Kyrgyz Republic - Joint Economic Assessment Report for the Kyrgyz Republic Donor Conference, Bishkek, July 27, 2010

At the time of the 2005 review of the Fund’s transparency policy, it was agreed that information on key trends in implementation of the transparency policy would be circulated to the Board regularly, along with lists indicating the publication status of reports discussed by the Board. The set of tables provided in this report updates the last Key Trends2 with information on documents published through December 2009.

Abstract

At the time of the 2005 review of the Fund’s transparency policy, it was agreed that information on key trends in implementation of the transparency policy would be circulated to the Board regularly, along with lists indicating the publication status of reports discussed by the Board. The set of tables provided in this report updates the last Key Trends2 with information on documents published through December 2009.

Summary of the Main Findings of the Joint Economic Assessment: Reconciliation, Recovery and Reconstruction

Prior to the events of April and June 2010, the Kyrgyz economy was on a recovery path from the global economic crisis, with GDP projected to rise by 4½ per cent in 2010. Economic policies were guided by reliance on the private sector for growth in a liberal trade environment, supported by a sharp rise in public capital spending especially in energy. A continuation in a fall in poverty was confidently expected.

The events dealt a shock to prospects for economic growth. There occurred a weakening of private sector confidence, a contraction of liquidity in the banking system, massive stress on public finances, damage to physical infrastructure, critically the destruction by arson of housing in the south, and the displacement of around 375,000, of whom 75,000 are still displaced. The economy is projected to shrink by 3½ per cent in 2010; and output per head in 2010 will fall from the pre-crisis projection of $943 to $826.

The post-crisis social burden arises from the widespread displacement with an attendant need for shelter before the onset of winter as well as durable housing, food, security, livelihoods- restoration and social services programs. Support for the vulnerable groups affected by earlier natural disasters is also important for reasons of equity and social peace. A coherent, integrated approach to housing and livelihoods solutions based on freedom of choice by the affected populations and protection of their security and human rights needs must be placed at the centre of the reconciliation effort.

Physical damage to the infrastructure sectors is large. Public buildings and private commercial enterprises were damaged or destroyed, with consequences for provision of government services. Severe disruptions in agricultural and retail distribution and in the supply chain for production have occurred. Critical sectors such as energy remain vulnerable to breakdown as a result of destruction or (more importantly) disrepair, which could lead to severe winter energy shortages, threatening stability and peace. Thus, security in energy and essential public services remains a major public policy concern.

The government has launched a post-crisis recovery program. The authorities relaxed the fiscal stance as a counter-cyclical response to the investment and output shocks, are assessing systematically the damage, loss and the consequent recovery and reconstruction needs, and have applied for international support. The social burden is being met by an international humanitarian effort; and funding the Flash Appeal of the UN is important. Temporary, winterized shelter solutions adjacent to or within destroyed housing units must be implemented rapidly, accompanied and followed by a durable housing solution.

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

  • Essential public expenditures and service. With emergency expenditure needs rising, the budget would have to address these while maintaining other spending in line with authorities’ regular spending plans.

  • Social needs. The resettlement and integration of the internally displaced and the needs associated with other affected populations has put an unsustainable burden on fiscal resources. Through support for housing, livelihoods, social protection and other social programs identified in the JEA, donors can make an important contribution to economic and social recovery.

  • Critical investments. The JEA has found that needs associated with destroyed private commercial and public buildings are closely tied with recovery prospects. Moreover, critical needs in energy and transport exist and if financed would make a large contribution to reconciliation and building peace. Financing need for such investments would be needed as a bridge to the period when the private sector resumes investing and enhance the economic security of the country by strengthening energy and transport.

The JEA finds that the total external financing need amounts to $1 billion over a 30-month period (Annex I on Financing Requirements). Of this amount:

  • A budget financing gap is estimated at $335 million in 2010.1

  • Social sector needs are estimated at $334 million, of which $96 million corresponds to the UN Flash Appeal2.

  • Infrastructure support is estimated at $350 million.

Support for agriculture and security-related needs as well as for private sector (tourism) makes up the balance (see Annex I).

In the next six months, donor support of $671 million is required -- $335 for the budget and $336 million for other programs (including the Flash Appeal). The requirements for the years 2011 and 2012, excluding the budget support amounts for those years that can be determined only once an elected government is able to formulate a budget, are estimated at $227 million and $102 million, respectively.

The JEA notes that the capacity of the government to implement such a program, with external partner support, is adequate. But it is clear that sustained international technical support in design, implementation, monitoring and financial management will be vitally required. The authorities have progressed with improving management and fiduciary systems. The JEA notes that the recent legacy of lack of accountability and poor management of public assets is being firmly addressed, and impressive steps are already being implemented.

Chapter I: Background to the Report

In early April 2010, anti-government political demonstrations took place in various cities of the Kyrgyz Republic against the authoritarian tendencies of the president that had led to a centralization of power within the presidency. Protests were fuelled by economic and social policy decisions taken without adequate public consultation. Moreover, there was a widespread belief that corruption and misuse of public assets had risen markedly. These protests culminated in riots in Bishkek and several other cities in Kyrgyzstan on April 7-8 and violent crackdown by the government, the subsequent removal of the president from office, and the formation of an interim government3 headed by a coalition of opposition political and civic leaders. The events led to loss of life and injuries to persons, the destruction of private and public property, a weakening of confidence within the private sector, and to economic and fiscal pressures.

In a letter dated April 24, 2010 addressed to the President of the World Bank, the head of the interim government requested a mission to conduct an expert evaluation of the financial and budgetary needs arising from the events of April. Subsequently, the government welcomed a broad range of international financial institutions and other donors constituting a joint team to carry out an assessment.

In June, social tensions that had been on the rise in the south of the country with a population fractured by divided loyalties to the new government climaxed into violent inter-ethnic clashes over three days, particularly in the cities of Jalalabad and Osh. These two cities and some neighboring areas erupted in a spasm of ethnically-directed extreme, brutal violence and targeted arson. It is reported officially that over 300 persons have lost their lives, but the president stated that the toll exceeds 2000. Over 2500 have been injured. Large scale destruction of public and private property, especially housing, occurred.

In the wake of the violence, an estimated 75,000 refugees fled to neighboring Uzbekistan and a further 300,000 were estimated to be internally displaced within the southern oblasts of the Kyrgyz Republic. In an encouraging development, a return of refugees took place within about ten days and most of the internally displaced had also returned to their homes by mid-July. The number of remaining internally displaced persons is now estimated at 75,000. The associated need for housing and livelihood support as well as for social reconciliation and peace-building will have to be addressed urgently in the interests of the stability of the country. Conditions in the south of the country remain dismal and highly volatile with a continuation of low intensity ethnic conflict, sporadic security coverage and deep scars left by the violence.

The violent conflict in the south created new and deep social tensions that left many people bewildered, shocked and confused. Although the immediate causes of the conflict remain unclear, key messages are emerging. First, there is a need to promote social and political stability and security as a foundation for economic and social recovery. Second, a focus on equity is essential to avoid a perception of unequal attention being given to particular ethnic groups, regions or types of beneficiaries. Such perceptions could aggravate inter-group tensions and fuel future violence. Interventions need to be part of a broader nationwide reconciliation, recovery and development effort. Third, strengthening the legitimacy of the state and reestablishing an impartial security regime capable of protecting all citizens are critical.

This report – the Joint Economic Assessment: Reconciliation, Recovery and Reconstruction (JEA) -- responds to the request of the government and provides an assessment of the impact of tumultuous events of April and June. It discusses their economic and social effects, assesses the implications for the budget and the principal sectors of the economy, and presents an estimate of the support that could be obtained from external sources for social reconciliation, reconstruction and economic recovery. The JEA was prepared for and in close collaboration with the government of the Kyrgyz Republic. The assessment is based on information and data from the authorities, and in particular from the official Commission for the Assessment of Damages in the South, and the official Directorate on Reconstruction and Development of Osh and Jalal-Abad. The mission undertook field visits to the south and conducted surveys.

The economic assessment was carried out with the joint leadership of the Asian Development Bank, the International Monetary Fund, and the World Bank; with the participation of the Eurasian Development Bank, the European Bank for Reconstruction and Development, the European Commission, the International Finance Corporation, and the United Nations. The report draws also on the contributions of the Swiss and United States development agencies and those of several NGO partners, including ACTED.

The table in Annex I outlines the financing requirements for reconciliation, recovery and reconstruction based on the work of the joint mission.

Political Background

Since independence in 1991, the Kyrgyz Republic has made an enormous advance towards the creation of a liberal market economy with the aim of promoting sustained economic growth and fighting poverty, and has sought international integration through trade and investment, notably through membership of the World Trade Organization. It has met with some success in fostering open institutions, but has struggled to embed lasting democracy and civic freedom. OSCE missions have criticized the electoral process over the past decade as having fallen short of good practice. Elections for parliament in 2007 and for the president in 2009 were found to be deficient: regulations were changed arbitrarily and procedures ignored, sometimes at the last minute, leading to widespread public dissatisfaction with the process and its results. Over the recent past, the president concentrated power in his own administrative apparatus, reduced the national assembly to a cipher, and circumvented ministerial forms of government. Thus, checks and balances all but disappeared, consultation over policies and accountability was greatly reduced, and governance standards fell.

As noted, power was assumed by a provisional government following the resignation of the president in April 2010. The government quickly dissolved parliament and disbanded the constitutional court, which had been seen as too compliant to both the previous presidents of the Kyrgyz Republic. Provisional Government Decree No.1 concentrated the functions of the parliament, president and government with the provisional government.

The provisional government drafted a new constitution that shifts the balance of executive power from a presidential system to a parliamentary one. The drafting process involved public consultations and a nation-wide debate. The constitution was approved in a nation-wide referendum on June 27, with an overall turnout of 72 per cent and an affirmative vote of 91 per cent. The turnout in the south of the country was 65 per cent. The referendum vested the powers of the presidency with the current interim president until the next presidential election in autumn 2011. International observers characterized the conduct of the referendum as substantially fair and proper, noting the conditions of large displacement of population in the south. Under the new constitution, parliamentary elections will be held in October 2010 and a fully empowered government would be formed thereafter, with the powers of the president being greatly reduced.

Organization of the Report

The JEA examines the overall impact of the political and social events of this year, assesses the measures necessary and the financing needs for early reconstruction and recovery, based on the losses and damages resulting from the events, as well as from the impact to confidence and private sector activity. It outlines a strategy for recovery as well as priority actions and investments based on the strategy. Sector specific assessments and needs are presented in annexes to the report. Annex I contains a comprehensive table of the financing needs for the recovery program that is being presented to donors for assistance.

Chapter II discusses the economic and social impact of the events and the resulting budget financing gap that must be funded in order to protect core economic and social needs, including essential public services and security. Chapter III presents the impact of the violent clashes in the south of the country in June, and assesses the humanitarian and the social needs that arise from the imperative to support the internally displaced persons and others affected by the conflict, develop and implement housing and livelihoods in a sustainable way and undertake measures towards social peace and reconciliation. It integrates the flash appeal of the UN system (in line with best practice for joint assessments). Chapter IV outlines reconciliation, recovery and reconstruction strategy that is being pursued by the authorities and which underlies the estimates for external financing need. The chapters that follow present the sector-specific impact and resulting needs. An assessment of the fiduciary safeguards and developments in public finance management is contained in Chapter IX as is a discussion of the financing options that are open to external partners and how coordination, implementation and reporting arrangements are being developed so as to ensure the integrity of the recovery program.

Acknowledgement

The JEA team wishes to express its warm gratitude to the Kyrgyz interim government for its partnership in this work. The head of the interim government, Ms. Otunbaeva, and the ministers of finance (till July 14), Mr. Sariev, and of economic regulation, Mr. Umetaliev, led the way and the cabinet of ministers, the National Bank, and government agencies engaged fully and keenly in the work of the mission. The mission benefitted greatly from discussions with Mr. Atambaev, a deputy head of the interim government and Mr. Satybaldiev, Vice Prime Minister and head of the State Directorate for the Reconstruction and Development of Osh and Jalalabad. A concluding discussion with the just-appointed First Vice Prime Minister, Mr. Muraliev, provided valuable insights. The close participation of the authorities has added greatly to the quality and the relevance of this report.

Chapter II: Economic and Social Impact

Summary

The political disturbances in Bishkek in April 2010 and the outburst of ethnic conflict in southern Kyrgyzstan in June 2010 have been significant shocks to the economy. The economy is expected to contract sharply and face more uncertain prospects in the period ahead than envisaged prior to the crisis. There is a generalized weakening of confidence that may particularly affect investment, including foreign direct investment. Public finances have come under severe stress; there has been trouble at a major bank, and some social disruption, as well as physical damage, remains to be addressed.

Table 1.

Impact of the Crisis in 2010

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Source: JEA team calculations.

Projections prepared in March 2010.

Pre-crisis projection includes planned imports related to new energy sector projects which were to be financed by external borrowing.

In summary, the April and June shocks are expected to lead to a significant contraction in the economy compared to the pre-crisis growth estimate, and to a significant loss in income per head. Foreign investment could slow down substantially. Reconstruction and development needs are expected to extend into next year, when the economy is expected to begin recovering. The fiscal balance will expand significantly and would require external financing in the amount of $335 million in 2010 and $225 million in 2011. Additional non-governmental support would also be critical in the reconstruction, recovery and rehabilitation effort.

The Economic Impact

In the first quarter of 2010 the Kyrgyz economy had begun to recover from the global economic crisis and its regional spillovers. The economy grew by more than 16 percent in the January- March period (year-on-year basis), following a sharp slowdown in 2009 when growth fell to 2.3 percent from 8.4 percent a year earlier. This recovery was largely driven by strong gold ore yield and a pickup in industrial production and construction. With an economic turnaround in Russia and Kazakhstan, the country was beginning to see a recovery in external demand, through higher exports (50 percent growth in the first quarter, year-on-year), and a boost to consumption, as remittances began recovering (31 percent growth in the first quarter, year-on-year).

The events of April and June 2010 will result in a contraction in economic activity this year, by 3½ percent, (4½ percent in non-gold terms), compared to the pre-April projection of 4½ percent economic growth. The disruption to agriculture, trade and other services caused by the closure of international borders and internal unrest has been serious. Agricultural activity is expected to decline by 12 percent in 2010 as security problems and lack of inputs have led to a disruption in agricultural work and trading in the south—which accounts for one-quarter of national output. A majority of large corporates (with the exception of Kumtor) have postponed their original investment plans and the general uncertainty following the turmoil and the transitory nature of the current government is likely to affect investor confidence. On the positive side, higher-than-normal water reservoir levels should ease winter energy shortages and ease constraints on economic activity seen in the recent past.

Table 2.

Kyrgyz Republic: Summary Economic Indicators, 2007–11

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Source: Kyrgyz authorities; and Fund staff estimates and projections

Inflation is expected to reach 6.6 percent by end 2010. The significant downward revision to 2010 economic growth and the reversal in electricity tariffs in April should result in lowering inflation from the earlier end-2010 estimate of 13 percent.4 However, the imposition of oil export duty by Russia in April 2010—which would likely raise oil products prices in the country by about 30 percent—would add to headline inflation.5

The external current account is expected to swing to a deficit of 6.6 percent in 2010 from a 4 percent surplus in 2009, largely because of deterioration of trade and services balances. The heightened uncertainty from the turmoil in the south, and border closures are expected to offset trade and services. Despite an economic recovery in Russia and Kazakhstan, the Kyrgyz Republic would not be able to fully benefit from the positive external environment; exports could be weak and summer tourism is expected to be badly affected. At the same time, the imposition of duty by Russia on oil exports to Kyrgyz Republic and Kumtor capital investment related imports are expected to result in a substantial increase in imports. The deterioration in the current account would be moderated by strong growth in worker remittances, which are showing signs of robust recovery (a near 30 percent increase in the January-May period, on a year-on-year basis). The import cover of international reserves would drop from 4.5 months in 2009 to 4.2 months in 2010, though if the anticipated external financing gap is not filled (see below) then this cover could drop to 3½ months, a low level given the high trade openness of the Kyrgyz economy and its vulnerability to external shocks.

Table 3.

Kyrgyz Republic: Summary Balance of Payments, 2008–11

(In millions of U.S. dollars, unless otherwise indicated)

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Source: Kyrgyz authorities; and Fund staff estimates and projections.

The recent crisis will have a muted impact on tax revenues which are expected to suffer moderately (in relation to GDP) as the economy slows. Tax revenues had been recovering well prior to the onset of the crisis, largely driven by the higher-than-expected output at Kumtor and a pickup in economic activity. Despite serious physical damage to tax offices in the April and June events, revenue capacity has been largely preserved and the authorities have generally resisted using tax incentives as a means to compensate those affected by the crisis (though there have been some incentives for tax payers in the south).6 Overall, institutional capacity in the State Tax and Customs Services has not been adversely affected by the turmoil. Given the less than proportionate share of the south in tax revenues—largely because of the preponderance of agriculture there—tax revenue decline from the events in Osh and Jalalabad is expected to be mild. Tax revenue performance in the April-June period has been volatile but broadly satisfactory. For the remainder of the year, however, the economic slowdown is expected have some effect on tax revenues, particularly on VAT. Moreover, the decision by the interim government to annul the imposition of VAT and retail tax on energy payments will also put downward pressure on revenues. Some exceptional non-tax revenues—cash confiscated from those linked to the previous regime—could provide relief, though its availability would depend on legal settlement.

Table 4.

Kyrgyz Republic: General Government Budget, 2008–11

(In percent of GDP)

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Source: Kyrgyz authorities; and Fund staff estimates.

The crisis will add significantly to spending pressures. Costs associated with rehabilitation, reconstruction and resettlement as well as repair and rehabilitation of government buildings and offices, compensation for victims of the crisis, security related spending and elections are expected to be significant. The dissolution of parliament and special administrative structures under the previous government—the Central Agency for Development, Investments and Innovation (CADII)—has yielded wage savings. However, expenditure increases announced by the previous government to compensate for the large electricity tariff increase in January have not been reversed following the reversal of the tariff increase. Of these, pensions are expected to rise significantly (by about 30 percent) and are likely to have a significant medium term impact. Bank recapitalization costs could also be significant as well (see below).

Table 5.

Kyrgyz Republic: Major Crisis Related Expenditure Measures in the 2010 Revised Budget

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Source: Kyrgyz authorities; and Fund staff estimates.

Capital spending is also expected to rise substantially to respond to the rehabilitation and reconstruction needs. About $100 million (2.2 percent of GDP) is expected to be spent on domestically financed infrastructure, housing and other items in 2010. But these needs are expected to extend till 2012, with additional demand on budgetary resources amounting to another $350 million in the 2011-12 period.

Infrastructure development is largely dependent on externally financed public investment projects (PIPs). The revised 2010 PIP has been adjusted downward by KGS 1.13 billion (compared to the authorities’ earlier estimates) as donors re-estimated their projected disbursements for 2010 mainly due to revisions in administrative and procurement issues. Recent surges in construction input prices are also expected to severely affect the investment estimates in the medium term, and this is particularly important for the transport sector that comprises 60 per cent of the country's investment portfolio. On average, project costs are expected to increase by 40 per cent based on Ministry of Transport and Communication estimates. Supplementary financing may be required to ensure investment continuity and completion of critical road network for goods movement.

Half of the reduction in PIP is related to two transport projects, and the rest is largely in the energy and agriculture sectors, which have all been deferred to 2011. In addition, a major road rehabilitation project (Bishkek-Torugart) to be financed by the Arab coordination group worth $65 million between 2011 and 2015 might be delayed due to difficulties in arranging an agreement between the investor and the interim government. The impact of the April 2010 events on PIP investments has also resulted in delays of approximately 1-2 months in implementation of some existing projects.

External support for the budget would be critical in allowing the authorities to overcome the consequences of the crisis and sustain essential public expenditures throughout 2010. The 2010 fiscal deficit (primary, excluding grants) is expected to worsen to 17½ percent from about 10 percent projected earlier, and 8.2 percent observed in 2009. The high one-off increase in gold related tax revenue and post crisis aid from Russia has provided a cushion for the budget in the first half of the year. While the government’s own resources—largely comprising saved bilateral assistance received from Russia in 2009—are sizeable and could be utilized to bridge any delays in donor financing, they will be insufficient to cover the 2010 budget entirely. The external financing budget gap would be $335 million with the greatest need in Q4, 2010. An amount of about $105 million has so far been identified from various donors7 and is expected to be mobilized in the last quarter of the year. In case of a significant shortfall in financing, the authorities intend to adjust spending while preserving essential and priority expenditures. In light of debt sustainability implications of the large increase in deficit, external financing with high degree of concessionality would be essential.

JEA estimates suggest that if the remaining external financing need for budget in the order of $230 million, were filled then recourse to domestic sources would be manageable. The authorities would utilize about $187 million from own resources (about 4 percent of GDP).8 Two modalities for providing external support exist: (i) transfers to the budget following the practice of the IFIs or (ii) financing of specific budgetary expenditures, perhaps in the social sectors or in reconstruction, against evidence of the execution of these expenditures.

The authorities’ monetary and exchange rate policies would support the post-crisis economic recovery while neutralizing the effects of large fiscal expansion. Notwithstanding the economic contraction, the unprecedented fiscal expansion expected in 2010 could result in large increase in monetary aggregates which in turn could be inflationary. The central bank plans to mop up any excess liquidity through domestic sterilization. While credit to the private sector contracted till Q3 2009, it rebounded briefly before declining again following the crisis. Credit demand is expected to remain sluggish largely because of the weak economy, while credit supply will be constrained if banking problems remain unresolved. With continued political and security uncertainty and a fiscal expansion, exchange market pressures are likely to mount.

The macroeconomic and fiscal outlook for 2010 is subject to a number of risks.

  • Economic growth is subject to more than usual uncertainty. It depends in large part on political uncertainties during the transition to an elected government and the maintenance of security and law and order, particularly in the south.

  • Agriculture which has been particularly affected by the events in the south remains vulnerable, and continued lack of access to local markets could affect the supply of produce in the country. This could also have implications for inflation.

  • The confidence of investors has been badly shaken by the events in the south and could deteriorate further if the situation there worsens.

