Europe and Central Asia Macro Poverty Outlook Country-by-country Analysis and Projections for the Developing World Annual Meetings 2023 © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclu- sions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Europe and Central Asia Annual Meetings 2023 Albania Kazakhstan Russian Federation Armenia Kosovo Serbia Azerbaijan Kyrgyz Rep. Tajikistan Belarus Moldova Türkiye Bosnia and Herzegovina Montenegro Ukraine Bulgaria North Macedonia Uzbekistan Croatia Poland Georgia Romania MPO 1 Oct 23 of high interest rates. To address the gap in human capital investment and the need ALBANIA Key conditions and for climate-resilient infrastructure, while maintaining support for the most vulner- challenges able, Albania will need to implement a Medium-Term Revenue Strategy to Table 1 2022 The Albanian economy has shown con- strengthen domestic revenues. Unlocking Population, million 2.8 siderable resilience in the face of con- further growth is conditional on the swift GDP, current US$ billion 18.9 secutive shocks during 2019-2022, includ- implementation of the Government’s pro- GDP per capita, current US$ 6743.1 ing the 2019 earthquake, the pandemic gram, anchored on the EU accession aspi- a 34.2 Upper middle-income poverty rate ($6.85) and the ensuing economic turmoil, and ration, and built on reforms tackling pro- a 36.0 Russia’s invasion of Ukraine. The econo- ductivity, including improving the busi- Gini index b 95.9 my experienced a strong rebound, with ness environment, streamlining govern- School enrollment, primary (% gross) Life expectancy at birth, years b 76.5 real GDP expanding by 8.9 percent in ment interactions with the private sector, Total GHG emissions (mtCO2e) 8.5 2021 and by 4.8 percent in 2022, and and expanding Albania’s integration into GDP exceeding its pre-pandemic level foreign markets. Source: WDI, Macro Poverty Outlook, and official data. a/ Most recent value (2018), 2017 PPPs. that year. Poverty rates continued their b/ Most recent WDI value (2021). downward trend in 2022. A key factor in Albania’s resilience has been the prox- imity to the European Union, which fa- Recent developments cilitates investment, remittances, and ex- ports. As a consequence, construction and In the first quarter of 2023, GDP grew by tourism are key growth drivers. The avail- 2.7 percent. Services, including trade and Growth in 2022 reached 4.8 percent as ability of hydropower, which meets 85 real estate, led growth on the supply side, private consumption, exports, and invest- percent of domestic energy demand in a followed by construction and manufactur- ment expanded despite increasing energy year with average precipitation, has pro- ing. Consumption and investment re- and food prices. Growth is expected to vided some insulation from the ongoing mained the main growth drivers on the de- energy crisis and contributed to contain- mand side. Net exports reduced growth, moderate in 2023, despite another year of ing the country’s greenhouse gas emis- due to smaller foreign demand. Leading exceptional increase in tourism. Poverty sions. Albania’s key development chal- economic indicators suggest growth accel- is expected to continue its downward lenges are its declining population, which erated during the second and third quar- trend as employment and wages increase. is partially owed to large migration; the ters with tourist arrivals hitting a record poor quality of the labor force and the high through July 2023, and construction Medium-term prospects hinge on the low quality of jobs created; the moderate activity accelerating. Increased income global recovery, structural reforms, and pace of structural reforms, especially in from employment, credit growth, busi- fiscal consolidation. the areas of private sector environment ness and consumers sentiment indicators, and governance; and rising fiscal pres- and strong tax revenues all suggest an in- sures, due to government responses to creasing contribution to growth from con- multiple crises, climate risks, contingent sumption, investment and net exports in liabilities, and debt refinancing at a time the second and third quarters. FIGURE 1 Albania / Economic sentiment index (ESI) and FIGURE 2 Albania / Actual and projected poverty rate and GDP growth real GDP per capita Real GDP Growth (percent, y/y, not sa) ESI Poverty rate (%) Real GDP per capita (constant LCU) 20 140 45 700000 15 120 40 650000 10 100 35 600000 5 80 30 0 60 550000 25 -5 40 500000 20 -10 20 450000 15 -15 0 10 400000 2016 2018 2020 2022 2024 GDP growth (lhs) Economic Sentiment Index (rhs) Upper middle-income pov. rate Real GDP pc Sources: Instat and Bank of Albania. Source: World Bank. Notes: see Table 2. MPO 2 Oct 23 Employment grew by 4.4 percent yoy alongside social insurance contributions Fiscal consolidation is expected on the during Q1 2023. Increasing wages and and personal income taxes, reflecting the spending side. On revenues, Government employment incentivized labor force par- increase in statutory minimum wages. The plans to introduce further tax policy mea- ticipation (ages 15+), which reached 64 increase in expenditures was relatively sures, envisioned in the Medium-Term percent in Q1 2023, the highest level small at 3.4 percent yoy but is expected to Revenue Strategy. Public debt is expected since 2019. Average private sector wage pick up during the second part of the year to decline slightly to 63.1 percent of GDP growth reached 9.5 percent, down from owing to increasing capital spending. in 2023, and more significantly over the 14.2 percent in the previous quarter, main- medium term, as a result of higher nomi- ly driven by wage increases in trade, trans- nal growth and a gradual reduction of the port, accommodation industry and public fiscal deficit. Given Albania’s growing re- administration. Unemployment reached Outlook liance on external financing, exchange rate, 10.9 percent in Q1 2023, slightly higher interest rate, and refinancing related risks than the end-2022 rate. Given strong GDP Growth is expected to moderate to 3.6 per- remain elevated. per capita growth in 2023, poverty is pro- cent in 2023, in the context of tight global Further increases in food and energy jected to decline by 1.9 percentage points financial conditions, limited economic prices are a key risk to growth, as they to reach 22.2 percent. growth in Europe, and the completion of could affect real disposable income, slow The annual inflation rate dropped to 4.2 programs for the post-earthquake recon- poverty reduction and potentially con- percent in July 2023 from a record high struction. Nevertheless, increased tourism strain the fiscal space. As a small, open of 8.3 percent in October 2022, as a result and construction are expected to drive ex- economy, Albania is highly exposed to ex- of downward pressures from lower import ports, consumption and investment ternal shocks, such as a recession in Eu- prices, domestic currency appreciation growth at rates similar to the pre-pandem- rope or further tightening of financing con- and monetary policy normalization; up- ic period. The inflation rate is projected to ditions in international capital markets be- ward pressures on inflation included wage start converging toward the 3 percent tar- yond the current year. increases and high-capacity utilization. get by 2024. Economic sentiment remains Domestic risks emanate from natural dis- For the first half of 2023, the government positive (Figure 1), though it has recently asters, public-private partnerships, and recorded a high surplus, on account of outpaced economic performance. SOEs, in addition to fiscal risks stemming strong revenue collection and lower Albania’s primary balance is projected to from the country’s hydropower-based en- spending. Grants accounted for most of reach 0.1 percent of GDP in 2023 and stay ergy sector that are mainly due to varia- the revenue increase (14.5 percent yoy), positive in observance of the fiscal rule. tions in hydrology. TABLE 2 Albania / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -3.3 8.9 4.8 3.6 3.2 3.2 Private consumption -3.4 4.3 6.9 2.3 2.6 2.7 Government consumption 1.5 7.8 -4.8 4.6 1.5 1.0 Gross fixed capital investment -1.4 19.2 6.5 -1.2 3.4 3.3 Exports, goods and services -27.9 52.0 7.5 6.7 5.4 5.9 Imports, goods and services -19.8 31.5 13.1 1.2 3.4 3.6 Real GDP growth, at constant factor prices -2.9 8.2 5.2 3.6 3.2 3.2 Agriculture 1.3 1.8 0.1 0.3 0.3 0.3 Industry -4.3 13.6 7.7 1.2 3.7 3.5 Services -3.8 8.1 5.9 6.0 3.9 4.0 Inflation (consumer price index) 2.2 2.6 6.7 5.0 3.5 3.0 Current account balance (% of GDP) -8.5 -7.8 -6.0 -5.6 -5.8 -5.6 Net foreign direct investment inflow (% of GDP) 6.7 6.5 6.7 6.8 6.8 6.8 Fiscal balance (% of GDP) -6.7 -4.6 -3.7 -2.5 -2.3 -1.9 Revenues (% of GDP) 25.9 27.5 26.8 28.1 27.5 27.7 Debt (% of GDP) 75.8 75.4 65.4 63.1 62.1 60.8 Primary balance (% of GDP) -4.6 -2.7 -1.8 0.1 0.3 0.5 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 34.3 27.1 24.1 22.0 20.5 19.0 GHG emissions growth (mtCO2e) -5.7 4.8 -1.5 -4.0 -2.2 -1.9 Energy related GHG emissions (% of total) 46.3 49.6 49.4 48.1 47.8 47.5 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2014- and 2019-SILC-C. Actual data: 2018. Nowcast: 2019-2022. Forecasts are from 2023 to 2025. b/ Projection using point-to-point elasticity (2013-2018) with pass-through = 1 based on GDP per capita in constant LCU. MPO 3 Oct 23 particularly in IT, trade, and transport sec- tors. Growth in industry slowed to 1 per- ARMENIA Key conditions and cent (yoy) in H1 2023 due to contraction in the mining sector. However, construc- challenges tion continued to grow at the exception- al rate of 19 percent (yoy). Agricultural Table 1 2022 Following Russia’s invasion of Ukraine, growth was flat, reflecting longstanding Population, million 3.0 Armenia absorbed a significant inflow of challenges in this sector (both statistical GDP, current US$ billion 19.5 migrants, businesses, and capital. Armenia and structural). GDP per capita, current US$ 6572.2 also benefited from rerouted trade and mon- The unemployment rate fell from 14.8 per- a 0.5 International poverty rate ($2.15) ey flows. These developments fueled do- cent in Q1 2022 to 13.7 percent in Q1 2023, a 8.7 mestic demand and supported the appreci- reflecting the strong economic activity. Lower middle-income poverty rate ($3.65) a 51.7 ation of the currency. While there are signs Average inflation dropped sharply, from Upper middle-income poverty rate ($6.85) Gini index a 27.9 these flows are easing somewhat, Armenia 8.6 percent in 2022 to 3.6 percent during School enrollment, primary (% gross) b 91.1 continues to benefit from them, and the January-July 2023, largely driven by a b 72.0 risk of reversal has so far not materialized. slowdown in food and transport inflation. Life expectancy at birth, years Overall, the economic environment enjoys In response to this trend, the Central Bank Total GHG emissions (mtCO2e) 13.5 sound macroeconomic policies, including of Armenia reduced the policy rate by 50 Source: WDI, Macro Poverty Outlook, and official data. active inflation targeting, adherence to a bps, to 10.25 percent in August. a/ Most recent value (2021), 2017 PPPs. b/ Most recent WDI value (2021). fiscal rule, and sound financial sector Credit to the economy increased by 14.6 oversight. In recent years, the authorities percent in nominal terms (yoy) as of the have aimed at reducing corruption and end of June 2023, mostly driven by an in- increasing transparency, particularly in crease in dram-denominated loans. This the tax and customs administrations. lowered loan dollarization to 35 percent Economic growth reached 10.5 percent However, important structural challenges as of the end of June 2023. Financial sta- (yoy) in H1 2023, driven by services and persist, resulting in an undiversified eco- bility indicators remained sound, with the continued inflows of citizens and money nomic structure with limited manufactur- Capital Adequacy Ratio (CAR) above 20 transfers from Russia, and is projected at ing and a narrow export basis, subdued percent and the Non-Performing Loans growth in the agriculture sector, insufficient (NPLs) ratio below 3 percent. 6.6. percent in 2023 as a whole. This was investment, and challenges to attract FDI, The fiscal budget recorded a surplus of 1.4 accompanied by a sharp reduction in in- limited human capital and skills mismatch. percent of projected GDP in H1 2023, com- flation to 3.6 percent (yoy) on average pared to the planned deficit of 1 percent of through July 2023. Unresolved issues at GDP. This was primarily due to a 6 per- the Armenian border, a reversal of recent cent overperformance in tax revenue col- inflows, potential sanctions, and a slow- Recent developments lection, which rose by 19 percent (yoy) in nominal terms. This was mostly driven by down in trade partner economies are the Armenia maintained double-digit GDP increased profits tax and VAT tax collec- main risks to the outlook. growth in H1 2023, at 10.5 percent (yoy) in tion of 45 percent and 20 percent (yoy, in real terms. As in 2022, growth was driven nominal terms), respectively, explained by by a 14 percent (yoy) increase in services, strong economic performance and higher FIGURE 1 Armenia / Real GDP growth and contributions to FIGURE 2 Armenia / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant million LCU) 16 70 3.0 12 60 2.5 8 50 2.0 4 40 0 1.5 30 -4 1.0 20 -8 10 0.5 -12 2018 2019 2020 2021 2022 2023f 2024f 2025f 0 0.0 Private Consumption Government Consumption 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Investment Net Export International poverty rate Lower middle-income pov. rate GDP growth Upper middle-income pov. rate Real GDP pc Sources: Statistical Committee of Armenia, CBA, and World Bank staff projections. Source: World Bank. Notes: see Table 2. MPO 4 Oct 23 consumption, and 20 percent greater in- 2023, large outflows to third countries re- Average inflation is forecast to reach 3.7 come tax collection in nominal terms due sulted in a 10 percent decline (yoy) in net percent in 2023 and to remain close to the to increased employment and salary levels. terms. This contributed as well to the de- target of 4 percent in the medium term. Current and capital expenditures were al- terioration of the current account balance. The deficit is expected to reach 2.4 percent so higher by 12 percent and 16 percent Nevertheless, appreciation pressures on of GDP in 2023, which is lower than bud- (yoy, in nominal terms), respectively; how- the AMD continued in 2023, resulting in geted due to tax revenue overperformance. ever, capital expenditures fell short by 46 a 2 percent stronger AMD against USD at The CAD is projected to widen in 2023, percent in nominal terms compared to the the end of July 2023 compared to the end impacted by a pick-up in goods imports, ambitious public investment plan ap- of 2022. International reserves declined in a slowdown in exports from a very high proved in the budget. Driven by robust Q1 but rebounded to a record USD 4.1 bil- base in 2022, and a deterioration in income economic and fiscal performance, govern- lion at the end of July 2023. accounts, while still being mostly financed ment debt to GDP continued to decline to by FDI inflows. about 44 percent of projected annual GDP Due to continued and strong economic at the end of July 2023. growth in 2022-2023, poverty is projected Growth of exports and imports of goods Outlook to fall from 51.7 percent in 2021 to 37.6 per- continued to be strong in H1 2023, both at cent in 2023, as measured by the UMIC 73 percent (yoy, in USD value), due to re- Growth is expected to moderate in H2 poverty line of USD 6.85/day (2017 PPP). routing of exports to Russia. The trade bal- 2023 as consumption slows due to the This will be supported by the reduction in ance in nominal terms deteriorated by 73 high base effect in H2 2022 and as import inflation, especially in food prices. percent (yoy), due to a 1.5 times larger im- growth outpaces export growth. Howev- The outlook is subject to significant un- port base compared to exports. This was er, moderation will be milder than ini- certainty, due to the risk of reversal of partly compensated by higher service ex- tially projected at the beginning of 2023, inflows; potential sanctions related to the ports, including a 70 percent (yoy) increase with growth revised up to 6.6 percent re-exports of double-use goods; a pos- in the number of tourist arrivals in H1 (yoy) in 2023. Growth in the medium- sible slowdown in trading partner 2023. While gross money transfers from term will moderate further to an average economies; and unresolved issues at the Russia increased by 88 percent (yoy) in H1 of 4.3 percent in 2024-2025. Armenian border. TABLE 2 Armenia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -7.2 5.8 12.6 6.6 4.1 4.5 Private consumption -13.9 2.8 5.5 6.3 4.5 4.4 Government consumption 9.2 -6.2 6.3 3.7 5.3 7.1 Gross fixed capital investment -1.5 23.6 9.0 16.7 9.6 8.3 Exports, goods and services -33.5 18.6 59.3 21.6 9.9 8.7 Imports, goods and services -31.5 12.9 34.5 23.2 11.8 9.9 Real GDP growth, at constant factor prices -6.8 5.6 13.2 6.6 4.1 4.5 Agriculture -3.7 -0.8 -0.7 0.6 0.9 1.2 Industry -2.5 2.6 9.2 6.0 5.3 4.7 Services -9.6 8.7 18.2 7.9 4.1 4.9 Inflation (consumer price index) 1.2 7.2 8.6 3.7 4.0 4.0 Current account balance (% of GDP) -4.0 -3.5 0.8 -2.1 -3.0 -3.4 Net foreign direct investment inflow (% of GDP) 0.7 2.5 4.9 2.5 2.7 2.9 Fiscal balance (% of GDP) -5.1 -4.5 -2.2 -2.4 -2.8 -2.6 Revenues (% of GDP) 26.0 24.9 25.1 25.6 25.4 25.9 a Debt (% of GDP) 63.5 60.2 46.7 48.6 49.2 49.5 Primary balance (% of GDP) -2.4 -2.0 0.1 0.4 0.4 0.5 b,c International poverty rate ($2.15 in 2017 PPP) 0.4 0.5 0.3 0.3 0.2 0.2 b,c Lower middle-income poverty rate ($3.65 in 2017 PPP) 6.7 8.7 5.7 4.2 3.7 3.1 b,c Upper middle-income poverty rate ($6.85 in 2017 PPP) 53.2 51.7 42.3 37.6 34.5 31.0 GHG emissions growth (mtCO2e) -1.8 15.4 18.7 9.1 8.2 9.4 Energy related GHG emissions (% of total) 60.3 66.5 72.2 74.8 76.8 78.8 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Excludes CBA debt. b/ Calculations based on ECAPOV harmonization, using 2021-ILCS. Actual data: 2021. Nowcast: 2022. Forecasts are from 2023 to 2025. c/ Projection using neutral distribution (2021) with pass-through = 0.87 (Med (0.87)) based on GDP per capita in constant LCU. MPO 5 Oct 23 On the demand side, consumption growth eased due to a decline in real AZERBAIJAN Key conditions and wages and moderation in money trans- fers from Russia. Investment growth re- challenges mained robust, supported by public in- vestment largely directed toward recon- Table 1 2022 Azerbaijan’s continued reliance on hydro- struction in liberated territories and the Population, million 10.2 carbons as a major source of export and energy sector. GDP, current US$ billion 76.8 fiscal revenues remains its main vulnera- The latest official figures show that the na- GDP per capita, current US$ 7533.4 bility. It challenges long-term growth tional poverty rate decreased from 5.9 in a 94.3 School enrollment, primary (% gross) prospects because of declining oil produc- 2021 to 5.5 in 2022. In the first months of a 69.4 tion, oil price volatility, and the global 2023, the unemployment rate remained Life expectancy at birth, years Total GHG emissions (mtCO2e) 53.2 transition away from fossil fuels. stable at 5.6 percent. Source: WDI, Macro Poverty Outlook, and official data. Constraints to private sector develop- Inflation moderated to 10.7 percent (yoy) a/ Most recent WDI value (2021). ment include a large state footprint in in H1 2023, from 14.3 percent at the end the economy, lack of a level playing field of 2022, driven by a slowdown in food in- for companies, shallow financial markets, flation. With inflation still in double digits, and a weak human capital base. Azer- the Central Bank of Azerbaijan (CBA) baijan’s 2022–2026 Socio-Economic De- raised the policy interest rate by 75 bps in velopment Strategy lays out a reform H1 2023, to 9 percent (which remains neg- plan to move to a private sector-led ative in real terms). Economic growth slowed sharply to 0.5 growth model and the development of Falling energy prices and falling oil pro- percent in H1 2023, dragged down by human capital, with a sustained 5-per- duction in H1 2023 negatively impact- contracting oil production and moderate cent growth target in non-energy sectors ed exports, with a decline of 2.9 per- in 2022–2026. cent (yoy) in USD terms, while imports non-energy sector activity. Growth is increased by 29 percent (yoy), largely projected at 1.5 percent in 2023 as a driven by public sector investment. De- whole. Inflation eased, although it re- spite faster growth in imports, the trade mains in double digits as of June 2023, Recent developments surplus reached 27.5 percent of GDP in H1 2023. Money transfers dropped by and is expected to continue to decline. In H1 2023, real growth slowed to 0.5 per- 48 percent in H1 2023 (yoy). Foreign The current account surplus is expected cent, compared to 4.6 percent in 2022. The currency reserves increased by 2.7 per- to reduce in 2023 due to a reduction in energy sector contracted due to a fall in cent compared to year-end 2022, reach- exports and money transfers. oil production because of aging oil fields, ing USD 9.2 billion or 5.4 months of im- while natural gas grew at a slower pace, port cover. with gas production nearing full capacity. The fiscal balance recorded a large sur- The non-energy sector expanded by 3.1 plus in H1 2023, at 18.4 percent of GDP. percent, with service sectors (transport, This is due to surge in revenue to 44 hospitality, retail trade) cooling after percent of GDP, supported by higher strong growth in 2022. tax receipts from sales of natural gas. FIGURE 1 Azerbaijan / Non-oil GDP growth and oil price FIGURE 2 Azerbaijan / Official poverty rate and unemployment rate US$ per bbl Percent Percent of population Percent 120 12 10 10 Crude oil price, avg (lhs) Official poverty rate (lhs) 100 Non-oil GDP growth (rhs) 9 Unemployment rate (rhs) 8 8 80 6 6 6 60 3 4 4 40 0 2 2 20 -3 0 0 0 -6 Sources: State Statistical Committee, World Bank data, and World Bank staff Source: State Statistical Committee. estimates. Notes: The World Bank has not reviewed the official national poverty rates for 2013–2022. * Preliminary data. MPO 6 Oct 23 Spending expanded to 26.5 percent The impact on poverty and inequality will of GDP, with public investment in- depend on the extent of the reduction in creasing to 6.5 percent of GDP, while Outlook food prices and the impact of slower eco- current spending lagged. Due to a nomic activity on employment. high revenue outturn, the Government GDP growth is projected at 1.5 percent in In 2023, the external balance is estimated to increased the 2023 planned budget 2023 due to the expected reduction in oil remain in surplus, supported by stable en- spending by 10 percent in nominal production and slow growth in non-ener- ergy prices. Imports are expected to grow terms (from the original budgeted gy sector activity as growth converges to in 2023, largely driven by public invest- amount). Sixty percent of the increase pre-COVID levels. ment. The fiscal balance is projected to re- will be allocated to reconstruction On the demand side, consumption will main in surplus in the medium term, av- needs. Fiscal buffers remain strong, ease in 2023 while increased social eraging 3.4 percent of GDP, as energy rev- with reserves of the State Oil Fund transfers enabled by the revision of the enue continues to offset higher spending in of the Republic of Azerbaijan (SOFAZ) budget are expected to limit the slow- reconstruction and implementation of the increasing by 12 percent, to USD 55 down. Capital formation will largely development strategy. billion (70 percent of 2022 GDP). Pub- be driven by public investment. In the The main downside risks are related to lic debt edged up to an estimated 14.5 medium term, in the absence of struc- the uncertainty around the economic im- percent of GDP. tural reforms, growth is expected to av- plications of Russia’s invasion of Ukraine, Credit to the economy rose by 9 per- erage 2.4 percent. including the risk of reversals of money cent in H1 2023, driven by a 10 per- Inflation is projected to slow to 9 percent transfers from Russia. In addition, a fall cent increase in consumer lending. The in 2023, as food prices continue to fall and in energy prices could impact economic NPL ratio fell to 2.3 percent by the external pressures ease while remaining activity, as occurred in 2016. Upside risks end of June, from 3.5 percent recorded above the CBA’s upper range. Inflation is include the potential increase in natural a year ago, while bank profits in- expected to return to CBA’s target interval gas production due to a new gas field be- creased substantially. of 4+/–2 percent by the end of 2024. coming operational. TABLE 2 