Economy

Kyrgyzstan can expect 2019 growth to come in at 4.2% (beating 2018’s 3.5%) and its 2020 economic expansion to register 4.0%, according to the January 2020 edition of the World Bank’s Global Economic Prospects report released at the end of last week. These forecasts are almost identical to what the international financial institution was anticipating in the June 2019 edition of the report.

Kyrgyzstan (green) vs Central Asia & Caucasus, GDP growth. Source: World Economic Outlook, IMF DataMapper.

As always, the Kyrgyz Republic’s economic fate will be very much tied to the trajectory of Russia’s economy—remittances sent home by Kyrgyz migrants employed in Russia account for approximately a third of the Kyrgyz economy. The country’s energy bill is also always a worry, given that Kyrgyzstan, very much unlike hydrocarbon-rich neighbour Kazakhstan, imports almost all of its oil and gas. In its latest forecasting, the World Bank also returns to an old difficulty, namely how Kyrgyz productivity gains are constrained by limited urban development.

The republic is Central Asia’s second poorest nation, with only Tajikistan faring worse. According to latest data held by the Asian Development Bank (ADB), almost 30% of Tajikistan’s population was living below the national poverty line in 2017, while for Kyrgyzstan the figure stood at 25.6%.

The World Bank calculates that the poverty rate in Kyrgyzstan fell by an average of 7 percentage points annually between 2002 and 2009 in. But since 2009 the picture has been radically different, with the poverty rate in fact having remained unchanged in the country for a decade. So why has poverty reduction stagnated while economic growth has proceeded at a fairly robust pace? One part of the answer can be found in the lack of job creation and anaemic wage growth. New and better jobs are some of the most effective means to reduce poverty. Bishkek has struggled with this, forcing millions of its citizens to seek work in Russia. Back home the oversized public sector crowds out the formal private sector. Corruption and an all-around abysmal business environment means that potential entrepreneurs face high barriers to entry and high operating risks.

Kyrgyzstan's industrial production volume officially grew by 16.5% y/y in January-September 2019, accelerating from the annual decline of 2.4% recorded in the same period of the previous year. The expansion was mainly achieved thanks to rising output at Kyrgyzstan’s flagship Kumtor gold mine.

Consumer prices in Kyrgyzstan rose by 2.8% y/y in November compared to the 2.6% y/y increase recorded in October. Inflation in the January-November period registered at 1%, down from 1.6% for the same period of 2018. The Kyrgyz central bank cut its main interest rate by 0.25% percentage points to 4.50% in March and cut it further to 4.25% in May, the level at which it presently stands.

Kyrgyzstan’s total foreign trade turnover shrank by 2.1% y/y to $5,622.7mn in January-October, marking the continuation of an abrupt reversal from the 5.6% expansion in trade recorded in 2018. Imports fell by 7.2% y/y to $4,059.1mn, while exports rose by 14.1% to $1,563.6mn. Trade with fellow Eurasian Economic Union (EEU) trade bloc countries shrank by 4.8% to $2,185mn.

In terms of Kazakhstan, the Central Asian economic powerhouse that is Kyrgyzstan’s big neighbour to the north, Kyrgyzstan accounts for 4% of Kazakhstan’s total trade turnover, while trade with Kazakhstan makes up 11% of Kyrgyzstan’s total trade. Kazakh-Kyrgyz mutual trade rose by 13% y/y to $850mn in 2018. It is set to rise to $1bn in 2020, Kyrgyz officials contended in July last year. 

A growing threat to Kyrgyzstan’s economic prosperity is climate change. Kazakhstan, Kyrgyzstan and possibly other Central Asian nations might be at risk of losing their meltwater buffer against drought as ice caps in locations from Kyrgyzstan’s Alai range to the Himalayas are shrinking under global temperatures, researchers at the British Antarctic Survey (BAS) reported in May last year. Since the mid-20th century, Central Asia’s southern segment has seen the average temperature grow by 0.5ºC, while northern parts saw a 1.6ºC increase. At the turn of the 21st century, according to some projections, half of Kyrgyzstan’s territory may be subject to desertification.

