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Kyrgyzstan: Kyrgyzstan Finance Profile 2012

2012/03/14

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Kyrgyzstan Finance Profile 2012

Market-based competition Free market competition is the country’s main economic philosophy, in principle and mostly in practice. A recent introduction of a low, flat 10% profit tax was greeted with enthusiasm, and business reforms, especially aimed at curbing the interference of controlling agencies and simplifying the process of business registration, have been under way and yielding moderate positive results. Programs of sweeping capital legalization and amnesties for the declaration of previously undeclared property have been introduced. The main problem that hinders healthy market competition is corruption in its many forms. The size of the informal economy has been estimated at some 50% of GDP, and its reduction has been only modest. Another recent disappointment was a long-anticipated new tax code, which, among other problems, introduced higher registration and patent fees on small businesses.

Anti-monopoly policy With a generally small economy and the recent introduction of a market system, the level of controls on monopolies has been relatively effective. Every year, the state anti-monopoly agency reviews and publishes a list of natural or allowed monopolies, such as companies in transportation, national infrastructure and major industrial producers, that have come to dominate specific spheres of the economy. Such monopolies are regulated by price-setting and/or obligatory guarantees of coverage for certain groups of consumers. Several sectors with state monopolies, such as electricity, gas and telecommunications, have been put forward for privatization, which has yet to be enacted. A still wider range of monopolistic and often inefficient services, either fully or partially state-run, remain in the hands of regional units, where monopoly controls are similar to national controls. The major problem in these and other state monopolies has been general inefficiency and mismanagement, rather than monopolistic pricing issues.

Liberalization of foreign trade Kyrgyzstan’s foreign trade policy remains very liberal. With its membership in the WTO since 1998 (it is still the only member country from Central Asia) Kyrgyzstan has maintained an open trade policy with low or internationally prescribed tariffs, and enacts only occasional import controls on quality grounds, such as the recent case with grain imports from China on suspicion of chemical contamination. In the Heritage Foundation’s indices of economic freedom over the past two years, Kyrgyzstan was rated among the freest or as the most free of the former Soviet republics, excluding the Baltic States. A latent indication of liberal trade policy has been the country’s serious trade balance deficit, with the ratio of imports to exports at about 2.5-to-1 in 2008, in an economy where the total volume of trade is 114% of GDP, according to World Bank 2007 data

Kyrgyzstan’s banking system has seen significant growth in recent years, with increased overall lending, the development of mortgage portfolios and the establishment of links to external financial sources, either through foreign capital participation, acquisitions by foreign banks or foreign banks entering the Kyrgyz market. However, lending risks remain high, and correspondingly real and lending interest rates are also high. Supervision by the National Bank has been steadily improving and minimum capital requirements are enforced. The capital market remains small and undeveloped, although vibrant trading in primary and secondary stocks is conducted regularly. Another relatively successful area has been in microcredit lending, with Kyrgyzstan often cited as an example of success in this area compared to other countries in the region.