## pigccaea

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### Executive Summary — Central message
- Making growth more inclusive—creating opportunities for all—is a stated objective of all the countries in the Caucasus and Central Asia (CCA).
- CCA countries achieved gains in inclusiveness over the past 20 years as incomes increased and poverty, inequality, and unemployment declined. Most of the progress occurred before the 2008–09 global financial crisis.
- Since the global financial crisis, poverty rates have barely moved and, for oil importers, remain elevated.
- The region’s growth prospects are subdued, reflecting global headwinds, weaker productivity growth, and an aging population.
- CCA economies rely heavily on a few sources of growth—oil, other commodities, and workers’ remittances—making them vulnerable to external shocks.
- Lack of inclusive growth would be a recipe for political discord and backsliding.

### Key policy directions (summary)
- Fiscal policy can facilitate inclusive growth by prioritizing investment in people and infrastructure:
  - Education, health, and targeted social safety nets that protect the vulnerable should be priorities.
  - With limited fiscal space, tax systems need to become broader-based and more equitable and must provide the right incentives to reduce informality.
  - Bringing tax collection in CCA countries to the level of the region’s best performer could increase tax revenues by 5–16 percent of GDP.
  - Improve spending efficiency, including by undertaking subsidy and civil service reforms.
  - Strengthen fiscal governance and tackle corruption to enhance fiscal policy effectiveness and trust in institutions.
- Increase financial inclusion—access to and use of financial services—to allow households and firms to invest in opportunities and build physical and human capital:
  - Households and firms are less financially included in CCA countries than in emerging market and developing economies on average; women, youth, and SMEs are included even less.
  - Policies should improve financial literacy, credit information availability, and digitalization.
  - Financial technology (fintech) could offer innovative ways to access financial services.
  - Strengthen prudential regulation and supervision while avoiding direct public intervention such as targeted lending, interest rate regulations, and credit guarantees.
- Improve governance and the business climate to lift productivity growth and increase private sector participation:
  - Reduce the state’s dominance, improve governance (including strengthening property rights and establishing an independent judiciary), and remove red tape to boost productivity.

### Rationale for prioritizing inclusive growth
- Inclusive growth defined: “broad sharing of the benefits of, and the opportunities for, economic growth, . . . that is robust and broad-based across sectors, promotes productive employment across the labor force, embodies equal opportunities in access to markets and resources, and protects the vulnerable” (IMF 2017a).
- Inclusive growth increases employment, reduces poverty and inequality, and promotes private sector activity and diversification.
- Inclusive growth requires macroeconomic stability; high inflation, exchange rate and financial market volatility, and large swings in output can hinder job creation.

### Recent performance and vulnerabilities
- CCA growth has slowed: average growth in the region fell by half after the global financial crisis, to 5 percent for CCA oil exporters and to 4 percent for CCA oil importers.
- Labor force participation is already high; in all CCA countries, except Tajikistan and Uzbekistan, the labor force is expected to decline in the medium term, with a corresponding increase in the old-age dependency ratio.
- Commodity dependence:
  - Commodity exports account for 45 to 70 percent of export revenues for CCA oil exporters.
  - CCA oil importers rely on other commodities for export revenues (for example, 10 to 20 percent of revenues from nonferrous metals for Armenia and Georgia) or on workers’ remittances (in particular, Tajikistan and the Kyrgyz Republic).
- With world growth slowing, CCA countries are vulnerable to volatile oil prices, escalating global trade tensions, and deteriorating risk sentiment—raising the urgency for diversification.

### Progress in inclusion metrics
- Poverty reductions before the global financial crisis:
  - Reductions in headcount poverty averaged 36 percentage points, ranging from 17 percentage points in Georgia to 48 percentage points in the Kyrgyz Republic.
- Post-crisis poverty:
  - Since the crisis, poverty rates have barely moved and, for oil importers, remain elevated, ranging between 14 percent (Armenia) and 20 percent (Tajikistan).
  - The highest share of people in extreme poverty (consumption below $1.90 a day in 2011 purchasing-power-parity prices) is still in Tajikistan (5 percent in 2015) and Georgia (4 percent in 2016).
- Inequality:
  - Between 2001 and the global financial crisis, the consumption-based Gini index fell by 3.1 points on average.
  - Kazakhstan and Armenia recorded the largest reductions in inequality: 7.5 and 6.2 points, respectively.
  - Since the crisis, the Gini coefficient declined by only 0.3 points on average; Tajikistan and Armenia recorded significant increases of 3.2 and 3.4 points, respectively.
  - As of 2016, inequality in CCA countries was broadly in line with emerging and developing Europe and emerging and developing Asia averages.

### Labor market: unemployment, employment, and participation
- Unemployment in the CCA region is not particularly high; ILO estimates in 2017 ranged from 3.7 percent in Turkmenistan to 17.8 percent in Armenia, averaging 8.5 percent.
- Except in Armenia and Georgia, unemployment rates fell in CCA countries during 2000–17, with the most notable declines in Uzbekistan, Kazakhstan, and Turkmenistan; progress stalled after 2008 in most countries.
- Female unemployment rates are similar to those of men; youth unemployment rates are significantly higher.
  - Average youth unemployment rate in the CCA region: 16.8 percent; comparator averages: emerging and developing Asia 10.3 percent, emerging and developing Europe 20.8 percent.
- Between 2009 and 2017, all CCA countries raised employment; increases ranged from 6 percent (of 2017 employment stock) in Georgia to 16 percent in Uzbekistan.
- Labor force participation (ILO estimates, 2017) ranges from 44 percent in Tajikistan to 71 percent in Kazakhstan.
- Changes in participation during 2000–17: increases between 1.3 (Tajikistan) and 4 percentage points (Georgia).
- Female labor force participation:
  - Increased by 0.4 percentage point since the global financial crisis, compared with a 0.8 percentage point increase in emerging Europe.
  - Ratio of female to male participation: 78 percent in CCA oil exporters; 68 percent in CCA oil importers; comparator: 77 percent in emerging Europe.
  - About 55 percent of respondents to the World Values Survey agreed that when jobs are scarce, men should be hired before women, compared with 25 percent among respondents in emerging Europe.

### Income convergence, productivity, investment, and diversification
- GDP per capita (PPP) for CCA oil exporters: 14 percent of advanced economy level in 2000 → 24 percent in 2008 → close to 30 percent by 2017.
- Oil exporters have exceeded emerging market average incomes but lag emerging Europe.
- Oil importers: GDP per capita (PPP) rose from 6 percent to 9.5 percent of advanced economies during 2000–08 and to 11 percent by 2017.
- After the global financial crisis, lower economic growth combined with higher population growth slowed convergence.
  - Annual population growth accelerated from 0.8 to 1.3 percent for oil importers and from 1.1 to 1.7 percent in oil exporters.
- Lower total factor productivity (TFP) growth accounts for the slowdown; slowdown in TFP growth is especially pronounced in oil exporters.
- Contribution of capital accumulation to growth has increased; in oil importers it is now the main engine of growth. Contribution of labor is small, especially for oil importers.
- Private investment slowed after the global financial crisis; the share of private investment in GDP decreased in all countries except Uzbekistan and Turkmenistan.
- Economic concentration: in most countries the top three industries account for more than 50 percent of GDP. As of 2017, Azerbaijan had 58 percent of value added in the top three industries; Georgia had 37 percent.

