Caucasus, Central Asia Set for Robust Growth, But Global Risks Weigh

Economic recovery gains momentum across the region

With inflation posing a risk, monetary tightening is needed in some countries

Fiscal consolidation would benefit most countries in the region

According to the Regional Economic Outlook for the Middle East and Central Asia, released October 26 in Dubai, the CCA is set to grow 5.6 percent in 2011 and 6.2 percent in 2012 (see table). For the region’s oil- and gas-exporting countries, the expansion is driven by high oil and gas prices, while the oil- and gas-importing countries are benefiting from the continued recovery in Russia, a key trading partner.

However, external risks to the outlook in the CCA region have increased and derive from a heightened perception of fragility in the global recovery, the report noted.

“For the CCA, a sharp decline in global growth could mean a fall in commodity prices, a decline in export demand, and a decrease in remittances and capital flows to the region,” David Owen, Deputy Director of the IMF’s Middle East and Central Asia Department told a press conference in Almaty, Kazakhstan.

“If these external risks do not materialize, however, we foresee good prospects for the region, with fairly solid growth,” he added.

Oil and gas importers need to address external vulnerabilities

The growth outlook for region’s oil- and gas-importing countries—Armenia, Georgia, the Kyrgyz Republic and Tajikistan—is favorable. Activity has picked up strongly in 2011, reflecting a recovery from last year’s fall in agricultural production in Armenia and a rebound from the Kyrgyz Republic’s contraction resulting from civil unrest. Continued global recovery, including in Russia, is also benefiting the region by boosting both trade and remittances. The IMF forecasts growth at an average of 5.3 percent in 2012 for the oil and gas importers.

Driven largely by high food prices, inflation has been rising since mid-2010 (see chart). In response to surging inflation, governments throughout the region tightened monetary policy, but additional tightening is still needed in some countries, such as the Kyrgyz Republic and Tajikistan, the IMF assessment says.

With the recovery gaining speed, CCA oil and gas importers should aim for fiscal consolidation to rebuild fiscal buffers that were depleted during the global financial crisis, to help safeguard their economies against future shocks. Such fiscal adjustment—which has already begun in Armenia and Georgia—would also help rein in large...