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Series: Central Asia and Japan: Part 4 Kyrgyz Republic Silk Road Lake Country at the Base of the Tien Shan Mountains | Kenji Nakazawa Senior Banker Senior Manager, Enterprise Growth Programme European Bank for Reconstruction and Development [Date of Issue: 31/July/2013 No.0221-0898]

Date of Issue: 28/June/2013

Series: Central Asia and Japan: Part 4
Kyrgyz Republic
Silk Road Lake Country at the Base of the Tien Shan Mountains

Kenji Nakazawa
Senior Banker
Senior Manager, Enterprise Growth Programme
European Bank for Reconstruction and Development

Since becoming independent in 1991, the Kyrgyz Republic has proactively pursued market economy transition. Now that it has moved beyond the 2010 crisis, the keys to economic development will be to improve the business environment and attract private investment.

Sheep grazing by Issyk-Kul Lake

Sheep grazing by Issyk-Kul Lake

When I first visited the Kyrgyz Republic on business in February 1997, I was deeply impressed by a splendid view of the Issyk-Kul Lake, stretching out at the foot of the Tian Shan Mountains and the magical sight of sheep grazing on the surrounding fields. On the far side of the Tian Shan Mountains lies China's Xinjiang Province. The Issyk-Kul Lake is mentioned in the Great Tang Records on the Western Regions of the traveller and scholar Xuanzang as 'the Great Hot Lake' and 'the Great Clean Lake'. And when the writer Yasushi Inoue was traveling in Central Asia in the 1960s, he recorded in his travel journal his disappointment that foreign visitors weren't allowed there.

A three-hour drive along the mountain road from the capital Bishkek brings one to the western shore of the lake - a lake so large that it takes another two hours around to the eastern shore. The hotels and summer houses that make up the lakeside resort facilities around the town of Cholpon-Ata in the middle of the northern shore are crowded with visitors from Russia and Kazakhstan in the summer, making them an important source of revenue for the Kyrgyz economy.

GDP by Industry Kyrgyz agriculture and forestry

Kyrgyz population of 5.6 million, around 10 per cent of the total population of Central Asia, is made up of the Kyrgyz (70 per cent), Uzbeks (14 per cent), Russians (8 per cent), and various minorities including the Dungans. The country is half the size of Japan, and around 90 per cent of the landscape is mountainous, more than 1,500 meters above sea level. Farmland is only seven per cent, forests four per cent. While agriculture and forestry make up 25 per cent of GDP, there are many small-scale farmers, comprising 48 per cent of the total labour force. In the mountain valleys in the south, limited farmland, irrigation water, grazing land and sales channels have been a source of conflict among ethnic groups. The Kyrgyz government is working to build up the agricultural product processing industry - and once the latest technologies are introduced into factories for dairy products, dried fruit, juice and mineral water bottling, and quality and inventory management and marketing know-how acquired, the Kyrgyz Republic will be able to export these products to neighbouring countries.

Vigorous commercial activity

Sitting at a crossroads on the Silk Road, Bishkek is a hive of commercial activity. Textiles, the latest consumer electronics, music and other goods imported from China, Turkey and elsewhere are sold at local shops. Not all of these products are consumed domestically; some are also exported to Kazakhstan and Russia. These two countries absorb 50 per cent of Kyrgyzstan's exports (excluding gold). When Russia, Kazakhstan and Belarus formed a customs union in 2010, they tightened up the previously relaxed customs procedures imposed on non-member countries. As a result, Kyrgyz export to the two countries has recently decreased. In the longer run, it is estimated that the customs union will boost Kyrgyz exports by enhancing intra-regional trade. However, if high tariffs are levied on Kyrgyz re-exports of products whose country of origin is somewhere like China, it could have a negative impact. The Kyrgyz government is currently considering the possibility of joining the customs union.

Breakdown of export partners Kumtor Gold Mine and the mining industry

The Kumtor ("sand sieve") Gold Mine is almost an industry in its own right, accounting for 12 per cent of the country's GDP and 30 per cent of its exports. The mine lies in the mountains to the south of Issyk-Kul Lake. By land-cruiser from Tamga, a lakeside town 1,600 meters above sea level, it is around two hours up a mining road to the base camp at 3,600 meters above sea level. It takes another 30 minutes from there up to the pit at 4,000 meters. Care needs to be taken in preparing for a visit-a medical check is vital. Canadian mining company Centerra Gold developed the mine with financing from the Canadian government, the IFC and the EBRD. The EBRD also helped the Kyrgyz Government by financing a power transmission line project supplying power to the mine in 1995 and the mine began operating in 1997. After the basic refining process, gold is bought by the Kyrgyz government and exported to Switzerland for further refining. More than 1,000 people live at the base camp and work in the mine on a shift basis.

Kyrgyz economy since the global financial crisis

The Kyrgyz Republic has achieved a steady transition to a market economy, achieving an annual average growth rate of 4.1 per cent between 1995 and 2004 (IMF statistics). This steady growth, while stalled briefly after the revolution in 2005, continued until 2008. The global financial crisis in the autumn of that year negatively affected the Kyrgyz economy. Kazakh banks, which accounted for around half of the Kyrgyz banking sector, began to pull out. Remittances from Kyrgyz migrant workers in Russia and Kazakhstan, which made up around 20 per cent of the total labour force, also declined. Exports of processed agricultural products became sluggish. As a result, economic growth stalled at 2.9 per cent in 2009 and then, following the April 2010 upheaval and subsequent ethnic conflict of June 2010, fell to minus 0.5 per cent. Having weathered three major crises, the Kyrgyz economy is currently being rebuilt. While six-per cent GDP growth in 2011 indicated a steady economic recovery, very severe weather conditions in the winter of 2012 disrupted Kumtor Gold Mine's operations and caused that the country's economic growth to stall again. Economic activities other than gold are recovering steadily with around four per cent GDP growth.

