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WORLD TRADE
ORGANIZATION
RESTRICTED
WT/TPR/S/170
4 September 2006
(06-4122)
Trade Policy Review Body
TRADE POLICY REVIEW
Report by the Secretariat
KYRGYZ REPUBLIC
This report, prepared for the first Trade Policy Review of the Kyrgyz Republic,
has been drawn up by the WTO Secretariat on its own responsibility. The
Secretariat has, as required by the Agreement establishing the Trade Policy
Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the
World Trade Organization), sought clarification from the Kyrgyz Republic on its
trade policies and practices.
Any technical questions arising from this report may be addressed to
Mr. Mario Kakabadse (tel. 022 739 5172).
Document WT/TPR/G/170 contains the policy statement submitted by the
Kyrgyz Republic.
Note:
This report is subject to restricted circulation and press embargo until the end of the
first session of the meeting of the Trade Policy Review Body on the Kyrgyz Republic.
Kyrgyz Republic
WT/TPR/S/170
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS
I.
II.
III.
vii
(1)
ECONOMIC ENVIRONMENT
vii
(2)
TRADE POLICY REGIME
viii
(3)
TRADE POLICIES AND PRACTICES BY MEASURES
ix
(4)
TRADE POLICIES BY SECTOR
x
(5)
OUTLOOK
xii
ECONOMIC ENVIRONMENT
1
(1)
INTRODUCTION
1
(2)
MACROECONOMIC POLICIES
(i)
Fiscal policy
(ii)
Monetary and exchange rate policy
7
7
7
(3)
STRUCTURAL POLICIES
(i)
Fiscal, tax and public sector reforms
(ii)
Banking system
(iii)
State-owned enterprises (SOEs) and privatization
(iv)
Corporate governance and finance
9
10
10
11
11
(4)
DEVELOPMENTS IN TRADE
(i)
Merchandise trade
(ii)
Services trade
12
12
15
(5)
TRENDS AND PATTERNS IN FOREIGN INVESTMENT
16
(6)
OUTLOOK
18
TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
20
(1)
INTRODUCTION
20
(2)
GENERAL INSTITUTIONAL AND LEGAL FRAMEWORK
21
(3)
TRADE POLICY FORMULATION AND IMPLEMENTATION
(i)
Objectives
(ii)
Institutional and legal framework
(iii)
Main trade laws
22
22
23
26
(4)
TRADE AGREEMENTS AND ARRANGEMENTS
(i)
World Trade Organization
(ii)
Regional and other arrangements
(iii)
Unilateral trade preferences
27
27
30
38
(5)
FOREIGN INVESTMENT REGIME
(i)
Incentives and promotion
(ii)
Bilateral investment treaties and double taxation agreements
38
40
40
(6)
TRADE-RELATED TECHNICAL ASSISTANCE
41
TRADE POLICIES AND PRACTICES BY MEASURE
42
(1)
42
INTRODUCTION
WT/TPR/S/170
Page iv
Trade Policy Review
Page
IV.
(2)
MEASURES DIRECTLY AFFECTING IMPORTS
(i)
Customs procedures
(ii)
Tariffs
(iii)
Other import charges
(iv)
Customs valuation, minimum import prices, and preshipment inspection
(v)
Rules of origin
(vi)
Import prohibitions and sanctions
(vii)
Import quotas and licensing
(viii)
Contingency measures
(ix)
Government procurement
(x)
State trading
(xi)
Standards and other technical requirements (including SPS)
(xii)
Countertrade
43
43
45
53
54
55
55
55
58
59
60
61
66
(3)
MEASURES DIRECTLY AFFECTING EXPORTS
(i)
Transit arrangements
(ii)
Taxes, charges, and levies
(iii)
Prohibitions, restrictions, and licensing
(iv)
Tax incentives, subsidies, free zones, and export-performance requirements
(v)
Promotion and marketing assistance
67
67
68
68
69
70
(4)
MEASURES AFFECTING PRODUCTION AND TRADE
(i)
Legal business framework, including licensing and registration
(ii)
Budgetary support and tax concessions
(iii)
State-owned enterprises and privatization
(iv)
Competition policy and price controls
(v)
Intellectual property rights
71
71
72
73
75
77
TRADE POLICIES BY SECTOR
83
(1)
INTRODUCTION
83
(2)
AGRICULTURE AND RELATED ACTIVITIES
(i)
Policy framework and developments
(ii)
Main subsectors
(iii)
Forestry
84
87
89
91
(3)
MINING
91
(4)
ENERGY
(i)
Electricity
(ii)
Petroleum and petroleum products
(iii)
Coal
(iv)
Gas
94
94
95
96
97
(5)
MANUFACTURING
97
(6)
SERVICES (OTHER THAN ENERGY)
(i)
Financial services
(ii)
Telecommunications
(iii)
Wholesale and resale trade
(iv)
Transportation
(v)
Tourism
100
101
109
112
112
115
REFERENCES
117
APPENDIX TABLES
121
Kyrgyz Republic
WT/TPR/S/170
Page v
CHARTS
Page
I.
