Central Asia in Transition No61
The Kyrgyzstan Economy:
Latest Developments and Policies
Copyright (c) 1998 by the Slavic Research Center. All rights reserved.
The emergence of the transition from a command economy to a market economy coupled to the specific economic, political and geographical problems of the various former Soviet States requires special approaches to be developed and special attention to be paid to the problems.
Despite having a considerable amount of natural resources, a highly skilled workforce and a beneficial geographical position, Kyrgyzstan faced many problems with the restructuring of the economy. The Kyrgyzstan economy entered a difficult period of economic adjustment in which the effects of the dissolution of the Soviet Union had to be faced and a new national government is now unable to call on customary support from former Soviet allies. The most significant of these effects included:
direct results of the dislocation of the Soviet monetary and central planning systems: hyperinflation, recurrent arrears, and the loss of several inter-enterprise and inter-republican production and distribution links;
- a sharp fall in demand from former Soviet republics because of contractions in defense budgets, overall economic decline, and gradual build-up of customs and exchange barriers;
- weakened domestic demand resulting from the loss of direct Soviet budgetary support and hidden subsidies such as low-priced fuel; and
- a sharp deterioration in terms of external trade because of changes in relative prices and the total removal of subsidies, the overall effect being to render much of the enterprise sector uncompetitive.
- In these circumstances, output fell dramatically across the entire Kyrgyz economy. GDP fell by about 10% in 1991, by 16.5% in 1993, and by over 20% in 1994. The industrial sector experienced the sharpest loss in output, with annual declines in 1992, 1993 and 1994 of roughly 25%.
- Nevertheless during late 1991 and 1992 Kyrgyzstan took its initial steps to transform the old centrally planned and administratively controlled economy into one governed by market forces and consumer preferences. A number of far-reaching changes to the legal system were enacted, including guarantees to the rights and property of foreign investors. Substantial progress was also made in liberalizing prices.
Of principle importance in the establishment of an independent monetary system were adoptions of two banking laws in December 1992 and the introduction of the national currency, the som, in May 1993. The new banking legislation sharply reduced the government's power over the National Bank of the Kyrgyz Republic: although the Chairman is nominated by the President of the republic and approved by the Jogorku Kenesh, the NBKR is now quite independent of the ministries. The introduction of the som minimized the effects on the Kyrgyz economy of external monetary and other economic shocks originating within the ruble zone. The resulting increase in both budgetary discipline and control over the money supply was further enhanced by the introduction later in 1993 of treasury bill auctions, which, with the inauguration of refinance credit auctions and Lombard facilities, was also a positive development for the commercial banking sector.
- Following these important reforms, it was agreed between the Government and the World Bank that at this stage of transformation process a more stable and efficient financial sector, with an effective banking system at its core, would be essential to help sustain macroeconomic stability, stimulate savings mobilization, support output recovery and expansion, and enhance the development of the private sector.
- A comprehensive Financial Sector Reform Program supported by a Financial Sector Adjustment Credit (FINSAC) was launched in 1996. The Financial Sector Reform Program supported by FINSAC focuses in five key objectives:
- the creation of a policy and regulatory environment conducive to the sound growth of a competitive and efficient private banking system;
- the liquidation of the two dominant and insolvent state-owned banks: Agroprombank and Elbank, which through their practices, stifle the growth of their young private competitors;
- the downsizing and financial restructuring through private re-capitalization of two large and insolvent former state banks: Promstroi and AKB Kyrgyzstan Banks, the survival of which have been only possible through preferential treatment and assistance from the National Bank;
- the establishment of temporary Debt Resolution Agency (DEBRA) to help collect, restructure, sell or write off the old non-performing loans, and thus accelerate enterprise restructuring or liquidation in the process;
- the creation of a regulatory and supervisory framework, and supporting policies and infrastructure, for the development and growth of emerging non-bank financial institutions (NBFIs).
