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p. 36 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asian Republics Azerbaijan Kazakhstan Kyrgyz Republic Tajikistan Turkmenistan Uzbekistan The Pacific III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia : Central Asian Republics

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Kyrgyz Republic

The macroeconomic situation stabilized in 2001 as the Government pursued prudent fiscal and monetary policies and implemented key structural reforms. The recently concluded Paris Club meeting has addressed the short-term problems of debt burden and bunching of debt service payments. Long-term prospects depend on further debt rescheduling by bilateral creditors in 2004.

Macronomic Assessment

In 2001, GDP grew by 5.3%, a rate slightly lower than in the previous year. In agriculture, which expanded by a healthy 6.8%, productivity growth and an expansion in the area under cultivation generated a large food grain harvest of 1.8 million tons. This was 16.3% higher than 2001’s output and 12% more than the previous peak. However, the output of animal husbandry, important for the poorer mountainous regions, rose by only 2.2%. Though the industry sector grew by 5.4%, growth was uneven and masks the decline in the output of several subsectors. Excluding the metallurgical sector, whose gross production increased by 13.8%, industrial output fell by 1.6% in 2001 due to a significant decline in the output of power generation, agroprocessing, oil refining, and pharmaceuticals. A sharp drop in transport services restricted growth in the services sector to a modest 2.4%, reflecting the decline in both industrial and foreign trade activity.

Gross domestic investment fell from 18% of GDP in 1999 to about 16% in 2000 due to a fall in the Public Investment Program (PIP), from 9% of GDP to 7% over this period. In 2001, the rate of investment declined further, by about 35%. A heavy external debt repayment burden, caused by the bunching of debt service requirements, pulled down the PIP to 4.4% of GDP in 2001.

The unemployment rate increased from 5.9% of the labor force in 1998 to 7.5% in 2000. The level of unemployment is not officially available, but on the basis of estimates of the registered unemployed, it seems that there has been very little reduction in unemployment in spite of robust growth in the last 2 years. However, poverty incidence has dropped, from 52% at the end of 2000 to 47.4% in September 2001, as a result of higher agricultural growth and stable food prices (Figure 2.23). This suggests that the insensitivity of the unemployment rate to significant growth may be the result of an increase in labor force participation rates.

Under IMF’s new Poverty Reduction and Growth Facility (PRGF) program, the Government embarked on an ambitious fiscal compression program, cutting its fiscal deficit from 10% of GDP in 2000 to 4.4% in 2001. Current revenues increased by 1.2 percentage points of GDP while public spending fell by 4.3 percentage points, and the PIP recorded a sharp fall. Parliament reviewed the budget in the middle of the year and amended certain tax measures to enhance the revenue-to-GDP ratio. It also increased user charges on many paid services to improve nontax revenues.

Continuing a policy begun in 2000, the central bank restricted monetary growth to 10–12%. However, it relaxed the reserve requirements of the commercial banks in June, resulting in an easing of the banking sector’s liquidity position. Tight monetary policy and solid performance of the agriculture sector sharply reduced the monthly average rate of consumer price inflation to 6.9% in 2001 from 18.7% in 2000, while the year-on-year rate of inflation fell sharply to 3.6% from 9.6% in the previous year. Increases in the administered prices of utilities and in user charges represented the main source of inflation, as nonfood consumer goods prices registered a modest increase of 1.4% and food prices did not rise at all.

The foreign sector contracted in 2001. Exports fell by 6% due mainly to lower exports of power, food products, and nonprecious metals, while imports shrank by 14.4% due to a fall in public investment. This resulted in a positive trade balance of $50.5 million, which helped limit the current account deficit to about 0.7% of GDP. The som depreciated by about 1.5% against the dollar in 2001.

Policy Developments

Under IMF’s PRGF, the Government will adopt a three-pronged approach to mitigate the medium-term risks to the economy and to improve economic performance. The PRGF takes into account some of the important structural adjustment reform programs of ADB and the World Bank. The key components of the program are: implementation of a credible debt strategy, continued pursuit of prudent fiscal and monetary policies to maintain macroeconomic stability, and implementation of structural reforms.