ECONOMIC ENVIRONMENT
I.1
I.2
I.3
Product composition of merchandise trade, 2000 and 2005
Direction of merchandise trade, 2000 and 2005
Structure of inward FDI, 2000 and 2005
II.
TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
II.1
Main bodies involved in trade policy formulation and implementation, 2006
III.
TRADE POLICIES AND PRACTICES BY MEASURE
III.1
III.2
III.3
III.4
Distribution of MFN tariff rates, 1999 and 2006
Applied MFN and final bound tariff averages by HS section, 2006
Applied MFN tariff averages by HS section, 1999 and 2006
Tariff escalation by 2-digit ISIC industry, 1999 and 2006
IV.
TRADE POLICIES BY SECTOR
IV.1
Interest rate spreads of commercial banks, 2001-05
13
14
18
25
47
50
51
52
104
TABLES
I.
ECONOMIC ENVIRONMENT
I.1
I.2
I.3
I.4
I.5
I.6
I.7
I.8
Main social and economic indicators, 2004 (unless otherwise indicated)
Indicators of progress in transition, selected years, 1996-05
Selected macroeconomic indicators, 2000-05
Share of GDP by sector, 1995 and 2001-05
Share of employment by sector, 1995 and 2001-05
Trade in services, 2000-05
Inward FDI, by source, 2000-05
Inward FDI, by sector, 2000-05
II.
TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
II.1
II.2
Main trade-related legislation, 2006
Latest notifications by the Kyrgyz Republic under WTO Agreements, March 2006
III.
TRADE POLICIES AND PRACTICES BY MEASURE
III.1
III.2
III.3
III.4
III.5
III.6
III.7
Structure of MFN tariff in the Kyrgyz Republic, 1999 and 2002-06
Goods subject to import licensing, 2005
Countertrade, 2000-05
Goods subject to export licensing, 2005
Privatization by sector and type, 1999 and 2001-04
Kyrgyz membership of international treaties on intellectual property, 2005
Intellectual property statistics, 2001-05
1
2
3
5
5
15
17
17
26
28
48
57
66
68
74
78
78
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Trade Policy Review
Page
IV.
TRADE POLICIES BY SECTOR
IV.1
IV.2
IV.3
IV.4
IV.5
IV.6
IV.7
IV.8
IV.9
Agricultural production, 2001-05
Exports and imports, 2001-05
Extraction of fuels and minerals, 2000-05
Manufacturing (excluding mineral processing) state-owned enterprises, 2006
GDP and employment shares for major manufacturing activities, 2001
Non-mining industrial production, 2000-05
Indicators of the banking system's financial strength, end-2000-05
Telecommunication licences, 1998-05
Tourism indicators, 2000-05
85
86
96
97
99
99
102
110
116
APPENDIX TABLES
I.
ECONOMIC ENVIRONMENT
AI.1
AI.2
AI.3
AI.4
Merchandise exports by group of products, 2000-05
Merchandise imports by group of products, 2000-05
Merchandise exports by destinations, 2000-05
Merchandise imports by origin, 2000-05
II.
TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
AII.1
Kyrgyz Republic's involvement in bilateral and regional trade arrangements, January 2006
III.
TRADE POLICIES AND PRACTICES BY MEASURE
AIII.1
AIII.2
Summary analysis of the Kyrgyz MFN tariff, 1999, 2002-03 and 2005-06
Applied tariff escalation and tariff ranges, 1999 and 2006
IV.
TRADE POLICIES BY SECTOR
AIV.1
Commitments on services under GATS
123
125
126
127
128
130
131
134
Kyrgyz Republic
SUMMARY OBSERVATIONS
(1)
THE ECONOMIC ENVIRONMENT
1.
The Kyrgyz Republic is landlocked by
Kazakhstan, Uzbekistan, Tajikistan, and
China. It has made impressive progress since
its economic and political transition. Some
reforms have been implemented speedily,
including
farm
privatization,
price
deregulation, financial sector liberalization,
and significant state privatization. Laws and
regulations have been changed to create a
legal framework supportive of a market
economy. Reforms have also helped the
Kyrgyz Republic face various setbacks such as
the Asian and Russian economic crises of the
late 1990s. Macroeconomic, trade and other
structural reforms, introduced from 1991 as
part of Kyrgyz Republic's transition to a
market economy, were to some extent locked in
by its WTO accession in December 1998.
However,
structural
reforms
remain
unfinished, aggravated by "stop go" policies
and poor implementation.
2.
Kyrgyz real GDP has grown almost
unabated since 1996.
It averaged 4%
annually during 2000-05, although it
contracted by 0.6% in 2005 due mainly to
falling gold output and political instability.
Growth has resumed in 2006 but official
projections of 5% seem optimistic. Growth,
predominantly consumption led, also reflected
the start of a major gold mining industry in
1997, a turnaround in agriculture and a
buoyant services sector, including substantial
electricity
exports.
Services
grew
substantially, accounting in 2005 for 51.1% of
GDP (43.1% in 2001). Poverty, which exists
mainly in rural areas, is being reduced and
GDP per head rose to US$473 in 2005 from
US$381 in 2003.
Growth has been
accompanied by reduced inflation, down from
18.7% in 2000 to an estimated 5.7% in 2006.
However, unemployment has remained high,
at an estimated 9.2% in 2005. The large
shadow economy is estimated to be around
half of GDP.
WT/TPR/S/170
Page vii
3.
Fiscal consolidation continues to
contain the Kyrgyz budget deficit, but further
reforms, particularly in revenue collection
(which is being addressed) could help. While
falling from 6.9% of GDP in 2000 to 2.8% in
2005, deficit reductions mainly reflect rising
tax collection rather than rationalized
expenditure. The deficit is set to rise, albeit
temporarily, to 3.3% in 2006. The National
(central) Bank has focused on price and
exchange rate stability. It has recently revised
upwards its annual inflation target several
times, from 4% to currently 5.7%, in the face
of rising liquidity and cost pressures. The
National Bank is expected to continue to limit
its interventions on the foreign-exchange
market to the minimum required to smooth
fluctuations and build up foreign reserves.
4.
Data on total factor productivity, a
key indicator of efficiency and international
competitiveness, suggest that it turned positive
and rose from the mid 1990s as efficiency
gains, induced by structural reforms and a
more competitive economy, began to take hold.
However, export competitiveness continues to
be eroded by high unit labour costs relative to
other CIS countries, largely due to a
comparatively high wage-labour productivity
ratio, exacerbated by labour market rigidities.
5.
With gross domestic investment
significantly exceeding gross national saving,
there is a substantial current account deficit.
While improving as a share of GDP in the
early 2000s, it deteriorated sharply from 3.4%
(excluding official transfers) in 2004 to 8.1%
in 2005, when the negative trade balance
escalated from 7.7% of GDP to 17.8%.
Services trade has consistently had a negative
balance but this improved from 12.5% of GDP
in 2000 to 2% in 2005. These deficits have
been met by capital inflows, particularly aid,
official loans from bilateral and multilateral
donors, rising remittances, and limited foreign
investment. Foreign reserves rose steadily
from 2000, to reach US$609 million in 2005
(equal to 4.5 months of merchandise imports).