Azerbaijan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -4.3 5.6 4.6 1.5 2.4 2.5 Private consumption -5.1 7.0 4.9 4.0 3.6 3.6 Government consumption 4.8 3.8 7.4 7.1 3.1 3.1 Gross fixed capital investment -7.1 -6.0 4.5 3.5 2.3 2.0 Exports, goods and services -8.1 5.6 3.3 -1.0 1.7 1.8 Imports, goods and services -10.5 2.5 3.2 2.2 2.7 2.7 Real GDP growth, at constant factor prices -4.4 5.6 4.6 1.5 2.4 2.5 Agriculture 1.9 3.3 3.4 3.2 3.0 3.0 Industry -5.2 4.1 2.4 -0.9 1.1 1.2 Services -4.4 8.6 8.5 4.9 4.2 4.2 Inflation (consumer price index) 2.8 6.7 13.8 9.0 5.8 5.2 Current account balance (% of GDP) -0.5 15.2 26.5 14.6 13.5 13.0 Net foreign direct investment inflow (% of GDP) -1.5 -4.1 -1.5 -1.0 -1.0 -0.9 Fiscal balance (% of GDP) -6.5 4.2 5.5 3.1 3.0 2.9 Revenues (% of GDP) 33.7 36.5 32.4 34.6 34.1 32.7 Debt (% of GDP) 18.4 16.2 11.7 13.3 14.0 15.0 Primary balance (% of GDP) -5.7 4.8 5.9 3.4 3.3 3.2 GHG emissions growth (mtCO2e) -1.6 0.7 1.4 0.0 0.7 1.3 Energy related GHG emissions (% of total) 62.5 63.9 64.3 64.0 64.2 64.5 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. MPO 7 Oct 23 presents challenges, requiring Belarus to delicately balance the preservation BELARUS Key conditions and of social benefits, wages, economic support, and overall economic stabili- challenges ty. This, coupled with a declining cur- rent account and exchange rate, price Table 1 2022 Belarus's economy is experiencing a robust controls, and labor force constraints, Population, million 9.3 rebound following its sharpest GDP de- pose risks of high inflationary pres- GDP, current US$ billion 72.0 cline in two decades in 2022. Strong ad- sures. Lastly, Belarus's economy con- GDP per capita, current US$ 7732.1 ministrative measures have curbed infla- tinues to grapple with its Soviet-era a 0.0 International poverty rate ($2.15) tion to single digits and stabilized the structure and a focus on quantitative a 0.1 exchange rate. Soft monetary and fiscal growth with diminishing prospects of Lower middle-income poverty rate ($3.65) a 1.3 policies are providing essential support economic diversification. Upper middle-income poverty rate ($6.85) Gini index a 24.4 to domestic demand, as reflected in School enrollment, primary (% gross) b 94.2 strong real growth of disposable in- b 72.4 comes. However, potential GDP de- Life expectancy at birth, years Total GHG emissions (mtCO2e) 59.4 creased after the introduction of sanctions Recent developments and while investment activity is showing Source: WDI, Macro Poverty Outlook, and official data. signs of improvement, it has not yet Benefiting from resilient demand from a/ Most recent value (2020), 2017 PPPs. b/ Most recent WDI value (2021). reached historical levels. Russia, accommodative monetary policy, The economy is actively adapting to sanc- and a low statistical base, GDP grew by 3.1 tions, forging new trade routes, and redi- percent in the first eight months of 2023. Despite robust growth, the economy faces recting exports, particularly in potash fer- Growth was driven by manufacturing (9.6 tilizers and refined oil products, through percent), construction (8.7 percent), and re- challenges from supply bottlenecks due to Russia, albeit with increased logistics tail and wholesale trade sectors (8.6 per- sanctions that target major currency- costs. The current focus lies on import cent), recovering from the 2022 dip. The earning sectors, hindering exports and substitution strategies to address supply agricultural sector decreased (1.7 percent) redirecting trade routes. Growth is bol- issues and boost local production. How- due to lower grain harvest compared to ever, even if proven to be efficient, these ef- last year. Conversely, the IT and transport stered by rebounding domestic demand, forts will take time to yield results, leaving sectors contracted, due to sanctions and driven by accommodative monetary and Belarus vulnerable to weak external de- labor migration. On the demand side, fiscal policies, redirection of trade routes, mand, particularly if Russia's economic monetary and fiscal conditions fueled and rising external demand from the east- outlook deteriorates. fixed investments (8.6 percent), while ro- ern markets. As monetary and fiscal poli- Elevated security concerns and geopoliti- bust wage growth, decelerating inflation, cal tensions exert additional pressure on and attractive interest rates on housing cies approach their limits, the increasing the economic outlook, especially if more and consumer loans drove household dependence on Russia and the looming sanctions are introduced, such as the clo- consumption. Net exports made a neg- threat of sanctions in the transportation sure of the western border for passen- ative contribution, as exports trailed be- sector pose significant risks. ger and cargo transportation. Prolonged hind imports due to sanctions and the adherence to accommodative policies collapse of IT services exports. FIGURE 1 Belarus / Quarterly real GDP growth and FIGURE 2 Belarus / Actual and projected poverty rates and contributions to real quarterly GDP growth real GDP per capita Percentage points Poverty rate (%) Real GDP per capita (constant LCU) 30 30 10000 20 9000 25 10 8000 0 7000 20 -10 6000 15 5000 -20 4000 -30 10 3000 -40 2000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 5 1000 2019 2020 2021 2022 2023 0 0 Stat discrepancy Imports Exports Gross Capital Formation 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 General Govt. Consumption HH Consumption International poverty rate Lower middle-income pov. rate GDP growth Upper middle-income pov. rate Real GDP pc Source: World Bank calculations based on Belstat data. Source: World Bank. Notes: see Table 2. MPO 8 Oct 23 Inflation slowed to 2.3 percent in August In the medium term, growth is antic- (YoY), driven by the base effect and price ipated to remain below potential, with controls, resulting in 5.6 percent inflation Outlook domestic demand substantially curtailed during January-August 2023. This led to due to diminished foreign exchange earn- a reduction in the base interest rate in While the economy redirects toward the ings and projected tighter monetary and June to 9.5 percent from 12 percent in East following the imposition of sanctions fiscal policies. Excepting sectors aligned January 2023. and the recession of 2022, the economic with Russian exports (oil, fertilizers, and Sanctions have left the external position prospects appear dim. Recent macroeco- machinery), investments are projected to vulnerable, relying heavily on Russian nomic stability masks deep-rooted ineffi- decelerate as the economy remains insu- credits. Exports grew by 8.6 percent in ciencies and growing reliance on one part- lated. Against this background, with lim- H1 2023, driven by Russian demand and ner. In 2023, growth is anticipated to be ited potential for growth, the economy commodity prices. However, with rising stimulated by expansionary policies, sup- may follow a close to zero growth trajec- real household incomes, imports grew port to SOEs, and recovering disposable tory. Inflation is forecasted to stabilize at significantly (23 percent), reducing the income. Nevertheless, GDP growth will 8.2 percent, with a gradual decline to 7.2 trade balance surplus. Remittances re- stabilize at around 3 percent as the stimu- percent expected by 2025 if administra- mained strong (27 percent), but the cur- lative economic policies reach their limits, tive measures are effectively maintained. rent account deficit expanded by 30 per- and a full recovery from the 2022 down- Lower external demand and commodi- cent y/y in the first quarter. This de- turn is projected by 2024/25. Consumption, ty prices are projected to erode the cur- terioration in the current account did the main driver of aggregate demand, rent account balance, leading to currency not significantly impact external debt (-5 which slumped in 2022, will be under- pressures. The fiscal outlook is anticipat- percent) or foreign reserves. However, pinned by real wage increases (8.4 per- ed to worsen, with fiscal deficits expected foreign reserves in hard currency expe- cent in seven months) and announced due to the government's pursuit of eco- rienced an 8 percent reduction, reflect- pensions and wage increases in the public nomic stimulus and job preservation mea- ing Belarusian ruble volatility, which sector in September. Likewise, invest- sures. With real disposable income up 3.9 mirrors the Russian ruble. ments are projected to have a positive percent over January-June 2023 compared Households' real disposable income de- contribution, particularly propelled by with the corresponding period of 2022, clined by 3.6 percent in 2022 but grew by the construction sector, but less machin- poverty is projected to fall in 2023 to a 3.9 percent in H1 2023 due to higher real ery. Amidst robust domestic demand and level comparable to 2021, though the fall wages and pensions. As a result, poverty, curbed foreign trade, imports are expect- is likely to be tempered by the decline in as measured by the national poverty line, ed to outpace export growth, resulting in the number of employed experienced so remained stable at 3.9 percent in Q1 2023. a negative net export contribution. far during all months in 2023. TABLE 2 Belarus / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -0.7 2.4 -4.7 3.0 0.8 0.7 Private consumption -1.1 4.9 -1.2 4.1 2.5 2.4 Government consumption -2.0 -0.8 -0.1 1.5 0.2 0.0 Gross fixed capital investment -3.9 -5.5 -13.3 7.6 0.8 1.1 Exports, goods and services -3.7 10.1 -12.3 10.5 2.8 2.5 Imports, goods and services -7.4 5.7 -11.4 14.8 4.7 4.4 Real GDP growth, at constant factor prices -0.7 2.4 -4.7 2.8 0.7 0.7 Agriculture 4.8 -4.1 4.4 4.1 2.0 2.3 Industry -0.4 3.1 -6.2 8.9 1.9 1.2 Services -1.8 3.0 -5.1 -1.9 -0.5 0.1 Inflation (consumer price index) 5.5 9.5 15.2 8.2 8.9 7.2 Current account balance (% of GDP) -0.3 3.1 3.7 0.8 -1.1 -1.4 Net foreign direct investment inflow (% of GDP) 2.1 1.9 1.8 1.8 1.9 1.8 Fiscal balance (% of GDP) -1.7 0.0 -2.1 -1.0 -1.5 -1.2 Revenues (% of GDP) 37.9 37.4 34.7 35.7 36.0 36.2 Debt (% of GDP) 41.1 35.8 39.6 40.3 41.3 42.6 Primary balance (% of GDP) 0.0 1.7 -0.6 0.0 -0.5 -0.3 a,b International poverty rate ($2.15 in 2017 PPP) 0.0 0.0 0.0 0.0 0.0 0.0 a,b Lower middle-income poverty rate ($3.65 in 2017 PPP) 0.1 0.1 0.1 0.1 0.1 0.1 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 1.3 1.2 1.4 1.2 1.2 1.2 GHG emissions growth (mtCO2e) -1.6 -1.9 -5.7 -0.5 -1.1 -0.5 Energy related GHG emissions (% of total) 85.7 85.7 85.6 85.9 85.9 85.9 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2020-HHS. Actual data: 2020. Nowcast: 2021-2022. Forecasts are from 2023 to 2025. b/ Projection using neutral distribution (2020) with pass-through = 0.87 (Med (0.87)) based on GDP per capita in constant LCU. MPO 9 Oct 23 achieve due to low investment rates, a growth model that relies on private con- BOSNIA AND Key conditions and sumption, and absent structural reforms. The implementation of structural reforms challenges HERZEGOVINA remains sluggish due to political frictions, pressures from frequent elections, wide- To become an EU candidate, BiH needs spread corruption, and fragmentation of to address 14 reform priorities in the ar- responsibilities between the two entities Table 1 2022 eas of democracy, the rule of law, human and cantons. Because of the resulting poor Population, million 3.2 rights, and public administration. In par- welfare prospects, BiH exhibits one of the GDP, current US$ billion 23.0 allel, economic criteria for EU accession highest labor out-emigration rates in the GDP per capita, current US$ 7118.9 require BiH to reduce internal market Western Balkans. Life expectancy at birth, years a 75.3 fragmentation by strengthening country- Total GHG emissions (mtCO2e) 27.2 wide regulatory and supervisory insti- tutions, enhancing transparency and ef- Source: WDI, Macro Poverty Outlook, and official data. a/ Most recent WDI value (2021). ficiency of the oversized public sector, Recent developments and reducing political involvement in the management of the public sector, includ- In 2022, real GDP grew 3.9 percent com- ing state-owned enterprises. EU accession pared to 7.4 percent the year before as the will also require an improved business rebound from the post-pandemic period environment in part based on (i) sim- subsided. Economic activity slowed from After decelerating to 3.9 percent in 2022, plified business registration and licensing 5.9 percent in Q1 2022 (yoy) to 1.7 percent real GDP growth is expected to further procedures and (ii) harmonized and mu- in Q4 2022 (yoy) mainly due to output de- tually recognized licenses and certificates celeration in manufacturing. This trend slow to 2.2 percent in 2023 as private between the entities. persisted into Q1 2023, with real output consumption weakens. Annual inflation BiH has shown macroeconomic stability rising a mere 1.1 percent (yoy). The latter will remain elevated at 6 percent in and resilience over the past decade, in- is primarily owed to the fall in private con- 2023 driven by food, housing, and ener- cluding during the COVID-19 and post- sumption, which contracted 0.4 percent gy prices, weakening disposable income, COVID periods. These have been largely (yoy) due to the weakening of real dispos- facilitated by three economic anchors: the able income caused by high inflation. and creating risks for poverty reduction. currency board (which ties the BiH mark Inflation slowed to 4.9 percent in June Upcoming municipal elections will like- to the euro), the state-wide collection of (yoy), which translates into an inflation ly make the 2022 fiscal surplus short- indirect taxes through ITA, and EU mem- rate of 9.3 percent during January-June of lived. Public debt is expected at about bership prospects. 2023, a 2.2 percentage point contraction Nevertheless, with real income growth av- vis-à-vis the same period last year. In- 36 percent of GDP. Structural reforms eraging around 1.6 percent from 2009 to flation dynamics were driven by higher remain delayed mainly due to ongoing 2019, living standards are stagnant as real food, housing, and transport prices, political frictions. per capita consumption is around 40 percent putting disproportionate stress on lower of the EU27 average. Faster convergence to- income groups, and generating risks for ward the EU27 average will be difficult to poverty reduction. FIGURE 1 Bosnia and Herzegovina / Real GDP growth and FIGURE 2 Bosnia and Herzegovina / Labor market contributions to real GDP growth indicators Percent, percentage points Percent 8 50 Q1 2022 Q2 2022 Q3 2022 6 40.1 40.8 Q4 2022 Q1 2023 40 4 30 2 0 20 16.7 13.3 -2 10 -4 2019 2020 2021 2022 2023e 2024f 2025f 0 Agriculture Industry Services GDP Emp. Rate (15-89) Unemp. Rate (15-74) Sources: BiH Agency for Statistics (BHAS) and World Bank staff calculations. Sources: LFS 2021-2022 report and World Bank staff calculations. MPO 10 Oct 23 Meanwhile, key labor market indicators re- External financing largely entails net FDI The return to fiscal surplus in 2022 is likely main static. The overall employment rate in- inflows, mainly into the foreign-owned to be short-lived due to the upcoming mu- creased marginally to 40.8 percent in Q1 of banking sector, which remained stable nicipal elections in 2024. Nevertheless, by 2023 compared to 40.1 percent in Q1 of 2022, during the first half of 2023. 2024-25 the fiscal stance should be bal- while the unemployment rate shrunk to 13.3 anced again. percent, a 3.4 percentage points decline vis- Given the ongoing supply shocks causing à-vis Q1 2022. However, the decline in the market disruptions and higher input costs unemployment rate was driven by people Outlook for firms, inflationary pressures are pro- moving from employment to inactivity, jected to remain for some time. Hence, the and, thus, the overall activity rate declined Real GDP growth is set to decelerate to 2.2 inflation rate is expected to remain elevat- by 1 percentage point during this period. percent in 2023, and 2.8 percent in 2024 as ed at around 6 percent in 2023 and stabilize Stronger nominal tax revenues supported private consumption weakens due to the in 2024-25 at around 2 percent, in line with by high inflation generated a fiscal surplus softening of real disposable income, and as rates prior to the pandemic. of 0.4 percent of GDP in 2022. This com- exports adjust to much lower growth in the Downside risks dominate the outlook. Pro- pares to a deficit of 0.3 percent the year be- EU. By 2025, real output growth is expect- tracted market disruptions and uncertain- fore, and 5.3 percent of GDP in 2020. High- ed to rebound to 3.4 percent as both ex- ty fanned by the war in Ukraine could er nominal expenditures in 2022 were dri- ports and private consumption strengthen have a negative impact on aggregate de- ven by social measures aimed at soften- based on improving conditions in the EU mand through depressed consumer and ing the inflationary impact on households, and tightening labor markets. Stronger ex- business confidence. Furthermore, the and pre-election spending, including wage ports in 2024 and 2025 are likely to be off- gradual recovery in the EU remains fragile, hikes and a hike in capital expenditures. set by higher imports of consumer goods, adversely impacting demand for BiH ex- Nevertheless, public debt remains low at resulting in a further widening of the cur- ports, except for energy. Adverse labor 36 percent of GDP. rent account deficit from 4.7 percent of market developments across the EU could Adverse terms of trade caused a widen- GDP in 2023 to 5.1 percent by 2025. With also limit remittance inflows, which sup- ing of the merchandise trade deficit dur- general elections completed, and govern- port private consumption. Finally, geopo- ing 2022 and the first half of 2023. The ments formed, the attention of policy mak- litical risks could further aggravate domes- current account deficit therefore broad- ers could turn to the structural reform tic political frictions with adverse conse- ened to 4.5 percent in 2022 and is set to fur- agenda and the fulfillment of legislative quences for the much-needed structural ther widen to 4.7 percent of GDP in 2023. priorities for EU accession. reform push. TABLE 2 Bosnia and Herzegovina / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -3.3 7.1 4.0 2.2 2.8 3.4 Private consumption -4.5 4.0 3.0 2.2 2.5 3.2 Government consumption 0.5 6.1 2.7 4.1 2.3 3.7 Gross fixed capital investment -22.0 33.3 19.7 6.9 2.9 -0.4 Exports, goods and services -8.5 5.0 9.9 4.0 5.5 6.0 Imports, goods and services -13.4 8.0 12.0 6.0 4.0 3.4 Real GDP growth, at constant factor prices -3.0 7.4 3.9 2.2 2.8 3.4 Agriculture -1.5 3.4 3.5 3.1 3.0 3.2 Industry -3.0 2.0 2.6 2.7 2.8 3.2 Services -3.2 10.1 4.4 1.9 2.8 3.5 Inflation (consumer price index) -1.1 2.0 14.0 6.0 2.5 1.0 Current account balance (% of GDP) -4.0 -2.3 -4.5 -4.7 -4.8 -5.1 Net foreign direct investment inflow (% of GDP) 2.0 3.3 3.0 3.3 3.5 4.0 Fiscal balance (% of GDP) -5.3 -0.3 0.4 -0.8 0.1 0.1 Revenues (% of GDP) 41.6 43.5 40.0 39.6 40.0 40.0 Debt (% of GDP) 40.3 38.0 35.9 36.2 36.1 35.8 Primary balance (% of GDP) -4.0 1.0 1.2 0.0 0.9 0.9 GHG emissions growth (mtCO2e) -2.5 7.7 5.5 3.7 3.6 4.1 Energy related GHG emissions (% of total) 86.6 87.2 87.7 87.7 87.6 87.4 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. MPO 11 Oct 23 and private sector expansion. Investment in people’s skills will also help move the BULGARIA Key conditions and economy closer to the productivity fron- tier. If Bulgaria succeeds in overcoming challenges these challenges with an ambitious reform agenda, it could accelerate its economic Table 1 2022 Bulgaria’s development path over the growth to above 4 percent in the period up Population, million 6.5 past two decades has been characterized to 2050. Under a no-reform scenario, how- GDP, current US$ billion 89.0 by gradual convergence to average real ever, growth may slow down to 1.2 per- GDP per capita, current US$ 13772.6 incomes in the EU. By 2022, it reached cent by the middle of the century. a 0.2 International poverty rate ($2.15) 59 percent of the average GDP per capita In parallel, the country needs to address a 1.4 in the EU in purchasing power parity persistent inequalities, including income Lower middle-income poverty rate ($3.65) a 4.5 terms but remained the poorest member inequality but also inequalities of oppor- Upper middle-income poverty rate ($6.85) Gini index a 40.5 state. Yet, income convergence was much tunities, which limit human capital for- School enrollment, primary (% gross) b 85.2 slower in the last decade, as reforms lost mation and growth, and further under- b 71.5 momentum while adverse demographic mine growth prospects. Fiscal policy cur- Life expectancy at birth, years trends resulted in a rapid decline in the rently has a very limited impact on re- Total GHG emissions (mtCO2e) 51.5 working-age population. Moreover, in- ducing child poverty. Yet, significant im- Source: WDI, Macro Poverty Outlook, and official data. vestment ran into diminishing returns, provements can be achieved by fine-tun- a/ Most recent value (2020), 2017 PPPs. b/ WDI for School enrollment (2020); Life expectancy and factor accumulation leveled off as the ing certain measures, such as improved (2021). country became richer. targeting and adequacy of means-tested Despite substantial progress in reducing child benefits. poverty, Bulgaria's poverty rates remain Following robust growth in 2022, the among the highest in the EU, while in- Bulgarian economy is set to slow down in come inequality was the largest in 2021. line with EU trends. Inflation remains Child poverty remains a particularly se- Recent developments rious issue, with 26 percent of children elevated, threatening plans for euro at risk of poverty in 2021. Energy af- GDP growth continued to decelerate in adoption in 2025. The fiscal deficit is fordability is also a challenge, with about early 2023, in tune with trends in Western expected to remain below the 3 percent 22.5 percent of households unable to keep Europe. The economy’s expansion slowed their homes warm in 2021, the highest in down to 1.8 percent y/y in Q2 as final Maastricht ceiling, possibly at the ex- the EU. This share rises to 42.7 percent consumption growth cooled off, while ex- pense of reduced public investment. A among poor households. port growth adjusted downward, mirror- new regular government is hoped to step The country needs a new set of policies ing the soft landing in key export markets up reform momentum. Poverty reduction and ambitious reforms to spur economic in the EU. is expected to slow down as Bulgaria growth, so that it can reach average EU A declining working-age population has income levels in the next 15 years. Bul- led to labor shortages across most sectors faces slower growth and elevated infla- and skill sets, and a decrease in overall garia needs to address its institutional tion. Energy affordability remains a and governance weaknesses and ensure employment, accompanied by real wage pressing concern. fair competition to boost firms’ efficiency increases since the start of 2023. Yet, the FIGURE 1 Bulgaria / Real GDP growth and contributions to FIGURE 2 Bulgaria / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 24 30 20000 18 18000 25 16000 12 14000 20 6 12000 15 10000 0 8000 10 -6 6000 4000 5 -12 2000 0 0 Imports Exports 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Gross fixed capital formation Private consumption International poverty rate Lower middle-income pov. rate Public consumption GDP Upper middle-income pov. rate Real GDP pc Sources: World Bank and Bulgarian National Statistical Institute. Source: World Bank. Notes: see Table 2. MPO 12 Oct 23 working-age population is diminishing improved in June-July and returned to Recovery and Resilience Plan, resulting in more rapidly than the overall decrease in positive territory (+0.2 percent) for Janu- further delays of upcoming tranches. employment, resulting in a still-rising em- ary-July. This became possible after the Inflation will continue to subside but re- ployment rate. new government took steps to increase tax main elevated in 2023, putting at risk the Following 2022, when Bulgaria recorded and non-tax revenue collection. For the full official eurozone accession target for 2025. one of the highest inflation rates in the EU, year, the government foresees a deficit of The government’s 3 percent fiscal deficit consumer price growth has slowed down 3 percent on an accrual basis, with the aim target in 2023 is achievable but may come in the early part of 2023, reaching 8.5 per- of meeting the line Maastricht criterion of at the expense of lower-than-planned cap- cent y/y in July. Even if energy and food up-to-3 percent deficit and joining the euro ital spending, which could hurt growth price inflation gradually subsided in H1, area in 2025. The EC’s Convergence Report