The Kyrgyz Republic made notable progress in reducing poverty prior to the pandemic. Poverty rates have increased notably since the COVID-19 outbreak which was further exacerbated by the recent spike in food and energy prices. Strengthening social safety nets is crucial to put poverty back on a downward trend. Given the limited fiscal space, priority should be given to improving targeting of social assistance programs and increasing the efficiency of spending. Over the medium term, building fiscal space through expenditure prioritization and revenue mobilization would allow to raise spending on social safety nets required for meaningful progress on the Sustainable Development Goals.

Abstract

The Kyrgyz Republic made notable progress in reducing poverty prior to the pandemic. Poverty rates have increased notably since the COVID-19 outbreak which was further exacerbated by the recent spike in food and energy prices. Strengthening social safety nets is crucial to put poverty back on a downward trend. Given the limited fiscal space, priority should be given to improving targeting of social assistance programs and increasing the efficiency of spending. Over the medium term, building fiscal space through expenditure prioritization and revenue mobilization would allow to raise spending on social safety nets required for meaningful progress on the Sustainable Development Goals.

Social Safety Nets and Poverty in the Kyrgyz Republic1

The Kyrgyz Republic made notable progress in reducing poverty prior to the pandemic. Poverty rates have increased notably since the COVID-19 outbreak which was further exacerbated by the recent spike in food and energy prices. Strengthening social safety nets is crucial to put poverty back on a downward trend. Given the limited fiscal space, priority should be given to improving targeting of social assistance programs and increasing the efficiency of spending. Over the medium term, building fiscal space through expenditure prioritization and revenue mobilization would allow to raise spending on social safety nets required for meaningful progress on the Sustainable Development Goals.

A. Recent Developments in Poverty and Inequality

1. The Kyrgyz Republic made good progress toward reducing poverty prior to the COVID-19 pandemic. Extreme poverty declined to about 1 percent in 2014 and remained broadly stable until 2019, while the overall national poverty rate fell by 10 percentage points to 20 percent, consistent with trends in poverty rates based on World Bank data. Poverty remains concentrated in rural areas, with only 30 percent of the poor living in cities on average. However, despite these gains, poverty rates remained high relative to peers, with almost two-thirds of the population living on less than $6.85 a day (Figure 1).

Figure 1.
Figure 1.

Poverty Rates in the Kyrgyz Republic and Regional Comparators

Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A003

2. Income inequality had fallen since mid-2000s. It remained broadly stable and relatively low compared to regional peers during the decade prior to the pandemic. The Gini index declined by 10 percentage points between 2006 and 2012, but progress has stalled since then (Figure 2). Nevertheless, the overall improvement in income inequality in the Kyrgyz Republic was more pronounced than in the CCA and Eastern Europe. Income distribution also remained relatively stable over this period, with the lowest quintile receiving 9.2 percent of the total income on average, compared to 39 percent earned by the highest quintile. Additionally, according to the World Bank's shared prosperity indicator2, growth in the Kyrgyz Republic was fairly inclusive, with consumption growth for the bottom 40 percent of the income distribution exceeding that of the average across the whole income distribution. Growth has become less inclusive since the mid-2010s.

Figure 2.
Figure 2.

Inequality and Inclusion Indicators

Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A003

3. Poverty has increased considerably since the COVID-19 outbreak, with almost 1 million people being pushed into poverty in 2020-2021. The overall poverty rate increased from 20 percent in 2019 to about 25 percent in 2020—mainly in rural areas—while extreme poverty increased by a marginal 0.35 percentage point (Figure 2). In 2021, poverty deteriorated further and reached 33 percent, which was predominantly driven by the unprecedented increase in the number of extremely poor (a sevenfold increase relative to 2020 which is equivalent to 5 percent of the population)3. It was accompanied by a significant upward revision of overall and extreme poverty lines, by 30 and 55 percent compared to 2020 respectively, by far exceeding CPI inflation and average disposable income growth (Figure 3, left panel). Given that the poorest households in the Kyrgyz Republic tend to spend almost 70 percent of their income on food (second highest share in the CCA region), poverty is particularly sensitive to food price changes (IMF, 2022b). As of October 2022, 17 percent of households or more than 1 million people were acutely food insecure, while 54 percent of the population remains only marginally food secure (WPF, 2022).

4. In 2021, the poverty increase was disproportionately concentrated in urban areas. The poverty rate in urban areas increased by 15 percentage points to 33 percent and caught up with the rural poverty rate, which went up by 4 percentage points only (Figure 3, right panel). Access to farms and domestic food production most likely helped mitigate the negative impact of higher food prices on poverty in rural areas.

Figure 3.
Figure 3.

