World Bank Group Assistance Program

Document of The World Bank



FOR OFFICIAL USE ONLY



Report No. 39719-KG



INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL FINANCE CORPORATION MULTILATERAL INVESTMENT GUARANTEE AGENCY



JOINT COUNTRY SUPPORT STRATEGY FOR THE KYRGYZ REPUBLIC (2007-2010)



May 23, 2007



Central Asia Country Unit Europe and Central Asia Region Asian Development Bank Swiss Cooperation UK Department for International Development United Nations Agencies



This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization



Last CAS Discussion: April 22, 2003



Currency Equivalent (Exchange Rate effective March 14, 2007)

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Currency Unit - Soms US$1.00 = 38



Weights and Measures

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Metric system



Fiscal Year

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January 1 - December 31



Vice President Country Director Task Team Leader



IBRD Shigeo Katsu Annette Dixon Roger Robinson



IFC Executive Vice President Vice President Director Task Team Leader



IFC Lars H. Thunell Edward A.Nassim Shahbaz Mavaddat Gorton De Mond, Jr.



ABBREVIATIONS AND ACRONYMS

AAA ADB ADF AIDS APR ASSP BEEPS CACO CAREC CAS CASCR CDF CDM CDS CEM CG CIS ESW EurAsEc FDI FSAP GDP GEF HIPC IDA IFI IOM IPO IsDB JCSS KfW MDGs MDRI MIGA MSMEs MTBF NBKR NGOs NPRS NPV OECD PBA PEFA PERs PFM PIP PIUs PRSGs Analytical and Advisory Assistance Asian Development Bank Africa Development Fund Acquired Immune Deficiency System Annual Progress Review Agricultural Services Support Project Business Environment and Enterprise Performance Survey Central Asia Cooperation Organization Central Asia Regional Economic Cooperation Program Country Assistance Strategy 2007-2010 Country Assistance Strategy Completion Report Comprehensive Development Framework Clean Development Mechanisms Country Development Strategy Country Economic Memorandum Consultative Group Commonwealth of Independent States Economic and Sector Work Eurasian Economic Community Foreign Direct Investment



Financial Sector Assessment Program

Gross Domestic Product Global Environment Facility Heavily Indebted Poor Countries International Development Association International Financial Institutions International Organization for Migration Initial Public Offering Islamic Development Bank Joint Country Support Strategy



Kreditanstalt für Wiederaufbau

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Millenium Development Goals Multilateral Debt Relief Initiative Multilateral Investment Guarantee Agency Micro-, Small and Medium Enterprises Medium-Term Budget Framework National Bank of the Kyrgyz Republic Non-governmental Organizations National Poverty Reduction Strategy Net Present Value Organization for Economic Co-operation and Development Performance Based Allocation



Public Expenditure and Financial Accountability program

Public Expenditure Reviews Public Financial Management Public Investment Program Project Implementation Units Poverty Reduction Support Grants



ABBREVIATIONS AND ACRONYMS

SDC SMEs SOEs SWAps TA TB TICI TVET UMB UN UNDP WBI WBG WUA Swiss Development Corporation Small and Medium Enterprises State-owned Enterprises Sector-wide Approach Technical Assistance Tuberculosis Transparency International Corruption Index Technical, Vocational Education and Training Unified Monthly Benefit United Nations United Nations Development Programme World Bank Institute World Bank Group Water Users’ Associations



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JOINT ASSISTANCE STRATEGY FOR THE KYRGYZ REPUBLIC (2007-2010) TABLE OF CONTENTS



EXECUTIVE SUMMARY PART I: KYRGYZ REPUBLIC JOINT COUNTRY SUPPORT STRATEGY ....... 1 I. INTRODUCTION ........................................................................................................ 1 II. POLITICAL AND ECONOMIC CONTEXT.......................................................... 1 III. THE COUNTRY DEVELOPMENT STRATEGY 2007-2010 ........................... 13 IV. DEVELOPMENT CHALLENGES AND OPPORTUNITIES ........................... 19 V. THE JOINT COUNTRY SUPPORT STRATEGY ............................................... 30

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Annex 1. JCSS Results Framework for the Kyrgyz Republic ................................... 39

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PART II. THE WORLD BANK GROUP ASSISTANCE PROGRAM ................... 51 I. INTRODUCTION ...................................................................................................... 51 II. IMPLEMENTATION OF THE LAST CAS .......................................................... 51 III. SUMMARY OF LESSONS LEARNED ............................................................... 55 IV. PORTFOLIO PERFORMANCE........................................................................... 56 V. WBG SUPPORT FOR IMPLEMENTATION OF THE JCSS ............................ 56 VI. IDA FINANCING AND INSTRUMENTS ............................................................ 65 VII. CAS CONSULTATIONS ...................................................................................... 65 VIII. MONITORING IMPLEMENTATION AND MANAGING RISKS .............. 66 IX. CONCLUSIONS ...................................................................................................... 67

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Annex 1. World Bank Group CAS Results Matrix for the Kyrgyz Republic .......... 68

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Annex 2. Kyrgyz Republic CAS Completion Report, FY03-06 ................................. 76

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Annex 3. Standard CAS Annexes ............................................................................... 115

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BOXES PART I: KYRGYZ REPUBLIC JOINT COUNTRY SUPPORT STRATEGY Box 1: Doing Business in the Kyrgyz Republic ............................................................... 12 Box 2: Transport Corridor Performance Measurement .................................................... 28

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PART II. THE WORLD BANK GROUP ASSISTANCE PROGRAM Box 1. Addressing Poverty at the Village Level in the Kyrgyz Republic ....................... 53

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FIGURES PART I: KYRGYZ REPUBLIC JOINT COUNTRY SUPPORT STRATEGY Figure 1. GDP Growth Rate, 1996-2006 ........................................................................... 4 Figure 2. Fiscal Performance in CIS 5, 1996-2005 ............................................................ 5 Figure 3. Regulatory Polices as a Problem to Doing Business ........................................ 24 Figure 3. Business Licenses as a Problem to Doing Business ......................................... 24

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TABLES PART I: KYRGYZ REPUBLIC JOINT COUNTRY SUPPORT STRATEGY Table 1: GDP Growth Rates and Structure ......................................................................... 4 Table 2: Progress toward the MDGs................................................................................ 10 Table 3: Summary Financial Sector Statistics for Selected Transition Economies .......... 21 Table 4: Annual Funding Requirements for Road Maintenance ...................................... 22

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PART II. THE WORLD BANK GROUP ASSISTANCE PROGRAM Table 1. IDA Lending and Non-Lending Program for FY07-FY10 ................................ 58

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EXECUTIVE SUMMARY i. Development Challenges. The Kyrgyz Republic, a land-locked mountainous country, faces formidable geographic barriers to obtain a high, sustained rate of economic growth. Its isolation is a significant barrier for international trade and transport, which is further hampered by inadequate physical infrastructure and protectionist policies in neighboring countries. In addition, poor governance and low institutional and technical capacity have limited implementation of reforms in many areas. Despite these challenges, the country succeeded in achieving economic growth around 4 percent and reducing poverty significantly during the late 1990s and early 2000s through prudent macroeconomic management and structural reforms in some areas. ii. The Kyrgyz Republic is still in the process of building the State. The political environment is turbulent, marked by the 2005 March revolution and subsequent instability with on-going disputes for power within and between Government, Parliament and civil society. In this complex political environment, identifying appropriate reforms, and building consensus around their implementation is difficult. iii. The existence of a vibrant civil society, and active political debate and participation, will assist the process of consolidation of the State. Political stability and the sustainability of the current government will depend upon making urgent and visible improvements in economic and social conditions, as well as clear results in attacking corruption, that meet the expectations of the population. In addition, consolidating basic market reforms already carried out, together with dynamic regional growth provides opportunities for accelerating growth. iv. Strategic Priorities. The Government’s CDS for the period 2007-2010 focuses on four strategic pillars—economic development, governance and transparency in public administration, human development, and environmental sustainability—and builds on the strategy laid out in the National Poverty Reduction Strategy (NPRS) for 2003-2005. v. The CDS focuses on consolidating the macroeconomic stability attained during implementation of the NPRS, and accelerating structural reforms to foster further growth and poverty reduction. The CDS places improving governance high on the agenda, and on fighting and reducing corruption in particular. The CDS emphasizes the importance of improving the accountability of officials to the people and reforms to the legislative and budget processes to reduce the capture of the state by powerful economic groups. Government ineffectiveness and poor performance in delivering basic social services will be tackled by deregulating the economy and strengthening public administration. Human and social development priorities in the CDS include access to increased and affordable education and health services; favorable living conditions with access to water, sanitation and basic social services, and social protection for vulnerable groups in the population. vi. The Kyrgyz Republic Joint Country Support Strategy (JCSS). This joint strategy of five development partners—the Asian Development Bank (ADB), the Swiss Cooperation (SC), the UK Department for International Development (DfID), the World Bank Group (WBG) and the United Nations Agencies—is closely aligned with the Government’s development goals. Certain strategic choices have been agreed among the development partners and have been applied across all donor groups, including the World Bank’s program: (i) focus on areas where support for reforms is already embedded; (ii)



mitigate risks associated with high indebtedness and growth volatility; (iii) focus on basic reforms, as opposed to complex operations; and (iv) focus on ESW and capacity building. vii. The Kyrgyz Republic Joint Country Support Strategy program focus. The JCSS partners will focus their programs on four areas identified in the CDS as particularly important for achieving the overarching goals, including: • Economic management consistent with strong and sustained pro-poor growth: strengthening the budget process and cross-cutting reforms in public financial management, and aligning financial management with government priorities; • Reducing corruption, improving governance and effective public administration: deregulating the economy, increasing transparency, improving the capacity of the civil service and public administration, and legal reform; • Building sustainable human and social capital through improved health and education outcomes, including access to and improving the quality of health, education and social protection services; and • Ensuring environmental sustainability and natural resource management. viii. The World Bank Group Program. This is the first joint country strategy for the Kyrgyz Republic and the Europe and Central Asia region. The WBG program contributes to the strategic goals outlined in the JCSS, with a focus on supporting the Government’s efforts to improve the environment for business and economic growth and improve the quality of and access to basic services (health, education, water and sanitation). The WBG strategy emphasizes selectivity given the limited IDA resources and limitations placed on the Government’s public investment program. Building on lessons learned, and in line with the principles of the JCSS, the Bank Program adopts a sequenced and long-term approach to development challenges, building on results achieved in first generation projects, targeting activities where projects can show visible results to the population, and leveraging our lending and analytical work to attract financing from other development partners. ix. Risks. Risks to CDS and JCSS implementation include those related to political instability, weak implementation capacity, and exogenous shocks. The JCSS proposes a number of measures to mitigate the risks. x. Monitoring and Evaluation. The commitment to a results-based framework represents a step forward for the authorities and the JCSS partners. The WBG, ADB and other partners are working together with Government to develop a robust monitoring and evaluation framework in line with the CDS framework under preparation. The annual joint country portfolio review process and joint annual review of the CDS will provide opportunities to review progress. To the extent possible, the review will use existing government processes as the main avenues for detailed discussion, dialogue and generating information. xi. Conclusion. The need for donors to present a joint position to their client is greater now than ever. The new Government is under pressure to deliver, and the development community is struggling to work out how best to provide support without overburdening the administration. The JCSS is a first step to further harmonization efforts and achieving results based on the principles framed in the Paris Declaration on aid effectiveness.



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PART I: KYRGYZ REPUBLIC JOINT COUNTRY SUPPORT STRATEGY I. INTRODUCTION 1. The Joint Country Support Strategy (JCSS) for the Kyrgyz Republic presents a core strategy of five development partners to support the Kyrgyz’s development agenda for the period 2007-10. The strategy is a joint effort of: the Asian Development Bank (ADB), the Swiss Cooperation (SC), the UK Department for International Development (DFID), the World Bank Group (WBG) and the United Nations Agencies. 2. The JCSS is a medium-term framework for managing cooperation between the Government of the Kyrgyz Republic and development partners to achieve national development and poverty reduction goals. It has been formulated in the spirit of national and international commitments and initiatives on aid effectiveness, particularly the Rome Declaration on Aid Harmonization and the Paris Declaration on Aid Effectiveness. Its objectives are to: align partners’ support with the goals of the Kyrgyz Republic’s Country Development Strategy 2007-10 (CDS); present the underpinnings of the group’s support; to reduce transaction costs, and ensure a coherent, well-coordinated response to support the implementation of the CDS. 3. The JCSS is results oriented, with a monitoring and evaluation framework derived from the CDS. The reform agenda in the JCSS draws upon the authorities’ own stated commitments, explicitly articulated in the CDS, which will be supported by donor engagement, policy dialogue, financial assistance and analytical work. The JCSS broadly outlines the ways in which partners will support the Government’s efforts to achieve the CDS outcome targets. II. POLITICAL AND ECONOMIC CONTEXT



A. The Political Context 4. From October 1990 to March 2005, the Kyrgyz Republic was governed by an increasingly authoritarian presidential regime 1 . The President mediated the competition between diverse groups within the elite for influence and economic rents. This resulted in frequent changes in personnel at the political level and contributed to low capacity in implementing policies and reforms. The Government was less openly repressive and was perceived to be more disposed to economic reform than others in the region.

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5. During the period 1990 to 2005, the Kyrgyz Republic made considerable progress in its transition to a market based economy. The economy began to recover from the

From October 1990 to March 2005, eleven governments have been appointed and forced to resign. In that time, there have been 10 Prime Ministers, and the average duration of cabinets was just over a year.

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break-up of the Soviet Union in 1990, which was associated with severe declines in output, high inflation and breakdown of the supply chains. The macroeconomic situation was stabilized and economic reforms laid the ground for a transfer of land and other assets into private ownership and generated private sector-led growth since the mid 1990s. 6. Progress in reforms was mixed. In some areas, significant reforms were carried out during the mid 1990s. These successes, together with a willingness of the Government to engage in dialogue in most reform areas, probably encouraged donors to overestimate the depth of reforms and contributed to an overambitious reform agenda on the part of donors. The Government meanwhile was readily accepting of all donor suggested reforms, even those that it was neither able nor committed to implement, in order to maintain external financial flows. The result was that, while some real economic reforms were carried out, many reforms remained on paper, either as policy statements or as legislation, were not implemented, were unfinished, or would be undermined by ad hoc policy interventions, given the weak ownership of the reforms. 7. The generally unexpected and so-called Tulip Revolution of March 2005, when President Akaev was ousted from power, was triggered by public dissatisfaction with the fraudulent February 2005 elections. Underlying dissatisfaction with a lack of tangible impact from economic reforms, poor governance, corruption and increasing nepotism, were probably also significant. The revolution itself had nationalist connotations which have since been manifested in a growing distrust of the international community. The donors were perceived as having been too close to the old regime, and implicitly as having fueled corruption without achieving significant development. 8. The revolution also set in motion a process of more open political conflicts between the Presidency, Government and parliament, and within these institutions, with the active participation of civil society. There have been some change of personalities in many government positions and some important gains in terms of political freedoms have been made; however, the initial effect of the revolution was to worsen the governance environment. The country’s assets are in demand by various interest groups, and there have been several disputes over property rights. In many instances, the consequences have been violent. 9. Since April 2006, there have been repeated large rallies and demonstrations in which protesters have demanded implementation of promised reforms and expressed general resentment against ineffective policy, corruption and growing criminality. These protests culminated with the implementation of delayed constitutional reforms in November 2006. The new constitution transferred some of the President’s powers to Parliament; however, amendments that restored the Presidential powers were reintroduced by his supporters in Parliament and passed in December 2006. 10. The combination of resurgent nationalism and a lack of trust by civil society in the International Financial Institutions (IFI’s) were important elements in the Government’s decision in February 2007 not to seek assistance under the Heavily



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Indebted Poor Countries (HIPC) debt relief initiative. The decision indicated a more cautious and skeptical attitude to engagement with donors particularly as regards widereaching policy reforms. 11. Constitutional debates are ongoing, where other leading opposition movements in the country are demanding the authorities to undertake constitutional reform (with reinstatement of the spirit of the November 2006 Constitution) and early presidential elections. Large protests were organized to this effect in April 2007. The President and his Government, led by opposition representative Almazbek Atambaev, re-established control, but the direction of future constitutional reform is still unclear. 12. The Kyrgyz Republic is still in the process of building the State. In this complex political environment, identifying appropriate reforms and, importantly, building consensus around them will be difficult. Nevertheless, there are a number of areas where support for change is already embedded. The existence of a vibrant civil society, which is the most robust in the Central Asian region, will assist the process of consolidation of the state. Political stability and the sustainability of the current Government will depend upon making urgent and visible improvements in economic and social conditions, as well as clear results in attacking corruption, that meet the expectations of the population. 13. The Government’s new CDS was endorsed by the National Development Council and launched by Presidential decree on May 16, 2007. The document attributes the limited pace of economic development and the skewed distribution of wealth to the unfinished development agenda (including the delays in privatizing state enterprises that are deemed to be of strategic importance, fostering energy sector efficiency and forging a friendly business climate conducive to private sector growth) which was undermined by weak governance. The challenge for the new Government will be to provide a coherent framework to implement this development agenda, while that of the donors will be to ensure that their support is effective in improving the economic and social conditions of the population. B. Economic Developments 14. Despite a sound record of macroeconomic performance in recent years, economic growth has been modest and volatile; a large burden of external debt has been accumulated and integration into global production and trade remains limited. These outcomes reflect the pattern in economic reforms. While over 1994-98 the Kyrgyz Republic had been among the fastest reformers among the Commonwealth of Independent States (CIS) economies, the period between 1999-2006 witnessed reversal and stagnation in reform efforts. The paragraphs that follow present an assessment of the Kyrgyz Republic’s growth performance since independence. 15. Few economies face initial conditions as challenging as in the Kyrgyz Republic: with a small population (just over 5 million) and one of the least accessible locations in the world. Its isolation is a significant barrier for international trade and transport, which is further hampered by inadequate physical infrastructure and protectionist policies in



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neighboring countries. Only about seven percent of the country’s land is arable. The two major natural resources are hydropower and gold. Known gold reserves are being depleted and, without new discoveries, they will be close to exhaustion within a decade. Output of hydropower has been constrained by depletion of assets that has taken place over the past 15 years. 16. Against this background, the trajectory of Kyrgyz output since transition is similar to that of the other small, resource poor CIS countries (see Figure1). After an initial decline, real Gross Domestic Product (GDP) started to recover in 1996 and reached 80 percent of its pre-transition level by 2005. The initial output shock in the Kyrgyz Republic (50 percent) was less severe than in other small resource poor CIS countries 2 (where it was more than 60 percent).

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17. Output growth was rapid Figure 1. GDP Growth Rate, 1996-2006 only during the first years of 20 adjustment. Subsequently modest growth was combined with high 15 volatility. The Kyrgyz Republic 10 grew at an annual rate of 4.7 5 percent during 1996-2005 (at less 0 than 4 percent in 2000-2005). This 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 growth rate was lower than in -5 similar CIS countries (i.e., 6-7 -10 percent over the whole period and Kyrgyz Republic Georgia Armenia above 8 percent since 2000). There Moldova Tajikistan have been three major decelerations in 1998, 2002 and 2005 due to Source: World Bank, ECA Regional Tables. various exogenous shocks, including the 1998 regional financial crisis, the 2002 drop in gold production and the 2005 political events. Table 1: GDP Growth Rates and Structure

1991-1995 GDP (growth rate, %) Agriculture Construction Gold1 Power Manufacturing and non-gold mining Services

P P



1996-1999 5.7 9.6 -11.7 10.6 -1.9 0.2 1.9 4.2



2000-2006 3.9 2.5 10.6 -3.9 1.1 1.4 6.9 4.7



-12.5 -5.9 -12.4 0.0 NA -21.1 -10.3 -12.5



Non-Gold GDP (growth rate,%) 2

P P



Source: NSC, staff calculations 1/ Gold growth rate refers to 1998-99 only. Gold output was zero in 1996 and increased to 6.4 percent of GDP in 1997 2/ Gold production was disrupted in 2002 and declined in 2005.



2

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Data refers to an average for Armenia, Georgia, Kyrgyz Republic, Moldova and Tajikistan.



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18. Services, gold and agriculture have been the main drivers of economic growth in the Kyrgyz Republic over the past decade. Growth relied primarily on agriculture in the 1990s (above 9 percent in 1996-1999) supplemented by the initiation of gold production (Table 1). After 2000, growth was dominated by services (driven by a growth of aggregate demand fuelled by remittances) at 6.9 percent compared with 1.9 percent from 1996-1999. For the same reason, construction has also been growing strongly since 2000, at an average of over 10 percent annually. In contrast the high agricultural growth rates of the 1990s declined to just 2.5 percent since 2000. While gold still contributes significantly to the balance of payments, it has had a negative overall impact on growth rates since 2000. 19. This growth pattern mirrors progress in the following economic reforms during the early years of transition: (i) tight monetary policy and reduction of inflation; (ii) public finance reforms including termination of direct budget subsidies; (iii) land reform and transfer of two-thirds of all land into private ownership; (iv) privatization of small and medium enterprises; (v) establishment of a two-tier banking system; (vi) initial tax, customs and licensing reforms; (vii) trade liberalization; and (viii) WTO membership in 1998.

Figure 2. Fiscal Performance in CIS 5, 1996-2005



20. The initial period of growth and Georgia 4 reforms was interrupted by the regional 2 financial crisis of 1998, which had a 0 disproportionate impact on the Kyrgyz 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 -2 Republic. This was partly due to the Tajikistan -4 Kyrgyz Republic’s close economic KR Armenia -6 linkages with Russia and the most liberal -8 Moldova trade regime in the CIS, but also low -10 capacity for coherent and timely policy -12 responses 3 . From 1998 macroeconomic -14 stabilization was renewed. However, weak institutions for implementing economic policy undermined the ability of the state to deepen structural economic reforms. Fiscal reforms were slower than in other CIS countries, which stabilized their fiscal accounts by 2000 while undertaking second generation reforms. The Kyrgyz Republic continued to run fiscal deficits around 10 percent throughout the late 1990s. Even in 2001 when the Kyrgyz fiscal accounts strengthened, through increased tax collection, its fiscal position remained weak compared to the other CIS comparators.

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21. Lower than expected growth and delayed fiscal adjustment resulted in longer and heavier reliance on foreign credits than in other CIS countries. The debt burden is high at over 70 percent of GDP in nominal terms in 2006 even after significant debt relief through two consecutive Paris Club restructurings. In 2005 the Net Present Value (NPV)

An example of this is the 1999 imposition of a 100% export tax on wheat and flour exports – so that the government could replenish their own reserves at lower price – which stopped wheat exports at a time when the som had recently depreciated, making Kyrgyz goods highly-competitive in regional markets.

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of debt to government revenues was 304 percent, making the Kyrgyz Republic eligible to seek debt relief under the HIPC, but strong revenue performance in 2006 has reduced debt ratios to below those required for HIPC eligibility. About 13 percent of government revenue was required for debt service in 2006, and even without HIPC and Multilateral Debt Relief Initiative (MDRI) debt relief, this will decline to around 10 percent in 2010. Had the Government decided to participate in the HIPC initiative, this would have been cut to about 4 percent of revenues by 2010. 22. Some reforms were partial and remain unfinished. Relative prices in non-tradable goods, particularly utilities, remain suppressed, hampering the gradual transformation of these sectors into profitable entities which generate savings and attract investments. Unlike in some other CIS countries, market signals continue to be distorted in the Kyrgyz Republic and resources are therefore only partially re-allocated to sectors with the highest potential returns, further hampering diversification of the economy. 23. In addition, the blurred distinction between public and private sector activity, poorly defined property rights in practice, and the absence of effective mechanisms for conflict resolution through the judicial system, both inhibit investment and contribute to pervasive corruption. According to official estimates, the private sector now accounts for 75 percent of GDP and 80 percent of employment. However, the amount of quasi public activities remains large, and many “private” businesses are linked to senior officials, thus creating a large informal public sector from which officials derive rents. 4

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24. The above fuels interference by public officials in the economy. There are numerous mechanisms for this including arbitrary decisions, multiple inspection, discretionary issue of licenses, delays in issuing permits and documents and even direct manipulation of prices of inputs and outputs. The response of the private sector is to operate informally. Responsiveness of the private sector to changes in formal policies, including tax cuts, is therefore small. It is estimated that about 53 percent of output is produced in the shadow economy. 25. Institutional weaknesses and widespread corruption in the public sector also diminished the ability and incentives of the public administration to act in the public interest and respond to the needs of the emerging private sector. This was the case in agriculture, where despite the liberalization of market and prices and an initial strong supply response to reforms, the absence of supplementary services, market access and shortsighted trade policies became a constraint for further growth and diversification, once the domestic market was saturated. In addition, the agricultural sector experienced a decline in its terms of trade, similar to other transition economies. In the absence of alternative sources of growth and employment in the economy, agriculture absorbed surplus labor released from other sectors and remained a low productivity activity. 26. In contrast to other similar CIS countries which adopted more liberal price and market policies and more rapid fiscal adjustment, gross domestic savings remained low,

4 ADB. Private Sector Development in the Kyrgyz Republic: Issues and Options. March 2007.



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while foreign savings have had to be gradually curtailed due to the growing indebtedness as a result of low savings. The slow pace of reform, particularly in the budget and public enterprise sector, is an important factor in both reducing corporate savings directly and reducing investment. Even the recent growth in remittances 5 (which estimates suggest may amount to at least 19 percent of GDP), was insufficient to guarantee an adequate level of gross national savings, as they have mostly been channeled to consumption. As a result, investment remains at only 20 percent of GDP and foreign direct investment has been channeled almost exclusively into gold mining which by its nature was less affected by market distortions.

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27. The Kyrgyz Republic’s close proximity to three fast growing countries (China, Russia and Kazakhstan) has provided an opportunity for the expansion of exports. Even after a decade and a half transition, production in the Kyrgyz Republic is mostly concentrated in non-manufacturing groups: primary agricultural goods (cotton, tobacco, hides and skins), electric power and gold. However, due to the above constraints, Kyrgyz’ export supply has not adapted well to the shifting demand in these markets for increasingly sophisticated and high quality food products and manufactures. Instead, a steady and growing flow of migrants has led to significant remittance flow into the Kyrgyz economy, mainly from Russia and Kazakhstan. C. Poverty and Inequality 28. Poverty remains high in the Kyrgyz Republic though extreme poverty is moderate. According to official government data for 2005, as defined by consumption per capita, an estimated 43 percent of the population lived below the poverty line and 11 percent in extreme poverty The poverty line is a national poverty line chosen on the basis of the food and non-food consumption pattern of the lower income group of the Kyrgyz population, and not based on international poverty lines. The unit of observation for poverty statistics is the individual. Almost three-quarters of the poor and extreme poor live in rural areas due not only to the higher proportion of the population living in this sector but also the higher prevalence of poverty: 51 percent of the rural population lived in poverty compared to 30 percent of the urban population. The incidence of poverty is over 50 percent in five out of the eight oblasts (Batken, Naryn, Osh, Jalal-Abad and Issyk-kul) - both in the northern and southern parts of the country. Poverty and low incomes are prevalent in those areas where geography (i.e., mountains), poor infrastructure and cross-border issues constrain access to markets. A large number of the total poor live in rural Osh and Jalalabad, which are the most populous oblasts. Bishkek has the lowest poverty rates estimated at 11 percent. 29. Economic growth has resulted in falling poverty over the last half-decade. In 2000 according to official government estimates, poverty was estimated at 63 percent of the population and over the next five years fell by a remarkable 20 percentage points –

According to the International Organization for Migration (IOM), some 300,000 migrant workers from the Kyrgyz Republic work in the Russian Federation; the number for Kazakhstan is 50,000 (Unofficial estimates are higher, at 400,000 – 700,000 in the Russian Federation, and 70,000 in Kazakhstan).

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though this may in part be a reflection of a change in surveys. Even over the last three years, for which comparable data are available, poverty responded strongly to economic growth: for every 1 percent increase in GDP per capita during 2003-2005, extreme poverty fell by 5 percent and overall poverty fell by 2 percent. The reduction in poverty has also been assisted by the decline in the real prices of utilities, which continue to be heavily subsidized and are far below their cost recovery levels. Much of the decline in poverty stems primarily from the fall in extreme poverty, especially in rural areas. Moderate poverty (the difference between overall poverty and extreme poverty) declined marginally from 33 percent to 32 percent and largely due to a decrease in urban moderate poverty rates. 30. Concurrent with changes in poverty, inequality has fallen slightly during 20002005. Official estimates of the Gini coefficient show a decline from 0.30 to 0.28 during this period. Inequality levels in the Kyrgyz Republic remain lower than in other ECA countries reflecting the welfare system of large social direct and indirect transfers. Direct expenditure on social protection has been high, though declining—20 percent of GDP in 1995 and 12 percent in 2001 and was topped up with indirect subsidies through utility prices estimated at 7-8 percent of GDP. Inequality in urban areas has seen the greatest improvement in this period though the sources of improvement require further analysis. This phenomenon may be driven by the greater employment opportunities available in the services sectors, greater access to subsidized utilities in the urban areas or due to the higher remittance income that has helped to raise incomes among the lower quintiles. 31. Both off-farm and on-farm income have been important to the reduction in rural poverty. The agriculture sector grew by an annual average of 2.6 percent during 20002005. The rural sector harbors many of the Kyrgyz Republic’s poor who are dependent upon their farm production for both their own household consumption and to generate income. Furthermore, in the early years of this decade, income from household production, livestock, and property sales was an important source of income for the rural population and more so for those in the lower quintiles. However, over time, earned income from labor or entrepreneurial activity has significantly increased in importance for the rural population and now comprises three-quarters of total income – indicating the growing importance of off-farm income in rural areas. 32. Poor domestic labor market outcomes linked to low output growth and little economic diversification have hindered a faster reduction in poverty and led to greater out-migration. Low wages, underemployment and outright unemployment are important explanatory factors of poverty in the Kyrgyz Republic. Almost half of the employed work in the informal sector – agriculture and services – where productivity and wages are low. Furthermore, a large share of the population in the lower quintiles suffers from under-employment which prevents them from increasing total income. Thus, it is not surprising that more able-bodied workers are leaving the Kyrgyz Republic to work abroad with the result that remittance income is becoming an important source of income for those remaining behind.



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33. Despite important gains in poverty and inequality reduction, the rate of improvement is likely to decelerate unless the economy can begin to create better – higher productivity – jobs. The Kyrgyz Republic’s growth has been too low for a country that must still achieve large gains before reducing the income gap with its neighboring countries. Without sustainable growth in wages and employment, the population will be held hostage to relatively low-productivity job environment thus constraining their future welfare. D. Progress Towards Achieving the Millennium Development Goals (MDGs) 34. The Kyrgyz Republic has a mixed track record in its progress towards achieving the national MDGs. It is unlikely that many of the MDG targets will be reached by 2015 if the country continues along its current path. The country can potentially achieve its targets on poverty reduction, universal enrolment in primary education and literacy, and ensuring environmental sustainability. However, the Kyrgyz Republic is a long way from achieving its targets on child mortality, maternal health and combating HIV/AIDS, TB and other infectious diseases and in providing safe drinking water. Problems of malnutrition and under-consumption persist, especially among rural children and women. In addition, considerable effort will be needed to achieve gender equality at the posteducation level. Making sustainable progress towards MDGs will require the development and implementation of a concrete plan of action and targeted investments in priority areas. 35. Enrolment rates in basic education in the Kyrgyz Republic are almost 95 percent, and the literacy rate is 99 percent. The 2003 household survey data show some disparity in the enrolment rates of school-age children (age 7-15) by household welfare, ranging from 88 percent for the poorest quintile to 94 percent for the richest quintile. However, over the past 5 years, the enrolment rate has been declining, coupled with the declining and uneven quality of education and a lack of qualified teachers in rural areas. The inability to provide good textbooks continues to be a pressing issue, as is the maintenance and development of school infrastructure. Their lack of access to quality education and opportunities for sustainable employment makes the youth one of the most vulnerable groups. 36. Healthcare reform in the Kyrgyz Republic has been ongoing for 10 years within the framework of the Manas National Healthcare Reforms (1996-2005). The implementation of Manas I resulted in the development of an internationally recognized primary healthcare reform model with the following building blocks: increasing the focus on primary health care and family medicine, restructuring service delivery and introducing a new healthcare financing model. Public healthcare facilities are now available throughout the country; although access of the poor to general medical services remains a significant issue due to high out-of-pocket costs. 37. There has been general improvement in health outcome indicators, such as infant (IMR), child (U5MR) and maternal mortality (MMR). Variation of the IMR and U5MR since 2004 can be explained by methodological changes in the calculation of the



9



mortality rates, with a move to internationally comparable methods. Additionally, the data for these indicators are extremely volatile from year to year: for example, the MMR reached 61 in 2005 and improved to 44 in 2006. Further, health statistics can often take several years to show improvements in response to reforms; and negative variations may reflect the under-funding of previous years. Ensuring universal access to qualified obstetrics and childbirth services is still a problem, especially in rural areas, as is access to preschool institutions and programs. Table 2: Progress toward the MDGs

Goals Radical reduction of extreme poverty Indicators 1996 19.1 39.9 57 (1998) 99.5 (1999) 91.6 (1990) 51.2 (1990) 46.5 6.7 (2001) 73 30 41.3 62.9 98.9 52.1/6.7 12.8 1 (1987) 4.75 0.2 6.2 7.7 118 (1991) 81.3 24 78 0.03 0.01 -0.28 -0.72 -0.79 2004 8.5 30.4 48.2 99.5 94.9 55.3 44.1 0 66.6 25.7 31.8 45 98.2 129.2/15.9 43.9 32 4.32 2.2 Extreme poverty level (% of population) Percentage of population below $2 a day (PPP) Percentage of undernourished population (30 100 8.5 10.4 15.7 100 52/7 12.8 >4.75 >1.9 3.5 >0.5 <2.4 <3



Performance On track On track Likely Likely Likely On track Unlikely Unlikely Unlikely Unlikely Unlikely Likely Unlikely Unlikely Unlikely Unlikely Likely On track On track On track Unlikely Unlikely Likely Unlikely Likely Unlikely Likely Unlikely



30 81.5 25.9 134 1.6 3.0 -0.83 -0.06 5.75 -0.92 4 5



* On a scale of -2.5 (the lowest point) to 2.5 (the highest point) ** On a scale of 1 (highest degree of democratic development) to 7 (the lowest level) *** Estimated by UNDP Kyrgyz Republic based on the technical note to the MDG Report for Europe and the CIS



38. The country has integrated national systems for combating HIV/AIDS, TB and other infectious diseases (including under the “Three Ones Principle” of the UN). Progress on reducing TB prevalence and slowing the rate of progress the HIV and AIDS epidemic over recent years is encouraging. Problems remain, particularly in prisons, and effective implementation of national strategies, together with continued donor support will be needed to meet the MDGs. Porous borders and increased drug trafficking increase the susceptibility of the country to HIV/AIDs, TB and other infectious diseases.



