MINISTRY

OF AGRICULTURE, WATER RESOURCES

AND PROCESSING INDUSTRY OF THE
KYRGYZ REPUBLIC

Export Promotion Strategy for

the Food Processing Industry
of the Kyrgyz Republic

June 2006

Produced in collaboration with the Ministry of Agriculture,

Water Resources and Processing Industry and
the International Trade Centre (UNCTAD/WTO)

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 Export Promotion Strategy for the Food Processing Industry
of the Kyrgyz Republic
STRATEGIC VISION

Kyrgyzstan has a long tradition in the food processing industry. In principle, the country has all the
ingredients required: favourable climate, fertile land, mass production of raw materials and the availability of
an abundant and relatively cheap labour force. A large number of peasants, industry workers and input
providers were, and still continue to be involved in the sector activities. Their employment and incomes are
directly linked to the sector results. Therefore, sector performance has numerous potential implications and
plays an important role in the socio-economic development of the whole country.

The sector has exhibited a low, but steady, rate of growth mainly through domestic sales, after several years
of decline during the transitional period of the 1990’s. Because the domestic market is small the only way
that this growth can be sustained is if sales are oriented towards export markets. Generally increasing
exports of processed agricultural products is vital for sustainable development of the overall agricultural
sector of the country in the long term.

The main goal of the strategy, supported by current market demand, is to increase the overall export volume
of the food processing industry from 59.5 million US dollars in 2005 up to 89.3 million US dollars by 2010.
This means that on average, sector exports should grow at approximately 7-10% per annum. During this
period, the total volume of exports of food products is planned to expand the general value of export
positions of MAWRPI from 130.0 million US dollars in 2005 to 163.5 million US dollars by 2010. If green-field
investments come into the sector during this period, which is quite possible, production, export growth rates
and rural benefits may be considerably higher. If the factors of production remain the same then the main
export products in the short term will continue to be cheese, butter, meat products, canned fruit and
vegetables, juices, dried fruit and vegetables, sugar, and non-alcoholic beverages. With the creation of
favourable opportunities for investments in new technologies and in equipment, existing producers could
change the product mix gradually towards higher-value products.

The strategy is closely aligned with the general economic strategy of the government, which considers
export growth as one of the main pillars of the social and economic development of the country. This accent
on exports requires a dramatic change in working practices to bring quality into line with current international
buyers’ expectations in export markets.

The strategy calls for change in five main areas:

 Secure access to the raw materials supply for processing. Despite an abundant supply of raw materials
in the country, food processing enterprises face increasing competition from buyers of agricultural raw
materials from neighbouring countries that have access to low cost working capital. The agricultural
products are also sold in local markets (bazaars) both fresh and processed, in non-industrial enterprise.
To counteract this, processors are making efforts to establish long term linkages. Firstly with farmers in
order to provide themselves with raw materials by pursuing purchasing policy of agricultural products
from farmers with an exchange for supplying them with necessary production components and services.
 Further explore markets and use this information for expanding market shares in traditional and new
export markets. The expected expansion of exports is based on recent studies of traditional markets
(Kazakhstan and Russia) and on numerous contacts of Kyrgyz businesspeople with their counterparts in
the target countries. This shows the growing potential of these markets and the availability of niches for
Kyrgyz products. Longer-term export growth and diversification would be linked to a gradual penetration
of Kyrgyz products into new markets in the EU, China, Turkey, and South-East Asia. The export product
structure is expected to gradually shift to higher value-added products (e.g. juices in small retail
packages, smoked sausages, etc.) in selected markets. Revenue to support the financing of these
changes should come from the expansion of traditional export products (tomato paste, cheese, meat and
so on) to industrial customers in Russia and other target markets. Processing capacity utilisation
currently covers around 25-40%, even in the more modern firms, so targeted expansion for processed
foods should be physically attainable if the input supply will not be an impeding barrier.
 Increase the quality of inputs and production and reduce operating costs in the sector. To ensure an
improvement in the quality of production, it will be necessary to introduce internationally recognised
quality systems, and make focused new investments in the technical renovation of existing enterprises.
Encouraged by these recent efforts of the business community and government agencies to address
performance issues, small numbers of new investors have already entered Kyrgyzstan and new

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 investors have approached some factories. As a result it would facilitate an increase of food processing
enterprises’ efficiency, quality and competitiveness of Kyrgyz products.
 Improve the business environment in the sector. A clearly articulated pro-business attitude in
government agencies will facilitate a general improvement on the business climate in the country towards
the provision of support services first and controls second. Stakeholders have planned a number of
activities to reduce the regulatory burden, and lower transaction and production costs in the sector.
Similarly, recognition of interdependence and the importance of cooper ation between Kyrgyz
stakeholders when facing external markets would boost the confidence of all players. During the strategy
development process stakeholders expressed a willingness to strengthen long-term partnerships for
mutual benefit, which would increase the reliability of the sectors’ value chains.
 Create additional distribution channel of fresh and processed agricultural products to foreign markets.
Currently there is a certain mechanism of selling fresh and processed agricultural products to foreign
markets. However in order to increase export volumes and to support local producers in promoting their
products for export, it is necessary to create a company (with a government property share) which would
take the responsibility for: market analysis, organization of purchasing, storage, transportation and sale
of agricultural and processed products, attraction of investments to the sector, and for development. This
company would operate taking a vivid and successful example from joint stock foreign trade companies
such as UZMARKAZIMPEX in Uzbekistan as well as the ASTYKEXPORT Company and
PRODCORPORATION in Kazakhstan.

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Strategic Vision ................................................................................................................................................. 2
Introduction ....................................................................................................................................................... 5
Overall Development Goal................................................................................................................................ 5
Strategy Summary ............................................................................................................................................ 6
Objective 1. Access to sector raw materials supplies secured ................................................................... 6
Objective 2. Improved market information provided, accessible to and used by all stakeholders in the
Kyrgyz part of the sector’s value chains ................................................................................. 9
Objective 3. Production quality upgraded ................................................................................................. 11
Objective 4. International price competitiveness raised for processing enterprises in the food industry . 12
Objective 5. Access to financial, transport and other infrastructure improved ......................................... 13
Objective 6. Regulatory burden on enterprises reduced and business environment improved ............... 15
Objective 7. New distribution channel to foreign markets established ........................................................ 16
The Macroeconomic Environment .................................................................................................................. 17
Implementation Framework ............................................................................................................................ 18
Key Sector Progress Indicators ..................................................................................................................... 18
Strategy Beneficiaries and Stakeholders ........................................................................................................ 19
Implementation Plan ....................................................................................................................................... 20
ANNEXES:
ANNEX 1. BRIEF INFO ON SECTOR SITUATION ....................................................................................... 30
Production and Export Dynamics ................................................................................................................ 30
ANNEX 2. List of documents and reports considered in the development of the strategy .......................... 36
ANNEX 3. List of participants of preparatory seminars
ANNEX 4. ITC "SHAPE" Methodology
Strategy development process

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INTRODUCTION

The production of food products in Kyrgyzstan has a long tradition and good prospects for development.
Nature and climate conditions in the country are very beneficial for growing different varieties of agricultural
products with an exceptional taste. A considerable portion of the agricultural land in almost all regions of the
republic is suitable for growing agricultural products. Many Kyrgyz peasants have long experience in
cultivating these crops.

The main reasons for low capacity utilization of Kyrgyz enterprises in the food processing industry are the
following: lack of assets, and the loss of opportunities for guaranteed input supply. Despite declines in the
1990s, due to the economic changes in the country, the industry has managed so far to maintain the
necessary production capacity and personnel. However, the situation is unsustainable for the future.

The country urgently needs to speed-up the development of the food processing industry. This should
significantly increase business revenues and stabilize employment in the processing sector, and in the
segment of agriculture serving the industry. Due to the narrowness of the domestic market and demand
abroad, exports should become a main engine for the sector’s development.

The export promotion strategy for the food processing industry in the Kyrgyz Republic is directed to assist in
prioritising the development objectives in the mid-term and to help coordinating stakeholders’ actions
towards the sector development. This has been done through identification of key factors for the success of
the sector’s export growth, provision of an action plan with prioritised activities and progress measures to
allow implementation to be managed. The time horizon of the strategy is 2006-2010. This five-year period
should be sufficient to bring about important changes in the sector and significantly improve its export
performance. The strategy is to be considered as one of the components of the National Development
Strategy for 2006-2010. The strategy is also consistent with the Concept of Agrarian Policy of the Kyrgyz
Republic until 2010.