WT/TPR/S/170
Page viii
6.
External public debt, at US$2.0 billion
in 2005, has fallen to 82% of GDP (130% in
2000), but remains a significant burden, with
downside risk to economic prosperity. Further
restructuring of Paris Club debt in March
2005 improved long-term debt sustainability,
and more is expected under the IMF's Heavily
Indebted Poor Countries (HIPC) Initiative's
sunset clause, and eventually under the
Multilateral Debt Relief Initiative (MDRI).
7.
Foreign trade is important to the
Kyrgyz economy. Exports and imports were
some 28% and 46% of GDP respectively, in
2005. Exports grew strongly between 2001
and 2004 but contracted by 6% in 2005.
Higher gold prices helped exports in 2005 but
were offset by a one-quarter fall in gold
output. Gold receipts, which normally account
for some 40% of exports, dropped almost one
fifth to US$236.2 million. Countertrade has
diminished, and now applies mainly to
electricity exports and natural gas imports.
The Government has, by and large, resisted
protectionist pressures.
(2)
TRADE POLICY REGIME
8.
While the main package of legal and
institutional reforms was adopted upon WTO
accession, ongoing legislative changes are
helping to create a more stable and
predictable
trade
regime
in
the
Kyrgyz Republic.
The Government is
attempting to promote good governance,
improve the business climate, and strengthen
the independence and consistency of the
judiciary, which has been questioned
internally. The main ministry formulating
trade-related policies is the Ministry of
Industry, Trade and Tourism. The WTO InterDepartmental
Commission
coordinates
multilateral issues, including implementation
of trade-related agreements.
WTO
Agreements are part of domestic law.
9.
The Kyrgyz Republic has one of the
region's most open trade and investment
regimes. Its main trade policy objectives are
achieving a more outward-oriented trade
Trade Policy Review
regime, greater market access for exports, and
improved integration into the world economy.
The Government believes trade and investment
liberalization will improve economic efficiency
and promote export diversification.
10.
Kyrgyz multilateral trade policy has
been focused on meeting WTO accession
commitments in goods and services trade, the
protection of intellectual property rights, and
participating in WTO negotiations.
The
Kyrgyz Republic is negotiating joining the
plurilateral Agreements on Government
Procurement and on Trade in Civil Aircraft.
In acceding to the WTO, it bound all its tariffs,
generally at a 10% ceiling rate, and other
import charges and agricultural export
subsidies at zero, eliminated discriminatory
excise taxes and applied the customs valuation
provisions. The Kyrgyz Republic grants at
least most-favoured-nation treatment to all
WTO Members; it has not been involved in any
WTO disputes.
11.
The Government has actively pursued
regional trade arrangements, largely with
former soviet states, in the form of bilateral
and regional free-trade agreements (FTAs)
and customs unions. Membership of multiple
preferential trade agreements that have
different rules, coverage, and implementation
periods, may add uncertainty to the Kyrgyz
trade regime, weaken transparency, and
detract from multilateral liberalization goals.
These regional agreements have sometimes
been implemented poorly, especially in a
customs, tariffs, other charges and fees, and
transit arrangements. The Kyrgyz Republic
has a series of ongoing disputes with parties to
such agreements, including Uzbekistan, but
dispute settlement procedures seem to have
been of limited benefit.
12.
The Kyrgyz Republic is a beneficiary
of the European Union (EU), Japanese and
U.S. preferential schemes under the
Generalized System of Preferences.
The
Kyrgyz Republic allows all imports from least
developed countries to enter duty free.
Kyrgyz Republic
13.
The 2003 Law on Investments, based
on national treatment, has strengthened the
investment regime. Foreign investors may
operate either wholly overseas-owned or joint
ventures with Kyrgyz or other partners. All
activities are generally open to FDI, and
seemingly no foreign equity limits exist, except
in air transport and production of alcoholic
beverages. FDI incentives (e.g. tax holidays)
have been rationalized, and ongoing efforts
have been made to improve the investment and
business climate, including use of ambitious
(but not always implemented) annual
government plans (matrixes).
