Reform has been an important feature of the Kyrgyz Republicís recent history. Reform has been a necessary response in adjustment to a changing global environment where social and political developments in many countries have become increasingly attuned to principles of human rights in their efforts to establish sustainable economic growth and development. In order to remain within the stream of global development, the Republic must keep changing, revising outdated approaches and methods for resolving social, political and economic issues, while remaining strongly committed to the high principles and values set out in its own Constitution. The Republicís efforts in reforming all aspects of the lives of its people have attracted the strong support of the international community Ė international development organizations and donor-countries.
††† 2.1. Macroeconomic Stability and Economic Growth
††††††††††† From the outset, the establishment of the countryís new economic system, which had to function within an independent state, called for a range of profound changes in all aspects of economic life. In order to overcome the systemic economic crisis, decisive action was taken in setting up a market economy, together with the necessary infrastructure and institutions that enabled the formation of the private sector, introduction, ahead of other CIS members, of the national currency and independent monetary policy, the arresting of hyperinflation and, as a result, the restoration of economic growth by 1996. Over the period 1996-2000, the average economic growth rate of the Kyrgyz Republic was 5.5 per cent, one of the best performances among the countries of the CIS. But very soon during the financial crisis of 1998-1999 it became obvious that the general economic situation in the country remained unsustainable and very vulnerable to external shocks. It remains too early to claim that macroeconomic sustainability and the required level of economic growth have been achieved, although the situation has been stabilized, with reduced inflation rates, slower devaluation of the national currency Ė the som - and some improvement in the GDP growth rate.
††††††††††† The main reason for the lack of stability is incompleteness of the market reforms in the country.† This includes lengthy process of the public sector reform, inadequately functioning financial and other markets, and a lack of reasonably conducive conditions for the conduct of private business and the promotion of investment activity. The domestic situation has been exacerbated by external obstacles, of which the main ones are high degree of dependence on the international financial and economic situation, remoteness from major international commodity and financial markets, difficulties in the trading and economic relations with neighboring states, as well as threats from international terrorism and religious extremism.
††††††††††† The state budget deficit, which was traditionally high at Soviet times, remains high at present (over 9 per cent of GDP in the year 2000); it is one of the major economic problems facing the country because of the public debt that has already exceeded the countryís yearly output. Furthermore, its servicing has become the largest single item of public expenditure, requiring further cuts in the already inadequate allocation of public funds for maintaining the basic functions of the state. A severe reduction in† external borrowing for covering the budget deficit is becoming a necessary condition for sustainable development in the years to come. One important reason for the budget deficit is the large shadow economy, the size of which is at least 25 per cent of GDP, according to the Kyrgyz National Statistics Committee.
2.2. The Situation in the Real Sector
††††††††††† Agriculture is the most important sector of the economy of the Kyrgyz Republic, producing more than one-third of the GDP. It has recently demonstrated† rapid and sustainable growth. The agriculture has undergone fundamental changes, related primarily to emergence of a great number of† peasant and† individual farms. Introduction of private ownership of land has been the most important step in the agricultural reform and is expected to give renewed impetus to the long-term development of† this sector and the economy as a whole. However, to maintain growth in the agricultural sector, a series of important issues must be addressed: how to ensure an inflow and efficient use of investments into agricultural production, proper functioning of rural infrastructure and the irrigation systems in particular, improved efficiency of product and input markets, and strengthening of the countryís agribusiness.
††††††††††† The production of non ferrous metals and the mining industry, together accounting for over 60 per cent of the total industrial production, generally are the most important components of production sector in the Republic that makes up little over 20 per cent of GDP. Production of gold at the Kumtor mine alone provides about 40 per cent of the Republicís total exports. The country has promising deposits of mineral resources, so it is necessary to encourage new productive activities in this area.† Hydropower is another sector of strategic importance as it is the second most important source of export revenue and provides some reasonable potential for further increasing exports of electric power and substitution for domestic use of imported fuels. Further development of the power sector requires significant amounts of investments that must be accompanied by restructuring of the power industry sector in ways that adopt market principles.
††††††††††† It is very important to the future of the country to provide for the sound development of:
∑†††††††† the transport infrastructure, to enable the Kyrgyz Republic to give effect to the ďGreat Silk RoadĒ doctrine and create the conditions for overcoming its geographic isolation;
∑†††††††† a modern system of telecommunications, without which it is not possible to develop further the nationís human potential and a modern economy;
∑†††††††† information technologies; and
∑†††††††† a dynamic tourism industry based on the unique natural and climatic wealth of the Kyrgyz Republic.
