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Kyrgyzstan at the Cross-Roads The Economic Situation in the Kyrgyz Republic Chris Lovelace Country Manager The World Bank March 3, 2006 Oxford, UK Economic Growth Growth remains fragile and sensitive to domestic and external instabilities. Growth in 2005 (-0.6%) was affected by a decline in gold production and political uncertainties. Structure of GDP, growth, and inflation 80000 20.0 70000 15.0 60000 50000 10.0 % Macroeconomic situation has been stable; Inflation remains low; and exchange rate relatively stable recent years. million soms, 1995 prices 40000 5.0 30000 20000 0.0 10000 0 -5.0 2000 2001 2002 2003 2004 2005p Agriculture Services Manufacturing Consutruction Power Gold GDP growth non-Gold GDP growth Inflation (avg) Economic base Instability of economic growth is largely due to the fact that the economic base remains narrow. “-” The economy heavily concentrated in agriculture, gold and power production and production of essential services. “+” Strong growth of services and signs of recovery in manufacturing. Inherited good infrastructure and a welleducated population (although deteriorated) Pro-poor economic growth Poverty declined steadily over last years Poverty is concentrated in rural areas Albeit progress in poverty reduction, its level remains high (with GDP per capita at about US$ 470) 8 70 63 6 % of population 5.3 50 50 46 40 30 2 0.0 0 -2 2001 -4 2002 2003 -8 20 2001 Rural poverty 2002 2003 Urban poverty 2004 Total 2004 -2.8 -6 2000 7.1 4 55 annual % change 56 60 7.0 -7.9 -9.0 -9.8 -10 Real GDP growth Change in poverty rate Progress made in fiscal adjustment, but further reforms are needed The general government deficit fell from 10% of GDP in 2000 to 3.8% of GDP in 2005. Better revenue collection and controlled spending However, public expenditure management reforms need to be deepened to improve public service delivery and use scare resources efficiently. General Government Balance 35.0 30.0 25.0 20.0 % of GDP 15.0 10.0 5.0 0.0 -5.0 2000 2001 2002 2003 2004 -10.0 -15.0 Total Revenue and Grants Total Expenditure Fiscal balance Primary balance (w/o foreing PIP and %) 2005p Low domestic investment is a constraint The economy continues to rely heavily on foreign and national savings, including increased remittances and foreign transfers. FDI is relatively low. 35.0 30.0 30.7 25.0 25.6 22.7 20.0 22.0 20.0 19.0 18.7 17.1 17.5 15.0 10.0 5.0 0.0 Armenia Tajikistan Uzbekistan Kyrgyz Rep. Mongolia Gross capital formation (annual % growth) Average 2000-2003 Nepal Uganda Burkina Faso Gross capital formation (% of GDP) Mali The Kyrgyz export performance remains weak and vulnerable Exports, Imports, and Current Account Balance 1,400.0 0.0 1,200.0 -1.0 1,000.0 -2.0 800.0 -3.0 600.0 -4.0 400.0 200.0 -5.0 0.0 -6.0 2000 2001 Exports GNFS 2002 2003 Imports GNFS 2004 2005p CAB (% GDP) % of GDP High commodity and geographical concentration. Gold is about 40% of exports. Exports are largely primary commodities and very volatile due to regional restrictions, barriers, and price shocks. The unfavorable performance of merchandise trade was counterbalanced by the strong flow of remittances. Oil price increase negatively affected the CAB million US$ External Debt is a constraint for development Progress achieved in debt restructuring (Paris Club) Debt/GDP ratio declined from 111% in 2002 to 89% in 2005 External debt service/ exports ratio declined from 20% in 2002 to under 10% in 2005 Debt sustainability remains vulnerable to domestic and external shocks HIPC eligible country Regulatory environment needs improvements Contributions of SMEs to GDP and employment increased only slightly over the last three years Corruption and poor governance are key issues. Source: BEEPS Growth requires more reforms Table 1 the Kyrgyz Republic:Key Economic Indicators, 2000-2010 2002 Medium Term (MT) assumptions: political stability and moderate progress with reforms But these path of reforms not sufficient to achieve stronger growth (8-10 % in MT) to reduce poverty substantially 2003 2004 2005 2006p 2006-2010 average Real Sector Real GDP growth (%) 0.0 7.0 7.0 -0.6 5.6 5.5 Non-gold real GDP growth rate (%) 3.6 5.4 7.8 1.5 5.7 5.4 GDP per capita (current US$) Investment (% of GDP)1 322 381 434 473 490 552 20.3 20.5 20.9 21.6 22.2 22.9 2.1 3.1 4.1 4.3 5.5 4.3 22.7 22.9 23.4 24.1 24.1 25.1 18.1 17.7 18.3 19.4 19.2 19.8 Expenditure 27.9 27.6 27.4 28.3 27.4 28.6 PIP credits 4.7 3.7 3.8 2.5 2.7 2.0 Fiscal Balance -5.2 -4.7 -4.0 -3.8 -3.3 -3.6 -3.1 -4.2 -3.4 -9.0 -7.0 -3.1 Exports (% growth) 3.7 18.1 24.6 -0.8 9.9 6.7 Imports (% growth) 25.1 21.4 31.3 17.7 9.8 7.3 111.1 101.2 95.2 82.8 80.9 69.1 Inflation (average) General Government Balance (% of GDP) Revenue and grants Tax revenue (incl. Payroll tax) External Sector Current Account Balance (% of GDP) External Debt (% of GDP) Source: Kyrgyz authorities, WB staff estimates and projections 1/ Data on investments for 2002-2005 are based on the IMF assumptions Good Governance is the key to higher growth Political stability and government speaking with coherent voice Implementation of Civil Service Reforms Institutions for effective management of public resources Implementation of reforms to improve business environment All the above required to deal with systemic corruption and rent seeking Huge challenges and not clear whether the state is strong enough to make these reforms Conclusions While macroeconomic situation is stable, growth remains fragile and sensitive to domestic and external instabilities, and fragmented policy making. Although the economic growth has been pro-poor, poverty remains high. Advantage of inherited infrastructure and a welleducated population should be capitalized. Export performance and external debt sustainability have to be strengthened. Investment levels both domestic and foreign need to be raised. Business environment, public finance management, and governance have to be improved substantially. Thank you!