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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 WT/TPR/S/170 Page vi 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. (5) 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.