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.

Total area

198,500 sq km

Population

5.42m (end-2009 official estimate)

Main towns

Population in '000 (end-2004 estimates)

Bishkek (capital): 804

Osh: 228

Jalalabad: 78

Kara Kul: 63

Climate

Continental high mountain

Languages

Kyrgyz and Russian are the official languages

Weights and measures

Metric system

Currency

The som was introduced on May 10th 1993. The average exchange rate in 2010 was Som45.97:US$1

Time

Five hours ahead of GMT

Fiscal year

Calendar year

Public holidays

January 1st (New Year); January 7th (Orthodox Christmas); February 23rd (Defenders' Day); March 8th (International Women's Day); March 21st (Noruz); March 24th (National Revolution Day); May 1st (Labour Day); May 5th (Constitution Day); May 9th (Victory Day); August 31st (Independence Day; end of Ramadan); November 7th (Feast of Sacrifice)

Official name

Kyrgyz Republic

Form of state

The Kyrgyz Soviet Socialist Republic declared its independence in August 1991 and changed its name to the Kyrgyz Republic. A constitution was approved on May 5th 1993. The president's powers were enhanced by referendums held in February 1996, February 2003 and October 2007. The provisional government in place since April 2010 held a referendum on a new constitution restoring powers to parliament in June 2010; a parliamentary election under this new constitution was held in October 2010

National legislature

The Jogorku Kenesh is a unicameral chamber elected for a five-year term. Under changes approved by referendum in June 2010, the number of seats in the legislature has been raised from 90 to 120.

National elections

October 10th 2010 (parliamentary) and July 23rd 2009 (presidential); a presidential election is due to be held in October 2011; the next parliamentary election is due in 2015.

National government

If a party holds more than one-half of the seats in parliament, it has the right to nominate the prime minister, who must then be approved by the president (if no party wins a majority, the president will entrust one of parliament's parties with forming a coalition)

Head of state

The president, Kurmanbek Bakiyev, re-elected in July 2009, was ousted after riots in April 2010; Roza Otunbayeva will remain as interim president until end-2011

Main political parties

Ata-Jurt (Fatherland); Ak Jol (True Path); Social Democratic Party of Kyrgyzstan (SDPK); Communist Party of Kyrgyzstan (KPK); Socialist Party Ata-Meken (Fatherland); Alga (Forward), Kyrgyzstan!; Adilet (Justice); Ar-Namys (Dignity); Asaba (Banner); Democratic Party of Women of Kyrgyzstan; Erkindik (Freedom); Mekenim (Fatherland) Kyrgyzstan movement; Moya Strana (My Country); Progressive-Democratic Party Erkin Kyrgyzstan (ErK); Respublika; Party of Communists of Kyrgyzstan (PKK); Protection Party; Republican People's Party; Butun Kyrgyzstan (United Kyrgyzstan)

Government

Prime minister: Almazbek Atambayev

First deputy prime minister: Omurbek Babanov

Deputy prime ministers:

;Shamil Atakhanov

;Ibragim Jusunov

Key ministers

Agriculture: Toragul Bekov

Defence: Abibilla Kudaiberdiyev

Economic regulation: Uchkunbek Tashbayev

Emergency situations: Bolot Borbiyev

Energy: Askar Shadiyev

Finance: Melis Mamejano

Foreign affairs: Ruslan Kazakbayev

Health: Sabir Jumabekov

Internal affairs: Zarylbek Risaliyev

Justice: Abylay Mukhamejanov

Labour, employment & migration: Almazbek Abytov

Natural resources: Zamirbek Esenamanov

State property committee: Nudrin Ilebayev

Transport & communications: Erkin Isakov

Head of National Security

Keneshbek Dushebayev

Acting central bank chairman

Baktygul Zheyenbayeva

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The security situation remains unstable following the violent ouster of the president, Kurmanbek Bakiyev, in April 2010, and an outbreak of ethnically motivated violence in June 2010 Kyrgyz Republic will remain vulnerable to further unrest over the forecast period. Despite successfully holding a parliamentary election on October 10th 2010, the formation of a new government was a protracted affair. The government, inaugurated in December, is a three-party coalition that appears to be split on such basic issues as whether the country should be a parliamentary republic or should revert to presidential rule. The Economist Intelligence Unit's baseline forecast is that the new government will continue the work of the previous interim administration in gradually asserting control, but the risk of further unrest remains. This is particularly the case given that the party that won the most votes in the election, Ata-Jurt (Fatherland), seems at odds with its two governing partners, and its longevity within the coalition is in some doubt. This bodes ill for the stability of the south, where Ata-Jurt enjoys most of its support. Furthermore, more than 60% of those who voted did so for parties that are not represented in the new parliament, and this de facto disenfranchisement increases the potential for protests by disaffected segments of the population.

