Over the years of independence in Kyrgyzstan, there has been a gradual transition from a command-administrative system to market relations, said Iskender Sharsheev, head of the Secretariat of the National Alliance of Business Associations. However, in his opinion, the country still has a lot to do to reform its economy.
Lost competition of national interests
The Kyrgyz Republic is a strange example in the post-Soviet space, which was supposed to demonstrate the advantage of a democratic way of developing society. All over the world, countries with access to the sea, large markets in the neighborhood, the same relatively liberal economy and strong civil society, strong micro-small and medium-sized businesses, as in Kyrgyzstan, have been demonstrating rapid growth and development for two decades. However, our country, locked from all sides by other states, including one rising superpower, demonstrates a strong economic lag.
In recent years, this has been influenced by the pandemic, the global logistics crisis, and the global processes in general, since no development is possible in a closed system of the economy, and in the system of economic processes in Central Asia, Kyrgyzstan has turned out to be the most vulnerable country to geopolitical pressure.
For example, in 2010 the Dordoi and Kara-Suu markets (bazaars) created a turnover of 6 billion USD (an indicator comparable to the country’s GDP), and formed re-export chains.
Moreover, at the same time, expansionary and integration processes began, which led to the entry of Kyrgyzstan into the EAEU in 2015 with the interception of re-export logistics to Khorgos and other routes. In 2018, bypassing the EAEU, a new logistics route was created that passed through Kyrgyzstan and operated in the shadow sector, but by 2021 it was also practically eliminated through other non-economic processes related to issues of war and peace.
In the country, in the absence of special attention from the state, light industry developed at an accelerated pace. The volume of the light industry market with employment in it up to 7% of the population amounted to slightly less than 270 million US dollars. However, the emergence of laws on mandatory labeling of goods after joining the EAEU in the main countries – the target markets of the country’s light industry, led to a reformatting of the sector.
At the moment, the focus of the production of light industry goods is shifting to other countries, to Uzbekistan – in particular for Central Asia, Vietnam, Bangladesh – for Asia.
The free movement of goods within the EAEU is de facto limited. According to a number of business associations, it is difficult to transport light industry goods across the Kyrgyz-Kazakh border from Kazakhstan.
Specificity of the country’s economy
The economic history of Kyrgyzstan over 30 years of independence has shown interesting trends. Thus, developed light industry in the country at the end of the USSR, after the breakdown of the system of economic division of labor and resources, like all high-tech and light industry, collapsed. The share of industry in the country’s economy is falling rapidly.
This does not mean that there is no industry in the country. Single large and small enterprises exist, function, new production companies appear on the market from time to time.
Previously, Kyrgyzstan was considered an agrarian and cattle-breeding country. However, the role of agriculture in the structure of GDP is also steadily declining, with a constant growth in the share of GDP in the services and trade sectors. Import is cheaper than local production. A strong national currency favors importers and hinders the development of local production and exports.
Kyrgyzstan is an exporter of labor. Income from this market to the country reaches an average of 2 billion USD per year. The pandemic is making its own adjustments and cash flows in this sector are falling.
The volume of foreign direct investment in the country is volatile and has a downward trend. During these thirty years, the country has practically never created special conditions for investors. Free Economic Zones (FEZ) in the country in a short time lost their meaning due to legislative adjustments. The markets of the Kyrgyz Republic are not attractive to investors due to the small population, the country’s lack of access to the sea, and hence the limited sales market. Although there is potential for creating investment attractiveness in the country. Especially for the tourism sector, as well as for the high-tech industry, given that the majority of the population has a fairly good education.
In the Kyrgyz Republic, two systems have developed in an amazing way. The first is the state apparatus that has survived and transmitted the old traditional value content, which has completely inherited all the basic principles of management and organization of labor from the Soviet Union.
There is a certain image of a command-administrative economy within state organizations, with features of state services. The second system is a parallel universe coexisting side by side, namely the private sector, in which the liberal economy is fully operating. This private sector actually operates in the absence of special conditions.
The country had an experience of wild privatization. To date, there are no exact results of the inventory, but approximately in the country there are more than 4,000 units of state property. This is despite the fact that the total number of households is about 430 thousand units.
The country also has 99 state-owned enterprises, of which only 6 had a certain positive balance until 2019, that is, they had income and profits. The rest of the enterprises are considered unprofitable, subsidized, and over the years they accumulate debts to counterparties. For 30 years, the government has avoided full privatization, as a result of which there are a very large number of real estate units in the country that do not participate in creating added value and, accordingly, fall out of the economy. All this property is used ineffectively.
Kyrgyzstan has a very high potential for the development of recreational tourism, this sector today brings up to 3% of the country’s GDP. In reality, these figures may be even higher. The prevailing development of tourism in rural areas, in natural areas, complicates tax administration and many tourism entities work in the shadow sector. In recent years, the pandemic has made a significant impact on tourism.
In terms of logistics through Kyrgyzstan, mainly across the southern regions, it is extremely profitable to build railways along the China-Kyrgyzstan-Uzbekistan route and further. This railway could enhance the country’s export potential and bring additional profits, which, according to economists, could form about one and a half billion US dollars for the country per year. However, the implementation of this project may reduce the income of neighboring countries. It is possible that this circumstance is the main obstacle to the construction of the railway. Now there is only a railway line through Kazakhstan, which does not create diversification of logistics.
