Macro Eco Overview

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Macro-Economic Overview of ECO Countries2002-2003

CONTENTSPages

Foreword 1-2Introduction 3-5Production and Growth 5-11Inflation and Exchange rate 11-15Trade Balance, Exports and Imports 15-23Foreign Direct Investment and External Debt 23-27Prospects for the ECO Regional Economy in 2004-

2005

27-29

ECO Countries Key Indicators 2003 TABLE-1 POPULATION 30 TABLE-2 POPULATION GROWTH RATE 30 TABLE-3 TOTAL LABOUR FORCE 31 TABLE-4 UNEMPLOYMENT RATE 31TABLE-5 GDP at CURRENT PRICES 32 TABLE-6 GDP Per CAPITA 32 TABLE-7 GDP GROWTH RATE 33TABLE-8 COMPOSITION OF GDP BY SECTORS 34 TABLE-9 PUBLIC SECTOR REVENUES 35

TABLE-10 SHARE OF TAXES IN PUBLIC SECTOR REVENUES 35TABLE-11 PUBLIC SECTOR EXPENDITURES 36TABLE-12 TOTAL FOREIGN DIRECT INVESTMENT 36TABLE-13 AVERAGE INFLATION RATE 37TABLE-14 TOTAL PRODUCTION OF ENERGY 37TABLE-15 TOTAL CONSUMPTION OF ENERGY 38TABLE-16 TOTAL LENGTH OF RAILWAYS 38TABLE-17 NET TON-KILOMETERS CARRIED BY RAILWAYS 39TABLE-18 TOTAL LENGTH OF ASPHALTED ROADS 39TABLE-19 NUMBER OF HOSPITAL BEDS PER 10,000POPULATION

40

TABLE-20 NUMBER OF PHYSICIANS PER 10,000 POPULATION 40TABLE-21 ADULT LITERACY RATE 41TABLE-22 NUMBER OF INCOMING TOURISTS 41TABLE-23 ECO COUNTRIES TOTAL EXTERNAL TRADE 42TABLE-24 ECO INTRA-REGIONAL TRADE 43-44TABLE-25 TOTAL EXTERNAL DEBT 45TABLE-26 EXTERNAL DEBT/GDP 45


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TABLE-27 EXCHANGE RATE: ANNUAL AVERAGE 46References 47-48

FOREWORD

This brief publication is prepared to provide snapshots of therecent macro-economic developments and future prospects,particularly in each ECO member state, and generally in the ECOregion to highlight areas for a strengthened regional economiccooperation. It also includes ECO Countries Key Indicators 2003presenting the most current available economic, financial, and socialdata on the ECO member countries during 1996-2002.The data seriesofECO Countries Key Indicators 2003 are compiled from three majorsources, namely, the ECO Secretariat database, the member countriesof ECO, and regional and international organizations/agencies. Hence,although exclusive attempts are made to present the data obtained

from member countries, however, considering the highlighting datalimitations, gaps, inconsistencies, lack of harmonization, and age ofdata revealed to obtain data from international agencies as well.

Regional cooperation constituted one of the most importantpillars of ECO countries development. The amazing pace ofdevelopment in communications and information technologies andtransfer of international capital without recognizing borders have allcontributed to the process of globalization and lead interdependencyand mutual solidarity became more necessary. At the global levelwhich is involved in shaping and even creating new phenomena would

show that even the big economies are seeking shelters within variouseconomic regional grouping and blocks such as NAFTA, SAARC, EFTA,EU, ASEAN, APEC, etc. This situation of course is, then, a reflection ofthe global atmosphere where small economic entities are finding itextremely difficult to survive in a highly competitive atmosphere. Inthis direction, ECO provides a unique opportunity for the memberstates to overcome, to a certain degree, the challenges, andrepercussions of globalization and needs to further develop itsrelations within the framework of regional economic cooperation.Moreover, cooperation at the regional level is the bridge betweennational realities and global priorities. Regional cooperation plays such

a critical role because the actors involved in global processes occupiedhighly unequal positions. Hence, regional action allows the voice ofsmaller countries to be heard within the global order.

Sustainable development within the ECO region shall be defined,as development that meets the needs of the present withoutcompromising the ability of future generations to meet their ownneeds. ECO countries call for improving the quality of life for all the

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region's people without increasing the use of natural resources beyondthe region's carrying capacity. At this point, efforts to spur mutuallyreinforcing and enduring economic liberalization and strengthencooperation for regional policies that are apt for sustainable way of lifein the region require the integration of action in four key areas:

economic growth and equity; transport infrastructure development;utilization of natural resources cost-effectively; trade and socialdevelopment. For the land-locked member countries of ECO and witheconomies in transition and developing, regional cooperation, offerassistance to respond to the challenges of globalization. It alsoprovides avenues for the use of the limited resources of the countriesin the region and the integration of those countries into the globaleconomy. In this perspective it is appealed that the international donorcommunity to be more attentive and responsive to this regionalcontext.

ECO countries represent a region of superlatives. It is vast about8 million square kilometers (twice the size of European Union) andpopulated with 370 million inhabitants sharing common cultures.Exceptionally region is rich in natural endowments and situated in ageographic position, which affords special opportunities and posesunique challenges. ECO is a heterogeneous group of countries in termsof being under diverse socio-economic achievements. For over adecade Azerbaijan, and Central Asian countries of former Sovietrepublics namely Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan,Uzbekistan have been striving to carry out market and structuralreforms. On the other hand, Iran, Pakistan, and Turkey can be

classified as developing countries. The average GDP per capita in theECO countries in 2002 was fairly below the worlds average of 5,202US$ dollars, which varies from 174 US dollars in Afghanistan to 2,608US$ dollars in Turkey. Both the developing and transition economies ofECO have been carrying out the restructuring programmes to movetowards more liberal economic systems. The existence of free andopen market relations in the region requires that certain conditions bemaintained. Several issues require policy attention, including ways tomaintain sound macroeconomic fundamentals and implement ongoingreforms in the region. Nevertheless, ECO countries as a group aregrowing faster than the global economy as well as some other groups

of countries. Progress is being made on both fronts as can be seen inthe declining rates of inflation, lower fiscal deficits and improvedcurrent account positions. Although economic growth in ECO region isprojected to settle to more sustainable rates in 2004-2005, oil and gassector and intraregional trade and strong consumer demand willremain a major driver of growth in ECO region over the next 2 years.Progressively, the whole of the region will benefit from the dynamism

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in intraregional trade. Overall, confidence is high in the economicoutlook for the region.

Considering the large number of people requesting accessinginformation on ECO member states and the role of ECO Secretariat indisseminating reliable information on the region, it is hoped that thisstudy providing a general view in terms of macro-economic situation inthe ECO region would be of interest and useful for the readers. I amconfident that the study will serve as an additional impetus for furtherconstructive activities of all parties concerned for the good of ECOregion and its people. The member states, as well as general readersare welcome to provide any relevant information for the furtherimprovement of this publication.

Tehran, August 2004Askhat OrazbaySecretary General

1. Introduction

After growth of less than 2 percent for over two years, the worldeconomy gained momentum in 2003. Following the war in Iraq, whichmade oil prices more volatile and outbreak of severe acute respiratorysyndrome (SARS) in early 2003, economic growth in an increasingnumber of countries shifted to a measurably higher gear in the secondhalf of the year, raising the growth of gross world product (GWP) for2003 as a whole to 2.5 percent. Despite some lingering uncertainties

and downside a risk, the economic recovery is expected to strengthenand broaden further, raising global economic growth to 3.2 percent in2004. The growth of world trade is expected to reach 7.5 percent in2004, up from 4.7 percent in 2003. The improved performance andoutlook does not, however, compensate for the subdued growth of theprevious two years when world per capita output failed to increase.

The global economy, including the ECO region, showedconsiderable strength in 2003. Indeed, estimates suggest that regionalGDP growth in 2003 will exceed the performance in 2002 (7.3 percent).Inflationary pressures have risen only slightly, despite higher

commodity prices and volatility in the energy markets, as a result,monetary authorities virtually across the region have been able tomaintain an environment of low interest rates. Buoyant global growth,already reflected in rising stock markets, is adding to business andconsumer confidence and should translate into higher corporateinvestment activities in the region, thus providing a platform for fastergrowth in the medium term.

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The ECO region is geographically vast and well endowed withpotential economic resources in different sectors, such as agricultureand arable land, energy and mining, human resources, and a vaststrategic trading constituency. Yet, this inherent potential does notmanifest itself in the form of reasonable levels of economic and social

development in the ECO countries as a group. Despite manyunfavourable factors, the economies of the region displayedimpressive resilience since 2000. The economies of the member stateswere slightly affected by the global downturn in 2001 but GDP growthpicked up in the region in 2002 and 2003. This was mainly on accountof the recovery of Turkey from negative growth in 2001 and highergrowth in Pakistan and the Iran. Concurrently, in other member statesof ECO after the setbacks associated with their transition economieshave achieved sound growth for a number of consecutive years. Thealready high rates of growth prevailing in countries such as Azerbaijan,Tajikistan, and Turkmenistan went up further in 2003. Kazakhstan

continued to make progress in developing its energy resources andmaintained its robust growth of recent years and Kyrgyzstan emergedsmartly from negative growth while Uzbekistan improved upon itssomewhat modest growth rate in 2002. Moreover, Afghanistan is alsoin progress to experience strong growth owing to the stimuli fromreconstruction efforts, the resumption of agricultural growth, and theimplementation of sound economic policies.

