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p. 7 of 36 BACK | NEXT Foreword 1. Developing Asia and the world Overview Prospects for developing Asia, 2006 and 2007 Prospects for the world economy, 2006 and 2007 Subregional summaries Central Asia East Asia South Asia Southeast Asia The Pacific Suspension of Doha talks and emerging trade issues II. Economic trends and prospects in developing Asia III. Developing Asia's imprint on global commodity markets Appendix Statistical notes and tables ADO forecasting performance for GDP growth and inflation

Asian Development Outlook 2006 Update : 1. Developing Asia and the world : Subregional summaries

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Central Asia

Growth in 2006

GDP growth in the Central Asian subregion in 2006 has been revised to 11.3%, a full percentage point above the projection made in April this year in ADO 2006 (Figure 1.4.1). This performance builds on the rapid pace of GDP growth seen in the subregion over the past 5 years, which has averaged just over 10%. Strong growth has been underpinned by the major oil exporters, Azerbaijan and Kazakhstan, which have benefited from substantial FDI, increased oil production, and the recent further escalation in international oil prices. Revised subregional growth projections in 2006 and 2007 mainly reflect greater buoyancy of the hydrocarbon sector in these two countries.

The non-oil exporting economies are also expected to fare well in 2006, in part due to continued substantial workers’ remittances—largely from those working in Kazakhstan and the Russian Federation—and in part due to expansion both in traditional exports, mainly cotton and metals as commodity prices stay favorable.

Among the oil-exporting economies, Azerbaijan’s GDP continued soaring, by an estimated 36.3% during the first half of 2006 year on year, and Kazakhstan’s expanded by 9.3%. Based on strengthened activities, this Update raises full-year growth from 30.5% to 35.0% in Azerbaijan and by a half percentage point to 9.0% in Kazakhstan. The extraordinary numbers posted for Azerbaijan reflect the continuing phase-in of production from very large investments in oil and gas fields and in pipelines in a small economy. The upgrade in the outlook for Kazakhstan (which accounts for about one half of Central Asian GDP) takes account of greater momentum in both the oil and non-oil sectors. Strong oil sector growth in these two economies continues to have spillover effects into other parts of the economy, by spurring expansion in activities of enterprises servicing the oil sector and by financing stepped-up government expenditures—both current and development. With incomes on an upswing, private spending on consumer goods and housing investment is increasing rapidly, raising price pressures as well as growth.

Among the economies that are not major oil exporters, Armenia grew at a very brisk 11.9% in the first half of 2006, with a drop in industrial production (mainly owing to a slump in the diamond polishing sector) eclipsed by a continued boom in construction and services. On the demand side, rapid growth was fed by government spending, FDI inflows, and remittances. In line with these developments, the Update raises Armenia’s projected 2006 growth to 11.3%, only slightly less than the 14.0% expansion of 2005. The Kyrgyz Republic saw a modest resumption in growth (3.1%) in the first half of 2006, after a contraction in 2005. Declining production from the Kumtor gold mine was offset by a 6.5% increase in non-gold GDP, reflecting primarily strong expansion in services. Tajikistan saw a 7.1% uptick in growth in January–June, based on stronger aluminum production. Resource-rich but slow-reforming Uzbekistan posted lower first-half growth of 6.6% year on year, as the previous 2 years’ above-trend growth rates in agriculture and industry abated. Developments in Kyrgyz Republic, Tajikistan, and Uzbekistan appear consistent with meeting ADO 2006’s GDP growth projections.

Inflation in 2006

Central Asia has wrestled with inflationary pressures in recent years, although actual outcomes have generally been moderate (Figure 1.4.2), within a range of 5–10%. Large foreign exchange inflows from exports and remittances, triggering accelerated growth in monetary aggregates, have been the main cause of inflation, since central banks’ control mechanisms are relatively underdeveloped. However, large wage hikes (from very low levels) and utility price increases (to eliminate a legacy of heavy subsidization) have also been important factors. A more rapid economic expansion and heightened cost-push pressures have increased the subregional forecast for inflation in 2006 to 8.5% from 7.9%.

