Large current account imbalances have been recorded in the Baltics, Russia, and other countries of the former Soviet Union since their independence. Are these current account positions sustainable, reflecting the special circumstances of transition, or are the positions untenable over the longer term? This study attempts to address this important question by first describing recent current account developments in these transition economies. It subsequently focuses on a wide range of external sustainability indicators by drawing on the existing literature, and attempts to assess their potential usefulness in a transiton country context. The indicators examined include real exchange rates, fiscal revenues and expenditures, savings and investment developments, openness measures, growth projections, external debt composition, foreign exchange reserve cover, and various financial sector measures.
This occasional paper provides an overview of the economic reform experiences of the Central Asian states of the former Soviet Union since their independence at the turn of the decade. The choice of countries reflects not only a geographical grouping, but also similarities in the types of transition challenges faced by these countries notwithstanding considerable variations in their sizes, ethnic composition, resource endowments, and economic structures. The paper attempts to identify a number of key macroeconomic and structural areas where the slower reformers in the group might benefit from the experience of the faster reformes.
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The virulence of the financial crisis in Asia and the continuing crisis in Russia highlight the importance of assessing the sustainability of a country’s current account balance, and, more generally, its vulnerability to external crisis.1 It is not surprising, therefore, that many previous assessments of external sustainability have been undertaken for a variety of industrial and emerging market economies. To date, however, very few such studies have focused on transition economies.
At the outset of their transition to a market economy, the social and economic indicators in the Central Asian states of the former Soviet Union—Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan—generally fell short of the standards of the region as a whole. Notably, per capita incomes ranged from just over 50 percent (Tajikistan) to about 90 percent (Kazakhstan) of the Soviet Union average, while social indicators, such as life expectancy, infant mortality, health facilities, and housing conditions, were considerably worse in most cases. All five Central Asian states—landlocked and distant from world markets—depended heavily on an intricate Soviet system of trade routes and energy pipelines for essential input supplies and exports. Rich agricultural, mineral, and fuel resources of the region, though, made it a potentially attractive outlet for foreign investors. Following a long period of isolation and catering to the needs of the Soviet Union, these countries faced the tough challenge of how to exploit more effectively their natural resources to improve living standards, while simultaneously introducing the systemic changes needed to achieve a market framework and to integrate their economies with the rest of the world.
Current account developments in the Baltics, Russia, and other countries of the former Soviet Union since independence are covered comprehensively in Kapur and van der Mensbrugghe (1997).6 This section highlights the main features of such developments as a backdrop to the analysis of current account sustainability indicators in these countries. Many issues raised in this section are covered in more depth in Section III, where individual indicators are examined.
The five former states of Soviet Central Asia—Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan—extend from the Caspian Sea in the west to China in the east, and from central Siberia in the north to Afghanistan and the Islamic Republic of Iran in the south, covering a combined area equivalent to just over one-fifth of Russia’s total land area. The region is rich in natural, agricultural, mineral, and fuel resources. Since the beginning of the 1990s, all five countries in the region have worked toward exploiting their resources more fully while moving their economies toward a market framework. Their progress with economic reforms has been influenced to a considerable extent by their political structures, ethnic characteristics, and remoteness from major world markets.
The differences in resource endowments and initial economic conditions influenced attitudes toward economic transformation in the Central Asian states. In 1992, Saparmurat Niyazov campaigned for the presidency of Turkmenistan on the platform that the country’s rich gas and oil resources would turn it into the Kuwait of Central Asia. Economic reforms were postponed largely on the expectation that sharp initial gains in the terms of trade and subsequent opening up of new export markets for the country’s energy resources would allow for a gradual pace of reform. Likewise, Uzbekistan’s preindependence specialization in cotton and gold, and its self-sufficiency in energy, may have contributed to its reliance on a more gradual and state-led approach to economic transformation.1 While cotton and gold exports were successfully redirected to new markets, a fall in the world price of gold forced the authorities to rethink their strategy and to introduce a comprehensive reform package in 1994, which became stalled by 1996. By contrast, Kazakhstan, the third most resource-rich state in Central Asia, refrained from over-reliance on a single product (oil) and pursued a more decisive approach to transformation. In addition, its close economic ties to Russia and a significant Russian population within its territory made it advantageous for Kazakhstan to reform at a comparable and, in some areas, at an even faster rate than Russia, in order to minimize the disruptions to economic relations between the two countries.
Previous studies have investigated the potential usefulness of current account or, more broadly, external sustainability indicators. Recent papers that examine the effectiveness of a variety of indicators in predicting current account/external crises in both industrial and emerging economies include Milesi-Ferretti and Razin (1996); Kaminsky and Reinhart (1996); Goldstein (1997); Kaminsky, Lizondo, and Reinhart (1998); and IMF (1998). Roubini and Wachtel (1997) is the only paper to date that concentrates on current account sustainability in a wide variety of transition economies.
An IMF staff team has visited Dushanbe during April 23–May 3, 2001, to undertake the second review of the third annual arrangement under the Poverty Reduction and Growth Facility (PRGF). With the exception of a continuous performance criterion pertaining to the accumulation of external arrears, all of the performance criteria for end-March 2001 have been observed. The authorities continue to make good progress with the preparation of their Poverty Reduction and Strategy Paper (PRSP). Policy performance under the macroeconomic and structural adjustment program has improved in recent months, but some concerns persist.