## Caucasus and Central Asia: Outlook and Policy Challenges

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**Canonical URL:** [Caucasus and Central Asia: Outlook and Policy Challenges](https://www.imf.org/-/media/files/publications/reo/mcd-cca/2019/october/english/cca-ppt-1119.pdf)

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### Outlook: Global headwinds and trade tensions weigh on growth
- Global growth figures (sources: National authorities; and IMF staff calculations):
  - 2018: World 3.6; US 2.9; Euro Area 1.9; China 6.6; Russia 2.3; Emerging and Developing Countries 4.5
  - 2019: World 3.0; US 2.4; Euro Area 1.2; China 6.1; Russia 1.1; Emerging and Developing Countries 3.9
  - Revisions from April 2019: World -0.3; US 0.0; Euro Area -0.1; China -0.1; Russia -0.5; Emerging and Developing Countries -0.4
  - 2020: World 3.4; US 2.1; Euro Area 1.4; China 5.8; Russia 1.9; Emerging and Developing Countries 4.6
  - Revisions from April 2019: World -0.2; US 0.2; Euro Area -0.2; China -0.3; Russia 0.2; Emerging and Developing Countries -0.3
- Growth in the CCA has stalled (Real GDP Growth, Percent) with projections shown for 2021–22 for both CCA oil exporters (AZE, KAZ, TKM, UZB) and CCA oil importers (KGZ, TJK, GEO, ARM).
- Policy stances have been loose to cushion growth:
  - Change in Policy Rate in CCA Countries (Percent, Sep. 2019 – Dec. 2018) shows easing for several countries (Source: Haver Analytics).
  - Overall Fiscal Balance (Percent of GDP) indicates negative balances and projections through 2021–22 (Source: National authorities; and IMF staff calculations).

### External environment and downside risks
- Weaker external demand:
  - Current Account Balance (Percent of GDP) shows declines and projections through 2021–22 for oil exporters and oil importers (Sources: National authorities; and IMF staff calculations).
  - CCA Export and Import Growth (Year-on-year percent change): 2017-18 Average vs. 2019-20 Average comparisons for Export Growth and Import Growth.
- Downside risks:
  - Growth of Imports of Top Trading Partners (Revisions from April 2019) highlights negative pressures 2017–23 (Sources: National authorities; and IMF staff calculations). Top 10 export destinations include China, Italy, Russia, Netherlands, Turkey, Switzerland, France, Spain, Ukraine and Uzbekistan.
  - Lower and volatile oil prices: Average petroleum spot price, US dollars a barrel (projections shown 2014–2024) and a Crude Oil Volatility Index (Fall 19, Spring 19, Fall 18).

### Structural constraints: Productivity, competitiveness, and labor
- Growth accounting, CCA Oil Exporters vs. Oil Importers, 2000–24 (Percent): decomposition into Capital, Labor, TFP across periods 2000–07, 2008–13, 2014–18, 2019–24¹.
- Challenges to Doing Business in CCA (Number of countries identifying the constraint among the top five) include:
  - Access to finance; Tax rates and regulation; Inflation; Corruption; Foreign currency regulations; Inadequately educated workforce; Inefficient govt bureaucracy; Poor work ethic in national labor force; Policy instability; Insufficient capacity to innovate; Government instability (Source: World Economic Forum, Global Competitiveness Report 2017–18).
- Labor force dynamics:
  - Projected Cumulative Labor Force Increase Relative to 2018 (Millions): chart 2019–24–29 with Oil exporters and Oil importers. Labor force in 2018: Oilexporters: 32.3; Oil importers: 8.6.
  - Inclusiveness index (10 is best and 1 is worst) for countries KAZ ARM UZB GEO TKM TJK AZE KGZ compared with Emerging Europe (Source: EBRD).

### Building resilience: Fiscal, monetary, and financial policy
- Fiscal frameworks and public debt:
  - Overview of Fiscal Management Frameworks (Fiscal Rules / Medium-term fiscal framework):
    - Armenia: Yes / Yes
    - Azerbaijan: Yes / In progress
    - Georgia: Yes / Yes
    - Kazakhstan: In progress / Yes
    - Kyrgyz Republic: In progress / No
    - Tajikistan: No / No
    - Turkmenistan: Yes / No
    - Uzbekistan: No / No
    - Note: Medium-term budgeting is planned to be introduced in 2019.
  - Total Public Debt in 2013 vs. 2019 (Percent of GDP) for AZE KAZ UZB TKM TJK GEO ARM KGZ (oil exporters vs oil importers).
  - Recommendation: Growth-friendly fiscal consolidation is needed to reduce debt vulnerability.
- Exchange rate flexibility and monetary policy:
  - Nominal Effective Exchange Rate index (Jan 2010 =100, 3-month moving average) series for TKM GEO KGZ TJK AZE UZB KAZ ARM (Aug-10 to Aug-19).
  - Modern Monetary Policy Framework components:
    - Independent, accountable, and forward-looking interest rate-based monetary policy
    - Objectives: price stability while preserving financial stability
    - Clear and timely communication
    - Better transmission mechanism
  - Recommendation: ER flexibility and modernization of MP frameworks are needed as shock absorbers.
- Financial sector repair:
  - Private Credit Growth (Percent, year-over-year average) for AZE KAZ UZB* GEO ARM* KGZ TJK (oil exporters vs oil importers).
  - Asset Quality in the CCA (Percent of total loans, latest available): Problem loans and Non-Performing Loans with country-level variations (Sources: National authorities; and IMF staff calculations).
  - Note on Problem Loans definition and country-specific particulars for Uzbekistan and Armenia.
  - Recommendation: Financial sector repair is needed to allow banks to contribute to growth.

