## 3. Caucasus and Central Asia: Unlocking the Region’s Growth Potential

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### Growth outlook and drivers
- Growth projection: 3.9 percent in 2019 (Figure 3.1).
- Azerbaijan: surge in public investment projected to boost the nonhydrocarbon sector and lead to a significant increase in growth in 2018.
- Kazakhstan: stronger nonhydrocarbon sector growth in 2018–19 expected, driven by structural reforms to enhance competitiveness and productivity, improvements in the business climate, opportunities from the Belt and Road Initiative, and reforms in Uzbekistan; hydrocarbon growth expected to slow as gains from the new Kashagan field moderate.
- Oil-importing countries: growth expected to slow from 6 percent in 2017 to 5 percent in 2018 and 4.8 percent in 2019.
- Country-specific notes:
  - Armenia: domestic consumption robust in 2017; growth likely to moderate in 2018 after an exceptionally strong performance in 2017 driven by a rebound in domestic demand.
  - Kyrgyz Republic: growth will be slower in 2018 due to weaker gold production but is expected to recover in 2019.
  - Tajikistan: growth will remain strong, supported by construction of large public investment projects and domestic demand.
- Medium term: growth momentum expected to fade due to softer growth in key partners, expected moderation of oil prices, and anticipated scaling back of public investment in some countries; growth will stabilize at lower levels, held back by weak private investment and productivity.

### Inflation, exchange rates, and monetary stance
- Bilateral exchange rates against the US dollar broadly stable for most countries; depreciation of the Russian ruble led to an appreciation of effective exchange rates.
- Appreciation has helped contain inflationary pressures despite an increase in oil prices.
- Recent appreciation against the Turkish lira will generate further appreciation of real exchange rates in countries with significant Turkish imports (Georgia, the Kyrgyz Republic; see Box 3.1).
- Inflation expected to remain generally subdued in 2018; adoption of inflation-targeting regimes in some countries helping anchor inflation expectations.
- Central bank actions in 2018: Azerbaijan, Georgia, Kazakhstan, and Tajikistan reduced policy rates.
- Uzbekistan: price reforms and lagged effects of exchange rate depreciation triggered higher inflation in 2018, expected to subside in 2019.
- Turkmenistan: inflationary pressures edged up as reforms of utility and energy prices continue.

### Fiscal consolidation and public finances
- Fiscal consolidation underway in most oil exporters after expansionary policy in 2017.
- Non-oil fiscal balance anticipated to narrow from –17.4 percent of GDP in 2017 to –12.1 percent in 2018, and further to –11.9 percent in 2019 (Figure 3.2).
- Expenditure reforms and specific country measures:
  - Kazakhstan: $9 billion Nurly Zhol Plan (started in 2015) has concluded.
  - Turkmenistan: capital spending will be reduced.
  - Uzbekistan: cut in onlending operations partially offset by increased social expenditures.
  - Azerbaijan: planned increase in capital expenditure, linked mostly to oil sector investments, will cause the non-oil primary balance to deteriorate.
- Net effect: measures coupled with further increases in oil revenue will shift overall fiscal balance in oil-exporting countries into a surplus from 2018 onward.
- Oil importers: fiscal restraint helped improve fiscal balances from –5.4 percent of GDP in 2016 to –4.4 percent in 2017; further improvements expected in 2018 (to –3.9 percent) and over the medium term.
- Kyrgyz Republic: deficit expected to widen due to discretionary spending.
- Public debt concerns: public debt in Azerbaijan, Armenia, the Kyrgyz Republic, and Tajikistan has increased to above 50 percent of GDP.

