Economic Resilience in Central Asia Amid Russian War in Ukraine

China maintains close trade and economic ties with the countries of the former Soviet Union, including concessional loans. To put this in context, it is essential to understand the general situation regarding the sovereign debts of these countries, including the outlook for the coming years. Figure 1 shows how sovereign debt as a proportion of GDP has evolved since the mid-1990salong with a forecast up to 2027, for the Central Asian republics.

In the 1990s, almost all the former Soviet republics were forced to borrow from international development institutions such as the World Bank and the International Monetary Fund (IMF). Some issued sovereign debt, such as government bonds. In some countries, sovereign debt far exceeded sustainable levels.

For example, sovereign debt exceeded 125% of GDP in Kyrgyzstan in 2000 and 110% of GDP in Tajikistan in the same year. In short, in the 1990s these countries could not independently maintain balance of payments and stability in socioeconomic development. In this regard, Kyrgyzstan achieved a partial cancellation and restructuring of its sovereign debts in March 2005 by submitting a request to the Paris Club of creditor countries.

But even more surprising, in the late 1990s, sovereign debt exceeded 110 percent of GDP in Turkmenistan and Russia, both major hydrocarbon exporters. In August 1998, Russia had to stop servicing its domestic public debt, undermining its reputation in the capital markets for a long time.

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However, from the chart above, you can see that since the early 2000s, there has been a healthy and steep decline in the sovereign debt-to-GDP ratio in Central Asia, which was associated with rapid economic growth and competent management of sovereign debt. debt of these countries. Despite the unsustainable level of debt in the early 2000s, with the exception of Kyrgyzstan, none of the Central Asian countries approached creditors with a request to restructure the debt.

An attempt by the Kyrgyz government to restructure the debt once again under the IMF and World Bank’s Heavily Indebted Poor Countries (HIPC) initiative even led to mass demonstrations in Bishkek in 2006, demanding that the government withdraw from the program. People didn’t want the country to be on the list of hopeless jurisdictions that couldn’t pay their debts. Aware of this reaction, the Kyrgyz government introduced a legislative rule that the sovereign debt/GDP ratio should not exceed 60 percent, which is in line with IMF recommendations.

The structure of external loans in Central Asian countries varies considerably. The sovereign debt structure of Kyrgyzstan and Tajikistan, both low-income countries, is dominated by obligations to international financial institutions, as they offer financing on concessional terms. They provide 40 and 36 percent of the total loan portfolio for Kyrgyzstan and Tajikistan, respectively.

That said, China remains the main source of credit in the region, lending at a prime rate of around 2 percent. Their share of the external debt of Kyrgyzstan and Tajikistan in 2020 was 45 and 52 percent, respectively, the equivalent of more than 20 percent of their GDP. However, Kyrgyzstan’s and Tajikistan’s debt to China has stabilized in recent years and has even started to decline.

Kyrgyzstan and Tajikistan are especially dependent on foreign debt; such obligations that constitute 77 and 86 percent of their total debt, respectively. The situation is different in countries rich in natural resources. China’s loans account for 16-17 percent of the GDP of Turkmenistan and Uzbekistan. Compared, Kazakhstan’s figure is the lowest at 6.5 percent.

It is even more lucrative to attract funds in international markets. In recent years, the government of Uzbekistan has also started to attract foreign loans. according to their Central bank, the country’s total external debt as of July 1, 2020 reached $27.6 billion, and compared to the beginning of 2020, the volume increased 12.7 percent. Turkmenistan currently refrains from attracting foreign loans, except Chinese ones. Unlike Kyrgyzstan and Tajikistan, Kazakhstan mainly attracts financing from private investors in foreign markets. Its main investors are the United States, Russia, Switzerland and China.

Interestingly, in September 2017, Tajikistan raised $500 million of its first 10-year international sovereign bonds for the first time, at a coupon rate of 7.125 percent. the agreement was designed to finance the construction of the Rogun HPP since the country could not attract loans from international financial institutions for these purposes.

All post-Soviet countries expect rapid economic growth in the coming years. The correct or erroneous management of public finances can speed up or slow down this process. All recipients and their donors should pay special attention to this problem.

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