Regions and Countries

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p. 2 of 7 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. The Government's Development Strategy III. ADB's Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program 2004-2006: Kyrgyz Republic

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I. Current Development Issues and Trends

A. Economic Growth¹

1. Geographic Situation and Natural Resources. The Kyrgyz Republic is a small country whose geography has had, and continues to have, a large influence on its destiny. It is landlocked, mountainous (over 90% of the country is mountainous and only about 6% of the land area is arable), and remote from major markets, making market access and trade difficult and expensive. The Kyrgyz Republic is relatively poorly endowed with natural resources that can be readily exploitable in a sustainable way. It has abundant water and hydroelectric potential, but exploiting this in a regional context has been problematic. Gold is the main mineral resource and leading export.

2. Overview of the Transition. The Kyrgyz Republic became independent of the Soviet Union in 1991. The country quickly embarked on a simultaneous transition to a democratic system of governance and an economic system based on market principles. For much of the early 1990s, the Kyrgyz Republic stood out in the region for both its determined transition to democracy and for its approach to economic reform. But progress in the transition to a market economy, stabilization, sustainable economic growth, and improvement in the living standards of the population has not been uniform. In the time since independence, the economic transition can be divided into two distinct periods. During 1991–1995, gross domestic product (GDP) dropped by almost 50%, coupled with a deterioration of all economic indicators including hyperinflation, increased unemployment, reduced real income, and increased incidence of poverty (Figure 1). These negative trends were reversed in 1996 when economic growth resumed (averaging 5% per annum over the period 1996–2001). But the recovery has been uneven. Growth was concentrated in a limited numbers of sectors, notably agriculture, gold mining, and energy, and it was weak in 1998–1999, following the Russian financial crisis of 1998. After a recovery in 2000–2001, the economy showed a slight contraction again (of 0.5% year on year) in 2002 due to a sharp fall in gold production (linked to an accident at the Kumtor gold mine) combined with a decline in electricity generation (Figure 2). Growth is expected to return to a positive trend from 2003 onward, barring any unexpected shocks.

3. Macroeconomic Adjustment. The collapse of the Soviet Union in 1991 was a dramatic and huge macroeconomic shock for the Kyrgyz Republic. Since 1994, with International Monetary Fund (IMF) support, the Government has focused on addressing macroeconomic imbalances through a comprehensive set of stabilization measures. As a result, the fiscal deficit was reduced from an estimated peak of about 17.5% of GDP in 1992 to about 5.9% in 2002. This was accomplished primarily through severe reductions in expenditures. Inflation rates that had reached over 1,200% in 1992 (according to IMF estimates) were reduced to single-digit levels from 2001, with average inflation of just over 2% in 2002. The external balance too improved as the current account deficit fell considerably from 23.3% of GDP in 1996 to about 2.0% in 2002 (Figure 3). This was accomplished mainly through import compression. The exchange rate depreciated sharply in 1998 and 1999 following the Russian financial crisis and remained fairly stable until 2002 when it began appreciating. The Government was able to comply with the requirements of the ongoing Poverty Reduction Growth Facility (PRGF) program supported by IMF in 2002, and its macroeconomic management received favorable reviews from IMF during the first quarter of 2003.