Outside actors are likely to assist the authorities to some extent. For example, an international donor conference in July 2010 agreed to the disbursement of US$1.1bn to help to restore stability and economic growth. Russia will also reinforce its role as an important security partner over the forecast period. However, public demonstrations are likely to remain frequent and could easily turn violent. There is also a high risk that ethnic violence could break out again in the south.

Any further outbreak of unrest on the scale seen in June 2010 could lead to the intervention of outside armed forces. Although our central assumption is that stability will gradually be reinforced, the situation remains tense and there is some risk that the country could degenerate into civil war. In an extreme scenario, one possible outcome could be a split along ethnic lines and a redrawing of the borders in Central Asia. Nevertheless, although neighbouring regimes in Central Asia will have been alarmed by the possibility of protest spreading to their own populations following the recent unrest in the Middle East and North Africa (MENA), our central assumption is that the Kyrgyz Republic will not suffer contagion from these events. Despite the continuing threat of instability within the country, the ouster of the authoritarian Mr Bakiyev, and the successful holding of a free and fair parliamentary election in October 2010, reduces the threat that copycat protests could spread from MENA to the Kyrgyz Republic.

A parliamentary election was held in October 2010. The next parliamentary election is not due until 2015. However, a coalition government comprising three parties has had to be formed from the five that won parliamentary representation in October, so as to achieve a parliamentary majority. The current grouping, comprising the Social Democratic Party of Kyrgyzstan (SDPK), Respublika and Ata-Jurt, is likely to be an unstable alliance. There is therefore a high risk that the coalition will collapse during the forecast period. Given that the current coalition is the result of a second attempt at forming a government since the election, its collapse could result in an early parliamentary election. A fresh election is unlikely to give a single party an overwhelming majority, so there is a risk of policy paralysis in the medium term.

Following Mr Bakiyev's ouster, the presidency has been occupied on a temporary basis by Roza Otunbayeva. The interim administration has set a date of October 2011 for the presidential election. Ms Otunbayeva has ruled herself out as a candidate. The next president is therefore most likely to come from among the leaders of the five parties that won parliamentary representation in October 2010.

Mr Bakiyev attempted to play off the interests of Russia against those of the US, securing a large financial aid and loan package from Russia in 2009, as well as a tripling in the rent paid by the US for its use of the Manas airbase. However, Russia became increasingly frustrated at what it saw as Mr Bakiyev's reneging on promises (notably, his failure to shut the US base), and it was quick to recognise the interim administration once he had been overthrown. This implies that Russia is set to become a more prominent partner for the country, particularly in view of its investment plans in the Kyrgyz hydropower sector. However, Ms Otunbayeva, although educated in Russia, has served as ambassador to the US and the UK. That she will remain interim president until the end of 2011 suggests that ties with the West will not suffer an immediate rupture. In addition, the uncertain security situation in Afghanistan is expected to lead to some degree of tolerance on the part of Russia of a US presence in the region.

Relations with immediate neighbours will remain tense. Ties with Uzbekistan were already under strain because of disputes over energy and water use. Uzbekistan, Tajikistan and Kazakhstan were alarmed by the outbreak of unrest in a neighbouring state, as they do not want their own populations to follow the Kyrgyz example. The borders with Uzbekistan and Kazakhstan have been closed periodically since the outbreak of violence in April 2010. Although the Kazakh border has since been largely reopened, and the Uzbek authorities allowed refugees across the border in order to flee the violence in June 2010, border restrictions will remain tight, and will continue to be subject to arbitrary closure throughout the forecast period.

