–Ś„ŤŮÚūŗŲŤˇ / ő ÔūÓŚÍÚŚ
¬Ż ÁšŚŮŁ: —“ņ“‹» / Strategies / Comprehensive Development Framework for the Kyrgyz Republic (2001)


ŖŪšŚÍŮ ŲŤÚŤūÓ‚ŗŪŤˇ

Kyrgyzstan Review, 10 years ago




5. MACROECONOMIC IMPLICATIONS OF THE STRATEGY TO 2010

††††††††††† Macro-economic policy under the Kyrgyz Republicís Comprehensive Development Framework aims at economic growth and stabilization in order to create the necessary conditions for poverty alleviation and improved standard of living. The strategy for doing this has been set out in detail in chapter 4 of this report, more specifically as regards economic growth and development in section 4.3. The macroeconomic and related projections to the year 2010 are set out in Table 1 below.
††††††††††† An important factor in achieving macro-economic stability, as projected, will be the reduction of inflation rate (as measured by GDP deflator) from 21.5 per cent in the year 2000 to about 6.7 per cent by 2004 and 4.5 per cent by 2010. Contemporaneous strict policy should restrain the growth of consumer prices at 8 per cent and further reduce it to 5 per cent by 2005. Reduction in the rate of inflation, to be achieved through tight fiscal and monetary policies, should lead to exchange rate stability and improved confidence in the national currency.
††††††††††† The Government is committed to gradually reduce the permanent state budget deficit that has been exacerbated by the high level of external debt. The overall state budget deficit, which was 8.9 per cent of GDP in 2000 and is presently at 5.5 per cent of GDP (2001), will be further reduced to 3.0 per cent in 2004 and 1.8 per cent by the year 2007. A principal message the Government would send through this reduction in state budget deficit would be its desire to avoid crowding out the private sector in investment but rather to give the sector the fiscal space to grow. The state budget deficit is expected to decrease further after 2007 and will come at 1.2 per cent of GDP by 2010. To support the growing needs of the population in quality education and health care services, and to ensure due operation of the state, the level of government consumption will increase to 13.4 per cent of GDP by 2010.
††††††††††† Overall reduction in the budget deficit will be achieved by increasing state budget revenues through tax reform and improved tax administration, decreasing expenditures and by removing subsidies while protecting the poor. Substantial improvements in efficiency are to be made in the management of budget expenditures. In kind payments into the budget and social fund will also be reduced and eventually eliminated. The efficiency of the public sector reforms and state programs will be simultaneously increased.
††††††††††† The Governmentís target is to achieve an average GDP real growth rate of about 5 per cent per annum over the period. The average growth rate for the 1996-2000 period has been over 5 per cent, suggesting that this target is achievable. The growth rate is projected to remain at 5.0 per cent in 2001 and then decrease to 4.6 per cent in 2004, reflecting the effect of the needed fiscal consolidation, including increasing payment of external debt and the decrease in PIP. After 2004, as the reform process picks up, the growth rate would increase, reaching 6.0 per cent by 2010. At the above GDP growth rates, the level of GDP in 2010 would be 1.6 times that of the year 2001. GDP per capita is expected to increase by over 50 per cent by the year 2010.
At the same time, one must note that the presence of certain external and internal economic risks might have an adverse impact on the projected figures. Such adverse factors relate to the land-locked location of the country, unstable trade relations and unsustainable contiguous economies, as well as limited volume and range of export products. A set of pro-active measures will be designed and realized in order to prevent the adverse impact of the aforementioned factors.
††††††††††† Economic growth is expected to be investment-led, with private investment being the engine of growth. Gross domestic investment, which stood at 16.0 per cent of GDP in 1999, is estimated to be 16.7 per cent in the year 2001 and climb gradually to 20.2 per cent by 2010. Its composition and sources of funding, however, would change. As was earlier set out in the report, domestic private sector savings and investment, supported by foreign direct investment (FDI), should replace reliance on Government foreign borrowing and public investment program (PIP) to provide the impetus for growth.
Public investment as a share of GDP is expected to decline steadily from 7.0 per cent in 2001 to 3.1 per cent in 2007. After the consolidation period, it would increase back to 3.5 per cent by 2010. The external component of PIP as a share of GDP should drop from 6.0 per cent in 2001 to 2.9 per cent by 2010, while private investment should grow from 7.5 per cent of GDP to 16.7 per cent over the same period. To this end, the CDF strategy envisages a strong stance on removing impediments to private investment.
