On 31 march, the World Bank group published its economic forecast on the countries of Europe and Central Asia. 

The report emphasised that economic activity in the emerging markets and developing economies in Europe and Central Asia (ECA) is estimated to have contracted by 2 percent in 2020 in the wake of disruptions related to the Covid-19 pandemic. The pandemic is expected to erase at least five years of per capita income gains in about a sixth of the region’s economies and raise the poverty headcount. Economies with strong trade or financial linkages to the euro area and those heavily dependent on services and tourism were the hardest hit. The pace of recovery in 2021 is projected to be faster than originally anticipated, at 3.6 percent, as firming external demand and stabilising industrial commodity prices partly offset a recent flare-up in new Covid-19 cases. Growth is then expected to rise to 3.8 percent in 2022, as the effects of the pandemic gradually wane and the recovery in trade and investment gathers momentum. The outlook remains highly uncertain, and growth could be weaker than envisioned if the pandemic takes longer than expected to fade, external financing conditions tighten, policy uncertainty spikes, or geopolitical tensions escalate again.

Armenia 

Going in-depth into the cases of the South Caucasus countries, the report underscored in Armenia’s case that in 2020, the country experienced one of the region’s sharpest GDP contractions—7.6 percent—as a severe Covid-19 outbreak and a military conflict with Azerbaijan late in the year impacted performance. The pandemic’s impact on vulnerable households, which has been severe, was only partially mitigated by the government’s Covid-19 response (estimated at 3.5 percent of GDP, including support through the banking sector to businesses). The poverty rate (measured at the upper middle-income economy poverty line) was estimated to have jumped to over 51 percent in 2020, a 7-percentage point rise. The unemployment rate rose by 1 percentage point year on year, reaching 18.1 percent at end-September 2020. 

The budget deficit widened sharply to 5.1 percent of GDP in 2020 (from 0.8 percent of 

GDP in 2019), driven by increased spending associated with the government’s pandemic response, higher military spending, and depressed tax revenues. The deficit was financed by a deposits drawdown and increased public borrowing, prompting Armenia to invoke its fiscal rule’s escape clause as public debt rose above the statutory level of 60 percent of GDP. 

GDP growth was projected to recover partially in 2021 (to 3.4 percent) and more strongly in 2022 (4.3 percent). The report said that recovery would be slow, as the economy is unlikely to return to pre-Covid output levels until 2023. Private consumption and the services sector are expected to recover gradually. Private investment will likely remain subdued, reflecting weak investor confidence. High post-conflict spending and ambitious public investment plans— although tempered by execution challenges—will keep the fiscal deficit elevated and drive the debt-to-GDP ratio above 70 percent in the medium term. The risks to the outlook are weighted heavily to the downside. They include uncertainty over progress in containing the pandemic and the pace of vaccination, weak economic recovery in key trading partners like the Russian Federation, geopolitical fragility, and heightened political uncertainty.

Azerbaijan

In 2020, Azerbaijan was hit by the triple shocks of the Civid-19 pandemic, reduced oil prices, and the armed conflict. The economy experienced its second recession since 2015, contracting by an estimated 4.3 percent. Three waves of Covid-19 induced lockdowns halted activity in nonhydrocarbon sectors, particularly travel, hospitality, and domestic trade. The energy sector contracted by 7 percent, as adherence to OPEC+ oil production quotas slashed oil output. On the demand side, investment fell by 8.3 percent as business confidence plummeted. Private consumption was also affected, but wage hikes in late-2019 prevented a deeper slump. 

Azerbaijan’s consolidated budget recorded a large deficit of 6.5 percent of GDP in 2020, as revenues collapsed and spending rose, including to finance the pandemic policy response (estimated at 2.7 percent of GDP). The deficit was financed by State Oil Fund (SOFAZ) assets. Depressed domestic demand and a stable exchange rate contained 12-month inflation to 2.7 percent in 2020. The Central Bank of Azerbaijan (CBA) cut the policy rate five times during the year, lowering it from 7.5 percent to 6.25 percent.

Azerbaijan’s economic recovery is expected to be gradual, with output returning to pre-Covid-19 levels only by the end of 2022. The early launch of Azerbaijan’s vaccination initiative and significantly higher public post-conflict reconstruction spending suggest that the recovery may materialise faster than previously anticipated. Downside risks to this forecast will remain substantial in the medium term. It was emphasised that the existing oil market equilibrium is fragile and largely depends on the OPEC+ agreements. In addition, the evolution of the pandemic was still highlighted as uncertain and would depend on the speed of the vaccine rollout. Finally, regional geopolitical risks would remain elevated in the foreseeable future, but that the significant SOFAZ reserves—over 100 percent of GDP at end-2020—will help shield the economy from these risks. 

Georgia

Georgia’s economy fell into recession in 2020, contracting by 6.2 percent. Following a strong start to the year, economic activity collapsed after March as the authorities introduced pandemic-related lockdown measures. The shock has been broad based, but the transport, tourism, and construction sectors suffered the largest impacts. Job and income losses were severe. The unemployment rate reached 20.4 percent in the fourth quarter of 2020. More than one-third of the employed were unable to work at the peak of the restrictions. Poverty is estimated to have risen by 5.4 percentage points in 2020 (using the national poverty line); even as government’s sizeable support package likely prevented an even greater increase in poverty.

The economic shock also put pressure on the external accounts. The current account deficit reached 12 percent of GDP in the first nine months of 2020, driven by weak services exports as border closings halted tourist arrivals. The deficit was only partially offset by an improving net income balance and transfers from abroad, with remittances remaining resilient and a narrowing trade deficit driven by import compression as domestic demand weakened. On the financing side, substantial public borrowing fully financed the gap and allowed for reserves accumulation. Official reserves rose to $3.9 billion by the end of 2020 (representing nearly 5 months of goods and services imports). However, the external debt-to-GDP ratio jumped to 124 percent of GDP by end-September, up from 102 percent of GDP a year earlier. 

The government’s fiscal response to the pandemic—estimated at over 7 percent of GDP—drove a widening of the fiscal deficit in 2020, with government spending up by 19 percent year on year. Simultaneously, revenue collection fell by round about 4 percent compared to 2019. As a result, the fiscal deficit widened to 9.7 percent of GDP and public debt to over 60 percent of GDP, above the limits prescribed by the fiscal rule, triggering the rule’s escape clause.

Georgia’s economy is projected to recover in 2021, growing by 4 percent, with the key baseline assumption that there are no further severe waves of Covid-19 infections that necessitate additional lockdowns and ongoing political impasse is resolved. The recovery will be supported by fiscal stimulus in the form of accelerated capital spending, tax deferrals, accelerated VAT refunds, and targeted support for the most affected businesses, as well as higher social spending. The fiscal deficit is expected to remain elevated at around 7 percent of GDP in 2021. Delayed vaccinations, further restrictions and prolonged political tensions represent the key downside risks to this outlook.