COMMENT: Kyrgyzstan reforms in sight

By bne IntelliNews January 18, 2008

Igor Lebedinets of Renaissance Capital -

Recent political developments in Kyrgyzstan, which culminated in the election of a new parliament on DecEMBER 16, have brought some clarity to the republic's future development. Kyrgyzstan has had little domestic political stability since 2005's "Tulip" revolution, although the results of December's extraordinary parliamentary elections has brought some signs of change in the political landscape.

The pro-presidential Ak Zhol party won the December elections in a landslide, while the opposition's claims that the elections were unfair have not changed the distribution of the seats. Ak Zhol, which President Kurmanbek Bakiev created only a few months ago, took 78% of the vote and 71 of the parliament's 90 seats. The remaining seats went to the Social Democratic Party (SDP) and the Party of Communists, both of which are considered loyal to Bakiev. The SDP, which is led by former Prime Minister Almazbek Atambaev, will occupy 11 seats and the Party of Communists eight seats. Parties opposed to Bakiev, including the major opposition party Ata Meken, failed to win any seats.

With control of 71 out of 90 seats, Ak Zhol nominated the new prime minister and formed a cabinet friendly to Bakiev. Despite the fact that this government has been formed more on a political basis rather than professional, parliamentary support for Bakiev looks as if it will allow the president to effectively implement new domestic policies. The election results have, therefore, significantly strengthened Bakiev's domestic political position, and he will henceforth be able to influence both the government's legislative and executive branches.

Given that Kyrgyzstan's political stability and economy have suffered from long-standing disagreements between President Bakiev and the opposition, we view the results of the recent parliamentary elections positively. We believe that with such a dominant position, President Bakiev will be able to conduct his government in an effective way. Moreover, an abatement of the political crisis gives us hope for an improvement in the republic's economic performance. If the political landscape does not shift again in the near future, we believe this will lead to positive results in the long term.

Reforms but still poor

Following the break-up of the Soviet Union, Kyrgyzstan has made significant progress in economic reforms, allowing private ownership of agricultural land, quickly reducing budget obligations, introducing one of the CIS's simplest tax systems and becoming the first CIS country to join the World Trade Organisation. However, these reforms did not result in any measurable improvement in the country's economic conditions, and Kyrgyzstan's population remains one of the poorest in the CIS, with poverty rates exceeding 50%.

In our view, this lack of economic progress helped to fuel to the Tulip revolution in spring 2005. Since his election as president in March 2005, Bakiev has failed to carry out further reforms due to domestic opposition and a generally turbulent domestic political environment.

One early indication of how Bakiev intends to utilise his improved position came in a development we view as positive. On January 10, the president called for large-scale economic reforms throughout the republic. Bakiev called on the loyalist government to increase the national retirement age, speed up privatisation, and strengthen the banking sector by mandating an increase in banks' capital requirements. The president also asked the cabinet to lower taxes for processing industries and agriculture, and to remove the VAT on imported technology. However, the president also insisted on higher taxes on the real estate and automotive transport sectors. Finally, the president also proposed a three-year budget planning system starting from 2009. We believe that, having achieved a remarkable degree of control over the parliament, the president will face little trouble in promoting the outlined reforms.

We believe that a very liberal economic regime with prudent fiscal and monetary policies would help to improve the living standards of Kyrgyzstan's population. A significant portion of the nation's income is currently derived from remittances from Kyrgyz nationals who are working abroad (predominantly in Kazakhstan). Aside from labour, Kyrgyzstan is also is a major supplier of agricultural produce to Kazakhstan, competing in this field with Uzbekistan. The large (and generally untapped) potential for developing the republic's economy lies, in our view, in harnessing the country's natural resources, including precious metals and expanding hydropower capacities. However, in order to achieve this, the country needs a significant strengthening of its central authority, providing strong guarantees to outside investors. Bakiev's recent talk of reform signifies the move in the right direction, in our view.

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