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: / Strategies / Comprehensive Development Framework for the Kyrgyz Republic (2001)




Kyrgyzstan Review, 10 years ago




4.3. Sustainable Economic Growth and Development

The Kyrgyz Republic will strive to establish effective market economy and achieve sustainable economic growth and development. This will allow to use all the available human, natural, material and financial resources and considerably reduce poverty. The private sector will be the main engine of growth, while the state will be primarily concerned with creating a favorable working environment through the achievement of macroeconomic stability, appropriate institutional arrangements, the development of essential economic infrastructure and the provision of essential social services. Apart from poverty, the most urgent problem that the Republic will have to solve is external public debt that has grown to over 130 per cent of GDP. A stable macroeconomic environment and the further development of institutional structures will encourage the emergence of a reliable financial system that will encourage the accumulation and efficient allocation of domestic savings as well as attracting direct foreign investment. As poverty is reduced and living standards generally rise, the increase in domestic demand, coupled with policies that promote export, should help to make the Republic a more attractive place for foreign investment. Special attention will be directed to the development of those sectors of the economy that can make the greatest contribution to poverty reduction. The most important for them is the agriculture; tourism and telecommunications as the sectors with biggest potential.
With a view to accomplish the tasks of economic development, efforts of the state and the society need to be focused on addressing the issues of primary importance set out below.
 
4.3.1. Macroeconomic stability and GDP growth
 
The objectives set for social and economic development of the country can be achieved only if economic growth is not less than 5 per cent a year on average. To succeed, this will require achievement and maintenance of macroeconomic stability through the appropriate conduct of monetary and fiscal policies, as well as a range of other internally agreed public finance policies aimed at the promotion of development in the production sectors (agriculture, industry and services) of the economy. Chapter 5 of this report considers the macroeconomic implications of the strategy.
 
4.3.2. Monetary policy
 
Monetary policy will contribute to economic growth and the reduction of poverty by working towards price stability and the further orderly development of the financial market, including the foreign exchange market. A steady reduction in the rate of inflation will be achieved by a generally tight monetary policy, bringing it down to a level of less than 5 per cent annually (as measured by the consumer price index), by the year 2005. Reforms and development in the financial sector as well as actions that reduce investment risks should, along with reduced inflation, allow for substantially lowered interest rates, thereby encouraging private sector investment in the production sectors of the economy.
One of the factors determining standard of price in the country is the exchange rate of som. The rate of exchange of the som against foreign currencies and the domestic price level are inter-related. The floating exchange rate policy based on supply of and demand for foreign currency in the domestic market, will continue. Stabilization of the national currency will, to a large extent, depend on improving the trade balance, the amount of direct foreign investments attracted into the country, an improved situation with regard to foreign debt and effective use of foreign assistance.
Taking into account the situation with the balance of payments the National Bank of Kyrgyz Republic (NBKR) will try to manage its international reserves so that they are maintained at a level of not less than three months of imports, other efforts will be directed at smoothing out short-run fluctuations in the rate of exchange of the som against foreign currencies.
The effectiveness of monetary policy will be improved as a result of measures to deepen and enhance domestic financial markets, rehabilitate and strengthen the banking system, improve monetary policy instruments, as well as by improving the extent to which the economy becomes monetarist by forcing out barter payments and monetary surrogates.
The NBKR will also make efforts to raise public awareness of its goals and the nature and results of monetary policy actions, bearing in mind that, for policy to be effective, the public and market participants must have confidence in the measures taken. Greater openness of the NBKRs activities should be achieved through an increase in the number of studies and publications made explaining its activities, using modern information technologies.
 