prospects going forward. The current ac- food prices retained above-average growth on Bulgaria’s readiness for accession is ex- count is projected to move to a slight sur- and even resumed their rise in July, which pected in spring 2024. While the fiscal bal- plus in 2023-2025 due to the expected impacts disproportionately the poorest ance target appears within reach, eurozone downward adjustment of import prices of segments of society. Moreover, core infla- accession plans may stumble upon the key raw materials and the increase of net tion also picked up in July, which may Maastricht criterion for inflation. As of services export. be attributed to still-strong demand pres- June 2023, Bulgaria’s annual average HICP Political risks have declined markedly fol- sures. Food and energy inflation can in- inflation is 5.3pp above the corresponding lowing the formation of a regular coali- crease poverty by 1 percentage point benchmark. Faster disinflation will be tion government in June 2023. The new ($6.85 line), slowing down overall poverty needed if the country is to align with the government’s priorities include speeding reduction in 2022. Energy price ripples, criterion by early 2024. up the implementation of the NRRP, as influencing core inflation, could amplify well as preparing the country for near- impacts up to 1.8 percentage points. En- term Schengen Area and eurozone ac- ergy affordability remains a major con- cession. Yet, the upcoming local elections cern: the World Bank’s rapid survey in Outlook in October may increase pressure on the July reveals that 15 percent of households ruling coalition, and political uncertainty struggled to heat homes last winter, 30 Bulgaria’s economy is expected to slow may re-escalate. percent faced summer cooling challenges, down substantially in 2023 – to 1.4 percent Given the growth deacceleration and po- and 73 percent deemed existing energy - in tune with the ongoing cooling off tentially persistent inflation, poverty (us- price caps insufficient. in the eurozone. Growth may be further ing the 6.85$ UMIC poverty line) is expect- Following the rapid deterioration of the suppressed if Bulgaria fails to deliver on ed to continue declining slowly, reaching fiscal position in early 2023, the balance the reform milestones under the National 3.5 percent in 2023. TABLE 2 Bulgaria / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -4.0 7.6 3.4 1.4 2.7 3.3 Private consumption -0.6 8.8 4.8 1.1 3.5 4.9 Government consumption 8.3 0.4 6.5 0.4 3.9 3.2 Gross fixed capital investment 0.6 -8.3 -4.3 1.3 4.0 5.1 Exports, goods and services -10.4 11.0 8.3 -2.7 5.7 6.6 Imports, goods and services -4.3 10.9 10.5 -3.0 6.5 7.8 Real GDP growth, at constant factor prices -4.0 8.0 3.4 1.4 2.7 3.3 Agriculture -3.3 28.8 -0.8 0.5 1.5 1.2 Industry -8.2 1.7 11.9 -3.5 6.7 5.2 Services -2.5 8.7 1.0 3.3 1.4 2.7 Inflation (consumer price index) 1.7 3.3 15.3 9.8 5.6 4.2 Current account balance (% of GDP) 0.0 -1.9 -0.7 1.6 1.9 0.9 Net foreign direct investment inflow (% of GDP) 4.5 1.8 2.4 1.8 2.6 2.9 Fiscal balance (% of GDP) -2.9 -2.7 -0.8 -2.9 -2.9 -2.3 Revenues (% of GDP) 36.8 37.7 39.2 39.5 40.6 41.3 Debt (% of GDP) 24.5 23.9 22.9 22.5 22.7 22.1 Primary balance (% of GDP) -2.4 -2.3 -0.4 -2.5 -2.5 -1.9 a,b International poverty rate ($2.15 in 2017 PPP) 0.2 0.2 0.2 0.2 0.2 0.2 a,b Lower middle-income poverty rate ($3.65 in 2017 PPP) 1.4 1.1 1.0 1.0 0.9 0.8 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 4.5 3.8 3.6 3.5 3.5 3.4 GHG emissions growth (mtCO2e) -3.7 7.0 7.7 1.5 3.5 3.0 Energy related GHG emissions (% of total) 80.2 78.5 75.2 74.0 72.3 71.2 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2021-EU-SILC. Actual data: 2020. Nowcast: 2021-2022. Forecasts are from 2023 to 2025. b/ Projection using neutral distribution (2020) with pass-through = 0.87 (Med (0.87)) based on GDP per capita in constant LCU. MPO 13 Oct 23 to the outlook as additional price shocks would dampen both domestic and external CROATIA Key conditions and demand. Furthermore, the full effect of higher interest rates and monetary tight- challenges ening is yet to feed through the economy increasing the vulnerabilities in non-finan- Table 1 2022 Despite significant headwinds coming cial sector and potential risks for financial Population, million 3.9 from high inflation, monetary tightening, stability. At the same time, price pressures GDP, current US$ billion 70.5 and faltering external demand for goods, might prove to be more persistent, leading GDP per capita, current US$ 18282.6 Croatia's process of economic conver- to adverse real income and confidence ef- a 0.3 International poverty rate ($2.15) gence continues, with GDP per capita (in fects. On the upside, economic stimulus a 0.8 PPP terms) in 2022 reaching 73 percent of coming from fiscal policy might be Lower middle-income poverty rate ($3.65) a 2.1 the average EU27 level. The country has stronger than anticipated in light of the up- Upper middle-income poverty rate ($6.85) Gini index a 29.6 recorded the highest post-pandemic re- coming parliamentary elections next year. School enrollment, primary (% gross) b 92.9 covery of all EU member states (with no- b 76.4 table exception of Ireland). The country's Life expectancy at birth, years solid performance largely reflects post- Total GHG emissions (mtCO2e) 20.2 Covid revival of global demand for trav- Recent developments Source: WDI, Macro Poverty Outlook, and official data. el, but also robust goods exports and per- a/ Most recent value (2020), 2017 PPPs. b/ WDI for School enrollment (2020); Life expectancy sonal consumption. However, as pent-up Croatia's economy further expanded in (2021). demand for services in tourism is un- the first half of 2023, mainly owing to likely to be sustained in the medium to recovery of personal consumption and long run, it will be crucial to address key strong growth of tourism. In this period Croatia's economy remained on an ex- structural issues that will support pro- annual real GDP growth rate averaged pansion path in the first half of 2023 ductivity and long-term growth acceler- 2.7 percent, well above EU average of 0.6 ation. These are linked to low levels of percent. Personal consumption recovered supported by robust private consump- Research and Development (R&D) invest- after a marked decline at the end of the last tion and buoyant demand for travel ser- ments, innovation and technology adop- year following favorable labor market de- vices. Over the forecast horizon, eco- tion, weaknesses in managerial and orga- velopments and recovery in consumer op- nomic growth is expected to stay close nizational practices, administrative capac- timism. Furthermore, performance of ex- ity and judicial quality and efficiency. In port of services was also strong with for- to 3 percent as inflation moderates, and addition, given unfavorable demographic eign tourists’ arrivals and overnight stays the external outlook improves. Steady trends and a tight labor market, improve- increasing on average on an annual basis growth and a declining need for fiscal ments in education and labor market poli- by more than 10 percent. Investment support are expected to keep the fiscal cies will be necessary to increase labor sup- growth was relatively suppressed but deficit contained and public debt on a de- ply and improve the quality of human cap- business optimism in the construction sec- ital. Over the medium term, the elevated tor remains high and it improved further clining path. Poverty in 2023 is expected at the beginning of Q3. On the other hand, uncertainty linked to Russia’s invasion of to decline to 1.3 percent. Ukraine and developments in energy and export of goods declined, partly due to the food commodity prices remain the key risk weakening of economic activity in some FIGURE 1 Croatia / Real GDP growth and contributions to FIGURE 2 Croatia / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 15 9 18000 8 16000 10 7 14000 5 6 12000 5 10000 0 4 8000 3 6000 -5 2 4000 1 2000 -10 2016 2017 2018 2019 2020 2021 2022 2023e 2024f 2025f 0 0 Final consumption Gross fixed capital formation 2009 2011 2013 2015 2017 2019 2021 2023 2025 Change in inventories Net exports International poverty rate Lower middle-income pov. rate GDP growth Upper middle-income pov. rate Real GDP pc Sources: CROSTAT and World Bank. Source: World Bank. Notes: see Table 2. MPO 14 Oct 23 of Croatia’s main trading partners. Fiscal 40 percent of the income distribution) re- monetary policy normalizes. Exports of policy continued to play an important role ported having some difficulty to make goods, after a sluggish performance in in supporting economic activity by extend- ends meet with their current income. 2023, are expected to pick up in 2024 and ing measures aimed at easing inflationary 2025 as external demand strengthens, pressures. Inflation, albeit declining, re- while, on the other hand, growth of ex- mains high and, at 8.5 percent in August ports of services might become more mod- was the second highest in the eurozone. Outlook erate after strong results in the 2021-2023 The ECB continued to increase key inter- period. Inflation is expected to remain ele- est rates which also had an impact on Economic activity growth is expected to vated over the near term but could decline financing conditions in Croatia. Howev- moderate in the second half of 2023, as de- towards the ECB target of close to 2 per- er, this impact was less pronounced com- mand for tourism services slows down and cent by the end of the forecast horizon, fol- pared to other euro area countries reflect- goods exports remain suppressed. lowing monetary measures implemented ing declining country risk premia, high Nonetheless, thanks to the relatively since end-2021, unwinding of global sup- bank liquidity, strong deposit base, and strong performance during the first six ply bottlenecks, and easing of commodity relatively low share of credits with vari- months, real GDP is set to grow by 2.7 price growth. The fiscal deficit is set to re- able interest rates. percent in 2023, and growth is expected main contained, as growth continues and The combination of strong economic to take a slight uptick by the end of the the need for fiscal support declines. This growth and the rebound of the labor mar- forecast horizon. Personal consumption is will allow for further reduction in public ket improved household total income. projected to remain robust, as recovery in debt which is expected to fall below 60 per- However, high inflation eroded household real incomes continues due to falling in- cent of GDP by the end of 2025. real purchasing power. Poverty is estimat- flation and strong labor demand. Further- Looking ahead, about 20 percent of Croat- ed to have declined modestly from 1.4 per- more, EU funds are expected to continue ian households, and more than 30 percent cent in 2022 to 1.3 percent in 2023. Prelimi- supporting investment activity, especially of those in the bottom 40 expressed a pes- nary findings from the World Bank rapid government investments, while private simistic view of their financial prospect, assessment survey in June 2023 showed sector investment growth might slow in according to the World Bank survey in that one in every two Croatian house- the near term before strengthening to- June. Poverty is projected to decline mar- holds (and 75 percent among the bottom wards the end of the forecast horizon as ginally to 1.2 percent by 2025. TABLE 2 Croatia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -8.5 13.1 6.2 2.7 2.5 3.0 Private consumption -5.1 9.9 5.1 2.2 2.5 2.8 Government consumption 4.3 3.0 3.2 2.6 2.8 2.7 Gross fixed capital investment -5.0 4.7 5.8 4.7 3.1 3.5 Exports, goods and services -23.3 36.4 25.4 -1.0 4.2 5.0 Imports, goods and services -12.4 17.6 25.0 -0.9 4.2 4.5 Real GDP growth, at constant factor prices -7.5 12.6 6.4 2.7 2.5 3.0 Agriculture -0.2 8.2 6.0 -0.2 3.5 3.5 Industry -4.1 9.0 2.3 1.2 3.0 3.0 Services -9.1 14.2 7.9 3.3 2.3 3.0 Inflation (consumer price index) 0.0 2.7 10.7 8.4 3.9 2.3 Current account balance (% of GDP) -0.5 1.8 -1.6 -0.6 -0.8 -0.7 Net foreign direct investment inflow (% of GDP) 1.4 4.8 5.6 3.7 3.7 3.7 Fiscal balance (% of GDP) -7.3 -2.5 0.4 -1.1 -1.3 -1.1 Revenues (% of GDP) 46.8 46.2 45.5 44.3 43.7 43.6 Debt (% of GDP) 86.9 78.3 68.8 62.8 60.2 58.3 Primary balance (% of GDP) -5.3 -0.9 1.8 0.2 -0.1 0.2 a,b International poverty rate ($2.15 in 2017 PPP) 0.3 0.3 0.3 0.3 0.3 0.3 a,b Lower middle-income poverty rate ($3.65 in 2017 PPP) 0.8 0.6 0.5 0.5 0.5 0.5 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 2.1 1.7 1.4 1.3 1.3 1.2 GHG emissions growth (mtCO2e) -5.6 13.2 5.7 0.2 0.4 0.7 Energy related GHG emissions (% of total) 88.3 88.8 88.6 88.1 87.6 87.2 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2021-EU-SILC. Actual data: 2020. Nowcast: 2021-2022. Forecasts are from 2023 to 2025. b/ Projection using neutral distribution (2020) with pass-through = 0.87 (Med (0.87)) based on GDP per capita in constant LCU. MPO 15 Oct 23 compared to 10.1 percent in H1 2022, driven by a rebound in private consumption. Ser- GEORGIA Key conditions and vice exports remained supported by contin- ued recovery in tourism. Unemployment challenges continued to fall, reaching 16.7 percent in June 2023, below pre-pandemic levels. Table 1 2022 Georgia has made notable gains in in- Inflation has declined sharply. Headline Population, million 3.7 come growth and poverty reduction over inflation fell to 0.3 percent (yoy) in July GDP, current US$ billion 24.6 the past decade. A robust economic man- 2023, from 9.4 percent in January. The de- GDP per capita, current US$ 6667.4 agement framework saw the GNI per cline was driven by lower commodity a 5.5 International poverty rate ($2.15) capita (constant 2015 USD) increase from prices, particularly for food and fuel, along a 19.1 USD 3,048 in 2010 to USD 5,424 in 2022. with a strong Georgian lari (GEL). On the Lower middle-income poverty rate ($3.65) a 55.4 Poverty (measured by the USD6.85 other hand, the price of financial services, Upper middle-income poverty rate ($6.85) Gini index a 34.2 poverty line in 2017 PPP) is also down personal care, and utilities have continued School enrollment, primary (% gross) b 100.8 from 70 percent at the start of the decade to put pressure on inflation. Core inflation, b 71.7 to 55.4 percent in 2021. which excludes food and energy compo- Life expectancy at birth, years Nevertheless, structural challenges per- nents, dropped from 7.1 percent (yoy) in Total GHG emissions (mtCO2e) 19.6 sist; notably, weak productivity and lim- January to 3.2 percent (yoy) in July. In Source: WDI, Macro Poverty Outlook, and official data. ited high-quality job creation. More than response, in August, the National Bank a/ Most recent value (2021), 2017 PPPs. b/ Most recent WDI value (2021). a third of all workers are engaged in of Georgia (NBG) reduced the monetary low-productivity agriculture. Poor learn- policy rate by 25 bps, to 10.25 percent. ing outcomes and lack of skills restrict The banking sector has remained healthy. private sector growth. Georgia also re- Returns on assets and equity reached 3.7 mains vulnerable to external shocks, percent and 26.7 percent in June 2023, re- largely due to its heavy reliance on spectively. The share of non-performing The economy performed strongly in H1 tourism and trade openness. Foreign ex- loans (NPLs) stood at 1.5 percent by the end 2023, with growth at 7.6 percent (yoy), change depreciation remains a risk be- of June, down from 2 percent in June 2022. and projected at 5.9 percent for 2023 as cause of high dollarization and persistent The current account deficit declined to dependence on external savings. 3.2 percent of GDP in Q1 2023, from 4 a whole. Buoyed by strong domestic The application for EU candidacy, initi- percent in 2022. During H1 2023, exports consumption, employment recovered, ated in 2022, provides opportunities for grew by 19.3 percent (yoy) in USD val- and poverty continued to fall. Growth is further income growth while requiring ue, mostly driven by re-exports of used expected to slow in H2 due to monetary significant reforms. cars. Conversely, exports of raw materials tightening in advanced economies and to (copper, ferroalloys, and nitrogen fertil- izers) produced in Georgia declined, as easing in money inflows from Russia international prices fell considerably, and putting pressure on the currency and Recent developments domestic production declined. Mean- increasing financing needs. while, imports expanded by 19.6 percent Growth remained robust in H1 2023, al- (yoy), driven by growth in used car im- though it eased to an estimated 7.6 percent, ports, whose share of total imports almost FIGURE 1 Georgia / Gross money inflows by country of origin FIGURE 2 Georgia / Actual and projected poverty rates and real GDP per capita Million US$ Poverty rate (%) Real GDP per capita (constant LCU) 1600 80 16000 1400 70 14000 Others 1200 60 12000 Russian Federation 1000 50 10000 EU 800 40 8000 US 600 30 6000 400 20 4000 200 10 2000 0 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 International poverty rate Lower middle-income pov. rate 2019 2020 2021 2022 2023 Upper middle-income pov. rate Real GDP pc Source: National Bank of Georgia. Source: World Bank. Notes: see Table 2. MPO 16 Oct 23 doubled to 18 percent. FDI inflows wages, contributing to increased house- projected to deteriorate to 6 percent by recorded an improvement in H1 2023 hold consumption. Steady remittance in- the end of 2023. The inflow in money with an 11 percent increase compared flows and lower food inflation have also transfers in the aftermath of Russia’s in- to the same period in 2022, driven by bolstered the population's purchasing vasion of Ukraine is expected to ease in the financial, energy, and manufacturing power. The poverty rate (below USD 6.85 the second half of 2023 and subside fur- sectors. Money transfers, primarily from a day, 2017 PPP terms) is estimated to de- ther in 2024. The current account deficit Russia, continued to support Georgia's crease to 48.7 percent in 2023. is expected to remain below pre-war lev- external position and increased by 32.5 els in the medium term, due to continued percent in H1 2023 compared to H1 2022. recovery in tourism and continued strong International reserves increased to USD export performance. 5.4 billion, or approximately 4.4 months Outlook The deficit is projected to reach 2.9 per- of import cover. cent of GDP in 2023. The government is Total revenue increased by 13.3 percent Growth is expected to slow in H2 2023 due expected to comply with the GDP fiscal (yoy) in real terms in H1 2023, supported to a slowdown in trading partners and an rule deficit ceiling in 2023 and in the by higher collection across the board, ex- easing of money transfer inflows, reaching medium term. To boost revenue collec- cept for profits tax. Current expenditures 5.9 percent this year. Looking ahead, tion, the authorities are committed to the grew by 6.7 percent (yoy), reflecting in- growth is expected to stabilize at around rationalization of tax expenditures. creases in the wage bill, higher spend- 5 percent of GDP in 2024–2025, supported Substantial risks remain, reflecting Rus- ing on goods and services, and increased by robust investments and tourism. sia’s invasion of Ukraine and broader un- (yoy) subsidies to SOEs and social assis- Inflation is expected to end the year below certainties. A faster reduction in money tance for the most vulnerable. Capital ex- the 3-percent target rate. Monetary policy inflows, a decline in tourism inflows, fur- penditure surged by 20.3 percent yoy in is expected to be eased to support econom- ther monetary tightening in advanced real terms as the pace of project imple- ic growth while remaining prudent. economies, or an increase in global com- mentation accelerated. Outturns for H1 Prospects for poverty reduction are pos- modity prices, could hinder growth, put 2023 showed a small overall surplus and itive. The overall poverty rate (measured pressure on the currency, and increase a primary surplus at 0.7 percent of GDP, below USD 6.85 per day, in 2017 PPP debt levels and financing needs. Currency due to the strong revenue performance terms) is expected to continue declining mismatches due to dollarization and a The public debt-to-GDP ratio has contin- and reach 45.2 percent in 2024 and 42.1 high exchange rate pass-through would ued to fall due to rapid economic growth percent in 2025, driven by higher wages also exacerbate vulnerability to currency and appreciation of the GEL. and improvements in the labor market. depreciation. On the upside, money Strong economic growth and improved On the external side, given the widen- transfer inflows could remain stronger employment rates resulted in higher real ing trade deficit, the current account is than expected, lifting economic growth. TABLE 2 Georgia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -6.8 10.5 10.1 5.9 4.8 4.5 Private consumption 8.8 14.5 -1.8 5.6 4.2 4.4 Government consumption 7.1 7.7 0.7 4.8 5.2 5.9 Gross fixed capital investment -16.5 -7.2 19.6 2.6 4.8 7.5 Exports, goods and services -37.6 24.4 38.2 10.0 11.0 10.0 Imports, goods and services -16.6 11.0 14.4 11.0 9.0 10.0 Real GDP growth, at constant factor prices -6.6 10.4 10.1 5.9 4.8 4.5 Agriculture 8.1 0.1 2.0 2.5 2.5 2.5 Industry -6.8 5.9 8.0 4.0 5.0 5.0 Services -8.1 13.0 11.6 6.7 5.0 4.6 Inflation (consumer price index) 5.2 9.6 11.9 2.3 2.5 3.0 Current account balance (% of GDP) -12.5 -10.4 -4.0 -6.0 -5.6 -4.7 Net foreign direct investment inflow (% of GDP) 3.6 4.9 7.5 3.9 4.7 4.9 Fiscal balance (% of GDP) -9.8 -7.1 -3.5 -2.9 -2.7 -2.5 Revenues (% of GDP) 25.2 25.2 27.0 27.0 26.7 26.8 Debt (% of GDP) 60.1 49.6 41.3 39.4 38.9 38.3 Primary balance (% of GDP) -8.2 -5.7 -2.4 -1.6 -1.5 -1.5 a,b International poverty rate ($2.15 in 2017 PPP) 5.8 5.5 4.0 3.3 2.8 2.3 a,b Lower middle-income poverty rate ($3.65 in 2017 PPP) 21.4 19.1 16.5 14.5 13.1 12.0 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 58.3 55.4 52.2 48.7 45.2 42.1 GHG emissions growth (mtCO2e) -0.6 3.5 7.8 5.7 1.4 1.6 Energy related GHG emissions (% of total) 55.0 56.8 60.2 62.7 63.6 64.5 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2021-HIS. Actual data: 2021. Nowcast: 2022. Forecasts are from 2023 to 2025. b/ Projection using neutral distribution (2021) with pass-through = 0.87 (Med (0.87)) based on GDP per capita in constant LCU. MPO 17 Oct 23 migrants bolstered domestic demand and brought a significant increase in registra- KAZAKHSTAN Key conditions and tion of new businesses, which has grown by over 20 percent (yoy) to June 2023. Ro- challenges bust growth of retail trade (8.8 percent in real terms, yoy), and car sales (11.1 per- Table 1 2022 Since 2008 average growth has slowed to cent, yoy) in H1 indicate strong consumer Population, million 19.6 less than 4 percent a year as productivity spending, while investment, driven by ris- GDP, current US$ billion 225.3 gains have stalled. In recent years, cou- ing FDI, has also strengthened. Growth in GDP per capita, current US$ 11476.6 pled with rising living costs, this lack- production was broad-based, including a 14.3 Upper middle-income poverty rate ($6.85) luster economic performance has fostered mining and machinery manufacture, basic a 27.8 public discontent over inequality and elite metals, and chemical products. Gini index b 100.3 capture, culminating in violent protests The unemployment rate declined slightly to School enrollment, primary (% gross) Life expectancy at birth, years b 70.2 in January 2022. Russia's invasion of 4.7 percent in Q2 2023, from 4.9 percent in Total GHG emissions (mtCO2e) 194.9 Ukraine has increased uncertainty and in- 2022. Economic growth and an above-infla- troduced new risks, given Kazakhstan’s tion increase in minimum wages drove up Source: WDI, Macro Poverty Outlook, and official data. a/ Most recent value (2018), 2017 PPPs. close economic ties to Russia. real wages by 1.2 percent in Q2 (yoy). b/ WDI for School enrollment (2020); Life expectancy Revitalizing economic growth and pro- In August 2023, inflation slowed to 14 per- (2021). ductivity requires implementing structur- cent (yoy) from a peak of 21.3 percent in al reforms to transition from a state-dom- February, still well above the National inated development model to a more re- Bank of Kazakhstan (NBK) 4-6 percent tar- silient private sector-led model. This en- get range. Food price inflation decelerated tails fostering competition and limiting to 13.5 percent yoy, while services inflation the market dominance of SOEs, reinforc- was 13.9 percent yoy. ing the rule of law, and resolute anti- The Central Bank (NBK) cut its policy rate corruption action. Enabling private invest- by 250 basis points to 16.50 percent in Au- GDP is projected to grow by 4.5 ment and competition in non-oil growth gust for the first time since February 2022. percent in 2023 and subsequent sectors would need to be a key part of this The current account deficit reached USD years, aided by new oil production effort. Public investment in human capital 3.6 billion in H1, reversing the surplus and public goods should support growth of USD 6.6 billion in H1 2022, as oil coming on-stream. Inflation is ex- prospects and more balanced development prices subsided, leading to a fall in nom- pected to return to target. Geopoliti- across the country. inal USD export values of 10.6 percent cal tensions, with attendant risks of (yoy). FDI increased by 18.6 percent (yoy) oil market disruption and secondary in nominal USD value, with investments sanctions, present downside risks. primarily flowing into the mining sector. Recent developments Gross international reserves decreased slightly to 7 months of import cover at The economy grew by 5.1 percent in H1 the end of June 2023. The KZT depreciat- 2023, driven by exports and fiscal stimulus. ed slightly against the USD in H1 2023, The influx of an estimated 150,000 Russian as the RUB depreciated sharply. FIGURE 1 Kazakhstan / Real GDP growth and contributions FIGURE 2 Kazakhstan / Poverty rate, percent of population to real GDP growth living on less than $6.85 (PPP) per day Percent, percentage points Percent of population 6 70 60 4 actual 50 forecast 2 40 30 0 20 Consumption Investment -2 Net exports Real GDP Growth 10 -4 0 2020 2021 2022 2023e 2024f 2025f 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Sources: Statistical Office of Kazakhstan and World Bank staff estimates. Source: World Bank staff estimates. MPO 18 Oct 23 The consolidated budget deficit reached an inventory restocking and the impact of Poverty is expected to fall slightly to 14.6 estimated 3.0 percent of GDP in H1 2023, rising real interest rates. As a result, eco- percent (at USD 6.85/day) in 2023, as compared to a 1.1 percent surplus in H1 nomic growth is projected at 4.5 percent in growth picks up and inflation subsides. 