2009 Index of Economic Freedom

Quick Facts

Population:

• 5.2 million

GDP (PPP):

• $9.4 billion
• 3.1% growth
• 3.3% 5-year compound annual growth
• $1813 per capita

Unemployment:

• 18.0%

Inflation (CPI):

• 10.2%

FDI Inflow:

• $182.0 million

The Kyrgyz Republic’s economic freedom score is 61.8, making its economy the 74th freest in the 2009 Index. Its score is 0.7 point better than last year, reflecting increases in business freedom and trade freedom. The Kyrgyz Republic is ranked 12th out of 41 countries in the Asia–Pacific region, and its overall score is slightly above the world average.

The Kyrgyz Republic's transition to a more market-driven economy is still in progress. Despite reform measures that have been implemented over the past years, overall progress has been rather slow. The country rates well in business freedom, trade freedom, fiscal freedom, labor freedom, and government size. The labor market is flexible; despite some remaining restrictions, the implementation of a new labor code has helped to tailor employment to free-market conditions. Personal and corporate taxation has become simple and efficient, with a competitive flat tax rate of 10 percent. Government spending is also moderate.

The Kyrgyz Republic's property rights and freedom from corruption remain weak. Lax rule of law fosters pervasive corruption and insecure property rights, which could jeopardize the country's prospects for lasting economic development.

Background Back to the top

The Kyrgyz Republic is a member of the Shanghai Cooperation Organization. Under President Kurmanbek Bakiyev, a new version of the 2003 constitution was approved in a flawed referendum in October 2007; in December 2007, Bakiyev's party won early parliamentary elections. The Kyrgyz Republic is landlocked, with underdeveloped agriculture and industry, and has had difficulty attracting foreign investment. Concerns include a large external debt and heavy dependence on foreign aid. In 2007, the current account deficit grew to around 20 percent of GDP. Drug trafficking and religious extremism remain formidable threats.

Business Freedom 75.3 Back to the top

The overall freedom to conduct a business is relatively well protected under the Kyrgyz Republic's regulatory environment. Starting a business takes an average of 15 days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 225 days. Closing a business can be a difficult and lengthy process.

Trade Freedom 87.6 Back to the top

The Kyrgyz Republic's weighted average tariff rate was 1.2 percent in 2006. Import bans and restrictions, import fees and taxes, export and import licensing requirements, complex regulations and standards, weak enforcement of intellectual property rights, and inefficient and corrupt customs administration add to the cost of trade despite progress in dismantling barriers. Ten points were deducted from the Kyrgyz Republic's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 93.4 Back to the top

The Kyrgyz Republic has low tax rates. The income and corporate tax rates are a flat 10 percent. The government implemented a temporary cut in the value-added tax (VAT) on food products to alleviate strain on producers during the recent food crisis. In the most recent year, overall tax revenue as a percentage of GDP was 21.4 percent.

Government Size 74.9 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 28.9 percent of GDP. Despite wage and pension increases, the government continues to run a low deficit. Energy concerns have made privatization in the power sector a central goal.

Monetary Freedom71.5 Back to the top

Inflation is high, averaging 8.5 percent between 2005 and 2007. Many price controls and subsidies have been eliminated, but the government regulates or influences prices through state-owned industries, including electricity, agriculture, telecommunications, water, and energy. Ten points were deducted from the Kyrgyz Republic's monetary freedom score to account for remaining price controls.

Investment Freedom50.0 Back to the top

Most of the economy is open to foreign investment. There are guarantees against expropriation or nationalization, and investors may bid on privatized firms. However, rules and regulations are non-transparent and arbitrarily applied. Corruption remains a disincentive to investment. Foreign investors are disadvantaged less by outright discrimination than by a simple lack of knowledge about how to “work the system.” Residents and non-residents may hold foreign exchange accounts. There are no restrictions on payments and transfers, but most capital transactions must be registered with the relevant government authority or are subject to controls. Foreign investors may lease but not purchase land.

Financial Freedom50.0 Back to the top

The financial system is underdeveloped but improving. Despite slow progress, financial intermediation has continued to increase, but high credit costs remain a barrier to more dynamic entrepreneurial activity. Banking dominates the financial sector, and domestic credit provided by the banking sector amounts to about 10 percent of GDP. Twenty-two commercial banks operate a total of 211 branches throughout the country. There are no limits on foreign ownership of banks and microcredit institutions. Several foreign-owned and partially foreign-owned banks also provide a range of banking services. The central bank has improved supervision and established minimum capital requirements, but the sector remains vulnerable to executive and legislative interference. Capital markets are not fully developed, but there is a small stock exchange.

Property Rights25.0 Back to the top

The legal system does not protect property sufficiently. Licensing, registration, and enforcement of contracts are prone to dispute. Property registration improved in 2006, but the country has not recovered from the looting and redistribution that occurred in 2005 when Askar Akayev's regime was ousted. An estimated 80 percent of DVDs, CDs, and other audio-visual products sold in the Kyrgyz Republic are counterfeit.

Freedom From Corruption21.0 Back to the top

Corruption is perceived as pervasive. The Kyrgyz Republic ranks 150th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Tax and customs agencies, law enforcement bodies, courts, and agencies controlling construction and the issuance of business licenses are notably corrupt. Thousands of cases of suspected official bribe-taking, negligence, fraud, embezzlement, and malfeasance have reportedly led to hundreds of arrests but no convictions.

Labor Freedom69.5 Back to the top

The Kyrgyz Republic's relatively flexible labor regulations facilitate employment and productivity growth. The government has adopted a new labor code to further improve labor market flexibility. The non-salary cost of employing a worker is moderate, but restrictions on the number of work hours remain rigid.