The Kyrgyz Republic Joint Economic Assessment: Reconciliation, Recovery and Reconstruction

1. The Kyrgyz Republic Joint Economic Assessment:Reconciliation, Recovery and Reconstruction ADB - IMF - 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 The United Nations Kyrgyz Republic Donors' Conference, July 27, 2010, Bihkek High-level Donor's Meeting, Bishkek, July 27, 2010

2. Significant economic impact of the crisis… Pre-April: Strong recovery from the regional economic crisis of 2009 Post crisis: A contractionin economic activity in 2010 • Internal unrest and border closure to affect agriculture and services, while gold would stay strong • Inflation muted (in single digits) as economic activity weakens. High-level Donor's Meeting, Bishkek, July 27, 2010

3. ….including a sharp balance-of-payments effect Current account to swing to a deficit of 6½ percent in 2010 from a 4 percent surplus in 2009: • Goods exports (non-gold) affected • Tourism to decline • But worker remittances recovering Import cover of international reserves to drop sharply if financing needs not met High-level Donor's Meeting, Bishkek, July 27, 2010

4. A significant increase in budget expenditures… • Revenues to hold up and have only a mild impact • But expenditures to rise sharply: • Resettlement, rehabilitation and reconstruction costs sizable • Security-related spending also high High-level Donor's Meeting, Bishkek, July 27, 2010

5. …would sharply raise the fiscal deficit and the financing gap in 2010 The fiscal deficit (primary, non-grant) to worsen substantially Despite a sharp increase in use of own resources to finance the budget… …a sizable rise in the external budget financing gap ($335 million compared to $175 million pre-crisis projection) High-level Donor's Meeting, Bishkek, July 27, 2010

6. Financial sector also affected by the crisis System capitalization and liquidity remain adequate But the crisis has: • Impaired loan quality • Slowed credit growth (both demand and supply) and, • Affected a systematically important bank (and imposed a cost on the budget) High-level Donor's Meeting, Bishkek, July 27, 2010

7. Risks to the macroeconomic and fiscal outlook for 2010 and beyond • Insecurity, and political instability  • Investor confidence • Systemic banking problem • Public debt and medium term outlook High-level Donor's Meeting, Bishkek, July 27, 2010

8. Impact on Public Infrastructure • Direct impact, damage • Electricity and gas distribution networks in Osh and Jalal-Abad • City roads in Osh • Public transport system in Bishkek and Osh • Public and commercial private buildings in Bishkek, Osh, Jalal-Abad oblasts • Indirect impact • Escalation in construction item prices High-level Donor's Meeting, Bishkek, July 27, 2010

9. Priority Energy Investments • Heating • Rehabilitation of heating systems in Bishkek, Osh and other 23 urban centers • Fuel to Bishkek and Osh CHPs • Electricity Production • Equipment and material for Toktogul HPP • Rehabilitation of transmission and distribution systems in Osh and Jalal-Abad High-level Donor's Meeting, Bishkek, July 27, 2010

10. Priority Transport Investments • Bridging finance for price escalation in regional road construction contracts • Rehabilitate city road network in Osh • Procure buses for public transport in Bishkek and Osh High-level Donor's Meeting, Bishkek, July 27, 2010

11. Priority Building Reconstruction • Reconstruction and content compensation for public and private commercial buildings in affected cities High-level Donor's Meeting, Bishkek, July 27, 2010

12. Summary Investments High-level Donor's Meeting, Bishkek, July 27, 2010

13. Financial stability has been adversely affected by the crisis • Most banks sufficiently liquid and capitalized • Main problem is at AUB which pre-crises was the largest bank with over 20% of system deposits • NBKR introduced temporary administration in AUB and other banks following significant non-resident deposit outflow (allegedly linked to the previous regime) • Banks under administration have deteriorating financials – authorities are developing action plans High-level Donor's Meeting, Bishkek, July 27, 2010

14. The April and June events have led to a worsening of loan quality • NPLs rose from 8% to 11% over April and May • Further deterioration expected following events in the south • Loan quality deterioration mainly in trade and commerce sectors • Credit growth likely to be weak because of low lack of business confidence and continued political uncertainty High-level Donor's Meeting, Bishkek, July 27, 2010

15. Priorities in the Banking Sector • How to handle AUB in a manner that minimizes the impact on financial stability and public finances • How to exit from the remaining banks under temporary administration • How to manage the large government deposits • The legal complications from arrests on assets and property by the Prosecutor’s Office High-level Donor's Meeting, Bishkek, July 27, 2010

16. Microfinance organisations (MFOs) play an increasingly important role in providing credit to the private sector • 23% of all credit provided by the financial system (MFOs portfolio of USD 154 mil at the end of 2009) • Strong presence in the South with concentration in financing agriculture (41%) and trade (35%) • The impact of the June events in Osh and Jalal-abad has been much more severe than April events • Virtually all lending suspended in affected regions • MFOs report a material spike in delinquencies • Overall disbursements in June contracts by 24% compared to previous months High-level Donor's Meeting, Bishkek, July 27, 2010

