The Kyrgyz Republic Joint Economic Assessment: Reconciliation, Recovery and Reconstruction ADB - IMF - The World Bank With the participation of The Eurasian.

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.


….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


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


Financial sector also affected by the crisis

72.0

74.0

76.0

78.0

80.0

82.0

84.0

86.0

88.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

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)


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


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


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


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


Priority Building Reconstruction

• Reconstruction and content compensation for public and private commercial buildings in affected cities


Summary Investments


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


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


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


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


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


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


JEA has identified the need for external support in three major areas:

• Essential public expenditures and services

• Social needs

• Critical investments


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 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)


Critical Investments needs……• Destroyed private commercial / public buildings • Energy / Transport

To: recovery of public administration recovery of private sector enhancing economic security


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


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


2010 2011 2012 Total

Budget support 335 335

Social reconciliation and recovery 214 95 25 334

Housing needs 45 40 20 105

Livelihoods 25 15 5 45

Social compensation 30 22 0 52

Other 18 18 0 36

Flash Appeal 96 96

Security and peace-building 6 3 2 11

Infrastructure 164 120 66 350

Buildings and structures 33 61 36 130

Energy sector 121 37 22 180

Transport 10 22 8 40

Agriculture 17 9 9 35

LESS: Amounts already identified as budget

Expenditures -101 -101

Private sector related needs 20 20

Others 16 16

Total 671 227 102 1000

Projected Disbursement Profile of Support(millions of US dollars)


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.


The Kyrgyz Republic Joint Economic Assessment: Reconciliation, Recovery and Reconstruction ADB - IMF - The World Bank With the participation of The Eurasian.

Documents

high highlevel donors

regional economic crisis

significant economic

crisis pre

osh public transport

post crisis

economic activity

crisis system capitalization