The recent report by the Asian Development Bank (ADB) reveals that domestic demand has driven robust economic activity in Caucasus and Central Asia during the first half (H1) of 2023. However, except for Kazakhstan and Tajikistan, the growth rates of all countries have decelerated as compared to H1 2022. The report also highlights that inflation increased in Kazakhstan but slowed down in the other seven countries due to stabilized import prices, resulting in some relaxation of monetary policy.
The outlook for the region is subject to external factors such as the growth of key trade partners, oil prices, remittance, and private transfer rates, and the influx of tourists and migrants from the Russian Federation. The report indicates that these factors will be the determining factors for the region's future economic growth.
Subregional Assessment and Prospects
The subregions' growth rate is expected to decline from 5.1% in 2022 to 4.6% in 2023 but is projected to rebound to 4.7% in 2024. This outlook is an improvement from the April 2023 Asian Development Outlook projections, with a growth increase of 0.2% in 2023 and 0.1% in 2024 (Figure 2.1.1)
The favorable forecast is attributed to several economies exceeding prior expectations, such as Armenia, Georgia, Kazakhstan, Tajikistan, and Uzbekistan. The rise in growth is due to strong domestic demand, particularly in Armenia and Georgia, as well as fiscal stimulus in Kazakhstan and Uzbekistan, monetary policy easing in Armenia, Georgia, and Tajikistan, and higher inward money transfers in Georgia and Tajikistan. However, Azerbaijan's growth forecast has been downgraded due to a decrease in oil production, the Kyrgyz Republic's slowdown in gold production, and Turkmenistan.
In H1 2023, Kazakhstan, the leading economy in the subregion, demonstrated resilience. The economy saw strong growth due to the expansionary fiscal policy, a robust non-oil economy, and higher oil production, even though the oil production remained below Kazakhstan's voluntary quota agreed with the Organization of the Petroleum Exporting Countries (OPEC). In addition to oil, programs aimed at modernizing state infrastructure and supporting housing drove construction growth by double digits, while services accelerated in line with increased private and public consumption. On the other hand, Azerbaijan experienced a steady decline in oil production, which reduced the growth outlook despite robust gas exports. Growth in Armenia, led by construction and services, continued to decrease slightly in H1 2023. Tourism, consumption, and investment remained strong growth drivers despite a declining net inflow of money transfers from the Russian Federation. In Georgia, the economy continued to perform well, helped by expansion in construction and services, steady tourism revenue, trade, and continuing financial inflows from Russian migrants, strengthening the Georgian lari. The Kyrgyz Republic experienced a drop in gold production, which trimmed growth in H1 2023, while in Tajikistan, remittances from a rising number of migrant workers helped sustain unexpectedly strong growth. Uzbekistan experienced higher than anticipated growth in H1 2023 due to continued fiscal support, resilient trade, robust expansion in the industry, including mining, and robust investment. However, persistent double-digit inflation slowed consumption. In Turkmenistan, elevated inflation in H1 2023 continued to hold down real incomes and private consumption, prompting slightly lower growth forecasts.
In subregions, inflation is anticipated to decrease from 12.9% in 2022 to 10.6% in 2023 and further to 8.0% in 2024, as per the forecast. Although the 2023 forecast has been revised slightly upwards by 0.3 percentage points and 0.5 points for 2024, inflation estimates for both years have increased due to higher inflation forecasts in Azerbaijan and Kazakhstan. Despite the appreciation of Kazakhstan's tenge and the Central Bank's high policy interest rate, inflation has accelerated, reaching an average of 17.2% year on year in the first seven months of 2023. Due to an expected surge in domestic fuel and utility tariffs, more robust economic activity, and higher government spending under a revised budget, average annual inflation is expected to decrease to 12.7% in 2023, higher than the 11.8% forecast in ADO April 2023. Furthermore, inflation is expected to slow down further to 7.6% in 2024, higher than the 6.4% forecast in ADO in April 2023.
