CAR turns an imperative for its major economical and political counterparts. Also, it is well recognized by all the parties involved in the region that any destabilization in CA has a potential of becoming a real threat to a complicated and fragile security system in an entire Central Eurasia.
The Response: National, Regional, and International
The governments of CA countries responded to the crisis with anti-crisis programs and targeted measures. Kazakstani government strengthened regulation of the economy and proposed an immense stabilization program valuated nearly 20% of GDP. The government has provided liquidity to the major domestic banks and took control on two of them. Also all of the state-owned assets in infrastructure, oil, power generating, and mining sectors were consolidated under the state-owned holding. The state budget was revised towards revenues and expenditures cut off, to mach extent public sector’s investments and non priority government’s spending. National currency was devaluated by about 18%. Mostly the resources for the program are coming from the National Oil Fund. Also, Kazakstan is developing a range of infrastructure projects that can support jobs and enlarge capital investments. Among the projects is the reconstruction of a Kazakstani part of Western China-Western Europe International Transport Corridor (CAREC), which is implemented with co-fnancing of Kazakstan’s government, WB, EBRD, ADB, and Islamic Development Bank (IDB).
In Kyrgyz Republic the government developed a program targeted on the support of key subsectors: agriculture, power generating, banking and fnance. Kyrgyzstan does not possess considerable reserves to accomplish the whole range of designed measures. However, the country received $150 mln fnancial aid from the Russian Federation and signed an agreement to get $300 mln loan plus $ 1.7 bln loan for the construction of power generating station with the Russia’s 50% partnership. Furthermore, the republic became one of the frst to access the new International Monetary Fund Exogenous Shocks Facility.
Tajikistan’s program aims to maintain fnancial and macroeconomic stability, while alleviating the economic impact of the crisis by adopting a fexible exchange rate regime, raising social and poverty-related expenditures. Tajik government has established a stabilization fund to implement anti-crisis policies. However, due to lack of reserves this fund will not be able to cover the required expenses. Tajikistan is seeking and receiving some aid from international fnancial institutions. The country will receive from IMF a three-year, about US$116 million fnancial assistance under the Poverty Reduction and Growth Facility to help mitigate the effects of this crisis . The World Bank agreed to support Tajikistan with $20 mln grant for development programs. EBRD will provide Euro 50 mln loan to support agriculture sector. EU will support the republic with $34 mln for the anti-crisis measures. Also, ADB will provide $100 mln loan to Tajikistan during a period of 2009-2010. It is important to notice here, that the aid provided by those institutions is essential. Yet, it does not meet all the needs of the republic under the crisis of this depth.
Uzbekistan`s government has developed a robust anti-crisis program for 2009-2012. The package includes tax cutting for small and micro enterprises, government’s preferential loans, tax-freezing and preferences for exporters, raise of all public-sector wages, pensions, and social benefts by 150% during 2008–2010 , increase of domestic investments. Uzbekistan implements a range of infrastructure and development projects under support of IDB. The World Bank provides up to $300 mln in 2007-2010 for the package of projects in melioration, environment protection, and infrastructure development. However, the scope of the crisis and its consequences for the poorest countries of the region raises concerns about their capability and had resources to tackle fundamental socio-economic challenges: deepening poverty, vast unemployment, and shortage of food, water and energy supply. Staying unsolved those quandaries escalate the risk of turning out of economic crisis into the social and political ones. In given circumstances, the signifcance of regional and international cooperation in facing up the threats for stability and security in CA raises drastically. There is an evident call for more intensive coordination in the designing and implementation of anti-crisis measures in the region.
