## 1kgzea2023002

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### Governance challenges in the Kyrgyz Republic — overview
- Good governance is essential for higher and more inclusive growth: strengthens investor confidence, promotes efficient and transparent use of public funds, reduces opportunities for corruption, and leads to more efficient allocation of capital and labor.
- Governance reforms could raise the country’s growth rates by about 1.2 percentage points per year.
- Governance approach emphasized: transparency and management of state-owned enterprises (SOEs); plus four pillars — economic regulation and the rule of law; Public Finance Management (PFM); anti-corruption; and Anti-money Laundering and Combating Financial Terrorism (AML/CFT).

### State-Owned Enterprises (SOEs): facts, issues, and recommendations
- Key facts and performance
  - Number of SOEs: 136 SOEs, or 22 per million inhabitants.
  - Sector concentration: largest SOEs in energy, telecommunications, mining and financial services.
  - Return on assets: energy sector SOEs ≈ around zero; other SOEs ≈ close to 8 percent (World Bank).
  - Recent government on-lending: in the past 3 years, government on-lending worth around 10 percent of GDP has been in large part written off.
  - Electricity quality: described as “very unreliable”.
  - Kumtor Gold Company: became fully state-owned in 2022; operates under a special tax arrangement.
- Fiscal risk
  - SOEs are the second largest category of fiscal risks (after the financial sector); realization of these risks could inflict significant fiscal costs of 3 percent of GDP on average.
- Institutional and legal shortcomings
  - Fragmented legal framework: two separate laws — one for Joint Stock Companies (JSC) covering 32 largest SOEs, and another for 104 SOEs not formally incorporated.
  - Corporate Governance Code adopted but unevenly implemented.
  - SOEs excluded from the 2021 public procurement law; temporary procurement rules adopted in 2022.
  - Operational oversight decentralized during 2020-2021, creating multiple reporting procedures.
  - KPIs introduced in 2018 not fully adopted.
  - Financial reporting mandated with IFRS requirements, but implementation not systematic; no single database for SOE financial statements and audits despite 2021 legislation.
  - Oversight of SOE holding companies unclear (e.g., “National Energy Holding Company” established 2015; “Legacy of Great Nomads” created 2021).
  - Chamber of Accounts audits published partially or with delays; COA reports often do not cover critical issues such as government on-lending to energy SOEs.
  - No explicit requirement to inform Parliament of SOE performance.
- Policy recommendations (selected)
  - Streamline and harmonize SOE legislation: define SOE, legal forms of government ownership, ownership role and powers, and reporting/disclosure requirements (e.g., publishing audited annual reports and financial statements).
  - Subject all SOEs to the public procurement law.
  - Articulate and publish a clear ownership policy: define shareholder objectives (financial, economic, social); mandates of each SOE; binding reviews of SOE budgets, borrowing plans, capital injections; determine which SOEs remain state-owned, which to privatize, and which to restructure or close.
  - Establish professional management and qualified boards; implement Corporate Governance Code consistently, starting with largest strategic SOEs.
  - Enhance transparency: require timely financial reporting, publish financial accounts and audit reports; prepare and publish a comprehensive annual SOE sector report alongside the annual budget execution report, including a full list of SOEs by industry, size, and ownership and information on individual companies (operations summary, abridged financial statements, KPIs, appointments, profit distribution).
  - Strengthen Ministry of Finance role: launch centralized analysis and monitoring of fiscal costs and risks from SOEs to inform the budget process; prioritize largest SOEs (energy and transport).

*Prepared by Erkeaim Shambetova and Jean van Houtte. Content from “GOVERNANCE CHALLENGES IN THE KYRGYZ REPUBLIC.”*

### Regulatory quality, rule of law, and judicial effectiveness
- Regulatory quality and government effectiveness
  - WGI score for regulatory framework comparable or better than other CCA countries except Georgia.
  - Progress since 2000 on regulatory quality has been slow.
  - On Government Effectiveness: outperforms low-income countries but lags emerging markets and several CCA peers.
  - Policy directions: streamline regulations; improve infrastructure (electricity, broadband, roads); limit discretion; harmonize rules with neighbors (technical/economic standards, VAT alignment, expedited border control, liberalize cross-border services, reduce non-tariff barriers).
- Rule of law and judicial effectiveness — indicators and case activity
  - Bertelsmann judicial independence: Kyrgyz Republic scores an average rating among CCA peers.
  - WGI “Rule of Law”: relatively low.
  - Court case inflow estimate (IMF staff): entire first instance civil, commercial and tax inflow for 2018 was 85,000 cases nationwide.
  - Comparative example: Antwerpen (population 520,000) had about 140,000 civil cases in 2018.
  - Tax case inflow documented:
    - 2015: 216 cases
    - 2016: 209 cases
    - 2017: 160 cases
    - 2018: 115 cases
  - Conclusion: declining court filings indicate weak trust in judiciary; strengthening judicial effectiveness is a priority.

### Public Financial Management (PFM) and fiscal governance
- PEFA coverage: Georgia, the Kyrgyz Republic, Tajikistan, and Uzbekistan have PEFA data.
- Kyrgyz PFM progress: significant increase in PEFA scores for all categories except budget reliability.
- Shortcomings not yet reflected in improvements:
  - 2022 public wage increase has medium-term implications.
  - Uptake in extra-budgetary funds hinders transparency and comprehensive budgeting.
- Recommendations:
  - Improve budget reliability by centralizing payroll management with IFMIS to better control the wage bill.
  - Institutionalize SOE oversight to centralize fiscal risks analysis and limit contingent liabilities.
  - Limit extra-budgetary funds and ensure their performance and allocations are discussed explicitly in the budget law at approval.

### Anti-corruption framework
- Legal framework and administration
  - Financial disclosures law adopted 2017: ‘On Declaring Incomes, Expenses, Obligations and Assets of Persons Holding or Occupying State and Municipal Offices’.
  - Implementing resolutions in 2018 set declaration form, filing procedures, classification, publication parameters, review procedures.
  - Administration moved from State Personnel Service to State Tax Services (STS).
  - Declarations required annually in electronic format via online system; summaries of some senior officials’ income/expenditure/property are published on STS website.
  - Sanctions for failure to submit or inaccurate declarations can include dismissals (see Law about state civil service and municipal service of May 30, 2016 (art. 47) and Law on anti-corruption of August 8, 2012 (art 7)).
- Gaps identified
  - Sanctions regime for non-submission unclear.
  - Coverage does not comprehensively include close relatives.
  - Triggers for investigation/prosecution for illicit enrichment not established.
  - Officials verifying compliance are not specifically trained.

### AML/CFT: legal progress and effectiveness gaps
- Legislative progress
  - 2018 AML/CFT Law improved risk-based supervision and introduced mandatory beneficial ownership disclosure for all legal entities.
  - EAG considered the law and by-laws a significant achievement.
- FATF-related performance
  - Kyrgyz Republic: 39 of the 40 FATF recommendations at or near compliance among CCA countries.
  - Effectiveness lags: money laundering and terrorism financing risks are little understood; domestic coordination needs strengthening (IO1); proceeds of crime rarely confiscated (IO8).
- Policy implications
  - Strengthen analytical capacity and implementation capabilities.
  - Strengthen risk-based AML/CFT supervision and monitoring of cross-border activities, with focus on detecting and recovering proceeds of corruption.

