On November 20, Jihad Azour, Director of Middle East and Central Asia Department at the IMF held an online roundtable with journalists where he presented an economic outlook for the region of Caucasus and Central Asia (CCA).
In his opening remarks, Azour gave a sense of the overall growth trends in the CCA area. He noted that despite uncertainties, “the economies of the region were able to maintain a good level of growth.” For this year, the IMF expects the rate of growth to be at 4.3% which is slightly higher than the IMF’s April projections. For 2025, the expectation is that the growth will reach 4.5%. Expectations are different, however, for the oil-exporting and the oil-importing countries of the region. Azour emphasized that this is because the “oil sector has affected the level of performance of the oil-exporting” Caucasus and Central Asia (CCA) countries.
The picture for oil-involved countries, though, was not all rosy. According to Azour, “we foresee” that some economies are beginning to show signs of a slowdown. One of the factors involved in this trend is the ongoing war between Russia and Ukraine. For the oil-exporting nations, the medium-term outlook is slightly diminished due to low oil production and uncertainty in the oil market. The oil-importing countries, on the other hand, have enjoyed a high level of growth. The global rate for the oil-importing economies of the region exceeds 6% on average. Azour noted, though, that the medium term outlook also has been revised “downward” because the countries of the region need to focus on implementing structural reforms to boost their growth prospects. The bright side, however, in Azour’s opinion, is the resulting lower rates of inflation. Inflation in the region has dropped to 6.9% this year. It is expected that it will fall to about 5% in the medium term.
Central to Azour's remarks throughout the roundtable was emphasizing the mixed nature of the economic outlook for the CAC countries. The IMF anticipates strong economic growth in the region but not growth across the board . Azour highlighted that there are notable differences between oil-importing and oil-exporting countries. Any economic forecast for the CAC countries must take this complexity and variance into account.
Uncertainty remains high about the economic future of these countries. Azour claims that external "shocks" from outside forces are affecting the countries of the region. In his opinion, it is important for these CCA countries to consider a risk matrix. Risks are currently elevated. The region will be affected by global risks such as economic fragmentation, fluctuations in commodity prices, regional conflicts, and the risk of additional export restrictions. There are also some vulnerabilities that exist in these economies. The capacity to absorb shocks by those countries varies from place to place, Azour emphasized. In his view, conflicts at the regional level can escalate. These conflicts could, in turn, have lasting implications for some countries, impacting their level of attractiveness for foreign direct investment.
What about non-economic factors and forces? What impact could these have? Azour drew attention to the possibility for social discontent and political resistance in the countries of the region. He claimed that keeping macroeconomic stability and strengthening their social protection framework will be a must for these countries. Azour also noted that risks of trade tensions and sudden changes in financial flows will be important to watch. This high level of uncertainty requires policies and reforms that need to be strategic in their formulation. First of all, said Azour, having a focus on structural reforms is key. This is particularly true on the governmental side in order to boost medium-term growth and to strengthen resilience. This is a means to create jobs and increase participation in the labor market, especially by women and youth. This type of reform will require countries to invest more capital per worker and to improve productivity. This can be achieved by a twofold approach: on the one hand, through state macroeconomic policies and on the other hand, through improving the quality of infrastructure, especially digital infrastructure. Other important factors include reducing trade barriers, diversifying products, and investing in infrastructure to help strengthen and increase connectivity among trade routes. Encouraging competition in the financial sector and reducing the state's role and footprint in the b are further steps in the right direction. Opportunities to strengthen regional integration, especially in the financial sector, will be the key element to improve growth, according to Azour.
The issue of creating "buffers" was at the forefront of Azour's comments on fiscal policies. Azour remarked that the CCA countries will need to keep rebuilding the buffers in order to cushion their economies against the risks of future shocks. Maintaining fiscal sustainability is a "must" in this area, he said. In Azour's view, rebuilding buffers and developing mechanisms to protect social systems need to go hand in hand. Some countries are facing a high debt level. Their financing needs have been affected by the increase in interest rates.
