Kyrgyzstan: Lavish Spending Drains Coffers, Racks up Debt

Kyrgyzstan is a fiscal train wreck waiting to happen. The Kyrgyz government is spending with abandon, even though it inherited an economy that was already in sorry shape. Foreign donors, meanwhile, are growing increasingly wary, as concerns mount about Bishkek’s reluctance to tackle transparency concerns.

 

During 2010 -- a year that saw Kurmanbek Bakiyev’s presidential administration collapse in April, followed by June’s interethnic violence in southern provinces -- Kyrgyzstan’s GDP contracted by 3.5 percent, according to US government estimates. The country’s new leadership stepped into a difficult situation, with state coffers nearly empty. But rather than engage in belt-tightening, officials proceeded to double-down on debt. In a move that won popular plaudits, the government reversed a utility tariff increase [7] that had been imposed during the Bakiyev era. Then, officials went on a spending spree, pressing ahead with infrastructure projects and raising state-sector salaries [8]. In addition, authorities allotted $100 million for the reconstruction [9] of Osh and Jalal-Abad following the ethnic clashes, though critics complain about opaque accounting practices in connection with the reconstruction process.

 

Bishkek’s 2011 budget calls for a massive 137-percent increase in spending, reaching 90.5 billion Kyrgyz soms (approximately $2 billion), a figure that is roughly 36 percent of the country’s GDP. The expenditures include a 270-350 percent pay increase for teachers and medical workers, a concession introduced after nationwide protests [10].

 

On June 27, an MP, Kanatbek Isaev, revealed that Kyrgyzstan’s budget deficit amounted to 22 percent of GDP. Officials justify the surge in public spending by contending that it will provide a boost to the ailing economy. But the budget is also drawing criticism from Kyrgyz deficit hawks.  One such critic, Omurbek Abdyrakhmanov, a deputy from the opposition Ata-Meken party, lashed out at the cabinet during a June 13 roundtable discussion in Bishkek. “How can such a state develop? If the [government] budget is 40 percent of the GDP, such a state dies out!” Abdyrakhmanov said.

 

At the same roundtable, where deputies and budget experts discussed 2012-2014 spending plans, Akylbek Japarov, chairman of parliament’s Committee on Budgeting and Finance from the opposition Ar-Namys party, said the treasury lacked funds to plug an estimated 21 billion som deficit (approximately $460 million).

 

Since the provisional government came to power, officials have courted foreign assistance to cover gaps in state finances. In July 2010, international donors including the World Bank, International Monetary Fund and Asian Development Bank, pledged over $1 billion [11] in aid to Bishkek. But concerns about ongoing political turmoil is causing hesitation among donors, and little of the money has been released, World Bank representatives, speaking on condition of anonymity, told EurasiaNet.org. Prime Minister Almazbek Atambayev recently complained that only $40 million has arrived in Bishkek.

 

The Eurasian Economic Community (EurAsEc), a body of former-Soviet states led by Russia, is considering a $200 million loan to Bishkek. But in addition to concerns about Kyrgyzstan’s political stability, aid officials and Russian diplomats say they worry the money may be misappropriated.

 

Stoking those fears, local budget experts say officials are reluctant to disclose details of how government funds are spent, including $30 million in Russian loans received in 2010.

 

“The recent dramatic events strongly affected the Kyrgyz economy. However, the crisis is a chance for the country to confront some of the deep-seated, interconnected problems it faces. These include enhancing transparency, fighting corruption, and radically improving the management of public finances,” said World Bank Managing Director Ngozi Okonjo-Iweala in a statement during her visit to Kyrgyzstan in early June.

The delay in aid is adding to anxieties in Bishkek. “If Kyrgyzstan does not receive assistance from the EurAsEc anti-crisis fund by September 2011, then the republic will have some serious problems,” budget chairman Japarov told the roundtable, warning that raising salaries of public-sector employees could spur inflation. 

 

The country’s economic troubles are compounded by an external debt estimated at $2.6 billion, or roughly half of GDP, which is mushrooming with compounding interest. According to some estimates, Bishkek will have to spend as much as 13 percent of the budget to service the country’s foreign debt in 2012. The World Bank said in February that Bishkek owed the Bank $658 million (or roughly 14 percent of GDP).

Critics say that the government must raise utility prices simply to keep decrepit infrastructure [12], especially electricity-production facilities operational. But Bakiyev was ousted in part due to anger over his utility increases, a fact that makes the current leadership in Bishkek reluctant to raise the cost of electricity. And despite lackluster investor interest, Bishkek has also charged ahead with the construction of the Kambar-Ata hydropower cascade -- a project estimated, conservatively, at $2 billion.

“Responding to acute economic problems requires systemic changes. Unfortunately, the current approach has been mainly to introduce staff reshuffles rather than change the system,” Rita Karasartova, a member of the public board of the State Tax Service, told EurasiaNet.org.

With a presidential election looming, spending decisions are also getting caught up in political rivalries, according to Amir Suleymanov, a political observer from Bishkek. “Raising salaries for teachers and medical workers has long been part of electoral politicking [in Kyrgyzstan]. Previous administrations have relied on this tool [to improve their chances at election] and the current officials are doing the same,” Suleymanov told EurasiaNet.org.

 

But if some politicians were hoping to boost their ratings ahead of the vote, there are signs their plan could backfire. Teachers in regions across the country say they have not received the promised raises; others are demanding even more.