Analysing Central Asian Economic Growth amid Development Challenges
Marina Gruzer | 04 July 2024
Summary
As of 2022, Central Asian economies have maintained an average GDP growth rate of 6.2% over the last 20 years. Despite the 2022 Russo-Ukrainian War, regional growth is expected to continue, at an average of 5.9% in 2025, with the influx of high-skilled Russian workers and ongoing migrant remittances.
Although Central Asian states are rich in natural gas, unstable energy resources have led to energy insecurity challenges that have constrained export growth in Kyrgyzstan and Uzbekistan.
To overcome the challenges of geographic isolation, geopolitical instability and energy insecurity, Central Asian states have focused more on regional infrastructure development and interconnectivity to diversify trade partners and energy resources.
Despite geopolitical instability, insufficient access to the sea and energy insecurity, Central Asia has achieved significant economic development in the last 20 years. Central Asian states are among the fastest-growing economies in the world, and the region is expected to see an average gross domestic product growth rate of 5.9% in 2025. Infrastructure spending, export diversification, strengthening intra-regional connectivity, and labour migration have contributed to a resilient regional economic posture amid development challenges.
Central Asia has been relatively successful in overcoming the economic challenges posed by the war in Ukraine. Migrant remittances contribute significantly to Central Asian economies, with 32% of Tajikistan’s GDP relying on remittance payments in 2022. Despite a temporary fall in remittances at the start of the 2022 Russo-Ukrainian war, 90% out of the 3.5 million new migrant workers in Russia were from Central Asia that year. Additionally, Central Asia saw an influx of highly skilled Russian migrants, including information technology specialists, and capital into their countries. Kazakhstan’s Ministry of International Affairs claims that by the end of October 2022, half a million Russian citizens had entered Kazakhstan following the announcement of the Russian mobilisation.
Another development challenge is Central Asia’s geographical isolation due to regional transportation bottlenecks and insufficient access to the sea. In an effort to pursue a multi-vector foreign policy, aiming to diversify economic partnerships, Central Asia has been crucial in developing the Middle Corridor trade route that connects China and Europe. This is driven by Central Asian infrastructure initiatives such as Kazakhstan’s Trans-Kazakhstan railway and the Western Europe - Western China International Transit Corridor road development program to improve regional connectivity and cooperation.
Severe droughts from rising temperatures have also become a hurdle to Central Asian development due to increasing tensions caused by water shortages. In April 2021, the mismanagement of water resources led to violent clashes along the disputed Tajikistan and Kyrgyzstan border after both states broke pre-existing water allocation agreements. Consequently, this disrupted the sense of trust and could impact the region’s capacity for development cooperation. Regional efforts have strengthened dialogue and collaboration to overcome climate challenges, namely with the Central Asia Climate Conference held in May 2024 with focuses on sustainable water management, carbon neutrality and energy security. Improving climate collaboration is crucial for overcoming regional tensions between rural communities over resource allocation in the long run.
Energy insecurity has been a significant barrier to economic growth in states like Kyrgyzstan and Uzbekistan. Although these countries are major gas exporters, the increasing domestic energy demand, especially in the winter, has led to reduced gas exports. To overcome energy shortages and to deliver on a pre-existing agreement made with China, which requires an annual delivery of 10 billion cubic metres of gas to China, Uzbekistan has agreed to buy Russian gas via the Central Asia-Centre pipeline. Alternatively, Kyrgyzstan recognised the long-term unsustainability of gas imports from neighbours and signed a memorandum of understanding with China on constructing the Kazarman hydrogen plant, costing an estimated $2.4-$3 billion.
Growing government spending will likely increase borrowing costs and may incentivise tariff reforms in Central Asian economies. In 2022, tariff reforms, which aimed to raise revenue to fund infrastructure development, sparked anti-government protests in Kazakhstan due to increased fuel prices and worsened living standards. Following recent water and energy supply constraints, implementing tariff reforms to sustain infrastructure policies and improve resource management would need to be done with caution to avoid dramatic price increases. Therefore, while enhancing infrastructure is significant for economic growth, it is important to plan project financing carefully to ensure sustainable development.
Wikimedia / Journey of Discovery
Forecast
Short-term
Central Asian states, like Kazakhstan, have a high risk of further civil unrest if more extensive tariff reforms are introduced in an attempt to accommodate the growing government spending on infrastructure development.
Medium-term
Growing trade diversification via the Middle Corridor is likely to increase connectivity with partners in Europe and Türkiye, hence, reducing the region’s economic reliance on Russia and developing trade flexibility.
Long-term
Reliance on international partners in the construction of energy infrastructure projects is likely to worsen the large foreign debts in states like Kyrgyzstan, which already owes over 40% of its foreign debt to China.
