Weathering Economic Storms in Central Asia

Policy options for Central Asia

Supportive fiscal policies can offset some of the negative economic effects, but should be handled with caution to keep debt and inflation levels in check

Provide targeted, temporary support to households to ease the impact of price increases

High commodity prices and food shortages represent significant risks going forward, which could be exacerbated for the 2023 harvest with rising fertiliser costs (IMF, 2022[116]). Governments across the region should therefore focus efforts on providing targeted support to the most affected households. As lower-income economies and poorer households spend a higher share of their incomes on energy and food commodities, targeted, temporary and means-tested support is needed to help the most vulnerable. The scope for doing so will vary across the region as a function of fiscal space and state capacities, with energy exporters Kazakhstan, Turkmenistan, and Uzbekistan finding themselves in a more comfortable position than Kyrgyzstan and Tajikistan. In these two countries, as in Mongolia, shielding the most vulnerable households without undermining debt sustainability will prove challenging. Reforms initiated during the COVID-19 pandemic to expand social safety nets may serve as a good basis to prevent a sharp rise in poverty (OECD, 2021[4]).

In terms of targeted support to vulnerable groups, measures could include tax reductions or cash transfers. Support should also account for the fact that households may be affected in different ways. Urban and rural households that are net food buyers may be losing out, as they incur higher expenses to maintain the same levels of consumption, while food-producing rural households may benefit, though this depends on the degree to which rising food prices do or do not outstrip increases in the cost of inputs, particularly fuel and fertilisers (FAO, 2008[117]). Governments have also considered market-level policy responses such as eliminating or reducing import tariffs and restrictions on food products. Measures could be financed by considering windfall taxes on energy company profits, especially in energy exporting countries, by re-prioritising spending plans (OECD, 2022[23]), and/or by blending non-contributory (financed by the government) and contributory financing schemes (World Bank, 2022[118]).

Provide targeted and temporary support to businesses to help them weather supply chain disruptions, liquidity constraints and increased debt servicing costs

Firm-level policies to support the diversification of trade linkages could help partially offset the supply chain disruptions. Central Asian firms indeed face significant supply and export challenges with a lack of alternative routes bypassing Russia, skyrocketing transport costs, delivery delays and increasing difficulties accessing credit (World Bank, 2022[54]; Kurbanov, 2022[119]). Support measures may include tariff and customs reductions, streamlined customs procedures, temporary fiscal waivers and elimination of import licensing and concessional lending for firms operating in essential sectors (OECD, 2020[120]). Governments may also consider providing incentives for firms to hold additional inventory, as precautionary inventory management can help mitigate input disruptions (Lafrogne-Joussier, 2022[121]).

In the longer run, central banks and governments need to carefully adjust monetary and fiscal policies to hold a delicate balance between containing inflation and supporting growth. The current monetary tightening across the region, except for Uzbekistan, bears the risk of provoking a liquidity crisis for businesses, especially SMEs, and weigh negatively on growth. Governments should act to maintain access to finance for SMEs, and contain excess debt servicing costs. Such policies could be based on mitigation measures implemented during the pandemic, for instance targeted government-backed loans, investments into selected sectors, temporary tax reductions, as well as temporary loan and mortgage repayments freezes. Careful communication about timely support measures is also essential to encourage businesses maintain investments, and banks continue financing firms.

Refrain from protectionist policies to ensure trade and agriculture keeps flowing

Although Russia and China, the region’s two large neighbours, have been implementing export restrictions, Central Asian countries should refrain from introducing similar protectionist measures, which might further exacerbate shortages (IMF, 2022[122]; OECD, 2022[23]). Export restrictions should be avoided as they magnify the surge in commodity prices and create a multiplier effect, whereby the increase in world prices leads governments to retaliate by imposing new export restrictions, pushing prices up (Espitia, 2022[123]). Attempts to “export” price pressures via export restrictions, if replicated by numerous countries, tend to make all worse off. As the experience of the 2008-09 crisis and the COVID pandemic show, freer and smoother trade tends to enhance food security. Import tariffs also affect prices on domestic markets, as they raise the prices of imported goods and lead to changes in the prices of domestically produced goods that compete with imports. Further, tariffs on imported intermediate inputs increase production costs and create a cascading effect through supply chains. In a period of increasing inflation rates, trade liberalisation can put downward pressure on prices, as lower import tariffs and prices can help reduce CPI inflation (Robinson and Thierfelder, 2022[124]).