### Climate change: exposure, projections, impacts, and priorities
- National exposure and vulnerability
  - Small emitter but highly vulnerable due to mountainous landscape and large agricultural sector.
  - Geography and climate:
    - Approximately 94 percent of country above 1,000 meters from sea level; about 4 percent permanently covered by snow.
    - Average annual temperatures range from less than −10°C in high altitudes to over 12°C in northern and western lowlands.
    - Average annual temperatures have risen by approximately 1.3°C between 1992–2021.
    - The country experiences 3,000 to 5,000 earthquakes every year.
  - Historical disasters since independence: 19 climate related disasters; about US$76 million in damages (in 2020 dollars, about 1 percent of 2020 GDP); more than 2 million people affected; 323 deaths.
- Climate projections (World Bank CMIP6 multi-model ensemble)
  - By 2100 under SSP5-8.5: projected warming in the Kyrgyz Republic is 6.1°C.
  - CCA regional average increase under SSP5-8.5: 5.3°C.
  - Global average rise under SSP5-8.5: 4.4°C.
  - Under SSP1-2.6: warming peaks at the end of the 2050s at around 1.7°C above the 1995–2014 baseline then declines.
  - Local effects: extreme temperatures (potentially over 40°C) may become regular in low-lying areas; extreme rainfall intensity appears to be increasing; melting glaciers will cause more intense winter flooding and reduced summer flows.
- Macro-financial and sectoral impacts
  - Disaster years: real per capita growth declines by 1.7 percentage points on average; recovery is slow, yielding a permanent output loss of almost 5½ percentage points of GDP.
  - Public debt: surges by 2½ percent of GDP following disasters.
  - Current account: deficit widens gradually by about 4 percentage points of GDP in the medium term after disasters.
  - Agriculture: most susceptible sector; rural population is 65 percent of total; agriculture contributed >14 percent to annual output over the last decade and employed >25 percent of economically active population on average; agricultural products ≈ about 8 percent of total exports in 2020.
  - Labor effects: temperature increases above annual averages reduced unemployment in CCA countries for about three years, but abnormally large temperature deviations can reduce GDP per capita; higher precipitation increased youth unemployment; temperature increases negatively and persistently affect agricultural employment while increasing service sector employment.
- Adaptation urgency and institutional readiness
  - Early adaptation critical; priority to policies with positive externalities that correct market imperfections and engage private sector.
  - Estimated benefit: adaptation policies can reduce annual output losses from global warming by up to 1.5 percent of GDP by 2060 (Saliba and others, 2022).
  - ND-GAIN (2020): ranked 69th out of 182 on Country Index; Kyrgyzstan was the 153rd most vulnerable and the 101st most ready; in 2020 ranked 4th out of eight CCA countries on ND-GAIN.
  - Institutional changes: Paris Agreement ratified; updated NDC (2021); State Committee upgraded to Ministry of Natural Resources, Ecology and Technical Supervision (Nov 2021); Coordinating Council for Climate Change, Ecology and Sustainable Development formed; Coordinating Committee for the Green Economy to be formed with private sector and development partners.
- Financing needs for adaptation (exact estimates)
  - Aggregate estimate: more than $2.8 billion, or 33 percent of 2021 GDP.
  - Authorities committed to provide 29 percent of financing from domestic sources and seek 71 percent externally.
  - Table: Required Financial Resources for the Implementation of Adaptation Measures (USD million 2021)
    - Water resources: Total requirement 1 977.7; Own resources 577.1; Need for additional international support 1400.6
    - Agriculture: Total requirement 276.0; Own resources 83.0; Need for additional international support 193.0
    - Energy: Total requirement 64.9; Own resources 25.2; Need for additional international support 39.7
    - Health care: Total requirement 144.1; Own resources 2.7; Need for additional international support 141.4
    - Reducing the risks of climate emergencies: Total requirement 309.9; Own resources 121.9; Need for additional international support 188.0
    - Forest and biodiversity: Total requirement 46.2; Own resources 4.0; Need for additional international support 42.2
    - Climate resistant areas and green cities: Total requirement 12.7; Own resources 1.9; Need for additional international support 10.7
    - Improving the adaptation reporting system: Total requirement 1.6; Own resources 0.6; Need for additional international support 1.0
    - Total: Total requirement 2 832.9; Own resources 816.3; Need for additional international support 2 016.6 (100%) (28.8%) (71.2%)
  - Financing modalities and constraints: domestic financing required without compromising debt sustainability; need to catalyze private investment; mobilize concessional financing given tight fiscal space post-COVID-19; IMF’s Resilience and Sustainability Facility (RSF) (put in place in 2022) could help finance reforms.
- Mitigation: emissions, NDC targets, and financing
  - Emissions profile: 2018 emissions ≈ about 0.03 percent of world total, or 15 million tons of greenhouse gas; around 60 percent of emissions concentrated in energy.
  - NDC mitigation targets (relative to BAU):
    - Unconditional (WM scenario): reduce greenhouse gas emissions by 16.63 percent by 2025 and by 15.97 percent by 2030.
    - Conditional on international support (WAM scenario): reduce greenhouse gas emissions by 36.61 percent by 2025 and by 43.62 percent by 2030.
  - Mitigation financing needs (national experts' calculation) — totals (USD million):
    - Energy: 7,155.8 total; Own** funds: 2,857.1; International support***: 4,298.7
    - IPPU: 0.6 total; Own** funds: 0.1; International support***: 0.4
    - Agriculture: 19.3 total; Own** funds: 12.1; International support***: 7.1
    - LULUCF: 63.0 total; Own** funds: 36.2; International support***: 26.8
    - Waste: 3.8 total; Own** funds: 0.5; International support***: 3.3
    - Total: 7,242.4 total; Own** funds: 2,906.1; International support***: 4,336.4 (100%) (40%) (60%)
  - Carbon pricing potential: taxing fossil fuel production/use can raise up to 6 percent of GDP in additional revenue by 2030 (IMF Carbon Pricing Assessment Tool).
- Policy options and priorities (selected)
  - Adaptation at the heart of climate policy given small emissions but high vulnerability.
  - Create fiscal space: revenue-side (eliminate/reduce tax exemptions, adjust tax rates, improve tax administration); expenditure-side (reduce public wage bill, energy subsidies including by raising electricity tariffs); structural reforms (strengthen governance, reduce corruption, restructure/divest loss-making SOEs, improve electricity sector).
  - Consider carbon taxation paired with targeted social assistance.
  - Catalyze private investment in green economy; enforce regulations and improve financial inclusion of farmers and small businesses.
  - Agriculture resilience: comprehensive agriculture risk management, timely hydrometeorological information, water-conserving crops, incentives for water-saving irrigation technologies.
  - Social protection and human capital: public investment in climate-resilient infrastructure, skills upgrading, healthcare and education; strengthen social safety nets.

