LONDON (TCA) — Kyrgyzstan and other Central Asian countries are constantly trying to attract foreign investment, which is very important for the local economies and one of the most important answers to persistent economic stagnation. The inability to solve this problem during at least the past decade requires a consideration on how the attraction of foreign investment has been handled and the several reasons behind the failure, involving not only large multinationals but also small and medium foreign entrepreneurs.
The case of Kyrgyzstan is most exemplary in this regard, marked by a widening gap between cash inflow and industrial productivity – caused by massive squandering of cash by economic elites due to the overall national economy. Tax privileges and other cosmetic measures are not going to help as long as investors do not see tangible yield on the horizon. The country tries to focus on so called “incentives” without realizing that the present tax system is quite adequate and what investors need is a completely different approach and a low-cost entry to the market and the respect of the established rules.
Misspending of cash comes from institutional lenders such as the World Bank, the International Monetary Fund and various European providers (mainly due to the latter and not to the Kyrgyz recipients). Add to this internal corruption, lack of vision and adequate planning, political instability and the failure to direct cash flows to tangible, productive sectors, and you will have the real picture of the present situation and the failure to attract investors.
Today the country lacks infrastructure and modern industrial zones, labor motivation is low and local productivity little inspiring to private investors looking for tangible and sustainable business. Add to this the bureaucracy and corruption, and generally felt political instability, and you will get the real picture.
In the first quarter of this year, Kyrgyzstan’s economy received capital investments to the amount of 16.5 billion som, according to the CIS Interstate Statistics Committee. The amount stands more or less at par with the same period of last year, and given the stable position of the national currency comes pretty close to the “real” economic figure. But if the trend persists through the year, it will cut the last full year’s sum of 120.9 billion som down to hardly more than half its size.
The reason is obvious: over the first three months of 2016 Kyrgyzstan’s gross domestic product dropped by 4 per cent to the amount of 78.8 billion som, while its industrial output lost a staggering 24.3 per cent on-year.
Where the money goes
The basic explanation is rather simple: the Kyrgyz nation is spending more than twice the amount that it earns. The number of lavish mansions and luxury estates mostly around Bishkek but also in other parts of the country is mushrooming. So is the construction of luxury housing in the capital most of which stand all but empty. The reason is quite simple — Kyrgyz do not have any other place to hide their cash if not to build apartments and develop real estate. No factories, no production, since this requires not only capital (that is locally available) but know how, managerial capacity and a market that are all missing. The situation may remain sustainable but not less troubled for it as long as the basic problem is not addressed.
Kyrgyzstan’s external trade deficit can be expected to oscillate around 200 million US dollar per quarter, with no improvement in sight through the current decade. The lack of internal production keeps a substantial part of the economy dependent on imported goods – hence the increasing inflation rate.
On the negative side, the expected “return to the homeland” of Kyrgyz working forces from Russia and other ex-Soviet states did not take place, nor did the expected investments from Russia or Kazakhstan. This in turn upholds the shortage of workers in Kyrgyzstan, replaced by cheap but little-performing (and to large proportions illegal) employees mainly from the countryside as well as from Tajikistan and Uzbekistan. According to people familiar with the education system, students are rushing to universities while vocational schools stand all but empty. The result is too many managers, engineers and other brain bosses with nobody left who can hold a hammer in his hand.
With Kyrgyzstan’s national debt coming close to the equivalent of 4 billion dollars and close to half of that amount spent on things the economy does not really needs, attracting credit should be limited to money spent on infrastructure factories and other facilities rather than consultants writing reports that nobody reads. In all: the main issue is not how to attract investments but how to spend them. Kyrgyzstan should focus on internal production and develop industrial zones. Foreign and local investors need a low cost of entry to the Kyrgyz production market with the possibility of leasing modern and infrastructure-equipped factory buildings and taking advantage of an expanded export market of the EEU, and not lower taxes. Very important is a favorable climate towards stability and the possibility to produce and increase productivity through training and suitable know how, making use of the export opportunities that the Eurasian Economic Union offers with its expanded market. All this should direct investment from idle real estate to factories and production facilities.
The real incentive
Offering to foreign companies (at this stage mainly Chinese) a pragmatic and more result oriented approach with less politicking but with keeping to prior agreements, is what Kyrgyzstan needs. This demands keeping taxes at the same level, but that money received from abroad is spent in the right way — mainly in productive infrastructure. If this is done investments will come and the work to be performed by the State would be to keep investors here without harassment and incredible populist demands. Allowing entrepreneurs to make profit and to pay existing taxes without bribes and different types of hidden blackmail is what the country needs.