The issues to be addressed vary from country to country. Some countries need to focus on accelerating fiscal consolidation to preserve sustainability. Some countries need to prioritize fiscal sustainability while tackling food security issues. The last element in terms of macroeconomic stability is maintaining the stands on monetary policy, with the objective to keeping inflation at a low level and preserving price stability. This should be complimented by strengthening the independence of the central banks. Azour identified climate issues and digitalization as also being important priorities.
Answering a question on what specific reforms the IMF would recommend to address the challenges of geo-economic fragmentation and commodity price volatility, Azour responded that the “recent war in Ukraine has provided for some countries in the region a capacity to play a greater role in trade and value chain.” There are national policies and regional strategies that can improve conditions on accelerating structural reforms that will allow these countries to be more competitive, improve doing business and increase their capacity to attract FDIs and raise productivity. The recent IMF studies have shown, he said, that capital and labor productivity in the region are low and have actually declined over the past twenty years.
Regarding the commodity market volatility, Azour said that the global demand and supply depend on the economic outcomes of various global blocs. For example, the extension of the OPEC plus agreement had to preserve the stability of oil prices and “also extend the impact on the oil sector.” Clearly, he said, countries of the region that have a variety of resources (energy-related and mineral-based) are capable of increasing the level of “economic impact.”
I had the opportunity to pose a question of my own to Azour. My inquiry focused on the quality of growth in Kazakhstan. I asked whether Azour could see it being still driven by extractive industries or being characterized by changes in economic diversification. In reply, Jihad Azour observed that the growth rate in Kazakhstan this year will be around 3.4% against 5% from 2023. He believes this slump is due to the oil sector. In the medium term, the IMF considers that the economic growth in Kazakhstan will stabilize at 3.5%. Diversifying the economy and reducing dependence on fossil fuels will be critical for Kazakhstan to ensure a higher rate of economic growth that is more resilient in the medium term. At this stage, the favorable macroeconomic developments and the buffers that exist in the system, as well as political and social stability, provide an opportunity to accelerate structural reforms. In Azour's opinion, diversification and greening the economy are both ways to strengthen the economic potential of Kazakhstan. Achieving these goals, however, would require fast implementation of structural reforms. Kazakhstan, according to Azour needs to redefine the role of the state and reduce its footprint in the economy by providing more space to the private sector. There is still a need, however, to increase productivity by improving labor and product market regulations. Accelerating trade diversification is another process Kazakhstan needs to undertake. This will require restructuring SOEs (state-owned enterprises), moving towards more targeted subsidies, and revising public support mechanisms, In addition, Kazakhstan needs to gradually eliminate price regulations, reduce some of the trade restrictions and promote competition in the private sector.
Regarding the imbalances between fiscal and monetary policies that have negatively impacted Kazakhstan (according to a recent address by the country's President), Azour believes Kazakhstan needs to keep policies tight and address domestic and external pressures. The target is to preserve and accelerate policies that address inflation and strengthen the credibility of monetary policies. Azour also identified the institutional dimension as important. He claimed that strengthening the independence of the National Bank is a priority and should be supported by Kazakh leadership. On the fiscal side, the priority is to enhance revenue mobilization and reduce dependence on oil. This would require the implementation of the tax reform that Kazakhstan is currently undertaking. As well, the country needs to use this opportunity to reduce tax exemptions and to increase non-oil revenues, including reforming the VAT rates. All this needs to be complimented by expenditure rationalization. In particular, some of the discretionary spending and the off-budget spending that are currently conducted through Kazakhstan’s National fund and SOEs should be limited. The spending process should also be more transparent.
To a question on the potential impact of nuclear plant construction in Kazakhstan on the country's future economic growth, Azour believes that it is a great opportunity for Kazakhstan to move away from fossil fuels and to diversify energy sources.
Azour concluded his remarks, in part, by noting that the Central Asian and Caucasus region is an important global conglomerate that connects East and West. Recent geopolitical challenges have prompted the countries of this area to accelerate regional economic integration through various channels. Economic performance in the region could be supported by improving connectivity in terms of trade and logistics to facilitate the flow of goods. Regional initiatives around energy and the building of joint infrastructure and initiatives to integrate financial sectors would also be helpful. Finally, upscaling cross border digital payments and promoting additional reforms on improving capacities of developing digital currencies and digital finance could also improve economic performance in the region.
Written by: Assel Nussupova
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