Government efforts in the immediate term will focus on restoring stability and enabling the economy to continue to function. The new government will also be concerned to ensure that budget revenue continues to meet targets, following setbacks in April-July 2010 and a large increase in spending, owing to the costs of unrest. As coalition governments will probably be fractious, there are likely to be protracted debates on the direction of policy. However, general policy trends in 2011-12 will be predominantly based on mitigating the impact of external economic shocks, cutting inflation, reducing poverty and restoring the economy to faster growth.

The Kyrgyz Republic has developed a policy programme with the IMF. It agreed a US$100m, 18-month arrangement under the Fund's exogenous shocks facility (ESF) in December 2008. In April 2010 the Fund reached preliminary agreement on further support, equivalent to around US$108m, under its rapid credit facility (RCF). A final decision on the RCF is expected in June 2011. The goal of meeting the IMF's criteria will have to be balanced against preventing further social instability. This will be made harder by the uncertain security situation, widespread poverty and the reliance of many households on family members working abroad for remittances, which will be lower than in previous years, despite recovering from their low point in 2009. An international donor conference in July 2010 agreed to provide the authorities with US$1.1bn in 2010-12. Much of this will go towards essential public services, social welfare support and reconstruction efforts, following the violence in April-June 2010.

A combination of political divisions, social concerns and vested interests is likely to continue to impede progress on implementing the structural reform agenda. The previous government pledged to make foreign direct investment (FDI) a priority-a pledge that the new administration has repeated. However, FDI inflows are likely to remain low in 2011-12. Doubts remain about the government's ability to implement FDI-friendly policies, as domestic opposition to the sale of state assets is strong, and foreign investors will remain wary because of fears of instability, the poor business environment and high levels of corruption. A more difficult international economic environment compared with 2007-08 will also limit the flow of fresh FDI into the Kyrgyz Republic. These factors mean that, for the most part, only foreign investors familiar with the business environment in Central Asia (essentially Russian and Kazakh companies) will seek opportunities in the Kyrgyz Republic. The sale of assets to such firms is unlikely to attract controversy, owing to the long-standing historical links with these two countries.

The state budget recorded a deficit of 1.5% of GDP 2009, following a surplus of 0.8% of GDP in 2008. The budget deficit for 2010 is estimated at 6.2% of GDP. Revenue suffered from the social unrest in mid-year as retail trade underwent a sharp downturn. Value-added tax (VAT) revenue will also have suffered from the population's relatively low purchasing power. The provisional authorities' decision to reverse steep tariff rises for electricity and to waive some newly introduced energy taxes also had an impact on budget revenue in 2010 (although electricity tariffs have since risen slightly). The new government will be reluctant to resort to excessive tariff increases to address any revenue shortfall, as the imposition of large electricity price increases in January 2010 contributed significantly to the unrest that led to Mr Bakiyev's ouster.

Emergency assistance from Russia, the EU and other multilateral lenders enabled the authorities to fulfil their spending obligations despite the downturn in revenue in 2010, and foreign assistance will continue to be forthcoming over the forecast period. External assistance and a return to economic growth will reduce pressure on the government to provide financial support to the real economy. However, spending pressures will remain high. For example, the authorities have authorised the payment of compensation to the families of the victims of the violence that occurred in April-June 2010. The new government has agreed an expansionary budget for 2011, with social spending remaining high and significant resources directed to reconstruction efforts following the unrest in 2010. We therefore forecast that the deficit will widen to 8.3% of GDP in 2011, remaining at around this level in 2012.

The effectiveness of monetary policy will remain constrained by the underdeveloped nature of the domestic financial sector. A trend of rapid depreciation of the som in the first quarter of 2009 led the National Bank of the Kyrgyz Republic (NBKR, the central bank) to make extensive foreign-currency sales. This trend continued in 2010, and accelerated as the currency came under severe downward pressure following the events of April-June, although a return to relative political stability has started to slow the som's fall in 2011. Continuing intervention will help the NBKR to control the som money supply, but the central bank will be reluctant to deplete its foreign-exchange reserves excessively. Higher inflows of remittances than in 2009 will also help to sustain the som.

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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.

