## 4.1 percent in 2017, up from 2.5 percent in 2016

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### Growth performance in 2017
- Regional real GDP growth: 4.1 percent in 2017, up from 2.5 percent in 2016.
- CCA oil-exporting countries: growth accelerated to almost 4 percent in 2017 (from 2.4 percent in 2016).
  - Drivers: Azerbaijan and Kazakhstan benefited from the sharp increase in oil prices in the second half of 2017.
  - Azerbaijan: high public investment contributed to growth momentum.
  - Kazakhstan: stronger demand for metals and agricultural products boosted growth.
- CCA oil importers: growth jumped to 5.9 percent in 2017 from 3.4 percent in 2016.
  - Drivers: rising remittances, stronger external demand (Georgia, Tajikistan), more robust industrial production (Kyrgyz Republic).
  - Armenia: monetary easing increased domestic demand; sharp rebound in agriculture in Q4.
  - Tajikistan: benefited from a delayed impact of the fiscal expansion in 2016, despite continued financial sector vulnerabilities.
- Outcome relative to prior forecasts: upward revision of 0.5 percentage points from the October 2017 forecast, with Armenia, Azerbaijan, the Kyrgyz Republic, and Tajikistan posting much larger upward revisions.

### 2018 outlook and short-term risks
- Regional GDP growth projection for 2018: 3.7 percent.
- Oil exporters: real GDP growth expected to slow to 3.7 percent in 2018.
  - Reasons: moderation of gains in oil production in Kazakhstan, weak credit growth, conclusion of large fiscal stimulus limiting non-oil pickup.
- Oil importers: growth expected to slow to 3.9 percent in 2018.
  - Offsetting factors: stronger remittances, global demand, copper prices (Armenia), and consumption (Georgia) versus continued structural impediments.
- External positions in 2017: current accounts improved dramatically in most CCA countries; deficits remained wide in some (Kyrgyz Republic, Turkmenistan).
- Monetary and exchange rate policy:
  - More flexible exchange rate regimes and pragmatic monetary policy have helped manage external pressures and contain inflation.
  - Inflationary pressures need careful management in several countries, especially Uzbekistan given recent price liberalization.
  - Monetary policy hampered in some countries by high dollarization.

### Medium-term projections and implications if policies unchanged
- Projection assuming current policies:
  - GDP growth projected at 3.9 percent in 2019.
  - Average growth of 4.1 percent over 2020–23.
- Labor market and inclusiveness implications:
  - Projected medium-term growth "less than half the average growth the region posted in the first decade of this century" and likely too slow to reduce unemployment meaningfully, especially with potential return of migrant labor.
  - Labor force in 2017 (estimate): 41.5 million.
- Structural mismatch: current growth model driven largely by oil and gas, mining, remittances, construction, and public spending is increasingly incompatible with securing high, sustainable, and inclusive medium-term growth.

### Structural reform priorities (policy recommendations)
- Transition to a private-sector-driven growth model by:
  - Completing the clean-up of the banking system in some countries while preserving progress in restoring banks’ soundness in others.
  - Implementing reforms to improve quality of institutions, reduce red tape, and expand product and trade diversification.
  - Promoting fair competition through trade and better regulation, investing in talent by modernizing education and training, and improving access to finance.
  - Removing tariff and non-tariff barriers, improving customs systems, and reducing uncertainty around tariff schedule changes.
  - Addressing loss-making SOEs through restructuring and privatization, and capping government guarantees to SOEs.
- Fiscal policy and public investment:
  - Pursue growth-friendly fiscal adjustment by strengthening revenues in a fair and equitable way and providing scope for productive public investment and critical social spending.
  - Ensure substantial public investments are consistent with available fiscal space and monitor potential impacts on debt sustainability.
  - Develop credible medium-term fiscal management frameworks, anchored where appropriate by fiscal rules, and improve public finance management and fiscal transparency.
  - Use project management frameworks (example: Kyrgyz Republic) to improve capital spending efficiency.

