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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, 2 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. 3 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 4 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. 5 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 6 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. 7 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.