Abstract
Governance reforms in the Kyrgyz Republic can leverage linkages to the global economy and structural transformation to deliver higher and more inclusive growth. Combating corruption and strengthening governance, including of state-owned enterprises and public finances, and improving the regulatory environment and the AML/CFT framework, are critical steps to improve the business climate and promote private sector-led growth. Reforms in these areas have a significant potential to increase efficiency of allocation of public resources and the delivery of public services.
Governance Challenges in the Kyrgyz Republic1
Governance reforms in the Kyrgyz Republic can leverage linkages to the global economy and structural transformation to deliver higher and more inclusive growth. Combating corruption and strengthening governance, including of state-owned enterprises and public finances, and improving the regulatory environment and the AML/CFT framework, are critical steps to improve the business climate and promote private sector-led growth. Reforms in these areas have a significant potential to increase efficiency of allocation of public resources and the delivery of public services.
A. Introduction
1. Good governance is essential for higher and more inclusive growth. It strengthens confidence of investors, promotes more efficient and transparent use of public funds, reduces opportunities for corruption, and thereby leads to more efficient allocation of capital and labor in the economy. The Kyrgyz Republic needs investment in physical and digital infrastructure to improve productivity and generate more jobs for its growing labor force, which requires more FDI and better global integration. Human capital development is also positively correlated with global integration,2 which in turn is robustly associated with good governance (Figure 1). However, the Kyrgyz Republic scores poorly on the perceptions-based corruption and governance indicators suggesting that considerable gains could be achieved through governance reforms.
Development, Connectedness and Governance
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
Development, Connectedness and Governance
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
Development, Connectedness and Governance
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
Development, Connectedness and Governance
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
Development, Connectedness and Governance
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
2. This paper aims to assess various aspects of governance in the Kyrgyz Republic and identify some of the key challenges in this area. The Fund's analytical work has shown that governance reforms could raise the country's growth rates by about 1.2 percentage points per year. Strengthening control of corruption and regulatory quality, reforming state-owned enterprises, and enhancing transparency and accountability of the public sector are important priorities to pursue. The paper places particular emphasis on transparency and management of state-owned enterprises, but in addition it approaches governance along four other traditional pillars: economic regulation and the rule of law; Public Finance Management (PFM); anti-corruption; and Anti-money Laundering and Combating Financial Terrorism (AML/CFT).
State-Owned Enterprises
3. State-owned enterprises are a prominent feature of the economic landscape in many countries. While SOEs exist in virtually all countries, state ownership and oversight frameworks differ. These frameworks are particularly consequential in countries with large SOE footprints, because they claim sizable allocations of limited public resources. Some SOEs provide essential goods and services, such as water, public transportation, and electricity, have social or strategic importance, or serve other national interests. Others operate in sectors that are traditionally served by the private sector. In both cases, however, SOEs are a particular source of economic and fiscal risk that requires vigilant oversight. Studies have shown that SOEs are the second largest category of fiscal risks (after the financial sector), realization of which could inflict significant fiscal costs of 3 percent of GDP on average. They enjoy privileged access to capital and sometimes labor, and can thereby distort competition and undermine market efficiency. Therefore, countries need to adopt strong legal frameworks governing SOEs and articulate a comprehensive SOE ownership, management and oversight strategy to ensure that public resources are put to their best use and generate maximum social and economic returns for taxpayers without crowding out the private sector. This strategy would define the rationale and the objectives for state ownership of SOEs and how it will exercise its ownership rights through good governance, including transparency and accountability arrangements.