 

Kyrgyzstan (red) vs Central Asia & Caucasus, Current account balance, % of GDP. Source: World Economic Outlook, IMF DataMapper.

Last year ended with Kyrgyz President Sooronbai Jeenbekov signing a decree banning the exploration and mining of uranium and thorium deposits in Kyrgyzstan. Kyrgyzstan has seen protests against the development of uranium deposits. The law aims to ensure safety from radiation and environmental safety and also bans the dumping and transfer of the materials.

Gold is an entirely different matter. Thanks to rising production levels at Kyrgyzstan’s flagship Centerra Gold-operated gold mine, the country’s economy officially expanded by 5.7% y/y in January-October, up from the 2.1% y/y growth recorded in the same period of 2018. Kumtor was on course to produce 18.2 tonnes of gold in full-year 2019, above its forecast of 16.6-17.6 tonnes. The government’s gave that forecast after Prime Minister Mukhammedkaliy Abylgaziyev met Centerra chief executive Scott Perry. Kumtor produced 16.6 tonnes of gold in 2018.

Given its status as a big foe of the US, it’s always a tough ask to gauge trade and investment potential with Iran, but late October saw the commencement of a temporary preferential trade agreement (PTA) between the Moscow-led Eurasian Economic Union (EEU), which includes Kyrgyzstan as a member, and the Islamic Republic, with more than 862 items seeing a significant tariff change, with many tariffs reduced to zero.

Iran, Russia and Kazakhstan early last year finalised a deal to secure long-term Iran-bound supplies of grain and in November Iran signed a wheat import deal with Russia and Kyrgyzstan. Kyrgyzstan has also become a key regional exporter of mutton and lamb to Iran. 

Iran is also interesting to Kyrgyzstan for its sole oceanic port, Chabahar on the Gulf of Oman, the development of which is protected from US sanctions because Washington acknowledges its growing importance to Afghanistan, as well as India and Central Asia.

Uzbekistan, which also intends to use Chabahar as a hub for trade flows, is, meanwhile, interested in joining the EEU—apart from Russia and Kyrgyzstan, the other members are Kazakhstan, Belarus and Armenia—meaning possible additional business potential ahead for the Kyrgyz.

In August, Russia-led Eurasian Development Bank (EDB) published a report analysing cluster development in EEU countries, exploring the reasons for it “lagging behind” in nations within the bloc. Kyrgyzstan ranked a poor 135th for cluster development on a global basis, the report said. The report concluded that the situation was mainly caused by limited financing of small and medium sized enterprises and underdeveloped venture capital markets.

In the World Bank’s Doing Business 2020 annual report, Kyrgyzstan lost ground. It fell 10 places to 80th in the ranking of 190 economies, although its Ease of Doing Business score rose to 67.8 from 65.4 the previous year. 

 

As well as being a big attraction in adventure tourism, Kyrgyzstan's glaciers (such as Engilchek Glacier, pictured) are under threat from climate change (Picture credit: Chen Zhao from Beijing).

In tourism, the first tourists from Uzbekistan arrived at Issyk-Kul lake in Kyrgyzstan via the Tashkent-Tamchy flight route, inaugurated in June. Nearly 3,000 Uzbek tourists were expected at the lake over the summer season. Much of the Kyrgyz economy and many Kyrgyz household incomes rely on tourism, such as nature tourism, adventure tourism and the summer resorts at Issyk-Kul. August saw Kyrgyz Tourism launch a new five-day horse trekking tour in partnership with the United States Agency for International Development (USAID). The tour runs between two popular destinations in Kyrgyzstan: the Suusamyr Valley and Son Kul lake. USAID sees tourism in Kyrgyzstan as an economic sector with high growth potential. It has helped promote Kyrgyzstan in international tourism markets.

