Download Trade Policy Review of - Permanent Mission of Pakistan to the WTO

Trade Policy Review of
The Kyrgyz Republic
Statement by the Discussant
H.E. Ambassador Manzoor Ahmad
9 October 2006
Madam Chair,
Distinguished delegates,
It is a great honour for me to be the discussant for the first Trade Policy
Review of the Kyrgyz Republic.
I
would
like
to
extend
a
warm
welcome
to
Mr. Sabyrbek Moldokulov, First Deputy Minister-Permanent Secretary,
Ministry of Industry, Trade and Tourism of the Kyrgyz Republic and the high
level delegation of the Kyrgyz Republic.
I would also like to thank the Government of Kyrgyz Republic and the
Secretariat for the high quality reports they have prepared for this Review.
As I already circulated in my earlier communication, I plan to group my
remarks into three areas: economic environment, trade policies and sectoral
policies.
Economic Environment
The Kyrgyz Republic was the first CIS country to accede to the World
Trade Organization in 1998. Since then, except for two years of 2002 and
2005, macroeconomic situation has been mainly stable. They have been on a
continuous path of growth averaging about 4% annual GDP growth. The fact,
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that during this period, this growth was also accompanied by reduced inflation
which was down from 18.7% to 5.7%, increase in revenue from 18% of GDP to
20.3% and decrease in budget deficit from 9.4% to 4.4%, stands to prove that
the overall economic growth was attained and sustained on solid grounds. This
is also evident from the fact that the national currency SOM, which continued
to depreciate ever since it was introduced in 1993, reversed this trend from
2001.
However, this reform process was not always that easy. During the
initial years of the introduction of trade and other structural reforms beginning
from 1991, the Republic had to face severe hardships. Within the first five
years i.e., between 1991 and 1995, the real GDP fell by an average of almost 50
percent. Despite some “stop go” policy measures, over all trend to continue
with reforms was maintained. This paid due dividends; and since 1996 the
GDP has been growing at an average rate of 4%.
Its decision to apply for the WTO accession in 1996 and then completing
the accession process in less than three years meant that not only all the earlier
reforms initiated since 1993 were locked in but also that the new WTO
obligations had to be rapidly implemented.
Some of the salient features of this reform process were the
improvement in the budget system, introduction of mid-term financing
forecasting, expanding responsibilities and control of ministries, agencies and
regions in public expenditure management, and bringing in more transparency
in the use of budget funds. Improvement in collection of tax revenue which
increased from 11.7% of GDP in 2000 to 20.2% in 2005 while keeping the
expenditure under control also greatly helped the reform process. A recent IMF
report highly commended successful implementation of all quantitative
performance criteria for end-2005.
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In order to accelerate social, political and economic reforms, the
government adopted a National Poverty Reduction Strategy (NPRS) in 2003
and has also adopted the IMF Memorandum on Economic Policy for 20052007.
Despite these positive signs, there are a number of factors which need to
be continuously monitored and improved. Although inflation is relatively low,
yet it is rising. The large shadow economy is estimated at around one half of
the GDP. External public debt at US$2 billion in 2005 has fallen to 82% of
GDP but still remains a heavy burden. Therefore, opportunities for external
financing of large investment projects will need to be balanced against the need
to avoid another cycle of excessive borrowing. The current policy of not
borrowing those loans which have a grant element of less than 45% is a sound
way of protecting against excessive borrowing. According to the Economist
Intelligence Unit, "Reforms are needed to improve the tax system, strengthen
corporate governance, fight corruption and ease the level of regulation. Without
these reforms, the Kyrgyz Republic will continue to be unable to mobilize the
domestic and foreign investment required."
Trade Policies
The Kyrgyz Republic is one of the most open trade and investment
regimes in the region. In terms of 2006 Index of Economic Freedom, it is
categorized as a mostly free economy. Its overall ranking is 71 out of 157
countries, which is the same as Thailand and just below Malaysia.
Its
liberalization and diversification process has been considerably fast paced since
its joining the WTO. The simple average applied MFN rate has almost been
halved since 1999 from 8.7% to 4.9%. Only for 7% of tariff lines, tariff rates
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exceed 10%. There are few tariff peaks and tariff escalations. Perhaps the only
negative aspect is that in some cases applied tariff rates exceed bound levels.
Despite such low tariff rates, smuggling is said to be substantial. This
could possibly be because of cumbersome customs procedures. Automated
system for processing of customs formalities which is already in process should
considerably cut down the processing time. A comprehensive plan to tackle
corruption adopted in 2004 is a welcoming move in the right direction.