14.
The Kyrgyz Republic's participation in
trade negotiations and arrangements has been
constrained by its limited human, technical,
and financial resources.
Kyrgyz trade
capacity has been assisted by various
technical cooperation initiatives, including by
the WTO. The authorities consider further
efforts are required, including training on
implementing Kyrgyz commitments and
applying WTO rules and regulations,
especially in trade facilitation, SPS, services,
and government procurement.
(3)
TRADE POLICIES AND PRACTICES BY
MEASURE
15.
The Kyrgyz Republic has substantially
liberalized its formal trade regime by reducing
tariff rates and eliminating most non-tariff
barriers. Import bans or licensing mainly
protect human health and safety, national
security, and the environment under
international conventions. Licensing has been
reduced substantially, and where imposed, is
generally "automatic". Import quotas are
applied only to alcoholic drinks.
16.
The tariff, the main Kyrgyz trade
policy instrument, has been rationalized. The
simple average applied MFN rate is 4.9%,
down from 5.2% in 2005 (8.7% in 1999).
However, while tariffs remain relatively low,
with one third of imports subject to a rate of
10%, the authorities have moved away from
the pre-accession uniform 10% rate, largely in
WT/TPR/S/170
Page ix
response to domestic protectionist pressures,
with possible undesirable implications for
economic efficiency. Nevertheless, only few
rates (7% of all lines) exceed 10%, and apart
from rates of 20% and 30% on certain sugar
items, the highest duty is 15%. Twelve tariff
bands in 1999 have been reduced to six. Tariff
averages are higher on agricultural (8.1%)
than industrial goods (4.1%). Rate disparities
and escalation are relatively low, with few
domestic and international tariff peaks. Only
a few rates (1.3%) are non-ad valorem,
thereby improving transparency, and only
sugar imports have been subject to seasonal
duties. The relatively uniform tariff structure
simplifies customs procedures, reduces market
distortions, and enhances transparency.
However, since the average bound rate of
7.7% exceeds the applied MFN rate, tariffs
can be raised within existing bindings, thereby
detracting from predictability. The tariff
structure and its economic effects are also
complicated by substantial preferential
imports and associated rules of origin.
17.
The Kyrgyz Republic uses the
transaction value method (c.i.f.) for customs
valuation, including, in principle, for secondhand goods (but not for cars, where book
values are seemingly substituted if higher). No
preshipment inspection is required. Customs
formalities and procedures, both formal and
informal, restrict imports (e.g. through
duplicative
and
excessive
physical
inspections). Smuggling is substantial. A noncost-based customs fee of 0.15% on the c.i.f.
value of imports is to cover costs of providing
customs services. Foreign hauliers entering
the Kyrgyz Republic without special permits or
TIR carnets are charged a US$250 fee.
18.
Domestic commodity taxes (e.g. VAT)
do not discriminate against imports. No antidumping, countervailing or safeguard
measures have been applied, although
separate legislation exists for each type of
contingency measure.
19.
Exports are largely unregulated.
Except for non-ferrous metal fragments and
WT/TPR/S/170
Page x
waste, licensing is mainly for public health
and safety, and environmental protection.
Exports are zero-rated for VAT (except gold,
which is VAT exempt) and free of excise.
Four free economic zones, with limited success
in attracting investment and promoting
exports, have encouraged tax evasion, and are
being scaled down; only the Bishkek zone is to
be retained.
Transit restrictions by
neighbouring countries, especially Uzbekistan
and until recently Kazakhstan, impede Kyrgyz
exports.
20.
Government procurement has been
liberalized and is now used less frequently as a
means of supporting domestic industry.
Despite
improved
legislation,
price
preferences apply (20% on goods and 10% on
works) based on minimum local content of
30%. The Kyrgyz Republic is negotiating
signing the WTO Government Procurement
Agreement.
Farmers receive minimal
financial support, but irrigation is heavily
subsidized.