A fall in global commodity prices in 2009 led to a marked slowdown in inflation, to an annual average of 6.9%, from 24.5% in 2008. Commodity prices rebounded in 2010, exerting upward pressure on inflation, and over the year as a whole average inflation came in at 8%. A faster pick-up was prevented by the reversal of utility price rises by the provisional government in April 2010, and by the sluggish performance of the economy. We expect that inflation will accelerate in 2011 as the economy returns to growth, and as global commodity prices rise further. The continuing downward trend of the som will also create imported inflationary pressures. We forecast a sharp acceleration in inflation in 2011, to 19%, largely owing to high global commodity prices. Inflation is set to slow in 2012 as global price pressures abate, with prices for food, oil and industrial raw commodities all expected to fall significantly.

Downward pressure on the som increased in mid-2010, owing to the instability in the country, but the NBKR intervened heavily throughout to support the currency. The NBKR will continue with its policy of intervention in the currency markets to attempt to smooth the pace of depreciation of the som, in an effort to prevent excessive import-driven inflation, while boosting export competitiveness. It will also occasionally make som purchases to limit the extent of money supply growth, as an anti-inflationary measure. We forecast that the currency will depreciate to Som47.8:US$1 by end-2011, a cumulative depreciation of around 9% compared with end-2009. Faster depreciation will be prevented by disbursements from the IMF and other donors, and by lower debt repayments as the external debt burden falls, owing to the renegotiation of Paris Club debt and the government's policy of tapping only concessional sources of credit. The pace of depreciation will slow in 2012, provided that political stability is maintained following the presidential election that is due at end-2011. We forecast an exchange rate of Som49:US$1 at end-2012.

Following a current-account deficit of US$300m (6.4% of GDP) in 2009, we estimate that the deficit widened in US dollar terms in 2010, to around US$400m, largely owing to higher prices for commodity imports. The deficit widened to an estimated 9.1% of GDP because of the economic downturn. Prices for gold, the Kyrgyz Republic's main export, boosted export revenue in 2010, and this trend will continue in 2011. However, import costs will rise in 2011 as domestic demand recovers, and will also be boosted by rising global commodity prices. We therefore forecast that the current-account deficit will continue to expand in 2011, to the equivalent of 13.3% of GDP. Although a continuing recovery in domestic demand in 2012 will suck in imports, import costs will be constrained by falling commodity prices. However, export revenue will also be held in check by a fall in global gold prices. We expect the current-account deficit to narrow slightly in 2012, to 13.1% of GDP.

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The three-party government coalition-formed in December by Ata-Jurt (Fatherland), Respublika and the Social Democratic Party of Kyrgyzstan (SDPK)-has justified doubts about its unity and durability (February 2011, The political scene). Since taking office it has been racked by discord, and faces a possible change in composition. In March coalition members disagreed over the right of the prime minister, Almazbek Atambayev, to hold office should he take part in the presidential election scheduled for October 2011. Kamchybek Tashiyev, a leader of the nationalist Ata-Jurt, agitated for a promise that Mr Atambayev, who heads the SDPK, would give up his current post if he stands, as most observers expect he will. Mr Tashiyev, who has threatened repeatedly to pull his party out of the coalition, is also expected to stand in the election. However, rumours abound that Ata-Jurt has itself been splitting into factions.

Recent press reports have linked Ata-Jurt members to several altercations. On April 1st Mr Tashiyev publicly exchanged blows with a deputy from Respublika. The fight was followed by a parliamentary lockdown in which security officers seized guns, including automatic weapons, from deputies and their staff. Several weeks later the parliamentary speaker, Akmatbek Keldibekov (also of Ata-Jurt), proposed legislation to grant deputies the right to bring weapons into the building. Soon after the brawl, allegations emerged that Mr Tashiyev had given a member of his own party concussion in an altercation. Mr Tashiyev, the veteran head of the National Boxing Federation, has denied any wrongdoing.

In mid-April the first deputy prime minister-Omurbek Babanov, the leader of Respublika-temporarily stepped down in the wake of a scandal surrounding the country's largest mobile telecommunications service provider, Megacom. Mr Babanov's voluntary suspension of duties followed two weeks of accusations by a former prosecutor-general, Kubatbek Baibolov, who had been dismissed on March 31st, pending an investigation into his own possible involvement in unscrupulous activity surrounding Megacom. Mr Baibolov claimed that Mr Babanov had illegally profited in 2010 from the company's partial nationalisation by the interim government and had extorted US$50m from Russian investors. Mr Babanov resumed his duties on May 16th, cleared of wrongdoing by a parliamentary commission.

