Definition of government activities

3. General government in the Kyrgyz Republic is largely defined in line with government finance statistics (GFS) principles, and is mostly covered in the budget process.

1.1.1

Until 2006, there was a four-tier structure of government—republican (central), oblasts (province), rayons (regional), and municipalities—with each level of government having its own budget³. The authorities, however, introduced a two-tier (republican and local) system of budgeting in 2007. The central government budget consists of a current budget, a special means budget, and a development budget. The government also prepares a consolidated state budget that includes the central government and local governments. The definition of government activity is consistent between the MoF and the central bank (NBKR). Some government activities, however, are still not covered in the budget. These include in-kind transactions⁴ and operations of certain state agencies, such as the state fund for economic development.⁵ It is also not clear whether the recently-created development fund should be treated as a general government unit or not.⁶

4. The general government currently includes the central and local governments as well as the social and medical insurance funds, two extrabudgetary funds (Box 1).

1.1.1

The social fund has its own budget, which is also approved by parliament. The social fund is regulated by the Law on the Social Fund of the Kyrgyz Republic and the Law on State Pension. It receives transfers from the budget (social contributions in respect of government employees) and contributions of private employers. The medical insurance fund is established under the Law on Medical Insurance and is a separate legal entity within the ministry of health. Its funding sources are: (i) transfers from the budget (to administer the state guarantee benefit scheme); (ii) transfers from the social fund (to administer the mandatory health insurance scheme for the working population); (iii) donor grants; and (iv) the receipts of copayments made by the respective beneficiaries.

Box 1.

General Government Budget in the Kyrgyz Republic, 2006

^1/Excluding grants and other interbudgetary transfers to local governments budget.

^2/Excluding payroll contributions from republican government budget and budgetary transfers.

^3/Excluding interbudgetary transfers republican government budget.

	In millions of Soms	In percent of GDP
General government in the Kyrgyz Republic comprises the following:
1. Republican government units covered by the budget	22,404.3	19.8
Of which: Current budget 1/	15,434.9	13.6
Special means budget	2,051.8	1.8
Development budget	4,917.6	4.3
2. Republican government units with individual budgets	4,098.3	3.7
Social Fund 2/	3,915.4	3.5
Medical insurance fund (part not covered under republican budget and social fund budget)	182.9	0.2
3. Local government 3/	6,794.8	6.0
General government budget (1+2+3)	33,297.4	29.5

^1/Excluding grants and other interbudgetary transfers to local governments budget.

^2/Excluding payroll contributions from republican government budget and budgetary transfers.

^3/Excluding interbudgetary transfers republican government budget.

View Table

	In millions of Soms	In percent of GDP
General government in the Kyrgyz Republic comprises the following:
1. Republican government units covered by the budget	22,404.3	19.8
Of which: Current budget 1/	15,434.9	13.6
Special means budget	2,051.8	1.8
Development budget	4,917.6	4.3
2. Republican government units with individual budgets	4,098.3	3.7
Social Fund 2/	3,915.4	3.5
Medical insurance fund (part not covered under republican budget and social fund budget)	182.9	0.2
3. Local government 3/	6,794.8	6.0
General government budget (1+2+3)	33,297.4	29.5

^1/Excluding grants and other interbudgetary transfers to local governments budget.

^2/Excluding payroll contributions from republican government budget and budgetary transfers.

^3/Excluding interbudgetary transfers republican government budget.

5. The use of special means (user charges and fees) complicates the definition of boundaries of the general government sector and its consistent coverage in the budget process.

1.1.1

According to the Regulation on Special Means and Deposited Amounts of Budget-Financed Institutions,⁷ special means are proceeds received by budget institutions themselves in addition to funds allocated to them through the budget (both current and development budgets). Special means could be generated by obtaining a permit and are defined as revenues of budget-financed institutions resulting from the sale of products, conducting of works, provision of services or other types of activities. Decisions on the use of special means are made by the managers of the respective budget-financed institutions. A separate annex to the annual budget (called Special Means Budget) shows the revenue and expenditure estimates for each category of special means. The treasury is allowed to open separate ledger accounts for deposit and use of special means revenues by budget institutions.⁸ Expenditure under special means is financed by the special means revenues of the corresponding fiscal year as well as any unspent balance available at the close of the preceding year. Some of the activities funded through special means fall under the category of market-based activities.⁹ However, the current regulations do not clearly distinguish between nonprofit/nonmarket institutions that should be included in the general government sector and nonprofit/market institutions and public corporations that should be included in the broader public sector. This complicates the definition of boundaries between the two for identifying the coverage of the general government in the budget process.¹⁰

6. The relationships between government and public nonfinancial and financial corporations are not always clear.

1.1.4

Public nonfinancial and financial corporations are guided by the same legal framework that applies to private corporations.¹¹ However, in practice some public corporations perform QFAs without an explicit statement of their related costs. In the banking sector, the state-owned commercial bank, Ayil Bank, lends at below-market interest rates to rural households and enterprises (see paragraph 13). In the energy sector, which is mostly owned by the government, electricity tariffs are set at below cost-recovery levels (see paragraph 8). These companies do not receive direct transfers from the government.

