Growth in the Caucasus and Central Asia (CCA) is expected to decline by about one percentage point of GDP in response to the slowdown in Russia, the IMF says in its latest regional forecast. The IMF's Regional Economic Outlook for the Middle East and Central Asia, released on November 4, projects that growth will fall to about 5.5 percent this year and next, in part owing to the region's close ties with its economically struggling neighbor. Economic developments in Russia significantly affect the growth prospects of the CCA region through a number of channels, mainly trade, remittances and investments. A protracted period of slower growth in other trading partners, particularly Europe or China, could also have a negative impact over a longer time horizon, the report cautioned. SOUNDBITE (English) Natalia Tamirisa, Middle East and Central Asia Department: "Economic growth in the Caucasus and Central Asia is expected to decline from about seven percent in 2013 to about 5.5 percent in 2014/2015. And the main reasons are the spillovers from the slowdown of economic growth in Russia, increased geopolitical risks, and also slower domestic demand growth in a number of countries in the region. Inflationary pressures are also rising because of weakening currencies and rising food prices. And risks are tilted to the downside. A deeper or more protracted slow down in Russia will further weaken remittances, exports and investments, and slower growth in the emerging market economies, for example, China, may affect exports of commodities from the region. One might think that an one percentage point decline in economic growth rates is not a big deal, especially given that many countries in the world are growing at much lower rates." The CCA's oil exporters—Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan—are expected to see growth soften to 5.6 percent this year from 6.8 percent in 2013. These countries are shielded to some extent from Russia's slowdown, thanks to diversified export markets and the high oil prices of recent years, which allowed large fiscal cushions to be built up. Non-oil growth in the oil-exporting countries is nonetheless forecast to decline by about 1 percentage point, because of slower consumer lending, increased investor caution, and higher geopolitical risk related to the conflict between Russian and Ukraine, the IMF said. Moreover, the recent decline in oil prices adds uncertainty to the outlook, Kähkönen told reporters. The region's oil exporters are vulnerable to a prolonged period of low oil prices. Growth in these economies may slow further as oil revenues fall, while fiscal and external surpluses would weaken unless governments take policy action. SOUNDBITE (English), Natalia Tamirisa, Middle East and Central Asia Department: "Given that the region is facing less favorable near term economic prospects, some pause in fiscal consolidation is justifiable in countries that have insufficient buffers. And if the current decline in oil prices persists, oil exporters in the region may need to adjust their fiscal positions by more than originally planned. More generally, we believe that the region is in need of a new economic model that delivers sustained, diversified, and inclusive growth. Immigration and unemployment, especially among the young people, remains persistently high in the region. We believe that the region needs bold structural economic reforms, particularly in areas that can promote growth of the private sector and create jobs. For this, what is needed is labour market reforms, reforms of the business climate, governance, trade integration and diversification. All this will help the region overcome the impediments that prevent it from realizing its full potential." Weaker external demand, especially from Russia, is putting pressure on the current account balances, with the surpluses of the CCA oil exporters shrinking appreciably. Fiscal surpluses are experiencing a similar downward trend, with an expected drop to 2.1 percent of GDP this year and 1.4 percent in 2015, down from 3.4 percent in 2013. Despite the more subdued growth, inflation is expected to rise throughout the region. Oil exporters will see a slight increase in inflation to 6.5 percent this year, up from 6.3 percent in 2013, mainly driven by recent currency devaluation/depreciation in some countries.

• published: 07 Nov 2014
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