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The Caucasus and Central Asia:The Caucasus and Central Asia:From Transition to Emerging Markets
Juha KähkönenDeputy Director
IMF Middle East and Central Asia Department
The Atlantic Council J 19 2013June 19, 2013
The Caucasus and Central AsiaThe Caucasus and Central Asia
OutlineGrowth performance over the past 20 yearsA vision for the next decadePolicies required to achieve this visionMonetary & financialFiscal & management of energy resourcesStructural—business climatesRegional cooperation—trade, transport,
energy and water security Political economy obstacles to reform
Growth in the CCA region has been strongbeen strong…
89
1996 2011Average Real GDP Growth
4567 1996-2011
0123
…helping reduce poverty. p g p y80 Poverty headcount ratio at national poverty line (% of population)1/
50
60
70 1996 or earliest2011 or latest
30
40
50
10
20
0ARM AZE GEO KAZ KGZ TJK
Source: World Bank1/ No data exist for TKM and UZB.
But high growth has not reduced inequalityinequality…
4550
1996 li t il blGINI Coefficient
354045 1996 or earliest available
2011 or latest available
202530
51015
0TJK KAZ KGZ AZE GEO TKM ARM UZB
Source: World Bank
…and CCA growth has been volatilevolatile…
56 Volatility of Real GDP Growth
(St d d D i ti )
2345
1996-2011(Standard Deviation)
012
…and uneven across CCA countriescountries.
Real GDP Per Capita 2011 / Real GDP Per Capita 1996
TKM
AZE
GEO
KAZ
ARM
UZB
TJK
GEO
0 1 2 3 4 5
KGZ
UZB
0 1 2 3 4 5
Growth in the region has not been diversifiedbeen diversified…80
100 Commodity Exports 1/, 2012 (% of total exports of goods and services)
0204060
GEO ARM KGZ TJK UZB KAZ AZE TKMSource: Country authorities, staff estimates and WEO1/ Includes oil, gas, precious metals, aluminum, copper, other metals, metal byproducts and cotton.
Remittances 2012d
150200250
Remittances, 2012 (% of total exports of goods and services)
6080
Commodity Revenue, 2012 (% of total revenue)
050
100150
AZE GEO ARM KGZ TJK0
204060
UZB KAZ AZE TKM AZE GEO ARM KGZ TJKSource: WEOUZB KAZ AZE TKM
Source: Country authorities, staff estimates and WEO
…and has not benefitted from regional integrationregional integration.
Baseline Outlook for the CCA, and AlternativesAlternatives…
CCA: GDP Growth Projections(In percent)
6
7(In percent)
4
5
2
3 Average Hydrocarbon ImportersAverage Hydrocarbon Exporters
0
1
2012 2013 2014 2015 2016 2017 2018
Source: World Economic Outlook; and IMF staff estimates.
Vision for CCA: Become vibrant emerging k t i th t d dmarket economies over the next decade
To achieve this, growth should be
High Less l tilHigh volatile
Growth
More inclusive
More diversifiedinclusive diversified
CCA Vision: Obstacles and risks
External DomesticGlobalte a
• Vulnerability to shocks
• Strong vested interests
• Uncertain global growth
(e.g., food and fuel prices)
• Weak institutions, including
g g
• Fragility and geopolitical hift
• Lack of integration with regional
including accountability
• Potential
shifts
gand global markets
Potential political uncertainty
Actions to Support the CCA Vision• Stronger macroeconomic policy frameworks and financial
sectors• Fiscal and international reserve buffersFiscal and international reserve buffers• Greater exchange rate flexibility
• Improved management of energy wealth
• Structural reforms to improve business climates
• Regional cooperation to strengthen trade, improve infrastructure and address energy and water security
Potential Payoff from Achieving the Visionthe Vision
60.0
es
Relative Gains in GDP per Capita by 2023: Better vs Existing Policies
39.940.0
50.0
nder
exi
stin
g po
lici Better vs. Existing Policies
25.7
20 0
30.0
capi
ta in
202
3 un
16.3
10.0
20.0
in %
of G
DP
per
0.0Average across CCA:
Gradual ImplementationAverage across CCA:Rapid Implementation
Top 3 countries:Rapid Implementation
CCA: Monetary and Financial PoliciesPolicies
Stocktaking of Monetary and Financial DevelopmentsFinancial DevelopmentsNotable successes Inflation and nominal interest rates have fallen
sharply Financial sectors are deeper Financial sectors are deeper
Room for improvementp Inflation remains volatile Real interest rates are high Monetary policy has been pro-cyclical Economies remain highly dollarized
CCA financial sectors made impressive gains but then stagnatedgains…but then stagnated
12Banking
CCA
Financial Reform Progress, 2012 1/
BalticRUS16,000
Credit to Economy, 2012 1/
SD
)
0
4
8 Insurance and other financial services
Capital markets
CEE
RUSAZE
GEO
KAZ
TKM
Baltic
CEECauc.6,000
8,00010,00012,00014,000
per c
apita
(US
CA
MSME finance
Private equity
Baltic
Source: EBRD1/ EBRD methodology. The highest score reflects the standards of an
ARMGEO
KGZTJK UZB
02,0004,000
0 20 40 60 80
GD
P
Private Sector Credit (percent of GDP)
CA
50
60
70 Cash and Dollarization, 2012
M2
KGZAZE
BalticCEE
RUS708090
100
GD
P
Bank Assets and Foreign Ownership
ARM
UZB
10
20
30
40
Cash
to M
KAZ
TJKGEO
TKM
ARM
AZE
GEOKAZ
KGZTJK
UZBTKM
CaucCA
10203040506070
Ass
ets
to
0
10
20 30 40 50 60 70
Dollarization of deposits
AZE0
10
0 20 40 60 80 100Foreign Share of Total Assets
Monetary and Financial Policies—What is the Vision?What is the Vision?
