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TITLE:  KYRGYZ ECONOMIC POLICY AND TRADE PRACTICES
DATE:  FEBRUARY 1994
AUTHOR:  U.S. DEPARTMENT OF STATE

                       THE KYRGYZ REPUBLIC

                     Key Economic Indicators
       (Millions of Russian rubles unless otherwise noted)


                                  1991      1992      1993 /2
Income, Production,
 and Employment

Real GDP (1990 prices)              7,619     n/a        14.0
Real GDP Growth Rates (pct.)       -5.2     -19       -18.7
GDP at current prices              15,170   106,190     860.6
 By Sector:
  Agriculture                       5,461     n/a       262.3
  Energy, Water
   and Manufacturing                6,826     n/a       445.8
  Construction                      1,214     n/a        34.9
  Services and Others               1,669     n/a       117.3
Net Exports of Goods
 and Services                       2,499     1,673     460.3
Labor Force (000's)                 1,546     1,525   1,500
Unemployment Rate (pct.)            1.5       0.17      0.29


Money and Prices

Money Supply (Ml)                     949    15,329     n/a
Base Interest Rate  /3              n/a       6         n/a
Personal Saving Rate               12.3       4.7     -11.5
Retail Inflation (pct.)           181         1,391     1,464
Wholesale Inflation (pct.)        259.6       1,754     1,106
Consumer Price Index              190.1       1,079     1,495
Exchange Rate
 Ruble/$
  Official                          1.75    350
  Parallel                        145       350
 Som/$ (October 93)
  Official                                              7.65
  Parallel                                              8.85


Balance of Payments and Trade

Total Exports (FOB)                 6,546    52,762   460.3
  Exports to U.S. ($ millions)      9.1       n/a       2
Total Imports (CIF)                 6,884    70,571   617.6
  Imports from U.S. ($ millions)    0         8.9      15.7
Aid from U.S. ($ millions)          n/a      18.8      83.6
Aid from Other Countries            n/a      75.0       n/a
External Public Debt ($ millions    0        43.0     365
Debt Service Payments (paid)        0         0         2.2
Gold and FOREX Reserves             n/a       n/a       n/a
Trade Balance                      -1,744   -17,809   -157
  Balance with U.S. ($ millions)    n/a       n/a     -13.7


Notes:

1/  All figures used are from Kyrgyz government sources.
2/  Six-month data in millions of Kyrgyz soms unless otherwise
    noted.  Ruble/som conversions are done at the rate of 200
    rubles = 1 som.
3/  Average annual interest rate for 1993 was not available. 
    The base interest rate on October 10, 1993 was 260 percent.



1.  General Policy Framework

    On August 31, 1991, the Kyrgyz Republic (Kyrgyzstan)
declared its independence as the Soviet Union disintegrated. 
Since that day, the country has been struggling to define its
own institutions, laws, and foreign relationships.  To this
end, a new constitution was adopted on May 5, 1993 by an
overwhelming vote of the Jogorku Kenesh (the parliament).  The
constitution defines the Kyrgyz Republic as a democratic
republic founded on secular principles.  It provides for a
government with three branches (legislative, executive, and
judicial) presided over by a president who is the head of state.

    The Kyrgyz Republic made significant progress in 1993
toward reforming the political and economic structures created
during the soviet period.  In addition to adopting a new
constitution, the Kyrgyz Republic introduced its own national
currency, the som.  However, like all the "newly independent
states" (NIS), Kyrgyzstan continued to face problems in
instituting its economic reform.

    The nation's economy continued to deteriorate in 1993 as
industrial production declined further while prices rose as
subsidies were removed and inflationary pressures continued. 
The introduction of the national currency, while giving the
nation an opportunity to escape the higher inflation levels of
the ruble zone, also exposed the economy to pressures from some
of its neighbors and created an additional complicating factor
in its trade with the rest of the NIS.

    The Government of Kyrgyzstan remains firmly committed to
the development of a market economy.  With favorable laws on
privatization, joint ventures, foreign trade and investment,
free economic zones and concessions to foreign investors, the
government has aggressively pursued economic reform and courted
foreign investment.

    With the introduction of the som, control of monetary
policy in Kyrgyzstan transferred from the Central Bank of the
Russian Federation to the National Bank of Kyrgyzstan (NBK) in
Bishkek.  The emission rate of the som in May and June was 0.7
and 0.5 Percent, respectively, of the total money supply,
compared to a 41 percent emission rate in April with the
ruble.  In July the discount rate offered by the NBK to banks
and state organizations was doubled to 100 percent.