7. The government is extensively involved in financial and nonfinancial sectors such as energy, mining, oil and gas, banking and telecommunications.

1.1.4

In the energy sector, the government owns more than 80 percent of the shares in each of the seven generation, transmission, and distribution companies. In the mining industry, the fully state-owned company, Kyrgyzaltyn, operates one gold mine and has equity ownership in several others. In the oil and gas sector, the government owns 85 percent of Kyrgyzneftegas. In banking, the government owns 100 percent equity in two commercial banks, Ayil Bank and the Savings and Settlement Company (SSC). In telecommunications, the government owns 90 percent of the fixed line communication monopoly, Kyrgyztelecom.¹² The government is planning to privatize some of these companies, particularly in the energy sector. While specific policy guidance is provided in some cases by the associated sectoral line ministries, the state property committee (SPC) is entrusted to oversee the management and privatization of state equity holdings. However, in practice there is no clear monitoring framework of state-owned enterprises or a comprehensive strategy to maximize the value of the government’s equity holdings, apart from the design of privatization programs that have been only partially implemented. Although the SPC receives annual reports from state-owned joint-stock companies, it does not consolidate the information or submit a standard report to the government and/or parliament.

Government relations with nonfinancial public corporations and the private sector

8. QFAs by state-owned electricity firms are substantial.

1.1.4

The government sets the tariffs of electricity firms at below cost-recovery levels. The quasi-fiscal deficit of the sector was estimated by the World Bank to range between 5 percent to 6 percent of GDP in 2006. As a result, electricity firms delay maintenance and investment spending and accumulate arrears among themselves and with the state tax committee (STC) and the social fund.¹³ Tax authorities have attempted to seize the assets of electricity firms, but the government has issued decrees that prohibit this.¹⁴ The complex array of distortions stemming from the tariff structure has made it difficult to hold managers of state-owned enterprises accountable, although this has not stopped the government, through the SPC, from recommending the firing of top executives. The extent of QFAs is not included in budget documentation. However, efforts have been made to make it transparent, and the size of this quasi-fiscal deficit, although not the potential fiscal implications, is presented in the medium-term budget framework (MTBF).

9. Arrangements regulating profit transfers from state enterprises to the budget are clear.

1.1.4

The Law on Joint Stock Companies requires the distribution of at least 25 percent of net profit as dividends unless decided unanimously by shareholders. The exact profit transfer from state enterprises to the budget is approved by shareholders with the recommendation of the Board of Directors. In practice, state enterprises have transferred around 25 percent of their net profits.

10. The legal framework for privatization is clear, and privatization processes and payments of receipts to the budget are broadly clear.

1.2.5/4.2.4

The Law on the Privatization of Public-Owned Property and the Civil Code provide the legal basis for privatization. In addition, the government formulates a privatization program, which it submits to parliament for approval. The government is in the last of its four-stage privatization program which involves the sale of large strategic firms that have been corporatized. In 2006, parliament approved the latest program, which contains the broad conditions, criteria, and timeframe of privatization as well as a list of entities to be privatized, with the caveat that the government is allowed to amend this list. The program also enables the government to introduce a “golden share” that gives it the right to veto decisions made by the general meeting of shareholders, when it deems necessary in order to protect state interest.¹⁵ The SPC oversees the overall privatization process, while the program provides for the creation of specific sectoral commissions involving the relevant ministries and the SPC as members. Each commission decides on the exact terms of the process, including the privatization method. Privatization proceeds are reflected as financing in the budget. In practice, government has had difficulty abiding by the timeframe of the program due to some resistance to the sale of state-owned assets to foreigners and lack of interest from investors.

11. Laws and processes governing government regulation of the nonfinancial private sector are not always clear and open.

1.1.5

Laws and regulations are often fraught with contradictions, giving regulators and government inspectors some discretion. Licensing and business registration procedures are long and cumbersome. According to the International Finance Corporation’s Doing Business Index (2008), the Kyrgyz Republic is rated 94 out of 178 countries in the composite index of the ease of doing business.¹⁶ The government has, however, taken steps to simplify the complex regulation system. The Law on Inspection Procedure in Conducting Inspections of Businesses, passed in June 2007, provides a legal framework for regulation of commercial entities by authorized bodies and limits the scope for discretion. The law outlines the rights of businesses, including an explicit provision that vagueness in legislation cannot be used against them. The anti-monopoly committee regulates corporations with large market shares, except for those that are in energy and communications and are directly handled by their respective sectoral ministries. A Law on Competition provides the legal basis for regulation of monopolistic activity.

