ADB

Asian Development Bank and Kyrgyz Republic

In 2007, despite a still challenging political environment, the economy grew at about 8.2%, driven mainly by services and construction, which benefited from a surge in aggregate demand due to rising real incomes, remittances, and capital flows. However, the Kumtor gold mine—the largest single contributor to gross domestic product (GDP)—has not fully recovered from an accident in July 2007 and, as a result, its performance continued to adversely affect the economy. Inflation also accelerated in 2007, driven by the rising cost of staple foods, which weighed heavily on the poor who represent about 40% of the population.

There was some progress in 2007 on structural reforms, including energy, the financial sector, the business and investment environment, public financial management, and administration. Parliament’s passage of legislation allowing the privatization of key sites in the Kyrgyz energy sector was another significant achievement. The country’s external debt burden remains large overall, but it has fallen due to the strict debt management strategy pursued by the Government and rapid output growth in 2007. After country-wide debate, the Government decided to withdraw its decision to participate in the Heavily Indebted Poor Countries (HIPC) Initiative, due to political and public resistance.

The Government has adopted a Country Development Strategy for 2007–2010, which focuses on four strategic pillars—economic development, governance and transparency in public administration, human development, and environmental.

Relationship with ADB

Since joining the Asian Development Bank (ADB) in 1994, the Kyrgyz Republic has received loans worth $603.5 million and Asian Development Fund (ADF) grants worth $66.1 million; and technical assistance (TA) grants worth $39.7 million.

The country received five Japan Fund for Poverty Reduction (JFPR) grants amounting to $6 million. The Kyrgyz Republic is the 20^th largest borrower.

ADB’s first operational strategy was prepared in 1996 to support government reforms; encourage private sector-led growth; and stimulate investment in infrastructure, human resources, and the environment.

It provided selective support for agriculture, basic public services, human resource development (especially education), and for energy and roads. The scope was widened to give priority to poverty reduction and include assistance to the financial sector.

The establishment of the ADB Resident Mission in the Kyrgyz Republic, in April 2000, significantly enhanced policy dialogue, programming, and project implementation.

ADB’s annual lending started at $40 million in 1994 and reached a peak of $89.2 million in 1997. Thereafter, lending declined as the Government’s debt reduction strategy limited the size of its externally funded Public Investment Program to about 3% of GDP.

Since 2005, concessionary ADF resources have been provided to the Kyrgyz Republic under the 50% grant component in view of the heavy external indebtedness of the country. In September 2007, the new grants framework was approved by ADB’s Board of Directors, which enables the Kyrgyz Republic to receive 100% of its annual Asian Development Fund (ADF) allocation in grants. Access to grants will depend on the country’s debt repayment capacity, which will need to be assessed periodically. The level of assistance for 2007–2008 is about $46 million.

The current Joint Country Support Strategy (JCSS) 2007–2010 for the Kyrgyz Republic was prepared by ADB together with the United Kingdom’s Department for International Development, Swiss Cooperation, United Nations agencies, and the World Bank Group.

The JCSS for 2007–2010 can be found at ww.adb.org/Documents/CSPs/KGZ/default.asp.

Impact of Assistance

The transport and communications sector, particularly roads, plays a crucial role for the landlocked Kyrgyz Republic by ensuring cost-effective access to regional and domestic markets, generating employment, and providing services. The sector continues to receive the largest share of ADB assistance. ADB provided three loans totaling $140 million for rehabilitating the Bishkek–Osh road—the country’s major transport corridor and a part of the transnational road network linking Central Asian countries, People’s Republic of China (PRC), and the Russian Federation. The road connects two major centers of economic activity and population which, together, account for more than half the country’s GDP and 80% of its industrial enterprises. A $5 million project for rehabilitating the Kyrgyz Republic segment of the regional Almaty–Bishkek road has also been completed. Improvements to the Osh–Sarytash–Irkeshtam road—which links the Fergana Valley with the booming markets of the PRC—has started with a $32.8 million loan approved in November 2004. In 2007, ADB also provided a $25.6 million ADF grant to rehabilitate a 142-kilometer (km) road from Sarytash to the Kyrgyz–Tajik border. This section is part of the PRC–Kyrgyz Republic–Tajikistan road corridor and a key transport corridor. ADB is currently planning to assist in rehabilitating the Bishkek–Naryn–Torugart corridor linking the PRC, Kazakhstan, and Kyrgyz Republic.

Cooperation in transport and trade facilitation through an integrated transport and customs system is a cornerstone of the Central Asia Regional Economic Cooperation (CAREC) program initiated by ADB. Under CAREC, the country has benefited from the adoption of a new Customs Code in 2004, single-window practices, and regional transit development. The Program also includes an ongoing regional land management initiative, regional business development opportunities, and knowledge and expertise products. The country is also involved in the CAREC transport and trade facilitation strategy, which will develop six priority transport and trade corridors in the participating countries.

