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Kyrgyzstan - ECONOMY
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 economic system of Kyrgyzstan is undergoing 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 is reorienting 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--see Glossary) while employing less than one-fifth of the labor force. 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.
<>Role in the
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. 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.
Soviet geologists have estimated Kyrgyzstan's coal reserves at about 27 billion tons, of which the majority remained entirely unexploited in the mid-1990s. About 3 billion tons of that amount are judged to be of highest quality. This coal has proven difficult to exploit, however, because most of it is in small deposits deep in the mountains. Kyrgyzstan also has oil resources; small deposits of oil-bearing shale have been located in southern Kyrgyzstan, and part of the Fergana oil and natural gas complex lies in Kyrgyzstani territory. In the Osh region, four pools of oil, four of natural gas, and four mixed pools have been exploited since the 1950s; however, the yield of all of them is falling in the 1990s. In 1992 their combined output was 112,000 tons of oil and 65 million cubic meters of natural gas, compared with the republic's annual consumption of 2.5 million tons of oil and 3 billion cubic meters of natural gas.
Kyrgyzstan's iron ore deposits are estimated at 5 billion tons, most containing about 30 percent iron. Copper deposits in the mountains are located in extremely complex mineral deposits, making extraction costly. The northern mountains also contain lead, zinc, molybdenum, vanadium, and bismuth. The south has deposits of bauxite and mercury; Kyrgyzstan was the Soviet Union's main supplier of mercury, but in the 1990s plummeting mercury prices have damaged the international market. A tin and tungsten mine was 80 percent complete in 1995. Kyrgyzstan had a virtual monopoly on supplying antimony to the Soviet Union, but post-Soviet international markets are small and highly specialized. Uranium, which was in high demand for the Soviet Union's military and atomic energy programs, no longer is mined in Kyrgyzstan.
The Soviet Union's largest gold mine was located at Makmal in Kyrgyzstan, and in the Soviet period Kyrgyzstan's 170 proven deposits put it in third place behind only Russia and Uzbekistan in gold production in the union. Two more promising deposits, at Kumtor and Jerui, have been discovered. Kumtor, said to be the seventh-largest gold deposit in the world with an estimated value of US$5.5 billion, is being explored by the Canadian Metals Company (Cameco), a uranium company, in a joint-venture operation. Gold deposits are concentrated in Talas Province in north-central Kyrgyzstan, where as much as 200 tons may exist; deposits in Makmal are estimated at sixty tons. Deposits adjacent to the Chatkal River in the northwest amount to an estimated 150 tons.
The terms of the agreement for Kumtor exploitation with Cameco, which gains one-third of profits from gold extraction, caused public concern in 1992. To improve control of the mineral-extraction and refining processes, and to address the uncontrolled movement of precious metals out of the country, President Akayev created a new administrative agency, Kyrgyzaltyn (Kyrgyzstan Gold), to replace Yuzhpolmetal, the Soviet-era body responsible for precious metals. In January 1993, Akayev also brought the country's antimony and mercury mines into Kyrgyzaltyn. The latter are especially important because mercury is used to refine gold. Control of the mercury mines makes more likely the realization of Akayev's hope that Kyrgyzstan will become more than just a supplier of raw materials.
Although Kyrgyzstan has one of the largest proven gold reserves in the world, in the early 1990s fuel and spare parts shortages combined with political disputes to hamper output (see Government and Politics, this ch.). Production in 1994 was 3.5 tons, but the output goal for 1996 was ten tons.
Kyrgyzstan's major energy source, water, has also been discussed as a commercial product. The export of bottled mineral and fresh water was the object of several unrealized plans in the mid-1990s.
