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