10



39. The Kyrgyz Republic can potentially reach the MDG targets for environmental sustainability. Progress on this front, however, has been very slow, largely due to the lack of political will and commitment to institutionalize and effectively implement measures for protecting the environment. Achieving the MDG targets on providing access to potable water and sewage facilities is an important area that needs effective policy measures and increased financial investments. 40. Gender equity has been maintained in the education system with adequate female participation at all levels of education. However, achieving gender equality remains a serious issue at post educational level; in fact, the Kyrgyz Republic has experienced an increased deepening of gender inequality since the fall of the Soviet Union. Women constitute 54 percent of the unemployed, and their wages make up 66 percent of those of men. Also, there has been a drastic decline in women's participation in decision-making processes and politics. Currently, there are no women members in Parliament, or in the national Government, and only one woman at the Ministerial level. 41. Progress towards achieving the MDG targets for the Global Partnership for Development is mixed. The country has shown considerable progress in the area of information and communication and will most likely achieve the targets. E. Governance and Corruption 42. As a result of weak capacity and poorly defined institutional responsibilities, mechanisms to resolve conflicts over policy are underdeveloped and the ability of the Government to effectively enforce policies and laws is limited. Within the civil service, extensive patronage networks and low pay have made it difficult to establish a professional merit-based civil service. Moreover, since the March 2005 revolution, in many institutions technocrats have been displaced by administratively inexperienced officials, and thus public administration has been weakened. It is only recently that the importance of a merit-based civil service has been recognized, and steps have been taken to implement reforms with regard to requirements for the competitive selection of civil servants. 43. Many of the potential benefits of a market economy have not been realized as businesses are subject to numerous inspections and requirements, with often different agencies inspecting the same aspect of the business. Tax regulations are numerous, inconsistent, and are constantly being amended. Inconsistencies in the tax code create opportunities for rent-seeking behavior by tax inspectors, auditors, and tax police. Political instability has also contributed to rent seeking through the redistribution of assets held by officials of the previous regime. In addition to endemic administrative corruption, there is widespread rent extraction through key state owned enterprises, particularly in the mining, energy and communications sectors, which undoubtedly creates strong interests opposed to reforms. Problems with governance and corruption have been exacerbated since the 2005 revolution.



11



Box 1: Doing Business in the Kyrgyz Republic Business rankings for the Kyrgyz Republic reflect its relatively advanced legal framework but weak enforcement. The World Bank’s doing business indicators, based mainly on an assessment of the formal legal and regulatory framework; rank the Kyrgyz Republic slightly below the average for the world, above most CIS countries in terms of ease of doing business. While the World Bank’s Doing Business Report 2007 rates the Kyrgyz economy as a relatively easy place to do business, the World Bank/EBRD BEEPS suggest a deterioration of governance.

Ease of... Doing Business Starting a Business Dealing with Licenses Employing Workers Registering Property Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts Closing a Business

T T HT



2006 rank 90 41 143 63 31 65 33 150 173 38 127



2005 rank 104 34 138 64 54 96 33 152 171 37 129

TH



Change in rank +14 -7 -5 +1 +23 +31 0 +2 -2 -1 +2



Note: 2005 rankings have been recalculated to reflect changes to the 2006 methodology and the addition of 20 new countries.



The 2005 BEEPS rated the Kyrgyz Republic highest in frequency of bribes, second-highest (to Azerbaijan) in the level of the bribe tax, and second-highest (to Albania) in the extent to which corruption is a problem for business. Moreover, two of the three indicators—the frequency of bribes and the extent to which firms see corruption as a problem for business—increased from 2002 to 2005, in contrast to the trends in most of the countries in the region.



Source: World Bank/EBRD Business Environment and Enterprise Performance Survey 2005.



44. According to the 2005 Business Environment and Enterprise Performance Survey (BEEPS), 59 percent of businesses cited corruption as a significant obstacle to doing business. This figure is the highest in the region and indicates a worsening compared to the 2002 survey. It was also ranked at 142 out of 163 countries on the 2006 Transparency International Corruption Index. Corruption covers a wide range of activities. In the provision of education and health services corruption has a corrosive effect and affects service delivery in these important areas. The new Government has



12



supported calls for a stronger line against corruption at all levels of government, but not yet implemented any new policies. 45. Despite the problems described above, the Kyrgyz Republic does have relatively liberal legislation in many areas, low formal government interventions, and a formally deregulated business environment. This environment has created a basis for a steadily developing business community that in turn has helped stimulate a buoyant civil society, opening the way for increased voice and accountability. Following the March 2005 revolution, civil society has consistently called on the authorities to fulfill their commitments to fight corruption and organized crime, and the authorities have in turn engaged in active dialogue with civil society. The mass media is freer now, and an environment of active political debate prevails. 46. Numerous initiatives, focusing largely on legal frameworks, have been undertaken in recent years included adoption of an anticorruption law, establishment of Councils on Good Governance (in 2003 and 2004) to advise on anticorruption policy, legal reform to improve the business environment, establishment of an anticorruption commission in 2005, and a law on the declaration of income and assets of high state officials, among others. However, there has been relatively little attention paid to implementation, capacity building, and upgrading of managerial skills. Practical enforcement and implementation have been slow, and in practice, these actions have not yet had significant impact. 47. Implementation of the Extractive Industries Transparency Initiative (EITI) to which the Kyrgyz Republic signed on in July 2004, is a potentially important measure. However, overly ambitious commitments combined with a lack of capacity have implied only partial compliance with the EITI. Nevertheless, the authorities have renewed their commitment to the EITI in the CDS and are receiving technical assistance in its implementation. III. THE COUNTRY DEVELOPMENT STRATEGY 2007-2010 F. CDS Development Vision and Priorities 6

PF P



F



48. The CDS for the period 2007-10, prepared by the Kyrgyz authorities, builds on the policy experience from the National Poverty Reduction Strategy (NPRS). The CDS is anchored on four pillars—growth-oriented economic development and improving the business environment, governance and transparency in public administration, human resource development, and environmental sustainability and natural resources management. 49. The CDS was prepared in a participatory manner, building on extensive consultations with a broad range of stakeholders, including representatives from



6

TP PT



Government of the Kyrgyz Republic, 2006. Country Development Strategy, 2007-2010



13



parliament, the private sector, and civil society organizations. 7 The JCSS development partners have likewise provided comments on the earlier versions CDS, but the vision and the spirit of the document remains that of the authorities. While recognizing that some CDS targets are overly ambitious, and/or in need of further justification, the JCSS partners share the right emphasis of the CDS on labor productivity, competitiveness, and governance improvement in achieving these targets. 8

PF FP PF F P



G. Growth-Oriented Development 50. The CDS focuses on consolidating the macroeconomic stability attained during implementation of the NPRS, to foster further growth and poverty reduction. Continued fiscal prudence should support long-term growth and help maintain macroeconomic stability. The primary deficit of the general government is expected to decline to an average of 2¾ percent of GDP during 2007–10, reflecting continued improvements in revenue mobilization and streamlining of expenditures. Success in improving the legal infrastructure and tax administration would yield higher tax revenues in support of the projected fiscal path. At the same time, fiscal savings will be sought through enhanced budget management and prioritization of spending. The CDS also identifies improving public financial management (through tax reforms and prudent expenditure management including better targeting of social spending) and improving governance as crucial for establishing a stable and transparent environment that is conducive to private investment. 51. The authorities are also committed to contain inflation in the low single digits and enhance financial intermediation. Inflation, which bottomed out at 2.2 percent in 2002, averaged 4.2 percent in 2003–06 and is expected to stabilize around 4 percent in the long term. At the same time, the National Bank of the Kyrgyz Republic (NBKR) plans to enhance the effectiveness of the payment system, champion legislative amendments to strengthen the legal foundations (including for collateral use and recovery in the case of default) for risk-taking, and step up bank supervision. 52. The CDS underscores the need to diversify the economy, given recent swings in productivity and growth stemming from performance variations in a single dominant industry—mining. 9 To achieve significant reductions in poverty, the CDS focuses

TPF FPT



The government launched the CDS preparation process in January 2006, and set up a working group comprising representatives from these various groups with an explicit mandate to update and extend the poverty strategy to 2010. This mandate involved drafting a poverty reduction strategy that reflects the renewed aspirations of the populace in the aftermath of the March 2005 “Tulip Revolution.” During the preparation process, the working group consulted development partners and representatives of the IFIs and completed a final draft of the CDS in December 2006 incorporating comments from a preliminary review by the IFIs. 8 A detailed assessment of the CDS, shared by the JCSS partners, is provided in the IMF-IDA Joint Staff Advisory Note (April 2007). 9 The CDS envisages the following measures for promoting diversification of the economy: measures directed at export promotion, including those of the agricultural processing enterprises and service industry; better understanding of the countries’ comparative advantages; proper regulation of the foreign investments process; reducing production and transaction costs and facilitating access to foreign markets for locally produced goods and services, improving customs-tariff policy and participation of the Kyrgyz Republic in formation of the single customs tariff of EurAsEc.

TP PT TP PT TP PT



7



14



reform efforts on sectors and industries that can provide the maximum cumulative contributions to GDP growth. The CDS envisages a target economic growth rate of 8 percent in 2007-08, and 8.5-9 percent in 2009-10. Nonetheless, it will be important to identify the right combination and sequencing of policies for attaining the required economic diversification; general improvements in the business environment could help in this direction. The focus will be on improving labor productivity, diversifying the economic base, pursuing a liberal trade policy and accelerated growth in key sectors described in succeeding paragraphs. 53. The CDS places a very high priority on the energy sector as an engine of growth, and broadly identifies the necessary policy and investment measures for further development of the sector. The objectives are to: (a) deliver a reliable, sustainable long term energy supply, while strengthening the sector’s financial situation by reaching cost recovery tariffs by 2010; (b) enable the sector to play its role in underpinning strong economic growth; and (c) ensure that the poor have the resources to pay for energy required to satisfy basic needs. The Government will also foster private sector participation in the energy sector. The cabinet has established a Ministry of Industry, Energy and Fuel which will be responsible for energy policy. Some decisions, such as a medium-term tariff policy, measures to improve financial discipline, and improve corporate governance and transparency have been taken recently, which shows a renewed commitment. 54. The CDS places a high emphasis on private sector participation. However, implementation of the chosen policies and measures—which are not new—remains a concern, especially given the lack of legal framework, political consensus on private sector participation, etc. The desired investment levels are too high at US$3.5 billion for the energy sector alone, and the country would be extremely fortunate to mobilize perhaps a tenth of such amount. 55. To enable the mining sector to play its rightful role in spurring strong economic growth, the Government is committed to creating a suitable legal and regulatory environment that provides security of tenure through an efficient licensing system for local and external investors. The CDS proposes new legislation that will create transparency in the sector in the award of concessions as well as the regulation and supervision thereof and the adoption of a fiscal regime consistent with international norms. Publishing audited financial reports of state revenues originating from the mining sector in accordance with the country’s obligations under the EITI will lend credibility to the Government’s stated commitments. 56. The CDS focuses on agriculture as a key sector for output and employment. The Government is committed to completion of land reforms and new legislation in support of agro-processing industry development. Irrigation is a critical input for profitable and market oriented agricultural production, but is dealt with very briefly in the CDS. In addition, specific proposals in the document bear no apparent relevance to their underlying goals and do not take into account the institutional weaknesses and lack of the resources needed to implement them.



15



H. Improving Governance and the Business Environment 57. The CDS places improving governance high on the agenda, and on fighting and reducing corruption in particular. It recognizes that a principal constraint on economic development is corruption. Government ineffectiveness and poor performance in delivering basic social services will be tackled by undertaking political reform, deregulating the economy, effective public administration, and legal reform. A key element is the creation of an impartial and effective judicial system. The CDS envisages moving away from authoritarian approaches in public governance and a transition to a genuinely democratic management model in partnership with civil society. Fiscal decentralization will be pursued actively, including by giving local communities greater authority over spending priorities, and strengthening their budgets so that poverty reduction can be achieved more effectively on the ground. 58. Policies and actions will focus on creating a favorable business environment that supports private sector development and an investment climate that will attract foreign investment. Reforming the tax system, including lowering taxes, increasing the tax to GDP ratio, improvements in tax administration to minimize harassment of taxpayers and boost compliance, and improving the efficiency of customs administration will be priorities. In addition, continued effective financial sector supervision to forestall risks and boost financial intermediation would be necessary to underpin improvements in the business climate. The authorities plan to use the Public Investment Program (PIP) as a key vehicle to channel resources to the infrastructure that will help development of the agricultural, industrial and social sectors. 59. The CDS recognize the importance of public administration and civil service reforms and the necessity of building an effective and professional Government to ensure a favorable environment for private sector development and economic growth. The document includes a range of activities, such as optimization of the Government’s structure based on functional reviews, cadre rightsizing, and strengthening capacity of civil servants. However, the Government has conducted such horizontal functional reviews of all ministries and agencies in the past with some support from donors, but failed to implement the most critical recommendations of these reviews. I. Human Resources Development 60. The CDS recognizes that the future of the Kyrgyz Republic is dependent on the quality of its labor force and the well-being of its population. Human and social development priorities in the CDS include access to increased and affordable education and health services; favorable living conditions with access to water, sanitation and basic social services, and social protection for vulnerable groups in the population. However, the authorities will need to translate these rather broad policy statements into a set of time-bound actions with adequate allocation of resources in the context of the annual budgets, with a clear and appropriate pro-poor focus.



16



61. The CDS summarizes key issues facing the health sector and how the Government’s comprehensive Manas Taalimi plan will address this during the CDS period. The country has shown strong performance on health reform over the part 10 years, and the Government is committed to continued good performance on budget planning and execution that will broaden and deepen these efforts to address the remaining issues in this sector, including achieving the health-related MDGs. The Government is also committed to continue the upward trend in overall financing for the sector to compensate for the declines witnessed from 2000 to 2004. 62. The CDS lays out a series of important tasks facing the education sector. It identifies providing access and improving the quality of basic secondary education provided, including the availability of good textbooks and appropriate school infrastructure. The Government intends to bolster targeted support for children from vulnerable households, and gradually increase financing of primary/secondary education, while introducing a capitation financing model that incorporates minimum standards. The Government is committed to raising expenditure on education from 4.9 percent of GDP in 2005 to 5.5 percent of GDP by 2010. 63. The CDS correctly identifies poor targeting as one of the main problems in the social assistance system. Consistent with good international practice, the Kyrgyz Republic had implemented a system to identify low-income households - the Unified Monthly Benefit (UMB)—providing guaranteed minimum income to 534,000 persons (10.4 percent of the population) in 2005. An improved UMB methodology has been submitted for parliamentary approval, and its implementation would improve targeting and reduce beneficiaries by at least 15 percent, using the savings to increase benefits. 64. The analysis of environment sustainability in the CDS—the fourth pillar— identifies many issues including the risks of natural disasters from earthquakes, mudslides and avalanches (the latter two linked to the problem of deforestation) and the threats to health from uranium tailing and other hazardous wastes. A key government priority is the appropriate management of natural resources. However, the links to economic and social development are less well articulated. J. Results of and Lessons Learned from NPRS Implementation 65. The CDS builds on the results achieved during the implementation of the NPRS. Solid results were achieved in poverty reduction, as described in the section on poverty and inequality. The Government’s record on improving governance has been weaker that what was hoped for. Measures to increase efficiency, transparency and fiduciary controls within the public sector have proceeded reasonably well at the technical level, but commitment to drive through core policy reforms—particularly with respect to corruption and civil service reform—has decreased considerably. 66. Two key lessons became apparent during the second review 10 of NPRS implementation: (i) the need for sound resource planning and mobilization, and (ii) the

TPF FPT



10

TP PT



Government of the Kyrgyz Republic. Second Review of NPRS Implementation, 2006



17



need for an effective monitoring mechanism. The NPRS and the policies to implement it were not linked strongly enough to the state budget and resource planning. Government and donors also need to become more outcome focused, through the adoption of a common monitoring framework, and link sector reforms and investment operations much more closely with the national budget process. 67. The reform agenda, particularly with respect to energy, the civil service and the business environment, was too complex and overly ambitious in an environment of limited political will. Implementation in most sectors has been weak; however, there have been good results in the areas of health and social protection, community managed development, land registration and irrigation. Significant improvements in donor coordination notwithstanding, projects and programs being spread across too many areas, adversely impacted implementation capacity. Greater government ownership, along with better cross-sectoral diagnosis in areas such as investment climate, improved service provision and public sector transparency is crucial. 68. This experience suggests that the most useful interventions will be those that support basic reforms rather than second or third generation reforms where institutional capacity has not yet been developed. Thus, greater selectivity is called for, both in the areas of engagement and between donor programs, that do not place a heavy burden on the Government. It is also important that a very careful examination of institutional arrangements such as the establishment of Project Implementation Units (PIUs) or policy units staffed by consultants be undertaken before interventions are agreed to with the Government. K. Monitoring and Evaluating Progress of the CDS 69. In identifying approaches for mitigating poverty and social deprivation, the CDS sets up benchmarks consistent with the MDGs. The CDS has enhanced the mechanisms for monitoring and evaluating progress, although these are still not fully articulated; the strategy includes plans to involve civil society and development partners in evaluating progress during implementation. 70. Monitoring indicators for the CDS concentrate largely on macroeconomic outcomes, governance and business environment outcomes. In addition, there are monitoring targets in some of the production sectors, such as agriculture and energy, which will assist in implementing the CDS. The CDS also proposes monitoring of the strategy both through official channels and by civil society.



18



IV. DEVELOPMENT CHALLENGES AND OPPORTUNITIES 71. Drawing on the analysis in the preceding sections, a number of key challenges emerge that need to be addressed and overcome. First, shoring up political commitment and country ownership of the reform agenda will be crucial. Second, capacity— resources, technical and implementation capacity—will need to be developed. Third, prioritizing and sequencing the implementation of the reform agenda will have to be worked out in each of the priority areas identified by the Government. The following paragraphs outline in greater detail specific challenges that the Government faces and will have to address in implementing the CDS. (i) Supporting Growth over the Long-Term



72. A key macroeconomic challenge for the Government is to overcome the remaining structural weaknesses of the economy and to move toward sustained output growth. The Government is committed to reduce the general government primary deficit to an average of 2.7 percent of GDP during 2007–10, reflecting continued improvements in revenue mobilization and streamlining of expenditures. During the JCSS period, assuming the reforms outlined in the CDS are implemented, growth is expected to average 5 percent supported mainly by a recovery of the gold sector and continued growth in services. Growth in external aggregate demand fueled by continued benign economic conditions in neighboring Russia, Kazakhstan and China would help maintain export growth and the flow of remittances. Acceleration of export growth should help reduce the external current account deficit.11

TPF FPT



73. The debt sustainability analysis suggests that debt ratios are likely to improve over time. However, this will take place gradually, despite the Government’s decision not to seek HIPC debt relief, assuming that macroeconomic targets can be maintained and crucially, that structural reforms facilitate growth of GDP and government revenues. It is estimated that using data for the end of 2006, the NPV of debt to government revenues had already declined to 240 percent (below the HIPC eligibility threshold). Nevertheless the debt outlook remains highly vulnerable to exogenous shocks or reversal of the prudent macroeconomic policies. 74. In the event of strong implementation of structural reforms it is possible that high productivity growth—stemming from improvements in resource efficiency that result from correcting relative price distortions and improvements in the business climate—will provide additional stimulus to output growth and non-gold exports. Reforms that are envisaged to promote diversification and boost long-term competitiveness include (i) developing the necessary infrastructure to support private sector activity particularly in the area of trade and agriculture; (ii) reducing regulatory burden on the private sector;



11

TP



The current account deficit has recently increased considerably. While imports increased rapidly and gold exports somewhat declined, the current account deterioration may partly reflect a revision in the statistical series on shuttle trade, which is mirrored by a large increase in net financial capital inflows, including errors and omissions. Also, recorded remittances maybe underestimated.

PT



19



(iii) strengthening the judiciary and championing legislative amendments to strengthen the rule of law and property rights. 75. The Kyrgyz Republic can further extend its growth potential over the medium term if it revitalizes reforms in the key growth generating sectors. Agriculture remains the strongest component of the Kyrgyz Republic’s economy and should remain an important focus area for the future.It is also the most important sector because of its essential role in providing employment, food security and consumer price stability. Since 1996, the agricultural sector has been characterized by a reduction in subsistence food orientation and the emergence of commercially oriented peasant farms. These small family farms have been the engine of agricultural growth, and in a supportive policy and public investment environment their contribution could increase further. 76. There is considerable but largely unexploited potential for the development of agri-businesses in food, cash crops and horticultural processing, and in inputs for light industry. This will require diversification towards high value-added production and a wider range of better quality processed products. The Government has outlined various policies for promoting agricultural development, including measures to strengthen private property rights in land ownership and facilitating the sale and use of land as collateral. Irrigation services and water resource management will likely be decentralised and privatised to local users. Experience suggests that farmers and local communities are willing and capable to assume responsibility for many aspects of local development. The growing role of Water Users’ Associations (WUAs) in irrigation and the response of farmers to opportunities provided by the formation of service cooperatives are further evidence of that willingness and capacity. Recent sector studies 12 have underscored the importance of a vigorous development of the non-farm rural economy.

TPF FPT



77. Major reforms are still needed in the utility sector to put it on a sound financial footing. The Kyrgyz Republic has considerable energy resources. Its hydroelectric resources are of the order of 26,000 MW of which only about 10 percent is exploited; it also has coal reserves in the order of 1.2 billion tons. In addition, the country has a developed electricity transmission and distribution system that has ensured that 100 percent of the population has access to electricity. Premised upon progress in implementing the Government’s energy sector reforms, it may attract Foreign Direct Investments (FDIs) to finance construction of new hydroelectric stations and transmission lines to potential export markets in South Asia. The first step in tapping this potential will be to undertake the financial and technical rehabilitation of the domestic electricity sector to restore its viability. The energy companies have accumulated a huge amount of debt—leading to a quasi-fiscal deficit amounting to 7.6 percent of GDP in 2005—that needs to be resolved. Actions to reduce losses both financial and technical, and improve cash collections—through a combination of policy and investment measures—will be necessary to attract the considerable financing that large projects will require. Critical actions in the CDS period that focus on financial rehabilitation of the sector could lay the foundation for the longer term growth.

12

TP



Government of the Kyrgyz Republic, Agricultural Sector Strategy, 2006 (prepared with ADB assistance); World Bank: Agricultural Policy Update and Livestock Review

PT



20



78. To take better advantage of the potential of the country’s mineral resources, reform needs to continue in the mining sector. The CDS identifies the mining sector as another potential area for supporting long-term growth if FDI can be attracted to exploit new gold deposits (e.g., at Jerui), rare earth minerals and sub-surface resources. The development of a robust mining industry is perceived as key to economic development and the social welfare of the population in mountainous areas. The task (which is a difficult one) is to enact new legislation and adopt a fiscal regime consistent with international norms. 13 Publishing audited financial reports of state revenues originating from the mining sector in accordance with the country’s obligations under the EITI will lend credibility to the Government’s stated commitments.

TPF FPT



79. Continued improvements to the lending environment that expands access to finance are necessary, as the level of financial intermediation remains low. The Government needs to design and implement a comprehensive financial sector policy and institutional reform that focuses on the following priorities, among others: (i) strengthening the financial sector supervisory framework; (ii) adoption of international standards of governance for financial intermediaries as well as full disclosure of beneficial ownership; (iii) strengthening deposit taking institution through increasing minimum capital requirements: (iv) weaning micro-credit institutions away from a reliance on concessional funding towards market-based funding; (v) developing access to alternative financing instruments for Small and Medium Enterprises (SMEs), including equity markets; (vi) reforming the legal and regulatory framework for insurance, and (vii) supporting a voluntary funded pension pillar. Table 3: Summary Financial Sector Statistics for Selected Transition Economies a

P P



Country Kyrgyz Republic Armenia Azerbaijan Kazakhstan Mongolia



No. of Banks



Interest Spreadb

P P



NPLsc (% of total loans)

P P



No. of Credit Unions



Broad Money



Bank Assets



Bank Insurance Deposits Premium % of GDP 8.6 6.0 12.0 30.0 39.0 0.2 0.4 0.8 0.7 0.5



Equity Market Cap.



19 20 42 35 17



22.6 14.0 8.9 9.0 11.2



7.0 7.2 8.2 13.1 11.0



306 — 28 52 570



18 15 18 21 47



19 19 18 49 61



1.5 0.8 0.1 7.5 1.4



Uzbekistan 33 3.5 1.5 — 9.3 37.8 2.1 0.3 4.4 GDP = gross domestic product, No. = number, NPL = nonperforming loan. a Data in Table 3 is for 2003 or 2004, depending on availability. b Difference between average lending rate and average deposit rate, as published in International Financial Statistics. c Official figures provided by national banking sector supervisory bodies. Independent estimates for Uzbekistan are much higher. d Calculated as the total capitalization of the most actively traded companies listed at the stock exchange. Sources: National Authorities, International Monetary Fund (IMF) International Financial Statistics, Financial Sector Stability Assessments, Article IV Consultation Reports, and European Bank for Reconstruction and Development (EBRD) Transition Report 2004.

P P P P P P P P



13

TP



Recent hearings and approval in the first reading by Parliament of the draft law on the gold mining sector have raised concerns on the side of the business community over the risks of expropriation and feasibility of future investments in mining sector. These concerns were expressed by the business community to the authorities in April 2007.

PT



21



80. Deepening and diversifying the financial sector and improving access to credit is a critical path to achieve rapid growth. As of June 2006, there were only 232,900 bank accounts for a population of 5.1 million people. The assets of banks and non-bank credit institutions were 22 percent and 4 percent of GDP respectively in 2005. The turnover in the payment system is low, at 1.45 times GDP in 2005, compared to 5 times GDP in middle-income countries and a turnover equivalent to GDP every three to five days in the high-income industrialized economies. 81. Effective measures must be taken to properly maintain the road network in the Kyrgyz Republic with limited resources. Due to fiscal constraints, funding for road maintenance has been inadequate since 1991. Consequently, only 11 percent of the current network is in good condition, while 51 percent is in poor to very poor condition 14 requiring immediate strengthening or rehabilitation. Under the present maintenance funding regime, the road network will continue to deteriorate, resulting in significant increases in vehicle operating costs and travel time.

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Table 4: Annual Funding Requirements for Road Maintenance

Type Routine maintenance on primary roads (5,697 km) Routine maintenance on intermediary roads (5,093 km) Routine maintenance on local roads (8,059 km) Emergency repair Design and administration (10%) Total Total Cost ($ ‘000) 3,850 2,470 403 2,000 870 9,593 510 Unit Cost ($/km) 680 485 50 Not available



Source: ADB. 2005. Technical Assistance to Kyrgyz Republic for the Institutional Support in the Transport Sector. Manila.



82. The priority actions in the transport sector should include broadening financial resources, prioritization of the road network and the introduction of preventative maintenance management. 15 Active participation in the Central Asia Regional Economic Cooperation (CAREC) program and other regional cooperation initiatives such as the Shanghai Cooperation Organization (SCO) will be necessary. Priority needs to be given to (i) improving regional transport corridors; (ii) improving border facilities; (iii) harmonizing and simplifying cross-border transport regulations, procedures, and documentation; and (iv) building transparency and the capacity and transparency of border officials. 16

TPF FPT TPF FPT



14

TP



Core Road Network Survey and Strategic Economic Analysis. World Bank, 2005 (unpublished). Government of the Kyrgyz Republic. Roads Sector Strategy. Draft March 2007 (prepared with ADB assistance). 16 ADB. Central Asia Regional Economic Cooperation Strategy and Program Update 2006-08. Manila. 2005.

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15

TP



PT



TP



PT



22



(ii)



Building a Transparent and Reliable Institutional Framework



83. Dealing with poor governance (and corruption) will be fundamental to achieve sustainable growth in the Kyrgyz economy. The two critical challenges that have to be addressed in moving the growth agenda forward will be in developing a coherent policy making framework, and—perhaps more importantly in the short to medium term— addressing issues of property rights and rent-seeking that inhibit investment and output growth. 84. To improve government effectiveness, establishing mechanisms at the center of Government to resolve conflicts over policy are essential, so that while there may be divergent opinions, coherent policy formation is still made possible. Mechanisms also need to be put in place for translation of government policy choices into law, ensure that the laws and regulations are relatively unambiguous and non-contradictory, and that the state has more effective mechanisms for implementing them. 85. Since independence, the Government of the Kyrgyz Republic has struggled with vested interests, particularly those of high-ranking officials who systematically undermined ownership of reforms. Public administration reform that threatened the power patronage and rents of senior officials was systematically opposed and manipulated. Similarly reforms in the energy sector were also undermined and opposed by officials. To fight and reduce corruption, the Government needs to begin to confront these entrenched interests, eliminate the ambiguities and arbitrary powers delegated to officials. It also needs to effectively separate economic and political interests of the many senior officials in some of the key sectors of the economy, including particularly power generation, banking, gold mining, and transport and communications. In this respect transparency in these sectors will be fundamental, but will have little impact unless there is strong political will to oppose vested interests and ensure that individual ministers, members of Parliament and other high-ranking officials are no longer able to oppose changes that threaten their own business interests. 86. One of the key tasks going forward is ensuring transparency and accountability of the civil service. The Government has begun to implement the legal framework for competitive and merit-based appointments to the civil service. An important aspect will be to ensure that due process is followed in all appointments and dismissals. Another important step in promoting accountability will be the publishing of income and assets declarations by high level state officials in the mass media. 87. Resolving many of the difficulties of budget execution will reduce rent-seeking opportunities and corruption. While the Medium Term Budgetary Framework (MTBF) has been partially successful in meeting priority needs, the Government is planning to improve budget execution through its Public Financial Management Action Plan. It is also updating the budget classification and including a more precise definition of povertyrelated expenditure in line with the CDS. In addition it is introducing sector-level



23



MBTF’s in five ministries—health, education, agriculture, labor and social protection, and transport—to facilitate alignment of budget allocation with sector priorities. 88. One of the key problems identified in all aspects of institutional reforms and governance is the so-called implementation gap. The Government is taking some action to address this important issue, with a limited civil service reform program focusing on merit-based appointments and promotions. There have also been some attempts to take forward the recommendations of a series of functional reviews; however, the outcomes have been patchy. 89. A sustained effort to create a more conducive business environment and eliminate key governance shortcomings that hamper domestic and foreign investment is crucial. 17 Regulations that have emanated from different ministries and agencies need to be rationalized. Recent assessments by donors have highlighted a number of priority measures 18 , including lowering administrative barriers (taxation and inspections), enforcement of creditor and property rights, modernizing the customs regime (reducing clearance and other border delays), reducing and rationalizing the licensing and permits regime and targeting investments in infrastructure that promote trade and development. It has been estimated that lowering trade barriers and costs by 50 percent would increase GDP by an estimated 55 percent over 10 years 19 .

TPF FPT TPF FPT TPF FPT T



Figure 3.

T T



Figure 4.

T



90. The legal inconsistencies that undermine regulatory reform process in the Kyrgyz Republic need to be addressed. In many instances, the regulatory and legal changes contradict existing legislation without specifically stating the hierarchy of legal and normative acts. The entry mechanisms for enterprises are not particularly cumbersome, but existing and running businesses often face difficulties from licensing requirements and inspections, excessive regulation, and overlapping functions on ministries and enforcement agencies. All of these inconsistencies and requirements allow opportunities for corruption.



