Kyrgyzstan—Economic System | Research & Encyclopedia Articles

Despite nearly seventy years of Soviet industrialization Kyrgyzstan's economy remains primarily agricultural. According to World Bank statistics, agriculture contributed an estimated 44.2 percent to gross domestic product (GDP) in 1997. Grain production generally accounts for more than 50 percent of agricultural production. Other products such as hay, forage, potatoes, and vegetables are also grown, primarily in the southern regions of Osh and Jalalabad. Livestock production, which once contributed significantly to the overall agricultural output, has declined since independence, partly because of the reduction in state subsidies and partly because of unregulated sale or consumption by the rural population. Agriculture employed more than 48 percent of the labor force in 1998, although, given the mountainous topography, only 7 percent of the land is arable. Private family farms cultivated an estimated 35 percent of the arable land in 1998, while the remainder was farmed collectively in the old Soviet style. The percentage of agriculture's contribution to GDP declined 4.6 percent during the 1990–1996 period, but the agricultural sector rebounded beginning in 1997 and registered growth rates of 15 percent and 12 percent in 1996 and 1997, respectively.

Industry accounts for approximately 16 percent of GDP. Manufacturing, including food processing, textiles, machinery, and nonferrous mineral products, has remained largely stagnant since the breakup of the Soviet Union. The sector employed an estimated 10 percent of the working population in 1997. Kyrgyzstan has considerable mineral resources, including gold, coal, tin, mercury, zinc, tungsten, and uranium. The gold deposit at Kumtor, the eighth-largest in the world, has made a sizable contribution to GDP since 1998. The construction industry also benefited from the development of the Kumtor site, but construction growth declined after the completion of projects related to the mining industry in 1997. The energy sector is dominated by the hydroelectric production for which Kyrgyzstan has an ideal topography. Oil and gas deposits are small, and the country depends on imports from Kazakhstan.

In 1997 the services sector accounted for an estimated 33 percent of GDP. The sector is the economy's second-largest employer. Foreign trade accounted for approximately 10 percent of GDP in that year.

Designed to satisfy the requirements of industrial centers outside its territory, Kyrgyzstan's economy has suffered a significant decline since the breakup of the Soviet Union. The process of restructuring the economy has been slow and uneven, despite substantial financial support from Western countries and major global donor agencies such as the World Bank, the International Monetary Fund (IMF), and the European Bank for Reconstruction and Development (EBRD). In 1993 President Akayev introduced an ambitious economic reform program, calling for macroeconomic stabilization, privatization, trade and price liberalization, and a new currency, the som, introduced in May. The conservative parliament opposed the program, which touched off a power struggle that led to the president's decision to disband the parliament and introduce constitutional amendments in 1994 and 1995. His victory resulted in the resumption of the economic reform program largely supported and financed by the IMF and the World Bank. Since 1995 the government has embarked on reforms of the banking sector and the tax structure and has privatized large enterprises. The reform program suffered a setback in the aftermath of the collapse of the Russian economy in 1998 and the decline in the price of gold, a major foreignexchange earner for Kyrgyzstan.

The privatization of the economy entered its third phase in 1998, with the aim of selling shares in large enterprises such as the Kyrgyztelecom and the energy company, Kyrgyzenergo. Although the government retains controlling stakes in these and other large enterprises, the entire process has yet to be completed. The first stage of privatization included small enterprises in service and retail sectors and was largely completed by 1995. The second stage, designed to sell shares of medium-sized enterprises, came to an abrupt halt in 1997, as allegations of corruption and nepotism resulted in an audit of previously privatized enterprises. The public received privatization coupons to be used toward the purchase of company shares. Unfortunately, the privatized industries have remained either stagnant or completely insolvent because the Soviet-era inter- and intra-enterprise order system has collapsed.

