Kyrgyz Republic: Selected Issues and Statistical Appendix
Author:
International Monetary Fund
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Publication Date:
07 Mar 2003
eISBN:
9781451821413
Language:
English
Keywords:
ISCR; CR; Kyrgyzstan; export; VAT; cost; Kyrgyz authorities; Kyrgyz goods; Kyrgyz export; Kyrgyz owner; transport cost; Exports; Imports; Trade barriers; Tariffs; Central Asia
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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.

IV. Restrictions on Foreign Trade in Central Asia: the Kyrgyz Perspective*

A. Introduction

36. The Kyrgyz Republic has one of the most liberal trade regimes among the CIS countries (Table IV-1), and it became the first CIS country to join the World Trade Organization (WTO) in 1998.10 Despite these arrangements and improvements in cost competitiveness, export developments have been weak. Still, foreign trade plays an important role in the economy; in 2001 exports accounted for 37 percent of GDP, while imports of goods and services amounted to 36 percent It appears that a significant obstacle to export-led growth has been the existence of numerous trade barriers imposed by the Kyrgyz Republic’s neighbors This chapter discusses these restrictions and analyzes their impact.

Table IV-1:

Trade Restrictiveness in BRO Countries, 2002 1/

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Source: Trade Policy Information Database; Kyrgyz authorities; and Fund staff estimates.

The information in this table is the latest available in 2002.

The overall rating consists of a 10-point scale which weighs a country’s simple average tariff and the extent of non-tariff barriers. Countries with a scale of 1 to 4 are considered to have broadly open trade regimes. A rating of 5 or 6 indicates moderate trade restrictions. Countries with ratings of 7 to 10 are considered to have restrictive trade regimes.

B. Structure of Trade

37. In 2001, gold produced by the Kumtor mine accounted for 40 percent of the country’s merchandise exports. The dependence on gold causes several problems. First, the country’s trade balance is subject to large swings because of gold price variations. Second, adverse natural circumstances (such as the recent landslide at the Kumtor gold mine) disturb gold production with significant impacts on overall economic activity. Third, Kumtor’s gold reserves will be exhausted by the end of the decade. Unless the export base is diversified, the decline in gold exports could lead to serious balance of payments problems.

38. The trade in energy (about 10 percent of exports) is restricted to CIS countries, and is mainly conducted under barter arrangements. The Kyrgyz Republic exports electricity to Uzbekistan and Kazakhstan in exchange for petroleum products, natural gas, and coal. Since this trade is not market based, its volume depends on cooperation among the trading partners. The barter trade with Uzbekistan in particular is subject to large swings. Since Uzbekistan imports electric energy to ensure the availability of irrigation water, a good rainy season can reduce the demand for Kyrgyz electricity drastically, and vice versa. In 2002, for example, energy exports reached only half of the 2001 level, due to favorable rainfall patterns in Uzbekistan. These trade arrangements in the energy sector make it unlikely to be a source of rapid export growth in the medium term.

39. The major markets for Kyrgyz exports within the CIS are Russia, Kazakhstan and Uzbekistan. Among non-CIS countries, Germany and Switzerland have been the destination for gold exports. China is the largest recipient of nongold exports among the non-CIS countries. The pattern for imports is similar. Russia, Kazakhstan and Uzbekistan are the main source of imports from CIS countries. Among non-CIS countries, a large part comes from the United States, Turkey and Germany. In recent years, however, China has covered an increasing fraction of the market, and it replaced the United States as the largest single source of Kyrgyz imports in 2001. Table IV-2 shows the dollar value of trade between the Kyrgyz Republic and its four biggest trading partners.

Table IV-2:

Percentage Share of Important Trading Partners in Imports and Exports, 1995-2002 (H1)

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Source: Kyrgyz authorities.

C. Regional Trade Arrangements

40. The Kyrgyz Republic is a landlocked country. Its longest borders are with Kazakhstan in the north and with China in the east. It also borders Uzbekistan and Tajikistan to the west and south, respectively. The country’s geographical location implies that all land-based trade must pass through the neighboring countries. This makes regional trade arrangements very important.

