introduction

            This is the first report of the Government of the Kyrgyz Republic on review of trade policy since its accession to the WTO in 1998. The main objectives of the report are to draw the attention of the WTO Members to the major results achieved by the Kyrgyz Republic since the accession and provide the information about policies and national reforms in foreign trade area.  The report includes economic and trade situation of the country, achievements in the trade policy since 1998, and future national policy directions and priorities.

            Since the accession to the WTO the Kyrgyz Republic has been successfully dealing with implementation of economic reforms, which are the necessary basis for the flexible reorientation of the economy to the use of new foreign opportunities, as defined by the world trade developments.

            Regardless of the fact that specific constraints related to the political events which took place in March of 2005 and resulting economic challenges existed, the Kyrgyz Republic continues to perform the liberal trade policy in order to create conditions for fair competition and secure a favorable climate for investments’ attraction.  The world experience shows that trade liberalization has a positive effect on economies.

            ECONOMIC ENVIRONMENT

            Economic Developments for 1998-2005

            Macroeconomic situation for the period under review has been mainly stable.  Since 1998, the structural reforms were undertaken in the Republic aimed at the recovery and reorganization of industrial and agricultural sectors, small and medium business support and development, investments attraction, positive changes in the social area, etc.  The reforms allowed for preserving the macroeconomic stability and ensuring sustainable economic growth.

            As a result, average annual GDP growth made up 3.7%.  The most problematic year over this period was 2002, with the substantial slow down of economic growth because of severe accident at “Kumtor” gold deposit and 2005 (GDP decline by 0.6%) because of the political situation in the country.

            Moreover, the gold mining sector impact on economic development should be marked (about 8% of GDP) during the period under review.  The annual average GDP growth was 4% without gold mining sector.  The economic growth was achieved due to agrarian and services sectors (share in GDP profile is nearly 70%).

            Improved confidence in national currency (stability of exchange rate), restraining the growth of monetary base, and moderate growth of consumer prices, contributed to decrease of the inflation level from 16.8% in 1998 to 4.9% in 2005.

            Structural actions in monetary regulation made it possible to stabilize exchange rate of Som and ensure convertibility of the national currency.  In 1998, it was impossible to keep the national exchange rate because of the Russian crisis. Thus the national currency has been sharply devaluated with respect to US dollar from 20.77 Som/dollar in 1998 to 48.44 Som/dollar in 2001.

            The national currency of the Kyrgyz Republic has been strengthened regarding US dollar since 2001.  For 2001-2005 the Kyrgyz national currency (Som) has strengthened by 18%. By the end of 2005 the exchange rate was 41.01 Som/dollar.

            The state budget revenues for 1998-2005 increased from 18% GDP in 1998 to 20.3% in 2005; in nominal value the increase equaled 14 billion Som or 3.2 times (from 6.3 billion Som in 1998 to 20.3 billion Som in 2005).

            Increase in resources inflow allowed for conducting active expenditures policy with the focus on key problems in social protection, health care, and education.  During the last eight years for the purpose of budget stabilization and deficit decrease the Government of the KR has been pursuing the policy of limited attraction of investments under its guarantee.

            Budget deficit decreased from 9.5% in 1998 to 4.4% in 2005.

            The total expenditures volume for investment projects under the Public Investment Program (PIP) has reduced with respect to GDP from 8.4% in 1999 to 3.2% in 2005.  As a result of fulfillment of investment policy actions aimed at creation of more favorable investment climate and attraction of private investments into the economy, the country succeeded in compensating the decrease of investments volume secured by the KR Government.  Since September 2001, active measures to create a favorable investment climate have been undertaken, notably, Investment Matrices have been developed and introduced.[1]

            The deficit of current accounts of balance-of-payments has been reducing from 22.1% of GDP to 1.6% of GDP accordingly, for the period 1998-2001.  However, since 2002 the reverse trend has been taking place and the deficit was 7.8% GDP in 2005.  The growth of deficit is explained by sharp growth of trade deficit due to increase in expenditures for imported fuel (international oil price increase) and fall of gold export.  However, the gross official international reserves made up over 600 million US dollars by the end of 2005, thus covering 4.6 months of import of trade and services against 2.1 months of import in 1998 owing to increase in capital inflow, involving the IMF assistance.  Balance-of-payments has changed from negative (-24.0 million USD in 1998) to positive value (48.8 million USD in 2005) (See table 2).

            Foreign trade turnover of the Kyrgyz Republic rose from 1075.7 million USD in 1998 to 1862.7 million USD in 2005.  The increase was due to exports growth (average growth rate for the period was 4.7%), and imports growth (average growth rate - 6.4%).

            Successful reforms and formation of the land market, development of market crediting institutions and consultancy network, introduction of new technologies, better water supply for arable lands, and the government support rendered in the form of commodity credits for agricultural machinery, have conditioned the agricultural sector growth over the recent years, with the annual average 3.4% growth.

            Due to successful reforming and expansion of market services, development of trade and paid services, having domestic demand, the growth in services sector was 5.8% annually.

            The manufacturing share in GDP for 1998-2005 has been kept at the 16% level.  In 2000-2001 only the manufacturing share has substantially increased up to 25-23% because of raise in production output at light, wood processing, and machine building factories.  The average manufacturing growth for the period was 1.1%.  The main problem and risk for development of manufacturing production of the Republic is high concentration of actual industries and extreme dependence on the operation of certain base enterprises (energy and gold mining industries).

            Annual average growth rate of gross construction products for 1998-2005 was 1.3%; the average share of the sector in GDP was 3.3% over the period.  For the last eight years construction works have been mainly carried out at electric power, transportation and communications, trade, agriculture, and housing building.

            In general, a number of employed population increased by 11% over the period reviewed (from 1705 thousand to 1894 thousand people).  The share of employed population is nearly 37% of the total population of the Republic.  The major economic sectors employing the greatest number of the population are services and agriculture (about 90% of total employed population).  Unemployment level is still increasing. It increased by 3.8% and amounted to 9.7% in 2005 according to expert evaluation.

Table No. 1

Specific Macroeconomic Indicators for 1998–2005

	1998	1999	2000	2001	2002	2003	2004	2005
GDP growth rate (in percentage to previous year)	102.1	103.7	105.4	105.3	100.0	107.0	107.0	99.4
Consumer Prices Index (CPI) (in percentage to December of the previous year)	116.8	139.9	109.6	103.7	102.3	105.6	102.8	104.9
Number of employed in economy, thousand people (data of labor resources balance)	1,704.9	1,764.3	1,768.4	1,787.0	1,807.1	1,837.0	1,879.9	1,934.4

Source:    National Statistic Committee of the Kyrgyz Republic.

Table No. 2

Balance of Payments of the Kyrgyz Republic

(mln.US dollars)

	1998	1999	2000	2001	2002	2003	2004	2005a
Current account	-363.9	-184.2	-77.5	-24.1	-49.4	-80.6	-75.1	-190.9
Goods and services	-333.5	-178.2	-82.9	-15.1	-80.5	-129.9	-193.4	-472.6
Trade balance	-220.7	-88.6	4.0	30.5	-74.0	-133.4	-171.2	-428.3
Exports (FOB)	535.1	462.6	510.9	480.3	498.1	590.3	733.2	686.6
FSU states	252.0	191.5	213.7	172.2	170.3	202.4	277.6	304.6
Non-FSU states	283.1	271.0	297.2	308.0	327.7	387.9	455.5	381.9
Gold	195.8	183.1	195.3	224.6	162.8	259.6	287.4	230.7
Imports (FOB)	755.7	551.1	506.9	449.8	572.0	723.7	904.4	1,114.9
FSU states	391.7	248.7	279.7	250.1	311.7	394.5	554.4	642.3
Non-FSU States	364.1	302.4	227.2	199.7	260.3	329.3	349.9	472.6
Services	-112.8	-89.7	-86.9	-45.6	-6.5	3.5	-22.2	-44.4
Transportation	-69.1	-52.7	-47.6	-27.0	-16.1	-7.7	-36.0	-56.0
Travels	4.9	3.4	-0.4	12.5	25.8	31.2	25.3	15.9
Others (excl.TA)	-1.4	2.2	3.8	4.9	26.2	24.5	29.1	33.0
Technical assistance (TA)	-19.8	-18.5	-20.4	-22.4	-22.1	-24.8	-22.3	-28.9
Income	-79.2	-74.0	-82.0	-60.0	-57.4	-62.4	-90.2	-80.5
Income on direct investment	-8.3	-4.8	-37.2	-25.6	-19.7	-26.7	-57.3	-35.9
Table No. 2 (cont'd)
Income on portfolio investments	-2.1	-0.4	0.0	-0.1	0.3	0.3	0.1	0.0
Income on other investments	-54.0	-57.3	-34.4	-24.0	-26.4	-22.7	-28.4	-35.6
Interest payments (scheduled)	-65.7	-67.3	-51.2	-35.6	-31.9	-27.1	-36.8	-41.1
Other income on other investments	11.7	10.0	16.8	11.6	5.5	4.5	8.4	5.5
Compensation of employees	-14.7	-11.5	-10.3	-10.3	-11.6	-13.3	-4.6	-9.0
Current transfers	48.7	68.0	87.4	51.0	88.4	111.7	208.5	362.2
Official	47.1	67.3	45.5	31.6	29.9	17.0	23.7	27.5
Private	1.6	0.7	41.9	19.5	58.5	94.6	184.8	334.7
Capital And Financial Account	276.3	205.4	58.7	7.4	80.0	-19.6	120.4	118.9
Capital account	-8.1	-15.2	-11.4	-32.0	-7.9	-0.9	-19.9	-6.1
Capital transfers	-8.1	-15.2	-11.4	-32.0	-7.9	-0.9	-19.9	-6.1
Financial account	284.4	220.6	70.1	39.4	87.9	-18.7	140.3	125.0
Direct investments	86.6	38.4	-6.9	-1.1	4.7	45.5	131.4	60.1
Portfolio investments	-4.3	-0.1	-1.3	1.2	-12.0	6.0	-2.5	-14.5
Financial derivatives	30.6	26.4	25.8	17.6	-5.1	-20.0	-20.5	0.5
Other investments	171.5	156.0	52.5	21.7	100.4	-50.2	31.8	78.9
Assets (- increase)	-84.1	-0.7	-27.3	-4.0	21.5	-78.7	-29.6	-40.5
Commercial banks	9.6	-1.4	-1.6	-16.5	-42.3	-50.2	-49.4	-20.1
Other assets	-2.4	0.7	8.5	0.2	24.2	-2.0	0.0	18.7
Liabilities (+ increase)	255.6	156.7	79.8	25.7	78.9	28.5	61.4	119.4
Commercial banks	1.0	-2.8	-0.3	3.9	32.7	36.6	25.8	68.4
Currency and deposits	1.0	0.4	-1.0	1.0	26.0	41.5	23.5	22.7
Loans	105.6	133.3	41.2	18.6	35.6	-16.1	43.1	29.4
General government	129.6	176.8	92.9	66.9	50.5	33.3	50.7	7.6
Disbursement	149.7	188.1	127.4	110.2	87.8	74.9	95.0	58.5
Amortization (scheduled)	-20.1	-11.2	-34.5	-43.4	-37.3	-41.6	-44.3	-50.9
Private sectors	-24.0	-43.5	-51.8	-48.2	-14.9	-49.4	-7.6	21.8
Disbursement	8.8	8.6	3.1	7.9	3.6	13.0	15.0	30.0
Amortization (scheduled)	-32.8	-52.1	-54.9	-56.2	-18.5	-62.4	-22.7	-8.2
Other liabilities		0.0	13.0	2.5	-2.1	-2.0	-1.7	-2.1
Errors & Omissions	63.6	-3.1	3.0	20.0	-1.5	108.3	71.0	120.8
Overall balance	-24.0	18.1	-15.8	3.3	29.1	8.1	116.3	48.9
Financing	24.0	-18.1	15.8	-3.3	-29.1	-8.1	-116.3	-48.9
Memo items:
Reserves by months of import under IMF methodology	2.1	3.4	4.3	3.9	4.0	3.8	4.6	4.6
GDP (mln. USD)	1,633.8	1,225.6	1,367.2	1,530.6	1,614.2	1,922.2	2,211.9	2,441.8
CA Deficit/GDP	-22.3%	-15.0%	-5.7%	-1.6%	-3.1%	-4.2%	-3.4%	-7.8%

a              Preliminary data.

Source:    National Bank of the KR

            Current Economic Situation (2006)

            The overall social and economic policy objective of the KR Government for 2006 is to create favorable conditions for sustainable economic growth and poverty reduction by maintaining the macroeconomic stability, improvement of quality of public administration and fight against corruption.

            The macroeconomic policy in 2006 shall be targeted to 5% growth of actual GDP and preserving the inflation level at no more than 5.7%.

            The inflation dynamics in 2006 shall be determined by the raising aggregate demand, changes in foreign economic environment, fiscal reform, and tariff policy of natural monopolies, changes in prices for fuel and oil, and seasonal fluctuation of prices for agricultural products.

            During this year, the policy of floating exchange rate shall be preserved.  The US dollar exchange rate is expected to reach 42 Som/US dollars.  The international reserves will be maintained at the level equal to 4.4 months of import of goods and services.

            Services and agrarian sectors in GDP profile shall dominate as before, at 41% and 30.5% of share accordingly.  The manufacturing share is not expected to change (16%).

            In 2006, 0.4% growth is forecasted in the manufacturing sector due to increase in energy, food processing, machine building, textile and sewing industries output.  The major obstacle for the higher growth will be decrease in gold production by 8.4%.

            The growth rate of gross agricultural output will be 4.5% in 2006.  For this purpose, it is planned to increase plant cultivation output (by 6.8%).  Gross animal breeding output shall also increase by 1.7%.

            In 2006, the actual growth of gross output in services sector is expected to be at 6.5% level, mainly due to the growth of market services, including trade.

            In 2006, the total volume of capital investments is forecasted to reach over 13 billion Som.  A significant growth of capital investments shall take place due to the increase of foreign direct investments, residential building, grant assistance, and additional domestic budget resources.  As a result, the actual growth of gross construction output is anticipated to be 15%.

            With regard to consumption, the GDP share will decrease from 98% in 2005 to 96% in 2006.  The increase in private consumption (real growth 4.2%) shall be supported by real growth of the population cash income.  Although the share the public consumption will decrease from 19.5% in 2005 to 18.8% in 2006, 1%-growth is anticipated due to rise in wages, increase in pension payments, and allocation of funds for implementation of the housing program.

            The share of gross investments to GDP in 2006 will rise from 22% in 2005 to 22.6% in 2006, basically due to private investments.

            Net export in 2006 will go down and make up (-18.7%) to the GDP, due to imports growth by 7.8%.

            High deficit of the current balance-of-payments account at 5.3% to GDP is anticipated because of further increase in deficit of trade balance up to 437.4 million US dollars, notwithstanding the moderate growth of current transfers by 16.5%.

            In January-June c.a. the trend of economic growth based on preservation of macroeconomic stability has been marked.  Despite that the output of gold mining enterprises has decreased, the GDP growth was 3.1%.  The economic growth excluding gold production on ““Kumtor”  is 6.5%.

