Thinking positive
By Karin Palmquist

With a positive trade balance for the first time in its brief history, an unexpected cash influx and a place on the world map as the anti-terrorist coalition's new base in Central Asia, Kyrgyzstan's economic outlook turns from bleak to rather hopeful.

It all happened rather fast. One of our time's mighty empires fell apart, and its protectorates found themselves with unexpected freedom. Some embraced independence with the justification that comes from a long occupation; others with a sense of newfound nationalism. For Kyrgyzstan, a tiny state in the heart of Central Asia with a long and proud nomadic history, it was not the reward of a long struggle, but the sense of excitement was no less. After the nationalistic fever settled, an inventory showed a budget dependent on state subsidies, no industrial base to speak of and hard-to-exploit natural resources. What the country did have was a strong commitment to democracy and market economy. It took a decade, but on its tenth anniversary in 2001, the Kyrgyz trade balance turned positive for the first time. And it doesn't look like it was a stroke of luck. Long a glimmer of democracy in Central Asia, Kyrgyzstan is setting out to be a model for economic development as well. 

Transforming a Soviet-type system to a functioning market economy is a huge task. At the time of independence there was no private enterprise, and no banking sector to provide the credits necessary to build a private sector. Land was owned by the collective, and marketing executives were a rarer sight than a Marco Polo sheep. 

Ten years later, that picture looks a bit different. Reforms have divided up much of the land and livestock from the collective farms. Rapid privatizations have dispersed state-owned companies and the most optimistic breed envision Kyrgyzstan as a Switzerland of Central Asia, providing banking services to the neighboring countries. Ulan Sarbanov, chairman of the National Bank confidently explains, "We had an inflation of 3.7 percent last year, and we'll have a one-digit inflation rate this year as well. A little higher than last year, but still good. The trade balance is positive for the first time and the private sector is finally making money. The presence of the troops has meant a positive influx of cash. Our fiscal deficit is down to six percent from around thirteen." 

On the list of government holdings to be privatized are KyrgyzTelecom, KyrgyzEnergo, KyrgyzGas and The Savings and Settlement Company. The tender for KyrgyzTelecom is expected this summer, while the timeframe, and model, for the privatization of the others is still uncertain. 

The road still ahead
There is still some cleaning up to do. The Kyrgyz economy was heavily subsidized during the time of the former Soviet Union, with state assistance making up 25 to 30 percent of the budget. After independence international donor organizations continued those subsidies. Kyrgyzstan is now the most aid dependent country of all the former Soviet republics, with the foreign debt equaling the country's GDP. Aid can't go on forever, and the country is trying its best to attract foreign direct investment. "We were alone in 1991, with minds handicapped by the Soviet system. Borrowing was the only way to survive. Now we know our way. It took us ten years, but we did it," says Djoomart Otorbaev, the president's special appointee on foreign investment. A restructuring of the debt was discussed with creditors in Paris in March and the parties agreed to a five to ten-year grace period. 

Further, there is the ever-present issue of corruption and red tape. "Criticism of red tape and corruptions is fair. Bureaucracy can't be eliminated all together, but the level must be reduced. Corruption is a disease and we're doing all we can to fight it," Prime Minister Kurmanbek Bakiev says. 

"Corruption has become a way of life here," Giorgio Fiacconi, publisher of The Times of Central Asia, says. "The salaries here are ridiculous. A police officer gets twenty dollars a month. With salaries like that there is no wonder there is a problem with corruption. This petty corruption will only disappear with raised incomes." Ercan Murat of the UN claims, "The people here are not the problem, institutions are. It's hard to change the minds of the old generation, but changing the institutions is even harder. It's been a painful process." 

Attracting investments
Since independence, the Kyrgyz government has shown a great commitment to democracy and market economy, steering the country on a clear path away from the trade protectionism of its neighbors and towards a free market with a WTO entry in 1998. Encouraging as these steps have been, the itty gritty details of it all - the tax and investment laws - have changed several times with changing administrations. "Politicians here have to have the courage to be unpopular, to think further than their own personal gain," Fiacconi says. The corporate tax used to be thirty percent, but after heavy lobbying from the business community through the International Business Council the rate was cut to a competitive twenty percent. 

And by enlarge the foreign investors are happy. "We have had good experiences as a foreign investor in Kyrgyzstan. Others might not have had as good experiences, but we have nothing but positive things to say," Eduard Rauch of German tobacco company Reemtsma reports. Reemtsma is one of the three largest foreign investors in the country, together with Hyatt and Canadian mining company Cameco. And these investments are important to Kyrgyzstan. "Just looking at the number of people we employ is misleading. Kyrgyz communities are different in that one breadwinner might support a large extended family. Close to half a million families get their bread and butter from the tobacco industry," Rauch explains.

Business has been good post-September 11 for the third largest investor, the Hyatt Regency in Bishkek. Lodging the American troops, the hotel's occupancy rate has soared to seventy percent. "A hotel is a long-term investment," general manager Kurt Straub says. "I think the fact that we are here speaks for itself as far as the faith we have in the country."

Restructuring the banking sector
Anyone who has followed the developments in the Kyrgyz banking sector over the last year might find the comparison to Switzerland a far cry, but put into a Central Asian context the sector is functioning fairly well. 

"We have no ambitions to change the Kyrgyz banking sector," Kwang-Young Choi, CEO of Kyrgyz Investment and Credit Bank, says. "We just want to lay down some bricks as groundwork. By Central Asian standards, the Kyrgyz banking sector is very liberal. Kyrgyz fiscal policies are very transparent. We have no difficulties here."

There are around twenty banks in Kyrgyzstan, in a market some observers believe can support less than five. In an effort to clean up the sector, six banks were declared insolvent last year. "We're trying our best to clean up the sector without destroying the public's confidence," Sarbanov assures. Ahmet Parmaksiz, general manager of Turkish-owned Demir Bank, one of the largest and most advanced banks in Kyrgyzstan, believes the number of banks will be reduced to around fifteen in the next year, but adds "the number is not the problem, capitalization is." The total capitalization of all banks in Kyrgyzstan is a mere $24 million. No depository base makes lending expensive. Kyrgyzstan is a very cash-oriented society with few places accepting credit cards. Demir Bank was the first bank to introduce checks and the bank hopes to go plastic soon, offering their customers ATM services. 

Looking at the economies of the former Soviet republics, it is easy to forget that the area has had only ten years to develop. Any comparisons to the west are not just irrelevant, but unfair. Kyrgyzstan has to be taken for what it is, a young democracy trying its way around market economy. Taking history into consideration, it is doing quite well. Its investors are optimistic. "Kyrgyzstan has great tourism potential, and the coalition will bring Kyrgyzstan visibility. I believe we'll see some results in a few months," Straub says. Fiacconi adds, "Kyrgyzstan really is an island of democracy. The people here are free, and they're very liberal in their attitudes." And ten years after independence, the Kyrgyz themselves are looking at the future with cautious positivism.