††††††††††† However, it will be impossible to develop such facilities and their potential for generating employment and export potential without undertaking large amounts of investment as well as providing appropriate institutional support.
2.3. The Search for a Place in the World Economy
††††††††††† The main principles selected by the country† for a new system of foreign trade relations are openness and mutually beneficial cooperation. Manifestations of this approach are the Republicís membership in the WTO (the first to do so among the CIS countries), membership of regional trading communities and treaties, as well as a liberal approach to its own foreign trade. The structure of the Kyrgyz Republicís foreign trade has changed considerably in recent years, both in the composition of traded goods and in the directions of its trade; the range of exports has been reduced considerably. Imports exceed exports by far, and this is presenting the Republic with a serious problem. The trade deficit has recently been significantly reduced, mainly because of a decline in imports due to the considerable devaluation of the national currency in 1998-1999. Currently, consumer goods and energy resources account for a large share of imports, while imports of investment goods have been declining. Because of the trade gap and the substantial payments being made to service foreign debt, the country still faces a considerable current account deficit in its balance of payments which, in view of an inadequate inflow of foreign investment, exerts pressure on foreign exchange reserves of the National Bank of the Kyrgyz Republic, threatening† the stability of national currency.
Despite the efforts made to attract foreign investors, agreements with many countries on protection and incentives for potential investors and the elimination of double taxation, the flow of direct foreign investment, that would have been the most desirable form of external funding for the Kyrgyz economy, is by no means large enough. To some extent, the dearth of foreign direct investment is related to the fact that the domestic market in the Republic is very small. In addition, however, the situation reflects macroeconomic instability, unfavorable local institutional environment, and the failure to take full advantage of its WTO membership.
2.4. Institutional Development of the Market Economy
††††††††††† The private sector now dominates in the Kyrgyz economy, accounting for the production of a greater part of GDP. The private sectorís key component is small and medium size business providing considerable potential for longer-term growth in the economy. It creates a competitive environment in the economy, supports internal demand and is an important source of employment. At the same time, businesses have been suffering from an inequitable and complicated taxation, excessive state regulation and arbitrariness of officials,† as well as shortage of financial resources.
††††††††††† In recent years, the countryís banking system has been experiencing serious difficulties which in turn serves as a serious barrier for the development of the private sector. These difficulties are related to weaknesses in the management of banks, creation and development of the new economic system, inadequate capital structure, and not sufficiently strict banking supervision. In these circumstances, repeated commercial bank failures have undermined the publicís confidence in them. This has been reflected in commercial bank deposits that, in early 2001, represented only 6.4 per cent of GDP, while commercial bank loans represented 3.4 per cent, very low by world standards. Foreign currency is widely used as an instrument of savings and payments. Commercial banksí interest rates on loans are as high as 50 per cent per annum, reflecting in part the still high risks related to entrepreneurship in the Republic and in part the difficulties of debt recovery due to the inadequacies of the legal system as it relates to commercial activities. This, of course, impedes the efficient mobilization of financial resources in the economy. The banks are not interested in long-term lending most needed for development of the real sector.
††††††††††† Non-bank financial institutions in the Kyrgyz Republic are not yet well developed. Therefore, most of the financial facilities needed to support business operation (e.g., insurance firms, mortgage finance, investment funds, securities markets, etc.,) are quite weak. In recent years, various forms of micro-finance, that can play an important role in poverty reduction, have emerged in the country with the support of international agencies. For its further development this part of the financial sector needs more institutional and training support.
††††††††††† The country is now facing the problem of creating a market for land. Effective functioning of such a market should ensure efficient utilization of this most valuable resource and promote investments in agricultural regions, thus increasing living standards in rural areas. So far, there remain very considerable legal and administrative problems for peasants attempting to implement fully their proprietary rights for land and action is needed to raise public awareness of their responsibility and rights to land.
††††††††††† A well functioning labor market is necessary† to increase employment.† Well-targeted efforts are required to create efficient employment services, system of industrial training and retraining and genuine protection of the rights of employees including migratory labor.
2.5. Shift in the Role of the State in the Economy
††††††††††† The most important role of the state is in its regulatory function that should† no longer be directive in nature, but aimed at creation of an appropriate business environment in the economy.
††††††††††† At one level, this implies maintenance of a healthy and stable macroeconomic situation through appropriate monetary and fiscal policies, as well as other types of economic policies. At another level, the state is responsible for setting uniform rules for economic activities for all participants, developing and exercising control over compliance with norms and standards, licensing and so forth. In this area there are still many problems such as corruption and the existence of cumbersome, costly and inefficient systems of licenses, inspections and permits. One may claim that dynamic development of the private sector, creation of a favorable investment environment and, consequently,† necessary rate of economic growth may not be reached without decisive reforms in these areas of the stateís responsibilities.