4.3.3. Fiscal policy and public debt management
 
Fiscal policy includes budget expenditure policy, policies relating to taxation and other state revenues, and public debt management. The main aim of budget policy is to rapidly reduce the deficit in the state budget. Reduction of the budget deficit should be achieved by increasing budget revenues in both absolute terms and as a proportion of GDP, as well as by reducing the level of budget expenditures as a proportion of GDP. This should lead to less need for official foreign borrowings to finance the budget deficit, freeing up such resources to finance basic development and promote macroeconomic stability.
In dealing with the problem of the accrued state debt, it is critically important for the Republic to meet its obligations on debt service, because violation of this principle will undermine its reputation and make it more difficult to attract foreign direct investment. At the same time, the Kyrgyz Republic cannot allow debt servicing to jeopardize vitally important state expenditures for supporting the social sphere and security of the nation. This dilemma will be resolved by the adoption of methods such as debt restructuring; debt swaps for equity in state-owned enterprises; repurchase of the least beneficial liabilities with funds released by privatization; and new borrowings, based on only very preferential terms. However, the main way to cope with the states debt problem must be to substantially increase the revenue of the state budget.
To increase budget revenues it is necessary to undertake a courageous restructuring of the tax system, which will include: reduction of tax rates, broadening of the tax base; simplified taxation for small and medium size businesses; improvement of tax administration to overcome endemic corruption; abolishing individual tax privileges. In the structure of taxation an emphasis will be on indirect taxes, which are easier to collect and partly shift the tax burden onto the shadow economy. Inefficient taxes such as those that are tied to output volumes will be abolished and replaced by taxes such as property and mineral resources taxes. It will be still necessary to create legislation related to product sharing agreements and other incentives that will create favorable conditions for increasing exports and attracting investments in the mining and other industries. Much attention will be paid to providing stable and transparent tax legislation. Tax reform, as well as the strengthening of the financial sector and improvement of the business environment, should encourage the transition of economic activities from the shadow economy to open and officially registered activities that, in its turn, will expand the base for collecting taxes.
Reduction of budget expenditure should be accompanied by increased efficiency in expenditure management, concentrating resources on providing only those services that cannot be provided directly by the private sector, especially basic services in education, healthcare, and targeted social protection. Measures will be taken to ensure consistency of fiscal policy with monetary and other economic policies of the government. Budget expenditures will be planned in a longer than one-year time frame, and the planning process will be disciplined and transparent. A much higher level of financial probity, accountability and transparency will be demanded. This will be facilitated by full adoption of international accounting and audit standards. Strict application of the Law on Procurement will improve the way in which the state acquires goods and services.
An important area of reform that should improve expenditure efficiency will be in the control and subsidization of price and utility tariffs aimed at supporting disadvantaged groups. Such controls and subsidies (often in the form of overlooked non-payments) will be reviewed and removed, and substituted by a system of targeted compensation payments to the most vulnerable groups of the population.
Steps will be taken to establish real fiscal decentralization. In pursuing this goal, financial resources made available to local authorities will be increased by transferring a number of taxes for their full disposition (e.g., land and property taxes) and by changing the scheme of allocation of tax revenues between national and local budgets. This will heighten the efficiency of the tax system and appreciably improve tax administration. At the same time, the amount of grant funding transferred from the national budget to local budgets will be substantially reduced. In addition, local budgets will assume full responsibility for financing those public expenditure items that have been transferred to local government as a result of the reforms generally in the administration of the state. In order for this to succeed, local authorities must first develop the necessary skills and local structures, and maintain high standards of probity in the management of their finances and of the activities for which they are responsible.
The main directions of economic, monetary and fiscal policies will be annually reviewed and adjusted taking into account the situation in the economy. The Government and the National Bank of the Kyrgyz Republic will announce the developments in an annual joint presentation.
 
