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p. 12 of 77 BACK | NEXT Foreword, Acknowledgments, Contents, Acronyms and Abbreviations, Definitions I. Developing Asia and the World Developing Asia and the Pacific: Performance and Prospects Prospects for the World Economy in 2006-2007 Subregional Summaries Central Asia East Asia South Asia Southeast Asia The Pacific Textiles and Clothing in the Post-Quota Era: The Outlook for Asian Suppliers The Doha Development Agenda: Asian Challenges and Prospects after the Ministerial Meeting in Hong Kong, China II. Economic trends and prospects in developing Asia III. Routes for Asia's Trade Statistical appendix

Asian Development Outlook 2006 : I. Developing Asia and the World : Subregional Summaries

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Central Asia

Economic performance

Growth in the Central Asian republics (CARs) for 2005 is estimated at 10.9% (Figure 1.3.1), higher than the 8.7% projection made in ADO 2005, with net exports acting as the main driver of growth. Within the subregion, however, growth performance varied markedly. The oil-exporting countries, led by Azerbaijan, saw greater production and continued high prices for oil and gas, and consequently expanded rapidly. Armenia, a non-oil exporting country, also saw robust growth in 2005, owing to rapid expansion of the construction sector for both housing and manufacturing facilities. At the other end of the spectrum, the Kyrgyz Republic, which underwent a political upheaval in 2005 and suffered a drop in gold production (a major export), saw a contraction. High growth in some of the countries translated into rapidly rising private consumption, for example Kazakhstan, while in other countries that also experienced accelerated growth private consumption remained flat, for example Uzbekistan.

Both fiscal and external balances strengthened in 2005. Fiscal balances improved mainly because the oil price windfall boosted revenues, though streamlining of tax administration also helped in some countries. At a structural level, Armenia, Kyrgyz Republic, and Tajikistan carried out economic programs supported by IMF arrangements under the Poverty Reduction and Growth Facility, and all met their fiscal targets and other program objectives for the year.

The external current account position for the subregion swung into positive territory, with Kazakhstan and Uzbekistan posting significant surpluses. Hydrocarbon exports continued to dominate in Kazakhstan, and cotton, gas, gold, and heavy machinery in Uzbekistan, though the latter economy is making progress toward export diversification in light industry. In Azerbaijan, the heavy current account deficit in 2004, which had been caused by large oil and gas sector investment, improved sharply to rough balance in 2005, reflecting the startup of production and exports from some new fields.

Stronger workers' remittances made substantial contributions to strengthening external positions of Armenia, Tajikistan, and Uzbekistan. Interestingly, recent studies have noted a rising trend in trade flows among some of the CARs, which together have been referred to as a "Russia-centric trading bloc." FDI inflows moderated during the year, reflecting completion of some hydrocarbon projects in Azerbaijan and Kazakhstan. At the same time, the People's Republic of China and the Russian Federation have been pursuing investment deals in several countries in the subregion. Notably, foreign direct investment in Uzbekistan's hydrocarbon sector could pick up as a result of these two countries' quest to secure sources of energy supply.

Inflation in the CARs rose from 5.8% in 2004 to 7.4% in 2005, but Armenia bucked the trend by bringing inflation down sharply. Azerbaijan, Kazakhstan, and Uzbekistan experienced a buildup in inflationary pressures with rapid monetary and credit growth and substantial wage increases in the public sector.

Some countries continued to make structural progress. The Transition Indicator scores of the European Bank for Reconstruction and Development for 2005 show upgrades for Armenia (in large-scale privatization, competition policy, and banking reform), Azerbaijan (in trade and the foreign exchange system), and Tajikistan (in small-scale privatization). Yet most of the countries in the subregion need to strengthen their "at-the-border" trade liberalization measures (Armenia and the Kyrgyz Republic are already WTO members) at the same time as reducing "behind-the-border" barriers to trade. These barriers present a diverse array among the CARs, ranging from import monopolies to large differences between the excise taxes levied on certain imports and the same domestically sourced products. Recent progress made in policy and institutional reform to reduce behind-the-border barriers includes simplification of the tax system (Armenia), acceptance of IMF Article VIII convertibility obligations (Azerbaijan), draft legislation to boost competition and investment and to lower costs in infrastructure (Kazakhstan), labor market reform (Kyrgyz Republic), allowing more competition in the banking sector including entry of foreign banks (Tajikistan), and commitment to remove cash restrictions (Uzbekistan). Still, the remaining agenda in domestic policy reform, particularly in the area of market competition, remains long.

While strong growth has generally translated into lower poverty incidence in Armenia, Kazakhstan, Kyrgyz Republic, and Tajikistan, this pattern is less evident in Uzbekistan. A possible explanation may be found in trends in inequality: in countries that have achieved a reduction in poverty incidence, income inequality as measured by their gini coefficients have also experienced a decline.

Prospects for 2006 and 2007

The near-term outlook remains favorable, albeit with some downside risks. Growth in the subregion is expected to slow marginally to about 10% in 2006 and 2007, reflecting easing in growth in a few countries. The exceptions are Azerbaijan, which is expected to see another growth spurt in 2006 with a ramping up of its oil and gas production, and the Kyrgyz Republic, where the economy should recover from the 2005 downturn. Inflation is likely to continue at over 7% in the subregion in 2006 with relatively minor variations in country performance from 2005. However, inflation in Azerbaijan is expected to jump due to a very large increase in government expenditure. The subregional current account surplus is forecast to increase moderately.

Medium-term outlook

Over the medium to long term, the outlook for the oil- and gas-producing countries will depend on how well they manage their windfall and diversify their economies to a broader base. For the other countries, prospects will rely heavily on how much headway the subregion makes in reducing barriers to trade, transport, transit, and investment. A recent study has attempted to quantify the costs of noncooperation and the benefits from cooperation, and suggests that potential benefits could raise per capita incomes by 50—100%, but over the next few years, at least, subregional cooperation is likely to remain limited with greater cooperation achieved in certain country groupings (among, for example, Kazakhstan, Kyrgyz Republic, and Tajikistan). Over the longer term, the demonstration effects of such cooperation may foment closer collaboration among the less cooperative countries.

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