ORDER OF THE GOVERNMENT OF THE KYRGYZ REPUBLIC

of August 23, 2018 No. 397

About the main directions of fiscal policy of the Kyrgyz Republic for 2019-2021

According to Article 82 of the Budget code of the Kyrgyz Republic, articles 10 and 17 of the constitutional Law of the Kyrgyz Republic "About the Government of the Kyrgyz Republic" the Government of the Kyrgyz Republic decides:

1. Approve the Main directions of fiscal policy of the Kyrgyz Republic for 2019-2021, including target figures for forming of the republican budget of the Kyrgyz Republic for 2019-2021 according to appendix.

2. To the ministries, state committees, administrative departments and other state-financed organizations:

- till August 24, 2018 on the basis of the Main directions of fiscal policy of the Kyrgyz Republic for 2019-2021 to develop and provide in the Ministry of Finance of the Kyrgyz Republic information necessary for creation of the draft of the republican budget of the Kyrgyz Republic for 2019-2021, including on program basis;

- provide observance of target figures when forming projects of expense budgets for 2019-2021.

3. To the Ministry of Finance of the Kyrgyz Republic:

- till September 15, 2018 to draft the bill of the Kyrgyz Republic "About the republican budget of the Kyrgyz Republic for 2019 and the forecast for 2020-2021" and to submit the Governments of the Kyrgyz Republic for consideration;

- by preparation of the bill of the Kyrgyz Republic "About the republican budget of the Kyrgyz Republic for 2019 and the forecast for 2020-2021" to establish turnover cash in the amount of 500, of 0 million som.

4. Declare invalid the Order of the Government of the Kyrgyz Republic "About the main directions of fiscal policy of the Kyrgyz Republic for 2018-2020" of July 5, 2017 No. 423.

5. Department of finance and credit policy of Government office of the Kyrgyz Republic shall be responsible for control over execution of this resolution.

Appendix

to the Order of the Government of the Kyrgyz Republic of August 23, 2018 No. 397

The main directions of fiscal policy of the Kyrgyz Republic for 2019-2021

1. Introduction

The main directions of fiscal policy of the Kyrgyz Republic for 2019-2021 (further - ONFP for 2019-2021) are developed according to Article 82 of the Budget code of the Kyrgyz Republic taking into account results of realization of budget policy for 2016-2017 and the expected assessment for 2018.

The government budget is one of the main instruments of regulation of social and economic processes of the country by means of management of the public expenditures, taxes for achievement of growth of real production volume and employment, inflation control and acceleration of economic growth. Respectively, budget processes need to be considered in the medium-term period. ONFP for 2019-2021 is the analytical document and the management tool public finances determining bases of realization of fiscal policy for the forthcoming medium-term period and allowing the Government of the Kyrgyz Republic to predict amounts of resources and corresponding expenses in general and on each separate industry.

By preparation of ONFP for 2019-2021 provisions of the Budget code of the Kyrgyz Republic were considered. Development programs of the Kyrgyz Republic for 2018-2022 "Unity. Trust, Creation", Programs of reform "Taz Koom", the industry (sectoral) strategy and development programs, the Mid-term forecast of the social and economic development of the Kyrgyz Republic for 2019-2021 approved by Coordination council on macroeconomic and investment policy under the Government of the Kyrgyz Republic (the minutes of April 19, 2018 No. 16-34).

ONFP purpose for 2019-2021 is determination of the parameters and conditions used in case of creation of the draft of the republican budget for the next fiscal year and the predicted period, approaches to its forming, the main characteristics and the predicted parameters of the government budget and budgets of other levels of budget system of the Kyrgyz Republic.

The expense forecast for the medium-term period is created on basis:

- the analysis of previous years - detection of patterns and determination of level of requirements satisfaction of the previous level by sectors of economy and departments;

- comparative analysis of actual expenses in 2017 to forecast expenses according to the Mid-term forecast of the budget of the Kyrgyz Republic for 2017-2019;

- monitoring of influence of external and internal political and economic factors.