††††††††††† Although the share of the public sector in the economy in the Kyrgyz Republic has notably decreased in recent years, it remains large; public expenditures account for about 30 per cent of GDP. Reduction of the budget deficit is necessary for macroeconomic stability; it requires a considerable improvement in the efficiency of public expenditures (by focusing on provision of basic services and streamlining social responsibilities) and improvement of the tax administration. Reforms in the tax system are especially important in this regard because the present high and non-uniformly applied taxes and social security deductions impede development of the economy in many ways.
2.6. State Building
††††††††††† From the outset, the citizens of the Kyrgyz Republic have made their strategic choice in favor of the democratic development, which guarantees freedom to all. This choice secured in the Kyrgyz Constitution serves as a basis for setting respective powers, responsibilities and interrelations between three arms of government - the legislative, the executive and the judiciary.
††††††††††† The legislative branch of power, the Jogorku Kenesh of the Kyrgyz Republic,† has created a rather firm, but at times conflicting, legislative and regulatory framework for socio-economic and political reforms in the Republic. During 1990-2000 the Jogorku Kenesh of the Kyrgyz Republic passed more than 850 laws. At the same time, there is insufficient oversight exercised by the legislature over implementation of adopted laws - especially over the execution of the national budget and† targeted use of funds provided through it. Another serious problem faced by the lawmakers is the adoption of laws that have not been adequately backed up by budgetary or other resources, as a result of which many laws have become merely declarations of intent, detached from reality. Many regulatory acts designed to regulate the division of functions and powers, ensure independence, equilibrium and efficient interaction among legislative, executive, and judicial branches of power as well as the local self - government require improvement.
††††††††††† The executive branch of power is facing the need to undertake effective reforms aimed at improving the efficiency and transparency of state administration and management, which includes much needed civil service reforms. These involve the introduction of substantial adjustments to public authoritiesí terms of reference, with transfers of appropriate functions and resources from the central government to local authorities and/or civil society and the private sector. State bodies are still relatively costly to run, insufficiently accountable, while their functions are rarely clearly defined and delineated. Drawbacks of the personnel policy, corruption among state officials, and inefficient remuneration system all serve as impediments to the social and economic development of the country.
††††††††††† Reform of the judicial system of the Kyrgyz Republic has been proceeding since 1993.† However, courts remain very dependent on powers exercised by other arms of the state, lack sufficient financial resources, necessary professional staff, and transparency, and suffer from shortcomings of legislation and regulations.† Certain difficulties are faced in the delineation of jurisdiction and coordination of decisions among the various court systems Ė the Constitutional Court, courts of general jurisdiction headed by the Supreme Court, and the system of arbitration courts.† The high costs of bringing a case before courts, slow trials and contradictory rulings result in few people being willing to resolve disputes and defend their rights through the courts. There is a pressing need to set up a fair and independent judiciary to secure efficient protection of property and civil rights without which it is impossible to build a market economy and democratic society.
††††††††††† In recent years, efforts have been made towards decentralization of the system of public administration. Responsibility for community facilities and local infrastructure has been transferred to local self-government bodies. However, the capacity of local authorities to provide for comprehensive development of villages, towns and regions is restricted by shortages of funds, weak delineation of powers and functions between them and central government, as well as inadequate professional skills among local civil servants. A real transfer of powers and responsibilities to local levels of public service implies a concurrent transfer to them of relevant material and financial resources, including rights and responsibilities relating to the handling of revenue and expenditure in their local budgets.
2.7. Human Rights
††††††††††† The concept of human rights is widely recognized and established by the Constitution of the Kyrgyz Republic and other legislative acts. However, the application of these rights often meets with considerable difficulties in practice, mainly because of the ignorance of individuals regarding their rights and more often because of their inability to defend themselves by statutory means. In recent times, NGOs have become increasingly visible in the protection of human rights by drawing the publicís attention to the violation of human rights. Unfortunately, the system of civil lobby in the area of human rights legislation is yet to develop, whereas organizations of the civil society are not coordinated and financially unsustainable. NGOís potential in rendering legal assistance is hardly ever used.
††††††††††† Provision of unhindered access to information is a necessary condition for adequate† implementation of human rights. Substantial achievements have been made in this area; there is a genuine pluralism of opinions expressed through mass media as previously existing obstacles for obtaining information have been removed. At the same time, the independent mass media is still poorly equipped and there have been cases where members of the media have been subject to pressure from civil servants. There are still problems with access by the rural population to television and other sources of information.