2022. This deterioration is primarily due 2023 as a whole. Household spending will High prices of basic items will remain a to increased spending on education, social strengthen gradually as inflation and fi- key factor impacting the population, espe- assistance, housing, and utility infrastruc- nancial conditions ease. Investment, no- cially the poorest households. ture, driving expenditures up 2.9 percent tably in mining and manufacturing, is ex- This outlook is subject to significant risks. to 25.8 percent of GDP. Elevated interest pected to be strong. Growth is expected Stubborn inflation may lead the authori- rates pushed up debt service costs to 2.3 to remain at around the same levels in ties to sustain higher volumes of targeted percent of GDP in H1 2023 (compared to 2024 and 2025. support, increasing fiscal costs. Russia’s 1.9 percent in H1 2022). Inflation is projected to gradually decline invasion of Ukraine, escalating tensions in The banking sector has sufficient capital- to the target range by the end of 2025 due and near the Black Sea related to the inva- ization levels and the reported asset qual- to monetary policy effects and easing ex- sion, and western sanctions against Rus- ity is relatively good. As of March 2023, ternal pressures. sia, leave Kazakhstan vulnerable to dis- the ratio of capital to risk-weighted assets The current account is expected to post a ruptions in oil exports via the Russian- stood at 18.8 percent – compared to the moderate deficit in 2023 and in future controlled Caspian pipeline, which could minimum requirement of 12 percent. The years. With FDI concentrated in the oil and have serious economic and fiscal implica- share of non-performing loans has re- gas sectors, foreign companies will contin- tions for Kazakhstan. In addition, the risk mained stable at 3.4 percent (although the ue to repatriate profits, leading to a prima- of secondary sanctions on Kazakh com- share of overdue loans with less than 90 ry income deficit. panies and banks continues to be a con- days has been increasing slightly). Government expenditure as a share of cern, given the wide and deep econom- GDP is expected to be 2 percent higher in ic ties to neighboring Russia. Kazakhstan 2023, but the government plans to wind has become a transit point for the im- back this increase over the next two years. port of dual-use goods to Russia. If im- Outlook However, the fiscal deficit is projected to posed, sanctions could bring sizable eco- increase further as revenues are projected nomic costs, erode confidence and ham- Economic activity is expected to weaken to decrease rapidly driven by a reduction per FDI, and threaten the development slightly in H2 owing to a lessening of in lower oil-related taxes. agenda and growth. TABLE 2 Kazakhstan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -2.5 4.3 3.2 4.5 4.3 4.5 Private consumption -3.8 6.3 2.0 4.0 5.0 5.0 Government consumption 12.8 -2.4 9.1 4.1 1.0 0.5 Gross fixed capital investment -0.3 2.6 3.6 5.2 4.8 5.0 Exports, goods and services -12.1 2.3 10.2 6.1 3.9 6.7 Imports, goods and services -10.7 -0.3 11.6 4.1 4.1 5.0 Real GDP growth, at constant factor prices -2.5 4.1 2.9 4.6 4.4 4.5 Agriculture 5.6 -2.2 9.1 4.0 3.5 3.5 Industry -0.4 3.6 1.2 5.2 4.1 5.7 Services -4.5 5.0 3.5 4.2 4.6 3.8 Inflation (consumer price index) 7.5 8.5 20.3 11.6 10.2 6.8 Current account balance (% of GDP) -6.4 -1.3 3.5 -1.1 -0.6 -0.2 Net foreign direct investment inflow (% of GDP) -3.4 -1.0 -3.5 -3.2 -3.3 -3.7 Fiscal balance (% of GDP) -6.5 -4.3 0.4 -1.0 -1.3 -1.0 Revenues (% of GDP) 18.0 17.6 22.0 21.7 20.8 19.8 Debt (% of GDP) 24.9 23.7 22.5 22.9 23.2 24.9 Primary balance (% of GDP) -5.4 -3.1 1.8 0.2 0.6 0.7 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 25.6 16.7 15.7 14.6 13.3 12.2 GHG emissions growth (mtCO2e) -5.8 -13.0 -12.4 -9.2 -8.4 -8.9 Energy related GHG emissions (% of total) 76.0 73.5 71.2 69.4 67.4 64.9 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2018-HBS. Actual data: 2018. Nowcast: 2019-2022. Forecasts are from 2023 to 2025. b/ Projection using neutral distribution (2018) with pass-through = 0.7 (Low (0.7)) based on GDP per capita in constant LCU. MPO 19 Oct 23 in Europe could negatively affect growth. Increased tensions in Kosovo’s northern KOSOVO Key conditions and municipalities remain a risk. Migration, if not offset by higher labor force partici- challenges pation, could constrain potential growth. To accelerate poverty reduction, Kosovo Table 1 2022 Following a robust post-pandemic recov- needs to transition to a more competitive Population, million 1.8 ery growth moderated in 2022 amid high growth model that creates more and high- GDP, current US$ billion 9.4 inflation driven by increased international er quality jobs, supports firm growth, and GDP per capita, current US$ 5315.7 commodity prices brought on by the war is driven by increases in productivity. To a 34.2 Upper middle-income poverty rate ($6.85) in Ukraine. In 2023, amid a challenging make this transition and increase poten- a 29.0 global context, macroeconomic conditions tial growth, Kosovo should further prior- Gini index b 76.8 remained favorable although growth de- itize reforms to entrench macroeconom- Life expectancy at birth, years Source: WDI, Macro Poverty Outlook, and official data. celerated. Despite steady economic ic stability and governance, enhance hu- a/ Most recent value (2017), 2017 PPPs. progress since independence, there re- man capital, and address regulatory gaps b/ Most recent WDI value (2021). mains a large income gap between Kosovo to support private sector development. and the average European Union member state. Limited firm dynamism and access to finance hamper private sector develop- ment and employment creation. The coun- Recent developments try’s growth model relies on remittances Amid a challenging global context, to fuel consumption but has recently GDP growth reached 2.9 percent in H1 growth decelerated but remains posi- shifted to more export-driven growth. In- 2023, driven primarily by a robust export tive. GDP growth reached 2.9 percent vestment is predominantly construction performance (9.8 percent, y/y). At 2.4 and in H1 2023, supported by export per- focused with limited contributions to 1.6 percent (y/y) respectively, private con- formance and consumption. Inflation growth. Human capital outcomes lag peer sumption and gross capital formation countries and the labor market continues marked a more moderate contribution to decelerated, but core inflation remains to face severe challenges. Only one in growth. On the production front, services heightened. Over the medium term, three Kosovars is employed, 61.4 percent and agriculture were the key contributors growth is expected to reach around 4 are classified as inactive, and gender gaps to H1 GDP growth. After reaching its 2023 percent, close to Kosovo’s potential, persist. In 2022, the working age popula- peak in January, consumer inflation was tion shrank, likely due to migration. Pow- on a downward trend until July 2023 (2.4 but risks associated to Russia’s inva- er generation capacity is limited and re- percent y/y) and experienced a slight sion of Ukraine and to a growth slow- lies on outdated and unreliable lignite- uptick in August 2023 (3.2 percent y/y). down in Europe remain elevated. fired generation plants, posing significant During this period, significant contributors challenges to growth. Over the medium to inflation were furnishing, household term, growth is expected to reach around items and maintenance (7.2 percent y/y), 4 percent, close to Kosovo’s potential, but alcoholic beverages and tobacco (6.3 per- risks remain elevated. An escalation of cent y/y), and food and non-alcoholic bev- the war in Ukraine and weaker activity erages (5.5 percent y/y), while transport FIGURE 1 Kosovo / Consumer price inflation FIGURE 2 Kosovo / Actual and projected poverty rate and real GDP per capita Percent Poverty rate (%) Real GDP per capita (constant LCU) 15 80 6000 70 12 5000 HCPI Inflation (y/y) 60 Core Inflation (y/y) 4000 9 50 40 3000 6 30 2000 3 20 1000 10 0 0 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 -3 Jan'19 Jul'19 Jan'20 Jul'20 Jan'21 Jul'21 Jan'22 Jul'22 Jan'23 Jul'23 Upper middle-income pov. rate Real GDP pc Sources: Kosovo Statistics Agency and Central Bank of Kosovo. Source: World Bank. Notes: see Table 2. MPO 20 Oct 23 (-3.8 percent y/y) subtracted from the in- falling to 23.5 percent in 2023, measured flation rate. Labor market formalization is using the upper-middle-income poverty steadily growing, evident in the 2.3 per- Outlook line (US$6.85/person/day in 2017 PPP). cent increase in formal employment be- Still, the materialization of downside tween July 2022 and July 2023. Addition- Despite continued inflationary pressures, risks could lead to a stagnation of pover- ally, the number of registered job-seekers GDP growth is expected to reach 3.2 ty reduction. Inflation is expected to de- decreased by 53 percent between July 2022 percent in 2023, driven by positive ex- celerate, yet price levels will remain el- and 2023. The current account deficit ports performance and private consump- evated throughout 2023. The current ac- showed signs of improvement by June tion. Diaspora-driven service exports are count deficit is projected to narrow, with 2023 (13.4 percent), driven by the lower expected to remain positive throughout the expected decline in commodity prices value of imports coupled with a positive the year. Positive credit growth, stable and continued positive service exports. performance in service exports and bal- remittances inflows, higher public wage The fiscal deficit is expected to remain ance of secondary income. By June 2023, spending following the implementation below 1 percent of GDP in 2023, driven the trade deficit decreased slightly (-4.6 of the new Law on Public Wages, and by positive tax revenue performance percent, y/y), with nominal merchandise elevated levels of public transfers, will and lower-than-budgeted capital expen- exports and imports dropping by 8.1 per- support consumption growth. The medi- ditures. Over the medium term, public cent and 5.2 percent (y/y), respectively. um-term outlook remains positive, with debt is projected to remain below 20 During January-August 2023, tax revenues growth expected to accelerate towards 4 percent of GDP. Closing the income gap grew by 12 percent while overall revenues percent, bringing the level of economic with the European Union requires an increased by 15 percent. Public and pub- activity closer to Kosovo’s potential. The acceleration in the implementation of licly guaranteed debt (PPG) decreased to contribution of investment to growth is structural reforms in energy, education, 17.3 percent in June 2023, from close to expected to pick up in 2024-2025, sup- social protection, and healthcare sectors. 20 percent in 2022. The financial sector re- ported by the implementation of the In addition, elevated global volatility re- mains robust. In July 2023, the annual Energy Strategy. Continued uncertainties quires authorities to continue preserv- change in loans reached 14 percent. Bank related to the war in Ukraine, the slow- ing fiscal buffers while ensuring spend- capital buffers and asset quality also re- down in Europe, and the domestic politi- ing is balanced between promoting eco- main adequate, with non-performing cal context entail significant risks. Pover- nomic growth and current expenditures, loans remaining stable at 2 percent. ty is projected to continue its decline, including transfers. TABLE 2 Kosovo / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -5.3 10.7 3.5 3.2 3.9 4.0 Private consumption 2.5 7.3 4.0 2.0 3.6 4.2 Government consumption 2.1 9.0 -1.5 4.9 2.7 -1.3 Gross fixed capital investment -7.6 13.0 -6.1 1.2 4.2 4.3 Exports, goods and services -29.1 76.7 17.2 9.8 5.5 5.5 Imports, goods and services -6.0 31.4 4.9 4.6 4.2 4.2 Real GDP growth, at constant factor prices -3.6 7.6 3.3 3.0 3.9 4.0 Agriculture -5.8 -2.5 2.3 1.8 2.3 2.5 Industry -1.0 7.8 1.9 2.0 3.5 4.0 Services -4.8 9.4 4.4 3.9 4.4 4.3 Inflation (consumer price index) 0.2 3.4 11.6 4.8 3.0 2.5 Current account balance (% of GDP) -7.0 -8.7 -10.5 -6.6 -6.0 -5.5 Net foreign direct investment inflow (% of GDP) 4.2 4.0 6.7 6.7 6.7 6.8 Fiscal balance (% of GDP) -7.6 -1.3 -0.5 -0.6 -2.0 -1.5 Revenues (% of GDP) 25.4 27.4 27.7 28.8 28.3 28.4 Debt (% of GDP) 22.0 21.2 19.6 18.5 19.3 19.9 Primary balance (% of GDP) -7.2 -0.9 -0.1 -0.3 -1.7 -1.1 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 32.4 27.0 25.0 23.5 22.2 20.4 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2017-HBS. Actual data: 2017. Nowcast: 2018-2022. Forecasts are from 2023 to 2025. b/ Projection using neutral distribution (2017) with pass-through = 0.7 (Low (0.7)) based on GDP per capita in constant LCU. MPO 21 Oct 23 KYRGYZ Key conditions and Recent developments challenges REPUBLIC Economic growth moderated from 6.3 per- cent in 2022 to 3.9 percent in H1 2023 (yoy), Economic growth has been volatile in as agricultural growth halved and gold the past decade due to overdependency production fell, following a build-up of Table 1 2022 on gold production and remittances, and gold stocks in 2022. Net remittance inflows Population, million 6.8 because of political instability. On av- in USD fell by 24 percent (yoy), contribut- GDP, current US$ billion 11.5 erage, over the last decade, gold pro- ing to an estimated 0.3 percent contraction GDP per capita, current US$ 1697.5 duction and remittances accounted for in consumption. International poverty rate ($2.15) a 1.3 10 percent and 25 percent of GDP, re- CAD is estimated to have remained abnor- a 18.7 spectively, while development assistance mally high in Q1 2023, with official statis- Lower middle-income poverty rate ($3.65) a amounted to approximately 5 percent of tics recording a 45.4 percent of GDP deficit. Upper middle-income poverty rate ($6.85) 67.6 a GDP. High prices for imported food and Such a large deficit, as in 2022, is associated Gini index 29.0 fuel, and utility tariff adjustments kept with elevated errors and omissions (about b 99.2 School enrollment, primary (% gross) domestic inflation in double digits for 40 percent of GDP) indicating these figures b 71.9 Life expectancy at birth, years the last four years, adversely affecting are unconfirmed. Unrecorded (re-)exports Total GHG emissions (mtCO2e) 15.5 poor households. and/or capital inflows may explain these Source: WDI, Macro Poverty Outlook, and official data. Although political stability was restored numbers. Exports in USD are estimated to a/ Most recent value (2020), 2017 PPPs. after the upheavals of 2020, public trust have increased by 15.6 percent (yoy) due to b/ Most recent WDI value (2021). in government remains weak and frequent the resumption of gold exports, while im- personnel changes within government ports grew by 27.4 percent (yoy), reflecting continue to hinder decision-making. Rus- increased imports of food, fuel, machinery, sia’s invasion of Ukraine and subsequent equipment, textile and consumer goods. international sanctions triggered a decline The deterioration in the trade balance and Growth is projected at 3.5 percent in in net remittances and increased uncer- the decline in remittance inflows have put 2023 due to a slowdown in agriculture tainty and risks to economic activity. pressure on the exchange rate, weaken- Growth is constrained by the lack of a ing the KGS against the USD by 1.8 per- and a contraction in manufacturing. In- competitive private sector. Fostering pri- cent in H1 2023. The National Bank of the flation remains high and the external po- vate sector development will require Kyrgyz Republic (NBKR) sold more than sition is weak. Fiscal outcomes were fa- boosting competition and facilitating in- USD 450 million in foreign reserves in a vorable in H1 2023 due to improved rev- vestment, notably by reducing the bu- bid to avoid sharp fluctuations in the ex- reaucratic burden (particularly related to change rate. As a result, reserves fell by enue performance, but driven by higher licensing, inspection, and taxation USD 359 million to 3.6 months of import spending, the fiscal deficit is expected to regimes), strengthening the rule of law and cover by June 2023, down from 4 months increase slightly. protecting investor rights, improving dig- at the end of 2022. italization, attracting FDI, and facilitating Inflation remained high, easing slightly to cross-border trade. 10.5 percent by June 2023 as fuel and food FIGURE 1 Kyrgyz Republic / Headline, food and fuel FIGURE 2 Kyrgyz Republic / GDP growth and poverty rate inflation Percent Percent of population Percent 80 40 15 35 Headline 60 10 Food 30 Fuel 40 25 5 20 20 0 15 10 0 -5 GDP growth (rhs) 5 USD 3.65/day PPP (lhs) -20 0 -10 Jan'19 Jul'19 Jan'20 Jul'20 Jan'21 Jul'21 Jan'22 Jul'22 Jan'23 2007 2009 2011 2013 2015 2017 2019 2021 2023 f 2025 f Source: Kyrgyz authorities. Sources: Kyrgyz authorities and World Bank staff. MPO 22 Oct 23 prices moderated. Recent tariff increases for under the “Social Contract” program drive The fiscal deficit is projected to increase utilities, including electricity and water, poverty reduction, despite a lower volume slightly to 1.6 percent of GDP in 2023 as were the largest contributors to inflation. of remittances and decelerating growth. the full year effect of increases in public The NBKR kept its policy rate unchanged sector wages and social benefits will limit at 13 percent during H1 2023 after a 500 ba- the decline in overall spending relative to sis point increase in 2022. the expected decline in non-tax revenues The budget surplus strengthened in H1 Outlook and grants as a share of GDP. The deficit 2023 to 2.2 percent of GDP from 1.2 percent is expected to widen to 2.6 percent of GDP in H1 2022 thanks to strong tax perfor- GDP growth is expected to moderate to in 2024, reflecting higher capital spending, mance, particularly VAT on imported 3.5 percent in 2023 as gold production and to narrow to 2.1 percent in 2025 as the goods, which more than compensated for contracts and the agriculture sector expe- authorities plan to consolidate current and the increase in public wages, social trans- riences a slowdown. On the demand side, capital spending. fers and pensions from 2022, and higher consumption and investment are expect- In 2023, high food prices, job insecurity, and spending on public infrastructure. Strong ed to support growth, while net exports declining remittances will continue to be the fiscal outcomes contributed to a reduction are projected to make a negative contri- most significant concerns for the welfare of in public debt to an estimated 48.1 percent bution. GDP is expected to converge to the population. Poverty levels are expected of GDP as of mid-2023, down from 49.2 a potential growth rate of only 4 percent to decline by 0.6 percent to 14.9 percent, re- percent in December 2022. over the medium term in the absence of flecting the positive effect of increased social Banks remained well capitalized with a structural reforms. protection programs and wage increases ex- capital adequacy ratio of 23.5 percent as Inflation is expected to remain elevated at ceeding the negative impact of falling remit- of the end of June 2023, nearly double the 12 percent in 2023, driven by rising tariffs tances and slower growth. minimum regulatory requirement of 12 for electricity and other utilities. Assuming Risks to this outlook remain significant. A percent. The liquidity level was 83.9 per- the NBKR maintains its monetary policy, deterioration of the Russian economy may cent, well above the 45 percent minimum inflation is projected to moderate gradual- lead to added decline in remittances. requirement. The quality of loans im- ly to 7 percent by the end of 2025. Stricter application of the existing interna- proved slightly, with the non-performing The current account deficit is projected to tional sanctions on Russia, or imposition of loan ratio declining to 10.9 percent from be about 29 percent of GDP in 2023 and secondary sanctions against Kyrgyz-based 12.8 percent at the end of 2022. to narrow in 2024–2025 as external de- companies might significantly impact The poverty rate (at USD 3.65/day) is ex- mand for non-gold goods improves and trade and domestic economic activity. The pected to decline from 17.2 percent in 2021 export of services increases. The deficit is domestic political situation remains sensi- to 15.5 percent in 2022. Increase in public expected to be financed by inward FDI tive to the upcoming increase in electricity and private wages, and social assistance and external borrowing. and other utility tariffs. TABLE 2 Kyrgyz Republic / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -7.1 5.5 6.3 3.5 4.0 4.0 Private consumption -8.3 20.9 6.4 1.3 3.4 3.9 Government consumption 0.9 0.4 1.6 1.4 0.4 0.4 Gross fixed capital investment -16.2 8.2 22.2 17.8 17.4 15.8 Exports, goods and services -27.3 16.4 -7.3 27.0 15.5 16.4 Imports, goods and services -28.0 39.3 62.1 13.3 13.5 14.0 Real GDP growth, at constant factor prices -7.1 5.5 6.3 3.5 4.0 4.0 Agriculture 0.9 -4.5 7.3 2.0 2.5 2.5 Industry -6.5 6.5 12.2 3.8 5.3 6.0 Services -13.7 14.4 3.0 4.7 4.5 4.2 Inflation (consumer price index) 6.3 11.9 13.9 12.0 10.0 7.0 Current account balance (% of GDP) 4.5 -8.0 -47.0 -29.1 -10.4 -10.6 Net foreign direct investment inflow (% of GDP) -7.0 6.1 6.5 3.9 4.0 3.9 Fiscal balance (% of GDP) -4.0 -0.3 -1.4 -1.6 -2.6 -2.1 Revenues (% of GDP) 29.0 31.8 36.2 34.5 34.1 33.4 Debt (% of GDP) 63.7 55.7 49.2 48.9 48.2 47.2 Primary balance (% of GDP) -2.8 1.2 -0.1 -0.4 -1.6 -1.2 a,b International poverty rate ($2.15 in 2017 PPP) 1.3 1.4 1.6 1.6 1.7 1.8 a,b Lower middle-income poverty rate ($3.65 in 2017 PPP) 18.7 17.2 15.5 14.9 14.1 13.4 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 67.6 66.0 64.0 63.3 62.3 61.3 GHG emissions growth (mtCO2e) -1.9 6.8 8.4 6.6 4.5 4.2 Energy related GHG emissions (% of total) 70.7 72.4 73.7 74.5 74.7 74.6 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2014-KIHS, 2019-KIHS, and 2020-KIHS. Actual data: 2020. Nowcast: 2021-2022. Forecasts are from 2023 to 2025. b/ Projection using average elasticity (2014-2019) with pass-through = 0.7 based on GDP per capita in constant LCU. MPO 23 Oct 23 further diminish agricultural yields, am- plifying inflationary pressures and damp- MOLDOVA Key conditions and ening economic activity. Against this backdrop, the reduction in poverty ob- challenges served in 2021 is likely to have been short-lived, as Moldova grapples with the Table 1 2022 Moldova has been severely affected by the repercussions of Russia's invasion of Population, million 2.5 spillover effects of Russia's invasion of Ukraine, affecting vulnerable Moldovans GDP, current US$ billion 14.5 Ukraine, which has led to energy and due to high food and fuel prices. In the GDP per capita, current US$ 5714.4 refugee crises. Despite concerted efforts to current geo-economic environment, a 0.0 International poverty rate ($2.15) mitigate these crises through robust fiscal Moldova’s long-term outlook relies on a 0.3 measures and swift monetary policies, pri- aligning its reform agenda with EU acces- Lower middle-income poverty rate ($3.65) a 14.4 vate consumption was stifled by dwin- sion and the pace of reforms aimed at en- Upper middle-income poverty rate ($6.85) Gini index a 25.7 dling household incomes and uncertain fi- hancing productivity. These reforms en- School enrollment, primary (% gross) b 107.8 nancial conditions. As a result, the econo- compass bolstering competition and pub- b 68.8 my plunged into recession in 2022. lic sector asset management, improving Life expectancy at birth, years The medium-term outlook will be influ- and digitalizing the business climate, im- Total GHG emissions (mtCO2e) 14.2 enced by the government's ability to proving public finance efficiencies, and a Source: WDI, Macro Poverty Outlook, and official data. counter the erosion of households' pur- climate-resilient economy. a/ Most recent value (2021), 2017 PPPs. b/ Most recent WDI value (2021). chasing power while maintaining momen- tum in the reform program. Key challenges include sluggish productivity growth, structural and governance deficiencies, a Recent developments sizable state-owned enterprise presence, The Moldovan economy has endured se- restricted competition, an imbalanced busi- In the first half of 2023, GDP contracted by vere repercussions stemming from Rus- ness environment, and tax distortions. 