ECONOMIC ISSUES IN KYRGYZSTAN

ECONOMY OF KYRGYZSTAN

Kyrgyzstan is the second poorest country in Central Asia after Tajikistan. It has very few things that anyone would want to buy and relies on its neighbors for essential goods. In 2002, the per capita annual income was $270. The national debt was $300 per person.

Kyrgyzstan is a poor, mountainous country with an economy dominated by agriculture and minerals extraction. Cotton, tobacco, wool, and meat are the main agricultural products, although only tobacco and cotton are exported in any quantity. Other exports include gold, mercury, uranium, natural gas, and—in some years—electricity. Bishkek remains embroiled in a legal battle with Canadian investors in the Kumtor gold mine, the nation’s largest. Kyrgyzstan has sought foreign investment to develop hydroelectric potential as a source of export revenue. The economy also depends heavily on remittances from Kyrgyzstani migrant workers, primarily in Russia. Following independence, Kyrgyzstan rapidly carried out market reforms, such as improving the regulatory system and instituting land reform. [Source: CIA World Factbook =]

Kyrgyzstan was the first Commonwealth of Independent States (CIS) country to be accepted into the World Trade Organization. The government has sold much of its ownership shares in enterprises. Drops in production had been severe after the breakup of the Soviet Union in December 1991, but by mid-1995, production began to recover and exports began to increase. The overthrow of President Bakiev in April 2010 and subsequent ethnic clashes left hundreds dead and damaged infrastructure. Under President Atambaev, Kyrgyzstan has developed a plan for economic development in coordination with international donors. In December 2014 Kyrgyzstan agreed to join the Eurasian Economic Union in early 2015. The keys to future growth include progress in fighting corruption, improving administrative transparency, restructuring domestic industry, and attracting foreign aid and investment. =

Economic Statistics for Kyrgyzstan

GDP (official exchange rate): $7.647 billion (2014 est.). GDP (purchasing power parity): $19.29 billion (2014 est.); $18.53 billion (2013 est.); $16.77 billion (2012 est.), country comparison to the world: 143. After increasing by 6 percent in 2004, the GDP declined by 0.6 percent in 2005 to US$2.14 billion (US$10.1 billion in purchasing power parity, US$420 per capita). In the early 2000s, operations in the Kumtor Gold Mine, Kyrgyzstan’s single most productive asset, contributed 7 percent of GDP. Gross National Product (GNP) in 1993 was estimated at US$2.77 billion, US$590 per capita, declining steadily in early and mid-1990s. [Source: CIA World Factbook =, Library of Congress, January 2007 **, Library of Congress, March 1996 *]

Growth (GDP - real growth rate): 4.1 percent (2014 est.); 10.5 percent (2013 est.); -0.9 percent (2012 est.), country comparison to the world: 67. In 1994 the growth rate was -26.2 percent. Economic growth stopped by insufficient privatization and restructuring, Soviet-era banking system, and rampant corruption. = *

GDP - per capita (PPP): $3,400 (2014 est.); $3,300 (2013 est.); $3,000 (2012 est.), country comparison to the world: 181. =

GDP - composition, by sector of origin: agriculture: 19.3 percent; industry: 31.1 percent; services: 49.6 percent (2014 est.). GDP - composition, by end use: household consumption: 103.2 percent; government consumption: 16.6 percent; investment in fixed capital: 29.1 percent; investment in inventories: 1.8 percent; exports of goods and services: 48.1 percent; imports of goods and services: -98.8 percent (2014 est.). In 2005 services accounted for 43.9 percent of GDP (up from 38.7 percent in 2004), agriculture for 35.3 percent (down from 38.5 percent in 2004), and industry for 20.8 percent (down from 22.8 percent in 2004). = **

Unemployment rate: 8.6 percent (2011 est.); 18 percent (2004 est.), country comparison to the world: 96. =

Inflation rate (consumer prices): 7.2 percent (2014 est.); 6.6 percent (2013 est.) In the early 1990s, inflation was a grave problem, as the rate reached 700 percent in 1993. Except for a brief spike caused by the Russian financial crisis of 1998, the government has controlled inflation much better in the late 1990s and early 2000s. In 2004 the inflation rate was 3.2 percent, and in 2005 it was 5.2 percent.. = **

