The Kyrgyz Republic
Joint Economic Assessment:Reconciliation, Recovery and Reconstruction
ADB - IMF - The World Bank
With the participation ofThe Eurasian Development Bank
The European Bank for Reconstruction and DevelopmentThe European Commission
The International Finance CorporationThe United Nations
Kyrgyz Republic Donors' Conference, July 27, 2010, Bihkek
High-level Donor's Meeting, Bishkek, July 27, 2010
Significant economic impact of the crisis…
Pre-April: Strong recovery from the regional economic crisis of 2009
Post crisis: A contraction in economic activity in 2010
• Internal unrest and border closure to affect agriculture and services, while gold would stay strong
• Inflation muted (in single digits) as economic activity weakens.
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
2005 2006 2007 2008 2009 2010 Proj.
GDP Growth Rates, % (2005-2010)
GDP Non-Gold GDP
-15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0
Industry
Agriculture
Construction
Transport and Communication
Trade
GDP Growth by Sectors (2006-2010)
Average 06-09 2010 Proj.
High-level Donor's Meeting, Bishkek, July 27, 2010
….including a sharp balance-of-payments effect
Current account to swing to a deficit of 6½ percent in 2010 from a 4 percent surplus in 2009:
– Goods exports (non-gold) affected
– Tourism to decline– But worker remittances
recovering
Import cover of international reserves to drop sharply if financing needs not met
-3.1-0.2
-8.1
4.0
-6.6
-24.2-28.3
-31.4
-18.6
-27.1
-35.0
-30.0
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
2006 2007 2008 2009 2010 Proj.
CAD and Trade Balance (% of GDP)
CAD Trade Deficit
3.0 3.0
4.04.5 4.2
-
0.50
1.00
1.50
2.00
0.0
1.0
2.0
3.0
4.0
5.0
2006 2007 2008 2009 2010 Proj.
Gross International Reserves and Remittances
Remittances ($ Bln) - RHS Reserves Cover (months of next year imports) - LHSHigh-level Donor's Meeting, Bishkek, July 27, 2010
A significant increase in budget expenditures…
• Revenues to hold up and have only a mild impact
• But expenditures to rise sharply:
– Resettlement, rehabilitation and reconstruction costs sizable
– Security-related spending also high
0.05.0
10.015.020.025.030.035.040.045.050.0
2006 2007 2008 2009 2010 Proj.
Tax Revenues and Expenditures, 2006-2010 (% of GDP)
Tax Revenues Total expenditures
High-level Donor's Meeting, Bishkek, July 27, 2010
The fiscal deficit (primary, non-grant) to worsen substantially
Despite a sharp increase in use of own resources to finance the budget…
…a sizable rise in the external budget financing gap ($335 million compared to $175 million pre-crisis projection)
…would sharply raise the fiscal deficit and the financing gap in 2010
High-level Donor's Meeting, Bishkek, July 27, 2010
Financial sector also affected by the crisis
72.074.076.078.080.082.084.086.088.0
0.05.0
10.015.020.025.030.035.040.0
Dec. 07 Dec. 08 Dec. 09 Mar. 10 May 10
Selected Financial Indicators
Capital Adequacy Ratio (LHS) NPL/Total loans (LHS)Liquidity ratio (RHS)
45.0
26.4
-2.8 -1.8
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
2007 2008 2009 2010 Proj.
