Regions and Countries

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p. 2 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Levels

Country Strategy and Program Update 2005-2006: Kyrgyz Republic

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II. Implementation of the Country Strategy and Program

A. Progress on the Poverty Reduction

8. The CDF provides the Government’s long-term development strategy until 2010. The NPRS for 2003–2005 is a medium-term plan to implement the CDF and was prepared by the Government in close consultation with civil society. The CDF and NPRS have poverty reduction as their overarching objective. In recent years, and particularly under the new strategy, Asian Development Bank (ADB) assistance has sought to support this fundamental development objective of the Government by fostering growth and providing selective support for the social sectors. The Government’s performance is mixed. Poverty levels have fallen in recent years owing mainly to growth in agriculture and the previous higher levels of public investment. Some conditions that helped reduce poverty are no longer sustainable. Broad-based growth that creates jobs, and improved access to health, education, and community infrastructure facilities for the poor, are required to reduce poverty in a sustainable manner.

9. These new imperatives for poverty reduction are adequately reflected in ADB’s current strategy and program. The ongoing projects in the social sector aim to improve access to community infrastructure: educational, social, and maternity and child health services for the poor. The projects included under the CSP seek to improve market access through better regional transport links to broaden the base of economic growth; support agriculture to realize its untapped potential and to create economic opportunities in rural areas, where most of the poor reside; improve access to primary education and health care, particularly for the poor; and create a conducive environment for the private sector through financial sector reforms.

B. Progress in the Country Strategy and Program Focus Area

10. The CSP of 2004–2006 takes into account the fact that debt and budget considerations will severely limit the Government’s capacity to borrow during the period. The CSP also notes the urgent need to promote private investment to offset the falling levels of public investment, meet the challenge of high levels of poverty and its uneven spatial incidence, and protect social development achievements. Lending will be reduced to less than half of previous levels, and the strategy is sharply focused on a few important areas to have maximum impact on economic growth and poverty reduction.

1. Sectoral Priorities

11. The CSP’s overall objective is reducing poverty by promoting private sector-led economic growth and supporting selected areas of human development. The major areas of support are (i) agriculture and rural development, to induce productivity and expand exports; (ii) the financial sector, to deepen financial intermediation, improve companies’ access to finance, and facilitate people’s access to financial services; (iii) regional cooperation, to reduce crossborder transport and trade bottlenecks; and (iv) investments in basic education and early childhood development. The CSP’s geographic focus will be on the poor areas of the country. Preparatory work to implement the program under the CSP is on schedule. In the area of regional cooperation, fact finding for the southern regional transport corridor road (Osh-Sary Tash-Irkeshtam) project (phase I), and the regional customs project is complete, and both loans are expected to be processed in 2004 if sufficient Asian Development Fund (ADF) resources are available. In the area of human development, project preparatory work for the proposed third education project, scheduled for 2005, has also begun with the fielding of project preparatory Technical Assistance (TA)¹ consultants in early 2004. Preparations for the proposed second financial sector program for 2005 are under way following the fielding of consultants² to study the sector and develop the program framework. Sector work on rural finance is under way. Assistance will be provided for a second agricultural area development project in 2006, based on the lessons learned from the project’s first phase. The Government’s Employment Policy until 2010, which was approved in February 2004, seeks to improve labor skills by reforming and strengthening vocational education and training facilities. The country needs a vocational education policy to consolidate facilities on a sustainable basis and to reorient the curriculum to meet the demands of a market economy. A $10-million vocational education project is included in the 2006 pipeline to address some of these critical needs. The Government requested assistance for the health sector in 2007.

2. Thematic Priorities

a. Economic Growth

12. Supporting private sector-led growth means widening the production base while recognizing the importance of agriculture and rural development. Three out of the four areas emphasized in the CSP and the assistance planned during 2004–2006 will directly impact on economic growth by encouraging private investment, widening access to export markets though development of regional transport infrastructure and facilitation of trade, and investing in agriculture and rural development, which are still the key areas for job creation and poverty reduction.

b. Human Development

13. The country inherited a high level of social development and extensive social infrastructure from the former Soviet Union. Much of the infrastructure has deteriorated as it was created and sustained when the country’s income was more than twice the current level, with considerable federal support from Moscow. Key development challenges are inadequate financing, shortcomings in sector policies, and inefficient management, which continue to threaten human development. Fiscal consolidation during the 1990s was achieved mainly by compressing social spending, resulting in sharp cuts in real wages and poor quality of services. Public spending on social services deteriorated from 17.8% of GDP in 1995 to 8.4% in 2000. Public spending has improved since then to reach 11.2% of GDP in 2002, and further to 11.6% in 2003. The improved allocation of resources reflects the priority now placed by the Government and external funding agencies on promoting human development.

c. Gender and Development

14. The high level of gender equality achieved under the Soviet system is gradually eroding in a number of areas. Among others, gender disparities in wages, and unemployment are increasing. The 1996 ADB gender assessment for the country needs updating. A regional TA is being prepared for four Central Asian Republics (CARs) to (i) update gender assessments, (ii) assess the gender dimension of poverty and develop interventions to mitigate it, and (iii) strengthen CARs’ capacity to implement gender and development strategies. The TA will be implemented in 2004 and cover the Kyrgyz Republic in addition to Azerbaijan, Kazakhstan, and Tajikistan.

