The International Monetary Fund (IMF) is raising an alarm about a spike in inflation in Kyrgyzstan. The country, weakened by instability over the past year, lacks the means to cope with a surge in consumer prices.
An IMF team of evaluators carried out a five-day visit to Kyrgyzstan January 31-February 4. The Central Asian state is struggling to recover from a tumultuous 2010, during which the country experienced the collapse of president Kurmanbek Bakiyev’s administration, was convulsed by inter-ethnic rioting in southern provinces and overhauled the constitution.
At the outset of 2011, the country experienced a bout of labor unrest, primarily strikes carried out by disgruntled teachers and doctors. As it tries to dig the country out of its economic hole, Kyrgyzstan’s new government has pledged to give teachers and medical personnel a significant pay hike.
The IMF, however, questioned whether a pay raise was the best remedy for the situation. Such a move could exacerbate inflation and limit the government’s fiscal room for maneuver over the medium term. “The mission encourages the authorities to utilize targeted social programs to provide social assistance to the poor,” Nadeem Ilahi, Senior Economist at the Middle East and Central Asia Department of the IMF, said in a statement on February 11.
But even without the pay hike, IMF experts are concerned about the inflation rate in Kyrgyzstan.
“Inflation, which began to rise sharply in the middle of 2010 and reached 19.2 percent at year-end, has been primarily driven by exogenous shocks,” Ilahi stated. “Higher inflation is beginning to be entrenched in inflationary expectations and is likely to have an adverse effect on the well being of the poor through an erosion of real incomes.”’
“The mission supports an expansionary fiscal stance to sustain the recovery and help those worst affected by last year’s crisis. Nonetheless, the risk of inflation becoming entrenched argues for keeping this fiscal expansion within reasonable bounds,” Ilahi continued.
The proposed pay raise for teachers and medical personnel is expected to take hold by mid-2011. If Parliament was to renege on the promised pay increases, it could spark a fresh wave of labor unrest. However, widespread inflation could also prompt public demonstrations as everyday food items become more costly.
Almost a third of Kyrgyzstan’s 5 million citizens live below the poverty line, according to the UNDP. In rural areas, 51 percent of the population lives in poverty compared to urban poverty rates of about 30 percent.
In 2010, the cost of flour and bread rose by 25 percent, fruits and vegetables were 12.7 percent more expensive and meat prices increased 11.9 percent over the previous year, according to the Kyrgyz National Statistics Committee. “Real incomes” did not enjoy comparable growth.”
The Ministry of Economic Regulation forecasts inflation at 10 percent in 2011. The Ministry also expects a 10.5 percent jump in unemployment, Dinara Shaydieva, the state secretary for the Ministry of Finance, said on February 2. Independent research bodies are projecting inflation in excess of 20 percent in 2011.
One western diplomat speaking on condition of anonymity warned that inflation could easily trigger another bout of social unrest in Kyrgyzstan. “Rising food prices are part of a global trend, but the Kyrgyz public won’t see it like that. They will blame the government and that discontent may trigger demonstrations. We are watching the situation,” the diplomat said.