Despite Easing Oil Prices, Central Asia's Growth to Remain Strong in 2007-2008, Says ADB

TOKYO, JAPAN - Central Asia’s economic expansion will continue with GDP growth in the region projected at 10.3% in 2007 and 9.4% in 2008, according to a major ADB report released today. The region grew 12.4% in 2006.

Growth will continue despite declining prices of oil and non-oil commodities, and will be driven by the region’s hydrocarbon producers, which are expanding capacity to meet demand from large Asian economies, particularly the People’s Republic of China (PRC), according to ADB's flagship annual economic publication, Asian Development Outlook (ADO).

Foreign direct investment in hydrocarbon industries is expected to remain large in the region’s two biggest oil producers, Kazakhstan and Azerbaijan. Uzbekistan is expected to see further increases in investment, particularly by the Russian Federation and the PRC.

The region’s growth prospects have benefited from efforts to improve the private sector investment climate. In Kyrgyz Republic and Uzbekistan, the tax regime is being streamlined. In Kazakhstan, private companies are benefiting from competition law; and in Armenia and Azerbaijan, reforms are underway in business registration and licensing.

“The region has progressed on structural reforms in areas such as small-scale privatization, banking and infrastructure reform,” says ADB Chief Economist Ifzal Ali. “In other areas, such as governance and enterprise restructuring, there is need for significant additional reforms.”

Putting the regional growth forecast at risk are surges in foreign exchange inflows and excess liquidity that monetary policy cannot control, resulting in a further increase in the inflation rate; deteriorating quality of loan portfolios as credit expansion continues unabated; tighter regulation of foreign migrants in the Russian Federation decreasing remittance inflows; and worsening current account balances among oil importing countries.

In 2006, Central Asia – including Armenia, Azerbaijan, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan – saw regional gross domestic product growth of 12.4%, up from 11.2% in 2005, and up from an average of about 10% in 2000-2005.

The hydrocarbon exporters of Azerbaijan, Kazakhstan, Uzbekistan, and Turkmenistan, accounted for much of the region’s growth. Most of the non-oil exporters also saw higher growth in 2006, benefiting from higher non-oil commodity prices, and from worker remittance inflows.

In Armenia, economic growth is expected to slow to 9%-10% over 2007 to 2008 as the construction and services sector boom abates. In 2006, growth was driven by domestic demand fueled by remittance inflows, wage hikes, foreign direct investment and public investment financed by foreign aid.

Azerbaijan’s sizzling 32% growth in 2006 is expected to slow down to 25% in 2007 and further to 17% in 2008. The key challenge for Azerbaijan over the medium-term is to ensure balanced growth of the non-oil sector and to institute major reforms to reverse the slowdown in that sector.

In Kazakhstan, economic growth strengthened to 10.6% in 2006, driven by strong domestic demand and positive net exports. The outlook is positive for continued strong growth, with domestic demand and net exports fueling an expected 8.9% growth from 2007 to 2008.

With the return of political stability, and barring any major shocks, Kyrgyz Republic could achieve about 5% growth in 2007-2008. Threatening this forecast is the country’s vulnerability to shocks. The narrowly-based gross domestic product structure concentrated on agriculture, gold production, and electricity translates into volatility in output and exports.

The economy of Tajikistan in 2006 grew 7%, sustained by strong domestic demand, particularly remittance-fueled consumption. Over the 2007-2008 period, the gross domestic product is expected to grow by over 7% based on expanding non-traditional exports and continued remittance inflows.

The highly restricted access to data in Turkmenistan makes economic analysis difficult, but it is estimated that the economy experienced strong growth of about 9% in 2006, fueled by hydrocarbon exports.

In Uzbekistan, the economy is expected to grow by about 7% over the period 2007-2008 based on favorable prices of its gas and non-fuel exports. On the back of increased net exports, a pick-up in worker’s remittances, and productivity gains in agriculture, GDP grew by 7.3%, well above the average growth rate of 5.2% in 2000-2005.