Regardless of whether we want it or not energy tariffs should be increased in Kyrgyzstan: World Bank

The economic situation in the Kyrgyz Republic, particularly in the context of the outcomes achieved in 2016, is one of the pressing topics of today. Despite the positive dynamics in the country’s economy, there are certain factors calling for attention, such as debt-to-GDP ratio, power tariffs, attracting investors, etc. What should Kyrgyz citizens expect in 2017? Should the energy tariffs be increased and why? Should Kyrgyzstan expect default? These are the issues discussed by Lilia Burunciuc, World Bank Country Director for Central Asia.

How do you assess the current economic situation in the KR? What forecast can be given in 2017?

Despite negative external factors, the Kyrgyz economy has in fact been quite resilient. Growth remained fairly robust at 3.8 percent in 2016, and we are expecting it to slightly decrease to 3.4 percent this year, mostly due to lower gold production. Inflation has also remained very much under control, which is important for businesses and the general population.

This being said, we do see some emerging signs of stress. In particular, a slowdown in private sector activity. If you look at the country’s export performance you will see that businesses are struggling. A considerable part of the economy remains informal and not productive. However, the only sustainable path for social and economic growth is through formal private sector activity, so the current state of affairs is cause for concern and attention.

What impedes the transition to a more effective economy with better jobs, enhanced productivity, and better competitiveness on foreign markets? What should the country focus on its efforts?

Kyrgyzstan has a significant potential in hydropower generation, agriculture, mining, and tourism – that could help it to become a thriving nation. To tap this potential, the country needs to do the following:

  • Provide favorable conditions for the private sector and attracting private investment. The private sector is the engine of economic growth. Today, many countries in the world compete for private investments. Therefore, any country should improve its investment climate for an investor not to go elsewhere;
  • Use the country's human capital – dynamic and educated youth. The task is to leverage this important asset today, as well as create conditions for development of entrepreneurs for the future economy;
  • Develop the country’s infrastructure (in the energy, irrigation, and transportation sectors) through resolving the issues of inadequate tariff policy and stimulating public private partnership;
  • Provide an adequate social safety net for the poor and vulnerable groups.

- What will be your assessment of the situation with the Kyrgyz debt burden being almost 60% of GDP? Is there a threat of default?

I can give you a very clear answer to that question: there is absolutely no risk of default on the public debt of the Kyrgyz Republic. This is because the debt of the country is highly concessional (contracted from the World Bank and other partners at rates much below those of the market) such that interest payments today are very manageable. To give you a sense of proportions, interest payments in 2016 amounted to only 2.8 percent of public expenditures.

Now that doesn’t mean that we should not be worried about debt, but instead that we should be smart about keeping it sustainable and using it wisely so that is does not constitute a burden for future generations. On that front, there is much that can be improved in the Kyrgyz Republic to ensure that public investments are selected more strategically, better implemented and properly evaluated.

Also, the country has to be careful to keep the fiscal deficit under control. In recent years, fiscal discipline has been relaxed to mitigate the effects of the regional downturn.

Another point that I want to raise is that today, a very large share of the Kyrgyz debt is contracted to support the energy sector for a simple reason: because tariffs are much too low to cover the sector’s needs, to say nothing of the urgently needed investments in the time-expired infrastructure. So one needs to know that low energy tariffs do not come for free: they will be paid for by taxpayers and future generations.

Speaking of the energy sector - what projects are being implemented by the WB in the energy sector of the KR?

First of all, I would like to stress that the World Bank does not implement projects – it provides funding for them. Project implementation is the responsibility of the Government and relevant ministries.

In this sector, a $25 million Electricity Supply Accountability and Reliability Improvement Project is currently under implementation in the Kyrgyz Republic. Under the Project, three substations in Bishkek are being built, 30 thousand smart meters are being installed, and new management information systems will be introduced in JSC “Severelectro”. The main expected results are better electricity supply in Bishkek, reduction of losses and, most importantly, greater transparency and accountability in management of “Severelectro” – the company serving half of electricity consumers in the country.

There is another important point here. These investments will bring very modest benefits, if the tariff issue remains unresolved. Why is it so??

The matter is that the financial situation and infrastructure of the energy sector are in a dreadful condition. The sector’s debt exceeds USD 1 billion. Over 70% of infrastructure facilities are operated far beyond their technical lifetime. The quality of power supply is very low, which is manifested through power outages and low stability of voltage. And finally, the country cannot use one of its most important assets – its hydro-resources. Hydropower could potentially be exported and generate budget revenues, which, in their turn, could be used to increase pensions and salaries in the public sector.

Can the country do without having to increase the tariffs?

Let’s draw the following analogy here. Let’s assume that the production cost of one liter of milk is 20 soms, and a farmer is paid 15 soms, and this has been so for many and many years. What outcome will it have? The farmer will have no money to upkeep his farm, provide for his family, to say nothing of any development whatsoever. This is very similar to the situation in the energy sector. The power tariffs do not cover even operational costs of the system.

The Kyrgyz Government has used other reserves, such as reduction of technical and commercial losses and improved governance of the sector. That is to say that regardless of whether we want it or not the tariffs in the energy sector should be increased. The only option for delaying the tariff increase for one or two years is the reduction of the lifeline amount of power consumption from the current 700 kW/h to 150-300 kW/h, which is a worldwide practice. At the same time, it is important to provide targeted social assistance to the vulnerable population who really need it. Currently in the Kyrgyz Republic, the lifeline amount of power consumption is provided to everyone without exception.

