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Central Asia: EBRD Says Reforms Will Help Seize The Moment

International financial institutions are looking at the former Soviet republics of Central Asia with added urgency as events unfold in neighboring Afghanistan. One institution at the forefront is the European Bank for Reconstruction and Development. The EBRD says some Central Asian projects it wants to finance are being hampered by reform delays. RFE/RL correspondent Ron Synovitz spoke with EBRD chief economist Willem Buiter about what Central Asian governments must do to take advantage of the current interest in their region.

Prague, 20 November 2001 (RFE/RL) -- Senior officials from the European Bank for Reconstruction and Development say basic economic reforms are still needed in the former Soviet republics of Central Asia if the region is to profit from increased international attention.

EBRD President Jean Lemierre says Central Asia has been catapulted into the global spotlight by events in Afghanistan. He said governments in the region must take advantage of the opportunity by opening their economies and implementing significant market reforms.

To underline the importance of reforms, Lemierre last week led an EBRD delegation on a tour of Uzbekistan, Tajikistan, and Kyrgyzstan. The delegates explained to senior officials in each country how they can create a more attractive environment for investment -- a step that is seen by the EBRD as crucial to development.

Today, the EBRD reinforced the message in its annual Transition Report -- a study that examines progress on economic transition across Eastern and Central Europe and the former Soviet republics.

A key author of the Transition Report, EBRD Chief Economist Willem Buiter, was also among the senior EBRD officials who visited Central Asia last week. Buiter told RFE/RL that today's report will be followed soon by new EBRD strategy on Central Asia.

"We are working on a new action plan for Central Asia. We have this under discussion in the bank at the moment. We would expect the plan to simply represent the bank's response to greater vulnerability of the region."

Central Asian projects have received about $1.3 billion of EBRD financing during the last 10 years. Out of that total, commitments of about $200 million have been approved in the last year. Buiter told RFE/RL that the EBRD wants to invest even more this year.

"We hope to do about 300 million euros ($264 million) [of investments] in the region [of Central Asia] this year alone. If possible, we will do more. We can do more. We are not held back by capital scarcity. The only thing that holds us back is the absence of bankable projects. To reduce that obstacle and allow us to do more, structural reforms in the countries of operation [are] necessary."

In Uzbekistan, Lemierre last week signed a loan program worth about $100 million to help upgrade the country's freight railroad system and to improve heating services.

But Buiter told RFE/RL that much more potential investment in Uzbekistan is being held back because of the government's failure to reform an antiquated currency exchange rate system.

"Uzbekistan is one of two countries in our area of operations that still have multiple exchange rates for current account transactions. The other one is its neighbor, Turkmenistan. It is a major obstacle to foreign direct investment, to trade and, in effect, to any kind of investment even by domestic producers who might consider entering actual markets."

Until the exchange rate system is reformed, Buiter says Uzbekistan will not see any significant increase in foreign direct investment.

"It's key for the future progress of that country, which is heavily dependent on additional foreign direct investment. [And foreign direct investment] will not be coming unless, this necessary condition, this exchange rate unification -- this convertibility -- occurs."

Buiter said the EBRD is eagerly watching developments in Tashkent for any signs of progress on the exchange rate issue.

"We went [to Uzbekistan last week] with the hope that we might be able to demonstrate to authorities the benefits of unifying the exchange rate -- of establishing complete convertibility. And we shall see in the weeks and months to come whether further movement is going to happen."

The EBRD economist praised Uzbekistan's progress during the last year on reforming its railroad and energy systems. He said that progress contributed to the decision to approve the latest EBRD loans there. But Buiter still describes Uzbek reforms overall as "disappointing."

"Uzbekistan is a laggard on the reform front. There has been some improvement in what has, up to now, been a very disappointing structural reform performance. Just this last year, there has been some progress on, especially, infrastructure in the railroad and power management. There have been some sensible and necessary reforms taken there. And some steps have been undertaken toward unifying the exchange rates for currency transactions."

Buiter also noted other policies that he says are hurting Uzbekistan's agriculture and trade sectors.

"Other weaknesses in the economy include the fact that the government still forces the cotton farmers to sell the bulk of their production to the government at prices that are a tiny fraction of world prices, creating huge disincentives to trade. And there are also problems with the obligatory surrender of hard currency by exporters, which provides a further disincentive to trade and to investment."

Buiter says trade across Central Asian borders is being hampered by what he called "downright non-cooperative, almost hostile" trade and transit restrictions between the region's former Soviet republics.

"Uzbekistan makes it difficult for Tajikistan to export. Kazakhstan makes it difficult for Kyrgyzstan to export to Russia. There is one reason for that which I think is a legitimate concern for everybody -- that Tajikistan and Kyrgyzstan are major transshipment routes for heroin from Afghanistan. The Kazakhs have a legitimate concern that with the trade and the migrant workers they might get an influx of hard drugs and the associated crimes and social deterioration."

But despite the issue of illegal drug smuggling, Buiter says cross-border trade restrictions need to be reexamined in Central Asia.

"The whole region would benefit massively if they would simply liberalize toward each other. Without that, without free and unrestricted access to markets in the CIS and elsewhere, Tajikistan and Kyrgyzstan's future is really very grim."

While much support for the international antiterrorism campaign in Afghanistan is being funneled through Uzbekistan and Tajikistan, the odd-man-out appears to be Turkmenistan -- the country least likely to receive any investment boost as a result of the global spotlight on the region.

The EBRD halted its financing for public sector projects in Turkmenistan last year due to concerns about Ashgabat's lack of commitment to market reforms.

Buiter noted that today's Transition Report singles out Turkmenistan as the only former Soviet republic that has gone backwards on economic reforms.

"Our transition indicators, in eight dimensions of progress in transition, range from [a score of] one -- which is sort of unreconstructed central planning -- to [a score of] four-plus. Turkmenistan, across the board, on every dimension, scores one. In fact, for this year, Turkmenistan unfortunately is the only country that, in terms of the average transition indicators that we construct, has regressed. It has fallen back. No other country has actually backtracked."

Buiter says the negative findings about Turkmenistan are largely due to the government's refusal to implement a World Bank-approved plan for privatizing large state firms.

"Turkmenistan has backtracked because they used to have an agreed large-scale privatization program with the World Bank. And they have discarded that and referred it to some plan of their own which doesn't quite do the job."

At the end of the day, Buiter says that only the governments of Central Asia have the power to improve economic conditions in their countries. "Reform is really in their own hands," he says. "They can make or break their own progress."