Growth in the region was achieved on the back of growinginvestor and consumer confidence that attracted, enhanced externalcapital to resource-rich economies and facilitated greater

macroeconomic stability, particularly exchange rate stability, asproduction increased and inflation declined virtually in most of theeconomies of the region.

Nevertheless, core development challenge within the region is toensure productive work and a much better quality of life for almost 370million inhabitants. On the other hand, significant achievements ineconomic and human welfare in ECO countries as measured byaverage human development indicators should be acknowledged. Inhindsight, the region has displayed considerable resilience in dealingwith the 1997-1998 crisis and in meeting the challenges it posed in

both economic and social fields. The implied shortfall in output in theregion translates into lower levels of job creation and, through reducedtax yields, new pressures on government budgets. The 2001-2002slowdown provided another opportunity to fashion new policyresponses to promote growth in 2003 and, for the region as a whole, toresume its pace of economic and social development. The immediatepolicy challenge, therefore, is to regain and sustain the momentum ofgrowth in the region. A point to emphasize is that sustaining the

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Simultaneously, Governments must facilitate structural change toenable their economies to maintain competitiveness in a globalizingworld economy. For the long term, the greatest challenges for the ECOcountries in particular emanate from meeting the MillenniumDevelopment Goals and agreements on sustainable development

reached at the World Summit on Sustainable Development(Johannesburg, South Africa, 26 August-4 September 2002)

2. Production and Growth

Output accelerated in most countries in the region in 2003 ascompared with the previous year. The ongoing reform of policies andstructures implemented by ECO member states, particularly thosewhich are in economies in transition bolstered consumer and investorconfidence, thus sustaining inward external resource transfers (bothprivate and public) and steady growth in domestic demand. Theagricultural sector plays an important role in income and employment

generation, and hence in poverty reduction in the economies of theregion. However, it is still primarily dependent on weather conditionsowing to insufficient irrigation and drainage facilities.

Looking to the economies of the ECO member states,individually, massive FDI inflows to Azerbaijan for the development ofoil and gas resources were the main stimulus to economic growth, withGDP going up by more than 11 percent in 2003 compared to 10.6percent in 2002. There was a healthy expansion in industrial output of6.1 percent during 2003 although that was confined mainly to the oiland gas sectors. Higher production of oil, gas, energy, and water, in

turn, helped to lower energy imports in 2003. Agricultural output in2003 was constrained by lack of credit for farmers and investment inagricultural infrastructure. Domestic production of agriculturalmachinery and the promotion of agricultural exports are among thefocal areas of government policy in the country.

Afghanistan is in the process of rebuilding its economy,particularly agriculture, energy, housing, education, and export-relatedindustries as part of its efforts to feed the population, create jobs,attract foreign investment, and earn desperately needed hardcurrency. GDP growth was estimated to reach 29.0 percent (or about

US$ 4 billion in real terms) in fiscal year 2002-2003, as a result ofinternational assistance and spending and a robust expansion ofagricultural production (excluding the illicit cultivation and productionof opium and its derivatives). Total output was expected to rise by afurther 20 percent in the following fiscal year. Agriculture, owing tohigher rainfall as well as the increased availability and better quality ofseeds, fertilizer, and other inputs with a relative share of about 52percent of GDP was a source of employment of three quarters of the

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population in fiscal year 2002-2003. Total cereal production (consistingof wheat, barley, maize and rice) went up by over four fifths, to 3.6million tons. Output of premium export crops such as raisins, fruits,and walnuts recovered strongly, although that of several agro-products(including livestock and orchard and plantation items) would take

longer to reach pre-conflict levels. Agricultural production remained ona strong upward trend in fiscal year 2003-2004 as well, with cerealproduction rising by 50 percent to 5.4 million tons, although furtherincreases in output will require considerable investment in repairingand rehabilitating irrigation facilities.

Industry accounted for 24.1 percent of GDP, while the servicesector, which contributed less than a quarter of GDP, expanded by15.5 percent in fiscal year 2002-2003. The impact of internationalassistance has been most visible in the construction and servicesectors in the wake of an improving security situation and the return ofnumerous refugees to reclaim their former homes. There was also arapid rise in the manufacturing of cement, beverages, and bottledwater and in retail trade, while the carpet-weaving industry is beingrestored and nurtured. Large-scale private investment has been limitedto telecommunication and the rehabilitation and new construction ofhotels. In this context, a significant and sustained increase in privateinvestment would require a market-oriented regulatory framework, aswell as a functioning legal and banking system.

In Kazakhstan, GDP growth of more than 9.2 percent in 2003was driven largely by higher industrial production (which expanded byalmost 9 percent in 2003) and positive impact of continued

institutional and banking reforms and strong inflows of FDI, foreigntrade earnings, latter consisting largely of oil and gas products. Forexample, oil production was expected to increase from 47 million tonsin 2002 to 52 million tons in 2003 and further to 61 million tons in2005, and this upward trend was mirrored by a sharp rise in exportvalue, by 33.4 percent in 2003. Oil revenues alone directly made upmore than a quarter of the countrys GDP and a more diversifiedeconomy remained a policy priority for Kazakhstan. Engineering plantswere also restructured to better serve the booming oil, gas industry,and other construction projects. The agricultural sector, which providedemployment for around 35 percent of the labour force, thus remainedthe second-largest employer. Agricultural output grew by 1 percent in2003. The grain harvest, at 15 million tons, was expected to be lowerthan in 2002 because of adverse weather conditions. Agriculturaldevelopment was one of the main priority areas in Kazakhstan, wherea new Land Code, introduced in 2003, provided for the institution ofprivate ownership of agricultural land.

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Considering the size of the GDP, Kyrgyzstan, and Tajikistanare the smallest economies of the region. Kyrgyzstan showed acontraction in GDP in 2002. In fact, GDP growth declined marginallyfrom 5.3 percent in 2001 to -0.5 percent in 2002, a setback due largelyto a decline of more than 13 percent in industrial production.

Agricultural output could not offset the slackening activities as it wentup by 3 percent in 2002, owing in part to insufficient liquidity foragricultural producers. Economic growth was constrained by aslowdown in market-oriented reforms and industrial restructuring,post-privatization reforms in the agricultural sector and the after-effects of a monetary squeeze. However, GDP expanded by 6.7percent in 2003, due largely recovery of industrial production (by 17percent), with the most dynamic sectors being manufacturing activitiesand electricity generation. The manufacturing upturn, in turn, wasdriven by significant growth in food processing and light industrialoutput. Gold mining was also recovering from the crisis of 2002. By

contrast, there was a marginal growth in agricultural output (by 4percent) due to the bad weather conditions and other constraintsassociated with inadequate agricultural reform. In particular, theexpected decrease in grain harvests affected the food situation in thecountry during 2003.

The GDP ofTajikistan went up by 9.5 percent in 2002 comparedwith 2001. Industrial production, up by 8.0 percent over the sameperiod, benefited from the continued growth in the aluminium sector.This sector had accounted for up to 60 percent of industrial output inprevious years and for more than half of the countrys total export

earnings. Agricultural output increased by almost 10.6 percent in 2002,making it the fastest-growing economic sector. GDP growth inTajikistan was sustained at a high rate, 10.2 percent in 2003 andindustrial production went up by more than 10 percent. In particular,there was a considerable increase in the production of consumergoods, which resulted in double-digit growth of retail trade turnover(by 24.5 percent in 2003). Rising real wages in Tajikistan boostedconsumer demand and contributed to the recovery of domesticproduction, while better irrigation and the improved availability ofinputs were behind the record harvest of cotton and a good wheat cropin 2003. The cotton output, for example, was up by 14 percent.

However, the growth prospects in Tajikistan were somewhatconstrained by low levels of capital investment and relatively largedeficits in the external current accounts.

Driven by the continued expansion of the oil and gas sector anda boom in construction, the GDP of Turkmenistan went up by 19.8percent in 2002. In 2002, value added by the various sectors of GDPwent up by 17-19 percent. Meanwhile, in Turkmenistan, GDP growth

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was expected to speed up further to 23.1 percent in 2003 owingmainly to raising output in the leading sectors, namely, hydrocarbons,and cotton. Within the industrial sector, priority was accorded todeveloping the oil and gas sector, construction activities, and textilemanufacturing. Hydrocarbons remained the principal engine of

economic growth in Turkmenistan and energy-based activities havereceived the bulk of both State and foreign investment over the lastfew years. The agricultural sector met the production target of 2.3million tons of wheat, a record grain harvest, in 2002. However, thecotton crop was poor owing to adverse weather conditions. Only about0.5 million tons of cotton, or a quarter of the planned target, had beenharvested by November 2002. Construction activities were anotherimportant source of production growth, however, while a harvest of 2.5million tons of grain in 2003 contributed to food self-sufficiency.