4.3.4. Foreign economic policy
 
The objective in the area of foreign trade and foreign economic cooperation will be to reduce the external current account deficit by increasing exports and reducing imports of goods and services. The Republics membership in the World Trade Organization and the potential for regional economic cooperation will be actively used to support the foreign economic policy. In order to increase the degree and extent of economic cooperation with other countries, it will be necessary to promote free movement of goods and financial resources across borders as well as the free movement of people pursuing their legitimate activities. The state will consistently promote the interests of Kyrgyz enterprises in foreign markets. Activities in this directions will include representing their interests in international relationships, providing them with information on trading and investment opportunities abroad, rendering legal support, simplifying documentation requirements, and introducing tax incentive for exporters. In the sphere of imports the emphasis will be made on encouraging inflow of investment goods and ensuring competition in the domestic market.
An efficient and accountable customs service is an essential element in both the promotion of external trade relations and the efficiency of the tax system. Immediate and fundamental improvement in the operation of the customs service is required to strengthen its technical capacity, legal basis, organizational structure and the quality of its personnel. Such improvement will help to reduce the level of smuggled goods and uncontrolled movement of narcotics, thus fostering the development of competitive domestic industry and contributing considerably to state budget revenue.
 
4.3.5. Investment policy and the Public Investment Program
 
The emphasis of the strategy for achieving sustainable economic growth and social development must shift from official borrowing overseas to direct investment. Foreign direct investment is particularly important because it injects new capital into the economy, introduces new technologies and management practices, and opens up new markets abroad. If business activity in the private sector is to become the main engine of growth, a favorable investment environment must be created in order to encourage greater domestic and foreign investment in Kyrgyz enterprises. The creation of such environment implies macroeconomic stability, transparent and efficiently functioning legislation that genuinely protects property and contract rights, a sharp reduction of state regulation and its associated corruption, reliability of the financial system, reduction of tax burden for investors, provision of equal rules for domestic and foreign investors, and general openness of the economy. Promoting investment opportunities in the private sector and providing businesses with information, consulting and other services should also encourage direct foreign investments.
The scope of the Public Investments Program (PIP), which is currently financed mostly from external borrowing, will be reduced and reoriented to support and establish only the strategically important production and social infrastructure. In selecting future projects, great attention will be paid to their financial, economic and social effectiveness. Grant-funded programs and projects will be accorded highest priority. Projects that attract concessionary financing will be chosen over others. Control over implementation of PIP projects (financed either on loan or grant basis) will be considerably strengthened and mechanisms of government co-financing optimized. The proportion of PIP activity financed by the state will be increased in order to offset the reduced level of foreign official borrowing and to maintain the general level of basic investment in the public sector. This will depend on very substantial improvements in the efficiency of tax administration and on a much-improved financial system in the Republic. Efforts will be made to involve the participation of Kyrgyz construction and other companies in the implementation of PIP projects on a competitive basis, and this will help to reduce some of the imports of goods and services required by these projects.
Efforts will be aimed at improving coordination and efficiency of foreign assistance under the medium-term assistance strategies being regularly developed jointly with the donor-countries and international financial organizations. In development of these documents Kyrgyzstan will appreciate intentions of the donor-countries and organizations to render support to program-specified goals and priorities established in the CDF.
At the same time, the state is to make substantial efforts directed at establishment of favorable conditions to promote foreign direct investment with a view to substitute the decreased volume of public investment.
 