- At the same time, a stabilization and structural adjustment program was initiated with support from the International Monetary Fund and the World Bank.
- The years 1994 to 1996 have seen further progress in the face of extremely difficult economic circumstances. The government has put in place the fundamentals of a market-oriented policy framework: prices, external trade, the foreign exchange regime and interest rates have been fully liberalized and legal and policy barriers to private sector activity have been eliminated.
- Privatization has made considerable progress, and competitiveness and transparency of privatization has been enhanced through cash and coupon auctions.
- The privatization program launched in 1991 has opened up every sector of the economy to private ownership and enterprise. With the exemption of some of the largest industrial and infrastructure companies, the majority of commercial enterprises are now private and corporate entities. The first phase, from 1991 to 1993, set up necessary legal and institutional frameworks; it also saw a large number of relatively small enterprises privatized by cash auction. The mass privatization program also began at this time, with the issue of Special Payments Means vouchers which could be exchanged for equity in largest enterprises. Technical problems with the voucher led to their replacement by Privatization Coupons in 1994, the beginning of the second phase. Unlike the vouchers, the coupons have always had a genuine market value and can be freely traded for shares or cash; more than three quarters of the population received them. This broad participation in privatization was regarded as essential to the encouragement of an enterprise culture and is arguably as important an achievement of the second phase as the fact that it completed the privatization of more than half of industry and construction, more than 40% of agriculture and transport, and virtually all trade and consumer services.
- In the course of the privatization a realistic transformation of the property structure has been achieved. Of course, we tried to avoid mistakes, however, the fate of an "Explorer"is to go through trial and errors. It was a challenging task since what had to be privatized was an enormous complex of enterprises and other state owned entities. We permanently analyzed and corrected the course of the privatization. This could be demonstrated by the fact that our privatization was carried out in several stages.
- Despite the faults and errors made in the course of a transformation of the property relations, it is worth to mention the realistic progress achieved during the years of reforms in the economy of Kyrgyzstan. If we are to evaluate the property structure by a number of enterprises, then as of the moment, 62.1% of the enterprises are operating in the non-state sector and 37.7% are working in the state sector. More than half of the fixed assets are held by the non-state sector.
- As a result of the denationalization and privatization, more than 2.5 thousand entities owned by private individuals and more than 2 thousand collectively owned entities emerged in the non-state sector of the economy Kyrgyz Republic.
- The current level of privatization in the industrial sector - 80.2%, in construction - 56.6%, in transport - 47.8%, in trade and public catering - 97.2%, services - 100%. 1110 joint stock companies and 169 limited liability companies have been established on the basis of the 1714 enterprises.
- The positive results of 5 years of the privatization program could be summed up the following way:
- firstly, the authentically multiform economy has been developed in Kyrgyzstan;
- secondly, along with the implementation of reforms in two directions, the structural overlapping have been eliminated in the economy;
- thirdly, the institute of private property has been founded and developed into a basis for carrying out economic activity in Kyrgyzstan.
Further objective of the Government in this regard is a postprivatization enterprise restructuring. It is essential to provide a thorough financial and technical assistance to the privatized enterprises in order to more effectively adapt them to a competitive market environment.
- The peculiarity of the current stage is a transition to demonopolization and privatization of enterprises of the main sectors of the economy. The Government of Kyrgyzstan is currently in the process of privatizing enterprises in number of strategic sectors, including:
- Energy sector
- Civil Aviation
- Fuel and Energy
Industrial policy and enterprise reform
The development of an industrial sector plays a key role in the economic development and improvement of living standards. The dynamic and an efficient operation of the enterprises is required for a sustainable growth and improvement of the economy.
- The macroeconomic stabilization cannot be achieved and a certain activation of the industrial production cannot be entertained if a radical improvements in the country's industrial sector fail to materialize. Despite a certain progress in the industrial production made last year, which has been mainly assured by two enterprises (Kumtor gold company JV and Kara-Balta Mining Plant) the crisis symptoms are still observed in the industry.