Recent Developments in National Poverty Indicators

Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A003

B. Overview of Main Social Safety Net Programs

5. Social safety nets (SSNs) constitute a set of transfer programs aimed at addressing current and future poverty. SSN programs—also often referred to as social assistance programs— encompass a wide variety of non-contributory transfer programs designed to protect households from poverty and destitution by ensuring a minimum level of economic well-being (Box 1). In addition, these programs are often designed to enhance human and physical capital of beneficiary households and support them in pulling out of poverty and avoiding future poverty.

6. Social assistance programs in the Kyrgyz Republic are mainly categorical and provide flat benefits, with a limited role for non-demographically targeted benefits. The social assistance system is centered on providing support to groups identified as needy or vulnerable, including low-income families with children, the elderly, the disabled, families living in high altitude or remote areas. Social assistance spending as a share of GDP remained broadly stable over the last ten years, at 1.7 percent of GDP on average. The two main social assistance schemes are the monthly Social Benefit (SB) and the monthly Benefit for Low-Income Families with Children (BLFC). In 2021, spending on these two programs accounted for 35 and 32 percent of the total social assistance spending (0.6 and 0.5 percent of GDP). The BLFC is the largest program in terms of the number of beneficiaries, with 5.3 percent of the total population in 2021 who benefited from BLFC compared to 1.5 percent for other programs. The third largest program is the Monetary Compensation (MC) scheme which accounted for 15 percent of the social assistance spending in 2021 (about 0.25 percent of GDP). All social assistance programs are administered by the Ministry of Labor, Social Security and Migration and financed out of the general government budget.

Figure 4.
Figure 4.

Social Assistance Programs

Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A003

7. The BLFC, the largest program in terms of the number of beneficiaries, is the only means-tested program and provides income support to low-income households with children. The program is targeted to low-income families with children under 16 years of age. The eligibility criteria are based on an income test (currently 1,000 soms or $12.1 per household member per month) and asset assessment. The benefit is a flat monthly allowance of 1,200 soms ($14.5) per child. It has been increased by 50 percent (from 810 soms) starting from June 2022 by the Presidential Decree. Since 2019, the number of beneficiaries has increased by 14 percent (or 0.5 percent of population) and reached 5.3 percent of the population in 2021. The total BLFC spending increased by about 16 percent in nominal terms but remained broadly unchanged as a share of GDP at 0.5 percent.

8. The SB is the second largest program which is aimed at providing benefits mainly to the disabled and the elderly who are not entitled to a contributory pension. The categories of SB beneficiaries include children and adults with disabilities, the elderly who have reached the retirement age but are not entitled to a contributory pension, survivor children and orphans. Children and adults with disabilities are the two largest groups, each accounting for about 35 percent of the 99,000 beneficiaries (1.5 percent of the population) in 2021. SB allowances were raised between October 2021 and June 2022 by 120 percent on average4. Each beneficiary receives a flat monthly allowance ranging between 2,000 soms ($24) for the elderly to 8,000 soms ($96) for certain categories of the disabled, and is not automatically adjusted to the cost of living.

9. The MC is a cash transfer scheme benefiting a large number of specific categories, but the pool of beneficiaries as well as spending on this program are steadily declining. This program was introduced in 2010 to replace the 'privileges' program inherited from the Soviet system, which provided assistance in the form of in-kind benefits and discounts to a large number of categories. The MC replaced these benefits with a flat cash transfers paid to 25 categories, including war veterans, survivors of the World War II labor camps, the Chernobyl accident's rescuers, and the disabled. Spending on the MC program has been on a downward trend (both in nominal terms and in percent of GDP) given that the pool of beneficiaries is declining due to the moratorium on the introduction of new categories and limits on new beneficiaries.

C. Social Safety Nets Performance: International Comparison

10. Spending on social safety nets is high by international comparison, but the effectiveness is low. Based on the World Bank's social assistance expenditure database, the Kyrgyz Republic's spending on social assistance corresponds to the 74th percentile for emerging and developing Europe and Central Asia and the 90th percentile for low-income developing countries (LIDC). However, higher spending does not seem to lead to better outcomes, such as poverty reduction. The median poverty reduction for emerging and developing Europe and Central Asia is estimated as 11 percentage points, while in the Kyrgyz Republic social safety nets reduce poverty by an estimated 4.7 percentage points.

uA003fig1

Simulated Poverty Headcount Reduction and Social Assistance Spending

(Percent)

Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A003

Source: IMF Fiscal Affairs Department Social Protection and Labor Toolkit; World Bank.

11. This weaker performance relative to comparators reflects low coverage and limited adequacy. The social assistance coverage in the Kyrgyz Republic is one of the lowest in the CCA region and only 16 percent of people in the bottom quintile receive social assistance benefits, which is about 23 percentage points below the CCA average (Figure 5). Adequacy (or generosity) of social assistance for the bottom quintile, measured as the total amount of social assistance received relative to the total pre-transfer income (or expenditures), is the second lowest in the CCA region (19 percent), compared to the CCA and LIDC averages of around 30 percent. Low level of adequacy is partially related to the fact that benefits are not regularly adjusted to inflation.