41. The Kyrgyz Republic is a member of the CIS Free Trade Area (FTA), created in 1992-94. Although in principle import duties are not imposed on intra-FTA trade, quantitative restrictions and foreign exchange controls have impeded trade among member countries in practice. Also, the coverage of individual goods under the FTA varies and substantial exemptions have been applied on a bilateral basis.

42. In 1996, the Kyrgyz Republic entered into a customs union with Kazakhstan, Russia and Belarus; Tajikistan joined in 1998. This arrangement has not functioned as a customs union, since the member countries have not been able to negotiate a common external tariff scheme. Under the customs union arrangement, a transportation agreement was reached in 1998, which in principle governs transit trade between the member states. This agreement states that transit trade shall be carried out on a permit-free basis. It also stipulates that transport vehicles used in transit, along with any passengers and cargo being transported, shall be exempt from all taxes and fees. The parliament of Kazakhstan has not, however, ratified this agreement.

D. Constraints to Trade with Kazakhstan

43. Kazakhstan is the Kyrgyz Republic’s single most important trading partner. In addition, all land-based trade with Russia and Western Europe must pass through its territory. This covers most of the total trade of the Kyrgyz republic (Table IV-3). Consequently, restrictions to trade imposed on the Kyrgyz Republic by Kazakhstan affect not just bilateral trade but also reduce Kyrgyz access to the rest of the world.

Table IV-3:

Dollar Value of Trade With Four Important Partners, 1995-2002 (H1)

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Source: Kyrgyz authorities.

Restrictions on Transit Trade

44. The transit trade through Kazakhstan is subject to several restrictions, some official and others unofficial. Officially, Kazakhstan issues a certain number of permits to the Kyrgyz Republic each year, and trucks holding a permit are allowed to pass through Kazakhstan without paying any transit fee. According to Kyrgyz data, trucks without a permit are subject to a fee of $15011. In 2001, Kazakhstan assigned 4500 such permits, but reduced the number to only 1000 permits in 2002. In addition to transit fees, trucks are required to be escorted by customs officials the whole way through the territory of Kazakhstan. The charge for a convoy ranges from $26-$260. Fees are also levied for the customs declaration form—$17; an electronic copy of the customs declaration form—$30; the services of customs brokers—$30; and passage over bridges—$2 to $25.

45. A fee of up to $500 is charged for excess weight. This prohibitive charge is reportedly applied to trucks even slightly over the limit. The axle weight limit is low by international standards, but Kyrgyz owners complain that their trucks are subject to even lower limits. Because of this restriction, trucks must typically carry a load that is far less than capacity, which reduces their profitability. However, adhering to the weight limit is not a guarantee against paying the fee, because there is considerable confusion at the local level about how the weight restrictions are to be interpreted.

46. Unofficially, trucks are subject to several charges as they pass through Kazakhstan’s territory. Bribes must reportedly be paid to officials at the oblast level as well as to the customs officers escorting the convoy. The longer the journey through Kazakhstan, the more are the layers of bureaucracy that have to be dealt with, and the greater the fees imposed.

Cost of Restrictions

47. It is difficult to estimate precisely the cost of transit trade restrictions. Many fees are not official, the official charges are subject to frequent changes, and often there is confusion on how to interpret the official decrees. A study by the ADB in 2000 concluded that a truck making the journey from Bishkek to Novosibirsk could expect to incur a total cost (excluding fuel and driver’s fees) of $1,598. Of this, $1,308, or 82 percent, would be collected in Kazakhstan. Of the cost incurred in Kazakhstan, an estimated 10-15 percent was estimated to be unofficial.

48. To examine whether these costs are large enough to pose an important impediment to trade, an estimate of the value of the average truckload is needed. The table below provides a breakdown, by value and tonnage, of Kyrgyz exports to Russia in 200112. From this data, we calculated the sales price per ton of each commodity. Weighting each commodity’s price by its tonnage provides an estimate of the sales price for a “representative ton.” Accordingly, the value of a representative ton of exports would be $542.