### External positions and reserves
- External positions strengthened in 2017; current account deficits improved in almost all CCA countries.
- Improvements in oil exporters reflected higher oil prices; oil importers benefited from robust external demand and higher remittances.
- Positive terms of trade shocks and gradual recovery of foreign direct investment helped rebuild international reserves; some countries could benefit from further strengthening buffers against external shocks (Figure 3.3).
- 2018: higher oil prices will further improve external positions of CCA oil exporters, with stronger growth of oil exports outstripping import growth (Figure 3.4).
- Uzbekistan: exception where current account balance is expected to decline in 2018 and over the medium term as trade liberalization generates strong import growth.
- Oil importers: current account deficit projected to widen from 4.9 percent of GDP in 2017 to 8 percent in 2018, driven by strong import growth from higher oil prices exceeding remittance growth; lower gold exports in the Kyrgyz Republic and imports linked to large construction projects in Tajikistan also contribute.
- Medium term: as commodity prices and global demand moderate, current account balances likely to stabilize at more negative levels than their average before the 2014 external shock.

### External and global risks
- Short-run risk: emerging pressures in Turkey may impact the region, particularly through direct trade channels and via strengthened currencies vis-à-vis the lira (Turkey is Azerbaijan’s second and Georgia’s third largest export destination).
- Escalating trade actions could depress growth prospects of key trading partners (including China and Russia) and reduce demand for CCA exports and remittances.
- Lower commodity prices from a weaker global outlook would worsen external and fiscal positions.
- An unexpected tightening of global financial conditions could lead to capital flow reversals and sharp exchange rate movements; countries with relatively large external debt and high dollarization in the banking sector (Azerbaijan, Georgia, and Tajikistan) are particularly vulnerable.

### Medium-term convergence and living standards
- At projected growth rates and given demographic trends, it will take on average 18 years for countries in the region to either graduate from low-income status or reach current per capita income levels of European emerging markets (Table 3.1).
- The convergence time varies widely across countries, ranging from less than a decade to more than a generation.
- The current convergence gap is similar to the gap that prevailed prior to the global financial crisis (20 years in 2007), indicating limited meaningful progress with reforms over the past decade.
- Scenarios for faster convergence:
  - Half a percentage point of additional growth per year would reduce the convergence time by two years.
  - A sustained larger increase in growth rates to those of 2010–14 would reduce the average convergence time to 12 years (and to a decade for oil exporters).

### State footprint, SOEs, and competition
- Large state sector and SOEs are important factors limiting medium-term growth prospects; SOEs have dominant positions in key industries.
- Examples:
  - Kazakhstan: SOEs heavily involved in extractives, telecommunications, finance, and transportation.
  - Georgia: SOEs are sufficiently large (and fragile) to constitute a principal fiscal risk; authorities have taken steps to disclose the risk.
- Weak SOE governance contributes to inefficient production; subsidized prices cause distortions in inputs to consumption and production.
- Risks of industrial policy: Azerbaijan’s industrial policy in diversification strategy requires caution to avoid “picking winners” that suppress competition.
- Fiscal cost: direct state intervention often comes at an implicit or explicit fiscal cost compared with market-based alternatives.
- Credit allocation: public companies receive a larger share of total banking credit in Azerbaijan, Tajikistan, and Uzbekistan (Figure 3.5), potentially sustaining loss-making public enterprises and constraining private sector access to credit.
- Policy recommendations:
  - Reduce the role of the state to free up resources for the private sector.
  - Improve SOE governance to reduce fiscal risks.
  - Examples of positive reforms: Kazakhstan’s planned initial public offerings for major SOEs; Kyrgyz Republic’s efforts to streamline SOEs, reducing their number by about a half.
  - Boost competition across the economy to prevent replacement of state control with private monopolies (Armenia’s amended law on economic competition and protection cited as a welcome step; Georgia should guard against high concentration in banking and health services).

### Private investment and business environment
- Private investment-to-GDP ratio has not yet recovered to 2000–10 levels (Figure 3.6); oil exporters rebounded in 2015–17 largely due to foreign oil company investments, particularly in Kazakhstan.
- Barriers cited by businesspersons (Figure 3.7): taxes, corruption, regulation, bureaucracy, access to finance, government instability, tax rates and regulation, inflation, corruption, foreign currency regulations, inadequately educated workforce, inefficient government bureaucracy, poor work ethic, policy instability, insufficient capacity to innovate.
- New firms struggle: business entry rates in the CCA much lower than in other regions, including sub-Saharan Africa (Figure 3.8). Exception: Georgia, with continuously higher rates of new business entries and private investment higher than the regional average due to successful structural reforms.
- Policy recommendations:
  - Alleviate barriers (access to finance, taxes, corruption, regulation, bureaucracy) to encourage private investment (see Chapter 5).
  - Pursue reforms to increase regional and global economic integration to expand trade and investment, spur competition, promote diversification, and raise productivity and growth (Box 3.1; Uzbekistan reforms and Belt and Road Initiative mentioned as opportunities).

