ACTION FICHE N 1 FOR THE KYRGYZ REPUBLIC 1. IDENTIFICATION Title/Number Total cost Sector Policy Support Programme, Social Protection and PFM - Kyrgyzstan 2007-2009 - Third allocation DCI-ASIE/2009/021-363 Total cost: 9 000 000 EUR Aid method I Method of implementation EC contribution 9 000 000 EUR Sector Policy Support Programme: Sector budget support (centralised management) DAC-code 16050 Sector SociaVWelfare Service 2. RATIONAL AND COUNTRY CONTEXT 2.1. Country context and rational for SPSP 2.1.1. Economic and social situation and poverty analysis The Kyrgyz Republic remains one of the poorest countries of the EECCA 1 region. After a period of severe economic crisis and almost 50% reduction in GDP, Kyrgyzstan achieved a broad economic stability in 2000-2005. This positive path was impeded by the revolution in March 2005 followed by 0.5% GDP reduction. However Kyrgyzstan quickly recovered its economic growth and in 2006 the GDP growth bounced back to almost 6%. GDP growth accelerated in 2007 and reached 8.2%, with non -gold output rising by 8.7%, led by strong activity in the transport, trade and manufacturing sectors. Real GDP growth in 2008 remained robust at 7 %. The core macro-economic problem from mid-2007 through mid-2008 was the picking up inflation. An increase in international food and energy prices during the second half of 2007 contributed to an increase in inflation, to 20% by the end of 2007, compared to 5% at the end of2006. Core inflation (non-food, non-energy) was also quite high at around 8% at the end of the 1st quarter of 2008. This was mainly due to the highly expansionary fiscal policy. Although the revenue outtum during the 1st quarter was higher than during the same period in 2007, the increase of salaries of civil servants and higher than planned expenditure in the agriculture and energy sectors made the MoF use government deposits 1 The 12 Eastern Europe, Caucasus and Central Asia (EECCA) countries are: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, the Kyrgyz Republic, Republic of Moldova, the Russian Federation, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. 2
stocks, which more than halved over the period, from Som 8, I billion in January 2008 to Som 3 billion in March 2008. The projected end of period ( eop) inflation for 2008 remains high at I5.3 %, while the average inflation for the year 2008 stands at I9.I% 2 2005 2006 2007 2008 Real GDP growth(%) -0.2 3.1 8.2 7 Per capita GDP ($) 478 546 713 895 Inflation (%, eop) 5.9 5.I 20.1 I5.3 The outlook for the Kyrgyz economy for 2009 has worsened as countries in the Central Asia region are increasingly being affected by the global economic crisis. The regional economic slowdown is hurting the Kyrgyz economy via trade (declining exports) and remittance (return of migrant workers from Russia and Kazakhstan) channels, spilling over to domestic demand. As a result, economic growth in the Kyrgyz Republic is expected to slow sharply, from 7Yz percent in 2008 to less than 1 percent in 2009. Inflation has come down sharply since spiking at over 30 percent in mid -2008. Inflation fell to 16.7 percent in February 2009 and is expected to continue to ease off, possibly till 10% at year-end 2009. The spreading economic crisis is putting pressure on the Kyrgyz balance of payments and government finances. The current account deficit widened in 2008 due to higher import prices for food and fuel, mitigated by higher exports and remittances. In 2009, the current account deficit is expected to remain high as the reversal in food and fuel prices will be more than offset by a drop in exports and remittances 3 In December 2008 the Executive Board of the IMP approved an I8 -month, SDR 66.6 million (about USDIOO million) arrangement under the Exogenous Shocks Facility (ESF) for the Kyrgyz Republic, to support the authorities in addressing the above - mentioned exogenous shocks. The program is based on a macro-economic framework consistent with a further significant reduction in inflation, while attempting to limit the decline in economic growth. It is expected, that the monetary policy will contribute to reducing the inflation to the mentioned target of about I 0 percent by end -2009, with a view to returning to single-digit inflation in 2010. Fiscal policy will support monetary policy, but will balance this with the need to support growth. The economic growth of recent years has been evidently pro-poor, since absolute poverty has clearly reduced during the last 3 years. In 2005 it was 43.1% compared to 49.9% in 2003. The reduction of poverty is also evident for extreme poverty: in 2005 the extreme 2 IMF, sixth review under the three year PRGF. 3 IMF Statement 18 March 2009 3
