Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey: Crisis Virtually Halts Growth in Caucasus and Central Asia

May 11, 2009

  • Growth in Caucasus and Central Asia expected to fall to 0.9 percent in 2009
  • Slowdown in Russia affecting capital flows, remittances
  • Appropriate polices so far, further measures may be needed

Growth in the Caucasus and Central Asia (CCA) is expected to come to a near halt this year—contracting to 0.9 percent in 2009 from 6.3 percent in 2008—and recover only gradually in 2010, according to the latest IMF forecast for the region.

Crisis Virtually Halts Growth in Caucasus and Central Asia

Elderly Kyrgyz woman weaving: Targeted government spending can help protect the poor and vulnerable during the crisis (photo: AFP/Vyacheslav Oseledko)


The global downturn is now affecting most CCA countries, which include four oil and gas exporters (Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan) and four oil and gas importers (Armenia, Georgia, the Kyrgyz Republic, and Tajikistan).

CCA countries differ substantially in terms of per capita GDP, which ranges from $800 in Tajikistan to $8,500 in Kazakhstan. Although linkages to international financial markets are relatively weak in most countries, the global economic crisis has caught up with the region via falling commodity prices, and lower export demand and remittance inflows, especially from Russia. And CCA growth—which had attained double-digit levels in recent years—is taking a hit.

“As the global crisis spreads through the region, the hard-earned macroeconomic gains of recent years have been put at risk, with growth coming to a virtual halt and financial vulnerabilities on the rise,” said Masood Ahmed, Director of the IMF’s Middle East and Central Asia Department, in a press release.

Links to Russia

The current contraction in Russia’s economy is now slowing sharply both trade and remittances. Russia remains a key economic partner for CCA countries, all associated within the Commonwealth of Independent States, the political-economic partnership of former Soviet Union republics. While trade flows with Russia have declined over the past decade, financial linkages have increased, and a number of CCA countries are heavily dependent on remittances from Russia. In Tajikistan, for example, remittances accounted for about 50 percent of GDP in 2008, with most Tajik migrants reportedly working in Russia.

Another factor affecting the region is the weakness of the Russian ruble, which has depreciated by about 30 percent against the U.S. dollar since July 2008. Some CCA countries were initially reluctant to let their currencies to depreciate, putting them at a competitive disadvantage and reducing the value of remittances given the corresponding appreciation of their currencies vis-à-vis the ruble. In recent months, however, most countries (such as Armenia, Georgia, and Kazakhstan) have moved to adjust their exchange rates.

Falling commodity prices

Oil exporters in the Caucasus and Central Asia are being affected by lower world oil prices, although they could use their accumulated reserves to moderate the downturn, the IMF assessment said. Even though current account and fiscal surpluses are disappearing as revenues fall, these countries have accumulated financial assets during the boom years which they can draw upon to provide a fiscal stimulus to domestic demand and counteract the decline in economic activity.

Three other countries in the CCA group that export commodities—Armenia (copper), Georgia (ferro alloys and copper), and Tajikistan (cotton and aluminum)—have also seen their export revenues weakened. Only the Kyrgyz Republic, with gold as its main export commodity and gold prices up, is maintaining high export receipts.

Lower inflows

Most CCA countries are also likely to see capital and other foreign exchange inflows drop off in 2009. The region has been affected by the drying up of trade credit and other credit lines.

In Kazakhstan, for instance, pressures in the non-oil private sector have increased, with banks challenged to secure funding and keep satisfactory levels of liquidity which affected credit availability and growth prospects. Furthermore, this could also put pressure on the Kyrgyz Republic’s banking system, which is one-third owned by Kazakhstan banks. And since Kazakhstan is also a destination for migrant workers from the region, the growth slowdown in Kazakhstan will contribute to lower remittances to other CCA countries.

Economic activity to fall sharply in most countries in 2009

The region’s countries have varying outlooks depending on their conditions, but most are experiencing a drastic decline in economic activity, although a recovery is expected in 2010. Armenia, Tajikistan, and the Kyrqyz Republic, which depend heavily on remittances, will be more severely impacted, as well as Kazakhstan; while growth will be just barely positive in Georgia and the Kyrgyz Republic. Only Turkmenistan, Uzbekistan, and Azerbaijan are expected to delink somewhat from the downturn because of continued increases in oil and gas production and fiscal stimulus.

Policy response

The report observes that CCA countries have responded to the crisis by taking the necessary policy measures—some by allowing their currencies to depreciate in response to lower foreign exchange inflows, some by using fiscal stimulus where feasible, and others by easing monetary policy and injecting short-term liquidity to limit the credit crunch as long as price stability was not compromised.

While the IMF expects the economies to start recovering from next year onward, there are also downside risks, especially from further knock-on effects from external factors and a more prolonged global recession. In this regard, sound macroeconomic management, contingency planning, and effective communication of policies are essential to instill confidence and respond effectively to the crisis.

The report identifies three areas that require continued attention by policymakers:

• Exchange rate flexibility. Exchange rate flexibility will continue to be important in most countries to allow the region to regain competitiveness and build confidence in their currencies.

• Social safety nets. Targeted government spending can help to protect the poor and vulnerable groups during this period, and in some countries this will need to be complemented by higher donor financing.

• Tighter banking supervision. Continued efforts will be needed to identify financial sector risks and ensure appropriate banking supervision to reduce vulnerabilities.

“The IMF is working with all the countries in the region to help them weather the effects of the crisis, and we expect to intensify this cooperation in the coming year,” Ahmed said.

Comments on this article should be sent to imfsurvey@imf.org