### Financial sector contribution and reforms
- Financial systems play a limited role in supporting growth; external shocks from 2014 exposed vulnerabilities in banking sectors of several CCA countries.
- Weak bank balance sheets continue to constrain credit provision and undermine banks’ ability to support economic growth (Figure 3.9).
- Credit growth: robust in Georgia and Armenia (banking sectors in good health); weak in Azerbaijan, Kazakhstan, and Tajikistan where banking sectors are yet to recover from financial stress.
- Structural causes of financial stress: lack of competition, weak governance, segmentation of the credit market, weak regulation and supervision, and elevated dollarization of the banking sector that can exacerbate balance sheet losses from sharp exchange rate movements.
- Priority reforms for financial stability and resilience:
  - Strengthen risk-based regulations and supervision.
  - Remove legal and structural barriers to competition.
  - Improve bank governance structures.
  - Continue efforts to reduce dollarization.
- Country progress:
  - Azerbaijan: new bank resolution framework established.
  - Kazakhstan: initiatives to strengthen the central bank’s supervisory power.
  - Tajikistan: initiated asset quality review of systemic banks and approved legislation on regulation of payment services.
  - Kyrgyz Republic: central bank implemented prudential norms meeting international standards and is taking steps toward risk-based supervision.
  - Georgia and Armenia: enhancing bank regulation and supervision, improving banking resolution frameworks, and strengthening bank governance.
- Complementary measures: develop capital markets (securities market infrastructure, regulation and supervision) to provide alternative channels for long-term capital and broader access to finance; promote financial inclusion and Fintech (particularly mobile payment systems).

### Oil exporters: debt vulnerabilities, fiscal stance, and reform priorities
- Debt vulnerabilities:
  - Large share of government debt in foreign currency or linked to the exchange rate raises vulnerabilities to large exchange rate movements.
  - Materialization of contingent liabilities associated with the financial sector and SOEs could aggravate the debt burden.
- Fiscal stance and recommended approach:
  - Countries’ medium-term fiscal plans suggest they are aiming to stabilize debt at current levels.
  - Need for more ambitious fiscal targets while keeping fiscal consolidation growth-friendly and inclusive.
  - Medium-term adjustment should come from a balanced mix of revenue mobilization and expenditure rationalization, such as reducing transfers to SOEs, while improving spending efficiency and promoting growth.
- Country-specific fiscal and governance measures:
  - Kazakhstan:
    - Fiscal reform to provide funding to health and education service providers on a per capita basis.
    - Expand public-private partnerships and outsourcing.
    - Review public wages.
    - Measures to align fiscal reporting to international standards.
  - Azerbaijan:
    - Management of SOEs has been tightened.
    - Efforts to raise tariff rates and make subsidies more transparent.
  - Armenia:
    - A new fiscal rule will help reduce the bias toward procyclical fiscal policy and avoid large and abrupt fiscal adjustments.
  - Kyrgyz Republic:
    - Initiatives to amend the budget code and implement the fiscal rule are commendable.
  - Turkmenistan:
    - Measures to align fiscal reporting to international standards.
  - Uzbekistan:
    - Commitment to bring all fiscal operations on-budget.
- Social spending and inclusiveness:
  - Social spending should increase; levels of cash transfers—a key means of supporting low-income households—are low by international standards (Figure 3.11).
  - Progress on increasing social spending and better targeting of benefits would help mitigate the impact of adjustment on the most vulnerable groups, ensuring fiscal policy is growth-friendly and inclusive.
- Strengthening fiscal frameworks and transparency:
  - Strengthening medium-term fiscal frameworks would support consolidation efforts.
  - Increasing fiscal transparency and accountability would help underpin the credibility of the public sector and improve market confidence.