  • Banking sector uncertainties also add to the risks to the economic outlook. Systemic problems could adversely affect intermediation and the payment system.

  • In a related manner, while the costs of capitalization of a major bank have been included in the fiscal accounts, any further need to recapitalize troubled banks could result in a substantially higher.

Macroeconomic outlook, risks and issues for 2011

The economy is expected to recover strongly, reaching 7 percent growth in 2011. The recovery would be made possible by a normalization of the security environment, continued reconstruction activity, an improvement in investor confidence and full resumption of trade and services flows. Resurgence in agricultural activity should also provide a major boost to economic activity. Continued growth pickup in large partner countries—Russia and Kazakhstan—should spur external demand for the Kyrgyz Republic, allowing an increase in exports and yielding a sustained recovery in consumption through higher remittance flows.

Considerable fiscal challenges would remain. The fiscal expansion initiated in 2009, and the further massive crisis related loosening in 2010, has been made possible, in part, by the space provided by improvement in debt ratios leading up to the crisis in 2009, and the timely availability of external financing. With growth expected to recover strongly in 2011, the authorities see the need to revert the fiscal deficit to a more sustainable level, and thus a substantial upfront adjustment in 2011. While some of the recent expenditure increases have been for wages and pensions, which would be difficult to moderate, the 2010 crisis has also resulted in an increase in one-off expenditures for rehabilitation, resettlement, reconstruction and social protection; these could be unwound quickly as the situation improves next year. However it is also clear that a significant amount of reconstruction would need to continue till 2012, resulting in high capital expenditures. The authorities also see a part of the fiscal consolidation coming from raising revenues through policy and administrative measures. In addition to the sizable fiscal consolidation in 2011, and the use of own saved resources, there would be significant external financing need.

Downside risks to the 2011 outlook remain.

  • A continuation of an adverse security environment and any political uncertainty following the October elections could add to downside risks for 2011. Uncertainties in the banking system are also likely to raise questions about financial stability and credit growth. Depositor confidence, which has held up quite well to date, may be affected.

  • The breakdown in intra-regional energy sharing agreements, which had come to the fore late in 2009, is expected to persist. The seasonality and regional dimension of the energy sharing crisis would mean that energy constraints could become binding, and pose a constraint on growth in 2011.

  • The coming into effect of the Russia-Kazakhstan-Belarus customs union could create additional uncertainty as, in the likely event that the Kyrgyz Republic joins the union, it would lose the comparative advantage it currently enjoys in shuttle trade from its low tariffs.9 The imposition of export duty on oil products by Russia is also likely to adversely affect Kyrgyz re-exports of such products.

Poverty and the Social Impact

The extent of the poverty and social impacts of the April and June events are still emerging. However, what is clear is that the impacts will be nationwide, and the effect on both the economy and the society will be profound and long term.

Multiple persistent societal stress points fed into the recent violence: poor governance (an ineffective administrative and security system), continuing poverty and widening socio-economic disparities. Factors in the south which further contributed to instability include competition over productive resources (agricultural land, irrigation water and pasture, commercial property and assets) harsh border regimes that stifle commerce and movement of people while feeding corruption, the role of the south as a transit area for the smuggling of drugs, widespread unemployment and under-employment particularly of youth. The problem of marginalized youth is further compounded by a neglect of children whose parents had migrated, and a deteriorating education system that does not equip a large part of youth for productive employment in the market economy.

The poverty and social impacts of the events will not be fully reversed by the reconstruction of infrastructure or the payment of compensation for lost livelihoods. Careful programming will be needed to address both underlying structural causes of poverty in these areas and the “new” poverty that has resulted from the recent events.

The strong rate of economic growth experienced over the 2003-08 period led to a sharp fall in poverty: during this period, overall poverty fell from 64 per cent to 32 per cent, and extreme poverty from 28 per cent to 6 per cent. A growth in worker remittances and a rise in real terms in pensions also played a significant role. Progress in fighting poverty is likely to have slowed in 2009 as growth decelerated in light of the international economic crisis, but a significant deterioration in poverty in 2010 is all but certain given the economic contraction projected for that year.

Quantitative estimates of the impact on poverty of the April events and the economic contraction in 2010 are not possible at this stage, but several qualitative statements can be made. First, the reversal in April 2010 of the energy tariff increases that came into effect at the beginning of the year will bolster household incomes, especially of the urban poor, with the effect being much more muted for the rural poor who though dependent on electricity are not beneficiaries of the district heating and hot water systems. The rise in tariffs was accompanied by increases in public sector wages, pensions, social allowances for privileged groups, and targeted cash transfers for the poor – as mentioned above, these have not been reversed.

Second, some rise in poverty, even if temporary, can be expected from the disruptions to economic activity from the April events. The closure of the border with Kazakhstan for six weeks and the persistent closure of the Uzbek border have affected border trade carried out by communities with a high incidence of poverty. Farming was disrupted by delays in supply of inputs, especially during the sowing season in the north of the country, as well as interruptions in the supply of credit.

Third, physical damage to businesses in certain cities and business closures will have an effect on employment. Moreover, the sectors that will bear the brunt of the disruptions and the growth slowdown, construction and tourism, are labor-intensive sectors. The tourism sector has been badly hit by the April and June events and the perception of lack of security. In particular, tourism has all but dried up in the important region of Issykul, with consequent highly significant losses in income and employment. However, reconstruction activities if rapidly undertaken will generate jobs that will dampen the poverty-worsening effects of the recent events.

Impact of the June Events

A significant negative social impact of the May-June conflict is internal displacement (see the next section) leading to a disconnection of the needy from the formal government network of assistance. Many people are believed or reported to have lost their identity documents that would prove their eligibility for various benefits or services. Many previously registered beneficiaries are missing and it would take the local authorities perhaps several months to find out the status of their former clients. As of mid-July, the Government is issuing temporary identification documents to all in need (valid until the end of 2010), which are supposed to be accepted by local social offices, schools and healthcare institutions, but are not valid for banking transactions. But the displaced may not be aware of this activity and of their eligibility for benefits and services in the place they are currently residing. Other returned populations may feel too insecure or mistrustful of government to attempt to register for such benefits. It is expected that this disruption may bring a temporary poverty increase, which is not likely to be reflected by the official statistics.

On return, many people have been unable to settle back into their homes or resume work: their houses are damaged, looting has been widespread, and fear is pervasive. Cases of sexual and gender-based violence have been reported. The perceived and actual violence perpetrated during the crisis, as well as reprisals, recriminations and intimidations thereafter have eroded relationships and trust between different ethnic groups.

Livelihoods have been decimated for numerous households in the directly affected areas. These impacts were varied, including affected peoples fleeing their home areas and therefore being unable to work, businesses being destroyed, farmers unable to have access to fields and markets, and workers and traders unable to travel to their job sites. Weeks after the violence itself, safety and security concerns are such that many affected people are afraid or unable to leave their homes, let alone travel to work. Others are unable to access the inputs and supplies on which their livelihoods depend, including tradable goods, water for irrigation of fields, etc. Still others have no livelihood to speak of since their shops, market stalls or other businesses have been destroyed.

In addition to the need to support affected populations to restore or re-access their livelihoods, the crisis also drew attention to the economic vulnerabilities of other populations such as those families affected by recent natural disasters, as well as the economic disparities, such as pervasive youth unemployment, which contributed to the events themselves and would therefore also need to be addressed by any livelihood recovery support provided by the government and its development partners.

Consultations with IDPs in Osh City

Consultations with returned refugees and IDPs in Osh highlighted the psychosocial impacts of the June conflict, including pervasive bewilderment regarding the reasons for the violence that had left whole families and communities destitute, feelings of abandonment due to lack of information from and presence of authorities, and intense fear and insecurity.10 The returnees also reported persistent and ongoing discrimination and harassment from authorities including the security forces since the end of outright conflict. This discrimination and harassment includes actions such as the continuing detainment of young Uzbek men, confiscation of identity documentation (e.g passports) by the police, and refusal by banks to provide services such as withdrawals from personal bank accounts of remittances from relatives working abroad. 11

An Uzbek community in Osh reported feeling no resentment towards their Kyrgyz neighbors during the crisis itself, and being able to separate these neighbors from those taking part in the violence, only to feel growing resentment following the crisis as stories of Uzbek government workers being retrenched or intimidated into vacating their jobs in state hospitals and other government services have circulated.

Some of the most common sentiments heard during the consultations include:

  • It is not our neighbors who did this

  • I want to live here in my home or I will die

  • We are afraid to leave our compounds

  • How can the government truly not know what is happening to us here

  • We no longer trust anyone in government to protect us

The Kyrgyz consulted felt that the young had been manipulated given the rumors and disinformation. There were fears of revenge attacks and concern at the fate of Kyrgyz policemen who had disappeared during the violence. Many Kyrgyz expressed a reluctance to travel to work or the markets through Uzbek neighborhoods. Others reiterated that the multi-ethnic apartment complexes had avoided the violence in June. Several were of the view that property damaged by recent mud slides, flash floods and earthquakes be repaired as well to ensure that all citizens benefit from the reconstruction process.

The impact of the most recent events on poverty in the southern oblasts—Osh, Jalalabad, and Batken—may be particularly severe such that both the depth and the extent of poverty increases. The loss of life and property is not only a human tragedy but will also have long term personal and economic consequences that will not be easily rectified through short-term assistance. For example, families may have lost a breadwinner or a childcare provider which could result in altering the economic opportunities for all members. In addition, households may have suffered the loss of livelihood if their business or place of employment was destroyed or if they were dependent upon the agriculture sector. Destruction of businesses by the outbreak of civil unrest in the South, subsequent outflow of refugees into Uzbekistan and waves of internal displacement of people have destroyed jobs in small service enterprises and in agriculture. Due to high informality in these sectors it is unlikely that the victims would be able to receive at least temporary unemployment benefits: most of them have never contributed to the Employment Fund, which makes them ineligible for assistance from this source.

Social safety net system

An important concern of the current government is that the existing social safety net system turned out to be too inflexible and not powerful enough to respond to the April and May-June crises. The risk of reversing the recent reforms of in-kind categorical benefits exists as there are no resources in place to build a responsive system that can address short- and longer-term poverty, including poverty upsurges, and link the needy to the labor markets including temporary work arrangements. Strengthening administration and inter-agency coordination of the safety nets is also seen as one of the important measures to ensure that the social safety nets are ready to respond promptly to a variety of needs and to follow their clientele in a way that addresses the entire complex of needs from temporary shelters to income support and non-disruptive service provision.

These impacts will require both immediate and longer term interventions. Short term support is essential to avoid household adoption of coping strategies that further undermine longer term welfare. These coping strategies, commonplace in situations where poorer households have experienced severe economic shocks, include the accumulation of unsustainable debt, the sale of productive assets, and foregone investment in human capital if education is interrupted or health treatment postponed because of non-affordability. Economic hardship will serve as a daily reminder to households of the violence that has taken place and, by intensifying resentments, is likely to make the reconciliation work that will be absolutely fundamental to longer term growth in these areas less successful. In this particular context, involvement in criminal activities may become an attractive option for groups that are unable to find other ways of providing for basic needs.

As noted, the overall lack of security has had a large impact on the tourism sector which is a major source of revenue for the government, profit for the enterprises, and income and employment for the population particularly in the north of the country. Accounting for 5 percent of GDP in 2009, tourism industry is one of the most affected sectors due to the recent crisis and the retail trade associated with tourism is expected to have declined sharply this year. There is anecdotal evidence that 80 percent of tourist bookings for the summer of 2010 have been cancelled. This will likely have significant impact on income and poverty particularly in the Issyk-Kul region.

Chapter III: The Humanitarian Impact and the Flash Appeal

The magnitude of the violence that affected southern Kyrgyzstan in June caused substantial physical damage and displacement of the population. The events highlighted the weakness of the interim government’s grip on the situation in the south and to a certain extent even in other parts of the country, and pose a serious threat to the legitimacy of the political process envisaged to restore democratic governance in Kyrgyzstan. Because tensions have taken on a strong ethnic dimension, the impact is likely to be long-lasting. In addition to the significant short-term humanitarian response that is ongoing, there is also a need for longer term interventions to support physical reconstruction and economic recovery and to build reconciliation and trust between communities directly affected by the violence, between these and other communities throughout the country, and between the citizenry and the state.

Description of the Events

On June 10, a wave of deadly violence began in the city of Osh (pre-crisis population: 258,000) in southern Kyrgyzstan, provoking a sharp rise in tension between the city’s ethnic Uzbek and Kyrgyz communities. The violence then continued in the city, and spread to the surrounding district of Kara Suu in Osh province and the neighboring town of Jalalabad as well as several other districts of Jalalabad Province. The areas affected have also seen widespread arson, looting of state, commercial and private property; and schools, hospitals, and public utilities have suffered significant damage. The pattern of destruction, damage, and looting indicate a targeted act based on detailed information that enabled selective destruction of Uzbek homes and businesses often leaving neighboring properties belonging to Kyrgyz and other nationalities intact.

Kyrgyzstan’s law enforcement and armed forces—still struggling to recover after April’s events—have been caught unprepared despite warning signs, and were not able to prevent the violence. The death toll is likely 2000, with over 2,500 people injured. The humanitarian consequences of the conflict are acute and pressing for 1.1 million people (over a fifth of Kyrgyzstan’s population). An estimated 375,000 people fled the conflict in Osh and Jalalabad, about 75,000 of whom sought refuge in neighboring Uzbekistan. Unexpectedly and apparently caused by a combination by both pull and push factors, the refugees began returning back to southern Kyrgyzstan in late June. Most refugees were back before the referendum on an interim constitution was held on June 27, 2010. Recent reports indicate that most of the displaced have returned to their homes, with many of the rest staying with host families. In addition to those displaced, the areas affected by the conflict are home to around 765,000 people, who were not displaced. Thus, 56percent of the population in the two Oblasts lives in conflict affected areas.

At this point, the security situation in southern Kyrgyzstan remains tense, and feelings of abandonment due to lack of information from and presence by the authorities persist, along with intense fear and insecurity. The returnees also report persistent discrimination and harassment from authorities including the security forces.

The events in the south have disrupted the post-April normalization process. They dealt a blow to the moral authority and legitimacy of the interim government, reducing the political space at its disposal for implementing much-needed market and governance reforms. While the politics and policies of crisis prevention, crisis management, and then post-crisis recovery will be pressing for some time they should not crowd out longer-term state-building, reform, and development initiatives. Even now that the majority of IDPs have returned to their homes, it will take many years of recovery and reconciliation efforts to heal the wounds.

The Flash Appeal

The UN Flash Appeal launched on June 18, which requested $71.1 million for immediate emergency assistance, was revised on July 19 to $96.4 million to meet the needs of around 1.2 million people living in the areas affected by violent conflict of June.12 The goal of the revised Flash Appeal is to address immediate humanitarian needs, strengthening the preparedness to respond to potential needs, and assist maintaining and enhancing protection for affected communities and individuals. The revised Flash Appeal is based on the following strategic objectives:

  • Provide humanitarian assistance to those in need taking into account the need for winter preparedness;

  • Continue to advocate for the protection of civilians and the respect for human rights with special programmatic focus on vulnerable groups;

  • Support essential health and social services, and help communities in rebuilding livelihoods, local economy, and trust among the affected communities;

  • Capitalize on the strong international humanitarian presence to enhance response capacity and preparedness to respond to potential humanitarian needs.

The revised Flash Appeal identifies the lack of protection of internally displaced, returnees, and other vulnerable groups as the overarching humanitarian concern as the affected communities still live in fear because of continuing threats, intimidation, arbitrary arrests, and lack of legal protection. This protection challenge needs to be overcome in order to effectively meet the needs of the affected population regarding shelter, food, water and sanitation, health care and education. The appearance of a return to normalcy is fragile, and there is a significant risk of deterioration.

Costs/needs related to the refugees and IDPs

With the return of relative stability, rapid cluster assessments were completed and the results have constituted the basis for the programmatic revision of the original Flash Appeal:

  • Early recovery/community restoration ($10.7 million)

  • Education ($5.2 million)

  • Food security and agriculture ($31.7 million)

  • Health ($5.6 million)

  • Protection (ranging from $4.4 to $11.1 million depending on priority levels)

  • Shelter ($29.8 million)

  • Water and sanitation ($3.5 million)

  • Coordination Support services, telecommunications, and logistics ($3.3 million).

The Joint Economic Assessment and the Flash Appeal

To ensure consistency between the humanitarian and the transitional and development oriented actions, promoting the necessary continuum from humanitarian response to development, the JEA and the Flash Appeal have been coordinated to the extent possible.13 To this end, the revision of the Flash Appeal and the JEA exercise have been conducted in parallel.

However, these two instruments have different scopes and foci. Whereas the Flash Appeal focuses on the immediate humanitarian needs of those affected directly and indirectly by the conflict, the JEA examines the recovery needs of those directly and indirectly affected by the conflict, in addition to the macro-economic impact and infrastructure damages and losses. As such, the JEA sets the basis for the mainstreaming of early recovery activities in all sectors, builds on the foundations of the humanitarian response, and determines the sectoral requirements and priorities from early recovery to full recovery and provides links to the long term development objectives. Therefore, in terms of target populations, the JEA has a broader coverage, including other vulnerable groups14. Both instruments intersect thematically in the social sector.

Chapter IV: The Strategy for Reconciliation, Recovery And Reconstruction

Chapters II and III sketched the immediate impact of the political and social disturbances on the economy and on the social sectors. The government has responded to the new economic shocks by attempting to strengthen confidence in the private sector and by protecting essential public spending. Through some fiscal relaxation, the authorities intend to provide a stimulus to economic activity and employment. Similarly, outlays on essential repairs and rehabilitation to infrastructure and the capital stock are intended to strengthen the supply base of the economy and in particular improve the reliability in energy supplies that is vital to continued economic growth and maintenance of social peace.

The government responded to the June events by establishing a Commission for the Assessment of Damages to prepare for comprehensive reconciliation, recovery and reconstruction in the south. The program for recovery centers on the restoration of livelihoods and the reconstruction of housing and of commercial enterprises and markets will provide critical support to the economy and create jobs. The work of the Commission will be based on a detailed damage assessment being carried out by a Directorate on Reconstruction and Development of Osh and Jalal-Abad, (headed by a vice-prime minister) that reports to the Commission.

The over-arching need is to help the Kyrgyz Republic attain stability and social cohesion as a necessary foundation for its economic growth and social development trajectory. This would not only require addressing the immediate effects of the conflict on economy, society and infrastructure, but undertaking a range of activities including a reformed impartial security regime capable of protecting all citizens along with measures that build reconciliation among communities and between these and the state. It also requires strengthening the capital base through public and donor-funded investments to provide a bridge to the period when full confidence returns and private investment flows are resumed. It would also create room in the budget for higher social spending.

The risks of an inadequate response by government and external partners could be serious. An early re-assertion of macro-economic stability is a precondition for a return of confidence and for the avoidance of a further fall in the living standards of the general population. Social tensions need to be avoided by rapid and comprehensive reconstruction and reconciliation in the south, measures to protect essential public services, the conduct of a clean electoral process that is open to all shades of political opinion, inclusion of the newly vulnerable in the social safety nets and assistance for the productive reinsertion of these groups within the society, and ensuring conditions for employment growth. Inadequate attention to infrastructure and energy needs as well as agriculture would cripple the capital stock and delay the return to growth.

Supporting growth

The strategy for recovery and sustained growth is based on the recognition that the shocks to business confidence currently being experienced as a result of the conflict will lead to falling private sector investment and, thus, to a sharp decline in the rate of economic growth. Falling domestic demand will affect fiscal revenues, reducing the capacity of the state to undertake vital expenditures, including additional outlays on social spending. The authorities see the need to undertake public expenditures as a bridge to the period when private confidence is substantially restored through

  • a combination of external financing for the budget and some counter-cyclical fiscal policy, implying a relaxation of the original fiscal deficit targets, so as to finance additional current expenditures, largely associated with the events;

  • external support for essential reconstruction and rehabilitation needs to be undertaken largely by the public sector to substitute for the private demand shortfalls, and to safeguard production and employment; and

  • external support for key priorities in the revival of private sector growth and financial support for the banking sector.

Protecting essential public spending

In view of the fiscal pressures, the authorities have taken prompt action to define a category of public expenditures – outlays on wages and salaries, social assistance, pensions, utilities, and procurement of medication and food – as protected expenditures. These were accorded priority and indeed have been paid in full. The government built on its experience from the Tulip Revolution in 2005 and managed to secure essential data required to continue the disbursements uninterruptedly. Expenditures for non-protected items -- capital repairs, purchases of equipment and machinery – were temporarily discontinued, but will be made only as resources permit.

The authorities have, therefore, shown the capacity to manage expenditure priorities with flexibility and skill.

Addressing the needs of internally displaced persons and the vulnerable

The government is at the stage of settling its strategy towards the internally displaced and the vulnerable, based on the findings of its Commission for Assessment of Damages and advice being provided by international experts in the field. This section of the chapter describes the broad approaches and principles to be followed in this difficult area where an integrated approach to the needs of the affected population, sensitivity in allowing the population voice and choices, and equity of treatment across groups are of critical importance.

With the return of those who became refugees in Uzbekistan as well as most of those internally displaced to their former homes, the overall situation has within a short time-span evolved from one of exclusively humanitarian concern to one that requires interventions to support early and longer term recovery. Some activities need to be initiated immediately such as improvement of the overall security situation where the fears of both the Uzbek and Kyrgyz are addressed with sensitivity, provision of shelter by the end of October (i.e., before the onset of winter) along with restoration of water, electricity, and gas services, restoration of identity and property documentation, and support for the enhancement of the capacity of the Directorate for Rebuilding and Reconstruction of Osh and Jalalabad. Other short-term activities that need to be initiated as part of an early recovery effort during the remainder of 2010 will need to continue into the medium and even longer term to yield their intended outcomes. These include measures to support the recovery of businesses and agriculture, rehabilitate basic and vocational education, provide cash transfers for vulnerable groups, generate employment through labor-intensive public works, initiate inter-community reconciliation, and establish psycho-social support for victims of violence.15

Cross-Cutting Principles for Effective Recovery Activities

In light of the underlying social, political and governance issues which played a role in both the April and June events, it is clear that reconstruction and recovery processes must do more than address the immediate damages in affected areas. To avoid further social cleavages and triggers to violence, the reconstruction and recovery efforts of the interim government and its development partners must be framed within a series of cross-cutting principles designed to address the drivers of violence and instability and to promote sustainable peace and security. These principles are of equal relevance to multiple sectors (housing, infrastructure, agriculture, finance, livelihoods etc.), time horizons (immediate term, short-term, medium-term and longer-term) and stages (design, implementation, management, monitoring, exit etc.) which will be involved in the recovery process.

