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

Kyrgyzstan Review, 10 years ago

B. Economic Policy

Major directions of the economic policy
299. According to the CDF, the economic policy goal of the Kyrgyz Government is ensuring sustainable economic growth in the interests of poverty reduction. Therefore, economic regulation is to be aimed both at attaining high and sustainable rates of economic development, while the benefits of growth would flow to all layers of the population and, in particular, its poorest strata.
300. Sustainable economic growth is possible only under the conditions of macroeconomic stability. An unstable economy, and its vulnerability to external and internal shocks, can cause the greatest damage to the poorest elements of the population. As a result, continuation of the policy of macroeconomic stabilization is considered to be a necessary component of the NPRS.
301. Given the nature of poverty in Kyrgyzstan, economic policy is to be aimed at every possible support for the development of agriculture and small and medium-scale business enterprises. Because a necessary condition for sustainable long-term growth is the largest possible diversification of economy, support will be provided to the development of industry and the services sector. An especially large significance will be attached to the attraction of domestic and foreign investment, and promotion of establishment of new and expanded activities of existing enterprises producing export products. It is clear that, for this purpose, the Government should continue and significantly strengthen its efforts to ensure a favorable climate for entrepreneurship and investment, to create and maintain reasonable rules on economic activity for all participants, as well as to provide all possible support for the effective functioning of labor, capital, land and natural resources markets.
302. Realizing that economic growth as such is a necessary, but not sufficient, condition for poverty alleviation, resulting in poverty reduction only if it is combined with a relatively even distribution of income, the Government will undertake special measures to prevent growth of income inequality. This task will be carried out through both social and economic policy.
303. The open economy of Kyrgyzstan is exposed to many negative and positive external shocks that can affect the countrys economic performance. In these circumstances, the strategy considers two scenarios of economic development: a basic scenario, based on relatively conservative assumptions about the overall impact of external factors and the effectiveness of the policy approach under the strategy; and a scenario of accelerated growth, envisaging more successful mobilization of internal resources of the country, lack of negative shocks and, possibly, development of positive external impacts (for example, in a form of expanded external assistance without increasing the public debt of Kyrgyzstan).
Ensuring macroeconomic stability 
304. The Government and the National Bank of the Kyrgyz Republic (NBKR), continue adhering to a policy aimed at the eliminating the causes of macroeconomic instability. Given the significance of price stability for the growth of economic activity, as well as for the protection of the incomes of the poor, efforts will continue to be taken to hold the inflation rate at the level of not more than 5 percent a year. A tight money policy will continue to be pursued. It is assumed that a low inflation rate, development of the financial sector of the country, and increased agricultural output will encourage monetization of the economy to some extent. The Government and the NBKR will attempt to strengthen confidence in the national currency and to expand the level of non-cash settlements. The policy of a floating exchange rate will be continued to maintain the value of the nations international reserves at a safe level (not less than three months of imports). The NBKR intends to intervene in the foreign exchange market only to support the international reserves at the desired level and to smooth out fluctuations in the som exchange rate. Reduction of the current account deficit of the balance of payments, achieved in recent years, and debt relief as a result of restructuring of the external public debt of Kyrgyzstan by the Paris Club, has allowed the policy of a floating exchange rate of the som to not have any significant inflationary consequences.
A decisive role in achieving macroeconomic stabilization lies with fiscal policy. It is envisaged that during the period under consideration it will be aimed at providing the necessary quantity and quality of public services, with a simultaneous reduction of the risks related to external debt servicing. For this purpose, coordinated measures will be aimed at:
increasing the social focus of budgetary expenditures, ensuring their targeted impact on the poor, and radical improvement of the efficiency of expenditures on public sector administration;
introduction of amendments to the taxation system, allowing an expansion of the tax base and, as a result of an increase in the tax collection rate to 15 percent of GDP by 2005, to relieve the tax burden on compliant taxpayers, creating incentives for economic growth; and
reduction of the budget deficit as a result of reducing the volume of Public Investment Program (PIP) borrowings, with a simultaneous increase in the efficient use of budget resources applied to development.
