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Caucasus, Central Asia See Solid Growth, But Risks Remain

Saturday 21 April 2012, by Babak KHANDANI

(IMF Survey online) – The outlook for the Caucasus and Central Asia region remains broadly positive, with growth for most countries projected to reach 5-7%, says the IMF’s latest economic outlook for the region.

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Regional Economic Outlook Update: Middle East and Central Asia (PDF)
The Caucasus and Central Asia (CCA) region recorded fairly strong economic performance in 2011, underpinned by robust commodity exports and remittance inflows. Although growth of such flows is expected to moderate in the near term – reflecting a weaker external environment – CCA economies are still expected to hold up well. This broadly positive outlook presents an opportunity for CCA policymakers to rebuild policy buffers, prepare for downside risks that might materialize, and foster an inclusive growth agenda.

But a sharp slowdown in global economic activity could pose a risk to the forecast for the region’s eight countries, Middle East and Central Asia Department Director Masood Ahmed told reporters in Washington. So far, the impact of the euro area crisis has been limited, Ahmed said, adding that despite a weaker external environment, oil and gas demand is expected to remain high this year and next, driving the region’s continued high growth. “The region’s oil and gas exporters benefitted from the high price of oil, while the oil and gas importers benefitted from the continued recovery in Russia, which has brought a steady increase in workers’ remittances,” Ahmed observed.

High exports, strong public spending

The region’s oil and gas exporters – Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan – saw 6.8% growth on average in 2011 (see table). With oil and gas prices forecast to remain high this year and next, growth is expected to remain strong. Because of a weaker external environment, growth will be slightly lower in 2012, at 5.7%. But this group of countries should be able to maintain high export levels and sustain activity in areas outside the oil sector through continued public spending.

The region’s oil and gas importers – Armenia, Georgia, the Kyrgyz Republic, and Tajikistan – grew by 6.2% last year. Because of lower levels of global demand, these countries are likely to see a moderation in export growth, but this decline will not amount to anything approaching the sharp collapse seen in 2009. Growth for these countries is expected to reach 5.3% in 2012.

Remittance inflows to CCA oil and gas importers, mainly from Russia, are also forecast to remain fairly strong, growing by an estimated 13% in 2012.

Inflation, which had been high, has been on a downward trend in most countries in early 2012.

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(Source: IMF, World Economic Outlook)

Risks to the outlook

The most immediate concern is that a severe escalation of the euro area crisis would trigger a much sharper decline in global growth than currently envisioned – including in Russia and China, the region’s main trading partners. Such a development could result in lower commodity prices and remittances, Ahmed said. He noted three actions that policymakers in the region could take to guard against the possibility that global risks materialize:

  • Use this period of relatively strong growth to rebuild policy buffers to be prepared in case of a downturn;
  • Develop a clear plan to address problem loans, given that banking sector balance sheets remain impaired in a number of countries (Kazakhstan, Kyrgyz Republic, Tajikistan);
  • Sustain strong growth and ensure that it translates into benefits for the entire population, including by creating more jobs. This medium-term objective will require further progress on improving governance and the business environment.

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