VAT Cut to Control Bread Crisis

The Kyrgyz government’s decision to abolish value-added tax on grain imports in an effort to reduce bread prices will put a significant dent in the already strained government, say NBCentralAsia analysts.



On September 11, Prime Minister Almazbek Atambaev signed a government decree abolishing VAT for flour and bread producers and traders whose annual turnover is less than five million som, or 132,000 US dollars.



The price of various bread products has gone up by between 20 and 40 per cent since the end of July, and the cost of the traditional unleavened flat bread has jumped from 5 to 7 som, or from 13 to 19 US cents.



The average wage in Kyrgyzstan is about 90 dollars a month.



The grain crisis has been brought on by rising global prices and an annual shortage at harvest time when major exporters such as Kazakstan and Russia have very little left in reserve and the new crop has not been brought in yet.



The grain Kyrgyzstan produces is of lower quality than its neighbour’s, and the country imports 250,000 tons of Kazak wheat every year, which is used to make 60 per cent of its bread.



Last month, the Kyrgyz government took around 15,000 tons of grain out of state reserves and sold it on to bakers at a reduced price in an effort to calm the market.



Atambaev says the Akun company is to sell bakers good-quality flour from state reserves at 750 soms or 19 US dollars per 50 kilograms. The market price is currently 1000 soms, or 26 dollars for the same amount.



This measure is not worked and the government is now hoping that abolishing VAT on grain imports will be more successful in bringing prices down.



NBCentralAsia analysts say the temporary measure might go some way towards resolving the crisis, but warn that it will mean lower government revenues at a time when the budget is already in deficit. This year’s deficit is anticipated to come in at over 100 million dollars.



“It will be a blow to the national budget,” said Sapar Orozbakov, the director of the Bishkek Centre for Economic Analysis.



Yet Orozbekov accepts that the VAT is a necessary measure that has to be taken since bread shortages could lead to social unrest.



“The measure will avert the growing economic crisis at least to an extent,” he said. “Moreover, abolishing VAT will increase the number of high-quality flour imports at reasonable and affordable prices”, he said.



Sergei Slepchenko, the coordinator of the Perspektiva think-tank, agrees that the government has taken the right preventive action given that the crisis will calm down when crops in Russia, Kazakstan and Ukraine have been harvested in October or November.



However, Marat Kazakpaev, an economic security analyst at the National Academy of Sciences, argues that the government’s slowness to respond has now forced it to take risky action that may not stem inflation.



“The government failed to react to rising bread prices in good time. It won’t be possible to stop the surge in the price of bread and other food products because inflation is rising all over the world, including Kyrgyzstan,” he said.



(NBCentralAsia draws comment and analysis from a broad range of political observers across the region)