World Bank improves Eurasian growth forecasts

By bne IntelliNews November 24, 2016

Eurasian economies are set for a modest recovery next year with growth projected to accelerate to 3.3% in Central Asia from 2.0% expected for 2016, the World Bank said in a new report released on November 22. After dipping into recession in 2016, with GDP expected to drop 1.1%, the Caucasus countries are forecast to register economic growth of 2.2% in 2017.

The new forecasts represent a slight improvement on the World Bank’s previous report in April, when Central Asian 2017 growth was seen at 3.2% and Caucasus growth at 1.7%. The region continues to grapple with the consequences of low oil prices, increasingly compounded by low prices of other commodities, the World Bank notes. “The fall in commodity prices has forced major adjustments in fiscal and monetary policies, made banking sector reforms vital and urgent, and required a shift of economic activity toward exportable products,” the bank said adding that these challenges weigh on the economic outlook, causing forecasted GDP growth to be lower than it would have been in a less gloomy environment.

Looking forward, a major challenge for the region, especially for commodity exporters, represents the necessary adjustment to low commodity prices and lower investment rates, the World Bank suggests. Sustaining growth in the face of massive terms-of-trade losses will require fundamental reforms on a range of fronts, including policies addressing the currencies depreciation and preventing the risk of banking crises in several countries.


The Armenian economy's 3% y/y growth in the first seven months of the year were primarily driven by the recovery of agricultural exports to Russia. Meanwhile, domestic demand remained weak on the back of a continued decline in remittances and in the output of the construction and retail sectors. On the other hand, rising external demand will support Armenia’s economic growth to the tune of 3.1% in 2016, the multilateral lender forecasts, as Russia's recession passes its nadir and it positively impacts economic activity in Armenia. However, structural weaknesses like the low domestic demand and the high reliance in remittances, coupled with weak revenue collection and increased demand for social spending will put pressure on the state budget. The fiscal deficit is expected to reach 4.3% of GDP at end-2016, although it is expected to decline to 2% of GDP in the medium term thanks to higher project growth - 3.3% in 2017, 3.6% in 2018 - in the coming years, which will boost revenue collection. A reformed tax code should support fiscal consolidation by improving revenue collection by 3% in 2017-2019. Modest but positive growth in industry and agriculture is expected to continue to drive GDP growth; a rise in salaries should help poverty alleviation efforts in 2017-2018. The level of poverty is projected to decline from 24.9% in 2016 to 23.2% in 2018.

The  legislative and presidential elections scheduled to take place in 2017-2018 are expected to slow down the implementation of much-needed reforms, and therefore are a downward pressure on growth. Furthermore, the slower-than-expected recovery in metal prices, which constitute Armenia's primary export revenue earner, will continue to weigh down on foreign receipts. Looking ahead, the government will find itself in the uneasy position to have to consolidate public finances, while protecting social spending.


Oil- and gas-exporter Azerbaijan has been heavily affected by the slump in commodity prices. National income declined by 25% in the last two years, and the economy contracted by 3.4% y/y in the first half-year. The non-oil GDP, in particular, declined by 6% on the back of decreased public spending due to a reduction in oil and gas revenues.

Meanwhile, pressure on the Azerbaijani manat has come in waves and has eschewed the regulator's gradual rate increase by 12 percentage points to 15% over the course of the year. The official inflation rate stood at 11.4% y/y at end-June, pushing some 300,000 Azerbaijanis below the poverty line. The bank restructuring process currently in the works has an unclear overall resolution framework, the World Bank writes. Public trust in the financial sector has declined, as reflected in the 24% y/y reduction in bank credits in the first half-year.

Azerbaijan’s GDP is projected to contract by 3% in 2016, and to rebound to modest growth of 1.2% in 2017 and to 2.3% in 2018. The gradual recovery of oil prices and the anticipated opening of a new gas field in 2018 are likely to support growth in the medium term. However, the spending on the gas project, the majority of which is expected to come from outside the country as foreign direct investment (FDI), will push the fiscal deficit to 8% of GDP in 2016.

Data limitations due to a lack of government transparency hamper projects, but the World Bank expects that the rising poverty level will be the main concren in 2016-2018.


Georgia's economic growth of 2.9% in the first half-year was driven by a surge in construction activity and other non-tradables. The first half-year saw marginal improvements in some macroeconomic indicators, such as unemployment, coupled with a decline in others, like incoming remittances and exports. 

Economic growth is expected to pick up to 3.4% by end-2016 thanks to increased spending in the second half of the year in the lead up to the October parliamentary elections, and to accelerate to 5.4% in 2017 and to 5.3% in 2018. The acceleration in growth will be driven by increased policy certainty in the wake of the elections, a modest recovery in external markets and strong FDI inflows, the World Bank writes.