The strategy has been developed through a participatory process over several practical workshops involving
almost all stakeholders in the sector – representatives of the processing industry, peasants, service
companies, government, and international organizations. It reflects a shared vision of the sector’s
development by the parties and their intention to collaborate in order to achieve the strategy’s goals. The
International Trade Centre UNCTAD/WTO provided the approach and coaching in its application. ‘ITC’s
office in Bishkek provided close support to stakeholders throughout the process.

OVERALL DEVELOPMENT GOAL

The main goal of the strategy, supported by current market demand, is to increase the overall export value of
the food processing industry 1.5 times from 59.5 million US dollars in 2005 up to 89.3 million US dollars by
2010. This means that on average, sector exports should grow at approximately 7-10% per annum. During
this period, it is planned to expand the main export products of the sector: (the following volumes are in
thousand tons) canned fruit and vegetable products – from 6.1 to 9.0; fruit juices – from 2.4 to 3.0; fried
vegetables – from 0.4 to 0.5; sugar – from 26.0 tо 31.0; dairy products– from 5.7 tо 40.0; flour – from 0.7 tо
0.9; bread, and confectionary products – from 0.7 tо 0.9; meat products – from 45.3 tо 53.0; confectionary
products (candies) – from 1.6 tо 2.5; as well as beer and non-alcoholic beverages – from 1.6 to 2.2. Sector
employment will increase by approximately 40 thousand people to 70 thousand people

The forecasted expansion of exports and production would also contribute to an increase in incomes and
sustain the employment of thousands of agricultural peasants. The positive effects of the development of the
sector are expected to spill over to other sectors (wholesale trade and procurement, transportation,
consulting and financial sectors). All these improvements should contribute to the general economic
development of the country and poverty reduction.

This projection is based on conservative assumptions and current export-quality production capacity, without
any investments in new large production sites. However, given the current level of investor interest it is quite
possible that additional modern capacity may be built. Over the past several years there have been foreign
investments in the production of combined oil and butter, fruit syrups, and starch in Chui-Tokmok, Sokuluk
and Jeti-Oguz regions.

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STRATEGY SUMMARY

Objective 1. Access to sector raw materials supplies secured

Successfully competing for domestic supplies

The planned increase in the exports of food processing enterprises requires a corresponding growth in the
outputs of the processing industry. This in turn requires a growing supply of raw materials. Kyrgyz agriculture
produces more than enough agricultural products to satisfy the needs of not only the current processed food
exports, but also that required for the planned level of exports, according to data on sector enterprises from
the National Statistical Committee of the Kyrgyz Republic. The problem for processors is that they face
increasing price competition for these raw materials from other buyers.

One source of competition is the tendency of farmers to sell their production in the open markets of Bishkek
and other towns of Kyrgyzstan. This tendency is especially accentuated in those years, when open market
prices are higher than the steady negotiated term prices that can be paid by processors. In these cases,
most small farmers choose to sell all their production in the markets. About 15% to 20% of these farmers
violate preliminary supply and off-take agreements with processors, leaving them without raw materials. This
situation undermines confidence between processors and agricultural producers and, in the long-term, is
harmful for agricultural producers as well, as it leaves them vulnerable to the high volatility of prices and
demand in the open market.

Another source of competition arises from the export of fresh agricultural products to neighbouring countries.
With improvement of transportation infrastructure, reduction of transit barriers and growing demand from
foreign industrial buyers; a large percentage of the raw production “leaks” into other countries. One reason
for this is the beneficial low working capital loan interest rates provided to these processors in Kazakhstan
and Uzbekistan. As their industries also intend to increase processing capacity the situation will get worse
unless Kyrgyz processors can compete on similar terms – at least in the short-term until the Kyrgyz food
processing industry is fully back on its feet. Kyrgyz processors and government agencies need to work
together to implement the recommendations below in order to become competitive buyers in the raw material
market of our own country.

Another important circumstance complicating the production and sale of food processing enterprise products
is competition from small producers processing agricultural products under home conditions. These
producers who are not obliged to observe sanitary-and-hygienic norms and standards, who avoid paying
taxes, deliver their products to so called street markets where they find buyers who are not concerned with
necessary quality requirements during the production process and are only oriented towards low prices. This
undermines the position of conscientious enterprises in the food industry and requires certain efforts to
regulate street trading from the government side.

Supply chain coordination improved

The enterprises of the sector are private, and they vary significantly according to their production capacity;
the majority of them are not large. The production situation of enterprises is determined by: access to raw
materials and other inputs, the range of products manufactured, production quality management, quality of
the enterprise management, the extent and character of horizontal and vertical cooperation and their
integration in the sector, and government regulation. The extent of cooperation among agricultural producers
is low; this causes a series of problems that affect negatively the processing enterprises activity:

Because farmers grow many different varieties of the same types of plants and animals, often using self-
propagation methods, there is no standardization of inputs to processors – the corresponding additional time
needed to test cook and sort the different varieties in factories also adds costs and delays to the production
process and reduces output quality consistency. This situation adversely affects export potential.

The most serious problem of coordination appears in the relationship between agricultural producers and
processors. Previously, the processors had to deal with a few large farms. Now, after the splitting of the large
agricultural enterprises into many small farms, there are more than 250,000 farms in Kyrgyzstan, the majority
of them have less than 10 hectares of land. In the southern part of the country the average size of a land plot
is less than 3 ha.

Farmers lack the necessary knowledge of crop growing techniques and farm management skills leading to:
 De-mechanization of production, lack of maintenance and scheduled renovation of agricultural
machinery;

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 Irregular quality and lack of standardization of raw materials;
 Insufficient access of farmers to credit for fixed and working capital;
 Substituting required agricultural products with other crops;
 High costs of agricultural production.

At the other end of the chain, the majority of enterprises are not able to market their products properly, due
to a lack of finance, knowledge and the almost complete absence of trading companies to professionally sell
the processed products. Small traders on their own are incapable of creating an efficient market, especially,
for foreign markets, because they lack adequate promotion systems. It is obvious that the development of
the processing industry will be closely linked to the development of processed products traders.

The small scale of most enterprises is reflected in their low capitalization and their limited potential to attract
financial resources, which are badly needed in order to maintain and increase their competitiveness. At the
same time, Russian and Kazakh companies, which are the main competitors of Kyrgyz enterprises in both
the domestic and the foreign markets, benefit from low interest, typically around 2 to 4%, supported by the
State. Russian and Kazakh companies are pursuing close contacts with Kyrgyz suppliers of raw materials
and trade companies in a way that Kyrgyz buyers cannot emulate.

Despite of all these problems, Kyrgyz processing enterprises have advantages, which could become the
basis for further cooperation and integration:
 Kyrgyz enterprises (in contrast to the Russian and Kazakh ones) are geographically close to the
suppliers of raw materials – and thus able to capture their unique qualities before they deteriorate (taste,
organic aspects, quality);
 There is some evidence that Kyrgyz processors start to understand the necessity to organise production
based on a knowledge of market requirements,
 Outsourcing of the market distribution/promotion functions to trading companies is becoming more
common;
 The creation and promotion of a brand of products such as “A Taste of the Sun”, “Riha”, “Dairy Spring”,
“Veselyi Molochnik” and others which should contribute to increased competitiveness of products of food
processing industry;
 The creation and functioning of “Associations of Processing Enterprises, which assist developing and
promoting new types of production, capable of meeting the requirements of domestic and external
markets.

Recommendations. The following actions were designed by stakeholders to resolve these problems and
achieve Objective 1:

Provide better financing terms to agricultural producers for the purchase of Kyrgyz raw materials: Develop
more flexible and competitive pricing policies for raw materials, offering agricultural producers supplementary
services (e.g., storage facilities close to their farms), establishing closer ties between processors and farmer
communities (contributing to social infrastructure development, etc); combined with traditional methods of
supplying farmers with monetary and commodity credits.

Facilitate the creation of associations, which would combine agricultural production, processing and possibly
trading activities of a sector’s value chain. This would allow securing the supply of raw materials to the
processing enterprises with controllable quantity and quality, reshaping the whole production chain according
to final market demand. At the same time it is also necessary to continue search for other solutions helping
to secure uninterrupted supply of raw materials to processing enterprises.

Facilitate the consolidation of farmers into production and marketing cooperatives; which would allow the
creation of farming partnerships suitable to have long-term and enforceable contractual arrangements,
training and information facilities. This would also contribute to a reduction of risks and transaction costs
associated with dealing with current situation of numerous disperse small producers.

