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

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

IMF Survey: Caucasus, Central Asia Set for Robust Growth, But Global Risks Weigh

October 31, 2011

  • Economic recovery gains momentum across the region
  • With inflation posing a risk, monetary tightening is needed in some countries
  • Fiscal consolidation would benefit most countries in the region

Growth in the eight countries of the Caucasus and Central Asia (CCA) is expected to remain fairly robust, but policymakers should be mindful of inflation risks and take advantage of the strong recovery to rebuild policy buffers and prepare for any downside risks that might materialize, the IMF says in its latest assessment.

Caucasus, Central Asia Set for Robust Growth, But Global Risks Weigh

Oil worker in Baku, Azerbaijan: CCA oil and gas exporters should try to keep inflation in check, the IMF says (photo: David Mdzinarishvili/RTR/Newscom)


According to the Regional Economic Outlook for the Middle East and Central Asia, released October 26 in Dubai, the CCA is set to grow 5.6 percent in 2011 and 6.2 percent in 2012 (see table). For the region’s oil- and gas-exporting countries, the expansion is driven by high oil and gas prices, while the oil- and gas-importing countries are benefiting from the continued recovery in Russia, a key trading partner.

However, external risks to the outlook in the CCA region have increased and derive from a heightened perception of fragility in the global recovery, the report noted.

“For the CCA, a sharp decline in global growth could mean a fall in commodity prices, a decline in export demand, and a decrease in remittances and capital flows to the region,” David Owen, Deputy Director of the IMF’s Middle East and Central Asia Department told a press conference in Almaty, Kazakhstan.

“If these external risks do not materialize, however, we foresee good prospects for the region, with fairly solid growth,” he added.

Oil and gas importers need to address external vulnerabilities

The growth outlook for region’s oil- and gas-importing countries—Armenia, Georgia, the Kyrgyz Republic and Tajikistan—is favorable. Activity has picked up strongly in 2011, reflecting a recovery from last year’s fall in agricultural production in Armenia and a rebound from the Kyrgyz Republic’s contraction resulting from civil unrest. Continued global recovery, including in Russia, is also benefiting the region by boosting both trade and remittances. The IMF forecasts growth at an average of 5.3 percent in 2012 for the oil and gas importers.

Driven largely by high food prices, inflation has been rising since mid-2010 (see chart). In response to surging inflation, governments throughout the region tightened monetary policy, but additional tightening is still needed in some countries, such as the Kyrgyz Republic and Tajikistan, the IMF assessment says.

With the recovery gaining speed, CCA oil and gas importers should aim for fiscal consolidation to rebuild fiscal buffers that were depleted during the global financial crisis, to help safeguard their economies against future shocks. Such fiscal adjustment—which has already begun in Armenia and Georgia—would also help rein in large external current account deficits, the IMF report states. Maintaining exchange rate flexibility and accelerating the pace of structural reforms to boost competitiveness will also help reduce external vulnerabilities.

Oil and gas exporters face risk of inflation becoming entrenched

The oil and gas exporters—Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan—are growing fast. This growth, coupled with an accommodative policy stance, poses a risk of overheating. Although international food and fuel prices are moderating, core inflation is projected to rise in 2012 in all of the CCA oil and gas exporters.

Given this risk, monetary policy should exit from its accommodative stance, the report recommends. However, monetary policy has only limited traction in most of the region’s countries, so policymakers should aim to enhance its effectiveness by fostering financial deepening, enhancing central bank independence, improving the capacity of monetary policy tools, promoting more competition in banking systems, and avoiding unnecessary government intervention.

For 2011, all of the region’s oil and gas exporters are maintaining an expansionary fiscal stance. To limit inflationary pressures and ensure stability, however, governments need to exercise caution over spending increases, cut nonpriority spending, and avoid further increases in hard-to-reverse items, such as wages and pensions, the report observes. Over the medium term, measures to enhance the transparency, quality, and efficiency of public spending, as well as to raise non-hydrocarbon revenues, would also contribute to fiscal consolidation.

“If, however, global growth deteriorates sharply, then tightening of macroeconomic policy might have to be put on hold,” the report cautions.

Fostering employment, inclusive growth

The reliability of unemployment estimates in the CCA is uncertain, but available data suggest that unemployment is high.

In Azerbaijan, the unemployment rate is near 10 percent, and in Armenia, it stood at 19 percent in 2009. Georgia’s unemployment rate in 2009 was about 17 percent, according to official estimates, but alternative estimates put unemployment in the range of 20–30 percent. In all countries, youth unemployment is even higher.

Creating jobs and fostering high and inclusive growth is therefore a priority for governments in the region, the report says. The key components of the medium-term reform agenda to address this challenge include policies that aim to improve the business environment; ensure equal access to public services; enhance transparency, governance and institutional quality; boost regional trade integration; and address skill mismatches between job-seekers and available jobs.