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IMF Issues Grim Economic Outlook For Former Soviet States

Many of the countries depend on remittances sent home by migrant workers in Russia, where work has become harder to come by.
WASHINGTON -- In its latest regional report, the International Monetary Fund (IMF) has issued a grim economic forecast for Central Asia and the Caucasus, projecting growth to slow to less than 2 percent in 2009 as the global economic crisis takes hold.

The bleak forecast comes amid a widening global downturn which the head of the IMF on March 10 labeled "a great recession."

IMF Managing Director Dominique Strauss-Kahn told delegates at a crisis meeting in the African country of Tanzania that the fund expects global growth to slow to below zero this year, what he called "the worst performance in most of our lifetimes." He urged wealthy Western states to maintain their support for low-income countries as things worsen.

David Owen, deputy director of the IMF's Middle East and Central Asia department, said the 2009 forecast for the Caucasus and Central Asia was as high as 8 percent only last October, and 4 percent just a month ago.

He called the latest numbers "a marked reversal of fortune" for the region, which experienced a growth rate of 6 percent in 2008 and 12 percent in 2007.

"Until recently this region had been awash with commodity-export receipts, capital inflows, and remittances. This had led to significant economic gains in recent years with real per capita GDP growing impressively," Owen said.

"Oil exporters in the region were able to build up substantial reserves including in sovereign wealth funds, while low-income countries benefited from the boom in the larger economies."

The global financial crisis has hit the region hard, and economic conditions in Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan have deteriorated sharply. The worst affected are countries that are very reliant on Russia as a trading partner or source of remittances.

The IMF warned that growth could decline even more if the economic situation in Russia worsens.

Commodity exporters are being affected by the decline in global demand and the sharp drop in commodity prices, while countries that are more closely integrated with international financial markets are experiencing serious financing constraints.

Taking Action

The economic crisis took center stage at a regional conference in Bishkek on March 4, jointly organized by the IMF and the Kyrgyz National Bank. Discussion focused on how to mitigate the effects of the global financial turmoil, and the meeting brought together central-bank governors and senior government officials from the region, who shared their experiences in managing the impact of the crisis in their countries.

Participants identified four main causes of the crisis: The difficulty of obtaining foreign capital; lower oil and commodity prices; lower remittances, primarily from Russia; and lower trade flows.

The IMF's Owen said the conference produced three key policy actions that could help countries buttress their economies against the impact of the crisis.

"First, countries should use the room they have for fiscal stimulus. We should be targeted on protecting the poor and supporting growth. Oil-exporting countries in the region can increase spending by drawing down the foreign-currency assets they accumulated in the boom years," Owen said.

"For the other countries, conference participants urged donors to step up with increased support so as to limit the erosion in poverty gains across the region."

Second, he said more must to be done to strengthen the financial sector, because every country in the region should have a contingency plan to prepare for liquidity and solvency problems in its banks.

The third policy recommendation is for some countries to consider adjusting their exchange rates to help absorb external shocks.

Owen said the region, along with the rest of the world, is "undoubtedly in for a tough time in 2009 and probably also in 2010."

"But the underlying fundamentals have improved greatly in recent years and by implementing the policies discussed at the conference, the region has a good chance of returning before too long, to healthy rates of growth," Owen added.

Last week, the IMF gave itself a scathing review for its mistakes in spotting the roots of the global crisis and acknowledged it fell short in its job as the world's financial overseer.

The IMF said warnings before the crisis, including its own, were too scattered and unspecific to force policymakers to act, let alone prompt collective policy action.