Regions and Countries

	Table of Contents
p. 2 of 20 BACK | NEXT I. Country Performance Assessment A. Economic Performance Assessment B. Poverty Assessment C. Assessment of Socio-Environmental Performance D. Governance E. Implementation Assessment II. Country Operational Strategy III. Sector Strategies IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Kyrgyz Republic : I. Country Performance Assessment

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A. Economic Performance Assessment

1. The Kyrgyz economy experienced another difficult year in 1999 as the adverse impact of the Russian crisis of August 1998 continued to affect the economy. Preliminary data indicate that real GDP grew by 3.7 percent, higher than in 1998, owing to continued growth in agriculture that counterbalanced the persistent decline in the industrial sector. Inflation, however, accelerated to about 53 percent by year-end, more than double that of 1998 largely due to a depreciating som and increases in prices of grain and flour. The nominal exchange rate of the som depreciated by about 46 percent in 1999 against the dollar, and real interest rates hovered at about 15 percent towards year-end. During 1999, total external trade contracted by 22 percent as compared to 1998 with import decline outpacing export decline. As a result, the external trade deficit was reduced by almost 65 percent and the external current account deficit was about 16.3 percent of GDP as against 19.8 percent in 1998. Gross reserves increased to about 3.2 months cover of imports by year-end. Detailed economic performance indicators are shown in Appendix1. The economic situation further improved in 2000 with GDP growing at 8.6 percent during the first seven months. Inflation over the first seven months was contained at 5.3 percent during which period food prices rose by 6.3 percent and fuel prices by 12.1 percent. Overall trade turnover fell by 1.2 percent during the same period. There was a marginal improvement in foreign exchange reserves.

2. The fiscal situation continued to be weak in 1999, as reflected in a cash deficit of 12 percent of GDP, higher than that of 1998. Monetary policy implementation was uneven, marked by large liquidity injections in the second and early third quarter, followed by a return to a tightened stance since third quarter of 1999. The Russian crisis weakened the banking sector considerably, and in April 1999 it was hit by a major financial fraud that substantially aggravated the situation. As a result, some of the largest banks were closed, with the five most affected banks representing about 60 percent of the banking system deposits. Despite restructuring and rescue efforts, indications are that the deterioration of the sector continues with the banking system continuing to post net losses. Meanwhile, military expenditure fell in real terms by 5.9 percent in 1998 despite a moderate GDP growth of 1.8 percent. The size of military spending was about 2.2 percent of GDP in 1998. Fiscal situation appears to be improving during 2000.

3. Structural reform made progress in some areas such as continued efforts in implementing the comprehensive pension reform, initiation of the privatization and restructuring of several large state-owned enterprises, and continued reform in the health sector. However, progress lagged in other areas including enterprise restructuring and further promotion of private sector development including enhancing legal and regulatory framework and its implementation.

4. The Government made major efforts to reach agreement with the International Monetary Fund (IMF) on reviving the second annual arrangement of the ESAF program which went off track in July due to failure to meet program targets. A set of prior actions was required and monthly targets towards year-end were set. With these conditions successfully met, the IMF Board approved the Poverty Reduction and Growth Facility (PRGF), the successor to ESAF program, on 9 February 2000. Under the new program the Government will strengthen its efforts in macro stabilization and deepen structural reforms. In particular, a significant fiscal adjustment is needed with primary surplus targeted at about 2 percent of GDP and fiscal deficit at about 7.5 percent of GDP for 2000. These targets are ambitious but necessary to restore fiscal balance and strengthen macrostability. Monetary policy will continue to be tight in order to contain inflation and further depreciation of the som. A key to restore public confidence in the som and domestic financial system is the restructuring of the banking sector. On 13 September 2000, the IMF's Board of Directors approved the July review of the Poverty Reduction Growth Facility (PRGF). The Government is determined to achieve the program's objectives for the rest of the year. In view of the favorable developments in the first half of 2000, growth projections for the year have been revised upwards to around 7 percent and inflation downwards to around 15 percent. The Government stands committed to deepening the reforms in the banking sector and to improving revenue performance. Current expenditures will be kept in line with program commitments and the Government intends to reduce significantly the size of the public investment program to conform to PRGF requirements. Managing its external debt will pose considerable problems to the country in the coming years and the IMF has identified the need to reduce borrowings. From 1 August, wages of civil servants have been increased by 20 percent on average. Public sector wages have not been raised since 1997. In tandem with the increase in wages, the Government has also increased pensions by 20 percent; further, pension arrears were reduced to Som 45.5 million by end-June (lower than the Som 75 million agreed to for this period under the PRGF). Despite these new expenditures, the programmed budget deficit will be maintained at Som 4.1 billion for the year (6.8 percent of GDP). The Government also intends to continue strengthening civil service reforms, reducing licensing requirements, raising energy prices and the reforms in the agriculture sector.

5. Structural weakness of the economy which underlined recent economic difficulties must be tackled through persistent structural reforms. Principally, the efficiency of public sector decision making must be improved. That includes a further reduction of the state’s role in the economy and promoting private sector development, and expediting the process of enterprise restructuring. Complementing these efforts are the civil service reform, the raising of energy tariffs and a further enhancing of the legal and regulatory framework. The process of privatization and restructuring of large state-owned enterprises must be accelerated and external debt management must be improved.

6. Largely because of the sharp depreciation of the som by over 50 percent since August 1998, external public debt/GDP ratio increased from about 72 percent in 1998 to 115 percent in 1999, and the NPV of debt to exports rose to over 212 percent, an indication of heavy indebtedness. By the end 1999, the Kyrgyz Republic has accumulated about $1.39 billion in external liabilities (over 100 percent of GDP) of which more that 40 percent is on non-concessional terms; a major portion of the latter falls due in the next five years. Some $170 million of this is owed to the Russian Federation and $40 million to Turkey with smaller amounts due to Pakistan and India. Most of the remainder of the non-concessional debt is for commercial loans related to the Kumtor gold mine. The Kyrgyz Republic’s debt service is sloping downwards over time with the highest concentration of repayments (about 13 percent of GDP) over the next five years when they will be the most difficult to make. Successful negotiations for the rescheduling of the Russian Federation and other debt is required to ease the considerable strain on the budget.

7. Provided there is strict adherence to these reform measures, the medium-term outlook of the economy is favorable. Real GDP is likely to grow at 3-4 percent for the next few years until 2003 when growth accelerates to 4-5 percent. Inflation is expected to be cut by half in 2000 and further decline to about 5 percent by end 2003. The budget deficit is expected to decrease to 7.5 percent this year and steadily to about 3 percent by 2003. Regarding external balance, with the economic recovery of the Kyrgyz Republic’s neighboring countries, the current account deficit will be reduced further to about 13 percent of GDP this year and gradually to around 10 percent in 2003.

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