Budgetary loans have been
eliminated, but many enterprises have large
accumulated outstanding government debt,
amounting to 15% of GDP in mid 2003. No
state-trading enterprises have been notified.
21.
The soviet-era standards system is
being transformed to a market-based regime.
Many of the 20,000 standards, which are to be
fully reviewed by 2009, are inoperative.
Where feasible, standards are being revised
and internationally harmonized, but, with 38%
currently harmonized, progress is slower than
planned. Certification and recognition of
overseas testing results has improved and
institutional arrangements are being reformed
for standardization, conformity assessment,
certification, and testing SPS requirements
have been streamlined.
22.
Privatization, largely completed in
manufacturing, is now aimed at significant
and politically sensitive entities, especially in
the energy and telecommunication sectors, still
under state ownership. Some sectors, such as
gold and minerals, may not be privatized, in
order to protect state monopolies.
Trade Policy Review
23.
Competition policy remains weak,
reflecting the existence of many sanctioned
monopolies (natural and authorized) and poor
enforcement.
The autonomy of the
Anti-monopoly Agency is uncertain. Prices
have been de-controlled apart from mainly
utilities and transport, which are set by the
Agency.
The legal business framework,
including licensing and registration, has been
simplified, but remains cumbersome. However,
the Government is attempting to strengthen the
institutions tasked with fighting corruption,
streamline regulatory bodies, and strengthen
property rights.
(4)
TRADE POLICIES BY SECTOR
24.
The
Kyrgyz
Republic's
GDP
composition has changed substantially under
transition. The services sector displaced
agriculture in the late 1990s as the largest
GDP contributor.
Agriculture's share
declined from 44.9% in 1995 to 37.2% in
2001, and fell sharply to 33.3% in 2004 before
rising slightly to 34.1% in 2005. Increased
commercialization of agriculture during the
1990s, boosted by accelerated land and
market reforms, including price deregulation
and removal of most subsidies, reversed the
sector's declining production. Agricultural
productivity, still low by international
standards, has improved.
High-cost and
poorly developed marketing chains and other
impediments, such as remaining land
rigidities, farmers' limited access to credit,
deteriorating rural infrastructure, declining
investment, old equipment, and low
mechanization, continue to penalize the sector.
Research, farm extension services, land
reform, and rural infrastructure are hampered
by insufficient funding.
25.
Agricultural policy seeks to raise rural
incomes and achieve food security by 2010.
This is to be achieved in wheat, poultry, eggs,
dairy products, vegetables, lamb, beef and
other meat, sugar, and vegetable oils.
However, care is needed that policies to
further this goal, such as increasing the
Government's role by setting production
Kyrgyz Republic
targets, providing support and protection, and
directing farmers what to produce, do not
encourage inefficient agriculture that would
undermine rather than enhance food security
(by, for example, raising food prices). Such
policies could hurt the poor most.
26.
While manufacturing's share in GDP
dropped from 19.0% in 2001 to 14.1% in
2005, it rebounded temporarily to 17.1% in
2004, and remains above the 1995 level of
12.8%. Its performance depends heavily on
gold processing.
The non-gold-mining
manufacturing sector, hard hit by transition
and plagued by substantial excess capacity,
has
successful
export
segments.
Manufacturing is widely dispersed across
many small activities and relies on low-valueadded agri-processing, machinery and
equipment, and non-metallic products e.g.
glass and light bulbs. A government priority is
to revitalize the textiles industry and to
promote domestic agri-processing.
27.
The Government participates directly
in the mining sector through equity holdings of
the state-owned mining company, KyrgyzAltyn.
Its 66% equity in the Kumtor gold mine was
reduced to 33.3% in 2005 and later to 15.7%.
KyrgyzAltyn forms voluntary mining jointventures, especially with foreign companies.
The improved 1997 mining legislation allows
the Government substantial discretionary
authority and control.
28.
