4. Caucasus and Central Asia: Sustaining the Recovery

International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
April 2011
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The sharper-than-envisaged rebound in the CCA in 2010 was led by commodity exports and public investment. To sustain and broaden this recovery, policies will have to confront three short-term challenges: first, countering second-round effects from food and fuel price increases, while protecting the poor; second, resisting expenditure pressures while improving the quality of spending, including by developing safety nets; third, strengthening bank balance sheets, risk management, and supervisory practices to reinvigorate credit growth and address vulnerabilities. Over the medium term, business environment improvements are needed to support diversified and broad-based growth and employment.

Growth Continued to Recover But Inflation Picked Up

The postcrisis recovery took hold in 2010, with growth estimated at 6½ percent, substantially higher than in 2009 (3½ percent). Last year’s outturn was higher than previously projected, except in Armenia and Turkmenistan, and consistent with performance in other emerging and low-income countries. CCA growth was well above the global expansion of 5 percent and growth in Russia of 3¾ percent (Figure 4.1).

Figure 4.1Real GDP

(Annual percentage growth)

Sources: National authorities; IMF World Economic Outlook; and IMF staff projections and calculations.

The recovery was mainly driven by higher oil and gas exports—helped by favorable prices—and by public investment and fiscal support to sectors affected by the crisis (Figure 4.2a). In the four oil and gas exporters—Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan—growth averaged 7 percent, compared with 4 percent in the oil and gas importing countries (Armenia, Georgia, Kyrgyz Republic, Tajikistan), although those countries benefited from higher mineral and metals prices.

Figure 4.2aExports of CCA Oil and Gas Exporters

(Billions of U.S. dollars)

Sources: National authorities; and IMF staff calculations.

The recovery in 2010 is likely to have narrowed output gaps in CCA countries.1 However, precrisis growth drivers did not fully recover and private demand remained subdued in countries like Kazakhstan, restrained by weak financial systems and ongoing deleveraging. Remittances—a key source of inflows and support for domestic construction activities in Armenia, the Kyrgyz Republic, and Tajikistan—picked up from 2009, but remained well off 2008 levels (Figure 4.2b). Similarly, in Georgia and Kazakhstan, foreign direct investment (FDI) continued to be well below precrisis levels, and there was a further net outflow of financing to foreign banks from Kazakhstan in 2010, in sharp contrast to the precrisis period.

Figure 4.2bExports and Net Remittances of CCA Oil and Gas Importers

(Billions of U.S. dollars)

Sources: National authorities; and IMF staff calculations.

Headline inflation increased in all countries, mainly following upward pressure on global commodity prices, but in some cases also demand pressures (Figures 4.3a and 4.3b). Nonfood inflation picked up in some countries (Kyrgyz Republic, Tajikistan, Uzbekistan). For the region as a whole, consumer price index (CPI) inflation increased by 1 percentage point to average 7¼ percent (year-on-year) in 2010.

Figure 4.3aAggregated Headline and Nonfood Inflation, CCA Oil and Gas Exporters

(GDP weighted CPI; year-on-year percent change; 2007–10)

Sources: National authorities; and IMF staff calculations.

1January and February 2011 do not include Turkmenistan.

Figure 4.3bAggregated Headline and Nonfood Inflation, CCA Oil and Gas Importers

(GDP weighted CPI; year-on-year percent change; 2007–10)

Sources: National authorities; and IMF staff calculations.

The external position of CCA countries strengthened in 2010. Current account balances improved by 1 percentage point of GDP in the oil and gas importing countries and by 5½ percentage points in the oil and gas exporters in 2010. However, current account deficits remain high in Armenia and Georgia, and a large public investment program led to a large current account deficit in Turkmenistan for the second year in a row. Foreign exchange reserves generally increased, particularly in Azerbaijan and Kazakhstan, where there was also a significant accumulation of assets in sovereign wealth funds. International reserves are generally at healthy levels across the region, although somewhat low in Tajikistan relative to common international benchmarks.