Gross national saving: 13 percent of GDP (2014 est.); 11.6 percent of GDP (2013 est.); 10.2 percent of GDP (2012 est.), country comparison to the world: 130. =

Macroeconomic Issues in Kyrgyzstan

Kyrgyzstan's problem is that has little that anyone wants. Kyrgyzstan doesn’t have many resources to exploit except the gold taken from a single mine and the energy generated from the rivers that flow out of its mountains. Any goodd that it produces are expensive to export anywhere other than the countries that immediately surround it.

Prior to 1991, Kyrgyzstan’s economy was highly dependent on the economy of the Soviet Union. The loss of key Soviet inputs caused severe economic contraction in the 1990s and has required substantial restructuring. The market reform program pursued in the 1990s has been partly abandoned as the state assumed a greater planning role in the late 1990s and early 2000s. Agriculture and services are the most important sectors, as industry remains concentrated in specific regions and outputs. In the early 2000s, workers have moved from industry to subsistence agriculture as industrial enterprises fail. A Comprehensive Development Framework has set economic goals from 2001 to 2010, with strong guidance from international financial institutions. As much as 50 percent of the gross domestic product is contributed by the gray economy. The government has launched two major programs to privatize state enterprises, which by 2003 had shifted about 7,000 enterprises to the private sector. However, domestic opposition and low foreign investment have slowed the rate of privatization. In 2006 widespread unemployment was a major cause of large-scale street demonstrations. [Source: Library of Congress, January 2007 **]

Kyrgyzstan relies on foreign aid to keep the economy afloat. It has received more foreign aid per capita than any other former Soviet republic. Kyrgyzstan is considered self-sufficient in both food and energy. Despite this, electricity is either unpredictable or rationed in the winter. About 35 percent of the people are involved in agriculture. In the early 1990s, Kyrgyzstan imported 95 percent of its oil and gas and 40 percent its grain.

Sectors of the Kyrgyzstan Economy

Kyrgyzstan is a country with few natural resources. The economy is based on agriculture, mining, and animal products. Most exports are in the form of raw materials. Kyrgyzstan has deposits of gold, coal, bismuth, mercury, antimony, tungsten, and copper. The most important exports are gold and hydroelectric power.

Agriculture: Heavily state controlled, reducing profitability and encouraging subsistence farming; irrigation necessary for more than 70 percent of land. Main use of land livestock raising; main crops corn, wheat, barley, vegetables, potatoes, and sugar beets. Bank credits and input materials scarce for farmers; severe output decline 1991-95. [Source: Library of Congress, March 1996 *]

Industry and Mining: Production decline 58 percent, 1992-94, caused by energy shortage and loss of Russian skilled workers. Political pressure maintains unprofitable Soviet-era state enterprises. Main industries machine building, textiles, food processing, electronics, and metallurgy. Iron ore, copper, gold, lead, zinc, molybdenum, mercury, and antimony are mined. *

Energy: Insignificant oil and natural gas deposits, and coal deposits not fully exploited. In 1994, some 39 percent of imports were fuels. Coal-powered thermoelectric power pro-duction replaced by hydroelectric power, early 1990s; emphasis on electric power based on abundant water power, providing exportable power bartered for coal from Kazakstan. *

Taxes and Budget of Kyrgyzstan

Budget: revenues: $2.036 billion; expenditures: $2.214 billion (2014 est.). Budget surplus (+) or deficit (-): -2.3 percent of GDP (2014 est.), country comparison to the world: 92. [Source: CIA World Factbook =]

Taxes and other revenues: 26.6 percent of GDP (2014 est.), country comparison to the world: 109. After Kyrgyzstan experienced high annual deficits through 1995, tax reforms and public expenditure restrictions reduced but did not eliminate annual deficits beginning in 1997. Several factors inhibit budget-balancing progress: state revenue is low as a percentage of gross domestic product, external debt remains high, and in 2004 social and welfare expenditures still were more than 50 percent of the budget. In 2004 revenues totaled US$431.3 million, and expenditures were US$445.4 million, incurring a deficit of US$14.1 million. In 2005 revenues increased to US$516.3 billion, but expenditures increased to US$539.9 million, increasing the deficit to US$23.6 million. [Source: Library of Congress, January 2007 **]

The balance of payments in 1992 was a deficit US$147.5 million. Drastic tax revenue shrinkage caused revenue crisis and reduced government spending in 1994. A widespread tax reform program took place 1995, focusing on enforcement and new land and excise taxes.

