Due to the worsening economic situation, the Kyrgyz government presented a revised state budget for 2020 in May. The new budget provided for a drop in revenues by 28.4 billion soms and a reduction in government spending by 8.6 billion soms. A 7.7 billion soms budget gap was filled by the Government by attracting loans from international organizations.
Will the loans help the state budget, specifically, government spending on public payroll, pensions, benefits, education and health? Yes, they will. Will the loans help the economy, and that means, above all, the private sector, people who earn their living independently? Probably not, since a substantial share of the loans is used to finance public expenditure. But without helping the private sector whose taxes replenish the state budget, the public revenue will quickly fade into nothing.
Also in May, the Government announced the tight fiscal policy to reduce government spending. But how tight is the fiscal policy, considering that the state machinery is expanding every year? This is especially interesting in the context of the coronavirus outbreak in July and a second wave of economic recession in Kyrgyzstan. Meanwhile, the global crisis that has already made the world economy shrink by 5.2%, which has never happened in the past eighty years, and the onset of a deep and prolonged recession are waiting on the doorstep. In times of crisis, all countries did their best to help their economies. Aid-dependent countries will have to count on themselves.
Every family and every organization knows that in the event of a loss of earnings or a drop in income, it is necessary, firstly, to cut spending, and, secondly, to think about the ways to earn or increase income. If this is not done, the family may be left without home and food, and the organization may go bankrupt.
The same is true for the state: if state revenues fall, it is necessary, firstly, to reduce government spending, and secondly, to stimulate revenue growth. If this is not done, the population may get poorer, and the state may be unable to pay off its debts and may go bankrupt. This is a frightening but very real prospect for Kyrgyzstan, whose economy has been seriously ill for many years. Is it necessary to cut government spending even further? This topic is covered in this article. Are there ways to foster revenue growth? This will be discussed in the next article.
(All data in this article are derived from a package of documents related to the updated republican budget 2020 and economic forecast 2021-2022 published on the website of the Kyrgyz Ministry of Finance at the link below http://www.minfin.kg/ru/novosti/novosti/glava-gosudarstva-odobril-popravki-v-respublikansk. For illustrative purposes, we attach hereto Schedule 1 to the above package, Budget Revenues and Expenditures).
The state budget of Kyrgyzstan (hereinafter the "budget") is needed to finance the services provided by the state to its citizens, i.e. the state and municipal administration services (hereinafter the "public administration"). It consists of expenditure on wages of state and municipal employees, education and health, social welfare, construction and maintenance of public infrastructure (roads, bridges, water and electricity supply, etc.), servicing of public debt.
A budget consists of revenues and expenditures.
Budget revenues are derived from: taxes (taxes, fees, customs duties, fines and penalties); non-tax receipts (rent payments, loan interest, duties, fees and charges); official transfers (grants); capital income (from the sale of capital assets - land, real estate, equipment).
Budget expenditures include: operating expenses (payroll, procurement of goods and services, loan interest, subsidies, grants, social benefits, other expenses); expenses related to transactions in nonfinancial assets (movable and immovable property); expenses related to transactions in financial assets (cash and non-cash funds, shares, monetary obligations); expenses related to principal debt obligations (principal debt repayments). Operating expenses plus expenses related to transactions in nonfinancial assets make aggregate budget expenditures.
Pre-crisis budget 2020 reflected the anticipated revenues of 163.7 billion soms. In May 2020, after the declaration of a state of emergency and shutdown, the Government reduced the revenues to 135.3 billion soms, i.e. by 28.4 billion soms. Such a drastic reduction has never happened in the history of sovereign Kyrgyzstan (see Table 1. Revenues).
Why were budget revenues reduced? The answer is simple: because people have no jobs, no earnings, and no income to pay tax on. Meanwhile, taxes are the main source of government revenue (up to 78%). The May revision (post-crisis) reflected a 31 billion soms decrease in tax revenue and a 0.4 billion soms decrease in non-tax revenue. At the same time, international grants increased by 3 billion soms.
If revenues fall, expenditures need to be reduced too. Pre-crisis budget 2020 reflected the anticipated expenditures of 171.6 billion soms. The revised budget reflected a reduction in expenditures to 163 billion soms, i.e. by 8.6 billion soms (see Table 2. Expenditures).
