Regions and Countries

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p. 3 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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II. The Government’s Development Strategy

A. Development Goals and Strategy

27. The Government’s long-term development vision is contained in the Comprehensive Development Framework of the Kyrgyz Republic to 2010, which was approved in 2001. The overarching objective of the CDF is poverty reduction. It was prepared after extensive stakeholder consultations and with assistance from the international development community, including ADB, and envisages a three-pronged approach to development: (i) formation of an effective and transparent state, (ii) building a fair society, and (iii) promoting sustainable economic growth. The NPRS is a medium-term operational plan (2003–2005) to implement the goals of CDF; it was finalized in December 2002. More specifically, it elaborates on the activities under the CDF to be implemented during this period, the main features of which are as follows:

1. Formation of an effective state primarily through decentralization, good governance (including judicial and legal reforms and increasing the role of civil society institutions in decision making), fighting corruption, and building democratic institutions.
2. Building a fair society with an emphasis on the need for greater efficiency and targeting combined with a gradual increase in funding levels for social assistance. Specifically the focus is on education, to improve the overall access to quality education, particularly for preschool, primary, and secondary institutions, and in the rural areas; health, with greater attention to streamlining the use of hospitals, specialists, and family health care, and a stronger attention to public health and combating communicable diseases; and pension reform, including the long-term goal of moving toward individual retirement accounts.
3. Promoting sustainable economic growth with emphasis on (i) the need for macrostability by keeping inflation to about 4% per annum, limiting new debt, strengthening tax collection, and limiting the external funding of public investments to below 4% of GDP by 2005; (ii) strengthening financial institutions and the regulatory framework, including improving access to differing types of investments such as microfinance; (iii) continuing the privatization process and improving the private sector environment; (iv) improving corporate governance; and (v) ensuring that growth is environmentally sustainable by improving water management and quality, reducing the degradation of forest lands, and protecting endangered species. The importance of regional cooperation to this landlocked country particularly in trade, and transport links for enhancing exports is stressed in the NPRS. In terms of sector focus, agriculture, including agro-processing, is identified as “being the most important for continuation and acceleration of economic growth from the viewpoint of poverty reduction”. Other important sources of growth identified are energy, industry, transport, mining, and services.

28. The Government has selected 16 poverty indicators, including some Millennium Development Goals (MDGs), and set time-bound quantitative targets for each. This will enable it to measure and monitor progress in poverty reduction. Besides targets for economic growth and containing debt, these include: reducing poverty from 55.3% in 1999 to 38.9% in 2005; improving the primary education coverage from 89.5% of all children in 1999 to 97% in 2005; reducing under-1 infant mortality from 22.7 per 1,000 live births in 1999 to 22 in 2005; reducing under-5 child mortality from 35.5 per 1,000 live births in 1999 to 28 in 2005; and reducing maternal mortality per 100,000 live births from 42.3 in 1999 to 40 in 2005. Appendix 1, Table A1.4, indicates the country's progress toward the MDGs and their targets.

B. Resource Mobilization and Investment

29. The Government’s overall objective over the next 3 years as described in the NPRS is to reduce poverty incidence to about 39% by the year 2005. This specific target for poverty reduction is derived from a projected annual GDP growth rate of around 5%. To achieve such growth rates, it will be necessary to achieve a level of gross domestic investment equivalent to about 20% of GDP over the NPRS period. Since the PIP is expected to be reduced to about 3% of GDP by 2005, private investment based on both domestic and foreign sources will need to provide most of the required balance of funds. Achieving these levels of private investment is challenging over the medium term given the present environment for private sector functioning that has been described. However, the Government is undertaking a series of measures to address the related issues. Simultaneously, the Government is making efforts to improve domestic resource mobilization. It is undertaking an extensive program of tax reforms, including value-added tax (VAT), customs, and property taxes. Important structural changes are being carried out to modernize and streamline the tax administration. The Government is also taking steps to reduce quasi-fiscal deficits, particularly in the energy sector. The above measures have begun to bear results as may be seen from fact that revenues rose from 14.2% of GDP in 2000 to 18.1% in 2002 and are projected by the Government and IMF to reach 19.8% in 2006. Further, if the Government successfully completes the ongoing PRGF by end-2004, the Paris Club creditors are likely to agree to favorable debt-stock treatment, which will significantly ease the future debt servicing burden and fiscal pressures (para. 5).

C. Role of External Assistance

30. The Kyrgyz Republic’s PIP has historically been almost entirely financed by external borrowings. The Government relied on financing from external agencies such as the World Bank, ADB, European Bank for Reconstruction and Development (EBRD), Islamic Development Bank (IsDB), Japan, and Germany to fund its development projects. Since the present level of debt is not fiscally sustainable, the Government’s debt strategy, which is supported by IMF, envisages bringing down the level of debt to more sustainable levels in the medium term by compression of the externally financed PIP (para. 5).

31. This would mean that the Government’s capacity to borrow will be severely constrained over the medium term. Traditionally, ADB and the World Bank have been the major lenders to the country and together account for about 75% of the PIP. Annual lending levels of these institutions in the past were about $65 million. Now, the Government has indicated that, owing to debt and budget constraints, it will be able to borrow only $70–90 million per annum over the next few years. Of this, ADB and the World Bank are expected to each provide around $30 million per annum in loans until 2006. The Government has requested external agencies to increase grant assistance to the country. The World Bank’s IDA-13 (FY2003–2005) guidelines provide for up to 40% of assistance being provided as grants for low-income highly indebted countries; the actual percentage of grants provided for this category (into which the Kyrgyz Republic falls) in FY2003 is 29%. The details of the World Bank’s new country assistance strategy and planned activities in the Kyrgyz Republic can be seen in paras. 55–57. The period 2003–2006 is therefore expected to be one of significantly reduced lending to the country, including that from ADB.

D. ADB’s Assessment of the Government’s Development Strategy

32. The NPRS seeks to build on the strengths of the CDF, particularly the inclusive nature of its formulation process. The NPRS represents a joint effort between the Government and civil society in the country. It also benefited from discussions with and comments from the international funding community during both the preparation process and the Consultative Group Meeting held in Bishkek in October 2002. Overall, the broad policy priorities of the NPRS are appropriate but the proposed agenda seems overly ambitious in the prescribed time period 2003–2005, particularly given the limited fiscal space. There are weaknesses in the prioritizing and costing of the NPRS. The Government is aware of these issues and is undertaking measures to address them. It has prepared a Medium-Term Budget Framework, 2004–2006, which identifies the investment priorities and expenditures that will be financed over this period. Owing to the CDF and NPRS exercises, the Government now has a keen sense of ownership of externally financed projects and will only accept those that meet its social and economic development priorities. A detailed process of consultations takes place with each external agency (as was the case with ADB) before operational strategies and assistance programs are finalized. Due care is taken to ensure that these reflect the prioritized interventions over the medium term, derived from the NPRS.

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