Almaty, Kazakhstan
August 28-29, 2003

Statement by Tapio Saavalainen Advisor
European II Department
International Monetary Fund

Mr. President, distinguished delegates, ladies and gentlemen;

Thank you for the opportunity to provide comments on the important topic of today. I would like to make a few remarks about the Central Asian countries. For these countries, in particular, external trade is an important source of economic growth as their potential trade is much greater than actual trade. According to the estimates we have made in the IMF in the Kyrgyz Republic, for example, potential external trade could be 3 to 4 times as much as its current trade. Another example is Kazakhstan, its trade potential with the European Union countries alone, is 5 times higher than actual trade.

The difference between actual and potential trade in Central Asia reflects both country-specific and regional causes. Country specific reasons include shortfalls in structural reform, infrastructure problems, poor governance and high corruption in customs and transport services in particular. Regionally, there are a host of formal and informal trade barriers which have not been addressed because of ineffective regional trade and cooperation agreements. In Central Asia, such restrictions strongly discourage foreign investors as they are unwilling to work in small individual country markets but would be willing to exploit larger regional markets.

For the landlocked Central Asia, there are three major areas of trade obstacles which could be greatly reduced through better regional cooperation between the states.

First, there is an inadequate transport infrastructure. Central Asia’s road network is lacking in both quantitative and qualitative terms. Road links to China, Afghanistan and beyond are few and in a poor shape. Rail transport suffers from logistical inefficiencies and is expensive especially for small exporters. In these areas, Tajikistan and Kyrgyzstan are hit hardest. In addition, oil and gas pipeline infrastructures are run down and trade operations are nontransparent and discriminatory restricting Kazakhstan’s and Turkmenistan’s growth.

Second, there are formal restrictions to trade. While the Kyrgyz Republic and Tajikistan have set up very liberal trade regimes, formal barriers to trade remain higher in Kazakhstan and they are severely restrictive in Uzbekistan and Turkmenistan. Such formal barriers are captured by the IMF’s trade restrictiveness index. The index number 1 means no restrictions while number 10 implies severe controls affecting more than 40 percent of total trade. In Central and Eastern Europe this index stood at an average of 2.0 in 2002. In the CIS region as a whole it was clearly higher—3.8—while the Central Asian average was 4.4. This average included a rating of 1 for the Kyrgyz Republic’s and Tajikistan’s trade regimes a rating of 4 for Kazakhstan, and a rating as high as 7 for Turkmenistan and 9 for Uzbekistan.

Third, there are informal restrictions to trade. These include excessive inspections at customs and on the road, high road transit charges, fees for transit escorts by customs officials, transit deposits, multiple certification requirements, physical limits on shuttle trade, and so on. Our estimates suggest that, for example, a truckload traveling from Kyrgyzstan to Russia has to pay 20 to 40 percent extra transit costs. This, of course, significantly weakens the Kyrgyz exporters’ competitiveness.

To address these obstacles, it is indeed time to move from words to deeds—a call made by several high level officials of the region recently including by the Kazakh Minister of Transportation this morning. All countries benefit from more trade, and all should contribute to reducing the trade barriers. A short-term Central Asian agenda should include at least the following 5 policy issues:

An important result of such initiatives would be larger trade opportunities for small- and medium size enterprises in Central Asia which have been shown to trade considerably less than their counterparts in other transition economies. Because it is widely recognized that small- and medium size enterprises are the engine of growth in transition economies, renewed efforts to reduce trade barriers in Central Asia would have a high rate of return for the entire region.

Thank you for your attention and let’s hope that this conference will lead to concrete steps in Central Asia toward reducing trade barriers.