The energy sector is dominated by
state-owned entities. Restructuring of the
highly
unprofitable
state
monopolist,
Kyrgyzenergo, started in 2001 when its
operations were unbundled into state
monopoly generation and transmission
operations, and four distribution companies
that were to be privatized. Power reforms,
including privatization, stalled but are again a
government priority, and regulated electricity
prices are to achieve cost recovery by 2010 to
further reduce the sector’s quasi-fiscal deficit,
estimated at 5.9% of GDP in 2006. The State
Energy Agency (SEA), created in 1997 to
regulate the sector, was abolished in 2005
WT/TPR/S/170
Page xi
and its functions transferred to the Antimonopoly Agency in 2006. The state gas
monopolist, Kyrgyzgas, owns and operates the
transmission and distribution network. It is to
be restructured into a separate transmission
company, and several distribution firms, which
are to be privatized.
29.
Telecommunications was liberalized
in line with WTO commitments from early
2003 by ending Kyrgyztelecom's state
monopoly on international and long-distance
calls.
The regulatory regime has been
strengthened to safeguard competition,
administered by a more independent,
regulator, the National Communications
Agency. However, many of these regulatory
functions, including over prices, were
transferred to the Anti-monopoly Agency in
2006, such that the agencies' respective roles
appear unclear. Kyrgyztelecom is to be fully
privatized.
30.
Restoring public confidence in banks
after several crises in the 1990s has been a key
government priority, including ongoing
rationalization and strengthening of the
financial and banking sectors. While the
health of banks, including the incidence of
non-performing loans and profitability, has
improved
substantially,
financial
intermediation remains low and costly.
Prudential requirements, e.g. raising minimum
capital levels and removing differences
between local and foreign banks, along with
National Bank supervision, are being
strengthened, including improving institutional
capacities and corporate governance, based
on the Basel Principles. There are no nonprudential restrictions on foreign banks, or
other
financial
institutions,
including
insurance companies, which are privately
owned. Only one state-owned bank remains,
accounting for 5% of bank assets. Foreign
bank ownership is increasingly high at over
60%.
The major non-bank financial
institution, Kyrgyz Agricultural Finance
Corporation (KAFC), is to be privatized by
end 2006 and converted to a bank. The capital
market, including the stock exchange, is thin
WT/TPR/S/170
Page xii
and undeveloped. The State Agency for
Financial Supervision and Reporting replaced
the State Commission on Securities Markets as
regulator in 2005.
31.
Transport services, other than road,
are heavily regulated.
Inter-city road
transport is largely privatized. The national
air carrier and railways are state owned and
only limited air transport and railway
restructuring has occurred. A new national
airline is to be established. Tourism, a
priority sector, is mainly privately run,
including with foreign participation.
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OUTLOOK
32.
The 2006 Budget projected 5%
growth, a substantial turnaround on 2005
performance. However, it may be overly
optimistic given uncertainties over gold
production, including at the Kumtor mine, and
the political situation. As the economy returns
to growth, inflation is moving upwards but is
forecast to decline to 4.5% in 2007. The
worsening overall primary budget deficit in
2006 is expected to improve slightly to 2.9% in
2007.
33.
Preserving macroeconomic stability
and accelerating structural reforms should
help diversify the economy into manufacturing
Trade Policy Review
and services, and soften the country's
vulnerable reliance on mining (gold) and
agriculture. This will require the Government
to resist political pressure to adopt quick fixes
or ad hoc sectoral incentives. In agriculture,
the policy challenge is to ensure that food selfsufficiency goals are not achieved by using
protection to promote inefficient and costly
activities, which will penalize consumers and
the economy generally.
34.
The
Kyrgyz
Republic's
future
economic performance will also depend on
external factors, such as the performance of
the world economy, including especially of its
main regional markets, like the Russian
Federation, Kazakhstan, and China.
Of
greater importance to its longer-term growth
prospects, however, will be its policy efforts
and economic management.
Further
improvements should include opening trade,
greater financial sector strengthening, and
more efficient customs services and transport,
both internally and regionally. Only then will
it be able to seize the expanding regional and
global trade opportunities.
Sustainable
growth will need private, including foreign,
investment, which will also require an
improved
business
climate,
restored
confidence in public institutions, and the
curbing of entrenched and pervasive
corruption.