4. SOEs remain prevalent in the CCA and the Kyrgyz Republic. The country has 136 SOEs, or 22 per million inhabitants, whereas the average OECD country has only one. The largest SOEs are concentrated in energy, telecommunications, mining and financial services – sectors that are critical for economic development and growth. SOE employment has come down over time as the private sector expanded fast, and its share in total employment in the Kyrgyz Republic is less than in many other countries in the region. On average, Kyrgyz SOEs also appear to be performing better than its peers, but international experience suggests that profitability and labor productivity of SOEs is generally lower than in private firms. Partly this relates to the public policy mandate of some SOEs (e.g. below cost pricing of essential goods and services), but profitability and productivity gaps with the private sector are also present in other areas, and are larger in more competitive sectors. This is a manifestation of resource misallocation.3
5. Performance of energy sector SOEs in the Kyrgyz Republic need to be improved. According to the World Bank,4 the return on assets of energy sector SOEs is around zero, while the return on assets of other SOEs is close to 8 percent. Moreover, energy sector SOEs have undergone successive restructurings of their liabilities to the state, underscoring weaknesses of their financial positions. In the past 3 years, government on-lending worth around 10 percent of GDP has been in large part written off, thus irrevocably claiming resources that the state could have allocated to other priorities. Meanwhile, the quality of electricity is described by the World Bank as “very unreliable” which is a serious obstacle to attracting investment, including FDI, but also for operations of existing businesses. This largely reflects below-the-cost residential tariffs for electricity and cost inefficiencies of operations. Therefore, long term sustainability of the energy sector will require a reform of the tariff policy to ensure cost-recovery while being mindful of affordability for the vulnerable, on the one hand, and strengthening management of respective SOEs to optimize costs and improve revenue collection, on the other. These reforms could also make the sector attractive to private power providers.
International bandwidth per Internet user
(Thousands of Bit/s)
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
International bandwidth per Internet user
(Thousands of Bit/s)
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
International bandwidth per Internet user
(Thousands of Bit/s)
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
6. The telecom sector needs to keep pace with new technologies. As in most CCA countries, international broadband capacity in the Kyrgyz Republic lags considerably behind Central European or Advanced Economies. Advancement in Information and Communications Technologies (ICT) is critical for productivity, employment, and growth in all sectors of the economy. The gateway to digitalization and the adoption of new technologies is Kyrgyz Telecom, an SOE which enjoys a monopoly on the development and provision of core ICT infrastructure. Therefore, the government's ownership strategy of Kyrgyz Telecom needs to articulate its development objectives for ICT. As part of this strategy, consideration should be given to allowing the private sector to play a lead role in the sector, including possibly by divesting all or part of this SOE through a competitive tender, and strengthening competition in the sector.
7. The Kyrgyz Republic's largest gold producer, Kumtor Gold Company, has become fully state-owned in 2022, but is still operating under a special tax arrangement negotiated with the former foreign sponsor. Its central role in economic activity, foreign exchange generation and contributions to public revenue make it a critical SOE for the country. Given the large cashflows generated by gold mining, strengthening its governance and oversight is critical. At the same time, a convergence of the tax regime in line with the mining code would improve competition in the sector, while channeling Kumtor's profits to the state budget would provide the much-needed fiscal resource.
8. The legal framework for the 136 SOEs in the Kyrgyz Republic is fragmented. There are two separate laws governing SOEs, one for Joint Stock Companies (JSC) covering 32 largest SOEs, and the other for the remaining 104 SOEs that are not formally incorporated. These 104 SOEs mostly encompass smaller local operations, but also the national railways. Neither law governing SOEs stems from a clear ownership policy and a strategic vision for SOEs. JSCs are subject to explicit governance, oversight, and reporting requirements by the state, but the rest are not.5 Both laws are complemented by secondary legislation but do not provide sufficient clarity and at times are contradictory. The Corporate Governance Code for board appointments has been formally adopted, but its implementation has been uneven, not adequately factoring in experience and competence. The SOE governance framework has also been weakened by exclusion of SOEs from the 2021 public procurement law. Instead, a temporary set of rules for SOE procurement was adopted in 2022 by the Ministry of Economy and Commerce.
9. During 2020-2021, operational oversight of SOEs was decentralized from the State Property Management Fund to line ministries, resulting in multiple reporting procedures. The system of Key Performance Indicators (KPIs), introduced in 2018 to evaluate SOE performance, has not been fully adopted by all SOEs. Financial reporting is mandated under the accounting law, with solid requirements to comply with IFRS reporting and disclosure standards, but its implementation has not been systematic. No single database for SOE financial statements and audits currently exists, although its establishment was legislated in 2021.
10. Oversight mechanisms for SOE holding companies are unclear. Whereas formal reporting arrangements exist for incorporated SOEs, the scrutiny of public financial holding structures that formally own SOEs in a given sector is undetermined. There are two leading SOE holdings: the “National Energy Holding Company” was established in 2015 and holds all energy sector SOEs, except one; a new SOE Holding (“Legacy of Great Nomads”) was created in 2021 to hold all corporate assets in the mining sector, including the recently nationalized gold mine, Kumtor. Other holdings were created recently but are less important. These recent developments highlight a trend of further decentralizing SOE ownership via diversified web of SOE Holdings, thus diluting their accountability.
