Countries and Regions

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p. 4 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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III. ADB’s Development Experience

A. Impact of Past Assistance

33. ADB lending to the Kyrgyz Republic began in 1994. As of 31 December 2002, ADB had approved 20 loans for 16 projects totaling $517.2 million, all from the Asian Development Fund (ADF). In addition, 51 TA grants have been approved amounting to $31 million. The Table below gives the breakup of ADB’s past lending by sectors. As may be seen, the two largest sectors of ADB assistance were transport and communications (28%) and finance (22%). ADB’s annual lending to the Kyrgyz Republic during the years 1994–2001 averaged around $66 million a year. The Government took a deliberate decision in 2002 to limit borrowings for a year to ease the pressures on the PIP. ADB lending in that year was limited to just $15 million extended for a regional trade facilitation and customs cooperation program⁶.

34. ADB’s previous operational strategy was prepared in 1996 and aimed at supporting government reforms, encouraging private sector-led growth, and stimulating investment in physical infrastructure rehabilitation, human resources, and the environment. To this end, it provided for selective support in four strategic areas: (i) agriculture (including rural finance), (ii) provision of basic public services, (iii) human resources development (especially education), and (iv) physical infrastructure (especially energy and roads). The scope of the strategy was widened subsequently to (i) give priority to poverty reduction and (ii) include assistance to the financial sector.

35. ADB-financed loans and TA have supported some of the country’s major development goals and needs. ADB’s operations have resulted in a sizable portfolio of ongoing projects. ADB has become a major source of development assistance to the Kyrgyz Republic. A significant number of ADB-supported projects are located in the southern part of the country. The highlights and impact of ADB assistance to the Kyrgyz Republic are summarized below.

36. In the agriculture sector, ADB assistance has helped the Government carry out important and strategic policy and institutional reforms (para. 41) and supported investments for setting up viable credit unions in rural areas⁷. In the power sector, ADB has worked closely with the World Bank to rationalize and raise tariff levels for electricity and district heating and to improve the finances of the power utility. ADB also helped rehabilitate the country’s power and district heating system⁸. In the road sector, ADB has played a lead role and its operations have helped develop an efficient policy and regulatory framework, improve road funding, enhance safety standards, address the needs of maintenance of the road network, and privatize several SOEs in the sector. ADB has extended support to the strategic and vital Bishkek-Osh Road Rehabilitation Project, the first and second phases of which are already substantially completed and work on the third phase is under way⁹. The rehabilitation of the Bishkek-Osh road has already brought considerable economic benefits to the region, significantly reduced travel time, and helped link the north and south of the country, which are separated by high mountains. ADB has also played a lead role in improving regional cooperation in the CARs. These efforts have already begun to yield results as evidenced by ongoing ADB support for (i) improving the regional road link between Almaty and Bishkek¹⁰ and (ii) the regional trade facilitation and customs cooperation program.

37. ADB program assistance has supported the development of the regulatory and supervisory framework that has helped stabilize the financial sector following the Russian financial crisis¹¹. It also focused on restructuring and consolidating the banking sector. At the Government’s request, ADB has taken the lead role in the education sector. ADB-supported¹² sector-wide policies have encouraged private education, improved financial sustainability — including introduction of school-based finance management, income generation and cost recovery mechanisms in post-primary education—as well as strengthening of planning and management capacities. In primary and secondary education, ADB has financed new curricula and textbooks, teacher education, and the improvement of school facilities and equipment.

38. Improving governance is a key feature of ADB’s past lending and TA operations in the agriculture, energy, road, and social sectors. ADB has provided loan and TA support to improve governance, including in fiscal management; the financial sector; and the areas of legal, judicial, and enterprise reform and corporate governance. These measures are helping to address some of the administrative bottlenecks and weaknesses in law enforcement and judiciary that have compounded the problems facing private sector activity.

B. Portfolio Performance and Status¹³

39. ADB’s operations in the Kyrgyz Republic have grown in complexity and magnitude and a sizable portfolio of ongoing projects has been built up. As of end-2002, ADB’s active portfolio in the Kyrgyz Republic consisted of 12 public sector loans with a total net loan amount of $262.5 million. The portfolio has generally performed well, with all active loans earning a satisfactory rating. No project is rated at risk. However, project implementation in recent years has been affected by the compression in PIP and the Government’s inability to meet even the reduced financing targets. In 2002, the contract award ratio was 13.3%, lower than the ADBwide average of 22.6%; the disbursement ratio for the Kyrgyz Republic was 15.2%, lower thanthe ADB-wide average of 22.2%¹⁴. Disbursements during 2002 totaled $27.2 million, bringing cumulative disbursements to $341.9 million. The shortage of counterpart funds and non-release of such funds in time have resulted in project implementation delays that are likely to adversely affect portfolio performance in the future, unless these issues are addressed. However, it is encouraging to note that pressures on PIP allocations are easing gradually as the volume of project loans taken annually by the Government from ADB, the World Bank, and other external agencies has been falling since 2001. Due to the continued restraint on fresh borrowings, the gap between the financing requirements of the PIP projects and the ceiling on PIP spending is expected to narrow from $59 million in 2001 to $26 million in 2003. The Government is currently evaluating various options to bridge this and future gaps by prioritizing/portfolio restructuring PIP projects during 2003.