Supply farmers with the production inputs required to produce high quality and standardized raw materials:
supplying farmers with standardized seeds, forage, inseminated agricultural animals, services for animals,
fertilizers, chemicals and other production inputs, as well as training in required production technologies.

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To implement these actions, a significant improvement in the regulatory environment and the sector
enterprises’ access to financial resources is needed. This requirement is addressed under Objectives’ 5 and
6 of the strategy.

Anticipated outputs. Major outputs of the activities under Objective 1 include increased revenues for raw
materials suppliers, expanded supply of grower inputs to farmers through processor-farmer agreements,
increase in the number and scope of agricultural and marketing coops and associations, and the creation of
loosely vertically integrated companies or consortiums.

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Objective 2. Improved market information provided, accessible to and used by all stakeholders in
the Kyrgyz part of the sector’s value chains

The planned expansion of Kyrgyz market share of processed F&V product sales to in the traditional markets
of Russia and Kazakhstan and, on a later stage, the penetration into new markets in China, EU, Turkey and
South-East Asia, should be based on improved knowledge of target market requirements and opportunities.
Sector stakeholders’ access to this type of information is currently very limited. Even when available, this
information is not systematically applied by processing enterprises for decision-making. A traditional
“production-focused” approach – is still far too commonplace.

On the other hand, export expansion in some selected markets of finished goods, for example, in the Kazakh
market first of all, would require the development of a recognizable brand label, which would help to
distinguish Kyrgyz products from many other brands. In addition, the minimum requirements for selling into
higher value niche markets are a prudent advertising campaign to publicize taste, quality and environmental
friendliness, and emotional aspects of the products. Some Kyrgyz exporters have already successfully tested
markets in Southern Siberia in this way with the help of Kyrgyz advertising agencies. The national brand
“The Taste of Sun” and its promotion within Kyrgyzstan and abroad is one example.

Since promotion of own brand for each enterprise is prohibitively costly, it will be necessary to establish
strong relationships with partners in export-destination countries and sell Kyrgyz produce in foreign markets
under national “Kyrgyz product” brand for building up visibility of the Kyrgyz products.

Recommendations. The creation of an effective market information system for the sector would require:

A unified system of collection and dissemination of market information: This system could be based in the
facilities of the Ministry of Agriculture, Water Resources, and Processing Industry (MAWRPI). The ministry
would be responsible for gathering and analysing information on foreign markets and for disseminating it
through regional information centres, which are to be established. In addition, targeted market studies are
planned with the help of government and/or international organizations and projects.

Determining target markets for Kyrgyz products: This should allow tailoring production and marketing
behaviour to the target markets’ particular needs. Taking into account the traditional economic and cultural
linkages and the absence of language barriers, Kazakhstan and Russia will most probably remain the main
export markets for Kyrgyz processed F&V products in the medium term. Fast economic growth in these
countries, improving living standards, an expanded demand for F&V and the existing positive attitude of
consumers towards the Kyrgyz products, result in a forecast showing considerable growth of exports to
these countries. At a later stage (closer to 2010), thanks to the establishment of contacts, the introduction of
new processed products and the adoption of international quality standards; Kyrgyz exports should become
diversified and target the capacious and price-attractive markets of China, the European Union, Turkey, and
South-East Asia. These intentions should be taken into account in forthcoming trade negotiations.

Adjustment of the range of products made according to target market requirements: This means introducing
changes in management, working practices and production technology to meet new market requirements
related to labelling, packaging and taste properties, and quality and safety standards. In particular, important
adjustments would be needed to ensure the eventual compliance of Kyrgyz products to organic food
standards. This will require consistent efforts, but these modifications would open access to more attractive
market niches, and in the long run, could become a significant export niche for the Kyrgyz food processing
sector.

Promotion of Kyrgyz products in some target markets: This will be possible at first in only a few selected
markets (Kazakhstan and possibly some Russian regions), where there is an intention to reach the final
consumer and where some knowledge of Kyrgyz products already exists. The sector enterprises should
cooperate in the promotion and reflect the properties of these products. Foreign and domestic consulting
companies and advertising agencies will be asked to assist.

Establishing stable linkages with partners in target market countries. This would help Kyrgyz exporters to
learn more about export market needs, build mutually beneficial alliances for distribution and secure market
niches. Later on, partnerships with renowned international retail networks may be possible.

Establishing a commodity exchange, rural information and training centres at markets in Kyrgyzstan. Once
the initial set-up has been funded, voluntary participation of market participants is expected to help to raise

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the effectiveness of market information dissemination and reduce transaction costs. By paying certain fees,
users will receive first-hand and up-to-date information about prices and quality in other markets, reducing
itinerant buyers leverage over small farmers and improving their decision-making ability.

Anticipated outputs under Objective 2 are: more, and more effective, advertising campaigns in target
markets, Enterprises in all stages of the chain can articulate market requirements, established export and
agency agreements according to long-term contracts with foreign partners, the adjustment of finished goods
to the requirements of target markets, an increase of demand for production through branded Kyrgyz
products and a functioning market information system.

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Objective 3. Production quality upgraded

The good taste of Kyrgyz raw materials is the basis for the production of high quality, processed products.
For quality control procedures, the enterprises currently only focus on laboratory, chemical-biological and
technical analyses of the inputs and outputs. The quality of the products is judged against available
standards (GOSTs or TUs). The GOSTs standards used in Kyrgyzstan, are inherited from the Soviet times
and do not correspond to international standardization and certification systems used elsewhere in
destination markets. The lack of eligible laboratories in the country to issue internationally recognized
certificates is a barrier for exports to markets outside the CIS. All enterprises and service providers in the
value chains need to adopt Hazard Analysis & Critical Control Point (HACCP) working practices as a
preliminary measure instead of relying on quality checks of inputs and outputs.

Apart from knowing the demand characteristics of the export markets, it is also necessary to make an effort
to upgrade the quality of production to meet the requirements of these markets. The production currently
sold by Kyrgyz processing enterprises is very often far from these requirements in terms of quality and safety
standards, packaging, labelling, speed and reliability of delivery.

Recommendations. Improvement of the quality of production of the F&V processing industry implies:

Introduce a HACCP safety control system in sector enterprises and service providers.

Design new convenient, durable and attractive packages, tailored to the requirements of industrial and final
consumers in the target export markets.

Renovate production technologies and modernise equipment. In particular, new highly efficient technical
solutions would be needed for the transition to new products and packaging (juices in smaller packs, twist-off
jars, containers, etc.).

Prepare enterprises for a gradual transition to the quality guaranteed system: ISO22000. This work is
expected to be completed by 2010.

Transition to European Union standards in food safety, traceability and plant inspection. This is a necessary
step, not only because the EU uses these standards, but because Russian and Kazakh buyers and
consumers are also switching to them and imported EU standard products are bought by the highest value
Kyrgyz consumers.

Accreditation of food laboratories used by enterprises and the National Institute of Standards and Metrology
by export destination countries. Another way of dealing with this issue is to achieve recognition of Kyrgyz
quality certificates in these countries or adopt similar standards throughout Kyrgyzstan after a period of
adjustment. This would avoid repeating the certification procedures and save the time and money losses
associated with it.

Anticipated outputs of the activities under the Objective 3 will include: the production of finished goods in
new packages, the installation of new equipment in enterprises, the approval of new standards, widespread
adoption and use of HACCP throughout the value chain from “farm to fork”, and ISO 22000 in enterprises,
and the recognition of the Kyrgyz quality certificates in other countries.

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Objective 4. International price competitiveness raised for processing enterprises in the food
industry

The desired expansion of exports will only happen if Kyrgyz products can be competitive on prices as well as
quality – despite the need to raise additional revenues to pay for the planned changes. The main reserve of
competitiveness lies in increasing enterprise productivity and reducing firms’ production costs. There are also
some macroeconomic factors, which could increase or limit firms’ competitiveness, for example: inflation, the
exchange rate or adverse changes to the fiscal system.

Recommendations. Raising productivity and efficiency could be achieved through:

Modernization of technologies and equipment (this should be done in parallel with measures under Objective
3). This has to allow for increasing production capacity of the enterprises, reducing production unit costs and
providing greater production flexibility and ability to switch quickly between different products.

Training enterprise personnel – managers, technologists, and workers. A permanent certified sector level
system of training and retraining of staff should be created. In particular, training in quality control and
mastering new production techniques should be given immediate attention.

Improvement of management style in processing enterprises: The overall development goal of the strategy
and these objectives will not be achieved, if the management of many of the processing enterprises
continues with its old soviet-style mentality. Radical changes in management approaches are absolutely
necessary, without letting go of essential technical knowledge and experience.