Equity. Recovery and reconciliation must focus on equity and avoid a perception of unequal attention being given to particular ethnic groups or regions or types of beneficiaries.

National Inclusion. Recovery and reconciliation must be national-level goals to which citizens throughout the country commit and in which they participate. The April and June events had direct and indirect impacts beyond those areas immediately affected by the conflict and weakened center-periphery relations throughout the country. State legitimacy cannot therefore be achieved without including the whole nation in building peace and stability.

Vulnerability Targeting. Reducing vulnerability, and not entitlement, should be the focus of the national response, in order to both help affected populations recover and mitigate against future violence. Patterns of marginalization and exclusion in different communities should be analyzed, and all vulnerable populations, whether IDPs, youth, households displaced by past natural disasters, female-headed households etc. should benefit from the recovery effort.

Transparency. Given the role that information and misinformation played in the events, and the ongoing propaganda campaigns, the recovery response should prioritize clear and regular communication with beneficiaries and the nation at large. Information sharing should include details of available support programs, eligibility and prioritization criteria, levels and duration of available support, etc. Scope for feedback from beneficiaries and non-beneficiaries (e.g. grievance mechanisms) should be built into all recovery activities.

Ownership. The active participation of affected communities and local leaders in the design and implementation of recovery efforts makes for more effective programming as well as strengthens the resilience of communities to future violence. Prioritizing beneficiary ownership can also help communities devastated by loss and displacement to regain a sense of identity and worth.

Peace Dividend. While different elements of the recovery effort will proceed along different timelines, identifying quick wins which can establish hope and trust and increase confidence in the state and the wider peace and recovery process will help to demonstrate a peace dividend to conflict-affected populations and promote stability.

Social Analysis. Recovery needs and expectations, even when linked to hardware (eg. buildings or finance), are inherently personal and linked to beneficiary’s individual and community experiences of conflict and expectations for the future. A good understanding of community dynamics, built on solid social analysis, is required to adequately develop, target, monitor and adapt programming.

Phasing. There is a tendency in recovery efforts to try to do too much at once, assuming that all required actions are priorities. Simplicity and realism are essential, to identify true priorities and avoid overwhelming the agencies implementing, coordinating and funding the recovery effort. Moreover, to avoid front-loading the immediate post-crisis period to the detriment of medium- and longer- term reconciliation and peace-building activities, it is essential to recognize that a comprehensive response requires immediate, short-term, medium-term and longer-term approaches.

Coordination. Close coordination amongst the stakeholders involved in the recovery process, whether beneficiary groups, implementing agencies, oversight bodies or the state is essential at all stages of the recovery process. Capacity building, if required, to ensure that the relevant state agency is able to effectively lead coordination efforts, including collecting data on the results of the recovery effort, will be an important immediate-term investment.

Exit Strategy. The exit strategy of the recovery effort should be clear from the beginning to avoid creating dependencies, distorting local markets etc. Doing this effectively requires a well-planned and ongoing communications strategy, including ensuring that beneficiaries are aware of the sources of support to which they can turn for assistance following the close of recovery programming. Sufficient capacity must also be built in the agencies to which ongoing activities, and the monitoring and evaluation of the impacts closed activities, will be transitioned

Core activities to support early recovery need to be coordinated between the government, the UN, NGOs, and other actors. Equally important is that there are robust monitoring arrangements to track reconstruction and recovery investments, which ensure transparency through involvement of local communities. Along with accelerated preparation, project design need to build in flexibility to enable responses to changing circumstances and opportunities. They must also build on best practice regarding procurement and financial management arrangements in post-conflict situations where timely delivery of projects benefits have urgency, and project management and implementing agencies may have limited experience on procurement and financial management procedures.

It is also critical that both the early recovery and medium to longer term assistance now being planned by the government will be governed by impartiality, needs based programming, and the humanitarian principles, and will not be perceived as favoring one ethnic group (the Uzbeks) over other groups, who may also be exposed to hardship and deprivation, and who may in the past have been subjected to disasters and displacement without receiving the assistance that is now being provided after the June events. For example, Kyrgyzstan has over the last several years been affected by a series of natural disasters including earthquakes and floods. Most recently, flash floods hit southern Kyrgyzstan in early June 2010 with over 70 villages affected and infrastructure seriously damaged. If the assistance to those affected by the current crisis is not part of a broader recovery and development effort also including those affected by these past events, it may contribute to aggravating inter-group tensions that could fuel future violence. The challenge of a broader recovery and development effort represents an opportunity for the state to demonstrate that it can deliver services equitably to its citizens irrespective of ethnic background, which in turn would contribute to fostering reconciliation, building the legitimacy of the state, and contributing to the stability necessary for sustained economic growth.

The violence and its aftermath revealed the weakness of the state and its lack of control over the security apparatus and the local administration. A precondition for stability and recovery is therefore the reestablishment of an impartial security regime capable of protecting all citizens.

Strengthening governance

The interim government has taken a number of steps to improve governance, create the conditions for higher standards in public accountability, and enforce assured control over budget expenditures and management of public assets.

First, the impact of the new constitution on the governance of the country would be revolutionary. A cabinet system of government headed by a prime minister answerable to parliament and with the powers of the president greatly attenuated would be an innovation for the Kyrgyz Republic. This constitutional change has been motivated by a widely-felt need to disperse executive power and bolster accountability to parliament. It is also driven by the need to widen consultation and debate within parliament, engage with the public at large, and allow a range of opinions within government to be expressed and evaluated before executive decisions are taken. If successful, such governance changes would prevent the concentration and centralization of power, lack of accountability, corruption and nepotism seen during the tenures of the last two presidents.

Clearly, institutions have to be built and governance practices re-engineered in order to make a parliamentary democracy work. Both parliament and the government would need strengthening, thereby increasing the burden on the civil service for analysis and policy advice. Parliament and its committees, the cabinet of ministers and cabinet committees, and civil servants would require technical assistance to develop modern practices. Donors, particularly those already engaged in government and civil service reforms, would be expected to play a major part in the reforms. It would be vital to strengthen local governance as well. The responsibilities of local self-governing bodies were rolled back in recent years and opportunities now exist to strengthen citizen’s participation in local planning and decision making. Investment in local governance is particularly important given the local elections planned for 2011.

Second, the interim government has placed importance on reforms in public financial management. Specifically, improvements in the Treasury system within the ministry of finance are being implemented and the coverage of the budget has been extended to include all investment spending.

Third, the abolition of the Central Agency for Development, Investments and Innovations will greatly assist in raising governance standards. This body represented an effort by the former president to tightly centralize powers within his administration and to concentrate all policy and investment decisions in one body led by his son. Such powers will now revert to ministries and decisions will be taken with due debate and accountability. Indeed, the ministerial system of government and reinforced accountability mechanisms to be exercised by parliament are key reforms to be found in the new constitution.

Fourth, the management of public investments will be rules based, transparent and fully reflected in the budget. The interim government is taking steps to liquidate the main body that managed public investments, the Development Fund, which was earlier controlled by the president with little accountability, and to deposit its holdings in the central bank. The Development Fund held investments amounting to $100 million (largely in a hydro power plant) and liquid assets of $191 million, out of the proceeds of a $300 million concessional credit from the Russian Federation to the state. A part of the liquid assets will be used to provide temporary bridging finance to the budget in the period prior to the flow of donor funds and will be safeguarded for high quality investment projects over the medium term.

Fifth, the authorities have reversed the privatizations of two electricity distribution companies and the telecommunications company that were carried out at end-2009 in violation of rules and procedures and which fell short of international good practices. Contrary to the law and regulations, these sales were not conducted with a pre-specified minimum reservation price and proper valuation of assets of the companies, and irregularities occurred in the acceptance of bid guarantees and documents. The reversal of privatizations in electricity distribution is proceeding with the agreement of the purchasing company and in telecommunications negotiations towards reaching an agreement are progressing.

Finally, the role of the State Property Commission in the management of public assets is being fortified so that proper standards can be applied in any transactions of state assets. The government is drafting revisions to the law of privatization and to supporting regulations to modernize practices. No transactions will take place before these are put into effect.

Risks to the strategy

The major source of internal risk arises from the continuation or even the intensification of social strife in the south of the country that led to violence and massive loss of life in mid-June. Social tensions are in part historic and ethnic-based with a mosaic of Kyrgyz, Tajik and Uzbek communities living both side by side and also within mono-ethnic enclaves in the Ferghana valley. Social tensions are partly political in nature: the ethnic Kyrgyz in the south have divided views about the change of government in April, whereas the ethnic Uzbek tend to support the interim government. Criminal activity, in part associated with the lucrative transport of illicit drugs through the south, and its links with governance structures together with the struggle over rent-seeking activities further complicate social relationships. A continuation of social tensions will damage economic activity and lead to higher reconstruction and recovery needs. It will also be a source of political instability and could poison the climate for the efficient absorption of donor financial support.

The external risks stem from the possibility of border closures with Kazakhstan and Uzbekistan; indeed, the border with Uzbekistan continues to be closed or open on occasion but with severe limitations. Such border closures have a severely disruptive effect on production and trade and lead to impoverishment of border communities. Keeping open the channels for trade flows as well as ensuring a smooth, uninterrupted operation of the common electricity grid that links these three countries are important contributors to stabilization.

Economic risks arise from weaker economic growth than projected, which would result in greater fiscal pressures and a possible threat to essential social expenditures. These risks would be compounded if the process of resolution of the large recently nationalized bank were to be protracted or if confidence in the sector itself were to weaken.

The governance environment remains weak; central government control over the south is sporadic, and even national-level institutions have been hollowed by years of centralized presidential rule by fiat. The run-up to the elections will distract political attention from governing with an attendant temptation to use public resources for electoral purposes.

Mitigating risks

These risks could be mitigated through a combination of decisive and sufficient external financing of the budget for 2010 and to the reconstruction and recovery program and by continued prudent fiscal management. The authorities have identified clear priorities in public spending and have successfully protected the essential. Budget support in the amounts assessed in this report, particularly if provided rapidly, would go a long way towards creating the conditions for social peace.

The authorities have shown flexibility in responding to the social tensions in the south by combining dialogue with law enforcement measures. But clearly they have been stretched to their capacity and beyond and international security intervention may be necessary. They have bolstered the pay of the security forces at fiscal cost. The neighbors can play a significant confidence-building role by announcing their determination to open borders or to keep them open and to ensure reliable transmission of electricity.

A comprehensive and well integrated approach to promoting social reconciliation and recovery based on the principles illustrated in the box above is important to mitigating the potentially dangerous social risks prevalent today. The implementation of measures over a period of years will have to be handled with sensitivity and skill.

A well formulated and determined post-events political process was launched by the interim government, with the rapid drafting of a constitution that entrenches democratic accountability and disperses political power and with the prompt scheduling of parliamentary elections in October 2010, to be followed by elections for a president (with greatly reduced powers) a year later. The country is well on the way to obtaining broad-based international political goodwill and support; this now has to be matched by significant international economic support. The impressive and rapid steps taken by authorities to improve governance and strengthen budget processes will help ensure that funds are spent for their intended purposes.

Chapter V: Critical Priorities In Social Reconciliation and Recovery

The need for social reconciliation and recovery in the Kyrgyz Republic is arguably the most pressing and significant in terms of establishing security and stability in the country in the short- to medium-term and thereby enabling ongoing recovery, development and growth. Chapter IV introduced the general principles and overall strategy for reconciliation, recovery and reconstruction; this chapter details the specific socioeconomic impacts of the crises, identifies targets populations and time horizons for action and assesses the instruments which will be most effective in meeting the country’s specific reconciliation and recovery needs. It is organized around two main priorities for reconciliation and recovery, namely: support for the reintegration of IDPs and other vulnerable and conflict-affected populations and socioeconomic reintegration and peace-building.1617

Across both of these areas, it will be critical that assistance not favor any one ethnic group and address the needs of all vulnerable populations in affected areas, including those who may in the past have been subjected to disasters and displacement without receiving the assistance that is now being provided. The challenge of a broader recovery and development effort represents at the same time an opportunity for the state to demonstrate that it can deliver services equitably to its citizens irrespective of ethnic background, which in turn would contribute to foster reconciliation, build the legitimacy of the state, and contribute to the stability necessary for sustained economic growth.

Support for the reintegration of IDPs and other vulnerable and conflict-affected populations

Housing Needs 18

The June violence is estimated to have displaced 375,000 people, more than 90 per cent of whom are now believed to have returned to their home areas. They have returned to widespread destruction and damage, with estimates of homes damaged or completely destroyed ranging from 1,813 to 3,450. Within Uzbek neighborhoods, the average household compound comprising two families (with an average of 7.5 persons per family) who generally inhabit separate small one-storey houses inside the joint compound, and an estimated 92 per cent of affected dwellings consist of this type of structure. An estimated 72 per cent of affected one-story houses are completely destroyed with another 19 per cent severely damaged. Close to a quarter of the completely destroyed houses do no longer have access to water, and around 72 per cent of the assessed houses no longer have access to electricity. At the moment most IDPs are living in tents erected inside their compounds, with friends, or in the streets and available public spaces. As housing is a primary human need and is cited by those affected by the recent violence as one of the most important elements of personal and community recovery, it is therefore a key priority for the recovery agenda.

Full assessments of the impacts of the June events on housing are still ongoing. In Jalalabad, a completed assessment has found 450 destroyed or damaged homes. As of July 11, 2010, the number of destroyed and damaged houses in Osh was estimated around 2,500 based on a UNOSAT damage assessment and at 1,363 by a government assessment. An ongoing assessment by ACTED and Save the Children for UNHCR suggests the number of damaged homes could be about 20 per cent higher than the UNOSAT estimate in areas surveyed.19 Final figures from this assessment will be available by July 18, 2010.

Table 6.

Infrastructure impacts at-a-glance

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IDPs are anxious to begin repair and reconstruction of their homes before the onset of winter in late October. In terms of required assistance, IDPs are clear as to their preference to reconstruct their homes themselves and are confident that they could find the specialized skills needed (e.g. masons, carpenters, electricians, plumbers) in the community, including through contracts with Kyrgyz artisans. to ensure that all ethnic groups participate in the reconstruction process. It is thus building materials, and not cash allowances, which is the clear request of IDP communities – in part because of the likely inflationary effects of large-scale construction on the price of building materials, but also because of IDPs’ desire to be active participants in rebuilding their own identities and futures. This option of resident-managed repair and reconstruction of homes would involve the following approach:

  • Supply of a package of construction materials that – depending on the level of destruction - would enable the IDP returnees to either construct a preliminary winterized (2-room) house or repair their original home.

  • Cash-for-food or in-kind food allowance to feed affected families during the construction period since they would not be able to earn an income during while working on their home.

  • Cash allowances to hire specialized artisans.

  • Oversight and technical assistance to ensure adequate construction quality and use of appropriate technologies to e.g. secure the buildings against earthquakes.

Investments in reconstruction of homes for IDPs would be complemented by parallel investments in reconstruction for those population whose homes were affected by the recent series of natural disasters, including earthquakes and mudslides, to contribute to wider development and reconciliation.

→Budget Requirement to meet housing needs: $105 million

Social compensation needs

The costs of social compensation will depend on the number of casualties of the crisis and also on the method of compensation. One possible scenario, using compensation levels envisaged for victims of the April events and a preliminary estimate for the final number of casualties is given in the table below. It should be emphasized that the government has not decided on the approach to be followed for victims of the violence in the south – the numbers given below are illustrative and based on considerations of equity in compensating victims and families in the north and south of the country.

Table 7:

Possible Social Compensation needs related to events in South Kyrgyzstan21

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Source: JEA estimates

Compensation for victims of the violence can be important both for humanitarian reasons and for reconciliation. However, given the ethnic rifts opened up and the magnitude of potential claims, it is critical to formulate an even-handed, ethnicity-blind approach that remains consistent with long-term sustainability of the social protection system.22 This is likely to call for a one-off donor-supported surge in compensation payouts followed by more targeted assistance based not on categories of recipients but actual need for income support. Adding an extensive categorical benefit even if well-deserved on moral grounds, but ill-targeted from a poverty reduction point of view, would not be fiscally sustainable.

Additional complications include: that the legal basis for refugees, the wounded, and heirs of the deceased from the June events to claim state support may differ from what the post-April legislation envisioned; that birth certificates, death certificates and other identity documentation lost or destroyed during the conflict may be difficult to replace, thereby constraining the ability of some families to make their claims or to have claims processed and; that any compensation system may need to address ongoing deaths, disappearances and injuries since the June crisis (e.g. injuries suffered by young men detained by security forces) which are perceived as equally meritorious of compensation by affected communities.

→Possible 2010 Budget Requirement to meet social compensation needs: $52 million

→Possible annual recurring Budget Requirement to meet social compensation needs: $12 million

Reconciliation through participatory community recovery and local area development

A coherent approach to promoting social reintegration will need to focus on building reconciliation and trust in communities directly affected by the April-June events in Osh and Jalalabad Oblasts and Bishkek, but also between and among communities throughout the country, as well as between the citizenry and the central state in which it has lost faith. A range of activities to facilitate reconciliation are recommended, including: community projects (reconstruction and rehabilitation of social infrastructure) and events (cultural, sporting, learning etc.) which promote social cohesion and help to rebuild social capital; ensuring access to medical and psychosocial support services for communities directly affected by violence, including victims of sexual and gender-based violence and torture; awareness-raising activities focused on civil rights and responsibilities; legal aid; strengthening community-level dispute resolution mechanisms; support to resolve title, property and access disputes; formal tracking of community dynamics and social acceptance to ensure a good understanding of reconciliation dynamics between displaced and communities of return or settlement.

In particular, community rehabilitation of social, economic and cultural infrastructure of collective benefit in communities in violence-affected regions as well as regions affected by recent natural disasters will be an important means of supporting social cohesion and may be mobilized relatively quickly through existing community development structures. Such projects will provide an opportunity for community members to unite round a collective goal with benefits for the whole population as well as to create short-term employment for vulnerable members of the population. The specific activities should be decided by communities in response to agreed local needs and could include: renovations of schools, health points and community centers, renovation or rehabilitation of potable water systems, renovation or upgrading of apartment buildings and associated facilities in urban settings, and rehabilitation of village or feeder roads and communal agriculture and erosion control activities in rural areas.

→Total Budget Requirement to meet reconciliation need: $25 million.

SocioEconomic Reintegration and Peace-Building

Livelihood Recovery

The June events decimated livelihoods for numerous households in the directly affected areas. The Commission for Assessment of Damages estimates a loss of employment for around 4,000 persons (mostly in service and trade). In addition, there is significant disruption of markets and economic activities since farmers and traders cannot move to sell their produce or buy inputs, and since people are afraid of venturing out of their homes and neighborhoods, they cannot access jobs, markets or necessary inputs to production. In addition to the need to support affected populations to restore or re-access their livelihoods, the crisis also drew attention to the economic vulnerabilities and disparities, such as pervasive youth unemployment, and the needs of people previously affected by natural disasters such as mudslides and earthquakes, which may have contributed to the events themselves and would therefore also need to be addressed.

In the immediate term, priorities include re-establishing safe access to employment sites and the means of production for those whose livelihoods have not been destroyed (e.g. farmers whose fields and agricultural inputs are unaffected, but who are unable to access them given ongoing insecurity) and developing temporary employment opportunities, such as cash for work initiatives and labor-intensive public works, for households whose livelihoods were lost or damaged during the recent events, as well as for other economically vulnerable populations.

In the short- to medium- term supporting employment creation/targeted livelihood support for IDPs and other vulnerable and lowest-income populations (including natural-disaster victims, female-headed households, families relying on others for accommodation, youth etc.) in areas directly affected by the April and June events, as well as other marginalized, at-risk regions will be a priority. Multi-dimensional support will be required, including local economic development grants, active labor market programs and self-employment assistance. In the longer-term, investments will also be required to improve the relevance of the educational system to the labor market, thereby reducing educational drop-out rates, youth joblessness and youth idleness, and contributing to enhanced security and local economic development.

→Total requirement for re-integration and livelihoods: $45 million.

Peace and Tolerance Building

Tensions and insecurity in the affected regions persist and the risk of future eruptions of violence remains high, particularly given the upcoming parliamentary elections. Supporting the establishment of a culture of peace and tolerance in at-risk environments throughout the country is both a short- and long-term priority. These activities will directly support security and stability and strengthen the resilience of communities to resist potential future drivers of conflict. Peace and tolerance activities recommended to address ongoing tensions in Kyrgyz include: immediate peace and tolerance training for local opinion-shapers (teachers, journalists, religious leaders, local officials, magistrates); human rights and protection training for security forces; public media campaigns on peace-building; community-level trainings on conflict management and conflict resolution; development of peace and tolerance curricula for schools; grants for arts and cultural activities promoting peace messages; forums for inter-ethnic dialogue and cooperation.

→Total requirement for peace and tolerance building: $3 million.

Youth Inclusion

Youth are one of the most poor, vulnerable and marginalized groups in Kyrgyz and large numbers of young people were involved in April - June events. Whether politically or economically manipulated into taking part in recent violence, or motivated by resentments, radicalization or criminal motivations, it is clear that achieving a sustainable peace will require explicit targeting of youth needs. The creation of a new Ministry of Youth Issues in July 2010 is an important signal of the government’s commitment to support young people to develop livelihoods and life skills as well as to contribute to decision-making and governance, and should be supporting by international partners. Specific activities recommended in the short- and medium-term to promote youth inclusion include: life skills development; employment support; development of youth-friendly spaces and recreational opportunities in rural and marginalized communities; legal education and support services for youth and youth employers, including training on labor and migrant rights; and capacity-building support for youth organizations and youth-run services.

