Due to political situation, some foreign partners of Bishkek authorities suspended financial assistance.
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The budget deficit of Kyrgyzstan in 2020 is predicted in the amount of 35.6 billion som (432 million dollars) or 6.1 per cent of GDP. Initially, the deficit was predicted as 7.9 billion som or 1.4 per cent of GDP when the budget for 2020 was set. However, the coronavirus pandemic has done its part. The lockdown that artificially suspended the economic activity in the country, as well as closure of borders, have increased the deficit by almost 4.5 times.
For comparison, in 2019 the budget deficit in the country was 10.3 billion som or 1.7 per cent of GDP. Receipts from external sources were 22 billion 834.7 million soms, including 11 billion 588.5 million som in grants. All money received from external sources were allocated to investment projects.
In 2020, the national budget was revised because of coronavirus. Back then, the budget deficit was predicted as 27 billion 692.3 million som or 4.7 per cent of GDP. However, this is the third version of the budget, where the deficit is 35.6 billion som.
The head of budgetary policy office of the ministry of finance, Almazbek Kochkorov, said the budget deficit will be covered every year by external sources. These are usually official transfers, loans and grants of donors from partner countries. Every year, the sources are different, but Kyrgyzstan often takes loans from the World Bank, Asian Development Bank, IMF and from such partner countries as Russia and Japan.
All external receipts to the national budget are special purpose. All receipts are based on agreements and have a predetermined purpose.
“There are external receipts that are meant to support the budget in certain state investment projects depending on their designated purpose. For example, projects in transportation, road construction, irrigation, education, public health, etc.,” Kochkorov said.
Speaking about the receipts of grants in the last few years, the representative of the ministry of finance reported that money was spent on such projects as house building for law enforcement agencies, grants for construction of social housing, construction of theatres. The World Bank finances projects in infrastructure and public welfare.
In addition to IMF, this year the European Union supports Kyrgyzstan in its fight against coronavirus and its consequences. Initially, the republic was reported to receive 36 million euros as a grant to support the sectors of education and social welfare. In July, the European Union transferred the grant for 24.8 million euros to the treasury account of the Kyrgyz government. The European Union decided not to allocate 6 million euros for digitisation. It is planning to allocate them in 2021.
This is not the only assistance of the European Union to Kyrgyzstan. For example, a total of 26 million euros was allocated in tranches to support the budget in 2016 to 2019. Also, 10 million euros were allocated for educational projects in the country.
Also, the World Bank supported the public health sector with the amount 201.5 million som, and the ADB allocated 2 billion 15 million som, according to the updated budget for 2020.
In general, official transfers to be received by the republican budget amount to 12 billion 774.4 million som and will increase by 3 billion 091.6 million som.
Is it fine to get loans for the budget?
Covering the budget deficit with the funds received from external sources, according to the head of the budgetary policy office of the ministry of finance Almazbek Kochkorov, is a normal phenomenon in all countries.
“Loans are constant. It happens around the world. The budget takes out loans and then services them as a national debt,” he said.
In fact, according to Kochkorov, the budget of Kyrgyzstan is balanced, i.e. all expenditures will be covered. He specified that the country has an impression that the national budget is shaped based on internal and external sources.
In 2020, Kyrgyzstan had to apply to donors for support because of the force majeure, i.e. coronavirus pandemic.
“At this moment, IMF allocated two tranches in the total amount of 242 million dollars. These receipts increased the gap between the planned deficit and the existing deficit. This phenomenon is valid only this year,” he said.
Despite the fact that external sources to support the national budget have been determined, there’s a risk that one of donors is not able to allocate the predetermined tranche in the amount of 100 million dollars (8 billion som). The question is the funds to be allocated by the Eurasian Fund for Stabilisation and Development. The Fund announced its suspension after the political events in Kyrgyzstan on October 5-6.
Borrow for the national development
Bakyt Satybekov, an expert in public finances, budget planning, said it is necessary to have more income in poor countries in order to develop. He specified that the budgetary deficit is not a problem, the problem is its size. Satybekov made an example that in many countries, including European Union, the deficit should not exceed 3 per cent of GDP.
“This norm is available in the Eurasian Economic Union, while it is only a recommendation,” he said.
Bakyt Satybekov said that the economy of the country won’t improve without external investments. Therefore, Kyrgyzstan takes on loans on easy terms from international organisations.
“If we look at the rate of state investment and the rate of deficit, they will be equal. It means that the amounts of foreign sources are intended for development. Interior sources are meant to downplay,” the expert said.
Expert in economic affairs, Adilet Mamatov, also notes that foreign borrowings are needed for the development.
“Kyrgyzstan has an outdated infrastructure that needs to be renovated. Substations and roads have been built. We cannot independently allocate funds for such expenses, therefore we accept a budget with a deficit. This is the subject of good, thoughtful policy,” he said.
Impact of political processes on the economy
Political tensions in Kyrgyzstan, according to experts, have had a significant impact on the already weak economy and especially on the investment image of the country.
According to Satybekov, in 2020 the coronavirus pandemic affected the decline in economic development up to minus 4 per cent. The predicted deficit was 25 billion som, but after the coup d’état the lack of money increased up to 35 billion som.
“Now we need funds not to cover development projects, but to implement social obligations,” he said.
In this regard, the expert thinks that the state may take certain measures to fill the gaps in the budget. In particular, he thinks that a part of the share of Kyrgyzstan must be sold to Centerra Gold Inc., unnecessary state enterprises should be liquidated, and state companies should be sold because they are unprofitable in their price.
“Now it is difficult to say who will help us because in fact we are in isolation. It’s unclear whether they will help us or not before the elections. Politics affects the national economy. We need to hold elections as soon as possible,” he said.
Azamat Mamatov added that this year the budget deficit is related to low tax collection. The main sectors of economy have been suspended for three months and did not pay taxes. Many companies are about to go into bankruptcy. The sales slowdown was caused by low purchasing power of people.
According to the law of Kyrgyzstan, the external debt of the country must not exceed 60 per cent of GDP. According to experts, today the debt has reached this mark and the country won’t be able to borrow from abroad.
Let us remark here that the national debt of Kyrgyzstan, according to official data of the ministry of finance, is 4 billion 827. 40 million dollars, including 4 billion 180.44 million dollars of external debt.
This article was prepared as part of the Giving Voice, Driving Change – from the Borderland to the Steppes Project