12. There is room for improving targeting of social assistance programs. At the bottom quintile of income distribution, targeting is somewhat better compared to regional peers. Almost 50 percent of social assistance benefits is going to the poorest quintile, which accounts for about 44 percent of all social assistance beneficiaries (Figure 5). However, targeting could be further improved given that non-poor households from second and third quintiles of the income distribution are getting almost 38 percent of total social assistance benefits, the highest benefits incidence across the CCA region.

13. Regular indexation would protect the real value of benefits for low-income and other vulnerable groups. There is no regular indexation of benefits that would mitigate the impact of changes in the cost of living which leads to erosion in the real value of benefits and increases the role of discretionary decisions in setting the level of benefits. The level of SB was broadly unchanged between 2012 and 2017 and, as a result, its purchasing power fell by 20 percent. Similarly, the BLFC allowance remained at the 2017 level until mid-2022, while consumer price inflation exceeded 30 percent over the same period.

uA003fig2

Changes in the Average Size of Benefits and CPI Inflation

(Annual percentage changes)

Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A003

Note: Chart shows annual percentage changes in the average size of benefits for low-income families with children (per child) and Social Benefit's allowance.Sources: National Statistical Committee of the Kyrgyz Republic; and IMF staff calculations.
Figure 5.
Figure 5.
Figure 5.

Social Assistance Programs: Performance Indicators

Citation: IMF Staff Country Reports 2023, 092; 10.5089/9798400232725.002.A003

Source: IMF Fiscal Affairs Department Social Protection and Labor Toolkit; World Bank.Note: The data correspond to the latest available year for each country. Social assistance expenditure is based on the World Bank definition and data. Coverage is the share of population in the corresponding quintile receiving social assistance transfers. Adequacy is the total transfer amount received by beneficiaries in the corresponding quintile as a share of pre-transfer welfare (income or expenditure) of beneficiaries in that quintile. Benefits incidence is the percentage of transfers going to a corresponding quintile relative to total transfers going to the population. Beneficiary incidence is the percentage of social assistance beneficiaries in a corresponding quantile relative to the total number of beneficiaries in the population. CCA=Caucasus and Central Asia; EMD Europe=emerging and developing Europe, LIDC=low-income developing countries.

D. Policies to Strengthen Social Safety Nets

14. Strengthening SSNs while preserving fiscal sustainability is crucial. In the near term, the already limited fiscal space would constrain a significant increase in SSN spending. Instead, priority should be given to improving efficiency of SSN spending. In parallel, prioritization of other expenditures, improving their efficiency, as well as revenue mobilization and phasing out inefficient tax exemptions would help to build fiscal space and increase social spending in the medium term.

15. A comprehensive SSN reform strategy should be centered on strengthening the efficiency of SSNs in the medium term. The main objective should be to develop an adaptive and sustainable SSN system that can provide adequate social benefits to the vulnerable within a sustainable envelope and protect people from falling into poverty. Reforming the SSN system would require rigorous distributional analysis of the existing system, including an assessment of relative effectiveness and trade-offs of different support schemes, as well as planning and development of new systems and delivery channels.

16. In the short term, the focus should be on upscaling existing means-testing programs, including by increasing the coverage at the bottom of the income distribution. A large fraction of low-income population does not receive benefits, while significant resources accrue to richer groups. The design and implementation of the income test should be strengthened to reduce leakage to higher-income households and avoid errors of exclusion and inclusion.

17. Consolidation of social assistance programs and phasing out of less effective categorical programs would simplify the system and help eliminate overlaps. Categorical social benefits schemes (children, the disabled, the elderly) result in overlaps and inefficiencies. The moratorium on new categories of MC beneficiaries should continue. Over time, resources feed up from the MC program would become available to strengthen more effective SSN programs.

18. More progressivity of social assistance would improve adequacy of benefits within the same spending envelope. Given the limited resource envelope for social assistance, better directing benefits to the poorest households by replacing flat benefits with differentiated amounts according to need would ensure that most in need are reached. For example, switching from flat to the progressive benefit schedule, with the level of benefits decreasing in household income, would help improve generosity and therefore the SSNs poverty mitigation effect.

19. Regular indexation of benefits would help preserve their real value but will require appropriate planning of SSN spending envelopes over the medium term. The absence of automatic indexation of social benefits leads to the erosion of their real value over time and makes the generosity of social benefits exposed to political discretion. Regular indexation of benefits, for example based on the price index reflecting the consumption basked of low-income households, would provide more adequate and stable benefits for the vulnerable. It would also ensure that the safety net automatically reacts to adverse shocks and could be scaled up quickly to protect the poor during health and economic crises.

