Sluggish Growth Delaying Economic Recovery in Emerging Europe and Central Asia
WASHINGTON, April 11, 2024 – Economic activity in the emerging and developing economies of the Europe and Central Asia region is likely to slow this year as a weaker global economy, tight monetary policy, slowdown in China and lower commodity prices weigh on the region’s growth outlook, says the World Bank’s Economic Update for the region, released today.
Regional growth is likely to slow to 2.8% this year, following substantial strengthening to 3.3% in 2023 as the economies of both Russia and war-hit Ukraine returned to growth and because of a more robust recovery in Central Asia. Regional output growth is likely to remain broadly unchanged in 2025.
Headwinds to the outlook are multiple. A slower-than-expected recovery in key trading partners, especially in the euro area, restrictive monetary policies, and an exacerbation of geopolitical developments could further dampen growth across the region.
“Countries of Europe and Central Asia continue to confront multiple crises, exacerbated by a challenging global growth environment,” said Antonella Bassani, World Bank Vice President for the Europe and Central Asia region. “Reviving productivity growth by stimulating business dynamism and improving resilience against the risks from climate change can help protect the region’s people and accelerate economic growth.”
Sluggish growth will further delay the region’s recovery from recent shocks, including Russia’s invasion of Ukraine, which remains ongoing, the pandemic, and the 2022 cost-of-living crisis.
Inflation has fallen faster than expected in the emerging markets and developing economies (EMDEs) of Europe and Central Asia, largely due to steep declines in global energy and food prices. The median annual consumer price inflation in the region fell to 4.2% by February 2024 from 15% at the start of 2023. Nevertheless, the 2022 cost-of-living crisis continues to affect households despite increases in real incomes last year.
In Ukraine, the pace of recovery is projected to slow to 3.2% this year from 4.8% in 2023, reflecting a smaller harvest and persistent labor shortage. The country’s economic outlook remains conditional on donor support and the duration of Russia’s invasion. According to recent estimates by the World Bank and partner institutions, the cost of reconstruction and recovery in Ukraine has grown to $486 billion, which is more than two times the size of Ukraine’s pre-war economy in 2021.
Growth in Türkiye is also likely to weaken to 3% this year – its lowest since 2009, except for the pandemic-affected years – as macroeconomic consolidation efforts are expected to restrain domestic demand. Subdued global oil prices will dampen prospects across Central Asia, with growth slowing to 4.1% this year from an estimated 5.5% in 2023.
The report includes a special focus chapter on unleashing the power of the private sector. It notes that economic development in the region has been a story of transition from plan to market economies, broad and deep structural reforms, and the emergence of private initiative, the main driver of growth and prosperity.
In less than three decades, 12 of the countries in the region joined the European Union (EU). The transition of these countries to EU-integrated market economies with robust institutions and production structures illustrates the success of the deep reforms of some of the countries, which have also achieved high-income status.
“The private sector in several countries in the region faces barriers, which hamper its ability to expand and innovate,” said Ivailo Izvorski, World Bank Chief Economist for Europe and Central Asia region. “Boosting business dynamism will require addressing several challenges, including upgrading the competition environment, reducing state involvement in the economy, improving the quality of education, and strengthening the availability of finance for firms.”
Efforts to foster competition and free markets should focus on reducing barriers to entry and facilitate exit for unproductive firms. The substantial presence of state-owned enterprises is also a major constraint to levelling the playing field for private enterprises.
Private firms are also faced with an inadequately educated workforce and large skills gaps, which are major constraints to growth. High emigration rates of young and skilled workers do not help in the short term. A better educated workforce is associated with higher productivity and can lead to more innovation.
Bank lending to the private sector is relatively low and has not increased in the past decade. The lending also tends to be more short-term. To improve productivity growth and innovation, firms need access to long-term finance.
UZBEKISTAN:
The economy grew by 6 percent in 2023 amid broad based expansion and fiscal stimulus. The government is expected to consolidate fiscal spending in 2024 following an increase in the fiscal deficit in 2023. Robust real wage growth has contributed to poverty reduction in 2023.
The medium-term outlook is positive as ambitious and ongoing structural reform is expected to improve the business environment in key sectors and stimulate private sector-led investment and growth.
Steady economic growth is expected to result in a reduction in poverty.
Key conditions and challenges
Uzbekistan has implemented sweeping reforms in recent years that have liberalized parts of the economy and improved prospects for private sector development.
In 2023, the authorities established an independent energy regulator, began energy tariff reform, restructured the state-owned enterprise (SOE) rail operator, privatized a large chemical plant and a bank, and unbundled the leading chemical SOE to promote competition.