17

TP



ADB. Private Sector Development: Issues and Options. March 2007. World Bank – Kyrgyz Republic Country Economic Memorandum: An Integrated Strategy for Growth and Trade, June 2004 19 United Nations Development Programme (UNDP) – Central Asia Human Development Report 2005

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18

TP



PT



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24



91. Legal and judicial reform targeted at better contract enforcement and the institutional strengthening of agencies and professional services will ensure predictability, efficiency and transparency of law enforcement. Currently, reform of the judicial system is not high on the political agenda, despite wide and deep criticism of the system. Such reform should include (i) improving court infrastructure and court management and administration; (ii) facilitating the timely disclosure and publication of court decisions; (iii) building the capacity of judges and the legal profession and (iv) supporting enforcement services (police, tax and customs administration, etc.). While overall legal and judicial reform will take a number of years, a system of alternative dispute resolution should be adopted to allow for impartial, fair and rapid dispute of commercial disputes which would support a more rapid growth of the private sector. 92. A more coordinated cross-sector approach that increases the scope of potential interventions to support private sector development is needed. Private sector development depends as much on contract enforcement (an effective judiciary) as on enterprise access to reliable physical infrastructure (roads, efficient energy supply) and transparent and efficient administrative services (customs and border administration). With better logistical and higher value-added service infrastructure (financial services, processing and packaging, etc) higher revenues could be generated from current and future trade and transit flows. Strengthened regional trade cooperation could expand access to regional or new markets. (iii) Improving Public Service Delivery



93. The Kyrgyz Republic is currently off-track on achieving the health-related MDGs, and several important issues remain to be addressed during Manas Taalimi implementation in the CDS period. The importance of addressing human resource constraints in the health sector, including the internal and external migration of health workers, rural-urban imbalances in health worker availability and the declining quality of medical education cannot be understated. Ongoing attention will also be required to ensure fiscal balance in the government’s commitments under the State Guaranteed Benefit Program; this can be done by avoiding ad hoc, fiscally unsupportable decisions to expand entitlements without ensuring the availability of additional resources to cover them. 94. Clearly, greater progress needs to be made on poverty-related health issues. In addition there are regional disparities across the country in service utilization and access to affordable medicines, exacerbated by the increase in out-of-pocket expenses as a share of household resources (from 4.7 percent to 7 percent per capita in 2001-04). Under the Health Sector-wide Approach (SWAp), the authorities are committed to increase national budget allocations to the health sector gradually from 2.5 percent of GDP in 2006 to 2.75 percent in 2007 and 3.5 percent by 2010. 95. The Kyrgyz Republic is on-track to achieve the MDGs in education. However, several hurdles remain, including limited financing for education, inefficiencies in the use of resources, and the decline in the quality of education at all levels and in the enrollment



25



in upper secondary education. A key priority will be to target poor, rural and disadvantaged schoolchildren to ensure universal access to quality education. Expanding a network of alternative preschools is an important measure for increasing access to preschool programs. The possibility of a SWAp for the education sector is under serious consideration. 96. Curriculum modernization is a pre-condition for improving the quality of education. The development and implementation of a revised curriculum requires a new generation of textbooks and learning materials. The shortage of teachers in rural schools, the aging of the teaching corps, the inability of the system to provide adequate in-service training, outdated teaching techniques and learning assessments and the limited use of information and communication technologies are some of the constraints that need to be addressed to improve the quality of education. 97. Early reforms in the social protection system included the introduction of a notionally defined contribution pension system, monetization of privileges and moderate changes to the main poverty benefit—a Unified Monthly Benefit (UMB) Scheme. The Government is making serious efforts to improve the system and its administration to improve targeting, but much work remains. Taking a comprehensive view of social protection that links multiple areas rather than addressing them in fragmented fashion (i.e., avoiding separate social protection mechanism for different sectors such as energy) will be central to any approach. Strengthening the capacity of implementing agencies— the Ministry of Labor and Social Protection for social assistance programs and the Social Fund for pensions—will be important for having real impact on the ground. 98. Due to population aging, an increasing dependency burden poses serious longterm sustainability issues for the pension system in the absence of remedial measures. Moreover, the current system is financed by a high payroll tax, which the authorities plan to continue reducing gradually in order to stimulate employment. The Government intends to develop a reform program consistent with fiscal sustainability, the mobilization of private savings, and long-term growth, with technical assistance from the World Bank, based upon a comprehensive assessment of alternative options: for example, strengthening the link between contributions and benefits, introducing a funded and transparently managed pension pillar, or greater flexibility in retirement ages, with appropriate adjustments in benefits or contributions. Strengthening Regional Cooperation 20

TPF



(iv)



FPT



99. Increased cooperation among the Central Asian republics stands to produce big gains for the people of the region. The benefits from reducing trade costs, increasing remittances from migrant workers, and more efficient use of water and energy resources could generate a regional economy twice as large and well off 10 years from now. The price of non-cooperation could also be large, a heavy toll extracted from the spread of disease, lost economic opportunities, natural disasters and environmental destruction, as

20

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UNDP 2005 Central Asia Human Development Report



26



well as conflict and insecurity. Both costs and benefits will be felt most among the region’s poorer populations. 100. The Kyrgyz Republic is an active member of a number of regional organizations, including the Eurasian Economic Community (EurAsEC), the SCO and the CIS. The Kyrgyz Republic is also an active member of the CAREC program led by the ADB and supported by other multilateral institutions. 21

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101. Since 1991, the country has been developing extensive economic and trade relations with its neighbors and the Russian Federation. Exports to Kazakhstan, Russia, Uzbekistan and the People’s Republic of China account for almost half of total exports and just under 15 per cent of GDP, mainly in the form of construction materials, textiles, agricultural products and energy (electricity). Facilitation of trade and transit, and the establishment of effective transport and energy networks are the main focus of the country’s regional economic policy. While opportunities for quick “win-win” situations appear to be relatively few, concerted efforts to prioritize and exploit them can yield good results. Perhaps the greatest prospects for quick win-win initiatives at the regional level appear to be in electricity trade 22 . Successful exploitation of such opportunities for bilateral trade will build a track record of cooperation and momentum for larger-scale initiatives. There are also possibilities for one or more “bold stroke” projects with large benefits for a number of countries and significant private sector participation. 23

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102. Strengthened relations within the region help create a positive investment climate and facilitate trade, tourism, business enterprise and other developments essential for creating productive employment and reducing poverty. Despite the Kyrgyz Republic’s own liberal trade policy, difficulties with border crossing, customs clearance, and unofficial charges make trade with neighboring countries – and transit trade to more distant markets – difficult, and undermines the competitiveness of Kyrgyz products (see Box 2). 103. The country’s economic dependence on imports of oil and gas from Kazakhstan and Uzbekistan further underscores the importance of effective regional economic cooperation. Similarly, the need for cooperation in the use of the regions trans-boundary water resources is important so that the Kyrgyz Republic receives adequate compensation for the operation and maintenance of water storage services and to mitigate the risks of regional environmental disasters such as receding of the Aral Sea’s shores.



CAREC is an initiative to encourage economic cooperation in Central Asia, and it includes Afghanistan, Azerbaijan, PRC, Kazakhstan, Kyrgyz Republic, Mongolia, Tajikistan, and Uzbekistan as participating countries, and is supported by ADB, EBRD, IMF, Islamic Development Bank, UNDP, and World Bank. Begun in 1997, the program has so far focused on regional initiatives in transport, energy, trade facilitation, and trade policy. 22 World Bank 2006, Economic Cooperation in the Wider Central Asia Region, Working paper No. 75 23 The Urumqi Declaration adopted by Afghanistan, Azerbaijan, PRC, Kazakhstan, Kyrgyz Republic, Mongolia, Tajikistan, and Uzbekistan at the CAREC’s 5th Ministerial Meeting in October 2006.

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Box 2: Transport Corridor Performance Measurement The performance measurement methodology for road corridors is based on the principles of the Bankdeveloped trade and transport facilitation methodology applied in South-Eastern Europe (TTFSE). For the purposes of the corridor measurements, the measured corridor had to be considered in its totality and the pilot sites comprising that corridor were to include all border, inland and roadside checkpoints where any processing was taking place. A performance measurement pilot was designed, and the methodology was particularly tailored for road corridors in Central Asia. It was tested with the active participation of local counterparts, including the private sector, in March 2006, on the pilot corridor Bishkek (KGZ) – Almaty (KAZ) – Petropavlovsk (KAZ/RUS border). After adjusting the methodology, the approach was expanded and measurements carried out in April 2006 on to two other major road corridors involving China-Kazakhstan-Kyrgyz Republic: Khorgos-Almaty-Bishkek-Osh and Khorgos-Almaty-Chymket-Saryagash. The main findings of the pilot exercise were as follows: • The longest customs processing time recorded at the border crossing: 27 hours • Non customs processing time at the border crossing: 5.2 hours • Total number of inspections: 665 times for 112 vehicles • Transport inspection: 149 times • Road police: 256 times • Customs: 144 times • Ecological inspection: 33 times • Other: 83 times • Total payments made along the corridor: US$153 official and US$2,018 unofficial • Average duration of each roadside check: 24 min • Average payment at roadside check: US$14 official and US$114 unofficial

Source: World Bank, Trade and Transport Facilitation in Central Asia: Transit Corridors Performance Measurement, June 2006



104. The rapid spread of tuberculosis and HIV/AIDS, and the impending threat from other communicable diseases such as Avian flu, can be more effectively countered through cooperation across the region. The UNDP concluded in a recent report 24 that the increase in communicable diseases in Central Asia represents one of the most critical health problems facing the countries. Given that the target date for achieving the MDGs is set for 2015, it is likely that the Central Asia region will not be in a position to meet health targets unless effective approaches are adopted soon 25 . A further point of tension, associated with Intra-Venous Drug Use and HIV/AIDS, is the increasing flow of drugs from Afghanistan.

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(v)



Implementation Challenges and Strategic Choices



105. Given the fractured politics and weak country ownership, efforts should be made to build consensus for reforms through extensive dialogue and broad consultation. Given

24

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UNDP, 2005. Central Asia Human Development Report. Bringing down barriers: regional cooperation for human development and security 25 Millennium Development Goals for Health in Europe and Central Asia, World Bank Working Paper No. 33, June 2004, and Millennium Development Goals, 2005: Progress and Prospects in Europe and Central Asia, World Bank

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current capacity and institutional constraints, the proposed reforms will have to be modest and sequential, focusing on step-by-step improvement over a long period of time with a focus on tangible results. For effective implementation of the CDS, the Government faces some key strategic choices that are outlined in the following sections. 106. Policies that have a visible impact as perceived by beneficiaries are more likely to generate broad public support for reforms. Skepticism towards the Government and development partners highlights the importance of engaging with and supporting nongovernment stakeholders to build greater demand for reforms. The key will be to initiate sustainable reform processes that will provide a catalyst for broader reforms, and build champions for them among the public. 107. Within each of the four pillars of the CDS the Government will have to identify the most pressing needs and make strategic choices that build upon the lessons learned and experience acquired from implementing the NPRS. • To achieve sustainable economic growth over the long-term, two overarching challenges will have to be addressed: debt sustainability and economic diversification. On the first challenge, any economic program will have to address the issue of the sources of financing development, whether through a tighter fiscal stance, measures to encourage domestic savings or the search for alternative sources of external finance. The second strategic choice is between an approach which confronts vested interests, introduces clear boundaries between the public and private sectors, promotes transparent market price setting and enforces property rights or the one which favors vested interests of those linked to the power structures at the expense of wider economic development. Two analyses—one by the International Crisis Group 26 and the other sponsored by DfID—underscore that the Kyrgyz Republic has been subjected to a progressive fragmentation of authority, characterized by regional rivalries and a blurring of the boundaries between criminal, economic and political life. The continuing turbulence in the aftermath of the “Tulip Revolution” has brought these realities to the surface. Under these conditions, far-reaching governance reforms are neither feasible nor likely to show results in the time horizon of the CDS. The urgent need is for actions capable of contributing rapidly to greater perceived legitimacy of state institutions.

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•



•



There is an urgent need to stem the deterioration in key infrastructure and social services that will reduce non-income dimensions of poverty. Systemic reform is critical, particularly in improving service delivery for making progress on those social development indicators which are crucial to sustaining economic development in the Kyrgyz Republic: health, education and social protection.



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International Crisis Group, Kyrgyzstan on the Edge – Asia Briefing No. 55, November 9, 2006,



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V. THE JOINT COUNTRY SUPPORT STRATEGY A. The Strategic Framework



108. The JCSS assistance is closely aligned with the Government’s development goals. JCSS partners will continue to assist the Government to translate the CDS into clear priorities within a credible medium-term expenditure framework and annual budget. Development partners will strive to enhance country ownership and capacity. All analytic and lending support will be scrutinized to assess how it achieves the goal of greater ownership, if it can be produced jointly or how others’ work can be leveraged. 109. One area with considerable potential for enhancing aid effectiveness through better cooperation includes the harmonization of fiduciary requirements, e.g., common procurement arrangements, documents and procedures, along with common accounting, reporting and auditing arrangements. Establishing project implementation units to manage fiduciary arrangements and secretariats of paid consultants within government structures to develop and implement policies has failed to build sustainable capacity within the administration, while attracting away the most potentially capable officials. Further, country systems will be used to the extent possible and partners will work to build and strengthen country capacity. 110. The JCSS partners will channel their assistance through pooled financing arrangements, where favorable policy frameworks are in place. Project aid will be used to support capacity building and institutional strengthening, community-driven initiatives and support for infrastructure investments. All project aid, except that channeled through Non-governmental Organizations (NGOs) and UN agencies will be recorded explicitly on budget. 111. In a small country with heavy donor presence, “business as usual” puts a strain on the limited resources available. Some donors might consider reducing their presence in some sectors, or become silent partners, i.e., continue to provide resources but giving the leadership to another donor, within an agreed aid framework. The Government has signaled its desire to do this; a good start has been made in the Health SWAp, with on – budget financing from five donors. All JCSS partners will be proactive across the entire donor community to encourage further selectivity and harmonization. Furthermore, the five JCSS partners will encourage other donors to join the joint strategy process. 112. The JCSS partners will continue to support policy analysis and engage in dialogue to help the Government prioritize expenditures and reform policies to more rapidly achieve CDS goals. The mix of instruments used by JCSS partners will include straightforward repeater projects and other investments, supported with targeted technical assistance and analytical services. The JCSS partners will adapt the level and nature of support in response to emerging national developments and needs, taking a flexible approach to providing assistance. These adjustments will be made in consultation with the Government and other partners. An annual JCSS review process will provide the opportunity to identify and agree on any changes.



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113. All projects will include components to strengthen governance, transparency and accountability. In practical terms this could mean that sector projects could only go forward after an analysis of the implications for overall governance (including fiduciary risk) has been made and shown to be positive—in addition to the analysis of the other benefits of the project. Using a governance lens approach also requires that donors be willing to say no to requests for assistance that may undermine overall governance. This also extends to supporting reforms for which the foundations are not in place; donors should hold back if there are no clear signals indicating government ownership of reform, and seek to scale up where strong support and a positive track record is evident. 114. The public and contentious debate over HIPC within the country highlights the need for developing an information dissemination and communications effort that will improve the credibility of the Government and the international donors. Skepticism about a reform process that has little legitimacy among the broader public will reduce the chances of success and for building ownership of the reform agenda. This approach might mean going beyond the consultation process with civil society to a more sustained and long-term communication effort, including more effective working with the national media, and with communication units within Government. B. Program Focus



115. The JCSS partners will focus their programs on four areas identified in the CDS as especially important for achieving the overarching goals. These are: • • • • Economic management consistent with strong and sustained pro-poor growth: strengthening the budget process and cross-cutting reforms in public financial management, and aligning financial management with government priorities; Reducing corruption, improving governance and effective public administration: deregulating the economy, increasing transparency, improving the capacity of the civil service and public administration, and legal reform; Building sustainable human and social capital through improved health and education outcomes, including access to and improving the quality of health, education and social protection services; and Ensuring environmental sustainability and natural resource management



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(i) Economic Management Consistent with Strong and Sustained Pro-Poor Growth 116. JCSS partners will provide financial and analytical support aimed at improving budget and public financial management, ensuring debt sustainability and developing a robust financial system. They will continue to support a range of core diagnostic work to improve fiscal sustainability, including public expenditure reviews, fiduciary assessments and expenditure tracking surveys. Such support will extend to strengthening the financial system and improve access to finance for small and medium enterprises, and modernization of the payments system. 117. The JCSS will support the adoption and implementation of a new tax code that removes ambiguities and contradictions and fosters a business friendly regulatory environment. JCSS partners will support the Government to implement legislation aimed at reducing the number of technical regulations and mandatory standards and introduce limits on the number and duration of inspections. Streamlining licensing and permit procedures and introducing mechanisms for reviewing new regulations will also be necessary. These actions will be conducive to promoting increased private sector activity. 118. The JCSS partners will support the implementation of the agriculture sector strategy and the development of rural auxiliary services. Programs will improve livestock productivity, enhance marketing systems and improve land registration. Programs will also support the development of an agro-processing industry for export, including in higher value-added products. Emphasis will be placed on sustainable use of water resources and soil quality. To promote rural development more broadly, JCSS partners will support sector reforms and investments in rural roads, and measures to improve access to rural credit. 119. The JCSS will support the creation of transparent tariff structures, an improved legal and regulatory framework, good corporate governance and financing arrangements consistent with cost-recovery that will help attract private capital into the energy and mining sectors. JCSS partners will provide analytical and advisory support; however, it should be recognized that political commitment and support across the Government will be necessary for making sustained progress. 120. The JCSS partners will continue to provide financial and technical support to the transport sector that will facilitate trade and transit. The support includes the preparation of a transport sector strategy—with a focus on the roads sub-sector—that takes into account operations and maintenance needs, the prioritization of a road network that improves transport corridors, strengthening regional transport linkages, and a reform program for road maintenance systems and practices. Support will be provided for creating infrastructure that reduces the cost of doing business, and links the various regions of the country to the broader economy. Investment and policy advice to improve transport corridors that will allow access to markets and improve cross-border trade will



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also form part of JCSS support. The JCSS partners may provide assistance in developing the framework for public-private partnerships to support infrastructure development. 121. The JCSS partners will continue to provide financial and technical support to strengthen the financial sector. Technical assistance will focus on governance, risk management, as well as new financial products such as housing finance and insurance. Support will also be given to increase microlending activities, particularly in the rural areas. (ii) Improving Governance, Effective Public Administration and Reducing Corruption 122. The JCSS support for good governance will focus on dialogue with Government and assistance to build and strengthen the capacity of institutions critical to achieving the CDS outcomes. The central pillar of JCSS support for governance is not an ambitious reform agenda, but rather a rapid, bottom-up push for development results. The Government should be seen to be delivering visible benefits to citizens in ways that are seen to be transparent and fair. These include civil society, parliament, the media and local government. Some programs will also focus on increasing voice—including that of women, in particular—and accountability. 123. The JCSS financial support will contribute to the strengthening of public financial management (PFM), procurement and accounting. Strengthened PFM and reduced corruption are critical for development of the Kyrgyz Republic. The JCSS partners will support implementation of the National PFM Action Plan, with a particular focus on budget reform. The JCSS will also support fiduciary and budget efficiency/tracking analyses, and work on increasing public demand for better management and use of budget funds. 124. The JCSS partners will support the Government in undertaking comprehensive judicial reform, a crucial underpinning and foundation for successful development. Support will be provided for programs that build up the capacity of judges—including on human rights—the development of an effective pre-trial supervision process and an overall strengthening of the courts system. Support may also be provided to develop an alternative dispute resolution mechanism to support a more rapid growth of the private sector. 125. The JCSS partners will support improvements in business environment and investment climate, which would alleviate constraints on market mechanisms, improve the efficiency of allocation of resources, and facilitate private sector investments into profitable sectors. Capacity building of the authorities in economic policy formulation and implementation will be critical for pursuing an open development policy. The JCSS partners will support the Kyrgyz Republic’s efforts to fully implement its commitments under the provisions of EITI. Greater transparency in the mining sector and management of prospective mining areas are considered a pre-condition of a more mature and environmentally responsible approach to exploration and mining activities.



33



(iii)



Building Sustainable Human and Social Capital



126. In education, the JCSS partners will support preparation of the Government’s national human resource strategy that seeks to link labor market needs to education and training. Other instruments of support will include investments in pre-school, primary and secondary education that improve access, quality and learning outcomes, including to poor and vulnerable groups in the population, particularly in rural areas. A study focusing on the Government’s priority of introducing a 12-year system will be undertaken under the ADB’s Second Education project. 127. If appropriate, the JCSS partners will work towards developing a SWAp in the education sector that will improve financing of education through a different approach in allocating resources to schools, teachers’ salaries and teachers’ training. In addition, support will be provided to better target poor, rural and disadvantaged students to ensure universal access to quality education. The JCSS support will seek to improve internal efficiency in the utilization of limited resources, and link all interventions to results on the ground. 128. The JCSS partners will support Manas Taalimi—a five year program that covers the JCSS period and reinforces the directions, achievements and results of Manas I— focus on population involvement in health issues and the increased emphasis on social mobilization to empower communities to resolve health needs at the local level. Emphasis in the ongoing Health SWAp is also being placed on reorienting the public health system and simultaneously strengthening and integrating priority programs such as TB, reproductive health, child health, and HIV and AIDS, to achieve better health outcomes. 129. Support will be provided to strengthening the role of the Ministry of Health in the areas of health policy formulation, inter-sector cooperation and donor coordination. Given the Government’s commitment to increasing the national budget allocation to the health sector from 10.6 percent in 2006 to an optimal 13 percent in 2010, and to 100 percent execution of the budget allocation. Five donors, including three from the JCSS group, are committed to providing on-budget funds till 2010 to meet the financing gap for successful implementation of Manas Taalimi. 130. Technical assistance and policy dialogue support will be provided for comprehensive pension reform and the implementation of the Children’s Code. The JCSS partners intend to support the development of a pension reform strategy consistent with fiscal sustainability, the mobilization of private savings, and long-term growth, based upon a comprehensive assessment of alternative options, including for example, greater flexibility in retirement ages, with appropriate adjustments in benefits or contributions. Other key reforms that will be supported include: (a) developing satisfactory legislation and implementation of parametric changes in the pay-as-you-go system; (b) adopting and implementing a phasing-in action plan for any pension pillar;



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(c) strengthening pension administration and financial management, and (d) pension policy reviews. 131. Support to social assistance reforms—through TA and sector work—will help to develop a more effective and simpler benefit structure for improving the presently low living standards among the poorest households, without undermining incentives for selfsufficiency. This will also include defining a more carefully differentiated set of eligibility conditions and building an administrative system for delivering benefits to eligible households. (iv) Environmental Sustainability and Natural Resources Management



132. The JCSS will support more effective disaster risk management, where the priority lies in creating adequate environmental safeguards. JCSS partners will support efforts to help policy makers—including the entire Government more broadly—to take environment-oriented concerns into consideration into key budget policies and processes. 133. The JCSS will support new initiatives in energy conservation and renewable power provision, which presents promising opportunities in rural areas. Such support however, will be provided without any loss in the urgency of further reforms in the energy sector: the development of renewable energy cannot be a substitute for the weak management of the existing system in the electricity sector. The JCSS will also support efforts to utilize the Clean Development Mechanisms (CDM) to secure grant funding for energy efficiency and carbon sequestration activities. 134. The JCSS partners envisages further support to irrigation modernization that goes beyond physical infrastructure (including drainage) remodeling and extends to modern methods of managing and paying for irrigation supplies. The JCSS partners will support continued investment in those areas of water management—including transboundary water management—where the policy and institutional framework is well defined (irrigation rehabilitation, rural water and sanitation) and will support further development of a coherent framework built around the concept of integrated water resource management. 135. The development of local capacity for the Environmental and Natural Resources Management (ENRM) and related activities (such as rural finance, agro-processing, rural extension, etc.) has rightly attracted large and diverse donor support. Capacity building needs to remain close to the center of donor assistance—including that from JCSS partners—during the period of the CDS. The detailed structure and evolution of that assistance is best left to individual donor agencies and their government and civil society partners. C. Monitoring and Evaluation



136. JCSS partners and the Government will regularly monitor and evaluate their performance relative to actions, indicators and targets outlined in the JCSS matrix in



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order to assess their progress towards achieving CDS goals. Monitoring and evaluation will take the form of a joint annual review of the CDS and indicators could include, for example, increased sector coverage of joint analytical work and building on the SWAp approach and increasing coverage to other sectors. To the extent possible, the review will use existing government processes as the main avenues for detailed discussion, dialogue and generating information. These include the CDS monitoring and evaluation framework, the national budget, the MTEF and Public Expenditure Reviews (PERs). 137. The annual report will bring together the results including progress, remaining challenges and the way forward, and will be made available in a timely fashion to all stakeholders. The monitoring indicators chosen will also reflect the internationally accepted Paris Declaration indicators adapted to the context of the Kyrgyz Republic. This will facilitate debate, discussion and public accountability. A joint mid-term review will be undertaken during the JCSS period. D. Financing Scenarios



138. Approximately US$80 million per annum will be available from the JCSS partners; there would be a mix of instruments including budget support (possibly in the form of Development Program Grants), and an investment program with a mix of straightforward repeater projects and other “simple” investments along with more complex policy oriented projects, supported with targeted TA and analytical services. Should the Kyrgyz Republic successfully undertake rapid reforms (significantly addressing governance and business climate issues, etc.,) consideration would be given— consistent with the Performance Based Allocation (PBA) methodology of the WBG and ADB—to increasing IDA and ADB allocations and the greater use of budget support instruments (e.g., Poverty Reduction Support Grants (PRSGs) or Program Development credits/grants. A Development Forum meeting is planned for May 31, 2007. 139. Joint policy dialogue on structural reforms between the donor community and the Government has generally been good and is improving. Opportunities for the JCSS donors to engage in dialogue occurs around projects and programs and includes subsector and sector dialogue (where progress has been greater) and dialogue on major structural reforms (where there has been less progress to date). E. Risk Mitigation



140. Various factors may put the implementation of the JCSS at risk. The significant risks can be categorized into political risk, institutional and operational risk, and the risks from exogenous shocks. The risks and their mitigation mechanisms are summarized in the paragraphs that follow.



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(i)



Political Risk



141. Continuing political instability and upheaval and other adverse events may hinder the Government’s commitment to implement the reforms supported by the JCSS, including possible changes in the political leadership. The existence of vested interests in key sectors may also block reforms. In addition there is a significant risk that the authorities may move away from a market based approach to economic policy to a more interventionist approach. Skepticism of the IFI’s may also result in the Kyrgyz Republic turning to non-traditional development partners, thus rendering the support of the JCSS irrelevant and ineffective. 142. • Political risk can be mitigated in the following ways: By opening a dialogue with the different branches of power on the obstacles to implementing the reform agenda of the CDS; when requested, providing capacity building to help the Government to build mechanisms to resolve conflicts over policy; By helping to improve governance and accountability; building on lessons from past experience and embedding governance elements into programs; By helping the Government and civil society build broader and deeper ownership of the reforms through transparent and wide consultations; and By raising awareness of the JCSS among parliamentarians and civil society and listening to their concerns on the reform process; and By implementing an effective communication strategy for the JCSS partners, and by the wider donor community.



• • • •



(ii)



Institutional and Operational Risk



143. The lack of implementation capacity may undermine the impact of the JCSS; implementing it requires substantial changes in behavior at all levels of government, and at the individual, organizational and institutional levels. Limited economic resources may also similarly impact implementation of reforms. 144. These risks can be mitigated by ongoing and proposed interventions and build upon successes generated in specific areas, including: • • • • Supporting the Government in retaining qualified personnel and meritocracy; the JCSS will help the Government build on measures already taken to develop a professional and effective civil service; Stemming migration of qualified labor by supporting private sector development; this includes support for small and medium enterprises in the rural areas; Developing interventions that support economic diversification; and Supporting regional cooperation initiatives in trade, transit, economic development and security.



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(iii)



Exogenous Shocks



145. External economic, political and social factors pose additional risks to the development process in the Kyrgyz Republic. Political and religious turmoil in neighboring countries can threaten stability, and crises stemming from them could spillover into the Kyrgyz Republic. Limited regional cooperation in the management of key natural resources could also jeopardize economic and political stability. A major macroeconomic shock due to a drop in gold production or a fall in GDP due to political instability, might generate a renewed threat of debt unsustainability and emergency funding requirements. 146. Given its size compared to those of its neighbors, the Kyrgyz Republic’s ability to manage the risks of exogenous shocks is limited. Nevertheless, these risks can be managed to some degree by: • • • • JCSS support for regional cooperation initiatives, and help the country leverage the existing regional forums such as CAREC, EurAsEC, SCO, etc; Donor investments and support through regional programs, including on sustainable environmental management; there are also regional health and security initiatives that could be leveraged; Financial support from donors in the event of emergencies when shocks occur in terms of trade or natural disasters; and Support for regional infrastructure initiatives to facilitate trade and transit could facilitate greater regional and economic cooperation.



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Part I: Annex 1. JCSS Results Framework for the Kyrgyz Republic

Country-level Development Goals CDS Outcomes and Indicators (2007-2010) Broad-based and rapid growth, faster poverty reduction Challenges and Constraints Outcomes influenced by the JCSS Results of planned CDS reforms Selected Performance Indicators JCSS Interventions



Goal 1. Economic management consistent with strong and sustained pro-poor growth • Limited natural resources • Improved business • GDP growth up to 7.3%, GDP per environment and climate for capita to US$770 • Inaccessible geographic investment location • Unemployment down from 9.3% to • Increased investment-to-GDP 4.5% by 2010 • Small national market ratio • Poverty headcount down to 31% • Unsustainable debt level • Strengthened banking system, • All state and municipal salaries paid • Low diversification of the greater financial electronically through banks economy intermediation, greater access • Kyrgyz Agriculture Financial Corp. • Underdeveloped capital to finance (KAFC) privatized markets • An improved tax and customs • Reduced costs imposed by regime regulation, as measured by surveys



Financing/Projects • JCSS policy dialogue, budget support, program and project support for public financial management, selective TA for banking and capital markets development Analytical work • Poverty Assessment • Joint Programmatic CEM • Private Sector Assessment • Financial Sector Accountability Assessment • Corporate governance ROSC • BEEPS and IC Surveys Other Donors USAID, IMF, EBRD Financing/Projects • Technical assistance support to achieve financial sustainability Analytical work • Sector Development Strategy • Heat Strategy Study • Social Protection Scheme for energy sector • Regional initiative on ‘water-



Goal 1.1 Financial rehabilitation, and a balanced and comprehensive development of the energy sector Provision of reliable • Large investment needs • Financially, technically • Tariffs increased to full cost electricity to consumers with deteriorated assets rehabilitated energy sector recovery, excluding crossthat enhances potential for that provides reliable energy subsidization • Electricity tariffs well economic growth to consumers below cost • Improved tariff collections to 93% • Improved collections by 2010 • Significant losses and theft, • Energy sector growth at 2.5% • Loss/theft reduction per year weak tariff collection • Analysis of the feasibility of • Quasi-fiscal deficit (QFD) expanded hydropower production • Low energy efficiency reduced (from 6.5% to 1.9% of and export completed GDP) • Improvements in loss reduction



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Country-level Development Goals CDS Outcomes and Indicators (2007-2010) Challenges and Constraints



Outcomes influenced by the JCSS Results of planned CDS reforms • More investments in sector, including FDI Selected Performance Indicators • Progress made in concession management and privatization of distribution companies JCSS Interventions



energy’ nexus • Exploiting carbon finance opportunities Other Donors EC, KfW, IMF, EBRD Financing/Projects • Investments, policy advice to improve transport corridors, access to markets, cross-border trade Analytical Work • CA Regional Sector Strategy • Roads sub-sector strategy • Regional cooperation in transport and trade facilitation Other Donors EC, IsDB, Japan, GTZ Financing/Projects • TA for mining sector reform • EITI implementation Analytical Work • Policy Dialogue Other Donors EBRD, IMF



Goal 1.2 A better transport infrastructure that provides access to local and regional markets A road transport network • Large investment needs • Rehabilitation of strategic road • Reconstruction of 85% of strategic that enhances access to network roads • Deterioration of the road markets and facilitates network, limited funding of • Sustaining and increasing • Construction and rehabilitation of trade and transport in the operations and maintenance funding available for strategic corridors CA region maintenance and operations • Deteriorated urban public • Construction and rehabilitation of transport services priority roads of local importance • Barriers to cross-border transport links



Goal 1.3 Accelerate the mining sector’s development through market mechanisms and by putting new deposits in operation Investments for bringing • Large investment needs • Transparent and simplified • New mining law enacted and new mineral deposits process for the award and implemented • Deteriorating support online cancellation of licenses infrastructure of roads, • Enhance transparency in the sector, • Steady and solid power supply • Institutional reform including including the use of resources and contribution to GDP privatization of non-state licensing process • Dominance by state from sector activities enterprises with preferential • Modernization of information treatment infrastructure • Lack of transparency in • Full compliance with obligations licensing under the EITI • Weak political will for reform



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Country-level Development Goals CDS Outcomes and Indicators (2007-2010) Challenges and Constraints



Outcomes influenced by the JCSS Results of planned CDS reforms Selected Performance Indicators JCSS Interventions



Goal 1.4 Increase productivity in agriculture, and strengthen market mechanisms in production and processing Improved growth and • Large investment needs • Creating an agri-business • Minimum economic size farms, productivity (4% per year) industry agricultural businesses, and • Insufficient investment in growth Creating a cooperatives developed irrigation and drainage • Greater access to financial competitive food systems, limited cost resources • Food market deregulated processing industry recovery of services • Water resources mgmt. • Progress towards privatizing seed • Limited diversification improved and breeding farms • Limited access to rural • Rural auxiliary services • Improved capacity of Ministry to finance developed make better public policy Goal 1.5 Creation of a competitive tourism sector Development of the • Significant investment Kyrgyz Republic into a needs successful and desired • Poor public infrastructure tourist destination • Risks of political and regional instability • Low private sector investment into the sector • Poor effective land use • Increase in the number of tourists to the country year upon year • Comprehensive tourism promotion strategy • Tourism infrastructure improved with privatization, development



Financing/Projects • Investment for improved farm productivity, land and water use, rural extension services Analytical Work • TA for Strategy development • Ministry capacity development Other Donors USAID, GTZ, EC Financing/Projects • Limited support for the development of the tourism sector at present • Donor engagement in infrastructure development, roads and generalized services improvement



Goal 2: Improving governance, reducing corruption and improving public administration Goal 2.1 Strengthening state effectiveness The creation of an effective • Policy making structures of • Clearly defined roles, • Greater and more coherent voice for and well-functioning state the Government weak and functions accountability civil society in reform process fragmented between the President, • Increased capacity of women to Government and Parliament • Lack of policy participate in Government and the implementation capacity • A better functioning and more political process transparent legislative process • Incomplete constitutional • Reform of election process and in Parliament reform electoral law • Independent functional reviews of governance and political reform



Financing/Projects Strengthening the capacity of Parliament, civil society, media, local government and women to participate, increasing voice and accountability Other Donors USAID, EC, OSCE, German Government



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Country-level Development Goals CDS Outcomes and Indicators (2007-2010) Challenges and Constraints



Outcomes influenced by the JCSS Results of planned CDS reforms Selected Performance Indicators JCSS Interventions



Goal 2.2 Deregulation of the economy Improving the business • Onerous licensing and • More business and trade environment and inspection regime activity, higher tax and investment climate customs collections • Unclear mandates and functions of government • National procedures on agencies permits and licensing harmonized with international • Pervasive role of the state in standards the economy • Reduced opportunities for • Inefficient market rent-seeking, corruption mechanisms, tax and customs administration • Increase in economic diversification • Limited potential for economies of scale Goal 2.3 Governance Reform: Increasing transparency and reducing corruption Reducing administrative • Corruption perception index • Improved budget formulation corruption, promoting 2005 ranks country at 130th and implementation, and greater transparency in out of 159 countries program based budgeting public financial • Accountability and rules • Improved budget preparation, management based decision making not execution and monitoring fully developed or • Fiscal decentralization implemented • Institutionalized Consultation • System of privileged access, with civil society on key areas high potential for rentof governance seeking and state capture • Internal audit systems in procurement



• Improvements in Business Environment Quality evidenced by surveys • New law on Normative Acts that defines hierarchy of legislation and a simple transparent process for developing legislation • Reduction in the number of regulating agencies



Financing/Projects • Investments and policy dialogue for creating transparency, accountability, and a competitive private sector Analytical work • Study on Shadow Economy • Private Sector Assessment • IBC survey, BEEPS • Doing Business report Other Donors EC, EBRD, USAID Financing/Projects • Policy dialogue and budget support for better tracking and monitoring of public expenditures • Treasury modernization (GTAC) • DFID TA on PFM • SECO / SIDA support for capacity building • Support for implementation of key elements of anti-corruption action plan Analytical Work /TA • PPER • PEFA • CFAA and CPAR Other Donors OSCE, USAID, EC, SIDA



• Regular publication of reports on corrupt and institutions and individuals and actions taken to sanction them • Regular publication of the Declaration of Income and Assets of high level state officials • Progress on anti-corruption plan monitored and made public



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Country-level Development Goals CDS Outcomes and Indicators (2007-2010) Challenges and Constraints



Outcomes influenced by the JCSS Results of planned CDS reforms Selected Performance Indicators JCSS Interventions



Goal 2.4 Improving the capacity of civil servants and public administration Improving state capacity • Politicization of the civil • Reform pilots in one or more and a professional civil service Ministries under national service leadership • Pervasive rent-seeking • Better use of public within the public sector • Competitive selection process resources for civil servants and merit • Absence of appropriate civil • More efficient public based salary structure for the service pay structure administration civil service established • Lack of continuity in public service