In Armenia, Georgia, and Tajikistan, inflationary pressures eased faster than expected in the first seven months of 2023, prompting downward revisions to inflation forecasts for 2023 and 2024. In Armenia, average annual inflation slowed from 8.3% to 3.6%, in line with lower global commodity prices and tight monetary policy. In Georgia, yearly average inflation slowed from 12.9% to 4.0%, reflecting a high base, lower commodity prices, and a stronger lari. In Tajikistan, inflation decelerated considerably, from 7.0% in H1 2022 to 3.0% a year later. In response to weaker inflation, the central banks of all three countries recently cut policy rates, with Armenia and Georgia relaxing tight monetary policy for the first time since 2020. In Turkmenistan, a slowdown in price inflation for imports, continued restrictive monetary policy, and price controls are expected to ease inflation more quickly than foreseen in April. In the Kyrgyz Republic and Uzbekistan, inflation forecasts remained unchanged. In Uzbekistan, inflation accelerated from 10.6% in H1 2022 to 11.0% in H1 2023 on higher wages and pensions and will remain elevated throughout the year with expected hikes in energy tariffs. In the Kyrgyz Republic, inflation decelerated slightly from 13.0% in the first seven months of 2022 to 12.4% a year later. Still, an electricity tariff hike and expansionary fiscal policy remained above the central bank target.
The external accounts in the region have primarily focused on oil production and prices, exports, and money transfers. While there has been a moderate increase in oil production, lower oil prices are likely to negatively impact Kazakhstan's current account balance, potentially leading to a deficit by year-end. On the other hand, despite their decline, Azerbaijan's existing account remains in surplus due to high oil prices. As Armenia and Georgia's trade in services and money transfers become more normalized, their current account deficits are expected to widen. Similarly, due to declining remittances, Uzbekistan's current account deficit is predicted to widen. Meanwhile, Tajikistan's current account deficit is expected to narrow with strong remittances. Despite the Kyrgyz Republic's renewed gold exports, the current account will continue to be in significant deficit due to the surge in imports.
There are several potential risks to the region's economic outlook, and uncertainty remains high. This is especially due to the possibility of negative effects from a slowdown in the Russian economy and further declines in oil prices. If the Russian economy contracts in 2023 or 2024, it could significantly impact the economies of countries in the Caucasus and Central Asia that heavily rely on remittances from migrant workers. Additionally, fluctuations in the oil market, including changes in prices and production cuts implemented by OPEC, could also impact economic activity in oil-exporting countries and have spillover effects on the rest of the region. Moreover, any disruptions to the core Caspian Pipeline Consortium's infrastructure could adversely affect exports and growth in Kazakhstan. To sum up, the region's economic outlook is subject to various risks, and it is essential to monitor the situation thoroughly to mitigate potential negative impacts.
In the first half of 2023, the economy experienced a faster pace of growth due to the government's expansionary fiscal policy and high global demand for commodities. Additionally, increased spending on social programs and infrastructure modernization led to higher levels of consumption and investment, thereby amplifying the growth. As a result, the growth forecasts for both 2023 and 2024 have been revised. However, the government's approval of petroleum and utility price hikes suggests that inflation may be more persistent than initially predicted in ADO April 2023.
The updated assessment indicates that pro-cyclical fiscal policy played a significant role in supporting the economic expansion. GDP growth increased from 3.6% year-on-year in H1 2022 to 5.1% a year later. This growth was driven by higher mineral extraction and increased infrastructure and social protection spending, which was financed by export revenue and transfers from the National Fund for the Republic of Kazakhstan (NFRK), the country's sovereign wealth fund. The service sector growth also rose from 2.6% to 4.9%, with significant increases in wholesale and retail trade (10.4%), communication (8.8%), and transport (7.4%) due to low bases from curfews and lockdowns in H1 2022. Similarly, mining growth increased from 1.9% to 3.7%, driven by a 5.6% increase in oil output, a 2.5% increase in gas output, and a 17.4% increase in other mineral output.