→Total requirement for youth inclusion: $5.1 million.

Building Confidence in Security, Stability and Justice.

This year’s events clearly eroded citizen confidence in the state’s ability to uphold security and stability in the country and to maintain its monopoly on violence – the very foundation of state legitimacy. While many communities in affected areas feel abandoned and/or persecuted by the full range of state institutions – from the executive itself to local authorities to state-owned media - it is state defense and security forces, both armed forces and the police – in which they are most disappointed. Unable to assure civilian protection, to control the spread and use of arms, to prevent military equipment and supplies from being co-opted by participants in the violence and to maintain command and control within their ranks, state security forces were seen - at best, as ineffective and strongly biased towards certain ethnicities - on the average, as complicit in the violence and - at worst, as the very instigators of the events.

In the immediate-term, experienced international security trainers and advisors working under the auspices of a respected agency, should be mobilized as a means of guiding this process and helping to ensure civilian protection and human security. The presence of neutral actors would reassure the citizenry of the commitment of government to fully respecting the human rights instruments to which the Kyrgyz Republic is a signatory and to preventing a culture of impunity within the defense and security sectors. Priority areas to be addressed in collaboration with international technical assistance include: prosecuting and punishing those guilty of human rights violations or torture, including sexual and gender-based violence; tasking the ombudsman or an independent agency with receiving citizen reports of crimes committed against them during the April - June events; and supporting an investigation of human rights abuses during the events.

In the medium-term, training of the security sector in civilian protection, professional ethics, human rights and due process should be prioritized, as should the overall professionalization of national security forces. Similarly, capacity-building for the ministries of defense, internal affairs and justice should all be envisioned. In all of these activities, the international community will be a key partner for the government and its expertise in similar exercises around the world should be fully utilized. Finally, the government of the Kyrgyz Republic is encouraged to commit to building a government and civil service representative of the nation’s ethnic diversity. This may require the adoption of specific quotas, such as those previously enacted in Kyrgyz parliament to address the historic underrepresentation of women in the government. A wider security sector reform process could provide the necessary space for addressing this issue, alongside other weaknesses in the technical skills, institutional capacities, coordination and civilian oversight of the defense and security sectors. This would be a valuable investment in the long-term security of the country for both the government and its international partners. In the absence of a comprehensive strategy to address the lack of confidence in the security and justice sectors, stability may continue to elude the country and perpetuate an institutional vacuum in which organized crime, extremist movements and violent elements take further root.

→The total requirement for security, stability and justice: $ 8.0 million.

These aspects could also be funded directly by interested donors through financial and in-kind contributions to the government of the Kyrgyz Republic, and could be considered within a larger security sector reform project, if deemed appropriate.

Chapter VI: Critical Priorities in Infrastructure

The Kyrgyz Republic faces severe deficiencies in infrastructure: energy insecurity, poor road connectivity, lack of basic infrastructure services at the local level. The current crisis only serves to highlight the needs in this important area, which is a prerequisite for the economic development of the country as well as for promoting much-needed peace, security, and social cohesion.

The direct damage to infrastructure—energy, transport, and local government infrastructure—has been limited but indirect losses are substantial. In fact, the most visible damage has occurred to public, commercial, and private residential buildings. Infrastructure development or needs assessed in this chapter should not be viewed simply as a routine matter of economic development. The development of energy, transport, and local government infrastructure holds much promise as a means to bringing communities together, especially if such work is done in an inclusive manner.

Energy

In January 2010, electricity tariffs were raised by 56 per cent and 114 per cent for industrial and household consumers, respectively, and increases of 186 and 110 per cent were put into effect for hot water and district heating in urban areas. At the same time, pensions and public sector wages were raised, cash transfers increased and housing allowances in Bishkek were also raised so as to offset the impact on the vulnerable and the poor. Even with the sharp rise, energy tariffs would not have led to full cost recovery, as the country continues to enjoy the lowest energy tariffs in the CIS. With additional revenues from the tariff increase, the energy companies planned to step up vital rehabilitation and investments critical to ensuring security of supply, particularly in the demanding winter months, and to bolster programs for curbing technical and commercial losses, notably through metering. With the introduction of VAT and the retail tax on energy, budget revenues were projected to rise by $15 million in 2010.

The interim government rolled back both the rise in household electricity tariffs (fully) and the rise in industrial tariffs (substantially) in light of heavy social pressure following the April events. The government has stated that future tariff policy will be determined by the elected government. The interim government recognizes the importance of raising tariffs towards full cost recovery levels, but has emphasized that future increases should take place in a gradual manner, with full consultation and communication with society, and with a targeted system of compensation for the poor. Without a carefully devised program of this kind, no sustained increases in tariffs would be achievable.

The impact of the reversal of the energy tariff increase will be felt on (i) the budget, in the form of losses in tax revenues and increases in subsidy expenditures for the communal energy services as well as for financing the tariff discount reinstituted for inhabitants in the mountainous areas of the country; and (ii) diminished revenues for the electricity companies that will lead to cutbacks in essential repairs, maintenance and investments. Finally, the June events (iii) led to losses in the gas distribution system in Osh. Needs arising out of item (i) are reflected in the budget and have been discussed in Chapter II. This section discusses the needs arising from items (ii) and (iii).

The energy crisis and government response

The country is heavily dependent on a Soviet-era regional power grid, developed as part of a regional water and power sharing arrangement, also involving Kazakhstan, Uzbekistan and Tajikistan. Because of geographical constraints, power was supplied to southern Kyrgyz Republic through the regional grid, but the recent construction of bypasses in neighboring countries means these countries may no longer participate in the regional grid, which in turn has raised the prospect of southern Kyrgyz Republic being cut off from the grid.

There is also a seasonal power production-consumption mismatch whereby hydroelectric production in Kyrgyz Republic is high in summer, but energy consumption peaks in winter. The sector is beset with heavy quasi-fiscal deficits, inadequate maintenance and investment, extremely low electricity tariffs (tariffs cover only a small fraction of costs) and high distribution losses (amounting to one-third of generation).

The authorities launched a comprehensive strategy in November 2009 to address these problems and have sought to build partnerships with bilateral and multilateral donors in support. The World Bank has been engaged in policy advice and investment financing over a number of years, including an emergency energy operation in 2009. USAID has been providing technical assistance. China and Kazakhstan have emerged as significant sources of financing for investment.

The southern supply problem is to be addressed by the immediate launching of construction of a new high voltage substation at Datka, and a north-south (Datka-Kemin) transmission line.

Energy production is to be boosted by revamping, the Bishkek thermal heating plant and completing the construction of Kambar Ata-II hydro power cascade (the latter mostly financed by donors and government resources.

Electricity distribution: To improve the sector’s efficiency and lower the quasi-fiscal burden, the authorities are implementing a two-stage tariff increase amounting to a cumulative hike of more than 150 percent. Losses are also being cut through a nationwide installation of new meters.

Demand for electricity peaks in the winter, when thermal plants and the district heating systems of Bishkek, Osh and certain other cities are brought fully on stream. It is important to ensure security of supply not only for basic human needs but also to maintain social peace and to support economic activity and employment. There are several sources of risk to the supply of electricity over the winter of 2010/11:

  • The budget for the fuel required to run the district heating systems described above are entirely unfunded. In the recent past, Kyrgyz exported electricity in the summer months (generated from water than was run off for irrigation purposes for neighboring states) and the proceeds were used to finance fuel stocks for the winter. In 2010, no summer export arrangements have been concluded, largely because of the April events, and it is unlikely that arrangements can be put in place on time. The requirement for purchasing stocks of mazut, coal and other fuels is estimated at about $50 million.

  • Essential repairs for the dilapidated equipment of the district heating plants for Bishkek and Osh amount to $30 million – such repairs would bring reliability of heat supply to minimal levels.

  • Essential repairs for the district heating systems for 23 other urban centres amount to $25 million, again bringing the reliability of supply to minimal levels.

  • Critical repairs to ensure security in electricity generation in Toktogul and the Bishkek thermal plants, purchases of cables, switches and other essential works in distributions, amount to $69 million.

  • The restoration of the gas distribution network in Osh and related expenditures amounts to $6 million.

Thus, the total energy sector critical financing requirement amounts to $180 million.

To put the energy sector on a path to sustainability, several priorities must be addressed. This will ensure that the activities financed in the energy sector are effective in meetings their objectives within a reasonable resource framework.

Starting a high-level dialogue with neighboring and downstream countries. It may be prudent to seek a high-level dialogue with neighboring countries to agree on summer exports linked with the irrigation water flows and on an arrangement to move power to areas in the north and south of the country in the summer and winter seasons.

Improving the financial viability of the power sector to avoid its collapse. In combination with efficiency improvements (decreased losses, better collection), a well-defined tariff trajectory to bring predictable cash flows to the sector would be essential to secure sustainable operations. Funds would be required for adequate maintenance to avoid further deterioration of sector assets and meet the significant investment needs to ensure reliable supply.

Enhancing sector transparency and strengthening governance. The Interim Government intends to immediately work on improving governance and transparency. This could be achieved by credible involvement of civil society and implementation of an Energy Transparency Initiative announced by the Interim Government. Such initiatives could underpin efforts to reduce corruption, increase transparency, improve targeting of social benefits, and accelerate the adoption of better practices in energy sector management and regulation.

Buildings and structures

Much of the damage in both the April and June 2010 events was borne by the building sector. In summary, damage to 2,314 residential buildings accounts for about 50 percent of the overall building damage estimate of approximately $144 million,23 followed by damage to several dozen public buildings accounting for 34 percent of the damage estimate, and damage to over 700 commercial establishments, accounting for 16 percent of the damage estimate.

The information provided above only accounts for direct damage to building structures, and does not account for damage to contents or ensuing economic losses. A detailed accounting of contents, or even economic activity for the various affected buildings, is unavailable at this time. In lieu of detailed data, the JEA team prepared an estimate based on simplifying assumptions drawn from experience to approximate damage to contents and ensuing economic losses to buildings. Economic loss in this case refers to losses other than direct property damage. Based on these simplifying assumptions, the estimate of total of building and contents damage is $241 million, with public buildings and private commercial buildings accounting for about 55 percent of the total loss, and private residential buildings the remainder.

Thus, the total estimate of damage reconstruction under the public space is $130 million including public buildings and private buildings-commercial.

Table 8:

Buildings and Structures Damage and Loss Assessment

($ million)

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Source: JEA estimates.

Sector Priorities

All three aspects of the building and structures sector (public, private-commercial, and private - residential) are high priorities for recovery and reconstruction.

Of the three, private residential is the highest priority. Winters in the affected area are harsh, requiring any transitional shelters to be particularly robust thermally as well as with regard to wind and snow. Such transitional shelters will require substantial resources to construct; these resources could alternatively be devoted to permanent dwellings, thereby avoiding double- building. The construction season permits outdoor construction until about late November, thus allowing almost four months for construction, if it can begin by early August. Four months are sufficient to permit construction of a permanent ‘core’ house of perhaps 50 or more sqm, which in many cases will serve households through the winter. Therefore, a streamlined building materials provisioned, technically assisted owner-builder would appear appropriate, beginning as quickly as possible.

Constraints on such a program include:

  1. Material support: As usual, lining up support (funds, building materials, technical assistance) for the program in a timely manner will be challenging, and should be tackled early.

  2. Community support: Consulting with communities and mobilizing their support for such a program, particularly in terms of buy-in by those affected, will be vital. Moving too quickly may feed suspicions, so building community support must move quicker.

  3. Equity: That is, tuning reconstruction in such a manner so as not to feed further animosities. This point has been emphasized by a number of parties - that victims should not be perceived by the larger community as gaining from the events, thereby feeding jealousy and touching off further rounds of violence. Building only a core house initially helps mitigate this issue.

  4. Design: One size doesn't fit all and neither does one housing design. Housing needs of ethnic Kyrgyz differ significantly from those of ethnic Uzbeks, so that design and reconstruction should anticipate and be flexible to accommodate these needs.

  5. Seismic: Given the high seismic risk in the region, reconstructed buildings should not be collapse-prone - to achieve adequate seismic resistance is not very difficult, but does require some training of owners and builders. Experience in other regions (e.g., in Latin America and in reconstruction following the 2001 Gujarat, India, 2005

Pakistan and 2006 Yogjakarta, Indonesia, earthquakes) shows how to effectively provide this training and assure seismic adequacy.

These issues need to be addressed in an integrated social program that not only addresses the issues of physical reconstruction, but also at the same time addresses issues of physical, psychological and social trauma, livelihoods, gender and economic needs. Given the socio-economic roots of the April and June events, the need for such an integrated social program is even more pressing than in say a natural disaster.

Transport

The direct damage to the transport and communications infrastructure as a result of the April/June events has been limited. There was no direct damage to regional road infrastructure and the only reported damage to municipal roads was in Osh due to movement of defense equipment. The overall estimate for municipal road rehabilitation and for replacement of damaged or destroyed rolling stock is $10 million.

Prices sharply increased for construction materials and petroleum products (bitumen, cement, steel, diesel fuel) because of the prolonged closure of the borders with Kazakhstan and Uzbekistan, and interrupted operations of domestic cement factories. Recent surges in construction input prices are also expected to severely affect the investment estimates in the medium term, and this is particularly important for the transport sector that comprises 60 percent of the country's investment portfolio. Moreover, parts of the road network are in need of urgent repair. Based on projected implementation of road projects, it is estimated that such significant price increases could lead to about US$20 million increase over 2010-12 PIP.

The estimated financing need for the road sector is estimated at $30 million.

Local government infrastructure

The April 2010 event caused no damage to water supply and sanitation infrastructure, roads, electricity, and heating infrastructure. The June 2010 events had a larger impact on civil structures. Osh City and Karasuysky District were affected in Osh Oblast, and Jalal-Abad Town, Bazar-Korgon, Suzaksky, Ala-Bukinsky districts were affected in Jalal-Abad Oblast. The immediate investments in the local government infrastructure are towards urban/public transport rolling stock replacement and expansion at approximately $10 million in Bishkek and Osh.

The total estimated need for infrastructure development and service delivery arising from the April/June 2010 event is $350 million.

Chapter VI: Agriculture

Agriculture is the backbone of the rural economy and accounts for a quarter of total GDP. Agricultural gross value is expected to decline by approximately 19 percent in 2010 due to: a) late spring planting following the April events and delayed fuel provision; b) the suspension of fertilizer imports from Uzbekistan following the June events; c) reduced irrigation, pest and disease control, weeding and timely harvesting due to the insecurity of ethnic minorities in the South; d) a severe contraction in crop trading activity by farmers and traders in the South due to insecurity; e) higher fuel, machinery service and input prices; f) lower output prices; and g) to a lesser extent disruption to livestock grazing. The impact of the crisis has been exacerbated by a wet spring and early summer as well as mudslides in isolated areas. Clearly, with lower cash incomes, and reduced availability of food for home consumption, more households will become food insecure this year.

Ethnic Tensions and Interdependence in Rural Areas

Competition over access to land, irrigation, and pastures have been long-term contributory factors to ethnic tensions in the South. Restricted access to markets through Uzbek enclaves creates further tensions and is worsened by, poor farm to market roads and weak storage infrastructure. These tensions have been exacerbated by weak and inequitable management of natural resources by government, resulting in low rural incomes, food insecurity, environmental degradation and a general lack of trust in local government.

Despite these long standing tensions, there has also been a high degree of economic inter-dependence between the Uzbek and Kyrgyz communities. While reconciliation and peace building must be the initial focus, these can best be sustained in a vibrant rural economy in which the Uzbek and Kyrgyz communities re-establish their economic inter-dependent. This can be achieved through investments to improve equitable access to natural resources for both communities, to increase agricultural productivity and stimulate trade between the two communities.

Investment Requirements

In the short-term, the shock to farm incomes and food security resulting from the crisis may be mainly addressed through cash transfers. The private sector is sufficiently developed to be able to import and distribute the necessary input, materials and food products if demand exists. In the medium and long-term, the response to the crisis should be a renewed program of investment in rural communities, including investments to improve in rural infrastructure, access to markets and agricultural productivity.

  • Improving Rural Infrastructure: Eighty percent of cultivated land in Kyrgyzstan is irrigated and generates an even higher proportion of crop output. Access to irrigation is a potential trigger for ethnic conflict. The State Committee for Water Resources estimates that a further 63 water user associations, serving 78,000 ha, require rehabilitation at an estimated cost of $17 million over a five-year period. An initial investment to rehabilitate irrigation and drainage on about 30,000 ha would require a budget of $12.5 million under the medium term program.

  • Improving Access to Markets: There are strong agricultural trading links between Kyrgyz and Uzbek communities but the benefits of this trade are limited by poorly maintained farm to market roads, inadequate storage facilities and poor market facilities. An assessment of rehabilitation needs, ownership and management arrangements for this infrastructure could be in the order of US$30 million over a five year period, including $15 million under the medium term program.

  • Improving Agricultural Productivity: The proposed investments in improved access to markets should be complemented by measures to improve farm productivity and to link farmers to markets. This requires measures to improve the provision of seed, improve crop and animal husbandry, implement land and pasture improvement measures, and rehabilitate orchards. It also requires advice to assist farmers to find and secure agreements with buyers. This support could be best implemented through a community-based micro-projects program, building on Kyrgyzstan’s substantial experience in this field. This investment would require $15 million over a five-year period, including US$7.5 under the medium term program.

The total financing requirement ($35 million) is calculated as the sum of the initial need for rehabilitation of irrigation and drainage, three year program for restoring and improving access to markets as well as raising agricultural productivity.

Principles for Investment

To re-establish trust in government and build peaceful communities, these investments should be based on principles of: a) equitable investment – this means ensuring a fair geographical distribution of investments, so that benefits are distributed fairly across ethnic groups; and b) community or private sector led investment – this means designing and implementing investments through community-based organizations (such as local investment committees, water user associations and pasture user unions) and managing public infrastructure and services through transparent public-private partnerships where possible.

Chapter VII: The Business Environment

In addition to business damages and losses, the events of April have dampened confidence within the private sector by creating uncertainty about political and economic prospects. The June ethnic violence further fueled this uncertainty. Although the June 27 referendum helped bolster the interim government’s credibility, the continuing ethnic tension and perception of lack of government control continues to hamper business confidence and weaken the investment climate. Private investment is now projected to amount to the equivalent of 14.8 per cent of GDP in 2010 or five percentage points below pre-April projections.

Thus, the loss in confidence has been translated into lower economic activity. In particular, tourism, which accounts for 5 per cent of GDP, has seen significant cancellations in bookings, and project reductions in foreign tourist arrivals well into the summer (tourism reservations are down 80 per cent from last year). Expectations have been conveyed that activity in this sector may not begin to recover before July-August, the usual peak of the season, and election –related activity may keep tourists away until the next year.

The closure of frontiers to trade and movement of persons by Kazakhstan and Uzbekistan - the latter closure persists - has created doubts about future access to trade and have broken or disrupted supply chains, especially in agriculture and road construction works. Neighboring countries' decisions to close borders for movements of goods and people have significantly impacted formal and informal trade, in both April and May. The readily observable substantial decline in exports of garments, fruits and vegetables, and dairy products is expected to show-up in trade figures once they become available. In addition to making the continuation of re-export activities difficult, the closure of the Kazakhstan and Uzbekistan borders also made it harder for bank borrowers from the trading sector to unload already imported stocks and repay working- capital loans (trading activities represented around 16 percent of GDP in 2009).

The business environment in Kyrgyz Republic has long been hampered by arbitrary behavior of the tax authorities, inspections and impositions of regulations not based on a predictable, transparent application of the rule of law, and poor progress with reforms relating to corporate governance, management of state owned enterprises and competition policy. Shortly after the April events, the business community proposed a series of actions to address some of these difficulties over the short term. The interim government has been sympathetic to these actions, and has moved them to an advanced stage of the approval process. Parallel initiatives are likely to come from other collective bodies (industry associations and professional bodies) as the opportunity to renew the impetus behind their reform agendas becomes clear to each stakeholder.

The reported increase in international and domestic perceptions of corruption and expropriation risks in the Kyrgyz Republic, which was covered in many international headlines throughout 2008-2009, has now been compounded by the uncertainty inherent in the current political and election processes. These will also need to be addressed by the future government alongside ongoing reform programs to improve the investment climate.

The damage to commercial establishments, business disruptions, and border closures arising from the April and June events resulted in losses to the private sector, particularly in tourism and retail trade. Displacement of people, lack of security and restriction to movement (e.g., imposition of curfews) in the south have further reduced consumer demand for goods and services.

There arises an urgent need to provide resources for private activities such that the private sector economy can begin to take advantage of a revival of demand. This is particularly important in the vital tourism sector, where re-investment and working capital needs are evident and where cash balances have been depleted. Tourism export receipts in 2009 were about $445 million, 20 per cent of which would be tourism-related retail sales. With the significant cancellations in tourist bookings, tourism export receipts for 2010 may fall as much as 60 percent. With this drastic drop in receipts, profits of tourist operators and retailers linked to tourism will be drastically cut. There will be limited reinvestment of profits. The foregone profits that would have been used for reinvestment would be around $20 million. As such, the private sector, particularly, the tourism and related retail trade establishments would benefit from access to project financing and bridging facility from development partners, amounting to around $20 million, to allow them to maintain and rehabilitate their establishments, and recoup foregone revenue in 2011, when more economic stability is achieved.24

Chapter VIII: Financial Sector

The Kyrgyz financial system remained sound through the 2009 economic crisis. Capital adequacy and liquidity of the system were adequate through the course of the economic crisis that the country faced in 2009. A large source of vulnerability of the system–exposure to banks in Kazakhstan—was reduced somewhat through the acquisition of two Kazakh banks by local banks, and the conversion of one subsidiary to its parent (Unicredit).

The April and June events have led to a worsening of loan quality. The non-performing loan ratio rose from 8 percent before April to 11 percent by end-May and is expected to deteriorate further following the events in the south of the country. The deterioration in loan quality is mainly concentrated in the trade and commerce sectors, suggesting a relatively strong impact of border closures. The business confidence effects of the continued political uncertainty suggest that credit growth this year will be weak.

