Need for Reforms Intensifies Amid Weak Growth in Caucasus, Central Asia

IMF News, October 21, 2016

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Authors: Neil Hickey, Juan Treviño IMF Middle East, Central Asia Department October
Published: October 21, 2016

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.
The region's growth overall is forecast to rebound to 2.6 percent in 2017.
The IMF expects the subsequent recovery to be slower than the recoveries that followed the 2009 global financial crisis and the 1998 Russian financial crisis, with potential medium-term deceleration in growth of living standards relative to other emerging markets and developing economies.

Oil exporters (Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan) are facing growth of 1 percent in 2016.
Oil importers (Armenia, Georgia, the Kyrgyz Republic, and Tajikistan) are forecast to grow at 3.7 percent in 2016, unchanged from 2015.

Major external factors weakening growth:
- Slump in global commodity prices, including crude oil and natural gas.
- Subdued economic conditions in Russia.
- Slowing growth in China.
Policy responses already used:
- Mix of public spending and currency adjustment to cope with the drop in commodity prices and slowdowns in key trading partners.
- In some cases, increased exchange rate flexibility to cushion external and fiscal balances and support competitiveness.
Adverse side effects of currency adjustment:
- Temporarily raised inflation in a number of countries.
- Added vulnerabilities in highly dollarized financial sectors, reflected by downward pressures on asset quality, and lower bank lending and borrowing.

Amid weak revenues, budget deficits have widened some 6.4 percentage points of GDP between 2014 and 2016.
Public debt has increased (no numeric value provided in source text).

Immediate priorities:
- Direct available spending toward pro-growth areas such as education, training, and health care.
- Prepare and implement medium-term fiscal consolidation plans to preserve fiscal space.
Monetary and financial policy priorities:
- Strengthen monetary policy frameworks by adopting credible nominal anchors.
- Enhance the independence of central banks.
- Bolster financial sector oversight and crisis management policies.
Structural transformation priorities:
- Diversify economies away from dependence on remittances and commodity exports.
- Strengthen governance, accountability, property rights, and financial intermediation.
- Implement diversification and privatization plans decisively, transparently, and thoroughly to boost medium- and long-term growth, improve living standards, and lower poverty rates.

“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,” said Juha Kähkönen, Deputy Director of the IMF’s Middle East and Central Asia Department.
“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,” Kähkönen added.
“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.
“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.

IMF Middle East and Central Asia Department — Need for Reforms Intensifies Amid Weak Growth in Caucasus, Central Asia (October 21, 2016).