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The Caucasus and Central Asia:
From Transition to Emerging Markets
Juha Kähkönen
Deputy Director
IMF Middle East and Centr...
The Caucasus and Central Asia
Outline
 Growth performance over the past 20 years
 A vision for the next decade
 Policies required to achieve this vis...
Growth in the CCA region has
been strong
strong…
9
8
7
6
5
4
3
2
1
0

Average Real GDP Growth
1996-2011
1996 2011
…helping reduce p
p g
poverty.
y
80 Poverty headcount ratio at national poverty line (% of population)1/
70
60

1996 or ea...
But high growth has not reduced
inequality…
inequality
50
45
40
35
30
25
20
15
10
5
0

GINI Coefficient

1996 or earliest ...
…and CCA growth has been
volatile…
volatile
6
5
4
3
2
1
0

Volatility of Real GDP Growth
(Standard Deviation)
(St d d D i ...
…and uneven across CCA
countries.
countries
Real GDP Per Capita 2011 / Real GDP Per Capita 1996
AZE
TKM
ARM
KAZ
GEO
TJK
UZ...
Growth in the region has not
been diversified
diversified…
Commodity Exports 1/, 2012
(% of total exports of goods and ser...
…and has not benefitted from
regional integration
integration.
Baseline Outlook for the CCA, and
Alternatives…
Alternatives
CCA: GDP Growth Projections
(In percent)

7
6
5
4
Average Hyd...
Vision for CCA: Become vibrant emerging
market economies over th next decade
k t
i
the
td
d
To achieve this, growth shoul...
CCA Vision: Obstacles and risks
External
te a
• Vulnerability
to shocks
(e.g., food
and fuel
prices)
• Lack of
integration...
Actions to Support the CCA Vision
• Stronger macroeconomic policy frameworks and financial
sectors
• Fiscal and internatio...
Potential Payoff from Achieving
the Vision
in % of GDP per capita in 2023 un
nder existing policies

60.0

Relative Gains ...
CCA: Monetary and Financial
Policies
Stocktaking of Monetary and
Financial Developments
Notable successes
 Inflation and nominal interest rates have fallen
sh...
CCA financial sectors made impressive
gains…but
gains but then stagnated
Credit to Economy, 2012 1/

Financial Reform Prog...
Monetary and Financial Policies—
What is the Vision?
Stability

Vision

Low and stable
inflation.

Flexibility

Counter-cy...
Monetary and Financial Policies—
What are the Priorities?
 Strengthen central bank independence
g
p
 Strengthen monetary...
CCA financial sectors: Way
forward

Reduce
the role of
state

Strengthen
financial infrainfrastructure

Strengthen
supervi...
CCA: Fiscal Policy
Fiscal Policy—Notable
Achievements…
Achievements
Substantial fiscal

consolidation prior t
lid ti
i to
the crisis

25

15...
…but also room for improvement.
p
Lower buffers

after the crisis

Low non-oil

revenue

Excessive quasiquasi

fiscal a...
Fiscal Policy—What is the Vision?
y
Governments
should focus on
core functions

While adhering to
best standards
for trans...
Fiscal Policy—Priorities
Policy Priorities
Develop fiscal
policy frameworks
Strengthen
transparency and
accountability

In...
Energy Resources—Challenges
 Heavy reliance on energy resources
p
 Limited transparency
Exports and Fiscal Revenue from ...
Energy Resources—Ten-Year Vision
Diversified economy: Natural resource wealth
transformed into productive assets
p

Inc
co...
Energy Resources—Policy
Energ Reso rces Polic Priorities

p
Revamp Fiscal
Policy
• Fiscal rules
• Resource funds
• Non-res...
CCA: Structural Reforms and
Regional Cooperation
Phases of Market Reforms
 Market enabling reforms
Market-enabling
 Market-deepening reforms
 Market-sustaining reforms
...
Market-sustaining reforms are lagging in
CCA countries
Three stages of reforms in CCA: Average Transition Indicators
4

3
...
0.4

0.3

0.2

0.1

Armenia
Azerbaijan
Infrastru
ucture

Source: EBRD and World Bank
Georgia Kazakhstan Kyrgyz R.

