1. Kyrgyzstan at the Cross-Roads The Economic Situation in the Kyrgyz Republic Chris Lovelace Country Manager The World Bank March 3, 2006 Oxford, UK

2. Economic Growth Macroeconomic situation has been stable; Inflation remains low; and exchange rate relatively stable recent years. Macroeconomic situation has been stable; Inflation remains low; and exchange rate relatively stable recent years. Growth remains fragile and sensitive to domestic and external instabilities. Growth remains fragile and sensitive to domestic and external instabilities. Growth in 2005 (-0.6%) was affected by a decline in gold production and political uncertainties. Growth in 2005 (-0.6%) was affected by a decline in gold production and political uncertainties.

3. Economic base Instability of economic growth is largely due to the fact that the economic base remains narrow. Instability of economic growth is largely due to the fact that the economic base remains narrow. “-” The economy heavily concentrated in agriculture, gold and power production and production of essential services. “-” The economy heavily concentrated in agriculture, gold and power production and production of essential services. “+” Strong growth of services and signs of recovery in manufacturing. “+” Strong growth of services and signs of recovery in manufacturing. Inherited good infrastructure and a well- educated population (although deteriorated) Inherited good infrastructure and a well- educated population (although deteriorated)

4. Pro-poor economic growth Poverty declined steadily over last years Poverty declined steadily over last years Poverty is concentrated in rural areas Poverty is concentrated in rural areas Albeit progress in poverty reduction, its level remains high (with GDP per capita at about US$ 470) Albeit progress in poverty reduction, its level remains high (with GDP per capita at about US$ 470)

5. Progress made in fiscal adjustment, but further reforms are needed The general government deficit fell from 10% of GDP in 2000 to 3.8% of GDP in 2005. The general government deficit fell from 10% of GDP in 2000 to 3.8% of GDP in 2005. Better revenue collection and controlled spending Better revenue collection and controlled spending However, public expenditure management reforms need to be deepened to improve public service delivery and use scare resources efficiently. However, public expenditure management reforms need to be deepened to improve public service delivery and use scare resources efficiently.

6. Low domestic investment is a constraint The economy continues to rely heavily on foreign and national savings, including increased remittances and foreign transfers. FDI is relatively low. The economy continues to rely heavily on foreign and national savings, including increased remittances and foreign transfers. FDI is relatively low.

7. The Kyrgyz export performance remains weak and vulnerable High commodity and geographical concentration. High commodity and geographical concentration. Gold is about 40% of exports. Gold is about 40% of exports. Exports are largely primary commodities and very volatile due to regional restrictions, barriers, and price shocks. Exports are largely primary commodities and very volatile due to regional restrictions, barriers, and price shocks. The unfavorable performance of merchandise trade was counterbalanced by the strong flow of remittances. The unfavorable performance of merchandise trade was counterbalanced by the strong flow of remittances. Oil price increase negatively affected the CAB Oil price increase negatively affected the CAB

8. External Debt is a constraint for development Progress achieved in debt restructuring (Paris Club) Progress achieved in debt restructuring (Paris Club) Debt/GDP ratio declined from 111% in 2002 to 89% in 2005 Debt/GDP ratio declined from 111% in 2002 to 89% in 2005 External debt service/ exports ratio declined from 20% in 2002 to under 10% in 2005 External debt service/ exports ratio declined from 20% in 2002 to under 10% in 2005 Debt sustainability remains vulnerable to domestic and external shocks Debt sustainability remains vulnerable to domestic and external shocks HIPC eligible country HIPC eligible country

9. Regulatory environment needs improvements Contributions of SMEs to GDP and employment increased only slightly over the last three years Contributions of SMEs to GDP and employment increased only slightly over the last three years Corruption and poor governance are key issues. Corruption and poor governance are key issues. Source: BEEPS

10. Growth requires more reforms Medium Term (MT) assumptions: political stability and moderate progress with reforms Medium Term (MT) assumptions: political stability and moderate progress with reforms But these path of reforms not sufficient to achieve stronger growth (8-10 % in MT) to reduce poverty substantially But these path of reforms not sufficient to achieve stronger growth (8-10 % in MT) to reduce poverty substantially

11. Good Governance is the key to higher growth Political stability and government speaking with coherent voice Political stability and government speaking with coherent voice Implementation of Civil Service Reforms Implementation of Civil Service Reforms Institutions for effective management of public resources Institutions for effective management of public resources Implementation of reforms to improve business environment Implementation of reforms to improve business environment All the above required to deal with systemic corruption and rent seeking All the above required to deal with systemic corruption and rent seeking Huge challenges and not clear whether the state is strong enough to make these reforms Huge challenges and not clear whether the state is strong enough to make these reforms

12. Conclusions While macroeconomic situation is stable, growth remains fragile and sensitive to domestic and external instabilities, and fragmented policy making. Although the economic growth has been pro-poor, poverty remains high. Advantage of inherited infrastructure and a well- educated population should be capitalized. Export performance and external debt sustainability have to be strengthened. Investment levels both domestic and foreign need to be raised. Business environment, public finance management, and governance have to be improved substantially.

13. Thank you!