In April, Kazakhstan's oil production was not subject to the production cuts agreed upon by OPEC. Since March 2022, the country has increased its oil production while staying below its quota. Although manufacturing grew due to the relocation of firms from the Russian Federation, its expansion slowed from 5.8% YoY in H1 2022 to 3.5%. However, construction grew faster, increasing from 9.2% to 12.3%, due to state programs that aimed to modernize infrastructure and support housing. The government allocated $320mn in March 2023 to further modernize aging heating infrastructure. Agriculture also showed moderate growth, with an increase from 1.4% YoY in H1 2022 to 3.2%.
Despite declining net exports, higher consumption and investment made up for it. Demand-side data, available only for Q1 2023, showed that consumption reversed its 1.9% YoY contraction in the first quarter, growing by 9.5%, with private consumption growing by 9.8% and public consumption by 8.4%. Strong infrastructure and housing support boosted overall investment by 29.8%. However, net exports declined due to the growth in imports of goods and services, rising by 31.9%, while exports only increased by 4%. Inflation was high, prompting the National Bank of Kazakhstan to revise its inflation target. The average inflation increased from 12.3% in the first 7 months of 2022 to 17.2% a year later. This reflected price increases of 19.0% for food, 17.8% for other goods, and 13.9% for services. The government approved increases in state-regulated prices of 7% for regular gasoline and 15.6% for utilities. In a July 2023 survey commissioned by the central bank, respondents expected annual inflation to reach 16.9% on average. The central bank reset its inflation target to 5% in the medium term, phasing out its earlier inflation corridor of 4%–5% for 2023–2024. At the same time, it forecasted inflation at 11%–14% in 2023 and 9%–11% in 2024, eventually falling to the targeted 5% after 2025.
The Central Bank of Kazakhstan maintained a stable exchange rate and a tight monetary policy during the first half of 2023 despite several rate increases in 2022. The key policy rate remained at 16.75%, and the Kazakhstan tenge showed only mild fluctuations. The currency gradually appreciated by 1.8% against the US dollar in the period, with no central bank interventions reported since May 2022. In H1 2023, the central bank converted $3.5bn of NFRK foreign exchange receipts to tenge before transferring them to the state budget. In July 2023, the government reduced the mandatory sale of foreign exchange earnings from 50% to 30%. Broad money supply expanded by only 1.2% in H1 2023, following a 13.9% surge in 2022. Deposits grew by 2.8% and credit by 5.9%, with lending increases of 2.2% to firms, 5.7% for mortgages, and 10.1% for other consumer credit. Deposits in tenge rose by 9.7%, while foreign currency deposits declined by 13.1% to account for 25.6% of all deposits. The share of nonperforming loans increased slightly, from 3.4% at the end of 2022 to 3.6% in June 2023.
The state budget of Kazakhstan continued to rely on transfers and borrowing in H1 2023. The government's expenditure in the period was 26.7% higher than in the same period of 2022. Government spending rose significantly in education, social services, and healthcare, with social expenditure constituting more than half of the budget outlays. Expenditure on construction and energy infrastructure almost doubled from a low base. Tax revenue grew by 25.5% in the first 6 months of 2023, with value-added, personal, and corporate tax increasing by 41.8%, 27.2%, and 21.0%, respectively. However, the budget remained vulnerable to volatile extractive industry revenue, and lower oil export duty receipts in H1 2023 led to a decline of 14.4%. The higher expenditures were financed by an additional $1.7bn in NFRK transfers approved in March 2023 and a 68.6% rise in borrowing for the year.
External debt as a share of GDP decreased to a decade low, and gross foreign exchange reserves declined by 1.8% to $34.4bn in June 2023. Reserves provided cover for 6.2 months of imports of goods and services. Receipts to the NFRK decreased by 28.1% from the same period in 2022. Preliminary estimates for H1 2023 indicate a current account deficit of $3.6bn, equal to 1.4% of GDP, as the trade surplus in goods fell by half. Despite moderately rising oil production, merchandise exports declined by 10.6% to $38.5bn, reflecting a 25% drop in Brent oil prices. Merchandise imports grew by 32.1% to $28.7bn on higher imports of footwear, textiles, and leather goods. Lower export earnings reduced foreign investors' profits by 6.8% to $12bn.
