Recent Economic Developments
Economic growth is estimated at 3.8% in 2016, declining only slightly from 3.9% in the previous year. Output expansion was driven mainly by a recovery of gold production and consumption, fueled by increased remittances and government recurrent spending, including wage increases. Non-gold real GDP growth slowed to 3.7% from 4.9% in 2015.
The current account deficit is estimated to have shrunk to 9.7% of GDP in 2016 from 15.9% a year ago on account of the recovery of remittances (growth by 18% in U.S. dollar terms) and a slight improvement of the trade balance.
In 2016, the som appreciated by almost 9% relative to the U.S. dollar. Together with low food and energy prices, this resulted in low inflation at 0.4% (year-on-year [y-o-y] average).
Fiscal policy was significantly expansionary, reflecting a combination of resolute public investment and recurrent overruns. The budget deficit grew to 6.6% of GDP from 3.1% in 2015. Although tax revenues increased to 25.2% of GDP from 24.2% a year ago, this was negated by lower non-tax proceeds, driving a reduction in total revenues to 33.3% of GDP from 34.9% a year ago.
Expenditures increased to 39.8% of GDP, up from 38% in 2015, driven by both higher recurrent and capital outlays. Thanks to the appreciation of the som vis-à-vis the dollar, the public debt-to-GDP ratio improved to 61.4% of GDP as of end-December 2016 from 67.2% a year ago.
The extreme poverty rate (measured at US$2.5 per day, 2005 purchasing power parity [PPP] terms) is estimated to have stagnated in 2016 at 32.8%. Low prices (external and domestic) and higher remittance inflows supported household consumption, but this was not accompanied by job creation or earned income growth.
The overall macroeconomic situation is expected to remain broadly unchanged in 2017, assuming exchange rate stability and no sudden deterioration in the external environment, especially the economic fortunes of Russia and Kazakhstan.
Overall growth is projected to decelerate slightly to 3.4% in 2017, reflecting a decline in gold production, while non-gold growth is projected to remain flat. In 2018, however, growth is expected to recover to 4% owing to remittance-supported consumption, while the contribution from investment is expected to be neutral and from net exports negative.
In light of the high debt burden (projected to remain above 60% of GDP in the coming years), the Government has committed to a significant fiscal consolidation over 2017–18, according to which the government deficit is projected to be reduced to 3.8% of GDP in 2018. The adjustment is expected to be led by expenditure, with capital spending and the wage bill the main components, as total revenue is projected to fall due to expected lower grant support.
Stable growth projections for agriculture and construction and further increases in remittances are likely to support rural poverty reduction during 2017–18. Real wages are projected to rise slowly in the private sector, resulting in a slight reduction in urban poverty, where wage employment is more prevalent. Social transfers will continue to play an important role in driving poverty reduction in both urban and rural areas.
A scheduled increase in pensions should have a positive distributional effect, given that pensions represent close to 15% of income among the poor. Finally, lower food prices in 2017 should also positively impact the purchasing power of households at the bottom of the income distribution.