The Megacom scandal also included a bitter ownership dispute in which two law enforcement bodies-the public prosecutor's office and the financial police-appeared to be working at cross purposes. The stand-off led to speculation that the two agencies had become proxies in a battle over commercial interests by different political groupings. Similarly, a high-profile campaign against organised crime, initiated in February by the president, Roza Otunbayeva, drew scepticism for its rash of arrests, which one lawmaker claimed had targeted criminals allied with a particular political clan.

As Ata-Jurt and Respublika tussled, the opposition Ar-Namys (Dignity) strengthened its position. Ar-Namys-led by a former prime minister, Felix Kulov-is now in negotiations to join the ruling coalition. This would neutralise Ata-Jurt's threat to defect by ensuring the necessary majority of seats for the governing alliance. Mr Kulov and Mr Atambayev have a chequered history of working together, but it appears that Mr Kulov is attempting to position his party inside the government before the presidential election. Although popular both domestically and with the Russian authorities, Mr Kulov cannot stand for the presidency, as he does not speak fluent Kyrgyz, a constitutional requirement. However, he could emerge in a powerful position following the election if he succeeds in joining the coalition and Mr Atambayev wins the presidency.

In March, during the fight for control over Megacom, two prominent Russian politicians visiting the Kyrgyz Republic accused Mr Babanov-and by extension the new government-of trying to defraud Russian investors. Mr Atambayev flew to Moscow to assure the Russian leadership of his loyalty and returned promising to bring the Kyrgyz Republic into the customs bloc comprising Russia, Kazakhstan and Belarus.

On April 28th Russia announced that it was imposing high export tariffs on its fuel (see The domestic economy), on which the Kyrgyz Republic relies heavily. Russia has threatened this action at least three times in the past year, in what has been seen as an attempt to expand its influence on Kyrgyz politics. However, this time the move seems to have been dictated by a domestic petrol shortage in Russia. In 2010 Russia's sudden increase of tariffs added to public anger against the previous Kyrgyz president, Kurmanbek Bakiyev, and rioting led to his ouster in April 2010. In recent months Russia has also responded angrily to nationalist rhetoric by some Kyrgyz politicians seeking to de-Russify place names and promote the Kyrgyz language at the expense of Russian-moves that Russia sees as a threat to the dwindling ethnic Russian minority in the Kyrgyz Republic.

The anniversary of the uprising of April 2010, which unseated Mr Bakiyev and left almost 100 people dead, passed peacefully. However, small demonstrations of varying intensity have taken place before government buildings weekly, if not daily, some of them blocking traffic or becoming aggressive. Among the most emotional protests have been those by relatives of victims of the inter-ethnic violence in southern Kyrgyzstan in June 2010. Their demands got vocal support from Ata-Jurt. By May 10th the government had approved the distribution of around Som600m (US$12.8m) in compensation to those bereaved or injured by the clashes.

A long-awaited international report on the violence was released May 3rd. The Kyrgyzstan Inquiry Commission (KIC)-led by a Finnish politician, Kimmo Kiljunen-found evidence that crimes against humanity were likely to have been committed when Kyrgyz military units took part in attacks against ethnic Uzbeks, and cited gross miscarriages of justice against the minority group. The report explicitly states that genocide did not take place. However, it disputes government assertions that the violence had been started by Islamist militants or members of the ousted Bakiyev regime, and censures several officials for doing too little to prevent the bloodshed, or even fuelling it; among them are a former defence minister, Ismail Isakov, and the nationalistic mayor of Osh, Melisbek Myrzakmatov. Many Kyrgyz officials have condemned the report and said that it would stoke more inter-ethnic conflict.

Tensions in the south remain high as the June anniversary of the violence approaches. The original protests calling for compensation to victims' families had been staged primarily by ethnic Kyrgyz, some of them brandishing anti-Uzbek slogans. Now new protests have taken their place, demanding that KIC investigators be punished for their report. In the south, the shortage of arable land is a possible flashpoint for renewed violence-small disputes over grazing rights and access to grazing land have been a common theme in previous ethnic disputes. Nationalist rhetoric has been strong nationwide, particularly in the Kyrgyz-language press.

