Achieving macroeconomic stabilization has been a key element of economic reform programs in transition countries, and many agree that sustained stabilization is essential for the resumption of economic growth. While stabilization appears to be a necessary condition for achieving growth, it is not a sufficient one. Another important condition for restoring sustained growth is structural reforms. In this regard, recent studies have shown that there is no shortcut to reforms; a comprehensive package combining progress in all areas, ranging from price and exchange liberalization to creating a market-oriented legal framework, is required.1 Some of these reforms can be undertaken virtually overnight, such as price liberalization, but others take more time to develop and implement by their very nature, including securing property rights and establishing a rule of law. Still, developing institutions that create a market-friendly environment cannot be delayed for too long, as the institutional vacuum that may appear will create opportunities for rent seeking and corruption. This will foster the development of strong vested interests, which, in turn, will oppose free competition, undermine the application of a rule of law, and may bring the transition process to a halt.

Achieving macroeconomic stabilization has been a key element of economic reform programs in transition countries, and many agree that sustained stabilization is essential for the resumption of economic growth. While stabilization appears to be a necessary condition for achieving growth, it is not a sufficient one. Another important condition for restoring sustained growth is structural reforms. In this regard, recent studies have shown that there is no shortcut to reforms; a comprehensive package combining progress in all areas, ranging from price and exchange liberalization to creating a market-oriented legal framework, is required.1 Some of these reforms can be undertaken virtually overnight, such as price liberalization, but others take more time to develop and implement by their very nature, including securing property rights and establishing a rule of law. Still, developing institutions that create a market-friendly environment cannot be delayed for too long, as the institutional vacuum that may appear will create opportunities for rent seeking and corruption. This will foster the development of strong vested interests, which, in turn, will oppose free competition, undermine the application of a rule of law, and may bring the transition process to a halt.

This section describes the progress that has been made in the five Central Asian states in implementing a number of key structural reforms: price liberalization, enterprise reform, financial sector reforms, and fiscal reforms. Reform of exchange and trade regimes—an important component of structural reforms—was discussed in Section VI.

Price Liberalization

As described by Kornai (1994), one of the key changes that is needed in the transformation to a market economy is to force a move from a sellers’ market to a buyers’ market. This primarily requires price liberalization. When Russia launched its price liberalization program on January 2, 1992, the Central Asian states had little choice but to follow. Kazakhstan and the Kyrgyz Republic implemented substantial price liberalization in the succeeding period and avoided significant policy reversals. With the exception of some monopoly products and utilities, Kazakhstan virtually completed its price liberalization by 1994 (when energy prices were freed) and eliminated most state orders. The Kyrgyz Republic initially kept subsidies on a small set of foodstuffs (primarily milk and bread), controlled the prices of monopoly products (including gas, electricity, and heat), and retained some agricultural state orders until 1993–94. In 1995 only nine monopoly prices were regulated by profit margin requirements, and by 1997 these were also mostly abolished.

Price reforms in Tajikistan, Turkmenistan, and Uzbekistan tended to be slower and more erratic. Tajikistan lifted price controls on 80 percent of all goods in 1992, only to reintroduce some control in 1993, and to resume price liberalization in 1995. By 1996, most prices had been liberalized, with the exception of utilities and transportation. Similarly, Uzbekistan liberalized most retail prices in 1992 but maintained a card system for price-controlled goods.2 Some backtracking of the initial liberalization took place before price reform was resumed in 1994. By 1998, price controls still existed for utilities and transportation, and for a large number of monopoly products including most foodstuffs. State orders remain in effect for cotton and wheat. Turkmenistan kept over 400 goods and services subject to price controls until January 1995, when the number was reduced to 51. Following further liberalization in 1997, a number of goods and services3 still remain under price controls; state orders are maintained for cotton and wheat.

All five countries in the group maintained administered prices for a number of natural monopoly services—notably electricity, water, heat, transportation, and telecommunications—that were priced below recovery cost. In all of the countries, prices for these services have been periodically adjusted closer to recovery-cost levels, but in most of them, prices still remain well below recovery-cost levels. Only Kazakhstan has made significant progress in this regard.

Enterprise Reform

A second key element of the transformation to a market economy is the enforcement of hard budget constraints on state enterprises via the elimination of various support mechanisms, such as budgetary subsidies, directed low-cost credits, tax exemptions and arrears, and interenterprise arrears. Together with price liberalization, this should provide incentives for the profit maximizing behavior of economic agents. Enterprise reform is needed to facilitate a reallocation of resources from old to new activities, via closures and bankruptcies, the creation of new enterprises, and restructuring within surviving firms.

Rehabilitation of State Enterprises

In general, the initial stage of the enterprise reform process—at times considered by Central Asian states’ authorities as privatization rather than just a first step toward it—involved the setting up of state enterprises as independent units, that is, corporatization, during which enterprises were typically turned into joint stock companies, with more clearly defined owners and balance sheets. The second stage generally involved attempts to restructure state enterprises, either with a view toward their future privatization or liquidation, or to make them more efficient state-run entities in the case of natural monopolies. The leading reformers in Central Asia—Kazakhstan and the Kyrgyz Republic—have advanced the furthest in restructuring state enterprises. Uzbekistan has also made some progress; 130 enterprises have been declared bankrupt by the courts and 70 have been referred for restructuring, although there is no agency with responsibility for overseeing the restructuring process. Turkmenistan, on the other hand, has not yet started to deal substantively with the largest, loss-making state enterprises.

Kazakhstan has used various methods to deal with large loss-making, state-owned enterprises. Initially, to facilitate restructuring, enterprises were placed under management contracts with outside (including foreign) parties. By mid-1997, 12 contracts out of a total of 47 had resulted in a transfer of equity. Full buyouts were rare, however, and following increasing accusations of corruption and asset stripping, the authorities shifted emphasis to state-led restructuring under the State Property Committee and the Rehabilitation Bank, an agency set up with World Bank funding to restructure insolvent enterprises. The Rehabilitation Bank was intended to control all financial transactions of the state enterprises undergoing restructuring and to be their sole source of credit. By mid-1998, 26 out of 46 enterprises had either been liquidated or offered for sale. Meanwhile, the authorities have increased emphasis on case-by-case privatization. In the Kyrgyz Republic, a specialized agency—the Enterprise Reform and Resolution Agency—was created to deal with the restructuring of large, loss-making, state-owned enterprises. By 1995, the agency had completed diagnostic studies (sponsored by the World Bank) of 28 enterprises. During the evaluation phase, access to bank credits for these enterprises was cut off and some employees were put on administrative leave. Following audits, five enterprises were liquidated and four were removed from the program. The remaining enterprises were downsized, including through the divestiture of social assets, and restructured; the sale of these enterprises was almost complete by mid-1998. The rehabilitation of other public and private enterprises is to be pursued under an Asian Development Bank corporate governance adjustment operation.