11. SOEs' control environment remains weak, the results of independent and state audits are published partially or with delays. While many of the large SOEs undergo independent audit, the legislative requirement to publish the complete set of annual audited financial statements is not followed by SOEs or enforced by the government. The state audit is carried out by the Chamber of Accounts, which has a mandate to audit companies that are majority owned by the central government or municipalities, and those entities that receive budget funding. The COA audit reports often do not cover critical issues such as government on-lending to energy SOEs. There is no explicit requirement to inform Parliament of SOE performance, which also weakens public scrutiny of this sector.
Characteristics of SOEs in the Kyrgyz Republic
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
Characteristics of SOEs in the Kyrgyz Republic
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
Characteristics of SOEs in the Kyrgyz Republic
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
Characteristics of SOEs in the Kyrgyz Republic
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
Characteristics of SOEs in the Kyrgyz Republic
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
12. A sound legal, institutional and operational framework for SOEs and a clear ownership strategy can improve SOE performance and increase economic activity. Staff analysis found that in addition to general governance reforms, the Kyrgyz Republic could significantly increase growth by reducing the state participation in the economy where companies can operate commercially, including through privatization and restructuring and strengthening corporate governance of SOEs (IMF 2022, forthcoming). Apart to sector-specific constraints to SOE performance (e.g. electricity tariff regulation), there are a number of broad reforms that can further improve the way SOEs are run. These include:
Streamlining and harmonizing legislation that govern SOEs. An SOE law should provide a clear definition of an SOE and legal forms of government ownership (e.g. incorporation); define the role and the powers of the government in exercising its ownership rights; and reporting and disclosure requirements (e.g. publishing of audited annual reports and financial statements). In addition, all SOEs should be subject to the public procurement law.
Articulating and publishing a clear ownership policy, reducing state presence in competitive sectors. The ownership policy should define the government's policy objectives as a shareholder (financial, economic, or social objectives); the mandate of each SOE; and the main principles of how the government will exercise its ownership rights in support of public interests, include binding reviews of SOE budgets, borrowing plans, and capital injections. This policy should then determine which SOEs should remain in state's ownership. For example, the government may decide to retain SOEs that serve strategic or social objectives, privatize commercially viable entities, and restructure or close non-viable ones.
Establishing a strong corporate governance framework. This framework should envisage professional management and qualified boards to allow SOEs to operate effectively without government's interference. To this end, the Corporate Governance Code, which reflects international standards6, should be implemented consistently. In view of capacity limitations, the application of the corporate governance framework could initially start with the most strategic and largest SOEs, and gradually extended to others.
Enhancing the operational and financial transparency requirements and strengthening institutional oversight. This should start with timely financial reporting by all SOEs, and publication of financial accounts and audit reports. A comprehensive annual report should be prepared and published alongside the annual budget execution report. It should review the SOE sector performance, including financial results and key policy decisions. The report should also include a full list of SOEs, broken down by industry, size, and type of ownership (e.g. shares of state ownership, strategic relevance, or candidates for privatization), and information on individual companies, comprising a summary of their operations, abridged financial statements, key performance indicators, the appointment of boards and management, and profit distribution.
The Ministry of Finance should exercise financial oversight. As a matter of fiscal due diligence, the MoF should launch the centralized analysis and monitoring of fiscal costs and risks stemming from SOEs, and use this analysis to inform the budget process and pro-actively manage such risks. In that connection, the largest SOEs should be prioritized, starting with those in the energy and transport sectors.
B. Economic Governance and the Rule of Law
13. The Kyrgyz Republic has a scope to strengthen economic regulations to promote private sector-led growth. The score for the World Governance Indicator (WGI) for the quality of the regulatory framework is comparable or better than other CCA countries except Georgia. However, progress since 2000 has been slow. On Government Effectiveness, the Kyrgyz Republic outperforms low-income countries, but lags emerging markets, central and eastern Europe as well as Armenia, Azerbaijan, Georgia, and Kazakhstan in the CCA. The Armenia and Georgia experiences show that comprehensive reforms can markedly improve regulatory quality and government effectiveness. The Kyrgyz Republic could significantly strengthen governance by streamlining of regulations, improving infrastructure, notably electricity, broadband telecommunication, and roads, limiting discretion and harmonizing rules with neighboring countries to help foster regional integration and a common market. The latter will require harmonizing technical and economic standards, aligning VAT rates, adopting an expedited border control mechanism, liberalizing cross-border service provision, and reducing non-tariff trade barriers.