### Macroeconomic policy and buffers
- Progress aided by more independent central banks, reduced inflation, deeper financial sectors, and fiscal buffers built before the global financial crisis.
- Many CCA countries have strengthened macroeconomic policy frameworks recently by introducing fiscal rules and moving toward greater exchange rate flexibility.
- In response to the 2014–16 external shocks, CCA countries mostly used countercyclical fiscal policies that stabilized growth but widened fiscal deficits and public debt and reduced fiscal buffers; consolidation is required in the years ahead.

### Reorienting fiscal policy to support inclusive growth — principles
- Fiscal policy is a powerful tool to achieve distributional objectives; tax and spending policies must minimize adverse effects on incentives to work, save, and invest.
- Revenue-side priorities: build wider, more reliable tax bases by reducing exemptions, combating tax evasion, and strengthening administration.
- Expenditure-side priorities: expand access to education and health to bolster equality of opportunity; better-target social benefits to the poor.
- Both spending and revenue measures are needed to support inclusive growth while safeguarding medium-term fiscal sustainability.

### Reorienting public spending: findings and numbers
- CCA countries generally have higher capital spending and lower current spending than peers; current expenditure relative to GDP has remained stable and below peer-country averages.
- Wage bill is below peer average except in the Kyrgyz Republic and Uzbekistan, where there is room for rationalization.
- Subsidies are significant in Azerbaijan and the Kyrgyz Republic; a subsidy reform, accompanied by social protection measures, could generate up to 2 percent of GDP.
- Social transfers are below peer levels overall, but high in:
  - Turkmenistan: 12 percent of GDP
  - Kyrgyz Republic: 9.3 percent of GDP
  - Georgia: 8.7 percent of GDP
  - Armenia: 7.4 percent of GDP
- In all countries, better targeting of social spending could help protect the most vulnerable while creating fiscal space.

### Health spending efficiency and risks
- Public health spending in the CCA region averages 2.5 percent of GDP—less than half the level in OECD countries (5.7 percent of GDP).
- Public spending as a share of total health expenditure ranges from 20 percent in Azerbaijan and Georgia to 70 percent in Turkmenistan.
- Out-of-pocket spending is much higher than in OECD countries; notably above 60 percent in Azerbaijan and Tajikistan, posing a high poverty risk.
- Potential gains from efficiency: on average, life expectancy could increase by four years by enhancing hospital infrastructure, introducing service delivery innovations, and strengthening information about providers’ performance.
- Lower pharmaceutical costs could be achieved by adopting more rational prescription practices and better procurement practices.
- Armenia and the Kyrgyz Republic are closest to the health efficiency frontier and would still benefit from increasing health spending with a focus on primary and preventive care.

### Education spending and efficiency
- Public spending on education in the CCA ranges from 2 percent of GDP in Georgia to 6 percent of GDP in the Kyrgyz Republic.
- On average, bringing efficiency in public spending in education to the frontier could improve education outcomes.
- Policy finding: Improving teacher quality and recruitment, training and deployment governance systems, school graduation exams, and multigrade teaching in rural areas could improve students’ performance by 16 percent.
- Country-specific finding: The Kyrgyz Republic could improve student performance by about 60 percent.

### Infrastructure and public investment needs
- The scope for infrastructure improvement in the CCA is large; the average logistic performance index is the lowest among peers.
- Transportation infrastructure identified as the largest need.
- Recommended public investment management actions:
  - Define a standard methodology for maintenance requirements and track maintenance funding.
  - Establish standards for project selection procedures and implementation plans.

### Energy subsidy reform and protecting the vulnerable
- Energy subsidy reform measures: adjust pretax energy prices and the consumption tax on energy products.
- Rationale: Subsidies aggravate fiscal imbalances, crowd out priority public spending, depress private investment, distort resource allocation, encourage excessive energy consumption and capital-intensive industries, reduce incentives for renewable energy investment, and accelerate depletion of natural resources.
- Universal subsidies largely captured by higher-income households, reinforcing inequality.
- Policy recommendation: Implement targeted social protection measures before subsidies are removed. Example: Tajikistan plans to enhance and expand its existing targeted social assistance program to protect poor households from increases in electricity prices.

### Public wage bills, employment, and civil service reform
- Wage bills in CCA countries are not out of line with peers but mask structural weaknesses:
  - High share of public sector employment (particularly among oil exporters), proliferated allowances, low recruitment standards, weak connection between performance and promotion.
- Policy recommendation: Comprehensive reform of civil services and salaries to reduce inefficiencies, and raise public sector productivity and efficiency.

### Mobilizing additional revenues: tax base, composition, and potential gains
- Total revenues are below peer levels, except in Georgia and Azerbaijan.
- Tax revenues: Georgia at 26 percent of GDP (highest in CCA); tax revenues are lowest for oil and gas exporters.
- Potential revenue gains: Bringing tax collection in CCA countries to Georgia’s levels could increase tax revenues by 5 to 16 percent of GDP.
- Tax structure characteristics:
  - CCA countries rely mostly on consumption taxes (VAT and excises).
  - Low collection of corporate income tax reflects large exemptions and special economic zones.
  - Personal income tax revenue is below peer averages in most CCA countries owing to narrow tax bases, low compliance and progressivity, and lack of taxation on international transactions in some CCA countries.
  - Property tax revenues currently negligible.
- Estimated additional revenues from improving tax productivity:
  - Increasing corporate income tax productivity to the best CCA performers’ level could generate, on average, 0.6 percent of GDP additional revenues.
  - Increasing VAT productivity to the best CCA performers’ level could generate, on average, 0.3 percent of GDP additional revenues.

### Tax administration and business tax environment (selected figures)
- Paying Taxes indicators (selected CCA country values and CCA Average):
  - Armenia: 74 14 26 21 94 9
  - Azerbaijan: 85 6 15 94 18 4
  - Georgia: 89 5 22 0 10 86
  - Kazakhstan: 79 7 18 22 9 49
  - Kyrgyz Republic: 57 51 22 5 29 37
  - Tajikistan: 61 6 22 4 67 40
  - Uzbekistan: 77 10 18 13 24 8
  - CCA Average: 75 14 20 8 32 56
  - (Note: numeric groupings follow the table presentation in the source.)

### Improving fiscal governance, transparency, and accountability
- Weaknesses in fiscal governance (including corruption) hamper fair and effective government spending and revenue collection.
- Recommended improvements:
  - Expand fiscal data coverage to broader government units, including state-owned enterprises.
  - Move to the Government Finance Statistics Manual 2014.
  - Introduce public sector balance sheet analysis to reveal quasi-fiscal operations, contingent liabilities, and fiscal risks.
  - Make state-owned enterprises more transparent by requiring and publishing International Financial Reporting Standards audits or clarifying commercial mandate as public corporations.
- Budget transparency progress since 2015: improvements in publishing intra-year reviews and prebudget statements in several countries; Georgia performs substantially better on budget transparency than its emerging and developing Europe peers, followed by Kazakhstan and the Kyrgyz Republic; Azerbaijan and Tajikistan are lagging.
- Additional transparency and oversight actions:
  - Publish audit reports online; produce and publish a citizens’ budget; publish prebudget statements and mid-year reviews; provide detailed expenditure information; increase monitoring of budget execution; provide more information on macroeconomic forecasts and policy actions.
- Citizen engagement and oversight recommendations:
  - Set up pilot mechanisms for public and executive branch exchange on national budget matters; establish formal mechanisms and hold legislative hearings on budget formulation and audit reports with public and civil society participation.
- Budget oversight strengthening actions:
  - Provide legislators the budget proposal before the start of the budget year; publish audit reports and in-year budget implementation analysis online; ensure audit institution independence with adequate funding and appropriate appointment/removal processes.