What was such reduction in expenditures due? It was due to a reduction in payroll by 0.5 billion soms, procurement of goods and services by 2.9 billion soms, grants and contributions by 0.5 billion soms, other expenses by 0.5 billion soms, investment in non-financial assets by 5.9 billion soms. However, there was also observed an increase in some expenditures: interest by 0.6 billion soms, subsidies to state-owned enterprises by 0.5 billion soms, social benefits and payments by 0.3 billion soms.
Payroll item also covers education and healthcare payroll expenses (accounting, on average, for 40% and 2% of total payroll expenses, respectively).
It should be noted that the reduced expenditure (8.6 billion soms) is three times less than the reduced revenue (28.4 billion soms), which is also one of the main causes of deficit.
Uneven and unequal reductions in the 2020 revised budget revenues and expenditures resulted in a huge 27.7 billion soms deficit (see Table 3. Deficit).
Most likely, the budget deficit (see Box 1. What does budget deficit mean?) will grow, because the economy continues to decline, the private sector has not resumed its normal operation, it is almost impossible to earn income, which means no taxes to replenish the budget, even at the 2019 level.
The reasonable question arises: how will the Government fund the deficit? It is not difficult to guess: through loans and grants. In July 2020, in an interview with Radio Azattyk, Baktygul Jeenbaeva, Minister of Finance of the Kyrgyz Republic, explained that to help the budget the country “has no choice but to resort to outside assistance", " ... imagine you are sick and lie at home. You have a choice: borrow from your neighbor, buy medicine, recover quickly, go back to work, repay the debt to your neighbor and continue working for yourself ... Or just lie at home...”. Apparently, this is what is happening now: Kyrgyzstan is always sick, borrows from a neighbor, buys medicines, works, gets sick again, buys medicines again ……. and so on and so forth, in a vicious circle, for several consecutive decades.
A small budget deficit, as the Minister says, "is normal" and "there is nothing wrong with that". That may be true, but over the past year and a half, the public debt of Kyrgyzstan has grown from 54.8% to 60.19% of GDP and now amounts to 4.76 billion US dollars (or 351 billion soms). In addition to becoming a heavy burden for future generations, the public debt will be a barrier to the country's economic growth, especially during the peak of debt repayments between 2023 and 2031.
According to the latest information published on the website of the Government, to address the impact of the pandemic, the Government attracted $ 627.3 million as external assistance. To date, there have been received half of the funding ($ 319.2 million), 99% of which were used to support the budget, and the remaining 1% (US $ 2.2 million) were spent in response to COVID-19.
In general, the management of the country's economy has been reduced to obtaining loans and grants. And Kyrgyzstan has succeeded in this, becoming the largest recipient of donor assistance in Central Asia. For the period from 1991 to 2018 (apart from China's foreign aid), Kyrgyzstan received more than $ 8 billion.
Are there other ways, besides loans, to help the economy? How to fund the budget deficit? How to support the private sector, which is the main breadwinner in the country? If the Government does not have solutions, it needs to learn from other countries. Many countries, first of all, cut government spending by abolishing bonuses, travel allowances, additional payments, depending on the severity of the situation, reducing the number of government agencies and employees, imposing a ban or freeze on hiring new employees, announcing temporary wage cuts, selling government assets, reducing government functions, outsourcing them to the private sector, or using other methods. All for the sake of economy.
As announced by the Government, the May Budget 2020 is based on the "tight fiscal policy". But is it really tight? This is especially interesting in the context of crisis which affected all sectors of the economy and all people of the country. What is the role of the Government as a body responsible for managing the budget and economy of the country (see Box 2. Role of the Government in managing state budget of the country)?
Source: Derived from the Basic Guidelines of the Fiscal Policy 2020-2022, approved by the Government Resolution of September 12, 2019 No. 469.
"The state budget is one of the main instruments of socio-economic policy intended for managing government spending, taxes, achieving growth in real production and employment, controlling inflation and accelerating economic growth."
To answer this question, let's have a look at the existing system of public administration.
Everyone knows that public administration in Kyrgyzstan is ineffective. This is confirmed by global surveys, according to which Kyrgyzstan is ranked 135th out of 193 countries in government effectiveness (by comparison, Armenia is the 90th, Kazakhstan is the 85th, and Georgia is the 47th). This is confirmed by the Corruption Perceptions Index, according to which Kyrgyzstan ranks the 126th out of 180 countries. The state itself admits ineffectiveness of government bodies (see Box 3. Kyrgyz Government about ineffectiveness of public administration).
