KYRGYZ GOVERNMENT INCREASES HYDROPOWER PRICES AMID HIGH INFLATION

Following an exceptionally cold winter that made hydropower resources scarce and led to frequent rolling blackouts throughout Kyrgyzstan, Kyrgyz Prime Minister Igor Chudinov announced the government’s plans to increase prices for electricity by 13 percent and water by 20 percent. The Kyrgyz capital of Bishkek will be most affected by the increase.

Chudinov explained that increased tariffs were urgently needed to modernize the national hydropower sector. In particular, Bishkek’s Thermal Power Plant-1, the largest in the country, will require up to $27 million for reconstruction. The new tariffs will amount to roughly 2.3 cents per kilowatt hour (kwh) compared with the current 1.7 cents per kwh. They will be introduced this May and will continue to increase gradually over the next five years. In the next decade Kyrgyzstan will need to increase tariffs up to 8 to 9 cents per kwh, roughly the price level in the United States today. It remains unclear whether the local and regional consumers will be able to pay such prices.

Along with the increasing electricity prices, Chudinov promised to increase pensions and social subsidies to more than 60,000 Bishkek residents. The prime minister failed, however, to identify the ratio between inflation and the increase of social subsidies. Over 20 percent of Kyrgyzstan’s population of 5 million live in Bishkek. While the average income level is higher in Bishkek than in the rest of the country, the number of people living in poverty far exceeds 60,000.

The increased prices for hydropower coincide with double-digit inflation for food products and gas. In the summer of 2007 the Kyrgyz government was unable to respond to the steeply increased prices for wheat, which led to severe shortages of bread in the country. The government had to release emergency stocks of wheat to the poorest parts of the country. Since wheat products are the main food source for the poorest strata of the population, over 500,000 people suffered from lack of food. This summer inflation is expected to be even higher, not only for wheat but also for meat, fruit and vegetables.

Meanwhile, Kyrgyz economists predict a 6 to 7 percent increase in GDP in 2008. This increase is likely to be based to a large extent on anticipated rising prices for gold, construction, tourism and, importantly, remittances by labor migrants living in Russia and Kazakhstan. According to Finance Minister Tadjikan Kalimbetova, in 2008 the budget deficit will be reduced to 2.3 percent of GDP. Despite the projected economic growth, however, inflation rates are still going to be higher. Kalimbetova and other government members blame Kyrgyzstan’s inflation on rising international prices for food products, oil and gas.

This price hike in energy tariffs comes roughly a year after the Kyrgyz government rejected the World Bank and International Monetary Fund’s Heavily Indebted Poor Countries (HIPC) initiative. One of the major goals set by the HIPC initiative was to carry out administrative reform of the energy sector and invest in the reconstruction of the sector’s infrastructure. The government refused to join the initiative, stating that the majority of the public was against the HIPC and that an increase of electricity tariffs proposed by the initiative would be excessive for the average local income. As some analysts argue, however, the Kyrgyz government wanted to avoid international intervention in the hydropower sites because of rampant corruption in the sector.

Foreign investors interested in reforming Kyrgyzstan’s hydropower sector face a lack of coordination of energy resources in Central Asia. For anyone planning to invest in the hydropower sector, it would be necessary to predict the demand level from neighboring countries. An investor would also need to be able to sell hydropower for higher prices both domestically and abroad. To date, four foreign investors are interested in Kyrgyzstan’s hydropower sector, according to Chudinov, although but the prime minister refuses to identify them publicly.

An increase in electricity tariffs together with inflation might provoke social unrest against President Kurmanbek Bakiyev’s government, especially as it comes without specific long-term goals or consultation with the opposition. An increase both in electricity prices and in inflation, although inevitable and affected by the international situation, is accompanied by growing corruption in the state. Since the December 2007 parliamentary elections, Bakiyev has blocked the political opposition from direct participation in the legislative process. A deteriorating economic situation could enable the opposition to mobilize support in the coming months (Akipress, 24.kg, parus.kg, March 20-April 2).