Myktybek Osmonaliev: Budget loses an amount equal to half of country's GDP because of contraband

Contraband import is a threat to domestic production. As of today, Kyrgyzstan like no other has grasped it. After all, the existence of the black market means less revenue for the legitimate local producers and increase in opportunities for the organized crime. The situation with contraband has worsened after Kyrgyzstan's accession to the Eurasian Economic Union. The country has become a member of the union 11 months ago, and the flow of contraband has immediately rushed to Kyrgyzstan. Analyst of BizExpert Center Myktybek Osmonaliev told to 24.kg news agency what was the reason and how to deal with smuggling.

-Lets first define what contraband is.

 - Smuggling harms all spheres of state's life. It is movement of a large amount of goods and values through the customs border that are banned or restricted from such movement. At the same time, the movement of goods takes place with hiding them from customs control or with the fraudulent use of documents or means of identification, either with deliberately false declaring.

Depressing is that the smuggling causes economic damage to the state, including foreign economic activity, the budget does not receive customs fees and duties. The life and health of citizens are endangered due to the lack of quality control of the imported goods. Let us not forget that incomes of the smugglers are growing, which contributes to their further illegal activities.

- What is the actual amount of smuggling in the country?

 - As of today, Central Asia and, in particular, Kyrgyzstan has no database to estimate the total volume of contraband. Due to the lack of exact figures, many studies are conducted based on mirror statistics. Relying on it we can conclude that Kyrgyzstan imports much less than there is exported by other countries. And this is the mirror statistics only for 2013, i.e. long before the country's accession to the Eurasian Economic Union.

Data show that Kyrgyzstan does not receive the goods for at least $ 3, 987,244 billion. It is a colossal sum for the economy of Kyrgyzstan. It is almost a half of the country's GDP.

 - It is unlikely that such amount is lost between the boundaries...

- Surely. We can say that these goods are imported illegally. It is very difficult to estimate the volume of smuggling. Today, there is a need to attract more attention of business and government to the problem. We must unite our efforts to develop effective measures to combat smuggling. It is also important to create a uniform agreement between states, which would have given the definition of contraband.

 - And where we have to look for contraband?

- Researchers at the International Monetary Fund, having analyzed the situation, concluded that bazaar trade is a lever of smuggling. Almost all markets in Central Asia are located near the border, and all the goods on them are not registered. It is worth paying attention to the fact that we have the biggest import-export discrepancy with China. China-Kyrgyzstan border crossing point is located in the mountainous region of Kyrgyzstan - less controlled part of the state.

- As a result, the domestic business suffers losses...

 - Yes, our products become uncompetitive in the local market. But the problem is not only in smuggling. This process is influenced by different factors: small wholesale, lack of production automation, high and unaffordable loans. It is necessary to specially emphasize the mediation. In Kyrgyzstan, it is not controlled and it directly affects the price of goods. In practice, it frequently happens that the intermediary chain includes up to five or six people. Each of them adds his own margin. Thus, the final price of the product is greatly increased. It should be clearly understood that too often the price of goods in Kyrgyzstan is overvalued by intermediaries, and not because of the high cost of production.

- How does contraband come to Kyrgyzstan?

- There are several ways. For example, there is the so-called traditional method. It involves illegal crossing of the customs border through official posts by falsifying customs documents. It is spread on the borders with Tajikistan, Uzbekistan and China. There is about collusion between businessmen and representatives of border services.

There is also a kind of smuggling like the import of goods under the guise of domestic use. It is often used in the border regions of the country, in particular in Batken region. Thanks to its geographical location, it has become a large canal of smuggling operations. The region gets significant resources from other regions ostensibly for consumption therein. But then, with the help of the local population, these products enter the market of Tajikistan. Of course, it is not without "help" of the representatives of state services.

- What other methods can be used?

 - Sometimes, contraband is carried out under the claim of export of goods for temporary storage and processing abroad. Naturally, the resources will not be returned. Therewith, the supervisory authorities are submitted the false documents about crossing of the border by an export cargo. Sometimes, there are drawn up forged refusal letters on behalf of shell companies, which allegedly should have received the products for processing. There are facts of export of goods within the officially concluded export contracts with foreign firms established by smugglers. The prices of a formal contract are underestimated. This method is often used when exporting metals and valuable raw materials.

- Smuggling has become a real scourge for Kyrgyzstan. How do you propose to deal with it?

 - It is necessary to tighten control over the criminal cases on the facts of smuggling. It is necessary to ensure their logical conclusion. It is necessary to increase the penalties for smugglers and officials. After all, people are engaged in smuggling because the financial returns from it are few times greater than the risk of being caught. If there are heavy fines, the smuggling will not be so attractive. For this, for example, we can fix the size of a fine equal to the value of the smuggled goods. Thus, it is necessary to closely monitor the future activities of smugglers. It is necessary to toughen punishment for officials who have allowed the contraband. Simply put, we have to make smuggling unprofitable.

- But we will not achieve much by prohibitions and fines only.

 - Exactly right. Therefore I propose to introduce a system of preferences for bona fide importers to encourage them. The preferences may be different: a reduction of inspections, provision of soft loans, the issuance of parameters (indexes), which will later on be the indicators for the participation of a businessman in the programs of public-private partnership.

- What are the other ways for government and business to fight against smuggling?

 - Most important is teamwork. The problem is that the government and business cooperate badly today. They need to intensify cooperation. It is easier to fight with the evil together. For example, it is possible to organize a mobile group with the participation of the State Service for Combating Economic Crimes, Tax Service and entrepreneurs to monitor the movement of goods across the border. It is necessary to motivate the third party to report on the schemes and participants of the smuggling.

- Even if all of this works, contraband will remain:  it is more profitable for the people to buy a cheaper product.

 - Yes, but that's only because the population is poorly informed about the negative effects of consumption of smuggled goods. The government needs to conduct an active information campaign about it. With the help of the media it has to tell about contraband, and what consequences it has. It has to organize outreach information campaigns in the regions. The authorities must constantly report on the results of the fight against smuggling. If people are more aware of it, they will not buy goods of dubious origin.

- How to deal with intermediaries?

 - There is no need to fight with them. Yes, intermediary institutions strongly affect the price of goods and, in some cases, create speculative moments. But that does not mean that we have to get rid of the intermediaries. It's impossible. It is only necessary to control the process, introduce rules for providing mediation services. A trading exchange can be created in the regions. It is necessary to conduct regular trade fairs, business meetings with customers, encourage employers to form unions (cooperatives).

- We started the conversation saying that the greatest flow of contraband remains in the bazaars. What do you propose to do in this part?

 - It is necessary to create markets for domestic producers. It is necessary to allocate individual quotas to farmers on the markets. As a result, local production will be competitive and the mediation institute will be systematized. It is necessary to introduce a system of tracking the market price. Often there is a situation when an importer buys goods for one price and shows the lower one at border posts. So he pays less customs fees. If the border posts have an automated program to determine the market price of the product, this could be avoided.

- The authorities have actively spoken for the development of cashless payments in the Kyrgyz Republic. Can "non-cash" resolve the problem of contraband?

 - Of course. In Kyrgyzstan, the import sector actively uses cash. This gives more opportunities to stay in the shade and avoid paying taxes. Banking transactions will be an excellent tool for tracking the real volume of imports. So we need to oblige all importers to conduct cashless payments, but to reduce bank service fees for them (bonus system, credit product development). In addition, it is necessary to create a legal framework to combat trafficking by improving the criminal legislation so that it was aimed at the timely detection of smugglers and bringing them to justice.