Journal Issue

Chapter 1. Introduction

International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
April 2014
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The countries in the Caucasus and Central Asia (CCA) have recorded significant macroeconomic achievements since independence. These countries have grown more rapidly—on average by 7 percent over 1996–2011—than those in many other regions of the world and poverty has declined. Inflation has come down sharply from high rates in the 1990s and interest rates have fallen. Financial sectors have deepened somewhat, as evidenced by higher deposits and lending. Fiscal policies were broadly successful in building buffers prior to the global crisis and those buffers were used effectively by many CCA countries to support growth and protect the most vulnerable as the crisis washed across the region. CCA oil and gas exporters have achieved significant improvements in living standards with the use of their energy wealth.1

Table 1.1.CCA: Basic Economic Indicators 1/


(millions of US$)
GDP per capita

Major components of GDP

(shares in percent)
Oil and gas exporters
Azerbaijan9.164,8197,114Industry, incl. energy (52), construction (8)
Kazakhstan16.7188,04911,278Industry, incl. energy (31), retail & wholesale trade (14)
Turkmenistan5.529,2335,290Industry, incl. energy (50), construction (16)
Uzbekistan29.145,4211,561Industry, incl. energy (24), services (22), agriculture (18)
Oil and gas importers
Armenia3.310,1383,096Agriculture (20), construction (13), retail & wholesale trade (13)
Georgia4.514,4353,230Retail & wholesale trade (15), public sector (10), industry (9)
Kyrgyz Republic5.56,1991,120Industry (22), agriculture (17)
Tajikistan7.86,523836Agriculture (24), retail & wholesale trade (17)
1/ All figures for 2011.
1/ All figures for 2011.

While macroeconomic achievements have been notable, there remains ample room to strengthen macroeconomic outcomes in CCA countries. Growth in CCA countries has been volatile, and has relied heavily on energy resources, other commodities, and remittances. Like growth, inflation has been volatile, and real interest rates generally remain high. Central banks in the region often lack independence, monetary policy has been pro-cyclical, and high rates of dollarization reflect continued weak confidence in many CCA countries. Progress has been uneven in restoring post-crisis fiscal positions and rebuilding fiscal buffers. Non-oil revenue remains low in resource-rich CCA countries and these economies have infrastructure gaps despite large capital outlays. Social and capital spending needs are generally high in the CCA, and quasi-fiscal activities—supported by directed lending and investment—are widespread and direct resources away from important priority areas such as health and education.

CCA countries face other common challenges arising from still weak regional cooperation, low global integration, and the relatively slow pace of structural reforms. Regional integration is lacking across a range of important dimensions, including trade, financial markets, and infrastructure. These are all critical to strengthen CCA countries’ ties to each other and the rest of the world, which would help drive diversification and growth. Many CCA countries moved rapidly after independence to implement first-generation structural reforms such as privatization and exchange rate unification. Few countries in the CCA have, however, pursued more difficult structural reforms—such as improvements in the governance of financial institutions and firms, and public private partnerships—that will deepen institutions and create appropriate capital stocks to sustain the development of markets and support job-creating investment and growth. In addition, some CCA countries face challenges arising from unresolved conflicts with their neighbors.

Over the coming decade, CCA countries have the opportunity to boost their economic development and to strive to become dynamic emerging markets.2 This opportunity rests on strong commodity prices and healthy remittance flows, which help create the macroeconomic space to pursue ambitious policy and structural reforms. The payoff to the citizens and governments in the CCA from the successful pursuit of ambitious reforms will be large and will come through the key strengths of emerging markets.3 These strengths lie in high and sustainable growth that rests on robust institutions, strong capital stocks, integration into regional and global production networks, and sustained investor interest backed by capital flows that help support the development of diverse economic activity and job creation.

As they look forward, CCA countries can take policy actions to realize their vision of becoming dynamic emerging markets:

  • Emulate the best practice in monetary policy frameworks of emerging market countries. Consolidating the decline in inflation and reducing its volatility, strengthening monetary transmission, fostering an environment that promotes lower dollarization and interest rates, and dealing with “fear of floating” concerns will be important steps in attaining this goal.
  • Aspire to develop competitive banking sectors and create nonbank financial institutions that support private-sector-led growth. The financial system should follow international standards of regulation and supervision to deepen and broaden financial intermediation, ensure the financial soundness of banks and other financial institutions, and increase the financial sector’s contribution to economic growth.
  • Fiscal policy over the coming decade should aim to provide increasingly effective core governmental functions, in a non-distortive, transparent, and accountable way. In addition to their security, justice, and regulatory functions, governments should notably aim at fostering long-term growth prospects and protecting the most vulnerable groups, through efficient spending on health, education, and infrastructure. To meet these objectives, governments will need to develop fiscal frameworks that anchor policies on clear fiscal paths; undertake revenue and spending measures to consolidate further their fiscal positions; and advance public financial management reforms aimed at promoting transparency and accountability and better fiscal policy outcomes.
  • CCA oil and gas exporters should leverage their resource wealth to ensure sustained improvements in living standards, achieve economic and asset diversification, and reduce reliance on natural resources. To meet these objectives, governments will need to establish fiscal anchors and sound resource fund management, and support macro policies through decisive improvements in governance and business climates.
  • Enhance economic and financial cooperation with the rest of world and within the CCA to create opportunities for economic diversification and structural transformation that will support sustainable growth.
  • Pursue forceful structural reform efforts and major improvements in governance frameworks and institutions to underpin better macro policy frameworks and ensure sustainable growth in the CCA.

This paper starts by discussing the growth experience in CCA countries and the vision of how the CCA economies can transform their economies. This is followed by chapters that, for each policy area noted just above, cover progress so far during the transition, the remaining challenges faced by CCA countries, and the priority actions they can pursue to overcome their challenges and achieve their emerging market vision.

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