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International Monetary Fund. Middle East and Central Asia Dept.

from important priority areas such as health and education. CCA countries face other common challenges arising from still weak regional cooperation, low global integration, and the relatively slow pace of structural reforms . Regional integration is lacking across a range of important dimensions, including trade, financial markets, and infrastructure. These are all critical to strengthen CCA countries’ ties to each other and the rest of the world, which would help drive diversification and growth. Many CCA countries moved rapidly after independence to implement

International Monetary Fund. Middle East and Central Asia Dept.

) Sources: National authorities; and IMF staff calculations. 1 In percent of non-oil GDP. Box 3.2 Balancing Macroeconomic and Financial Stability Objectives in CCA Countries Faced with a weakening economic environment and rising financial risks, CCA countries need to reconcile three competing policy objectives: supporting growth, reining in domestic and external imbalances, and ensuring that the financial sector remains stable and intermediates effectively between savers and investors. The external shocks are affecting banking system stability through an

International Monetary Fund. Middle East and Central Asia Dept.

creation of private credit bureaus and stronger microfinance institutions. Deepening government debt markets and developing other capital markets are also important. CCA countries should take measures to move beyond the status quo in which several CCA countries face gradually weakening growth prospects and continuing vulnerability to shocks. Resolute actions to pursue structural reforms, enhance business environments and regional cooperation, and strengthen policy frameworks are likely to lead to greater investment and higher, more inclusive growth, moving these

International Monetary Fund. Middle East and Central Asia Dept.

Chapter 3 ). Going forward, MENAP and CCA countries face the difficult challenge of reducing fiscal vulnerabilities to strengthen economic resilience while fostering higher and more inclusive growth through structural reforms. Elevated global growth and trade uncertainties only make this challenge more difficult, and prospects for lower and more volatile oil prices will weigh on MENAP oil exporters in particular. Ensuring well-developed and credible fiscal institutions can not only help ease the burden of adjustment, but also reduce fiscal vulnerabilities on a

International Monetary Fund. Middle East and Central Asia Dept.
The countries in the Caucasus and Central Asia (CCA) have recorded significant macroeconomic achievements since independence. These countries have grown more rapidly-—on average by 7 percent over 1996–2011—-than those in many other regions of the world and poverty has declined. Inflation has come down sharply from high rates in the 1990s and interest rates have fallen. Financial sectors have deepened somewhat, as evidenced by higher deposits and lending. Fiscal policies were broadly successful in building buffers prior to the global crisis and those buffers were used effectively by many CCA countries to support growth and protect the most vulnerable as the crisis washed across the region. CCA oil and gas exporters have achieved significant improvements in living standards with the use of their energy wealth.
Mr. Mark A Horton, Hossein Samiei, Mr. Natan P. Epstein, and Mr. Kevin Ross

. TA related to improving financial regulation and supervision should focus on dollarization and FX-related risks, which are impediments to greater ER flexibility. TA could have a regional element, as the eight CCA countries face common issues and have a fairly common institutional setup and path. This would contribute to peer-to-peer learning. Further efforts would help enhance peer-to-peer networks related to monetary and ER market activities. Gaps and vulnerabilities identified in FSSAs should continue to be addressed. The Financial Sector Stability Review

Mr. Mark A Horton, Hossein Samiei, Mr. Natan P. Epstein, and Mr. Kevin Ross
Since late 2014, exchange rates (ERs) and ER regimes of the Caucasus and Central Asia (CCA) countries have come under strong pressure. This reflects the decline of oil and other commodity prices, weaker growth in Russia and China, depreciation of the Russian ruble, and appreciation of the U.S. dollar, to which CCA currencies have historically been linked. Weaker fiscal and current account balances and increased dollarization have complicated the picture. CCA countries entered this period with closely managed ER regimes and, in many cases, currencies assessed by IMF staff to be overvalued. CCA central banks have price stability as their main policy objective, and most have relied on ER stability to achieve this objective. Thus, the first policy response involved intervention in local foreign exchange (FX) markets, often with limited communication. In this context, the IMF staff has reviewed ER policy advice and implementation strategies for CCA countries.