Gold mine in the Kyrgyz Republic: The region has found new export markets for commodities such as gold, oil, and gas (photo: Shamil Zhumatov/Reuters)
REGIONAL ECONOMIC OUTLOOK
The May 19-21 conference, entitled “The Transition Journey: Experience and Lessons of the Past 20 Years,” noted that the region’s economies are currently experiencing strong growth—near 6 percent, on average—fueled by high oil and gas prices and strong remittances. But private investment in these countries has been limited, and the region remains heavily dependent on remittances and commodity earnings, leaving it vulnerable to shocks.
“CCA countries have the potential to join the next generation of emerging markets, but to do so, they will have to change their growth model,” said IMF Deputy Managing Director Min Zhu.
The conference, held in Bishkek, Kyrgyz Republic, was organized to take stock of the region’s economic progress some two decades after the collapse of the Soviet Union and to chart a way forward.
Bringing together current and former policymakers, academics, and representatives of international institutions, the gathering was sponsored by the IMF, the government of Switzerland, the European Bank for Reconstruction and Development (EBRD), and the National Bank of the Kyrgyz Republic as host.
Building resilience
Looking back over the past 20 years of transition, conference participants pointed to several significant achievements of the region’s economies. Growth has been robust, inflation and interest rates have come down significantly, and the financial sector is developing, with a rise in bank deposits and lending in recent years.
Moreover, after the global crisis, the CCA recovered quickly, in part owing to the fiscal cushions built up in the years preceding the crisis that allowed governments to take measures to dampen the initial downturn and then support growth. But with these buffers eroded by the crisis response, the CCA is now vulnerable to shocks—a vulnerability that is compounded by the region’s dependence on commodity earnings and remittances, participants said.
For this reason, CCA policymakers will have to redouble their efforts to diversify their economies away from natural resources and to create jobs. As part of their effort to develop other sectors, countries in the region will need to take steps to improve the business climate. And transparency and accountability will have to be brought closer to international best practice for both government and private sector transactions, the conference heard.
Macroeconomic stability remains a prerequisite for inclusive growth. In his presentation, Juha Kähkönen, Deputy Director of the IMF’s Middle East and Central Asia Department Kahkonen, stressed the need to further strengthen fiscal and monetary frameworks, improved management of energy wealth to build up buffers, and more exchange rate flexibility to reduce vulnerabilities.
CCA Region Sustains Strong Growth, But Risks Remain
Following a solid performance in 2012, the Caucasus and Central Asia (CCA) continues to generate strong growth that is set to reach 5.8 percent in 2013, the IMF says in its latest assessment of the region.
Growth is being driven by high oil prices for the region’s oil- and gas-exporting countries and by strong commodity prices and remittances in the oil- and gas-importing countries, according to the IMF’s Regional Economic Outlook Update for the Middle East and Central Asia. But sluggish global demand, domestic political uncertainties, and geopolitical threats could pose a downside risk to the forecast, the report noted.
Policymakers should take advantage of this favorable outlook to carry out reforms and rebuild fiscal buffers to shield against a potential downturn, the report said.
With growth at 5.7 percent, the region’s expansion in 2012 was moderately lower than in previous years, reflecting subdued external demand, among other factors.
The near-term outlook remains broadly favorable for CCA oil and gas exporters—Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan—reflecting the region’s limited direct exposure to Europe and continued high oil prices. Most of these countries are projected to grow between 5 percent and 8 percent in 2013–14.
Growth in CCA oil and gas importers—Armenia, Georgia, the Kyrgyz Republic, and Tajikistan—is also expected to remain fairly strong, at 6 percent in 2013 and 5.8 percent the following year, on average.
Inflation has declined across the CCA from the elevated levels of 2011, as the region has benefited from lower international food prices and monetary policy tightening in some countries. But this trend could be reversed as economic activity picks up, the report cautioned.
Fostering new trade patterns
Trade integration represents another opportunity for the CCA region. Over time, trade patterns have shifted away from trade with Russia toward trade with Europe and China. CCA exports to China alone grew by over 200 percent between 2009 and 2012. Much of this shift is explained by the CCA’s success in finding new markets for its commodities, such as oil, gas, cotton, and gold.
But regional economic integration remains well below its potential, conference participants pointed out, calling on CCA policymakers to foster greater regional cooperation. This should include lowering obstacles to trade and addressing crucial cross-border issues like transport, energy and water, which would support both greater diversification and growth.
Financial deepening
Despite some progress in financial sector development, the region’s banking and financial systems remain relatively small and underdeveloped. Financial sector reform should aim at improving access to finance and enhancing financial sector competition, with less state involvement.
If the region’s policymakers succeed in implementing these reforms, participants said, the financial systems in the region should be in a much better position to support the investment needed for growth.
IMF’s role
The region faces significant challenges, but if CCA policymakers are able to make considerable progress in these areas, they should be able to realize the objective of achieving emerging market status over the medium term, the conference heard.
“We have every confidence that CCA countries can break through to the next level of development,” said Min Zhu, the IMF’s Deputy Managing Director. “The IMF will do its part to work with the authorities in developing and implementing their medium-term macroeconomic and structural agendas.”
The IMF, in cooperation with other international partners, can provide policy advice, financial support, and capacity building assistance to help the region meet its fundamental objective of fostering high, sustained, and inclusive growth, he added.