Government relations with the central bank and public financial sector

12. The NBKR is legally independent, and it has no fiscal role.

1.1.4

The NBKR is guided by the Law on the National Bank of the Kyrgyz Republic which clearly specifies the relationship between the government and the NBKR. The law prohibits the NBKR from making loans to the government and other state bodies. The Law also specifies that 70 percent of profit after deductions for required reserves be transferred to the government budget. Deposits of the government are remunerated at market interest rates. In turn, the NBKR charges the government a minimal fee for the services it provides, while its claims on the government are also linked to market interest rates.¹⁷ The chairman and members of the management board are all appointed by the president for a term of seven years and only the chairman’s appointment needs to be confirmed by parliament. Operationally, there has been stability in the tenure of the chairman. Turnover among members of the management Board has been higher. The COA is required by law to audit not only the NBKR’s administrative expenditures, but also the monetary policy and international reserves. This has allowed parliament to scrutinize the NBKR’s accounts and make proposals that could threaten its independence.¹⁸

13. Public financial corporations do carry out some QFAs.

1.1.4

The government fully owns two commercial banks, Ayil Bank and the SSC. Ayil Bank, which accounts for 11 percent of total credit in the banking system, charges average loan interest rates of around 15 percent compared to 34 percent among microfinance institutions and 20 percent among commercial banks although it does not receive any direct subsidy from the budget. Previously named the Kyrgyz Agricultural Finance Company (KAFC), Ayil Bank was created in 1997 to increase credit in the rural sector. Despite the lower-than-market rate, the bank remains profitable and has a relatively low share of nonperforming loans, owing to its funding from onlending by the government of concessional World Bank and ADB loans. The government envisions that two-thirds of Ayil Bank will be privatized by the end of the year. The SSC, previously owned and operated by the NBKR, is the bank with the most branches and undertakes the provision of payment services by and to the government, particularly the collection of utility payments and release of salaries and transfers.¹⁹ It accounts for 3 percent of total credit in the banking system. SSC is profitable, earning most revenues from fees collected on these services to the central treasury and state-owned utility companies. No government unit quantifies the cost of or reports on these banks’ QFAs. The NBKR supervises both banks, like any other commercial bank.

Fiscal management relations among the branches of government

14. The fiscal roles of the executive, legislative, and judicial branches are defined in the constitution and relevant laws.

1.1.2

The powers of the president and the legislative, executive, and judicial branches are defined in Chapters 3, 4, 5 and 7 of the constitution, respectively.²⁰ Parliament has the prerogative of approving the republican budget. The fiscal powers and responsibilities of parliament and the executive branch are also set out in the Law on Basic Principles of Budget. Under Article 18 of this law, if the annual budget law is not approved by the start of the fiscal year, the government is authorized to undertake monthly expenditures within the limits of one-twelfth of the annual budget estimates for the corresponding fiscal year.

Fiscal management relations among different levels of government

15. The responsibilities of different levels of government are not clearly defined and can vary from year to year.

1.1.3

Although various laws refer to a two-level budget (republican and local), none give a clear definition of a local government.²¹ As a result, the oblast and rayon levels will change from being part of the republican budget (current 2007 two-tier budget) to having their own budget (planned 2008 three-tier budget—one republican and two-level local). Although the legal framework defining revenue responsibilities exists,²² it does not provide adequate guidance on the determination of revenue shares, and its explicit definition of the revenue base is occasionally superseded by the annual republican budget. Every year, the republican budget law specifies the revenue base and tax shares of different levels and types of local governments. The process of determining the base and shares within the MoF is not transparent and changes can occur each year, despite a provision in the law restricting revisions of shares to once every three years.²³ The expenditure assignments for lower levels of government have a legal basis,²⁴ although in practice, they are not always implemented.²⁵ Arrears in local governments exist, and this is recognized in the annual republican budget, which requires arrears from the previous year to be financed within the current year’s budget, with priority to payroll and social fund contributions. Such arrears are not, however, formally monitored by the MoF. The law provides for three kinds of budgetary transfers: categorical, equalizing, and matching grants. Government instructions guide the determination of transfers.²⁶ In practice, grants could also be distributed via nontransparent offsets in the central level as in the case when the republican budget covers the local government’s arrears in utility payments. Local governments are legally allowed to borrow, with the consent of the local parliament and the MoF, but the MoF has yet to formulate the criteria that will guide the decision to approve borrowing.²⁷ In practice, there has been no record of local government borrowing.

The legal and administrative framework for budget management

16. The legal framework for management of public funds is generally clear, but risks fragmentation due to a division of fiscal management functions between two ministries.

1.2.1

The key principles for management of the republican and local budget processes are set forth in the Law on Basic Principles of Budget, the Law on Financial and Economic Basis of Local Self-Government, the Law on the Principles of Treasury and various government decrees. The annual budget law establishes fiscal targets and constraints.²⁸ The Law on State Social Insurance and the Law on State Pensions regulate the Social Fund. The MoF plays a dominant role in fiscal management, but its role is likely to change, and some of its functions could overlap with that of the newly created ministry of economic development and trade (MEDT).

17. Foreign-financed development expenditure is not well integrated with budgetary operations, which complicates monitoring and fiscal management.

2.1.5

As noted in Box 1, the social fund and the medical insurance fund are extrabudgetary funds, which are regulated through respective laws. General government expenditure financed from special means revenues are also approved by parliament in the budget. However, the public investment program (PIP) financed by donors is shown separately in the budget documents and is not fully covered by treasury operations. Information on projects financed by donors is incorporated in budget documents. The annual law on the budget determines the overall budget deficit target including information about projects to be financed by donors.

The legal and administrative framework for tax policy and administration

18. The legislative basis for taxation is clear and is comprehensive but the scope for interpretation and discretion by tax officials is significant.

