ASIA: IMF says economic crisis “virtually” halts growth in Caucasus and Central Asia
Wednesday, 20 May 2009 20:00
(EnergyAsia, May 21, Wednesday) --- Economic growth in the Caucasus and Central Asia (CCA) is expected to crawl at a mere 0.9% this year and may only recover slightly next year, compared with 6.3% in 2008, said the International Monetary Fund (IMF).
The global downturn is now affecting most countries in the region, including the four oil and gas exporters of Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan, and the four importers of Armenia, Georgia, the Kyrgyz Republic, and Tajikistan.
As a result, CCA growth, which had attained double-digit levels in recent years, is taking a hit.
“As the global crisis spreads through the region, the hard-earned macroeconomic gains of recent years have been put at risk, with growth coming to a virtual halt and financial vulnerabilities on the rise,” said Masood Ahmed, director of the IMF’s Middle East and Central Asia Department.
The current contraction in Russia’s economy is now hurting the region’s 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, the IMF said 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% of GDP in 2008, with most Tajik migrants reportedly working in Russia.
Another factor affecting the region is the weakness of the Russian rouble, which has depreciated by about 30% against the US dollar since last July. Some CCA countries were initially reluctant to let their currencies to depreciate as it put them at a competitive disadvantage and reduced the value of remittances as their currencies rose against the rouble.
In recent months, however, Armenia, Georgia, and Kazakhstan have begun to depreciate their currencies.
The region’s oil exporting economies are suffering from the impact of lower world oil prices, but the IMF said they could use their accumulated reserves to moderate the downturn. Even though current account and fiscal surpluses are disappearing as revenues fall, these countries have accumulated financial assets during the boom years which they can draw upon to provide a fiscal stimulus to domestic demand and counteract the decline in economic activity.
Armenia (copper exporter), Georgia (ferro alloys and copper), and Tajikistan (cotton and aluminum) have also seen their export revenues fall sharply. Only the Kyrgyz Republic, with gold as its main export commodity and gold prices up, is maintaining high export receipts.
Most countries in the region will also feel the sharp decline in capital and other foreign exchange inflows this year. Their economies are hurting from 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 the Kyrgyz Republic’s banking system, which is one-third owned by Kazakhstan banks.
As Kazakhstan is also a destination for migrant workers from the region, its economic slowdown will contribute to lower remittances to other CCA countries.
The IMF report stated that CCA countries have responded to the crisis by taking policy measures such as allowing their currencies to depreciate in response to lower foreign exchange inflows, using fiscal stimulus where feasible, and 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.
