In order to avoid the record fiscal deficit in the country’s history, Kyrgyzstan had to reduce costs almost by one third. This economy cut has affected the republic’s social obligations as well.
The republican fiscal deficit for 2022 will be 360.8 million dollars (30 billion 352.7 million som) or 3.7 per cent of GDP. This statement was made in early November of last year by the ministry of finance.
The ministry expected the deficit at the end of 2021, when the budget for 2022 was approved. It was not a surprise as Kyrgyzstan’s treasury in the last 10 years (according to the EEC, the ministry of finance’s data is not available due to malfunctions on the agency’s old website) permanently lacked money. However, the deficit was estimated at just over 108 million dollars (9 billion 121.7 million som).
“The fiscal deficit for 2022 was increased by 252.4 million dollars (21 billion 231 million som) compared to the previously approved budget, and will amount to 320.8 million dollars (30 billion 352.7 million som) by results of the year,” according to the ministry of finance.
In other words, it was increased by more than three times.
According to economist Iskender Sharsheev, constant fiscal deficit is not a norm.
The country’s fiscal deficit emerged due to the rising costs and expected reduction in income. The government expected to earn 3.4 billion dollars (282 billion 112.9 million som) in 2022 or 39.5 per cent of GDP. However, after the budget was revised, income was reduced by 100 million dollars (8 billion 421.7 million som). It happened due to the reduction of income from a range of such taxes as gold mining, excise taxes, foreign trade tax, and customs dues from EAEU countries.
“The cut in tax revenue compared to the previously approved plan will amount to 344.7 million dollars (29 billion som),” according to the ministry of finance.
The decrease in budget spending was partially compensated by grants from international organisations and foreign states. In general, Kyrgyzstan expected to receive 237.4 million dollars (19 billion 975.8 million som) from donors in 2022, which is 21.9 per cent more than the approved plan.
The amount of grants was increased by the aid from Russia and Azerbaijan, which was not included in the initial budget of 2022, and by increased financing from the Asian Development Bank and World Bank.
Less income, more costs
Costs in the revised draft budget for 2022, less financial assets, were estimated at 3.6 billion dollars (304 billion 43.9 million som), and 4 billion dollars (336.8 billion som) or 40.8 per cent of GDP, including financial assets. This is 320.9 million dollars (27 billion som) more than was approved earlier and despite the measures taken to optimise treasury costs.
“The ban on using budget money for expenses related to holding celebrations was introduced. From March 1, 2022, purchases of official vehicles, major repairs of administrative buildings, office premises out of budget money were prohibited. Official trips of officials of executive bodies and local governments should be financed from extra-budgetary sources. The exception applies to business trips determined by president’s and cabinet of ministers’ resolutions,” according to the ministry of finance.
Along with reduction of some spending in 2022, other spending increased. Namely, salaries of public sector employees were increased. According to the estimates of the relevant agency, the annual need for increased pay was 382.7 million dollars (32.2 billion som).
Economist Iskender Sharsheev explained that decision on increased spending with limited resources was difficult and depended on certain circumstances and priorities of the relevant government.
“In general, there may be situations when it makes sense to increase spending, even with limited resources. For example, during the crisis or when there’s a strong need for investments in such essential fields as public health care or education. However, it is important that governments take a closer look at trade-offs emerging during increase in spending with limited resources,” he said.
Expectations and reality
The annual national account for 2022 will become available to the public not earlier than the middle of 2023, so now we can rely on preliminary data only. However, we can already see that the ministry of finance committed a mistake in the deficit projections
Instead of the expected deficit of record 360.8 million dollars (30.4 billion som), it amounted just over 154.5 million dollars (13 billion som) or half as much. The indicator was at the level of 2016, 2017 and 2020.
However, the treasury managed to avoid a big fiscal hole not by high earnings. They decreased, as the ministry of finance forecast, by 40.4 million dollars (3.4 billion som) below the revised budget and by 140.3 million dollars (11.8 billion som) below the approved budget. Less taxes were collected, 6.2 million dollars (524.37 million som) less than the revised indicator.
According to Iskender Sharsheev, the state must take certain measures to mitigate negative consequences of the economic recession and promote recovery in the period of low earnings. According to him, there are several options of actions to be taken by the government. It should use its fiscal policy to boost the economy by increasing public spending or by reducing taxes. It could contribute to the increase in the demand for goods and services, which, in turn, can lead to increase in production and employment.
Besides, loan interest rates could be reduced or money supply could be increased. Also, assistance could be provided to vulnerable groups and struggling businesses.
“The state can provide support to the unemployed by such programmes as unemployment insurance or vocational training programmes. It can also provide assistance to struggling enterprises by such programmes as loans or grants. It can support businesses during hard times and prevent from job losses,” the expert said.
He also said that the state could use investments in such infrastructure projects as roads, bridges, and public transport during the low income period. These types of projects can create jobs and ensure long-term economic benefits.
However, as we can see, the authorities of Kyrgyzstan chose a different way. To avoid the fiscal deficit, they decided to cut spending significantly. Thus, costs were 634.7 million dollars (53.4 billion som) less, including financial assets, and amounted to 3.4 billion dollars (283 billion 362.6 million som), and 1.2 billion dollars (97.7 billion som) less.
Costs were cut more by decreasing spending on purchase and use of goods and services. Meanwhile, decrease of costs affected social payments and subsidies to state and private organisations.
In other words, deficit was felt not only at the top, but also by ordinary people. To cope with the lack of money, the government offered to decrease social obligations by 487.2 thousand dollars, and support to business approximately by 1.5 million dollars.
This strategy can be dangerous during the crisis. First, it can lead to the increase in poverty and inequality because people relying on state support will be left without aid.
Second, leaving business without support at such times can lead to even deeper issues. Companies may be forced to close, which will lead to the increase in unemployment and economic uncertainty. The negative impact of such decisions may be long term. If enterprises are not provided with timely support, they can never recover again. It will harm the economic growth and development of Kyrgyzstan.
In the future, this situation can result in the increased taxes, which are the main item of treasury revenue (nearly 80 per cent), more expensive loans because of the state’s increased demand for loans inside the country, increased inflation rate, and cuts in government services. Thus, fiscal deficit can have a significant impact on citizens in many ways, including economic slowdown.