Kyrgyzstan

EDB investment portfolio

01/02/2018

5 projects

$50 million

0.79% of the total

EFSD investment portfolio

06/30/2017

5 projects

$330 million

5.9% of the total


Kyrgyz Republic became a full member of Eurasian Development Bank in August 2011. Its contribution to the Bank’s capital is US $100,000.

Trends

GDP

The manufacturing industry of Kyrgyzstan, led by the gold mining sector, has been contributing to high GDP growth for the fourth quarter in a row. Economic growth is slowing as the low base effect diminishes. 2Q 2017 GDP growth was 5.4% y-o-y (vs. 7.8% in 1Q 2017 y-o-y).

The economic performance in Kyrgyzstan has been shaped by the following key factors:

  • In terms of value added:

Processing industries continue to make a dominant albeit declining contribution to GDP growth. The leading role here belongs to the production of gold ingots that rose by more than 40% y-o-y in 2Q 2017. In the mineral extraction industry, the production of metallic ores has been a fast-growing sector since the end of 2014. However, due to its low share of GDP, this sector has so far made a limited contribution to the growth rate (0.7 percentage points in 2Q 2017). The construction industry rejoined the growth drivers in 2Q 2017 (up 8.3% from 2Q 2016). The volume of services rendered has declined by 0.4% y-o-y, which is in many ways due to the reduction in the volume of services in the IT and telecom industries. This sector has been showing a downward trend since 2Q 2016, which is partly due to unresolved corporate issues at some of the telecom sector players and the growth in popularity of telecom capabilities of Internet resources.

  • In terms of expenditure:

According to preliminary estimates of the National Statistics Committee of Kyrgyzstan, exports of goods and services are the key growth driver, while domestic demand has exercised a limited effect on the GDP growth rate.

The output gap was negative in 2Q 2017 and is estimated at -1.8%.

GDP growth slowed to 5.0% y-o-y in January-September 2017. The headline leading indicator calculated by the Eurasian Economic Commission signals that the cyclical component of growth will continue on an upward growth at the end of 3Q and at the beginning of 4Q 2017. Positive expectations in the construction industry and recovering consumer demand will contribute to this trend. An upward growth in investments is making up for the shortage of credit impulse, which remain weak despite the recovery in lending volumes.

Inflation

The food sector left the deflation zone in 2Q 2017 (up 4.7% y-o-y). This is attributable to the supply shock in agricultural products in 1Q 2017 and partly due to the low base effect of 2016. The low annual inflation rate in the non-food sector (1.2% in 2Q 2017 on average) came against a background of the som’s strengthening against the US dollar as part of a consistent trend between January and May 2017. The high inflationary background in the service sector (7.1% y-o-y) is attributable to higher charges for telecom, healthcare, and education services. In 2Q 2017, annual inflation accelerated to 3.9% y-o-y on average (vs. 1.6% y-o-y in 1Q 2017 on average).

Once fruit and vegetables from the new crops arrived on the market in September 2017, the monthly inflation rate returned to the deflation zone, thereby slowing the annual inflation rate. The 12-month inflation rate in September 2017 stood at 3.3%.

External Sector

The depreciation of the real effective exchange rate of the som in 2Q 2017 compared to 2Q 2016 is mostly attributable to the real devaluation of the som against the basket of Eurasian Economic Union member states’ currencies (11.5% y-o-y). Meanwhile, the som strengthened against the basket of other currencies by 7.7% y-o-y in real terms. Improved price competitiveness has been one of the factors driving exports to CIS member states (up 47.0% from 2Q 2016). The 30% increase in exports to non-CIS countries is mostly due to gold exports to Switzerland. The nominal volume of imports in dollar terms remained roughly at the level of 2Q 2016. As a result, the trade deficit decreased in 2Q 2017, according to preliminary estimates. In addition, a more than one-quarter increase in remittances from migrant workers also contributed to a reduction in the current account deficit to 7.4% of GDP (vs. 14.7% of GDP in 2Q 2016). The inflow of net direct foreign investment has more than offset the foreign currency outflow in current account transactions.

Fiscal Policy

The budget deficit in 2Q 2017 amounted to 2.9% of GDP (vs. 14.9% of GDP in 2Q 2016). While in 1Q 2017 growth on the revenue side of the budget was recorded only in tax revenue, in 2Q 2017 the sources of revenue were complemented by increasing non-tax proceeds (by 1.7 times y-o-y) and the growing volume of incoming transfers (by 3.5 times y-o-y). This shifted the state budget revenue growth into positive territory (+31.9% y-o-y in 2Q 2017). Growth in current spending decreased to 2.9% y-o-y, while the net outflow of funds due to investments in non-financial assets declined by 28.0% y-o-y.

Public debt had risen by 4.3% since the beginning of 2017 to 293.6 billion soms (59.4% of GDP) as of July 1, 2017 (vs. 61.4% of GDP as of December 2016). The improvement in relative indicators of the external debt performance is attributable to GDP growth.

Monetary Policy

The National Bank of Kyrgyzstan kept the refinancing rate unchanged at 5.0% in 2Q 2017. Money market rates fluctuated near the lower limit of the interest rate range set at 0.25%, which reflects a surplus of liquidity in the system. Despite the structural surplus, the National Bank continued the practice of refinancing the banks. The total supply of credit resources amounted to 15.0 billion soms, while demand from commercial banks was at the level of 4.5 billion soms. A loan of 23.0 million soms was extended to international organizations founded by Kyrgyzstan jointly with other states within the Eurasian Economic Union framework. In the face of the som’s strengthening against the US dollar, the National Bank of Kyrgyzstan intervened in the domestic foreign exchange market as a net buyer of foreign currency, buying USD 16.2 million in 2Q 2017.

Commercial bank deposits at the end of August 2017 increased by 8.5% compared with the beginning of 2017, due to a 14.8% increase in national currency deposits, while foreign currency deposits increased by a mere 2.5%. Deposit dollarization has decreased by 2.8 percentage points to 48.2% since the beginning of 2017.

The loan portfolio of commercial banks at the end of August 2017 rose by 12.2% compared with the beginning of 2017, mostly due to an increase in loans extended in the national currency (21.2%), while foreign currency loans increased at a far more moderate rate (1.1%).

EDB’s investment activities in the Kyrgyz Republic in 2013-2017 included the following:

  • The Bank finances investment projects in the power sector, transport, mining and IT.
  • SMEs in agriculture, the light and processing sectors are supported by targeted programmes fulfilled via the banking sector.
  • The Bank is ready to support projects aimed at developing human capital, as well as projects in healthcare and education in cooperation with the donor club and through the Technical Assistance Fund.

Bishkek Representative Office

Address:
21 Erkindik Blvd., Bishkek, 720040, Kyrgyz Republic