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. The Caucasus and Central Asia

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. 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. …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. 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. …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. …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. 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. …and has not benefitted from
regional integration
integration.

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. 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. 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. 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. 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. CCA: Monetary and Financial
Policies

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. 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. 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. 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. CCA financial sectors: Way
forward
Reduce
the role of
state
Strengthen
financial infrainfrastructure
Strengthen
supervision

22. CCA: Fiscal Policy

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. …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. 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. Fiscal Policy—Priorities
Policy Priorities
Develop fiscal
policy frameworks
Strengthen
transparency and
accountability
Increase non-oil
revenue
Improve efficiency
and composition
of spending

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. 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. 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. CCA: Structural Reforms and
Regional Cooperation

31. Phases of Market Reforms
 Market enabling reforms
Market-enabling
 Market-deepening reforms
 Market-sustaining reforms
Source: EBRD

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. 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. 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. 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. CCA: Political Economy Challenges

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. 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. 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