Identifier
Created
Classification
Origin
07BISHKEK1173
2007-09-21 12:33:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Bishkek
Cable title:  

KYRGYZ FEEL INFLATIONARY AND FINANCIAL PRESSURES

Tags:  ECON EFIN EAGR PGOV SOCI KG 
pdf how-to read a cable
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UNCLAS SECTION 01 OF 02 BISHKEK 001173 

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR SCA/CEN

E.O. 12958: N/A
TAGS: ECON EFIN EAGR PGOV SOCI KG
SUBJECT: KYRGYZ FEEL INFLATIONARY AND FINANCIAL PRESSURES


BISHKEK 00001173 001.2 OF 002


UNCLAS SECTION 01 OF 02 BISHKEK 001173

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR SCA/CEN

E.O. 12958: N/A
TAGS: ECON EFIN EAGR PGOV SOCI KG
SUBJECT: KYRGYZ FEEL INFLATIONARY AND FINANCIAL PRESSURES


BISHKEK 00001173 001.2 OF 002



1. (SBU) Summary: With "official" monthly food price
inflation of 2.3%, hoarding and rapid price inflation are
affecting an increasing array of foodstuffs in Kyrgyz
markets. Meanwhile, the Kyrgyz Central Bank has pumped the
equivalent of over $150 million into the local currency
market to curb Kyrgyz som appreciation against the dollar and
protect dollar-denominated savings of many Kyrgyz citizens.
Despite the heavy reliance of Kyrgyz banks on Kazakh capital,
there has been no observed "pullback" of Kazakh funds from
Kyrgyz banks. However, Kyrgyz media report that Kyrgyz banks
have begun limiting credit to local applicants. With the
upcoming constitutional referendum and the possibility of
early parliamentary elections, bread and butter issues will
likely play a greater role in political debate in the coming
weeks. End summary.

Inflation and Hoarding Affect Food Supplies
--------------


2. (SBU) Amidst sharply increasing wheat and bread prices,
anecdotal reports indicate that cooking oil is becoming
scarce throughout the country. A local IMF official told
emboff September 20 that Kyrgyz Central Bank-commissioned
surveying revealed monthly food price inflation of 2.3%. The
IMF official reasoned that recent, significant monetary
supply growth (which has been supported by customs levies on
a surge in Chinese imports) has finally fueled an
inflationary spiral. However, Embassy staff observations as
well as press accounts in recent weeks indicate price
appreciation above the Central Bank's 2.3% figure.

Pressure on the Dollar
--------------


3. (SBU) Despite an increased supply of Kyrgyz soms, the
continued inflow of dollar-dominated remittances and
increasing concerns about the U.S. dollar have led to a
slight appreciation of the Kyrgyz som. (Note: The current
exchange rate is 37 soms to the dollar. End note.)
According to the IMF official, the Kyrgyz Central Bank has
pumped the equivalent of over $150 million into the local
currency market since the spring to moderate the som's
appreciation. As many Kyrgyz continue to retain their
savings in dollars, and as many large value transactions are
made in dollars, the Central Bank has attempted to maintain
the value of personal savings in the Kyrgyz Republic. In the
short term, the Central Bank appears to have sufficient
reserves to continue its interventionist policy.

Impact of Kazakh Credit Crunch
--------------


4. (SBU) While some local observers have predicted that the
Bishkek real estate price boom will soon collapse, others
note that continued demand for new housing stock will sustain
real estate price increases. However, concerns that Kazakh
banks are restricting credit have sent a shudder through
Kyrgyz banking circles. Although the IMF official noted that
there has been no "pullback" of Kazakh capital from Kyrgyz
banks, he expressed concern about the heavy reliance of
Kyrgyz banks on their Kazakh neighbors. A Kazakh financial
"burp," he added, would generate severe gastrointestinal
distress for Kyrgyz banks. Regardless, Kyrgyz media report
that Kyrgyz banks have curtailed their lending activities.

Comment
--------------


5. (SBU) Kyrgyz officials have begun to respond to concerns
about food prices, supply shortages and possible social
discord. With the advent of a constitutional referendum and

BISHKEK 00001173 002.2 OF 002


possible parliamentary elections, bread and butter issues may
become increasingly prominent in the political debate. While
the government's attempts to control bread price inflation
have not had the desired effect (supplies are limited,
quality is down and loaves have decreased in size),the
government may also not be able to stabilize prices for a
broader basket of goods. Embassy will continue to monitor
market developments.
YOVANOVITCH