The World Bank in the Kyrgyz Republic

Country Context

The Kyrgyz Republic is a land-locked, lower-middle-income country. It has rich endowments, including minerals, forests, arable land, and pastures, and has significant potential for the expansion of its agriculture sector, hydroelectricity production, and tourism industry.

The country has experienced instability since its independence in 1991. Corruption and nepotism were major stress factors underlying revolts that deposed presidents in 2005, 2010, and 2020. Mr. Sadyr Japarov, who came to power following political unrest in October 2020, was elected president in January 2021 with 80 percent of the vote and pledged to tackle crime and corruption while establishing order in the country. The presidential form of government has been consolidated, and a government structure with clear lines of authority and reporting has been established. Parliamentary elections took place in November 2021.

The Kyrgyz economy is vulnerable to external shocks owing to its heavy dependence on remittances (30 percent of GDP) and gold production (about 10 percent of GDP and 35 percent of exports). Strong and sustainable economic growth requires institutional strengthening and policies to develop the private sector, spur international trade, and encourage fiscally sustainable energy production.

Strategy

The World Bank and the Kyrgyz Republic

Since the country joined the World Bank in 1992, the Bank’s assistance has amounted to US$2.1 billion. The Bank’s support has helped the country to maintain macroeconomic stability, invest in strategic infrastructure, and improve access to social services.

In the context of the COVID-19 pandemic and resulting economic shocks, the Bank focused on supporting the health sector’s response to the crisis, speeding up the recovery of micro, small, and medium-sized enterprises (MSMEs), and promoting community-focused initiatives with a direct impact on people’s lives. The Bank was the first international financial institution in the country to respond to COVID-19 on the ground, and its assistance in vaccine deployment and support for MSMEs and local communities contributed to the country’s recovery from the impact of the pandemic.

Key Engagement

The strategic focus of the World Bank’s program as highlighted in the FY2019–22 Country Partnership Framework is to assist the Kyrgyz Republic in promoting diversified, export-oriented, inclusive, and sustainable growth.

World Bank engagement has been building around three focus areas:

First, strengthening the foundations for inclusive private sector–led growth, focusing especially on fiscal stability, improvements in the regulatory environment for business, and risk reduction.

Second, boosting overall productivity and building greater connectivity through support for the development of promising natural resource sectors and greater digital and physical connectivity.

Third, further expanding economic opportunities and building resilience through investments in human capital, efforts to decentralize and support regional development, and better adaptation to environmental and climate risks.

Support for these areas is being provided through concessional International Development Association (IDA) lending, supplemented by Trust Fund financing, as well as Advisory Services and Analytics that emphasize practical, problem-solving advice.

Economy

Recent Economic Developments

The economy was hit hard by the pandemic in 2020 but recovered in 2021 as GDP grew by 3.6 percent. In the first two months of 2022, annual growth slowed to 2 percent from lower gold production and weaker service sector growth.

Driven by food and fuel price increases, inflation increased to 11.2 percent in December 2021 from 9.7 percent a year ago but fell to 10.8 percent in February 2022. The central bank raised its policy rate four times in 2021 and early 2022 and maintained exchange rate stability by selling US$689 million of foreign reserves in 2021. In March 2022, the central bank raised its policy rate twice by a total of 550 basis points to 14 percent to offset inflationary risks caused by the 23 percent national currency depreciation.

The Government’s fiscal position improved in 2021: the deficit fell to 0.3 percent of GDP from 4.2 percent in 2020. The robust fiscal stance helped to lower public debt to 60.3 percent of GDP from 67.7 percent at the end of 2020. According to the national poverty line, the poverty rate was 20.1 percent in 2019 and is estimated to increase to 38 percent in 2022.

Economic Outlook

The Ukraine conflict and the sanctions imposed on Russia have significantly worsened the outlook for the Kyrgyz economy. The economy is projected to contract by 5 percent largely due to a projected 33 percent decline in remittance inflows and a fall in investment spending. Growth is forecast to pick up to 3.2 percent in 2023 and 4 percent in 2024, assuming a stabilization in the region, domestic political stability, the easing of pandemic conditions as vaccine deployments continue, and higher public investment.

Inflation is projected to remain high at about 18 percent by end-2022 but is expected to moderate to 8 percent by end-2024. Because of the regional crisis spillovers, the fiscal deficit is expected to widen to 5.3 percent of GDP in 2022 and narrow to 3 percent of GDP over 2023–24 as economic activity recovers.

The poverty rate, which slightly deteriorated in 2021, is likely to further increase and deepen in 2022 mainly due to lower remittances, higher food prices, fewer job opportunities domestically and abroad, and the contraction of the economy.