Kyrgyzstan - Overview of economy

Kyrgyzstan is a remote, landlocked country with inadequate trade and transportation infrastructure . Kyrgyzstan's economy heavily emphasizes agriculture and animal husbandry, but there is a growing service sector in the urban areas. In 1999 agriculture accounted for 45 percent of the economy, while services comprised 35 percent. Industry made up the remaining 20 percent. Oil and gas, machinery and equipment, and foodstuffs are Kyrgyzstan's main imports. Kyrgyzstan's principal trading partners are Germany, Russia, Kazakhstan, and Uzbekistan. Cotton, wool, hides and meat are the main agricultural products and exports. Industrial exports include gold, mercury, uranium, and electricity. Kyrgyzstan is a mountainous country with significant hydroelectric power generating potential.

While it was part of the Union of Soviet Socialist Republics (USSR) from 1917 to 1991, Kyrgyzstan had a highly specialized economic niche in the communist economic system. Kyrgyzstan served primarily as a provider

of primary commodities such as gold, mercury, and uranium, and unprocessed agricultural goods such as foodstuffs, cotton, wool, and meat. After the USSR collapsed in 1991, Kyrgyzstan's mining and industrial enterprises underwent rapid contraction due to the loss of orders from buyers and the inability of the existing transportation infrastructure to make possible a rapid entrance into other markets. Kyrgyzstan's military industrial enterprises soon lost their financing. Production at Kyrgyzstan's gold, mercury, and uranium mines fell sharply.

After national independence on 31 August 1991, the newly established Kyrgyz government planned to create a market-based economy and to integrate into the world economy. Among the former communist countries, Kyrgyzstan became a leader in the movement of the post-So-viet states toward an open market economy. But the transition to an open economy has been difficult for this small country with few manufactured goods. The economy underwent severe contraction between 1990 and 1995. However, the Kyrgyzstan economy began to rebound in 1996 as new, post-communist practices began to take effect. The budget deficit as a proportion of the GDP was cut in half during the period 1995 through 1997.

With assistance from international organizations, such as the World Bank and the International Monetary Fund, the Kyrgyzstan government has made good headway in establishing the legal and regulatory foundation for a market economy. Kyrgyzstan carried out privatization of small enterprises and overhauled the country's banking and financial systems. In 1998 the Kyrgyzstan constitution was amended to allow for private ownership of land. Kyrgyzstan was the first country of the CIS to join the World Trade Organization (December 1998). At the urging of international financial institutions, the Kyrgyzstan government took steps to liberalize its foreign trade relations. These steps included eliminating some tariff restrictions (1991-92), eliminating certain highly bureaucratic export registration requirements (1998), and eliminating export duties (1999).

But Kyrgyzstan's enthusiastic pro-market posture has not met with the anticipated level of economic success. Basic economic indicators plunged between 1991 and 1995 when Soviet-era government subsidies for industry, farming, and public services were eliminated. Rapid restructuring of the economy led to sharp drops in farm and industrial output. From 1996 to 1997, the declines in output were reversed and the economic picture for Kyrgyzstan brightened considerably. A large increase in government revenue from the newly opened Kumotr gold mine, the largest single industrial enterprise in the country, combined with favorable weather that helped boost agricultural production. Economic growth in 1996 registered 7 percent and climbed to 10 percent in 1997. Inflation declined, and the government's current account deficit, an indicator of the government's fiscal responsibility, dropped to its lowest level since independence.

This picture changed when Kyrgyzstan was hit hard by the 1998 financial collapse in its major trading partner, Russia. The financial collapse in Russia led to a sudden drop in orders for Kyrgyzstan goods from Russia. The contraction in output led also to a deterioration in Kyrgyzstan's balance of payments at the same time as the country's indebtedness to foreign lenders increased substantially.