2. Macrofiscal technical note

2.1. Macroeconomic policy and mid-term forecasts

The macroeconomic situation in the Kyrgyz Republic in 2016-2017, despite the developed ambiguous situation in world economy, in the raw and financial markets, remained insufficiently steady. Annual average rate of surplus of GDP kept positive dynamics and made 4,5 of percent.

In 2016 as a result of improvement of situation in industries of economy it was succeeded to reach real GDP growth at the % 4,3 level due to increase in growth rates of gross output in all industries of economy, including in agricultural industry - on % 3,1, service industry - on % 3,1, construction - on 9,3 of % and the industry - on % 4,9. Increase in prices for gold, surplus of net inflow of money transfers of physical persons, provision of soft credits to farmers, strengthening of national currency in relation to US dollar became the advantage factors which influenced economic growth.

In 2017 real GDP growth developed at the % 4,6 level due to increase in growth rates of gross output in the industry - on % 11,5, agricultural industry - on % 2,2, construction - on 7,1 of % and service industry - on % 2,8. The major advantage factors which influenced economic growth became the moderate rate of inflation, than the actual growth of the income of the population, increase in net inflow of money transfers of physical persons, provision of soft credits to farmers is caused.

In 2016-2017 annual average growth of real GDP (% 4,5) was provided with production of service industry (annual average rate of actual growth made % 3,0), to the industry (% 8,2), constructions (% 8,2), agricultural industry (% 2,7).

Table 1

Structure of production and growth rates of real GDP, 2016-2017

	2016.	2017.	Average for 2016-2017.
GDP in current prices (one million som.)	476331,0	520958,6
GDP by sectors (%)	100,0	100,0	100,0
- Agricultural industry	12,8	12,3	12,55
- Industry	18,2	18,2	18,2
- Construction	8,4	8,2	8,3
- Services	47,5	48,0	47,75
- Net taxes on products	13,1	13,3	13,2
Rates of real surplus of GDP (%)	4,3	4,6	4,5
GDP without Kumtor	4,3	4,7	4,5
Rates of actual growth of gross output of industries, %
- Agricultural industry	3,1	2,2	2,7
- Industry	4,9	11,5	8,2
The industry without Kumtor	4,8	21,0	12,9
Construction	9,3	7,1	8,2
Services	3,1	2,8	3,0

In the industry annual average growth for 2016-2017 constituted % 8,2. Without Kumtor annual average growth in the industry constituted % 12,9.

The growth in volumes of industrial output in 2016 on 4,9 of % is caused by increase in production of foodstuff (including drinks) and tobacco products (on % 12,1), the purified oil products (on % 44,4), the main metals and finished metal goods, except machines and the equipment (on % 5,8), vehicles (on % 8,8), and also mining (on % 20,1).

In 2017 growth of the industry on 11,5 of % is caused by growth rates in processing industry on % 7,6, the energy sector - on 10,1 of % and increase in mining - in time 1,8.

In processing industry growth is provided at the expense of growth in volumes of production of foodstuff (including drinks) and tobacco products (on 12, %), the main metals and finished metal goods, except machines and the equipment (on % 3,7), coke and the purified oil products (on % 25,9), textile production, production of clothes and footwear, skin and other leather products (on % 11,4), chemical products (on % 6,7), pharmaceutical products (on % 25,6), rubber and plastic products, other nonmetallic mineral products (on % 20,8), machines and the equipment (on % 17,9), vehicles (on % 35,6).

In mining the growth in volumes of industrial production is provided with production growth: metal ores (in time 3,8), crude oil and natural gas (on % 20,1).

Annual average growth rate in agricultural industry for 2016-2017 developed at the % 2,7 level.

In 2016 on growth of gross release of agricultural industry, forestry and fishery (on % 3,1) growth as in crop production (growth on 3, of %) due to increase in production of sugar beet (factory) (in time 3,8), fruit and berry cultures (affected % 17,2), vegetables (% 2,6), and in livestock production (growth on % 2,9) due to increase in number of cattle, horses and bird.

