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ORDER OF THE GOVERNMENT OF THE KYRGYZ REPUBLIC

of December 20, 2018 No. 596

About approval of the Program of the Government of the Kyrgyz Republic for development of export of the Kyrgyz Republic for 2019-2022

For the purpose of increase in the export potential of the country and competitiveness of domestic production in the world market, within program implementation of development of the Kyrgyz Republic for 2018-2022 "Unity. Trust. Creation", the Kyrgyz Republic approved by the Resolution of Jogorku Kenesh of April 20, 2018 No. 2377-VI, according to articles 10 and 17 of the constitutional Law of the Kyrgyz Republic "About the Government of the Kyrgyz Republic" the Government of the Kyrgyz Republic decides:

1. Approve:

- The program of the Government of the Kyrgyz Republic for development of export of the Kyrgyz Republic for 2019-2022 according to appendix 1;

- The actions plan on program implementation of the Government of the Kyrgyz Republic on development of export of the Kyrgyz Republic for 2019-2022 (further - the Actions plan) according to appendix 2.

2. To the ministries, the state committees, administrative departments and local government bodies (in coordination):

- in case of annual forming and introduction of amendments to the republican budget to provide financing of expenses on implementation of the Actions plan.

3. To the ministries, the state committees, administrative departments, local government bodies (in coordination) and to National Bank of the Kyrgyz Republic (in coordination):

- quarterly, no later than the 15th following the accounting period to provide information on execution of the Actions plan in the Ministry of Economics of the Kyrgyz Republic for generalization.

4. Quarterly, no later than the 30th following the accounting period to provide to the Ministry of Economics of the Kyrgyz Republic in Government office of the Kyrgyz Republic the summarized information on course of execution of the Actions plan.

5. Establish the personal responsibility of heads of state bodies for high-quality and timely accomplishment of the Actions plan.

6. To impose control of execution of this Resolution on department of economy and investments of Government office of the Kyrgyz Republic.

7. This Resolution becomes effective after seven days from the date of official publication.

Prime Minister of the Kyrgyz Republic

M. Abylgaziyev

Appendix 1

to the Order of the Government of the Kyrgyz Republic of December 20, 2018 No. 596

The program of the Government of the Kyrgyz Republic for development of export of the Kyrgyz Republic for 2019-2022

1. Overall assessment of the current situation

Foreign economic activity of the Kyrgyz Republic since 2013 is characterized by certain decrease of the activity. The foreign trade balance decreased with 7993, 8 million US dollars in 2013 to 6259, 0 million US dollars in 2017. For the same period export decreased with 2006, 8 million US dollars to 1764, 3 million US dollars in 2017, and import decreased from 5987 million US dollars in 2013 to 4494, 7 million US dollars in 2017.

The negative balance of trading balance in 2013 made 3980, one million US dollars and slightly improved, having made 2730, 4 million US dollars in 2017.

At the same time, results of 2017 show export growth on % 12,1 that, in turn, shows accomplishment by exporters of the requirements of the Eurasian Economic Union (further - EEU) shown to goods for export, functioning of veterinary and other test laboratories, lifting of restrictions on borders of state members of EEU. The government of the Kyrgyz Republic takes the measures aimed at the development of national infrastructure of quality, attraction of financial resources for leasing of processing equipment, the project of financing of the export-oriented and import-substituting companies is approved, the imported processing equipment is exempted from the value added tax. All this stimulates export of domestic production.

Nevertheless, there is number of problems which solution will promote further development of export. The questions connected with concern to them:

- access to financing of export transactions and companies;

- quality infrastructure;

- export stimulation;

- transport and logistic infrastructure;

- staffing;

- efficiency of productive activity of the companies;

- promotion in the foreign markets.

The solution of the above-stated questions will allow to improve product competitiveness and to increase several times export opportunities of priority industries of economy of the republic.

Expansion of export is implemented at the expense of the existing priority sectors which products have steady export focus.

On analysis results four priority sectors to which development this Program is oriented were chosen:

1) sewing industry;

2) dairy industry;

3) conversion of vegetables and fruit;

4) green and innovative instrument making.

Also the Program includes three cross-industry sectors:

1) quality infrastructure;

2) access to finance;

3) export stimulation.

The export companies of the specified sectors in priority procedure will be given help in access to finance (including to subsidies, soft credits), in marketing and sales of products in the foreign markets.

The description of condition of the specified export industries follows below.

Sewing industry

The sewing industry consists of more than 3000 polytypic subjects most of which part is constituted by the small companies (shops) performing orders for production of products of certain design and the models or products having the most popular design type in the market which then are on sale in the local markets or are exported on personal channels.

From 200 to 300 thousand people are engaged in industry. Numbers vary because of large number of the companies working in shadow economy. Over 90% of workers of the sector - women. They possess most the companies.

Almost all necessary raw materials for production (fabrics and fitment) are imported (except for some grades of yarn) and Madina in the city of Bishkek and the Cara-Suu market in the Osh region is bought by the companies in the local markets "Dordy". The markets are provided not only by sellers, but also intermediaries and agents. Prime vendor of the fabrics offered in the local market is China. Some most developed producers import raw materials from such countries as South Korea, Turkey, India and Italy. Producers of knitted products also import yarn from China, Turkey, Uzbekistan and Tajikistan. However some of them also buy material from local producers.

The maximum export volume of sewing products from Kyrgyzstan was reached in 2012 and made 156 million US dollars. Further indicators of export decreased. In 2017 7 million US dollars are exported sewing products on 118, that constituted 6,73 of % of total amount of export. The industry takes the third place on export, after precious metals and agricultural products.

