Last week, on November 4 the International Monetary Fund (IMF) released the Regional Economic Outlook for the Middle East and Central Asia where they project that growth will fall to about 5.5% this year and next. Part of the region’s problems are close ties with Russia.
“Weaker growth in the Caucasus And Central Asia (CCA) region stems from the economic slowdown and increased geopolitical risks in Russia, coupled with weaker domestic demand in a number of countries due to fiscal tightening and flat oil production in some countries” Juha Kähkönen, Deputy Director of the IMF’s Middle East and Central Asia Department, told reporters in Almaty, Kazakhstan.
Russia’s economy significantly affects the growth of the CCA region. The big neighbor’s impact has been materializing via different factors like: trade, remittances and investments. Slower growth in Europe or China, could also have a negative impact on the region’s economic development.
Courtesy of IMF
The CCA’s oil exporters — Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan—are expected to see growth slowing to 5.6% this year from 6.8% in 2013. These countries managed to build up solid fiscal cushions due to the relatively high oil prices during the recent years and diversified export markets.
On the other hand, non-oil growth in the oil-exporting countries is forecast to decline by about 1 percentage point. The factors to blame are: slower consumer lending, increased investor caution, and higher geopolitical risk related to the conflict between Russian and Ukraine.
Unfortunately, the recent decline in oil prices complicates the outlook. The local oil exporters are very sensitive to a prolonged period of low oil prices and that may contribute to further growth slowdown as oil revenues decrease.
Weaker demand from Russia, is adding extra pressure on the current account balances, with the surpluses of the CCA oil exporters shrinking. Fiscal surpluses are also under a downward pressure, with an expected drop to 2.1% of GDP this year and 1.4% in 2015, down from 3.4% in 2013.
Inflation is expected to rise in the region. Oil exporters will see an increase in inflation to 6.5% this year, up from 6.3% in 2013, mainly due to recent currency depreciation.
Growth in the CCA’s oil importers — Armenia, Georgia, Kyrgyz Republic, and Tajikistan—is forecast to slow by 1 percentage point this year, to 4.6% of GDP. That’s predominantly due to the fact these countries have close trade and remittance linkages with Russia. Unfortunately, they will see a greater impact from Russia’s slowdown than the CCA’s oil – exporting countries according to IMF.
Courtesy of IMF
The IMF report suggests the CCA regions needs a new economic model. Despite the past 20 years of solid economic growth the problem is inequality. Also high youth unemployment and emigration are not good signs for the future.
The IMF report recommends that the local governments should 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.
Courtesy of IMF
The full IMF report can be accessed under the following link:
Regional Economic Outlook: Middle East and Central Asia, October 2014
Source: IMF
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