    In an attempt to further control inflation, the government
has been pursuing a restrictive budget policy aimed at reducing
its growing budget deficit.  On August 16, the government
declared an emergency budget for the second half of 1993.  The
declaration stated that budget revenues for the first six
months of 1993 were far below projected levels, with shortfalls
in the collection of the value-added tax (VAT), the tax on
profits, the industrial property tax, and especially the excise
tax.  In addition, mid-year increases in wages, pensions and
other allowances added to the government's difficulties in
balancing the budget.

    The government introduced a variety of austerity measures
to close the gap, including a 10-percent reduction in the size
of the staff at the Ministries of Education, Health, and
Culture as well as a five percent turnover tax (from which
agriculture, energy, coal-mining and bread industry are
exempt).  Nevertheless, in the third quarter of 1993, budget
expenditures exceeded revenues by 36 percent.  The government's
ability to successfully implement its austerity plan and
generate additional revenues was in large part undermined by
the continued contraction of the country's economy.  Budget
revenues for the second half of 1993 were projected to be 497
million soms while outlays were projected to be 657 million
soms.

    Kyrgyzstan is the first NIS for which the IMF approved an
Upper Credit Tranche Standby Arrangement and also the first to
have access to the Systemic Transformation Facility, with
potential purchases amounting to about $85 million (92 percent
of quota).  This was followed by the approval of a $60 million
import rehabilitation credit from the World Bank on IDA terms. 
The World Bank continues to coordinate international assistance
efforts to Kyrgyzstan and in May held a consultative group
meeting to discuss Kyrgyzstan's technical assistance needs and
priorities.  The Bank also intends to lend to Kyrgyzstan $80
million worth of fast-disbursing loans in the coming year.  The
Bank will focus in particular on the financial sector;
enterprise restructuring; new business development and support;
the creation of a social safety net; and, the promotion of the
agricultural sector.  Kyrgyzstan is also a member of the
European Bank for Reconstruction and Development and the Asian
Development Bank.


2.  Exchange Rate Policy

    Beginning in May 1993, the National Bank started supplying
the inter-bank foreign exchange market through weekly foreign
exchange auctions.  Kyrgyzstan's foreign exchange market is
segmented into official and black markets, and is tightly
regulated by the National Bank, which limits the amount of
currency that can be traded at the weekly auctions.  The
initial auction rate in May was four soms per dollar.  By
November 5 the rate had fallen to 7.70 soms per dollar.

    The rates at state commercial banks and on the black market
were higher than the rate fixed by the National Bank.  At the
beginning of November, they ranged from 8.5 To 9.2 Soms to the
dollar.


3.  Structural Policy

    In 1993 Kyrgyzstan continued its privatization program.  To
date, 4,036 small and medium-size enterprises, constituting
27.5 percent of all state property, have been privatized.  The
rate of privatization is highest in the service sector (92.4
percent of value), followed by trade and public catering (71.1
percent), and the construction sector (55.3 Percent).  In
contrast, the share of privatized assets is much lower in
industry (40.1 percent) and Agriculture (33.7 percent) and even
less in the transportation and wholesale sectors.

    Pricing policies:  Price liberalization continued in 1993. 
The list of goods and services whose prices continued to be
regulated was limited to energy, natural gas, coal, oil
products, nonferrous metals and strategic raw materials.  Only
bread and bread products were still directly subsidized by the
government, although at decreasing rates, and prices for bread
increased five-fold from January to October 1993.  Prices on
dairy products were liberalized in February 1993 while prices
for housing, transportation and communications had their
subsidies removed, but remain regulated.  The government also
maintained a limit on the increase retailers can charge over
the wholesale price of a domestically produced product. 
Imports are exempt from this control.

    Tax policies:  The major source of revenue for the
government is the value-added tax (20 percent) and enterprise
profit taxes (35 percent).  Imported raw materials and
components labeled for foreign investment production are exempt
from customs duties.

    Foreign investment:  Under Kyrgyzstan's foreign investment
law, "the legal status and conditions of foreign investment
will never be less favorable than the status and conditions of
investment by juridical persons and citizens of the Kyrgyz
republic."  In May 1993, Kyrgyzstan's parliament adopted
several amendments to the Law on Foreign Investment of February
1992.  The new version of the law extends tax exempt status to
foreign investors in all sectors with the following grace
periods: five years in manufacturing and construction; three
years in mining, agriculture, transportation and
communications; and, two years in trade, tourism, banking, and
insurance.  After expiration of the initial tax-free period,
the taxes imposed on profits will be reduced as follows: by 50
percent on profits reinvested in Kyrgyzstan; by 25 percent, if
not less than 50 percent of the enterprise's products and
services are exported; by 25 percent, if not less than 50
percent of production is derived from imported raw materials
and components; and 25 percent, if no less than 20 percent of
the profit is spent on professional training.  The law also
guarantees the right of foreign investors to repatriate their
profits.  In 1993, a Special Commission on Foreign Investment
(Goskominvest) was created under the government with
responsibility for registering and assisting foreign investors.