Dependence on export of primary products which account for some three
quarters of its exports is excessive. There is high dependency on export of gold
which accounts for over one third of exports. Other exports include oil and oil
products, non-metallic mineral products, cotton, electricity, machinery, sugar,
fruit and vegetables. Major imports include fuels, machinery, transport
equipment, iron and steel and pharmaceuticals.
Direction of trade has changed substantially over the last five years.
Kyrgyzstan exports to over 72 countries. While export to CIS countries still
accounts for about 45% of total exports, its exports to EU 25 have fallen from
37% to 3.7% in 2005. The UAE market now accounts for 25% of Kyrgyz
exports, mostly of gold. Similarly exports to Switzerland, primarily because of
gold have increased from 6.8% to 9.7%. On the import side also, the Kyrgyz
Republic is open to business with almost all regions and imports from over 100
countries. Almost one third of imports consist of mineral and fuel and energy
resources, chemicals, cars, electrical items, etc. Being a land-locked country,
competitiveness of its international trade depends upon transit trade facilities
from its neighbours especially Uzbekistan and Kazakhstan. Sometimes its
exports face considerable impediments in the form of high entry and transit fee
for Kyrgyz trucks.
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Volume of trade in services is low but is increasing at a fast rate. Since
1998, the export of services has increased by four times and amounted to 255.5
million US dollars. Similarly import of services increased by 69% to 305
million USD. Key service sectors are wholesale and retail trade and transport
and communications.
There are no restrictions on foreign investment. According to the
government report, foreign investors are permitted to own 100% of property in
all sectors. However, the Economist Intelligence Unit reports that legal entities
and foreign corporations may not purchase land. Investors are guaranteed with
freedom of repatriation of capital, dividends and revenue. Also, foreign
employees at foreign enterprises are automatically granted with visa, work, and
residence permits.
Government is continuing to develop modern intellectual property
protection. They acceded to the World Intellectual Property Organization
(WIPO) in 1994 and also to other major related international treaties. However,
some independent observers such as the Economist Intelligence Unit are of the
view that the legal system does not protect private property sufficiently.
Sectoral Policies
The Kyrgyz Republic’s GDP composition has changed substantially
since its transition from a centrally planned to a market based economy.
Services sector now accounts for over half of the GDP while agriculture’s share
has reduced from about 45% to 34% - about one-third of the GDP.
The share of manufacturing has been varying between 12 to 19%
depending upon gold processing. Except for gold production, industrial
production mainly involves low-value-added activities. However, a new
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program of industrial development is being developed. It would focus on
achieving sustainable annual growth of 5-7% through diversification and
increased domestic processing.
Agriculture policy is based on raising rural income and achieving food
security by 2010. This is being achieved through market based reforms
including price deregulation and removal of subsidies. However, poorly
developed market chains and infrastructure, farmers’ limited access to credits
and low mechanizations are keeping the productivity low by international
standards. Moreover, agri-processing remains weak and only 15% of
agricultural output is processed. Limited availability of arable land which is
only 7% is another limiting factor but through better use of water resources,
irrigated land is programmed to be increased by 10% by 2010.
The energy sector which accounts for about 5% of GDP is still
dominated by state-owned entities. While they have large energy resources,
especially in hydro, they rely on imported oil, gas and coal. The government is
attempting to attract foreign investment in hydro-generation to boost exports of
electricity, which even at present is the second largest export.
The Kyrgyz Republic made comprehensive liberalizing commitments for
services during the WTO accession process. Bank privatization is fairly
advanced. Foreign bank ownership is fairly high at over 60%. Similarly the
telecommunication market was liberalized in line with WTO commitments
when Kyrgyztelecom’s monopoly on international and long-distance calls was
removed. However, Kyrgyztelecom is yet to be fully privatized. Transport
services, other than road are heavily regulated. The national carrier and
railways are still state-owned. A new national airline is, however, being
established.
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Conclusion
Although the Kyrgyz Republic is facing major challenges of high
poverty rates and unemployment, with almost 100% literacy rate, open
economy, rich mineral and energy resources, lots of potential for tourism and
fast paced reforms, I am confident that the country would soon be able to
overcome these challenges and quickly climb up the ladder of economic
development.
Madam Chair, with these remarks, I look forward to hearing the
representatives of the Kyrgyz republic and the other Members for their
comments. Based on those comments, I hope to have another opportunity to
draw some conclusions.
Thank you.