Table 9:

Kyrgyz Republic: Selected Financial Indicators

(In percent, unless otherwise indicated)

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Source: National Bank of the Kyrgyz Republic

Financial stability has been adversely affected by the crisis. Whilst most banks appear sufficiently liquid and capitalized, there have been problems at some banks, including Asia Universal Bank (AUB)—the largest, with over 20 percent of system deposits. The NBKR introduced temporary administration in AUB and 6 other banks (later reduced to four) after AUB saw a significant nonresident deposit outflow, allegedly linked to the previous regime. The five banks are also seeing deteriorating financial health and some are undergoing audits. The authorities are developing action plans accordingly—these could involve a change in management, and/or capital injections, if necessary.

AUB has been particularly affected by the crisis. The bank’s loan portfolio has been affected by connected and insider lending, and loan quality has deteriorated, particularly following the events in the south where the bank had significant exposure. A sizable portion of its liquid assets placed with asset management companies prior to the crisis may not be recoverable. The government put the bank under conservatorship in June and subsequently nationalized it. Operations have been restricted, including (i) deposits from individuals will not be accepted, and transactions of legal entities will be restricted to a limited type of transactions, including salary-related payments, social fund payments and AUB loan repayments. The situation has been further complicated by a recent court decision to hand over AUB assets that were acquired from Kyrgyz Promstroi Bank in 2007, back to the original owners. This decision is now under consideration in the courts.

AUB problems impose a cost on the budget. According to the latest estimates it requires regulatory capital in the order of KGS 3½ billion ($76 million; 1.7 percent of GDP). Budgetary costs to resolve the bank will likely be inevitable.

The authorities are considering a number of options for resolving the bank. These could include (i) outright bankruptcy and liquidation; (ii) rehabilitation and sale and; (iii) restructuring through purchase and assumption—a good bank, bad bank solution or; (iv) sale to a foreign buyer. In considering these options, the authorities are cognizant of the systemic implications, fiscal costs and the need for the system to recover quickly and start providing an impetus to growth again. Given the technical deficiencies in the country, the authorities may need help to defray the cost of an external audit and hiring management and legal teams, in addition to covering the cost of recapitalizing the bank or covering the loss of government deposits.

Chapter IX: Fiduciary Safeguards, Financing Mechanisms and Institutional Arrangements

The management of external aid for recovery should build on the progress achieved by the Kyrgyz Republic and donor organizations in aid harmonization. Kyrgyzstan is the first country in the Central Asia region that participates in international initiatives for aid harmonization and effectiveness in line with principles of the Rome and the Paris Declarations on Aid Effectiveness.

This section describes the overall fiduciary environment (public financial management, fiduciary and safeguards arrangements), potential financing options for the recovery efforts as well as the principles and mechanisms which will guide the implementation and monitoring of external aid provided for the recovery program.

Public financial management

A decade long reform effort on the PFM system25 has resulted in a gradual formation of a professional technical team in the MOF and Central Treasury and establishment of a reasonably strong aggregate fiscal discipline in budget execution. This has entailed a process of fiscal consolidation and bringing extra-budgetary funds into the budget, introduction of cash flow forecasting and implementing a balanced budget, and elements of accountability in the use of public funds, considerable improvement in reporting, as a result of the introducing of new budget classification and a unified chart of accounts.

The remaining weaknesses of the PFM system are related to the shortcomings in strategic planning. They result in: (i) inconsistent outcomes of budget policy with a huge variation in the quality of public service provision across the country; (ii) frequent re-allocation of resources within the originally approved budget and hence low predictability of funds for spending units; (iii) weak links between the sector strategies, the Medium Term Budget Framework (MTBF), and the annual budget; (iv) a lack of transparency, with poor public access to key budget information and (v) poor system of internal checks and balances with the exception of selective spending entities. The internal audit system is at an early stage and cannot provide credible assurance of the legality, effectiveness, and efficiency of the use of public funds.

PFM reform efforts continue with heavy donor involvement and supervision. There is clear strong ownership by the current government. The Public Financial Management system proved to be sound against the disruptions caused by the April and June events and ensured functioning of essential budget organizations. The MOF and Central Treasury (CT) undertook the following actions and policy measures:

  1. Treasury information was backed-up in a timely manner at the central data processing centre prior to violence against the treasury premises. Measures to protect budget execution records in locations near heightened ethnic and political tension were also taken. As a result information on the budget execution has been protected in spite of the physical damage incurred by local treasury divisions.

  2. The MOF and the Central Treasury continued to adhere to strict overall aggregate budget discipline in budget execution, with the exception of June when expenditure pressures became unmanageable and undermined the concept of balanced budget – main achievement of the PFM reform in Kyrgyz Republic.

In summary, progress in PFM has been tangible and the reform momentum is strong. Nonetheless, there are weaknesses as indicated above, but these are being addressed in an organized way with donor assistance. The new government will be asked to demonstrate clear commitment to reforms and to demonstrate results within the framework of receiving JEA- supported assistance for the economy. The JEA judges that conditions are appropriate for donor financing of the recovery and reconstruction program with the PFM tools and safeguards currently in place; a demonstrated continuation of reforms and strengthening of PFM systems will be required from the next elected government.

Financing Safeguards Fiduciary aspects

Accounting, recording and reporting. Kyrgyzstan has reasonably strong systems of accounting, recording and reporting. Computerization of treasury functions enables regional treasuries to agree expenditure details with the local transit banks daily before submitting details to the central treasury which then agrees the total with the National Bank. The 2007 introduction of a GFS 2001 compliant chart of accounts has also improved the level of information available on a quarterly basis. However, national accounting and reporting standards for the public sector are not fully developed yet although recent resolutions if fully implemented, would go a long way in improving accounting and reporting in the public sector. Strengthened accounting and reporting systems in the public sector would result into development partners putting reliance on such systems for implementation of investment projects.

Internal audit. The internal audit system is at an early stage and cannot provide credible assurance of the legality, effectiveness, and efficiency of the use of public funds. While the normative and methodological basis for introduction of internal audit has been established, much needs to be done to develop reliable internal control systems. Today 12 units out of a planned 14 in ministries and central agencies have been established. But auditor capacity needs improvement and the importance attached to their work by managers is insufficient. The MOF, as a lead organization, is planning some activities aimed at improving capacity and further developing systems of internal control for the public administration in general.

External audit. Public sector auditing is performed by the Chamber of Accounts (CoA), the equivalent of supreme audit institution (SAI) in the country. However, due to capacity limitation audit of both ADB and World Bank-financed projects in Kyrgyzstan continue to be performed by private sector audit firms that periodically undergo assessments to determine their capacity to conduct audits in accordance with International Standards on Audit (ISA). Ongoing capacity strengthening of the Chamber of Accounts that is supported by the Bank, in parallel with the efforts being made to develop financial reports in the public sector that can be subject to audit, should result in improving its performance in the medium to long term. The recently approved law on internal audit, together with the planned capacity development under the PFM Multi- Donor Trust Fund (MDTF), should help develop institutional and professional capacity for internal audit in the country. Other efforts to build internal audit capacity continue in parallel through investment projects implemented by line ministries.

Public procurement. Public procurement has gone through some reform through revisions introduced in the Public Procurement Law to bring it in line with international standards; introducing principles and stages of an efficient procurement process, and defining the mandate and authority of the State Procurement Agency. However, this agency which was established as an independent public procurement oversight body, was abolished in October 2009 as a part of the Government reorganization which took place under previous government. Instead, a new Department on Public Procurement Methodology has been established under MOF while the procurement supervision function was not assigned to any organization. In addition, the National Procurement Training Center has been taken over by a private ownership and the range of procurement training has been gradually decreasing.

As such, budget entities have become solely responsible for the procurement process, with no regular oversight from other government bodies. Random external audits are conducted by the Chamber of Accounts once every two years. This decision seriously undermines a system of checks and balances in public procurement and creates a responsibility gap for assuring the quality of public procurement, especially given that the public sector internal audit is weak. This heightens corruption risks in procurement.

MOF procurement unit intends to start publishing contract award information to bring more transparency to the procurement system. However, the process for redressing tender violations remains unclear. Given that public procurement carries a risk of high corruption, appropriate oversight and transparency will need to be established as a priority. The MOF recognizes this priority, but its capacity and current legal basis are the main constraints for immediate improvements. The MOF public procurement unit includes only five staff, whose major responsibility concerns methodology of public procurement. Recently, the unit began to request the minutes of tender commission meetings in an attempt to check accuracy of the tender process; however, the unit’s capacity clearly is not sufficient to do this promptly and with acceptable quality. The unit also drafted a new public procurement law that is intended to re-establish appropriate procurement oversight. The process of approving the draft law will take quite some time. Even once approved, there will be a need for extensive capacity and institution building.

The treasury is developing a database of contracts, but there is an institutional gap in monitoring the adherence to the procurement rules. The Chamber of Accounts reviews procurement process only during the regular assessment of budget organizations once every two years. The Government had noted that the supervision function in procurement had been reportedly a source of administrative corruption. The provisional government will need to establish the procurement oversight function to foster credible state institutions and to develop mechanism of dispute resolution and handling of complaints to reduce corruption in procurement.

Financing Options

A variety of instruments is at the disposal of donors for providing financing for reconciliation, recovery and reconstruction. Consistent with the Paris Declaration on Aid Effectiveness, aid should be predictable, harmonized, and aligned with national priorities and use the country’s own institutions and systems. To the extent possible, donors should employ existing and already planned mechanisms for the provision of financing to the greatest degree, thereby strengthening the linkages to the national budget process. Such mechanisms are budget support, support to government agencies involved in reconstruction, support for the financial sector, financing of relief and reconstruction activities undertaken by international agencies, support through trust funds, and direct financing.

First, budget support, provided by donors directly into the government’s treasury account, to fill the fiscal gap associated with the revenue shortfall and expenditure increase that are a direct result of the April and June events. Donors could use this mechanism to finance costs associated with the economic and social consequences of the events. As the government has programs under implementation in these areas, the use of this instrument would be a particularly effective mechanism and a speedy way of deploying resources.26 Budget support could also be used to directly, or indirectly create fiscal space to finance rehabilitation and essential maintenance activities that the government intends to initiate. Moreover, fiduciary reviews of the country’s budget systems covering all aspects of financial management, procurement, monitoring and auditing show that Kyrgyz has adequate standards. The country has undertaken to further improve these standards, including those in public finance management.

Second, donors may reimburse the government for specific relief and reconstruction expenditure incurred on goods and services under the government’s procurement system, reimburse particular activities of government relief and reconstruction agencies and finance individual contracts for reconstruction based on national procurement rules, Third, support for the financial sector in the form of technical assistance, capacity building, and participation through debt or equity instruments and guarantees to the AUB bank that would help bolster investor and consumer confidence.

Fourth, project financing will be required for the range of recovery activities identified in the JEA. Project financing could be used to meet the needs associated with infrastructure damage and loss, the energy sector needs, sustaining basic urban service delivery and ensuring adequate maintenance of core infrastructure including roadways, and agriculture. It could also be an instrument for the private sector growth needs.

Coordination and Monitoring Arrangements

The involvement of the international community in Kyrgyz Republic’s recovery calls for effective coordination across all actors and monitoring of aid flows across all sectors. Building on current government practice a comprehensive monitoring system should be built around three components, namely monitoring results, tracking aid, and assessing impact.

Monitoring Arrangements

Monitoring results. The monitoring of results under the recovery efforts will use systems already in place and align with the Country Development Strategy (CDS) results monitoring and evaluation process which involves civil society and development partners. The CDS established framework has enhanced the mechanisms for monitoring and assessing progress which include baseline data and expected outcomes focusing largely on macroeconomic performance, governance and business environment, monitoring targets in agriculture, infrastructure, and energy, which are coherent with efforts planned under the recovery. A nationwide monitoring system was established and operating from February 2008 with public access to the system from April 2008 at http://www.mes.in.kg/. The site provides the basis of a good system for monitoring and reporting of the recovery outcomes.

Tracking aid. Aid tracking is critical to ensure that the donor funds, especially when they do not go through the budget, are spent on the agreed activities in order to achieve the agreed objectives. Comprehensive and transparent reporting on aid, and how it is used, is also an important way of ensuring that donors align aid flows with national development priorities Donor assistance should be consistent with the government’s program and the projects they finance should be included therein. It also facilitates funding allocation and identifies financing gaps.

Assessing impact. In addition to project related impact assessments, there could be periodic monitoring at the household level that uses a quantitative and/or qualitative method to measure the outcomes and impact of the overall post-crisis program. Such a tool would provide valuable information and help reinforce and/or redirect the recovery effort, as needed, in real time. Tools such as citizen score cards that have been used successfully elsewhere could be adapted for use in Kyrgyz Republic.

Coordination Arrangements

The government will hold quarterly coordination meetings with the donor community present in Bishkek. It could use these meetings to present progress achieved under its post-crisis program using data from the abovementioned aid tracking and results monitoring mechanisms.

Implementation Arrangements

In the case of non-budget support activities, existing implementation arrangements should be used to the extent possible and partners will work to build and strengthen country capacity through adopting a multi donor approach, or a “silent partners” approach when resources are provided by a donor while the implementation leadership is agreed with another donor within an agreed aid framework.

Capacity Development Needs

Capacities exist in most Kyrgyz Republic public sector entities. However, they are unevenly distributed with national structures stronger than those at the regional/sub-regional level, and stronger in some sectors than in others. Capacities also vary amongst regions/sub-regions. Weaknesses can be observed in terms of financial capacity, institutional capacity, skills capacity, and infrastructure capacity. Depending on the sector, one or more of these areas may require strengthening.

Chapter X: Donor Support Forc Reconstruction and Recovery

This chapter attempts to pull together the overall financing requirement for the reconciliation, recovery and reconstruction program that is based on the analysis of the JEA. The financing requirement consists of budget support for 201027 and of investment financing for social needs, infrastructure needs, agriculture, and private sector support needs that will be implemented over a 30 month period from July 2010 to end-2012. Donors are being asked to provide pledges and commitments for the overall financing support that has been assessed.

The overall financing requirement is $1 billion (Annex I). It can be broken into three main elements: (i) support for budget, including the recapitalization needs of a major systemically- important bank -- $335 million; (ii) support for social reconciliation and recovery, including the housing and restoration of livelihoods needs of the internally displaced persons -- $334 million; (iii) infrastructure needs related to damages and losses of buildings and property and urgent rehabilitation or repair needs in energy and transport -- $350 million. Other items consist of agriculture, security related spending, and support for private sector.

A tentative disbursement profile for the investment expenditures is also presented in Annex I. Clearly, much will depend on project management and implementation, but also on how quickly and firmly donor commitments are made and then translated into disbursements by them.

The profile shows that in the next six months, donor support of $671 million is required -- $335 for the budget and $336 million for other programs (including the Flash Appeal). The requirements for the years 2011 and 2012, excluding the budget support amounts for those years that can be determined only once an elected government is able to formulate a budget, are estimated at $227 million and $102 million, respectively.

Annex I: Financing Requirements For Reconciliation, Recovery and Reconstruction

(millions of US dollars)
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Annex II: Projected Disbursement Profile of Support

Annex III: Reconciliation and Recovery

Introduction

Southern Kyrgyzstan comprises the three Oblasts of Osh, Jalalabad and Batken which border Uzbekistan and Tajikistan and is part of the wider Fergana valley region. The population of southern Kyrgyzstan number 2.4 million with a complex ethnic make-up in which the Kyrgyz constitute the majority with 68% of the total population in the three Oblasts, and the Uzbeks are the largest minority with 26%. The remaining groups comprise Tajiks, Tatars, Uigurs, Turks, Russians, and other nationalities. Most of the population (78%) lives in the rural areas.

Key drivers of conflict include poor governance characterized by an ineffective administrative and security system, poverty and socio-economic disparities, competition over natural resources such as agricultural land, irrigation water and pasture, harsh border regimes that negatively affect the lives of ordinary people by stifling commerce and movement of people and by feeding corruption, the role of the south as a transit area for the smuggling of drugs, widespread unemployment and under-employment particularly of youth, and a deteriorating education system that does not equip youth to participate meaningfully in society. All of these factors contribute to create persistent societal stress points that can and have become articulated as inter- ethnic rivalry.

Both Southern Kyrgyzstan and the wider Fergana valley area have witnessed inter-ethnic conflict in the past.32 Yet, while the violence that began in southern Kyrgyzstan on June 10, 2010, was carried out by one ethnic group against another, and while rural youth are reported to have perpetrated much of the violence, the circumstances that triggered the violence and the actors that instigated and organized it are still unclear.

What is clear, however, is that the violence and its aftermath revealed the weakness of the state and its lack of control over the security apparatus and the local administration. A precondition for stability and recovery is therefore the reestablishment of an impartial security regime capable of protecting all citizens.

It is also critical that both the early recovery and medium to longer term assistance now being planned by the government and international actors will not be perceived as favoring one ethic group (the Uzbeks) over other groups, who may also be exposed to hardship and deprivation, and who may in the past have been subjected to disasters and displacement without receiving the assistance that is now being provided after the June events. If the assistance is not part of a broader recovery and development effort, it may contribute to aggravate inter-group tensions that could fuel future violence. Thus, Kyrgyzstan has over the last few years been affected by a series of natural disasters including earthquakes and floods. Most recently, flash floods hit southern Kyrgyzstan in early June 2010 with over 70 villages affected and infrastructure seriously damaged. The challenge of a broader recovery and development effort represents at the same time an opportunity for the state to demonstrate, that it can deliver services equitably to its citizens irrespective of ethnic background, which in turn would contribute to foster reconciliation, build the legitimacy of the state, and contribute to the stability necessary for sustained economic growth.

Sector Impacts

Support for reintegration of IDPs: The June violence caused a massive displacement of Uzbeks. Most of those who were displaced are from the cities of Osh (population 258,100), Jalalabad (population 92,100) or the immediate surrounding areas. Some people, of both Kyrgyz and Uzbek ethnicity, have also been displaced within rural areas of southern Kyrgyzstan. Depending on estimates, between 179 to 2,000 persons were killed, and 375,000 people were displaced, with 75,000 people fleeing to neighboring Uzbekistan, while 300,000 became IDPs within Kyrgyzstan. Unexpectedly and apparently caused by a combination by both pull and push factors, the refugees began returning back to southern Kyrgyzstan in late June. Most refugees were back before the referendum on an interim constitution was held on June 27, 2010. Recent reports indicate that more than 90% of the displaced have returned to their homes, with the rest staying with host families. In addition to those displaced, the areas affected by the conflict are home to around 765,000 people, who were not displaced. Thus, 56% of the population in the two Oblasts lives in conflict affected areas.

The population profile of the two Oblasts of Osh and Jalalabad is as follows: 33

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UN together with international NGOs have very rapidly provided the affected families with immediate humanitarian relief comprising shelter, food, and critical non-food assistance. By early July, WFP had provided 300,000 displaced people with two-week rations. UNHCR has also established a 24-hour protection hotline for both Osh and Jalalabad that provides support for grievance redress regarding issues such as damage assessments and property documentation, law enforcement, and missing people.

The pattern of destruction, damage, and looting indicate a targeted act based on detailed information that enabled selective destruction of Uzbek homes and businesses leaving – with a few exceptions – neighboring properties belonging to Kyrgyz and other nationalities intact. Consultations with returned IDPs in Osh showed pervasive bewilderment regarding the reasons for the violence that had left them destitute, feelings of abandonment due to lack of information from and presence by the authorities, and intense fear and insecurity.35 The returnees also reported persistent discrimination and harassment from authorities including the security forces. This discrimination and harassment comprise actions such as the continuing detainment of young Uzbek men during nightly operations by unknown actors, confiscation of identity documentation (e.g passports) by the police, and refusal by banks to provide services such as withdrawals from personal bank accounts of remittances from relatives working abroad.36

Assessments of the impacts on housing have been completed for Jalalabad but are still ongoing for Osh. For Jalalabad the number of destroyed or damaged homes is 450. Findings by July 11, 2010, indicate that final figures on destroyed, damaged and looted houses in Osh may be higher than initially estimated. The damage assessment undertaken by UNOSAT found that around 2,500 homes had been affected compared to the government assessment of 1,363 homes. However, the current ongoing assessment by ACTED and Save the Children for UNHCR has found around 20% more damaged homes compared to the UNOSAT figures in areas surveyed. 37 Final figures from this assessment will be available by July 18, 2010.

The average household compounds in the Uzbek neighborhoods comprise two families (with an average of 7.5 persons per family), who generally inhabit separate small one-story houses inside the joint compound. An estimated 92% of affected dwellings consist of this type of structures, and 72% of these houses are completely destroyed with another 19% severely damaged. Close to a quarter of the completely destroyed houses do no longer have access to water, and around 72% of the assessed houses no longer have access to electricity. Compared to water and electricity, fewer homes had access to piped gas before the June events, and of those who did, 94% are now without gas supply. Mostly outdoor toilet facilities were available in 94% of the affected homes, and the damage to 58% of these also includes the toilets.38 At the moment most IDPs are living in tents erected inside their compounds, in the streets, or in available public spaces.

In addition to damage to private housing, businesses and public buildings have also been destroyed or damaged:39

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The Commission for Assessment of Damages estimates that the violence and displacement have caused loss of employment for around 4,000 persons (mostly in service and trade). In addition, there is significant disruption of markets since farmers cannot move to sell their produce or buy inputs, and since people are afraid of venturing out of their homes and neighborhoods, they cannot access markets. Lately though, there has been some resumption of commerce.

A Flash Appeal based on a UN inter-Agency needs assessment was issued on 18 June 2010, with a budget of USD 71 million. The goal of this Flash Appeal is to provide life-saving assistance to the IDPs in southern Kyrgyzstan, and to the around 765,000 people who are not displaced, but live in the areas affected by the conflict. With the return of the refugees from Uzbekistan and the gradual availability of more solid data on impacts and needs, the Flash Appeal is being revised based on the cluster approach headed by OCHA, which now will include Early Recovery with UNDP as the lead agency. The updated Flash Appeal is scheduled to be available by mid July 2010.