### Fiscal positions, contingent liabilities, and frameworks
- Public debt trends: lower commodity prices, slower growth, and expansionary fiscal policies over the past seven years contributed to rising public debt across CCA countries.
  - For oil exporters, debt is almost three times higher (albeit from low levels).
  - For oil importers, debt has reached higher levels.
- Contingent fiscal liabilities: large and deriving from guarantees, SOEs, the financial sector, and PPPs; could aggravate debt sustainability challenges, particularly for oil importers.
- Country-specific fiscal developments:
  - Kazakhstan: once large-scale support to the banking sector is accounted for, fiscal position in oil exporters generally improved.
  - Turkmenistan: deficits were higher in 2017 due to spending pressures related to the 2017 Asian Indoor and Martial Arts Games.
  - Uzbekistan: larger than expected on-lending to SOEs contributed to a wider deficit; potential use of off-budget expenditures could compromise targeted consolidated fiscal surplus.
  - Armenia: underlying fiscal performance in line with expectations, aided by tax revenue overperformance.
  - Georgia: broad-based revenue strength and containment of current primary expenditure improved performance.
  - Tajikistan: anticipated banking sector intervention did not materialize; prudent fiscal policy continued.
  - Kyrgyz Republic: large slippages ahead of presidential elections contributed to a larger-than-expected deficit in 2017; authorities working on incorporating a fiscal rule into the budget code.
- Fiscal rules and medium-term fiscal frameworks (as presented):
  - Armenia: Fiscal Rules = Yes; Medium-Term Fiscal Framework = Yes
  - Azerbaijan: Fiscal Rules = In progress; Medium-Term Fiscal Framework = No
  - Georgia: Fiscal Rules = Yes; Medium-Term Fiscal Framework = Yes
  - Kazakhstan: Fiscal Rules = Yes; Medium-Term Fiscal Framework = Yes
  - Kyrgyz Republic: Fiscal Rules = In progress; Medium-Term Fiscal Framework = No
  - Tajikistan: Fiscal Rules = No; Medium-Term Fiscal Framework = Yes
  - Turkmenistan: Fiscal Rules = Yes; Medium-Term Fiscal Framework = No
  - Uzbekistan: Fiscal Rules = Yes; Medium-Term Fiscal Framework = No
  - Note: Medium-term budgeting is planned to be introduced in 2019 in one jurisdiction.

### Banking intermediation and financial sector vulnerabilities
- Recent developments: external shocks exposed banking sector vulnerabilities, hampering growth and creating fiscal contingent liabilities in some countries.
- Progress: improvements in regulation, supervision, bank resolution frameworks, and governance in several countries, including Armenia and Georgia; troubled banks addressed in Azerbaijan, Kazakhstan, Kyrgyz Republic, and Tajikistan.
- Credit and problem loan dynamics:
  - Credit growth to the private sector has resumed in several countries; in others, banks remain constrained in intermediation.
  - Problem loans and nonperforming loans remain significant concerns across the region.
  - In Uzbekistan, the rapid increase in credit growth in 2017 reflects currency depreciation.
- Policy guidance:
  - Diagnose and promptly address bank balance sheet vulnerabilities.
  - Intervene effectively and timely in weak banks.
  - Provide support for bank resolution under strict conditions and within a sound legal framework.
  - Ensure new lending is on commercial terms and within sound and transparent business practices.
  - Strengthen consolidated supervision, raise capital requirements for systemically important banks, and enhance oversight of credit bureaus (examples: Georgia).

### Regional and global integration opportunities and risks
- Opportunities to reap benefits of global economy and initiatives:
  - Promote product and trade diversification.
  - Implement Kazakhstan’s privatization and modernization initiatives, Turkmenistan’s seven-year plan, Armenia’s Center for Strategic Studies.
  - Removing tariff and non-tariff barriers and inefficient customs systems will support regional integration.
  - Ensure additional public investments are consistent with fiscal space and monitored for debt sustainability.
- Risks:
  - Global: commodity price uncertainty and inward-looking policies could threaten growth and amplify fiscal/external vulnerabilities.
  - Regional: reform fatigue or vested interests could derail recovery; long-standing governance weaknesses in SOEs pose fiscal risks.
- Example policy responses:
  - Georgia published an extended fiscal risk statement covering PPPs, power purchase agreements, and contingent liabilities, and submitted a PPP law to control government fiscal risks.
  - Armenia has taken steps toward a PPP law in line with best practice and strengthened the Fiscal Risks Assessment Division.