### Regional integration, trade measures, and projected growth contributions (2019–23)
- Regional growth potential and integration:
  - Forecast growth rates suggest it will take close to two decades to raise living standards in the Caucasus and Central Asia (CCA) to the current levels of emerging Europe.
  - Securing higher and more inclusive growth requires new growth drivers and moving away from a state-led growth model.
  - Greater economic integration could raise growth rates in the CCA by 1 percentage point on average if the region increases trade openness (October 2017 Regional Economic Outlook: Middle East and Central Asia).
- Policy areas for reforms to support integration and diversification:
  - Fiscal:
    - Stronger fiscal frameworks are needed to manage fiscal risks associated with regional integration initiatives, such as the Belt and Road Initiative.
    - More ambitious fiscal adjustment would enhance macroeconomic resilience and encourage more foreign direct investment.
    - Trade liberalization could reduce tariff revenues that currently yield about 1.7 percent of GDP.
  - Monetary:
    - Move toward greater exchange rate flexibility and inflation targeting to encourage higher investment by promoting price stability and improving economic resilience.
  - Financial sector:
    - Healthier banking systems and deeper capital markets to promote more efficient financial intermediation and absorb larger capital inflows.
  - Structural:
    - Reforms to strengthen infrastructure, the business environment, governance, and labor skills to make countries more competitive and attractive to outside investors.
- Estimated contributions of trade measures to growth (2019–23 projected average growth) conditional on an increase in the trade measure equal to the best historical period-over-period improvement observed in the region in the last 20 years:
  - Trade openness: 7.7 percentage points (pp)
  - Global value chains (GVC): 4 pp
  - Diversification: 2.4 pp
  - Quality: 1.5 pp
- The analysis distinguishes oil exporters and oil importers in projected gains.

*Prepared by Philip Barrett and Fang Yang. Research assistance provided by Jorge de Leon Miranda. Prepared by Peter Kunzel.*

### 3.9 percent in 2019 (Figure 3.1). In Azerbaijan,

### 3. Caucasus and Central Asia: Unlocking the Region’s Growth Potential

### Growth outlook and drivers
- Growth projection: 3.9 percent in 2019 (Figure 3.1).
- Azerbaijan: surge in public investment projected to boost the nonhydrocarbon sector and lead to a significant increase in growth in 2018.
- Kazakhstan: stronger nonhydrocarbon sector growth in 2018–19 expected, driven by structural reforms to enhance competitiveness and productivity, improvements in the business climate, opportunities from the Belt and Road Initiative, and reforms in Uzbekistan; hydrocarbon growth expected to slow as gains from the new Kashagan field moderate.
- Oil-importing countries: growth expected to slow from 6 percent in 2017 to 5 percent in 2018 and 4.8 percent in 2019.
- Country-specific notes:
  - Armenia: domestic consumption robust in 2017; growth likely to moderate in 2018 after an exceptionally strong performance in 2017 driven by a rebound in domestic demand.
  - Kyrgyz Republic: growth will be slower in 2018 due to weaker gold production but is expected to recover in 2019.
  - Tajikistan: growth will remain strong, supported by construction of large public investment projects and domestic demand.
- Medium term: growth momentum expected to fade due to softer growth in key partners, expected moderation of oil prices, and anticipated scaling back of public investment in some countries; growth will stabilize at lower levels, held back by weak private investment and productivity.

### Inflation, exchange rates, and monetary stance
- Bilateral exchange rates against the US dollar broadly stable for most countries; depreciation of the Russian ruble led to an appreciation of effective exchange rates.
- Appreciation has helped contain inflationary pressures despite an increase in oil prices.
- Recent appreciation against the Turkish lira will generate further appreciation of real exchange rates in countries with significant Turkish imports (Georgia, the Kyrgyz Republic; see Box 3.1).
- Inflation expected to remain generally subdued in 2018; adoption of inflation-targeting regimes in some countries helping anchor inflation expectations.
- Central bank actions in 2018: Azerbaijan, Georgia, Kazakhstan, and Tajikistan reduced policy rates.
- Uzbekistan: price reforms and lagged effects of exchange rate depreciation triggered higher inflation in 2018, expected to subside in 2019.
- Turkmenistan: inflationary pressures edged up as reforms of utility and energy prices continue.