4. Large capital inflows have been an important part of the stabilization strategy. The Kyrgyz Republic started its transition process without external debt as the Russian Federation assumed the entire external debt burden as well as external assets inherited from the former Soviet Union (FSU). In less than 10 years, however, the external indebtedness of the country reached crisis levels. At the end of 2002, the external debt stock was equivalent to about $1.8 billion (111% of GDP), of which about $1.6 billion was public or government guaranteed (Figure 4). Debt stock ratios crossed the Highly Indebted Poor Country Initiative thresholds levels by 2000. The debt burden built up in two distinct phases. During 1993–1996, the public sector budgets generated substantial internal deficits as the federal grants from FSU had stopped following independence and the contraction of output eroded the revenue base. In these circumstances, and due to lax fiscal controls, public enterprises found it relatively easy to get external credit at high cost with government guarantee to finance machinery and other imports. These debts subsequently devolved on the Government. The stock of debt rose from almost nothing in 1992 to about 63% of GDP by 1996 and it carried a high average interest rate of 5.2%. Over 20% of this high-cost debt was used for consumption. During 1997–2000, GDP grew consistently, the composition of external borrowings changed for the better, and the average interest cost fell sharply to 2.5%. The quality of public resource management improved. The annual rate of gross domestic investment which was equivalent of 17.9% of GDP during this period exceeded the rate of external borrowings (13.8% of GDP) indicating a qualitative change and a significant improvement in the use of external borrowings for productive purposes. Yet, the debt stock to GDP ratio during this period rose sharply (to a peak level of 132% of GDP in 1999) due to the large devaluation of the som following the Russian financial crisis. The peculiarity of the Kyrgyz Republic’s debt is its excessive burden on the fiscal system as compared to the external sector. The predominance of public or publicly guaranteed debt in the total debt, and relatively low revenue ratios due to structural deficiencies in the tax base and to poor tax effort severely restrict the Government’s ability to borrow in the medium term.

5. To address the problem of high external debt and to reduce the burden to sustainable levels, the Government formulated a debt reduction strategy in July 2001 in consultation with IMF. The key elements of the strategy are: (i) achieving a primary fiscal surplus of 3.3% of GDP by 2005; (ii) reducing the externally financed PIP to 3% of GDP by 2005; (iii) stopping new nonconcessional public and publicly guaranteed borrowings; and (iv) prepaying nonconcessional loans where possible. The aim of the strategy is to bring debt stock ratios to sustainable levels by 2008. Since the PIP is the major source of external borrowings, this strategy envisages a reduction in foreign borrowing for financing capital formation in the public sector. Following the approval of the PRGF and the debt reduction strategy in 2001, the Paris Club creditors agreed with the Government to restructure external debt (in March 2002). As a result of the agreement, debt service due to the Paris Club creditors was reduced significantly. The terms of the restructuring also include a goodwill clause, whereby upon successful completion of the PRGF program, the Kyrgyz Republic may be able to secure still more concessional restructuring involving a substantial reduction not only of the debt service but also of total debt outstanding. Notwithstanding this, debt and fiscal sustainability considerations will continue to require a reduction of the external funding of the PIP, as envisaged under the debt reduction strategy.

6. Structural Adjustment. Progress in structural reform has been uneven in the Kyrgyz Republic. Good progress was made in the early part of the 1990s. In order to overcome the severe economic crisis of the early 1990s, several measures were taken to set up a market economy, together with the necessary infrastructure and institutions that enabled the formation of the private sector. These reforms entailed diminishing the role of the state in economic activity by means of privatization, establishing a new tax system, giving more autonomy to the central bank, and liberalizing prices and trade among others. In a landmark achievement, the Kyrgyz Republic joined the World Trade Organization (WTO) in 1998 and became the first Central Asian republic (CAR) to do so. The exchange rate regime is liberal and there are no restrictions on current account transactions. Notwithstanding the above developments, the transition process remains incomplete. This is particularly true in the areas of institution building, regulation, and governance. Corruption levels in the country are high and pose a threat to longterm development. Today it is clear that the process of market reforms and transition is more complex than anticipated and requires more time to complete. This includes unfinished sector reforms, inadequately functioning financial markets, lack of conducive conditions for private sector growth and the promotion of investment activities, as well as weak implementation and enforcement of completed and ongoing reforms. Box 1 gives the status of structural reforms in some key sectors in the country.

