A recent report by the International Monetary Fund on the Kyrgyz Republic highlights the country's stable inflation, which stands in contrast to regional trends. The report notes that Kyrgyzstan experienced a significant inflation surge in 2022, initially triggered by global food and energy prices during the COVID pandemic, and exacerbated by Russia's war with Ukraine. Inflation rose from about 6% in 2020 to 16.2% by February 2023, surpassing both the global average of 8.7% and the Central Asia average of 13% in 2022.
While some countries in the region experienced moderate inflationary pressure from the second half of 2022, Kyrgyz Republic began to see a decrease only from March 2023, with inflation reaching single digits by August. However, core inflation (excluding food and energy) remains stable in double digits.
IMF experts note that Kyrgyzstan's inflation closely correlates with global food and energy prices, but internal factors such as exchange rates, public sector wages, and inflation expectations have played a more significant role. The analysis reveals a partial transmission of the country's central bank policy to inflation, with limited impact on credit growth, production volume, and ultimately inflation.
The mismatch between interest rates set by monetary policy and market liquidity needs to be addressed to enhance the effectiveness of monetary policy transmission. To support the transition of the National Bank of the Kyrgyz Republic to an inflation targeting system, experts recommend reducing excess liquidity to align it with the policy rate.
This will involve ending the National Bank's participation in the domestic gold market, a major source of liquidity inflows. Additionally, supportive fiscal and public wage policies are needed, along with reducing reliance on price controls that distort markets and undermine monetary policy transmission channels, as highlighted in the IMF report.