Continuing Recovery at a Moderating Pace

Current projections point to a moderation of growth across the CCA, from 6½ percent in 2010 to 5¾ percent in 2011. This is driven by lower growth in CCA oil and gas exporting countries, despite higher oil prices, as oil production is expected to grow at a slower pace in Kazakhstan and to decline in Azerbaijan. Non-oil GDP growth is projected to ease slightly from the strong rebound in 2010 in both countries and in Turkmenistan. In the oil and gas importers, growth is expected to accelerate, on average, reflecting a recovery from last year’s poor harvest in Armenia and a rebound from the civil unrest and crisis-related contraction in the Kyrgyz Republic. Growth is expected to slow but remain strong in Georgia and Tajikistan.

With global fuel and food prices expected to increase by 18 and 15 percent, respectively, in 2011, inflation is projected to pick up to almost 10 percent in 2011, nearly 3 percentage points higher than previously envisaged. Annual CPI inflation is approaching double digits in Azerbaijan and Kazakhstan, and has already passed this threshold in the other CCA countries (except Turkmenistan). Higher commodity prices will result in stronger current account balances in the oil and gas exporting countries, and weaker among the oil and gas importers.

The authorities’ announced policies for 2011 point to further fiscal consolidation in Armenia and Georgia in light of relatively constrained fiscal space and signs of self-sustained recovery. In contrast, a widening of the fiscal deficit is expected in the Kyrgyz Republic, where increased spending is intended to address the impact of last year’s political crisis, Turkmenistan, where high public investment levels will continue, and Tajikistan2 (Figure 4.4a). Oil and gas exporting countries, notably Azerbaijan and Kazakhstan, are expected to continue to benefit from rising commodity prices and to improve their overall fiscal positions despite sustained fiscal support to the economy. However, non-oil deficits will remain significantly higher than before the crisis (Figure 4.4b). All CCA countries are facing pressures to respond to the surge of inflation. This may involve increases in public spending ranging from use of strategic grain reserves to targeted transfers, to more generalized subsidies and possible wage and pension hikes. Tax cuts intended to ease food price increases will also contribute to fiscal pressures.

Figure 4.4aFiscal Balances in Oil and Gas Importers

(Percent of GDP)

Sources: National authorities; and IMF staff calculations and projections.

Figure 4.4bNon-Oil-Gas Fiscal Balances in Oil and Gas Exporters

(Percent of non-oil-gas GDP)

Sources: National authorities; and IMF staff calculations and projections.

1Fiscal balance over GDP is used.

Central banks in the region, which had generally conducted accommodative monetary policies to stimulate credit growth in the wake of the crisis, have mostly started to respond to the surge of headline inflation by increasing policy rates—so far, by 50–550 basis points (Figure 4.5). Although policy rates in some countries have limited operational effectiveness, these rate increases are important signals, and the monetary authorities of Armenia, Azerbaijan, Georgia, and the Kyrgyz Republic have also strengthened reserve and liquidity requirements.

Figure 4.5Adjustment in Policy Rates, 2010–11

(Policy rate; percent)

Source: National authorities.

Banking sector balance sheets remain impaired in some CCA countries (Kazakhstan, Kyrgyz Republic, Tajikistan), requiring continued policy action. Banking sector conditions have improved in Armenia and Georgia—where bank profitability has continued to recover, foreign funding and domestic credit have picked up, and nonperforming loans (NPLs) have declined. Elsewhere, borrowers are struggling to pay back loans, given the decline in demand and depreciation of currencies. In Kazakhstan and the Kyrgyz Republic, the share of NPLs remains particularly high (Figure 4.6). In some CCA countries, private-sector credit growth is negative (Kazakhstan) or sluggish and dependent on central bank support (Tajikistan).