Privatization of State Enterprises

Progress with privatization programs varied among the Central Asian states. Typically, the countries in the region designed their privatization programs in three stages. The first stage concentrated on the privatization of small-scale enterprises and housing, and was implemented by means of auction sales, employee buyouts, or outright donation to workers. The second stage entailed mass privatization of mostly medium-sized enterprises. The third, and final, stage involved case-by-case privatization of large-scale enterprises, including natural monopolies and infrastructure. The Kyrgyz Republic completed the privatization of small-scale enterprises (with fewer than 100 employees) during 1991-93, mostly through outright sales by its state property fund. Kazakhstan and Uzbekistan followed close behind, privatizing about 90 and 96 percent, respectively, of the targeted small enterprises. Turkmenistan has, thus far, privatized almost one-half of the 4,000 approved small state enterprises. Privatization gained momentum in Tajikistan during 1998 and over 1,100 small enterprises were privatized.

The methods and timing of the first privatization waves differed across countries. In Kazakhstan, beginning in 1991, approximately 10 percent of the assets of small enterprises were sold directly to managers and workers. In Uzbekistan, privatization began somewhat later in 1992, and was implemented through a variety of methods, such as employee/management takeovers and leasing arrangements. In Turkmenistan, the first stage started in 1993. with 80 percent of the small-scale enterprises sold transferred to employees (who were obliged to continue existing activities); the remainder was sold in cash auctions. In Tajikistan, until 1995, the privatization of small enterprises could be initiated only by the employees, thus constraining the process. With the exception of Turkmenistan, where housing reform has barely begun, almost all housing has been privatized in the Central Asian states.

By 1993, Kazakhstan and the Kyrgyz Republic were entering the second stage of their privatization programs, while Turkmenistan was still enacting its initial privatization law, and Tajikistan was in the midst of a civil war with all reform efforts put on hold. In Kazakhstan and the Kyrgyz Republic, a voucher scheme was the main vehicle for privatizing medium-and large-scale enterprises. All citizens received (tradable) vouchers that they used for direct purchases of shares in state enterprises or invested in licensed privatization funds. These privatization funds bid for shares in the state enterprises, which were then converted into joint stock companies. Employees typically received from 5 to 10 percent of the shares, while the funds could bid for 25 to 51 percent of the value of the company (the Kyrgyz Republic was at the lower end and Kazakhstan at the higher end of this range), and the remaining shares were sold in cash auctions. Voucher privatization has been completed in these two countries. The second stage proceeded somewhat differently in Uzbekistan and Tajikistan. In Uzbekistan each citizen could purchase 100 shares in one of several privatization investment funds, and each fund used these personal shares to purchase property from the government. The enterprises privatized in the second stage were first converted into joint stock companies and then sold either through coupon auctions or cash auctions. In Tajikistan the shares of the joint stock companies were either sold or transferred to the employees or remained in state hands. Turkmenistan is still largely at the preparatory phase of the second stage of its privatization program.

The third stage of privatization deals with large-scale enterprises, monopolies, or hard-to-sell enterprises. The disposal of this property involves initial corporatization, followed by case-by-case attempts to sell the enterprises. Some of these companies have considerable social assets, which complicates their sale. The third stage of privatization is proving to be a slow and difficult task within the region, although it is well under way in Kazakhstan. In the Kyrgyz Republic, the privatization program was relaunched in 1998. following a suspension in 1997 because of an investigation of past privatization practices and allegations of misconduct, but only a few enterpises were sold. Progress has also been slow in Uzbekistan, with only a few large enterprises privatized to date (Box 8.1). The privatization of medium-and large-scale enterprises has barely begun in Turkmenistan. While also a latecomer on the scene. Tajikistan made significant progress during 1998 in corporatizing and selling shares in medium-and large-scale enterprises. In early 1999, an international tender was announced for the privatization of 22 state-owned cotton ginneries, and the state cotton monopoly was liquidated.

Some progress has also been made in privatizing agriculture in the region. The present constitutions of the Central Asian states do not permit private land ownership. The state, therefore, remains the sole owner of all land and mineral resources, although it can allocate land to cooperative or private entities through leases of various lengths and grant right-of-use and tradable status. Initially, agricultural reform in the Central Asian states concentrated mainly on the transfer of land control from state farms to cooperative farms—by law, privatizing the land, but, in reality, maintaining old relationships, including through state orders and state monopolies of input and marketing services. In Kazakhstan, more than 80 percent of farmland has been privatized. Farm privatization has often led to cooperative structures, providing individual farmers with long-term leases and buyout options to the land. Execution of such options has been limited, however, because of unclear property rights, although leases can be transferred and inherited. In 1993, the Kyrgyz Republic started distributing long-term leases with transfer and inheritance rights, and now more than half of the arable land is leased on 99–year terms. In October 1998, an amendment to the constitution was approved, allowing private land ownership. The land code will be amended accordingly. Starting in 1991. arable land in Uzbekistan was transferred to cooperative farms and leased to individual farmers. The new land code of 1998, however, declared all land that cannot be traded or mortgaged to be state property. In Tajikistan, the revised land code of 1996 allows lifetime leases with transfer and inheritance rights, but the issuance of land titles has been slow. Land reform in Turkmenistan was initiated at end-1996. The program provides for an initial, free, two-year lease, with potential ownership rights afterward (but without the right to sell), contingent upon fulfillment of government-determined output targets for cotton and wheat. Registration of land titles has been very slow so far.

Progress with Privatization of Nonfinancial State Enterprises


The small-scale enterprise privatization program was officially concluded in 1997 and attention then shifted to restructuring of the energy and heat sector, railways, and telecommunications enterprises, as well as to the continuation of the case-by-case privatization program, aimed at some of the largest state-owned enterprises. During 1997, a number of contracts were signed with foreign firms covering the sale and management of enterprises and of oil and gas fields. In 1998, the authorities committed themselves to the flotation of shares in four large “blue chip” enterprises and to sign contracts with lead managers on future flotation of an additional five “blue chip” companies, although these plans were delayed, partly because of the unfavorable international economic situation. They also undertook to review management practices to improve efficiency and transparency. All remaining medium-sized enterprises listed under the third-stage privatization are to be sold.

Kyrgyz Republic

By mid-1997. approximately two-thirds of the medium-to large-scale enterprises had been sold. A number of heavily indebted enterprises were also restructured with support from the World Bank with a view toward exploring whether they could ultimately be privatized. The privatization of larger enterprises outside the mass privatization program was halted in 1997, pending the outcome of an investigation on whether enterprises had been sold too cheaply. The investigation was completed in December 1997 and the privatization program was restored. The government has initiated a plan to transform stale enterprises operating in the key areas of aviation, mining, gas. oil. and telecommunications into viable businesses that make regular tax payments and service their debts.