Source: Derived from the Kyrgyz Government Programme 2018-2022 "Unity, Trust, Creation", approved by the Kyrgyz Parliament Resolution of April 20, 2018 No.2377-VI (Clauses 1.3.3; 3.1; 3.2)
"Despite the progress achieved in certain areas, insufficiently flexible and mobile system of public administration remains one of the key barriers to development." “…Today changes in government happen frequently and appointments to public offices are made on the basis of loyalty rather than merit. All these factors undermine government effectiveness, while the government employees have no responsibility for attaining the objectives sought by the society, or for the assessment and impact of public administration." “At the same time, the state machinery maintenance costs are growing. Uncertain implementation deadlines are constantly extended. The lack of agreement and coordination among government bodies in reaching the country's goals causes corruption and growth of the shadow economy».
Despite ineffectiveness of the public sector admitted by the Government itself, the number of public administration employees (namely, state, municipal and other employees of state and municipal institutions) is constantly growing: from 38 thousand people in 2000 to 60 thousand people in 2020. In 2019 alone, the number of state employees alone increased by 1.2 thousand people. (See Box 4. Education and healthcare workers are not considered state and municipal employees).
Despite quantitative growth, the productivity of those employed in public administration fell by 21.4%. Public trust in government bodies is low.
For your information, education and healthcare workers are not included in the number of public administration employees. Today, there are 108 thousand public education workers, including 78 thousand school teachers, and 49.7 thousand public healthcare workers, including 14.1 thousand doctors and 35.6 thousand nurses.
How much does public administration cost?
With the growing number of public administration employees, their maintenance costs also increase. Like twenty years ago, everything the country earns is spent on public administration and services, with only one difference: in 2000, there was almost no budget deficit in Kyrgyzstan, that is, revenues and expenditures were approximately equal, and in 2020 there was a 27.7 billion soms deficit, which is steadily growing due to the ongoing economic recession.
In Kyrgyzstan, public administration payroll expenses (including education and healthcare workers payroll, accounting, on average, for 42% of the total public payroll expenses) significantly exceed international standards. For example, in developed countries, payroll expenses account, on average, for 24.5% of their budget expenditures, versus 27% in developing countries. In 2020, in Kyrgyzstan, public administration payroll expenses amounted to 37.5%. It is noteworthy that despite the general drop in government effectiveness, public sector payroll expenses are growing steadily. So, in 2020, compared to 2019, public administration payroll expenses increased by 4.6 billion soms (without taking into account a 5.2 billion soms increase in education payroll expenses and a 0.1 billion soms increase in healthcare payroll expenses).
Where do public administration employees work?
Out of 60 thousand state and municipal employees, 19 thousand are state employees, 10 thousand are municipal employees and 31 thousand are employees of public defense, security, law-enforcement, and prosecution bodies (the number of such employees constitutes restricted data), and other employees of state and municipal bodies without the status of state or municipal employees. The above employees work in various state and municipal institutions.
State institutions include 87 government institutions, including 12 ministries, 33 state committees, commissions, services, inspections, agencies, funds and centers, and the General Prosecutor's Office, Counting Chamber, Ombudsman, Supreme Court, Military Prosecution, Social Fund, seven executive offices of plenipotentiary representatives of the Government in seven regions and many other institutions.
Each state body has from dozens to thousands employees, for example, the Ministry of Justice - 442 (which can increase up to 552 by January 1, 2023), the Ministry of Emergency - 4,887, the Ministry of Economy - 335, the Ministry of Finance - 975, the State Customs Service - 1,138, the Ministry of Agriculture - 669, the Ministry of Transport - 993, the Ministry of Culture - 180, the Ministry of Health - 174, the State Agency for Environmental Protection - 1,926, the General Prosecutor's Office - 1,076, the State Agency for Water Resources - 4,896 and so on. Such number of government bodies and employees obviously is inconsistent with the vision of the National Strategy of the country (see Box 5. What the state machinery should be like?)
Source: Derived from the Kyrgyz Republic National Development Strategy 2018-2040, approved by the Presidential Decree of October 31, 2018 UP No. 221.
Objectives 9.1 and 9.3: "Mobile and compact state machinery. By 2020 the number of ministries, agencies, state employees should be reduced, including by implementing new technologies. The government should be compact, more transparent, professional and young. Transparency and effectiveness should be the main principles of public administration". "The best people should be attracted to state and municipal service and paid twice as much as they are now".
What does state government own?
