Jacopo Dettoni in Almaty -

The sharp depreciation of the Kyrgyz som is building up inflationary pressure in Kyrgyzstan, where prices are growing at a double-digit pace a few months ahead of the October parliamentary elections.

The annual inflation rate reached 10.5% in 2014 - the highest level since 2010, when rising prices created social tensions that eventually led to the second Kyrgyz revolution - and climbed further to 11.6% in January, according to figures from the National Bank of the Kyrgyz Republic.

Inflation pressures are mounting as the Kyrgyz som keeps losing ground against the dollar in the currency market – the som depreciated by more than 20% in 2014 and another 3% in the year-to-date, making imports increasingly more expensive. 

Kyrgyzstan is one of the world’s most import-dependent economies. Total imports amounted to over $5.6bn in 2014, or 86.9% of 2014 GDP, according to figures from the central bank. Some of the imported goods, mostly from China, only transit through the country as they are re-exported to other Central Asian countries, yet the overall trade deficit still amounted to $3.8bn in 2014.

As the som lost value against the dollar, the overall import bill spiked up as all international trades are settled in dollars. Importers naturally passed the price difference on to the final consumers. Consumer food prices alone increased by 14.7% y/y in 2014. At the same time, the government was forced to increase energy tariffs twice last year.

The central bank is making efforts to prevent prices from rising further. The official base interest rate stood at 4.17% at the end of 2013 and started to grow in March 2014, when the monetary authorities began the implementation of a new policy framework, to gradually reach today's 11%.

At the same time, central authorities are repeatedly intervening in the currency market to shore up the falling som. The central bank carried out 45 operations in the foreign exchange market worth a total of $511.75mn to support the som in 2014, according to official figures. Another four interventions worth $60.5mn were carried out in January. So far such efforts have had little effect. The som keeps falling and prices growing despite a shrinking monetary base.

“The central bank cannot use the monetary base because they want to support the exchange rate,” Kuban Choroev, a Bishkek-based, independent economist tells bne IntelliNews. “Because of that, rates on loans in local currency are very high (over 20% on average) and that affects the competitiveness of our goods compared to imported goods.”

Growing inflation, paired with slowing economic growth – annual GDP growth decelerated to 3.6% in 2014 from 10.9% in 2013 – is stirring discontent ahead of the parliamentary elections to be held in October this year. Opposition parties have already called street protests for the spring and the debate over the current economic crisis will inevitably be a key topic in the run-up to the elections.