Central Asia faces a gloomy economic outlook for the rest of this year and into next, battered by the tanking Russian economy and low commodity prices, according to a regional outlook released by the International Monetary Fund (IMF) on May 19. Several countries face double-digit inflation.
“The region has been hit by two major external shocks: the oil price and the slowdown in the Russian economy,” Juha Kahkonen, deputy director of the IMF’s Middle East and Central Asia department, told a briefing in Almaty as the forecast was released.
Growth slowed last year and is set to decrease “much more significantly” this year, he said, before recovering “only slightly” next year.
All the Central Asian states are feeling the pinch of the slump in Russia, “which has close linkages with the region through remittances, trade, and foreign direct investment,” the IMF pointed out.
Energy exporters (Kazakhstan, Turkmenistan, and Uzbekistan) and importers (Kyrgyzstan and Tajikistan) alike are suffering: exporters are battling falling revenues from the drop in global oil and gas prices, while importers are feeling what Kahkonen described as “only a very small beneficial impact” from lower prices because of the long-term nature of their energy import contracts in which prices are set.
Falls in prices for other commodities (gold in the case of Kyrgyzstan and aluminum for Tajikistan, for example) are also biting.
Kyrgyzstan, Tajikistan and Uzbekistan are also suffering from a drop in labor remittances from Russia, as migrants lose their jobs and the dollar value of remittances falls because of the depreciation of the ruble. This is causing weaker domestic demand in remittance-dependent economies.
The ruble’s depreciation is putting downward pressure on currencies across the region, and the appreciation of the dollar is taking its toll in these heavily dollarized economies, the report added.
The IMF has radically scaled back growth forecasts for the region since 18 months ago, before oil prices started on their downward trajectory, the Ukraine conflict erupted and crisis bit Russia amid a sanctions war with the West.
The IMF now forecasts growth in 2015 of only 1.7 percent in Kyrgyzstan (just below the National Bank’s forecast of 1.8 percent); 2 percent in Kazakhstan (slightly more optimistic than the government’s forecast of 1.5 percent); and 3 percent in Tajikistan (far below the government’s forecast of 7.6 percent).
Central Asia’s weakest economies will experience the highest inflation. The IMF expects consumer prices in Tajikistan to rise 12.8 percent this year and by 10.7 percent in Kyrgyzstan.
Forecasts are more optimistic for Uzbekistan and Turkmenistan, although skeptics say this is due to the IMF’s over-reliance on opaque official statistics. The IMF predicts growth of 9 percent in Turkmenistan (where the government has not released an official forecast) and 6.2 percent in Uzbekistan (below the government’s forecast of 8.1 percent).
The IMF sees economic stimulus as one effective way of tackling the slump (the path chosen by Kazakhstan, through its Nurly Zhol infrastructure program): “Where fiscal space and available financing allow, temporary fiscal easing would help economies respond to weakening demand and declining remittances.”
But this is a short-term measure sustained by running budget deficits, the IMF warns, and “over the medium term, fiscal consolidation is needed to rebuild depleted buffers and adjust spending plans to the new regional and global economic context.”
There is also a need for “greater exchange rate flexibility,” the outlook suggests, to “ease pressure on reserves while helping oil exporters adjust to lower oil prices.”
Currencies across the region have been sliding under pressure from the ruble, with Tajikistan’s somoni and Uzbekistan’s sum recently feeling the squeeze. Kazakhstan has been spending billions of dollars propping up its tenge while ruling out another sharp currency devaluation.
At the IMF briefing, Kazakhstan’s National Bank chairman Kayrat Kelimbetov confirmed the government’s commitment to abandoning its currency corridor and moving to inflation targeting (letting the market decide the rate) “in the medium term,” which he defined as 12-36 months.
Ultimately, the IMF concludes, “bold structural reforms are needed” to “create jobs, jobs, alleviate poverty, and diversify economies away from reliance on commodity exports and remittances,” and create investor-friendly economies that will propel growth.