DUSHANBE, May 12, 2009, Asia-Plus — Growth in the Caucasus and Central Asia (CCA) is expected to come to a near halt this year—contracting to 0.9 percent in 2009 from 6.3 percent in 2008—and recover only gradually in 2010, according to the latest International Monetary Fund (IMF) forecast for the region.
According to report posted on the IMF’s website on May 11, the global downturn is now affecting most CCA countries, which include four oil and gas exporters (Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan) and four oil and gas importers (Armenia, Georgia, Kyrgyzstan, and Tajikistan).
CCA countries differ substantially in terms of per capita GDP, which ranges from $800 in Tajikistan to $8,500 in Kazakhstan. Although linkages to international financial markets are relatively weak in most countries, the global economic crisis has caught up with the region via falling commodity prices, and lower export demand and remittance inflows, especially from Russia. And CCA growth — which had attained double-digit levels in recent years — is taking a hit.
The current contraction in Russia’s economy is now slowing sharply both trade and remittances. Russia remains a key economic partner for CCA countries, all associated within the Commonwealth of Independent States, the political-economic partnership of former Soviet Union republics. While trade flows with Russia have declined over the past decade, financial linkages have increased, and a number of CCA countries are heavily dependent on remittances from Russia. In Tajikistan, for example, remittances accounted for about 50 percent of GDP in 2008, with most Tajik migrants reportedly working in Russia.
Another factor affecting the region is the weakness of the Russian ruble, which has depreciated by about 30 percent against the U.S. dollar since July 2008. Some CCA countries were initially reluctant to let their currencies to depreciate, putting them at a competitive disadvantage and reducing the value of remittances given the corresponding appreciation of their currencies vis-à-vis the ruble.
Three countries in the CCA group that export commodities — Armenia (copper), Georgia (ferro alloys and copper), and Tajikistan (cotton and aluminum) — have seen their export revenues weakened. Only Kyrgyzstan, with gold as its main export commodity and gold prices up, is maintaining high export receipts.
Most CCA countries are also likely to see capital and other foreign exchange inflows drop off in 2009. The region has been affected by the drying up of trade credit and other credit lines. In Kazakhstan, for instance, pressures in the non-oil private sector have increased, with banks challenged to secure funding and keep satisfactory levels of liquidity which affected credit availability and growth prospects. Furthermore, this could also put pressure on Kyrgyzstan’s banking system, which is one-third owned by Kazakhstan banks. And since Kazakhstan is also a destination for migrant workers from the region, the growth slowdown in Kazakhstan will contribute to lower remittances to other CCA countries.
The region’s countries have varying outlooks depending on their conditions, but most are experiencing a drastic decline in economic activity, although a recovery is expected in 2010. Armenia, Tajikistan, and Kyrgyzstan, which depend heavily on remittances, will be more severely impacted.
The report observes that CCA countries have responded to the crisis by taking the necessary policy measures — some by allowing their currencies to depreciate in response to lower foreign exchange inflows, some by using fiscal stimulus where feasible, and others by easing monetary policy and injecting short-term liquidity to limit the credit crunch as long as price stability was not compromised.
While the IMF expects the economies to start recovering from next year onward, there are also downside risks, especially from further knock-on effects from external factors and a more prolonged global recession. In this regard, sound macroeconomic management, contingency planning, and effective communication of policies are essential to instill confidence and respond effectively to the crisis.
The report identifies three areas that require continued attention by policymakers: exchange rate flexibility that will continue to be important in most countries to allow the region to regain competitiveness and build confidence in their currencies; social safety nets (targeted government spending can help to protect the poor and vulnerable groups during this period, and in some countries this will need to be complemented by higher donor financing); and tighter banking supervision (continued efforts will be needed to identify financial sector risks and ensure appropriate banking supervision to reduce vulnerabilities).