• Regulations to reduce corruption in the civil service, retrenchment and remuneration plans • Greater participation of women at senior levels civil service, greater gender neutrality in civil service appointments



Financing/Projects • Investments and policy dialogue to create a well-qualified and effective civil service cadre Analytical Work • Functional reviews of central government, state agencies • Review of salary structure to attract and retain talent, create a professional civil service Other Donors



Goal 2.5 Legal Reform: Creating an independent and effective judiciary and judicial system Creating an independent • Low professional • Greater access to justice for • Council of judges created and impartial judiciary competence vulnerable groups • Improved court infrastructure, • An effective court • Capture of the judicial • Improvement in case including physical facilities system system by political and management systems criminal forces • Comprehensive national judicial reform program • High corruption pervades the judicial system and law • Body of judicial precedents enforcement



Financing/Projects • Comprehensive judicial reform project that includes programs for capacity building of judges, including on human rights, and development of effective pre-trial supervision process Analytical Work Other Donors US, EBRD



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Country-level Development Goals CDS Outcomes and Indicators (2007-2010) Challenges and Constraints



Outcomes influenced by the JCSS Results of planned CDS reforms Selected Performance Indicators JCSS Interventions



Goal 3: Human and Social Development - Building sustainable human and social capital Goal 3.1 Ensuring access to and improving the quality of basic and secondary education Improving education • Limited financing of the • Improved access to basic • Curriculum modernization and outcomes, good progress education sector, inefficient education, particularly for reform towards achieving MDGs use of resources children from vulnerable • In-service training for teachers • MDG targets as households • Declining quality at all • Learning assessments indicators levels • Improving attendance rates, • Greater availability of textbooks learning outcomes • Declining enrolment and computer labs, IT facilities attendance from pre-school • Better financing model • Feasibility study of 12-year system to upper secondary completed education • Low salaries for education staff Goal 3.2 Ensuring access to and improving the quality of healthcare services Improvements in health • Low budget allocation for • Continuing upward trend in and living standards, health health financing particularly in maternal • Financial burden on • Affordable healthcare system and child health outcomes households from informal for vulnerable population • MDG goals as payments • Strengthened capacity and indicators • Inadequate access to and role of Ministry of Health in quality of health services policy formulation delivery, especially for • Regional cooperation to poor people in rural areas reduce uncontrolled migration • Lack of qualified health and risks of HIV epidemic, professionals, particularly drug trade in rural areas and human resource migration • 100 % budget execution • Reduction in informal payments • Public health programs (including nutrition) effectively integrated within Manas Taalimi (DOTS for TB, HIV/AIDS)



Financing/Projects • Investments in primary and secondary education to improve access, quality and better learning outcomes Analytical Work • TA to move towards a SWAp • Public expenditure review • TA in Monitoring and Evaluation Other Donors • Multi-Donor Fast Track Initiative In Education



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Country-level Development Goals CDS Outcomes and Indicators (2007-2010) Challenges and Constraints



Outcomes influenced by the JCSS Results of planned CDS reforms Selected Performance Indicators JCSS Interventions



Goal 3.3 Improving the effectiveness and efficiency of social assistance and pension schemes A fiscally sustainable, • Lack of leadership, policy • Strengthened capacity and better-targeted, wellcoherence role for Ministry of Labor and financed social protection Social Protection in policy • Weak social program that meets the formulation and security/welfare legislation needs of the most implementation • Declining funding, poor vulnerable people • Gradual increase of the targeting Guaranteed Minimum Level • Growing child poverty and of Consumption (GMLC) to number of institutionalized the poverty line children ‘left behind’ due to labor migration



• Phasing strategy for funded pension pillar • Decentralization of social services • Implementation of the Kyrgyzstan Children’s Code and development of secondary legislation • Special measures on protection of disabled children and socially vulnerable categories



Financing/Projects • TA and policy dialogue on pension system reform and Implementation of the Children’s Code. Other interventions link to the wider social assistance reform agenda e.g. PSIA for energy sector reform. Analytical Reform • Household expenditure and user surveys that track access to the health system • Review of pension reform options Other Donors EC Financing/Projects • Investment projects and policy dialogue to improve quality of and access to safe drinking water • Projects for environmentally sustainable waste water management Analytical Work • Public Expenditure Review Other Donors KfW, USAID, EBRD •



Goal 3.4 Ensuring the guaranteed provision of and access to key public services Improving the • Poorly financed, degraded • Public private partnerships to maintenance, management social infrastructure deliver key social and delivery of public infrastructure services • Unclear delineation of services responsibilities for services • Sustainable community• MDG targets related to provision between national based water management water and sanitation and local levels practices • Upgraded rural public infrastructure



• Improved maintenance and operations • Improved access to public services for vulnerable groups • Community-based infrastructure management system • Well-developed municipal waste management system, including public private partnerships



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Country-level Development Goals CDS Outcomes and Indicators (2007-2010) Improving environmental and natural resources management, reducing risks of disasters • MDG Environment Indicators Challenges and Constraints



Outcomes influenced by the JCSS Results of planned CDS reforms Selected Performance Indicators JCSS Interventions



• Inadequate disaster preparedness and prevention • Habitat degradation and land conversion • Poor disposal of hazardous, toxic waste • Hazard risks from mine tailings



Goal 4: Environmental Sustainability • Improved and sustainable use • Integration of Sustainable Land of natural resources by local Management Practices communities • Energy efficiency and energy • Integrated Water Resources conservation initiatives, including Management renewable energy • Expansion in protected territories



Financing/Projects • Investment projects in natural resource management and improving past environmental damage, such as reforestation, forestry management, land use planning and restoration • Investments and policy dialogue for better preparedness for disasters both natural and man-made Analytical Work Other Donors EC



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Part I: Annex 2. JCSS Development Issues and Constraints

Risks and vulnerabilities Risk: Weak capacity and limited economic resources slow the growth potential • Limited diversification and high dependence on few sectors may limit growth potential • Weak regional cooperation impedes the economic development opportunities • Inefficient state owned enterprises reduce the growth potential • Low competitiveness, and weak investment and business environment reduce economic growth potential • Lack of the enabling environment for SME development • Continued out-migration of the qualified professionals weakens labor force/markets Risk: HIGH • Develop joint interventions to support economic diversification • Support regional cooperation initiatives in trade, transit and economic development Support new mechanisms for accountability and transparency in SOE operations • Support policies to remove barriers to effective competition and the implementation of Law on Competition • Support micro and SME organizations in the rural areas (greater access to finance) • Support the Government in retaining qualified professionals through supporting private sector development Impact: HIGH JCSS partners’ actions to mitigate risks



Risk: Poor governance and political uncertainty hinders achievement of development objectives • Political stalemate and continuing power struggle creates a gap in the country’s leadership and management • Continued high staff turnover in the public sector weakens institutional capacity • Lack of political commitment to reduce corruption undermines the reform process • Vulnerability to organized crime and terrorism increases fragility of the political stability • Lack of clarity in the decision-making, roles and responsibilities among the branches of power reduce the effectiveness of governance; • Persisting gender inequality in the decision-making may hinder equitable development; • Disconnect between the state and civil society further contributes to the political instability • Law enforcement and justice system does not uphold human rights principles • Lack of the long-term vision for development fosters haphazard decision-making; • Growing regional divide within the country may endanger unity; • Slow progress to completing constitutional reforms may damage people’s trust in the new Government Risk: HIGH • Help build consensus among branches of power and develop incentives to speed up the reform process • Support capacity-building and professional development of Parliament and civil servants • Support initiatives (strengthen tax and customs administration, improve monitoring capacity of civil society) to reduce corruption • Enable civil society to be in a stronger position to coherently voice demands for reforms; • Support the establishment of clear roles and functions at all levels of the Government • Build up capacity of women to participate in government and decision-making processes • Help create space for a meaningful policy dialogue between civil society and the Government • Advise and advocate civil society and the Government on human rights obligations • Support national and local governments and communities in peace-building, conflictsensitive approaches to development • Support to creating a long-term development strategy/vision for the Government Impact: MEDIUM



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Risks and vulnerabilities



JCSS partners’ actions to mitigate risks



Risk: Inadequate access to and quality of basic public services (education, health, basic infrastructure) slows the progress towards the achievement of the Millennium Development Goals (MDGs) • Weak access of the poor, especially in rural areas to quality public services (health, education and basic infrastructure) negatively affect the well-being of citizens; • Low capacity of public servants lower the effectiveness of public service delivery • An increasing trend in labor migration may increase social instability and health risks; • Negative shift in the migration policy in Kazakhstan and Russia may adversely affect the welfare of the Kyrgyz population; • Regional developmental differences are overlooked by policy-makers and donors, leading to ineffective support to public service delivery; • Poor natural resource management (especially of land and water) reduces the quantity and quality of resources, increasing the potential of conflict (including inter-ethnic) over resources; • Help the Government and communities to identify the needs (both in terms of policy and resources) for scaling up the progress towards the MDGs and support the Government in formulating MDG-sensitive budgets; • Support reallocation of aid to MDG priorities, and provide targeted support to highimpact interventions in the areas of health, education, gender equality, environment; and basic infrastructure; • Develop a 'national human resource development strategy' linking labor market needs to training opportunities; • Support development of the modern professional training and vocational education programs, focusing on professions in “demand”; • Help the Government and communities to develop preventive measures to mitigate negative social effects of labor migration; • Jointly support the regional development approaches to effectively address unique needs of regions; • Develop joint programs/interventions in the areas of sustainable natural resource (land, water and waste) management Impact: HIGH



Risk: MEDIUM



Risk: External economic, political and social factors pose additional risks to development • Political and religious radicalism in the neighboring countries will negatively influence stability; • Crises in political and social spheres in the neighboring countries may have a negative spillover effect on Kyrgyzstan; • Low capacity for regional cooperation in management of key natural resources will jeopardize economic and political stability in Kyrgyzstan, especially in regards to the use of natural resources (oil, gas and water); • Fluctuations in the global terms of trade may negatively impact Kyrgyzstan’s export oriented industry; • Climate change may reduce agriculture sector productivity and create additional obstacles to the development process Risk: HIGH Impact: LOW • JCSS partners will support regional peace-building initiatives; • JCSS partners will invest in regional programs on sustainable environmental management; • Donors will collectively provide emergency funds/support when shocks occur in global terms of trade, and in climate change; • Support to regional infrastructure initiatives (roads, etc) to facilitate trade and transit and economic and social cooperation



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Risks and vulnerabilities



JCSS partners’ actions to mitigate risks



Risk: Uncertainty and vulnerability in human rights and the human security situation will further undermine political stability and long-term sustainability • Weak capacity of civil society to monitor and enforce Human Rights and other international obligations slows the democratization/reform process; • Lack of institutional structure responsible for human rights and anti-corruption reduce the Government’s ability to implement human rights obligations; • Underdeveloped space for civil society involvement in the decision-making increase political instability; • Lack of a national coordination mechanism to effectively address human security concerns increases the country’s vulnerability to natural and man-made disasters within the country and in Central Asia; • Porous borders with the neighboring countries and ineffective border control increase the risk of Kyrgyzstan becoming a major drug transit route; • Poor regional cooperation on human security issues may increase the risk of spread of infectious diseases, including HIV/AIDS; • Growing risk of religious and other forms of terrorism in the region and worldwide can easily tip the fragile stability in the country and the region; • The country’s poor institutional capacity to effectively prevent and manage natural disasters may increase vulnerability to disasters; • Environmental time-bombs such as uranium waste and other unmanaged hazardous waste increase risks to health and security; • Social protection measures are not properly targeted and supported, and therefore do not reach the vulnerable groups (poor families with children, etc) in need; • Lack of conflict sensitive approach to development (both by donors and the Government), and weak capacity of the Government to peace-building initiative may worsen the existing conflicts (inter-ethnic, among power structures, etc) Risk: MEDIUM • JCSS partners will build capacity of civil society to professionally engage in monitoring, decision-making and implementation of human rights policy and activities; • Support the Government in building an institutional structure for addressing human rights issues; • Support the Government in strengthening coordination mechanisms for disaster risk reduction measures; • JCSS partners will jointly develop and implement contingency plans; • JCSS partner will jointly support the Government in improving the regional cooperation measures on border improvement, drugs control, and trade and transit; • Facilitate regional collaboration on reducing risks to human security, including HIV/AIDS, counter-terrorism, etc; • JCSS partners will support the Government and communities in measures to prevent and manage disasters nationwide and locally; • Collectively support waste management (hazardous, industrial and household) measures; • Facilitate the Government in developing a better targeted and effective social protection system; • JCSS partners collectively monitor the country’s progress towards upholding of human rights, including prompt feedback on human rights violations that may occur (eg. in regards to refugees, labor migrants, vulnerable groups); • JCSS partners support the Government and civil society in mainstreaming conflict prevention into policies and strategies at national and local levels



Impact: MEDIUM



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Risks and vulnerabilities



JCSS partners’ actions to mitigate risks



Risk: Failure to effectively implement CDS will reduce the effectiveness of aid coordination • Inadequate implementation measures by all partners will hamper development progress; • Non-alignment of the CDS priorities with the medium-term and annual budgets will reduce the effectiveness of CDS and JCSS implementation; • Inadequate harmonization and coordination of external assistance for the achievement of the country priorities will negatively impact effectiveness of aid; • Weak monitoring of CDS indicators will weaken the achievement of CDS goals; • Citizens of the Kyrgyz republic are not familiar with the development priorities outlined in the CDS, and thus may not support the realization of CDS; • National priorities may not be aligned with regional and local needs; Risk: MEDIUM • JCSS partners support realization of CDS priorities, including through budget support and increasing grant allocations; • JCSS partners will support in monitoring and evaluation of CDS and JCSS; • JCSS partners will work towards increased joint programming to improve aid effectiveness and utilization of limited resources; • JCSS partners will ensure wider consultations with other donors in harmonizing aid in support of country priorities; • Support to increasing public awareness of CDS and JCSS; • Address regional and local specifics (beneficiaries, local communities) when developing programs Impact: MEDIUM



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PART II. THE WORLD BANK GROUP ASSISTANCE PROGRAM



I. INTRODUCTION 1. The JCSS supports the Kyrgyz Republic’s efforts to meet the targets set out in the Government’s CDS for the period 2007-2010 and make progress towards achieving the MDGs. 2. The WBG program contributes to the strategic goals and outcomes outlined in the JCSS, and focuses on supporting the Government’s efforts to improve the environment for business and economic growth and improve the quality of and access to basic services (health, education, water and sanitation). Achieving the outcomes in the Results Framework depends on improving governance at all levels, reducing corruption and strengthening the state’s institutional capacity. The challenge, for the Bank and other donors, is in finding effective ways to support the Government in a time of political upheaval and uncertainty. 3. The need for donors to present a joint position to their client is greater now than ever. The new Government is under pressure to deliver, and the development community is struggling to work out how best to provide support without overburdening the administration. The JCSS is a first step to further harmonization efforts. II. IMPLEMENTATION OF THE LAST CAS 4. The 2003 CAS was aligned with the areas of focus described in the Government’s NPRS, with significant attention to poverty reduction. The CAS priority areas included: supporting private sector led growth, stemming the deterioration in key infrastructure and social services and finally addressing governance constraints to growth and poverty reduction. A CAS Completion Report (CASCR) for the 2003 CAS was prepared in February 2007 (Annex 2). The CAS performance is rated as satisfactory. 5. To date, the Kyrgyz Republic has made good progress on economic reform, despite the fact that there was no clear majority in favor of reform, due to the centralized decision-making process. Most notably, the Kyrgyz Republic has liberalized price, foreign exchange and trade regimes and has instituted a generally equitable land-reform agenda, including transferring about 60 percent of the land to private ownership, which is now available for rent or sale. Despite this progress the Kyrgyz economy remains fragile with low living standards, high level of corruption and debt. 6. The overall effectiveness of the Bank’s FY03-06 program was positive. Considerable progress was made in achieving the overarching CAS objective of poverty reduction. All CAS supported NPRS targets have seen a marked improvement with the exception of health. Poverty—measured using consumption expenditures—declined from an estimated 63 percent in 2000 to 43 percent in 2005. Although reforms are well underway in the health sector this deterioration may be due to reporting or statistics issues or lagged effects of past under-financing in the sector (see paragraph 17 in Annex 2).



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7. The Bank’s support to the Kyrgyz Republic in the areas of health, education and social protection, has been complemented by the community driven development approach including providing assistance for rural water supply and sanitation, small town infrastructure, rehabilitation of power and district heating systems, and urban transport and maintenance. 8. The second Health Reform project was critical in building institutions necessary to enable the Ministry of Health to function as a steward of the sector rather than an implementer. The IDA’s convening role is evident in the exemplary collaboration among donors which led to the success of the reform program and not just the project itself. Partly due to close coordination, the current IDA-supported operation is being implemented under a SWAp which includes donor support for financing of recurrent/operational costs and efforts to harmonize procedures and strengthen fiduciary systems in the health sector. 9. Under the Rural Education project, new student and class achievement tracking instruments have been developed and 100 fellowships for rural teachers have been created. Schools in two pilot regions are being trained in new skills and abilities of joint strategic planning for school development with engagement of school staff, parents and boards of trustees. The WBG and ADB, whose education projects share the same goals, committed to move towards a joint project implementation unit within 2007. 10. IDA operations in the agriculture sector have been explicitly aimed at improving the operating environment for private farmers and agri-businesses and at refocusing the public sector on policy and enabling functions in a market economy. Some 70 percent of farm land is now privately owned as a result of the generally equitable land reform, supported by the Agricultural Services Support project (ASSP). The institutional, operational and policy framework presented in the multi-component ASSP has allowed a number of other donors (e.g., DfID, TACIS, SIDA and UNDP) to attach their related operations to this project. 11. The IDA-financed Land and Real Estate Registration project has been successful in increasing land tenure security, improving access to investment capital and more efficient use of land and real estate assets, stemming from an efficient system for land and real estate transactions. These results are impressive given that a transparent land and real estate market did not exist prior to the project approval in 2000. Access to credit has improved—the number and value of mortgages have increased, with over 40,000 mortgages valued at more than US$418 million equivalent registered during 2005 alone. 12. Empowerment of local communities has progressed well through the introduction of community driven initiatives in several areas, notably through the Bank’s Village Investment Project (VIP) and On-Farm Irrigation Project (OIP). Under the On-farm Irrigation project, water user association (WUA) creation, registration, and strengthening continue. At the end of 2006, 436 WUA’s have been legally registered, serving 710,000 ha out of the developed area of 1.1 million ha. The WUA concept has now been fully accepted in the country and the foundation is laid for sustainable WUA development in the future. The Bank’s VIP has been having a major impact on governance at the local level, rapidly spreading and institutionalizing concepts and practices such as transparency, citizen involvement, and public accountability (Box 1).



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Box 1. Addressing Poverty at the Village Level in the Kyrgyz Republic Over the last two years, the VIP has supported 1,600 micro-projects in about 80 different categories - from push-button traffic lights that save the lives of school children crossing busy roads, to school heating systems, bridges, health posts, computer centers, machinery workshops, textile cooperatives, storefronts and even a morgue. These projects have affected almost half of the Kyrgyz Republic’s scattered population of 5 million. The project is designed in such a way that each community involved is guaranteed four years of financial support as long as it plays by the project’s rules. This medium-term commitment seeks to avoid a situation in which villages benefit one year but are left to their own devices the next. A financial return assessment conducted in 2005 found that most projects had spectacular rates of return because of the thriftiness and ingenuity of the villagers who co-financed them. Continuity also allows villagers to plan ahead and move up the development ladder. In the first year of the program, poor villagers overwhelmingly chose to implement micro-projects addressing some of their basic social needs. However they show a greater tendency to invest in income-generating micro-projects next. Other features of the VIP are also remarkable: • • The project is run entirely by Kyrgyz people rather than foreign experts. Local knowledge and expertise is crucial. If a project is designed in a way that’s suitable for them, it will work. There is no central implementing agency. The project management agency facilitates relations with the Bank and channels the project funds to the communities. It does not design, procure, or manage funds or micro-projects on behalf of the villagers. It distributes instead micro-project handbooks giving people ideas of what they might strive to achieve and organizes a range of training events for villagers. Micro-projects are handled by local investment committees which are legally constituted bodies of self-government. These committees combine mayors, council members and ordinary citizens. They manage their own bank accounts and are responsible for mobilizing community contributions, project selection, design, procurement, contracting, implementation, and monitoring. These committees remain active from year to year, as the planning for next year’s community investments begins even while the current year’s projects are being completed. Large bulletin boards publicize all financial and contractual information related to micro-projects, and in this way there is no corruption as everybody is an auditor. Money is allocated on a per capita basis, starting with the poorest villages in the country. In the first year, the amount allocated per person per year isUS$2.50. The sum rises to US$5.00 in the third year. The VIP uses official poverty and demographic statistics to avoid contestation.



•



• • •



The local response to this project has been impressive, generating enthusiasm and ideas across the country’s remote mountains and valleys. Villagers came up with cash and labor contributions that far exceeded the 25 percent contribution required. Contributions reached 48 percent (including 9 percent in cash) in 2004 and 68 percent (14 percent cash) in 2005. The US$15 million IDA grant, generated US$3 million in community counterpart contributions in the project’s first two years.



13. The Government’s record on and commitment to improving governance has been relatively weak. Measures to increase efficiency, transparency and fiduciary controls within the public sector have proceeded reasonably well at the technical level (through the development of the Treasury, elimination of many special means accounts and extrabudgetary funds, improved classification and reporting), but there was no commitment to tackle core policy reforms. In retrospect it was clear that there was no ownership of



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reforms which would threaten vested interests in different areas. Public administration reforms which affected the power, patronage and rents of senior officials were undermined. This holds true particularly for structural reforms in the energy sector for example. The NPRS recognized the importance of the reduction of losses (much of which were due to organized theft by officials) and the need to have a medium term tariff policy so that investment needs could be covered. During the period of the NPRS, no progress was made on these issues. 14. Failure to increase electricity tariffs and an increase in commercial and technical losses to around 43 percent by 2004, meant that the Government’s objective of financial viability, operational efficiency and private investment in the energy utilities was not achieved. Parliamentary elections at the beginning of 2005 were a one reason why the Government deferred its planned tariff increases, which were also politically difficult in the period following the change of Government. In addition it is recognized that entrenched rent seeking and interests within the energy sector have meant that Government commitments to reform have often not been carried out. As a result, the Bank’s CSAC facility was closed before the third and final tranche was released.

T T



15. The authorities have recently developed and made some progress in implementing a focused action plan to strengthen public finance management. This work is supported by all development partners and is based on the (PEFA) findings. The action plan recognizes that the priority is to deal with a few basic issues which will allow spending agencies to implement their budgets in a predictable way and with a solid internal control framework. The Bank has supported this work under the programmatic public expenditure review (PPER), which has focused on providing practical technical assistance to the authorities. 16. The Bank has also been supporting the judicial system through an IDF grant which has enabled the development of a court information and management system. This will allow all court cases to be publicized while improving the functioning of the court system. 17. The IFC projects in the financial sector, mining, agribusiness and manufacturing have been successful, however, all have faced difficulties as a result of issues related to the business environment and the absence of regional cooperation which limits market opportunities for and thus the economic viability of Kyrgyz enterprises. Projects generally require significant levels of technical assistance to ensure the economic viability and long-term sustainability of IFC investments. 18. Impediments in the business and investment climate include: (i) poor quality of tax administration; (ii) uncertainty and unpredictability of economic policy; (iii) high level of corruption; (iv) high cost of financing; (v) macroeconomic instability; (vi) customs and foreign trade regulation; (vii) criminality and lack of law and order; (viii) low qualification of workers; (ix) difficulties of access to finance; (x) judicial system and conflict resolution. There is also overregulation by a number of ministries and agencies that has created multiple layers and high administrative barriers, driving economic activity outside the formal sector. Inadequate investments in maintenance of physical infrastructure, including transport and communications, have constrained the growth of business enterprises.



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19. The absence of privatization of energy and infrastructure projects as well as a non-transparent legal and regulatory framework in the extractive industries sector are obstacles to increased foreign and IFI investment in these sectors. 20. The most effective means of providing financing to SMEs is through effective financial intermediaries. Unfortunately financial intermediation is weak in the Kyrgyz Republic which limits opportunities for using the system for IFI support to micro and small business enterprises. The banking system, with US$670 million of total assets or about 25 percent of GDP at the end of 2006, is weak with limited trust among the populace and business community. The sector offers limited products and needs to develop leasing, housing finance, private pension funds factoring and insurance in order to better support the private sector. III. SUMMARY OF LESSONS LEARNED 21. Greater selectivity is needed given the limited IDA resources and the limitations placed on the Government’s own PIP. In this respect, the WBG strategy focuses on building on successful results achieved in first generation projects, targeting activities where the Bank can show visible results to the population, and leveraging our lending and analytical work to attract financing from other development partners. The Bank programs in the Kyrgyz Republic should assume a sequenced and long-term approach to development challenges and reflect this in its operations focusing on basics before attempting more complex reforms. 22. An important lesson learned is that policy reform of the governance and institutional framework often takes longer than expected. There are many reasons for this, including the limitations of the country’s implementation capacity, the absence of prerequisites for sustained and durable reform, and the time lag between altered incentives and behavioral response. Exogenous factors can delay implementation, but there are very few that can accelerate change. Expectations, and related performance indicators, on the pace of reform and response to reform should reflect that experience. 23. Project and program conditionalities remain important but have proven to be a blunt instrument in persuading the Government to carry out major institutional (and particularly governance) reforms where significant vested interests remain. The Bank intends to move away from development policy operations with conditionality in exchange for budget support towards focused technical assistance and investment with concrete results. The use of instruments like Development Policy Lending or Poverty Reduction Support Credits (PRSCs) as a lever for change needs to be reconsidered in the context of the Kyrgyz Republic. The reluctance of the authorities to participate in the HIPC and MDRI initiatives also indicates the poor chances of success for development policy operations. Attempts should be made to build consensus for reform through nonlending activities, and supporting the reforms that are already on the Government's own agenda. 24. For this reason the Bank’s lending program for FY07-10 includes primarily investment lending. That being said, the positive experience of implementation of the Health SWAp needs to be continued, supported by further capacity building in the area of public expenditure management. Broadening the consultative process and multi-donor



55



financial support to other elements of the Government program to build local capacity may be supported through SWAps in other areas (e.g., education). The Bank intends to take a programmatic approach with a focus on results, to ensure the amount of financial support is commensurate with real progress to support long-term reforms and institution building. 25. One of the most important achievements during the FY03-06 CAS period was improved donor coordination and harmonization. This was seen particularly following the change in Government in March 2005 when donors came together with one voice to provide support to the new Government and help quickly identify development priorities. Greater harmonization has also translated into the development of a joint country support strategy as well as the preparation of joint projects, such as the Heath SWAp and joint Technical Assistance (TA) in Public Financial Management (PFM) reform. IV. PORTFOLIO PERFORMANCE 26. Efforts were made to improve portfolio performance during the period of the previous CAS and as a result there are currently no projects at risk. Two of 19 projects in the portfolio are rated as highly satisfactory: the VIP and Land and Real Estate Registration project. The size of the Bank’s portfolio grew over the last CAS period from 16 projects in 2003 to 19 as of March 1, 2006. Total commitments slightly decreased from almost US$286 million in FY03 to US$254.3 million in March 2006. Disbursements have improved substantially compared to the previous CAS period. Throughout FY03-05, the disbursement ratio was consistently higher than the ECA average, increasing from around 20 percent in FY03 to almost 27.5 percent in FY06. 27 The average project age of 3.8 years is slightly higher than the ECA average of 3.4 years. 28

PF FP PF FP



27. CPPRs have evolved into an effective tool for managing portfolio performance. Most systemic issues identified, i.e., compliance with procurement, disbursement and financial management requirements, have been resolved through regular CPPRs. The most recent CPPRs have put a greater emphasis on results-based approaches in portfolio management and launched the discussion with the Government on how the portfolio contributes to achieving CAS outcomes. In addition, CPPRs focused attention on more specific issues, such as taxation of project resources, PIU inspections, and insufficient coordination of donors and portfolio by the Government. With respect to the latter, progress is being made as CPPRs are now being conducted jointly with other development partners, for example ADB, IsDB and KfW. V. WBG SUPPORT FOR IMPLEMENTATION OF THE JCSS 28. The Bank’s proposed program during the JCSS period will continue the current CAS focus on economic growth and poverty reduction with an emphasis on the following four outcomes envisioned in the JCSS: (i) promoting economic management consistent with strong and sustained pro-poor growth; (ii) improving governance, effective public



27

TP PT



28

TP PT



Average disbursement ratio in ECA was 19.7 in 2003, 18.3 in 2004, and 23.8 in 2005. As of March 1, 2007.



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administration and reducing corruption; (iii) building sustainable human and social capital; and (iv) environmental sustainability and natural resources management. 29. Certain strategic choices outlined in the JCSS have been applied across all donor groups and have helped to guide the World Bank’s program: • Focus on areas where support for reforms is already embedded: The Kyrgyz Republic is still in the process of becoming an effective state. Economic management and government ownership is weak and fragmented. In this environment, moving reforms is difficult and the Bank intends to build on successful programs already in place. Mitigate risks associated with high indebtedness and growth volatility. The JCSS identifies growth as a priority for poverty reduction, but also recognizes the constraints in moving towards a sustainable growth path. The Bank will continue to provide support to the Kyrgyz Republic to overcome these challenges. Focus on basic reforms, as opposed to complex operations: Lessons learned among development partners have shown that given Kyrgyz Republic’s uncertain political environment, complex reforms are not feasible and are unlikely to show results in the time horizon of the JCSS. The Bank will focus on generating rapid and visible results for the population, in particular in providing basic social services such as health, education, water and sanitation, while IFC will focus on reforms which lead improvements to the business environment, such as licensing, permits and inspections. Focus on ESW and capacity building: The discussions in the first part of this JCSS indicate that a weak institutional framework and weak implementation capacity play a significant role in constraining growth potential. The Bank will focus significant attention on providing a strong level of analytical work that will help build capacity and address problems, constraints and issues in sectors with high growth potential, including electricity and mining.



•



•



•



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Table 1. IDA Lending and Non-Lending Program for FY07-FY10

FY07 Lending Program Reduce Technical Barriers to Trade (US$5 m) Village Investment Project 2 (US$15 m) On-farm Irrigation 2 (US$16 m) Non-Lending Program Poverty Assessment Update PPER CPAR/CFAA Update Urban Slums Financial Sector Assessment Update CEM follow-up PPER Social Protection Strategy Public Expenditure Tracking Survey Poverty Assessment Heating Strategy Fiduciary Assessment Education User Survey Access to Health Judicial Reform Study CEM Poverty Assessment Update Corporate Governance ROSC



FY08



FY09



Statistical Capacity Building Project (US$1 m) Agricultural Investments and Services (US$10 m) Bishkek/Osh Urban (US$15 m) Economic Management TA (US$4 m) Regional Biodiversity Project (US$2 m) National Road Network Maintenance and Rehabilitation Project (US$20 m) Rural Water 2 (US$10 m) Education SWAp (US$15 m) Land and Real Estate Registration 2 (US$6 m) Judicial Reform Project (US$10 m)



FY10



* The programs are indicative and annual commitments will depend on the availability of IDA resources through the Performance Based Allocation exercise.



(i) Promoting economic management consistent with strong and sustained pro-poor growth Economic Management 30. The Bank in collaboration with the IMF will continue to support macroeconomic stability and fiscal management in the Kyrgyz Republic. The Bank will assist the Government in addressing constraints to growth through an Economic Management TA project and the CEM follow-up under implementation with the possible participation of other partners. The project will have two main axes. The first will focus on providing technical assistance to strengthen the economic management and policy making capacity in the newly established Ministry of Economy and Development. This part of the project will focus on building capacity to develop and implement measures to improve the business and regulatory environment so as to support economic growth and strengthen the responsiveness of the Government to the private sector needs. The assistance would also include support to the Ministry of Economy and Economic Development to restructure its activities in line with international practice. The second axis of support would be to provide assistance to the Ministry of Finance to develop modern personnel management and incentive systems, and build the capacity of staff of the Ministry, to develop and implement macroeconomic and fiscal policy. This project will build on previous and on-going donor assistance in the area of growth and private sector development. In particular, the TA will support implementation of the findings of the Bank’s 2005 CEM, the ADB’s 2007 Private Sector Study, the Bank’s 2007 CEM TA follow-up and the Statistical Capacity Building Project which provide insights in identifying and measuring the obstacles to sustained pro-poor growth. In addition, the assistance would build on and complement on-going public finance reforms supported by all the JCSS partners and other donors.