C
Crime...
Major challenges in energy, water and
transportation weaken growth opportunities
 Most CCA countries have major gaps in e...
Structural and Regional Policies—
What are some Priorities?
 Improve business climates to leverage FDI into non-

resourc...
CCA: Political Economy Challenges
Major PE Obstacles in the CCA
 State—often family—capture of desirable economic sectors, and

“poaching” of attractive ne...
Some questions on overcoming PE
obstacles
 Does capacity building TA provided by the Fund and other

partners effectively...
In Closing: Main Messages
 Absent major shocks, CCA countries are likely to

continue to muddle through, and remain vulne...
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The Caucasus and Central Asia: From Transition to Emerging Markets

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The Caucasus and Central Asia: From Transition to Emerging Markets

  1. 1. The Caucasus and Central Asia: From Transition to Emerging Markets Juha Kähkönen Deputy Director IMF Middle East and Central Asia Department The Atlantic Council June 19, 2013 J 19
  2. 2. The Caucasus and Central Asia
  3. 3. Outline  Growth performance over the past 20 years  A vision for the next decade  Policies required to achieve this vision Monetary & financial Fiscal & management of energy resources Structural—business climates Regional cooperation—trade, transport, energy and water security  Political economy obstacles to reform
  4. 4. Growth in the CCA region has been strong strong… 9 8 7 6 5 4 3 2 1 0 Average Real GDP Growth 1996-2011 1996 2011
  5. 5. …helping reduce p p g poverty. y 80 Poverty headcount ratio at national poverty line (% of population)1/ 70 60 1996 or earliest 2011 or latest 50 40 30 20 10 0 ARM AZE Source: World Bank 1/ No data exist for TKM and UZB. GEO KAZ KGZ TJK
  6. 6. But high growth has not reduced inequality… inequality 50 45 40 35 30 25 20 15 10 5 0 GINI Coefficient 1996 or earliest available li t il bl 2011 or latest available TJK KAZ Source: World Bank KGZ AZE GEO TKM ARM UZB
  7. 7. …and CCA growth has been volatile… volatile 6 5 4 3 2 1 0 Volatility of Real GDP Growth (Standard Deviation) (St d d D i ti ) 1996-2011
  8. 8. …and uneven across CCA countries. countries Real GDP Per Capita 2011 / Real GDP Per Capita 1996 AZE TKM ARM KAZ GEO TJK UZB KGZ 0 1 2 3 4 5
  9. 9. Growth in the region has not been diversified diversified… Commodity Exports 1/, 2012 (% of total exports of goods and services) 100 80 60 40 20 0 GEO ARM KGZ TJK UZB KAZ AZE TKM Source: Country authorities, staff estimates and WEO 1/ Includes oil, gas, precious metals, aluminum, copper, other metals, metal byproducts and cotton. Commodity Revenue, 2012 d (% of total revenue) 80 60 40 20 0 UZB KAZ AZE TKM Source: Country authorities, staff estimates and WEO Remittances, Remittances 2012 (% of total exports of goods and services) 250 200 150 100 50 0 AZE GEO ARM KGZ TJK Source: WEO
  10. 10. …and has not benefitted from regional integration integration.
  11. 11. Baseline Outlook for the CCA, and Alternatives… Alternatives CCA: GDP Growth Projections (In percent) 7 6 5 4 Average Hydrocarbon Importers Average Hydrocarbon Exporters 3 2 1 0 2012 2013 2014 2015 Source: World Economic Outlook; and IMF staff estimates. 2016 2017 2018
  12. 12. Vision for CCA: Become vibrant emerging market economies over th next decade k t i the td d To achieve this, growth should be Less volatile l til High Growth More inclusive More diversified
  13. 13. CCA Vision: Obstacles and risks External te a • Vulnerability to shocks (e.g., food and fuel prices) • Lack of integration g with regional and global markets Global Domestic • Uncertain g global g growth • Strong vested interests • Fragility and geopolitical shifts hift • Weak institutions, including accountability • Potential political uncertainty
  14. 14. Actions to Support the CCA Vision • Stronger macroeconomic policy frameworks and financial sectors • Fiscal 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