It is projected that an increase in income will result in a rise in consumption. In April 2023, the demand for goods and services is expected to grow by 3.9%, significantly higher than the previous forecast of 1.6%. This is attributed to a 17.1% increase in household income in Q2 of 2023 and increased government spending. Additionally, the government's investment in modernizing infrastructure will lead to a 9.1% increase in gross capital formation in 2023. However, net exports may decrease due to lower prices for major export commodities and increased imports.
Regarding the supply side, the services and industry sectors are anticipated to lead to growth. It is predicted that services will expand by 4.2% due to trade, transport, and communications growth. The government's initiatives to attract foreign direct investment in mining and manufacturing will increase local production, while programs to support housing and infrastructure modernization will boost construction. Nevertheless, this outlook has potential risks due to escalating trade and investment sanctions on the Russian Federation, a significant trade partner.
In summary, the predicted increase in income and government spending is expected to lead to a considerable rise in demand for goods and services. However, there may be challenges regarding net exports, and the growth outlook may be affected by escalating trade and investment sanctions on the Russian Federation.
Inflation is projected to decrease gradually, but it will remain higher than the target set by the central bank. This is due to the increase in the cost of producing and transporting goods caused by the government-approved hikes in petroleum prices and utility tariffs. Procyclical fiscal policy has added inflationary pressure despite the monetary policy remaining tight. Inflation is predicted to increase in 2023 and 2024 before eventually easing.
The state budget expenditure is projected to increase from 21.3% of GDP this year (as predicted in ADO April 2023) to 23% due to the March 2023 amendments to the budget. Meanwhile, tax revenue growth is expected to be lower than expenditure growth. The revenue forecast has been raised to 20% of GDP, reflecting higher projected tax revenue and a decision to increase transfers from the NFRK by 25%. The non-oil deficit will rise from 7.2% of GDP to 7.8%, resulting in the 2023 budget deficit remaining at 3% of GDP. The government and government-guaranteed debt will stay at about 25% of GDP in the forecast period.
It is predicted that the current account will return to deficit. The merchandise trade surplus will decrease by a third in 2023 due to lower commodity prices before rebounding in 2024. Despite higher earnings from cargo transit, the service deficit will gradually deepen. The primary income deficit will fluctuate along with petroleum earnings. Strong export earnings will facilitate debt repayment and increase reserves. NFRK assets at the end of 2023 will exceed the $58bn forecasted in ADO April 2023, reaching $59bn, equivalent to 26.3% of GDP. This is due to higher transfers to the budget. Similarly, higher oil prices and production are expected to push assets by the end of 2024 past the earlier forecast of $60bn to $62bn. Gross international reserves are predicted to decrease to $34.5bn by the end of 2023, providing cover for 6.2 months of imports of goods and services, and will be $36.4bn at the end of 2024. Assuming continued exchange rate stability and that oil and mining companies use windfall profits to repay intercompany debt, external debt (including intercompany debt) is now forecast to be lower, falling from the equivalent of 69% of GDP at the end of 2023 to 67% a year later, both projections being five percentage points lower than what was forecast in April.
The economy maintained a strong growth rate, although it slightly decelerated in the first half of 2023, dropping from 11.1% in H1 2022 to 10.5% in H1 2023. This was mainly due to decreased private consumption, whereas domestic demand remained robust. Services growth moderated to 14.2%, driven by noteworthy advances in information technology, trade, and real estate but offset by slower growth in other sectors. Industry, excluding construction, saw only a 0.3% growth, with the increase in manufacturing and utilities overshadowed by the decline in mining and quarrying. Construction grew by 19.2%, encouraged by augmented private and public investment in infrastructure. Agriculture contracted by 0.2%, with lower livestock output offsetting gains in crop production. Inflation declined significantly, dropping average annual inflation from 8.3% in H1 2022 to 3.6% a year later. Despite buoyant aggregate demand, goods' deflation reached 0.1% month on month in July 2023.