Uzbekistan recorded steady economic progress, with GDPgrowing by 4.2 percent during 2002. The expansion was driven by

higher industrial production, by almost 8.5 percent, and agriculturaloutput, by over 6 percent. In particular, the grain harvest increasedfrom 4 million tons in 2001 to 5.3 million tons in 2002. GDP inUzbekistan was expected to expand marginally, to 4.4 percent in 2003.A slight decline in the growth rate of industrial production to 6.2percent was recorded in 2003. There was a moderate growth inagricultural output in 2003 although the grain harvest still exceededdomestic demand. However, the main export earner and the largestsource of employment in the country, the cotton sector, facedconsiderable difficulties such as a shortage of credit and adverseweather conditions in the spring of 2003. A new agricultural contract

system was expected to be introduced in Uzbekistan in 2004 toimprove market-based management and incentive structures, amongother objectives. The new system also envisaged the transformation ofall collective farms and other agricultural units into a system of leases.Services comprised the fastest-expanding sector, growing by morethan 12.7 percent in 2002. To foster greater private activities andservices, measures have been introduced to crack down oninterference by local officials in the operations of small and medium-sized businesses and to lighten their tax burden. In response, all lightindustrial enterprises with foreign investment were exempted from alltaxes, except VAT until the beginning of 2005, so as to enable them to

upgrade and modernize their technologies and expand consumergoods production.

Development at the side of larger economies of the ECO region,Turkey has been experiencing relatively sharp swings in economicproduction in the recent past. The economy contracted by 7.5 percentin 2001 as a result of the massive earthquakes and financial crisis of2000-2001. However, GDP expanded by 7.8 percent in 2002, an upturn

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driven by strong foreign investments, coupled with an improvedbusiness climate, robust export performance, strong agriculturalproduction, and large inventory rebuilding. There was, in addition, asharp rise in public consumption and investment during the secondhalf of the year reflecting accelerated government spending ahead of

early elections held in November 2002. The upturn was also a positiveresponse to a variety of policy measures aimed at (a) reducinguncertainties in the financial markets through the implementation ofurgent measures to enhance the stability of interest and exchangerates, (b) completing structural reforms to promote economicefficiency and (c) focusing macroeconomic policies on economicstabilization to ensure a rapid economic turnaround and a moresustainable growth path. Compared to previous year, the economicrecovery tapered off slightly in 2003 with GDP growth registered at 5.8percent. Although the war in Iraq was short, but precarious securitysituation have relatively affected tourism revenues and economic

activities.Meanwhile, a higher level of activities in the oil sector, rising

domestic demand, increased business confidence and recovery inagricultural output helped to maintain a robust rate of economicgrowth of 6.5 percent in Iran in 2002-2003. GDP grew by 5.8 percent ayear on average over the first three years of the countrys third five-year development plan (2000/01-2005/06). A higher expansion in totaloutput was largely underpinned by a significant increase of around 7.5percent in non-oil production activities. Domestic demand (includingprivate and public investment) grew reasonably quickly as a result of

enhanced business confidence as well as monetary and fiscal stimuli.Good weather conditions helped to bolster agricultural performance, sothat output grew from 4.2 percent to over 10 percent between fiscalyear 2001 and 2002, while the industrial sector sustained a highgrowth rate of around 7 percent. The continued expansion of valueadded in service activities, amounting to 4.8 percent in 2001 and 5.1percent in 2002, helped to widen employment opportunities furtherwith unemployment falling to 12.8 percent in 2002-2003 from 14.2percent a year earlier. Compared to previous year, the economicrecovery continued to expand slightly in 2003 with GDP growthregistered at 6.9 percent.

There was a noticeable pickup in economic activities in Pakistanso that GDP rose by over 5.1 percent in fiscal year 2002-2003,compared with 3.4 percent in the previous year. A strong surge inaggregate demand, including private investment, and a sustainedexternal account surplus, among other improvements inmacroeconomic fundamentals, combined with good weatherconditions, contributed to a broad-based acceleration in economic

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activities. Agricultural sector posted an impressive recovery andproduction went up by over 4 percent in 2003 compared with stagnantoutput growth in the previous year. Another contributor to stronggrowth was the exceptional performance of the large-scalemanufacturing sector, which expanded by 8.7 percent in 2003 against

the previous years 4.9 percent. Export-led demand for manufacturescontinued to increase as a result of better access to key foreignmarkets as well as the supportive stance of the central bank in holdingdown the appreciation of the rupee while simultaneously pushing downinterest rates to historically low levels. Additionally, the service sectorhad been growing at a faster pace than that of the commodity-producing sectors for quite some time. This trend remained unchangedin 2003 as the service sector grew by 5.3 percent, compared with 4.1percent in 2002.

With a total population of about 369.9 million (almost 6.0 percentof the world population), the combined GDP of the ECO countriesamounted to US$ 423 billion in 2002. This made up only 1.3 percent ofthe world GDP. The economic recovery achieved by the ECO countriesas a group accelerated significantly in 2000 with average real GDPgrowth recorded at 6.2 percent compared to 0.6 percent contractionin 1999. However, due to the weakened world economic activity inlate 2000 and during 2001, combined GDP of the ECO countriesdropped to US$ 403.6 billion and real output growth declined to 1.1percent in 2001, relatively affected by negative growth (7.5) achievedby Turkey. Nevertheless, ECO countries recovered significantly andreal output growth increased to 7.3 percent in 2002. The ECO

countries average per capita GDP in 2001 and 2002 remained at US$1,111 and US$ 1,144 respectively owing to high population growth (2.0percent during 2001-2002) of the region. At the individual country level,Afghanistan (US$ 174) and Tajikistan (US$ 189) were the country withthe lowest per capita GDP in 2002, while Turkey was the highest (US$2,608) in the same year.

TABLE 1: ECO Countries GDP and per capita GDP1998 1999 2000 2001 2002

GDP* (billion US $) 391.7 378.6 431.6 403.5 423.0

As % of World 1.3 1.2 1.4 1.3 1.3

Per capita GDP* (US $) 1,212 1,151 1,211 1,111 1,144

GDP growth rate** (%) 3.3 -0.6 6.2 1.1 7.3

Developing countries 3.5 3.9 5.7 4.0 3.3

(*) Figures for 1998,1999 calculated without data of Afghanistan

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(**) The figures calculated without data for Afghanistan.Sources: World Development Report 2003, World Bank, ECO Secretariat database.

Throughout the period under consideration (1998-2002), the ECOcountries achieved the highest average real GDP growth rate of 7.3percent in 2002. This rate was comparably higher than the average

growth rate of the developing countries in that year. However, thegrowth performance of the region slowed down steadily in 2001 inwhich the average real GDP growth rate fell to 1.1 percent in 2001. Ingeneral, similar trends were observed in developing countries. In 2002,except Kyrgyzstan (-0.5) all the economies of the ECO membercountries registered a positive GDP growth. Overall (except 1999 and2001), it appears that the ECO countries performed quite similar to thedeveloping countries even during 1998 when the Asian financial crisisreached its peak. Yet, the recovery in the year 2002 was stronger inthe groups of ECO countries (except Kyrgyzstan). This means that, theECO members were able to benefit enough from the strengthening of

world economic activities.FIGURE-1: GDP Growth and Unemployment rates of the ECO region*

(%)

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1996 1997 1998 1999 2000 2001 2002

GDP growth Unemployement

Note: (*) Calculated without data of Afghanistan

Changes in the growth pattern of the member states economiesover the years have brought corresponding changes in theemployment structure, though agriculture sector remained the largestemployer (39.6 percent) in the region. The performance of labourmarket in the region compared to previous year increased by 2.1percent and accounted to 122.4 million (4.0 percent of total world) in

2002. However, as shown in Figure-1 average unemployment rate(without data of Afghanistan) of the ECO region in 2002 increasedslightly to 8.2 percent, compared to the level of previous year of 8.1percent.

3. Inflation and Exchange rate

Price stability and low levels of inflation rates are essentialfactors for maintaining macroeconomic stability in the economies of

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the ECO member states. The governments of ECO countries paidspecial attention and applied different fiscal and monetary policiesover the last decade to control inflation and maintain price stability intheir economies. Because of these efforts, the average rates ofinflation have fallen considerably in most of the countries, particularly

in the second half of the 1990s. However, with few exceptions, inflationwas on a downward trend in ECO member states in the past few years.

TABLE 2: Average inflation rates in ECO member countries*

(Annual % change in consumer prices)1998 1999 2000 2001 2002

ECO countries 41.9 41.1 23.9 31.2 18.9

Developing countries 10.6 6.9 6.1 5.7 5.6

(*) The figures do not include data for Afghanistan.

Sources: ECO Secretariat database, Economic and social survey of Asia and the Pacific 2003, UNESCAP,

Statistical Database of SESRTCIC, Economist Intelligence Unit, Country Reports (London, 2001).

The regional perspective, as may be seen from Table-2, inflationremains relatively high, but halved since 1998. Nevertheless, asinflationary pressures build up in line with stronger demand, countriesare expected to gradually raise interest rates. The extent of theirmonetary tightening will also depend on the increase in internationalinterest rates, government borrowing requirements, and exchange-rate movements. The average inflation rate in the developing countriesdeclined to 10.6 percent in 1998 and further to only 5.6 percent in2002. Similar patterns but with higher rates were observed in the ECO

countries. The ECO member states managed to curb the averageinflation rate and bring it down to a low level of 23.9 percent in 2000.However, the average inflation rate realised by the group of ECOcountries in 2001 ascended to 31.2 percent, but effective monetaryand fiscal policies of the countries enabled the region to realize 18.9percent inflation rate in 2002. At the individual country level,Afghanistan, Turkey and Uzbekistan were the countries with thehighest inflation rate of 52.3 percent, 29.7 percent and 22.0 percent in2002 respectively and Kyrgyzstan with the lowest rate of 2.3 percent inthe same year.