Pursuing exchange rate policies favourable to the sector’s exports. This means non-admission of the
appreciation of the Kyrgyz Som in real terms against currencies of importing countries; particularly Russia
and Kazakhstan and eventually other countries depending on the success of Kyrgyz penetration into other
markets. Maintaining low inflation in the country would also increase the competitiveness of the sector.

Establishing a taxation regime that recognizes and supports the agricultural production and processing cycle
of the sector. This mainly relates to the provision of an efficient VAT credit/refund for all enterprises and, in
particular, to exporters, and lowering the Social Fund contribution rates. Another major source of savings
would be the simplification of taxes, customs, and quality control procedures not required by buyers and
reduction of transit costs, when crossing borders and territories on the way to export markets. This package
of measures is particularly relevant to transportation and transit within the Central Asian region. Improved
regional cooperation is badly needed and would save a lot of unnecessary expenditure and delays. Lowering
import tariffs and other taxes, fees and unofficial payments imposed on inputs for exported Kyrgyz products
would also help. This would require the Government to negotiate with partner countries favourable trade
regimes for the sector.

Anticipated outputs of the activities under the Objective 4 include: increased labour productivity, profitability,
workers’ wages, and investments in the enterprises.

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Objective 5. Access to financial, transport and other infrastructure improved

An ambitious agenda for modernizing factories, handling and farm technology, improved pricing policies for
raw material procurement and expansion of exports constitutes the core of the strategy. Its success
however, requires much better and more reliable access to communications, trade and capital financing,
transport, and other infrastructure for the sector enterprises. The sector needs cheaper and more reliable
access to these services. Although, that will be achieved, to some extent in the long run by the entry of new
actors in response to increased demand, some technical assistance and high-level leadership will be
required to “kick-start” these changes. The banks and the public sector play a crucial role in the provision of
this infrastructure, as food processing enterprises, agricultural producers and trading companies have little
influence over it.

On the demand-side for financial resources, the main barriers are related to insufficient financial
management skills of enterprises: the quality of the business plans and applications for legal documents do
not often meet the requirements of financial institutions. Moreover, low official reported profitability and the
lack of transparency of financial reporting of enterprises, which are related to high and unequal taxation, also
undermine the creditworthiness of enterprises. As a result, only few enterprises have been able to meet the
requirements for receiving loans, establishing a credit history and building confidence with creditors. All the
above problems are aggravated by the lack of effective conflict resolution mechanisms, which are currently
said to be ambiguous, and uncertain.

However, on the supply-side, written laws and their subordinate legislation are basically consistent with
market economy principles, and they constitute a normal basis for business development. The sector does
not suffer from any specific legal constraints. In particular, there are no licensing requirements for the
industry, except for the production of tobacco and alcoholic beverages.

One perennial problem for enterprises is the very conservative, and often inappropriately cautious, approach
of many credit organizations to the valuation of collateral. Frequently, the amount of collateral required
exceeds by 200% the credit amount. Such large collateral is usually deemed necessary, because the legal
status of pledges (equipment or real estate) is unclear, or the pledges have low liquidity. Other problems that
enterprises encounter when working with credit institutions is the lengthy and bureaucratic application
process and the sometimes necessary payment of “facilitation fees” to employees of the financial
companies. Besides these difficulties, there are other problems of high real interest rates, reflecting the risks
perceived by financing institutions of an uncertain legal and contractual situation, exchange rate weakness,
insufficient development of the financial system in the country or the low domestic savings rate.

Consequently, the financing of fixed assets (mainly equipment and buildings) at the moment comes mainly
from enterprises’ own resources. According to available data, more than half of all enterprises use this
source of financing; 20% borrows from private investors and just slightly above 10%, obtain bank loans. The
majority of enterprises suffer from capital shortages. Partially, this could be explained by the imperfection of
the Kyrgyz financial system and its inability to transform savings into investments. However, there are also
many enterprises that are not yet prepared to use the opportunities offered by a capital market for reasons
mainly associated with lack of trust, high interest rates on loans and their inappropriate urgency.

This undermines the competitiveness of those enterprises, which wish to strictly abide by the existing
legislation.

Recommendations. Improved supply of financial, transportation and other services to the sector could come
from the following measures:

Reduction of interest rates and softening collateral requirements for credits by banks and credit agencies
(e.g., Kyrgyz Agricultural Financial Corporation). This could be achieved through time-limited macroeconomic
and structural policies directed to lowering risks in the economy, inflation and strengthening banking and
credit system.

Development of commercial insurance services. These services should become cheaper, more reliable and
expanded to the agricultural sector of the economy. They would also provide banks with a means to offset
some risks and disburse loans into a secondary market.

Reduction in transportation time and costs. This could be achieved through the construction and
rehabilitation of strategic automobile and railway links, increased supply of modern transportation vehicles
and the elimination of transit and custom barriers.

13
Ensuring better, or preferential, access to communications, water and energy supply services. This requires
efforts by the government and private companies in the sectors of infrastructure development to improve the
reliability and consistency of service supplies.

Anticipated outputs of activities under Objective 5 should be: increased access to credit for enterprises of the
sector, lower transportation tariffs and more reliable transport services, better access to communications,
energy and water supply.

14
Objective 6. Regulatory burden on enterprises reduced and business environment improved

Many difficulties experienced by processing enterprises are related to the imperfect business climate and the
excessive regulatory burden imposed on them (as well as on other enterprises in other sectors of economy)
by the State. The lack of confidence between different economic agents – partners in sector value chains,
the impossibility to effectively enforce contracts, the weak and non-transparent court system, widespread
corruption in virtually all regulatory bodies of the government and especially in tax and custom services;
contributes to a big increase in transaction costs, undermines investment incentives and lowers the potential
for the expansion of exports. These problems can be partially addressed by sector stakeholders, but also
require economy-wide treatment.

Recommendations. Efforts to improve the business climate within the sector require:

The strengthening of confidence in contractual arrangements between enterprises all along the value chain –
agricultural producers and processors, trading companies, etc. Sector players should gradually move to
longer-term contracts, which would allow balancing the benefits and risks to all parties.

Partial or full transfer of the marketing functions to trading or marketing companies. It is recommended that
trading companies or dealers order the necessary quantities and range of products from the processors, and
that they supply them with containers, labels and ingredients, needed to facilitate the export sales of their
products. This action assumes specialization of all partners along the added value chain in the sector
suffering from lack of enterprise management’s experience in marketing and insufficient utilization of
economies of scale.

Facilitation across government departments of the creation of joint ventures of Kyrgyz processors with
foreign consumers from Russia, Kazakhstan and other countries. This would allow combined inflow of
investments and marketing information necessary to sustain export market shares.

Economy-wide measures to improve the business climate: Including the improvement of governance
practices in State bodies, the elimination of excessive central regulation of the economy, the strengthening of
property rights, effective contract enforcement, comprehensive reform of the courts system towards a
transparent, predictable and professional service, reduction of corruption, etc. This should reduce outsiders
perceived risks in establishing economic relations in the country, reduce transaction costs and increase the
investment attractiveness of the economy as a whole and of this sector in particular.

Anticipated outputs of the activities under Objective 6 are: An increase in the mutual confidence between
different parties, an increased number of joint ventures, a more simple and clear legislation, a reduced
corruption burden, and other improvements in the regulatory environment for enterprises.

15
Objective 7. New distribution channel to foreign markets established

Currently there are weak linkages between farming, processing and resource provision in the KR. There are
significant impeding problems for the development of the agrarian sector. They are: an adverse business
environment; lack of entrepreneurship and management skills; weak agricultural structures; absence of
strong farmer associations; insufficient access to loans; export development barriers; and small share of the
internal market. Goals such as access to foreign markets, forming associations of farmers, and the general
structure of the policy on the development of small and medium size business are unattainable without
essential efforts by the government.

Kyrgyz agricultural commodity producers have proven that they can be good farmers, cattle breeders, and
develop production processes which find buyers in foreign markets. But tracing the market conditions of
fresh and processed agricultural products, providing proof of conformity of their production to meet export
requirements, and carrying out foreign trade activities in full capacity; including making contacts with
wholesale or retail trading networks in foreign markets, is an excessive problem for them. Thus, in view of
the absence of additional money resources, it is not always possible for many small businessmen in
Kyrgyzstan to negotiate commercial contracts with specialized intermediaries for the provision of raw
materials and sale of finished goods.

