Kyrgyzstan Economy Profile 2012

As a small open economy, the Kyrgyz Republic has been hit hard by the financial and economic crisis, following significant negative impact from the world food and energy crisis earlier. In particular, the significant slowdown of the economies of the Russian Federation and Kazakhstan has put considerable pressure on the Kyrgyz Republic’s economy through trade, investment, remittances, as well as through financial channels. As a result, real gross domestic product growth slowed to 2.3% in 2009, as compared to 7.6% for 2008.

While much has been achieved since the country’s independence in 1991, less-than-stellar economic growth is a major constraint to development (growth averaged 4.1% for 2000–2005 and much lower prior to this). The current government has announced long-term economic growth and development as the country’s key objective. This also anchors the Country Development Strategy 2009–2011. President Bakiev reiterated this objective recently amid present economic difficulties. ADB strongly supports this development agenda, as inclusive economic growth is essential to building up the country’s resilience to shocks to the economy, both external and internal, as well as to bettering the lives of the Kyrgyz people.

To achieve sustainable economic growth, the government will need to continue following prudent macroeconomic policies and advance structural reforms, which would create favorable conditions for private sector-led growth. In October 2009, the government embarked on administrative and government sector reform to make the decision-making process of the public sector more efficient and effective. In addition, the government is in the process of revising its long-term development strategy, with key focus on improving the investment climate and the environment for doing business.

The country has made good progress in improving the business environment, which led to a rise in the country’s ranking in the World Bank Group’s Doing Business Survey from 68 in 2009 to 41 in 2010. Significant progress has been made in the area of starting a business and dealingwith construction permits. Moreover, the Kyrgyz Republic improved investor perceptions by amending its law to allow minority investors to take legal actions as shareholders. A one stop shop has been established to ease business registration. The pledge law and the Civil Code have been amended to allow for extrajudicial enforcement of creditor rights. A legal basis for agricultural land mortgages was completed in 2009. Under the new law, agricultural land can be used as loan collateral.

The government continues its work to reduce hindrances to open trade. It introduced changes in legislation aimed at streamlining import–export procedures. As a result, the country has been ranked 91st in the World Bank’s 2010 Logistic Performance Index, which is a jump from 103rd place in 2007. A new Tax Code became operational from 1 January 2009, with number of taxes reduced from 16 to 8. Under the new Tax Code, the average value-added tax (VAT) was reduced from 20% to 12%. To offset revenue losses from VAT reduction, the authorities introduced new taxes on owners of automobiles and property. Overall, many of these changes were welcomed by large businesses. The authorities have also introduced a new “tax contract” scheme under which businesses pay a fixed amount indicated in the contract and are not subjected to further tax inspections. Among other achievements is the launch of an online facility for filing financial documents.

The political and ethnic turmoil earlier this year has taken a heavy toll on the Kyrgyz economy. Gross Domestic Product is likely to contract by 3½ % in 2010 owing to serious disruption in agriculture and damage to infrastructure as well as the adverse impact on trade and services stemming from a fragile security situation and border closures. The fiscal deficit is likely to rise sharply in the second half of the year whilst the current account balance and international reserves are expected to decline. The RCF-supported program aims at addressing the balance of payments need, enabling progress towards a stable and sustainable macroeconomic position and helping catalyze donor support for the country.

The RCF, which provides rapid and flexible financial assistance for low-income countries with an urgent balance of payments need, does not require any explicit program-based conditionality or review. However, economic policies are expected to address the underlying balance of payments difficulties and support policy objectives including macroeconomic stability and poverty reduction. Financing under the RCF carries a zero-% interest rate (until end 2011), has a grace period of 5½ years, and a final maturity of 10 years. The Fund reviews the level of interest rates for all concessional facilities every two years

The political turmoil in Bishkek in April 2010 and the outbreak of ethnic conflict in the south of the Kyrgyz Republic in June 2010 caused considerable disruption to economic activity. Along with a difficult external environment, these developments contributed to a severe recession. While inflation is expected to remain in the single digits, the external current account could swing to a deficit from a small surplus in 2009. The authorities’ program, supported by the Fund under the Rapid Credit Facility, will help address the balance of payments need and restore a sustainable macroeconomic position, while catalyzing critically needed donor support.

The authorities are responding with a strong fiscal stimulus targeted at overcoming the impact of the recent shocks and providing for social and reconstruction needs. They are aware of the need to avoid excessive borrowing and to adjust the pace of spending in line with the economy’s absorptive capacity. Looking beyond 2010, priority will need to be given to ensuring fiscal sustainability.

In the aftermath of the crisis, the authorities have taken prompt action in the banking sector to stabilize the situation. They are moving forward with resolving and restructuring Asia Universal Bank and are developing plans to take action on the banks under temporary administration. Monetary and exchange rate policies are designed to support the economic recovery while preventing any resurgence of inflation.