“Policymakers in the region have responded to the downturn by easing fiscal and monetary policies and strengthening social safety nets. The region as a whole should see a modest recovery in 2010, although the degree of the upturn will vary among countries. The energy importing low-income countries still face a difficult year head, and some countries will need additional donor support to contain the adverse impact of the crisis,” said Ahmed, speaking ahead of the IMF-World Bank Annual Meetings.

The IMF expects that most energy exporters of the region—Azerbaijan, Turkmenistan, and Uzbekistan—will record solid growth in 2009, owing to long-term energy export contracts, supportive policies, and limited linkages to international markets. With global energy demand increasing, most energy exporters are expected to grow strongly in 2010.

One exception is Kazakhstan, which is likely to see growth contract by about 2% in 2009, with recovery in 2010 held back by lingering problems in the banking system.

The region’s energy importers—Armenia, Georgia, the Kyrgyz Republic, and Tajikistan—are facing a marked slowdown in growth and deteriorating living standards (Chart 1) as a result of a sharp drop in remittances (Chart 2)—especially from Russia, which is in recession and has had to shed jobs previously filled by CCA workers. Armenia is likely to suffer a contraction of more than 15% and Georgia 4.0%, in 2009, while the Kyrgyz Republic and Tajikistan are faring better.

CCA countries should continue to pursue fiscal policies that support growth and keep social protection a priority. The energy importers will need additional donor support on concessional terms to prevent a buildup of unsustainable debt levels, while the energy exporters should use part of their anticipated uptake in revenue from rising energy prices to proceed with structural reforms.

Financial sectors across the region are under stress, notably in Kazakhstan, and restoring financial health remains a priority. The region’s vulnerabilities in this sector call for close monitoring of CCA financial systems as well as enhanced supervision and crisis preparedness.

The IMF also recommends that countries in the region continue to preserve exchange rate flexibility or move towards flexible exchange rate regimes over time to maintain competitiveness and discourage speculative capital flows.

Selected Economic Indicators in Caucasus and Central Asia (CCA)