Turning to member states, the exchange rate, which fluctuatedwidely in late 2001 and early 2002 due to political and economicuncertainties, strongly affected consumer prices in Afghanistan.Subsequently, with the increasing availability of goods, inflationdeclined to 3.5 percent in the first 8 months of 2002. However,uncertainties over the introduction of a new currency in the lastquarter of 2002 contributed to a sharp depreciation of the exchangerate, while consumer prices rose by a cumulative 52.3 percent during

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2002. With the completion of the currency conversion in January 2003and after an introductory bout of speculative depreciation, theexchange rate strengthened and has stabilized to around AF48/US$1since May 2003. Stability is maintained through a managed floatregime and this was expected to instill confidence in the currency and

support price stability, given the rapid transmission of exchange ratefluctuations to domestic prices. Monetary expansion has beenprogrammed and implemented to keep pace with the increase in thetransactions demand for money, which has been met by accumulationof foreign exchange reserves. These reserves stood at US$ 568 millionin late September 2003, well above the AF22.4 billion currency incirculation. Tight monetary policy as well as increased supplies ofstaple foodstuffs, the average monthly inflation remained close to zeroand the 12-month inflation rate fell to 51 percent by August 2003. Theconsumer price index (CPI) covered 50 items, mainly food in Kabul. Itwas expanded to include 200 items and the collection of price data

was expected to cover all major provincial cities in the near future.A tight monetary policy and domestic currency stability

contributed to relatively low rates of inflation in Azerbaijan andKyrgyzstan. In particular, Azerbaijan has sustained great price stabilityin the region for the last four years. However, the elimination ofpreferential tariffs for energy and transport services in January 2002and the increase in real wages by about 15 percent in the first half of2002 pushed up consumer price inflation marginally from 1.5 percentin 2001 to 2.8 percent in 2002. In Azerbaijan, inflationary pressureswere both lower and moderate in absolute terms, the net outcome

from a combination of tight monetary policy and the stability of thenational currencies in 2003. Inflation remained subdued, with theaverage annual CPI rising by 2.2 percent in 2003. While the nominalexchange rate of the national currency against the dollar remainedvirtually unchanged in 2003. The real effective exchange ratedepreciated by an estimated 13.1 percent, giving domestic producersa competitive edge. The overall inflation could be marginally higher inAzerbaijan in 2004 due to government commitments to increaseemployment and wages in the hydrocarbons sector and to liberalizeenergy prices.

Kyrgyzstan recorded a year-on-year price deflation of 0.3 percentin May 2002. However, the monthly consumer prices were pushed upin June 2002 as a result of higher prices for food products, whichconstituted a major part of the consumption basket in the country,inflation rate decreased from 3.7 percent in 2001 to 2.3 percent by theend of 2002. The budget of Kyrgyzstan for 2003 was based on anannual inflation target of 5 percent but with slight deviation consumerprices rose by 5.6 percent in 2003. This price increase was due mainly

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to higher food prices, which, in turn, were attributable to thecancellation of VAT exemptions previously granted to large agriculturalproducers. In addition, there was a modest rise in the prices and costsof services while a reduction in the excise tax on fuel in 2003contributed to a decline in non-food prices. Meanwhile, in the first half

of 2003, the national currency of Kyrgyzstan appreciated by about 10percent and interventions by central banking authorities in the foreignexchange market were designed to smooth out sharp daily fluctuationsand strengthen the international reserve position.

Inflation in Turkey, though still high in absolute terms, has beenon the decline in recent years, for example, from over 68.5 percent in2001 to 29.7 percent in 2002. The increase in food prices was at thelowest rate in the last 15 years, thus moderating somewhat domesticinflation. The macroeconomic policies and structural reforms carriedout under the new economic programme became the determiningfactors in the struggle against inflation, leading in the process to adecrease in future inflationary expectations. Other stabilizing factorsincluded weak domestic demand, a marginal increase in consumptionand investment expenditure, and the stability of the Turkish lira.Helped by stable and low world prices, Turkey reduced the rate ofincrease in the CPI to 25.3 percent in 2003 and further to 12 percent in2004 and to single digit numbers in 2005. The Turkish lira depreciatedagainst the euro in 2003 but its value remained relatively stableagainst the dollar.

The downward trend in inflation continued in Pakistan with priceincreases amounting to just over 3.1 percent in fiscal year 2003, from

3.5 percent in the previous year. Among the stabilizing factors werethe improved availability of essential food commodities, lower creditcosts, excess capacity in most industries, appreciation of the Pakistanrupee, the greater availability of credit at low interest rates forproduction purposes, prudent fiscal management and effectivesterilization of the monetary impact of massive capital inflows. Drivenby current account and capital account surpluses, the surplus in theoverall balance of payments amounted to US$ 4.6 billion or 6.7 percentof GDP in 2003, boosting the accumulation of foreign exchangereserves to a record US$ 11.7 billion by the end of fiscal year 2003.Notably in this connection, the major portion of the increase in foreignexchange reserves came from non-debt-creating inflows. The Pakistanirupee continued to appreciate against the dollar, by 3.9 percent duringfiscal year 2003 on top of an appreciation of 6.7 percent in theprevious year.

There was some pickup in consumer prices in Iran, whichreached to 15.8 percent in fiscal year 2002, as compared with 11.4percent in the previous year. Food prices rose by 19.4 percent in 2002,

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as against 7.3 percent in 2001. This was considerably faster than theincreases in non-food prices, despite the government subsidy for basicfoodstuffs, such as wheat, rice, vegetable oil, and sugar. Strongdomestic demand, partly fuelled by higher public spending, along witha relatively accommodating monetary policy led to the acceleration of

monetary growth, to 27.5 percent in 2002, and higher prices. Inflationwas estimated to rise to 16.8 percent in 2003, and concerted efforts atgreater price stabilization at a lower level have been among thehighest priorities of monetary policy in the country. The multi-tierexchange rate regime was abolished in March 2002 and the unifiedexchange rate was relatively stable against the dollar, as indicated bythe low market premium. The central bank has been pursuing amanaged floating regime, with limited intervention to smooth out ratefluctuations. In addition, the Government allowed foreign branches ofdomestic banks to operate in the offshore foreign exchange market forcurrent, and some capital, account transactions. This broadened

access to foreign exchange contributed to a convergence of theexchange rates in the domestic and offshore markets.

Higher pensions and public sector wages in Uzbekistan pushedinflation up to 22 percent in 2002. The country had been experiencinghigh rates of inflation for several years. However, monthly inflation wason a downward trend in the middle of 2002 owing to a seasonal fall infood prices and an increase in the production of consumer goods. Infact, Uzbekistan experienced deflation of almost 4 percent in June2002. The tight credit policy of the Central Bank of Uzbekistan (CBU)over 2003 as well as the fiscal squeezes lowered inflation to about 13.9

percent. In 2003, the Uzbekistan undertook wide-ranging measures forcurrency liberalization, including the unification of exchange rates, thecreation of a free market in foreign exchange and the elimination ofrestrictions on access to hard currency for enterprises. Previously threedifferent kinds of exchange rates (namely, the exchange bureau rate,the official rate and the commercial rate) had existed in the country.As a result of these policy changes, the official exchange rate wasgenerally stable in 2003 and the spread between the official exchangerate and the black-market rate was minimal, below 5 percent in mid-2003. The national currency was expected to be fully convertible in2004.

Relatively stable domestic food prices and government pricecontrols in Turkmenistan have helped to keep inflation at the relativelystable level of 7-9 percent in the last few years. Consumer prices wentup by 7.8 percent in 2002, a sharp decline from inflation of 20.1percent in 1999. While the official exchange rate of the nationalcurrency, pegged at TMM 5,200/US$1, remained unchanged, theparallel market rate appreciated by 7.4 percent to about TMM

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20,000/US$1. This helped reduce open inflation, as measured by theofficial CPI to 5.5 percent in 2003.

Inflation was also on a downward trend in Kazakhstan, fallingfrom 17.8 percent in 1999 to 9.8 percent a year later and to around 6.4percent in 2001. In 2002, however, consumer prices went up by 6.6percent, reflecting rising wages, large-scale hard-currency inflows andan amnesty for capital repatriation, the last two factors contributed toan expansion in the money supply, which served to fuel inflation in2002. In 2003, end-of period inflation was 6.4 percent, 1 percentagepoint higher than the planned target, mainly due to higher prices forgasoline and bread products in the last months of the year. This wascaused by a jump in the prices for gasoline in the Russian Federation,which led to an increase in exports of local gasoline to that country(Kazakhstans main trading partner), thus reducing domestic supplyand by government intervention to raise the price of grain. During2003, the Tenge strengthened against the dollar by 12.6 percent inreal terms, driven by large export earnings and foreign exchangeinflows from increased private external borrowing and FDI. Under themanaged float arrangement, NBK continued its policy of intervening inthe market to prevent undue appreciation of the currency, though withlimited tools for sterilization this led to a 52.2 percent expansion inreserve money. In contrast to its performance against the dollar, theTenge recorded real devaluations against the euro by 6.9 percent,which helped sustain the competitiveness of domestic producers.