B. Poverty²

7. Poverty Assessment. At present, almost half of the population of the Kyrgyz Republic is poor. It is a country of very low income levels with a per capita GDP of around $320 in 2002. The breakup of the FSU and the consequent economic decline led to a substantial increase in the incidence of poverty, which reached a peak in 1999, following the Russian financial crisis, of an estimated 55.3% on a per capita expenditure basis. Since then, as a result of economic recovery, aggregate poverty was reduced significantly, with the headcount index of absolute poverty declining by about 11% in 2000–2002. Despite progress in 2000–2002, the poverty challenge remains very large with an estimated 44.4% of the population living in absolute poverty and 13.8 % living in extreme poverty in 2002 (Figure 5). There is moderate inequality with the Gini index of consumption inequality at the lower end of the 0.3–0.4 range in 2001. Rural poverty declined over 1998–2001 at an average rate of 8% per year largely due to the better performance of the agriculture sector. However, rural poverty continues to be significantly higher than urban poverty. About 66% of the country’s population lived in rural areas in 2001 as did three quarters of the poor people. The rural-urban differences in poverty levels stem partly from the fact that Bishkek city, which is a major population center, has the lowest incidence of poverty. The rural-urban gap would have been worse but for the high agricultural growth and the consequent rural poverty reduction. Rural households have much less access to public services such as running water, reliable electricity, district heating, and telephone services.

8. Regional differences in poverty are very large: Naryn oblast (province) has the highest incidence of poverty; followed by Talas; the three southern oblasts of Jalal-Abad, Osh, and Batken and the northern oblast of Issyk-Kul; the least poor areas are Chui oblast and the capital city of Bishkek. Another important feature of poverty is the consumption sensitivity of all income levels of the community to both internal and external shocks, since much of the population lives very close to the margin between poor and nonpoor. This creates a significant degree of transient poverty (about 39% of the total in 2001). The relatively high level of transient poverty reflects not only the relatively high degree of fluctuation in the earnings capacity of the employed population, but also reflects the inadequate development of savings instruments and weaknesses of the financial sector.

9. There is general agreement on the causes and determinants of poverty in the country. The emergence of high levels of poverty in the country can be traced to the disintegration of the Soviet Union, which caused severe reductions in production due to the disruption of geographically spread production chains and the loss of traditional markets. This in turn led to rapidly increasing unemployment at a time when the state’s capacity to respond was impaired by the loss of federal budgetary support and a sharp shrinkage of the revenue base. The reasons for continuing high levels of poverty in the country are to be found in the challenges associated with reform of state institutions and the restructuring of society and the economy, specifically: (i) difficulties in creating and sustaining opportunities for gainful employment on a substantial scale; (ii) problems relating to external and domestic market development for Kyrgyz products, reflecting the landlocked nature of country with its trade and transit problems, limited natural resources and small size of the domestic market; (iii) limited capacity of the state to address essential needs in the social sectors due to fiscal constraints; and (iv) continuing corruption and inefficiency in the instruments of state governance that inhibit private enterprise and legitimate entrepreneurial activity.

10. As in many other countries of the FSU, the level of registered unemployment in the Kyrgyz Republic was low at only 3% or 58,000 individuals in 2000. However, the International Labor Organization (ILO) unemployment rate (ratio of the number of unemployed to the sum employed, aged 15 and more, and unemployed) for the country was 7.5% and corresponded to 144,000 individuals looking for jobs. Further, ILO estimates of hidden unemployment indicated that this may have been as high as 22.0% in 1998. ILO statistics also indicate higher unemployment rates (2.6% vs. 3.6%) among women in 2000. Steady economic growth and increases in real wages in recent years have led to modest net employment creation and some improvement in the unemployment situation. However, a feature of this was the shift of employment toward agriculture owing to the improved performance of the sector and the success of land distribution, which encouraged displaced laborers to migrate to farming. But productivity is low in the agriculture sector and poverty remains highest in rural areas. Consequently, there is also a need to create jobs outside agriculture. Policy needs to be geared to: (i) increasing agricultural productivity, (ii) creating a conducive environment for the growth of small enterprises in the formal sector, (iii) improving the structure of taxes and social benefits to encourage formal employment, and (iv) realigning the skills mix to meet the changing requirements of the economy.

