ASTANA – The International Monetary Fund (IMF) released its updated Regional Economic Outlook for the Caucasus and Central Asia (CCA). The document, presented April 25, indicated the economic growth in the region has slowed to a two-decade low, “owing to the large and sustained decline in commodity prices, wide-ranging spill-overs from Russia’s recession and the slowdown and rebalancing of China’s economy.”
“2016 is an historic and momentous year for the countries of the Caucasus and Central Asia –their 25th year of independence since the breakup of the Soviet Union. From rather challenging beginnings, the CCA countries have made enormous gains over the past quarter century and have much to celebrate,” according to the op-ed “Economic Shadow over CCA Anniversary Celebrations” by Juha Kähkönen, deputy director of the IMF’s Middle East and Central Asia Department, published by bne IntelliNews.
“Without a doubt, 2016 is a time for celebrating the CCA’s first 25 years of independence – and the many achievements of all these countries. But it is also a time to find ways of becoming less dependent on commodities and remittances and promoting the development of the private sector as the engine of growth. In a proud and historic year for the CCA, this will not only help to weather the current storm, but also lay the foundations for stronger growth and prosperity in the coming years,” he added.
According to the op-ed, average growth for the period from 2017-2021 is projected to be 3.7 percent, while in 2000-2014 the rate was 8.3 percent.
“Therefore, to navigate this difficult terrain successfully, the CCA countries urgently need bold policy responses,” said Kähkönen.
“For the CCA’s oil exporters, whose growth will drop from 3.2 percent in 2015 to 1.1 percent this year, the steep fall in international oil prices and spill-overs from the recession in Russia have led to cuts in public investment, a weakening of private demand and increased exchange rate and monetary policy uncertainty. Lower oil production in some countries is also weighing on the outlook. For the CCA’s oil importers, whose growth will dip from 3 percent last year to 2.6 percent in 2016, the positive impact of cheaper oil is being more than offset by lower remittances from Russia, lower demand from China for CCA-produced goods and lower prices in other commodities, such as copper, aluminium and cotton,” he added.
The report also mentioned measures that have been taken to deal with unexpected issues. One such measure is the full exchange rate flexibility, which has also been introduced in Kazakhstan. According to the source, it has been “effective in absorbing the impact on export and fiscal revenues and preserving valuable international reserves.” At the same time, however, it has created pressures on inflation and the financial sector, which is “highly dollarised and has a significant number of un-hedged borrowers and large non-performing loans from previous crises.”
Authorities have also increased fiscal spending to both soften the impact of the shocks and support economic activity, which was mentioned in the piece.
“Yet, with these shocks expected to last and with public debt projected to rise, this stance will eventually need to move toward consolidating fiscal positions in the medium term. Such plans should limit public expenditure cuts that harm long-term growth prospects and safeguard targeted social spending. Overall, it is vital for sufficient savings to be set aside for future generations and for public debt to remain on a sustainable footing,” according to the op-ed.
The IMF recommends modernising the exchange rate and monetary policy frameworks, which in essence requires replacing the exchange rate with an effective interest rate instrument as the nominal anchor.
“This should be supported by making central banks truly independent and improving their institutional capacity, transparency and accountability. It is also crucial to have clear communication on policy actions, as a lack of clarity can increase uncertainty, weaken confidence and ultimately undermine the effectiveness of policy actions,” noted the op-ed.
The opinion added the CCA region needs reforms that promote diversification away from commodities, reduce reliance on remittances, foster a competitive business environment and create jobs.
“Thanks largely to high commodity prices and strong remittance flows, living standards in the region – as measured by real GDP per capita – doubled in the past 12 years. At the much lower growth rate projected for 2017-21 and in the absence of much-needed reforms, it would take about 25 years for living standards to double again. This underscores just how critical market-enabling reforms, improvements in the quality of education, deepening of financial markets and broad-based trade integration are to improving the region’s outlook,” it stated.