Essence of the Proposals
The draft law proposes the possibility of state regulation of prices for a period of up to 90 days a year with the possibility of extension, concerning:- socially significant goods and services, the list of which will be established by the Cabinet of Ministers;
- goods and services from entities with a dominant position in the market.
According to her, this will allow businesses to set prices for goods and services within the established level of profitability, which should not exceed 25% of the cost price.
Deputy Dastan Bekeshev inquired about which specific services would fall under regulation, to which the head of the Antimonopoly Regulation Service, Jenaly Orozbaev, replied that socially significant services, including the cost of education in universities, would be included in the regulated list.
“I support this bill, but it is important that not all services and goods are subject to antimonopoly regulation. A list of services to which profitability can be applied needs to be developed. In general, order needs to be established in the market. Otherwise, why do we need the state if it will only refer to self-regulation of the market?” - expressed Dastan Bekeshev regarding the bill.
Economic Risks
The proposed bill paves the way for significant expansion of state price regulation in Kyrgyzstan. One of the most critical changes is the introduction of control over socially significant goods and services with a profitability limit of up to 25% of the cost price, which may lead to serious macroeconomic consequences.These changes indicate increasing state intervention in the pricing process.What does the 25% limit mean? It means that for every 100 soms of cost price (purchase price), businesses are not allowed to set a markup of more than 25%. This is a strict measure, considering that the purchase price is often uncontrollable.
Who will be affected by these amendments? Potentially all sectors, even despite the emphasis on "socially significant goods and services." The amendments state that the list of such goods will be established by the government, which may include not only bread and milk but also electronics and financial services.
Economist Yuri Ruzavin shares his opinion: “I am closely monitoring the actions of the National Bank of the Kyrgyz Republic and believe that the regulator is making decisions about the rate in advance. The rate is likely to be raised at the next meeting in February by 200 basis points, which is related to the growth of the money supply and imported inflation from EAEU countries, as well as a decrease in currency inflows.”
The current situation creates pressure on inflation, and it is likely that the National Bank sees an increase in wholesale inflation in the food sector, which will reflect on retail inflation in the future. The devaluation of the ruble will also affect the som exchange rate, increasing demand for foreign currency.There is a high probability of negative scenarios being realized for the economy of Kyrgyzstan. Economists warn that the government, by limiting profitability, is trying to prevent an inflationary spiral and hyperinflation in the future.
However, the experience of other developing countries shows that such measures have often led to shortages of goods and an increase in the "gray" economy.Yuri Ruzavin emphasizes that such an amendment may be beneficial for the Ministry of Finance and the National Bank, but it is already clear that the economy is facing a storm.
Inflation as an Economic Factor
Sergey Ponomarev, head of the Markets Association, emphasizes that the Cabinet's measures are understandable: they are aimed at curbing prices. However, it is necessary to analyze the reasons for rising prices.One should ask the question: is the situation local to Kyrgyzstan or is it global? Ponomarev notes that similar problems are observed in many countries.
“The Cabinet and the National Bank have enough tools to combat inflation. For example, the National Bank can gradually raise the rate, making loans more expensive and reducing business lending, thereby balancing supply and demand,” he says.
Among the reasons for rising prices, Ponomarev highlights the exit of businesses from the shadow economy. Many entrepreneurs previously operated in the "gray" zone and set low prices because they did not pay taxes.
“Now, as businesses become more legitimate, tax contributions increase, which, in turn, affects prices. But is it worth fighting this?” - ponders Ponomarev.
Inflation may not always be a negative phenomenon. It can activate the economy. But the scale of inflation is a separate topic. Inflation is observed worldwide.However, let’s return to the amendments to the Law "On Pricing." Businesses are dissatisfied with the new initiatives.
Logistics costs, taxes, marketing, and employee salaries are not taken into account, which may exceed the specified 25%. There is no clarity on whether the government is ready to compensate for these expenses.
“Businesses are shocked by the proposal. We thought we had a market economy where prices change depending on the market. Kyrgyzstan still depends on imports, and resources for domestic production are limited,” reminds Gulnara Uskenbaeva, head of the Suppliers Association.
Logistics remains expensive due to the global geopolitical situation.
The producer's price often does not include transportation costs, which are also not considered when discussing profitability. Employee salaries, storage costs, and other obligations, such as loans, are not taken into account. For excise goods, the price does not include excise and VAT, which is 12%.So how will pricing look then? Buy for 1,000 soms, sell for 1,100, and add another 500? Such a business will not survive.
Gulnara Uskenbaeva emphasizes that the state has already had negative experience in price regulation, and now a similar solution is being proposed again. This raises serious concerns.
Sergey Ponomarev also agrees that the proposed measures were discussed last summer, but many entrepreneurs were not involved in the discussion.
This draft law contains anti-market tools that should not be applied.He reminds that price is determined by the ratio of supply and demand, not by state intervention. “It seems that the concept of the bill is based on Marx's ideas, which raises questions about what kind of economy we are building - a market or a socialist one?” - says Ponomarev.
He also points out the uncertainty regarding profitability, which can be set at 5%, 7%, or 10%, and there is no methodology for its determination.
“Many entrepreneurs are in debt and rent, and these costs need to be taken into account. The lack of consideration will lead to administrative pressure and corruption risks,” he adds.
Consequences for the Economy
Before adopting such bills, a thorough study should be conducted to understand what consequences they led to in other countries.The adoption of the bill may negatively affect the country's investment attractiveness. Investors, seeing government price regulation, may choose more free markets.
I believe that certain goods should be regulated, but as soon as the state intervenes in the free market, it can lead to problems.“Now the Cabinet will gain too much power, and officials often act unpredictably. This will change the investment climate. Businesses will be forced to reduce profitability, which will lead to losses and possibly bankruptcy,” emphasizes Ponomarev.
Mass bankruptcies may affect the financial system and lead to the collapse of banks, which will impact citizens' deposits. Thoughtless measures will lead to serious consequences.Gulnara Uskenbaeva emphasizes that such bills could return Kyrgyzstan to a planned economy, like in the USSR, but with a lack of resources.
“We were not explained how this will be implemented, and there are more questions than answers,” she states.
The Need to Revise the Bill
We remind you that the bill has already been approved by the Jogorku Kenesh in the first reading, and there is little time left for corrections. Business associations are preparing an appeal to the authorities to revise the document.This is a serious issue, as the bill contradicts the country's development strategy. It would be logical if the deputies listened to us and returned the document for revision, taking into account the business community's opinion.“We will ask to exclude the profitability clause. It is necessary to weigh all the pros and cons, study international experience. We see risks of corruption and a decrease in investment attractiveness. We recommend the Ministry of Economy to conduct broad discussions with the business community,” concludes Sergey Ponomarev.
