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U.S. DEPARTMENT OF STATE
KYRGYZ REPUBLIC: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES
BUREAU OF ECONOMIC AND BUSINESS AFFAIRS





                         KYRGYZ REPUBLIC

                    Key Economic Indicators 1/
            (Millions of soms unless otherwise noted)


                                     1992      1993      1994 2/

Income, Production and Employment:

Real GDP (1990 prices)              7,100     5,800     4,205
Real GDP Rates (pct.)               -19.0     -18.7     -27.5
GDP (at current prices)               772     5,720     7,388
By Sector:
  Agriculture                         N/A     1,739     2,009
  Energy/Water/Manufacturing          N/A     2,963     1,899
  Construction                        N/A       232       750
  Services/Other                      N/A       785     2,730
Net Exports of Goods & Services       8.3     460.3     671.6
Real Per Capita GDP                   N/A       N/A       N/A
Labor Force (000s)                  1,525     1,500     1,450
Unemployment Rate (pct.)             0.17      0.29      0.70

Money and Prices:

Money Supply (M1)                     N/A       N/A       N/A
Base Interest Rate 3/                   6       N/A       N/A
Personal Saving Rate                  4.7     -11.5       N/A
Retail Inflation (pct.)           1,391.0   1,464.0     153.7
Wholesale Inflation (pct.)        1,754.0   1,106.0     516.8
Consumer Price Index              1,079.0   1,495.0     166.7
Exchange Rate (USD/som)
  Official                          ---        7.65     10.60
  Parallel                          ---        8.85     10.90

Balance of Payments and Trade:  (USD millions) 4/

Total Exports (FOB)                 131.9      77.6      63.6
  Exports to U.S.                     N/A       0.0       0.4
Total Imports (CIF)                 176.4      26.4      28.7
  Imports from U.S.                   8.9      15.7       2.1
Aid from U.S.                        18.8      83.6      83.6 5/
Aid from Other Countries             75.0       N/A      28.0
External Public Debt                 43.0      45.6      79.3
Debt Service Payments (paid)          0.0       2.2      24.1
Gold and Foreign Exch. Reserves       N/A       N/A        60
Trade Balance                       -44.5      51.2      34.9
  Balance with U.S.                   N/A     -15.7      -0.7


N/A--Not available.

1/ All figures used are from Kyrgyz government sources.
2/ Nine-month data in millions of Kyrgyz soms unless otherwise
noted.
3/ Average annual interest rate for 1994 was not available. 
The base interest rate on October 15, 1994 was 185 percent.
4/ Six-month data for 1994.
5/ Fiscal year 1994.



1.  General Policy Framework

    After the disintegration of the former Soviet Union (FSU)
and the achievement of independence in 1991, the Kyrgyz
Republic (Kyrgyzstan) inherited an economy which had been 
highly dependent on the Soviet economy and on budget subsidies
from Moscow.  Kyrgyzstan is one of the poorest of the FSU
republics both in terms of output and resource base.  As a
result, there was a sharp deterioration of economic activity in
1994.  GDP for the first nine months of the year dropped 27.5
percent over the same period of 1993, though it is expected
that 1994 GDP will reach the projected figure of 9.38 billion
soms (about $900 million) for the entire year.

    During 1992 and 1993 the Kyrgyz government took some major
steps in transforming the economy from one dominated by central
planning to a market oriented economy.  A number of progressive
changes were made to the legal system, including the adoption
of laws on privatization, joint ventures, foreign concessions
and investment, and free economic zones.  Most prices were
liberalized in January 1992, although bread prices were not
freed up until February 1994.

    In May 1993 an independent national currency, the som, was
introduced.  At the same time, a stabilization and structural
adjustment program was initiated with support and assistance
from the IMF, and the World Bank, the United States and other
donor countries.  Tightened monetary policy, beginning at the
end of 1993, resulted in a steady decline in monthly inflation
rates (from 33 percent in October 1993 to 0.2 percent in
September 1994).

    However, the government was unable to meet IMF inflation
targets and other performance goals for the end of 1993.  The
IMF stand-by facility was therefore replaced with an ESAF
(Enhanced Structural Adjustment Facility) in July 1994.  The
ESAF runs three years and its loans are at concessional rates.

    The system of government procurement at fixed prices (the
so called "state order") was abolished in early 1994 and was
replaced by a system where government procurement of a limited
range of goods will be accomplished through freely negotiated
contracts with suppliers. 