††††††††††† Declining public expenditure not withstanding, within a constrained fiscal envelop, adequate human development investment would be made through increases in public expenditure in the education and health sectors as discussed elsewhere in this report.
††††††††††† With the share of public investment as a certain percentage of total investment decreasing over the period covered by the CDF and the share of private investment needing to increase, private savings will need to grow. The projected levels of domestic private investment will need to be supported by gross domestic savings of 15.5 per cent of GDP by the year 2010, compared with 9.3 per cent in 2001. To achieve this would require reform and strengthening of the banking and financial systems.
††††††††††† With such developments and the entry of new institutions into the financial sector, the ratio of broad money supply (M2) to GDP, an indication of deepening of the financial sector, which dropped from 13.0 per cent in 1999 to 11.9 per cent in 2000 as a result of a banking crisis, is expected to increase gradually to 15 per cent by 2010. As indicated in chapter 4, other elements of the countryís macroeconomic policy framework include strict commitment to reducing the relative level of external debt and to maintaining the countryís international solvency by carefully managing the budget.
††††††††††† The key to the countryís economic growth lies with the development of agriculture/agribusiness and of the micro, small and medium enterprise sector. These sectors will make the growth process pro-poor and broad-based, therefore making the economy less dependent on the situation in few sectors.
††††††††††† Agriculture, currently accounting for 38.5 per cent of GDP, is expected to lower to the level of 30.6 percent of GDP by 2010 as other sectors (such as industry and non-manufacturing services) increase their contribution to growth. Agriculture should provide the basis for agribusiness (agri-trade, agri-services and agri-processing) to foster growth. The service sector, in which many small and medium sized business enterprises can be found, which presently (2001) accounts for 32.5 per cent of GDP, will account for 38.0 per cent by 2010. The contribution of the industrial sector (including mining and mineral processing) to production should increase from 21.2 per cent in 2001 to 23.2 per cent in 2010.
Kyrgyz Republic has significant potential for further development and promotion of foreign investment into hydroelectric power and mining sectors (in particular, efforts to be made with regard to the promotion of foreign investment in gold production). However, a regulatory and legal framework that would assure investors of fair treatment in their investment pursuits would need to be established in order to attract investment capital. Further, new export markets for hydropower would be developed.
††††††††††† A liberal foreign policy, greater use of advantages available from WTO membership and opportunities presented by regional cooperation will enable the country increase the volume of exports by more than 30 per cent by the year 2010. However, as a share of GDP, exports are projected to decline from 40.7 per cent in 2001 to 37.3 per cent in 2010. These projections take into account the current production schedule of the Kumtor mining company (which accounts for about one third of the countryís exports and 16 per cent of GDP), prospective new gold projects and the growth of non-gold exports. The latter depends on the countryís ability to attract direct investment in export-oriented production.
Electricity is another significant source of export revenue. As mentioned above, the country has enormous hydroelectric power potential for increasing this source of export revenue which is, however, greatly dependent on expansion of markets to China, CIS countries, etc. Besides, the maximum possible use of the countryís potential depends on efficiency of restructuring of the corresponding sector.
††††††††††† Other significant sources of export revenue include cotton and tobacco. Tourism is another source of foreign exchange earnings with considerable potential, which has been factored into the projections. The Government will aim at reducing bureaucratic barriers to trade such as customs barriers and to improve regional transit arrangements.
††††††††††† Imports, as a share of GDP, are projected to decline steadily from 48.2 per cent in year 2001 to 42 per cent in 2010, reflecting expected import substitution as the energy sector is reformed and tariffs on the imported gas are increased. In addition, the import of consumption goods is expected to decline as more agricultural goods are processed locally. The Government expects import growth to reflect more the investment needs of the country (rather than the need for consumption purposes) as the share of imports for private investment purposes is projected to increase.
The balance on external current account, which stood at -14.8 per cent of GDP in 1999 and improved to -5.1 per cent in year 2000 is expected to remain in deficit in line with levels in comparable developing countries. As forecasted, it is going to decrease to Ė7.9% with further improvement to Ė6.3 in 2003.
 
