Kyrgyzstan was the first country in Central Asia to introduce its own currency (May 1993) following the collapse of the USSR. When first introduced, 4 som were equal to US$1. However, over the years since the som was introduced inflation reduced the value of the som relative to the dollar. Kyrgyzstan experienced hyperinflation in the early 1990s, with inflation reaching 1,400 percent, but economic measures have since brought inflation down.
Between 1995 and 1997, positive developments in the economy reinforced the government's intention to restrict the supply of money. A scarce currency will tend to be valuable, but as the currency becomes more available, its value declines. Accordingly, as the money sup-
|Exchange rates: Kyrgyzstan|
|soms (KS) per US$1|
|SOURCE: CIA World Factbook 2001 [ONLINE].|
ply increased, the value of the Kyrgyz som declined. Following the 1997 crisis in the Asian financial markets and, in particular, following the collapse of financial markets in Russia in August 1998, the Kyrgyz economy suffered dramatically. Kyrgyzstan's money supply rose in 1998 and 1999. During this period inflation, which had been brought under control, rebounded in 1998 and reached nearly 40 percent in 1999. During 1999, the som lost 35 percent of its value to the U.S. dollar. Public confidence in the currency was further shaken by a major financial fraud involving some of the country's largest commercial banks.
In 1998 the Kyrgyzstan banking system suffered a major financial crisis which led to closing half of Kyrgyzstan's 26 commercial banks in 1999. The Soviet-era banking system had been expanded and slightly modified during the period between 1992 and 1995 but had not adopted standards of bank operations in accordance with international practice. As a result, in 1995, according to a World Bank study, over half of the commercial banks had a negative net worth. The study also concluded that 60 percent of all the banking sector's loans were considered unrecoverable, that is, these loans would never be paid back by the borrowers, according to the IMF. The public lost confidence in the banking system, and many people withdrew their funds, leading many of the banks to go out of business.
Kyrgyzstan is a relatively heavily indebted country. Outstanding debt in the first quarter of 2000 amounted to US$1,409 billion, according to the IMF. Much of the Kyrgyzstan republic's debt is concessional; that is, it has been loaned by public entities as special assistance at better-than-market terms by international financial institutions such as multilateral development banks. But a considerable portion is non-concessional; that is, it is money that was loaned by private lenders such as commercial banks. Even if Kyrgyzstan is granted special repayment terms, delays, or postponements in the repayment schedule, the burden of future debt will remain high. The Kyrgyzstan government will need to bolster its fiscal position through reducing government expen-
|GDP per Capita (US$)|
|SOURCE: United Nations. Human Development Report 2000; Trends in human development and per capita income.|
ditures and increasing revenue. More competent debt management and limits on contracting debt will help. More emphasis on government reforms may also improve the overall economic pictures by improving the investment climate and enhancing the productive and export potential of the country.