### Continuing glacial melt and pressure on water resources — sectoral impacts and adaptation benefits
- Impacts on agriculture, livestock, and land
  - Climate drivers: CO2 availability, precipitation, temperatures; indirect effects on water resources, seasonality, soil erosion, and arable area decline due to desertification.
  - Grasslands productivity: reduced across 96% of land surface area (Wang and others, 2020).
  - Food security: increased water scarcity and droughts can reduce drinking water and foraging, reduce crop yields, and exacerbate food insecurity; livestock more vulnerable to infectious diseases.
  - Vulnerable groups: poorest quintile estimated > twice as likely to be exposed to droughts than other groups (Winsemius and others, 2018); women and low-income rural dwellers most likely affected by flash flooding and landslides.
- Impacts on the energy sector
  - Hydropower provides around 90 percent of electricity.
  - Supply risks: changing rainfall, increasing temperatures and droughts reduce hydropower reliability; glacial/snow melt may increase flows in next 5–10 years then decline thereafter.
  - Infrastructure threats: aging plants and transmission threatened by higher temperatures, heavy rains, floods, and mudslides.
  - Demand sensitivity: electricity demand increase per degree of temperature varies between 0.5 and 8.5 percent (Santamouris and others, 2015).
- Macroeconomic, financial, and social risks
  - Long-term growth reduced via impacts on human/physical capital and TFP; sectors first impacted include agriculture and hydropower with ripple effects.
  - Fiscal/external stability: lower growth shrinks tax base, raises expenditure needs, increases deficits and public debt, widens current account, pressures reserves and exchange rate.
  - Financial stability: weaker asset quality for banks; insurers and investment funds face larger losses; potential capital outflows and fire sales.
  - Social/political stability: more migration, conflicts, increased poverty especially among youth and women.
- Adaptation urgency
  - Early adaptation critical; estimated reduction in annual output losses up to 1.5 percent of GDP by 2060 (Saliba and others, 2022).

### Poverty, social safety nets (SSNs), and reform priorities
- Poverty developments (2021)
  - Urban poverty rate increased by 15 percentage points to 33 percent.
  - Rural poverty rate increased by 4 percentage points.
  - World Bank preliminary estimate: $3.65 poverty rate deteriorated to 21.8 percent in 2021; extreme poverty broadly unchanged.
  - Social assistance spending averaged 1.7 percent of GDP over the last ten years.
- Main SSN programs and performance
  - SSN system centered on categorical support with flat benefits and limited non-demographic targeting.
  - Two main programs:
    - Social Benefit (SB) and Benefit for Low-Income Families with Children (BLFC) accounted for 35 and 32 percent of total social assistance spending in 2021 (0.6 and 0.5 percent of GDP respectively).
    - BLFC reached 5.3 percent of population in 2021; other programs reached 1.5 percent.
  - Monetary Compensation (MC) scheme: accounted for 15 percent of social assistance spending in 2021 (about 0.25 percent of GDP); beneficiary pool declining due to moratorium on new categories.
- BLFC specifics
  - Means-tested; eligible: families with children under 16; income test currently 1,000 soms or $12.1 per household member per month plus asset assessment.
  - Benefit: flat monthly allowance 1,200 soms ($14.5) per child.
  - Benefit increased by 50 percent (from 810 soms) starting June 2022 by Presidential Decree.
  - Coverage: beneficiaries increased by 14 percent since 2019 (or 0.5 percent of population) reaching 5.3 percent in 2021.
  - BLFC spending increased nominally by about 16 percent but remained at 0.5 percent of GDP.
- SB specifics
  - Targets disabled and elderly not entitled to contributory pension and other categories; ~99,000 beneficiaries in 2021 (1.5 percent of population).
  - SB allowances raised between Oct 2021 and June 2022 by 120 percent on average.
  - Flat monthly allowances range from 2,000 soms ($24) to 8,000 soms ($96) depending on category.
  - Allowances not automatically indexed to cost of living.
- International comparison and effectiveness
  - Social assistance spending corresponds to 74th percentile for emerging and developing Europe and Central Asia and 90th percentile for LIDC.
  - Effectiveness low: median poverty reduction in region ≈ 11 percentage points; Kyrgyz SSNs reduce poverty by an estimated 4.7 percentage points.
  - Coverage: only 16 percent of bottom quintile receive social assistance benefits (≈23 percentage points below CCA average).
  - Adequacy for bottom quintile: 19 percent (vs CCA and LIDC averages ≈ 30 percent).
  - Distribution: almost 50 percent of benefits go to poorest quintile (which accounts for about 44 percent of beneficiaries); non-poor in second and third quintiles receive almost 38 percent of benefits.
- Policy recommendations for SSNs (priorities)
  - Near-term: improve efficiency of SSN spending; prioritize and reallocate expenditures; mobilize revenue and phase out inefficient tax exemptions.
  - Medium-term: develop adaptive and sustainable SSN system; conduct rigorous distributional analysis; plan new systems and delivery channels.
  - Short-term operational reforms: upscale means-testing and increase coverage of bottom income groups; strengthen income test design to reduce leakage and exclusion/inclusion errors.
  - Program consolidation: phase out less effective categorical programs; continue moratorium on new MC beneficiary categories to reallocate resources.
  - Improve progressivity and adequacy: replace flat benefits with differentiated amounts by need (progressive benefit schedule).
  - Regular indexation: institute regular indexation (e.g., based on a price index for low-income households) to preserve real value and allow automatic shock response.
  - Administrative capacity and digitalization: build robust capacity, develop a single registry, enhance coordination and information sharing, and expand digitalization to improve coverage and cost-effectiveness.

*Source: IMF staff chapter content.*

### 1. Development, Connectedness and Governance ________________________________________ 3

### GOVERNANCE CHALLENGES IN THE KYRGYZ REPUBLIC

### A. Introduction
- Good governance is essential for higher and more inclusive growth: it strengthens confidence of investors, promotes more efficient and transparent use of public funds, reduces opportunities for corruption, and leads to more efficient allocation of capital and labor in the economy.
- The Kyrgyz Republic needs investment in physical and digital infrastructure to improve productivity and generate more jobs for its growing labor force, which requires more FDI and better global integration.
- Human capital development is positively correlated with global integration, which in turn is robustly associated with good governance.
- The Kyrgyz Republic scores poorly on perceptions-based corruption and governance indicators, suggesting considerable gains could be achieved through governance reforms.
- Fund analysis shows governance reforms could raise the country’s growth rates by about 1.2 percentage points per year.
- The paper emphasizes transparency and management of state-owned enterprises, and approaches governance along four other pillars: economic regulation and the rule of law; Public Finance Management (PFM); anti-corruption; and Anti-money Laundering and Combating Financial Terrorism (AML/CFT).

### B. State-Owned Enterprises (SOEs): Overview and Issues
- SOEs are a prominent feature of the economic landscape; state ownership and oversight frameworks differ across countries and are consequential where SOE footprints are large.
- SOEs are the second largest category of fiscal risks (after the financial sector), realization of which could inflict significant fiscal costs of 3 percent of GDP on average.
- SOEs enjoy privileged access to capital and sometimes labor, can distort competition and undermine market efficiency.
- A comprehensive SOE ownership, management and oversight strategy is needed to ensure public resources generate maximum social and economic returns without crowding out the private sector.

