EDB Macroreview, April 2019. Kyrgyz Republic: trends and forecasts

After two years of economic recovery, GDP growth slowed to 3.5% in 2018, from 4.7% in 2017. The economic slowdown was caused by a decline of production at the Kumtor gold mine and stabilization of the growth rates in other sectors at near potential levels. Domestic demand in 2018 showed unstable growth, reflecting the volatility of households’ real incomes. A slowdown in lending and remittances inflows growth rates in 2018 compared to 2017, as well as deferred demand of the public sector, also constrained domestic demand. The deviation of inflation from the target during 2018 resulted from weak prices in the world food markets as well as from the high base effect in the vegetables and solid fuel segments. The current account deficit expanded as the negative goods and services balance widened, while the net inflow of current transfers remained virtually the same as in 2017. The state budget posted a deficit of 1.1% of GDP in 2018, down from 3.1% of GDP the year before. The decreased State budget deficit resulted from lower public spending and slightly higher budget revenues. The slower growth in budget revenues was due to lower grants received from other countries’ governments and international organizations, while tax revenue growth was unchanged. Public debt decreased in nominal terms, mainly on account of the debt to the Russian Federation being written off pursuant to an agreement between the countries. In May 2018, the National Bank of the Kyrgyz Republic reduced its policy rate from 5.0% to 4.75% as inflation was low, and took a number of decisions concerning the width of the interest band during the year. In 2019, economic activity in the Kyrgyz Republic is projected to accelerate, largely on account of optimistic assessments of its gold production volumes and moderate expansion of public sector demand. In the medium term the economy is expected to grow steadily at near potential rates. The inflation trends will depend on the world food market. According to our assessment, world food prices will start recovering in the 1st half of 2019 and stabilize by early 2020, which, in turn, will shape the growth trajectory of the consumer price index in the Kyrgyz Republic.