With the return of most displaced to their former homes, the overall situation has within a short time-span evolved from exclusively humanitarian concerns to a situation that requires interventions to support early and longer term recovery. Some activities need to be initiated immediately such as improvement of the security situation for the Uzbek communities, provision of shelter before the onset of winter by the end of October along with restoration of water, electricity, and gas services, restoration of identity and property documentation, and support for the enhancement of the capacity of the Directorate for Rebuilding and Reconstruction of Osh and Jalalabad. Other short-term activities that need to be initiated as part of an early recovery effort during the remainder of 2010 will need to continue into the medium and even longer term to yield their intended outcomes. These include measures to support the recovery of businesses and agriculture, rehabilitate basic and vocational education, provide cash transfers for vulnerable groups,41 generate employment through labor intensive public works, provide opportunities for youth, initiate reconciliation between communities and between these and the state, and establish psycho-social support and counseling services to victims of the June violence.

Core activities to support early recovery need to be coordinated between the government, the UN Cluster System, NGOs, and other actors. Equally important is that there are robust monitoring arrangements to track reconstruction and recovery investments which ensure transparency through involvement of local communities. Along with accelerated preparation, project design need to build in flexibility to enable responses to changing circumstances and opportunities, and also need to build on best practice regarding procurement and financial management arrangements in post-conflict situations where timely delivery of projects benefits have urgency, and project management and implementing agencies may have limited experience on procurement and financial management procedures.

Key activities and design elements outlined above can be brought together in the early recovery phase to support economic revival, reconciliation and peace-building over the medium and even longer term. Since information on needs is incomplete, the costs in the table below should be considered preliminary.

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Recovery and Reconciliation through Infrastructure Delivery

Housing for IDPs: As described above, the June events resulted in extensive destruction of houses that is expected to amount to around 3,000 family homes. The majority of the IDPs (>90%) are now back in their homes and anxious to begin repair and reconstruction before the onset of winter in late October. All IDPs consulted expressed that they wanted to construct their homes themselves, since they or their parents or grandparents had originally built the houses. The IDPs would prefer to receive building materials rather than cash allowances, since they expected that prices for materials would increase sharply with the aggregate demand from all the returnees. They were confident that they could find in the wider neighborhood the specialized skills needed (e.g. masons, carpenters, electricians, plumbers), and would even contract Kyrgyz artisans if nobody within their immediate neighborhood were available. Thus, IDP management of the house reconstruction could contribute to reconciliation through the involvement of Kyrgyz members of the wider community.

If the option of repair and reconstruction of homes being managed by the owners themselves, this could involve the following approach:

Supply of a package of construction materials that – depending on the level of destruction - would enable the IDP returnees to either construct a preliminary winterized (2-room) house or repair their original home.

Cash-for-food or in-kind food allowance to feed the family during the construction period since they would not be able to earn an income during while working on their home.

Cash allowance to hire artisans.

Oversight and technical assistance to ensure adequate construction quality and use of appropriate technologies to e.g. secure the buildings against earthquakes.

→Budget Requirement to meet IDP housing needs: 45,000,000 USD

B. Other infrastructure: The Commission for Assessment of Damages has estimated the damage caused to public infrastructure (e.g. gas and power supply, public buildings) in Osh and Jalalabad. This component would finance the costs of rehabilitation and repair of such infrastructure and equipment.

→Budget Requirement to meet needs for repair of public infrastructure: 3,000,000 USD

Reconciliation through participatory community recovery and local area development: An effective response to the recent crises will not be achieved without a coherent and substantial approach to promoting social reintegration. Reconciliation and trust need to be built and rebuilt in communities directly affected by the June events in Osh and Jalalabad Oblasts and Bishkek, but also between and among communities throughout the country, as well as between the citizenry and the central state in which it has lost faith.

The June events are viewed through an ethnic lens, both by directly affected populations, as well as by the overall populace throughout the rest of the country. The perceived and actual violence perpetrated during the crisis, as well as reprisals, recriminations and intimidations thereafter have eroded relationships and trust between different ethnic groups. As but one example, an Uzbek community in Osh reported feeling no resentment towards their Kyrgyz neighbors during the crisis itself, and being able to separate these neighbors from those taking part in the violence, only to feel growing resentment following the crisis as stories of Uzbek government workers being retrenched or intimidated into vacating their jobs in state hospitals and other government services have circulated. Perceived regional and ethnic inequities in terms of allocations of government resources, and international responses, have also inflamed resentments towards the South in unaffected parts of the country.

Societal fractures take time to heal and reconciliation activities must therefore be strongly participative and supported over the short- and medium-term horizon. Their focus should be on re-establishing dialogue as a means of rebuilding relationships and trust. Both intra- and inter- community reconciliation will need to be supported. And while reconciliation activities will need to be highly tailored to specific localities and the events experienced there, they will also need to include national reconciliation dimensions. Psychosocial interventions to address the traumas and stresses experienced by violence-affected populations, including sexual, physical and psychological violence against women and children, will also be key.

To address these issues, a range of activities to facilitate reconciliation should be developed, including: community projects (reconstruction and rehabilitation of social infrastructure) and events (cultural, sporting, learning etc.) which promote social cohesion and help to rebuild social capital; ensuring access to medical and psychosocial support services for communities directly affected by violence, including victims of sexual and gender-based violence and torture; awareness-raising activities focused on civil rights and responsibilities; legal aid; strengthening community-level dispute resolution mechanisms; support to resolve title, property and access disputes; formal tracking of community dynamics and social acceptance to ensure a good understanding of reconciliation dynamics between displaced and communities of return or settlement.

In particular, community rehabilitation of social, economic and cultural infrastructure of collective benefit in communities in violence-affected regions as well as regions affected by recent natural disasters will be an important means of supporting social cohesion and may be mobilized relatively quickly through existing community development structures (eg. ARIS).

Such projects will provide an opportunity for community members to unite round a collective goal with benefits for the whole population as well as to create short-term employment for vulnerable members of the population. The projects should feature an inclusive participatory planning and management process and involve both community/neighborhood level activities, and activities that bring together communities and neighborhoods representing different ethnic groups in joint planning of activities that address shared needs. Such activities involving a larger area with multiple communities and neighborhoods would also provide a framework for engaging with local government, and contribute to restore trust by providing citizens a voice in local affairs. The specific activities should be decided by communities in response to agreed local needs and could include: renovations of schools, health points and community centers, renovation or rehabilitation of potable water systems, renovation or upgrading of apartment buildings and associated facilities in urban settings, and rehabilitation of village or feeder roads and communal agriculture and erosion control activities in rural areas.

→Total Budget Requirement to meet reconciliation need: 25,200,000 USD

Socio-Economic Reintegration and Peace-Building

Support for Livelihood Recovery: The June events decimated livelihoods for numerous households in the directly affected areas. These impacts were varied, including affected peoples fleeing their home areas and therefore being unable to work, businesses destroyed farmers unable to go to their field or access irrigation water, and workers and traders unable to travel to their job sites. Weeks after the violence itself, safety and security concerns are such that many affected people are afraid or unable to leave their homes, let along travel to work. Others are unable to access the inputs and supplies on which their livelihoods depend, including tradable goods, water for irrigation of fields, etc. Still others have no livelihood to speak of since their shops, market stalls or other businesses have been destroyed.

Box: Livelihoods in Osh

The main sources of employment in Osh oblast are agriculture and trade. These account for 39 and 19%, respectively, of total employment. Based on informal discussions with affected peoples and response organizations in Osh city, the indicative daily income (Kyrgyz Som) for various types of livelihoods is as follows:

Day laborer (builder): 400

Day laborer (high skill): 600

Shopkeeper (large shop): 1400

Shopkeeper (small shop): 950

Market vendor (agricultural and food items): 200

In addition to the need to support affected populations to restore or re-access their livelihoods, the crisis also drew attention to the economic vulnerabilities and disparities, such as pervasive youth unemployment, and the needs of people previously affected by natural disasters such as mudslides and earthquakes, which may have contributed to the events themselves and would therefore also need to be addressed by any livelihood recovery support provided by the government and its development partners.

An effective response thus requires a multi-targeted and multi-phase approach which is targeted not only at the 375,000 people displaced by the conflict, but also the 765,000 living in the affected areas.

In the immediate term, priorities will be to:

Re-establish safe access to employment sites and the means of production for those whose livelihoods have not been destroyed (e.g. farmers whose fields and agricultural inputs are unaffected, but who are unable to access them given ongoing insecurity). This will involve re-establishing rule of law and central command and control over security forces, as well as facilitating opportunities for local populations to regain confidence in local security forces.

Develop temporary employment opportunities as a short-term coping mechanism for households whose livelihoods were lost or damaged during the recent events, as well as other economically vulnerable populations (e.g. unemployed youth). The authorities may wish to focus on cash for work initiatives and labor-intensive public works, which can absorb large numbers of people and contribute to projects of local significance (e.g. infrastructure rehabilitation, sanitation etc.) at relatively, low per person costs.

In the short- to medium- term, the priority will be to:

Support employment creation/targeted livelihood support for IDPs and other vulnerable and lowest-income populations (including female-headed households, families relying on others for accommodation, youth etc.) in areas directly affected by the April and June events, as well as other marginalized, at-risk regions. Multi-dimensional support will be required, including: local economic development grants; active labor market programs (e.g. provision of employment information, counseling and referral services, apprenticeship schemes, vocational training and second-chance learning opportunities, including literacy and numeracy skills); self-employment assistance (e.g. promoting access to credit, capacity-building for cooperatives and SMEs; agricultural extension support etc.). Activities must minimize market distortions and maximize beneficiary choice, involve strong involvement of local communities and build on existing capacities rather than create new structures.

In the medium- to longer-term, priorities will include:

Improving the relevance of the educational system to the labor market through national education reform. An education system able to provide quality teachers and schools, relevant curriculum and employment-relevant skills will support reduced educational drop-out rates, youth joblessness and youth idleness, and thereby contribute to enhanced security as well as local economic development.

→Total Budget Requirement to meet Economic Reintegration Support/ Livelihood Recovery Needs: 45,000,000 USD

Social Reintegration Support: The Kyrgyz Republic is a country of considerable social diversity – whether in terms of ethnicity, language, religion, urbanization or poverty. Many of these aspects played a direct role in both the April and June events. Diversity is not always a risk, however, and must be promoted as an opportunity for sustainable development moving forward. An effective response to the recent crises, whether in terms of rebuilding homes, restoring livelihoods or promoting stability and security, will therefore not be achieved without a coherent and significant approach to promoting social reintegration.

A Snapshot of Three Aspects of Social Diversity in Kyrgyz

(i) Ethnic Groups in Kyrgyzstan

(ii) Economic Poverty

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(iii) Human Poverty

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The following three elements, peace and tolerance building, youth inclusion, and building confidence in security, and stability and justice are elements of the minimum package of social reintegration investments which are called for to enable the country’s transition from crisis to sustainable development. A fourth element, namely reconciliation and rebuilding of social capital within and between communities, is addressed by the operation on Recovery and Reconciliation through Infrastructure Delivery described above.

Peace and Tolerance Building. While the April and June events were relatively short-lived, tensions and insecurity in the affected regions continue, exacerbated by highly polarizing information campaigns and rumors propagated through the media, mobile telephones and word- of-mouth. The high risk of future eruptions of violence, particularly given the uncertainties of upcoming parliamentary elections, is very high. Supporting the establishment of a culture of peace and tolerance in at-risk environments throughout the country is both a short- and long-term priority. These activities will directly support security and stability and strengthen the resilience of communities to resist potential future drivers of conflict. Peace and tolerance activities which would help to address ongoing tensions in Kyrgyz and which have proven effective in similar contexts include: immediate peace and tolerance training for local opinion-shapers (teachers, journalists, religious leaders, local officials, magistrates); human rights and protection training for security forces; public media campaigns on peace-building; community-level trainings on conflict management and conflict resolution; development of peace and tolerance curricula for schools; grants for arts and cultural activities promoting peace messages; forums for inter-ethnic dialogue and cooperation.

→Total Budget Requirement to meet Peace and Tolerance Building Needs: 3,070,000 USD

Youth Inclusion Activities. Large numbers of young people were involved in both the April and June events and youth are one of the most poor, vulnerable and marginalized groups in Kyrgyz. Whether politically or economically manipulated into taking part in recent violence, or motivated by resentments, radicalization or criminal motivations, it is clear that achieving a sustainable peace will require explicit targeting of youth needs. Yet, properly encouraged, young Kyrgyz could play an important role in driving growth, development and peace in their communities.

Youth in Kyrgyz

Youth are one of the most populous sub-groups in the country. In 2008, young people aged 14 to 34 accounted for close to 40% of the overall population. Two-thirds of young people in the country reside in rural areas44, where education, employment and leisure opportunities are often limited and/or of poor quality. Agriculture is the biggest employer of young people in the country (38% of all employed youth), yet jobs in this sector are often poorly paid and seasonal. Overall, young people are highly pessimistic about current trends in the country. A survey of youth attitudes conducted in 2009 found that only 21% of young people felt that positive changes were taking place in the country; meanwhile, 23% felt dissatisfaction with what was happening, 31% felt fear of the future and 14% felt apathy and acceptance of their fate.45 Feelings of exclusion and powerlessness leave many young people open to negative forces in society, including criminal organizations, the drug trade and extremist groups, all of which are active throughout Kyrgyz.

It is recommended that the government and its partners develop youth inclusion activities to support young people to develop livelihoods and life skills as well as to contribute to decision- making and governance. Specific activities could include: life skills development (including information technology, foreign languages, leadership, healthy lifestyles and citizenship skills); employment support (including formal and non-formal skills training and vocational education, apprenticeships, business development skills, access to micro-credit, mentoring, employment creation and job counseling and referrals); development of youth-friendly spaces and recreational opportunities in rural and marginalized communities; legal education and support services for youth and youth employers, including training on labor and migrant rights; and capacity-building support for youth organizations and youth-run services.

→Total Budget Requirement to meet Youth Inclusion Needs: 5,100,000 USD

Building Confidence in Security, Stability and Justice: The April and June events clearly eroded citizen confidence in the state’s ability to uphold security and stability in the country and to maintain its monopoly on violence – the very foundation of state legitimacy. While many communities in affected areas feel abandoned and/or persecuted by the full range of state institutions – from the executive itself to local authorities to state-owned media – it is state defense and security forces, both armed forces and the police – in which they are most disappointed. Unable to assure civilian protection, to control the spread and use of arms, to prevent military equipment and supplies from being co-opted by participants in the violence and to maintain command and control within their ranks, state security forces were seen - at best, as ineffective and strongly biased towards certain ethnicities - on the average, as complicit in the violence and - at worst, as the very instigators of the events. Moreover, in many Uzbek communities, state agencies are claimed to have continued an anti-Uzbek campaign of harassment and intimidation since the end of the widespread violent conflict. In this context, fear continues to paralyze communities of all ethnicities in the affected areas and citizens throughout the country lack confidence in the state security and justice apparatus.

In the immediate-term, experienced international security trainers and advisors working under the auspices of a respected agency such as the OSCE, should be mobilized as a means of guiding this process. The presence of neutral actors would reassure the citizenry of the commitment of government to fully respecting the human rights instruments to which the Kyrgyz Republic is a signatory. A strong signal needs to be given to end any perceptions of a culture of impunity within the defense and security sector and to ensure that all legal provisions of the Kyrgyz Republic are protected and upheld. The full legal and legislative arsenal of provisions to regulate the defense and security forces, and to prosecute and punish those guilty of human rights violations or torture, including sexual and gender-based violence, should be enacted. An ombudsman, independent state agency reporting directly to the President or parliamentary committee, supported by international observers, may also be beneficial in encouraging citizens to report crimes committed against them during the April and June events, to which many victims currently feel the state is turning a blind eye. Currently, many victims are reluctant to report crimes and violence to the Criminal Investigations division of the police, given that many allegations concern police officers. In other cases, victims report police inaction in the face of reported crimes. In parallel, the government is encouraged to support any international Human Rights investigations of the events which its international partners may propose. This type of commitment will further encourage confidence in the state’s commitment to transparency and justice.

In the medium-term, training of the security sector in civilian protection, professional ethics, human rights and due process should be prioritized, as should the overall professionalization of national security forces. Similarly, capacity-building for the Ministries of Defense, Internal Affairs and Justice should all be envisioned. In all of these activities, the international community will be a key partner for the government and its expertise in similar exercises around the world should be fully utilized. Finally, the government of the Kyrgyz Republic is encouraged to commit to building a government and civil service representative of the nation’s ethnic diversity. This may require the adoption of specific quotas, such as those enacted in Kyrgyz parliament to address the historic underrepresentation of women in the government. A wider security sector reform process could provide the necessary space for addressing this issue, alongside other weaknesses in the technical skills, institutional capacities, coordination and civilian oversight of the defense and security sectors. This would be a valuable investment in the long-term security of the country for both the government and its international partners. In the absence of a comprehensive strategy to address the lack of confidence in the security and justice sectors, stability may continue to elude the country and perpetuate an institutional vacuum in which organized crime, extremist movements and violent elements take further root.

→The total Budget Requirement to build confidence in Security, Stability and Justice = 8.0 million USD. These aspects could also be funded directly by interested donors through financial and in-kind contributions to the government of the Kyrgyz Republic, and could be considered within a larger security sector reform project, if deemed appropriate.

ANNEX IV: SOCIAL PROTECTION

Introduction

The April-June events led to a considerable death toll and injuries that are unprecedented in Kyrgyzstan’s history as an independent country. This, and the associated social upheaval, has had both direct impacts by causing major and lasting disruptions in society and economic activity and internal displacement, and the indirect effects—ranging from the closure of borders, which seriously disrupted trade, and labor migration through the effect on the financial sector, the business climate and on investor confidence. The inter-ethnic tensions in the south are most likely to depress the growth rate in 2010 and beyond, especially if political tensions do not abate and reconstruction and reconciliation processes take off slowly. The interim government’s policy actions will play a critical role in containing the damage through direct assistance and indirect channels.

Background

Poverty. The Kyrgyz Republic is one of the poorest countries in the CIS, with a per capita income of US$853. The country faced a difficult economic situation in 2009 and experienced only 2.3 percent growth, compared to an average of 5 percent over the preceding half decade. The global financial crisis adversely affected the economy through the transmission channels of exports and worker remittances, which declined, respectively, by 14 percent and 30 percent in 2009. Early information indicates that the recent political upheaval will dampen an economic recovery, keeping growth at about 2.2 percent per annum for 2010. Low economic growth makes significant poverty reduction more difficult to achieve, especially in the absence of a flexible and widely accessible safety net.

The population of the Kyrgyz Republic has experienced a significant decline in poverty over the last decade. According to national accounts data, private household consumption per capita increased by 16 percent in real terms during 2003-08. Over this same period, the average consumption per capita of the poorest 20 percent of the population grew by 11 percent a year. The factors driving the increase in household expenditures were the growth in worker remittances, public sector wages, pensions, and private sector wages.

The National Statistical Committee estimates total and extreme poverty at 32 percent and 6 percent of the population, respectively, for 2008 based on the latest available data from the Kyrgyz Integrated Household Survey (KIHS). Rural poverty significantly exceeds urban poverty, as seen in the Table 1. Two-thirds of the poor and the extreme poor live in rural areas. The incidence of poverty is highest in the oblast of Issykul (52 percent) and lowest in Bishkek (15 percent). However, due to the concentration of the population in the southern region, one-quarter of the Kyrgyz Republic’s poor live in Osh and another 19 percent live in Jalalabad.

Table 1.

IKyrgyz Republic: Poverty Rates, 2008

(Poor as percentage of total population)

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Source: Kyrgyzstan, Integrated Household Survey 2008

Poverty in Kyrgyzstan differs considerably between urban and rural residents. This is due in part to the fewer income earning opportunities available in rural areas and high dependence on agriculture, whose productivity is circumscribed by such factors as the scarcity of dependable irrigation systems, availability of quality seeds and agriculture inputs, and less-than-optimal land use practices. Moreover, the lack of cash income leaves those rural households dependent on farming, which is especially vulnerable to weather -related shocks.

In addition, the non-income dimensions of poverty also appear more in rural areas. Electricity is available to all urban and rural residents, while district heating and hot water are available in Bishkek and partially in Osh as well as a few other towns. Additional community services, such as sewerage, gas supply, and water supply, are also available in most of the oblasts, but rural access rates to basic community services are significantly lower than in urban areas—as is common in many other CIS countries.

The profile of poor families is closely correlated to family composition. Families with three or more children have a much higher probability of living below the poverty line. An estimated 46 percent of children from families with three and more children fall below the poverty line against 36 percent of children from smaller families. An estimated 10 percent of children from families with three or more children are below the extreme poverty line against 4 percent of children from smaller families. The proportion of children living below the poverty line in the Kyrgyz Republic is 36 percent, with the highest incidence in Talas and Issykul oblasts at 55 percent and 53 percent respectively. Child extreme poverty rates are highest in Issykul and Naryn oblasts at 19 percent and 13 percent, respectively, and lowest in Bishkek and Chui (between 2 and 3 percent).46

In the first quarter of 2010, significant policy changes were introduced that would impact household incomes. On January 1, 2010, the government raised electricity and district heating and hot water tariffs by 114 percent, 110 percent, and 320 percent, respectively. Simultaneously, the government also increased the level of pensions (24 percent), public sector wages (by KGS 200 per month), and cash transfer programs of the MB and the MSB (by about 18 percent and 81 percent, respectively). In addition, the government monetized the categorical benefits based on entitlements and abolished some recipient categories (e.g., persons living in high altitude areas). Moreover, during the first quarter of 2010, remittances rebounded by 18 percent compared to the first three months of 2009.

Poverty is estimated to have remained constant in 2009 at 31.7 percent. However, in 2010 it is likely to fall by a total of 2.3 percentage points to about 29 percent. The increase in social benefits through the MB, MSB, and monetization of categorical benefits led to a decrease in poverty of 1.7 percentage points. The decrease due to the pensions and public sector wages led to an additional decline in poverty in 2010 of about 0.5 percent47. There are potentially two avenues that would result in significant revision of poverty trends: (1) a remittance rebound—which could lead to a decrease in poverty, and (2) a supply shock resulting an export fuel tariff imposed by Russia, which provides the vast majority of Kyrgyz Republic’s total fuel imports.