            Foreign trade turnover in goods in January – May 2006 was 893.5 million US dollars; that is the increase by 30% in comparison with the relevant period of 2005.  Exports went up by 9.7% and equaled 301.2 million US dollars; imports went up by 43.5% and amounted to 592.3 million US dollars.  The trade balance was negative (deficit), amounted to -291.1 million US dollars.

            In January-June c.a. the inflation level was 4.1%, which is mainly caused by price increase for fuel, sugar, fruit and vegetables, etc.

            Trade and Investments

            (1)   Foreign Trade Development

            Since recently, a number of countries having trade-economic relations with the Kyrgyz Republic have been increasing.  Today, the Kyrgyz Republic has trade-economic relations with 105 countries of the world trade community (as of 2005); comparing with only 90 countries in 1998.

            Geographic expansion of foreign trade relations of Kyrgyzstan for the last years was facilitated by the WTO membership.  CIS countries occupy 55.4% of trade turnover of the Kyrgyz Republic, while foreign countries’ share is 44.6%; of them WTO member-countries compose 43.2% share, including export – 52.3% and import – 37.6% (2005).  Upon accession to the WTO (1998) the share of WTO member-countries in total trade turnover of the Kyrgyz Republic made up 30%, only 12.3% in export and 40.5% in import.

            The growth of foreign trade turnover over the period is observed (Figure No. 1); stable growth takes place since 2002.  In 2005, foreign trade turnover equaled 1773.3 million US dollars and increased by 418.1 million USD in comparison with 1998 (by 30%).  Foreign trade turnover growth was due to exports and imports increase.  Export volume amounted to 672.0 million US dollars in 2005 and increased by 158.3 million US dollars or 30 % comparing with 1998.  However, export has decreased from 6.5% or 46.8 million USD in comparison with 2004.  In 2004, the highest export level was reached: 718.3 million US dollars.  Import volume equaled 1101.3 million US dollars in 2005 and increased by 259.8 million US dollars or 30 % comparing to 1998.

            Principal trading partners of the Kyrgyz Republic are Russia (28.8% share in total trade turnover of the KR), Kazakhstan (16.7%), United Arab Emirates (10%), China (7.3%), Uzbekistan (4.3%), USA (4%), Switzerland (3.9%), Turkey (2.9%), Ukraine (2.6%), Germany (2.3%).[2]

            Foreign trade turnover with foreign countries increased from 683.9 million USD in 1998 to 790.4 million USD in 2005.  Export of goods to foreign countries rose by 30% for the last five years and amounted to 368.7 million USD in 2005, that is by 85.6 million USD more (1998 – 283.1 million USD).  Import of goods from foreign countries amounted to 421.7 million USD in 2005 and increased by 5% comparing to 1998, or by 20.9 million USD.

 

 

            Foreign trade turnover with CIS countries for 1998-2005 increased by 46% and amounted to 982.9 million USD (1998: 671.2 million USD); the increase is mainly due to export and import growth.  Export of goods to CIS countries rose from 230.5 million USD in 1998 to 303.3 million USD in 2005 or by 31%.  Imports from CIS countries equaled 679.6 million USD in 2005; that is by 54% or 238.9 million USD more than in 1998.

            In 2001, the positive trade balance was marked, amounted to +8.9 million USD; it happened for the second time during 11 years (first positive trade balance was in 1994: +23.1 million USD).  The largest deficit of trade balance over the period was in 2005; it amounted to -429.3 million USD and increased by 1.3 times in comparison with 1998 (-327.9 million USD).  Worsening of the balance was resulted from the demand of manufacturing enterprises in imported raw materials, materials and components for production, including export products.

            The excess of import over export shall be kept in future, as manufacturing demand for imported raw materials, materials and components for export production is still sufficient.  The main imports for manufacturing purposes are petroleum products, natural gas, coal, electric machinery and equipment, ferrous metals and articles of them, chemicals, plastic and articles of it, rubber and articles of it, overland vehicles, dyes and paints, etc.  The share of materials and raw materials in total import volume is 68-70%.  It should be marked that the negative balance at the given economic development stage is a natural process.  In future, in the process of manufacturing development the decrease of the negative trade balance should become one of the priorities of economic development.

            Kyrgyzstan exports to over 72 countries.[3]  Main export items are precious metals (35% of total export volume); mineral, fuel and energy resources (12.5%), including electric power (3.1%); light industry goods (12%), including cotton fiber (6.2%); clothes of knitted and textile fabrics (3.4%), wool (0.4%); foodstuffs and agricultural raw materials (11.5%), including fruits and vegetables (2.6%), milk and articles of it, (2.4%), white sugar (1.7%), tobacco (1.7%), canned fruits and vegetables (0.3%), tea (0.2%); building materials (8.8%), including glass (4.9%), cement (1.9%), slate (1.4%), brick, ceramic tiles (0.3%); machinery, electric equipment, mechanical devices and parts thereof (4.8%), including electric filament bulbs (2.3%), drilling machines and parts thereof (0.5%), centrifuges (0.1%), engines (0.1%); chemicals (5%), including plastic articles (packaging) (2.1%), articles of inorganic chemistry (1.5%), mercury (0.6%); scrap of ferrous and non-ferrous metals and articles of it (3.5%), overland vehicles and parts thereof (2.5%), leather raw materials and articles of it (1.8%); different finished goods (optical tools, photo and measuring devices, furniture, watches, articles of art) (5.1%).

            Imports into the Kyrgyz Republic are from 100 world trade community countries.[4]^. Main import items are mineral and fuel and energy resources (30.3% of total import volume), including petroleum products (23.4%), natural gas (2.7%), coal (1.7%), salt, limestone (1.6%); chemicals (17%), including pharmaceuticals (4.9%), plastic articles (3.4%), perfumery and cosmetics, soap and detergents, and dyes (2.7%); organic and inorganic chemicals and other chemicals (silicon, hydrate of sodium, carbonate dinatrium, sodium cyanide) (2.5%); rubber and articles of it (2.0%), fertilizers (1.1%); foodstuffs and agricultural raw materials (15%), including wheat and wheat floor (2.4%), sugar (2.1%), tobacco and tobacco articles (1.9%), confectionery articles and cocoa (1.4%), beer (1.1%), fresh and canned vegetables and fruits (1.1%), alcohol and non-alcoholic drinks (0.8%), tea (0,3%); cars, electric equipment, mechanical devices and parts thereof (14.1%); ferrous, non-ferrous metals and article of it (6.0%), wood and cellulose and paper articles (4.1%), including paper, cardboard, and printing articles  (2.1%), timber and articles of wood (1.9%), light industry goods (3.8%), including synthetic fabric (1.4%), knitted and textile clothes (0.8%), footwear (0.4%); overland vehicles and its parts (3.5%); finished articles, optical devices, photo and measuring devices, furniture, watches, articles of art (2.7%).

            (2)   Foreign Trade in Services

            For the period of the WTO membership, the changes in foreign trade in services took place; the negative balance decreased from -117.58 million USD in 1998 to -49.6 million USD in 2005.  In 2003, the balance of international services was positive and amounted to 3.5 million USD.  Growth in export of services is marked annually since 2001 (see Figure No. 2).  Since 1998, the export of services increased by 4 times in 2005 and amounted to 255.5 million USD.  Prevalent portion of export of services has “trips” and “transport services” items. 

            Import of services increased by 69% from 1998 and amounted to 305 million USD in 2005.  The main items of import of services are “transport services”, “trips”, “business services”, “insurance services”.

            (3)   Attraction of Foreign Direct Investments

            During the last 5 years, the FDI volume has been annually increasing and amounted to 210.3 million USD in 2005 (see Figure No. 3).  In comparison with 1998, the FDI volume increased by 1.5 times in 2005.  According to data of 2005, the major investor-countries are Kazakhstan (40.3 million USD), Germany (36.5 million USD), Great Britain (29.5 million USD), Canada (26.1 million USD), Turkey (16.1 million USD), USA (11.7 million USD), Cyprus (10.5 million USD), Russia (8.1 million USD), Portugal (7.6 million USD), and Australia (4.9 million USD).

 

 

 

 

 

            Dominating economic sectors for investing are processing industry, financial activity, mining industry, trade, repair of cars, household appliances, and articles for personal use, and construction. The share of these sectors is 95-99% in foreign direct investments inflow (see Table No. 3).

Table No. 3

Inflow of Foreign Direct Investments by Activity^a

(thousand US dollars)

	1998	1999	2000	2001	2002	2003	2004	2005
Total	136,301.2	108,562.1	89,607.9	90,088.5	115,666.1	146,955.5	175,585.4	210,306.2
Agriculture, hunting and forestry	299.9	620.3	40.8	130.1	805.3	2,009.9	9,752.7	763.4
Mining industry	1,627.8	4,005.1	4,607.6	4,320.7	5,058.2	12,285.4	9,952.2	24,309.6
Processing industry	27,873.9	55,732.4	44,026.0	50,897.4	52,802.4	73,164.4	92,972.8	94,799.6
Electric power generation and distribution	68.5	0.1			31.5	322.6	2,202.8	103.8
Construction	21,198.6	11,647.0	4,670.3	129.3	2,166.7	5,037.7	5,818.2	12,121.0
Trade; repair of cars, household appliances and articles for personal use	58,868.4	15,488.5	14,686.9	23,267.3	19,737.8	22,626.9	24,579.1	21,834.6
Hotels and restaurants	998.7	130.4	10,587.5	6,962.6	4,812.0	1,960.6	960.8	2,485.0
Transport and communications	8,131.7	794.6	3,078.5	2,309.2	7,954.8	4,670.4	6,880.1	4,746.0
Financing	5,375.3	1,663.7	1,560.3	469.5	6,005.6	3,960.5	10,813.5	41,024.1
Transactions with real estate, lease
and consumer services	11,633.8	18,083.4	5,600.1	1,377.3	13,171.7	3,544.8	8,791.7	7,369.4
Public governance						1,393.5	677.3	75.3
Education	58.7	45.4	72.6	80.1	2,612.2	9,325.0	1,000.2	0.2
Health and social services	128.6	71.5	0.5	14.9	6.3	5,317.6	762.9	0.3
Utilities, social and personal services	37.3	279.7	676.8	130.1	501.6	1,336.2	421.1	673.9

a              Without flow-out

Source:   National Statistic Committee

            ECONOMIC REFORMS OUTCOMES

            Monetary and Exchange Policy

            The principal achievement of reforming in monetary policy is that the inflation is kept at 4-5% for the last five years, after the 1998-1999 crises, followed by the price increase up to 40%; at the same time the monetary “portion” of inflation and inflation expectations has been decreased.

            The cancellation of direct financing of the budget deficit since January 1, 1998 is of a great importance; dynamics of the money supply has been determined by the situation in the public finance area (Art. 24, Law on National Bank of the Kyrgyz Republic).

            The regime of floating exchange rate in place, improvement of monetary policy tools, development of interbanking crediting market have reduced the inflation level; the macroeconomic indicators are improving from mid-1999.

            The outcomes of the exchange policy implementation are stabilization of the exchange rate and accumulation of international reserves, equaling 4.6 months of import of goods and services as of the end of 2005.  The changes in dynamics of the national currency exchange rate against US dollar were characterized by raise of the national currency from 17.4 Som per 1 US dollar in end-1997 to 49.6 Som per 1 US dollar in mid-2001.  Decrease and stabilization of exchange rate took place later on.  US dollar exchange rate was fluctuating in the range of 47.7 Som per 1 US dollar by end-2001 to 41.3 Som by end-2005.

            The efficient regulation of the liquidity level in the banking system, with the help of the monetary policy tools enabled further decrease of interest rates for financial assets.

            Fiscal Policy

            Since the day of independence, the budget system of the Kyrgyz Republic is undergoing constant improvement, so that to efficiently implement the financial and budgeting policy and cooperate with foreign financial institutions on a mutual beneficial basis.  Over the period under review the following significant achievements have been made in the budget system.

            The Ministry of Economy and Finance introduced the middle-term financing forecast into the budget process, as a tool allowing for national budgeting in connection with the priorities in social and economic development.  The introduction of such system enables to establish reasonable limit expenditures (norms) for ministries and other budget organizations for the middle-term period on the basis of sectoral strategies.

            To improve the efficiency of financing for priority development trends of the country in terms of limited financial resources of the national budget, the introduction of the mechanism of budgeting on a program basis has been implemented since 2002.  Program budgeting allows ranging of measures set for compliance with tasks of national strategies and identification of a priority level in the middle-term strategy of budget expenditures.

            To adjust the system of mandatory payments and improve the environment for business development, the stage-by-stage transition of financing for budget organizations and institutions to full budgetary financing is being accomplished within GSAC/GTAC programs.

            For the purpose of social mobilization of local self-governance bodies, the mechanism of stimulating (share) grants was introduced in 2003; the mechanism helps to determine the most necessary and priority trends in development of social infrastructure at places and mobilizes all available resources.

            To strengthen control over expenditures within Public Investment Program and improve efficiency of investments use through functional and economic integration of the PIP into the national budget, the expenditures for PIP have been incorporated into the Law on the Republican Budget of the Kyrgyz Republic since 2000.

            A number of draft laws stipulating financial independence and powers of local self-governance bodies, and differentiating powers in public expenditures management between various government levels were adopted.

            The powers of ministries, agencies and regions in public expenditures management were expanded; responsibilities and control over expenditures had also been strengthened.

            The transparency, subordination and timely use of budget funds were ensured; transfer of cash funds into the real time regime is planned with the use of information technologies; the Treasury system is in the process of automation (under GTAC framework).

            The important aspect of the Government’s activity is foreign debt servicing.  In terms of growth of budget expenditures for paying off foreign debt and co-finance the projects of the Public Investment Program, the credits are attracted only on a preferential basis.

            The use of funds of the Centralized Fund for Poverty Reduction (CFPR).  Resulted from the sale of the Kyrgyz portion of “Centerra Gold Inc.” shares at the stock exchange, the Government received 106.6 million Canadian dollars or 3.5 billion Som on September 27, 2004.  The expenditures for CFPR funds should be forwarded to development in priority sectors, such as health care and education, and should not give additional burden on the budget.

            Since 2005, the work is carried out to implement the Concept for Housing Credit.  At present, the efficient housing crediting system for low income population is being formed.  At the current stage, the efforts are focused at three sectors or Programs: 1) Housing for a Young Teacher (doctor) in Rural Area; 2) Housing accumulating crediting system; 3) Share housing building.

            Taxation

            Taxation policy of last years has been implemented within the Concept for Taxation Policy Improvement and Strategy for Fiscal Reform, as well as within the program of arrangements with the International Monetary Fund.  At present, quite favourable taxation treatment is created.   Since January 1, 2006, the income rate for natural persons is 10 percent, the base non-taxable minimum amounted to 650 Som; revenue tax for enterprises is decreased from 20 to 10 percent (starting from January 1, 2006), while the given decrease will be valid for natural and permitted monopolies since January 1, 2007; the VAT on agricultural goods is cancelled; several non-efficient local taxes are eliminated; VAT exemption is stipulated by offsetting in importation of capital assets.

            Under Decree of the President of the Kyrgyz Republic of April 13, 2006, No. 172, the middle-term Strategy for Taxation Policy Improvement in the KR for 2006-2008 was approved.

            The most important taxation measures within the Strategy are as follows: expansion of taxable base with simultaneous reduction of tax burden for economic entities, including approval of provisions on efficient tax collection for real estate, review of land tax rate, liquidation of all Free Economic Zones (FEZ), except for “Bishkek” FEZs.

