May 30, 2024

Central Asian Economies in Limbo As China Fails To Find Its Feet

China’s fiscal woes are likely to drag on economies across the Caucasus and Central Asia over the next two years, the World Bank is forecasting

The Bank’s economic update for 2024-25 says the entire area spanning Europe and Central Asia faces “multiple headwinds,” including China’s “lackluster recovery” and “moderating” commodity prices. “With heightened geopolitical risks and substantial policy uncertainty, investment growth … could weaken further, especially if progress in advancing structural reforms remains sluggish,” according to the Bank.

In the Caucasus, Azerbaijan is set to see a slight uptick in growth during 2024-25, thanks to increasing European demand for its energy exports. The Bank notes that Georgia and Armenia had been among the region’s strongest performers in recent years, but are now facing a decline in economic performance.

“Growth is set to ease in Armenia and Georgia reflecting heightened geopolitical risks, moderating exports, and the fading boost to growth from the large inflows of migrants and capital from Russia,” the report states. “Growth in Azerbaijan is likely to be stronger as the downturn in the oil industry eases, oil revenues continue to support investment, and amid progress on structural reforms to diversify the economy.”

A slowing economy has potentially significant implications for Georgia, which is set to hold parliamentary elections in October. At present, the ruling Georgian Dream coalition is widely expected to retain power, but a sputtering economy could focus attention on policies that, critics contend, are undermining the country’s chances of joining the European Union. 

A 2022 poll showed that a majority of Georgian respondents favor EU membership, seeing it as a vehicle for strong economic growth. However, Georgian Dream policies, including the recent re-introduction of legislation that has the potential to curtail basic rights, threaten to derail the country’s EU bid.

Asked whether an economic downturn could shake things up ahead of the election, Alex Melikishvili, a country risk expert for the Caucasus and Central Asia, was doubtful. “In the run up to the elections, the ruling Georgian Dream will unveil a slew of generous government spending to curry favor with the electorate and to safeguard political survival,” he said. “The Georgian government is positioned quite well for this, as Georgia’s sovereign reserves are at [a] record level with [the] central bank recently even buying gold for the first time in post-Soviet history of Georgia.”

The World Bank report predicts varying results in Central Asia: it forecasts big drops in Kyrgyz and Tajik growth rates, and marginal increases for Kazakhstan and Uzbekistan. The Bank did not have sufficient data to predict Turkmenistan’s economic prospects. Central Asia’s poorest states are highly vulnerable to geopolitical factors relating to Russia; a downturn in Russia, for example, can have considerable impact on labor migration, a major source of income for many Kyrgyz and Tajik families. Other significant risks include rising food costs and global warming.

Signs of economic pitfalls are already emerging across the region. In Kyrgyzstan, for instance, Russia’s war in Ukraine has disrupted supply chains and raised the price of imports; in the Caucasus, Russians who fled conscription at home in 2022 and hurriedly resettled in cities like Tbilisi and Yerevan are now starting to move on to other countries, taking their savings with them.

Even better-off states in the region have reason to worry about the near future. In Kazakhstan’s case, the Bank report says that revitalizing economic growth will require a reduction of the government’s role in the private sector, alongside “strengthening human capital and policies to support decarbonization.”

Melikishvili, the risk analyst, told Eurasianet that the World Bank’s projections are not necessarily the best metrics to predict trade trends. “China-EU relations, the sanctions environment, the situation in the Red Sea and, more broadly speaking, the growing Iran-Israel conflict in the Middle East are more important factors to consider,” he said.

The World Bank report dwells at length on China’s struggles, but makes only a couple of fleeting references to the turbulent situation in the Middle East and to Red Sea piracy.

China has been sending confusing signals to international markets in recent months, at times appearing on the cusp of an economic crisis and, at others, outperforming expectations. Some experts believe China is using command-style tactics to solve strategic economic problems, deploying large sums of state funds to produce near-term results without addressing structural flaws. Such an approach, they add, can cover up problems for a while, but not solve them.

Central Asian nations will surely be watching for signals coming from Beijing. Since 2022, countries in the region have revived interest in the development of an East-West trade route known as the Middle Corridor. Such diversification can hedge against troubles with the Chinese or Russian economies, which Central Asian nations have historically been dependent on. But even so, poor economic developments in Beijing can send shockwaves rippling across the route all the way to Europe.

“Lower growth in major trading partners,” like China (and Russia), poses a substantial “external” risk for both Kazakhstan and Uzbekistan, the Bank says. 

By Brawley Benson via

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