Fiscal Year: Calendar year.

Economies of Central Asia

There are hopes that Central Asia could reemerge as the crossroads for a new Silk Road, providing transportation links for a variety of goods between Asia, the Middle East and Europe. Nations with oil and gas need pipelines to get them out. Those without oil and gas hope to profit by having pipelines cross their territory.

As a result of merely being cogs in the centrally-planned Soviet economy, all the Central Asian nations have economies that are too specialized and too dependent on Russia for markets and supplies to make a real go of it on their own without some serious changes.

Unemployment rates are very high in all five Central Asian countries but there are no reliable figures on exactly how high. Young people have difficulty getting jobs without connections. The streets are full of idle young men. There are concerns that these young men will be recruited by terrorists.

Regional economic cooperation, another type of unity that has received substantial lip service in the 1990s, has failed to materialize on a large scale. All five republics joined the Economic Cooperation Organization (ECO) shortly after independence, and Kazakstan, Kyrgyzstan, and Uzbekistan established a limited common market in 1994. But Uzbekistan vetoed the membership of unstable Tajikistan, and Turkmenistan refused to join. Existing arrangements within the free-trade zone have not significantly promoted large-scale commerce within the group of three. For all five republics, Russia remains the top trading partner because much of the emphasis in their agricultural and industrial infrastructures remains the same as when the republics had assigned roles in supplying Moscow. Those roles and dependence on Russian trade are changing slowly in the mid-1990s, however, as diversification occurs. [Source: Glenn E. Curtis, Library of Congress, March 1996 *]

Several factors encourage economic rivalry rather than cooperation. Water, a crucial resource for agriculture and power generation, has been the object of bitter bilateral and multilateral disputes both before and after independence. In the 1990s, the republics at the headwaters of major rivers, Kyrgyzstan and Tajikistan, have chafed at apportionment of water consumption favoring downstream consumers Turkmenistan and Uzbekistan, and Turkmenistan has complained about excessive water consumption by the Uzbekistanis upstream. Kyrgyzstan and Uzbekistan have come close to conflict over water in the Fergana Valley, where vital agricultural reform and land privatization programs are endangered by unresolved water disputes.*

The republics still offer a similar range of commodities for trade. Their common emphasis on cotton, natural gas, and oil limits the potential for advantageous commerce within the group and fosters rivalry in trade with outside customers. Some of the commercial relationships that have developed--such as the sale of fuels to Kyrgyzstan and Tajikistan by the other three fuel-rich republics--have been one-sided and subject to shutdown in response to nonpayment or in attempts to gain economic and political leverage.*

Economic Problems in Central Asia

The five republics have several major problems in common. All remain in the economic, military, and political shadow of their giant neighbor to the north. In the mid-1990s, Russian policy makers, encouraged by a very vocal nationalist faction in the federation, speak openly of recapturing influence in the "near abroad"; Central Asia usually is the first region cited as an example. In the first two years of independence, the five republics remained in the ruble zone , their monetary activities restricted by the nonconvertibility of the old Soviet ruble that remained the currency of that grouping. In 1993 all but Tajikistan introduced new currencies with limited convertibility. Russia had attempted to keep Kazakstan and Uzbekistan in a new Russian ruble zone, but ruble distribution problems and harsh conversion conditions forced those republics to follow the independent course of Kyrgyzstan and Turkmenistan. The Tajikistani ruble (for value of the Tajikistani ruble) introduced in 1995 remained closely connected with its Russian counterpart. In 1996 Kazakstan and Kyrgyzstan established a new customs union and other economic ties with Russia and Belarus, hoping to gain selected advantages while avoiding large-scale concessions that would increase Russian influence. [Source: Glenn E. Curtis, Library of Congress, March 1996 *]