### Policy actions to raise revenues (Box 1)
- Simplify VAT: fewer rates (ideally a single rate) and a broader base (reduce exemptions).
- Rationalize exemptions: move large agrobusinesses, higher education and medical services, and special economic zones to the regular tax system.
- Increase revenue productivity of excise taxes and eliminate broad-based turnover taxes.
- Simplify corporate taxation and small-business regimes.
- Reform taxation of mineral resources in line with international best practices.
- Improve progressivity of personal taxation by raising the threshold for exempt income and introduce graduated rates; tax capital income; enhance property taxation with modern, simplified systems.
- Revamp tax and customs administration, strengthen large taxpayer units, and introduce risk-based compliance systems.

### Financial inclusion: importance and measured gaps
- Definition: Financial inclusion = access to and use of formal financial services coupled with financial literacy.
- Aggregate access indicators and gaps:
  - In 2017, 45 percent of adults in CCA countries had an account at a financial institution or through a mobile money provider.
  - Mobile money accounts: 3 percent in 2017.
  - Mobile phone ownership ranges from 71 percent (Tajikistan) to 92 percent (Azerbaijan).
  - Borrowing: 17 percent of borrowers borrowed formally out of 40 percent of borrowers in 2017.
  - Gender: 47 percent of men had a bank account in 2017; 43 percent of women did. The gender gap in account ownership has doubled since 2014.
  - Income quintiles: fewer than one-third of the poorest households had a bank account in 2017, compared with more than half in the richest 60 percent.
  - Business inclusion: SMEs account for 97 percent of firms and generate 45 percent of employment; SMEs make up less than 7 percent of credit to the economy.
  - Firm-level access to bank credit: 25 percent in CCA versus 31 percent in emerging and developing Europe.

### Causes of low financial inclusion (reported obstacles)
- Households (Global Findex 2017):
  - 46 percent: too little money.
  - 25 percent: lack documentation.
  - 23 percent: have family members with a bank account.
  - 13 percent: financial institutions are too far away.
  - Religious considerations: 6 percent overall; 11 percent in the Kyrgyz Republic; 16 percent in Tajikistan.
- SMEs:
  - Lack of credit information, limited collateral, high collateral requirements (more than 200 percent of the loan amount in Armenia, Azerbaijan, and Georgia), large interest rate spreads (10 percent and higher in the Kyrgyz Republic and Tajikistan), concerns about governance and business environment, and high dollarization.

### Quantified benefits of improving SME financial inclusion
- Closing the SME financial inclusion gap vis-à-vis emerging and developing European countries would raise growth by 0.3 percentage points.
- Firm-level and DSGE analyses indicate:
  - Removing constraints to SME financial inclusion leads to higher economic activity.
  - Access to formal financial services is positively related to employment growth, with stronger impacts for smaller firms.
  - Better access tends to be associated with higher labor productivity.
  - Inequality effects depend on the constraint addressed: easing participation barriers could lead to more equal income distribution; relaxing collateral requirements could intensify income inequality.
  - Greater SME financial inclusion is associated with more responsiveness to fiscal and monetary policies and lower central bank risk aversion toward inflation.

### Policy recommendations to promote financial inclusion
- Overarching approach:
  - Remove structural obstacles and create an enabling environment for the private sector.
  - Ensure financial stability to foster trust and mitigate constraints such as limited credit information and weak payment systems.
  - Favor market-driven credit allocation and competitive financial sectors rather than sustained targeted lending, interest rate regulations, or credit guarantees.
- Financial literacy: scale up financial literacy programs.
- Payment systems and digitalization: create and improve infrastructure for electronic payments and mobile/internet service quality; leverage digital payments to reduce informality and encourage account use.
- Business environment, governance, and credit information: strengthen legal rights of borrowers and lenders, contract enforcement, insolvency frameworks; expand credit registries and bureaus; improve SME accounting and reporting; broaden movable-collateral registries.
- Develop alternative financing channels and fintech: use capital markets, venture capital, SME loan securitization, SME-specific equity trading systems; pilot fintech innovations while implementing regulatory and supervisory frameworks.
- Strengthen financial stability and supervisory frameworks: address distressed institutions, related-party lending risks, consolidate and increase capitalization where planned, improve liquidity management, advance risk-based regulation and supervision, and expand oversight to nonbank financial institutions.

### Mutual fund and pension fund assets; business environment and private sector development
- The business environment in the CCA has improved over the past decade; on average, the region fares better than the global mean in many areas, except access to electricity and processes to pay taxes.
- Examples: In Georgia, two days and one procedure to register a business; Armenia reduced days to start a business from 105 in 2004 to 4½ in 2018.
- The most problematic factors for doing business in the CCA are access to financial services, overregulation, lack of macroeconomic stability, weak governance (corruption), and inadequate labor force skills.
- Structural imbalances and labor market composition examples:
  - In Azerbaijan, agricultural sector absorbs about 37 percent of the workforce but constitutes only 5 percent of GDP; mining contributes 40 percent of GDP but employs only 1 percent of the population.
- Development and inclusion gaps (selected EBRD assessments):
  - Business Skills: Large across all listed countries; Labor Markets: Large in Azerbaijan, Kyrgyz Republic, Tajikistan; Education: Medium in Armenia, Kazakhstan, Uzbekistan.

### Policy recommendations to promote private sector development and inclusiveness
- Adapt the labor force to new skills: improve education system, school-to-work transition, vocational education, and job-related training; focus on IT and critical thinking skills.
- Enhance skill and technological transfers and innovation: attract FDI through macroeconomic stability and public-private partnership frameworks.
- Strengthen governance and tackle corruption: strengthen judicial and legal institutions, property rights, corporate governance, land administration, accounting, auditing, and reporting standards.
- Enhance competition: establish and enforce competition frameworks; deregulate and liberalize product and service markets; promote trade; reduce tax distortions.
- Improve business dynamism and innovation: strengthen insolvency framework; promote research and development, industry clusters, and partnerships with international companies.

### Governance, growth, and implementation approach
- Improving governance can encourage trade, investment, and entrepreneurship, creating jobs and raising income levels.
- Making growth more inclusive requires broad, ambitious, but doable policy steps, given subdued growth prospects from global headwinds, weaker productivity growth, and aging populations.
- Implementation is a shared responsibility among international financial institutions, country authorities, the private sector, firms, and civil society.
- IMF engagement: Article IV consultations have covered women’s economic role, education, inequality, and governance; IMF-supported program initiatives have included higher social spending and support for structural reforms.

*Promoting Inclusive Growth in the Caucasus and Central Asia — Executive Summary and chapter excerpts (pigccaea).*

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### Executive Summary

### Central message
- Making growth more inclusive—creating opportunities for all—is a stated objective of all the countries in the Caucasus and Central Asia (CCA).
- CCA countries achieved gains in inclusiveness over the past 20 years as incomes increased and poverty, inequality, and unemployment declined. Most of the progress occurred before the 2008–09 global financial crisis.
- Since the global financial crisis, poverty rates have barely moved and, for oil importers, remain elevated.
- The region’s growth prospects are subdued, reflecting global headwinds, weaker productivity growth, and an aging population. CCA economies rely heavily on a few sources of growth—oil, other commodities, and workers’ remittances—making them vulnerable to external shocks.
- Lack of inclusive growth would be a recipe for political discord and backsliding.

