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




Kyrgyzstan Review, 10 years ago




Lending Scenarios, Triggers and the Use of Grants

Based on the Kyrgyz Republics population, poverty, performance and capacity, the four year base case allocation is US$171 million. The base case provides a mix of traditional investment projects, programmatic support for the NPRS, and continued attention to Economic and Sector Work (see Table 4).
 
The base case is the most likely case, and has been developed in discussions with the government on the assumption of continued reform progress in key areas such as health, energy, and governance. As a consequence, the base case includes several operations which, while high priority, would not be appropriate without deepening ongoing reforms, particularly in health, energy and governance. This means that in order to stay in the base case, the Kyrgyz Republic will need to continue to advance these reforms over the CAS period. Base case triggers have been defined in a stepped and progressive manner, to benchmark the critical steps in moving forward on reforms. Individual triggers will be assessed both in terms of their contribution to the overall reform program and their relevance to the individual project under consideration for Board presentation. For example, the GSAC presentation to the Board with the CAS is based on adequate progress having been made on energy reforms under the CSAC. IDA would not go forward with the FY05 PRSC or the energy project without good progress in ongoing energy reforms as well as progress under the GSAC. The triggers also include economic growth indicators to ensure that the Kyrgyz Republic has the absorptive capacity to utilize these funds effectively (see Table 5).
 
The CAS provides for a low case for IDA of US$97 million (see Table 4) in the event that the base case triggers on reform progress, project implementation, or absorptive capacity grounds are not met. In this case, activities would focus on technical assistance, social sector operations and community driven development activities. Under the low case, the PRSC in FY06 could be structured as a traditional structural adjustment operation designed to support the government moving to an eventual PRSC and the SWAp could be structured as a social sector investment operation. IDA would focus more of its resources towards building an improved policy dialogue than delivering new lending.
 
The CAS provides for a high case of US$211million, triggered by meeting the above noted based case conditions as well as stronger than anticipated reform progress and economic performance which would increase the countrys capacity to absorb additional resources. The additional activities in the high case could include (i) increased support for the PRSC, SWAp, and other investment projects and (ii) a possible Trade and Investment Project. In this event, IDA will return to the Board with a progress report providing an indication that these additional funds can be absorbed productively while maintaining progress towards debt sustainability.
 
The IDA program is built on expectations of continued improvements in macro-economic and debt sustainability indicators. The projected improvements in debt sustainability are particularly sensitive to a number of macro-economic parameters including government and export revenues, and non-debt creating capital inflows. IDA will closely monitor these indicators. Should such review indicate that the Kyrgyz Republics prospects for improved debt sustainability would be jeopardized by the IDA program outlined in this CAS, a progress report would be prepared and submitted to the Board, setting forth a recalibration of IDAs program necessary to ensure progress towards debt sustainability.
 
As the Kyrgyz Republic is classified as a low income country with high debt vulnerability, it is eligible to receive a significant level of grants. The IDA grant component will be allocated primarily for (i) activities that address basic social needs and the environment and (ii) community driven development (CDD) projects. In accordance with these criteria, the most likely candidates for grants are the education and health/social protection projects, the Natural Disaster Mitigation Project as well as the two CDD projects. However, each projects eligibility for grants will be considered on a case-by-case basis. Other projects, like the PRSC, might be considered for grant allocation if they include a focus on social sectors or CDD as per the above criteria. As presented in more detail in Attachment 1, IDA operations, including grant and credit financed operations, are consistent with progress towards debt sustainability.
 
Table 4: FY03-06 Main Operational Scenarios (US$ Millions)
 

 
Low Case
Base Case
Likely
Candidate for Grants
FY03
Governance Structural Adj Credit
Governance Technical Asst. Credit
 
 
 
20
8
 
FY04
Financial Sector & Bus Development
Village Investment Project
Natural Disaster Mitigation
 
12
13
5
 
12
15
5
 
FY05
PRSC a/
Rural Education
Small Town Infrastructure
Agric Modernization & Marketing
 
 
15
12
20
 
15
15
15
20
 
FY06
PRSC a/
Health & Soc Protect SWAp b/
Energy Investment Project
 
10
10
 
 
15
15
16
 
 
 
97
171
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 5: Triggers for Maintaining the Base Case

Macro-Economic Performance and Absorptive Capacity
Satisfactory macroeconomic performance as evidenced, for example, by satisfactory implementation of the IMF PRGF, and continued increase in exports and progress towards debt sustainability in line with annual ratios projected under the base case CAS scenario
 

NPRS Implementation

Preparation of 2004-2006 budgets using the MTEF and NPRS framework for expenditure prioritization. Progress on implementing fiduciary actions under the PER, CPAR, CFAA. Progressive development of an acceptable approach to improve M&E. As evidenced through NPRS progress reports.

Governance

Continued wide dissemination of the state budget each year. Progressive introduction of asset and income disclosure (decree, followed by law, followed by actual publication of income and assets of civil servants and high level state officials by 2005), publication of annual audits of 10 largest SOEs (starting in 2004), and implementation of civil service reform. As evidenced by satisfactory GSAC implementation.

Business and Financial Environment

Introduction of Regulatory Impact Assessments (RIAs) on new regulatory acts by 2004. Steady improvements in the payments and settlement system in the financial system. Establishment of a review body for setting technical standards. As evidenced by satisfactory agreement and implementation of FINBUS program.

Health Reform

Adoption by 2004 and subsequent satisfactory implementation of action plan on health reform including extending health reforms into Osh and Bishkek. As evidenced by satisfactory implementation of the Health II program.

Energy Reform

Preparation of a detailed action plan to move towards a concession based public/private partnership in energy distribution by 2004 and subsequent progressive steps taken on implementing this. As evidenced through satisfactory progress on CSAC 3rd tranche triggers.
Portfolio Performance
Satisfactory progress in improving portfolio performance. As evidenced through CPPRs.
Triggers for Moving to the High Case
base case triggers plus:

Enhanced Key Sectoral Reforms

-- Satisfactory progress in phasing out special means funding of regulatory agencies through fines, license fees etc.
-- Significant reduction in quasi-fiscal deficits in energy.
-- Full expansion of health reforms to country-wide scale and more equitable health funding across the country.
-- Satisfactory agreement and implementation on deeper education and pension reform strategy.

Increase in Absorptive Capacity

-- Stronger than anticipated growth in GDP (over 7 percent growth per annum on average), exports (over 10 percent growth per annum on average), and foreign investments