The Investment Climate Improvement Program, approved by the Asian Development Bank (ADB) in 2008, follows a programmatic approach and envisages three subprograms to assist the government in creating conditions for sustainable economic growth and employment-generating investments. Subprogram 1, implemented in 2007 2008, included a policy-based grant, a project grant supporting the development of information technology systems for effective implementation of reforms, and a TA grant to help prepare subprogram 2. Preparation and implementation of subprogram 2 has also benefited from and reinforced other interventions. The reforms supported under subprogram 2 build on the achievements made under subprogram 1 despite difficult political and external conditions. They address binding constraints to private sector development and diversification in the areas of business regulation and taxation, access to finance, worker skills development, and public private partnerships (PPPs). The relevance of these constraints has been confirmed through recent studies and surveys, which explain some deviations from the constraints originally identified in 2008. Subprogram 2 is effectively gender mainstreamed to maximize benefits to women. The reform agenda that remains after subprogram 2 will be addressed under subprogram 3.
Subprogram 2 complements the efforts of (i) ADB and other development partners to strengthen physical infrastructure and improve access to finance; and (ii) the International Monetary Fund (IMF) to rebuild fiscal buffers and safeguard monetary stability, which are important for a healthy business and investment climate.
Improving the investment climate for the private sector is critical for the government's economic growth policies. Subprogram 2 contributes toward this end. The Government of the Kyrgyz Republic emphasizes improving the business climate. ADB's country operations business plan for the Kyrgyz Republic identifies subprogram 2 as a means of broadening the Kyrgyz economy and its private sector.
|Project Rationale and Linkage to Country/Regional Strategy
With almost a third of its 5.6 million people living in poverty, the Kyrgyz Republic's economic growth and investment have been low and unstable. Growth of gross domestic product (GDP) averaged 4.1% since 2002, fluctuating from 1.4% to 8.5%. Gross fixed capital formation increased from 16.4% of GDP in 2005 to 25.3% in 2011, but its growth was volatile. The country has attracted foreign investment, but mainly in gold mining, which generates little employment. The official unemployment rate was 7.8% in 2011, but actual unemployment may be much higher. Low growth rates and economic instability were mainly caused by weaknesses in the business environment, combined with internal and external shocks. These included political turmoil in 2005 and 2010, and spillover from the global crisis in 2008 2009, mainly through Kazakhstan and the Russian Federation. Insufficient economic diversification makes the economy of the Kyrgyz Republic particularly vulnerable to shocks.
With the investment climate and despite past reforms, private enterprises still suffer from excessive regulatory and licensing requirements, pervasive inspections by various enforcement agencies, complex and arbitrary taxation, and cross-border trade barriers such as complex pre-customs clearance. These, with the room for corruption and fraud they create, constrain most private enterprises, especially women entrepreneurs' smaller businesses. Remaining policy, legal, and regulatory issues restrict access to finance, particularly for micro, small, and medium-sized enterprises and women entrepreneurs, who frequently have little collateral to offer for cultural reasons. Inadequate worker skills are an increasingly pressing issue, as the education system responds poorly to changing market needs and many qualified workers seek employment abroad. Labor migrants' remittances reached 25% of GDP in 2010, but they fuel consumption rather than investment and increase imports, as the weak business environment prevents many enterprises from positively responding to demand by increasing production and employment. Finally, weaknesses in the education and health systems and inadequate infrastructure in other sectors frequently result from underinvestment. A weak enabling environment has been preventing private investment in these areas. Due to fiscal weakness, the Kyrgyz Republic is in particular need of such investment.
There is broad consensus that the long-term development prospects of the Kyrgyz Republic depend on its ability to improve its investment climate to develop a vibrant private sector, diversify the economy, and expand markets. This would make the economy more resilient, promote long-term growth, create additional employment, and help reduce poverty.