Trends in key economic indicators Impact of the political event of April 2010

The two major social upheavals of the March 2005 revolution and the April 2010 ouster reflect the harshness of winter life in the mountainous country. Pent-up dissatisfaction with issues unresolved in all the years since independence - the little progress with the necessary rehabilitation of power, roads and municipal infrastructure, corruption of government officials, and growing disparities between the metropolitan region in the north and the farming region in the south - were aggravated after the global economic crisis by rising inflation, the decline of migrant worker remittances, and increasingly tight household budgets. President Kurmanbek Bakiev, who took power as a result of the Tulip Revolution in 2005, responded to his resounding victory in the July 2009 presidential elections by establishing the Central Agency for Development, Investment and Innovation (CADII), a new institution under the direct control of the Office of the President. He appointed his younger son, Maksim Bakiev, to head the agency. The pending issue of the privatisation of backbone industries, including the state-owned telecommunications and electric power utilities, proceeded quickly. Early in 2010, the AUB-AGRO Microcredit Company was established as a joint venture between a state agency and a private bank. The new policy of centralised planning to "transform the weak and poor country" appeared to have made a good start. However, when it became clear that all the local companies commissioned to undertake these state projects belonged to Maksim Bakiev, as a beneficiary owner, public disenchantment with corruption and the abuse of power was immense, spurring the April 2010 event.

Following a referendum after the political unrest, the newly elected democratic government has been focusing on improving the country's business climate. The main challenges are to improve investment climate by making competitive bidding and licensing rules simpler and more transparent, and to attract foreign direct investment into the development of hydropower and natural resources. To restore the public trust in the financial sector that was destroyed under the previous administration, the transparency of the National Bank and its independence from politics need to be ensured, and private banks' capitalisation needs to be enhanced. The continuing development of the microfinance sector will be essential in stimulating the development of the agriculture in the country. To reduce opportunities for corruption, the new government has decreased the number of activities subject to regulations from 500 to 220, while also restructuring government departments to cut down the number of public sector employees by 15 per cent.

EBRD financing and technical assistance

As an international institution with its mandate to support transition to a market economy, the EBRD is supporting the economic development of the Kyrgyz Republic together with the IMF, the World Bank, the Asian Development Bank, UN agencies, and bilateral development assistance agencies. While there are 22 commercial banks in the country, the total of commercial financing amounts to only around 20 per cent of GDP, with economic activities mainly reliant on cash transactions. The same ratio is usually above 50 per cent in more advanced transition economies, and close to 100 per cent in advanced economies. The EBRD has supported the attraction of foreign direct investment in the country's financial sector, including the Kyrgyz Investment and Credit Bank (KICB) and the Turkish Demirbank, as well as lending to key microfinance companies. The total of microfinance loans stands at eight per cent of GDP, or one-third of all private-sector financing. Many areas where microfinance is particularly active - Central Asia, the Caucasus, and the Balkan Peninsula, for example - are dominated by mountainous regions, hampering conventional commercial bank activities.

The EBRD has supported foreign investors with their investment into Issyk-Kul Lake resort facilities, leading hotels (the Hyatt), and the mining industry (the Kumtor Gold Mine), and assisted local companies in the sectors of food processing, beverages, float glass production, furniture, and other products through its Direct Lending Facility (DLF). After the global financial crisis, The EBRD began lending in the local currency in order to expand its support to local small and medium enterprises. Through the EBRD Enterprise Growth Programme (EGP), highly-experienced industry experts are helping medium-sized companies with corporate restructuring, productivity improvement and energy saving. A recent example is the Bank's contribution to improving management and expanding sales channels at the Dairy Spring Company, whose well-received local cheeses are produced using Swiss technology. Japanese advisers are also participating in EGP. Through its Business Advisory Services (BAS) operations, the Bank supports small and medium-sized companies as they work with local consultants on projects related to financial management, quality control, and preparing business plans. In the public sector, the EBRD has supported the development of the Osh-Isfana highway in the south (co-financed with the World Bank and the European Union), as well as water supply system rehabilitation (co-financed with the Swiss Government) in Bishkek.

Economic and technical cooperation with Japan

Around 150 Japanese nationals live in the Kyrgyz Republic, including embassy and ODA-related staff and their families, JICA experts and JOCV volunteers. Japan is the country's third-largest ODA donor after the US and Germany (as of 2010). Japan's technical cooperation, including biogas technologies, road maintenance and repair, and IT human resource development, is regarded highly in the country. In August 2009, the Japan-Kyrgyz Network for Investment Environment Improvement was established to strengthen cooperation between related institutions and private companies in the two countries and facilitate trade and investment. Prior to that, the Japan-Kyrgyz Business Forum was held in Bishkek in February 2009, attended by 35 business representatives from Japan. A Kyrgyz Investment Seminar was held in October 2011 by the Japan-Kyrgyz Friendship Association and the EBRD, with support from the Kyrgyz Embassy in Japan. With various presentations of economic activities in the country, photographs of local people and landscape, and the performance of the Kyrgyz ethnic music, the seminar was highly appreciated by its participants.

(original article : Japanese)
(For the Japanese version of this article)

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