405. The medium-term strategy for economic development that has been designed to reduce the level of poverty in the Kyrgyz Republic, depends largely on the nation’s ability to mobilize domestic savings and private capital and to attract substantial amounts of foreign direct investment into the private sector. This must be achieved if the rate of economic growth is to be sustained by an adequate level of investment since, in the interests of its public debt management, investment by the state sector through the budget and the Public Investment Program must be curtailed. Macroeconomic stability is a necessary precondition for the maintenance of investor interest and, with it, economic growth and development. Other factors are dealt with below.
In order to attract direct foreign investment and mobilize domestic financial resources, Kyrgyzstan will try to develop its comparative advantages and eliminate internal barriers for development of private enterprise.
Investment advantages of Kyrgyzstan
406. Kyrgyzstan’s geographic location has provided the nation with some comparative strengths such as pleasant natural surroundings and climatic conditions, as well as an ecologically pure environment. The Republic has the potential for the development of energy, mining industries, agro-industry and tourism. The country has a small market, so that any successfully implemented investment project can make a significant contribution to the development of the whole economy and provide the investor with the possibility of “quick wins”. Many sectors of the economy have not been efficiently developed, so there is almost no market competition. It is therefore possible for the investor to quickly increase production efficiency and reduce costs by replacing old technologies that still exist in key sectors of the economy.
The presence of large neighboring countries, provides future potential for investors to expand the market for their goods and services. Cheap and qualified labor can provide investors with good opportunities for making profits. Adaptability of Kyrgyz citizens to change provides investors with an opportunity to use the human resources of the country effectively when applying modern technologies and new methods in management. These advantages make the country attractive to potential investors.
407. In recent years, the Republic has done a lot to create a conducive investment climate. Some of the major achievements are as follows:
· political stability;
· consistent pursuit of market reforms and macroeconomic stabilization;
· a liberal trade regime and an unrestricted foreign currency exchange and capital markets have been put in place;
· the Republic is a member of the World Trade Organization;
· a liberal investment regime, under which almost all sectors of economy are open to foreign investors;
· private land ownership has been introduced;
· a road network covers the whole country and is being gradually improved; and
· privatization and development is proceeding in important sectors of economy such as telecommunications, energy, transport and tourism.
Impediments to investment in the private sector
408. Despite these advantages, there are a number of difficulties that need to be resolved if both domestic and foreign private investment is to be encouraged in the Republic.
The development of Kyrgyzstan has been effected by a number of external challenges. First, there was the crisis that took place in 1998 in Russia, a country that is the major trading partner of Kyrgyzstan. Then there were the events of 1999-2000, connected with invasion of guerillas in the southern parts of the country. These events had an immediate impact on direct investment inflow, the volume of which decreased from US$ 135.8 million in 1998 to US$ 93.8 million in 2001.
According to a UNDP study, the index of economic freedom in the Republic is on the same level as that of China and Russia. As in the case with all transition economies, infrastructure, trade, institutional, administrative and legal issues, as well as informational barriers impede promotion of investment in Kyrgyzstan. The domestic market is small, the country is remote from international railways and shipping routes and faces barriers to its international trade through dumping and restrictive policies of neighboring countries. Transportation costs, combined with regional transportation problems, underdeveloped economic infrastructure represent only some of the economic difficulties faced by the country when attracting direct foreign investment.
State institutions dealing with investment policy are weak. General and financial managers are not well qualified. There are insufficient numbers of professionally developed sectoral and regional strategies, as well as attractive investment projects. These factors result in insufficient use of domestic savings and a small volume of domestic investment. Low incomes and a lack of confidence in the domestic banking system result in low levels of private investment in the country at present. Existence of the informal “shadow” economy diverts capital away from priority areas of investment.
409. Unfortunately, few in the world know about Kyrgyzstan. Many maps still bear old names of the country and its capital city. Kyrgyzstan is more associated with the former USSR. There are not enough books, brochures, articles, web sites about the country, and weak public relations campaigns. The policy on attraction of investment to the country and its regions is not yet adequately developed.