Among oil exporters, Azerbaijan’s inflation accelerated to 7.9% in June 2006 (year on year), fueled by large public sector wage increases and other government spending, as well as a surge in foreign exchange inflows that boosted the money supply. Although government spending remains on track to increase by about 60% during the year, its impact on prices appears somewhat delayed and this Update reduces average inflation expected for the year to 11.0% from 13.0%. The central bank raised its benchmark refinancing rate by 50 basis points to 9.5% in July, but this increase likely will have only a limited impact on monetary conditions and inflation, given the central bank’s inability to sterilize the large foreign exchange inflows.

In Kazakhstan, consumer price inflation rose by 8.7%—well above the 5.7–7.6% target range. The authorities there have responded by raising the central bank’s refinancing rate and by allowing nominal appreciation of the tenge (of some 10% against the US dollar over the first 6 months of 2006). Full-year inflation is now projected to average 8.5%.

In the rest of Central Asia, inflation rose in Armenia to 3.6%, because of high oil and metal prices, prompting the central bank to warn that the 3.0% inflation target for 2006 is under threat. Prices felt upward pressure in the Kyrgyz Republic from shortfalls in farm output and higher fuel prices; consumer price inflation in the first half of 2006 is estimated at 4.1% relative to the prior-year period.

Inflation in Tajikistan rose by 6.0% during the first 5 months of 2006, with pressure from domestic utility price rises and from spending boosted by larger inward remittances. It is likely to be in the 6–7% range for the whole year. The officially reported inflation estimate in Uzbekistan was 3.5% for the first half of 2006 (although International Monetary Fund inflation estimates are generally higher than official figures, consistent with monetary data and trends in producer prices).

External payments balances in 2006

External sector developments diverged between oil exporters and the rest. Kazakhstan’s exports during the first quarter of 2006 were 30% higher year on year, but imports grew at a less rapid 20%. As a result, the current account swung from a deficit in the fourth quarter of 2005 to a surplus in the first quarter of 2006. Reflecting the substantial strengthening in the external position, Kazakhstan’s official reserves rose by $6.0 billion in the first half of 2006 to $13.1 billion. Azerbaijan, too, saw strong growth in exports—up by about 133% in January–May from the year-earlier period—with surging oil revenues accounting for over 90% of export earnings (according to trade data records). Import growth was lower at 22%. Mainly reflecting much stronger oil exports than foreseen, the Update raises Azerbaijan’s current account surplus from 15.8% to 19.7% of GDP and lifts that of Kazakhstan by roughly one half percentage point to 1.1% of GDP (Figure 1.4.3).

In marked contrast—but for the same oil-related reasons—Armenia’s trade deficit in the first quarter of 2006 was about 40% higher than in the same period of the previous year, and the current account deficit nearly doubled to $101.9 million. In the Kyrgyz Republic during this period, the current account deficit at $92.7 million was markedly wider than in the previous year, as a modest expansion in non-gold exports was overwhelmed by much higher imports. Export performance in Tajikistan improved markedly in the first quarter of 2006 year on year, mainly due to higher shipments of aluminum, which benefited from stronger international prices. Nevertheless, the current account deficit showed little improvement, as higher import and services payments largely offset the export gains. Uzbekistan’s export growth decelerated to 4.3% in the first quarter of 2006 while import growth was up by 3.5%, to yield a reported surplus of $387 million, which is slightly higher that in the year-earlier period. Higher international gold and cotton prices aided exports.

Outlook for 2007

The outlook for the oil exporters appears bright over the near term, as world oil prices are likely to remain high through 2007. GDP growth in Azerbaijan and Kazakhstan is expected to stay strong, upgraded from ADO 2006 projections to 30% and 9.0%, respectively, while the projections for their current account surpluses have also been raised. High oil prices will leave open the window of opportunity for these two countries to channel high oil revenues into productive investment in the non-oil sectors and into saving in the special funds that have been established to foster future development. The risks that the oil exporters face in the near term are inflationary pressures and domestic overheating. Revised projections of inflation in 2007 for Azerbaijan and Kazakhstan anticipate moderation from 2006 levels; even so rates would remain uncomfortably high.

Uzbekistan, with its abundant natural resources, is also positioned for continued growth, provided that the climate improves for private sector development and for employment generation. For the Kyrgyz Republic and Tajikistan, imparting resilience to growth will depend on diversification away from their traditional heavy dependence on gold and aluminum exports, respectively; on continued inflows of remittances; and on attracting FDI. For Armenia, a strong track record of reforms together with services sector growth is likely to hold growth at still-respectable, even if somewhat slower, levels, though high oil prices will continue to exert pressure on the country’s balance of payments.

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