Private Sector Assessment Update The Kyrgyz Republic This report updates the 2007 private sector assessment for the Kyrgyz Republic. It is based on the experience gathered by the Asian Development Bank over the last 5 years and includes information current as of January 2013. Despite notable examples of entrepreneurship in some industries, such as dairy and garments, the Kyrgyz Republic’s private sector as a whole remains weak and has made little progress in expanding its production capabilities and creating more wealth. The report identifies challenges facing Private Sector Assessment the development of a vibrant private sector—the country’s main driver of economic growth—and suggests interventions for meeting them. Update About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Despite e KyrgyzPRIVATE SECTOR DEVELOPMENT Republic / 2013 the region’s many successes, it remains home to two-thirds of the world’s poor: 1.7 billion people who live on less than $2 a day, with 828 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org Printed on recycled paper Printed in the Philippines Private Sector Assessment Update The Kyrgyz Republic 2013 © 2013 Asian Development Bank All rights reserved. Published in 2013. Printed in the Philippines ISBN 978-92-9254-351-8 (Print), 978-92-9254-352-5 (PDF) Publication Stock No. RPT136165-3 Cataloging-In-Publication Data Asian Development Bank. Private sector assessment update: The Kyrgyz Republic. Mandaluyong City, Philippines: Asian Development Bank, 2013. 1. Kyrgyz Republic. 2. Economic development. 3. Private sector. I. Asian Development Bank. The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel +63 2 632 4444 Fax +63 2 636 2444 www.adb.org For orders, please contact: Public Information Center Fax +63 2 636 2584 [email protected] Printed on recycled paper Contents Tables and Figures v Abbreviations vii Foreword viii Acknowledgments x Executive Summary xi The Private Sector in the Kyrgyz Republic 1 Development Performance and Challenges 1 Long-Term Economic Trends and Recent Performance 1 Development Challenges 9 The Private Sector 10 Production and Employment 10 Infrastructure 14 Service Sector 18 Small and Medium-Sized Enterprises 25 Informal Sector 26 Major Constraints on Private Sector Development 28 The Business Environment 29 Taxation 30 Foreign Trade Clearance 31 Licensing, Inspections, and Business Registration 32 Legal and Judicial System 33 Human Capital 33 Wages 34 Higher Education and Vocational Training 34 Financing for the Private Sector 36 iii Contents Framework for Private Sector Development 39 Government’s Private Sector Development Policy 39 Institutional Framework 40 Privatization Policy 40 External Assistance for Private Sector Development 42 Primary Focus—Policies and Institutions 45 Improve the Business Environment 46 Modernize and Improve Higher Education and Vocational Training 46 Develop the Finance Sector 46 Foster Innovation in Manufacturing 47 Realize the Potential for Private Sector Participation in Service Delivery 48 Support Female Entrepreneurship 49 Secondary Focus—Transaction Advisory Services and Direct Private Sector Investment 49 References 50 iv Tables and Figures Tables 1 Selected Economic Indicators for Central Asia 2 2 Dynamics of Gross Domestic Product in the Kyrgyz Republic 4 3 Investment in the Kyrgyz Republic 5 4 Key Macroeconomic Indicators 8 5 State and Private Sector Shares of Gross Domestic Product in the Kyrgyz Republic 10 6 Employment in the Private Sector 10 7 The Kyrgyz Republic Agriculture Sector 11 8 The Kyrgyz Republic Manufacturing Sector 12 9 The Dordoi and Kara-Suu Bazaars 18 10 Financial Intermediation in the Kyrgyz Republic 19 11 Banking Sector in the Kyrgyz Republic 20 12 Major Indicators of the Microfinance Sector 21 13 Financial Transactions in the Kyrgyz Republic 21 14 The Kyrgyz Republic Leasing Market 23 15 Cross-Country Comparison in Financial Intermediation 24 16 Major Indicators of the Tourism Sector 24 17 Small and Medium-Sized Enterprises in the Kyrgyz Republic 25 18 Share of Small and Medium-Sized Enterprises in Sector Output 26 19 Share of Small and Medium-Sized Enterprises in Total Employment 26 20 Informal Employment in the Kyrgyz Republic 26 21 Perception of Corruption in the Kyrgyz Republic 30 22 Tax Revenues in the Kyrgyz Republic 31 23 Cost of a Typical Foreign Trade Transaction in the Kyrgyz Republic 31 24 Structure of Official Employment in the Kyrgyz Republic 35 25 Wage Premiums in Selected Sectors 35 26 Access to Finance in the Kyrgyz Republic 36 v Tables and Figures 27 Bank Credit by Sector of Activity 38 28 Privatization by Sector and Type, 2006–2010 41 29 Energy Sector Privatization Attempts 41 30 The 10 Largest Nonfinancial, State-Owned Enterprises 42 31 Major Donor Private Sector Development Projects 43 Figures 1 Economic Activity after the Breakup of the Former Soviet Union 2 2 Real Gross Domestic Product Growth in Central and West Asia 3 3 Real Gross Domestic Product Growth in the Kyrgyz Republic 3 4 The Kyrgyz Republic’s 20 Leading Exports (2010) 6 5 High-Tech Exports of Selected Economies 6 6 Net Remittance Inflows to the Kyrgyz Republic 7 7 Poverty in the Kyrgyz Republic 7 8 Interbank Money Markets in the Kyrgyz Republic 22 9 Interest Rates of Kyrgyz Republic Government Securities 23 10 Domestic Credit to the Private Sector versus Income Level 37 vi Abbreviations ADB – Asian Development Bank EBRD – European Bank for Reconstruction and Development GDP – gross domestic product GIZ – Deutsche Gesellschaft für Internationale Zusammenarbeit GWh – gigawatt-hour IFC – International Finance Corporation IMF – International Monetary Fund JSC – joint stock company km – kilometer MW – megawatt PPP – public–private partnership PRC – People’s Republic of China SDR – special drawing right SMEs – small and medium-sized enterprises USAID – United States Agency for International Development In this publication, “$” refers to US dollars. vii Foreword The Kyrgyz Republic’s transition from a centrally planned to a market economy has been one of the most remarkable in Central Asia. Today, the country is a notably open society and has made good progress in reducing poverty over the past decade. But the reform process is far from complete—as this private sector assessment update shows. This assessment contains information current as of January 2013 and updates a previous assessment done in 2007. It defines private sector development as a dynamic process through which a broad base of private entrepreneurs and investors set up and expand their businesses, and produce more and higher value-added products. The assessment is based on the experience gathered by the Asian Development Bank (ADB) over the last 5 years in engaging with government, investors, and entrepreneurs in the Kyrgyz Republic. Statistical data was collected from secondary sources. The report identifies challenges facing the development of a vibrant private sector—the country’s main driver of economic growth—and suggests interventions for meeting them. Doing so will be crucial for sustaining a healthy economy. The government and its development partners therefore need to focus on improving the economy’s production capabilities. Longer-term development prospects—particularly for higher wages, employment, and profitable investment opportunities—depend on diversifying into higher value-added products and opening up new markets. To get there, strong and supportive government institutions are needed. Yet, as the report points out, the government institutional framework has so far not been able to provide market-supporting mechanisms that foster private sector development. Among the constraints are a harsh business environment that discourages firms and entrepreneurs from expanding; an increasing shortage of qualified workers (a hurdle for firms trying to move up the production ladder); and a lack of access to finance, which is expensive and concentrated in a few sectors. viii Foreword For ADB and its development partners in the Kyrgyz Republic, private sector development