            In addition, it is planned to improve and strengthen tax administration, increase the efficiency of tax and customs bodies.  The particular attention is given to streamlining the taxation of small and medium business, and interaction with international organizations on already developed and still operating projects, considering the best practice of advanced countries.

            The new draft Tax Code of the Kyrgyz Republic was elaborated.  The Draft is submitted for consideration by the Jogorku Kenesh (the Parliament) of the Kyrgyz Republic (KR Government Resolution of March 31, 2006, No. 212).

            The Draft Law covers both fiscal tasks, and social aspects.  It is anticipated that good faith tax payers shall be granted with more privileged (liberal) taxation treatment.  At the same time, tax and administrative pressure on unfair payers will be intensified due to improvement of administration.  Notable indulgence is observed in administrative and procedural sections of the draft Code (all unavoidable legislation contradictions are interpreted for the favour of a taxpayer; provisions stipulating minimization of contacts of tax payers with tax services and the taxation principles are laid down, in particular “the principle of good faith tax payer”); the cases of non-compliance of regulatory acts to the Tax Code and the retirement of hopeless debts are defined.

            To attract large-scale world producers for investing into the national economy and create a lot of joint and foreign enterprises, the work on signing the Agreement on Avoidance of Double Taxation with foreign countries is being carried out.  As of May 1, 2006, Agreements on Avoidance of Double Taxation with 27 countries were concluded.  The given Agreement was enacted with 17 countries, namely, the Republic of Kazakhstan, the Russian Federation, Belarus, the Republic of Uzbekistan, Canada, Turkey, India, Ukraine, Tajikistan, Poland, Mongolia, Switzerland, Austria, China, Iran, the Republic of Moldova, Finland. The Agreement with Malaysia was ratified by the Jogorku Kenesh of the Kyrgyz Republic and will be soon enacted.  The Agreements with Germany and Pakistan were signed and are currently undergoing domestic procedures.  Similar agreements are initialling with Georgia, Armenia, Netherlands, Latvia and Czech Republic.  At present, the draft Agreements submitted from Azerbaijan and France are being analyzed.  The first negotiation round with Korea is planned to be conducted.

            Industrial Policy

            The Government of the Kyrgyz Republic has undertaken programs for industry and export development.  Alongside, complicated transitional processes of economic reforms significantly changed the GDP profile; manufacturing share was only 16%.

            During last decade the GDP manufacturing share has undergone strong fluctuations. The GDP share was up from 11.1% in 1996 to 25% in 2000, and had been constantly getting down by 16% (2005).  Growth in manufacture over the period (1998-2005) was 1.1% on average.

            The importance of manufacturing in the economy of the country is caused by the fact that it supports more than half of budget receipts and employs a large amount of people; this is despite that the GDP share is low.

            The reform period has been characterized by reduction of share of finished products and growth of share of raw materials sector.  For example, light industry share has been reduced during last seven years from 8.4% to 2.4%; food industry – from 18.1% to 12.9%.  However, metallurgy share has been increased from 40 to 46%; electric power – from 9.6 to 18.7, accordingly.  At present, the manufacturing is based on gold and energy, with the 65% share.

            For 2005, the manufacturing production in the Republic was 49.7 billion Som (87.9%).  Decline in manufacturing is due to reduction of production output at Kumtor deposits.  Without considering enterprises of Kumtor deposit the manufacturing output was 31.6 billion Som (95.4%).  Production output in mining and processing industries has been reduced (86.1% and 84.4% accordingly).

            The production output in coal mining, oil and gas, oil processing, cellulose and paper, food processing, publishing and printing, chemical, metallurgic, leather sectors, finished metal articles, electric machinery, other non-metal mineral goods, machinery and equipment had reduced.

            The positive results were gained in energy (101.6%), textile (113.3%), clothing (115.7%), wood processing (102.3%), production of rubber and plastic articles (102.2%), vehicles and equipment (102.6%).

            The modern industrial production consists of mining and processing industries, energy sector, including 39 types and subtypes of economic activity throughout all production sectors.

            The main objective of the industrial policy of the Kyrgyz Republic for next years is diversification of processing economic sectors and shift from raw materials orientation in development, preparation of conditions for transition to innovative economic forms in the long-term perspective.

            The industrial diversification strategy should be performed with the focus on value added sectors.  Such sectors are textile and sewing, agro industrial, energy, mining and construction.  Mainly domestic resources are used in these sectors; however, they are not always targeted at deep processing.  For example, cotton processing: out of 35 thousand tons of cotton fiber, the textile sector processes 1.5-2 thousand tons, the remaining part is exported.  Due to increase in cotton processing within the country and output of finished goods, it is planned to gain high production growth rate of cotton yarn and fabrics.

            The economic efficiency of the process of deepened processing of local resources is evident, the matter is not only to increase the share of finished products in export and saturate domestic market, but also to create additional workplaces, expand the taxable base.  It conditioned the performance of the policy of further growth of manufacturing, taking into account the natural decrease in gold output and the need to overcome GDP dependence upon gold mining and energy sectors.

            The industrial development for next years shall be based on macroeconomic stability, attraction of investments at the maximum possible level, sciences and innovations, improvement of professional level and education, modern infrastructure, and development of industry in regions with the deepening processing of local raw materials.

            Reforms in Agriculture and Forestry

            (1)   Agriculture

            Agriculture is a major economic sector of the Kyrgyz Republic.  In 2005, in GDP profile the share of agriculture was 30.5%.  In agriculture and forestry 340 thousand economic entities were created, including 296 thousand collective (farm) holdings.  In 2005, gross output of agriculture, hunting and forestry amounted to 63307.5 million Som and reduced by 4.2 percent in comparison with 2004.  In 2004, GDP growth by 4.1 percent was gained.

            Large scale sectoral reforms were implemented in 90s.  Political reforms had been speeded up since 1995.  The significant progress was achieved in agricultural and land reform.  As a result, the land has become a subject to purchase and sale; market relations were introduced in agriculture.  The government has fully liberalized the policy of centralized planning and distribution of material and technical resources and goods produced. 

            The self-sufficiency was gained in particular industrial products, thus allowing solving the main tasks of food security of the country at the level of minimal consumption rate. 

            The Government of the Kyrgyz Republic in cooperation with the European Economic Commission has developed and approved the National Policy for Food Safety in the Kyrgyz Republic in 1999.

            Despite that there is a number of problems, Kyrgyzstan has self-sufficiency in basic agricultural goods, including meat, milk, vegetables, and partially grain.

            At the same time, the constant increase in population demand and prices for food, low income, insufficient export, and growth of import of food, complicate the provision of food safety of the country at the level of consumption standard.  Food safety is one of the main priorities of the KR.

            Principal producers of agricultural commodities are small collective and farm holdings.  The management of agricultural business is improving, the financial responsibility for the management results have been increased.

            Market mechanisms of land use are developed; the Constitution was added with the provision on land property and the Law of the Kyrgyz Republic “On Management of Land for Agricultural Purpose” was adopted, envisaging purchase and sale transactions of land; the work to improve the registration system for land has started.

            The new Land Code of the Kyrgyz Republic enables dispute settlement of land issues under court proceedings and ensures creation of arbitral mechanisms as an alternative method to solve land conflicts.

            Significant changes have undergone in public regulation of agrarian sector at the republican and regional levels.  The government bodies shifted to economic methods of regulation instead of direct interference into production processes and management of economic activity of goods producers.

            However, the agriculture has undergone difficult transition process in search of new economic forms and property ownership.  The reform had been performed in terms of lack of experience, legislative framework and regulatory acts, especially at the initial stage.

            Below are given the indicators of plant growing and animal breeding developments from 1998 to 2005.

            Plant growing. The main challenge is stable provision of grain, most of all, the wheat grain for the population.  In this regard, yields of cereals increased up to 600-610 thousand hectares, that is 50% of total area of tillage; it is a monoculture.

            While gross grain output increased from 1.6 in 1998 to 1.7 million tons in 2005, the wheat grain production is gradually decreasing from 1.2 in 1982 to 1.0 million tons in 2005.  Fodder corn grain production is gradually rising from 440 to 490 thousand tons; and barley production is up from 150 to 245 thousand tons.

            Production of industrial crops is unstable; while production of raw cotton increased from 45 to 123 thousand tons, tobacco production decreased from 28.0 to 13.6 thousand tons.  Production of sugar beet roots was up from 430 in 1998 to 812 thousand tons in 2004; however, it has decreased by 287 thousand tons in 2005.

            Bean production is increasing steadily and rapidly from 2.5 to 48 thousand tons in 2005.  Potato production was rising and it came to the maximum level of 1362 thousand tons in 2004; thus resulting in sale difficulties.  Therefore, in 2005 the production decreased up to 1141 thousand tons.

            Vegetables production increased from 520 to 735 thousand tons, melons and gourds – from 70 to 85 thousand tons.  Production of fruits and vegetables is unstable: frequent spring cold, in particular in northern regions of the Republic, results in loss of fertility and fruits elements of stone fruits plantings. However, totally, the collection increased from 102 in 1998 to 160 thousand tons in 2000.  In 2003, the decrease up to 130 thousand tons took place; in 2005 the production was increased up to 176 thousand tons.

            High demand for grain resulted in reduction of yields of fodder crops by 257 thousand hectares by mid-90s; of them 141.0 thousand hectares of perennial plants; the saturation by fodder crops on arable lands decreased up to 15.2% on the average, while the advisable area should be 30%.  However, recently due to rise in livestock and demand for fodder, the perennial plants sowing is increasing, as it is the main type of plants used for fertility of soils.

            Grape production was at the maximum level in 2000-2001 (26-27 thousand tons) and minimum in 2003 and 2005 (12.7-13.7 thousand tons); the average level in other years was 17‑18 thousand tons.

            Oil-bearing crops production is closely related to high demand of population for vegetable oil. Therefore, its production is raising and made up 90.7 thousand tons in 2005 comparing to 80 thousand tons in 1998.

            Cattle breeding. From 1998 to present time the growth of livestock was increasing by 11%, including cows – by 7%, poultry – 51%.  However, livestock horses and pigs reduced by 1% and 21% accordingly.  Livestock productivity is increasing, since average milking of 1 cow is increased by 11 kg and amounted to 2156 kg; average sheep shear is up by 0.1 kg and amounted to 3.5 kg; egg-laying qualities of egg-laying birds is up by 3 eggs and amounted 120 eggs.

            Meat, milk and egg production is increasing; milk production increased by 123 thousand tons, eggs by 105 million pieces, and meat by 1.2 thousand tons.  Wool production has decreased by 711 kg.

            (2)   Forestry

            The Forest Code of the Kyrgyz Republic was developed and adopted in 1999. It envisages much better framework for the forest sector, giving more responsibility and a new status to employees in the area of protection of forests.

            As a result of forest restoration actions and transfer of former kolkhoz and sovkhoz forests, the total area of the State Forest Fund has increased; it includes lands covered with forest, and not covered with forest, but designated for forest sector needs.  New especially protected natural territories and other structural units and government authorized bodies for forest sector development were organized.

            To train and prepare future experts of forest sector the chair of forestry was established under the Kyrgyz Agrarian University and professional vocational institutions were supported to develop new calculation programs and methodological aspects of education.

            The local population is getting more involved into the forest sector through development of lease relations and communal management of forestry; the private forms of forestry activity, such as nursery forest, creation of forest cultures, stocking up and processing of wood and non-wood forest goods, etc. were introduced.

            Regulation on Provision and Use of Areas of the State Forest Fund (SFF) for Lease was approved by Resolution of the Government of the Kyrgyz Republic of April 15, 1997, No. 226.  The Regulation provides for transfer of lands of SFF to lease.

            Lease of lands from the Forest Fund is expanding, but not all lease-related issues were settled (taxation, contracts, etc.).  There is no clear understanding of the Concepts of Communal Forestry Management, thus resulting in improper interpretation.

            Under the Law of the Kyrgyz Republic on Decentralization and Privatization of State Property in the Kyrgyz Republic, the state property used by the forestry sector shall be gradually transferred to the private ownership.

            At present, in accordance with Resolution of the Government of the Kyrgyz Republic No. 576, of September 22, 2001, approving the List of Objects Subject to Privatization, timber enterprises are privatized.  The forest sector does not process wood.

            Regulation on Communal Forestry Management in the Kyrgyz Republic, aimed at efficient forestry management, involvement of the population into management and protection of forests was approved by Resolution of the Government of the Kyrgyz Republic No. 377, of July 27, 2001.  The State Program “Forest for 2001-2005” was adopted (Resolution of the KR Government of November 17, 2001, No. 715).  In 2004, the Concepts for Development of Forestry in the Kyrgyz Republic was adopted and shall act until 2025 (Resolution of the KR Government of April 14, 2004, No. 256), giving the directions for transparent reforms taking into account the need in large-scale involvement of local population to forest management for the purpose of support of social and economic development of regions, and preservation of forests through sustainable multifunctional use.

            Energy

            Total hydro energy capacity of 252 large and medium rivers of Kyrgyzstan is 160 billion kWh of electric energy, with technical capacity of these rivers amounting to 100 billion kWh, and 55 billion kWh of economic capacity.  At present, the tenth part of technical hydro energy capacity of the Republic is used.

            Since 2000, the actions to develop small scale hydro energy have been undertaken.  Under the actions taken, it is planned to improve Alamedinsky hydroelectric power stations system (HPS) with output of 120.0 million kWh, rehabilitation of 20 operating small HPS with 10.0 Megawatt capacity and output of 84.6 million kWh, as well as construction of 27 new small HPS with overall capacity of 68.0 megawatt and output of 281.0 million kWh. 

            Export of electric energy during 1998-2005 was accompanied by changes of cyclic nature, mainly caused by hydrological situation (See Table No. 4).

Table No. 4

Electric Energy Export

Year	1998	1999	2000	2001	2002	2003	2004	2005
Electric power export, mln. kWh	798.1	2,011.3	3,153.1	2,164.9	1,060.6	1,708.6	3,191.0	2,604.8

Source:    State Inspection on Energy and Gas under the KR Government.

            The Kyrgyz Republic exports electric energy into the Republic of Kazakhstan, the Republic of Uzbekistan, the Republic of Tajikistan, the Russian Federation and People’s Republic of China. Energy system of the Republic is connected with the Central Asian countries by the network of 500 kW and operates under the common energy regime.

            In 2000, the Kyrgyz Republic restructured the energy system.  As a result, vertical integrated “Kyrgyzenergo” JSC was separated into one generating company holding hydro and heat electric power stations, one transmission energy company operating electric networks with voltage 110-500 kW, four electric distribution energy companies, and one heating distribution energy company selling electric and heating power to consumers. All energy companies were reincorporated and are open joint stock companies.

            Generating and transmission energy companies shall not be a subject to further privatization under the legislation of the Kyrgyz Republic.  93 percent of these companies are state-owned and managed by a state body.

            In 2006-2007, further stage-by-stage privatization of electric distribution energy companies in the form of concession is anticipated.

            Today, construction of Kambaratinsky HES 1 and 2 is of vital importance.  Upon completion of construction of Kambaratinsky HES 2, electric power generation shall be executed by hydraulic units with 360 megawatt installed capacity.  Putting into operation of Kambaratinsky HES 1 will help to raise the installed capacity of all HESs by 1900 megawatt. Construction of five hydro stations in upper flow of Naryn River makes possible to increase the installed capacity of hydraulic units by 520 megawatt and construction of 5 HESs at Sarydjaz River, Issyk-Kul oblast – by 692 megawatt.

