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The economies of the five Central Asian countries have been affected by the global economic crisis. All of the “stans,” Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan have had to cope to varying degrees with banking crises, currency shocks, declines in labor remittances, and drastically reduced income from the sale of oil, gas, and most export metals. Despite the fact that living standards and poverty levels in some of the Central Asian countries are much closer to levels in Africa than to those in Europe, international financial institutions and most aid agencies have failed to provide sufficient support to the resource-rich but struggling region. Structural reforms and macroeconomic policies have suffered, and the landlocked region’s dependence on its two continent-sized neighbors, Russia and China, is increasing steadily.

Varying But Clear Impact of the Crisis

Kazakhstan, the only Central Asian country facing negative growth prospects in 2009, has suffered for its closer integration with global financial markets; its banks were hard hit by the U.S. sub-prime crisis (even faster, in fact, than those of Russia). In response, Kazakhstan has spent down a third of its national fund of some $45 billion, in an attempt to support the tenge as well as some of their failing banks and construction companies. Kazakhstan’s banks and investment capital were deeply involved in the Kyrgyz economy.  Their withdrawal is a major cause of Kyrgyzstan’s drop in growth rate, and has hurt Uzbekistan’s economy as well. The downturn in Russia and Kazakhstan has ended jobs for 1–2 million workers from neighboring countries. Remittances from abroad account for over a third of the GDP in Kyrgyzstan and roughly a half of the GDP in Tajikistan.

Turkmenistan, while more insulated from the crisis than many of its Central Asian neighbors, still is expected to see declines in GDP comparable to other developing countries, given that Turkmenistan has sold no gas to Russia since late April, due to an ongoing pricing dispute.

All of the “stans” have had to cope to varying degrees with banking crises, currency shocks, declines in labor remittances, and drastically reduced income from the sale of oil, gas, and most export metals.

Uzbekistan is expected to suffer the smallest decline in growth in the region. Its economy has been bolstered by its supplies of gas, which were purchased at inflated prices by Russia and its considerable gold reserves, which have increased in value by a third over the last three years. However, official statistics are unreliable in Uzbekistan, and it is likely that the country has suffered more than the current numbers indicate, particularly from declining remittances from migrants in Russia and Kazakhstan.

Real GDP growth (y/y)

A Severe Hit to Already Struggling Economies

The stresses triggered by the crisis only add to the large economic and political challenges associated with Central Asia’s transition to independence, achieved less than 20 years ago. Poverty in Central Asia is greater than often perceived. Of the five countries in the region, only Kazakhstan could fairly be considered to be a middle income country, with a pre-crisis estimated per capita GDP of $11,500 for 2008. Tajikistan, Kyrgyzstan, and Uzbekistan are among the fifty poorest countries in the world, as measured by GDP per capita. Tajikistan is wealthier than Mali, but poorer than Ghana; Kyrgyzstan is wealthier than Benin, but poorer than Chad; and Uzbekistan is wealthier than Kenya, but poorer than Senegal.

Background statistics

A Gap in the Aid System

Despite the clear and mounting challenges facing this relatively impoverished region, the plight of Central Asian countries―and their 60 million plus citizens―has not attracted sustained international attention. Struggling to keep afloat in the midst of today’s global crisis, the poorer Central Asian countries have sought external assistance. Yet despite scattered offers of support (both Kyrgyzstan and Tajikistan are slated to receive additional IMF assistance), aid agencies and international financial institutions (IFIs) have failed to target this region for major economic recovery assistance.

International financial institutions and most aid agencies have failed to provide sufficient support to the struggling region.

This may be due in large part to the overshadowing effect of neighboring Afghanistan and Pakistan, strategically important countries whose problems dwarf even the most daunting challenges facing the poorest Central Asian countries. Institutional arrangements in aid agencies often make the Central Asian countries and Afghanistan competitors for the same assistance money.

Russia and China Stepping In
 
Despite their own troubles, both Russia and China have stepped up their investment to the region, offering funding that outstrips anything contemplated by Western aid. For example, when U.S. negotiations for an airbase in Kyrgyzstan faltered, Russia came in with a $450 million aid and credits package (and $1.7 billion of promised investment). China has used the crisis to increase its stake in Kazakhstan’s and Turkmenistan’s oil and gas industries. It lent Kazakhstan’s Development Bank $5 billion and made another $5 billion loan to Kazmunaigaz, the cash-strapped national oil company, to finance a joint oil company takeover. Turkmenistan was just promised $3 billion to develop its South Iolatan field, whose supply would then go to China. 

The IFIs and Western Aid Agencies Can Do More

Tighter trade and investment relations with Russia and China have the potential to serve an important role in Central Asia’s economic development. However, the nature of these links and the quality of assistance also matters, especially given the region’s nascent institutions and weak governance. Current Russian and Chinese involvement is marked by a lack of transparency and a reluctance or inability to accompany investment with support for institutional improvement. Unfortunately, the wrong type of “assistance” can make the Central Asian countries even more reluctant to introduce economic and political reforms than they have been to date.

The wrong type of “assistance” can make the Central Asian countries even more reluctant to introduce economic and political reforms.

There is, therefore, an important role for the IFIs and other aid agencies in offering assistance that encourages institutional development. However, this requires that these organizations step up the amount and type of assistance in the region. This would also entail better coordination of bilateral and multilateral assistance in specific areas, such as: projects designed to retrain and upgrade the qualification of returning labor migrants; educational reform that respects national priorities but stresses the sharing of resources; and working with rural, and especially remote, communities to help them meet short- and medium-term energy needs through renewable resources.