Kyrgyzstan: Declining foodstuff prices – a mixed blessing for rural poor?

Bishkek, KYRGYZSTAN – 23 May 2012 – The slowdown in the consumer and foodstuff price inflation, which began in the second half of 2011, continued in 2012 and even resulted in  deflation of foodstuff, and consequently consumer prices. In particular, our calculations based on official data show that a half percent deflation in consumer prices was observed in April 2012 compared to the same month in 2011; this is the first time Kyrgyzstan experienced a negative consumer price inflation rate in more than eight years (Chart 1). In the same month foodstuff prices decreased by almost 10 percent over April 2011, which is also a record indicator for the past eight years. The decline in foodstuff prices was mainly due to a significant drop in the prices of baked goods and cereals (16.9 percent on y-o-y basis), and in the prices of fruits and vegetables (32.1 percent on y-o-y basis) in April 2012.  While a continued favorable trend in foodstuff prices has a positive impact on households’ budgets in general, on the supply side poor rural households that earn money by selling home-grown fruits and vegetables are affected negatively by a decline in the price of these items.

Favorable trends in consumer prices have also boosted population real wages and are expected to continue doing so. Our calculations based on the most recent statistical data on average nominal wages in Kyrgyzstan (deflated using consumer price inflation) show that  in February 2012 real wages grew by 33 percent - the highest growth since 2005 (Chart 2). Official data also show that remittance receiving households continued to benefit from a high amount of incoming remittances during the first quarter of 2012 – USD 324 million. However, Chart 3 shows a significant slowdown in the trend during the first months of 2012, and a 4 percent decline in March on year-on-year basis.  This situation can be partly explained with the fact that beginning from the second half of 2011 the number of outgoing migrants from Kyrgyzstan was continuously declining (Chart 3). However, there can be several other factors affecting remittances, notably the number of returning migrants, as well as the migrants’ opportunities and decision to send money back home, like declining wages or less employment opportunities in the host countries.

Analysis of the main macroeconomic indicators points to a continued decline in Kyrgyzstan’s gross domestic output in April 2012. As was indicated in our previous analysis, the economic slowdown was mostly driven by a sharp decline in industrial production that started in November 2011 and deepened in the following months. Chart 4 shows that during the first four months of 2012 Kyrgyzstan’s economy contracted by 6.8 percent.

The International Monetary Fund (IMF) and the Asian Development Bank (ADB) in their latest analysis forecast a five percent year-on-year growth of Kyrgyzstan’s economy in 2012. Current GDP trends are already casting doubt on the feasibility of reaching such high growth, unless GDP reaches a double digit growth during the rest of the year. At the same, time a double digit growth in the second half of 2012 would be very difficult to achieve considering the high growth rates recorded in the second half of 2011 and the current trends in the industrial sector of the economy.

Official statistics indicate that the negative trend in industrial output is continuing with some fluctuations. In March industrial production declined by 21.3 percent (over March 2011), somehow an improvement compared to the 35% February year-on-year decline. However, in April 2012 industrial output fell by more than 35 percent in comparison to the same month of the previous year (Chart 5). The overall decline in industrial output during January-April 2012 compared with the same period a year ago was 29.9 percent. Production trends in different sectors of industry shows that during the same period (January-April 2012) the highest  decline was observed in manufacturing – 43.2 percent on year-on-year basis, including metallurgy, where the production decreased by 60.7 percent in January – April 2012 over the same period of 2011.

If this negative trend continues, besides the negative impact on the country’s economic growth, it may put serious pressures on government budget and this might eventually lead to cuts in spending with negative consequences on the poorest and most vulnerable people.  Budget data from Statistics Committee of Kyrgyzstan indicate a budget deficit of 946.7 million soms - 1.9 percent of GDP, in the first quarter of 2012.

The decline in industrial production had a direct consequence on exports: in the first quarter of 2012 Kyrgyzstan’s exports shrank by 12 percent. Meanwhile imports rose significantly in the same period – 40 percent over first quarter of 2011. Increasing imports and shrinking exports raised the trade deficit, which reached about USD 677 million  in the first quarter of 2012. This is 112 percent higher than it was in the same period of 2011. Unless these trends are reversed, with declining remittance inflows and decreasing output, the country will have to find a solution to finance the growing trade deficit.

Overall, the interplay of output, prices, and the trade and budget deficits point to a path for the Kyrgyzstan’s economy that is unlikely to prove sustainable beyond the short term.

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