Caucasus and Central Asia should prepare for “long-lasting” shocks, IMF says

By bne IntelliNews October 12, 2015

bne IntelliNews -


Following fiscal stimulus to the economies, Eurasian countries should start the process of budgetary consolidation because the economic difficulties the region is experiencing are going to be “long-lasting”, the International Monetary Fund (IMF) believes.

Weaker-than-expected growth in the main trading partners of Caucasus and Central Asian (CCA) countries – Russia, China and the EU – and a possible further decline in commodity prices represent risks to economic growth in the region, Masood Ahmed, director of the IMF’s Middle East and Central Asia Department, told a news conference during the IMF/World Bank Annual Meetings in Lima on October 10.

“Our view is that these shocks that they are experiencing are likely to be long-lasting in nature. As a result, we believe that in countries where they have undertaken some degree of countercyclical fiscal policy, now fiscal consolidation will be needed,” Ahmed warned. “Monetary policy, in our view, should now aim more on reducing inflationary pressures... At the same time, high dollarisation of bank balance sheets and depreciating currencies call for the strengthened use of financial supervision and macro-prudential regulation in these countries.”

The CCA countries have been hit hard by the combination of the decline in global commodity prices, the economic slowdown in Russia and the sharp movements in exchange rates, which resulted in downward pressure on economic activity in all of these countries, Ahmed said. The region’s oil-exporting countries – Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan – are going to earn about $45bn less from energy exports this year compared with last year. “For the oil importers, although they have been helped a little bit by lower oil prices, that has been more than compensated by the impact of lower remittances from Russia, by the impact of lower commodity prices, and also by reduced FDI inflows.”

The IMF predicts net energy exporters in CCA – Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan – will post a combined current account deficit of 2.7% of GDP in 2015 and 3.2% in 2016 against a combined surplus of 3.3% in 2014.

A major issue all of the countries in the region have been grappling with in the past year is the volatility in exchange rates. All CCA countries have seen their currencies depreciate against the dollar to varying degrees. In some cases with quite large foreign reserve losses at the same time. This has triggered inflationary pressures in some countries, raising concerns about financial stability, Ahmed said. “Notwithstanding this, our view is that the policy responses have been generally appropriate in the short term. Where conditions have permitted, there has been some degree of temporary fiscal easing as a way of dampening the effect of these shocks.”

“Greater exchange rate flexibility has helped to limit the rundown of reserves, and that is particularly important because in some of the countries the reserve margins are not very large,” he said. Trying to prop up the exchange rate of the tenge, Kazakh authorities spent $28bn between February 2014, when the tenge was devalued by 19%, and August 20, when it was allowed to float freely, resulting in an immediate 29% drop in the value of the tenge against the dollar. The National Bank of Kazakhstan, the central bank, resumed interventions in September and has since spent nearly $2bn to maintain the exchange rate, despite the switch to the free-floating exchange regime.

In order to move to a higher growth path, Ahmed believes, the CCA countries should carry out “structural reforms”, focusing on “areas of financial development, export diversification, governance, and in some cases also the quality of education”.

The IMF has adopted assistance programmes to some oil-importing countries, namely Georgia, Armenia and Kyrgyzstan, in order to provide fiscal stimulus to the economies. “In all of those cases, in our view, it was a useful way to moderate the shock and to buy time to undertake the policies that would deal with the shock,” Ahmed noted. “But the shock is not turning out to be temporary. It is something that is likely to be long-lasting... We do feel that it is now important to start with the process of consolidating budgetary spending, so that over time you begin to bring spending and income in line.”

“So it is useful not to react immediately to a shock if you can afford it, but then you do need to take into account the new reality and start slowly, gradually, but in a sustained way, adjusting to that new reality,” the director of the IMF’s Middle East and Central Asia Department said. “Allowing the exchange rate to depreciate, which makes some of their products more competitive and also takes away the market pressure of the exchange rates, allows also to protect their reserves, gives the governments a little bit more space to undertake the fiscal consolidation in a more gradual way. So, it has, on balance, been a helpful instrument for them,” he concluded.

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