Executive Summary

The Kyrgyz Republic has acquired a great position for achieving a breakthrough in reform and growth. The external terrorist threat has been removed with the defeat of the Taliban in Afghanistan and the arrival of Western troops in Kyrgyzstan. After the referendum on February 2, the domestic political situation has calmed down. Financial stability has never been greater thanks to new financial discipline, increasing state revenue collection and substantial debt relief through the Paris Club. Meanwhile, Kyrgyzstan's major export markets are thriving with high growth. Alas, the country saw no economic growth in the last year. While this shortfall can be explained by a landslide in the big gold mine and falling demand for Kyrgyz electricity because of ample rain in the neighboring countries, it illustrates the country's economic vulnerability.

The focus of economic policy should be economic growth. The GDP growth of recent years of slightly over 5 percent a year is not enough, but should rise to at least 7-8 percent a year and preferably 10 percent a year. Such a growth rate requires an annual expansion of exports of 10 percent or more, while exports have stated flat at the level of 1996. The key is to break through into the Kazakhstan market, and all efforts should be undertaken for that purpose. The main opportunity arises when Kazakhstan enters the WTO, but bilateral diplomacy, international support and business contacts must all be exploited

At the same time, supply must be released, by further improving the business climate. Although much has been done to rationalize contacts between the state and enterprises, corruption appears to have increased in the last few years. Some decisive measures are needed to improve governance. First, elementary discipline within the state administration must be imposed from above. Second, the continued "indicative" planning with physical plan indicators should be eliminated. Third, Kyrgyzstan has no need for four administrative levels. Three are enough, and the natural choice would be to eliminate the raion level. Fourth, the regional and local agricultural administration, which has outlived itself, should be abolished to facilitate the establishment of free intermediaries in agriculture. Some more mergers of duplicating state institutions appear appropriate, especially the establishment of a Ministry of Economic Development and Trade.

Since revenue collection has improved, the tax system can be further liberalized and streamlined. The special means should be the first taxes to go, and the income tax should be reduced to a flat 10 percent. The profit tax should be cut and eventually eliminated, while revenue collection from the big state enterprises should be improved and the customs cleaned up.

The banking system needs to be stimulated through the introduction of more legal security, more competition and deposit insurance. This is a suitable time for a reform of state salaries to raise them, differentiate them, make them more transparent and monetize remuneration. Meanwhile a new more liberal labor code should be adopted to raise legal employment and make the labor market more flexible. A pension reform with the introduction of private savings accounts can both increase social security and improve the financial system. The laudable education reform, aiming at cutting corruption and raising education standards, should proceed.

List of Contents

· Executive Summary
· Introduction
· No Growth in 2002 But Favorable Preconditions for Take-Off
· Kazakhstan: Key to Export Expansion
· The Dilemma of the Kyrgyz State
· Further Tax Reform
· A Shortage of Financing
· Time for Reform of State Salaries and Labor Market
· Pension Reform Is Needed
· Sensible Education Reforms Proceeding

This report is a part of my ongoing work as an economic advisor to President Akaev since 1998, administered by the UNDP. It is based on observations from my visit in Kyrgyzstan from April 22 to May 2, 2003, and extensive reading of analytical reports before and after that trip. This report focuses on issues in economic policy that appear of particular importance at this time. The main tasks should be to expand exports, primarily by opening up the Kazakh market, and stimulating supply through further reforms in governance and taxation.