Figure 4.6High and Mostly Rising Levels of Nonperforming Loans

(90-day basis; percent of total loans)

Source: National authorities.

130-day basis.

Risks to the Outlook

Risks to the outlook are mixed. Growth could be stronger if the upward movement in oil prices continues, with higher exports and investment. CCA oil and gas importers would face a larger import bill, but would also benefit from higher remittances from Russia. Downside risks are posed by heightened inflation expectations, lingering financial sector problems, and a possible deterioration of the global economy. The sociopolitical environment in the CCA also poses risks, with the possibility of spillovers from the events in the Middle East and North Africa, given the high poverty levels and perceptions of low voice and accountability in some countries, and tensions and unresolved conflicts throughout the region (Box 4.1).

Policy Challenges: Achieving Sustainable and Inclusive Growth

In the period immediately ahead, CCA policymakers will need to adapt policies to the evolving situation to maintain macroeconomic stability while protecting the most vulnerable. In doing so, they will need to address several increasingly pressing challenges:

  • The surge of inflation with risks of inflationary expectations becoming entrenched.

  • An upsurge of social pressures to increase fiscal spending, which may generate threats to macroeconomic stability.

  • The poor quality of bank portfolios, which restrains credit growth and effective intermediation.

Over the medium term, sustaining growth, employment creation, and poverty reduction are the main challenges. Progress will depend on reforms to develop adequate social safety nets, increase the role of the private sector, and diversify economies away from natural resources. Improving the business environment and achieving greater regional synergies would enhance domestic and regional competitiveness and achieve greater economies of scale. Although CCA countries have made progress over the past decade, they lag behind other emerging market economies—and, in some cases, low-income countries—in transparency, governance, and institutional quality. Further substantial improvements should be an important part of the medium-term agenda.

Box 4.1Poverty and the Social Context in the CCA

Although official data do not capture poverty, inequality, and unemployment adequately in all CCA countries, evidence suggests that poverty is still high, especially in Tajikistan, the Kyrgyz Republic, and Uzbekistan. Income inequality, unemployment, and underemployment are also matters of concern throughout the region. Because of the Soviet legacy, human development indicators are better than in other countries at a similar income level; however, they are now deteriorating in some countries.

CCA countries employ various forms of social assistance, but in some cases insufficient funding, design challenges, weak administrative capacity, and corruption limit their effectiveness.1 Governments generally rely heavily on simpler but distortionary and poorly targeted measures, such as entitlement spending and administrative price controls. Therefore, social protection arrangements need to be enhanced to protect the most vulnerable.

Poverty, inequality, and inadequate social protection combined with corruption elevate the risk of social disruption (see Figure). Significant enhancements in governance, transparency, and accountability, and a boost in investment in human development, should help provide employment opportunities, including to the sizable youth population, which in a few years will enter the job market in large numbers (particularly in Central Asia).

Human Development and Corruption

(2010 UN Human Development Indicators and Transparency International Corruption Perception Index)

Sources: United Nations Development Programme; and Transparency International.

Massive migration to Russia helps mitigate unemployment and poverty, but remittances have proven vulnerable to downturns in the cyclical, migrant-employing sectors in Russia. The labor-supplying countries of the region have not “invested” sufficiently in migration infrastructure to enhance benefits in terms of stable employment and, thereby, social protection. Given that the ongoing migration to Russia acts as a safety valve in terms of job opportunities and remittance flows, better skills and language training would benefit the migrating population, and, with other business environment reforms, eventually lead to better prospects at home.

Prepared by Nadeem Ilahi and David Amaglobeli.1Social programs in Georgia and Armenia are better targeted as they use proxy means-testing.

Is Inflation a Concern?