In the longer term, the foreseeable reduced economic weight of Russia requires Central Asia to diversify trade and investment relationships

Seize the opportunity to reinforce integration into regional and global supply and value chains

The disruptions to global trade caused by the pandemic, and subsequently by the war, are an opportunity for the region to play a larger role in global supply and value chains (GVCs). A way for Central Asia countries to better integrate into GVCs starts with increasing regional economic integration. Regional cooperation indeed entails cost and efficiency gains, as well as an increase in market size for regional production (ADB, 2020[125]; OECD, 2021[4]; OECD, 2020[120]). Two obvious, significant barriers to regional integration that need to be addressed are the lack of quality infrastructure and disparities across legal and regulatory standards across Central Asia, as indicated by the performance gap of the countries of the region in the OECD Trade Facilitation indicators (OECD, 2020[120]; OECD and ITF, 2019[67]). With regard to infrastructure, customs automation, pre-arrival data processing and other digital solutions can ease customs operations and trade (OECD, 2022[126]). As for legal and regulatory disparities, the mutual recognition of standards or the adoption of common international standardisation and certification principles, such as EU certification, could ease trade flows, and increase products’ competitiveness and value (OECD, 2021[4]).

Further, joining global alliances can promote integration into global value chains and diversify away from a declining trade partner. Four of the six countries in the region (Kyrgyzstan, Mongolia, Tajikistan and Uzbekistan) already benefit from favourable access to the EU market, through the Generalised Scheme of Preferences (GSP) or GSP+. Uzbekistan and Turkmenistan could accelerate WTO accession talks, while Kyrgyzstan could ensure its compliance with WTO standards. Such initiatives can prove beneficial to boost trade, diversify export markets, and attract investment for sectors to move up in the value chains.

Improve the overall business environment to increase the region’s longer-term growth prospects and attractiveness

Temporary mitigating measures should not lose sight of longer-term reforms needed to address market distortions and absorb a rapidly growing labour force. Latest OECD surveys assessing the business climate in Kazakhstan and Uzbekistan found that the three main impediments to conducting business in both countries remain bureaucracy, corruption and lack of qualified workers. Governments across the region should pursue their efforts to reduce the role of the state in the economy, by enhancing competition – including through the removal of SOEs’ privileges and barriers to market entry –, widening access to financial services, designing efficient and non-distortionary tax systems and removing excessive rigidities in labour market codes (IMF, 2022[122]; OECD, 2020[120]). Efforts to improve the business environment can also contribute to tempering investors’ perceptions of heightened risk in the region.

Building resilient and inclusive economies can support this agenda

Seize the opportunity to advance the region’s green transition

Considering Central Asia’s vulnerability to climate change, abundant renewable energy resources, and opportunities for energy efficiency, high global fossil energy prices provide momentum for the region to diversify its energy mix. Commodity exporters Turkmenistan and Kazakhstan, as well as Uzbekistan to some extent, can invest windfall revenue in their green transition, while Kyrgyzstan and Tajikistan may consider decreasing their reliance on hydrocarbon imports through investments in hydropower capacity. Moving away from fossil fuel dependence and reaching stated climate goals will require phasing out fossil-fuel subsidies and support to upgrade the energy transmission and distribution systems. OECD assessments suggest that post-COVID recovery funding in many countries has been allocated to existing infrastructure or to measures unlikely to have a sizeable positive environmental impact. More broadly speaking, Central Asian countries also need to develop long-term low-emission development strategies and integrate these objectives across other planning and policy making activities (OECD, 2022[127]).

Capitalise on highly skilled human capital flocking into the region

The war and subsequent mobilisation have triggered unprecedented migration flows from Russia to the Central Asia region. Beyond the need to address short-term pressures on national infrastructures, Central Asian countries should capitalise on the influx of migrants from Russia and Belarus to retain high-skilled workers (Foreign Policy, 2022[128]). Unlike more “typical” migration waves, Russian-speaking migrants do not encounter language barriers coming into the region and have high education levels. Given the skills shortages facing the private sector in Central Asia, integrating these workers in national labour markets can contribute to increase the general level of skills and reduce the skills mismatch, as well as provide additional fiscal revenue for governments. The latter should therefore ensure that conditions are in place to incentivise workers to stay in the long term. Relevant measures include employment matching services, experience and skills testing, and developing guidelines and FAQs to facilitate the establishment of opening a business.

Box 2. National programmes supporting business relocations to Central Asia

Kazakhstan, Kyrgyzstan and Uzbekistan quickly introduced measures to support entrepreneurs relocating to the region pursue their business activities.

Kazakhstan’s Astana hub offers foreign IT specialists and companies registering in the hub a special tax regime, infrastructure, visa support and other benefits. Start-ups can benefit from 12-month free office rent and business-development grants of up to 50k USD.

Kyrgyzstan launched a Digital Nomad programme which allows foreign citizens eligible to the scheme to enter and stay in the country without a residence registration and grants them a work permit. The scheme is open for citizens of Azerbaijan, Armenia, Belarus, Kazakhstan, Moldova and Russia working in the field of digital technologies. As of October 2022, 600 citizens had applied to the scheme.

In the same vein, Uzbekistan introduced an IT visa for investors, founders of IT park resident companies and IT professionals. The scheme offers several tax breaks and incentives, including exemption from all types of taxes and customs charges for imported equipment for personal use. IT parks offer support to obtain medical insurance, open a bank account, and search for a job and accommodation, among other services.

Source: (The Astana Times, 2022[129]) (Ministry of Economy and Commerce of the Kyrgyz Republic, 2022[130]) (IT Visa, 2022[131])