poverty declined to 11.1% compared to 17.2% in 2003. According to the latest poverty data (end 2006) 39.9% of households living below the poverty line and 9.1% living in extreme poverty. However, poverty in rural areas remains relatively higher and in 2006 poverty in rural areas was 50.8% compared to the 29.8% in urban areas and extreme poverty was consequently 13.8% compared to 6.5%. The main features of the macro -economic situation of the country are presented in Annex 2- Section 1 and Annex 4. 2.1.2. National development policy In relation to the Government of Kyrgyz Republic (GoK) the Sector Policy Support Programme (SPSP) Kyrgyzstan 2007-2009 in Social Protection and Public Finance Management is consistent with the Country Development Strategy 2007-2010 (CDS), approved on 19 April2007, the rolling three-year Medium Term Budget Framework and the Plan of Action for PFM reforms (see Annex 2 - Section 4). This initiative has full government support and donor agreement. The key government policy document is indeed the CDS and as such is the successor to the National Poverty Reduction Strategy 2003-2005. It constitutes the second phase of the Comprehensive Development Framework ofthe Kyrgyz Republic to 2010. GoK is committed to reform social protection in general and child protection in particular. More specifically it aims to increase the efficiency of social assistance which does not always optimally targets the poorest families and to create non -institutionalised approaches to services for children in difficult situations. GoK also continues to support Public Finance Management reform of the ministries in charge of social protection and agriculture by improving the linkage between government spending and development programmes that evolve from the CDS. 2.2. Sector context: Policies and challenges Two main social assistance programmes are currently operating in the Kyrgyz Republic: (a) the Unified Monthly Benefit (UMB), the main safety net programme targeted to poor families with children, and the Monthly Social Benefit (MSB), which targets specific disadvantaged categorical groups ofthe population (disabled, orphans, elderly, etc.). The CDS is committed to the rationalisation of social assistance in order to better target the poorest families, to increase the levels of UMB and at the same time make the ref orm fiscally sustainable. On the 20 1 h of June 2007 the Kyrgyz Government issued a Decree N 175 to establish a Working Group for the elaboration of the Social Development Concept 2007-2012. The concept is elaborated in order to coordinate the activities of the reform directions in the social sector and the MoLSD is chairing the working group. 4
The Kyrgyz Government is expected to adopt new social assistance legislation, with new eligibility criteria and access procedures, by the end of20 10. The 'New Generation: National programme on implementation of the children's rights in Kyrgyzstan' programme of 2001 kicked -off strategic planning in childcare and child protection. The aim ofthe programme is to improve both vertical and horizontal linkage in state structures. The programme outlined special measures to address the condition of children in difficult situations. In 2006 the Parliament adopted the Child Code and the challenge now facing the government is the operationalisation and implementation of this legislation. The Agricultural Development Strategy 2007-2015, in line with the CDS 2007-2010, places its focus on the development and expansion of agro -processing and investment promotion in agriculture. The Sector Policy Support Programme (SPSP) Kyrgyzstan 2007-2009 in Social Protection and Public Finance Management is the natural successor of the Food Security Programme 2005-2006 and continues the tradition of already established budgetary support in Kyrgyz Republic. The programme focuses on: 1) Social protection reform; 2) Support to public fmance management reform in relation to the Ministry of Labour and Social Development (MoLSD) and the Ministry of Agriculture, Water Resources and Processing Industries (MoA WR&PI); and 3) Support to statistics reform. More specifically the SPSP serves the following 2007-2010 Central Asia Indicative Programme objectives: Poverty reduction and increasing living standards (priority area 2); Support for good governance and economic reform (priority area 3). The programme is fully in line with the 2007 EU Strategy for Central Asia. It will contribute directly to sectoral issues, including youth. 2.3. Eligibility for budget support The review missions of the first two instalments under this programme, carried out in June 2008 and November 2008, confirmed the conclusions ofthe formulation mission of 2007 and concluded that the general conditions I eligibility criteria for a Sector Policy Support Programme (SPSP) Kyrgyzstan in Social Protection and Public Finance Management with budget support as fmancing modality continue to be fulfilled: 5