40. Project completion reports (PCRs) have been prepared for five¹⁵ of the eight loans that were closed. Three of the projects were rated as successful, one of them (the Special Assistance Project) was rated as generally successful and one, the Agriculture Sector Program (ASP) as partly successful. However, the ASP’s project performance audit report rated it as successful (para. 41). A number of pointers have emerged from these PCRs. These include: (i) the strengthening of banking sector intermediation is a lengthy process in a transition economy; (ii) strong political commitment is a prerequisite for banking sector consolidation; (iii) there is a strong link between finance and corporate sector reforms; (iv) legal and judicial reforms are critical for the country; (v) corporate governance reforms cannot hold ground if public sector governance is unsound; (vi) the impacts of structural adjustment on the agriculture sector typically take considerable time to emerge; (vii) detailed institutional analysis of the capacity for policy formulation, review, and implementation should be a core part of program loan design; and (viii) the implementing capacity of executing agencies needs to be assessed closely and augmented as necessary, including thorough training.

41. The only project performance audit report completed so far is for the ASP loan¹⁶. The ASP was aimed at facilitating the transition of the agriculture sector to a competitive marketbased system by (i) encouraging the development of market institutions, (ii) increasing the competitiveness of markets, (iii) improving social and environmental protection, and (iv) enhancing public sector support. The ASP was rated successful. In particular, the program was assessed as highly relevant as the scope of reforms was consistent with the priorities of the Government and the ADB. Moreover, the ASP was effective in terms of achieving its objectives of land reform, clarifying the requirements for establishing water users associations, reducing government intervention in distribution and marketing of agrochemicals, and improving the social protection program. The report concluded that sustainability of ASP is likely to be achieved.

C. Conclusions and Lessons for the CSP

42. Notwithstanding generally good implementation, there are several lessons learned and issues associated with implementation of the previous operational strategy that are to be addressed under the new CSP.

1. The Government’s capacity to borrow is limited, given the high external debt level and the limits on PIP required under the PRGF. In view of significantly reduced level of ADB lending expected over the medium term, it is necessary that ADB’s country strategy, as well as sectors and areas of future support, be sharply focused. It would not be possible or desirable for ADB to extend support to the same wide range of sectors that were covered in the past.
2. Institutional capacity is weak. Public sector capacity remains thin, affected by frequent changes in personnel, low wages, and high staff turnover. This has often resulted in poor implementation of projects. Capacity building should be an integral part of all ADB projects. There is a need to (i) streamline the functions and responsibilities of sector agencies, (ii) undertake appropriate structural reform, and (iii) strengthen the knowledge and capacity of government agencies in (a) policy formulation, (b) implementation, and (c) effective delivery of roles and functions. To achieve this, ADB should continue to emphasize knowledge and capacity building of the Government by providing adequate funding, technical support, and technology transfer.
3. ADB’s portfolio has been affected recently by inadequate counterpart funding and non-release of funds on time, resulting in implementation delays. Whether ADB’s portfolio in the Kyrgyz Republic will continue to perform satisfactorily depends to a large extent on issues related to the funding and management of the PIP. ADB extended TA¹⁷ to assist the Government in this respect. Factors that came to light as a result of the TA indicate that the fiscal constraints and implementation problems will seriously affect ongoing and future projects over the next few years and will call for a cautious and selective approach to lending by ADB and other aid agencies. The flow of funds to individual projects must be monitored very closely and on a regular basis. The TA also highlighted deficiencies in the Government’s fiscal management system. A study of budgetary processes undertaken by ADB in 2002 highlighted operational implications and concrete steps for ADB staff to follow during the project cycle. These recommendations will be taken into account over the CSP period.
4. Regional cooperation is critical for a landlocked country like the Kyrgyz Republic. The country’s domestic market is limited and regional cooperation in trade and transport is crucial for it to achieve its social and economic development objectives.
5. External agency coordination is still limited and must be improved. Development activities of various external agencies are focused in the same sectors, with reasonable information sharing but with a limited sense of integration. While there are several instances of close cooperation in terms of common approaches and geographic focus, overall coordination of external agency assistance by the Government is still weak. To reduce implementation overload, external agencies and the Government need to work more closely with a shared vision, in analysis, formulation, and implementation of policy and investment. It is encouraging to note that there is definite agreement among all stakeholders of the need for this although there is still some distance to go in achieving this objective (see also paras. 55–58).

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