Key facts and performance in the Kyrgyz Republic:
- The country has 136 SOEs, or 22 per million inhabitants, whereas the average OECD country has only one.
- The largest SOEs are concentrated in energy, telecommunications, mining and financial services.
- SOE employment has come down over time as the private sector expanded; its share in total employment is less than in many other countries in the region.
- On average, Kyrgyz SOEs appear to be performing better than peers, but international experience suggests profitability and labor productivity of SOEs is generally lower than in private firms.
- According to the World Bank, the return on assets of energy sector SOEs is around zero, while the return on assets of other SOEs is close to 8 percent.
- Energy sector SOEs have undergone successive restructurings of their liabilities to the state; in the past 3 years, government on-lending worth around 10 percent of GDP has been in large part written off.
- The quality of electricity is described by the World Bank as “very unreliable”, reflecting below-the-cost residential tariffs for electricity and cost inefficiencies of operations.
- Kyrgyz Telecom, an SOE, enjoys a monopoly on the development and provision of core ICT infrastructure; international broadband capacity lags considerably behind Central European or Advanced Economies.
- Kumtor Gold Company became fully state-owned in 2022 and operates under a special tax arrangement negotiated with the former foreign sponsor; strengthening its governance and oversight is critical given its central role in economic activity and foreign exchange generation.

Legal, institutional and oversight shortcomings:
- The legal framework for the 136 SOEs is fragmented: two separate laws govern SOEs — one for Joint Stock Companies (JSC) covering 32 largest SOEs, and the other for the remaining 104 SOEs that are not formally incorporated.
- Neither law stems from a clear ownership policy and strategic vision for SOEs; JSCs are subject to explicit governance, oversight, and reporting requirements by the state, but the rest are not.
- The Corporate Governance Code for board appointments has been formally adopted, but its implementation has been uneven, not adequately factoring in experience and competence.
- SOE governance framework weakened by exclusion of SOEs from the 2021 public procurement law; a temporary set of rules for SOE procurement was adopted in 2022 by the Ministry of Economy and Commerce.
- During 2020-2021, operational oversight of SOEs was decentralized from the State Property Management Fund to line ministries, resulting in multiple reporting procedures.
- The system of Key Performance Indicators (KPIs), introduced in 2018 to evaluate SOE performance, has not been fully adopted by all SOEs.
- Financial reporting is mandated under the accounting law with solid requirements to comply with IFRS reporting and disclosure standards, but implementation has not been systematic.
- No single database for SOE financial statements and audits currently exists, although its establishment was legislated in 2021.
- Oversight mechanisms for SOE holding companies are unclear: leading holdings include the “National Energy Holding Company” (established in 2015) and a new SOE Holding (“Legacy of Great Nomads”) created in 2021 to hold mining sector assets, including Kumtor.
- SOEs’ control environment remains weak; independent and state audits are published partially or with delays.
- The Chamber of Accounts (COA) audits entities majority owned by the central government or municipalities and entities receiving budget funding, but COA reports often do not cover critical issues such as government on-lending to energy SOEs.
- There is no explicit requirement to inform Parliament of SOE performance, weakening public scrutiny.

### C. Policy Recommendations to Improve SOE Governance and Performance
- Streamline and harmonize legislation that governs SOEs:
  - An SOE law should provide a clear definition of an SOE and legal forms of government ownership (e.g. incorporation); define the role and powers of the government in exercising ownership rights; and reporting and disclosure requirements (e.g. publishing of audited annual reports and financial statements).
  - All SOEs should be subject to the public procurement law.
- Articulate and publish a clear ownership policy, reducing state presence in competitive sectors:
  - The ownership policy should define the government’s policy objectives as a shareholder (financial, economic, or social objectives); the mandate of each SOE; and principles of how the government will exercise its ownership rights, including binding reviews of SOE budgets, borrowing plans, and capital injections.
  - The policy should determine which SOEs should remain in state ownership, privatize commercially viable entities, and restructure or close non-viable ones.
- Establish a strong corporate governance framework:
  - Provide for professional management and qualified boards to allow SOEs to operate effectively without government interference.
  - Implement the Corporate Governance Code consistently, initially focusing on the most strategic and largest SOEs and gradually extending to others.
- Enhance operational and financial transparency requirements and strengthen institutional oversight:
  - Require timely financial reporting by all SOEs and publication of financial accounts and audit reports.
  - Prepare and publish a comprehensive annual report alongside the annual budget execution report reviewing SOE sector performance, including financial results and key policy decisions.
  - The report should include a full list of SOEs broken down by industry, size, and type of ownership, and information on individual companies (summary of operations, abridged financial statements, key performance indicators, appointments of boards and management, and profit distribution).
- Strengthen Ministry of Finance role in financial oversight:
  - MoF should launch centralized analysis and monitoring of fiscal costs and risks stemming from SOEs and use this analysis to inform the budget process and proactively manage such risks.
  - Prioritize largest SOEs, starting with those in the energy and transport sectors.

*Prepared by Erkeaim Shambetova and Jean van Houtte. Content from “GOVERNANCE CHALLENGES IN THE KYRGYZ REPUBLIC.”*

### 13. The Kyrgyz Republic has a scope to strengthen economic regulations to promote

### 13. The Kyrgyz Republic has a scope to strengthen economic regulations to promote private sector-led growth

### Regulatory quality and government effectiveness
- WGI score for the quality of the regulatory framework in the Kyrgyz Republic is comparable or better than other CCA countries except Georgia.
- Progress since 2000 on regulatory quality has been slow.
- On Government Effectiveness:
  - The Kyrgyz Republic outperforms low-income countries.
  - It lags emerging markets, central and eastern Europe, and Armenia, Azerbaijan, Georgia, and Kazakhstan in the CCA.
- Lessons from peers:
  - Armenia and Georgia show that comprehensive reforms can markedly improve regulatory quality and government effectiveness.
- Policy directions recommended:
  - Streamline regulations.
  - Improve infrastructure, notably electricity, broadband telecommunication, and roads.
  - Limit discretion and harmonize rules with neighboring countries to foster regional integration and a common market, including:
    - Harmonizing technical and economic standards.
    - Aligning VAT rates.
    - Adopting an expedited border control mechanism.
    - Liberalizing cross-border service provision.
    - Reducing non-tariff trade barriers.