Stability Low and stable inflation.
Vision FlexibilityCounter-cyclical
monetary policy to smooth the business
cyclecycle.
Support th
Lower real interest rates, deeper
growth financial sectors.
Monetary and Financial Policies—What are the Priorities?What are the Priorities?
Strengthen central bank independenceg p
Strengthen monetary policy transmission
Improve data and forecasting model
Strengthen communicationsStrengthen communications
Clarify the role of the exchange rate
Allow greater exchange rate flexibility
CCA financial sectors: Way forward
Reduce the role of
state
Strengthen Strengthen financial infrafinancial infra--
structurestructureStrengthen Strengthen supervisionsupervision
CCA: Fiscal PolicyCCA: Fiscal Policy
Fiscal Policy—Notable AchievementsAchievements…
Substantial fiscal lid ti i t
20
25Fiscal Balances, 1997-2008In Percent of non-oil GDP
consolidation prior to the crisis
I t i 0
5
10
15
Oil exporters
Improvement in public debt ratios
St th i f fi l
-10
-5
0
1997 1999 2001 2003 2005 2007
Oil
Strengthening of fiscal institutions
80
100
120Public Debt, 1997-2008In Percent of GDP
20
40
60 Oil
0
20
1997 1999 2001 2003 2005 2007
Oil exporters
…but also room for improvement.p
Lower buffers 20
25Fiscal Balances, 1997-2012In Percent of non-oil GDP
after the crisis
Low non-oil 0
5
10
15In Percent of non oil GDP
Oil exporters
revenue
Excessive quasi-
-10
-5
1997 2000 2003 2006 2009 2012
Oil importers
Excessive quasifiscal activities
80
100
120Public Debt, 1997-2012In Percent of GDP
40
60 Oil importers
0
20
1997 2000 2003 2006 2009 2012
Oil exporters
Fiscal Policy—What is the Vision?y
• Provision ofProvision of public goods in a sustainable and
di t ti
Governments should focus on core functions non-distortive waycore functions
• Stronger PFM and budget systems
While adhering to best standards
for transparency budget systemsfor transparency and
accountability
Fiscal Policy—PrioritiesFiscal Policy Priorities
Develop fiscalDevelop fiscal policy frameworks
Increase non-oil revenue
Strengthen transparency and revenue
Improve efficiency
accountability
Improve efficiency and composition
of spending
Energy Resources—Challenges
p
Heavy reliance on energy resourcesLimited transparency
TMP GNQIRQNGASDN AGO
COGGINTCD
AZE100
ports
Exports and Fiscal Revenue from Natural Resources(Average 2006–10, in percent)1
Limited transparency
NGATKM DRC
TCD
GAB YEMMNG PNG
MLIZMB
CMRGUY
BOLKAZ
40
60
80
Exp
orts
/ To
tal E
xp
GUYSYR
MRTVNM
IDN0
20
40
0 10 20 30 40 50 60 70 80 90 100atur
al R
esou
rce
E
Oil
Non-Oil
0 10 20 30 40 50 60 70 80 90 100Na
Sources: World Development Indicators, World Bank; World Economic Outlook, IMF; and IMF staff estimates.
