Honourable Speaker of the Jogorku Kenesh, Mr. First Vice Prime Minister, Vice Prime Ministers, Ministers, representatives of Kyrgyz civil society and the international development community, Ladies and Gentlemen:
As co-organiser of this High-Level Development Conference, the World Bank Group would like to echo the warm welcome from our Kyrgyz partners.
We designed this conference to maximize the opportunity for dialogue: dialogue about economic and social policies, a dialogue that is substantive, evidence-based, analytical and open.
I am glad to see both CSOs and the press represented in the High Level Development Conference today. The informed engagement of civil society and the media in the planning of reforms is critical.
I’d also like to offer congratulations on the Conference Document produced jointly by government and International Development Partners. It is remarkable achievement: a truly collective analysis of the challenges and priorities for action.
The World Bank Group’s goals are shared prosperity and the elimination of poverty. However, the Kyrgyz Republic’s poverty reduction gains of 2003-8 have halted and in some areas been reversed. As a result of the 2010 violence and 2011-12 food price increases the overall poverty rate has increased from 34 percent in 2010 to 38 percent in 2012, with an increase in Bishkek in headcount poverty from 8 percent to 21 percent. The aspiration of all those here today is to restore the positive trend.
Ladies and Gentlemen, for dialogue to be constructive, it must be frank. It must recognize the challenges. My purpose in this intervention is to highlight – on behalf of the International Development Partners – 10 key policy challenges which must be addressed by 2017 if the National Sustainable Development Strategy is to deliver shared prosperity and reduced poverty.
Challenge number 1 is the restructuring of public expenditure. Public expenditure has exploded from 30 percent of GDP to 40 percent over the space of 5 years. Debt indicators therefore began to worsen again in 2011.We know the causes: pensions and public sector wages. In health, for example, staff costs have shot up from 50 percent to 70 percent of the total in 5 years. The government’s macroeconomic programme agreed with our IMF colleagues now aims to reduce public spending to 33 percent of GDP by 2015. This is huge, so it is essential for government to begin the necessary public service and pension reforms immediately. Otherwise the cuts will be focused on the non-salary recurrent spending which is critical for service quality: like maintenance, medical consumables and school supplies.
The second challenge is to improve the climate for private investment. The World Bank’s 2013 World Development Report on jobs showed that more than half of poverty reduction comes from increases in labour income. The National Sustainable Development Strategy’s emphasis on private-sector led growth is therefore the right approach. However, large formal sector investors – Kyrgyz or foreign - are not coming. Two numbers tell the whole story. The Kyrgyz Republic is number 70 out of 185 countries this year in the Doing Business Rankings. So far as reforms on paper are concerned, the Kyrgyz Republic is in the same zone as the Czech Republic and Turkey - a notable achievement. However, on Transparency International’s Corruption Perceptions Index, the Kyrgyz Republic is down at 154 out of 174, in the company of Yemen, Guinea and Angola. The message is clear: good regulations are not enough to encourage private investment. Officials and institutions must also respect the regulations and abide by legal arrangements. Taxes are a good example: despite all the work to simplify the regime, entrepreneurs in Kyrgyzstan on average must make 51 tax payments per year.
Challenge number 3 is improving risk management in the financial sector. Because the Kyrgyz banking sector is still perceived as high-risk, banks are paying up to 10 percent even on US dollar deposits, intermediation margins are high and borrowing rates are in the twenties. Critical risk reduction measures include the new Banking Code, financial regulation improvements, accounting standards reform and streamlining of the credit and pledge databases. However, the June 2013 law on Usurious Lending was a step backwards, as it will discourage lending to small or remote clients.
Challenge number 4 is to restore the finances of the energy sector. Thanks to two decades of financial losses and underfunding, the Kyrgyz Republic is facing a power crisis. Severelektro, for example, has 20 outages every day in winter. What is more, next year will be the first when total power demand exceeds potential supply. By 2020 the supply shortfall will be 30 percent of 2012 domestic consumption. To restore the power sector’s economic condition requires a combination of professional management, clear lines of responsibility, investment, transparent financial accounts and higher tariffs. Otherwise, we will see closed factories, dark schools and freezing homes.