2.8. Social Equality and Diversity
††††††††††† To a large extent, the future of the nation† is determined by† the progress towards building a coherent society by using its existing social diversity as a source of ideas and efforts in building success, rather than as a source of problems. Regional differences in the country are considerable and there is an uneven allocation of economic and human resources. Isolation, undeveloped condition of the transportation and communication sectors, as well as other forms of infrastructure constitute major hindrances to development of regions.
††††††††††† The existing form of economic development has contributed to an intense migration within the country from less developed to more developed areas, from rural areas to urban areas. This has been accompanied by changes in both the standards of living and ways of life of the people involved, which often brings about increased poverty rather than its reduction. There is still high level of emigration, caused by sharp changes in the political systems of all former USSR countries, and by security and economic considerations. However, such emigration is being somewhat contained because the state has clearly identified the priority of encouraging the development of a multi-ethnic society with equal opportunities for all. The society and state governance bodies attach great importance to the issue of inter - ethnic relations and will continue to focus their attention in the future as well.
††††††††††† Mature society has emerged in the Kyrgyz Republic, characterized by a diversity of positions and opinions, and active participation in public and political processes. Free development and operation of NGOs is an important feature of the developing democratic process that distinguishes the local situation from many CIS countries. More than 3,000 public associations have been registered in the country. Among these are 121 political organizations and 25 political parties, 109 organizations representing private business groups, 289 trade unions, 335 creative scientific and technical unions, more than 1,600 public organizations related to social support and protection, veterans', children's and other organizations, about 100 women's and more than 70 youth and students' organizations, 195 religious organizations and about 200 sports organizations. Non-government organizations play an increasingly active role in the political, social and economic development of the country, which has also been reflected in the process of preparing CDF. A lot of work is being carried out with veterans', women's and youth organizations to provide social support and protection of people. Political parties and community organizations are represented in the Jogorku Kenesh (the Parliament) of the Kyrgyz Republic.
††††††††††† The social status of women has always been Ė and remains - relatively high among the people of the Kyrgyz Republic, where women have in most cases had good access to education and skilled work opportunities. Compared with neighboring countries, women are well represented in the supreme bodies of state power. However, continued efforts need to be made by the authorities in order to ensure that womenís equal social status is maintained. This is being strongly supported by a growing womenís movement a feature of which are the non-governmental organizations engaged in protection of womenís rights. Such organizations now constitute a large and significant share of all non-governmental organizations in the country.†
††††††††††† The youth of the country represents a considerable part of the Republicís population. Many find opportunities for obtaining education and training, so that more and more young people are filling positions of responsibility in political, social and economic organizations of the country. However, many other young people find real difficulties in finding jobs and obtaining the skills required by a modern society and economic system, which results in poverty among them and which, in turn, may push them to engaging in anti-social behavior. Newly emerged and growing problem of homeless children requires an immediate solution.
2.9. Development of the Education System, Healthcare, Science and Culture
††††††††††† The Kyrgyz Republic is distinguished for its high level of education of people and virtually universal literacy level. However, considerable efforts are now required to maintain existing educational potential. Reforms already carried out in the education sector have resulted in a variety of educational institutions, providing a wide range of educational programs and funded from various sources. However, there is an acute general shortage of funds that has resulted in the weakening of this most important system. Other problems include scattered available resources, outflow of highly skilled educators and trainers, inadequate technological equipment of educational institutions, training methods often do not answer the needs of modern society and the market economy and, because of their poverty, certain groups of children are not able to obtain proper education.
††††††††††† Reforms have already begun in the health care sector. These include some structural adjustments involving introduction of the family medicine and the development of a mandatory health insurance system. However, funding of the health care sector remains quite inadequate, as a result of which the general level of health among the population is deteriorating. This is especially so among the poor where poor nutrition is also an important factor. The situation in maternity and childhood protection remains very complex and requires substantial improvement.
††††††††††† Cuts in public funding for scientific research and cultural institutions have necessitated a substantial review of their activities. If the situation here is not corrected soon, the Republic faces the prospect of irreplaceable losses of human resources in educational, scientific research and cultural spheres. Another contributing factor is the flight of specialists into other areas of activity and because of emigration.
2.10. Standard of Living, Poverty and Social Protection
††††††††††† The standards of living for the majority of the population remain low (see Appendix G), with more than 52 per cent recognized as poor.† Income inequality is growing: the Gini coefficient has increased from 0.2 in 1991 up to 0.43 in the year 2000. Living conditions of a significant portion of the population, especially of those who are poor and living in rural areas, are unsatisfactory. Many people in the country even† have problems of access to clean drinking water.
