05.02.2020
The article by G. Nurgalieva, head of the Eurasian Research Laboratory at the Institute for Emerging Markets Research at the Moscow School of Management SKOLKOVO, presents a comprehensive view of the impact of the COVID-19 epidemic on the economic development of the Eurasian countries (in particular, the EAEU and the CIS), including in the context of the implementation of the “One Belt, One Road” initiative and relations with the PRC. In comparison, the approaches of the states of the region to overcome the situation of slowing economic growth, which was provoked by a sharp decline in business activity, are considered, their potential and opportunities in the post-crisis period are assessed.
It seems that the dynamics of the recovery of the economies of the Central Eurasian countries (as a land bridge between Asia and Europe) will also affect the effectiveness of the Belt and Road initiative in the coming years.
The economies of the Eurasian countries (EAEU) are experiencing shocks associated with the pandemic, as well as the accompanying volatility in the global financial and commodity markets. The transport and logistics industry, tourism, wholesale and retail trade, the services sector, and the export of raw materials suffered the most.
The EAEU governments make decisions on the closure of cities and regions for quarantine, with checkpoints allowing only food and other necessary products. Eurasian manufacturers have experienced the negative consequences of disrupting the supply chain – interruptions in the supply of components from abroad, reduced demand from outside, unavailability of financial resources from foreign sources, certain quotas for export products and closed borders.
Already in February-March of this year, Chinese companies notified their Eurasian partners in Kazakhstan, Turkmenistan and Uzbekistan about a decrease in the volume of energy purchases by an average of 17% . To ensure domestic demand, the EAEU countries have imposed restrictions on the export of food, agricultural products and medical goods to third countries until June 30, 2020.
Analysts do not predict a decline in trade turnover between China and Russia (trade turnover reached a historical maximum of more than $110 billion in 2019 ), even in the conditions of a pandemic. In the first quarter of 2020, China’s trade turnover with Russia increased by 3.4% to $ 25.35 billion, and imports of Russian goods to China increased by 17.3%. But the growth of trade turnover between Russia and China is rather an exception to the general rule among the countries of Eurasia.
The fight against COVID-19 and its economic impact requires an infusion of enormous financial resources. Kazakhstan and Azerbaijan have funds in the national welfare funds. Other states, such as Uzbekistan and Armenia, have managed to form a small reserve “for a rainy day” in recent years of successful economic development, but they will still need assistance in the form of borrowing from international development institutions.
Kyrgyzstan and Tajikistan are having the most difficult time due to the closure of borders with China, as well as with other neighbors-the main trading partners like Russia and Kazakhstan, domestic business activity and foreign economic activity are almost paralyzed. These countries will be heavily dependent on foreign loans on preferential terms, voluntary contributions from the corporate sector, charitable organizations and caring citizens. In Kyrgyzstan, for example, it was possible to raise more than $200 thousand in this way to the fund created to finance measures to combat the coronavirus.
The fate of the “One Belt – One Road”project
Some projects within the framework of One belt one road continue to be implemented, but their pace has been significantly slowed down or suspended for a while. For example, in Russia, the Power of Siberia pipeline was sent for” prevention ” after its launch in March due to a decrease in gas supplies to China from Kazakhstan and Uzbekistan. In Tajikistan, it was announced that the project to create an enterprise for the extraction of antimony and gold, initiated by the Talco aluminum plant together with the Chinese Tibet Huayu Mining, was postponed for three months due to the closure of borders.
However, for large projects in Central Asia, the equipment ordered earlier is being shipped, construction works are underway and financial transactions are being carried out (in Kazakhstan – a polypropylene production plant in the Atyrau region, in Uzbekistan – the construction of a hydroelectric power station, credit transactions with the Industrial and Commercial Bank of China ICBC).
How do countries plan to get out of the crisis?
According to the latest report of the Asian Development Bank, the economies of the Central Asian region and the Transcaucasian countries will also slow down. The Armenian economy can be kept afloat by tax incentives, current spending on healthcare and social protection, as well as measures to support business and state investment.
The State Oil Fund SOFAZ will serve as a” safety cushion ” for Azerbaijan to finance the budget deficit, whose assets will grow by 12.5% in 2019 compared to the same period last year to $43.3 billion. For the most open economy in the region – Georgia, the prospects for growth are in a healthy financial sector.