The Soviet legacy includes an economic infrastructure in which all republics depend heavily on other republics for vital inputs. A complex Soviet-designed system of pipelines and electric cables connects the five republics. Pending completion of Turkmenistan's new line to Iran, only one railroad line leading out of Central Asia connects the region with a destination other than Russia (the one line goes only to the Xinjiang Uygur Autonomous Region in China). Heavy industry in all five republics also has depended heavily on local Russian skilled labor.*

The Central Asian republics also suffer common geographic disadvantages. All are landlocked and located far from potential markets outside the Commonwealth of Independent States (CIS) and the Middle East. Nations such as Azerbaijan and Afghanistan, through which goods must travel overland to reach Western markets, still are quite unstable, and others such as China and Russia are powerful neighbors with a history of taking advantage of weaker nations that need commercial favors. Kazakstan and Turkmenistan, both in need of a route to move oil and gas to Western customers, have been especially frustrated by Russia's failure to support new pipelines. The landlocked position also presents a national security obstacle.*

Although the region is blessed with ample arable land, most of that land becomes useful only when irrigated. Large-scale irrigation, in turn, has taken a huge toll on the hydrological systems of the region--in the most obvious case, the system that feeds the fast-disappearing Aral Sea. Regional cooperation on the Aral Sea problem, recognized as one of the most serious environmental crises in the world, received much lip service and little action in the first half of the 1990s. By 1995 an estimated 36,000 square kilometers of the sea's bed had been exposed, and an estimated 3 million inhabitants of nearby Turkmenistan, Uzbekistan, and Kazakstan had developed chronic health problems associated with that process. In October 1995, a United Nations (UN)-sponsored regional conference produced the Nukus Declaration, which resulted in the promise of intensified joint efforts to stabilize the sea and a pledge of US$200 million from the UN and the World Bank for regional development and aid. [Source: Glenn E. Curtis, Library of Congress, March 1996 *]

Economic Conditions of Central Asia

The traditional place of business has been open air markets and bazaars. Central Asians are used to the market style of commerce and being choosy shoppers rather than the Soviet style of waiting in lines and buying stuff from shops with limited choice. The market buildings today are not like bazaars from the Silk Road era. Many are housed in Soviet-era concrete structures supported by exposed girders.

Among other Central Asia, Uzbeks have a reputation of being traders and businessmen. They were merchants on Silk Road and shopkeepers in the Soviet era.

The possessions of many people consist primarily of carpets. Wealth has traditionally been kept in the form of carpets jewelry and gold, which has been regarded as a hedge against inflation. The pickings at the local stores are pretty slim. Canned goods are sometimes more than a year old and the best goods are kept under the counter for customers who are friends of the store manager or who are willing to pay extra.

“Immediate face-to-face relationships are the determining factors for most action among all Central Asian cultures, and rules take a backseat to subjective obligations. Most are very polychromic...and mostly re highly risk adverse.”

Economic and Business Customs in Kyrgyzstan

Even though important branches of the Silk Road passed through Kyrgyz territory, the Kyrgyz were isolated on their mountain pastures and did not get rich from the trade and didn’t even participate much in it.

The black market, smuggling and illegal drugs are intrinsic parts of the Kyrgyzstan economy. Average salaries are higher in the north than in the south. Employees sometimes go months without getting paid. Pensioners receive minimal monthly payments as well as flour and cooking oil. In 1998, a total of 23 percent of households could not meet their basic food needs.

Local entrepreneurship is limited, yet nearly every village family has a garden where they grow food to support their needs. Most people have a small amount of livestock, such as sheep, cows, and chickens. Excess produce and dairy products are commonly sold to neighbors or at the bazaar. [Source: everyculture.com <<<]

Unemployment is high, but many people make money by selling goods at the bazaar or by using their private cars as taxis. Kyrgyzstan is dependent on other countries, such as Turkey and China, for consumer goods and chemical products. Since independence, most manufacturing plants and factories have closed or are working at reduced capacities. <<<

Early attempts at privatization led to rioting in Osh in 1990, so this process was put on hold. Farmland cannot be owned by individuals, but it is possible to hold land rights for up to ninety-nine years. [Source: everyculture.com]

See Livestock, Agriculture, Drug Trafficking and Smuggling

Soviet Economy in Central Asia

The Russians and Soviet traditionally viewed Central Asia as a place to produce cotton and grain and fruits and vegetables that needed a warm climate. Cotton production has left a terrible legacy of pollution and environmental damages but still remains an important sector the economy.

