VZCZCXRO4893
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHLN RUEHPW RUEHVK RUEHYG
DE RUEHEK #0328/01 0980834
ZNR UUUUU ZZH
R 070834Z APR 08
FM AMEMBASSY BISHKEK
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RUEHBJ/AMEMBASSY BEIJING 2479
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RUCNDT/USMISSION USUN NEW YORK 2255
RUEHNO/USMISSION USNATO BRUSSELS BE
RUEHBS/USEU BRUSSELS
RUEHLMC/MILLENNIUM CHALLENGE CORP
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL

UNCLAS SECTION 01 OF 02 BISHKEK 000328 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR SCA/CEN 
 
E.O. 12958: N/A 
TAGS: ECON PGOV KG
 
SUBJECT: NEW KYRGYZ 2008 BUDGET ADOPTED 
 
 
BISHKEK 00000328  001.2 OF 002 
 
 
¶1.  (SBU) Summary: Kyrgyz President Kurmanbek Bakiyev signed the 
2008 Kyrgyz budget into law March 17.  The 2008 budget projects a 
25% increase in revenues and 19% rise in expenditures over 2007 
budget levels, with revenues reaching approximately $1.1 billion and 
expenditures reaching almost $1.2 billion.  The government plans to 
cover the projected $100 million budget deficit through 
privatizations and other measures.  However, commodity price 
increases, growth in government spending and other factors are 
kindling inflation, which may reach 25-30% this year.  A new tax 
code, which may include a reduction in VAT, is expected to be 
debated in the parliament this spring.  End summary. 
 
General Budget Overview 
----------------------- 
 
¶2.  (U) The Kyrgyz parliament, dominated by the pro-presidential Ak 
Jol party, adopted the 2008 state budget without the delays seen 
last year.  President Bakiyev, while undergoing medical treatment in 
Germany, signed the legislation into law on March 17.  Budget 
expenditures are expected to increase by 19% compared to 2007 
figures, reaching $1.177 billion or 27.3% of the projected GDP. 
(Note: Expenditures, which are growing at a faster rate than GDP, 
equaled 22.2% of GDP in 2006 and 25.6% of GDP in 2007.  End note.) 
 
¶3.  (U) The 2008 budget outlines significant increases in salaries 
and services for education (up 29%), health (up 40.5%) and social 
protection (up 17%).  Basic operating expenses of the government for 
2008 are estimated at $527.3 million.  The salaries of civil and 
municipal servants will be raised (for the first time since 2000) by 
an average of 59%.  (Note:  The state budget is denominated in 
Kyrgyz som.  We have converted budget figures using an exchange rate 
of 36.6 som/USD.  End Note.) 
 
¶4.  (U) Budget revenues are projected at about $1.1 billion, or 25% 
of projected GDP.  Revenues are projected to increase 17% over 2007 
budget targets, as the government forecasts significant growth in 
tax and non-tax revenue.  Kyrgyz data indicate that customs duties 
for 2008 are anticipated to reach $511 million, amounting to nearly 
half of overall revenues. 
 
Financing the Deficit 
--------------------- 
 
¶5.  (U) The projected $97 million budget deficit (2.2% of GDP) is 
less than 2007's projected budget deficit.  (Note: According to the 
IMF, the Kyrgyz 2007 consolidated budget deficit was only 0.4% of 
GDP, much less than original budget projections, due to higher than 
expected levels of revenue.  However, the IMF also recently 
predicted a bigger deficit for 2008.  End note.)  The government 
plans to cover the projected budget deficit by selling government 
securities and non-financial assets, privatizing state property, 
collecting additional taxes and customs fees, and utilizing foreign 
grants.  Specifically, the Kyrgyz government is aiming to privatize 
the largest electricity distribution company, "Severelectro," the 
Bishkek thermal power plant, the telecommunications giant "Kyrgyz 
Telecom," the natural gas transport and distribution firm 
"Kyrgyzgaz," and the rural customer-focused "Ayil Bank."  However, 
problems affecting previous privatization attempts of Kyrgyz Telecom 
may also complicate these planned sales. 
 
Adding Another Tier to the Budget 
--------------------------------- 
 
¶6.  (U) The 2007 budget, based on a two-tier budget system designed 
to decentralize government administration, allocated funds directly 
from the central budget to local administrations.  However, the 2008 
budget reintroduces funding to rayon (district) level 
administrations as well.  This change may have no significant impact 
on the government's decentralization program unless rayon level 
budgets in future years expand beyond the limited scope envisioned 
in the new allocations. 
 
 
BISHKEK 00000328  002.2 OF 002 
 
 
Innovations 
----------- 
 
¶7.  (U) For the first time, the 2008 budget law introduces budget 
projections, which are binding on Kyrgyz ministries, through 2010. 
This new approach envisions 2009 revenues and expenditures at $1.454 
billion and 2010 revenues and expenditures at $1.594 billion. 
 
Comment 
------- 
 
¶8.  (SBU) Significant price rises for commodities, growth in Kyrgyz 
budgetary outlays and other factors over the past two years have 
kindled inflation, which is expected to reach 25-30% in 2008.  The 
government's attempts to make the state budget more transparent and 
progressive could be aided by a revised tax code.  The draft tax 
code, devised partially with the input of business associations, is 
expected to be debated in parliament this spring.