### Rule of law and judicial effectiveness
- Investment and business activity are sensitive to perceptions of protection of property and contract enforcement.
- Indicators:
  - The Kyrgyz Republic scores an average rating among CCA peers on the Bertelsmann Foundation’s judicial independence indicator.
  - Relatively low on WGI’s “Rule of Law” indicator.
  - Progress since 2000 has been limited for Kyrgyzstan; Georgia has achieved faster progress.
- Court activity and trust:
  - There is a disproportionately small number of court case filings in the Kyrgyz Republic relative to its population.
  - IMF staff estimate the entire first instance civil, commercial and tax inflow of cases for 2018 was 85,000 cases nationwide.
  - In comparison: in the Belgian city of Antwerpen (population of 520,000) the number of civil cases in 2018 was about 140,000 cases.
  - Number of arbitration cases filed abroad is similar to that of Kazakhstan, which has a population three times larger and economy 20 times larger.
  - The number of court filings on tax disputes has been declining steadily, suggesting weak perceptions of enforcement mechanisms.
- Tax case inflow (documented):
  - 2015: 216 cases
  - 2016: 209 cases
  - 2017: 160 cases
  - 2018: 115 cases
- Conclusion: Declining court filings manifest lack of trust in the judiciary, impose inefficiencies and constrain growth. Strengthening judicial effectiveness is a key priority.

### Fiscal governance and public financial management (PFM)
- Sound PFM practices support development; countries that monitor and control public resources more effectively perform better on development measures.
- PEFA data:
  - Four CCA countries with PEFA data are Georgia, the Kyrgyz Republic, Tajikistan, and Uzbekistan.
  - These countries achieve better development outcomes than PEFA performance would predict, but room for improvement remains.
- Kyrgyz Republic PFM progress:
  - PFM has progressed well with a significant increase in PEFA scores for all categories except budget reliability.
  - Improvements do not yet reflect:
    - The 2022 public wage increase, which has significant medium-term implications.
    - The recent uptake in extra-budgetary funds that hinder transparency and comprehensive budgeting.
- Ongoing work and recommendations:
  - Improve budget reliability by centralizing payroll management with IFMIS to better control the wage bill.
  - Institutionalize SOE oversight mechanisms to centralize fiscal risks analysis, monitoring, and limit accumulation of contingent liabilities.
  - Limit extra-budgetary funds and ensure their performance and new allocations are discussed explicitly in the budget law at the time of approval.

### Anti-corruption framework
- Enforceable, transparent, and comprehensive financial disclosure by public officials can deter corruption, strengthen integrity, and improve public trust.
- Public access to financial declarations enhances transparency and accountability.
- Combating illicit enrichment is critical to strengthen anti-corruption and achieve accountability.
- Legal framework in the Kyrgyz Republic:
  - A financial disclosures law was adopted in 2017 titled ‘On Declaring Incomes, Expenses, Obligations and Assets of Persons Holding or Occupying State and Municipal Offices’.
  - Implementing resolutions adopted in 2018 establish the declaration form, filing procedures, classification of financial information, parameters for publication, and procedures for review and analysis.
  - Administration, control and verification responsibility transferred from the State Personnel Service to the State Tax Services (STS).
  - The law requires annual submission of declarations in an electronic format through an online system.
  - Summary of income, expenditure, and property of some senior officials (whose activities are not related to national security) and their relatives are published on the STS website.
  - Failure to submit a financial disclosure or submission of inaccurate or incomplete information can lead to sanctions, including dismissals (see: Law about state civil service and municipal service of May 30, 2016 (art. 47) and Law on anti-corruption of August 8, 2012 (art 7)).
- Gaps identified:
  - The sanctions regime for non-submission is unclear.
  - Coverage does not include close relatives comprehensively.
  - Triggers for investigation and prosecution for illicit enrichment are not established.
  - Officials verifying compliance are not specifically trained to implement the law.

### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)
- Legislative progress:
  - In 2018 the Kyrgyz Republic adopted a new AML/CFT Law that improved financial risk-based supervision and introduced mandatory disclosure of beneficial ownership of all legal entities.
  - EAG (a FATF-affiliated regional group) marked the new law and related by-laws as a significant achievement.
- FATF-related performance:
  - Among CCA countries, the Kyrgyz Republic has the strongest record with 39 of the 40 FATF recommendations at or near compliance.
  - Despite strong legal framework, effectiveness lags:
    - Money laundering and terrorism financing risks are little understood.
    - Better domestic coordination is needed to combat money laundering and financing of terrorism and proliferation (IO1).
    - Proceeds of crime are rarely confiscated (IO8).
- Policy implications:
  - Strengthen analytical capacity and implementation capabilities.
  - Strengthen risk-based AML/CFT supervision and monitoring of cross-border activities, with a focus on detecting and recovering proceeds of corruption.

### Climate change adaptation and mitigation — overview and prospects
- National exposure and vulnerability:
  - The Kyrgyz Republic is a small emitter of greenhouse gases but vulnerable due to mountainous landscape with glaciers and a large agricultural sector.
  - Approximately 94 percent of the country is above 1,000 meters from sea level and about 4 percent is permanently covered by snow.
  - Average annual temperatures vary from less than −10°C in high altitudes to over 12°C in the northern and western lowlands.
  - Average annual temperatures have risen by approximately 1.3°C between 1992–2021, frequently exceeding the world average.
  - The country experiences 3,000 to 5,000 earthquakes every year.
  - Since independence in the early 1990s, the country has experienced 19 climate related disasters, resulting in about US$76 million in damages (in 2020 dollars, about 1 percent of 2020 GDP), more than 2 million people affected, and 323 deaths.
- Policy focus:
  - Given the small carbon footprint, the authorities’ main focus should be on adaptation policies to build resilience and reduce annual output losses from global warming.
  - Success of adaptation policies depends on availability of sufficient financing from domestic and external sources.

### Climate change projections and impacts
- Mean-temperature projections (World Bank CMIP6 multi-model ensemble):
  - By 2100 under SSP5-8.5: projected warming in the Kyrgyz Republic is 6.1°C.
  - CCA regional average increase under SSP5-8.5: 5.3°C.
  - Global average rise under SSP5-8.5: 4.4°C.
  - Under SSP1-2.6: warming peaks at the end of the 2050s at around 1.7°C above the 1995–2014 baseline and then begins to decline.
- Local climate effects:
  - Extreme temperatures, potentially over 40°C, could become a regular occurrence in low-lying and densely populated areas.
  - While long-term precipitation trend projections are uncertain, intensity of extreme rainfall events appears to be increasing with temperature.
  - Melting glaciers will lead to more intense winter flooding and reduced summer water flow, altering hydrology and increasing vulnerability to extreme events.
- Macro-financial and sectoral impacts:
  - Short-term: Weather shocks reduce economic performance; in disaster years, real per capita growth declines by 1.7 percentage points on average and recovers slowly, resulting in a permanent output loss of almost 5½ percentage points of GDP.
  - Public debt: Surges by 2½ percent of GDP following disasters, mainly due to immediate budget and growth deterioration.
  - External accounts: Current account deficit widens gradually by about 4 percentage points of GDP in the medium term after disasters.
  - Sectoral effects:
    - Agriculture is most susceptible to climate change.
    - Rural population constitutes 65 percent of total population.
    - Over the last decade, agriculture contributed more than 14 percent to annual output and employed more than 25 percent of the economically active population on average.
    - Leading agricultural products: grain and forage crops (80 percent of cultivated area), meat and dairy.
    - Agricultural products comprised about 8 percent of total exports in 2020.
    - Temperature increases above annual averages have reduced unemployment in CCA countries for about three years, but abnormally large temperature deviations can reduce GDP per capita.
    - Higher precipitation has increased youth unemployment for both males and females.
    - Temperature increases have weighed negatively and persistently on agricultural employment, but have increased employment in the service sector (and a discernible effect on industry), amplifying labor shift from agriculture to services.