Experts say that high inflation rates in Kazakhstan-up to 7.8% at the end of the year (the upper limit of inflation set by the National Bank of 6% was reached already in March 2020), the main reasons will be rising prices for food and utilities, the transfer of the exchange rate to the prices of imported products from the depreciated tenge. In the next two years, World Bank experts still predict a recovery in business activity, an increase in consumer spending and gross fixed capital investment, which will allow achieving 3-4% GDP growth by 2022.
In order to contain inflation in the Kyrgyz Republic, the Central Bank of the country raised the base rate by 75 basis points to 5%. Also, like its neighbors, Kyrgyzstan will begin recovery in 2021 and in 2022 will be able to achieve GDP growth of up to 4.6%, largely due to the growth of export revenue from the sale of gold from the second largest gold deposit in the country, Jeruy, increased investment in fixed assets, and a gradual increase in private consumption.
In 2021-2022, a slow recovery of economic activity in the country is expected for Tajikistan, which will lead to a moderate growth of the country’s GDP, on average up to 3.5%. According to the results of last year, Uzbekistan demonstrated a confident 5.6% growth in real GDP due to a high level of investment (mainly state investment in infrastructure, housing construction, industrial development), and an increase in activity in agriculture. The outbreak of coronavirus greatly undermines the transition to market mechanisms of the economy of Uzbekistan. However, by 2022, according to forecasts, the economy will reach the level of 2019, due to large investments in fixed assets, increased export revenues and private consumption.
Digitalization for the EAEU countries
Digitalization has not passed the test of efficiency in crisis conditions everywhere. Before the pandemic, e-government was introduced in Kazakhstan for a long time, a project on distance learning of schoolchildren was successfully completed, in conditions of increased traffic, the systems could not stand it and there are interruptions.
In Georgia, in recent years, the IT, R & D and technical activities sectors accounted for 7% of GDP. After the COVID-19 outbreak, a number of online platforms were created in Georgia to help find and purchase remotely necessary goods and services, as well as various web resources to support small and medium-sized businesses. For example, Prevencia.ge, which catalogues all types of goods and services available remotely in Georgia – from sportswear to legal advice.
In some regions of the Eurasian countries, the situation is much worse. Not everywhere there is an elementary Internet coverage, and the vast majority of the population simply does not have experience using online shopping, while in the Asian tigers, there are debates about electronic immune passports, programs and mobile applications are being developed to track coronavirus cases, online platforms for communication are offered.
In companies where there is automation of the workflow process or electronic accounting, the possibility of digital payment for services or goods is established, there are often certain technical problems with IT products. Due to the underdeveloped market and limited supply, the quality of these products and technical support services suffers. It is possible to observe difficulties in training personnel who show inertia to the introduction of digital innovations and prefer to work “the old-fashioned way”. But there are also successful stories, for example, in the conditions of the pandemic, Chinese specialists conducted remote training of Uzbek personnel and helped to conduct tests on a joint project to modernize a hydroelectric power plant on the Bozsu canal near Tashkent.
The Eurasian countries were not ready to activate Internet commerce not only in the technical, but also in the legal field. On April 10, the EAEU has just begun to develop the issue of rules for integrated regulation of cross-border Internet trade. Today, various tax and financial threats have arisen: the tax base is being reduced due to the reduction of ordinary trade, profit centers are moving to countries where the parent companies of Internet sites are registered, shops are being closed and jobs are being eliminated, threats to the safety and health of citizens are gradually increasing due to the actual lack of certification and other restrictions .
Businesses that have entered the Internet space can stay afloat thanks to digitalization. But for the traditional industries of the economy that have not had time or are taking the first steps on the path of digitalization, it does not yet bring additional benefits.
State measures of the Eurasian countries on quarantine and support
The main measures to protect the economy in the countries of Eurasia, as well as around the world, are primarily aimed at supporting business. According to the International Monetary Fund, Armenia and Georgia were the first and most active among the Eurasian countries in taking response measures to combat coronavirus infection and its negative effects on the economy. The Armenian government is implementing 11 packages of measures to counteract the crisis (and the 12th package of compensation for utilities is under consideration), aimed at stabilizing the social situation, providing assistance to the poor and those who have lost their jobs, as well as supporting businesses in the context of a global pandemic. The state has allocated about $300 million for these purposes. The International Monetary Fund is ready to issue a loan of $280 million to Armenia to combat the socio-economic consequences of the infection. At the same time, the state of emergency in the country, including restrictions on freedom of movement, has been extended until May 14 this year.
