Economic studies
Kyrgyzstan

Kyrgyzstan

Population 5.9 million
GDP per capita 1,112 US$
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Synthesis

major macro economic indicators

  2014 2015  2016 (f) 2017 (f)
GDP growth (%) 4.0 3.5 1.7 2.0
Inflation (yearly average) (%) 7.5 6.5 1.1 7.4
Budget balance (% GDP) 1.9 -1.2 -4.5 -2.7
Current account balance (% GDP) -18.8 -10.4 -15.0 -14.9
Public debt (% GDP) 52.3 66.0 72.1 72.2

 

(e) Estimate (f) Forecast

STRENGTHS

  • Major gold reserves
  • Support from bilateral and multilateral donors
  • Strategic pivotal position between Asia and CIS
  • Member of the Eurasian Economic Union since 2015 (Russia, Belarus, Kazakhstan and Armenia)

WEAKNESSES

  • Low level of economic diversification, reliance on gold and remittances
  • Landlocked country with very high energy dependency
  • Difficult business climate
  • Political and social instability, regional and inter-ethnic tensions
  • Difficult relations with its neighbours (water management, borders, etc.)

Risk assessment

The fall in the price of gold and the Russian recession will continue to hold back growth

After achieving growth of nearly 11% in 2013, the Kyrgyz economy continued slowing in 2016 and is expected to settle at a moderate level in 2017. Kyrgyzstan is struggling as the other economies in the region and, more specifically, in Russia and Kazakhstan, its key trading partners, struggle. Household consumption is suffering as a result of the situations in its neighbouring countries, with remittances from Kyrgyz workers in Russia (-25% in 2015), accounting for 25.7% of GDP, in decline. On top of this, the slowness of the recovery of international gold prices, the country’s leading export, is also a drag on the rate of growth. The standoff in the dispute concerning the operation of the Kumtor mine – the country’s biggest mine, accounting for 10% of GDP and 25% of industrial output – between the Canadian company Centerra and the government, threatens the future of production (-36% in the first six months of 2016) and growth in this critical sector. The gradual improvement in these external pressures should thus make it possible for growth to stabilise in 2017.

The actions of the central bank, the National Bank of the Kyrgyz Republic (NBKR), together with the weakness of domestic demand, the stabilisation of the som and above all, the fall in food prices, led to a drop in inflation in 2016. Higher food prices are likely however to push inflation back up steeply in 2017 with non-food inflation already in the central bank’s 5% - 7% target range.

 

Kyrgyzstan struggling with twin deficit

There should be an improvement in the budget deficit in 2017 thanks specifically to the removal of a number of tax exemptions, including VAT on flour. Efforts to reduce spending also need to be applied but with the approach of the Presidential elections in 2017, non-budgeted expenditure cannot be ruled out. Given the slow rate of growth and the critical level reached by the public debt, fiscal consolidation is a key challenge.

The current account deficit, which widened in 2016, should stabilise at a very high level in 2017. The balance of trade deficit is likely to remain substantial taking into account the fairly unpromising forecasts concerning the price of gold, Kyrgyzstan’s leading export. The outlook for remittances from workers abroad and Russian FDI is unlikely to improve in 2017. These will continue to suffer from the slowness of any recovery in the Russian economy. The scale of the deficit, the roots of which lie in the extent of the country’s external dependence for its energy and food needs, makes the economy vulnerable to external shocks. Its currency reserves, equal to 4.6 months of future imports of goods and services, are not large enough to reduce this risk.

 

Political instability provoked by dispute over constitutional reforms

The government, in power since the parliamentary elections of October 2015, resigned on 26 October 2016 after the Social Democratic (SDPK) party of the President Almazbek Atambayev left the coalition. This followed the refusal by the Ata Meken party, which was in the government coalition, to support constitutional reforms, accusing Mr. Atambayev of trying to extend his power over the country beyond the end of his term of office at the end of 2017. Two weeks later, however, the PSDK found two new coalition partners and the Prime Minister was re-elected to lead the government. His appointment came after the ruling by the Supreme Court in favour of a referendum on the controversial constitutional reforms. These reforms would conflict with the provisions of the 2010 Constitution stipulating that constitutional amendments cannot come into effect before 01 September 2020. These reforms, which include increasing the powers of the government and of the parliament, are being seen as a way for President Atambayev to maintain his influence over parliament when he reaches the end of his term of office as President at the end of 2017. The constitutional reform is an illustration of the fragile nature of this evolving democracy and its persistent political instability. With this political instability, the level of corruption and the weakness of regulation, the business climate remains poor.

In addition, in the border areas, there are ethnic frictions between the Tajik, Uzbek and Kyrgyz populations and there is a heightened risk of Islamic terrorist activity. The unclaimed attack on the Chinese embassy in Bishkek at the end of August 2016 highlights the security risks.

Its diplomatic relations have included moves to establish closer links with Russia through membership of the Eurasian Economic Union in 2015. Whilst this agreement helps to protect its access to the Russian and, in particular, the Kazakh markets, it could be a sign of a loss of political independence relative to Moscow and be an obstacle on its increased cooperation with China, in particular in the development of the “One Belt, One Road” initiative, aimed at rebuilding Eurasian trade routes.

 

Last update: January 2017

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