Recommendations: Creation of a new distribution channel for products will require:

Creation of a company with state participation, which would serve as a development centre for all
participants of the value chain, as an effective addition to the developed structure of wholesale-retail trading
agents in Kyrgyzstan, and could carry out state export promotion policy for food products.

Anticipated outputs for the activities under Objective 7 are: Efforts of the state for the creation of a
corresponding company will essentially facilitate the positions of most of the small producers in Kyrgyzstan; it
will deepen the level of processing agricultural products; will raise efficiency of small and medium size
businesses in the agrarian and industrial sector; and will increase export deliveries of Kyrgyz products.

16
 THE MACROECONOMIC ENVIRONMENT

The strategy is based on several documents regarding the macroeconomic environment in the country,
which includes to the National Poverty Reduction Strategy, Poverty Reduction and Growth Facility agreed
with the IMF, and the Mid-Term Budgetary Framework approved by the Government.

It is expected that during the 2006-2010 period, the average annual real GDP growth rate would be 5-8%,
i.e., approximately higher than the level of the previous several years' growth rates. The fiscal policy of the
Government will be directed towards a further reduction of the budget deficit to 3% of the GDP, through
improved tax collection and optimisation of public expenditures. Monetary policy will continue to be targeted
at maintaining the low inflation at around 5% per annum. Foreign economic policy is expected to open up
and import tariffs will be lowered, or removed, transport and transit barriers to Kyrgyz exports should
eventually disappear.

The National Bank of the Kyrgyz Republic should continue to pursue a managed floating exchange rate
policy. In general, the Government will continue to refrain from attempts to provide direct support to
enterprises (budget subsidies or subsidized credit, etc.) and will aim at macroeconomic stability.

The writing-off of a large portion of the government foreign debt negotiated with the Paris Club in 2005 will
ease the macroeconomic situation in the country and make the above policies directed to further
macroeconomic stabilization feasible. Government plans to reduce external borrowing for the Public
Investment Program and implement other measures preventing an uncontrollable accumulation of foreign
debt in the future.

Frequent changes and contradictions in the tax legislation contribute to complicate further the situation. All
these problems reduce the investment potential of the enterprises and the possibilities of their production
expansion.

According to entrepreneurs’ opinions, the VAT refund/crediting for exporters or for those who import
equipment or production inputs, is a big problem. There are no investment incentives in the tax legislation,
such as accelerated amortization, or the deduction of reinvested amounts from taxable profit. In the area of
property rights, the barriers to development are: the lack of land disposal rights on the side of the collateral
holder, the absence of a collateral selling procedure that does not involve long-winded court proceedings,
and the absence of land property rights for legal persons.

At the start of the strategy development process there was a lack of cooperation between the different
participants in the sector value chains: input (raw materials, fertilizer, seed, package) suppliers, processors,
wholesale traders and retail traders. This was because the previous mechanisms of administrative
interaction between the different value-chain participants were broken up by the economic crisis and
changes in the economic system in the mid 1990’s. The establishment of new market-based mechanisms is
taking place much slower, but is proceeding slower than that needed to save Kyrgyz processors.

The general external environment is expected to provide slower, but still robust growth in Kazakhstan and
Russia, with stronger growth in China. This will mean increased demand for Kyrgyz production and Kyrgyz
migrant labour (in the first two countries) and increased inputs of FDI to Kyrgyzstan. This should contribute to
a reduction in the Kyrgyz unemployment rate and modernisation of enterprises.

This positive macroeconomic scenario is subject to considerable variability related to the continuation of
political stability in the country and in the whole region, neighbouring countries adopting fairer trading terms,
the sharp fluctuation of world prices on key export and import commodities (gold, cotton, oil, and few other),
and the continuing commitment of donor countries and organizations to support the Kyrgyz economy with the
supply of cheap loans and, increasingly, grants.

17
IMPLEMENTATION FRAMEWORK

Key participants in the process of strategy implementation are the processing enterprises, raw materials
producers, trading and procurement companies, input and consulting service suppliers, investors and credit
organizations, governmental organizations and international organizations.

Ministry of Agriculture, Water Resources, and Processing Industry is responsible for general coordination of
implementation activities while a working group is to be responsible for intra-sector coordination, monitoring
and evaluation of the strategy’s implementation.

It is planned that at the end of the second year of the strategy’s implementation, the working group will
critically assess the situation in the sector’s production and exports, the degree of success in achieving the
strategy’s goal and objectives and changes in the business environment. On the basis of this assessment
the working group will call meetings of sector stakeholders to develop any necessary changes in the strategy
and implementation plans.

KEY SECTOR PROGRESS INDICATORS

The effective monitoring of the strategy requires the use of a set of progress indicators to trace the most
important developments in the sector and its environment. Indicators should include:

 Value and volume of the production and use (exports, domestic consumption and imports) of the food
processed production by product and country of destination (in the case of exports)/origin (in the case of
imports);
 Value and volume of the production and use of raw materials, domestic prices for main agricultural
products and other inputs needed by the sector;
 Number, potential and actual production capacity and employment in the enterprises in the sector;
 Market structure in the farming sector (number and production share of small farms, cooperatives, big
farms, etc.);
 Targeted foreign market prices and potential shares for the Kyrgyz export products;
 Accessibility of the market information by the sector stakeholders;
 Scale (total expenditure) and efficiency (costs per unit of exports) of Kyrgyz produce advertising
campaigns on foreign markets;
 Sales of recognisable Kyrgyz products on the foreign and domestic markets;
 Numbers of new registered businesses, new associations and similar collective groups in the sector
 Quality characteristics of the sector production (compliance with modern standards including those for
organic food, share of production in new packaging, etc.);
 Disbursement to enterprises of credit by registered financing institutions.
 Actual and forecast demand for key production inputs (including labour force) from enterprises;
 Business and regulatory environment indicators (survey-based data on perception of corruption,
regulatory burden and the like).

Data is collected by the National Statistical Committee, MAWRPI, sector associations, consulting companies
and Kyrgyz trade delegations in export destination countries.

18
STRATEGY BENEFICIARIES AND STAKEHOLDERS

The implementation of the strategy should benefit all the sector stakeholders. The primary beneficiaries of
the strategy are at this time:

 More than 450 enterprises of the food processing industry;

 About 6,000 micro-enterprises of the sector;
 More than 250,000 farmers supplying raw materials;
 Trading companies exporting Kyrgyz produce to foreign markets.

Indirectly implementation of the strategy should also benefit production input suppliers (credit organizations,
fertilizer, seed, chemical, and equipment suppliers, consulting companies, etc.) as well as other involved
parties – professional training institutions, central and local governments and buyers.

Implementation should also contribute to more sustainable growth in the country and the achievement of
donor, NGO and development agency goals in relation to poverty reduction.

19
IMPLEMENTATION PLAN

20
 Objective No.

Forecasted
Activity No.
Strategy's

beginning
objective

date of
Required
Activities Direct recipients Potential partners external Progress indicators
support

Introduction of more flexible 1.1 Agricultural Government, consulting 3Q2006 Examples of Farm-gate procurement
pricing system for raw producers, companies, similar pricing price offered by processors
materials processing international systems as % of open market price
Secure access of enterprises of the sector to raw materials supply

enterprises development
organizations
Offering better purchase terms 1.2 Processing Government, consulting 3Q2006 Examples of Price for coops as % of
to farmer coops/associations enterprises, companies, similar pricing price offered to individual
coops international systems farmers
development
organizations
Provision of farmers with 1.3 Agricultural Government, credit 1Q2006 Concessional Quantity of the inputs
required production inputs producers, organizations, loans supplied by the processors
(seeds, fertilizers, storage processing consulting companies, accessible to in monetary and physical
space, etc.) by processors enterprises international processors units
development
1 organizations
Establishing agro-schools for 1.4 Agricultural Government, 3Q2006 Grant for Number of functioning agro-
farmers providing them with producers, educational establishing schools
training and consulting in processing establishments, the schools
growing required crops and enterprises consulting companies,
feeding animals international
development
organizations
Contribution of processors to 1.5 Agricultural Government 3Q2006 Amounts directed by the
social development of farmer producers, processors to these
communities processing purposes
enterprises
Running advocacy campaign 1.6 Agricultural Government, 3Q2006 Grant to Number of coops registered
explaining farmers the producers, international support the after beginning of the
advantages of cooperation processing development campaign campaign
enterprises organizations

21
 Objective No.

Forecasted
Activity No.
Strategy's

beginning
objective

date of
Required
Activities Direct recipients Potential partners external Progress indicators
support