Initial privatization efforts concentrated mainly on housing and small-scale enterprises, where considerable progress was made. Several state enterprises have been transformed into joint stock companies. Despite the sale of 25–30 percent of shares of many of these companies to employees, the private sector does not hold a controlling share in most of them. Moreover, as long as the state retains at least 25 percent of the shares, it still has a controlling vote. Even when the state holds as little as 1 percent of the shares, a shareholder meeting cannot take a vote unless the state’s representative is present. Beginning in 1996, minority stakes in 150 medium and large enterprises were sold to privatization investment funds in auctions. Individuals could participate by purchasing stakes in the privatization investment funds. Follow-up sales, however, have been delayed. The authorities are planning to privatize six large enterprises through international tenders.

Enforcement of Financial Discipline on State Enterprises

A key component of the enterprise reform process is the enforcement of financial discipline on state-owned enterprises. Progress toward subjecting state enterprises to hard budget constraints has been uneven. Kazakhstan and the Kyrgyz Republic had eliminated subsidized bank credits by 1995. In the Kyrgyz Republic, there is still budgetary lending to some enterprises at subsidized rates, although such lending is being phased out. The rest of the group has generally been less successful in these areas, as they continued to use central credit as a means of maintaining output and employment. In 1993–94, Uzbekistan replaced outright directed credits with central bank loans, channeled through the ministry of finance, primarily to the agricultural, mining, and steel sectors, but this was reversed in 1997. In mid-1993, the government guaranteed the extension of short-term credits at below 3 percent interest to finance enterprise wage increases in line with government wage adjustments. As of end-1996, directed credits to sectors other than agriculture had been mostly eliminated. Turkmenistan terminated directed credits in early 1996, only to significantly resume them (on highly preferential terms) later in the year and during 1997–98, mainly to finance the agricultural sector. In Tajikistan, while directed credits were, in principle, prohibited by presidential decree in 1997, the central bank was instructed to continue issuing credits to state-owned enterprises.

Interenterprise arrears—often a substitute for bank or budgetary financing—were a serious problem in the Central Asian states. Attempts to periodically monetize such arrears fueled inflation and sent wrong signals to state enterprises about the government’s intention to impose hard budget constraints. In 1994, Kazakhstan, undertook such an operation, substantially derailing its stabilization program. Likewise, the rapid credit expansion in Uzbekistan in 1993 largely reflected the monetization of arrears. Turkmenistan engaged in similar operations, although interenterprise arrears grew sharply, related partly to the nonpayment for gas exports. Bankruptcy procedures, another important component of enforcing financial discipline, are discussed in the next section.

Legal and Institutional Reforms

Legal and institutional reforms are an integral part of the transition to a market economy. Setting up a legal and institutional framework that guarantees and enforces property rights and safeguards private property is an important precondition for healthy private sector development. A major problem in the Central Asian states is the lack of experience with clearly defined property rights; legal systems in existence over the past 70 years precluded such rights. As important as the enforcement and guaranteeing of property rights, are the laws that assist economic agents in making and amending contracts. More broadly, the civil codes of the countries, dating back to Soviet times, need to be updated and transformed. With the exception of Kazakhstan, none of the Central Asian states have embarked on in-depth reform of their civil codes, a serious deficiency given the needs of the market system. Commercial disputes are also rarely settled in the courts, because of the general inexperience with commercial contracts.

Related to civil codes reform is the need for the development of corporate laws and the enforcement of bankruptcy laws. In the initial stages of economic reform, all of the countries passed bankruptcy laws that were aimed mainly at the liquidation of loss-making enterprises. Although these laws clearly defined liquidation procedures, they contained insufficient provisions governing the restructuring process. Kazakhstan, for example, applied its bankruptcy law (originally adopted in 1992) only after a major revision in 1994, allowing the restructuring of loss-making enterprises. Turkmenistan has never applied its bankruptcy law, while the Kyrgyz Republic’s courts apply the law sporadically (only 14 out of 250 loss-making enterprises were closed and 25 were reorganized). However, the Kyrgyz State Property Fund now has plans to start bankruptcy proceedings against 400 enterprises in its portfolio, which is expected to help identify areas for improvement in the bankruptcy law and strengthen financial discipline. In Uzbekistan, the bankruptcy law has been applied more rigorously following a revision in 1996, which incorporated the concept of limited liability of the shareholders in joint stock companies; 130 of the 200 complaints filed with the courts have resulted in bankruptcies and the remainder have been referred for rehabilitation.

As of end-1997, the bankruptcy laws of the Central Asian states contained several identical basic elements (Table 8.1). Insolvency occurs when the debtor cannot meet its liabilities as they fall due, including tax obligations in the case of Uzbekistan (but not in the other countries).4 All laws allow for restructuring if the majority of creditors reach a binding agreement with the debtor. Liquidators are court appointed in all cases; in Tajikistan and Uzbekistan, creditors are also consulted before the appointment. Specialized courts have not been set up to apply the law, other than the arbitration courts in Tajikistan and Uzbekistan, As noted before, the law has not been applied in Turkmenistan, and only a small number of enterprises have been declared bankrupt in Tajikistan.

Table 8.1.

Bankruptcy Laws in the Central Asian States

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The Central Asian states have also passed a series of laws establishing a more level playing field for small and large enterprises and, in particular, laws safeguarding competition. In the Kyrgyz Republic, the 1994 Antimonopoly Law defines a monopoly as a company or a product with a domestic market share of 35 percent. The so-called natural monopolies (railways, communications, energy, gas, water and sewage, tobacco and alcohol) and the so-called permitted monopolies (civil aviation, oil, publishing, coal and gold mining) are subject to regulation, while the “temporary” monopolies5” are monitored but not regulated.6 The 1996 Antimonopoly Law in Uzbekistan considers a product or a firm a monopoly if its share is more than 65 percent, up from a 35 percent limit in the previous version of the law. The Antimonopoly Committee is charged with monitoring the prices of all enterprises, including those considered to be natural monopolies (gas, oil, communications, rail). Antimonopoly legislation is at an early stage of development in Tajikistan and Turkmenistan.

Financial Sector Reforms

Evolution and Reform of the Banking Systems

During the initial years of independence (1991–92), the banking systems of the five Central Asian states continued to be segmented and sector-oriented. The state was still—directly or indirectly through public enterprises—a major shareholder in most banks, which, as discussed in Section V, remained largely dependent on central bank financing. At the time of independence, the five states adopted their own banking laws, allowing universal banking. The number of commercial banks (which had already expanded from the five traditional ones7 following banking sector reforms in the Soviet Union in 1987-88) continued to increase rapidly, especially in Kazakhstan (Box 8.2). Most new banks were established by state enterprises as a conduit for central bank credit. The structure of the banking systems, however, did not change very much. As most new banks were very small, the traditional banks (or their successors) continued to dominate the banking systems, accounting for about 75 percent of bank credit in Kazakhstan to 90 percent and more in Uzbekistan and Tajikistan at end-1992. All countries lifted the monopoly of the Savings Bank on household deposits during 1991–92, but continued to guarantee the deposits held with this bank, giving it a competitive advantage over other banks. Uzbekistan limited banks’ holdings of household deposits to their capital for several years and, as a result, most household deposits remained with the Savings Bank.

