: / Strategies / National Poverty Reduction Strategy (2003-2005)

Kyrgyzstan Review, 10 years ago

L. Development of the Real Sector of Economy

466. According to experts of the Japanese International Cooperation Agency (JICA), that provides assistance to Kyrgyzstan on development of industrial policy, secondary or manufacturing industry should be considered in the context of other major production sectors, agricultural production and production of services. The level of the Republics development and therefore its poverty reduction capabilities, depends on these three economic sectors. The share of agricultural output in developed countries contributes only one to three percent of GDP, while the share of secondary industry is about 30 percent of GDP, meaning that the largest share of output is contributed by the services sector. Thus, the latter two sectors produce the highest value added in developed economies.
467. The history of the development of secondary industry in Kyrgyzstan since 1991 indicates that this sector has been a weak contributor to the formation of GDP. Secondary industrys contribution to the total volume of GDP dropped down from 27.4 percent in 1991 to 11.1 percent in 1996. Only after the development of the Kumtor gold deposit with the support of foreign direct investments in 1997, did gross industrial output start growing, its share reaching the level of 21.3 percent of GDP in 2001. At the same time, the situation in other major sectors of the economy has been stable and sustainable growth has been observed. Thus, the share of agricultural output in the total volume of GDP on average has been about 38 percent, while the share of services has increased from 31 percent of GDP in 1991 to 39 percent of GDP 2001.
468. It is worth noting that in the Republic, more than 50 percent of state budget revenue is provided by the manufacturing sector, the services sector contributes 35 percent, and the agricultural sector, only about 4 to 5 percent.
469. The process of privatization has been most successful in agriculture, where 99 percent of inputs of this sector to GDP are produced by the private sector. Private enterprises of the services sector, where many public utilities such as telecommunication and transportation services have not been fully privatized yet, or are at the initial stage of privatization, are responsible for 68 percent of the sectors contribution to GDP. As for the manufacturing sector, the given indicator is about 90 percent, and a decline in production by local private enterprises can be observed. This suggests that not much can be hoped for from existing manufacturing enterprises by the process of privatization, particularly as many of the privatized enterprises have become bankrupt due to non-competitiveness of their products.
470. It should be emphasized that, at present, the presence of one large investor in non-ferrous metallurgy (Kumtor), dominates the development of practically the whole manufacturing industry sector where, according to the data for 2001, its share was more than 45 percent of the sectors total contribution to GDP. This indicates that local manufacturing industry has not yet been able to adapt to market reforms. This view is also supported by statistical evidence on changes in the shares of large industrial sectors, such as energy, power and the food industry. From 1997 to 2001, the share of the energy sector fell from 13.2 percent of GDP to 11.9 percent of GDP, the power industry from 11 percent of GDP to 5.6 percent of GDP, and the food industry from 16.1 percent of GDP to 13.9 percent of GDP.
471. Thus, the structure of Kyrgyzstans economy, and the level of its development, are determined by:
A high level of dependence of the industrial sector on the performance of one large gold-mining enterprise, Kumtor, incompleteness of the sectors structural reforms, as well as the large share of the tax burden borne the sector.
Development of the services sector, where the private sector is gradually taking the initiative over the public sector, with tangible revenues flowing to the state budget.
Minimal receipts by the state budget from the agricultural sector, that is basically private and developing steadily. 
472. In future, it will be necessary to change the structure of the economy to shift its orientation to the development of services and manufacturing industry for a more stable and reliable reduction in poverty.
473. The State will ensure effectiveness of state regulation of the economy by curtailing its interference in the activities of enterprises. For the purpose of ensuring market-based regulation of demand and supply of goods and services, the system of state regulation of natural and permitted monopolies will be streamlined through limitation of control over prices, deals, the need to agree on the forms of contracts, etc.
474. The State shall support the development of the system of financing for industrial enterprises. Measures will be taken to improve the regulatory base of the banking system, as well as of other financial institutions, and the establishment of new banking institutions that are capable of ensuring the necessary volume of financing for the real sector on a long-term and affordable basis. The recently established Kyrgyz Investment Bank should become a striking example for other banks in terms of effective provision of financial resources to producers.
The system of government contractual work for production of goods of public importance will be used in order to promote the development of local enterprises.
475. Certain measures will be taken to provide local productive capacities with local raw materials, stimulate export of local goods and services.
476. The State will welcome strengthening of associations and cooperatives of local entrepreneurs and establishment of oblast-level industrial and commercial chambers. In particular, cooperation of small and large enterprises will permit the use of existing material resources more efficiently.
477. At present, the most significant issue is that of providing industrial enterprises with qualified staff. This implies ensuring a streamlined system of state regulation in the market for educational services aimed at providing priority sectors of the economy with professional staff. Germany will provide assistance in this area by establishing a Kyrgyz-German engineering and technical higher educational institution in the country.