The run-up of inflation is complicating policymaking and adversely affecting the poor. Food prices are a key driver, as food comprises over 50 percent of consumption baskets in most countries. Fuel price increases are also a factor, and in some countries, demand pressures also appear to be contributing (Box 4.2). In the absence of effective social safety nets, CCA governments are taking (or considering) administrative measures to counter price increases and protect the poor. These include actions to limit rises in the price of key staple foods and fuels (Uzbekistan); reduced customs duties on wheat flour (Kyrgyz Republic); exemptions in value-added tax rates (Azerbaijan, Tajikistan); or activation of strategic reserves, including for grain. In Kazakhstan, memoranda were signed with producers and processors to control the rise in bread prices. In Georgia, the authorities have not used administrative measures, but instead distributed electricity and food vouchers to households.

Box 4.2What Is Driving Inflation in the CCA?

Headline inflation increased in 2010 in all countries, mainly following upward pressure on global commodity prices, but in some cases also reflecting other factors.

Global food inflation. The current rise in global food prices has contributed to marked increases in headline inflation throughout the CCA.1 This reflects high weights on food items in overall CPI baskets, significant dependence on imported food, and a strong link between food prices and inflation expectations (see Table). Adverse weather conditions also affected agricultural production in Armenia, Azerbaijan, and Kazakhstan. Domestic food price inflation, which appears highly correlated with global food inflation, increased from an average of 4 percent year-on-year in June 2010 to 17 percent in January 2011, with the rise most pronounced in Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, and Tajikistan.

Fuel prices. Rising global energy prices are also contributing to inflationary pressures. Fuel and energy shares in CPI baskets range from 1–2 percent in Azerbaijan and Tajikistan to 9–13 percent in Armenia, Georgia, and Kazakhstan. Although various subsidy and price regulation mechanisms limit the direct pass-through of rising global energy prices—mainly in the oil and gas exporting countries—indirect channels, particularly distribution costs and inflation expectations, can quickly transmit external energy price shocks, reinforcing the effects of the food price shock.

Firming recoveries, accommodative policies, and capital inflows. The CCA economies have begun to recover, aided by global conditions and accommodative domestic policies. Although there are few signs of overheating, core inflation has increased in some countries, and strong base money expansion throughout most CCA countries underscores the potential for future inflationary pressures. For now, credit and real income growth generally remain weak, but the region is once again experiencing foreign exchange inflows, with a rebound in remittances to the commodity importers, and oil-price-related FDI and revenue flows to the commodity-exporting countries.

The Role of Food in CCA Inflation
Food share in CPI14853393958585558
Correlation between
Global Food Prices and:
Headline Inflation0.720.790.800.760.750.770.820.69
Food Inflation0.790.810.820.790.810.790.840.68
Net food importerYesYesYesNoYesYesYesNo
Sources: United Nations, Food and Agriculture Organization (FAO) and Comtrade; national authorities; and IMF staff calculations.
Prepared by Ali Al-Eyd and Niklas Westelius.1 The degree of pass-through from import to domestic prices depends on exchange rate movements, the share of imported goods in the consumption basket, domestic market structure, and distribution costs.

In general, it is advisable that countries allow global commodity price increases (which are beyond their control) to pass through into domestic retail prices. Seeking to avoid this adjustment through the use of administrative measures such as export bans, export taxes, and price controls creates market distortions and could give rise to substantial fiscal costs. Given the importance of food in consumption, headline inflation will inevitably rise. The main concern for CCA policymakers is that this rise will contribute to worsening inflation expectations and broadening price pressures, affecting macroeconomic stability and disproportionately hurting the poor. A comprehensive policy response will therefore be needed to effectively address the impact of the food price shock. This would involve:

  • Further tightening monetary policy in response to rising inflation. Experience suggests that, even though the impact may be delayed and hard to detect, higher commodity prices will eventually have second-round effects in the absence of a proactive policy response. With economic recovery now taking hold throughout the region, it is appropriate to move away from accommodative monetary policies.

  • Improving communication of monetary policy. Conveying clearly the current and expected causes of inflation and inflation objectives would help moderate expectations.