Finally in the business sector, since he was elected by a special commission in Kyrgyzstan last June, former UK ambassador to Bishkek Robin Ord-Smith has served as the nation’s business ombudsman. The commission consists of the European Bank for Reconstruction and Development (EBRD), representatives of the Kyrgyz government, business groups and associations. The post was established by Kyrgyz authorities to protect the rights, freedoms and legitimate interests of entrepreneurs. The appointment of an ombudsman will be welcome news for Kyrgyzstan where approximately 40% of the economy relies on small and medium sized enterprises (SMEs).

Banking and finance

Not much was heard out of Kyrgyz banking last year. As the previous year drew to an end, the EBRD urged Kyrgyzstan to strengthen its banking sector, noting that non-performing loans (NPLs) and dollarisation continue to pose challenges for the Kyrgyz economy.

Moody’s Investor Services said in August that in the next five years Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan were set to see a “substantial” expansion of Islamic banking from a very low base thanks to government initiatives aimed at nurturing the sector. Kazakhstan and Kyrgyzstan were labelled as having the strongest growth potential in this branch. Kyrgyzstan’s total Islamic banking assets were calculated as standing at 1.4% of banking sector assets. Bishkek was reportedly aiming to expand that figure to 5% by 2025. Islamic finance meets cultural and religious needs of Kyrgyzstan’s Muslim population and provides a way to foster investment ties with fast-growing economies in the Gulf and Asia that have large Muslim populations with large pools of capital, Moody’s noted.

The Kyrgyz central bank and Islamic Development Bank (IDB) were last year working on creating a new fully-fledged Islamic bank in Kyrgyzstan. The Islamic Corporation for the Development of the Private Sector (ICD), the private sector arm of the IDB Group, previously provided a Sharia-compliant $10mn credit facility for Kyrgyz micro-credit company Mol Bulak Finance to on-lend to MSMEs.

Politics

Politics in Kyrgyzstan is not for the faint-hearted. At times last year it seemed that all hell had broken loose on the Kyrgyz political scene.

First came deadly clashes on the Kyrgyz-Tajik border (the trouble in what is actually an age-old problem has not been properly resolved, so expect more this year); then came a brawl between stone-throwing Kyrgyz locals and Chinese gold miners that ended with 47 workers injured and Chinese company Zhong Ji Mining’s operations suspended; and, last but not least, a bloody confrontation erupted after Kyrgyz security forces botched a raid on ex-president Almazbek Atambayev’s compound and found themselves in a violent standoff with Atambayev’s incited supporters. The operation concluded with one commando dead and 170 people, including 79 law enforcement officers, injured.

Sooranbai Jeenbekov is now very much in charge (Picture credit: Kremlin.ru).

Former president Atambayev was once seen as preparing to treat his successor, current president Sooranbai Jeenbekov, as a puppet, while continuing to rule behind the scenes. But things have not turned out like that at all. Jeenbekov turned against Atambayev and went after him with a vengeance. By now the fact that he’s own man and has anchored his very own presidency is not in question—a trial of Atambayev for illegally releasing a jailed notorious organised crime boss, Aziz Batukayev, in 2013, is to be held in absentia as the former head of state continues to refuse to take part in the process, it was reported last week. The judge made the ruling after Atambayev reportedly once again “left the room” when the proceedings began inside the State Committee for National Security headquarters. Sixty-three-year Atambayev has also been charged with organising mass unrest and violence against state representatives, murder and attempted murder along with organised hostage-taking. Moreover, he was also accused of plotting a coup against the government. Atambayev has rejected all the accusations against him, insisting that his arrest was political. There is no sign of his supporters gaining back ground in domestic politics.