The condition of agriculture in Kyrgyzstan is determined by the state's continuing control of production, marketing, and prices, as well as by the republic-wide specialization mandated by the former Soviet Union to promote interdependence among the republics. Most agricultural production continues to occur in the state farm and collective farm systems, which are slowly being privatized. In the early post-Soviet years, government policy encouraged self-sufficiency in cereal grains to provide food security. Maintaining such self-sufficiency, however, has entailed continued government regulation such as compulsory marketing, which in turn has discouraged the development of diversified farm enterprise. The main agricultural regions are in the Fergana Valley (Osh and Jalal-Abad provinces), in the northern Chu and Talas valleys, and in the Ysyk-Köl basin in the northeast. In the early 1990s, income declined steadily in both state-run and privatized agricultural enterprises.
Kyrgyzstan has about 1.4 million hectares of arable land, which is only about 7 percent of the nation's total area. More than 70 percent of the arable area depends on irrigation for its productivity. In the Soviet period, only about 4 percent of agricultural land was owned privately, although private plots contributed a much higher percentage of overall output, especially in fruits and vegetables. In 1994 only an additional 6 percent of agricultural land had passed to some form of private ownership. The privatization of land was a difficult issue that was contested between President Akayev and more conservative government officials. The latter reflected the Soviet-era view that land should be common property protected and disposed of only by the state. More immediately, these officials represented the interests of state farm administrators, whose enterprises suffered greatly from post-Soviet economic shocks and redistribution of resources.
In 1992 and 1993, the land redistribution program also was hindered by poor cooperation between the national and local governments and by lack of clarity in the program outline. Nevertheless, by early 1993 some 165 of the 470 existing state and collective farms had been reorganized or privatized into about 17,000 peasant enterprises, cooperatives, or peasant associations. However, the state retained control over vital agricultural inputs and market distribution channels, meaning that private land users often lacked material support and that price controls limited the profitability of private farms. The privatization program was halted in early 1993, and a more comprehensive reform program was developed. In early 1995, the government offered debt relief to state and collective farms that expedited the availability of land to private farmers.
According to privatization law, state agricultural assets are distributed according to a share system in which all citizens have the right to a garden plot, but only individuals in the rural population have the right to occupy land and other agricultural assets formerly owned by state and collective farms. Recipients of shares can maintain the property as part of the collective, transfer it to a cooperative, or establish an individual farm. In the early 1990s, the former alternative was much more popular because of the perception that larger units offered greater security in a time of financial uncertainty. Private ownership of land remained illegal in 1995, but use rights are guaranteed for forty-nine years, and use rights can be bought, sold, and used as collateral for loans. In 1994 a new decree on land reform expanded and clarified the legal basis for the use and exchange of land and improved the administration of land privatization, which is the responsibility of the Ministry of Agriculture and Food.
In the post-Soviet years, Kyrgyzstan has continued to emphasize production of raw materials for industrial processing, a role assigned to the republic in the Soviet system. An estimated 62 percent of the population is rural (see Population, this ch.). The chief crops are fodder crops, wheat, barley, and cotton. Other agricultural products are sugar beets, tobacco, fruit, vegetables, and silk (see table 13, Appendix). In 1994 the largest crop harvests were of wheat (611,000 tons), barley (300,000 tons), potatoes (288,000 tons), and tomatoes (160,000 tons).
The chief agricultural use of land is pasturage for livestock, mainly sheep, goats, and cattle, the tending of which is the traditional vocation of the Kyrgyz people. An estimated 83 percent of land in agricultural use is mountainous pastureland. In the 1980s, livestock production accounted for about 60 percent of the value of the country's agricultural output; such production included mutton, beef, eggs, milk, wool, and thoroughbred horses. In 1987, when herds reached their largest numbers, about twice as much grain was used for animal feed as for human consumption. However, the prices of and demand for livestock products have dropped significantly in the 1990s relative to those of crops. For this reason and because Soviet-era herds had been supported largely by cheap imported grain, in 1994 livestock contributed less than half the total value of Kyrgyzstan's agricultural earnings. In 1994 the most important livestock products were cow's milk (750,000 tons), beef and veal (70,000 tons), mutton and lamb (50,000 tons), eggs (30,600 tons), wool (56,300 tons), pork products (30,000 tons), and poultry meat (25,000 tons). All of those figures were below the totals for the previous two years.
