IMF Regional Economic Outlook:
Strong Recovery in the Caucasus and Central Asia to Continue in 2011

Press Release No. 11/151
April 28, 2011

Strong post-crisis recovery in the Caucasus and Central Asia (CCA) region is expected to continue in 2011, although at a somewhat slower pace than in 2010, the International Monetary Fund (IMF) said in its Regional Economic Outlook for Caucasus and Central Asia released in Tbilisi today. According to the report, average growth across the region this year is expected to remain strong, at just below 6 percent, compared with 6½ percent last year. Growth will continue to be driven by positive external factors—high commodity prices, the pickup in Russia, and strong growth in China.

The recovery was mainly driven by higher oil and gas exports—helped by favorable prices—and by public investment and fiscal support to sectors affected by the crisis. “To sustain the recovery, policymakers in the Caucasus and Central Asia will need to address rising inflation, respond to social pressures arising from high food prices without threatening fiscal stability, and restore the health of banking systems,” said Middle East and Central Asia Department Deputy Director David Owen.

Looking ahead, a key issue for countries in the region will be to diversify their sources of growth beyond mining, oil, and gas. They can best do this by improving the business environment to increase the role of the private sector and by strengthening regional trade and investment links. Action on these fronts is critical for job creation and poverty reduction.

Fiscal pressures are a concern

Fiscal pressures are a growing concern in the CCA, the report notes. Governments in the region are finding it difficult to resist pressures to raise wages, pensions, and other social payments. In particular, to help limit the impact of higher food prices on the poor, governments are controlling price increases of staple goods, reducing taxes, and drawing on strategic food reserves. Such untargeted measures are not very cost effective, as they benefit both the rich and the poor, and involve high fiscal costs. But for many countries these have been unavoidable in the absence of adequate social safety nets.

Over time, therefore, more effective, targeted safety nets should be developed to protect the poor. As this happens, administrative measures can be phased out, and global commodity prices rises can be allowed to pass through into retail prices.

At the same time, pressures for general wage increases should be resisted, if possible, as these could risk entrenching inflation at a high level and threaten debt sustainability in the region’s oil and gas importing countries (Armenia, Georgia, the Kyrgyz Republic, and Tajikistan).

Inflation is on the rise

Headline inflation has sharply risen in the CCA, as in other parts of the world, according to the report. Consumer price inflation in the region reached 11 percent on average in February, up from about 6 percent a year ago. This can be explained mainly by the rising cost of food, which makes up more than 50 percent of consumption baskets in the region. Higher fuel prices are another driving force.

With global food and fuel prices expected to rise by a further 15–18 percent in 2011, inflationary pressures are projected to continue, with headline inflation rising further in the months ahead.

Experience suggests that higher food and fuel prices will eventually pass through into general price inflation, if governments and central banks do not respond. Central banks are already tightening monetary policy, and may need to do so more forcefully to contain inflation. And fiscal policy needs to remain prudent and support anti-inflationary efforts.

Banks in the region have not yet fully recovered from the crisis

Restoring banking system health remains a key priority for the region, the report says. In Armenia and Georgia, banks’ profitability is recovering, foreign funding and domestic credit have picked up, and nonperforming loans have declined. In other countries in the region, however, borrowers are struggling to pay back loans. In Kazakhstan, the Kyrgyz Republic, and Tajikistan, where the share of nonperforming loans remains particularly high, authorities will need to put in place comprehensive resolution strategies.

Greater competition would also help develop stronger banking systems, most notably in Tajikistan, Turkmenistan, and Uzbekistan, where directed lending continues to crowd out development of credit to the private sector. Dollarization, which rose with the crisis, remains a risk, and supervisors need greater autonomy, independence, and legal protection to do their jobs properly.

Risks ahead

Risks to the outlook are mixed. Growth could be stronger if the upward movement in oil prices continues, with higher exports and investment. The region’s oil and gas importers would face a larger import bill, but would also benefit from higher remittances from Russia and greater foreign investment.

Heightened inflation expectations, lingering financial sector problems, and a possible deterioration of the global economy could all potentially hurt the country’s growth prospects. The sociopolitical environment also poses risks because of high poverty levels and perceptions of low voice and accountability in some countries.

Policy challenges

Policymakers in the CCA face the tricky balance of trying to maintain macroeconomic stability while protecting the most vulnerable, the report says. This will involve addressing several pressing challenges:

• the surge of inflation with risks of inflationary expectations becoming entrenched;

• an upsurge of social pressures to increase fiscal spending, which may generate threats to macroeconomic stability;

• the poor quality of bank portfolios, which restrains credit growth and effective intermediation.

The report recommends that, over the long term, the region’s policymakers should seek to create jobs and reduce poverty by working toward:

• developing adequate safety nets;

• increasing the role of the private sector;

• diversifying economies away from natural resources;

• achieving greater regional synergies; and

• improving the business environment through enhanced transparency, governance and institutional quality.

Selected Economic Indicators in Caucasus and Central Asia (CCA)
  Average           Proj.
  2000–05 2006 2007 2008 2009 2010 2011

Real GDP Growth

9.4 13.6 12.3 6.8 3.7 6.6 5.7

(Annual change; percent)



11.2 13.2 13.7 6.9 -14.2 2.6 4.6


11.3 34.5 25.0 10.8 9.3 5.0 2.8


6.5 9.4 12.3 2.4 -3.8 6.4 5.5


10.3 10.7 8.9 3.2 1.2 7.0 5.9

Kyrgyz Republic

4.1 3.1 8.5 7.6 2.9 -1.4 5.0


9.2 7.0 7.8 7.9 3.9 6.5 5.8


16.6 11.0 11.1 14.7 6.1 9.2 9.0


5.1 7.5 9.5 9.0 8.1 8.5 7.0

General Government Fiscal Balance

0.6 4.2 3.1 6.2 0.9 3.4 4.5

(Percent of GDP)



-2.6 -2.0 -2.3 -1.8 -7.8 -4.9 -3.9


0.2 -0.2 2.6 20.8 6.8 13.9 16.9


-1.1 -3.0 -4.7 -6.3 -9.2 -6.6 -4.0


2.4 7.2 4.7 1.1 -1.4 1.3 1.8

Kyrgyz Republic

-5.6 -2.1 -0.3 0.0 -3.6 -6.5 -8.9


-3.0 1.7 -5.5 -5.1 -5.2 -3.0 -5.4


1.0 5.3 3.9 10.0 7.8 2.1 1.0


-0.6 5.2 5.3 10.7 3.1 4.6 7.0

Current Account Balance

-1.6 3.2 1.6 8.9 0.4 5.7 8.6

(Percent of GDP)



-6.4 -1.8 -6.4 -11.8 -16.0 -13.7 -12.4


-12.2 17.6 27.3 35.5 23.6 27.7 28.4


-8.0 -15.1 -19.7 -22.6 -11.2 -9.8 -13.0


-1.4 -2.5 -8.1 4.6 -3.7 2.5 5.8

Kyrgyz Republic

-0.1 -3.1 -0.2 -8.1 2.0 -7.4 -8.7


-2.8 -2.8 -8.6 -7.6 -5.9 2.2 -4.1


4.1 15.7 15.5 16.5 -16.1 -11.4 -4.7


3.8 9.1 7.3 8.7 2.2 6.7 10.0



Sources: National authorities; and IMF staff estimates and projections.


1Central government.


2State government.



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