Preparing and publishing of 1.7 Agricultural Government, consulting 2Q2006 Grant to Number of copies of the
guidelines for framers producers, companies, develop and guidelines and the code
association and best practices processing international publish the published and distributed
code regarding processor- enterprises development guidelines among the sector
farmer relationships organizations stakeholders

Introduction of new 2.1 Processing Consulting companies, 4Q2006 Concessional Absolute Value and share
Ensure better provision and use of market

products/packaging fitting enterprises, credit organizations, loans of exports of new products

export market requirements trading international accessible to in total exports of the sector
companies development processors
organizations
Advertizing of the Kyrgyz 2.2 Processing Government, consulting 2Q2006 Number of fairs, shows
produce on foreign markets enterprises, companies attended; export value to
information

through participation in fairs, trading the markets covered by

2 trade shows, advertizing companies advertisement campaigns
campaigns in Kazakh and
possibly Russian media

Conclusion of long-term 2.3 Processing Government, consulting 1Q2008 Absolute Value and share
contracts with industrial enterprises, companies of exports supplied through
customers and retail networks trading long-term contracts in total
in the destination countries companies exports of the sector

22
 Objective No.

Forecasted
Activity No.
Strategy's

beginning
objective

date of
Required
Activities Direct recipients Potential partners external Progress indicators
support

Expansion of production under 2.4 Processing Consulting companies 3Q2006 Technical Value of production and
the national “Kyrgyz product” enterprises, assistance in exports under the brand
brand trading development
companies of standards
for products
which will
meet
requirements
for national
“Kyrgyz
product ”
brand
Conducting studies on the 2.5 Processing Government, consulting 4Q2006 Grant to Coverage of the target
target markets enterprises, companies, support the markets by updated market
trading international studies studies; export values to
companies, development these markets
agricultural organizations
producers
Create market information 2.6 Processing Government, 3Q2006 Grant to Number of the centers
centers in the regions of the enterprises, international support the operating in the country and
country open to all sector trading development centers number of farmers.
stakeholders companies, organizations processors. other parties
agricultural served by these centers
producers
Involve Kyrgyz trade missions 2.7 Processing Government 2Q2006 Number and value of trade
abroad into marketing of the enterprises, transactions related to the
sector produce trading sector implemented with
companies, facilitation of the trade
agricultural missions
producers
Concentrating exports on few 2.8 Processing Government 2Q2006 Share of export sales on
target markets enterprises, target markets to total
trading sector exports
companies
23
 Objective No.

Forecasted
Activity No.
Strategy's

beginning
objective

date of
Required
Activities Direct recipients Potential partners external Progress indicators
support

Concentration of market 2.9 Processing Government, consulting 4Q2006 Technical Regularity and
information collection, enterprises, companies, assistance in completeness of market
analyzing and dissemination trading international developing the information bulletins/leaflets
activities in MAWRPI companies development system disseminated by the
organizations MAWRPI
Creation and popularization of 2.10 Processing Government 3Q2007 Amount of transactions on
commodity exchange in enterprises, the exchange
Kyrgyzstan trading
companies,
farmers

Introduction of quality 3.1 Processing Consulting companies, 2Q2006 Technical Number of enterprises
management systems on enterprises international assistance in introducing the quality
enterprises development introduction management systems
organizations the systems
Introduction of HACCP and 3.2 Processing Consulting companies, 2Q2006 Technical Number of enterprises
Upgrade production quality

ISO22000 on enterprises enterprises international assistance in using HACCP and ISO

development introduction 22000
organizations the systems
Modernization of production 3.3 Processing Credit organizations 2Q2006 Concessional Value of investments into
technologies and equipment enterprises loans the equipment and new
3
accessible to technology
processors
Accreditation of food 3.4 Processing Government, 1Q2007 Technical Number of accredited
laboratories enterprises international assistance in laboratories
development accreditation
organizations
Adoption of the EU standards 3.5 Processing Government 1Q2007 Technical Passing relevant legislation
relevant to the sector enterprises assistance in
adjustment the
standards

24
 Objective No.

Forecasted
Activity No.
Strategy's

beginning
objective

date of
Required
Activities Direct recipients Potential partners external Progress indicators
support

Change in management 4.1 Processing Consulting companies, 1Q2006 Dissemination Profitability of enterprises in
practices on the enterprises enterprises international of good the sector
development management
organizations practices and
benchmarking
Negotiating simplified border 4.2 Processing Government, 2Q2006 Technical Formal and informal costs
crossing and transit enterprises, international assistance in of crossing borders and
Raise competitiveness of processing enterprises

procedures with the trading and development developing the transit through Kazakh and
governments of the transportation organizations procedures Uzbek territories
neighboring countries companies and
identification
of benefits of
their
simplification
Simplifying VAT refund rules 4.3 Processing Government 2Q2006 Value of VAT refund
and lower Social Fund enterprises, received by the exporters of
4
contribution rates trading the sector; rates of SF
companies contributions
Simplifying tax and custom 4.4 Processing Government, 2Q2006 Technical Costs and time of
administration rules both within enterprises, international assistance in shipments of produce to
the country and in transit and trading and development negotiations export markets
destination countries transportation organizations with other
companies countries
Establishment of professional 4.5 Processing Government, 1Q2007 Technical Number of staff members
training and retraining system enterprises, international assistance in going through the training
for the processing enterprises' educational development organization of system each year
personnel establishments organizations training
Strengthening higher and 4.6 Processing Government 1Q2007 Number of graduates of
vocational education system enterprises, universities and vocational
serving the food processing educational schools employed by the
sector establishments sector enterprises each
year

25
 Objective No.

Forecasted
Activity No.
Strategy's

beginning
objective

date of
Required
Activities Direct recipients Potential partners external Progress indicators
support

Negotiate lower transportation 4.7 Processing Government 2Q2006 Level of transport and
and transit tariffs with the enterprises, transit tariffs
countries of the region trading and
transportation
companies
Maintaining macroeconomic 4.8 Sector Government, 2Q2006 Technical Stable real exchange rate
environment favorable for the stakeholders of international assistance in with regards to ruble and
sector the value chain development macroeconomi tenge; inflation in
organizations c Kyrgyzstan
management
Negotiate lower import tariffs 4.9 Processing Government 2Q2006 Import tariffs and other
and other taxes/fees on Kyrgyz enterprises, tax/fee rates in destination
exports trading and countries
transportation
companies
Ease access of farmers and 5.1 Agricultural Government, credit 2Q2006 Concessional Values of credits received
Improve access of the sector enterprises

processors to credit through producers, organizations, loans by the sector enterprises

to financial, transport and other

lower interest rates and less processing international accessible to and farmers per year
strict collateral requirements enterprises development processors
organizations and farmers
Develop insurance services for 5.2 Agricultural Government, insurance 2Q2006 Value of insurance
infrastructure

the sector producers, companies premiums paid by the

processing sector
5
enterprises,
trading and
transportation
companies
Ensure reliable supply of 5.3 Agricultural Government, public 2Q2006 Number of water/energy
energy, water and producers, utilities supply and telephone
communication services to the processing connection interruptions per
sector enterprises enterprises year

26
 Objective No.

Forecasted
Activity No.
Strategy's

beginning
objective

date of
Required
Activities Direct recipients Potential partners external Progress indicators
support

Run information campaign 5.4 All stakeholders Government, 2Q2006 Technical Value of new investments
attracting investors to the of the value international assistance in coming into the sector
sector chain development investment enterprises
organizations attraction
Expand use of leasing 5.5 Processing Government, credit 2Q2006 Concessional Value of leasing operations
arrangements for equipment enterprises organizations, loans for in the sector
modernization international leasing
development
organizations
Increase number of 5.6 Processing Credit organizations 1Q2007 Number of required
specialized transport vehicles enterprises, vehicles
to ship the sector produce trading and
(refrigirators, etc.) transportation
companies
Write-off previously 5.7 Agricultural Government 4Q2006 The Value of debt written-
accumulated debts of producers, off
enterprises to the government processing
enterprises
Introduction of new financial 5.8 Agricultural Government, credit 1Q2007 Technical Value of credits issued
products allowing joint liability producers, organizations, assistance in under non-traditional
of the sector stakeholders for processing international developing schemes
credits enterprises, development such products
trading organizations
companies
environment

Governance improvement in 6.1 All stakeholders Government, civil 2Q2006 Technical Transaction costs of
and reduce

enterprises
burden on
regulatory
business
Improve

executive agencies, lowering of the value society organizations, assistance enterprises; probability to
6 corruption, improvement of chain international enforce contracts
court performance development
organizations

27
 Objective No.

Forecasted
Activity No.
Strategy's

beginning
objective

date of
Required
Activities Direct recipients Potential partners external Progress indicators
support

Reduction in regulatory burden 6.2 All stakeholders Government and civil 2Q2006 Number of checks by
on enterprises though of the value society organizations different government
decreased number of checks, chain agencies per year; number
more transparent appeal of cases in courts against
procedures, etc. the government won by
entrerprises
Reduction in number of sales 6.3 Processing Government 2Q2006 Number of eliminated sales
departments on processing enterprises, departments; number of
enterprises and transition to trading enterprises having long-
long-term relationships with companies term contracts with trading
traders companies
Creation of new joint ventures 6.4 Processing Consulting companies 1Q2007 Number of established and
with foreign partners/traders enterprises operating joint ventures in
on the target markets the sector

Creation of a Development All stakeholder Government, 3Q2006 Technical Value and volume of
Centre, with government of the value Consulting companies, assistance, purchased, processed and
participation, which could carry chain international concessional sold export products by the
Distribution

7 out government policy directed development loans company

at sustainable development of organizations, financial
channel

agro-industrial sector including institutes

sectoral export.