4.  Debt Management Policies

    In a July 1992 bilateral agreement, the Russian federation
took over responsibility for Kyrgyzstan's share of the former
Soviet Union's external debt in return for Kyrgyzstan's share
of the former Soviet Union's external assets.

    External public debt to the other NIS reached 166.6 billion
rubles in 1993.  Loans from non-NIS countries and international
financial organizations amounted to $170.6 million, of which
$13.6 million (interest payments) were to be paid in 1993. 
Thus as a percentage of GDP, the external debt increased from 4
percent in 1992 to 60 percent in 1993.


5.  Significant Barriers to U.S. Exports

    Kyrgyzstan lacks hard currency and, despite liberalized
foreign exchange laws, repatriation of earnings is difficult. 
Kyrgyzstan's ability to import goods and technologies which
require payment in hard currency is therefore severely
limited.  In addition, inadequate telecommunications and
banking facilities, as well as extremely high transportation
costs, add further practical barriers to exporters.

    To normalize its trade and investment relations with the
Kyrgyz Republic, the United States has proposed a new network
of bilateral economic agreements.  The U.S.-Kyrgyz Trade
Agreement, which provides reciprocal most-favored-nation
status, was concluded and entered into force in August 1992.

    The same year, the trade agreement was followed by the
conclusion of an Overseas Private Investment Corporation (OPIC)
incentive agreement offering political risk insurance and other
programs to U.S. companies interested in investing in
Kyrgyzstan.  In January 1993, a U.S.-Kyrgyz Bilateral
Investment Treaty (BIT) was signed establishing a bilateral
legal framework to stimulate mutual investment.  In December
1993, the U.S.-Kyrgyz Bilateral Investment Treaty came into
effect, establishing a bilateral legal framework to stimulate
mutual investment.  Further discussions are needed on the
bilateral tax treaty, which would provide businesses relief
from double taxation.


6.  Export Subsidies Policies

    Kyrgyzstan inherited the Soviet legacy of subsidization of
state enterprises, but these subsidies are aimed at maintaining
employment and production, and not specifically at making
exports more competitive.

    In 1992, the U.S. Department of Commerce made a preliminary
finding that uranium from Kyrgyzstan was being dumped in the
United States.  In October 1992, the Department of Commerce
signed an agreement with Kyrgyzstan to suspend the dumping
investigation.


7.  Protection of U.S. Intellectual Property

    A package of laws on intellectual property rights has been
introduced in Kyrgyzstan's parliament and is to be discussed
during its December session in 1993.  The new laws will provide
for international obligations in the area of intellectual 
property rights.  The U.S.-Kyrgyz Trade Agreement includes
commitments on protection of intellectual property.


8.  Worker Rights

    a.   Right of Association

    In February 1992, the government adopted a comprehensive
law which included provisions protecting the rights of all
workers to form and belong to trade unions.  The law requires a
minimum of five workers to form a union.  There is no evidence
that government policy sought to obstruct the formation of
independent unions.  Unions are legally permitted to form and
join federations and to affiliate with international trade
union bodies.

    b.   Right to Organize and Bargain Collectively

    The law recognizes the right of unions to negotiate for
better wages and conditions.  In most sectors of the economy,
wage levels continued to be set by government decree.  Union
members are protected by the law from antiunion discrimination.

    c.   Prohibition of Forced and Compulsory Labor

    Forced or compulsory labor is forbidden and does not occur.

    d.   Minimum age for Employment of Children

    The minimum age of employment is 18.  Students are allowed
to work up to six hours per day in summer or in part-time jobs
from the age of 16.  Restrictions on the use of child labor are
largely observed.

    e.   Acceptable Conditions of Work

    The standard work week is 41 hours, usually within a
five-day week.  Safety and health conditions in factories are
far behind western standards.  An April 1992 law established
occupational health and safety standards as well as enforcement
procedures.

    f.   Rights in Sectors with U.S. Investment

    There is no significant U.S. investment in the Kyrgyz
Republic.

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