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WEEKLY NEWSLETTER
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Kyrgyzstan
Index
Kyrgyzstan paid dearly for its designated role as an exporter of raw
materials when the Soviet Union unraveled and retail prices began to be
freed: the prices paid for raw materials rose much more slowly than did
prices of finished goods. Thus, in 1992, for example, the cost of what
Kyrgyzstan imported rose by fifty to 100 times, while the amounts received
for exports rose by fifteen to twenty times. This explains in part why the
GNP for 1992 was valued at 250 billion rubles (for value of the ruble--see
Glossary), while the cost of Kyrgyzstan's imports was put at 400 billion
rubles. In 1992 Russia began discounting the paper value of the Kyrgyzstan
ruble, effectively devaluing the goods that Kyrgyzstan was supplying.
Moscow then required that the country assume the imposed "difference"
as a loan, which had the effect of increasing Kyrgyzstan's debt burden.
To escape the disparities inherent in dependence on the ruble, in May
1993 Kyrgyzstan was the first former Soviet republic to leave the ruble
zone (see Glossary) and introduce its own currency, the som. This new
policy earned Kyrgyzstan the hostility of neighboring Kazakstan and
Uzbekistan, which had declared loyalty to the ruble and feared an
avalanche of devalued Kyrgyzstani rubles entering their countries. The
som, which is fully convertible to foreign currency and has a floating
exchange rate, has been underwritten largely by the IMF, which has
provided a large measure of stability. After introduction at a rate of two
som to the United States dollar, the som traded at eleven to the dollar at
the end of 1995. According to President Akayev, about half the som in
circulation are backed by gold or by international loans. Although the som
has received strong international backing, experts questioned the
likelihood that such support would continue once other new national
currencies emerged in former Soviet republics, eliminating the som's
status as a unique experiment. Such doubt grew clear as Kyrgyzstan's first
international loans came due in 1995, with scheduled payments of
approximately US$58 million that year, rising to nearly US$100 million the
next year. The republic's collapsed economy made it possible that
Kyrgyzstan would become a permanent international client state.
Especially in the first year of independence, hyperinflation seriously
eroded buying power (see table 10, Appendix). At the end of 1992,
wholesale prices were more than eighteen times higher than in 1991. Retail
prices rose 40 percent in December 1992 alone, explaining in part why
retail sales declined by 64 percent from 1991, the greatest decline in all
of Central Asia. Between 1990 and 1992, meat consumption dropped 20
percent, milk product consumption by 30 percent, and fats consumption by
40 percent. Beginning in 1993, however, international support for the som
and for Kyrgyzstan's economy in general has kept inflation much lower than
it is elsewhere in the CIS. From a high of about 1,400 percent annually in
1992 and 1993 (caused mainly by large increases in fuel costs), inflation
dropped to about 180 percent for 1994 (mainly because of tighter credit
and the government's reduced expenditures); the government's inflation
target for 1995, set in cooperation with the IMF, was 55 percent, with
monthly declines throughout the year. Prices rose by 16 percent in the
first quarter of 1995, slightly above target, but budgetary expenditures
for the first half of the year were far above the IMF target of 5 percent
of GDP.
In the spring of 1995, average monthly pay in Kyrgyzstan was 508 som,
compared with a government-estimated minimum family budget of 487 som.
Earning statistics are not considered totally reliable, however. In 1995
food required an average of 61 percent of the family budget. To eliminate
price distortions inherited from price support policies of the Soviet
regime, the Akayev government decontrolled most prices in 1992, which had
the immediate result of fueling inflation and reducing individual
purchasing power. The economic decline of 1993 caused reintroduction of
price controls, notably on agricultural products, and ceilings of 10 to 25
percent were placed on price increases for a wide range of retail
commodities. The state Anti-Monopoly and Pricing Committee restricted
pricing decisions in most of Kyrgyzstan's large enterprises. Although such
institutional mechanisms did not work consistently, they encouraged
development of unofficial economic arrangements and barter arrangements,
which further undermined the national economy. In 1994 the government
again reversed its policy, ending obligatory sale and price controls on
agricultural goods that had depressed the agricultural market. The reform
would nominally free farmers to negotiate commodity prices with government
agencies and other buyers. However, because the government remained the
only large-scale purchaser of many products, liberalizing the procurement
process was not expected to have immediate effects.
Data as of March 1996
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