1.2.2

The tax and customs codes provide the legal basis for taxation and exemptions. The government has drafted a new tax code, which would integrate tax rules into a single code, simplify provisions, and remove inconsistencies. Within the existing code, the business tax for small business has been simplified, which should help reduce compliance costs, reduce incentives to avoid tax payments, and increase collection rates.

19. Tax exemptions are large in number, and tax expenditures are not reported.

1.2.1/3.1.3

Nevertheless the number of exemptions is not inconsistent with tax rules of other countries. The state customs committee (SCC) and the STC estimate the value of foregone tax and customs revenues due to exemptions in their periodic reports to the MoF. These estimates are not made public.

20. Tax administration is clearly defined and is mostly coordinated with overall fiscal management. The STC and the SCC now are independent entities with ministerial status.

1.2.2/4.2.6

The STC and the SCC generally are organized by function. The STC has a special unit to administer large taxpayers and should continue to enhance its capabilities. The STC has a department responsible for internal compliance with tax legislation and regulations. It also has a unit providing taxpayer services, which maintains a website and periodically places information for taxpayers in the mass media. Employees of the STC are subject to the code of conduct designed for all public servants and employees of the SCC are governed by the Law on Serving in Customs and the Customs Disciplinary Charter.

21. Taxpayers’ legal rights are largely defined.

1.2.2/4.2.6

The tax code contains a taxpayer bill of rights, used as the basis for 15-20 taxpayer appeals per month, as reported by the STC. However, the appeals procedure should be more fully described in the tax code. There are no separate tax tribunals. Appeals are handled by the civil courts, and the process is lengthy, discouraging the use of the appeals process.

Public servants’ code of behavior and anti-corruption activity

22. Some initiatives have been taken to regulate the conduct of public servants.

4.2.1

The Kyrgyz Republic participates in the Istanbul Anti-Corruption Action Plan. It has established a national agency for the prevention of corruption,²⁹ which is responsible for the assessment of the effectiveness of anti-corruption measures undertaken by government authorities. However, in practice, comprehensive and effective anti-corruption measures have yet to be undertaken. A draft anti-corruption law is being prepared, which will cover all public servants and prescribe a code of ethics for them.

The macroeconomic framework and policy basis for the budget

26. Although the overall balance of general government is the main indicator of the fiscal position in the budget, its monitoring during the year could be improved.

3.2.3

The main focus of fiscal policy formulation in the budget is the overall deficit of general government. However, lack of a comprehensive and consolidated reporting of general government fiscal operations during budget execution creates difficulty in monitoring of the deficit target, particularly due to the exclusion of information about projects financed by donors.

27. Budget forecasts are clearly presented in the budget, and their underlying macroeconomic assumptions are provided through an explanatory note.

2.1.2

The macroeconomic framework for the budget year and forecasts for next three years are prepared by the economic and financial analysis and forecasting department in the MoF. An explanatory note on the macroeconomic framework underpinning the budget is presented, which includes the key forecast figures and underlying assumptions. However, information on the methodology and forecasting models used are not explained in the budget. Also no external scrutiny or analysis of the macroeconomic framework or its underlying assumptions takes place.

28. The macroforecasts and their underlying assumptions come too late in the budget process to feed into the MTBF and provide timely guidance to the ministries and budget units.

2.1.2/4.1.1

There are separate processes for preparing the macroeconomic framework and the MTBF. While the MoF prepares the MTBF in April for submission to the coordination council by May 1 each year, the macroeconomic framework is finalized only by end-June (see Box 2 above). This sometimes necessitates changes to the MTBF and line ministries/budget units are informed of the updated macroeconomic indicators only by end-June to adjust their draft budget proposals.

29. With the recent creation of the MEDT, the government agency responsible for preparing macroeconomic forecasts is likely to change.

2.1.2

The MEDT has been created by a government decree with the mandate to prepare macroeconomic forecasts and formulate the fiscal policy of government.³⁵ It could not prepare the macroeconomic forecasts in time for the 2008 draft budget, which is based on the MoF forecasts. However, the MEDT is likely to be the lead agency responsible for preparation of the macroeconomic forecasts from the 2009 budget onwards.

Medium-term planning and analysis of fiscal risks

30. A statement on medium-term fiscal policy objectives is not included in the budget document, and fiscal sustainability issues are not presented.

2.1.2/2.1.4

However, the MTBF document includes medium-term fiscal targets, and the MoF plans to include a medium-term fiscal policy objective statement in the 2009 budget. Although some of the existing policy commitments of the government have a future financial impact, the fiscal sustainability of such policies and programs are not systematically analyzed and presented. One such example is the pension liabilities and unemployment and other benefits under the Law on State Social Insurance and the Law on State Pension. The lowering of the retirement age in 2007 has created additional liabilities, which are planned to be met through transfers from the budget and improved contribution collection. It is unclear, however, how such expenditures would be financed in later years in a sustainable manner.

