Kyrgyzstan’s National Bank Governor Analyzes Effects of Russian Downturn

Kyrgyzstan is acutely dependent on remittances from migrant workers in Russia.

The fallout from Russia’s economic downturn is forcing Kyrgyzstan to spend its limited reserves to fend off speculators and ease pressure on its currency, National Bank Governor Tolkunbek Abdygulov tells Abdygulov is using the crisis to try to strengthen rules for the Central Asian country’s under-regulated financial sector.

Abdygulov has told banks to increase their som capitalization. He also would like to close thousands of poorly regulated currency exchange shops, which he accuses of sustaining the shadow economy and of spreading panic by speculating on the som.

Kyrgyzstan is acutely dependent on remittances from migrant workers in Russia, which total the equivalent of roughly 32 percent of GDP, according to the World Bank. The net inflow of remittances, measured in dollar terms, declined by 5.1 percent last year, according to Abdygulov. Almost 97 percent of incoming remittances arrived from Russia. The decline in inflows helped push the som down 19.7 percent against the dollar last year. The ruble fell almost 50 percent.

Abdygulov explained that much of the som’s volatility – especially in December, when the ruble hit record lows – was “caused by panic.”

He believes it was panic because, at the time, there was no unusual demand for dollars at banks. “Our currency exchange bureaus started to use this opportunity to speculate on the fluctuation of the Kyrgyz currency to profit,” he said.

The ruble’s volatility forced the National Bank to spend about $500 million last year and $106 million during the first six weeks of 2015 to stabilize the som. But Abdygulov stressed that the bank was also purchasing dollars. Total reserves fell from $2.21 billion in January 2014 to $1.87 billion in December, a net decline of $340 million.

The central bank’s interventions are just to “smooth the impact” of the ruble’s slide, he said. “We don’t want to allow […] panic on the financial market. But we never fix the som.”

In January the International Monetary Fund said it expects Kyrgyzstan’s economy to grow just 1.7 percent this year – down from a 3.6 percent growth rate in 2014 and 10.9 percent the year before. “The deepening economic crisis in Russia is expected to dampen remittances, trade, and domestic demand,” the IMF said.

Inflation is driven by the som’s depreciation. “Inflation in this country is mainly imported inflation because we are not a big producer. We have a big trade deficit. If the prices of major imported goods go up, then inflation is also imported here,” Abdygulov explained. He projects 11 percent inflation this year, or roughly double the bank’s target.

In response to the depreciation of the som, some have called for a de-dollarization of the Kyrgyz economy. Abdygulov says any decision to move in that direction is not the government’s. De-dollarization cannot be implemented by “a single decision of the government and the central bank. It is also a decision for businesses. Are businesspeople in Kyrgyzstan and China ready to start trading in yuan and som?” he asked. He doubted it, because the dollar is treated as a trusty storage mechanism.

“People in Kyrgyzstan save in two ways: first they buy apartments, which is why our construction sector is booming, because they don’t have any other assets available [to buy],” Abdygulov said. “The second is the US dollar. But the Kyrgyz som is the national currency, and so all transactions are done in som, which is why people also need to have soms in their pockets.”

Abdygulov would like to close the thousands of informal exchange points around the country. The move would, he said, strengthen the banking sector and bring a large segment of the economy out of the shadows; officials estimate that the informal economy is worth about 40 percent of Kyrgyzstan’s GDP. People are willing to buy dollars at lower rates in the exchange bureaus “to hide” their transactions, he said, explaining that he has drafted legislation for government consideration.

Meanwhile, the National Bank began shifting last year to inflation targeting in order to stabilize interest rates and offer better credit conditions in the commercial loan market. Abdygulov hopes a merging of rates will strengthen, over the medium term, the bank’s ability to maintain an inflation target closer to 5-7 percent. On February 24, the bank announced it would leave its key discount rate unchanged at 11 percent. 

Kyrgyz commercial bankers often complain they are unable to offer loans in soms because of low liquidity. Abdygulov insisted that there are plenty of soms in circulation, but banks are not doing enough to attract deposits. One theory is that the banks are holding too much of their capital in dollars. According to National Bank figures compiled in December 2014, 68 percent of the som supply was outside the banking system.

“There is no reason for [bankers] to claim there is not enough som liquidity. The problem is that the soms are not in the formal sector, they are outside the banking system,” Abdygulov said. He has instituted new rules that will require banks to increase their capital from 150 million to 600 million soms ($10 million) by 2017.

 That should bolster the som’s attractiveness, the governor hopes. At the moment about 43 percent of deposits are held in soms, according to National Bank data, and 57 percent in dollars. Historically, on average, about 50 percent of total deposits have been in soms.

Low financial literacy is one reason many borrowers choose to take loans in dollars, which are harder to maintain for people who earn soms. “People see the interest rates for mortgages and when they see that the interest rate for a US dollar loan is less [than a loan in soms], they think they’ll pay less,” Abdygulov said, adding that he is working to ban dollar loans to anyone who does not earn dollars.

by David Trilling: Kyrgyzstan’s National Bank Governor Analyzes Effects of Russian Downturn is republished with permission from

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