Economic studies
Kyrgyzstan

Kyrgyzstan

Population 6.5 million
GDP per capita 1,189 US$
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 4.6 -8.6 3.7 0.9
Inflation (yearly average, %) 1.1 6.3 11.9 14.0
Budget balance (% GDP)* -0.1 -3.3 -0.3 -2.5
Current account balance (% GDP)* -12.1 4.8 -8.5 -12
Public debt (% GDP) 51.6 68.0 61.0 61.0

(e): Estimate (f): Forecast *Including grants

STRENGTHS

  • Abundance of mineral resources (gold, copper, uranium, mercury, antimony, lead, iron) of which the exploitation represents 30% of GDP
  • Tourism and hydroelectric potential (only 10% exploited)
  • Strategic position and transit corridor between China, Russia and Europe
  • Financial support from multilateral and bilateral donors, as well as from China
  • Member of the Eurasian Economic Union (EAEU)
  • Member of China's Belt and Road Initiative (BRI)

WEAKNESSES

  • Small open economy highly dependent on economic fluctuations in Russia, via transfers of expatriate workers (30% of GDP), and in China and Kazakhstan, with which half of trade is carried out
  • Strong dependence on gold (45% of exports) and agriculture (20% of GDP, 40% of jobs)
  • Fragile, concentrated and dollarized banking system (43% of deposits and 33% of loans), and expensive, directed and underdeveloped credit (25% of GDP)
  • Difficult geography (landlocked and 94% mountainous) and high energy dependency
  • Poor infrastructure (energy, water, health)
  • Poor governance (corruption, organized crime, highly politicized judicial system, large informal economy (23% of GDP) that reduces public resources) and difficult business environment
  • Political and social instability linked to the weakness of institutions, poverty (20% of the population) and ethnic, linguistic and economic opposition between the northern and southern valleys

Risk assessment

Kyrgyz economy close to recession

The deep recession expected in 2022 in Russia will have serious consequences for the Kyrgyz Republic, which is not only vulnerable as a trading partner (25% of Kyrgyz exports, 34% of its imports in 2021), but also very dependent on remittances (30% of GDP) from expatriate workers in Russia (80% of the total). However, these remittances could contract by at least 30% this year. This will have a significant impact on both the current account and private consumption (83% of GDP). The return to normal activity at the Kumtor gold mine, as well as continued high gold prices, will be offset by higher oil prices, of which the country is a net importer (10% of its imports). The slowdown in growth in Kazakhstan (23% of exports), another major trading partner, will also weigh on economic activity. Inflation will accelerate in 2022, as continued high global oil and food prices will keep import costs high. Russia's decision to ban wheat exports to EEU countries until August 2022 will put additional pressure on prices. It is unlikely that the government will extend price regulation beyond essential foodstuffs (wheat, oil, sugar, meat, etc.), but this cannot be ruled out given the current inflationary trend. Following the Russian invasion of Ukraine, the ruble depreciated sharply, and the som followed soon after. After the imposition of strict capital controls by the Central Bank of Russia (CBR), the som, alongside the ruble, returned to pre-war levels. However, its volatility is likely to persist as the CBR relaxes some of its capital controls, and the NBKR (Central Bank of the Kyrgyz Republic) has little capacity to support the som. Since the beginning of 2021, the NBKR has raised its policy rate by a total of 900 basis points to 14% amid rising inflation. Overall, the risks to the country are tilted downwards and the probability of a recession this year is high, especially if the economic shock in Russia proves to be more severe than expected.

 

Growing indebtedness to China

In early 2018, the government adopted a new fiscal rule, setting the budget deficit ceiling at 3% of GDP and a maximum range for public debt of 60-65% of GDP. In 2022, revenues are expected to decline, with the most certain source being the authorities' direct takeover of Kumtor's mining and export operations (10% of GDP), following the forced departure of its Canadian owner. Despite funding infrastructure projects, the government will limit its spending and still meet its deficit target. About 60% of the deficit is financed by concessional loans and foreign grants. The Kyrgyz Republic has a structural trade deficit due to its dependence on imported energy and machinery. It will widen further in 2022 due to high import costs. A serious decline in remittances will contribute to the widening of the current account. The country has a high level of external debt, which is expected to reach 100% of GDP in 2022, split roughly equally between private and public debtors. Its public share (82% of total public debt, or 52% of GDP) is held by multilateral (IMF, ADB, World Bank, EFSD) and bilateral (58%) lenders, and by the Chinese Eximbank (42%). Kyrgyzstan's large accumulated debt to China for its infrastructure projects raises concerns that the country will have to sell off lucrative assets if it fails to meet its repayment obligations. The risk of sovereign default is high, but the government will service its debt in the short-term through subsidies and extended payment terms. Gross international reserves cover about 4.5 months of imports.

 

China and Russia go toe to toe in Kyrgyzstan

Kyrgyzstan has neither approved nor officially condemned Russia's invasion of Ukraine. It will want to maintain good relations with Russia and China, which provide funding, security and investment. Nevertheless, the situation is complicated with the hostility of the population towards the Chinese presence, fuelled by the situation of the people in the Chinese region of Xinjiang. Although China is increasingly concerned about the Kyrgyz Republic's ability to repay its debt on time, Chinese investment will continue because of the country's geographic importance to China's Belt and Road initiative. China will not eclipse Russia's military hold under the Collective Security Treaty Organization (CSTO), but it will exert increasing influence in areas where it has interests, such as maintaining security on the border between Xinjiang and the eastern part of the Kyrgyz Republic. Relations with Tajikistan will remain problematic because of long-standing border disputes that the two countries do not seem motivated to resolve. In 2021 and 2022, tensions around Vorukh - a Tajik exclave surrounded by Kyrgyz territory - erupted, leading to clashes between civilians and armed forces on both sides. Relations with Uzbekistan are on the right track. In March 2021, the two countries signed a protocol on the full delimitation and demarcation of their border, a key step for border relations in Central Asia and for the development of Kyrgyz-Uzbek cooperation.

 

Last updated: July 2022

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