The announcement on Friday of a billion-dollar loan to Kazakhstan by the Asian Development Bank (ADB) draws attention to the deepening economic crisis in the Central Asian region as well as the economic abyss into which the oil economies in the Greater Middle East in general could be staring.
Kazakhstan was touted until recently as the economic powerhouse of Central Asia. It was a keen promoter of the Russia-led Eurasia Economic Union (EEU) and the ‘multi-vector’ foreign policy of Kazakhstan, which is sandwiched between Russia and China, drew admiration in the West as deft and sophisticated.
Therefore, the Central Asian steppes shook when on Thursday, against the backdrop of a bleak price outlook for oil, Kazakhstan announced a new monetary policy, abandoning its currency-band exchange system and opting for a free-floating exchange rate – and, within hours, the tenge had lost a quarter of its value against the US dollar.
It is possible to co-relate the shift in the monetary policy with the ADB loan, which has been under negotiation. The ADB statement in Manila said, “The loan will give Kazakhstan an opportunity to overcome the unintended consequences of the falling oil prices and the negative impact of the economic recession in neighboring countries.” The reference would have been to the Russian economy in particular.
In geopolitical terms, the fact that the ADB in which the US and Japan call the shots came to the rescue of the Kazakh government is significant. Interestingly, after nearly two decades of negotiations, the World Trade Organization also formally approved last month Kazakhstan’s bid to join the body. Kazakhstan’s membership of the EEU had figured as a contentious issue in its WTO accession talks.
President of Kazakhstan Nurusultan Nazarbayev explained that this week’s devaluation has been “a forced measure, but we did not have any alternative.” He said economic policies must be “oriented to the new realities and be ready for oil prices of $30 to $40 per barrel.” (On Wednesday, the price for benchmark Brent crude oil fell to $47.22 per barrel.)
The Kazakh economy has taken a double beating from low global oil and commodities prices, the country being a significant exporter of metals. Exports fell by 40% in the first seven months of the year.
A period of belt-tightening lies ahead with large-scale layoffs likely and cutbacks in public investment and social and infrastructure programs. As it is, growth had plunged to just 1.2%. The latest 26% devaluation comes on top of last year’s 19%, which caused food prices to soar and sharply eroded the purchasing power of the population.
In some ways, what is happening to Kazakhstan may be regarded as a forerunner of what can also happen to the Gulf oil economies as a whole, which are facing the spectre of rising budget deficits and debt management.
Saudi Arabia’s foreign assets have fallen by $60 billion (8.3%) in the past six months to touch $664 billion. Kuwait expects a budget deficit in the current year of almost $27 billion, Oman $6.47 billion, Bahrain $3.9 billion (11% of GDP). With the looming prospect of low oil prices in the coming years, budget deficits may only increase, with the GCC future spending uncertain and investment funds drying up.
Among the Gulf oil economies, the UAE is the solitary exception as a “success story” in economic diversification. As a scholar at the Brookings Doha Center, Luay Al-Khatteeb wrote this week, “Faced with low oil prices, rising competition (from shale oil, Iran, Russia, and oil producers in Africa, Caspian Sea, etc.), and little else other than oil to offer the world, these oil-dependent economies may be facing a bleak future if the world economy remains subdued.”
Foreign investment has been in decline for some time already and the Islamic State casts further shadows on the investment climate. But what makes the overall mix quite inflammable is the demographic bulge. According to the World Bank, the Middle East region needs to generate 100 million job opportunities in the next five-year period.
However, Khateeb wrote, “Job creation seems to be well beyond the ability of most politicians who have often squandered oil riches in creating bloated government bureaucracies awash with corruption and cronyism, or built up reserves rather than build infrastructures that could provide the platform for economic diversification and employment prosperity for their populations.
“Are we witnessing the curse of oil dependency, creating the slow death of the region as sovereign wealth funds are being gradually depleted to fund fiscal deficits?”
(Copyright 2015 Asia Times Holdings Limited, a duly registered Hong Kong company. All rights reserved. Please contact us about sales, syndication and republishing.)