During this visit, I had the pleasure and benefit of one substantial meeting with President Askar Akaev. I had about 50 meetings, including Deputy Prime Minister for Economic Affairs and the President's Special Representative on Foreign Investments Djoomart Otorbaev, Minister of Labor and Social Protection Roza Aknazarova, Minister for Foreign Affairs Askar Aitmatov, Minister of Industry and External Trade Sadriddin Djinbekov, Minister of Interior Bakirdin Subanbekov, Chairwoman of the Supreme Court Nellya Beishenalieva, Governor of Osh oblast Naken Kasiev, Mayor of Osh Jantoro Satubaldiev, Deputy Head of the President's Administration Temirbek Akmataliev, State Secretary Osmonakun Ibraimov, Deputy Chief of Staff, Prime Minister's Office, Bekbolot Talgarbekov, Head Kubat Kanmetov and Deputy Head Leonid Komarover of the Economic Department of the President's Administration, Head Tsoi Man-Su of the Economic Policy and Forecast Department at the Prime Minister's Office, First Deputy Chairman of the National Bank Emil Abdumanapov, First Deputy Minister of Transportation Kubanychbek Mamaev, Deputy Minister of Finance and Head of the Committee on Revenues Shadiev, Director of Kyrgyzstandard Batyrbek Davlesov, Director of Kyrgyzalko Ulanbek Baiyizbekov, Deputy Chairman of the National Statistics Committee Djanbulat Baidjumanov, Director of the Investment Promotion Center Beyshenbek Bolotbekov, Deputies Marat Sultanov and Akylbek Japarov of the Legislative Assembly, many other government officials, numerous businessmen and journalists, US Ambassador John O'Keefe, representatives of the UNDP, the IMF, the World Bank, the Asian Development Bank, the EBRD, and USAID. Especially, I want to thank Kubat Kanmetov and Leonid Komarover of the Economic Department of the President's Administration and Jerzy Skuratowicz, David Akopyan and Aynur Muhamedgalieva from the UNDP for all their assistance. I also gave seminars at the Economic Department of the President's Administration, the Bishkek Business Club, the American University of Kyrgyzstan, the Slavonic University and the UNDP. Finally, I gave a press briefing at the UNDP.

I have drawn on studies from the Kyrgyz government and the organizations mentioned, especially the Comprehensive Development Framework of the Kyrgyz Republic to 2010 (CDF), the National Poverty Reduction Strategy (NPRS), the National Anti-Corruption Strategy of the Kyrgyz Government, the Matrix of Principal Measures to Attract Foreign Investment of the Council of the Promotion of Foreign Investment, the UNDP National Human Development Report for Kyrgyzstan 2002, UNDP Millenium Development Goals Progress Report for the Kyrgyz Republic, the IMF 2002 Article IV review under the Poverty Reduction and Growth Facility, the Memorandum of Economic Policies with the IMF, the EBRD Strategy for Kyrgyzstan 2002, TACIS/PROMA - National Business Opinion Survey of the Kyrgyz Republic, summer 2002, USAID/Pragma Corporation - Report on the Situation Facing the SME Sector in Kyrgyzstan, August 2001, and comments on the NPRS by Professor Marek Dabrowski.

No Growth in 2002 But Favorable Preconditions for Take-Off

After an average growth of about 5 percent a year from 1996 to 2001, the Kyrgyz Republic recorded a decline in GDP of 0.5 percent last year, and, industrial production fell by a devastating 13 percent. This can be explained by two factors. First, the big gold mine Kumtor suffered a major landslide early in 2002, which substantially reduced gold production. Second, because of ample rainfall, Uzbekistan and Kazakhstan demanded less electricity deliveries than in previous years. Although this drop was a case of bad luck, it shows the structural weakness of the Kyrgyz economy. Its dependence on one gold mine, owned by the state to two-thirds, and electricity owned entirely by the state. Industries that could be expected to develop are not taking off. The most glaring shortfall is in agriculture. Whereas agriculture has grown steadily by over 7 percent a year on average since 1996 and accounts for 36 percent of GNP, its share of exports vacillates around 10 percent without any tendency to rise. One obvious cause is protectionism directed against Kyrgyzstan's agriculture, but the absence of intermediaries and foodprocessing is striking. The one sector that really did well in 2002 was tourism.