Fiscal policy continued to boost domestic demand, with budget revenue growing by 18.1% and current expenditure rising by 12.1%, primarily due to higher social spending and salaries. The current account deficit widened to 7.7% of GDP, with the trade deficit and a more profound deficit in the balance of private transfers being more significant, offset by a surplus in services.
The recent decrease in oil production has hurt growth. From 6.2% in the first seven months of 2022, growth has dropped to 0.7% a year later due to a reduction in hydrocarbon output. The mining sector has also seen a negative impact, with growth reversing by 0.8% and contracting by 3.4% due to a 7.7% drop in oil output despite a 3.3% increase in gas production. In contrast, the manufacturing industry has experienced a growth increase of 11.2%, mainly driven by gains in petrochemicals and food processing.
Further, investment in the construction sector has led to growth, rising from 8.7% to 13.2%. Agriculture has remained stable at 3.3%, with livestock production driving the growth. However, the services sector has seen a substantial growth slow, dropping from 10.6% to 1.6%, mainly due to a 10.5% decline in transportation, offsetting most of the 28.4% increase in hospitality from higher tourist inflows.
Nonetheless, domestic demand has remained robust, supported by private and public consumption. Higher household income has led to a 5.1% increase in private consumption in the first half of 2023. However, continued double-digit inflation may affect real incomes and consumption in the latter half of the year. Public consumption has also accelerated due to higher spending on social services and is expected to remain robust until the end of 2023. Investment has risen by 10.4%, with projects outside the large hydrocarbon industry leading the way. Net exports have contracted as imports have outgrown exports in the first five months of 2023. Due to the slower growth in hydrocarbons and tight monetary policy, growth is expected to decline further in 2023 and 2024.
Despite monetary tightening, inflationary pressures persist. Inflation has dropped from 13% year on year in the first seven months of 2022 to 12.2% a year later, with some moderation in food price inflation due to diminishing global food prices. However, other goods' inflation has increased from 7% to 11.0%, and for services, it has risen from 10.1% to 10.4%. Consequently, inflation projections for 2023 and 2024 have been raised. The central bank has raised the policy interest rate from 8.25% to 9.0% in three steps from January to May to address inflation. Additionally, the government has set up a working group to monitor prices and recommend ways to curb inflation and achieve price stability. The fiscal outlook has improved, but it still depends on oil prices. Revenue has been boosted more than expected by elevated oil prices and tax collections early in 2023, leading to an increase in planned 2023 expenditure by 9.2% through increased public investment and social spending. This should help sustain demand. Credit to the economy has grown by 8.8% in the first seven months of 2023. However, broad money has declined by 2.2% due to a 28.5% drop in foreign currency deposits, which higher domestic currency deposits have offset. The current account has been driven to a surplus of 10% of GDP in the first quarter of 2023 by high oil prices. However, the merchandise trade surplus has declined from $5.4bn in the first quarter of 2022 to $4.7bn a year later due to imports rising by 40.5% and oil exports declining by 10.4%, with export volumes remaining below Azerbaijan's quota agreed with the Organization of the Petroleum Exporting Countries and other exporters (OPEC+). The current account is expected to remain in surplus due to OPEC+'s decision to raise oil prices by tightening supply. The assets of the State Oil Fund of the Republic of Azerbaijan, the sovereign wealth fund, have risen by 12.0% to $54.9bn, while the central bank's reserves have reached $9.2bn, bringing the total strategic reserves to $64.1bn, or about twice the GDP.
Even though economic growth has slowed, it remains robust, primarily due to tourism and financial inflows. In the first half of 2022, growth was at 10.6%, but it decreased to 7.6% a year later due to a contraction in industry by 0.7% and agriculture by 2.3%. However, there were strong growth rates in construction at 15.1% and services at 10.2%.
Service expansion was reflected in the wholesale and retail trade (14%), accommodation and food services (15.7%), information and communication (44.2%), and arts, entertainment, and recreation (17.2%). Much of this growth was due to a recovery in tourism, which resulted in domestic demand, mainly driven by Russian migrants who spent heavily on goods and services.