*Source: IMF staff chapter content.*

### 7.     Continuing glacial melt and pressure on water resources in the Kyrgyz Republic will

### 1kgzea2023002 - 7.     Continuing glacial melt and pressure on water resources in the Kyrgyz Republic will

### Impacts on agriculture, livestock, and land
- Climate drivers: changes in carbon dioxide availability, precipitation, and temperatures; indirect effects on water resources and seasonality, soil erosion, and decline in arable areas due to desertification.
- Grasslands productivity: climate change reduces productivity of grasslands across the majority (96%) of the Kyrgyz Republic’s land surface area (Wang and others, 2020).
- Food security and livestock:
  - Increased water scarcity and droughts can reduce access to drinking water and adequate foraging, potentially reducing crop yields and exacerbating food insecurity.
  - Increased biological stress and poorer nutrition are likely to leave livestock more vulnerable to infectious diseases.
- Vulnerable populations and exposure:
  - The poorest quintile is estimated to be more than twice as likely to be exposed to droughts than other groups (Winsemius and others, 2018).
  - Women and low-income rural dwellers are most likely to be affected by flash flooding and landslides as they spend more time in exposed residential and subsistence production areas.
  - Historical evidence suggests a climate-driven increase in floods and landslides could contribute to rural-urban migration.

### Impacts on the energy sector
- Hydropower dependency: Hydropower provides around 90 percent of the country’s electricity.
- Supply risks:
  - Changing rainfall patterns, increasing temperatures and increasing droughts will likely reduce reliability and availability of water for hydropower and thermoelectric cooling.
  - Increasing glacial and snow melt are expected to affect hydropower sources in the coming decades, with increases likely in the next five to ten years and significant decreases thereafter.
  - Aging power plants, energy infrastructure and transmission face threats from higher temperatures and increased heavy rains along with floods and mudslides.
- Demand sensitivity: analysis of fifteen studies shows the increase of electricity demand per degree of temperature increase varies between 0.5 and 8.5 percent (Santamouris and others, 2015).

### Macroeconomic, financial, and social risks
- Growth and productivity:
  - Climate change will reduce long-term growth through adverse impacts on human and physical capital, and total factor productivity; agriculture and hydropower are typically first impacted with ripple effects on manufacturing, trade, tourism, and services.
- Fiscal and external stability:
  - Lower growth would shrink the tax base and reduce fiscal space, generate additional expenditure needs for infrastructure, social protection, and investment in human capital, resulting in higher fiscal deficits and public debt.
  - Lower potential growth would also reduce exports, while import may rise due to increased infrastructure investment needs, weakening the external balance and exerting pressure on international reserves, the exchange rate, and price stability.
- Financial stability:
  - Lower growth and loss of incomes by firms and households would weaken asset quality and bank balance sheets.
  - More frequent climate disasters could result in larger losses for insurers and investment funds and trigger capital outflows, fire sales and other negative macro-financial spillovers.
- Social and political stability:
  - Compounding effects could cause social and political instability, more migration and conflicts, increase poverty especially among the youth and women, and worsen growth potential in a vicious cycle.

### Adaptation: strategy and urgency
- Rationale: Early adaptation is critical to strengthen resilience of the Kyrgyz economy to climate change; priority should be given to policies with positive externalities that remove market imperfections and engage the private sector.
- Estimated benefit: Adaptation policies are estimated to reduce annual output losses from global warming in the Kyrgyz Republic by up to 1.5 percent of GDP by 2060 (Saliba and others, 2022).
- Vulnerability and readiness (ND-GAIN, 2020):
  - Ranked 69th out of 182 countries on the University of Notre Dame ND-GAIN Country Index.
  - Kyrgyzstan was the 153rd most vulnerable country and the 101st most ready country.
  - In 2020, Kyrgyzstan ranked 4th out of eight CCA countries on the ND-GAIN Index.
- Institutional commitments:
  - Ratified the Paris Agreement; updated NDC (2021) outlines low-carbon transformation until 2030.
  - In November 2021, State Committee on Ecology and Climate upgraded to the Ministry of Natural Resources, Ecology and Technical Supervision.
  - Coordinating Council for Climate Change, Ecology and Sustainable Development formed; Coordinating Committee for the Green Economy to be formed with private sector and development partners.

### Financing needs for adaptation (exact estimates)
- Aggregate estimate:
  - Financial resources required for adaptation are estimated at more than $2.8 billion, or 33 percent of 2021 GDP.
  - Authorities committed to provide 29 percent of this financing need from domestic sources and will seek the remaining 71 percent externally.
- Table of Required Financial Resources for the Implementation of Adaptation Measures (USD million 2021)
  - Water resources: Total requirement 1 977.7; Own resources 577.1; Need for additional international support 1400.6
  - Agriculture: Total requirement 276.0; Own resources 83.0; Need for additional international support 193.0
  - Energy: Total requirement 64.9; Own resources 25.2; Need for additional international support 39.7
  - Health care: Total requirement 144.1; Own resources 2.7; Need for additional international support 141.4
  - Reducing the risks of climate emergencies: Total requirement 309.9; Own resources 121.9; Need for additional international support 188.0
  - Forest and biodiversity: Total requirement 46.2; Own resources 4.0; Need for additional international support 42.2
  - Climate resistant areas and green cities: Total requirement 12.7; Own resources 1.9; Need for additional international support 10.7
  - Improving the adaptation reporting system: Total requirement 1.6; Own resources 0.6; Need for additional international support 1.0
  - Total: Total requirement 2 832.9; Own resources 816.3; Need for additional international support 2 016.6 (100%) (28.8%) (71.2%)
- Financing modalities and constraints:
  - Domestic financing needed without compromising debt sustainability; need to catalyze private investment in green economy.
  - Multilateral adaptation assistance often linked to institutional capacity; countries in transition face limited access.
  - Mobilizing more concessional financing for adaptation is crucial given tight fiscal space post-COVID-19.
  - IMF’s Resilience and Sustainability Facility (RSF) (put in place in 2022) could help finance reforms addressing climate-related challenges.

### Mitigation plans, emissions, and financing
- Emissions profile:
  - In 2018, the country contributed only about 0.03 percent of the world’s total carbon emissions, or 15 million tons of greenhouse gas.
  - Around 60 percent of all emissions in the country are concentrated in energy.
- NDC mitigation targets (relative to business-as-usual, BAU):
  - Unconditional (WM scenario): reduce greenhouse gas emissions by 16.63 percent by 2025 and by 15.97 percent by 2030.
  - Conditional on international support (WAM scenario): reduce greenhouse gas emissions by 36.61 percent by 2025 and by 43.62 percent by 2030.
- Sectoral mitigation priorities:
  - Energy: decrease consumption of fossil fuels and increase power generation from renewable sources; modernization of energy supply systems; expansion of natural gas network; promotion of electric vehicles and energy efficiency.
  - Agriculture: increase farming of climate-resistant crops; reduce headcount and increase productivity of livestock; expand area of cultivated organic and climate change-resistant crop farming lands; increase efficiency of fertilizer use and generation of biogas.
  - Forestry and land use: preserve and increase area of forests and expand perennial plantations.
  - Mining: transition to more environmentally friendly gold extraction technologies to help preserve glaciers and fresh water.
- Mitigation financing: mitigation policies will also require significant financing; bulk envisaged from external sources which are yet to be identified.
- Carbon pricing potential:
  - Taxing production and use of fossil fuels can raise up to 6 percent of GDP in additional revenue by 2030 (IMF estimates via Carbon Pricing Assessment Tool).