1) There is satisfactory progress in the implementation of the Kyrgyz social protection strategy and this strategy will need to be continuously refined/followed up to target social assistance more effectively. 2) Although impact of food and energy price rises led to an overall inflation rate at the end of2007 of some 20%, macro -economic policy has been stability-oriented. 3) The Government efficiently implements PFM reforms and soundly manages public fmancial resources. There is credible commitment on behalf of the Government to improve PFM system (Annex 2, Section 4). 2.4. Lessons learnt From 1996 to 2006 the European Commission has provided Kyrgyzstan through its Food Security Programme (FSP) with 92.5 million of which 88.1 million was devoted to budgetary support and 4.4 million to TA. In the early days the budgetary support was indirect and targeted. The programme then provided a foreign exchange facility in two instalments per annum to the National Bank as balance of payment (BoP) support and on condition that eligible food and agriculture commodities were imported for an equivalent amount by the private sector. The counter value in local currency was used as targeted budget support to the food security and agriculture sector. This approach was transformed in 2005 when budgetary support became direct and untargeted. The release of fixed tranches was tied to certain achievements in the reform of the Public Finance Management (PFM); while the release of variable tranches was linked to reforms in the agriculture and social protection sectors and improvement in the statistical information systems relating to food security and poverty. The programme had positive impact on PFM reform and secto ral reform within agriculture and social protection. The draft evaluation report (February 2009) of FSP 1996-2006 in the Kyrgyz Republic assesses the programme as highly relevant, meeting both the needs of the country and the broad objectives of the EC. It represented a combination of relief fmancing and moves towards the establishment of a framework for longer term development. In addition, the adoption of the budget support modality to deliver the programme from the early stages on is considered to be relevant to the stage of development. In terms of effectiveness, the report notes that "the true benefit of the programme was not in individual reforms but in the overall reform psychology and in the laying of foundations for future reforms, notably under the EC-SPSP". In terms of efficiency, the evaluation notes that the cost of delivery of the programme is relatively small and the use of the MoLSD to channel funds directly to social benefit programmes are an efficient method of transferring funds to the p oor. The lack of strong links between strategic priorities and budget formulation on the Kyrgyz side however reduced the efficiency of Government expenditure. 6
Finally, the report highlights also that with many of the reforms incomplete and ongoing, the latter have limited sustainability yet. It acknowledges however that FSP laid the foundations for the continuation of the reforms under SPSP 2007-2009. A number of constraints were faced during the implementation of previous budgetary support programmes: The turnover of ministers undermined steady and constant support to reform; and The poor design of performance and process indicators delayed the release of tranches. More specifically, the March 2007 review of the 2006 Food Security Programme has made a number of recommendations for further structural and policy reform in social and child protection based on the lessons learned from the past. These are outlined below. Social protection sector strategy: The review team recommended to re-visit the priorities identified in the MoLSD strategy 2006-2008 and the CDS, and to analyse the feasibility of policy reform such as decentralisation. A major issue would be to clarify the role and responsibilities of all agencies involved in social protection issues, such as the Presidential administration, the Prime Minister Administration, MoLSD, MoE, MoH, and local government bodies. Childcare and child protection: The review team noted that the CDS emphasizes on de - institutionalisation and alternative social services for vuln erable children and their families. It is essential to clarify the roles and responsibilities of the different government agencies covering childcare issues. The decision to establish a State Agency for Physical Training, Sports, Youth and Child Protection has been insufficiently thaught through and was created mainly upon instigation from international agencies. The review team recommended the strengthening of the inter -linkage between institutions and agencies so that the required administrative setup, supervision and reporting is in place to better target families and children in difficult situations. The MoLSD, MoE & MoH have vertical reach right down to communities, and the newly created Commissions on Child Affairs (CCA) and the Family and Children Support Departments (FCSD) are rayon-based with community reach and with potential for horizontal inter -linkage particularly if brought under the aegis of the MoLSD. Social assistance: improved streamlining, efficiencies and targeting : The review team strongly supported that the improvement of the targeting of the poor via the unified monthly benefit (UMB) should be continued, with assistance on the methodology and its enforcement by the relevant social protection units. Capacity building: The review team highlighted the need for capacity building in MoLSD and all agencies engaged in social and child protection. 7