Country Context

The Kyrgyz Republic is a landlocked, lower-middle-income country that is highly dependent on remittances and natural resources. Although overall levels of poverty have been reduced—from 37.0 percent of the population in 2013 to 20.1 percent in 2019—the population remains vulnerable.

Despite the Kyrgyz Republic being an early leader among Central Asian countries in economic liberalization, broad-based economic growth remained elusive throughout the evaluation period. Major challenges included the following:

• Weak governance—particularly low capacity for economic management and effective service delivery across the public sector, weak management and control of public finance, persistent corruption, uneven enforcement of the rule of law, and lack of transparency and accountability at the sectoral level, especially in energy and mining, which had significant economywide implications. The country’s substantial political instability was driven by competition among patronage networks (Radnitz 2012).
• Challenges to private sector development—particularly unpredictability in the business environment; firms’ difficulty accessing finance; vulnerabilities related to financial stability; and limited capabilities within firms for financial management, innovation, and product quality.
• The low quality of essential local public services—particularly water supply, sanitation, and solid waste collection—driven by inadequate resources, unclear delineation of responsibilities among tiers of government, and weak human resource capacity.

Design and Implementation of World Bank Group–Supported Strategies

The fiscal years (FY)14–17 Country Partnership Strategy aimed primarily at improving governance and focused on public administration, public service delivery, and the business environment. It was well aligned with the country’s development challenges. However, its scope and objectives were overly ambitious given the country’s political and governance context.

A shift in attention to private sector–led growth, and away from governance, began at the Country Partnership Strategy review stage in FY16. The subsequent FY19–22 Country Partnership Framework (CPF) increased its focus on private sector–led growth, further reducing its direct support for governance reform. While the focus on private sector–led growth was relevant to the country context, the pivot away from governance undermined the effectiveness of the strategy given that governance challenges were a major deterrent to private sector activity, as discussed in chapters 4, 5, and 7.

The Country Partnership Strategy and CPF programs were implemented largely as planned, although support deviated from plans to support the COVID-19 pandemic response. Development policy financing was paused after FY17, with the exception of FY19, as a result of backtracking on priority reforms. Dropping the planned judicial sector reform project reduced the effectiveness of the World Bank’s work. The approach to improving predictability in the business environment was focused on technical approaches rather than addressing higher-level constraints. The approach to essential local public services in most sectors was weighted toward infrastructure while neglecting to address binding constraints in service delivery.

World Bank Group Support to Improve Governance

Over the evaluation period, the World Bank Group program made several tangible contributions to enhancing governance, particularly with respect to budget transparency, public procurement, and tax administration. However, overall progress was below expectations, and most targets (including in civil service, anticorruption, and access to justice) were not met. While the focus on governance and anticorruption was appropriate, the program relied too much on development policy financing to advance reforms that were institutionally demanding and required complementary support over an extended period of time to generate results.

The governance program under the FY19–22 CPF narrowed its focus to public financial management, stepping back from support to control corruption and strengthen the rule of law—both major constraints to progress in other areas of the program.

Bank Group support for public procurement and tax administration was more effective; however, not all procurement reform achievements were sustained.

World Bank Group Support to Private Sector Development

Bank Group support helped make some headway in addressing major constraints to private sector development, including with respect to access to finance, agricultural productivity, and financial stability; however, overall outcomes were modest.

Bank Group support to improve the business environment relied on technical solutions to reduce discretion but did not address the main drivers of unpredictability—weak rule of law and abuse by government officials of regulatory processes to pressure businesses. The International Finance Corporation made some important contributions to helping microfinance institutions transform into commercial banks and providing longer-term finance to financial institutions.

Only in the dairy sector did the Bank Group effectively address the capabilities of firms to grow, although the 2018 Systematic Country Diagnostic had identified lack of growth in small firms as an issue.

World Bank Group Support to Essential Local Public Services

There was limited support to understand and address the factors constraining local government capacity to deliver local services. Inadequately addressed challenges included a lack of clarity on the division of responsibilities among levels of government, sustainable access to fiscal resources, and capacity at both the local and central government levels.

Bank Group–supported projects approached the water supply sector in a holistic way, supporting institutional reform of the sector at the local and national levels and increased access to and quality of water supply. While there are issues with the capacity and mandate of the national-level agency and financial sustainability of rural water user unions, long-term efforts are progressing in the right direction and have enabled other development partners to increase their activities.

In contrast, other local public infrastructure was supported through community-driven development modalities that, while they provided inputs valued by the communities, did not aim to improve quality of service. In fact, access to and quality of services were not monitored by the World Bank.

Main Findings and Lessons

The main findings from this evaluation are as follows:

• Governance weaknesses remain a major impediment to fostering private sector development to drive economic growth and achieve development results.
• The World Bank learned from experience when it paused development policy lending, but, other than in the water sector, it did not adequately adapt its approach to local public services despite weak performance.
• Before the pause in budget support, development policy operation prior actions were spread thin across multiple reform areas, some of which were not strategic or did not receive complementary implementation support, and were not effective.
• The design of World Bank and International Finance Corporation interventions on private sector development did not target growth-oriented firms or address weak firm capabilities that were needed to improve productivity and spur growth.
• World Bank projects addressed only a limited dimension of the constraints to improving essential local public services. In contrast, the World Bank–supported projects in education and health were able to improve outcomes.
• The implementation of the World Bank–supported projects through quasi-public implementing agencies, such as the Community Development and Investment Agency and the Agribusiness Competitiveness Center, has contributed to sustainability concerns because of a lack of progress in developing local capacity for project implementation.

The Independent Evaluation Group draws the following lessons from this evaluation, which may be of relevance to the next CPF and of interest to countries facing similar challenges.

1. Promoting diversified, export-oriented, inclusive, and sustainable growth—the main objective of the FY19–22 CPF—requires more attention to governance weaknesses and constraints on firm-level growth. Preconditions for economic growth include the interrelated objectives of reducing corruption, increasing predictability of the business environment, and reforming the judiciary. This can also reduce incentives for informality. Firm capabilities and quality also need to be improved. The World Bank may wish to engage with stakeholders to identify opportunities for providing greater regulatory stability and fostering growth.
2. In areas that are preconditions for the achievement of broader and higher-level development objectives (for example, increasing the predictability of the business environment as a precondition for private investment and thus economic growth), even when the government does not have the appetite to reform, the Bank Group should remain engaged, including by remaining current on issues through analytical work. The Bank Group can deepen its understanding of constraints and priorities so that it is prepared to act quickly when a window of opportunity opens. It should also engage with civil society to inform debate about the costs of inaction and strengthen demand for reforms.
3. The use of development policy operations should continue to be contingent on the government’s appetite for reform; if and when development policy financing lending resumes in the Kyrgyz Republic, it should be used more selectively and strategically. Before the pause in development policy financing, reforms supported by development policy operations either lacked ownership and complementary implementation support or did not address major constraints.
4. Achievement of development objectives related to essential local public services requires strengthening the institutional and financial capacity of local governments. Binding constraints to local service delivery include clarity in the respective responsibilities of different levels of government, access to adequate resources, and sufficient technical capacity.
5. In the context of the Kyrgyz Republic, investment projects should be used to build institutional capacity within all levels of government. This includes central and local governments and institutions that deliver agriculture services in rural areas.