Speech

Opportunities and Challenges for Central Asia -- Speech by Horst Köhler, Managing Director, IMF

November 14, 2003

1. It is with great pleasure that I join you today in celebrating the tenth anniversary of the introduction of the tenge. Over the past decade, Kazakhstan has made significant strides in the transition to a market economy. And the introduction of its own currency marked not only an economic milestone, but also a major step in the development of a new nation. As a basis for the pursuit of sound monetary policy, the tenge has contributed to the strong economic performance of recent years. Based on oil sector development and the steady implementation of structural reforms, Kazakhstan is now experiencing a phase of robust high growth. I congratulate Kazakhstan, its leadership and its people, for its achievements. By building on these, and continuing the process of political and economic reform, Kazakhstan will be able to fulfill its promise for a bright future for its people. And I would like to join others in paying particular tribute to you, Mr. Governor, for being named Central Bank Governor of the Year by Euromoney.

The global and regional economic outlook

2. The global economic outlook is improving. Prospects for a recovery are firming in the advanced economies, led by developments in the United States. This is good news for emerging market and developing country economies as well, which are also benefiting from a supportive financial market environment. But we know that risks remain. Chief among these risks are the excessive dependence of the world economy on growth in the United States and the resulting global current account imbalances. Resolving these imbalances in an orderly manner must be the primary objective of international economic policy. This requires a cooperative approach involving all major countries and regions. Such an approach must strengthen the domestic forces of growth, particularly in Europe and Asia, building on the new momentum for structural reform. And where reserve accumulation has been rapid and current account surpluses large, allowing greater exchange rate flexibility would be helpful, both domestically and globally.

3. The Central Asian region has been relatively resilient to the global economic downturn. Indeed, economic performance has improved considerably in the period since the 1998 Russia crisis, in particular in those countries that have succeeded in achieving macroeconomic stabilization and implementing market reforms. In these countries, including in Kazakhstan, prudent fiscal and monetary policies have sharply reduced inflation and export performance has often been impressive. And in most countries, structural reforms are beginning to pay off, yielding successive years of robust economic growth. But these gains have yet to translate into widespread rising living standards. The dual challenge in the coming years for most countries in the region will be to ensure that economic progress is sustained by strengthening structural reforms, and that it is followed in equal measure by broad-based social progress.

Policy challenges for the region

4. An outward-looking strategy of accelerated integration into the world economy offers significant benefits in creating jobs and raising living standards for Central Asia. New growth hubs are emerging in Asia, where growth has outpaced Europe by 5 percentage points per year over the past decade - and according to our World Economic Outlook will continue to do so in the coming years. This economic potential of Asia, and of China in particular, will provide significant new economic opportunities for the region. Seizing these opportunities will require that countries in the region stay the course and consolidate the gains they have realized in achieving macroeconomic stability. This means first and foremost ensuring sound fiscal policies that also provide adequate public resources for strengthening social safety nets and developing regional infrastructure; and moving toward more flexible exchange rate regimes, to help ensure internal and external balance. But equally important is the creation of a healthy business climate, an area where, according to the latest EBRD Transition Report, Central Asia continues to lag behind other transition economies. There is an unfinished reform agenda, especially in the establishment of strong institutions to support a market economy through transparent, predictable, and well-enforced rules and regulations. In particular, the business environment in many countries in the region continues to suffer from weak competition policies and a lack of transparency, including in the tax regimes.

5. Looking ahead, I see four main challenges for the region to achieve sound and sustained growth over the medium term:

• First, sustaining high rates of growth and creating jobs requires economic diversification. Reflecting both natural resource endowments and recent economic and political history, many countries in Central Asia show a high concentration of export commodities and markets. This makes them more vulnerable to fluctuations in commodity prices and to developments in specific markets, as experienced during the crises in Russia and Turkey. Promoting diversification will require high quality investment by both the public and the private sectors to develop new sources of growth. But this does not mean a public sector-led strategy of "picking winners". More important is a legal and regulatory environment that encourages rather than stifles private business development. Promoting the development of small and medium-sized enterprises, which regularly account for the bulk of job creation, benefits particularly from a level playing field and transparent and well-enforced rules.



• Second, there remains significant scope for trade liberalization in Central Asia. Regional and bilateral preference schemes can play a useful role in promoting regional trade, which remains underdeveloped in Central Asia. But our experience suggests clearly that they are no lasting alternative to a multilateral approach. The establishment of a Unified Economic Space now contemplated by Belarus, Kazakhstan, Russia, and Ukraine must not delay their progress toward WTO accession or come at the expense of their integration into the world economy.



