Kyrgyz Republic Regional Economic Development Project

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The Kyrgyz economy grew at an estimated 6.2 percent in 2023, following a 9 percent expansion in 2022. This growth was driven by gold production and a rebound in the agriculture and services sector, particularly services related to transit trade from China and Russia. On the expenditure side, exports and consumption supported growth. Average consumer price inflation declined from 13.8 percent in 2022 to 10.8 percent in 2023 due to easing global food and fuel prices and a tight monetary policy. GDP growth in 2024 is expected to moderate to 4.5 percent as services sector growth decelerates. Investment and exports are expected to drive growth, while consumption growth may ease despite a slight rise in remittances. Without structural reforms, the GDP growth rate is likely to stabilize at 4 percent in the medium term. Inflation is projected to decrease within the target range of 5-7 percent by the end of 2024 and remain stable in the medium term. Despite the Kyrgyz Republic's promising economic performance, poverty remains a significant challenge, impacting approximately 25 percent of the population, particularly in rural areas. The COVID-19 pandemic has further exacerbated existing vulnerabilities, resulting in increased poverty rates and economic hardships for many households. The contrast between rural and urban poverty is stark, particularly in the southern regions, where poverty rates are among the highest in the country. In the Batken and Osh Regions, estimates indicate that over 30 percent of the population lives in poverty. In comparison, Bishkek, the capital, has a relatively lower poverty rate of around 15-20 percent. The RED-1 project serves as a flagship initiative designed to assist the Government in addressing critical regional development challenges. By prioritizing key economic sectors, particularly tourism and agriculture, the Project aims to leverage these industries as primary drivers of local and regional economic growth in the Osh Region. This strategic focus seeks to improve the economic landscape of the region by enhancing key tourism attractions in the cities of Osh and Uzgen and nearby and transforming them into destination hubs for tourism development. Additionally, the Project supports the development of small and medium-sized enterprises (SMEs) and startups through customized capacity-building activities aimed at improving business operations and providing financing for high-potential businesses. The Suleiman-Too Complex, a UNESCO-protected site, and Uzgen Archaeological Complex, key investments under the RED-1 Project, hold immense cultural and historical significance for the Kyrgyz Republic. Both sites have faced substantial degradation over the past 30 years, threatening their unique heritage. Revitalizing the Suleiman-Too Complex is particularly crucial for regional development. Osh, where the complex is located, has the potential to become a major tourist destination in the eastern Ferghana Valley. Recognizing the cultural and economic significance of these sites, the Government has sought the Bank’s support for their revitalization and included them in the RED-1. However, given the unique skillset required for the preparation of anticipated interventions coincided with limited capacity at both national and local levels, the preparatory phase has taken longer than anticipated, posing risks for its implementation under the Project. To address this issue, the PIU has mobilized extra domestic and international expertise to bridge the capacity gap. In parallel, the Bank has engaged additional consultants to assist stakeholders in meeting UNESCO's stringent requirements and advancing the preparation of design packages. Now that the implementation momentum has been regained, the Government approached the Bank with a request for Additional Financing to address the estimated financing gap of US$8.5 million for the referenced activities and a 23-month time expansion to allow for the completion of flagship investments.