- The economic recession is continuing in such an important sector as Light industry (11%), food industry (18%), electric energy (6%). The number of loss-making and idle enterprises remain at a high level - more than 250.
- The following areas, ensuring developments of an efficient enterprise sector, should be given a priority in the government industrial policy in 1998-2000:
- first, preservation and development of a viable enterprises through a broad-scale introduction of the corporate governance principles;
- second, transformation of enterprises through a decisive reorganization and liquidation of non-viable enterprises;
- third, technical modernization of the whole industrial sector with a broad-scale introduction on new technologies;
- forth, development and fast growth of new industries with attraction of foreign investments.
- It is thus clear that one of the keys to economic recovery is the development of strong private agricultural sector. Just as with industry, agriculture has suffered a considerable reduction in production volumes and thus income. The productivity of the farms reduced and system of material and technical support collapsed. Under these circumstances the Government commenced the implementation of agrarian reforms. From 1991, the creation of agricultural farms commenced and was followed by mass restructuring of collective and Soviet State Farms (kolkhozes and sovkhozes) from 1993.
- To ensure successful implementation of reforms in this sector the program of Privatization in Agriculture and the Restructuring of Agricultural Enterprises was commenced. The aim was to develop land markets, remove monopolies and privatize the large State concerns in the area of the sale and processing of agricultural products and remove distortions in pricing and trade. Further, restrictions on the export of agricultural products were removed.
- In order that there will be a stabilizing of agricultural production in the farms and related enterprises, the following measures are to be implemented:
- finalizing of the process of privatization and restructuring, creation of a land market and improvement of the development and administration of law for the sector;
- creation of special agricultural funding, attraction of foreign investors for agriculture and development of sale of agricultural products by way of auctions;
- creation of a system of co-operatives and technical service centers for agrarians.
Years of reforming in the agriculture sector permitted to create necessary legal and organizational conditions for functioning a multistructural agriculture. Some of 38 thousand peasants' farms are created. Recently, due to persistent measures in land reforming a considerable growth of agricultural production has been achieved.
- Last year the gross crop production will result in 1.7 million tons that is 20 % more than the previous year figures. Production of potato, vegetables, tobacco also grows. Reduction of cattle is slowed down.
- Nevertheless a number of vitally important problems need to be urgently resolved.
- One of the main problems continues to be finishing the land reform. Lately we managed to achieve some results in this regard. More than 700 thousand certificates to use plots of lands have been handed over. More than 661 thousand hectares of arable land have gone to the possession of farms. Peasants' psychology has been deeply transformed, they feel themselves real owners of land. As a result the land reform acquired irreversible features with multiple forms of property set up in the agrarian sector.
Development of small and medium size enterprises
- Every year small and medium size enterprises in Kyrgyzstan are growing their potential, thus making a significant contribution to the economic development of the country. As a today, the number of small and medium size enterprises is about 27 thousand, number of farms and peasants - 38 thousand. The share of small and medium size enterprises in the GDP has reached 20%.
- Truly, a comprehensive development and dissemination of small and medium size enterprises constitute a basis for a dynamic development of the economy. The main objective of the Government is to create an explosive wave of developing small and medium size enterprises that would gain a vigor of a "ninth wave"exactly in the future and would bring into being conditions for economic growth. Besides, this way we would solve the problem of unemployment, since small and medium size enterprises represent one of the main economic sectors that provide employment.
- The following objectives should be accomplished in order to achieve this goal:
- promotion of the legal, economic and organisational infrastructure for the development of small businesses;
- development of the efficient system of Government support to small and medium size enterprises;
- development of the financial, credit and investment mechanisms to support small businesses;
- quest of required financial resources.