The early 1990s saw many farmers turn from commercial production to subsistence crops, a trend that hurt the country's export activities (roughly half of its exports were agricultural in 1990) as well as the availability of foods within Kyrgyzstan. Experts believe that Kyrgyzstan's main agricultural problems are inappropriate and slow-moving reforms (especially land redistribution), intrusive bureaucratic regulations, poor availability of credit, and delayed payments to farmers for their crops. More immediately, both water and fertilizers have been in short supply since the end of the Soviet Union. In addition, Kyrgyzstan's agriculture uses an average of less than 50 percent of the amount of pesticides used by agriculture in the Western nations.
In 1994 the agriculture sector was in the fourth and most difficult year of a major decline that included reduced output, isolation from commercial markets, decreased earnings, and a deteriorating natural resource base (see table 6, Appendix). In 1994 total agricultural output dropped by 17 percent, and the decline in marketed and processed output was substantially greater because of the trend toward subsistence farming. Production ceased to increase at about the time of the collapse of the Soviet system, an event that initiated the loss of markets and trading partners, the loss of transfer payments from Moscow, and a condition of general monetary instability. The national government did not address these problems effectively in the first years of independence; in fact, government marketing quotas, price controls, and trade restrictions exacerbated the decline. By restricting farmers' marketing and pricing practices, the government in effect levied a tax on agriculture that redistributed income to other sectors of society. National reforms in land tenure, farm organization, and the financial system, together with privatization of services, were eroded by the continued authority of local officials to interfere in administration of those reforms.
A key agricultural resource, pastureland, was degraded severely by the Soviet-era practice of mandating livestock populations too large for available pasturage on state farms and by post-Soviet transfer of livestock from inefficient collective and state farms to private ownership without limiting grazing rights on common pastures. By 1994 over-grazing had led to serious erosion of much pasture land (see Environmental Problems, this ch.).
In 1994 a continuing controversy over granting central bank credits to support farmers during the growing season again made financial support a dubious proposition. Without such support, planting and fertilization would be severely limited because farmers in many rural areas lack financial resources to buy seed and fertilizer. On the other hand, such credits have always been a threat to the government's overall economic program. For several reasons, including the state's failure to pay farmers on time for their crops, the agricultural sector's bank debts increased rapidly in the early 1990s. This situation was the basis of arguments that the government could not afford to pay agricultural credits.
Industrial production in Kyrgyzstan declined significantly in 1992 and 1993, especially in comparison to the average annual growth rate from 1985 to 1990, which was 3.3 percent. Important factors in this decline were the energy crisis caused by the loss of Soviet-era fuel supply agreements and the outflow of skilled Russian industrial and management personnel. By 1994, when output had fallen by another 25 percent, Kyrgyzstan's production was only 42 percent of its 1990 level. Only four of the country's 200 most important industrial products--oil, electrical power, household electric appliances, and alcoholic beverages--showed an increased output in 1994. By the first quarter of 1995, some 120 enterprises, more than one-third of the national total, were idle. The decline was caused by problems in obtaining raw materials, components, and other inputs; a drop in effective demand; the economic weakness of trading partners; and problems in arranging for payments. An important additional problem, however, is the nature of Kyrgyzstan's Soviet-era industrial structure, which was specialized for defense-related manufacturing. Many defense-related industries closed in the early 1990s because they could not find alternative types of production once Soviet defense contracts ended. The government's initial policy was to avoid supporting unprofitable state enterprises, but intense political pressure has kept many such firms open.