While 2002 was a disappointment in terms of growth, four preconditions have been formed that could provide a basis for a substantial economic take-off. These four factors are the alleviation of external threats, domestic political stability, financial stability and splendid economic growth in the region. At the same time, many reforms either have been undertaken or are under way.

First, the external military terrorist threat that harassed Kyrgyzstan from 1999 to 2001 has been removed through the US-led war against the Taliban in Afghanistan and the military reduction of the Islamic Movement of Uzbekistan. With both US and Russian military bases in Kyrgyzstan, the country seems to have sufficient security guarantees. The external threat is gone.

Second, the police shooting five people in Aksy in March 2002 led to several months of domestic political unrest and the demise of the Kyrgyz government last May. The discussion over constitutional amendments also focused government attention on domestic politics. After the referendum on February 2, 2003, the domestic political situation appears to have stabilized, and parliamentary elections are scheduled for February 2005 and presidential elections for November 2005. This may give the government a political window of opportunity for one year to undertake essential reforms.

Third, the substantial macroeconomic improvement that occurred in 2001 was further reinforced in 2002. This success consists of three elements: expenditure control, increased fiscal revenues, and the Paris Club agreement on debt relief. Public expenditures have been brought under control, being reduced from 30.4 percent of GDP in 1999 to 23.7 percent of GDP in 2002. This has mainly been accomplished by cutting the public investment program (PIP), which peaked at 9.4 percent of GDP in 1999, to 5.1 percent of GDP in 2002. At the same time, revenue collection has improved considerably, as state revenues have increased from a low of 15.1 percent of GDP in 2000 to 19.1 percent of GDP in 2002, or by as much as 4 percent of GDP. As a result, the budget deficit has shrunk from 9.2 percent of GDP in 2000 to 5.6 percent of GDP in 2002. It is set to decline further because the PIP will shrink to 3 percent of GDP by 2006 at the insistence of the IMF, and revenue collection is likely to continue improving, while current expenditures as a share of GDP must not grow. Vital disbursements of salaries and pensions are being made.

For long after the Russian financial crisis in 1998, Kyrgyzstan was on the verge of external default. On March 7, 2002, however, Kyrgyzstan received substantial debt relief in the Paris Club. For the next three years, the country will have to pay only $6 million in debt service to the Paris Club rather than $101 million, according to the so-called Houston terms on benign rescheduling. As a result, Kyrgyzstan's external debt fell to 96 percent of GDP, if the commercial Kumtor debt is excluded. If Kyrgyzstan follows through with its fiscal policy and maintains its IMF conditions, one-third of the debt will be written off in 2005 in line with the Naples terms on debt relief. No other CIS country has received such favorable conditions from the Paris Club. One reason for this success was that Kyrgyzstan had undertaken such an impressive fiscal adjustment. The international financial institutions and other creditors had also realized the serious of the country's predicament. This agreement makes it all the more vital for the country to comply with the IMF programs not to miss the big debt write-off.

In the fall of 2002, Kyrgyzstan held a fundraising consultative-group meeting, which recorded pledges of grants and loans of no less than $700 million for the ensuing three years. Thus, Kyrgyzstan's external situation looks quite secure. The international currency reserves held by the National Bank of the Kyrgyz Republic (NBKR) have risen to four and a half months of imports. Although the money supply (M2) increased by 42 percent in 2002, inflation stopped at 2.3 percent, as the economy was remonetized. Even so, interest rates remain very high and decline only slowly, rendering the availability of finance and financial costs an ever greater concern of the business community. In relation to the US dollar, the som revalued by 5 percent in 2002 and so far by another 7 percent in 2003, but considering that the US dollar has been severely devalued, this is rather a devaluation in relation to a weighted basket of world currencies. Moreover, given that the Kyrgyz average salary is as low as $35 a month, revaluation is hardly a concern for the country's competitiveness. Because of the shortfall of gold and electricity exports, exports increased by only 2 percent, whereas imports surged by 23 percent, resulting in a large trade deficit. The foreign account was salvaged by Kyrgyzstan benefiting from sharply increased service exports, partly from the new military base, partly from increased tourism mainly at Issyk-Kul. Therefore, the current account deficit actually shrunk from 3.3 percent of GDP in 2001 to 2.8 percent of GDP in 2002, a respectable number.

