Regional Focus

Central Asia: forging ahead

Published: Mar 2015

Key facts

8.409 million (2014)
Somoni (TJS)
GDP real growth:
7.4% (2013), 6% (2014)
$8.508 billion (2013)
30.14 million (2014)
Som (UZS)
GDP real growth:
8.0% (2013), 7.1% (2014)
$56.8 billion (2013)
Kyrgyz Republic
5.744 million (2014)
Som (KGS)
GDP real growth:
10.5% (2013), 4% (2014)
$7.226 billion (2013)
17.02 million (2014)
Tenge (KZT)
GDP real growth:
6.0% (2013), 4.5% (2014)
$231.9 billion (2013)
5.307 million
Manat (TMT)
GDP real growth:
10.2% (2013), 10.8% (2014)
$41.85 billion (2013)

Prior to the sudden collapse of the Soviet Union in 1991, the capacity for economic management within Central Asian countries was limited; development strategies were centrally planned in Moscow.

It comes as little surprise, then, that these five countries faced economic shocks when transitioning from central planning to independence. Due to new national borders, mismanagement problems and evolving issues with supply links and demand sources were faced – and in the end, each country chose a different transition path to market economy.

Tajikistan’s economy, due to waging a civil war, underachieved for the most part of the 1990s. However, recognition as one of the stand-out global improvers in the World Bank Group’s (WBG) Doing Business 2015 report indicates promise. The report also acknowledges the government’s Asian Development Bank (ADB) supported strategic priority to remove binding constraints to private sector growth as a positive move.

Whilst the Kyrgyz Republic claimed, in 2011, the first peaceful transition of power in the region, its economy has been hindered by corruption and stagnation. The National Sustainable Development Strategy, launched in 2013, aims to build a stable economic growth by 2017. In line with this, ADB announced a $22m grant to address major gaps within the education system in 2015.

Favourable world market conditions for its major export (cotton) and well-governed macroeconomic management ensured Uzbekistan experienced limited economic decline after Russian rule. Recent agriculture growth (nearly 7% in the first half of 2014) is typical of the economic volatility experienced throughout Central Asia. The countries are dependent on a limited number of exports and trade partners. Thus, are vulnerable to changes in demand and other external factors – the weather that produced recent record grain harvest in Uzbekistan is not consistent, for example.

Kazakhstan’s economy has more than doubled in size; GDP per capita rose from $1,515 in 1992 to $11,935 in 2012 – largely due to access to vast amounts of oil resources. But, to achieve the country’s objective of joining the 30 most developed countries by 2050, Kazakhstan must diversify. That said, the country is embarking on major reforms to education and negotiating an accelerated schedule for further integration into several free trade agreements.

In Turkmenistan, the economy is similarly dominated by rich oil and gas reserves, as well as crops. Historically, it hasn’t benefited to the extent that Kazakhstan has due to an absence of adequate export routes. Numerous governmental obstacles also hinder international business activity. However, the National Socio-Economic Development Programme for 2011-2030 does intend to modernise infrastructure and promote FDI.

Regional economy

The combined economies grew by an average rate of 9.7% during 2001-2005. Nevertheless, recent predictions suggest that growth may be over-reliant on volatile sources (commodity exports and remittance flows). Subdued economic activity in Russia – a main trading partner – has resulted in weaker-than-expected growth predictions from the International Monetary Fund (IMF) of 5.5% in 2014-15 for the Caucasus and Central Asia region, down from 6.6% the previous year.

The IMF’s Regional Economic Outlook suggests four steps that could help minimise the vulnerability faced by the commodities-based economies:

  1. Carrying out bold structural reforms to develop worker talent, increase competitiveness, and create an environment conducive to private sector-led growth.
  2. Promoting inclusive growth through better access to finance for small and medium-sized enterprises (SMEs) and a deeper, more stable financial system.
  3. Creating a diverse and dynamic non-oil tradable sector to diversify the region’s economies and reduce their dependence on oil and gas.
  4. Pursuing broad-based, balanced trade integration at both the regional and multilateral levels.

Progress in the region

As a whole, all of the Central Asian countries are intensifying efforts to expand trade links, increase production and encourage the diversification of commodities-based economies. Indeed, a number of projects, with the shared goal of broader participation in global value chains, do exist. The Central Asian Regional Economic Cooperation (CAREC), for instance, has aided communication, trade facilitation and trade and energy policy among Central Asian countries and Afghanistan, Azerbaijan, PRC, Mongolia and Pakistan since 1997.

As a whole, all of the Central Asian countries are intensifying efforts to expand trade links, increase production and encourage the diversification of commodities-based economies.

Between 2001 and 2014, CAREC invested $24.6 billion in infrastructure and trade, noting that regional co-operation is expanding the commercial opportunities available; trading regimes are being simplified and policy barriers are being broken down.

Reducing reliance on oil and encouraging further diversification of exports would reduce exposure to volatility, increase employment and work towards sustainable growth. “Medium-term economic prospects hinge on the region’s ability to expand production of goods and services for domestic and foreign markets,” reports the World Economic and Financial Surveys 2014 Regional Economic Outlook.

Financial landscape and payments

Looking at the treasury landscape in the region, this too is distinct between the countries.

In Uzbekistan, an established two-tier banking system is headed by the Central Bank of the Republic Uzbekistan, responsible for supervising more than 30 banks and financial institutions. It focuses on: the creation of well-capitalised banks, attracting FDI, avoiding single major shareholder banks, introducing effective payment systems and the cash management of the public budget and of state reserves. In terms of payments, the popularity of payment cards is rapidly increasing; the use of cheques rapidly declining.

Reducing reliance on oil and encouraging further diversification of exports would reduce exposure to volatility, increase employment and work towards sustainable growth.

Kazakhstan’s two-tier banking system (including 38 commercial banks) is currently experiencing turmoil. Nearly three-quarters of loans are non-performing, a legacy of the pre-crisis property boom. When it comes to payments, the popularity of payment cards has rapidly increased – particularly debit cards which experienced a 36.3% increase in circulation from 2013-2014. Direct debits are widely available but usage is limited.

Tajikistan has a two-tier banking system composed of The National Bank of Tajikistan (NBT) and 14 banks (one state bank, nine joint stock banks and four foreign banks). The four largest control 76% of total assets. They are all under the supervision of the NBT with the principal objective of maintaining price stability. A national strategy of poverty reduction is devoted to boosting entrepreneurial activity and expanding micro-lending in the country. Like Uzbekistan and Kazakhstan, the popularity of payment cards is increasing in Tajikistan – but at a slower pace.

The National Bank of the Kyrgyz Republic supervises 24 commercial banks. Similarly to Tajikistan, the country’s financial landscape has seen growth in the micro-financing and a main objective of the national bank is the maintenance of inflation levels. Further modernisation of payment systems is planned to enable populations, in both cities and rural areas, access to banking services. Accordingly, the popularity of payment cards has rapidly increased – particularly debit cards which experienced a 59.8% increase in circulation from 2012-2013.

In Turkmenistan, banks, including commercial banks, are controlled by the state. There are six state banks and two commercial banks. These commercial banks are prohibited from providing services to state enterprises. With no capital market in the country, the financial system significantly hinders the flow of financial resources.

Making headway

Integral to its economic development, Central Asia is making headway in business regulatory reform. The World Bank’s Doing Business 2015 guide reports that, combined with Europe, Central Asia had the largest share of economies making it easier to do business in 2013/14 – 85% implemented at least one regulatory reform.

Looking forward, improvements in the business environment, greater transparency and the countries’ efforts to unlock their land-linked potential, should help them work towards sustainable and inclusive growth.

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