Including mining, the electric power industries, and construction, industry contributed about 45 percent of GDP in 1991, but that percentage dropped significantly in the following years, even with a parallel agricultural decline. For example, between 1991 and 1993 production of crude steel decreased 45 percent, cement production decreased by 49 percent, and production of metal cutting machines dropped by 77 percent. Gross capital formation decreased an estimated 55 percent in 1994, and investment for that year was below 25 percent of the rate at the end of the Soviet period. Private investment, however, rose slightly to nearly half of total investment for 1994.
None of the major industrial projects planned for 1993-94 was completed on time. Included in major construction postponements was a cigarette factory in Osh, which could have taken advantage of southern Kyrgyzstan's favorable tobacco-growing conditions. Many other projects were completed on a much smaller scale than originally planned. As conversion to useful new lines of manufacture was delayed, the national economy shrank. In addition, unemployment grew rapidly as state-owned enterprises were phased out but not replaced.
In the mid-1990s, the most valuable industrial components of Kyrgyzstan's economy were machine building, textiles, and food processing, which are centered in Bishkek, Osh, and Jalal-Abad (see fig. 5; table 14, Appendix). Some electronics and instruments are produced in former defense plants, and a limited metallurgical industry also exists. The most productive"industry" is electric power, which is produced in the country's numerous hydroelectric plants.
Unlike its neighbors Kazakstan and Uzbekistan, Kyrgyzstan has no significant exploited reserves of oil or natural gas; in 1994 petroleum production was 88,000 tons, and natural gas production was 39 million cubic meters. Although substantial coal deposits are present, in the mid-1990s experts described Kyrgyzstan's coal industry as in a state of collapse. In the early 1990s, only four of the fourteen state-owned coal mines were considered economically viable, and little coal came from privately owned mines. Between 1991 and 1993, brown coal production decreased by 50 percent (to 959,000 tons), and black coal production decreased by 53 percent (to 712,000 tons). The domestic price of conventional fuels rose slightly above world levels after the much cheaper energy-sharing arrangements of the Soviet era ended. (In 1992 oil and gas import costs were 50 percent of the total state budget, compared with 10 percent in 1991.) In 1994 some 39 percent of Kyrgyzstan's total import expenditures went for the purchase of conventional fuels, contributing an estimated US$100 million to the country's trade imbalance (see Foreign Trade, this ch.). Energy consumption, meanwhile, has declined sharply since 1991, and experts do not expect it to return to its 1990 level.
Management of national energy and fuel policy is distributed among several ministries and other state agencies--an arrangement that has hindered efficient acquisition and distribution. Distribution of heat and electricity is the responsibility of the state-run Kyrgyzstan National Energy Holding Company, and natural gas purchases are managed by the Kyrgyzstan Natural Gas Administration (Kyrgyzgas). Oil, gas, and coal exploration is the responsibility of the State Geological Commission (Goskomgeologiya). Natural gas, provided by the Republic of Turkmenistan in the Soviet era, now comes mainly from neighboring Uzbekistan. Coal, used to heat households and to fuel some thermoelectric plants, is mainly received from Kazakstan in a barter arrangement for electrical power. Kazakstan's coal is preferred because the heaviest demand in Kyrgyzstan is concentrated in the north, and Kyrgyzstan's remaining coal mines are in the south, from which transportation is problematic.
For these reasons, existing thermoelectric stations have been deemphasized in the 1990s in favor of expanded hydroelectric production. Thus, in 1994 thermoelectric power production dropped by 46 percent while hydroelectric production rose by 30 percent. These statistics enabled the national energy sector to show a modest drop of 4 percent in total power generation in 1994, but district heating, which comes from coal- and gas-powered combined heat and power plants, suffered heavily from the transition. Meanwhile, government promotion of electricity brought an increase of 117 percent in household power use between 1991 and 1994, although overall household energy consumption declined by 36 percent during that period. Some aspects of the promotion plan have been criticized, including the large-scale promotion of electric heat in a country with poorly insulated houses.
