The global economic crisis of 2008–09 was transmitted to the Caucasus, Central Asia, and Mongolia through the decline in prices of commodity exports and a slowdown in destination countries—principally the Russian Federation—which buy their exports and employ migrant workers. Unlike the other countries, however, Kazakhstan, which is well-integrated into global financial markets, experienced a sudden stop in capital flows in 2007. Fiscal stimuli have supported weakening economies, and have been financed through official borrowing by energy importers (Armenia, Georgia, the Kyrgyz Republic, Mongolia, Tajikistan) to the extent pre-crisis imbalances and the resulting debt dynamics allow and by stabilization funds in energy exporters (Azerbaijan, Kazakhstan, Turkmenistan, Uzbekistan). But more concessional financing will be needed to moderate the tradeoff between stimulus and sustainable debt levels in the event of a global recovery, which is weaker than expected. Distress in the banking sectors has been contained through liquidity support and deposit guarantees but regulatory forbearance should be avoided and proactive bank restructuring undertaken so as not to impede financial intermediation and economic recovery. Means-tested safety net programs, which can be scaled up to cushion the poorest households from the effects of the crisis, are in general better developed in the Caucasus than in Central Asia and Mongolia, where significant reform within existing fiscal envelopes and, in some cases, introduction of new programs is called for. Structural reforms to stay competitive in a post-crisis environment, where capital flows to developing countries are likely to be lower, should prioritize infrastructure and labor skills, which have emerged as the tightest bottlenecks to growth.
