Caucasus, Central Asia See Robust Growth, But Risks Remain

Oil, gas, other extractive industries and strong domestic demand are driving growth

Slowdown among key trading partners presents downside risks

Region should capitalize on current conditions to strengthen finances, enact reforms

The IMF’s Regional Economic Outlook for the Caucasus and Central Asia, released October 25, projects that growth in the region will average about 6 percent in 2013-14.

This strong growth reflects the expansion of production in hydrocarbons and other extractive industries as well as firm growth in domestic demand, supported by stable remittance inflows, the report says.

“The favorable outlook presents an opportunity for the region to begin the structural transformation into dynamic emerging economies,” said Juha Kähkönen, Deputy Director of the IMF’s Middle East and Central Asia Department, who unveiled the report in Almaty, Kazakhstan.

Expansion continues…

Growth for the region’s oil- and gas-exporting countries—Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan—is projected to pick up slightly, to about 6 percent in 2013 and 6.2 percent in 2014 (see table). This growth is driven mainly by the recovery in oil and gas production in Kazakhstan and elsewhere.

For the oil- and gas-importing countries—Armenia, Georgia, the Kyrgyz Republic, and Tajikistan—growth is set to slow to about 5 percent in 2013 before rising to about 5½ percent in 2014, if private investment and external demand pick up as expected.

…but risks remain

The report cautioned that lower-than-anticipated growth rates in emerging markets, including, among others, China and Russia, would reduce commodity prices further and cause economic activity in the region’s oil- and gas-exporting countries to weaken.

A slowdown in emerging markets could also affect the region’s oil-importing countries by dampening exports and bilateral official project lending. Russia’s slowdown, in particular, is an important source of risk for the oil importers, in light of its close linkages with the region. Remittances from migrants working in Russia have so far remained strong, but a marked slowdown in that country could reverse this situation.

The report notes that most countries in the CCA region need to consolidate their budgets to build up their fiscal cushions and ensure that fiscal positions are sustainable. These steps are particularly necessary in light of the risk of lower oil prices and, in some countries, higher expenditures and challenges in implementing tax...