The efficient and rational use of the available financial resources provided in the framework of foreign credit-lines for the development of small and medium size enterprises attracts a special attention. Currently they have not been used efficiently enough. Successful implementation of these credit-lines will allow to create a good basis for further institutional improvement of the system of crediting of small and medium size enterprises.
- The Government also should direct a serious attention to the issue of supporting small and medium size enterprises in a remote regions of the republic through establishment of a special holiday regimes. As of today, the small and medium size enterprises located in large cities are the main recipients of the financial assistance. At the same time the remote regions are characterized with a low level of business activity which consequently leads to a difficult situation. The regional principle of financial and technical assistance to small and medium size enterprises should become one of the priority directions.
External trade policy
- Since the beginning of market reforms in external trade of Kyrgyzstan a serious changes have occurred. The volume of external trade turnover with the CIS countries in 1997 comprised about 60% of the total external trade volume. It has significantly decreased in comparison with 1992, when it was 80%. In 1997 the volume of export into the CIS countries has declined by the 20% compared to the 1996. All this demonstrates that the republic is losing its traditional markets, without gaining any new ones.
- In the export policy of the republic the orientation towards the CIS countries will be preserved in a long-run, especially to Customs and Central Asian Unions. Therefore it is essential to actively increase commodity turnover with our traditional partners.
- Kyrgyzstan also can and should use its economic relations with the ECO countries for additional increase of the volume of external trade. New connections with developed countries of Europe, North America, South-East Asia should also actively work for the expansion of export. In fact, trade relations with foreign countries have been growing quite rapidly thanks to development of an open economic system in Kyrgyzstan. In this regard, our objective is to support the current liberal trade regime.
- However, a direct competition with goods made in the developed countries in near future will remain an extremely difficult task for Kyrgyzstan. Therefore, we need to double our efforts aimed at preservation of traditional markets in the CIS countries.
- Special attention should be paid to the policy of import substitution. A considerable currency reserves of the country are used for procurement of the items which could have been successfully produced locally. Instead of this, using the saved money we could have brought modern equipment and new technologies for modernization of the appropriate branches of the industry.
- In this connection, it is important to highlight the need for a number of new laws. In particular, this refers to the legislation on intellectual property, copyright and exclusive rights, patents, trade marks, commercial secret, antidumping and other. It needed to introduce several amendments and changes into Customs and Civil Codes (in parts deal with an intellectual property and other). Without a proper legal basis we will not be able to ensure Kyrgyz Republic's full-fledged entrance on to international markets. The adoption of such a legislation will also allow to accelerate the accession of the republic to the World Trade Organization.
- The advantages which are created by the developed export sector include closer tiers to the world economy, which enables to gain new technologies for the increase of production efficiency and inflow of significant currency resources for import of materials needed for production. All countries which lately achieved an economic growth and maintain it at a high level came to this thanks to the fast expansion of export-oriented activities.
Success in reforming is first of all assessed by the level of people's life. However, this macroeconomic stability has been achieved at the expense of the living standards of the population. Today, one of the biggest problems is that of the growth of poverty among the population.
- The poverty scale is still high. According to investigations of the level of life realized by the WB 60% of the Republic's population live below the poverty line. Presently National Strategy of Sustainable Human Development is worked out, which main task is elaborate a policy on reducing poverty, improve people's level of life, efficient and quality securing in Education and Healthcare.
- The main task of the State on realizing the strategy of sustainable human development will consist in raising people's well-being. Struggle against poverty is one of the most prioritized tasks in the framework of this strategy.
- In the field of social support with the limited financial means, measures have to be focused on the exactness of the addressee the assistance is rendered to. The State must first of all help most vulnerable part of the population, for example those who are most in need.
- Reduction of unemployment is another way of to combat poverty. Last year we have managed to partially reduce tension with unemployment. The number of officially registered unemployed diminished from 78 thousand to 55 thousand people as of today. Nine thousand new job created last year was also a good sign. Thus, the unemployment was reduced to 3.2 % compared 4.5%. Every two out of every five applicant during the last month received employment. Fighting the unemployment by creating reliable and efficient employment service, a system of professional training and re-training is to be developed. It is essential to actively involve local labor resources to release large scale projects on the territory of Kyrgyzstan.