410. Studies have revealed that the major deterrent to both foreign and local investment in Kyrgyzstan is the instability of the legal framework in the area of investment activity. Regular amendments to the Tax Code, changes in the Law on Foreign Investments in the Kyrgyz Republic, revocation of a number of investment initiatives of a taxation and legal nature, have significantly reduced the attractiveness of existing free economic zones (FEZs). Heavy taxation does not stimulate investment in priority sectors of economy, problems with export-related VAT refunding due to limited budget resources, the presence of off-set operations in the financial system, ambiguity and inconsistency of customs legislation, are all factors that discourage investors.
The level of reinvestment in the country is very low because it cannot depend on the system for protection of investment.
411. Official regulation of direct investment does not permit ready and quick entry of investors into the Republic. A large number of expensive licenses and permits that are subject to annual renewal represent an additional financial burden on investors. The existing state regulatory and licensing system is a serious impediment to the creation of a conducive investment climate. Some of the most significant barriers are the problems of technical regulation (technological standards on products and evaluation of compliance).
412. Excessive regulation in the economy leads to growth of corruption. According to surveys conducted by international organizations, the level of existing corruption in the country sometimes neutralizes all the efforts taken by the State to attract foreign direct investment. Corruption is present in judicial, law-enforcement, financial, customs instrumentalities, as well as in taxation and other public administration bodies.
Policy reforms relating to investment
413. Starting in 2001, the Kyrgyz Republic began formulating a new investment policy. Annual investment summits are key events, defining major directions of state policy for the attraction of investment, and developing proposals for immediate action on elimination of investment barriers. The summits are held with the participation of the President of the Republic, key managers of economic agencies, as well as involvement of large-scale direct foreign investors. The first such summit, held in July of 2001, specified basic conceptual directions of the new policy on attraction of investment in the form of a range of measures on elimination of existing barriers and strengthening of the marketing policy. In order to coordinate implementation of decisions taken at the summit, the Advisory Council on Foreign Investments was established and the office of a special representative of the President of the Kyrgyz Republic on attraction of foreign investments was introduced in August of 2001.
414. As a result of the decisions of the summit of 2002, the new draft Law on Investments in the Kyrgyz Republic, regulating activities of investors, has been prepared and submitted to the Parliament. It establishes basic principles aimed at improvement of the investment climate. It ensures a fair and equal investment regime for both local and foreign investors, as well as guarantees on protection of the capital attracted by them. A one-year moratorium has been introduced on adopting new regulations and laws limiting business activities of entrepreneurs. The “One Stop Shop” system (a government agency designed to facilitate foreign investors’ entry into the Republic) has started functioning.
415. In July of 2002, the participants of the second investment summit discussed progress with the implementation of the new national investment policy of the Kyrgyz Republic, adopted specific measures on improvement of the investment climate in the country, and increased the degree of accountability of government entities. This new approach to formulation of the investment policy provides good opportunities for future attraction of direct investment to the Republic.
416. The major goal of the new investment policy is creation and utmost use of the comparative advantages of the nation in order to ensure active attraction of direct investment.
417. For the dynamic development of Kyrgyzstan, there is a need for an abrupt increase in foreign direct investment in priority areas of the economy: energy, mining industry, processing industry, tourism, information and telecommunication spheres. Employment, income and the future prosperity of the people of Kyrgyzstan will depend on their ability to compete in international trade and attraction of investment from the international market. Investors coming to Kyrgyzstan should develop a feeling of economic freedom, impartiality and effectiveness of the legal system, intolerance of corruption and international trade standards. It is necessary to strengthen confidence in the Republic and to strengthen motivation for attracting investors. This applies equally to domestic as well as to foreign investors.
418. For the purpose of further liberalization of the country for investors Kyrgyzstan will be applying an “open door” policy in order to attract direct investment. Amendments will be introduced to the legislation on migration, ensuring a liberal visa regime for potential investors, to optimize the regulations on entry, exit and stay of foreign citizens.
