In one of the reports devoted to the development of private sector in Kyrgyzstan[1], it was said that the Kyrgyz Republic encountered some serious obstacles to economic development.  It was pointed out that one of the deepest economic crises in world history has occurred in Kyrgyzstan. The crisis resulted from persistent problems caused by unfavorable physical and economic peculiarities such as:

• Relatively small internal market
• Distant geographical location (the lack of access to sea ports)
• Relatively poor mineral resources

It should be noted that only Kyrgyzstan (and, probably, Tajikistan) has all these three peculiarities. 

It does not explain why the Kyrgyz Republic, which had the same problems in mid-1990's, surpassed its neighbors in levels of economic growth, or why these levels decreased (in relation to its neighbors) only in 2002 (see Chart 1). The level of economic growth during the period between 1995 and 2001 averaged 5,5 %, while between 2002 and 2006 it made up only 3,1 %.

Chart 1. GDP growth (1995-2006)

Source: http://www.cisstat.com/, author's calculations.

The latest research studies, conducted by international financial institutions[2], show that the main obstacle to the economic growth is the trade barrier that the Kyrgyz Republic experiences in its borders. The Chart 2, particularly, shows that trade barriers in neighboring countries are more considerable than in the Kyrgyz Republic.       

Chart 2. Trade barriers related to trade policies

Source: ADB, See reference 2

Taking into consideration that the country is significantly dependent upon external economic relations, these barriers could be noted as having negative effect upon the economic growth in the Kyrgyz Republic. According to the authors of the abovementioned reports, the removal of trade barriers will increase the real GDP within 10 years to 50-55 percent or 4, 2-4, 5 % per year as compared to the basic scenario. It should be noted that the increase of economic growth to 4 or more percent is seen as the significant increase, which can imply a stable economic growth. At the same time, this increase of potential economic growth creates a legitimate question: does it mean that the development of Kyrgyzstan is impossible without solving the problems with trade cooperation? Research studies, conducted by our institution[3], have shown that the removal of trade barriers will lead to the following results:            

• The growth of the country's economy and budget incomes
• Strengthening of integration trends
• More balanced economic growth, which exerts a special influence upon the development of relatively poor economic sectors
• Stimulates an export of priority industries 

However, these studies have also shown that the economic growth in this case will increase moderately or to 2, 3 % per year. More importantly, the effect from the removal of trade barriers will have a fading character. It means that the economic growth is determined not only by economic surrounding, but also by internal factors and processes of development that the economy of Kyrgyzstan is undergoing.     

Table 1 shows that the economy of Kyrgyzstan, generally, has been adequately responding to the increasing demand from trading partners during the period between 2002 and 2006. Based on Kyrgyzstan's export shares, GDP Partners growth averaged 6, 1 %, while Kyrgyzstan's export growth averaged 10, 2 %, which is twice as much as its GDP growth. However, it did not affect adequately upon the growth rate in Kyrgyzstan, which made up only 3,1  % . This is due to the fact that significant portion of income goes to purchasing import products. Thus, the growth of import averaged 17 %, while the deficit of trade balance increased from 48,9 million dollars in 2002 to 1135,2 million[4]  in 2006.   

Table 1. The dynamics of external demand

Source: NSC and author's calculations

Table 2 shows that there is a stable internal demand in Kyrgyzstan, which is significantly ensured at the expense of incoming transfers and other unaccounted receipts[5].  Within 5 years the number of transfers and unaccounted receipts has increased unprecedented from 6 % of GDP to 28 % of GDP.

Table 2. Transfers and Unaccounted receipts (in million dollars)

This flow of money to the economy of Kyrgyzstan is leading towards significant increase of individual consumption, the growth rate of which averaged 7, 5 % (Table 3). In turn, such growth of individual consumption leads to the increase of service sector in the Kyrgyz Republic, and, particularly, of trade and public nutrition.

Table 3. Internal Demand  

Source: NSC and author's calculations

The following graph shows trade and public nutrition as the main sectors, which has been ensuring the GDP growth in the last years.  