### Policy options and priorities
- Core recommendation: For the Kyrgyz Republic, adaptation should be at the heart of climate policies given small emissions but high vulnerability.
- Fiscal space creation:
  - Revenue-side: eliminate or reduce tax exemptions, adjust certain tax rates and improve tax administration.
  - Expenditure-side: reduce the public wage bill and energy subsidies (including by raising electricity tariffs), and improve efficiency of capital spending.
  - Structural reforms: strengthen governance and reduce corruption, restructure or divest loss-making SOEs, and improve the electricity sector to generate higher and more inclusive growth and broaden the tax base.
  - Consider carbon taxation paired with well-targeted social assistance to protect the vulnerable.
- Private sector and financial inclusion:
  - Catalyze private investment in the green economy; enforce regulations and improve financial inclusion of farmers and small businesses.
- Agriculture resilience:
  - Put in place a comprehensive agriculture risk management system with built-in mechanisms to mitigate, reduce, or transfer climate risks.
  - Provide timely hydrometeorological information to farmers, switch to water-conserving crops, and improve irrigation efficiency by providing incentives to adopt water-saving technologies.
- Social protection and human capital:
  - Public investment in climate-resilient infrastructure, skills upgrading, healthcare and education; strengthen social safety nets to shield the vulnerable.

*Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1kgzea2023002.pdf*

### 22.      Mitigation policies would help reduce relatively small greenhouse gas emissions even

### 22.      Mitigation policies would help reduce relatively small greenhouse gas emissions even further

### Mitigation policy recommendations and measures
- Maintain and, if fiscal space permits, expand fiscal instruments to encourage green transition:
  - Preferential customs tariffs for fuel-efficient vehicles and energy-efficient appliances.
  - Discourage air, soil, and water pollution through fines and penalties.
- Introduce feebates (revenue neutral sliding scales of fees on products and activities with above or below average emission intensity) to promote mitigation responses without additional fiscal costs.
- Prefer public procurement of goods and services with reduced environmental impact throughout their life cycle when cost-equivalent to alternatives to reduce emissions without adding budget pressures.
- Expand renewable power generation and gradually raise electricity tariffs to cost recovery to attract private investment in power generation.
- Gradually increase heating tariffs to cost-recovery rates to reduce excessive heating consumption and associated fossil fuel use.
- Consider raising fuel (diesel, natural gas, coal) prices through corrective taxes to reflect both supply and environmental costs; use extra revenue to contribute to fiscal space and to compensate the vulnerable for higher prices.

### Sectoral resource requirements for NDC Mitigation (national experts' calculation)
- The required resources were calculated based on the cost of specific actions of the NDC Implementation Plan under the “Mitigation” section.
- Own** funds refer to funds from the national budget, private sector, international donors, and current public investment programs.
- International support*** refers to funds not currently supported by funding sources that need to be mobilized during the implementation period of the NDC.

- Energy: 7,155.8 total; Own** funds: 2,857.1; International support***: 4,298.7
- IPPU: 0.6 total; Own** funds: 0.1; International support***: 0.4
- Agriculture: 19.3 total; Own** funds: 12.1; International support***: 7.1
- LULUCF: 63.0 total; Own** funds: 36.2; International support***: 26.8
- Waste: 3.8 total; Own** funds: 0.5; International support***: 3.3
- Total: 7,242.4 total; Own** funds: 2,906.1; International support***: 4,336.4
- Coverage: (100%) total; (40%) Own** funds; (60%) International support***

### Institutional, data, and planning priorities
- Improve climate data collection, including:
  - Information on the costs of high and low intensity disasters.
  - Disaster response expenditure and sources of financing.
- Mainstream climate resilience into all sectoral plans and strengthen cross-ministerial cooperation, especially among:
  - Ministry of Finance, Ministry of Economy, Ministry of Natural Resources, Ecology and Technical Supervision, and Ministry of Emergency Situations.
- Standardize post-disaster information gathering and reporting across ministries.
- Translate overarching plans and commitments (including NDC) into implementable and “finance-ready” sectoral strategies to increase realism.
- Strengthen institutional capacity to implement commitments.

### Financing strategy and public financial management
- Success hinges on availability of sufficient financing; take a strategic view matching climate projects with accessible financing sources at acceptable cost.
- Use NDC forums to articulate a strategy for raising climate-change financing.
- Mobilize private financing and external grants to avoid worsening fiscal and debt sustainability.
- Continue dialogue with development partners to secure donor financing for unmet climate and development goals.
- Advance structural reforms to improve climate resilience and engagement with development partners, prioritizing:
  - Reforms of governance, SOEs, and the energy sector.
  - Public finance management reforms to improve efficiency and transparency of climate-related spending, including:
    - Strengthening climate-sensitive budgeting.
    - Rigorous practices for prioritizing, costing and monitoring of projects.
    - Regular spending reviews.
    - Systematic ex-post audits of climate investments.

### Economic principles for climate change policies (Box 2)
- Integrate climate policies into a holistic development strategy involving both private and public sector responses.
- Prioritize climate change programs with positive externalities and address market imperfections to make private sector responses efficient.
- Apply cost-benefit analysis (CBA) to climate change policies to assess social welfare impacts and identify programs with positive net present value (NPV).
  - Some programs with positive NPV can be self-funding; others may require financing.
  - Example: Additional spending to make public infrastructure more resilient can have positive NPV if construction costs are smaller than potential losses from climate shocks.
- Consider distributional aspects: positive NPV programs can create winners and losers; governments can redistribute aggregate gains (e.g., taxing carbon to pay for adaptation) and may scale back programs if net benefits accrue mainly to the wealthiest.
- Consider macro-fiscal implications when selecting programs:
  - Global adaptation needs in 2030 are estimated at 0.25 percent of world GDP per year, with costs reaching above 1 percent of GDP per year for some developing countries.
  - Lack of fiscal space may prevent financing all viable positive NPV projects; rank competing programs using CBA and prioritize those with greatest synergies and positive externalities.
- Mainstream climate change policies into fiscal policy and public financial management with four essential building blocks:
  - Identifying climate vulnerabilities and adaptation gaps (take stock of vulnerabilities, macroeconomic impacts, capacity gaps, develop roadmaps and guidance).
  - Identifying solutions (address information and capacity gaps, identify solutions consistent with national development plans, conduct CBAs and assess distributional impacts).
  - Mainstreaming adaptation in public financial management (incorporate needs in the budget and enhance implementation capacity).
  - Monitoring, evaluation, and reporting (continuous monitoring, reevaluation, and regular updates of climate change plans).

