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International Monetary Fund. Middle East and Central Asia Dept.

decline by 1 percent to 5 percent of GDP across the remittance-dependent countries in the CCA. The international community has responded quickly by increasing its support to CCA energy importers ( Table 3 ). Multilateral and bilateral donors have stepped up budget grants to CCA governments. The IMF has entered into new or augmented programs with all four CCA energy importers—these programs accommodate an easing of fiscal policy and are focused on protecting key social and development expenditure. Thus, assistance from the international community has substituted for

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
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.
Iulia Ruxandra Teodoru and Klakow Akepanidtaworn
The COVID-19 crisis raises the risk of renewed financial sector pressures in the Caucasus and Central Asia (CCA) region in the period ahead. Bank distress and its economic and fiscal fallout have been recurring features of many CCA countries, as seen after the global financial crisis and the 2014–15 oil price shock. Strong policy responses have delayed the full impact of the COVID crisis so far, but financial sector risks will increase once public support is phased out. If these risks are not preemptively addressed, banks’ ability to lend during the recovery phase could be impaired and there may be a need for costly public interventions, as in the past.
International Monetary Fund. Middle East and Central Asia Dept.

Bank; Dabla-Norris, E., J. Brumby, A. Kyobe, Z. Mills, and C. Papageorgiou (2011); and IMF staff estimates. 1/ Or latest available. Figure 6.4. Changes in Govenance (Percentile rank) Sources: Worldwide Governance Indicators (government effectiveness, regulatory quality, rule of law and control of corruption); and IMF staff calculations. Sustainable and Accountable Delivery of Core Government Functions Achieving the status of dynamic emerging market economies will require CCA governments to focus on core government functions , such as

Mr. Mark A Horton, Hossein Samiei, Mr. Natan P. Epstein, and Mr. Kevin Ross

inflation objective, and allowing greater ER flexibility call for: Presentation and acceptance of the case for modernization of monetary frameworks: – Stressing that ER rigidity may helpful to stabilize high inflation but not to adjust to shocks nor to address dollarization issues. – Emphasizing that if CCA governments wish to develop and enhance their private sectors and nontraditional exports—a cornerstone of strategies to confront the current shocks and diversify and strengthen growth—they must become accustomed to uncertainties and risk. Building an “in

International Monetary Fund

debt, available at CCA in the government’s in the debt agency (CCA). government’s debt agency (CCA). A nnex 2: I da A nd G overnment S upplemental F inancing F or G overnance R eform Transparency and Governance Capacity Building Project (PRCTG) supplemental financing (IDA funding: US$15 Million, Government funding US$ 5.6 Million) Rationale The Government of the Republic of Congo has committed itself to the implementation of a comprehensive Reform Plan, linked to the

Iulia Ruxandra Teodoru and Klakow Akepanidtaworn

distress could lead to costly public interventions, potentially affecting fiscal sustainability. Indeed, several CCA governments stepped in to prevent bank failures in recent years, and the resulting fiscal costs were very high—exceeding 20 percent of GDP in a few cases. This departmental paper assesses the key financial sector risks in CCA countries and proposes policies to prevent costly bank failures, including based on past experience in the region. It is organized as follows: the next chapter presents key macro-financial risks in the CCA region. Chapter 3

International Monetary Fund. Middle East and Central Asia Dept.

large deterioration in the terms of trade is negatively affecting domestic demand, and the fiscal stimulus envisaged will only partly cushion the extent of the downturn, most notably in Kazakhstan, where the impact of the global financial crisis is particularly severe. Figure 19 . CCA: Government Fiscal Balance (In percent of GDP) Sources: Data provided by country authorities; and IMF staff estimates and projections. Hydrocarbon importers are benefiting from lower import prices, but this is not necessarily translating into better economic outcomes. The

International Monetary Fund. Middle East and Central Asia Dept.

countries, demand pressures also appear to be contributing ( Box 4.2 ). In the absence of effective social safety nets, CCA governments are taking (or considering) administrative measures to counter price increases and protect the poor. These include actions to limit rises in the price of key staple foods and fuels (Uzbekistan); reduced customs duties on wheat flour (Kyrgyz Republic); exemptions in value-added tax rates (Azerbaijan, Tajikistan); or activation of strategic reserves, including for grain. In Kazakhstan, memoranda were signed with producers and processors to