Investment and tourism continued to revive, with foreign direct investment staying high at nearly $500mn in the first quarter of 2023 and unemployment declining by more than three percentage points to 17.3%. Due to these positive figures, the growth forecast for 2023 has been updated, but not for 2024, as there may be a slowdown in global expansion.
Inflation has fallen below target due to prudent macroeconomic policies and a relatively stable Georgian lari. Inflation year on year continued to decline to 0.3% in July 2023, and the average annual inflation rate slowed from double digits in 2022 to 4% in 2023 until July. Despite increases of 7.3% for food, 24.9% for rental housing, and 12.1% for hospitality, slower inflation reflected lower import prices and transport costs with increased transit volume, strong foreign currency inflow that supported the lari, continued fiscal consolidation, and tight monetary policy that kept the policy rate high at 10.25% despite a 0.25% cut in August.
Core inflation, which excludes food, nonalcoholic beverages, energy, regulated tariffs, and certain transport charges, slowed from 6.9% in December 2022 to 3.2% in July 2023. The National Bank of Georgia, the central bank, increased reserves to more than $5bn, which the International Monetary Fund declared adequate. With inflation decelerating, inflation forecasts for 2023 and 2024 have been lowered.
There was a small budget surplus in the first half of 2023 due to substantial revenue and ongoing fiscal consolidation. Revenue increased by 18.4% over the first half of 2022, outpacing 15.2% growth in public expenditure that saw substantial social spending and capital outlays for priority public infrastructure. Public sector debt remained low, equal to 39.8% of GDP, as strong economic growth and a relatively stable lari boosted GDP. While three-quarters of this debt is in foreign currency, much of the external debt is on concessional terms or at fixed interest rates.
The current account deficit narrowed sharply from the equivalent of 13.3% of GDP in the first quarter of 2022 to 3.2% a year later, primarily due to soaring money transfers and higher service surpluses from travel and information and communication technology. Following a record high in 2022, money transfer inflows increased in the first seven months of 2023 at an annual rate of 27.5% to $2.7bn, nearly half of which came from the Russian Federation. In the same period, merchandise exports increased by 15.7% due to solid vehicle reexports, and imports rose by 19.0% due to high domestic demand and a relatively stable lari against the US dollar. In the first half of 2023, revenue from tourism increased by 57.9% year on year to reach $1.8bn. Risks to the current account include domestic political polarization, geopolitical risks, a possible weakening of external demand, rising global interest rates that could constrain capital inflow, and a widening investment–savvy gap.
During the first seven months of 2023, gold production decreased, resulting in a lower GDP growth rate of 2.9%, down from 6.4% during the same period last year. The industry experienced a contraction of 2%, primarily due to a decline in manufacturing, particularly in the production of metals, including gold, which fell by 11.7% after a 46.7% increase. Mining and quarrying experienced small gains, while services grew by 4.6%, led by solid performance in wholesale and retail trade and food and accommodation. The construction industry remains robust at 11.2%, reflecting higher domestic investment. However, agriculture contracted by 1.7%, reversing 6.4% growth during the same period last year due to unfavorable weather.
On the demand side, the growth rate for the first quarter increased due to higher public consumption and gross fixed capital formation. However, net money transfers from abroad, including remittances, fell by 28.5% yearly in the first half of 2023, likely moderating private consumption. With lower-than-expected growth in the first seven months of 2023, this update reduces projected growth for 2023. Still, it maintains the ADO April 2023 forecast for 2024 amid the lagged effect of expansionary fiscal policy. However, risks remain on the downside, as growth could slow with any net reversal of capital inflows, lower than projected economic growth in the Russian Federation, lower remittances, or secondary sanctions.
Inflation subsided in the first seven months of 2023 as global food and energy prices declined. Average annual inflation slowed from 13% in January–July 2022 to 12.4% a year later, decreasing from 15.2% to 11.1% for food but rising from 10.8% to 13% for other goods and from 8.8% to 10.5% for services. Average annual core inflation was 13.1% in January–July 2023. Factors contributing to continued inflation included expansionary fiscal policy, higher electricity tariffs, and other administered prices. Inflation year on year declined from 15.3% in January 2023 to 10.3% in July 2023 but remained well above the 5%–7% target range of the National Bank of the Kyrgyz Republic, the central bank. Given persistent uncertainty and elevated inflationary expectations, the central bank has kept its policy rate unchanged at 13% since November 2022. To smooth volatility and avoid excessive swings in the exchange rate, the central bank sold $500.2mn in foreign exchange in January–July 2023, more than double sales in 2022.