Emphasis on electricity is backed by abundant water power, mainly from the country's location at the mountain headwaters of the Syrdariya, one of the two largest rivers in Central Asia. On the Naryn River, chief tributary of the Syrdariya, a series of hydroelectric stations has been built, the largest of which is the Kürp-Say Hydroelectric Plant, fed by the Toktogol Reservoir in central Kyrgyzstan. Other major hydroelectric plants are located at Atabashin, Alamedin, and Uchkorgon. Such stations have made possible the net export of electric power, worth an estimated US$100 million in 1994. That figure was only about half the value of Kyrgyzstan's 1990 export, however, because demand in neighboring republics dropped considerably in the early 1990s. The main customer is Kazakstan, with which power is exchanged through the Central Asian Integrated System.
Only about 10 percent of Kyrgyzstan's hydroelectric power potential and only about 3 percent of the potential of its smaller streams are currently being exploited; the Naryn River is estimated to afford an additional 2,200 megawatts of easily accessible rated capacity. Meanwhile, the Fergana Valley, the only working oil field in the country, has remaining reserves of 14 million tons of oil that require expensive recovery tech-nolgy. No serious oil exploration has been done elsewhere, although the Chu and Ak-Say valleys are believed to be prom-ising.
Since independence, Kyrgyzstan has undertaken significant structural reforms of its economy; in 1994 the International Monetary Fund (IMF--see Glossary) ranked Kyrgyzstan fourth among former Soviet republics (behind the three Baltic states) in the pace of economic reform, but positive results have not been forthcoming. As elsewhere in the former Soviet Union, one of the most significant reforms is privatization. The goal of privatization, a high priority in the early 1990s, has been 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.
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.
In the early years of independence, a major cause of Kyrgyzstan's economic distress has been 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, this ch.).
In mid-1995, the banking system continued to be dominated by the central savings bank (the National Bank of Kyrgyzstan, created in 1991) and by the three major commercial banks that succeeded the sectoral banks of the Soviet era and remained under state control. Those banks--the Agricultural and Industrial Bank (Agroprombank), the Industrial and Construction Bank (Promstroybank), and the Commercial Bank of Kyrgyzstan--owned 85 percent of banking assets in 1994. New commercial banks, of which fifteen were established in 1993 and 1994, were owned by individuals or enterprises and had much less financial power than the state-owned banks. The new commercial banks have the right to buy and sell foreign currency and open deposit accounts. The National Bank is the official center of currency exchange, but in the mid-1990s it did not adhere to official exchange rates. In mid-1994, the government established the Bank for Reconstruction and Development, which uses state funds, foreign currency assets, and loans from abroad to aid small and medium-sized enterprises and to invest in targeted spheres of the economy, especially housing, construction, power generation, and agriculture.
The banking system has remained concentrated in the same areas as in the Soviet period. Although some diversification has occurred, loans tend to go to traditional clients. Because new commercial banks are small and initially were owned by state ministries and state-owned enterprises, competition has developed slowly. Through 1994 Soviet-style accounting and reporting systems remained in use, and banking services such as domestic and international payments have remained at the same noncompetitive level as they were prior to 1991. Capabilities vital to a market-type economy, such as credit risk assessment and project appraisal, are lacking. Post-Soviet regulations on capital funds, exposure limits, and lending practices have not been enforced. The technical infrastructure of the banks also requires substantial overhaul. In addition, the National Bank has been plagued by scandal; the first director, an Akayev protégé, was linked to several illegal financial operations in 1993 and 1994.
The limitations of the banking system have made it unable to efficiently mobilize and allocate financial resources into the national economy. This failure has hindered privatization and other types of economic reform that require substantial amounts of risk capital upon which borrowers can rely. Especially critical are the bad loans held by the three state-owned banks (influenced by government interference in loan decisions, together with poor financial discipline on the part of major enterprises) and eroded capital base. In 1995 the National Bank's outstanding loans to agricultural and industrial enterprises totaled 1 billion som each.
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