7.1

28
Annexes

29
ANNEX 1. BRIEF INFO ON SECTOR SITUATION

Production and Export Dynamics

In 2005 enterprises of food processing industry of the KR produced products for 9968, 0 million soms. Growth
rate to the production level was 2.0 % in 2004. Production of all kinds of food processing products increased
except sugar, meat products, canned fruit-and-vegetables, bread and beverage products. Despite of rough
political events took place during the financial year, 428 enterprises of different capacities were introduced
which enabled additional employment of more than 1500 people.

According to COMTRADE (ITC/WTO) statistics for 2004, comparative advantage index of food processing
th
industry of Kyrgyzstan made 0.90. This sector of Kyrgyzstan took 98 place among similar sectors of 200
surveyed countries and the first place among sectors of the food processing industry of Central Asia countries.
th
In Uzbekistan, the index of the corresponding sector made 0.53 and its food processing sector took 119
place in the world. Sector index of Tajikistan made 0.31. Among similar food processing sectors of Tajikistan
th
it took 128 place in the world. Comparative advantage index of food processing industry of Kazakhstan was
th
0.14. On this indicator Kazakhstan’s sector took 145 place in the world and the last in the Central Asian
region. It tells about certain opportunities for export expansion of Kyrgyz food processing production to
Kazakhstan and Tajikistan.

Milling/flour industry made 37 % of total volume of food production sector. Growth rate of flour production was
4.6 % in 2005 compared with previous year. There are 2651 operating enterprises in this sector. Available
capacities enable to process all grain harvest to products and to fully satisfy consumption of the population of
the country as well as to export. At the same time, due to the absence of assets, production capacities of
separate flour plants are not demanded. The level of utilizing production capacities on large flour/milling plants
decreased on flour to 40-50 %, on mixed feed to 10-20 % and on groats down to 20-40 %. Nevertheless
taking into account arrival of domestic and foreign investors to the sector, MAWRPI thinks that prospects of
developing this sector and export is rather steady.

Sugar production during the considered year was reduced as a result of decreased interest of commodity
producers in cultivation of sugar beet due to low procurement price. Decrease in crops of sugar beet has been
continuing since 2004. During the financial year, 55.7 thousand tons of sugar were produced which is 36,8 %
below the level of 2004. Currently only 30-40 % of sugar plants’ capacities are utilized. Considering
importance of producing sugar from beets and also getting of accompanying products demanded in other
sectors, MAWRPI will support expansion of annual production of sugar beet up to 600 thousand tons
(maintaining balance of interests of agricultural commodity producers and processors of this sector) in order to
fully satisfy internal sugar market and its export deliveries.

Production of bread and bakery products decreased for 1.7 % in 2005 while production of confectionery
products increased for 22 % and production of pasta\macaroni products increased 2.4 times. As per
calculations of experts, shadow production of bread and bakery products exceeds more than 4 times their
legal volumes. Considering vital social importance of this sector, efforts of the MAWRPI will be directed on
creation of association of grain producers and processors and provision of support for development of this
sector.

Currently there are more than 300 large, medium and small size enterprises in confectionery sector. There are
also joint ventures established on production of confectionery products together with foreign investments.
Utilization of production capacities at the enterprises of this sector makes 5-10 %. Internal market of the
country is filled with cheaper import products. The greatest share in import of confectionery products belong to
Russian, Ukrainian, Kazakh and Turkish confectionery products. The prices for the imported confectionery
products are much more below the prices of domestic products which do not create favorable conditions for
the further development of domestic producers of confectionery products. Past years production of caramels
and chocolates decreased among the enterprises of the sector, prevailing assortment of production of flour
confectionery products are: pies, cakes, cookies, gingerbreads with wide use of non traditional and wild-
growing kinds of raw material such as nuts, pumpkin, vegetable marrows, a barberry and sea-buckthorn
berries.

Fruit and vegetable processing sector of Kyrgyzstan showed stable growth rate from 2001 to 2005. Only in
2005 sharp decrease in cost volumes of production of this product was observed which was connected to

30
increase of the prices for raw material of 2005 crop. The geographical location and climatic conditions allow
growing a wide variety of vegetables and fruit-berry cultures practically in all regions KR. There are more than
128 enterprises with medium and small capacity on processing fruits, vegetables and berries in the sector.
Assortment of the products can be divided into 8 groups: fruit juices, jam-varenie, jellies, jams, fruit purees, a
tomato paste and puree, tomato juice, canned vegetables, compotes, dried vegetables and fruits. Share of
processed fruits is 10.9%, of vegetables 2.5%. Main buyer of fruit and vegetable products of Kyrgyzstan are
Kazakhstan and Russian Federation which buy around 65 % of all export volume of this sector (Kazakhstan-
44%, Russia- 21%). Besides other countries importing fruit-and-vegetable production from Kyrgyzstan such
are following: Germany, Turkey, China and others. High export potential of this sector allows to expect
increase of average annual export growth rate of its products up to 20%.

Tobacco sector of the republic is presented by 17 enterprises whose capacities are capable to ferment
annually more than 70 thousand tons of tobacco. However they utilize 20-40 % of enterprises capacities which
process raw materials. Decrease in production volumes of fermented tobacco is marked from 2000 to 2004.
Thanks to some increase of procurement prices in 2005, its production increased from 7.3 thousand tons up
to 12.0 thousand tons or more than 60 %. Single producer of cigarettes in Kyrgyzstan, "Reemstma-
Kyrgyzstan" company uses only 30 % of its capacities. Taking into account the tendency of increase in import
of cigarettes (in 2005 63 % of produced volumes were imported), there is a necessity of import replacement,
providing employment for the population and export opportunities of fermentative factories. MAWRPI will
independently search for investors in order to support effective development of tobacco production and export
of the production.

Production of meat and sausage products in the country is done by more than 220 enterprises. Within past
two years production volumes of meat and meat products steadily has been decreasing. So in 2003 there
were 195.6 thousand tons of all kinds of meat produced in recalculation on slaughter weight, in 2004 this
indicator showed 190.6 thousand tons, and in 2005- 187.6 thousand tons. Currently the share of meat
processing is not more than 2%. Taking into account stable growth of production of cattle breeding, this shows
growth of illegal processing of meat and processed meat products. Nevertheless, since cattle breeding is
traditional specialization of Kyrgyzstan and shows stable growth rates, meat processing sector also has good
prospects for development and export.

Production volumes of the dairy industry in 2005 increased for more than 30 %. There are 24 enterprises that
process milk with capacity of more than 1 500 tons of milk per day. Many enterprises of this sector have
foreign partners as owners which explain expansion volumes of high quality products demanded in foreign
markets. Kyrgyzstan mainly exports milk, cheese, butter and dried milk. The basic importer of Kyrgyz dairy
products is neighboring Kazakhstan. However, despite of the positive moments in sector development, a great
work needs to be done to increase utilization of production capacities which today does not exceed 25-30 %,
and share of processed milk makes only 7-8 % from volume of the produced crude milk in the country.

One of the positively growing sectors of food industry is beer nonalcoholic beverages. Production of mineral
water and other nonalcoholic beverages is annually growing for 4-8%. Production growth rate of non alcoholic
beverages in 2005 was 104.9%, in beer production- 108.1%. Taking into account sources of natural mineral
water, promoted national beverages and other opportunities for import substitution developing this sector as
well as its export has a comparative advantage.