### Uzbekistan: reforms, challenges, and regional spillovers
- Background: prior policy of state intervention and FX restrictions left unrealized potential despite prudent fiscal policies and amassed FX reserves.
- 2017 policy course change: move toward a more open, market-oriented economy.
  - September 2017: official and black-market exchange rates unified and surrender requirements abolished.
    - Result: official rate depreciated by about 50 percent.
    - Price liberalization started; energy prices raised in several steps.
    - These measures were accompanied by a surge in inflation but expected to allow more efficient resource allocation.
  - Government plans: continue raising energy prices toward market levels; reforms to tax system and monetary policy planned to stabilize inflation.
- Short-term challenges: contain inflation, restructure state enterprises, consolidate fiscal accounts to target priority spending on education, health, and public infrastructure in line with the United Nations Sustainable Development Goals.
- Medium-term challenges: adapt fiscal and monetary institutions to a more open economy; foster a banking system that can sustainably finance growth and job creation without reliance on large-scale public funding.
- Regional significance:
  - Uzbekistan’s share of regional trade rose from 12 to 18 percent over the past 10 years.
  - Population size largest in Central Asia.
  - Successful Uzbek reforms could catalyze change and prosperity across the region via demonstration effects, increased regional trade, and integration in supply chains.
  - Recent steps to ease border crossing restrictions with CCA neighbors will facilitate spillovers.
- Data point from Uzbekistan figure: exchange rate unification and inflation surge tracked across Jan.17 to Dec.17 (Official, Parallel exchange rates; Inflation RHS).

### Key statistics (selected)
- CCA (Real GDP annual growth): 8.1 3.1 2.5 4.1 3.7 3.9
- CCA (Current Account Balance): 0.9 -3.7 -6.4 -2.5 -2.0 -1.7
- CCA (Overall Fiscal Balance): 2.4 -4.3 -3.5 -4.3 -1.6 -1.3
- CCA (Inflation, year average; percent): 8.9 6.4 10.4 9.0 9.1 7.2
- CCA oil and gas exporters (Real GDP annual growth): 8.4 3.0 2.4 3.9 3.7 3.8
- CCA oil and gas exporters (non-oil growth): 8.7 2.8 1.2 3.6 3.8 3.6
- CCA oil and gas importers (Real GDP annual growth): 6.3 3.9 3.4 5.9 3.9 4.3
- CCA oil and gas importers (Current Account Balance): -7.8 -8.9 -8.2 -6.0 -8.0 -7.3
- CCA oil and gas importers (Overall Fiscal Balance): -3.0 -2.8 -5.2 -3.4 -3.3 -2.8
- CCA oil and gas importers (Inflation, year average; percent): 7.1 4.8 1.8 4.5 4.4 4.3

*Middle East and Central Asia Department — REO Update, May 2018 (content unit: cca0518-full - 4.1 percent in 2017, up from 2.5 percent in 2016)*

### 4.1 percent in 2017, up from 2.5 percent in 2016

### cca0518-full - 4.1 percent in 2017, up from 2.5 percent in 2016

### Growth performance in 2017
- Regional real GDP growth: 4.1 percent in 2017, up from 2.5 percent in 2016.
- CCA oil-exporting countries: growth accelerated to almost 4 percent in 2017 (from 2.4 percent in 2016).
  - Drivers: Azerbaijan and Kazakhstan benefited from the sharp increase in oil prices in the second half of 2017.
  - Azerbaijan: high public investment contributed to growth momentum.
  - Kazakhstan: stronger demand for metals and agricultural products boosted growth.
- CCA oil importers: growth jumped to 5.9 percent in 2017 from 3.4 percent in 2016.
  - Drivers: rising remittances, stronger external demand (Georgia, Tajikistan), more robust industrial production (Kyrgyz Republic).
  - Armenia: monetary easing increased domestic demand; sharp rebound in agriculture in Q4.
  - Tajikistan: benefited from a delayed impact of the fiscal expansion in 2016, despite continued financial sector vulnerabilities.
- Outcome relative to prior forecasts: upward revision of 0.5 percentage points from the October 2017 forecast, with Armenia, Azerbaijan, the Kyrgyz Republic, and Tajikistan posting much larger upward revisions.