            Taking into account the coverage of demand for electricity in economy and the population, export to neighboring countries and inevitable losses, the output of electricity will be 13.6 billion kWh in the near future.

            Privatization

            Today, the major privatization stages were passed at a relatively high speed.

            At the first stage (1991-1993), the legislative framework for privatization and investment attraction was laid down; the relevant organizational infrastructure was formed.  The main focus was on the so-called “small scale privatization”, that is privatization of commercial, public catering and consumer services objects.

            At the second stage (1994-1997), the principal task was to transform large and medium enterprises in industry, transport and construction sectors, and privatize enterprises with bankruptcy criteria, conduct mass (voucher) privatization and introduce corporate governance principles.

            During the third stage (1998-2000), as a result of global financial crisis in 1998, the privatization process was slowed down.  Reorganization of large strategic objects of monopolistic economic sectors and privatization of non-productive area had been initiated.  It should be noted that since 1998, Programs of State Property Privatization are approved by the Jogorku Kenesh of the Kyrgyz Republic.

            At present, the largest direction of the state property reforms under the Privatization Program is to reform strategic economic sectors, privatize resort and recreation units, and state property objects not privatized before. 

            As of January 1, 1991, 9989 state property objects were registered in the Republic.  They formed the basis and are used in the analysis of privatization process and calculation of the privatization level.

            As a result of reorganization of property relations in the KR, the total level of privatized enterprises is over 70%, as of January 1, 2006.

            The enterprises of strategic importance for the economy of the Republic being the national welfare are privatized following the sectoral concepts or individual projects developed on the basis of financial and economic assessment, given the strategic, regional, sectoral, and specific peculiarities, including setting stages, procedure and terms for privatization.

            As of January 1, 2006, the state has share in 111 JSCs; out of them, the state control share is in 72 JSCs.

            Restructuring in Public Service and Good Governance

            The experience accumulated by the Kyrgyz Republic since gaining the independence in 1991 showed the need to reform the public service system.  On August 11, 2004, the Law on Public Service was adopted aimed at ensuring succession, stability, and independence of professional public service, hiring experienced public servants, and better efficiency of public service management.

            The Law has the following provisions: (1) to restrict political interference in government bodies operation the state positions were divided into political and administrative; (2) the Agency on Public Service Affairs was formed to elaborate and implement the uniform national policy in public service; (3) the institution of State Secretaries was formed in order to ensure stability and independence of professional public service; (4) the principle of mandatory competition for public positions vacancies was ascertained.

            At present, the Agency is completing the formation of the institution of State Secretaries based on a competitive selection[5]; accomplishes programs for training and skill development of administrative public servants; takes part in competitive selection procedures and evaluation in government bodies; monitors the enforcement of the given Law; introduces the modern information technologies; improves the legislation related to public service; undertakes measures to control the rule of law at public service; collects, analyzes and publishes income statements of public servants.

            The support to reform the public service is given by the World Bank through GSAC/GTAC programs (Governance Structural Adjustment Credit/Governance Technical Assistance Credit).

            With a view of further deepening of the administrative reform, Decree of the KR President “On Optimizing Government Bodies Structure” of November 30, 2005, No. 607 was adopted. Under the Decree, 228 governance units shall be canceled, including 3 central offices, 37 subordinate units, 157 oblast territorial units, 31 rayon territorial units.  At the same time, the partial reorganization of 714 governance structures is anticipated, including 20 central offices, 57 subordinate organizations, 109 oblast territorial units, and 528 rayon territorial units.

            Furthermore, the number of employees of state governance bodies is reduced by 5539 individuals and 1164 office vehicles, thus leading to reduction of total expenditures for maintenance of governance offices by 279 million Som, including 154 million Som out of the salary fund.

            TRADE AND TRADE-RELATED POLICIES

            Trade Policy

            Trade has been always playing the key role in the economy of the Kyrgyz Republic.  Being a small country with vulnerable economy the Kyrgyz Republic recognizes the need and importance of international integration and world trade liberalization, and is willing to have access to foreign markets, required for both the stabilization of the balance-of-payments, and attraction of foreign and domestic investors into advantageous sectors.  Due to the reasons above the Kyrgyz Republic gives a great importance to the Uruguay Round results and multilateral trading system based on WTO rules.

            The Kyrgyz Republic’s accession and membership in the WTO has directly assisted in implementation of reforms.  During WTO membership new laws, regulatory acts liberalizing foreign trade regime and attracting investments into the country were adopted; geography and profile of foreign trade turnover and exports have been expanded and modified; the basis for safe and predictable trade system was laid down.

            The main package of legal and institutional documents regulating trade regime was adopted in 1998 at the moment of accession to the WTO.

            Since 1998 and to the present time Kyrgyzstan liberalize foreign trade regime following the WTO commitments.  For the moment the Kyrgyz Republic does not apply customs duties for export of goods and quantitative restrictions on export and import.  There are no restrictions on import and export of currency.  Enterprises are free to choose any trade partner.  State and private companies have the right to engage into export/import transactions without specific registration or restrictions, except for cases when products are subject to export and import licensing.

            Export and import licensing procedures do not restrict imported goods by quantity or cost of exported/ imported goods.

            After accession to the WTO the new Customs Code and the Law on Investments of the Kyrgyz Republic were adopted.  The technical regulation reform is in the progress; the Law On Technical Regulation was adopted.  The work is carried out on drafting Tax Code and Law on Licensing.  The WTO Enquiry Points were established.

            Customs and Tariff Regulation

            The customs tariff is a code for customs duties rates; it represents one of the key tools of state regulation of foreign trade and applied for imported goods only.  Export of goods is not charged with customs duties.

            Prior to accession to the WTO, the uniform 10% customs tariff for all imported goods acted in the Kyrgyz Republic, customs and tariff systems have cumbersome scheme of exemptions difficult for administering.

            Upon accession to the WTO the Kyrgyz Republic annually reviews and approves the customs tariff for imported goods according to the WTO commitments.

            The Ministry of Industry, Trade and Tourism drafts the Law on Customs Tariff for Imported Goods to the Kyrgyz Republic jointly with other ministries and agencies, with active involvement of the private sector.   The information on draft law is placed in newspapers and official website of the Ministry (www.mvtp.kg).

            Draft Law on Customs Tariff for Imported Goods is submitted for approval to the Government of the Kyrgyz Republic and for further adoption by the Jogorku Kenesh.  After the Jogorku Kenesh considers and adopts the draft law, it is forwarded for signing to the President.

            Today, the Law on Customs Tariff of the Kyrgyz Republic No. 81 of March 29, 2006 is in force. The Law is based on the Commodity Nomenclature of Eurasian Economic Community (EAEC), approved on September 20, 2002, due to transition to 10-digit code.

            According to acting customs tariff, zero rates constitute 46.6% of commodity nomenclature, 5% duty rates – 14.2%, 10% duty rates – 33.4%, 12% duty rates – 3.1%, 15% duty rates – 2.7%, 20% duty rates 0.2%, 30% duty rates 0.2 % of commodity nomenclature.  Specific duty rates amount to 0.11% and combined duty rates are 1.3%

            The modifications of customs tariff by years are given in the table below.

Table No. 5

 

            The Kyrgyz Republic gives preferences (no customs duties imposed) for goods from 47 least-developed countries according to EAEC’s preference scheme.

            Non-Tariff Regulation

            (1)   Trade Embargo and Sanctions

            The Kyrgyz Republic has no trade embargoes or sanctions.

            (2)   Quoting

            The Kyrgyz Republic does not apply tariff quota on export/import of goods.

            The Kyrgyz Republic applies quota on import of alcohol beverages[6] and beer from non-WTO member-countries under the Law on State Monopoly on Production, Storage and Sale of Spirits and Alcohol Beverages, and Resolution of the KR Government of April 5, 2004, No. 227, approving the Regulation on Procedure for Quoting of Import of Alcohol Drinks and Beer and Determination of Import Quota.

            The maximum amount of quota on import of alcohol beverages and beer is established.  The allocation of quotas on import of alcohol beverages and beer is performed by a competitive commission formed by the State Inspectorate on Control over Production, Storage and Sale of Spirits and Alcohol Drinks under the Government of the KR (pursuant to the above said Regulation).

            Annual import volume of alcohol beverages and beer is calculated on a competitive basis, as the average import value during the last three years justified by official statistics.  Maximum amount of quotas for import of alcohol drinks and beer are estimated on the basis of importers application, consumer demand in domestic market for a particular good, purchasing capacity, and production volume of alcohol drinks and beer by domestic producers, with breakdown by quarters of a planned year within annual amount of quota on import.

            To protect environment and human health and life, quota on import of light medium distillates, other types of raw materials and components for production of commodity petroleum products depending on productive capacity of operating petroleum processing plants were introduced in 1997 (Resolution of July 07, 1997, no. 404).

            In 2002, the given provision was canceled by Resolution of the KR Government of November 18, 2002, No. 783.  The Resolution approves the List of Economic Entities Allowed to Import Light and Medium Distillates, Other Types of Raw Materials and Components for Production of Commodity Petroleum Products.  The List includes “Kyrgyz Petroleum Company” JV, “Vostok” JV, “”Kara-Archa” Ltd., “Kyrgyz-Russian TKN” Ltd., “Tyan-Shansky Oil Concern” Ltd.  These companies are petroleum processing plants and licensed to produce petroleum products.  In 2005, the given Resolution was added (Resolution of the GKR of August 18, 2005) with temporary permission for “Geleon Trade” Ltd. to supply gas condensate for processing to “Vostok” JV from Kazakhstan.

            There are no quota and licenses on importation of raw materials and components for production of petroleum products.  The quantity of imported goods is determined following the productive capacity of operating petroleum plants, pursuant to the Resolution.

            Other importers may import raw materials for processing at operating petroleum plants. For this purpose, they need to make arrangement with a plant on the volume of delivery of raw materials.  Alternatively, a petroleum plant may import raw materials for processing, if it has license to produce petroleum products.  They should address the Ministry of Industry, Trade and Tourism to initiate additions to the List of the above indicated Resolution.

            (3)   Export and Import Licensing

            At present, import of 18 commodity groups[7] and export of 19 commodity groups[8] is subject to licensing (Resolution of the Legislative Assembly of Jogorku Kenesh of June 8, 1998, No.1101-1 as amended on June 25, 2004, З N 1690-II).

            The ground for issuance a license is as follows:

Conclusion of a specialized expert organization on possibility and expediency of export/import of a good based upon national interests, national and ecological security of the Kyrgyz Republic;

In the event of introduction of quantitative restrictions on export/import of a good (observing WTO rules):  the availability of quota obtained by an applicant (economic entity), as a result of participation in competition and tenders according to the established procedure;

In the event of introducing a state monopoly (observing WTO rules) on export/import of specific goods: a permit (license) for the right to perform export/import transactions.

            The ministries and agencies issuing licenses are the Ministry of Industry, Trade and Tourism, the Ministry of Interior, the Ministry of Health, the State Commission on Drugs Control, the State Inspectorate on Control over Production, Storage and Sale of Spirits and Alcohol Drinks under the GKR, and “Kyrgyztamekisi” SJSC.

            The ministries and agencies that issue expert’s conclusion are the Ministry of Interior, the Ministry of Finance, the Ministry of Emergencies, the Ministry of Agriculture, Water Economy and Processing Industry, the Ministry of Defense, the Ministry of Health, the Ministry of Foreign Affairs, the National Security Service, the National Academy of Science.

            Pursuant to the Law On Licensing (Article 8) foreign legal entities or individuals, as well as individuals without citizenship shall receive licenses on the same conditions and under the same procedure as legal entities and individuals of the Kyrgyz Republic, unless otherwise provided by legislative acts.

            Licensing procedure is not aimed at restriction of export/import of goods by quantity or cost.  The introduction of licensing allowed for calculation of export/import of specific goods, which may negatively affect human health, consumer and ecological welfare, national security, safety of artistic historical and archeological values and protection of national wealth and exhaustible natural resources.

            Licensing of export of scraps and wastes of nonferrous metals and monopoly on export of ferrous metals was introduced to regulate the activity in turnover of such products in the Republic and prevention of related violations damaging the national economy and security.  The violations included stealing of phone, telegraph cables and electric cables and other units with a view of illegal sale and re-sale, and exportation from the territory of the Kyrgyz Republic.

            At present, the new draft Law on Licensing is being accorded.  The draft contains provisions on automatic and non-automatic licensing (Article 26 of the draft law).

            (4)  Prohibitions and Export Control

            The Kyrgyz Republic has not applied trade measures for protection of balance-of-payments.

            Export and import prohibitions are performed under international conventions to protect human health and safety, environmental protection, and for national security purpose.

            The import and export of outdated and used articles and equipment is prohibited, in operation of which ozone depleting substances are used (Freon) with a view to implement Vienna Convention for the Protection of the Ozone Layer and Montreal Protocol on Substances That Deplete the Ozone Layer.  Under Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, hazardous wastes are subject to export and import control.  Pursuant to Rotterdam Convention on the Prior Informed Consent (PIC) Procedure for Certain Hazardous Chemicals and Pesticides in International Trade, the pesticides and industrial chemical substances are prohibited for use.  The Stockholm Convention on Persistent Organic Pollutants provides for export and import control for 12 chemical substances.

            The national policy in export control is carried out to ensure security of the country, its political, economic and military interests only.

            Export control covers controllable products, including certain types of raw materials and materials, equipment and technology, scientific and technical information, works and services, goods for double-purpose use, and results of intellectual activity, which may be used in the process of creation of weapons of mass destruction, ways of delivery, other types of arms and defense technology.  The export control legislation includes Law on Export Control of January 23, 2003, No. 30, the KR Government Resolution No. 55 of February 6, 1996 On Approval of Regulations on Procedures for Export and Import of Materials and Technologies used in Creation of Chemical, Nuclear-Missile Weaponry and Resolution No. 330 “On Measures for Further Introduction of Export Control System in the Kyrgyz Republic” of May 4, 2004.

            The national check-list of controlled goods currently under approval by the Jogorku Kenesh was drafted.  The draft List of Controlled Goods was elaborated under Agreement on Uniform Procedure for Export Control of EAEC member countries, signed by the heads of the Governments in October 2003.

            (5)   Anti-dumping, Safeguard, and Countervailing Measures

            Regulatory framework of the Kyrgyz Republic, which regulates safeguard, anti-dumping, and countervailing measures was developed pursuant to WTO Agreements and consists of Law on Anti-dumping of the Kyrgyz Republic of October 31, 1998, No. 139; Law on Safeguard Measures of the Kyrgyz Republic of October 31, 1998, No. 141; Law on Subsidies and Countervailing Measures of October 31, 1998, No. 140; Regulation on Conduct of Investigation Prior to Introduction of Safeguard Measures approved by Resolution of January 20, 2001, No. 15; Regulation of Procedure for Anti-dumping Investigation and Investigation on Subsidies Subject to Compensation, approved by Resolution of January 20, 2001, No. 14.

            The Kyrgyz Republic has not introduced any anti-dumping, safeguard, and countervailing measures.