2.3 percent. This was driven by a 4.7-per- sia's invasion of Ukraine and a surge in Heightened risks of extreme weather events centage-point dip in private consumption, inflation. By the first quarter of 2023, di- and energy shocks remain prominent. attributed to elevated prices and dimin- Persistent inequality has hindered access ished purchasing capacity. Restocking ef- minishing purchasing power led to eco- to public services and dampened re- forts yielded a positive impact (1pp), and nomic contraction, nevertheless, inflation silience and intergenerational mobility. investments experienced a reduction (-0.8 is gradually abating. The near-term out- Furthermore, the full impact of Russia's pp), possibly due to a lenient monetary ap- look hinges on the unfolding invasion of invasion and energy supply on the proach and heightened risks. Net exports Ukraine, commodity-energy prices, and Moldovan economy in 2023 remains un- added 2.3 percentage points as imports certain. The potential increase of energy were muted in line with depressed domes- weather conditions. In contrast, the costs in the latter half of 2023 might ne- tic demand. On the supply side, the ener- longer-term outlook relies on realizing cessitate a reallocation of funds or ad- gy and trade sectors emerged as primary unfinished structural reforms and ditional financing to mitigate the impact growth inhibitors, sapping 2.5 percentage Moldova's pace toward EU accession. on households. Moreover, elevated input points. Amid a subdued regional climate, costs and arid weather conditions may manufacturing fell 1.3 percentage points, FIGURE 1 Moldova / Actual and projected macroeconomic FIGURE 2 Moldova / Actual and projected poverty rates and indicators real private consumption per capita Percent of GDP Poverty rate (%) Real private consumption per capita (constant LCU) 15 45 60000 10 40 50000 35 5 30 40000 0 25 30000 20 -5 15 20000 -10 10 10000 5 Real GDP, % change -15 0 0 Current account balance, % GDP Fiscal deficit 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 -20 International poverty rate Lower middle-income pov. rate 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Upper middle-income pov. rate Real priv. cons. pc Source: World Bank, based on national statistics. Source: World Bank. Notes: see Table 2. MPO 24 Oct 23 while IT and communications contributed power, employment was up 2.2 percent in constrained by heightened input expenses. 0.5 percentage points. Agriculture strug- 2022 driven by a 4.5 percent increase in the Nevertheless, the service sector will spear- gled with last year's drought and input employment of women. Poverty, as mea- head growth, with a strong contribution costs (-0.1pp). sured by the international US$6.85 2017 from the transport sector, mainly due to Moldova's external position improved, but PPP per day poverty line is forecasted to Ukraine freight. elevated energy costs and decreased ex- have increased from 14.4 percent in 2021 to Assuming moderated import prices and ports pose vulnerabilities. Strengthened 16.2 percent in 2022. controlled second-round effects, inflation by robust service exports (transport and will gradually recede towards the Central IT) and positive developments in primary Bank target of 5 percent by end-2023. The and secondary accounts (remittances in- external stance is expected to be chal- creased by 11 percent), the current ac- Outlook lenged by high import prices and sub- count deficit diminished by 2.6 percent- dued capital inflows driven by height- age points, reaching 16.1 percent of GDP. GDP growth is predicted to gradually re- ened uncertainty. In the medium term, re- Financing primarily relied on cash and bound to 1.8 percent in 2023, fully recov- mittance inflows will stabilize as migrants deposits. External debt, however, escalat- ering in 2024. Amidst strong base effects, seek alternative destinations, helping to ed to 66.6 percent of GDP. growth will resume later this year due to address the structural deficit of the cur- The inflation rate is on a descending trajec- strong remittances, fiscal stimulus, and rent account. The current account deficit tory, reaching 18.7 percent between Janu- better monetary conditions supporting is anticipated to exceed pre-COVID-19 ary- July. In the first half of 2023, the fiscal consumption and investments. On the pro- levels and remain reliant on external fi- deficit expanded to 4.7 percent of GDP, duction side, agriculture is expected to nancing. The expected economic slow- propelled by a 20 percent rise in expen- strongly rebound from last year's drought. down will lower revenues, resulting in a ditures driven by interest rates and social In medium term, growth depends on in- 5.4 percent fiscal deficit in 2023. In the spending. Revenues lagged (13 percent), as flation dynamics, energy security, and the medium-term high deficits are expected economic activity is subdued. Public debt ongoing Russian invasion of Ukraine. Gov- to persist due to infrastructure needs. De- increased by 2 percentage points, totaling ernmental measures, like higher pensions, spite the challenging outlook, public debt 32.5 percent of GDP. social protection, and wages throughout remains sustainable. Due to record high prices and reduced 2023, are anticipated to alleviate the impact Poverty, as measured by the US$6.85 2017 purchasing power, average household real on households. Consumer credit remains PPP poverty line, is forecasted to decrease income declined by 6 percent during 2022, subdued, and the proximity to Ukraine from 16.2 percent in 2022 to 13.9 percent in with consumption down 10 percent in real poses challenges to both domestic and for- 2023. With the anticipated economic recov- terms among households in the first quin- eign investments, as well as net exports. In ery, poverty is projected to decline further tile. Despite the decline in purchasing terms of production, industry will remain to 11.1 percent in 2024. TABLE 2 Moldova / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -7.4 13.9 -5.0 1.8 4.2 4.1 Private consumption -8.3 15.5 -6.3 3.0 4.1 4.2 Government consumption 3.1 3.8 5.1 1.3 2.1 0.0 Gross fixed capital investment 0.4 1.7 -6.8 1.9 5.1 5.3 Exports, goods and services -9.6 17.5 26.7 3.3 4.6 5.1 Imports, goods and services -5.0 19.2 15.9 3.6 3.9 4.1 Real GDP growth, at constant factor prices -7.6 15.6 -4.9 1.9 4.2 4.0 Agriculture -26.4 18.7 -21.2 4.6 3.3 3.5 Industry -4.3 5.6 -8.6 1.2 4.6 5.1 Services -4.8 19.3 -0.7 1.8 4.2 3.7 Inflation (consumer price index) 4.1 5.1 28.7 14.1 6.2 4.9 Current account balance (% of GDP) -7.7 -12.4 -15.7 -11.7 -10.4 -9.4 Net foreign direct investment inflow (% of GDP) 1.3 1.6 0.8 1.4 2.6 2.4 Fiscal balance (% of GDP) -5.3 -1.9 -3.2 -5.4 -4.4 -3.5 Revenues (% of GDP) 31.4 32.0 33.4 32.1 31.8 32.5 Debt (% of GDP) 36.4 33.8 35.9 34.9 36.8 35.7 Primary balance (% of GDP) -4.5 -1.1 -2.0 -4.6 -3.6 -2.9 a,b International poverty rate ($2.15 in 2017 PPP) 0.0 0.0 0.0 0.0 0.0 0.0 a,b Lower middle-income poverty rate ($3.65 in 2017 PPP) 0.5 0.3 0.4 0.3 0.3 0.2 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 15.4 14.4 16.2 13.9 11.1 9.2 GHG emissions growth (mtCO2e) -2.4 10.8 -3.0 3.7 3.6 2.6 Energy related GHG emissions (% of total) 64.6 66.9 67.4 65.6 65.3 65.6 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2021-HBS. Actual data: 2021. Nowcast: 2022. Forecasts are from 2023 to 2025. b/ Projection using neutral distribution (2021) with pass-through = 0.87 (Med (0.87)) based on private consumption per capita in constant LCU. MPO 25 Oct 23 political party, Europe Now, won the most seats in the snap elections that took MONTENEGRO Key conditions and place in June 2023 and is tasked with forming a government. A political con- challenges sensus focused on structural reforms, the rule of law, and fiscal prudence will be Table 1 2022 Montenegro’s small, open, and service- critical to safeguard and improve Mon- Population, million 0.6 based economy is highly vulnerable to ex- tenegro’s development prospects in a GDP, current US$ billion 6.2 ternal shocks, while the country’s strate- highly uncertain external environment. GDP per capita, current US$ 10093.4 gies and policies have not always been a 2.9 International poverty rate ($2.15) conducive to enhancing resilience. After a a 6.4 deep recession of -15.3 percent in 2020, the Lower middle-income poverty rate ($3.65) Upper middle-income poverty rate ($6.85) a 18.5 economy recovered strongly in 2021 and Recent developments Gini index a 36.9 2022, averaging 13 and 6.4 percent growth, School enrollment, primary (% gross) b 102.3 respectively. However, the unfavorable The economy made a very strong start in b 73.8 global environment, coupled with domestic 2023, as GDP expanded by 6.6 percent in Life expectancy at birth, years challenges is weighing on growth prospects. the first half of 2023, driven by personal Total GHG emissions (mtCO2e) 3.8 Given euroization, Montenegro relies on consumption, underpinned by an increase Source: WDI, Macro Poverty Outlook, and official data. fiscal policy and structural reforms to in public sector wages, employment gains, a/ Most recent value (2018), 2017 PPPs. b/ Most recent WDI value (2021). maintain macroeconomic stability. How- and household borrowing, but also a very ever, the debt-financed highway, the pan- strong tourism season. In the first seven demic, and a lack of commitment to fiscal months of 2023, real retail trade grew by Over the past two years, Montenegro targets have contributed to increased fis- 10.4 percent y/y, while the number of cal vulnerabilities and debt. Despite a sig- tourist overnight stays outpaced the levels defied external headwinds, as GDP nificant decline in public debt to an es- observed in the same period of 2019 by growth remained solid, reaching 6.4 timated 62.1 percent of GDP in 2023, it 29.1 percent. In the same period, industrial percent in 2022 and prospects remain nevertheless presents a vulnerability be- production increased by 5.4 percent, dri- good. However, multiple challenges cause it is subject to significant financing ven by stronger electricity production and rollover risk in the present environ- amid favorable hydrological conditions, loom and require attention, especially ment. Considering large Eurobond repay- and despite falling manufacturing. How- on the fiscal front, as the country ap- ments in 2025 and 2027 and high borrow- ever, the value of construction works con- proaches large debt repayments during ing costs, Montenegro must demonstrate tracted by 11.8 percent in H1 2023, as in- 2024-2027 in an environment of high fiscal prudence by consolidating its pub- vestments remain subdued. financing costs. Montenegro requires lic finance to narrow the fiscal deficit and Strong employment gains in 2022 contin- further reduce public debt. ued into 2023. Administrative data show prudent fiscal and debt management Since a major political change in 2020, record high employment in July and a policies to overcome these challenges Montenegro’s political and institutional record low administrative unemployment and structural reforms to safeguard and landscape has been complex and fragile, rate of 13.1 percent. improve development prospects. resulting in a vote of no-confidence in While annual inflation moderated to 10.1 two governments in one year. The new percent y/y over the first eight months, FIGURE 1 Montenegro / Real GDP growth and contributions FIGURE 2 Montenegro / Actual and projected poverty rates to real GDP growth and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 20 30 6000 15 25 5000 10 5 20 4000 0 15 3000 -5 10 2000 -10 -15 5 1000 -20 2018 2019 2020 2021 2022e 2023f 2024f 2025f 0 0 Final consumption Gross fixed capital formation 2012 2014 2016 2018 2020 2022 2024 Change in inventories Net exports International poverty rate Lower middle-income pov. rate GDP growth Upper middle-income pov. rate Real GDP pc Sources: MONSTAT and World Bank. Source: World Bank. Notes: see Table 2. MPO 26 Oct 23 monthly inflation remains elevated, led by was more moderate, as capital spending estimated to bring the CAD to 10.9 percent food prices. Despite high inflation, real declined by 54.6 percent y/y, despite an in- of GDP by 2025. wages remained flat. Consequently, pover- crease in public sector wages and social On the fiscal side, while one-off revenues ty (income below $6.85/day in 2017 PPP) is spending. Consequently, government de- will result in a lower-than-planned fiscal projected to decline to 16 percent in 2023. posits increased to 3.9 percent of GDP deficit of 2 percent of GDP in 2023, the By August, banking sector lending and de- from 1.9 percent of GDP in December 2022. fiscal deficit is expected to remain ele- posits increased by 8.9 and 13.6 percent By end-June, public debt declined to an es- vated at 3.9 and 3.6 percent of GDP in y/y respectively. In June, the average cap- timated 61.3 percent of GDP. 2024 and 2025, respectively. Public debt ital adequacy ratio was at a healthy 20.1 is expected to increase from 62.1 per- percent, while non-performing loans de- cent of GDP in 2023 to 66.1 percent of clined to 6.1 percent from 6.9 percent of to- GDP in 2024. Fiscal consolidation mea- tal loans a year earlier. Outlook sures would, however, result in a better On the external side, the current account fiscal performance. deficit (CAD) narrowed slightly in H1, as Montenegro’s growth is expected to re- Given the tightening of global financial export growth of 26.7 percent y/y outpaced main strong at 4.8 percent in 2023, under- conditions and Montenegro’s sizable fi- import growth of 15.1 percent. Net income pinned by private consumption and ser- nancing needs over 2023-25, cautious fis- accounts increased marginally, despite a vice exports, while investments remain cal management is needed, particularly decline in net remittances of 5.7 percent y/ subdued. However, the slowing of the with respect to expenditures, including y. Net FDI fell by 26.4 percent y/y, financ- global economy is weighing down on implementing the pension and public ad- ing just half of the CAD, the remainder be- Montenegro’s outlook. Over 2024-25, de- ministration reforms. ing financed from reserves. clining private consumption growth is ex- The outlook is surrounded with down- On the fiscal side, by July, the central gov- pected to result in a slower average growth side risks. High geopolitical uncertainties ernment achieved a fiscal surplus of 2.3 of 3.2 percent. Tourism is likely to surpass may weaken growth prospects in Mon- percent of GDP, due to strong revenues its 2019 level in 2023, and continue grow- tenegro’s major trading partners. Mone- and capital budget under-execution. The ing, although deteriorating growth tary tightening is rapidly increasing the surge in revenues of 24.5 percent y/y was prospects in the EU and the region may cost of external financing. Political chal- supported by one-off payments of 1.8 per- adversely affect tourism. Poverty is pro- lenges are major domestic risks. The cent of GDP for the economic citizenship jected to decline by 0.6 percentage points severity of challenges ahead, however, re- program, a hedging fee, and grants, but from 2023 to 15.4 percent in 2025. Expected quires strong political and economic also strong CIT and contributions collec- service export growth and moderation of stewardship through carefully designed tion. Expenditure growth of 12.9 percent imports due to slowing consumption are and well-costed policies. TABLE 2 Montenegro / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -15.3 13.0 6.4 4.8 3.2 3.1 Private consumption -4.6 4.0 9.7 6.3 3.3 3.5 Government consumption 0.8 0.5 1.5 2.8 0.6 0.4 Gross fixed capital investment -12.0 -12.3 0.1 0.0 2.6 2.8 Exports, goods and services -47.6 81.9 22.7 11.1 4.9 4.3 Imports, goods and services -20.1 13.7 21.3 5.9 3.9 3.8 Real GDP growth, at constant factor prices -14.4 13.2 6.3 4.8 3.1 3.1 Agriculture 1.1 -0.5 -2.9 -0.2 0.1 0.1 Industry -12.0 0.3 -8.1 1.6 2.0 2.4 Services -16.9 19.9 11.7 6.1 3.6 3.5 Inflation (consumer price index) -0.3 2.4 13.0 8.4 4.0 2.8 Current account balance (% of GDP) -26.1 -9.2 -12.9 -11.5 -11.3 -10.9 Net foreign direct investment inflow (% of GDP) 11.2 11.7 13.2 8.0 8.1 7.9 Fiscal balance (% of GDP) -11.0 -1.9 -5.1 -2.0 -3.9 -3.6 Revenues (% of GDP) 44.4 44.0 38.6 40.5 39.0 39.1 Debt (% of GDP) 105.3 84.0 69.3 62.1 66.1 62.3 Primary balance (% of GDP) -8.3 0.5 -3.4 -0.3 -1.8 -1.0 a,b International poverty rate ($2.15 in 2017 PPP) 3.1 2.9 2.4 2.3 2.2 2.1 a,b Lower middle-income poverty rate ($3.65 in 2017 PPP) 7.6 6.4 5.8 5.5 5.3 5.1 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 21.1 18.3 17.2 16.0 15.4 14.9 GHG emissions growth (mtCO2e) -9.2 5.2 1.9 1.8 1.2 1.6 Energy related GHG emissions (% of total) 68.8 71.1 72.3 71.7 72.8 73.8 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2019-SILC-C. Actual data: 2018. Nowcast: 2019-2022. Forecasts are from 2023 to 2025. b/ Projection using neutral distribution (2018) with pass-through = 0.87 (Med (0.87)) based on GDP per capita in constant LCU. MPO 27 Oct 23 main policy rate in August 2023 reached 6.15 percent. Credit growth slowed largely NORTH Key conditions and due to reduced borrowing by firms as fi- nancial conditions tightened. challenges MACEDONIA Overlapping crises have scarred the growth potential and further slowed con- Despite setbacks stemming from the ener- vergence with the EU. Boosting productiv- gy crisis and Russia’s invasion of Ukraine, ity, advancing on inclusion, and enhanc- Table 1 2022 growth in early 2023 proved to be more ing fiscal and environmental sustainability a 2.1 resilient than expected. After surpassing a are critical for long-term steady growth in Population, million GDP, current US$ billion 13.6 two-decade peak in 2022, inflation the context of pronounced and widespread GDP per capita, current US$ a 6597.7 dropped to single digits in June 2023, but uncertainty. Rebuilding resilience to cli- Upper middle-income poverty rate ($6.85) b 19.1 core inflation remained elevated. Poverty mate change shocks and decarbonizing to b 33.6 reduction has resumed in 2023 albeit at maintain international competitiveness Gini index c a slower pace, with the poverty rate pro- given the EU CBAM implementation. School enrollment, primary (% gross) 95.5 c jected to fall by less than 1 percentage Life expectancy at birth, years 74.5 point given the disproportionate erosion Total GHG emissions (mtCO2e) 10.2 of real incomes of the relatively less well- Source: WDI, Macro Poverty Outlook, and official data. off and an anemic labor market. Namely, Recent developments a/ Most recent WDI value (2020) for population. b/ Most recent value (2019), 2017 PPPs. the employment rate (15+) remained at c/ WDI for School enrollment (2020); Life expectancy just over 47 percent during 2021-22, and Output increased by 1.6 percent in H2 (2021). the reduction in the unemployment rate 2023, led by decelerating consumption and from 15.4 percent in 2021 to 14.4 in 2022 exports, as imports and stockpiling pres- came on the back of the increase in inac- sures subsided. Growth was driven by ser- The economic growth is decelerating as tivity of the older age cohort, rather than vices and industry which is slowing due to inflationary pressures remain persistent, transitions into employment. lower external demand, while agriculture Fiscal policy continues to be challenging. and construction remained negative. and public finances are stretched amidst The additional fiscal cost of the public sec- The Q2 2023 labor market data, lacking monetary tightening and rising borrow- tor wage increase negotiated in July 2023 is comparability due to census and ing costs. Poverty reduction resumed estimated at around 0.7-0.8 percent of GDP methodological changes with previous slowly. Fiscal consolidation needs to be a year. Furthermore, the construction costs years, reveal an unemployment rate of prioritized given new spending commit- for a highway to Albania worth 10 percent 13.1 percent, with the youth unemploy- of GDP will need to be absorbed in the ment rate declining to 25.6 percent. The ments for highways and public sector budget, adding to the need for fiscal con- labor force participation rate (ages 15+) wages. Boosting growth calls for struc- solidation. While public debt slightly de- stood at a low of 52.4 percent (for tural reforms that have been delayed clined, it is projected to rise over the medi- women at 42.5 percent), while the em- amidst a parliamentary impasse. The out- um term, while expenditure arrears re- ployment rate remained stagnant at 45.5 main consistently above 3 percent of GDP. percent. Wage growth surpassed infla- look over the forecast horizon is positive, Monetary tightening continued to confront tion as of April 2023 after the minimum but downside risks prevail. rising inflationary expectations, with the wage correction. Wages will increase FIGURE 1 North Macedonia / Fiscal performance FIGURE 2 North Macedonia / Actual and projected poverty rate and real GDP per capita Percent of GDP Percent of GDP Poverty rate (%) Real GDP per capita (constant LCU) 70 -1 45 300000 60 40 250000 -3 35 50 30 200000 40 -5 25 30 150000 20 20 -7 15 100000 10 10 50000 0 -9 5 0 0 2009 2011 2013 2015 2017 2019 2021 2023 2025 Guarantees (lhs) Foreign debt (lhs) Upper middle-income pov. rate Real GDP pc Domestic debt (lhs) Fiscal deficit with PESR (rhs) Sources: North Macedonia State Statistics Office, Ministry of Finance, and World Source: World Bank. Notes: see Table 2. Bank staff calculations. Note: Fiscal deficit with PESR included. MPO 28 Oct 23 further as the Government signed a new At the same time, the NPL ratio declined recovered consumption and exports, be- collective agreement for the public sec- to 2.8 percent. fore slowing towards the potential growth tor that includes a 10-percent wage rise Headline inflation fell to 8.4 percent in Ju- trend thereafter. Annual inflation is pro- from September 2023 and a revision to ly 2023, but core inflation remains sticky jected to remain elevated at 9.1 percent in the wage-setting methodology from 2024 at above 8 percent. The pegged exchange 2023 and fall to the long-term average of linking the public sector wage to the rate has remained stable and FX reserves 2 percent in 2025. The baseline scenario is national gross wage; an annual leave have recovered from losses incurred built on the assumption that the impact of bonus at 30 percent of the average net largely at the start of the war in Ukraine, crises subsides over the forecast horizon. wage; as well as loyalty bonuses. The standing at more than 4 months of im- While underlying risks remain largely fiscal deficit (with the State Roads) will ports in June 2023. skewed to the downside and reflect the likely remain at 4.8 percent of GDP for outlook for the country’s main trading 2023 after the technical budget realloca- partners, moving ahead with EU accession tion to accommodate new spending com- negotiations may accelerate critical re- mitments. The central government deficit Outlook forms and unlock growth. However, reached 2.7 percent of GDP by June as heightened political uncertainty and a pro- revenue growth decelerated and spend- The medium-term outlook is positive, but longed parliamentary impasse due to lack ing increased led by investments and so- risks are tilted to the downside. Growth in of consensus for constitutional changes cial spending. Public debt to GDP stood 