Outlook for 2011-12

Following the ouster of the president, Kurmanbek Bakiyev, in April 2010, and an outbreak of ethnically motivated violence in June, the country will remain vulnerable to further unrest. The Economist Intelligence Unit's baseline forecast is that the new administration-formed following the parliamentary election in October 2010-will gradually improve the security situation. However, public demonstrations will continue and could turn violent. There is also a risk of a renewed outbreak of ethnic violence in the south. Policy in the immediate term will focus on restoring stability, and foreign financial assistance will support social spending. However, policy formulation will be difficult, as the government is a three-party coalition that appears inherently unstable. Difficulties with revenue-raising and high levels of social spending will lead to large budget deficits in 2011-12, of more than 8% of GDP. We expect the economy to recover in 2011-12, following a contraction in real GDP of 1.4% in 2010. We forecast growth of 4-5% in 2011-12, but risks are on the downside. We expect the current account to record a deficit equivalent to just over 13% of GDP in 2011-12.

The political scene

The three-party ruling coalition appears increasingly in danger of splitting, with a number of disputes emerging between the constituent parties. A former prime minister, Feliks Kulov, is attempting to negotiate the entry of his own party, Ar-Namys, into the coalition. Following the conclusion of an international investigation into the ethnic unrest in 2010, which found armed forces and senior politicians culpable, inter-ethnic tensions remain high.

Economic policy

The IMF has reached preliminary agreement on a new rapid credit facility (RCF) lending arrangement with the Kyrgyz Republic, amounting to US$108m. The budget recorded an increased surplus in the first quarter of 2011, compared with the year-earlier period, but the full-year budget for 2011 targets a large deficit.

The domestic economy

Real GDP expanded by 3.2% year on year in the first four months of 2011, a sharp slowdown on growth of 10.5% in the same period of 2010. Industry is performing well, but retail trade is recovering only slowly from the 2010 unrest. Problems in the gold sector have been affecting the recovery.

Foreign trade and payments

Export growth was outpaced by import growth in the first quarter of 2011, and the trade deficit widened to US$319m, compared with US$263m in January-March 2010.