A “Representative Ton” of Exports to Russia in 2001

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Source: Kyrgyz authorities; and Fund staff estimates.

49. Transport costs as a percentage of the sales price of different truckloads of commodities are presented below. It is assumed that a truck carries 10 tons of cargo. Four individual commodities, which comprise the bulk of total exports to Russia, are examined: tobacco, cotton, fruits, and vegetables. The table presents the transport cost of a “representative truckload” (the representative ton multiplied by ten). “Representative Truckload B” adjusts for the fact that exports to Russia can be carried by either road or rail, and the latter category is excluded.13

Percentage Transport Costs for Different Cargos

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Source: Fund staff estimates.

Based on transport costs in Kazakhstan of $1,308.

Based on an estimate of $986 for transport costs that can be eliminated.

Comprising the categories “Fresh Tomatoes” and “Other Fresh Vegetables.”

50. Based on the ADB study, column 2 of the above table assumes that transport costs within Kazakhstan are $1,308 per truckload. The higher the price of the commodity per ton, the lower are transport costs in relative terms. The table suggests that the costs are significant (15 percent) even for a cargo of tobacco, the highest priced commodity. At the other end of the price spectrum, for a truckload of fruit the costs are prohibitively large (186 percent). For the two representative truckloads, the costs are estimated at 24 and 54 percent, respectively. Although the methodology is crude, the orders of magnitude suggest that extra transport costs indeed restrict trade. The table also provides estimates of the impact of eliminating $986 of the transport costs per truck. This estimate represents the sum of transit fees of $150, excess weight fees of $500, customs convoy charge of $140, and unofficial charges of $196. The remaining transportation cost for a representative truckload would decline to 6-13 percent of the sales price.

Transport Substitution From Road to Rail

51. Various restrictions on transit trade appear to apply only to goods transported by road. This makes transport by rail an attractive option as transport by air is not economical for more than a fraction of goods. The ADB staff compared the cost of transporting two commodities—jam and tomato paste—from Bishkek to Novosibirsk (Table IV-4). The comparison indicates that rail transport is more economical, although it takes longer and thus is not optimal for perishable goods.

Table IV-4:

Cost of Transport from Bishkek to Novosibirsk

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Source: Asian Development Bank.

52. There has been significant substitution from road to rail in recent years. Table IV-5 breaks down, by mode of transport, trade with Russia passing through Kazakhstan. In 1999, almost two thirds of exports to Russia transited through Kazakhstan by road. By 2001, this share had fallen to 16 percent. Also, the share of imports by rail declined from 56 percent in 1999 to 28 percent in 2001.

Table IV-5:

Transit Trade With Russia by Mode of Transport, 1999-2002

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Source: Kyrgyz authorities.

53. If substitution between road and rail were costless, then barriers to road transport would be less important. The main reason that trade restrictions have not led to a complete substitution from road to rail appears to be that rail transport enjoys economies of scale that places small exporters at a significant disadvantage. The low transport costs for rail transport apply only to exporters with enough products to fill a boxcar. Many Kyrgyz exporters do not export sufficiently large amounts for this. Neither are there trading agencies buying wholesale from small producers to fill boxcars. In addition, transport of perishable goods (fruits and vegetables) by rail is not as profitable as by road. Also, railroad capacity constraints (such as the lack of air-conditioned boxcars) impede substitution.

54. A back-of-the envelope calculation suggests that road transport could become competitive again with the removal of the charges noted in paragraph 50. The savings of $99 per ton would bring the cost of road transport down to $51 per ton, much closer to the cost of rail transport ($43 per ton), and with the advantage of a shorter delivery time (Table IV-5).

55. In 1999, Kyrgyz exports to Russia by road and rail combined amounted to $72.3 million. Given the real appreciation of the ruble against the som of 17.5 percent over the period, and assuming a unitary price elasticity, the change in competitiveness would imply higher exports, that is, $87.5 million in 2001l4. Since actual exports were only $61 million in 2001, the difference must be explained by other factors, including transit barriers. By this methodology, the impact of such factors amounted to $27.5 million in foregone exports to Russia in 2001, That is, the potential impact of trade restrictions could be as high as 45 percent of exports to Russia. This estimate is based on no impact from income elasticity on demand.