CA countries have a wide range of formal instruments to bring resources to the region and enhance the anti-crisis policies through cooperation. Firstly, they are the members of a number of multilateral organizations. The list of those includes, but not ends with: Commonwealth of Independent States (CIS), Shanghai Cooperation Organization (SCO), Collective Security Treaty (CST), Eurasian Economic Community (EurAsEC), Organization for Security and Cooperation in Europe (OSCE), Conference on Interaction and Confdence Building Measures in Asia (CICA), the Organization of the Islamic Conference (OIC) . Secondly, the countries of CA build up sometimes contradicting, but in general fairly benefcial bilateral economic and political relationships with the main regional and global players – Russia, China, Islamic countries, India, Japan, as well as with EU and U.S. Aforementioned multilateral establishments introduce to the region a variety of missions and mandates from confict prevention and counterterrorism drills to military and economic cooperation. Taking the Asian vector it is obvious that SCO is the institution that can play a truly prominent role in the enrichment of the region’s capacity to maintain social stability and security under the crisis. It is the time when the Organization is able to add a great value to the region through the support of measures aiming on jobs creation, poverty reduction and infrastructure development in the most vulnerable countries. Also, an extra attention in anti-crisis cooperation of SCO member states should be paid to the effectiveness of labor migration regulation and water management in the region, as the crisis has amplifed the urgency and magnitude of these problems.
In this regard, it might be decisive in addition to the exiting mechanisms of cooperation within SCO`s mandate to execute the assessment of economic and social impact of the crisis in member countries; develop tools, methodology and policies for better coordination in combating the crisis at regional level. What's more, it appears fundamental to move forward the establishment of fnancing instruments/institutions aiming to underpin the most urgent anti-crisis measures of member states (SCO Development Fund). At the same time, the aid and investments from the main economic partners as such as Russia and China to the poorest CA countries can make a difference to the prospects of the region. Russia is the major trade partner for CA. Yet, China is visibly expanding its economic presence. The share of PRC in foreign turnover of Uzbekistan and Kyrgyzstan has increased respectively from 0.3% and 2% in 1992 to 11% and 27% in 2007. Kazakstan’s trade turnover with China has exceeded $13 bln in the same period of time. PRC is involved in a range of large scale O&G production and transportation projects, as well as power generating, infrastructure and telecommunication ventures across the region. Just recently China has agreed to provide a $10 bln loan to Kazakstani government and CNPC has purchased 50% share of an oil producing/refning asset at $1.4 bln.
By the moment, it is evident, that substantial reserves and available liquidity can play as a driver for further extension of China’s involvement in the region’s economy. Following this, one of the impacts of the crisis to Central Asia might be reconfguration of the vectors of international political and economic cooperation. “Go East” might become for all countries of the region a dominant strategy in the development of international economic cooperation in coming years. In other words, responding to fundamental shifts at the global arena Central Asia might turn out to be “more Asian”, than it seemed to be earlier.
This motion has a potential to play some stabilization role in the region, which is flled with an assortment of contradicting interests and latent conficts. Even though CA countries share a common historical, cultural, economic and political background at present stage intra-regional cooperation is not as abundant as it tends to be. The countries of the region economically are more tied with the rest of the World than with each other. They are the commodities exporters highly focused on one or two sorts of commodities, mostly oil and gas. This puts them in a very “tight” political and economic environment with a limited space for maneuver. In this light a more intense cooperation with the developing Asian economies might enhance economic performance of CA countries and bring to them a highly seeking economic and political diversifcation.
As the evidence shows current global crisis goes from one stage to another from fnancial sector and capital markets to the real economy all over the World. Due to interdependence of economic subsectors, markets, and institutions it hits every industry, country or region. Developed countries are experiencing a severe shrink at capital market and fnance sector, as well as slowdown of industrial production and negative GDP growth. Emerging markets have diffculties with dropping export and commodities prices. However, both groups of the countries mostly have a leverage to deal with those strains. The poor developing countries do not have suffcient resources and capabilities to combat the crisis effectively. Moreover, the most dangerous stage for those countries is the turn of economic crisis into social and political ones.
CA states with a low GDP per capita and lack of reserves are in the group of “at risk” countries. In these circumstances international political and economical support and coordination of anti-crisis activities are vital for those countries and for the CA region as a whole. There is a hope that the cooperation of these countries within the Asian dimension will help them to accomplish a faster recovery after the crisis.