The high burden of public debt prevented the Government from devoting more resources to consumption and investment expenditures. Total external debt was estimated to be about $1.7 billion (112% of GDP) at the end of 2001, of which 55% was multilateral and 29% bilateral (owed mainly to Japan, the Russian Federation, and Turkey), and the rest commercial debt. The debt service burden is high at around 30% of exports of goods and services, and until recently, the Government had to face the looming problem of bunching of debt over 2002–2004. A large part of the nonconcessional debt (representing about one fifth of the total) was due for repayment, with grace periods for many concessional loans coming to an end. However, in March this year, agreement was reached at the Paris Club whereby debt servicing during 2002–2004 was rescheduled favorably with the possibility of debt stock restructuring in 2004, provided that the ongoing PRGF is implemented successfully. In addition, the Government has adopted a debt reduction strategy that, among other things, stipulates lowering the PIP to 3% of GDP by 2005.

The main objective of the fiscal stance for 2001–2004 is to achieve a turnaround in the budget, securing budgetary savings of 2% of GDP by 2004 from dissavings of 2.5% in 2000. This requires an increase in fiscal revenues of about 3.5% of GDP and rationalization of government consumption expenditures. The Government proposes to cut direct tax rates in 2002. Several measures have been put in place to compensate for the potential short-term loss of tax revenues. Further reforms to customs; VAT; and turnover, property, and land taxes are envisaged to improve revenues, and a 10% tax on interest incomes is to be introduced. Tax administration will be modernized and streamlined with a special focus on the customs department. On the expenditure side, the burden of fiscal adjustment will fall mainly on the PIP.

The Government undertook several structural reform measures in 2001 in an attempt to create a conducive environment for the private sector to function efficiently and to improve public sector governance. In the finance sector, it took steps to liquidate four nonviable banks. It also purchased the largest commercial bank—Kairat—from the central bank, augmented its capital, and has taken steps to improve its management with a view to eventual privatization. The regulatory capacity and powers of the central bank are being strengthened further. The Government has also initiated measures to strengthen the legal framework for the debt restructuring agency. Other notable structural reform measures include the introduction of international accounting standards, preparation of a blueprint and a time-bound implementation plan for judicial reform, and steps to facilitate rapid implementation of public enterprise reforms.

Outlook for 2002–2003

GDP is expected to grow at 4.5% in each of the next two years. This is lower than the 5% target set under the interim National Poverty Reduction Strategy (NPRS), which charts the development approach for the 3 years 2001–2003. The lowering of the growth target reflects the constraints imposed by a gradually declining public investment program and the difficulties in attracting private investment to fill the gap. Achieving even this lower growth target depends on several important factors: substantial easing of the debt repayment burden this year; continued pursuit of tight fiscal and monetary policies to maintain macroeconomic stability; prompt implementation of key structural reforms in a number of areas, particularly in banking, agriculture, energy, and infrastructure; public sector governance and adjudication processes; and a favorable external environment for the economy. Under these assumptions, consumer price inflation is expected to have fallen to 5.5% by 2003 (after reaching 7.5% in 2002). Although the current account deficit in 2001 fell sharply due to a trade surplus and a squeeze on public investment, it is expected to rise to over 6% of GDP in the next 2 years as investment activity reverts to normal levels.

The recent restructuring of external debt is likely to prove critical for ensuring sustainability of public finances and for maintaining even the gradually reduced levels of spending on the PIP.

Recent developments, such as declining production in several industry subsectors including food processing, a fall in commercial credit in the banking sector, low levels of private investment, and subdued inflows of FDI indicate that the general business environment is still not supportive of the private sector.

Economic prospects depend to a large extent on the urgent implementation of structural reforms under a tight fiscal regime, limited implementation capacity, and political difficulties in implementing stringent measures to improve public sector governance. Fortunately, though, the aftermath of the events of September 11th and the conflict in Afghanistan did not have the feared major adverse impact. Nevertheless, political uncertainty in the region could make Central Asia a less attractive destination for FDI. Therefore, any deterioration in the political situation in Afghanistan could impede inflows of FDI and the long-term prospects for economic growth and poverty reduction in the Kyrgyz Republic.

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