BISHKEK, Kyrgyzstan (17 July, 2012) – According to official statistics, gross output of Kyrgyzstan’s gross domestic product (GDP) declined by 5.6 percent in the first half of 2012. This fact puts serious doubts on official forecasts of GDP growth for 2012 of 7.5 percent and the International Monetary Fund (IMF) projection of about five percent growth for the economy of Kyrgyzstan in 2012. The high base represented by the strong GDP growth rates reported in the second half of 2011 (Chart 1) will reduce positive effects on the possible 2012 boost in production in the second half of the year.
As it was indicated in our previous analysis, the decline in GDP has been largely due to continued strong negative trends in industrial production (Chart 2). In the first half of the year, industrial production fell by 31.6 percent. Manufacturing had the highest decline – 42.6 percent, due to the decreased production at the Kumtor Gold Mining Complex. At the end of March, because of ice movement in the southeast section of the pit, Centerra Gold (owner of Kumtor Gold Mine) decreased its production forecast for 2012 from 575,000 to 625,000 ounces to 390,000 to 410,000 thousand ounces.
The decline in industrial production also had a negative impact on exports, as during January-May they decreased by 16 percent on a year-on-year basis. However, imports continued to grow and during the first five months of the year they reached a 37 percent increase over the same period of 2011. In turn, such a trend contributed to the increase of the trade deficit, which was $1.275 billion – two times more than in the same period of 2011.
The year-on-year change in consumer prices kept its negative trend, with half a percent deflation in June on year-on-year basis. Year-on-year foodstuff price deflation which has begun in January continued to June and reached 10.3 percent level. For example, in June the prices of baked goods and cereals were 17 percent less than they were in the same month of last year. This provides significant support to the budgets of vulnerable households. However, as we have indicated in our last analysis, 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 vegetables are affected negatively by a decline in the price of these items.
Chart 7 shows that despite a continued decline in the number of outgoing migrants from Kyrgyzstan, the volume of incoming remittances have kept a positive trend. This seems to confirm our concern about the ability of migration statistics to fully capture the movement of migrant workers as pointed out in our previous fast facts. According to the data from the National Bank of Kyrgyzstan, working migrants abroad sent 22 percent more money during the first five months of 2012 in comparison to the same period of the last year. Undoubtedly this contributes not only to the well being of the receiving households in Kyrgyzstan but also to the growth of GDP through higher consumption and investments spending by migrants’ households.
Increasing nominal wages and declining prices have been boosting real wages in the country since the second half of 2011 (Chart 8). For example, in March year-on-year growth of real wages peaked at 40 percent while in April it was 32 percent.
Chart 9 shows that along with increasing real wages, year-on-year change in the real value of budget spending on social protection has also been positive and in April it was 26 percent (while in December 2011 and January 2012 the same indicator was at 38 percent).
It is clear that increasing real wages, incoming remittances and budget spending on social protection contributes to improvement of the wellbeing of the population, especially for vulnerable households. However, in conditions of declining production and shrinking exports, such positive trends in wages and budget spending on social protection may not be sustainable and may further exacerbate the deficit. Finally, if the slowdown in the Russian and Kazakh economies forecasted for the second half of the year materialize and the depreciation of the Russian ruble versus the US dollar continues, export demand for non-gold exports might weaken and remittance inflows might slow down, leading to a negative impact on government revenues and private income in remittance receiving households.