The EDB: The coronavirus pandemic has slowed potential economic growth in most of the Bank’s member states

08 September 2020

Moscow, 8 September 2020. EDB analysts have assessed the impact of the COVID-19 pandemic on key macroeconomic indicators of the Bank’s member countries, including their cyclical and trend (equilibrium) components. The results of the research are presented in the special report by the EDB’s Directorate for Research entitled Assessment of Unobservable Economic Variables in EDB Member Countries.

The paper notes that the negative effects of the coronavirus outbreak in the first half of 2020 had strongly impacted the cyclical development of the countries in the EDB’s region of operations. In the second quarter, manufacturing activity in the Bank’s member states fell significantly below potential, leading to serious negative output gaps. The national currencies in most of the member countries have moved towards undervaluation, after having weakened vis-à-vis the monetary units of the countries’ main trading partners. Monetary regulators have softened interest rate policies amid the cyclical economic downturn.

The report points out that the potential for economic growth in the region’s countries that have introduced large-scale quarantine measures in the first six months of 2020 declined by 0.2-1% from pre-crisis levels. In particular, Armenia’s potential GDP growth is currently estimated at about 4.8%, Belarus’s 1.5%, Kazakhstan’s 2.2-2.7%, the Kyrgyz Republic’s 3.4-3.6%, Russia’s about 1%, and Tajikistan’s 6.9%.

EDB analysts point to a downward trend in the equilibrium real effective exchange rates of all the countries of the Bank’s region of operations (except Armenia), which has intensified under the influence of the negative effects of the COVID-19 pandemic.

The special report also notes that the natural level of the money market interest rate in EDB countries continued to decline in the first half of 2020, which may result from inertia in its dynamics, associated with the previously observed slowing down of the equilibrium devaluation of national currencies. The discontinuation of this trend and the decrease in potential economic growth rates have had a multidirectional effect on the neutral rate, which made it possible to avoid sharp fluctuations in its level. The report estimates the current equilibrium real interest rate in the money market of Armenia at around 4.0-4.5%, Belarus 3-3.5%, Kazakhstan 4.0-4.5%, the Kyrgyz Republic 4.5%, Russia 2-2.5%, and Tajikistan 8-8.5%.

EDB analysts point out that the COVID-19 pandemic may impact the equilibrium economic indicators of the Bank’s member states more profoundly than suggested in the report, as further developments around the epidemic situation in the world and the region are highly uncertain. Experts believe that a protracted recession will depress investments for a long time, and this will undoubtedly push down the rate of capital accumulation and total factor productivity and affect potential output.

Additional Information:

The Eurasian Development Bank (EDB) is an international financial institution founded by Russia and Kazakhstan in January 2006 with the mission to facilitate the development of market economies, sustainable economic growth, and the expansion of mutual trade and other economic ties in its member states. The EDB's charter capital totals US $7 billion. The member states of the Bank are the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan, the Kyrgyz Republic, the Russian Federation, and the Republic of Tajikistan. 

The EDB Media Centre:

Alexander Savelyev +7 (985) 765 23 59 (Moscow)

Azima Sapargaliyeva +7 (777) 750 00 08 (Almaty)

Sergey Gorbachev +7 (916) 727 22 00 (Moscow)

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