20. Building a robust administrative capacity is needed to deliver benefits to the most vulnerable in a reliable, cost-effective, and timely manner. A strong information system— developed with the help of development partners—would allow to effectively identify those in need and verify their eligibility. A single registry for all SSN programs would reduce fragmentation and overlapping of different programs and, with greater digitalization, help expand the coverage. The coordination and the information sharing between different official databases also should be enhanced.

Typical Social Safety Nets Program Components 1/

Programs that compose Social Safety Nets (SSNs) can be classified in different ways (Grosh and others, 2008; Beegle and others, 2018; World Bank, 2018) and typically include:

  • Cash transfer programs. These programs offer periodic monetary transfers with the objective of providing regular and predictable income support to beneficiaries. This category covers a wide range of programs, including poverty-targeted cash transfers; family, children, and orphan allowances (including benefits for vulnerable children); and non-contributory funeral grants and burial allowances. This includes both conditional and unconditional cash transfer programs.

  • Social pensions. These are regular cash transfers provided exclusively to elderly which, unlike contributory pensions, do not require prior contributions. Social pensions may be universal or targeted to the poor and vulnerable.

  • School feeding programs. These programs supply meals or snacks for children at school, including take-home food rations for children's families.

  • Nutrition programs. This includes programs providing food stamps and vouchers, food distribution programs, and other nutritional programs (except school feeding programs).

  • Fee waivers and targeted subsidies. These encompass a variety of benefits targeting the poor and vulnerable, including: health insurance exemptions and reduced medical fees; education fee waivers; housing subsidies and allowances; utility and electricity subsidies and allowances; agricultural input subsidies; and transportation benefits.

  • Emergency programs. This includes programs providing emergency support in cash or in-kind to individuals in case of emergency or in response to shocks (including support to refugees and returning migrants). Transfers are usually temporary.

  • Other programs. These include other non-contributory programs targeting the poor or vulnerable, such as programs distributing school supplies, tax exemptions, social care services, and other programs not included in the other categories.

1/ This box draws on IMF (2022a).

References

  • Beegle, Kathleen, Aline Coudouel, and Emma Monsalve (2018). Realizing the Full Potential of Social Safety Nets in Africa. Washington, DC: The World Bank Group.

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  • Grosh, Margaret, Carlo del Ninno, Emil Tesliuc, and Azedine Ouerghi (2008). For Protection and Promotion: The Design and Implementation of Effective Safety Nets. Washington, DC: The World Bank Group.

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  • IMF (2022a). IMF Engagement on Social Safety Net Issues for Surveillance and Program Work, IMF Technical Notes and Manuals 2022/007. Washington, DC: International Monetary Fund.

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  • IMF (2022b). Regional Economic Outlook for the Middle East and Central Asia, October. Washington, DC: International Monetary Fund.

  • IMF (2022c, forthcoming). Challenges of Social Safety Nets in the Caucasus and Central Asia. IMF Departmental Paper DP/2022. Washington, DC: International Monetary Fund.

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  • OECD (2018). Social Protection System Review of Kyrgyzstan, OECD Development Pathways, OECD Publishing, Paris.

  • World Bank (2018). The State of Social Safety Nets 2018. Washington, DC: The World Bank Group.

  • World Bank (2022). Social Protection for Recovery, Europe and Central Asia Economic Update, Fall. Washington, DC: The World Bank Group.

  • WFP (2022). Food Security Monitoring Update, October 2022. World Food Programme.

1

Prepared by Alexandra Solovyeva.

2

Shared prosperity measures the extent to which economic growth is inclusive by focusing on household consumption or income growth among the poorest population rather than on total growth. It is an important indicator if inclusion and well-being that correlate with reductions in poverty and inequality.

3

Based on the World Bank data, poverty rate (in the Kyrgyz Republic increased from 11.7 percent in 2019 to 18.7 percent in 2020 at the $3.65 a day, 2017 PPP), while extreme poverty rate (at the $2.15 a day, 2017 PPP) increased by 0.5 percentage points to 1.3 percent. According to World Bank's preliminary estimates, the $3.65 poverty rate had deteriorated further in 2021 to 21.8 percent, while extreme poverty remained broadly unchanged. This estimated increase in poverty in 2021 is of much smaller magnitude compared to increases in national poverty rates, and could be partially attributed to differences in the level of corresponding poverty lines.

4

SB allowances for all the categories were raised in three stages between October 2021 and June 2022, resulting in a cumulative increase of 50 percent for mothers of 7 or more children, 175 percent for the disabled (Group I), 200 percent for children without parents, and 100 percent for all other categories.

Kyrgyz Republic: Selected Issues
Author: International Monetary Fund. Middle East and Central Asia Dept.