Publication: Monitor Volume: 7 Issue: 156

Like many post-Soviet economies, Kyrgyzstan has had difficulty ensuring an adequate tax take. This has been due partly to shortfalls in the amount of tax paid on legitimate economic activity, a reflection of under-reported earnings by businesses. It has also been due to the existence of a sizable gray economy, in which transactions are in cash and records few. Neither of those problems is easily remedied. Apart from relying on the heavy hand of the state for a solution, Kyrgyzstan also appears to be experimenting with a more conciliatory approach, in the hope that acceptance of prevailing practices may somehow translate into greater observance of the law and improved revenues.

Several steps have been taken in that direction this summer. The newest proposal, which Central Bank Chairman Ulan Sarbanov recently pledged to support if adopted, seeks to attract back into the banking system much of the cash held by the population. If successful, the tabled measure would enhance the depth of the financial system and, with a bit of luck, boost economic growth. The Finance Ministry prepared a draft law for the purpose at the start of the summer, and it now awaits approval from the government and legislature. Envisioned as a one-month opportunity, the legislation promises all who come forward with undeclared incomes that no questions will be asked as to the origins of the cash. In return, the government plans to levy a 1-percent tax on the sums involved.

In July, Kyrgyzstan approved a controversial tax cut, which dropped maximum rates on corporate and individual earnings by as much as two-thirds. The hope is that the reduction will eliminate incentives to cheat on taxes and boost entrepreneurship. Whether the law remains on the books and takes effect remains to be seen, however, as there is already talk of a moratorium on the cuts ahead of upcoming budget talks with the IMF. Kyrgyzstan had reportedly decided on the cut without the IMF’s knowledge, despite participation in an IMF program. The cut is already alleged to have induced the Fund to block its disbursement of a tranche under the Poverty Reduction and Growth Facility (PRGF).

At the start of the summer, the government decided to legitimize, and tax, fees charged by doctors and educators directly to their patients and students, outside the framework of the legally regulated relationship between those professionals and their clients. In Kyrgyzstan, as in other post-communist countries, healthcare and education are supported by the state. Nevertheless, the practice of charging patients and students additional fees is quite common and a reflection on the low earnings of workers within the sectors.

In 2000, the government of Kyrgyzstan failed to meet its full-year tax revenue target by 11.7 percent. First-quarter tax revenues this year exceeded expectations. According to a State Tax Service representative, tax revenues through the end of the quarter were 1.3 percent higher than planned and 16.4 percent above the same period last year. It remains to be seen whether the new initiatives, if approved, will lead to further improvement in the country’s fiscal situation (AKIpress, July 20, August 14; Interfax, April 6-15; Kabar News Agency, May 30; Kyrgyz-Press, May 23; Kyrgyz Radio First Program, 1300 GMT, August 3; Vecherny Bishkek, July 17).