17. Other issues affecting MFOs • Lack of funding – most international microfinance funds downgraded Kyrgyz Republic and postponed planned disbursements • Lack of viable FX hedging instruments – AUB was main source (MFOs reported a total of USD 60 million in swaps and back-to-backs with AUB) • Tight KGS liquidity in the coming months – could limit MFO operations and increase costs High-level Donor's Meeting, Bishkek, July 27, 2010

18. Priorities in the Microfinance Sector • Kyrgyz microfinance sector has been among the most successful in the world, largely because it has followed market principles • Reaffirmation of such policies would contribute to continued access • Importance of local currency funding as affordable and predictable as possible in the absence of viable FX hedging instruments • MFOs and credit unions need to remain vigilant in monitoring borrower performance – prudent restructuring to minimise defaults High-level Donor's Meeting, Bishkek, July 27, 2010

19. A few facts…………….. • Between 179 to 2,000 people were killed • 375,000 people were displaced • 1,813 – 3,450 homes were destroyed or damaged • No water access for about 25% of destroyed/ damaged homes • No electricity supply for about 72% of destroyed / damaged homes • 79 public buildings were destroyed or damaged • 248 businesses were destroyed or damaged • Around 4,000 people lost their jobs

20. Kyrgyz Republic Joint Economic Assessment (JEA); A Framework for…….. • Joint cooperation among donors • Partnership between the government and international institutions • Integration with the UN Flash Appeal High-level Donor's Meeting, Bishkek, July 27, 2010

21. JEA has identified the need for external support in three major areas: • Essential public expenditures and services • Social needs • Critical investments High-level Donor's Meeting, Bishkek, July 27, 2010

22. Essential public expenditures and services…. Close to 40% of the State budget are the essential spending (protected items of salaries, social fund contributions, social insurance, state debt , etc. ) that have to be maintained; Emergency expenditure needs added significant pressure on the budget, widening the gap Estimated at $335 million in 2010 High-level Donor's Meeting, Bishkek, July 27, 2010

23. Increased social needs …. • Resettlement & integration of the IDPs, • other affected populations Would require: • housing • livelihoods • social reconciliation/other social programs ; (need for compensation, community recovery, local area development , peace building, Youth inclusion, confidence in security, stability and justice) High-level Donor's Meeting, Bishkek, July 27, 2010

24. Critical Investments needs…… • Destroyed private commercial / public buildings • Energy / Transport To: • recovery of public administration • recovery of private sector • enhancing economic security High-level Donor's Meeting, Bishkek, July 27, 2010

25. Physical damage to public buildings and private commercial enterprises ….. • Relatively few public buildings damaged (79), restoration of public Buildings important as they are symbols of governance • Private Commercial building reconstruction sizable task (248), vital for the economy ; not just buildings, but associated loss of assets/income; need combination of compensation, credit access, tax concessions and selected reconstruction; • Economic losses of enterprises/traders associated with impact on tourism High-level Donor's Meeting, Bishkek, July 27, 2010

26. Major shock to agriculture….. • (from late spring planting, higher fuel and input prices, lack of fertilizer import, loss of crop trade, reduced irrigation, and pest control) • Support needed for cash transfers (short term) • Investments to improve rural infrastructure, access to market & agricultural productivity (med-long term) • – ensure a fair geographical distribution of investments • – community or private sector lead investment – design / implement through local investment committees, water user associations and pasture user unions High-level Donor's Meeting, Bishkek, July 27, 2010

27. Kyrgyz Republic: Financing Requirements for Reconciliation, Recovery and Reconstruction PUBLIC SECTOR RELATED NEEDS 980 Budgetary financing gap 335 Social reconciliation and recovery 334 humanitarian 96 support for IDPs and vulnerable groups 238 housing needs 105 livelihoods 45 social compensation 52 other 36 Security and peace-building 11 Infrastructure 350 Buildings and structures 130 public 90 private commercial 40 Energy sector 180 Transport 40 Agriculture 35 LESS: Amounts already identified as budget expenditures 101 PRIVATE SECTOR RELATED NEEDS (loss from tourism) 20 GRAND TOTAL 1000 (millions of US dollars) High-level Donor's Meeting, Bishkek, July 27, 2010

28. Projected Disbursement Profile of Support 2010 2011 2012 Total Budget support 335 335 Social reconciliation and recovery 214 95 25 334 Housing needs 45 40 20 105 Livelihoods 25 15 5 45 Social compensation 30 22 0 52 Other 18 18 0 36 Flash Appeal 96 96 Security and peace-building 6 3 2 11 Infrastructure 164 120 66 350 Buildings and structures 33 61 36 130 Energy sector 121 37 22 180 Transport 10 22 8 40 Agriculture 17 9 9 35 LESS: Amounts already identified as budget Expenditures -101 -101 Private sector related needs 20 20 Others 16 16 Total 671 227 102 1000 (millions of US dollars) High-level Donor's Meeting, Bishkek, July 27, 2010

29. Stability and social cohesion is a necessary foundation for economic growth and social development ; International financial support can make an important contribution to economic and social recovery in the Kyrgyz Republic. High-level Donor's Meeting, Bishkek, July 27, 2010