BISHKEK, KYRGYZ REPUBLIC – Growth in the Kyrgyz Republic is expected to rebound this year after recent low gold production held the economy back, according to the Asian Development Bank (ADB) new macroeconomic outlook for developing Asia.
Asian Development Outlook 2013 (ADO 2013), ADB’s flagship annual economic publication, shows that GDP declined in 2012 as adverse geological factors affected gold production. Despite some recovery in gold output toward the end of 2012 and 5.0% growth in other sectors, real GDP growth contracted by 0.9%. Agricultural growth was hampered by a poor grain harvest.
Growth is expected to reach 5.5% in 2013 and 4.5% in 2014 on the back of higher gold production and investments, mainly from the Russian Federation and the People’s Republic of China, in energy and transport infrastructure projects. However, gold output could fall below expectations if the political environment deteriorates, weakening investment incentives.
Services, which provide half of GDP, grew strongly for the second consecutive year, by 6.2%. The strongest gains were in transportation, at 8.9%; trade at 10.5%; and hotels and restaurants at 11.7%, reflecting higher consumer demand and improved cross-border trade.
On the demand side, private consumption is estimated to have grown by more than 6%, as higher employment, wage increases averaging 16.5%, and a rise in remittances exceeding 17.0% fueled an 11.0% increase in retail sales.
The report projects that inflation will rise to 7.5% in 2013 with the rebound in gold output and infrastructure investments in the energy sector, and then ease to 5.5% in 2014. Substantial price hikes are not expected for food, which occupies 45% of the consumer price index, given current forecasts for declining global food prices.
“Increasingly unreliable electricity supply is among the binding constraints on growth that pose major risks to economic development, so energy security remains a primary concern,” said Rie Hiraoka, ADB’s Country Director in the Kyrgyz Republic.
The ADB report emphasizes that the Kyrgyz Republic has the potential to expand its hydropower capacity, which supplies more than 80% of all locally generated electricity. However, the sector is plagued by high commercial and technical losses, poor corporate governance, corruption, aging infrastructure in serious need of upgrading, and artificially low tariffs.
To resolve these challenges, in 2012 the government adopted a new strategy to develop the energy sector. The plan aims to improve state regulation, strengthen the management of energy companies, make corporate activities more transparent, gradually raise tariffs, increase exports of electricity, and stabilize domestic electricity supply.
However, making the ambitious energy plan a reality will require billions of dollars of investment. Thus, improving the investment climate, protecting investor rights, and developing a new tariff policy remain key challenges to achieving a more secure energy supply that can contribute to economic development, ADO 2013 points out.