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




Kyrgyzstan Review, 10 years ago




I. Stimulating Private Enterprise

430. Dynamic development of small and medium enterprises (SMEs) is the key priority area for poverty reduction in the country. One of the main features of the SME sector is its employment generating capacity. Nearly 60 percent of the population is currently engaged in the SME sector. The sector, producing over 43 percent of the national product, is constantly growing. In the year 2001 compared to 2000, the number of SMEs increased by 25,800 entities (11.5 percent). While the number of employed in the same period increased by 58,500 people or 6 percent.
 
431. A number of concrete steps have been taken by the State to stimulate private enterprise in the country. Much work has been done to refine the legal framework regulating private enterprise. One of the principal actions has been adoption of the Law on Protection of the Rights of Entrepreneurs, has become the key legal document promoting the development of the private enterprise.
 
432. Many measures have been directed at streamlining and curtailing the system of permits. These include amendment of existing legal instruments and adoption of several new ones that all together facilitated a reduction in the number of licenses by almost ten times (down to 30 types), as well as streamline procedures and reducing the waiting period. Several rules have been approved to eliminate the conflict of interests in the area of state regulation of private enterprise. In accordance with these rules, entities operating under a certain license cannot issue licenses for the same type of activity to other entities.
 
433. Other developments have included introduction of a differentiated taxation system for SMEs; reduction of profit tax for legal entities from 30 to 20 percent; reduction and differentiation of individual income tax down to 10 and 20 percent; cutting the insurance contributions to the Social Fund from 29 to 25 percent. The list of activities for which a simplified system of patent taxation applies has been expanded. Moreover, those entities paying tax on a patent basis are exempt from inspections for the patent validity period. An automated information system has been developed to monitor inspections and analyze the activities of inspectors.
 
434. A one-stop-shop mechanism has been introduced for official registration of legal entities. Measures have been taken to rationalize the activities of state inspection agencies, including adoption of a unified order and inspection procedure. A one-year moratorium has been announced on adoption of new legal instruments that limit business activities.
 
435. Due to the still excessive control over business activities by state agencies and corruption, the environment for development of private enterprise remains restrictive.
 
436. The inadequate financing infrastructure in the Republic does not satisfy the need of SMEs for low cost and long-term financing. Credits provided by commercial banks, including those flowing from international donors, are not attractive for SMEs because of high interest rates, hard currency repayments, complicated procedures, short period of lending and other reasons.
 
437. In spite of the measures taken on reduction of the tax burden, general tax rates remain high while complicated administration create opportunities for corruption. The barriers created by the neighboring countries for transit of cargo on their territories create additional costs.
 
438. Entrepreneurs are weakly associated and have not learned to effectively defend their legitimate rights. Professional and managerial skills of entrepreneurs are yet to improve. Marketing information is not readily available to entrepreneurs.
 
439. The main goal in the private enterprise sector is to create an enabling environment for active and dynamic development of small and medium enterprises with the aim of increasing employment and reducing poverty. Priority measures for creation of the enabling business environment include:
Optimal minimization of state intervention into SME activities.
Improvement of fiscal policy to stimulate activity of private enterprise.
Provision of SMEs with borrowing and investment resources.
Development of private enterprise support services (information, etc.).
Promoting all forms of producers associations.
 
440. Stabilization in the private enterprise sector will be ensured through the following mechanisms:
Revision of the principal state functions on regulation of business activity to assess their relevance, adequacy, and effectiveness. Optimization of the system of permits (licenses, certificates, permits) and elimination of duplication and irrelevant regulative norms. Streamlining of control and inspection function of state regulatory agencies. Increasing the responsibility of officials for unlawful intervention into activities of private sector business enterprises. Only standards related to security and health issues must remain.
Universal introduction of a simplified taxation system for business enterprises. Reduction of the tax burden with concurrent expansion of the taxable base. Rationalizing the customs control system with the aim of simplifying procedures and reducing their cost to protect the interests of domestic producers. Improving the legal framework and strengthening the system of enforcing the legal instruments regulating lending operations and the use of collateral. Gradual introduction of a mechanism of pledging land as collateral.
Increasing the availability of financing to SMEs operating in priority areas of economic development. Expanding SMEs access to capital funds and unclaimed property (after bankruptcy procedures), leasing of equipment and technical know-how. Expanding financing, including through international credit lines, by reducing interest rates, simplifying the procedure of reviewing applications and issuing credits. Developing the microfinancing system.
Finding ways of eliminating barriers related to transportation costs for transit of cargo through the neighboring states. Strengthening private enterprise support infrastructure in regions.
Providing SMEs with accessible information services. Creating a system for training and qualification upgrading of entrepreneurs in business planning, marketing, management, finances, etc.
Assisting with establishment and development of private enterprise support associations in order to coordinate the decision making related to the private enterprise.
 
441. Further development of SME sector envisages:
Further refinement of the taxation system to stimulate the legal private enterprise.
Development of the legislative framework to support alternative types of investment (leasing, franchising, venture funding, etc.).
Development of a system for informational, innovative, and technical support to the private enterprise.