Kyrgyzstan: ECONOMY

ECONOMY



Overview: Prior to 1991, Kyrgyzstan’s economy was highly dependent on the economy of the Soviet Union. The loss of key Soviet inputs caused severe economic contraction in the 1990s and has required substantial restructuring. The market reform program pursued in the 1990s has been partly abandoned as the state assumed a greater planning role in the late 1990s and early 2000s. Agriculture and services are the most important sectors, as industry remains concentrated in specific regions and outputs. In the early 2000s, workers have moved from industry to agriculture as industrial enterprises fail. A Comprehensive Development Framework has set economic goals from 2001 to 2010. As much as 50 percent of the gross domestic product is contributed by the gray economy. The government has launched two major programs to privatize state enterprises, which by 2003 had shifted about 7,000 enterprises to the private sector.



Gross Domestic Product (GDP): After declining by 0.2 percent in 2002 and rising by 6 percent in 2003, in 2004 the GDP increased by 6 percent to US$2.08 billion (US$8.5 billion in purchasing power parity). The International Monetary Fund predicted a growth rate of 4.5 percent for 2004. In 2004 the contributions of the services and industrial sectors to GDP decreased and that of agriculture increased. In 2004 services accounted for 38.7 percent of GDP (down from 40 percent), agriculture for 38.5 percent (up from 35 percent), and industry for 22.8 percent (down from 25 percent). In 2003 and 2004, operations in the Kumtor Gold Mine, Kyrgyzstan’s single most productive asset, contributed 7 percent of GDP. In 2004 per capita GDP was US$404.



GOVERNMENT Budget: After Kyrgyzstan experienced high annual deficits through 1995, tax reforms and public expenditure restrictions reduced but did not eliminate annual deficits beginning in 1997. However, several factors inhibit budget-balancing progress: state revenue is low as a percentage of gross domestic product, external debt remains high, and in 2004 social and welfare expenditures still were more than 50 percent of the budget. In 2004 revenues totaled US$431.3 million, and expenditures were US$445.4 million, incurring a deficit of US$14.1 million.



Inflation: In the early 1990s, inflation was a grave problem, as the rate reached 700 percent in 1993. Except for a brief spike caused by the Russian financial crisis of 1998, the government has controlled inflation much better in the late 1990s and early 2000s. In 2003 the inflation rate was 5.6 percent, and in 2004 it was 3.2 percent.



Agriculture: Agriculture remains a vital part of Kyrgyzstan’s economy and a refuge for workers displaced from industry. Subsistence farming has increased in the early 2000s. After sharp reductions in the early 1990s, by the early 2000s agricultural production was approaching 1991 levels. Grain production in the lower valleys and livestock grazing on upland pastures occupy the largest share of the agricultural workforce. Farmers are shifting to grain and away from cotton and tobacco. Other important products are dairy products, hay, animal feed, potatoes, vegetables, and sugar beets. Agricultural output comes from private household plots (55 percent of the total), private farms (40 percent), and state farms (5 percent). Further expansion of the sector depends on banking reform to increase investment and market reform to streamline the distribution of inputs. Land reform, a controversial issue in Kyrgyzstan, has proceeded very slowly since initial legislation in 1998. The irrigation infrastructure is in poor condition.



Forestry: Only 4 percent of Kyrgyzstan is classified as forested. All of that area is state-owned, and none is classified as available for wood supply. The main commercial product of the forests is walnuts.



Fishing: Kyrgyzstan does not have a significant fishing industry. In 2002 aquaculture contributed 66 percent of the country’s total output of 142 tons of fish.



Mining and Minerals: In the post-Soviet era, mining has been an increasingly important economic activity. The Kumtor Gold Mine, which opened in 1997, is based on one of the largest gold deposits in the world. Several other gold deposits have been developed slowly, and the closing of Kumtor—expected by 2010—will deplete the contribution of the mining sector to gross domestic product. The state agency Kyrgyzaltyn owns all mines, many of which are operated as joint ventures with foreign companies. Uranium and antimony, important mineral outputs of the Soviet era, no longer are produced in significant amounts. Although between 1992 and 2003 coal output dropped from about 2.4 million tons to 411,000 tons, the government plans to increase exploitation of Kyrgyzstan’s considerable remaining deposits (estimated at 2.5 billion tons) in order to reduce dependency on foreign energy sources. A particular target of this policy is the Kara-Keche deposit in northern Kyrgyzstan, whose annual output capability is estimated at between 500,000 and 1 million tons. The small domestic output of oil and natural gas does not meet national needs.



Industry and Manufacturing: In the post-Soviet era, Kyrgyzstan’s industries suffered sharp reductions in productivity because the supply of raw materials and fuels was disrupted, and Soviet markets disappeared. The sector has not recovered appreciably from that reduction; if gold production is not counted, in 2004 industry contributed only 13 percent of the gross domestic product (GDP). Investment and restructuring have remained very low, and the electricity industry (traditionally an important part of industry’s contribution to GDP) has stagnated in recent years. Government support is moving away from the machine industries, which were a major contributor to the Soviet economy, toward clothing and textiles. Food processing accounts for 10 to 15 percent of industrial production.



