EurasiaNet Business & Economics - Corruption and Poverty Threaten Kyrgyz Growth Forecasts

BUSINESS & ECONOMICS

CORRUPTION AND POVERTY THREATEN KYRGYZ GROWTH FORECASTS
Mark Berniker 3/13/03

For much of the past year Kyrgyzstan has experienced political turmoil that is in part connected with economic disparity in the country. A recent report by the International Monetary Fund (IMF) suggests Kyrgyzstan may experience better than previously anticipated growth in 2003. However, observers caution, widespread poverty and corruption will likely continue to create obstacles to economic expansion.

The IMF report, released March 7, expressed optimism about Kyrgyz economic trends, but outlined several challenges that the government must confront.

"The level of external debt remains high, more needs to be done to reduce poverty and improve social conditions, and in light of the decline in gold resources, greater diversification of the economy is needed, built on stronger small- and medium-scale enterprises," says the report. Without changes that encourage a greater degree of entrepreneurship, the report suggested, corruption will persist and the country’s monetary, tax, trade, banking and legal systems will still look too risky to foreign investors.

The Kyrgyz economy contracted slightly in 2002 after expanding at close to 5 percent per year in recent years. A major reason for the poor economic performance was the political instability that buffeted Kyrgyzstan following the Ak-Sui riot. [For background see the Eurasia Insight archive]. Kyrgyz are preparing to mark the first anniversary of the Ak-Sui tragedy on March 17. Another factor hindering 2002 economic performance was problems with the Kumtor gold mining operation.

One of the biggest criticisms of President Askar Akayev’s administration, which has faced mounting internal opposition over the past year, has been its ineffectiveness in combating poverty.

On March 3, the Interfax news agency reported the IMF was generally satisfied with Kyrgyzstan’s three-year Poverty Reduction and Growth Facility program. But IMF mission head Taipo Saavalainen expressed concern that corruption and poor government oversight threatened the implementation of the poverty reduction strategy. The IMF report followed a regular semi-annual meeting between IMF representatives and Kyrgyz government officials. The IMF mission was in Kyrgyzstan from February 27-March 6.

Akayev has pledged to reduce poverty by 5 percent in 2003, provided the economy meets inflation and growth targets. The government aims to increase real incomes by 8 to 10 percent over the next 12 months, in part by backing the coal, gold, textile and military sectors to bolster its economy. Prime Minister Nikolai Tanaev, according to Interfax, said the government would develop gold fields and court foreign investors in order to increase gold production by up to 30 tons in three years. He also expressed hope that the government could stimulate growth in the "military-industrial" sector by forging closer defense ties with Russia. [For background see the Eurasia Insight archive].

Some Western observers believe the IMF is overly optimistic about Kyrgyzstan’s economic prospects. The most recent Economist Intelligence Report on Kyrgyzstan suggests that growth forecasts are unreliable. "Real GDP growth in 2003 is unlikely to reach 5 percent� given structural constraints and a slow recovery in the gold mining sector," analysts wrote.

The Economist Intelligence Unit also projects that "politically motivated fiscal policies will push inflation up." Such policies include state support for businesses like the Kumtor Gold Company, whose flagship mine literally collapsed in 2002. The company, a joint venture between the state and a Canadian company, Cameco, is due for a restructuring in 2003. Interfax reported on February 20 that Cameco would increase its stake from 33 percent to 90 percent, with the state-owned gold company retaining the balance as a preferred shareholder.

In the poverty-reduction struggle, some international experts have said poor management skills and corruption continue to hamper the government’s initiatives.

United Nations Development Program resident representative Jerzy Skuratowicz blamed "weak institutions and corruption" for entrenching poverty, the Kabar news agency reported February 22. Two days earlier, state television broadcast a report that asserted "almost all people in Kyrgyzstan encounter extortion at schools, universities, police offices, hospitals, customs offices, state motor-vehicle and customs inspectorates. Plants and factories encounter�bribery even more often than ordinary citizens."

International financial institutions are working with Kyrgyz government officials to improve governance and reduce graft. the Asian Development Bank on February 16 announced a $580,000 technical grant that would promote better management of foreign investment projects.

Poverty may be the most pressing socio-economic problem, but it is just one of many issues that the government needs to address. Like other Central Asian countries, Kyrgyzstan also is grappling with unmanageable rates of addiction, prostitution and related illnesses. Smuggling is also undermining government economic stabilization efforts. Kabar on March 1 reported that officials estimate that the government loses between $13 million and $17 million in revenue annually from smuggling.

Geopolitical issues, including those connected with the rise of Islamic radical activity in Central Asia, threaten Bishkek’s efforts to promote economic development. Security officials have warned in recent months that activists of Hizb-ut-Tahrir, an underground radical Islamic group, have stepped up operations in Kyrgyzstan and neighboring countries. [For additional information see the EurasiaNet archive].

There would also appear to be a risk that, given Bishkek’s political and economic difficulties, Russia is souring on economic cooperation with Kyrgyzstan. Russian media reported that Akayev was excluded from a recent summit meeting that sought to foster closer economic ties among CIS states. [For background see the Eurasia Insight archive].

Editor�s Note: Mark Berniker is a freelance journalist specializing in Eurasian economic and political affairs. This is part four of an eight-part series on political risk in Eurasia.

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