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Financial Markets 31. The WBG, in close cooperation with other partners will continue the ongoing policy dialogue and selective TA for developing the financial sector. The Financial Sector Assessment Program (FSAP) update undertaken in 2006 recognized that substantial progress has been made in the Kyrgyz banking system. It appears well capitalized and resilient to moderate shocks; the supervisory framework for banks under the NBKR has generally been strengthened; and the payment system reform is making good progress. Areas demanding substantial further progress have been identified however: (i) access to finance; (ii) development of public confidence to attract deposits: (iii) increased skills in risk management and credit analysis: (iv) full disclosure of beneficial ownership: (v) new financial products including housing finance, factoring and insurance; (vi) the institutional strengthening of the Non Bank Financial Institution Regulatory and Supervisory Agency (SAFSR). In addition, special attention will be given to governance in both the corporate and banking sector, with a Corporate Report on the Observance of Standards and Codes (ROSC) planned in FY10. Ongoing investment operations will be limited to support improvements in the payments systems. 32. The IFC will continue to help increase access to finance to medium-, small- and micro-sized enterprises (MSMEs) by strengthening local financial institutions, by expanding microfinance and by developing leasing facilities. The IFC financing and advisory services will continue to focus on strengthening and expanding existing local financial intermediaries which provide a micro lending program that otherwise may not have access to the formal financial system. Deepening the financial system would contribute positively to growth in the Kyrgyz Republic and increase financial access especially for small- and medium-scale enterprises. The IFC will continue to assist in the development of leasing and housing finance as well as initiate technical assistance to develop good governance in the financial and real sectors. The IFC’s investments in local intermediaries demonstrates best practices in the market by: (i) demonstrating that lending to SMEs is not only beneficial to the economy but also for profitable business, and (ii) highlighting the importance of operating policies, credit technology, transparent corporate governance and environmental screening procedures in creating sustainable financial intermediaries. IFC has also selected the Kyrgyz Republic as one of the frontier countries in which selected opportunities for direct SMEs investments are actively being pursued. The MIGA could also provide guarantees for foreign banks interested in entering the Kyrgyz Republic financial market. The MIGA would seek to support financial institutions that would improve MSME’s access to finance and contribute towards strengthening standards of corporate governance. Agriculture 33. An important element in the drive to foster pro-poor growth and maintain the momentum in poverty reduction will be an increase in productivity in agriculture and an improvement of market mechanisms in production and processing. The Agricultural Investment and Services Project, the WBG’s second operation to improve agricultural support services, especially in the livestock sub sector, will bring benefits to some of the poorest regions in the country which have few alternatives for income generation. Ongoing operations in agribusiness and marketing and in land and title registration will continue throughout the life of this CAS. In the latter case, a second operation to support 59



completion of the state cadastre and improve land use planning and management is envisioned. To support this lending program analytical and advisory activities (AAA) will include policy notes designed to encourage development of agro-processing, improvement in input quality (for example in seeds and livestock breeding) and in export development. 34. The IFC will support small companies in the agricultural sector through local microfinance institutions. The IFC will also continue to explore opportunities for making direct investments in viable agro-processing companies which demonstrate potential for production of value–added products for both the domestic and export markets. The MIGA would also consider supporting foreign investment that would have a significant development impact in the agribusiness, manufacturing and services sectors. 35. The WBG program, in concert with other partners, will also address constraints in the enabling infrastructure for growth in the agriculture sector through supporting the irrigation networks and improving water resource management. In addition to assisting the Government in rehabilitating the main irrigation systems the WBG will also provide technical support leading to increased cost-effectiveness and reduction of waste in irrigation for longer-term sustainability. The Bank’s lending program includes a second operation to improve irrigation systems and build on the substantial progress achieved in this sector. Transport 36. The WBG program, in concert with other partners, will address constraints in the enabling infrastructure for growth: in particular in the road networks. Within the transport sector the Bank, in collaboration with other partners, will provide advice to help the Government develop a roads sub-sector strategy to improve sustained maintenance of the road network and an appropriate framework for regional cooperation in transport and trade facilitation. In conformity with Government priorities under the CDS and other donor efforts, an investment operation is planned for the rehabilitation of the Osh-Isfana trunk road which is a strategic road whose rehabilitation will encourage and facilitate inter regional trade. The Bank’s interventions in the transport sector will contribute to increasing the present share of reconstructed strategic roads and improving overall condition of roads throughout the country. The Bank’s assistance will also lead to concrete results in enhancement of road budget management in the Ministry of Transport as measured by application and use of the Highway Development and Management Model (HDM-4). Energy The Kyrgyz Republic is endowed with massive electricity generation capacity that can serve regional needs, but this potential will require large investments that are beyond domestic resource mobilization capacity. Attracting much-needed investment will however require substantial reform and financial rehabilitation of the existing structures and systems. The Bank will provide support through a range of AAA services, including support for the Government’s electricity sector strategy, assessment and encouragement of regional energy collaboration, a heating strategy study and an ongoing assessment of the feasibility of carbon finance opportunities. In the event that the Government shows a



60



strong commitment to fundamental reform of the electricity sector, including for public/private partnerships, the Bank would consider an Energy Loss Reduction Investment project in partnership with other development partners (e.g., KfW). A further project in the electricity sector would also be dependent on the availability of IDA resources through the Performance Based Allocation exercise. 37. The IFC will seek to support investment in private or public-private infrastructure projects, particularly privatizations in the power and communications sectors. Such investments, however, will depend on significant legal and regulatory reforms and transparency in the award of concessions or licenses for such projects. The MIGA is also prepared to support foreign investment in the energy sector. However, private sector interest and IFC’s and MIGA’s assistance and support would depend on the Government making significant steps towards improving the sector’s financial health and transparency. (ii) Improving Governance, Effective Public Administration and Reducing Corruption 38. Rather than pursuing an ambitious agenda of governance reforms, the Bank intends to focus on areas that can achieve rapid development results, with the Government being seen to be delivering visible benefits to citizens, and doing so in ways that are transparent and fair. Experience has demonstrated that far reaching institutional reforms are neither feasible nor likely to show results in the short- to medium-term. Governance reform will be embedded in specific investment operations, including consideration for capacity enhancement and institutional strengthening in public sector counterparts. This will encompass organizational and functional reviews of central government ministries, as well as efforts to enhance the capacities of local government. Public Financial Management and Public Administration 39. The Bank, in close collaboration with the other development partners will build on ongoing work and programs that enhance the national public financial management. Specifically, support will be provided to implement the public finance reform action plan adopted in June 2006 to: (i) strengthen mechanisms to ensure that annual budgets clearly reflect CDS priorities; (ii) implement mechanisms to enhance expenditure accounting, tracking and reporting; (iii) develop internal control system and introduce effective internal audits; and (iv) strengthen public procurement. The Banks’ interventions in this area will help the authorities to considerably improved the PEFA ratings, particularly in the area of budget execution, measured by PEFA indicator PI-16 and accounting and auditing, PI-25. The Bank is willing to support the authorities’ efforts to improve the financial transparency of operations in SOEs and in this context could provide advice to strengthen the asset management strategy and help guide and sequence government reforms. 40. In public administration reform, the authorities have recently recognized the importance of a merit-based civil service and begun to implement the new legal framework for competitive and merit-based civil service appointments. Deepening of this process and setting public sector remuneration and ensuring that public servants receive adequate remuneration will take considerable time and will require gradual improvement in reform management capacity. The Bank will continue to support



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creating a professional civil service through technical assistance on the restructuring and implementation of new systems of remuneration in pilot public agencies. These pilot programs will be evaluated and subsequently extended to the rest of the public sector. 41. The bulk of the Bank’s engagement to support this CDS goal will be through comprehensive AAA activity. This will include the ongoing PPER, the Country Fiduciary Update, an expenditure tracking review in key social sector service providers, and a comprehensive corruption diagnostic to be undertaken by the WBI in FY08. The Bank’s ongoing PPER will support economic management by bringing about changes in budget performance and monitoring, and contributing to the dialogue on spending priorities. Ongoing support under existing operations will support continued capacity building in budget management and internal and external audit. Improving the Business Environment 42. An important element in the fight against corruption will be to increase the momentum of deregulation in the economy and reduce the scope for rent-seeking behavior. The Government’s CDS envisages a wide range of reforms in tax and customs administration, business procedures and licensing regulations. The WBG will assist the Kyrgyz Republic in improving its business environment and moving to a regulatory framework based upon transparent laws, reducing inspections and streamlining license requirements and establishing clear and transparent procedures for new laws and regulations affecting businesses. In the context of BEEPS and other periodic business surveys, there will be a close monitoring of progress in changes in the business environment that will guide the ongoing policy dialogue. Ongoing investment operations in this area will be limited to assisting the authorities in reducing technical barriers to entrepreneurship and trade. The IFC’s advisory services will also seek to improve the business environment. Such assistance may include surveys of the business environment as viewed by micro and small business enterprises; reforms to the licensing and permit regime; or work to limit inspections. IFC will also support direct investment into manufacturing, infrastructure and extractive industries which demonstrate good governance, financial and economic viability and environmental sustainability. 43. Mining (and particularly gold) is a significant resource of the Kyrgyz economy. The sector now accounts for 10 percent of GDP, 11 percent of budget revenues, and over 40 percent of exports and it holds considerable potential for growth. However, conditions for further development of the sector are hampered by lack of transparency and excessive discretionary authority by government agencies as well as a lack of clear vision concerning the role of the state mining company (KyrgyzAltyn). Mining licenses (also outside the gold sector) remain a source of rents. Disputes are currently on-going for the licenses for the Jerooy and Taldybulak gold mines. 44. The Bank will assist the authorities in implementation of the EITI to increase the transparency in the mining sector. An appropriate licensing and regulatory framework could encourage large investments for exploiting new resources (e.g., gold deposits in the Jerui mine) and stimulating economic growth. An ongoing policy dialogue and TA program for reform of the basic mining regulatory and licensing structure will continue under the Bank program to help the country conform to international practices and standards, in particular to develop a coherent and unambiguous mining code, consistent



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with international practice. Subject to the success of the TA program to increase transparency in the mining sector, the IFC may consider sustainable investments in the sector with qualified private sector sponsors. 45. Weak property rights and a lack of effective mechanisms for conflict resolution through the judicial system inhibit investment, exacerbate corruption and represent a major constraint to private sector operation. Foreign investors have faced difficulties in enforcing private property rights in the Kyrgyz Republic and have suffered due to interventionist actions of the Government. Over the past two years, MIGA insured investors have experienced difficulties with regards to their investments which have resulted in two claims situations. MIGA has been active in mediation efforts between the investors and the Government to resolve the disputes and is working towards finalizing a settlement agreement between the two parties in two of its projects. 46. Ongoing and follow-up operations to support completion of the state cadastre and improve land use planning and management are part of the Bank program. A Judicial Reform Study (FY09) and Judicial Reform project (FY10) are also envisioned to modernize the judicial system and improve its effectiveness and transparency. Developing Alternative Dispute Resolution Systems for example under this project will enhance access to the legal system, facilitate contract dispute resolution and provide avenues for small and medium scale firms to seek remedies against excessive regulation or arbitrary administrative actions that are being driven by rent seeking objectives. (iii) Building Sustainable Human and Social Capital 47. The Bank will continue to focus on improving the quality of service delivery of public services and broadening the access to these services for all members of society. The emphasis will be on achieving rapid improvements in access by the poorer households. The ongoing Health SWAp operation will continue throughout this assistance strategy and will be supported by public expenditure tracking analysis and household expenditure and user surveys to evaluate access levels. Furthermore the recently approved Avian Flu project and the Bank’s engagement (with others) on implementation of the National AIDS strategy will complement the broad sector wide approach under the Health project. These interventions should contribute toward improving the more problematic MDGs of reducing child and maternal mortality rates and stemming the spread of HIV/AIDS. The Bank will assess the progress toward achieving outcomes by monitoring the budget allocation to the health sector and the level of qualified personnel in the sector. 48. The Bank will also continue to have strong engagement in the education sector. If the necessary fiduciary conditions and commitment and capacity of the Government are seen to be in place, the Rural Education project may be followed by an Education SWAp in FY10 that will address both secondary and primary education. A multi-donor “Education For All Fast Track Initiative” (EFA-FTI) for US$15 million has just been approved which will further enhance the support provided by the Bank to support the education goals set out in the CDS. Financial operations in education will be complemented by AAA activity including a fiduciary assessment of the education sector. TA will be provided to facilitate further development of the country’s education strategy and develop monitoring and evaluation mechanisms to monitor progress in implementing



63



this strategy. The FY07 programmatic PPER also looks at expenditures in the education sector. 49. The Government’s desire to improve the effectiveness and efficiency of social assistance and pension schemes will be supported by comprehensive Bank analytical work. This will include support for developing a comprehensive Social Protection strategy that addresses targeting of beneficiaries and pension policy reform, a Poverty Assessment and a Poverty Update. Annual household expenditure surveys will track effectiveness of social protection programs on poverty and access to public services. Finally analytical work will be undertaken to develop a Heating Strategy for the country and will include a proposed social protection scheme to ensure that the most vulnerable households are provided essential utility services as reforms are undertaken to improve the financial viability of these utilities. 50. The JCSS agrees on the need to support the Government’s efforts to ensure and enhance provision of and access to essential public services. Ongoing operations in rural potable water and sanitation and small town infrastructure and capacity building will continue throughout the CAS period. A second Rural Water project is planned following completion of the first. Furthermore, an Urban Infrastructure project will be initiated in Bishkek and Osh in FY08 to bring basic public services to sections of these cities that have witnessed significant in-migration from rural areas. These areas lack basic services such as potable water, sanitation, solid waste removal and appropriate drainage systems. A second Village Investment project was approved in FY07 that builds on the achievements of the first (see Box 1). This provides a strong community-based element and includes capacity building and institutional development components designed to ensure future financial sustainability and appropriate maintenance. (iv) Environmental Sustainability and Natural Resources Management 51. The ongoing Disaster Hazard Mitigation project will continue throughout the life of this JCSS. A new regional operation, the Tien Shan Natural Resources project, is being developed and will focus on biodiversity and natural resource management in conjunction with GEF and other regional funds. In addition, land use planning and sustainable management practices together with integrated water resource management will be enhanced under the planned second Land and Real Estate Registration project and the ongoing Water Management Improvement project. Regional Initiatives 52. As mentioned in the JCSS, the Kyrgyz Republic is a member of several regional initiatives including the CAREC program. A wide range of issues are addressed in this regional forum, including regional security, trade and transport facilitation, the water/energy nexus, migrant worker issues, environmental protection and disaster preparedness and drug trafficking. The World Bank will endeavor to ensure a greater flow of benefits from this array of regional agreements, given that benefits in the past have been limited. This will be achieved primarily through regional analytical and advisory work; however, regional program objectives on environment protection and natural resource management will be achieved through individual country lending.



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VI. IDA FINANCING AND INSTRUMENTS 53. Bank financing during fiscal 2007 to 2010 is expected to average about US$35 million in new commitments annually. These commitments are balanced across all primary CDS goals, although the CDS goal on environmental sustainability represents the smallest area of Bank engagement. This reflects other donor involvement, both JCSS and non JCSS partners, and of course the need for selectivity given the finite amount of available IDA resources. Furthermore the Bank will continue to solicit trust funds and other sources of funds to complement both the identified TA and the planned AAA activity. 54. The IDA allocations will be determined annually based upon the performance based allocation system, which includes the Country Policy and Institutional Assessment (CPIA) rating, governance and measures of annual portfolio performance, including procurement. The Kyrgyz Republic had a slight improvement in its CPIA rating which is expected to increase to 3.6 in 2006, however further improvement will require very strong efforts and achievements in improving performance in areas of governance, property rights and rule-based governance, transparency and accountability in the public sector and the quality of public administration. The strong focus on governance issues in this CAS together with the emphasis on the delivery of public services will form a solid foundation for the policy dialogue to improve the overall CPIA rating. 55. Lending limits are determined annually based upon the IDA14 performance based allocation system, which in turn depends on country performance, its performance relative to the performance of other IDA countries; the amount of overall resources available to IDA during the IDA14 and IDA15 replenishment periods; changes in the list of active IDA-eligible countries; and the terms (grants or loans) for which the Kyrgyz Republic qualifies under the grant eligibility and allocation framework. The Kyrgyz Republic is currently characterized as a high risk country in terms of debt distress and all IDA allocations are on grant terms. 56. There will be a move away from general structural budgetary support in this assistance strategy, because past experience has shown these instruments to be less effective in the Kyrgyz environment given lack of ownership and weak institutional capacity. To improve the Bank’s impact reform efforts will be addressed through sector specific investment projects, technical assistance and analytical work where assistance can be focused on fewer issues and a sequenced approach can provide flexibility. This would allow for better measurement of step-by-step improvements and for timely adjustments if necessary. Sector-wide programs could be expanded into new areas such as education if current arrangements in the health sector continue to bear fruit and if the fiduciary environment is conducive. VII. CAS CONSULTATIONS 57. The World Bank Program has been broadly discussed with the Government and the authorities fully support the proposed strategy as it is closely aligned with the Government’s development goals as outlined in the CDS. Discussions centered on the implementation of the 2003-2006 CAS and particularly lessons learned, on portfolio performance and WBG support for the JCSS. The Government fully shares the WBG’s



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approach centered on JCSS principles to: align the WBG’s programs with national priorities, harmonize processes and procedures, use results-based approaches, and to be more selective. In particular, the Government enthusiastically supported the Bank's intention to move away from development policy operations with conditionality towards focused investment projects with concrete tangible results for the population within a relatively short period of time. VIII. MONITORING IMPLEMENTATION AND MANAGING RISKS 58. Several mechanisms are in place for monitoring and evaluating the Government’s implementation of its reforms and poverty reduction strategy. The Government itself plans to undertake quarterly reviews of budget implementation and bi-annual reviews of CDS progress and implementation. There are a number of well established sector working groups that meet periodically to review progress in implementing sector strategies. An ongoing sector level dialogue will feed into the Government’s monitoring and evaluation framework which is continually being upgraded since completion and approval of the CDS. 59. The JCSS will undergo an annual review of performance, and a joint CPPR will be developed and discussed at length with the Government. The local Donors Council meets every month where it takes stock of overall implementation of all partner programs. This helps to harmonize dialogue with the Government and to reach consistent positions in response to possible deterioration in performance or delay in reforms. 60. In addition to participating in the implementation reviews of the CDS and the JCSS, the WBG will assess the results of its specific interventions through more intensified outcome-oriented management of the portfolio. The results framework outlined in Part II Annex 1 establishes a more direct link between specific CDS outcomes, and the contribution of Bank inputs to these targeted outcomes. 61. The risks associated with the evolving political environment, poor governance, weak public sector capacity and external shocks are outlined in the JCSS. An additional risk which the Bank faces is a reputational risk relating to growing skepticism among the population in terms of the Bank’s development effectiveness. This culminated recently in the Government’s decision not to pursue HIPC. To mitigate this risk the Bank has focused its assistance strategy on achieving concrete results which are visible to the population. In addition the Bank is embarking on a targeted and robust communications campaign. The mid-term review of the JCSS progress will also include a review of the implementation of this communication strategy and an assessment of its effectiveness. 62. The WBG communication strategy includes partnering with the Government and strengthening the dialogue on results that will ensue from investment lending and AAA. It also includes reaching out to new partners in the Parliament, civil society, the multi faceted array of NGOs, the private sector and their various business associations and the media. Outreach will focus on some key goals which include furthering trust and credibility, and showing positive results and outcomes on the economy and peoples lives. Besides pursuing an intensified dialogue on development issues, the strategy will build partnerships that encourage ownership and accountability for results. The WBG will also seek to build capacity in key Ministry counterparts to communicate results and reforms.



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In addition all new projects will feature an effective communication program that will be followed during project preparation and implementation. For ESW stronger efforts will be made to strategically disseminate analytical work to wider audiences than previously might have been the case. IX. CONCLUSIONS 63. The next four years will be a critical period for the Kyrgyz Republic, which faces challenges on economic, social and political fronts and Government commitment will be critical to propel the country to higher sustained growth rates and achieve the MDGs. The WBG and other development partners have been asked to provide advice and support the implementation of the reform agenda outlined in the Government’s CDS. JCSS partners agree with the broad direction of the strategy but recognize the targets are ambitious and will require extraordinary efforts. The WBG and its development partners are ready to stand behind the Government in order to maximize their respective contributions to overcome these challenges and help the Kyrgyz Republic achieve its development potential.



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Part II: Annex 1. World Bank Group CAS Results Matrix for the Kyrgyz Republic Country Development Goals Issues and Obstacles CAS Outcomes Milestones Bank Program

• Economic Management TA (planned) • Statistical capacity building project (planned) AAA/Non-lending • Programmatic CEM (ongoing) • Programmatic PER (ongoing) • Comprehensive Poverty Assessment (ongoing) • Corruption diagnostic to be undertaken by the WBI (planned)



Priority Area 1. Promoting economic management consistent with strong and sustained pro-poor growth Capacity constraints both Sound economic Enhanced efficiency of public • Public sector reform in a managerial and technical management to support administration limited number of pilot sustained and shared CPIA indicator 15 agencies to improve their Baseline: 2.5 (2006) growth performance, optimize Increase average GDP Target: 3.0 (2010) staffing, and ensure growth improved remuneration Baseline: 4 % (2000consistent with fiscal 2006) sustainability Target: 6% (2007Common agreement between • All future comprehensive 2010) authorities and Donors on future reviews of Public Finance Reduce poverty headcount steps and benchmarks for PFM Management are conducted Baseline: 43% (2006) reform following the principles of Target: 31% (2010) the Strengthened Approach Cut fiscal deficit as % GDP to PFM reforms Baseline: 4.1% (2006) Closer link between the annual • Improved system of Target: 2.4% (2010) budgets and CDS objectives information flows in the Reduce public debt as % PEFA indicator PI-12 MOF and implementation GDP Baseline: D+(2006) of a database for budget Baseline: 70% (2006) Target: B+ (2010) preparation Target: 49% (2010) Sequence of measures to support • Roadmap of measures to growth agreed between the support growth is Government and private sector developed and discussed is under implementation with stakeholders Improved statistical capacity • Improved National for Monitoring and Evaluation Accounts and 2010 census Improved statistical indicators organized and funded integrated into the CDS implementation process



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Country Development Goals

Develop a sound financial system and improve access to financial services Credit to the private sector as share of GDP Baseline: 10.5 % (2006) Target: 17% (2010)



Issues and Obstacles

Low level of financial intermediation Weak institutional capacity at Non Bank Financial Institution Regulatory and Supervisory Agency (SAFSR) in charge of regulation and supervision of Non-Bank Financial Institutions (NBFIs) Unstable and non transparent regulatory environment Proliferation of controls and inspections Inefficient system of licenses and permits



CAS Outcomes

Increased total value of



Milestones

• Complete the payment system reform • Strengthen SAFSR through approval of appropriate legal framework and provision of TA



Bank Program

• Payment and Bank system modernization project (ongoing) AAA/Non-lending • FSAP Follow up on Access to Finance (planned) IFC: Investments and advisory services in financial sector for banks/ non-bank intermediaries. Legal and regulatory work to develop leasing and housing finance. • RTBET (ongoing) AAA/Non-lending • Programmatic CEM (ongoing) • Judicial Reform Study (planned) IFC: Advisory Services could include work to limit inspections of private sector business or rationalization of licensing and permits regime. IFC Advisory Services to develop the legal and regulatory framework as well as work with larger enterprises to develop the culture of good corporate governance.



transactions channeled through and processed by the National payments system Baseline: 109,000 (2005) Target: 180,000 (2008) Increase in total number of bank accounts Baseline: 200,000 (2005) Target: 400,000 (2008) Technical regulations harmonized with internationally accepted standards Reduction in costs of transactions required for import and export Number of days and documents required for imports (Doing Business) Baseline: 18 docs / 127 days (2006) Target: 8 docs / 40 days (2010) Eliminate inspections not consistent with the new law on inspections



Improve the business environment, and climate for investment Increase investment-to-GDP ratio Baseline: 22.6% (2006) Target: 24% (2010)



• Develop internationally recognized accreditation scheme • Streamline list of products subject to mandatory certification (baseline 2000 in 2006) • Develop and implement action plan for cutting foreign trade transaction costs • Approve and implement a new law on inspections limiting their number, length and duration



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Country Development Goals

Improve the business environment, and climate for investment Increase investment-to-GDP ratio Baseline: 22.6% (2006) Target: 24% (2010) Increase productivity and output in agriculture Agriculture GDP growth Rate Baseline: 1.5% (20022006) Target: 3% each (20062010)



Issues and Obstacles

Continued institutional weakness



CAS Outcomes

Improved property rights and ability of landowners to borrow Number of registered land and real estate sales, leases, and mortgages in one year Baseline: 88,000 (2006) Target: 120,000 (2010) Improved sustainability of irrigation system Collection rate of irrigation service fees Baseline: 80% (2006) Target: 95% (2010)



Milestones

• Establish well functioning arrangement which uses registry revenue to finance key headquarters functions (e.g. information technology and quality control) Improved water resource management Command area by functional WUAs (ha) Baseline: 200,000 (2006) Target: 300,000 (2007) 400,000 (2008) 550,000 (2009) • Government Agriculture Strategy approved and implemented • Simplification of pasture management through new law passed and implemented • Improve data collection and reporting on animal health • Increased capacity of public and private veterinary services Number of vaccinations Baseline: 0 (2006) Target: 15% (2010)



Bank Program

• Land and Real Estate Registration Project (ongoing and planned)



Poor state of irrigation infrastructure Farm productivity affected by waterlogging, salinization of irrigated lands, and soil erosion Unsuitable split of responsibility among different local governments



• On Farm Irrigation Projects (ongoing) • Water Management Improvement Project (ongoing)



Poor feed and animal health



Improved efficiency of land use for pastures Percentage of pasture land transferred to Aiyl Okmotus and local pasture user associations Baseline: 25% (2006) Target: 40% (2010) Improved animal health Reduction in incidence of brucellosis in humans (transferred from animals) Baseline: 75-150/100,000 Target: 35-75/100,000 (50% reduction)



• Agricultural Support Services Project (ongoing) • Agricultural Investments and Services Project (planned)



• Agricultural Investments and Services Project (planned) • Avian Flu Project (ongoing)



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Country Development Goals

Increase productivity and output in agriculture Agriculture GDP growth Rate Baseline: 1.5% (20022006) Target: 3% each (20062010)



Issues and Obstacles



CAS Outcomes

Share of agricultural production being processed Baseline: 12% (2005) Target: 17% (2010)



Milestones

• Build business capacity in agribusiness enterprises • Increase number and volume of loans to agricultural producers, agro-processors and agribusiness • Improve road budget planning and management in Transport Ministry (measured by application and use of modern road management system) • Develop a regional trade and transport facilitation strategy • Prioritization of roads network, rehabilitate strategic roads • Sustain and increase funding for maintenance and operations



Bank Program

• Agribusiness and Marketing Project (ongoing) • IFC: Potential for advisory services related to agriprocessing linkage projects. Investments for agri-processing and indirect lending through financial intermediaries to agricultural enterprises. • National Road Network Maintenance and Rehabilitation Project (planned) • VIP Projects (ongoing) AAA/Non-lending • Regional Trade and Transport Facilitation study (ongoing) • CEM (ongoing) • PPER (ongoing) • IDF grant on budget management (ongoing)



Create a better transport and infrastructure system to ensure access to regional markets

Percentage of the classified network which is in ”fair” or “good” condition Baseline: cumulative 34% Target: cumulative 47%



Physical and soft barriers to cross-border transport links with neighboring countries Deterioration of the road network Limited funding of operation and maintenance of road network



Maintenance of strategic international roads is planned and managed objectively incorporating economic priorities Target - maintenance of 95% of national roads prioritized by end 2010 Rehabilitation of key link to Fergana valley



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Country Development Goals

Improve financial viability of the energy sector Percentage of population with access to clean fuel for heating Baseline: 40% (2006) Target: 50% (2010) Energy sector growth at 2.5% per year Reduce energy sector losses Baseline: 8.1% of quasifiscal deficit (2006) Target: 1.9 % (2010)



Issues and Obstacles

Large financing gap of 2.5 billion with deteriorated assets



CAS Outcomes

Increased efficiency of the energy sector Reduce electricity losses and increase cash collection Baseline: 40% and 58.3% (2006) Target: 14% and 94.3% (2010)



Milestones



Bank Program

• Power and district heating rehabilitation project (ongoing) AAA/Non-lending • Heat Strategy Study (planned) • Regional initiative on ‘waterenergy’ nexus (ongoing) • Policy dialogue (ongoing) IFC: Support investment in private or public private energy sector investments.



• Comprehensive nationallyowned energy sector strategy • Satisfactory institutional Tariffs below cost of and legal framework for production implementation of Significant losses and comprehensive reform theft • Tariffs increased in a stepby-step manner to full cost Low energy efficiency recovery, excluding crossProblems with regional subsidization, and with cooperation mechanisms for social protection incorporated Priority Area 2. Improving governance, effective public administration and reducing corruption Lack of transparency in Improve transparency and Predictability in the • Amend budget legislation public asset management accountability in public availability of funds for to tighten responsibility for finance management commitment of expenditures in-year adjustments Transparency International PEFA indicator PI-16 • Improved payroll oversight Corruption perception index Baseline: D (2006) • Introduction of electronic Baseline: 2.2 (2006) Target: B (2010) Treasury system by end Target 2.9 (2010) 2008 Quality and timely annual • Introduce new accounting financial statements are standards consistent with produced IPSAS PEFA Indicator PI-25 • Approve law on Internal Baseline: C (2006) Audits and issue internal Target: B+ (2010) audit manual Weak internal controls Improved controls in budget • Implement a new budget execution classification to meet GFS Ad hoc non-transparent PEFA Indicator PI-20 2001 requirements budget execution Baseline: D (2006) Target: C+ (2010)



• GSAC and GTAC (ongoing technical assistance) including Treasury Modernization • Economic Management TA (planned) AAA/Non-lending • Programmatic PER (ongoing) • Public Expenditure Tracking Surveys (ongoing and planned)



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Country Development Goals

Improve contribution of mining sector to GDP Average annual growth rate in the mining sector Baseline: 3.2 % (2006) Target: 5 % (2010)



Issues and Obstacles

Lack of transparency in licensing Large financing requirements which can not be provided domestically



CAS Outcomes

More transparent legal and regulatory framework for the mining sector is in place



Milestones

• New mining law developed and enacted • Improved fiscal regime for subsoil taxation and progressive land tax • Institutional reform including privatization of non-state activities • Separation of regulatory and operational functions • Transparent and simplified process for the award and cancellation of licenses



Bank Program

AAA/Non-lending • Ongoing TA for revisions in mining code • TA for a corporate plan for Kyrgyz Altyn and other stateowned entities in the mining sector (planned) IFC: Direct investment • TA for full implementation of EITI (ongoing)



Improved governance and transparency in the mining sector Annual publication of EITI data Priority Area 3. Building sustainable human and social capital Financial burden to Ensure equitable access to Improved access to primary households due to quality health care health care continuing informal Under 5 mortality rate Number of visits to family payments and coBaseline: 29.5 (2001) General Practitioner per citizen payments Target: 10.4 (2015) Baseline: 2.2 Infant mortality rate Target: 3.0 Insufficient access to and Baseline: 21.7 (2001) quality of health services Target: 8.5 (2015) delivery, especially for Adequate financing of basic Maternal mortality rate poor people and/or in health as share of total (per 100,000 live births) rural areas expenditure Baseline: 43.8 (2001) Baseline: 10.4% Low motivation of some Target: 15.7 (2015) Target: 13% health professionals, Measles vaccination particularly in rural areas Baseline: 60 (2005) Target: 100 (2015)



Dominance by state enterprises with preferential treatment



• Retention of health care specialists in rural areas • National Health Care Reform Program successfully implemented



• Health SWAp (ongoing)



• National Health Care Reform Program implemented • Community and local government involvement in health care expanded



AAA/Non-lending • Public Expenditure Tracking Survey • User surveys to track access to health system (planned)



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Country Development Goals

Ensure access and quality of basic and upper secondary education Net enrolment ratio in basic education (grades 1-9) Baseline: 90% (2004) Target: 100% (2015) Proportion of pupils starting grade 1 who complete grade 9 Baseline: 93% (2004) Target: 100% (2015) Literacy rate of 15-24 yr olds Baseline: 99.6% (2005) Target: 100% (2015) Improve the efficiency effectiveness of the social protection system Increase the share of the Unified Monthly Benefit as a share of extreme poverty line Baseline: 37% Target: 100%



Issues and Obstacles

Limited financing of the education sector.



CAS Outcomes

Adequate resources for total and secondary education Public financing as % GDP Baseline: 4.4 and 2.2% (2005) Target: 6 and 3.5% (2010) Improved quality of education PISA scores Baseline: PISA 2006 results expected later this year (2007) Target: Kyrgyz Republic is participating in PISA 2009, so the target will be set based on the results from PISA 2006 and monitored using PISA 2009 results Improved targeting of social benefits Share of extreme poor households receiving guaranteed minimum income benefit(UMB) Baseline: 30% (2006) Target: 50% (2010) Improved fiscal sustainability of the pension system Long term projection of NPV of expected net receipts of pension system is positive



Milestones

• Implementation of new financing arrangements for the education sector based on capitation and minimum standards • Increased availability of textbooks and learning materials in schools nationwide • Curriculum reform initiated with framework document developed and approved by 2008 • 50 school buildings rehabilitated • Develop a comprehensive social protection strategy • Revised UMB methodology introduced and targeting improved • Number of UMB beneficiaries reduced and level of benefits increased • Produce a long-term fiscally sustainable pension system strategy



Bank Program

• Rural Education Project (ongoing) • Education for All Fast Track Initiative Catalytic Fund Grant • Education SWAp (planned) AAA/Non-lending • Fiduciary assessment of education spending (planned) • PPER (ongoing)



Lack of textbooks and learning materials in schools Inappropriate and deteriorating school infrastructure



Low level of poverty benefits Lack of comprehensive social protection strategy



Inefficiency in social protection expenditures



AAA/Non-lending • Social protection Strategy, including social protection scheme to protect most vulnerable against energy tariff increases and pension reform options (planned) • PPER (ongoing) • Economic Management TA (planned)



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Country Development Goals

Ensure guaranteed access of the population to clean water and sanitation services Population with access to safe drinking water (urban and rural) Baseline: 67% (2006) Target: 90% (2015) Population with access to improved sanitation Baseline: 29% (2006) Target: 40% (2015)



Issues and Obstacles

Lack of financing for social infrastructure Degradation of social infrastructure Unclear delineation of services provision responsibilities at the national and local levels



CAS Outcomes

Increased access to safe and clean water in rural areas Increase percentage of population with access to clean drinking water in rural areas Baseline: 50% (2006) Target: 75% (2010)



Milestones

• Rural water strategy developed • Community-based infrastructure management system established • Increase number of completed water supply and sanitation rehabilitation schemes Baseline: 145 (2006) Target 300 (2010) • Laws related to local utilities debt restructuring implemented



Bank Program

• Rural Water Supply, Sanitation projects I / II (ongoing and planned) • Small Town Infrastructure and Capacity Building (ongoing) • Village Investment project (ongoing and planned) • Bishkek-Osh Urban Infrastructure project (planned) • Water Management Improvement Project (ongoing) AAA/Non-lending • PPER (ongoing) TA to improve local government financial management and service delivery (ongoing) • Bio-Diversity and Natural Resources Management project (planned) AAA/Non-lending • TA carbon finance development for forestry (ongoing) • Disaster Hazard Mitigation project (ongoing)



More Efficient water utilities Increase number of financially viable water utilities Baseline: 0 (2006) Target: 12 (2010) Priority Area 4. Environmental sustainability and natural resources management Landslide and soil erosion Improved reforestation Ensure environmental due to past deforestation sustainability activities Pas management Improve survival rate of effectiveness (IUCN reforestation scorecards) Baseline: 10% (2006) Baseline: 77% Target: 50% (2010) Target: maintain 77% Poor enforcement of regulations for industrial hazardous, toxic and household waste disposal (do we remove this and the Disaster Mitigation project because there are no outcome or milestone indicators? Reduced exposure to humans, animals and plants of radioactive products from uranium mine tailings Increased effectiveness of disaster hazard monitoring warning and response system Real time landslide monitoring and effective warning systems



• Designated National authority for carbon trading operational and carbon trading scheme for forestry developed • Improved sustainability of forestry activities through carbon trade • Abandoned uranium mining wastes isolated and protected from dispersal into the environment • Disaster monitoring and response system established and effectively administered



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Part II: Annex 2. Kyrgyz Republic CAS Completion Report, FY03-06 EXECUTIVE SUMMARY i. The World Bank’s 2003 CAS program was built upon the areas of focus outlined in the NPRS with an overarching objective to support poverty reduction in the Kyrgyz Republic. The three pillars of the country’s poverty reduction strategy were: the Formation of an Effective State; Building a Fair Society; and Promoting Sustainable Economic Growth. The three CAS priority areas were: • • Supporting private sector-led growth, with a focus on agriculture, industry and energy as the main drivers of growth, and helping develop an enabling business environment conducive to small and medium enterprises; Providing essential services through community driven development initiatives—for example, as through the water supply and sanitation project—that support local capacity development and investment, and arresting the deterioration in key infrastructure, and Strengthening the governance framework: improving the efficiency and transparency of the budget process, streamlining and improving the professionalism of the civil service and helping address governance constraints to growth and poverty reduction



•



ii. The CAS was approved acknowledging the weaknesses in political stability and the risk of economic shocks. However, the strategy did not and could not have envisaged the degree of political and economic dislocation that took place in March 2005 and the following years. The political situation started to deteriorate seriously in 2004 and culminated in the overthrow of President Akaev’s regime in March 2005; continuing political instability led to a number of serious and continuous political crises in 2005 and 2006. These upheavals have had an adverse effect upon the Kyrgyz economy and the ability of the Government to implement its policies. iii. The CAS was over optimistic in assessing the institutional capability and technical capacity of the Government to implement an ambitious and wide-ranging reform program. These difficulties were exacerbated by the fragmentation of the political structures before and after the March 2005 events, including the deadlock between the Government and the Parliament, making the approval and further implementation of reforms very difficult. iv. The CAS outcomes have been mixed. Considerable progress was made in achieving the overarching CAS objective of poverty reduction. Growth performance, however, was highly volatile and fragile. CAS-supported NPRS targets for social indicators have seen marked improvement, with the exception of health, where indicators showed some deterioration. However, this deterioration may represent changes in reporting of health statistics—including the adoption of internationally accepted methodologies for compiling them—and the lagged effects of past under-financing of the health sector.