### Key policy directions (summary)
- Fiscal policy can facilitate inclusive growth by prioritizing investment in people and infrastructure:
  - Education, health, and targeted social safety nets that protect the vulnerable should be priorities.
  - With limited fiscal space, tax systems need to become broader-based and more equitable and must provide the right incentives to reduce informality.
  - Bringing tax collection in CCA countries to the level of the region’s best performer could increase tax revenues by 5–16 percent of GDP.
  - Improve spending efficiency, including by undertaking subsidy and civil service reforms.
  - Strengthen fiscal governance and tackle corruption to enhance fiscal policy effectiveness and trust in institutions.
- Increase financial inclusion—access to and use of financial services—to allow households and firms to invest in opportunities and build physical and human capital:
  - Households and firms are less financially included in CCA countries than in emerging market and developing economies on average; women, youth, and small and medium enterprises (SMEs) are included even less.
  - Policies should create an enabling environment for private sector activity, including improving financial literacy, credit information availability, and digitalization.
  - Financial technology (fintech) could offer innovative ways to access financial services.
  - Strengthen prudential regulation and supervision to support a healthy financial sector, while avoiding direct public intervention such as targeted lending, interest rate regulations, and credit guarantees.
- Improve governance and the business climate to lift productivity growth and increase private sector participation:
  - Reduce the state’s dominance, improve governance (including strengthening property rights and establishing an independent judiciary), and remove red tape to boost productivity.

### Rationale for prioritizing inclusive growth
- Inclusive growth defined: “broad sharing of the benefits of, and the opportunities for, economic growth, . . . that is robust and broad-based across sectors, promotes productive employment across the labor force, embodies equal opportunities in access to markets and resources, and protects the vulnerable” (IMF 2017a).
- Inclusive growth increases employment, reduces poverty and inequality, and promotes private sector activity and diversification.
- Inclusive growth requires macroeconomic stability; high inflation, exchange rate and financial market volatility, and large swings in output can hinder job creation.

### Recent performance and vulnerabilities
- CCA growth has slowed: average growth in the region fell by half after the global financial crisis, to 5 percent for CCA oil exporters and to 4 percent for CCA oil importers.
- Labor force participation is already high; in all CCA countries, except Tajikistan and Uzbekistan, the labor force is expected to decline in the medium term, with a corresponding increase in the old-age dependency ratio.
- Commodity dependence:
  - Commodity exports account for 45 to 70 percent of export revenues for CCA oil exporters.
  - CCA oil importers rely on other commodities for export revenues (for example, 10 to 20 percent of revenues from nonferrous metals for Armenia and Georgia) or on workers’ remittances (in particular, Tajikistan and the Kyrgyz Republic).
- With world growth slowing, CCA countries are vulnerable to volatile oil prices, escalating global trade tensions, and deteriorating risk sentiment—raising the urgency for diversification.

### Progress in inclusion metrics
- Poverty reductions before the global financial crisis:
  - Reductions in headcount poverty averaged 36 percentage points, ranging from 17 percentage points in Georgia to 48 percentage points in the Kyrgyz Republic.
- Post-crisis poverty:
  - Since the crisis, poverty rates have barely moved and, for oil importers, remain elevated, ranging between 14 percent (Armenia) and 20 percent (Tajikistan).
  - The highest share of people in extreme poverty (consumption below $1.90 a day in 2011 purchasing-power-parity prices) is still in Tajikistan (5 percent in 2015) and Georgia (4 percent in 2016).
- Inequality:
  - Between 2001 and the global financial crisis, the consumption-based Gini index fell by 3.1 points on average.
  - Kazakhstan and Armenia recorded the largest reductions in inequality: 7.5 and 6.2 points, respectively.
  - Since the crisis, the Gini coefficient declined by only 0.3 points on average; Tajikistan and Armenia recorded significant increases of 3.2 and 3.4 points, respectively.
  - As of 2016, inequality in CCA countries was broadly in line with emerging and developing Europe and emerging and developing Asia averages.

### Way forward (implementation emphasis)
- The paper proposes actions for CCA policymakers across three key policy areas:
  - Reorient fiscal policy to invest in people and infrastructure.
  - Promote financial inclusion in a responsible and sustainable manner.
  - Improve governance and the business environment.
- Other cross-cutting priorities:
  - Concerted efforts among stakeholders—including the private sector, civil society, and development partners—are needed.
  - Collaboration among countries through greater regional and global economic integration would support higher sustainable growth.
  - Policies should be tailored to country-specific circumstances and translated into deliverables with time-bound action plans.

*Promoting Inclusive Growth in the Caucasus and Central Asia — Executive Summary*

### 1. Headcount Poverty Rate

### 1. Headcount Poverty Rate

### Labor market: unemployment, employment, and participation
- Unemployment in the CCA region is not particularly high; ILO estimates in 2017 ranged from 3.7 percent in Turkmenistan to 17.8 percent in Armenia, averaging 8.5 percent.
- Except in Armenia and Georgia, unemployment rates fell in CCA countries during 2000–17, with the most notable declines in Uzbekistan, Kazakhstan, and Turkmenistan; progress stalled after 2008 in most countries.
- Female unemployment rates are similar to those of men; youth unemployment rates are significantly higher, reflecting lower labor force participation.
- Average youth unemployment rate in the CCA region: 16.8 percent; comparator averages: emerging and developing Asia 10.3 percent, emerging and developing Europe 20.8 percent.
- Between 2009 and 2017, all CCA countries raised employment; increases ranged from 6 percent (of 2017 employment stock) in Georgia to 16 percent in Uzbekistan.
- Labor force participation (ILO estimates, 2017) ranges from 44 percent in Tajikistan to 71 percent in Kazakhstan.
- Most CCA countries surpass average labor force participation rates in emerging Europe and emerging Asia.
- Changes in participation during 2000–17: increases between 1.3 (Tajikistan) and 4 percentage points (Georgia); youth (ages 15–24) and female participation rates are also high.
- Due to relatively high labor participation rates, the prospects for higher growth from increases in the labor force are limited; more scope may exist to reduce unemployment.

### Female labor force participation and gender gaps
- Female labor force participation in CCA countries has increased by 0.4 percentage point since the global financial crisis, compared with a 0.8 percentage point increase in emerging Europe.
- Ratio of female to male participation: 78 percent in CCA oil exporters; 68 percent in CCA oil importers; comparator: 77 percent in emerging Europe.
- Attitudes: about 55 percent of respondents to the World Values Survey agreed that when jobs are scarce, men should be hired before women, compared with 25 percent among respondents in emerging Europe.
- The Gender Development Index measures disparities in health, knowledge, and living standards; CCA region lags emerging Europe peers but performs similarly on average to countries in emerging Asia.