### Boosting competitiveness for higher inclusive growth
- Global Competitiveness Index components (0–100, where 100 is best): Institutions, Infrastructure, ICT adoption, Macroeconomic stability, Health, Skills, Product market, Labor market, Financial system, Market size, Business dynamism, Innovation capability; CCA compared with EMEU.
- IMF Exchange Rate Assessment: Number of countries classified as broadly in line with fundamentals vs Overvalued (latest assessment).
- Non-commodity export performance:
  - Share of Noncommodity Exports in Global Exports (Index 2008 = 100) series 2008–19 for CCA OE, EMEA, ASIA comparisons.
  - Export Quality¹ (Index 0–1, higher is more diverse) latest available: UZB, KAZ, TKM, AZE, KGZ, GEO, ARM, TJK, EMEU, EMASIA (Note: 2014 is latest available year for the quality index).
- Promote global value chain participation:
  - Global Value Chain Participation Rate (Share of exports): CCA Oil importers, CCA Oil exporters, Comparators, Transition Economies, Asia (source: UNCTAD – Eora GVC database).
  - Transportation Cost (Costs are in 000s of Euros per container) to Shanghai and to Rotterdam; categorical ranges 0-0.9, 1-1.9, 2-2.9, 3-3.9, 4-4.9, 5-5.9.
- SOE reform and private sector:
  - SOE share of total value added and SOE share of total employment (Percent) for ARM AZE GEO KAZ KGZ TJK UZB compared with CCA and CESEE.
  - Business Entry Density Rate: Number of newly registered firms with limited liability per 1,000 working-age people (Source: World Bank Doing Business Report).
  - Recommendation: Reform SOEs to reduce state size and foster private sector dynamism.

### Improving governance
- Governance gap: Two thirds of countries in the world rank better than the CCA countries on average in Worldwide Governance Indicators (Source: WGI 2017). WGI indicators (on -2.5 to 2.5 scale): Rule of Law, Regulatory Quality, Government Effectiveness, Control of Corruption — CCA vs Peers.
- Benefits of good governance (Source: IMF Policy Paper, April 6, 2018):
  - Effects of moving up one quartile in governance indicators: increases in GDP per capita Growth, Investment-to-GDP, Revenue-to-GDP (measured in percentage points).
- Fiscal governance room for improvement (Sources: WEO, World Bank, and IMF staff calculations (2019)):
  - Fiscal Governance (On a 0 (worst) to 1 (best) scale): Revenue Outcomes, Revenue Institutions, Spending Outcomes, Procurement, Fiscal Transparency (quartiles), PFM Controls — CCA vs Peers vs Advanced Economies.
- Financial sector oversight and supervisory compliance:
  - Compliance to Basel Core Principles for Effective Banking Supervision, by region, 2019 (red/least to green/most compliant scale): regional comparisons AFR, MENA, WHA, CCA, EUR, APAC with specific Principles highlighted (e.g., Permissible activities; Internal control and audit; Independence and resourcing; Country and transfer risks; Interest rate risk in the banking book; Abuse of financial services).
- Central bank governance and operations:
  - Central Bank Governance and Operations (On a 1 (high) to 4 (low risk) scale): CCA vs Peers vs Advanced Economies (Source: IMF Safeguards Assessment of Central Banks).
- AML/CFT:
  - AML/CFT indicators (Source: Financial Action Task Force (2019)) on a 1 (worst) to 5 (best) scale: Overall, Preventive Measures, Entity Transparency, Criminal Justice, International Cooperation — CCA vs Peers vs Advanced Economies.
- Policy recommendation: Improve governance across fiscal, supervisory, central bank, and AML/CFT frameworks to lift growth, investment, and revenues.

### IMF’s role and engagement
- Strong IMF engagement in the CCA region:
  - Program and Technical Assistance (TA) and Capacity Development (CD) activities (Team Visits Intensity May 2018 – April 2019) across:
    - Fiscal: public financial and investment management, tax administration, tax policy.
    - Monetary policy: monetary policy framework, central bank operations, reserves management and foreign exchange arrangements.
    - Financial policies: bank, pensions, and insurance laws and regulations, AML/CFT.
    - Statistics: national accounts and prices, government financial statistics, monetary and financial statistics, balance of payment and debt statistics.
    - JVI Training: monetary policy workshop, financial programming and policies.
  - New regional TA center in Almaty will fill an important gap.
- Analytical work and outreach:
  - Papers on: “Promoting Inclusive Growth in the Caucasus and Central Asia”; “Opening Up in the CCA: Policy Frameworks to Support Integration”; “Building Resilient Banking Sectors in the Caucasus and Central Asia”; “A Growth –Friendly Path for Building Fiscal Buffers in the Caucasus and Central Asia”; “Exchange rate developments and Policies in the Caucasus and Central Asia.”
  - Fall 2019 REO chapters on fiscal institutions and on capital flows.
  - Discussion of ministers and governors on inclusive growth at the 2019 annual meetings.
  - Annual CCA central banks workshop.
  - Note on operationalizing inclusive growth in country work.

### Takeaways
- Growth in the CCA has stalled amid downside risks.
- To address these risks, enhance resilience by strengthening fiscal, monetary, and financial policies.
- Boost competitiveness and governance through reforms to achieve higher inclusive growth.
- Strong IMF engagement, including through the new regional center.

*IMF | Middle East and Central Asia Department, November, 2019*

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_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2019/october/english/cca-ppt-1119.pdf_