The project will contribute positively to the Kyrgyz Republic's economic growth and poverty reduction by establishing a State Tax Service (STS) that (i) helps promote macroeconomic stability and provides fiscal space for priority economic and social expenditures through increased revenue collection; (ii) minimize corruption and practices good governance and transparency, and (iii) facilitates private sector development.
The outcome of the Project is an effective, modern, and efficient STS that achieves improvement in tax collection.
|Project Rationale and Linkage to Country/Regional Strategy
The Kyrgyz Republic has maintained macroeconomic stability and achieved steady growth, despite economic and political shocks. During 2000-2005, real gross domestic product (GDP) growth averaged 3.9% and inflation remained modest at 4.4%. Notwithstanding political uncertainties in 2005-2006, structural reforms continued to progress. Growth in 2006 is estimated at about 3%, with inflation remaining below 6%. For 2007, GDP growth is projected to be 5.5% and inflation 4.5%.
Fiscal consolidation has been an important component in the Kyrgyz Republic economy's good performance, and will be vital in sustaining its achievements. The general Government fiscal deficit, which had exceeded 9% of GDP during 1996-2000, declined to about 5% of GDP during 2001-2005. Consequently, external public debt fell from 111% of GDP in 2001 to 70% of GDP in 2006. This fiscal achievement has been due to good control of expenditures and modest increases in tax collection. During 2000-2005, tax collection (excluding customs revenues and local governments) increased from 13.3% of GDP to about 15% of GDP.
The Kyrgyz Republic faces the dual fiscal challenge of maintaining its prudent fiscal policy to sustain macroeconomic stability and economic growth, while providing for priority economic and social expenditures to help raise per capita GDP above $540 and meet the Millennium Development Goals. The challenge requires sustained increases in tax collection.
However, tax administration was beset by inadequate equipment and facilities, inefficient practices, and inadequate staff skills. Consequently, tax collection was below potential, operations are error-ridden and prone to corruption, and tax administration was not perceived to be conducive to business and private sector development. The STS needed reform and modernization to install appropriate infrastructure, instill best practices in tax administration, reform its business processes and workflows, upgrade its staff's skills, and ensure that its operations use modern technology. These reforms enable STS to (i) increase its efficiency and staff skills, thereby improving its tax collection capacity, governance, and transparency; (ii) minimize corruption; and (iii) reduce compliance costs.