††††††††††† Elderly and disabled are among the most vulnerable groups of population. Due to the persistent economic problems in general, the imperfect fiscal system and the considerable demographic pressure upon the able-bodied working population, the pension system is inadequate. There is also large-scale unemployment throughout the country. Under the circumstances, state must bear the responsibility of providing social protection to those who are not able to help themselves. A system of targeted social assistance to the poor is being developed in the country, along with a transition towards insurance based pensions and unemployment benefits, and active labor market policy programs. However, social policy faces major problems due to both the magnitude of the social commitments that the state needs to assume that is clearly beyond its capacity to deliver, as well as inefficiencies in the system of social protection itself, such as delays in payment of benefits, inadequate accountability of service providers and payments in kind.
††††††††††† An important indicator of living standards is the availability of housing. Although the Republicís Constitution declares the right of all citizens to housing, for many people this right has not been sufficiently implemented. More than 166,000 families need dwellings or improvements to their present dwellings, more than 17,000 families live in hostels, while over 16,000 families live in areas that are subject to natural disasters or other emergencies and need to be resettled. The general standard of dwellings and the provision of utility services are well below foreign standards.† Sixty five per cent of families have accommodation of less than 5 square meters per family member. The number of homeless is increasing, especially in the large cities. Over the past decade, the number of new apartments constructed has fallen by about 80 per cent, only 4,800 new apartments were constructed in the year 2000, 94% of which were constructed with private means.
††††††††††† As the volume of state capital investment has dropped sharply, so has its composition. Most of the investment recently has been based on government guaranteed external loans directed at implementation of specific projects.† Contracts for implementation of these projects are usually won by foreign companies, which sub - contract domestic companies and producers of constructing materials at extremely disadvantageous terms. This has led to high unemployment in the construction sector and considerably underutilized local capacity. The construction sector was the third largest after agriculture and manufacturing industry, so the crisis in this area is one major factor in the growth of general unemployment and poverty.† Revival of the construction industry would be an important factor in the revival of the private sector and an important contributor to the creation of job opportunities. The accommodation problem and the crisis in the construction industry cannot be addressed without the adoption of new approaches to them based on market principles, with special attention paid to promotion of private investments into construction of houses. Only then can the rights to dwellings enshrined in the Constitution be realized.
††††††††††† Ecology and environmental protection issues are a focus of attention by both society and the state. Relevant laws and regulations have been adopted and specialized public bodies have been set up. Ecology as a subject has been introduced into the curricula of all educational institutions, while the mass media also frequently turns to the topic. Two opposing trends are beginning to emerge regarding the protection of the environment against pollution caused by economic activity.† One is that because of the generally depressed situation in industrial and agricultural production, there is a reduced adverse impact on the environment. The other trend is also due to economic adversity, revealing itself in short-term and often predatory attitudes to the exploitation of natural resources (land, forest, water resources), a decline of environmental standards or their neglect, and reduced spending for environment protection needs. The pressure upon the environment must be mitigated through implementation of well-directed measures for protection and maintenance of the ecological balance.
2.13.† Safety of the State and the People
††††††††††† In international relations, the Kyrgyz Republic invariably conducts a policy of peace and cooperation. The Republic is actively cooperating with neighboring countries, as well as with other countries and international organizations in maintaining regional and international security. Nevertheless, peace and security in the country is under very real threat resulting from international terrorism and religious extremism, as well as of criminal groups engaged in illegal drugs trafficking. This requires strengthening of those public bodies responsible for the external security of the state. Provision of personal and proprietary security of individuals is also a serious problem. Crime, which has risen to high levels, is a direct consequence of poverty and inadequate law enforcement mechanisms, including the activities of the police. Some profound reforms are required in the systems of law and order to reduce criminal activity. The country also needs to spend a significant portion of its rather scarce resources for the prevention of natural and man-made disasters and the correction of their negative consequences.
2.14. Support of the International Community
††††††††††† Economic and social reforms in the Kyrgyz Republic are carried out with the support of international organizations, such as the World Bank, the International Monetary Fund, the Asian Development Bank, the United Nations Organization, and the European Union. Many countries, including Germany, Great Britain, USA, Japan, Turkey, Malaysia, and Switzerland, to mention only a few, have also provided invaluable assistance.† Russia, China and other neighboring countries have provided notable assistance in strengthening the Kyrgyz Republicís external security. The major part of foreign funding and technical assistance has been provided to the Republic on a grant basis or on soft loan terms.† See Appendix C for details of international assistance.
††††††††††† It is clear from the foregoing that much has been achieved by the government and people of the Republic since gaining independence. It is also clear that much remains to be done.