In 2017 growth of agricultural industry on 2,2 of % is caused by increase in production of crop products at % 2,5, due to increase in production of cotton (on 25, %), vegetables (on % 3,4), potatoes (on 2, %), sugar beet (factory) (on % 1,0), melon cultures (on % 9,2), and growth of livestock production on % 2,0 due to increase in production of meat (on % 1,7), milk (on % 2,1), eggs (on % 8,7) and wool (on % 1,9).

In 2016-2017 growth of services was provided on average on % 3,0 in year generally due to expansion of services of wholesale and retail trade, car repairs and motorcycles. Rather stable prices of consumer goods, development of activities of hotels and restaurants became favorable premises.

In 2016 growth in the field of services constituted % 3,1 as a result of growth of amounts of services of wholesale and retail trade, car repairs and motorcycles (on 8, %), services of hotels and restaurants (on % 9,5), transport activities and storage of loads (on % 0,1), financial intermediation and insurance (on % 0,6).

In 2017 growth rate of services made 2, % generally due to increase in amount of services of wholesale and retail trade, car repairs and motorcycles (on 3, %), services of hotels and restaurants (on % 8,5), financial intermediation and insurance (on % 2,3), professional, scientific and technical activity (on % 1,4).

In construction industry for the considered period growth on average on % 8,2 as a result of growth of gross output of construction on % 9,3 in 2016 and on % 7,1 in 2017 was observed.

In 2016 growth of construction industry constituted % 9,3 due to growth of development of investments into fixed capital (on % 5,8) thanks to increase in the mastered investments directed to construction and reconstruction of objects for electricity supply, gas, vapor and the conditioned air (on % 8,3), water supply, cleaning, processing of waste and receipt of secondary raw materials (in time 2,9), wholesale and retail trade (in time 1,9), objects of the transport sphere and storage of loads (in time 1,6), hotels and restaurants (in time 3,6), educations (on % 12,1), on construction of facilities of art, entertainment and rest (in time 2,7), housing construction (on % 8,4).

In 2017 growth in industry on 7,1 of % is caused by increase in development of investments into fixed capital (on % 6,2), including due to increase in the mastered investments into construction of facilities on mining (on % 4,7), the processing productions (on % 14,4), wholesale and retail trade (in % time 1,4), hotels and restaurants (in time 1,7), health cares (in time 4,1), arts, entertainment and rest (on % 6,4), in construction and reconstruction of objects for electricity supply, gas, vapor and the conditioned air (on % 17,9), housing construction (on % 11,8).

In 2016 the deflation (decrease in consumer prices) (in % by December of previous year) by % 0,5 as a result of decrease in internal prices on foodstuff and soft drinks (on % 5,0), housing services, water, the electric power, gas and other types of fuel is fixed (on % 4,3).

In 2017 the rate of inflation (in % by December of previous year) made % 3,7 in connection with growth of internal prices on foodstuff and soft drinks (on % 2,7), alcoholic beverages, tobacco products (on % 4,0), nonfoods (on % 3,2), rates for services (on % 6,9).

Commodity export increased with 1482, 9 million US dollars in 2015 to 1573, 2 million US dollars in 2016 and to 1790, 7 million US dollars in 2017. Increase in annual average nominal growth rate of commodity export for 2016-2017 constituted % 10,0.

In 2016 commodity export in nominal terms increased by % 6,1 due to increase in the main export supply of gold - on 5, %, vegetables - on 35, %, fruit - on 2,1 of %, waste and scrap copper - in 3,0 of time, fiber cotton - on 2,5 of %, glass - on 35,0 of %, fabrics cotton - in 16,4 of time, portland cement - in time 2,3.

In 2017 commodity export in nominal terms increased on 13, % due to increase in export of fruit - by 40,3 of %, milk and dairy products - in 1,8 of time, tobacco products - in 1,7 of time, oil products - on 21,2 of %, fiber cotton - on 20,4 of %, articles of clothing and clothes accessories - in 1,9 of time, portland cement in 1,6 of time, glass - in time 1,8.