Restrictions on Bilateral Trade

56. Bilateral trade with Kazakhstan is important, since it is one of the Kyrgyz Republic’s largest trade partners. Although restrictions on bilateral trade are not as severe as those on transit trade, there are areas of concern. For example, seasonal tariffs and antidumping measures have been used to protect domestic markets. Since 1999 Kazakhstan has been imposing quotas and anti-dumping tariffs on Kyrgyz cement. In principle, the tariffs have been temporary, but they have recurred in 2001 and 2002; a tariff of 67.3 percent was in place for six months in both years. In 1998,364 thousand tons of cement were exported, falling to 60 thousand tons in 2001. Since 1998, the value of cement exports declined from $9.6 million to $1.4 million in 2001. This could be compared with an expected value for cement exports of $9.5 million in 2001 based on the methodology described above.15 Currently, cement exports to Kazakhstan have to be negotiated. According to the most recent agreement, an annual quota of 135,000 tons will be in effect at a price of $24.4 per ton.

57. Since 1998 Kazakhstan has imposed quantitative and tariff restrictions on clay-slate, butter and dairy fats, alcoholic and non-alcoholic beverages, tobacco and its industrial substitutes, power meters, and roofing materials. In addition, informal non-tariff barriers are reportedly imposed in border areas, with local authorities refusing access to bazaars for Kyrgyz agricultural products. The data on exports for several items confirms that restrictions have had a substantial effect. For example, exports of raw tobacco fell from $3.3 million in 1998 to $0.5 million in 2001, against an expected value of exports of $3.3 million, while sugar exports fell from $5.5 million in 1999 to $0.5 million in 2001, against an expected export value of $5.5 million.

58. The Kyrgyz authorities maintain that they have imposed neither tariffs nor quotas on Kazakh products since 1998. This year, however, a seasonal tariff of 20 percent was set on wheat imports for a period of two months, and a tariff of 20 percent was applied to flour imports for a period of 5 months.

E. Constraints to Trade with Uzbekistan

59. Uzbekistan is not a member of the Customs Union. However, trade with Uzbekistan is in principle governed by the terms of the FTA agreement among the CIS countries. Some progress has been made in eliminating tariff restrictions on bilateral trade in recent years.16 However, according to the Kyrgyz authorities the Uzbek market is largely closed apart from the barter trade in energy, including through high import tariffs on consumer goods. The Uzbek authorities also allegedly restrict their own exports to the Kyrgyz Republic, although Uzbek agricultural products and gasoline can be obtained in Kyrgyz markets such as Osh and Karasu. Recently, the Uzbek authorities cut off the bridge linking Karasu to Uzbek territory, to prevent access of goods to the Karasu bazaar.

60. Transit trade consists mainly of trucks carrying goods from one part of the Kyrgyz Republic to another through the Kyrgyz territory. Although the fee of $300 on Kyrgyz trucks in transit was supposedly abolished in 1999, police and border control officials reportedly still impose this fee.

61. Uzbekistan has a multiple foreign exchange regime, with a large spread between the official rate and the “street” rate. In November 2002, the official rate was 3 Uzbek sums to the Kyrgyz som, while the street rate was 12.6 sums to the som. Were Uzbekistan to liberalize its foreign exchange regime, Kyrgyz goods (which are mainly traded at the street rate) would become more competitive assuming that the unified rate would be set between the official and street rates.

