Dear Deputy Prime Minister and members of the Government! Distinguished participants! I am very pleased to be here today to discuss how to further advance the efforts of the Kyrgyz Republic to improve the business environment. The Bank is pleased to support this priority area of the Government’s reform program.
In the current global economic environment, it is getting much more difficult to attract FDI except if a country has natural resources. Worldwide, due the economic slowdown FDI flows declined by 27% between 2008-2010. FDI flows peaked at 4.2% of world GDP in 2007, dropping to 2.3% in 2010.
The decline in FDI for the ECA region during this period was much sharper (70%). FDI in the ECA region as a whole peaked at 5.7% of GDP in 2007 and declined sharply during the crisis -- to 2.2% in 2010. It is now making a modest recovery – 3.4% of GDP in 2011; 3.1% projected for 2012. In the Kyrgyz Republic, FDI reached 9.1% in 2010, but then dropped to 6.6% in 2011 (6.4% projected in 2012).1
Despite having natural resources, the Kyrgyz economy has grown at a slower rate than other CA economies. Since 2000, annual growth in the Kyrgyz economy has averaged 4% (compared to 8.3% for the CA region and 5.8% for the CIS). Due to external and internal shocks2, the Kyrgyz Republic has been unable to sustain economic growth (the economy contracted by 0.5% in 2010, before rebounding by 5.7% in 2011 (5% growth projected for 2012).
The Kyrgyz republic therefore needs to diversify its economy to accelerate growth, reduce vulnerability to global commodity prices and remittances, and create more jobs. Kyrgyz exports are highly concentrated on a few export destinations and on a few products [Gold accounts for 46% of exports; textiles/garments and agricultural products make up two thirds of non-mining exports].3 FDI is also highly concentrated in the mining industry.
A favorable business environment is critical both for attracting foreign investors and for enabling local firms to grow and create jobs. This is important for all economies, but even more so for small, landlocked countries like the Kyrgyz Republic, which need to compete globally to attract foreign investment.
The Government’s emphasis on improving the business climate and reducing corruption is therefore very appropriate. The Kyrgyz Republic has already made some efforts in recent years to improve the regulatory environment, particularly in setting up a credit bureau to facilitate firms’ access to credit (8th in the world in DB) and adopting laws and regulations to protect investors (13th place) and make it easier to start a business and register property (17th place for both indicators).
Creating a favorable business climate takes more than adopting laws and regulations. It involves many aspects, some of which are hard to achieve in the short term. Getting there requires clear priorities, as not all aspects of the business climate can be improved at once.
A competent public administration and an effective judicial system are essential for reducing the gap between laws and regulations and their actual implementation. It is the implementation and enforcement of laws that affects firms doing business in the country – both local and foreign ones. Improving the effectiveness and reducing corruption in the tax and customs administrations is particularly important [KG ranked 162nd and 171st in paying taxes and ‘trading across borders’ in DB]. The effectiveness and integrity of the judicial system also need to improve.4
A strong business climate also relies on a well-functioning banking sector, which requires effective supervision. Despite recent positive trends5, the stability of banking sector in the Kyrgyz republic remains fragile and its capacity to provide financial services to firms remains limited. Strengthening the supervision of systemically important banks and resolving the status of problem banks under conservatorship are immediate priorities. Strengthening the deposit insurance system and improving the security of transactions will help banks increase their effectiveness in financial intermediation.
A labor force with adequate skills is also a very important element of the business climate. According to business surveys, shortage of workers’ skills is increasingly a problem for firms in the whole of the ECA region and also in Central Asia and the Kyrgyz republic in particular6. These show that labor productivity in the Kyrgyz republic’s manufacturing sector has remained stagnant [-0.1% decline shown by latest IFC enterprise survey].
Investing in high-quality education, including vocational education, will therefore be key to increasing productivity and the international competitiveness of the Kyrgyz economy. At present, all Central Asian countries lag behind international standards of educational achievement in terms of primary and secondary students’ literacy and numeracy skills. A better educated labor force will be key to increasing productivity.
Like in other countries in Central Asia, infrastructure remains a key constraint to doing business in the Kyrgyz republic. The unreliable electricity supply is reported as the main problem,7 which makes it imperative to reduce energy losses and improve the efficiency of energy consumption. Inadequate transport and ICT links also hinder the development of the private sector.
The private sector in the Kyrgyz republic has much potential to grow. In the Kyrgyz Republic, the share of the private sector is 75% of GDP [65% in Kazakhstan; 55% in Tajikistan; 45% in Uzbekistan; and 25% in Turkmenistan]. Despite some good examples of private entrepreneurship in certain sectors (e.g. garments), the private sector has made limited progress in expanding its productive capabilities and generating employment. Manufacturing, tourism, telecoms, and transport have been growing quite rapidly and could grow more and create a lot of jobs. The Kyrgyz republic needs to do more to ensure fair competition in the domestic market (126th in the world according to WEF) and enable the private sector to flourish.