Thanks to the restructuring of the external debt of Kyrgyzstan by the Paris Club, the situation with debt servicing has been significantly relieved. This permits the expectation that all government debt commitments will be fulfilled, and necessary resources will be accumulated in the budget for this purpose (including at the expense of the proceeds received from privatization of state property).
It is assumed that, due to the reduction of government borrowings, reduction in government debt payments and export promoting measures, the situation with the balance of payments will remain stable, and that the current account deficit will not exceed 3 to 4 percent of GDP. This deficit will be more and more financed by the inflows of foreign direct investments. It will also contribute to the stability of the exchange rate and relief of the burden on the nations international reserves.
Investment as an important source for growth 
310. One of the necessary conditions for long-term economic growth in the Republic is a rather high level of investment inflow. The realistic aim is to achieve a level of gross investments not lower than 18 percent of GDP. As mentioned above, in order to avoid an increase in external public debt, the share of public investment at the expense of borrowed resources must be decreased as compared to the level of 1999-2000. It is expected that by 2005 the size of the PIP will be less than 3 percent of GDP. At the same time, the allocation of public investment to critically important areas of production and social infrastructure, will be continued. In parallel, private investment must grow (from 11 percent of GDP in 2002 to 14 percent of GDP in 2005) as a result of both domestic and foreign direct investment. Obviously, this will require significant reforms aimed at improvement of the investment climate. Such reforms will include a series of measures to stimulate domestic savings, strengthen the banking and non-banking financial sectors, deregulation, ensuring of an equal treatment for all investors both domestic and foreign, facilitation of access for foreign investors to the market of Kyrgyzstan, and establishment of a tax regime favorable for investment.
When attracting foreign investment, special attention needs to be paid to the issues of the extent that such investments promote employment growth and poverty reduction in the country, the degree to which they make use of domestic resources and produce a demand for the products of local enterprises, and whether they promote an improvement in a technological level of production in Kyrgyzstan.
It is worth noting that implementation of such a program of reforms will promote not only an improvement of investment attractiveness of Kyrgyzstans economy, but improvement of its overall effectiveness and growth in total factor productivity that will give an additional impetus to economic growth.
Development of foreign economic relations 
311. To ensure both macroeconomic stability and attraction of private investment, it is necessary to provide maximum opportunities for an increase in, and diversification of, exports. The Government has intensified its efforts to create conditions in external markets favorable for exports of products of Kyrgyz enterprises and reduction of expenses for their transit through third countries. For this purpose, it is planned to use fully the potential related to the Republics membership in the WTO, which is growing now with the accession of China and, in the foreseeable future, some other neighboring countries joining as well. A priority task in the area of foreign economic relations is regional cooperation, where it is necessary to achieve a considerable improvement of export opportunities for Kyrgyz enterprises. Export growth will be also promoted by development of the transport infrastructure, marketing and information support for local export-oriented enterprises. Active assistance will be provided to expand export of services, that is considered one of the most prospective sources of economic growth.
Decisive measures will be taken to strengthen the customs services and prohibit illegal imports of goods in order to protect domestic producers and replenish the budget.
Measures to ensure growth that results in greater income equality
312. For this purpose it is intended to stimulate first of all such forms of economic development that encourage employment growth and the involvement of the poor in economic activity. In particular, this includes establishment of enterprises in the poorest and most remote areas of the country, development of small and medium-scale entrepreneurship. An important component for adjustment of conditions of economic development for the poor, will be further development of the microfinancing system, economic and legal measures to ensure access for a poor to land, water and other resources, and to protect the rights of hired workers as established by the law.
Economic growth in sectors of economy 
313. Agriculture is a sector that is the most important for continuation and acceleration of economic growth from the viewpoint of poverty reduction. This is because, on one hand, it is the largest sector of economy and, to a significant extent, leads many other sectors while, on the other hand, it provides much of the employment for a majority of the poor. Ensuring sustainable growth in agriculture requires continuation of drastic reforms aimed at significant facilitation of access for agricultural enterprises to markets for finished products and production resources, including:
formation of a sustainable land market;
implementation of measures on comprehensive development of processing industry;
increasing the area of irrigated farming due to rehabilitation of irrigation networks;
improvement of water resources management at the local level;
promotion of development of private enterprises providing technical and sales services to the agricultural sector;
broadening and improvement of informational and educational services provided to farmers, promotion of seed farming and improved animal breeding.