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v. The Government’s record on and its commitment to improving governance has been very weak. Measures to increase efficiency, transparency and fiduciary controls within the public sector have proceeded reasonably well at the technical level. However, commitment to tackle core policy reforms, particularly with respect to reducing corruption and civil service reform, was weak and superficial under the previous Government. In retrospect, it is clear that there was no ownership of reforms and powerful vested interests played a role. Public administration reforms, which affected the power, patronage and rents of senior officials, were undermined. A number of structural reforms, including energy reforms in particular, were stalled for a number of years. vi. Nevertheless there were some achievements improved donor coordination and harmonization. This progress has translated into the development of a JCSS and also preparation of joint projects, such as the Health SWAp and joint technical assistance for public financial reform. vii. Important lessons were learned during the CAS implementation and these have been considered in the preparation of the JCSS: • • • • The risks of continued political instability suggest having a more realistic set of expectations with regard to reform implementation. This implies that more modest— rather than wide-ranging—reforms have a greater chance of success. The fragmented political environment also reflects the lack of consensus that is necessary for true country ownership of reforms. Under such circumstances, conditionality is a blunt and less effective instrument for major institutional reform. Experience in the health sector has shown that reforming institutional arrangements is much more feasible when supported by an integrated strategy and sustained investment over several years. Support for public finance reform through the programmatic public expenditure review demonstrated how sustained dialogue and engagement can help build consensus for reform. It also illustrated how technical knowledge can be transferred better through hands-on technical assistance rather than through large pieces of economic and sector work. Community driven approaches—such as the Village Improvement Project—have illustrated the opportunities for building on successful reforms at the local level. Similarly, targeted interventions—in clearly defined areas such as land registration— are also successful models. These community-driven projects have also demonstrated how governance approaches at the local level can be successfully implemented and insulated from political instability at the national level. Future assistance should include ways of assessing the extent of true country ownership and take into account the institutional and technical capacity of the Government to implement reforms. CAS implementation suggests that the most useful interventions are those that support basic reforms with limited objectives. Finally, the resurgent nationalism and more interventionist economic approach of the new authorities may require a more flexible economic dialogue, in which the Bank examines the most effective way to support a government which sees a greater role for state participation in economic activity. 77



•



• •



•



INTRODUCTION 1. This Completion Report reviews the FY03-06 CAS for the Kyrgyz Republic, discussed by the World Bank Board in April 2003. The CAS evaluation has been carried out by the Bank Group country team in close cooperation with the Government and other donors. I. KYRGYZ REPUBLIC’S LONG TERM GOALS AND OUTCOMES A. Strategic Goals 2. In 2001, the Kyrgyz Republic prepared an inclusive 10-year Comprehensive Development Framework (CDF), which provided the broad vision and directions of its long-term development path. The overarching objective of the CDF was to achieve political stability and social well-being, economic growth alongside democracy, human development and improved opportunities for all citizens of the Kyrgyz Republic. 3. The NPRS was the first phase in implementation of the CDF. The three pillars of the NPRS were: • Formation of an Effective State: The overall vision in the NPRS was for a smaller, more professional and accountable state apparatus. It identified the need to address corruption, enhance democratic institutions and improve the effectiveness and integrity of the state. Building a Fair Society: The NPRS focused on increasing access to quality education (particularly pre-school, primary and secondary education) in rural areas, on health reforms, emphasizing primary health care, and on creating a targeted system of social protection. This was to be achieved through increasing funding for human development and greater efficiency and targeting. Promoting Sustainable Economic Growth: The NPRS envisaged the implementation of structural reforms to support economic growth. Improving productivity in agriculture, including agro-processing, was a key focus area. Other sources of growth identified were small-scale industry and services (telecom, transport, energy, etc.).



•



•



4. The Boards of the IMF and IDA considered the NPRS in February 2003, and indicated that it provided an appropriate vision for development, while emphasizing the need for further prioritization. The World Bank’s CAS and program built upon the areas of focus outlined in the NPRS. B. Progress Towards Achieving Goals 5. Overall, the borrower’s performance could be considered moderately satisfactory during this CAS period. Government has made mixed progress in advancing the NPRS agenda. The incidence of poverty in the Kyrgyz Republic—based on a consumption aggregate and defined by a national poverty line—fell from 63 percent in 2000 to 43 78



percent in 2005, with extreme poverty falling from 24.7 percent to 11 percent. Poverty has declined in both rural and urban areas, and across all regions. However, poverty rates among oblasts as well as within the oblast, i.e., urban and rural sectors, are highly unequal. Rural poverty remains extremely high at 51 percent in 2005. 6. The reduction in income poverty was achieved due to economic growth. The decline in extreme poverty has been notably high during 2003-04, when the economy grew by 7 percent. Growth was driven mainly by services, light industry and construction sectors, and reflected the favorable nexus of a stable macro-environment and increased demand from fast-growing neighboring markets. However, this was not fully taken advantage of due to deteriorating political stability, increased rent seeking and stagnation of reforms in some key sectors, especially energy. The high agricultural growth rates of the 1990s declined to just 2.5 percent since 2000. 7. Although buoyant, economic growth was volatile and less that of other CIS countries. Average GDP growth was 4.1 percent per year during 2003-2006, but varied between 7 percent in 2003 and -0.2 percent in 2005 largely reflecting gold output volatility due to a number of natural disasters. Non-gold GDP grew on average by about 5.1 percent per year during the same period. This growth was driven mainly by services, light industry and construction sectors, and reflected the favorable nexus of a stable macro-environment and increased demand from fast-growing neighboring markets. Nevertheless, average growth over the period was considerably less than in other CIS countries, indicating that the economy was not able to take full advantage of these conditions due to deteriorating political stability, increased rent seeking and stagnation of reforms in some key sectors, especially energy. Agricultural production has also been volatile and experienced a significant fall in 2005 (4.6 percent) partly in response to the turbulent political situation of that year. Trade disruptions caused by adverse political developments in the neighboring Uzbekistan have also negatively affected agricultural performance during the same period. 8. The CAS period was characterized by broad macro-economic stability; the 4 percent per annum target for inflation was met. The country’s debt outlook has also improved to around 83 per cent of GDP in 2005 from 111 percent of GDP in 2002. This was due to a reduction in the Government’s primary fiscal deficit and streamlining of externally financed public investment projects. The debt position, however, remains difficult. Despite the stabilization of debt ratios, they still remain high and constitute a serious macroeconomic risk to the Kyrgyz economy. 9. Progress towards achieving the NPRS human development goals was also mixed. Despite under-funding of the health sector since 1996-2003, health sector reforms led to significant improvements in performance and in the health services people receive. These improvements are reflected in improved equity of access to health services, greater transparency, improved efficiency and quality of service provision, reduction in mortality from infectious disease and improved administrative efficiency. Nevertheless, the 2005 health outcome indicators, such as infant (IMR), child (U5MR) and maternal mortality (MMR) showed deterioration. This is because these health outcome indicators cannot be improved by reforms in the health sector alone. Increases of IMR and U5MR since 2004 can also be explained by methodological changes to the calculation of the mortality rates with the move to internationally comparable methods of calculation. Further, health 79



statistics can often take several years to show improvements in response to reforms; these results also almost certainly reflect the previous years of under-funding. For example, the MMR is very volatile from year to year, reaching 61 in 2005 and improving to 44 in 2006. The Government is addressing this under the second generation Manas Taalimi program, 2006-2010. Some positive progress has been recorded in education, with improvements in aggregate enrollment ratios for basic education. Table 1: Main NPRS Poverty Alleviation Targets 29

TPF



FPT



Indicators Level of population below poverty line Basic education coverage (grades 1 – 9) Infant mortality (under one year) per 1000 live births Child mortality (under five years) per 1000 live births Maternal mortality rate per 100,000 live births Mortality from infectious diseases (per 100,000 population) Proportion of population with access to healthcare services Proportion of population with access to safe drinking water GDP growth rate (percentage change from 1999) Share of private sector in GDP External debt as proportion of GDP External debt service as proportion of public expenditure External debt as a proportion of exports General unemployment (of economically active population)d Telephone lines per 1000 people Personal computers in use f

P P P P P P



1999 Actual 55.3 89.5 22.7 35.5 42.3 32.9 85.6 85.9 100.0 82.7 134.0 4.4 279.0 7.2 78 25, 997



2005 Target 38.9 97.0 22.0 28.0 40.0 25.0 90.0 87.8 128.7 84.3 78.0 3.6 231.2 8.4 80 37,000



2005 Actual 37.5a 95.9 29.7b 35.2b 61.0 c 22.3 93.5 84.4 126.8 89.6 82.9 3.9 214.8 8.1e 86 55,765

P P P P P P P P P P



Source: NPRS a Based on expenditure patterns, targets were set using the expenditure methodology to calculate poverty levels Since 2003, the National Statistics Council (NSC) uses only consumption base for officially reporting the poverty indicators, according to the 2005 poverty level which is 43.1 percent. b Figures for 2005 are derived from a new methodology that is based on international requirements which have more strict requirements for defining live births. This makes comparison of data for 1999 and 2005 difficult. c Data for this indicator is volatile from year to year. MMR in 1999 was the lowest it had been since 1996. MMR for 2006 is 44 despite reaching 61 in 2005. d Reflects administrative data for the registered unemployed. The expected increase by 2005 is explained by improvements in coverage of data, making comparison between 1999 and 2005 difficult. e Based on household survey f Number of computers in legal entities

P P P P P P P P



10. The Government’s record on and commitment to improving governance has been relatively weak. Measures to increase efficiency, transparency and fiduciary controls within the public sector have proceeded reasonably well at the technical level. However, commitment to drive through core policy reforms, particularly with respect to tackling corruption and civil service reform, was weak and superficial under the previous Government. The new Government expressed a strong commitment to improve governance and reduce corruption following the revolution, but turbulent political

29

TP PT



All numbers in percentages unless otherwise indicated.



80



conditions and a fragmentation of state power during this period has meant that there has been little observable improvement during the CAS period. Empowerment of local communities has progressed reasonably through the introduction of community driven initiatives in several areas, notably with assistance from the Bank’s Village Investment and On-Farm Irrigation projects. 11. Persistent corruption remains a daunting challenge. The Kyrgyz Republic was ranked 142 out of 163 countries on the 2006 Transparency International Corruption Perceptions Index, a worsening from a ranking of 130 out of 159 countries from the previous year. The World Bank/EBRD BEEPS showed corruption as a significant obstacle to doing business between 2002 and 2005. While this represents a slight improvement over previous years, it is clear that addressing and reducing administrative corruption has been difficult. In 2004, the Kyrgyz Republic became a signatory to the EITI. However, overly ambitious commitments combined with a lack of capacity have implied only partial compliance with the EITI. 12. Despite political uncertainties, the Prime Minister and the President have publicly stated that NPRS priorities remain valid for the new Government, with a renewed focus on addressing corruption, unemployment, and social inequality. Poor governance, including public anger over the conduct of parliamentary elections in early 2005, led to the overthrow of President Akaev in March 2005, and civil unrest and disturbances in many areas of the country. Although the subsequent Presidential elections in July 2005 were deemed by OSCE to be free and fair, political instability has increased and made it difficult for the Government to set more than a short term agenda. II. CAS OUTCOMES A. CAS Objectives 13. The CAS for 2003-06 focused on three key priorities. Each is aligned with the key long-term goals identified in the Kyrgyz Republic’s NPRS and the CAS builds on the areas of focus by further refining critical reform priorities within them. Bank support for private sector led growth was crucial for helping sustain poverty reduction and to increase employment opportunities. Arresting the deterioration in public services delivery and in key infrastructure has a positive impact on the non-income dimensions of poverty, and Bank support in these areas builds on the success of past interventions and impels progress towards achieving the MDGs. Improving public financial management, the effectiveness of public administration and of public service delivery are all critical factors for successful implementation of reforms in other areas. 14. The highest priority was supporting private sector-led growth. Three key drivers of economic growth - agriculture and agro-processing, industry and energy, and small and micro enterprises – were identified IDA and IFC aimed to help the Kyrgyz Republic reduce bureaucratic barriers, moving to market pricing, rehabilitate key infrastructure and increase access to market information and financing. IDA and IFC would help strengthen existing financial institutions and create a framework conducive to attracting investments, capital formation and savings. IFC would continue its advisory services directly and through its Private Enterprise Partnership (PEP) to improve the regulatory framework for



81



leasing and to help financial intermediaries build institutional capability. IDA was to complement these activities with Community Driven Development (CDD) projects which should help to diversify the economy, increase farm productivity and growth in non-farm jobs outside the main cities. 15. A second key priority was to help arrest the deterioration in key infrastructure and social services that had been slowly worsening since independence. The Kyrgyz Republic could not afford to put off this rehabilitation; at the same time, it could not afford to rehabilitate it all, and required to be selective and to undertake systemic reforms. IDA sought to support overall systemic changes to make service provision more efficient, while empowering local communities to identify priorities, in keeping with the decentralized vision in the NPRS. 16. A third priority was to address governance constraints to growth and poverty reduction, while recognizing that this was going to be a long term challenge. In IDA's client survey, poor governance was identified as among the most important issues limiting returns to structural reforms. Increasing transparency and accountability, building technical and implementation capacity at the central and local levels, and supporting the continued development of the NPRS and public finance reform as vehicles for government planning and budgeting were the key objectives. B. CAS Outcomes 17. Progress towards achieving CAS outcomes has been mixed, and could be considered moderately satisfactory during the CAS period. Considerable progress was made in achieving the overarching CAS objective of poverty reduction. Several CASsupported NPRS targets for social indicators have also improved (see Table 1). Growth performance was volatile, in part due to the political situation, but nevertheless the average annual GDP growth remains at about 4 percent. The Government’s commitment to moving forward with political reforms and improving governance, however, has been weak during the CAS period. 1. Poverty Reduction 18. Progress toward achieving the poverty reduction – an overarching outcome under the Government’s development strategy—has been generally satisfactory during the CAS period. Key poverty indicators showed a significant declining trend. Poverty—measured using consumption expenditures—declined from an estimated 63 percent in 2000 to 43 percent in 2005. Extreme poverty has also fallen and was 11 percent in 2005. The urban and rural poverty both fell significantly during this period. 19. Poverty rates among oblasts, as well as within the oblast, i.e., urban and rural sectors, are highly unequal. The urban poverty rates fell faster, and were at a significantly lower level: 30 percent of the urban population, compared to 51 percent of the rural population, is living below the poverty line in 2005. 20. The authorities are closely monitoring poverty reduction indicators, including non-income dimensions of poverty. The National Statistics Committee’s poverty statistics and measurement methodology have improved considerably since the 82



introduction of the Kyrgyz Integrated Household Survey in 2003, supported by DfID. The Bank is also providing continuous methodological technical assistance in poverty measurement through its Poverty Assessment. 21. The linkage between poverty monitoring and policy formulation remains weak. Although the authorities recognize that sustained poverty reduction depends on broadening sources of economic growth through continued reform and support to private sector development, more needs to be done to understand the growth-povertyemployment linkages and to inform policy actions in this area. To this end, the authorities are working with the World Bank on the elaboration of a poverty profile data linked with labor force data that is expected to be completed in FY07.



83



Objective Poverty Headcount



Key Goals (1999-2005) Poverty headcount to decline from 55 percent to 39 percent



Table 2: Core Monitorable Benchmarks Intermediate Indicators Results Improvement in reliability of national The poverty reduction target was achieved already in 2003, with further decline to poverty statistics and clear link with 37.5 percent in 2005. policy decisions Steady progress in meeting NPRS targets as evidenced by the Annual Progress Report (APR) Reduction in externally funded Public Investment Program to below 4 percent of GDP by 2005, steady progress towards debt sustainability Reduction in barriers to SME growth, including in excessive inspections and licensing Growth in agro-processing Mainstreaming health pilots as measured through ongoing Health II project Establishment of an acceptable education strategy with Government and partners Increase in cash-based funding for social sectors Introduction of civil service reform, tightening fiduciary controls through GSAC/GTAC, including annual disclosure of assets and income of high-level civil servants Improved service delivery and reduced corruption as measured by a survey Steady reduction in quasi-fiscal operations to below 5 percent of GDP by end of CAS period Increase in service delivery by local governments and communities Despite improved debt management, including streamlining of externally financed public investment projects and successful completion of Paris Club negotiations in 2002 and 2005, external debt target was not achieved and was 83 percent of GDP in 2005. The Government in January 2007 decided against participating in the HIPC Initiative. Though the growth rates declined in last 2 years (due to political tensions observed after 2005 March revolution and external factors), actual GDP growth is close to the target level (27 percent vs. 29 percent above 1999 levels). Basic education coverage has improved noticeably from 89 percent in 1999 to 96 percent in 2005. Despite successful implementation of healthcare reform, child and maternity mortality rates appear to have increased. While the transition to the new internationally accepted methodology makes comparison difficult, the 2005 infant mortality rate at 30 per million is one of the highest in CIS countries. The maternal mortality rate during 2000-2005 was higher than in 1999, with outstanding 61 per million in 2005. At the same time, situation with infectious diseases has been improved from 33 per 100,000 people to 22. Despite the new Government’s commitment to reforms in public sector, the pace of reforms was slow and uneven. The most visible changes have occurred in civil service, with a new law on civil service, together with the establishment of the Civil Service Agency to oversee appointments, providing a basis for establishing more fare and transparent merit-based selection of civil servants. Corruption is still perceived to be very high, and so far, there is little evidence of actual measures undertaken to reduce corruption. The public finance reform is moving forward, though slower than expected, and low staff capacity and the lack of political will have been identified as major impediments. The major focus of the reform currently is making annual budget more strategic, predictable and transparent. The reform process in the energy sector has stalled almost completely since 2002 and as a result, quasi-fiscal losses in the sector have only declined marginally, reaching 7.6 percent of GDP in 2005.



Stimulating Growth



Debt to decline from 134 percent of GDP to 78 percent of GDP GDP to be 29 percent above 1999 levels in 2005



Improving Service Delivery



Improving Governance



Basic education coverage to increase from 89 percent to 97 percent in 2005. Under 5 mortality to decline from 35.5 to 28 per 1000 live births Mortality from infectious diseases to decline from 33 to 25 per 100,000. Improve transparency, efficiency and fiduciary controls in government Empower local communities



84



2. Supporting Private Sector-Led Growth 2.1 Macroeconomic Environment 22. During the CAS period, a generally stable macroeconomic environment was achieved. Overall macroeconomic management during the CAS period has been in accordance with the IMF agreements under the Poverty Reduction Growth Facility (PRGF) program. Fiscal and external policies have kept internal and external balances at sustainable levels. The fiscal deficit was reduced from 4.7.percent of GDP in 2003 to 3.9 percent in 2005, while the current account deficit increased from 4.2 percent of GDP in 2003 to 8.3 percent in 2005; the balance of payments has been financed by significant inflows on the capital account. The Government has also achieved good tax collection performance. Tight fiscal and monetary policies have kept inflation at low rates of 3-4 percent throughout. 23. The debt outlook improved as a result of the reduction in the general government primary fiscal deficit, the streamlining of externally financed public investment projects, and limiting public debt to loans. In March 2005, Paris Club creditors granted a debt relief on Evian terms for bilateral public debt. This agreement is expected to result in a 36 percent reduction in the NPV of official bilateral debt. The conversion to 100 percent grant for FY06 has also contributed to the improvement. Despite the improvement, the Kyrgyz Republic’s debt-service capacity remains stressed over the medium term; the NPV of public debt currently stands at around 180 percent of exports and over 360 percent of budget revenues, i.e., above the HIPC threshold of 150 percent and 250 percent respectively. 2.2 Business and Financial Environment 24. The recently completed Investment Climate Assessment (ICA) confirms that administrative barriers are an important hindrance to private sector growth. Overall, businesses are constrained by unpredictability and corruption, particularly relating to regulations and legal enforcement. More specifically, the current licensing and inspection regimes undermine firms’ competitiveness and ability to grow. The Bank’s RTBET, approved by the Board in July 2006, includes targeted support to the Government’s deregulation efforts by streamlining and revamping the burdensome standards regime and promoting enterprise competitiveness. In 2006, FIAS completed a review on FDI Law and conducted a workshop for the Government and private sector to discuss its results, however, the Government has not acted on the report and its recommendations. 25. The tax system is perceived as a major impediment: regulations are numerous, inconsistent, and are constantly being amended (over 300 times since 2000). In addition, inconsistencies present throughout the tax code create the opportunities for rent-seeking behavior notably by tax inspectors, auditors, and tax police. Major revisions to the Tax Code were proposed in 2006, including simplification through the reduction of nuisance taxes and key tax reductions in the context of the agreed IMF PRGF program. However,



85



the continuing deadlock between the Government and the Parliament has made the approval of this and other legislation very difficult. 26. There have been improvements in the financial environment. The overall level of private financing to the economy has increased during the last three years from 15.8 percent of GDP in 2003 to a projected 17.2 percent of GDP in 2005. Foreign direct investment has also increased, although from a very low base, but domestic savings have decreased slightly, from 18.5 percent of GDP in 2003 to 16.8 percent in 2005. Bank loans and deposits increased as a percentage of GDP from 3.5 percent and 5.7 percent in 2003 to 6.0 percent and 8.0 percent in 2005. Similarly, the credit portfolio of microfinance institutions has increased and now accounts for about 50 percent of banks’ loans and 3 percent of GDP. The Payments and Banking System Modernization project is being satisfactorily implemented and is expected to lead to improvements in the payments and clearance systems of the banking sector. 27. IDA’s main achievement has been supporting the transformation of the KAFC into the largest Non-Bank Financial Institution (NBFI) in the country through the Second Rural Finance project. It now accounts for 10 percent of all financial sector assets and approximately 25 percent of the loan portfolio of banks and NBFIs combined as of August 2005. KAFC serves more than 30,000 clients and has 11 branches and 47 representative offices in all parts of the country. The Bank remains active in its support for the conversion of KAFC into a private rural bank with the likely support of IFC to be provided should a strong technical partner take a strategic position in the bank through privatization. 28. The KAFC became a principal supplier of credits in rural areas with a 65 percent share in the agricultural sector. Its financial performance is strong, with a high recovery rate of 98.3 percent; and contributes significantly to poverty reduction. However, the 2006 Joint CPPR raised concerns over changes in KAFC’s executive management that undermined good corporate governance, including transparency which could threaten the efficiency and sustainability of the institution. 29. IFC has continued to support the growth of its existing clients such as providing an additional equity to Demirbank, new financing of $2.5 million to the Kyrgyz Investment Bank (KICB) and an additional loan of $1.4 million to the Altyn-Ajydaar JSC packaging plant to expand its operation to a second factory in Issyk Ata which included a new waste paper processing operation using recycled paper. In the banking and financial sector, IFC activities included increasing access to finance by MSMEs through strengthening local financial institutions and expanding microfinance, development of leasing and housing finance. IFC support included investment in seven local financial intermediaries - KICB, Demir, Ineximbank, AKB, Bai Tushum, Kazcommertsbank and Finca. Technical assistance is often extensive as with Bai Tushum where IFC is helping the NGO transform from a non-profit status to a more sustainable, commerciallyoriented, deposit-taking financial institution that can serve as a model for similar microfinance organizations in the Kyrgyz Republic. IFC financing will enable BaiTushum to expand its lending activities to farmers, private entrepreneurs, and micro and small enterprises and extend its reach to other remote regions of the Kyrgyz Republic. The Bai Tushum transformation project, as the FINCA Microfinance project, provides an



86



opportunity for the authorities to refine and apply the rules and regulations that have been laid out to address the transformation of suitably qualified micro credit organizations operating in the country and reach more MSE clients. 30. IFC technical assistance in the Central Asian Leasing Project (CALP) worked with the Government and financial intermediaries to create a best practices framework for leasing as well as providing training for intermediaries.,. IFC provided advisory services to undertake a diagnostic of the legal, regulatory and tax framework for mortgage finance development in mid-2006 and will begin implementation of the findings to improve the framework for mortgage finance through the, IFC PEP Central Asia Primary Mortgage Market Development Project beginning in early 2007. 31. IFC completed a tourism study which outlined a strategy to institutionally strengthen tourism marketing for the Kyrgyz Republic, as well as curricula building for education at both the university and vocational school levels. IFC provided support on a strategic framework for tourism sector development as well as a framework to institutionally strengthen tourism marketing. As a follow up of these studies, in 20042005 the Swiss Government approved funding for implementation of the project that is being carried out by Swiss Helvetas Agency. 32. The IDA-financed Land and Real Estate Registration project has been successful in increasing land tenure security, improving access to investment capital, and more efficient use of land and real estate assets. These impacts are particularly remarkable given the fact that an official transparent land and real estate market did not exist at all prior to the start of the project in 2000. Rights on virtually all land and real estate properties are now or will soon be secure, and backed by appropriate registry records. 33. Registry transactions are efficient by international standards. Access to credit has improved – the number and value of mortgages have increased, with over 40,000 mortgages valued at more than US$418 million equivalent registered during 2005 alone. Land and real estate assets were distributed and used more efficiently in response to market forces as demonstrated by the increased sales and leases. Furthermore, with project support, Gosregister has implemented a number of measures to reduce the opportunities for corruption, collusion, and fraud, and increase accountability within its own operations. 2.3 Agriculture and Agro-Processing 34. Agricultural growth in the CAS period was modest, and severely affected by the political turmoil of 2005. The sector has considerable potential but remains subject to low productivity and unpredictable fluctuations caused by climatic variations, natural disasters and also by exogenous factors such as political unrest and cross-border trade restrictions. The agro-input business (except seeds) in particular remains weak because private entrepreneurs are unwilling to commit significant resources. The risk that the Ministry of Agriculture may enter this market with large government or donor-funded input distribution programs at any moment is perceived as high. 35. IFC identified agri-processing as an important sector for development of the Krygyz economy. Support for this sector has been provided through an investment in Akun, a leading enterprise that uses improved technology for the production of flour and



87



pasta, much of which is exported. Support for agri-processing is also provided through investment in packaging companies as well as loans made through microfinance institutions and financial intermediaries that have received IFC funding. 36. IDA operations in this sector have been explicitly aimed at improving the operating environment for private farmers and agri-businesses and at refocusing the public sector on policy and enabling functions in a market economy. The Agricultural Support Services Project (ASSP) has been the central vehicle for establishing effective support services (extension, market information, crop protection, access to seeds and credit) for farmers. The Second Rural Finance project, now closed, led the way in extending credit to agriculture and agribusiness. The new Agribusiness and Marketing Project (ABMP), through its Market Development and Access to Credit components, is focused on improving the operations of all participants in the agribusiness value chain. 37. IDA has also supported government and local communities with developments in the irrigation sector through the On-Farm Irrigation project (OIP) and the Irrigation Rehabilitation poject (IRP). Under the latter project which closed in May 2006, rehabilitation and modernization of 20 irrigation systems with a total command area of 250,000 ha has been completed, facilitating adequate and timely water supplies. Also, rehabilitation of the four major irrigation dams, with a combined storage capacity of 80 percent of all irrigation dams in the country, has improved their safety and guaranteed water supply to 415,000 ha. IDA will continue to support the Government with rehabilitation and modernization of higher-order irrigation and drainage infrastructure through the Water Management Improvement project that became effective in August 2006. This project will also assist with the implementation of the new Water Code, a modern piece of legislation, prepared with the assistance of OIP, which is expected to change the way water resources are managed in the country. The project will also support the technical and financial reform of the Department of Water Resources to turn it into a fully client-oriented, accountable organization. 38. The multi-component ASSP has allowed a number of other donors 30 to attach their related operations to this project, taking advantage of its institutional, operational and policy framework. Two ESW studies, an Agricultural Policy Update and the Livestock Sector Review, were prepared. The former guided the Bank’s and other donors' policy dialogue in the Kyrgyz Republic, while the latter is expected to help frame the scope and focus of future external donor support in the livestock sub-sector.

TPF FPT



39. Some 70 percent of farm land is now privately owned as a result of the generally equitable land reform, supported by the ASSP. There has been a strong commitment to develop land markets, including a constitutional amendment to allow for private ownership of land, introduction of a legal framework for collateralization, and ongoing investment to develop a proper registration system. The establishment of a land rights registration system and systematic registration of these rights in urban areas, essential for mortgaging and the development of a land market, have been provided through the Land



30

TP PT



DfID, the EU through Tacis, SIDA and UNDP etc.



88



and Real Estate Registration Project. Systematic land registration in rural areas is ongoing. 2.4 Energy Sector 40. At the beginning of this CAS period, the quasi-fiscal deficit in the energy sector had been reduced substantially (from 17 to 10.4 percent) due to the Government’s efforts in energy sector reform in the previous FY99-01 CAS period, supported by the CSAC. It was expected that reforms to the energy sector to further reduce losses and make it financially viable would continue during the current CAS period. However the Government failed to increase electricity tariffs in line with the MTTP approved in 2003, and targets for reducing commercial and technical losses were not met. Political turmoil and Parliamentary elections at the beginning of 2005 resulted in the Government deferring its planned tariff increases. Entrenched rent-seeking and vested interests within the energy sector have also adversely affected the Government’s commitments to reform. The absence of privatization of energy and infrastructure projects as well as a nontransparent legal and regulatory framework are obstacles to increased foreign and IFI investment in these sectors. 41. Consequently, the Bank’s CSAC facility was closed before the third and final tranche was released. The Implementation Completion Report (ICR) determined that this project had been overambitious and could not have been implemented in the timeframe envisaged. Several reasons contributed to the unsatisfactory performance of the CSAC project: an over-reliance on the possibility of privatization, the adoption of a rather radical sector restructuring program, inadequate consideration of country circumstances and sequencing, the use of a Structural Adjustment Loan (SAL) rather than a Sector Adjustment Loan (SECAL), and investment lending for tackling what were operational problems in the sector, were all was partly to blame. The Government intends to move forward on energy policy, including a concession or privatization of the largest distribution company, improving the efficiency and reducing corruption in the energy sector and tariff policy. During 2006, the first steps towards a renewed commitment to energy reforms were taken with the unification of household tariffs in May 2006. 2.5 Mining 42. The mining sector accounts for over 10 percent of GDP. The NPRS recognized that its development and potential was hampered by a poor legal and regulatory framework as well as a lack of transparency. IDA supported an ongoing mining dialogue and technical assistance through an IDF grant to support the authorities in developing the appropriate legal and institutional framework for the development of the sector. Although a number of proposals for legal reforms have been developed, entrenched interests have prevented most of these from being implemented. The delays in implementation continued even after the change of Government in March 2005, amid concerns that reforms in the sector consistent with international norms might imply a loss of sovereignty to the Kyrgyz Republic. Nevertheless one important advance was the endorsement by the Government of the EITI in May 2004. However compliance with commitments has been limited due in part to weak capacity; the Government produced 89



some compliance reports in 2004, but there have been none after that. The absence of transparency in the award and monitoring of mining concessions hampers the attraction of new investment, and particularly foreign investment into the sector. 2.6 Transport Sector 43. Roads account for around 92 percent of freight movements and 99 percent of passenger traffic (excluding intra-urban). The 424 km of the railway network is small, with separate branch lines that link the north of the country to the Kazakhstan rail system, and the south of the country to the Uzbekistan rail system. Air transport accounts for less than 1 percent of passenger movement, mainly between Bishkek and Osh. Water transport is confined to vessels on Lake Issyk-Kul, mainly serving tourism. 44. The Government received substantial financial assistance from external donors for road improvement, particularly from the ADB. However, much of this investment was targeted at the rehabilitation of the major trade corridors, with much less resources allocated for the maintenance of the rest of the road network. This has led to serious maintenance backlog and overall poor condition of the road network. If the present trend of maintenance funding continues, the road network will continue to deteriorate, resulting in significant increases in vehicle operating costs and travel time. Inadequate investments in maintenance of physical infrastructure, including transport and communications, have constrained the growth of private business enterprises. 45. IDA lending operations in the transport sector have been limited to an Urban Transport project that aimed at providing sustainable, reliable, and affordable access to mobility for the populations of the cities of Bishkek, Osh, and Jalalabad. Project investments were directed at these three cities. The project has also had significant impact on the institutional development of public transport by supporting reform of the road sub-sector finances, regulatory reform in urban passenger transport services, institutional reform of urban road departments, and divesting road rehabilitation and maintenance functions to the private sector. 46. In addition, an extensive TA and ESW, including the IDF grant for Institutional Capacity Enhancement for the PPER, was provided to the Government for introducing a rational budgeting process, including an integrated way to evaluate road investments and maintenance expenditures based on objective economic and engineering criteria and covering the full road management cycle. 47. The Urban Transport project closed in November 2005, and the rehabilitation of the Bishkek-Osh road funded by several IFIs is almost complete. However, several policy issues in the sector have yet to be resolved. Without a proper road maintenance system in place, the large investments in Bishkek-Osh may be wasted. In the meanwhile, the road network continues to deteriorate, with an estimated 200 km of pavement lost annually.