In April, the economic situation changed significantly. The political instability, closure of the border with Kazakhstan for six weeks, and the continued closure of the border with Uzbekistan led to a disruption in economic activity. The farming sector was particularly affected due to the resulting difficulty for farmers to obtain affordable fertilizer and credit (due to the disruption in the financial sector). They were also hit hard by the sharp increase in fuel prices. Moreover, as a result of the June civil unrest many businesses—especially those in southern cities—were adversely affected by total destruction, closures and/or decrease in sales. The events in April resulted in an immediate human impact, as 9648 persons were killed and 1,622 persons injured, of which 822 were registered as receiving medical treatment49. Furthermore, the official death toll in Osh and Jalalabad oblasts has reached 322 after the June clash, and more than 2,200 people were injured.

The disruptions have not impacted all social groups equally. The population groups most likely to bear the brunt of the slowdown are SMEs, construction, agriculture and tourism sector employees and small farmers. The disruption in the supply of credit, especially to farmers, during the sowing season in April/May, exacerbated the difficulty farmers had in purchasing fertilizer and fuel resulting from the border closure. The political instability and civil unrest forced thousands to flee the South of Kyrgyzstan leaving their land and property unattended, wiping out even small opportunities for many who would otherwise be employed at least in the informal agriculture and trade. Issykul, already the oblast with the highest poverty rate, is likely to be severely affected, given the importance of income from Kazakhstan tourists to the local economy. The other most affected areas are Osh and Jalalabad oblasts where the number of the poor has been the highest.

Spending for social assistance. Currently, the main types of policies to protect the poor and vulnerable include:: (i) social assistance, (ii) social services for vulnerable groups of the population, (iii) social insurance, and (iv) unemployment allowances50.

uA01app04fig02

2010 Republican Budget Expenses in Social Protection

Citation: Policy Papers 2010, 073; 10.5089/9781498337106.007.A001

Source: 2010 Approved Republican Budget, Ministry of Finance, Kyrgyz Republic

The spending for social assistance (cumulative MB and MSB) in 2010 increased by 73 percent compared to 2009. Spending has increased relative to GDP as well, and for the first time reached 1 percent of GDP, which is still lower than in most peer countries.

The main reason for the higher MB budget was an increase of GMI51 envisaged in the CDS. The main reason for the increase in the MSB amount was the January 1, 2010 increase of energy tariffs (subsequently reversed). New regulations detach the calculation of MSB from the GMI, and flat rates of MSB are set for 15 categories of beneficiaries52. The increase of the “privileges” budget because (i) on January 1 all privileges were monetized, and (ii) there was an increase in energy tariffs.

During the last three years, the increase of the privileges budget has been at much higher rates than the increase in the MB and MSB budgets.

Table 2:

Republican budget spending on social assistance

(KGS million)

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Source: 2009 & 2010 approved Republican Budgets; 2009 annual budget execution report of the Central Treasury, Kyrgyz Republic

The social fund expenses, excluding government contribution, are projected to decrease by 7 percent in 2010. However, the budgetary contribution to the social fund has been increased substantially in 2010. The approved 2010 budget envisages a transfer of KGS 5 billion (8 percent of total budget expenditure) to the pension fund against KGS 2 billion in 2009. As result the total expenditures of the social find are projected to increase by 43 percent in 2010. In 2010 the total budget is KGS 19.1 billion. of which KGS 17.6 billion is projected to be spent on pensions, compared to 12.1 billion in 2009.

Unemployment and unemployment benefits. The rate of unemployment in Kyrgyzstan is estimated at 8.2 percent in 2008 based on the ILO definition. Neither national statistics nor ILO provides more recent data. However, according to other surveys the share of the labor force without jobs is much higher, at 18 percent. Both figures are strongly affected by measurement issues related to the high share of the informal economy in Kyrgyzstan.

Unemployment benefits are aimed at providing a safety net in case of job loss. But their level (the amount of the individual benefit ranges from KGS 250 to 1.000 per month, with an average of KGS 450 per month as of 2009) is too low to provide effective consumption smoothing, or to have a significant poverty reduction effect. While this low level discourages “dependency mentality” and encourages job search, it may deter job seekers to register as unemployed, given the paperwork involved. Eligibility depends on 3-years’ participation in the formal labor market with at least 12 months of social contributions payment. This disqualifies youth—comprising 60 percent of all registered unemployed—from obtaining unemployment benefits. The economic and poverty reduction significance of the unemployment benefits scheme is limited, with high under-registration and hidden unemployment. Only 3.000 unemployed in the Republic receive the benefit, most of which are residents of Bishkek. With very limited coverage, insufficient labor demand in the formal sector, and the pressure of high poverty levels, job-seekers are forced to the informal sector for some kind of paid work. That work, however, is badly paid, irregular, and does not confer the labor rights and safety standards associated with formal employment.

It is expected that internal displacement resulting from the June events brings an unemployment upsurge, which is not likely to be reflected by the official administrative statistics. People who have lost semi-formal or informal jobs in small business, petty trade and farming have mostly been non-contributors to the Employment fund and therefore (i) are unlikely to turn up for registering as unemployed, (ii) would not receive the status of an unemployed according to the Employment Law in effect. To respond to the expected unemployment crisis caused by June unrest, the Government is considering a few options including public works, establishment of a ‘restoration and development’ fund and setting up a system of micro credits for revitalization of SMEs. However, administrative barriers are worrisome as (i) there is no single agency in charge and coordination between migration, employment, fiscal, social authorities and local governments remains to be improved, (ii) at the local level administrative barriers – different operational procedures and eligibility requirements of various possible programs – are likely to discourage many of those in need to apply.

Social Assistance. The social assistance system in the Kyrgyz Republic is in the process of transition, and is currently a mix of new programs and programs inherited from the previous system. Over the last 10 years the government made serious efforts to reform the social assistance system in order to improve its targeting and turn it into a more consistent and efficient scheme.

Currently the social assistance system includes a number of cash benefits and category-based compensations (formerly called “privileges”). There are two targeted cash benefit programs: the Monthly Benefit53 (MB) for the children of poorest families and the Monthly Social Benefit (MSB), mainly for the disabled and elderly not eligible for a pension54. People capable to work are not entitled to social assistance benefits.

In the Kyrgyz Republic, granting of state benefits to eligible beneficiaries is strictly centralized and regulated by the Law of the Kyrgyz Republic on State Benefits. State benefits are funded from the central government budget and administered by the State Agency for Social Welfare (ASW), with the exception of unemployment benefits, which remain administered by the Ministry of Labor, Employment and Migration (MoLEM).

Monthly Benefits. The MB is a means-tested cash benefit for children from the poorest families. Since 1998, after the adoption of the Law on State Benefits, the government started applying means-testing to social benefits through the introduction of the MB targeted to children of low- income families and other poor individuals.

Recipient families have to meet certain criteria to qualify for assistance. The average monthly per capita family income has to drop below a means-tested threshold, called the Guaranteed Minimum Income (GMI),55 which is calculated as a relative share of the extreme poverty line. When per capita income of a family is below GMI, the Government pays this difference to the children. The children are the only beneficiaries of MB within the family. The MB scheme covers 17 percent of children in the country.

The persistent problems in the social assistance system of Kyrgyzstan, irrespective of the recent political upheaval, are the large exclusion of extreme poor from the mainstream social assistance schemes, and the weak purchasing power resulting from the low level of the benefits paid to the extreme poor children (average MB is 25 percent of the extreme poverty line, at around US$5.6 per month for a child). The low level of benefits during the last several years has been the result of the lack of regular updates of GMI levels.

In November 2009, the Law was amended (and entered into legal force from January 1, 2010), and currently the MB is targeted to children from extreme poor families only. The analysis done before the adoption of the new law showed that the coverage of the extreme poor children by the MB is too low, approximately 35 percent. Hence, the previous government decided to improve the MB eligibility criteria to reduce the inclusion and exclusion errors and to expand the coverage of the extreme poor through the MB system. Further work was planned to be done during 2010.

The level of GMI stood at KGS 200 until recently. It should be noted that the extreme poverty level is currently set at KGS 960. October 1, 2009, the level of GMI was increased to KGS 240, and again to KGS 282 beginning January 1, 2010. Currently the average MB paid to beneficiaries is KGS 212 plus a KGS 40 flat rate topping-up to compensate for food price increases (the latter is financed by the European Union funds). The government is planning to increase GMI to KGS 310 retroactively from July 1, 2010, and the funds to cover this increase are foreseen in the approved 2010 budget.

Targeting is in Kyrgyzstan is complicated by the large number of households living below or near the poverty line, and by the high share of household income coming from informal earnings that is difficult to verify. In addition, the “propiska” system, which restricts lawful residence to where one is registered, leads to the exclusion of the majority of internal migrants from applying for social benefits (as well as for maternity and unemployment benefits, healthcare, and education for their children). Other groups often excluded from these services and benefits are stateless individuals (some of them ethnic Kyrgyz without proper papers); rural women in Muslim religious marriages without a state marriage certificate, and persons with disabilities (who are required to obtain 10 different documents in different places in the span of 7 days to prove their status—a physical impossibility for someone with a serious disability, unless a bribe is paid).

The MB also envisages a one-off benefit at child birth for poor families and flat-rate allowances for children under 3 years old.

In April 2010 the number of MB beneficiaries stood at 351.000. It should be noted that 84 percent of the MB beneficiaries are concentrated in the three southern regions (Jalalabad, Osh, and Batken), which were the scene of renewed unrest (June 2010). Currently, the social protection authorities cannot confirm the changed needs or the situation of their clientele: the work to track registered clients has just started in late June, when social offices resumed their operations. In Osh, one of the most affected cities, only 21 new applicants turned up for the MB in June, hence it is difficult to estimate the need and possible inflow of applicants. The MB administration and outreach mechanisms are weak and additional barriers are likely to be (i) migration and internal displacement – mostly migrants cannot apply for the MB and other benefits in their current place of temporary residence since local welfare offices are unable to communicate and cross-check their information timely, (ii) lack of verification documents of families, whose property had been damaged or destroyed, (iii) low awareness of the population of whether they could be eligible for the MB as a result of worsened conditions such as loss of income source.

uA01app04fig03

MB beneficiaries in 3 southern regions

Citation: Policy Papers 2010, 073; 10.5089/9781498337106.007.A001

Source: Agency for Social Welfare (Kyrgyz Republic) operational data

Monthly Social Benefits. The Monthly Social Benefit (MSB) is a cash payment paid to defined categories of individuals unable to work and not entitled to pensions. Currently, the following categories of citizens are MSB recipients:

  • Children with disabilities;

  • Disabled from childhood;

  • Disabled ineligible for pensions;

  • Elderly above retirement age ineligible for pensions;

  • Mother-heroes;

  • Children who lost the breadwinner

Most citizens in the above categories are entitled to additional allowances for health services at state health care institutions, free medicine, housing subsidies for payment of public utility bills and a number of other state social support measures.

In recent years, the number of MSB recipients significantly increased (more than 66 percent between 2000 and 2008). As of May 1, 2010, the number of MSB recipients was 63,818 persons56. Due to economic and social disruptions in June the Government is concerned that the number of MSB recipients can decrease, at least temporarily, until de facto location and status of every client is reconfirmed.

According to legislation, the MSB was linked to the GMCL, and until October 1, 2007 its size grew uniformly for all categories of beneficiaries in tandem with the increase of the GMCL.

In response to the 2008 increase in food prices, in September 27, 2008, a Presidential Decree was issued on “On Payment of Supplements to Monthly Social Benefits.” For different categories of beneficiaries the supplements varied from minimum of 100 KGS to maximum of 300 KGS. This was followed by another Presidential Decree, October 13, 2009, “On the Size of State Benefits,” which further increased the MSB amount for all categories. It also detached the calculation of MSB from the GMI, and set flat rates of MSB for 15 categories of beneficiaries.

In 2009, MSB program expenditures amounted to KGS 535 million, which is 1.2 percent of the state budget. From January 1, 2010, in light of the increase of the MSB for all categories of beneficiaries, the total MSB expenditure envisaged in the budget was increased by 77 percent (to just below KGS 1 billion in 2010). Currently the average monthly amount of MSB is around KGS 1,300 and the temporary Government has drafted a decree increasing it up to KGS 1,500.

Privileges (now called compensations). The social assistance system also used to support 38 types of “privileges” for 33 types of beneficiaries. The privileges were enacted under 10 laws and a number of regulations. Privileges were extended for transport, communications, energy, medicines, health services, housing, sanatorium and resort services, utilities, and other municipal services. Depending on the category, privileged persons were eligible for l00 percent, 50 percent, or 25 percent price discounts up to a quota (social norms of consumption). The difference between market prices (posted tariffs in the case of energy and utilities) and amounts actually paid by privileged categories within social norms previously were paid directly to the energy/utility providers by the government.

In 2010 the number of privileged groups was decreased to 25 and in-kind privileges were monetized. After monetization, the privileges became a monthly lump sum compensation for all types of what were previously in-kind privileges. Currently the list of recipients of privileges pertains mostly to those living in mountainous areas (accounting for almost two-thirds of all privilege recipients), people with disabilities (about 20 percent), war veterans (10 percent), law enforcement officials, the military, Chernobyl victims, and some other categories. Currently there are 52.009 beneficiaries of this compensation system.57 The 2010 total budget of compensations is KGS 1.7 billion, which is more than double the 2009 budget and 42 percent of the total budget for social assistance. The monthly amount of monetized privileges varies from 1,000 to 7,000, depending on the category of the beneficiary.

There has been a concern about reversal of the reforms and achievements reached earlier in 2010, especially since the electricity, district, and hot water tariff increases were reversed by varying degrees after April 2010. Formally, there have not been any changes in the social safety net and monetized privileges remain intact. The Government is aware of the positive impact of monetization on the rural beneficiaries, especially those living in the South where the economy is more cash-scarce. At the same time, the recent initiatives of the temporary Government – focused on developing a set of compensatory measures to the April and June victims – are flowing in the ‘old’ direction, by suggesting to establish new categorical in-kind benefits such as free housing, free kindergarten access, free vocational schooling and so on. This is a result of the current social safety net’s inflexibility, low coverage, small benefits and administrative weaknesses, making it a poor tool to address the shocks and to ensure inclusivity of those in need. Until these hurdles are overcome, the reversal trends are likely to be unavoidable.

Social services. Social services include those for vulnerable population groups. In practice, these services are almost exclusively limited to residential institutions for children, people with disabilities, and the elderly. There is also a poorly funded system of home-based social services for orphans, elderly, and people with disabilities. The government has a plan to develop a system of rehabilitation centers for the disabled. In 2009 the government established a Child Protection Department at the national level, as well as a network of regional Family and Children Support Departments, staffed by 178 specialists of child protection. While this is a positive development, they still lack capacity and training to be fully operational. However, services for families and children at the community level are still lacking, apart from a few pilot projects supported by donor resources.

Social insurance. The social insurance system consists mainly of pensions for former employees or farmers (for old age and disability) and their dependents (survivorship). Other social insurance benefits include illness or maternity benefits for contributors and funeral benefits for pensioners.

Pensions are one of the main social protection instruments in the country from the point of view of both coverage and the impact on welfare. Kyrgyzstan inherited from the Soviet Union a notionally-defined benefit (NDB) pension system operated on a pay-as-you-go basis, with a low pensionable age (55 for women and 60 for men), and practically universal coverage. Pension entitlements in this system were generous in comparison to the fiscal potential of the state, with the result that after the collapse of the Soviet Union, the pension system in the 1990s was characterized by substantial arrears. Delays in the payment of pensions and payment in kind were the frequent result.

A new pension law for the Kyrgyz Republic was adopted in 1997. Important features of the new pension system were: (i) the gradual increase in pension age to 63 for men and 58 for women by 2007; (ii) the abolition of some pension privileges; and (iii) the introduction of a three-component pension system. The first component is the so-called base pension, which is equal for everyone who has the necessary number of work years (25 years for men and 20 years for women). The second component is the continuation of a notionally-defined contribution (NDC) based pension supplement to smooth the transition from the previous to the new system. The third component is a new NDB-based supplement, which will eventually replace the NDB component.

The NDC system introduces a direct link between workers’ pension contributions and their pension entitlements after retirement, but keeps in place the pay-as-you-go principle. The reforms allowed for the transfer of pension liabilities from the government to an increasingly balanced Social Fund. The pension system has also become an effective instrument for reducing poverty among the elderly: World Bank data show that households with pensioners have 20 percent less risk of becoming poor compared to households without pensioners.

The longer-term sustainability of pension system was weakened by amendments introduced into the Pension Law in 2007, which effectively returned the pension age to 55/60, substantially increasing the number of pensioners, while also reducing the number of contributors. As a result, further adjustments to the system were made to rebalance Social Fund financing to meet growing pension liabilities. To help rectify this situation, the Government plans to transfer base pension payments from the Social Fund to the Republican Budget in stages over five years, commencing with a transfer of 20 percent of the base pension in 2010. This should release Social Fund resources for payment of insurance components of pension, but puts an additional burden on the government budget. Meanwhile, legislation was passed that introduces a fully funded pillar into the pension system, requiring resolution of issues related to the replacement of the pay-as-you-go system of resources allocated to the funded pillar, and the funding of reliable investment options in the small and volatile financial market of Kyrgyzstan.

A key problem with social insurance benefits is that they assume employment in the formal sector. Nearly half of the work force, is found in the informal sector, which by definition is excluded from the formal pension scheme. This also precipitously shrinks the base for social contributions, placing serious pressure on the finances of the Social Fund, and hence on the consolidated budget.

Although in theory the main function of pensions is to smooth income over the life-cycle, in practice they function as a key form of social assistance in Kyrgyzstan, since most pensioners live in large extended families. Households with children therefore benefit from the presence of a pensioner in the household. Owing to this poverty alleviation effect, raising pensions may be a socially desirable policy in the short term. This effect is incidental, however, since pensions are by definition not specifically targeted on the poor/vulnerable.

Sector Impact

Impact on social assistance system (social and budgetary). The April protests in Bishkek officially resulted in 1,688 casualties, of which 86 were reported dead. The interim government decided to pay one-off lump sum compensation to all the victims: 1 million KGS to the families of the dead, and from 10,000 to 100,000 wounded depending on the severity of the injuries. As of May 26, the total amount paid one-off was KGS 100 million out of the total of KGS 200 million envisaged. This amount was added to the ASW budget for “Compensations.”

Out of 1,622 wounded victims as of May 24, only 82258 were formally recorded in the hospitals59. The Ministry of Health currently is examining the recorded casualties to assign categories of disability. Depending on the category, these victims may become MSB beneficiaries. If all 1,622 wounded victims are categorized as disabled, this will increase the number of MSB beneficiaries by 2.6 percent, and hence require additional budget resources amounting to around KGS 15 million during 2010 (from June 2010 to December 2010). In 2011, the required increase in the MSB budget to include 1,622 victims would be KGS 25 million if the current average level of MSB is maintained60.

Currently there is also a pressure on the interim government to compensate the victims permanently, by assigning them to a privilege/compensation category similar to World War II Veterans. The monthly payment of compensation to this category is KGS 7,000. If this measure is confirmed, the required additional amount to be paid to the victims in 2010 would be KGS 82.7 million, or a 4.7 percent increase of the compensation budget (June-December 2010). The required estimated additional amount for 2011 would be KGS 141.8 million, or an 8 percent increase of the compensation budget.

As said earlier, currently it is not possible to quantify the impact on poverty. However, authorities stated that they expect some increase in extreme poverty, and therefore up to a 20% increase in the number of MB applicants in autumn. Given the 7.4 percent of extreme child poverty, every percentage increase in extreme poverty may bring approximately 19.000 new MB beneficiaries into the system. The planned increase of GMI to 310, and therefore an increase of average level of MB to 240 (212 now), plus the KGS 40 flat-rate food price increase compensation paid to all the beneficiaries would result in additional monthly spending of KGS 5.3 million on MB. Therefore, the required additional spending for MB would be KGS 31 million for July-December 2010.

If the underlying assumptions of this estimation materializes, then the overall additional spending required in 2010 would be about KGS 130 million, in addition to the KGS 200 million already foreseen in the amended budget for one-off compensation measures.

The authorities are fully aware of the need to maintain social peace if the current fragile stability in the Republic is to be preserved. As often happens in post-crisis situations, social pressure is high to increase social benefits in terms of eligibility as well as amounts of transfers. Authorities reported that payment of the pre-existing social benefits has been fully executed for the months of April and May and the commitment by MOF and line agencies assessed to continue protecting social expenditure in the critical months ahead.

The authorities are preparing an adjusted budget, which will be adopted by decree, as parliament was dissolved after the April events. In the frame of the preparation of this adjusted budget, ASW has already submitted to MOF a request for the financing of various social benefits for which it holds responsibility. The request is broadly based on the appropriations contained in the initial 2010 budget law, apart from the ad hoc one-off compensations for the victims of the April events. While the ASW expressed concern over whether it will be able to fully execute its payment obligations over the next few months, the MOF seems confident it will find the necessary fiscal space to finance in full all protected social expenditure.

January-May 2010 Treasury reports confirmed full and timely payments of all state benefits. ASW reports confirmed the Treasury reports. Payments of privileges in May 2010 from the Central Treasury were KGS 114.5 million. KGS 100 million as lump-sum compensation to the victims of the April events was also paid. Payments of MSB in April61 2010 from the Central Treasury were KGS 85.4 million. This is in line with the required amount requested by the ASW from the Central Treasury.

The Treasury reports provide evidence of payments of MB as well as payment of the KGS 40 topping-up for the month of May.

Table 3:

January-May 2010 budget execution of MB

(KGS thousands)

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Source: ASW operational data

In two regions close to Bishkek, Sukuluk and Belovodsk,62 it was verified on the ground that the amounts were credited with the local treasuries and transferred to the respective post offices and banks for payment to final beneficiaries.

Authorities stated that the delivery systems of benefits were not damaged during April events. No regional social protection center has been affected. However, in several locations in Jalalabad oblast, the local branches of banks and post offices have been closed for several days following the unrest there at the end of April and beginning of May. This caused some temporary delay in payments of benefits in these regions.

