: / Strategies / Kyrgyz Republic Country Assistance Strategy (2003)

Kyrgyzstan Review, 10 years ago

IFC and MIGA Program

The private sector business environment in the Kyrgyz Republic, as well as in most of the frontier markets of Central Asia, remains difficult with slow reform progress and minimal investor interest. Issues which impact the development of a more robust IFC investment program include (i) the small domestic market and neighboring country export barriers, (ii) limited capital and management skills in small businesses needed in a market economy, (iii) poor corporate governance in medium and larger enterprises, (iv) weak financial intermediation due to an underdeveloped banking sector, (v) slow progress in privatizing large enterprises in air transportation, communication, energy and mining, (vi) limited judicial experience in dealing with commercial disputes, and (vii) significant administrative barriers. These issues are more fully described in the Private Sector Strategy attached.
The above issues have implications for IFCs role and operations. In light of the limited potential for investment without technical assistance and institution building, IFC will continue to devote significantly more resources to technical assistance than in more developed markets, necessitating even greater cooperation with IDA, EBRD and AsDB, as well as with bilateral donors such as USAID, SECO, KfW, DEG, and DFID. The IFC PEP Central Asia program is developing rapidly and has achieved significant results in the areas of leasing and microfinance, thus building trust with major stakeholders in the country. IFCs technical skills and facilitating role, combined with the ability to provide investments once the regulatory framework is improved and institutions strengthened, has facilitated IFCs activities.
IFCs strategy during the CAS period will focus on institution and capacity building, through investment and technical assistance, that will promote private sector development, especially SMEs, and support the transformation into a market based economy. Specifically, IFCs strategy is focused on the following areas:
Promoting micro/small and medium enterprises (M/SMEs) by (i) institution building of financial intermediaries that can become effective conduits of IFC funding to microenterprises and SMEs; (ii) providing direct financial assistance through pilot initiatives which can have a demonstration effect and are replicable; (iii) creating sustainable micro-finance facilities such as FINCA, and support the development of ; and, (iv) improving the business environment. Support for these activities will include both technical assistance provided directly by IFC or through the PEP program as well as investment capital.
Assisting the agri-business sector by identifying promising agri-processing entrepreneurs, and providing technical assistance on linkages, marketing, and project implementation in order to facilitate their access to investment capital which IFC and other investors can provide through financial intermediaries.
Strengthening the financial sector through technical assistance and investment for existing institutions and in addition to those that will be created. Past IFC support has been given through investment in Demir Kyrgyz International Bank, and the Kyrgyz Investment and Credit Bank (KICB), a joint-venture between the Aga Khan Fund and two other IFIs, along with a small government shareholding. IFC is joining with EBRD and Switzerland on a US$153 million Central Asian Microlending Facility for Central Asia, of which about US$10 million is expected to be invested in the Kyrgyz Republic. The development of housing finance is another area of priority both in terms of technical assistance on the regulatory framework and investment.
Development of leasing, including small business leasing, through technical assistance to create an appropriate regulatory framework and financial support for creation of model institutions. A new law on leasing as well as changes to the civil code and tax regulations were drafted with IFC assistance and adopted by the Kyrgyz Government and Parliament during the past year. IFC will continue its technical assistance to existing intermediaries to develop their leasing activities, and work to create new institutions to undertake leasing and provide them with access to investment capital either directly or through a broader regional facility under development.
Provision of equity capital. A regional early stage equity investment fund (Central Asia Small Enterprise Fund - SEAF - CASEF) was set up in 2002 by IFC, SECO, and SEAF, a leading manager of small equity funds and will support Kyrgyz entrepreneurs to grow their businesses.
Developing tourism. Tourism has potential for SME development as well as foreign exchange earnings. IFC continues to provide assistance in developing a strategic framework for tourism, and will continue to provide technical support for tourism development, as well as financing through facilities provided to intermediaries. Significant increases in international tourism will, however, continue to be limited until more regional cooperation in tourism is developed. 
Expanding investment in the mining sector. IFC is an investor in the countrys largest gold mine, Kumtor, a project with significant impact on foreign exchange earnings, GDP and contribution to the state budget. IFC continues to seek other investment opportunities in mining although commercial prospects are limited given the relatively poor regulatory framework and geographical isolation of the country from major markets. IFC will continue to closely coordinate with IDA to support regulatory reform in this area. 
Assisting privatization opportunities. IFC will investigate opportunities to support the privatization of major SOEs and natural monopolies, such as Kyrgyz Telecom. The IFC is closely coordinating with IDA on the power distribution sector and could review other opportunities for investment in public-partnerships with international investors through a concession or other types of operating arrangements for other large monopolies. 
MIGA has made an important contribution to the development of the private sector in the Kyrgyz Republic by extending foreign investment guarantees to four projects in the manufacturing, services and mining sectors. Three are currently outstanding two related to airport services at Manas Airport and one related to the Kumtor gold mine. The total amount of foreign investment facilitated by MIGA guarantees is over US$360 million. MIGA has also provided capacity building in foreign investment techniques to the State Committee on Foreign Investments and Economic Development, in an initiative supported by the Swiss government. MIGA plans to continue to assist the development of the Kyrgyz Republic through its guarantee program and capacity building. Data on the Kyrgyz Republic is also featured in MIGAs Privatization Link service, which connects potential investors to information on companies slated for divestiture via the internet.
The Foreign Investment Advisory Service (FIAS) has been an active partner in the Kyrgyz Republic as well, providing technical advisory services and reports on how to improve the investment climate. In recent years, FIAS has worked with the Government in revising its foreign investment code.