- The current social and economic situation of the Republic as well as in other CIS countries is characterized by social stratification of the society. The figures obtained today by the National Statistics Committee show that 20% of incomes of the most well off part of the population exceeds that of 20% of the least well-off part six fold, which is well below than in many other CIS countries.
Current economic situation
- Gradually these economic reforms have begun to pay off. In that comparatively short time Kyrgyzstan has achieved an impressive degree of political and economic stability through a carefully planned program of comprehensive market-oriented reform. The positive results of these reforms are evident in a number of key economic indicators: comparatively high growth in real GDP and international trade, strengthened international reserves position, stable exchange rate for the national currency, low inflation, improved fiscal situation and substantial reduction of the current account balance. These developments have been underscored by strict monetary and credit policies, supported by a sizable reduction in the budget deficit, and by wide-ranging structural reforms. There has been significant progress in reform of the financial sector, budgetary procedures, privatization program, and enterprise restructuring. These factors, combined with a number of other attractive features of the Kyrgyz economy - a skilled labor force, rich natural resources and favorable market regulations - make for an attractively stable investment environment.
- The last seven years have witnessed a significant recovery in economic output. Following a cumulative decline of about 50% during 1991-1994, real GDP increased by 0.5% in 1995, by 5.6% in 1996 and by 10.4 % in 1997. Strong increases across the industrial sector have led to a growing share of GDP. Agriculture and some services have also shown the significant growth.
- In 1997 industrial production grew by 46.8% and agricultural production by 10.7%. A large portion of GDP growth in can be attributed to output from the Kumtor gold mine, one example of the republic's successful foreign investment projects. Continued steady economic growth is forecast at 4-5% through 2000.
- With the introduction of the som, the national currency, in 1993 and application of a carefully planned set of macro-economic policies, inflation has gradually come under control. Tight monetary and budget policies succeeded in steadily reducing inflation from 87% in 1994 to 32% in 1995, to 14% in 1997. The Government aims to reduce the annual rate of inflation still further to 10% in 1998 and 8% by the year 2000.
- In addition, the republic's liberal series of foreign exchange and trade policies are to remain in force. There are no restrictions on holding and transfers of any currency - domestic or foreign.
- Such policies of macroeconomic stabilization have been implemented in co-operation with the IMF, and supported by resources of the IMF, credits of the World Bank, and the combined efforts of various bilateral donors and other multilateral assistance institutions. Economic reforms continue to be achieved in accordance with long-term, sustainable economic growth and development plans.
- In general terms, analyzing the economic situation in the country, we can say that we have achieved our main objective set for 1997 - enhancement of the macroeconomic stabilization and continuance of the economic growth and we have completed the first stage of transition to the market economy.
- Kyrgyzstan has now entered into second stage of transition to the market economy. We believe that it will be even more difficult than the first stage. We will need to overcome unbalanced production and marketing sectors where there is too great a concentration of resources in certain sectors and not enough in others that is effectively restricting overall growth and development of the economy. Real changes at the macro level of the economy must be supported by progress on the micro level of the economy. In addition to those areas already mentioned, progress on strengthening of the management of companies, creation of an institutional basis in the spheres of advisory, marketing and insurance services, revival of the financial sector, development of capital markets, strengthening of the judicial system and strengthening of environmental protection are all major requirements.
- A. Akaev, On State Economic Policy in 1998, Bishkek, October 1997.
- IMF, Kyrgyz Republic: Recent Economic Developments, January 1998.
- EBRD, Transition report 1997.
- National Statistical Committee of the Kyrgyz Republic, Sotsial'no-economicheskoe polozhenie Kyrgyzskoi respubliki 1997. (Statistical data)