The Kyrgyz economy may have got off to a bad start this year, but the government remains confident that it will register positive growth in 2016, Economy Minister Arzybek Kozhoshev told bne IntelliNews in an interview in London on May 12.

The GDP contraction of 4.9% in the first quarter was due to a decline in production at the largest gold mine in the country, the official explained, but production will increase in the second half of the year. Excluding Kumtor the economy was flat y/y.

"We realise that the 5.1% GDP growth target we set last year for 2016 is too ambitious, but we believe we can still realistically achieve 3% growth. The contraction in the first quarter is due to the decline in production at the Kumtor [gold mine], which accounts for nearly 10% of our GDP.

“Last year, [the Kumtor Gold Company] anticipated a production volume of 5mn tonnes [of ore] per quarter, but they only produced half of that in the first quarter," the official said, while adding that Kumtor had reassured the ministry that production would pick up in the second half of the year, and that they could even meet their annual production target of 16mn tonnes in the third quarter. "Our worst case scenario is 1.8% GDP growth this year," the official said.

Owned by Canada's Centerra Gold, in which the Kyrgyz government also commands a 32% stake, mining operator Kumtor Gold Company has been a thorn in the side of the Kyrgyz authorities for years. The company has delivered late and below expectations, its productivity affected by alleged corruption and mismanagement, two revolutions, threats of nationalisation, and lower gold estimates.

According to Centerra Gold, the decrease in first-quarter gold production “reflects the processing of lower grade ounces mined from the upper benches in cutback 17, blended with low-grade stockpiled ore, as well as lower recoveries [....] In contrast, Kumtor mined and processed the final benches from cutback 16 that contained higher grade ore in the comparative quarter of 2015.”

A golden nightmare

After a lawsuit in 2014 during which the then-chairman of state-owned gold company Kyrgyzaltyn was imprisoned for making illegal dividend payments, authorities have launched several searches at the company's Bishkek offices this year as part of investigations for financial and environmental violations. The troubled mining company is now facing a €90.4mn lawsuit for harming glaciers near its open pit mine, and an investigation into €177mn in dividends paid to Centerra in 2013, as well as pressures to change its management structure and dividend policy.

On top of existing controversies, gold price volatility is likely to dictate the performance of the Kyrgyz mining sector - and the wider economy - in the coming years. The price of gold has rebounded strongly since January, growing by 20% to $1,278 per ounce, but consultancies such as BMI Research expect output to remain depressed as miners continue to cut costs and to divest non-core assets.

But while the mistrust between the management of the massive mine – which is the largest employer and taxpayer in the country – and the government threatens to drag on, Kozhoshev believes that things are looking up for Kyrgyzstan because the country has not put all its eggs in one basket. "We have other large-scale projects in the works, such as the Jerooy gold mine and the Tokmak oil refinery, which will boost our growth when they come on line," he says.

In addition to mining, hydropower is another sector that Kozhoshev believes holds great potential, especially after the €887mn CASA-1000 project is launched in 2019. " Kyrgyzstan is only using 10% of its hydropower potential at the moment, which stands at 140bn kilo watts (kW). CASA-1000 is a good start, but we hope many more projects will follow." The project is a joint scheme between Tajikistan and Kyrgyzstan that will enable the two countries to export their excess power generation to Pakistan and Afghanistan during the summer.  

"Renewable energy is a promising area for investors in Kyrgyzstan; we normally sell electricity at $2 cents per kilo watt hour (kWh), but we recently passed a law allowing producers of solar and wind power to sell electricity at as much as six times that price to encourage them to invest in our country," Kozhoshev says.

Open for business - and financing

Despite Kyrgyzstan's reliance on Russia for trade and investment – recession-hit Russia accounts for a quarter of the country's trade, which pushed overall trade down by 28.6% y/y in the first quarter - Kozhoshev believes that Bishkek will continue to do well after it joined the Russian-led free trade Eurasian Economic Union (EEU) in August 2015.

"Last year, we had a cash shortage so we were unable to finance our private sector, particularly small and medium enterprises (SMEs). But thanks to a joint €444mn Russia-Kyrgyzstan development fund we set up this year with Russian financing, we are better able to support our private companies now," he believes.

While trade might have declined, foreign direct investment (FDI) from Russia did indeed increase by 640% y/y in the first half of 2015, as the Kremlin sought to help its smaller neighbour to "adjust" to the EEU. And Russian investment promises to keep coming, both from the Kremlin and from private companies such as Vostok-Geoldobycha, which won the right to develop the Jerooy mine with a €88mn bid in May.

Speaking on the sidelines of the European Bank for Reconstruction and Development (EBRD) Annual Meeting in London, Kozhoshev had a very clear mission at the event: to "raise the profile of the EBRD in Kyrgyzstan", for the institution had only invested some €50mn in Kyrgyzstan compared to €160mn in neighbouring Tajikistan in the past year.

"Our performance indicators are similar, we are a democratic country, our investor protection mechanisms are very good - we are even thinking of setting up an ombudsman for investors," he lamented. Kozhoshev is mystified as to why Bishkek is not receiving more EBRD financing, while crisis-ridden Dushanbe is.

CASA-1000 is undoubtedly one of the sources of healthy competition for financing between Kyrgyzstan and Tajikistan. Last year, the latter received a €101mn loan from the EBRD for the construction of a power converter station, while Bishkek, which needs a quarter of the financing Tajikistan needs, has not received any financing from the EBRD for the project.  

But even if the EBRD agrees to finance more projects in Kyrgyzstan, Kozhoshev has a dilemma as to how to guarantee loans from the institution for much-needed regional development projects.

"We met with [EBRD president] Sir Suma Chakrabati [on May 12] and he said that the EBRD was interested in financing projects in infrastructure and transport with a focus on regional development, and against government guarantees. But we have a law that prevents the government from guaranteeing loans given out to regions or municipalities. As Economy Minister, I can guarantee loans given to the central government," he says.

Kyrgyzstan has been so successful at attracting foreign money recently that the International Monetary Fund cautioned authorities in May that its public debt could exceed 70% of GDP this year. Kozhoshev believes that is an exaggeration; "our public debt is 58% of GDP at the moment, down from 63-64% last year. Legally, we are constrained to keep it under 60%, and we only exceeded that in 2015 due to exchange rate volatility. The parliament has been criticising us for the public debt [...], but we borrow money for large-scale projects that have an impact on the entire economy," he says.

Political upheaval, which is very frequent in Central Asia’s most democratic country, will not disrupt economic growth and should not interfere with investor confidence in the country, the official reassures, while acknowledging that the frequent change in government is a problem.

"On average, a prime minister does not last longer than one year in office. We have had 29 governments since 1991. But the recent change of prime minister will not affect the economy; we have strengthened our institutions and developed long-term growth strategies, and whichever prime minister is in office continues the work of his predecessors. Besides, most of the former ministers have retained their portfolios, myself included," the official concludes.