419. The State will actively continue the process of privatization in order to reduce sectoral barriers and functional restrictions for the inflow of foreign capital. Programs on development of sectors and regions will be prepared. It is necessary to establish databases on specific investment projects in energy, mining processing industries, tourism, information and telecommunication spheres, as well as in the services sector. These projects will be very attractive to direct foreign investment. The country’s economic infrastructure will need to be further developed and improved.
420. A clear and transparent legislative base will be established and further improved to ensure a conducive investment climate to provide for a sustainable basis for investment policy, legal guarantees for investors and protection of their capital. Measure will be taken for a maximum reduction and simplification of the regulatory system and clear and transparent procedures on administrative regulation will be developed that will be strictly complied with by the responsible public administration bodies. Administrative regulations on foreign direct investment shall be adapted to ensure free and quick entry of investors into the Republic. It is necessary to bring technical standards into compliance with the standards set by the WTO and other international organizations.
The regulatory and legal base for the insurance industry will be improved. The presence of sound insurance institutions will allow investors to come confidently into the market of the Republic to conduct economic activities. This will also create one more future sector of the market for financial services capable of attracting the funds of foreign investors and mobilizing domestic resources.
421. It is necessary to secure reinvesting of capital. The State should guarantee protection against expropriation of investors’ funds and deprivation of opportunities to use the results of investing. It should also guarantee that investment disputes between the State and investors will be considered impartially and fairly. Such guarantees should be confirmed by law and be strictly observed. It is necessary to strengthen the investors’ confidence in the Republic’s courts and judicial proceedings in general.
422. In addition, the situation will be improved by the signing agreements on protection of investment with the countries of potential investors. Protecting the investors’ right and reduction of possible risks when they undertake investment in the Republic, will become a firm characteristic of the attitude of Kyrgyzstan towards investors.
423. To promote investment necessary and possible amendments will be introduced into tax legislation to increase the level of neutrality of the tax system in relation to foreign and local investors, as well as to stimulate inflow of investments into the country. Certain amendments will be introduced to customs legislation for the purpose of its simplification, transparency and clear interpretation.
424. The Republic will continue to develop effective free economic zones (FEZs), using them as export centers and centers of investment growth. It is necessary to bring the activities of free economic zones into line with international standards. In order to improve the attractiveness of FEZs that already operate successfully, incentives and motivation shall be provided through improvement of the regulatory and legal framework. In future, Kyrgyzstan will have to use FEZs to stimulate inflow of new technologies, output growth and production for export of modern products.
425. It is necessary to strengthen institutions attracting direct investments, attaching a priority to quasi-public structures. Special attention will be paid to providing training for professional managers when preparing investment projects and carrying out marketing for them.
426. Against the background of measures to improve the investment climate, the most important task will be to create the image of Kyrgyzstan as a small country with very attractive possibilities for capital investments. This implies giving top priority to the development and continuous conduct of public relations campaigns to spread information about investment opportunities of the country.
To address these issues, a plan of informational work for 2002-2005 will be developed for coordination of activities of all ministries and government agencies on presentation of investment opportunities.
427. It is intended to develop the office of trade and investment representatives of the Republic abroad that can be entrusted with these tasks.
428. An important measure will be establishment of a specialized analytical center of expertise to provide assistance with the development of business plans and projects. A major goal of this center will be improvement of the literacy of the local business population, as well as assistance to entrepreneurs on further development of their business plans . Another function of the center will be reviewing the regulatory and legal framework for further improvement of the legislation related to investment activity and coordination of national priorities with sectoral and regional ones.
429. Ensuring inflow of foreign direct investment will provide the impetus for the development of the Republic’s economy. It will also serve to stimulate domestic direct investment. Solution of the problem of mobilizing the informal savings of the private sector will permit an increase in the effectiveness of the operation of the economy and stimulate creation of new jobs, thus making a significant contribution in the process of reducing poverty in the country.