Managing Director's Speech on the “Golden Promise” of Economic Reform in Caucasus and Central Asia

IMF News, June 8, 2023

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Authors: Kristalina Georgieva
Published: June 8, 2023

Introduction and framing

Speaker: Kristalina Georgieva, Managing Director, IMF; location: Nazarbayev University, Astana; date: June 8, 2023.
Region: Caucasus and Central Asia described as historic crossroads shaped by nomads of the steppe and traders of the Silk Road.
Central thesis: In a more shock-prone, fragmented world, the region should pursue a new growth model that invests in people, reimagines the role of the state, and unlocks the private sector to create high paying jobs and improve living standards for all.
Three priority reform areas highlighted: inclusion (invest in people), private sector development (reduce and modernize the role of the state), and climate change.

Economic outlook and IMF engagement

Recent performance and shocks:
- Growth in the region: 4.8 percent in 2022.
- Russia’s invasion of Ukraine: major adverse shock reshaping trade, finance and migration.
- Pandemic effects: increased poverty and inequality.
Structural reform potential:
- IMF research: structural reforms could boost output in the region by 5 to 7 percent in the medium term.
IMF financial and technical support provided:
- Emergency financing to the Kyrgyz Republic: $121 million (first member country to receive emergency support during the pandemic).
- Emergency financing to low-income countries in the region: $800 million.
- Global allocation of Special Drawing Rights: $650 billion total; $4 billion of the allocation went to the Caucasus and Central Asia.
- Capacity Development Center (official opening tomorrow in Almaty): since early 2021 has delivered more than 200 capacity-development activities, including 140 bilateral missions and 34 regional workshops.
Policy implication: deeper regional economic integration and diversification of trade partners to reduce vulnerability from geopolitical shifts.

Reform area 1 — Invest in people (inclusion)

Key goals:
- Build human capital to support social cohesion and inclusive growth.
- Enable youth to thrive through education and create opportunities.
Social protection and delivery:
- Region has higher poverty and lower government spending on social protection compared with peers in emerging Europe.
- Recommendations: consolidate household data, strengthen administrative capacity, and digitalize government systems to improve delivery and timeliness of benefits.
- Design principle: benefits should create labor-force incentives and act countercyclically—scale up during shocks and scale back during expansions (examples: unemployment insurance, targeted social assistance).
Fiscal constraints and revenue mobilization:
- Acknowledge fiscal pressure from recent shocks, high debt, and competing spending needs.
- Example of revenue improvement: Kyrgyz Republic digitized tax administration, reducing informality and increasing tax collection by about 3 percent of GDP in 2022 compared with pre-COVID levels.

Reform area 2 — Reduce and modernize the role of the state (private sector development)

Governance and institutional reforms:
- Good governance and rule of law attract private investment and support dynamic growth.
- Case study: Georgia’s Public Service Halls delivering about 450 public services under one roof—cut red tape, increased transparency, improved business climate, and contributed to strong economic growth.
State-owned enterprise (SOE) reform:
- Many SOEs operate in sectors that could be served more efficiently by the private sector.
- Policy actions: privatize and restructure SOEs, reform corporate governance to lift medium-term growth and resilience to shocks.
Role of the state: facilitator and enabler, not the primary driver of economic activity.

Reform area 3 — Climate change and the low-carbon transition

Vulnerability and projected impact:
- The region is highly vulnerable; temperatures rising faster than elsewhere, increased droughts and flooding.
- IMF estimate: climate change could cause a loss of annual output of nearly 6.5 percent in the region by 2060.
Mitigation and adaptation policy options:
- Scale back energy subsidies and introduce carbon-price mechanisms.
- Examples: Kyrgyz Republic raised electricity tariffs by 30 percent; Tajikistan raised electricity tariffs by 17 percent—steps toward gradual elimination of energy subsidies.
- Scale up climate-resilient infrastructure: Armenia funded drip irrigation to help farmers adapt and save water.
Transition challenges for oil exporters:
- Oil exporters such as Kazakhstan will face tradeoffs and must diversify to reduce dependence on fossil fuels and strengthen the business climate for non-oil investment.
Labor-market opportunities:
- IMF research: green-intensive jobs pay 7 percent more on average than pollution-intensive work.
Cross-border coordination: “No country can do it alone!” — global policies to cut emissions plus domestic adaptation/transition steps are needed to reduce projected losses.

Policy recommendations (concise)

Invest in people: expand education, digitalize service delivery, consolidate household data systems, and design social programs that are targeted and countercyclical.
Raise revenues where feasible: pursue tax policy and administration reforms (example: Kyrgyz Republic’s tax digitization).
Improve governance and rule of law to attract private investment; replicate successful service delivery models (example: Georgia’s Public Service Halls).
Reform SOEs through privatization, restructuring, and corporate-governance reforms to boost efficiency and resilience.
Prepare for low-carbon transition: remove energy subsidies, introduce carbon pricing, scale up climate-resilient infrastructure, and diversify economies away from fossil-fuel dependence.
Leverage IMF support: financial instruments, SDR allocation, and capacity development to assist implementation.

Closing message

The region stands at a crossroads; continued market-oriented reforms are presented as the surest path to insulate economies against future shocks and to realize private-sector led growth.
Inspirational closing: quote by Abai — “Through summer heat and winter cold, you stood firm, your spirit bold.”
IMF commitment: “We at the IMF will continue to support your efforts, working in partnership for the benefit of all people in this region and beyond.”

Source: Managing Director's Speech on the “Golden Promise” of Economic Reform in Caucasus and Central Asia, Kristalina Georgieva, Nazarbayev University, Astana, June 8, 2023.