Export volume growth of agricultural and food production was from 57,6 million USD in 2001 up to 130,1
million USD in 2005. Export of cattle-breeding production increased 2 times from 7,3 million USD up to 14,5
million USD, plant growing production from 32,2 million USD up to 56,1 million USD, because of export
growth of a clap-fibre for 2 times, food production from 40,1 million USD up to 59,5 million USD, because of
export growth of milk and fruit and vegetable product for 4 times.

Goods were exported to 40 countries and at the same time main importer of agricultural products and
processed products are Kazakhstan and Russia. In 2005 23% was exported to Kazakhstan and 45% to
Russia. Export data in food producing industry is shown in Table 1.

31
 Table 1. Exports of food producing industry in the KR by type and country
Name of the type Volume, tonns Volume thousand US dollars
Countries
of the export 2001 2002 2003 2004 2005 . 2001 2002 2003 2004 2005 .
Totals export in the
476200 485500 581700 718800 671743
KR
Total export as per
57613 118403 106227 132566 130070
MAWRPI
Total export in
40886 40557 40742 61326 59486
food industry

Russia 4.6 12.8 11.2 13.4 42.6 127.0 125.6 133.9

Kazakhstan 158.2 139.0 40.4 65.1 196.4 53.8
Tajikistan 1.8 1.7 12.3 5.8
Uzbekistan 1.1 1.7 5.1 8.2
Turkey 1.4 2.3 2.3 2.1 30.6 21.5
Germany 7.1 4.5 58.5 38.4
UAE 5.1 4.5 81.7 84.4
Meat products
Iraq 8.0 26.1
Iran 10.0 15.0
India 1.2 0.6 11.6 5.0
China 3.5 4.9 5.1 1.5 42.5 32.7
Korea 0.3 1.0 4.2 10.7
Other
countries 46.0 235.1 0.0 6.3 0.5 211.0 391.2 0.0 16.3
Russia 131.9 136.9 256.5 48.0 474.4 260.6 154.5 210.2 51.3 330.3
Kazakhstan 4591.4 8498.8 19895.3 17845.8 22876.9 2417.0 4923.6 7752.9 8969.2 14925.5
Tajikistan 0.1 0.1 0.4 345.3 0.6 0.5 0.2 258.8
Dairy products Uzbekistan 119.5 651.0 57.4 341.5
Afghanistan 150.5 116.2 153.0 165.1 155.9 282.8
Other
countries 1620.3 346.5 192.6 129.2 36.0 812.2 127.1 55.4 240.1 12.8

32
 Russia 2.0 1.6 1.0 0.6
Tajikistan 1354.6 2682.0 441.7 740.4 217.1 490.8 73.8 171.5
Wheat or surjik Iran 20.0 3.9
flour Afghanistan 1252.0 20.0 151.1 2.7
Other
countries 528.4 3119.8 1019.9 0.0 1.6 90.6 373.2 2.8 0.0 0.1
Russia 4.6 12.9 7.9 11.8 42.6 127.0 92.7 132.8
Kazakhstan 27 25.8 150.8 10.1 26.3 147.5
Tajikistan 140.4 478.7 93.4 327.8
Uzbekistan 9.4 39.2 12.2 28.5
Turkey 1.9 2.9 2.3 1.8 18.8 29.4 30.6 21.2
Germany 7.1 4.1 58.5 37.7
Bread and bread
products UAE 3.5 4.0 77.1 83.1
India 1.2 0.6 11.6 4.8
China 4.9 4.8 42.5 32.2
Korea 0.3 0.9 4.2 9.7
Mongolia 37.1 28.2
Other
countries 6.4 29.7 116.2 40.5 37.3 2.5 171.1 285.3 36.8 30.5
Russia 67 315.5 578.3 302.2 22.2 91.9 390.4 239.9
Kazakhstan 66.3 9.6 86.0 3.4 2.5 40.5
Turkey 399.4 560.5 1019.6 88.6 254.5 1454.8
Germany 36.6 64.1
UAE 89.8 143.7
Iraq 107.9 136.3
Dried vegetables
and nuts Iran 349.4 369.1
Afghanistan 21.0 6.3
France 17.9 0.2 82.3 7.2
Syria 129.3 166.3
Netherlands 80.9 94.5
Other
countries 1497.7 3483.5 2396.8 130.8 1181.3 1303.9 3515.4 3885.5 163.6 1733.3
33
 Russia 266.4 310.5 116.2 460.8 926.3 124.4 112.0 57.8 163.8 323.9
Kazakhstan 1767.1 1008.1 2566.8 598.4 400.6 1217.6
USA 2.6 6.4
Turkey 17 110.2 215.3 1.0 2.7 31.4 60.8 1.2
Canned fruit and Germany 350.0 105.1
vegetable products China 308.5 147.6
Tajikistan 1.2 12.6 1.6 9.5
Uzbekistan 98.3 64.5
Other
countries 597.5 899.2 2258.1 938.9 1650.8 293.9 645.1 0.0 453.0
Russian 1.9 1.6 0.5 0.5 8.3 14.8 6.2 6.8
Kazakhstan 100.3 9.0 1626.9 390.5 8.5 5934.3
Tajikistan 0.2 0.3 3.4 1.1 1.0 25.9
Uzbekistan 7.2 58.0
Turkey 0.3 0.1 3.7 1.6
Germany 0.9 0.4 3.7 5.7
Beverages UAE 0.9 0.7 5.3 15.6
India 0.1 903.0 0.7 0.8
Afghanistan 131.1 1.3 358.9 4.4
China 0.2 0.3 3.6
Korea 0.1 0.1 1.0 2.5
Other
countries 1.8 38 120.6 1445.0 0.0 177.3 361.9 296.4 4309.1 0.0
Russia 2507.6 7725.2 18842.0 59655.0 24537.5 1015.1 2694.3 6412.0 21532.6 9154.5
Kazakhstan 1662.2 2648.8 536.0 320.0 5096.0 546.2 913.8 175.3 104.0 1539.7
Tajikistan 1437.7 2012.1 300.0 627.3 1100.0 276.7 788.7 86.5 211.5 406.8
Ukraine 64.0 22.4
White sugar China 200.0 78.0
Iran 10.0 5.9
Afghanistan 350.0 122.5
Other
countries 110.9 2330.2 0.0 0.0 0.0 25.6 856.3 0.0 0 0
34
 Russia 0.6 7.3 11.0 5.0 0.7 11.7 8.5 4.3
Kazakhstan 4.3 807.3 6.4 4.2 124.3 8.7
Tajikistan 1 0.5 25.3 1273.1 0.7 1.0 16.7 708.2
Confectionary Uzbekistan 4.7 320.8 2.6 167.9
products UAE 0.1 0.1
Mongolia 9.7 11.8
Other
countries 0 8.9 123.7 1.4 16.4 0 5.5 14.7 0.6 26.0

Source: Materials of MAWRPI and MITT of the Kyrgyz Republic

35
ANNEX 2. LIST OF DOCUMENTS AND REPORTS CONSIDERED IN THE DEVELOPMENT OF THE
STRATEGY

1. Kyrgyz Republic: Agricultural Policy Update. The World Bank, 2004.

2. Technical Cooperation of Germany with the Kyrgyz Republic, GTZ, 2004.
3. Kyrgyz Republic: Country Economic Memorandum on An Integrated Strategy for Growth
and Trade. The World Bank, 2004.
4. The Kyrgyz Republic: Improve Governance an Expand Exports. Anders Aslund, UNDP,
2003.
5. Agribusiness and Marketing Project Outline. AFC/MNT, 2003.

6. Identifying Opportunities for Kyrgyz Agro-Processors in the Russian Markets. USAID,

Pragma, 2002.

7. National Business Opinion Survey of Kyrgyz Republic. TACIS, 2002.

8. Kyrgyz Agro-Input Enterprise Development Project. USAID/CAR, IFDC, 2000.
9. The Conception of the Kyrgyz Agrarian Policy up to 2010. MAWRPI, Helvetas, 2004.
10. The Food Industry Development Program up to 2010. MAWRPI, 2003.
11. Kyrgyzstan: Statistics. NCS, 2003-2004.
12. COMTRADE Statistics, ITC, 2002-2003.
13. Fruit and Vegetable Processing Industry Analysis for the Kyrgyz Republic. Financial
Company SENTI, 2003.
14. Strategy for Development of the Fruit-and-Vegetable Processing Industry in Kyrgyzstan.
SDC, Helvetas, SENTI, CASE-Kyrgyzstan, 2004.
15. MAWRPI Materials, 2006.

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