Economy

Although Kyrgyzstan is rich in natural resources – as well as water and hydro-electric potential, there are sizeable deposits of gold, coal, mercury and other minerals.  However, the cost of extraction and the distance from world markets have hampered development of these resources. For some time the Kumtor Gold mine has dominated the economy, (although this influence is slowly beginning to decline as the economy strengthens and the mine approaches the limit of the deposit), and the mining industry has, probably, the most potential for the development of the economy.

The country is rich, however, in natural beauty. Tourism has been identified as a major sector of the economy and there are high hopes for the contribution that it can make to improving the standard of living, especially in the more remote, rural regions.  Tourism, however, provides only about 4% of the country's GDP, a little less than transportation which accounts for about 5%.

Another resource which is a strong asset is the population.  Many are young and lively – and well educated.  The Kyrgyz are, by nature, an optimistic people – and the relatively low labour costs is an attraction for inward foreign investment.

With the collapse of the Soviet Union, The newly independent Kyrgyz Republic not only lost its main sponsor (roughly 20-30% of the Kyrgyz budget was provided by Moscow in the years before 1990), but also its main trading partners (more than 90% of its trade had been with Comecon countries).  Kyrgyzstan's industry had been working almost exclusively for the military-industrial complex and collapsed almost completely - the highly-mechanized agricultural sector found itself deprived of spare parts, advance payments, and marketing services.  The service sector, which had also been oriented to the needs of the Soviet Union (for example:  tourism), had to find a totally new orientation. The government under President Akaev initiated an economic reform policy which has been supported since 1993 by large loans from the international financial institutions as well as bilateral donors..

The Kyrgyz economy is often referred to as a “Transition Economy” – adapting from the Centrally Planned Soviet model to one based on the principles of a Free Market Economy.  The process of “transition” has not been an easy one. 

Following independence the government was recognized as one of the most progressive in the former Soviet Union in terms of introducing market reforms, with widespread programmes of privatization, a fully convertible currency (introduced in 1993), various incentives given to direct foreign investment, and development of a sound legal basis in support of business.  This earned it strong support from the international community and institutions such as the International Monetary Fund, (IMF), and the World Bank.  The structure of the Kyrgyz economy changed considerably in the period since the demise of the Soviet Union.  Kyrgyzstan experienced a period of de-industrialisation in the 1990's and the share of GDP contributed by manufacturing industry fell whilst that of agriculture rose and more attention was being paid to the development of the service sector.   Following the collapse of the Soviet Union, many large, loss-making enterprises and large Collective Farms, went bankrupt, were privatized or reorganized. About 95% of all enterprises are now in private ownership.  Small or Medium sized Enterprises, (SMEs), and individual entrepreneurs play an important role in the economy. About 80% of the companies now registered qualify as SMEs – for example, employing less than 30 people or with a turnover of less than USD20,000. Many of these are less than five years old.

However, growth has not been as rapid as might have been hoped. Inflation and the exchange rate have see-sawed erratically – inflation rocketed to over 1000% after independence, but fell to 35% in 1996 and by 2003 was thought to be under control, thanks to a strict monetary control and other measures.  The Tulip Revolution did not have a serious affect on inflation but did it rise dramatically shortly towards the end of 2007, having risen an annual figure of around 5% it reached almost 10% in 2006 and to over 20% in 2007.  The country has suffered particularly as a result of a number of setbacks such as the economic crisis in Asia and the collapse of the Russian Rouble in the early 1990s. The drop in the level of production since the break up of the Soviet Union has been quite severe – although there have been signs of some improvement in recent years. 

Furthermore, growth in the economy been universally distributed throughout the country. It is strongest in the capital, Bishkek; the surrounding Chui valley and Osh region. The rural regions are still largely undeveloped and have high rates of poverty and unemployment.  About 40% of the population still live below “the poverty line” – especially those living in rural districts, outside the main cities and a number of projects and measures have been introduced with a view to reducing or eliminating poverty.

It has been said that the population were not ready for the drastic changes brought about the radical reforms adopted by the government – and there is some truth in this. There is amongst the older generation still a lingering regret for the demise of the Soviet Union – when the factories all worked and people had jobs. It is sometimes said that in “former times”, (the days of the Soviet Union), the people had money but there were no goods in the shops to buy – now there are goods in the shops but no-one has any money to buy them. That is clearly not true – there is money in the economy, (or else the shops wouldn’t stock the goods), but it is concentrated in certain areas (of the country and of the population). 

Attracting Direct Foreign Investment (DFI) has been a major thrust of the government’s policy – and is seen as a major tool in the fight against poverty.  Although this has been an uphill struggle, there are an increasing number of large investments from countries as varied as Russia, Turkey, the USA, the United Kingdom, Italy, France, Korea, Australia and China. One of the biggest hurdles to attracting DFI has been the constantly changing legal base. For example, there were over 600 amendments to the Tax Code since it was adopted in 1996 – a new Tax Code was drafted and finally passed in 2008.  Another disincentive is the number of licenses and other regulations that govern business activity – although steps have been initiated to reduce the number from about 55,000 to just 5,000.  The amount of regulation has led to a reputation for corruption – even one of the government run newspapers ran a story under the headline “When was the last time you gave a bribe – or took one?”. Once again, the government is taking stringent steps to combat this problem – the year 2004 was designated as the “ The Year of Social Mobilization and Diligent Management ” – although it is sometimes difficult to see how corruption can be effectively eliminated – for example, when salary levels are so low.  

Foreign Aid is received from countries such as Austria, China, Denmark, Finland, France, Germany, India, Japan, Korea, the Netherlands, Norway, Pakistan, Sweden, Switzerland, The United Kingdom, and the USA. In all, between 1991 and 2002 the country has received over one and a half billion US dollars in aid – or about USD370 per person of the population.  The amount of foreign debt that this has involved is by no means a small sum, and there have been a number of agreements to reschedule, or write off, some of these debts.  A proposal to write off about about half of the debt by joining the Highly Indebted Poor Countries scheme (HIPC) proved to be controversial, unpopular and was eventually rejected. 

The country was the first of the Central Asian countries to gain membership of the World Trade Organization.  Although this has brought some benefits, it has also led to heightened tensions with some of its neighbours who are not members.  

Agriculture plays an important part in the country’s economy – especially livestock raising, although arable farming, (growing grains, vegetables, fruit, walnuts, cotton and tobacco), is becoming increasingly important.  Some 70% of the population live in rural areas and agriculture accounts for about 40% of the county’s GDP, employing about half of the available workforce.   

The banking system has undergone a series of crises – with most of the original banks having their licenses either suspended or revoked, and many having gone bankrupt.  This has, in turn, led to a strengthening of the banking system which is now seen as quite strong – with a small number of international banks, (especially from neighbouring Kazakhstan), opening subsidiaries here – and the European Bank, (EBRD), has supported this development investing in a number of banks.  

The capital, Bishkek, in particular has seen a boom in construction with new shopping centers, hotels and apartment blocks, and the skyline of the city has changed considerably in recent years.

In keeping with the historical associations that the country has with the Silk Road, a large proportion of the Kyrgyz economy is concerned with trade, (giving another interpretation of the phrase "Transition Economy").  Virtually every village has a bazaar, some of them are very large bazaars - including Central Asia's largest: Dordoi, just outside Bishkek.  More traditional retail outlets around, many of the streets are lined with kiosks and Bishkek, in particular, has a number of newly constructed shopping centres.