Kyrgyz Republic: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
07 Mar 2003
eISBN:
9781451821413
Language:
English
Keywords:
ISCR; CR; Kyrgyzstan; export; VAT; cost; Kyrgyz authorities; Kyrgyz economy; Kyrgyz goods; Kyrgyz market share; Kyrgyz electricity export; Real exchange rates; Imports; Exchange rate indexes; Competition
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This Selected Issues paper examines figures related to the key policy areas for the Kyrgyz Republic. Specifically, the paper studies the sources of growth, the cost competitiveness of export, and trade restrictions in the region, which are all linked to the achievement of the growth and poverty reduction targets of the National Poverty Reduction Strategy. It addresses the issues of agricultural taxation and fiscal aspects of the environment. The paper also focuses on a specific structural problem in taxation, and analyzes the fiscal aspects of environmental protection.

Abstract

This Selected Issues paper examines figures related to the key policy areas for the Kyrgyz Republic. Specifically, the paper studies the sources of growth, the cost competitiveness of export, and trade restrictions in the region, which are all linked to the achievement of the growth and poverty reduction targets of the National Poverty Reduction Strategy. It addresses the issues of agricultural taxation and fiscal aspects of the environment. The paper also focuses on a specific structural problem in taxation, and analyzes the fiscal aspects of environmental protection.

III. An Assessment of External Competitiveness5

A. Background

20. Since 1997, exports of gold have contributed significantly to economic growth. As the output of the Kumtor mine—the only large producer of gold—will begin to decline in the medium term and new gold projects are not likely to offset this decline, sustained growth will require strong competitiveness of other exports and domestic producers. This section investigates the competitiveness of the Kyrgyz economy.

B. Developments in Export and Import Market Shares

21. The literature on competitiveness suggests that a good indicator of competitiveness should measure the evolution in a country’s market shares of traded goods abroad and at home.6 Thus, changes in export volumes relative to the trading partners’ import volumes would be an appropriate measure for exporters’ competitiveness. On the import side, development of imports relative to domestic demand would serve as an indicator of domestic producers’ competitiveness. Due to the lack of volume data disaggregated by country, this analysis is limited to the evolution of dollar exports and imports.

22. Measured by export market shares, Kyrgyz nongold and nonenergy exporters have lost ground in their main markets since mid-1990s. Table III-1 summarizes the geographic distribution of exports to the main CIS and non-CIS markets. While economic growth picked up in the CIS region during the second half of the 1990s, Kyrgyz exports to main CIS countries declined and market shares were lost In Russia, the share of Kyrgyz goods in its imports declined from 0.16 percent to 0.12 percent between 1995 and 2001. In Kazakhstan, this share fell more, from 1.24 percent to 0.47 percent. Of the three largest trading partners in the CIS, Kyrgyz exports maintained their market share only in Uzbekistan. This was primarily due to the strategic importance of the Kyrgyz electricity exports to Uzbekistan (associated with the release of water from the Kyrgyz reservoirs for irrigation in Uzbekistan). Excluding energy, however, the Kyrgyz market share declined as much as in Kazakhstan. Meanwhile—thanks to gold exports—the market share in non-CIS countries remained relatively stable.

Table III-1.

Kyrgyz Republic: Geographic Structure of Exports. 1995-2001

(in millions of U.S. dollars, FOB prices)

article image
Source: Authorities

23. At home, the share of Kyrgyz goods in total domestic demand remained broadly unchanged between 1995 and 2001 (Table III-2). The share of imports of total domestic demand increased to 43 percent in 1998 from 31 percent in 1995. In 2001, however, importers’ market share had fallen back to 31 percent This suggests that the country’s domestic markets experienced strong import substitution following the sharp devaluation in 1998.

Table III-2.

Kyrgyz Republic: Functional Structure of Import, 1995-2001

(in millions of US dollars; CIF prices)

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Sources: Kyrgyz authorities.

C. Level of Competitiveness

24. Does the real exchange rate explain declining exports? A standard approach to address this question is to investigate whether the level of the real exchange rate is overvalued. In 1997, Krajnyak and Zettelmeyer estimated “equilibrium” dollar wages for a number of transition economies by regressing actual dollar wages on productivity and human capital in a panel of 85 countries. This approach was “inspired by the way in which macroeconomic practitioners often form a judgment of the international competitiveness of a country, namely by comparing the country’s average dollar wage with that of other countries which are considered “similar” in terms of the remaining determinants of profitability or unit cost, such as the quality and quantity of human and physical capital” (p. 9, Krajnyak and Zettelmeyer 1997).

25. According to this study, in 1995, the average dollar wage in the Kyrgyz Republic was at about 32-41 percent of the predicted “equilibrium” level, suggesting that the real exchange rate was highly undervalued (Table III-3). For comparison, dollar wages in Kazakhstan were at 55-80 percent and in Russia at 36-45 percent of the predicted equilibrium. Thus, based on the degree of undervaluation of dollar wages, the Kyrgyz Republic was more competitive than Russia and Kazakhstan. Overall, a competitiveness index7 suggested that Kyrgyz exports had a 20-30 percent competitive edge in its export markets in 1995. Building on this finding, the following section investigates how has the competitiveness developed since then.

