Republic of Kazakhstan and the IMF
Kyrgyz Republic and the IMF
Russian Federation and the IMF
Republic of Tajikistan and the IMF
Republic of Uzbekistan and the IMF
Economic Performance and Trade in the
It is a pleasure for me to address this conference. I will begin my presentation with a brief overview of the main recent macroeconomic developments in the Commonwealth of Independent States (CIS). In the second part of my presentation, I will address some of the key policy challenges that need to be addressed for the recovery to continue, focusing on the importance of trade.
Economic performance in the countries of the CIS has generally been much better in the period since the 1998 financial crisis in Russia than in the early part of the 1990s.2 This has in particular been the case in the oil-exporting countries and in countries that had made headway in implementing market reforms. Economic growth has been impressive; inflation has come down, in most countries to single-digit levels; the balance of payments has strengthened; and international reserves have increased significantly. In addition, budget deficits have been brought down and the process of remonetization has gained momentum.
Real GDP growth in the CIS picked up strongly in 1999-2001 and held up well in most countries of the region in 2002. Average real growth had reached 7½ percent in 2001, but fell to a somewhat lower level in 2002, except for the countries in the Caucasus (Figure 1).
Regional inflation continued to decline in 2002 from the very high levels that had wreaked havoc in the early 1990s (Figure 2). In particular, the pace of consumer price increases in Ukraine, Moldova, and Kazakhstan came down further in 2002, and inflation in the Kyrgyz Republic has now reached the low level attained for some time already by the countries in the Caucasus, where it averages 3 percent. While inflation in Tajikistan was much lower in 2002 then in previous years, an upsurge in the second half of the year indicates the need to strengthen monetary discipline. Inflationary pressures in Russia also remain a cause for concern. Inflation continues to run high in the slow-reforming countries, Belarus and Uzbekistan, but came down in Uzbekistan in 2002.
Assessing the size of the government sector, as measured by the tax-to-GDP ratio, there are large differences between countries (Figure 3). In Russia, the tax ratio has been at the level of 35 percent for some years. In most other CIS countries, the tax ratio is much lower, despite improvements in tax collection in Georgia, Kazakhstan, the Kyrgyz Republic, and Tajikistan. In Uzbekistan the tax ratio has fallen sharply since the mid-1990s.
The tax ratio is a measure of the size of the government sector that the country can afford. A very low tax ratio prevents the government from providing public goods, such as education, health care, a social safety net, and the infrastructure that is needed for economic growth, on the scale that people would like. There is a serious need in the Kyrgyz Republic and many other CIS countries to explain to the public why more public goods cannot be provided. At the same time efforts should be made to rationalize public services so as to increase value for money, and to remove tax exemptions and strengthen tax administration. Only once all this has been done does it make sense to cut tax rates.
The process of monetary deepening in the region, which had been interrupted
We expect remonetization to continue in CIS countries. This will allow a substantial rise in money and credit in the economy without threatening inflation. However, policy makers, especially in central banks, must monitor the situation carefully, because the pace of remonetization is unpredictable. It will be important not to overestimate it and as a result allow excessive monetary growth and inflation.
II. Trade and growth
In the rest of my presentation I want to focus on external trade and its importance for strengthening growth. Of course, trade is not the only factor enabling growth. Structural and institutional reforms aimed at reducing undue government interference and strengthening competition on a level playing field are the most important components of a strategy to improve the business climate and hence growth. Monetary and fiscal policies to maintain macroeconomic stability are also essential. But the relatively low level of trade of CIS countries restricts the opportunities for growth. This is most obvious in the case of small countries like the Kyrgyz Republic, which large investors avoid because the domestic market is small and the larger regional market is not fully accessible.
Across countries of all types, there is a strong association of higher trade ratios with higher per capita income (Figure 5). Some researchers question the direction of causality and there are many econometric debates. But there has not been a single case of a country that has achieved sustained prosperity under autarky or restricted trade. On the other hand, we have many examples of countries that have become rich while trading.
Trade openness in the CIS remains relatively low (Figure 6). In 2002, the openness ratio3 reached only 12 percent, compared to 32 percent for other transition countries and 49 percent for the EU. The ratio for the Kyrgyz Republic was only 7 ½ percent, well below the CIS average.
The European II Department of the IMF has tried to quantify how much more trade CIS countries could engage in under alternative policy regimes. We have simulated the level of trade that would occur if the CIS economies were at the same stage of transition as those in Central and Eastern Europe, after controlling for differences in population and per capita income (Figure 7).
These numbers look very high and we do not want to suggest that the Kyrgyz Republic or other countries could easily achieve them. However, they are indicative of how much potential still remains unrealized.
The difference between actual and potential trade can be explained by both country-specific and regional factors. Major country-specific reasons include trade blockades in the Caucasus, infrastructure problems (e.g., pipelines), and governance and corruption problems in customs and transport services. For the entire group, however, the key factors are distance from major world markets and the landlocked character of many countries, restrictions on trade, slower progress in transition, and exchange rate developments.
The lower trade openness ratio of the CIS economies is partly explained by formal and informal trade barriers, established in spite of numerous regional trade agreements. These barriers are captured by the IMF trade restrictiveness index, which takes into account trade taxes and nontariff barriers.4 The average trade restrictiveness index in the CIS reached 3.8 in 2002, significantly higher than the average of 2.0 for the Central and East European countries and the Baltics (Figure 8). The Kyrgyz Republic and Tajikistan are very open economies, but the benefits for them are limited by the restrictions imposed by their neighbors, especially Uzbekistan and Kazakhstan.
The depreciation of the real effective exchange rate of several CIS countries following the 1998 Russian crisis improved their competitiveness (Figure 9). As a consequence, market-driven import substitution increased and imports declined by one third between 1997 and 1999. However, the recovery of exports helped by a lower real exchange rate was initially not large enough to compensate for the fall in imports. Total trade recovered from the impact of the Russian crisis only in 2002. The effect of the crisis on trade was strongest for Russia, but also significant for other CIS countries, including the Kyrgyz Republic.
In my presentation I have summarized the main recent macroeconomic developments in the CIS and highlighted some key policy challenges, mainly in the area of trade. The CIS countries have lower external trade than one would expect given their size and level of income; the Kyrgyz Republic has an especially low level of trade.
Trade is an important generator of growth through attracting investors who are unwilling to operate in small markets but would be willing to exploit larger markets. Accordingly, governments should give priority to reducing barriers to trade. This is partly a matter of reducing tariffs and non-tariff barriers imposed by the central government. It is also necessary to stop all the harassment and corruption by officials at the border and those controlling transit trade. In Central Asia, centrally placed Uzbekistan plays a crucial role. It is the most closed economy in Central Asia, and its growth potential, as well as the potential of neighboring countries, would be greatly enhanced by major trade liberalization. All countries benefit from more trade, and all should contribute to reducing the barriers.
1This paper was prepared for delivery at the International Conference dedicated to the 10th Anniversary of the National Currency of the Kyrgyz Republic, held in Bishkek on May 10, 2003.
2For lack of information, this discussion excludes Turkmenistan.
3Defined as the sum of exports and imports divided by GDP, adjusted for PPP.
4The index level of 1 means no restrictions; the index level of 10 implies pervasive restrictions affecting more than 40 percent of total trade and trade taxes above 20 percent.
IMF EXTERNAL RELATIONS DEPARTMENT