On 28 April, the International Monetary Fund (IMF) published their economic outlook for Middle Eastern, Caucasus and Central Asian countries to assess the impact of Covid-19 on those regions. 

The report projected a growth decline from 1.2 percent in 2019 to a 2.8 percent in 2020 in the regions before rising to 4.0 percent in 2021. The report names the decline of oil prices as the main driving force on the economic impacts. It highlighted that the decreases in oil prices were so large that fiscal and export revenues are expected to decline across all oil-exporting countries in the region, including those that might manage to gain market share from higher-cost producers. The lower oil and commodity receipts will erode policy space to address the crisis in some countries, put pressures on exchange rates and government budgets, and weaken external positions.

At the same time, restrictive containment measures introduced by governments in the region and fear of contagion are weakening the region’s consumer demand, particularly in tourism, hospitality and retail sectors. The largest impact is likely to be felt by small- and medium-sized enterprises (SMEs) due to their limited buffers. Moreover, given heavy employment in these service sectors, there could be significant second-round effects on domestic demand across the region if unemployment rises and wages and remittances fall.

Another worrying condition was the tightening of financial conditions globally which also could have a major impact on the region. Equity markets are down by 20-30 percent since their peak in mid-February, with energy sectors being among the hardest hit economic branches. High frequency data also revealed that nearly $5 billion of portfolio flows had left the two regions in the month of March and such a tightening in financial conditions could prove to be a major challenge given the region’s estimated $35 billion in maturing external sovereign debt in 2020.

Going specifically into the Caucasus and Central Asia (CCA) region, the report outlined that the region is projected to contract by 1.7 percent of GDP in 2020. The current conjuncture is a multifaceted crisis. First and foremost, it is a domestic health crisis, with an urgent need for critical containment and mitigation measures. The pandemic and lockdowns also bring demand and terms of trade shocks as well as a supply shock, including via disrupted supply chains. The parallel tightening of financial conditions exacerbates circumstances facing the CCA region.

Adverse impacts of the multiple shocks are expected to drive most countries in the CCA region into a recession. While CCA oil exporters are projected to contract by 0.8 percent due to supply disruptions and a decline in export demand, mostly in oil, CCA oil importers are expected to be hit harder, with growth shrinking by more than 8 percentage points to –2.2 percent. The current account deficit among CCA oil exporters could decline further to 6.7 percent of GDP in 2020, led by a sharp fall in exports (including those of commodities), with effects most pronounced in Azerbaijan, Kazakhstan and Uzbekistan. 

Mirroring the decline in domestic demand, import growth would also drop. A worsening of the current account deficit among CCA oil importers—to 10.5 percent in 2020— reflects lower remittances and contractions in growth rates of both exports and imports. Overall, CCA oil importers’ exports would contract by 29.4 percent while imports would shrink by 19.9 percent; in both cases, magnitudes for Georgia and Kyrgyz Republic are higher, given the larger services share in GDP and their regional role as ports for trade with China, respectively.

The report further outlined that while the international reserves and debt ratios were assessed as broadly adequate and sustainable prior to the pandemic, sharp declines in commodity prices and anticipated drops in remittances and sovereign spreads makes it less so. Sovereign spreads have spiked significantly from their lows in mid-February, with increases (above 400 basis points) in Azerbaijan, Georgia, and Tajikistan, broadly in line with emerging markets but raising debt service and refinancing costs and further constraining fiscal space. These improvements in macroeconomic frameworks since the external shock of 2014–16 had smoothed the management of the crisis across most countries in the CCA region.

While financial systems in the region have remained stable so far, vulnerabilities exist in the current conjuncture. For instance, the recent rise in retail and mortgage credit growth has been accompanied by relaxed lending standards and subsidized and directed lending (Azerbaijan, Kazakhstan, Kyrgyz Republic).

A global slowdown in tourism would further constrain growth, particularly in countries where inbound tourism expenditure constitutes a high percentage of GDP or exports (Armenia, Georgia, Kyrgyz Republic).

The report concluded that the CCA countries have generally communicated well regarding the pandemic with accommodated exchange rate pressures and planned for additional health-related spending. The IMF recommended to the countries to make direct, urgent fiscal spending in order to alleviate capacity constraints in health services and contain the spread. These may include mitigation measures such as the provision of temporary health facilities to quarantine and treat those affected. Authorities could also consider tax and revenue administration measures to facilitate imports of medicines, personal protective equipment, medical supplies, and related goods. 

Additionally, targeted social spending (cash transfers to the poorest households, especially those affected by a decline in remittances and loss of employment) as well as temporary subsidies or deferred tax payments to the hardest hit firms (such as SMEs and the hospitality sector) should be instituted (Azerbaijan, Kazakhstan and Uzbekistan have the space for such measures). Monetary and exchange rate policies would also play a critical and complementary role to play to counter impacts of pandemic-induced demand and terms of trade shocks. Therefore, in countries with flexible exchange rates, credible monetary frameworks, low inflation, and relatively moderate currency mismatches (like Armenia, Georgia and Kazakhstan), exchange rates could act as shock absorbers.  

On 14 April, the IMF published their World Economic Outlook for the year 2020. For Armenia the IMF forecasted a shrink by 1.5 percent of its GDP in 2020 that would grow to 4.8% in 202. For Azerbaijan, the IMF forecasted a 2.2% reduction to the country’s GDP in 2020 and expected a 0.7% growth in the economy in 2021. Georgia’s GDP would be reduced by 4% in 2020, followed by a 3% growth in 2021 (Caucasus Watch reported).