It is assumed that development of secondary industry will take place mainly in traditional sectors (electric power, light, food and mining industry, construction materials) as a result of expanding production output by existing enterprises, as well as due to new production capacities that can appear as a result of expected inflows of private investment. It is necessary to take into account that during the period under consideration (2003-2005), a significant reduction of gold mining can take place at the Kumtor deposit for technical reasons that will result in a reduction in industrial production growth and exports. This reduction should be compensated for by development of other industrial sectors; thus in 2005[1] the positive growth rate of the total volume of industrial output will be restored.
It is expected that the services sector will become an important source of growth, and a major sector of economy. Developments in this sector will take place mainly because of increased internal demand for paid services and services for trade supported by growth of real income of the population. Another actively growing sector of services shall be tourism, which will make a significant contribution to an increase in the countrys exports. Development of other sectors of economy will stimulate growth of transport, telecommunication, financial, information and hotel sectors.
Scenarios of economic development for 2003-2005
314. According to the basic scenario (see Table 1, Annex 2) the average growth rate of real GDP will be 4.4 percent; at the same time, GDP per capita will increase on average by 3.5 percent per year. Provided that the existing level of inequality in income distribution[2] does not increase, this will allow reduction of poverty in the Republic by approximately 2 percent each year. It is assumed that GDP growth will be mainly secured by agriculture and the services sectors; gross value added in these sectors will grow by 5.6 percent and 5.2 percent per year, respectively. The growth rate of value added in industry (without enterprises of the Kumtor deposit) will be 4.0 percent per year. There will be a gradual increase in the share of private consumption (from 66.4 percent in 2001 to 70.5 percent in 2005), and that of gross investment[3] (from 16.4 percent in 2001 to 17.8 percent in 2005) in the structure of GDP use, with a simultaneous decrease in government consumption as well as net exports (due to a decrease in gold exports and an increase in imports of investment goods) from -0.3 percent of GDP in 2001 to -4.5 percent of GDP in 2005. The situation with the government budget should improve significantly due to growth in budget revenues from 17.0 percent in 2001 to 18.5 percent of GDP in 2005 and reduction in the budget deficit during the same years from 4.9 percent to 2.9 percent of GDP. There will be some reduction in public expenditures (from 21.9 percent in 2001 to 21.4 percent in 2005) due to a reduction in PIP volumes and a simultaneous increase in expenditures for social needs (education, health care and social protection). Thus, the given scenario reflects the countrys capability of moving towards poverty reduction and economic growth, on the moderately optimistic assumptions with regard to key exogenous factors, that include sustained inflows of private investment and foreign aid, the extent of mobilization of internal resources and the effectiveness of economic policy measures.
Should the situation in relation to these exogenous factors be more favorable, i.e.:
  • there is success in creating a radical improvement in the investment climate;
  • facilitating export opportunities (for example, by succeeding in regional economic integration, which does not dependent on the Kyrgyz side alone);
  • reforms in the sphere of public administration producing a maximum effect;
  • there is significant progress in the development of market institutions; and, in the end,
  • the country receives additional external assistance which does not increase the public debt,
it is possible to postulate the scenario of accelerated growth. This scenario assumes that the GDP growth rate will be 7 percent each year. Such a GDP growth rate could be achieved because of the higher share of both private and public investment, as well as additional growth of exports allowing the avoiding of the drop in net exports expected in the basic scenario. In these circumstances, more active development is expected on the part of industry, construction and services, and this would contribute to the modernization of the structure of economy of Kyrgyzstan. Faster growth in these sectors would provide for an increase in state budget revenues and expenditures and expanded financing of government social and investment programs. All these would create a solid foundation for more rapid poverty reduction and sustainable economic growth.

[1] Under favorable external conditions, even earlier.
[2] Characterized by the Gini coefficient a little higher than 0.4.
[3] In the structure of which, public investments will be replaced by private ones.