RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -

1. (SBU) Summary: The Kyrgyz Republic, a net food importer
with limited arable land, saw 28% food price inflation in
2007 and is likely to see its wheat import bill double to
$142 million in 2008. With wheat a major staple of the
Kyrgyz diet, Kyrgyz officials have announced a 45,000 hectare
expansion of land under wheat cultivation this year. State
wheat reserves have reportedly doubled, and the Kyrgyz
government has formed a prime ministerial-level Council on
Food Security to develop appropriate strategies to ensure
food (and political) stability. End summary.

Calming Demand


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2. (U) The Kyrgyz Republic, a major wheat consumer and net
importer of foodstuffs, endured a precipitous price rise for
basic commodities in August-October 2007. For 2007, the
Kyrgyz National Statistics Committee reported overall food
price inflation of 28%, but that figure masks price increases
of 55% for baked and cereal products, 30% for dairy products,
43% for cooking oil and 48% for fruits. Food inflation
moderated in late 2007, but has registered a slight uptick
for the first quarter of 2008.



3. (U) Kyrgyz officials advised Embassy that the Kyrgyz
Republic will require nearly 1.1 million tons of wheat for
2008, and will be able to cover 800,000 tons of demand with
domestic production. The net wheat import requirement
(sourced almost exclusively from Kazakhstan) will be less
than 2007's net import volume of 356,000 tons, but will
exceed the 2006 figure of 223,000 tons. In 2006 and 2007,
the Kyrgyz Republic also imported 47,000 and 52,000 tons of
flour from Kazakhstan, respectively. Embassy has not noticed
any significant shift in consumption from wheat-based
products to other foodstuffs.

Expanding Supply


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4. (U) Kyrgyz Prime Minister Igor Chudinov recently revealed
that the land area dedicated to wheat production in the
Kyrgyz Republic, a largely mountainous country with limited
arable land, will increase in 2008 by 45,000 hectares to
roughly 400,000 hectares. (Note: However, Kyrgyz wheat is
considered by local consumers to be inferior to Kazakh wheat.
End note.) Amidst the rapid rise in bread prices late last
year, Kyrgyz officials released approximately 37,000 tons of
wheat from state reserves to increase supplies and stabilize
prices. Although the figures on Kyrgyz state reserves are
"confidential," Kyrgyz officials have advised Embassy that
reserves have doubled over last year's quantities. The
Kyrgyz also succeeded in negotiating supplies of Kazakh
wheat, which will circumvent a recently announced Kazakh
wheat export ban.

Minimal Political Impact


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5. (SBU) While complaints about high food prices continue,
there have been no signs of violence related to the issue.
However, the government remains acutely aware of the
political sensitivity of food, and particularly, bread
prices. Government efforts to date seem aimed at minimizing
any food disruptions.

Inflationary Economic Impact


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6. (U) Inflation has spiraled upwards as a result of
commodity price hikes, and may hit 30% this year. The
International Monetary Fund (IMF) has projected that the
Kyrgyz Republic's wheat import bill may double to $142
million in 2008. As the Kyrgyz Republic already runs a
significant current account deficit (amounting to about $728
million in 2007), high wheat prices will consume a
significant amount of foreign exchange. With one IMF
projection showing that the Kyrgyz government will run out of
money later this year (septel), a continued rise in wheat
prices combined with a significantly higher natural gas bill
later this year will constrain the government's abilities to
respond to further wheat price shocks.



7. (U) According to Kyrgyz Ministry of Agriculture
officials, there is widespread undocumented export of Kyrgyz
meat, dairy products and vegetables to neighboring (and more
affluent) Kazakhstan. These transactions have accentuated
price increases, and contributed to occasional shortages of
foodstuffs. An early April snowstorm apparently had a
devastating effect on fruit crops in the north, and higher
fruit prices are already predicted for later this year.

Limited Environmental Impact


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8. (U) While the government is encouraging farmers to till
more land, the amount of available arable land is limited.
In addition, water reservoirs, which power the Kyrgyz
Republic's hydroelectric facilities, are at very low levels.
As a result, the government has called for cutbacks on water
usage in agricultural regions to protect electricity
supplies. The government has also instituted rolling
blackouts in an effort to allow water to accumulate in
reservoirs.

Kyrgyz Government Policy Response


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9. (U) While the Kyrgyz government has not imposed any trade
restrictions or taken any steps to nationalize industries as
a result of recent food price increases, the prime minister
has created a "Council on Food Security" to formulate
government strategies. The government has also allocated
resources for the purchase of seeds, fertilizer and equipment
for transfer to farmers at low interest rates. The VAT tax
rate on imported grain, flour and vegetable oil has been
reduced to 10%. The Kyrgyz parliament also recently passed
legislation banning construction on agricultural land.

Post Programs and Policy Programs


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10. (U) Embassy continues to accentuate existing U.S.
government efforts that aid Kyrgyz citizens. Embassy will
advise separately of the overall impact of food price
increases on U.S. government assistance programs in the
Kyrgyz Republic. Embassy will also advise at that time of
any proposals for enhanced U.S. assistance on this subject.
YOVANOVITCH