The current situation
314. Over the period 1999-2001, state budget expenditures decreased from 29.7 percent of GDP to 21.9 percent of GDP. So significant a reduction was necessary so as to reduce the budget deficit and to meet obligations on external public debt. Practically all items of government expenditure were affected, including expenditure for social needs (including education, health care, social insurance and social protection) that have been reduced from 9.5 percent of GDP to 8.0 percent of GDP. It is clear that further reduction of such expenditures cannot be made, as this will create a threat to the accumulation of human capital, a major requirement for the long-term development of the nation. It would also severely undermine the efforts to reduce poverty.
Reduction in the volume of budgetary resources has raised a serious question as to their efficient use. The absence of program budgeting, inadequate budget transparency and accountability of budgetary organizations, still weakly targeted social programs (notwithstanding the efforts undertaken recently in this direction), incompleteness of social insurance reform (including that of the pension system), all reflect the fact that limited budget resources are not always spent efficiently. A significant portion of the cost of government services to the community is financed by special means (i.e., by direct payment for services to the population rendered by budget funded organizations), that in practice means weak state control over the transfer and use of the funds involved.
315. All this is also applicable to the Public Investment Program (PIP). Its reduction in 1999-2001 by 4.0 percent of GDP
aggravated a long-standing issue on prioritization of the projects included in the PIP, their economic and social impact and efficiency of the resources used. An insufficiently developed mechanism for prioritization of PIP projects leads to systematic under-execution of the plans for co-financing from the state budget. Project management, decision making on clarification of project goals and design, changes in implementation periods and project scale, coordination with donors, are all carried out slowly that do not allow for a promptly response to changes in the needs of social and economic development. Due to the incomplete integration of the PIP into the national budget, an adequate level of transparency and efficiency of expenditures has not been ensured.
Major directions of government expenditure policy
316. According to medium term budget projections for 2003-2005, total expenses of the state budget will first increase to 23.2 percent of GDP, and then decrease to 21.4 percent of GDP by 2005. This is closely connected with the policy of macroeconomic stabilization that assumes, in particular, a reduction in the budget deficit and reflects the presence of two major tendencies envisaged in the policy of government expenditures: an increase in expenditures for social needs and a reduction in the scale of the PIP. A reduction in total government expenditures will also reflect a reduction in external debt servicing payments.
It is planned that budget expenditures in the social sector will be increased from 9.0 percent of GDP in 2003 to 9.6 percent of GDP in 2005. During these years, expenditures will be approximately as follows: 3.7 percent of GDP for education (3.4 percent in 2002), 2.5-2.7 percent of GDP for health (2.2 percent in 2002), and 3.0-3.1 percent of GDP for social insurance and social protection (3.0 percent in 2002). The most important measures for increasing efficiency of expenditures in this sector and for raising the quality of services provided include:
Increase of wages to workers with a gradual transfer from the uniform wage structure to a contract-based system of wages.
Allocation of sufficient budgetary resources to educational and medical establishments, not only to pay salaries and utility bills, but to purchase necessary supplies (medical preparations, textbooks, equipment, etc.), that will be possible as a result of the reforms; this also assumes reduced expenditures on activities with low priority.
Annual increases in the size of state benefits to the poorest strata of society (disabled, elderly citizens, those who do not receive pensions), by increasing the guaranteed minimum level of consumption; continuing the work on social documentation that will allow better targeting of social assistance provided to the community.
Streamlining existing social benefits
, their transfer to the principle of targeted allocation and transformation into monetary payments; adopting the Law on State Social Benefits in the Kyrgyz Republic, aimed at providing support for those in the community who really need such support, and envisaging a reduction in the number of benefits granted.
Continuation of the experiment with lump-sum payments of the annual amount of the uniform monthly benefit, in order to provide the poor with starting capital to initiate entrepreneurial activities.
Gradual transfer to accumulative financing of the pension scheme and, as a result, gradual reduction in the subsidies allocated to the Social Fund from the state budget.
318. In the light of the need to continue fighting against international terrorism and extremism, expenditures on public order and security will be increased from 0.9 percent of GDP in 2002 to 1.2 percent of GDP in 2005. With regard to this sector, it is planned that the reforms in the judicial and law enforcement systems will be continued, aimed at optimization of law enforcement structures, reduction of duplicating subdivisions and ensuring the observance of human rights. Expenses for defense will remain at the level of 1.4 percent of GDP; it is intended to conduct the reform on transfer to a contract-based military service, as well as to carry out modernization and technical equipping of the Armed Forces.
319. Expenses for public administration will be reduced from 2.8 percent of GDP in 2002 to 2.5 percent of GDP in 2005. This reduction shall take place within the framework of the governance reforms currently being conducted. A staged strategy will be developed and implemented aimed at increasing salaries to civil servants with a parallel rationalization of their numbers. Financing will be provided for measures to change the structure of government, based on a comprehensive functional review of ministries and departments.
