Governments in the Caucasus and Central Asia (CCA) should embark on policies and structural reforms to improve economic prospects as the region heads for its weakest growth in nearly two decades, the International Monetary Fund (IMF) said in a report released on October 21.
Low commodity prices and slowdown in key economic partners, such as Russia and China, continue to weigh on growth in Eurasia with GDP expected to slow down to 1.3% in 2016, lower than at any other year since 1998. This growth is particularly being weighed down by the region’s oil exporters – Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan that are facing growth of 1% this year, down from 3.1% seen in 2015. At the same time, the region’s oil importers –- Armenia, Georgia, the Kyrgyz Republic and Tajikistan - are forecast to grow at 3.7%, unchanged from 2015.
Specifically, Azerbaijan and Kazakhstan are pulling the region's oil exporting economies down, with both economies expected to shrink by 2.4% and 0.8% respectively in 2016. On the other hand, Turkmenistan and Uzbekistan are forecast to post GDP growth of 5.4% and 6%, respectively. Among oil importers, Tajikistan is projected to register the strongest growth of 6%, ahead of Georgia at 3.4%, Armenia at 3.2% and Kyrgyzstan at 2.2%
The CCA countries have been using a mix of public spending and currency adjustment to cope with the falling commodity prices and the economic slowdowns in key trading partners, IMF notes. Public debt has increased and weak revenues led to widening of budget deficits some 6.4 percentage points of GDP between 2014 and 2016. While currency adjustment and increased exchange rate flexibility helped cushion shocks on external and fiscal balances, the adjustments led to a rise in inflation, hurting the regions highly dollarised financial sectors. That caused downward pressures on asset quality, and lower bank lending and borrowing.
The region is being held up mainly by external factors only intensifying the need for further monetary and financial policy actions, as well as key structural reforms, Deputy Director of the IMF’s Middle East and Central Asia Department, Juha Kahkonen said while presenting the fund’s regional economic outlook. “The protracted nature of these shocks underlines the pressing need to diversify these economies away from their dependence on remittances and commodity exports, so they can more effectively cope with the kinds of economic challenges they’re currently facing,” Kahkonen added.
“For these countries, the immediate priorities are to direct what spending is available toward pro-growth areas—such as education, training, and health care. At the same time, these countries need to prepare and implement medium-term fiscal consolidation plans to preserve fiscal space,” Kahkonen said.
IMF urges policymakers to strengthen their monetary policy frameworks by enhancing the independence of central banks and by adopting credible nominal anchors. There is a need to bolster policies on financial sector oversight and crisis management, IMF said. “All these actions will help to support growth in the near term, while boosting competitiveness and keeping inflation and debt levels in check,” Kahkonen noted.
The IMS is also calling on CCA countries to strengthen governance, accountability, property rights, and financial intermediation - all of which are areas the region lags behind other emerging markets. “The success of these measures will allow the region to enjoy more sustained and inclusive growth, which will improve living standards and lower poverty rates,” Kahkonen concluded.
Looking ahead, CCA growth is projected to improve in the coming years, but the IMF expects that recovery to be slower than either of those that followed the 2009 global financial crisis and the 1998 Russian financial crisis. “Should that happen, the region could see growth in its living standards decelerate over the medium term compared with other emerging markets and developing economies,” the fund said.