Table III-3.

Kyrgyz Republic: Estimated Competitive Position in 1995 Compared to Selected BRO Countries

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Source: Krajnyak, K. and J. Zettelmeyer, 1997, “Competitiveness in Transition Economics: What Scope for Real Appreciation?” IMF Working Paper 97/149 (Washington, DC: Internatianal Monetary Fund).

Estimated for each country as a ratio of equilibrium to actual dollar wages divided by a trade-weighted average of the equilibrium to actual dollar wage ratios of tie country’s six main trading partners.

D. Developments in Competitiveness

26. Real exchange rate movements are reported in the IMF’s INS database for a number of countries. The measure is derived by using a ratio of consumer price inflation (CPI) in the reporting country relative to that in trade partner countries. The CPI-based real exchange rate index has some significant weaknesses, however, especially in transition economies. First, it includes a large share of nontradable goods. Second, significant shares of these countries’ consumer baskets are allocated to goods and services with prices regulated by the state (e.g., public utilities). Therefore, also other measures were used to reduce the potential bias. One alternative is the producer price (PPI) based real exchange rate. Producer prices may reflect better relative cost developments than consumer prices. Another alternative measure is a unit-labor-cost-based real exchange rate index which directly addressed the main cost component of production.

27. Internal real exchange rates—i.e., relative price of tradable and nontradable goods—have also been used in the literature to measure competitiveness. Usually, the price index in manufacturing is used as a proxy for the tradable goods sector and prices in agriculture as a proxy for the nontradable goods sector. If relative prices for nontradable goods increase, resources are expected to shift to this sector, which would lead to a deterioration of external competitiveness and a worsening of the trade balance. In the case of the Kyrgyz Republic, it may not be appropriate to use agricultural prices as proxies for nontradables because agriculture also produces tradable goods. An alternative approach—used recently in a study of Ukraine—was applied here. This approach uses the world market producer price index as a measure of the tradable goods prices and the domestic PPI (and CPI) as a measure for nontradable goods prices.8

28. Several real exchange rate indices were calculated vis-à-vis the United States (as a proxy for industrialized countries), Kazakhstan, Russia, and Uzbekistan (the main CIS trading partners). All indices suggest that the Kyrgyz real exchange rate (RER) depreciated vis-à-vis the U.S. dollar between 1995 and 2001. Recently, however, the depreciation has leveled off and the RER was broadly stable in 2000-01. In 2001, the CPI-based RER was approximately 40 percent below the 1995 level. The trend was similar for the RER index based on PPI—-the PP1-based index was 23 percent below its 1995 level. The relative unit labor cost index (RULC) vis-à-vis the US declined by 37 percent in 1996-2001.

uA03fig01

Exchange Rate Indices vis-a-vis-USA

Citation: IMF Staff Country Reports 2003, 053; 10.5089/9781451821413.002.A003

29. The competitiveness improved also vis-à-vis Kazakhstan. By 2001, the CPI-based real exchange rate had depreciated by almost 30 percent since 1995. At the same time, the PPI-based index was 18 percent below the 1995 level, and the RULC had declined by 46 percent. By all indices, the depreciation took place mainly in 1996-98.

uA03fig02

Exchange Rate Indices vis-a-vis-Kazakhstan

Citation: IMF Staff Country Reports 2003, 053; 10.5089/9781451821413.002.A003

30. The competitiveness of Kyrgyz exports in the Russian market deteriorated between 1995 and 1999 when measured by the PPI-based index. In contrast, CPI and RULC-based indices do not suggest weakening. Since 1999, however, Kyrgyz exports have become more competitive by all three indicators. In 2001, the CPI, PPI, and RULC-based RERs vis-à-vis Russia were about 10-20 percent below the 1999 level. Overall, the CPI and RULC-based RERs suggest a 30 percent depreciation between 1995 and 2001.

uA03fig03

Exchange Rate Indices vis-a-vis-Russia

Citation: IMF Staff Country Reports 2003, 053; 10.5089/9781451821413.002.A003

31. Relative to Uzbekistan, Kyrgyz goods became more competitive between 1995-99 when measured by both the CPI and the relative unit labor cost indices.9 However, the next two years saw a sharp reversal. Overall, compared to 1995, the CPI-based RER against the Uzbek sum had appreciated by 8 percent by 2001, while the relative unit labor cost index had depreciated by 36 percent.