F. Constraints to Trade with China

62. The Kyrgyz Republic has relatively free trade links with China. China’s recent membership in the WTO (and the steps it took during the accession process) resulted in lower import tariffs. The average import tariff is 16.4 percent, compared with 30 percent in 1992. Under WTO commitments, China will bring the average tariff further down to 10 percent. However, quotas and high tariffs are imposed on certain goods. Restrictions in two key areas are especially important to Kyrgyz exporters. First, the Kyrgyz Republic used to supply China with significant amounts of mercury (552 tons in 1999, with a value of over $2 million). Upon accession to the WTO, China reduced the tariff rate on this commodity from 8 percent to 5.5 percent. However, mercury is subject to licensing in China, and since 2001 the country has stopped issuing licenses to mercury importers. Imports of mercury are expected to resume after China approves a regulation streamlining the use of mercury by manufacturing industries. Second, China places quantitative restrictions on the import of cotton fiber, and charges a high tariff of 54 percent on extra-quota imports.

63. A major constraint to trade with China is the lack of good transportation infrastructure. A single road, which is in poor repair and tends to be blocked by snow in winter, links the two countries. China’s strong growth performance and its WTO membership would suggest that better transportation links could lead to a major expansion in trade. This could compensate to some extent for the loss of trade due to restrictions imposed by Kazakhstan and Uzbekistan. A better transport corridor is being planned to link Osh to Irkistan on the border with China, with financial support from the ADB.

G. Domestic Constraints to Trade

64. In addition to the restrictions imposed by its neighbors, the Kyrgyz Republic suffers from domestic constraints to trade. Bureaucratic procedures associated with trade are lengthy and cumbersome. Although the list of items subject to import and export licensing is short, comprising mainly military equipment and hazardous materials, various other kinds of certifications—for quality, safety, point-of-origin, etc.—are still required. Obtaining them is time-consuming, and breeds corruption. Refunds on VAT are another area in which reforms are vital as it can take several months to process refunds.

65. The customs authorities note that the lack of automation in clearance procedures is a major problem. All documents pertaining to any consignment are individually checked by the authorities, although the goods themselves are subject only to random sampling. Computerization would greatly speed up clearance procedures. By reducing the margin for human error and corruption, it might also help in eliminating misclassification and undervaluation pf imports, which are believed to be widespread.

H. Conclusions

66. Trade barriers imposed by the Kyrgyz Republic’s neighbors appear to have had a large impact on the country’s exports. This is true both regarding barriers to bilateral trade and restrictions on transit trade. There are also domestic restrictions which negatively affect trade capacity. It appears that many restrictions were imposed in 1998-99, suggesting that they were related to the Russian financial crisis and the subsequent shift in real exchange rates. The Kyrgyz Republic’s medium-term objectives of diversifying the export base and using exports as an engine of growth, would be substantially easier to attain if progress were made in eliminating these restrictions.

References

Asian Development Bank, “Trade and Export Promotion Study: the Kyrgyz Republic (TA3458 KGZ)” September 2000, (Manila).

10

In 1999, in accordance with WTO commitments, the country adopted a tariff structure consisting of 12 bands and a maximum rate of 50 percent. By 2002, this had been simplified to a tariff structure comprising only four bands, with a maximum tariff at 20 percent and an average tariff rate of 5.1 percent.

*

Prepared by Shekhar Aiyar.

11

This fee took effect in January 2002; the earlier fee was $300 per truck.

12

The table shows the breakdown of exports only for those goods for which quantities are measured in tons (omitting, e.g., cotton cloth, which is measured in linear meters). Such commodities comprised over 75 percent of exports in 2001.

13

Data on exports by road and rail are not available at the level of individual commodities, but in 2001 as much as 84 percent of total exports to Russia went by rail, and the balance by road. Because total shipments were 67 million, the total tonnage by road was only about 11 million. It was assumed that in the three largest categories—tobacco, cotton and fruits—only 4 percent of these commodities went by truck, which gives the correct total tonnage. Reweighting then gives the price of the new representative ton as $254.

14

This calculation also takes into account changes in the cross-rates between the som, the ruble and the U.S. dollar.

15

Based on a real depreciation of the tenge against the som of 3.3 percent and a unitary price elasticity for cement, and changes in the cross-rates.

16

In 2001, Uzbekistan abolished the collection of provisional excise taxes on imports from the Kyrgyz Republic.

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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