The IMF’s Regional Economic Outlook for the Middle East and Central Asia, officially launched on October 19 in Dubai and October 21 in Almaty, forecasts
the region’s growth in 2016 to be 1.3 percent, lower than at any other year since 1998.
This growth rate is particularly being weighed down by the region’s oil exporters—Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan—who are facing
growth of 1 percent this year, according to the IMF. The region’s oil importers—Armenia, Georgia, the Kyrgyz Republic, and Tajikistan—are forecast to grow
at 3.7 percent, unchanged from 2015.
The IMF says the region's growth overall will rebound to 2.6 percent in 2017 (see table).
In subsequent years, growth is projected to improve further, but the IMF expects that recovery to be slower than either of those that followed the 2009
global financial crisis and the 1998 Russian financial crisis.
Should that happen, the region could see growth in its living standards decelerate over the medium term compared with other emerging markets and developing
economies.
Persistent external shocks
The Deputy Director of the IMF’s Middle East and Central Asia Department, Juha Kähkönen, said that while the region is being held back by factors outside
its control—the slump in global commodity prices, including crude oil and natural gas, subdued economic conditions in Russia, and slowing growth in
China—these developments have only intensified the need for further monetary and financial policy actions, as well as key structural reforms.
“The CCA region is at an important juncture, and policymakers need to take important steps toward promoting strong and inclusive growth and job creation,
much needed to preserve and improve living standards,” Kähkönen told reporters in Almaty, Kazakhstan.
“The protracted nature of these shocks underlines the pressing need to diversify these economies away from their dependence on remittances and commodity
exports, so they can more effectively cope with the kinds of economic challenges they’re currently facing,” he added.
To this point, the region’s countries have used a mix of public spending and currency adjustment to cope with the drop in commodity prices and the economic
slowdowns in key trading partners.
However, according to the IMF, amid weak revenues, budget deficits have widened some 6.4 percentage points of GDP between 2014 and 2016—and public debt has
increased.
Currency adjustment, and in some cases increased exchange rate flexibility, has helped cushion the effect of the shocks on external and fiscal balances,
while also supporting competitiveness.
However, currency adjustment has temporarily raised inflation in a number of countries and added to vulnerabilities in the region’s highly dollarized
financial sectors, as reflected by downward pressures on asset quality, and lower bank lending and borrowing.
Structural transformation needed
Kähkönen said that to address the legacy of the external shocks, the CCA countries need to pursue the right mix of policies and structural reforms.
“For these countries, the immediate priorities are to direct what spending is available toward pro-growth areas—such as education, training, and health
care. At the same time, these countries need to prepare and implement medium-term fiscal consolidation plans to preserve fiscal space,” Kähkönen said.
To reap the benefits of needed increased exchange rate flexibility, policymakers should strengthen their monetary policy frameworks by adopting credible
nominal anchors and enhancing the independence of central banks. At the same time, there is a need to bolster financial sector oversight and crisis
management policies, the report said.
“All these actions will help to support growth in the near term, while boosting competitiveness and keeping inflation and debt levels in check,” Kähkönen
noted.
Beyond that, however, Kähkönen said the Caucasus and Central Asian countries need to undertake wide structural reforms of their economic models, especially
to strengthen governance, accountability, property rights, and financial intermediation, all of which are areas the region lags behind other emerging
markets.
“This is crucial for helping to boost growth over the medium and longer term,” he said.
The report highlights that many countries have drawn up diversification and privatization plans, and emphasizes that the focus must now turn to
implementing these plans decisively, transparently, and thoroughly.
“The success of these measures will allow the region to enjoy more sustained and inclusive growth, which will improve living standards and lower poverty
rates,” Kähkönen said.