*Italic source attribution line.*

### 4.     In 2021, the poverty increase was disproportionately concentrated in urban areas. The

### 4.     In 2021, the poverty increase was disproportionately concentrated in urban areas. The

### Poverty developments and drivers
- Urban poverty rate increased by 15 percentage points to 33 percent and caught up with the rural poverty rate, which went up by 4 percentage points only.
- Access to farms and domestic food production most likely helped mitigate the negative impact of higher food prices on poverty in rural areas.
- World Bank preliminary estimates: the $3.65 poverty rate had deteriorated further in 2021 to 21.8 percent, while extreme poverty remained broadly unchanged.
- Social assistance spending as a share of GDP averaged 1.7 percent over the last ten years.

### Overview of main Social Safety Net (SSN) programs
- SSNs encompass non-contributory transfer programs designed to protect households from poverty and destitution and to enhance human and physical capital.
- The social assistance system is centered on categorical support with flat benefits and limited non-demographic targeting.
- The two main programs:
  - Social Benefit (SB) and Benefit for Low-Income Families with Children (BLFC) together accounted for 35 and 32 percent of total social assistance spending in 2021 (0.6 and 0.5 percent of GDP respectively).
  - BLFC reached 5.3 percent of the total population in 2021; other programs reached 1.5 percent.
- The Monetary Compensation (MC) scheme accounted for 15 percent of social assistance spending in 2021 (about 0.25 percent of GDP).
- All social assistance programs are administered by the Ministry of Labor, Social Security and Migration and financed out of the general government budget.

### BLFC (Benefit for Low-Income Families with Children) — program specifics and performance
- Only means-tested program; targeted to low-income families with children under 16 years of age.
- Eligibility criteria: income test (currently 1,000 soms or $12.1 per household member per month) and asset assessment.
- Benefit: flat monthly allowance of 1,200 soms ($14.5) per child.
- Benefit increase: raised by 50 percent (from 810 soms) starting from June 2022 by Presidential Decree.
- Coverage and spending:
  - Since 2019, beneficiaries increased by 14 percent (or 0.5 percent of population) reaching 5.3 percent of the population in 2021.
  - Total BLFC spending increased by about 16 percent in nominal terms but remained at 0.5 percent of GDP.

### SB (Social Benefit) — program specifics and performance
- Aimed mainly at disabled and elderly not entitled to a contributory pension; categories include children and adults with disabilities, elderly who reached retirement age but not entitled to contributory pension, survivor children and orphans.
- In 2021, about 99,000 beneficiaries (1.5 percent of the population); children and adults with disabilities each account for about 35 percent of beneficiaries.
- SB allowances were raised between October 2021 and June 2022 by 120 percent on average (with category-specific cumulative increases noted in a footnote).
- Flat monthly allowances range between 2,000 soms ($24) for the elderly to 8,000 soms ($96) for certain categories of the disabled.
- Allowances are not automatically adjusted to the cost of living.

### MC (Monetary Compensation) — program specifics and trends
- Introduced in 2010 to replace Soviet-era in-kind privileges; provides flat cash transfers to 25 categories (e.g., war veterans, survivors of WWII labor camps, Chernobyl rescuers, disabled).
- Spending and beneficiary pool are declining due to a moratorium on introduction of new categories and limits on new beneficiaries.

### International comparison of SSN performance
- Kyrgyz Republic’s social assistance spending corresponds to the 74th percentile for emerging and developing Europe and Central Asia and the 90th percentile for low-income developing countries (LIDC) based on World Bank database.
- However, effectiveness is low: median poverty reduction for emerging and developing Europe and Central Asia is estimated as 11 percentage points, while in the Kyrgyz Republic SSNs reduce poverty by an estimated 4.7 percentage points.
- Coverage and adequacy issues:
  - Only 16 percent of people in the bottom quintile receive social assistance benefits, about 23 percentage points below the CCA average.
  - Adequacy for the bottom quintile is 19 percent (share of transfers relative to pre-transfer income/expenditure), compared to CCA and LIDC averages of around 30 percent.
  - Almost 50 percent of social assistance benefits go to the poorest quintile; this quintile accounts for about 44 percent of all social assistance beneficiaries.
  - Non-poor households in second and third quintiles receive almost 38 percent of total social assistance benefits—the highest benefits incidence across the CCA region.

### Indexation, benefit erosion, and administrative issues
- No regular indexation of benefits leads to erosion in real value and increases discretionary adjustments.
- Example: SB purchasing power fell by 20 percent after being broadly unchanged between 2012 and 2017.
- BLFC allowance remained at the 2017 level until mid-2022 while consumer price inflation exceeded 30 percent over the same period.
- A strong information system and a single registry for all SSN programs are needed to reduce fragmentation, overlap, and improve targeting and verification.

### Policy recommendations to strengthen SSNs (priorities and measures)
- Near-term priorities given limited fiscal space:
  - Improve efficiency of SSN spending.
  - Prioritize and improve efficiency of other expenditures, mobilize revenue, and phase out inefficient tax exemptions to build fiscal space for medium-term increases in social spending.
- Medium-term comprehensive SSN reform strategy:
  - Develop an adaptive and sustainable SSN system that provides adequate benefits within a sustainable envelope and protects people from falling into poverty.
  - Conduct rigorous distributional analysis of the existing system, assess effectiveness and trade-offs of different schemes, and plan new systems and delivery channels.
- Short-term operational reforms:
  - Upscale existing means-testing programs and increase coverage at the bottom of the income distribution.
  - Strengthen design and implementation of the income test to reduce leakage and avoid errors of exclusion and inclusion.
- Program consolidation and resource reallocation:
  - Consolidate social assistance programs and phase out less effective categorical programs to simplify the system and eliminate overlaps.
  - Continue moratorium on new MC beneficiary categories so resources can be reallocated over time to strengthen more effective SSN programs.
- Improve progressivity and adequacy:
  - Replace flat benefits with differentiated amounts according to need (progressive benefit schedule where benefits decrease with household income) to improve generosity and poverty mitigation within the same spending envelope.
- Regular indexation:
  - Institute regular indexation of benefits (e.g., based on a price index reflecting the consumption basket of low-income households) to preserve real value and allow automatic scaling up during shocks.
- Administrative capacity and digitalization:
  - Build robust administrative capacity, develop a single registry, enhance coordination and information sharing between official databases, and expand digitalization to improve coverage and cost-effectiveness.

### Box — Typical SSN program components (typology)
- Cash transfer programs (conditional and unconditional).
- Social pensions.
- School feeding programs.
- Nutrition programs (food stamps, vouchers, food distribution).
- Fee waivers and targeted subsidies (health, education, housing, utilities, agricultural inputs, transport).
- Emergency programs (temporary cash or in-kind support).
- Other non-contributory programs (school supplies, social care services, tax exemptions).

*International Monetary Fund — Kyrgyz Republic (excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1kgzea2023002.pdf_