Caucasus, Central Asia Feel Impact of Adverse Shocks

Oil price drop, Russia’s slowdown, appreciation of the dollar are taking a toll

Fiscal stimulus, exchange rate flexibility helping countries cope in near term

Deep structural and fiscal reforms are vital for creating jobs, reducing poverty

The Regional Economic Outlook Update for the Caucasus and Central Asia, released on May 19, predicts growth in the region will reach just over 3 percent this year (see table). This latest forecast represents a downward revision of 2½ percentage points from the one released by the IMF in October 2014.

“The twin shocks of the economic slowdown in Russia, a key trading partner, and lower oil prices are taking a toll on the region,” Juha Kähkönen, Deputy Director of the IMF’s Middle East and Central Asia Department told reporters in Almaty, Kazakhstan.

“Exchange rate developments—such as the appreciation of the U.S. dollar and the depreciation of the ruble—are compounding the problem. Overall, the outlook for the region has not been this weak since the global financial crisis in 2008-09.”

Oil exporters use cushions to soften impact of oil price shock

The CCA’s oil and gas exporters—Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan—should see growth decline to 3 ½ percent in 2015 from 5½ percent last year. In some of these countries, the impact from lower oil prices and Russia’s contraction is being amplified by a slowdown in domestic oil production and delays in development of new oil fields, the IMF report says (see Chart 1).

The oil and gas exporters’ external position is set to weaken sharply in 2015. The current account balance is expected to turn from a surplus of 3 percent of GCP in 2014 to a deficit of 2 ½ percent in 2015, reflecting both oil export revenue losses and stronger import growth.

The drop in oil prices is also having a budgetary impact. Some of the region’s oil and gas exporters—such as Kazakhstan and Uzbekistan—are dipping into the large reserves built up in recent years to blunt the impact of the oil price shock. As a result, the oil and gas exporters’ fiscal balance is shifting from a surplus of about 1½ percent in 2014 to a deficit of close to three percent in 2015, according to the report.

Given that many of the oil and gas exporters cannot balance their budgets at currently projected prices, the IMF says these countries should consider taking steps toward fiscal consolidation as soon as conditions allow, to rebuild buffers, strengthen fiscal sustainability, and share the...