The fourth positive factor for Kyrgyzstan's future growth is the very substantial growth of its three main export markets, Russia, Kazakhstan and China. For the last three years, Kazakhstan has had an average growth of 11 percent a year, which is likely to stay 9-10 percent a year for the next decade, given that its oil production is set to rise by 10-15 percent a year. Russia has entered a steady growth trajectory of an average of 6 percent for the last four years, and it is more likely to rise than to decline. China's growth lingers around 8 percent a year. The Kyrgyz Republic needs to jump on this growth bandwagon and reach a corresponding growth rate of about 8 percent a year.

The focus of economic policy should be to promote economic growth. The Kyrgyz Republic has maintained an average GDP growth of slightly over 5 percent a year from 1996 to 2001, interrupted by a fall of -0.5 percent last year. Yet, Kyrgyzstan's growth rate should rise to at least 7-8 percent a year, and preferably to 10 percent a year, the current Kazakh growth rate. The obvious reason for the shortfall is that exports have remained approximately stable at their 1996 level, while they should expand annually at 10 percent or more to generate the growth rate Kyrgyzstan can and should achieve. The prime task now is to expand exports, which requires greater access to the Kazakh market and better transit opportunities through Kazakhstan. The other lever to unleash great growth is a supply effect. Kyrgyzstan has undertaken so many substantial reforms that a limited number of additional reforms should produce a great supply effect. In particular, large enterprises that usually dominate exports must be allowed to grow stronger. Investment is no critical bottleneck. The issue is rather to utilize existing resources more efficiently through a further limitation of state intervention, together with a reinforcement of law and order.

In social reforms, Kyrgyzstan has been successful, with swiftly improving health indicators since the mid-1990s. The most striking successes have been recorded in the health care system, where Kyrgyzstan appears the leader in the CIS. Health care probably represents the most successful Kyrgyz reform by international comparison. The reforms currently under way in education could become similarly impressive. The social benefit system has been rationalized and reoriented to focus on those in deep poverty and those unable to work. The main priorities appear to be to improve the labor market, rendering the labor code more flexible to maximize legal employment, reducing the payroll tax, and rationalizing the state wage system. A pension reform needs to be undertaken, because the current pension system provides neither good protection nor the right incentives, and the payroll tax is too high, while long-term pension savings could help fix the financial system.

Kazakhstan: Key to Export Expansion

The main hurdle to Kyrgyzstan's economic development is access to export markets. Economic growth is closely correlated to the expansion of a country's export markets. Kyrgyzstan's four main export markets are Kazakhstan, Russia, Uzbekistan and China. Ideally, the country would grow in pace with its northern neighbor Kazakhstan at about 10 percent a year.

China is Kyrgyzstan's only neighbor that is also a member of the WTO. Their mutual trade has been rocky, but it amounted to 9 percent of Kyrgyzstan's exports in 2000 and it seems to be set for a rise. Given their geographical closeness, their complementarity, and market-oriented systems with limited protectionism, these two countries can and should trade much more with each other. The main problems are two. First, little traditional trade has existed, and businessmen in the two countries need time to come to know each other and find out what trade makes sense. The other problem is rudimentary infrastructure. An improvement of the two roads to China and the possible building of a railway to China should be priorities in the Public Investment Program. Trade policy is a subordinate concern.

