DEVELOPMENT CHALLENGES
Since gaining its independence in 1991, the Kyrgyz Republic has embarked on a transition to a democratic system of governance and a market economy and, today, hosts a growing private sector and a vibrant civil society. During this time, the country’s economic foundation has gotten firmer, with an average annual growth rate of 4.3% over the period 2006-2010. Despite these positive developments, the country’s growth decreased to 2.9% in 2009 during the peak of the global economic crisis, which was exacerbated by the socio-political disturbances of 2010, resulting in a GDP contraction of 1.4% that year. The Kyrgyz Republic also faces a number of development challenges.
Poverty and income inequality
While the proportion of the population living below the national poverty line has decreased (from 62.6% in 2000 to 31.7% in 2008), the living standards of the majority of the population remain low, with significant disparities between regions and urban and rural areas. In addition, the global economic crisis cut GDP growth levels, exacerbating existing high levels of poverty and income inequality. In 2011, the country ranked 126th of 187 countries in terms of human development, with a Human Development Index (HDI) of 0.615. Classified as a “low income” country, the Kyrgyz Republic had a per-capita GNI of only US$880 in 2010.
High unemployment and labour migration
In the Kyrgyz Republic, there is also a lack of employment opportunities, with decreasing salaries and rising unemployment, which reached 8.2% of the total labour force in 2010. These tendencies are exacerbated among women, youth and the rural population. Furthermore, internal and external labour migration is on the rise, yet migrants’ remittances have dropped significantly in recent years, by 60% between 2008 and 2009. As remittances constitute upward of 35% of the country’s GDP, this drop has further impeded the economic stability of many vulnerable households.
Skills gap
Also affecting the country’s development and competitiveness is a significant skills gap, resulting from a misalignment of education and labour market needs and lack of involvement by employers in educational decision-making. Although the country has very high rates of adult literacy (99% in 2009) and primary school completion (94% in 2009), secondary and tertiary education levels remain low. Public spending on education has also been declining over the past decade, with evidence of a narrowing of access, a drop in quality, and a deterioration of the educational infrastructure.
Political instability and weak public administration
Since 2005, the country has been experiencing recurrent political instability, divisiveness, insecurity and violence. This has hindered state functioning and private sector development, significantly affecting the quality of life in the country. Poor governance has limited the state’s ability to provide cost-effective social services and ensure proper maintenance of many social and economic infrastructure facilities. As a result, gaps in access to basic social services have led to further social exclusion and inequality.
KEY TRADE ISSUES
Export concentration
Production in the Kyrgyz Republic is mostly concentrated on primary agricultural goods (cotton, tobacco and hides), services, extractives industries, construction materials, and light industry. Gold represents 29% of all exports from the Kyrgyz Republic, followed by re-exported oil, cement and clothing. Most of the remainder is made up of various agricultural products, including fruits, vegetables, milk and dairy products, cotton fibre, and tobacco. Relying heavily on natural resources, the Kyrgyz Republic is therefore vulnerable to external terms of trade shocks resulting from unstable commodity prices.
Weak competiveness, low productive capacity and trade deficit
The country has had difficulties in diversifying the range of products it exports, as well as in raising value-added, despite efforts to increase the local processing of fruits and vegetables. Moreover, the few existing trade support institutions (TSIs) in the country have limited capacities to provide the services necessary for enterprises, in particular SMEs, to increase their international competitiveness. Furthermore, concentration on low value-added exports, along with dependence on imports of fossil fuels and high value-added vehicles, machinery and equipment, has resulted in a wide trade deficit: the value of exports is less than half the value of imports.
Market concentration
The narrow domestic market makes it necessary for Kyrgyz producers to find and gain access to external markets. Although the Kyrgyz Republic is a small open economy and member of many international and regional economic organizations and partnerships (including the WTO), unresolved border issues, uncertainties in relations with neighbouring countries, and untapped possibilities for regional cooperation in Central Asia, have restricted the access of Kyrgyz products to potential new markets. In fact, Kyrgyz exports remain concentrated on a small number of trading partners: Switzerland (as a buyer of gold from the Kumtor mine), the Russian Federation, Uzbekistan (as an importer of re-exported mineral fuels), and Kazakhstan. As a result, the country is exposed to adverse trends in its partners’ economies.
Burdensome business environment
The business environment in the Kyrgyz Republic is not fully conducive to trade, resulting from a lack of access to trade information, limited public-private cooperation, and cumbersome regulatory measures. In particular, there are a great number of uncoordinated administrative procedures and fees that add time and cost to trading across borders, rendering trade in perishable goods extremely difficult and risky.
Underdeveloped physical infrastructure
In the same vein, the transfer of goods, services and human resources across national borders is hampered by inadequate physical and institutional infrastructure. The geographical constraints of the Kyrgyz Republic, a landlocked and mountainous country located far from sea ports and major markets, produce high costs for physically moving goods to and from partners abroad. However, the physical infrastructure that could potentially address these issues (road and railway networks, freight terminals and border crossing facilities) is underdeveloped and deteriorating.
Underdeveloped quality management infrastructure
Moreover, although efforts are underway to obtain international recognition of the Kyrgyz Accreditation Centre, the quality management infrastructure is little developed, leaving few possibilities for local exporters to ensure and to demonstrate the conformity of their goods with international standards.
Limited access to finance
The Kyrgyz investment climate is inefficient and unpredictable, disproportionately constraining the development and competitiveness of SMEs. The financial sector is small and several major banks are dominated by foreign interests. Access to finance for businesses is further hindered by limited diversification of financial products, inadequate global financial integration, and high interest rates and collateral requirements, due to the high risk of the country to service its external debt (the Kyrgyz Republic scored 7 out of 7 on the OECD Country Risk Classification scale). Although foreign direct investment (FDI) inflows towards Central Asia has been increasing in recent years, reaching 5% of GDP in the Kyrgyz Republic in 2010, FDI remains concentrated in the extractive sectors.
Statistics have been compiled by the World Bank, OECD and UNECE. Information has been adopted from: the United Nations Development Assistance Framework for the Kyrgyz Republic 2007-2013; the 2003 United Nations Country Team in the Kyrgyz Republic Common Country Assessment; the 2010 United Nations report on “The MDGs in Europe and Central Asia: Achievements, Challenges and the Way Forward”; the 2010 UNDP Aid for Trade Regional Review for the Countries of the United Nations’ Special Programme for the Economies of Central Asia (SPECA): Trade and Human Development; and the 2011 OECD report on “Central Asia Competitiveness Outlook”.