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UNCLAS SECTION 01 OF 02 BISHKEK 000144 
 
SENSITIVE 
 
SIPDIS 
 
DEPARTMENT FOR SCA/CEN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV KG
 
SUBJECT: GROWING DEFICIT CHALLENGES 2009 KYRGYZ STATE BUDGET 
 
BISHKEK 00000144  001.4 OF 002 
 
 
¶1.  (SBU) Summary:  Kyrgyz President Kurmanbek Bakiyev signed the 
2009 Kyrgyz budget into law on January 21, 2009.  The 2009 budget 
law projects a 5.9% increase in revenues and 4% rise in expenditures 
over 2008 budget levels, with revenues reaching $1.115 billion and 
expenditures reaching $1.202 billion, resulting in a projected 
budget deficit of $87.2 million.  However, global financial turmoil, 
a new tax code, an optimistic economic growth forecast, and domestic 
energy shortages have already cast doubt on the budget forecasts. 
As a result, the Ministry of Finance is now planning to submit a 
supplementary budget forecasting lower revenues, higher 
expenditures, and a budget deficit reaching to $212.2 million.  End 
summary. 
 
General Budget Overview 
----------------------- 
 
¶2.  (SBU) President Bakiyev signed the 2009 state budget, which had 
earlier received Kyrgyz parliamentary approval, into law on January 
¶21.  Budget expenditures are expected to increase by 4% compared to 
2008 figures, reaching $1.202 billion.  While the public decree 
Bakiyev signed only identified gross figures, the parliamentary 
version contained specific outlays.  The 2009 budget increases funds 
for health (up 5.7%), social protection (up 8%) and capital 
investment (up 11.5%).  Several other sectors register declines -- 
education down 2.9%, defense lower by 13.9%, and public order and 
security down 17.6%.  (Comment:  There has been no explanation as to 
why defense and security allocations would decrease.  End comment.) 
In addition, the Government will channel $62.7 million into foreign 
debt service and $87 million into internal debt service.  Basic 
operating expenses of the government for 2009 are estimated 
approximately at $343 million, which is less than 2008 figure. 
(Note:  We have used an exchange rate of 40 soms per dollar for 
these calculations.  End note.) 
 
¶3.  (U) Budget revenues are projected at about $1.115 billion. 
Revenues are projected to increase 5.9% over 2008 budget targets 
despite likely decreases in tax revenues arising from tax code 
revisions. 
 
¶4.  (SBU) The projected $87.2 million budget deficit may balloon to 
$212.2 million if a supplementary budget that is currently being 
drafted reflects decreasing revenues and increasing expenditures. 
The government planned to cover the initial deficit projection by 
selling state treasury bills and non-financial assets, privatizing 
some state property, and attracting foreign grants and loans.  The 
promised injection of Russian financial assistance may cover this 
year's gap. 
 
Impact of the New Tax Code 
-------------------------- 
 
¶5.  (U) A new tax code which became effective at the beginning of 
2009 decreased the rate for value added tax (VAT), a major source of 
government revenue, from 20% to 12% and abolished some other taxes. 
The new tax code established sales tax and property taxes, which 
when implemented, should cover some revenue losses arising from the 
lower VAT rate.  President Bakiyev has suggested a review of the VAT 
rate later this year.  Some businesspeople have also expressed 
concern with increased indirect taxes on entertainment venues, 
casinos, and currency exchange offices. 
 
Innovations 
----------- 
 
¶6.  (U) The 2009 budget law establishes budget projections, which 
are binding on Kyrgyz ministries, through 2011.  This new approach 
envisions 2010 revenues and expenditures at $1.248 billion and 
$1.312 billion.  The 2011 revenues and expenditures are projected at 
$1.372 billion and $1.410 billion.  The new projections spur 
longer-term planning and should help the Kyrgyz finance minister 
control government spending. 
 
 
BISHKEK 00000144  002.2 OF 002 
 
 
Comment 
------- 
 
¶7.  (SBU) Global financial difficulties, continuing Kyrgyz power 
shortages, and the implementation of the new tax code are having an 
impact on government budget plans.  Although some Kyrgyz politicians 
argue that the Kyrgyz Republic is isolated from global markets and 
will be able to weather global trends without difficulty, problems 
in Kazakhstan and Russia have repercussions on the Kyrgyz workers in 
those countries and on the remittances they send back to relatives 
in the Kyrgyz Republic.  The recent devaluation in the Kazakh 
national currency triggered high local demand for the U.S. dollar 
and intervention by the Kyrgyz Central Bank.  The government also 
forecasts an overly optimistic 6% growth in gross domestic product 
in 2009. 
 
¶8.  (SBU) Of more immediate concern for budget planners is a recent 
estimate that tax code changes will result in an additional $85 
million revenue shortfall.  The Kyrgyz Ministry of Economic 
Development has also projected that reduced economic activity as a 
result of recent electricity cuts will trim Kyrgyz budget revenues 
by $17.4 million.  These and other shortfalls as well as increased 
expenditures have caused the Ministry of Finance to draft updated 
2009 budget figures.  The worsening economic conditions will 
challenge the government's ability to maintain services and pay 
salaries in 2009, especially if anticipated external financial 
assistance from Russia and other donors is not provided. 
 
¶9.  (SBU) The impact of the Russian loan, grant and debt forgiveness 
package will be discussed septel.