Remittances help cushion central Asia from pandemic hit

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Remittances from Russia are helping to ease the economic impact of the pandemic on central Asian nations, which are recovering from their first recession in a quarter of a century but have been hit by a drop in gas revenues from China and the slow pace of vaccination.

Earnings sent home by central Asian workers in Russia dropped 25 per cent in the first half of 2020 when the virus first took hold, but have since begun to rise again, according to the IMF.

Millions of central Asians live and work in Russia, and the cash they send home is one of the region’s biggest earners, accounting for up to 30 per cent of GDP in some countries. By the end of last year the number of labour migrants living in Russia or entering for seasonal work had shrunk to 6m, from between 9m and 11m in most years, according to official data.

Subir Lall, deputy director of the Middle East and central Asia department at the IMF, called the recovery in remittances “crucial”, adding that the cash migrants send home “can serve as a lifeline for the poorest countries”.

“This illustrates the stabilising role that remittances can play after an [economic] shock,” he said.

According to the World Bank, last year was central Asia’s first recession since it transitioned from the Soviet system in the mid-1990s.

Central Asia and the Caucasus experienced a 1.9 per cent drop in economic output in 2020, according to the IMF. The fund expects the region to expand 3.7 per cent this year and 4.1 per cent in 2022. However, it will underperform the average for emerging markets of 6.7 per cent and 5 per cent growth respectively.

The IMF blamed the underperformance largely on the slow rollout of inoculations. The fund expects a maximum of just 20 per cent of people across the region to be vaccinated in the near-term except in Kazakhstan, which has the capacity to dose 60 per cent of its population given its domestic vaccine production facilities. So far, Kazakhstan has vaccinated 0.6 per cent of the population.

Given the low capacity for vaccine storage and distribution, broad vaccine coverage is not expected until 2023, according to the IMF.

The economic recovery is also being held back by a fall in revenues earned from China, the region’s biggest trading partner. Gas is the single largest commodity that central Asia sells to China and prices plunged last year.

According to Petr Grishin, chief economist for eastern Europe at VTB Capital, Uzbekistan’s total exports to China fell 27 per cent year on year in US dollar terms in 2020.

That illustrates how one of central Asia’s traditional economic strengths — its natural resources — may be weakening as a driver of growth.

Peter Burian, special representative for central Asia at the EU, warned that “for too many years the countries of the region were relying for their economic growth on exceptionally high commodity prices, export of minerals or revenues of remittances [from] labour migrants mostly working in Russia”.

But central Asia’s lack of development progress means that it is “still one of the least integrated and connected regions” in the world, he said — which “prevents the region from fully benefiting from its strategic location as a gateway between Europe and Asia, not only east-west, but also north-south”.

Line chart of GDP, rebased (2019 = 100) showing Underperforming the average

There are signs that this is changing, however, he added: “Most of the countries realise that business as usual is not an option and it’s not sustainable.”

Lall called on central Asian economies to do more to encourage private sector activity to boost their economic resilience.

“The state has to rearrange itself in many countries and modernise . . . as an enabler and facilitator for the private sector . . . not as a gatekeeper,” he said. 

Private sector involvement in central Asian infrastructure projects, such as ports, airports, railways and energy production, is “a way out of the impasse in public spending in many countries”, said Alain Pilloux, vice-president at the EBRD, which invested $1.5bn in central Asia last year. 

A number of central Asian economies, including as Kyrgyzstan and Tajikistan, have reached a critical level of indebtedness and cannot afford to increase public spending despite greatly needing additional infrastructure and social spending, he said.

Central Asia’s two largest economies, Kazakhstan and Uzbekistan, have begun to speed up privatisation, which analysts expect to support their growth.

They “enjoy supportive demography . . . governments with a strong developmental mentality and a very rich resource base”, Grishin said. “Growing at 5 per cent per year . . . is achievable for both of them.”

One area in which the state should play a key role is in the adoption of environmentally friendly technologies, Lall argued: “It is money well spent, including by the state . . . [a country] can leapfrog [other nations] in terms of technology and adaptation.”

He urged central Asian nations to “take advantage of the opportunity” to reconstruct their economies after the pandemic “in a way that reduces poverty and inequality”.

Uzbekistan has been trying to do so. The country’s finance minister Timur Ishmetov said that “technological changes in the last decade [can] help countries with abundant natural resources use them in a more efficient way, which would lead to more inclusive growth”.

Uzbekistan, central Asia’s most populous country, enjoys rising domestic demand for resources and their products, prompting it to expand processing capacities and create more value-added goods.

Green recovery and integration can take the region a long way, Pilloux said: “This pandemic is the incentive to speed up reform.”

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