Financial sector reform has constituted an important element of the reform programs of transition economies. Following the halt of transfers from the Soviet budget to finance enterprises, the role of the banks needed to change from mere administrators of transfers to the intermediaries between savers and investors, and to the allocators of scarce resources to the most efficient enterprises. In addition, banks were the conduit through which monetary policy—which became an active instrument—was transmitted. The efficiency and health of banks, however, was threatened by the impact of the stabilization and reform process, as borrowers had to adjust to ongoing changes, including sharply higher interest rates.

In the fastest reformers, Kazakhstan and the Kyrgyz Republic, banking sector reform was done in two stages.8 In the first stage (1993–94), both countries began to eliminate small banks—many could not compete in an environment of higher interest rates and with a lack of directed credits—by raising minimum capital requirements. Banks unable to comply with the new requirements were closed. Given that the banks that were closed were small and generally held only deposits of their shareholders, this restructuring was implemented without much cost. In addition, licensing requirements were tightened and prudential regulations strengthened. At the same time, the government’s share in commercial banks was gradually reduced.

In the second stage of reforms (1995–96),9 bank supervision was further strengthened and the problems of the large banks were addressed. In 1994, banks were audited, revealing nonperforming debt equivalent to 55 percent of total portfolios in Kazakhstan and 70–80 percent in the Kyrgyz Republic. These bad debts were mostly held by successors of the traditional specialized banks and related to government directed credits provided in earlier years. The importance of the larger banks often precluded their closure, although in the Kyrgyz Republic, the Elbank (formerly the Savings Bank) and the Agroprombank were closed. In general, banks were restructured through mergers, recapitalization by government or private sector funds, and transfer of a large portion of nonperforming debt to special debt-recovery agencies (Box 8.3). As part of their restructuring efforts, both countries introduced new central bank and banking laws, enhancing the powers of their central banks. Banking supervision regulations were brought closely in line with international standards,10 while additional legislation was introduced to promote financial sector development.

The restructuring programs in Kazakhstan and the Kyrgyz Republic brought into the open the very high costs of the lack of proper banking procedures and supervision in the initial years of independence. In the Kyrgyz Republic, the total costs to the government of the reform were as high as 5 percent of GDP in 1996, or 31 percent of budget revenue, although these costs were financed mostly through long-term bond issues, and only the interest payments on them were immediately reflected in government expenditure. In Kazakhstan, nonperforming loans equal to 11 percent of GDP were transferred from the banks to special debt-recovery agencies.

Despite the progress made, the restructuring effort in these two countries is far from complete. In Kazakhstan, the share of nonperforming loans in total credit declined, but still exceeded 40 percent at end-1996. A number of large foreign banks brought much needed banking expertise to the country. However, the general skill level in many of the indigenous banks—the four largest of which still account for about one-half of total assets—remained low. Progress was faster in the Kyrgyz Republic. A large share of nonperforming debt was taken out of the banks and the recapitalization of the banks was stronger. By mid-1997, all banks complied with the prudential guidelines, and the share of nonperforming debt was reduced to 7 percent.

The other three Central Asian states progressed more slowly in the restructuring of their banking systems. Uzbekistan and Turkmenistan improved bank supervision, but in both countries little has been done to restructure the financial system, which continues to be dominated by the traditional specialized banks. The banks have not been audited, and are thought to be largely insolvent, although there are no hard data to confirm this. In late 1998, Turkmenistan announced plans to merge some of the (partially) state-owned banks to further increase their specialization and to achieve greater government control. In Tajikistan, a wide-ranging banking reform program was initiated in 1998, including audits of the major banks by international accounting firms. While the number of small banks declined, the banking sector remains dominated by the traditional, specialized banks.

Banking System Reform in the Central Asian States


The number of banks increased rapidly after the 1988 reforms to 204 by end-1993, although the banking system remained dominated by the traditional specialized banks. Banking system reform in the subsequent period reduced the number of banks to fewer than 100 by 1997 through mergers and closures. In December 1991, all banks were allowed to accept deposits from and lend to all sectors. Banking system reforms were initiated following adoption of a new banking law in 1993. In 1994, the specialized banks were reorganized, prudential regulations tightened, and noncomplying banks were merged or closed. The restructuring of the banking system was intensified during 1995–96. and the number of banks with state participation was reduced. Supported by new central bank and commercial bank laws, the National Bank of Kazakhstan further tightened prudential regulations, bringing them closer to international standards. Larger banks with a high share of bad debt were restructured and nonperforming loans transferred to two debt-recovery institutions. However, the share of nonperforming loans in the banking system, although declining, remained high. In 1996, the fourth largest bank was closed; in 1997, two other large banks, one private, were taken over by the government, merged, and recapitalized. The same bank was reprivatized in 1998. A program was also adopted, under which banks have to comply with all prudential regulations, including capital adequacy, over a five-year period.

The Kyrgyz Republic

The 1991 Banking Law allowed universal banking for all banks. Nevertheless, banks remained sector oriented and the four traditional specialized banks accounted for 85 percent of total loans by end-1992. Improved supervision of banks in 1993–94 revealed large financial problems and a high share of bad debts. Licensing was tightened, banks were prohibited from lending to enterprises with nonperforming loans, and intervention by the National Bank of the Kyrgyz Republic was stepped up, including placing banks under their temporary administration. In 1995, as part of a comprehensive financial restructuring program, two state banks were closed, and a debt restructuring agency was set up. Two other former specialized banks were downsized and recapitalized. In 1996, new central bank and banking laws were adopted, prudential regulations were brought in line with international practices, and preparations were started on legislation for the development of nonbank financial institutions. By mid-1998. almost all banks complied with the new prudential guidelines, and the share of bad debt in banks’ portfolios declined dramatically compared to 1996.


As in the other Central Asian states, five banks accounted for 90 percent of total bank credit and they still dominate the banking sector. Although the Law on Banks and Banking Activity of 1991 allowed universal banking, the banks remain sector oriented and most banks are directly or indirectly state owned. During 1996–97, banking supervision regulations were tightened and brought more in line with internationally accepted practices. Most banks fail to comply with the regulations, however, and major banks remain severely undercapitalized, and the share of nonperforming loans in banks’ portfolios is estimated to be high. To tackle these problems, a number of initiatives were taken in mid-1998: a comprehensive bank restructuring program was initiated and diagnostic studies of the major banks were conducted; revised and simplified prudential regulations consistent with international standards were introduced, including loan classification and provisioning guidelines; and loan-loss provisions were made tax deductible.


