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




Kyrgyzstan Review, 10 years ago




Projects and Programs

Supporting Sustainable Private Sector Led Growth: The CAS top priority is private sector-led growth, with a particular focus on three main drivers of economic growth - agriculture, industry and energy, and the development of an enabling environment conducive to the growth of small and medium enterprises. The strategy also focuses on measures to ensure an adequate financial system and infrastructure at both the central and local level to support entrepreneurs, and on identifying means to mitigate against natural resource risks that could derail a recovery.
 
Agriculture Development: Agriculture is a central element in supporting growth and poverty alleviation, and is the sector that IDA has traditionally been most active. The extensive land reform program being supported by IDA is making a significant contribution to productivity. IDA is also supporting the agriculture sector through three ongoing irrigation projects, as well as an ongoing Agriculture Support Services project and Rural Finance Project. Most of these operations will remain active during the coming CAS period. However, IDA will continue to support this sector through a planned Agriculture Modernization and Marketing Project, which will provide additional irrigation infrastructure support, while also helping farmers to establish cooperative mechanisms to obtain inputs and market their goods. This project would be developed in synergy with similar projects by IDA and others in neighboring countries in the context of a regional approach. IDA also plans to take stock of its ongoing agriculture activities and policy concerns through an agriculture policy note, an irrigation study, and a livestock study which would set the stage for future agriculture interventions and explore the link between these issues and health. The IFC is actively engaged in identifying ways of increasing agricultural output and providing support to promising agro-processing enterprises.
 
Energy and Industry: The energy sector is an area critical to improving the state budget by reducing quasi-fiscal deficits, improving the business environment, and has the potential to facilitate export growth. It is also a sector in which IDA has been very active in the past in increasing efficiency through the CSAC and the Power and District Heating Rehabilitation Project. These projects will continue to provide the basis for Bank energy policy dialogue in the CAS period. IDA, in consultation with IFC, will support the government in its development of its energy infrastructure, including through a proposed energy sector investment project focusing on attracting private sector participation in the energy distribution sector through a public-private partnership approach which would in turn help to further reduce losses and improve service quality. In one of the key industrial sectors, mining, the Bank has already prepared a comprehensive mining report and recommendations, which the NPRS has identified as needing to be translated into a government action plan During the CAS period, IDA will support continued mining dialogue and a possible IDF grant on the basis of this report to improve transparency. The IFC is prepared to facilitate the commercialization of Kyrgyz Telecom and other major state enterprises as they undergo privatization, expand investments in mining, selectively support the development manufacturing enterprises, and provide support for the development of the tourism industry. IFC will also collaborate with IDA to develop the structure for a public-private partnership in energy distribution as noted above.
 
Business and Financial Environment: IDA, in consultation with IFC, has also been active in improving the business environment, including a Financial Sector TA Project which was recently closed and a Private Enterprise Support Project, due to be completed this year. Together with the IMF, IDA has just completed a Financial Sector Assessment Paper (FSAP), which indicated that the main constraint is the need to build confidence through systemic reform, good business practices and appropriate regulations. This would help mobilize domestic savings, increase productive investments (banks now invest about 40 percent of their assets in short term securities and overseas bank accounts) and help to reduce interest rates. IDA plans to help support the implementation of the recommendations of the FSAP through a proposed Financial Sector and Business Development Project (FINBUS), which will provide technical assistance to strengthen the financial sector including improving the payments system and increasing the availability of bank accounts to the rural population and support continued efforts to reduce the bureaucratic barriers to enterprise growth such as excessive licensing and inspections requirements. Business environment reforms will also be included in the Governance Structural Adjustment Credit (GSAC). This will be complemented by additional support to the financial sector and corporate governance by the AsDB, and support for privatization by EBRD. The IFC will provide institution building technical assistance for selected banks with IFC investment as well as continued support for implementation of the new regulatory framework for leasing and microfinance developed by IFC and its PEP program in coordination with the National Bank, other IFIs and bilateral donors such as Seco and USAID. IFC also supports improvements in the business environment through its PEP program in order to create a more conducive climate and demand for financing by SMEs.
 
SME and Micro-Finance: SMEs and micro-entrepreneurs have the potential to be a key element in the growth strategy, building from the bottom-up and diversifying the economy. The Bank Group currently has several operations to extend SME and micro-credit, particularly through the Kyrgyz Agriculture Finance Corporation (KAFC) via the Rural Finance Project and the new joint IFC/EBRD Central Asia microlending facility. There are now many operators and lines of credit, and the new micro-finance law has been passed with assistance from IDA, IFC and the AsDB. The next step is to take advantage of the clarified legal situation, consolidate knowledge of best practices and scale these experiences up. During the CAS period, IDA will sponsor a strategic/partnership review of micro-credit (a FY03 Central Asia-wide study on micro-finance institutions and seminar). The IFC is expanding micro-finance in the Kyrgyz through an initial US$1 million investment in FINCA, and the above noted microlending facility, of which Kyrgyz Republic is likely to receive over US$10 million plus associated technical assistance. The IFC sponsored SEAF-CASEF small equity fund will also be providing needed equity and loan financing to Kyrgyz entrepreneurs.
 
