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 Kyrgyz economy is vulnerable to external shocks owing to its heavy dependence on remittances (27 percent of GDP) and gold exports (9 percent of GDP). Strong and sustainable economic growth requires institutional strengthening and policies to develop the private sector, spur international trade, and encourage fiscally sustainable energy production.

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 79 percent of the vote. A referendum, held concurrently with the presidential election, reinstated presidential rule 10 years after it was abolished in favor of a parliamentary system. A new version of the constitution, expected to be adopted through a referendum in April 2021, provides for a significant increase in presidential powers. Parliamentary elections will take place in fall 2021.

Strategy

The World Bank and the Kyrgyz Republic

Since the Kyrgyz Republic joined the World Bank in 1992, the Bank’s financial assistance has amounted to over US$2.040 million.

World Bank support has helped the country maintain macroeconomic stability, invest in strategic infrastructure, and improve access to social services. To enhance the impact of the sizable external assistance and avoid duplication of effort by donors, the World Bank Group, through its convening role, has worked closely with the Government to help improve broader donor coordination in the country and link it more directly to identified national priorities.

In response to the outbreak of COVID-19, the World Bank allocated emergency funds of US$22.15 million to address immediate health needs and US$88 million to aid in the recovery of poor and vulnerable populations as well as businesses from the economic impacts 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 private sector-led growth.

World Bank engagement for the next several years will continue to build 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, 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 will be provided through concessional International Development Association (IDA) lending, supplemented by trust fund financing and intensified Advisory Services and Analytics that emphasize practical, problem-solving advice.

Under the Sustainable Development Financing Policy initiative, which seeks to incentivize IDA countries to borrow sustainably, the Kyrgyz Government agreed on Performance and Policy Actions (PPAs) for FY21. Agreed PPAs focus on improved macro-fiscal management.

In the context of the COVID-19 pandemic, the Bank will focus primarily on the health emergency as well as the broader recovery goals and vaccination needs.

Economy

Recent Economic Developments

Real GDP contracted by 8.6 percent in 2020 because of the COVID-19 outbreak, the policies to limit its impact, and the domestic political turmoil. Twelve-month inflation rose to 9.7 percent in December (from 3.1 percent a year earlier), primarily driven by exchange rate depreciation (19 percent). The current account is estimated to have run a surplus of 4 percent of GDP in 2020, reflecting a 30 percent contraction in imports and resilient export earnings that— supported by gold exports—declined only by about 2 percent.

Surging expenditures and weaker revenues drove a widening of the general government deficit in 2020 to 4.2 percent of GDP (from 0.5 percent in 2019). The fiscal easing was appropriately aimed at supporting private enterprises and addressing health and social needs. Tax payment deferments and temporary tax exemptions for crisis-affected businesses resulted in 1.4 percent of GDP decline in tax revenues. An increase in grant receipts partially offset the tax shortfall. Spending increased by 2.2 percent of GDP, driven by increased compensation to medical workers and spending on medicines, personal protective equipment, and other medical materials. The higher deficit—together with the GDP contraction and the depreciation of the som—drove an increase in public debt to 68 percent of GDP in December 2020.

Economic Outlook

The coronavirus pandemic and the recent political turmoil have weakened the Kyrgyz Republic’s macroeconomic outlook, with the economy projected to recover to its pre-pandemic level only by 2023. Real GDP growth is projected to grow by 3.8 percent in 2021 as economic activity recovers, driven by services and construction. Growth is forecast to increase to an average of 4.4 percent in 2022–23. This scenario assumes a reduction in new COVID-19 cases as vaccines are deployed, political stability is maintained, and external demand and trading conditions improve. With the stabilization of the exchange rate, average inflation is expected to moderate to 5.4 percent. The current account deficit is projected to widen to about 7 percent of GDP in 2021, reflecting a faster pace of import recovery relative to export growth.

The fiscal deficit is projected to narrow to 3.9 percent of GDP in 2021, driven by higher tax revenues stemming from an economic recovery and the expiration of tax deferments and exemptions. Over the medium term, the authorities are targeting a fiscal deficit of 3 percent of GDP. Fiscal consolidation requires measures to expand the tax base, roll back pandemic-related expenditures, streamline nonpriority purchases, and reduce the wage bill as a share of GDP. 

All Projects

Highlighted Project

Kyrgyz Republic Emergency COVID-19 Project

On April 2, 2020, the Kyrgyz Republic was among the first group of countries to receive World Bank financing to respond to the COVID-19 pandemic. At the request of the Government, the World Bank provided US$12.15 million through the Emergency COVID-19 Project.

To help prevent the spread of the virus, urgently needed supplies will be procured, including testing kits, laboratory reagents, and personal protective equipment. The country will also acquire 20 fully equipped ambulances, and rapid response groups will receive vehicles specifically for the transfer of equipment and supplies.

The project will also procure Intensive Care Unit (ICU) equipment and supplies, which will include mechanical ventilators, cardiac defibrillators, mobile x-rays, oxygen concentrators, and other essential equipment, to establish or renew 10 eight-bed, fully equipped ICUs in designated hospitals. Another 20 ICUs and 100 isolation rooms in 24 hospitals around the country will undergo emergency repairs to ensure patient and staff safety. Project funds will also be used to top up salaries for medical staff and to hire additional staff where necessary.

“The purpose of the Emergency COVID-19 Project is to save lives and prevent further contagion.  Investments will focus on immediate health care needs,” says Bolormaa Amgaabazar, World Bank Country Manager for the Kyrgyz Republic.