Uzbekistan should be one of Kyrgyzstan's major trade partners, but Uzbekistan's trade is greatly encumbered, because it remains one of the few state-trading countries in the world. Kyrgyz exports to Uzbekistan have dwindled from 20 percent of its exports in 1996 to 10 percent in 2001. Kyrgyzstan can do little to boost trade with Uzbekistan until it has unified its exchange rate, which will require a major political transformation of the country. The persistence of multiple exchange rates and state-controlled prices in Uzbekistan means that decentralized trade is not possible with anybody. Illicit Uzbek exports to Kyrgyzstan of state-subsidized petrol, for instance, means that the Uzbek state subsidizes Kyrgyz consumers, while the Kyrgyz state loses tax revenues and Kyrgyz petrol suppliers rightly complain about unfair competition. For the time being, Kyrgyzstan is condemned to continue its hazardous negotiations at state level over electricity for gas, which is really determined by Uzbekistan's need for water.

Leaving the gold exports to Germany and Switzerland aside, Russia is Kyrgyzstan's largest export market. Even so, it purchased barely 14 percent of Kyrgyzstan's exports in 2001. With a similar degree of market reform, the Russian and Kyrgyz economic systems are quite compatible, with evident complementarities. Russia needs many agricultural products that Kyrgyzstan wants to export. Increasingly, viable old Soviet economic links are being re-established. Eastern Russia is a large bulk market, to which Kyrgyzstan can sell products without much refinement. Russia can be seen as an ally of Kyrgyzstan in the liberalization of trade through Kazakhstan, as it has an interest in receiving Kyrgyz exports, notably food in East Siberia. Kyrgyzstan could try to attract more Russian companies to invest by undertaking a debt-for-equity swap with its debt to Russia, as Armenia has successfully done. Russia is quite an open market with few quotas and low tariffs. The problem is rather that very expensive transit through Kazakhstan hampers Kyrgyz exports to Russia.

Kazakhstan would naturally be Kyrgyzstan's biggest trade partner, but its share of Kyrgyzstan's exports has declined steadily from 22 percent in 1996 to 8 percent in 2001, ending up as Kyrgyzstan's fifth export market. The halving occurred after Kazakhstan has imposed draconian protectionist measures on imports from Kyrgyzstan in 1999. Kyrgyz goods faced import tariffs of up to 200 percent or quotas. The cause was that Kyrgyzstan was forced to devalue in the fall of 1998 after the Russian financial crash, while Kazakhstan avoided devaluation for another half a year.

It is strange that Kyrgyzstan and Kazakhstan fail to trade with one another. Two nations could hardly be more similar. Their economic systems are very similar and the complementarities between the Kyrgyz and Kazakh economies are obvious. Kyrgyzstan enjoys a surplus of agricultural produce, while most of Kazakhstan's agriculture, save grain production, is lagging behind the country's economic development. It would be natural if food processing developed in Kyrgyzstan for exports to Kazakhstan. Kyrgyzstan has very attractive tourist spots with its mountains and Issyk-Kul, which are popular among Kazakhs living on the hot and dusty steppes. Kyrgyzstan has ample cheap hydropower and water, and Kazakhstan needs both. Several enterprises in Kyrgyzstan are designed for deliveries to Kazakhstan, for instance, a large cement factory in Kant just on the border to Kazakhstan. Kyrgyzstan is well suited to become a service provider for Central Asia in general and Kazakhstan in particular. Bishkek is developing into the capital of higher education in Central Asia.

Ironically, the main cause of Kazakhstan's ruthless protectionism against Kyrgyzstan is that the latter is too cheap. While the average wage in Kyrgyzstan is about $35 a month, it is almost five times higher in Kazakhstan at $160 a month. While standard trade theory suggests that a country would be able to export more if it devalues, the opposite is true of Kyrgyzstan because it arouses protectionism from Kazakhstan. Hence, Kyrgyz exports are completely inelastic, as a new IMF study evidences. Nor do imports depend on the exchange rate, as they are largely determined by the Public Investment Program. Hence, Kyrgyzstan does not suffer from a sharp revaluation of the Som, while an appreciation might help solve its trade problems with Kazakhstan, reducing Kazakh protectionist sentiments. Besides, higher Kyrgyz dollar wages would mitigate the large outflow of qualified labor to Russia and Kazakhstan.