Energy: Because it has limited deposits of fossil fuels and low investment in extraction industries, Kyrgyzstan is very dependent on foreign sources of energy. Most natural gas imports come from Uzbekistan, with which Kyrgyzstan has had a series of imperfect barter agreements. Per capita energy consumption is high considering average income, and the government has no comprehensive plan to reduce demand. An estimated 45 percent of electricity generated is diverted illegally or leaks from the transmission system. Hydroelectric plants generate some 92.5 percent of domestically consumed electricity, and only three commercial thermoelectric plants are in operation. Because of its rich supply of hydroelectric power, Kyrgyzstan sends electricity to Kazakhstan and Uzbekistan in return for fossil fuels. A new hydroelectric plant at Kambaratinsk will supply power to parts of China and Russia, improving Kyrgyzstan’s export situation and domestic energy supply. However, an antiquated infrastructure and poor management make Kyrgyzstan more dependent on foreign energy when water levels are low. In the early 2000s, Kyrgyzstan was exploiting only an estimated 10 percent of its hydroelectric power potential. In 2001 Kyrgyzstan had about 70,000 kilometers of power transmission lines served by about 500 substations.



Services: Substantial post-Soviet growth in the services sector is mainly attributable to the appearance of small private enterprises. The central bank is the National Bank of the Kyrgyz Republic, which nominally is independent but follows government policy. Although the banking system has been reformed several times since 1991, it does not play a significant role in investment. A stock market opened in 1995, but its main function is trading in government securities. Because of the Akayev regime’s economic reforms, many small trade and catering enterprises have opened in the post-Soviet era. Although Kyrgyzstan’s mountains and lakes are an attractive tourist destination, the tourism industry has grown very slowly because it has received little investment. In 2002 income from tourism was estimated at US$36 million.



Labor: In 2000 Kyrgyzstan’s labor force was estimated at 2.7 million; 55 percent of workers were employed in agriculture, 30 percent in services, and 15 percent in industry. Estimates of unemployment are not likely accurate because many people are engaged in unofficial economic activities, are underemployed, or do not register for benefits. In 2002 the United Nations estimated the unemployment rate at 12.5 percent. In rural villages, long-term unemployment exceeds 70 percent, especially in the younger generations. The numbers fall when summer farming work is available. The average income in rural areas, where many engage in subsistence farming, is less than US$1 per day. In 2004 the minimum wage was US$2.30 per day, and the average monthly wage was US$44.



Foreign Economic Relations: Beginning in the 1990s, the government of Kyrgyzstan has attempted to liberalize its trade policies. In 1998 Kyrgyzstan became the first country in the Commonwealth of Independent States (CIS) to gain membership in the World Trade Organization (WTO). However, Kyrgyzstan’s isolated geographic position and import requirements have hindered the development of trade relations outside the former Soviet Union. Beginning in 1997, increased gold exports have provided new world markets, but reliance on the gold trade also has decreased export diversity. Gold accounts for about 80 percent of exports outside the CIS. In 2004 the principal suppliers of imports, in order of value, were Russia, China, Kazakhstan, Turkey, Germany, Uzbekistan, and the United States. The principal customers for Kyrgyzstan’s exports, in order of value, were the United Arab Emirates (UAE), Switzerland, Russia, Kazakhstan, and China. In 2004 the principal exports were gold and other precious and semiprecious metals; mineral products; textiles and fabrics, prepared foods, beverages, and tobacco; and machinery and electrical equipment. The principal imports were mineral products, including fossil fuels, machinery and electrical equipment, chemical products, prepared foods and beverages, and textiles and fabrics.



Trade Balance: In 2004 Kyrgyzstan’s exports were worth a total of US$646.7 million and its imports, US$775.1 million, creating a trade deficit of US$128.4 million. This shortfall continued a sharp turnaround from 2001, when the trade surplus was US$40 million.



Balance of Payments: In 2003 the overall balance of payments was US$3.8 million. Beginning in 2000, the current account balance has fluctuated considerably but always remained negative. In 2004 the current account deficit was US$87.9 million. Portfolio investment has been very small, and foreign direct investment has decreased sharply in the early 2000s. Investments by international creditors have compensated for Kyrgyzstan’s negative balances.

External Debt: At the end of 2003, Kyrgyzstan’s external debt totaled US$1.9 billion, of which more than half was long-term public debt. Since 2001 Kyrgyzstan has renegotiated some of its debt with Russia and all of its debt of US$450 million with the Paris Club of Western creditors, and it has engaged in a debt-swapping program of the United Nations Development Programme.



Foreign Investment: Foreign direct investment reached a peak during construction of the Kumtor Gold Mine in the late 1990s, then dropped sharply. In the early 2000s, foreign investment has been concentrated in the gold industry and in Bishkek, which has received more than 50 percent of the total. Norox Mining of the United Kingdom is the chief foreign developer of gold resources outside Kumtor, which is operated and one-third owned by Cameco of Canada. The Anbang Company of China owns assets in Kyrgyzstan’s modest oil industry.



Currency and Exchange Rate: Kyrgyzstan’s currency is the Kyrgyzstan som. In early November 2005, the exchange rate of the som was about 41 to the U.S. dollar. The last currency reform occurred in 1998.



Fiscal Year: The fiscal year is the calendar year.