foreign inflows to the caucasus and central asia · non-oil fiscal balance for azerbaijan,...

Foreign Inflows to the Caucasus and Central Asia

David Owen

April 2007

Overview of Presentation

• Size and types of inflow• Policy responses:

– Intervention and the exchange rate– Monetary policy (sterilization; interest rates)– Fiscal policy

• Macroeconomic results:– Inflation– Real exchange rates– Growth and income per head

Size and Types of Inflow

Foreign inflows to the CCA have nearly doubled since 2000

(In percent of GDP)

15

20

25

30

35

2000 2001 2002 2003 2004 2005 2006

Oil exports, FDI and remittances

All countries are receiving substantial inflows

(Average of 2005 and 2006; in percent of GDP)

-10

0

10

20

30

40

50

60

70

80

Azerbaijan Kazakhstan Turkmenistan Armenia Georgia KyrgyzRepublic

Tajikistan Uzbekistan

FDI Oil exports Remittances

Policy Responses

Official reserves have risen sharply

(In billions of dollars)CCA

Oilexporters

Other0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006

Reserves have risen in all countries

0

5

10

15

20

25

30

Azerbaijan KazakhstanTurkmenistan Armenia Georgia KyrgyzRepublic

Tajikistan Uzbekistan

(Change from end-2004 to end-2006; in percent of GDP)

Most countries now have adequate reserves coverage

0

2

4

6

8

10

12

14

16

18

20

Azerbaijan Kazakhstan Turkmenistan Armenia Georgia KyrgyzRepublic

Tajikistan Uzbekistan

(End-2006; in months of imports)

0

1

2

3

4

5

Armenia Georgia KyrgyzRepublic

Tajikistan Uzbekistan

(Non-oil exporters, end-2006;in billions of dollars)

Exchange rate regimes are mostly inflexible, with limited nominal appreciation

(Percentages; during 2005 and 2006)

Armenia

KyrgyzRepublic

Azerbaijan

TajikistanUzbekistan

GeorgiaTurkmenistan Kazakhstan

-20-15-10-505

1015202530

Nom

inal

app

reci

atio

n

More flexibility(Based on size of monthly changes in exchange rates)

100806040200

Broad money and credit growth have been fast in most countries

0102030405060708090

100

Azerbaijan Kazakhstan Turkmenistan Armenia Georgia KyrgyzRepublic

Tajikistan Uzbekistan

Broad money Credit to private sector

(2006; in percent)

The region has moved into fiscal surplus

(In percent of GDP)

CCA

Oilexporters

Other

-6

-4

-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006

Commodity exporters have sizeable surpluses, others have moderate deficits

-4

-2

0

2

4

6

8

Azerbaijan Kazakhstan Turkmenistan Armenia Georgia KyrgyzRepublic

Tajikistan Uzbekistan

(Average of 2005 and 2006; in percent of GDP)

Most countries have tightened fiscal policy in response to higher inflows

Non-oil fiscal balance for Azerbaijan, Kazakhstan, and Turkmenistan.

-6

-4

-2

0

2

4

6

Azerbaijan Kazakhstan Turkmenistan Armenia Georgia KyrgyzRepublic

Tajikistan Uzbekistan

(Change from 2004 to 2006; in percent of GDP)

Macroeconomic Results

Inflation has been rising and now averages over 10 percent

(Average; in percent)

CCA

56789

101112131415

2002 2003 2004 2005 2006

Inflation is now above the comfort zone in most countries

0

2

4

6

8

10

12

14

Azerbaijan KazakhstanTurkmenistan Armenia Georgia KyrgyzRepublic

Tajikistan Uzbekistan

(End-2006; in percent)

Policies have not prevented real appreciation

(Real effective exchange rate index, 2000=100)

CCA

Oilexporters

Other

50

60

70

80

90

100

110

2000 2001 2002 2003 2004 2005 2006

Nearly all countries have experienced real appreciation since 2004

(Real effective exchange rate index, 2004=100)

80

90

100

110

120

2004 2005 2006

Armenia

Azerbaijan

Uzbekistan

Kazakhstan

Turkmenistan

Georgia

Kyrgyz Republic

Tajikistan

But non-oil export growth has been strong

(In percent)

CCA

-505

10152025303540

2000 2001 2002 2003 2004 2005 2006

...with double digit non-oil export growth in all countries

05

1015202530354045

Azerbaijan Kazakhstan Turkmenistan Armenia Georgia KyrgyzRepublic

Tajikistan Uzbekistan

(Average for 2005 and 2006; in percent)

And GDP growth has also been strong....

(In percent)

CCA

Oilexporters

Other

02468

1012141618

2000 2001 2002 2003 2004 2005 2006

....including in countries that have had substantial real appreciation

0

5

10

15

20

25

30

Azerbaijan Kazakhstan Turkmenistan Armenia Georgia KyrgyzRepublic

Tajikistan Uzbekistan

(Average growth in 2005 and 2006; in percent)

Real appreciation and strong growth can coexist

(Percentage change; 2004 to 2006)

Azerbaijan

ArmeniaKazakhstan

GeorgiaTurkmenistan

KyrgyzRepublic

Tajikistan Uzbekistan

0

5

10

15

20

25

30

35

-10 -5 0 5 10 15 20 25

Real appreciation

Ann

ual a

vera

ge G

DP

gro

wth

And real appreciation helps to boost growth in dollar GDP per head

Azerbaijan

ArmeniaKazakhstan

GeorgiaTurkmenistan

KyrgyzRepublic

Tajikistan Uzbekistan

0

20

40

60

80

100

120

140

-10 -5 0 5 10 15 20 25

Real appreciation

GD

P p

er h

ead

grow

th

(Percentage change, 2004 to 2006)

Conclusions• Inflows pose a dilemma: nominal appreciation,

sterilized intervention, or fiscal tightening• Most countries have resisted nominal appreciation,

with largely unsterilized interventions– Reserves coverage is now generally adequate

• Fiscal policy has been moderately supportive in most cases…

• …but not sufficiently to prevent rapid monetary growth

• …which has led to rising inflation– now above comfort zone in most countries

• Policies have not prevented real appreciation, but…• …real appreciation has gone hand in hand with

strong growth and rising income per head