Quality of the Regulatory Framework and its Implementation
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
Quality of the Regulatory Framework and its Implementation
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
Quality of the Regulatory Framework and its Implementation
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
| The Kyrgyz Republic: | |
| Tax Case Inflow | |
| 2015 | 216 cases |
| 2016 | 209 cases |
| The Kyrgyz Republic: | |
| Tax Case Inflow | |
| 2015 | 216 cases |
| 2016 | 209 cases |
14. Improving perceptions of the rule of law and contract enforcements can attract investment and support business activity. Investment decisions could be negatively affected if entrepreneurs believe that they cannot protect their property and enforce contracts, or that these will cost an excessive amount of time and money. The Kyrgyz Republic scores an average rating among its CCA peers on the Bertelsmann Foundation's judicial independence indicator, and relatively low on WGI's “Rule of Law” indicator. Progress since 2000 has been limited for Kyrgyzstan, whereas Georgia shows that faster progress is possible. There is also a disproportionately small number of court case filings in the Kyrgyz Republic relative to its population. The number of cases filed in the country is significantly smaller than a city in Europe,7 while the number of arbitration cases filed abroad is similar to that of Kazakhstan, which has a population three times larger and economy 20 times larger. The number of court filings on tax disputes has been declining steadily, suggesting that perceptions of enforcement mechanisms are weak. Declining court filings manifest the lack of trust in the judiciary, which imposes inefficiencies and constrains growth. Strengthening judicial effectiveness is therefore one of the key priorities.
Legal Framework and its Implementation
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
Legal Framework and its Implementation
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
Legal Framework and its Implementation
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
C. Fiscal Governance and Public Financial Management
15. Sound PFM practices are necessary to support development. Countries that monitor and control their public resources more effectively perform consistently better in terms of commonly accepted measures of development. The four CCA countries for which Public Expenditure and Financial Accountability (PEFA) data are available8 achieve better development outcomes than their PEFA performance would predict, but there is room for improvement. PFM has progressed well in the Kyrgyz Republic with a significant increase in PEFA scores for all categories except budget reliability. Two other CCA countries show similar progress. However, these improvements do not yet the reflect (i) the 2022 public wage increase, which has significant medium-term implications; and (ii) the recent uptake in extra-budgetary funds that hinder transparency and comprehensive budgeting. Work is ongoing to improve budget reliability by centralizing payroll management with IFMIS to better control the wage bill; institutionalize SOE oversight mechanisms to centralize fiscal risks analysis, monitoring, and limit the accumulation of contingent liabilities. Extra-budgetary funds need to be limited, and their performance and new allocations need to be discussed explicitly in the budget law at the time of approval.
PEFA Scores for Select CCA Countries
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
PEFA Scores for Select CCA Countries
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
PEFA Scores for Select CCA Countries
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
D. Anti-Corruption Framework
16. Enforceable, transparent, and comprehensive financial disclosure by public officials could serve as an important corruption deterrent. It is an important tool to strengthen integrity of the public service, limit opportunities for illicit enrichment and corruption, and hence improve public trust. Allowing public access to these financial declarations greatly enhances transparency of disclosure schemes and strengthens accountability of public officials. Combating illicit enrichment is equally critical to strengthen an anti-corruption framework and achieve accountability.
17. The Kyrgyz Republic adopted a financial disclosures law in 2017.9 Implementing resolutions, adopted in 2018 establish the declaration form, the procedures for filing, the classification of the financial information, the parameters for publication and the regulations on the procedures for reviewing and analyzing the declaration information. This new regime transfers the administration, control and verification responsibility from the State Personnel Service to the State Tax Services (STS). The law requires the annual submission of declarations in an electronic format through an online system. Summary of the income, expenditure, and property of some senior officials whose activities are not related to national security and their relatives are published on the website of the STS. Failure to submit a financial disclosure or submission of inaccurate or incomplete information can lead to sanctions, including dismissals.10 However, the sanctions regime for non-submission is unclear, the coverage of the requirements does not include close relatives, and triggers for investigation and prosecution for illicit enrichment are not established. Finally, officials tasked with verifying compliance are not specifically trained to implement this law.