Chart 4. Contribution of specific sectors to read GDP growth, 2001-2006

Source: NSC and author's calculations

According to this data, the economy of Kyrgyzstan has significant internal and external demand. However, the economy does not respond quite adequately to this demand. One can be questioned in this context as to why having both unfavorable physical and economic peculiarities and more favorable signs from demand the economy of Kyrgyzstan is developing (in the last 5 years) according to the rate 1,5 times lower than that of the previous five-year period. The data provided above (Table 3) shows that the gross saving has been significantly decreasing over a long period of time. At the same time, as shown in the Table 5, the rate of savings is 1,5 times lower than that of our neighbors.          

Table 5. The Rate of Savings         

Source: ADB

Many studies focus on the following features when describing the investment climate in the Kyrgyz Republic.

• Imperfect Legislation (wide competencies of the corresponding agencies, which put unmotivated demands)
• Superfluity (conducting any type of business requires obtaining a document or conciliatory visa, without which the business is considered as illegal);
• Increasing direct and indirect costs in conducting business;
• Provoking corruption;
• Entrepreneurs prefer to go into "shadow" business, than being confronted with numerous bureaucratic problems.
• The presence of a significant number of contradictory acts, reference rules and distortion of acts of lower level.

The following graphs serve as the proof for these statements. The Chart 6 shows that according to various indicators, the system of regulation in the Kyrgyz Republic is far from the best indicators of the world. 

Chart 5. The Level of Regulation in Kyrgyzstan and the World

Source: www.doingbusiness.org

It is necessary to start activities on improving the investment climate in the Kyrgyz Republic and it should go on in the following directions[6]:

• Opening up the business (State Registration of Enterprises);
• Permissions for conducting special types of activities (licensing);
• Setting obligatory state requirements and conditions for allowing the products and services in the market (technical regulation);
• Permissions and coordination from the state agencies (permission to use the land, taking the lands out, permission to throw polluting materials etc.);
• Creation of stable and predictable legislation;
• Conducting audits
• Ensuring the property rights
• Improving the institutions of stock market
• Establishing institutions responsible for attracting and advancing the investments

In general, the following should be noted:  the improvement of the regulatory system can significantly improve the situation in the country. EBRD's research, which studied the influence of economic factors on the growth of the economy, is the example for this. Even insignificant improvement of the investment climate can seriously increase the economic growth, as shown in the Table 6.

Table 6. The main components of improving the investment climate in the Kyrgyz Republic.  

Rafkat Khasanov, Executive Director of "Investment Round Table" Public Union

[1] ADB Report on development of private sector in KR: Problems and  choices. ADB 2007.

[2] ADB report on Central Asia. How to increase benefits from trade by regional cooperation in the sphere of trade policy, transport and customs transit. ADB 2006. Report on human development in Central Asia. UNDP 2005.

[3] "Obstacles on the trade path of Kyrgyzstan in the region of Central (Middle) Asia", Bishkek 2006.

[4] Data of the payment balance of KR for 2002., NBKR (The National Bank of the Kyrgyz Republic). 2007. Data of express information of NSC for January 2007.

[5] In the balance of payment for 9 months of 2006 the line "mistakes and omissions" compose 211,2 million dollars. In essence, this number is equal to the unfinished financing of trade balance and, thus, can be considered as unaccounted receipts.

[6] Further reforms on these directions are considered in detail in the following publications (in development of which the author took direct participation).

Kyrgyzstan on the new stage of development, UNDP, Bishkek, 2005

Policy documents (developed by IRT with support of USAID, Bishkek, 2006 http://www.investment.kg/ ): 1) Conditions of regulatory and permitory processes: courses of worsening of the business climate and recommendations on its improvement; 2) Reasons of the increase of the number of checks of business activity by governmental bodies, corruption in controlling bodies and recommendations on the improvement of administration and decreasing of corruption; 3) Problems of protection of private property and recommendations on providing guarantees and means of protection of immunity; 4) Problems of lack of transparency of the legislative process and ineffective execution of laws.