CAREC Institute’s Quarterly Economic Monitor No. 21

The CAREC Institute has published its latestQuarterly Economic Monitor. Main conclusion about the region’s economic performance in the first half of 2026: The CAREC region is experiencing growth divergence, inflation pressures and re-orientation in trade flows.

• Divergent Growth Paths: Growth remains highly uneven across the region. The fastest-growing economies—the Kyrgyz Republic, Georgia, and Uzbekistan—are expanding rapidly, buoyed by strong remittances, active market reforms, and major infrastructure investments. In Uzbekistan, structural reforms like tax simplification and public service digitalization have successfully reduced the informal economy. The People’s Republic of China (PRC) and Kazakhstan continue to post stable growth supported by resilient exports and industrial expansion, while Turkmenistan’s growth is driven by robust capital investments and a strong services sector. Conversely, Azerbaijan experienced moderate economic contraction, constrained by geopolitical risks, high external debt, narrow industrial base, and external economic shocks.
• Persistent Inflationary Pressures: High domestic demand, wage growth, rapid credit expansion, and higher fuel prices have kept inflation elevated. The regional median inflation reached 7.2% year-on-year (yoy) in June 2026, with four countries, including Pakistan, Mongolia, Kyrgyz Republic and Kazakhstan experiencing double-digit inflation. External supply shocks, particularly geopolitical tensions in the Middle East, have spiked global energy and commodity prices, heavily impacting oil-importing countries. In response, central banks in the region are adopting divergent policies: some are raising policy rates to anchor inflation, while others are cutting rates to stimulate growth.
• Reshaping of Trade and the Middle Corridor: Volatile energy prices and geopolitical realignments are reshaping regional trade dynamics. Some net energy exporters have registered widening trade surpluses, whereas energy-importing nations face mounting trade deficits. These shifts have accelerated the rise of the “Middle Corridor” as a primary transit route between Asia and Europe. However, trade competitiveness remains hampered by border closures, sanctions-related payment hurdles, and rising shipping costs.
• Investment and Capital Flows: The region remains a net recipient of foreign direct investment (FDI), primarily directed toward natural resources and renewable energy. While official reserves serve as the primary buffer against external shocks for most CAREC members, the PRC, Georgia, and Kazakhstan exhibit highly diversified external assets. In contrast, Mongolia’s heavy reliance on debt financing highlights a vulnerability shared by several leveraged economies in the region.
• Improved but Divergent Outlook: International financial institutions (IFIs) have raised the average real GDP growth forecast for the CAREC region to 5.1% for 2026 and 4.9% for 2027. However, this positive outlook is highly uneven: upward revisions for the Kyrgyz Republic and Uzbekistan reflect strong early-year performance, while growth projections for oil-exporting nations have been trimmed due to Middle East geopolitical risks and volatile global energy markets.

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