Foreign Direct Investment in Kyrgyzstan

The economic benefits to the recipient countries by providing capital, foreign exchange. The question of potential causality between foreign debt and domestic savings in the context of the Kyrgyz Republic. The problem of tracking new private businesses.
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Foreign Direct Investment in Kyrgyzstan

Introduction

Kyrgyzstan was the first Central Asian Republic to declare independence in 1991. It is a small country, but has a strategic location bordering Kazakhstan, Uzbekistan and China, and is not far from the huge market of India. It has a predominantly agricultural economy, but has been one of the most progressive in the CIS. Kyrgyzstan has abundant energy resources, an inexpensive and well-educated labour force, and good potential for agriculture, food processing, consumer industries and tourism. (Investment Profile, Business Forum, London, 2001)

Kyrgyzstan has implemented the most liberal and democratic transition path in Central Asia in terms of macroeconomic stabilization and restructuring. It has a very liberal trade regime, no foreign exchange controls, and has been accepted into the WTO. As its WTO membership requires that domestic policies be consistent with international practice, legislation of the country has been substantially improved to introduce better legal standards, and an impetus has been given to the transition process towards a market-based economy. (Investment Climate in Kyrgyzstan, Country report, 2003). As a WTO member, Kyrgyzstan is also under obligation to develop domestic institutions and reduce the role of the Government in the economy. In the process of macroeconomic stabilization, a unified exchange rate system has been achieved and inflation has been reduced. Small-scale privatization has been completed, and reforms in the telecommunications and energy sectors are under way. Substantial progress in tightening fiscal policies has been achieved, including initial modernization of the tax system and a comprehensive reform of the budgetary procedures and intergovernmental relations. The monetary policy framework and instruments have been overhauled, in parallel with successful reform of the financial sector. Non-tariff barriers have been removed and export taxes have been eliminated on all goods.

The number of trade relations of the Kyrgyz Republic with other countries has increased in recent years. So, today Kyrgyzstan has trade relations with 109 countries of world trade community. There is the progress in cooperation with these countries in many areas particularly, in export-import operations. Trade relationships with most of these countries were created within the framework of WTO, full member of which Kyrgyz Republic became on December 20, 1998.

External trade regime of the Kyrgyz Republic is one of the most liberal among CIS countries. There are no private or state enterprises with exclusive rights or powers to influence the level or direction of imports and exports. Export and import licensing applies to only eight articles adopted in worldwide practice, including weaponry, explosives, drugs and virulent poisons, precious metals and works of art, etc. The volume of commodity circulation in the Republic keeps its level on about 1,6 billion US$.

The Kyrgyz Republic along with Kazakhstan, Tajikistan, Belarus and Russia, has a common system of payments, equal access to international economic organizations within the framework of the Eurasian Economic Union. Common borders and good trade relations with China have formed a huge potential for export.

On the world market, the Kyrgyz Republic acts as a supplier of electric power, gold, cotton fiber, articles made of wool and cotton, wood, leather materials, tobacco, antimony and mercury. It is a net importer of energy resources, oil products, natural gas, coal, fertilizers and other chemical products, machinery, vehicles and spare parts, and household appliances. Bowels of the Republic are consisted of large stocks of gold, tungsten, tin, antimony, mercury and others metals. Kyrgyzstan takes the third place in the world on manufacture of mercury and the tenth on sale of gold. Foreign business can invest the capital in development of a tourist infrastructure on unique lake «Issyk Kul», and also in creation of joint venture in agricultural sphere and techno parks.

After known March events of 2005, Kyrgyzstan has opened a new page in the contemporary history. New leaders of country have accepted a number of operative measures to achieve recovery of economy, emphasizing on growth of a private sector. The Government purposefully works above liquidation of any barrier interfering successful development of private business and creation of a favorable investment climate. In addition, fight against corruption and recovery of economy's industrial sector are defined as two principle national priorities. Given Kyrgyzstan's geographical location with access to vast market of 2,5 billion consumers in Russia, China and India, it makes Kyrgyzstan a favorable and profitable destination for investment.

Kyrgyzstan has also made progress in attracting foreign investment. The government has adopted a new law on foreign investments in the Kyrgyz Republic, introduced special incentives for investors, established a liberal exchange rate regime, and supported all initiatives to attract foreign investment. The guarantees that are provided to foreign investors such as national treatment, freedom of transfers and protection against nationalization meet western and international standards, although implementation could be further improved. The establishment of the Advisory Council on Investment Policy (ACIP) in 1999 has been a positive move to ensure dialogue between investors and government, and to address issues relevant to the investment climate.

1. Foreign Direct Investment

A vital prerequisite of economic development is attracting direct investments. At present, neither the Kyrgyzstan government, nor domestic investors are in a position to provide the investments needed to stimulate various branches of the Kyrgyz national economy. Moreover, as the classical development of most of the world's nations shows, relying on domestic investments alone to boost the economy is a long and laborious process.

Liberalization of the economy, privatization of state property, deregulation of prices, openness of trade, and reduction of state intervention (in favor of a free market) - all these features became the principal manifestations of economic reforms during the transition period. In the opinion of the International Monetary Fund (IMF), Kyrgyzstan's policy in the sphere of structural transformation of its economy was the most progressive among all the countries of the region, particularly with respect to the liberalization of prices and privatization. (International Monetary Fund, Economic Review: Kyrgyzstan (1992), pp. 8, 13.) Despite the difficult position that confronted Kyrgyzstan because of the high degree of its dependence on the Soviet economy, its reforms followed the path of «shock therapy.» Simultaneously, the government of Kyrgyzstan encountered problems that were associated with the assertion of sovereignty, the need to pursue a policy aimed at macroeconomic stabilization and economic reform, and the establishment of a new posture with respect to foreign policy and foreign trade.

Data on foreign direct investment (FDI) in Kyrgyzstan are reported by the National Bank of the Kyrgyz Republic (NBKR), based on data collected by the National Statistics Committee (NSC). FDI data are collected from enterprise surveys on joint-ventures and foreign-owned non-financial enterprises conducted by NSC. However, FDI data on the banking sector are collected by NBKR through the international transactions reporting system, which was introduced in 1997.

A new «Law on Investments», enacted in 2003, provides the legal framework applicable to activities of investors within the country. It provides fair and equal treatment for investors and the protection of their investments in Kyrgyzstan. The law also regulates legal relationships between investors and governmental bodies of Kyrgyzstan, allowing investors to resolve any disputes that may arise through international arbitration proceedings. Ownership of land by foreign investors is restricted. However, land can be leased. Kyrgyzstan has established four free economic zones under the 1992 Law «On Free Economic Zones in the Kyrgyz Republic», which was amended in 2002. Foreign investors may establish wholly foreign-owned enterprises or joint-ventures, acquire shares in existing entities and participate in privatization programmes.

In 2001, the Government established the Investment Promotion Centre (IPC) under the State Committee of the Kyrgyz Republic on State Property and Direct Investments. IPC acts as a one-stop shop to assist foreign investors in investing in the country. It provides information on investment opportunities, assists foreign investors to contact interested partners for project implementation, and provides administrative facilities in obtaining permits, licenses and registration certificates. The Consultative Council on Foreign Investment was established in 2001 by the Decree of the President. The Council, chaired by the President, provides a platform for investors and the Government to exchange views and discuss policy implementation and related measures in improving the investment climate of the country.

Foreign Direct Investment (FDI) (millions of US$)

FDI	2000	2001	2002