uA03fig04

Exchange Rate Indices vis-a-vis Uzbekistan

Citation: IMF Staff Country Reports 2003, 053; 10.5089/9781451821413.002.A003

32. The Effective Real Exchange Rate Indices (REER) show the evolution of the CPI-based REER indices vis-à-vis the country’s top ten trading partners. This index is based on the IMF’s INS which assigns weights to countries’ currencies based on their 1995 trade flows. Since 1995, however, the Kyrgyz trade structure has changed substantially. Thus, using trade weights in 2000 was preferred. Also by these indices, Kyrgyz exports have become more competitive compared to 1995. For example, the unit labor cost index was 27 percent and the PPI-based index 12 percent below the 1995 level in 2001.

uA03fig05

Effective Real Exchange Rate Indices

Citation: IMF Staff Country Reports 2003, 053; 10.5089/9781451821413.002.A003

33. Following Berengaut et al. (2002), an index for the world market prices of tradable goods was calculated as a weighted average of the producer price indices of five major industrial countries (the United States, Germany, France, the United Kingdom, and Japan) with SDR weights during 1996-98. Based on this data and using the exchange rate, PPI and CPI data, internal real exchange rate indices (IRER) were designed (Table III-4). These indices suggest a significant real depreciation between 1995 and 1999 but some real appreciation thereafter. However, in 2001, the internal real exchange rate was still clearly below the 1995 level by both indicators.

Table III-4.

Kyrgyz Republic; Internal Real Exchange Rate, 1995-2001

(index, 1995=100; unless indicated otherwise)

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Sources: Kyrgyz authorities; Fund staff estimates and projections; and WEO database.

During the period January 1,1996-January 1,1999, the weights in the SDR basket were: 39 percent for the U.S. dollar, 21 percent for the German mark, 18 percent for the Japanese yen, and 11 percent each for the French franc and the pound sterling.

Period average.

uA03fig06

Internal Real Exchange Rates, 1995-2001

Citation: IMF Staff Country Reports 2003, 053; 10.5089/9781451821413.002.A003

E. Conclusions

34. This section suggests that the weak export performance since mid-1990s cannot be explained by competitiveness developments. In fact, Kyrgyz competitiveness improved when measured by a variety of external and internal competitiveness indicators. However, the data suggest that there were two distinct stages in real exchange rate developments, the pre-Russian crisis and post-crisis periods. The depreciation mainly took place in 1996-98 with stabilization or some appreciation starting in 1999. A closer look at the market shares during these two periods reveals that real depreciation did support exports. In Russia (until 1999) and Kazakhstan (until 1998), market shares were maintained, or even increased, although in Uzbekistan gains were achieved only in 1996. That export market shares were lost after the Russian crisis despite a strong level of competitiveness suggest that other factors played a role. A need to seek other than relative price explanations for the weakening of export performance since 1998/99 is also consistent with the fact that on the import side, the stronger competitiveness has indeed produced market gains since 1998/99.

uA03fig07

Share of Kyrgyz Non-gold. Non-Energy Exports in Total Imports, 1995-2001

Citation: IMF Staff Country Reports 2003, 053; 10.5089/9781451821413.002.A003

35. One possible hypothesis is that, in response to the stronger competitiveness of Kyrgyz exports, the neighboring countries increased trade restrictions. Indeed, such was the early response in many CIS countries following the Russian crisis. The next section investigates this issue.

References

  • Berengaut, J. et al., “An Interim Assessment of Ukrainian Output Developments, 2000–01,” IMF Working Paper 02/97, 2002 (Washington, International Monetary Fund).

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  • Lipschitz, L. and D. McDonald, “Real Exchange Rates and Competitiveness: A Clarification of Concepts and Some Measurements for Europe,” IMF Working Paper 91/25, 1991 (Washington, International Monetary Fund).

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  • Krajnyak, K. and J. Zettelmeyer, “Competitiveness in Transition Economies: What Scope for Real Appreciation?” IMF Working Paper 97/149, 1997, (Washington, International Monetary Fund).

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5

Prepared by Alexander Pivovarsky.

6

See Lipschitz, etal. (1991).

7

A ratio of equilibrium to actual dollar wages in the Kyrgyz Republic divided by a tradeweighted average of the equilibrium to actual dollar wage ratios in trading partners countries.

8

See Berengaut, et al. (2002).

9

The calculations used the official exchange rate.

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Cover IMF Staff Country Reports
Kyrgyz Republic: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Volume/Issue:
Volume 2003: Issue 053
Publisher:
International Monetary Fund
ISBN:
9781451821413
ISSN:
1934-7685
Pages:
98
DOI:
https://doi.org/10.5089/9781451821413.002

Exchange Rate Indices vis-a-vis-USA

Exchange Rate Indices vis-a-vis-Kazakhstan

Exchange Rate Indices vis-a-vis-Russia

Exchange Rate Indices vis-a-vis Uzbekistan

Effective Real Exchange Rate Indices

Internal Real Exchange Rates, 1995-2001

Share of Kyrgyz Non-gold. Non-Energy Exports in Total Imports, 1995-2001