Officials continue to warn that the country faces a growing threat of Islamic terror. However, clear corroboration of this threat seems to be in short supply. A reported call in late 2010 from the Islamic Movement of Uzbekistan (IMU)-now largely based in northern Afghanistan-to carry jihad to the south of the Kyrgyz Republic appears to have had no effect. On April 29th the head of the National Security Service, Keneshbek Dushebayev, declared the existence of a previously unknown terrorist group, the Islamic Movement of Kyrgyzstan, made up mostly of young Uzbek men. He provided no evidence to support his claims. Mr Dushebayev has been warning about a terrorist threat since mid-2010, when he blamed the ethnic violence in June of that year on jihadists-a theory contested by the KIC report.

The IMF has agreed a new lending facility with the Kyrgyz Republic, following the expiry in June 2010 of the previous, 18-month programme under the exogenous shocks facility (ESF), which was introduced in response to the global financial crisis. Under the previous programme, only one of the planned three reviews was completed, owing to political turmoil. The IMF released a loan of US$33m under a rapid credit facility (RCF) in September 2010, and in late April 2011 reached preliminary agreement on an RCF credit amounting to US$108m. The IMF executive board is expected to reach a final decision on the RCF in June.

In a press release, the Fund stated that it had agreed with the government on the need to put the public finances on a sustainable footing over the medium term, despite the passage of an expansionary budget for 2011. Revenue-raising measures are to be based on simplifying the tax system, spreading the tax burden more evenly and limiting tax evasion. The Fund also called for spending restraint, despite the need to offset the economic shock on the population resulting from the decline in the economy in 2010. In particular, it called for wage restraint in the public sector. It also called for the maintenance of a tight monetary stance in order to contain inflationary expectations.

In the first quarter of 2011 the state budget recorded a surplus of Som1.5bn (US$31.6m), compared with one of Som1.1bn in the year-earlier period. The surplus amounted to 3.2% of first-quarter GDP, up from 2.8% in January-March 2010. The budget for 2011, which was approved in March, sets the full-year deficit at Som13.3bn (US$28m). Revenue is targeted at Som68.8bn, compared with Som58bn in the 2010 outturn. Expenditure is set to reach Som82.1bn, an increase of 19% on the 2010 outturn. However, grant expenditure from the public development programme will push overall spending up to Som90.1bn.

Revenue from personal income tax is expected to be almost 14% lower than in 2010, as the government increases exemptions in order to reduce economic hardship. However, this is likely to be offset by a rise of almost 21% in revenue from profit tax and a 29.5% increase in value-added tax (VAT), as business activity rebounds in line with the economic recovery. Expenditure is likely to pick up later in the year as government institutions rush to use up their spending allocations.

In the first four months of 2011 real GDP rose by 3.2% year on year, a sharp slowdown compared with the rate of 10.5% recorded in the year-earlier period. The economy is still struggling to recover from the after-effects of the violent political and inter-ethnic turmoil seen in 2010. Furthermore, the important gold-mining sector is exerting a drag on overall economic performance. Excluding production at the Kumtor goldmine-the largest in the Kyrgyz Republic and the country's most significant economic asset-real GDP rose by 3.7% year on year in January-April 2011. In the same period of 2010, by contrast, real GDP had been boosted by higher Kumtor production: excluding Kumtor, real GDP rose by just 5.7% in that period, only around one-half the pace of growth when Kumtor output was included.

Similar trends are observed in the reported growth rates for industrial production. Industrial output, excluding Kumtor, rose by 12% year on year in January-April, compared with 5.6% when output at the mine is included in the calculation. Again, this is a reversal of the phenomenon in the year-earlier period, when Kumtor boosted overall industrial output growth to 57.2%, compared with 40.6% for the non-gold sector.

Retail trade is recovering only slowly from the violence in 2010, when many outlets suffered from looting, and traders were affected by border closures with Kazakhstan and Uzbekistan. Retail trade turnover rose by 1% year on year in the first four months of 2011, compared with a fall of 6.6% in the year-earlier period.

The crucial gold-mining sector has faced a number of challenges in recent months, with production affected by both technical issues and public protests against mining concerns. Output of gold at Kumtor fell by 9% year on year in the first quarter of 2011, to 164,167 oz. Less ore was milled as a result of a four-day closure of the facility to replace equipment, and the ore mined was of a lower grade than that mined in the first quarter of 2010.

