ECA-countries in transition to a 'New Normal'
Thursday, 19 May, 2016

On Wednesday, May 18 Hans Timmer, Chief Economist of Europe and Central Asia (ECA) at the World Bank, paid a visit to ISET. He delivered a presentation entitled “Economic Outlook for the South Caucasus”, transmitting the idea that the countries of Europe and Central Asia (ECA), including Georgia, are transitioning to a situation – against the backdrop of a weakening global economy and volatility in international financial markets – which is called 'New Normal' and is characterized by the slow trend growth of global trade, low commodity prices, and less abundant availability of international liquidity.

Mr. Timmer thinks that for ECA-oil-exporting states it will be painful to adjust their economies to low commodity prices, but this adjustment is not avoidable and will be followed by declining household incomes, sharp real deprecations, falling asset prices, job losses in trade, construction, and domestic services, and increased fragility in semi-dollarized financial sectors. Similar problems are arising in other countries which have strong economic relations with oil exporters through remittances and trade flows such as Russia and Georgia. Due to declined trade and reduced real remittances, most of the affected countries have seen their purchasing power drop more than was originally suggested by GDP numbers.

However, this kind of adjustment can also create some incentives for ECA-countries to become more competitive and increase market shares abroad. Recent real depreciations can intensify trade relations with China. Therefore, strategies of diversification can now be much more successful than during the oil-price boom. All these changes will probably create more jobs in sectors that produce tradable, non-oil products.

According to Hans Timmer, relative price changes might require changes in monetary policy regimes. Oil-exporting and remittance-receiving countries need flexible exchange rates in wake of a fall in oil prices. Central Banks in oil-exporting countries might consider oil prices in local currency as a new policy target. Other Central Banks could reconsider inflation targets, with more emphasis on GDP deflating factors and housing prices.