Karmen Naidoo: Fuel subsidies, central bank independence mitigate inflationary shocks in Caucasus, Central Asia

In the countries of the Caucasus and Central Asia, an elevated level of fuel subsidization, the prevalence of managed exchange rate regimes, and significant central bank autonomy contributed to weakening the transmission of inflationary pressure from external shocks, Economist of the IMF's Middle East and Central Asia Department Karmen Naidoo said during the presentation of the International Monetary Fund's regional economic outlook for the Middle East and Central Asia held in Uzbekistan, Report informs.

Naidoo pointed out that the depth of the credit market also has a significant impact: in economies with less developed credit markets, the core consumer price index rises by approximately 2.3% over a two-year horizon.

"At the same time, in states with more developed credit markets, the reaction turns out to be statistically insignificant. In small financial systems, where inflation expectations are not sufficiently anchored and financial barriers reduce the efficiency of monetary policy transmission, supply-side shocks force the use of tighter monetary tools to restore price stability," she said.

The analysis conducted by the IMF indicates that fuel subsidization and central bank autonomy are the two most significant factors determining cross-country differences in inflation transmission. These are followed by the exchange rate regime, the size of public debt, and the level of credit market development. The expert emphasized that for the region, long-term stability is driven by the strength of institutions and the implementation of structural transformations.

"At the same time, amid an increasing debt burden, authorities should maintain a fiscal buffer and abandon universal fuel subsidies, which can exacerbate inflationary pressure through the channels of currency and economic expectations. A balanced and forward-looking set of policy measures aimed at anchoring expectations and deepening credit markets remains a priority task for achieving macroeconomic stability," Naidoo stated.