669. Successful achievement of the objectives established under the NPRS in many ways depends on a realistic assessment of the financial resources necessary for successful implementation of the whole program, as well as on the proper prioritization of policy directions and efficient management of the limited financial resources available for public expenditures.
670. Availability of resources in general under the NPRS is based on projections of a midterm budget framework until 2005 that defines revenue flows. Expenses on major development directions have been specified in the light of the major NPRS priorities. It is intended that general expenses of the budget will be allocated first of all to implement the reforms aimed at poverty reduction.
671. A significant resource constraint for the budget is the need to reduce the PIP to 3 percent of GDP by 2005 in order to deal with the external debt situation. A methodology of prioritization of the PIP projects has been developed with the assistance of the Asian Development Bank, based on the criteria of the impact on economic growth, export potential and poverty reduction. Using this methodology, a list of projects that are recommended for inclusion in the PIP for 2003-2005 has been prepared. The selected projects are connected with the NPRS priorities. (See Appendix D)
672. The financial needs of the measures included in the NPRS are based on the proposals submitted by 23 working groups and 8 regional councils of sectoral and regional experts that included representatives of all branches of government, the private sector, NGOs and local self-government. In preparing their analytical materials, each working group identified a block of specific measures to meet NPRS objectives and specified the estimated cost of their implementation.
673. The work on prioritization of the planned policy measures and assessment of the financial needs was rather difficult because of the absence of a program budget structure within which such work could be undertaken. Although some preliminary action has been taken to place government activities on a full program budget basis, several years might be required before it is completed. In addition to this, ministries, departments, organizations and oblast administrations simply do not have sufficient capacity to use contemporary methods of prioritizing and costing of development programs, or for linking the proposed policy measures with poverty indicators.
674. On the whole, this problem is related to the need for further improvement of the system of public resource management and improvement in the efficiency with which budget resources are used. In this connection, technical assistance from international financial organizations is still needed in order to assess the resource requirements and to prioritize policy measures, as well as to develop the skills of those responsible for designing national, regional and sectoral programs. Such assistance had been requested by the Government of the Kyrgyz Republic earlier when preparing the interim NPRS in September of 2001.
675. This NPRS document provides a detailed description of all existing major problems that to some extent impede the attainment of the major goal of poverty reduction. Given the limited financial resources available, major policy directions (priorities) have been selected when forming the action matrix, their implementation will promote more effectively the attainment of the major goal.
676. Specific activities on implementation of the policy measures have been focused on the three major directions established under CDF:
· formation of an effective state;
· building a fair society; and
· promoting sustainable economic growth.
677. The need to optimize and improve the efficiency of the system of public administration requires first the further development of democracy to ensure the rights and freedoms of the citizens of the Kyrgyz Republic. Major priority directions have been identified for the development of democratic institutions, improvement of law drafting activity, reforming public administration bodies (at the national and local levels), establishment of an efficient civil service and improvement of the system of public finance (in particular, the system of Treasury under the Ministry of Finance of the Kyrgyz Republic).
The financial needs of these measures will be mainly covered at the expense of the budget, by credits of the World Bank and the Asian Development Bank, with the technical support of the TACIS, UNDP and other international financial organizations, as well as by the mobilization of internal resources. One of the intended directions of public sector administration reform is the move to the principles of “electronic government”. Successful implementation of such measure requires the support of donor countries and international financial organizations. Additional financial resources will also be required to carry out measures aimed at fighting against corruption, economic crimes, drug-trafficking and international terrorism
The volume of financing envisaged for the public administration sector for 2003-2005 in the midterm budget framework totals US$150 million. Of this amount, US$1.9 million are to be covered from external sources.
Additionally needed external grants amount to US$4.6 million.
678. Building a fair society is based on ensuring the delivery of social guarantees such as social protection in the form of pension schemes, state benefits to poor families, allowances for disabled, inhabitants of alpine and remote areas, ensuring access to clean potable water and educational and health care services. The size of benefits and pensions will be increased in order to support the living standards of needy families and pensioners, taking into account the impact of inflation. At the same time, based on the results of social passportization, the targeted approach of state social assistance will be improved. Together with the measures on social mobilization of the population, this will lead to a reduction in the number of recipients of state social benefits. The salaries of workers of the educational and health care sectors and civil servants will be also need to be increased in order to create the necessary incentives to retain and attract highly professional staff, improve the quality of services rendered.
The major source of funds for increased benefits, pensions and salaries will be the budget economies that will result from improved targeting of social assistance, reforms in the area of public administration, health care and educational systems. A large share of expenses related to the financing of measures on expanding access to clear potable water, improved access and quality of educational and health care services (repairing and construction of water pipelines, schools, hospitals, medical units, supply of equipment, textbooks, etc.) will be covered by credits from donor countries and international financial organizations and the state budget (within the PIP). At the same time, additional resources will be necessary to cover those villages that have not been included under PIP projects.
679. Besides, additional resources will be required to reform the pension system, maintain the guaranteed minimum level of consumption of the poor strata of the population at a necessary level, as well as ensure social protection for the poor, in particular, when increasing tariffs for electricity and heating.
680. The midterm budget framework for 2003-2005 envisages US$550 million for the social sphere (social protection, education, healthcare), of which US$26,7 million are to be covered from external sources. In order to attain the established objective of an annual reduction in the poverty level by 5 percent, additional financing is required in the amount of US$70,7 million in the form of grants. (See Appendix B)
681. According to preliminary estimates, to attain sustainable economic growth at a level of 5 percent (the scenario for implementation of a stabilization policy), it is necessary to ensure a volume of investment of at least 18 percent of GDP. The envisaged reduction in the PIP by 3 percent by 2005 will need to be compensated for in part by an increase in both domestic and foreign private investment (as a result of a more favorable investment climate), support of SMEs, improved market conditions and elimination of trade barriers for export, as well as by increasing capital expenditure from the budget, including co-financing of PIP projects. In order to attain a sustainable annual economic growth rate of 7 percent (the scenario for implementation of the development policy), the rate of investment will need to be at a level of 25 percent of GDP.
682. For the next three years, it is assumed that additional volumes of direct investment will be attracted to the energy sector, mining industry, oil extraction, processing industry, the sphere of services and communication technologies. (See Appendix B)
683. At the same time, in order to broaden opportunities for the creation of new job opportunities, successful development of small and medium business, and an increase in the volume of micro-financing for the unemployed and the poor, additional resources will be required for development of financial services, especially in rural areas, rehabilitation and construction of irrigation networks, local roads, expansion of public services for rural commodity producers. It is assumed that the major sources could be grant funds of donor countries and international financial institutions allocated to local communities, associations, NGOs and farmers.
For the development of the real sector, the midterm budget framework for 2003-2005 envisages US$314 million,of which US$151 million are to be covered from external sources. Additional financial support required from external sources (including grants and direct investment) totals about US$200 million. (See Appendix B).
The financial support for the NPRS will be adjusted each year within the budget framework, reflecting the results of reforms already carried out, implementation of the PRGF, as well as the agreements reached in the process of negotiations with the Paris Club on regulating the external debt.
684. Because of the importance of the linkage between policy directions and specific measures within the NPRS framework on the one hand, and identification of realistic volumes of financing required on the other, the government intends to continue the work on prioritization and assessment of the cost of sectoral and regional programs. For this purpose, the government will approach donor countries and international financial institutions for technical and advisory assistance. Such assistance will be also necessary to assess the nature and impact of the various risks that might impede successful implementation of the NPRS.