### 2018 outlook and short-term risks
- Regional GDP growth projection for 2018: 3.7 percent (a slowdown from 2017).
- Oil exporters: real GDP growth expected to slow to 3.7 percent in 2018.
  - Reasons: moderation of gains in oil production in Kazakhstan, weak credit growth, conclusion of large fiscal stimulus limiting non-oil pickup.
- Oil importers: growth expected to slow to 3.9 percent in 2018.
  - Offsetting factors: stronger remittances, global demand, copper prices (Armenia), and consumption (Georgia) versus continued structural impediments.
- External positions in 2017: current accounts improved dramatically in most CCA countries; deficits remained wide in some (Kyrgyz Republic, Turkmenistan).
- Monetary and exchange rate policy: more flexible exchange rate regimes and pragmatic monetary policy have helped manage external pressures and contain inflation, though inflationary pressures need careful management in several countries, especially Uzbekistan given recent price liberalization. Monetary policy hampered in some countries by high dollarization.

### Medium-term projections and implications if policies unchanged
- Projection assuming current policies:
  - GDP growth projected at 3.9 percent in 2019.
  - Average growth of 4.1 percent over 2020–23.
- Labor market and inclusiveness implications:
  - Projected medium-term growth "less than half the average growth the region posted in the first decade of this century" and likely too slow to reduce unemployment meaningfully, especially with potential return of migrant labor.
  - Labor force in 2017 (estimate): 41.5 million.
- Structural mismatch: current growth model driven largely by oil and gas, mining, remittances, construction, and public spending is increasingly incompatible with securing high, sustainable, and inclusive medium-term growth.

### Structural reform priorities (policy recommendations)
- Transition to a private-sector-driven growth model by:
  - Completing the clean-up of the banking system in some countries while preserving progress in restoring banks’ soundness in others.
  - Implementing reforms to improve quality of institutions, reduce red tape, and expand product and trade diversification.
  - Promoting fair competition through trade and better regulation, investing in talent by modernizing education and training, and improving access to finance.
  - Removing tariff and non-tariff barriers, improving customs systems, and reducing uncertainty around tariff schedule changes.
  - Addressing loss-making SOEs through restructuring and privatization, and capping government guarantees to SOEs.
- Fiscal policy and public investment:
  - Pursue growth-friendly fiscal adjustment by strengthening revenues in a fair and equitable way and providing scope for productive public investment and critical social spending.
  - Ensure substantial public investments are consistent with available fiscal space and monitor potential impacts on debt sustainability.
  - Develop credible medium-term fiscal management frameworks, anchored where appropriate by fiscal rules, and improve public finance management and fiscal transparency.
  - Use project management frameworks (example: Kyrgyz Republic) to improve capital spending efficiency.