### Income convergence, productivity, investment, and diversification
- GDP per capita (PPP) for CCA oil exporters: 14 percent of advanced economy level in 2000 → 24 percent in 2008 → close to 30 percent by 2017.
- Oil exporters have exceeded emerging market average incomes but lag emerging Europe.
- Oil importers: GDP per capita (PPP) rose from 6 percent to 9.5 percent of advanced economies during 2000–08 and to 11 percent by 2017.
- After the global financial crisis, lower economic growth combined with higher population growth slowed convergence.
- Annual population growth accelerated from 0.8 to 1.3 percent for oil importers and from 1.1 to 1.7 percent in oil exporters.
- Lower total factor productivity (TFP) growth accounts for the slowdown; slowdown in TFP growth is especially pronounced in oil exporters.
- Contribution of capital accumulation to growth has increased; in oil importers it is now the main engine of growth. Contribution of labor is small, especially for oil importers, reflecting stagnant employment ratios.
- Private investment slowed after the global financial crisis; the share of private investment in GDP decreased in all countries except Uzbekistan and Turkmenistan (where it increased from a very low level).
- Azerbaijan, the Kyrgyz Republic, Tajikistan, and Turkmenistan have room to boost private investment ratios.
- Economic concentration: in most countries the top three industries account for more than 50 percent of GDP. As of 2017, Azerbaijan had 58 percent of value added in the top three industries; Georgia had 37 percent.

### Macroeconomic policy and buffers
- Progress in promoting inclusive growth helped by more independent central banks, reduced inflation, deeper financial sectors (higher deposits and lending), and fiscal buffers built before the global financial crisis.
- Many CCA countries have strengthened macroeconomic policy frameworks recently by introducing fiscal rules and moving toward greater exchange rate flexibility.
- In response to the 2014–16 external shocks, CCA countries mostly used countercyclical fiscal policies that stabilized growth but widened fiscal deficits and public debt and reduced fiscal buffers; consolidation is required in the years ahead.

### Reorienting fiscal policy to support inclusive growth — principles
- Fiscal policy is a powerful tool to achieve distributional objectives; tax and spending policies must minimize adverse effects on incentives to work, save, and invest.
- Revenue-side priorities: build wider, more reliable tax bases by reducing exemptions, combating tax evasion, and strengthening administration.
- Expenditure-side priorities: expand access to education and health to bolster equality of opportunity; better-target social benefits to the poor.
- Both spending and revenue measures are needed to support inclusive growth while safeguarding medium-term fiscal sustainability.

### Reorienting public spending: findings and numbers
- CCA countries generally have higher capital spending and lower current spending than peers; current expenditure relative to GDP has remained stable and below peer-country averages.
- Composition of spending varies widely and is mostly driven by wages, social benefits, and purchases of goods and services; wage bill is below peer average except in the Kyrgyz Republic and Uzbekistan, where there is room for rationalization.
- Subsidies are significant in Azerbaijan and the Kyrgyz Republic; a subsidy reform, accompanied by social protection measures, could generate up to 2 percent of GDP.
- Social transfers are below peer levels overall, but high in:
  - Turkmenistan: 12 percent of GDP
  - Kyrgyz Republic: 9.3 percent of GDP
  - Georgia: 8.7 percent of GDP
  - Armenia: 7.4 percent of GDP
- In all countries, better targeting of social spending could help protect the most vulnerable while creating fiscal space.

### Health spending efficiency and risks
- Public health spending in the CCA region averages 2.5 percent of GDP—less than half the level in OECD countries (5.7 percent of GDP).
- Public spending as a share of total health expenditure ranges from 20 percent in Azerbaijan and Georgia to 70 percent in Turkmenistan.
- Out-of-pocket spending is much higher than in OECD countries; notably above 60 percent in Azerbaijan and Tajikistan, posing a high poverty risk for the most vulnerable.
- Potential gains from efficiency: on average, life expectancy could increase by four years by enhancing hospital infrastructure, introducing service delivery innovations, and strengthening information about providers’ performance.
- Lower pharmaceutical costs could be achieved by adopting more rational prescription practices and better procurement practices.
- Although Armenia and the Kyrgyz Republic are closest to the health efficiency frontier and have limited room to improve outcomes within current spending envelopes, they would still benefit from increasing health spending with a focus on primary and preventive care.

### Education spending and efficiency
- Public spending on education in the CCA ranges from 2 percent of GDP in Georgia to 6 percent of GDP in the Kyrgyz Republic.
- Some countries (Kazakhstan and Georgia) have announced education reforms recently.
- On average, bringing efficiency in public spending in education to the frontier could improve education outcomes.

### Tax administration and business tax environment (Doing Business indicators)
- Paying Taxes indicators as presented:
  - Regions: East Asia & Pacific73211813456; Europe & Central Asia76172153264; Latin America & Caribbean60273304747; Middle East & North Africa75181973350; OECD high income83111594084; South Asia60282754442; Sub-Saharan Africa58372814755
  - CCA Countries: Armenia74142621949; Azerbaijan85  61594184; Georgia89  52201086; Kazakhstan79  71822949; Kyrgyz Republic57512252937; Tajikistan61  62246740; Uzbekistan77101813248; CCA Average75142083256

- Policy implication: increasing revenue mobilization and improving fairness of the tax system can be achieved by broadening tax bases, making tax systems more progressive, and tackling corruption in tax administration.

*Source: pigccaea - 1. Headcount Poverty Rate (PDF chapter), PROMOTING INCLUSIVE GROWTH IN THE CAUCASUS AND CENTRAL ASIA*

### 2. Capital Expenditure

### 2. Capital Expenditure

### Government expenditure composition and trends
- Figures present government expenditure breakdowns (compensation of employees; purchases/use of goods & services; interest; social benefits (transfers); subsidies; other (not classified and grants ...); capital expenditure) as percent of GDP for 2008–2018.
- Figure labels use ISO country codes for ARMAZEGEOKAZKGZ TJKTKMUZBEMOECD groupings.

### Health and education expenditure and outcomes
- Health indicators: charts show Health-adjusted life expectancy, infant deaths per 1,000 people, life expectancy at birth, hospital beds per 1,000 people (RHS), nurses and midwives per 1,000 people (RHS), physicians per 1,000 people (RHS), Total health expenditure per capita, PPP$ (0, 1,000, 2,000, 3,000, 4,000), and Health expenditure, public (% of GDP); Health expenditure, public (% of government expenditure); Health expenditure, public (% of total health expenditure); Out-of-pocket expenditure (% of total health expenditure); Total health expenditure PPP per capita (RHS).
- Education: TIMSS and PISA scales centered around 500 with standard deviation of 100.
- Policy finding: Improving teacher quality and recruitment, training and deployment governance systems, school graduation exams, and multigrade teaching in rural areas could improve students’ performance by 16 percent.
- Country-specific finding: The Kyrgyz Republic could improve student performance by about 60 percent (Figure 10).
- Learning-adjusted years of schooling (Figure 10) reported for 2018; TKM and UZB not included in CCA averages due to data availability; AZE not included in CCA average breakdown by gender.

### Infrastructure and public investment needs
- The scope for infrastructure improvement in the CCA is large; the average logistic performance index is the lowest among peers.
- Transportation infrastructure identified as the largest need.
- Recommendations to enhance public investment management:
  - Define a standard methodology for maintenance requirements and track maintenance funding.
  - Establish standards for project selection procedures and implementation plans.
- Figure 11 components referenced: Logistics Performance Index (Index of 0–5 where 5 is best); Losses owing to electricity outages (Percent of annual sales of affected firms); Estimated infrastructure needs breakdown (Percent of total infrastructure investment needs) including categories: Catch-up investment; Supporting future growth; Replacement & maintenance.

