Regions and Countries

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Country Strategy and Program Update 2002-2004: Kyrgyz Republic

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I. Development Situation

A. Recent Political and Social Developments

1. Two-phased parliamentary elections were conducted in February-March 2000 and presidential elections in October 2000 returned incumbent President Akaev for a new five-year term. Following this, a new Government was sworn into office in December 2000 with considerable changes at the cabinet and other senior government levels. It was widely anticipated that, once the elections were over, the momentum of the reform process, which had slowed in the preceding two years, would pick up. Recent developments indicate positive signs in this regard and the Government’s willingness to address the difficult social and economic problems facing the country.

2. The effects of the Russian crisis had a serious impact on the Kyrgyz economy in 1998 and 1999. It also had a substantial effect on poverty in the country, which rose from 42.9 percent in the preceding year to 54.9 percent in 1998. The crisis impacted most on urban sector activities; urban poverty rose by 90 percent to reach 42.2 percent of the urban population in 1998. In 1999, 53.3 percent of the population was living in poverty, which declined marginally to 52 percent in 2000. The severe budget constraints experienced over the last several years have led to a decline in the quality of the social services in the country. Further, many existing subsidies have declined in value, and new utility and other tariffs that had been introduced affected the lives of the poor. A detailed poverty assessment carried out by the Government with the assistance of the World Bank, Asian Development Bank (ADB), United Nations Development Program (UNDP) and other aid agencies has accurately gauged the extent of poverty in the country and identified the correlates of poverty and major issues that affect the poor.

3. The problem of poverty and its causes have been the focal point of a comprehensive development framework (CDF) process that was launched in the country in 1999. As part of this process, the World Bank, ADB and other aid agencies have been assisting the Government in carrying out studies on a wide range of sectors. The results have contributed to the formulation of the CDF strategy as well as the national poverty reduction strategy (NPRS).¹ The CDF represents the development vision of the Government till the year 2010, while the NPRS represents the CDF’s activities during the first three years of implementation. The CDF has three major themes to achieve the goal of poverty reduction: (i) effective and transparent state governance, (ii) a fair and secure society, and (iii) sustainable and economic growth and development. Under the NPRS there will be an explicit attempt to identify the policies and priority areas of intervention that will have the greatest impact on poverty. The Government considers the CDF and NPRS documents as its blueprints for development. The Government expects future external assistance to be directed only to the priority areas identified in the two documents. While the original target date for finalizing the two documents was December 2000, the process is still incomplete.

B. Economic Assessment and Outlook

4. The Kyrgyz Republic is recovering from the adverse impact of the 1998 Russian crisis. The economy grew at 5 percent in 2000 allowing an increase in real per capita incomes in dollar terms for the first time in three years. The growth is broad-based and marginally reduced the incidence of poverty. Poverty increased sharply (para. 2) following the Russian crisis as the economy slowed, prices rose sharply, and real wages fell. The Government followed a tight monetary policy during 2000 to bring down inflation and stabilize the exchange rate. Consequently, inflationary pressure abated significantly in 2000. End-of-period consumer price inflation in 2000 was 9.6 percent against 11.6 percent planned for the year and 39.9 percent in 1999. Exports grew by 10.4 percent aided by a massive depreciation of the som in 1999, yet the absolute level of exports in 2000 was 5 percent less than in 1998. As a result of a marked decline in investment demand, imports fell by 8.2 percent compared with those in 1999. This was due to a reduction in the public investment program (PIP) by 3 percentage points of the gross domestic product (GDP). The external current account deficit declined from 14.9 as percent of GDP in 1999 to 6.8 percent in 2000. Foreign reserves increased marginally to cover 4.5 months imports. During the year, the fiscal deficit declined by 2.5 percentage points of GDP to 10.2 percent. The economic indicators are in Appendix 1.

5. Despite better macroeconomic performance, the Government was not able to attain some of the benchmarks set for the last two quarters of 2000 under the second year annual arrangement of the poverty reduction and growth facility (PRGF). Consequently, IMF postponed its final review of the second year and put in place a shadow program of interim quantitative targets on key monetary and fiscal variables for monitoring on a monthly basis. The main threat to economic growth comes from the high external public debt burden which stands at around $1.24 billion or 95 percent of GDP, and the IMF has begun to work on a detailed debt strategy with the government. Rescheduling the entire bilateral debt to Turkey and a part of the debt to the Russian Federation on relatively favorable terms took place in April 2001. This certainly removed the risk of macroeconomic instability in the immediate future. But, the debt servicing burden of the Government is expected to remain at a high level of above 20 percent during this decade.

6. The presentation of the third annual arrangement of the PRGF to the IMF Board was scheduled in late July 2001. However, since the Government unexpectedly signed new legislation introducing lower rates of income and profit taxes, the current PRGF lapsed. No new PRGF is expected unless the Government approaches the Paris Club before the end of this year to discuss debt rescheduling. Details of the rescheduling request will be thrashed out with an IMF mission in September 2001. Provided agreement on debt rescheduling and other matters pertaining to the new PRGF is reached with the IMF mission, the new 3-year program is expected to be ready for consideration by the IMF Board in late 2001.

7. In addition to the focus on Paris Club negotiations, the new PRGF program is expected to include further fiscal consolidation, a continuation of tight monetary policy, significant progress in structural reforms with particular emphasis on the financial and public sectors, and the creation of an environment conducive to private sector growth. As percent of GDP, the size of PIP is currently fixed at 6 for 2001, 5.5 for 2002, and will progressively fall to 3 by 2005. If the country adheres to the new PRGF program whose general policy prescriptions are not expected to differ substantially from the lapsed one, the economy is expected to grow at about 5 percent over the next two years.

C. Implications for the Country Strategy and Program (CSP)

8. A number of issues and factors affecting prospective ADB operations in the Kyrgyz Republic have arisen of which a clearer picture is unlikely to emerge shortly. These include finalizing of the CDF and NPRS; formulating the debt strategy of the country, final understanding being reached on the outstanding debt to major bilateral creditors; the Government’s decisions on prioritization of the projects in the PIP; and the formulation of the new PRGF. Further developments on these issues need to be closely assessed in determining the ADB assistance program. Consequently, whereas during this year’s country programming exercise, broad agreement was reached with the Government on a program of loans and TAs for 2001-2004, this was on the understanding that the projects and actual levels of lending for 2002-2004 will have to be further discussed during the next country programming mission.

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