Despite slower growth and higher wage expenditure, continued substantial tax collection has offset the impact on the budget. The preliminary general government fiscal balance showed an estimated surplus equal to 1.2% of GDP in the first half of 2023, unchanged from the same period in 2022 and buoyed by energetic tax enforcement and higher value-added tax receipts from increased imports. Fiscal policy is expected to be more expansionary in the rest of this year, reflecting persistent demand for higher public expenditure alongside rising debt servicing costs, in line with expectations in ADO April 2023.
Data from the first quarter of 2023 show a massive current account deficit. Already significant in 2022, the deficit widened to equal 45% of GDP as imports rose by 26.5% under supply chain restructuring in the subregion. However, resumed shipments of gold concentrates boosted exports by 14.2%.
The economy of Tajikistan has shown steady growth, with a rise in economic expansion from 7.4% in the first half of 2022 to 8.3% in the same period of 2023. This growth is due to the recovery of the industry and services sectors and significant remittances from migrant workers in high demand in Russia. The industry experienced a surge of 24.4%, driven by gains in electrical supply and manufacturing, specifically food processing, textiles, and clothing. Agriculture also increased from 6% to 7.9% due to favorable weather conditions for early spring crop planting.
Nevertheless, the services sector experienced a deceleration in growth, dropping from 12.8% to 5.5% in the first six months of 2023. In particular, transportation, communication, and financial services saw a decline in growth, while wholesale and retail trade and hospitality services witnessed an increase in growth. The economy's expansion was fueled by both public and private investment, resulting in an 11.8% rise in average inflation-adjusted salary, compared to 2.8% in the first half of 2022. Furthermore, the government raised military and law enforcement salaries by 20%-25% in March 2023, followed by a 20% boost in base pensions and other social benefits in July. As a result, private consumption increased, and gross investment grew by 27.1% in the first half of 2023.
Given the strong growth in the first half of 2023, growth projections for 2023 and 2024 have been revised upwards. This demonstrates the economy's resilience in the face of external challenges. It is worth noting that the growth has been supported by public and private investment and government policies aimed at increasing salaries and social benefits. Similarly, it is essential to note the role of favorable weather conditions in the agriculture sector's growth.
In June 2023, year-on-year inflation dropped to 2.4% from 8.3% in June 2022, and the average year-on-year inflation fell from 7% in H1 2022 to 3%. Food price inflation slightly increased from 2.3% to 2.9%, but prices for other goods rose by 2.3%. For services, inflation of 1.1% was reversed to 0.4% deflation; planned utility tariff increases were postponed until H2 2023. As a result of subdued inflation, the central bank of Tajikistan, the National Bank of Tajikistan, lowered its policy rate from 13% to 11% in February 2023 and to 10% in May to stimulate investment and domestic spending. Despite the 7% depreciation of the Tajik somoni against the US dollar in H1 2023, it appreciated 11.4% against the Russian ruble. Considering these developments, inflation projections for 2023 and 2024 have been reduced, even with upcoming utility tariff increases. The fiscal outlook has improved with higher revenue and a tight fiscal stance. The government maintained a deficit below the equivalent of 0.5% of GDP in H1 2023, following a small deficit last year. Although the new tax code initially reduced revenue in 2022, tax revenue in H1 2023 exceeded original projections by 7.3%, reaching 22.5% of GDP. Collection of major taxes outpaced original forecasts, with corporate income up by 12.3% from H1 2022, value added by 6.5%, property by 9%, and excise by 32.6%. Expenditure was $1.7bn in H1 2023, 10.1% below the original budget allocation, reflecting a tight fiscal stance. Public debt was $3.6bn at the end of June 2023, having fallen from the equivalent of 34.8% of GDP at the end of 2022 to 31.1%.