  15. 15. Potential Payoff from Achieving the Vision in % of GDP per capita in 2023 un nder existing policies 60.0 Relative Gains in GDP per Capita by 2023: Better vs Existing Policies vs. 50.0 39.9 40.0 30.0 20.0 20 0 25.7 16.3 10.0 0.0 Average across CCA: Gradual Implementation Average across CCA: Rapid Implementation Top 3 countries: Rapid Implementation
  16. 16. CCA: Monetary and Financial Policies
  17. 17. Stocktaking of Monetary and Financial Developments Notable successes  Inflation and nominal interest rates have fallen sharply  Financial sectors are deeper Room for improvement p  Inflation remains volatile  Real interest rates are high  Monetary policy has been pro-cyclical  Economies remain highly dollarized
  18. 18. CCA financial sectors made impressive gains…but gains but then stagnated Credit to Economy, 2012 1/ Financial Reform Progress, 2012 1/ CCA 12 CEE Capital markets RUS Baltic SD) GDP per capita (US Banking 16,000 Insurance and other financial services 8 4 0 Private equity 10,000 MSME finance CEE Baltic 6,000 4,000 0 0 70 20 40 60 80 Private Sector Credit (percent of GDP) UZB TJK ARM TKM KAZ 10 100 KGZ GEO 20 Foreign Share of Total Assets GEO ARM AZE 30 80 Cauc. Cash and Dollarization, 2012 40 ARM 60 KGZ UZB TJK 2,000 50 Cauc 40 CA CEE 60 GEO KGZ AZE TKM 8,000 Cash to M2 M Assets to GDP Bank Assets and Foreign Ownership Baltic KAZ 12,000 Source: EBRD 1/ EBRD methodology. The highest score reflects the standards of an 100 90 RUS 80 70 60 KAZ 50 UZB 40 CA TKM 30 TJK 20 AZE 10 0 0 20 RUS 14,000 0 20 30 40 50 60 Dollarization of deposits 70
  19. 19. Monetary and Financial Policies— What is the Vision? Stability Vision Low and stable inflation. Flexibility Counter-cyclical monetary policy to smooth the business cycle. cycle Support growth th Lower real interest rates, deeper financial sectors.
  20. 20. Monetary and Financial Policies— What are the Priorities?  Strengthen central bank independence g p  Strengthen monetary policy transmission  Improve data and forecasting model  Strengthen communications  Clarify the role of the exchange rate  Allow greater exchange rate flexibility
  21. 21. CCA financial sectors: Way forward Reduce the role of state Strengthen financial infrainfrastructure Strengthen supervision
  22. 22. CCA: Fiscal Policy
  23. 23. Fiscal Policy—Notable Achievements… Achievements Substantial fiscal consolidation prior t lid ti i to the crisis 25 15 10 5 I Improvement i t in public debt ratios Oil exporters 0 -5 Oil -10 1997 St Strengthening of fi l 120 th i f fiscal institutions Fiscal Balances, 1997-2008 In Percent of non-oil GDP 20 100 1999 2001 2003 2005 2007 Public Debt, 1997-2008 In Percent of GDP 80 Oil 60 40 20 0 1997 Oil exporters 1999 2001 2003 2005 2007
  24. 24. …but also room for improvement. p Lower buffers after the crisis Low non-oil revenue Excessive quasiquasi fiscal activities 25 20 15 Fiscal Balances, 1997-2012 In Percent of non oil GDP non-oil 10 Oil exporters 5 0 -5 Oil importers -10 1997 120 100 2000 2003 2006 2009 2012 Public Debt, 1997-2012 In Percent of GDP 80 60 Oil importers 40 20 0 1997 Oil exporters 2000 2003 2006 2009 2012
  25. 25. Fiscal Policy—What is the Vision? y Governments should focus on core functions While adhering to best standards for transparency and accountability • Provision of public goods in a sustainable and non-distortive way di t ti • Stronger PFM and budget systems
  26. 26. Fiscal Policy—Priorities Policy Priorities Develop fiscal policy frameworks Strengthen transparency and accountability Increase non-oil revenue Improve efficiency and composition of spending
  27. 27. Energy Resources—Challenges  Heavy reliance on energy resources p  Limited transparency Exports and Fiscal Revenue from Natural Resources Na atural Resource Exports / Total Exp E ports (Average 2006–10, in percent)1 AZE 100 COG GIN MNG 80 ZMB 60 PNG BOL KAZ MLI CMR 40 SYR VNM GNQ GUY MRT 20 AGO IRQ TMP NGA TCD TKM DRC GAB YEM SDN IDN Non-Oil Oil 0 0 10 20 30 40 50 60 70 80 Natural Resource Revenue / Total Fiscal Revenue 90 Sources: World Development Indicators, World Bank; World Economic Outlook, IMF; and IMF staff estimates. 100