The number of banks in Turkmenistan, most of which are directly or indirectly government owned, increased to 22 before declining to 15 in 1998 through mergers and closures. The banking system remains dominated by four traditional banks, which account for a major share of total bank credit. The bulk of banks’ lending operations consists of channeling directed credits and foreign loans to designated state enterprises. A new banking law was adopted in November 1993. Bank supervision regulations were brought more in line with international standards in 1995, and even further in 1998, but compliance remains poor. Banks have not been audited by international auditors, but the share of nonperforming loans is believed to be large. At the end of 1998, a number of measures pertaining to the banking system were introduced, including mergers of several partially state-owned banks, reinforced sector concentration of banks, and the prohibition of state enterprises from holding accounts with private banks.


At end-1991, five traditional banks (out of a total of 21 banks) accounted for over 96 percent of all bank credit. The 1991 banking law allowed for universal banking, although banks could not accept deposits from households in excess of their capital until 1994. New banking and central bank laws were adopted in 1996. under which the central bank’s powers to regulate banks were enhanced. In November 1996, loan classification and provisioning guidelines were issued and operations of 17 banks with excessive amounts of nonperforming debt were restricted, but implementation of the new regulations remains difficult. In 1998, the banking sector continued to be dominated by the state-owned National Bank of Uzbekistan, which accounts for 60 percent of all banking assets. The national bank and other state-owned banks extend directed credits to state-owned enterprises and enforce tax, trade, and wage regulations; enterprises without foreign participation are required to have only one bank account.

The experiences of Kazakhstan and the Kyrgyz Republic illustrate that it will take some time before banks in the region can play an important role in investment financing. Even in the two more rapidly reforming countries the role of the banking system continues to be limited. The currency to deposit ratios, although declining, remain high, indicating a reluctance on the part of the public to hold bank deposits. While the slow pace of development of the banking system may reflect, to some extent, a general lack of confidence in the new currencies of the countries, resulting in high velocities of broad money (see Section V), it also confirms that strengthening the public’s trust in the banking system is likely to be a lengthy process.

Bank Supervision

Bank supervision was introduced in the Soviet Union with the advent of a two-tier banking system in the late 1980s. The 1991 Law on the State Bank of the Soviet Union required Gosbank to set up prudential regulations pertaining to minimum capital and capital-asset ratios, liquidity requirements, single borrower limits, maximum foreign exchange holdings, interest, and exchange rate risks. The licensing of banks was the responsibility of republican central banks (except for all-union banks). Following independence, the five Central Asian states followed the Gosbank model of bank supervision and the central banks became responsible for the licensing and supervision of banks. Because of a lack of experience, however, the issuance and enforcement of prudential regulations took several years.

As part of their financial sector reforms, Kazakhstan and the Kyrgyz Republic turned their attention to bank supervision in 1993. Initially, the main prudential regulation was a minimum capital requirement. In 1994, both countries initiated bank audits, while Kazakhstan further strengthened prudential regulations through introduction of a risk-weighted capital-asset ratio based on international standards. This was complemented by issuance of loan classification and provisioning guidelines in 1995. The Kyrgyz Republic also issued such guidelines in 1995 and brought prudential regulations up to international standards by early 1997 as part of the second phase of banking sector reforms. In both countries, the improvement in regulations was supported by a rapid expansion in the bank supervision departments of their central banks.

Bank supervision regulations in Turkmenistan developed along similar lines, although their enforcement has been much weaker and bank inspection needs improvement. Moreover, banks have not yet been audited. In early 1998, prudential regulations were further strengthened, including through an increase in the minimum capital adequacy requirement to the manat equivalent of one million U.S. dollars, and an increase in the capital adequacy requirement to 10 percent of risk-weighted assets. Uzbekistan and Tajikistan were relatively late in improving bank supervision. Uzbekistan introduced loan classification and provisioning guidelines, mandatory annual audits, and a strengthened off-and on-site supervision system in 1996. Prudential ratios fall short of internationally accepted levels, however, and loans are not yet classified adequately for sound risk management. Tajikistan tightened prudential regulations in 1995–96, but it was not until 1998 that they were brought up to international standards.

Accounting System

The accounting system that the Central Asian states inherited from the Soviet Union applied uniformly to the central and the commercial banks. The system included detailed accounts at the level of individual enterprises but lacked information needed for modern bank accounting. In addition, the unified system was oriented toward commercial banks and inappropriate for modern central banking. By 1997, Kazakhstan, the Kyrgyz Republic, and Uzbekistan adopted new charts of accounts, which are mandatory for all financial institutions; Tajikistan followed in January 1999. Turkmenistan still uses the traditional chart of accounts, although it introduced an updated version in March 1998 as an intermediate step toward introducing a new plan of accounts in line with international systems in 1999.

Payments System

Under the Soviet system, individuals made payments in cash, while enterprises transacted by means of payment orders or payment demand orders.11 Under the monobank system, most enterprise payments were made through Gosbank accounts. Payment delays did not affect the latter’s liquidity and it could easily advance the payment to creditors. In the initial years of transition, due to soft budget constraints and easy availability of low-cost credits, enterprises and banks lacked incentives to accelerate the clearing of payments, which could take months. When interest rates were raised, however, bank credit became less easily available, and as governments started to impose hard budget constraints on state enterprises, reform of the payment system became essential. All Central Asian states first centralized interenterprise payments in a clearing center within the central bank (1991–92). In the next phase, the countries started to automate the clearing process, with the objective of eliminating the large delays experienced under postal and manual clearing systems. This was supported by legislation to bring about particular changes; for example, in Kazakhstan the execution of payment orders was forbidden for a lack of funds, and Tajikistan imposed penalties in 1995 on banks that delayed settlements. By mid-1997, the interbank payment systems in Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan were fully or largely automated.

Method and Costs of Banking Sector Restructuring in the Kyrgyz Republic

By end-1995, total nonperforming loans in the four large specialized banks (Agroprom Bank, Elbank, Promstroi Bank, and AKB Kyrgyzstan Bank) amounted to som 1.5 billion, or about 9 percent of GDP. with performing assets of 3 percent. As a result, all four banks were largely insolvent, and survived only because of special terms on their liabilities to the National Bank of Kazakhstan and exemptions from prudential requirements.

The insolvency of these banks caused serious problems for the economy. The large share of nonperforming assets reduced banks’ interest income, and the lack of confidence in the banks obstructed deposit mobilization. Banks thus lacked loanable funds, while they preferred investing in secure treasury bills over higher risk-bearing credit. Credit to enterprises increased only marginally, hampering investment and growth.