A tight monetary policy and a stable level of food stocks resultedin a substantial reduction of inflation in Tajikistan, from 60.6 percent in

2000 to 14.5 percent in 2002. However, average inflation in 2003 wasunexpectedly high at 17.1 percent, exceeding the 9.0 percent targetset by the National Bank of Tajikistan (NBT). The year-on-year increaseto December, however, was held to 13.8 percent due to better priceperformance in the last 2 months of the year. While price pressuresfrom higher tariffs for electricity and gas introduced under the energysector reforms had been expected, the uptick in inflation stemmedfrom two unanticipated factors: the sharp increase in prices ofimported grains and wheat flour caused by severe droughts inneighboring countries producing these commodities, and anunintended loosening of monetary policy that resulted in a steep 44.4percent increase in the money supply (M2). The nominal exchange rateagainst the dollar was kept at about TJS3.09/US$1 for most of the year.

4. Trade Balance, Exports and Imports

World trade performance was adversely affected by the rippleeffects following the events of 11 September 2001 and slowereconomic growth in major export markets. During this period, the ECO

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countries exports have also been lackluster. However, later theeconomies of the region have benefited from global trade recovery andmove toward further liberalization. In 2002, export volume of theregion grew by 15 percent and the countries of the region continued todiversify their markets. There was a relatively strong expansion of

external trade with most countries in the region recording double-digitgrowth. Moreover, most countries in ECO region recorded a significantexpansion in export earnings in 2003, with the former beingattributable largely to favourable prices for energy products. Growth inworld trade consistently strengthened throughout 2003, and remainedstrong in the beginning of 2004, growing at double-digit rates. Worldexport volume expanded by 4.7 percent in 2003 about 1 percentagepoint faster than in 2002. The strong performance of world trade in thefirst quarter of 2004 should translate in world trade volume growth ofaround 8-8.5 percent in 2004, slowing somewhat to about 6-7 percentby 2005. The economies of the region should further benefit from this

greater trade and trade volume of the region is projected to increase in2004 notably through expanded trade opportunities. This forecast,however, depends critically on world commodity and energy prices,and positive developments in Iraq.Business and consumer confidencehad been relatively depressed in the region in 2003 due to the build-upto war in Iraq, the invasion, and its aftermath, as well as to thepersistence of the Israeli-Palestinian conflict.

ECO countries, particulary Pakistan experienced, by and large,favourable outcomes in external trade in 2003. Both exports andimports registered impressive growth, the current account posted a

large surplus, workers remittances continued to surge. Pakistansexport earnings, which fell marginally by 0.7 percent to US$ 9.1 billionin 2001-2002, were on track to reach 22.2 percent to US$ 11.1 billionin 2002-2003. In fiscal year 2001, there were cancellations of exportorders, particularly those destined for United States and Europeanmarkets, and higher freight charges on all cargo entering and leavingPakistan. Earnings on primary commodity exports (e.g., rice, rawcotton, fish and fruits) registered the largest contraction at almost 15percent. However, textile manufactures, which constituted about twothirds of total exports, registered an increase of 25 percent in 2002-2003. Receipts from other manufactured exports grew by almost 11

percent, with engineering goods, chemicals and pharmaceuticalproducts, petroleum products and sports goods showing high growthrates. Import expenditure, at US$ 12.2 billion in 2003, represented anincrease of 18.2 percent as compared with negative growth of 3.6percent in the previous year. Almost one fourth of imports consisted ofoil-related products, which grew by 9 percent in value owing to higheroil prices. Higher spending on non-food and non-oil imports, by almost22 percent in 2003, was instrumental in improving local production and

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manufacturing activities; notably, in this context, imports of machinerywere up by one third in 2003. Pakistan registered lower importexpenditure on food items, with the value of imported sugar andsoybean oil falling by over 90 and 70 percent, respectively. Meanwhile,a stronger expansion of export earnings in 2003 further lowered the

trade deficit to a 10-year low of US$ 1.1 billion and the current accountsurplus improved to 5.9 percent of GDP in 2003, from 4.8 percent inthe previous year, on account of a lower service account deficit plus asharp rise in current transfers inwards.

Iran had recorded a substantial rise in export earningsamounting US$ 28 billion of almost 18 percent in fiscal year 2002, asagainst a contraction of 16 percent for the previous year, because ofbetter oil prices despite a lower export volume in 2002. Earnings oncarpets, in particular, were also particularly strong. Oil and gasaccounted for around 80 percent of total merchandise exports whilenon-oil exports also registered higher growth in 2002. In dollar terms,the value of exports in fiscal year 2003 was estimated as remainingvirtually at the level attained in the previous year. A significant rise inearnings on non-oil exports helped to offset the somewhat smallerexports of oil owing to lower prices. Imports exceeding US$ 23 billionhad grown at a high rate, over 31 percent in 2002 on top of anincrease of over one fifth in the earlier year, as a result of buoyantdomestic demand, recent trade liberalization measures and a build-upof inventories in the period leading up to the Iraq war. In particular,some of the recent liberalization in the trade regime included theconsolidation of customs duty rates and other import charges and fees

into a single customs duty rate set at 4 percent, the elimination ofvarious exemptions from the customs duty and the ongoingreplacement of non-tariff barriers with tariffs plus a significantreduction in non-tariff barriers. Import spending on capital andintermediate goods constituted more than 80 percent of the total, andtotal imports continued to grow by an estimated 19.4 percent in 2003.Largely as a result, the current account surplus of 3.3 percent of GDPin 2002 turned into a small deficit in 2003.

Similarly, exports from Turkey staged a strong recovery andgrowing at the rate of 12.8 percent in 2001, expanded by about 15.1percent reaching US$ 36 billion in 2002. Manufactured exports,accounting for 93 percent of the total export value, consisted largely oftextiles and garments, construction materials, household appliancesand electrical goods, and motor vehicles and parts. The EU accountedfor just over a half of Turkeys exports while some 10 percent ofexports went to the United States. Despite a significant appreciation ofthe Turkish lira in real terms, the momentum of export growthcontinued into 2003 with earnings rising by over 29 percent. In Turkey,

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a rebound in import spending occurred in 2002 owing to strongergrowth in private consumption and gross fixed investment and tohigher prices of non-oil commodities. Imports increased even morerapidly at 24.5 percent to exceed US$ 51 billion in 2002, following asharp contraction of 24 percent in the previous year. The main

categories of imported goods were intermediate goods, including steeland plastics, electronic components, and oil and gas. Investment goods(mostly industrial machinery) accounted for around 17 percent of totalimports, and consumer goods another 10 percent. The main sources ofimports apart from the EU were the United States, Switzerland, Japan,the Russian Federation, and Saudi Arabia. Iraq has the potential tobecome a major trading partner of Turkey once the security situationimproves in Iraq and its economy starts functioning normally.Expenditure on imports continued to be on a rising trend in 2003 owingto a recovery in domestic demand and higher oil prices, surging bymore than 31.4 percent in 2003. Supported by tourism and inward

remittances from overseas workers, the external services accountregistered a substantial surplus. As a result of a large trade deficit,however, the usual deficit in the current accounts was projected to riseto around 3 percent of GDP in 2003.

Despite a narrow export base and lower oil prices, exportearnings in Kazakhstan rose from US$ 8.63 billion in 2001 to US$ 9.67billion in 2002. Among other major traders in the region such asTurkey, Iran, and Pakistan, Kazakhstan became the fourth biggesttrader country with total trade volume of about US$ 16 billion in 2002.Import spending increased by 2.1 percent in 2002 to US$ 6.5 billion.

The direction of trade was largely unchanged, with the RussianFederation being the largest trading partner of Kazakhstan, supplyingmore than half of the imports and taking over one fifth of the exports.Kazakhstan increased its trade surplus from US$ 3 billion in 2002 toUS$ 4.6 billion in 2003, owing to a significant gain in export receipts,which reached US$ 12.9 billion in 2003. Oil and gas accounted formore than one half of the countrys export earnings. Spending onimports led by greater imports of capital goods and constructionmaterials rose by more than 26 percent to reach US$ 8.3 billion in2003.

Azerbaijan ran a trade surplus of US$ 502.1 million in 2002,which was slightly lower than that recorded for 2001 (US$ 883.4million). In part, this decline was due to the strong expansion inimports (by 16.4 percent) in 2002 because of higher spending onmachinery and equipment used for the construction of two new oilpipelines. There was also a hike in food imports in response to risingdomestic demand, a development that partly reflected rising realwages in the oil and related sectors. However, there was a

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considerable fall of 6.3 percent in export revenue, from US$ 2.3 billionin 2001 to US$ 2.1 billion in 2002. This setback was due mainly tolower oil prices and the restrictive measures introduced in 2002 toprevent oil export leakages. The accelerating investment in andexpansion of the hydrocarbons sector of Azerbaijan also contributed to

deterioration in the trade balance. The trade surplus in 2002 became adeficit of US$ 34 million in 2003 despite an increase of about 20percent in export revenue (to US$ 2.6 billion) owing to higher demandfor oil and continued high oil prices. Oil exports accounted for nearlythree fifths of total export receipts although earnings from chemicalsand metals also grew rapidly as a result of the strong expansion in theindustrial sector. The most significant import items were machineryand base metals for the construction of new oil pipelines.