            Customs Procedures

            Since January 1, 2005, the new Customs Code was enacted in the Kyrgyz Republic.  The fundamentally new provisions on application of modern customs procedures, such as independent assessment, selection, post-entry control (inspection after release of goods), and provisions streamlining the customs formalities and control of goods and vehicles moved through the customs border of the Kyrgyz Republic were laid down.

            The new customs Code of the Kyrgyz Republic was drafted in compliance with the International Convention on the Simplification and Harmonization of Customs Procedures (revised Kyoto convention).

            The new Customs Code provides for introduction of information systems and information technologies.

            The work to introduce the automated system on collection of statistical data on cargo customs declaration, customs receipts, check up and registration of documents for issuance of license for the customs bodies is in progress.   

            Application of modern information technologies allows for creation of new opportunities for speeded customs formalities, better reliability of customs statistics, improvement of efficiency of fight against counterfeiting and violation of customs rules. Automatization and computerization in customs area enable to improve efficiency of decision execution, monitoring of information and its availability, effective use of the uniform information system.

            Declaration may be submitted by electronic application, including details for goods to the customs body.

            For transparency purpose all regulatory acts related to customs issues are published in an official newspaper.  In addition, the important customs information is posted on the website of the customs body.  

            Technical Regulation

            (1)   Technical Regulation Reform

            Upon accession of the Kyrgyz Republic into the WTO it was stressed that there is a cumbersome system of establishing mandatory requirements by the state.  The number of such requirements is unreasonably numerous.  The government completely oversight the enterprises’ activity in production and sale of goods, performance of various processes, works and services.  By acceding the WTO Kyrgyzstan has become the party to the WTO Technical Barriers to Trade Agreement and Agreement on Application of Sanitary and Phytosanitary Measures, thus, committing to create the technical regulation system in full compliance with international rules, norms and standards, widely spread international practice and reduce technical barriers to trade.

            To reform the technical regulation system successfully the government bodies in collaboration with international organizations worked on creation of a legislative framework.

            The authorized body on technical regulation, which is the Ministry of Industry, Trade, and Tourism of the KR, creates conditions for transparency and openness of the technical regulation system.  The list of goods subject to mandatory certification was reduced by over 70%; indicators for the remaining part of goods subject to mandatory certification were cut down by 2-3 times.  It will facilitate a sufficient reduction of expenditures and time spending by entrepreneurs (suppliers, seller) for certification of goods, as well as cases of abuse by certification bodies.  Exclusion of unjustified requirements by certification bodies and state executive bodies, lessened state interference into market relations, reduction of terms of customs formalities for supply of goods to a consumer, cancellation of intermediate form of goods access to market allow to eradicating corruption due to clear distribution of functions in technical regulation.

            Since December 2004, the Law on the Fundamentals of Technical Regulation in the Kyrgyz Republic is in force.  The Law provides for standardization principles under the WTO Technical Barriers to Trade Agreement.

            Pursuant to the WTO principles the requirements to goods shall be clearly divided into two categories: (1) mandatory for fulfillment: minimal requirements to safety, which should become technical regulations; (2) voluntary: fixed by standards, the fulfillment of which shall be kept by producers.  Standards became the documents of voluntary application and should serve for improvement of competitiveness of goods.

            The technical regulation reform shall ensure creation of favorable conditions for development of industry, entrepreneurship, and trade; improving citizens’ protection from consumption of unsafe goods; limiting state interference into market relations; improvement of the investment climate of the country.

            In December 2005, first ten (10) fundamental standards of the National Standardization System harmonized with international rules and norms establishing principal definitions in standardization area were approved.  The procedure for drafting and content of national standards, recommendations for drafting standards by organizations and technical committees were also established.

            The Fund of Standards acting in the territory of the Kyrgyz Republic is 20000; of them about 580 are national standards KMS and about 19000 are regional standards (Interstate Council of Standardization, Metrology, and Certification is recognized by the International Standardization Organization as a regional standardization organization).  The level of harmonization of national standards with international is 50%, the level of harmonization of all acting Fund of Standards is 38%.

            30 technical committees on standardization, as well as representatives of goods producers, scientific and research and public organizations for consumers’ rights protection, executive bodies and other organizations may draft national standards.

            Annually about 60 national standards are developed (reviewed and modified) by technical standardization committees in the Republic.  Kyrgyzstandard organizes participation of interested organizations in consideration of 350 draft regional (interstate) standards.

            (2)   Sanitary and Phytosanitary Provisions

            The bodies responsible for implementation of the Agreement on Application of Sanitary and Phytosanitary Measures are the Ministry of Health Care and the Ministry of Agriculture, Water Economy and Processing Industry of the Kyrgyz Republic.

            While performing state sanitary and epidemiological oversight the Department of State Sanitary and Epidemiological Oversight under the Ministry of Health of the Kyrgyz Republic, oblast, city, rayon centers of sanitary and epidemiological oversight within their competence established by Law of the Kyrgyz Republic on Sanitary and Epidemiological Welfare of Population shall:

take mandatory decisions to perform hygienic and anti-epidemiological actions by legal entities, individual entrepreneurs and citizens;

apply measures of administrative sanctions in the event of committing sanitary violations, and give materials to law enforcement bodies to bring law offenders to liability in accordance with the Law of the Kyrgyz Republic;

control observance of sanitary rules, hygienic provisions, sanitary and epidemiological actions in development and putting into operation, production output, application and use of goods, including purchased abroad, with further issuance of sanitary and epidemiological conclusion on safety indicators for human beings health;

issue sanitary and epidemiological conclusion for production, application and sale of new types of goods to population, new technological production processes, food additives, manufacturing raw materials, materials and articles, which are in contact with food products, as well as for importation of goods into the territory of the Kyrgyz Republic by citizens, natural persons and legal entities.

            To improve the activity in veterinary area, bring it into compliance with international requirements, ensure protection of animal and human beings health from diseases, production and sale of good quality animal goods in terms of veterinary and sanitary properties, the new Law on Veterinary was developed and adopted in April 2005.  The new Law sets forth requirements to be met by the WTO members on application of sanitary measures in veterinary.  The Law was approved by the Office International des Epizootics (OIE).

            The amendments were introduced into the Law on Chemicalization and Plant Protection in June 2003 related to sale of pesticides and agricultural chemicals and administrative liability applied. In June 2005, the amendments were made into the Law on Seeds.

            The State Veterinary Department under the Ministry of Agriculture, Water Economy and Processing Industry of the Kyrgyz Republic is a contact point for OIE.

            Veterinary and sanitary requirements to imports of animals, animal products, and other cargoes and goods controlled by the state veterinary body were developed and approved by the Intergovernmental Council for Cooperation in Veterinary of CIS member-countries and fully observe the provisions of the OIE Terrestrial Animal Health Code, the enquiry WTO point on international trade in animals and animal goods.

            In 1999, the Kyrgyz Republic joined the Convention of the European and Mediterranean Plant Protection Organization and recognizes all provisions of the Convention (GKR Resolution No. 214 of April 12, 1999).

            Since March 2002, the Kyrgyz Republic is a member of the Commission “Codex Alimentarius”.  In October 2003, the National Committee “Codex Alimentarius” was established.

            Risk level assessment is conducted in solution of import issues, that is determination of a possibility of penetration of contagious diseases agents in importation of goods or impact of other factors, which require veterinary and sanitary actions so that to prevent emergence and spreading of diseases and forecasting of biological and economic consequences.

            Risk assessment is carried out on the basis of information received about epizootic status regarding especially dangerous diseases of the OIE List A and B, analysis of the situation in a country-exporter regarding specific diseases and a possibility of consequences of carrying agents into the territory of the country.  The import of meat of livestock and sheep, as well as live animals from unsafe countries with spongiform encephalopathy (mad cow), foot-and-mouth disease, cattle-plague, and other especially dangerous diseases is prohibited upon the official confirmation of welfare of countries in quarantine diseases. The risk assessment analysis of a threat of carrying the disease is performed by the State Veterinary Department on the basis of OIE data and information received from countries-exporters.

            The importation of quarantine cargoes and transit shipment along the territory of the KR is performed in presence of phytosanitary certificate, issued by the state plant quarantine bodies of a country-exporter, and import quarantine permit.  All quarantine materials and objects crossing the national border and boundaries of special quarantine zones shall be subject to phytosanitary control irregardless of the country of origin.

            Any requirements to phytosanitary control shall be established within the framework required for provision of phytosanitary measures by reasonable tools and within reasonable time limits.

            According to veterinary requirements to meat of various animals, including imported poultry, meat obtained from slaughter of animal, which have undergone effect of natural or synthetic estrogenic, hormone substances, thyrostatic preparations, antibiotics, pesticides, and other pharmaceuticals injected before slaughter later than deadline recommended by guidelines, shall be prohibited for importation.

            Investment Policy

            (1)   Public Investment Programs

            Public investing is one of the serious factors supporting overall economic development, and specific regions.  There are several economic areas where the use of direct private investments is either limited or impossible due to a noncommercial character.

            The Public Investment Program is a tool, by which the Government plans and inputs capital investments into the state sector, so that to compensate non-market nature and support the economic environment for further growth of private investments.

            To date and in future, the policy of the Kyrgyz Republic is aimed at rejection of attraction of non beneficial credits (grant element is not less than 45%) and securing commercial credits by the Government or the National Bank.

            In terms of increasing burden of foreign debt liabilities, the policy of attraction of the most favorable loans is not aimed at keeping the same extent as before in the middle-term and long-term perspective.  The basis of the policy is principles of stringent selection of new investment projects.  Two main approaches, quantitative and qualitative restrictions of borrowings are used; the approaches are basically determined by the IMF Poverty Reduction and Growth Facility Program (PRGF) and the need to reduce the foreign debt.  PRGF Program contains, inter alia, a number of indicators limiting budget deficit calculated given the foreign financing of PIP.

            According to conditions of the PRGF Program the Government of the Kyrgyz Republic reduced assimilation of the Public Investment Program from 9.4% of GDP in 1999 to 3.1% GDP in 2001.

            Further reduction and leveling of investment expenditures should be undertaken at the expense of reduction of the number of signed credit agreements and withdrawal of sectors, which are being privatized from the PIP list.

            With regard to foreign debt issues, the management of foreign debt acquires more importance in the economic strategy of the Government; foreign debt is considered to be one of the factors directly affecting the PIP financial framework.

            The stress is put and will be kept on attraction of grant assistance.  The principal donors are the World Bank, the Asian Development Bank, Germany, the Islamic Bank for Development.  According to the World Bank’s Country Assistance Strategy for 2006-2007 fiscal years, the allocated funds shall be in the form of grants.  Also since 2005 the ADB shall give about 50% of assistance in the form of grants.  The given grant financing will have a positive effect on implementation of the IMF Program, since the IMF established annual restrictions for signing investment and program loans.

            (2)   Foreign Direct Investments Attraction

            Attraction of foreign direct investments into the economy is one of the principal tasks of the national economic policy and also the aspect of mutually beneficial economic cooperation with foreign countries.  Therefore, the Government makes all efforts to create the favorable investment climate meeting interests of foreign investors and business.

            Foreign investments in the Kyrgyz Republic are regulated by the Law on Investments of March 27, 2003, No. 66, which gives the national treatment of economic activity for foreign investors equal to that applied for domestic investors of the country.

            Pursuant to the Law there are no restrictions to foreign investments. All economic sectors are open for investment projects.  Besides, foreign investors are permitted to own 100% of property in all sectors.  In other words, there are no closed industries and sectors for foreign investors, which do not require creation of a joint venture.  Foreign employees at foreign enterprises are automatically granted with visa, work, and residence permits.

            The Law stipulates timely payment of adequate and efficient compensation in case of expropriation.  Therefore, investors are guaranteed with freedom of repatriation of capital, dividends, and revenue. There are no restrictions to exchange of revenue in national currency to foreign currency, including export of currency for further import or payment of prospective expenditures.  Investors may keep the revenue in foreign currency; no restrictions to convert it to the national currency exist.

            Today, there are no economic sectors in which foreign investors’ activity is restricted, in accordance with the Law on Investments.  The restrictions related to movement of foreign investors in specific territories are restrictions to move into territories of military areas and objects of national security, state reserves, etc.  There are no areas completely prohibited for movement of foreign investors.

            Foreign citizens and legal entities may be given land plots within a settlement (city, villages, and rural settlements) in the event of crediting of mortgage residential building.[9] Foreign investors may lease agricultural lands for 49 years.

            Foreign investors are granted with investment visa for the period from one to five years and foreign employees are granted with permits by migration services of Kyrgyzstan.

            Under taxation legislation of the Kyrgyz Republic tax remissions are applied for any investor (both domestic and foreign) making investment of own funds, loan proceeds or attracted funds.

            At present, four free economic zones operate in the Kyrgyz Republic, namely, FEZ “Bishkek” located in the capital of the country; FEZ “Karakol” located at the shore of the Issyk-Kul lake; FEZ “Maimak” located at the border with the Republic of Kazakhstan; and FEZ “Naryn” located at the Kyrgyz-Chinese border.

            Under the Law on Free Economic Zones in the Kyrgyz Republic, Article 8, FEZ entities are exempted from all types of taxes, fee and duties for the period of their activity in the free economic zone. The preferential taxation and customs treatment in the FEZ territory for all FEZ’s entities cover the whole period of their operation and only regarding their operation in the territory of FEZs.

            In the event of performing an economic activity by FEZ entities in the territory of the KR taxation is applied under the Tax Code.  Services rendered by FEZ entities for consumption in domestic market shall be charged with VAT under the Tax Code.

            According to the IMF Memorandum on Economic Policy, the Government of the Kyrgyz Republic during 2005-2007 anticipates liquidation of all FEZs, except for FEZ “Bishkek”, as the tax policy action for the 2006 budget.  Based on the given Memorandum the draft Law on liquidation of FEZ Naryn and Maimak[10] was submitted for consideration by the Government.

            Considering the current changes in social-economic situation of the Republic the proposals on quality improvement of current Law On Investments are prepared; the new Law on Licensing was drafted.

            The Kyrgyz Republic has signed and ratified bilateral agreements with 24 countries in order to protect and stimulate investments (Turkey, China, Ukraine, France, Armenia, Great Britain, USA, Malaysia, Indonesia, Pakistan, Iran, Uzbekistan, Kazakhstan, Georgia, Azerbaijan, India, Germany, Switzerland, Belarus, Mongolia, Tajikistan, Sweden, Finland, and Moldova).  It is planned to sign agreements with seven more countries (Denmark, Russian Federation, Austria, Netherlands, Hungary, Italy, Bosnia and Herzegovina).

            Intellectual Property Protection

            Starting from 1996 the State Agency for Intellectual Property under the Government of the Kyrgyz Republic has been acting as a state body pursuing common state policy in the area of intellectual property rights protection (industrial property objects, copyright and related rights, non-traditional objects of IP) in the Kyrgyz Republic.

            Creation of efficient system of intellectual property is a factor of economic growth, expansion of market relations and development of the activity of entrepreneurs and creative workers, as well as the prerequisite for formation of favorable investment climate.

            By today the legislative framework for IP protection has been formed and includes 13 Laws.[11] In general, the legislation of the Kyrgyz Republic stipulates for the procedures and remedies (civil law, administrative, including border measures, and criminal law) that are called for assisting the rightholders to efficiently protect these rights with consideration of provisions of international treaties, to which the Kyrgyz Republic is a signatory.

