IMF Sees Incipient Recovery in the Caucasus and Central Asia

Countries in the Caucasus and Central Asia (CCA) are seeing initial signs of recovery after being hit hard by the financial crisis in 2009, according to the International Monetary Fund’s (IMF) Regional Economic Outlook published today. The report forecasts the region’s overall economic growth to increase to 4.3 percent in 2010 after a 3.5 percent rise in 2009.

“The signs of recovery are there, albeit at an embryonic stage,” said Masood Ahmed, Director of the IMF’s Middle East and Central Asia Department. “Exports have begun to pick up, the decline in remittances appears to be slowing or reversing, and capital inflows have turned positive. However, these trends are far from uniform and, in a number of countries, stress in the banking sector is holding back credit growth and weighing on economic activity,” Mr. Ahmed said.

Turning to the short-term economic outlook for the region, the report notes that for the energy exporters, growth projections range from 2 to 3 percent for Azerbaijan and Kazakhstan to 8 percent in Uzbekistan and 12 percent in Turkmenistan. Growth is expected to remain weaker on average in energy-importing countries, with GDP expansion projected at around 2 to 4 percent. “For these countries, some of which also have a large number of poor people, it is important that continued donor support cushions the blow until private sector activity picks up to sustain growth and improve living standards,” Mr. Ahmed underscored. 

Looking at policy priorities, the report states that reviving private-sector credit growth should be a main concern for most CCA countries. CCA banking systems were heavily affected by the global crisis, and credit growth has slowed sharply and even turned negative in real terms in a number of countries, compared to the meteoric increases, ranging from 40 to 80 percent, in the period immediately prior to the crisis. “The cleanup of commercial banks’ balance sheets is a precondition for a recovery of credit activity and ultimately for a sustainable recovery. In this context, policy measures should aim at recognizing losses and dealing with nonperforming loans. In the medium term, macro-prudential policies should promote de-dollarization and develop local debt markets to provide a more diversified funding base for banks,” Mr. Ahmed underlined.

As regards fiscal policies, the report notes that energy exporters have ample fiscal space but should consider exiting from accommodative policies as growth gains traction, to prevent the buildup of inflationary pressures. CCA energy importers, on the other hand, have limited fiscal space and should mostly be aiming for a neutral fiscal stance or modest fiscal adjustment in 2010.

Selected Economic Indicators in Caucasus and Central Asia (CCA)