The central bank of Kyrgyzstan raised its key interest rate for the second time this year and didn’t exclude further rate hikes, saying rising global commodity prices are pushing up inflation and while there are signs of a recovery of the domestic economy, demand remains weak.
The National Bank of the Kyrgyz Republic (NBKR), one of only a handful of central banks to have raised its rate last year in the face of the COVID-19 pandemic, raised its discount rate by another 100 basis points to 6.50 percent and has now raised it 150 points this year following a hike in February.
“The continuing rise in prices on world commodity markets determines the upward dynamics of inflation in the Kyrgyz Republic in the near future,” the bank said, adding in the event of any risks, it doesn’t exclude the possibility of making additional changes to its monetary policy stance.
In March 2016 NBKR shifted into a monetary easing cycle but this came to an end in February last year when the central bank raised the rate to dampen inflationary pressures.
Inflation in the former Soviet republic eased to 8.6 percent as of April 16, the bank said, from 10.23 percent in March, with the main upward pressure by external factors, such as accelerated growth in the prices on world food markets and limited supply in producer countries.
But NBKR said a possible rise in a number of administered prices will contribute to inflation on top of the rise in food prices, leading to higher inflation by the end of the year.
NBKR intends to move to inflation-targeting in the medium term and last month the International Monetary Fund (IMF) said it will be important to strengthen the bank’s autonomy, governance structure, recapitalization rules, the money markets along with the resolution framework to ensure a smooth transition.
After contracting by 8.6 percent last year due to a drop in tourism, non-gold exports and slower economic activity, Kyrgyzstan’s economy is showing signs of recovery, NBKR said.
However, domestic remains weak – real wages fell by 5.3 percent in the first two months of the year – while remittances rose 6.4 percent to US$254.1 million during the same period, helping boost domestic consumption, the bank added.
On March 31 IMF said it expects Kyrgyzstan’s economy to expand 3.8 percent this year and 6.4 percent in 2022, underpinned by a recovery in the global and domestic economy, higher gold production, an increase in remittances from oil-exporting neighbors and a rebound in tourism, transportation and related services.
The IMF expects growth to gradually converge to its potential of 4 percent in the medium term while inflation will remain elevated in coming months but then ease to around 7.4 percent by the end of this year and return to the bank’s target range of 5-7 percent thereafter.
Kyrgyzstan’s som has been trading near lows of just below 85 to the U.S. dollar most of this year, the same level it hit April last year, and NBKR said the revitalization of the country’s economy along with continued volatile commodity prices had led to an increase in demand for foreign currency in the domestic foreign exchange markets.
The central bank noted it participates in the foreign exchange market to smooth out sharp fluctuations and while the IMF said FX interventions are used to smooth excessive volatility, the exchange rate should remain market driven going forward.
”However, the exchange rate alone cannot address the underlying structural weakness of the balance of payments, which require deep structural reforms to improve the competitiveness of the economy,” the IMF said.
In 2020 Kyrgyzstan’s budget deficit widened to 3.3 percent of gross domestic product and the IMF expects the deficit to widen further this year to 4.2 percent of GDP while the overall level of public debt rose to 68 percent of GDP, with authorities faced with the challenge of lowering debt while creating fiscal space for development.
IMF recommends lowering public debt to below 60 percent by 2025.
The som was trading at 84.8 to the U.S. dollar today, down 2.4 percent since the start of this year and down 18 percent since the start of 2020.
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