            Civil law remedies for protection of IPRs are set forth in the corresponding articles of the Civil Code and special laws, whereas criminal, administrative and customs measures are envisaged in the corresponding Codes.

            In the area of international cooperation the Kyrgyz Republic has been a member of the WIPO since 1994. The country jointed the following 22 international treaties (Please, see Table No. 6).

Table No. 6

Membership of the Kyrgyz Republic in International Treaties in IP Area

No.	Name of a Treaty	Date of Entry into Force
1.	Convention establishing the World Intellectual Property Organization (WIPO)	December 25, 1994
2.	Paris Convention for the Protection of Industrial Property	December 25, 1994
3.	Madrid Agreement Concerning the International Registration of Marks	December 25, 1994
4.	Patent Cooperation Treaty (PCT)	December 25, 1994
5.	Eurasian Patent Convention	January 13, 1996
6.	Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks	December 12, 1998
7.	Locarno Agreement Establishing an International Classification for Industrial Designs	December 12, 1998
8.	Vienna Agreement Establishing an International Classification of the Figurative Elements of Marks	December 12, 1998
9.	Marakesh Agreement Establishing World Trade Organization (WTO), annex Ic: Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)	December 20, 1998
10.	Strasbourg Agreement Concerning the International Patent Classification (IPC)	September 10, 1999
11.	WIPO Copyright Treaty (WCT)	December 12, 1998
12.	Berne Convention for the Protection of Literary and Artistic Works	July 8, 1999
13.	International Convention on Protection of New Plants Sorts	June 26, 2000
14.	Patent Law Treaty (PLT)	November 26, 2001
15.	Geneva Convention for the Protection of Producers of Phonograms Against Unauthorized Duplication of Their Phonograms	October 12, 2002
16.	WIPO Treaty on Performance and Phonograms	August 15, 2002
17.	Treaty on the Law of Trademarks	August 15, 2002
18.	Hague Agreement Concerning the International Deposit of Industrial Designs	March 17, 2003
19.	Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure	March 17, 2003
20.	Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations	May 17, 2003
21.	Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks	June 17, 2004
22.	Nairobi Treaty on the Protection of the Olympic Symbol	May 11, 2004

            In the area of copyright the country cooperates with the International Confederation of Authors and Composers (CISAC), Paris. Kyrgyzstan has also signed bilateral inter-governmental treaties on industrial property protection with Russia, Kazakhstan, Uzbekistan, Azerbaijan, and Armenia. An Agreement on IP protection has been signed with the Turkish Republic.

            By the end of April, 2006 40637 industrial property objects are protected in the territory of the Kyrgyz Republic, of them 1902 – inventions (of which 1502 – protected by Eurasian patents), 1 558 – industrial designs; 6 – utility models; 37171 – trademarks (of which 30587 protected pursuant to Madrid Agreement).

            Among the urgent problems faced by the country are illegal use of IP objects and sale of counterfeit goods.

            A necessity in efficient protection of rights and legal interests of authors and IP rightholders is dictated by a host of objective reasons: status of the national economy, i.e. transition stage to the market relations, limited financial possibilities of IP objects creators, poorly developed infrastructure in the given area, absence of traditions and legal culture in the area of IP objects exploitation.

            Coordinated actions of all ministries and agencies, as well as public organizations aimed at identification and prevention of IPRs violations are required for establishing efficient system of IPRs protection.

            Understanding the importance of the given problem, the Government of the Kyrgyz Republic issued Resolution # 93 on February 23, 2003 that established Inter-governmental Committee on Counteraction to Violations in IP area under the Government of the Kyrgyz Republic. The Committee includes all law enforcement bodies and carries out a set of complimentary measures ensuring IPRs protection. 

            Special structural sub-divisions have been created in Kyrgyzpatent, notably unit on research and unit on examination of copyright and related rights objects, whose major goal is to examine the counterfeit nature of the goods, study and analysis of audio and video piracy. These structures closely cooperate with law enforcement bodies in identifying violations of copyrights and related rights. A special unit on fight with violations in IP area is within the structure of the Ministry of Home Affairs. Inspections on identification of copyright and related rights’ violations in the area of audio and video business have been included within the plan of activities of law enforcement bodies. General Prosecution office of the Kyrgyz Republic issued a decree for all prosecutors of the regions and the capital ordering to strengthen the control over examination of complaints about observation of the legislation in the area of copyright and related rights, and in case corpus delicti is established to initiate criminal charges and conduct investigation in an efficient manner.

            Moreover it should be noted that for the purpose of fighting with piracy and counterfeiting law enforcement bodies jointly with employees of Kyrgyzpatent carry out activities on seizure of counterfeit audio and video products. 

            Agriculture

            During the next stage of reforms in agriculture, the state efforts are aimed at creation of favorable conditions for development of private collective and farm holdings, related to stimulating of production, processing and sale of products and rendering services by organizing new cooperation forms, as well as ensuring social protection to vulnerable population layers.

            Thereto, the Government approved a set of actions until 2010 covering development of plant growing[12]; animal breeding[13]; system of procurement and export of agricultural and processing goods[14]; water supply to rural areas[15] to implement the National Strategy of the Kyrgyz Republic “Complex Rural Development”.[16]

            Principal actions to implement the Set of Actions on development of plant growing in the Kyrgyz Republic until 2010 are as follows: allocation of additional irrigated lands for seed-growing holdings; creation of additional specialized seed-growing holdings; strengthening of public services for crop variety testing and seed control by laboratory and field equipment; purchase of foreign equipment for labeling and packaging of seeds; creation of the republican biotechnological center for transition of potato seed-growing to virus-free basis; creation of agricultural technical and chemical service centers at each ayil okmotu (rural board); finding sources of financing for purchase of specialized machinery and equipment on conditions to hand over to farmers and peasant, and services centers on leasing terms; saturation of market of the Republic with chemicalization means, spare parts, various types of agricultural machinery and equipment by reduction of prices, thus exempting suppliers of these products from VAT payment. The results of implementation of the Set of Actions will be growth of agricultural goods in 2010 in comparison with 2003 (forecast): grain – 45%, sugar beet – 47%, raw cotton – 31%, tobacco – by 4.4 times, potato – 16%, vegetables – 41%, fruits and berries – 48%.

            Set of actions to develop cattle breeding provides for the following measures: improvement of regulatory framework for development of cattle breeding; reforming of management system in agriculture and creation of an institutional structure; creation of cattle breeding auxiliary services; improvement of material basis, financial and technical provision.  The results expected are production output of highly valuable and productive pedigree animals, restoration of export of pedigree products of animal breeding.

            The principal measures for development of system of procurement and export of agricultural products and processing are as follows: restructuring debts of export enterprises to the Social Insurance Fund if the export share of such enterprises exceeds 30 percent; determination of scaling of export producers in examination of options of partial, preferential and full exemption from taxation; expansion of programs of crediting for export enterprises and economic entities; stimulation of increase in volumes of insurance transactions in foreign trade activity and expansion of types of insurable risks in this area; development of consultancy and marketing services; incentives for attraction of domestic and foreign investments into development of the system of procurement and export of agricultural products and processing industry, etc.  The outcomes anticipated cover export growth agricultural and processing industry products by 10 percent.

            The implementation of the set of actions for development of water supply in rural areas stipulates construction and reconstruction of the water supply system in rural area. The result should be provision of rural population with good quality drinking water, with the growth by 80 percent.

            Competition Development Policy

            The national policy of entrepreneurship support and development has promoted the competition development.  For this purpose, a number of laws, resolutions, aimed at removal of administrative barriers to entrepreneurship and private sector development was adopted in 2001-2004.  The simplified procedure for issuance of permits for designing and construction of small and medium businesses was introduced; the period for consideration of documents was reduced by 2.5 times; the number of unjustified inspections was decreased.  In general, the number of licensable activities was reduced from 400 to 30 types; and the number of paid services rendered by executive bodies and structural units by 30%.  The rates and tariffs for services granted by the government bodies are reduced; the control over expenditures is toughened.

            One of the main features of the competition development is increase of the number of economic entities.  According to data of the National Statistic Committee as of the beginning of 2005 the number of registered economic entities was 297.2 thousand.  During one year the number of entities raised by 10.2%, that is the increase by 210.5 thousand in comparison with 1995 (as of January 1, 1996: 86.7 thousand entities).

            The dynamics of the total number of industrial enterprises shows the sustainable growth.  Their number increased by 205 entities in comparison with 2001, that is the evidence of the demonopolization process in the industrial sector and decrease of large enterprises.

            The number of economic entities in the market of construction services is constantly increasing, thus enabling competition development in the construction sector.  As of January 1, 2000, there were 2784 enterprises, and as of January 1, 2005, 3655 enterprises operate, that is the rise by 871 entities for 4 years.

            Road transport services sector achieved the most active formation of the competitive environment.  This is due to presence of the large number of enterprises both in public transport, and departmental, as well as increase of portion of passenger and cargo transportations by road vehicles of the private sector.

            As a result of reorganization of “Kyrgyz Aba Joldoru” National Air Carrier JSC, the competition was established in the market of air transportations.  At present, 15 air companies were registered in the Kyrgyz Republic.  The number of foreign air carriers is increasing.  Recently, the flights of different air companies on a parity basis have become operating.  The competitive activity of air companies in cargo transportations was strengthened.

            Government Procurement

            Pursuant to Decree of the KR President of January 29, 1997, the State Agency for Government Procurement was formed.  The Agency is authorized to implement the national policy in government procurement.  The Law of the Kyrgyz Republic “On Government Procurement of Goods, Works and Services” was adopted on May 13, 1997.

            The World Bank conducted the survey of the government procurement system in 2002.  Based on the survey results the Report on Assessment of Procurements in the Kyrgyz Republic was prepared with recommendations to make amendments to the Law On Government Procurement of Goods, Works and Services.

            In May 2004, the Law On Government Procurement of Goods, Works and Services was amended. The given Law was brought into compliance with the WTO Government Procurement Agreement and European Union guidelines. 

            Today, the standard tender documents for purchase of goods, works, and services are being developed in accordance with the new Law on Government Procurement.

            The draft Law on Electronic Purchases will be developed in the third quarter of 2006 with the following submission to the Government. 

            The Kyrgyz Republic during the WTO accession process has committed to join the WTO Government Procurement Agreement.  At present, the Kyrgyz Republic have prepared and answered the Checklist of questions regarding joining the GPA. The answers to the US questions were also prepared. Two sessions of the WTO Committee on Government Procurement were held considering joining of the KR to the Agreement.

            Banking Policy

            Despite the positive changes made under the WB Finance Structural Adjustment Credit Program in 1996, the sharp worsening of financial sustainability of the banking sector has occurred by the end of 1998.  Worsening of the quality of credit portfolio of banks, increase in share of unprofitable or unpaid credits, poor management system, lack of control over executive officials’ actions by stockholders, imperfect system of internal control and audit had resulted in insolvency of several banks.

            To prevent the system crisis, the National Bank of the KR jointly with the Government had undertaken actions to restore and restructure insolvent banks, intensify work on improving the legislative framework for oversight over commercial banks activity.  As a result of these joint actions, the viable core of the banking system has been preserved, and the system risk in banking sector was localized and neutralized.

            Today, there are no restrictions and limitations to opening and operation of foreign commercial banks, branches, and subsidiaries.  Foreign capital share in the total banking capital increased by two times and constituted 62 percent as of the end of 2005, in comparison with 30 percent as of the end of 1998.  Out of operating commercial banks in 2005 the prominent stockholders in 11 banks are foreign investors.  The given figures show the raise in confidence for the banking system by the foreign investors.

            With a view to improve sustainability and reliability of the banking system the requirement to 300 million Som of authorized capital stock for newly opened commercial banks and 60 million Som of equity capital for operating commercial banks was established.  Since January 2008 the amount of equity capital should be 100 million Som.

            As of December 31, 2005, the banking system of the Kyrgyz Republic consists of 19 operating banking institutions with 166 branches located throughout the country.

            By the end of 2005, the correlation of assets, credits, and deposits to the nominal GDP amounted to 22.0 percent, 7.7%, and 12.0 %, accordingly.

            The total regulatory capital of the banking system during the last years is increasing; it equaled 3.51 billion Som by the end of 2005, thus rising by 2.2 times during the last four years.  The significant growth rate was due to new investments into the capital of commercial banks.

            The positive changes in the banking sector took place mainly due to favorable macroeconomic trends (reduction of inflation level and stabilization of exchange rate).  As a result, the interest rates at interbank credit market have been substantially decreased.  The trend toward crediting economy in national currency created prerequisites for development of domestic production, which is the main income source for the population and reduction of poverty.

            To improve financial sustainability of banks the requirements meeting international standards were set covering risk management, application of international standards of financial reporting, disclosure of information, conduct of independent internal audit, organization of internal audit and control systems, introduction of corporate governance principles, fight against money laundering, and financing for terrorism.

            Non-Bank Financial Sector

            The development of non-bank financial and credit institutions (NBFCI) has started since 1997, when the first credit unions were formed.

            As of January 1, 1998, 15 credit unions, 2 specialized financial crediting institutions operated in the Kyrgyz Republic.  Their credit portfolio amounted to 28.6 million Som. Over the period from 1998 to 2006, a number of operating NBFCIs run up to 458 entities, including 320 credit unions and 136 microcrediting companies and agencies; the credit portfolio amounted to 4225.1 million Som. At present, the NBFCI system renders services for 105.5 thousand of active debtors.

            In December 2005, the Medium Term Micro Finance Development Strategy for 2006-10 was adopted aimed at development of microfinancing organizations, credit unions and other financial crediting institutions operating in microfinancing market.

            The State Agency for Financial Oversight and Reporting under the KR Government is the authorized body to conduct the uniform national policy in development of accounting and audit system.

            As a main reforming tool, the International Accounting Standards (IAS) and International Standards for Auditing (ISA) developed by the Board of Committee on IAS (London City) and Committee on International Auditing Practice of Financial Reporting (New York City) were adopted.[17]

            The policy objectives in the non-bank area are to create a legal environment and conditions for formation, development, and strengthening of non-banking financial institutions; regulate and oversight over their activity; apply measures improving the activity in the given area, as one of the component of future investing into the economy of the Republic.

            Insurance. Upon adoption of the Law on Organization of Insurance in the Kyrgyz Republic in 1998 the market has started to develop.  Under the given Law, an insurance entity may be established and operate only in the form of a joint stock company (open or closed type).  The right for insurance contract was secured by the Civil Code (Chapter 46).

            The number of insurance companies reached 86 entities by 1998; of them only 39-45% was operating and the remaining part was not operating or closed due to lack of receipts of insurance payments.  However, for the last five years, the amount of insurers has reduced by 2 times; at present all 11 registered insurance companies operate.  There are no state insurance companies and specialized brokerage and re-insurance organizations.

            Insurance market of Kyrgyzstan is at the initial stage of development and comprises only 0.2% of GDP.[18] The amount of insurance premium per capita is not significant, which is 37.3 Som in 2004 on average per capita, and it decreased by 25 Som in 2005.

            The main trends of the Strategy for Development of Financial Market are as follows: development of voluntary and mandatory insurance; provision of reliability and financial sustainability of insurance system; development of state regulation; improvement of government body on insurance oversight; development of investment activity for insurance entities; development of institution of insurance system and improvement of taxation; collaboration with international insurance organizations; improvement of insurance population culture and other important aspects.

