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

_IMF News, April 25, 2016_

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## Bibliographic details
- Published: April 25, 2016

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### Growth outlook and key drivers
- 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.

### Country group outcomes
- 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.

### External balances and remittances
- 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.

### Inflationary pressures and exchange rate policy
- 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.

### Financial sector vulnerabilities
- 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.

### Fiscal positions and consolidation guidance
- 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.

### Structural reform priorities for a new growth model
- 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).*

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_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/socar042516d_