Decline in output and insufficient tax revenue collection have combined to create a chronic budget deficit since independence. According to the IMF, the budget deficit was 9.9 percent of GDP in 1998 and was estimated at around 10 percent of GDP in 1999. A new three-year Poverty Reduction and Growth Facility program was signed with the IMF in February 2000. It replaced the Enhanced Structural Adjustment Facility program in effect since 1992 and accurately predicted a budget deficit of 7.4 percent of GDP in 2000, to be reduced to 4.6 percent by 2002. Inflation has been pegged at 20 percent, 9.9 percent, and 5.0 percent for 2000, 2001, and 2002, respectively. Thus far, the targets have not been met. Between 1994 and 1998 inflation amounted to 51.6 percent. An estimated 60 percent of government spending is devoted to social-welfare programs. The government has been planning to introduce private land ownership, but the issue has generated considerable controversy, which has delayed the process.

Real GDP declined by nearly 50 percent between 1991 and 1995. Growth returned to the economy in 1996 as a result of foreign investment projects in the mining sector and as positive agricultural growth. GDP continued to grow in 1997 but suffered a decline in 1998, achieving only 2 percent real growth. Private consumption has constituted an estimated 65 percent of GDP in recent years, but the continued economic uncertainties will adversely affect the level of consumption for some time to come. A 1997 World Bank survey revealed that an estimated 60 percent of the Kyrgyz population lives in poverty, the majority residing in the impoverished south of the republic.

Much like the other central Asian republics, Kyrgyzstan's trade with the Commonwealth of Independent States (CIS) has declined since independence. The figure for 1998 indicated an export contraction of nearly 30 percent in CIS trade. In dollar terms the trade with CIS members accounted for 44 percent of exports and 52 percent of imports. In 1997 many of Kyrgyzstan's exports were nonferrous metals, notably gold (36 percent), followed by electricity (14 percent), food processing (13 percent), machine construction (10 percent), and agriculture (8 percent). Oil and gas topped the import list at 25 percent, followed by machine construction (22 percent), chemical and petrochemical production (14 percent), and food processing (12 percent). The major non-CIS trading partners included China, the United States, Germany, Switzerland, and Turkey.

Kyrgyzstan has accumulated a sizable foreign debt since 1993: nearly $1 billion in 1998, or 54 percent of GDP. In 1999 the government reallocated $60 million to prevent a possible default on servicing its loan. More than $600 million is owed to multilateral institutions. The government restructured its loans to Turkey and Russia in 1996 and 1998, and the EBRD allowed it to delay payments on the $75 million partially due in 1999. To prevent further defaults, the IMF extended an additional loan of $29 million in 1999. A total of $99.1 million was earmarked for the three-year period from January 2000 through December 2002. Between 1992 and 1999 the World Bank disbursed an estimated $500 million to help the republic's transition to a market economy. Foreign direct investment, which is also critical in preventing further decline of the economy, amounted to nearly $400 million between 1993 and 1999.

The Kyrgyz national currency, the som, was the first currency to be allowed to float freely in central Asia. Since its introduction in 1993 the som experienced a steady nominal depreciation from $1 to 4 som to $1 to 42 som in 1999. In real terms the som lost more than 50 percent of its value by 1998. Kyrgyz foreign reserve currency has fluctuated since 1998, as the government has attempted to address its foreign debt and current account obligations. The reserves in early 1999 could cover only three months of imports. Foreign reserves amounted to $163 million, 70 percent of which was held in dollars.

European Bank for Reconstruction and Development. (1996, 1997, 1998, 1999) Transition Report. London: European Bank for Reconstruction and Development.

International Monetary Fund. (2000) The Kyrgyz Republic— Recent Economic Trends. Washington, D.C.: International Monetary Fund.

Pomfret, Richard. (1995) The Economies of Central Asia. Princeton: Princeton University Press.

World Bank. (1993, 1996) Krygzstan: Country Profile. New York: The World Bank.

This is the complete article, containing 1,390 words (approx. 5 pages at 300 words per page).