            As a result of the Strategy’s implementation, the main numerical features of modern insurance market (the volume of insurance fees and capacity of insurance companies) should increase by 10-12 times.

            Lottery and gambling industry.  The lottery activity is regulated by Regulation on Republican Lotteries, approved by Resolution of the Kyrgyz Republic of January 17, 2001, No. 11.  A permit is the certificate for the right to perform lottery.  As of January 1, 2006, six (6) organizers of lottery operate.[19]

            The state regulation is aimed at provision of financial sustainability of lottery companies by working out economic justified provisions which observance minimizes the risk in their operation. The control and oversight over the lottery business pursue the increase of the general level of organization of lottery conduct, which will improve the population trust to lottery.  Further, the revenue budget part should be increased.

            Gambling activity is performed in accordance with the Law on Gambling Activity in the Kyrgyz Republic of July 26, 2004, No. 95.  As of January 1, 2006, 127 gambling institutions operate (15 – casino, 101 – halls and spots for playing machines; 11 – totalizator (bingo, Russian lotto), 2 – handbook offices).

            Non-state pension funds. The reform of the pension system has initiated in 1997, when the transition from traditional distribution model of “solidarity of generations” to the model based on personal savings of each citizen (conditional accumulating pension system) was accomplished in accordance with the Law on State Pension Social Insurance.

            Since 1994 only one non-state pension fund operates in the KR.  For 10 years of operation only 1800 depositors were registered.

            The Law of the KR On Non-State Pension Funds was adopted in 2001.  However, these funds have not been properly developed.  According to the opinion of international experts, the main obstacle is improper interpretation of concepts of private pension funds; legislative framework and conditions for organization are not satisfactory and require further development.  It is necessary to set incentives for attraction of population savings for a long-term period with a view to form pension accumulations and the relevant paying offs.

            To protect rights of next generations of pensioners, it is anticipated to have the stage-by-stage transition to accumulating pension system.  An employee will additionally deduct insurance fees, which will form pension accumulations by the pension age.   These funds will be forwarded to investing and investment revenue will be repaid in the form of larger amount of pension payments.

            In the long-term perspective, all pension system will be shifted to servicing non-state accumulating pension funds.  The productive development of non-state pension funds will be one of the significant factors of strong stimulating of the securities market development in the Kyrgyz Republic.

            Transport

            (1)   Air Transport

            Civil aviation in the Kyrgyz Republic is component of the uniform transport system.  Its specific role is determined by the opportunity to ensure better speed of the passenger, cargo and postal conveyance for a long distance in comparison with other transportation means.

            At present, the Kyrgyz Republic singed 26 Intergovernmental agreements on air transportation with different countries, including 10 agreements signed for the period from 2000.

            The regular air flights are carried out by over ten (10) foreign air companies, namely, Russian, British, Turkish, Uzbek, Chinese, Tajik, and Iranian. Additional chartered flights and chartered transportations are performed, if necessary.  Moreover, Kyrgyzstan declared the policy of “open air” for cargo air transportations.

            128 licenses were issued by air companies in 2005, including 110 passenger, luggage, cargo, and postal transportation licenses, 4 licenses for air works; 9 licenses for technical servicing of air crafts and relevant equipment, 5 licenses for landing and take-off of air crafts.

            The certification of airfields “Naryn”, “Kazarman”, “Batken”, “Issyk-Kul”, “Talas”, “Osh”, “Jalal-Abad”, “Caravan”, “Manas” was carried out.  The certificates for flying suitability for 43 airplanes were issued.

            At present, to liberalize air services market, the work on adoption of the Law on Civil Aviation of the KR and other regulatory acts is being performed.

            (2)   Road Transport

            The transportation of larger part of passenger and cargoes is performed by road transport in the Kyrgyz Republic; 95% of all cargoes are transported.  For the most cases, the road transport is the only transport means ensuring communication between different regions.

            At present, Kyrgyzstan concluded 23 Intergovernmental Agreements on International Road Traffic. Besides, road transportations are regulated by the Memorandum on International Cooperation in Transport Area, interdepartmental Agreements on joint passenger transportations, agreements on opening of regular international bus routes, regulations for implementation of agreements, protocols on creation of permit issuance system, etc.

            Bilateral agreements cover technical issues such as emission of vehicles, size and dimensions of vehicles, and allow for application of own national standard/norm by each country.  Besides, there are multilateral agreements, such as Minsk Agreement (1999) On Dimensions of Vehicles, Performing Interstate Transportations on Road Vehicles of CIS member-countries.  Road carriers should observe such provisions as maximum sizes and other linear parameters of vehicles.  CIS standards are complied with national standards/norms of PRC, but there are differences such as PRC standard require narrower width of a vehicle. The infringers shall be liable under the national legislation (additional payment, fees).

            The principles of payments/fees imply that they are charged for the use of roads, as determined by the Road Fund, rather than entry fee or transit fee, since they are granted under the Agreement.

            In 2005, 27236.9 thousand tons of cargoes were moved, that is 91.3% to the relevant period of 2004.  Water transport moved 25.5 thousand of tons of cargo, that is 75.4 % to the relevant level of the previous year.

            The passenger traffic by buses was 5588.0 million passenger km, that is 104.7 % to the relevant period of the previous year.

            68389 licenses were issued totally, including passenger carriages - 65618, international freight transportations - 2771, operation of bus stations and bus terminal - 35 licenses, or by 4149 license more in comparison with the previous year, that is 106.4 %. To perform international carriages in 2005, 21613 permits were issued for the amount of 27478000 Som, which was transferred to the republican budget in full volume.

            At present, 1034 bus routes operate in the Republic; of them 45 international, 69 interoblast, 657 intraoblast and 263 municipal (including Bishkek and Osh).  5200 buses operate on these routes.

            (3)  Railroad Transportations

            The fundamental legislative acts regulating cargo and passenger railroad transportations are the Agreement on International Railroad Cargo Traffic of November 10, 1951, Agreement on International Railroad Passenger Traffic, Agreement on Interaction of CIS member-countries on Approaching Taxation Mechanism for Railroad Transport of March 10, 2000, On Cooperation in Technical Re-equipment and Modernization of Railroad Rolling Stocks of September 9, 1994, Agreement on Coordinating Bodies for Railroad Transport of CIS countries of February 14, 1992, Law of the Kyrgyz Republic On Railroad Transport of July 9, 1998 No. 90, and Statute of the Railroad of the Kyrgyz Republic of June 2, 2000, No. 315.

            Under the Article 7 of the Law On Railroad Transport of the Kyrgyz Republic the railroad and all objects and other property of railroad transport, which ensure carriages, repair and recovery works, shall not be subject to denationalization and privatization.  Besides, paragraph 3.1.20 of the “Program for Privatization of State Property in the Kyrgyz Republic for 2004-2006” approved by the KR Government Resolution of March 19, 2004, No. 189 envisages that railroads shall be prohibited for privatization.

            Foreign railroad carriers have the right to deliver and take cargoes or passengers without mandatory transshipping at the border.  Transit carriers may also provide international services in the Kyrgyz Republic.

            Telecommunications

            The legislative framework in telecommunication area includes the Law on Informatization of October 8, 1999, No. 107, Law On Electric and Postal Communications of April 2, 1998, No. 31, On Licensing, On Restriction of Monopolistic Activity, Competition Development and Protection” and other subordinate legislation.

            Liberalization and demonopolization processes in place, successful development of market relations and competition and accession of the Kyrgyz Republic to the WTO ensured the independence for economic development of operators and communications services.  Operators provide service of fixed, mobile and radiotelephony communications, personal paging, data transmission, TV and radio programs broadcasting, etc. At present, 249 communications operators act in the territory of the Kyrgyz Republic, holding 316 licenses.  Due to strong growth of telecommunications and emergence of large variety of communication services, several operators have several licenses for such services.

            Currently, four mobile operators function in telecommunications market.  The competition level in mobile, fixed communications and data transmission is not high.  The number of mobile subscribers is annually increasing by two times.  Recently the development of mobile services with the use of pre-paid calling cards took place.

            Fifteen (15) operators work in the international, long distance calls, and real-time packet-switched voice transmission market.  International and long distance calls services are provided by four operators: Kyrgyztelecom open JSC, Saima-Telecom Ltd., Katel Ltd., and Winline Ltd.

            38 operators render local calls services.

            40 operators function in data transmission services, including Internet. 

            Public access centers are opened (internet-cafes, internet-clubs, etc.), which provide a broad range of telematics services; at present 112 operators are licensed to provide telematics services.

            At present, 38 companies provide services of constructing-and-mounting, balancing and commissioning in communications, such as Agrouniversaltechnic Ltd., Komset Ltd., Stins Com Ltd., Nazar Ltd. and other.

            50 operators act in the Republic, rendering services in TV and radio programs broadcasting, of them 18 - radio-programs broadcasting; 18 - TV programs broadcasting; 7 - TV and radio programs broadcasting; 5 - cable TV broadcasting.

            TV services are rendered in all oblasts of the Republic by Kyrgyztelecom JSC and independent private TV and radio companies.

            Under Resolution of the KR Government On Privatization of State Share of Kyrgyztelecom Open Joint Stock Company No. 590 of December 19, 2005, the State Property Committee was assigned to held investment competition for privatization of 77.84% of state share in Kyrgyztelecom.

            In 2003, due to end of exclusive rights of Kyrgyztelecom to render services of international, long distance calls and coming privatization, on May 7 the KG Government adopted Resolution On Introducing amendments into Resolution of the KR Government On Licensing of Certain Types of Entrepreneurial Activity of May 31, 2001, No. 260, providing for conditions of obtaining a license for international and long distance calls, including real-time packet switched voice transmission (VoIP).

            Pursuant to the Law on Licensing of the Kyrgyz Republic, issuance of licenses is performed on the paid basis.  The amount of payment for consideration of application, conduct of required examination and registration of documents is determined based on appropriate costs of a body authorized to perform a licensing activity and equals 300 Som or 3 minimal monthly wages.  The issuance of licenses is performed at equal terms for all persons (Kyrgyz and foreign), meeting requirements established for performance of the communications sector activity.  The issuance of license is prohibited for the purpose of competition restriction.

            Postal communication services are provided by seven commercial enterprises along with operator-monopolist Kyrgyz Pochtasy state enterprise.  For private competition the services in receipt, transportation and delivery of domestic and international posting, express mail, courier, and distribution of periodicals are opened.

            Tourism

            For the last years the KR Government has started to view tourism as one of the economic sectors for budgeting.  The Decree of the KR President On Creation of Favorable Conditions for Tourist Period in 2005 and Actions to Further Development of Tourism in the KR of August 9, 2005, No. 307, recognized tourism as a priority sector with sufficient export opportunities and capacity for budget allocations. 

            The principal regulatory acts in tourism area are the Law On Tourism of March 25, 1999, No. 34, Resolution of the GKR On Program for Tourism Development in the Kyrgyz Republic until 2010, of February 2, 2001, No. 33, Resolution of the GKR On “Hospitable Kyrgyzstan” Marketing Strategy of Tourism Development in the Kyrgyz Republic, of October 6, 2004, No. 734.

            During last years the market of tourist services was formed due to consistent implementation of the national policy and market reforms. 

            There is a developed transport sector (air lines and land), the sector for tourist accommodation, tourism operators sectors, guides and tour guide services; financial institutions now accept payment by Visa and MasterCard and cashing traveler cheque. Therefore, the level of services for tourists is improving.

            The State Program for Denationalization and Privatization of Resort and Recreational Objects is almost fulfilled; at present all resort and recreational objects, in particular at the Issyk-Kul Lake are privately owned, except for a few.  The privatization has become a strong incentive for foreign direct investments attraction. Due to FDIs the construction and restoration of hotels and holiday homes was carried out.  Mountain skiing centers were put into operation after reconstruction in Bishkek outskirts.

            The infrastructure projects such as reconstruction of “Manas” airport, Bishkek-Osh road were fulfilled; the modern communications technologies providing regular connection with the entire world were introduced.  A number of high ranked hotels were put into operation in Bishkek; new air lines were opened, where international air companies British Airways, Turk Hava Yolari, Aeroflot, etc. perform flights.

            Visa regime was simplified and registration for tourists from developed foreign countries was canceled; the procedure of border control for tourists was streamlined.

            Owing to joint efforts made by government bodies and private entrepreneurs in tourism area the advertising and PR activity aimed at popularization of Kyrgyzstan’s image as a tourism country is carried on in world tourist markets.  Annually the representatives of Kyrgyz tour industry take part in international exhibitions and fairs.

Table No. 7

Main Indicators for Tourism Development in the Kyrgyz Republic for 2002-2005

No.	Main Indicators	2002	2003	2004	2005
1	Number of registered companies rendering recreation services	3918	4261	4601	4787
2	Gross added value in tourism activity (mln. Som)	3019,7	3010,9	3372,2	3458,7
3	In percent to GDP	4,0	3,6a	3,6	3,5
4	Manufacturing production accompanying tourism development (mln. Som)	77,1	77,2	97,6	98,0
5	Investments into main capital in tourism (mln. Som)	1357,1	739,5	1645,9	876,0
6	Capital assets brought (million Som)	1797,4	187,8	3337,9	3589,4
7	Revenue from tourists transportations (million Som)	1289,4	1368,2	1684,0	1567,2
	Retail trade turnover in tourism (million Som)	1691,3	1930,8	2279,3	2301,7
8	Turnover of restaurants, bars, canteens and other catering companies (million Som)	1143,8	1469,9	1787,1	2184,7
9	Export of tourist services (revenue from receipt of foreign citizens) (million USD)	35,7	47,8	75,6	70,5
10	Number of visits by foreign citizens (thousand people)	139,6	211,3	971,6b	761,2b
11	Import of tourist services (costs of citizens of Kyrgyzstan abroad) (million USD)	9,9	16,6	50,3	43,5
12	Paid services to population (million Som):
A	Tour and trips	140,4	168,7	365,1	345,0
B	Health improving	223,6	248,6	375,6	359,4
C	Hotel and other accommodation places services	524,6	651,9	715,6	719,2

a                      Decrease in GDP share due to reduction of construction volumes.

b              According to data of Border Service of the National Security Council,, the number of foreign citizens entering the territory of the Republic, which fall under the WTO “tourist” category.

Source:    National Statistics Committee of the KR

            Regional Trade Agreements

            Within the regional cooperation framework the importance is given to further development of relations with CIS countries, EurAsEC, Shangai’s Organization for Cooperation (SOC), Economic Cooperation Organization (ECO), due to territorial proximity of the commonwealth countries, prevalent economic and cultural relations, and mutual accessibility of domestic markets of countries for goods.

            (1)   Commonwealth of Independent States

            On December 8, 1991, the Agreement on Creation of Commonwealth of Independent States was signed in Minsk, Belarus.  CIS members are Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, the Kyrgyz Republic, Moldova, Russian Federation, Tajikistan, Turkmenistan, Uzbekistan, and Ukraine.

            The fundamental document for CIS countries cooperation is the Agreement on Creation of Free Trade Area of April 15, 1994, as amended on April 2, 1999.  Furthermore, the Kyrgyz Republic concluded bilateral free trade agreements with Belarus (effectuated March 17, 2000), Tajikistan (effectuated December 7, 2001), Azerbaijan[20], Armenia (effectuated October 27, 1995), Republic of Kazakhstan (effectuated November 11, 1995), Republic of Moldova (effectuated November 21, 1996), the Russian Federation (effectuated March 24, 1993), the Republic of Uzbekistan (effectuated March 20, 1997), Ukraine (effectuated December 31, 1997).