The value of Kyrgyzstans foreign trade grew by 13.7 percentduring 2002, to US$ 1,072.2 million. There was a marginal increase inexport earnings (by 2.0 percent), so that the large increase in importspending of about 25.6 percent contributed to a negative tradebalance of US$ 101.2 million. However, higher world prices for goldand several agricultural exports from Kyrgyzstan and a recovery inelectricity sales to neighbouring countries brought a modest pick-up inexport earnings to US$ 485.5 million for 2002 as a whole. In 2003, theimport expenditure of Kyrgyzstancontinued to exceed export receipts,a reflection of rising investment in the capital goods and gold sectors.Exports rose by 19.7 percent (to US$ 582 million) mainly due to arecovery in gold exports, but non-gold exports fell as electricity andagricultural exports shrank. Imports expanded by more than 22

percent (to US$ 717 million) in 2003, resulting in a widening tradedeficit from the US$ 101.2 million recorded in 2002 to US$ 135 millionin the following year.

Tajikistans trade deficit US$ 30.9 million recorded in 2001 wasturned to surplus to US$ 23.0 million in 2002. There was an increase of13.3 percent and about 4.8 percent in export revenue and importspending, respectively. Tajikistan relied heavily on imported energyand raw materials from CIS countries for its aluminium production.Aluminium and cotton remained the principal sources of exportearnings, accounting for up to seven tenths of total export earnings. In2002, trading activities benefited considerably from the resumption ofrail links with, and the lowering of transit tariffs in neighbouringcountries. The trade surplus of Tajikistan during 2002 again became adeficit of US$ 83 million in the following year because of a steep rise ofmore than 22 percent in import outlays compared with an expansion of8.3 percent in export revenue (to US$ 798 million) in 2003. Aluminiumcontinued to be the main export item, providing more than half of

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merchandise earnings, while cotton brought in another one fifth in thesame period.

Turkmenistan and Uzbekistan implemented their import-substituting industrialization policies in 2002 through the introductionof trade restrictions such as import licences, government certificates,and limits on hard currency sales. During 2002, import spending fromUzbekistan nevertheless rose by 1.2 percent owing mainly to anincrease in imported machinery and equipment, which accountedalmost for 44 percent of all imports of goods and services. Exportearnings marginally increased from US$ 3.14 billion in 2001 to US$3.18 billion in 2002, mainly owing to a decline in the value of cotton,food and energy exports. Trade liberalization (including through thereduction of customs duties and the promotion of cross-border trade)continued to be one of the main areas of focus of trade policy inUzbekistan in 2003. As a whole, the trade surplus was expected toreach US$ 422 million in 2003, with exported goods and services thusrising by just under 7 percent in 2003. The depreciation of the localcurrency contributed to an expanded external market for the countrysproducts, about two fifths of which (in terms of value) consisted ofmanufactured and finished goods from the import substitutingindustries. Meanwhile, there was only a modest rise in imports ofgoods and services, reflecting in part policy measures to conserve thestock of foreign exchange reserves.

Turkmenistan was developing its textile industry to raisedomestic employment and add value to cotton-processing capacityand manufacturing activities. However, the gas and oil sectors

remained the main contributors to export earnings, with a relativeshare of more than four fifths. Turkmenistans receipts from exportsrose by 9.0 percent to reach US$ 2.8 billion in 2002. The merchandisetrade surplus nearly doubled to US$ 1.27 billion in 2003 from US$ 736million in 2002. Exports surged by 30.3 percent to US$ 3.72 billion,largely on account of high world prices for energy products and cottonfiber. This was partly offset by a 15.6 percent rise in imports, whichreached US$ 2.45 billion. Reflecting the Turkmenistans policy toincrease exports with high value added, the share of petrochemicals intotal exports rose to 18.3 percent in 2003 from 14.2 percent in 2002,while the share of natural gas and crude oil fell to 58.6 percent from69.4 percent. At the same time, the commodity composition of importsdid not change significantly, with machinery and equipmentaccounting for about half of total imports.

Estimates of Afghanistans balance of payments suggest thatexports of goods totaled US$ 113 million in fiscal year 2001 and US$101 million in fiscal year 2002, with domestic exports, mainlyagricultural products, and carpets. Most of the re-exports, mainly from

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Iran to Pakistan to minimize import tariffs and domestic sales taxes,were unofficial. Re-establishment of an effective customsadministration may slow future growth in unofficial re-exports.

According to official records, Pakistan accounted for about aquarter of Afghanistans exports in fiscal year 2002, followed byFinland, Germany, and the United Arab Emirates. Imports of goodswere estimated at US$ 551 million in fiscal year 2001 and US$ 950million the following year. Higher import spending on machinery andequipment, automobiles and consumer goods reflects the revival ofprivate sector activity. Japan accounted for more than two fifths of theofficial import value, including re-exports, in fiscal year 2002, followedby the Republic of Korea and Pakistan. Although commodity food aidwent up from US$ 71 million to US$ 94 million in fiscal years 2001 and2002, it was expected to fall in fiscal year 2003 with higher productionof domestic cereals.

Although a number of restrictive rules and regulations remain inplace, Afghanistan now follows a very liberal trade regime with asimplified tariff regime to be in place by the end of 2003 and reform ofthe customs administration under implementation. There is virtually nocontrol on imports, exports, payments on invisibles and capitaltransactions in Afghanistan, and only a commercial licence, requiredfor all businesses, was necessary for engaging in external tradingactivities. While Afghanistan is a landlocked country dependent on itsneighbouring countries for access to the sea, it is also an importanttransit location for trade between Iran and Pakistan as well as between

Central Asia and the Indian Ocean. A feasibility study to run a naturalgas pipeline from Turkmenistan to Pakistan was being undertaken, andits construction could yield substantial transit and easement fees. Thequality of the transport infrastructure, security, and borderadministration, however, still needs to be improved. Normalization oftrade relations and discussion of new transit and trade agreementswith Iran, and Pakistan in 2003 together with other regional initiativeswas expected to lead to more transit trade.

FIGURE-2 ECO Countries Total External Trade ($ US mln)

0

20000

40000

60000

80000

100000

120000

1998 1999 2000 2001 2002

IMPORT

EXPORT

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During the five-year period (1998-2002) under consideration, thetotal merchandise exports of the ECO member states reached its peakof US$ 94.6 billion in 2002. The region dominated 1.47 percent and1.54 percent of the world merchandise exports and importsrespectively in 2002. The intra-exports in the ECO region accounted for

5.4 percent in 2002. The figures in Table-3 show that the average ratesof change in merchandise exports of ECO countries dropped sharply in1998 when most of the members experienced negative rates of growthin their merchandise exports reflecting the effect of the Asian crisis.However, the following years (except 2001) witnessed a strongrecovery in export performance when member countries registered thehighest average rates of change in their merchandise exports in 2002.After 1998, export performance of the region deteriorated again andexperienced negative rates of growth (1.1 percent) in 2001, affectedby the slowdown of world economy and the deterioration in worldcommodity prices.

In fact, despite that the ECO countries registered high averagerate of change in merchandise exports in 2002 (14.9 percent), regionsshare in the total merchandise exports of the world increased by amere 0.2 percentage point over the previous year. This means that theECO countries were, in general, unable to benefit enough from theworld trade output in 2002 and, consequently, from the enlargement ofworld trade by increasing their share in it. It is also observed that theexports of the ECO countries were heavily concentrated in Iran,Pakistan and Turkey. For example, these countries accounted for 79.7percent of the total ECO members exports in 2002, where Turkey

alone accounted for 38.1 percent.TABLE 3: ECO Trade (Billion US $)

1998 1999 2000 2001 2002Exports 59.3 68.7 83.2 82.3 94.6Imports

81.3 75.4 93.0 84.9103.3

Total Trade Volume140.6

144.1

176.2

167.2

197.9

Total Exports (Annual %change)

-11.2 16.0 21.1 -1.1 14.9

Intra-ECO Exports* 6.1 5.0 5.5 5.1 5.4

Intra-Trade Ratio* (%) 5.3 5.0 5.3 5.1 5.2

(*) Calculated without data of Afghanistan.Sources: ECO Secretariat database, International trade statistics 2002, WTO.

In general, the trend of export performance in the ECO regionduring the period under consideration can be explained, in part, by thenegative effects of the world recession that took place in the two-yearperiod of 1997-98 and particularly in 2001. It can also be explained, by

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the sharp fall in world commodity prices and the decline in officialfinancial flows to countries in the same period. However, in the two-year period of 1999-2000, the improved situation and recovery in theworld economy as well as the improvement in world commodity prices,particularly in 2002, positively affected the trend of export

performance.

The ECO member states had made efforts to promote intra-tradeand taken significant steps forward for improvement of regulatoryframeworks and removal of tariff and non-tariff barriers in the region. The regional intra trade situation is, however, far from satisfactorywhen compared to preceding year and the prospect of an imminentchange does not seem very likely unless private initiatives backed bypolitical will of the member states are given momentum. So far, thescope and depth of trade linkages served as the main channel oftransmission of external shocks between the member states. Total

intra-regional trade volume of ECO region (excluding Afghanistan data)in 2002 increased to US$ 10.2 billion from US$ 8.6 billion in 2001. Theintra-trade ratio of the ECO region (excluding Afghanistan data) in2002 alike the previous years could not overpass the threshold of 6.0percent.