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3. Providing Essential Services 3.1 Health 48. Implementation of health reforms has continued to be satisfactory despite the difficult political environment and changes in key personnel. The Health II project was completed successfully and achieved the following: (i) country-wide implementation of health financing reforms that promote increased allocation of resources to primary health care and to those groups most in need of health services, (ii) rightsizing of the health sector through staff and infrastructure reductions, (iii) strengthening and expansion of the model of family medicine throughout the country, and (iv) piloting interventions to link primary health care with health promotion. The inclusion of strategic policy actions in the GSAC, complemented by an investment credit through the Second Health Sector Reform project, has helped to mainstream health reforms. 49. The Government has approved its second generation five-year strategy (Manas Taalimi) and implementation plan for the health sector and has received widespread support for the strategy, including the adoption of a sector-wide approach (SWAp). Progress has been made in synchronizing the output orientation of the health sector with budget formulation. The 2006 budget was calculated on the basis of outputs, and general budget contributions for health were centralized, and streamlined procedures adopted for the flow of centralized health funds to the Ministry of Health and the Health Insurance Fund. Early implementation of Manas Taalimi has been successful and points to a high likelihood that results in the present CAS period will be sustained and deepened. 50. A key challenge facing the Kyrgyz Republic is inter-regional disparities in maternal and child mortality. A MDG study completed by the Bank, in collaboration with the Ministry of Health (MOH) during the CAS period, highlighted the importance of addressing disparities in health outcomes in order to achieve the MDGs. A key area of emphasis of the new health reform strategy is reducing these disparities, including in MDG outcomes. This will be supported under the SWAp and be achieved through strengthening the delivery of emergency medicine, primary health care and public health interventions among vulnerable groups, e.g., rural populations, urban migrant communities, etc. 51. The Kyrgyz Republic is also a beneficiary of IDA’s Central Asia Regional HIV/AIDS project and will receive support for both supply- and demand-driven interventions to reduce the burden of HIV/AIDS and related issues such as stigma, discrimination etc. During the CAS reporting period, the Kyrgyz Republic has been cited as a good example of coordinating national and regional responses to achieve greater effectiveness in the fight against HIV/AIDS. 3.2 Education 52. While literacy in the Kyrgyz Republic is nearly universal, there are multiple indications of eroding the quality of education, particularly in rural areas. Monitoring Learning Achievement surveys carried out by the United Nations International Children’s Education Fund (UNICEF) in 2001 and 2005 show a decline in student achievement scores. The gap between the urban and rural students is still significant. There are 91



difficulties in recruiting teachers to go to remote areas and this issue is being addressed under the Rural Education project by improving teachers’ incentives and providing Teacher Fellowship deposits to attract and retain young teachers in remote villages. Early childhood development programs continue to be a low priority when it comes to funding, and coverage of preschool education is approximately 10 percent. 53. In October 2006, the Ministry of Education, Science and Youth Policy approved an Education Sector Development Strategy (2006-2010) which was developed in close consultations and with active involvement of major stakeholders, including the Ministry of Economy and Finance (MOEF), MOH, local development partners, regional educational departments and external experts. This strategy is consistent with the overall country’s CDS (2007-2010) objectives as well as major government programs in the education sector. 54. Following the successful appraisal and endorsement of the country’s Education Sector Development Strategy (2006-2010) by the local donor group, the Kyrgyz Republic was approved for a US$15 million grant allocation for 2007-2008 from the Education For All (EFA) Fast Track Initiative (FTI) Catalytic Fund (CF) to support the implementation of the Government’s Education Sector Strategy and accelerated achievement of the EFA goals. The CF FTI grant will be administered by the World Bank on behalf of contributing donors to the fund and is expected to become effective early 2007. 55. The Rural Education project became effective in May 2005. New student and class achievement tracking instruments have been developed. In addition, 100 fellowships for rural teachers have been created. Schools in two pilot regions are being trained in new skills and abilities of joint strategic planning for school development with engagement of school staff, parents and boards of trustees. Work is underway on improving the quality of textbooks and methodological guides in core subjects and supplying all schools with necessary learning materials. 56. A number of reforms will have to be undertaken to sustain the impact of completed projects in this sector. Presently, the Government’s spending is focused mostly on inputs (maintenance, learning materials and salaries) rather than on outcomes such as the relevance of skills and the knowledge of school graduates in a marketoriented economy. The Government would have to review financing arrangements and implementing per capita financing to sustaining earlier achieved outcomes. 3.3 Social Protection 57. Social assistance programs, focused primarily on means-tested benefits and categorical assistance for vulnerable groups, have been further streamlined. The targeting of poor and vulnerable groups identified by the poverty assessments has increased, and budget allocations for this program have been increasing. Overall focus of public expenditure on poverty reduction objectives has been gradually improving, including significant wage increases of selected public sector employees, e.g., teachers and medical workers. In the last few years, social assistance expenditures have been roughly around 1.4 percent of GDP. Nevertheless, broad untargeted social assistance is still being provided through universal price subsidies in electricity and other utility sectors.



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58. Between 2001 and 2005, the total number of contributors to the pension fund increased by over 30 percent. Average pensions were raised by 35% in nominal terms, with higher increases for poor pensioners between 2003 and 2006. A recent change in the law on Assistance to the Employment of Population has led to an increase in the number of registered unemployed, putting a further strain on the already fragile financial status of the Ministry of Labor and Social Protection (MOLSP). 59. The Bank’s support to central government in the areas of health, education and social protection has been complemented by the community driven development approaches adopted through the VIP. In addition, the Bank has successfully provided assistance for rural water supply and sanitation, small town infrastructure, rehabilitation of power and district heating systems, and urban transport and maintenance. These projects are all expected to achieve their development objectives. 60. These community-driven projects have all been successful in a number of ways. They have expanded local ownership, knowledge and capacity. They have tapped into local expertise and have governance elements that are feasible to implement. They have produced tangible and near-immediate results and sustainable impact. The results from one project have complemented results from another. The success of these projects has underscored the case for repeater projects that will deepen and broaden their impact. 61. In some cases, some work remains to be done. For example, the physical progress in rehabilitation of rural water supply systems has been impressive, with about 55 percent being complete at the end of 2005. However, the lack of progress under an ADB-funded project in institutional strengthening of community drinking water users units, proper maintenance of rehabilitation schemes and delays in the implementation of the hygiene and sanitation component raises serious concern over project’s sustainability. At the beginning of the World Bank-funded Rural Water Supply project, the poor condition of the infrastructure needed urgent intervention to address the most pressing needs before focusing on sector development strategy. 4. Strengthening the Governance Framework 62. Various laws have been passed to create an appropriate institutional framework for the judiciary. A training centre for judges has been established and salaries for judges have been increased. Also, arbitration courts have been set up and are being increasingly resorted to. However, corruption and incompetence in the law enforcement agencies and the judiciary pose serious problems and weaken the rule of law, leading to a lack of public trust in these institutions. 63. The Bank has been supporting reform in the judicial system through an IDF grant which has enabled the development of a court information and management system. This will allow all court cases and decisions to be publicized, as well as improving the functioning of the court system. It has also provided support to the State Commission on Public Procurement through strengthening of the National Procurement Training Centre. Both projects have been rated satisfactory with respect to their development objectives.



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4.1 Civil Service Reform 64. Despite the enactment of a new civil service law and laws requiring asset and income declarations of high state officials, and the provision of greater independence to the Chamber of Accounts, the overall pace of civil service reform has been slow. The Civil Service Law, approved in June 2004, was amended by the Jogorku Kenesh to increase the powers of ministers in appointments and reduce the role of the Civil Service Agency (CSA), thus raising questions about the Government’s commitment to civil service reform. The reform was further undermined by the appointment in October 2004 of a close relative of the President as State Secretary of the CSA. In the months following the March revolution, there was considerable pressure to make high level appointments without due regard for the newly established competitive procedures overseen by the CSA, and there was very little official recognition of the role of the CSA to manage the appointments process. These issues led to postponement of the disbursement of the second tranche of the GSAC, which was supporting these reforms, and the project having an unsatisfactory rating. The Government has since begun to address the deficiencies in implementation of the reforms, although commitment to them is still uneven across government structures. The proportions of appointments through due process are now close to 90 percent, compared with about 30 percent in the months after the revolution. There is a greater recognition within the Government of the importance of a merit based civil service. Progress made at the end of 2006 has been sufficient to upgrade the implementation of the GSAC to moderately satisfactory and authorize the disbursement of the delayed second tranche. The establishment of the CSA and competitive appointment procedures can be the basis for further reforms, if the necessary consensus and understanding can be developed at the highest political levels. 65. The implementation of the Law on Declaration of Income and Assets by high state officials (approved in June 2004) was also slow and, until early 2006, compliance was low, particularly among parliamentarians. There was a reluctance to publish the declarations of income and assets; however, from March 2006, compliance among officials has reached 95 percent and declarations are now published on the internet and in major newspapers. 66. A new public procurement law was introduced in 2004, which takes into account most of the recommendations of the 2002 CPAR and introduces major improvements in the transparency, economy and efficiency of public procurement and selection of consultancy services. The country is facing a challenge in implementation and enforcement of the law, due to lack of resources, qualified procurement staff and adequate equipment and reluctance to implement the provisions of the law requiring the State Committee for Public Procurement and Material Resources (SCPPMR) not to participate directly in procurement processes. 4.2 Public Finance Reforms 67. The public finance system has been successful in reducing the fiscal deficit and ensuring macro-economic stability. Budget comprehensiveness and transparency have increased, in particular, improved budget documentation and public access to key fiscal information. In addition, there has been some attempt to introduce a multi-year focus to budget planning. The authorities recognize that significant problems still remain in 94



public financial management, and that improvements are key to making progress in poverty reduction and economic growth. In particular, frequent and non-transparent revisions to the budget make budget execution at the sectoral level unpredictable. Accountability for the use of funds is further weakened by the lack of robust internal controls and a modern and comprehensive accounting framework. 68. The authorities have recently developed and made some progress in implementing a focused action plan (also supported by other donors) aimed at a strengthened approach to PFM reform. The action plan recognizes that the priority is to deal with a few basic issues which will allow spending agencies to implement their budgets in a predictable way and with a solid internal control framework. The development of the action plan has been supported by IDA under the PPER, which has focused on providing practical technical assistance to the authorities and is envisaged to continue in the next CAS period. 69. The GTAC is supporting the modernization of the Treasury, and has financed the development of a new system design. Procurement of the new systems will begin during 2007, but a significant impact on the technical efficiency of the Treasury cannot be expected for at least two to three years. At least as important as the improvement of technical systems will be institutional and political reforms to the budget execution process. 4.3 Local Service delivery. 70. Much progress has been made in the provision of essential services for the rural population. Examples include: advisory services for farmers through the WB/IFAD/SDC funded ASSP; infrastructure services such as drinking water, electricity and road access through the VIP; primary health infrastructure maintenance and school repairs through the VIP; cadastral services and title registration through the Land and Real Estate Registration project (LRERP); access to rural credit through the Second Rural Finance Project and the group lending component of the ASSP. Both the VIP and the LRERP have been rated highly satisfactory on achieving development objectives and implementation performance. 71. Under the OIP, WUA’s creation, registration, and strengthening continue. At the end of 2006, 436 WUAs have been legally registered, serving 710,000 ha out of the developed area of 1.1 million ha. Organizing large groups of water users and achieving their acceptance and openness towards such aspects as cost recovery for operation and maintenance, are time-consuming and complex. The WUA concept has now been fully accepted in the country and the foundation is laid for sustainable WUA development in the future. 72. From data collected from ten schemes where rehabilitation works were completed at least two years ago, it is evident that there are already positive impacts. The analysis showed that the water supply reduced in eight of these schemes, which means that the rehabilitated systems are operated more efficiently. In seven schemes, the crop yields



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and gross production have already increased substantially. Nine of the WUAs have increased irrigation service fees; operation and maintenance expenditures increased and collection rates are high, with eight WUAs collecting more than 90 percent of the fees. 73. In addition, the Rural Water Supply and Sanitation project has already provided improved water supply systems for about 120 villages, covering about 20 percent of the total population or about one third of the rural population. The result will be to improve access to potable water in the majority of the villages in the Issyk-Kul, Naryn and Talas Oblasts as well as hygiene and sanitation in these areas. The community based approach to management of rural water supply systems including the selection, implementation, operation and maintenance of water supply systems has been internalized, and there is evidence of the communities’ commitment to the process. 74. The Bank’s VIP has had a major impact on governance at the local level, rapidly spreading and institutionalizing concepts and practices such as transparency, citizen involvement, and public accountability. Community contributions are much higher than anticipated and micro-projects have been implemented quickly, efficiently and at high quality. Project coverage of rural communities is already more than double that expected at appraisal, and in-country pressure to expand coverage even more rapidly is high. III. MEASURING BANK PERFORMANCE 75. When the CAS was approved, the weaknesses in political stability and the risk of economic shocks were considered. However, the strategy did not and could not have envisaged the degree of political and economic dislocation that took place in March 2005 and that subsequently affected over a third of the CAS period. Despite these adverse circumstances the performance of the Bank could be considered satisfactory. The Bank program focused on visible results and achieved considerable success particularly in rural- and community based projects. The quality of the Bank’s products and services was not compromised, and the portfolio implementation remained generally on track. Aid coordination improved significantly and resulted in the preparation of joint projects and technical assistance, as well as a Joint Country Support Strategy. 76. Overall the sustainability of the Bank’s strategy and its implementation is likely. Where positive outcomes have been achieved; they are likely to be sustained. The implementation of the Bank program has been successful in several areas of institutional reform which have been maintained through significant stress-testing. One example is the deepening of land reform. The Bank supported Cadastre system was tested during the revolution. Under pressure the system processed thousands of inquiries and maintained its integrity. Another example it the overall transparency of the health expenditures which continue to be sustained; and health care reforms which have led to a more robust primary care system in the country.



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A. Quality of Products and Services 77. The overall development effectiveness of the Bank’s assistance program and its impact on poverty reduction was high. Evaluation of most of the projects completed during the CAS period has shown good quality at entry, and generally satisfactory achievement of outcomes; about half have a positive likelihood of sustainability, but only one third achieved their institutional development impact. The most recent OPCS report on the status of projects under execution show the majority of projects to be either on track or to be likely to exceed their development objectives. The two projects which do not fall into this category are the CSAC and the GSAC, which have both received unsatisfactory ratings (see Table 3). Table 3: Summary of Ratings, Active Portfolio

Project title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Agricultural Support Services Land and Real Estate Registration Agribusiness and Marketing On-farm Irrigation Irrigation Rehabilitation Disaster Hazard Mitigation Village Investment Small Town Infrastructure and Capacity Building Health Sector Reform II Rural Education Power and District Heating Rural Water Supply and Sanitation Consolidation TAC Gov.SAC GTAC Payment and Banking System Modernization Health and Social Protection SWAP Problem projects – percent of rated projects Problem projects - percent of commitments DO* S HS S S S S HS S MS S S S S U MS S N/A 5.8 7.7 IP* S HS S S S MS HS S S S S S MS U MS S N/A 5.8 7.7 Critical Risks** February 2006 M M H H S S M M H H S S M H H S H



* DO/IP Ratings: S – satisfactory; U – unsatisfactory ** Critical Risks Ratings H- high; S – substantial; M - modest



78. The CAS has provided lending and grants for 13 projects totaling around US$155 million and contributed about US$2 million to one regional IDA grant – the Central Asia HIV/AIDS Project (US$26.9 million, FY05), and an Emergency Investment Grant of US$4 million to strengthen the country’s response capability to an Avian flue epidemic. The actual commitments of approximately US$155million for FY03-FY06 fell short of planned commitments in CAS of US$171 million mainly because of IDA13 allocation cuts in FY05. Projects approved under the FY03-06 CAS were still being implemented at the time of this review and therefore many of the expected results are yet to materialize.



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79. The Bank Group also delivered a number of important ESW reports over the CAS period, including the following: Poverty Assessment; Public Expenditure Review; Country Financial Accountability Assessment; Country Procurement Assessment; Trade and Growth Report, and Agriculture Policy Update. The Kyrgyz Republic also benefited from several Central Asia regional studies such as the Regional Electricity Export Potential Study (REEPS), HIV/AIDS Report, Tuberculosis Study, the Trade and Transport Facilitation Report, and the Central Asia MDG study (including Kyrgyz case studies in health and education). 80. The Quality Assurance Group (QAG) rated the Kyrgyz Republic’s ESW program as “Satisfactory” overall, as well as in its dimensions of Internal Quality, Participation, Consultation and Dissemination, and Likely Impact. The dimensions of Strategic Relevance as well as Coherence and Integration were rated as “Highly Satisfactory”. Bank Inputs and Processes were also rated Satisfactory. The program is remarkably homogenous, with only two of the 12 tasks in the sample rated less than satisfactory. 81. Several AAA tasks were highly instrumental in helping other donors shape their respective programs in the Kyrgyz Republic. For example, the PER helped DfID, EU and USAID support improved budget management, including the introduction of the MTBF; the FSAP helped underpin the Fund's PRGF, and secure donors' support for strengthening the capacity of the National Bank; the CEM informed the CG meeting, and is likely to provide donors with a common framework for support to economic growth and export diversification; the Agricultural Policy Update is likely to influence IMF work on taxation in agriculture, and has had an impact on the EU funding practices and ADB TA programs in the sector; the Poverty Assessment was explicitly used by ADB to underpin its Poverty Partnership Agreement; the CPAR helped harmonize procurement practices under the Health Sector SWAp; the CFAA findings have impacted on policies and programs of other donors, especially DFID, ADB, and EU, and served as an input into the IMF program. 82. The Assessment Panel suggested that the future AAA program could consider work on the sources of growth (including the shadow economy), regional trade and cooperation, governance (including accountability of public financial management), monetization of non-monetary incomes, rationalization of social services and benefits, and rationalization of higher education. 83. The relevance of the AAA program is now higher than ever, owing to the decision to produce a multi-donor JCSS, which offers a new opportunity to put in place more transparent arrangements for the production, dissemination and use of AAA outputs to help the Government accelerate and deepen reform. I n particular, the JCSS may help to establish a clearer division of labor and propose measures to enable the joint preparation of economic and sector reports.



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B. Portfolio Assessment 84. The size of the Bank’s portfolio was relatively stable throughout the CAS period. The number of projects grew to 19 in 2006 from 16 in 2003, while total commitments slightly decreased from almost US$286 million in FY03 to US$268 million in November 2006. This decrease was due to the closure of five projects worth during FY05-06, with four new operations being approved in the same period. More than 50 percent of current operations and more than 60 percent of total commitments was inherited from the previous CAS period. 85. Recent project approvals are closely aligned with the FY03-06 CAS and, with the exception of two projects, are on schedule. An energy project, originally planned for FY06, and a PRSG that has slipped two years from FY05 to FY07—may not be included in the JCSS. There have been some slippages 31 and deviations 32 from the program, but overall most programmed activities were implemented as planned 33 . The Business Enhancement component of the Financial Sector and Business Development Project had to be cut from the original project and its preparation postponed to FY06. Similarly, the Agriculture Modernization and Marketing Project had to be split into two projects, with the Agribusiness and Marketing Project having become effective in May 2005. The Water Management Improvement Project was delivered in FY06. ESW and TA activities were closely aligned with the CAS.

TPF FPT TPF FPT TPF FPT



86. Disbursements have improved substantially compared to the previous CAS period. Throughout FY03-05, the disbursement ratio was consistently higher than the ECA average, increasing from around 20 percent in FY03 to almost 29 percent in FY05 34 . The average project age of 3.9 35 years is a little higher than the ECA average of 3.4 years, which can partly be attributed to some projects being extended.

TPF FPT TPF FPT



87. In FY03, several projects had slow disbursement (mainly due to ceilings imposed on the Public Investment Program (PIP), procurement problems, and project management flags. Throughout FY04, efforts were made to improve portfolio performance and the number of flags has been significantly reduced. The nature of flags also changed, from “process” flag categorization in 2003 to mostly slow disbursement 36 and legal covenant problems in 2004/5. The overall status of the country portfolio was also affected by a country record flag, due to net disconnect exceeding the 20 percent threshold.

TPF FPT



31

TP



E.g. Livestock Review planned for FY05, slipped to FY06; the Integrated Financial Assessment (IFA) planned for FY04, slipped to FY06; the Investment Climate Assessment (ICA) slipped from FY05 to FY04. 32 Currently ongoing Energy Dialogue/TA, was not envisioned in the FY03-FY06 CAS. 33 CEM/DPR was dropped in FY05, GFATM Implementation TA – in FY04. Also, Environmental Expenditure and Policy planned for FY06, seems to have been dropped. 34 Average disbursement ratio in ECA was 19.7 in 2003, 18.3 in 2004, and 23.8 in 2005. 35 As of November 6, 2005 36 The slow disbursement flag may be indicative of capacity and commitment problems.

PT TP PT TP PT TP PT TP PT TP PT



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89. The CPPRs have evolved into an effective tool for managing portfolio performance. Most process-related issues identified as generic, i.e., compliance with procurement, disbursement and financial management requirements, during earlier CPPRs have been resolved. The most recent CPPRs put a greater emphasis on resultbased approaches in portfolio management and launched the discussion with the Government on how the portfolio contributes to achieving CAS goals. In addition, CPPRs focused attention on more specific issues, such as taxation of project resources, project implementation unit (PIU) inspections, and insufficient coordination of donors and portfolio by the Government. Moreover, CPPRs contribute significantly to donor coordination as they are conducted jointly with other development partners, such as ADB, IsDB and KfW. 90. During the current CAS period, IFC has financed 6 projects for the total amount of US $10 million. Five projects were in the financial sector and one project in the pulp and paper sector. Additionally, IFC has invested in regional projects that benefit the Kyrgyz Republic. These include the Central Asia Micro and Small Enterprises Facility (MSEF), a revolving financing facility to help augment availability of sustained credit to MSEs, and the SEAF Central Asia Small Enterprise Fund ($2.5 million IFC financing), to invest in SMEs across a range of sectors. 91. IFC’s present outstanding portfolio in the Kyrgyz Republic is US$13 million. All projects are performing successfully. C. Country Dialogue and Aid Coordination 92. Dialogue with the Government has been constructive throughout the CAS period and, even during the run-up to elections and after the appointment of the new administration, the Government has continued to consult with the Bank on macroeconomic and social policy issues. Efforts to engage in dialogue with Parliament on core policy work has required additional time and effort by the Bank team, but this has been critical in ensuring a better understanding of the need for reforms in areas such as the energy sector. The CG meetings in 2002 and 2004 were extremely beneficial for clarifying the Bank’s and other donors’ support for the Government’s overall development agenda. 93. Regular meetings have been held with NGO and civil society group representatives on a range of topics. For example, in 2004, the Programmatic Poverty Analysis team held dissemination meetings at sub-national level with academicians, NGOs and local administrators to share the findings of their work. However, these efforts have not dispelled skepticism and distrust of international financial institutions and donors in general, which has worsened in recent months. The upcoming JCSS 200710 of a core group of five partners, includes plans for a sustained outreach program that will help better relations with civil society and hopefully reduce distrust and suspicion of the donor community.



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94. Donor coordination and harmonization in the Kyrgyz Republic is well advanced, both in practical terms and in spirit. The effectiveness of the Donor Council was demonstrated in the immediate post-Revolution weeks in March 2005 when members were able to speak with one voice. Since then, several joint letters have been sent to the Government raising donor concerns, and a coordinator has been funded by donors. There has been real progress in project co-financing, joint donor missions, joint policy positions and joint IFI portfolio reviews. The recently approved Health SWAp is a good example of a harmonizing program involving five partners. 95. Since the October 2002 CG meeting in Bishkek, aid coordination and harmonization have been high on the agenda. In December 2003, the Government initiated the establishment of a harmonization steering committee and working group, comprising government and donor representatives. The working group developed a draft harmonization and alignment program and action plan. A joint CAS is one of the objectives of the action plan. At the High-Level Forum on Harmonization in Rome in February 2003, the Kyrgyz Republic was identified as a pilot country on harmonization and has been actively participating in the Organization for Economic Cooperation and Development Assistance Committee (OECD-DAC) meetings. 96. Information sharing and coordination have improved over the last three years, and the donor community has made significant steps towards the harmonization of procedures. Examples include: the use of the World Bank’s Poverty Assessment Report by the ADB for its CAS, close coordination of the IMF’s structural reform agenda with World Bank and ADB policies, a joint Portfolio Review by the ADB, World Bank, KfW and the IsDB in 2004, and the decision by KfW to fund a rural community infrastructure project based on the appraisal and implementation documents of the Bank’s VIP. 97. The OECD/DAC Survey on Harmonization and Alignment has indicated a number of areas that need further improvements. The survey points to a very weak use of country systems by donors. Also, there is no real alignment with sector programs, with the exception of the health sector. Donors did not streamline their conditionality and only about 10 percent of the approximately 250 field missions were carried out jointly. The survey report also notes that while there is a high-level of commitment by the Government to aid effectiveness, the capacity to drive the process remains weak. These factors should be addressed in the implementation of the upcoming JCSS. D. Lessons and Recommendations 98. Given the fractured politics and weak country ownership, building consensus for reforms will require continued policy and broad consultation, including with Parliament. Resurgent nationalism and the more interventionist economic approach of the new Government may require a more flexible economic dialogue. The challenge for the Bank and other donors is to find effective ways to support the Government in a time of political upheaval and uncertainty. Skepticism towards the Government and development partners highlights the importance of engaging with and supporting non-government stakeholders.



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The key will be to initiate sustainable processes that will catalyze broader reforms, and build champions for them among the public. 99. Policies that have a visible impact as perceived by beneficiaries are more likely to generate broad public support for reforms. Given current capacity and institutional constraints, proposed reforms will have to be modest and sequential, focusing on step-bystep improvement over a long period of time with a focus on tangible results. 100. Policy reforms requiring institutional changes often take much longer than expected. There are many reasons for this, including limitations of the host's implementation capacity and the Bank’s own supervision capacity, the absence of prerequisites for durable reform, and the time lag between altered incentives and resultant changes in behavior. There are an infinite number of exogenous factors that can delay implementation. Expectations, and related performance indicators, on the pace of reform and response to reform should reflect that experience. 101. Conditionality remains important but has proven to be a blunt instrument in persuading the Government to carry out major institutional (and particularly governance) reforms. The use of structural adjustment credits have not worked well in the context of the Kyrgyz Republic. The adoption of a more consultative process to conditionality, around multi-donor financial support, may be appropriate. 102. Some projects—in energy, the GSAC and GTAC, for instance—have been overly complex in their objectives. With implementation capacity such a major constraint, the Bank and other donors must make every effort to make projects as simple as possible and be patient when things do not move as expected. 103. Despite the less than ideal environment for budget support, the positive experience with the healthy SWAp suggests that programmatic approaches, particularly in the social sectors, may be feasible. 104. The JCSS should consider a less ambitious reform agenda and focus (in the short term) on ensuring that reforms achieved in areas such as health and education to date are protected. Public financial management reforms, for example, have been instrumental in ensuring macro-economic stability and growth during the CAS period. In some cases, the results of projects under the previous CAS are only just starting to show now. This should be taken into consideration when determining the mix of instruments and sector activities for the JCSS, and in choosing indicators for measuring success of the Bank’s program. 105. Greater selectivity will be needed in the next CAS/JCSS period. The need for prioritization is evident given the limited IDA resources and the limitations placed on the Government’s own Public Investment Plan. In this regard, donors will need to assist the Government to work out what infrastructure not to “fix” as much as what to invest in.



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106. IFC projects in the financial sector, mining, agribusiness and manufacturing have been successful, however, all have faced difficulties as a result of issues related to the business environment and the absence of regional cooperation which limits market opportunities for and thus the economic viability of Kyrgyz enterprises. Projects generally require significant levels of technical assistance to ensure the economic viability and long-term sustainability of IFC investments. 107. The most effective means of providing financing to SMEs is thorough effective financial intermediaries. Unfortunately financial intermediation is weak in the Kyrgyz Republic which limits opportunities for using the system for IFI support to micro and small business enterprises. The banking system, with US$670 million of total assets or about 25 percent of GDP at the end of 2006, is weak with limited trust among the populace and business community. The sector offers limited products and needs to develop leasing, housing finance, private pension funds factoring and insurance in order to better support the private sector.



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Poverty Reduction



Promoting Sustainable Economic Growth



Formation of an Effective State



STATUS AT COMPLETION A. Longer Term Strategic Goals: • In 2001, about 63 percent of the population • The incidence of poverty in Kyrgyz Republic fell lived below the poverty line from 63 percent in 2000 to 43 percent in 2005 • Extreme poverty was about 25 percent. • Extreme poverty fell from 24.7 to 11 percent. • Poverty was concentrated in the rural areas. • Poverty has declined in both rural and urban areas, and across all regions. However, rural poverty remained very high at 51 percent in 2005. • Growth was quite volatile in early 2000s, • Growth remained volatile. mainly due to variations in gold output. • Average growth from 2003-06 was slightly higher at just over 4 percent, reflecting a favorable • Real GDP grew by less than 4 percent macro-environment and increased demand from annually during 1999-2002. fast-growing neighboring markets, but was still weaker than in most other CIS countries. • Growth continued to rely on services and gold • The economic base was narrow and based mining but started to show the signs of on the agriculture, services, gold mining diversification into light industry and and power sectors. construction. • The debt to GDP ratio fell to around 83 per cent • Debt sustainability became an issue, of GDP in 2005 from 111 percent in 2002. prompting reductions in externally However, the debt position remained difficult. financed public investment. • IFC activities included increasing access to finance to MSMEs by strengthening local financial institutions and expanding microfinance, development of leasing and housing finance. • The political environment was more open • Despite rhetoric, the Government’s commitment than in many neighboring countries, but to improving governance and drive through core quite fragile and precarious. policy reforms was very weak. • Low wages and appointments of public • After many problems, some progress has been officials on a patronage basis were made in establishing institutions to support a endemic. professional merit based civil service. • Ineffective governance and significant • There was some progress on technical reforms to levels of corruption had seriously impeded increase transparency and fiduciary controls. But implementation of reforms. corruption remains endemic. The Kyrgyz Republic has also subscribed to the EITI.



STATUS AT CAS DESIGN



LESSONS LEARNED • Sustaining the rate of poverty reduction will require faster growth rate than that seen in this CAS period.



• Macroeconomic stability is a necessary but not a sufficient condition for growth. Deteriorating political stability and increased rentseeking can lead to stalled reforms in key sectors: for example, as in energy. • Low labor productivity and high unemployment that have hindered faster growth have to be addressed. • Finding effective mechanisms to address the issues of the business environment, and ineffective service delivery will be key to success



• Policy-based lending as a lever for major institutional changes may not work in the Kyrgyz Republic context. • Conditionality is a blunt instrument in persuading the Government to carry out major governance reforms. • The Bank should be realistic in assessing both the Government’s commitment to reforms and their implementation capacity.



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Building a Fair Society



STATUS AT CAS DESIGN • Health reforms initiated in the early 1990s showed marked improvement in health indicators, but by 2002 reform progress slowed as funding was diverted from the health system. • Progress in reducing infant and maternal mortality was achieved in pilot health reform programs. • Primary school enrollment, at over 90 percent, was already very strong. However, the challenge was to raise enrollment (particularly secondary) rates to near universal, focusing on rural education, and improve educational quality which has deteriorated.



STATUS AT COMPLETION • Despite health reforms the 2005 health indicators, showed deterioration from 2000, although there was a reduction in mortality from infectious diseases, due to methodological changes, and the lagged effects of past under financing. • Some positive progress has been recorded in education, with improvements in aggregate enrollment ratios for basic education, but education quality remains a significant concern. • Overall, progress towards the NPRS human development goals was mixed.



LESSONS LEARNED • Institutional reforms in social sectors often take longer than expected, due to limitations in client’s implementation capacity and the Bank’s own supervision capacity • The tendency to underestimate the resources required to achieve an impact, the absence of prerequisites for durable reform, and the time lag between altered incentives and behavioral response can affect impact. • Many projects have been overly complex in their objectives. With implementation capacity a major constraint, the Bank must make every effort to keep projects as simple as possible and be patient when things don’t move as expected.



B. CAS Outcomes I. Promoting Sustainable Growth 1.1 Improving the Business • Businesses are constrained by Environment unpredictability and corruption relating to regulations and legal enforcement. • Current licensing and inspection regimes undermine firms’ competitiveness and ability to grow. • Important revisions to the laws on licenses and inspections, and a new tax code have encountered opposition from vested interests which benefit from rent seeking and administrative discretion. • Survey data suggests deterioration in the business environment during the whole CAS period. • The LRERP provided catalytic support for the creation and development of the Gosregister. • The KAFC has been transformed into the largest NBFI through the Second Rural Finance Project. • The Payments and Banking System Modernization project is also being satisfactorily implemented. • The ICA documenting administrative barriers, rent seeking and other hindrances to private sector growth is completed. • FIAS completed a review on FDI Law and conducted a workshop for the Government and private sector to discuss its results. • Targeted interventions in clearly defined areas, such as land registration and the support of KAFC tend to be successful. • A wide ranging and complex agenda, has tended to produce more mixed results. • Dealing with the complex set of entrenched interests will require better mechanisms at the center of Government to resolve conflicts over policy.



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1.2 Agriculture and AgroProcessing



STATUS AT CAS DESIGN • Agricultural growth is modest, volatile and severely affected by political turmoil. • The sector remains subject to unpredictable fluctuations caused by climatic variations, natural disasters and by external factors such as cross-border trade restrictions. • Agribusiness growth has been sluggish due to the uncertain business environment and the barriers to SME growth.



1.3 Energy



• The quasi-fiscal deficit in the energy sector had been reduced to 10.4 percent of GDP as a result of previous energy reforms supported by the CSAC. • The failure to increase electricity tariffs and reduce technical losses hindered progress to financial viability, operational efficiency and private investment. • Entrenched interests and rent-seeking have weakened commitment to reform.