4.3.6. Property rights and operation of the markets
 
In order to ensure the efficient functioning of the market economy, it is necessary to maintain a competitive environment and to create the appropriate legal and institutional framework within which various forms of property ownership and equity are established and protected. The key direction in addressing this issue is the reorganization, denationalization and privatization of state owned companies in the power, telecommunications, aviation, utility services, resorts and recreational facilities and other sectors of the economy (except for a limited number of enterprises that are of strategic importance). Privatization should attract large-scale foreign direct investment and provide needed funds for the state budget. Privatization will be completed on an exclusively competitive basis in order to attract foreign investors. Such investors must be capable of bringing in efficient management and provide for the profitable operation of the joint-stock companies thus created, as well as improving the quality, reliability and affordability of services delivered to the community. Throughout the reform of proprietary relations interests of the state are to be observed to ensure economic growth and required level of the countrys independence in strategic sectors.
It is very important to ensure that modern corporate management principles are used by all joint stock companies, providing maximum transparency and efficiency of management of state and private property. A legal framework and mechanisms will be developed to secure the protection of the interests of the state and individuals, particularly minority shareholders, and provide for participation of small and medium size enterprises in the privatization of the state property.
An active policy will be pursued to overcome the monopoly of the public sector in various appropriate areas of community administration, encouraging the gradual and orderly transfer of some regulatory functions to civil society (public associations and unions).
Another important task is in the further development and strengthening of the securities market. Further development is needed of the legal framework and infrastructure of the markets for financial securities in order to provide for the transparency, reliability and legitimacy of transactions, protection of investor interests, and compliance with international requirements and standards.
Further work needs to be done in developing land and real estate markets in order to realize the guarantees under the Constitution for private ownership of land with protection of proprietary rights, as well as the efficient and environmentally safe utilization of land. This requires the establishment of a centralized system for the registration of real estate ownership and independent private assessment of property values. The development of an active mortgage financing through financial institutions is essential for the expansion and development of the market for land. Bankruptcy procedures will need to be used appropriately in order to facilitate the reallocation and redistribution of assets to more viable activities. Such procedures need to ensure that the interests of all parties, including the state, are protected and dealt with on the basis of well-defined rules and procedures. The capacity for action against economic entities seeking deliberate bankruptcy will be strengthened. Arbitration courts decisions and rulings will be enforced.
 
4.3.7. Effective financial system
 
Actions to improve and to strengthen the banking sector will be undertaken in order to increase the public confidence, improve the quality, efficiency and reliability of banking services, and use financial potential of banks for development of economy. This will promote the mobilization of savings and transformation of savings into loans for individuals and business entities. Supervisory and regulatory functions of the National Bank of the Kyrgyz Republic will be strengthened through improvement of the practice of banking supervision and improvement of prudential requirements.
The following measures to be taken by the authorities will improve management in commercial banks and raise the importance of public supervision:
amendments to banking legislation that place the responsibility for bank failures on directors and managers of banks;
encouraging corporate management and introducing appropriate standards;
mandatory public disclosure of commercial banks financial reports;
At the same time, it will be necessary to improve the market environment for commercial banks. This will be done by encouraging competition (possibly through the introduction of quality foreign banking interests) and by creating equitable conditions for their operations and reducing the risks of lending by banks to the private sector. A background of macroeconomic stability will promote a decline in the cost of bank loans offered to business enterprises. The results of a stronger and more reliable banking system will be increased flows of financial resources to it, consequently to the business enterprises that use commercial bank services.
Mandatory insurance of national currency deposits will be introduced in order to increase the public confidence after improvement of the situation in the banking area. With introduction of private ownership on land, mortgage lending will become one of the promising banking services.
Another important direction of reforms is to create the legal framework and incentives for the development of non-bank financial institutions, particularly, insurance companies, private pension funds and investment funds. Special attention will be paid to the development of rural financial services, including support to micro-finance facilities and credit unions. In this regard, measures will be taken to provide maximum flexibility in the utilization by clients of various forms of financial assistance, while ensuring that the organizations involved remain viable and able to work closely with clients.
 
4.3.8. Effective real sector
 
The sectors of economy that improve employment, increase the populations income, and reduce poverty will be in the focus of the development strategy. Such traditional sectors as agribusiness, energy, mining, and transport infrastructure will be developed. Also, tourism and telecommunications being highly promising areas are going to be developed.
 
In agro-industrial sector, the state will focus on creating a market environment that will facilitate increased efficiency of production. This implies:
in the area of land and agrarian reform, urgent legislative and institutional support for land title registration and the market for land;
support of the processing industry (agribusiness) by creating attractive conditions for private companies;
promotion of private services that are able to provide farmers with quality machinery, seeds and other resources, including the development of supply and marketing cooperatives of small agricultural producers;
lifting all internal barriers for transportation of agricultural products;
institutional and informational support for exports of agricultural products that orient farmers at production of higher profitability crops and breeds;
development of agricultural extension services that provide farmers with training, consultation and information;
due maintenance of water supply and irrigation systems involving increased participation by water users themselves; for such purposes, the management and financing of the main elements of irrigation systems will be decentralized.
 
