Kyrgyz officials’ delight at hosting the SCO summit on a ‘decent’ level proved to be not long lasting, as this fall, which usually brings cheap prices for essential products, has became known for a ‘bread crisis.’ Due to the shortage of wheat in the country, the prices of bread and other basic products have increased dramatically. This alarming reality, quite capable of spurring discontent among the people, nagged the Kyrgyz government to approach inflation quite seriously. Given the fact that inflation is caused by myriad factors, it is hard to project that the government will be able to tackle it soon. If prices keep moving upward, affecting the vulnerable population such as unskilled workers and pensioners, analysts agree it will add more heat to political turbulence in this fall.

BACKGROUND: It is apparent that the quick surge of inflation was first caused by external factors, while internal factors have reinforced it and disclosed the Kyrgyz government’s lack of preparation for potential economical downward slopes. Externally, the main trigger was the rise in prices of wheat in Kazakhstan and Russia, which are currently preparing themselves to a general shortage of wheat supply in the world, chiefly caused by drought in Ukraine, Europe and Canada. As became clear, Kazakhstan, the third-largest grain producer in the region, as well as Russia, are on the doorstep to introduce licenses for grain exports to reduce speculative trading and to restrain domestic food prices. According to the London-based International Grains Council, in the middle of 2008 global wheat reserves will drop to their lowest level in more than 25 years.

The fact that Kyrgyzstan imports about 80 percent of its grain from Kazakhstan signifies the eminent vulnerability of the Kyrgyz economy. Such circumstances were dictated both by the low quality of domestic grain, and the unwillingness of Kyrgyz farmers to cultivate wheat due to its lack of profitability. Thus, Kyrgyzstan produces less grain than it needs. Furthermore, a considerable portion of what Kyrgyz farmers grow is fodder grain, which is not eatable and mainly used for breeding livestock.

Although the National Bank estimated the inflation rate at 9 percent, economic experts are convinced that the actual rate is around 20 percent. Thus, many come to believe that the actions of the government will entail little decreasing effect on inflation in the short run, if any at all. First of all, it is obvious that state’s reserves of grain are limited and grain grown within Kyrgyzstan is not enough to cover the needs of its people. Nonetheless, apart from wheat, states that are economically better off also seem to absorb the agricultural products and construction materials of Kyrgyzstan, leaving little for Kyrgyzstan’s internal market. And, last but not least, at the end of 2006 Uzbekistan almost doubled the gas price for Kyrgyzstan, from US$55 to US$100 per 1000 cubic meters, which directly tightened ordinary people’s spending.

IMPLICATIONS: Apparently the rise of the prices of wheat in neighboring countries like Kazakhstan and Russia took the Kyrgyz government by surprise. Ordinary people see this as the government’s inability to predict the evolution of prices in neighboring states, and as its mistake in not supporting agriculture. Agriculture comprises 35-40 percent of the country’s GDP and engages about 50 percent of Kyrgyzstan’s labor force. Nevertheless, many farmers are dissatisfied with the government, which in their view does not ensure lower prices for petrol and fertilizers.

The government’s first reaction was to release 150,000 tons of low-price grain from state stockpiles into the domestic market, money from which will be used for purchasing more grain from Kazakhstan. As experts observe, grain levels in the market purely depend on demand and private sector suppliers in Kyrgyzstan and Kazakhstan. Therefore, the government currently makes attempts to bring local bakeries up to the legal market by lowering license requirements, and consequently allowing them buy cheap grain from the government. The government is also discussing the possibility of increasing the value-added tax threshold for individual bakeries in an effort to increase the number of bakeries for greater competition. Additionally, the government tries to encourage the purchase of grain from Kazakhstan by permitting people to bring in up to 20 tons of grain and flour with relieved scrutiny and lower taxes. However, the latter measure may prove quite barren if the Kazak government decides to install export licenses on wheat.

However, according to many local experts, such measures will bring only a short-term effect on prices, unless the government pours adequate funds into domestic production, abandons the erratic approach of state spending, and stops releasing too much cash into circulation for momentary purposes. For example, last year the government printed additional money, raising circulation by 40 percent in an attempt to strengthen the national currency. It was also suggested that hosting the SCO summit in August generated unforeseen expenses. As a matter of fact, official statistics seem to earn little trust – the National Bank and State Statistical Committee asserted that the inflation rate is no higher than 9 percent, quite lower than the actual figures estimated by observers – reinforcing the belief that the government fails to take into account a good part of money not engaged in production such as remittances sent to Kyrgyzstan by migrant workers in Russia and Kazakhstan. The number of labor workers abroad is thought to have reached one million, a fifth of the total population, and the sum they will send home by the end of the year will likely amount to US$ 1 billion. Once in Kyrgyzstan, the money is usually turned into real estate, partly providing the answers to why prices of apartments in Bishkek, the capital city, doubled in the last couple of years.

CONCLUSIONS: Although the Kyrgyz government, led by the experienced economist Almazbek Atambaev, tries to boost the national economy by privatizing sluggish or undeveloped state companies, cutting huge electricity losses, reforming the fiscal system, and haggling with foreign gold mining companies for more favorable contracts, inflation seems to have more forces behind than what would allow it to disappear easily. These economic endeavors promise to bring benefits in the long run. For the short run, the government has no choice but to increase social spending in order to protect the lower social strata from high prices, which in turn will decrease the chances for economic problems turning into political protests.

AUTHOR’S BIO: Nurshat Ababakirov is a Bishkek-based freelance writer.