The Impact of the Economic Crisis on the Fiscal Stance of Low Income Countries in the Commonwealth of Independent States

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ABSTRACT

The paper analyses how the global economic crisis affected the economies and public finances of three low income, non fuel exporting, members of the Commonwealth of Independent States. The paper discusses the main channels of transmission of the economic crisis. It examines the impact of the crisis on government budgets, the discretionary fiscal policies implemented to help mitigate the adverse impact of the crisis and how these policies were financed. The paper makes estimates of the fiscal impulse in each country in 2009. Finally it assesses the impact of the economic crisis on public debt indicators.

JEL classification E62

1. INTRODUCTION

The economies of the Commonwealth of Independent States (CIS) were among the hardest hit of all economies by the global economic crisis in 2008/09. In real terms, they contracted by an average of 6.6 percent in 2009, a fall of 12.1 percentage points from the growth attained in 2008.2 The severity of the impact of the crisis on the CIS economies is mainly because the dominant economy in the CIS, that of the Russian Federation, was hit very hard by a combination of the fall in international oil prices and a reversal of international capital flows in 2008, while the other economies in the CIS are highly integrated with the Russian Federation through trade, migrant worker remittances3 and capital flows (Alturki, Espinosa-Bowen and Ilahi, 2009).

This paper analyses the impact of the global economic crisis on the economies and public finances of three of the low income CIS countries and examines the fiscal policies which these countries implemented in response to the crisis. The countries studied in the paper are Armenia, the Kyrgyz Republic and Tajikistan; countries which have some important economic characteristics in common. They are relatively small economies,4 they are quite open to international trade (with imports of goods and services in 2008 equivalent to 40 percent of GDP in Armenia, 55 percent of GDP in Tajikistan and 74 percent of GDP in the Kyrgyz Republic), they rely on remittances to provide a substantial share of their foreign exchange earnings and they are fuel importers, unlike several of the CIS economies which are major fuel exporters. Their economies all performed relatively well during the 2000s, with real growth in part driven by the impetus supplied by the expansion of the Russian economy which provided a market for their exports, employment for their migrant workers and foreign capital.

The paper addresses three issues. First, how did the global economic crisis affect the economies and public finances of these three low income CIS countries? Secondly, were these countries able to implement counter-cyclical fiscal policies to mitigate the impact of the crisis, and if so, how were they funded? Thirdly, has the economic crisis undermined long run fiscal sustainability? It thus contributes to the growing literature which examines the fiscal policy response to the global economic crisis in countries around the world (e.g. Horton, Kumar and Mauro, 2009; Abdi et al, 2010).

The paper is organized as follows. Section 2 briefly examines the fiscal performance of Armenia, the Kyrgyz Republic and Tajikistan in the 2000s, to provide a background for the rest of the paper. Section 3 explores how the global economic crisis affected these three economies, focusing on the nature of the external shock, the transmission channels to the domestic economy and the impact on real output. Section 4 analyses the impact of the crisis on public finances and examines how increases in the fiscal deficit were financed. Section 5 analyses the extent to which fiscal policy was actually expansionary in 2009, using estimates of the fiscal impulse in 2009 in each country. Section 6 evaluates the impact of the economic crisis on public debt, by comparing projections of the ratios of external public debt to GDP made just prior to the crisis with those made in early 2010. …