31. There is an MTBF which is updated in May/June each year, but its projections are yet to be based on fully costed expenditure policy proposals.³⁶

2.1.3

The government just issued a 2008-10 MTBF (see Box 3). The annual budget includes estimates for two forward years under broad revenue and expenditure categories. However, the costs of government policies and programs are yet to be tracked with an acceptable degree of accuracy to serve as the basis for a well-developed forward estimates system and systematic preparation of the MTBF. Moreover, the current and capital budgets are still not well integrated. Capital expenditure is split between the special means budget and the development budget, and there is no systematic assessment of the future recurrent expenditure requirements of the present capital investments, including those that are financed externally.

32. No fiscal rule is used in the budget process.

2.1.2

There are no explicit fiscal rules guiding fiscal policy formulation and implementation.

33. Estimates of the cost of new initiatives and of ongoing government policies are not clearly distinguished in the budget documents.

2.1.3

There are, however, general statements on new government priorities and large expenditure programs in the MTBF document (which is approved by the government, but not presented to parliament).

34. The budget documents do not include an analysis of the sensitivity of budget estimates to changes in economic variables and contain no information or discussion of fiscal risks.

2.1.4/3.1.3

There are no data or discussion of fiscal risks related to macroeconomic variables or QFAs. No statement describing the nature and significance of government contingent liabilities, including a statement on government guarantees, is included with the budget. There is also no system of systematically assessing the risks associated with explicit government guarantees, including the probability of guarantees being invoked and their possible fiscal impact.

Clarity of control of budget execution

35. Basic accounting procedures are in place, with some limitations, and expenditure control is mostly focused at the payment stage.

2.2.1

Accounting and reporting on budget execution are discussed below (paragraphs 44-46). The treasury is responsible for executing both the republican and local budgets. It has a central treasury unit and 65 regional treasury units subordinated to the central treasury. The treasury is regulated under the Law on the Principles of Treasury and other regulations/instructions such as the Instructions on Revenue Management, the Instructions on Expenditure Management, and the Instructions for Opening and Management of Accounts in Local and Territorial Treasuries. The treasury applies expenditure controls only at the payment stage when it processes the payment requests received from budget institutions. However, there is partial ex ante control on allocation of cash resources to budget units through the issuance of monthly financial plans by the treasury.

36. There is a lack of proper commitment controls in the Kyrgyz Republic, and expenditure payment arrears, which sometimes emerge, are not systematically reported.

2.2.1

There is no system of recording and controlling commitments either by the treasury or by budget institutions, although the latter are supposed to report on commitments³⁷. The only information available to the treasury are the monthly requests for financing received from the budget institutions.³⁸ If the monthly financial plan issued by the treasury falls short of actual cash requirements by budget institutions, it sometimes leads to payment arrears. There have been instances of arrears being accumulated, particularly for utilities payments, by budget institutions using their appropriations for other purposes. Such arrears are not systematically tracked and reported.

37. The treasury controls the cash balances of most government bank accounts and the bank account structure is largely integrated.

2.2.1

Most bank accounts used to process budget receipts and payments are controlled by the treasury, with some exceptions.³⁹ The treasury controls two current accounts (one for so-called budgetary transactions and the other for special means transactions of the republican and local government units), one foreign currency account, and 49 other special accounts.⁴⁰ Although each of these accounts hold individual cash balances, the total cash balance under all these accounts is taken as part of the government’s consolidated fund.

38. Financial management practices are mostly coordinated, but cash expenditure forecasting could be more usefully linked to the central bank’s liquidity management.

2.2.1

The preparation of monthly financial plans by the treasury are coordinated with the revenue department, the debt management department, and the PIP division in terms of updating forecasts of revenue, loan disbursements, and flow of grants/credits for externally funded projects, respectively. However, the treasury’s monthly financial plan and cash forecasting system is yet to contribute effectively to the NBKR’s liquidity forecasting system by providing a systematized schedule of payments for the week ahead.⁴¹

39. Although some progress has been made, the internal audit function is yet to be fully developed.

4.2.5

Currently, the financial control unit (established in April 2007) within the MoF carries out inspections in ministries, budget units and regional treasury units mostly focusing on legal compliance of expenditure. Internal audit units have also existed in a number of line ministries for some time, generally due to donor conditionalities.⁴² However, there is a lack of legal and regulatory framework governing internal audit, and the capacity continues to be very low for application of modern audit practices. The government has taken some recent initiatives for internal audit reform, which includes the establishment in 2006 of a new division of internal audit and accounting methodology within the MoF, submission of a draft internal audit law to parliament⁴³, preparation of draft standards for internal audit and an internal audit manual, and training workshops for accountants and auditors.

40. Procurement rules mostly conform to international best practice, but some problems with their implementation remain.

1.2.4/4.2.3

The 2004 Law on Procurement provides the legal framework for procurement by government agencies. Under the law, all budget institutions are required to have procurement units manned by qualified staff, and contracts above a certain threshold amount⁴⁴ are subject to approval by a tender commission following competitive procurement procedures. The state committee on public procurement (SCPP) monitors the implementation of procurement rules in budget institutions. Its website (www.goszakupki.gov.kg/english) disseminates information about tenders and contract awards. Although there is a sound legal framework for procurement, its implementation remains weak. Problems with the existing public procurement arrangements have been documented in some depth in other reports, and include: few procuring entities have qualified procurement staff; others use a permanent tender commission, which is not consistent with the prevailing law; difficult access to bidding documents, which are of poor quality; short bid preparation time allowed to bidders; cancellation of contract awards without justification; and frequent amendments to contracts during contract performance.⁴⁵ Moreover, the controls are weak for contracts below the threshold amount for tenders, and there is a risk of splitting contracts to escape scrutiny of large purchases by the ministerial tender commissions.