Credit to Private Sector (percent change, eop)
System capitalization and liquidity remain adequateBut the crisis has:
– Impaired loan quality– Slowed credit growth (both
demand and supply) and,– Affected a systematically
important bank (and imposed a cost on the budget)
High-level Donor's Meeting, Bishkek, July 27, 2010
Risks to the macroeconomic and fiscal outlook for 2010 and beyond
• Insecurity, and political instability
• Investor confidence
• Systemic banking problem
• Public debt and medium term outlook
High-level Donor's Meeting, Bishkek, July 27, 2010
Impact on Public Infrastructure
• Direct impact, damage– Electricity and gas distribution networks in Osh and Jalal-
Abad– City roads in Osh– Public transport system in Bishkek and Osh– Public and commercial private buildings in Bishkek, Osh,
Jalal-Abad oblasts
• Indirect impact– Escalation in construction item prices
High-level Donor's Meeting, Bishkek, July 27, 2010
Priority Energy Investments• Heating
– Rehabilitation of heating systems in Bishkek, Osh and other 23 urban centers
– Fuel to Bishkek and Osh CHPs
• Electricity Production – Equipment and material for Toktogul HPP– Rehabilitation of transmission and distribution systems in
Osh and Jalal-Abad
High-level Donor's Meeting, Bishkek, July 27, 2010
Priority Transport Investments
• Bridging finance for price escalation in regional road construction contracts
• Rehabilitate city road network in Osh
• Procure buses for public transport in Bishkek and Osh
High-level Donor's Meeting, Bishkek, July 27, 2010
Priority Building Reconstruction
• Reconstruction and content compensation for public and private commercial buildings in affected cities
High-level Donor's Meeting, Bishkek, July 27, 2010
Summary Investments
High-level Donor's Meeting, Bishkek, July 27, 2010
Financial stability has been adversely affected by the crisis
• Most banks sufficiently liquid and capitalized
• Main problem is at AUB which pre-crises was the largest bank with over 20% of system deposits
• NBKR introduced temporary administration in AUB and other banks following significant non-resident deposit outflow (allegedly linked to the previous regime)
• Banks under administration have deteriorating financials – authorities are developing action plans
High-level Donor's Meeting, Bishkek, July 27, 2010
The April and June events have led to a worsening of loan quality
• NPLs rose from 8% to 11% over April and May• Further deterioration expected following events in
the south• Loan quality deterioration mainly in trade and
commerce sectors• Credit growth likely to be weak because of low lack of
business confidence and continued political uncertainty
High-level Donor's Meeting, Bishkek, July 27, 2010
Priorities in the Banking Sector
• How to handle AUB in a manner that minimizes the impact on financial stability and public finances
• How to exit from the remaining banks under temporary administration
• How to manage the large government deposits• The legal complications from arrests on assets and
property by the Prosecutor’s Office
High-level Donor's Meeting, Bishkek, July 27, 2010
Microfinance organisations (MFOs) play an increasingly important role in providing credit
to the private sector• 23% of all credit provided by the financial system (MFOs
portfolio of USD 154 mil at the end of 2009) • Strong presence in the South with concentration in
financing agriculture (41%) and trade (35%)• The impact of the June events in Osh and Jalal-abad has
been much more severe than April events• Virtually all lending suspended in affected regions• MFOs report a material spike in delinquencies• Overall disbursements in June contracts by 24% compared
to previous monthsHigh-level Donor's Meeting, Bishkek, July 27, 2010
Other issues affecting MFOs
• Lack of funding – most international microfinance funds downgraded Kyrgyz Republic and postponed planned disbursements
• Lack of viable FX hedging instruments – AUB was main source (MFOs reported a total of USD 60 million in swaps and back-to-backs with AUB)
• Tight KGS liquidity in the coming months – could limit MFO operations and increase costs
High-level Donor's Meeting, Bishkek, July 27, 2010
Priorities in the Microfinance Sector
• Kyrgyz microfinance sector has been among the most successful in the world, largely because it has followed market principles
• Reaffirmation of such policies would contribute to continued access
• Importance of local currency funding as affordable and predictable as possible in the absence of viable FX hedging instruments
• MFOs and credit unions need to remain vigilant in monitoring borrower performance – prudent restructuring to minimise defaults
High-level Donor's Meeting, Bishkek, July 27, 2010
A few facts……………..• Between 179 to 2,000 people were killed
• 375,000 people were displaced
• 1,813 – 3,450 homes were destroyed or damaged
• No water access for about 25% of destroyed/ damaged homes
• No electricity supply for about 72% of destroyed / damaged homes
• 79 public buildings were destroyed or damaged
• 248 businesses were destroyed or damaged
• Around 4,000 people lost their jobs
Kyrgyz Republic Joint Economic Assessment (JEA); A Framework for……..