Infrastructure: IDA will continue to implement a number of ongoing operations during the CAS period to support the infrastructure needed for local entrepreneurship to grow. This includes two ongoing irrigation projects, an Urban Transport Project, a Water Supply Project and a Power and District Heating Project. IDA will seek to supplement these activities during the CAS period through two proposed Community Driven Development (CDD) projects the Village Investment Project and the Small Town Infrastructure and Capacity Building Project. These CDD projects are designed to empower village and small-town communities to identify and implement high-priority investments and infrastructure needed to facilitate local enterprise and thereby generate local employment and growth. They are expected to raise rural and small-town incomes and living standards, easing the pressure on internal migration to the major cities, a potential poverty trap.
 
Trade and Investment: Increasing trade and investment is a central part of the growth strategy. The Kyrgyz Republic is relatively competitive, especially in agricultural production and energy, areas where there is potential for increased trade given the natural resource wealth in the region. However, expanding trade and investments will be difficult, given the geographic situation of the Kyrgyz Republic and the non-tariff trade barriers of some of its neighbors. The impact of domestic policies and technical standards on exports also needs further study. Many of the operations proposed in the CAS would facilitate foreign investment, domestic production and exports. The impediments to growth of trade and investment will be analyzed through a FY04 Trade Diagnostic Study and a FY04 Investment Climate Survey. These country specific studies are being complemented by an ongoing regional analysis of trade and transport facilitation systems. Altogether, these studies will help identify actions or programs that could be implemented through operations proposed under this CAS or other operations in addition to those being developed by other institutions (e.g., the AsDBs proposed Customs Project).
 
Reducing Natural Resource and Environmental Risks. Growth in agriculture and livestock, in mining, and in other areas can be both seriously affected by natural resource risks (rock slides, rainfall levels etc) and can themselves lead to environmental concerns relating to water quality, forest preservation, and pollution. IDA will therefore plan to extend a small Learning and Innovation Natural Disaster Mitigation Project to enable the Kyrgyz Republic to develop a program to address key natural resource and environmental risks, including the impact of rock slides on uranium tailings stored in the Mailuu Suu area, while supporting selected small investments. IDA would seek to combine this with a GEF project that could be focused on specific amelioration activities. IDA is also currently supporting two regional environment projects, the Aral Sea Basin Program and the Central Asia Transboundary Biodiversity Protection project which seeks to protect a variety of plant and animal species under threat. Both projects are due to be completed during the CAS period. IDA will prepare an environmental expenditure and policy note, which would consolidate knowledge on the overall institutional and budget framework for environmental management and protection. Recommendations could be included in a future PRSC and could also lead to a possible follow-up regional Biodiversity and Sustainable Use GEF project.
 
Providing Essential Services: The NPRS presents a two pronged approach to improving essential services. First, it calls for decentralizing government services to the local and community level. Second, it discusses the future approach to delivering three critical social services health sector reform, pension and social protection reform, and education sector reform. The CAS foresees IDA providing targeted support to the government in these areas.
 
Strengthening Community Service Delivery: There is an urgent need to provide services to the poor. In keeping with the NPRS focus on decentralization, IDA has begun to work through community driven development initiatives under its recently launched water supply and sanitation project. The CDD approach is an important vehicle for reaching out to the poorest regions. The AsDB and the UNDP are also supporting local capacity development and investment. IDA plans to complement these efforts through a proposed Village Investment Project and a proposed Small Town Infrastructure and Capacity Building Project. IDA will consolidate its learning in CDD through a region wide study of CDD activities in FY03-04. IDA will also prepare an Urban Slums study. Finally, the CAS provides for a local governance and anti-corruption review to analyze how to effectively support local governance, including through inter-governmental finance reforms.
 