The good news is that the CASA-1000 project, a power line to export Kyrgyzstan’s summer surplus power to Pakistan and Afghanistan, can make a massive contribution to the finances of Kyrgyzstan’s power sector. The World Bank, the IFC and other partners are supporters of CASA-1000 because the economic, social, environmental and security studies for CASA-1000 show the project to be a good deal for everyone. Improving the accountability and transparency of the power sector will ensure that CASA-1000 revenues are used properly.
My fifth challenge is to consolidate the decentralization of health and education. The Kyrgyz Republic has done well to keep budgetary commitments to health and education at 3 percent and 6 percent of GDP respectively. The health and education reforms have begun to decentralize money and decision-making to schools, clinics and hospitals. We are seeing positive results: a Kyrgyz household is three times less likely to be hit by catastrophic health spending than a Kazakh and four times less than a Russian. What an incredible achievement ! The Government’s Rural Education Project in Talas and Issyk-Kul oblasts improved international test scores compared with other oblasts. However, there are many vested interests which would like decision-making and budgets to return from the frontline to the centre and from the primary level to hospitals. This backlash must be resisted at all costs, because it threatens the achievements of the last decade. The best way to defend the reforms is for ordinary people to see real tangible results. In education, this means children testing better in reading and maths. In health, a top priority is getting more people on high blood pressure medication; hypertension causes half the deaths in the country, but only one person out of fifty is getting preventative treatment.
Challenge number 6 is to improve the targeting of social payments. Shared prosperity depends on social protection going to the right people. At 3.1 percent of GDP the social assistance budget is adequate by regional standards and it is growing. However, it covers less than a quarter of poor people, and they get only 10 percent of their income from social assistance. The problem is that funding for the only well-targeted program, the Monthly Benefit for Poor Families, is being cut to pay for benefits for people who are not poor. For example, much of the cash compensations and energy compensations budgets are going to people who are better-off.
The seventh challenge is infrastructure maintenance. Budgets are entirely inadequate for the maintenance of key infrastructures such as water supply, sanitation, solid waste, irrigation, roads, and energy. As a result, donor funding for rehabilitation is substituting for national financing, which is clearly neither sustainable nor efficient. Meanwhile, potential private investors in infrastructure want to see a firm political commitment to financial viability. It is well known that maintenance gives a higher economic return than new infrastructure. It is therefore alarming to see ambitious new projects going hand-in-hand with minuscule maintenance budgets.
The eighth challenge is to make life easier for traders. An exporter on average needs 63 days to deal with the paperwork, so border formalities need attention. As the NSDS mentions, understanding the implications of the Kyrgyz Republic’s decision to join the Customs Union will be a significant agenda item. Key topics for study will include the compatibility of Customs Union membership with Kyrgyzstan’s World Trade Organization commitments, the trade diversion effect, and impacts upon trade intermediation between China and the CIS and on garments manufacturing. These last two sectors represent large shares of GDP and employment, particularly for female entrepreneurs and employees.
A ninth challenge is to strengthen water resource management institutions. The World Bank estimates that the Kyrgyz Republic is the second most vulnerable country to climate change in Europe and Central Asia. Rainfall, river flows and glacier melt are changing the country’s hydrology right now. A strong National Water Council and Kyrgyz Hydromet are essential for the country’s agriculture and energy sectors, as well as cooperation with Kyrgyzstan’s downstream neighbours.
Finally, ladies and gentlemen, a tenth challenge stands above the rest. It is the improvement of governance and the fight against corruption. In 2010 the Kyrgyz Republic began a bold experiment: to demonstrate that transparency and anti-corruption can prevent conflicts, protect rights, attract private capital, create jobs, improve infrastructure and deliver better services. Three years later, the Republic’s citizens demand and expect resolute action by government, as promised in the NSDS. On 25 July the World Bank Group’s Board of Directors will therefore discuss our new partnership strategy for 2013-7. It is a programme of US$ 240 million based on one single pillar: governance.
The World Bank Group looks forward to being a partner of the Kyrgyz Government in the framework of theNational Sustainable Development Strategy as it addresses the daunting challenges of the next 4 years.