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




Kyrgyzstan Review, 10 years ago




CHAPTER V. PROMOTING SUSTAINABLE ECONOMIC GROWTH

A. Macroeconomic Situation

299. The macroeconomic situation in Kyrgyzstan during 1999-2001 has been stabilized significantly, although it remains to be seen whether the situation is sustainable.
The GDP growth rate during 1999-2001 was on average 4.7 percent a year, and in 2000 and 2001 GDP increased by more than 5 percent each year. This growth was attained mainly as a result of increased output in agriculture (average growth rate 5.9 percent per year) and in services (average growth rate 3.8 percent per year). Development in agriculture has taken place mainly as a result of radical restructuring and land reform, as well as a broader inflow of financial resources into the sector during recent years[1]. At the same time, agriculture has started to experience an acute lack of long-term capital investment as well as the detachment of agricultural producers from markets for their products, production resources and services. Growth in the services sector has reflected a stronger private sector, including small and medium-scale entrepreneurship. Developments in the industrial sector during recent years have mainly reflected the influence of technical and climatic factors that are capable of significantly changing the volume of production in the two most important industries production of gold and power generation, that have fluctuated widely in recent years[2]. The remaining areas of secondary industry have developed slowly, although some quite recent revival has become noticeable in light and food industry.
 
300. Growth of GDP and, in particular, agriculture has provided the necessary conditions for growth in private consumption (by 5.2 percent in 2001); as a result, the populations living standards have somewhat increased, and the poverty level decreased.
Government consumption during this time has fallen from 19.1 percent of GDP in 1999 to 17.5 percent in 2001, primarily reflecting increased payments on external public debt. This has served as a serious incentive to start rationalization of government expenditures but, at the same time, it has forced the government to reduce expenditures for strategically important social programs in education and health care.
 
301. The volume of gross investments in the Republic has also decreased (from 18.0 percent in 1999 to 16.4 percent in 2001). This was connected both with a decrease in the scale of the Public Investment Program and with a decrease in the inflow of foreign direct investments that, undoubtedly, is an alarming development. At the same time, private domestic investment has increased, which might reflect a sound tendency for an increase in private domestic savings and their transformation into investments.
 
302. Of all the components of GDP, the largest increase has been registered in net exports (from 14.7 percent of GDP in 1999 to 0.3 percent of GDP in 2001). This has reflected stagnation of exports of goods and services (which still have not recovered the level of 1998) and a sharp decrease in imports volume (almost twofold compared with 1998). The reasons for problems in the area of exports were restrictions in trade with neighboring countries and transition of exported goods through their territory, as well as the composition of exports and their concentration on a few raw materials[3] the prices of which fluctuate in international markets. The decline in imports is connected with a decrease in imports of capital goods within the PIP but, to a major extent, is a consequence of import substitution, particularly in the production of consumer goods and agricultural produce.
The performances of exports and imports, as well as a general trend of reduced foreign aid receipts, have produced significant changes in the balance of payments. Whereas earlier large current account deficits had reached 22 percent of GDP, in 2001 this deficit was only 1.3 percent of GDP. At the same time, previously significant capital inflows and financial operations by which the current account deficits were financed, became zero in 2001, i.e., there was no net inflow of funds to the country on this account. As a result of all these developments, and the restructuring of the external debt of the Republic by donor countries, the nations international reserves increased both in absolute terms and in terms of months of imports, reaching the amount of 6.3 months of imports of goods and services by the end of 2001.
Improvement in the trade balance and the current account of the balance of payments, together with a tight monetary policy[4] pursued by the NBKR, have resulted in stabilization of the som exchange rate. During 2001, the nominal exchange rate of the som even firmed by 1.2 percent against the US dollar. In turn, stability of the som, tight monetary policy and decreased public expenditures resulting in a smaller budget deficit, have created conditions for a significant reduction in the rate of inflation. In 1999, the inflation rate was 39.9 percent, and in 2001 it dropped to only 3.7 percent, which is the lowest rate indicated for the entire history of independent Kyrgyzstan.
 
303. Many changes that took place in the economy during 1999-2001 reflected development of the situation with the state budget and the external public debt. Before that, economic development of the country was characterized by very large government external borrowings, the proceeds of which were spent on financing both current expenditure and investment projects. As a result, the State rather quickly accumulated significant external debt that, after devaluation of the som in 1998-1999, became comparable with the countrys GDP, and its servicing became rather problematic. Solution of the problem with debt required a significant reduction in the budget deficit (from 11.9 percent of GDP in 1999 to 4.9 percent in 2001), financed mainly by external borrowings. This affected loans raised to finance the PIP, with the result that its size decreased from 8.4 percent in 1999 to 4.4 percent of GDP in 2001.
On the whole, government expenditures had decreased radically - from 29.7percent of GDP in 1999 to 21.9 percent of GDP in 2001. Such a considerable reduction in state expenditures was also required because the government could not manage to increase budget revenues that even fell from 17.7 percent of GDP in 1999 to 17.0 percent in 2001. This painful budget adjustment resulted in a number of undesirable changes in the countrys economy[5], but the stabilization of other macroeconomic parameters allowed the conclusion of an agreement with the IMF on the PRGF Program and the negotiation of a restructuring of a part of the external public debt with the Paris Club.
 
 


[1] By such organizations as the Kyrgyz Agricultural Financial Corporation, credit unions, various micro-financing programs, as well as in a form of investment projects on rehabilitation of irrigation networks, development of agricultural supplementary services.
[2] These factors had a cardinal impact on the results of economic activities in Kyrgyzstan in the first half of 2002. Due to reduction of gold mining by Kumtor and late crop harvesting GDP growth rate was -4.9 percent as compared to the first half of 2001. Although the economy (in particular, industry) still faces serious problems, it is not in such a deep crisis as might be suggested if judging only by the indicator of GDP growth.
[3] In 2001 only four basic export commodities (gold, electricity, tobacco, cotton) made up 68 percent of the total export of the country.
[4] It is worth noting that the broad money indicator 2x in 2000-2001 increased on average by 11.7 percent per year, which is significantly lower than the nominal GDP growth rate; as a result, monetization of the economy decreased from 11.8 percent in 1999 to 10.5 percent in 2001.
[5] Decrease in public investments, expenditures for education, health care, etc.