In the power sector the task is to develop further production of hydro energy, gradually increasing its share in the overall energy consumption of the country, as well as efficient use of the Republics own mineral energy resources. These results can be achieved by:
gradual reduction in the states participation, and an increase of the private sector role, in the development of the nations energy systems;
pursuing an energy tariff policy that encourages a greater degree of electric energy generation;
privatization of energy distribution companies;
undertaking administrative and technical measures to sharply reduce power losses;
development (with active involvement of private investors) of the domestic infrastructure for power transmission and energy resources transportation, which will enable to increase consumption of internal energy resources and reduce imports;
settling outstanding issues relating to water use with neighboring countries, increasing export of electric energy and using market principles in mutual settlements with neighboring countries;
increasing the number of the countries purchasing hydro electric power produced in the Kyrgyz Republic; and
examining the potential for domestic production of petroleum products, coal and nonconventional sources of power.
In the mining industry, the focus will be on production of steady volumes of gold and non-ferrous metals, opening up new deposits of gold, tin and wolfram ores, and exploiting deeper deposits in existing mines. At the same time, prospecting and exploration work for gold and other minerals will continue in prospective areas.
Development of transport infrastructure (transnational railways and major roads that form part of the Central Asian international transport corridor), will assist in overcoming the Republics geographic isolation from its main international markets and improve communication between different parts of the country. In aviation transport such aims should be sought through privatization and the creation of a competitive environment. Indeed, wherever possible, transport development should be attempted by promoting private investment, including direct foreign investment. The efforts aimed at implementation of the Great Silk Road doctrine are to be pursued as much as possible.
Much attention will be paid to the development of telecommunications facilities in order to provide the population and enterprises of the Kyrgyz Republic with access to new information on international economic, social and cultural matters. The growing potential of this sector will be realized through its privatization and by encouraging competition. Conditions have to be created to pursue comprehensive development of information technologies, which is to promote the republic into the global information community and enjoy advantages of integrating into the economic and social process.
Tourism should become an essential source of foreign exchange earnings and employment that will also stimulate agricultural development as well as other sectors of the economy. The state (including local governments) should make substantial efforts to provide informational and institutional support to tourism, to encourage investment in tourist facilities in order to bring them up to acceptable quality standards, ensure efficient and reasonable use of countrys natural resources. There is also a need to streamline visa entry conditions for foreign travelers and to coordinate tourism development programs with the neighboring countries.
 
4.3.9. Development of small and medium-sized business enterprises
 
Private entrepreneurship, including small and medium-sized enterprises play a key role in providing employment, reducing poverty, creating a competitive environment, and searching for new directions for profitable development. An important task of the state is to create legislative and institutional environment that maximizes the growth and strength of this sector of the economy. This includes:
Improvement of the legislative and regulatory framework, that provides for full and equitable protection of rights of entrepreneurs, guaranteed package of strictly justified minimum market based regulation of their activity, development of stable partnership relations between the private sector and the state, and creation of conditions for its free effective development and legalization.
Decisive measures on reduction of bureaucratic licensing and permitting procedures, application - based nature of registration of business entities, maximum possible reduction of inspections, elimination of opportunities for corruption by encouraging transparency, accountability, and harder control over executive authorities and responsibility of public officials involved in regulation of businesses.
Development of mechanisms of financial and credit support and insurance of businesses; efforts in this direction will include improvement of the tax legislation, simplification of the taxation procedures, reduction of tax rates; better access to credit resources allocated for support of the private sector from overseas official loans or funded from the republican or local budgets; larger volume of micro-financing at acceptable terms, and encouraging self - funding through commercial banks, credit unions, insurance companies and other market based institutions;
Promotion of institutional development of the private sector through: establishment of associations of producers; gradual transfer of some regulatory functions of the state to associations and professional unions; development of business infrastructure, which includes companies that provide businesses with quality consulting, managing, legal, innovative and other services; rendering state support in training and qualification upgrading of entrepreneurs, improvement of informational support.
Efforts will be made to protect the rights of domestic entrepreneurs doing business abroad and foreign entrepreneurs working in the Kyrgyz Republic by signing inter - governmental and international agreements and improving the domestic legislation.
The regular state mid -term concepts and programs for development of entrepreneurship will identify priority areas in development of individual, small and medium size businesses. To support these priority areas the state will allocate funding from the republican and local budgets, as well as use soft loans and grants provided to the country.
 