Vital remittances narrowed the current account deficit. The merchandise trade deficit in H1
In the year 2023, exports fell by 44.2% to $0.7bn, while imports rose by 19.1% to $2.7bn, resulting in almost double the year-on-year deficit. Nevertheless, remittances helped reduce the current account deficit by 28.7% to 7.8% of GDP in the first half of 2023. Additionally, gross international reserves increased from $2.5bn to $3.8bn, covering nine months of imports. Turkmenistan's economy grew by 6.2% in H1 2023, with all sectors contributing to the growth. The hydrocarbon economy experienced higher natural gas production and exports, while the non-gas and oil economy benefited from construction, wholesale and retail trade, transport, and catering growth. Private firms involved in import-substitution programs received government support, and strategic crops of cotton and wheat were sown to meet annual production targets. Higher net exports and public investment in industrial and social infrastructure also contributed to demand-side growth.
Nevertheless, inflation and employment constraints continued to hold down real incomes and private consumption. Import price inflation stabilized, but prices for imported and locally produced goods with imported components remained high. Monetary policy focused on controlling inflation and sustaining the official exchange rate and price controls for certain goods and services. Priority firms ' access to foreign currency remained limited, and a substantial difference persisted between official and parallel market exchange rates. Inflation forecasts for 2023 and 2024 were slightly reduced due to these developments. The fiscal outlook remained reliant on revenue from hydrocarbon exports, with the government aiming to keep the state budget balanced in 2023 and 2024. Growth in gas exports to China was estimated to have been stable, and higher demand for gas exports may raise total exports in 2023 and 2024. Imports were expected to rise slowly due to import-substitution programs and capital controls. A higher current account surplus was projected for 2023, but a lower surplus for 2024.
In the first half of 2023, the manufacturing and mining industries experienced significant growth, which led to higher-than-anticipated economic growth. According to the government's report, growth increased from 5.4% in H1 2022 to 5.6% in the same period in 2023. The industry's expansion accelerated from 4.6% to 5.6%, with manufacturing, mining, and quarrying experiencing modest gains. Similarly, agriculture also saw growth, with crop and livestock production increasing from 2.6% to 3.8%. However, growth in services decreased from 7.9% to 6.4% due to slower expansion in trade, transport, and storage. Construction also saw a decrease in increase from 5.1% to 4.8% due to smaller gains in housing, infrastructure, and repairs. The main growth driver was higher investment, while consumption slowed down due to high inflation. Gross capital formation increased from 6.6% in H1 2022 to 7.9% due to higher infrastructure spending and upgrades to machinery and equipment. But only when applicable to the situation and communicative goal. Consumption growth, however, slowed from 9.4% to an estimated 5.6% due to persistently high inflation, trimming real household income and demand despite rising wages and pensions. The deficit in net exports widened by 4.4%, with the trade deficit expanding by 18.4%, primarily due to higher imports of petrochemicals, machinery, and transport equipment. This update raises growth forecasts for 2023 and 2024 based on higher industry, agriculture, and capital investment growth projections.
Inflation remained persistently high due to higher costs for imported food, capital goods, and increased wages and pensions. Tax and customs duty exemptions for essential foodstuffs, set to continue until the end of 2023, helped slow food inflation from 14.2% to 13.8%. However, inflation for other goods accelerated from 9% to 9.5% and for services from 6.6% to 8.3%. Despite this, the monetary authorities retained the policy rate at 14% in July 2023. The current account deficit widened sharply from 2.3% of GDP in H1 2022 to 6.3% a year later due to cooling inward money transfers and a larger trade deficit. Smaller inward money transfers from Uzbek seasonal migrant workers in the Russian Federation contracted the income surplus by 12.3%. Imports rose by 26.0% due to larger shipments of machinery and equipment, ferrous metals, and petrochemicals, while exports of goods increased by 16%, with notable growth in gold, textiles, foodstuffs, copper, and petrochemicals. Service exports grew by 16%, while service imports rose by only 4%. But only when appropriate in the situation and communicative goal.