Health Sector: IDA has been very involved in the health sector, helping the government to pilot health reform through the now closed Health I and rolling it out in the ongoing Health II project. The goals the Governments medium term goals for the health sector are ambitious including reducing child mortality from 36 per 1000 to 28 by 2005 and increasing the portion of population with access to health care services from 86 percent to 90 percent by 2005. To reach them, the government must continue to deepen reforms. IDA will continue to assist in this endeavor, including through a proposed Sector Wide Approach (SWAp) to Health and Social Protection in FY06. Such an approach would facilitate a cross sector approach to social funding. However, if this programmatic approach is not feasible because of fiduciary, budgetary programming or partnership issues, IDA would consider replacing the SWAp with a health investment project. IDA will also be deepening support on regional health issues through a Central Asia regional strategy for HIV/AIDS and TB. In addition, the Kyrgyz Republic has also obtained a US$17 million grant from the Global Fund to Fight AIDS, TB, and Malaria (GFATM) and has requested IDA to play a leadership role in managing the TB funds to be provided under the GFATM grant. IDA will pay particular attention to TB in prisons which has helped spread the disease, and the sustainable provision of TB medicines and vaccines.
 
Pension Reform: IDA has worked closely with the Kyrgyz Government through the now-closed SOSAC to establish a sustainable pension system. Once the SOSAC closed, IDA did not continue its dialogue intensively with the government on this issue, and pressures have emerged to move away from a sustainable system. Going forward, building on a recent pension policy note (FY03), IDA will maintain an active dialogue in this area, focusing on helping the Government to further refine the existing scheme in a sustainable manner and set the stage for exploring a fully funded system, but only when the preconditions for sustainability are in place. A key issue is linked to social taxes, which reduce the incentives for companies to join the formal economy, but are necessary to fund even the minimum level of pensions now provided. A related issue is to ensure that the social fund can adequately support both health and social protection needs. These are among the issues that would be addressed in the above noted proposed SWAp operation.
 
Education: In poverty surveys, one of the main services that the rural poor are concerned about is the deteriorating quality of basic education. As a result, the NPRS has adopted the goal of stemming the deterioration in quality and increasing attendance in primary schools from 90 to 97 percent by 2005. The Government has requested IDAs involvement, particularly in the area of rural education. IDA, the ADB, UNICEF and the government, have agreed to work closely to develop a shared strategy and approach focusing on critical needs such as teacher training and textbooks. IDA will prepare a Rural Education Project on this basis, with a particular focus on the rural communities in the poorest provinces. The development of a shared education strategy will also help IDA to work towards establishing the Kyrgyz Republics eligibility for the Education For All initiative.
 
Scaling Up in the Social Sectors: Given IDAs leadership role in health and pensions, and the increased focus on moving towards programmatic lending in partnership with other donors, the CAS proposes to pilot a Sector Wide Approach (SWAp) to Health and Social Protection in FY06. Such an approach will build on and deepen the partnerships with other donors such as USAID, WHO, DFID and Switzerland established under the Health II project, and provide a vehicle to help ensure that the trade-offs and synergies between pensions and health policies and funding are considered in a strategic manner. A two-sector approach will help to build a focus on youth at risk (e.g., the relationship between street children and drug addiction/communicable diseases) as well as the elderly poor (for whom issues of health and pensions converge). At the same time, the CAS recognizes the risk that the Government and other partners may not be ready to implement such an approach in FY06, and in this event IDA would continue its support in health through a more traditional investment operation.
 
Strengthening the Governance Framework: Weak governance, including petty corruption and state capture, is a major constraint on development and growth in the Kyrgyz Republic. The importance of strengthening the overall governance framework is highlighted as a key pillar in the NPRS, as well as at the recent CG meeting and in IDAs recent Client Survey. This is an area where steady effort over time will be required.
 
A centerpiece of the CAS for the next three years will be the Governance Structural Adjustment Credit, complemented by a Governance Technical Assistance Credit, both accompanying this CAS. These credits address three key aspects of governance: (i) improving the efficiency and transparency of the budgetary and treasury process, (ii) streamlining and increasing the professionalism of the civil service, and (iii) opening space for the demand for good governance to grow, including requiring senior civil servants to declare assets and incomes. They will complement the governments public sector governance efforts supported by the IMFs PRGF, as well as corporate governance efforts supported by the AsDB. The GSAC will also provide a vehicle to re-emphasize a number of governance concerns in education, health, social protection, and the business environment.
 
These operations are underpinned by key pieces of Economic and Sector work completed in FY03 including a Governance Survey, a Public Expenditure Review, a Country Financial Accountability Assessment and a Country Procurement Assessment. In light of the increasing focus at the community level, IDA will complement these efforts with an in-depth study on Local Governance and Anti-Corruption. IDA will also support capacity building directly through IDF grants in financial accountability, procurement, and judicial institutions. In addition, IDAs regional Central Asia Knowledge Sharing Initiative will help strengthen good governance on a broader basis. IDA will also build capacity in civil society through the Innovation Day (a Central Asia Wide competition for the most innovate grass roots programs), developing a Community Driven Development (CDD) Network, and the Small Grants Program.
 