### Fiscal consolidation and public finances
- Fiscal consolidation underway in most oil exporters after expansionary policy in 2017.
- Non-oil fiscal balance anticipated to narrow from –17.4 percent of GDP in 2017 to –12.1 percent in 2018, and further to –11.9 percent in 2019 (Figure 3.2).
- Expenditure reforms and specific country measures:
  - Kazakhstan: $9 billion Nurly Zhol Plan (started in 2015) has concluded.
  - Turkmenistan: capital spending will be reduced.
  - Uzbekistan: cut in onlending operations partially offset by increased social expenditures.
  - Azerbaijan: planned increase in capital expenditure, linked mostly to oil sector investments, will cause the non-oil primary balance to deteriorate.
- Net effect: measures coupled with further increases in oil revenue will shift overall fiscal balance in oil-exporting countries into a surplus from 2018 onward.
- Oil importers: fiscal restraint helped improve fiscal balances from –5.4 percent of GDP in 2016 to –4.4 percent in 2017; further improvements expected in 2018 (to –3.9 percent) and over the medium term.
- Kyrgyz Republic: deficit expected to widen due to discretionary spending.
- Public debt concerns: public debt in Azerbaijan, Armenia, the Kyrgyz Republic, and Tajikistan has increased to above 50 percent of GDP.

### External positions and reserves
- External positions strengthened in 2017; current account deficits improved in almost all CCA countries.
- Improvements in oil exporters reflected higher oil prices; oil importers benefited from robust external demand and higher remittances.
- Positive terms of trade shocks and gradual recovery of foreign direct investment helped rebuild international reserves; some countries could benefit from further strengthening buffers against external shocks (Figure 3.3).
- 2018: higher oil prices will further improve external positions of CCA oil exporters, with stronger growth of oil exports outstripping import growth (Figure 3.4).
- Uzbekistan: exception where current account balance is expected to decline in 2018 and over the medium term as trade liberalization generates strong import growth.
- Oil importers: current account deficit projected to widen from 4.9 percent of GDP in 2017 to 8 percent in 2018, driven by strong import growth from higher oil prices exceeding remittance growth; lower gold exports in the Kyrgyz Republic and imports linked to large construction projects in Tajikistan also contribute.
- Medium term: as commodity prices and global demand moderate, current account balances likely to stabilize at more negative levels than their average before the 2014 external shock.

### External and global risks
- Short-run risk: emerging pressures in Turkey may impact the region, particularly through direct trade channels and via strengthened currencies vis-à-vis the lira (Turkey is Azerbaijan’s second and Georgia’s third largest export destination).
- Escalating trade actions could depress growth prospects of key trading partners (including China and Russia) and reduce demand for CCA exports and remittances.
- Lower commodity prices from a weaker global outlook would worsen external and fiscal positions.
- An unexpected tightening of global financial conditions could lead to capital flow reversals and sharp exchange rate movements; countries with relatively large external debt and high dollarization in the banking sector (Azerbaijan, Georgia, and Tajikistan) are particularly vulnerable.

### Medium-term convergence and living standards
- At projected growth rates and given demographic trends, it will take on average 18 years for countries in the region to either graduate from low-income status or reach current per capita income levels of European emerging markets (Table 3.1).
- The convergence time varies widely across countries, ranging from less than a decade to more than a generation.
- The current convergence gap is similar to the gap that prevailed prior to the global financial crisis (20 years in 2007), indicating limited meaningful progress with reforms over the past decade.
- Scenarios for faster convergence:
  - Half a percentage point of additional growth per year would reduce the convergence time by two years.
  - A sustained larger increase in growth rates to those of 2010–14 would reduce the average convergence time to 12 years (and to a decade for oil exporters).

