5. Policy Responses in CIS countries
- Ara Stepanyan, Agustin Roitman, Gohar Minasyan, Dragana Ostojic, and Natan Epstein
- Published Date:
- November 2015
Policy responses so far have focused on mitigating the immediate consequences of spillovers. Fiscal policies were loosened in addition to allowing automatic stabilizers to work in most countries. Exchange rates were allowed to depreciate to absorb shocks and monetary policies were tightened significantly. In a number of countries, macroprudential measures were put in place to discourage further financial dollarization. Going forward, there is a need to continue strengthening policy frameworks, including improving institutional frameworks and accelerating structural reforms to bolster growth, increasing resilience to shocks, and buttressing financial stability.
In the fiscal area, many countries responded to shocks with expansionary policies in 2015, though to varying degrees (see Figure 4). In most cases, countries chose to let the automatic stabilizers work, while spending increased as a function of available fiscal space and financing.
Figure 4.Fiscal Response in CIS countries
The fiscal policy response of energy exporters—countries with buffers—was mixed. Kazakhstan took a proactive stance, enacting a large fiscal stimulus to counteract spillovers from Russia, as well as lower oil prices. The stimulus, financed from the oil fund and multilateral developments banks could total up to 6 percent of GDP over the next 3 to 5 years and includes infrastructure spending projects as well as subsidized programs to promote small and medium enterprise (SME) lending and measures to reduce NPLs in the banking system. The government also requested $2 billion (about 1 percent of GDP) in budget support from the World Bank and $1 billion from the Asian Development Bank to help finance the expected larger deficit. Uzbekistan cut some taxes, including corporate income tax to stimulate economic growth. However, Turkmenistan and Azerbaijan have cut spending plans because of capacity constraints and earlier large investments.
For energy importers with low buffers, increasing spending to support growth is conditional on securing favorable financing. Financing under IMF-supported programs allowed Armenia and the Kyrgyz Republic to implement countercyclical polices. In addition, some governments (Armenia, Tajikistan) have sought additional donor support, in particular for capital spending projects and on-lending to SMEs. Kyrgyz Republic is implementing an intensive externally financed public investment program. In 2014, Moldovan authorities introduced a 0.2 percent of GDP subsidy to the agricultural sector to shore up the affected sector in response to the import ban imposed by Russia on some of the Moldovan agricultural products. Some countries are also considering easing tax policy.
Nearly all CIS countries have allowed some nominal depreciation/devaluation over the past year or so. The policy response has involved central bank FX interventions, while allowing gradual depreciation, and three cases of step devaluation. In some countries, FX sales have reached more than 20 percent of gross reserves, and currencies continued to depreciate:
While initially resisting exchange rate changes through interventions, CIS oil importers allowed their exchange rate to depreciate. Armenia and Tajikistan have allowed some depreciation, but sought to limit this with large FX sales. Georgia and the Kyrgyz Republic, however, have allowed their exchange rates to move with less intervention. Following an initial attempt to stave off mounting exchange rate pressures through administrative measures, the National Bank of Republic of Belarus (NBRB) has allowed substantial ruble depreciation, which amounted to 30 percent against the U.S. dollar. It also started the transition toward a more flexible exchange rate regime. Reflecting weaknesses in the banking system, political uncertainty, and spillovers from Russia, Moldova’s exchange rate has depreciated by about 30 percent against the U.S. dollar.
In contrast, most CCA oil exporters have tightly managed exchange rates and most resorted to step devaluations or move to more flexible regimes. Following the preemptive devaluation in February 2014, Kazakhstan tightly managed its tenge/dollar exchange rate before moving to the floating regime in August 2015. In response to the combined effects of ruble depreciation and falling energy prices, Turkmenistan devalued its currency by 19 percent against the dollar (January 2015), and Azerbaijan devalued the manat by 34 percent vis-à-vis the dollar (February 2015). Uzbekistan has maintained the same pace of adjustment of its crawling peg as in 2014, but the spread between official and parallel market exchange rate has more than doubled in 2015. In most cases, the exchange rate adjustments have been poorly communicated, thus undermining confidence in the currency.
Monetary policies tightened in response to rising pressures on currencies and inflation in majority of countries. Armenia, Belarus, the Kyrgyz Republic, Moldova, and to some extent Tajikistan used a wide set of instruments to tighten monetary policy, including raising policy and other rates and mopping up excess liquidity. For example, the Central Bank of Moldova has significantly tightened monetary policy, increasing the policy rate by 1000 basis points within three months. However, given impaired interest rate transmission channels and barely positive real policy rates in some case, the effectiveness of monetary policy was limited. Uzbekistan policy has been mixed: while tightening the monetary policy by restricting growth of monetary aggregates, the authorities relaxed policy at the same time by keeping interest rates low.
In the financial sector, some countries have reacted to increased dollarization by introducing macroprudential measures. The policy response involved increased reserve requirement for foreign currency deposits (Armenia), higher provisioning for foreign currency lending (the Kyrgyz Republic), tightening consumer lending (Azerbaijan), and reducing the share of mortgage and consumer loans in the total loan portfolio (Azerbaijan). To mitigate negative spillover to the banking system from problems in the agricultural sector, generated by Russia’s import ban on Moldovan agricultural goods, the Moldovan authorities relaxed temporarily regulation for agricultural loan classification.
Looking ahead, the case for strengthening domestic policies to spur potential growth and buttress financial stability in view of the long-lasting nature of the shocks is discussed in various IMF staff reports and regional reports.