According to 2002 statistics, the share of intra regional export ofPakistan was just 4.9 percent, Turkey 2.9 percent, Iran and Kazakhstan3.1 percent and 8.5 percent respectively. While for Azerbaijan itamounted 7.8 percent, for Turkmenistan 21.3 percent, for Kyrgyzstanand Tajikistan 22.3 percent and 26.6 percent respectively.

The import expenditure of ECO countries was deteriorating since1997, but reached its peak in 2002 with US$ 103.3 billion. While thisamount accounted for 1.54 percent of the total merchandise imports ofthe World, corresponded to an increase by 0.23 percentage point overthe previous year. In 2001, import performance weakened andamounted to US$ 84.9 billion.Overall, the ECO regions total trade datareveals a volume of US$ 167.2 billion in 2001. It accounted US$ 197.9billion in 2002, when compared to preceding year an overall increaseof 18.4 percent was observed in the total trade volume in the region.The ECO member states as a group recorded trade balance deficits inall the years over the period 1998-2002. The export/import rate of theregion recorded at 96.9 percent in 2001 and lowered to 91.5 percentin 2002. However, the export/import rate was the highest in 2001 butthe region had the lowest trade deficit in 2001 and amounted to US$2.5 billion, the figure for 2002 reached to US$ 8.7 billion in 2002.

FIGURE-3: Export/Import of ECO region (%)

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0

2040

60

80

100

120

1998 1999 2000 2001 2002

Concerning regional and global integration efforts, Pakistan,Turkey, and Kyrgyzstan are WTO members while other countries in theregion continued to negotiate WTO accession in 2003. At present,some 215 regional trade agreements (RTAs) and bilateral tradeagreements (BTAs) are operational in the world. By 2007, some 300such agreements are expected to be in force. Some 40 percent ofglobal trade is currently conducted within existing or emerging RTAs

and BTAs, and it is estimated that more than a half will be covered byRTAs by 2005. ECO countries have concluded and continuing to signBTAs, as part of a their trade trends. To this end, ECO members alsoadopted the ECO Trade Agreement (ECOTA) in second half of 2003 andagreed to consider the fast track approach which envisages bringingdown tariff to 10 percent in next five years. The said agreement wouldenhance the liberalization of regional trade by removal of regionaltrade barriers and encourage to increase the ratio of inter and intra-trade. At this point, it should be underlined that a key challenge forRTAs among developing countries has been the effectiveimplementation of their liberalization programmes. Experience shows

that the degree of implementation of such RTAs has been greater fortraditional and less sophisticated agreements focusing on trade ingoods than for agreements that seek deeper integration and coversuch issues as investment, competition policy and governmentprocurement. The latter type of agreements tend to lag behind theplanned time frame.

The widening, deepening and consolidation of regionalintegration among developing countries has had differing impacts onintra-group trade. Between 1990 and 2001, the share of such tradewithin the Southern Common Market (MERCOSUR) rose from 8.9

percent to 21.8 percent and was consistently between 20 and 25percent for Association of Southeast Asian Nations (ASEAN) countries,except during the Asian financial crisis. The ratio is less in the CentralAmerican Common Market (CACM) (15.0 percent), the UnionEconomique et Montaire Ouest Africaine (UEMOA) (13.5 per cent), theCaribbean Community (CARICOM) (13.4 percent) and the SouthernAfrican Development Community (SADC) (10.9 percent). AmongAfrican groupings, the shares of intraregional trade of the Common

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Market of Eastern and Southern Africa (COMESA), the CommunautEconomique et Montaire de lAfrique Centrale (CEMAC) and theEconomic Community of Central African States (ECCAS) were only5.2 percent, 1.3 percent and 1.1 percent, respectively, in 2001. For theECO region, it is expected that full implementation of ECO Trade

Agreement (ECOTA-2003) by member states would truly prove to be amajor step towards expansion in intra-regional trade which stood at 5.2percent in 2002.

5.Foreign Direct Investment and External Debt

In 2003, global FDI flows were about US$ 653 billion, similar to2002, suggesting a bottoming-out after the downturn from the peak ofUS$ 1.4 trillion in 2000. FDI inflows declined in 108 out of 195economies in 2002. The regional unevenness of flows in 2002continued into 2003. The main factors behind this downturn in FDIwere slow global economic growth, including the delayed recovery in

the major developed economies, lower corporate profitability, fallingstock market valuations, and the decline in privatization in somecountries. The continuing low number and value of cross-bordermergers and acquisitions (M&As) the key driving force behind globalFDI flows since the late 1980s contributed heavily to the stagnation inFDI. FDI flows are expected to rebound in 2004. The strengtheningglobal economy, improved corporate profitability, a recovery in M&Atransactions and growing investor confidence will all provide a stimulusfor FDI flows. Flows to individual countries, regions, and sectors willdepend on economic growth, corporate profitability and corporatestrategies, the scope for, and speed of, privatization and security and

safety considerations.

In the ECO member states, liberalization of laws and regulationson foreign investment continued and a series of steps were taken tosimplify various administrative procedures. FDI inflows to the region(Figure-4) boosted from US$ 4.5 billion in 1998 to about US$ 10 billionin 2001. All these served thus to support and accelerate financialstabilization process, development of domestic financial markets,resource exploitation activities and privatization programmes inseveral member states economies. Then again, FDI inflows to theregion slightly decreased and amounted to US$ 8.3 billion in 2002

attracting 1.3 percent of global FDI.

Considering the region with particular respect to member states,the capital account of the Iran registered a sizeable surplus with thecontinuation of sizeable FDI mainly in the oil sector. The new law forthe attraction and promotion of foreign investment, approved in June2003, introduced significant measures to liberalize investments in thenon-oil sector, thus attracting considerable interest from foreign

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investors. The country also returned to the international capitalmarkets in 2002, with the issue of two five-year euro bonds (worth 625million and 375 million euros), in part to serve as a benchmark for thecorporate sector of the country. FDI inflows into Iran have alsoremained on a relatively stable level for the last few years, which

amounted US$ 50 million in 2001, slightly decreased to US$ 37 millionin 2002.

Turkey received the highest FDI inflow in 2001 amounting to US$3,288 million, but in 2002 the figure fall sharply to US$ 590 million.However, in terms of FDI stock inward, Turkey with US$ 18.5 billion asof 2002 has the biggest share in the ECO region. Among the majorsteps carried out to promote external investment were constitutionalamendments to allow international arbitration, the approval of a newFDI law in June 2003 to improve conditions for foreign investments(replacing the earlier legislation which had been in place since 1954)and the establishment of an investment promotion agency. FDI flowsinto Pakistan increased significantly in relative terms with 18 percentof total inflows during the last 10 years (1993-2002). FDI surged byabout 100 percent, from US$ 485 million in 2001 to US$ 798 million in2002. About two thirds of such investment went to the oil and gas andpower sectors.

Despite a global decline in FDI, several economies of ECOcontinued to see strong capital inflows. The resource inflows wereuneven, however, with the oil and gas sectors in Azerbaijan,Kazakhstan, and Turkmenistan remaining the most attractive areas forFDI. The Kazakhstan economy was also driven by higher FDI in oil-

related production and export capacities. In 2001, for example, thecountry received the largest annual inflows since independence (morethan US$ 4.5 billion), with the stock of FDI estimated at US$ 13.7 billionfor the decade 1992-2002. The Law on Investment approved in January2003 was important in improving the investment climate inKazakhstan. The legislation included the best clauses of the previousinvestment law together with additional provisions based oninternational experience relating to foreign investment. Turkmenistancontinued to receive FDI in its main economic sectors: hydrocarbons,construction, and textiles. To some extent, however, exchange raterestrictions and a business environment not yet fully conducive toforeign investors hampered such inflows. The peak inflows intoTurkmenistan, with a high of US$ 233 million being recorded in 1995.After the fall of FDI in 1998, inflows were steadily rising until 2002,when they fell by one third to a value of US$ 100 million.

Export-oriented gold mining was another attraction for FDI in theregion. Particularly, foreign investment was considered vital for thedevelopment of the economy and export activities in Kyrgyzstan. In

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2002, the country was the destination of US$ 116 million of FDI, withthe large bulk of this external resource used for the development ofgold mining in Kumor. In 2003, a new assistance programme forKyrgyzstan, amounting to US$ 171 million in credit, was approved bythe World Bank to foster the development of private sector activities,

including small businesses in the energy, agricultural and agro-processing sectors, among other focal areas.

Generally, in 2002, FDI flows to Tajikistan and Uzbekistan totaledsome US$ 434 million and US$ 81 million respectively. Most of FDI inTajikistan went into the mining and textiles sectors, representing 42percent and 45 percent of FDI stocks respectively. Azerbaijan was thedestination during 2002 for US$ 2,012 million of FDI, used mainly forthe construction of new oilfields and pipelines. This, in turn, provided astimulus to domestic investment, which rose by more than 70 percentin 2003, with nine tenths of capital investment going to the oil and gassectors. FDI accounted for about 85 percent of the total fixed capitalformation in Azerbaijan and it was expected to reach US$ 10 billionover the next 3 years, an amount that about doubled the FDI receivedby the country during 1996-2002.