In 1996, the Kyrgyz Republic started a restructuring program for the four largest banks, supported by a loan from the World Bank of approximately $45 million. Under this program, the Agroprom Bank and the Elbank were closed and their recoverable loans—a total of som 816 million—were transferred to a debt resolution agency, which was charged with recovering these loans. The Agroprom Bank—which was replaced by a new interim rural credit system implemented with assistance from the World Bank—had few individual depositors, who were paid out from its liquid assets. The government assumed the debt of the Agroprom Bank to the national bank (consisting mainly of directed credits) of som 965 million by issuing 30–year securities to the national bank, with a 5 percent annual interest rate (the security could be paid off with receipts from the debt resolution agency). In addition, it paid som 84 million (part of which was advanced by the National Bank of Kazakhstan) to small depositors of the Elbank, while som 38 million from large depositors were transferred to a new savings and payments corporation.

The Promstroi and Kyrgyzstan Banks were recapitalized. The former raised new capital from its private shareholders (and the government issued som 20 million in securities in guarantee of credit to a government institution), reversing the negative net worth position to a positive one that exceeded the target of 8 percent of risk-weighted assets. The AKB Kyrgyzstan Bank was unable to raise new private capital, but. in recognition of the fact that a large share of its problems stemmed from directed credits, it received a som 127 million government security, bearing a 25 percent annual interest rate. As a result, by mid-1997, both banks complied with the National Bank of the Kyrgyz Republic’s prudential regulations.

Fiscal Reforms

The major structural fiscal reforms pursued by the Central Asian states covered the budget process, including budget preparation and execution; expenditure prioritization and policies, including public investment plans and reform of subsidy, pension, health schemes, as well as other aspects of the social safety net system; tax policy and administration; and public debt management (see Section VII).

Reforming the Budget Process

Basic budget laws specifying the procedures and financial responsibilities of governments and the establishment of treasuries to manage and account for government financial flows are essential prerequisites to sound budgeting. Ideally, one might expect budget laws to precede the development of the treasury institutions. In practice, the legislative base has lagged behind in the Central Asian experience. Formal budget laws were not introduced in Kazakhstan and the Kyrgyz Republic until 1997. The Kyrgyz law has some interesting provisions, including establishment of a budget commission to review budget implementation, inclusion of externally financed project loans in the budget, and adoption of more detailed budget appropriation classifications for spending units. In Turkmenistan, a law on budgetary systems was approved in 1996, although a more comprehensive law on budget operations is now being drafted. A formal budget law is under consideration in Tajikistan.

There has been greater progress with establishing sound centralized treasuries. With the exception of Tajikistan and Uzbekistan, all countries in the region have operating treasuries to manage the execution of their budgets. Uzbekistan took the initial steps to establishing a treasury in 1996 but work on the drafting of the related legislation and staffing subsequently stopped. Tajikistan has recently made progress on establishing a treasury.

In particular, Kazakhstan has made steady progress since the formal establishment of its treasury in January 1994–a treasury single account has been established and the payment process has been taken over from the central bank; accounting of all borrowing and debt service payments has been placed directly under the treasury single account; and the accounting and budget frameworks and the chart of accounts have been redeveloped. In the Kyrgyz Republic, the treasury became fully operational in 1996 and was integrated into the budget execution process in 1997. All bank accounts operated by ministries and budget institutions, including extrabudgetary accounts, have been closed and their balances consolidated in the treasury single account maintained at the central bank. Control on spending by each ministry has been enhanced and monthly warrants are issued to ministries to limit spending to available resources, although problems with expenditure control resurfaced in 1998. In Turkmenistan, the treasury was established in 1994 to handle central and local government budget payments. Although the treasury has been operational since then, some improvements are needed, including the centralized recording of spending commitments and arrears. Communications with regional offices also require strengthening.

The coverage of the general government sector in the official fiscal statistics have varied widely among the five states. While most retain a republic or central government budget plus a local budget that is largely controlled and financed by the central government, there are, typically, a substantial number of extrabudgetary funds, including one or more social security funds, financing pensions, and other social expenditure. At the time of independence, a number of countries also maintained separate foreign exchange funds into which state-controlled export revenues flowed. All of the countries, except for Turkmenistan, have discontinued such funds. Recently, the task of compiling comprehensive fiscal data has been further complicated by the emergence of public investment programs, which are almost entirely foreign financed, often cover enterprise as well as general government activity, and may require collection of data from a wide range of sources.

Kazakhstan and the Kyrgyz Republic led the way in defining and measuring their general government sectors and producing relevant fiscal statistics. In Kazakhstan, the general government sector covers the central and local government budget sectors, as well as the operations of extrabudgetary funds and the quasi-fiscal activities of the banking system. Budget estimates are available on a comprehensive basis and the treasury data systems enable central and local government outcomes to be monitored regularly, with monthly fiscal outputs published with a lag of about four weeks. In the Kyrgyz Republic, the general government budget covers the central (republican) budget and the local governments, as well as the city of Bishkek budget. A number of independent extrabudgetary operations are outside this sector.12 The treasury produces both an economic and functional classification for the budget sector on a quarterly basis, with a lag of six to eight weeks. Revenue and expenditure arrears are recorded, although there is no quantification of quasi-fiscal activities, which have historically been relatively small.

In Tajikistan, the general government consists of the central budget, the local government budgets, and two extrabudgetary funds—the social protection fund and the road fund.13 A state foreign exchange fund also existed until it was abolished in mid-1995. Analysis of the general government sector suffers from the absence of timely and complete information on the two extrabudgetary funds. The budget presentations employed still follow the classifications of the former Soviet Union. The information on revenue and expenditure arrears is incomplete. There has been no quantification of quasi-fiscal activities, which the central bank has undertaken from time to time, typically by extending directed foreign exchange credits to state-owned enterprises. In Uzbekistan, there is a central and local budget and six extrabudgetary funds.14 The so-called hard currency budget was abolished and consolidated into the central government budget in 1996. Data for the state budget and extrabudgetary funds are compiled each month, with a delay of about three weeks. Financing data is often inadequately specified and mixed with “above the line” items. Information on revenue and expenditure arrears is incomplete. The central bank also undertakes quasi-fiscal operations that, to date, have not been quantified. The privatization and business funds are financed by revenues from privatization operations; the funds collected are lent at preferential rates to newly created private firms and privatized enterprises, Turkmenistan’s budget coverage is seriously deficient, with less than 50 percent of general government activity estimated to pass through the formal budget. One of the difficulties of interpreting the fiscal accounts is the often overlapping accounting of public enterprise and general government operations. The proceeds of public enterprises are often used to fund activities that would normally be funded by taxes. In an attempt to improve the budget coverage, the authorities now include estimates of the total revenues and expenditures of the four major extrabudgetary funds—the oil and gas development fund, the agriculture development fund, the transportation and communication fund, and the health fund—as well as the recurrent and investment expenditures of so-called self-financing ministries and enterprises in the consumer goods and power industry sectors. This is done for monitoring purposes only, though, with no treasury control over the funds’ transactions.

