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Regions and Countries Country Economic Reviews Document
Country Strategy and Program 2004-2006: Kyrgyz Republic
Executive SummaryThe circumstances of Asian Development Bank (ADB) operations in the Kyrgyz Republic have changed significantly since 1996, when the last operational strategy was finalized. The country has made major progress in the past few years toward macroeconomic stability and putting the economy back on a growth path. Poverty incidence has fallen from a peak of 55.3% in 1999 to 44.4% in 2002. The economic recovery after the Russian financial crisis of 1998 has led to notable poverty reduction. However, the gains in poverty reduction achieved in recent years could face challenges in the medium term because of difficulties the country is experiencing, such as severe fiscal and external debt constraints, low levels of domestic savings and investment, a weak enabling environment for private sector growth, unemployment, and deteriorating social services. As part of its debt reduction strategy, the Government is scaling down significantly its public investment program (PIP) to limit external borrowing. This will mean that it will certainly not be business as usual for ADB during the country strategy and program (CSP) period as its lending program will be reduced by more than half from the levels of the past which, in turn, will limit the activities that ADB can support. The Government’s overall objective over the next 3 years, as described in its National Poverty Reduction Strategy (NPRS), is to reduce poverty incidence to about 39% by 2005. This will be challenging in an environment where public investment is being reduced while the enabling environment is still not conducive to private sector-led growth and investment because of weak governance and financial intermediation, difficult conditions for private enterprises, and corruption. The investment climate is further weakened by a lack of access to direct transport routes and heavy reliance on neighbors for markets and market access. Further, human capital is at risk as the Government’s capacity to maintain the achievements in the social sectors under the previous system is undermined by strained public finances. The Government has initiated several measures to address these problems and its success in this regard will have a direct bearing on achieving the growth rates and poverty reduction targets envisaged under the NPRS. ADB lending to the Kyrgyz Republic began in 1994. ADB’s Kyrgyz operations have grown in complexity and magnitude and a sizable portfolio of ongoing projects has been built up. Overall, the Kyrgyz portfolio has performed well and brought many visible benefits to the country. In recent years, however, the severe fiscal constraints facing the Government have led to a shortage of counterpart funds and non-release of such funds on time. These resulted in project implementation delays that have begun to affect portfolio performance; the situation could worsen unless these issues are addressed. The overall objective of the CSP is to reduce poverty. This will be addressed primarily by promoting private sector-led economic growth and selective support for human development. In view of the country’s low income and high poverty levels, achieving sustainable growth is a fundamental requirement for progress in poverty reduction and this is recognized clearly in the NPRS. A considerable adjustment both in 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 given the high external debt levels. Greater effort is needed to foster private sector activities instead. ADB will contribute to private sector-led growth by supporting the following areas: (i) agriculture and rural development to induce further productivity and to expand exports; (ii) the financial sector to strengthen the banking sector, improve depositor confidence, and deepen bank intermediation; and (iii) regional cooperation to reduce cross-border and transport and trade bottlenecks, stimulating overall economic growth and reducing poverty. Through these initiatives, ADB willassist the Government in meeting the target of the first Millennium Development Goal (MDG), i.e., halving income poverty levels. To address concerns brought about by declining public investment in the social sectors, ADB will provide for selective support for human development, primarily basic education and early childhood development. Through these initiatives, ADB will seek to address those MDGs related to achieving universal primary education, reducing child mortality, and improving maternal health. The geographic focus of the CSP will be on the poorer areas of the country. Given the current constraints to external borrowing, the program envisages annual base case commitments of only $30 million, which are much lower than historical lending levels (averaging around $66 million a year in 1994–2001). The lending program for 2004–2006 consists of six loans for a total amount of $90 million. The lending program will be supported by nonlending assistance, including a technical assistance (TA) grant pipeline of about $6.5 million. The nonlending program will include assistance to prepare investment projects as well as advisory and capacity building TA. It will complement the lending program by supporting policy reform and building institutional capacity. In view of the limited resources that will be available to the Kyrgyz Republic over the CSP period, it was proposed to sharply focus the country strategy and limit the numbers of sectors and areas to be supported. The latter were carefully selected, based on the Government’s and ADB’s strategic priorities, lessons learned, comparative advantage, and complementarity with the activities of other external agencies. The Kyrgyz Republic’s sectors and sector institutions have limited absorptive and implementing capacity. Consequently, a further narrowing of the proposed areas of support would not be desirable. ADB and the World Bank together account for over 75% of the PIP. As such, a flexible approach to the strategy would need to be taken if favorable developments occur regarding the present assumptions on growth, debt, and budget constraints. Further, as a major development partner, ADB may need to respond to unanticipated internal and external shocks that a small economy like that of the Kyrgyz Republic is particularly vulnerable to. Extensive consultations took place with the stakeholders in the preparation of the CSP. Discussions were held with senior officials of the Government, the Ombudsperson, representatives of Parliament, the judiciary, the private sector, nongovernment organizations (NGOs), and the international funding community. The thrusts and directions of the proposed strategy and program were supported and well received by them. The proposed CSP stands on a substantial body of knowledge of poverty in the Kyrgyz Republic. The country’s development partners, including ADB, were actively involved in the preparation of its Comprehensive Development Framework (CDF) and the NPRS through the provision of significant technical and financial assistance. ADB-funded TA has produced eight reports that analyzed various aspects of poverty in the country. A key risk to the success of the CSP is the vulnerability of the economy to internal and external shocks. The CSP seeks to reduce this by putting a heavy emphasis on private sectorled growth as a means to further economic diversification; it also focuses on regional cooperation with an emphasis on trade facilitation and the reduction of physical and other trade barriers. Another risk revolves around the Government’s ability and willingness both to pursue the difficult reforms needed to improve the investment climate as well as to develop strategic sectors in the economy. This is particularly relevant since presidential and parliamentary elections are due in 2005. Consequently, ADB will emphasize policy dialogue with each sector intervention.
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