41. Despite recent initiatives, the existing civil service employment arrangements are still problematic.

4.2.2

Recent initiatives include the enactment of a Law on Civil Service and the creation of a civil service agency in 2004. The definition of civil servants under this law, however, does not cover all categories of employees who are paid salaries through the budget.⁴⁶ The government sector continues to have several separate wage systems under a fragmented regulatory framework for various categories of employees in different ministries and budget institutions. Although the percentage of civil service appointments bypassing an open competitive process has decreased markedly in recent years, the scope for discretion in recruitment and promotion continues, due to complex and non-standardized rules. The other problems documented in recent studies of the civil service include: problems in recruitment and retention of qualified staff; ad hoc setting of pay rates for civil servants, with pay supplements accounting for up to 50 percent of total compensation; lack of a comprehensive database of civil servants; and the payroll data not being linked to personnel records.⁴⁷

clarity of internal control and independence of tax administration

42. The tax authorities are working to improve internal monitoring and control mechanisms.

4.2.6

Although there is little computerization (especially in regional tax offices), the STC signed an agreement with the Asian Development Bank in August 2007 governing a US$10 million grant to modernize and computerize the tax office. As part of this initiative, the committee will establish a call center to provide information, answer questions, and help register taxpayer concerns. An internal audit function exists, and there are plans for internal audits of field operations.

43. The STC is given legal protection from political interference.

4.2.6

The STC is organized independent of the MoF and has ministerial status. It publishes information on its website (www.sti.gov.kg).

Accounting and reporting on budget execution

44. The accounting system is capable, with some difficulty, of producing accurate in-year reports on state budget executed by the treasury.

2.2.1

The central treasury and regional treasury units produce monthly reports on republican and local government budget outturns respectively. The monthly budget execution reports are published on the treasury’s website (www.kazna.gov.kg) by the end of the following month. These monthly budget execution reports are not derived from the accounts of budget institutions, but from the treasury’s accounting records.⁴⁸ The accounting system, however, does not provide accurate consolidated data on budget arrears in a timely manner. Arrears data are supposed to be maintained by the budget institutions themselves, but are not consolidated and reported for centralized decision-making.

45. The treasury follows a single-entry accounting system, and its chart of accounts differs from that followed by budget institutions (see Box 4).

4.1.2

The Treasury and budget institutions essentially follow two different accounting systems, and there is a lack of consistency between the two. While the treasury’s accounting system incorporates the new budget classification (introduced in January 2007), the chart of accounts for budget institutions does not include budget classification codes. This creates difficulty for reconciling the two sets of accounts and for ensuring that the accuracy of the reports is of an internationally-accepted level and quality. The practice of making accounting entries after the receipt of bank statements also defeats the purpose of reconciling the general ledger with the bank statements, and conflicts with a basic principle of modern accounting. The accounting methodology department under the MoF is currently developing a draft unified chart of accounts with donor assistance, which would incorporate the new budget classification and be used by the treasury as well as budget institutions.

46. Fiscal reporting appears to cover most if not all general government.

3.1.1/3.1.4

The treasury system covers both the republican and local government budgets. Several off-budget funds have been progressively integrated into the treasury system. The special means revenue and expenditure transactions of budget institutions are also processed by the treasury. However, significant part of general government operations still remain outside the control of treasury. These include externally-financed project expenditures and some internally-financed expenditures, such as social fund operations and health sector expenditures financed through copayments. General government fiscal reports are produced by consolidating the reports from the treasury, the social fund, and the PIP division of the MoF (for externally financed project expenditures). Although the quality of consolidation of general government fiscal data has improved substantially, further work remains to be done.⁴⁹ Also, a comprehensive assessment of the status of government-controlled organizations for inclusion within the general government sector has not yet been undertaken.

47. The legislature receives monthly budget execution reports, but does not undertake a formal mid-year budget review.

2.2.2

The monthly budget execution reports are prepared by the treasury after aggregating the data received from 65 regional treasury units located in oblasts and rayons.

48. The consolidated annual budget execution report is submitted to parliament within six months after the end of the fiscal year, but is not subject to external audit beforehand.

2.2.4

Article 45 of the Law on Basic Principles of Budget stipulates that the annual report on budget execution shall be submitted to parliament by May 15 of the following year together with an explanatory note. Accordingly, the government submits the unaudited annual budget execution report simultaneously to both the parliament and the COA.⁵⁰ The audit report of the COA is generally received by September or October each year. Parliament adopts an Annual Law on Budget Execution based on the annual budget execution report submitted by the government, the audit report of the COA, and the report of the parliamentary standing committee on budget and finance.

49. The treasury prepares annual financial statements based on data received from budget institutions, but their coverage, quality and timeliness need substantial improvement.