Most Central Asian states have started to adapt the budget presentations inherited from the former Soviet Union to international standards, although much work remains to be done in this area. Moreover, while revenue and expenditure data for budget operations are often available within a standard Government Finance Statistics framework, information on financing operations and public debt is typically still deficient. More work is also required in some countries to document revenue and expenditure arrears and quasi-fiscal activities. Again, Kazakhstan has taken the lead, with the 1997 budget sector accounts employing Government Finance Statistics classifications. In the Kyrgyz Republic, considerable progress has been made in budget presentation within the budget sector itself, with monthly data now published in both economic and functional classifications, although classification problems still exist. Data on revenue and expenditure arrears are also available. Uzbekistan and Turkmenistan do not prepare their budgets according to internationally accepted standards, although work is under way to rectify this.

Expenditure Prioritization and Reforms

Public expenditure reforms in the Central Asian states have focused on strengthening spending in social areas, notably health and education; phasing out subsidies; streamlining and more closely targeting the social safety net systems; reforming the pension systems; establishing means of providing unemployment benefits; and developing public investment programs.

The need to maintain basic health and education spending in real terms has received increased attention in recent years and specific programs are being developed to achieve this goal. In the Kyrgyz Republic, for example, education services are to be, at least, maintained in real terms and emphasis is placed on preserving high enrollment rates for primary and secondary education by, among other things, switching funding mechanisms from teacher-to pupil-based grants. In this regard, however, it should be kept in mind that quantity does not guarantee quality. Therefore, in the provision of education and health services, efforts are also being directed toward improving efficiency. In Kazakhstan, the authorities intend to introduce copayments on higher-level services and to consolidate underutilized facilities, while shifting spending priorities toward primary and preventive medicine.

Attention is also being given to improved funding mechanisms for health care. Kazakhstan established a new compulsory medical insurance fund in 1996. funded from local budget transfers and 10 percent of the payroll tax (formerly paid into the social insurance fund), to provide a basic package of health services. The Kyrgyz Republic established a medical insurance fund in 1997, that imposes compulsory levies on individuals to fund a guaranteed basic package of services. Turkmenistan has also established a voluntary medical insurance scheme that, at this stage, is used to subsidize the differential between pharmaceutical goods’ prices and the level of budget support. Medical treatment and hospital care formally remain free and available to all, although, in practice, free public service is limited and patients must seek private services.

All the Central Asian states have social safety net systems inherited from the Soviet Union. Benefits under these systems have been too costly relative to available domestic resources, as the benefits apply to the population at large rather than to its poorest segments. Reforms have started to streamline the social safety net systems. Notably, progress has been made in replacing across-the-board subsidies and price controls with assistance targeted to the most vulnerable groups. Kazakhstan largely removed subsidies for food, housing, transport, and other items in October 1994. Subsidies were replaced by targeted cash payments and further efforts are under way to improve the benchmarks for the social benefits payment system. The Kyrgyz Republic followed closely behind. A unified cash benefit was introduced in January 1995 to replace generalized subsidies for bread, as well as various child and other allowances, with about a fourth of the population benefiting. The authorities have recently set a goal of ensuring that the most vulnerable groups receive, at least, 60 percent of the benefits provided. A wide range of subsidies were removed in Uzbekistan during 1993–94,15 while central heating and public transport subsidies were abolished in 1996. Some services, including municipal services, continue to be subsidized, although at lower rates. Still, many price controls, including for most foodstuffs, remain in effect, with price levels below cost recovery. Efforts are under way to improve the targeting of generalized family allowances. Most food subsidies were removed in Turkmenistan in the period up until 1996. Relatively small subsides for bread and public transport remain, but are largely funded by state enterprises via cross-subsidization of products. Substantial general subsidies remain for gas, electricity, and water. Tajikistan replaced its general bread subsidy with targeted cash compensation payments to families in 1996, while simultaneously reducing subsidies for electricity and irrigation. The overall program, however, remained relatively unfocused, with substantial subsidies remaining for transport, housing, and utilities.

As shown in Table 8.2 public pension expenditures remain large relative to GDP in most of the Central Asian states.16 They are often funded by high payroll contributions by employers (with employees bearing a relatively small burden), and are often paid with delays. Although pensions are usually based on earnings, most schemes involve some redistributive element, with higher income earners implicitly subsidizing lower earners. There is often a minimum social pension available to those whose work record is insufficient to support an earnings-based pension. Despite the fiscal burden imposed on enterprises, the pension systems have become a crude safety net measure, providing a limited benefit to large sections of the population. In addition to revenue problems, which have contributed to severe pension arrears in several countries, as the population ages, generous early retirement provisions can be expected to raise the ratio of beneficiaries beyond that which can be sustained by contributors.17 Given these difficulties, all countries in the region have been turning their attention to pension reform. Most countries have expressed interest in a multipillar scheme involving a minimum public pension available on a universal basis, regardless of work record; a compulsory, fully funded contributions element; and, in some cases, voluntary contributions which may be used to increase the base pensions.

Table 8.2.

Public Pension Expenditures

(In percent of GDP)

article image
Source: de Castello Branco (1998).

Kazakhstan has led the way in this area, aided by the World Bank and the Asian Development Bank. At the beginning of 1998, Kazakhstan put into effect a pension reform program to transform the public pension system into a fully funded system. The existing pay-as-you-go public pension system was transformed into a defined contribution-funded system of individual pension accumulation accounts, coupled with a minimum pension guarantee by the state. Under the new system, all workers are required to save 10 percent of their earnings in accumulation funds.18 Investment of the assets of these funds is undertaken by a licensed asset management company. Retirees under the pay-as-you-go scheme and individuals unable to accumulate sufficient private funds are protected by a minimum pension guarantee, indexed to annual inflation. The retirement age is to gradually increase for both men and women. The Kyrgyz Republic developed a similar program in 1998, with World Bank assistance. The current pay-as-you-go system, which has become unsustainable, will be adapted to an annuity like system based on crediting payroll contributions to individual pension accounts. Benefits will be determined on the basis of an individual’s contributions, while granting an appropriate minimum pension. Both the retirement age and the minimum requirement for years of service to qualify for full benefits will be increased gradually. A similar approach is to be followed by Tajikistan. The age of pension eligibility is to be raised gradually, early retirement provisions tightened, and greater scrutiny given to pension increases to ensure that they are affordable. During 1999, the government plans to establish individual retirement accounts, also with technical assistance from the World Bank. In Turkmenistan and Uzbekistan, plans for pension reform are less advanced, although work is under way in Turkmenistan toward introducing a self-financing pension scheme. In Uzbekistan, the immediate focus has been mostly on stabilizing pension fund finances by collecting contribution arrears and reducing the number of pensioners receiving a full pension.