  • Establishing a prudent fiscal stance. Enhanced coordination between governments and central banks and guarding against procyclicality will be increasingly important, to ensure that fiscal policy is supportive of price stability. Cautious public wage increases and spending initiatives that are well targeted to supply bottlenecks are crucial to this end.

  • Using administrative measures cautiously. Where well-targeted social assistance is hard to implement, administrative measures may provide short-term relief. However, these should be selective, time-bound, and removed as better-targeted instruments are developed. The fiscal cost of these schemes should be transparently disclosed and may need to be offset by savings in other areas in countries where fiscal space is limited.

Looking further ahead, structural reforms should be pursued to enhance the resilience of CCA economies and to improve the efficiency of macroeconomic policies, including:

  • Strengthening the monetary transmission mechanism. Monetary policy effectiveness would be increased by further moving away from fixed or heavily managed exchange rates, enhancing central bank independence, promoting domestic financial market development to reduce dollarization, and encouraging increased competition in the banking sector.

  • Developing better social safety nets. Safety nets should aim at targeted and cost-effective income support based on cash or near-cash transfer schemes.

  • Enhancing supply responses. Reforms are needed, particularly in agriculture, to improve competitiveness, labor market flexibility, and productivity.

Resisting Fiscal Pressures, Improving Expenditure Quality

As the recovery has gained momentum and inflationary pressures have emerged, governments are finding it difficult to resist pressures to further raise wages, pensions, and other social payments, particularly in the oil and gas exporting countries, which have ample fiscal space (Figure 4.7). These pressures are also related to political developments—including election cycles. In Kazakhstan and Uzbekistan, for example, public wages are due to increase by a further 25 percent in 2011, and an even larger increase is planned in the Kyrgyz Republic. These wage increases and other fiscal measures could further fuel inflation and begin to threaten the achievement of fiscal consolidation plans. The challenge for CCA authorities is to move in parallel to improve the efficiency of spending, favoring health, education, and other productive expenditures, and avoiding hard-to-reverse nonessential outlays. Efforts to strengthen non-oil revenue performance will also be important.

Figure 4.7Public Spending Growth

(Real terms; percent)

Sources: National authorities; and IMF staff calculations and projections.

Strengthening Bank Balance Sheets

High and rising NPLs 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 their balance sheets. Uncertainties surrounding the stability of funding sources and provisioning needs have increased incentives to maintain cash reserves and restrain lending activity.

Restoring the health of banking systems is therefore a key priority for ensuring credit recovery and efficient intermediation of resources. In the near term, the authorities in CCA countries with problematic bank assets should undertake comprehensive and transparent resolution strategies that include recapitalizing banks and attracting new capital, if needed. At the same time, strengthened risk management practices, legal and regulatory changes to improve collateral recovery, and increased competition among borrowers and lenders would help prevent a recurrence of the NPL problem. Some countries have already taken action, such as introducing leverage ratios or new prudential reporting standards. Continued recourse to directed lending in some countries (Tajikistan, Turkmenistan, Uzbekistan) remains an important distortion to the functioning of markets. Restructuring of state-owned enterprises and subjecting them to greater financial discipline are longstanding issues.

Following a marked increase at the outset of the crisis, deposit and credit dollarization has declined in most CCA countries, although it is still above levels prevailing prior to the crisis. Risks inherent to dollarization have been addressed by tightening prudential regulations on foreign exchange funding and lending operations in a number of countries in the region, including Armenia, Georgia, and Kazakhstan. Looking ahead, the supervisory authorities should continue to encourage better risk management practices and enhance coordination between the monetary and fiscal authorities to promote the development of local currency money and capital markets.

Regulatory, supervisory, and governance frameworks need to be improved concurrently to address underlying bank vulnerabilities. Across the region, supervisors need enhanced autonomy, independence, and legal protection. Supervisors must have the power to act on the basis of information and inspections, and should not resort to regulatory forbearance, or feel any pressure to do so. In some countries, macroprudential policies should be introduced or strengthened to address potential vulnerabilities, including excessive reliance on foreign funding and risky lending practices.

