IMF Survey: Crisis Brings Reversal of Fortune to Caucasus and Central Asia

March 10, 2009

  • Growth stalls in Caucasus and Central Asia as global crisis hits
  • Region’s ties to Russia make it vulnerable to the downturn in that country
  • IMF, regional officials meet in Bishkek to share crisis management strategies

Growth in the resource-rich Caucasus and Central Asia (CCA) is projected to slow to under 2 percent in 2009 from 6 percent in 2008, as the deepening global crisis hits the region hard, the IMF says in its latest regional forecast.

Crisis Brings Reversal of Fortune to Caucasus and Central Asia

Oil worker in Kazakhstan: CCA oil exporters have seen a sharp turnaround in their external and fiscal balances (photo: Reuters/Shamil Zhumatov).


Awash with commodity export receipts, capital inflows, and remittances, the countries of CCA made significant economic gains in recent years, with real per capita GDP growing impressively. Oil exporters in the region were able to build up substantial reserves including in sovereign wealth funds, while low-income countries benefited from the boom in the larger economies, with domestic demand in these countries heavily reliant on trade receipts and remittances from neighboring countries. Now, however, the global crisis is reversing many of these gains.

Bleak outlook for 2009

With the onset of the global financial crisis, economic conditions in CCA—comprising Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan—have deteriorated sharply. Countries hardest hit by the crisis are those that are very reliant on Russia or have large external financing needs. For most countries in the region, Russia remains a main trading partner and a major source of remittances. The slowdown in Russia is hurting growth via trade and remittance channels, spilling over to domestic demand.

Commodity exporters are being affected by the decline in global demand and the sharp drop in commodity prices, while those countries that are more closely integrated with international financial markets are experiencing serious financing constraints. The external dimension of the crisis is reflected clearly in current account projections, with the region expected to shift, on average, from a large current account surplus in 2008 to a small deficit in 2009. With lower growth and commodity prices, the average fiscal position is similarly moving from a surplus into a deficit.

As a result of the large external shocks, the pace of economic growth in the region is already estimated to have slowed considerably to 6 percent in 2008, from 12 percent in 2007. It is projected to fall well below 2 percent in 2009, with risks clearly on the downside, particularly if the situation in Russia worsens. Meanwhile, the drop in growth and lower commodity prices are dampening inflationary pressures across the region.

Pressures on financial sectors in the region have intensified, especially in those countries where banks face large external rollover needs, but also in other countries not directly exposed to the global financial difficulties. With the deterioration in economic and financial conditions, credit growth has come to a halt in most countries, and loan losses have started to rise and are likely to increase further.

Furthermore, the large depreciation of the Russian ruble has put pressure on regional currencies. Policymakers have faced the challenge of maintaining competitiveness while ensuring stability in financial sectors with large external liabilities and foreign currency loans to unhedged borrowers. The actual or expected depreciation of national currencies has also contributed to a drop in deposit growth and increasing dollarization.

IMF conference in Bishkek

These issues were the subject of discussion at a March 4 conference jointly organized by the IMF and the National Bank of the Kyrgyz Republic. The regional conference, held in the Kyrgyz capital of Bishkek, focused on how to mitigate the effects of the global financial turmoil on CCA. Bringing together central bank governors and senior government officials from the region, the conference served as a forum for policymakers to discuss their experiences in managing the impact of the crisis in their countries. In his opening remarks to participants, Igor Chudinov, the Prime Minister of the Kyrgyz Republic, highlighted the timeliness and the importance of the subject to the region.

The Bishkek conference brought together senior government officials from the region to discuss how to mitigate the effects of the crisis (photo: Veronica Bacalu).

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