### State footprint, SOEs, and competition
- Large state sector and SOEs are important factors limiting medium-term growth prospects; SOEs have dominant positions in key industries.
- Examples:
  - Kazakhstan: SOEs heavily involved in extractives, telecommunications, finance, and transportation.
  - Georgia: SOEs are sufficiently large (and fragile) to constitute a principal fiscal risk; authorities have taken steps to disclose the risk.
- Weak SOE governance contributes to inefficient production; subsidized prices cause distortions in inputs to consumption and production.
- Risks of industrial policy: Azerbaijan’s industrial policy in diversification strategy requires caution to avoid “picking winners” that suppress competition.
- Fiscal cost: direct state intervention often comes at an implicit or explicit fiscal cost compared with market-based alternatives.
- Credit allocation: public companies receive a larger share of total banking credit in Azerbaijan, Tajikistan, and Uzbekistan (Figure 3.5), potentially sustaining loss-making public enterprises and constraining private sector access to credit.
- Policy recommendations:
  - Reduce the role of the state to free up resources for the private sector.
  - Improve SOE governance to reduce fiscal risks.
  - Examples of positive reforms: Kazakhstan’s planned initial public offerings for major SOEs; Kyrgyz Republic’s efforts to streamline SOEs, reducing their number by about a half.
  - Boost competition across the economy to prevent replacement of state control with private monopolies (Armenia’s amended law on economic competition and protection cited as a welcome step; Georgia should guard against high concentration in banking and health services).

### Private investment and business environment
- Private investment-to-GDP ratio has not yet recovered to 2000–10 levels (Figure 3.6); oil exporters rebounded in 2015–17 largely due to foreign oil company investments, particularly in Kazakhstan.
- Barriers cited by businesspersons (Figure 3.7): taxes, corruption, regulation, bureaucracy, access to finance, government instability, tax rates and regulation, inflation, corruption, foreign currency regulations, inadequately educated workforce, inefficient government bureaucracy, poor work ethic, policy instability, insufficient capacity to innovate.
- New firms struggle: business entry rates in the CCA much lower than in other regions, including sub-Saharan Africa (Figure 3.8). Exception: Georgia, with continuously higher rates of new business entries and private investment higher than the regional average due to successful structural reforms.
- Policy recommendations:
  - Alleviate barriers (access to finance, taxes, corruption, regulation, bureaucracy) to encourage private investment (see Chapter 5).
  - Pursue reforms to increase regional and global economic integration to expand trade and investment, spur competition, promote diversification, and raise productivity and growth (Box 3.1; Uzbekistan reforms and Belt and Road Initiative mentioned as opportunities).

### Financial sector contribution and reforms
- Financial systems play a limited role in supporting growth; external shocks from 2014 exposed vulnerabilities in banking sectors of several CCA countries.
- Weak bank balance sheets continue to constrain credit provision and undermine banks’ ability to support economic growth (Figure 3.9).
- Credit growth: robust in Georgia and Armenia (banking sectors in good health); weak in Azerbaijan, Kazakhstan, and Tajikistan where banking sectors are yet to recover from financial stress.
- Structural causes of financial stress: lack of competition, weak governance, segmentation of the credit market, weak regulation and supervision, and elevated dollarization of the banking sector that can exacerbate balance sheet losses from sharp exchange rate movements.
- Priority reforms for financial stability and resilience:
  - Strengthen risk-based regulations and supervision.
  - Remove legal and structural barriers to competition.
  - Improve bank governance structures.
  - Continue efforts to reduce dollarization.
- Country progress:
  - Azerbaijan: new bank resolution framework established.
  - Kazakhstan: initiatives to strengthen the central bank’s supervisory power.
  - Tajikistan: initiated asset quality review of systemic banks and approved legislation on regulation of payment services.
  - Kyrgyz Republic: central bank implemented prudential norms meeting international standards and is taking steps toward risk-based supervision.
  - Georgia and Armenia: enhancing bank regulation and supervision, improving banking resolution frameworks, and strengthening bank governance.
- Complementary measures: develop capital markets (securities market infrastructure, regulation and supervision) to provide alternative channels for long-term capital and broader access to finance; promote financial inclusion and Fintech (particularly mobile payment systems).