### Energy subsidy reform and protecting the vulnerable
- Energy subsidy reform measures: adjust pretax energy prices and the consumption tax on energy products.
- Rationale: Subsidies aggravate fiscal imbalances, crowd out priority public spending, depress private investment (including in the energy sector), distort resource allocation, encourage excessive energy consumption and capital-intensive industries, reduce incentives for renewable energy investment, and accelerate depletion of natural resources.
- Distributional concern: Universal subsidies largely captured by higher-income households, reinforcing inequality.
- Policy recommendation: Implement targeted social protection measures before subsidies are removed. Example: Tajikistan plans to enhance and expand its existing targeted social assistance program to protect poor households from increases in electricity prices.

### Public wage bills, employment, and civil service reform
- Wage bills in CCA countries are not out of line with peers but mask structural weaknesses.
- Issues: High share of public sector employment (particularly among oil exporters), proliferated allowances, low recruitment standards, weak connection between performance and promotion.
- Policy recommendation: Comprehensive reform of civil services and salaries to reduce inefficiencies, and raise public sector productivity and efficiency.

### Mobilizing additional revenues: tax base, composition, and potential gains
- Total revenues are below peer levels, except in Georgia and Azerbaijan.
- Tax revenues: Georgia at 26 percent of GDP (highest in CCA); tax revenues are lowest for oil and gas exporters.
- Potential revenue gains: Bringing tax collection in CCA countries to Georgia’s levels could increase tax revenues by 5 to 16 percent of GDP.
- Tax structure characteristics:
  - CCA countries rely mostly on consumption taxes (VAT and excises).
  - Relatively low collection of corporate income tax reflects large exemptions and special economic zones.
  - Personal income tax revenue is below peer averages in most CCA countries owing to narrow tax bases, low compliance and progressivity, and lack of taxation on international transactions in some CCA countries.
  - Property tax revenues currently negligible.
- Measures to broaden tax base and improve fairness:
  - Reduce special tax regimes and exemptions.
  - Address informality.
  - Introduce VAT thresholds for small businesses to raise compliance.
  - More progressive personal income tax and introduction of thresholds to protect lowest-income segments.
- Estimated additional revenues from improving tax productivity:
  - Increasing corporate income tax productivity to the best CCA performers’ level could generate, on average, 0.6 percent of GDP additional revenues.
  - Increasing VAT productivity to the best CCA performers’ level could generate, on average, 0.3 percent of GDP additional revenues.
- Tax administration and collection weaknesses to address:
  1. Widespread exemptions in several countries.
  2. Low or no taxation of capital gains and dividends.
  3. Significant underreporting and tax avoidance by those not subject to the regular tax regime.
  4. Tax fraud and evasion due to limited tax administration capacity.
  5. Complex property tax systems leaving properties undeclared.
  6. Limited collection enforcement and dispute resolution mechanisms.
- Taxpayer services recommendation: Provide services that are accessible and understandable to strengthen voluntary compliance.
- Empirical tax details (from Table 2):
  - Armenia: CIT Rates 20; VAT Statutory Rates 20; VAT Thresholds 0.13 (thousands USD? table formatting); CIT Productivity 0.47; VAT C-Efficiency 0.38.
  - Azerbaijan: CIT Rates 2018 No threshold; CIT Productivity 0.20; VAT C-Efficiency 0.36; VAT Productivity 0.58.
  - Georgia: CIT Rates 15; VAT Statutory Rates 18; VAT Thresholds 39.00 (thousands USD?); CIT Productivity 0.21; VAT C-Efficiency 0.73; VAT Productivity 0.54.
  - Kazakhstan: CIT Rates 20; VAT Statutory Rates 12; VAT Thresholds No threshold; CIT Productivity 0.21; VAT C-Efficiency 0.42; VAT Productivity 0.27.
  - Kyrgyz Republic: CIT Rates 10; VAT Statutory Rates 12; VAT Thresholds 0.40; CIT Productivity 0.20; VAT C-Efficiency 0.74; VAT Productivity 0.71.
  - Tajikistan: CIT Rates 24; VAT Statutory Rates 18; VAT Thresholds No threshold; CIT Productivity 0.10; VAT C-Efficiency ––; VAT Productivity ––.
  - Turkmenistan: CIT Rates 20; VAT Statutory Rates 15; VAT Thresholds 28.6; CIT Productivity –––; VAT C-Efficiency –––; VAT Productivity –––.
  - Uzbekistan: CIT Rates 14; VAT Statutory Rates 20; VAT Thresholds 0.01; CIT Productivity 0.73; VAT C-Efficiency 0.72; VAT Productivity 0.30.
  - EMDE averages listed: CIT Rates 15.8; VAT Statutory Rates 19.8; VAT Thresholds 15.9 (thousands USD?); CIT Productivity 0.15; VAT C-Efficiency 0.61; VAT Productivity 0.44.
  - Source: IMF FADTP Rates Database (table note: EMDE = emerging and developing Europe).
- Five out of eight CCA countries have a flat personal income tax rate, and two have no thresholds.

### Subsidies, wage bill, and revenue structure (Figure 13)
- Figures present:
  1. Post-tax subsidies by product, 2017 (Percent of GDP) and components (Percent of GDP).
  2. Wage bill and public-sector employment indicators (based on International Labour Organization 2013–14 estimates; public sector share of total employment; wage bill as a share of GDP, 2015; wage bill as a share of total government expenditure, 2015).
  3. General government revenues composition: Tax Revenue (excl. SSC); Social Contributions; Grants; Other Revenue.
  4. General government tax revenues and PIT rates and progressivity breakdowns.
- Country labels include TKM ARM AZE GEO KAZ KGZ TJK UZB, and comparisons with Advanced, EM Europe, Lower middle income, Upper middle income groups.

### Improving fiscal governance, transparency, and accountability
- Weaknesses in fiscal governance (including corruption) hamper fair and effective government spending and revenue collection.
- Potential benefits of curbing corruption: less revenue leakage, less waste in expenditures, higher-quality public education and infrastructure.
- Recommended fiscal governance improvements:
  - Expand fiscal data coverage to broader government units, including state-owned enterprises.
  - Move to the Government Finance Statistics Manual 2014.
  - Introduce public sector balance sheet analysis to reveal quasi-fiscal operations, contingent liabilities, and fiscal risks.
  - Make state-owned enterprises more transparent by requiring and publishing International Financial Reporting Standards audits (example: Tajikistan) or clarifying commercial mandate as public corporations (example: Georgia).
- Budget transparency progress since 2015: improvements in publishing intra-year reviews and prebudget statements in several countries; Georgia performs substantially better on budget transparency than its emerging and developing Europe peers, followed by Kazakhstan and the Kyrgyz Republic; Azerbaijan and Tajikistan are lagging.
- Open Budget Index (OBS) 2017 results: Figure 14 shows scores (scale of 0–100) for Budget transparency, Public participation, Role and effectiveness of oversight institutions, Supreme audit institution oversight, Legislative oversight with AZE GEO KAZ KGZ TJK highest performer annotations.
- Additional measures to improve transparency, execution, and accountability:
  - Publish audit reports online.
  - Produce and publish a citizens’ budget.
  - Publish a prebudget statement and a mid-year review in a timely manner, with detailed information on macro-fiscal projections.
  - Provide detailed expenditure information by administrative units and programs.
  - Increase monitoring of budget execution against the approved budget.
  - Provide more information on macroeconomic forecasts, outcomes, policy actions, and the financial position of the government in year-end reports and the Executive’s budget.
- Citizen engagement and oversight recommendations:
  - Set up pilot mechanisms for public and executive branch exchange on national budget matters during formulation and implementation.
  - Establish formal mechanisms and hold legislative hearings on budget formulation and audit reports with public and civil society participation; maintain public relations offices to answer questions.
- Budget oversight strengthening actions:
  - Provide legislators the budget proposal before the start of the budget year so the legislature can debate budget policies prior to submission of the Executive’s budget proposal and approve recommendations for the forthcoming budget.
  - Budget committee to publish online the audit report and in-year budget implementation analysis.
  - Ensure audit institution has adequate funding; audit processes reviewed by an independent agency; chief nominated with legislative approval and removable only by judicial decision.
- Caveats: Exceptions cited where oversight is limited—Azerbaijan (legislature’s role limited during planning and implementation) and Kazakhstan (head of audit institution can be removed without judicial approval, undermining independence).

