Capital inflows: a mixed blessing?
| Author | John Wakeman-Linn |
| Position | IMF Middle East and Central Asia Department |
| Pages | 142-143 |
Page 142
Like many emerging market and developing countries around the world, nine countries in the Caucasus and Central Asia are on the receiving end of large inflows of foreign exchange and are grappling with some of the same issues of how to control inflation and manage the exchange rate. An April 25 seminar in Almaty, Kazakhstan, organized by the IMF's Middle East and Central Asia Department and co-sponsored by the National Bank of Kazakhstan, focused on policy options that would maximize the benefits of the inflows to the countries while maintaining external competitiveness and keeping inflation under control.
The nine countries-Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Pakistan, Tajikistan, Turkmenistan, and Uzbekistan-are benefiting from large inflows of foreign exchange into their economies (see chart) in the form of buoyant export receipts, remittances, foreign direct investment, and external borrowing by banks. The inflows are driven in part by high energy prices and a favorable situation in global financial markets. They have contributed to exceptionally fast economic growth in the region, averaging more than 10 percent a year for the past four years.
They have also led to abundant liquidity, rising inflation, and pressures for exchange rate appreciation, which have complicated the conduct of monetary and exchange rate policies.
Policymakers in these countries are thus grappling with two potentially serious challenges. First, they are struggling to prevent exchange rate appreciation from undermining their external competitiveness and efforts to diversify their exports while keeping inflation under control. Second, they are trying to ensure that the developing financial sectors in their economies are able to effectively intermediate the massive inflows while minimizing the risks of future financial sector problems.
The one-day seminar, attended by representatives of the central banks and governments of the nine countries, provided a forum in which the participants could discuss the strategies for managing strong foreign exchange inflows. It was opened by Kazakhstan's Prime Minister, Karim Massimov, and was co-chaired by Anvar Saidenov, Chairman of the National Bank of Kazakhstan, and Mohsin S. Khan, Director of the IMF's Middle East and Central Asia Department.
Following the opening remarks, David Owen (IMF) described how...
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