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.

Kyrgyz Republic - Joint Economic Assessment Report for the Kyrgyz Republic Donor Conference, Bishkek, July 27, 2010
Author: International Monetary Fund