The energy sector in Kyrgyzstan is experiencing serious problems, especially in connection with cyclical global warming, when dry cycles have been observed in recent years. At the same time, the potential of the country’s water resources is extremely high. The only problem is that there are not enough hydroelectric power plants. In fact, the Toktogul hydroelectric power station and several smaller hydroelectric power stations operate in the country. Potentially, the Saryjaz hydroelectric power station, the Upper Naryn cascade of hydroelectric power stations, Kambarata 1, Kambarata 2 cold be built. A cascade of 6 hydroelectric power plants could be erected on the Sary-Jaz River. Their total generation could provide the entire country and allow up to 60% of the generated electricity to be exported to neighboring countries even in wintertime.
The country remains dependent on the supply of carbon fuel, coal, fuel oil, fuel, and lubricants. At the same time, almost 99% of all fuel and fuels and lubricants come from only one country.
Domestic demand for real estate in Kyrgyzstan with a population of over 6.6 million people is about 30 million square meters. However, in terms of the pace of construction, the Kyrgyz Republic reached the 1990 level only in 2019. The pandemic has dealt a severe blow to the construction sector, with growth dropping 80% in 2020. Today, there is a very slow market recovery and, apparently, it will take several years to reach that level of 2019.
In general, the economy in the Kyrgyz Republic is not sufficiently globalized and the country is heavily dependent on imports. The best way out of this situation is re-export, which is difficult because the interests of neighboring countries collide here. In terms of public administration and state regulation of the economy in Kyrgyzstan, the state exists due to the fact that a strong trade and service economy has independently grown in the country, up to 45% of which is in the shadow. However, even that part, which is not in the shadows, makes it possible to pay for the existence of the state at the expense of tax payments and levies.
However, the country still retains a very ramified command and control apparatus, which, in fact, is outdated in terms of management. In the country, there are one and a half million people, who receive payment from the form the state budget. 640 thousand of them are pensioners, 440 thousand are state employees, teachers, doctors, in sectors of the economy that are declared social and guaranteed by the state and the Constitution. There are about 20 thousand civil servants and 19 thousand municipal employees in the country according to the data of the last three years. There are also military personnel, the number of which is classified.
The state apparatus is overstuffed for such a small country and small population. Almost one and a half million people work in the civil service and in the public sector. Also, about one and a half million children do not participate in economic activities. One million people are in migration.
Accordingly, within the country, only two and a half million people are economically active population, of which about a million people participate in direct taxation. Thus, the tax base is very small. As a rule, indirect taxes, the coverage of which concerns 100% of the entire population, save a lot. The total tax burden in the country for direct taxes is no more than 26% of the income of a commercial company, for indirect taxes up to 64% of the gross income of each citizen.
The return of public confidence in the authorities, optimization and even reduction of the state apparatus is critically important for the country. A serious modernization of the public administration system is required, since the country is not in need of such a large number of civil servants. Up to half a million people who are currently listed as state employees should participate in creating added value in the economy. So far, almost two and a half million people have been pulled out of economic processes but are present in the economy as consumers. The pension system for the country is also a challenge. There are forecasts that in 2040 there will be a serious pension crisis in the country.
The financial sector of the Kyrgyz economy is rather conservative. The country has very high rates for consumer loans, on average up to 26% per annum. Bank capital is extremely expensive, which is also a deterrent to economic development.
On the other hand, up to 80-90% of all business activity of local businesses is secured by bank lending. Even in such an unusually harsh environment of high cost of capital, due to the lack of alternatives, local business has grown at the expense of banking capital.
It should be borne in mind that from 2011 to 2015, the Kyrgyz economy could be called the most liberal in Central Asia. Closer to 2017, the leadership in this indicator passed to Kazakhstan. And yet, a lot has been done over the years. Many types of taxes were eliminated, the number of taxes was reduced to 2 indirect and 8 direct. Previously, there were registers of 25 thousand government services. Today their number has dropped to almost 600. These indicators may suggest that the country was slowly moving away from the command-administrative system and deep regulation of the economy by the state towards a more market-based system.
The influence of tribal and clan ties on the economy of Kyrgyzstan is ambiguous. If at the very beginning these ties had at least some significance for the economy, now their role has been practically reduced to zero. The clan system today is implemented in the system of obtaining political power. Attachment to the clan-tribe, to relatives, is important for victory in electoral processes. This is not a significant factor for the economy. As practice shows, successful strong family businesses are still rare in the Kyrgyz Republic.
Most often, family businesses die or suffer severe damage due to the lack of competence of workers.
Some state or private enterprises with high profitability and a monopoly position may fall under the control of political clans. However, in general, their impact on the economy is not as great as in other countries of the former Soviet Union. It can be estimated that the number of such enterprises does not exceed 1% of the total number of enterprises operating in the economy.
Strange combination of market and command-and-control methods
Summing up, we can say that, in the system of state administration and state regulation of the economy, there is still a command-administrative system, which is put up in the neighborhood with a fairly developed market economy in Kyrgyzstan. In general, the economy in the Kyrgyz Republic is more market-oriented when compared with its neighbors. If it were not for the situation of foreign policy pressure and strong competition between neighboring countries, in general, Kyrgyzstan has the potential to enter its average niche of economic development and get its place in the list of developed countries.
The country has a high mobilization potential of civil society, is able to resist regional threats and finance its security and actions to protect national interests. It can be concluded from this that the country took shape as a state.
However, there is no limit to perfection, and the citizens of the country, including the elites of all levels, still need to make a lot of efforts to achieve a normal level of development.