• Joint cooperation among donors
• Partnership between the government and international institutions
• Integration with the UN Flash Appeal
High-level Donor's Meeting, Bishkek, July 27, 2010
JEA has identified the need for external support in three major areas:
• Essential public expenditures and services
• Social needs
• Critical investments
High-level Donor's Meeting, Bishkek, July 27, 2010
Essential public expenditures and services….
Close to 40% of the State budget are the essential spending (protected items of salaries, social fund contributions, social insurance, state debt , etc. ) that have to be maintained;
Emergency expenditure needs added significant pressure on the budget, widening the gap
Estimated at $335 million in 2010High-level Donor's Meeting, Bishkek, July 27, 2010
Increased social needs ….
• Resettlement & integration of the IDPs, • other affected populations
Would require: housing livelihoods social reconciliation/other social programs ; (need for
compensation, community recovery, local area development , peace building, Youth inclusion, confidence in security, stability and justice)
High-level Donor's Meeting, Bishkek, July 27, 2010
Critical Investments needs……• Destroyed private commercial / public buildings • Energy / Transport
To: recovery of public administration recovery of private sector enhancing economic security
High-level Donor's Meeting, Bishkek, July 27, 2010
Physical damage to public buildings and private commercial enterprises …..
• Relatively few public buildings damaged (79), restoration of public Buildings important as they are symbols of governance
• Private Commercial building reconstruction sizable task (248), vital for the economy ; not just buildings, but associated loss of assets/income; need combination of compensation, credit access, tax concessions and selected reconstruction;
• Economic losses of enterprises/traders associated with impact on tourism
High-level Donor's Meeting, Bishkek, July 27, 2010
Major shock to agriculture….. (from late spring planting, higher fuel and input prices, lack of fertilizer import, loss of crop trade, reduced irrigation, and pest control)
• Support needed for cash transfers (short term)• Investments to improve rural infrastructure,
access to market & agricultural productivity (med-long term)
– ensure a fair geographical distribution of investments
– community or private sector lead investment – design / implement through local investment committees, water user associations and pasture user unions High-level Donor's Meeting, Bishkek, July 27, 2010
PUBLIC SECTOR RELATED NEEDS 980Budgetary financing gap 335Social reconciliation and recovery 334
humanitarian 96support for IDPs and vulnerable groups 238housing needs 105livelihoods 45social compensation 52other 36
Security and peace-building 11Infrastructure 350Buildings and structures 130
public 90private commercial 40
Energy sector 180Transport 40Agriculture 35LESS: Amounts already identified as budget expenditures 101PRIVATE SECTOR RELATED NEEDS (loss from tourism) 20GRAND TOTAL 1000
(millions of US dollars)
Kyrgyz Republic: Financing Requirements for Reconciliation, Recovery and Reconstruction
High-level Donor's Meeting, Bishkek, July 27, 2010
2010 2011 2012 TotalBudget support 335 335Social reconciliation and recovery 214 95 25 334
Housing needs 45 40 20 105Livelihoods 25 15 5 45Social compensation 30 22 0 52Other 18 18 0 36Flash Appeal 96 96
Security and peace-building 6 3 2 11Infrastructure 164 120 66 350
Buildings and structures 33 61 36 130Energy sector 121 37 22 180Transport 10 22 8 40
Agriculture 17 9 9 35LESS: Amounts already identified as budget Expenditures -101 -101Private sector related needs 20 20Others 16 16Total 671 227 102 1000
Projected Disbursement Profile of Support(millions of US dollars)
High-level Donor's Meeting, Bishkek, July 27, 2010
Stability and social cohesion is a necessary foundation for economic growth and social development ;
International financial support can make an important contribution to economic and social recovery in the Kyrgyz Republic.
High-level Donor's Meeting, Bishkek, July 27, 2010