Improving the Business Climate to Create Job Opportunities

CCA economies depend heavily on commodity exports or remittances, and are vulnerable to their volatility. Non-hydrocarbon exports remain at relatively modest levels throughout the region. CCA countries generally lack diversified production or export bases, and several rely heavily on remittance inflows linked to construction activity in Russia or Kazakhstan. This has proved to be a fragile source of consumption-led growth.

In this context, sustaining strong, inclusive growth, employment creation, and poverty reduction will depend on invigorated structural reforms to encourage economic diversification and competitiveness. Reforms should help CCA countries move beyond precrisis sources of growth by fostering greater openness and contestability of sectors to new domestic and foreign entrants, and to generate greater activity through enhanced involvement and operations of domestic financial sectors. Improving the business environment and increasing the role of the private sector in the economy are key ingredients in these efforts.

Achieving an investor-friendly environment entails a combination of efforts in several areas. Infrastructure improvements in transportation and telecommunications and a reduction in the role of the state enterprises in the non-oil sector are major challenges throughout the region. In addition, while CCA countries have made some progress over the past decade in strengthening governance and institutions (Figure 4.8), they lag behind other emerging market economies. Less progress has been made in some measures of voice and accountability, rule of law, or control of corruption. Further substantial improvements in transparency, governance, and institutions are therefore crucially needed in the CCA, as in other regions in the world. Finally, a pro-employment strategy should also incorporate a boost to investment in human development.

Figure 4.8Governance Indicators1

(World Governance Indicators; normalized rank 0–100)

Sources: The 2009 World Governance Indicators.

1EM is the average rank of 19 emerging markets.

Regional trade links are relatively low, have declined over the past decade, and have been hampered by the high cost of the required infrastructure, as well as regional tensions and conflict. Achieving greater regional synergies and economies of scale within CCA countries would also help enhance competitiveness. This would involve further cooperation among countries, including enhancement of trade across borders in the region, a specific area where CCA countries score relatively poorly in Doing Business indicators (Boxes 4.3 and 4.4).

Box 4.3How Integrated Are CCA Countries?

A difficult transition. In the 20-year period since achieving independence, CCA countries have had to move away from the Soviet system, where countries became highly specialized in the production of a few commodities, and trade and financial flows between the republics were centrally planned. Integration was further complicated by shocks (most notably, the Russian financial crisis of 1998) and frictions between countries in the CCA region. These hampered intraregional cooperation by disrupting trade and transportation links and hindering development of labor, energy, and capital markets.

Low intraregional trade despite efforts to liberalize. On an aggregate level, trade among CCA countries appears lower than would be expected on the basis of the size of the economies and their geographical proximity (Figures 1a, 1b). Only about 5 percent of total exports or imports of these countries are destined for (or come from) other CCA countries. Furthermore, this ratio has been on a declining trend. China and the EU are the main destinations for CCA exports, while imports come mainly from China, the EU, and Russia. China is growing rapidly in importance not only for Central Asia, but also for the Caucasus.

Figure 1aCCA Exports, 2010

(Percent of total)

Source: IMF, Direction of Trade Statistics.

Figure 1bCCA Imports, 2010

(Percent of total)

Source: IMF, Direction of Trade Statistics.

Low aggregate numbers for intra-CCA trade are driven to some extent by the region’s two major exporters—Azerbaijan and Kazakhstan. Both primarily export oil. When these two countries are excluded, the share of other CCA countries in exports and imports increases from 5 to a still relatively low 15 percent, and the declining trend is no longer evident. This trade consists primarily of agricultural commodities.

