Five Things to Know About the Economic Outlook in the Caucasus and Central Asia

IMF News, April 29, 2019

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Growth is stable but longstanding challenges threaten the region's potential.
Reform acceleration is urgent amid slow global growth and policy uncertainty.
Regional growth is projected at 4.1 percent in 2019 and 2020, in line with the 4.2 percent growth seen in 2018.

Since the external shocks of 2014-16, growth has stabilized, helped by strengthened macroeconomic frameworks.
Tax code reform was implemented in Armenia, Georgia, and Uzbekistan.
Fiscal rules were adopted in Armenia, Azerbaijan, and Kyrgyz Republic.
Strengthening of monetary policy frameworks and more flexible exchange rates in some countries helped manage external pressures and contain inflation.
Growth is projected to average just 4.2 percent over 2020-23, which is less than half the recorded rate during the 2000s.
Given demographic trends, it will take on average 18 years for countries in the region to either graduate from low-income status or reach the current per capital income levels of European emerging markets.

Banking systems are burdened with problematic assets such as nonperforming loans (NPLs) and restructured loans.
In some countries, the percentage of loans that have become troublesome has reached alarming levels.
Tajikistan’s problem loans constitute more than 35 percent of its total loans, according to the latest data, with a significant majority of those being NPLs.
Pockets of bank stress persist, eroding lending capacity and inhibiting credit growth.
Monetary and exchange rate policy frameworks have not been fully upgraded; exchange rates remain largely managed, limiting shock absorption.
A marked rise in public indebtedness in some countries strains fiscal buffers and space to support growth.

Weaker growth in Russia and other key trading partners is already affecting the region through lower trade volumes and remittances.
A lack of diversity in exports increases vulnerability to commodity price swings and further slowdown in global growth.
Mounting external headwinds increase the urgency of boosting economic resilience by addressing legacy challenges and unfinished reform efforts.

Repair the financial sector to support growth by:
- Strengthening regulatory and supervisory frameworks.
- Establishing stronger resolution and crisis management frameworks to facilitate orderly and faster resolution of nonviable banks.
Fully modernize monetary policy frameworks based on credible, rules-based regimes to:
- Keep inflation expectations well-anchored.
- Foster full exchange rate flexibility to support competitiveness and shock absorption.
Rebuild fiscal buffers in growth-friendly ways by avoiding cuts to capital and social spending — especially important in countries such as Azerbaijan and Tajikistan where public debt increased significantly because of past expansionary policies.
Promote private sector development and diversification by:
- Reducing the state's outsized role and moving to more market-based approaches.
- Improving the business environment and promoting good governance to spur medium-term growth.

International Monetary Fund