Kyrgyzstan's problem with Kazakh protectionism is so great that Kyrgyzstan must use all the levers to solve it: the bilateral Kyrgyzstan-Kazakhstan commission, the WTO, Russia, the CIS, the Eurasian Economic Community, the US, the World Bank, public diplomacy, Russian businessmen and Kazakh businessmen.

1. First of all, Kyrgyzstan must publicly declare Kazakhstan's protectionism its greatest economic problem. Nobody will help you solving a problem, if you do not clarify how critical it is.

2. Kyrgyzstan has only rudimentary trade diplomacy. The new Ministry of Economic Development and Trade should focus on building a capacity of trade policy specialists and negotiators. International assistance can be mobilized from USAID or Switzerland for this purpose.

3. Kyrgyzstan's greatest opportunity to solve all its problems with Kazakhstan comes when Kazakhstan enters the WTO. As a member of the WTO, Kyrgyzstan can ultimatively demand that Kazakhstan comply with all WTO rules in relation to Kyrgyzstan. Kyrgyzstan can demand that Kazakhstan eliminate all trade barriers out of line with WTO regulations, notably its internal borders posts (GAI), discriminatory transit fees, discriminatory import tariffs, and discriminatory import quotas. Ninety percent of Kyrgyzstan's trade problems can be resolved in Kazakhstan's accession to the WTO.

4. Most problems in the CIS realm are solved through bilateral negotiations between their leaders. Bilateral Kyrgyz diplomacy with Kazakhstan must be intense and aim at resolving the trade problems. The natural forum for the resolution of these problems is the bilateral Kyrgyzstan-Kazakhstan commission. All personal and political contacts need to be utilized for this purpose.

5. The CIS and Eurasian Economic Community remain weak institutions, but Kyrgyzstan should try to mobilize them for their maximal usefulness. These institutions can be useful for bilateral trade relations as well. The most critical question is how to facilitate transit traffic through Kazakhstan, most of all to Russia.

6. Another strong lever Kyrgyzstan can utilize in its resolution of Kazakhstan's protectionism is Russia. Kyrgyzstan has wisely concluded trade deals with several Russian regions, concretizing their interest in purchases from Kyrgyzstan. Russia has an interest in better trade relations among the CIS countries, especially between two countries as friendly to it as Kyrgyzstan and Kazakhstan. Russia has many means to influence CIS member states.

7. Kyrgyzstan can mobilize various international organizations in its struggle. The IMF has just undertaken a small study on the effects of Kazakhstan's protectionism on Kyrgyzstan's economy, and they are devastating. The World Bank is about to undertake a study of trade problems in the Central Asian region.

8. Increasingly, major policy problems are being resolved under the pressure of big enterprises. Russian enterprises buy Kyrgyz companies exporting to Russia, and then they need to be able to transport through Kazakhstan. Russian enterprises also know how to break through into the Kazakh market, as the Russian juice and dairy company Wimm-Bill-Dann has shown, after having bought and modernized the dairy in Bishkek. Big serious Russian companies investing in Kyrgyzstan, can help resolve these trade problems.

9. Debt-equity swaps with Russian private enterprises can be a good means to attract large Russian companies to Kyrgyzstan, which will not only invest and develop production but also facilitate exports to both Kazakhstan and Russia.

10. Another useful lever might be big Kazakh companies. Kazkommertsbank has just bought one Kyrgyz bank, and Temir Bank is about to buy another. These big banks will have an interest in their clients having access to the Kazakh markets, and they can facilitate that. Kyrgyz authorities can discuss directly with some of the large financial-industrial groups, which dominate the Kazakh economy.