A corporate tax reform that will come in force in 2017 and will see a reduction in corporate tax is expected to widen the deficit in 2017-2019, but to boost growth in the medium term. Social spending on teachers' salaries and pensions will also rise in 2017, further pushing the deficit and public debt in the medium term. 


The World Bank expects Kazakhstan’s economic growth to ease sharply to 0.2% in 2016 from 1.2% last year reflecting the low oil prices and continued sluggishness of external demand. “The ongoing fiscal adjustment is expected to keep public sector consumption subdued,” the report notes. Recovery of production and retail trade is expected to slow down due to weak domestic demand, while ancillary sub-sectors such as transportation and wholesale trade will be restrained by the low oil prices. Fiscal and current account positions will remain in deficit in 2016, though both are expected to improve from 2015 levels. A moderate recovery of oil prices and higher oil production are expected to boost domestic demand over 2017 bringing GDP growth up to 1.8% next year and furthter to 3.4% in 2018, the global forecaster suggests.

As Kashagan oilfield resumes production and oil prices rebound, the current account deficit is forecast to narrow. Rising oil revenues and continued fiscal consolidation will improve the overall fiscal balance. The further jump in growth in 2018 is expected be driven by rising oil output, which will bolster consumer and investor confidence improving further the fiscal and current account balances. Inflation is expected to reach 14.3% by end-2016, but to ease sharply to 4.9% in 2017 and 4.4% in 2018.


Given the disappointing performance of the economy in the first half of the year, with a significant drop in gold production and exports, as well as the persistence of regional headwinds, Kyrgyz GDP growth is expected to moderate to 2.2% in 2016 from 3.5% in 2015. The country’s gold production is projected to recover in the second half of the year, bringing the annual decline in production to 3.2%, against a 8.3% in 2015. Agricultural output growth is expected to ease to 1.5% from 6.2% last year, while the non-gold industry will contract by 2% due to supply side constraints and competition from Kazakh producers. Inflation will not exceed 3.5% reflecting weak demand and declining prices for fuel and food. Fiscal balances are expected to deteriorate relative to 2015, with the overall deficit widening to 7.4% of GDP as a result of both lower non-tax revenues and higher investment outlays. Despite the projected 5% growth in remittances in 2016 in dollar terms, the current account deficit is expected to widen to 13.3% of GDP this year from 10.4% in 2015.


Tajik GDP growth rate is projected to remain broadly stable at 6% in 2016, supported by the ongoing expansion of industry, construction and agriculture, the World Bank forecasts. The ongoing fiscal adjustment, though necessary to ensure medium-term fiscal and debt sustainability, will also contribute to lower growth rates in the future. On the demand side, consumption is projected to decline moderately while investment growth remains robust. The overall budget deficit is expected to reach 4% of GDP, while the government’s budgetary position should improve from a fiscal adjustment in the second half of 2016. Recovery in Russia that should support a moderate increase in remittances. Structural reforms designed to encourage private investment and exports should yield improvements to growth “over the medium term”, the report reads. The World Bank forecasts GDP to slow to 4.5% in 2017 before strengthening to to 5.2% in 2018.


The World Bank predicts economic growth in hydrocarbons-rich Turkmenistan to weaken to 6.2% this year from 6.5% in 2015. Turkmenistan’s medium-term growth rate is likely to remain below its average during the commodity-price boom. If export volumes recover due to the likely implementation of new gas-export agreements, growth will likely accelerate from 2017 onward, the report suggests. On the other hand, the current account deficit is expected to widen to more than 13% of GDP in 2016 from 12.3% in 2015, financed by sufficient foreign direct investment inflows in the oil and gas sector. Despite the ongoing consolidation, the fiscal deficit is forecast to double from 0.7% of GDP in 2015 to approximately 2% in 2016.


Uzbek GDP growth is projected to slow from 8% in 2015 to an average of 7.4% per year over the medium term. However, the country's positive outlook is predicated on significant investment growth and growth in export revenues due to a gradual recovery of commodities prices. Yet, demand from Russia and other trading partners is expected to remain weak. Remittances are also forecast to remain weak, the World Bank notes. “With the GOU’s emphasis on credit growth, the allocation of additional credit to SMEs is expected to facilitate absorption of returning migrants in the labor market.” Moreover, a reduction in the inflation rate is possible as that is the aim of the country’s current monetary policy. The World Bank believes inflation will ease from 10% in 2016 to 9% in 2017 and to 8% in 2018.

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