Press Release No. 06/219

Press Release: IMF's Middle East and Central Asia Department Sees Continued Strong Growth in Central Asian Countries

October 16, 2006

The latest Regional Economic Outlook by the International Monetary Fund's Middle East and Central Asia Department sees continued strong growth in the Central Asia region but highlights the need for policies to guard against rising inflation and excessive borrowing. Mr. David Owen, Senior Advisor in the IMF's Middle East and Central Asia Department, presented the report's main findings for the region in Almaty, Kazakhstan, today:

"Macroeconomic performance in the Central Asia region remains very good. Growth in Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan is expected to average around 8 percent in 2006. This will be the seventh year in a row of growth at this pace or higher—a sustained strong performance that has nearly doubled the region's GDP in real terms over the past decade. Growth has been aided by large external inflows to the region, reflecting buoyant oil and non-oil commodity exports, remittances, and capital inflows, which have led to rising foreign reserves in all countries. Fiscal policies have improved in recent years, and public debt is on a downward trend. Inflationary pressures are, however, increasingly evident, fueled by high oil prices and strong credit growth, with average consumer price inflation in the region now around 10 percent.

Growth is set to remain high in 2007, at 7-8 percent on average, and inflation is expected to ease slightly, but there are risks to the outlook. In particular, the region remains heavily dependent on volatile oil and non-oil commodity prices. Moreover, performance could be significantly affected if global growth were to slow or global financial market conditions were to tighten, which could significantly reduce external inflows to the region. While progress in building reserves and reducing debt has put the region in a better position, policies should continue to aim at strengthening the region's resilience to such developments. In particular:

• The authorities in all four countries could limit inflationary pressure by tightening monetary policies and allowing more nominal exchange rate appreciation in response to continued foreign inflows.
• Governments should be vigilant to the risks of a new cycle of excessive external borrowing, whether public or private. In Kazakhstan, tighter prudential measures may be needed to limit the external borrowing by banks that is financing rapid credit growth. The Kyrgyz Republic and Tajikistan need to avoid excessive debt accumulation while investing to improve infrastructure.
• Adjustment to higher oil prices remains a challenge. Both oil producers and consumers should ensure that changes in world oil prices are passed through quickly to domestic product prices, while strengthening compensation mechanisms for the poor.
• Structural and institutional reforms should continue, to foster private sector development, increase productivity, and boost countries' resilience to shocks. Increased regional cooperation would promote trade and investment, and improve prospects for long-term growth and poverty reduction."