2.2.4/3.1.5/4.1.2

These statements include information on: revenues and grants; expenditures according to budget classifications, with comparisons between budget and outturns; cash balances in treasury bank accounts; the stock of public debt; and fixed assets of budget institutions. However, these statements are neither prepared on a timely basis,⁵¹ nor audited by the COA. They do not include, inter alia, information on the stock of government financial assets, payables/arrears, or contingent liabilities. The reliability of the disclosures made in these statements is also undermined by undeveloped accounting systems in the treasury and budget institutions. No reconciliation is carried out between these statements and the cash-based budget execution reports submitted to parliament.

Results-oriented budgeting and reporting

50. The objectives and expected results from government activities are discussed in budget documents only in general terms.

3.2.4

Although some progress has been made in preparing sectoral strategies and programs as part of the MTBF, the budget formulation process mostly focuses on inputs, and the budget documents presented to parliament say little about policy or program objectives. No performance information—performance measures or indicators—is made available. A sound program classification system will have to be in place as a precondition to moving towards a performance-based budgeting system.

The coverage and quality of budget documents

52. Although the budget documents cover most central government fiscal activities, they still do not reflect QFAs, and analytical content requires further improvement.

3.1.1/3.1.4

The main budget documents include inter alia: (i) the budget estimates by major revenue and expenditure categories; (ii) the main macroeconomic forecasts, such as aggregate growth and inflation; (iii) the fiscal deficit and its financing; and (iv) some explanatory notes. Information on donor-financed projects is also disclosed. Although the overall debt and financing data are indicated in the budget, a public debt management report, covering both internal and external debt, is not included. The budget also does not include a medium-term fiscal policy objective statement nor statements of QFAs and contingent liabilities. The annual budget law is published on the MoF website (www.minfin.kg).

53. Defense expenditures are included in the budget presented to parliament.

3.1.1

Defense transactions are presented in the budget in the same format and classifications as used for other types of spending.

Past and forecast fiscal data in the budget

54. The budget document discloses the main revenue and expenditure aggregates for two years prior to the budget year and forecasts for the next two years.

3.1.2

These data are provided in tables, including tax and nontax revenues components, and expenditures by major economic categories. As far as past data is concerned, actuals for the year preceding the prior year and original appropriations rather than estimated outturns for the prior year are provided.

Budget treatment of off-budget fiscal activity

55. No statement on contingent liabilities is included in the budget documents.

3.1.3

No information on contingent liabilities, such as loan guarantees granted by the government, is presented in the budget documents (see also Para 34). However, the public debt department within the MoF maintains a register of government guarantees.

56. Statements of tax expenditures are not included in the budget documents.

3.1.3

However, the STC and the SCC compute the foregone revenue from exemptions. These are included in the internal reports they submit to the MoF.

57. QFAs are extensive and their estimated cost is not included in the budget documents.

3.1.3

The quasi-fiscal deficit in the energy sector is estimated at between 5 and 6 percent of GDP in 2006. While discussed in a chapter of the MTBF, a description of this deficit is not included in the budget documents. In the financial sector, the QFAs of two state-owned commercial banks, Ayil Bank and the SSC, are not mentioned in the budget documents. There is no information on their cost.

Publication of data on debt and financial assets

58. Information on gross public debt is published on the website of the MoF.

3.1.5

The information includes external debt by individual creditors and by level of concessionality; domestic debt by instrument and maturity; and contingent liabilities by individual creditors and original debtor. There is no breakdown of debt by remaining maturity and currency.⁵³ A section that lists and describes loan agreements is also updated semi-annually. There are plans to post explanatory notes starting in October 2007. The MoF coordinates on the compilation of debt data with the central treasury, NBKR, and the PIP unit in the MoF, which has information on bilateral debt through commercial banks. External debt is also reconciled with loan agreements and disbursement invoices. Projections of debt service and new borrowing are included in the budget.

59. Information on government financial assets is not published.

3.1.5/3.1.6

Several government units receive data of financial assets in the course of fulfilling their functions. The state property fund monitors equity holdings in state-owned enterprises, but it does not prepare a consolidated statement. The MoF possesses data on external loans of state-owned enterprises. The state fund for economic development, in its task to oversee payments of government credit, keeps a database of government loans to domestic companies. However, these are not fully consolidated nor discussed in budget documents or internal reports.

Commitment to timely publication of fiscal data

60. Formal commitments for more regular publication of fiscal data have been made and advance release data calendars are announced.

3.3.1/3.3.2

The Kyrgyz Republic subscribed to the IMF’s Special Data Dissemination Standard (SDDS) in February 2004 and complies with SDDS requirements to produce advance release calendars. Updates of the advance release calendar have been timely. The data are disseminated on the 20^th of every month, on the website of the MoF (www.minfin.kg). SDDS requirements for timeliness were met or exceeded in 2006 for publication of general government operations, central government operations and central government debt. The data are produced from accounting records and reports of the treasury. While the timing of the provision of annual budget execution reports to parliament, and therefore their public release, is laid down in the Law on Basic Principles of Budget, there is no such requirement for in-year reporting.

