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Mr. Mark A Horton, Hossein Samiei, Mr. Natan P. Epstein, and Mr. Kevin Ross
Since late 2014, exchange rates (ERs) and ER regimes of the Caucasus and Central Asia (CCA) countries have come under strong pressure. This reflects the decline of oil and other commodity prices, weaker growth in Russia and China, depreciation of the Russian ruble, and appreciation of the U.S. dollar, to which CCA currencies have historically been linked. Weaker fiscal and current account balances and increased dollarization have complicated the picture. CCA countries entered this period with closely managed ER regimes and, in many cases, currencies assessed by IMF staff to be overvalued. CCA central banks have price stability as their main policy objective, and most have relied on ER stability to achieve this objective. Thus, the first policy response involved intervention in local foreign exchange (FX) markets, often with limited communication. In this context, the IMF staff has reviewed ER policy advice and implementation strategies for CCA countries.
International Monetary Fund. Middle East and Central Asia Dept.

DISCUSSIONS A. Implementing a Sustainable Fiscal Consolidation B. Modernizing Monetary and ER Policy Frameworks C. Reducing Financial Sector Vulnerabilities D. Implementing Reforms to Raise Potential Growth STAFF APPRAISAL A. IBA B. Supervision C. The Rest of the Banking System D. Insurance Fund and Macro-Prudential Policies E. Epilogue: FSAP issues BOXES 1. Non-Oil Tax Revenue 2. Linkages and Spillovers 3. Macro-Financial Linkages 4. Recommended Fiscal Rule Targets FIGURES 1. CCA Macroeconomic Outcomes 2. Real Sector Indicators

Mr. Mark A Horton, Hossein Samiei, Mr. Natan P. Epstein, and Mr. Kevin Ross

average. However, as discussed elsewhere, legislation does not always ensure adequate independence and transparency in practice. 2. ER Policy Advice IMF ER Policy Advice and Rationale 7 IMF ER policy advice for CCA countries—both oil exporters and importers—has been to move toward greater ER flexibility. This has been combined with recommendations to modernize monetary and ER policy frameworks, develop and deepen capital markets, and improve macroprudential supervision. These actions would support implementation of independent monetary policy and

International Monetary Fund. Middle East and Central Asia Dept.

debt stock. Staff stressed that a rule-based fiscal framework supplemented by a strong public financial management system, detailed multi-annual budgets, and a public debt strategy would entrench fiscal discipline and mitigate the volatility of oil revenue while promoting intergenerational equity. In this context, the authorities plan to request FAD TA on fiscal rules. B. Modernizing Monetary and ER Policy Frameworks 2 16. The CBA is informally targeting base money growth in 2016, with a desired move to IT in the long-run . A tighter monetary stance has

International Monetary Fund. Middle East and Central Asia Dept.
This 2016 Article IV Consultation highlights that the economic performance in Azerbaijan has been impaired by a number of negative shocks. Lower oil prices, weak regional growth, currency devaluations in its main trading partners, and a contraction in hydrocarbon production rapidly erased the large current account surplus the country enjoyed during the oil boom years. Near-term economic prospects remain weak. Under current policies, growth is expected to contract in 2016 and remain sluggish in the next few years, while inflation is expected to gradually decrease. The current account balance should improve as the devaluations work to limit imports and support nontraditional exports.
International Monetary Fund. Middle East and Central Asia Dept.

, which has targeted infrastructure, utilities, housing, and SMEs, an overhaul of the monetary and ER policy framework, and structural reforms focusing on the business climate and the public sector (transparency, accountability, and efficiency)—has helped mitigate the impact of the shocks and stabilize conditions. Fiscal and external buffers, accumulated during the period of strong growth and high oil prices, have been instrumental in implementing anti-crisis policies. Recovery is underway, supported by increases in oil prices. However, to sustain the positive momentum

International Monetary Fund. Middle East and Central Asia Dept.

.70 manat per dollar since March 2017. Continue modernizing the CBA’s monetary and ER policy frameworks. The CBA has committed to moving toward an inflation targeting regime over the medium term. Financial Sector Policy Further downsize the largest state bank (IBA), resolve its NPLs, and privatize it. The IBA’s balance sheet shrunk further in 2018, after declining by some 40 percent in 2017. The authorities are discussing privatization plans with an IFI advisor. NPLs have declined. Address NPL problem and restart credit intermediation

International Monetary Fund. Middle East and Central Asia Dept.
This 2019 Article IV Consultation with the Republic of Azerbaijan highlights that the economy is continuing to recover from a banking crisis and recession. Looking ahead, economic growth is expected to reach 2.7 percent in 2019 on strong hydrocarbon production and robust domestic demand, benefitting from new spending measures. Gradual and growth-friendly fiscal consolidation is needed to strengthen intergenerational and precautionary buffers while mitigating the adverse impact on the economy. Consolidation could rely on prioritizing and improving the efficiency of spending, rationalizing tax policy, and improving revenue administration. Reducing administrative burden for businesses, encouraging competition, and strengthening governance and transparency would reduce the cost of doing business, foster entrepreneurship, and attract foreign capital. Prioritizing investment for healthcare and education, improving its efficiency, and better targeting of social protection would help nurture human capital and improve productivity. Addressing governance weaknesses is essential to reduce vulnerabilities to corruption. More integrated policies, along with better data availability, would support decision making and credibility, and attract investment.
International Monetary Fund. Middle East and Central Asia Dept.
This 2017 Article IV Consultation highlights growth in Kazakhstan expected to strengthen to 2.5 percent in 2017 after a slowdown in 2016, reflecting higher oil production and the effect of substantial fiscal stimulus spending. The sharp exchange rate depreciation in late 2015 and early 2016 triggered a surge in consumer prices, but inflation has come down to levels consistent with the National Bank of Kazakhstan’s target range. The medium-term outlook has improved; growth in the non-oil sector is expected to pick up gradually to 4 percent, benefiting from structural reforms and a resumption of bank lending. Uncertainty is high, however, because the economy remains vulnerable to commodity price swings and especially to a sustained decline in oil prices.
International Monetary Fund. European Dept.
Serbia succeeded in addressing macroeconomic imbalances and restoring confidence and growth under the precautionary SBA which expired in February 2018. Fiscal sustainability has been restored by placing public debt on a firm downward path and the external position has been realigned with fundamentals. Monetary policy has kept inflation under firm control, while supporting economic recovery. The resilience of the financial sector has improved. Progress has also been made on structural and institutional reforms, including in rationalizing the size of public sector employment, addressing fiscal risks from SOEs, and improving the business environment. However, challenges remain for achieving robust, inclusive, and sustainable growth, which Serbia needs for faster income convergence with its EU peers. The authorities requested a 30-month Policy Coordination Instrument (PCI) to provide a framework for continued macroeconomic stability and reforms, and maintain close policy dialogue with staff.