Natural Resource Revenue / Total Fiscal Revenue
Energy Resources—Ten-Year Vision Diversified economy: Natural resource wealth
transformed into productive assetsp
Countries with Natural Resource Exports>10% of GDP
r cap
ita
Exports 10% of GDP
com
e p
er
Countries with N t l RIn
c Natural Resource Exports<10% of GDP
Economic Complexity IndexSource: Hausmann, 2013
Energ Reso rces Polic PrioritiesEnergy Resources—Policy Priorities
Revamp Fiscal Balance Saving Advance pPolicy
• Fiscal rules• Resource funds
gand Investment
• Absorption capacityP bli
Structural Reform
• Competition• Access to
fi• Non-resource taxes
• Public investment efficiency
finance• Trade
CCA: Structural Reforms andCCA: Structural Reforms andRegional Cooperation
Phases of Market Reforms
Market enabling reformsMarket-enabling reforms
Market-deepening reforms
Market-sustaining reforms
Source: EBRDSource: EBRD
Market-sustaining reforms are lagging in CCA countriesCCA countries
Three stages of reforms in CCA: Average Transition Indicators
4
2
3
1
2
Source: EBRD Transition Reports Transition indicators are on the scale of 1 to 4 33;
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
First-phase reforms Second-phase reforms Third-phase reforms
Source: EBRD Transition Reports. Transition indicators are on the scale of 1 to 4.33;unweighted averages of 8 countries.
Corruption, labor skills and infrastructure remain key constraintsremain key constraints…
Top 3 obstacles to firms' operationsTop 3 obstacles to firms operationsru
ptio
n
uctu
re
rupt
ion
Crim
e
ngs to
land0.5
rrupt
ion
Cor
r
Infra
stru
Ski
lls
Cor
r
Ski
lls
C
ness
licen
sin
min
istra
tion
Acc
ess
truct
ure
frast
ruct
ure
ion
kills ion
tion
tion
rime
e re
0.3
0.4
Cor
Bus
in
Tax
adm
Ski
lls
Infra
s Inf
Cor
rupt
i
Sk
Cor
rupt
i
Ski
lls
x ad
min
istra
t
Crim
e Cor
rup t Cr
Infra
stru
ctur
e
Infra
stru
ctur
Ski
lls0.1
0.2
Tax S
0Armenia Azerbaijan Georgia Kazakhstan Kyrgyz R. Tajikistan Uzbekistan Mongolia
Source: EBRD and World Bank
Major challenges in energy, water and transportation weaken growth opportunitiestransportation weaken growth opportunities Most CCA countries have major gaps in energy and water
infrastructure
Energy endowments differ dramatically across CCA countries and former system of regional energy trade hascountries and former system of regional energy trade has broken down
Uneven access to water; improved management is critical Uneven access to water; improved management is critical
Long distances and low density require efficient and well-maintained transport infrastructure to facilitate connectivitymaintained transport infrastructure to facilitate connectivity and trade
F i l h i f di l d i l Few regional mechanisms for dialog and regional institutions are weak
Source: World Bank
Structural and Regional Policies—What are some Priorities?What are some Priorities? Improve business climates to leverage FDI into non-
resource sectors
Make regulators into enablers instead of obstaclesMake regulators into enablers instead of obstacles
Strengthen governance of firms and financial
i tit tiinstitutions
Strengthen education and health care
Leverage regional cooperation to improve energy and
water security, and transport infrastructure
CCA: Political Economy Challenges
Major PE Obstacles in the CCA State—often family—capture of desirable economic sectors, and
“poaching” of attractive new assets
“Parallel” governments that intentionally weaken the independence of key economic institutions Regulatory bodies favor politically powerful vested interests Regulatory bodies favor politically powerful vested interestsGovernment finances used to benefit the elite
B l f i hi ll li h k h diffi l Balance of power within a small elite that makes change difficult
Uncertainty about political transitiony p
Regional considerations—interests of major powers and tensions among some CCA countries (e g Armenia and Azerbaijan;among some CCA countries (e.g. Armenia and Azerbaijan; Tajikistan and Uzbekistan)
Some questions on overcoming PE obstaclesobstacles Does capacity building TA provided by the Fund and other
partners effectively strengthen institutions, and prepare them for a time when PE constraints may lessen?them for a time when PE constraints may lessen?
Beyond TA, how can the Fund and other international t b t h l t l l liti lpartners best help to relax or resolve political economy
constraints to reforms and better growth?
A h f i l i h Are there ways to foster regional cooperation—such as through CAREC—that will break through the regional deadlock on resolving water, energy and transport issues?
How much uncertainty, and what opportunities, arise for CCA countries from likely medium-term developments in Af h i t d f th ( ) i l f Chi dAfghanistan and from the (re)emerging roles of China and Russia?
In Closing: Main Messages
Absent major shocks, CCA countries are likely to continue to muddle through, and remain vulnerable
Much better growth—higher, less volatile, more di ifi d d i l i d i kdiversified, and more inclusive— and emerging market status are available with resolute and bold action
Major implementation gaps exist due to political economy choices made by CCA countries and pooreconomy choices made by CCA countries and poor prospects for regional cooperation