During the Soviet-era, the Central Asian republics were cogs in the centrally-planned Soviet economy. Their economic sectors—such as cotton production— were very specialized. Uzbekistan was dependent on the rest of the Soviet Union for markets, goods and supplies. Industry and mining didn't really get cranked up until after World War II. Much of the development of the oil industry has taken place since the break up of the Soviet Union

The Central Asian republics were the poorest republics in the Soviet Union. Those without oil wealth remained that way after independence. The Soviets opened stores and cooperatives but the majority of business continued to be carried out in open air markets and bazaars.

Kyrgyz Economy in the Soviet Era

In the Soviet era, the previously self-sufficient Kyrgyz were incorporated into the Soviet system. Their means of production was collectivized and controlled by a government based thousands of miles away in Moscow. In turn the Kyrgyz became dependent on manufactured goods they couldn’t produce themselves, especially medical supplies, and ultimately were unable to afford.

The Soviets introduced a number of industries, including food processing, oil drilling, coal and gas mining, lumbering and woodworking, textiles, leatherworking, sugar refining, and agricultural and electrical production.

The Kyrgyzstan economy was based on processing minerals brought in from Uzbekistan, Turkmenistan and Kazakhstan, and mining uranium used in the Soviet weapons program. Factories were built for reprocessing mercury, antimony, zinc, tungsten and uranium and hydroelectric power plants were built yo power them.

As a result of being but a cog in the centrally-planned Soviet economy, all the Central Asian nations have economies that are too specialized and too dependent on Russia for markets and supplies to make a real go of it on their own without some serious changes.

See Livestock

Kyrgyzstan’s Role in the Soviet Economy

As part of the Soviet Union, Kyrgyzstan played a small but highly integrated role in the centrally controlled economy. Figures for 1990 show that agriculturally the republic contributed 1 percent or less of the total Soviet output of preserved vegetables, animal fats, plant oils, and meat, and 3 percent of the total Soviet output of beet sugar. Kyrgyzstan also produced small proportions of Soviet wine products and tobacco. [Source: Library of Congress, March 1996 *]

Industrially, the republic supplied 1 to 2 percent of the Soviet Union's total output of cotton cloth, silk cloth, linen, and woolen cloth, and an equal proportion of ready-made clothing and shoes. Machine-assembly plants, steel plants, motor-assembly plants, and miscellaneous light industry contributed another 1 percent or less of the Soviet total. The only energy resources that Kyrgyzstan contributed in any volume were coal (0.5 percent of the Soviet total) and hydroelectric power (0.8 percent). Kyrgyzstan's radio-assembly and other electronic plants accounted for a small portion of the defense industry. A torpedo-assembly plant was located on the shores of Ysyk-Köl. One of the Soviet Union's two military airbases for the training of foreign pilots was located outside Bishkek. *

Kyrgyzstan's largest role in the Soviet economy was as a supplier of minerals, especially antimony (in which the republic had a near monopoly), mercury, lead, and zinc. Of greatest significance economically, however, was gold, of which Kyrgyzstan was the Soviet Union's third-largest supplier. *

Post-Soviet Economy in Central Asia

The economies of Central Asia declined in the years after independence. Their leaders had little business sense or grasp of market economic fundamentals. There were shortages, production declines, negative growth, high inflation, declining standards of living, unpaid workers, starving pensioners and professors driving taxis. Because the economies of Central Asia had traditionally been were very specialized and were dependent on Russia for markets, goods and supplies, they have had difficulty making goods of their own.

Unemployment rates are high, especially among young men. High unemployment has been blamed on outbreaks of ethnic violence such as that that occurred in 1989 and 1990 between Uzbek and Meshketian Turks and between Uzbeks and Kyrgyz.