2023 is expected to increase modestly by and upcoming elections may delay reform at 59.1 percent of GDP in June 2023 and 1.8 percent, reflecting a slowdown in ex- implementation. Finally, policy slippages is expected to rise by 2025. ternal demand, and a persistent cost-of-liv- may risk fiscal sustainability and inflation Banking sector stability was preserved ing crisis, offset in part by the impact of the persistence in turn requiring further mon- with an increase in the capital adequacy highway construction. Growth is expect- etary tightening that can further restrict fi- ratio to 18 percent in Q1 2023 despite a ed to moderately accelerate in the medium nancing options and decelerate economic drop in the liquidity rate to 19.1 percent. term led by the rise in public investments, activity going forward. TABLE 2 North Macedonia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -4.7 3.9 2.1 1.8 2.5 2.9 Private consumption -3.4 7.8 3.1 4.2 1.5 2.4 Government consumption 9.7 -0.4 -2.6 0.3 0.2 0.2 Gross fixed capital investment -15.7 0.9 15.9 8.0 6.5 6.5 Exports, goods and services -10.9 11.7 13.4 6.0 5.5 5.0 Imports, goods and services -10.9 11.9 16.1 5.8 4.5 4.5 Real GDP growth, at constant factor prices -4.3 4.1 2.5 1.8 2.5 2.9 Agriculture 2.5 -5.2 2.0 2.0 2.5 1.8 Industry -6.9 -1.8 -4.3 2.1 3.4 3.0 Services -4.1 7.5 4.9 1.7 2.2 3.0 Inflation (consumer price index) 1.2 3.2 14.2 9.1 3.0 2.0 Current account balance (% of GDP) -2.9 -3.1 -6.0 -3.7 -3.2 -2.8 Net foreign direct investment inflow (% of GDP) 1.4 3.3 5.2 5.2 4.7 4.2 Fiscal balance (% of GDP) -8.2 -5.4 -4.6 -4.7 -4.1 -3.5 Fiscal balance incl. public enterprise for state roads (% of -8.6 -5.8 -4.8 -4.8 -4.5 -3.8 GDP) Revenues (% of GDP) 29.9 32.5 32.4 34.9 35.0 35.7 Debt (% of GDP) 59.8 61.0 59.6 60.2 61.5 62.2 Primary balance (% of GDP) -7.0 -4.1 -3.4 -3.2 -2.4 -1.5 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 20.1 19.1 18.3 17.9 17.3 16.2 GHG emissions growth (mtCO2e) -5.5 -1.1 -3.0 -2.9 -3.0 -3.1 Energy related GHG emissions (% of total) 70.6 70.7 70.0 69.0 68.0 66.8 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2020-SILC-C. Actual data: 2019. Nowcast: 2020-2022. Forecasts are from 2023 to 2025. b/ Projection using neutral distribution (2019) with pass-through = 0.87 (Med (0.87)) based on GDP per capita in constant LCU. MPO 29 Oct 23 temporarily eased some of the labor mar- ket tightness and boosted private con- POLAND Key conditions and sumption. Meeting decarbonization com- mitments is another challenge. Institution- challenges al strengthening is also needed for sus- tained and inclusive growth and for nar- Table 1 2022 The well-diversified Polish economy has rowing regional disparities. Population, million 38.4 recovered robustly after the COVID crisis GDP, current US$ billion 690.2 recession in 2020 (-2 percent) -- one of the GDP per capita, current US$ 17959.9 shallowest recessions in the region. Upper middle-income poverty rate ($6.85) a 0.9 Long-term inclusive growth and poverty Recent developments a 28.9 reduction were supported by a sound Gini index b 84.1 macroeconomic framework, effective ab- Economic growth has decelerated marked- School enrollment, primary (% gross) Life expectancy at birth, years b 75.6 sorption of EU investment funds, a sound ly in the first half of 2023, from a robust Total GHG emissions (mtCO2e) 333.6 financial sector, access to long-term credit 5.1 percent growth recorded in 2022, with and to the European market. Strong do- a particular drag coming from household Source: WDI, Macro Poverty Outlook, and official data. a/ Most recent value (2019), 2017 PPPs. mestic labor markets and higher median consumption which contracted in response b/ WDI for School enrollment (2020); Life expectancy and bottom 40 real incomes have support- to high inflation, tighter financing condi- (2021). ed private consumption. The improved tions, the unwinding of household support business environment and the accession to measures, and weak consumer sentiment. the EU fostered the integration into region- This is despite a robust labor market, al value chains (RVCs) and economic di- with low unemployment rates, higher After a robust 5.1 percent growth in versification. Higher private investment, employment, and double-digit increases 2022, Poland’s GDP growth decelerated an improved innovation ecosystem, and in average and minimum wages. The un- further upgrading of RVCs are needed to winding of the sizeable buildup in in- sharply in the first half of 2023 as high boost productivity and growth. ventory is now representing a significant inflation, tighter financing conditions, The policy response to mitigate the im- drag on growth. Strong financial per- and an unwinding inventory cycle pacts of the COVID crisis and high infla- formance of firms has bolstered invest- weighed on growth. Private consumption tion have narrowed the available policy ment activity, particularly for medium- space. Increased efficiency of spending sized and large companies in the energy, declined due to declines in real wages, and tax expenditure is needed to rebuild mining, and water sectors. Export growth loss of purchasing power, and weak con- fiscal buffers, accommodate higher spend- remained robust, while weak domestic sumer sentiment. The large number of ing on health, defense, the green transi- demand reduced import demand. displaced Ukrainians joining the labor tion, and to prepare for fiscal pressures Inflation decelerated markedly from 18.4 market relieved some of the pressures in linked to the rapidly aging population. percent in February 2023, to 10.1 percent Over the medium term, a key challenge by August, as global commodity prices, the tight labor market. The share of the stems from expected declines in labor sup- including energy prices, declined, the population at risk of poverty is expected ply due to the declining and rapidly aging zloty appreciated, and supply disrup- to remain elevated through 2024. population. The large influx of displaced tions eased. The zero VAT rate on staple Ukrainians, estimated at nearly 1 million, food products and statutory price caps FIGURE 1 Poland / Real GDP growth and contributions to FIGURE 2 Poland / Actual and projected poverty rate and real GDP growth real private consumption per capita Percent, percentage points Poverty rate (%) Real private consumption per capita (constant LCU) 20 10 40000 9 35000 15 8 30000 10 7 6 25000 5 5 20000 0 4 15000 3 -5 10000 2 1 5000 -10 2000 2003 2006 2009 2012 2015 2018 2021 2024 0 0 Gov. cons. Exports GFCF 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Inventories Private cons. Imports Upper middle-income pov. rate Real priv. cons. pc Statistical disc. GDP Sources: GUS and World Bank staff calculations. Source: World Bank. Notes: see Table 2. MPO 30 Oct 23 on fuels sold by local governments main- Getin Noble Bank S.A. (0.3 percent of GDP). although further delays in EU NRRP dis- tain prices lower. The tax system reform, which enhanced bursements represent a downside risk. The National Bank of Poland started its progressivity, contributed to the 0.9 per- Slowing demand from the EU will be par- monetary easing cycle with a surprise 75 centage point decline in PIT revenue. tially compensated by stronger exports to basis points cut in September, after an ear- Extreme poverty rates using the national Ukraine. This, together with weaker im- ly and aggressive monetary tightening concept continue to remain elevated in port demand and lower energy import since October 2021 (665 basis points), even 2022 compared to the pre-COVID-19 pan- prices, is expected to result in a current ac- as inflation remains well above the target- demic period, reflecting the deterioration count surplus of 1.3 percent of GDP in 2023. ed range. Markets price in additional rate of purchasing power among households The general government deficit is expect- cuts as inflation pressure eases. The zloty whose consumption baskets are heavily ed to exceed 4.7 percent of GDP in 2023, appreciated by 10 percent in 2023, before tilted towards necessities; the Gini coeffi- on account of the impact of the structural easing in response to the rate cuts. The cient of inequality continued the upward tax reform (Polish Deal, 1.1 percent of banking sector remains well capitalized, trajectory visible since 2017. GDP), the freeze on electricity and gas although profitability of the banking sector prices and the zero-VAT on food (2 per- has declined recently. cent of GDP), election-related spending, The terms of trade shock and robust do- and assistance to displaced Ukrainians mestic demand widened the current ac- Outlook (0.2 percent of GDP). Defense spending count deficit to 3 percent of GDP in 2022. is expected to rise by 0.8 percent of GDP Stronger exports and subdued imports re- Economic growth is projected to decelerate this year. The general government deficit sulted in a marked improvement in 2023. markedly to 0.7 percent in 2023 due to high is expected to remain elevated in 2024. Measures to protect households and firms inflation, negative real income growth, A prolonged inflationary period poses a from the energy and food price shock, pre- tighter financing conditions, continued risk to progress on poverty reduction, with dominantly untargeted, cost 2.4 percent of negative confidence effects related to the elevated energy and food prices affecting GDP in 2022, contributing to the widening Russian invasion of Ukraine, and an un- heavily poorer segments, who spend 50 of the fiscal deficit to 3.7 percent of GDP, winding of the large inventory cycle. A re- percent of their monthly budgets on food as did higher debt service costs and assis- covery in private consumption and and energy. The share of the population tance to displaced Ukrainians (a cumula- stronger investment activity are expected at risk of anchored poverty is expected to tive 1 percent of GDP), and resolving the to support growth over the medium term, remain 1-2 percent above 2019 levels. TABLE 2 Poland / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -2.0 6.9 5.1 0.7 2.6 3.4 Private consumption -3.4 6.1 3.3 -1.3 2.8 3.3 Government consumption 4.9 5.0 -2.0 1.5 3.2 3.7 Gross fixed capital investment -2.3 1.2 5.0 4.0 4.5 5.4 Exports, goods and services -1.1 12.3 6.2 3.1 4.3 5.2 Imports, goods and services -2.4 16.1 6.2 -2.5 5.1 5.9 Real GDP growth, at constant factor prices -2.0 6.6 5.0 0.8 2.6 3.5 Agriculture 15.3 -11.5 -1.7 5.2 0.2 0.1 Industry -4.5 1.9 6.7 0.5 3.0 3.1 Services -1.4 9.7 4.5 0.9 2.5 3.7 Inflation (consumer price index) 3.4 5.1 14.4 12.0 6.1 3.5 Current account balance (% of GDP) 2.5 -1.4 -3.0 1.3 0.9 0.4 Net foreign direct investment inflow (% of GDP) 2.4 4.1 4.0 2.3 2.3 2.3 Fiscal balance (% of GDP) -6.9 -1.8 -3.7 -4.7 -4.3 -3.4 Revenues (% of GDP) 41.3 42.3 39.8 38.0 38.2 38.6 Debt (% of GDP) 57.2 53.6 49.1 49.4 50.9 52.4 Primary balance (% of GDP) -5.6 -0.7 -2.2 -2.5 -1.9 -1.7 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 1.0 0.9 0.9 0.9 0.8 0.7 GHG emissions growth (mtCO2e) -3.5 3.4 4.4 -0.2 0.9 1.3 Energy related GHG emissions (% of total) 91.9 91.9 91.8 91.9 91.9 92.0 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2013-EU-SILC and 2020-EU-SILC. Actual data: 2019. Nowcast: 2020-2022. Forecasts are from 2023 to 2025. b/ Projection using point-to-point elasticity (2012-2019) with pass-through = 0.7 based on private consumption per capita in constant LCU. MPO 31 Oct 23 health sectors, public administration, tax, and pension systems; and decarbonization ROMANIA Key conditions and reforms along with an efficient use of EU Multiannual Financial Framework and challenges Next Generation EU funds. Table 1 2022 Romania has made impressive strides in Population, million 19.9 enhancing its economic performance and GDP, current US$ billion 300.3 prosperity over the past two decades, sup- Recent developments GDP per capita, current US$ 15076.5 porting convergence in living standards a 2.2 International poverty rate ($2.15) with the EU. However, several con- Romania’s economic growth decelerated a 4.7 straints, including weak institutions, to 1.7 percent y-o-y in H1, 2023. Private Lower middle-income poverty rate ($3.65) a 10.7 shortages of skilled workforce, poor con- consumption remained the main driver Upper middle-income poverty rate ($6.85) Gini index a 35.2 nectivity, low resilience to natural haz- of growth, up 3.9 percent y-o-y, benefit- School enrollment, primary (% gross) b 87.8 ards, and the effects of climate change, ing from higher wages and muted unem- b 73.0 hold Romania back from making growth ployment. Investment, up 11.2 percent y- Life expectancy at birth, years more inclusive and more sustainable eco- o-y, was boosted by increased public in- Total GHG emissions (mtCO2e) 83.9 nomically and environmentally. vestment supported by EU funds. Tem- Source: WDI, Macro Poverty Outlook, and official data. Romania's persistently high at-risk-of- porary factors notably dampened growth, a/ Most recent value (2020), 2017 PPPs. b/ WDI for School enrollment (2020); Life expectancy poverty rate, particularly compared to EU with inventory changes contributing neg- (2021). peers with comparable or lower per capita atively to GDP dynamics. Despite weak- incomes, remains concerning and could ening export volumes, trade and current worsen due to ongoing inflation, espe- account deficits narrowed, supported by The Romanian economy decelerated to 1.7 cially among lower-income groups. In higher services surplus and modest im- percent in the first half of 2023, in spite of December 2022, a 3.1 ppts inflation gap port compression. On the supply side, al- existed between Romania's lowest and though construction (up 6.8 percent y-o- resilient private consumption and invest- highest quintiles. y) was the main driver of growth, its mo- ment aided by EU funds. Growth will The key challenges in the short term are to mentum waned, reflecting a slowdown in moderate in 2023, in alignment with curb the increase in the cost of living and both residential and non-residential con- EU’s weakened economic activity, but re- sustainably address the significant twin structions. Industry continued to contract deficits, while mitigating the impact of ris- (down 3.3 percent y-o-y) due to elevated bound in the medium term. Fiscal and ing energy prices with targeted transfers production costs, especially in energy-in- current account deficit pressures will re- to help the most vulnerable. The surge in tensive sectors, which experienced among main elevated, necessitating structural inflation prompted a tightening of mone- the highest output declines. Unemploy- reforms. Poverty reduction is set to decel- tary policy, while elevated core inflation ment remains contained at 5.4 percent in erate due to high food and energy costs, points to persistent inflationary pressures. June 2023. Nominal net wages grew by Achieving a sustainable recovery and sup- 15.4 percent y-o-y in June 2023, above in- partly offset by government support. flation, driven by wage increases in the porting fiscal consolidation efforts will Tackling energy poverty is key to poverty hinge on implementing structural reforms private sector propelled by a minimum alleviation and social inclusion. in key areas, including education and gross wage rise fueling companies’ labor FIGURE 1 Romania / Real GDP growth and contributions to FIGURE 2 Romania / Actual and projected poverty rates real GDP growth and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 30 45 60000 40 20 50000 35 30 40000 10 25 30000 0 20 15 20000 -10 10 10000 5 -20 0 0 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Gov. cons. GFCF Private cons. International poverty rate Lower middle-income pov. rate Imports Exports GDP Upper middle-income pov. rate Real GDP pc Source: World Bank. Source: World Bank. Notes: see Table 2. MPO 32 Oct 23 costs. July's annual inflation slowed to 9.4 well as measures supporting public wage term, supported by private consumption percent from 12.2 percent in March, dri- and pension reforms. and EU funds aided investment. The out- ven by lower energy costs. Food prices Poverty ($6.85/day PPP) is projected to de- look depends on multiple factors, includ- remain high but should temper given the crease from 10.7 percent in 2020 to 9.6 per- ing the extent and duration of Russia's in- Government's temporary cap on markups cent in 2022, due to positive GDP per capi- vasion of Ukraine and its repercussions for 14 staple items starting end of July ta growth and rising employment rates, on the European economy, alongside fluc- 2023. Following 575 basis points of hikes but at a slower pace due to inflationary tuations in global prices and domestic in- from October 2021, the National Bank of pressures. Microsimulation shows higher flation. Romania’s capacity to efficiently Romania has maintained its policy inter- food and energy prices could increase absorb the EU funds will be critical for est rate at 7 percent since January 2023. short-term poverty ($6.85/day PPP) by 0.9 a sustainable, green, and inclusive recov- Private sector credit growth decelerated ppts without government support. Exist- ery, aiding private investment amid high- to 6.4 percent y-o-y in June 2023 from ing energy price caps temper this, but en- er interest rates and uncertainty. The siz- 17.5 percent in June 2022, reflecting a ergy hikes' ripple effects are even more im- able funds and associated structural re- slowdown in loans to households (0.1 pactful via core inflation. In 2023, energy forms will also be critical in supporting a percent y-o-y). affordability remains a concern. The July sustainable reduction of the fiscal deficit The fiscal deficit widened to 2.3 percent 2023 World Bank rapid survey shows that over the medium term, particularly aimed of GDP in the first half of 2023, a 0.7 ppts 15 percent of households struggled to heat at reducing inefficient expenditures and increase from the previous year. The dete- their homes during the past winter, and 30 strengthening revenue mobilization. rioration resulted from slower fiscal rev- percent found it difficult to cool in sum- Strengthened lifelong skills formation and enue growth, notably VAT, coupled with mer. Over half were dissatisfied with the private capital mobilization will be piv- increased expenditures, mainly stemming Government's energy price caps, finding otal in boosting potential growth. from social assistance spending, higher them insufficient against increasing prices. Due to the growth slowdown, 2024 may investments, and record high interest ex- Poverty ($6.85/day PPP) is projected to see slower poverty reduction. However, penditures. Narrowing the fiscal deficit decrease further to 8.9 percent in 2023. the poverty trajectory will hinge on the is a key challenge given its structural duration of the war in Ukraine and its nature. To meet the deficit target agreed impacts on food and energy prices, as with the European Commission, the Gov- well as the approach to tackle the fiscal ernment is working on a comprehensive Outlook deficit while protecting the more vulner- fiscal reform package which includes mea- able. The Government's role in mitigat- sures aimed at increasing the equity of the Growth is projected to decelerate in 2023 ing energy cost effects through targeted tax system and reducing distortions, as to 1.8 percent but firm over the medium support is vital. TABLE 2 Romania / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -3.7 5.8 4.7 1.8 3.7 3.9 Private consumption -3.9 8.1 5.5 3.7 4.5 4.8 Government consumption 1.1 1.3 4.3 2.9 1.4 1.2 Gross fixed capital investment 1.1 1.9 8.0 7.9 7.2 7.5 Exports, goods and services -9.5 12.6 9.6 0.7 5.8 6.3 Imports, goods and services -5.2 14.9 9.9 1.2 7.5 8.0 Real GDP growth, at constant factor prices -3.4 5.4 4.0 1.8 3.7 3.9 Agriculture -15.3 5.9 -11.6 2.8 2.1 2.1 Industry -6.5 6.6 -2.3 -2.5 1.9 2.1 Services -0.8 4.8 8.2 3.7 4.5 4.7 Inflation (consumer price index) 2.6 5.1 13.8 10.1 5.4 4.2 Current account balance (% of GDP) -4.9 -7.2 -9.3 -7.4 -6.3 -6.1 Net foreign direct investment inflow (% of GDP) 1.4 3.7 3.7 3.1 3.2 3.2 Fiscal balance (% of GDP) -9.2 -7.1 -6.2 -6.0 -4.8 -3.7 Revenues (% of GDP) 32.8 32.5 33.5 32.7 32.9 33.1 Debt (% of GDP) 46.9 48.6 47.3 50.8 51.5 51.9 Primary balance (% of GDP) -7.8 -5.5 -4.6 -4.6 -3.4 -2.3 a,b International poverty rate ($2.15 in 2017 PPP) 2.2 2.0 2.0 1.8 1.7 1.6 a,b Lower middle-income poverty rate ($3.65 in 2017 PPP) 4.7 4.2 4.2 3.9 3.6 3.3 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 10.7 9.6 9.6 8.9 8.3 7.7 GHG emissions growth (mtCO2e) -3.8 6.3 4.7 1.1 3.7 4.2 Energy related GHG emissions (% of total) 92.6 93.1 93.9 94.3 94.8 95.2 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2014-EU-SILC and 2021-EU-SILC. Actual data: 2020. Nowcast: 2021-2022. Forecasts are from 2023 to 2025. b/ Projection using point-to-point elasticity (2013-2020) with pass-through = 0.7 based on GDP per capita in constant LCU. MPO 33 Oct 23 Retail sale volumes grew by 1.1 percent (yoy) in H1 2023 (9 percent yoy in Q2 RUSSIAN Key conditions and 2023) with real wages 6 percent higher in H1. Investment grew by 7.6 percent challenges FEDERATION in H1 2023. Both services and manufac- turing contributed to growth, while the After the initial recessionary impact of energy sector, affected by sanctions in- sanctions in 2022, the economy has re- troduced toward the end of 2022, kept Table 1 2022 turned to growth in 2023, supported by growth down. Oil production so far has a 143.6 credit growth and fiscal stimulus includ- been relatively resilient to sanctions intro- Population, million GDP, current US$ billion 2274.5 ing military spending. However, Russian duced at the end of 2022 on the export GNI per capita, Atlas method, current US$ a 11610.0 businesses and households continue to be of oil and derivatives, with oil production Upper middle-income poverty rate ($6.85) b 4.1 affected by great uncertainty, restricted only 0.9 percent lower (yoy) in H1, al- c 36.0 access to international markets, and high- though more substantive production cuts Gini index d er trade costs. A shrinking current ac- are expected in H2. Moreover, Urals School enrollment, primary (% gross) 104.2 d count surplus is driving exchange rate de- prices decreased to USD 52.3/bbl on av- Life expectancy at birth, years 69.4 preciation. The fiscal position has deterio- erage in H1 2023, compared to USD 83.9/ Total GHG emissions (mtCO2e) 1494.4 rated, with energy receipts compressed by bbl in 2022, reducing oil sector revenues Sources: WDI, MPO, Rosstat. the sanctions. Banking sector risks, man- and export receipts. Gas production de- a/ Most recent value (2021). b/ Most recent value (2020), 2017 PPPs. ageable in the short term, could add fur- creased by 12.3 percent in H1 2023 (yoy), c/ Most recent value (2020). ther pressure on the budget due to recap- largely due to a fall in Russian pipeline d/ Most recent WDI value (2019). italization needs. Loss of skilled workers, gas deliveries to the European Union, and restrictions on imports of technological prices also fell by 55 percent on average goods, and loss of productive FDI is ex- in H1 2023 (yoy). Growth is projected at 1.6 percent in pected to depress medium- to long-term Expansionary fiscal expenditure (social 2023. Fiscal stimulus supported con- growth prospects. benefits, government consumption, and investment – some directly related to sumer demand and military spending, the war – and loan subsidies) was an while the energy sector contracted less important factor in economic growth in than anticipated. Heightened external Recent developments H1 2023, with expenditure rising by 18.5 pressure, with a shrinking current ac- percent in H1 2023 (yoy). However, oil count surplus, and narrowing fiscal space Following an economic contraction of 2.1 and gas revenues fell by 47 percent over percent of GDP in 2022, GDP expanded the same period. This led to a rapid- worsen the outlook. Medium-term growth by 1.6 percent (yoy) in H1 2023. On the ly expanding general government deficit, prospects are muted due to constraints on demand side, growth was largely driven which reached 3.3 percent of GDP in H1, Russia’s access to global markets, skilled by consumer demand, boosted by accel- compared to a surplus of 4.6 percent of human capital, and productivity-enhanc- erated public spending in H1 2023 (in- GDP in H1 2022. Public debt issuance cluding a 7.1 percent real increase in pen- (RUB 1.4 trillion, or USD 16.1 billion) ing technologies. Poverty is expected to sions), and expanding consumer credit, and National Welfare Fund drawdown fall slightly between 2023 and 2025. while military spending remained high. (RUB 0.5 trillion, or USD 5.3 billion at FIGURE 1 Russian Federation / Real GDP growth and FIGURE 2 Russian Federation / Actual and projected contributions to real GDP growth poverty rate and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 12 20 800000 18 700000 8 16 600000 14 4 12 500000 0 10 