E. Anti-Money Laundering and Combating Financial Terrorism (AML/CFT)
18. The authorities have strengthened AML/CFT legislation. In 2018 the Kyrgyz Republic reformed its AML/CFT framework by adopting a new AML/CFT Law that considerably improved financial risk-based supervision and introduced mandatory disclosure of beneficial ownership of all legal entities. In the review by EAG (a FATF11-affiliated regional group), the new law and related by-laws are marked as a significant achievement. Among CCA countries, the Kyrgyz Republic has the strongest record with 39 of the 40 FATF recommendations at or near compliance. However, while the Kyrgyz Republic is ahead of its peers in terms of the legal framework, it lags on the effectiveness of managing the related risks. This underscores the need to strengthen analytical capacity and implementation capabilities. In particular, the FATF found that money laundering and terrorism financing risks are little understood and better coordination is needed domestically to combat money laundering and the financing of terrorism and proliferation (IO1). It also found that the proceeds of crime are rarely confiscated (IO8). This finding underscores the importance of strengthening risk-based AML/CFT supervision, and monitoring of cross-border activities with a focus on detecting and recovering proceeds of corruption.
FATF Compliance and Effectivness of Measures
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
FATF Compliance and Effectivness of Measures
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
FATF Compliance and Effectivness of Measures
Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A001
References
“Corporate Governance of SOEs in Europe and Central Asia – a Survey”, the World Bank, 2020
“Ownership and Governance of State-Owned Enterprises - a Compendium of National Practices, 2021”, OECD 2021
“Transition Report 2020-21 – the State Strikes Back. Chapter 2, SOEs”, EBRD, 2021
“Kyrgyz Republic: Integrated State-Owned Enterprise Framework Assessment”, the World Bank 2021
“State-Owned Enterprises in Middle East, North Africa, and Central Asia - Size, Role, Performance, and Challenges”, IMF, 2021
“How to Improve the Financial Oversight of Public Corporations”, IMF, 2016
“Paving the Way to More Resilient, Inclusive and Greener Economies in the Caucasus and Central Asia”, MCD Departmental Paper, IMF, 2022 (forthcoming).
Prepared by Erkeaim Shambetova and Jean van Houtte.
The Global Connectedness Index measures the depth and breadth of international flows of trade, capital, information, and people. It draws on more than 3.5 million data points across the 13 measures of country-to-country flows: merchandise trade; services trade; FDI stock; FDI flows; portfolio equity stocks; portfolio equity flows; international internet bandwidth; telephone call minutes; scientific research collaboration; trade in printed publications; tourist departures and arrivals; international university students; and migrants (foreign-born population). A higher score implies more dispersion or diversification. The data are from NYU Stern School of Business; Center for the Future of Management; DHL Initiative on Globalization.
IMF, 2020, Fiscal Monitor, Chapter 3: State-Owned Enterprises, the Other Government.
World Bank, 2021. Kyrgyz Republic: Integrated State-Owned Enterprise Framework Assessment.
Unincorporated SOEs include the National Railway Company, which is proving difficult to reform in the absence of normative transparency and reporting requirements, despite incurring chronic large losses.
“How to Improve the Financial Oversight of Public Corporations”, IMF, 2016
IMF staff estimate the entire first instance civil, commercial and tax inflow of cases for in 2018 at was 85,000 cases nationwide. In comparison, in the Belgian city of Antwerpen with population of 520,000 the number of civil cases in that year was about 140,000 cases (www.rechtbanken-tribunaux.be)
Georgia, the Kyrgyz Republic Tajikistan, and Uzbekistan.
The law is titled 'On Declaring Incomes, Expenses, Obligations and Assets of Persons Holding or Occupying State and Municipal Offices'. The financial disclosure obligations apply to persons holding political, special civil service posts; persons holding administrative civil service posts; military servicemen, law enforcement officers and diplomatic officials; persons holding or occupying political and administrative municipal offices; Chairman of the National Bank and his deputies.
See: Law about state civil service and municipal service of May 30, 2016 (art. 47) and Law on anti-corruption of August 8, 2012 (art 7).
The Financial Action Task Force (FATF) is a global money laundering and terrorist financing watchdog. It developed a set of recommendations, or FATF standards, which ensure a coordinated global assessment mechanism and response to prevent organized crime, corruption and terrorism.