The currency plunged 100 percent in the months that followed the Russia currency crisis in August, 1998.

Inflation averaged over 80 percent between independence and 1994. The economy shrunk less in Uzbekistan less than the economies of other former Soviet republics. In 1997 the GDP was 85 percent of 1990 level compared to 45 percent in Kazakhstan and 62 percent in Russia.

Kyrgyzstan Economy in the Post Soviet Era

Of the five Central Asian countries, Kyrgyzstan made was the quickest off the mark to make economic reforms. They made little difference. The economy plummeted. After the dissolution of the Soviet Union, Kyrgyzstan went into a deep recession. In 1992 industrial production declined 27 percent.

The economy declined in the years after independence. Soviet era industry all but collapsed. high. Between 1990 and 1996, industrial production fell by 64 percent. Many industrial and mining centers became ghost towns. Unemployment was high. The economy didn’t stop shrinking until 1996.

In 1992 and 1993, Kyrgyzstan experienced periods of hyperinflation as high as 1,400 percent a month. The inflation rate shrunk to about 180 percent 1994 and reached the 1995 government target of 55 percent. The value of the som (the Kyrgyzstan currency) stabilized, supported by international banks beginning in 1993, and price controls reintroduced 1993. [Source: Library of Congress, March 1996 *]

In the first five years of independence, Kyrgyzstan's economy made more progress in market-oriented reform legislation but less progress in economic growth than the other four Central Asian states. This disparity was largely because Kyrgyzstan lacked the diversified natural resources and processing infrastructure that enable a national economy to survive the shutdown of some sectors by shifting labor and other inputs to new areas of production. *

The economy improved in 1997, but was dealt a set back in 1998 due collapse of the Russian ruble. The currency plunged 100 percent in the months that followed the Russia currency crisis in August, 1998. Kyrgyzstan was also hurt by the Asian financial crisis in 1997-98. The Kyrgyzstan economy grew by 3.7 percent in 1999. GDP declined in the first half of 2002 but overall in 2002 and 2003, GDP grew by 6.7 percent.

Kyrgyzstan’s Changing Economic Roles in the Post-Soviet Era

The economic system of Kyrgyzstan experienced a slow, painful, and uncertain transition. Once a highly integrated provider of raw materials for the centrally controlled economy of the Soviet Union, the republic's economy reoriented itself toward processing its own raw materials and producing its own industrial products. During the late 1980s and early 1990s, however, industry accounted for only about one-third of the country's net material product (NMP) while employing less than one-fifth of the labor force. [Source: Library of Congress, March 1996 *]

The primary emphasis of the economy remained agriculture, which accounted for about 40 percent of NMP and officially employed about one-third of the labor force. The transportation and communications sector employed only about 3.2 percent of the labor force in 1991. As in other Soviet republics, the vast majority of workers were employed by the state, while most of the remainder worked on private agricultural plots. *

Kyrgyzstan paid dearly for its designated role as an exporter of raw materials when the Soviet Union unraveled and retail prices began to be freed: the prices paid for raw materials rose much more slowly than did prices of finished goods. Thus, in 1992, for example, the cost of what Kyrgyzstan imported rose by fifty to 100 times, while the amounts received for exports rose by fifteen to twenty times. This explains in part why the GNP for 1992 was valued at 250 billion rubles, while the cost of Kyrgyzstan's imports was put at 400 billion rubles. In 1992 Russia began discounting the paper value of the Kyrgyzstan ruble, effectively devaluing the goods that Kyrgyzstan was supplying. Moscow then required that the country assume the imposed "difference" as a loan, which had the effect of increasing Kyrgyzstan's debt burden. *

In the early years of independence, a major cause of Kyrgyzstan's economic distress was corruption and malfeasance. In a January 1993 speech, President Akayev reported that as much as 70 percent of the money that the country had invested in its economy had been diverted into private hands. Meanwhile, a poll of the country's few entrepreneurs found that 85 percent of them reported having to offer bribes to stay in business. The truth of Akayev's statement was difficult to verify, but reports in newspapers and elsewhere suggest that it could be correct. Official data indicated that since independence at least 100,000 tons of cast iron, steel, aluminum, and zinc had been sold abroad without legal permission, and that a credit for 1.7 billion rubles for the purchase of grain had vanished. Other anecdotal evidence of corruption, often connected with local centers of political power, was plentiful (see Structure of Government).

