Securing a Transformational Recovery in Caucasus and Central Asia

The International Monetary Fund (IMF) projects real GDP growth at 4.3 percent in 2021 and 4.1 percent in 2022 in its latest economic outlook report for the region. Jihad Azour, director of the IMF’s Middle East and Central Asia Department, discusses some of the key issues facing the region.

Jihad Azour.

What is the status of the recovery in the Caucasus and Central Asia (CCA) region?

The recovery is underway, aided by stronger trading partner growth, policy support, and remittances. In addition, despite recent pandemic outbreaks, vaccination has accelerated significantly recently, with some countries having made good progress this year, such as Azerbaijan and Kazakhstan. Vaccinations are key, including for tourism activity, and supply of an additional 14 million vaccines is needed to achieve herd immunity across the CCA.

While we see the recovery continuing in 2022, it is likely to remain uneven and subject to headwinds and large uncertainty. 

Inflation has emerged as a new challenge for the region, which is projected to increase to 8.5 percent this year, reflecting higher global food and commodity prices and the ongoing recovery in demand. Policymakers in the region have generally responded by beginning to appropriately tighten the monetary policy stance. Inflation is expected to gradually decrease next year, yet central banks need to carefully monitor inflation expectations. Rising food prices are also a concern due to their disproportionate impact on the poor and the risk that they could trigger social discontent. Fiscal balances are beginning to improve after sharp deteriorations in deficits and public debt in 2020.

What are some other key challenges caused by the pandemic?

The region’s average unemployment rate rose to 8.7 percent in 2020. This marked a 0.8 percentage point increase over the average for 2018-19, with young people, women, and migrant workers being the hardest hit. Informal workers, who are a significant portion of the workforce in CCA countries, were more affected than in previous downturns due to lockdown measures. Likewise, smaller firms throughout the region faced a more significant adverse impact from the pandemic. 

The region also faces risks from economic scarring, a widening of existing wealth, income, and social gaps, and, ultimately, durably weaker growth.

What are some key policy priorities in the near term? 

CCA countries will need to strike a balance between navigating short-term challenges and laying the foundation for a transformational recovery. 

The immediate priority is to continue to meet health and economic support needs in line with available fiscal space. Widespread vaccination remains the most urgent priority to save lives, spur growth, and reduce inequities. To ensure that no one is left behind, stronger regional and international cooperation in vaccine deployment is essential.

Countries will need to calibrate policies carefully to manage difficult tradeoffs. As noted, inflation warrants close monitoring, and further interest rate increases could be needed if inflation expectations rise excessively. Given limits on fiscal space, additional fiscal support will need to increasingly target households that are most in need and distressed but viable firms. In the financial sector, the relaxation of prudential requirements should be gradually reversed to safeguard financial stability. Strengthening policy frameworks will help boost credibility and ease tradeoffs.

At the same time, policies are needed that address the overarching challenge for the region: how to increase potential growth and make it more inclusive. Doing so will require reforms that lead to more market-based economies and reduce and refocus the role of the state. 

Additional steps are also needed to address inequities, support employment, and mitigate risks. The region should focus on strengthening health and education and enhancing social safety nets. To address unemployment, countries could improve training programs, provide hiring incentives to help workers transition toward productive sectors, and support employment opportunities for the youth and women in the formal sector. These efforts could be facilitated by measures that reduce informality and bolster private sector employment, including by ensuring a stronger and more transparent business environment. The current moment also calls for reassessing the objectives of state-owned enterprises and their governance. Together with reforms to increase competition and the broader business environment, this could prove critical to reducing fiscal risks and promoting private sector growth and job creation.  

How can the region help ensure this recovery is transformational? 

CCA countries must also maintain a clear-eyed focus on the future and how they can ensure this recovery transforms the region. Essential to this will be capitalizing on global trends, including by investing in digital and climate-resilient technologies. Reforms are needed to ensure a robust, sustainable, and inclusive recovery and to support economic diversification. Areas to strengthen include education and training, domestic financial markets, business environment, and governance.

Digitalization has already proved helpful to many countries as they navigate this crisis. It will be vital going forward in supporting efficient social safety nets, developing new growth sectors, and ensuring the region stays competitive globally. 

The frequency and cost of climate-related disasters are already high in many CCA countries, and are projected to increase steadily in the decades ahead, which is why climate adaptation efforts are essential. For several countries, economic diversification and early reform planning will be critical to secure sustainable growth as part of a global transition to a low-carbon economy. Well-targeted climate investments would help create new, sustainable jobs for the next generation and build dynamic private sectors.   

How is the IMF supporting the region?

The CCA region is not alone as it continues to grapple with the pandemic and pursues a recovery that would put it on a more sustainable and inclusive economic path. The IMF provides close technical support and policy advice in all of the above areas. It has also supported the region with $1.4 billion in new financing since the pandemic began and allocated $4.1 billion in Special Drawing Rights.

The pandemic has made the partnership between CCA countries and the IMF stronger. Working together, we can help the region emerge from this crisis on a path to a more inclusive, resilient, and greener future. 

 

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