Abstract
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While the public finance system in the Kyrgyz Republic was inherited from commanded economy and remains quite ineffective, the government has made little progress over the past decade. The central budget and local budgets of self-governments are built on the principle of unity meaning that all budgets are linked to one revenue system. On one hand, the central authorities have a broad power and competencies to influence and coerce, and on the other hand, the local self-governments (LSG) are financially dependent and have limited right to review, approve, and execute their own budgets. Thus, the formation of budgets and determination of revenue sources and transfers lies within the competencies of the central government. A decentralized fiscal system could play an important role in improving governance mechanism, transparency and better targeting of fiscal resources as local government is better positioned and more responsive to local aspects of social needs with respect to resource mobilization and allocation. The Government of Kyrgyz Republic (KR) has chosen fiscal decentralization to enhance local governance system, to encourage private sector growth and to reduce poverty.
In an effective market economy, local taxes play an important role as a major revenue source of local governmental funds and important economic regulator. Thus, it is necessary for countries in transition (CITs) to achieve these objectives of taxation. While many CITs experienced serious budgetary problems, a rational local tax reform would be helpful to meet the revenue needs of local governments and to achieve fiscal stabilization in the transition period. Moreover, tax reform facilitates and supports other economic reforms necessary for restructuring of economic mechanism.
The paper is motivated by the questions about the main directions of local tax reform in Kyrgyz Republic, the performance and dynamic of local budget revenues and expenditures during the transition period. The goals of the study are to review and evaluation the local tax reform process in Kyrgyz Republic, to identify particular reform components and restrictions, and to examine the effects of the actual financial and economic crises to local government finance. The paper would include detailed discussion of data sources and procedures used to develop the county specific dataset, local budget revenue sources and expenditure analysis, and evaluation of the local taxes performance.
The overall objectives to review the dynamic of local revenues and expenditures in 1991-2008 period, to assess the quality of the budget system at local government level and to develop an up-to-date picture of the regional economic situation in the Kyrgyz Republic, underlining some problems of local tax reform, especially in tax administration, and establishing a baseline for monitoring the progress of municipal finance reform in the future. Therefore, the study would involve elements of both explorative and descriptive research. The source of information data is the Ministry of Finance, the State Tax Inspectorate, the National Bank and the National Statistical Committee of the Kyrgyz Republic. Key materials would be obtained from the World Bank, International Monetary Fund, United States Agency for International Development, UK’s Department for International Development, Swiss Development Agency, and European Union TACIS.
The paper is concluded by examining several lessons from the first decades of the local tax reform in CITs and offering some recommendations. The recommendations would propose immediate changes in local tax administration of Kyrgyz Republic to strengthen the existing tax system and actions to prepare the way for more fundamental public finance reform in the long-term.
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