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Country Strategy and Program 2004-2006: Kyrgyz Republic
IV. ADB's Strategy
A. Summary of Key Development Challenges
43. The circumstances of ADB operations in the Kyrgyz Republic have changed vastly since
1996, when the last operational strategy was finalized. The Kyrgyz economy has made major
progress in the past few years toward macroeconomic stability and putting the economy on a
growth path. The economic recovery after the Russian financial crisis has led to a significant
reduction in poverty. However, the gains in poverty reduction achieved in recent years may be
difficult to sustain over the medium term as the country is facing several serious problems:
- The large level of external debt threatens macroeconomic stability and is putting
considerable pressure on the budget, calling for fiscal restraint including a reduction
in the largely externally funded PIP. As a result, the Government will have to make
careful allocation decisions over the medium term and direct the funding only to key
social and economic development priorities to maximize its impact.
- Despite progress in 2000–2002, the poverty challenge remains large with close to
44.5% of the population living in poverty. Sustained economic growth is needed to
address this problem. The majority of the poor live in rural areas and, consequently,
agricultural productivity needs to be raised. In addition, there is a need to foster
private sector-led growth in other sectors, with the aim of securing greater
employment. Growth, in a small landlocked country like the Kyrgyz Republic, is also
critically dependent on improved regional trade and access to external markets.
- Public investment is being reduced while the enabling environment is still not
conducive to private sector-led growth and investment. This, unless rectified, will
affect future growth and poverty reduction. The Government needs to address this
issue through improved governance and greater progress in removing corruption,
administrative bottlenecks, and weaknesses in the legal system that have
compounded the problems facing private sector activity. In addition, financial sector
reforms are essential to improve financial intermediation to stimulate the private
sector.
- Human capital is at risk. While the Kyrgyz Republic still compares favorably relative
to countries of similar income levels in terms of social indicators owing to the legacy
of the FSU, the ability of the country to maintain these achievements and support
social sectors is undermined primarily by strained public finances.
B. CSP Strategic Focus
44. The formulation of the new strategy is based on the Government’s development
objectives and strategy contained in the CDF to 2010 and NPRS, 2003–2005; the MDGs; the
strategic focus and ongoing and planned programs and projects of other external agencies; and
ADB’s past operational knowledge and experience in the country. The proposed strategy covers
a period of unusual circumstances, given the current constraints to PIP borrowing and the much
reduced amount of lending envisaged over the CSP period. Consequently, it will not be possible
for ADB’s strategy or assistance to cover comprehensively the CDF, NPRS, or MDG priorities.
Instead, ADB will aim to direct its assistance to a limited number of sectors and areas. The
choice of sectors will be based on (i) ADB’s comparative advantage built over nearly 10 years of
working with the Government as well as (ii) the unmet requirements of strategically important
sectors and activities. The selected sectors/areas of intervention are: agriculture, finance,
regional cooperation, and education. The CSP’s role in helping the Government meet selected
MDG and NPRS priorities and how this will be complemented by the work of other external
agencies may be seen from para. 50.
45. The overall objective of the new CSP is to reduce poverty. This will be primarily
addressed by the promotion of private sector-led economic growth and selective support for
human development. ADB’s strategy will contribute to the achievement of these objectives
through policy dialogue, institutional development, and key investments. The geographic focus
of the CSP will be on the poorer areas of the country.
46. Promoting Private Sector-Led Economic Growth. In view of the country’s low income
and high poverty levels, achieving sustainable growth is a fundamental requirement for progress
in poverty reduction. A considerable improvement in both the external and fiscal accounts is
needed to underpin these efforts. The type of public investment-led growth of 1996–2001,
financed primarily by external resources, is no longer sustainable over the medium term.
Greater effort is needed to shift the origins of the external imbalance from public investment to
private sector activities. A more vibrant and outward-oriented private sector will be critical to
maintaining the momentum of growth, broadening the growth base, and increasing the
economy’s access to diversified inflows of external capital. In promoting private sector-led
growth the following will be emphasized by ADB.
- Agriculture and Rural Development. In the period ahead, agriculture is likely to
emerge as a key sector of comparative advantage for the Kyrgyz economy
(particularly as gold reserves in the Kumtor gold mine are diminishing). Reforms in
the agriculture sector—if broadened and deepened to create an enabling
environment for private sector initiatives and to induce further productivity gains—will
be pivotal in expanding exports, stimulating overall economic growth, and reducing
poverty. Agriculture is the most important sector in the economy, employing about
half of the labor force and contributing close to 40% of GDP. Furthermore, most of
the poor reside in rural areas, where deteriorating physical infrastructure and land
degradation impinges on potential economic growth. Priority investments and policy
and institutional support in agriculture and allied activities will improve productivity
and help address poverty and rural unemployment. ADB has assisted the
Government in implementing a program of policy and institutional reforms and will
continue support to the sector in these areas and through area-focused investment in
close coordination with other external agencies, particularly the World Bank.
- Financial Sector Development. Despite the progress made in implementing
reforms, the contribution of the financial sector to private sector development has
been weak, as the banking sector remains fragmented. Capital markets and other
parts of the financial sector are still at a very early stage of development. Confidence
in financial institutions remains low. Weaknesses in financial intermediation and the
consequent lack of savings instruments have contributed to the high level of transient
poverty due to high consumption volatility. More importantly, the lack of mature
financial institutions and capital markets constrains any potential leveraging of
foreign inflows of funds, whether official development assistance or foreign direct
investment. The Government has developed a banking sector reform program aimed
at restoring depositor confidence and deepening bank intermediation. This strategy
builds on the findings of the TA provided by ADB and the IMF/World Bank financial
sector assessment conducted in 2002. ADB has played a major role in the financial
sector since the beginning of the Russian financial crisis, and will continue to do so
over the CSP period in close collaboration with IMF and the World Bank. In the near
to midterm, ADB support will enhance the sector’s capacity to carry out efficiently its
intermediation role by deepening reforms, and further strengthening the legal,
regulatory, and institutional environment.
- Regional Cooperation with an Emphasis on Trade and Transport
Infrastructure. Regional cooperation is critical for a small, landlocked country like
the Kyrgyz Republic to enhance its access to regional markets and to diversify its
exports. Trade barriers imposed by neighboring countries have had a considerable
negative impact on the country’s export activity. Improvement in the regional trade
framework over the medium term via increased demand from neighboring countries
is essential to the country’s future growth prospects. This is particularly critical to the
expansion of value-added agricultural activities. ADB has played a pioneering and
lead role in fostering regional cooperation in the CARs since 1997, which will be
sustained in the near term by targeting strategic investments in regional road links
and in trade facilitation to reduce physical and other trade barriers.
47. Human Development. To assist the Government in achieving its MDGs and to address
concerns brought about by declining public investment in the social sectors, ADB will provide for
selective support for human development. The past decade of declining social investment in
human capital is likely to produce high future economic costs in terms of lost productivity and
lost potential income. There is a need to ensure that the poor have improved access to basic
social services, including education and health. Ensuring that the next generation is
intellectually prepared and physically fit is a critical factor for pro-poor growth and development.
Considering its significant past involvement and lead role in the education sector, and taking
into account the activities of other external agencies, ADB will focus on the education sector
with particular support to basic education and in the related area of early childhood
development.18 A sustained, long-term commitment from ADB will assist the Government in
addressing concerns brought about by declining public investment in the social sectors. This
fundamental approach to preserving human capital is a key element for pro-poor economic
growth and long-term poverty reduction.
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