Belt and Road

What the Kyrgyz Republic must do to diversify its economy

Backed by healthy gold reserves and multilateral agencies keen to improve infrastructure, the outlook for the Central Asian republic is positive. However, the population’s tense relationship with China must be addressed if it is to make serious economic headway.
Woman presents handmade textiles at annual textile expo in 2009 at Jalalabad, Kyrgyzstan.
Woman presents handmade textiles at annual textile expo in 2009 at Jalalabad, Kyrgyzstan.

The second poorest Central Asian nation after Tajikistan, the land-locked Kyrgyz Republic – formerly known as Kyrgyzstan – has struggled to shift to a market-based economy since gaining independence during the break up of the USSR. It has remained for the past few years in what multilateral agencies euphemistically call a transition phase.

It is true, of course, that this growth is coming from a low base, but thanks to an abundance of minerals, particularly the open-pit gold mining site of Kumtor in Issyk-Kul, there is a sense that the tide might be turning.

For the first half of last year, GDP jumped 6.4% according to the Eurasian Development Bank and the bank expects an average growth rate of 3.4% for the next couple of years.

Last year, Moody’s affirmed the Kyrgyz Republic’s B2 issuer rating putting it squarely between Uzbekistan and Ukraine. The ratings agency praised the country's high debt affordability and long debt maturities, some signs of improvement in policymaking, and a more stable domestic political climate.

The attention of the multilateral agencies has concentrated on developmental work. Talking by telephone from Bishkek, Asian Development Bank country director Candice McDeigan explains that the regional development bank has helped rehabilitate 863 kilometres of major transport corridors and feeder roads.

The thinking is both to help internal connections and to develop international ones to Kazakhstan, Pakistan and Tajikistan. “Without infrastructure, there’s very limited opportunity scope to invest in the country,” she said.

There is already what she calls “a major artery” leading from China to the capital which then leads on to Kazakhstan, and China is already known to be working on a rail network which will amplify the land bridge between the two.

Aside from infrastructure, the ADB has also focused on energy (“It is critical to the country - 90% of it comes from hydropower and the ADB has supported rehabilitation of major hydropower installations in the country,” she said) as well as significant support for small and medium-sized companies like agri-businesses and agriculture.

“These are areas that can support economic diversification, which will bring the private sector to the table,” said McDeigan.

All good news, but there is still a great deal of work to do.

Relations With China

The cloud that hangs over the Kyrgyz Republic at the moment is foreign investment and more specifically its relationship to China.

Foreign direct investment (FDI) in the country dropped $57.3 million in the September quarter last year compared with a jump of $118 million in the previous quarter, according to CEIC data and it has been on a downward path for the past few years. Between 2015 and 2017 it slipped from $1.14 billion to $94 million.

After Russia, China is the largest investor in the country and significantly, it currently holds almost half of the government’s debt.

“Since the rollout of its massive infrastructure construction programme, the Belt and Road Initiative, the Middle Kingdom has become Kyrgyzstan’s largest trading partner and second-largest investor,” said Stefan Hedlund, professor and research director at the Centre for Russian and Eurasian Studies at Uppsala University in Sweden.

At a senior political level, relations between the two countries are good.

When Chinese president Xi Jinping met Kyrgyz president Sooronbay Jeenbekov in June last year – his second trip in six years – he was fulsome in his praise for bilateral relations, the country’s reform and development and what he called the “in-depth and substantial development” in its Belt and Road Initiatives.

This is not shared as much by the population at large which is publicly concerned by what it sees as a land grab by its larger neighbour and privately, as a mostly Muslim country, by sympathy for China’s oppressed Uighur minority.

Towards the end of February, a $280 million joint venture set up by China’s One Lead One to build a logistics centre at At-Bashi in the Naryn Free Economic Zone was pulled after protests. It was only the most recent of protests which have become ever-more vocal over the past year.

The joint venture said in a statement that the contract had been cancelled because “it is not possible to work on a large, long-term project in such circumstances”.

Populist resentment aside, protests are unlikely to change the broad themes of investment. As Hedlund said, “the raw financial muscle of the BRI” would keep the outlook positive for China’s interests in the region.

¬ Haymarket Media Limited. All rights reserved.

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