 
Table 1. MACROECONOMIC PROJECTIONS(1)
 
Actual
Preliminary
Projections
Indicators
1999
2000
2001
2004
2007
2010
GDP Nominal (mln.soms)
48 744
62 203
71 257
101 006
136 260
184 332
Consumption (mln.soms)
46 890
55 445
64 639
92 128
117 050
155 734
Gross investment (mln.soms)
8 787
9 953
11 900
18 777
25 907
37 266
Real GDP per capita (soms)
10 020
10 413
10 825
12 001
13 472
15 426
Real per capita consumption (soms)
8 337
8 036
8 342
9 513
9 912
11 217
Real annual GDP growth rate (%)
3.7
5.0
5.0
4.6
5.2
6.0
GDP Deflator (%)
37.6
21.5
9.1
6.7
5.0
4.5
 
 
 
 
 
 
 
Output by sector as % of GDP
 
 
 
 
 
 
†Agriculture
34.9
36.8
38.5
38.2
35.0
30.6
†Industry
21.7
21.5
21.2
21.5
22.1
23.2
†Services
36.0
34.5
32.5
32.4
34.7
38.0
Consumption as % of GDP
96.2
88.5
90.1
91.2
85.9
84.5
†Government
13.0
12.1
13.8
11.9
13.1
13.4
†Private
83.2
77.0
76.9
79.3
72.8
71.1
 
 
 
 
 
 
 
Gross investment as % of GDP
18.0
16.0
16.7
18.6
19.0
20.2
†Public Investment
9.5
8.5
7.0
4.2
3.1
3.5
of which: Public Investment Program
8.4
6.9
6.0
3.9
2.9
2.9
†Private Investment
8.6
7.5
9.7
14.4
15.9
16.7
Gross Domestic Savings as % of GDP
3.8 
10.9 
9.3 
8.8 
14.1 
15.5 
 
 
 
 
 
 
 
†Exports of goods and services % of GDP
42.2
43.9
40.7
33.4
35.7
37.3
†Imports of goods and services % of GDP
56.4
49.1
48.2
43.2
40.6
42.0
†Net Exports % of GDP
-14.2 
-5.1 
-7.4 
-9.8 
-4.9 
-4.7 
Current account balance as % of GDP
-14.8
-5.1
-7.9
-10.1
-5.0
-5.4
Gross Reserves (months of imports)
4.1
4.3
4.1
3.3
3.6
3.5
Money Supply (M2) as % of GDP
13.0 
11.9 
12.5 
13.9 
13.9 
14.9 
State Budget as % GDP
 
 
 
 
 
 
†Total budget revenue as % GDP
17.0
16.1
19.1
18.0
18.6
19.1
of which: Tax Revenue "
10.6
12.3
13.2
13.9
14.3
15.0
†Total budget expenditures "
26.7
25.0
24.7
21.0
20.3
20.1
of which: Interest on public debt
2.9
1.8
2.3
2.5
1.6
1.1
†Deficit as % GDP
-9.8
-8.9
-5.5
-3.0
-1.8
-1.2
Debt and Debt Service
 
 
 
 
 
 
†Total debt outstanding as % of GDP
132.6
137.2
125.3
107.9
86.9
72.0
†Debt Service/exports
24.8
22.9
35.0
20.9
11.5
8.3
†Capital repayments as % GDP
6.5
7.2
11.5
4.9
2.9
2.2
Social Indicators
 
 
 
 
 
 
†Population (mln.)
4.86
4.92
4.96
5.11
5.27
5.43
†Poverty (% of population)
55.3
52.3
49.4
41.7
34.0
26.5
†Unemployment (% of population)
12.0
11.5
11.0
9.8
8.3
6.4
 
††††††††††† After a temporary deterioration in 2004 to -10.0 per cent, the balance of payments on current account is expected to improve gradually to -5.4 per cent by 2010. The account deficit would be covered through FDI and foreign borrowings. The improved situation with the current account and debt service should lead to stabilization of the exchange rate.
††††††††††† Gross reserves in terms of imports of goods and services, which currently stand at 4.1 months of imports, would decline to 3.5 months in the period between 2007 and 2010.
††††††††††† Debt service is expected to be high in the next three to four years. There is the risk that such a rapid decline in the level of debt may not be achieved and debt rescheduling may be unavoidable. The projection, however, is that official debt would be reduced from the level of over 125.3 per cent of GDP in 2001 to about 72 per cent by the year 2010. As a per cent of exports, debt servicing would improve from 35.0 per cent in year 2001 to 8.3 per cent in 2010. Debt repayment as a ratio of GDP would decline from 11.5 per cent to 2.2 per cent over the same period. These improvements in the external debt situation would be achieved through measures outlined in the strategy.
††††††††††† Effective implementation of the CDF strategy should result in higher growth of per capita private income and in its improved distribution (mainly through the improvement of the situation in the rural sector).
††††††††††† The projections show that per capita private consumption in nominal prices would increase by about one-third over the ten years to 2010. A balance must be struck between the need to generate savings and investment while ensuring that average consumption, particularly for the poorest people in the population increases sufficiently so as to bring the level of absolute poverty down. Relative poverty is also expected to decrease steadily over the decade as the poverty level (as a percentage of the population) would decline from 52.3 per cent in the year 2000 to 26.5 per cent in 2010. The projections also show that the unemployment level would decline from 11.0 per cent in the year 2001 to 6.4 per cent by the year 2010.


(1) The macroeconomic projections in this table are derived using the World Bank's Revised Minimum Standard Model (RMSM-X)