11. Human Development. The Kyrgyz Republic still compares favorably relative to countries of similar income levels in terms of social indicators such as life expectancy, infant mortality, or literacy. But the ability of the country to maintain these achievements, largely inherited from the Soviet Union, is undermined by strained public finances. In education, there is some indication that quality is declining, although the lack of a national testing system has prevented any systematic analysis of educational performance in recent years. The declines in education quality can be largely attributed to deterioration of education facilities, difficulties in attracting and retaining qualified staff, as well as shortages in textbooks and learning equipment. Obsolete teaching methodologies and inappropriate educational content can also be assumed to be factors. In terms of access to education, preschool education has suffered the most serious decline in enrollments following the widespread closure of preschool institutions linked to state-owned enterprises (SOEs). The gross enrollment rate (GER) now stands at just 14%. While the GER in primary education remains high at around 97% for both boys and girls, maintaining these levels is proving increasingly difficult in the face of mounting problems in retaining pupils due to prevailing perceptions of the declining value of education as well as problems in ensuring the constant supply of education services, especially in the poorest areas.

12. As in most other FSU countries, health indicators in the Kyrgyz Republic deteriorated early in the 1990s and began to improve in the middle of the decade. Average life expectancy at birth for males and females increased from 65.9 years in 1995 to 68.1 years in 2002. This improvement is due mostly to a decrease in infant mortality. Despite these improvements, basic health indicators in the country remain relatively low compared to other CARs. In particular, the infant mortality rate and the under-5 child mortality rate are very high. The major causes of child mortality include easily preventable illnesses such as acute respiratory infection and diarrhea. The nutrition status of children is also a serious concern. Access to health services is an important issue as well. According to official statistics, nearly 10% of the population do not have access to health services whether they can afford it or not. In addition, the spread of HIV/AIDS³, drug use, and infectious diseases such as tuberculosis have recently emerged as important areas of concern, particularly in the south of the country (para. 14).

13. The majority of the infrastructure in the Kyrgyz Republic, including such basic services as water supply, waste removal, electricity, gas, and heating, was constructed during the Soviet period. At the beginning of the 1990s, the country enjoyed a comparatively high level of infrastructure services. However, most of the present infrastructure is in poor condition since it has not been properly maintained due to lack of financing. Limited access to basic services has also had an impact on health status, especially in rural areas.

C. Political Environment

14. While the country continues to feature well in the regional context in terms of progress toward political pluralism, with many political parties (including genuine opposition parties) and relatively strong civil society, political and social tensions have increased since early 2002, as evidenced by several public protests. A new government was formed in May 2002 and a new constitution that would devolve more power to the Parliament and the Cabinet was approved in a referendum in February 2003. The constitutional amendments envisage a greater role for local governments and therefore could provide opportunities and an institutional framework to promote community participation in the implementation and management of development activities. The amendments also envisage improving the independence, status, and emoluments of the judiciary. Nonetheless, the political and social unrest in 2002, particularly in the mostly poor southern regions, underscores the need to accelerate reforms, especially in the areas directly affecting socially vulnerable groups of the population. The Kyrgyz Republic has a long-standing history of north-south differences. The industrially developed north has traditionally filled in key government positions causing discontent in the mostly agricultural south. A fine line is required to maintain balance not to revive these potentially disruptive differences. An additional complication is related to the complex ethnic situation in the south, which has a significant share of Uzbeks in the population. The upcoming presidential and parliamentary elections scheduled for 2005 are an additional factor that could potentially affect the pace of reforms.