### Fiscal positions, contingent liabilities, and frameworks
- Public debt trends: lower commodity prices, slower growth, and expansionary fiscal policies over the past seven years contributed to rising public debt across CCA countries.
  - For oil exporters, debt is almost three times higher (albeit from low levels).
  - For oil importers, debt has reached higher levels.
- Contingent fiscal liabilities: large and deriving from guarantees, SOEs, the financial sector, and PPPs; could aggravate debt sustainability challenges, particularly for oil importers.
- Country-specific fiscal developments:
  - Kazakhstan: once large-scale support to the banking sector is accounted for, fiscal position in oil exporters generally improved.
  - Turkmenistan: deficits were higher in 2017 due to spending pressures related to the 2017 Asian Indoor and Martial Arts Games.
  - Uzbekistan: larger than expected on-lending to SOEs contributed to a wider deficit; potential use of off-budget expenditures could compromise targeted consolidated fiscal surplus.
  - Armenia: underlying fiscal performance in line with expectations, aided by tax revenue overperformance.
  - Georgia: broad-based revenue strength and containment of current primary expenditure improved performance.
  - Tajikistan: anticipated banking sector intervention did not materialize; prudent fiscal policy continued.
  - Kyrgyz Republic: large slippages ahead of presidential elections contributed to a larger-than-expected deficit in 2017; authorities working on incorporating a fiscal rule into the budget code.
- Fiscal rules and medium-term fiscal frameworks (Table 1 summary as presented):
  - Armenia: Fiscal Rules = Yes; Medium-Term Fiscal Framework = Yes
  - Azerbaijan: Fiscal Rules = In progress; Medium-Term Fiscal Framework = No
  - Georgia: Fiscal Rules = Yes; Medium-Term Fiscal Framework = Yes
  - Kazakhstan: Fiscal Rules = Yes; Medium-Term Fiscal Framework = Yes
  - Kyrgyz Republic: Fiscal Rules = In progress; Medium-Term Fiscal Framework = No
  - Tajikistan: Fiscal Rules = No; Medium-Term Fiscal Framework = Yes
  - Turkmenistan: Fiscal Rules = Yes; Medium-Term Fiscal Framework = No
  - Uzbekistan: Fiscal Rules = Yes; Medium-Term Fiscal Framework = No
  - Note: Medium-term budgeting is planned to be introduced in 2019 in one jurisdiction.

### Banking intermediation and financial sector vulnerabilities
- Recent developments: external shocks exposed banking sector vulnerabilities, hampering growth and creating fiscal contingent liabilities in some countries.
- Progress: improvements in regulation, supervision, bank resolution frameworks, and governance in several countries, including Armenia and Georgia; troubled banks addressed in Azerbaijan, Kazakhstan, Kyrgyz Republic, and Tajikistan.
- Credit and problem loan dynamics:
  - Credit growth to the private sector has resumed in several countries; in others, banks remain constrained in intermediation.
  - Problem loans and nonperforming loans remain significant concerns across the region (see figure data for country-specific trajectories).
  - In Uzbekistan, the rapid increase in credit growth in 2017 reflects currency depreciation.
- Policy guidance:
  - Diagnose and promptly address bank balance sheet vulnerabilities.
  - Intervene effectively and timely in weak banks.
  - Provide support for bank resolution under strict conditions and within a sound legal framework.
  - Ensure new lending is on commercial terms and within sound and transparent business practices.
  - Strengthen consolidated supervision, raise capital requirements for systemically important banks, and enhance oversight of credit bureaus (examples: Georgia).

### Regional and global integration opportunities and risks
- Opportunities to reap benefits of global economy and initiatives (e.g., Belt and Road Initiative, Eurasian Economic Union, reforms in Uzbekistan):
  - Promote product and trade diversification.
  - Implement Kazakhstan’s privatization and modernization initiatives, Turkmenistan’s seven-year plan, Armenia’s Center for Strategic Studies.
  - Removing tariff and non-tariff barriers and inefficient customs systems will support regional integration.
  - Ensure additional public investments are consistent with fiscal space and monitored for debt sustainability.
- Risks:
  - Global: commodity price uncertainty and inward-looking policies could threaten growth and amplify fiscal/external vulnerabilities.
  - Regional: reform fatigue or vested interests could derail recovery; long-standing governance weaknesses in SOEs pose fiscal risks.
  - Example policy responses: Georgia published an extended fiscal risk statement covering PPPs, power purchase agreements, and contingent liabilities, and submitted a PPP law to control government fiscal risks. Armenia has taken steps toward a PPP law in line with best practice and strengthened the Fiscal Risks Assessment Division.