            Based on the agreements the Kyrgyz Republic provides free trade treatment to all goods originating from CIS countries.  All CIS countries, except for Turkmenistan, ensure free trade treatment for the Kyrgyz export.

            (2)   Eurasian Economic Community

            EAEC, the Customs Union successor[21], was created in full compliance with UN principles and international law.  It is a clearly structured organization with strict mechanism for adoption and execution of decisions.  It has international legal personality.  The Treaty on Formation of Eurasian Economic Community was concluded on October 10, 2000 in Astana, Kazakhstan.

            The members of the EAEC are five countries from the date of formation: Belarus, Kazakhstan, Kyrgyzstan, Russia and Tajikistan.  As requested by Moldova and Ukraine the observer status in EAEC was granted.  Due to joining of the Organization “Central-Asian Community” (OCAC) with the EAEC[22], Uzbekistan is in the process of accession to the EAEC.

            The actual results of integrative interaction of EAEC member-countries include the elimination of customs duties in mutual trade, operation of free trade treatment with no exemptions and restrictions, transition to principles of levying indirect taxes by a “country of destination”, adoption of commodity nomenclature of EAEC based on 10-digit coding system, formation of the Common Customs Tariff (62% of EAEC commodity nomenclature), adoption of international acts (88 documents in total), aimed at harmonization of foreign trade, tax, customs and tariff/non-tariff legislation, as well as related to currency regulation, border issues, energy and transport.

            The level of harmonization of the Customs Tariff of the Kyrgyz Republic for 2006 with the EAEC Common Customs Tariff (CCT) is nearly 30%.  The Kyrgyz Republic believes that the CCT will be formed after accession of EAEC members into the WTO, considering their tariff commitments under the WTO.  Therefore, the Kyrgyz Republic has a position to join the CCT after accession of other EAEC members into the WTO; the KR declared this point for EAEC countries.

            (3)  Shanghai’s Organization for Cooperation

            SOC was formed under results of meeting of heads of five counties (Republic of Kazakhstan, PRC, the Kyrgyz Republic, the Russian Federation, and the Republic of Tajikistan) in April 1996 in Shanghai, PRC, when the Agreement on Confidence-Building in the Military Field Along the Border Areas was signed. In April 2000 Uzbekistan joined the SOC.

            By signing the Memorandum between governments of SOC member-countries on Main Objectives and Trends of Regional Economic Cooperation and Launching the Process on Creation of Favorable Conditions in Trade and Investments of September 14, 2001, in Almaty City the cooperation in trade and economy has started.  At the second meeting of heads of governments of SOC member-countries on September 23, 2003, Beijing, the Program for Multilateral Cooperation of SOC member-countries was signed, and several vital decisions were taken, including SOC budget for 2004.  On September 22-24, 2004, the regular SOC meeting was held in Bishkek. In the course of the meeting a number of decisions were taken covering SOC financial activity, creation of the SOC Development Fund, SOC Business Council, opening of website of SCO regional economic cooperation, and Plan of actions to perform the Program for Multilateral Trade and Economic Cooperation of SOC member-countries.

            At present, the draft Intergovernmental Agreement of SOC member-countries on creation of favorable conditions for road transportation is being developed.  The draft agreement is aimed at trade swaps between SOC countries and more efficient use of transit capacity.

            (4)   Economic Cooperation Organization (ECO)

            The initiators of ECO formation were Iran, Turkey and Pakistan. In November 1992, the Kyrgyz Republic, the Republic of Kazakhstan, the Republic of Uzbekistan, the Republic of Tajikistan, the Republic of Turkmenistan, Azerbaijan and Afghanistan joined the ECO.  The principal tasks of the organization are to speed up regional cooperation in economy, science and technologies, develop communications infrastructure between ECO member-countries and at the international level.

            The Framework Agreement on Technical Assistance, Trade Agreement ECOTA[23], Agreement on transit of transport and Framework Agreement on Transit of Transport are valid under the ECO.

            ECO trade agreements do not provide for free trade zones, or formation of a customs union.  ECOTA agreement is a preferential, but the Kyrgyz Republic is not a party to the Agreement, since it considered that the Agreement does not comply with WTO provisions.

            Doha Round Participation

            The Kyrgyz Republic has supported the new multilateral negotiations round, initiated in Doha, and has the following position regarding current negotiations, as it was stated during 6^th Ministerial Conference in Hong Kong in December 2005.

            Agriculture: modalities on agriculture negotiations should reflect the interests of small and vulnerable transition economies, but with high liberalization commitments, as Kyrgyzstan.  In this regard Kyrgyzstan requested provision of equal approach in undertaking new commitments, the same as anticipated for the least developed countries, referred to in paragraph 45 of the Decision of the General Council of August 1, 2004.  In the process of preparation for the 6^th Ministerial Conference the Kyrgyz Republic jointly with Armenia, Georgia, and Moldova made the joint statement for the Committee on Agriculture (TN/AG/GEN/10 of June 29, 2005) on concerns of low income and transition countries regarding new commitments in agriculture to be undertaken.

            Non-agricultural market access: modalities for industrial goods should reflect the urge of WTO members toward significant improvement of market access, as referred to in paragraph 13 of the Doha Declaration.  At the same time, the Kyrgyz Republic stressed that economic indicators clearly show that level of development of the country comparable to that of low-income and vulnerable developing countries, and some least developed countries, especially being a land-locked country and facing additional difficulties in economy and trade. In this respect, the Kyrgyz Republic requested the WTO members and the Negotiating Group on Market Access to consider additional provisions in modalities for such countries.  The Kyrgyz Republic jointly with Armenia, Georgia and Moldova made the joint statement to the Negotiating Group on Market Access (TN/MA/W/56/Rev1 of June 6, 2005) on concerns of low income and transition countries regarding new commitments to be undertaken.

            Liberalization of trade in services: The Kyrgyz Republic supported the Modalities adopted on March 6, 2003 at the session of the Council on Trade in Services.  The Kyrgyz Republic made statement, which was included into the minutes of the special session of the Council on Trade in Service held March 3-6, 2003 and supported by the WTO members. The statement noted that according to the schedule of specific commitments of the Kyrgyz Republic on trade in services, out of 99 sectors and nearly 600 subsectors under UN CPC, the Kyrgyz Republic undertook commitments during accession on 545 subsectors and activities.  This is a quantitative portion of the schedule.  The qualitative portion is more evident in terms of openness of horizontal and specific commitments, which have no restrictions to market access and national treatment nearly by all sectors and modes of supply (except for a few strategic sectors and mode 4 of supply).  The schedule of commitments is equal to that of the group of Recently Acceded Members, sometimes even more liberal.  It was also mentioned at the specific statement distributed among WTO members in WT/MIN(03)/W/3 of August 26, 2003 before the Cancun Ministerial Conference.

            Drawing attention to Article 49 of the Doha Ministerial Declaration stating that negotiations “…shall be conducted with a view to ensuring benefits to all participants and to achieving an overall balance in the outcome of the negotiations”, and that the Kyrgyz Republic has already undertaken commitments with high liberalization level, different from those of the WTO original members, Kyrgyzstan has no opportunity to liberalize market access more than commitments already undertaken and implemented since the WTO accession.

            With respect to the KR’s position in services the letter to the WTO General Director was submitted (no. 03-1-1/2551 of June 1, 2005).

            TRIPS: The Kyrgyz Republic supported strengthening of TRIPS provisions by ensuring clear and predictable rules under Articles 22 and 23, covering protection of geographic indicators regarding products, other than wines and alcohol beverages.  The Kyrgyz Republic also supported the WTO Decision on TRIPS and Public Health at the Cancun Ministerial Conference in 2003, since the Decision allows for the poor population of the world to get access to cheap pharmaceuticals and the right to receive medicines from different countries and sources.

            Trade facilitation: Considering that one of the main constraints for foreign trade is customs barriers at border and transit procedure the Kyrgyz Republic supported measures for improvement of Article V, VII, X of GATT proposed in the report of the Negotiating Group on Trade Facilitation (Appendix E of the draft Ministerial Declaration).  The Kyrgyz Republic requested the WTO members to agree that adequate technical assistance shall be granted for capacity building for small countries with transition economy and low income under paragraph 5 and 6 of the Appendix D of the Decision of General council of August 1, 2004.

            In February 2006 the Kyrgyz Republic has supported the joint statement of EU, Canada, Japan, Armenia, Mongolia, New Zealand, Moldova and Paraguay on proposals to the Negotiating Group on Trade Facilitation (TN/TF/W/79 of February 15, 2006). 

            ECONOMIC DEVELOPMENT AND TRADE PERSPECTIVES

            Middle-term Economic Forecast

            The middle term strategy of the Kyrgyz Republic for 2007-2009 defines the key activities by the Government, aimed at achievement of strategic goals of the development: improvement of population welfare and poverty reduction on the basis of dynamic and sustainable economic growth.

            The important prerequisites for successful realization of macroeconomic policy are as follows:

            Social and political stability in the country;

            Fight against corruption and better public governance;

            Keeping inflation at the level not more than 4.2%;

            Conduct of agreed monetary and tax and budget policy;

            Strengthening the banking system and deepening financial markets;

            Ensuring stability of exchange rate;

            Gaining the real GDP growth at the level of 6.3% on the average during the period due to growth in:

Industry - 11.6%;

Agriculture – not less than 4%;

Services – 5.7%;

Construction - 9%.

            Further promotion of structural reforms in priority areas of economic development;

            Incentive for small and medium business development through strengthening of market institutions and improvement of efficiency of regulatory policy actions;

            Creation of favorable investment climate for inflow of private investments;

            Reduction of foreign debt burden;

            Legalization of illegal economy;

            Expansion of foreign economic cooperation.

            The GDP annual growth rate at the level of 6.3% will be secured by the sustainable growth in all economic sectors.

            The main prerequisites for the sustainable development of industry by 11.6% per year will be gold production output increase due to mastering of the southern-western area of Kumtor deposit and putting into operation of Taldy-Bulak Levoberejnyi and Jerui gold mining deposits, as well as growth by 4.8% per year in other industrial sectors (without gold mining), as a result of radical reforms in energy sector, launching of standing idle and new enterprises, restructuring of enterprises debts, etc.

            The annual growth rates in agriculture are forecasted at the 4% level, because of increase in agricultural production output by 4.5% per year, expansion of agricultural production given consumer demand in domestic and foreign markets, better access to crediting, etc.

            The sustainable growth shall be kept in services sector in the middle-term perspective.  Annual volumes of gross output in services will increase by 5.7% on average due to development of trade, transport and communications services, hotel and restaurants, export of tourist services by 15% per year.  Taxation policy actions to simplify taxation for business entities shall also enable this process.

            The annual average growth rate in construction area is anticipated at the 9% level due to increase of assimilation of investments in gold mining deposits, transport infrastructure, energy and expansion of residential building by development of housing credits and state support to construction of social housing.

            Monetary policy will be aimed at maintaining the inflation level at the level of no more than 4.2%.  Dynamics of inflation shall be established by domestic demand, price fluctuations at foreign markets, budget and taxation and tariff policy.

            The policy of floating exchange rate shall be kept in the middle-term perspective. The exchange rate of US dollar is anticipated at the level of 42 Som/USD.  The currency interventions shall be performed in volumes required for smoothing sharp fluctuations of exchange rate.

            The middle-term investment policy provides for the annual average growth of gross investments by 23.5% to GDP.  Public investments within the PIP framework shall be reduced from 3.1% in 2006 to 1.6% to GDP in 2009.  The investments growth will be secured through raise in private investments resulted from removal of all administrative barriers, building confidence and improving sustainability of financial system and banking sector for the purpose of insurance of eventual investors’ risks, and creation of favorable customs and taxation treatment.

            Net export indicator will be improved.  The leading real export growth (9.5% annual average growth rate) over import growth (5% annual average growth rate) is forecasted due to increase in production and export of gold connected with putting new deposits Jerui and Taldy-Bulak Levoberejnyi into operation.

            As a result, deficit of current accounts of balance-of-payments will be slightly improved from 103.8 million US dollars to 89.9 million US dollars in 2009.  This forecasting is based on assumption of positive trade balance, despite the growth impairment of inflow of private transfers.  The IMF forecast of world prices were used for forecasting the balance-of-payments.

            The main task for 2007-2009 in social policy shall be the market-oriented social development in social protection, education and health care areas.  The annual average population growth by 51‑53 thousand people is planned during this period.  The growth of employment shall be 17.5 thousand people annually.

            Future Trade Policy Directions

            The Kyrgyz Republic shall continue conducting the liberal trade policy and ensure that trade policy tools are transparent, predictable, and equal for both domestic and foreign legal entities and individuals.  The Kyrgyz Republic’s commitments under the WTO shall be observed.

            To expand trading, the Kyrgyz Republic shall perform the active diversification of industrial sectors (without gold) with the focus on value added sectors and export of finished goods, so that to move away from raw materials focus of the economy.  Such sectors include textile and clothing, agroindustrial, energy, mining and construction areas, which use local resources at the larger extent, but do not always concentrate on deep processing.   For this purpose the Program for Export Development of the Kyrgyz Republic for 2006-2008 and Program for Industrial Development for 2006-2008 will be adopted.

            The particular attention will be given to improvement of quality of exported goods and competitiveness with the help of technical regulation reform.

            The export growth of finished goods of light industry, machine building, processing, construction and electric power resources is anticipated.  At the same time the import growth of products of machine building, electrical equipment, petroleum products, natural gas, cars, medicines and pharmaceuticals, coal, chemical products will take place, as such products either lack or not produced in the Republic.

            In addition, the prior objective of the state is to ensure institutional framework for fast development of the legal activity of private sector, thus diversifying export and creating work places.  The key political actions shall be continuation of administrative barriers removal, further reduction and streamlining the registration, licensing, and permit systems, which currently constraint business development.  Such actions will include, inter alia, further improvement of the legislative framework and creation of optimal taxation conditions for businesses.   In this regard, the important step will be the enforcement of the new Tax Code.

            The Kyrgyz Republic will continue to develop and strengthen good neighborhood partner trade-economic relations with CIS regional partners and foreign countries at bilateral and multilateral levels.  It will also support accession of CIS regional partners into the World Trade Organization.

List of Abbreviations

ADB      - Asian Development Bank

CIS         - Commonwealth of Independent States

EAEC     - Eurasian Economic Community

ECO      - Economic Cooperation Organization

ECOTA  - Trade Assistance Agreement of ECO member-countries

GATT     - General Agreement on Tariffs and Trade

GDP      - Gross Domestic Product

GSAC     - World Bank Credit for Governance Structural Adjustment Credit

GTAC    - Governance Technical Assistance Credit

HES       - Hydro electric power station

IAC       - International Accounting Standards

IMF       - International Monetary Fund

KMS      - National Standard of the Kyrgyz Republic

OCAC    - Organization “Central Asian Commonwealth”

OIE       - World Animal Health Organization

PIP        - Public Investment Program

SOC      - Shanghai Organization for Cooperation

TRIPS   - Trade-Related Intellectual Property Rights Agreement

WIPO    - World Intellectual Property Organization

WTO     - World Trade Organization

 

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