*Italic: Prepared by Philip Barrett and Fang Yang. Research assistance provided by Jorge de Leon Miranda.*

### 1. Oil Exporters

### 1. Oil Exporters

### Debt vulnerabilities and fiscal stance
- The large share of government debt in foreign currency or linked to the exchange rate raises countries’ vulnerabilities to large exchange rate movements.
- The materialization of contingent liabilities associated with the financial sector and SOEs could also aggravate the debt burden.
- Countries’ medium-term fiscal plans suggest they are aiming to stabilize debt at current levels.
- The increase in debt vulnerabilities, coupled with the need to build fiscal space to close infrastructure gaps in some countries, points to the need for more ambitious fiscal targets while keeping fiscal consolidation growth-friendly and inclusive.
- Medium-term adjustment should come from a balanced mix of revenue mobilization and expenditure rationalization, such as reducing transfers to SOEs, while improving spending efficiency and promoting growth.

### Country-specific fiscal and governance measures
- Kazakhstan:
  - Fiscal reform to provide funding to health and education service providers on a per capita basis.
  - Expand public-private partnerships and outsourcing.
  - Review public wages.
  - Measures to align fiscal reporting to international standards.
- Azerbaijan:
  - Management of SOEs has been tightened.
  - Efforts to raise tariff rates and make subsidies more transparent.
- Armenia:
  - A new fiscal rule will help reduce the bias toward procyclical fiscal policy and avoid large and abrupt fiscal adjustments.
- Kyrgyz Republic:
  - Initiatives to amend the budget code and implement the fiscal rule are commendable.
- Turkmenistan:
  - Measures to align fiscal reporting to international standards.
- Uzbekistan:
  - Commitment to bring all fiscal operations on-budget.

### Social spending and inclusiveness
- Social spending should increase; levels of cash transfers—a key means of supporting low-income households—are low by international standards (Figure 3.11).
- Progress on increasing social spending and better targeting of benefits would help mitigate the impact of adjustment on the most vulnerable groups, ensuring fiscal policy is growth-friendly and inclusive.

### Strengthening fiscal frameworks and transparency
- Strengthening medium-term fiscal frameworks would support consolidation efforts.
- Increasing fiscal transparency and accountability would help underpin the credibility of the public sector and improve market confidence.

### Regional growth potential and integration (CCA context with implications for oil exporters)
- Forecast growth rates suggest it will take close to two decades to raise living standards in the Caucasus and Central Asia (CCA) to the current levels of emerging Europe.
- Securing higher and more inclusive growth requires new growth drivers and moving away from a state-led growth model.
- Greater economic integration could raise growth rates in the CCA by 1 percentage point on average if the region increases trade openness (October 2017 Regional Economic Outlook: Middle East and Central Asia).

### Policy areas for reforms to support integration and diversification
- Fiscal:
  - Stronger fiscal frameworks are needed to manage fiscal risks associated with regional integration initiatives, such as the Belt and Road Initiative.
  - More ambitious fiscal adjustment would enhance macroeconomic resilience and encourage more foreign direct investment.
  - Trade liberalization could reduce tariff revenues that currently yield about 1.7 percent of GDP.
- Monetary:
  - Move toward greater exchange rate flexibility and inflation targeting to encourage higher investment by promoting price stability and improving economic resilience.
- Financial sector:
  - Healthier banking systems and deeper capital markets to promote more efficient financial intermediation and absorb larger capital inflows.
- Structural:
  - Reforms to strengthen infrastructure, the business environment, governance, and labor skills to make countries more competitive and attractive to outside investors.

### Estimated contributions of trade measures to growth (2019–23 projected average growth)
- Growth increase conditional on an increase in the trade measure equal to the best historical period-over-period improvement observed in the region in the last 20 years:
  - Trade openness: 7.7 percentage points (pp)
  - Global value chains (GVC): 4 pp
  - Diversification: 2.4 pp
  - Quality: 1.5 pp
- The analysis distinguishes oil exporters and oil importers in projected gains.

*Prepared by Peter Kunzel. Source: chp-3 - 1. Oil Exporters (IMF Regional Economic Outlook: Middle East and Central Asia, October 2018).*

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_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2018/november/en/cca/chp-3.pdf_