Five Key Questions: The Caucasus and Central Asia Economic Outlook

IMF News, May 14, 2018

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Strong public investment in Azerbaijan and higher oil production in Kazakhstan, coupled with a significant increase in oil prices in the latter half of 2017, led to better-than-expected growth for CCA’s oil exporters up to almost 4 percent.
Growth in oil importers exceeded expectations at 5.9 percent.
All countries benefitted from rising remittances.
Strong external demand provided an additional boost to countries such as Georgia and Tajikistan.
A reduction in interest rates and a strong rebound in the agricultural sector helped GDP growth reach 7.5 percent in Armenia.

Overall, regional growth is expected to be 3.7 percent in 2018 and 3.9 percent in 2019, assuming current policies.
The IMF expects gains from oil production in Kazakhstan to slow and non-oil activity to experience only a gradual pickup due to weak credit growth, among other reasons.
Growth in remittances is expected to taper off, limiting further gains for oil importers.

If the medium-term growth projections are realized, the region’s economy will have grown at less than half the average rate seen between 2000 and 2010.
The region has grown at a slower pace than other emerging markets, increasingly falling behind its peers.
Debt levels are three times higher than they were seven years ago, limiting capacity to increase public spending to boost growth.
Weak banks in some countries limit the availability of credit to boost private investment.
The current growth model—largely based on oil and gas, mining, remittances, construction, and public spending—is increasingly inconsistent with an economic vision that champions strong and sustainable inclusive growth.

Accelerate the transition to an economic growth model underpinned by a strong private sector.
- This includes cleaning up the banking system in certain countries and improving the business climate in others.
Strengthen fiscal resilience to best position countries for growth over the medium term.
- Strengthening revenues to help finance critical public investments and social spending without increasing debt.
Champion openness and integration—both globally and within the region.
- Trade within the region has gone down significantly in recent decades.
- Non-oil exports to the rest of the world are well below levels of emerging markets.
- Greater integration would allow the region to capitalize on the opportunities presented by the strengthening global economy.

Use the positive global economic outlook as an opportunity to accelerate structural reforms aimed at boosting resilience to fiscal risks.
Examples of strengthening defenses:
- Georgia published an extended fiscal risks statement that covers public-private partnerships, power purchases agreements, and contingent liabilities related to state-owned enterprises.
- Armenia enacted efforts to adopt a new public-private partnership law aligned with international best practices and to strengthen the role of its Finance Ministry’s Fiscal Risks Assessment Division.
The report encourages a reform agenda that moves away from an economic model based on remittances, commodities, and the public sector toward one defined by a well-diversified private sector.

Source: Five Key Questions: The Caucasus and Central Asia Economic Outlook (May 14, 2018).