Analytical materials / Kyrgyzstan

Uran Abdynasyrov: “In 2015, the economy of Kyrgyzstan faces a number of serious challenges.”

24.02.2015

“We need to understand that no one, except the Kyrgyz Republic itself, will ensure the growth of the country and strengthen the national economy, because others, even under such close cooperation, think of their own benefit,” said Uran Abdynasyrov, Director of the Public Foundation “Eurasian Studies” (Kyrgyzstan, Bishkek), in an article written exclusively for the CABAR.
In 2015, the economy of Kyrgyzstan faces a number of serious challenges, and it is unlikely that Kyrgyzstan can cope with them. However, the professionalism of the government can soften the future crisis blows against the government itself, the business and the public.

The fact that the country is not able to overcome all the challenges and risks is associated with a number of external and internal factors, most of which do not depend on the government. However, there are also aspects, which the government is responsible for.
The skillful work on controllable factors in the economy will help minimize the effects of the economic crisis, and some of the risks, on the contrary, can even be used to one’s own advantage and drawn maximum benefit, if proper calculations are made and relevant actions are taken.
The Ministry of Economy of Kyrgyzstan traditionally encourages the public, predicting the economic growth of up to 6.2% in Kyrgyzstan in 2015.
Early last year, the Minister of Economy promised almost similar rates (6.9%) at the end of 2014, but in fact, the results barely exceeded half of the projected growth which was only 3.6%.[1] This is almost three times lower compared to 2013, when the real dynamics of the national economy reached 10.9%.[2]
Returning to the current year, in 2015, experts, (at least a number of international financial institutions) predict the GDP growth in Kyrgyzstan of no more than 3 per cent.
Analysts of the World Bank (WB) tentatively expect the growth of up to 3.5%,[3] the European Bank for Reconstruction and Development (EBRD) – up to 3.2%, and the International Monetary Fund (IMF) proved to be the most pessimistic – 1.7%. About the same forecast was given by the UN Department of Economic and Social Affairs.

The main risks that will slow down the economy of Kyrgyzstan in 2015 are inflation, decline in remittances from migrants, reducing imports and a decline in production in the domestic market.
In addition to the global trends, the reasons for risks include a close relationship or dependence of the Kyrgyz economy on Russian economy, from which our country is suffering with a low volume of exports and a high level of imports, due to which the country depends on foreign markets, and the accession of Kyrgyzstan into the Eurasian Economic Union (EEU). In the short term, particularly for 2015, the accession promises nothing but threats to the economy, although there are claims that in the future, it will have a positive impact on the development of domestic production.
Let’s consider in detail.
According to forecasts of the Asian Development Bank (ADB), the inflation in Kyrgyzstan this year amounts to almost 10 per cent (9.8%), which is expected to primarily affect the increase of the prices of basic foodstuffs. The entire population will feel, of course, the impact of the first factor, particularly the people with medium-low and low income (i.e., the poor and the needy sections of the population), as food is still the main part of the consumer basket in Kyrgyzstan.
The decrease in remittances from migrants, which, according to the Ministry of Economy of Kyrgyzstan, in 2015, can be reduced to 25% or half a billion dollars, accounting for 7% of the total GDP of the country, will create a lot of problems associated with the economic turnover of the country. Mostly, it will affect the purchasing power of the population, especially in the regions, as well as the construction and banking sectors, the development of small, medium-sized businesses; respectively, the payment of taxes and the turnover of national currency, the free rotation of the ruble and the dollar.
Although there is no special threat to major industrial sectors – mining sectors of the economy, the uncertainty about the future of CJSC “Kumtor Operating Gold Company” and the fall in gold prices due to the strengthening of the dollar have an impact on the gold mining industry. It is clear that, together with inflation, the reduction of the cash inflows and concern of the banking sector, it will affect the agricultural industry, just like the services sector.
In addition to these risks, the Ministry of Economy outlined the following factors regarding the republican budget for 2015 and forecast for 2016-2017:
– Instability of the world economy;
– Volatility of world prices for gold;
– Deterioration of terms of trade with the countries -main trading partners, members of the CU (the entry into the Customs Union may lead to equalization (or tightening) the price level of the Kyrgyz Republic with Russian and Kazakh prices, to certain inflationary pressures and price increases);
– Dependence of the internal market of bread on imports of grain and flour;
– The uncertainty of the terms of trade with the countries – major trading partners (fuel, gas);
– The shortfalls in the planned foreign investment;
– The natural climatic factors that can have a negative impact on the development of agriculture.
At the same time, we must recognize that Kyrgyzstan, firstly, is a hostage to the global trend, and, secondly, to the situation with the economy in Russia. These are the external factors that directly affect the growth of the country’s GDP, but the government here can not affect the external independent factors, for which, however, Kyrgyzstan itself is to blame, because the risks coming from abroad are associated with the weakness of its economy – high import content and very low levels of its own production.
It means that we must now carefully monitor what is going to happen at the global and Russian markets. If we talk about the global trend, after the economic growth, which was estimated at 2.6 percent in 2014, the growth of the global economy is projected to reach 3 percent this year, 3.3 percent – in 2016 and 3.2 percent – in 2017. It is predicted in one of the major World Bank reports published twice a year.[4]
Economic growth in developing countries in 2014 amounted to 4.4 percent and is expected to rise to 4.8 percent in 2015 and then will be firmly established at 5.3 in 2016, and 5.4 percent – in 2017.
It is estimated that growth in developing countries of Eurasia slowed in 2014 to a lower-than-expected figure and was 2.4 percent, which resulted from the intermittent economic recovery in the euro zone and stagnation in Russia. Economic growth across the region, as expected, will recover to 3 percent in 2015, but with significant differences between the countries.[5]
Speaking specifically about Russia, there is no organization in the world that would not predict the most worst-case scenario for Russia. Against this background, the situation in Kyrgyzstan this year will be even more deeply integrated into Russian economic zone, despite the quite objective pessimistic forecasts for Russia, founded by weighty reasons.
In 2014, Russia showed their GDP growth of only 0.6%, which is associated with reciprocal sanctions for a number of product denominations between Russia and the West, Russian freezing Russian accounts in foreign banks, and most importantly – the decline in oil prices.
This immediately affected Kyrgyzstan in the third quarter, when the Kyrgyz som began to depreciate, while inflation increased, migrant remittances reduced, and the dollar strengthened.
The influence on the economy and the population of last year factors continues so far, and this trend will continue at least until the end of 2015.
In this context, it is very curious to know what will happen to Russia in order to understand what Kyrgyzstan should expect.
If one is to believe the analysts of the EBRD, there will not be any GDP growth in Russia this year, and it even may fall by up to the level of  4.8%.[6] The level of falling may be corrected by the end of the year; however, it is evident that the positive balance is out of the question.
Accordingly, Russia’s ability to provide financial support to Kyrgyzstan and to prevent mass return of migrants seems doubtful. And here’s why:
The sharp deterioration in the prospects of the Russian economy development is explained by various factors, among which the fall in world oil prices, the negative impact of the sanctions imposed by the West, as well as the decline in consumer demand and investment.
In general, the negative growth of the Russian economy, and more specifically, its decline is determined by the following factors: average annual oil price will be $58 per barrel, while sanctions remain in force. Structural and cyclical negative factors will reinforce each other, and the low activity of investors jeopardizes long-term growth prospects.
If we talk about the influx of foreign money to Russia, the rising cost of domestic credit and limited access to external financing will reduce the investment in the Russian economy by more than 10% in 2015.
Reduced investment poses a threat to the resumption of economic growth, and this threat will increase as the capacity of existing production facilities will strengthen, and the lack of investment in the oil and gas sector can make it difficult to maintain the production volume of oil and gas, even at current levels.[7]
From this forecast for the economic situation in Russia, three conclusions can be made: there is a decline in production and economic activity in the country that will affect the reduction of financial expenses, which primarily affects the staff, that is, reducing the workforce from neighboring countries – migrants from Central Asia. The legal relief, which is often mentioned in the framework of joining the EEU, will not help, as the market dictates processes.
The second conclusion is based on the first one – as business in Russia is forced to cut costs and optimize its activities, the investment into Kyrgyzstan will be out of question, because the main thing for Russia is to keep the existing power and hold on during the blockade by Western partners. It can be concluded that after the ratification of the treaty on the Kyrgyz Republic membership in the EEU, the promised large investment inflows into a number of sectors of the economy of Kyrgyzstan will not take place, at least, the investment from the private sector this year.
The third conclusion is that we should not expect powerful financial investments from Russia, at least in 2015. Russia itself suffers from a lack of investment. Of all the previously agreed and promised details, only the construction of customs offices and laboratories at the external borders of the Union is taking place on the paper, for which until now, there was allocated only half of the requested amount – 100 million dollars, although there remained just two months before the formal entry – May 2015.
It is unlikely that after the formal accession to the Eurasian Economic Union and the establishment of all the necessary equipment, the actual rules for import of goods from the traditional importing countries – China, Turkey, South-Eastern and Arab countries – will drastically change, as the government understands the explosiveness of the consequences that will affect trade, the largest markets and thousands of citizens, working in these commercial areas. Informal import or smuggling, as it is now working on the Kyrgyz-Uzbek and Kyrgyz-Tajik border, are likely to intensify at the Kyrgyz-Chinese border and from other countries listed above, too.
The Kyrgyz-Tajik border in the area with the Osh region will play a special role in the import of Chinese goods by smuggling. In the western sector of the Tajik-Chinese border, there is a well-established channel of imports of Chinese goods, which lies near the Kyrgyz-Tajik border. Due to the fact that officially, it will be more difficult for businessmen to bring a large amount of goods at low duties, the site of the Kyrgyz-Tajik border, which is practically not controlled, can be another channel for Chinese imports through Tajikistan.
Yet, somehow, the import will be gradually reduced, because some businessmen in Kyrgyzstan are thinking about, and some have already reoriented their businesses to domestic textile manufactures and exports to the EEU.
It is also expected that the projected inflation will affect these products, too, first of all, for objective reasons related to the situation around the dollar, the depreciation of Kyrgyz som and the gradual equalization of prices with Kazakhstan and Russia, and secondly, smuggling – this is an additional expenditure on transportation across the border, which will be compensated by the buyer, and a small speculation from the sellers themselves.
With regard to the development of agriculture, increased exports of crop and livestock products from Kyrgyzstan to the EEU countries, it must be admitted that there will be no breakthrough in this sector. Firstly, as has been previously stated, this is due to the difficult financial situation in Russia and the lack of resources for injections here. Secondly, conversion and standardization of products in accordance with the necessary requirements could begin this year, but the actual production will start in the best case only in the beginning of spring field work in 2016. Thirdly, Kyrgyzstan will not be able to put on the conveyor its agricultural industry and to ensure delivery of its products to Russian cities in the required volume. Therefore, a sizeable increase in exports in this sector cannot be expected.
Based on the above, the following steps should be made in the short term:
– Since the inflation rate of up to 10 percent is inevitable, the population should think about increasing their income, which can be ensured through any additional employment or indexation of current wages by at least 10-15% of the actual amount received;
– Depreciation of the Kyrgyz som is inevitable this year, and if you store the main savings for large purchases (house, car, travel abroad, education) in Kyrgyz soms, you need to use more US dollars. If the upcoming purchase is intended mostly for household appliances or repair, it is best to keep money is Kyrgyz soms;