Prices, Monetary Policy, and Debt in the 1990s

To escape the disparities inherent in dependence on the ruble, in May 1993 Kyrgyzstan was the first former Soviet republic to leave the ruble zone and introduce its own currency, the som. This new policy earned Kyrgyzstan the hostility of neighboring Kazakstan and Uzbekistan, which had declared loyalty to the ruble and feared an avalanche of devalued Kyrgyzstani rubles entering their countries. The som, which is fully convertible to foreign currency and has a floating exchange rate, has been underwritten largely by the IMF, which has provided a large measure of stability. After introduction at a rate of two som to the United States dollar, the som traded at eleven to the dollar at the end of 1995. According to President Akayev, about half the som in circulation are backed by gold or by international loans. Although the som has received strong international backing, experts questioned the likelihood that such support would continue once other new national currencies emerged in former Soviet republics, eliminating the som's status as a unique experiment. Such doubt grew clear as Kyrgyzstan's first international loans came due in 1995, with scheduled payments of approximately US$58 million that year, rising to nearly US$100 million the next year. The republic's collapsed economy made it possible that Kyrgyzstan would become a permanent international client state. [Source: Library of Congress, March 1996 *]

Especially in the first year of independence, hyperinflation seriously eroded buying power. At the end of 1992, wholesale prices were more than eighteen times higher than in 1991. Retail prices rose 40 percent in December 1992 alone, explaining in part why retail sales declined by 64 percent from 1991, the greatest decline in all of Central Asia. Between 1990 and 1992, meat consumption dropped 20 percent, milk product consumption by 30 percent, and fats consumption by 40 percent. Beginning in 1993, however, international support for the som and for Kyrgyzstan's economy in general has kept inflation much lower than it is elsewhere in the CIS. From a high of about 1,400 percent annually in 1992 and 1993 (caused mainly by large increases in fuel costs), inflation dropped to about 180 percent for 1994 (mainly because of tighter credit and the government's reduced expenditures); the government's inflation target for 1995, set in cooperation with the IMF, was 55 percent, with monthly declines throughout the year. Prices rose by 16 percent in the first quarter of 1995, slightly above target, but budgetary expenditures for the first half of the year were far above the IMF target of 5 percent of GDP. *

In the spring of 1995, average monthly pay in Kyrgyzstan was 508 som, compared with a government-estimated minimum family budget of 487 som. Earning statistics are not considered totally reliable, however. In 1995 food required an average of 61 percent of the family budget. To eliminate price distortions inherited from price support policies of the Soviet regime, the Akayev government decontrolled most prices in 1992, which had the immediate result of fueling inflation and reducing individual purchasing power. The economic decline of 1993 caused reintroduction of price controls, notably on agricultural products, and ceilings of 10 to 25 percent were placed on price increases for a wide range of retail commodities. The state Anti-Monopoly and Pricing Committee restricted pricing decisions in most of Kyrgyzstan's large enterprises. Although such institutional mechanisms did not work consistently, they encouraged development of unofficial economic arrangements and barter arrangements, which further undermined the national economy. In 1994 the government again reversed its policy, ending obligatory sale and price controls on agricultural goods that had depressed the agricultural market. The reform would nominally free farmers to negotiate commodity prices with government agencies and other buyers. However, because the government remained the only large-scale purchaser of many products, liberalizing the procurement process was not expected to have immediate effects. *

Economic Reforms in Kyrgyzstan

In 1994 the International Monetary Fund (IMF) ranked Kyrgyzstan fourth among former Soviet republics (behind the three Baltic states) in the pace of economic reform, but positive results were not forthcoming.

In the 1990s, Kyrgyzstan President Askar Akayev introduced economic reforms such as privatizing state-run businesses, introducing a new national currency, and liberalizing trade and investment laws. Kyrgyzstan tried to attract foreign investors with relaxed taxes, tariffs and export-import regulations. Reforms were difficult to implement on a local scale because the Soviet way of thinking was so entrenched.