400000 8 300000 -4 6 200000 4 -8 2 100000 2020 2021 2022 2023 2024 2025 0 0 Stat error Import Export Change in inventories 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Gross fixed capital formation Consumption Upper middle-income pov. rate Real GDP pc GDP growth Sources: Rosstat and World Bank. Source: World Bank. Notes: see Table 2. MPO 34 Oct 23 the end of June) were the main sources 100 billion recapitalization of VTB, and consumption growth is expected to be of deficit financing. reportedly solid capital buffers allowed strong in 2023 at approximately 6 percent. Russia’s labor market remained tight as banks to continue lending throughout Lower oil revenues and higher expendi- outward migration and the military sector the year. Credit to the private sector ture in 2023 are expected to widen the gen- reduced the amount of labor available for grew by 9.7 percent in real terms (yoy) eral government deficit to 3.3 percent, a non-military-related activities. The unem- over the same period. deterioration of approximately 5 percent ployment rate fell to an unprecedented compared to 2022. low of 3 percent in July 2023. Average annual CPI inflation is expected Russia’s positive external balances nar- to be lower in 2023, at 5.6 percent, with rowed over the course of 2023. The H1 Outlook RUB depreciation contributing to rising in- 2023 CAS was USD 29 billion, five times flation later in the year. Lower prices for less than in 2022, as exports fell by 26 per- It is currently difficult to produce growth commodities exported by Russia, lower ex- cent (yoy) and imports grew by 17 percent. forecasts for Russia due to significant port volumes, and growing imports are all As the external balance adjusted, the RUB changes to the economy associated with expected to reduce CAS to approximately began to depreciate rapidly, by 36 percent the Russian invasion of Ukraine, and USD 50 billion in 2023 (2.6 percent of since the end of December 2022 to the end Russia’s decision to limit publication of GDP), compared to USD 236.1 billion in of August 2023. economic data related to external trade 2022 (10.1 percent of GDP). The shrinking output gap and rising cost and to financial and monetary sectors. Moderate growth is expected in 2024, with of imports fueled inflationary pressures. Available data limit assessment of consumer demand slowing and exports CPI inflation rose from 2.3 percent in April economic performance. gradually recovering. In 2025, GDP is ex- to 4.3 percent in July, with mom inflation This outlook assumes that Russia’s war pected to grow by 0.9 percent, in line with in July more than doubling to 1 percent on Ukraine and existing sanction will lower growth potential. mom sa. In response, the Central Bank of continue. A moderate contraction in Poverty is expected to fall slightly, if at all, Russia (CBR) raised interest rates by 550 crude oil and oil products exports, cou- between 2023 and 2025. bps to 13 percent – in three stages, in July, pled with a rebound in domestic demand Russia’s economic outlook remains closely early August, and September – and sus- in 2023, mean the economy is expected to tied to its ongoing invasion of Ukraine and pended FX purchases. grow 1.6 percent this year, with growth possible further rounds of mobilization The banking sector recorded a profit of moderating to 1.3 percent in 2024. Oil and sanctions. Broadly supported and RUB 2 trillion (USD 21 billion) in the production is expected to contract by 2 strengthened sanctions, particularly affect- first 7 months of 2023, compared to RUB percent in 2023. Growth momentum is ex- ing inflows of oil and gas revenues, and 0.2 trillion in the full year 2022. Govern- pected to slow in H2 2023 as monetary and disruptions to evolving trade patterns may ment support measures, including a RUB fiscal policy tighten; nevertheless, private have significant impact. TABLE 2 Russian Federation / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -2.7 5.6 -2.1 1.6 1.3 0.9 Private consumption -5.9 9.9 -1.4 6.3 1.3 0.7 Government consumption 1.9 2.9 2.8 8.6 1.6 1.4 Gross fixed capital investment -4.0 9.1 3.3 4.1 2.3 1.2 Exports, goods and services -4.2 3.3 -13.9 -4.3 0.9 1.9 Imports, goods and services -11.9 19.1 -15.0 13.5 7.3 3.0 Real GDP growth, at constant factor prices -2.2 6.1 -1.4 1.6 1.3 0.8 Agriculture 0.2 -0.8 6.7 0.5 1.2 1.2 Industry -2.7 5.3 -0.2 1.5 2.0 1.4 Services -2.2 7.0 -2.5 1.8 1.0 0.5 Inflation (consumer price index) 3.4 6.7 13.7 5.6 5.2 4.0 Current account balance (% of GDP) 2.4 6.6 10.4 2.6 2.1 2.0 Net foreign direct investment inflow (% of GDP) 0.2 -1.4 -1.2 -1.4 -1.4 -1.4 a Fiscal Balance (% of GDP) -4.0 0.8 -1.4 -3.3 -1.9 -1.8 Revenues (% of GDP) 35.5 35.6 34.6 34.5 35.6 35.3 Debt (% of GDP) 19.9 17.3 16.9 19.4 20.7 21.8 a Primary Balance (% of GDP) -3.2 1.6 -0.5 -2.4 -1.0 -0.9 b,c Upper middle-income poverty rate ($6.85 in 2017 PPP) 4.1 3.3 3.6 3.3 3.1 3.0 GHG emissions growth (mtCO2e) -3.5 1.2 -3.4 -0.5 -0.6 -1.5 Energy related GHG emissions (% of total) 91.7 90.8 90.3 90.1 89.5 88.9 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Fiscal and Primary Balance refer to general government balances. b/ Calculations based on ECAPOV harmonization, using 2020-HBS. Actual data: 2020. Nowcast: 2021-2022. Forecasts are from 2023 to 2025. c/ Projection using neutral distribution (2020) with pass-through = 0.87 (Med (0.87)) based on GDP per capita in constant LCU. MPO 35 Oct 23 energy imports (compared to the same period of 2022), as well as to compressed SERBIA Key conditions and non-energy import demand. Labor market indicators remained broad- challenges ly unchanged in 2023. The unemployment rate reached 10.1 percent in Q1 2023 (a Table 1 2022 Growth in the first half of 2023 is estimat- slight increase compared to Q4 2022 Population, million 6.7 ed at 1.2 percent, y/y, significantly lower when it reached 9.2 percent). Wages in- GDP, current US$ billion 63.4 than in the same period of 2022. The main creased by 15.5 percent in nominal terms GDP per capita, current US$ 9511.5 reason for this deceleration is a major de- in the first half of the year compared to a 1.6 International poverty rate ($2.15) crease in investment with both private the same period of 2022. a 2.9 and public investment contracting. To a Poverty (based on the upper-middle in- Lower middle-income poverty rate ($3.65) a 10.1 large extent, investment decreased due to come line of $6.85/day in 2017 PPP) is Upper middle-income poverty rate ($6.85) Gini index a 35.0 lower inventories. Serbia needs to fur- estimated to have declined slightly from School enrollment, primary (% gross) b 96.8 ther remove bottlenecks for private sec- 9.1 percent in 2021 to 8.5 percent in 2022. b 72.7 tor investment including toward green- In 2023, poverty reduction continued due Life expectancy at birth, years er growth. Another challenge is the stub- to strong economic growth and improv- Total GHG emissions (mtCO2e) 63.1 bornly high inflation, eroding the incomes ing labor market conditions, though it Source: WDI, Macro Poverty Outlook, and official data. of the poor due to their relatively high was partly countered by an output de- a/ Most recent value (2020), 2017 PPPs. b/ Most recent WDI value (2021). share of spending on food. cline in agriculture, rising inflation at the Over the medium term, under the base- end of the year, and the phasing out of case scenario, the Serbian economy is ex- government support programs. pected to grow at around 3 to 4 percent. Inflation remains stubbornly high, With limited space for future stimulus mainly due to a large increase in The growth of the Serbian economy packages, structural reforms are needed food and energy prices. The inflation slowed down in the first half of 2023 to accelerate growth to accelerate conver- reached a peak in March 2023 (16.2 amid elevated inflation that started to gence to incomes of the EU. percent), the highest since the CPI hurt consumption. Growth is expected measurement started (in 2007). Infla- tion moderated to 12.5 percent in July. to pick up in the second half of 2023, In the same month, food prices were but risks to the outlook are tilted to the Recent developments 21.1 percent higher than a year earlier downside. The incidence of poverty de- while energy prices were up by 23.7 clined to an estimated 8.5 percent. Go- Weak GDP growth in Q1 and Q2 (0.9 percent. Rents for housing went up by ing forward, poverty reduction is expect- and 1.7 percent, y/y) was caused by a 15.3 percent. significant decline in investment and to Budgetary revenues have overperformed ed to stagnate, as income gains are erod- some extent by declining consumption thus far in 2023, primarily thanks to ed by high inflation and rising food (their contribution to growth was -4.7 higher than planned collection of corpo- prices in particular. and -0.7 percentage points in H1). On the rate income tax and high collection of other hand, net exports made a positive contributions for social insurance. In the contribution to growth thanks to lower first half of the year, total revenues were FIGURE 1 Serbia / Indexes of the level of sectoral GDP FIGURE 2 Serbia / Actual and projected poverty rates and real GDP per capita Index 1=2000 Poverty rate (%) Real GDP per capita (constant LCU) 3 35 1000000 900000 Agriculture value add (Index 1=2010) 30 2.5 800000 Service value add (Index 1=2010) 25 700000 Industry value add (Index 1=2010) 600000 2 20 500000 15 400000 1.5 300000 10 200000 5 1 100000 0 0 2012 2014 2016 2018 2020 2022 2024 0.5 International poverty rate Lower middle-income pov. rate 2000 2003 2006 2009 2012 2015 2018 2021 2024 Upper middle-income pov. rate Real GDP pc Source: World Bank staff calculations. Source: World Bank. Notes: see Table 2. MPO 36 Oct 23 higher by 12.6 percent in nominal terms stable at around 3 percent (at 3.2 percent (in real terms declined by 2.4 percent) in June 2023). compared to the same period in 2022. Outlook Poverty reduction is expected to gradually Over the same period, expenditures in- decline or stagnate in 2023 and beyond. creased by 7.7 percent. As a result, the The Serbian economy is expected to grow While Serbia’s economy is expected to con- consolidated fiscal deficit recorded in the at around 2 percent in 2023, driven pri- tinue to grow, contributing to income same period of 2022 turned into a sur- marily by consumption. The impact of the growth for households, rising inflation will plus in 2023, reaching an estimated 0.6 war in Ukraine, a slowdown in global limit purchasing power. Particularly, ris- percent of GDP. Public debt remained growth and tighter financing conditions, ing energy prices would disproportionate- broadly stable throughout 2023 and stood were key factors for the downward revi- ly affect the poor. Poverty in 2023 is esti- at around 56 percent of GDP. sion of 2023 GDP growth. Further revi- mated at 8.0 percent, but it could be re- The current account deficit (CAD) shrank sions are possible depending on the per- vised upward, depending performance of significantly in the first half of 2023 to formance of the economies of Serbia’s the economy in 2023. The pace of labor 0.8 percent of GDP (down by 82 percent main trading partners. market recovery remains critical for re- compared to the same period of 2022). Over the medium term, the economy is sumed poverty reduction. This improvement, by and large, was dri- projected to grow steadily at around 3-4 The outlook also crucially depends on the ven by a major decrease in the trade percent annually, supported by increases domestic reform agenda and its implemen- deficit (which stood at EUR 3.2 billion in in consumption and investment. Foreign tation. In particular, structural reforms in the first half of 2023 compared to EUR direct investment is expected to continue education, SOEs, along with further im- 5.3 billion in the same period of 2022) to play a key financing role. Inflation is ex- provements in governance would pay off as imports slowed. Foreign currency re- pected to decline gradually as commodi- since those should incentivize private in- serves increased to a record high level of ty prices normalize. The banking sector is vestors to invest more and to raise the EUR 22.6 billion. expected to remain resilient, with NPLs quality of foreign investments in Serbia. TABLE 2 Serbia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -0.9 7.5 2.3 2.0 3.0 3.8 Private consumption -1.9 7.6 3.9 1.8 2.4 3.4 Government consumption 2.9 2.6 1.6 2.0 0.3 3.0 Gross fixed capital investment -1.9 12.9 2.0 -9.2 4.1 7.1 Exports, goods and services -4.2 19.4 17.8 3.0 4.2 6.0 Imports, goods and services -3.6 19.3 16.2 1.9 3.0 5.8 Real GDP growth, at constant factor prices -0.7 7.3 2.0 2.7 3.0 3.8 Agriculture 2.3 -5.7 -8.3 12.0 3.4 3.4 Industry -0.3 8.6 -0.7 0.3 4.5 4.5 Services -1.2 8.4 4.5 2.9 2.2 3.5 Inflation (consumer price index) 1.6 4.0 11.9 12.7 5.3 3.5 Current account balance (% of GDP) -4.1 -4.3 -6.9 -2.5 -3.6 -3.8 Net foreign direct investment inflow (% of GDP) 6.3 6.9 7.2 5.9 5.7 5.8 Fiscal balance (% of GDP) -8.0 -4.1 -3.0 -2.8 -2.0 -1.5 Revenues (% of GDP) 41.0 43.2 43.4 42.9 41.9 40.9 Debt (% of GDP) 57.8 57.1 55.6 55.5 53.1 51.5 Primary balance (% of GDP) -6.0 -2.4 -1.5 -1.0 0.0 0.3 a,b International poverty rate ($2.15 in 2017 PPP) 1.6 1.5 1.4 1.4 1.3 1.2 a,b Lower middle-income poverty rate ($3.65 in 2017 PPP) 2.9 2.6 2.5 2.4 2.4 2.4 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 10.1 9.1 8.5 8.0 7.5 6.9 GHG emissions growth (mtCO2e) 2.3 5.0 -5.1 3.2 5.1 4.3 Energy related GHG emissions (% of total) 74.7 75.6 74.8 75.5 76.5 77.3 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2021-EU-SILC. Actual data: 2020. Nowcast: 2021-2022. Forecasts are from 2023 to 2025. b/ Projection using neutral distribution (2020) with pass-through = 0.87 (Med (0.87)) based on GDP per capita in constant LCU. MPO 37 Oct 23 This challenging reform agenda is also crit- ical to enable the financing of Tajikistan's TAJIKISTAN Key conditions and ambitious infrastructure plans, notably the construction of the Rogun Hydropower challenges Plant (HPP), in a macroeconomically sus- tainable manner. Debt sustainability Table 1 2022 Tajikistan’s GDP growth averaged 7.1 analysis highlights substantial risks that Population, million 10.0 percent over the 2010–2022 period. Strong point to the importance of maintaining fis- GDP, current US$ billion 10.5 growth and higher wages helped reduce cal discipline, including reducing contin- GDP per capita, current US$ 1054.2 poverty from 32 percent of the population gent liabilities and boosting exports by en- a 6.1 International poverty rate ($2.15) in 2009 to an estimated 12.4 percent in abling a competitive private sector. a 25.7 2022 (at the international poverty line of Lower middle-income poverty rate ($3.65) a 66.4 USD 3.65/day). However economic Upper middle-income poverty rate ($6.85) Gini index a 34.0 growth has been driven by remittance-in- School enrollment, primary (% gross) b 100.9 duced household consumption and pub- Recent developments b 71.6 lic infrastructure investment and the Life expectancy at birth, years country remains characterized by the ab- GDP growth was 8.3 percent (yoy) in H1 Total GHG emissions (mtCO2e) 19.9 sence of a competitive private sector and 2023, driven by robust remittance inflows Source: WDI, Macro Poverty Outlook, and official data. very limited jobs creation, in the face of a stimulating household consumption and a/ Most recent value (2015), 2017 PPPs. b/ WDI for School enrollment (2017); Life expectancy fast-growing population. investments. The share of households with (2021). The result has been substantial labor out- a migrant reached 48 percent in June 2023, migration, notably to Russia, leading to in- with the share of households receiving re- creasing economic dependence on remit- mittances rising gradually from 14 percent tances. Remittances peaked at 50 percent in January to almost 22 percent in June. of GDP in 2022. High dependence on an The average consumer price inflation rate undiversified external income source has declined from 7.7 percent during the first Economic growth is projected at 6.5 increased vulnerability to external shocks; seven months of 2022 to 3.1 percent over percent in 2023 and moderating in fu- the difficult domestic business environ- the same period in 2023. Inflationary pres- ture years in the absence of strong ment inhibits the establishment of private sures decreased as the TJS appreciated structural reforms to open up the econ- sector-led alternatives. against the RUB, lowering import prices To achieve the objectives of the National for food and fuel products from Russia. omy. Inflation has been kept under con- Development Strategy 2030, the author- The Central Bank reduced the policy rate trol and expected to remain around 3.4 ities need to address the challenges gradually from 13.5 percent in September percent in 2023. The authorities’ effort brought by inefficient public enterprises, 2022 to 10 percent as of May 2023. Since to support the currency in H1 2023 elite capture, corruption, weak competi- the transmission mechanism of the mon- have resulted in a substantial loss of tion, inadequate digital connectivity, poor etary policy is weak, the exchange rate is transport links, insufficient financial inter- the main anchor to controlling inflation FX reserves. in Tajikistan. mediation, weak human capital develop- ment, and substantial social and environ- Despite the strong remittance inflows, mental vulnerabilities. Tajikistan’s external position deteriorated in FIGURE 1 Tajikistan / Fiscal balance and public debt FIGURE 2 Tajikistan / Actual and projected poverty rates and real GDP per capita Percent of GDP Percent of GDP Poverty rate (%) Real GDP per capita (constant LCU) 0.0 55 90 1200 -0.5 Fiscal Balance (lhs) 80 1000 50 70 Public and Publicly -1.0 Guaranteed Debt (rhs) 60 800 45 50 -1.5 600 40 -2.0 40 30 400 -2.5 20 200 35 10 -3.0 0 0 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 -3.5 30 International poverty rate Lower middle-income pov. rate 2020 2021 2022e 2023f 2024f 2025f Upper middle-income pov. rate Real GDP pc Sources: TajStat, Ministry of Finance, and World Bank staff estimates and Source: World Bank. Notes: see Table 2. projections. MPO 38 Oct 23 Q1 2023. The current account recorded a implemented targeted social assistance re- Over the medium term, Tajikistan’s cur- deficit of 2.6 percent of GDP in Q1 2023 com- forms to better identify vulnerable house- rent account deficit is projected to hover pared with a 15.6 percent surplus in 2022. holds and increased the amount of bene- at 2.5 to 3 percent of GDP, assuming The trade deficit widened from 30 percent fits for households with more children. the normalization of remittance flows and of GDP in H1 2022 to 41 percent in H1 The banking sector has high capitaliza- lower prices for major export commodi- 2023, primarily due to the doubling of ve- tion levels; however, the asset quality is ties (metals and minerals). hicle imports and a complete halt in the relatively poor. As of March 2023, the ra- To ensure macro-fiscal stability, the au- export of precious metals. The export of tio of capital to risk-weighted assets stood thorities will need to allow greater ex- precious metals was temporarily halted to at 25.9 percent – more than double the change rate flexibility and limit the fiscal prevent the re-export of non-Tajik prod- minimum requirement of 12 percent. On deficit at 2.5 percent of GDP over the ucts due to Russian sanctions and to im- the other hand, the share of non-perform- medium term. prove compliance with OECD standards. ing loans in total loans stood at 11.5 per- Expenditure on the construction of the Monetary authorities intervened in the cent (albeit declining from 12.2 percent at Rogun HPP and other large infrastructure foreign exchange market to support the the end of 2022). projects is projected to be financed by TJS, resulting in a fall in international re- borrowing from development partners serves from USD 3.8 billion at the end of and streamlining other non-priority 2022 to USD 3.2 billion in mid-2023. Re- spending. The authorities plan to contin- serves remain adequate at more than 6.5 Outlook ue increasing targeted social allocations to months of import cover. better protect the vulnerable. Poverty is In H1 2023, the state budget was in bal- Tajikistan's growth is expected to slow to projected to fall from 12.4 percent in 2022 ance. Tax receipts increased by 20 percent 6.5 percent in 2023 due to a projected mod- to 11.3 percent in 2023. in nominal terms (yoy) to 22.5 percent of eration in remittance inflows (to 32 percent Risks to the economic outlook stem from GDP (from 22 percent last year’s same pe- of GDP from the high base in 2022), lower geopolitical uncertainty, global financial riod) due to robust economic activity and FDI, and weaker exports. The economy's conditions, remittance flow reversals (no- better tax administration. Budget expendi- growth potential is estimated to be 4.5–5 tably due to the risk of military conscrip- tures increased by 34 percent in nominal percent over the medium term in the ab- tion of migrants with dual Tajik-Russ- terms (yoy) to 33.8 percent of GDP (from sence of structural reforms. ian citizenship), and the slow pace of 29.6 percent last year’s same period), led Inflation is projected to gradually rise to- structural reforms. Tajikistan also remains by the energy and communication sec- ward the inflation target of 6 percent, after highly sensitive to climate change and tors. Since July 2023, the authorities have hitting a low in 2023. natural disasters. TABLE 2 Tajikistan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices 4.4 9.4 8.0 6.5 5.0 4.5 Private consumption 3.1 4.3 9.0 7.1 3.0 3.0 Government consumption 2.3 4.6 7.8 6.4 4.3 3.7 Gross fixed capital investment -4.6 12.0 10.3 11.2 5.3 4.6 Exports, goods and services 21.8 55.4 -15.0 -4.6 11.0 8.1 Imports, goods and services -0.4 20.0 3.0 8.0 3.1 3.6 Real GDP growth, at constant factor prices 7.6 9.2 9.2 6.5 5.0 4.5 Agriculture 7.9 -0.3 5.1 5.0 5.0 5.0 Industry 17.3 13.2 8.3 8.0 5.0 5.0 Services -1.9 10.6 12.5 5.6 5.0 3.7 Inflation (consumer price index) 8.6 9.0 6.6 3.4 5.4 6.1 Current account balance (% of GDP) 4.3 8.2 15.6 -2.4 -2.9 -3.1 Net foreign direct investment inflow (% of GDP) 0.4 0.4 1.5 0.0 2.4 2.6 Fiscal balance (% of GDP) -3.1 -1.2 -1.4 -2.3 -2.5 -2.5 Revenues (% of GDP) 26.2 26.7 27.7 26.2 26.1 26.1 Debt (% of GDP) 50.3 41.9 32.5 33.5 32.9 32.2 Primary balance (% of GDP) -2.3 -0.4 -0.7 -1.6 -1.7 -1.7 a,b International poverty rate ($2.15 in 2017 PPP) 3.5 2.8 2.3 2.2 2.0 1.8 a,b Lower middle-income poverty rate ($3.65 in 2017 PPP) 16.2 14.2 12.4 11.3 10.1 9.2 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 54.8 50.6 46.8 44.3 43.0 41.6 GHG emissions growth (mtCO2e) 4.3 6.4 3.0 4.6 3.2 2.8 Energy related GHG emissions (% of total) 44.4 46.8 46.4 46.9 46.8 46.5 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2015-HSITAFIEN. Actual data: 2015. Nowcast: 2016-2022. Forecasts are from 2023 to 2025. b/ Projection using neutral distribution (2015) with pass-through = 0,87 (Med (0.87)) based on GDP per capita in constant LCU. MPO 39 Oct 23 TÜRKIYE Key conditions and Recent developments challenges After expanding 5.5 percent in 2022, real GDP grew 3.9 percent yoy in H1 2023. Table 1 2022 The new economic team, under Finance Responding to accommodative monetary Population, million 85.3 Minister Simsek and central bank Gover- policy, earthquake response and pre-elec- GDP, current US$ billion 906.3 nor Erkan, has started to normalize macro- tion spending, H1 growth was driven by GDP per capita, current US$ 10627.4 financial policies, and outlined more mea- private and public consumption (16.4 and a 12.6 Upper middle-income poverty rate ($6.85) sures in the September Medium Term Pro- 5.7 percent real growth yoy, respectively) a 41.9 gram, to remedy imbalances in the econo- and investment (4.4 percent yoy), while Gini index b 96.5 my. The central bank increased the policy merchandise exports in USD terms con- School enrollment, primary (% gross) Life expectancy at birth, years b 76.0 rate from 8.5 percent in May 2023 to 30 tracted 4.8 percent yoy as competitiveness Total GHG emissions (mtCO2e) 525.0 percent in September (and signaled further and external demand weakened. On the tightening until there is significant im- production side, services grew 5.4 percent Source: WDI, Macro Poverty Outlook, and official data. a/ Most recent value (2019), 2017 PPPs. provement in inflation) and imposed new yoy in real terms in H1. On the other b/ WDI for School enrollment (2020); Life expectancy reserve requirements and other measures hand, the industry contracted 1.8 percent (2021). to limit loan growth. Distortive financial yoy in real terms due to early earthquake- regulations are being unwound (including related disruptions and a slight contrac- easing maintenance requirements on secu- tion in