What is being proposed
The draft law allows for the possibility of introducing state price regulation for up to 90 days a year, with the option for extension. This applies to:- socially significant goods and services, the list of which is determined by the Cabinet;
- goods and services provided by dominant economic entities.
“This will allow businesses to set prices for goods and services within the framework of profitability. The draft law proposes to limit the level of profitability to 25% of the cost of production,” she reported.
Deputy Dastan Bekeshev inquired about which specific services would be subject to regulation. In response, the Chairman of the Antimonopoly Service, Jenaly Orozbaev, stated that it concerns social services, including the cost of education in universities.
“I support the draft law, but it is important to define a specific list of services that will be regulated. Otherwise, why do we need the state if it will not control the market?” Dastan Bekeshev expressed his opinion while commenting on the draft law for Kaktus.media.
A storm is brewing for the economy
The proposed changes imply a significant expansion of the state's powers in regulating prices in Kyrgyzstan. A key innovation is the introduction of control over profitability for socially significant goods, which could have serious macroeconomic consequences.These changes indicate a more active state intervention in pricing.What does the 25% limit mean? It means that for every 100 soms of cost, a business will not be able to set a markup of more than 25%. In other words, the selling price will be strictly controlled, regardless of the purchase price.
The amendments will affect all sectors of the economy, despite the emphasis on socially significant goods. The Cabinet has the right to determine which goods will be classified in this category. Today it is bread and milk, but tomorrow it could be electronics and financial services.
“I am monitoring the actions of the National Bank and believe that the regulator is taking measures in advance. Currently, the rate is 11%, and I anticipate that it may be raised by 200 basis points at the next meeting. This is due to an increase in the money supply and imported inflation from EAEU countries,” noted Kaktus.media economist Yuri Ruzavin.
This puts pressure on inflation. I suspect that the National Bank is already noticing an increase in wholesale inflation in the food sector, which will soon affect retail inflation.There are serious risks for the economy of Kyrgyzstan, and the government, according to experts, is trying to prevent negative scenarios by limiting business profitability to avoid inflationary spirals and hyperinflation in the next two years.
However, similar measures have already been implemented in a number of developing countries and have always led to shortages of goods and a rise in the gray economy.“I believe that such amendments are necessary so that the Ministry of Finance and the National Bank have non-monetary tools to regulate macroeconomic parameters. Nevertheless, it is now clear that an economic storm is approaching, and we need to be prepared for it,” added Yuri Ruzavin.
Inflation is not always bad
Sergey Ponomarev, head of the Markets Association, emphasizes that the Cabinet is trying to curb price increases; however, a detailed analysis of the causes of inflation must be conducted before making decisions.We need to answer the question: is this a local problem of Kyrgyzstan or is it global? A similar situation is observed in many countries.
“The National Bank has sufficient tools to combat inflation. For example, it can gradually raise the average interest rate, which will lead to higher loan costs and a slowdown in the pace of lending to the private sector,” explains Sergey Ponomarev.
He also points to another factor in the rise in prices in recent years — the exit of businesses from the shadows. Many companies previously operated in the "gray" zone and did not pay taxes, but with the increase in the number of legal enterprises, prices for goods have also risen.
“When there is less 'gray' business, tax revenues increase. We see a growing budget and new roads, schools, and other important facilities. But this also affects prices. Should we fight this? I don’t think so,” reflects Ponomarev.
Salaries and pensions have also increased, which increases the money supply. In a market economy, this will always lead to inflation.“Inflation is not always a negative factor. It can stimulate the economy. The scale of inflation is another question, as it is observed worldwide,” added Sergey Ponomarev.
Who will account for business costs?
Returning to the amendments to the Law "On Pricing." The business community does not support this initiative.The costs of logistics, taxes, marketing, and employee salaries are not taken into account, which may exceed the very 25% mentioned in the draft. There is no clarity on whether the state will compensate these expenses.
“The Cabinet's proposal shocked the business community. We believe that we have a market economy where prices should vary depending on market conditions. Kyrgyzstan still depends on imports, despite efforts to develop local production. Resources are limited, and we cannot meet all needs independently,” noted Gulnara Uskenbaeva, head of the Suppliers Association.
Logistics also remains expensive due to the current geopolitical situation.
Often, the manufacturer's price does not include transportation costs, which are borne by suppliers. These costs are not taken into account when it comes to profitability. The same applies to salaries, storage costs, and loans. If we are talking about excise goods, the price does not include excise and VAT, which is 12%.How should businesses account for these expenses? How will pricing be determined? If a product is purchased for 1,000 soms and sold for 1,100, adding another 500, can one really run a business? Such a business will quickly go bankrupt.
“The state already has experience in price regulation, which has not led to positive results. We are concerned about this initiative,” added Gulnara Uskenbaeva.
She is supported by Sergey Ponomarev, who noted that this proposal was discussed last summer, but many businesspeople were not involved in the process.
This law contains anti-market regulatory tools, and their application is impractical.He pointed out that according to the classical definition by Adam Smith, price is the ratio of supply and demand, while according to Karl Marx, it is socially necessary labor costs.
“It seems that the concept of the draft law is based on Marxist ideas. But what economic model are we adhering to — market or socialist? This draft law raises questions, as we have already gone through product shortages,” says Sergey Ponomarev.
He also raises an important question about profitability. The draft law states that it can be set at 25%, but it can also be 5%, 7%, or 10%, while the methodology for its determination is not specified. Accounting standards and international methodologies are not taken into account.
“Many companies are in debt, and these costs should also be considered. The absence of such things will lead to administrative pressure and corruption risks. The Cabinet may set prices independently, which could have negative consequences,” believes the head of the Markets Association.
Instead of lowering prices — shortages and investor outflow
“Before developing such draft laws, thorough research should have been conducted to understand what such measures led to in other countries. There is no positive experience, as far as I know. It would also be worth discussing the concept with business associations and experts,” believes the head of the Markets Association.In his opinion, the adoption of this draft law could negatively affect the country's investment attractiveness. The National Investment Agency is actively working to attract investments, but investors may leave for places where there are no such legislative norms.
I believe that in a market economy, the state should only regulate monopolies and socially significant goods. But intervention in other sectors of the economy can lead to problems.“The Cabinet will be delegated a significant number of powers, and officials may act unpredictably. The investment climate may change. Businesses always take loans, and with profitability reduced to 5% or 10%, businesses may incur losses. This threatens the banking sector, as entrepreneurs may fail to meet their credit obligations, leading to the bankruptcy of small and medium-sized businesses,” noted Sergey Ponomarev.
If this happens on a large scale, it could affect the financial system and lead to bank bankruptcies, which would impact citizens' deposits. Reckless measures, not thought through from an economic perspective, could lead to serious consequences.Gulnara Uskenbaeva added that such draft laws could return Kyrgyzstan to a planned economy, as it was during the USSR, although at that time the state had resources for investment. And now?
“We were not explained how this would be implemented, and no calculations were provided. There are far more questions than answers,” she concluded.
The draft law should be withdrawn
We remind you that the draft law has already been adopted by the Jogorku Kenesh in the first reading, and there is not much time left for changes. Business associations are preparing an appeal to the authorities requesting not to adopt the document in its current form.This is a serious problem. The draft law contradicts the country's development strategy and the president's decrees. It would be wise for the deputies to listen to us and return the document for revision, taking into account the business community's opinion.“We will insist on the exclusion of the profitability clause. It is necessary to weigh all the pros and cons, study international experience to avoid corruption risks and a decline in investment attractiveness. I recommend that the Ministry of Economy actively discuss all initiatives with the business community and experts,” summarized Sergey Ponomarev.
