The widespread social and political instability in April-June 2010 had a severe impact on the economy, with much of the retail sector suffering from looting, and hampered by the intermittent closure of the Uzbek and Kazakh borders. Full-year real GDP contracted by 1.4% in 2010. The economy is now recovering, and real GDP rose by 3.2% year on year in the first four months of 2011.

Assuming that political stability holds, we expect the economy to bounce back in 2011, and forecast growth of 4%. The Russian and Kazakh economies, which are important markets for Kyrgyz exports, will recover further in 2011. Moreover, these countries are important sources of the remittances on which many Kyrgyz households rely, and inflows of remittances will help to boost Kyrgyz retail trade. Construction, which suffered a severe downturn in 2010, is likely to provide a significant boost to the economy as infrastructure projects resume, and as the damage that businesses and dwellings suffered in mid-2010 is repaired. Foreign investment is also likely to pick up slightly as political instability moderates. Growth is likely to accelerate in 2012, to 5%, as the Russian and Kazakh economies continue to expand and domestic demand picks up. Nevertheless, the risks to this forecast are on the downside, as crossborder trade, which supports much of the retail sector, could suffer further if border controls with Uzbekistan and Kazakhstan are tightened. Renewed outbreaks of political instability could also threaten the economy.