Shadow Economy in Kyrgyzstan: Analyses and Tackling Policies

The shadow economy in the Kyrgyz Republic, estimated by the state statistical office to be approximately 20% of GDP in 2023, is closely tied to widespread labor market informality, which encompasses 66% of the workforce. Alternative estimates of the shadow economy using alternative methods show higher values of the shadow economy in the country—from 28 to 46% in 2017–2022. The shadow economy in Kyrgyzstan provides vital income and employment opportunities, particularly through micro- and small enterprises, but it constrains fiscal revenues, social protection coverage, and long-term productivity. Various types of taxpayers face unfair treatment due to different taxes and unequal social security rates. These taxation disparities complicate compliance and encourage informal business activities across different sectors. Informality in the labor market is most prevalent in construction, trade, transport, and processing industries, with urban job growth dominated by informal employment and women’s participation in the labor market declining from 41 to 39% during the last decade. Since 2007, policies have generally ignored the clear distinction between the “shadow” and “informal” economies, focusing more on tax control than on supporting formalization. Different tax and social contribution systems create many issues for entrepreneurs and workers, leading to unfair tax payments. Addressing this requires a balanced approach to motivate businesses to pay their taxes, including tighter enforcement, incentives to formalize, sustainable funding for social protection, and targeted labor market interventions. Gender disparities need specific strategies to empower women in Kyrgyzstan. Effective reform depends on coordinated policymaking, clear definitions, thorough analysis of proposed tax reforms, and stakeholder engagement to reduce informality without hindering entrepreneurship and economic growth.