As most CCA countries have substantially reduced traditional tariff and nontariff barriers, the low intraregional trade is surprising. Remaining impediments are mostly institutional. Most CCA countries rank poorly on indicators of trading across borders, such as the number of documents and days needed for export or import procedures. Costs of exporting or importing are higher than in other transition economies (Figure 2).

Figure 2Trading Across Borders

(U.S. dollars per container)

Source: World Bank, Ease of Doing Business Rankings, 2011.

Efforts are needed to strengthen cooperation. Initiatives to strengthen regional cooperation include projects implemented under the Central Asian Regional Economic Cooperation Program (CAREC) in the areas of energy, transport, and trade facilitation. CAREC also provides member countries with a forum to discuss their trade policies.1 Still, there are significant, unrealized benefits from regional integration. For example, while foreign companies are often active in several countries of the region—in telecommunications, banking, insurance, construction, and energy—investment flows among CCA countries are negligible. There are only a few examples of banks or other companies from one CCA country being active in another. The degree of country “ownership” of regional projects has also varied. These projects have often been driven by non-CCA countries or multilateral institutions. Improvements in governance and the business environment across the region would help in attracting intra-CCA and other FDI and increasing interest in regional projects.

Prepared by Dmitriy Rozhkov.1 As discussed in Box 4.4, another example of regional efforts is the Central Asia–China gas pipeline.

Box 4.4New Pipelines in the Caucasus and Central Asia Region

The first line of the Central Asia–China gas pipeline began operations at end-2009. The pipeline starts in Turkmenistan and transits Uzbekistan and Kazakhstan (map). With a second, parallel line (opening in 2011), capacity will reach 40 billion cubic meters (bcm) per year. The pipeline currently delivers gas from Turkmenistan, and 2010 volumes were about 4 bcm. Exports from Uzbekistan will come onstream in 2011, and an extension will link in gas supplies in southwestern Kazakhstan. In addition, a new pipeline from Turkmenistan to Iran was opened in early 2010, doubling existing capacity.

Central Asia–China Gas Pipeline

The projects promise to have a significant impact on the region:

  • Diversifying export destinations. Diverse destinations will reduce vulnerability to lower demand from Russia, strengthen Central Asia’s ability to negotiate prices in line with global trends, and generate new revenues from transit.

  • Promoting construction and employment. The projects have contributed to capital inflows and allowed Central Asian countries to cushion the negative effect of the global downturn.

  • Supporting regional cooperation. The first line of the China pipeline was built and became operational in less than 28 months, providing an important example of cooperation that could be extended to other projects and sectors.

  • Setting the stage for future investments. Together with an East–West pipeline in Turkmenistan, construction of which commenced in 2010 to connect Turkmenistan’s eastern fields with the Caspian and facilitate exports to Europe, the China pipeline may prepare the ground for a possible pipeline from Central Asia to Afghanistan, Pakistan, and India.

Prepared by Svetlana Cerovic.
Selected Economic Indicators: CCA
Real GDP Growth9.413.612.
(Annual change; percent)
Kyrgyz Republic4.
Consumer Price Inflation9.79.311.416.
(Year average; percent)
Kyrgyz Republic6.55.610.
General Government Fiscal Balance0.
(Percent of GDP)
Kyrgyz Republic-5.6-2.1-0.30.0-3.6-6.5-8.9
Current Account Balance-
(Percent of GDP)
Kyrgyz Republic-0.1-3.1-0.2-8.12.0-7.4-8.7
Sources: National authorities; and IMF staff estimates and projections.

Prepared by Ana Lucía Coronel and Mark Horton with input from country teams.

Estimating potential output in the CCA countries is complicated by data constraints, interactions between natural resource sectors and the rest of CCA economies, structural changes, and demand and supply shocks.

In Tajikistan, the path of the overall fiscal deficit (5.2 percent of GDP in 2009, 3.0 percent in 2010, and 5.4 percent in 2011) reflects under-execution of the budget in 2010 (lower-than-expected current spending and lower foreign-financed capital expenditure).

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