Kyrgyz politicians have again been calling for the agreement with the mine's operator, Centerra Gold, to be revisited. Centerra was formerly a joint venture between Canada's Cameco and the state-owned Kyrgyzaltyn, until Cameco pulled out in late 2009, in the process selling off part of its holding on the open market and transferring the rest to Kyrgyzaltyn, bringing the state's share in the mine to one-third (February 2010, The domestic economy). Before that transaction, the production agreement had long been a source of controversy, with populist politicians claiming that the government's share of revenue was too low and playing on popular mistrust of foreign investors. The currently high price of gold on global markets, in conjunction with the economy's difficulties, has led to renewed calls to increase the share of Kumtor profits that accrue to the state. In April Joomart Saparbayev, a parliamentary deputy, pointed out that production agreements in Mongolia, where Centerra also operates, tend to split the proceeds evenly between Centerra and its state-owned partners. A deputy from the Socialist Party Ata-Meken (Fatherland), Ravshan Sabirov, also called for the Centerra production agreement to be scrutinised by a parliamentary committee-a process that began in late April. The Jogorku Kenesh (parliament) will debate its findings in due course, according to Raikan Tologonov, a member of the relevant committee.

A small public protest in late April alleging the misappropriation of compensation payments that Kumtor had made for ecological damage passed peacefully. However, before that, on March 10th, a protest in the western province of Talas against what demonstrators said were unfair employment practices at a local mine-the South African-owned Talas Copper Gold-turned violent, with young men on horseback bursting through security fences, and looting and damaging property. Company sources were reported to have put a cost of US$1m on the damage, although local government officials claimed that it amounted to only around one-tenth of this figure.

In April 2011 consumer prices rose by 22.8% year on year, up from 21.1% in March and just 2.9% in April 2010. Prices are being driven by high global commodity prices, particularly for oil and related products, and by high food prices. In the first four months of 2011 prices for food and beverages had risen by around 12% since the start of the year.

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Fuel costs are likely to continue to exert upward pressure on prices in the coming months. From May 1st Russia increased its duties on exports of petrol by 44%, as a petrol shortage in Russia has led to a sharp rise in prices. These higher duties have not yet been reflected in official Kyrgyz inflation data, but will result in sharp price rises at petrol stations, as Russia is the main supplier of petroleum products.

Over the first four months of 2011 consumer price inflation averaged 21.1%, with particularly sharp rises-in addition to food prices-for clothing (up by 20.8% compared with January-April 2010), diesel (up by 33.7%) and petrol (up by 18.1%).

Industrial producer price inflation averaged 21.4% in January-April, broadly the same as in the year-earlier period, when producer prices rose by 21.9% year on year. However, producer price inflation has been accelerating, from 19.4% in January to 25.8% in April. Manufacturing prices exerted the strongest upward pressure, rising by 30.3% year on year, with particularly rapid increases recorded in the textiles industry (where inflation averaged 49% year on year in January-April) and food-processing (36.5%).

In the first quarter of 2011 foreign trade turnover reached US$1.2bn, an increase of 10.3% compared with the year-earlier period. Exports rose by 5.2%, to US$442.2m, but this was outpaced by a rate of growth of 11.7% in imports, which took the total to US$761.5m, largely because of higher prices for imported commodities. The trade deficit therefore widened to US$319.3m, compared with US$262.6m in January-March 2010. The effect of global price trends on the Kyrgyz Republic's foreign trade balance can be seen the data for petrol imports, which fell in volume terms by 16% year on year, but rose by 1.3% in value terms. A similar effect is observable with regard to imports of wheat, which dropped by 13.5% year on year in volume terms but more than doubled in terms of cost.

Exports to other members of the Commonwealth of Independent States (CIS) rose by 36% year on year, to US$114.5m, offsetting a decline in exports to non-CIS markets of 2.5% (this was largely owing to lower gold production). Imports from the CIS declined, however, by 2.1% year on year, which is likely to be the result of higher tariffs on imports from Russia, following the introduction of a customs union comprising Russia, Kazakhstan and Belarus that raised tariffs for countries outside the union. Imports from outside the CIS rose by 34.7%, owing to higher global commodity prices. This meant that the Kyrgyz Republic ran a trade deficit both with its CIS and non-CIS trading partners. Traditionally it has run a surplus on non-CIS trade, owing to the sale of gold (its main export product) to Western markets.