Addressing Regional Issues: The NPRS and the recent donor CG confirm the importance of the regional dimension of development for the Kyrgyz Republic. While there are many regional activities within this, three deserve particular attention trade facilitation, the water/energy nexus, and knowledge sharing. IDA can play an important role, together with the AsDB, the EU and others, in strengthening the analytic base and playing the role of honest broker to strengthen coordination among the regions Governments.
 
Trade Facilitation: Increasing exports is an essential element of Kyrgyz Republics long term growth strategy, but to date this has proved difficult. IDA will provide the analytic basis for considering ways to improve regional trade via a Regional Trade and Transport Facilitation Review. This will be complemented by country specific studies (including for Kyrgyz Republic). These reviews will help identify some practical next steps that IDA can support. It will be critical to move in coordination with the ADB, which is supporting customs harmonization and road development, and the EU, which also has an ongoing program to facilitate trade.
 
Water/Energy Nexus: The current system presents water sharing difficulties because the Kyrgyz Republic needs power generation during the winter, while downstream countries need water flows during the spring and summer. IDA will continue to work on strengthening the analytic base for greater collaboration in this area, particularly a regional study on energy markets in Central Asia. IDA will also study the potential to improve water storage and flows in Central Asia through the development of the KambarAta Dam system in the Kyrgyz Republic, and will assist the government as an honest broker in its dialogue on this with neighboring countries.
 
Knowledge: Sustained economic reform and growth will only be achieved if the Central Asian countries themselves strengthen their policy formulation capacity. To facilitate this, a Central Asia Knowledge Sharing Initiative is setting up regional distance learning centers in each country enabling them to learn from each other. The Almaty Hub, together with WBI, will also strengthen its capacity to host regional forums on key issues like micro-finance in Central Asia.
 
Programmatic Activities: The Kyrgyz Republic has made a good start in developing its NPRS. While more needs to be done particularly in prioritizing, costing and monitoring the program, IDA expects to play a leadership role in helping the Kyrgyz Republic to strengthen its strategy and in moving all donors towards supporting the NPRS in a more programmatic way over the CAS period. Moving in this direction will also reduce implementation difficulties associated with individual projects and help to strengthen government capacity. A key instrument will be a proposed Poverty Reduction Support Credit (PRSC). However, the approach and timing of the PRSC will be flexible, commensurate with the progress of the government on implementing the NPRS, including deepening fiduciary reforms, strengthening partnership, and maintaining commitment for a multi-year reform program during an election period. If these are achieved, the first PRSC will be presented to the Board in late FY05, to be followed by a possible second PRSC towards the end of FY06. If commitment remains strong but progress is slower on NPRS implementation, then the PRSC could be substituted with a traditional structural adjustment credit designed to assist the Kyrgyz Republic to take the necessary steps that could enable IDA to extend a PRSC subsequently. If reform commitment lags and the Kyrgyz Republic falls out of the base case, the PRSC would not be extended in FY05, but an adjustment credit could be considered for FY06 to help assist the country to get back on a reform path.
 
The PRSC will be developed with three main analytic inputs. First, the PRSC will build on the implementation of the broad policy matrix developed under the GSAC. The GSAC, and various IDF grants, will also support the implementation of the fiduciary recommendations laid out in the FY03 CFAA and the CPAR. Second, the PRSC will build on the FY03 PER to strengthen budget transparency and prioritization within a medium term expenditure framework. GTAC activities to strengthen budgetary procedures and transparency will also be important inputs. Third, the PRSC will benefit from a Development Policy Review (DPR) to completed in early FY05 that will consolidate macro and sectoral policy prescriptions. The FY04 investment climate and trade diagnostic studies will also help to inform the PRSC.
 
As noted earlier, IDA will also plan to extend a separate programmatic operation in FY06 a proposed SWAp in Health and Social Protection. Moving forward with the SWAp in parallel with the PRSC will enable IDA to bring focused support on deepening donor and government partnerships already well developed in the field of health. However, The PRSC and the SWAp will be developed in a manner that is mutually reinforcing. It is expected that the PRSC will focus on supporting a sound overall fiscal management and policy framework, including a focus on expenditure and revenue sharing arrangements between central and local governments. Within this framework, the SWAp would then provide an instrument for the government and donors to collectively establish each year an agreed set of specific policies and expenditures in the field of health and social protection. The SWAp would also provide a vehicle for the government and donors to explore stronger harmonization of procedures and policy formulation, which could be utilized under a future PRSC program. In the event that government budget planning capacity and donor coordination has reached a high enough level by FY06, the SWAp could be integrated into the PRSC.