Kyrgyzstans Government Struggles to Improve Business Climate
Less than one year after the Tulip Revolution, Kyrgyzstan's economy appears to be stagnating amidst a paralyzed public administration and growing problems with organized crime. While the government has undertaken steps to help improve the country's business climate, business leaders are pushing for more radical change.
The instability that followed the March 24, 2005 revolution has led many investors to shut down businesses or postpone planned investments.
Members of the business community say that they are worried by criminal groups' increased political influence as well as ongoing clashes between various political clans over how to run the state administration. Growing pressure is on the administration of President Kurmanbek Bakiyev to provide for the rule of law.
That uncertainty appears to be having a direct economic effect. Kyrgyzstan's economy grew by only 1.4 percent in 2005, the Economy and Finance Ministry announced on January 31, the Kyrgyzstani AKIpress news agency reported. That number compares with 7.5 percent in 2004.
Kyrgyzstani President Kurmanbek Bakiyev, however, expects the country to register 8 percent growth in 2006, the Russian news agency RIA Novosti reported on January 18.
The country's business community does not appear to echo the president's optimism. In an interview with EurasiaNet, Umar Shavurov, executive director of the International Business Council, a Bishkek-based non-governmental organization that lobbies for the interests of businesspeople in Kyrgyzstan, stated that Kyrgyzstani entrepreneurs are hovering "on the edge of fear and hope."
Shavurov cited increased corruption, political instability, the lack of a strong rule of law and the lack of a clear long-term government strategy to reverse Kyrgyzstan's business woes as among the factors contributing to this sense of malaise.
Little sense exists that business owners or foreign investors have any legal recourse when contracts are violated, Shavurov stated. The Oxus Gold Company provides one case in point, he said. On December 31, 2005, the government revoked the British firm's license for development of a gold deposit in the country's Talas province. Officials allege that Oxus failed to make the investments necessary to start the project under the terms of its agreement with the government, but some observers argue that the government wants to reconsider the terms of the license to benefit from 2005 gold prices, which are nearly $100 higher than when the license agreement was signed in 2003.
Particular attention has also focused on the country's organized crime groups, which both international and domestic observers cite as contributing to the country's precarious stability. To address this ill, on February 1 Prime Minister Feliks Kulov ordered Kyrgyzstan's interior ministry to stamp out all 22 known organized crime groups active in Kyrgyzstan.
Eliminating the groups "can be resolved through preventive measures, by persuading members . . . strictly within the law to stop their activities or else by bringing criminal proceedings against them, again within the law," the Russian news agency ITAR-TASS reported Kulov as telling a meeting of senior ministry officials.
The measure follows on the January 31 dismissal of the head of the ministry's criminal investigation unit and the resignation, days earlier, of the secretary and deputy-secretary of the National Security Council. The trio stepped down after a January 25 accusation from Kulov, a former policeman, that Kyrgyzstan's interior ministry and security forces are falling short in the fight against corruption and criminal groups.
Kulov stated that a schedule would be set for the ministry to finish the fight against organized crime, and warned that the campaign would persist "until organized crime groups are eliminated in full." Any reports that the groups have influential patrons within the government are "untrue," he stressed.
A new tax code is also among the measures officials hope will improve the country's business climate and encourage economic growth. Parliament is expected to approve the tax code sometime in February.
But some business owners are skeptical that the code will introduce the changes needed. Under the draft code, Kyrgyzstan's Value Added Tax (VAT) will remain at 20 percent, four percentage points higher than in neighboring Kazakhstan, which has a faster growing economy. Income tax will be cut to 10 percent, but businesspeople fear that the introduction of a land tax will cancel any of the benefits from the income tax cut.
Stronger measures to rebuild business confidence are in order, they say, to fight corruption. Businesspeople maintain little has changed from the days of ousted President Askar Akayev, when graft was routine.
State inspections are one of the most oft-cited problems in this regard.
Reportedly, an entrepreneur can easily spend most of his or her day talking with state inspectors to justify some aspect of a business. Ignoring inspectors' requests for financial incentives to stop their inspections only increases their frequency. Though businesspeople say that inspectors take fewer bribes than under former President Akayev, the rate demanded is allegedly two to five times as high.
"Since last year our turnover has decreased significantly, so there's nothing left [for inspectors] to check," commented one Bishkek computer store owner who asked not to be identified. "There hasn't been any revolution. The old corruption schemes have remained."
Customs now headed by popular singer Bek Borbiev -- and the tax inspectorate are considered to be the most corrupt government offices. Importers are required to pay a 20 percent value-added tax, but for a fee ranging from half to a quarter of this amount, customs officials will allegedly allow products to be imported without registration. The practice is especially popular with goods from neighboring China or the United Arab Emirates.
Although Central Asian states Uzbekistan, Tajikistan and Turkmenistan were deemed more corrupt in a 2005 survey by the anti-corruption watchdog Transparency International, Kyrgyzstan ranked among the top 20 percent of countries worldwide for corruption.
President Bakiyev and other government leaders have maintained that Kyrgyzstan is committed to rooting out corruption. "It is very difficult to finish with corruption in one day," Bakiyev told a visiting representative from the Millennium Challenge Corporation, a US-financed economic development program, on February 2, AKIpress reported.
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