IMF predicts slower economic growth in CCA countries

The International Monetary Fund (IMF) predicts economic growth in the Caucasus and Central Asia (CCA) will slow by an average of one percentage point this year due to the slowdown in Russia, news.tj reports.

The IMF report, Regional Economic Outlook: Middle East and Central Asia; October 2014, notes that economic activity in the CCA region is weakening, mainly because of the near-term slowdown and rising regional tensions affecting Russia, a key trading partner and sources of remittance and investment inflows, as well as weaker domestic demand in a number of CCA countries.  Near-term risks are to the downside and tied to the fortunes of large trading partners.  Policies need to focus on bolstering economic stability and, where needed, short-term support to ailing economic growth.  In addition, a new model for high, sustained, diversified, and inclusive growth is needed to set the direction for economic policies for the next decade.

Economic growth in the CCA region is expected to decline from 6.6 percent in 2013 to about 5.5 percent in 2014–15.  The forecast is ¾ percentage point weaker than in the May 2014 Regional Economic Outlook Update, mainly because of negative spillovers from an economic slowdown and increased geopolitical risks in Russia and weaker domestic demand in a number of CCA countries. Inflation pressures are rising because of weakened exchange rates.

In the region’s oil exporters, high oil prices, large policy buffers, and diversified export markets reduce the impact of Russia’s slowdown.  However, economic growth is still expected to soften from 6.8 percent in 2013 to about 5.6 percent in 2014–15.

Non-oil growth in oil exporters is projected to decline by about 1 percentage point to about 7¼ percent in 2014–15 on the back of slower consumer lending, following the implementation of macroprudential measures; increased investor caution resulting from the devaluation of the tenge and other CCA currencies; and increased geopolitical risks surrounding the conflict between Russia and Ukraine.

In the region’s oil importers, larger remittance and trade linkages with Russia, coupled with limited initial policy space, will reduce growth from 5.6 percent in 2013 to 4.6 percent in 2014.

In the CCA oil and gas exporters, inflation is expected to increase slightly to 6.5 percent in 2014, up from 6.3 percent in 2013.

In the CCA oil importers, inflation is expected to accelerate from 3.6 percent in 2013 to about 5 percent in 2014–15.  A weakening of the Russian ruble is putting pressure on the Kyrgyz and Tajik currencies, feeding quickly into inflation.

In Tajikistan, the authorities should stand ready to tighten monetary policy, especially if high private credit growth persists, says the report.

Weaker external demand is putting pressure on the external positions of most CCA countries.  The current account surplus for the CCA region is projected to decline from 3.2 percent of GDP in 2012 to about 1.6 percent and 0.7 percent of GDP in 2014 and 2015, respectively.

Lower remittances will worsen the external position of many oil importers, with the current account deficit expected to widen from 7 percent of GDP in 2013 to more than 8 percent of GDP in 2014–15.

In Tajikistan, remittance inflows and export earnings from aluminum and cotton are reportedly declining, while imports are still growing, leading to low reserve coverage.

The report notes that bold structural reforms that lead to better institutions, good governance, and vibrant business environments are necessary for the region to achieve an economic model that is sustainable, more inclusive, and diverse.