Kyrgyzstan introduced its own currency, the som, in May 1993, before the Central Asian nations. In July 1994, Kyrgyzstan formed an economic union with Uzbekistan and Kyrgyzstan . In 1996, Kyrgyzstan joined a customs union with Kazakhstan and Russia. Soviet-era factories and other enterprises were transformed into shareholder companies. A privatization program was launched in which people were given a chance to buy coupons, with employees of the enterprises given a preference. These businesses however were not able to find markets.

See Livestock

Privatization and Restructuring in Kyrgyzstan

As elsewhere in the former Soviet Union, one of the most significant reforms was privatization. The goal of privatization, a high priority in the early 1990s, was to create new productive enterprises with efficient management systems while involving the population in the reform program at a fundamental level. The process began in December 1991 with the adoption of the Privatization and Denationalization Law and the creation of the State Property Fund as the agency to design and implement the program. In late 1992, a new parliamentary "Concept Note" reoriented the program toward rapid sale of small enterprises and ownership transition in larger enterprises by vouchers and other special payments. By the end of 1993, about 4,450 state enterprises, including 33 percent of total fixed enterprise assets, were fully or partially privatized. By mid-1994, nearly all services and 82 percent of assets in trade enterprises, 40 percent of assets in industry, and 68 percent of construction assets were in private hands. [Source: Library of Congress, March 1996 *]

However, the practical results of those statistics have not been nearly so positive. Most privatization (and almost all privatization in industry) was accomplished by creation of joint-stock companies, transferring enterprise shares to labor groups within them. Almost no public bidding for enterprise shares occurred, and the state maintained significant shares in enterprises after their conversion to joint-stock companies. Also, because the sale of shares was prohibited, shareholders wishing to leave the company had to return their holdings to the labor collective. The 1994 Law on Privatization remedied this situation by providing for competitive bidding for shares in small enterprises (with fewer than 100 employees) as well as long-term privatization of medium-sized (with 100 to 1,000 employees) and large enterprises by competitive cash bidding among individuals. The new law also provided for the auctioning of all enterprise shares remaining in state hands, over an undetermined period of time. In 1994 and early 1995, voucher privatization moved toward its goals quickly; by the end of 1994, an estimated 65 percent of industrial output came from non-state enterprises. *

Privatization was not the final step in economic success, however. After that step, many firms needed drastic restructuring--most notably in management and technology--to function in a market environment. Because the commercial banking system had not been reformed substantially, enterprises found little financial or technical support for such upgrading (see Financial System, this ch.). On the other hand, enterprises (especially state enterprises) have not been discouraged from defaulting on loans because they often are closely associated with banks, whose pliable loan policy is backed by the National Bank of Kyrgyzstan. Plans called for establishment of an intermediary agency to distribute foreign and international funds to privatized enterprises until the banking system is able to take over lending activities. A stock exchange opened in Bishkek in May 1995 and was considered an important step in expediting this process. *

Impact of the Economic Reforms

Kyrgyzstan won praise from the IMF and World Bank for pro-reformist policies. As a reward for following an economic program proposed by the IMF, Kyrgyzstan was the first Soviet republic to be selected as a member of the World Trade Organization, in 1998, and received heaps of economic aid. But not much positive came from the reforms. Not many foreign investors came. The economy didn’t improve.

The economy and the standard of living or ordinary Kyrgyz declined in the years after independence. The monthly income of people in Bishkek was about $55. In the countryside most people earned less than half that. Formally subsidized industries collapsed, poverty increased and there was a widespread belief that Kyrgyzstan would become an economic backwater.

Kyrgyzstan fell seriously in debt and was unable to pay back loans and keep the economy stable without foreign assistance. Some experts believed it will become a permanent welfare nation, dependent on foreign aid to remain afloat.

Discussing the transition to a market economy, one herder told the New York Times, “This is better. You breed your own horses, you sell your own horses. You make kumiss, You sell kumiss. But you have to pay taxes.”

Privatization ended up placing assets in the hands of family members of people connected with Akayev.

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, U.S. government, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.

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© 2008 Jeffrey Hays

Last updated April 2016

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