Weathering Economic Storms in Central Asia

Executive summary

Central Asia has so far withstood the shock created by the war in Ukraine

The effects of Russia’s full-scale invasion of Ukraine were expected to have a rapid negative economic impact on Central Asia, whose economies remain closely integrated with its large neighbour. However, contrary to predictions, GDP has continued to grow across the region in the first half of 2022 as the main engines of growth, commodity export prices and labour remittances, have been on the rise. The rebound of national currencies to pre-war levels after an initial drop, and an influx of skilled workers have further supported consumption across the region. However, rising inflation is weighing negatively on businesses and households, further adding to supply chain disruptions and raising cost of living and food security concerns, in particular for non-commodity exporters, Kyrgyzstan and Tajikistan.

However, the region’s medium-term outlook remains fragile

Central Asia’s surprising resilience to the economic headwinds comes against the backdrop of a fragile post-COVID recovery that left growth subdued and fiscal margins reduced, leaving the region with an uncertain future. As the medium-term effects of the sanctions against Russia, the global cost-of-living crisis, and China’s economic slowdown start to unfold, the impact on economies of Central Asia could be substantial and negative. In particular, if the trade channel has remained robust so far across the region, its close ties with Russia leaves it vulnerable to political and supply risks; increased uncertainty might reduce investment attractiveness, while financial market developments might weigh negatively on the sustainability of public finances.

Policy options for Central Asia to further advance their private sector development agenda in uncertain times

If growth patterns are more fragile than ever, the current situation also offers an opportunity to Central Asia to address long-term structural needs and redefine its economic relations with its two large neighbors. Doing so will require Central Asian countries to further reform their business environments, and mobilise investments for the green transition. In addition, diversifying trade away from Russia and China will not only require the opening up of new trade routes, but also, and more immediately, advancement of regional integration, both in terms of infrastructures and the harmonisation of legal and regulatory standards.