Kyrgyzstan: Country Economic Forecast: 05 Oct 2011

Improved political stability and security have been in place since the ethnic clashes and political turmoil that saw the toppling of the president in April 2010. But there is a fear of renewed violence in this ethnically and culturally divided country ahead of presidential elections on 30 October. Economic activity has recovered strongly from the political upheaval and ethnic clashes, with GDP growing 6.5% in January- July, albeit from a low base. Growth has been driven primarily by higher gold production coming from the Kumtor mine, accounting for 40% of all exports. Manufacturing and utilities have also grown strongly but construction and fixed investment have been declining. Fiscal stimulus, higher gold prices and rising remittances have also driven activity. For 2011 overall, we expect GDP to grow 6% after a 1.4% fall in 2010. Weaker gold prices and a less favourable base will see growth slip slightly to 5.5% in 2012, but there is a significant downside risk because of the worsening political and security situation. Inflation has risen from just 3.5% in June 2010 to 22.7% this June, mainly to higher world food and energy prices over the same period, food costs rose by 37.5%. Higher public sector salaries have also contributed. But inflation is set to plunge over coming months as the impact of global food costs reverses and tight economic policies and currency appreciation have an increasing impact. We forecast inflation of 19.2% this year, falling to 9.4% in 2012.