STATUS AT COMPLETION • The LRERP has supported systematic land registration in rural areas. • The ASSP has been the central vehicle for establishing effective support services for farmers, and contributed to private ownership over 70 percent of farm land. • The Second Rural Finance project assisted in extending credit to agriculture and agribusiness. • The Agribusiness and Marketing Project (ABMP) focused on improving the operations of all participants in the agribusiness value chain. • IDA support expanded the area under irrigation and facilitated adequate and timely water supplies through the OIP and the Irrigation Rehabilitation Project (IRP). Two studies, an Agricultural Policy Update and the Livestock Sector Review, guided the policy dialogue and helped frame the scope and focus of future external donor support for livestock. • IFC provided financing to Akun Ltd., a leading enterprise in producing flour and pasta and provided credit lines to two local financial intermediaries which provide micro lending to farmers and entrepreneurs in the agribusiness sector. • Failure to carry out the reforms resulted in the closure of the Bank’s CSAC facility before the third and final tranche was released. • The Government continues to look to IDA as its principal interlocutor on matters related to energy. • During 2006 the first steps towards a renewed commitment to energy reforms were taken, with the unification of household tariffs in May 2006.



LESSONS LEARNED • Operations aimed at bringing about institutional change (establishing the institutional infrastructure of a market economy and refocusing public policy) are likely to have limited impact until there is real ownership of reforms in the central institutions. • Success with the ASSP has suggests that broadening the impact could be achieved through repeater projects.



• Utility reform works well only if the Government is fully committed. • Radical restructuring without appropriate sequencing, having an adequate timeframe and consideration of country circumstances is overly ambitious. • It is important not to underestimate the complexity of the task in the absence of real country ownership.



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1.4 Mining



STATUS AT CAS DESIGN • There has been no investment in the power sector in recent years; continuous deterioration in the infrastructure has impacted service delivery. • The development and potential of the mining sector was hampered by a poor legal and regulatory framework as well as a lack of transparency.



STATUS AT COMPLETION



LESSONS LEARNED



1.5 Transport



• The road network is generally adequate for the development needs of the country, but resources for its maintenance are limited. • The network has continued to deteriorate, resulting in significant increases in vehicle operating costs and travel time. • External financial assistance is targeted at the rehabilitation of the major trade corridors, but much less resources have been allocated for the maintenance of the rest of the network. • There is a serious maintenance backlog and the road network is in very poor condition.



• IDA supported an ongoing mining dialogue and technical assistance through an IDF grant to support the authorities in developing the appropriate legal and institutional framework for the development of the sector. • Implementation difficulties continued as a result of political tensions of March 2005, and amid concerns that reforms in the sector might imply a loss of the Kyrgyz Republic’s sovereignty. • Entrenched interests prevented implementation of a number of proposals for legal reforms that were developed. • One important advance was the decision to participate in the EITI though compliance has been limited due in part to weak capacity. • IFC has provided advisory services support to develop a favorable legal framework for attracting investments into the mining sector. • The Urban Transport project provided support for road financing reforms, and regulatory reform in urban passenger transport services. • It was successful in providing sustainable, reliable, and affordable access to mobility for the populations of the main cities. • Extensive TA and ESW, including the IDF grant and the PPER, was provided for introducing a rational budgeting process, including integrated and systematic approaches to evaluate road investments and maintenance expenditures.



• Dialogue on technical issues will only be effective when there is consensus behind proposed reforms and if the political economy of the sources of opposition to the reforms is explicitly addressed. • Dialogue not backed up by concrete support (in terms of lending or grants) may be ineffective.



• The focus on institutional development (particularly prioritization mechanisms for road maintenance) is likely to ensure more effective use of domestic and donor resources in the sector. • Adequate attention to road maintenance is necessary for the impact of road investments to be sustainable.



107



STATUS AT CAS DESIGN II. Providing Essential Services 2.1 Health • Since 2002, reform progress has slowed. • Funds raised as contributions for health insurance were diverted to the Social Fund to pay pensions, and large arrears accumulated in payments to providers. • Healthcare providers reintroduced informal payments in order to pay their contractors. • Increased oversight by Parliament has delayed the full rollout of reforms Health outcomes have been mixed with reductions in mortality from infectious diseases, but increase in infant and maternal mortality (although this is partly due to methodological changes). 2.2 Improving Education Services • While literacy in the Kyrgyz Republic is nearly universal, there are multiple indications of eroding quality of education, particularly in rural areas. • The gap between the urban and rural students is still significant. • Recruiting teachers to go to remote areas is difficult. • Early childhood development programs continue to be a low priority when it comes to funding; coverage of preschool education is only around 10 per cent.



STATUS AT COMPLETION • Health sector reforms have been carried out in conjunction with the Bank under the Health II project and subsequently the multi-donor SWAp. • As a result, the Government has approved its second generation five-year strategy (Maanas Taalimi) and the implementation plan for the health sector and has received widespread support for the strategy. • On of the key achievements of the Bank and other donors, in addition to supporting institutional reforms, was to reverse the decline in funding of the health sector in previous years.



LESSONS LEARNED • Successes achieved in implementing the health SWAp indicate that in areas where there is government ownership, real results on the ground are possible. • Institutional reforms make take much longer and require more resources than is often assumed. • Reforming institutional arrangements is much more feasible when supported by an integral strategy and investment over many years. • Experience showed that even well designed institutional reforms can easily be derailed if insufficient resources are available. • Reforms to the financing system in education are ineffective without reforms to intergovernmental finance system. • Success requires both institutional reform and investments over time. • The failure of proposed per capita financing for education illustrated the importance of ensuring that technical proposals in a sector are appropriate to the level of institutional development.



• Per capita financing was proposed for education under the GSCA program. • The Rural Education Project which began in May 2005 is the main vehicle of support to education. • New student and class achievement tracking instruments have been developed, and 100 fellowships for rural teachers have been created. • Schools in two pilot regions were trained in strategic planning for school development jointly with school staff, parents and boards of trustees. • The quality of textbooks and methodological guides in core subjects is being improved and all schools are being supplied with necessary learning materials. • The Kyrgyz Republic was approved for a grant of US$15 million from the FRI Catalytic Fund to support implementation of the Government’s Education Sector Strategy and accelerated achievement of the EFA goals.



108



STATUS AT CAS DESIGN III. Improving the Governance Framework 3.1 Civil Service Reform • The overall pace of civil service reform has been slow. • Commitment to the reform is uneven across government structures. • High level appointments are made without regard for due competitive process. • The Civil Service Law, approved in June 2004, was weakened initially in Parliament and then under the previous government systematically undermined.



STATUS AT COMPLETION • Civil service reforms were extensively supported by the GSAC project, but poor implementation led to postponement of the release of the second. • A Civil Service Authority has been established for implementing competitive and merit-based appointment procedures. • The proportions of appointments through due process are close to 90 percent, compared to about 30 percent in the months after the revolution. • Compliance particularly among parliamentarians with the Law on Declaration of Income and Assets by high state officials, which was low, has reached 95 percent since March 2006. These declarations are now published on the internet and in major newspapers. • The progress made at the end of 2006 has been sufficient to upgrade the implementation of the GSAC to moderately satisfactory, after extensive dialogue and supervision. • Prior to the work of the PPER, considerable resources had been provided by numerous donors on different aspects of Public Finance Reforms. • A PFM action plan has been supported by IDA under the Programmatic Public Expenditure Review, in coordination with other donors. • IDA has also provided support to the State Commission on Public Procurement through strengthening of the National Procurement Training Centre. • The GTAC is supporting the modernization of the Treasury, and has financed the development of a new system design.



LESSONS LEARNED • The reforms supported under GSAC illustrated the risks of an overambitious and over complex reform agenda where there is little real commitment and implementation capacity is very weak. • Supporting reform of the legal framework but failing to follow through with detailed implementation has tended to suggest that donors (including the Bank) are not interested in deep reforms. • Building real consensus before embarking on reforms is crucial to their success. • Supporting governance reform also needs technical assistance and investment. • The support for public finance reforms through the PPER illustrated how sustained dialogue and engagement can help build consensus for reforms. • Focusing on basic issues—budget execution for instance—is more likely to have real impact. • Attempting complex reforms for which the institutional framework is not yet in place is not feasible. • Technical knowledge can be transferred better through hands-on TA than through large pieces of ESW.



3.2 Public Finance Reform



• The public finance system has been successful in reducing the fiscal deficit and ensuring macro-economic stability. • Significant problems still remain in public financial management (PFM) • Frequent and non-transparent revisions to the budget make budget execution at the sectoral level unpredictable. • Accountability is further weakened by the lack of robust internal controls and a modern and comprehensive accounting framework.



109



3.3 Local Services Delivery



STATUS AT CAS DESIGN • The rural population has lower access to essential public services such as drinking water, electricity and road access. • Access to credit and thus the opportunity to boost incomes, is limited.



STATUS AT COMPLETION • IDA has supported local service delivery through community driven development approaches adopted through the VIP. • IDA has successfully provided assistance for rural water supply and sanitation, small town infrastructure, rehabilitation of power and district heating systems, and urban transport and maintenance. • An impact assessment exercise, involving a sample of 21 completed sub-projects, carried out in October 2005 showed community satisfaction with improved water supply. • The Bank’s VIP has had a major impact on governance at the local level, rapidly spreading and institutionalizing concepts and practices such as transparency, citizen involvement, and public accountability. • Project coverage of rural communities is already more than double that expected at appraisal. • Under the OIP, data collected showed that the rehabilitated water supply systems operate more efficiently. In seven schemes the crop yields and gross production have already increased substantially. • Under the Rural Water Supply and Sanitation project, IDA has contributed significantly to the management, operation and maintenance of water supply system, and to improve its sustainability.



LESSONS LEARNED • The VIP, OIP and Rural Water Supply projects have illustrated the importance of combining a focus on local governance with the application of resources directly to the rural poor. • Organizing large communities to accept and internalize concepts such as cost recovery for operations and maintenance can be time-consuming and complex, but yield good results when they are successful. • Community management of rural water supply systems is new in the Kyrgyz Republic and still fragile, but is an important step forward. • Additional capacity building and continued government support—both local and central—will be required for sustainability of impact.



110



TABLE 2: PLANNED VS ACTUAL LENDING DELIVERABLES

FY 2003 2003 2004 2004 2004 2004 2004 2004 2005 2005 2006 2006 2006 2006 PROJECT PLANNED IN CAS Project IDA Amount ($M) GSAC 20 GSAC TA 8 Financial Sector and Business 12 Development 37 Payment and Banking Modernization 38 Village Investment Project 15

TPF FPT TPF FPT



CURRENT STATUS Status IDA Amount ($M) Approved FY03 20 Approved FY03 8 Divided into 2 projects Approved FY04 9 Approved FY04 Approved FY04 Dropped Approved FY04 Approved FY05 Approved FY05 Postponed till FY07 Approved FY06 Postponed till next CAS Approved FY06 Approved FY06 Approved FY07 Approved FY07 15 6.9



Natural Hazard Mitigation project PRSC Rural Education Small Town Infrastructure Agri-Business and Marketing 40

TPF FPT



5 15 15 15 20 15 15 16



15 15 39

TPF FPT



8.10



PRSG (to be absorbed into HIPC) Health and Social Protection SWAp Energy Investment Project Water Management Improvement 41 Avian Influenza Project 42 Reducing Technical Barriers 43 Village Investment Project 2 Total

TPF FPT TPF FPT TPF



15



19 4 5 15 155



2006



FPT



171



37

TP



The project was divided into two separate projects: 1.Payment and Banking Modernization and 2.Reducing Technical Barriers to Entrepreneurship and Trade. 38 The project was not envisaged in initial CAS plan; it appeared after the division of Financial Sector and Business Development Project. 39 The project was planned as IDA grant, however due to IDA resource limitations 3.1 million - IDA grant and 12 - IDA credit. 40 The Agricultural Modernization and Marketing Project included in the CAS for US$20 million was split into the Agri-Business and Marketing Project (FY05) and the Water Management Improvement Project (FY06). 41 See footnote 12 above. 42 The project was not planned under the CAS; it is funded by Global Program for Avian Influenza Control and Human Pandemic Preparedness and Response (GPAI) 43 The project was not envisaged in the initial CAS plan; it appeared after the division of Financial Sector and Business Development Project

PT TP PT TP PT TP PT TP PT TP PT TP PT



111



Table 3. Planned Versus Actual Non-Lending Deliverables a) AAA/ESW

FY FY03 FY03 FY03 FY03 FY03 FY04 PRODUCT PLANNED IN CAS Public Expenditures Review Poverty Assessment FSAP CFAA CPAR Trade Diagnostic CURRENT STATUS Completed FY04 Completed FY04 Completed FY03 Completed FY03 Completed FY03 Two ESW – Trade Study and Development Policy Review were combined into one – CEM: Trade andGrowth Study ongoing Completed FY04 Completed FY04 Completed FY04 Completed FY05 Completed in FY 06 Completed in FY 06 Completed in FY 06 dropped Completed FY06 ongoing ongoing ongoing ongoing



FY05 FY04 FY04 FY04 FY05 FY05 FY06 FY06 FY06 FY06 annual annual annual annual



Support of NPRS Investment Climate Survey Local Governance and Anticorruption Agriculture Policy Update



Country Economic Memorandum: Trade and Growth Study

Livestock Sector Review Poverty Profile Update Poverty Mapping Report Environmental Expenditure and Policy Urban Slums Note Dialogue on Social Protection Dialogue on PER Dialogue on Mining Management of GFATM (TB)



b) Trust Fund/IDF

FY FY03 MULT FY03 FY04 MULT FY04 PRODUCT PLANNED IN CAS Institutional Building Support to PRSP-I IDF Grant on Court Information and Management System Development Strengthening Organization Structure and Statistics Capacity of National Statistics System Partnership Building Capacity in Governance and Revenue Management in Natural Resources IDF Grant IDF Grant Institutional Strengthening thru Support to National Procurement Center in Bishkek IDF Grant Institutional Capacity Enhancement for Public Expenditure CURRENT STATUS Completed FY05 Completed FY06 Completed FY06



Will be completed in FY07



FY04



Will be completed in FY08



FY06



Will be completed in FY09



112



FY06 MULT FY06



Management Institutional Building Support to PRSP-II Local Government Capacity Building Grant to Implement Intergovernmental Fiscal Reforms



Will be completed in FY08 Will be completed in FY09



c) PHRD for Projects Preparation

FY FY01 FY03 FY04 FY04 FY04 FY04 FY04 FY05 FY05 FY05 FY05 PRODUCT PLANNED IN CAS Agribusiness and Marketing Project Payments and Banking System Modernization Project Village Investment Project Poverty Reduction Support Grant (PRSG) Small Towns Infrastructure and Capacity Building Project Rural Education Project Disaster Hazard Mitigation Project Health and Social Protection Project SWAP Urban Transport and Maintenance Project Water Management Improvement Project (WMIP) Disaster Hazard Mitigation Project CURRENT STATUS Completed FY05 Completed FY04 Completed FY04 Completed FY07 Completed FY05 Completed FY05 Completed FY05 Completed FY06 Completed in FY06 Completed in FY06 Completed FY07



d) IFC

FY0304 FY04 FY04 IFC Leasing TA IFC Institutional Support to Akun JSC IDF Grant for Building Capacity in Governance and Revenues Streams Management for the Mining and Natural Resource Sectors IFC Kumtor Gold Monitoring Advisory Group IFC Tourism Development Study IFC Information Technologies Sector Review IFC Leasing TA IFC Leasing TA, the Second Stage IFC Central Asian Primary Market Development Project Completed FY03 Completed FY04 Will be completed FY07



FY03FY05 FY03FY05 FY03FY05 FY03FY05 FY05 FY05



Completed FY03 Completed FY03 Completed FY03 Completed FY03-04 ongoing ongoing



113



e) Regional Non-Lending Deliverables

Irrigation in Central Asia - Social, economic, and environmental considerations Meeting the Environment MDG in Europe and Central Asia MDG Goals for Health in Europe and Central Asia: Relevance and Policy Implications Microfinance and the Poor in Central Asia: Challenges and Opportunities Central Asia Water Energy Nexus Microfinance and the Poor in Central Asia: Challenges and Opportunities Regional Energy Export Potential Study Trade and Transport facilitation in Central Asia Drought Management and Mitigation Assessment for Central Asia and the Caucus, Phase two Work Plan Reversing the Tide: Priorities for HIV/AIDS Prevention in Central Asia Stopping Tuberculosis in Central Asia Operationalizing the Health and Education MDGs in Central Asia: A Framework for Policy and Programmatic Action (draft) Operationalizing the Health and Education MDGs in Central Asia: Kyrgyz Republic Health and Education Case Studies Review of Experience of Family Medicine in Europe and Central Asia: Executive Summary (In Five Volumes) Volume I Review of Experience of Family Medicine in Europe and Central Asia: (In Five Volumes) Volume IV: Kyrgyz Republic Case Study

H H



Completed FY03 Completed FY03 Completed FY04 Completed FY04 Completed FY04 Completed FY04 Completed FY05 Completed FY05



Completed FY05 Completed FY05 Completed FY05 Completed FY05



Completed FY05



Completed FY05



Completed FY05



114



Kyrgyz Republic at a glance

POVERTY and SOCIAL 2005 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions) Average annual growth, 1999-05 Population (%) Labor force (%) Most recent estimate (latest year available, 1999-05) Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5) Access to an improved water source (% of population) Literacy (% of population age 15+) Gross primary enrollment (% of school-age population) Male Female KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1985 GDP (US$ billions) Gross capital formation/GDP Exports of goods and services/GDP Gross domestic savings/GDP Gross national savings/GDP Current account balance/GDP Interest payments/GDP Total debt/GDP Total debt service/exports Present value of debt/GDP Present value of debt/exports 1985-95 (average annual growth) GDP GDP per capita Exports of goods and services -5.3 -6.6 .. .. .. .. .. .. .. .. .. .. .. .. 1995-05 4.6 3.4 2.6 1995 1.7 18.3 29.5 5.4 8.6 -14.1 1.2 36.7 13.2 .. .. 2004 7.0 5.9 12.8 2004 2.2 14.5 42.6 5.8 11.1 -3.4 1.3 94.9 14.0 68.5 131.7 2005 -0.6 -1.8 -6.8 2005 2.4 14.4 39.0 -4.7 5.5 -8.3 .. .. .. .. .. 2005-09 5.2 4.1 .. Kyrgyz Republic Low-income group Domestic savings

Economic ratios*



9/15/06



Kyrgyz Republic 5.2 440 2.3



Europe & Central Asia 473 4,113 1,945



Lowincome 2,353 580 1,364



Development diamond*



Life expectancy



1.0 1.8



0.0 0.6



1.9 2.3



GNI per capita



Gross primary enrollment



48 36 68 58 7 77 99 98 98 98



.. 64 69 28 5 92 97 104 105 102



.. 31 59 80 39 75 62 104 110 99



Access to improved water source Kyrgyz Republic Low-income group



Trade



Capital formation



Indebtedness



STRUCTURE of the ECONOMY 1985 (% of GDP) Agriculture Industry Manufacturing Services Household final consumption expenditure General gov't final consumption expenditure Imports of goods and services .. .. .. .. .. .. .. 1985-95 (average annual growth) Agriculture Industry Manufacturing Services Household final consumption expenditure General gov't final consumption expenditure Gross capital formation Imports of goods and services -2.9 -14.3 -24.3 -2.7 -13.9 -19.3 -17.1 .. 1995 43.9 19.5 9.3 36.6 75.0 19.5 42.4 1995-05 5.2 2.7 5.7 4.8 5.1 2.0 -1.4 1.0 2004 33.3 24.1 17.1 42.6 76.0 18.2 51.3 2004 4.1 3.0 2.2 11.9 7.5 4.6 23.6 16.3 2005 34.1 20.9 14.1 45.0 85.9 18.9 58.2 2005 -4.2 -10.9 -15.6 8.1 12.0 -0.8 -1.1 12.7

Growth of capital and GDP (%)

40 20 0 -20 -40 00 01 02 03 04 05



GCF



GDP



Growth of exports and imports (%)

20 10 0 00 -10 -20 01 02 03 04 05



Exports



Imports



Note: 2005 data are preliminary estimates. This table was produced from the Development Economics LDB database. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.



115



116



117



CAS Annex B2 - Kyrgyz Republic Selected Indicators* of Bank Portfolio Performance and Management

As Of Date 05/09/2007



Indicator Portfolio Assessment Number of Projects Under Implementation a Average Implementation Period (years) b Percent of Problem Projects by Number a, c Percent of Problem Projects by Amount a, c Percent of Projects at Risk by Number a, d Percent of Projects at Risk by Amount a, d Disbursement Ratio (%) e Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project)

P P P P P P P P P P P P P P



2004 16 3.4 18.8 22.6 25.0 28.0 20.8 yes 1729 108



2005 16 3.5 6.3 8.2 18.8 24.6 28.5 yes 1547 97



2006 17 3.5 0.0 0.0 0.0 0.0 27.5 yes 1352 80



2007 19 4.0 5.3 13.9 5.3 13.9 24.4 yes 1588 84



Memorandum Item Proj Eval by OED by Number Proj Eval by OED by Amt (US$ millions) % of OED Projects Rated U or HU by Number % of OED Projects Rated U or HU by Amt



Since FY 80 18 466.7 22.2 8.9



Last Five FYs 7 109.3 42.9 25.3



a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.



118



CAS Annex B3 - IBRD/IDA Program Summary - Kyrgyz Republic

As Of Date 05/09/2007



Proposed IBRD/IDA Base-Case Lending Program

Fiscal year

2007



Proj ID

Reducing Tech. Barriers Village Investment Project 2 On-farm Irrigation 2 Result



US$(M)

5.0 15.0 16.0 36.0



Strategic Rewards b (H/M/L)

M H H



Implementation Risks (H/M/L)

M L L



2008



Statistical Capacity Building Agricultural Investments and Services Bishkek/Osh Urban Economic Management TA Regional Biodiversity Result



1.0 10.0 15.0 4.0 2.0 32.0



M M H M M



M L M M M



2009



National Road Network Maintenance and Rehabilitation Rural Water 2 Result



20.0 10.0 30.0 15.0 6.0 10.0 31.0 129.0



H H



M L



2010



Education SWAp Land and Real Estate Registration 2 Judicial Reform Result



H H H



M L M



Overall Result



119



CAS Annex B3 (IFC & MIGA) for Kyrgyz Republic

Kyrgyz Republic - IFC and MIGA Program, FY 2004-2007

2004 2005 2006 2007 IFC commitments (US$m) 3.10 3.90 1.20



Sector (%)

Finance Markets General Manufacturing 64 100 36 100 100 100 100



Total Investment instrument(%)

Loans Equity



0



Total

MIGA guarantees (US$m)



97 100 100 3 100 100 100 42.14 0.00 0.00



0



120



CAS Annex B4 - Summary of Nonlending Services - Kyrgyz Republic

As Of Date 05/09/2007



Product Recent completions Investment Climate Assessment Poverty Update Institutioal Fiduciary Assessment Livestock Review Programatic PER TA Energy Dialogue TA Underway Urban Slums Poverty Assessment Update PPER CPAR/CFAA Update FSAP Update Poverty Assessment PPER Social Protection Strategy Pub. Exp. Tracking Survey CEM follow-up Heating Strategy Fiduciary Assessment Education User Survey Access to Health Judicial Study CEM Poverty Assessment Update Corporate ROSC



Completion FY



Cost (US$000)



Audiencea

P P



Objectiveb

P P



FY05 FY05 FY06 FY06 FY06 FY06



129 349 46 185 286 51



G,D,B G,D,B G,B G,B G,D,B G,B



KG,PD,PS KG,PS PS PS PS,PD PS



FY07 FY07 FY07 FY07 FY07 FY08 FY08 FY08 FY08 FY08 FY09 FY09 FY09 FY09 FY10 FY10 FY10



85 87 100 80 52 150 100 100 100 185 200 50 150 100 250 100 150



G,D,B G,D,B G,D,B G,D,B G,D,B G,D,B G,D,B G,D,B G,D,B G,D,B G,D,B G,D,B G,D,B G,D,B G,D,B G,D,B G,D,B



KG,PS KG,PD KG,PD,PS KG,PD,PS PD,PS KG,PD KG,PD,PS PD,PS KG,PS KG,PS KG,PS KG KG,PS KG,PS KG,PS KG,PS KG,PS



____________

a. Government, donor, Bank b. Knowledge generation, public debate, problem-solving.



121



CAS Annex B6 - Key Economic Indicators - Kyrgyz Republic

As Of Date 05/09/2007



Indicator National accounts (as % of GDP) Gross domestic producta Agriculture Industry Services Total Consumption Gross domestic fixed investment Government investment Private investment Exports (GNFS)b Imports (GNFS) Gross domestic savings Gross national savingsc Memorandum items Gross domestic product (US$ million at current prices) GNI per capita (US$, Atlas method)



2002



Actual 2003 2004



Estimated 2005 2006 2007



Projected 2008 2009



2010



100 38 23 39 94 18 7 12 43 47 15 17



100 37 22 41 104 15 5 10 43 50 6 9



100 33 24 43 105 16 5 11 47 57 6 12



100 32 22 46 104 16 5 11 43 65 -5 6



100 33 20 46 121 16 5 11 41 78 7 9



100 32 22 46 116 17 5 13 43 76 8 13



100 30 23 46 112 17 5 12 44 74 9 14



100 29 25 46 109 20 4 16 46 75 10 14



100 29 25 46 107 20 5 15 46 73 10 15



1,606 290



1,919 340



2,212 400



2,460 450



2,817 3,116 500 550



3,438 600



3,796 4,132 650 710



Real annual growth rates (%, calculated from 95 prices) Gross domestic product at market prices 0.0 Gross Domestic Income 0.3



7.0 7.0



7.0 6.0



-0.2 0.2



2.7 3.8



6.4 5.9



7.2 6.1



7.2 5.8



5.7 4.9



Real annual per capita growth rates (%, calculated from 95 prices) Gross domestic product at market prices -0.8 6.1 Total consumption 2.9 18.0 Private consumption 3.9 22.9 Balance of Payments (US$ millions) Exports (GNFS)b Merchandise FOB Imports (GNFS)b Merchandise FOB Resource balance Net current transfers Current account balance Net private foreign direct investment Long-term loans (net) Official Private Other capital (net, incl. errors & ommissions) Change in reservesd Memorandum items Resource balance (% of GDP) Real annual growth rates ( YR95 prices) Merchandise exports (FOB) Primary Manufactures Merchandise imports (CIF) 640 498 721 572 -80 88 -49 5 36 51 -15 38 -50 745 590 875 724 -130 112 -81 46 -16 33 -49 59 -52



5.9 5.9 6.4



-1.6 8.4 10.8



1.7 21.8 23.7



5.2 2.7 2.4



6.0 4.1 3.9



6.1 4.1 3.8



4.6 3.8 3.7



942 733 1135 904 -193 209 -75 131 43 51 -8 17 -162



942 687 1397 1106 -455 332 -204 43 16 16 0 145 -93



1156 806



1347 942



1526 1064



1746 1223



1913 1319



2188 2382 2540 1632 1779 1891 -1032 -1035 -1014 512 774 850 -543 -300 -212 105 62 62 0 188 -278 110 78 78 0 135 -73 104 89 89 0 90 -42



2859 3026 2153 2275 -1114 -1113 887 888 -281 -289 116 100 100 0 65 -93 124 55 55 0 45 -40



-4 8.1 .. .. 11.4



-7 5.3 .. .. 22.0



-9 12.8 .. .. 15.8



-19 -6.8 .. .. 30.8



-37 -0.4 -4.5 8.2 47.1



-33 14.8 19.2 6.9 9.8



-30 13.9 17.3 7.2 7.6



-29 12.9 16.1 5.9 14.0



-27 6.1 6.5 5.2 5.1



(Continued)



122



Kyrgyz Republic - Key Economic Indicators (Continued)

Actual 2003 2004 Estimated 2006 2007 Projected 2008 2009



Indicator



2002



2005



2010



Public finance (as % of GDP at market prices) Current revenues Current expenditures Current account surplus (+) or deficit (-) Capital expenditure Foreign financing Monetary indicators M2/GDP Growth of M2 (%) Private sector credit growth / total credit growth (%) Price indices( YR2005 =100) Merchandise export price index Merchandise import price index Merchandise terms of trade index Real exchange rate (US$/LCU)f Real interest rates Consumer price index (% change) GDP deflator (% change)



e



23 23 0.0 5.4 5.1



23 23 -0.5 4.4 4.4



23 23 -0.2 4.4 4.7



24 24 -0.2 4.3 3.6



25 25 -0.2 4.4 1.7



25 25 0.1 4.3 0.3



25 25 0.4 4.3 -0.4



25 25 0.7 4.2 -0.9



25 25 0.9 4.7 -0.9



15 34 12



17 33 95



21 32 -150



21 10 93



29 52 102



31 22 101



33 19 97



33 12 112



33 8 110



80 99 81 85



90 98 92 92



100 111 89 98



100 100 100 100



118 108 109 107



120 107 112 111



119 106 112 114



121 106 115 116



123 106 116 119



2.1 2.0



3.1 4.0



4.1 5.1



4.4 7.1



5.6 9.2



5.0 5.0



4.0 4.0



4.0 4.0



4.0 4.0



a. b. c. d. e. f.



GDP at factor cost "GNFS" denotes "goods and nonfactor services." Includes net unrequited transfers excluding official capital grants. Includes use of IMF resources. Consolidated central government. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.



123



CAS Annex B7 - Key Exposure Indicators As of 05/09/2007



Actual Indicator Total debt outstanding and disbursed (TDO) (US$m)a

P P



2000 1712



2001 1678



2002 1785



2003 1839



2004 2098



2005 2024



Estim ate 2006 2198



Projected 2007 2037 2008 2101 2009 2159 2010 2225



Net disbursements (US$m)a

P P



58 186



20 171



24 116



22 135



41 134



69 118



62 93



78 79



89 78



100 79



55 79



Total debt service (TDS) (US$m)a

P P



Debt and debt service indicators (%) TDO/XGSb TDO/GDP TDS/XGS Concessional/TDO

P P



299 125 29 …



298 110 29 75



279 111 18.1 74



247 96 18.1 77



223 95 14.2 80



215 82 12.5 80



190 78 8.0 88



151 65 5.9 88



138 61 5.1 87



124 57 4.5 84



116 54 4.1 81



IBRD exposure indicators (%) IBRD DS/public DS Preferred creditor DS/public DS (%) IBRD DS/XGS IBRD TDO (US$m) Of which present value of guarantees (US$m) Share of IBRD portfolio (%) IDA TDO (US$m) IFC (US$m) Loans Equity MIGA MIGA guarantees (US$m)



0.0 44



0.0 53



0.0 61



0.0 98



0.0 93



0.0 99



0.0 100



0.0 100



0.0 99



0.0 97



0.0 96



0.0 0



0.0 0



0.0 0



0.0 0



0.0 0



0.0 0



0.0 0



0.0 0



0.0 0



0.0 0



0.0 0



0 379



0 389



0 457



0 529



0 574



0 558



0 612



0 630



0 643



0 633



0 620



1.4



0.7 1.0



11.6 3.5



13.3 3.5



14.3. 3.6.



15.9 3.3



42



0



0



a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net shortterm capital. b. "XGS" denotes exports of goods and services, including workers' remittances.



124



CAS Annex B8 (IFC) for Kyrgyz Republic

Kyrgyz Republic Statement of IFC's Held and Disbursed Portfolio As of 04/30/2007 (In US Dollars Millions)

Held Equit y 0 0 0.6 0 0 0 0 1.4 2.0 Quas i 0 0 0.0 0 0 1 0.4 0 1.4 Parti c 0 0 0.0 0 0 0 0 0 0.0 Loa n 0.5 1.07 0.0 1.5 2 0.7 0.9 2.5 9.2 Disbursed Equit y 0 0 0.6 0 0 0 0 1.4 2.0 Quas i 0 0 0.0 0 0 1 0.4 0 1.4 Parti c 0 0 0.0 0 0 0 0 0 0.0



FY Approval 2004 2006 1997/ 1999/ 2004 2004 2002 2000/ 2005 2001/ 2005



Company AKB Kyrgyzstan Bai Tushum Demirbank Kyrgyz Ineximbank KKB Kyrgyzstan SEF Akun Ltd. SEF Altyn-Ajydar SEF KICB



Loan 0.5 1.06 7 0 1.5 2 0.7 0.9 2.5 9.2



Total Portfolio:



Approvals Pending Commitment

2006 1997 Bai Tushum Demir KyrgyzIncr Loan 0 0 0 Equit y 1 0.15 1.15 Quas i 0 0 0 Parti c 0 0 0



Total Pending Commitment:



125



CAS Annex B8 - Kyrgyz Republic Operations Portfolio (IBRD/IDA and Grants) As Of Date 05/09/2007

Closed Projects 19



IBRD/IDA * Total Disbursed (Active) of which has been repaid Total Disbursed (Closed) of which has been repaid Total Disbursed (Active + Closed) of which has been repaid Total Undisbursed (Active) Total Undisbursed (Closed) Total Undisbursed (Active + Closed) Active Projects



126.25 0.46 480.63 14.56 606.88 15.02 135.51 0.00 135.51 Difference Between Expected and Actual Original Amount in US$ Millions Fiscal Year 1996 1998 2000 2000 2000 2002 2003 2003 2004 2004 2004 2005 2005 2005 2006 2006 2006 2007 2007 IBRD IDA GRANT Cancel. Undisb. 35 14.98 9.42 20 5 15 20 7.775 15.1 9 6.9 8.1 15 15 15 19 4 5 15 254.28 1.00 0.94 1.12 2.68 2.69 2.73 16.59 7.18 4.69 5.29 5.89 6.64 10.69 10.88 13.57 19.30 3.27 5.13 15.21 135.51 Disbursements a/ Orig. -13.81 2.39 0.54 0.88 2.36 -0.03 14.85 4.85 0.51 3.33 2.24 0.74 6.21 2.49 1.83 -0.26 0.09 3.60 32.73 Frm Rev'd 2.16 0.51 -0.07 -1.25 -0.10



Last PSR Supervision Rating Project ID P008519 P040721 P049719 P049723 P069814 P036977 P071061 P071063 P073973 P074881 P083235 P049724 P078976 P083377 P084977 P088671 P099453 P087811 P098949 Overall Result Project Name POWER & DIST HEAT REHAB ASSP LAND REGISTRATION ON-FARM IRRIGATION CONSLD TA RURAL WS & SAN GOV SAC GOV TA VIP PYMNT/BANK SYST MOD DISASTER HAZARD MITIGATION AGRIBUSINESS & MARKETING RURAL EDUC SMALL TOWNS INFRA & CAP BLDG HEALTH & SOC PROT WATER MGMT IMPRVMT AVIAN FLU - KG RED TECH BARRIERS FOR ENTREPR & TRADE VIP 2 Development Objectives MU S HS S S S MS MS HS S S S S S S S S # S Implementation Progress MU S HS S MS S S MS HS S MS S S S S S S # S



2.03



2.46



2.03



3.70



126



127