IMF Survey : External Shocks Hurt Growth in Caucasus, Central Asia

IMF News, April 25, 2016

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Growth in the Caucasus and Central Asia (CCA) this year is expected to slow to a two-decade low.
The IMF’s Regional Economic Outlook Update for the Middle East and Central Asia (released on April 25) predicts growth in the CCA region to decline to 1.2 percent in 2016.
This is a sharp drop from the 3 percent growth rate the region experienced last year, and much weaker than the 8.3 percent average in 2000-14.
Main external shocks:
- Sustained decline in prices of key commodities (oil and non-oil commodities such as copper, aluminum, and cotton).
- Spillovers from Russia’s recession.
- China’s slowdown, reducing external demand directly and indirectly.

Oil-exporting countries (Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan):
- Growth will decline to 1.1 percent this year, down from 3.2 percent in 2015.
- Combined current account deficit is projected to widen to 4 percent this year, from 2.7 percent last year.
Oil-importing countries (Armenia, Georgia, the Kyrgyz Republic, and Tajikistan):
- Growth will slow to 2.6 percent this year, down from 3 percent in 2015.
- Current account deficit is set to remain high at 9.6 percent of GDP this year.
Oil price projection cited: around $35 a barrel in 2016.

Weakened oil prices significantly reduced export revenues for oil exporters.
Lower oil prices have not benefited some oil importers because sharp drops in remittances (linked to Russia) are erasing the positive gains from lower oil prices.
Lower demand from China and falling non-oil commodity prices are additional weights on exports and investor confidence.

Currency weakening has heightened inflationary pressures, especially where inflation was already higher.
In oil exporters (Azerbaijan and Kazakhstan), inflation has reached double digits for the first time in more than 15 years.
In oil importers, smaller currency depreciations plus lower food and fuel prices and weak domestic demand have contained inflationary pressures.
Policy recommendation:
- Modernize exchange rate and monetary policy frameworks, including replacing the exchange rate as the nominal anchor with an effective interest rate instrument to help curb inflationary pressures.

The region’s financial sectors are experiencing repercussions from the external environment:
- Highly dollarized bank balance sheets are likely to continue to weaken.
- Liquidity is declining due to slowing foreign currency earnings and capital flight, exacerbated by increasing deposit dollarization.
- Credit risks are on the rise, partly because of slower growth and weaker currencies.
Recommendation:
- Stronger financial sector surveillance and supervision will be essential to minimize risks to financial stability.

Many countries have widened budget deficits by dipping into savings and increasing public spending to support activity.
Fiscal deficits:
- For oil-exporting countries: projected to widen by 1.7 percentage points of GDP to 4.9 percent in 2016.
- For oil importers: projected to reach 4.9 percent of GDP, 1.4 percentage points higher than in 2015.
Policy guidance:
- With sustained low oil prices and increasing debt, countries should start fiscal consolidation as soon as conditions allow.
- Countries with larger fiscal cushions can choose a slower pace of consolidation.
- Preserve targeted social spending and avoid spending cuts that harm medium-term growth prospects.

The shocks highlight the urgency of:
- Diversifying away from commodities.
- Reducing reliance on remittances.
Recommended reforms to support longer-term growth and job creation:
- Raise the quality of education.
- Strengthen governance.
- Increase access to finance.
- Foster private entrepreneurship to create jobs and alleviate poverty.
Warning:
- Without diversification and reforms, much of the gains made in catching up with emerging markets could be lost over the next two decades.

Source: IMF Survey : External Shocks Hurt Growth in Caucasus, Central Asia (April 25, 2016).