The Caucasus and Central Asia will see "strong" economic growth this year, but the struggles of the Russian and Chinese economies will provide a drag, the International Monetary Fund forecast in an economic outlook update released on May 6.
"Economic growth in the Caucasus and Central Asia (CCA) is expected to decline to 6% in 2014 from 6.5% in 2013, mainly because of sharply weaker activity in Russia and other emerging markets," the IMF said in its CCA Regional Economic Outlook Update. Slower growth prospects in the region's main trading partners - Russia, China, and Turkey - are likely to affect exports, foreign direct investment, and remittances.
However, the slowdown in Russia remains the main risk, the international lender warns. "Geopolitical risks related to the Russia/Ukraine crisis may also affect the CCA through a gamut of trade, remittance, and financial channels, as well as possible disruptions in production or transportation of commodities," it adds.
Along the same lines, "a temporary decline in oil output growth in Kazakhstan will also affect the region's economy in the near term," the report suggests, referring to the delay of production at the giant Kashagan offshore field. Both operator NCOC and the Kazakh government admitted in April that production will not resume this year. The government is now trying to persuade other oil producers to help make up for the shortfall.
Yet in light of the risks emanating from the Ukraine crisis, Kazakhstan is in a privileged position compared with many of its peers. The report notes that gas- and oil-importing countries in the region - Armenia, Georgia, Kyrgyzstan and Tajikistan - have low fiscal and external cushions. "This dearth of buffers would make it difficult for these countries to avoid an adjustment in the event of a large shock," the IMF says.
The report recommends countries launch reform to ward off the potential ill effects - a common thread through IMF reports of all shades. It calls for fiscal consolidation to "improve debt sustainability, increase resilience to shocks, and preserve wealth for future generations".
"CCA countries could also do more to strengthen monetary policy frameworks - such as providing greater independence to central banks, improving national statistics, and increasing transparency," the IMF recommends. "These steps would help reduce inflation volatility."
Inflation across the region is expected to rise by 1.5 percentage points to 7.5% in 2014-15, mainly on the back of the recent currency depreciation in Kazakhstan and strengthening domestic demand in Georgia. "In countries where inflation is expected to stay within central bank target ranges, monetary policy can remain at a neutral setting," the IMF said. "But the region's central banks should stand ready to tighten policy if inflation pressures build up more quickly than expected."
"The region could also strengthen financial regulatory and supervisory policies to ensure the continued soundness of its financial institutions - especially in the current environment of rapidly expanding consumer credit," the IMF recommended.
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