320. Government expenditures in the fuel and energy sector and the housing and communal services sector of the Republic will decrease from 0.7 percent of GDP for each of the sectors in 2002 to 0.1 percent of GDP and 0.4 percent of GDP, respectively, in 2005. In the long term, it is planned to transfer to full payment for these services by users and cessation of budget subsidies. This will reflect structural reforms being implemented in maintenance and housing utilities organizations that are aimed at:
financial rehabilitation of these sectors and attraction of investments;
reliable and quality provision of services in these sectors at affordable prices;
creation of a transparent and competitive environment in the energy market;
conducting an efficient tariff policy based on the principles of user-pays in the energy sector and housing and communal services;
user-pays will be attained by developing a more effective tariff structure and elimination of cross subsidizing for various categories of consumers, reduction of technical and commercial losses, development of competition with simultaneous creation of a mechanism providing adequate targeted assistance to socially vulnerable strata of the population;
gradual transfer of boilers of the Kyrgyzzhilcommunsoyuz (Kyrgyz Housing Communal Services Union) to local self-government or their privatization, implementation of the programs for reducing the costs connected with generation and supply of thermal energy by boiler units of the Kyrgyzzhilcommunsoyuz by conducting comprehensive resource saving measures, transfer of the boilers from expensive to cheaper and local types of fuel;
introduction of energy “passports” for budget funded organizations, that will set actual financial limits on consumption of electric and thermal energy by them; budget funded organizations will be given the right to use the resources allocated under the item “Utility services” for carrying out energy-saving measures.
Such changes in the structure of government expenditures will allow the budget to be socially-oriented and provide more effective and precisely targeted social assistance to the poor, promote market reforms in the economy and improve effectiveness of public services.
The Public Investment Program
321. A key aspect of fiscal policy will be reduction of expenditures for the PIP to the level of 3 percent of GDP by 2005
. The strategy of the Government on PIP financing envisages a complete refusal of commercial loans. Attraction of extremely soft loans will not be on the scale of previous years. Formation of the PIP will be based on the principles of strict selection of a limited number of new investment loans. Restrictions on the volume of borrowing will be determined by the need to reduce external state debt and the budget deficit, and as formulated in the Poverty Reduction and Growth Facility (PRGF) adopted by the Republic. According to this program, the PIP volume shall be reduced from US$ 90 million in 2002 to US$ 65 million in 2005. When selecting investment projects to be included in the PIP, the following criteria, that establish their priority, will be strictly observed:
· compliance with the CDF goals and objectives;
· strategic importance of the project and its ability to promote attraction of private and foreign direct investment; and
· internal rates of return of not less than 12 percent and economic rates of return of not less than 10 percent.
The most important priorities of the PIP will remain: development of the transportation system, telecommunication and energy infrastructure, agriculture and processing of agricultural products, mining industry, irrigation, as well as further development of the social infrastructure (health care, education and culture). It is planned to carry out the rehabilitation of and to complete the construction of regional and interregional electricity transmission lines and hydroelectric power plants.
Improvement of the Budgetary System
322. In order to improve the efficiency with which government expenditure is made, it is necessary to implement a series of measures to change the procedures for budget planning, allocation of budget resources and control over their use. It is planned that during 2003-2005, the transfer to a system of program budgeting will be fully completed. The basis for budget planning will be a medium term projection, and it is planned to improve the methodology of its preparation. The information system of the Treasury will be strengthened, as a result of which transparency and accountability of budgetary organizations will be improved, and the accuracy and timeliness of budgetary reporting will be perfected. At important step in this direction will be abolition of “special means” of financing budget funded activities and a complete transfer to the state budget of all funds received by budget funded organizations for rendering paid services. Strengthening financial reporting by budget funded organizations will be promoted by improvement of internal and external audit. International Government Finance Standards will be adopted gradually. Within the period under consideration, the PIP will be fully integrated in the budgetary and treasury procedures of the Ministry of Finance. The effectiveness of work on budgetary system reform would be increased if grant-based technical assistance can be attracted for these purposes.
The system of budget relations between central and local government will be further improved, particularly at the lower levels of local administrative bodies, allowing improvement in local budget management and the quality of work of local budgetary organizations. Budgetary financial resources and authorities will be reallocated between the central government and local administration bodies in such a way that the capacities and responsibilities of local governments will increase significantly. In particular, a mechanism for stimulating (shared) grants will be introduced starting from 2003. This form of financing has been envisaged in the existing legislation but it has not been applied in budgeting processes until now. Such a mechanism shall become an important instrument for mobilization of resources at the local level, adaptation of government expenditure programs to the needs of the poor.