Commodity import decreased with 4153, 9 million US dollars in 2015 to 4000, 4 million US dollars in 2016 and increased to 4490, 0 million US dollars in 2017. Increase in annual average nominal growth rate of commodity import for 2016-2017 constituted % 4,3.

In 2016 nominal growth rate of commodity import decreased by % 3,7 generally due to reducing import of diesel fuel - on 42,6 of %, automobile gasoline - on 49, %, medicines - on 18,4 of %, vegetable oil - on 17,9 of %, hire of ferrous metals - on 27,1 of %, fertilizers - on 23,8 of %, coal - on 61,8 of %, wheat flour - on 30,5 of %, the equipment for the food industry - on % 48,4.

In 2017 commodity import in nominal terms increased by % 12,2 due to increase in import of milk and dairy products - in 5,8 of time, tobacco products - in 1,3 of time, coal - in 1,3 of time, oil products - on 25,2 of %, wheat flour - on 11,0 of %, gas natural - on 3,5 of %, medicines - on 35,0 of %, tires and tires pneumatic rubber - on % 28,2.

The main transformations in the social sphere in 2016-2017 were directed to accomplishment in full of the guaranteed social obligations of the state, to increase in level of living of the population and improvement of the situation of socially unprotected categories of citizens. The government of the Kyrgyz Republic managed to provide stability of system of social protection and succession of social policy.

In 2017 the average monthly salary constituted 15670, 0 som that exceeds subsistence minimum of able-bodied population in 2, time. In 2016 the average monthly salary in relation to 2015 increased on % 9,7 in real terms and constituted 14847, 0 som. The cost size of subsistence minimum on average per capita increased by % 2,2 in comparison with 2016 and constituted 4900, the 8th catfish in 2017 (4794, 3 som in 2016), including able-bodied population - on 2,4 of % and constituted 5479, 1 som (5352, 0 som in 2016).

In 2017 GDP per capita in US dollars increased in comparison with 2016 by 8,0 of % and constituted 1272, 5 US dollars.

Results of estimates of measurement of welfare of the population in the republic demonstrate decrease in level of poverty with % 32,1 in 2015 to % 25,6 in 2017.

The annual average number of the cash population of the republic in 2017 in comparison with 2016 increased by 118,6 of one thousand people and constituted 5943,3 of one thousand people. The number of occupied population in the republic in 2016 in comparison with 2015 increased by % 0,8 (with 2363,7 of one thousand people in 2016 to 2382,6 of one thousand people in 2017). Level of the registered unemployment in 2017 constituted 2,3 of % of economically active population (in 2016 - % 2,2).

Table 2

Social indicators for 2016-2017

	2016 fact	2017 the fact will precede.
Annual average number of the cash population (one thousand people)	5824,7	5943,3
Poverty (in % to the population)	25,4	25,6
Number of occupied population (one thousand people)	2363,7	2382,6
Official unemployment (in %)	2,2	2,3
Average monthly salary (som.)	14847,0	15670,0
real growth rate (in %)	109,7	102,2
in % to subsistence minimum of able-bodied population	277,4	286,0
Cash incomes of the population (one billion som.)	309,9	355,6

Main objective of macroeconomic policy for 2018 is preserving macroeconomic stability and creation of conditions for positive dynamics of economic growth.

In 2018 economic development of the country is performed on the basis of effective program implementation of development of the Kyrgyz Republic for 2018-2022 "Unity. Trust. Creation". Within implementation of this Program of the Government works on implementation of new approaches in informatization of fiscal processes with use of opportunities of the automated information systems begin. Work on improvement of business climate through enhancement of licensed authorization system and control and supervising activities of state bodies will be continued. Work on integration into the Eurasian Economic Union will be continued. The main activities are further building-up of export to EEU member countries, elimination of technical and other barriers in mutual trade on Eurasian space, step-by-step movement to single electricity market, digital reformatting of economy. With respect thereto GDP growth is expected on % 2,8. Inflation will be determined mainly by volatility of the exchange rate of national currency to foreign currencies, influence of the world prices for food, and also inflation expectations of the population. The rate of inflation in 2018 is expected at the % 3,5 level (in % by December of previous year).