d. Governance

15. The Government is aware of the need to promote good governance in the public and private sectors. In the public sector the focus is on civil service reforms, public resource management, streamlining and simplification of regulation, and judicial reforms. Promoting good corporate governance is the main focus in the private sector. The Government also gives considerable importance to combating corruption. The high-level National Council on Governance, headed by the Prime Minister, has been set up and is mandated to quickly prepare and implement an action plan to improve governance and fight corruption. The Government has issued a decree to establish the national commission on civil service to create an agency to regulate the civil service. The Government made progress in improving the functioning of the judiciary with ADB assistance by (i) completing a comprehensive review of adjudication processes, systemic weaknesses, and constraints to develop a reform agenda for the judiciary; (ii) undertaking legal and administrative steps to establish third-party arbitration for expeditious out-of-court resolution of commercial disputes; and (iii) amending laws to bring finality to the judgments of higher courts. The Government has also adopted international standards of accounting, audit, and valuation. The legal and regulatory framework for corporate governance in joint stock companies and financial institutions has been strengthened, although enforcement is still a serious issue. The country governance assessment completed by ADB in 2003 will guide policy dialogue in this area. As cited in the CSP, the Government’s determination and success in improving governance will have a direct bearing on the realization of development goals, including poverty reduction.

e. Private Sector Development

16. As the issue of debt sustainability is restricting the level of public investment, ADB’s strategy supports the Government’s efforts to assign a greater role to the private sector to maintain aggregate investment to generate growth and reduce poverty. The Government’s focus is on deregulating the economy to reduce corruption, which is encouraged by excessive regulation. Not only must the steps in para. 15 be undertaken, but also the financial sector must be strengthened and financial intermediation deepened. The banking sector has yet to be consolidated and nonbank financial institutions are in their infancy. Improvement of trade and transit relations with neighbors is also crucial for functioning of the private sector in landlocked Kyrgyz Republic (para 18). In 2004, the Government prepared and circulated for public discussion two draft laws on licensing and on regulation of agencies that control and/or regulate economic activities. As part of the ongoing electricity sector reforms, the Government intends to privatize electricity distribution through concession agreements. The Government has recently signed the Private Sector Operations Agreement with ADB. The private sector assessment carried out by ADB in 2003 will provide a good framework for private sector operations. A recent business opinion survey found that business confidence improved marginally in 2003, with 52% of respondents expecting their business to expand in future.

f. Environmental Protection

17. Due to severe budget constraints, the Government is reluctant to use loan resources, including ADB’s, to support interventions to improve the environment. ADB seeks to protect the environment by addressing environmental concerns under all its projects and through TAs. ADB carried out an environmental sector assessment in 2003 as part of CSP preparation. ADB provided a two-phase TA³ to build capacity in environmental monitoring, the second phase of which was completed in 2003. The Kyrgyz Republic is participating in a regional TA to improve environmental information systems in the CARs⁴. Proposed assistance in the pipeline includes a project for reducing vulnerability of the poor to natural disasters⁵, and a regional TA to prevent land degradation and erosion in collaboration with the Global Environmental Facility⁶. In an encouraging development, the Government has sought assistance from the World Bank to address the problem of uranium tailings at the MyliSuu site in the southern oblast of Jalabad.

g. Regional Cooperation

18. Since 1997, ADB has been pioneering and leading in fostering cooperation among the CARs, the Xinjiang-Uygur Autonomous Region of the People’s Republic of China, and Mongolia. Trade facilitation, transport, and energy are the priority areas identified for support. The second ministerial conference was held in November 2003, under ADB’s overall institutional framework to promote regional cooperation. Major multilateral institutions participated and agreed to use this framework as a joint mechanism to promote regional economic cooperation, with ADB serving as the secretariat. The conference emphasized that (i) in trade facilitation, further efforts should go beyond customs cooperation to promote trade by improving trade policies and establishing conditions for trade development in line with the World Trade Organization standards; (ii) in transport, develop east-west and north-south transport corridors, harmonize and simplify regulation of transit; and (iii) in energy, strengthen the legal and regulatory framework, and recognize the imperatives of energy and water nexus. In this context the conference endorsed the proposal to set up a sector coordination committee on trade policy, a working group on water and energy, and a donor coordination group. Regional cooperation is of particular importance to a landlocked country, and the CSP focuses on improving trade and transit links. In a significant development, the customs departments of the Kyrgyz Republic and Kazakhstan signed an agreement in March 2004 to facilitate free road transit of Kyrgyz goods through Kazakhstan.

C. Highlights in Coordination of External Funding and Partnership Agreements

19. ADB coordinates closely its activities with the European Bank for Reconstruction and Development (EBRD), IMF, Islamic Development Bank (IsDB), World Bank, United Nations (UN) System, and bilateral donors at all levels of development cooperation. Significant strides have been made in aid coordination since the last Consultative Group meeting held in Bishkek in November 2002, when the Government and external funding agencies agreed to focus on significantly improving efforts in this direction. Since then, sectoral and operational information has been shared and coordination of lending and TA activities improved. In 2003, ADB and the World Bank, which together account for over 75% of the PIP, conducted a joint portfolio review. The Kyrgyz Republic was one of the partnership countries selected to harmonize donor procedures at the Rome conference on harmonization held in February 2002. The Kyrgyz Resident Mission (KYRM) is participating in the working group set up by the Government to identify areas for harmonization of donor procedures. The areas identified for immediate harmonization are (i) procedures for procurement of goods and services, (ii) financial management and monitoring of projects, and (iii) project implementation units. KYRM also chairs the International Advisory Council for the Ministry of Education. With its help, ADB is following a participatory approach to preparing an education sector master plan⁷ and is sharing the findings with other donors active in this sector. In conjunction with its lending program, ADB will continue to actively pursue cofinancing from official sources (particularly concessional and grant cofinancing sources) to address the thematic priorities for ADB operations. ADB will maintain its dialogue with the Government to identify cofinancing for projects included in the 2005–2006 program.

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