manufacturing. The PMI index re- rities that require banks to hold govern- mained above 50 since January but fell Following the May 2023 elections, the ment bonds and rolling back the FX-pro- below 50 in July. government has taken positive steps to tected deposit scheme) alongside fiscal Policy normalization improved the exter- consolidation through tax increases. nal balance but vulnerabilities remain. The normalize Türkiye’s macroeconomic poli- Recent macro-financial instability exacer- TRY continued its steady realignment, de- cies. After growing by 5.5 percent in bated longstanding structural challenges, preciating 26 percent since the May elec- 2022, Türkiye’s economy is projected to including high private sector debt; persis- tions (and 31 percent since January) as initially slow to 4.2 percent in 2023 and tent current account deficits financed by foreign exchange interventions slowed. short-term portfolio flows; low productiv- This helped the current account reach a 3.1 percent in 2024 as the economy ad- ity growth; and low labor force participa- surplus of USD 0.7 billion in June for the justs from the previous over-accommoda- tion and employment levels. Nevertheless, first time since October 2021 but returned tive and unsustainable macroeconomic high growth lowered the July 2023 season- to a USD 5.5 billion deficit in July. Re- stance, followed by an expected accelera- ally adjusted unemployment rate to 9.4 flecting greater investor confidence, CDS tion of growth in outer years. The combi- percent, the lowest level since January spreads have come down from 679, prior 2014. However, high inflation – especially to the second round of elections in May, to nation of high inflation, particularly food the 72.9 percent yoy food inflation in Au- under 400 in mid-September; and non-res- inflation, and the earthquakes could erode gust 2023 – combined with the impact of ident net portfolio inflows turned positive prior achievements in poverty reduction. the February 6 earthquakes, may erode for 9 consecutive weeks, as of early Au- prior achievements in poverty reduction. gust. As a result, central bank net reserves FIGURE 1 Türkiye / Real GDP growth and contributions to FIGURE 2 Türkiye / Actual and projected poverty rate and real GDP growth real GDP per capita Percent, percentage point Poverty rate (%) Real GDP per capita (constant LCU) 20 30 30000 15 25 25000 10 20 20000 5 0 15 15000 -5 10 10000 -10 5 5000 -15 2020 2021 2022 2023 2024 2025 0 0 Private Consumption Government Spending Investment Exports 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Imports Stocks Upper middle-income pov. rate Real GDP pc Growth Sources: Turkstat and World Bank staff calculations. Source: World Bank. Notes: see Table 2. MPO 40 Oct 23 have started to recover, reaching USD 17.6 The authorities have also targeted fiscal consolidation is expected to continue billion in mid-September from an all-time imbalances. Parliament passed a supple- supporting fiscal balances, and the low of USD –5.7 billion in early June. mentary budget in July to counter pres- macro-financial stabilization alongside li- Financial market conditions tightened in sures from the February earthquakes and ra depreciation and policy support to ex- response to monetary policy. Credit election-related pension and civil service porters is expected to further narrow the growth continued to slow and commercial wage increases, which resulted in a record current account deficit. and consumer loan interest rates in- high 12-month fiscal deficit in June of 4.8 Well-implemented and timely social pro- creased, with the latter nearly positive in percent of 2022 GDP. Increases in the VAT tection programs, targeted expressly at real terms. But TRY depreciation, a 34 per- rate and a special consumption tax on fuels vulnerable populations in earthquake-af- cent minimum wage increase in July, and supported a central government budget fected areas, can mitigate the earthquakes’ the impact of higher taxes reignited infla- surplus of TRY 49 billion in July and 51 impacts and economic slowdown on tionary pressures. Annual inflation rose billion in August, and a reduction in the poverty. The government has already sup- for the first time in nine months in July 12-month deficit to 3.7 percent of 2022 ported earthquake survivors by activating and August to 58.9 percent, after reaching GDP. Government debt remained manage- established social protection and labor an 18-month low in June, and year-end in- able at 31.7 percent of GDP in 2022, but the schemes. Poverty is projected to stay at flation expectations rose to 67.8 percent in FX-share was high at 66 percent. 12.9 percent in the next few years. September despite monetary policy tight- The outlook faces considerable uncertain- ening. Domestic asset prices continued to ty related to the macroeconomic policy soar well above CPI inflation; across stance in the run up to the March 2024 Türkiye, house prices increased 95 percent Outlook municipal elections and the phasing out yoy in July and the stock market was up of the FX-protected deposit scheme and 140 percent yoy in mid-September. TRY The economy is projected to grow 4.2 heterodox regulations distorting the fi- depreciation led to declining CARs from percent in 2023 and 3.1 percent in 2024 nancial sector. Despite recent prioritizing 20.4 percent in March to 18.7 percent in as it adjusts from the previous over-ac- of policy tightening and disinflation, a August in private banks, and from 19.8 commodative and unsustainable policy pre-election stimulus could increase percent to 15.9 percent in state banks. Im- stance, followed by an expected acceler- short-term growth, while aggravating al- porters and non-traders are most exposed ation in growth in outer years. Private ready-elevated external risks. The FX-pro- to TRY depreciation and SMEs to interest consumption is the largest component of tected deposit scheme, which accounts for rate increases. While the official NPL ratio GDP and 12-month consumer confidence 26 percent of total banking sector deposits fell to 1.7 percent in mid-August despite indicators fell sharply in August 2023, to and is sensitive to TRY depreciation, re- phased-out forbearance measures, asset the lowest level over 12 months due to mains a source of fiscal risk. Some rating quality risks remain high from FX-exposed expectations of a slowdown in income agencies have recently revised Türkiye’s companies, past rapid credit growth, and growth, the possibility of unemployment, outlook from negative to stable with the remaining high loan exposures. and persistent inflation. Gradual fiscal return to a more consistent policy mix. TABLE 2 Türkiye / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices 1.9 11.4 5.5 4.2 3.1 3.9 Private consumption 3.2 15.4 18.9 6.1 1.7 3.4 Government consumption 2.2 3.0 4.2 7.2 2.1 2.4 Gross fixed capital investment 7.3 7.2 1.3 5.7 3.5 4.4 Exports, goods and services -14.6 25.1 9.9 -2.2 5.4 5.8 Imports, goods and services 6.8 1.7 8.6 7.4 2.4 6.4 Real GDP growth, at constant factor prices 0.9 12.7 6.2 4.2 3.1 3.9 Agriculture 5.8 -3.0 1.3 0.4 1.5 1.6 Industry 0.8 13.0 -0.6 5.5 3.5 4.9 Services 1.1 13.2 10.1 3.5 3.1 3.6 Inflation (consumer price index) 12.3 19.6 72.3 53.4 57.2 27.5 Current account balance (% of GDP) -4.4 -0.9 -5.3 -5.0 -3.3 -2.6 Net foreign direct investment inflow (% of GDP) 0.6 0.8 0.9 1.1 1.3 1.4 Fiscal balance (% of GDP) -3.9 -2.6 -2.9 -5.3 -5.3 -3.8 Revenues (% of GDP) 32.4 30.9 26.4 26.9 27.8 27.5 Debt (% of GDP) 39.6 41.8 31.7 33.0 34.4 34.7 Primary balance (% of GDP) -1.1 0.0 -0.6 -2.2 -1.7 0.0 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 12.6 12.8 12.8 12.9 12.9 13.0 GHG emissions growth (mtCO2e) 1.5 9.7 2.5 1.4 2.1 2.6 Energy related GHG emissions (% of total) 77.9 78.7 78.8 78.2 77.7 77.6 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on ECAPOV harmonization, using 2014-HICES and 2019-HICES. Actual data: 2019. Nowcast: 2020-2022. Forecasts are from 2023 to 2025. b/ Projection using annualized elasticity (2014-2019) with pass-through = 0.85 based on GDP per capita in constant LCU. MPO 41 Oct 23 increases Ukraine’s dependence on forex resources to meet debt service payments UKRAINE Key conditions and and complicates future debt treatment ef- forts. A reliance on deficit monetization challenges in 2022 has increased the money supply and liquid savings in the banking sector, Table 1 2022 After contracting by 29.1 percent in 2022 which poses inflation risks when efforts Population, million 43.5 Ukraine’s economy has benefited from im- to compress demand end. GDP, current US$ billion 155.4 proved electricity supply, a localization of While Ukraine has continued to take re- GDP per capita, current US$ 3568.5 active fighting, and more reliable receipt of form steps during Russia’s invasion, ad- a 7.1 Upper middle-income poverty rate ($6.85) external assistance in H1 2023, which has dressing institutional and structural con- a 25.6 allowed for a growth resumption. A low- straints related to the rule of law, labor Gini index b 99.0 base uptick of economic activity notwith- supply and competition will be critical to School enrollment, primary (% gross) Life expectancy at birth, years b 69.6 standing, Ukraine’s economy remains fun- facilitate a sustainable recovery, as are re- Total GHG emissions (mtCO2e) 153.4 damentally altered and operates as a war form efforts to accelerate Ukraine’s EU ac- economy in which private demand is sup- cession. Ensuring continued delivery of Source: WDI, Macro Poverty Outlook, and official data. a/ Most recent value (2020), 2017 PPPs. pressed by contractionary monetary policy key social services is important for liveli- b/ WDI for School enrollment (2014); Life expectancy to finance, together with external assis- hoods, especially among the poor and (2021). tance, a significant government deficit. vulnerable already affected by the war. Ukraine’s economy is in a fragile equi- librium in which policy must manage a triple imbalance. On the real side, high government expenditure generates sub- Recent developments Despite Russia’s invasion, Ukraine’s stantial demand, which can only be met through the concurrent compression of Ukraine’s GDP has started to recover, economy is showing signs of a modest private demand and the receipt of im- with growth turning positive in Q2 2023 recovery, aided by more reliable electrici- ports. This generates an external and fis- for the first time since Russia’s invasion. ty supply, and underpinned by the cal imbalance, which, with the private This was aided by public consumption steady receipt of external assistance that sector suppressed, requires external re- and a modest supply recovery in sectors sources to be financed. To date, Ukraine related to supporting the war economy has upheld public demand. GDP is now has managed these imbalances through and those benefiting from improved elec- expected to grow by 3.5 percent in assistance from its international partners, tricity supply. 2023. Poverty is projected to remain ele- but pressure points are rising. For one, Inflation has also moderated, declining to vated. Economic risks are rising, and the discontinuation of the Black Sea Grain 8.6 percent year-on-year at the end of Au- Ukraine will continue to depend on as- Initiative, unilaterally announced by Rus- gust, led by food and transport prices, with sia in July 2023, exerts downward pres- restrictive monetary policy contributing to sistance from its international partners sure on Ukraine’s main remaining ex- the decline. An increase of electricity tar- in the medium term. ports. In addition, the reliance on external iffs from June has exerted upward pres- loans has generated a large external debt sure. Food and energy inflation especially burden held by preferred creditors, which hurt poor families because they spend a FIGURE 1 Ukraine / Quarterly GDP growth, year-over-year FIGURE 2 Ukraine / Actual and projected poverty rate and real GDP per capita Percent Poverty rate (%) Real GDP per capita (constant LCU) 10 6.2 6.3 30 30000 2.9 0 25 25000 -0.9 -0.1 -3.3 -2.3 20 20000 -10 -11.0 -10.5 15 15000 -14.9 -20 10 10000 -30 5 5000 -30.6 -31.4 -36.9 0 0 -40 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Upper middle-income pov. rate Real GDP pc 2020 2021 2022 2023 Source: Ukraine Statistics Office. Source: World Bank. Notes: see Table 2. MPO 42 Oct 23 larger budget share on these. Banks have poverty reduction. Based on the global needed to reign in post-war inflation. In- remained profitable and stable, but risks line of US$6.85 a day (2017PPP), poverty flation is projected to decline gradually to are prevalent. is estimated to have increased from 5.5 7 percent by 2025. Many households con- Ukraine’s current account has turned into percent to 24.1 percent in 2022, pushing tinue to face difficult financial situations, a USD 1.3 billion deficit in H1 2023, driven 7.1 million more people into poverty. 6 and poverty is projected to remain elevat- by high import growth and a further con- million people are still displaced to neigh- ed at 22 percent in 2023. This scenario is traction in exports. The financial account boring countries, and another 5 million subject to significant downside risks relat- has also turned negative as government li- are displaced internally. ed to a deterioration of the security situa- abilities more than doubled and new trade tion and overall macroeconomic risks are credits – an earlier source of outflows– dis- exceptionally high. appeared. Reserves were aided by front- The current account is expected to regis- loaded external assistance and reached Outlook ter a 3.8 percent of GDP deficit in 2023 USD 40.4 billion by September 1. which is projected to widen to 4.8 percent Public expenditure grew by 67 percent Ukraine’s economic outlook remains con- by 2025 under the baseline assumption, year-on-year in H1 2023, whereas tax rev- ditional on the assumed duration of Rus- as imports increase during the reconstruc- enue increased by only 25 percent, due sia’s invasion. Under an indicative sce- tion period whereas exports remain sub- in large parts to continued subdued eco- nario in which active hostilities continue dued. In the medium term, reserves are ex- nomic activity. Revenue was aided by until mid-2024, GDP is expected to expand pected to continue benefiting from exter- receipts from non-budgetary institutions. by 3.5 percent in 2023 and 4 percent in nal assistance inflows and are projected to Ukraine met its financing needs through 2024. Starting in late 2024, Ukraine’s econ- remain adequate by 2025. domestic bank borrowing and external omy is expected to recover more rapidly The fiscal deficit is expected to remain assistance but has not resorted to moneti- under the baseline assumption, driven by high during the wartime before declining zation in 2023. public investment, as reconstruction and to 11.5 percent of GDP by 2025. Public Loss of private sector jobs and income, export activity pick up. Private consump- and publicly guaranteed debt is projected high inflation, and assets loss brought on tion growth is projected to remain modest to stabilize around 100 percent of GDP in by the war have reversed 15 years of due to contractionary monetary policy the medium term. TABLE 2 Ukraine / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices -3.8 3.4 -29.1 3.5 4.0 6.5 Private consumption 1.7 6.9 -26.7 5.0 6.0 7.0 Government consumption -0.7 0.8 18.0 5.0 -4.0 -6.5 Gross fixed capital investment -21.0 9.1 -35.3 9.3 14.0 21.2 Exports, goods and services -5.8 -8.6 -42.4 -10.0 15.0 30.0 Imports, goods and services -6.4 14.2 -18.5 3.0 10.0 15.0 Real GDP growth, at constant factor prices -3.8 3.5 -29.1 3.5 4.0 6.5 Agriculture -11.5 14.4 -25.0 -15.0 -5.0 3.3 Industry -4.5 1.1 -60.0 3.0 4.5 5.0 Services -2.2 2.4 -20.3 6.8 5.2 7.1 Inflation (consumer price index) 5.0 10.0 26.6 11.0 10.0 7.0 Current account balance (% of GDP) 3.5 -1.9 4.9 -3.8 -4.5 -4.8 Net foreign direct investment inflow (% of GDP) 0.0 2.4 0.4 0.4 0.4 1.9 a Fiscal Balance (% of GDP) -6.1 -4.0 -25.0 -27.6 -21.5 -11.5 Revenues (% of GDP) 41.0 36.3 41.0 38.6 39.0 39.9 Debt (% of GDP) 60.4 49.0 78.5 93.5 100.8 100.3 a Primary Balance (% of GDP) -3.1 -0.4 -22.0 -23.4 -16.0 -7.9 b,c Upper middle-income poverty rate ($6.85 in 2017 PPP) 7.1 5.5 24.1 22.0 .. .. GHG emissions growth (mtCO2e) -3.8 1.7 -29.1 -5.7 -7.7 -5.1 Energy related GHG emissions (% of total) 77.8 78.1 74.3 75.5 75.1 74.8 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Fiscal Balance and Primary Balance are excluding grants in 2022-2023. b/ Calculations based on ECAPOV harmonization, using 2020-HLCS. c/ Projection using neutral distribution (2020) with pass-through = 0.7 (Low (0.7)) based on GDP per capita in constant LCU. 2022 estimate based on simulation reflecting economic contraction and poverty impacts of inflation. Actual data: 2020. Nowcast: 2021-2022. Forecasts are from 2023 to 2025. MPO 43 Oct 23 by 5.5 percent, compared to 44 percent in 2022. Services exports, mainly in UZBEKISTAN Key conditions and transport and tourism, increased by 16 percent due to higher tourist arrivals challenges (93 percent from Tajikistan, Kazakhstan, Kyrgyz Republic, and Russia). In re- Table 1 2022 Uzbekistan has implemented an ambi- sponse to higher domestic demand, im- Population, million 35.6 tious set of reforms in recent years. How- ports expanded by 17 percent in H1 GDP, current US$ billion 80.4 ever, the Government recognizes that per- in machinery, equipment, fuels, and in- GDP per capita, current US$ 2255.6 sistently stimulating private sector-led termediary industrial goods. The trade a 98.1 School enrollment, primary (% gross) growth and job creation requires more deficit of 18.4 percent of GDP was part- a 70.9 reform: specifically, opening key sectors ly offset by net remittance inflows of Life expectancy at birth, years Total GHG emissions (mtCO2e) 174.3 of the economy to competition, including 12.1 percent of GDP in H1 2023 com- Source: WDI, Macro Poverty Outlook, and official data. factor markets and key services, and re- pared to 16.7 percent of GDP in H1 2022 a/ Most recent WDI value (2021). ducing the market dominance of SOEs. (but still above the historical average of Further strengthening the regulatory en- 8 percent of GDP). Thus, the current ac- vironment and reducing high trade and count deficit widened to 6.3 percent of transit costs would also encourage private GDP in H1, up from 1.4 percent of GDP sector growth. in H1 2022. On the supply-side, high- In order to spur the transition towards er growth in agriculture (3.8 percent) low-carbon growth and renewable ener- and industry (5.6 percent) was offset by The economy is expected to grow by gy, the Government plans to strength- slower growth in construction (4.8 per- 5.5 percent in 2023. Fiscal consoli- en energy sector regulation, gradually re- cent) and services (6.4 percent). dation is expected to continue gradu- move large and untargeted energy sub- Between January and August 2023, the sidies, and accelerate policy action on UZS depreciated by 6.9 percent against the ally in the medium term, given the climate change. USD, in part due to the flow-on impact of need to cushion the impact of exter- the depreciation of the RUB. nal shocks and to restructure energy By the end of June 2023, international prices by bringing them to cost-re- reserves decreased by USD 2 billion to covery levels. The medium-term out- Recent developments reach USD 33.7 billion, or 9 months of import cover. This was due to the depre- look remains positive as ambitious Real GDP grew by 5.6 percent in H1 ciation of both the UZS and RUB, lead- ongoing reforms are expected to 2023, led by exports, remittances, and ing to lower inflows of foreign currency stimulate private sector-led growth consumption. Total exports and non- from trade and remittances, given Rus- gold exports increased by 16 percent sia’s position as a major trading partner and job creation. and 12.5 percent, respectively, in H1 and Uzbek migrant destination. 2023 (in USD value, led by fruit and The fiscal deficit widened to 5.7 percent in vegetables, cars, and ferrous metals), H1 2023 from 4.1 percent of GDP in H1 while exports of gas, textiles, and chem- 2022 due to increased spending (e.g., emer- icals decreased. Exports to Russia grew gency energy spending in the early 2023 FIGURE 1 Uzbekistan / Real GDP growth and contributions FIGURE 2 Uzbekistan / Poverty, GDP per capita, and small to real GDP growth business development Percent GDP per capita, US$ Percent 20 3,000 70 2,500 60 15 50 2,000 10 40 1,500 30 5 1,000 20 0 500 10 0 0 -5 2017 2018 2019 2020 2021 2022 2021 2022 2023 2024 2025 Small Busines, % of GDP (rhs) Private Consumption Government Spending GDP per capita, US$ (lhs) Investment Net Exports Total incomes of population per capita, US$ (lhs) Stocks Growth National poverty rate, % of population (rhs) Sources: Uzbekistan official statistics and World Bank staff calculations. Source: Uzbekistan official statistics. Note: The national poverty line is more ambitious (67 percent higher) than the lower-middle-income country poverty line. MPO 44 Oct 23 energy crisis) and lower than expected rev- higher remittance inflows, although the Budget consolidation is expected to begin enues from excise duties. expected H2 2023 drop in remittances in the medium term, with the budget Lower global commodity prices drove CPI may stall this progress. deficit falling to 4 percent of GDP in 2024 inflation to 9 percent in July 2023, down and 3.6 percent in 2025 due to reduced tax from 10.7 percent in July 2022. benefits and energy subsidies, and in- The Central Bank of Uzbekistan (CBU) creased privatization proceeds. The Gov- began monetary easing by cutting the Outlook ernment is expected to adhere to its debt policy rate by 100 bsp to 14 percent in limits, with public debt increasing to 36 March 2023, down from 17 percent in Growth is expected to remain close to percent of GDP in 2023 and peaking at 36.6 March 2022. 5.5 percent in 2023 and accelerate grad- percent in 2024. Credit growth slowed to 18 percent in ually in the medium term. Consumption Despite expanded social protection pro- June 2023, down from 36 percent in 2022, growth in 2023 is expected to fall as the grams, slower growth in remittances and as capital buffers declined, and banks remittances from Russia continue to de- private consumption could limit expected enacted more cautious lending policies crease. Import growth is expected to ac- progress in poverty reduction. The na- following Russia’s invasion of Ukraine. celerate in 2023 and grow fast in the tional poverty rate is projected to fall However, the banking sector remained medium-term to support Uzbekistan’s marginally to 13.9 percent in 2023. resilient and adequately capitalized, with economic modernization, and with de- Downside risks to this outlook include a a CAR of 16.4 percent in June 2023, high- creasing remittances, the current account deterioration in Russia’s economic perfor- er than the required 13 percent. NPLs deficit will widen. The fiscal deficit is ex- mance, higher external inflationary pres- declined to 3.3 percent in June 2023, pected to widen to 5 percent of GDP in sures, and tighter-than-expected global fi- down from 4.8 percent in June 2022. The 2023 as a result of persistently high en- nancial conditions. Upside risks include poverty rate fell to 14 percent in 2022, ergy tariffs, higher expenditure on educa- higher global gold, natural gas, and copper down from 17 percent in 2021 (using the tion, public sector wages, pension and al- prices and stronger productivity growth national poverty line), primarily due to lowances, and lower revenue collections. due to ongoing structural reforms. TABLE 2 Uzbekistan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022 2023e 2024f 2025f Real GDP growth, at constant market prices 2.0 7.4 5.7 5.5 5.6 5.8 Private consumption 0.2 11.6 11.4 3.0 4.8 5.5 Government consumption 1.4 3.1 1.3 3.0 1.0 4.0 Gross fixed capital investment -4.4 2.9 0.9 2.5 3.0 3.2 Exports, goods and services -20.0 13.3 27.9 28.1 20.1 16.6 Imports, goods and services -15.0 19.9 10.1 19.2 17.8 16.5 Real GDP growth, at constant factor prices 2.0 7.4 5.7 5.5 5.6 5.8 Agriculture 2.9 4.0 3.6 3.5 3.7 3.9 Industry 2.5 7.9 5.5 5.7 5.6 6.5 Services 1.2 9.1 7.0 6.4 6.6 6.4 Inflation (consumer price index) 12.9 10.8 11.4 10.2 10.0 9.9 Current account balance (% of GDP) -5.0 -7.0 -0.8 -4.1 -4.5 -4.6 Net foreign direct investment inflow (% of GDP) 2.9 3.3 3.1 3.0 3.0 3.0 Fiscal balance (% of GDP) -4.4 -6.0 -4.1 -5.0 -4.0 -3.6 Revenues (% of GDP) 25.5 25.9 30.9 29.7 29.6 29.5 Debt (% of GDP) 37.4 36.6 34.9 36.0 36.6 34.6 Primary balance (% of GDP) -4.1 -5.7 -3.7 -4.4 -3.4 -3.0 GHG emissions growth (mtCO2e) -1.8 -1.1 -3.2 -2.5 -2.3 -2.5 Energy related GHG emissions (% of total) 60.1 59.4 58.1 56.9 55.8 54.5 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. MPO 45 Oct 23 Macro Poverty Outlook 10 / 2023