    Kyrgyzstan's ESAF program requires the government to
finance the budget deficit primarily through foreign loans, not
the central bank.  The budget deficit was 8.2% of GDP in
September 1994.  The deficit arises from social programs (52.5
percent of all budget expenditures) and financing of state
owned enterprises (15 percent).  To increase revenues, the
Kyrgyz government is restructuring the entire tax system.  In
1994, the Ministry of Finance was empowered to exercise control
over all revenue raising agencies, such as the State Tax
Inspectorate and State Customs Administration, both of which
are now structural units of the Ministry of Finance.  The Tax
Police Department, also established in 1994, reports directly
to the government.  It is expected that a new treasury system
will cover all budget transactions nationwide by December 1994.


2.  Exchange Rate Policy

    Interbank foreign exchange auctions were held twice a week,
with the exchange rate of the som depreciating from 8.03 soms
to the dollar in January to 10.6 soms in October.  The highest
point of depreciation was observed in May when the dollar was
traded for 12.45 soms.

    Since early 1994 all foreign exchange bureaus along with
the commercial banks have been permitted to buy hard currency
without any restrictions.  This resulted in a sharp narrowing
to about three percent of the margin between the official
auction rate and those of the commercial banks, exchange
bureaus and the black market.  At the end of October the latter
ranged from 10.6 to 10.9.

    The NBK intends to eventually replace foreign exchange
auctions by direct sales and purchases in the fledgling
interbank market.


3.  Structural Policy

    In 1994 Kyrgyzstan continued its privatization program.  To
date, 4,800 small and medium size  enterprises, constituting
about fifty percent of all state enterprises, have been
privatized.  The rate of privatization is highest in the
service sector (99 percent), followed by trade and public
catering (93 percent), and then industry (46.5 percent). 
Privatized enterprises make up 38.1 and 34.5 percent of the
construction and agricultural sectors, respectively, and a much
smaller percentage in the transportation and wholesale sectors.

    Pricing Policies:  Price liberalization continued in 1994. 
The list of goods and services whose prices continued to be
regulated was further reduced.  Prices for electricity were
doubled both for residential and industrial consumers in
September 1994, whereas natural gas prices were raised
fivefold.  However, prices for electricity, natural gas, and
heat remain partially subsidized.  The government will adjust
them in stages with the objective of full coverage of the cost
of energy by the end of 1995.  Liberalization of bread prices
on February 17, 1994 caused prices to double; by September they
had risen another 50 percent.  State subsidies for bread are
scheduled to be eliminated by mid-1995 when state-owned
bakeries are privatized.

    Tax Policies:  Kyrgyzstan's major source of government
revenue is the value-added tax (VAT - 20 percent) and
enterprise profit taxes (35 percent).  In order to reverse the
rapid decline in tax revenues, the government intends to
broaden the base of the VAT, impose a higher excise tax on
imported luxury goods, and introduce other taxes and fees.  As
a temporary emergency measure, in September 1994, the
government introduced a five percent sales tax on retail
transactions.  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
no 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 by 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
was created under the government (Goskominvest) with
responsibility for registering and assisting foreign investors. 

    In September 1994 a presidential decree was issued amending
the Foreign Investment Law and providing further investment
incentives.  In particular, foreign investors are exempt from a
five percent tax imposed on exported profits.


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.

    Loans from foreign countries and international financial
organizations amounted to $197.5 million, of which 24.1 million
(interest payments) were to be paid in 1994.  Thus as a
percentage of GDP, the external debt is expected to increase
from 17.9 percent in 1993 to 19.3 percent in 1994.


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 (MFN)
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 investment in each other's
country.  The Treaty came into effect in December 1993. 
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, Commerce signed an agreement
with Kyrgyzstan to suspend the dumping investigation.


    7.  Protection of U.S. Intellectual Property

    A package of laws intended to protect intellectual property
rights was introduced in Kyrgyzstan's parliament.  However, the
extraconstitutional dissolution of the parliament by the
president in September 1994 prevented the parliament from
completing action on the measure.  A newly structured
parliament is to be chosen in February 1995 and is expected to
review this proposed legislation.  The U.S.-Kyrgyz trade
agreement includes commitments on protection of intellectual
property.


8.  Worker Rights

    a.  The 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.  The Right to Organize and Bargain Collectively

    The law recognizes the right of unions to negotiate for
better wages and conditions.  While the right to strike is not
codified, strikes are not prohibited.  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 except in
government prisons.

    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 the summer or at part time
jobs from the age of 16.  The law has been largely observed. 
However, rapidly deteriorating economic conditions in the
country have resulted in a growing number of children working
to help support the family.

    e.  Acceptable Conditions of Work

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

    f.  Rights in Sectors with U.S. Investment

    Rights and conditions in sectors with U.S. investment do
not differ substantially from other sectors.  However, work
places or enterprises with U.S. investment have much better
conditions of work than the norm.  U.S. companies have already
improved conditions at some job sites.


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