In December, two former prime ministers of Kyrgyzstan were sentenced to long jail terms on corruption charges in a trial that roiled the national elite and fuelled suspicion toward China. Sapar Isakov, who was PM from 2017 to 2018 and a clear ally of Atambayev, and Jantoro Satybaldiyev, who held the position from 2012 to 2014, were handed 15 and 7½ year prison terms, respectively. The pair were among eight defendants on trial over a near-$400mn China-financed deal for modernising a power plant. The power plant that services Bishkek, where nearly a million people live, broke down during the winter of 2018, after it was completed. Prosecutors said that Chinese contractor Tebian Electric Apparatus (TBEA) secured the $400mn deal to modernise the ageing power plant facility thanks to Isakov’s lobbying and in spite of a rival bid being cheaper. The court heard that a number of items procured for the modernisation were bought at inflated prices. The items even included a pair of pliers priced at $600. Public anger erupted over the project after the plant failed amid temperatures approaching minus 30 degrees Celsius (minus 22 degrees Fahrenheit), amid the coldest winter the country had seen in a decade.

At the start of last year, Jeenbekov signed a law that will allow police and citizens who report graft to receive a share of any financial sums recovered by the government (corruption is one factor that stymies Kyrgyzstan’s economy—the country scored 29 out of 100 on Transparency International’s Corruption Perceptions Index (CPI) 2018, below the global average of 43). However, by the end of the year, there were street protests involving hundreds of demonstrators in Bishkek after the activities of Aierken Saimait (aka Ayerken Saymaiti), a businessman from China's Xinjiang province who was shot dead in Istanbul in November, were revealed.

Saimat by his own admission helped illegally wire around $1bn from Kyrgyzstan. He also ran an informal network of cash couriers, an investigation by RFE/RL's Kyrgyz Service, the OCCRP and Kyrgyz news site Kloop revealed. The cash couriers regularly carried tens of millions of dollars from the Central Asian country to Turkey by hand. Saimait, central to an investigative report by RFE/RL, secretly provided reporters with evidence of corruption in Kyrgyzstan’s customs service along with information on the massive outflows of cash from the country. Hundreds of millions of dollars were moved out via a network allegedly led by Khabibula Abdukadyr, a Chinese-born Uyghur with a Kazakh passport.

Journalists in Kyrgyzstan do well to watch their backs. The editor-in-chief of Kyrgyz investigative website FactCheck, Bolot Temirov, was attacked by three unidentified assailants last week near the media outlet's office in Bishkek. Temirov's site and the open source investigative organisation Bellingcat have recently probed the fortune of the former deputy chief of Kyrgyz customs, Raimbek Matraimov, and his relatives. Matraimov is at the centre of the corruption scandal regarding the alleged funnelling of around $1bn from Kyrgyzstan.

Trade unions are also often not flavour of the month in Kyrgyzstan. New-York based Human Rights Watch (HRW) last October called on Kyrgyz lawmakers to reject draft amendments to their country's trade union law as they would “severely inhibit independent trade union organizing and violate international labor treaties”.

The Freedom in the World 2019 annual survey issued by US-based watchdog Freedom House stuck with the conclusion that Kyrgyzstan is the second freest country in Central Asia. The nation was again categorised “Partly Free”, but saw only a slight improvement to 38 in its score, up from 37 last year.

One issue to watch this year will be the controversy surrounding the future of China’s “re-education camps” said to hold around 1mn ethnic Uighurs along with thousands of ethnic Kazakhs and Kyrgyz. US Secretary of State Mike Pompeo last September called on all countries to resist China’s demands to repatriate such detainees. The comments were made after Pompeo met with the foreign ministers of Turkmenistan, Kyrgyzstan, Uzbekistan, Kazakhstan and Tajikistan in New York.

In October, the UN Refugee Agency (UNHCR) gave a Kyrgyz lawyer, whose work has supported Kyrgyzstan’s efforts in ending statelessness, the Nansen Refugee Award for 2019. In August, Kyrgyzstan handed citizenship to the last known stateless people on its territory, issuing passports and birth certificates. The Central Asian nation thus became the first country to meet the goals of an UN-led “global fight” to end the plight of millions of "legal ghosts" who are not recognised as nationals of any country.

On the geopolitical front, Kyrgyzstan last year agreed to expand the territory of its Russian military base by 0.6 square kilometres. However, Kyrgyz officials denied speculation that Kyrgyzstan was looking to host a second Russian military base. Rules concerning the use of drones based at the existing air base, in Kant, were set to be introduced.