Eurasia adjusts to the “new mediocre”

By bne IntelliNews April 23, 2015

Naubet Bisenov in Washington, DC -


With the Caucasus and Central Asia among the regions of the world expected to post the slowest growth in 2015, the countries are facing an enormous task in adjusting to what the International Monetary Fund (IMF) calls a “new mediocre” of growth. The IMF says it stands ready to extend a helping hand should the region’s economies need assistance.

For Caucasian and Central Asian countries that are feeling the pain of the regional geopolitical tension and the slowdown in the region’s main trading partner Russia, “the basic message is that they are going through a more difficult period than they have faced since the global financial crisis in 2008 and 2009,” Masood Ahmed, director of the IMF’s Middle East and Central Asia Department, said as part of his presentation of the “Middle East and Central Asia Economic Outlook Update” made during the IMF/World Bank Spring Meetings in Washington in April. “They have been hit by some very large shocks, and it has made the economic management much more challenging for them.”

Growth in the Caucasus and Central Asia is expected to fall from 5.3% in 2014 to 3.2% in 2015, according to the IMF. This is a downward revision of 2.4 percentage points relative to its October 2014 forecast. “The decline is projected as a result of spillovers from Russia (through remittances, trade, and foreign direct investment) and lower prices for oil, metals, and minerals,” the update says. Russia, it forecasts, will see its economy contract by 3.8% against the October forecast of 4.25% due to the oil price slump, tighter financial conditions, international sanctions and weaker confidence.

In the region’s largest economy, Kazakhstan, the IMF predicts the economy will grow by just 2% in 2015, which is 3 points lower than its October forecast, because of lower oil prices and production delays at the giant offshore Kashagan oilfield and weakness in the global economy, despite a government stimulus programme. The Kazakh government predicts the country’s economy will grow even less, by 1.5% in 2015, National Economy Minister Yerbolat Dossayev told a panel during the Spring Meetings. The minister said an oil price hovering between $50 and $60 a barrel was still high compared with the $10 seen in the late 1990s – a boon for a country where oil and gas accounts for 70% of export earnings and 35% of national income. Dossayev told bne IntelliNews the government hoped that commercial production would start at Kashagan in “the last quarter of 2016” and insisted the project would still be “profitable” at the current oil price, because the cost of producing at the field was “$45 per barrel”.

Taking steps

The IMF believes that that faced with spillover effects from Russia, the Caucasus and Central Asian governments should implement counter-cyclical fiscal policies, “if fiscal space, available financing and the external position permit”. “These countries should generally allow greater exchange rate flexibility supported by appropriate macroeconomic and structural policies and, if necessary, further depreciation to minimise loss of reserves and the erosion of competitiveness.”

Exchange rate flexibility will help economies adjust to adverse shocks in the long run and tighter monetary policy will be needed to address inflationary pressures stemming from currency depreciation, according to the IMF. In the medium term, the region’s oil and gas exporters – Kazakhstan, Azerbaijan, Turkmenistan and Uzbekistan – should recalibrate their fiscal consolidation plans, as the price of oil could stay low, with priority given to “reining in hard-to-reverse current expenditures, widening tax bases, and strengthening tax administration”. At the same time, oil importers – Armenia, Georgia, Kyrgyzstan and Tajikistan – should resume fiscal consolidation to rebuild buffers as soon as cyclical conditions allow. “Structural reforms in governance, corruption, education, and the financial sector need to be stepped up to diversify economies, improve the business climate, and enhance financial intermediation.”

The IMF’s Ahmed believes that the region has been affected by “two large shocks”, with one being international (the low price of oil, strong dollar and weak ruble and the other being regional) and the other regional (the slowdown in Russia). “We also see increased pressures on exchange rates that have already led to significant currency depreciation in a number of these countries,” Ahmed said. “And I will say that the balance of risks even to this lower outlook is tilted to the downside, and risks come from possibly continuation of the regional slowdown in some of the trading partners, China, Russia, the euro area.”

The persistent low price of oil and a faster-than-expected tightening of global financial conditions will not only affect the region’s macro economies, but they will also impact the financial sector and the banks, so it's important to manage them as well, the IMF director for Central Asia argued.

While oil exporters are using the financial buffers that they built up during the years of high oil prices to weather short-term shocks, in the medium term they need to bring their spending more in balance with what they can sustainably afford, Ahmed said.

Help if need be

The countries that significantly depend on remittances sent home by migrant workers in Russia – Armenia, Tajikistan, Kyrgyzstan and Uzbekistan – will see their growth fall by about 1.5 points due to the weaker ruble, while “their fiscal and current accounts are also feeling the strain”. “So for them, the need will be to try and adjust to this new reality […] and we in the international community, and the Fund can provide support on it,” Ahmed said. “And for them, also, the challenge is to then move forward with improving their competitiveness so that they can create jobs for young people, and to do this, through a series of reforms that will improve the business environment for the companies working in the Caucasus and Central Asia.”

Asked by bne IntelliNews whether remittance-dependent countries could ever rid themselves of their dependency on Russia, at least in terms of remittances, Ahmed said that they could do it as “their economies grow and they create more jobs, so the share of and reliance on remittances becomes lower”.

Ahmed said the IMF could, in turn, help these countries reduce their dependence on remittances via three vehicles that the fund offers. “One is that we can provide them with the technical assistance which shares the experience of other countries as they have tried to deal with improving their business climate or improving their macroeconomic framework,” Ahmed said. “Second, we work with them in terms of providing surveillance, which is looking at a health check of their economy every year, as a way of also identifying any risks that they face and how to manage them. And third, we help them by providing financial support where there is a need for financial support to help overcome the shocks, and right now, in the countries of the Caucasus and Central Asia, we have financial support being provided through national programmes that the countries have come up with in Armenia, in the Kyrgyz Republic and in Georgia – so three out of the countries that I mentioned, we already have programmes of financial support. For the others, it's through the technical assistance and the advice.”

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