D. Governance and Institutional Capacity

15. Weaknesses in governance and corruption have emerged as major constraints in the ability of the country to fight poverty. To achieve to the present state of governance, the Government embarked on a major reform program in 1992 that it is still continuing. However, the Government’s current policy development framework, civil service capacity, paucity of funds, and the costs of corruption all weaken its good intentions. The civil service still has to be refocused on policy development and service delivery rather than its current emphasis on compliance with rules and procedures. Some of the most serious shortcomings are low salaries and the lack of good managers and policy analysts. The culture of control inherited from the past results in inadequate delegation of authority and overcentralization of decision making. The Government has recently initiated a program of reforms with the assistance of the World Bank, which focuses on three key aspects of governance, i.e., (i) improving the efficiency and transparency of the budgetary and treasury process; (ii) streamlining the civil service and increasing its professionalism; and (iii) introducing measures to institute good governance in the civil service. Reforms in taxation and customs are an important priority in improving fiscal management in the Government’s revenue situation. The process is ongoing and the Asian Development Bank (ADB) is assisting in the implementation of a comprehensive program of customs reforms (para. 52).

16. While corruption is often discussed in the Kyrgyz Republic, little factual information about its prevalence is available. The perception of the population at large is that it is widely pervasive in most public agencies and the judiciary. In March 2003, the Security Council of the Kyrgyz Republic, which is chaired by the President, discussed measures to strengthen anticorruption efforts in the country. Following this, a new national anticorruption strategy entitled “Kyrgyzstan – A Country of Good Public Governance” has been adopted and is under implementation. The Comprehensive Development Framework (CDF) envisages judicial and legal reforms and the Government has embarked on a program for this purpose with the assistance of ADB⁴. Independent bodies have been established to help formulate and implement a strategy for judicial reform, a process that is ongoing. The judicial reorganization mandated by the changes made to the Constitution in February 2003 is being moved forward as is the drafting of a series of revised laws and decrees. Thus, it may be seen that the Government has already initiated several measures to improve governance, bring about civil service reforms, improve fiscal management, and fight corruption. Its success in undertaking and implementing these measures will have a direct bearing on the achievements of the National Poverty Reduction Strategy (NPRS) targets on growth and poverty reduction. Addressing governance issues will be an important feature of future ADB-supported projects in the Kyrgyz Republic.

E. Gender Assessment

17. Gender issues in the Kyrgyz Republic are less pronounced than in countries of similar income levels. Gender equality has been generally achieved in education (enrollment ratios are essentially the same for boys and girls in primary education and are higher for girls in secondary education). A generally equitable land reform distribution system exists where women are allocated land equally with men. There has been progress in maternal and infant mortality in recent years. Nonetheless, the transition has had a detrimental impact on the social and economic lives of women. While the female employment rate in the economy remains quite high (53.2% in 2000 according to official statistics), the loss of jobs in sectors that tended to employ a majority of women and the shrinking employment market have led to increasing exclusion of women from the economic sphere. The closure of child-care centers, kindergartens, and schools has increased the burden on women for child-care and family support, further undermining women’s opportunities to seek work. While the share of women working in agriculture has increased, this often represents unpaid family labor. The economic vulnerability of women has made them targets for domestic violence and human trafficking. A note on gender issues is in Appendix 4. The Government has made gender an important issue in the NPRS. Priorities include: (i) an increase in women’s representation in government positions; (ii) addressing gender considerations in the areas of labor, employment and social protection; (iii) strengthened access to basic health services and preventing violence against women; and (iv) increased public awareness of gender issues. Gender issues have been taken into consideration in the design of past ADB-supported projects and this will be the case in the new CSP.

F. Private Sector

18. Over the last 5 years, the Government has taken several important policy efforts to support private sector development and move to a market economy. These have been concentrated in agriculture and land reform, improving the legal, financial, and regulatory framework supporting private sector development and in privatizing small and medium enterprises (SMEs). Despite these efforts and the improved macroeconomic environment, the private sector still faces significant challenges. On the one hand, there are contributing external factors such as low levels of foreign investment stemming from the Kyrgyz Republic’s difficult geographic situation, small market, and low level of exports (outside the gold and energy sectors) due to regional trade barriers. On the other hand, there remains an unfinished domestic agenda for private sector development that could help to attract investments and support both domestic-led and export growth. Among the most fundamental constraints to private sector development is a poor enabling environment, especially the burden of bureaucracy and administrative constraints on businesses. The contribution of the financial sector to private sector development has also been weak, as the banking sector remains small and fragile, while capital markets, pension, and insurance sectors are still at a very early stage of development.

