Kyrgyzstan Steels Itself for Slowdown

As the Kyrgyz government takes steps to counter the effects of international financial crisis, analysts say the banking and construction sectors are already feeling the pinch.

In December, the government approved a set of measures designed to ensure economic stability through the current period of turbulence. The three-pronged strategy will seek to boost economic growth, bring inflation down to single-digit figures and insulate the most vulnerable sections of the population.

The International Monetary Fund, IMF, has approved a special loan of 100 million US dollars to fund the programme.

Expectations of a slowdown are reflected in the IMF’s prediction that growth will fall to 3.7 per cent in 2009 compared with an estimated 7.5 per cent last year.

President Kurmanbek Bakiev spelled out how his government plans to stimulate growth at a meeting in early December 1. According to his press office, government money will be injected into new construction projects around the country to create jobs and offset unemployment.

Although it is clear from the government’s published economic programme that it is well aware of the economic risks, official statements are carefully tailored to avoid any sense of panic. At a cabinet meeting in mid-November, for example, Bakiev said, “We are having a difficult situation due to global economic and financial crisis. But nevertheless, there are no grounds for talking about a catastrophic crisis in our country.”

The minister for economic development and trade, Akylbek Japarov, was reportedly reprimanded for expressing his concerns in blunt terms in early November.

“Our state is effectively on the verge of the financial crisis. The economic situation in Kyrgyzstan may worsen in February-March 2009,” he said.

Economists note that because the Kyrgyz economy is relatively isolated, it was not immediately exposed to the crisis. Local banks did not borrow from abroad, and the country does not have a well-developed stock market.

That led the deputy chairman of the central bank, Kubanychbek Bokontaev to state confidently that “Kyrgyzstan’s banking system will not be hit by the financial crisis as badly as Russia, Kazakstan or China were”.

Nevertheless, economists say that far from being immune, the country is already suffering in a number of ways.

In recent years, Kazakstan’s successful banking sector has branched out into its smaller neighbour, and now accounts for 60 per cent of the basic assets of banks in Kyrgyzstan, according to that country’s central bank.

Since late 2007, Kazak banks have been pulling in their horns after finding themselves dangerously exposed with high levels of borrowing on the international market. That has had knock-on effects on their Kyrgyz operations.

Rita Karasartova, a lecturer in the finance department of Kyrgyzstan’s Academy of Management, explained how the commercial banks were locked together in a web of transactions and as these operations slowed, interest rates could rise and banks would run short of money to lend.

She added, “Even a psychological environment in which people are thinking about where to put their money… will prompt them to withdraw it from the banking system.”

To counter the risks to the commercial banking sector, President Bakiev issued a decree on January 8 ordering the create of a new “refinancing fund”, which will use money from the central bank to keep local banks solvent. Central bank chairman Marat Alapaev said the fund will offer short-term loans to commercial banks if they run into liquidity problems.

One area where banks and the economy as a whole have seen a downturn in cashflow is the remittances that Kyrgyz labour migrants send home from abroad. Depending on the time of year, there are perhaps half a million of these people, mostly in Russia but increasingly also in oil-rich Kazakstan,

Unofficial estimates put the number of Kyrgyz migrants working abroad at 500,000. Many work in the construction industry, which has boomed in those countries in recent year but has been one of the first areas to feel the crunch as credit availability has collapsed.

For a poor country like Kyrgyzstan, the sums they send home are substantial, and many households are kept afloat by this money, as are the businesses they buy from.

Adam Beishenaly, head of economic analysis with the government’s financial markets regulator, said that in 2007, migrant remittances were put at over one billion dollars, equivalent to the country’s gold and foreign currency reserves.

In a December 22 statement, economic development minister Japarov sounded an upbeat note about the state of the remittances, noting that they had grown. However, his statement referred only to figures for the first nine months of 2008, omitting the last quarter when job losses really started to bite in the migrant labour market abroad.

In an extensive report in December, IWPR found that there was no evidence of a mass exodus of migrant workers from Russia and Kazakstan yet, as even those made unemployed were keen to hang on for as long as they could. However, the prediction was that the real job crunch might only make itself felt in the spring, when building companies normally take on new workers for the season. (See Testing Times for Central Asian Migrants, RCA No. 557, 01-Dec-08.)

Kyrgyzstan’s construction industry is already in recession, according to the chairman of the national association of builders, Askarbek Moldobaev, who says 40 per cent fewer buildings were put up in 2008 than the year before.

Karasartova agreed, saying, “Even now it is clear that work at some construction sites has halted, and this could mean job losses.”

The slowdown in the sector both here and in Kazakstan has had the perverse effect of increasing demand and prices for building materials, because these are being produced in smaller amounts.

“Our costs have gone up because of the increased price of building materials, as well as general price rises,” said the director of a building firm in Bishkek. “The pace of construction has now slowed, and we’re hoping we can at least complete our ongoing projects and after that we’ll stop borrowing and not expand our business.”

It is significant that in a country where a popular uprising has ousted the then president Askar Akaev in 2005, more people are now worried about recession than about a repetition of the political upheaval.

In an opinion poll conducted by the International Republican Institute last month, over 40 per cent of respondents said their main concern was economic crisis, in contrast to a previous survey which suggested most people feared social unrest and revolution.

Igor Gorbachev is a correspondent with the online news agency 24.kg. Yrys Kadykeev is a pseudonym for a journalist in Bishkek.