For oil exporters of Caucasus and Central Asia (CCA), the economic growth is projected at 3.75 percent for 2015, down from nearly 5.5 percent in the previous year, despite a sizable fiscal stimulus in some countries (3 percent of GDP in Kazakhstan and 1 percent of GDP in Uzbekistan), said a report issued by the International Monetary Fund (IMF).
Slower growth in oil production in Azerbaijan and Kazakhstan, fewer remittances from Russia to Uzbekistan and less public investment in Turkmenistan, as well as weaker confidence resulting from currency depreciations, have contributed to the economic slowdown, according to the report.
“Growth is expected to pick up in 2016 to 4 percent, as growth strengthens in important trading partners, such as Russia and the euro area, and as domestic confidence improves,” said the report.
Another downside risk is that the normalization of US monetary policy would raise borrowing costs for countries with access to international markets (Armenia, Azerbaijan, Georgia, Kazakhstan) by more than is currently expected, according to the IMF experts.
“A further strengthening of the US dollar, reflecting asymmetric monetary policy in major advanced economies, together with a weakening of emerging market currencies, could put CCA currencies under pressure, adversely affecting intermediation through the CCA countries’ highly dollarized financial systems,” said the report.
Upside risks include a stronger recovery in Russia, faster-than-expected growth in China and Europe, and a larger-than-expected improvement in commodity prices, said the IMF.
The report said that many CCA countries tightly manage their currencies against the US dollar, either as outright pegged arrangements (Azerbaijan, Turkmenistan), within narrow ranges (Armenia, Tajikistan), or using a predetermined path (Uzbekistan).
“Prior to moving to a floating exchange rate regime in August 2015, Kazakhstan also tightly managed its currency within a narrow band,” said IMF. “Appreciation of the US dollar and the sharp drop in the value of the Russian ruble, together with declining foreign currency inflows (remittances, FDI, exports), created pressure on the CCA currencies to adjust.”
Many CCA countries intervened in the foreign exchange market and, consequently, suffered losses in international reserves, said the report.
“Between November 2014 and August 2015, all the CCA currencies weakened against the US dollar,” said IMF. “This in turn helped to moderate the sharp appreciation of real effective exchange rates.”
The IMF experts believe that pressure to adjust the exchange rate persists in some countries.
“For example, in Uzbekistan the difference between the official and parallel market rate has increased substantially since the beginning of the year,” said the report. “Greater exchange rate flexibility, accompanied by clear communication to anchor market expectations, would help CCA economies adjust to external shocks and improve their competitiveness.”
However, policymakers also need to consider the impact of the exchange rate on their financial sector and take measures to ensure its health, especially given the sector’s substantial foreign currency lending to unhedged borrowers and short open foreign exchange positions, according to the IMF report.