• Third, closer regional cooperation through increased market integration needs to extend beyond trade. Regional transportation networks need to be developed to facilitate access to world markets. Kazakhstan, which accounts for a significant share of Central Asian transit trade, bears a particular responsibility in this area. All countries in the region need to ensure that arbitrary restrictions and corruption do not interfere with the flow of goods and services. And reinforcing cooperation in the areas of water and energy will be crucial for the development of the region and also for addressing serious environmental issues, for example regarding the Aral Sea. The CIS-7 initiative has boosted regional economic cooperation in the areas of regional tax issues, social sector reform, public expenditure policy, and financial sector issues. It will be important to build on this important stepping stone.



• Fourth, sound and sustained economic growth requires transparency and good governance. Experience, as well as recent research at the IMF, shows that transparency is correlated with better investment and growth performance.¹ There has been some progress in the region and I warmly welcome Kazakhstan to the growing group of countries that has taken steps to meet international standards by subscribing to the IMF's Special Data Dissemination Standard and publishing our recent reports. But there remains significant scope to improve governance and strengthen efforts to fight corruption.² A particular challenge faces countries that are rich in natural resources. Experience in many countries around the world shows that resource wealth can often be a curse rather than a blessing. Here, in particular, transparency is the key to successfully eliminating lucrative opportunities for fraud and corruption. The IMF supports the UK-led Extractive Industries Transparency Initiative (EITI), which aims at improving disclosure practices by both the public and the private sectors. I strongly encourage all resource-rich countries in the region to become active participants in this initiative.

6. The energy sector has played a particularly important role in generating economic growth in Kazakhstan. I welcome its prudent management of oil revenue, which has been instrumental in maintaining macroeconomic stability. But with oil production projected to rise sharply over the next decade or so-perhaps even tripling-the challenge for Kazakhstan will be to ensure that these resources contribute to rising living standards for all. Macroeconomic policies will need to ensure resilience in the face of the inevitable volatility in global commodity markets, and more flexible exchange rate management can play an important role as a shock absorber. And using the revenue from natural resources well also requires tackling the unfinished reform agenda. This means first and foremost strengthening domestic institutions to encourage investment, building human and physical capital, and providing adequate and sustainable social protection mechanisms.

The Role of the IMF in Central Asia

7. The IMF remains fully engaged in assisting Central Asia in its quest for faster sustained growth and rising living standards for all. In this partnership, how can the IMF be most helpful?

• First, we are working to support a key objective for the region, i.e. the deepening of its integration with the world economy. Through our ongoing dialogue with all countries in the region, we share the experiences of our near-universal membership. And in recent years, we are focusing intensively on the development of standards of international best practice in economic policy and their adoption throughout our membership. In Central Asia, this work includes working toward high quality, internationally comparable economic statistics, as well as transparent fiscal and monetary policies. And in particular, the IMF is paying increasing attention to the importance of sound and diversified financial sectors as a basis for economic development and job creation. We have reinforced our work in this area in Central Asia, including through the Financial Sector Assessment Program in Kazakhstan and the Kyrgyz Republic.



• Second, to help strengthen institutions, we are enhancing our technical assistance, most recently in Afghanistan. And through the Joint Vienna Institute, we are continuing to assist countries in the region to build domestic capacity through targeted training programs for country officials.



• Third, we remain actively engaged with financial arrangements in several countries in the region, including Azerbaijan, Kyrgyz Republic, Pakistan, and Tajikistan, as a temporary source of financial support.



• And finally, together with other international financial institutions, we are supporting greater regional cooperation, especially in trade, water and energy areas. I welcome the Ministerial Conference on regional cooperation, which took place only two days ago in Tashkent. But we must now move on from words and conferences to concrete action. The IMF will soon be coming up with a set of proposals for the way forward.

Ladies and Gentlemen,

8. The last decade has brought significant change to Central Asia. These changes have not been without difficulties, but they are increasingly paying off and delivering economic growth, jobs, and a better life for your populations. Building on this success will require perseverance. It will also require embracing further change as an opportunity to foster Central Asia's integration in the global economy. In this effort, you may rest assured that the IMF stands by your side.

² Central Asian countries mostly have scores in the bottom third of Transparency International's Corruption Perception Index, and the World Bank's 2002 Business Environment and Enterprise Performance Survey shows a high "bribe tax" for many countries in the region.