Georgia has published a specific economic stimulus plan since mid-March. The priority measures are aimed at supporting the tourism industry, which is exempt from property taxes and income tax until November. Small and medium-sized hotels in the country will receive interest subsidies and large amounts of loan guarantees. The government provides a subsidy for the import of 9 basic food products (including flour, wheat, pasta, rice, butter, sugar, milk powder, beans, buckwheat), and also creates a warehouse for these goods. The World Bank is ready to provide Georgia with an additional 45 million euros, and negotiations are also underway with the IMF on financial assistance for the Georgian economy.
The Azerbaijani government has allocated, according to various estimates, from $0.6 -1.5 billion (3% of the country’s GDP) for the implementation of 11 programs aimed at supporting 12 sectors: tourism, entertainment, transport and trade. Financial assistance will be provided in the form of loans, tax benefits, deferrals, as well as compensation for employees ‘ salaries.
In response to the consequences of the pandemic, Kazakhstan has launched a large-scale anti-crisis program of $13 billion (5% of the country’s GDP). The anti-crisis package includes cash payments to the unemployed ($95 per month per person), a 10% increase in pensions and social benefits, additional expenses for strengthening the health sector (increasing salaries for medical workers, purchasing medical equipment) and supporting employment and business. Measures to assist SMEs include subsidized lending, working capital financing, and the provision of tax incentives.
The authorities of the Kyrgyz Republic faced a sharp increase in the budget deficit amid the consequences of the pandemic and a decrease in income due to the closure of borders with China (36% of imports are accounted for by China) and border restrictions with other neighboring countries (Kazakhstan and Uzbekistan). The government has approved an anti-crisis plan to mitigate the impact on the economy, but it does not have enough funds for its implementation. Kyrgyzstan became the first country in the world to which the IMF allocated emergency assistance in connection with COVID-19 – $120.9 million. Negotiations have also begun with other donors to enlist additional financial support to eliminate the funding gap. The World Bank has allocated $12.5 million in financial assistance to Kyrgyzstan. Currently, Kyrgyzstan is considering the second package of measures aimed at supporting small businesses, and is also analyzing the possibility of a phased resumption of work in some industries.
In Tajikistan, only at the beginning of April, a special package of anti-crisis measures was developed aimed at mitigating the consequences of the pandemic in the economy. Within the framework of the program, entrepreneurs from “vulnerable” industries will be provided with tax breaks in the form of benefits and delays, and strict control over food supply in the market will be established. Tajikistan has requested financial assistance from foreign countries and organizations, and has already received accelerated funding from the World Bank in the amount of 11.3 million euros, and from the EU – 78 million euros in the form of grants and loans.
According to official media, as of April 9, 2020, no cases of Covid-19 have been detected in Turkmenistan. The authorities have taken a wide range of measures to prevent the outbreak of COVID-19 in the country, including closing borders, canceling and changing flight routes, as well as mandatory testing of COVID-19 for arriving travelers. The authorities imposed restrictions on movement within the country, closed roads between some regions and stopped railway transportation. A special regime was established to implement important projects and ensure priority imported goods, it was decided to open the border with Iran, which accounts for up to 80% of Turkmenistan’s imports, including a significant part of food and essential goods.
In Uzbekistan, an anti-crisis package was approved at the end of March, the government intends to allocate $1 billion to increase spending on healthcare and social needs, as well as to ease tax, debt and financial restrictions for businesses. Tax benefits for businesses will be valid until October 1, 2020. Enterprises that have failed to pay taxes on real estate, land and the use of water resources will be exempt from paying penalties. Tax audits will be suspended until January 2021. In order to ensure employment, programs for the construction and repair of infrastructure will be launched in the country.
Gaukhar Nurgalieva, Head of the Eurasian Research Laboratory at the Institute for Emerging Markets Research at the Moscow School of Management SKOLKOVO
Source: https://forbes.kz/…/izolyatsiya_stran_azii_i_perspektivyi_…/?
China Studies Centre,
Nur-Sultan, 2020
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