Two features of production of clothes in Kyrgyzstan are the most significant from the point of view of further development of industry:

- the industry is almost completely oriented to export. The key markets are Russia and Kazakhstan;

- the industry is generally provided by small business. Part of the companies performs the activities in "the shadow sector" of economy whereas other part of the companies works according to the patent scheme as individual entrepreneurs.

Threats and challenges

Decrease in export volumes of sewing products from Kyrgyzstan in 2014-2016 was caused by impact of two factors:

- decrease in purchasing power in the traditional markets (Russia and Kazakhstan) in connection with financial crisis;

- reducing the sales channels used by most the sewing companies of the Kyrgyz Republic.

The first factor is obvious and rather well-known. As for the second factor, the situation looks as follows. One of the most important conditions promoting growth of industry and export volumes of clothes from the Kyrgyz Republic was high fragmentation of the sector of retail trade in Russia and Kazakhstan. Expansion of the Kyrgyz producers fell on the period when the considerable share of sales of clothes fell on the wholesale markets (including through the Dordy and Cara-Suu markets in Kyrgyzstan). It led to the fact that most domestic enterprises has practically no access to retail sales. Only the small share of the companies itself develops design of products, has logos, makes products with high value added and independently is engaged in marketing both on national, and on international levels.

According to National research university "Higher School of Economics" of the Russian Federation, only from 2004 for 2011 clothes sales volumes in the wholesale and retail markets of Russia were reduced from 45% to 16%. Thus, the trade format providing rapid growth of clothing industry of the Kyrgyz Republic till 2014 is disappearing. As well as in other developed markets, brands become key players in Russia and in Kazakhstan; expansion of retail networks, both international, and the Russian origin, continues, even despite the crisis phenomena in economy of Russia.

The markets of clothes in Russia and Kazakhstan more and more are considerably integrated into global chain of value added in light industry.

On top levels of global chain of value added (further - TsDS) consecutive separation of the carried-out functions between different participants of chain happens:

- contract manufacturing: tailoring by request of various brands, on the basis of provided by them design and design documentation. In world practice similar activities are designated by the term SMT (English Cut, Make&Trim, literally - "Cut out, make and off"). Core competency: mass production;

- sale: sale of clothes by retail networks to final consumers. Core competencies: design, marketing and sales.

Prospects of development of industry

Key strategic option for sewing industry of the Kyrgyz Republic is forming of industrial potential for contract manufacturing. This direction is the most logical following stage in development of clothing industry of the republic. First, the companies saved up considerable amount of basic know-how. Besides, number of the companies is informed on requirements imposed to suppliers of SMT-services; there are successful examples of cooperation of the domestic companies with the Russian and world brands. Purposeful support of this direction will allow to keep high rates of employment in industry, will make positive impact on social development in the country, will lead to growth of capital investments in the industry and infrastructure. Besides, rather inexpensive labor power, proximity to the large raw materials market and accessories (China), proximity to the large growing markets (Russia, Kazakhstan) - the factors promoting successful implementation of this Program.

For SMT-business the capability is extremely important to make products corresponding to the quality required by the customer in the shortest possible time. At the same time costs of production and logistics shall be minimized. It implies availability of advantageous conditions for access to the raw materials market, use of advanced technologies and most effective methods of labor organization.

The existing problems in industry

Lack of financing. As the industry is generally provided by the small business working at patent basis, its financial opportunities are limited; the lack of financial resources is key barrier of entry into world chains of creation of value added.

Barriers of access to the raw materials market. The industry has practically no direct access to the raw materials market, to purchases directly from producers. The high share of involvement of intermediaries into raw materials supply, the narrow assortment available in the local market, raises business costs, increases instability of production and increases production cycle.

Low effective production. The industry in general is characterized by low production of work that does not allow to compete successfully today in the market of SMT-services. The companies do not own the corresponding infrastructure and resources for production on regular basis, with permanency in the quality level and in necessary amounts.

Personnel problem. The current situation in industry is characterized by general labor shortage and low qualification of the available personnel. The industry also lacks skilled cutters, designers, production engineers.

Lack of necessary knowledge and skills. The experience of the separate companies got by them in case of job-shop operation of retail networks is at the moment insignificant and episodic. The companies (owners, managers and specialists) need forming of competences in contract manufacturing and marketing practically from "zero" level.

Strategic objective - growth in volumes of export of sewing products by 3 times by 2022.

Indicators:

- the export volume of sewing products will reach 300 million US dollars in 2022;

- at least 70% of total amount of export of sewing products will make deliveries under contracts for retail networks.

Dairy industry

The dairy industry is one of the major and dynamically developing industries in the overworking sector of national economy. Over 20% of all turned-out food products fall to the share of dairy industry. As the cross-industry complex, dairy industry unites several industries of the national economy, exerting considerable economic and social impact on development of national economy in general. Dairy conversion in the Kyrgyz Republic, on statistical data, represents 144 milk-processing companies and more than 300 private producers of dairy products.

Production of milk in the republic within the last 10 years shows positive dynamics. For 2017 in the Kyrgyz Republic 1556,2 of one thousand tons of milk is made that there is higher than the level of 2008 on 282,7 of one thousand tons. Increase in production of raw milk is connected with the fact that in 10 years the livestock of cows in the republic increased by % 29,4, having reached 757 thousand heads. However, despite growth of livestock of the cattle, the level of annual average milk yield of milk from one cow in 10 years decreased to 6%.

Figure 1. Production volumes of raw milk in the Kyrgyz Republic for 2008-2017 and trend line till 2023.

According to National Statistical Committee of the Kyrgyz Republic and the international trade TradeMap database, 61% of total quantity of the made butter, 50% of cheeses and 28% of the processed milk are exported. The main exported products of dairy industry following the results of 2017 are:

- butter - % 32,8 (the Commodity Nomenclature of Foreign Economic Activity code 0405);

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