If we talk about large-scale actions, this year the government, business and the public, as always, should traditionally rely on the development and strengthening of the traditional sectors of the economy – agriculture, services and tourism.
Favorable preconditions for the growth in agricultural production will be the implementation of the following measures:
– An increase in acreage of perennial grasses and industrial crops at the expense of involving the unused arable land in the production;
– Restoration of soil fertility of agricultural land and a complex of protective measures against major particularly dangerous pests, diseases and weeds;
– Improvement of material and technical base of agriculture;
– Rational use of pastures;
– Provision of high-yielding seed crops;
– Timely spring field work;
– Optimization of cropping patterns;
– Development of a loan system;
– Development of new irrigated lands;
– Construction of canals for irrigation, etc.
The practice of providing preferential loans to agricultural producers and privileges in the access to fuels and lubricants and mineral fertilizers, and others should continue in carrying out the planned tasks.
In the area of services, the Ministry of Economy forecasts a moderate growth trend this year. Annual volume of gross output of services will amount to 5.1%- in 2015, 5.3% – in 2016 and 5.5% – in 2017, mainly due to the growth in trade, transport and communications services, hotels, restaurants and tourism. The demand for services will be supported by real growth of monetary incomes of the population.
The policy in the service sector should be aimed at improving the availability of essential services and expanding them throughout the country, including telecommunications services, transport services, microfinance institutions, trade and other services. Measures should be taken to reduce the level of informal trade to increase tax collections in this area.
Information and communication services will be the fastest to develop in the structure of services (Ministry of Economy forecasts: 2015 – by 13.1%, 2016 – by 12.9%, 2017 – by 13.9%). It is expected that this growth will be achieved by continuing the construction of fiber-optic communication lines, the introduction of digital forms of information.
With regard to the growth of services in transport and storage of goods in 2015 – 2017, it is projected at 7.3%, 6.5% and 7.6%, respectively.
A priority in the development of transport services must emphasize the improvement of the road transport system through the rehabilitation of international transport corridors, as well as keeping up to standard and improving the quality of roads for internal use. The work on modernization in the provision of transport services should also be continued by providing air transport services through improved air navigation equipment.
It is also expected that the volume of services in hotels and restaurants will increase (2015 – by 9.5%, 2016 – by 8.9%, 2017 – by 9.1%) due to the increased network of services and the influx of tourists.
Tourism is regarded as one of the main economic priorities of the country. For the development of this area there should be solved such problems, as: (a) the formation of a modern infrastructure of tourist services; (b) support of domestic entrepreneurship in tourism; (c) strengthening and extending the positions of the tourist product of Kyrgyzstan in foreign markets.
The issues of attracting investments still remain problematic. To solve them, the Government should adopt a number of measures this year to stabilize the situation in the country, reducing corruption and simplifying the legislation.
Therefore, the state represented by the Kyrgyz Government and the Parliament has to learn to give and execute guarantees to investors. Apparently it is necessary to develop the culture and ethical traditions of behavior so that any populist manifestations were negatively perceived by the population.
Legislation should  also be developed to clearly distinguish between the step-by-step actions of investors and reduce their contact with the government. The goal is to increase guarantees to investors, especially foreign.
To increase the economic growth, it is necessary to maintain the turnover, mainly, of small and medium businesses. The formation and retention of low, competitive tariffs for goods and services that form the basis of factors of production and affect the cost – (raw materials, electricity, etc.) is necessary.
The search and formation of the locomotive of the economy and market: in this regard, a positive factor is the country’s accession to the Eurasian Economic Union. 
Although the entry of Kyrgyzstan into the Eurasian Economic Union generates a lot of risks and difficulties for businesses, the public and the government, and in the present situation, it would be better, on the contrary, to seek to develop cooperation with more favorable states from an economic point of view rather than Russia, yet because the integration should be taken already for granted, we should look for ways to obtain the necessary benefits.
Any crisis could both pose a threat and give a chance for recovery. In this regard, Kyrgyzstan should, without waiting for any help from the EEU and various subsidies, in the first place, stimulate small and medium enterprises for the production of their own products and establish point agreements with Russian businessmen about the sale of particularly agricultural products.
We need to understand that no one, except the Kyrgyz Republic itself, will ensure the growth of the country and strengthen the national economy, because others, even under such close cooperation, think of their own benefit. Therefore, the development of production of real sectors of the economy, the country’s traditional agriculture, light industry and mining, tourism and others should come through the country’s own strength and efforts, rather than using outside stimulation.
Uran Abdynasyrov, Doctor of Economics, Professor at the Academy of Management under the President of KR, director of PF “Eurasian Studies”
Opinion of the author may not necessarily represent that of CABAR

Latest

Popular