Kyrgyz economy close to recession

The deep recession expected in 2022 in Russia will have severe 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 significantly impact the current account and private consumption (83% of GDP). The return to regular activity at the Kumtor gold mine and 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 global oil and food prices keep import costs high. Russia’s decision to ban wheat exports to EEU countries until August 2022 will put additional pressure on prices. The government will likely extend price regulation beyond essential foodstuffs (wheat, oil, sugar, meat, etc.), but this must 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 Central Bank of Russia (CBR) imposed strict capital controls, the som, alongside the ruble, returned to pre-war levels. However, its volatility will likely persist as the CBR relaxes some of its capital controls, and the NBKR (Central Bank of the Kyrgyz Republic) cannot support the som. Since the beginning of 2021, the NBKR has raised its policy rate by 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%. In 2022, revenues were expected to decline, with the most specific 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. Concessional loans and foreign grants finance about 60% of the deficit. 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 severe decline in remittances will contribute to the widening of the current account. The country has a high level of external debt, 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 by the population’s hostility towards the Chinese presence, fuelled by the condition 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 its geographic importance to China’s Belt and Road initiative. China will not eclipse Russia’s military hold under the Collective Security Treaty Organization (CSTO). Still, 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 the two countries need more motivation to resolve long-standing border disputes. In 2021 and 2022, tensions around Vorukh - a Tajik exclave surrounded by Kyrgyz territory - erupted, leading to clashes between civilians and armed forces. Relations with Uzbekistan are on the right track. In March 2021, the two countries signed a protocol on the complete delimitation and demarcation of their border, a critical step for border relations in Central Asia and for developing Kyrgyz-Uzbek cooperation.