Caucasus, Central Asia Rebound, But Inflation Poses Risk

Recovery driven by commodity exports, public investment

But higher inflation is leading to government spending pressures

Countries need to develop targeted, cost-effective safety nets for the poor

The Regional Economic Outlook for Middle East and Central Asia notes that the region’s post-crisis recovery took hold in 2010, with growth registering 6½ percent, up from 3½ percent in 2009. This unexpectedly strong rebound was driven by commodity exports and public investment, with oil and gas exporters enjoying particularly strong growth.

In 2011, as oil and gas production growth slows, the region’s expansion is expected to moderate to 5¾ percent, IMF Middle East and Central Asia Department Deputy Director David Owen told reporters at an April 28 press briefing on the report in Tbilisi, Georgia.

“To sustain the recovery, policymakers in the Caucasus and Central Asia will need to address rising inflation, respond to social pressures arising from high food prices without threatening fiscal stability, and restore the health of banking systems,” Owen said.

Road to recovery

In 2010, the region’s oil and gas exporters (Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan) experienced 7 percent growth and improved their current account position by 5½ percentage points of GDP. Although the expansion was lower—at 4 percent—in oil and gas importing countries (Armenia, Georgia, the Kyrgyz Republic and Tajikistan), these countries’ external positions also strengthened, aided by higher mineral and metal prices. Foreign exchange reserves generally increased, particularly in Azerbaijan and Kazakhstan, where there was also a significant accumulation of assets in sovereign wealth funds, the report says.

Despite clear signs of recovery, remittances—a key source of inflows in Armenia, the Kyrgyz Republic, and Tajikistan—picked up from 2009, but did not return to 2008 levels. Similarly, in Georgia and Kazakhstan, foreign investment continued to be well below pre-crisis levels. And private demand remains subdued in countries like Kazakhstan, restrained by weak financial systems and ongoing deleveraging, the report notes.

Since the crisis, financial sector difficulties have continued to plague the region. High and rising nonperforming loans have impaired bank financial positions and pose risks to capital adequacy. In Kazakhstan, the Kyrgyz Republic, and Tajikistan, despite ample bank liquidity, banks are unwilling to extend loans to avoid further risks to...