19. The NPRS recognizes the private sector as the driving force behind sustainable growth and poverty reduction. The Government has undertaken several measures to maintain focus and follow-up on private sector concerns, and to foster domestic and foreign investment. It is implementing the second phase of a far-reaching program of corporate governance with ADB assistance. In 2002, it established a Secretariat of the Special Representative of the President of the Kyrgyz Republic on Foreign Investment, which is headed by a deputy prime minister. The Government holds periodic high-level investment summits with the participation of key stakeholders to identify constraints to private investment and to draw up time-bound plans to address these. Foreign direct investment, which was negative during 2000 and 2001, showed a modest increase of $15 million in 2002. However, this increase does not yet provide the confidence to suggest that there is a firm trend tied to an improved investment climate. In fact, the views of the business community that were discussed at the latest investment summit, convened in June 2003, indicate that corruption and considerable administrative and legal barriers still exist and are affecting the functioning of the private sector in the country.

20. Box 2 shows the extent of progress of the transition of the Kyrgyz Republic’s former command economy to a market economy. Progress is commendable in two out of the 11 critical transition indicators monitored by the European Bank for Reconstruction and Development (EBRD), namely foreign trade and exchange rate regimes, and small-scale privatization. The share of the private sector in GDP was 60% in 2002, up from 40% in 1996. The country has made notable progress in creating extensive and effective commercial legislation, price liberalization, and large-scale privatization. Progress in the remaining six areas, most of which are critical for improving investment climate, is poor. These include banking sector reforms, financial sector regulation, capital markets, competition policy, corporate governance, and infrastructure reforms. Among these, the weaknesses in the financial sector discussed in the section on structural reforms (para. 6) are a major impediment to the healthy development of the private sector. Among the factor markets, problems exist mainly in the capital market, largely due to the weaknesses in the financial sector. The capital market is tiny and is unlikely to play a significant role in mobilizing savings in the medium term. The situation in the labor market is somewhat better, and wages in the private sector are largely market determined. However, there is a significant mismatch between the skills presently imparted to students and the requirements of a market economy. The land market is being liberalized and private ownership of land is permitted, though foreigners are not allowed to own land.

21. A draft private sector assessment was prepared by ADB for the Kyrgyz Republic and this assisted the CSP exercise. The draft paper identifies several priorities for the purpose of facilitating private sector development in the country, such as strengthening the commercial legal framework, the judiciary, the financial sector, the corporatization framework for SOEs and the environmental framework. It also cites the need for the restructuring of the water and transport sectors and support of regional cooperation, with particular emphasis on trade and transport links. Almost all these activities are currently being supported by ongoing ADB or other external agency assistance or are envisaged for such support during the CSP period.

G. Environment⁵

22. The Kyrgyz Republic has been encumbered with a daunting legacy of environmental problems derived from a combination of the Soviet-era pattern of neglect for many environmental quality considerations and the more recent deterioration of environmental and natural resources management institutions and infrastructure. Environmental monitoring and management capacity was severely degraded in the first years of independence, and it is slowly being reestablished with substantial external agency support. At the national level, through three TA projects, ADB—along with the Government of Finland—has played an important role in helping strengthen environmental monitoring and management capacity. The ADB-supported Agricultural Area Development Project has also helped address land degradation problems associated with inappropriate irrigation practices. The World Bank and the European Union-Technical Assistance to Commonwealth of Independent States (EU-Tacis) have assisted in the analysis of environmental problems in the country and have plans to assist with the stabilization and remediation of uranium tailings at Maili-Suu in the south.