According to information published on the website of the State Property Management Fund under the Government of the Kyrgyz Republic, there are 1,760 state institutions in Kyrgyzstan. Apart from that, the state owns shares in 32 joint stock companies and 6 limited liability companies, and also 104 state-owned enterprises (the "SOEs").
As a rule, the SOEs are established to support the economy of the country. But, according to the Kyrgyz Prime Minister, half of them are not working or are not profitable. Despite this, the Government keeps subsidizing them for years. Is it necessary to keep operating the loss-making enterprises? Wouldn't it be better to sell or outsource them to private owners who, in addition to freeing the state from the burden of maintenance, will create new jobs and pay taxes?
The State also owns numerous assets: about 620 thousand units of equipment, more than 21 thousand buildings and structures, 412 units of incomplete construction, more than 6 thousand vehicles.
Some part of state assets is rented out on a short-term basis for a token fee (basic rental rates amount to 100, 90 and 80 soms per 1 square meter). In 2019, the rental income amounted to 516 million soms accounting for 0.3% of the total budget revenues. Moreover, most of the rented or other state assets are worn out and in disrepair, and there isn't enough cash to make capital improvements or investments in such property. Why does the State maintain unprofitable and collapsing assets? Also, as in the case of the SOEs, isn't it better to sell or outsource them to private companies, replenish the perishing state budget, and let private owners invest in them, create jobs and pay taxes. Moreover, the state planned to accomplish this by 2020 (see Box 6. The transfer of state property).
Source: Derived from the National Development Strategy 2018-2040 approved by the Presidential Decree of October 31, 2018 UP No. 221
"The state should pursue the policy of reducing the economically unsound state participation in the economy and optimizing the public sector." “By 2020, the state should fully transfer public assets, except strategic ones, to private ownership".
What do local self-government bodies own?
There are 31 cities, 453 rural municipalities and 10 thousand municipal employees in the country, without taking into account non-municipal employees of municipal institutions and enterprises. Administrative-territorial division is not optimized. There are 67 rural municipalities which consist of only one village; other rural municipalities may comprise more than 15 villages. There are hundreds or even thousands of municipal enterprises and institutions operating in the country, but there is no list of such entities in the public sources. There is no analysis and assessment of performance of municipal enterprises and institutions. There are no publicly accessible registers of municipal property, despite the legal requirements for public access to such information. Local self-government ineffectiveness is largely attributable to the same factors as government ineffectiveness: underfunding, incompetence, corruption and poor quality of public services.
Let's ask again: Is the tight fiscal policy really tight? Rather, the reverse is the case: there is no cost-effective economy; on the contrary, the economy can boldly be called wasteful. Hundreds of thousands of taxpayers rapidly becoming impoverished have to feed a growing and ineffective army of public administration workers, whose maintenance is more expensive for the nation than in other countries. In addition, taxpayers' money is spent on the maintenance of unprofitable SOEs, worn-out and collapsing state and municipal assets, dozens or even hundreds or thousands of state and municipal institutions, whose benefit to the country is doubtful.
5.Is it necessary to further reduce the budget?
Kyrgyzstan suffers from a second wave of the pandemic, huge losses of health and life... Thousands of people are losing their jobs, poverty is growing. Will the state attract new loans to help the economy? Apparently, yes. Will the Government further reduce its spending? It's not clear yet. But it is clear that the May reduction in government spending is certainly not enough. In the context of drastic decline in revenues and taxes, an equally drastic reduction in government spending is needed.
How can this be done? Let's not invent the wheel, but look at the experience of other countries in distress, examine the recommendations of international organizations, including the latest recommendations to reduce public spending during the pandemic. We cannot do without reducing unnecessary and ineffective government functions, bodies and services, unnecessary and unprofitable SOEs; public payroll expenses should not exceed 27% of total public expenditures. It is necessary to look for options for increasing government revenues by selling burdensome and worn out state and municipal assets. In general, the management of the country's revenues and expenditures should be subordinated to the aim of helping the economy and fostering economic growth, rather than driving the country into new debts.
We are only at the beginning of the crisis, urgent solutions are needed. Without really cost-effective fiscal policy, without measures aimed at supporting the business sector, the economy may not recover. If this is not done today, it won't be long before the state becomes unable to pay public employee salaries, pensions and benefits, and pay off its debts.
Of course, the budgetary issues cannot be effectively solved unless the state finds ways to foster economic growth. This topic will be covered in the next article.
This is article 2, you can found the first article at: