RISING BREAD PRICES SPUR KYRGYZ GOVERNMENT ACTION

C O N F I D E N T I A L SECTION 01 OF 02 BISHKEK 001087 SIPDIS SIPDIS DEPT FOR SCA/CEN (GEHRENBECK) E.O. 12958: DECL: 08/29/2017 TAGS: ECON EAGR SOCI KG SUBJECT: RISING BREAD PRICES SPUR KYRGYZ GOVERNMENT ACTION BISHKEK 00001087 001.2 OF 002 Classified By: Ambassador Marie Yovanovitch for Reasons 1.4 (b) and (d) ¶1. (C) Summary: Amidst a 20-40% increase in bread prices due in part to a three-fold increase in the price of imported Kazakh wheat, Kyrgyz Prime Minister Atambayev and other senior officials have criticized bakers for raising bread prices. However, PM Atambeyev's government has moved beyond populist rhetoric to pursue several remedies: releasing wheat reserves, reducing taxes on wheat imports and baked goods, purchasing additional Kazakh wheat and subsidizing future bread production. While pursuing such remedies, PM Atambayev also told the Ambassador that he was considering increasing salaries and pensions, a move which would increase inflationary pressures in the Kyrgyz economy. End summary. Too Much Yeast in Bread Prices? -------------- ¶2. (U) Kyrgyz bread prices, which have risen by 20-40% in recent months, have captured not only the media spotlight, but also the attention of senior Kyrgyz officials. Front page newspaper articles have questioned the price increases, and led to accusations of price gouging and hoarding. As prices for Kazakh wheat have nearly tripled to roughly $200 per ton, Kyrgyz dependence on annual imports of 250,000 tons of Kazakh wheat has impacted bread prices. According to data from a Ministry of Agriculture official, this reliance on Kazakh wheat is heightened by the steep decline in Kyrgyz wheat production from 1.3 million tons in 2001 to 790,000 tons in 2007. (Note: Kazakh wheat is considered superior to Kyrgyz varieties for bread preparation. End note.) Whipping Bakers into Shape -------------- ¶3. (C) While bread is still widely available, Prime Minister Atambayev, Finance Minister Japarov and senior officials of the Bishkek city government have chastised bakers for raising prices and mooted the imposition of price controls. PM Atambayev's August 14 decree authorizing the release of 15,000 tons of wheat from the state reserve resulted in rumors, which quickly disappeared from the media, that the state reserves had been previously emptied. PM Atambayev told the Cabinet that few bakers have accepted subsidized government wheat because they are unable to provide proof they have paid taxes. Bakers have responded to official criticism by offering smaller loaves and reportedly using inferior grades of wheat to control prices. The suitability of the quality of state wheat supplies for bread production has also been questioned. The Government's Cookie Cutter Approach -------------- ¶4. (U) In addition to an ad hoc working group chaired by Finance Minister Japarov and charged with developing a program to bring bread production "out of the shadows" by early September, the Kyrgyz government is considering the temporary reduction of taxes on wheat imports and baked goods, the purchase of additional Kazakh wheat and allocating funds to subsidize future bread production. The government also announced August 29 the imposition of licensing requirements on bakers. ¶5. (C) PM Atambayev, eyeing an unexpected surplus in budget revenues, told the Ambassador he is contemplating a package of salary and pension increases to combat rising costs for not only bread, but also other staples such as fruits, vegetables and meat. The Central Bank and other government officials, however, caution that Kyrgyzstan may soon experience an inflationary spiral that salary and pension increases would exacerbate. Separately, Chief of Staff Medet BISHKEK 00001087 002.2 OF 002 Sadyrkulov told the Ambassador that President Bakiyev was also opposed to wage and pension hikes, and would make this clear when he returns from vacation next week. Comment -------------- ¶6. (C) The government is clearly seeking solutions to rising bread prices. With the average monthly salary well under $100 per month, substantial price increases for staple foods can generate widespread grumbling. While Bishkek city officials have advocated a command approach to curbing the price increases, the Embassy has detected a more measured approach from White House officials. We note that Deputy Minister of Defense Orozbayev believes the bread crisis could become serious, especially in regions where people might not be able to afford bread. However, we have not noticed movement in this direction. ¶7. (SBU) The Embassy will monitor conditions and advise the Department of any developments that signal the need for external assistance. YOVANOVITCH