11. Kyrgyzstan can help Kazakhstan solve one of its greatest economic problems, namely overheating. For the last three years, Kazakhstan has had an average growth of 11 percent a year, and its growth is likely to stay almost that high for the foreseeable future. That implies substantial risks for bottlenecks for economic development, overheating and inflation. In 2001, Kazakh food prices rose by 17 percent, while Kyrgyz food prices fell by 4 percent because of a glut of food that could not be exported. Obviously, both the Kazakh national economy and its population would have been better off if Kyrgyzstan had been allowed to export its abundant food there.

By and large, small countries tend to pursue more liberal trade policies and are careful not to undertake retaliatory measures against bigger countries, because small countries are too weak to accomplish much in that way and would only harm themselves. Until the last year, Kyrgyzstan has shared this philosophy. Lately, however, Kyrgyzstan has undertaken protectionist measures against Kazakhstan in two cases. First, it introduced a temporary protective tariff on wheat last year, when the Kazakhs had a bumper harvest driving down the Kazakh wheat price to half that of Kyrgyzstan. In WTO terms, this could possibly be justified with state aid to agriculture in Kazakhstan, but should Kyrgyzstan really use 65 percent of its agricultural land for wheat? Recently, Kyrgyzstan tripled its excise tax on cigarettes imported from non-WTO countries other than Russia, that is, Kazakhstan and Uzbekistan. The reason is that both countries have closed their markets to Kyrgyz tobacco. However, then that should be used as the direct argument, and corresponding trade sanctions should be undertaken rather than excise taxes, which are not supposed to be trade-related. Kyrgyzstan cannot win its trade disputes with Kazakhstan, if it refuses to acknowledge them and face up to them. In general, Kyrgyzstan needs to appeal to the standards of the international trade system, holding on to high standards, low tariffs and an open economy.

The Dilemma of the Kyrgyz State

For many years, the Kyrgyz government has systematically tried to improve governance and reduce corruption. Numerous important measures have been undertaken. A large number of state agencies have been abolished or merged; severe restrictions have been introduced on government inspections of enterprises; many government procedures and taxation have been simplified; tax rates have been brought down; and a number of feedback mechanisms and checks have been introduced.

Even so, the results appear disappointing. In the EBRD and World Bank survey of business enterprises in 26 postcommunist countries, Kyrgyzstan stood out in several negative ways. It was the country with the highest bribe tax, 3.7 percent of sales in 2002. Moreover, it recorded an increase in the bribe tax of 50 percent over 1999, while the average for the postcommunist countries was a decrease in the bribe tax of 15 percent. Similarly, while Kyrgyz entrepreneurs reported 83 percent of their sales to the tax authorities in 1999, that share had dropped to 73 percent by 2002, that is, self-reported tax compliance fell sharply. Still, Kyrgyz businessmen reported a substantial improvement in overall business environment and the average time senior managers spent with public officials plummeted by half from 13 percent in 1999 to 7 percent in 2002. The worst problems they report are, in order, access to financing, taxation, corruption and quality of the judiciary.

This picture is reinforced by other enterprise surveys, of which several have been undertaken in the Kyrgyz Republic. TACIS/PROMA undertook a National Business Opinion Survey of the Kyrgyz Republic in the summer of 2002, questioning over 3,000 enterprises in the whole country. Forty-five percent of the businessmen thought that corruption in state agencies had increased, and only 4 percent thought that it had declined. Forty-eight percent reckoned that the number and complexity of licenses and certificates had increased, and 66 percent that their cost had increased. Only 27 percent considered that they could pay all taxes, and only 12 percent had used any external finance in the last three years. Yet, business confidence was high, with 48 percent of the businessmen expecting their firms to expand in the next two years, and 68 percent perceiving increased competition. Most firms are young, 66 percent being less than five years old. These observations are consistent with other surveys.

The number of agencies and officials who deal with each enterprise might have dwindled. If entrepreneurs complained a bout 10-20 hara