The need for payment of unemployment benefits has not been widely acknowledged in Central Asia, partly because of a reluctance to concede the breakdown of the Soviet system of lifetime guaranteed employment. Generally, employment fund expenditures are very low and cover mainly training expenditures and some very limited unemployment benefits, financed by a 2 percent payroll tax.

Countries have started to adapt their systems to deal with the unemployment problem. In Kazakhstan, for example, the payroll contributions to the employment fund have traditionally run at 2 percent of payrolls but the workforce coverage was limited. From the beginning of 1996, the standard contributions were extended to all sectors and, as of January 1997, previously exempted budgetary organizations are required to contribute 1 percent of payrolls to the employment fund. The benefit levels will also be improved, with the replacement rate (the ratio of the average unemployment benefit to average wages) expected to almost double to 30 percent.

Historically, the planning mechanisms in place in the Central Asian states placed a heavy emphasis on public investment, much of which, however, failed to achieve lasting benefits for the economy. As financial constraints have reduced essential maintenance expenditures, there has been a substantial overall decline in the public infrastructure of the Central Asian states. The World Bank, in cooperation with other international agencies, has assisted these countries in formulating and implementing coordinated public investment programs, focusing mainly on basic public infrastructure investments (including rehabilitation of roads, bridges and railroads, health, education, and social protection) and a number of projects in the public utilities, energy, and oil and gas sectors. So far, public investment programs have been established in Kazakhstan and the Kyrgyz Republic; the size of the public investment program in the Kyrgyz Republic exceeded 5 percent of GDP in 1998. In both countries, the public investment programs are financed mainly by foreign borrowing.

Tax Policy and Tax Administration Reforms

As discussed in Section IV, most of the countries in the region have experienced a significant decline in their revenue to GDP ratios. These declines have reflected the well-documented problems experienced by most transition economies—the shrinkage of most traditional tax bases relative to GDP; the problems of adapting tax structures to capture the changing nature of activity and the expanding private sector; and the inefficiencies of tax administrations, including weak compliance with governance requirements of a market economy.19 Special factors have also prevailed in the region, however, particularly regarding revenue generation from energy sector taxes. For example, payments difficulties for Turkmenistan’s gas exports, coupled with a heavy goods component in payments, have severely constrained the ability to raise revenue from the gas sector. Because gas is the largest single source of budget revenue, the country has been hit hard by these developments. Uzbekistan stands out as the only country in the region where the share of the general government sector has remained at over 30 percent of GDP. The durability of revenues reflects, for the most part, the smaller output decline, the less strict budget constraints faced by state enterprises, restrictions on cash withdrawal from banks, and the benefits to tax collections in periods of high inflation in the absence of adjustments to allowances for depreciation and other deductions to enterprise profits.

Tax policy reforms have generally advanced more than tax administration reforms (Table 8.3), albeit with considerable variation across the Central Asian states. Kazakhstan and, to a lesser extent, the Kyrgyz Republic, Tajikistan, and Uzbekistan have made considerable progress in reforming their tax policies. New tax codes were introduced in Kazakhstan (mid-1995), the Kyrgyz Republic (mid-1996), Uzbekistan (January 1998), and Tajikistan (November 1998). Tax reform has just started in Turkmenistan, which essentially retains the systems inherited from the former Soviet Union.

Table 8.3.

Summary of Tax Administration Reform

article image
Source: Ebrill and Havrylyshyn (1999).

On specific taxes, most progress has been achieved in the elimination of export taxes and excess wage taxes, with mixed progress in the introduction of appropriate value-added tax, excise tax, and personal income tax regimes, and in the unification of rates within various tax categories. Not surprisingly, least progress has taken place on aspects that are very difficult to implement either technically or politically, such as the introduction of new accounting systems and standards, the elimination of exemptions, the consistent use of a destination basis for value-added tax. and the effective taxation of small businesses.20

As the transition to a market economy proceeded, the new tax administrations had to shift from handling the taxation of a highly controlled state sector to the more difficult task of ensuring compliance by the emerging private sector and still state-owned but more autonomous enterprises. Tax administration reforms, by their nature, take more time and effort than changes in tax policy itself. It is, therefore, not surprising that progress generally has been slow. Reforms covered enactment of tax administration legislation consistent with the shift to market-oriented economies; management and organizational reforms, including the establishment of large taxpayer units; development of systems and procedures, including audit programs, taxpayer registration procedures, filing and payment procedures, and computerization; and collection, enforcement, and determination of the scope of noncompliance. Table 8.3 provides some indicators of tax administration reform in countries in the region. Kazakhstan again leads the way, with a strong legal framework, and planning and registration arrangements in place. The other countries in the region generally lag behind considerably in each of these fields, and Uzbekistan and Turkmenistan, notably, have no clear plans for reforms.


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See Havrylyshyn and others (forthcoming).


Key consumer items (bread, flour, macaroni, vegetable oil. milk, meat, eggs, sugar, tea. and soap) as well as electricity, water, heating, and some other utilities were rationed at controlled prices through the card system.


Most notably. Hour, bread, milk, cottonseed oil, rice, and sugar; as well as heating, rent, transportation, telecommunications, gas. oil, and water.


See EBRD (1997), pp. 176–213.


Monopolies that will be broken up by the restructuring and privatization of the associated enterprises.


The Promstroi, Agroprom. and Zhilsots Banks, the Savings Bank, and the Vneshekonom Bank.


For a detailed discussion of banking sector reforms in Kazakhstan, see Hoelscher (1998). The paper shows that although substantial reforms in the structure of Kazakhstan’s financial system had been accomplished by the end of 1997, the banking system had not yet begun to play an active role in financial intermediation.


In both countries, the banking sector restructuring was supported with World Bank assistance.


However, Kazakhstan gave banks five years to comply with the new prudential regulations.


A payment order was issued by the debtor to its bank, requesting that payment be made to the creditor. A payment demand order was issued by the creditor to the bank of the debtor, requesting the bank to make the payment from the debtor’s accounts.


The following extrabudgetary funds existed in the Kyrgyz Republic through 1998: pension fund, social insurance fund (providing mainly health-related benefits), employment fund (providing unemployment benefits), state property fund (managing the privatization program), medical insurance fund, agricultural development fund, industrial enterprise support fund, and housing fund. The state property fund is included in the general government budget as of 1999.


The social protection fund was established in 1996 as an amalgam of the pension fund, the employment fund, and the social insurance fund.


The employment fund, fund for replenishment of mineral resources and raw materials, road fund, Uzgosfund, social insurance fund, and fund for the Trade Union Federation Council.


Including subsidies on bread, flour, rice, eggs, meal, milk, sugar, tea, and some nonfood items.


See de Castello Branco (1998) for a more detailed description.


At end-1996, all the countries in question had retirement ages of 60 years for men and 55 years for women.


At end-1998. there were 13 accumulation funds, of which one is state owned. Workers are free to choose among these funds.


For a detailed description of changes in taxation, see Ebrill and Havrylyshyn (1999).