Commonwealth of Independent States: A Rebalancing of Growth Is Needed to
Sustain the Expansion
Real GDP growth slowed significantly in the Commonwealth of Independent
States (CIS) during 2005, to 6.5 percent from 8.4 percent in 2004 (see table
below). A particularly sharp slowdown in Ukraine accounted for much of this,
the pace of expansion also moderated in other key countries in the region.
Lower output growth in the energy sector (Russia, Kazakhstan), political and
economic uncertainties that undermined investment (Ukraine, Kyrgyz
Republic), and an increasingly negative contribution from the external
sector (Ukraine, Russia) all contributed to this weaker growth.
At the same time as growth has slowed, the composition of demand has been
very unbalanced, raising concerns about the sustainability of growth going
forward. Investment has remained weak, averaging just under 21 percent of
GDP in 2005, the lowest of any emerging market and developing country region
(see charts below). Consumption, on the other
hand, has expanded strongly, particularly in Russia, Ukraine, and
Kazakhstan, underpinned by large hikes in wages and public pensions and
increased access to credit. Indeed, credit has grown extremely strongly in a
number of countries in the region, and in Ukraine and Kazakhstan has
increasingly been directed at households and a significant share is
denominated in foreign currency. While the ongoing process of financial
deepening in the region is welcome—the ratio of bank credit-to-GDP is still
low in many countries—rapid credit growth poses a risk to financial
stability given banks’ generally weak abilities to assess borrower
creditworthiness and the increasing reliance by banks in some countries on
financing from abroad.
This combination of strong consumption growth and weak investment has led to
increasing capacity constraints in some countries and sectors and, together
with higher food and energy prices (although pass-through to domestic prices
has not been complete), contributed to a sharp increase in inflationary
pressures in the first half of 2005 that have moderated only slightly in
recent months. The current account, however, remains in large surplus at the
regional level, although there is increasing differentiation across
countries. In energy exporters as a group, higher oil prices underpinned a
further increase in the surplus during 2005, but in energyimporting
countries the surplus declined due both to higher oil imports and an
increase in non-oil import volumes.
Looking forward, growth is projected to slow further to 6 percent in 2006,
although decisive policy actions will be needed to lock in this pace of
expansion. Monetary policy will increasingly need to focus on reducing or
containing inflation, with the authorities correspondingly allowing nominal
exchange rates to appreciate as necessary. And while countries that are
benefiting from higher oil revenues have scope to raise productive
government spending, such increases will need to be carefully managed in
line with cyclical considerations to ensure they are consistent with overall
macroeconomic policy objectives.
To encourage investment spending, a more hospitable business climate needs
to be created by reducing uncertainties about government intervention in the
economy and moving to strengthen the institutional structures necessary for
vibrant market-based economies to flourish.
Structural reforms are also needed to boost productivity in the noncommodity
sectors to improve competitiveness in the face of upward pressures on
exchange rates. In terms of the financial sector, progress has been made in
banking reform, but it has lagged that in countries in central and eastern
Europe. Regulatory and supervisory systems, in particular, need to be
upgraded in line with the growing importance of the financial sector.
Turning to individual countries, after a weak start to 2005, real GDP growth
in Russia has accelerated, and the economy is expected to expand by 6
percent in 2006 (0.8 percentage points higher than projected in the
World Economic Outlook).
The expansion is being driven by private consumption, while export growth
has fallen. Investment, despite a recent pickup, is relatively subdued, and
concerns remain that the economy may begin to run into capacity constraints.
Real wages are rising faster than productivity, imports are surging, and CPI
inflation is running at over 11 percent.
Against this background, fiscal policy should not be relaxed until cyclical
pressures have eased, and monetary policy needs to be tightened.
Without allowing for greater nominal exchange rate appreciation, it is
unlikely the central bank will be able to meet its end-2006 inflation target
of 8.5 percent. Turning to the financial sector, credit growth remains
rapid, and it is important that prudential practices are strengthened under
the new deposit insurance scheme to ensure that risks in the sector are
In Ukraine, real GDP growth has slowed sharply, reflecting a less favorable
external environment and political and policy uncertainties that have
Growth is expected to slow further this year— to 2.3 percent—as continued
political uncertainties and a significant hike in import prices for natural
gas weigh on activity. Inflation has fallen from a peak of 15 percent in
mid-2005, but remains over 10 percent, while credit growth remains strong.
Reflecting uncertainties about the economic and political situation, spreads
on Ukrainian external bonds have widened somewhat and the central bank
conducted substantial foreign exchange interventions to maintain the
official hryvina-U.S. dollar exchange rate. The authorities need to tighten
monetary policy to reduce inflation, support this with fiscal restraint, and
implement reforms to create a positive investment climate. In Kazakhstan,
growth remains strong, underpinned by high oil prices. Inflationary
pressures, however, have risen, and the central bank has raised interest
rates, although further tightening is still required. WTO accession
negotiations are proceeding, but progress with other structural reforms has
Growth in the low-income CIS countries remains very strong, although there
are considerable differences across countries. In Azerbaijan (oil
production), Armenia (remittance inflows and a good harvest), and Georgia
(agricultural recovery), growth has picked up, but in the Kyrgyz Republic
and Tajikistan it has slowed. The central challenge for the region remains
to put in place the policies that will maintain the strong growth needed to
reduce poverty going forward. To achieve this, the
sources of growth need to be diversified, particularly by improving the
business climate to encourage investment in the noncommodity sectors,
liberalizing trade regimes, and reducing high external debt levels.
Commonwealth of Independent States:Unbalanced Growth Raises Concerns
About the Outlook
Consumption has grown strongly in a number of countries, supported by wage
and pension increases and rapid credit growth.
Investment, however, remains relatively weak,
raising concerns about the sustainability of current growth rates.
International Financial Statistics;
and IMF staff calculations.
1/ Emerging market and developing countries