### Uzbekistan: reforms, challenges, and regional spillovers
- Background: prior policy of state intervention and FX restrictions left unrealized potential despite prudent fiscal policies and amassed FX reserves.
- 2017 policy course change: move toward a more open, market-oriented economy.
  - September 2017: official and black-market exchange rates unified and surrender requirements abolished.
    - Result: official rate depreciated by about 50 percent.
    - Price liberalization started; energy prices raised in several steps.
    - These measures were accompanied by a surge in inflation but expected to allow more efficient resource allocation.
  - Government plans: continue raising energy prices toward market levels; reforms to tax system and monetary policy planned to stabilize inflation.
- Short-term challenges: contain inflation, restructure state enterprises, consolidate fiscal accounts to target priority spending on education, health, and public infrastructure in line with the United Nations Sustainable Development Goals.
- Medium-term challenges: adapt fiscal and monetary institutions to a more open economy; foster a banking system that can sustainably finance growth and job creation without reliance on large-scale public funding.
- Regional significance:
  - Uzbekistan’s share of regional trade rose from 12 to 18 percent over the past 10 years.
  - Population size largest in Central Asia.
  - Successful Uzbek reforms could catalyze change and prosperity across the region via demonstration effects, increased regional trade, and integration in supply chains.
  - Recent steps to ease border crossing restrictions with CCA neighbors will facilitate spillovers.
- Data point from Uzbekistan figure: exchange rate unification and inflation surge tracked across Jan.17 to Dec.17 (Official, Parallel exchange rates; Inflation RHS).

*Middle East and Central Asia Department — REO Update, May 2018 (content unit: cca0518-full - 4.1 percent in 2017, up from 2.5 percent in 2016)*

### References

### References

### IMF Publications Cited
- IMF. 2016. “Analyzing and Managing Fiscal Risks—Best Practices.” IMF Policy Paper, Washington, DC.
- IMF. 2017. Regional Economic Outlook, Middle East and Central Asia. Washington, DC, April.
- IMF. Forthcoming-a. “A Growth-Friendly Path for Building Fiscal Buffers in the Caucasus and Central Asia.” IMF Middle East and Central Asia Department Departmental Paper, Washington, DC.
- IMF. Forthcoming-b. “Building Resilient Banking Sectors in the Caucasus and Central Asia.” IMF Middle East and Central Asia Department Departmental Paper, Washington, DC.
- IMF. Forthcoming-c. “Opening Up in the CCA Policy Frameworks to Support Enhanced Regional and Global Integration.” IMF Middle East and Central Asia Departmental Paper, Washington, DC.

### Selected Economic Indicators for the CCA Region, 2000–19 (Percent of GDP, unless otherwise indicated)
- Sources: National authorities; and IMF staff calculations and projections.
- CCA oil and gas exporters: Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan.
- CCA oil and gas importers: Armenia, Georgia, the Kyrgyz Republic, and Tajikistan.
- Projections

Key statistics (Average 2000–14, 2015, 2016, 2017, 2018, 2019)
- CCA
  - Real GDP (annual growth): 8.13.1 2.5 4.1 3.7 3.9
  - Current Account Balance: 0.9 -3.7 -6.4 -2.5 -2.0 -1.7
  - Overall Fiscal Balance: 2.4 -4.3 -3.5 -4.3 -1.6 -1.3
  - Inflation (year average; percent): 8.9 6.4 10.4 9.0 9.1 7.2
- CCA oil and gas exporters
  - Real GDP (annual growth): 8.4 3.0 2.4 3.9 3.7 3.8
  - of which non-oil growth: 8.7 2.8 1.2 3.6 3.8 3.6
  - Current Account Balance: 2.1 -3.1 -6.2 -2.0 -1.2 -1.0
  - Overall Fiscal Balance: 3.3 -4.5 -3.3 -4.4 -1.3 -1.1
  - Inflation (year average; percent): 9.2 6.6 11.5 9.6 9.7 7.6
- CCA oil and gas importers
  - Real GDP (annual growth): 6.3 3.9 3.4 5.9 3.9 4.3
  - Current Account Balance: -7.8 -8.9 -8.2 -6.0 -8.0 -7.3
  - Overall Fiscal Balance: -3.0 -2.8 -5.2 -3.4 -3.3 -2.8
  - Inflation (year average; percent): 7.1 4.8 1.8 4.5 4.4 4.3

*Middle East and Central Asia Department — REO Update, May 2018*

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_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2018/may/english/cca0518-full.pdf_