FDI inflows into Afghanistan continue to be minimal, althoughthey rose temporarily from nearly nothing to US$ 1 million in 2001,following the end of the war. Although financial inflows intoAfghanistan were largely in the form of bilateral grants and highlyconcessional loans, the amount pledged to cover reconstruction inAfghanistan was relatively low, compared with the amount pledged toother post-conflict countries in recent years. In terms of aid per capita

per year, Afghanistan received US$ 67 during 2002-2003, as againstUS$ 256 in the case of Timor-Leste during 1999-2001. During thoseperiods, aid approached only 40 percent of Afghanistans estimatedGDP but exceeded 60 percent of Timor-Lestes. Preliminary needsassessment for the donor conference for Afghanistan held at Tokyo inJanuary 2002 estimated a total of US$14.6 billion would be required tounderpin economic and social recovery, excluding humanitarianassistance, over 10 years with US$ 4.9 billion for the first two and ahalf years. At the conference, pledges were made for US$ 4.5 billionover the first five years and US$ 2.1 billion in grants during the first 15months. Of these amounts, over US$ 1.8 billion in grants and US$ 100million in loans were disbursed, but two thirds of the disbursed amountwas dedicated to humanitarian assistance. Very little of the amountdisbursed in fiscal year 2002 went to the government budget in viewof its limited administrative capacity at the level of the line ministries.

FIGURE-4: FDI and Total External Debt of ECO countries (Billion US$)

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0.0

50.0

100.0

150.0

200.0

250.0

1996 1997 1998 1999 2000 2001 2002

0.0

2.0

4.0

6.0

8.0

10.0

12.0

External Debt FDI

The debt service burden on the member countries continued tobe heavy and total regional debt increased from US$ 170.5 billion in1999 to US$ 182.0 in 2000, and further increased to around US$ 204.5billion in 2002, thus pressure on the balance of payments increased.

Kazakhstan, Kyrgyzstan, Tajikistan, and Turkey had relatively highdebt-to-GDP ratio levels of more than 60-70 percent in 2002. Most ofthe debt was owed to multilateral lenders, such as IMF and the WorldBank, plus the Paris Club of international creditors. Turkmenistan isalso among the bilateral lenders, mainly through their energy exportsto other countries. The external debt of the country amounted to US$2,303 million in 2000. The restructuring of Kyrgyzstans foreign debtby the Paris Club in March 2002 not only alleviated a potential debtpayment crisis in 2003 but also improved the prospects for economicgrowth in the country. The total external debt compared to 2002increased by US$ 238 million and amounted to US$ 1,754 million by

the end of 2003.

In Iran, external debt fell by 11 percent to US$ 7.2 billion in2001. The ratio of outstanding external debt to GDP dropped from 6.1to 5.0 percent in 2000-2001. The amount of external debt of Iran hasincreased, totaling about US$ 9.2 billion or just 8 percent of GDP infiscal year 2002. Of the outstanding debt, about 23 percent was short-term. External debt was expected to rise marginally in 2003 along withthe projected current account deficit in the balance of payments. Anincrease in non-debt-creating external flows, the Paris Club debtrestructuring, and a debt write-off of US$ 1 billion significantly

improved the debt profile of Pakistan in 2003. External debt amountedto US$ 29.8 billion in 2002-2003 as a percentage of GDP decreasedfrom 46 to 42 percent compared to previous year. Retirement of someexternal debts and the replacement of expensive debt by soft loansfrom international financial institutions have helped in reducing debtservicing costs.

By contrast, Turkeys external debt has risen steadily, reachingUS$ 131.2 billion or 72.3 percent of GDP in 2002 compared with US$

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113.8 billion in 2001. Medium and long-term foreign debt (contractedlargely by the public sector) was put at US$ 116 billion or about 88percent of the total, and short-term debt at US$ 15.2 billion, the latterwas held almost entirely by the private sector.

The substantial FDI inflows also enabled Azerbaijan andKazakhstan to reduce their foreign debt burden. In net terms, the lattercountry did not have external debt as most of the external obligationsconsisted of intra-company loans in the energy sector. Kazakhstansexternal debt was increased from US$ 15.1 billion in 2001 to US$ 18.2billion in 2002. External resource inflows, including new bond issues,were expected to help to diversify the economy away from its heavyreliance on hydrocarbon resources. The foreign debt of Azerbaijan wasabout US$ 1.4 billion in 2002 increased from a gross external debtposition of US$ 452 million in 1996.

Tajikistan succeeded in reducing its foreign debt in 2002, from

US$ 1.2 billion (or 124.2 percent of GDP in 2000) to US$ 982 million (or81 percent) at the end of 2002. Moreover, the Government had alsoreached an agreement with the Russian Federation on restructuring itsUS$ 300 million debt over a 3-year period. The foreign debt ofKyrgyzstan, which amounted to more than 100 percent of GDP in 2001-2003, was expected to reach $1.7 billion in 2003. Improvements infiscal policy and revenue generation would help to reduce publicborrowing from the present level of 8 per cent of GDP per year to 3 percent in the medium term.

Uzbekistan had a relatively strong position in servicing their

external debt owing to the strong export performance by the formercountry, and large resource inflows. Uzbekistan stabilized its foreigndebt stock, which accounted for about 45.6 percent of GDP in 2002.Afghanistans national development budget for fiscal 2003 includesUS$ 1.8 billion of humanitarian and reconstruction projects to befinanced by donor grants but commitments were US$ 500 million shortof that amount. International assistance over the next several yearsneeds to be in the form of grants in order to avoid future debt-servicing difficulties; relief of existing claims and regularization ofrelations with all creditors were essential to ensure the sustainability ofdebt-service payments.

6. Prospects for the ECO Regional Economy in 2004-2005

The economic recovery in ECO region, which was weakened in2001 (1.1 percent), strengthened considerably in 2002 (7.3 percent)making it the one of the most dynamic regions in the world. Buoyantgrowth in the ECO countries represents an impressive turnaround afterthe 2001 slowdown. ECO countries as a group are growing faster than

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the global economy as well as some other groups of countries.Progress is being made on both fronts as can be seen in the decliningrates of inflation, lower fiscal deficits and improved current accountpositions. This progress is providing greater stability in exchange ratesand a more stable environment for investment, both domestic and

foreign. However, institutional progress has been slower and moreuneven, especially in the financial sector, a key interface between thereal economy and the saving and investment decisions of individuals.Although substantial imbalances remain in the world economy, growthin major industrial countries is projected to be quite robust, while ECOcountries, the improved external environment, combined with high oilprices, strong domestic demand and buoyant intraregional trade, willallow the region to grow in 20042005 at annual rates similar topervious year. Particularly, the oil and gas sector will continue to drivegrowth in the hydrocarbon-producing countries of ECO such asAzerbaijan, Iran, Kazakhstan, and Turkmenistan.

The economies of ECO countries generally showed significantresilience in 2003. Despite the war in Iraq and outbreak of the severeacute respiratory syndrome (SARS) epidemic, developments of thecountries in the ECO region in 2002-2003 and the first quarter of 2004show that the economic fundamentals of the region are strong.Domestic demand has been picking up. In this context, it is worthnoting that avian influenza impact on regional growth was modest ashappened with SARS in 2003.

Prospects for 2004 are for an easing of the collective growth rateof the region. The outlook for Iran for fiscal year 2004 is favourable,

the investment and growth momentum under the impetus of theeconomic reforms of the past few years is expected to sustain theexpansion in both oil-related and non-oil activities and hence indomestic demand to underpin projected GDP growth at around 7percent in 2004. Depending on the realization of the hopes for peace,security, and further stability raised by the adoption of the Constitutionand on the success of the national elections planned for 2004, 20percent GDP growth in fiscal year 2003 for Afghanistan is predictabledriven by continued strong growth in agriculture and donor finance-induced growth in services and construction. Turkeys economy isexpected to come up against sluggish growth in the EU, its principaltrading partner. In Turkey, output expansion is expected to be robustat around 10 percent in 2004, with the agricultural sector making somegains over the previous year but GDP growth projected to stand around5 percent in 2005. Pakistan could expect a slight improvement ofeconomic growth to 5.3 percent in 2004 (the Governments strategy isto expand aggregate output further to 6 percent in a couple of years).Economic growth in the other member states of ECO, by and large, was

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expected to moderate somewhat in 2004-2005 mainly due to aweakening of external stimuli, including less buoyancy in the exportprices for natural resources. Meanwhile, the economies of Kyrgyzstanand Tajikistan are expected to be affected by limited investment andsluggish domestic demand. Thus, GDP growth could decelerate to 4.1

percent in 2004 and pick up somewhat to 4.5 percent in 2005 inKyrgyzstan, and about 8 percent in 2004 and about 5 percent in 2005as the recovery phase is completed in Tajikistan. GDP of Azerbaijan isprojected to grow by 9.0 percent in 2004 and by 12.5 percent in 2005,based on oil sector projects and price of crude oil. Although preliminaryestimates for GDP growth in Kazakhstan is at 77.5 percent in themedium term, but rising exports of oil from a new hydrocarbon-bearingarea at Karachaganak and Kashagan and continued high investmentcould push up GDP growth to 9.5 percent in 2005. GDP growth isexpected to remain buoyant in Turkmenistan, at around 10 percent peryear in 20042005, driven largely by continuing expansion of

production and export of energy products. In Uzbekistan GDP growth isprojected not to improve significantly from the 2003 rate of about 4percent, although the outturn in 2004 could be slightly higher at about4.5 percent if the global recovery and buoyant import demand inUzbekistans main marke

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