Relations with the international
financial institutions and the EU: economic conditionality
79. The direction of economic policy in each of the
countries has been heavily influenced by their relationships with
the international financial institutions: by the extent to which
they take advice, and the extent to which they receive aid. We
heard from Mr Hannan that:
"... The Kyrgyz Republic,
one of the poorest of these states,...is absolutely dependent
upon the IMFand, to some extent, the EU.....[Aid dependency]
is much less striking in the case of some of the other states..."
We discuss above the EU's aid programmes to the region.
There are also large bilateral programmes in some of the countries:
for example, the US Embassy in Yerevan told us that the US provides
$143 million per year to Armenia. The Know How Fund (KHF) has
small programmes in all of the countries of the region, ranging
from £1.5 million in Kazakhstan to £0.2 million in Turkmenistan.
The focus of aid to Tajikistan has been humanitarian rather than
technical, with several million pounds contributed through the
EU, the UN and the Aga Khan Foundation.
80. Asked whether the aid flows to the region had
been well spent, Mr Hannan told us:
my specific involvement in the water side of things, there was
a lot of money poured into...Central Asia specifically, because
of the Aral Sea crisis...a lot of that money was not put to good
use....we studied the Aral Sea at great expense; and in the end
all we have come up with is that if we had put more water into
the Aral Sea it would have been better, which we probably could
have said from the beginning."
The FCO informed us that "DFID are supporting
international efforts to assist with Kazakhstan's two major environmental
disasters: the shrinkage of the Aral Sea due to environmental
mismanagement in the Soviet era and health problems in and around
the Semipalatinsk nuclear test range."
We discuss the water crisis facing the region above.
81. Apart from the direct benefit of aid, the promise
of assistance can also be used to influence policy-making in recipient
countries. We discuss below the human rights commitments within
the Agreement Establishing the EBRD.
The Agreement also requires the Bank to support development only
in countries "committed to and applying the principles of
There are elements of economic conditionality in the programmes
of other international financial institutions, but no conditionality
based on political criteria (at least explicitly). With reference
to Uzbekistan, the World Bank has agreed with the Uzbek Government
to commit only modest financial resources, given the Government's
present limited reforms: however, if the Government were to implement
broad-based policy reforms, the financial support would increase
In contrast, the World Bank's Country Assistance Strategy for
Tajikistan states that the trend toward improvement in the country
merits its expanded support and adds that without its support
the trend cannot remain positive.
82. Similarly, conditionality in the IMF's programmes
focusses on economic and financial issues.
All of the countries of the region bar Turkmenistan and Uzbekistan
have agreements with the IMF, which include commitments to a range
of liberalisation and stabilisation measures: for example, Armenia's
letter of intent of 18 December 1998 includes a commitment to
a budget deficit target.
We heard in Turkmenistan that the IMF had offered the Turkmen
Government a first-phase assistance package of £35 million.
However, the two parties had not been able to agree on the conditions
to be attached to this package. Turkmenistan has pleaded the effect
of external factors on its economy, but the IMF believes that
improvements can be made in the areas of transparency and sound
fiscal management. No agreement seems likely in the short term.
While there is some criticism in the region of the effect on ordinary
people of IMF austerity programmes, a matter raised with us in
Armenia and Georgia, the two countries without IMF programmes
are not performing notably better than those countries with programmes.
83. For the EBRD, there appears to be no correlation
between the amount of money allocated to a particular country
and the extent to which it applies principles of market economics.
For example, in 1998, greater funding was allocated to Uzbekistan
than to Kazakhstan or Tajikistan, and almost as much as to the
Kyrgyz Republic, the most liberal of the Central Asian economies.
Turkmenistan also receives considerable funding (see below, Table
7), despite the fact that the EBRD classifies the country as having
a trade and foreign exchange system characterised by "widespread
import and/or export controls or very limited legitimate access
to foreign exchange."
In fact, the EBRD states that "as part of its mandate, the
EBRD is committed to operating in all 26 of its countries of operations,"
apparently ruling out the use of any conditionality. This requirement
to operate in all 26 countries is an interpretation of the Agreement
Establishing the EBRD, but it is not clearly stated in that Agreementcertainly
not as clearly as the commitment to operating only in countries
which apply the principles of market economics.
84. This approach presents two problems. Firstly,
EBRD projects may be wasting money by investing in countries where
the economic system is highly distorted (for example, the renovation
of the port at Turkmenbashi in Turkmenistan will not achieve its
potential while the Turkmen currency is artificially fixed at
a rate which will prevent trade developing.). Secondly, efforts
by the international community to influence the policies of governments
in the region will be less effective, as the EBRD appears to undertake
projects regardless of the economic (or indeed political situation.
There are some indications that the EBRD may be shifting its stance.
The Chief Economist of the EBRD, Nicholas Stern, was quoted as
saying that as the region's largest investor, the EBRD had the
clout to "be more vocal."
But this is not sufficient. We believe that conditionality
is most effective when donors coordinate policies. We recommend
that the Government should use its position within the EBRD to
ensure that the EBRD does not spend money in countries which do
not have programmes agreed with the IMF and World Bank.
85. Until the Russian crisis of August 1998, trade
between the United Kingdom and the countries of the region was
growing fast, albeit from a small base. As Table 3 demonstrates,
our exports are around a third of those of France and Germany,
although higher than those of Italy. These trade figures need
to be treated with some caution: for example, Armenian government
figures show a much higher level of trade, routed through Moscow
and Rotterdam, than UK government figures.
We were informed by British Invisibles that, as far as the service
industries of its members were concerned, "unlike 'visible'
exports, there are no comprehensive statistics, official or otherwise,
to record [the growth in trade]."
Exports from selected European countries
to Central Asia
and the South Caucasus (1997) (£000s)