Impact on Social Services. Social services are not likely to be substantially affected directly by the April or June events, largely due to their non-existence in many (rural areas) and generally minor role even in the country’s weak social safety nets. Rather, they face a number of pre-existing challenges, notably the fragmentation of relevant ministries and agencies. The former problem is compounded by the lack of a social policymaking body in the Cabinet. The latter occurs despite the potential for NGOs to provide efficient, community-based services for families, young people, and children and adults with disabilities, given the existence of a law on social contracting, and that Kyrgyzstan has more NGOs operating than other Central Asian countries.

Key challenges

The direct impact of April – June events on the social safety net seems limited, but highlights the weakness of the pre-existing system in terms of targeting, overall support levels (i.e., inadequate amounts for significant poverty reduction), and high exclusion error. On the other hand, there is a risk that, under social pressure, important earlier systemic reforms to address those shortcomings would be reversed. If such backsliding were to materialize, those results could be sacrificed for the sake of social pacification.

Impact on Employment, Unemployment, and Migration. Employment and unemployment levels are expected to have changed little in the immediate aftermath of the April events. This is in line with world experience that these are slow-moving variables, which react to shocks with a considerable lag.

It is more likely to expect high impact of the June events on unemployment. While no pick-up in applications for registered unemployment status was observed so far, it can be attributed to large internal displacement, loss of documents and disruption of work of the employment services during the civil unrest. Additionally, as mentioned earlier the people who have lost jobs in the semi-formal or informal sector would not be eligible for the employment benefit anyway and thus have no motivation to go through the bureaucracy of application procedures. Also, such applications are strongly seasonal, and early summer is the seasonal low point. The impact would mostly be noticeable from the fall, after seasonal jobs in agriculture fade out. The Ministry of Labor registered no marked impact on unemployment of the April events. The number of job- seekers without work was 104,000; 66,000 of whom were registered as unemployed, of which 3,000 were receiving unemployment benefits (two-thirds of them in the Bishkek area). About a third of the registered unemployed were women. At the same time, the data on the post-June situation is currently being collected with the assistance of local authorities and the expectations are that while the April events had not had a substantial impact on migration, the opposite has to be said about the unrest in June. According to the Russian migration authorities, they are facing a peak of applications from Kyrgyz migrants, who are explaining that they are not only seeking migration permits for the purposes of getting employment, but also for personal security reasons. NGOs and media in several Russian regions report an increased inflow of migrants from the country as well. Bishkek authorities are increasingly concerned about a visible increase in internal migration to the country’s capital, leading to increased risks of repeated authorized acquisition of land and further pressure on the capital’s labor market and social infrastructure. It is important that the authorities respond to this challenge not by introducing more prohibitive policies, but by focusing on enforcement of law and human rights of the migrants as well as the residents.

Following the June events, it is expected that growth performance of the major host countries continues to be markedly better and migration will pick up. In this regard the MOL said there were 350,000 Kyrgyz labor migrants in Russia, and about 60,000 in Kazakhstan. Kyrgyz diasporas in Russia estimate the number of migrants as over 500,000 and likely to increase to 700,000 and further. Roughly 80 percent of all labor migrants were from southern Kyrgyzstan and this share is not likely to drop. Remittances that recently picked-up largely due to improving activity in the Russian and Kazakh economies, are currently being supplemented by humanitarian assistance collected through Kyrgyz diasporas in Russia and Kazakhstan and transferred to the South.

uA01app04fig04

Monthly Remittance Inflow US$mn

Citation: Policy Papers 2010, 073; 10.5089/9781498337106.007.A001

Priorities

From a short-term perspective, the key challenge for the authorities will be to keep operational the social assistance delivery mechanisms and ensure that the payments of social assistance transfers made from the Central Treasury reach the intended beneficiaries.

In the medium- and long-term perspective, it should be noted that with the exclusion of 67 percent of extreme poor from the MB system, and 60 percent of disabled from MSB system, the social assistance scheme of the Kyrgyz Republic could be considered badly targeted. In addition, the amounts provided to the beneficiaries were not sufficient to have a significant impact on living conditions. The allocation of the overall budget on social assistance would also need to improve to enhance its pro-poor orientation. An obvious way to attain this would be to reverse the rising trend in the share of privileges/categorical compensation in the total budget.

Before the April events, the Government took sound measures to improve the social safety net, i.e., to increase the coverage of the extreme poor and raise the benefit level to help the beneficiaries escape extreme poverty, as well as to decrease the outflow of funds to the non-poor. By introducing new selection criteria and increasing the GMI level from January 2010, leakage to the non-poor was lowered, and inclusion of extreme poor was improved during the first three months of 2010.

The new authorities are building on existing policies and recent policy reforms with the aim of fighting poverty and social exclusion and promoting greater social inclusion. They are currently assessing the key immediate and longer-term challenges to social inclusion, the most crucial of which is the increased social and ethnic tension, especially in the southern regions. The increase of GMI from KGS 282 to 310 is already envisaged in the approved 2010 budget of MB, and MOF officials provided assurances that the budget amendments initiated after the April events would not affect this expenditure item. A formal decision of the interim government (a draft decree) needs to be adopted to apply this increase 63.

In the near future, given the current methodology applied for the MB, and in order to deal effectively with poverty and social exclusion, the only swift reaction from the government could be a further increase of GMI above planned KGS 310 and waiving – at least temporarily - the eligibility barriers related to land possession. When the authorities include the 40 KGS flat-rate payments to the MB beneficiaries (currently paid as compensation for food price increases) into the GMI, the GMI will increase to KGS 350. Analysis shows that an increase of GMI to KGS 350 will increase the number of beneficiaries by 10 percent64.

In the medium- and long-term perspective, to address poverty and social exclusion, the authorities will have to improve the measurement of both, as well as identify the major problems affecting the social assistance system. On this basis, the authorities will have to take complex and multi-dimensional measures, which will require an integrated approach combining existing policies in social assistance domains. The issue of a disproportionate increase of compensation/privileges budget, compared to other social assistance transfers, needs to be addressed, and resource reallocations should be made toward transfers that have a better targeting performance on the poor65.

One of the challenges faced by the authorities is to resist social pressure that could reverse some of the social reforms introduced over the last two years in an effort to preserve social peace and stability. In this respect, the announced proposal to roll back the monetization of privileges, if confirmed, would undo a centerpiece of the social reform package of late 2009.

A more direct, and far more efficient approach (in terms of poverty alleviation, including for children), would be to expand the MB in coverage and size in the post-June situation. This would help reach more of the poor and vulnerable, and provide better protection for those it reaches. It probably would also require direct donor support.

Categorical benefits (privileges), on the other hand, are an opaque and weakly targeted form of providing social assistance. As the Government is lacking alternative instruments for providing compensations to the victims of the June clash, there is a clear danger of them gaining ground in relative and absolute terms among the social protection programs, thereby reducing the targeting efficiency of the overall social protection system. This would act to reduce the fiscal space available for programs with better targeting performance, notably the MB and MSB, as well as for social services. A related issue is the possible reversal of the monetization of privileges (i.e., return to providing in-kind benefits). The demand effect of an effective reduction of the price of selected energy and other public services up to zero may well bring about rising fiscal and/or quasi-fiscal costs. The move would also inject unpredictability and non-transparency into the system, and saddle utilities with large quasi-fiscal burdens. This, in turn, would place those utilities in even worse financial shape, with dire implications for maintenance and investment.

Over time, Kyrgyzstan needs to continue building up a comprehensive and sustainable system of social protection. This would involve putting pension provision more firmly on a social insurance basis, with Social Fund finances on a sustainable basis. It would allow developing the safety-net role of social assistance, with the budget guaranteeing adequate social assistance benefits to vulnerable households. Finally, it would involve sufficient provision of community and local services that respond flexibly to the special needs of different categories of the population. Some of these services can be provided by the non-governmental sector. The events in June showed a huge gap in the social service sector that needs to be bridged: rehabilitation assistance, linking medical, social and employment assistance together, counseling, shelters, outreach and information provision – should these services have been in place before June, the efforts to provide post-conflict relief would be more prompt and efficient.

The interim government intends to retain broadly unchanged employment and unemployment policies during the remainder of the year. Its posture relative to the private sector and the business environment will play an important—potentially positive—role in private sector job creation. In this regard, the interim government is already implementing public work schemes as a short-term emergency measure, with UN and USAID support.

Another area where substantial efforts have been made is revamping vocational education to better equip youth with skills to facilitate their employment. A pilot program with EU support has already been implemented, providing three-month training for youth from underprivileged regions. The Ministry also noted that vocational training was being reoriented toward areas where employers have expressed a desire to have more trained job applicants. It stressed that Kyrgyzstan has an inverted pyramid in post-secondary education, compared with other countries, with more than twice (70,000) the number of students in university studies than in vocational studies (33,000).

Annex V: Energy

Introduction

This annex focuses on the impact of the recent developments, including April events and the June riots in southern Kyrgyz Republic, on energy sector performance, including decisions made on: (i) electricity and heat tariff roll-backs; (ii) institutional and management changes in the sector; (iii) immediate damage of the June clashes; and (iv) capital and operating investment plans for 2010-11 and onwards. The decisions made by the interim government will have a sizeable impact on energy sector revenues, the energy companies, and the state budget. There is the possibility of a substantial shrinking of operational and investment plans of energy companies, including putting at risk the country’s ability to successfully pass the 2010-11 winter energy needs.

Background

The energy sector is a key economic driver of the Kyrgyz economy. Hydropower production accounts for about 80 percent of the total primary energy production and electricity is the dominant energy. The power sector accounts for around 3.9 percent of GDP and 16 percent of industrial production. It also has huge export potential, which represents a significant contribution to sector financing as well as to the overall economy. Access to power is quasi- universal and the consumption per capita (at 2,400 kWh) is quite high for a developing country. In 2009, the power consumption was 6.95 TWh, of which about 54 percent for households, 23 percent for industry, 9 percent for government and other administration (budget), 1.5 percent for agriculture, and 12.5 percent for other purposes.

The sector is monopolistic and involves state involvement. The former vertically integrated JSC Kyrgyzenergo system was unbundled in 2001 into one generation company; one transmission company, and four distribution companies (see Box 1).

Structure of the energy sector

Currently the power sector is managed by six joint-stock companies (JSC):

  • The state generation company JSC “Power Plants,” which accounts for about 99 percent of total generation;

  • The state transmission company JSC “National Power Grid of Kyrgyzstan,” which enjoys a monopoly on the transmission segment, except for some large consumers close to and directly supplied by generation units;

  • Four licensed state distribution companies: JSC “Severelectro,” JSC “Vostokelectro,” JSC “Jalalabadelectro,” and JSC “Oshelectro”; each operating the distribution system with exclusive rights to supply consumers in its concession area.

  • Twenty-seven licensed private wholesalers/small distributors buying power from the generation company (about 250 to 300 GWh in 2009) and selling it to consumers.

  • In addition, the Bishkek District heat Distribution Company (BTS) distributes heat and hot water for the city. Osh CHP is responsible for production and distribution of heat and hot water there.

In mid-2008, the Kyrgyz Government intensified activities to privatize its “strategic assets,” including state-owned stakes in six energy companies. These included the Bishkek Combined Heating Power Plant (CHP), Bishkek Heating Distribution Company, BishkekTeploSet (BTS), and four power distribution companies. This resulted in a sale of 80.49 percent of shares in the two largest power distribution companies: Severelectro for about US$3 million and Vostokelectro for about US$1.2 million. The chronology of privatization tenders is detailed in Table 1.

Table 1:

Energy sector privatization chronology

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The Governance structure in the sector weakened further few months ahead of the April 2010 event. The 1996 Energy Law and 1997 Electricity Law led to the creation of a State Energy Agency (SEA) as the regulatory body for the whole energy sector, while the policy formulation was in the hands of the Department of Energy and Mineral Resources under the Prime Minister. In 2008, the government established a new Ministry of Industry, Energy, and Fuel Resources that subsequently, after the government reorganization of November 2009, was restructured into the

Ministry of Energy (MOE), and the SEA became a department within the MOE. These changes, regardless of rationale, decreased the predictability of sector governance and decision-making.

Weakness in financial management hinders the transparency of the power and financial flows in the sector and impedes the commercialization of sector entities. The current contractual arrangements in the sector are sub-optimal. The four distribution companies purchase electricity directly from the generating company on the basis of a standard one-year Power Purchase Agreement at prices determined by the MOE’s Regulatory Department. This approach reduces the role of the distribution companies to intermediaries, with no responsibility for business development. The generation, transmission, and distribution companies are not responsible for cash management: cash payments from end-users are collected and accumulated in escrow accounts and divided among the generation, transmission, and distribution companies on the basis of percentages set on a monthly basis by the MOE’s Regulatory Department. Wholesalers, however, collect and retain their funds. Finally, barters and offsets are resorted to (though to a lesser extent) in settlements between sector entities as well as between sector entities and end-users. In addition, power utilities often submit monthly and quarterly reports late and with unbalanced power flows. The same power exchange numbers between generation-transmission-distribution companies submitted by different utilities differ from each other. Finally, utilities often change reporting numbers after the reports have been submitted.

Lack of reforms and investments in the system, increasing production costs, and population growth exacerbate energy insecurity. During the past two winters, these factors interacted with record low levels in the Toktogul hydro power complex—which generates the bulk of Kyrgyz Republic’s electricity—resulting in severe shortfalls in electricity delivery, necessitating painful national electricity rationing.

The sector performance is also substantially below industry norms. Due to severe under- maintenance and related degradation of assets, the technical losses exceed industry norms. The commercial losses are related to legal, institutional, and governance issues. Apart from foregone revenue, such losses impose higher costs on the system. The losses are higher during winter and the additional generation to compensate for them is through the Bishkek CHP plant—which is very inefficient and increases the incremental costs of power supply well above the end-user tariffs. However, it must also be acknowledged that in the absence of adequate meters for proper energy flow accounting, it would be difficult to identify areas that need to be targeted as priorities.

The generation mix is inadequate. More than 90 percent of the country’s electricity supply comes from the Toktogul and the downstream Naryn cascade reservoirs, which together accounts for 78 percent of the total installed power generation capacity in the country. This makes the power sector vulnerable to hydrology and reservoir management variability, especially during the winter. The generation mix needs to be optimized to meet the load reliably and cost effectively.

Civil society is not a significant driver for more transparency in the sector. Historically, civil society was not sufficiently involved, as the government kept it away from the sector. Absence of reliable data, lack of independent audits by reputable firms, and inadequate public participation in tariff hearings by companies, worsens the situation.

Tariffs are among the lowest in the Europe and Central Asia region, and below cost recovery, placing perennial pressure on energy sector cash flows and fiscal balance. The current tariff structure is sub-optimal and lacks a sufficient cost-of-service analysis that would underpin further increases. The tariffs do not provide incentives for efficient management of resources at the supply level or for efficient use of power at the end-user level. Sales tariffs between entities do not ensure minimal cash expenses for the transmission company, the distribution companies, or wholesalers. Consequently, the sector is continually cash-strapped, causing Kyrgyz households to experience perpetual winter energy insecurity, reducing the competitiveness of the national economy, and frustrating longer-term prospects for reducing poverty and meeting the Millennium Development Goals.

Prior to the April events, the Kyrgyz Government had introduced a major increase in energy tariffs in January 1, 2010. The aim was to bring energy tariffs closer to cost-recovery levels, thereby raising revenues and decreasing demand in the short run. The April 7-8 events clearly show that the tariff structure had strong socio-political dimensions that preclude “shock therapy” solutions. Table 3 (below) shows the changes in tariff rates. It is noteworthy that tariffs were significantly rolled back for the categories with dominant consumption: residential, industries, and pumping account for nearly 76 percent of total power consumed domestically. A second round of tariff increases was foreseen for July 2010, pending an evaluation of the effects of the first round in the first quarter of 2010.

Table 2:

Power consumption and tariffs

Electricity Tariffs

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Source: Ministry of Energy
Table 3:

Issues and Challenges in the Kyrgyz Energy Sector

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Energy subsidies, which also increased substantially in the month before the April 2010 events, are widespread but poorly targeted. Simultaneously, the government introduced a number of social protection measures in January 1, 2010 to mitigate the immediate impact of the tariff increase. While the aim of the tariff reform was to eliminate the inherently universal subsidy in the old tariff structure, and the introduction of equitable cost recovery tariffs, the government did not assess adequately the impact of this steep tariff increase on the population in general, and the poor and vulnerable in particular. Governance shortfalls also occurred in the management of the subsidies. Numerous privileges, discounts, and subsidies were provided to various end-user groups without clear targeting. Some subsidies were financed from the state budget, while the burden for the rest (the discounts) was left to the sector, adding to its financial deficit. Although fiscal data point to dramatic increases in the subsidies paid in early 2010, anecdotal evidence suggests that many of these funds failed to reach the intended beneficiaries. Forty percent Kyrgyz Republic households receive energy subsidies.

Sector Impact

Impact of the April 2010 events

A – Reversal of tariffs increase

The direct impact on the state and sector budgets is estimated at KGS 6.8 billion (or about US$151 million – see Table 5). On April 20, 2010, the interim government reduced electricity, heating, and hot water tariffs, reversing most of the increases, with the following impact:

Table 5.

Urgent Funding (Investment) Needs by December 2010

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Source: MOE and JEA estimates.

Reversal of the power and heat tariffs led to a significant energy sector consolidated cash deficit for 2010, estimated at about KGS 2.5 billion66 (US$55.6 million), According to the interim government’s decree, this deficit would be compensated by the state budget.

VAT and retail tax exemptions67 for provision of electricity and heat service supply would result in about KGS 356 million (US$7.9 million) of lost revenues.

Increase in state subsidies to KyrgyzJilKommunSoyus (providing heating services to 23 urban centers) would increase by KGS 187 million (US$4.1 million).

A decision to re-install the power tariff discounts for mountainous areas was taken by the previous government just before the April events and will require a state budget allocation of about KGS 118 million (US$2.6 million).

B – Reversal of Privatization

The interim government has suspended implementation of the privatization program and annulled the results of energy company privatization tenders. The government has initiated a process of voluntary reversal dealing with the winning bidder, Chakan GES. In the deal, Chakan GES would return the shares back to the state and the government would return about US$4.2 million to Chakan GES, which includes US$3 million for Severelectro and US$1.2 million for Vostokelectro. The reversal of privatization deals (considered to be carried out in haste through an inadequately prepared and managed process) would require the state budget to return US$3.0 million equivalent for the sale of SeverElectro68.

C – Ensuring supply of electricity

Beyond these immediate needs, additional financing will be required to ensure supply of electricity over the winter of 2010/11 in order to preserve social peace. With no certainty in 2010 about export agreements69 for summer surplus electricity generated for water used for irrigation flows; no firm agreements with neighboring countries to use the Central Asia grid to transport large power in winter; and with budget deficits with the companies, it is likely that power and heat supply interruptions in winter will occur and may create a difficult situation for the interim government and its citizens. Similarly, a large reduction in the investment budget and a deficit would delay urgent repairs to thermal plants, district heating systems, and the generating stations in Toktogul complex, thus risking further disruption in the Kyrgyz power system. Several plans under consideration by the interim government, such as an accountability framework to track energy and cash flows in the sector, would need investment support for their implementation.

D – Burden on the State Budget

Sector debt and financial losses are a significant burden on the state budget (see Table 4). On December 31, 2009, the reported70 total debt of the distribution companies amounted to KGS 4.6 billion (about US$102 million). The total debt of the generation company as of December 31, 2007 (latest available audited financial statement) stood at KGS 5.5 billion (about US$122 million). 71 There are various forms of budget support to the sector, including loans (mainly to clear the arrears for fuel supplies), subsidies to finance urgent rehabilitation and some capital investments, cash transfers to vulnerable groups of the population to cover their electricity bill, and on-lending of guaranteed credits received from International Financial Institutions (IFIs). Finally, several debt restructurings and/or write-offs have been undertaken in the past, with the last large write-off of bad debts amounting to KGS 2.42 billion in December 2009.

Table 4:

Budget allocations (KGS million)

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Source: Ministry of Energy

E - Impact Assessment of Recent Key Decisions in the Energy Sector

The interim government has initiated development of an updated sector strategy with much more focus on transparency and improved sector governance. Prior to the April events, the energy strategy of the Kyrgyz Republic was guided by the: “National Energy Program 2008-10” (NEP), the “2025 Fuel and Energy Complex Development,” and the Mid-term Tariff Policy (2010-2012), approved by GOK. The new strategy aims at reversing the loss-making financial performance of the sector by introduction of transparency mechanisms to retain cash in the sector and ensure its proper use.

Impact of the June 2010 events

The overall direct damage to Osh and Jalalabad regions is estimated74 in amount of about KGS 90 mln (equivalent of about US$ 2.3 million). A number of poles, wires, transformers have been burned up, damaged, and/or stolen. A number of the gas distribution network parts are not operable. The revenues losses are estimated to have reached US$ 0.5 million.

The impact of key decisions by the interim government to date is delineated below.

Change in administrative ministry and senior management of the energy companies. The right to represent the government on the Board of Energy Sector Joint Stock Companies was temporarily given to the Ministry of Energy. The majority of staff in key positions has been replaced by new managers.

Enhanced focus on governance and transparency. The interim government has identified transparency and proper governance in the energy sector as one of the highest priorities on its agenda. The advisors to the ministry noted that the MOE is drafting a decree on a fuel and energy transparency initiative and examining immediate implementation measures. A metering and data acquisition system is being considered as one of the key priorities, with support of the ongoing distribution metering project from KfW, and the planned high-voltage metering project being prepared jointly with ADB.

Capital and operating investment plans for 2010-11. After April 2010, the Public Investment Program (PIP) financed by donors was revised to reflect reduction of the investment plans under KfW-funded projects; however, this was not linked to the April events and occurred as a routine planning exercise.

Priorities

Immediate needs to restore service supply in the South. The power and gas supply to the affected regions has to be restored as urgently as possible, before the winter season approaches. Various equipment and materials, including transformers, wires, poles, etc, need to be procured along with possible provision of funding for rehabilitation and construction works. Funding for supply of critically needed fuel (mazout) needs to be considered for the Osh CHP.

Short-term needs. The energy sector presents an excellent opportunity for the authorities