In 2018 monetarist policies are still pursued according to the mode of the floating exchange rate chosen in the country. Currency interventions will be directed to mitigation of exchange rate fluctuations of som.

In structure of production of GDP the service industry, the industry and agricultural industry with specific weights of 48,3 of %, 17,9 of % and 12,2 of % respectively will dominate.

In 2018 in the industry (without the cost of the processed raw materials supplied by the customer, but taking into account the purchased electric power) growth on % 1,7 is expected. Without Kumtor growth will constitute % 7,4. Positive growth in industrial industry will be caused by increase in mining (on 1, %), the processing production (on % 1,3) generally due to increase in production of products (including drinks) and tobacco products (on % 5,0), coke and the purified oil products (on % 24,8), rubber and plastic products, other nonmetallic mineral products (on % 7,4), textile production (on % 10,0), electricity supply, gas, vapor and the conditioned air (on % 3,3).

In agricultural industry in 2018 growth on % 2,5 due to increase in production of crop production - on 2,5 of % and livestock production - on % 2,7 is expected.

Main objective of development of agricultural industry are creation of conditions for increase in production, improvement of quality of products and ensuring food security of the country. Render the following factors on increase in production: beneficial effect of climatic factor, active use and implementation by farmers of systems of drop irrigation, continuation of the program of preferential crediting of farmers within the Financing of Agricultural Industry 6 program, continuation of rendering the state support in release of fuel and lubricants, providing farmers with necessary agricultural machinery on preferential credit terms, continuation of development of greenhouse facilities and increasing production in economy.

Growth rate of service industry in 2018 is expected at the % 3,0 level due to development of wholesale and retail trade, car repairs and motorcycles (on % 5,0), transport activities and storage of loads (on % 6,0), hotels and restaurants (on % 8,0), financial intermediation and insurance (on 1, %). Actual growth of cash incomes of the population, increase in the consumer demand, program implementation of the Government of the Kyrgyz Republic on development of the sphere of tourism till 2020 approved by the Order of the Government of the Kyrgyz Republic on April 11, 2016 No. 192 exerts impact on development of service industry.

The total amount of capital investments in 2018 is expected at the level 159, of 3 billion som. Proceeding from the expected amount of development of capital investments the gross output of construction is expected in amount 151, of 8 billion som with actual growth on % 7,7. The priority directions in construction are construction objects of individual housing, objects of the thoroughfare and power.

In structure of GDP on use the share of gross investments will increase from % 33,29 in 2017 to % 33,43 in 2018.

The specific weight of general consumption in GDP will increase from % 97,81 in 2017 to % 97,85 in 2018 due to increase in share of the state consumption (% 17,37 in 2017, % 17,54 - in 2018). The share of private consumption will decrease (% 80,44 - in 2017, % 80,31 - in 2018). Rate of actual growth of private consumption in 2018 will develop at the % 2,8 level, and the state consumption on % 0,9.

The indicator of net commodity export and services to GDP in 2018 will constitute (-% 31,28) and will worsen on percent point 0,18 in comparison with 2017 (-% 31,1).

In 2018 commodity export will constitute 1900, 0 million US dollars and will increase by % 6,1 (in nominal terms) due to export growth of gold, cement, articles of clothing and clothes accessories, cotton-fiber, vegetables and fruit.

Commodity import will constitute 5023, 8 million US dollars and will increase by % 11,9 (in nominal terms) due to growth of import of oil products, natural gas, the machines which are specially intended for specific industries, ferrous metals and products from them, plastic and products from them, pharmaceutical products, paper, cardboard and products from them, food products (including agricultural raw materials).