  28. 28. Energy Resources—Ten-Year Vision Diversified economy: Natural resource wealth transformed into productive assets p Inc come per capita r Countries with Natural Resource Exports 10% Exports>10% of GDP Countries with Natural Resource N t lR Exports<10% of GDP Economic Complexity Index Source: Hausmann, 2013
  29. 29. Energy Resources—Policy Energ Reso rces Polic Priorities p Revamp Fiscal Policy • Fiscal rules • Resource funds • Non-resource taxes g Balance Saving and Investment • Absorption capacity • P bli Public investment efficiency Advance Structural Reform • Competition • Access to finance fi • Trade
  30. 30. CCA: Structural Reforms and Regional Cooperation
  31. 31. Phases of Market Reforms  Market enabling reforms Market-enabling  Market-deepening reforms  Market-sustaining reforms Source: EBRD
  32. 32. Market-sustaining reforms are lagging in CCA countries Three stages of reforms in CCA: Average Transition Indicators 4 3 2 1 1992 1994 1996 1998 First-phase reforms 2000 2002 2004 Second-phase reforms 2006 2008 2010 2012 Third-phase reforms Source: EBRD Transition Reports. Transition indicators are on the scale of 1 to 4 33; Reports 4.33; unweighted averages of 8 countries.
  33. 33. 0.4 0.3 0.2 0.1 Armenia Azerbaijan Infrastru ucture Source: EBRD and World Bank Georgia Kazakhstan Kyrgyz R. C Crime Busin ness licensin ng Corrupti ion Skills S Sk kills Infrastructur re Corrupti ion Infrastructure e Skills Corr ruption Inf frastructure Cr rime Skills Infrastructure Corrupt tion Skills Crime Tax administrat x tion 0.5 Corr ruption Access to land s Cor rruption Tax adm ministration Skills Corruption, labor skills and infrastructure remain key constraints constraints… Top 3 obstacles to firms operations firms' 0 Tajikistan Uzbekistan Mongolia
  34. 34. Major challenges in energy, water and transportation 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 has broken down  Uneven access to water; improved management is critical  Long distances and low density require efficient and well- maintained transport infrastructure to facilitate connectivity and trade  F Few regional mechanisms f di l and regional i l h i for dialog d i l institutions are weak Source: World Bank
  35. 35. Structural and Regional Policies— What are some Priorities?  Improve business climates to leverage FDI into non- resource sectors  Make regulators into enablers instead of obstacles  Strengthen governance of firms and financial institutions i tit ti  Strengthen education and health care  Leverage regional cooperation to improve energy and water security, and transport infrastructure
  36. 36. CCA: Political Economy Challenges
  37. 37. 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  Government finances used to benefit the elite  B l Balance of power within a small elite that makes change diffi l f i hi ll li h k h difficult  Uncertainty about political transition y p  Regional considerations—interests of major powers and tensions among some CCA countries (e g Armenia and Azerbaijan; (e.g. Tajikistan and Uzbekistan)
  38. 38. Some questions on overcoming PE obstacles  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?  Beyond TA, how can the Fund and other international partners best help t relax or resolve political economy t b t h l to l l liti l constraints to reforms and better growth?  A there ways to f Are h foster regional cooperation—such as i l i h 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 Afghanistan d from th ( ) Af h i t and f the (re)emerging roles of Chi and i l f China d Russia?
  39. 39. 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 diversified, and more i l i di ifi d d inclusive— and emerging market d i k status are available with resolute and bold action  Major implementation gaps exist due to political economy choices made by CCA countries and poor prospects for regional cooperation

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