EURASIA BLOG: Kyrgyz rate hike rings alarm bell ahead of election

By bne IntelliNews October 1, 2015

Jacopo Dettoni in Bishkek -


Kyrgyzstan National Bank’s unexpected rate hike just a few days ahead of the October 4 parliamentary elections has aired the mounting concerns over the state of the economy.

In a sudden turnaround, the National Bank raised its policy interest rates by 200 basis points to 10% on September 28. The bank had previously cut interest rates twice earlier this year to shore up economic growth, yet inflation pressures and the depreciation of the som have now forced it to reverse its policy course.

“A decline in foreign trade and inward remittances are happening  because of, among other things, the depreciation of the currencies of the country’s major trading partners,” the National Bank’s statement reads, pointing to the depreciation of the Russian ruble, the Kazakh som and, to a lesser extent, the Chinese yuan.

“These factors, combined with the current instability of foreign financial markets, have constituted the main reason for the growing pressure on the domestic currency market, which in turn can enhance inflationary pressure in the short and medium term.”

The Kyrgyz som has lost 16.9% against the dollar in the year-to-date, on top of another 19.7% in 2014, increasing concerns among the population over the credibility of the local currency.

Yet the alarm bell rang by the National Bank fell on deaf ears, as there is little trace, if any, of economic and monetary policy in the political platforms of the 14 parties running for the 120 seats available at the Jogorku Kanesh.

Although the parties all enjoy a unique degree of freedom of expression for a Central Asian country, they are mostly based around clientelism and their programmes fail to address many of the country’s major priorities, including its current economic headaches.

“People are more interested in the som exchange rate than in the political platforms of the running parties, because parties don’t really address this issue, they are just interested in gaining a seat in parliament,” Kuban Choroev, a Bishkek-based, independent economist, tells bne Intellinews.  

“But people go to the market every day and see with their eyes that the prices of primary goods are going up, because they are mostly imported goods.”

Consumer prices are on the rise again after months of relatively moderate growth. Month-on-month consumer price inflation (CPI) rose to 0.8% in mid-September, the highest increase since January, according to figures from the National Statistical Committee, with the price increase of non-food products and clothing reaching, respectively, 1.8% and 1.6%.  Annual CPI inflation stood at 5.8% in August, within the 5% to 7% inflation goal set by the National Bank.

“Let alone the fact that half of the loans issued by commercial banks is in dollars, which shrinks family budgets as borrowers as they mostly earn money in local currency, but then have to repay interest and capital in foreign currency,” Choroev added. The share of commercial bank loans in foreign currency stood at 54.1% of the total outstanding loans at the end of August, with loans in the national currency made up the remaining 45.9%.

The National Bank has already had to dip into its foreign currency reserves to prop up the som, selling $214.9mn in the currency market since the beginning of the year, on top of $536.7mn in 2014, according to the bank’s latest figures. Yet these interventions fell short of protecting the som, and a new round of interest hikes became inevitable right ahead of the elections - a timing that may be no coincidence.

“Some may say the ruling elite of the Social Democratic Party (SDPK) has leverage over the National Bank, and wants to show people that they are able to able to manage things the right way when needed,” Medet Tiulegenov, a politics lecturer at the American University of Central Asia, tells bne Intellinews.

Beyond such speculations, a coherent national framework for economic and monetary policy, as well as solutions to pull the Kyrgyz economy out of its current troubles are absent among the programmes of the running political parties, and any concrete intervention will likely be postponed until after the elections, Tiulegenov noted. 

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