*Source: PROMOTING INCLUSIVE GROWTH IN THE CAUCASUS AND CENTRAL ASIA (chapter content extracted from pigccaea - 2. Capital Expenditure).*

### 2. To What Extent Does the Supreme Audit Institution Provide

### 2. To What Extent Does the Supreme Audit Institution Provide Budget Oversight?

### Budget oversight depiction
- Figure reference: "Figure 15. Budget Oversight by Legislature and Audit" (scale of 0–100, where 100 is best). (Visual details shown in source.)

### Policy actions to raise revenues (Box 1)
- Simplify the value-added tax (VAT): fewer rates (ideally a single rate, for example, the Kyrgyz Republic) and a broader base (reduce exemptions).
- Broaden the tax base by rationalizing exemptions:
  - Move large agrobusinesses (Armenia), higher education and medical services (Armenia), and special economic zones (Azerbaijan, Kazakhstan) to the regular tax system (income tax and VAT).
  - Review taxation of free economic zone firms by targeting tax incentives on investment and employment rather than on profitability; limit tax preferences to indirect taxes but not to direct (profit taxes).
- Increase revenue productivity of excise taxes:
  - Limit excises to a selected list of products and improve targeting for cellular airtime and gambling (Armenia), in addition to tobacco and beverages (the Kyrgyz Republic).
  - Increase the excise on petroleum products (Georgia, the Kyrgyz Republic).
- Eliminate broad-based turnover tax on all businesses.
- Simplify corporate taxation by eliminating multiple rate structures at the firm level.
- Simplify taxation of small businesses through flat rates, with two regimes for small and microbusiness: a patent system for microbusinesses and a presumptive tax based on turnover for small business, including for small farmers (Armenia, Georgia).
- Reform taxation of mineral resources in conformity with best international practices to capture a fair share of the rent for the budget.
- Diversify revenue collection for oil and gas exporters.
- Improve progressivity of personal taxation by raising the threshold for exempt income and introduce graduated rates (Armenia).
- Tax capital income (Armenia). Enhance property taxation with a modern and simplified system focused on the taxable asset (land and property) instead of on income and rate graduation; substitute the current system with an appropriate value threshold to protect the poor (Georgia); align cadastral value more closely with market levels to increase revenue productivity (the Kyrgyz Republic).
- Revamp the tax and customs administration—including strengthening large taxpayer units and introducing risk-based compliance systems—to accompany tax policy changes (Georgia, the Kyrgyz Republic).

### Financial inclusion: importance and measured gaps
- Definition: Financial inclusion = access to and use of formal financial services (accounts at financial institutions or mobile money providers) coupled with financial literacy.
- Aggregate access indicators and gaps:
  - In 2017, only 45 percent of adults in CCA countries had an account at a financial institution or through a mobile money provider.
  - Mobile money accounts: 3 percent in 2017.
  - Mobile phone ownership ranges from 71 percent (Tajikistan) to 92 percent (Azerbaijan).
  - Borrowing: 17 percent of borrowers borrowed formally out of 40 percent of borrowers in 2017.
  - Gender: 47 percent of men had a bank account in 2017; 43 percent of women did.
    - The gender gap in account ownership has doubled since 2014.
    - Georgia and Kazakhstan report consistently higher female account ownership.
  - Income quintiles: in 2017, fewer than one-third of the poorest households had a bank account, compared with more than half in the richest 60 percent of households.
    - The gap widened in 2011–17 by 8 percentage points, compared with a narrowing of the gap in emerging and developing Europe by 6 percentage points.
  - Business inclusion:
    - Small and medium enterprises (SMEs) account for 97 percent of firms and generate 45 percent of employment in CCA countries.
    - SMEs make up less than 7 percent of credit to the economy.
    - The share of investment and working capital financed by banks in the CCA region is, on average, 2–3 percentage points lower than the emerging and developing Europe average.
    - Firm-level access to bank credit: 25 percent in CCA versus 31 percent in emerging and developing Europe.

### Causes of low financial inclusion (reported obstacles)
- Households (Global Findex 2017):
  - 46 percent of unbanked respondents: too little money.
  - 25 percent: lack documentation.
  - 23 percent: have family members with a bank account.
  - 13 percent: financial institutions are too far away.
  - Religious considerations: 6 percent overall; 11 percent in the Kyrgyz Republic; 16 percent in Tajikistan (signals need to further develop Islamic banking).
- SMEs:
  - Lack of information to assess credit risk; vague or no credit history; limited collateral.
  - High collateral requirements: in Armenia, Azerbaijan, and Georgia more than 200 percent of the loan amount.
  - Large interest rate spreads: 10 percent and higher in the Kyrgyz Republic and Tajikistan, respectively.
  - Concerns about governance and the business environment.
  - High dollarization could also block SME inclusion, though evidence is not conclusive.

### Quantified benefits of improving SME financial inclusion
- Closing the SME financial inclusion gap vis-à-vis emerging and developing European countries would raise growth by 0.3 percentage points (Macro-Level Analysis).
- Firm-level and DSGE analyses indicate:
  - Removing constraints to SME financial inclusion leads to higher economic activity (DSGE simulation).
  - Access to formal financial services is positively related to employment growth, with stronger impacts for smaller firms (Firm-Level Analysis).
  - Better access to financial services tends to be associated with higher labor productivity (Labor Productivity Growth Gains).
  - Inequality effects depend on the constraint addressed:
    - Easing participation barriers could lead to more equal income distribution.
    - Relaxing collateral requirements could intensify income inequality.
  - Macroeconomic policy effectiveness:
    - Greater SME financial inclusion is associated with more responsiveness to fiscal and monetary policies and lower central bank risk aversion toward inflation.
    - Figure reference: "Figure 18. SME Financial Inclusion and Macroeconomic Policy Effectiveness" (includes metrics such as output gap response to monetary tightening by 100 basis points; tax-to-GDP response to output gap; ratio of variances of output gap and inflation).