Integrity of data processes

61. The credibility of the budget is still low, as the variance between budgeted and actual outturns have been considerable and partially disclosed to the public.

4.1.1

As a result of the unreliability of budget estimates, the average difference between budgeted and actual expenditures (for major functional categories) exceeded 20 percent of original budgeted expenditure over the three years 2002, 2003, and 2004.⁵⁴ The process by which budget funds are reallocated or increased during budget execution is not clear and reportedly ad hoc in the absence of clear virement rules. This reduces the credibility of the budget as the main policy instrument. The in-year budget execution reports also do not show a comparison between the budgeted and actual expenditures.⁵⁵ Although deviations between budget estimates and outturns are explained in the final accounts, such deviations are calculated with reference to the final adjusted figures and not the original appropriations.

62. Statements on accounting policy are not included in the budget or final accounts documents.

4.1.2

Accounting practices, which differ between the treasury and budget institutions, have been described above, and they do not meet international standards. Financial accounting at the level of budget institutions is mostly manual. USAID has been assisting the authorities in the introduction of cash-based International Public Sector Accounting Standards (IPSAS); however, there have been no recent developments in government accounting standards.

63. The process of accounts reconciliation and fiscal reporting is largely effective with some limitations (see Box 5).

4.1.3

Bank balances are reconciled monthly on both aggregate and detailed levels. As noted in Box 4, the quality of the reconciliations between budgetary accounts and financial accounts is undermined by the different accounting systems of the treasury and budget institutions and the largely manual system of recording and consolidation both at the regional treasury offices and the budget organizations. The reconciliation of debt and deficit data between the fiscal and monetary accounts, including between above- and below-the-line figures, requires improvement. The data reconciliations are not shown explicitly in accounting reports.

Independent oversight

64. The external audit is fairly independent of the executive branch, and its mandate covers all public sector activities.

4.3.1

The COA is established by the constitution as the national audit institution of the Kyrgyz Republic.⁵⁷ The constitution (Article 80) and the Law on the Chamber of Accounts endow it with a broad mandate to audit the execution of republican and local budgets, non-budget funds, and the use of state and municipal property. The constitution (Articles 46 and 58) and the Law on the Chamber of Accounts stipulate that the president and parliament each appoint half of all auditors of the COA and dismiss them.⁵⁸ The appointment of the chairman of the chamber is made by the president and approved by parliament. The COA submits its audit reports to both the president and parliament. Amendment of the Law on the Chamber of Accounts in 2004 (No. 117 of August 2004) resulted in some changes with regard to the chamber’s role, staffing and budget.⁵⁹ It has the right to set up its own staffing structure and its budget (a separate line in the republican budget) is determined by a parliamentary committee. The word “control” under the earlier law was also replaced with “audit.” The COA audits each budget institution/agency once every two years, although some agencies are audited on an annual basis. It does not provide any certification of final accounts, neither for individual agencies nor for the government as a whole.

65. Strengthening of audit capacity is required.

4.3.1

The COA has about 190 staff, including staff at its regional units. The technical capacity of the staff is still limited, and a lack of training and exposure to modern auditing practices by the staff hampers an effective implementation of the COA’s audit mandate. It remains largely an inspection and control unit that carries out periodic checks to ensure compliance with existing regulations, including the public procurement law.⁶⁰

66. The legislature discusses external audit reports, but does not systematically follow up on audit findings.

4.3.2

The audit reports of the COA are presented to parliament and the president. The parliamentary committee on budget and finance discusses the annual audit reports, but since there is a time lag of up to six months between the submissions by the government of the annual report on budget execution and the audit report by the COA respectively, the committee hires independent experts to provide an opinion on the government’s annual report on budget execution. Under Article 45 of the Law on Basic Principles of Budget, parliament is required to review the report of the COA before approving the government’s report on budget execution. The parliament, however, does not systematically follow up on audit findings to ensure that adequate actions are taken to address the issues identified in its review. The COA has a website (www.ach.kg) where extracts of its reports are published, but the general public does not have access to the COA’s audit reports.

67. External scrutiny of macroeconomic models and assumptions is not encouraged.

4.3.3

As the budget data are made publicly available only after approval of the budget, this constrains independent analysis and comments on the quality of fiscal data included in budget documents, especially regarding macroeconomic and macrofiscal forecasts, at the stage of parliamentary discussions. There is little public discussion of this topic. The model used by the MoF for the macroeconomic forecasts underpinning the budget is not made publicly available. Information about some key assumptions is, however, available in explanatory notes appended to the budget.

68. The NSC is given legislative assurance of independence.

4.3.4

The Law of the Kyrgyz Republic on State Statistics provides the basis for the autonomy and independence of the NSC in the compilation of national statistics. The law explicitly prohibits interference by central and local governments. Moreover, appointment and removal from office of heads of lower-level statistical offices can be undertaken without the approval of the local self-government bodies. The chairman of the NSC is appointed by the President of the Kyrgyz Republic. The NSC publishes data on its website (http://www.stat.kg) as well as in paper bulletins. The Kyrgyz Republic subscribes to the SDDS and meets the timetable for providing data on monthly and annual state government operations and quarterly debt information.