4.3.10. Development of regions, towns and villages
 
A long-term strategy is required in order to reduce the existing unevenness in social and economic development of the Kyrgyz Republic's regions. Six out of the countrys seven provinces currently require subsidization. The regional development strategy will have the following areas of focus:
Comprehensive rural development based on the development of the agricultural sector and the provision of essential infrastructure. This is fundamental to the CDF approach and, as already discussed in this report, a major element in the fight against poverty.
The development of small towns based on the stimulation of small and medium business enterprises that can expand existing productive capabilities and create new ones, based on locally available skills, raw materials and resources. This will aim at creating new job vacancies, consistent with the national strategy for improving social and economic conditions in the country as a whole.
Development of mountainous zones and remote areas with severe natural and climatic conditions, based on agricultural development and small and medium-size food processing enterprises, as well as exploiting such areas potential for tourism. This should foster the revival and development of traditional folk industries, use of local raw materials and natural recreational resources.
Long-term development programs in Bishkek and Osh, directed at full and efficient use of the available productive, scientific and cultural capacities, and their further development.
Gradual and consistent resolution of a housing problem, creation of environment for implementation of the constitutional right to dwelling.
 
New approaches will have to be developed to assist people living in rural areas, depressed small towns and remote areas.
 
The principles to be applied in program based approach for addressing the existing problems will be:
- grant economic preferences and privileges;
- encourage investment in small and medium enterprise development;
- stimulate entrepreneurship and self-employment through micro-financing and other financial means appropriate for agricultural and small business activities;
- provide remote and local communities with better access to communication facilities, road and transport services, fresh drinking water, repaired or newly constructed medical and educational facilities;
- provide extension services that will offer technical assistance and training to people pursuing productive activity in rural and remote areas.
Comprehensive solution of problems of regions, small town, remote areas and villages is also linked to creation of economic conditions that will generate employment; development of effective system of social protection; maximum reduction of internal migration of population from regions; reduction of crime and drug addiction.
Regions will have to create effective modern systems of local self - government designed to resolve problems of local development with available local resources. Measures aimed at strengthening the economic foundation of local communities will include transfer of some state property to municipalities, decentralization of budgets and introduction of an effective system of local taxes.
Comprehensive and consistent solution of the housing problem will be found within the framework of the Concept of Housing Construction in the Kyrgyz Republic until 2010, approved by decree of the President of the Kyrgyz Republic and the State Program of Housing Construction in the Kyrgyz Republic until 2010, approved by the Government of the Kyrgyz Republic in April 2001.
The main goal of the State Program is to provide the population with affordable housing through rehabilitation and organization of a housing construction system on the basis of funding from the state, domestic and external private investments, as well as mortgage lending system. It is still necessary to develop and implement measures for construction of municipal housing for socially disadvantaged and for citizens with low income. Efforts will be made to improve housing conveniences. Provisions are developed to improve housing and engineering infrastructures thus allowing to improve delivery of utility services to houses.
 
Although the main directions of the strategy have been presented separately, all of them constitute an integral entity. The desired impact from implementation of the strategy may be achieved only if all activities provided in the strategy are carried out in a coordinated manner simultaneously in all directions.