### Policy recommendations to promote financial inclusion
- Overarching approach:
  - Remove structural obstacles and create an enabling environment for the private sector.
  - Ensure financial stability to foster trust and mitigate constraints such as limited credit information, weak payment systems, and weak investment climate and governance.
  - Favor market-driven credit allocation and competitive financial sectors rather than sustained targeted lending by state banks, interest rate regulations, or credit guarantees that may distort markets and create fiscal or quasi-fiscal costs.
- Financial literacy:
  - Scale up financial literacy programs (examples: Georgia and the Kyrgyz Republic have started programs).
- Payment systems and digitalization:
  - Create and improve infrastructure for electronic payments, mobile and internet service quality.
  - Continue financial education to disseminate benefits of routine electronic payments.
  - Leverage digital payments to reduce informality and encourage account use.
- Business environment, governance, and credit information:
  - Continue reforms to strengthen legal rights of borrowers and lenders, contract enforcement, insolvency frameworks, and reduce tax burdens.
  - Examples of recent actions: Azerbaijan created a functional secured transaction system; Kazakhstan expanded court automation; Kyrgyz Republic and Georgia strengthened insolvency frameworks; Azerbaijan introduced enhanced electronic tax payment; Georgia and Uzbekistan reformed tax laws.
  - Expand coverage and effectiveness of credit registries and bureaus; improve SME accounting and reporting; broaden movable-collateral registries (Azerbaijan created a unified collateral registry for movable property; Georgia incorporated credit bureaus under central bank supervision).
- Develop alternative financing channels and fintech:
  - Use capital markets to mobilize savings and diversify funding for larger firms to free bank financing space for SMEs.
  - Consider venture capital, SME loan securitization, and SME-specific equity trading systems as pilots or longer-term options.
  - Fintech can lower costs for small transactions, enable peer-to-peer lending and crowdfunding, and improve credit information through new data methods; examples: Azerbaijan data processing centers and mobile network operators expanding cashless payments in rural areas; a Georgian bank enabling mobile payments.
  - Implement proper regulatory and supervisory frameworks for fintech to manage financial stability and consumer/investor protection risks.
- Strengthen financial stability and supervisory frameworks:
  - Address distressed financial institutions and related-party lending risks.
  - Kazakhstan: plans to consolidate and increase capitalization, improve bank liquidity management, advance risk-based regulation and supervision, and increase financial literacy.
  - Georgia: strengthened capital requirements and prudential regulation to reduce dollarization, tightened lending standards, and expanded oversight to nonbank financial institutions.

*Source: IMF staff chapter text in "PROMOTING INCLUSIVE GROWTH IN THE CAUCASUS AND CENTRAL ASIA" (excerpts provided).*

### 2. Mutual Fund and Pension Fund Assets

### 2. Mutual Fund and Pension Fund Assets

### Key findings on business environment and private sector development
- The business environment in the CCA has improved over the past decade; on average, the region fares better than the global mean in many areas, except for access to electricity and streamlined processes to pay taxes.
- Example improvements:
  - In Georgia, it takes two days and one procedure to register a business.
  - Armenia reduced the number of days to start a business from 105 in 2004 to 4½ in 2018.
- Despite improvements, further reforms are needed to lift productivity growth and the share of the private sector in the economy.
- The most problematic factors for doing business in the CCA are:
  - access to financial services
  - overregulation
  - lack of macroeconomic stability
  - weak governance (corruption)
  - inadequate labor force skills
- The CCA region lags emerging Europe in the Global Competitiveness Index and has a long way to go to fill the gap with advanced economies.
- Analytic estimate: implementing reforms that would raise competitiveness by 1 percentage point would raise productivity growth1.4 percentage points on average in emerging market economies (IMF 2016).

### Structural imbalances and labor market composition
- Sectoral mismatch example (Azerbaijan):
  - Agricultural sector: absorbs about 37 percent of the workforce, but constitutes only 5 percent of GDP.
  - Mining sector: contributes 40 percent of GDP, but employs only 1 percent of the population.
- Table 3. Development and Inclusion Gaps (source: EBRD Transition Report, 2016–17) — country assessments of gaps in Education, Labor Markets, Business Skills:
  - Armenia: Education Medium, Labor Markets Medium, Business Skills Large
  - Azerbaijan: Education Small, Labor Markets Large, Business Skills Large
  - Georgia: Education Small, Labor Markets Medium, Business Skills Large
  - Kazakhstan: Education Medium, Labor Markets Small, Business Skills Large
  - Kyrgyz Republic: Education Small, Labor Markets Large, Business Skills Large
  - Tajikistan: Education Small, Labor Markets Large, Business Skills Large
  - Turkmenistan: Education N/A, Labor Markets N/A, Business Skills Large
  - Uzbekistan: Education Medium, Labor Markets Small, Business Skills Large

### Policy recommendations to promote private sector development and inclusiveness
- Adapt the labor force to new skills:
  - Prepare the labor force, particularly the young, for new business and labor market opportunities.
  - Address shortcomings in the education system, the school-to-work transition, vocational education, and job-related training.
  - Ensure development of skills increasingly in demand in the global labor market (for example, skills in information technology and critical thinking).
  - Note: Efforts in some countries (for example, Tajikistan) have focused on improving prospects for migrant workers to maintain access to external markets.
  - Labor market regulation could be improved in several countries to support flexibility and protection.
- Enhance skill and technological transfers and innovation:
  - Put in place policies that improve macroeconomic stability, business confidence, and public-private partnership frameworks to attract foreign direct investment to the region.
  - Attracting FDI can address infrastructure and energy gaps and promote technology and skill transfers that ease economic diversification.
  - Example: Georgia approved a new public-private partnership framework in 2017 that needs to become operational.
- Strengthen governance and tackle corruption to support inclusiveness:
  - Priority actions include strengthening judicial and legal institutions and property rights and administration to address low scores on incidence of corruption, judicial independence, and efficiency of the legal framework in settling disputes.
  - Improve property rights and intellectual property, corporate governance, and the quality of land administration.
  - Improve accounting, auditing, and reporting standards to promote access to financial services.
- Enhance competition:
  - Establish and enforce a well-designed competition framework.
  - Deregulate and liberalize product and service markets.
  - Promote trade.
  - Support entry and exit of firms and firm growth in a competitive setting.
  - Reduce tax distortions on competition.
- Improve business dynamism and innovation:
  - Strengthen the insolvency framework to enhance business dynamism.
  - Promote research and development, industry clusters, and partnerships with international companies to boost innovation.

### Governance, growth, and implementation approach
- Improving governance can encourage trade, investment, and entrepreneurship, thereby creating jobs and raising income levels.
- Making growth more inclusive requires broad, ambitious, but doable policy steps, especially given subdued growth prospects from global headwinds, weaker productivity growth, and aging populations.
- Implementation is a shared responsibility:
  - International financial institutions can assist countries but should work in partnership with country authorities and the private sector to tailor policies to country-specific needs.
  - Firms and civil society need to contribute to private sector development, accountability, and collective design of solutions that drive economic prosperity for all.
- IMF engagement:
  - Article IV consultations have covered issues such as women’s economic role, education, inequality, and governance in CCA countries.
  - IMF-supported program initiatives to address inclusive growth challenges have included higher social spending and support for structural reforms that increase economic resilience to external shocks and medium-term potential growth.

*Source: "Promoting Inclusive Growth in the Caucasus and Central Asia" (chapter excerpts).*

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_Source: https://www.imf.org/-/media/files/publications/dp/2019/english/pigccaea.pdf_