Assistance to the social sector includes projects to improve basic education, primary and secondary health care, early childhood development, preschool programs, and childcare practice at home and in the community. Building on the achievements of the first ADB-financed initiative, the $15.5 million grant-funded Second Education Project aims to modernize the basic education curriculum by providing a new generation of textbooks and learning materials. The project is also upgrading facilities and equipment in 90 priority schools in the rural areas.

ADB has helped implement a program to improve the policy, regulatory, and institutional capacity of the banking sector. It has also helped the Government implement reforms to improve corporate governance and regulations, and the functioning of the judiciary. ADB will seek to strengthen the supervision of the securities market, to improve market transparency, to protect investors, and to remove policy distortions.

In agriculture, ADB has provided $96 million in assistance (including one program loan, two project loans, and one grant) and one JFPR grant for $1 million, along with project preparatory and advisory technical assistance.

In 2007, ADB’s program included four ADF grants amounting to $50.6 million: (i) a $10 million grant for modernizing and reforming a tax administration system, (ii) a $25.6 million grant as part of the CAREC Regional Road Corridor Improvement Project, (iii) a $5 million grant for southern agriculture area development project, and (iv) a $10 million grant for development of vocational education system. Three TA projects, amounting to $1.7 million approved in 2007, will help improve the skills and institutional capacity of government workers involved in tax administration and agriculture land improvement. ADB has also approved a $1 million JFPR grant for improving access to quality basic education for children with special needs, and a $2 million JFPR grant to improve the livelihoods of rural women through the development of handicrafts.

Future Directions

In line with the Government’s own 2007–2010 Country Development Strategy, ADB’s future program will focus on (i) promoting economic management consistent with strong and sustained pro-poor growth; (ii) improving governance, promoting effective public administration, and reducing corruption; (iii) building sustainable human and social capital; and (iv) ensuring environmental sustainability and natural resources management. It will be premised on ensuring environmental sustainability, private sector development, and regional cooperation.

ADB is also considering two new initiatives, which could become flagship projects. The first is the proposed Support for Investment Climate Improvement Project, which is designed to streamline procedures for private businesses, and to lower administrative barriers and enforce property and creditor rights.

The second is the proposed Issyk-Kul Sustainable Development Project, which will address the framework for the development of the main ecological asset of the country, the Issyk-Kul Lake. It is designed to create conditions that can attract private sector investment, facilitate the economic development of the region, and enhance its tourism potential.

Regionally, ADB is likely to continue fostering cooperation among the Central Asian republics, Afghanistan, Azerbaijan, PRC, Mongolia, Pakistan, and the Russian

The selection of ADB interventions is guided by the Government’s priorities, performance of the portfolio, the institutional framework, and the activities of other development partners in the country.

Operational Challenges

Sustaining a high level of public investment while carrying a heavy debt burden will be the most formidable challenge facing the country. Diversification and expansion of industry activity beyond gold; fiscal consolidation; implementation of structural reforms; good governance; and the pursuit of sound macroeconomic policies will be the keys to achieving sustainable growth.

Partnership

The Kyrgyz Republic was selected as one of the pilot countries during the February 2003 Rome Conference on Harmonization. Since then, key development partners have learned to better coordinate and harmonize procurement procedures, oversee financial management and monitoring, share project implementation units, and conduct joint country portfolio reviews. The JCSS for the Kyrgyz Republic has been prepared by the five funding agencies.

ADB cooperates extensively with civil society organizations (CSOs) in the Kyrgyz Republic to strengthen the effectiveness, quality, and sustainability of the services it provides. ADB solicited and incorporated the views of a cross-section of CSOs on the government’s performance in the areas of social development, gender equity, governance, and structural economic policies in the process of preparing the 2007 Country Performance Assessment. ADB’s Kyrgyz Republic Resident Mission (KYRM) continues to establish stronger links with local civil society groups by organizing project site tours that demonstrate ADB’s development initiatives in the country.

Cofinancing and Procurement

Cofinancing operations enable ADB’s financing partners—government or their agencies, multilateral financing institutions, and commercial organizations—to participate in financing ADB projects. The additional funds are provided in the form of grants, official loans, or credit enhancement products.

As of year-end 2007, cumulative direct value-added cofinancing for Kyrgyz Republic amounted to $48.66 million for three investment projects and $2.28 million for five TA projects. A summary of investment projects with cofinancing is available at www.adb.org/Documents/Fact_Sheets/Kyrgyz/cofinancing.asp.

A summary of procurement contracts awarded to companies and consultants from the Kyrgyz Republic for goods and works, and consulting services can be found at www.adb.org/Documents/Fact_Sheets/Kyrgyz/procurement.asp.

For more information on ADB and its activities please visit www.adb.org  and www.adb.org/kyrm