In your opinion, was Kyrgyzstan’s accession to the EEU beneficial for the country’s economy?

When people debate this issue they forget one very important thing. The EEU has brought tremendous benefits to the Kyrgyz Republic by allowing migrants in Russia to work legally in the country, and we all know how critical this is for the country and so many Kyrgyz families. Then again it is important to keep in mind that accession has not happened at a good time given the regional slowdown. But one shouldn’t draw the wrong conclusions because the Kyrgyz Republic would not have been shielded from these developments had it chosen to remain outside the Union.

This being said, it is clear that accession has come with challenges: including difficulties for exporters to adapt to EEU standards and increased pressure from regional competitors.

But let us look forward. In many ways the Kyrgyz Republic makes me think of Ireland - a country, which in the early 1980s had the same poverty rate as the Kyrgyz Republic and was known for sending migrants abroad in search of new opportunities. In the following decades Ireland turned things around in a very spectacular way by leveraging its membership in the EU through very smart policies: by making it easy for firms to locate in Ireland to enter the common market, by building on its young and educated population and by using its tax regime to attract investment. So I want to leave you with this thought and with a question: how can the Kyrgyz Republic be the success story of Central Asia over the next decade? The World Bank is ready to work with Kyrgyzstan in this area.

Earlier, a $525 grant for Dairy Productivity Improvement Project was approved by the WB. How will the project be implemented? How will financing be disbursed?

First of all, it is necessary to clarify that US$525,000 grant is an activity to prepare the ground for a larger project to finance development of the dairy sector in Issyk Kul oblast. This grant is to be used for preparation and implementation of a larger project, potentially up to US$20 million, of which the first phase of US$ 5 million was approved by the World Bank, and the remaining US$ 15 million are expected to follow. The US$ 20 million program comprehensively addresses all aspects of improving the quantity and quality of milk in Issyk-Kul oblast, including improved animal feeding and breeding practices, animal health control, promoting linkages with milk processing companies, and many other aspects of developing a promising dairy sector.

The US$525,000 grant, as well as the larger program, will be implemented by the Ministry of Agriculture, Food Industry and Land Reclamation. The World Bank does not work with individual farmers or milk producers, so disbursements will take place according to the standard procedures: funds from the World Bank will flow to the Government of the Kyrgyz Republic in accordance with the program of activities agreed with the Government.

Earlier, there were reports of the WB’s interest in supporting the Digital CASA project. Please tell in more detail about the project. What is the idea, how it will be implemented and what is the amount of funding? What institutions will be implementing agencies for this project?

Today, Kyrgyzstan has one of the highest costs of international access to the Internet in the region. The new project "Digital CASA - Kyrgyzstan" aims to improve high-speed international and national cheaper broadband access and a shared digital government infrastructure for the digital economy in the country. Shared digital platforms and innovative solutions for public services delivery can help to reduce corruption by minimizing contacts between citizens, business and the state.

The project is designed jointly with the State Committee for Information Technologies and Communications of the Kyrgyz Republic. Its preparation and implementation is planned for 2017-2022.

The World Bank’s funding is estimated at $20 million. Additional funding is negotiated and this is one of the priority sectors for the Kyrgyz Government.

IFC is planning the Time Release Study under Trade and Logistics Project. Please tell about the project. What is the study about? How will be the study results used? What is the amount of financing?

The International Finance Corporation, a private sector development arm of the World Bank Group, will be conducting a Time Release Study (TRS) as a grant-based technical assistance to the Kyrgyz Republic. The TRS is a unique tool and method for measuring the performance of Customs and other border agencies. We are in the process of preparation of conducting this Study together with our main counterparts – the Ministry of Economy and the Customs. The Study will measure the effectiveness of operational procedures that are carried out by the Customs and other regulatory actors in the standard processing of imports, exports and in transit movements. As a result of the TRS, the Ministry of Economy and Customs will determine where delays exist in the process of releasing goods; identify the types of delays or bottlenecks; reasons for such delays. To summarize, the Study will help to address the concerns of the trading community of the Kyrgyz Republic and help facilitate trade in order to take advantage of the EEU markets.

What projects funded by the WB in the KR do you consider a priority? What are your future plans? What projects are planned for this year?

The World Bank supports projects which are the most important for the country. About 40% of the rural population in Kyrgyzstan do not have access to clean drinking water. Therefore, the World Bank finances the implementation of the ongoing project and is designing a new drinking water project for the total amount of approximately $60 million.

Currently, the largest projects are being implemented in the sectors of irrigation, healthcare, and energy. Five new projects – currently under preparation – will support development of transportation and ICT and address issues in district heating, as well as reconstruction of schools and other social facilities to ensure their safety and safeguarding people’s lives in emergency situations.

In the nearest future, the World Bank and the Kyrgyz Republic will be developing a new Country Partnership Strategy for 2018-2021. The need for projects is identified jointly with the Government of the KR and stems from the National Strategy for Sustainable Development of the KR and the World Bank’s analytical work – the Systematic Country Diagnostic which is currently underway. The Diagnostic identifies and prioritizes the most important policy issues that need to be tackled to turn challenges into opportunities. The World Bank is holding extensive consultations with the Government and all stakeholders across the country. The outcomes of the consultations will be incorporated in our Country Partnership Strategy.

At the end of our conversation, I would like to once again emphasize that the World Bank has been a reliable partner for the Kyrgyz Republic. The decisions the country is taking today will have a direct impact on its future; therefore, we would like to see a breakthrough in social and economic development so that Kyrgyzstan could become a thriving nation.

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