23. A country environmental analysis prepared in support of the CSP has identified highpriority environmental management challenges facing the country and has reviewed the efficacy of current policy and program responses to these problems. Based on a consultative review process, the following priority areas of environmental management were identified: (i) land resources management; (ii) energy efficiency improvements and a balancing of hydropower and irrigation uses for water storage facilities; (iii) attention to industrial and urban pollution as these sectors recover and expand; (iv) better prediction, mitigation, and preparation for natural and man-made disasters; and (v) regional cooperation on energy, water, and biodiversity conservation. Efforts to reduce poverty and establish the basis for sustainable economic growth are conditional on sound environmental and natural resources management—especially given the fragile nature of the country’s environment.

24. Environmental management thus is central to the country’s social and economic development. Nevertheless, the Government has historically been reluctant to borrow for standalone environmental interventions; these do not feature in the proposed assistance pipeline. ADB will, however, pay close attention to these relationships between the country’s economic and environmental health, and will actively seek opportunities to incorporate sound environmental and natural resources management into future lending. This mainstreaming of environmental considerations into ADB’s operations will constitute an important element of future activities, and the recommendations of the country environmental analysis will serve as a key reference. As in the past, ADB-supported projects will fully incorporate environmental safeguards into project design and implementation.

H. Regional Cooperation

25. The trade in water and energy has led to recurrent disputes between the Kyrgyz Republic and Uzbekistan and to a lesser extent with Kazakhstan. The root of the problem lies in the lack of efficient markets for water or gas in the region. Any trade among countries takes the form of complex and difficult to verify negotiated settlements. During Soviet times, the Kyrgyz Republic’s reservoirs stored water in winter and released it during summer for irrigation in neighboring countries. The Kyrgyz Republic used to be supplied with energy during the winter months from its fossil fuel-rich neighbors in return for its summer water. Following independence, implementation of these arrangements became much more complex, given each state’s own resource needs and priorities. Under annually negotiated bilateral agreements, Kazakhstan and Uzbekistan purchase power from the Kyrgyz Republic during periods that coincide with the release of water. The power is paid for in opaque barter terms rather than hard currency. These agreements have, over time, been subject to financial, technical, and political constraints. These arrangements have, on occasion, resulted in supply disruptions for the Kyrgyz Republic, which have necessitated the country to make unscheduled winter drawdown of its reservoirs to meet domestic consumption needs. Collaborative regional effort to ensure efficient delivery of water and energy resources to the region is a pressing issue (and one in which the World Bank is expected to play a major role in the future).

26. ADB has been playing a lead role in fostering regional cooperation in the CARs and the Xinjiang-Uygur Autonomous Region of the People’s Republic of China (PRC). The participating countries have confirmed that economic cooperation is particularly important to the region and that transport, energy, and trade facilitation are the priority areas. In the Kyrgyz Republic’s context, the unbundling and selected privatization of the energy utilities is under way and the Government is reluctant to borrow for investments in the sector until the process is complete. Its focus in external borrowings in the coming years will be more on improving regional transport links and trade. Given that the Kyrgyz Republic is landlocked, access to export markets is vital for this small country. Yet, despite the country’s liberal trade regime and membership of WTO, international trade has so far failed to boost growth and productivity. The country is dependent on its neighbors for market access, none of whom, except the PRC, have joined WTO. There are various restrictions and difficulties and costs encountered in the flow of goods from the Kyrgyz Republic to Kazakhstan and Uzbekistan. Corruption in the customs services remains widespread. Trade opportunities with Uzbekistan are further complicated by the fact that the country does not have a convertible currency and has numerous restrictions on imports. Since end-2002, Uzbekistan has imposed strict restrictions on border crossings, particularly those with the southern part of the Kyrgyz Republic, which has caused considerable disruption to regional trade. Improving trade relations with Kazakhstan and Uzbekistan is of great priority in achieving the country’s development objectives; trade with Uzbekistan is particularly important for the south of the Kyrgyz Republic. Similarly, improving the road transport links to the PRC in the south is also very important to the Kyrgyz Republic in order to increase exports, stimulate growth, and reduce poverty.

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