They also established the National Agency for Social Protection, approved strong new legislation to combat gender-based violence, and expanded access to free legal aid. Uzbekistan also took a green transition path by introducing more ambitious environmental targets, a new pollution control system, and a national green taxonomy.
With high population growth and a large amount of youth entering the workforce each year, economic growth will need to support strong job creation.
To do so, Uzbekistan needs to continue its reforms program to open up markets and boost competition, notably by reducing dominance of SOEs in the economy, strengthening land rights, liberalizing the telecommunications sector and raw materials trade, and reducing high trade costs. Faster job creation and productivity growth will also require increasing labor force skills.
Recent developments
Real GDP grew by 6 percent in 2023, led by investment, private consumption, and exports. Faster investment growth was facilitated by credit growth to SOEs and private sector. Real credit (loans to SOEs and private sector) grew by 11.6 percent between 2022 and 2023, up from 5.1 percent between 2021 and 2022.
Consumer price inflation fell to its lowest level in seven years, dropping to 8.8 percent yoy in December 2023, compared to 12.3 percent in 2022. This was driven by sustained, tight monetary policy, as well as a VAT tax rate cut and lower international food and energy prices.
In 2023, the Uzbek som depreciated by 9 percent against the US dollar (USD), in part due to a flow on effect of the depreciation of the Russian ruble (a close trading currency) against the USD.
The current account deficit deteriorated as import growth accelerated and remittances declined in 2023 (the latter was related to the ruble’s depreciation). Uzbekistan’s gas exports dropped by half, and amid rising domestic gas needs, Uzbekistan began importing gas from Russia in 2023 for the first time.
The fiscal deficit expanded from 4.1 percent in 2022 to 5.8 percent of GDP in 2023 due to emergency spending on energy infrastructure and fuel during the cold winter, higher spending on salaries and social benefits, energy subsidies, and subsidized lending to SOEs via state-owned banks. Foreign reserves remained ample at $34.6 billion by December 2023, more than 8 months of prospective imports.
Robust real wage growth contributed to reducing poverty from 5.0 percent in 2022 to 4.5 percent in 2023, measured at the lower-middle income poverty line (USD 3.65/day, 2017 PPP). The unemployment rate has dropped to 8.1 percent in 2023, down from 8.9 percent in 2022.
Average real wages in 2023 increased by 7.8 percent not only due to growing demand but also because of skills shortages in the labor market. As a result, wage growth was higher among the more skilled (and wealthier) workers than among the poor, resulting in higher income inequality.
Outlook
GDP growth is projected at 5.3 percent in 2024 given the expected fiscal consolidation and slower export growth prospects to Russia and China, Uzbekistan’s key trading partners. Growth will be supported mainly by the continued implementation of structural reforms, notably SOEs’ restructuring and privatization, and high energy sector investment.
Inflation is expected to increase in 2024 due to relatively sharp increases in domestic energy prices because of the energy tariff reforms (accompanied by social protection measures). This will be partially offset by a continued tight monetary stance while the central bank completes its transition to full inflation targeting. Inflation is expected to decelerate to 8 percent in the medium term, higher than the CBU target of 5 percent.
Import growth is expected to moderate in 2024 but remains buoyant as imports support both economic modernization and growing consumption.
Remittances in 2024 are projected to decline mainly due to an expected reduction in the number of labor migrants to Russia. With decreasing remittances and strong imports, the current account deficit will widen slightly but remain sustainable as Uzbekistan’s transformation process brings in foreign savings to finance the deficit. This economic outlook is expected to reduce poverty moderately to 4.3 percent in 2024.
The fiscal deficit is expected to fall to 4.2 percent of GDP in 2024 and towards 3 percent of GDP by 2026 as large, untargeted energy subsidies and ineffective incentives to SOEs are withdrawn, and thanks to growing budget revenues amid privatization proceeds. The government is expected to adhere to its debt limits (60 percent of GDP for total Public and Publicly Guaranteed debt), with public debt slightly increasing to 36.5 percent of GDP in 2024 and then gradually declining to 34.4 percent of GDP by 2026.
Risks to outlook are tilted to the downside. External risks include possible deterioration of growth in key trading partners, notably China and Russia, and further tightening of external financial conditions. Domestic risks stem from the growing contingent liabilities from SOEs, PPPs, and state-owned banks. Upside risks include higher global gold and copper prices and stronger productivity growth due to ongoing structural reforms.
Source: PRESS RELEASE NO: 2024/ECA/085