In basis of development evaluations of the country three macroeconomic scenarios of development of the Kyrgyz Republic taking into account factors, the available resources and proceeding from the developed actual situation are pledged.

All three scenarios of the forecast are developed on the basis of single assumptions of influence of external conditions and internal factors which can exert impact on development of national economy on current and the next years.

Distinction of scenarios is caused by difference of behavior models of private business, work of industrial enterprises, perspectives of increase in its competitiveness and efficiency of realization of state policy of development.

When forming the Main directions of fiscal policy of the Kyrgyz Republic for 2019-2021 the basic (probable) macroeconomic scenario of social and economic development of the Kyrgyz Republic for the medium-term period corrected since 2019 taking into account the target reference points pledged in the Development program of the Kyrgyz Republic for 2018-2022 "Unity is assumed as a basis. Trust. Creation".

In the medium-term period for 2019-2021 strengthening of macroeconomic stability and ensuring sustained economic growth will be main goals of economic policy.

Target macroeconomic indicators will be reached through continuation of implementation of large national projects, reforming of system of state regulation for stimulation of all industries of economy. Also economic development of the country will be performed on the basis of carrying out active policy on forming and strengthening of economic potential in operating conditions of the Kyrgyz Republic in EEU, fixing of trajectory of economic growth in the countries the main trading partners and state members of EEU and continuation of recovery of demand.

The most important premises of successful realization of macroeconomic policy will become:

- socio-political stability in the country;

- increase in attractiveness of business environment and growth of business activity of business entities against the background of improvement of the investment climate;

- implementation of large investment projects;

- continuation of recovery of the consumer demand;

- control of acute fluctuations of the exchange rate instruments of monetary policy;

- moderate growth of net inflow of the money transfers of physical persons made through systems of transfer;

- strengthening of work on import substitution, development of export transactions and priority sectors with the high export potential;

- realization of state policy of social and economic development of regions of the Kyrgyz Republic, forming of basic design for preparation of the disaggregated development programs of specific settlements which will serve as points of development of regions within the Concept of regional policy of the Kyrgyz Republic for 2018-2022 approved by the Order of the Government of the Kyrgyz Republic of March 31, 2017 No. 194.

Treat external and internal risks which can make impact on GDP growth in 2019-2021:

- dependence of national economy on the world prices for gold, energy carriers and other raw material resources;

- possible application of protective measures of the domestic markets from the countries - the main trading partners that can entail decrease in competitiveness of domestic goods and commodity export;

- risk of preserving separate customs barriers, delay of opening of veterinary posts, incomplete accounting of movement of goods in connection with opening of borders, etc.;

- risk of continuation of adverse geopolitical situation and intensity in the region;

- toughening of monetary policy of Federal Reserve System (possible triple increase in rate of FRS);

- the additional inflationary pressure upon economy caused by growth of cost of import on the main food products and energy resources against the background of volatility in the foreign exchange market;

- not diversification of economy: high dependence of the industrial sector on results of activities of the companies for mining Kumtor;

- dependence of the domestic market on import of food group of goods (flour, vegetable oil, sugar, grain, etc.), fuel and lubricants;

- climatic factor which can make negative impact on development of agricultural industry and the energy sector;

- openness of economy, substantially subject to influence of external shocks;

- continuation of capital outflow from the country (following the results of for 2017 the amount of outflow of the direct foreign investments (DFI) exceeded the inflow amount in year on % 17,4, and receipts were reduced in comparison with 2016 by % 24,2 (in 1 quarter 2018 the amount of outflow of PII exceeded the inflow amount twice in 1 quarter 2017);

- preserving high level of shadow economy in the country (following the results of 2016 constituted % 24,5);

- possible reducing money transfers that in turn will lead to decrease in amounts of gross output of construction, services;

- decrease in demand because of delay of economic activity in the certain countries - the main trading partners of the Kyrgyz Republic;

- possible filling of the national markets with cheap goods and replacement of domestic manufacturers.

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