DUSHANBE, December 3, 2014, Asia-Plus — The
Regional Economic Outlook for the Middle East and Central Asia
, released last month, projects that growth will fall to about 5.5 percent this year and next, in part owing to the region’s close ties with its economically struggling neighbor.
Economic developments in Russia significantly affect the growth prospects of the CCA region through a number of channels, mainly trade, remittances and investments. A protracted period of slower growth in other trading partners, particularly Europe or China, could also have a negative impact over a longer time horizon, the report cautioned.
The CCA’s oil exporters—Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan—are expected to see growth soften to 5.6 percent this year from 6.8 percent in 2013. These countries are shielded to some extent from Russia’s slowdown, thanks to diversified export markets and the high oil prices of recent years, which allowed large fiscal cushions to be built up.
Non-oil growth in the oil-exporting countries is nonetheless forecast to decline by about 1 percentage point, because of slower consumer lending, increased investor caution, and higher geopolitical risk related to the conflict between Russian and Ukraine, the IMF staff said.
Weaker external demand, especially from Russia, is putting pressure on the current account balances, with the surpluses of the CCA oil exporters shrinking appreciably. Fiscal surpluses are experiencing a similar downward trend, with an expected drop to 2.1 percent of GDP this year and 1.4 percent in 2015, down from 3.4 percent in 2013.
Growth in the CCA’s oil importers—Armenia, Georgia, Kyrgyzstan, and Tajikistan—is forecast to slow by a full percentage point this year, to 4.6 percent of GDP. Because these countries have close trade and remittance linkages with Russia—as well as limited fiscal cushions—they will see a greater impact from Russia’s slowdown than the CCA’s oil-exporting countries, the IMF staff’s report noted
Lower remittances from Russia, in particular, will cause the current account deficit of these countries to widen to more than 8 percent of GDP in 2014-15 from 7 percent in 2013 (except in Armenia, where remittances have remained resilient).
Fiscal deficits are likewise expected to worsen this year.
Inflation is an issue for the CCA oil importers, as it is for the region’s other countries, with the rate forecast to rise to about 5 percent in 2014-15 from 3.6 percent in 2013. This rise in inflation is partly attributable to pressure on the Kyrgyz and Tajik currencies from a weakening of the Russian ruble and rising domestic food prices.
And the recent drop in oil prices will also affect the CCA oil importers, although the exact impact is as yet uncertain. While these economies would benefit from lower oil import bills, they are particularly exposed to negative spillovers from Russia, an economy that itself depends heavily on oil.
Despite two decades of solid economic performance, inequality in the CCA remains high, along with youth unemployment and emigration. Moreover, the region’s past growth was mainly driven by volatile sources such as commodity exports and remittance flows, the report noted. Structural reforms in several areas are required to overcome the long-lasting impediments to sustainable and inclusive growth.
To move to a fairer, more viable development model, the report recommends that the region’s policymakers give priority to the following: carrying out bold structural reforms to develop worker talent, increase competitiveness, and create an environment conducive to private sector-led growth; promoting inclusive growth through better access to finance for small and medium-sized enterprises and a deeper, more stable financial system; creating a diverse and dynamic non-oil tradable sector to diversify the region’s economies and reduce their dependence on oil and gas; and pursuing broad-based, balanced trade integration at both the regional and multilateral levels.
